As filed with the Securities and Exchange Commission on December 28, 2001
1933 Act File No. 333-72754
1940 Act File No. 811-10491
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 5
NUVEEN REAL ESTATE INCOME FUND
Enter Name of Registrant as Specified in Charter
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
Address of Principal Executive Offices (Number, Street, City, State and Zip
Code)
(312) 917-7700
Registrant's Telephone Number, including Area Code
GIFFORD R. ZIMMERMAN, ESQ. -- VICE PRESIDENT AND SECRETARY
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
Name and Address (Number, Street, City, State and Zip code) of Agent for Service
COPIES OF COMMUNICATIONS TO:
David A. Sturms, Esq Thomas S. Harman, Esq. Sarah E. Cogan, Esq.
Vedder, Price, Kaufman & Kammholz Morgan, Lewis & Bockius, LLP Simpson Thacher & Bartlett
222 N. LaSalle Street 1800 M Street, N.W. 425 Lexington Avenue
Chicago, IL 60601 Washington, D.C. 20036 New York, NY 10017
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE(1)
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Taxable Auctioned Preferred Shares Series
M, T, W and F .......................... 6,880 $25,000 $172,000,000 $41,108*
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* $250 has been previously paid.
(1) Transmitted prior to filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES THAT: (1) FOR PURPOSES OF
DETERMINING ANY LIABILITY UNDER THE SECURITIES ACT OF 1933, THE INFORMATION
OMITTED FROM THE FORM OF PROSPECTUS FILED AS PART OF THIS REGISTRATION STATEMENT
IN RELIANCE UPON RULE 430A AND CONTAINED IN A FORM OF PROSPECTUS FILED BY THE
REGISTRANT PURSUANT TO RULE 424(b)(1) OR (4) OR 497(h) UNDER THE SECURITIES ACT
SHALL BE DEEMED TO BE PART OF THIS REGISTRATION STATEMENT AS OF THE TIME IT WAS
DECLARED EFFECTIVE. (2) FOR THE PURPOSE OF DETERMINING ANY LIABILITY UNDER THE
SECURITIES ACT OF 1933, EACH POST-EFFECTIVE AMENDMENT THAT CONTAINS A FORM OF
PROSPECTUS SHALL BE DEEMED TO BE A NEW REGISTRATION STATEMENT RELATING TO THE
SECURITIES OFFERED THEREIN, AND THE OFFERING OF SUCH SECURITIES AT THAT TIME
SHALL BE DEEMED TO BE THE INITIAL BONA FIDE OFFERING THEREOF.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 28, 2001
PROSPECTUS
[NUVEEN INVSTMENTS LOGO] $172,000,000
NUVEEN REAL ESTATE INCOME FUND
TAXABLE AUCTIONED PREFERRED SHARES ("TAPS(R)")
1,720 SHARES SERIES M
1,720 SHARES SERIES T
1,720 SHARES SERIES W
1,720 SHARES SERIES F
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------------
Nuveen 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. The Fund's secondary investment
objective is capital appreciation. Under normal market conditions, the Fund will
invest at least 90% of its total assets in income producing common stocks,
preferred stocks, convertible preferred stocks and debt securities issued by
real estate companies, such as real estate investment trusts ("REITs"); at least
80% of its total assets in income producing equity securities issued by REITs;
and up to 20% of its total assets in debt securities, including convertible debt
securities issued or guaranteed by real estate companies. In addition, the Fund
will not invest more than 25% of its total assets in non-investment grade
preferred stocks, convertible preferred stocks and debt securities (commonly
known as "junk bonds"); and 10% of its total assets in illiquid real estate
securities. There can be no assurance that the Fund will achieve its investment
objectives.
The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (312) 917-7700. Investors are
advised to read this prospectus, which sets forth concisely the information
about the Fund that a prospective investor ought to know before investing, and
retain it for future reference. A statement of additional information dated
, 2002 containing additional information regarding the Fund has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference in its entirety into this prospectus. A copy of the
statement of additional information, the table of contents of which appears on
page 46 of this prospectus, may be obtained without charge by calling the Fund
at (800) 257-8787. In addition, the SEC maintains a web site
(http://www.sec.gov) that contains the statement of additional information,
material incorporated by reference, and other information filed electronically
with the SEC.
------------------------
INVESTING IN TAXABLE AUCTIONED PREFERRED SHARES ("TAPS") INVOLVES CERTAIN
RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 16.
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.
------------------------
(R) Registered trademark of Nuveen Investments
PER SHARE TOTAL
--------- -----
Public Offering Price $25,000 $172,000,000
Sales Load $ $
Proceeds to Fund(1) (before expenses) $ $
---------------
(1) Not including offering expenses payable by the Fund estimated to be
$ .
The underwriters are offering the shares of TAPS subject to various
conditions. The underwriters expect to deliver shares of TAPS in book-entry
form, through the facilities of the Depository Trust Company to purchasers on or
about , 2002.
------------------------
SALOMON SMITH BARNEY NUVEEN INVESTMENTS
A.G. EDWARDS & SONS, INC. MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES UBS WARBURG
, 2002
The Fund is offering 1,720, 1,720, 1,720 and 1,720 shares of Series M, T, W
and F TAPS, respectively. The shares are referred to in this prospectus as
"TAPS." The TAPS have a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The TAPS also have priority over the Fund's
common shares as to distribution of assets as described in this prospectus. The
dividend rate for the initial dividend rate period will be %, %,
%, and % for TAPS Series M, T, W and F, respectively. The initial rate
period is from the date of issuance through , 2002 for TAPS Series M,
, 2002 for TAPS Series T, , 2002 for TAPS Series W and
, 2002 for TAPS Series F. For subsequent rate periods, TAPS pay
dividends based on a rate set at auction, usually held every 7 days. Prospective
purchasers should carefully review the auction procedures described in the
prospectus and should note: (1) a buy order (called a "bid order") or sell order
is a commitment to buy or sell TAPS based on the results of an auction; (2)
auctions will be conducted by telephone; and (3) purchases and sales will be
settled on the next business day after the auction. TAPS are not listed on an
exchange. You may only buy or sell TAPS through an order placed at an auction
with or through a broker-dealer that has entered into an agreement with the
auction agent and the Fund, or in a secondary market maintained by certain
broker-dealers. These broker-dealers are not required to maintain this market,
and it may not provide you with liquidity.
The TAPS do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other governmental agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 8
The Fund.................................................... 9
Use of Proceeds............................................. 9
Capitalization.............................................. 10
Portfolio Composition....................................... 10
The Fund's Investments...................................... 11
Risk Factors................................................ 16
How the Fund Manages Risk................................... 22
Management of the Fund...................................... 22
Description of TAPS......................................... 25
The Auction................................................. 36
Description of Borrowings................................... 39
Description of Common Shares................................ 39
Certain Provisions in the Declaration of Trust.............. 40
Repurchase of Fund Shares; Conversion to Open-End Fund...... 41
Tax Matters................................................. 41
Custodian, Transfer Agent, Dividend Disbursing Agent and 43
Redemption Agent..........................................
Underwriting................................................ 44
Legal Opinions.............................................. 45
Available Information....................................... 45
Special Note Regarding Forward-Looking Statements........... 45
Table of Contents for the Statement of Additional 46
Information...............................................
Until , 2002, (25 days after the date of this prospectus),
all dealers that buy, sell or trade the TAPS, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this prospectus, statement of additional information and
the Fund's Statement Establishing and Fixing the Rights and Preferences of
Taxable Auctioned Preferred Shares (the "Statement") attached as Appendix A to
the statement of additional information. Capitalized terms used but not defined
in this prospectus shall have the meanings given to such terms in the Statement.
The Fund...................... Nuveen Real Estate Income Fund (the "Fund") is
a recently organized, non-diversified,
closed-end management investment company. See
"The Fund." The Fund's common shares, $.01 par
value ("Common Shares"), are traded on the
American Stock Exchange under the symbol
"JRS." See "Description of Common Shares." As
of December 20, 2001, the Fund had 28,107,000
Common Shares outstanding and net assets of
$406,735,925.
Investment Objectives and
Policies...................... The Fund's primary investment objective is
high current income. Capital appreciation is a
secondary investment objective. The Fund's
investment objectives and certain investment
policies are considered fundamental and may
not be changed without shareholder approval.
See "The Fund's Investments."
Under normal market conditions, the Fund will
invest at least 90% of its total assets in
income-producing common stocks, preferred
stocks, convertible preferred stocks and debt
securities issued by real estate companies,
such as REITs. At least 80% of the Fund's
total assets will be invested in
income-producing equity securities issued by
REITs, and substantially all of the equity
securities of real estate companies in which
the Fund intends to invest are traded on a
national securities exchange or in the
over-the-counter markets. The Fund may invest
up to 20% of its total assets in debt
securities, including convertible debt
securities, issued or guaranteed by real
estate companies.
The preferred stocks, convertible preferred
stocks and debt securities in which the Fund
may invest are sometimes collectively referred
to in this prospectus as "Ratable Securities."
The Fund will not invest more than 25% of its
total assets in Ratable Securities of below
investment grade quality. Investment grade
quality Ratable Securities are those that have
received a rating no lower than Baa or BBB by
Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's, a division of The
McGraw-Hill Companies ("S&P"), or Fitch IBCA,
Inc. ("Fitch"). The Fund will not invest more
than 10% of its total assets in illiquid real
estate securities. The Fund will not enter
into short sales or invest in derivatives,
except as described in this prospectus in
connection with interest rate swap or interest
rate cap transactions. See "The Fund's
Investments -- Use of Leverage" and
"-- Interest Rate Transactions." The Fund will
not invest in real estate securities that are
controlled by Security Capital Group
Incorporated, an affiliate of the Fund's
investment subadviser, or its affiliates. See
"Management of the Fund -- Investment Adviser
and Subadviser." All of the Fund's investments
will be in securities of U.S. issuers and the
Fund will not invest more than 10% of its
total assets in the securities of any one
issuer.
1
A real estate company generally derives at
least 50% of its revenue from the ownership,
construction, financing, management or sale of
commercial, industrial or residential real
estate (or that has at least 50% of its assets
invested in such real estate). A common type
of real estate company, a REIT, is a company
that pools investors' funds for investment
primarily in income-producing real estate or
in real estate related loans (such as
mortgages) or other interests. Therefore, a
REIT normally derives its income from rents or
from interest payments, and may realize
capital gains by selling properties that have
appreciated in value. A REIT is not taxed on
income distributed to shareholders if it
complies with several requirements relating to
its organization, ownership, assets and income
and a requirement that it distribute to its
shareholders at least 90% of its taxable
income (other than net capital gains) for each
taxable year and otherwise complies with the
requirements of the Internal Revenue Code of
1986, as amended (the "Code"). As a result,
REITs generally pay relatively high dividends
(as compared to other types of companies) and
the Fund intends to use these REIT dividends
in an effort to meet its primary objective of
high current income.
There can be no assurance that the Fund's
investment objectives will be achieved. See
"The Fund's Investments."
Investment Adviser and
Subadviser.................... Nuveen Institutional Advisory Corp. ("NIAC")
is the Fund's investment adviser and Security
Capital Research & Management Incorporated
("Security Capital") is the Fund's subadviser.
NIAC is a wholly owned subsidiary of Nuveen
Investments ("Nuveen") and Security Capital is
an indirect wholly owned subsidiary of
Security Capital Group Incorporated ("SCGI").
Security Capital is a registered investment
adviser with approximately $2.4 billion in
assets under management as of September 30,
2001, all of which were real estate
securities. Security Capital has been
investing in public real estate securities
since 1995, through the open market purchase
of real estate securities as well as through
the negotiation and structuring of private
placements of convertible preferred real
estate securities. See "Management of the
Fund" and "Underwriting."
Use of Leverage............... The Fund intends to use financial leverage,
including issuing TAPS, for investment
purposes. The Fund currently anticipates its
use of leverage to represent approximately 30%
of its total assets, including the proceeds of
such leverage. In addition to issuing of TAPS,
the Fund may make further use of financial
leverage through borrowing, including the
issuance of commercial paper or notes.
Throughout this Prospectus, commercial paper,
notes or borrowings sometimes may be
collectively referred to as "Borrowings." Any
Borrowings will likely have seniority over the
TAPS. Payments to holders of TAPS in
liquidation or otherwise will be subject to
the prior payment of all outstanding
indebtedness, including Borrowings.
Interest Rate Transactions.... In connection with the Fund's anticipated use
of leverage through the sale of TAPS or
through Borrowings, the Fund may enter into
interest rate swap or cap transactions. The
use of interest rate
2
swaps and caps is a highly specialized
activity that involves investment techniques
and risks different from those associated with
ordinary portfolio security transactions. In
an interest rate swap, the Fund would agree to
pay to the other party to the interest rate
swap (which is known as the "counterparty") a
fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a
variable rate payment that is intended to
approximate the Fund's variable rate payment
obligation on TAPS or any variable rate
Borrowings. The payment obligations would be
based on the notional amount of the swap. In
an interest rate cap, the Fund would pay a
premium to the counterparty to the interest
rate cap and, to the extent that a specified
variable rate index exceeds a predetermined
fixed rate, would receive from the
counterparty payments of the difference based
on the notional amount of such cap. If the
counterparty to an interest rate swap or cap
defaults, the Fund would be obligated to make
the payments that it had intended to avoid.
Depending on the general state of short-term
interest rates and the returns on the Fund's
portfolio securities at that point in time,
this default could negatively impact the
Fund's ability to make dividend payments on
the TAPS. In addition, at the time an interest
rate swap or cap transaction reaches its
scheduled termination date, there is a risk
that the Fund will not be able to obtain a
replacement transaction or that the terms of
the replacement will not be as favorable as on
the expiring transaction. If this occurs, it
could have a negative impact on the Fund's
ability to make dividend payments on the TAPS.
If the Fund fails to maintain the required
asset coverage on the outstanding TAPS or
fails to comply with other covenants, the Fund
may be required to redeem some or all of these
shares. Such redemption likely would result in
the Fund seeking to terminate early all or a
portion of any swap or cap transaction. Early
termination of the swap could result in a
termination payment by or to the Fund. Early
termination of a cap could result in a
termination payment to the Fund. The Fund
intends to maintain, in a segregated account
with its custodian, cash or liquid securities
having a value at least equal to the Fund's
net payment obligations under any swap
transaction, marked to market daily. The Fund
would not enter into any interest rate swap or
cap transactions having a notional amount that
exceeded the outstanding amount of the Fund's
leverage. See "The Fund's
Investments -- Interest Rate Transactions."
The Offering.................. The Fund is offering 1,720, 1,720, 1,720, and
1,720 shares of Series M, T, W and F
respectively, each at a purchase price of
$25,000 per share. TAPS are being offered by
the underwriters listed under "Underwriting."
Risk Factors Summary.......... Risk is inherent in all investing. Therefore,
before investing you should consider certain
risks carefully when you invest in the Fund.
The primary risks of investing in TAPS are:
- if an auction fails you may not be able to
sell some or all of your shares;
- because of the nature of the market for
TAPS, you may receive less than the price
you paid for your shares if you sell them
3
outside of the auction, especially when
market interest rates are rising;
- a rating agency could downgrade TAPS, which
could affect liquidity;
- the Fund may be forced to redeem your shares
to meet regulatory or rating agency
requirements or may voluntarily redeem your
shares in certain circumstances;
- in extraordinary circumstances the Fund may
not earn sufficient income from its
investments to pay dividends;
- the TAPS will be junior to any Borrowings;
- any Borrowings may constitute a substantial
lien and burden on the TAPS by reason of its
prior claim against the income of the Fund
and against the net assets of the Fund in
liquidation;
- if the Fund leverages through Borrowings,
the Fund may not be permitted to declare
dividends or other distributions with
respect to the TAPS or purchase TAPS unless
at the time thereof the Fund meets certain
asset coverage requirements and the payments
of principal and of interest on any such
Borrowings are not in default.
For additional general risks of investing in
the Fund, see "Risk Factors -- General Risks
of Investing in the Fund" below.
Trading Market................ TAPS are not listed on an exchange. Instead,
you may buy or sell TAPS at an auction that
normally is held weekly by submitting orders
to a broker-dealer that has entered into an
agreement with the auction agent and the Fund
(a "Broker-Dealer"), or to a broker-dealer
that has entered into a separate agreement
with a Broker-Dealer. In addition to the
auctions, Broker-Dealers and other
broker-dealers may maintain a secondary
trading market in TAPS outside of auctions,
but may discontinue this activity at any time.
There is no assurance that a secondary market
will provide shareholders with liquidity or
that the trading price in any secondary market
would be $25,000. You may transfer shares
outside of auctions only to or through a
Broker-Dealer, or a broker-dealer that has
entered into a separate agreement with a
Broker-Dealer.
The table below shows the first auction date
for each Series of TAPS and the day on which
each subsequent auction will normally be held
for each Series of TAPS. The first auction
date for each Series of TAPS will be the
business day before the dividend payment date
for the initial rate period for each Series of
TAPS.
4
The start date for subsequent rate periods
normally will be the business day following
the auction date unless the then-current rate
period is a special rate period, or the day
that normally would be the auction date or the
first day of the subsequent rate period is not
a business day.
FIRST AUCTION SUBSEQUENT
SERIES DATE AUCTION*
------ ------------- ----------
M Monday
T Tuesday
W Wednesday
F Friday
-------------------------------------------------
*All dates are 2002.
Dividends and Rate Periods.... The table below shows the dividend rate for
the initial rate period of the TAPS offered in
this prospectus. For subsequent rate periods,
TAPS will pay dividends based on a rate set at
auctions, normally held every 7 days. In most
instances dividends are also paid every 7
days, on the day following the end of the rate
period. The Applicable Rate that results from
an Auction will not be lower than 70% of the
applicable AA Composite Commercial Paper Rate
(the "Minimum Rate") or greater than 150% (the
"Maximum Rate") of the applicable AA Composite
Commercial Paper Rate (for a Dividend Period
of fewer than 184 days) or the applicable
Treasury Index Rate (for a Dividend Period of
184 days or more) at the close of business on
the Business Day next preceding such Auction
Date. See "Description of TAPS -- Dividends
and Dividend Periods -- Determination of
Dividend Rate" and "The Auction."
The table below also shows the date from which
dividends on the TAPS will accumulate at the
initial rate, the dividend payment date for
the initial rate period and the day on which
dividends will normally be paid. If the day on
which dividends otherwise would be paid is not
a business day, then dividends will be paid on
the first business day that falls after that
day.
Finally, the table below shows the number of
days of the initial rate period for the TAPS.
Subsequent rate periods generally will be 7
days. The dividend payment date for special
rate periods of more than 7 days will be set
out in the notice designating a special rate
period. See "Description of TAPS -- Dividends
and Dividend Periods -- Notification of
Dividend Periods."
DIVIDEND
PAYMENT SUBSEQUENT NUMBER OF
INITIAL DATE OF DATE FOR DIVIDEND DAYS OF
DIVIDEND ACCUMULATION INITIAL RATE PAYMENT INITIAL RATE
SERIES RATE AT INITIAL RATE* PERIOD* DAY PERIOD
------ -------- ---------------- ------------ ---------- ------------
M Tuesday
T Wednesday
W Thursday
F Monday
-------------------------------------------------
* All dates are 2002.
5
Ratings....................... It is a condition of the Underwriter's
obligation to purchase the TAPS that the TAPS
require a rating of "Aaa" from Moody's and
"AAA" from Fitch.
Restrictions on Dividend
Redemption and Other
Payments.................... If the Fund issues any Borrowings that
constitute senior securities representing
indebtedness (as defined in the 1940 Act),
under the 1940 Act, the Fund would not be
permitted to declare any dividend on TAPS
unless, after giving effect to such dividend,
asset coverage with respect to the Fund's
Borrowings that constitute senior securities
representing indebtedness, if any, is at least
200%. In addition, the Fund would not be
permitted to declare any distribution on or
purchase or redeem TAPS unless, after giving
effect to such distribution, purchase or
redemption, asset coverage with respect to the
Fund's Borrowings that constitute senior
securities representing indebtedness, if any,
is at least 300%. Dividends or other
distributions on or redemptions or purchases
of TAPS would also be prohibited at any time
that an event of default under the Borrowings,
if any, has occurred and is continuing. See
"Description of TAPS -- Restrictions on
Dividend, Redemption and Other Payments."
Asset Maintenance............. The Fund must maintain Eligible Assets having
an aggregated Discounted Value at least equal
to the TAPS Basic Maintenance Amount as of
each Valuation Date. The Fund also must
maintain asset coverage for the TAPS on a
non-discounted basis of at least 200% as of
the last business day of each month. See
"Description of TAPS -- Asset Maintenance."
The Discount Factors and guidelines for
calculating the Discounted Value of the Fund's
portfolio for purposes of determining whether
the TAPS Basic Maintenance Amount has been
satisfied have been established by Moody's and
Fitch in connection with the Fund's receipt
from Moody's and Fitch of the "Aaa" and "AAA",
respectively, Credit Rating with respect to
the TAPS on their Date of Original Issue.
The Fund estimates that on the Date of
Original Issue, the 1940 Act TAPS Asset
Coverage, based on the composition of its
portfolio as of November 30, 2001, after
giving effect to the issuance of the TAPS
($172,000,000) and the deduction of sales
loads and estimated offering expenses for such
shares ($2,017,208), will be 333%.
In addition, there may be additional asset
coverage requirements imposed in connection
with any Borrowings.
Redemption.................... Although the Fund will not ordinarily redeem
TAPS shares, it may be required to redeem
shares if, for example, the Fund does not meet
an asset coverage ratio required by law or to
correct a failure to meet a rating agency
guideline in a timely manner. The Fund
voluntarily may redeem TAPS in certain
circumstances. See "Description of
TAPS -- Redemption."
6
Liquidation Preference........ The liquidation preference of the shares of
each series of TAPS will be $25,000 per share
plus accumulated but unpaid dividends, if any,
thereon. See "Description of
TAPS -- Liquidation."
Voting Rights................. Except as otherwise indicated, holders of TAPS
have one vote per share and vote together with
holders of Common Shares as a single class.
In connection with the election of the Board
of Trustees, the holders of outstanding shares
of Preferred Shares, including TAPS, as a
class, shall be entitled to elect two trustees
of the Fund. The holders of outstanding shares
of Common Shares and preferred shares of
beneficial interest ("Preferred Shares"),
including TAPS, voting together, shall elect
the remainder. However, upon the Fund's
failure to pay dividends on the Preferred
Shares in an amount equal to two full years of
dividends, the holders of Preferred Shares
have the right to elect, as a class, the
smallest number of additional Trustees as
shall be necessary to assure that a majority
of the Trustees has been elected by the
holders of Preferred Shares. The terms of the
additional Trustees shall end when the Fund
pays or provides for all accumulated and
unpaid dividends. See "Description of
TAPS -- Voting Rights."
Federal Income Taxes.......... Distributions with respect to the TAPS will
generally be subject to U.S. federal income
taxation. Because the Fund's portfolio income
will consist principally of dividend income
from REITs, which is not eligible for a
dividends received deduction, capital gain and
interest income, corporate investors in the
TAPS generally will not be entitled to the 70%
dividends received deduction. The Internal
Revenue Service ("IRS") currently requires
that a regulated investment company, which has
two or more classes of stock, allocate to each
such class proportionate amounts of each type
of its income (such as ordinary income and
capital gain) based upon the percentage of
total dividends distributed to each class for
the tax year. Accordingly, the Fund intends
each year to allocate ordinary income
dividends and capital gain dividends between
its Common Shares and the TAPS in proportion
to the total dividends paid to each class
during or with respect to such year. See "Tax
Matters."
7
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on November 15, 2001 until November 30, 2001. Since the Fund was
recently organized and commenced operations on November 15, 2001, the table
covers approximately two weeks of operations, during which a substantial portion
of the Fund's portfolio was held in temporary investments pending investment in
long-term 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 performances.
(UNAUDITED)
-----------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period...................... $ 14.33
--------
Net Investment Income.................................. --
Net Gains on Securities (Unrealized)................... .07
--------
Total from Investment Operations..................... .07
--------
Offering Costs............................................ (.03)
--------
Net Asset Value, End of Period............................ $ 14.37
========
Per Share Market Value, End of Period..................... $ 15.09
Total Return on Net Asset Value........................... .28%
Total Investment Return on Market Value................... .60%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands).................. $354,985
Ratio of Expenses to Average Net Assets Before
Reimbursement.......................................... .95%*
Ratio of Net Investment Income to Average Net Assets
Before Reimbursement................................... .34%*
Ratio of Expenses to Average Net Assets After
Reimbursement.......................................... .65%*
Ratio of Net Investment Income to Average Net Assets After
Reimbursement.......................................... .64%*
Portfolio Turnover Rate................................... --
---------------
* Annualized
8
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on August 27, 2001 pursuant to a Declaration of
Trust (the "Declaration of Trust") governed by the laws of the Commonwealth of
Massachusetts. On November 20, 2001, the Fund issued an aggregate of 24,700,000
Common Shares of beneficial interest, par value $.01 per share, pursuant to the
initial public offering thereof. On December 7, 2001, the Fund issued an
additional 3,400,000 Common Shares in connection with a partial exercise by the
underwriters of the over-allotment option. The Fund's Common Shares are traded
on the American Stock Exchange (the "Exchange") under the symbol "JRS." The
Fund's principal office is located at 333 West Wacker Drive, Chicago, Illinois
60606, and its telephone number is (800) 257-8787.
The following provides information about the Fund's outstanding shares as
of December 20, 2001:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common Shares........................................... unlimited 0 28,107,000
TAPS.................................................... unlimited 0 0
Series M.............................................. 1,720 0 0
Series T.............................................. 1,720 0 0
Series W.............................................. 1,720 0 0
Series F.............................................. 1,720 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $169,982,792 after
payment of the sales load and estimated offering costs.
The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objectives and policies as stated below, as soon as
practicable. It is anticipated that, under normal market conditions, such
investments will be completed no later than one month after the completion of
the offering. The Fund's actual investment timetable will depend on the
availability of such investments and other market conditions. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
debt securities.
9
CAPITALIZATION
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
November 30, 2001, and as adjusted, to give effect to the issuance of 3,400,000
Common Shares on December 7, 2001, as well as the issuance of the shares of TAPS
offered hereby.
ACTUAL AS ADJUSTED
------------ -------------
(UNAUDITED)
SHAREHOLDERS' EQUITY:
TAPS, $25,000 stated value per share, at liquidation
value; unlimited shares authorized (no shares issued,
and; 6,880 shares issued, as adjusted, respectively)... $ -- $172,000,000
Common Shares, $.01 par value per share; unlimited shares
authorized, 24,707,000 shares outstanding and
28,107,000 shares outstanding as adjusted,
respectively*.......................................... 247,070 281,070
Paid-in surplus**......................................... 352,939,705 399,491,497
Balance of undistributed net investment income............ 93,703 93,703
Net unrealized appreciation of investments................ 1,704,658 1,704,658
------------ ------------
Net assets................................................ $354,985,136 $573,570,928
============ ============
---------------
* None of these outstanding shares are held by or for the account of the Fund.
**As adjusted paid-in surplus reflects the proceeds of the issuance of 3,400,000
Common Shares ($48,705,000) less $.01 par value per Common Share ($34,000) and
the offering costs of $.03 per Common Share ($102,000) as well as a reduction
for the sales load and estimated offerings costs of the TAPS issuance
($2,017,208).
PORTFOLIO COMPOSITION
As of November 30, 2001, 57.4% of the market value of the Fund's portfolio
was invested in long-term investments and 42.6% of the market value of the
Fund's portfolio was invested in short-term investments.
10
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is high current income. Capital
appreciation is a secondary investment objective. The Fund has a policy of
concentrating its investments in the U.S. real estate industry and not in any
other industry. There can be no assurance that the Fund's investment objectives
will be achieved.
Under normal market conditions, the Fund:
- will invest at least 90% of its total assets in income producing equity
and debt securities of real estate companies. These equity securities can
consist of (i) common stocks, (ii) preferred stocks, (iii) rights or
warrants to purchase common stocks and preferred stocks, and (iv)
convertible preferred stocks;
- will invest at least 80% of its total assets in income producing equity
securities issued by REITs;
- will invest at least 40% of its total assets in common stocks; and
- may invest up to 20% of its total assets in debt securities, including
convertible debt securities, issued or guaranteed by real estate
companies.
Substantially all of the equity securities of real estate companies in
which the Fund intends to invest are traded on a national securities exchange or
in the over-the-counter markets.
It is the Fund's intention to initially invest approximately:
- 55% of its total assets in common stocks issued by real estate companies;
- 40% of its total assets in preferred stocks issued by real estate
companies; and
- 5% of its total assets in convertible preferred stocks issued by real
estate companies.
The actual percentage of common, preferred and convertible preferred
stocks, rights and warrants and debt securities in the Fund's portfolio may vary
over time based on Security Capital's assessment of market conditions.
The Fund will not invest more than 25% of its total assets in
non-investment grade Ratable Securities. Investment grade quality Ratable
Securities are those that have received a rating no lower than Baa or BBB by
Moody's, S&P or Fitch. See Appendix B in the statement of additional information
for a description of security ratings.
The Fund will not invest more than 10% of its total assets in illiquid real
estate securities. All of the Fund's investments will be in securities of U.S.
issuers, and the Fund will not invest more than 10% of its total assets in the
securities of any one issuer.
The Fund will not enter into short sales or invest in derivatives, except
as described in this Prospectus in connection with the interest rate swap or
interest rate cap transactions. See "Use of Leverage" and "Interest Rate
Transactions." The Fund will not invest in real estate securities that are
controlled by SCGI or its affiliates.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and Preferred
Shares, including TAPS, voting together as a single class, and of the holders of
a "majority of the outstanding" Preferred Shares, including TAPS, if any, voting
as a separate class. A "majority of the outstanding" Common Shares means (i) 67%
or more of the shares present at a meeting, if the holders of more than 50% of
the shares are present or represented by proxy, or (ii) more than 50% of the
shares, whichever is less. See "Description of TAPS -- Voting Rights" for
additional information with respect to the voting rights of holders of TAPS.
11
INVESTMENT PROCESS
The organization and investment processes of Security Capital reflect its
belief that superior investment results are achieved through a dedication to
proprietary, fundamental research. Its investment process focuses on three
fundamental research disciplines that it believes play an important role in the
performance and pricing of real estate companies:
- real estate research;
- company analysis; and
- market strategy.
These are highly specialized disciplines and each impacts the performance
of real estate companies and the ultimate pricing of their securities. The
investment process integrates these three disciplines under the broad direction
of Security Capital's Portfolio Management Committee, the decision-making body
for investment strategies.
Real Estate Research. Research analysts focus on understanding the market
pressures and factors that affect rent growth, occupancy and development. This
understanding provides perspectives on future supply and demand trends for
property types in various markets and the relative impact for different
companies.
Company Analysis. Investment analysts focus on analyzing real estate
companies within Security Capital's defined universe of investments and modeling
their cash flow potential. They form a complete assessment of the company's
assets, operating management team and strategies through company and property
visits, careful scrutiny of regulatory filings and fieldwork. The recurring
output of the investment analysts includes a detailed five-year cash flow
forecast, an analysis of net asset value and a detailed qualitative assessment
of a company.
Market Strategy. Market strategy focuses on establishing appropriate cost
of capital thresholds for pricing real estate companies in Security Capital's
coverage universe of the companies. This effort requires consideration of the
risks underlying the securities as well as the appetite for and pricing of risk
in the broader equity and capital markets. With this understanding, discount
rates and terminal multiples are set that govern the key discounted cash flow
models and other valuation models employed. The definition and execution of
trading strategies is also an important part of market strategy.
Portfolio Construction. All investment decisions are directed by a
committee of senior investment professionals -- the Portfolio Management
Committee. The Committee meets formally on a weekly basis and informally
throughout the week to evaluate emerging real estate research and company
analysis, as well as key recurring reports, to create price forecasts to produce
a target portfolio for the Fund. This target portfolio integrates the critical
real estate and capital market expertise that helps to identify the most
attractive investment opportunities.
PORTFOLIO COMPOSITION
The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the Statement of Additional Information.
Real Estate Companies. Under normal market conditions, the Fund will
invest at least 90% of its total assets in income producing common stocks,
preferred stocks, convertible preferred stocks and debt securities issued by
real estate companies, such as REITs. For purposes of the Fund's investment
policies, a real estate company is a company that:
- derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial or residential
real estate; or
- has at least 50% of its assets in such real estate.
12
Real Estate Investment Trusts (REITs). Under normal market conditions, the
Fund will invest at least 80% of its total assets in income producing equity
securities issued by REITs. A REIT is a real estate company that pools
investors' funds for investment primarily in income producing real estate or in
real estate related loans (such as mortgages) or other interests. Therefore, a
REIT normally derives its income from rents or from interest payments, and may
realize capital gains by selling properties that have appreciated in value. A
REIT is not taxed on income distributed to shareholders if it complies with
several requirements relating to its organization, ownership, assets and income
and a requirement that it distribute to its shareholders at least 90% of its
taxable income (other than net capital gains) for each taxable year and
otherwise complies with the requirements of the Code. As a result, REITs tend to
pay relatively higher dividends than other types of companies, and the Fund
intends to use these REIT dividends in an effort to meet the high current income
goal of its investment objectives.
REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
Preferred Stocks. The Fund may invest in preferred stocks issued by real
estate companies. Preferred stocks pay fixed or floating rate dividends to
investors, and have a "preference" over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters.
Debt Securities. The Fund may invest up to 20% of its total assets in debt
securities, including convertible debt securities, issued or guaranteed by real
estate companies.
Lower-Rated Securities. The Fund will not invest more than 25% of its
total assets in Ratable Securities of below investment grade quality. Securities
of below grade investment quality (Ba/BB or below) are commonly referred to as
junk bonds. Securities of below investment grade quality are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal. The Fund may only invest in high yield securities
that are rated CCC or higher by S&P, rated Caa or higher by Moody's, or rated
CCC or higher by Fitch, or unrated securities determined by Security Capital to
be of comparable quality. The issuers of these securities have a currently
identifiable vulnerability to default as to payment of principal and interest
and such issues may be in default or there may be present elements of danger
with respect to principal or interest. The Fund will not invest in securities
which are in default as to payment of principal and interest at the time of
purchase. For a description of security ratings, see Appendix B of the Statement
of Additional Information.
Illiquid Securities. The Fund will not invest more than 10% of its total
assets in illiquid real estate securities (i.e., securities that are not readily
marketable). For purposes of this restriction, illiquid securities include, but
are not limited to, restricted securities (securities the disposition of which
is restricted under the federal securities laws), securities that may only be
resold pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days. The Board of Trustees or its delegate
has the ultimate authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid for purposes of
this 10% limitation. The Board of Trustees has delegated to Security Capital and
NIAC the day-to-day determination of the illiquidity of any security held by the
Fund, although it has retained oversight and ultimate responsibility for such
determinations. Although no definitive liquidity criteria are used, the Board of
Trustees has directed Security Capital and NIAC to look for such factors as (i)
the nature of the market for a security (including the institutional private
resale market; the frequency of trades and quotes for the security; the number
of dealers willing to purchase or sell the security; the amount of time normally
needed to dispose of the security; and the method of soliciting offers and the
mechanics of transfer), (ii) the terms of certain
13
securities or other instruments allowing for the disposition to a third party or
the issuer thereof (e.g., certain repurchase obligations and demand
instruments), and (iii) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Trustees or its delegate. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should be
in a position where more than 10% of the value of its net assets are invested in
illiquid securities, including restricted securities which are not readily
marketable, the Fund will take such steps as is deemed advisable, if any, to
protect liquidity.
Defensive Position. Upon Security Capital's recommendation, during
temporary defensive periods and in order to keep the Fund's cash fully invested,
including the period during which the net proceeds of the offering are being
invested, the Fund may deviate from its investment objectives and invest all or
any portion of its net assets in investment grade debt securities, without
regard to whether the issuer is a real estate company. In such a case, the Fund
may not pursue or achieve its investment objectives.
Other Investments. The Fund's cash reserves, held to provide sufficient
flexibility to take advantage of new opportunities for investments and for other
cash needs, will be invested in money market instruments. Money market
instruments in which the Fund may invest its cash reserves will generally
consist of obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities and such obligations which are subject to repurchase
agreements and commercial paper. See "Investment Policies and Techniques" in the
Statement of Additional Information.
Portfolio Turnover. The Fund may engage in portfolio trading when
considered appropriate, but short-term trading will not be used as the primary
means of achieving the Fund's investment objectives. Although the Fund cannot
accurately predict its annual portfolio turnover rate, it is not expected to
exceed 50% under normal circumstances. However, there are no limits on the rate
of portfolio turnover, and investments may be sold without regard to length of
time held when, in the opinion of Security Capital, investment considerations
warrant such action. A higher turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses which are borne by the
Fund. High portfolio turnover may result in the realization of net short-term
capital gains by the Fund which, when distributed to shareholders, will be
taxable as ordinary income. See "Tax Matters."
USE OF LEVERAGE
The Fund intends to use leverage through the issuance of TAPS, for
investment purposes. The Fund currently anticipates its use of leverage to
represent approximately 30% of its total assets, including the proceeds of such
leverage. In addition to issuing TAPS, the Fund may make further use of
financial leverage through borrowing, including the issuance of commercial paper
or notes. See "Description of TAPS" and "Description of Borrowings" below. The
Fund employs financial leverage for the purpose of acquiring additional
income-producing investments when Security Capital and NIAC believe that such
use of proceeds will enhance the Fund's net income. The amount of outstanding
financial leverage may vary with prevailing market or economic conditions.
Leverage entails special risks. See "Risk Factors -- Risks of Investing in
TAPS -- Leverage Risk." The management fee paid to Security Capital and NIAC
will be calculated on the basis of the Fund's total managed assets, including
proceeds of financial leverage, so the fees will be higher when leverage is
utilized.
INTEREST RATE TRANSACTIONS
In connection with the Fund's anticipated use of leverage through its sale
of TAPS or Borrowings, the Fund may enter into interest rate swap or cap
transactions. Interest rate swaps involve the Fund's agreement
14
with the swap counterparty to pay a fixed rate payment in exchange for the
counterparty paying the Fund a variable rate payment that is intended to
approximate the Fund's variable rate payment obligation on TAPS or any variable
rate borrowing. The payment obligation would be based on the notional amount of
the swap.
The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount.
The Fund would use interest rate swaps or caps only with the intent to reduce or
eliminate the risk that an increase in short-term interest rates could have on
Common Share net earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, the Fund's use of interest rate swaps or caps could
enhance or harm the overall performance on the Common Shares. To the extent
there is a decline in interest rates, the value of the interest rate swap or cap
could decline, and could result in a decline in the net asset value of the
Common Shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
Common Share net earnings. If, on the other hand, short-term interest rates are
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance Common Share net earnings. Buying interest rate caps could enhance the
performance of the Common Shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the Common Shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund would not enter into interest rate swap or cap
transactions in an aggregate notional amount that exceeds the outstanding amount
of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on TAPS or interest payments on Borrowings.
Depending on whether the Fund would be entitled to receive net payments from the
counterparty on the swap or cap, which in turn would depend on the general state
of short-term interest rates at that point in time, such a default could
negatively impact the performance of the Common Shares.
Although this will not guarantee that the counterparty does not default the
Fund will not enter into an interest rate swap or cap transaction with any
counterparty that NIAC believes does not have the financial resources to honor
its obligation under the interest rate swap or cap transaction. Further, NIAC
will continually monitor the financial stability of a counterparty to an
interest rate swap or cap transaction in an effort to proactively protect the
Fund's investments.
In addition, at the time the interest rate swap or cap transaction reaches
its scheduled termination date, there is a risk that the Fund will not be able
to obtain a replacement transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction. If this occurs, it could
have a negative impact on the performance of the Common Shares.
The Fund may choose or be required to redeem some or all Preferred Shares,
including TAPS, or prepay any Borrowings. This redemption would likely result in
the Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in termination
payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.
15
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in TAPS.
RISKS OF INVESTING IN TAPS
Interest Rate Risk. The Fund issues TAPS, which pay dividends based on
short-term interest rates. The Fund purchases real estate equity securities that
pay dividends that are based on the performance of the issuing companies. The
Fund also may buy real estate debt securities that pay interest based on
longer-term yields. These dividends and interest payments are typically,
although not always higher than short-term interest rates. Real estate company
dividends, as well as long-term and short-term interest rates, fluctuate. If
short-term interest rates rise, dividend rates on the TAPS may rise so that the
amount of dividends paid to stockholders of TAPS 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 TAPS
offering) is available to pay dividends on the TAPS, however, dividend rates on
the TAPS would need to greatly exceed the Fund's net portfolio income before the
Fund's ability to pay dividends on the TAPS would be jeopardized. If long-term
interest rates rise, this could negatively impact the value of the Fund's
investment portfolio, reducing the amount of assets serving as asset coverage
for the TAPS. The Fund anticipates entering into interest rate swap or cap
transactions with the intent to reduce or eliminate the risk posed by an
increase in short-term interest rates. There is no guarantee that the Fund will
engage in these transactions or that these transactions will be successful in
reducing or eliminating interest rate risk. See "How the Fund Manages Risk."
Auction Risk. You may not be able to sell your TAPS shares at an auction
if the auction fails; that is, if there are more TAPS offered for sale than
there are buyers for those shares. Also, if you place hold orders (orders to
retain TAPS) at an auction only at a specified rate, and that bid rate exceeds
the rate set at the auction, you will not retain your TAPS. Finally, if you buy
shares or elect to retain shares without specifying a rate below which you would
not wish to continue to hold those shares, and the auction sets a below-market
rate, you may receive a lower rate of return on your shares than the market
rate. See "Description of TAPS" and "The Auction -- Auction Procedures."
Secondary Market Risk. If you try to sell your TAPS between auctions, you
may not be able to sell any or all of your shares, or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated dividends.
If the Fund has designated a special rate period (a rate period other than 7
days), changes in interest rates could affect the price you would receive if you
sold your shares in the secondary market. Broker-dealers that maintain a
secondary trading market for TAPS are not required to maintain this market, and
the Fund is not required to redeem shares either if an auction or an attempted
secondary market sale fails because of a lack of buyers. TAPS are not registered
on a stock exchange or the NASDAQ stock market. If you sell your TAPS to a
broker-dealer between auctions, you may receive less than the price you paid for
them, especially when market interest rates have risen since the last auction.
Accrued TAPS dividends, however, should at least partially compensate for the
increased market interest rates.
Ratings and Asset Coverage Risk. While Moody's and Fitch assign ratings of
"Aaa" and "AAA", respectively, to TAPS, the ratings do not eliminate or
necessarily mitigate the risks of investing in TAPS. A rating agency could
downgrade TAPS, which may make your shares less liquid at an auction or in the
secondary market, though probably with higher resulting dividend rates. If a
rating agency downgrades TAPS, the Fund will alter its portfolio or redeem TAPS.
The Fund may voluntarily redeem TAPS under certain circumstances. See
"Description of TAPS -- Asset Maintenance" for a description of the asset
maintenance tests the Fund must meet.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your TAPS
investment or the income from that investment will be worth less in the future.
As inflation occurs, the
16
real value of the TAPS and distributions declines. In an inflationary period,
however, it is expected that, through the auction process, TAPS dividend rates
would increase, tending to offset this risk.
Income Risk. The Fund's income is based primarily on the income it earns
from its investments, which vary widely over the short- and long-term. If the
Fund's income drops, over time the Fund's ability to make dividend payments with
respect to the TAPS may be impaired. Please see "-- General Risks of Investing
in the Fund" below for the general risks affecting the Fund.
Decline in Net Asset Value Risk. A material decline in the Fund's net
asset value may impair the Fund's ability to maintain required levels of asset
coverage. For a description of risks affecting the Fund, please see "-- General
Risks of Investing in the Fund" below.
Payment Restrictions. The Fund is prohibited from declaring, paying or
making any dividends or distributions on TAPS unless it satisfies certain
conditions. See "Description of TAPS -- Restrictions on Dividend, Redemption and
Other Payments." The Fund is also prohibited from declaring, paying or making
any dividends or distributions on Common Shares unless it satisfies certain
conditions. These prohibitions on the payment of dividends or distributions
might impair the Fund's ability to maintain its qualification as a regulated
investment company for federal income tax purposes. The Fund intends, however,
to redeem shares of TAPS if necessary to comply with the asset coverage
requirements. There can be no assurance, however, that such redemptions can be
effected in time to permit the Fund to distribute its income as required to
maintain its qualification as a regulated investment company under the Code. See
"Tax Matters -- Federal Income Tax Treatment of the Fund" in the statement of
additional information.
Leverage Risk. The Fund uses financial leverage for investment purposes in
an amount currently anticipated to represent approximately 30% of its total
assets (including the proceeds from such financial leverage). In addition to
issuing TAPS, the Fund may make further use of financial leverage through
borrowing, including the issuance of commercial paper or notes. The Fund may
also borrow funds (a) in connection with a loan made by a bank or other party
that is privately arranged and not intended to be publicly distributed or (b) in
an amount equal to up to 5% of its total assets for temporary purposes only.
If the Fund issues any senior securities representing indebtedness (as
defined in the 1940 Act), including any Borrowings, under the requirements of
the 1940 Act, the value of the Fund's total assets, less all liabilities and
indebtedness of the Fund not represented by such senior securities, must be at
least equal, immediately after any such senior securities representing
indebtedness, to 300% of the aggregate value of such senior securities,
including any Borrowings. Upon the issuance of TAPS, the value of the Fund's
total assets, less all liabilities and indebtedness of the Fund not represented
by senior securities must be at least equal, immediately after the issuance of
the TAPS, to 200% of the aggregate value of any senior securities, including any
Borrowings, and the TAPS.
If the Fund seeks an investment grade rating from one or more nationally
recognized statistical rating organizations for any commercial paper and notes
(which the Fund expects to do if it issues any such commercial paper or notes),
asset coverage or portfolio composition provisions in addition to and more
stringent than those required by the 1940 Act may be imposed in connection with
the issuance of such a rating. In addition, restrictions may be imposed on
certain investment practices in which the Fund may otherwise engage. Any lender
with respect to borrowings by the Fund may require additional asset coverage and
portfolio composition provisions as well as restrictions on the Fund's
investment practices.
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. The
money borrowed pursuant to any Borrowings may constitute a substantial lien and
burden on the TAPS by reason of their prior claim against the income of the Fund
and against the net assets of the Fund in liquidation. The Fund may not be
permitted to declare dividends or other distributions, including shares with
respect to TAPS or purchase or redeem shares, including TAPS unless (i) at the
time thereof the Fund meets certain asset coverage requirements and (ii) there
is no event of default under any Borrowings, that is continuing. See
"Description of TAPS -- Restrictions on Dividend, Redemption and Other
Payments." In the event of a default under any Borrowings, the lenders may have
the right to cause
17
a liquidation of the collateral (i.e., sell portfolio securities) and if any
such default is not cured, the lenders may be able to control the liquidation as
well.
The Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted by the 1940 Act and existing agreements between the Fund and
third parties.
Because the fee paid to Security Capital and NIAC will be calculated on the
basis of total managed assets, the fee will be higher when leverage is utilized,
giving Security Capital and NIAC an incentive to utilize leverage.
GENERAL RISKS OF INVESTING IN THE FUND
LIMITED OPERATING HISTORY
The Fund is a recently organized, non-diversified closed-end management
investment company with a limited operating history.
INVESTMENT RISK AND INTEREST RATE RISK
The prices of the common stocks of real estate companies, including REITs,
and other securities in which the Fund invests, will fluctuate from day to day
and may -- in either the near term or over the long run -- decline in value.
Preferred stocks and debt securities are generally more sensitive to changes in
interest rates than common stocks.
Interest rate risk is the risk that fixed-income investments such as
preferred stocks and debt securities, and to a lesser extent dividend-paying
common stocks such as REIT common stocks, will decline in value because of
changes in market interest rates. When interest rates rise, the market value of
such securities generally will fall. The Fund's investment in such securities
means that the net asset value of the Fund will tend to decline if market
interest rates rise.
GENERAL RISKS OF SECURITIES LINKED TO THE REAL ESTATE MARKET
The Fund will not invest in real estate directly, but only in securities
issued by real estate companies, including REITs. However, because of the Fund's
policy of concentration in the securities of companies in the real estate
industry, it is also subject to the risks associated with the direct ownership
of real estate. These risks include:
- declines in the value of real estate
- risks related to general and local economic conditions
- possible lack of availability of mortgage funds
- overbuilding
- extended vacancies of properties
- increased competition
- increases in property taxes and operating expenses
- changes in zoning laws
- losses due to costs resulting from the clean-up of environmental problems
- liability to third parties for damages resulting from environmental
problems
- casualty or condemnation losses
- limitations on rents
18
- changes in neighborhood values and the appeal of properties to tenants
- changes in interest rates
Thus, the value of the Fund's portfolio may change at different rates
compared to the value of the portfolio of a registered investment company with
investments in a mix of different industries and will depend on the general
condition of the economy. An economic downturn could have a material adverse
effect on the real estate markets and on real estate companies in which the Fund
invests, which in turn could result in the Fund not achieving its investment
objectives.
General Real Estate Risks. Real property investments are subject to
varying degrees of risk. The yields available from investments in real estate
depend on the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., Americans with Disabilities Act and tax laws),
interest rate levels, and the availability of financing. If the properties do
not generate sufficient income to meet operating expenses, including, where
applicable, debt service, ground lease payments, tenant improvements,
third-party leasing commissions and other capital expenditures, the income and
ability of the real estate company to make payments of any interest and
principal on its debt securities will be adversely affected. In addition, real
property may be subject to the quality of credit extended and defaults by
borrowers and tenants. The performance of the economy in each of the regions in
which the real estate owned by the portfolio company is located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the income from such properties and their underlying values. The financial
results of major local employers also may have an impact on the cash flow and
value of certain properties. In addition, real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions is
limited. A real estate company may also have joint venture investments in
certain of its properties, and consequently, its ability to control decisions
relating to such properties may be limited.
Real property investments are also subject to risks which are specific to
the investment sector or type of property in which the real estate companies are
investing.
Retail Properties. Retail properties are affected by the overall health of
the economy. A retail property may be adversely affected by the growth of
alternative forms of retailing, bankruptcy, decline in drawing power, a shift in
consumer demand due to demographic changes and/or changes in consumer preference
(for example, to discount retailers) and spending patterns. A retail property
may also be adversely affected if an anchor or significant tenant ceases
operation at such location, voluntarily or otherwise. Certain tenants at retail
properties may be entitled to terminate their leases if an anchor tenant ceases
operations at such property.
Office Properties. Office properties generally require their owners to
expend significant amounts for general capital improvements, tenant improvements
and costs of reletting space. In addition, office properties that are not
equipped to accommodate the needs of modern businesses may become functionally
obsolete and thus non-competitive. Office properties may also be adversely
affected if there is an economic decline in the businesses operated by their
tenants. The risks of such an adverse effect is increased if the property
revenue is dependent on a single tenant or if there is a significant
concentration of tenants in a particular business or industry.
Hotel Properties. The risks of hotel properties include, among other
things, the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.
Also, hotels may be operated pursuant to franchise, management and
operating agreements that may be terminable by the franchiser, the manager or
the operator. Contrarily, it may be difficult to terminate an ineffective
operator of a hotel property subsequent to a foreclosure of such property.
19
Healthcare Properties. Healthcare properties and healthcare providers are
affected by several significant factors, including federal, state and local laws
governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); and competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis.
These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursement. In addition, in the event that a tenant is in default
on its lease, a new operator or purchaser at a foreclosure sale will have to
apply in its own right for all relevant licenses if such new operator does not
already hold such licenses. There can be no assurance that such new licenses
could be obtained, and consequently, there can be no assurance that any
healthcare property subject to foreclosure will be disposed of in a timely
manner.
Multifamily Properties. The value and successful operation of a
multifamily property may be affected by a number of factors such as the location
of the property, the ability of management to provide adequate maintenance and
insurance, types of services provided by the property, the level of mortgage
rates, presence of competing properties, the relocation of tenants to new
projects with better amenities, adverse economic conditions in the locale, the
amount of rent charged, and oversupply of units due to new construction. In
addition, multifamily properties may be subject to rent control laws or other
laws affecting such properties, which could impact the future cash flows of such
properties.
Other factors may contribute to the riskiness of real estate investments.
Insurance Issues. Certain of the real estate companies may, in connection
with the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. However such insurance is not uniform among the portfolio companies.
Moreover, there are certain types of extraordinary losses that may be
uninsurable, or not economically insurable. Certain of the properties may be
located in areas that are subject to earthquake activity for which insurance may
not be maintained. Should a property sustain damage as a result of an
earthquake, even if the portfolio company maintains earthquake insurance, the
portfolio company may incur substantial losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should any type of uninsured
loss occur, the portfolio company could lose its investment in, and anticipated
profits and cash flows from, a number of properties and as a result, would
impact the Fund's investment performance.
Financial Leverage. Real estate companies, including REITs, may be highly
leveraged and financial covenants may affect the ability of those companies to
operate effectively. The portfolio companies are subject to risks normally
associated with debt financing. If the principal payments of a real estate
company's debt cannot be refinanced, extended or paid with proceeds from other
capital transactions, such as new equity capital, the real estate company's cash
flow may not be sufficient to repay all maturing debt outstanding.
In addition, a portfolio company's obligation to comply with financial
covenants, such as debt-to-asset ratios and secured debt-to-total asset ratios,
and other contractual obligations may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.
Environmental Issues. In connection with the ownership (direct or
indirect), operation, management and development of real properties that may
contain hazardous or toxic substances, a portfolio company may be considered an
owner or operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and, therefore, may be potentially
liable for removal or remediation costs, as well as certain other costs,
including governmental fines and liabilities for injuries to persons and
property. The existence of any such material environmental liability could have
a material adverse effect on the results of
20
operations and cash flow of any such portfolio company and, as a result, the
amount available to make distributions on the shares could be reduced.
Smaller Companies. Even the larger REITs in the industry tend to be small
to medium-sized companies in relation to the equity markets as a whole. There
may be less trading in a smaller company's stock, which means that buy and sell
transactions in that stock could have a larger impact on the stock's price than
is the case with larger company stocks. Smaller companies also may have fewer
lines of business so that changes in any one line of business may have a greater
impact on a smaller company's stock price than is the case for a larger company.
Further, smaller company stocks may perform in different cycles than larger
company stocks. Accordingly, REIT shares can be more volatile than -- and at
times will perform differently from -- large company stocks such as those found
in the Dow Jones Industrial Average.
Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. It is possible that the Fund may invest in a real estate
company which purports to be a REIT but which fails to qualify as a REIT. In the
event of any such unexpected failure to qualify as a REIT, the company would be
subject to corporate-level taxation, significantly reducing the return to the
Fund on its investment in such company. REITs could possibly fail to qualify for
tax-free pass-through of income under the Code, or to maintain their exemptions
from registration under the 1940 Act. The above factors may also adversely
affect a borrower's or a lessee's ability to meet its obligations to the REIT.
In the event of a default by a borrower or lessee, the REIT may experience
delays in enforcing its rights as a creditor or lessor and may incur substantial
costs associated with protecting its investments.
INTEREST RATE TRANSACTIONS RISK
The Fund may enter into a swap or cap transaction to attempt to protect
itself from increasing dividend or interest expenses resulting from increasing
short-term interest rates. A decline in interest rates may result in a decline
in the value of the swap or cap, which may result in a decline in the net asset
value of the Fund. See "Interest Rate Transactions."
RISKS OF INVESTMENT IN LOWER-RATED SECURITIES
Fixed-income securities of below grade investment quality (Ba/BB or below)
are commonly referred to as junk bonds. Securities of below investment grade
quality are regarded as having predominately speculative characteristics with
respect to capacity to pay interest and repay principal.
Lower-rated securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of lower-rated securities have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. Yields on
lower-rated securities will fluctuate. If the issuer of lower-rated securities
defaults, the Fund may incur additional expenses to seek recovery.
The secondary markets in which lower-rated securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the net asset value of the Fund. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities, and adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon. New laws and
proposed new laws may adversely impact the market for lower-rated securities.
The Fund may only invest in high yield securities that are rated CCC or
higher by S&P, rated Caa or higher by Moody's, or rated CCC or higher by Fitch,
or unrated securities determined by Security Capital to be of comparable
quality. The issuers of these securities have a currently identifiable
vulnerability to default
21
and such issues may be in default or there may be present elements of danger
with respect to principal or interest. The Fund will not invest in securities
which are in default at the time of purchase.
NON-DIVERSIFIED STATUS
Because the Fund is classified as "non-diversified" under the 1940 Act, it
can invest a greater portion of its assets in obligations of a single issuer. As
a result, the Fund will be more susceptible than a more widely diversified fund
to any single corporate, economic, political or regulatory occurrence. See "The
Fund's Investments."
RECENT DEVELOPMENTS
As a result of the terrorist attacks on September 11, 2001, the U.S.
equities markets were closed for a four day period. These terrorist attacks and
related events have led to increased short-term market volatility and may have
long-term effects on U.S. and world economies and markets. A similar disruption
of the financial markets could impact interest rates, auctions, secondary
trading, ratings, credit risk, inflation and other factors affecting the TAPS.
In addition, the potential adverse impact on Fund service providers may affect
the Fund's operations, although the Fund is not aware at this time of
significant operating difficulties at its service providers.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and Preferred Shares, including TAPS,
voting together as a single class, and the approval of the holders of a majority
of the outstanding Preferred Shares, including TAPS, voting as a separate class.
The Fund is subject to guidelines which are more limiting than the investment
restriction set forth above in order to obtain and maintain ratings from Moody's
or Fitch on the TAPS. See "Investment Objectives -- Investment Restrictions" in
the statement of additional information for a complete list of the fundamental
and non-fundamental investment policies of the Fund.
LIMITED BORROWINGS
Under the requirements of the 1940 Act, the Fund, immediately after
issuance of any Borrowings that are senior securities representing indebtedness
(as defined in the 1940 Act) must have an asset coverage of at least 300%. With
respect to any Borrowings that are senior securities representing indebtedness,
asset coverage means the ratio which the value of the total assets of the Fund,
less all liabilities and indebtedness not represented by senior securities bears
to the aggregate amount of such Borrowings that are senior securities
representing indebtedness issued by the Fund. Certain types of Borrowings may
result in the Fund being subject to covenants in credit agreements relating to
asset coverages or portfolio composition or otherwise. In addition, the Fund may
be subject to certain restrictions imposed by guidelines of one or more rating
agencies which may issue ratings for commercial paper or notes issued by the
Fund. Such restrictions may be more stringent than those imposed by the 1940
Act.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by NIAC and Security Capital.
There are seven trustees of the Fund, one of whom is an "interested person" (as
defined in the 1940 Act) and six of whom are not "interested persons." The names
and business
22
addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the statement of additional information.
INVESTMENT ADVISER AND SUBADVISER
NIAC, 333 West Wacker Drive, Chicago, Illinois 60606, serves as the
investment adviser to the Fund. NIAC serves as investment adviser to investment
portfolios with approximately $2.4 billion in assets under management as of
September 30, 2001. See the statement of additional information under
"Investment Advisers."
NIAC is responsible for the selection of the subadviser and ongoing
monitoring of the subadviser, managing the Fund's business affairs and providing
certain clerical, bookkeeping and other administrative services.
NIAC is a wholly owned subsidiary of Nuveen, 333 West Wacker Drive,
Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates have over
$75 billion of net assets under management or surveillance. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
Security Capital, 11 South LaSalle Street, 2nd Floor, Chicago, Illinois
60603, is the subadviser to the Fund. Security Capital is an indirect, wholly
owned subsidiary of SCGI, a publicly traded company that is one of the country's
leading real estate investors and operators, with interests in companies having
a total market capitalization of approximately $18.98 billion as of October 31,
2001. On December 17, 2002, G.E. Capital Corp., a subsidiary of General Electric
Co., announced its intention to acquire SCGI. The transaction is proposed to
close during the first half of 2002. There is no assurance that the transaction
will be completed.
Security Capital, which is registered as an investment adviser with the
Securities and Exchange Commission, commenced operations in January 1995 and had
approximately $2.38 billion in assets under management as of October 31, 2001.
A team of full-time Security Capital professionals, working together as the
Fund's Portfolio Management Committee, is primarily responsible for overseeing
the day-to-day operations of the Fund. See "The Fund's Investments -- Investment
Process."
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between NIAC and the Fund,
the Fund has agreed to pay for the services and facilities provided by NIAC an
annual management fee, payable on a monthly basis, according to the following
schedule:
AVERAGE DAILY MANAGED ASSETS(1) MANAGEMENT FEE
------------------------------- --------------
Up to $500 million.......................................... .9000%
$500 million to $1 billion.................................. .8750%
$1 billion to $1.5 billion.................................. .8500%
$1.5 billion to $2 billion.................................. .8200%
$2 billion and over......................................... .8000%
---------------
(1) Net assets including assets attributable to Preferred Shares, including
TAPS, and the principal amount of Borrowings.
23
Security Capital will receive from NIAC a percent of the management fee
(net of the reimbursements described below) according to the following schedule:
PERCENTAGE OF
AVERAGE DAILY MANAGED ASSETS(1) MANAGEMENT FEE
------------------------------- --------------
Up to $125 million.......................................... 50.0%
$125 million to $150 million................................ 47.5%
$150 million to $175 million................................ 45.0%
$175 million to $200 million................................ 42.5%
$200 million and over....................................... 40.0%
---------------
(1)Net assets including assets attributable to Preferred Shares, including TAPS,
and the principal amount of Borrowings.
In addition to the fee of NIAC, the Fund pays all other costs and expenses
of its operations, including compensation of its trustees (other than those
affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses of preparing, printing and distributing shareholder reports,
notices, proxy statements and reports to governmental agencies, and taxes, if
any.
For the first ten years of the Fund's operation, NIAC has contractually
agreed to reimburse the Fund for fees and expenses in the amounts, and for the
time periods, set forth below:
PERCENTAGE REIMBURSED
(AS A PERCENTAGE OF AVERAGE
YEAR ENDING NOVEMBER 30, DAILY MANAGED ASSETS)*
------------------------ ---------------------------
2001**................ 0.30%
2002.................. 0.30%
2003.................. 0.30%
2004.................. 0.30%
2005.................. 0.30%
2006.................. 0.30%
PERCENTAGE REIMBURSED
(AS A PERCENTAGE OF AVERAGE
YEAR ENDING NOVEMBER 30, DAILY MANAGED ASSETS)*
------------------------ ---------------------------
2007.................. 0.25%
2008.................. 0.20%
2009.................. 0.15%
2010.................. 0.10%
2011.................. 0.05%
---------------
* Net assets including assets attributable to Preferred Shares, including TAPS,
and the principal amount of Borrowings.
** From the commencement of operations.
NIAC has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond November 30, 2011.
LEGAL PROCEEDINGS
A lawsuit brought in June 1996 (Green et al. v. Nuveen Advisory Corp., et
al.) by certain individual common shareholders of six leveraged closed-end funds
sponsored by Nuveen is currently pending in federal district court. The
plaintiffs alleged that the leveraged closed-end funds engaged in certain
practices that violated various provisions of the 1940 Act and common law. The
plaintiffs also alleged, among other things, breaches of fiduciary duty by the
funds' directors and Nuveen Advisory Corp. ("Nuveen Advisory), an affiliate of
NIAC, and various misrepresentations and omissions in prospectuses and
shareholder reports relating to the use of leverage through the issuance and
periodic auctioning of preferred stock and the basis of the calculation and
payment of management fees to Nuveen Advisory and Nuveen. Plaintiffs also filed
a motion to certify defendant and plaintiff classes. The defendants filed
motions to dismiss the entire lawsuit asserting that the claims are without
merit and to oppose certification of any classes.
On March 30, 1999, the court entered a memorandum opinion and order (1)
granting the defendants' motion to dismiss all of plaintiffs' counts against the
defendants other than Nuveen Advisory, (2) granting
24
Nuveen Advisory's motion to dismiss all of plaintiffs' counts against it other
than breach of fiduciary duty under Section 36(b) of the 1940 Act, and (3)
denying the plaintiffs' motion to certify a plaintiff class and a defendant
class. No appeal was made by plaintiffs of this decision, and the remaining
Section 36(b) count against Nuveen Advisory has proceeded through the discovery
phase.
As to alleged damages, plaintiffs have claimed as damages the portion of
all advisory compensation received by Nuveen Advisory from the funds during the
period from June 21, 1995 to the present that is equal to the proportion of each
of such fund's preferred stock to its total assets. The preferred stock
constitutes approximately one third of the funds' assets so the amount claimed
would equal approximately one third of management fees received by Nuveen
Advisory for managing the funds during this period, or more than $60 million.
Nuveen Advisory believes that it has no liability and that plaintiffs have
suffered no damages and has filed a motion for summary judgment as to both
liability and damages. Plaintiffs have filed a partial motion for summary
judgment as to liability only. In a memorandum opinion and order dated September
6, 2001, the court granted Nuveen Advisory's motion for summary judgment and
denied plaintiffs' motion for partial summary judgment, thereby terminating the
litigation before the court. Plaintiffs appealed this decision on October 8,
2001.
While the Fund cannot assure you that the litigation will be decided in
Nuveen Advisory's favor on appeal, NIAC believes a decision, if any, against
Nuveen Advisory would have no material adverse effect on the Fund, its Common
Shares, or the ability of NIAC to perform its duties under the investment
management agreement.
DESCRIPTION OF TAPS
The following is a brief description of the terms of TAPS. This description
does not purport to be complete and is subject to and qualified in its entirety
by reference to the more detailed description of TAPS in the Fund's Statement
Establishing and Fixing the Rights and Preferences of Taxable Auctioned
Preferred Shares (the "Statement") attached as Appendix A to the statement of
additional information.
GENERAL
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of preferred shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees without the approval
of common shareholders. The Statement currently authorizes the issuance of
shares of TAPS as follows: 1,720, 1,720, 1,720 and 1,720 TAPS Series M, T, W and
F, respectively. The shares of TAPS have a liquidation preference of $25,000 per
share, plus all accumulated but unpaid dividends (whether or not earned or
declared) to the date of final distribution. The TAPS when issued and sold
through this Offering (i) will be fully paid and non-assessable, (ii) will not
be convertible into Common Shares or other capital stock of the Fund, (iii) will
have no preemptive rights, and (iv) will not be subject to any sinking fund. The
TAPS will be subject to optional and mandatory redemption as described below
under "-- Redemption."
Holders of TAPS will not receive certificates representing their ownership
interest in such shares. DTC will initially act as Securities Depository for the
Agent Members with respect to the TAPS.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, the Auction Agent will act as the transfer agent,
registrar, and paying agent for the TAPS. Furthermore, the Auction Agent will
send notices to holders of TAPS of any meeting at which holders of TAPS have the
right to vote. See "-- Voting Rights" below. However, the Auction Agent
generally will serve merely as the agent of the Fund, acting in accordance with
the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any share of TAPS, so long
as the Fund is current in the payment of dividends on the TAPS and on any other
capital shares of the Fund ranking on a parity with the TAPS with respect to the
payment of dividends or upon liquidation.
25
DIVIDENDS AND DIVIDEND PERIODS
General. Holders of TAPS will be entitled to receive, when, as and if
declared by the Board of Trustees, out of funds legally available therefor,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "-- Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the Common
Shares.
On the Business Day next preceding each Dividend Payment Date, the Fund is
required to deposit with the Paying Agent sufficient funds for the payment of
dividends. The Fund does not intend to establish any reserves for the payment of
dividends.
All monies paid to the Paying Agent for the payment of dividends shall be
held in trust for the payment of such dividends to the Holders. Each dividend
will be paid by the Paying Agent to the Holders as their names appear on the
share ledger or share records of the Fund, which Holder is expected to be the
nominee of the Securities Depository. The Securities Depository will credit the
accounts of the Agent Members of the beneficial owners in accordance with the
Securities Depository's normal procedures. The Securities Depository's current
procedures provide for it to distribute dividends in same-day funds to Agent
Members who are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. The Agent Member of a beneficial owner will be
responsible for holding or disbursing such payments on the applicable Dividend
Payment Date to such beneficial owner in accordance with the instructions of
such beneficial owner.
Dividends in arrears for any past Dividend Period may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to the
Holders as their names appear on the share ledger or share records of the Fund
on such date, not exceeding 15 days preceding the payment date thereof, as may
be fixed by the Board of Trustees. Any dividend payment shall first be credited
against the earliest accumulated but unpaid dividends. No interest will be
payable in respect of any dividend payment or payments which may be in arrears.
See "-- Default Period" below.
The amount of dividends per outstanding share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be
365, multiplying the amount so obtained by the liquidation value, and rounding
the amount so obtained to the nearest cent. During any Dividend Period of one
year or more, the amount of dividends per share payable on any Dividend Payment
Date (or in respect of dividends on another date in connection with a redemption
during such dividend period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year consisting of
twelve 30-day months.
Determination of Dividend Rate. The dividend rate for the initial Dividend
Period (i.e. the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date are set forth
on the inside cover page of the prospectus. For each subsequent Dividend Period,
subject to certain exceptions, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Fund has resulted from an Auction.
The initial Dividend Period for the TAPS shall be , , and
days for TAPS Series M, TAPS Series T, TAPS Series W and TAPS Series F,
respectively. Dividend Periods after the initial Dividend Period shall either be
Standard Rate Periods or, subject to certain conditions and with notice to
Holders, Special Rate Periods.
A Special Rate Period will not be effective unless Sufficient Clearing Bids
exist at the Auction in respect of such Special Rate Period (that is, in
general, the number of shares subject to Buy Orders by Potential Holders is at
least equal to the number of shares subject to Sell Orders by Existing Holders).
26
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. For
Dividend Periods of less than 30 days Dividend Payment Dates shall occur on the
first Business Day following such Dividend Period and, if greater than 30 days
then on a monthly basis on the first Business Day of each month within such
Dividend Period and on the Business Day following the last day of such Dividend
Period. Dividends will be paid through the Securities Depository on each
Dividend Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from Auction will not be greater than the Maximum Rate, which is equal
to 150% of the applicable AA Composite Commercial Paper Rate (for a Dividend
Period of fewer than 184 days) or the applicable Treasury Index Rate (for a
Dividend Period of 184 days or more (each, a "Reference Rate")), in each case
subject to upward but not downward adjustment in the discretion of the Board of
Trustees after consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund would be in compliance with the TAPS Basic
Maintenance Amount nor, for Standard Rate Periods or less only, will the
Applicable Rate be less than the Minimum Rate, which is 70% of the applicable AA
Composite Commercial Paper Rate. No minimum rate is specified for Auctions in
respect to Dividend Periods of more than the Standard Rate Period.
The Maximum Rate for the shares of TAPS will apply automatically following
an Auction for such shares in which Sufficient Clearing Bids have not been made
(other than because all shares of TAPS were subject to Submitted Hold Orders) or
following the failure to hold an Auction for any reason on the Auction Date
scheduled to occur (except for circumstances in which the Dividend Rate is the
Default Rate, as described below).
The All Hold Order Rate will apply automatically following an Auction in
which all of the outstanding shares are subject to (or are deemed to be subject
to) Hold Orders. The All Hold Order Rate is 80% of the applicable AA Composite
Commercial Paper Rate.
Prior to each Auction, Broker-Dealers will notify Holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Notification of Dividend Period. The Fund will designate the duration of
Dividend Periods of the TAPS; provided, however, that no such designation is
necessary for a Standard Rate Period and that any designation of a Special Rate
Period shall be effective only if (i) notice thereof shall have been given as
provided herein, (ii) any failure to pay in the timely manner to the Auction
Agent the full amount of any dividend on, or the redemption price of, the TAPS
shall have been cured as set forth under "-- Default Period," (iii) Sufficient
Clearing Bids shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period, (iv)
if the Fund shall have mailed a notice of redemption with respect to any shares,
as described under "-- Redemption" below, the Redemption Price with respect to
such shares shall have been deposited with the Paying Agent, and (v) in the case
of the designation of a Special Rate Period, the Fund has confirmed that, as of
the Auction Date next preceding the first day of such Special Rate Period, it
has Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount (as defined below) and has consulted with the
Broker-Dealers and has provided notice and a TAPS Basic Maintenance Certificate
(as defined below) to each Rating Agency which is then rating the TAPS and so
requires.
If the Fund proposes to designate any Special Rate Period, not fewer than 7
(or two Business Days in the event the duration of the Dividend Period prior to
such Special Rate Period is fewer than 8 days) nor more than 30 days prior to
the first day of such Special Rate Period, notice shall be (i) made by press
release and (ii) communicated by the Fund by telephonic or other means to the
Auction Agent and confirmed in writing promptly thereafter. Each such notice
shall state (A) that the Fund proposes to exercise its option to designate a
succeeding Special Rate Period, specifying the first and last days thereof and
(B) that the Fund will, by 3:00 p.m. New York City time, on the second Business
Day next preceding the first day of such Special Rate Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Special Rate
Period, subject to the terms of
27
any Specific Redemption Provisions, or (y) its determination not to proceed with
such Special Rate Period in which latter event the succeeding Dividend Period
shall be a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Fund shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as a Special Rate Period, specifying the
first and last days thereof and (B) the terms of any Specific Redemption
Provisions; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period, the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Dividend Period to the effect set forth in
clause (ii) above, thereby resulting in a Standard Rate Period.
Default Period. Subject to cure provisions, a "Default Period" with
respect to a particular Series will commence on any date the Fund fails to
deposit irrevocably in trust in same-day funds, with the Paying Agent by 12:00
noon, New York City time, (A) the full amount of any declared dividend on that
Series payable on the Dividend Payment Date (a "Dividend Default") or (B) the
full amount of any redemption price (the "Redemption Price") payable on the date
fixed for redemption (the "Redemption Date") (a "Redemption Default") and
together with a Dividend Default, hereinafter referred to as "Default"). Subject
to cure provisions, a Default Period with respect to a Dividend Default or a
Redemption Default shall end on the Business Day on which, by 12:00 noon, New
York City time, all unpaid dividends and any unpaid Redemption Price shall have
been deposited irrevocably in trust in same-day funds with the Paying Agent. In
the case of a Dividend Default, the Applicable Rate for each Dividend Period
commencing during a Default Period will be equal to the Default Rate, and each
subsequent Dividend Period commencing after the beginning of a Default Period
shall be a Standard Rate Period; provided, however, that the commencement of a
Default Period will not by itself cause the commencement of a new Dividend
Period. No Auction shall be held during a Default Period applicable to that
Series of TAPS. No Default Period with respect to a Dividend Default or
Redemption Default shall be deemed to commence if the amount of any dividend or
any Redemption Price due (if such default is not solely due to the willful
failure of the Corporation) is deposited irrevocably in trust, in same-day funds
with the Paying Agent by 12:00 noon, New York City time within three Business
Days after the applicable Dividend Payment Date or Redemption Date, together
with an amount equal to the Default Rate applied to the amount of such
non-payment based on the actual number of days comprising such period divided by
360 for each Series. The Default Rate shall be equal to the Reference Rate
multiplied by three (3).
Subject to the foregoing, and any requirements of Massachusetts law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the TAPS, the Fund intends to distribute such net
investment income to the holders of the Common Shares. The term "net investment
income" includes interest, dividends, net short-term capital gains and other
income received or accrued less the advisory fee, bank custodian charges, taxes
(except capital gains taxes) and other expenses properly chargeable against
income, but generally does not include net capital gains, dividends paid in
shares of stock, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. The Fund also intends to
distribute any realized net capital gains (defined as the excess of net
long-term capital gains over net short-term capital losses) annually to the
holders of the Common Shares (subject to the prior rights of the holders of the
TAPS) subject to the foregoing and any requirements of Massachusetts law.
28
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not (i) declare any dividend with respect
to the TAPS if, at the time of such declaration (and after giving effect
thereto), asset coverage with respect to the Fund's Borrowings that are senior
securities representing indebtedness (as defined in the 1940 Act), would be less
than 200% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
declaring dividends on its preferred shares) or (ii) declare any other
distribution on the TAPS or purchase or redeem shares of TAPS if at the time of
the declaration (and after giving effect thereto), asset coverage with respect
to the Fund's Borrowings that are senior securities representing indebtedness
would be less than 300% (or such higher percentage as may in the future be
specified in or under the 1940 Act as the minimum asset coverage for senior
securities representing indebtedness of a closed-end investment company as a
condition of declaring distributions, purchases or redemptions of its shares of
beneficial interest). "Senior securities representing indebtedness" generally
means any bond, debenture, note or similar obligation or instrument constituting
a security (other than shares of beneficial interest) and evidencing
indebtedness and could include the Fund's obligations under any Borrowings. For
purposes of determining asset coverage for senior securities representing
indebtedness in connection with the payment of dividends or other distributions
on or purchases or redemptions of stock, the term "senior security" does not
include any promissory note or other evidence of indebtedness issued in
consideration of any loan, extension or renewal thereof, made by a bank or other
person and privately arranged, and not intended to be publicly distributed. The
term "senior security" also does not include any such promissory note or other
evidence of indebtedness in any case where such a loan is for temporary purposes
only and in an amount not exceeding 5% of the value of the total assets of the
Fund at the time when the loan is made; a loan is presumed under the 1940 Act to
be for temporary purposes if it is repaid within 60 days and is not extended or
renewed; otherwise it is presumed not to be for temporary purposes. For purposes
of determining whether the 200% and 300% asset coverage requirements described
above apply in connection with dividends or distributions on or purchases or
redemptions of TAPS, such asset coverages may be calculated on the basis of
values calculated as of a time within 48 hours (not including Sundays or
holidays) next preceding the time of the applicable determination.
In addition, a declaration of a dividend or other distribution on or
purchase or redemption of TAPS may be prohibited (i) at any time that an event
of default under any Borrowings has occurred and is continuing; or (ii) after
giving effect to such declaration, the Fund would not have eligible portfolio
holdings with an aggregated Discounted Value at least equal to any asset
coverage requirements associated with such Borrowings; or (iii) the Fund has not
redeemed the full amount of Borrowings, if any, required to be redeemed by any
provision for mandatory redemption.
Upon failure to pay dividends for two years or more, the holders of TAPS
will acquire certain additional voting rights. See "-- Voting Rights" below.
Such rights shall be the exclusive remedy of the holders of TAPS upon any
failure to pay dividends on the TAPS.
For so long as any shares of TAPS are outstanding, except in connection
with the liquidation of the Fund, or a refinancing of the TAPS as provided in
the Statement, the Fund will not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase, Common
Shares or other shares, if any, ranking junior to the TAPS as to dividends or
upon liquidation) in respect to Common Shares or any other shares of the Fund
ranking junior to or on a parity with the TAPS as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the TAPS as
to dividends and upon liquidation) or any such parity shares (except by
conversion into or exchange for shares of the Fund ranking junior to or on a
parity with the TAPS as to dividends and upon liquidation), unless (i) there is
no event of default under any Borrowings that is continuing; (ii) immediately
after such transaction, the Fund would have Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount (as defined
below) and the Fund would maintain the 1940 Act TAPS Asset Coverage (as defined
below) (see "-- Asset Maintenance"); (iii) immediately after such transaction,
the Fund would have eligible portfolio holdings with an aggregated discounted
value at least equal to the asset coverage
29
requirements, if any, under any Borrowings; (iv) full cumulative dividends on
the TAPS due on or prior to the date of the transaction have been declared and
paid; (v) the Fund has redeemed the full number of shares of TAPS required to be
redeemed by any provision for mandatory redemption contained in the Statement
(see "-- Redemption"); and (vi) the Fund has redeemed the full amount of any
Borrowings required to be redeemed by any provision for mandatory redemption.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem shares of TAPS having a
Dividend Period of one year or less, in whole or in part, on the Dividend
Payment Date upon not less than 15 days' and not more than 40 days' prior
notice. The optional redemption price per share shall be $25,000 per share, plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to the date fixed for redemption. Shares of TAPS having a
Dividend Period of more than one year are redeemable at the option of the Fund,
in whole or in part, prior to the end of the relevant Dividend Period, subject
to any Specific Redemption Provisions, which may include the payment of
redemption premiums to the extent required under any applicable Specific
Redemption Provisions. The Fund shall not effect any optional redemption unless
after giving effect thereto (i) the Fund has available certain Deposit
Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of TAPS by reason of the
redemption of TAPS on such date fixed for the redemption and (ii) the Fund would
have Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount.
The Fund also reserves the right to repurchase TAPS in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the TAPS, but is
under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any Valuation
Date, Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount or, as of the last Business Day of any month, the
1940 Act TAPS Asset Coverage, and such failure is not cured within ten Business
Days following such Valuation Date in the case of a failure to maintain the TAPS
Basic Maintenance Amount on the last Business Day of the following month in the
case of a failure to maintain the 1940 Act TAPS Asset Coverage as of such last
Business Day (each an "Asset Coverage Cure Date"), the TAPS will be subject to
mandatory redemption out of funds legally available therefore. See "-- Asset
Maintenance." The number of shares of TAPS to be redeemed in such circumstances
will be equal to the lesser of (i) the minimum number of shares of TAPS the
redemption of which, if deemed to have occurred immediately prior to the opening
of business on the relevant Asset Coverage Cure Date, would result in the Fund
having sufficient Eligible Assets to restore the TAPS Basic Maintenance Amount
or 1940 Act TAPS Asset Coverage, as the case may be, in either case as of the
relevant Asset Coverage Cure Date (provided that, if there is no such minimum
number of shares the redemption of which would have such result, all shares of
TAPS then outstanding will be redeemed), and (ii) the maximum number of shares
of TAPS that can be redeemed out of funds expected to be available therefore on
the Mandatory Redemption Date (as defined below) at the Mandatory Redemption
Price (as defined below).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the TAPS Basic Maintenance Amount or the 1940 Act TAPS Asset Coverage,
as the case may be, among the Holders of TAPS pro rata among the Holders of TAPS
in proportion to the number of shares they hold, by lot or by such other method
as the Fund shall deem fair and equitable, subject to mandatory redemption
provisions, if any.
The Fund is required to effect such a mandatory redemption not later than
30 days after the Asset Coverage Cure Date, as the case may be (the "Mandatory
Redemption Date"), except that if the Fund does not have funds legally available
for the redemption of, or is not otherwise legally permitted to redeem, all of
the required number of shares of TAPS which are subject to mandatory redemption,
or the Fund otherwise is unable to effect such redemption on or prior to such
Mandatory Redemption Date, the Fund will redeem those
30
shares of TAPS on the earliest practicable date on which the Fund will have such
funds available, upon notice to record owners of shares of TAPS and the Paying
Agent. The Fund's ability to make a mandatory redemption may be limited by the
provisions of the 1940 Act or Massachusetts law.
The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
plus (in the case of a Dividend Period of more than one year) any redemption
premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions
(the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the Fund
will file a notice of its intention to redeem with the SEC so as to provide at
least the minimum notice required by such Rule or any successor provision
(notice currently must be filed with the SEC generally at least 30 days prior to
the redemption date). The Fund shall deliver a notice of redemption to the
Auction Agent containing the information described below one Business Day prior
to the giving of notice to Holders in the case of optional redemptions as
described above and on or prior to the 30th day preceding the Mandatory
Redemption Date in the case of a mandatory redemption as described above. The
Auction Agent will use its reasonable efforts to provide telephonic notice to
each holder of TAPS called for redemption not later than the close of business
on the Business Day immediately following the Business Day on which the Auction
Agent determines the shares to be redeemed (or, during a Default Period with
respect to such shares, not later than the close of business on the Business Day
immediately following the day on which the Auction Agent receives notice of
redemption from the Fund). Such telephonic notice will be confirmed promptly in
writing not later than the close of business on the third Business Day preceding
the redemption date by providing the notice sent by the Paying Agent to each
holder of record of shares of TAPS called for redemption, the Paying Agent (if
different from the Auction Agent) and the Securities Depository ("Notice of
Redemption"). Notice of Redemption will be addressed to the registered owners of
the TAPS at their addresses appearing on the share records of the Fund. Such
notice will set forth (i) the redemption date, (ii) the number and identity of
shares of TAPS to be redeemed, (iii) the redemption price (specifying the amount
of accumulated dividends to be included therein), (iv) that dividends on the
shares to be redeemed will cease to accumulate on such redemption date, and (v)
the provision under which redemption shall be made.
If fewer than all of the shares of a series of TAPS are redeemed on any
date, the shares to be redeemed on such date will be selected by the Fund on a
pro rata basis in proportion to the number of shares held by such holders, by
lot or by such other method as is determined by the Fund to be fair and
equitable, subject to the terms of any Specific Redemption Provisions. Shares of
TAPS may be subject to mandatory redemption as described herein notwithstanding
the terms of any Specific Redemption Provisions. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder of
all of the shares of TAPS, and the Securities Depository will determine the
number of shares to be redeemed from the account of the Agent Member of each
beneficial owner. Each Agent Member will determine the number of shares to be
redeemed from the account of each beneficial owner for which it acts as agent.
An Agent Member may select for redemption shares from the accounts of some
beneficial owners without selecting for redemption any shares from the accounts
of other beneficial owners. Notwithstanding the foregoing, if neither the
Securities Depository nor its nominee is the record holder of all of the shares,
the particular shares to be redeemed shall be selected by the Fund by lot, on a
pro rata basis between each series or by such other method as the Fund shall
deem fair and equitable, as contemplated above.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, dividends on such shares should cease to
accumulate and such shares should be no longer deemed to be Outstanding for any
purpose and all rights of the owners of the shares so called for redemption will
cease and terminate, except the right of the owners of such shares to receive
the redemption price, but without any interest or additional amount. The Fund
shall be entitled to receive from the Paying Agent, promptly after the date
fixed for redemption, any cash deposited with the Paying Agent in excess of (i)
the aggregate redemption price of the shares of TAPS called for redemption on
such date and (ii) such other amounts, if any, to which holders of shares of
TAPS called for redemption may be entitled. The Fund will be entitled to
receive, from time to time, from the Paying Agent the interest, if any, earned
on such funds deposited with the Paying Agent
31
and the owners of shares so redeemed will have no claim to any such interest.
Any funds so deposited which are unclaimed two years after such redemption date
will be paid, to the extent permitted by law, by the Paying Agent to the Fund
upon its request. Thereupon, Holders of TAPS called for redemption may look only
to the Fund for payment.
So long as any shares of TAPS are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no shares of
TAPS may be redeemed unless all dividends in arrears on the outstanding shares
of TAPS, and all shares of beneficial interest of the Fund ranking on a parity
with the TAPS with respect to the payment of dividends or upon liquidation, have
been or are being contemporaneously paid or set aside for payment, except in
connection with the liquidation of the Fund in which case all shares of TAPS and
all shares ranking in a parity with the TAPS must receive proportionate amounts
and that the foregoing shall not prevent the purchase or acquisition of all the
Outstanding shares of the TAPS pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all Outstanding shares of the TAPS.
Except for the provisions described above, nothing contained in the
Statement limits any legal right of the Fund to purchase or otherwise acquire
any shares of TAPS outside of an Auction at any price, whether higher or lower
than the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any shares of TAPS for which Notice of Redemption has been
given and the Fund is in compliance with the 1940 Act TAPS Asset Coverage and
has Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount after giving effect to such purchase or
acquisition on the date thereof. Any shares which are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the outstanding shares of TAPS are redeemed or otherwise acquired by the Fund,
the Fund shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Trustees.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance requirements
in respect of the TAPS: (i) the Fund must maintain assets in its portfolio that
have a value, discounted in accordance with guidelines set forth by a rating
agency, at least equal to the aggregate liquidation preference of the TAPS plus
specified liabilities, payment obligations and other amounts; and (ii) the Fund
must maintain asset coverage for TAPS of at least 200%.
TAPS Basic Maintenance Amount. The Fund must maintain, as of each
Valuation Date on which any share of TAPS is Outstanding, Eligible Assets having
an aggregate Discounted Value at least equal to the TAPS Basic Maintenance
Amount, which is calculated separately for Moody's (if Moody's is then rating
the TAPS), Fitch (if Fitch is then rating the TAPS) and any Other Rating Agency
which is then rating the TAPS and so requires. If the Fund fails to maintain
Eligible Assets having an aggregated Discounted Value at least equal to the TAPS
Basic Maintenance Amount as of any Valuation Date and such failure is not cured
on or before the related Asset Coverage Cure Date, the Fund will be required in
certain circumstances to redeem certain of the shares of TAPS. See
"-- Redemption -- Mandatory Redemption."
The "TAPS Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to:
(i)(A) the sum of the products resulting from multiplying the number
of Outstanding TAPS on such date by the liquidation preference (and
redemption premium, if any) per share; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or not
earned or declared) to and including the first Dividend Payment Date for
each Outstanding TAPS that follows such
32
Valuation Date (or to the 30th day after such Valuation Date, if such 30th
day occurs before the first following Dividend Payment Date); (C) the
amount of anticipated Fund non-interest expenses for the 90 days subsequent
to such Valuation Date; (D) the amount of the current outstanding balances
of any indebtedness which is senior to the TAPS plus interest actually
accrued together with 30 days additional interest on the current
outstanding balances calculated at the current rate; and (E) any current
liabilities, payable during the 30 days subsequent to such Valuation Date,
including, without limitation, indebtedness due within one year and any
redemption premium due with respect to Preferred Shares for which a Notice
of Redemption has been given, as of such Valuation Date, to the extent not
reflected in any of (i)(A) through (i)(D): less
(ii) the sum of any cash plus the value of any of the Fund's assets
irrevocably deposited by the Fund for the payment of any (i)(B) through
(i)(F) ("value," for purposes of this clause (ii), means the Discounted
Value of the security, except that if the security matures prior to the
relevant redemption payment date and is either fully guaranteed by the U.S.
Government or is rated at least P-1 by Moody's, it will be valued at its
face value).
The Market Value of the Fund's portfolio securities (used in calculating
the Discounted Value of Eligible Assets) is calculated in the same manner as the
Fund calculates its net asset value. See "Net Asset Value" in the statement of
additional information.
The discount factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets, and guidelines for determining
the Market Value of the Fund's portfolio holdings for purposes of determining
compliance with the TAPS Basic Maintenance Amount are based on criteria
established in connection with rating the TAPS. The Discount Factor relating to
any asset of the Fund, the TAPS Basic Maintenance Amount, the assets eligible
for inclusion in the calculation of the Discounted Value of the Fund's portfolio
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the Fund, without shareholder approval, but only in
the event that the Fund receives written confirmation from each rating agency
which is then rating the TAPS and which so requires that any such changes would
not impair its rating.
A rating agency's guidelines will apply to shares of TAPS only so long as
such rating agency is rating such shares. The Fund will pay certain fees to
Moody's and Fitch for rating shares of TAPS. The ratings assigned to TAPS are
not recommendations to buy, sell or hold shares of TAPS. Such ratings may be
subject to revision or withdrawal by the assigning rating agent at any time. Any
rating of TAPS should be evaluated independently of any other rating.
1940 Act TAPS Asset Coverage. The Fund is also required to maintain, with
respect to TAPS, as of the last Business Day on any month in which any share of
TAPS is outstanding, asset coverage of at least 200% (or such other percentage
as may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing shares of a closed-end investment
company as a condition of declaring dividends on its common shares) ("1940 Act
TAPS Asset Coverage"). If the Fund fails to maintain the 1940 Act TAPS Asset
Coverage as of the last Business Day of any month and such failure is not cured
as of the related Asset Coverage Cure Date, the Fund will be required to redeem
certain shares of TAPS. See "-- Redemption -- Mandatory Redemption."
The Fund estimates that based on the composition of its portfolio as of
November 30, 2001, assuming the issuance of 3,400,000 Common Shares on December
7, 2001, less the offering costs related thereto, and the issuance on the date
thereof of all shares of TAPS offered hereby and giving effect to the deduction
of sales load and estimated offering costs related thereto estimated at
$2,017,208, the 1940 Act TAPS Asset Coverage with respect to TAPS, will be
computed as follows:
Value of Fund assets less liabilities not
representing senior securities $573,570,928
--------------------------------------------------------- = ------------ = 333%
Senior securities representing indebtedness $172,000,000
plus aggregate liquidation preference of the TAPS
33
Notices. Upon the Date of Original Issue and in certain other
circumstances, the Fund is required to deliver to the Auction Agent and to any
Rating Agency which is then rating the TAPS (i) a certificate with respect to
the calculation of the TAPS Basic Maintenance Amount; (ii) a certificate with
respect to the calculation of the 1940 Act TAPS Asset Coverage and the value of
the portfolio holdings of the Fund; and (iii) a letter proposed by the Fund's
independent accountants regarding the accuracy of such calculations. See
"Description of TAPS -- Notices" in the statement of additional information.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of TAPS then outstanding and any
other shares ranking on a parity with the TAPS then outstanding, in preference
to the holders of Common Shares, will be entitled to payment out of the assets
of the Fund, or the proceeds thereof, available for distribution to shareholders
after satisfaction of claims of creditors of the Fund, of a liquidation
preference in the amount equal to $25,000 per share of the TAPS, plus an amount
equal to accumulated dividends (whether or not earned or declared but without
interest) to the date of payment of such preference is made in full or a sum
sufficient for the payment thereof is set apart with the Paying Agent. However,
holders of TAPS will not be entitled to any premium to which such holder would
be entitled to receive upon redemption of such shares of TAPS. After payment of
the full amount of such liquidation distribution, the owners of the TAPS will
not be entitled to any further participation in any distribution of assets of
the Fund.
If, upon any such liquidation, dissolution or winding up of the affairs of
the Fund, whether voluntary or involuntary, the assets of the Fund available for
distribution among the holders of all outstanding Preferred Shares, including
the TAPS, shall be insufficient to permit the payment in full to such holders of
the amounts to which they are entitled, then such available assets shall be
distributed among the holders of all outstanding Preferred Shares, including the
TAPS, ratably in any such distribution of assets according to the respective
amounts which would be payable on all such shares if all amounts thereon were
paid in full. Upon the dissolution, liquidation or winding up of the affairs of
the Fund, whether voluntary or involuntary, until payment in full is made to the
holders of TAPS of the liquidation distribution to which they are entitled, no
dividend or other distribution shall be made to the holders of shares of Common
Shares or any other class of shares of beneficial interest of the Fund ranking
junior to TAPS upon dissolution, liquidation or winding up and no purchase,
redemption or other acquisition for any consideration by the Fund shall be made
in respect of the shares of Common Shares or any other class of shares of
beneficial interest of the Fund ranking junior to TAPS upon dissolution,
liquidation or winding up.
A consolidation or merger of the Fund with or into any other company or
companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund.
VOTING RIGHTS
Except as otherwise indicated herein and except as otherwise required by
applicable law, holders of shares of TAPS have one vote per share and vote
together with holders of shares of Common Shares as a single class. Under
applicable rules of the American Stock Exchange, the Fund is currently required
to hold annual meetings of shareholders.
In connection with the election of the Board of Trustees, the holders of
outstanding Preferred Shares, including the TAPS, represented in person or by
proxy at said meeting, shall be entitled, as a class, to the exclusion of the
holders of all other securities and classes of beneficial interest of the Fund,
to elect two Trustees of the Fund. The holders of outstanding Common Shares and
Preferred Shares, including the TAPS, voting together as a single class, shall
elect the balance of the Trustees. Notwithstanding the foregoing, if (a) at the
close of business on any Dividend Payment Date accumulated dividends (whether or
not earned or declared) on outstanding shares of the Preferred Shares, including
outstanding TAPS, equal to at least two full years' dividends shall be due and
unpaid; or (b) any time holders of any other Preferred Shares are entitled under
the 1940 Act to elect a majority of the Trustees of the Fund, then the number of
members constituting the Board shall automatically be increased by the smallest
number that, when added to the two
34
Trustees elected exclusively by the holders of Preferred Shares, including the
TAPS, as described above, would constitute a majority of the Board as so
increased by such smallest number; and at a special meeting of shareholders
which will be called and held as soon as practicable, and at all subsequent
meetings at which Trustees are to be elected, the holders of outstanding
Preferred Shares, including the TAPS, voting as a separate class, will be
entitled to elect the smallest number of additional Trustees that, together with
the two Trustees which such holders will be in any event entitled to elect,
constitutes a majority of the total number of Trustees of the Fund as so
increased. The terms of office of the persons who are Trustees at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding
Preferred Shares, including the TAPS, for all past Dividend Periods, or the
Voting Period is otherwise terminated, the voting rights stated in the above
sentence shall cease, and the terms of office of all of the additional Trustees
elected by the holders of Preferred Shares, including the TAPS (but not of the
Trustees with respect to whose election the holders of Common Shares were
entitled to vote or the two Trustees the holders of Preferred Shares, including
the TAPS, have the right to elect in any event), will terminate automatically.
Any shares of TAPS issued after the date hereof shall vote with the TAPS as a
single class on the matters described above, and the issuance of any other
shares of TAPS by the Fund may reduce the voting power of the TAPS.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, including the TAPS, determined with reference to a "majority
of outstanding voting securities" as the term is defined in Section 2(a)(42) of
the 1940 Act, voting as a separate class, is required to (i) amend, alter or
repeal any of the preferences, rights or powers of such class so as to affect
materially and adversely such preferences, rights or powers; (ii) increase the
authorized number of shares of Preferred Shares; (iii) create, authorize or
issue shares of any class of capital stock ranking senior to or on a parity with
the Preferred Shares with respect to the payment of dividends or the
distribution of assets, or any securities convertible into, or warrants, options
or similar rights to purchase, acquire or receive, such shares of beneficial
interest ranking senior to or on parity with the Preferred Shares or reclassify
any authorized shares of beneficial interest of the Fund into any shares ranking
senior to or on parity with the Preferred Shares (except that, the Board of
Trustees, without the vote or consent of the holders of Preferred Shares, may
from time to time authorize, create and classify, and the Fund may from time to
time issue, shares or series of Preferred Shares, including other series of
TAPS, ranking on a parity with the TAPS with respect to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up to
the affairs of the Fund, and may authorize, reclassify and/or issue any
additional shares of each Series of TAPS, including shares previously purchased
or redeemed by the Fund, subject to continuing compliance by the Fund with 1940
Act TAPS Asset Coverage and TAPS Basic Maintenance Amount requirements; (iv)
institute any proceedings to be adjudicated bankrupt or insolvent, or consent to
the institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, Trustee, sequestrator (or other
similar official) of the Fund or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(v) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
TAPS, (D) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness permitted under
clause (vi) below and (E) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's custodian and the
Auction Agent, or (vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions;
35
provided, however, that transfers of assets by the Fund subject to an obligation
to repurchase shall not be deemed to be indebtedness for purposes of this
provision to the extent that after any such transaction the Fund has Eligible
Assets with an aggregate Discounted Value at least equal to the TAPS Basic
Maintenance Amount as of the immediately preceding Valuation Date.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of TAPS, voting separately from any other series, shall be
required with respect to any matter that materially and adversely affects the
rights, preferences, or powers of such series in a manner different from that of
other series of classes of the Fund's shares of capital stock. For purposes of
the foregoing, no matter shall be deemed to adversely affect any right,
preference or power unless such matter (i) alters or abolishes any preferential
right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish)
any restriction on transfer applicable to such series.
The foregoing voting provisions will not apply with respect to the TAPS if,
at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption, and sufficient funds shall have been
deposited in trust to effect such redemption.
The Board of Trustees, without the vote or consent of any holder of
Preferred Shares, including TAPS, or any other shareholder of the Fund, may from
time to time adopt, amend, alter or repeal any or all of any definitions or add
covenants and other obligations of the Fund or confirm the applicability of
covenants and other obligations set forth herein in connection with obtaining or
maintaining the rating of Moody's, Fitch or any Other Rating Agency with respect
to TAPS and any such amendment, alteration or repeal will not be deemed to
affect the preferences, rights or powers of TAPS or the holders thereof,
provided the Board of Trustees receives written confirmation from the relevant
rating agency (such confirmation in no event being required to be obtained from
a particular rating agency with respect to definitions or other provisions
relevant only to another rating agency's rating) that any such amendment,
alteration or repeal would not adversely affect the rating then assigned by such
rating agency.
Also, subject to compliance with applicable law, the Board of Trustees may
amend the definition of Maximum Rate to increase the percentage amount by which
the Reference Rate is multiplied to determine the Maximum Rate shown therein
without the vote or consent of the holders of the Preferred Shares, including
TAPS, or any other shareholder of the Fund, and without receiving any
confirmation from any rating agency after consultation with the Broker-Dealers,
provided that immediately following any such increase the Fund would be in
compliance with the TAPS Basic Maintenance Amount.
Unless otherwise required by law, holders of shares of TAPS shall not have
any relative rights or preferences or other special rights other than those
specifically set forth in the Statement. The holders of shares of TAPS shall
have no rights to cumulative voting. In the event that the Fund fails to pay any
dividends on the shares of TAPS, the exclusive remedy of the holders shall be
the right to vote for Trustees as discussed above.
THE AUCTION
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
) which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for each series of TAPS so long as the Applicable Rate for shares of such
series is to be based on the results of an Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
36
Broker-Dealer Agreements. Each Auction requires the participation of one
or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for TAPS.
The Auction Agent after each Auction for TAPS will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate Period
of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of TAPS placed by such Broker-Dealer
at such Auction. For the purposes of the preceding sentence, TAPS will be placed
by a Broker-Dealer if such shares were (a) the subject of Hold Orders deemed to
have been submitted to the Auction Agent by the Broker-Dealer and were acquired
by such Broker-Dealer for its own account or were acquired by such Broker-Dealer
for its customers who are Beneficial Owners or (b) the subject of an Order
submitted by such Broker-Dealer that is (i) a Submitted Bid of an Existing
Holder that resulted in such Existing Holder continuing to hold such shares as a
result of the Auction or (ii) a Submitted Bid of a Potential Holder that
resulted in such Potential Holder purchasing such shares as a result of the
Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for series of TAPS,
each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares of
such series (a "Beneficial Owner") may submit orders ("Orders") with respect to
shares of such series to that Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold shares of such series without
regard to the Applicable Rate for shares of such series for the next Rate
Period thereof.
- Bid -- indicating its desire to sell shares of such series at $25,000 per
share if the Applicable Rate for shares of such series for the next Rate
Period thereof is less than the rate specified in such Bid (also known as
a hold-at-a-rate order).
- Sell Order -- indicating its desire to sell shares of such series at
$25,000 per share without regard to the Applicable Rate for shares of
such series for the next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of TAPS then held by such
Beneficial Owner. A Beneficial Owner of shares of such series that submits a Bid
with respect to shares of such series to its Broker-Dealer having a rate higher
than the Maximum Rate for shares of such series on the Auction Date therefore
will be treated as having submitted a Sell Order with respect to such shares to
its Broker-Dealer. A Beneficial Owner of shares of such series that fails to
submit an Order with respect to such shares to its Broker-Dealer will be deemed
to have submitted a Hold Order with respect to such shares of such series to its
Broker-Dealer; provided, however, that if a Beneficial Owner of shares of such
series fails to submit an Order with respect to shares of such series to its
Broker-Dealer for an Auction relating to a Rate Period of more than 28 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order
with respect to such shares to its Broker-Dealer. A Sell Order shall constitute
an irrevocable offer to sell the shares of TAPS subject thereto. A Beneficial
Owner that offers to become the Beneficial Owner of additional shares of TAPS
is, for purposes of such offer, a Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of a series of
TAPS but that wishes to purchase shares of such series, or that is a Beneficial
Owner of shares of such series that wishes to purchase additional shares of such
series (in each case, a "Potential Beneficial Owner"), may submit Bids to its
Broker-Dealer in which it offers to purchase shares of such series at $25,000
per share if the Applicable Rate for shares of such series for the next Rate
Period thereof is not less than the rate specified in such Bid. A Bid
37
placed by a Potential Beneficial Owner of shares of such series specifying a
rate higher than the Maximum Rate for shares of such series on the Auction Date
therefore will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of TAPS held by it or customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of TAPS held by it. A Broker-Dealer may also
submit Orders to the Auction Agent for its own account as an Existing Holder or
Potential Holder, provided it is not an affiliate of the Fund.
If Sufficient Clearing Bids for a series of TAPS exist (that is, the number
of shares of such series subject to Bids submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Potential Holders with rates
equal to or lower than the Maximum Rate for shares of such series is at least
equal to the number of shares of such series subject to Sell Orders submitted or
deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of
Existing Holders), the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof will be the lowest rate specified in the
Submitted Bids which, taking into account such rate and all lower rates bid by
Broker-Dealers as or on behalf of Existing Holders and Potential Holders, would
result in Existing Holders and Potential Holders owning the shares of such
series available for purchase in the Auction. If Sufficient Clearing Bids a
series of TAPS do not exist, the Applicable Rate for shares of such series for
the next succeeding Rate Period thereof will be the Maximum Rate for shares of
such series on the Auction Date therefore. In such event, Beneficial Owners of
shares of such series that have submitted or are deemed to have submitted Sell
Orders may not be able to sell in such Auction all shares of such series subject
to such Sell Orders. If Broker-Dealers submit or are deemed to have submitted to
the Auction Agent Hold Orders with respect to all Existing Holders of a series
of TAPS, the Applicable Rate for shares of such series for the next succeeding
Rate Period thereof will be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of TAPS that is
fewer than the number of shares of such series specified in its Order. To the
extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as Existing Holders or Potential Holders in respect of
customer Orders will be required to make appropriate pro rata allocations among
their respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
SECONDARY MARKET TRADING AND TRANSFER OF TAPS
The Broker-Dealers are expected to maintain a secondary trading market of
TAPS outside of Auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that such secondary trading
market of TAPS will provide owners with liquidity of investment. TAPS are not
registered on any stock exchange or on the Nasdaq Stock Market. Investors who
purchase shares in an Auction for a Special Rate Period should note that because
the dividend rate on such shares will be fixed for the length of such Rate
Period, the value of the shares may fluctuate in response to changes in interest
rates,
38
and may be more or less than their original cost if sold on the open market in
advance of the next Auction therefore, depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of TAPS only in whole shares and only (1) pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the Auction Procedures,
(2) to a Broker-Dealer or (3) to such other persons as may be permitted by the
Fund; provided, however, that (a) a sale, transfer or other disposition of TAPS
from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of the foregoing if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other person,
if permitted by the Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
DESCRIPTION OF BORROWINGS
The Declaration authorizes the Fund, without prior approval of holders of
Common and Preferred Shares, including TAPS, to borrow money. In this
connection, the Fund may issue notes or other evidence of indebtedness
(including bank borrowings or commercial paper) and may secure any such
borrowings by mortgaging, pledging or otherwise subjecting as security the
Fund's assets. In connection with such borrowing, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any such requirements will increase the
cost of borrowing over the stated interest rate.
Limitations. Under the requirements of the 1940 Act, the Fund, immediately
after issuing any Borrowings that are senior securities representing
indebtedness (as defined in the 1940 Act), must have an asset coverage of at
least 300%. With respect to any Borrowings, asset coverage means the ratio which
the value of the total assets of the Fund, less all liabilities and indebtedness
not represented by senior securities, bears to the aggregate amount of any such
Borrowings that are senior securities representing indebtedness, issued by the
Fund. Certain types of Borrowings may also result in the Fund being subject to
covenants in credit agreements relating to asset coverages or portfolio
composition or otherwise. In addition, the Fund may be subject to certain
restrictions imposed by guidelines of one or more rating agencies which may
issue ratings for commercial paper or notes issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.
Distribution Preference. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such Borrowings will be senior to
those of the TAPS shareholders, and the terms of any such Borrowings may contain
provisions which limit certain activities of the Fund, including the payment of
dividends to TAPS shareholders in certain circumstances.
Voting Rights. The 1940 Act does (in certain circumstances) grant to the
lenders to the Fund certain voting rights in the event of default in the payment
of interest on or repayment of principal. In the event that such provisions
would impair the Fund's status as a regulated investment company under the Code,
the Fund, subject to its ability to liquidate its relatively illiquid portfolio,
intends to repay the Borrowings. Any Borrowing will likely be ranked senior or
equal to all other existing and future borrowings of the Fund, including TAPS.
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Borrowings. If the Board of Trustees
determines to authorize any of the foregoing, the terms may be the same as, or
different from, the terms described above, subject to applicable law and the
Fund's Declaration.
DESCRIPTION OF COMMON SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
Common Shares, par value $0.01 per share. All Common Shares have equal rights to
the payment of dividends and the distribution of assets upon liquidation. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
39
"Certain Provisions in the Declaration of Trust," non-assessable, and will have
no pre-emptive or conversion rights or rights to cumulative voting. Whenever
TAPS are outstanding, Common shareholders will not be entitled to receive and
distributions from the Fund unless all accrued dividends on TAPS have been paid,
and unless asset coverage (as defined in the 1940 Act) with respect to TAPS
would be at least 200% after giving effect to the distributions.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees. The Declaration of Trust further provides
for indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration of Trust includes provisions that could limit the ability
of other entities or persons to acquire control of the Fund or to convert the
Fund to open-end status. Specifically, the Declaration of Trust requires a vote
by holders of at least two-thirds of the Common Shares and Preferred Shares,
including TAPS, voting together as a single class, except as described below, to
authorize (1) a conversion of the Fund from a closed-end to an open-end
investment company, (2) a merger or consolidation of the Fund, or a series or
class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund, or (5) removal of Trustees by shareholders, and
then only for cause, unless, with respect to (1) through (4), such transaction
has already been authorized by the affirmative vote of two-thirds of the total
number of Trustees fixed in accordance with the Declaration of Trust or the
Bylaws, in which case the affirmative vote of the holders of at least a majority
of the Fund's Common Shares and Preferred Shares, including TAPS, outstanding at
the time, voting together as a single class, is required; provided, however,
that where only a particular class or series is affected (or, in the case of
removing a Trustee, when the Trustee has been elected by only one class), only
the required vote by the applicable class or series will be required. Approval
of shareholders is not required, however, for any transaction, whether deemed a
merger, consolidation, reorganization or otherwise whereby the Fund issues
Common Shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the Common Shares and Preferred Shares, including TAPS, voting
together as a single class. In the case of the conversion of the Fund to an
open-end investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
Preferred Shares, including TAPS, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's Preferred
Shares, including TAPS, outstanding at the time, voting as a separate class, or,
if such action has been authorized by the affirmative vote of two-thirds of the
total number of Trustees fixed in accordance with the Declaration of Trust or
the Bylaws, the affirmative vote of the holders of at least a majority of the
Fund's Preferred Shares, including TAPS, outstanding at the time, voting as a
separate class. The votes required to approve the conversion of the Fund from a
closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
Preferred Shares, including TAPS, are higher than those required by the 1940
Act. The Board of Trustees believes that the provisions of the Declaration of
Trust relating to such higher votes are in the best interest of the Fund and its
shareholders. See the statement of additional information under "Certain
Provisions in the Declaration of Trust."
40
Reference should be made to the Declaration of Trust on file with the SEC
for the full text of these provisions.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Fund to an open-end investment company. The Fund
cannot assure you that its Board of Trustees will decide to take any of these
actions, or that share repurchases or tender offers will actually reduce market
discount.
If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares, including TAPS, then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio), and the Common Shares
would no longer be listed on the American Stock Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less any redemption charge that is in effect at the time of redemption. See the
Statement of Additional Information under "Certain Provisions in the Declaration
of Trust" for a discussion of the voting requirements applicable to the
conversion of the Fund to an open-end company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
statement of additional information under "Repurchase of Fund Shares; Conversion
to Open-End Fund" for a further discussion of possible action to reduce or
eliminate such discount to net asset value.
TAX MATTERS
The following is intended to be a general summary of certain federal income
tax consequences of investing in TAPS. It is not intended as a complete
discussion of all such tax consequences, nor does it purport to deal with all
categories of investors. INVESTORS ARE THEREFORE ADVISED TO CONSULT WITH THEIR
TAX ADVISORS BEFORE MAKING AN INVESTMENT IN THE FUND.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify for, and to elect to be treated as, a regulated
investment company under Subchapter M of the Code and intends to qualify under
those provisions each year. As a regulated investment company, the Fund
generally will not be subject to federal income tax on its investment company
taxable income and net capital gains (net long-term capital gains in excess of
the sum of net short-term capital losses and capital loss carryovers from prior
years), if any, that it distributes to shareholders. However, the Fund would be
subject to corporate income tax (currently imposed at a maximum effective rate
of 35%) on any undistributed income. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% federal
excise tax. To prevent imposition of the tax, the Fund must
41
distribute or be deemed to have distributed, during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the twelve month period ending on October 31 of the calendar year,
and (3) all such ordinary income and capital gains for previous years that were
not distributed during such years. A distribution will be treated as having been
paid on December 31 if it is declared by the Fund in October, November or
December with a record date in such months and is paid by the Fund in January of
the following year. Accordingly, such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared. To
prevent application of the excise tax, the Fund intends to make distributions to
satisfy the calendar year distribution requirement.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify as a regulated investment company, the Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits, would generally constitute ordinary dividends, which
although eligible for the corporate dividends received deduction, would be
taxable to shareholders as ordinary income, even though such distributions might
otherwise (at least in part) have been treated as long-term capital gains in
such shareholders' hands.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TAPS
Under present law, the Fund is of the opinion that TAPS will constitute
stock of the Fund, and thus distributions with respect to TAPS (other than as
described below and other than distributions in redemption of TAPS subject to
Section 302(b) of the Code) will generally constitute dividends to the extent of
the Fund's current or accumulated earnings and profits, as calculated for
federal income tax purposes. Such dividends generally will be taxable as
ordinary income to holders but will not qualify for the dividends received
deduction available to corporations under Section 243 of the Code. Dividends
designated by the Fund as capital gain distributions will be treated as
long-term capital gains in the hands of holders regardless of the length of time
such holders have held their shares. The IRS currently requires that a regulated
investment company that has two or more classes of stocks allocate to each such
class proportionate amounts of each type of its income (such as ordinary income
and capital gains). Accordingly, the Fund intends to designate distributions
made with respect to TAPS as capital gain distributions in proportion to the
TAPS' share of total dividends paid during the year. See "Tax-Matters -- Federal
Income Tax Treatment of Holders of TAPS" in the Statement of Additional
Information.
SALE OF SHARES
The sale of TAPS shares by holders will generally be a taxable transaction
for federal income tax purposes. Selling holders of shares of TAPS will
generally recognize gain or loss in an amount equal to the difference between
the net proceeds of the sale and their adjusted tax basis in the shares of TAPS.
If such shares of TAPS are held as a capital asset, the gain or loss will
generally be a capital gain or loss. Similarly, a redemption by the Fund
(including a redemption resulting from liquidation of the Fund), if any, of all
the shares of TAPS actually and constructively held by a shareholder generally
will give rise to capital gain or loss if the shareholder does not own (and is
not regarded under certain tax law rules of constructive ownership as owning)
any Common Shares in the Fund, and provided that the redemption proceeds do not
represent declared but unpaid dividends. Other redemptions may also give rise to
capital gain or loss, but certain conditions imposed by the Code must be
satisfied to achieve such treatment. Any loss realized upon a taxable
disposition of shares of TAPS held for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gain
received with respect to such shares.
BACKUP WITHHOLDING
The Fund may be required to withhold, for U.S. federal income tax purposes,
a portion of all taxable distributions payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or who fail
to make required certifications or if the Fund or a shareholder has been
notified by the IRS
42
that the shareholder is subject to backup withholding. Corporate and certain
other shareholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability
provided the appropriate information is furnished to the IRS.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident aliens,
may be subject to U.S. withholding tax on certain distributions at a rate of 30%
or such lower rates as may be prescribed by any applicable treaty.
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the state, local or foreign tax consequences to them
of an investment in TAPS.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND REDEMPTION AGENT
The custodian of the assets of the Fund is JPMorgan Chase Bank, P.O. Box
660086, Dallas, Texas 75266-0086. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is also JPMorgan Chase Bank. [ ] is
the Auction Agent with respect to shares of TAPS and acts as transfer agent,
registrar, dividend disbursing agent and redemption agent with respect to the
TAPS.
43
UNDERWRITING
Salomon Smith Barney Inc. is acting as representative of the underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus, each underwriter named below has
agreed to purchase, and the Fund has agreed to sell to such underwriter, the
number of TAPS shares set forth opposite the name of such underwriter.
NUMBER OF SHARES
-----------------------------------------
NAME SERIES M SERIES T SERIES W SERIES F
---- -------- -------- -------- --------
Salomon Smith Barney Inc. ..................
Nuveen Investments..........................
A.G. Edwards & Sons, Inc. ..................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................
Prudential Securities Incorporated..........
UBS Warburg LLC.............................
Total.................................. 1,720 1,720 1,720 1,720
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the TAPS shares if they purchase any of the
shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $ per share. The sales load the Fund will pay of $ per share
is equal to % of the initial offering price. The underwriters may allow,
and dealers may reallow, a concession not to exceed $ per share on sales to
other dealers. After the initial public offering, the underwriters may change
the public offering price and the other selling terms. Investors must pay for
any TAPS shares purchased in the initial public offering on or before
, 2002.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with, and
perform services for, the Fund. Nuveen may engage in these transactions only in
compliance with the 1940 Act.
The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the statement of additional
information.
Nuveen, one of the underwriters, is the parent company of NIAC.
The Fund and NIAC have agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, or
to contribute to payments the underwriters may be required to make because of
any of those liabilities. Insofar as indemnification for liability arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
44
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
The settlement date for the purchase of the TAPS shares will be ,
2002, as agreed upon by the underwriters, the Fund and NIAC pursuant to Rule
15c6-1 under the Securities Exchange Act of 1934.
LEGAL OPINIONS
Certain legal matters in connection with the shares of TAPS offered hereby
will be passed upon for the Fund by Vedder, Price, Kaufman & Kammholz, Chicago,
Illinois, and for the underwriters by Simpson Thacher & Bartlett, New York, New
York. Vedder, Price, Kaufman & Kammholz and Simpson Thacher & Bartlett may rely
as to certain matters of Massachusetts law on the opinion of Bingham Dana, LLP,
Boston, Massachusetts.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549, Northeast Regional Office, 233 Broadway, New York, NY
10279, and Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661-2511. Reports, proxy statements,
and other information about the Fund can be inspected at the offices of the
American Stock Exchange.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and TAPS shares can be found in the
Fund's Registration Statement (including amendments, exhibits, and schedules) on
Form N-2 filed with the SEC. The SEC maintains a web site (http://www.sec.gov)
that contains each Fund's Registration Statement, other documents incorporated
by reference, and other information the Fund has filed electronically with the
SEC, including proxy statements and reports filed under the Securities Exchange
Act of 1934. Additional information may be found on the Internet at
http://www.nuveen.com.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity or achievements, and neither the Fund nor any other person
assumes responsibility for the accuracy and completeness of such statements.
45
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Investment Objectives....................................... S-1
Investment Policies and Techniques.......................... S-2
Interest Rate Transactions.................................. S-6
Management of the Fund...................................... S-8
Portfolio Transactions and Brokerage........................ S-14
Net Asset Value............................................. S-15
Description of TAPS......................................... S-16
Additional Information Concerning the Auctions for TAPS..... S-17
Certain Provisions in the Declaration of Trust.............. S-19
Repurchase of Common Shares; Conversion to Open-End Fund.... S-20
Tax Matters................................................. S-22
Experts..................................................... S-26
Additional Information...................................... S-26
46
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$172,000,000
NUVEEN REAL ESTATE
INCOME FUND
TAXABLE AUCTIONED PREFERRED SHARES
TAPS(R)
1,720 SHARES, SERIES M
1,720 SHARES, SERIES T
1,720 SHARES, SERIES W
1,720 SHARES, SERIES F
------------------------
PROSPECTUS
, 2002
------------------------
SALOMON SMITH BARNEY
NUVEEN INVESTMENTS
A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
UBS WARBURG
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The information in this statement of additional information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
statement of additional information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED December 28, 2001
NUVEEN REAL ESTATE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
This statement of additional information relating to this offering does
not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated _______________ ___, 2002. This statement of
additional information does not include all information that a prospective
investor should consider before purchasing TAPS in this offering, and investors
should obtain and read the prospectus prior to purchasing such shares. A copy of
the prospectus may be obtained without charge by calling (800) 257-8787.
Capitalized terms used but not defined in this statement of additional
information have the meanings ascribed to them in the prospectus.
TABLE OF CONTENTS
PAGE
----
Investment Objectives ................................................. S-1
Investment Policies and Techniques .................................... S-2
Interest Rate Transactions ............................................ S-6
Management of the Fund ................................................ S-8
Portfolio Transactions and Brokerage .................................. S-14
Net Asset Value ....................................................... S-15
Description of TAPS ................................................... S-16
Additional Information Concerning the Auctions for TAPS ............... S-17
Certain Provisions in the Declaration of Trust ........................ S-19
Repurchase of Common Shares; Conversion to Open-End Fund .............. S-20
Tax Matters ........................................................... S-22
Experts ............................................................... S-26
Additional Information ................................................ S-26
The date of this statement of additional information is _________________, ___,
2002.
INVESTMENT OBJECTIVES
The Fund's primary investment objective is high current income. The
Fund's secondary investment objective is capital appreciation.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and the Preferred Shares, including TAPS (as hereinafter defined) voting
together as a single class, and of the holders of a majority of the outstanding
Preferred Shares, including TAPS, voting as a separate class:
1. Issue senior securities, as defined in the Investment
Company Act of 1940, other than (i) preferred shares which immediately
after issuance will have asset coverage of at least 200%, (ii)
indebtedness which immediately after issuance will have asset coverage
of at least 300%, or (iii) the borrowings permitted by investment
restriction (2) set forth below;
2. Borrow money, except as permitted by the Investment Company
Act of 1940;
3. Act as underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities;
4. Purchase or sell real estate, except that the Fund may
invest in securities of companies that deal in real estate or are
engaged in the real estate business, including REITs, and securities
secured by real estate or interests therein and the Fund may hold and
sell real estate or mortgages on real estate acquired through default,
liquidation, or other distributions of an interest in real estate as a
result of the Fund's ownership of such securities;
5. Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, derivative instruments or from investing in securities or
other instruments backed by physical commodities);
6. Make loans, other than by entering into repurchase
agreements and through the purchase of debt securities in accordance
with its investment objectives, policies and limitations; and;
7. Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total
assets would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer; provided that, with respect to 50% of
the Fund's assets, the Fund may invest up to 25% of its assets in the
securities of any one issuer.
For purposes of the foregoing, "majority of the outstanding," when used
with respect to particular shares of the Fund, means (i) 67% or more of the
shares present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (ii) more than 50% of the shares, whichever
is less.
Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its total assets in the aggregate in shares of other investment
companies and only up to 5% of its total assets in any
S-1
one investment company, provided the investment does not represent more than 3%
of the voting stock of the acquired investment company at the time such shares
are purchased. As a stockholder in any investment company, the Fund will bear
its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's management, advisory and administrative fees
with respect to assets so invested. Holders of Common Shares would therefore be
subject to duplicative expenses to the extent the Fund invests in other
investment companies. In addition, the securities of other investment companies
may also be leveraged and would therefore be subject to the same leverage risks
described herein. The net asset value and market value of leveraged shares would
be more volatile and the yield to shareholders would tend to fluctuate more than
the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
1. Sell securities short, unless the Fund owns or has the
right to obtain securities equivalent in kind and amount to the
securities sold at no added cost, and provided that transactions in
options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities
short.
2. Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act of 1940
or any exemptive relief obtained thereunder.
3. Purchase securities of companies for the purpose of
exercising control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the Fund's
Prospectus.
It is the Fund's fundamental policy to concentrate its investments in
the U.S. real estate market and not in any other industry. Under normal market
conditions, the Fund will invest at least 90% of its total assets in income
producing common stocks, preferred stocks, convertible preferred stocks and debt
securities issued by real estate companies, such as real estate investment
trusts ("REITs"). At least 80% of the Fund's total assets will be invested in
income producing equity securities issued by REITs, and substantially all of the
equity securities of real estate companies in which the Fund intends to invest
are traded on a national securities exchange or in the over-the-counter markets.
The Fund will invest at least 40% of its total assets in common stocks. The Fund
will not invest more than 25% of its total assets in below or non-investment
grade preferred stocks, convertible preferred stocks and debt securities
(commonly known as "junk bonds"). The Fund may invest up to 20% of its total
assets in debt companies. The actual percentage of common, preferred and
convertible preferred stocks, rights and warrants and debt securities in the
Fund's portfolio may vary over time based on Security Capital's assessment of
market conditions.
S-2
REAL ESTATE COMPANIES
For purposes of the Fund's investment policies, a real estate company
is a company that:
- derives at least 50% of its revenues from the ownership,
construction, financing, management or sale of commercial,
industrial or residential real estate; or
- has at least 50% of its assets in such real estate.
REAL ESTATE INVESTMENTS TRUSTS (REITS)
A REIT is a company that pools investors' funds for investment
primarily in income-producing real estate or in real estate related loans (such
as mortgages) or other interests. Therefore, a REIT normally derives its income
from rents or from interest payments, and may realize capital gains by selling
properties that have appreciated in value. A REIT is not taxed on income
distributed to shareholders if it complies with several requirements relating to
its organization, ownership, assets and income and a requirement that it
distributes to its shareholders at least 90% of its taxable income (other than
net capital gains) for each taxable year and otherwise complies with the
requirements of the Code. As a result, REITs tend to pay relatively higher
dividends than other types of companies and the Fund intends to use these REIT
dividends in an effort to meet the current income goal of its investment
objectives.
REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
PREFERRED STOCKS
Preferred stocks pay fixed or floating rate dividends to investors, and
have a "preference" over common stock in the payment of dividends and the
liquidation of a company's assets. This means that a company must pay dividends
on preferred stock before paying any dividends on its common stock. Preferred
stockholders usually have no right to vote for corporate directors or on other
matters. The Fund may invest in preferred stocks issued by real estate
companies. It is the Fund's intention to initially invest approximately 40% of
its total assets in preferred stocks issued by real estate companies. The actual
percentage of preferred stocks in the Fund's portfolio may vary over time based
on Security Capital's assessment of market conditions.
LOWER-RATED SECURITIES
Securities of below grade investment quality (Ba/BB or below) are
commonly referred to as junk bonds. Securities of below investment grade quality
are regarded as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal.
Lower-rated securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of lower-rated securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments.
Yields on lower-rated securities will fluctuate. If the issuer of lower-rated
securities defaults, the Fund may incur additional expenses to seek recovery.
S-3
The secondary markets in which lower-rated securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the net asset value of the Fund's shares. Adverse publicity and
investor perceptions may decrease the values and liquidity of high yield
securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities, and adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon. New laws and
proposed new laws may adversely impact the market for lower-rated securities.
The Fund may only invest in high yield securities that are rated CCC or
higher by S&P, rated Caa or higher by Moody's, CCC or higher by Fitch, or
unrated securities determined by Security Capital to be of comparable quality.
The issuers of these securities have a currently identifiable vulnerability to
default as to payment of principal and interest and such issues may be in
default or there may be present elements of danger with respect to principal or
interest. The Fund will not invest in securities which are in default as to
payment of principal and interest at the time of purchase.
ILLIQUID SECURITIES
The Fund will not enter into short sales or invest in derivatives,
except as described in the Prospectus and the statement of additional
information in connection with the interest rate swap or interest rate cap
transactions. See "Interest Rate Transactions" below.
NO SHORT SALES OR DERIVATIVES
The Fund will not enter into short sales or invest in derivatives,
except as described in the prospectus and the statement of additional
information in connection with the interest rate swap or interest rate cap
transactions. See "Interest Rate Transactions" below.
NO INVESTMENTS IN REAL ESTATE SECURITIES CONTROLLED BY SCGI
The Fund will not invest in real estate securities that are controlled
by SCGI, an affiliate of Security Capital, or its affiliates.
SHORT-TERM INVESTMENTS
For temporary defensive purposes or to keep cash on hand fully
invested, the Fund may invest up to 100% of its net assets in cash equivalents
and short-term fixed-income securities. Short-term fixed income investments are
defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government agency securities
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 Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of
S-4
the agency or instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its credit. While
the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be
given that it always will do so since it is not so obligated by law.
The U.S. government, its agencies, and instrumentalities do not
guarantee the market value of their securities. Consequently, the value
of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in
a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate 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. NIAC and Security Capital
monitor the value of the collateral at the time the action is entered
into and at all times during the term of the repurchase agreement. The
investment adviser does so in an 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. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. NIAC and Security Capital will
consider the financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity ratios) and will continuously
monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper
rated in the highest categories by a major rating agency and which
mature within one year of the date of purchase or carry a variable or
floating rate of interest.
EXPECTED INITIAL PORTFOLIO COMPOSITION INDUSTRY SECTOR
The Fund expects its initial portfolio, after invest-up is completed,
will represent a range of industry sectors.
S-5
[PIE GRAPH APPEARS HERE]
By Industry Sector
Office 27.5%
Retail 23.5%
Multifamily 23.0%
Industrial 16.0%
Health Care 5.5%
Storage 3.0%
Diversified 1.5%
The industry sector allocations shown here are estimates based on
September 30, 2001 market conditions. Actual allocations may differ.
INTEREST RATE TRANSACTIONS
In connection with the Fund's anticipated use of leverage through its
sale of Fund Preferred Shares, including TAPS, or Borrowings, the Fund may enter
into interest rate swap or cap transactions. Interest rate swaps involve the
Fund's agreement with the swap counterparty to pay fixed rate payment in
exchange for the counterparty paying the Fund a variable rate payment that is
intended to approximate the Fund's variable rate payment obligation on the Fund
Preferred Shares, including TAPS, of any variable rate Borrowings. The payment
obligation would be based on the notional amount of the swap. The Fund may use
an interest rate cap, which would require it to pay a premium to the cap
counterparty and would entitle it, to the extent that a specified variable rate
index exceeds a predetermined fixed rate, to receive from the counterparty
payment of the difference based on the notional amount. The Fund would use
interest rate swaps or caps only with the intent to reduce or eliminate the risk
that an increase in short-term interest rates could have on Common Share net
earnings as a result of leverage.
The Fund will usually enter into swaps or caps on a net basis; that is,
the two payment streams will be netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. Depending on the state
of interest rates in general, the Fund's use of interest rate swaps or caps
could enhance or harm the overall performance on the Common Shares. To the
extent there is a decline in interest rates, the value of the interest rate swap
or cap could decline, and could result in a decline in the net asset value of
the Common Shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
Common Share net earnings. If, on the other hand, short-term interest rates are
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance the Fund's share net earnings. Buying interest rate caps could enhance
the performance of the Common Shares by providing a maximum leverage expense.
Buying interest rate caps could also decrease the net earnings of the Common
Shares in the event that the premium paid by the Fund to the counterparty
exceeds the additional amount the Fund would have been required to pay had it
not entered into the cap agreement. The Fund has no current intention of selling
an interest rate swap or cap. The Fund would not enter into interest rate swap
or cap transactions in an aggregate notional amount that exceeds the outstanding
amount of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities
or other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest payment
that the Fund is contractually obligated to make. If the counterparty defaults,
the Fund
S-6
would not be able to use the anticipated net receipts under the swap or cap to
offset the dividend payments on the Fund Preferred Shares, including TAPS, or
interest payments on Borrowings. Depending on whether the Fund would be entitled
to receive net payments from the counterparty on the swap or cap, which in turn
would depend on the general state of short-term interest rates at that point in
time, such a default could negatively impact the performance of the Common
Shares. Although this will not guarantee that the counterparty does not default,
the Fund will not enter into an interest rate swap or cap transaction with any
counterparty that NIAC believes does not have the financial resources to honor
its obligation under the interest rate swap or cap transaction. Further, NIAC
will continually monitor the financial stability of a counterparty to an
interest rate swap or cap transaction in an effort to proactively protect the
Fund's investments. In addition, at the time the interest rate swap or cap
transaction reaches its scheduled termination date, there is a risk that the
Fund will not be able to obtain a replacement transaction or that the terms of
the replacement will not be as favorable as on the expiring transaction. If this
occurs, it could have a negative impact on the performance of the Fund's Common
Shares.
The Fund may choose or be required to redeem some or all of the
Preferred Shares, including TAPS, or prepay any Borrowings. This redemption
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transaction. Such early termination of a swap could result in
termination payment by or to the Fund. An early termination of a cap could
result in a termination payment to the Fund.
S-7
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at seven, one of whom is an "interested" person (as the term
"interested" person is defined in the Investment Company Act of 1940) and six
of whom are not "interested" persons. None of the trustees who are not
"interested" persons of the Fund has ever been a director or employee of, or
consultant to, Nuveen, SCGI or its affiliates. The names and business addresses
of the trustees and officers of the Fund and their principal occupations and
other affiliations during the past five years are set forth below, with those
trustees who are "interested" persons of the Fund indicated by an asterisk.
BIRTH POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS DATE WITH THE FUND PAST FIVE YEARS
---------------- ---- ------------- ---------------
Timothy R. Schwertfeger* 3/28/49 Chairman of the Board, Chairman and Director (since July 1996)
333 West Wacker Drive President and Trustee of The John Nuveen Company, Nuveen
Chicago, IL 60606 Investments, Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.;
prior thereto, Executive Vice President
and Director of The John Nuveen Company
and Nuveen Investments; Director (since
1992) and Chairman and Chief Executive
Officer (since 1996) of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Chairman and Director (since
January 1997) of Nuveen Asset Management,
Inc.; Director (since 1996) of
Institutional Capital Corporation;
Chairman and Director of Rittenhouse
Financial Services Inc. (since 1999);
Chief Executive Officer (since September
1999) of Nuveen Senior Loan Asset
Management Inc.
James E. Bacon 2/27/31 Trustee Business consultant and Treasurer,
114 W. 47th St. Cathedral of St. John the Divine (New
New York, NY 10036 York City); formerly (1992-1999),
Director of Lone Star Industries, Inc.;
previously, Director and Executive Vice
President of U.S. Trust Corporation and
Trustee of United States Trust Company of
New York.
William E. Bennett 10/16/46 Trustee Private Investor; previously, President
55 W. Monroe and Chief Executive Officer, Draper &
Chicago, IL 60606 Kramer, Inc. (September 1995 - August
1998).
Jack B. Evans 10/22/48 Trustee President, The Hall-Perrin Foundation, a
115 Third Street, S.E. private philanthropic corporation (since
Cedar Rapids, IA 52401 2996); Director, Alliant Energy; Director
and Vice Chairman United Fire & Casualty
Company; formerly President and Chief
Operating Officer, SCI Financial Group,
Inc., a regional financial services firm.
William L. Kissick 7/29/32 Trustee Professor, School of Medicine and the
University of Pennsylvania Wharton School of Management and former
224 NEB/2L Chairman, Leonard Davis Institute of
Philadelphia, PA 19104 Health Economics, University of
Pennsylvania.
S-8
BIRTH POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS DATE WITH THE FUND PAST FIVE YEARS
---------------- ---- ------------- ---------------
Thomas E. Leafstrand 11/11/31 Trustee Retired; previously, Vice President in
412 W. Franklin charge of Municipal Underwriting and
Wheaton, IL 60187 Dealer Sales at The Northern Trust Company
Sheila W. Wellington 2/24/32 Trustee President (since 1993) of Catalyst (a
250 Park Avenue not-for-profit organization focusing on
New York, NY 10003 women's leadership development in
business and the professions).
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investments (since
333 West Wacker Drive Treasurer January 1999), prior thereto, Assistant Vice
Chicago, IL 60606 President (from January 1997); formerly,
Associate of Nuveen Investments; Vice President
and Treasurer (since September 1999) of
Nuveen Senior Loan Asset Management Inc.;
Chartered Financial Analyst.
Michael S. Davern
333 West Wacker Drive 6/26/57 Vice President Vice President of Nuveen Advisory Corp.
Chicago, IL 60606 (since January 1977); prior thereto, Vice
President and Portfolio Manager of Flagship
Financial.
Lorna C. Ferguson 10/24/45 Vice President Vice President of Nuveen Investments;
333 West Wacker Drive Vice President (since January 1998) of
Chicago, IL 60606 Nuveen Advisory and Nuveen Institutional
Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President Vice President and Managing Director of Nuveen
333 West Wacker Drive Advisory Corp. (since December 1995); Assistant
Chicago, IL 60606 Vice President of Nuveen Advisory Corp. (from
September 1992 to December 1995), prior thereto,
Assistant Portfolio Manager of Nuveen Advisory
Corp., Chartered Financial Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President of Nuveen Investments and (since
333 West Wacker Drive Controller May 1988) The John Nuveen Company; Vice President
Chicago, IL 60606 (since September 1999) of Nuveen Senior Loan
Asset Management Inc.; Certified Public Accountant.
David Lamb 3/22/63 Vice President Vice President (since March 2000) of
333 West Wacker Drive Nuveen Investment, previously Assistant
Chicago, IL 60606 Vice President (since January 1999);
prior thereto, Associate of Nuveen
Investments; Certified Public Accountant.
S-9
BIRTH POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS DATE WITH THE FUND PAST FIVE YEARS
---------------- ---- ------------- ---------------
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary and
333 West Wacker Drive Assistant Secretary Assistant General Counsel of Nuveen
Chicago, Il 60606 Investments; Vice President and Assistant
Secretary of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.'
Assistant Secretary of the John Nuveen
Company and (since January 1998) of
Nuveen Asset Management, Inc.; Vice
President and Assistant Secretary (since
September 1999) of Nuveen Senior Loan
Asset Management, Inc.
Edward F. Neild, IV 7/7/65 Vice President Vice President (since September 1996),
333 West Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since December 1993) of Nuveen Advisory
Corp., Portfolio Manager prior thereto;
Vice President (since September 1996),
previously Assistant Vice President
(since May 1995), of Nuveen Institutional
Advisory Corp.; Chartered Financial
Analyst.
Gifford R. Zimmerman 9/9/56 Vice President and Vice President, Assistant Secretary and
333 West Wacker Drive Secretary Associate General Counsel, formerly
Chicago, IL 60606 Assistant General Counsel, of Nuveen
Investments; Vice President, Assistant
Secretary and General Counsel of
Nuveen Advisory Corp, and Nuveen
Institutional Advisory Corp.; Vice
President and Assistant Secretary
(since September 1999) of Nuveen
Senior Loan Asset Management, Inc.;
Assistant Secretary of The John
Nuveen Company (since May 1994);
Chartered Financial Analyst.
William L. Kissick and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees of the Fund. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees. In addition
to the Fund, the Trustees are trustees of 14 Nuveen open-end and closed-end
funds advised by NIAC and two funds advised by Nuveen Senior Loan Asset
Management Inc. Mr. Schwertfeger is also a director or trustee, as the case may
be, of 30 Nuveen open-end funds and 66 Nuveen closed-end funds advised by Nuveen
Advisory Corp.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Trust
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time
for commencing distributions from a trustee's deferral account, the trustee may
elect to receive distributions in a lump sum or over a period of five years. The
Fund will not be liable for any other fund's obligations to make distributions
under the Plan.
S-10
TOTAL COMPENSATION AMOUNT OF TOTAL
FROM FUND AND FUND COMPENSATION
NAME OF TRUSTEE FUND* COMPLEX** THAT HAS BEEN DEFERRED
--------------- ----- --------- ----------------------
James E. Bacon .............. $6,720 $45,500 $ 20,000
William E. Bennett*** ....... $6,720 N/A N/A
Jack B. Evans ............... $6,720 $45,500 $20,448
William L. Kissick .......... $6,720 $45,500 $18,000
Thomas E. Leafstrand ........ $7,720 $47,100 $20,996
Sheila W. Wellington ........ $6,720 $45,500 $40,895
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception through the end of the Fund's first
full fiscal year for services to the Fund.
** Based on the total compensation paid to the trustees for the one year
period ending December 31, 2000 for services to the open-end and
closed-end funds advised by NIAC and Nuveen Senior Loan Asset Management
Inc.
*** Mr. Bennett was appointed to the Board in January 2001 and therefore
received no compensation in calendar year 2000.
The Fund has no employees. Its officers are compensated by NIAC or
Nuveen.
INVESTMENT ADVISER AND SUBADVISER
NIAC acts as investment adviser to the Fund, with responsibility for
the overall management of the Fund. Its address is 333 West Wacker Drive,
Chicago, Illinois 60606. NIAC is responsible for the selection of the
subadviser, managing the Fund's business affairs and providing day-to-day
administrative services to the Fund. For additional information regarding the
management services performed by NIAC, see "Management of the Fund" in the
Fund's Prospectus.
NIAC is a wholly owned subsidiary of Nuveen, which is also a
co-managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from CDA Weisenberger, Nuveen is a leading sponsor of
exchange-traded funds as measured by number of funds (78) and fund assets under
management ($30 billion) as of September 30, 2001. Overall, Nuveen and its
affiliates have over $75 billion in assets under management or surveillance.
Nuveen, like NIAC, is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul
is a publicly-traded company located in St. Paul, Minnesota, and is principally
engaged in providing property-liability insurance through subsidiaries.
Security Capital, 11 South LaSalle Street, 2nd Floor, Chicago, Illinois
60603, is the subadviser to the Fund. Security Capital is an indirect, wholly
owned subsidiary of SCGI, a publicly traded company that is one of the country's
leading real estate investors and operators, with interests in companies having
a total market capitalization of approximately $18.98 billion as of October 31,
2001.
Security Capital, which is registered as an investment adviser with the
Securities and Exchange Commission, commenced operations in January 1995 and had
assets under management of approximately $2.38 billion as of October 31, 2001.
A team of full-time Security Capital professionals, working together as
the Fund's Portfolio Management Committee, is primarily responsible for
overseeing the day-to-day operations of the Fund. The members of the Portfolio
Management Committee are as follows:
S-11
ANTHONY R. MANNO JR. is the Chief Investment Officer of Security
Capital, and Chairman of Security Capital Real Estate Mutual Funds
Incorporated and Security Capital Preferred Growth Incorporated. He is
a member of the Portfolio Management Committee and responsible for
overseeing all of the investment activities for Security Capital. Prior
to joining Security Capital in 1994, Mr. Manno spent 14 years with
LaSalle Partners Limited as a Managing Director, responsible for real
estate investment banking activities. Mr. Manno began his career in
real estate finance in 1974 at the First National Bank of Chicago. He
received his MBA in Finance with honors from the University of Chicago
and graduated Phi Beta Kappa from Northwestern University with a BA and
MA in Economics. Mr. Manno is also a CPA and was awarded an Elijah Watt
Sells Honorable Mention.
KENNETH D. STATZ is a Managing Director and Senior Market Strategist of
Security Capital and is a member of the Portfolio Management Committee,
where he is responsible for the development and implementation of
portfolio investment strategy. Prior to joining Security Capital in
1995, Mr. Statz was the Senior REIT Analyst for Goldman, Sachs & Co.
concentrating on research and underwriting for the REIT industry.
Previously, Mr. Statz was the REIT Portfolio Manager and a Managing
Director of Chancellor Capital Management and has 15 years of
experience in the real estate securities industry. Mr. Statz received
his MBA and BBA in Finance from the University of Wisconsin.
KEVIN W. BEDELL is a Senior Vice President of Security Capital and a
member of the Portfolio Management Committee where he directs the
Investment Analysis Team, which provides in-depth proprietary research
on publicly traded companies. Prior to joining Security Capital in
1996, Mr. Bedell spent nine years with LaSalle Partners Limited where
he was equity vice president and portfolio manager with responsibility
for strategic, operational and financial management of a private real
estate investment trust with commercial real estate investments in
excess of $1 billion. Mr. Bedell received his MBA in Finance from the
University of Chicago and his BA from Kenyon College.
DAVID E. ROSENBAUM is a Senior Vice President of Security Capital with
primary responsibility for origination and structuring of privately
negotiated investments. Prior to joining Security Capital in 1997, Mr.
Rosenbaum was a Vice President at Lazard Freres & Co., LLC, where he
structured investments in real estate operating companies. Previously,
he was an Associate in the New York and Chicago offices of Lazard
Freres & Co., LLC, where he executed merger and acquisition
transactions for real estate and hotel companies. Mr. Rosenbaum holds a
BA from Yale University.
See "The Fund's Investments - Investment Process" in the Fund's
prospectus for more information.
Pursuant to an investment management agreement between NIAC and the
Fund, the Fund has agreed to pay for the services and facilities provided by
NIAC an annual management fee, payable on a monthly basis, according to the
following schedule.
S-12
AVERAGE DAILY NET ASSETS(1) MANAGEMENT FEE
--------------------------- --------------
Up to $500 million ..................... .9000%
$500 million to $1 billion ............. .8750%
$1 billion to $1.5 billion ............. .8500%
$1.5 billion to $2 billion ............. .8200%
$2 billion and over .................... .8000%
(1) Net assets including assets attributable to Preferred Shares, including
TAPS, and the principal amount of Borrowings.
Security Capital will receive from NIAC, a percent of the management
fee (net of the reimbursement described below) according to the following
schedule:
AVERAGE DAILY MANAGED ASSETS(1) MANAGEMENT FEE
------------------------------- --------------
Up to $125 million .................... 50.0%
$125 million to $150 million .......... 47.5%
$150 million to $175 million .......... 45.0%
$175 million to $200 million .......... 42.5%
$200 million and over ................. 40.0%
(1) Net assets including assets attributable to Preferred Shares,
including TAPS, and the principal amount of Borrowings.
In addition to the fee of NIAC, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses of issuing any Preferred Shares, including TAPS, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
For the first ten years of the Fund's operation, NIAC has contractually
agreed to reimburse the Fund for fees and expenses in the amounts, and for the
time periods, set forth below:
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
(AS A PERCENTAGE OF (AS A PERCENTAGE OF
YEAR ENDING AVERAGE DAILY YEAR ENDING AVERAGE DAILY
NOVEMBER 30, MANAGED ASSETS)(1) NOVEMBER 30, MANAGED ASSETS)(1)
------------ ---------- ------------ ----------
2001(2) ............ .30% 2007 .25%
2002 ............... .30% 2008 .20%
2003 ............... .30% 2009 .15%
2004 ............... .30% 2010 .10%
2005 ............... .30% 2011 .05%
2006 ............... .30%
(1) Net assets including assets attributable to Preferred Shares, including
TAPS, and the principal amount of Borrowings.
(2) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount
of income available for the Common shareholders. NIAC has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond November 30,
2011.
S-13
The Fund, NIAC Security Capital, Nuveen, Salomon Smith Barney Inc. and
other related entities have adopted codes of ethics which essentially prohibit
certain of their personnel, including the Fund's portfolio management team, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of a client's, including the Fund's, anticipated or actual
portfolio transactions, and are designed to assure that the interests of
clients, including Fund shareholders, are placed before the interests of
personnel in connection with personal investment transactions. Text-only
versions of the codes of ethics can be viewed online or downloaded from the
EDGAR Database on the SEC's internet web site at www.sec.gov. You may also
review and copy those documents by visiting the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 202-942-8090. In addition, copies of the codes of
ethics may be obtained, after mailing the appropriate duplicating fee, by
writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington,
DC 20549-0102 or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, decisions to buy
and sell securities for the Fund and brokerage commission rates are made by
Security Capital. Transactions on stock exchanges involve the payment by the
Fund of brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter market but the price paid by
the Funds usually includes an undisclosed dealer commission or mark-up. In
certain instances, the Fund may make purchases of underwritten issues at prices
which include underwriting fees.
In selecting a broker to execute each particular transaction, Security
Capital will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the trustees may
determine, Security Capital shall not be deemed to have acted unlawfully or to
have breached any duty solely by reason of it having caused the Fund to pay a
broker that provides research services an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker would have charged for effecting that transaction if Security Capital
determines in good faith that such amount of commission was reasonable in
relation to the value of the research service provided by such broker viewed in
terms of either that particular transaction or Security Capital's ongoing
responsibilities with respect to the Fund. Research and investment information
may be provided by these and other brokers at no cost to Security Capital and is
available for the benefit of other accounts advised by Security Capital and its
affiliates, and not all of the information will be used in connection with the
Fund. While this information may be useful in varying degrees and may tend to
reduce Security Capital's expenses, it is not possible to estimate its value and
in the opinion of Security Capital it does not reduce Security Capital's
expenses in a determinable amount. The extent to which Security Capital makes
use of statistical, research and other services furnished by brokers is
considered by Security Capital in the allocation of brokerage business but there
is no formula by which such business is allocated. Security Capital does so in
accordance with their judgment of the best interests of the Fund and its
shareholders. Security Capital may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the
Fund for services provided to it for which it would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, Security Capital may consider sales of shares of the
Fund as a fact in the selection of brokers and dealers to enter into portfolio
transactions with the Fund.
S-14
Certain other clients of Security Capital may have investment
objectives and policies similar to those of the Fund. Security Capital may, from
time to time, make recommendations which result in the purchase or sale of a
particular security by its other clients simultaneously with the Fund. If
transactions on behalf of more than one client during the same period increase
the demand for securities being sold, there may be an adverse effect on the
price of such securities. It is the policy of Security Capital to allocate
advisory recommendations and the placing of orders in a manner which is deemed
equitable to Security Capital to the accounts involved, including the Fund. When
two or more of the clients of Security Capital (including the Fund) are
purchasing or selling the same security on a given day through the same
broker-dealer, such transactions may be averaged as to price.
Under the 1940 Act, the Fund may not purchase portfolio securities from
any underwriting syndicate of which Nuveen is a member except under certain
limited conditions set forth in Rule 10f-3. The rule sets forth requirements
relating to, among other things, the terms of an issue purchased by the Fund,
the amount which may be purchased in any one issue and the assets of the Fund
that may be invested in a particular issue. In addition, purchases of securities
made pursuant to the terms of the Rule must be approved at least quarterly by
the Board of Trustees of the Fund, including a majority of the members thereof
who are not interested persons of the Fund.
NET ASSET VALUE
The Fund will determine the net asset value of its shares daily, as of
the close of regular session trading on the New York Stock Exchange (normally
4:00 p.m. eastern time). Net asset value is computed by dividing the value of
all assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding. Any swap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have a
positive or negative value for purposes of calculating net asset value. Any cap
transaction that the Fund enters into may, depending on the applicable interest
rate environment, have no value or a positive value. In addition, accrued
payments to the Fund under such transactions will be assets of the Fund and
accrued payments by the Fund will be liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Trustees shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ("NASDAQ") National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
adviser to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the mean of the current bid and asked
prices as reported by NASDAQ or, in the case of securities not quoted by NASDAQ,
the National Quotation Bureau or such other comparable source as the Trustees
deem appropriate to reflect their fair market value. However, certain
fixed-income securities may be valued on the basis of prices provided by a
pricing service when such prices are believed by the Board of Trustees to
reflect the fair market value of such securities. The prices provided by a
pricing service take into account institutional
S-15
size trading in similar groups of securities and any developments related to
specific securities. Where securities are traded on more than one exchange and
also over-the-counter, the securities will generally be valued using the
quotations the Board of Trustees believes reflect most closely the value of such
securities.
DESCRIPTION OF TAPS
Notices. The Fund shall deliver to the Auction Agent and Moody's (if
Moody's is then rating TAPS), Fitch (if Fitch is then rating TAPS) and any other
rating agency which is then rating TAPS and when so requires a certificate which
sets forth a determination of certain items (a "TAPS Basic Maintenance
Certificate") as of (A) the Date of Original Issue, (B) the last Valuation Date
of each month, (C) any date requested by any rating agency, (D) a Business Day
on or before any Asset Coverage Cure Date relating to the Fund's cure of a
failure to meet the TAPS Basic Maintenance Amount Test, (E) any day that Common
Shares or Preferred Shares, including TAPS, are redeemed and (F) any day the
Eligible Assets have an aggregate discounted value less than or equal to 115% of
the TAPS Basic Maintenance Amount. Such TAPS Basic Maintenance Certificate shall
be delivered in the case of clause (i)(A) on the Date of Original Issue and in
the case of all other clauses above on or before the seventh Business Day after
the relevant Valuation Date or Asset Coverage Cure Date.
The Fund shall deliver to the Auction Agent, Moody's (if Moody's is
then rating TAPS), Fitch (if Fitch is then rating TAPS) and any Other Rating
Agency which is then rating TAPS and which so requires a certificate with
respect to the calculation of the 1940 Act TAPS Asset Coverage and the value of
the portfolio holdings of the Fund (a "1940 Act TAPS Asset Coverage
Certificate") (i) as of the Date of Original Issue, and (ii) as of (A) the last
Valuation Date of each quarter thereafter, and (B) as of the Business Day on or
before the Asset Coverage Cure Date relating to the failure to satisfy the 1940
Act TAPS Asset Coverage. Such 1940 Act TAPS Asset Coverage Certificate shall be
delivered in the case of clause (i) on the Date of Original Issue and in the
case of clause (ii) on or before the seventh Business Day after the relevant
Valuation Date or the Asset Coverage Cure Date. The certificates of (d) and (e)
of this Section 12 may be combined into a single certificate.
Within ten Business Days of the Date of Original Issue, the Fund shall deliver
to the Auction Agent, Moody's (if Moody's is then rating TAPS), Fitch (if Fitch
is then rating TAPS) and any Other Rating Agency which is then rating TAPS and
which so requires a letter prepared by the Fund's independent accountants (an
"Accountant's Certificate") regarding the accuracy of the calculations made by
the Fund in the TAPS Basic Maintenance Certificate and the 1940 Act TAPS Asset
Coverage Certificate required to be delivered by the Fund as of the Date of
Original Issue. Within ten Business Days after the last Valuation Date of each
fiscal quarter of the Fund on which a TAPS Basic Maintenance Certificate is
required to be delivered, the Fund will deliver to the Auction Agent, Moody's
(if Moody's is then rating TAPS), Fitch (if Fitch is then rating the TAPS) and
any Other Rating Agency which is then rating TAPS and which so requires an
Accountant's Certificate regarding the accuracy of the calculations made by the
Fund in such TAPS Basic Maintenance Certificate and in any other TAPS Basic
Maintenance Certificate randomly selected by the Fund's independent accountants
during such fiscal quarter. Within ten Business Days after the last Valuation
Date of each fiscal quarter of the Fund on which a 1940 Act TAPS Asset Coverage
Certificate is required to be delivered, the Fund will deliver to the Auction
Agent, Moody's (if Moody's is then rating TAPS), Fitch (if Fitch is then rating
the TAPS) and any Other Rating Agency which is then rating TAPS and which so
requires an Accountant's Certificate regarding the accuracy of the calculations
made by the Fund in such 1940 Act TAPS Asset Coverage Certificate. In addition,
the Fund will deliver to the relevant persons specified in the preceding
sentence an Accountant's Certificate regarding the accuracy of the calculations
made by the Fund on each TAPS Basic Maintenance Certificate and 1940 Act TAPS
Asset Coverage Certificate delivered pursuant to clause (iv) of paragraph (d) or
clause (ii)(B) of paragraph (e) of this Section 13, as the case may be, within
ten days after the relevant Asset Coverage Cure Date. If an Accountant's
Certificate delivered with respect to an Asset Coverage Cure Date shows an error
was made in the Fund's report with respect to such Asset Coverage Cure Date, the
calculation or determination made by the Fund's independent accountants will be
conclusive and binding on the Fund with respect to such reports. If any other
Accountant's Certificate shows that an error was made in any such report, the
calculation or determination made by the Fund's independent accountants will be
conclusive and binding on the Fund;
S-16
provided, however, any errors shown in the Accountant's Certificate filed on a
quarterly basis shall not be deemed to be a failure to maintain the TAPS Basic
Maintenance Amount on any prior Valuation Dates.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR TAPS
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for each series of TAPS so long as the Applicable Rate for
shares of such series is to be based on the results of an Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for TAPS. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members with respect to each series of
TAPS. One certificate for all of the shares of each series of TAPS will be
registered in the name of Cede, as nominee of the Securities Depository. Such
certificate will bear a legend to the effect that such certificate is issued
subject to the provisions restricting transfers of TAPS contained in the
Statement. The Fund will also issue stop-transfer instructions to the transfer
agent for each series of TAPS. Prior to the commencement of the right of holders
of preferred shares to elect a majority of the Fund's trustees, as described
under "Description of TAPS -- Voting Rights" in the prospectus, Cede will be the
holder of record of all shares of each series of TAPS and owners of such shares
will not be entitled to receive certificates representing their ownership
interest in such shares.
S-17
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in TAPS, whether for its own account or as a
nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of TAPS, the Auction Agent's registry of Existing
Holders, the results of Auctions and notices from any Broker-Dealer (or other
Person, if permitted by the Fund) with respect to transfers described under "The
Auction -- Secondary Market Trading and Transfer of TAPS" in the prospectus and
notices from the Fund. The Auction Agent is not required to accept any such
notice for an Auction unless it is received by the Auction Agent by 3:00 p.m.,
New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of TAPS will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of TAPS placed by such Broker-Dealer
at such Auction. For the purposes of the preceding sentence, TAPS will be placed
by a Broker-Dealer if such shares were (a) the subject of Hold Orders deemed to
have been submitted to the Auction Agent by the Broker-Dealer and were acquired
by such Broker-Dealer for its own account or were acquired by such Broker-Dealer
for its customers who are Beneficial Owners or (b) the subject of an Order
submitted by such Broker-Dealer that is (i) a Submitted Bid of an Existing
Holder that resulted in such Existing Holder continuing to hold such shares as a
result of the Auction or (ii) a Submitted Bid of a Potential Holder that
resulted in such Potential Holder purchasing such shares as a result of the
Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have
S-18
knowledge of all Orders submitted by it in that Auction; such Broker-Dealer,
however, would not have knowledge of Orders submitted by other Broker-Dealers in
that Auction.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for debts or obligations of the Fund and requires that notice of such
limited liability be given in each agreement, obligation or instrument entered
into or executed by the Fund or the trustees. The Declaration of Trust further
provides for indemnification out of the assets and property of the Fund for all
loss and expense of any shareholder held personally liable for the obligations
of the Fund. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is very remote.
The Declaration of Trust includes provisions that could limit the
ability of other entities or persons to acquire control of the Fund.
Specifically, the Declaration of Trust requires a vote by holders of at least
two-thirds of the Common Shares and Preferred Shares, including TAPS,
outstanding at the time, voting together as a single class, except as described
below, to authorize (1) a conversion of the Fund from a closed-end to an
open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of trustees, and then only for cause,
unless, with respect to (1) through (4), such transaction has already been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration of Trust or the By-laws, in which case
the affirmative vote of the holders of at least a majority of the Fund's Common
Shares and Preferred Shares, including TAPS, outstanding at the time, voting
together as a single class, is required, provided, however, that where only a
particular class or series is affected (or, in the case of removing a trustee,
when the trustee has been elected by only one class), only the required vote by
the applicable class or series will be required. Approval of shareholders is not
required, however, for any transaction, whether deemed a merger, consolidation,
reorganization or otherwise whereby the Fund issues shares in connection with
the acquisition of assets (including those subject to liabilities) from any
other investment company or similar entity. None of the foregoing provisions may
be amended except by the vote of at least two-thirds of the Common Shares and
Preferred Shares, including TAPS, outstanding at the time, voting together as a
single class. In the case of the conversion of the Fund to an open-end
investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
Preferred Shares, including TAPS, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's Preferred
Shares, including TAPS, outstanding at the time, voting as a separate class, or,
if such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration of Trust or
the By-laws, the affirmative vote of the holders of at least a majority of the
Fund's Preferred Shares, including TAPS, outstanding at the time, voting as a
separate class. The votes required to approve the conversion of the Fund from a
closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
Preferred Shares, including TAPS, are higher than those required by the 1940
Act. The Board of Trustees believes that the provisions of the Declaration of
Trust relating to such higher votes are in the best interest of the Fund and its
shareholders.
Reference should be made to the Declaration of Trust on file with the
Securities and Exchange Commission for the full text of these provisions.
S-19
The Declaration of Trust 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 of Trust,
however, protects a trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares, or the conversion of the Fund to an
open-end investment company. There can be no assurance, however, that the Board
of Trustees will decide to take any of these actions, or that share repurchases
or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's Preferred
Shares, including TAPS, are outstanding, the Fund may not purchase, redeem or
otherwise acquire any of its Common Shares unless (1) all accrued Preferred
Shares, including TAPS, dividends have been paid and (2) at the time of such
purchase, redemption or acquisition, the net asset value of the Fund's portfolio
(determined after deducting the acquisition price of the Common Shares) is at
least 200% of the liquidation value of the outstanding Preferred Shares,
including TAPS (expected to equal the original purchase price per share plus any
accrued and unpaid dividends thereon). Any service fees incurred in connection
with any tender offer made by the Fund will be borne by the Fund and will not
reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees of the Fund at the time it
considers such issue, it is the Board of Trustees' present policy, which may be
changed by the Board of Trustees, not to authorize repurchases of Common Shares
or a tender offer for such shares if (1) such transactions, if consummated,
would (a) result in the delisting of the Common Shares from the American Stock
Exchange, or (b) impair the Fund's status as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code") (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objectives and
policies in order to repurchase shares; or (3) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such
S-20
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the American
Stock Exchange, (c) declaration of a banking moratorium by federal or state
authorities or any suspension of payment by United States or state banks in
which the Fund invests, (d) material limitation affecting the Fund or the
issuers of its portfolio securities by federal or state authorities on the
extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Fund or its shareholders if shares were
repurchased. The Board of Trustees of the Fund may in the future modify these
conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's Common Shares and Preferred Shares,
including TAPS, outstanding at the time, voting together as a single class, and
of the holders of at least two-thirds of the Fund's Preferred Shares, including
TAPS, outstanding at the time, voting as a separate class, provided, however,
that such separate class vote shall be a majority vote if the action in question
has previously been approved, adopted or authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration of Trust or By-laws. See the prospectus under "Certain Provisions in
the Declaration of Trust" for a discussion of voting requirements applicable to
conversion of the Fund to an open-end company. If the Fund converted to an
open-end company, it would be required to redeem all Preferred Shares, including
TAPS, then outstanding, and the Fund's Common Shares would no longer be listed
on the American Stock Exchange. Shareholders of an open-end investment company
may require the company to redeem their shares on any business day (except in
certain circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charge, if any, as might be in effect at the time of
redemption. In order to avoid maintaining large cash positions or liquidating
favorable investments to meet redemptions, open-end companies typically engage
in a continuous offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
The Board of Trustees of the Fund may at any time propose conversion of the Fund
to an open-end company depending upon their judgment as to the advisability of
such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers from time to time, or
that the Fund may be converted to an open-end company, may reduce any spread
between market price and net asset value that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when Preferred Shares, including TAPS, are outstanding will increase the
leverage applicable to the outstanding Common Shares then remaining. See the
Fund's prospectus under "Risks -- Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of the Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
S-21
TAX MATTERS
The following is intended to be a general summary of certain federal
income tax consequences of investing in TAPS. It is not intended as a complete
discussion of all such tax consequences, nor does it purport to deal with all
categories of investors. INVESTORS ARE THEREFORE ADVISED TO CONSULT WITH THEIR
TAX ADVISORS BEFORE MAKING AN INVESTMENT IN THE FUND.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify for, and to elect to be treated as a
regulated investment company under Subchapter M of the Code and intends to
qualify under those provisions each year. To qualify as a regulated investment
company, the Fund must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stocks, securities or currencies; and (b)
diversify its holdings so that, at the end of each quarter of its taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by cash
and cash items, U.S. Government securities, securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more 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 of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies) or of two or more issuers controlled by the Fund and
engaged in the same, similar or related trades or business.
As a regulated investment company, in any taxable year with respect to
which the Fund distributes at least 90% of its net investment income (i.e., the
Fund's investment company taxable income, as that term is defined in the Code,
without regard to the deduction for dividends paid), the Fund (but not its
shareholders) generally will be relieved of U.S. federal income taxes on its net
investment income and net capital gain (i.e., the Fund's net long-term capital
gain in excess of the sum of net short-term capital loss and capital loss
carryovers from prior years, if any) that it distributes to shareholders.
However, the Fund will be subject to federal income tax (currently imposed at a
maximum rate of 35%) on any undistributed net investment income and net capital
gain. Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax
payable by the Fund. To avoid the tax, the Fund must distribute, or be deemed to
have distributed, during each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income for the calendar year, (2) at least 98% of its
capital gain net income for the twelve-month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gain net income for
previous years that were not distributed during such years. For this purpose,
any income or gain retained by the Fund that is subject to corporate tax will be
considered to have been distributed by year-end. To prevent application of the
excise tax, the Fund intends to make distributions to satisfy the calendar year
distribution requirement. Compliance with the calendar year distribution
requirement may limit the extent to which the Fund will be able to retain its
net capital gain for investment.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Code, the Fund will be taxed in the same manner as
an ordinary corporation and distributions to its shareholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of failure to qualify as a regulated investment company, the Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits, will generally constitute dividends which, although
possibly eligible for the dividends received deduction available to corporate
shareholders, will be taxable to shareholders as ordinary income, even though
those distributions might otherwise (at least in part) have been treated as
long-term capital gain in the shareholder's hands.
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of the
Common Shares and/or the TAPS until the asset coverage is restored.
See "Description of TAPS -- Restrictions on Dividends, Redemption and Other
Payments" in the Prospectus. Such a
S-22
suspension of distributions might prevent the Fund from distributing 90% of its
net investment income, as is required in order to qualify for taxation as a
regulated investment company, or cause the Fund to incur a tax liability, a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) TAPS in order to maintain or restore the requisite asset coverage and
avoid failure to remain qualified as a regulated investment company. The
determination to repurchase or redeem TAPS and the amounts to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem TAPS may adversely
affect the Fund's ability to distribute annually at least 90% of its net
investment income, which distribution is required to qualify for taxation as a
regulated investment company. The Fund may also recognize income in connection
with funding repurchases or redemptions of TAPS, and such income would be taken
into account in determining whether or not the above-described distribution
requirements have been met. Depending on the size of the Fund's assets relative
to its outstanding senior securities, redemption of TAPS might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances.
Investments of the Fund in securities issued at a discount (or treated
as if issued at a discount) or providing for deferred interest or payment of
interest in kind are subject to special tax rules that will affect the amount,
timing and character of distributions to shareholders. For example, with respect
to certain securities issued or treated as if issued at a discount, the Fund
will be required to accrue as income each year a portion of the discount and to
distribute such income each year in order to satisfy both the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Fund may have to borrow money or dispose of securities that it would
otherwise have continued to hold.
The Fund's transactions in forward contracts and options and futures
contracts will be subject to special provisions of the Code that, among other
things, may affect the character of gain and loss realized by the Fund (i.e.,
may affect whether gain or loss is ordinary or capital), accelerate recognition
of income to the Fund, defer Fund losses, and affect the determination of
whether capital gain and loss is characterized as long-term or short-term
capital gain or loss. These rules could therefore affect the character, amount
and timing of distributions to shareholders. These provisions also may require
the Fund to mark-to-market certain types of the positions in its portfolio
(i.e., treat them as if they were closed out), which may cause the Fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections, and will make the appropriate entries in its books
and records when it acquires any option, futures contract, forward contract, or
hedged investment in order to mitigate the effect of these rules, prevent
disqualification of the Fund as a regulated investment company and minimize the
imposition of income and excise taxes.
S-23
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TAPS
Under present law and based in part on the fact that there is no
express or implied agreement between or among a Broker-Dealer or any other
party, and the Fund or any owners of the TAPS, that the Broker-Dealer or any
other party will guarantee or otherwise arrange to ensure that an owner of TAPS
will be able to sell his or her shares, the Fund is of the opinion that the TAPS
will constitute stock of the Fund, and thus distributions with respect to the
TAPS (other than capital gain distributions and distributions in redemption of
the TAPS subject to section 302(b) of the Code) will generally constitute
dividends to the extent of the Fund's current or accumulated earnings and
profits, as calculated for federal income tax purposes. The following discussion
assumes such treatment will apply.
The Fund's income will consist of net investment income and may also
consist of net capital gain. The character of the Fund's income will not affect
the amount of dividends to which the holders of the TAPS are entitled. Holders
of the TAPS are entitled to receive only the amount of dividends as determined
by periodic auctions. For federal income tax purposes, however, the Internal
Revenue Service currently requires that a regulated investment company that has
two or more classes of shares, allocate to each such class proportionate amounts
of each type of its income (such as ordinary income and net capital gain) for
each tax year. Accordingly, the Fund intends to designate distributions made
with respect to the Common Shares and the TAPS as consisting of particular types
of income (net capital gain and ordinary income), in accordance with each
class's proportionate share of the total dividends paid to both classes. Thus,
each dividend paid with respect to the TAPS during a year will be designated as
ordinary income dividends and distributions if the Fund designates any dividend
as a capital gains dividend, capital gains in proportion to the total dividends
paid on the TAPS during the year to the total distributions paid on both the
TAPS and the Common Shares during the year. Each holder of the TAPS during the
year will be notified of the allocation within 60 days after the end of the
year. The amount of the net capital gain realized by the Fund may not be
significant, and there is no assurance that any such income will be realized by
the Fund in any year. Distributions of the Fund's net investment income are
taxable to shareholders as ordinary income. Distributions of the Fund's net
capital gains, if any, are taxable to shareholders at rates applicable to
long-term capital gains, regardless of the length of time the TAPS have been
held by holders. Distributions in excess of the Fund's earnings and profits will
first reduce a shareholder's adjusted tax basis in his or her shares of TAPS
and, after the adjusted tax basis is reduced to zero, will constitute capital
gains to a holder of shares of TAPS who holds his or her shares of TAPS as a
capital asset.
Although the Fund is required to distribute annually at least 90% of
its net investment income, the Fund is not required to distribute net capital
gain to its shareholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gain"). In
such case, the Fund may elect to have its shareholders of record on the last day
of its taxable year treated as if each received a distribution of its pro rata
share of the net undistributed capital gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of the tax paid by the Fund on the net undistributed capital
gain, and will increase the tax basis for his or her shares by an amount equal
to the deemed distribution, less the tax credit. However, it is unclear whether
a portion of the net undistributed capital gain would have to be allocated to
the TAPS for federal income tax purposes. Until and unless the Fund receives
acceptable guidance from the Internal Revenue Service as to the allocation of
the net undistributed capital gain between the Common Shares and the TAPS, the
Fund intends to distribute its net capital gain for any year during which it has
shares of TAPS outstanding. Such distribution will affect the tax character but
not the amount of dividends to which holders of shares of TAPS are entitled.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December with a record date in such
months, and paid in January of the following year, will be treated as having
been distributed by the Fund and received by the shareholders on December 31. In
addition, solely for the purpose of satisfying the 90% distribution requirement
and the distribution requirement for avoiding income taxes, certain
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid during such taxable year. In such case, shareholders
will be treated as having received such dividends in the taxable year in which
the
S-24
distribution was actually made. The IRS has ruled privately that dividends paid
following the close of the taxable year that are treated for tax purposes as
derived from income from the prior year will be treated as dividends "paid" in
the prior year for purposes of determining the proportionate share of a
particular type of income for each class. Accordingly, the Fund intends to treat
any such dividends that are paid following the close of a taxable year as "paid"
in the prior year for purposes of determining a class's proportionate share of a
particular type of income. However, the private ruling is not binding on the
Internal Revenue Service, and there can be no assurance that the Internal
Revenue Service will respect such treatment.
Most of the Fund's net investment income is expected to be derived from
dividends from REITs and interest-bearing securities. Accordingly, dividends
paid with respect to the TAPS generally will not qualify for the dividends
received deduction available to corporate shareholders. However, from time to
time, a portion of the Fund's net investment income may be attributable to
dividends on equity securities which are eligible for the dividends received
deduction under Section 243 of the Code. Corporate shareholders who otherwise
are eligible to claim the dividends received deduction under Section 243 of the
Code can deduct 70% of the portion of the TAPS dividend representing the
shareholder's portion of the Fund's eligible dividend income. The Internal
Revenue Service has ruled that corporate shareholders of a regulated investment
company must meet the holding requirements of Section 246(c) of the Code with
respect to the shares of the regulated investment company to qualify for the
dividends received deduction. The Fund will inform holders of shares of TAPS of
the source and tax status of all distributions shortly after the close of each
calendar year.
SALE OF SHARES
A holder's sale of shares of TAPS will be a taxable transaction for
federal income tax purposes. Selling holders of shares of TAPS will generally
recognize gain or loss in an amount equal to the difference between the net
proceeds of the sale and their adjusted tax basis in the shares of TAPS sold. If
such shares of TAPS are held as a capital asset, the gain or loss will generally
be a capital gain or loss. Similarly, a redemption (including a redemption by
the Fund resulting from liquidation of the Fund), if any, of all the shares of
TAPS actually and constructively held by a shareholder generally will give rise
to capital gain or loss if the shareholder does not own (and is not regarded
under certain tax law rules of constructive ownership as owning) any Common
Shares in the Fund and provided that the redemption proceeds do not represent
declared but unpaid dividends. Other redemptions may also give rise to capital
gain or loss if several conditions imposed by the Code are satisfied. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced by substantially identical shares within a period of 61
days beginning 30 days before and ending 30 days after the disposition of the
original shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon a taxable
disposition of shares of TAPS held for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gain
received with respect to such shares.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income tax
purposes, a portion of all taxable distributions payable to shareholders who
fail to provide the Fund with their correct taxpayer identification number or
who fail to make required certifications, or if the Fund or a shareholder has
been notified by the Internal Revenue Service that the shareholder is subject to
backup withholding. Corporate shareholders and other shareholders specified in
the Code are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability, provided the appropriate information is
furnished to the IRS.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions at a
rate of 30%, or such lower rates as may be prescribed by
S-25
any applicable treaty.
Investors are advised to consult their own tax advisors with respect to
the application to their own circumstances of the above-described general
taxation rules and with respect to the state, local or foreign tax consequences
to them of an investment in TAPS.
EXPERTS
The Financial Statements of the Fund as of October 29, 2001,
appearing in this Statement of Additional Information have been audited by
Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois 60603, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
is included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing. Arthur Andersen LLP provides accounting
and auditing services to the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2 relating to the shares offered
hereby, has been filed by the Fund with the Securities and Exchange Commission
(the "Commission"), Washington, D.C. The prospectus and this statement of
additional information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
prospectus and this statement of additional information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
S-26
REPORT OF INDEPENDENT AUDITORS
AND
FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of
Nuveen Real Estate Income Fund
We have audited the statement of net assets for the Nuveen Real Estate Income
Fund (the "Fund") as of October 29, 2001 and the related statement of operations
for the period from August 27, 2001 (date of organization) through October 29,
2001. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these statements
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of the Fund as of October 29,
2001, and the results of its operations for the period from August 27, 2001
(date of organization) through October 29, 2001, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
October 30, 2001
F-2
NUVEEN REAL ESTATE INCOME FUND
FINANCIAL STATEMENTS
Nuveen Real Estate Income Fund
Statement of Net Assets
October 29, 2001
Assets:
Cash............................................................$100,275
Offering costs.................................................. 600,000
Receivable from adviser......................................... 15,000
--------
Total assets.................................................. 715,275
--------
Liabilities:
Accrued offering costs.......................................... 600,000
Payable for organization costs.................................. 15,000
--------
Total liabilities............................................. 615,000
--------
Net assets..........................................................$100,275
========
Net asset value per Common Share outstanding ($100,275 divided
by 7,000 Common Shares outstanding).............................$ 14.325
========
Net Assets Represent:
Cumulative Taxable Auctioned Preferred Shares, $25,000
liquidation value; unlimited number of shares authorized,
no shares outstanding........................................$ -
Common Shares, $.01 par value; unlimited number of shares
authorized, 7,000 shares outstanding.......................... 70
Paid-in surplus................................................. 100,205
--------
$100,275
========
F-3
Nuveen Real Estate Income Fund
Statement of Operations
Period from August 27, 2001 (date of organization) through October 29, 2001
Investment income.......................................... $ -
--------
Expenses:
Organization cost..................................... 15,000
Expense reimbursement................................. (15,000)
--------
Total expenses................................... -
--------
Net investment income...................................... $ -
========
Note 1: Organization
The Fund was organized as a Massachusetts business trust on August 27, 2001, and
has been inactive since that date except for matters relating to its
organization and registration as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended, and the
Securities Act of 1933, as amended, and the sale of 7,000 Common Shares to
Nuveen Institutional Advisory Corp., the Fund's investment adviser (the
"Adviser"), a wholly owned subsidiary of The John Nuveen Company.
Nuveen Investments, also a wholly owned subsidiary of The John Nuveen Company,
has agreed to reimburse all organization expenses (approximately $15,000) and
pay all offering costs (other than the sales load) that exceed $.03 per Common
Share.
The Fund is authorized by its Declaration of Trust to issue Taxable Auctioned
Preferred Shares having a liquidation value of $25,000 per share in one or more
classes or series, with dividend, liquidation preference and other rights as
determined by the Fund's Board of Trustees without approval of the Common
Shareholders.
Note 2: Accounting Policies
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the use of
management estimates. Actual results may differ from those estimates.
The Fund's share of offering costs will be recorded as a reduction of the
proceeds from the sale of Common Shares upon the commencement of Fund
operations. The offering costs reflected above assume the sale of 20,000,000
Common Shares.
Note 3: Investment Management Agreement
Pursuant to an investment management agreement between the Adviser and the Fund,
the Fund has agreed to pay a management fee, payable on a monthly basis, at an
annual rate ranging from 0.9000% of the first $500 million of the average daily
net assets (including net assets attributable to Taxable Auctioned Preferred
Shares and the principal amount of borrowings ("managed assets")) to 0.8000% of
the average daily managed assets in excess of $2 billion.
F-4
In addition to the reimbursement and waiver of organization and offering costs
discussed in Note 1, the Adviser has contractually agreed to reimburse the Fund
for fees and expenses during the first 10 years of operations. These reductions
range from 0.3000% of the average daily managed assets during the first year of
operations, declining to 0.0500% of the average daily managed assets during the
tenth year. The Adviser has not agreed to reimburse the Fund for any portion of
its fees and expenses beyond November 30, 2011.
Note 4: Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
investment income, in addition to any significant amounts of net realized
capital gains from investment transactions.
F-5
STATEMENT OF NET ASSETS (UNAUDITED)
November 30, 2001
ASSETS
Investments at market value (cost $414,141,421) $ 415,846,079
Interest receivable 188,604
-------------
Total assets 416,034,683
-------------
LIABILITIES
Cash overdraft 4,863,517
Payable for investments purchased 55,350,129
Accrued expenses:
Management fees 72,315
Organization and Offering costs 756,000
Other 7,586
-------------
Total liabilities 61,049,547
-------------
Net assets $ 354,985,136
=============
Shares outstanding 24,707,000
=============
Net asset value per share outstanding (net assets
divided by shares outstanding) $ 14.37
=============
Net assets consist of:
Common Shares, $.01 par value per share $ 247,070
Paid-in surplus 352,939,705
Balance of undistributed net investment income 93,703
Net unrealized appreciation of investments 1,704,658
-------------
Net assets $ 354,985,136
=============
Authorized shares:
Common Unlimited
Taxable Auctioned Preferred Shares Unlimited
=============
F-6
STATEMENT OF OPERATIONS (UNAUDITED)
For the Period November 15, 2001 (commencement of operations) through
November 30, 2001
INTEREST INCOME $ 188,604
-----------
EXPENSES
Management fees 130,974
Shareholders' servicing agent fees and expenses 349
Custodian's fees and expenses 3,633
Trustees' fees and expenses 349
Professional fees 926
Shareholders' reports - printing and mailing expenses 2,298
Stock exchange listing fees 30
-----------
Total expenses before expense reimbursement 138,559
Expense reimbursement (43,658)
-----------
Net expenses 94,901
-----------
Net investment income 93,703
-----------
UNREALIZED GAIN FROM INVESTMENTS
Change in net unrealized appreciation
of investments 1,704,658
-----------
Net gain from investments 1,704,658
-----------
Net increase in net assets from operations $ 1,798,361
===========
F-7
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
For the Period November 15, 2001 (commencement of operations) through November
30, 2001
OPERATIONS
Net investment income $ 93,703
Change in net unrealized appreciation
of investments 1,704,658
------------
Net increase in net assets from operations 1,798,361
------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares 353,086,500
------------
Net increase in net assets 354,884,861
Net assets at the beginning of period 100,275
------------
Net assets at the end of period $354,985,136
============
Balance of undistributed net investment income at
the end of period $ 93,703
============
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Fund covered in this report and its corresponding American Stock Exchange
symbol is Nuveen Real Estate Income Fund (JRS) (the "Fund").
The Fund seeks to provide high current income by investing primarily in a
portfolio of income-producing common stocks, preferred stocks, convertible
preferred stocks and debt securities issued by real estate companies, such as
REITs. The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, closed-end management investment company.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with
accounting principles generally accepted in the United States.
Securities Valuation
Securities are valued at the last sales price on the securities exchange or
Nasdaq on which such securities are primarily traded. Securities traded on a
securities exchange or Nasdaq for which there are no transactions on a given day
or securities not listed on a securities exchange or Nasdaq are valued at the
mean of the closing bid and asked price. The prices of securities are provided
by a pricing service approved by the Board of Trustees. If it is determined that
market prices for a security are unavailable or inappropriate, the Board of
Trustees of the Fund, may establish a fair value for the security. The Fund
utilizes a fund "sweep" vehicle to invest daily excess liquidity. Such
investments are valued at the end of day net asset value of such fund.
Because the Fund may invest a substantial portion of its assets in Real Estate
Investment Trusts ("REITs"), the Fund may be subject to certain risks associated
with direct investments in REITs. REITs may be affected by changes in value of
their underlying properties and by defaults by tenants. REITs depend generally
on their ability to generate cash flow to make distributions to shareholders,
and certain REITs have self-liquidation provisions by which mortgages held may
be paid in full and distributions of capital returns may be made at any time.
Securities Transactions
Securities transactions are recorded on a trade date basis. Realized gains and
losses from such transactions are determined on the specific identification
method.
Investment Income
Dividend income is recorded on the ex-dividend date. Interest income is
determined on an accrual basis.
Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
investment income to its shareholders. Therefore, no federal income tax
provision is required.
Dividends and Distributions to Shareholders
Net investment income is declared monthly as a dividend and payment is made or
reinvestment is generally credited to shareholder accounts on the first business
day after month-end. Net realized capital gains from investment transactions, if
any, are distributed to shareholders not less frequently than annually.
Furthermore, capital gains are distributed only to the extent they exceed
available capital loss carryforwards.
Distributions to shareholders of net investment income and net realized capital
gains are recorded on the ex-dividend date. The amount and timing of
distributions are determined in accordance with federal income tax regulations,
which may differ from accounting principles generally accepted in the United
States. Accordingly, temporary over-distributions as a result of these
differences may occur and will be classified as either distributions in excess
of net investment income or distributions in excess of net realized gains, where
applicable.
F-8
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results may differ from those estimates.
Organization and Offering Costs
Nuveen Investments, a wholly owned subsidiary of The John Nuveen Company,
has agreed to reimburse all organization expenses (approximately $15,000) and
pay all offering costs (other than the sales load) that exceed $.03 per Common
Share. The Fund's share of offering costs ($741,000) were recorded as a
reduction of the proceeds from the sale of shares.
2. FUND SHARES
The Fund sold 24,700,000 Common Shares during the period November 15, 2001
(commencement of operations) through November 30, 2001.
3. SECURITIES TRANSACTIONS
Purchases and sales of long-term investments for the period November 15, 2001
(commencement of operations) through November 30, 2001, were as follows:
--------------------------------------------------------------------------------
Purchases:
Long-term investments $237,026,558
Sales:
Long-term investments --
--------------------------------------------------------------------------------
At November 30, 2001, the cost of investments owned for federal income tax
purposes was the same as the cost for financial reporting purposes.
4. UNREALIZED APPRECIATION (DEPRECIATION)
Gross unrealized appreciation and gross unrealized depreciation of investments
at November 30, 2001, were as follows:
------------------------------------------------------------------------------------------------------
Gross unrealized:
appreciation $ 2,673,432
depreciation (968,774)
------------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 1,704,658
======================================================================================================
5. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Fund's investment management agreement with Nuveen Institutional
Advisory Corp. (the "Adviser"), a wholly owned subsidiary of The John Nuveen
Company, the Fund pays an annual management fee, payable monthly, at the rates
set forth below, which are based upon the average daily managed assets of the
Fund. "Managed assets" shall mean the average daily net assets of the Fund
including assets attributable to Taxable Auctioned Preferred Shares and the
principal amount of borrowings.
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE
-----------------------------------------------------------------------------------------------------
For the first $500 million .9000%
For the next $500 million .8750
For the next $500 million .8500
For the next $500 million .8200
For net assets over $2 billion .8000
======================================================================================================
The fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Adviser has entered
into a Sub-Advisory Agreement with Security Capital Research & Management
Incorporated ("Security Capital"), under which Security Capital manages the
investment portfolio of the Fund. Security Capital is compensated for its
services to the Fund from the management fee paid to the Adviser. The Fund pays
no compensation directly to those of its Trustees who are affiliated with the
Adviser or to its officers, all of whom receive remuneration for their services
to the Fund from the Adviser.
F-9
For the first ten years of the Fund's operation, the Adviser has agreed to
reimburse the Fund for fees and expenses in the amounts, and for the time
periods set forth below:
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
(AS A PERCENTAGE (AS A PERCENTAGE
YEAR ENDING OF AVERAGE DAILY YEAR ENDING OF AVERAGE DAILY
NOVEMBER 30, MANAGED ASSETS) NOVEMBER 30, MANAGED ASSETS)
------------- ----------------- ------------- -----------------
2001*........................ .30% 2007 ................ .25%
2002 ........................ .30 2008 ................ .20
2003 ........................ .30 2009 ................ .15
2004 ........................ .30 2010 ................ .10
2005 ........................ .30 2011 ................ .05
2006 ........................ .30
---------------
* From the commencement of operations.
The Adviser has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond November 30, 2011.
SUBSEQUENT EVENTS
On December 14, 2001, GE Capital Corp., a wholly-owned subsidiary of General
Electric Co., announced its intention to acquire Security Capital Group,
Incorporated, the parent company of Security Capital, subadvisor to the Fund.
The transaction is proposed to close during the first half of 2002 but there is
no assurance that the transaction will be completed. Pursuant to the Investment
Company Act of 1940, in the event that this proposed transaction is completed,
shareholders of the Fund will be required to approve the change in the
subadvisor.
F-10
PORTFOLIO OF INVESTMENTS (UNAUDITED)
NUVEEN REAL ESTATE INCOME FUND (JRS)
November 30,2001
MARKET
SHARES DESCRIPTION VALUE
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 46.9%
APARTMENTS - 5.4%
158,900 Amli Residential Properties Trust $ 3,921,652
116,400 Gables Residential Trust 3,422,160
346,800 Post Properties, Inc. 11,975,004
----------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED - 0.5%
2,900 Bedford Property Investors, Inc. 64,409
500 Lexington Corporate Properties Trust 7,455
59,300 Liberty Property Trust 1,722,072
----------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 3.5%
406,800 First Industrial Realty Trust, Inc. 12,468,420
----------------------------------------------------------------------------------------------------------------------------------
OFFICE PROPERTY - 26.8%
650,000 Brandywine Realty Trust 13,279,500
750,000 Great Lakes REIT, Inc. 11,925,000
1,066,700 Highwoods Properties, Inc. 27,094,180
1,707,400 HRPT Properties Trust 14,376,308
622,100 Mack-Cali Realty Corporation 18,227,530
375,000 Prentiss Properties Trust 9,915,000
----------------------------------------------------------------------------------------------------------------------------------
REGIONAL MALLS - 8.4%
1,187,100 The Macerich Company 29,831,823
----------------------------------------------------------------------------------------------------------------------------------
SHOPPING CENTERS - 2.3%
211,100 Federal Realty Investment Trust 4,722,307
316,700 IRT Property Company 3,452,030
----------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $165,609,236) 166,404,850
-------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS - 20.4%
APARTMENTS - 2.0%
9,300 Apartment Investment & Management Company, 10.100% 237,150
65,600 Apartment Investment & Management Company, 10.000% 1,683,296
6,700 Apartment Investment & Management Company - Class G, 9.375% 170,515
40,200 Apartment Investment & Management Company - Series P (Convertible), 9.000% 977,262
800 Mid-America Apartment Communities, Inc. - Series B, 8.875% 19,960
6,000 Mid-America Apartment Communities, Inc. - Series C, 9.375% 150,360
60,000 Post Properties, Inc. - Series A, 8.500% 3,033,000
30,200 United Dominion Realty Trust, Inc., 8.600% 771,006
----------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED - 1.0%
26,300 Colonial Properties Trust - Series A, 8.750% 656,185
94,200 Liberty Property Trust - Series A, 8.800% 2,361,594
1,600 Vornado Realty Trust - Series B, 8.500% 40,336
19,300 Vornado Realty Trust - Series C, 8.500% 489,834
----------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE - 0.9%
24,900 Health Care Property Investors, Inc. - Series B, 8.700% 637,440
16,400 Healthcare Realty Trust, Inc. - Series A, 8.875% 408,852
7,400 Health Care REIT, Inc. - Series B, 8.875% 186,850
27,287 Nationwide Health Properties, Inc., 7.677% 2,020,943
----------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 0.2%
20,000 First Industrial Realty Trust, Inc., 8.750% 508,000
2,000 First Industrial Realty Trust, Inc. - Series D, 7.950% 47,820
----------------------------------------------------------------------------------------------------------------------------------
OFFICE PROPERTY - 5.4%
683,100 Crescent Real Estate Equities Company (Convertible), 6.750% 12,739,815
3,600 Highwoods Properties, Inc. - Series D, 8.000% 85,680
29,100 HRPT Properties Trust - Series A, 9.875% 755,145
49,081 Parkway Properties, Inc. - Series A, 8.750% 1,239,295
187,500 Reckson Associates Realty Corporation - Series A, 7.625% 4,378,125
----------------------------------------------------------------------------------------------------------------------------------
REGIONAL MALLS - 1.2%
50,000 Simon Property Group, Inc. - Series B (Convertible), 6.500% 4,125,000
1,900 Taubman Centers, Inc. - Series A, 8.300% 44,878
----------------------------------------------------------------------------------------------------------------------------------
SHOPPING CENTERS - 9.5%
1,200,000 Federal Realty Investment Trust, 8.500% 30,675,000
45,800 Glimcher Realty Trust - Series B, 9.250% 1,128,970
88,200 New Plan Excel Realty Trust - Series B, 8.625% 2,219,995
----------------------------------------------------------------------------------------------------------------------------------
STORAGE - 0.2%
20,700 Shurgard Storage Centers, Inc. - Series D, 8.750% 534,060
----------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stocks (cost $71,417,322) 72,326,366
-------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 49.8%
177,114,863 JP Morgan Prime Money Market Fund 177,114,863
----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Investments (cost $177,114,863) 177,114,863
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $414,141,421) - 117.1% 415,846,079
-------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - (17.1)% (60,860,943)
-------------------------------------------------------------------------------------------------------------------
Net Assets - 100% $354,985,136
===================================================================================================================
See accompanying notes to financial statements.
APPENDIX A
NUVEEN REAL ESTATE INCOME FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND
PREFERENCES OF TAXABLE AUCTIONED PREFERRED SHARES (THE "STATEMENT")
Nuveen Real Estate Income Fund, a Massachusetts business trust (the
"Trust"), certifies that:
FIRST: Pursuant to the authority expressly vested in the Board of the
Fund by Articles IV and VI of Fund's Declaration of Trust (which, as hereafter
restated or amended from time to time, are together with this Statement herein
called the "Declaration"), the Board of Trustees has, by resolution, authorized
the issuance of 6,880 Preferred Shares of beneficial interest ("Preferred
Shares"), $.01 par value, classified as Taxable Auctioned Preferred Shares
("TAPS"), and further classified as Series M, T, W and F TAPS (each series, and
together with additional series of TAPS that may be authorized and issued, a
"Series") each with a liquidation preference of $25,000 per share.
SECOND: The preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of such series of TAPS are as follows:
DESIGNATION
Series M: A series of 1,720 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series M Taxable Auctioned Preferred
Shares" ("TAPS Series M"). Each share of TAPS Series M shall have an Applicable
Rate for its initial Dividend Period equal to [__]% per annum and an initial
Dividend Payment Date of [______, 2002], and each share of TAPS Series M shall
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Fund, as are set forth in Part I and Part II of this
Statement. The TAPS Series M shall constitute a separate series of Preferred
Shares of the Fund.
Series T: A series of 1,720 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series T Taxable Auctioned Preferred
Shares" ("TAPS Series T"). Each share of TAPS Series T shall have an Applicable
Rate for its initial Dividend Period equal to [__]% per annum and an initial
Dividend Payment Date of [______, 2002], and each share of TAPS Series T shall
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Fund, as are set forth in Part I and Part II of this
Statement. The TAPS Series T shall constitute a separate series of Preferred
Shares of the Fund.
Series W: A series of 1,720 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series W Taxable Auctioned Preferred
Shares" ("TAPS Series W"). Each share of TAPS Series W shall have an Applicable
Rate for its initial Dividend Period equal to [__]% per annum and an initial
Dividend Payment Date of [______, 2002], and each share of TAPS Series W shall
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption, in addition
to those required by applicable law or set forth in the Declaration applicable
to preferred shares of the Fund, as are set forth in Part I and Part II of this
Statement. The TAPS Series W shall constitute a separate series of Preferred
Shares of the Fund.
Series F: A series of 1,720 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series F Taxable Auctioned Preferred
Shares" ("TAPS Series F"). Each share of TAPS Series F shall have an Applicable
Rate for its initial Dividend Period equal to [__]% per annum and an initial
Dividend Payment Date of [______, 2002], and each share of TAPS Series F shall
have such other preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law or set
forth in the Declaration applicable to preferred shares of the Fund, as are set
forth in Part I and Part II of this Statement. The TAPS Series F shall
constitute a separate series of Preferred Shares of the Fund.
Subject to the provisions of Section 12(b) of Part I hereof, the Board
of Trustees of the Fund may, in the future, classify additional authorized but
unissued shares of the Fund's Preferred Shares as TAPS Series M, T, W and F,
with the same preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption and other
terms of the respective series herein described, except that the Applicable Rate
for its initial Dividend Period, its initial Dividend Payment Date and any other
changes in the terms herein set forth shall be as set forth in an amendment to
this Statement.
As used in Part I and Part II of this Statement, capitalized terms
shall have the meanings provided in Section 18 of Part I.
PART I: TAPS TERMS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting TAPS Series
M, TAPS Series T, TAPS Series W and TAPS Series F is [1,720], [1,720], [1,720]
and [1,720] shares, respectively. No fractional shares of TAPS Series M, TAPS
Series T, TAPS Series W and TAPS Series F shall be issued.
(b) Any shares of each Series of TAPS which at any time have been
redeemed or purchased by the Fund shall, after such redemption or purchase, have
the status of authorized but unissued shares of Preferred Shares.
(c) The shares of each Series of TAPS shall rank on a parity with
shares of any other series of Preferred Shares (including any other shares of
TAPS) as to the payment of dividends to which such shares are entitled and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
(d) No holder of shares of any Series of TAPS shall have, solely by
reason of being such a holder, any preemptive or other right to acquire,
purchase or subscribe for any shares of any Series of TAPS, shares of Common
Shares of the Fund or other securities of the Fund which it may hereafter issue
or sell.
2. Dividends.
(a) The Holders of shares of any Series of TAPS shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends on their shares at the Applicable
Rate, determined as set forth in paragraph (c) of this Section 2, and no more,
payable on the respective dates determined as set forth in paragraph (b) of this
Section 2. Dividends on the Outstanding shares of any Series of TAPS issued on
the Date of Original Issue shall accumulate from the Date of Original Issue.
(b) (i) (i) Dividends shall be payable when, as and if declared by
the Board of Trustees following the initial Dividend Payment Date, subject
to subparagraph (b)(ii) of this Section 2, on the shares of each Series of
TAPS, with respect to any Dividend Period on the first Business Day
following the last day of such Dividend Period; provided, however, if the
Dividend Period is greater than 30 days then on a monthly basis on the
first Business Day of each month
2
within such Dividend Period and on the Business Day following the last day
of such Dividend Period.
(ii) If a day for payment of dividends resulting from the
application of subparagraph (b)(i) above is not a Business Day, then the
Dividend Payment Date shall be the first Business Day following such day
for payment of dividends.
(iii) The Fund shall pay to the Paying Agent not later than 3:00
p.m., New York City time, on the Business Day next preceding each Dividend
Payment Date for the shares of each Series of TAPS, an aggregate amount of
funds available on the next Business Day in the City of New York, New York,
equal to the dividends to be paid to all Holders of such shares on such
Dividend Payment Date. The Fund shall not be required to establish any
reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of
dividends shall be held in trust for the payment of such dividends by the
Paying Agent for the benefit of the Holders specified in subparagraph
(b)(v) of this Section 2. Any moneys paid to the Paying Agent in accordance
with the foregoing but not applied by the Paying Agent to the payment of
dividends, including interest earned on such moneys, will, to the extent
permitted by law, be repaid to the Fund at the end of 90 days from the date
on which such moneys were to have been so applied.
(v) Each dividend on a Series of TAPS shall be paid on the
Dividend Payment Date therefor to the Holders of that series as their names
appear on the share ledger or share records of the Fund on the Business Day
next preceding such Dividend Payment Date. Dividends in arrears for any
past Dividend Period may be declared and paid at any time, without
reference to any regular Dividend Payment Date, to the Holders as their
names appear on the share ledger or share records of the Fund on such date,
not exceeding 15 days preceding the payment date thereof, as may be fixed
by the Board of Trustees. No interest will be payable in respect of any
dividend payment or payments which may be in arrears.
(c) (i) The dividend rate on Outstanding shares of each Series of
TAPS during the period from and after the Date of Original Issue to and
including the last day of the initial Dividend Period therefor shall be
equal to the rate per annum set forth under "Designation" above. For each
subsequent Dividend Period with respect to the shares of TAPS Series M, T,
W and F Outstanding thereafter, the dividend rate shall be equal to the
rate per annum that results from an Auction; provided, however, that if an
Auction for any subsequent Dividend Period of a Series of TAPS is not held
for any reason or if Sufficient Clearing Bids have not been made in an
Auction (other than as a result of all shares of a Series of TAPS being the
subject of Submitted Hold Orders), then the dividend rate on the shares of
a Series of TAPS for any such Dividend Period shall be the Maximum Rate
(except (i) during a Default Period when the dividend rate shall be the
Default Rate, as set forth in Section 2(c)(ii) below) or (ii) after a
Default Period and prior to the beginning of the next Dividend Period when
the dividend rate shall be the Maximum Rate at the close of business on the
last of such Default Period). The All Hold Rate will apply automatically
following an Auction in which all of the Outstanding shares of a Series of
TAPS are subject (or are deemed to be subject) to Hold Orders. The rate per
annum at which dividends are payable on shares of a Series of TAPS as
determined pursuant to this Section 2(c)(i) shall be the "Applicable Rate."
(ii) Subject to the cure provisions below, a "Default Period"
with respect to a particular Series will commence on any date the Fund
fails to deposit irrevocably in trust in same-day funds, with the Paying
Agent by 12:00 noon, New York City time, (A) the full amount of any
3
declared dividend on that Series payable on the Dividend Payment Date (a
"Dividend Default") or (B) the full amount of any redemption price (the
"Redemption Price") payable on the date fixed for redemption (the
"Redemption Date") (a "Redemption Default") and together with a Dividend
Default, hereinafter referred to as "Default"). Subject to the cure
provisions of Section 2(c)(iii) below, a Default Period with respect to a
Dividend Default or a Redemption Default shall end on the Business Day on
which, by 12:00 noon, New York City time, all unpaid dividends and any
unpaid Redemption Price shall have been deposited irrevocably in trust in
same-day funds with the Paying Agent. In the case of a Dividend Default,
the Applicable Rate for each Dividend Period commencing during a Default
Period will be equal to the Default Rate, and each subsequent Dividend
Period commencing after the beginning of a Default Period shall be a
Standard Rate Period; provided, however, that the commencement of a Default
Period will not by itself cause the commencement of a new Dividend Period.
No Auction shall be held during a Default Period applicable to that Series
of TAPS.
(iii) No Default Period with respect to a Dividend Default or
Redemption Default shall be deemed to commence if the amount of any
dividend or any Redemption Price due (if such default is not solely due to
the willful failure of the Corporation) is deposited irrevocably in trust,
in same-day funds with the Paying Agent by 12:00 noon, New York City time
within three Business Days after the applicable Dividend Payment Date or
Redemption Date, together with an amount equal to the Default Rate applied
to the amount of such non-payment based on the actual number of days
comprising such period divided by 360 for each Series. The Default Rate
shall be equal to the Reference Rate multiplied by three (3).
(iv) The amount of dividends per share payable (if declared) on
each Dividend Payment Date of each Dividend Period of less than one (1)
year (or in respect of dividends on another date in connection with a
redemption during such Dividend Period) shall be computed by multiplying
the Applicable Rate (or the Default Rate) for such Dividend Period (or a
portion thereof) by a fraction, the numerator of which will be the number
of days in such Dividend Period (or portion thereof) that such share was
Outstanding and for which the Applicable Rate or the Default Rate was
applicable and the denominator of which will be 365, multiplying the amount
so obtained by $25,000, and rounding the amount so obtained to the nearest
cent. During any Dividend Period of one (1) year or more, the amount of
dividends per share payable on any Dividend Payment Date (or in respect of
dividends on another date in connection with a redemption during such
Dividend Period) shall be computed as described in the preceding sentence,
except that it will be determined on the basis of a year consisting of
twelve 30-day months.
(d) Any dividend payment made on shares of any Series of TAPS shall
first be credited against the earliest accumulated but unpaid dividends due with
respect to such Series.
(e) For so long as the shares of the TAPS are Outstanding, except as
contemplated by Part I of this Statement, the Fund will not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other shares of beneficial interest, if any,
ranking junior to the TAPS as to dividends or upon liquidation) in respect to
Common Shares or any other shares of the Fund ranking junior to or on a parity
with the TAPS as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or any
other such junior shares (except by conversion into or exchange for shares of
the Fund ranking junior to the TAPS as to dividends and upon liquidation) or any
such parity shares (except by conversion into or exchange for shares of the Fund
ranking junior to or on a parity with the TAPS as to dividends and upon
liquidation), unless (i) immediately after such transaction, the Fund would have
Eligible Assets with an
4
aggregate Discounted Value at least equal to the TAPS Basic Maintenance Amount
and the 1940 Act TAPS Asset Coverage would be achieved, (ii) full cumulative
dividends on the TAPS due on or prior to the date of the transaction have been
declared and paid and (iii) the Fund has redeemed the full number of shares of
the TAPS required to be redeemed by any provision for mandatory redemption
contained in Section 3(a)(ii).
(f) The Fund will not declare, pay or set apart for payment any
dividend or other distribution in respect to the TAPS unless (i) there is not an
event of default under indebtedness senior to the TAPS Series M, T, W and F, if
any, or (ii) immediately after such transaction, the Fund would have eligible
portfolio holdings with an aggregate discounted value at least equal to the
asset coverage requirements under the indebtedness senior to the TAPS.
3. Redemption.
(a)(i) After the initial Dividend Period, subject to the provisions
of this Section 3 and to the extent permitted under the 1940 Act and
Massachusetts law, the Fund may, at its option, redeem in whole or in part
out of funds legally available therefor shares of a Series of TAPS herein
designated as (A) having a Dividend Period of one year or less, on the
Business Day after the last day of such Dividend Period by delivering a
notice of redemption not less than 15 days and not more than 40 days prior
to the date fixed for such redemption, at a redemption price per share
equal to $25,000, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for
redemption ("Redemption Price"), or (B) having a Dividend Period of more
than one year, on any Business Day prior to the end of the relevant
Dividend Period by delivering a notice of redemption not less than 15 days
and not more than 40 days prior to the date fixed for such redemption, at
the Redemption Price, plus a redemption premium, if any, determined by the
Board of Trustees after consultation with the Broker-Dealers and set forth
in any applicable Specific Redemption Provisions at the time of the
designation of such Dividend Period as set forth in Section 4 of this
Statement; provided, however, that during a Dividend Period of more than
one year no shares of a Series of TAPS will be subject to optional
redemption except in accordance with any Specific Redemption Provisions
approved by the Board of Trustees after consultation with the
Broker-Dealers at the time of the designation of such Dividend Period.
Notwithstanding the foregoing, the Fund shall not give a notice of or
effect any redemption pursuant to this Section 3(a)(i) unless, on the date
on which the Fund intends to give such notice and on the date of redemption
(a) the Fund has available certain Deposit Securities with maturity or
tender dates not later than the day preceding the applicable redemption
date and having a value not less than the amount (including any applicable
premium) due to Holders of a Series of TAPS by reason of the redemption of
such TAPS on such date fixed for the redemption and (b) the Fund would have
Eligible Assets with an aggregate Discounted Value at least equal the TAPS
Basic Maintenance Amount immediately subsequent to such redemption, if such
redemption were to occur on such date, it being understood that the
provisions of paragraph (d) of this Section 3 shall be applicable in such
circumstances in the event the Fund makes the deposit and takes the other
action required thereby.
(ii) If the Fund fails to maintain, as of any Valuation Date,
Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount or, as of the last Business Day of any month,
the 1940 Act TAPS Asset Coverage, and such failure is not cured within ten
Business days following such Valuation Date in the case of a failure to
maintain the TAPS Basic Maintenance Amount on the last Business Day of the
following month or in the case of a failure to maintain the 1940 Act TAPS
Asset Coverage as of such last Business Day (each an "Asset Coverage Cure
Date"), the TAPS will be subject to mandatory redemption out of funds
legally available therefor. The number of shares of TAPS to be redeemed in
such
5
circumstances will be equal to the lesser of (A) the minimum number of
shares of TAPS the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the relevant Asset Coverage
Cure Date, would result in the Fund having Eligible Assets with an
aggregate Discounted Value at least equal to the TAPS Basic Maintenance
Amount, or sufficient to satisfy 1940 Act TAPS Asset Coverage, as the case
may be, in either case as of the relevant Asset Coverage Cure Date
(provided that, if there is no such minimum number of shares the redemption
of which would have such result, all shares of TAPS then Outstanding will
be redeemed), and (B) the maximum number of shares of TAPS that can be
redeemed out of funds expected to be available therefor on the Mandatory
Redemption Date at the Mandatory Redemption Price set forth in subparagraph
(a)(iv) of this Section 3.
(iii) In determining the shares of the TAPS required to be
redeemed in accordance with the foregoing Section 3(a)(ii), the Fund shall
allocate the number of shares required to be redeemed to satisfy the TAPS
Basic Maintenance Amount or the 1940 Act TAPS Asset Coverage, as the case
may be, pro rata among the Holders of shares of the TAPS in proportion to
the number of shares they hold and shares of other Preferred Shares subject
to mandatory redemption provisions similar to those contained in this
Section 3, subject to the further provisions of this subparagraph (iii).The
Fund shall effect any required mandatory redemption pursuant to
subparagraph (a)(ii) or (a)(iii) of this Section 3 no later than 30 days
after the Asset Coverage Cure Date (the "Mandatory Redemption Date"),
except that if the Fund does not have funds legally available for the
redemption of, or is not otherwise legally permitted to redeem, the number
of shares of the TAPS which would be required to be redeemed by the Fund
under clause (A) of subparagraph (a)(ii) or subparagraph (a)(iii) of this
Section 3 if sufficient funds were available, together with shares of other
Preferred Shares which are subject to mandatory redemption under provisions
similar to those contained in this Section 3, or the Fund otherwise is
unable to effect such redemption on or prior to such Mandatory Redemption
Date, the Fund shall redeem those shares of the TAPS, and shares of other
Preferred Shares which it was unable to redeem, on the earliest practicable
date on which the Fund will have such funds available, upon notice pursuant
to Section 3(b) to record owners of shares of the TAPS to be redeemed and
the Paying Agent. The Fund will deposit with the Paying Agent funds
sufficient to redeem the specified number of shares of the TAPS with
respect to a redemption required under subparagraph (a)(ii) or subparagraph
(a)(iii) of this Section 3, by 1:00 p.m., New York City time, of the
Business Day immediately preceding the Mandatory Redemption Date. If fewer
than all of the Outstanding shares of the TAPS are to be redeemed pursuant
to this Section 3(a)(iii), the number of shares to be redeemed shall be
redeemed pro rata from the Holders of such shares in proportion to the
number of such shares held by such Holders, by lot or by such other method
as the Fund shall deem fair and equitable, subject, however, to the terms
of any applicable Specific Redemption Provisions. "Mandatory Redemption
Price" means the Redemption Price plus (in the case of a Dividend Period of
one year or more only) a redemption premium, if any, determined by the
Board of Trustees after consultation with the Broker-Dealers and set forth
in any applicable Specific Redemption Provisions.
(b) In the event of a redemption pursuant to Section 3(a), the Fund will
file a notice of its intention to redeem with the Securities and Exchange
Commission so as to provide at least the minimum notice required under Rule
23c-2 under the 1940 Act or any successor provision. In addition, the Fund shall
deliver a notice of redemption to the Auction Agent (the "Notice of Redemption")
containing the information set forth below (i) in the case of an optional
redemption pursuant to subparagraph (a)(i) above, one Business Day prior to the
giving of notice to the Holders, (ii) in the case of a mandatory redemption
pursuant to subparagraph (a)(ii) above, on or prior to the 30th day preceding
the Mandatory Redemption Date. The Auction Agent will use its reasonable efforts
to provide telephonic notice to each Holder of shares of each Series of TAPS
called for redemption not later
6
than the close of business on the Business Day immediately following the day on
which the Auction Agent determines the shares to be redeemed (or, during a
Default Period with respect to such shares, not later than the close of business
on the Business Day immediately following the day on which the Auction Agent
receives Notice of Redemption from the Fund). The Auction Agent shall confirm
such telephonic notice in writing not later than the close of business on the
third Business Day preceding the date fixed for redemption by providing the
Notice of Redemption to each Holder of shares called for redemption, the Paying
Agent (if different from the Auction Agent) and the Securities Depository.
Notice of Redemption will be addressed to the registered owners of each Series
of TAPS at their addresses appearing on the share records of the Fund. Such
Notice of Redemption will set forth (i) the date fixed for redemption, (ii) the
number and identity of shares of TAPS to be redeemed, (iii) the redemption price
(specifying the amount of accumulated dividends to be included therein), (iv)
that dividends on the shares to be redeemed will cease to accumulate on such
date fixed for redemption, and (v) the provision under which redemption shall be
made. No defect in the Notice of Redemption or in the transmittal or mailing
thereof will affect the validity of the redemption proceedings, except as
required by applicable law. If fewer than all shares held by any Holder are to
be redeemed, the Notice of Redemption mailed to such Holder shall also specify
the number of shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section
3, but subject to Section 7(e), no shares of the TAPS may be redeemed unless all
dividends in arrears on the Outstanding shares of the TAPS and all shares of
beneficial interest of the Fund ranking on a parity with the TAPS with respect
to payment of dividends or upon liquidation, have been or are being
contemporaneously paid or set aside for payment; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all Outstanding
shares of the TAPS pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, Holders
of all Outstanding shares of the TAPS.
(d) Upon the deposit of funds sufficient to redeem shares of any
Series of TAPS with the Paying Agent and the giving of the Notice of Redemption
to the Auction Agent under paragraph (b) of this Section 3, dividends on such
shares shall cease to accumulate and such shares shall no longer be deemed to be
Outstanding for any purpose (including, without limitation, for purposes of
calculating whether the Fund has maintained the requisite TAPS Basic Maintenance
Amount or the 1940 Act TAPS Asset Coverage), and all rights of the holder of the
shares so called for redemption shall cease and terminate, except the right of
such holder to receive the redemption price specified herein, but without any
interest or other additional amount. Such redemption price shall be paid by the
Paying Agent to the nominee of the Securities Depository. The Fund shall be
entitled to receive from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the shares of TAPS called for redemption on such
date and (ii) such other amounts, if any, to which Holders of shares of each
Series of TAPS called for redemption may be entitled. Any funds so deposited
that are unclaimed at the end of two years from such redemption date shall, to
the extent permitted by law, be paid to the Fund, after which time the Holders
of shares of TAPS so called for redemption may look only to the Fund for payment
of the redemption price and all other amounts, if any, to which they may be
entitled. The Fund shall be entitled to receive, from time to time after the
date fixed for redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption
has been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of any Series of
TAPS shall be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Fund shall have failed, for any
reason whatsoever, to deposit in trust with the Paying Agent the redemption
price with respect to any shares for which such Notice of Redemption has been
given.
7
Notwithstanding the fact that the Fund may not have redeemed shares of any
Series of TAPS for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of TAPS Series and shall include those shares of
TAPS for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the
redemption price of shares of any Series of TAPS called for redemption shall be
held in trust by the Paying Agent for the benefit of holders of shares so to be
redeemed.
(g) So long as any shares of any Series of TAPS are held of record
by the nominee of the Securities Depository, the redemption price for such
shares will be paid on the date fixed for redemption to the nominee of the
Securities Depository for distribution to Agent Members for distribution to the
persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in
this Statement limits any right of the Fund to purchase or otherwise acquire any
shares of each Series of TAPS outside of an Auction at any price, whether higher
or lower than the price that would be paid in connection with an optional or
mandatory redemption, so long as, at the time of any such purchase, there is no
arrearage in the payment of dividends on, or the mandatory or optional
redemption price with respect to, any shares of any Series of TAPS for which
Notice of Redemption has been given and the Fund is in compliance with the 1940
Act TAPS Asset Coverage and has Eligible Assets with an aggregate Discounted
Value at least equal to the TAPS Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Fund shall have no voting
rights. If fewer than all the Outstanding shares of any Series of TAPS are
redeemed or otherwise acquired by the Fund, the Fund shall give notice of such
transaction to the Auction Agent, in accordance with the procedures agreed upon
by the Board of Trustees.
(i) In the case of any redemption pursuant to this Section 3, only
whole shares of TAPS shall be redeemed, and in the event that any provision of
the Declaration would require redemption of a fractional share, the Auction
Agent shall be authorized to round up so that only whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary, including,
without limitation, Sections 2(e), 6(g) and 12 of Part I hereof, the Board of
Trustees may authorize, create or issue any class or series of shares of
beneficial interest, including other series of TAPS, ranking prior to or on a
parity with the TAPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, to the extent permitted by the 1940 Act, as amended, if,
upon issuance, either (A) the net proceeds from the sale of such shares of
beneficial interest (or such portion thereof needed to redeem or repurchase the
Outstanding TAPS) are deposited with the Auction Agent in accordance with
Section 3(d) of Part I hereof, Notice of Redemption as contemplated by Section
3(b) of Part I hereof has been delivered prior thereto or is sent promptly
thereafter, and such proceeds are used to redeem all Outstanding TAPS or (B) the
Fund would meet the 1940 Act TAPS Asset Coverage, the TAPS Basic Maintenance
Amount and the requirements of Section 12 of Part I hereof.
4. Designation of Dividend Period.
(a) The initial Dividend Period for each Series of TAPS is as set
forth under "Designation" above. The Fund will designate the duration of
subsequent Dividend Periods of each Series of TAPS; provided, however, that no
such designation is necessary for a Standard Rate Period and, provided further,
that any designation of a Special Rate Period shall be effective only if (i)
notice thereof shall have been given as provided herein, (ii) any failure to pay
in a timely manner to the Auction Agent the full amount of any dividend on, or
the redemption price of, TAPS shall have been cured as provided
8
above, (iii) Sufficient Clearing Bids shall have existed in an Auction held on
the Auction Date immediately preceding the first day of such proposed Special
Rate Period, (iv) if the Fund shall have mailed a Notice of Redemption with
respect to any shares, the redemption price with respect to such shares shall
have been deposited with the Paying Agent, and (v) in the case of the
designation of a Special Rate Period, the Fund has confirmed that as of the
Auction Date next preceding the first day of such Special Rate Period, it has
Eligible Assets with an aggregate Discounted Value at least equal to the TAPS
Basic Maintenance Amount, and the Fund has consulted with the Broker-Dealers and
has provided notice of such designation and a TAPS Basic Maintenance Certificate
to Moody's (if Moody's is then rating the TAPS), Fitch (if Fitch is then rating
the TAPS) and any Other Rating Agency which is then rating the TAPS and so
requires.
(b) If the Fund proposes to designate any Special Rate Period, not
fewer than 7 (or two Business Days in the event the duration of the Dividend
Period prior to such Special Rate Period is fewer than 8 days) nor more than 30
Business Days prior to the first day of such Special Rate Period, notice shall
be (i) made by press release and (ii) communicated by the Fund by telephonic or
other means to the Auction Agent and confirmed in writing promptly thereafter.
Each such notice shall state (A) that the Fund proposes to exercise its option
to designate a succeeding Special Rate Period, specifying the first and last
days thereof and (B) that the Fund will by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such Special Rate Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to proceed with such
Special Rate Period, subject to the terms of any Specific Redemption Provisions,
or (y) its determination not to proceed with such Special Rate Period, in which
latter event the succeeding Dividend Period shall be a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Fund shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to
designate the next succeeding Dividend Period as a Special Rate Period,
specifying the first and last days thereof and (B) the terms of any
Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to
exercise its option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Rate Period to the Auction Agent or is unable to make
the confirmation provided in clause (v) of Paragraph (a) of this Section 4 by
3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such proposed Special Rate Period, the Fund shall be deemed to have
delivered a notice to the Auction Agent with respect to such Dividend Period to
the effect set forth in clause (ii) above, thereby resulting in a Standard Rate
Period.
5. Restrictions on Transfer. Shares of a Series of TAPS may be transferred
only (a) pursuant to an order placed in an Auction, (b) to or through a
Broker-Dealer or (c) to the Fund or any Affiliate. Notwithstanding the
foregoing, a transfer other than pursuant to an Auction will not be effective
unless the selling Existing Holder or the Agent Member of such Existing Holder,
in the case of an Existing Holder whose shares are listed in its own name on the
books of the Auction Agent, or the Broker-Dealer or Agent Member of such
Broker-Dealer, in the case of a transfer between persons holding shares of TAPS
through different Broker-Dealers, advises the Auction Agent of such transfer.
The certificates representing the shares of a Series of TAPS issued to the
Securities Depository will bear legends with respect to the restrictions
described above and stop-transfer instructions will be issued to the Transfer
Agent and/or Registrar.
9
6. Voting Rights.
(a) Except as otherwise provided in the Declaration or as otherwise
required by applicable law, (i) each Holder of shares of any Series of TAPS
shall be entitled to one vote for each share of any Series of TAPS held on each
matter submitted to a vote of shareholders of the Fund, and (ii) the holders of
Outstanding shares of Preferred Shares, including each Series of TAPS, and
shares of Common Shares shall vote together as a single class on all matters
submitted to shareholders; provided, however, that, at any meeting of the
shareholders of the Fund held for the election of trustees, the holders of
Outstanding shares of Preferred Shares, including each Series of TAPS,
represented in person or by proxy at said meeting, shall be entitled, as a
class, to the exclusion of the holders of all other securities and classes of
shares of beneficial interest of the Fund, to elect two trustees of the Fund,
each share of Preferred Shares, including each Series of TAPS, entitling the
holder thereof to one vote. The identity of the nominees of such Trustees may be
fixed by the Board of Trustees. Subject to paragraph (b) of this Section 6, the
holders of Outstanding shares of Common Shares and Preferred Shares, including
each Series of TAPS, voting together as a single class, shall elect the balance
of the trustees.
(b) During any period in which any one or more of the conditions
described below shall exist (such period being referred to herein as a "Voting
Period"), the number of trustees constituting the Board of Trustees shall be
automatically increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of shares of Preferred Shares,
including each Series of TAPS, would constitute a majority of the Board of
Trustees as so increased by such smallest number; and the holders of shares of
Preferred Shares, including each Series of TAPS, shall be entitled, voting as a
class on a one-vote-per-share basis (to the exclusion of the holders of all
other securities and classes of capital stock of the Fund), to elect such
smallest number of additional trustees, together with the two trustees that such
holders are in any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend Payment Date
accumulated dividends (whether or not earned or declared) on Preferred
Shares equal to at least two full years' dividends shall be due and
unpaid; or
(ii) if at any time holders of any other shares of Preferred
Shares are entitled under the 1940 Act to elect a majority of the
trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the Holders of shares of Preferred Shares,
including each Series of TAPS, upon the further occurrence of any of the events
described in this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Shares, including each Series of TAPS, to elect
additional trustees as described in paragraph (b) of this Section 6, the Fund
shall notify the Auction Agent, and the Auction Agent shall call a special
meeting of such holders, by mailing a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 30 days after
the date of mailing of such notice. If the Fund fails to send such notice to the
Auction Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting shall be
the close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
shares of Preferred Shares, including each Series of TAPS, held during a Voting
Period at which trustees are to be elected, such holders, voting together as a
class (to the exclusion of the holders of all other securities and classes of
capital stock of the Fund), shall be entitled to elect the number of trustees
prescribed in paragraph (b) of this Section 6 on a one-vote-per-share basis.
10
(d) The terms of office of all persons who are trustees of the Fund
at the time of a special meeting of holders of the TAPS and holders of other
Preferred Shares to elect trustees shall continue, notwithstanding the election
at such meeting by the holders and such other holders of the number of trustees
that they are entitled to elect, and the persons so elected by such holders,
together with the two incumbent trustees elected by such holders and the
remaining incumbent trustees elected by the holders of the Common Shares and
Preferred Shares, shall constitute the duly elected trustees of the Fund.
(e) Simultaneously with the termination of a Voting Period, the
terms of office of the additional directors elected by the Holders of the TAPS
and holders of other Preferred Shares pursuant to paragraph (b) of this Section
6 shall terminate, the remaining trustees shall constitute the trustees of the
Fund and the voting rights of such holders to elect additional trustees pursuant
to paragraph (b) of this Section 6 shall cease, subject to the provisions of the
last sentence of paragraph (b) of this Section 6.
(f) So long as any of the shares of Preferred Shares, including each
Series of TAPS, are Outstanding, the Fund will not, without the affirmative vote
of the holders of a majority of the Outstanding shares of Preferred Shares
determined with reference to a "majority of outstanding voting securities" as
that term is defined in Section 2(a)(42) of the 1940 Act, voting as a separate
class, (i) amend, alter or repeal any of the preferences, rights or powers of
such class so as to affect materially and adversely such preferences, rights or
powers as defined in Section 6(g) below; (ii) increase the authorized number of
shares of Preferred Shares; (iii) create, authorize or issue shares of any class
of shares of beneficial interest ranking senior to or on a parity with the
Preferred Shares with respect to the payment of dividends or the distribution of
assets, or any securities convertible into, or warrants, options or similar
rights to purchase, acquire or receive, such shares of beneficial interest
ranking senior to or on a parity with the Preferred Shares or reclassify any
authorized shares of beneficial interest of the Fund into any shares ranking
senior to or on a parity with the Preferred Shares (except that, notwithstanding
the foregoing, but subject to the provisions of either Section 3(j) or 12, as
applicable, the Board of Trustees, without the vote or consent of the holders of
the Preferred Shares, may from time to time authorize, create and classify, and
the Fund may from time to time issue, shares or series of Preferred Shares,
including other series of TAPS, ranking on a parity with the TAPS with respect
to the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up to the affairs of the Fund, and may authorize,
reclassify and/or issue any additional shares of each Series of TAPS, including
shares previously purchased or redeemed by the Fund, subject to continuing
compliance by the Fund with 1940 Act TAPS Asset Coverage and TAPS Basic
Maintenance Amount requirements); (iv) institute any proceedings to be
adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy
or insolvency proceedings against it, or file a petition seeking or consenting
to reorganization or relief under any applicable federal or state law relating
to bankruptcy or insolvency, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Fund or a substantial part of its property, or make any assignment for the
benefit of creditors, or, except as may be required by applicable law, admit in
writing its inability to pay its debts generally as they become due or take any
corporate action in furtherance of any such action; (v) create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust receipt
or other material encumbrance of any kind upon any of the Fund's assets as a
whole, except (A) liens the validity of which are being contested in good faith
by appropriate proceedings, (B) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) liens, pledges,
charges, security interests, security agreements or other encumbrances arising
in connection with any indebtedness senior to the TAPS, (D) liens, pledges,
charges, security interests, security agreements or other encumbrances arising
in connection with any indebtedness permitted under clause (vi) below and (E)
liens to secure payment for services rendered including, without limitation,
services rendered by the Fund's custodian and the Auction Agent; or (vi) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money
or any direct or
11
indirect guarantee of such indebtedness for borrowed money or any direct or
indirect guarantee of such indebtedness, except the Fund may borrow as may be
permitted by the Fund's investment restrictions; provided, however, that
transfers of assets by the Fund subject to an obligation to repurchase shall not
be deemed to be indebtedness for purposes of this provision to the extent that
after any such transaction the Fund has Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount as of the
immediately preceding Valuation Date.
(g) The affirmative vote of the holders of a majority of the
Outstanding shares of Preferred Shares, including each Series of TAPS, voting as
a separate class, shall be required to approve any plan of reorganization (as
such term is used in the 1940 Act) adversely affecting such shares or any action
requiring a vote of security holders of the Fund under Section 13(a) of the 1940
Act. In the event a vote of holders of shares of Preferred Shares is required
pursuant to the provisions of Section 13(a) of the 1940 Act, the Fund shall, not
later than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's (if Moody's is then rating TAPS, Fitch (if Fitch is then
rating the TAPS) and any Other Rating Agency which is then rating TAPS and which
so requires that such vote is to be taken and the nature of the action with
respect to which such vote is to be taken and shall, not later than ten Business
Days after the date on which such vote is taken, notify Moody's, Fitch and any
such Other Rating Agency, as applicable, of the results of such vote.
(h) The affirmative vote of the holders of a majority of the
Outstanding shares of Preferred Shares, including any Series of TAPS, voting
separately from any other series, shall be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series of classes of the Fund's
shares of beneficial interest. For purposes of the foregoing, no matter shall be
deemed to adversely affect any right, preference or power unless such matter (i)
alters or abolishes any preferential right of such series; (ii) creates, alters
or abolishes any right in respect of redemption of such series; or (iii) creates
or alters (other than to abolish) any restriction on transfer applicable to such
series. The vote of holders of any shares described in this Section 6(i) will in
each case be in addition to a separate vote of the requisite percentage of
Common Shares and/or Preferred Shares necessary to authorize the action in
question.
(i) The Board of Trustees, without the vote or consent of any holder
of shares of Preferred Shares, including any Series of TAPS, or any other
shareholder of the Fund, may from time to time amend, alter or repeal any or all
of the definitions contained herein, add covenants and other obligations of the
Fund, or confirm the applicability of covenants and other obligations set forth
herein, all in connection with obtaining or maintaining the rating of Moody's
(if Moody's is then rating the TAPS), Fitch (if Fitch is then rating the TAPS)
and any other rating agency which is then rating the TAPS, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of Preferred Shares, including TAPS, or the Holders thereof,
provided that the Board of Trustees receives written confirmation from Moody's,
Fitch or other rating agency, as applicable (with such confirmation in no event
being required to be obtained from a particular rating agency with respect to
definitions or other provisions relevant only to and adopted in connection with
another rating agency's rating of the any Series of TAPS) that any such
amendment, alteration or repeal would not adversely affect the rating then
assigned by such rating agency.
In addition, subject to compliance with applicable law, the Board of
Trustees may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of the shares of the
Preferred Shares, including any Series of TAPS, or any other shareholder of the
Fund, and without receiving any confirmation from any rating agency after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the TAPS Basic Maintenance
Amount.
12
(j) Unless otherwise required by law, holders of shares of any
Series of TAPS shall not have any relative rights or preferences or other
special rights other than those specifically set forth herein. The holders of
shares of any Series of TAPS shall have no rights to cumulative voting. In the
event that the Fund fails to pay any dividends on the shares of any Series of
TAPS, the exclusive remedy of the holders shall be the right to vote for
trustees pursuant to the provisions of this Section 6.
(k) The foregoing voting provisions will not apply with respect to
any Series of TAPS if, at or prior to the time when a vote is required, such
shares have been (i) redeemed or (ii) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
7. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of the affairs
of the Fund, whether voluntary or involuntary, the holders of each Series of
TAPS then Outstanding, together with holders of shares of any class of stock
ranking on a parity with each Series of TAPS upon dissolution, liquidation or
winding up, shall be entitled to receive and to be paid out of the assets of the
Fund (or the proceeds thereof) available for distribution to its shareholders
after satisfaction of claims of creditors of the Fund an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for shares of each Series of TAPS shall be $25,000 per share, plus an amount
equal to all accumulated dividends thereon (whether or not earned or declared
but without interest) to the date payment of such distribution is made in full
or a sum sufficient for the payment thereof is set apart with the Paying Agent.
No redemption premium shall be paid upon any liquidation even if such redemption
premium would be paid upon optional or mandatory redemption of the relevant
shares.
(b) If, upon any such liquidation, dissolution or winding up of the
affairs of the Fund, whether voluntary or involuntary, the assets of the Fund
available for distribution among the holders of all outstanding Preferred
Shares, including the TAPS, shall be insufficient to permit the payment in full
to such holders of the amounts to which they are entitled, then such available
assets shall be distributed among the holders of all outstanding Preferred
Shares, including the TAPS, ratably in any such distribution of assets according
to the respective amounts which would be payable on all such shares if all
amounts thereon were paid in full.
(c) Upon the dissolution, liquidation or winding up of the affairs
of the Fund, whether voluntary or involuntary, until payment in full is made to
the holders of TAPS of the liquidation distribution to which they are entitled,
no dividend or other distribution shall be made to the holders of shares of
Common Shares or any other class of shares of beneficial interest of the Fund
ranking junior to TAPS upon dissolution, liquidation or winding up and no
purchase, redemption or other acquisition for any consideration by the Fund
shall be made in respect of the shares of Common Shares or any other class of
shares of beneficial interest of the Fund ranking junior to TAPS upon
dissolution, liquidation or winding up.
(d) A consolidation, reorganization or merger of the Fund with or
into any other trust or company, or a sale, lease or exchange of all or
substantially all of the assets of the Fund in consideration for the issuance of
equity securities of another trust or company shall not be deemed to be a
liquidation, dissolution or winding up, whether voluntary or involuntary, for
the purposes of this Section 7.
(e) After the payment to the Holders of Preferred Shares, including
TAPS, of the full preferential amounts provided for in this Section 7, the
holders of Preferred Shares, including TAPS, as such shall have no right or
claim to any of the remaining assets of the Fund.
13
(f) In the event the assets of the Fund or proceeds thereof
available for distribution to the Holders of TAPS, upon any dissolution,
liquidation or winding up of the affairs of the Fund, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to paragraph (a) of this Section 7, no such
distribution shall be made on account of any shares of any other class or series
of Preferred Shares ranking on a parity with TAPS unless proportionate
distributive amounts shall be paid on account of the shares of TAPS, ratably, in
proportion to the full distributable amounts to which holders of all such parity
shares are entitled upon such dissolution, liquidation or winding up.
(g) Subject to the rights of the holders of shares of any Series or
class or classes of stock ranking on a parity with TAPS with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, after payment shall have been made in full to the holders
of the shares of TAPS as provided in paragraph (a) of this Section 7, but not
prior thereto, any other series or class or classes of stock ranking junior to
TAPS with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund shall, subject to any respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the holders of the shares of TAPS shall
not be entitled to share therein.
8. Auction Agent. For so long as any shares of TAPS are Outstanding,
the Auction Agent, duly appointed by the Fund to so act, shall be in each case a
commercial bank, trust company or other financial institution independent of the
Fund and its Affiliates (which, however, may engage or have engaged in business
transactions with the Fund or its Affiliates) and at no time shall the Fund or
any of its Affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent resigns or for any reason its appointment is
terminated during any period that any shares of TAPS are Outstanding, the Fund
shall use its best efforts promptly thereafter to appoint another qualified
commercial bank, trust company or financial institution to act as the Auction
Agent.
9. 1940 Act TAPS Asset Coverage. The Fund shall maintain, as of the
last Business Day of each month in which any shares of the TAPS are Outstanding,
asset coverage with respect to the TAPS which is equal to or greater than the
1940 Act TAPS Asset Coverage; provided, however, that Section 3(a)(ii) shall be
the sole remedy in the event the Fund fails to do so.
10. TAPS Basic Maintenance Amount. So long as shares of the TAPS are
Outstanding and Moody's or any Other Rating Agency which so requires is then
rating the shares of the TAPS, the Fund shall maintain, as of each Valuation
Date, Moody's Eligible Assets (if Moody's is then rating the TAPS), Fitch
Eligible Assets (if Fitch is then rating the TAPS) and (if applicable) Other
Rating Agency Eligible Assets having an aggregate Discounted Value equal to or
greater than the TAPS Basic Maintenance Amount; provided, however, that Section
3(a)(ii) shall be the sole remedy in the event the Fund fails to do so.
11. Certain Other Restrictions. For so long as any shares of TAPS are
Outstanding and Moody's, Fitch or any Other Rating Agency which so requires is
then rating such shares, the Fund will not, unless it has received written
confirmation from Moody's (if Moody's is then rating TAPS), Fitch Eligible
Assets (if Fitch is then rating the TAPS) and (if applicable) such Other Rating
Agency that any such action would not impair the rating then assigned by such
rating agency to a Series of TAPS, engage in any one or more of the following
transactions:
(a) purchase or sell futures contracts or options thereon with
respect to portfolio securities or write unsecured put or uncovered call options
on portfolio securities;
(b) issue additional shares of TAPS or any class or series of
shares ranking prior to or on a parity with TAPS with respect to the payment of
dividends or the distribution of assets upon
14
dissolution, liquidation or winding up of the Fund, or reissue any shares of
TAPS Series M, T, W and F previously purchased or redeemed by the Fund;
(c) engage in any short sales of securities;
(d) lend portfolio securities; or
(e) merge or consolidate into or with any other corporation.
For purposes of valuation of Moody's Eligible Assets: (A) if the Fund
writes a call option, the underlying asset will be valued as follows: (1) if the
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of TAPS, at the lower of the Discounted
Value of the underlying security of the option and the exercise price of the
option or (2) otherwise, it has no value; (B) if the Fund writes a put option,
the underlying asset will be valued as follows: the lesser of (1) exercise price
and (2) the Discounted Value of the underlying security; and (C) call or put
option contracts which the Fund buys have no value. For so long as TAPS is rated
by Moody's: (A) the Fund will not engage in options transactions for leveraging
or speculative purposes; (B) the Fund will not write or sell any anticipatory
contracts pursuant to which the Fund hedges the anticipated purchase of an asset
prior to completion of such purchase; (C) the Fund will not enter into an option
transaction with respect to portfolio securities unless, after giving effect
thereto, the Fund would continue to have Eligible Assets with an aggregate
Discounted Value equal to or greater than the TAPS Basic Maintenance Amount; (D)
the Fund will not enter into an option transaction with respect to portfolio
securities unless after giving effect to such transaction the Fund would
continue to be in compliance with the provisions relating to the TAPS Basic
Maintenance Amount; (E) for purposes of the TAPS Basic Maintenance Amount assets
in margin accounts are not Eligible Assets; (F) the Fund shall write only
exchange-traded options on exchanges approved by Moody's; (G) where delivery may
be made to the Fund with any of a class of securities, the Fund shall assume for
purposes of the TAPS Basic Maintenance Amount that it takes delivery of that
security which yields it the least value; (H) the Fund will not engage in
forward contracts; and (I) there shall be a quarterly audit made of the Fund's
options transactions by the Fund's independent accountants to confirm that the
Fund is in compliance with these standards.
12. Compliance Procedures for Asset Maintenance Tests. For so long as
any shares of TAPS are Outstanding and Moody's, Fitch or any Other Rating Agency
which so requires is then rating such shares:
(a) As of each Valuation Date, the Fund shall determine in
accordance with the procedures specified herein (i) the Market Value of each
Eligible Asset owned by the Fund on that date, (ii) the Discounted Value of each
such Eligible Asset using the Discount Factors, (iii) whether the TAPS Basic
Maintenance Amount is met as of that date, (iv) the value of the total assets of
the Fund, less all liabilities, and (v) whether the 1940 Act TAPS Asset Coverage
is met as of that date.
(b) Upon any failure to maintain the required TAPS Basic
Maintenance Amount or 1940 Act TAPS Asset Coverage on any Valuation Date, the
Fund may use reasonable commercial efforts (including, without limitation,
altering the composition of its portfolio, purchasing shares of the TAPS outside
of an Auction or in the event of a failure to file a certificate on a timely
basis, submitting the requisite certificate), subject to the fiduciary
obligations of the Board of Trustees, to reattain (or certify in the case of a
failure to file on a timely basis, as the case may be) the required TAPS Basic
Maintenance Amount or 1940 Act TAPS Asset Coverage on or prior to the Asset
Coverage Cure Date.
(c) Compliance with the TAPS Basic Maintenance Amount and 1940 Act
TAPS Asset Coverage tests shall be determined with reference to those shares of
the TAPS which are deemed to be Outstanding hereunder.
15
(d) The Fund shall deliver to the Auction Agent and Moody's (if
Moody's is then rating TAPS), Fitch (if Fitch is then rating TAPS) and any other
rating agency which is then rating TAPS and when so requires a certificate which
sets forth a determination of items (i)-(iii) of paragraph (a) of this Section
12 (a "TAPS Basic Maintenance Certificate") as of (A) the Date of Original
Issue, (B) the last Valuation Date of each month, (C) any date requested by any
rating agency, (D) a Business Day on or before any Asset Coverage Cure Date
relating to the Fund's cure of a failure to meet the TAPS Basic Maintenance
Amount Test, (E) any day that Common Shares or Preferred Shares, including TAPS,
are redeemed and (F) any day the Eligible Assets have an aggregate discounted
value less than or equal to 115% of the TAPS Basic Maintenance Amount. Such TAPS
Basic Maintenance Certificate shall be delivered in the case of clause (i)(A) on
the Date of Original Issue and in the case of all other clauses above on or
before the seventh Business Day after the relevant Valuation Date or Asset
Coverage Cure Date.
(e) The Fund shall deliver to the Auction Agent, Moody's (if
Moody's is then rating TAPS), Fitch (if Fitch is then rating TAPS) and any Other
Rating Agency which is then rating TAPS and which so requires a certificate with
respect to the calculation of the 1940 Act TAPS Asset Coverage and the value of
the portfolio holdings of the Fund (a "1940 Act TAPS Asset Coverage
Certificate") (i) as of the Date of Original Issue, and (ii) as of (A) the last
Valuation Date of each quarter thereafter, and (B) as of the Business Day on or
before the Asset Coverage Cure Date relating to the failure to satisfy the 1940
Act TAPS Asset Coverage. Such 1940 Act TAPS Asset Coverage Certificate shall be
delivered in the case of clause (i) on the Date of Original Issue and in the
case of clause (ii) on or before the seventh Business Day after the relevant
Valuation Date or the Asset Coverage Cure Date. The certificates of (d) and (e)
of this Section 12 may be combined into a single certificate.
(f) Within ten Business Days of the Date of Original Issue, the
Fund shall deliver to the Auction Agent, Moody's (if Moody's is then rating
TAPS), Fitch (if Fitch is then rating TAPS) and any Other Rating Agency which is
then rating TAPS and which so requires a letter prepared by the Fund's
independent accountants (an "Accountant's Certificate") regarding the accuracy
of the calculations made by the Fund in the TAPS Basic Maintenance Certificate
and the 1940 Act TAPS Asset Coverage Certificate required to be delivered by the
Fund as of the Date of Original Issue. Within ten Business Days after the last
Valuation Date of each fiscal quarter of the Fund on which an TAPS Basic
Maintenance Certificate is required to be delivered, the Fund will deliver to
the Auction Agent, Moody's (if Moody's is then rating TAPS), Fitch (if Fitch is
then rating the TAPS) and any Other Rating Agency which is then rating TAPS and
which so requires an Accountant's Certificate regarding the accuracy of the
calculations made by the Fund in such TAPS Basic Maintenance Certificate and in
any other TAPS Basic Maintenance Certificate randomly selected by the Fund's
independent accountants during such fiscal quarter. Within ten Business Days
after the last Valuation Date of each fiscal quarter of the Fund on which a 1940
Act TAPS Asset Coverage Certificate is required to be delivered, the Fund will
deliver to the Auction Agent, Moody's (if Moody's is then rating TAPS), Fitch
(if Fitch is then rating the TAPS) and any Other Rating Agency which is then
rating TAPS and which so requires an Accountant's Certificate regarding the
accuracy of the calculations made by the Fund in such 1940 Act TAPS Asset
Coverage Certificate. In addition, the Fund will deliver to the relevant persons
specified in the preceding sentence an Accountant's Certificate regarding the
accuracy of the calculations made by the Fund on each TAPS Basic Maintenance
Certificate and 1940 Act TAPS Asset Coverage Certificate delivered pursuant to
clause (iv) of paragraph (d) or clause (ii)(B) of paragraph (e) of this Section
13, as the case may be, within ten days after the relevant Asset Coverage Cure
Date. If an Accountant's Certificate delivered with respect to an Asset Coverage
Cure Date shows an error was made in the Fund's report with respect to such
Asset Coverage Cure Date, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund with respect
to such reports. If any other Accountant's Certificate shows that an error was
made in any such report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund;
16
provided, however, any errors shown in the Accountant's Certificate filed on a
quarterly basis shall not be deemed to be a failure to maintain the TAPS Basic
Maintenance Amount on any prior Valuation Dates.
(g) The Accountant's Certificates referred to in paragraph (g) will
confirm, based upon the independent accountant's review, (i) the mathematical
accuracy of the calculations reflected in the related TAPS Basic Maintenance
Amount and 1940 Act TAPS Asset Coverage Certificates, as the case may be, and
(ii) that the Fund determined whether the Fund had, at such Valuation Date,
Eligible Assets with an aggregate Discounted Value at least equal to the Basic
Maintenance Amount in accordance with the Declaration.
(h) In the event that an TAPS Basic Maintenance Certificate or 1940
Act TAPS Asset Coverage Certificate with respect to an applicable Valuation Date
is not delivered within the time periods specified in this Section 12, the Fund
shall be deemed to have failed to maintain the TAPS Basic Maintenance Amount or
the 1940 Act TAPS Asset Coverage, as the case may be, on such Valuation Date for
purposes of Section 13(b). In the event that an TAPS Basic Maintenance
Certificate or 1940 Act TAPS Asset Coverage Certificate or the applicable
Accountant's Certificates with respect to an applicable Asset Coverage Cure Date
are not delivered within the time periods specified herein, the Fund shall be
deemed to have failed to have Eligible Assets with an aggregate Discounted Value
at least equal to the TAPS Basic Maintenance Amount or the 1940 TAPS Asset
Coverage, as the case may be, as of the related Valuation Date, and such failure
shall be deemed not to have been cured as of such Asset Coverage Cure Date for
purposes of the mandatory redemption provisions.
13. Notice. All notices or communications hereunder, unless otherwise
specified in this Statement, shall be sufficiently given if in writing and
delivered in person, by telecopier or mailed by first-class mail, postage
prepaid. Notices delivered pursuant to this Section 13 shall be deemed given on
the earlier of the date received or the date five days after which such notice
is mailed.
14. Waiver. Holders of at least two-thirds of the Outstanding shares of
TAPS, acting collectively, or each Series of TAPS acting as a separate series,
may waive any provision hereof intended for their respective benefit in
accordance with such procedures as may from time to time be established by the
Board of Trustees.
15. Termination. In the event that no shares of TAPS are Outstanding,
all rights and preferences of such shares established and designated hereunder
shall cease and terminate, and all obligations of the Fund under this Statement,
shall terminate.
16. Amendment. Subject to the provisions of this Statement, the Board
of Trustees may, by resolution duly adopted, without shareholder approval
(except as otherwise provided by this Statement or required by applicable law),
amend this Statement to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval. All such additional shares shall be governed by the terms
of this Statement. To the extent permitted by applicable law, the Board of
Trustees may interpret, amend or adjust the provisions of this Statement to
resolve any inconsistency or ambiguity or to remedy any patent defect.
17. Definitions. As used in Part I and Part II of this Statement, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
(a) "'AA' Composite Commercial Paper Rate" on any date means (i)
the interest equivalent of the 7-day rate, in the case of a Dividend Period
which is a Standard Dividend Period or shorter; for Dividend Periods greater
than 7 days but fewer than or equal to 31 days, the 30-day rate; for Dividend
Periods greater than 31 days but fewer than or equal to 61 days, the 60-day
rate; for Dividend
17
Periods greater than 61 days but fewer than or equal to 91 days, the 90-day
rate; for Dividend Periods greater than 91 days but fewer than or equal to 270
days, the rate described in (ii); for Dividend Periods greater than 270 days,
the Treasury Index Rate; on commercial paper on behalf of issuers whose
corporate bonds are rated "AA" by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, such rate shall be determined on the basis of the
quotations (or quotation) furnished by the remaining Commercial Paper Dealers
(or Dealer), if any, or, if there are no such Commercial Paper Dealers, by the
Auction Agent. For purposes of this definition, (A) "Commercial Paper Dealers"
shall mean (1) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (2) in lieu of any
thereof, its respective Affiliate or successor; and (3) in the event that any of
the foregoing shall cease to quote rates for commercial paper of issuers of the
sort described above, in substitution therefore, a nationally recognized dealer
in commercial paper of such issuers then making such quotations selected by the
Corporation, and (B) "interest equivalent" of a rate stated on a discount basis
for commercial paper of a given number of days' maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of 1%)
of (1) such rate expressed as a decimal, divided by (2) the difference between
(x) 1.00 and (y) a fraction, the numerator of which shall be the product of such
rate expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.
(b) "Accountant's Certificate" has the meaning set forth in Section
12(g) of this Part I.
(c) "Affiliate" means any person controlled by, in control of or
under common control with the Fund; provided that no Broker-Dealer controlled
by, in control of or under common control with the Fund shall be deemed to be an
Affiliate nor shall any corporation or any person controlled by, in control of
or under common control with such corporation one of the trustees, directors or
executive officers of which is also a trustee of the Fund be deemed to be an
Affiliate solely because such trustee, director or executive officer is also a
trustee of the Fund.
(d) "Agent Member" means a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(e) "All Hold Rate" means 80% of the "AA" Composite Commercial
Paper Rate.
(f) "Applicable Rate" means, with respect to each Series of TAPS
for each Dividend Period (i) if Sufficient Clearing Orders exist for the Auction
in respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do
not exist for the Auction in respect thereof, the Maximum Applicable Rate and
(iii) in the case where all the shares of TAPS are the subject of Hold Orders
for the Auction in respect thereof, the All Hold Rate.
(g) "Asset Coverage Cure Date" has the meaning set forth in Section
3(a)(ii).
(h) "Auction" means each periodic operation of the procedures set
forth under "Auction Procedures."
18
(i) "Auction Agent" means [_________] unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Trustees enters into an agreement with the Fund to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
(j) "Auction Date" means the first Business Day next preceding the
first day of a Dividend Period for each Series of TAPS.
(k) "Auction Procedures" means the procedures for conducting
Auctions set forth in Part II hereof.
(l) "Beneficial Owner," with respect to shares of each Series of
TAPS, means a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares of
such series.
(m) "Bid" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of this Statement.
(n) "Bidder" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of this Statement; provided, however, that neither the Fund
nor any affiliate thereof shall be permitted to be a Bidder in an Auction,
except that any Broker-Dealer that is an affiliate of the Fund may be a Bidder
in an Auction, but only if the Orders placed by such Broker-Dealer are not for
its own account.
(o) "Board of Trustees" or "Board" means the Board of Trustees of
the Fund or any duly authorized committee thereof as permitted by applicable
law.
(p) "Broker-Dealer" means any broker-dealer or broker-dealers, or
other entity permitted by law to perform the functions required of a
Broker-Dealer by the Auction Procedures, that has been selected by the Fund and
has entered into a Broker-Dealer Agreement that remains effective.
(q) "Broker-Dealer Agreement" means an agreement among the Auction
Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
(r) "Business Day" means a day on which the New York Stock Exchange
is open for trading and which is not a Saturday, Sunday or other day on which
banks in the City of New York, New York are authorized or obligated by law to
close.
(s) "Code" means the Internal Revenue Code of 1986, as amended.
(t) "Commercial Paper Dealers" has the meaning set forth in the
definition of AA Composite Commercial Paper Rate.
(u) "Commission" means the Securities and Exchange Commission.
(v) "Common Share" means the shares of beneficial interest, par
value $.01 per share, of the Fund.
(w) "Date of Original Issue" means the date on which a Series of
TAPS is originally issued by the Fund.
(x) "Default" has the meaning set forth in Section 2(c) ii of this
Part I.
(y) "Default Period" has the meaning set forth in Section 2(c)(ii)
of this Part I.
19
(z) "Default Rate" means the Reference Rate multiplied by three
(3).
(aa) "Deposit Securities" means cash and any obligations or
securities, including Short Term Money Market Instruments that are Eligible
Assets, rated at least AAA, A-2 or SP-2 by S&P, except that, for purposes of
section 3(a)(i) of this Part I, such obligations or securities shall be
considered "Deposit Securities" only if they are also rated at least P-2 by
Moody's.
(bb) "Discount Factor" means the Moody's Discount Factor (if
Moody's is then rating the TAPS), Fitch Discount Factor (if Fitch is then rating
the TAPS) or the discount factor established by any Other Rating Agency which is
then rating the TAPS and which so requires, whichever is applicable.
(cc) "Discounted Value" means the quotient of the Market Value of
an Eligible Asset divided by the applicable Discount Factor, provided that with
respect to an Eligible Asset that is currently callable, Discounted Value will
be equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable, Discounted
Value will be equal to the quotient as calculated above or the par value,
whichever is lower.
(dd) "Dividend Default" has the meaning set forth in Section
2(c)(iii) of this Part I.
(ee) "Dividend Payment Date" with respect to a Series of TAPS means
any date on which dividends are payable pursuant to Section 2(b) of this Part I.
(ff) "Dividend Period" means, with respect to a Series of TAPS, the
period commencing on the Date of Original Issue thereof and ending on the date
specified for such series on the Date of Original Issue thereof and thereafter,
as to such series, the period commencing on the day following each Dividend
Period for such series and ending on the day established for such series by the
Fund.
(gg) "Eligible Assets" means Moody's Eligible Assets or Fitch's
Eligible Assets (if Moody's or Fitch are then rating the TAPS) and/or Other
Rating Agency Eligible Assets if any Other Rating Agency is then rating the
TAPS, whichever is applicable.
(hh) "Existing Holder," with respect to shares of a series of TAPS,
shall mean a Broker-Dealer (or any such other Person as may be permitted by the
Fund) that is listed on the records of the Auction Agent as a holder of shares
of such series.
(ii) "Exposure Period" means the period commencing on (and
including) a given Valuation Date and ending 41 days thereafter.
(jj) "Fitch" means Fitch IBCA, Inc. and its successors at law.
(kk) "Fitch's Discount Factor" means for the purposes of
determining the TAPS Basic Maintenance Amount, the percentage determined below:
20
(i) Common Stock and Preferred Stock of REITS and Other Real Estate
Companies:
DISCOUNT FACTOR
---------------
REIT Preferred Shares...................................... 154%
Common Stock Preferred Shares.............................. 195%
Investment Grade Convertibles.............................. 200%
Below Investment Grade Convertibles........................ 250%
(ii) Debt Securities of REITS:
TERM TO
MATURITY AAA AA A BBB BB B CCC
------------ ----- ---- ---- ----- ----- ---- -----
1 year...... 111% 114% 117% 120% 121% 127% 227%
2 year...... 116% 125% 125% 127% 132% 137% 137%
3 year...... 121% 123% 127% 131% 133% 140% 225%
4 year...... 126% 126% 129% 132% 136% 140% 164%
5 year...... 131% 132% 135% 139% 144% 149% 185%
7 year...... 140% 143% 146% 152% 159% 167% 228%
10 year..... 141% 143% 147% 153% 160% 168% 232%
12 year..... 144% 144% 150% 157% 165% 174% 249%
15 year..... 148% 151% 155% 163% 172% 182% 274%
20-30 year.. 152% 156% 160% 169% 180% 191% 306%
----------
(1) The Fitch Discount Factors will also apply to interest rate swaps and
caps, whereby the rating on the counterparty will determine the
appropriate Discount Factor to apply.
(2) If a security is unrated by Fitch, but is rated by two other NRSROs,
then the lower of the ratings on the security from the two other NRSROs
should be used to determine the Fitch Discount Factor. If the security
is not rated by Fitch, but has a rating from only one other NRSRO, and
the security is investment grade, then the security will be notched one
rating category for purposes of computing the Discount Factor. If the
security is not rated by Fitch, but has a rating from only one other
NRSRO, and the security is below investment grade, then the security
will be notched two rating categories for purposes of computing the
Discount Factor.
(iii) U.S. Treasury Securities:
REMAINING TERM TO MATURITY DISCOUNT FACTOR
-------------------------- ---------------
1 year............... 100%
2 years.............. 103%
3 years.............. 105%
4 years.............. 107%
5 years.............. 109%
5-7 years............ 112%
7-10 years........... 114%
15 years............. 122%
20 years............. 130%
25 years............. 146%
30 years............. 154%
(iv) Short-Term Instruments and Cash:
The Fitch Discount Factor applied to short-term portfolio
securities will be (A) 100%, so long as such portfolio
securities mature or have a demand feature at par exercisable
within the Exposure Period and (B) 125%, so long as such
portfolio securities neither
21
mature nor have a demand feature at par exercisable within the
exposure period. A Fitch Discount Factor of 100% will be
applied to cash.
(v) Other Securities:
The Fitch Discount Factor with respect to securities other
than those described above will be the percentage provided in
writing by Fitch.
(ll) "Fitch Eligible Assets" means the following:
(i) Common Stock, Preferred Stock, and any debt security of
REITs and Real Estate Companies.
(ii) Unrated debt securities issued by an issuer which (1) has
not filed for bankruptcy in the past three years; (2) is current on all
interest and principal on its fixed income obligations; (3) is current
on all preferred stock dividends.
(iii) Interest rate swaps entered into according to
International Swap Dealers Association (`ISDA') standards if (1) the
counterparty to the swap transaction has a short-term rating of not
less than F1, or, if the swap counterparty does not have a short-term
rating, the counterparty's senior unsecured long-term debt rating is AA
or higher and (2) the original aggregate notional amount of the
interest rate swap transaction or transactions is not greater than the
liquidation preference of the Preferred Shares originally issued.
(iv) U.S. Treasury securities and U.S. Treasury Strips.
(v) Short-Term Money Market Instruments as long as (a) such
securities are rated at least `F1' by Fitch, (b) in the case of demand
deposits, time deposits and overnight funds, the supporting entity is
rated at least `A' by Fitch, or (c) in all other cases, the supporting
entity (1) is rated at least `A' by Fitch and the security matures in
one month (2) is rated at least `AA' by Fitch and matures within six
months.
(vi) Cash (including, for this purpose, interest and dividends
due on assets rated (a) BBB or higher by Fitch if the payment date is
within 5 Business Days of the Valuation Date, (b) A or higher by Fitch
if the payment is within thirty days of the Valuation Date, (c) A+ or
higher by Fitch if the payment date is within the Exposure Period) and
receivables for Fitch Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades
which are generated by such receivables are (a) settled through
clearing house firms with respect to which the fund has received prior
written authorization from Fitch or (b) (1) with counterparties having
a Fitch long-term rating of at least BBB by Fitch or (2) with
counterparties having a Fitch short-term rating of at least `F1'.
(mm) "Holder" means, with respect to TAPS, the registered holder of
shares of each Series of TAPS as the same appears on the share ledger or share
records of the Fund.
(nn) "Hold Order" shall have the meaning specified in paragraph (a)
of Section 1 of Part II of this Statement.
(oo) "Mandatory Redemption Date" has the meaning set forth in
Section 3(a)(iv) of this Part I.
22
(pp) "Mandatory Redemption Price" has the meaning set forth in
Section 3(a)(iv) of this Part I.
(qq) "Market Value" means the fair market value of an asset of the
Fund as computed as follows: [Securities listed on the New York Stock Exchange
at the last sale price reflected on the consolidated tape at the close of the
New York Stock Exchange on the business day as of which such value is being
determined provided that, if there has been no sale on such day, the securities
are valued at the mean of the closing bid and asked prices on such day and
provided further that, if no bid or asked prices are quoted on such day, then
the security is valued by such method as the Board of Trustees shall determine
in good faith to reflect its fair market value. Readily marketable securities
not listed on the New York Stock Exchange but listed on other domestic or
foreign securities exchanges or admitted to trading on the National Association
of Securities Dealers Automated Quotations, Inc. ("NASDAQ") National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities. Readily marketable
securities traded in the over-the-counter market, including listed securities
whose primary market is believed by the investment adviser to be
over-the-counter, but excluding securities admitted to trading on the NASDAQ
National List, are valued at the mean of the current bid and asked prices as
reported by NASDAQ or, in the case of securities not quoted by NASDAQ, the
National Quotation Bureau or such other comparable source as the Trustees deem
appropriate to reflect their fair market value. Certain fixed income securities
may be valued on the basis of prices provided by a pricing service when such
prices are believed by the Board of Trustees to reflect the fair market value of
such securities. Where securities are traded on more than one exchange and also
over-the-counter, the securities will generally be valued using the quotations
the Board of Trustees believes reflect most closely the value of such
securities.]
(rr) "Maximum Rate" means, on any date on which the Applicable Rate
is determined, the rate equal to 150% of the applicable Reference Rate, subject
to upward but not downward adjustment in the discretion of the Board of Trustees
after consultation with the Broker-Dealers, provided that immediately following
any such increase the Fund would be in compliance with the TAPS Basic
Maintenance Amount.
(ss) "Minimum Rate" means, on any Auction Date with respect to a
Dividend Period of 28 days or fewer, 70% of the AA Composite Commercial Paper
Rate at the close of business on the Business Day next preceding such Auction
Date. There shall be no Minimum Rate on any Auction Date with respect to a
Dividend Period of more than the Standard Rate Period.
(tt) "Moody's" means Moody's Investors Service, Inc. and its
successors at law.
(uu) "Moody's Discount Factor" means, for the purposes of
determining the TAPS Basic Maintenance Amount, the percentage determined below:
23
(i) Common Stock and Preferred Stock of REITs and Other Real
Estate Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common Stock of REITs............................................. 154%
Preferred Stock of REITs
with Senior Implied Moody's (or S&P) rating:................... 154%
without Senior Implied Moody's (or S&P) rating:................ 208%
Preferred Stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P) rating:................... 208%
without Senior Implied Moody's (or S&P) rating:................ 250%
----------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed
30% of Moody's Eligible Assets but are not greater than 35% of Moody's
Eligible Assets.
(2) A Discount Factor of 250% will be applied if dividends on such
securities have not been paid consistently (either quarterly or
annually) over the previous three years, or for such shorter time period
that such securities have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is between
$150 million and $500 million.
(ii) Debt Securities of REITs and Other Real Estate
Companies(1):
MATURITY
IN YEARS Aaa Aa A Baa Ba B Caa NR(2)
-------- ---- ---- ---- ---- ---- ---- ---- -----
1 109% 112% 115% 118% 119% 125% 225% 250%
2 115% 118% 122% 125% 127% 133% 225% 250%
3 120% 123% 127% 131% 133% 140% 225% 250%
4 126% 129% 133% 138% 140% 147% 225% 250%
5 132% 135% 139% 144% 146% 154% 225% 250%
7 139% 143% 147% 152% 156% 164% 225% 250%
10 145% 150% 155% 160% 164% 173% 225% 250%
15 150% 155% 160% 165% 170% 180% 225% 250%
20 150% 155% 160% 165% 170% 190% 225% 250%
30 150% 155% 160% 165% 170% 191% 225% 250%
----------
(1) The Moody's Discount Factors for debt securities shall also be applied
to any interest rate swap or cap, in which case the rating of the
counterparty shall determine the appropriate rating category.
(2) Unrated debt securities are limited to 10% of discounted Eligible
Assets. If a security is unrated by Moody's but is rated by S&P, a
rating two numeric ratings below the S&P rating will be used, e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used; where
the S&P rating is AA+, a Moody's rating of Aa3 will be used. If a
security is unrated by either Moody's or S&P, the Corporation will use
the percentage set forth under "NR" in this table.
24
(iii) U.S. Treasury Securities and U.S. Treasury Strips (as
defined by Moody's):
U.S. TREASURY
SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- --------------------
1 year or less................................... 107% 107%
2 years or less (but longer than 1 year)......... 113% 114%
3 years or less (but longer than 2 years)........ 118% 120%
4 years or less (but longer than 3 years)........ 123% 127%
5 years or less (but longer than 4 years)........ 128% 133%
7 years or less (but longer than 5 years)........ 135% 145%
10 years or less (but longer than 7 years)....... 141% 159%
15 years or less (but longer than 10 years)...... 146% 184%
20 years or less (but longer than 15 years)...... 154% 211%
30 years or less (but longer than 20 years)...... 154% 236%
(iv) Short-Term Instruments and Cash. The Moody's Discount
Factor applied to Moody's Eligible Assets that are short term money
instruments (as defined by Moody's) will be (i) 100%, so long as such
portfolio securities mature or have a demand feature at par exercisable
within 49 days of the relevant valuation date, (ii) 102%, so long as
such portfolio securities mature or have a demand feature at par not
exercisable within 49 days of the relevant valuation date, and (iii)
125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable within 49 days of
the relevant valuation date. A Moody's Discount Factor of 100% will be
applied to cash.
(vv) "Moody's Eligible Asset" means the following:
(i) Common stock of REITs and preferred stock and any
debt security of REITs and Other Real Estate Companies: (A) which
comprise at least 7 of the 14 Moody's Real Estate Industry/Property
Sector Classifications ("Moody's Sector Classifications") listed below
and of which no more than 35% may constitute a single such
classification; (B) which in the aggregate constitute at least 40
separate classes of common stock, preferred stock, and debt securities,
issued by at least 30 issuers; (C) issued by a single issuer which in
the aggregate constitute no more than 7.0% of the Market Value of
Moody's Eligible Assets, (D) issued by a single issuer which, with
respect to 50% of the Market Value of Moody's Eligible Assets,
constitute in the aggregate no more than 5% of Market Value of Moody's
Eligible Assets; and (E) and which are issued by REITs or Other Real
Estate Companies with a minimum market capitalization (including common
stock and preferred stock) of $150 million;
(ii) Unrated debt securities issued by an issuer which:
(A) has not filed for bankruptcy within the past three years; (B) is
current on all principal and interest on its fixed income obligations;
(C) is current on all preferred stock dividends; (D) possesses a
current, unqualified auditor's report without qualified, explanatory
language and (E) in the aggregate, do not exceed 10% of the discounted
Moody's Eligible Assets;
(iii) Interest rate swaps entered into according to
International Swap Dealers Association ("ISDA") standards if (i) the
counterparty to the swap transaction has a short-term rating of not
less than P-1 or, if the counterparty does not have a short-term
rating, the counterparty's senior unsecured long-term debt rating is
Aa3 or higher and (ii) the original aggregate notional amount of the
interest rate swap transaction or transactions is not to be greater
25
than the liquidation preference of the Preferred Shares originally
issued. The interest rate swap transaction will be marked-to-market
daily;
(iv) U.S. Treasury Securities and Treasury Strips (as
defined by Moody's);
(v) Short-Term Money Market Instruments so long as (A)
such securities are rated at least P-1, (B) in the case of demand
deposits, time deposits and overnight funds, the supporting entity is
rated at least A2, or (C) in all other cases, the supporting entity (1)
is rated A2 and the security matures within one month, (2) is rated A1
and the security matures within three months or (3) is rated at least
Aa3 and the security matures within six months; provided, however, that
for purposes of this definition, such instruments (other than
commercial paper rated by S&P and not rated by Moody's) need not meet
any otherwise applicable Moody's rating criteria; and
(vi) Cash (including, for this purpose, interest and
dividends due on assets rated (A) Baa3 or higher by Moody's if the
payment date is within five Business Days of the Valuation Date, (B) A2
or higher if the payment date is within thirty days of the Valuation
Date, and (C) A1 or higher if the payment date is within 49 days of the
relevant valuation date) and receivables for Moody's Eligible Assets
sold if the receivable is due within five Business Days of the
Valuation Date, and if the trades which generated such receivables are
(A) settled through clearing house firms with respect to which the
Corporation has received prior written authorization from Moody's or
(B) (1) with counterparties having a Moody's long-term debt rating of
at least Baa3 or (2) with counterparties having a Moody's Short-Term
Money Market Instrument rating of at least P-1.
(ww) "Moody's Real Estate Industry/Property Sector Classification"
means, for the purposes of determining Moody's Eligible Assets, each of the
following Industry Classifications (as defined by the National Association of
Real Estate Investment Trusts, NAREIT):
(i) Office
(ii) Industrial
(iii) Mixed
(iv) Shopping Centers
(v) Regional Malls
(vi) Free Standing
(vii) Apartments
(viii) Manufactured Homes
(ix) Diversified
(x) Lodging/Resorts
(xi) Health Care
(xii) Home Financing
(xiii) Commercial Financing
26
(xiv) Self Storage
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment in consultation
with the independent auditor and/ or Moody's, as necessary.
(xx) "1940 Act TAPS Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Fund which are stock,
including all Outstanding TAPS (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities which are stock of a closed-end investment company as a
condition of declaring dividends on its common shares), determined on the basis
of values calculated as of a time within 48 hours next preceding the time of
such determination.
(yy) "1940 Act" means the Investment Company Act of 1940, as
amended from time to time.
(zz) "1940 Act TAPS Asset Coverage Certificate" means the
certificate required to be delivered by the Fund pursuant to Section 12(e) of
this Part I.
(aaa) "Notice of Redemption" means any notice with respect to the
redemption of shares of TAPS pursuant to Section 3.
(bbb) "Order" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of this Statement.
(ccc) "Other Rating Agency" means any rating agency other than
Moody's or Fitch then providing a rating for the TAPS pursuant to the request of
the Fund.
(ddd) "Other Rating Agency Eligible Assets" means assets of the
Fund designated by any Other Rating Agency as eligible for inclusion in
calculating the discounted value of the Fund's assets in connection with such
Other Rating Agency's rating of TAPS.
(eee) "Other Real Estate Companies" means companies which generally
derive at least 50% of their revenue from real estate or have at least 50% of
their assets in real estate, but not including REITS.
(fff) "Outstanding" or "outstanding" means, as of any date, shares
of TAPS theretofore issued by the Fund except, without duplication, (i) any
shares of TAPS theretofore canceled, redeemed or repurchased by the Fund, or
delivered to the Auction Agent for cancellation or with respect to which the
Fund has given notice of redemption and irrevocably deposited with the Paying
Agent sufficient funds to redeem such shares of TAPS and (ii) any shares of TAPS
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Fund. Notwithstanding the foregoing, (A) for
purposes of voting rights (including the determination of the number of shares
required to constitute a quorum), any shares of the TAPS to which the Fund or
any Affiliate of the Fund shall be the Existing Holder shall be disregarded and
not deemed Outstanding; (B) in connection with any Auction, any shares of a
Series of TAPS as to which the Fund or any person known to the Auction Agent to
be an Affiliate of the Fund shall be the Existing Holder thereof shall be
disregarded and deemed not to be Outstanding; and (C) for purposes of
determining the TAPS Basic Maintenance Amount, shares of TAPS held by the Fund
shall be disregarded and not deemed Outstanding but shares held by any Affiliate
of the Fund shall be deemed Outstanding.
27
(ggg) "Paying Agent" means [_________] unless and until another
entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Fund to serve as paying agent, which paying agent may be the
same as the Auction Agent.
(hhh) "Person" or "person" means and includes an individual, a
partnership, a Fund, a trust, an unincorporated association, a joint venture or
other entity or a government or any agency or political subdivision thereof.
(iii) "Potential Beneficial Owner," with respect to shares of a
series of TAPS, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
(jjj) "Preferred Share" means the preferred shares of beneficial
interest, par value $.01 per share, including the TAPS, of the Fund from time to
time.
(kkk) "Redemption Default" has the meaning set forth in Section
2(c)(ii) of this Part I.
(lll) "Redemption Price" has the meaning set forth in Section
3(a)(i) of this Part I.
(mmm) "Reference Rate" means, with respect to the determination of
the Maximum Rate and Default Rate, the applicable AA Composite Commercial Paper
Rate (for a Dividend Period of fewer than 184 days) or the applicable Treasury
Index Rate (for a Dividend Period of 184 days or more).
(nnn) "REIT" or real estate investment trust, means a company
dedicated to owning, and usually operating, income producing real estate, or to
financing real estate.
(ooo) "Securities Act" means the Securities Act of 1933, as amended
from time to time.
(ppp) "Securities Depository" means The Depository Trust Company
and its successors and assigns or any successor securities depository selected
by the Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of TAPS Series M, T, W and
F.
(qqq) "Sell Order" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(rrr) "Short-Term Money Market Instrument" means the following
types of instruments if, on the date of purchase or other acquisition thereof by
the Fund, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper
matures in 30 days or A-1+ if such commercial paper matures in over 30
days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust
company incorporated under the laws of the United States of America or
any state thereof or the District of Columbia or (B) a United States
branch office or agency of a foreign depository institution (provided
that such branch office or agency is subject to banking regulation
under the laws of the United States, any state thereof or the District
of Columbia);
(iii) overnight funds; and
28
(iv) U.S. Government Securities.
(sss) "Special Rate Period" means a Dividend Period that is not a
Standard Rate Period.
(ttt) "Specific Redemption Provisions" means, with respect to any
Special Rate Period of more than one year, either, or any combination of (i) a
period (a "Non-Call Period") determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the shares subject to such
Special Rate Period are not subject to redemption at the option of the Fund
pursuant to Section 3(a)(ii) and (ii) a period (a "Premium Call Period"),
consisting of a number of whole years as determined by the Board of Trustees
after consultation with the Broker-Dealers, during each year of which the shares
subject to such Special Rate Period shall be redeemable at the Fund's option
pursuant to Section 3(a)(i) and/or in connection with any mandatory redemption
pursuant to Section 3(a)(ii) at a price per share equal to $25,000 plus
accumulated but unpaid dividends plus a premium expressed as a percentage or
percentages of $25,000 or expressed as a formula using specified variables as
determined by the Board of Trustees after consultation with the Broker-Dealers.
(uuu) "Standard Rate Period" means a Dividend Period of 7 days.
(vvv) "Submission Deadline" means 1:30 P.M., New York City time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time.
(www) "Submitted Bid" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of this Statement.
(xxx) "Submitted Hold Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(yyy) "Submitted Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(zzz) "Submitted Sell Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(aaaa) "Sufficient Clearing Bids" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
(bbbb) "TAPS" means Taxable Auctioned Preferred Shares, liquidation
preference [$25,000] per share.
(cccc) "TAPS Basic Maintenance Amount" as of any Valuation Date
means the dollar amount equal to the sum of
(i) (A) the sum of the products resulting from multiplying
the number of Outstanding TAPS on such date by the liquidation
preference (and redemption premium, if any) per share; (B) the
aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) to and including
the first Dividend Payment Date for each Outstanding TAPS that follows
such Valuation Date (or to the 30th day after such Valuation Date, if
such 30th day occurs before the first following Dividend Payment Date);
(C) the amount
29
of anticipated Fund non-interest expenses for the 90 days subsequent to
such Valuation Date; (D) the amount of the current outstanding balances
of any indebtedness which is senior to the TAPS plus interest actually
accrued together with 30 days additional interest on the current
outstanding balances calculated at the current rate; and (E) any
current liabilities, payable during the 30 days subsequent to such
Valuation Date, including, without limitation, indebtedness due within
one year and any redemption premium due with respect to Preferred
Shares for which a Notice of Redemption has been given, as of such
Valuation Date, to the extent not reflected in any of (i)(A) through
(i)(D): less
(ii) the sum of any cash plus the value of any of the Fund's
assets irrevocably deposited by the Fund for the payment of any (i)(B)
through (i)(F) ("value," for purposes of this clause (ii), means the
Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated at least P-1 by Moody's,
it will be valued at its face value).
(dddd) "TAPS Basic Maintenance Certificate" has the meaning set
forth in Section 13(d) of this Part I.
(eeee) "TAPS Series M, T, W and F" means the shares of Series M, T,
W and F of the TAPS or any other shares of Preferred Stock hereinafter
designated as shares of Series M, T, W and F of the TAPS.
(ffff) "Treasury Index Rate" means the average yield to maturity
for actively traded marketable U.S. Treasury fixed interest rate securities
having the same number of 30-day periods to maturity as the length of the
applicable Dividend Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having the next shorter
and next longer number of 30-day periods to maturity treating all Dividend
Periods with a length greater than the longest maturity for such securities as
having a length equal to such longest maturity, in all cases based upon data set
forth in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations shall be based upon the average of comparable data as quoted to the
Fund by at least three recognized dealers in U.S. Government securities selected
by the Fund.
(gggg) "U.S. Government Securities" mean securities that are direct
obligations of, and obligations the timely payment of principal and interest on
which is fully guaranteed by, the United States of America or any agency or
instrumentality of the United States of America, the obligations of which are
backed by the full faith and credit of the United States of America and in the
form of conventional bills, bonds and notes.
(hhhh) "Valuation Date" means every Friday, or, if such day is not
a Business Day, the next preceding Business Day; provided, however, that the
first Valuation Date may occur on any other date established by the Fund;
provided, further, however, that such date shall be not more than one week from
the date on which TAPS Series M, T, W and F initially is issued.
(iiii) "Winning Bid Rate" has the meaning set forth in Section
3(a)(iii) of Part II of this Statement.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
30
PART II: AUCTION PROCEDURES
1. Orders
(a) Prior to the Submission Deadline on each Auction Date for shares
of a series of TAPS:
(i) each Beneficial Owner of shares of such series may submit
to its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial Owner
desires to continue to hold without regard to the Applicable Rate
for shares of such series for the next succeeding Rate Period of
such shares;
(B) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial Owner
offers to sell if the Applicable Rate for shares of such series for
the next succeeding Rate Period of shares of such series shall be
less than the rate per annum specified by such Beneficial Owner;
and/or
(C) the number of Outstanding shares, if any, of such
series held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for shares of
such series for the next succeeding Rate Period of shares of such
series;
and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
number of shares, if any, of such series which each such Potential
Beneficial Owner offers to purchase if the Applicable Rate for shares
of such series for the next succeeding Rate Period of shares of such
series shall not be less than the rate per annum specified by such
Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A) (i), (B), (i) (C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of
shares of a series of TAPS subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
31
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such
series determined on such Auction Date shall be less than the rate
specified therein;
(B) such number or a lesser number of Outstanding shares
of such series to be determined as set forth in clause (iv) of
paragraph (a) of Section 4 of this Part II if the Applicable Rate
for shares of such series determined on such Auction Date shall be
equal to the rate specified therein; or
(C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall be higher
than the Maximum Rate for shares of such series, or such number or a
lesser number of Outstanding shares of such series to be determined
as set forth in clause (iii) of paragraph (b) of Section 4 of this
Part II if the rate specified therein shall be higher than the
Maximum Rate for shares of such series and Sufficient Clearing Bids
for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder
of shares of a series of TAPS subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding shares
of such series as set forth in clause (iii) of paragraph (b) of
Section 4 of this Part II if Sufficient Clearing Bids for shares of
such series do not exist;
PROVIDED, HOWEVER, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of TAPS shall not be liable to any Person for failing to
sell such shares pursuant to a Sell Order described in the proviso to paragraph
(c) of Section 2 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Fund)
with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker-Dealer's records, such Broker-Dealer believes it
is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential
Holder of shares of a series of TAPS subject to an Auction on any
Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such
series determined on such Auction Date shall be higher than the rate
specified therein; or
(B) such number or a lesser number of Outstanding shares
of such series as set forth in clause (v) of paragraph (a) of
Section 4 of this Part II if the Applicable Rate for shares of such
series determined on such Auction Date shall be equal to the rate
specified therein.
(c) No Order for any number of shares of TAPS other than whole
shares shall be valid.
32
2. Submission of Orders by Broker-Dealers to Auction Agent
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for shares of
TAPS of a series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series that are
the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of
shares of such series:
(A) the number of shares, if any, of such series subject
to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series subject
to any Bid of such Existing Holder and the rate specified in such
Bid; and
(C) the number of shares, if any, of such series subject
to any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares
of such series, the rate and number of shares of such series specified
in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of
TAPS of a series held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding shares of such series held by such Existing Holder and
not subject to Orders submitted to the Auction Agent; provided, however, that if
an Order or Orders covering all of the Outstanding shares of such series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Rate Period consisting
of more than 28 Rate Period Days, the Auction Agent shall deem a Sell Order to
have been submitted by or on behalf of such Existing Holder covering the number
of outstanding shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of TAPS of a series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:
33
(i) all Hold Orders for shares of such series shall be
considered valid, but only up to and including in the aggregate the
number of Outstanding shares of such series held by such Existing
Holder, and if the number of shares of such series subject to such Hold
Orders exceeds the number of Outstanding shares of such series held by
such Existing Holder, the number of shares subject to each such Hold
Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii)(A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding
shares of such series held by such Existing Holder over the number
of shares of such series subject to any Hold Orders referred to in
clause (i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of such series is submitted to the
Auction Agent with the same rate and the number of Outstanding
shares of such series subject to such Bids is greater than such
excess, such Bids shall be considered valid up to and including the
amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to
cover the number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one
Bid of an Existing Holder for shares of such series is submitted to
the Auction Agent with different rates, such Bids shall be
considered valid in the ascending order of their respective rates up
to and including the amount of such excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion of Bids
considered not valid in whole or in part under this clause (ii)
shall be treated as the subject of a Bid for shares of such series
by or on behalf of a Potential Holder at the rate therein specified;
and
(iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over the
sum of shares of such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of TAPS
is submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and number of shares
therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate
(a) Not earlier than the Submission Deadline on each Auction Date
for shares of a series of TAPS, the Auction Agent shall assemble all valid
Orders submitted or deemed submitted to it by the Broker-Dealers in respect of
shares of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for such series:
34
(i) the excess of the number of Outstanding shares of such
series over the number of Outstanding shares of such series subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available TAPS" of such series);
(ii) from the Submitted Orders for shares of such series
whether:
(A) the number of Outstanding shares of such series
subject to Submitted Bids of Potential Holders specifying one or
more rates between the Minimum Rate (for Standard Rate Periods or
less, only) and the Maximum Rate (for all Rate Periods) for shares
of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series
subject to Submitted Bids of Existing Holders specifying one or more
rates between the Minimum Rate (for Standard Rate Periods or less,
only) and the Maximum Rate (for all Rate Periods) for shares of such
series; and
(C) the number of Outstanding shares of such series
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series
exist, the lowest rate specified in such Submitted Bids (the "Winning
Bid Rate" for shares of such series) which if:
(A)(I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted Bids
of Existing Holders specifying lower rates were rejected, thus
entitling such Existing Holders to continue to hold the shares of
such series that are subject to such Submitted Bids; and
(B)(I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted Bids
of Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of Outstanding shares of such
series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available TAPS of such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise the
Fund of the Minimum Rate and Maximum Rate for shares of the series of TAPS for
which an Auction is being held on the Auction Date and, based on such
determination, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series
exist, that the Applicable Rate for all shares of such series for the
next succeeding Rate Period thereof shall be equal to the Winning Bid
Rate for shares of such series so determined;
35
(ii) if Sufficient Clearing Bids for shares of such series do
not exist (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), that the Applicable Rate
for all shares of such series for the next succeeding Rate Period
thereof shall be equal to the Maximum Rate for shares of such series;
or
(iii) if all of the Outstanding shares of such series are
subject to Submitted Hold Orders, that the Applicable Rate for all
shares of such series for the next succeeding Rate Period thereof shall
be All Hold Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares
Existing Holders shall continue to hold the shares of TAPS that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of TAPS have
been made, all Submitted Sell Orders with respect to shares of such series shall
be accepted and, subject to the provisions of paragraphs (d) and (e) of this
Section 4, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of TAPS subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be rejected, thus entitling each such
Existing Holder to continue to hold the shares of TAPS subject to such
Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be rejected, thus entitling such Existing
Holder to continue to hold the shares of TAPS subject to such Submitted
Bid, unless the number of Outstanding shares of TAPS subject to all
such Submitted Bids shall be greater than the number of shares of TAPS
("remaining shares") in the excess of the Available TAPS of such series
over the number of shares of TAPS subject to Submitted Bids described
in clauses (ii) and (iii) of this paragraph (a), in which event such
Submitted Bid of such Existing Holder shall be rejected in part, and
such Existing Holder shall be entitled to continue to hold shares of
TAPS subject to such Submitted Bid, but only in an amount equal to the
number of shares of TAPS of such series obtained by multiplying the
number of remaining shares by a fraction, the numerator of which shall
be the number of Outstanding shares of TAPS held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall
be the aggregate number of Outstanding shares of TAPS subject to such
Submitted Bids made by all such Existing Holders that specified a rate
equal to the Winning Bid Rate for shares of such series; and
36
(v) each Potential Holder's Submitted Bid for shares of such
series specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be accepted but only in an amount equal to
the number of shares of such series obtained by multiplying the number
of shares in the excess of the Available TAPS of such series over the
number of shares of TAPS subject to Submitted Bids described in clauses
(ii) through (iv) of this paragraph (a) by a fraction, the numerator of
which shall be the number of Outstanding shares of TAPS subject to such
Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of TAPS subject to such Submitted Bids
made by all such Potential Holders that specified a rate equal to the
Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of TAPS have
not been made (other than because all of the Outstanding shares of such series
are subject to Submitted Hold Orders), subject to the provisions of paragraph
(d) of this Section 4, Submitted Orders for shares of such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the shares of TAPS subject to such
Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower than the Maximum
Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such
series specifying any rate that is higher than the Maximum Rate for
shares of such series and the Submitted Sell Orders for shares of such
series of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was submitted any
such Submitted Bid or Submitted Sell Order to sell the shares of such
series subject to such Submitted Bid or Submitted Sell Order, but in
both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of this paragraph
(b) by a fraction, the numerator of which shall be the number of
Outstanding shares of such series held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the aggregate number of Outstanding shares of such
series subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of TAPS are subject
to Submitted Hold Orders, all Submitted Bids for shares of such series shall be
rejected.
(d) If, as a result of the procedures described in clause (iv) or
(v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
TAPS on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, round up or down the number of shares of TAPS
of such series to be purchased or sold by any Existing Holder or Potential
Holder on such Auction Date as a result of such procedures so that the number of
shares so purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be whole shares of TAPS.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of a
37
series of TAPS on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, allocate shares of TAPS of such
series for purchase among Potential Holders so that only whole shares of TAPS of
such series are purchased on such Auction Date as a result of such procedures by
any Potential Holder, even if such allocation results in one or more Potential
Holders not purchasing shares of TAPS of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
TAPS, the Auction Agent shall determine the aggregate number of shares of such
series to be purchased and the aggregate number of shares of such series to be
sold by Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate number
of shares to be purchased and such aggregate number of shares to be sold differ,
determine to which other Potential Holder(s) or Existing Holder(s) they shall
deliver, or from which other Potential Holder(s) or Existing Holder(s) they
shall receive, as the case may be, shares of TAPS of such series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a series of TAPS with respect to whom a Broker-Dealer submitted a
Bid to the Auction Agent for such shares that was accepted in whole or in part,
or submitted or is deemed to have submitted a Sell Order for such shares that
was accepted in whole or in part, fails to instruct its Agent Member to deliver
such shares against payment therefor, partial deliveries of shares of TAPS that
have been made in respect of Potential Holders' or Potential Beneficial Owners'
Submitted Bids for shares of such series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect to the failure of
an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver shares of TAPS of any
series or to pay for shares of TAPS of any series sold or purchased pursuant to
the Auction Procedures or otherwise.
38
IN WITNESS WHEREOF, NUVEEN REAL ESTATE INCOME FUND has caused these
presents to be signed in its name and on its behalf by its Vice-President, and
its corporate seal to be hereunto affixed and attested by its Assistant
Secretary. The Fund's Declaration of Trust is on file with the Secretary of
State of the Commonwealth of Massachusetts, and the said officers of the Fund
have executed this Statement as officers and not individually, and the
obligations and rights set forth in this Statement are not binding upon any such
officers, or the Trustees or shareholders of the Fund, individually, but are
binding only upon the assets and property of the Fund.
NUVEEN REAL ESTATE INCOME FUND
By:
--------------------------------------
Gifford R. Zimmerman, Vice President
ATTEST:
--------------------------------------
Jessica Droeger, Assistant Secretary
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness
of an obligor with respect to a specific financial obligation, a specific class
of financial obligations, or a specific financial program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by S&P from other sources it considers reliable. S&P does
not perform an audit in connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA An obligation rated "AAA" has the highest rating assigned
by 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.
B-1
A An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and
economic conditions than obligations in higher-rated
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB, B, CCC,
CC,and C Obligations rated "BB", "B", "CCC", "CC", and "C"
are regarded as having significant speculative
characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations
will likely have some quality and protective
characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions, which could lead to
the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB", but the obligor currently
has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the
obligation.
CCC An obligation rated "CCC" is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic
conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the
obligation.
CC An obligation rated "CC" is currently highly vulnerable
to nonpayment.
C The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
D An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation
are not made on the date due even if the applicable grace
period has not expired, unless 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.
Plus (+) or minus (-). The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
B-2
c The "c" subscript is used to provide additional
information to investors that the bank may terminate its
obligation to purchase tendered bonds if the long-term
credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
p The letter "p" indicates that the rating is provisional.
A provisional rating assumes the successful completion of
the project financed by the debt being rated and
indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the
risk of default upon failure of such completion. The
investor should exercise his own judgment with respect to
such likelihood and risk.
* Continuance of the ratings is contingent upon S&P's
receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash
flows.
r The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may
experience high volatility or high variability in
expected returns as a result of noncredit risks. Examples
of such obligations are securities with principal or
interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only
and principal-only mortgage securities. The absence of an
"r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in
total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as investment-grade
ratings) generally are regarded as eligible for bank investment. Also, the laws
of various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A S&P note ratings reflects the liquidity factors and market access
risks unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:
- Amortization schedule -- the larger the final maturity relative
to other maturities, the more likely it will be treated as a
note; and
- Source of payment -- the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note.
B-3
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 A short-term obligation rated "A-1" is rated in the highest
category by S&P. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category,
certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories.
However, the obligor's capacity to meet its financial commitment
on the obligation is satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated "B" is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not
expired, unless 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
B-4
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Moody's Investors Service, Inc. -- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
Aaa Bonds which are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
A Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
B-5
C Bonds which are rated "C" are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Issues that are secured by escrowed funds held in trust, reinvested in
direct, non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S. Government or Resolution Funding
Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes superior credit quality.
Excellent protection is afforded by established cash
flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality.
Margins of protection are ample, although not as large
as in the preceding group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and
market access for refinancing is likely to be less
well-established.
SG This designation denotes speculative-grade credit
quality. Debt instruments in this category may lack
sufficient margins of protection.
COMMERCIAl PAPER
Issuers rated Prime-1 (or related supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
B-6
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc. -- A brief description of the applicable Fitch IBCA,
Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA Highest credit quality. "AAA" ratings denote the lowest
expectation of credit risk. They are assigned only in
case of exceptionally strong capacity for timely payment
of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low
expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation
of credit risk. The capacity for timely payment of
financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is
currently a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. "BB" ratings indicate that there is a
possibility of credit risk developing, particularly as
the result of adverse economic change over time; however,
business or financial alternatives may be available to
allow financial commitments to be met. Securities rated
in this category are not investment grade.
B Highly speculative. "B" ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent
upon a sustained, favorable business and economic
environment.
B-7
CCC,CC, C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic
developments. A "CC" rating indicates that default of
some kind appears probable. "C" ratings signal imminent
default.
DDD, DD,
and D Default. The ratings of obligations in this category
are based on their prospects for achieving partial or
full recovery in a reorganization or liquidation of the
obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision,
the following serve as general guidelines. "DDD"
obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued
interest. "DD" indicates potential recoveries in the
range of 50%-90%, and "D" the lowest recovery potential,
i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities
rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a
formal reorganization process. Entities rated "DD" and
"D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding
obligations, while entities rated "D" have a poor
prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+"
to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as
great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse
changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC", or to short-term ratings other than
"F1".
"NR" indicates that Fitch does not rate the issuer or issue in question.
B-8
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over
a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are `stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action.
Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.
B-9
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Statement of Net Assets, October 29, 2001 (audited)
Statement of Operations from August 27, 2001 (date of
organization) to October 29, 2001 (audited)
Statement of Net Assets, November 30, 2001 (unaudited)
Statement of Operations from November 15, 2001 (commencement
of operations) to November 30, 2001 (unaudited)
Statement of Changes in Net Assets from November 15, 2001
(commencement of operations) to November 30, 2001 (unaudited)
Portfolio of Investments, November 30, 2001 (unaudited)
2. Exhibits:
a.1 Declaration of Trust dated August 27, 2001. Filed on
September 5, 2001 as Exhibit a to Registrant's
Registration Statement on Form N-2 (File No. 333-68948)
and incorporated herein by reference.*
a.2 Form of Statement Establishing and Fixing the Rights and
Preferences of Taxable Auctioned Preferred Shares
("TAPS"). Filed herewith as Appendix A to the Statement
of Additional Information contained herein.
b. By-Laws of Registrant. Filed on September 5, 2001 as
Exhibit b to Registrant's Registration Statement on Form
N-2 (File No. 333-68948) and incorporated herein by
reference.*
c. None.
d. Form of Share Certificate.**
e. Terms and Conditions of the Dividend Reinvestment Plan.
Filed on October 17, 2001 as Exhibit e to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-2 (File No. 333-68948) and incorporated herein
by reference.*
f. None.
g.1 Investment Management Agreement between Registrant and
Nuveen Institutional Advisory Corp. dated October 3,
2001. Filed on November 14, 2001 as Exhibit g.1 to
Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 (333-68948) and
incorporated herein by reference.*
g.2 Investment Sub-Advisory Agreement between Nuveen
Institutional Advisory Corp. and Security Capital
Research & Management Incorporated dated October 3,
2001. Filed on November 14, 2001 as Exhibit g.2 to
Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 (333-68948) and
incorporated herein by reference.*
h. Form of Underwriting Agreement.**
Part C-1
i. Nuveen Open-End and Closed-End Funds Deferred
Compensation Plan for Independent Directors and
Trustees. Filed on October 17, 2001 as Exhibit i to
Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 333-68948)
and incorporated herein by reference.*
j. Form of Exchange Traded Fund Custody Agreement between
Registrant and The Chase Manhattan Bank dated October
29, 2001. Filed on November 14, 2001 as Exhibit j to
Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 (333-68948) and
incorporated herein by reference.*
k.1 Form of Shareholder Transfer Agency Agreement between
Registrant and Chase Manhattan Bank dated October 29,
2001. Filed on November 14, 2001 as Exhibit k.1 to
Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 (333-68948) and
incorporated herein by reference.*
k.2 Form of Expense Reimbursement Agreement between
Registrant and Nuveen Institutional Advisory Corp. dated
October 3, 2001. Filed on November 14, 2001 as Exhibit
k.2 to Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 (333-68948) and
incorporated herein by reference.*
k.3 Form of Auction Agency Agreement.**
k.4 Form of Broker-Dealer Agreement.**
k.5 Form of DTC Representations Letter.**
l.1 Opinion and consent of Vedder, Price, Kaufman &
Kammholz.**
l.2 Opinion and consent of Bingham Dana LLP.**
m. None.
n. Consent of Arthur Andersen LLP.**
o. None.
p. Subscription Agreement of Nuveen Institutional Advisory
Corp. dated October 29, 2001. Filed on November 14, 2001
as Exhibit p to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-2
(333-68948) and incorporated herein by reference.*
q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.
Filed on September 5, 2001 as Exhibit r.1 to
Registrant's Registration Statement on Form N-2 (File
No. 333-68948) and incorporated herein by reference.*
r.2 Code of Ethics of Security Capital Research & Management
Incorporated. Filed on October 17, 2001 as Exhibit r.2
to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 333-68948)
and incorporated herein by reference.*
r.3 Code of Ethics of Salomon Smith Barney Inc. Filed on
October 17, 2001 as Exhibit r.3 to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-2 (File No. 333-68948) and incorporated herein
by reference.*
s. Powers of Attorney.*
-----------------
* Previously filed.
** Filed herewith.
ITEM 25: MARKETING ARRANGEMENTS
See Section 9g of the Underwriting Agreement to be filed as Exhibit h to
this Registration Statement.
Part C-2
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission fees...................... $ 41,108
Printing and engraving expenses.............................. 45,000
Legal Fees................................................... 60,000
Accounting expenses.......................................... 6,000
Rating Agency fees........................................... 137,600
Miscellaneous expenses....................................... 7,500
--------
Total..................................................... $297,208
========
-------------------------
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At November 15, 2001
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares, $0.01 par value........................... 0
ITEM 29: INDEMNIFICATION
Section 4 of Article XII of the Registrant's Declaration of Trust
provides as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office;
(b) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not
involving a final adjudication (as provided in paragraph (a) or (b)) and
resulting in a payment by a Covered Person, unless there
Part C-3
has been either a determination that such Covered Person did not engage
in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or a
reasonable determination, based on a review of readily available facts
(as opposed to a full trial-type inquiry), that he did not engage in
such conduct:
(i) by a vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Section 4 shall be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses
arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in
office act on the matter) or independent legal counsel in a written
opinion shall determine, based upon a review of the readily available
facts (as opposed to a full trial-type inquiry), that there is reason to
believe that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is
not an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment
Trust Errors and Omission policies in the aggregate amount of $20,000,000 (with
a maximum deductible of $500,000) against liability and expenses of claims of
wrongful acts arising out of their position with the Registrant, except for
matters which involve willful acts, bad faith, gross negligence and willful
disregard of duty (i.e., where the insured did not act in good faith for a
purpose he or she reasonably believed to be in the best interest of Registrant
or where he or she had reasonable cause to believe this conduct was unlawful).
Part C-4
Section 8 of the Underwriting Agreement to be filed as Exhibit h.1 to
this Registration Statement provides for each of the parties thereto, including
the Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Nuveen Institutional Advisory Corp. serves as investment adviser to the
following open-end and closed-end management type investment companies: Nuveen
Investment Trust, Nuveen Investment Trust II, Nuveen Investment Trust III,
Nuveen Select Tax-Free Income Portfolio, Nuveen Select Tax-Free Income Portfolio
2, Nuveen Insured California Select Tax-Free Income, Nuveen Insured New York
Select Tax-Free Income Portfolio, and Nuveen Select Tax-Free Income Portfolio 3.
Security Capital Research & Management Incorporated ("Security Capital")
serves as investment adviser to Security Capital Real Estate Mutual Funds Inc.,
an open-end management type investment company and subadvises 5 other open-end
funds.
Nuveen Institutional Advisory Corp. has no other clients or business at
the present time. Security Capital also offers separate account management for
certain institutional and high net worth clients. For a description of other
business, profession, vocation or employment of a substantial nature in which
any director or officer of the investment adviser who serve as officers or
Trustees of the Registrant has engaged during the last two years for his or her
account or in the capacity of director, officer, employee, partner or trustee,
see the descriptions under "Management of the Fund" in Part B of this
Registration Statement. Such information for the remaining senior officers of
NIAC appears below:
OTHER BUSINESS PROFESSION, VOCATION OR
NAME AND POSITION WITH NIAC EMPLOYMENT DURING PAST TWO YEARS
--------------------------- --------------------------------
John P. Amboian, President............................. President, formerly Executive Vice President,
of The John Nuveen Company, Nuveen
Investments Nuveen Advisory Corp., Nuveen
Asset Management, Inc. and Nuveen Senior Loan
Asset Management Inc. and Executive Vice
President and Director of Rittenhouse
Financial Services, Inc.
Margaret E. Wilson, Vice President and Controller .... Vice President and Controller of the John
Nuveen Company, Nuveen Investments and Nuveen
Advisory Corp. and Senior Vice President and
Controller of Nuveen Senior Loan Asset
Management Inc.; formerly CFO of Sara Lee
Corp., Bakery Division.
Part C-5
Set forth below is a list of each director and officer of Security
Capital indicating each business profession, vocation or employment of a
substantial nature in which such person has been, at any time during the past
two fiscal years, engaged for his or her own account or in the capacity of
director, officer, partner or trustee.
OTHER BUSINESS PROFESSION, VOCATION OR
NAME AND POSITION WITH SECURITY CAPITAL EMPLOYMENT DURING PAST TWO YEARS
--------------------------------------- --------------------------------
Anthony R. Manno, Jr., President and
Managing Director......................... Chairman of the Board, Managing Director and
President, Security Capital Real Estate
Mutual Funds Incorporated.
Kenneth D. Statz, Managing Director.......... Managing Director, Security Capital Real
Estate Mutual Funds Incorporated.
Russell C. Platt, Managing Director.......... --
Kevin Bedell, Senior Vice President.......... Senior Vice President, Security Capital Real
Estate Mutual Funds Incorporated.
David E. Rosenbaum, Senior Vice President.... --
Jeffrey C. Nellessen, Vice President,
Treasurer, and Assistant Secretary........ Vice President, Treasurer and Assistant
Secretary, Security Capital Real Estate
Mutual Funds Incorporated.
ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
Nuveen Institutional Advisory Corp., 333 West Wacker Drive, Chicago,
Illinois 60606, maintains the Declaration of Trust, By-Laws, minutes of trustees
and shareholders meetings and contracts of the Registrant and all advisory
material of the investment adviser.
Security Capital Research & Management Incorporated, 11 South LaSalle
Street, 2nd Floor, Chicago, Illinois 60606, maintains certain advisory material
of the subadviser.
The Chase Manhattan Bank, P.O. Box 660086, Dallas, Texas 75266-0086
maintains all general and subsidiary ledgers, journals, trial balances, records
of all portfolio purchases and sales, and all other required records not
maintained by Nuveen Institutional Advisory Corp.
ITEM 32: MANAGEMENT SERVICES
Not applicable.
ITEM 33: UNDERTAKINGS
Part C-6
1. Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if (1) subsequent to the effective date
of its Registration Statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of the
Registration Statement, or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by
the Registrant under Rule 497(h) under the Securities Act of 1933
shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
b. For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business
days of receipt of a written or oral request, any Statement of
Additional Information.
Part C-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 28th day of
December, 2001.
NUVEEN REAL ESTATE INCOME FUND
/s/ Gifford R. Zimmerman
----------------------------------------
Gifford R. Zimmerman, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller December 28, 2001
-------------------------
Stephen D. Foy (Principal Financial and
Accounting Officer)
Timothy R. Schwertfeger* Chairman of the Board and By: /s/ Gifford R. Zimmerman
------------------------
Trustee (Principal Executive Gifford R. Zimmerman
Officer) Attorney-In-Fact
December 28, 2001
James E. Bacon* Trustee
William E. Bennett* Trustee
Jack B. Evans* Trustee
William L. Kissick* Trustee
Thomas E. Leafstrand* Trustee
Sheila W. Wellington* Trustee
*Original powers of attorney authorizing Gifford R. Zimmerman, among
others, to execute this Registration Statement, and Amendments thereto, for each
of the trustees of Registrant on whose behalf this Registration Statement is
filed, have been executed and filed as an exhibit.
EXHIBIT INDEX
d. Form of Share Certificate
h. Form of Underwriting Agreement
k.3 Form of Auction Agency Agreement between the Registrant and Banker's
Trust Company as to the Registrant's MuniPreferred Shares
k.4 Form of Broker-Dealer Agreement as to the Registrant's MuniPreferred
Shares
k.5 Form of DTC Representations Letter as to the Registrant's
MuniPreferred Shares
l.1 Opinion and consent of Vedder, Price, Kaufman & Kammholz
l.2 Opinion and consent of Bingham Dana LLP
n. Consent of Arthur Andersen LLP