Toronto, May 8, 2002: Pro-AMS U.S. Trust (the "Trust" or the "Fund") announced today that it has declared a monthly distribution of $0.08333 payable on May 31, 2002 to holders of record on such date. In addition the Trust also announced details of its plan to reposition its managed portfolio in order to preserve its ability to meet its investment objectives in the long term. The Trust originally issued units on October 5, 2000 and is a closed end mutual fund trust with two primary investment objectives.
Its primary investment objective is to return at least the original issue price of the units to unitholders upon termination of the Trust on January 4, 2011. To achieve this objective, approximately $13.70 of the initial net proceeds of $23.59 per unit was used to acquire the "fixed portfolio". This portfolio was sold forward to the Royal Bank of Canada and serves the purpose of repaying the unitholdersı original investment amount on termination on January 4, 2011. This capital repayment feature remains in force with the Royal Bank of Canada.
The second objective of the Trust is to pay out monthly distributions at a rate of 9% per annum based upon the original $25.00 unit price. To accomplish this approximately $9.81 per unit sold (the balance of the initial net asset value of $23.59 less the allocation to the fixed portfolio of $13.78) was allocated to the active or ³managed portfolio². This managed portfolio was invested in a basket of stocks and money market instruments against which either call or put options could be written. This portfolio receives interest income from money market investments, dividend income from its stock investments as well as option premiums received from its covered option writing. Distributions on the units are funded from these various revenue sources within the managed portfolio.
The magnitude of the equity market decline over the past 18 months has been such that even the relatively large amounts of option premium earned have not been sufficient to offset all of the decline in value in the underlying portfolio of stocks held within the managed portfolio. This decline in the value of the managed portfolio investments has adversely affected the Trust by reducing the market value of the assets with which the Trust has available to generate the ongoing distributions. This requires an increasing proportion of the NAV of the managed portfolio assets to be utilized to generate sufficient option premium income to fund distributions.
An additional factor which has adversely affected the Trust is the volatility levels of the overall markets which have declined from the inception date of the product. Generally speaking, lower volatility levels generate a lower absolute level of premium income which has the effect of reducing the amount of cashflow generated from covered option writing.
The combination of these two factors, namely, a market decline of approximately 25 to 35% which has reduced the amount of assets which the Trust has to work with and a decline in volatility levels has resulted in a significant erosion in the operating flexibility of the managed portfolio. The result is that all of the assets of the managed portfolio must now be utilized in order to continue to generate the ongoing distributions. Therefore, the managed portfolio has little if any potential to increase in value in a rising market as its upside would effectively be capped by the writing of call options.
Given the relatively low level of current volatility and the potential upside which may be available in the market over the next several months, this tradeoff between option premium generation and potential upside market participation may not represent the best risk/reward choice. Consequently, the Trust believes that continuing the existing distribution policy may not be in the best longer term interest of the unitholders as such policy would effectively eliminate all potential capital appreciation from the managed portfolio.
As a result, Mulvihill Capital Management Inc. ("MCM") will take the following steps to reposition the investment operations of the Trustıs managed portfolio which it believes will have the effect of preserving or growing the value of the managed portfolio thereby increasing the long term viability of a sustainable distribution.
The reduction of the management fees and distributions will result in a decrease in the proportion of managed assets which must be subject to call option writing. As a result, additional option premium which could be earned may be retained by the Trust to preserve the NAV or to provide additional downside protection through taking a more defensive investment posture. Alternatively this increase in flexibility could also be used by the Trust to maintain unwritten equity positions giving it an enhanced capability to participate in market upside.
The following table illustrates initial and current net asset values and the effect of the reduction in distributions and is included for illustrative purposes only and should not be construed as a forecast:
In summary, the extremely difficult market conditions in which the Trust has been operating for the past 18 months require that the Trust take the actions outlined above in an attempt to ensure that distributions can be generated and maintained by the Trust on a going forward basis. These actions became necessary for this Trust because it has been operating for the longest period of time in the most negative market environments. Despite the circumstances that have given rise to the need for this plan, the Trust still retains its capital repayment feature by virtue of its forward contract and as such will still return $25.00 per unit on termination of the Trust in 2011.
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