<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
CNA Income Shares, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
[CNA INCOME SHARES, INC. LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
CNA PLAZA
CHICAGO, ILLINOIS 60685
February 26, 1999
TO THE STOCKHOLDERS OF
CNA INCOME SHARES, INC.
An Annual Meeting of Stockholders of CNA Income Shares, Inc., a Maryland
corporation (the "Company"), will be held on April 23, 1999, at 2:00 P.M.,
Chicago Time, in Room 305, CNA Plaza, 333 South Wabash Avenue, Chicago, Illinois
60685, for the following purposes and for the transaction of such other business
as may properly come before the meeting:
(1) the election of six directors;
(2) the approval of the continuation of the Investment Advisory Agreement,
as amended, between the Company and Continental Assurance Company;
(3) the approval of the appointment of The Chase Manhattan Bank as a sub-
investment advisor of the Company for the purpose of engaging in
repurchase, reverse repurchase and securities lending arrangements on
behalf of the Company.
(4) the ratification of the selection made by the Board of Directors of
Deloitte & Touche LLP as independent auditors for the Company for the
year ending December 31, 1999.
The subjects referred to above are discussed in detail in the Proxy
Statement attached to this notice. The Board of Directors has established the
close of business on February 22, 1999 as the record date for the determination
of stockholders entitled to notice of and to vote at the meeting. Each
stockholder is invited to attend the Annual Meeting of Stockholders in person.
If you cannot be present at the meeting we urge you to fill in, sign and
promptly return the enclosed proxy in the envelope provided for that purpose.
By Order of the Board of Directors
LYNNE GUGENHEIM
Secretary
<PAGE> 3
[CNA INCOME SHARES, INC. LOGO]
CNA PLAZA
CHICAGO, ILLINOIS 60685
(312) 822-4181
PROXY STATEMENT
INTRODUCTION
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of CNA Income Shares, Inc., a Maryland
corporation (the "Company"), for use at the Annual Meeting of Stockholders (the
"Annual Meeting") to be held on April 23, 1999, at 2:00 P.M., Chicago Time, in
Room 305, CNA Plaza, 333 South Wabash Avenue, Chicago, Illinois 60685 and at any
and all adjournments thereof.
The proxy statement and form of proxy were first sent to the Company's
stockholders on or about February 26, 1999. Proxies may be solicited by mail,
telephone, telecopier and personal interview by a few regular employees of the
Company. The Company may also request brokers, custodians, nominees and
fiduciaries to forward proxy material to the beneficial owners of stock held of
record by such institutions. The cost of soliciting proxies will be paid by the
Company.
PROXIES WILL BE VOTED AS SPECIFIED. HOWEVER, IF NO CONTRARY SPECIFICATIONS
ARE MADE IN A PROXY, IT WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4 HEREINAFTER
SET FORTH. Abstentions are considered as shares present and entitled to vote at
the meeting, but are not counted as votes cast with respect to the Proposal to
which the abstention relates. A broker or nominee holding shares registered in
its name, or in the name of its nominee, which are beneficially owned by another
person, and for which the broker has not received instructions as to voting from
the beneficial owner, has the discretion to vote the beneficial owner's shares
with respect to Proposals 1, 2 and 4 hereinafter set forth. However, such broker
or nominee does not have discretionary voting authority under applicable New
York Stock Exchange rules to vote the beneficial owner's shares with respect to
Proposal 3 hereinafter set forth; with respect to Proposal 3, any broker or
nominee "non-votes" shall be considered as shares which are not present or voted
at the meeting. The enclosed proxy is revocable by you at any time. Signing and
mailing the proxy will not affect your right to revoke the proxy, to give a
later proxy or to attend the meeting and to vote your shares in person.
Stockholders should send proxies to the following address:
The Bank of New York
CNA Income Shares, Inc.
Proxy Department
P.O. Box 11058
New York, NY 10203-0058
<PAGE> 4
At the close of business on February 22, 1999, the date of determination of
stockholders entitled to receive notice of and to vote at the Annual Meeting or
any adjournment thereof, there were issued and outstanding 9,044,984 shares of
common stock of the Company, each entitling its holder to one noncumulative
vote, constituting all of the Company's then outstanding securities which
entitle their holders to vote at the Annual Meeting.
To the best of the Company's knowledge, as of February 1, 1999 no person or
group owned 5% or more of the Company's outstanding shares of common stock. As
of that date, the Company's 9 directors and officers, as a group, beneficially
owned 1,294 shares, constituting .014% of the Company's outstanding shares of
common stock, all of such shares being owned with sole voting power and sole
investment power, except for 200 shares owned by Franklin A. Cole, a director of
the Company, in joint tenancy with his spouse (Mr. Cole's voting power and
investment power with respect to such 200 shares being shared with his spouse).
The Company's 1998 annual report is being mailed together with this proxy
statement. Any stockholder who desires additional copies may obtain them upon
request by writing to The Bank of New York, Shareholder Relations
Department -- 11E, P.O. Box 11258, Church Street Station, New York, NY 10286.
STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in proxy materials for the 2000 Annual
Meeting of Stockholders should be addressed to the Company's Secretary, CNA
Plaza, 23S, Chicago, Illinois 60685, and must be received not later than October
30, 1999. If a stockholder intends to present a proposal at the 2000 Annual
Meeting of Stockholders but does not seek inclusion of that proposal in the
Company's proxy statement for that meeting, the proxy holders for that meeting
will be entitled to exercise discretionary authority on that proposal if the
Company has not received notice of the proposal by January 13, 2000. If notice
of any such proposal is timely received, the proxy holders may exercise
discretionary authority with respect to such proposal but only to the extent
permitted by the regulations of the Securities and Exchange Commission.
1. ELECTION OF DIRECTORS
Six directors are to be elected at the Annual Meeting to hold office until
the next Annual Meeting of Stockholders and until their successors are elected
and qualified. To be elected, they must receive the affirmative votes of the
holders of at least a majority of the shares of the Company's outstanding common
stock present at the Annual Meeting in person or by proxy. The nominees listed
below have been nominated by the nominating committee of the Board of Directors.
If any of the nominees are unable to serve as directors, the persons named in
the proxy will vote the proxies for such other persons as the nominating
committee may select. All of the nominees listed below have agreed to serve as
directors if elected. The Company presently knows of no reason why any of the
nominees listed below will be unable to serve if elected. All nominees except
Edward S. Bottum are presently directors
2
<PAGE> 5
of the Company whose terms expire at the Annual Meeting or, if later, when their
successors are elected and qualified.
<TABLE>
<CAPTION>
NUMBER OF
WHOLE SHARES
OWNED
BENEFICIALLY
PRINCIPAL OCCUPATION FOR THE LAST DIRECTOR AS OF FEBRUARY 1,
FIVE YEARS AND OTHER DIRECTORSHIPS HELD AGE SINCE 1999(1)
NOMINEE --------------------------------------- --- -------- -----------------
<S> <C> <C> <C> <C>
Edward S. Bottum......... Managing Director, Chase Franklin Cor- 65 1999 None
poration (merchant banking)(2) since April
1990; Director, Kellwood Company (women's
apparel manufacturer) since 1981; Trustee,
Time Horizon Funds (mutual funds family)
since July 1995; Trustee, Pacific Horizon
Funds (mutual funds family) since January
1998; Trustee and Chairman, Pacific
Innovations Trust (mutual fund for variable
annuities) since December 1997 and December
1996, respectively; Trustee, Underwriters
Laboratories, Inc. (product safety
certification) since May 1997; Former Vice
Chairman, Continental Bank N.A. (retired
1990).
Franklin A. Cole......... Chairman of the Board, Croesus Corporation 72 1985 1,100(3)
(financial services, investments and
investment management); Director, Aon
Corporation (insurance holding company) and
Duff & Phelps Utilities Income Inc.
(closed-end investment company).
Sidney Davidson.......... Distinguished Service Professor Emeritus, 79 1973 194
Graduate School of Business, University of
Chicago, since November 1997. Prior
thereto, Ernst & Young Distinguished
Service Professor of Accounting, and
Director of Business Research at the
Graduate School of Business, University of
Chicago.
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
NUMBER OF
WHOLE SHARES
OWNED
BENEFICIALLY
PRINCIPAL OCCUPATION FOR THE LAST DIRECTOR AS OF FEBRUARY 1,
FIVE YEARS AND OTHER DIRECTORSHIPS HELD AGE SINCE 1999(1)
NOMINEE --------------------------------------- --- -------- -----------------
<S> <C> <C> <C> <C>
Richard W. Dubberke*..... Vice President and Treasurer of the Company; 61 1975 None
Committee Member of Continental Assurance
Company Separate Account (B) (open-end
investment company); Vice President and
Manager of Corporate Bond Investments of
Continental Assurance Company ("Adviser")
and Continental Casualty Company
("Casualty") (4).
Marilou R. McGirr*....... Vice President and Assistant Treasurer of the 45 1998 None
Company since April 1992; Vice President of
the Adviser and Casualty since January
1997, Assistant Vice President of the
Adviser and Casualty from January 1995 to
January 1997, Director, Money Desk, of the
Adviser and Casualty from September 1993 to
January 1995. Prior thereto, Fixed Income
Trader of the Adviser and Casualty.
Committee Member and Chairman of the
Committee of Continental Assurance Company
Separate Account (B) (open-end investment
company) since November 1997.
David G. Taylor.......... Retired; formerly Managing Director, Chemical 69 1995 None
Bank.
</TABLE>
- ---------------
* An "interested person", as defined in Section 2(a)(19) of the Investment
Company Act of 1940 ("1940 Act"), of the Company and of the Adviser, by
virtue of being an officer of the Company and an officer of the Adviser.
(1) The shares listed are owned with sole voting power and sole investment
power, except as otherwise indicated. As of February 1, 1999, the shares
owned by all six nominees, in the aggregate, represented .014% of the
outstanding shares of the Company's common stock.
(2) Mr. Bottum is a director of Chase Franklin, a registered broker dealer with
the Securities and Exchange Commission. Chase Franklin does not execute
portfolio transactions for the Company nor does it engage in principal
transactions with or act as an underwriter for the Company. Mr. Bottum has
advised the Company that Chase Franklin will not execute portfolio
transactions for, engage in principal transactions with, or act as an
underwriter for the Company during any period when he is a Director.
Accordingly, Mr. Bottum will not be considered interested persons of the
Company because of his relationship with Chase Franklin.
(3) 200 of these shares are beneficially owned by Mr. Cole and his spouse in
joint tenancy. Mr. Cole shares voting power and investment power with
respect to such 200 shares with his spouse.
4
<PAGE> 7
(4) CNA Financial Corporation, a Delaware corporation ("CNA Financial"), CNA
Plaza, Chicago, Illinois 60685, owns all of the stock of Casualty which, in
turn, owns all of the stock of the Adviser. See "Approval of the
Continuation of the Investment Advisory Agreement, As Amended".
ADDITIONAL INFORMATION REGARDING THE BOARD OF DIRECTORS AND OFFICERS
Standing Committees
The Board of Directors annually elects certain of its members to standing
audit and nominating committees. Messrs. Cole, Davidson (Chairman), and Taylor
and A. Dean Swift, a director who is not standing for re-election, are currently
members of the audit committee. The audit committee makes recommendations to the
Board of Directors regarding the engagement of the independent auditors; reviews
and approves the scope of the audit and the fees and other arrangements
regarding such services; reviews the independence of the auditors; reviews with
the independent auditors the plan and results of the audit engagement; and
generally reviews the adequacy of the Company's accounting systems and internal
accounting controls. Messrs. Cole (Chairman), Davidson, Swift and Taylor are
currently members of the nominating committee. The nominating committee reviews
the performance of incumbent directors and officers; considers candidates for
the Board of Directors and offices of the Company; and makes recommendations to
the Board of Directors regarding retention of incumbent directors, selection of
nominees for election as directors and election as officers of the Company, and
membership on the standing and ad hoc committees of the Board of Directors. The
nominating committee will consider nominees recommended by the stockholders for
election as directors at the 2000 Annual Meeting of Stockholders. Such
recommendations should be submitted in writing to the Secretary of the Company,
CNA Plaza, Chicago, Illinois 60685, not later than December 31, 1999, so that
the nominating committee will have ample time to evaluate the recommendations.
The Board of Directors does not have a standing compensation committee.
If elected, it is anticipated that Mr. Bottum would serve on the Audit
Committee and Nominating Committee.
Meetings
The Board of Directors held four meetings in 1998. In addition, the audit
committee held two meetings and the nominating committee held two meetings in
1998. Each director attended all of the meetings of the Board of Directors
except Mr. Swift who attended 75% of the meetings. Each member of the audit and
nominating committees attended all of the meetings thereof held while he was
serving as a member thereof.
Certain Material Relationships of Nominees for Director
No director or nominee for director of the Company has served as an officer
of the Company or the Adviser or had any other material interest in or
relationship with the Company, the Adviser or any of their respective affiliates
during the past five years, except as noted above in the table listing the
nominees for election as directors of the Company.
Remuneration of Directors and Officers
The Company pays each of its directors a director's fee and reimburses
directors for expenses incurred in attending meetings of the Company's Board of
Directors and committees thereof, except
5
<PAGE> 8
that no payments are made to any directors who are officers or employees of or
special consultants to the Adviser, CNA Financial or any of their affiliated
companies. Therefore, neither Mr. Dubberke nor Ms. McGirr has received or will
receive any such payments. The director's fee is currently $10,000 per annum.
Directors who are not "interested persons" (as defined in the 1940 Act) received
an aggregate of $16,388 in reimbursement for expenses in 1998. The Company pays
no other compensation to its directors or officers for their services.
The following table sets forth information regarding the compensation of
all directors of the Company for services rendered in 1998 to the Company and to
funds deemed to be included in the same fund complex as the Company. A "fund
complex" for this purpose means any two or more funds that hold themselves out
to investors as related companies or that have a common or related investment
adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION FROM
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON FUND AND FUND COMPLEX
NAME OF PERSON, POSITION FROM FUND OF FUND EXPENSES RETIREMENT PAID TO DIRECTORS
------------------------ ------------ ------------------------ ---------------- -----------------------
<S> <C> <C> <C> <C>
Franklin A. Cole,
Director.................. $10,000 None None $10,000
Sidney A. Davidson,
Director.................. $10,000 None None $10,000
Richard W. Dubberke,
Director*................. None None None None
Marilou R. McGirr
Director*................. None None None None
A. Dean Swift,
Director.................. $10,000 None None $10,000
David G. Taylor
Director.................. $10,000 None None $10,000
</TABLE>
- ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act).
Executive Officers
The Company has five executive officers: Richard W. Dubberke, Lynne
Gugenheim, Meghan K. Halloran, Marilou R. McGirr and Douglas B. Schaeffer. Ms.
Gugenheim is 39 years old and has been Secretary of the Company and Continental
Assurance Company Separate Account (B) since April 1995. Since January 1996, Ms.
Gugenheim has been a Vice President and Associate General Counsel of the Adviser
and Casualty. From November 1994 to December 1995, she was an Assistant Vice
President and Assistant General Counsel of the Adviser and Casualty. From 1991
to November 1994, Ms. Gugenheim was Counsel of the Adviser and Casualty. Ms.
Halloran is 30 years old and has been a Vice President of the Company since
August 1997, Director, Money Desk, of the Adviser and Casualty since August
1997, Manager, Money Desk of the Adviser and Casualty from September 1995 to
August 1997. Prior thereto, Ms. Halloran was Capital Markets Administrator at
Ameritech Corporation. Mr. Schaeffer is 34 years old and has been Vice President
of the Company since April 1998, Director, Securities Operations, of the Adviser
and Casualty since March 1996 and Short Term Portfolio Manager of the Adviser
and Casualty from October 1994 to March 1996. Prior thereto, Mr. Schaeffer was
an Investment Analyst of the Adviser and Casualty. Information regarding Mr.
Dubberke and Ms. McGirr
6
<PAGE> 9
is contained in the table on pages 3 and 4 of this Proxy Statement. All officers
are elected annually to serve for terms of one year and until their respective
successors are elected and qualified.
2. APPROVAL OF THE CONTINUATION OF THE INVESTMENT
ADVISORY AGREEMENT, AS AMENDED
At a meeting held for such purpose on January 25, 1999, the Board of
Directors, including a majority of the directors who are not "interested
persons" (as defined in the 1940 Act) of the Adviser or the Company, by votes
cast in person, approved the continuation of the Investment Advisory Agreement
dated March 21, 1975, as amended, between the Company and the Adviser,
Continental Assurance Company, CNA Plaza, Chicago, Illinois 60685 (the "Advisory
Agreement"), and decided, as a matter of policy, to submit such continuation for
approval by a vote of the stockholders. The continuation of the Advisory
Agreement was last approved by the stockholders at the 1998 Annual Meeting of
Stockholders held on April 24, 1998.
Pursuant to the 1940 Act, in order for the Advisory Agreement to remain in
effect, it must be approved by a majority of the outstanding voting securities
of the Company. A majority, for such purposes, means the lesser of (a) 67% of
the Company's outstanding voting securities present at a meeting if the holders
of more than 50% of the outstanding voting securities of the Company are present
in person or by proxy, or (b) more than 50% of the outstanding voting securities
of the Company. The Company's only outstanding voting securities are the
outstanding shares of its common stock.
If approved by a majority (as defined above) of the stockholders at the
Annual Meeting, the Advisory Agreement will continue from year to year
thereafter so long as such continuance is specifically approved at least
annually by (1) the Board of Directors of the Company or the vote of the holders
of a majority (as defined above) of the outstanding voting securities of the
Company and (2) the vote of a majority of the directors of the Company who are
not interested persons of the Adviser or the Company cast in person at a meeting
called for the purpose of voting upon such approval. The Advisory Agreement
provides that the Adviser shall have no liability to the Company or any
stockholder of the Company for any error of judgment, mistake of law or any loss
arising out of any investment, or for any other act or omission in the
performance by the Adviser of its duties under such Agreement, except for
liability resulting from willful misfeasance, bad faith or gross negligence on
the Adviser's part or from reckless disregard by the Adviser of its obligations
and duties under such Agreement. The Advisory Agreement also provides that it
will terminate automatically in the event of its assignment and that,
additionally, it is terminable at any time, without penalty, by the Board of
Directors of the Company on 60 days' written notice to the Adviser or by the
Adviser on 60 days' written notice to the Company.
The Adviser is a wholly owned subsidiary of Casualty, which, in turn, is a
wholly owned subsidiary of CNA Financial. (As of February 1, 1999, Casualty also
owned 113,053 shares of common stock of the Company, constituting 1.2% of the
outstanding shares of the Company's common stock.) The Adviser is a stock life
insurance company organized under the Illinois Insurance Code in 1911 and is an
investment adviser registered under the Investment Advisers Act of 1940. As of
December 31, 1998, it had total assets of approximately $14.2 billion and equity
of approximately $2.4 billion. The Adviser
7
<PAGE> 10
operates twelve "separate accounts" which had total assets aggregating
approximately $5.2 billion as of December 31, 1998.
Loews Corporation, a Delaware corporation ("Loews"), 667 Madison Avenue,
New York, New York 10021-8087, with interests in insurance, hotels, watches and
other timing devices, drilling rigs and tobacco, owned approximately 85% of the
outstanding voting stock of CNA Financial as of December 31, 1998. As of
December 31, 1998, Laurence A. Tisch and Preston R. Tisch owned approximately
31% of the outstanding common stock of Loews and may therefore be deemed to be
parents of Loews, and thus of CNA Financial and the Adviser, within the meaning
of the federal securities laws. Laurence A. Tisch and Preston R. Tisch are
brothers.
Pursuant to the Advisory Agreement, a copy of which is attached hereto as
Exhibit A, the Adviser provides the Company with an investment program complying
with the investment objectives, policies and restrictions of the Company and, in
carrying out such program, makes the investment decisions and is responsible for
the investment and reinvestment of the Company's assets. The Adviser performs
research, statistical analysis and continuous supervision of the Company's
investment portfolio. The Adviser bears the cost of fees, salaries or other
remuneration of directors and officers of the Company who also serve as officers
or employees of, or special consultants to, the Adviser, CNA Financial or any of
their affiliated companies. The Adviser also pays for office space, facilities
and business equipment. In return for its advisory services, the Company pays
the Adviser a monthly fee at an annual rate of 1/2 of 1% of the average weekly
net assets of the Company. Fees totaling $460,525, $450,708, and $426,773,
respectively, were paid by the Company to the Adviser during 1998, 1997 and
1996. The Company's net assets on December 31, 1998, December 31, 1997 and
December 31, 1996 were $87,286,080, $95,026,456, and $88,723,067, respectively.
The Advisory Agreement does not require employees of the Adviser to devote their
exclusive efforts to the Company's account, and it is expected that they will
provide investment management services for the Adviser's other accounts and for
CNA Financial and its affiliates.
The Company pays all its other costs and expenses, including directors'
fees not borne by the Adviser, custodian expenses, legal fees, costs of keeping
the Company's books and records, fees and expenses of independent accountants,
costs of acquiring and disposing of portfolio securities, interest, taxes, stock
exchange listing expenses and fees, costs and fees of registration with and
reporting to the Securities and Exchange Commission, costs of the Company's
automatic dividend investment plan, and fees and expenses of the Company's
transfer agent, registrar, custodian and dividend disbursing agent. However, if
such costs and expenses (excluding interest, amortization of deferred finance
expense, taxes, brokerage commissions and extraordinary expenses) borne by the
Company in any fiscal year exceed 1 1/2% of average net assets up to $30,000,000
plus 1% of average net assets over $30,000,000, the Adviser is obligated to
reimburse the Company for any excess pursuant to the Advisory Agreement, as
amended. The determination of whether such reimbursement is due is made monthly,
on an accrual basis, and to the extent that such reimbursement is due it serves
as an offset against the investment advisory fee payable monthly by the Company
to the Adviser. If, at the end of the Company's fiscal year, full reimbursement
has not been accomplished by such monthly offsetting, the balance due must be
paid by the Adviser to the Company. There was no reimbursement for expenses made
by the Adviser to the Company in 1998, 1997 and 1996. Expenses of the nature
described in the first sentence of this paragraph (excluding interest,
amortization of deferred finance expense, brokerage commissions and
extraordinary expenses) borne by the Company in those years were $826,654,
$753,389, and $743,839, respectively.
8
<PAGE> 11
The directors of the Adviser are Philip L. Engel, Bernard L. Hengesbaugh,
Jonathan D. Kantor, W. James MacGinnitie and William H. Sharkey, Jr., CNA Plaza,
Chicago, Illinois 60685. Mr. Hengesbaugh is Chairman and Chief Executive Officer
of the Adviser and Casualty, Mr. Engel is President of the Adviser and Casualty,
Mr. MacGinnitie is Senior Vice President and Chief Financial Officer of the
Adviser and Casualty, Mr. Kantor is Senior Vice President, Secretary and General
Counsel of the Adviser and Casualty, and Mr. Sharkey is Senior Vice President of
the Adviser and Casualty.
The Adviser has two affiliates, CNA Investor Services, Inc. ("Investor
Services"), and Hedge Investor Services, Inc. ("Hedge Services") which are
registered broker-dealers. The Company had no transactions with either Investor
Services nor Hedge Services during 1998, nor with Investor Services for 1997 and
1998. The Company paid $900 in brokerage commission in 1998, no brokerage
commission to any broker-dealer in 1997 and $3,840 in brokerage commissions to
broker-dealers in 1996. The rate of portfolio turnover for the Company during
1998, 1997 and 1996 was 27%, 60% and 66%, respectively.
BOARD OF DIRECTORS REVIEW OF THE INVESTMENT ADVISORY AGREEMENT
Before approving the continuation of the Advisory Agreement, the Board of
Directors of the Company reviewed the material factors relating to its
evaluation of the Adviser and the Advisory Agreement. The directors examined the
performance of the Company in relation to its stock price, net asset value and
dividend history over various periods of time and in comparison to other
closed-end bond funds. They noted that Mr. Dubberke has been the portfolio
manager of the Company since its inception. In addition, the Board of Directors
reviewed the list of and cost for services provided by the Adviser and compared
them to services and costs of investment advisors of other closed-end bond funds
of various sizes. The directors also noted that the Adviser receives research
services from brokerage firms at no additional cost to the Adviser or the
Company. These services are available to be used by the Adviser in its
management of the Company's portfolio as well as the Adviser's other accounts.
At the conclusion of its review of these factors, the Board of Directors
approved the continuation of the Advisory Agreement on its present terms and
conditions. The Board of Directors recommends a vote FOR approval of this
proposal.
MISCELLANEOUS INFORMATION
The Bank of New York acts as transfer agent, registrar and dividend
disbursing agent for the Company.
The Chase Manhattan Bank acts as custodian for the Company.
Chase Global Funds Service Company provides accounting and pricing services
to the Company.
Neither The Bank of New York, nor The Chase Manhattan Bank nor Chase Global
Funds Service Company performs any managerial or policy making functions for the
Company. If Proposal 3 is adopted, The Chase Manhattan Bank will act as a
sub-investment advisor of the Company.
9
<PAGE> 12
3. APPROVAL OF THE APPOINTMENT OF THE CHASE MANHATTAN BANK AS A SUB-INVESTMENT
ADVISOR OF THE COMPANY FOR THE PURPOSE OF ENGAGING IN REPURCHASE, REVERSE
REPURCHASE AND SECURITIES LENDING ARRANGEMENTS ON BEHALF OF THE COMPANY.
The Board of Directors has approved, subject to the approval of the
stockholders, the appointment of The Chase Manhattan Bank ("Chase") as a
sub-investment advisor of the Company for the purpose of engaging in repurchase,
reverse repurchase and securities lending arrangements on behalf of the Company.
REASON FOR ENGAGING IN REPURCHASE, REVERSE REPURCHASE AND SECURITIES LENDING
TRANSACTIONS
The Company is presently authorized to enter into repurchase, reverse
repurchase and securities lending transactions in accordance with its
fundamental investment objectives and policies. The Company seeks to provide
additional income to the portfolio by engaging in these types of transactions.
As described in further detail below, the Company believes that the appointment
of Chase as a sub-investment advisor would enhance the ability of the Company to
engage in these types of transactions.
DESCRIPTION OF REPURCHASE, REVERSE REPURCHASE AND SECURITIES LENDING
TRANSACTIONS
Repurchase, reverse repurchase and securities lending transactions are
fully secured loans of securities generally made between a bank, on behalf of
its customers, and brokers.
Repurchase Agreements. A repurchase agreement is an agreement under which a
person buys a security (typically U.S. Treasury obligations) and simultaneously
commits to sell the security to the seller at an agreed upon price (including
principal and interest) on an agreed upon date. If the Company were the buyer of
the security, it would bear the risk of loss in the event the other party
defaulted on its obligations and the Company was delayed or prevented from
exercising its right to dispose of the collateral securities or if the fund
realized a loss on the sale of the collateral securities.
Reverse Repurchase Agreements. A reverse repurchase agreement is an
agreement under which a person sells an underlying debt instrument (typically
U.S. Treasury obligations) and simultaneously obtains the commitment of the
purchaser (typically a commercial bank or a broker or dealer) to sell the
security back at an agreed upon price (including principal and interest) on an
agreed upon date. The Company may enter into reverse repurchase agreements with
respect to debt obligations which could otherwise be sold by the Company. The
value of underlying securities will be at least equal at all times to the total
amount of the resale obligation, including the interest factor. The Company
receives payment for such securities only upon physical delivery or evidence of
book entry transfer by its custodian. Reverse repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Company's ability to dispose
of the underlying securities.
Securities Lending. Subject to certain conditions and in compliance with
applicable regulatory requirements, the Company may lend its portfolio
securities, but in no event may the aggregate value of all portfolio securities
loaned by the Company at any one time exceed 25% of the value of the Company's
net assets at that time. Any loans of portfolio securities will be made
principally to broker-dealers and, under present regulatory requirements, (1)
the Company must receive 100% collateral in the form of cash or cash equivalents
(e.g., U.S. Treasury bills, letters of credit, notes or other liquid securities)
from the borrower; (2) the borrower must increase the collateral whenever the
market
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value of the securities loaned (determined on a daily basis) rises above the
value of the collateral; (3) after giving notice, the Company must be able to
terminate the loan at any time; (4) the Company must receive reasonable interest
on the loan or a flat fee from the borrower, as well as amounts equivalent to
any dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the Company may pay only reasonable custodian
fees in connection with the loan; and (6) the Board of Directors of the Company
generally must be able to vote proxies on the securities loaned, either by
terminating the loan or by entering into an alternative arrangement with the
borrower. In the event of the bankruptcy of the other party to a securities
loan, the Company could experience delays in recovering either the securities
loaned or cash. To the extent that, in the meantime, the value of the securities
loaned has increased or the value of the securities purchased has decreased, the
fund could experience a loss.
Use of Agents. To gain access or increased access to the markets for
repurchase, reverse repurchase and securities lending transactions, companies
sometimes authorize large financial institutions to enter into these types of
transactions on their behalf. If this proposal is approved, Chase would enter
into repurchase, reverse repurchase and securities lending transactions on
behalf of the Company and other customers of Chase which have executed
securities lending and repurchase agreements (the "Agreements"). At the end of
each such transaction, any income earned by Chase or other benefits of such
transaction would be allocated among Chase and its customers such as the Company
that participated in the particular transaction in accordance with each
customer's Agreement.
REASON FOR THE APPOINTMENT OF THE CHASE MANHATTAN BANK AS SUB-INVESTMENT ADVISOR
Because repurchase, reverse repurchase and securities lending transactions
generally involve the transfer of large blocks of securities, primarily to
brokers, the Company is limited in its access to the market for securities
lending, repurchase and reverse repurchase transactions done on a direct basis.
An investment company such as the Company often does not have the amount of
securities required by such brokers. Because brokers seek to minimize the number
of transactions with each lender of securities and look first to sources such as
banks that can provide them with large amounts of the desired securities, the
Company believes that the appointment of Chase as a sub-investment advisor would
enhance the ability of the Company to engage in these types of transactions.
When selecting an agent bank for these types of transactions, investment
companies generally select their custodian bank as the agent bank because the
custodian bank generally has the most accurate information about the investment
company's portfolio. Because Chase is the Company's custodian bank, the Company
believes it should be able to readily enter into such transactions on behalf of
the Company. In addition, Chase has a significant presence in the repurchase,
reverse repurchase and securities lending market. The Investment Advisor
believes that the proposed division of income between the Company and Chase is
competitive. Under the proposed arrangement the Company would receive 75% of the
income earned and Chase would receive 25%.
Stockholders are encouraged to review carefully the proposed form of
Agreement between the Company and Chase attached hereto as Exhibit B which sets
forth in additional detail information regarding the scope of services to be
provided and the proposed compensation, indemnification and other arrangements
with Chase with respect to such transactions.
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RISKS
The Company's primary risks in engaging in repurchase, reverse repurchase
and securities lending transactions through Chase include the risk of loss in
the event that the other party to such transactions defaults on its obligations
in circumstances where the collateral held by Chase has declined in value. Under
the proposed arrangement, Chase generally would agree to indemnify the Company
against the risk that borrowers of the Company's securities default in their
obligation to return the securities when required by obtaining replacement
securities or crediting the Company's account with the market value of the
loaned securities. However, if the market value of the collateral at the time of
default by a borrower is less than that which is required to purchase
replacement securities or to credit the Company's account, Chase would not be
responsible for such difference. Further, if a securities loan is made against a
letter of credit as collateral, in the event of a default both by the borrower
and the issuer of the letter of credit, Chase would not be responsible for any
resulting collateral deficiency. Further, if Chase should become insolvent, it
would likely not be able to satisfy its indemnification obligations under the
Agreement with the Company and the Company could suffer a loss in connection
with collateral held by Chase if Chase does not maintain proper books and
records to indemnify the owners of the collateral. The Company also may engage
in an increased level of such transactions, with the attendant risks and
benefits, than it has historically if the proposal with Chase is approved by
stockholders.
VOTE REQUIRED
Approval of this proposal requires the affirmative votes of the lesser of
(a) holders of 67% of the shares of the Company's outstanding common stock if
the holders of more than 50% of the shares of the common stock are present at
the annual Meeting in person or by proxy; or (b) the holders of more than 50% of
the shares of the Company's outstanding common stock. The Board of Directors of
the Company recommends a vote FOR approval of this proposal.
4. RATIFICATION OF APPOINTMENT OF AUDITORS
Deloitte & Touche LLP served as the Company's auditor for the fiscal year
ended December 31, 1998, with responsibilities including auditing the books and
records of the Company and reporting from time to time on the financial
statements of the Company. At a meeting held on January 25, 1999, the Board of
Directors, including a majority of the directors who are not "interested
persons" (as defined in the 1940 Act) of the Adviser or the Company, upon
recommendation of the Company's audit committee, selected Deloitte & Touche LLP
as auditors for the Company for the fiscal year ending December 31, 1999.
Pursuant to the 1940 Act, such selection must be submitted to the stockholders
for ratification or rejection at the Annual Meeting. Ratification requires the
affirmative votes of the holders of at least a majority of the shares of the
Company's outstanding common stock present at the Annual Meeting in person or by
proxy, and the Board of Directors recommends a vote FOR ratification. To the
best knowledge of the Company, Deloitte & Touche LLP has no direct or material
indirect financial interest in the Company. Representatives of Deloitte & Touche
LLP are expected to be present at the Annual Meeting with the opportunity to
make a statement if they desire to do so, and such representatives will be
available to respond to appropriate questions.
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OTHER MATTERS
The Board of Directors does not know of any other matters to be presented
at the Annual Meeting other than those mentioned in this proxy statement. If any
other business should come before the meeting, the persons named in the proxy
will vote thereon in accordance with their best judgment.
By Order of the Board of Directors
LYNNE GUGENHEIM
Secretary
February 26, 1999
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EXHIBIT A
Set forth below is a composite copy of the Investment Advisory Agreement
between the Company and the Adviser, dated March 21, 1975, incorporating all
amendments thereto made to the date of this Proxy Statement.
WITNESSETH:
WHEREAS, the Company engages in business as a closed-end management
investment company and is registered as such under the Investment Company Act of
1940 ("1940 Act"); and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, and is engaged in the business of providing
investment advice; and
WHEREAS, the Company desires to retain the Adviser to render such services
in the manner and on the terms and conditions hereinafter set forth; and
WHEREAS, the Adviser desires to perform such services in the manner and on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, the Company and the Adviser agree as follows:
1. The Company hereby employs the Adviser to provide investment advisory
and statistical services and research facilities and services, to supervise the
composition of the Company's portfolio continuously, and to determine the nature
and timing of changes therein and the manner of effectuating such changes,
subject to supervision by the Company's Board of Directors and for the period
and on the terms set forth in this Agreement. The Adviser hereby accepts such
employment and agrees to render the services and to assume the obligations
herein set forth, for the compensation herein provided. The Adviser shall for
all purposes herein be deemed an independent contractor.
2. The Adviser shall furnish to the Company, at the Adviser's expense:
(a) research and statistical and other factual information and reports
with respect to securities held by the Company or which the Company might
purchase. It will also furnish to the Company such information as may be
appropriate concerning developments which may effect issuers of securities
held by the Company or which the Company might purchase or the businesses
in which such issuers may be engaged. Such statistical and other factual
information and reports shall include information and reports on
industries, businesses, corporations and all types of securities, whether
or not the Company has at any time any holdings in such industries,
businesses, corporations or securities.
(b) from time to time, advice, information and recommendations with
respect to the acquisition, holding, or disposition by the Company of
securities in which the Company is permitted to invest in accordance with
its investment objectives, policies and limitations.
(c) necessary assistance in:
(i) The preparation of all reports now or hereafter required by
federal or other laws.
(ii) The preparation of prospectuses, registration statements and
amendments thereto that may be required by federal or other laws or by
the rules or regulations of any duly
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authorized commission or administrative body. However, the Adviser shall
not be obligated to pay the costs of preparation, printing, or mailing
of prospectuses used in connection with sales of the Company's shares or
otherwise provided herein.
(d) office space at such place as may be agreed upon from time to
time, and all necessary office facilities, simple business equipment,
supplies, utilities and telephone service for managing the affairs and
investments of the Company.
3. Except as otherwise expressly provided herein, the Company assumes and
shall pay or cause to be paid all costs and expenses of the Company, including
without limitation:
(a) officers', directors' and employees' compensation and expenses,
except that the Adviser shall pay all fees, salaries or other remuneration
of directors and officers of the Company who also serve as directors and
officers or employees of or special consultants to the Adviser, CNA
Financial Corporation, or any subsidiary or affiliate of CNA Financial
Corporation or the Adviser;
(b) all costs and expenses incident to any public offering of stock of
the Company, for cash or otherwise, including those relating to the
registration of shares under the Securities Act of 1933, as amended, the
qualification of shares of the Company under state securities laws, the
printing or other reproduction and distribution of any registration
statement (and all amendments thereto) under the Securities Act of 1933,
the preliminary and final prospectuses included therein, and any other
necessary documents including underwriting documents incident to any public
offering, the advertising of shares of the Company and review by the
National Association of Securities Dealers, Inc. of any underwriting
arrangement;
(c) the charges and expenses of any registrar or any custodian
appointed by the Company for the safekeeping of its cash, portfolio
securities and other property;
(d) the charges and expenses of auditors;
(e) the charges and expenses of any stock transfer or dividend
disbursing agent or agents appointed by the Company;
(f) brokers' charges and expenses, including without limitation,
brokers' commissions and fees, dealer mark-ups and other charges and
expenses incurred in the acquisition or disposition of portfolio
securities;
(g) all taxes, including securities issuance and transfer taxes, and
corporate fees payable by the Company to federal, state or other
governmental agencies;
(h) the cost and expense of engraving or printing of stock
certificates representing shares of the Company;
(i) fees involved in registering and maintaining registrations of the
Company and of its shares with the Securities and Exchange Commission under
the 1940 Act and with various states and other jurisdictions;
(j) all expenses of stockholders' and directors' meetings and of
preparing, printing and mailing proxy statements and quarterly, semi-annual
and annual reports to stockholders;
(k) all fees and expenses incident to any dividend or distribution
program, including without limitation, the Company's Automatic Dividend
Investment Plan;
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(l) charges and expenses of legal counsel in connection with matters
relating to the Company including without limitation, legal services
rendered in connection with the Company's corporate and financial structure
and relations with its stockholders, issuance of Company shares, and
registrations and qualifications of securities under federal, state and
other laws;
(m) association dues;
(n) interest payable on Company borrowings;
(o) fees and expenses incident to the listing of the Company shares on
any stock exchange and continued compliance with listing requirements;
(p) the expense of keeping the general accounts and records of the
Company;
(q) postage; and
(r) extraordinary costs and expenses.
4. In return for its advisory services, the Company will pay the Adviser a
monthly fee at an annual rate of 0.5% of the average weekly net assets of the
Company. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for such
month shall be computed in a manner consistent with the calculation of the fees
payable on a monthly basis. Subject to the provisions of paragraph 5 hereof, the
accrued fees will be payable monthly as promptly as possible after the end of
each month during which this Agreement is in effect.
5. If costs and expenses borne by the Company, including amounts payable to
the Adviser pursuant to paragraph 4 hereof (but excluding interest, taxes,
brokers' charges and expenses, extraordinary costs and expenses, and if payable
by the Company, the following costs and expenses incident to the public offering
of shares of the Company [except for costs and expenses incident to the public
offering of Company shares registered under the Securities Act of 1933 which may
from time to time be issued by the Company, including without limitation, under
the Automatic Dividend Investment Plan, which costs and expenses shall be
included in the expense limitation contemplated by this paragraph 5]: filing and
legal fees incident to the registration and qualification of the Company's
shares under the Securities Act of 1933 and the securities laws of various
states, legal and auditing fees and expenses incurred in the preparation or
filing of all documents incident to such registration and qualification, the
costs of printing a registration statement, the preliminary and final
prospectuses forming a part thereof, or any blue sky surveys or memoranda
incident to an offering to be made pursuant to such a registration statement and
the preliminary and final prospectuses forming a part thereof, and fees payable
to the National Association of Securities Dealers, Inc. incident to its review
of such offering), for any fiscal year ending on a date on which this Agreement
is in effect exceed one and one-half per cent (1 1/2%) of the first thirty
million dollars ($30,000,000) of the average net assets of the Company, plus one
per cent (1%) of the average net assets of the Company in excess of $30,000,000,
in each case computed by dividing (i) the sum of the net asset values of the
Company as of the last business day of each week of such fiscal year or of each
week during such fiscal year during which this Agreement was in effect, as the
case may be, by (ii) the number of weeks of such fiscal year or the number of
weeks (including a partial week) during which this Agreement is in effect during
such year, as the case may be, the Adviser will pay to the Company the amount of
such excess as soon as is practicable at the end of a fiscal year of the
Company; provided, however, that although payment shall be made by the Adviser
as soon as is practicable at the end of a fiscal year of the Company, the
determination of whether reimbursement for such costs and expenses is due the
Company from the Adviser will be made on an accrual basis once monthly, and if
it is so determined that such
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reimbursement is due, the accrued amount of such reimbursement which is due
shall serve as an offset to the investment advisory fee payable monthly by the
Company to the Adviser pursuant to paragraph 4 hereof, and the amount to be paid
by the Adviser to the Company as soon as is practicable at the end of a fiscal
year of the Company shall be equal to the difference between the aggregate
reimbursement due the Company from the Adviser for that fiscal year and the
aggregate offsets made by the Company against the aggregate investment advisory
fees payable to the Adviser pursuant to paragraph 4 hereof for that fiscal year
by virtue of such aggregate reimbursement.
6. The services of the Adviser to the Company are not to be deemed
exclusive, and the Adviser shall be free to engage in any other business or to
render investment advisory, or management services of any kind to any other
corporation, partnership, trust, individual or association, including any other
investment company, so long as its services hereunder are not impaired thereby.
Nothing in this Agreement shall limit or restrict the right of any director,
officer or employee of the Adviser to engage in any other business or to devote
his time and attention in part to the management or other aspects of any other
business, whether of a similar or dissimilar nature.
7. Neither the Adviser nor any of its officers or directors nor any
affiliate of the Adviser nor any of the officers or directors of such affiliate
shall take a long or short position in the stock of the Company, except that
they may purchase shares of such stock for investment purposes at the same price
as that available to the public at the time of purchase or, if prior to the
initial public offering, at the contemplated public offering price less
contemplated underwriting discount.
8. The Adviser assumes no responsibility under this Agreement other than to
render the services called for hereunder in good faith. The Adviser shall not be
responsible for any action of the Board of Directors of the Company or any
committee thereof in following or declining to follow any advice or
recommendation of the Adviser. The Adviser shall be entitled to rely on written
instructions of the President or any Vice President of the Company or of a
majority of the Board of Directors of the Company.
9. Neither the Adviser, nor any director, officer, agent or employee of the
Adviser shall be liable or responsible to the Company or its stockholders for
any error of judgment, mistake of law or any loss arising out of any investment,
or for any other act or omission in the performance by the Adviser of its duties
under this Agreement, except for liability resulting from willful misfeasance,
bad faith or gross negligence on the Adviser's part or from reckless disregard
by the Adviser of its obligations and duties under this Agreement. The Company
will hold the Adviser harmless against judgments rendered against the Adviser,
together with settlements paid by the Adviser and expenses of defense incurred
by the Adviser which (a) result from specific actions or omissions by the
Adviser in respect of the performance of its obligations hereunder, which
specific acts or omissions occur as a result of express written instructions of
the President or any Vice President of the Company or of a majority of the Board
of Directors of the Company, and (b) arise in actions in which there is an
express finding that such specific acts or omissions did not constitute willful
misfeasance, bad faith, gross negligence, or reckless disregard of its duty.
10. This Agreement has been approved by the Board of Directors of the
Company, including all of the Directors who are not "interested persons" (as
defined in the 1940 Act) of the Adviser or the Company on January 31, 1975, and
by a majority of the outstanding voting securities of the Company on the date
hereof, and shall continue in effect from year to year thereafter (unless sooner
terminated as hereinafter provided), provided its continuance is specifically
approved at least annually by (1) the
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Board of Directors of the Company or the vote of a majority of the outstanding
voting securities of the Company and (2) the vote of a majority of the Directors
of the Company who are not "interested persons" (as defined in the 1940 Act) of
the Adviser or the Company cast in person at a meeting called for the purpose of
voting upon such approval, provided, however, that (a) the Company may, at any
time and without the payment of any penalty, terminate this Agreement upon sixty
days' written notice to the Adviser either by majority vote of the Board of
Directors of the Company or by the vote of a majority of the outstanding voting
securities of the Company; (b) this Agreement shall immediately terminate in the
event of its assignment (within the meaning of the 1940 Act) unless such
automatic termination shall be prevented by an exemptive order of the Securities
and Exchange Commission; provided, however, (i) that the Company shall be under
no obligation to apply for or render assistance to any other person who applies
for such exemptive order in the event of such assignment and (ii) that in the
event that such exemptive order is obtained, this Agreement may nevertheless be
immediately terminated, without penalty, by the Board of Directors of the
Company or by a vote of the majority of the outstanding voting securities of the
Company; and (c) the Adviser may terminate this Agreement without payment of
penalty on sixty days' written notice to the Company.
11. All notices or communications hereunder shall be in writing and, if
sent to the Adviser shall be mailed by first class mail, or delivered, or
telegraphed and confirmed in writing to the Adviser at CNA Plaza, Chicago,
Illinois 60685, Attention: Corporate Secretary, and if to the Company shall be
mailed by first class mail or delivered, or telegraphed and confirmed in writing
to the Company at CNA Plaza, Chicago, Illinois 60685, Attention: Secretary.
12. This Agreement may be amended. Any amendment hereto shall become
effective when approved by the Adviser and by a majority of (a) the outstanding
voting securities of the Company and (b) the Directors of the Company who are
not parties to this Agreement or "interested persons" (as defined in the 1940
Act) of any such party, whichever occurs later.
13. For purposes of this Agreement, a "majority of the outstanding voting
securities of the Company" shall be determined in accordance with the applicable
provisions of the 1940 Act.
14. This Agreement shall be construed in accordance with the laws of the
State of Maryland and the applicable provisions of the 1940 Act. To the extent
applicable law of the State of Maryland, or any of the provisions herein,
conflict with applicable provisions of the 1940 Act, the latter shall control.
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EXHIBIT B
AGREEMENT dated as of , among CNA Income Shares, Inc. ("Company"), a
Maryland corporation having its principal place of business at CNA Plaza,
Chicago, Illinois 60685, and The Chase Manhattan Bank ("Chase"), having its
principal place of business at 3 Chase Metro Tech Center, Brooklyn, New York
11245.
WHEREAS, Chase has entered into a Domestic Custody Agreement with Company
dated as of November 26, 1996 (the "Custody Agreement") pursuant to which it has
agreed to open and maintain a custody account for certain financial assets of
Company under the laws of the State of New York; and
WHEREAS, Company would like to appoint Chase, in its capacity as custodian,
to act as agent in lending securities from time to time constituting Company's
financial assets;
Now, Therefore, it is hereby Agreed as follows:
Section 1 -- Definitions
Unless the context clearly requires otherwise, the following words shall
have the meanings set forth below when used herein:
"Account" shall mean the securities account established and maintained by
Chase on behalf of Company.
"Authorized Investment" shall mean any type of instrument, security,
participation or other property in which Cash Collateral may be invested or
reinvested, as described in Section 5(e) hereof and Appendix 4 hereto (and as
such Appendix may be amended from time to time by written agreement of the
parties).
"Authorized Person" shall mean, except to the extent that Chase is advised
to the contrary by Proper Instruction, any Person who has been identified to
Chase by written notice, delivered to Chase and signed by any two of the
President, or any two Vice Presidents, as authorized to give instructions to
Chase pursuant to this Agreement and any mandates given to Chase in connection
with this Agreement. An Authorized Person shall continue to be so authorized
until such time as Chase receives Proper Instructions that any such person is no
longer an Authorized Person.
"Borrower" shall mean an entity listed on Appendix 1 hereto other than any
entity which Chase shall have been instructed to delete from such list pursuant
to Written Instructions and as such Appendix may be amended in accordance with
Section 4(b) hereof.
"Business Day" shall have the meaning assigned thereto in the applicable
MSLA.
"Cash Collateral" shall mean fed funds and such U.S. and non-U.S.
currencies as may be pledged by a Borrower in connection with a particular Loan.
"Collateral" shall have the meaning assigned thereto in the applicable
MSLA, together with Cash Collateral.
"Collateral Account" shall mean, as the case may be, an account maintained
by Chase with itself, with any Depository or with any Triparty Institution and
designated as a Collateral Account for the purpose of holding any one or more of
Collateral, Authorized Investments, and Proceeds in connection with Loans
hereunder.
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"Collateral Requirement" shall mean have the meaning assigned thereto in
Section 5(e) hereof.
"Depository" shall mean (i) the Depository Trust Company, the Participants
Trust Company, and each of their respective successors (ii) the Federal Reserve
book-entry system or (iii) any additional depository or system which has been
approved by the Director of the Maryland Department of Insurance and agreed by
the Company and Chase as an appropriate depository.
"Difference" shall have the meaning assigned thereto in Section 7(c)(ii)
hereof.
"Distributions" shall have meaning assigned thereto in Section 3(b)(v)
hereof.
"Dollars" shall have the meaning assigned thereto in Section 5(c) hereof.
"Foreign Securities" shall mean Securities issued by an issuer that is not
organized under the laws of the United States.
"Letter of Credit" shall have the meaning assigned thereto in the
applicable MSLA and be issued, by a bank listed on Appendix 2 hereto (as such
list may be amended by Chase from time to time on notice to Company), other than
a bank deleted from such list pursuant to Written Instruction.
"Loan" shall mean a loan of Securities hereunder and under the applicable
MSLA.
"Loan Fee" shall mean the amount payable by a Borrower to Chase pursuant to
the applicable MSLA in connection with Loans collateralized other than by Cash
Collateral.
"Market Value" shall have the meaning assigned thereto in the applicable
MSLA.
"MSLA" shall mean a master securities agreement or securities borrowing
agreement between Chase and a Borrower, pursuant to which Chase lends securities
on behalf of its customers (including Company) from time to time. A copy of
Chase's standard forms of MSLA, including (as applicable) the international
addendum thereto, are annexed (i) as Appendices 3A and 3B in the case of
borrowers domiciled in the United States, and as Appendix 3C in the case of
borrowers domiciled in the United Kingdom. The form of MSLA applicable to each
Borrower is indicated in Appendix 1.
"Oral Instructions" shall have the meaning assigned thereto in Section 10
hereof.
"Proceeds" shall mean interest, dividends and other payments and
Distributions received by Chase in connection with Authorized Investments.
"Proper Instructions" shall mean Oral Instructions and Written
Instructions.
"Rebate" shall mean the amount payable by Chase on behalf of Company to a
Borrower in connection with Loans collateralized by Cash Collateral, which shall
be a Percentage of the Cash Collateral as agreed by the Borrower and Chase.
"Return Date" shall have the meaning assigned thereto in Section 7(c)(i)
hereof.
"Securities," shall mean government securities (including U.S. Government
Securities), equity securities, bonds, debentures, other corporate debt
securities, notes, mortgages or other obligations, and any certificates,
warrants or other instruments representing rights to receive, purchase, or
subscribe for the same, or evidencing or representing any other rights or
interests therein and held pursuant to the Custody or Agreement.
"Term Loan" shall have the meaning assigned thereto in Section 5(h) hereof.
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"Triparty Institution" shall mean a financial institution with which Chase
shall have previously entered a triparty agreement among itself, such Triparty
Institution and a particular Borrower providing, among other things, for the
holding of Collateral in a Collateral Account at such Triparty Institution in
Chase's name on behalf of Chase's lending customers and for the substitution of
Collateral; provided, however, that any substituted Collateral shall meet the
standards then obtaining for acceptable Collateral set by Chase.
"U.S. Government Security" shall mean book-entry securities issued by the
U.S. Treasury (as defined in Subpart 0 of Treasury Department Circular No. 300
and any successor provisions) and any other securities issued or fully
guaranteed by the United States government or any agency, instrumentality or
establishment of the U.S. government, including, without limitation, securities
commonly known as "Ginnie Maes," "Sally Maes," "Fannie Maes" and "Freddie Macs."
"U.S. Securities shall mean Securities issued by an issuer that is
organized under the laws of the United States or any State thereof or that are
otherwise traded in the U.S.
"Written Instructions" shall have the meaning assigned thereto in Section
10 hereof.
Section 2 -- Appointment, Authority
(a) Appointment. Company hereby appoints Chase as its agent to lend
Securities in the Accounts on Company's behalf on a fully disclosed basis to
Borrowers from time to time in accordance with the terms hereof and on such
terms and conditions and at such times as Chase shall determine and Chase may
exercise all rights and powers provided under any MSLA as may be incidental
thereto, and Chase hereby accepts appointment as such agent and agrees to so
act.
(b) Authority. Company hereby authorizes and empowers Chase to execute in
Company's name and on its behalf and at its risk all agreements and documents as
may be necessary to carry out any of the powers herein granted to Chase. Company
grants Chase the authority set forth herein notwithstanding its awareness that
Chase, in its individual capacity or acting in a fiduciary capacity for other
accounts, may have transactions with the same institutions to which Chase may be
lending Securities hereunder, which transactions may give rise to actual or
potential conflict of interest situations; provided, however, that Chase is not
authorized to enter into Loans wherein Chase or any affiliate of Chase is the
Borrower. Chase shall not be bound to: (i) account to Company for any sum
received or profit made by Chase for its own account or the account of any other
person or (ii) disclose or refuse to disclose any information or take any other
action if the same would or might in Chase's judgment, made in good faith,
constitute a breach of any law or regulation or be otherwise actionable with
respect to Chase; provided that, in circumstances mentioned in (ii) above, Chase
shall promptly inform Company of the relevant facts (except where doing so
would, or might in Chase's judgment, made in good faith, constitute a breach of
any law or regulation or be otherwise actionable as aforesaid).
Section 3 -- Representations and Warranties
(a) Representations of each party. Each party hereto represents and
warrants to the other that: (i) it has the power to execute and deliver this
Agreement, to enter into the transactions contemplated hereby, and to perform
its obligations hereunder; (ii) it has taken all necessary action to authorize
such execution, delivery, and performance; (iii) this Agreement constitutes a
legal, valid, and binding
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obligation enforceable against it; and (iv) the execution, delivery, and
performance by it of this Agreement shall at all times comply with all
applicable laws and regulations.
(b) Representations of Company. Company represents and warrants to Chase
that: (i) this Agreement is, and each Loan shall be, legally and validly entered
into, and does not and shall not violate any statute, rule, order or judgment
binding on Company, or any provision of Company's charter or by-laws, or any
agreement binding on Company or affecting its property; (ii) the person
executing this Agreement and all Authorized Persons acting on behalf of Company
has and have been duly and properly authorized to do so; (iii) it is lending
Securities as principal and shall not transfer, assign or encumber its interest
in, or rights with respect to, any Securities available for Loan hereunder; and
(iv) it is the beneficial owner of all Securities or otherwise has the right to
lend Securities; and (v) it is entitled to receive all interest, dividends and
other distributions ("Distributions") made by the issuer with respect thereto.
Company shall promptly identify to Chase by notice, which notice may be oral,
any Securities that are no longer subject to the representations contained in
(b).
Section 4 -- Borrowers
(a) MSLA. Company hereby acknowledges receipt of the forms of MSLA and
authorizes Chase to lend Securities in the Account to Borrowers thereunder
Pursuant to an agreement substantially in the form thereof. In each instance,
prior to the initiation of a Loan, Chase will have entered into a written master
agreement with each Borrower, which agreement shall be substantially in the form
of the MSLA attached hereto as Appendix 3A or 3B, or such successor form of MSLA
as Chase and the Company may from time to time agree.
(b) Borrowers. Securities may be lent to any Borrower listed in Appendix 1,
as such Appendices may be updated from time to time to add new Borrowers and to
delete entities that have ceased to be Potential Borrowers. Chase will provide
the Company with notice of each addition of a Borrower to such list. If the
Company notifies Chase in writing within five Business Days from the date of any
such notice that it objects to a potential Borrower, no Loans of Securities will
be made to such potential Borrower. If the Company does not so object within
such live Business Day period, each potential Borrower notified to the Company
by Chase shall be deemed acceptable to the Company.
Section 5 -- Loans
(a) Securities to be lent. Lending opportunities. Loan initiation. All
Securities of Company held by Chase that are issued, settled or traded in the
markets that have been approved by Chase from time to time for purposes of
Chase's discretionary securities lending program shall be subject to the terms
hereof. Chase shall seek to assure that Company receives a fair allocation of
lending opportunities vis-a-vis other Companys, taking into account the demand
for and availability of Securities, types of Collateral, eligibility of
Borrowers, limitations on investment of Cash Collateral, tax treatment, and
similar commercial factors. From time to time, Chase may lend to Borrowers
Securities held in the Account (except Securities that the Company has notified
to Chase are unavailable or Securities that are no longer subject to the
representations set forth in Section 3) and shall deliver such Securities
against receipt of Collateral in accordance with the applicable MSLA. Chase
shall have the right to decline to make any Loans to any Borrower and to
discontinue lending to any Borrower in its sole discretion and without notice to
Company.
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(b) Receipt of Collateral. Collateral substitution For each Loan, Chase
shall receive and hold on behalf of the Company Letters of Credit received as
Collateral and Chase or a Triparty Institution shall receive and hold all other
Collateral required by the applicable MSLA in a Collateral Account, and Chase is
hereby authorized and directed, without obtaining any further approval from
Company, to invest and reinvest all or substantially all Cash Collateral. Chase
shall credit, or where applicable shall have a Triparty Institution credit, all
Collateral, Authorized Investments and Proceeds to a Collateral Account and
Chase shall mark its books and records to identify Company's interest therein,
it being understood, however, that all monies credited to a Collateral Account
may for purposes of investment be commingled with cash collateral held for other
Companys of securities on whose behalf Chase may act. Chase may, in its sole
discretion, liquidate any Authorized Investment and credit the net proceeds to a
Collateral Account. Chase shall accept substitutions of Collateral in accordance
with the applicable MSLA, and shall credit, or where applicable shall have a
Triparty Institution credit, all such substitutions to a Collateral Account.
With respect to any Letter of Credit held as Collateral for any Loan made
by Company, Chase will notify the Company if in any instance such Letter of
Credit is within seven business days of expiration and Chase has not received a
substitute Letter of Credit or other Collateral with respect to the Loan.
(c) Mark to market procedures. (i) Chase shall require initial Collateral
for a Loan in an amount determined by applying the then applicable "Collateral
Requirement" (as defined below) to the Market Value of the Security that is the
subject of the Loan. The Collateral Requirement with respect to a given Security
shall be an amount equal to the then applicable percentage (currently 102% for
securities issued in the U.S. and 105% for securities issued outside of the
U.S.) of the Market Value of the Security which is the subject of a Loan as
determined as of the close of trading on the preceding Business Day. (ii) With
respect to each Loan, if the aggregate Market Value of the Collateral held by
Chase on behalf of the Company for such Loan on any Business Day is less than
the aggregate Market Value of the Securities which are the subject of such Loan,
the Borrower, upon notice thereof by Chase on behalf of the Company, shall
provide additional Collateral, which shall be delivered by the close of trading
that Business Day or for Collateral other than in United States dollars
("Dollars"), as provided in the applicable MSLA. Such additional Collateral,
together with the Collateral then held by Chase on behalf of the Company for
such Loan, shall be not less than the applicable Collateral Requirement. In
accordance with general market practice, the Market Value of certain Securities
(including, without limitation, U.S. Government Securities), whether on Loan or
received as Collateral, may be determined on a same day basis by reference to
recognized pricing services.
(d) Changes in procedures applicable to Collateral. The Collateral
procedures set forth in Sections 5(b) through (c) above reflect Chase's current
practice and may be changed by Chase from time to time based on general market
conditions (including volatility of Securities on Loan and of securities
Collateral), the Market Value of Securities on Loan to a given Borrower, and in
accordance with general market practice and regulatory requirements. Chase shall
give Company at least 10 Business Days prior notice of any material changes to
such procedures.
(e) Investment of Cash Collateral. (i) Chase is hereby authorized to invest
and reinvest Cash Collateral in accordance with the investment guidelines
annexed hereto as Appendix 4. (ii) Authorized Investments are made for the
account of, and at the sole risk of, Company. In that connection, Company shall
pay to Chase on demand in cash an amount equal to any deficiency in the amount
of Collateral available for return to a Borrower pursuant to an applicable MSLA.
Chase is authorized to select brokers and dealers for the execution of trades in
connection with the investment
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of Cash Collateral, which broker or dealer may be an affiliate of Chase provided
that a competitive execution price is obtained.
(f) Distributions.
(i) Chase shall credit Company's account on payable date with the
amount of all cash Distributions with respect to Securities on Loan over
their record date that Company would have received had such Securities not
been on Loan over record date; provided, that with respect to Foreign
Securities, Chase's obligation to credit Company's account shall extend
only to record dates up to and including the date of any Event of Default
(as defined in the applicable MSLA). To the extent that cash Distributions
are not delivered to Chase by Borrower and Chase has so credited Company's
account with such Distributions, Chase will be subrogated to Company's
rights against Borrower as provided in Section 7(c). In connection with the
foregoing, Company shall promptly return any amount so credited upon oral
or written notification from Chase: (a) that such amount has not been paid
by the issuer of the Securities or the paying agent therefor (as
applicable) in the ordinary course of business or (b) that such amount was
incorrectly credited. If Company does not promptly return any amount upon
such notification, Chase shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting Company's
account for the amount previously credited.
(ii) (a) Any non-cash Distribution which is in the nature of a stock
split or a stock dividend shall be added to the existing Loan to which such
dividend relates as of the date such non-cash Distribution is payable and
shall be subject to the provisions of this Agreement and the applicable
MSLA. (b) Any non-cash Distribution which is in the nature of warrants or
rights to purchase shares made with respect to any Loaned Securities shall
be deemed to be a new Loan made by Company to Borrower (and shall be
considered to constitute Securities on Loan) as of the date such non-cash
Distribution is payable and shall be subject to the provisions of this
Agreement; provided that Company may, by giving Chase ten (10) Business
Days' notice prior to the date of such non-cash Distribution (or such
different amount of time as Chase may from time to time require on advice
to Company), direct Chase to request that the Borrower deliver such
non-cash Distribution to Chase pursuant to the applicable MSLA, in which
case Chase shall credit such non-cash Distribution to Company's account.
(c) If upon Chase's request on behalf of Company, Borrower fails to deliver
the non-cash Distribution on its payable date, the indemnity provisions and
corresponding subrogation rights set forth in Section 7 will apply.
(iii) During the term of any Loan, Chase will permit the Securities on
Loan to be transferred into the name of and be voted by the Borrower or
others. Company shall not be entitled to participate in any dividend
reinvestment program or to vote proxies with respect to Securities that are
eligible for Loan (whether or not actually on Loan) as of the applicable
record date for such Securities.
(iv) In the event that Company wishes to vote proxies with respect to
any Securities actually on Loan at any time, Chase will recall such
Securities at Company's request given in accordance with Section 5(h)
hereof.
(g) Advances, overdrafts and indebtedness; Security Interest. Chase may in
its sole discretion, advance funds on behalf of Company in order to pay to
Borrowers any Rebates or to return to Borrowers Cash Collateral to which they
are entitled pursuant to the applicable MSLA. Company shall repay Chase on
demand the amount of any advance or any other amount owned by Company
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hereunder. Any such advance shall be deemed a service provided by Chase
hereunder for which Chase is entitled to recover its costs as may be determined
by Chase in good faith. In order to secure repayment of any advance or other
indebtedness of Company to Chase arising hereunder, Chase shall have a
continuing lien and security interest in and to all assets now or hereafter held
in the Account and any Collateral Account (to which Company is entitled
hereunder) and any other property at any time held by it for the benefit of
Company or in which Company may have an interest which is then in Chase's
possession or control or in the possession or control of any third party acting
on Chase's behalf. In this regard, Chase shall be entitled to all the rights and
remedies of a pledgee under common law and a secured party under the New York
Uniform Commercial Code and/or any other applicable laws and/or regulations as
then in effect.
(h) Termination of a Loan. (i) Loans shall generally be terminable on
demand. With the prior approval of Company, however, Loans may be made on the
basis of a reasonably anticipated termination date ("Term Loan") and without
providing for the right of substitution of equivalent securities; provided,
however, that all loans established pursuant to this Agreement shall terminate
no more than one year from the date of origination of such loan. Termination of
a Term Loan prior to its anticipated termination date by either Company or
Borrower may result in the terminating party having to pay the non-terminating
party damages based on the cost of obtaining a replacement loan. (ii) Chase
shall terminate any Loan of Securities to a Borrower as soon as practicable
after: (a) receipt by Chase of a notice of termination of the respective MSLA;
(b) receipt by Chase of Written Instructions directing it to terminate a Loan;
(c) receipt by Chase of Written Instructions instructing it to delete from
Appendix 1 the Borrower to whom such Loan was made; (d) receipt by Chase of
Written instructions advising that the Security subject to a Loan is no longer
subject to the representations contained in Section 3 hereof; (e) receipt by
Chase of notice advising that an Event of Default (as defined in the applicable
MSLA) has occurred and is continuing beyond any applicable grace period; (f)
whenever Chase, in its sole discretion, elects to terminate such Loan other than
a Term Loan; or (g) termination of the Agreement. (iii) If Securities which are
the subject of a Loan being terminated are to be sold by Company, Written
Instructions shall in no event be given to Chase later than the time and date as
set forth in Appendix 5 hereto. Chase shall not be liable for any fails
occurring on a settlement date for sale of Securities if timely notice is not
given by Company as provided in this Section, and shall not be liable in any
event (except as provided in sec.7) for failure of a Borrower to return
Securities on Loan in a timely fashion.
(i) Recordkeeping and Reports. Chase shall establish and maintain such
records as are reasonably necessary to account for Loans that are made, the
income derived therefrom, and the collateral held with respect thereto. Chase
shall provide Company with a monthly statement describing the Loans made during
the preceding month, and the income derived from Loans, during the period
covered by such statement. A party shall comply with the reasonable requests of
the other party for information necessary to the requester's performance of its
duties hereunder.
Section 6 -- Default by Borrower
(a) Chase may assume (unless it has actual knowledge to the contrary) that
any representations made by a Borrower in connection with any Loan are true,
that no event which is or may become an Event of Default (as defined in the
applicable MSLA) has occurred and that a Borrower has complied with its
obligations under the applicable MSLA. Subject to Sections 5(f) and 7(b) through
(c), Chase shall have no responsibility for the accuracy or completeness of any
information supplied, or for any
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breach of any obligation, by any Borrower under or in connection with any MSLA
or Loan. Chase shall not be liable as a result of taking or omitting to take any
action provided that Chase shall have carried out its responsibilities hereunder
in good faith. (b) If any Borrower with respect to any Loan effected pursuant
hereto and pursuant to the applicable MSLA fails to return any loaned Securities
when due thereunder for reasons other than relating to the solvency of the
Borrower, Chase shall then take whatever action it deems appropriate in
accordance with general market practice and Chase's reasonable judgment,
including, but not necessarily limited to, claiming compensation from such
Borrower on behalf of Company in the event a trade executed by Company fails on
account of such Borrower's failure timely to have returned Securities on Loan
or, where Chase deems it necessary, such other action as may be permitted by the
applicable MSLA, including collecting any applicable penalties or fines. (c) If
any Borrower with respect to any Loan effected pursuant hereto and pursuant to
the applicable MSLA fails to return any Securities on Loan when due thereunder
for reasons relating to the solvency of the Borrower, Chase shall take such
action as it deems appropriate in accordance with Chase's reasonable judgment
under the applicable MSLA.
Section 7 -- Standard of Care, Liabilities, Indemnification
(a) Standard of care. Liabilities. Except as provided in sec.5(f) and
paragraphs (b) and (c) hereof, Chase shall not be liable for any costs,
expenses, damages, liabilities or claims (including attorneys' and accountants'
fees) incurred by Company, except those costs, expenses, damages, liabilities
and claims arising out of the negligence, bad faith or willful misconduct of
Chase. Chase shall have no obligation hereunder for: (i) costs, expenses,
damages, liabilities or claims (including attorneys' and accountants' fees),
which are sustained or incurred by Company by reason of any action or inaction
by any pricing service, any Depository or a Triparty Institution or their
respective successors or nominee; and (ii) any failure to perform any obligation
due to any matters beyond the control of Chase. In no event shall Chase be
liable for indirect or consequential damages or lost profits or loss of
business, arising hereunder or in connection herewith, even if previously
informed of the possibility of such damages and regardless of the form of
action.
Except for any costs or expenses incurred by Chase in performing its
obligations pursuant to 5(f) and paragraphs (b) and (c) hereof and ordinary
operating expenses incurred by Chase in providing services hereunder, Company
shall indemnify Chase and hold it harmless from and against any and all costs,
expenses, damages, liabilities or claims, including reasonable fees and expenses
of counsel, which Chase may sustain or incur or which may be asserted against
Chase by reason of or as a result of any action taken or omitted by Chase in
connection with operating under this Agreement or enforcing Company's rights
under the applicable MSLA, Other than those costs, expenses, damages,
liabilities or claims arising out of the negligence, bad faith or willful
misconduct of Chase. The foregoing indemnity shall be a continuing obligation of
the Company, its successors and assigns, notwithstanding the termination of any
Loans hereunder or of this Agreement. Chase may charge any amounts to which it
is entitled hereunder against the Account, and Company shall be entitled to an
accounting of all amounts so charged. Actions taken or omitted in reliance upon
Proper Instructions, or upon any information, order, indenture, stock
certificate, power of attorney, assignment affidavit or other instrument
reasonably believed by Chase, in good faith, to be genuine or bearing the
signature of a person or persons believed, in good faith, to be authorized to
sign, countersign or execute the same, shall be conclusively presumed to have
taken or omitted in good faith.
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(b) Indemnification of Company in respect of Distributions. If the Borrower
in respect of any Loan effected pursuant hereto and pursuant to the applicable
MSLA fails to deliver any non-cash Distributions with respect to Securities on
Loan as and when requested to do so by Chase as provided in Section 5(f) hereof,
Chase shall, (x) with respect to U.S. Securities at its option, credit such
non-cash Distribution or an amount equivalent thereto to Company's account on
the date it is due, or (y) with respect to Foreign Securities at its option,
either (i) purchase replacement securities (of an equal amount of the same
issue, class, type or series as the Distribution) on the principal market in
which such securities are traded or (ii) credit Company's account, with the
Market Value in Dollars of such Distributions on the due date as determined by
Chase in good faith.
(c) Indemnification of Company in respect of Securities.
(i) U.S. Securities. If the Borrower in respect of any Loan of U.S.
Securities effected pursuant hereto and pursuant to the applicable MSLA
fails to return any Securities on Loan to Chase for the Account when due
thereunder (the "Return Date") which is the date of default, then Chase
shall, at its expense (subject to paragraph (c) hereof) deposit replacement
Securities of the same issue, type, class and series to the Account, as
soon as practicable. If Chase is unable to obtain replacement Securities,
Chase will credit Company's account in Dollars with the Market Value of
such loaned Securities on the credit date (including, in the case of debt
Securities, accrued interest up to and including the credit date). If the
Market Value of the Collateral at the time of default by the Borrower on a
credit date is less than that which is required to purchase replacement
securities of to credit Company's account, with the Market Value in Dollars
of the Loaned Securities as a result of a decrease in the Market Value of
Authorized Investments, Chase will not be responsible for that decrease and
will deposit replacement securities or credit Company's account, with the
Market Value of such Loaned Securities only to an amount net of the
decrease in Market Value of Authorized Investments. With respect to and to
the extent that a Loan is made against Letter of Credit Collateral, in the
event of a default by both the issuer of the Letter of Credit and the
Borrower, Chase will not be responsible for any resulting decrease in the
Market Value of such Letter of Credit Collateral or have any obligation to
either contribute to or otherwise provide for any resulting Collateral
deficiency.
(ii) Foreign Securities. If the Borrower in respect of any Loan of
Foreign Securities effected pursuant hereto and pursuant to the applicable
MSLA fails to return any Securities on Loan to Chase for the Account on the
Return Date, Chase will, at Chase's sole election and at its expense
(subject to paragraph (c) hereof), as soon as practicable, either (x)
deposit replacement Securities of the same issue, type, class and series to
the Account or (y) credit to Company's Account, in Dollars with the
difference ("Difference") (where a positive number), if any, between (xx)
the market value of such lent Securities on the Return Date (including, in
the case of debt Securities, accrued but unpaid interest), and (yy) in the
case of Loans collateralized by (I) Cash Collateral, the greater of (A) the
Market Value of the Cash Collateral on the date of initial pledge as
adjusted for any subsequent marks-to-market through the Return Date and (B)
the Market Value of Authorized Investments on the Return Date, (B) non-Cash
Collateral comprising securities Collateral, the Market Value of such
Collateral on the Return Date, or (iii) non-Cash Collateral comprising
Letter of Credit Collateral, the Market Value of the Letter of Credit
Collateral on the date of initial pledge as adjusted for any subsequent
marks-to-market through the Return Date. Market Value shall be determined
by Chase in accordance with the applicable MLSA, including the computation
of Dollar equivalents where Securities on Loan
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and/or Collateral (and Proceeds) are denominated in a currency other than
Dollar. Where Cash Collateral and non-Cash Collateral have each been
allocated to a Loan as of the Return Date, the Difference payable by Chase
shall be computed in accordance with the foregoing as if there had been two
Loans in effect on the Return Date, one collateralized by Cash Collateral
and the other collateralized by non-Cash Collateral.
(c) Subrogation. If Chase makes a payment or a purchase pursuant to
Sections 5(f) or 7(b), Chase shall, to the extent of such payment or purchase,
be subrogated to, and Company shall assign and be deemed to have assigned to
Chase, all of its rights in, to and against the Borrower (and any guarantor
thereof) in respect of such Loan, any Collateral pledged the Borrower in respect
of such Loan (including any Letters of Credit and the issuers thereof), and all
proceeds of such Collateral. In the event that Company receives or is credited
with any payment, benefit or value from or on behalf of the Borrower in respect
of rights to which Chase is subrogated as providers herein, Company shall
promptly remit or pay to Chase the same (or its Dollar equivalent).
Section 8 -- Chase Compensation
Company shall pay fees to Chase on such terms as Chase and Company may
agree from time to time in writing.
Section 9 -- Taxes
Company shall be responsible for all filings, tax returns and reports on
any Loans undertaken by Chase on Company's behalf which are to be made to any
authority whether governmental or otherwise and for the payment of all unpaid
calls, taxes (including, without limitation, any value added tax), imposts,
levies or duties due on any principal or interest, or any other liability or
payment arising out of or in connection with any Securities or any Collateral.
In so far as Chase is under any obligation (whether of a governmental nature or
otherwise) to pay the same on Company's behalf, Chase may do so out of any
monies or assets held by it pursuant to the terms of the Custody Agreement or
hereunder.
Section 10 -- Instructions
(a)(i) Written Instructions. "Written Instructions" shall mean written
communications actually received by Chase from an Authorized Person or from a
person reasonably believed by Chase to be an Authorized Person by letter,
memorandum, telegram, cable, telex, telecopy facsimile, computer, video (CRT)
terminal or other on-line system, or any other method reasonably acceptable to
Chase and whereby Chase is able to verify with a reasonable degree of certainty
the identity of the sender of such communicate or which communications are
transmitted with proper testing or authentication pursuant to terms and
conditions which Chase may specify. (ii) Oral Instructions. "Oral Instructions"
shall mean oral communications actually received by Chase from an Authorized
Person or from a person reasonably believed by Chase to be an Authorized Person.
Oral Instructions shall promptly thereafter be confirmed in writing by an
Authorized Person (which confirmation may bear the facsimile signature of such
Person), but Company will hold Chase harmless for the failure of an Authorized
Person to send such confirmation in writing, the failure of such confirmation to
conform to the Oral Instructions received, or Chase's failure to produce such
confirmation at any subsequent time. Company shall be responsible for
safeguarding any testkeys, identification codes or other security devices which
Chase may make available to Company or its Authorized Persons. (iii) "Original
Written Instructions" shall mean written instructions bearing two original
signatures of officers of the Company, one of which
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must be the president or any senior or group vice president of the Company, and
the second of which may be any of the foregoing officers or any Assistant
Treasurer or Assistant Secretary of the Company. Notwithstanding anything in
this Agreement to the contrary, any delivery of assets from the Account not in
connection with a Loan, other than a delivery to a custody account or cash
account of the Company held at Chase, shall be made only on receipt of Original
Written Instructions by Chase. The Company shall indemnify Chase and hold it
harmless from any claim, expense or damages based on Chase's refusal to make
such delivery pending Chase's verification that such Original Written
Instructions are genuine.
(b) Unless otherwise expressly provided, all Proper Instructions shall
continue in full force and effect until canceled or superseded.
Section 11 -- Pricing Services
Chase may use any pricing service referred to in an applicable MSLA and any
other recognized pricing service (including itself and any of its affiliates) in
order to perform its valuation responsibilities with respect to Securities,
Collateral and Authorized Investments and Company shall hold Chase harmless from
and against any loss or damage suffered or incurred as a result of errors or
omissions of any such pricing service.
Section 12 -- Termination
This Agreement has been approved by the Board of Directors of the Company
("Directors"), including all of the Directors who are not "interested persons"
(as defined in the Investment Company Act of 1940) of Chase or the Company on
November 2, 1998, and by a majority of the outstanding voting securities of the
Company on the date hereof, and shall continue in effect from year to year
thereafter (unless sooner terminated as hereinafter provided), provided its
continuance is specifically approved at least annually by (1) the Board of
Directors of the Company or the vote of a majority of the outstanding voting
securities of the Company and (2) the vote of the majority of the Directors of
the Company who are not "interested persons" (as defined in the 1940 Act) of
Chase or the Company cast in person at a meeting called for the purpose of
voting upon such approval, provided, however, that (a) the Company may at any
time and without the payment of any penalty, terminate this Agreement upon 30
days' written notice to Chase either by majority of the Board of Directors of
the Company or by the vote of a majority of the outstanding voting securities of
the Company; (b) this Agreement shall immediately terminate in the event of its
assignment (within the meaning of the 1940 Act) unless such automatic
termination shall be prevented by an exemptive order of the Securities and
Exchange Commission; provided, however, (i) that the Company shall be under no
obligation to apply for or render assistance to any other person who applies for
such exemptive order in the event of such assignment and (ii) that in the event
that such exemptive order is obtained, this Agreement may nevertheless be
immediately terminated, without penalty, by the Board of Directors of the
Company or by a vote of the majority of the outstanding voting securities of the
Company; and (c) Chase may terminate this Agreement without payment of penalty
on 30 days' written notice to the Company. Notwithstanding any such notice, this
Agreement shall continue in full force and effect with respect to all Loans
outstanding on the termination date, which Loans shall, however, be terminated
as soon as reasonably practicable.
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Section 13 -- Miscellaneous
(a) Legal proceedings. Chase may refrain from bringing any legal action or
proceeding arising out of or in connection with any Loan until it shall have
received such security as it may require for all costs, expenses (including
legal fees) and liabilities which it will or may expend or incur in relation
thereto.
(b) Integration. Agreement to Govern. This Agreement and the Custody
Agreement contain the complete agreement of the parties with respect to the
subject matter hereof and supersede and replace any previously made proposals,
representatives, warranties or agreements with respect thereto by the parties.
In the event of any conflict between this Agreement and the Custody Agreement,
this Agreement shall govern.
(c) Notices. Unless expressly provided herein to the contrary, notices
hereunder shall be in writing, and delivered by telecopier, overnight express
mail, first-class postage prepaid, delivered personally or by receipted courier
service. All such notices which are mailed shall be deemed delivered on receipt.
Notices shall be addressed as follows (or to such other address as a party may
from time to time designate on notice duly given in accordance with this
paragraph): notices to Chase shall be addressed to it at, 4 New York Plaza, New
York, New York, 10004, Attention: Securities Lending Division; notices to be
given to Company shall be addressed to it at its offices at CNA Plaza, 23 South,
Chicago, Illinois 60685, Attention: Money Desk
(d) Amendments. Waiver. This Agreement may be modified only by a written
amendment signed by both parties, and no waiver of any provision hereof shall be
effective unless expressed in a writing signed by the party to be charged.
(e) Governing Law. Consent to Jurisdiction. Waiver of Immunity. This
Agreement shall be construed in accordance with the laws of the State of New
York, without regard to the conflict of laws principles thereof. Chase and
Company each hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and Company hereby waives any claim of forum non conveniens to the
extent that it may lawfully do so. To the extent that in any jurisdiction
Company may now or hereafter be entitled to claim, for itself or its assets,
immunity from suit, execution, attachment (before or after judgment) or other
legal process, Company irrevocably shall not claim, and it hereby waives, such
immunity.
(f) Counterparts. Headings. This Agreement may be executed in several
counterparts, each one of which shall constitute an original, and all
collectively shall constitute but one instrument. The headings of the sections
hereof are included for convenience of reference only and do not form part of
this Agreement.
(g) Severability. Any provisions of this Agreement which may be determined
by competent authority to be prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
B-12
<PAGE> 33
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above-written.
CNA INCOME SHARES, INC. THE CHASE MANHATTAN BANK
<TABLE>
<S> <C>
By: By:
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Title: Vice President
Title:
--------------------------------------------------
By:
-------------------------------------------------
Title: Secretary
</TABLE>
B-13
<PAGE> 34
<TABLE>
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<S><C>
1. Election of Directors FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] *EXCEPTION [ ]
listed below for all nominees listed below
Nominees: E. Bottum, F. Cole, E. Davidson, R. Dubberke, M. McGirrt and D. Taylor
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME ON
THE LINE PROVIDED BELOW.)
*Exceptions ________________________________________________________________________________________________________________________
2. Approval of the continuation of the Investment Advisory 3. Approval of the appointment of the Chase Manhattan Bank as
Agreement as amended, between the Company and Continental a sub-investment advisor of the Company for the purpose of
Assurance Company. engaging in repurchase, reverse repurchase and securities
lending arrangements on behalf of the Company.
FOR [ ] AGAINST [ ] ABSTAIN [ ] FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Ratification of the selection of Deloitte & Touche LLP as 5. In their discretion, the Proxies are authorized to vote upon
independent auditors for the Company. such other business as may properly come before the meeting.
FOR [ ] AGAINST [ ] ABSTAIN [ ] FOR [ ] AGAINST [ ] ABSTAIN [ ]
Change of Address and
or Comments Mark here [ ]
Please sign exactly as name appears at left. When
shares are held by joint tenants, both should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name
by President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
Dated:________________________________________ , 1999
_____________________________________________________
Signature
_____________________________________________________
Signature, if held jointly
VOTES MUST BE INDICATED
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. (X) IN BLACK OR BLUE INK. [ ]
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</TABLE>
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CNA INCOME SHARES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS, APRIL 23, 1999
Richard W. Dubberke, Lynne Gugenheim and Marilou R. McGirr, or any of
them, with full power of substitution, are hereby authorized to represent and
to vote the shares of the undersigned as fully as the undersigned could do if
personally present at the Annual Meeting of Stockholders of CNA Income Shares,
Inc. (the "Company") to be held April 23, 1999, at CNA Plaza, 333 South Wabash
Avenue, Chicago, Illinois, in Room 305, at 2:00 P.M. Chicago Time and at any
and all adjournments on the matters indicated on the reverse hereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1,2,3, AND 4.
Continued and to be signed and dated on the reverse side.
CNA INCOME SHARES, INC.
P.O. BOX 11058
NEW YORK, N.Y. 10203-0058
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