<PAGE>
As filed with the Securities and Exchange Commission on April 7, 2000
Securities Act File No. 333-30248
Investment Company Act File No. 811-05484
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-2
[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[x] Pre-Effective Amendment No. 1
[_] Post-Effective Amendment No. ____
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] Amendment No. 13
--------------------
ZENIX INCOME FUND INC.
(Exact name of registrant as specified in its charter)
--------------------
388 Greenwich Street
New York, New York 10013
(Address of principal executive offices)
(212) 783-7857
(Registrant's telephone number, including area code)
--------------------
Mr. Heath B. McLendon
SSB Citi Fund Management LLC
7 World Trade Center
New York, New York 10048
(Name and address of agent for service)
--------------------
With copies to:
Burton M. Leibert, Esq. Sarah E. Cogan, Esq.
Willkie Farr & Gallagher Simpson Thacher & Bartlett
787 Seventh Avenue 425 Lexington Avenue
New York, New York 10019 New York, New York 10017
--------------------
<PAGE>
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [_]
It is proposed that this filing will become effective (check appropriate
box)
[_] when declared effective pursuant to Section 8(c).
If appropriate, check the following box:
[_] This amendment designates a new effective date for a previously
filed registration statement.
[_] This Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is ___________ .
--------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===============================================================================
<TABLE>
<CAPTION>
Amount Proposed Maximum Proposed Maximum Amount of
Title of Securities Being Offering Price per Aggregate Offering Registration
Being Registered Registered Unit(1) Price Fee(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Auction Rate Preferred
Stock, par value $.01 per share..... 2,400 $25,000 $60,000,000 $15,840
======================================================================================================================
</TABLE>
(1) As calculated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended.
(2) $15,840 was wired to the Securities and Exchange Commission's account at
Mellon Bank, Pittsburgh, Pennsylvania in payment of the required
registration fee due in connection with this Registration Statement.
----------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
2
<PAGE>
ZENIX INCOME FUND INC.
Form N-2
Cross-Reference Sheet
Parts A and B of Prospectus
<TABLE>
<CAPTION>
Item No. Caption Location in Prospectus
- ------- ------- ----------------------
<S> <C> <C>
Part A - Information Required in a Prospectus
1. Outside Front Cover .............................. Front Cover Page
2. Cover Pages; Other Offering Information .......... Front Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis ........................... Prospectus Summary
4. Financial Highlights ............................. Financial Highlights
5. Plan of Distribution ............................. Front Cover Page; Prospectus
Summary; Underwriting
6. Selling Shareholders ............................. Not Applicable
7. Use of Proceeds .................................. Use of Proceeds
8. General Description of the Registrant ............ Front Cover Page; Prospectus
Summary; The Fund; Investment
Objective and Policies; Risk
Factors and Special
Considerations; Description
of Preferred Shares;
Description of Common Stock;
Net Asset Value
9. Management ....................................... The Fund; Prospectus Summary;
Financial Highlights;
Investment Objective and Policies;
Management of the Fund;
Custodian, Transfer Agent,
Dividend Paying Agent and
Registrar
10 . Capital Stock, Long-Term Debt, and
Other Securities ................................. Prospectus Summary; Capitalization;
Investment Objective and Policies;
Risk Factors and Special Considerations;
Description of Preferred
Shares; Description of Common
Stock; Repurchase of Common
Shares; Determination of Net
Asset Value; Taxes
11 . Defaults and Arrears on Senior Securities ........ Not Applicable
12 . Legal Proceedings ................................ Not Applicable
13 . Table of Contents of the Statement
of Additional Information ........................ Table of Contents of the
Statement of Additional
Information
Part B - Information required in a Statement of Additional Information
14. Cover Page ...................................... Front Cover Page
15. Table of Contents ............................... Front Cover Page
16. General Information and History ................. General Information
17. Investment Objective and Policies ............... Investment Objective and
Policies; Investment Restrictions
18. Management ...................................... Investment Adviser; Management
of the Fund
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
19. Control Persons and Principal Holders
of Securities ................................... Principal Stockholders
20. Investment Advisory and Other Services .......... Investment Adviser; Experts;
Custodian, Transfer Agent,
Dividend Paying Agent
and Registrar; Principal Stockholders
21. Brokerage Allocation and Other Practices ........ Investment Adviser
22. Tax Status ...................................... Taxes
23. Financial Statements ............................ Experts
</TABLE>
PART C - Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in the Prospectus is not complete and may be changed. We may +
+not sell these securities until the Registration Statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 7, 2000
PROSPECTUS
$60,000,000
Zenix Income Fund Inc.
Auction Rate Cumulative Preferred Shares
("Preferred Shares")
2,400 Shares
Liquidation Preference $25,000 per share
--------
Zenix Income Fund Inc., or the Fund, is selling 2,400 Auction Rate Cumulative
Preferred Shares. The Fund is a diversified, closed-end management investment
company. The Fund's investment objective is to seek high current income by
investing in a diversified portfolio of high yield, lower rated fixed-income
securities. The Fund invests at least 65% of its total assets in such high
yield fixed-income securities. These securities are commonly known as "junk
bonds" because they are rated in the lower rating categories by nationally
recognized rating agencies. There is no assurance that the Fund will achieve
its investment objective. An investment in the Fund is not appropriate for all
investors.
Investors in Preferred Shares will be entitled to receive cash dividends at
an annual rate that may vary for the successive dividend periods for such
Preferred Shares. The dividend rate on the Preferred Shares for the period from
and including the date of issue to but excluding April 26, 2000 will be % per
year. For each subsequent period, the Auction Agent will determine the dividend
rate for a particular period by an auction conducted on the business day prior
to that period. The auction is usually held weekly. Investors in Preferred
Shares may participate in auctions through their broker-dealers in accordance
with the procedures specified in this Prospectus and in the Statement of
Additional Information. The Fund may redeem Preferred Shares as described under
"Description of Preferred Shares--Redemption."
Preferred Shares are not listed on an exchange. You may only buy or sell
Preferred Shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the Auction Agent and the
Fund, or in a secondary market maintained by certain broker-dealers. These
broker-dealers are not required to maintain this market, and it may not provide
you with liquidity.
The Preferred Shares will be senior to shares of the Fund's outstanding
Common Stock, par value $.01 per share. The Fund's Common Stock is traded on
the New York Stock Exchange under the symbol "ZIF." It is a condition of the
closing of this offering that the Preferred Shares be offered with a rating of
AAA from Standard & Poor's Rating Group and aaa from Moody's Investors
Services, Inc.
This Prospectus sets forth concisely the information you should know before
investing, including information about risks. You should read this Prospectus
before you invest and keep it for future reference. The Fund's Statement of
Additional Information, dated April , 2000, contains additional information
about the Fund and is incorporated by reference into (which means it is
considered to be a part of) this Prospectus. You may obtain a free copy of the
Statement of Additional Information by calling the Fund at 1-800-451-2010, or
by writing to the Fund at 388 Greenwich Street, New York, New York 10013. A
table of contents to the Statement of Additional Information is located at page
31 of this Prospectus. The Statement of Additional Information is also
available, along with other Fund-related materials, on the Securities and
Exchange Commission's internet web site (http://www.sec.gov).
Investing in the Preferred Shares involves risks. See the "Risk Factors and
Special Considerations" section beginning on page 15 of this Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<CAPTION>
Per Share Total
- -------------------------------------------------------------------------------
<S> <C> <C>
Public Price............... $25,000 $60,000,000
- -------------------------------------------------------------------------------
Sales Load................. $250.00 $ 600,000
- -------------------------------------------------------------------------------
Proceeds to Fund (before
expenses)................. $24,750 $59,400,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares are
first issued.
--------
The underwriter is offering the Preferred Shares subject to various
conditions. The underwriter expects to deliver the shares to purchasers, in
book-entry form through the Depository Trust and Clearing Corporation, on or
about April , 2000.
--------
Salomon Smith Barney
<PAGE>
You should rely only on the information contained in or incorporated by
reference into this Prospectus. Neither the Fund nor the Underwriter has
authorized anyone to provide you with different information. If anyone
provides you with different information, you should not rely on it. Neither
the Fund nor the Underwriter is making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. You should not
assume that the information provided by this Prospectus is accurate as of any
date other than the date on the front of this Prospectus. The Fund's business,
financial conditions, results of operations and prospects may have changed
since that date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 1
Financial Highlights....................................................... 6
The Fund................................................................... 10
Use of Proceeds............................................................ 10
Capitalization............................................................. 11
Portfolio Composition...................................................... 11
Investment Objective and Policies.......................................... 12
Risk Factors and Special Considerations.................................... 15
Management of the Fund..................................................... 18
Description of Preferred Shares............................................ 19
The Auction................................................................ 23
Taxes...................................................................... 26
Description of Common Stock................................................ 27
Determination of Net Asset Value........................................... 28
Conversion to Open-End Fund................................................ 28
Repurchase of Common Shares................................................ 28
Custodian, Transfer Agent, Dividend Paying Agent and Registrar............. 28
Underwriting............................................................... 29
Legal Opinions............................................................. 29
Reports to Shareholders.................................................... 29
Independent Auditors....................................................... 30
Further Information........................................................ 30
Financial Statements....................................................... 30
Table of Contents of the Statement of Additional Information............... 31
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information. Cross references in this summary are to headings in the
body of this Prospectus or the Statement of Additional Information.
The Fund.................... Zenix Income Fund Inc. is a diversified,
closed-end management investment company. The
Fund was incorporated under the laws of the
State of Maryland on February 11, 1988. The
Fund's outstanding Common Stock is listed on
the New York Stock Exchange under the symbol
"ZIF." See "The Fund" and "Description of
Common Stock." The Fund's principal office is
located at 388 Greenwich Street, New York,
New York 10013 and its telephone number is
(212) 783-7857.
Investment Adviser.......... SSB Citi Fund Management LLC, or SSBC, a
subsidiary of Salomon Smith Barney Holdings
Inc., is the Fund's investment adviser. SSBC
is responsible for the selection and on-going
monitoring of the Fund's investment
portfolio. The Fund pays SSBC for the
services it provides to the Fund a monthly
fee at the annual rate of .50 of 1% of the
Fund's average daily net assets. See
"Management of the Fund."
The Offering................
The Fund is offering a total of 2,400 shares
of Auction Rate Cumulative Preferred Shares
at a purchase price of $25,000 per share plus
dividends, if any, that have accumulated from
the date the Fund first issues the shares.
The Preferred Shares are being offered by
Salomon Smith Barney Inc. as underwriter. See
"Underwriting."
Investment Objective and The Fund's investment objective is to provide
Policies.................... high current income. This income, if any,
will be distributed to holders of Common
Stock after the satisfaction of the
obligations to pay dividends on the Preferred
Shares. See "Investment Objective and
Policies" and "Description of Preferred
Shares--Dividends." An investment in the Fund
may not be appropriate for all investors and
the Fund cannot guarantee you that it will
achieve its investment objective.
Investment Strategy......... The Fund seeks to achieve its objective by
investing in a portfolio of high yield, lower
rated fixed-income securities. Under normal
market conditions, the Fund invests at least
65% of its total assets in high yield fixed-
income securities. These securities are
commonly known as "junk bonds" because they
are rated in the lower categories by
nationally recognized rating agencies
(consisting of fixed-income securities rated
BB to as low as C by Standard & Poor's Rating
Group, or S&P, or Ba to as low as C by
Moody's Investors Services, Inc., or
Moody's).
The Fund may invest up to 35% of its total
assets in investment grade fixed-income
securities during normal market conditions
and in excess of that amount during temporary
defensive periods.
The Fund may also invest up to 20% of its
total assets in non-rated securities that
SSBC believes to be of a quality comparable
to rated
1
<PAGE>
securities in which the Fund may invest. See
"Investment Objective and Policies--
Investment Strategies."
Lower rated fixed-income securities are
subject to a greater degree of risk than
higher rated securities, which generally bear
a lower interest rate; accordingly, to the
extent the Fund's assets are invested in
higher rated securities, the Fund's
investment objective of high current income
may not be attained. Consequently, the Fund
cannot guarantee you that it will achieve its
investment objective. See "Risk Factors and
Special Considerations--Lower Rated and
Unrated Securities Risk."
The Fund's investments are subject to
diversification, liquidity and related
guidelines established in connection with the
Fund's receipt from S&P and Moody's of
ratings of AAA and aaa, respectively, for the
Preferred Shares. See "Investment Objective
and Policies."
Ratings issued by nationally recognized
rating agencies, including S&P and Moody's,
do not eliminate or mitigate the risks of
investing in the Fund's securities. See "Risk
Factors and Special Considerations" below and
in the Statement of Additional Information
and "Description of Preferred Shares--Asset
Maintenance" in the Statement of Additional
Information.
Risk Factors and Special Risk is inherent in all investing. Therefore,
Considerations.............. before investing in Preferred Shares you
should consider certain risks carefully. The
primary risks of investing in Preferred
Shares are:
. if an auction fails you may not be able
to sell some or all of your shares
(auction risk);
. because of the nature of the market for
Preferred Shares, you may receive less
than the price you paid for your shares
if you sell them outside of the auction,
especially when market interest rates are
rising (secondary market risk);
. a rating agency could downgrade the
rating assigned to the Preferred Shares,
which could affect liquidity (ratings and
asset coverage risk);
. the Fund may be forced to redeem your
shares to meet regulatory or rating
agency requirements or may voluntarily
redeem your shares under certain
circumstances (ratings and asset coverage
risk);
. in extraordinary circumstances the Fund
may not earn sufficient income from its
investments to pay dividends (interest
rate risk);
. if the Fund redeems your Preferred
Shares, you may not be able to find as
good a yield on an investment with
similar terms and quality (reinvestment
risk);
. if long-term rates rise, the value of the
Fund's investment portfolio will decline,
reducing the asset coverage for the
Preferred Shares (interest rate risk);
and
2
<PAGE>
. if an issuer of a fixed-income security
in which the Fund invests defaults, there
may be a negative impact on the income
and net asset value of the Fund's
portfolio (interest rate risk and credit
risk).
In addition, although the offering described
in this Prospectus is conditioned upon the
receipt of ratings of AAA from S&P and aaa
from Moody's for the Preferred Shares, the
Fund invests in lower rated securities,
commonly known as "junk bonds" because of
their lower rating by nationally recognized
rating agencies, and unrated securities of
comparable quality. These lower rated and
comparable unrated securities involve greater
risk than higher rated securities.
These securities generally offer a higher
return potential than higher rated securities
but also involve greater volatility of price
and risk of loss of income and principal,
including the possibility of default or
bankruptcy of the issuers of the securities.
See "Risk Factors and Special
Considerations--Credit Risk" and--"Investment
Strategy Risk." For additional risks of
investing in the Fund and the Preferred
Shares, see "Risk Factors and Special
Considerations."
Trading Market.............. Preferred Shares are not listed on an
exchange. Instead, you may buy or sell
Preferred Shares at an auction that normally
is held weekly, by submitting orders to a
broker-dealer that has entered into an
agreement with the Auction Agent and the Fund
(a "Broker-Dealer"), or to a broker-dealer
that has entered into a separate agreement
with a Broker-Dealer.
In addition to the auctions, Broker-Dealers
and other broker-dealers may maintain a
secondary trading market in Preferred Shares
outside of auctions, but may discontinue this
market at any time. A secondary market may
not provide you with liquidity. You may
transfer shares outside of auctions only to
or through a Broker-Dealer, a broker-dealer
that has entered into a separate agreement
with a Broker-Dealer, or other persons as the
Fund permits. See "The Auction--Secondary
Market" in the Statement of Additional
Information.
The first auction date for Preferred Shares
will be Tuesday, April 25, 2000, the business
day before the dividend payment date for the
initial rate period for Preferred Shares. The
auction date for Preferred Shares normally
will be a Tuesday, and the start date for
subsequent rate periods normally will be the
following business day, typically a
Wednesday, unless the then-current rate
period is a special rate period, or the day
that normally would be the auction date or
the first day of the subsequent rate period
is not a business day.
Dividends and Rate Periods..
Dividends on the Preferred Shares will be
cumulative from the date the shares are first
issued. The Fund will pay dividends on the
Preferred Shares, on each dividend payment
date, out of legally available funds,
commencing on April 26, 2000. See
"Description of Preferred Shares--Dividends--
General."
3
<PAGE>
Dividends on Preferred Shares will accumulate
beginning on Friday, April 14, 2000 at the
initial rate of %. For subsequent rate
periods, Preferred Shares will pay dividends
based on a rate set at the auctions, normally
held weekly. For each subsequent period, the
Auction Agent will determine the dividend
rate for a particular period by an auction
conducted on the business day prior to that
period. The rate set at auction will not
exceed the Maximum Applicable Rate. Dividends
will be paid on shares of Preferred Shares on
Wednesday, April 26 and normally thereafter
on each Tuesday. If the Tuesday on which
dividends otherwise would be paid is not a
business day, then dividends will be paid on
the first business day that falls before that
Tuesday. See "Description of Preferred
Shares--Dividends--General and--Dividend Rate
Set At Auction."
The number of days in the initial rate period
will be 12 days. Subsequent rate periods
generally will be seven days. The dividend
payment date for a special rate period of
more than seven days will be set out in the
notice designating a special rate period. See
"Description of Preferred Shares--Dividends--
General."
Administrator............... In addition to serving as the Fund's
Investment Advisor, SSBC currently serves as
the Fund's administrator. The Fund pays SSBC
for the services it provides as administrator
to the Fund a monthly fee at the annual rate
of .20 of 1% of the Fund's average daily net
assets. See "Management of the Fund."
Use of Proceeds............. The net proceeds from the sale of the
Preferred Shares offered by this Prospectus
will be used to redeem 30,000 shares of the
outstanding Preferred Stock (the "Outstanding
Preferred Stock") that are subject to
mandatory redemption on April 15, 2000 and to
retire the Fund's debt under its existing
line of credit with PNC Bank, N.A. See "Use
of Proceeds."
Underwriting................ Salomon Smith Barney Inc. will serve as
underwriter of the Preferred Shares offered
by this Prospectus. See "Underwriting."
Asset Maintenance........... Under the Fund's Articles Supplementary,
which establishes and fixes the rights and
preferences of the Preferred Shares, the Fund
is required to maintain, as of the last
business day of each calendar month
. asset coverage of at least 200% with
respect to senior securities that are
stock, including the Preferred Shares,
and
. asset coverage of at least 300% with
respect to any senior securities
representing indebtedness.
See "Description of Preferred Shares--Asset
Maintenance" in the Statement of Additional
Information. If the Fund fails to maintain
these asset coverages, the Preferred Shares
must be redeemed in certain circumstances.
See "Description of Preferred Shares--
Redemption."
Minimum Liquidity Level..... For as long as Preferred Shares are still
outstanding, the Fund will be required to
maintain on a semi-annual basis certain
assets having
4
<PAGE>
a discounted value not less than the Dividend
Coverage Amount. See "Description of
Preferred Shares--Minimum Liquidity Level" in
the Statement of Additional Information.
Ratings..................... It is a condition of closing of the offering
described in this Prospectus that the
Preferred Shares be issued with a rating of
AAA from S&P and aaa from Moody's. See
"Investment Objective and Policies."
Redemption.................. The Fund will not ordinarily redeem Preferred
Shares. However, it may be required to redeem
shares if, for example, the Fund does not
meet an asset coverage ratio required by law
or correct a failure to meet a rating agency
guideline in a timely manner. The Fund
voluntarily may redeem Preferred Shares under
certain conditions. Any redemption of
Preferred Shares will be made at a price
equal to $25,000 per share plus accumulated
but unpaid dividends to the redemption date
plus (in the case of a dividend period of one
year or more only) a redemption premium. See
"Description of Preferred Shares--
Redemption."
Liquidation Preference...... The liquidation preference of each Preferred
Share is $25,000, plus any accumulated but
unpaid dividends to the date of distribution.
See "Description of Preferred Shares--
Liquidation Rights" in the Statement of
Additional Information.
Voting Rights............... Normally, holders of Preferred Shares will
elect two Directors, holders of Common Stock
will elect two Directors and holders of
Preferred Shares and Common Stock, voting as
a single class, will elect the remaining
Directors. If the Fund fails to pay dividends
on the Preferred Shares in an amount equal to
two full years' dividends, however, holders
of Preferred Shares, voting as a single
class, will have the right to elect the
smallest number of Directors that would
constitute a majority of the Directors until
cumulative dividends have been paid or
provided for. The holders of Preferred Shares
vote separately as a class on certain other
matters, as required under the Fund's
Articles of Incorporation, the Investment
Company Act of 1940, as amended (the
"Investment Company Act") and Maryland law.
See "Description of Preferred Shares--Voting
Rights."
Federal Income Taxes........ So long as the Fund continues to meet the
requirements for being a tax-qualified
regulated investment company, it pays no
federal income tax on the earnings it
distributes to shareholders. Because the
Fund's portfolio income consists principally
of interest income, corporate investors in
Preferred Shares generally will not be
entitled to the Federal dividends received
deduction. See "Taxes."
Custodian, Transfer Agent,
Dividend Paying Agent and PNC Bank, N.A., or PNC, serves as the Fund's
Registrar................... custodian. PFPC Global Fund Services or PFPC,
a subsidiary of PNC Corporation, serves as
transfer agent, dividend paying agent and
registrar for the Common Stock and Preferred
Shares and, for the Preferred Shares, as
agent to provide notice of redemption and
certain voting rights. See "Custodian,
Transfer Agent, Dividend Paying Agent and
Registrar."
5
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below set forth selected financial information for an outstanding
share of Common Stock, a share of Outstanding Preferred Stock and a share of
the Fund's 9.67% Cumulative Preferred Stock (which was redeemed on April 15,
1993) throughout each period presented. All of the Fund's Outstanding
Preferred Stock will be redeemed on April 15, 2000. See "Use of Proceeds." The
financial highlights for fiscal years ended March 31, 1996 through and
including March 31, 1999 have been audited by KPMG LLP, the Fund's independent
accountants, as stated in their report dated May 12, 1999, included in the
Fund's March 31, 1999 Annual Report and incorporated by reference into the
Fund's Statement of Additional Information. The financial highlights for the
fiscal years ended March 31, 1990-1995 have been audited by other independent
auditors. The Fund's unaudited financial statements in its September 30, 1999
Semi-Annual Report are also incorporated by reference in the Statement of
Additional Information. The financial highlights should be read in conjunction
with the financial statements and notes thereto included in the Fund's March
31, 1999 Annual Report and the September 30, 1999 Semi-Annual Report, which
are available without charge by calling the Fund at 1-800-451-2010.
PER SHARE OPERATING PERFORMANCE THROUGHOUT EACH PERIOD(1)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------
1990 1991 1992 1993 1994 1995
------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 8.71 $ 6.30 $ 5.58 $ 6.39 $ 6.86 $6.76
------- ------ ------ ------ ------ -----
Net Investment Income.... 1.42 1.17 1.08 1.07 1.02 0.93
Net Realized and
Unrealized Gain (Loss).. (2.37) (0.74) 0.82 0.51 (0.13) (0.78)
------- ------ ------ ------ ------ -----
Total from Investment
Operations.............. (0.95) 0.43 1.90 1.58 0.89 0.15
------- ------ ------ ------ ------ -----
Underwriting Commissions
and offering cost on
7.00% Cumulative
Preferred Stock......... -- -- -- (0.05) -- --
Less Distributions
Dividends (from net
investment income)
(i)To Outstanding
Preferred
Stockholders.......... -- -- -- -- (0.11) (0.16)
(ii)To 9.67% Preferred
Stockholders.......... (0.26) (0.25) (0.24) (0.23) (0.12) --
(iii)To Common
Shareholders.......... (1.20) (0.90) (0.85) (0.82) (0.82) (0.87)
Change in Accumulated
Undeclared Dividends on
Preferred Stock......... -- -- -- (0.01) 0.06 --
------- ------ ------ ------ ------ -----
Total Distributions...... (1.46) (1.15) (1.09) (1.06) (0.99) (1.03)
Net Asset Value, End of
Period.................. $ 6.30 $ 5.58 $ 6.39 $ 6.86 $ 6.76 $5.88
======= ====== ====== ====== ====== =====
Per Share Market Value,
End of Period........... $ 5.88 $ 5.50 $ 6.63 $ 7.25 $ 7.13 $6.63
======= ====== ====== ====== ====== =====
Total Investment
Return(2)............... (27.68)% 10.58 % 39.12 % 24.02 % 10.02 % 6.41 %
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended March 31, Ended
------------------------------------ Sept. 30,
1996 1997 1998 1999 1999
------- ------ ------ ------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 5.88 $ 6.31 $ 6.45 $ 6.96 $ 5.96
Net Investment Income..... 0.86 0.92 0.87 0.82 0.38
Net Realized and
Unrealized Gain (Loss)... 0.45 0.08 0.56 (0.97) (0.54)
Total from Investment
Operations............... 1.31 1.00 1.43 (0.15) (0.16)
Less Distributions
Dividends (from net
investment income)
(i)To Outstanding
Preferred Stockholders. (0.15) (0.14) (0.14) (0.14) (0.06)
(ii)To Common
Shareholders........... (0.73) (0.72) (0.78) (0.69) (0.33)
Distributions (from
capital gains)
(i)To Common
Shareholders........... -- -- -- (0.02) --
Returns of Capital
(i)To Common
Shareholders........... -- -- -- -- --
Total Distributions....... (0.88) (0.86) (0.92) (0.85) (0.39)
Net Asset Value, End of
Period................... $ 6.31 $ 6.45 $ 6.96 $ 5.96 $ 5.41
Per Share Market Value,
End of Period............ $ 7.00 $ 7.25 $ 7.50 $ 5.88 $ 5.31
Total Investment Return,
Based on Market Value(2). 18.35 % 15.55 % 14.81 % (12.53)% (4.14)%(3)
Total Investment Return,
Based on Net Asset
Value(2)................. 20.01 % 14.04 % 19.75 % (4.38)% (3.78)%(3)
</TABLE>
- --------
(1) Until October 2, 1989, the Fund employed Bernstein-Macaulay, Inc., a
subsidiary of Shearson Lehman Brothers, as investment adviser. On October
2, 1989, Bernstein-Macaulay, Inc. was merged into Shearson Lehman
Brothers, becoming a division of Shearson Lehman Brothers and changing its
name to Bernstein-Macaulay. In September 1990, Bernstein Macaulay changed
its name to Shearson Lehman Advisors. Shearson Lehman Advisors was
acquired by Mutual Management Corp., or MMC, a wholly-owned subsidiary of
The Travelers Inc., in 1993. On February 23, 1999 the Board of Directors
of MMC voted to change its name to SSBC Fund Management Inc. ("SSBC"). On
September 21, 1999 SSBC converted to a limited liability company and
changed its name to SSB Citi Fund Management LLC.
(2) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
(3) Total return is not annualized, as it may not be representative of the
total return for the year.
7
<PAGE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Six Months
Year Ended March 31, Ended
----------------------------------- Sept. 30,
1996 1997 1998 1999 1999
------- ------- -------- ------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Assets(1), End of
Period (000)........... $90,318 $95,034 $105,861 $93,561 $86,224
Ratio of Expenses to
Average Net Assets(2)
Interest Expense........ 1.98% 1.92% 1.81% 1.81% 1.85%(3)
Other Expense........... 1.65% 1.59% 1.51% 1.53% 1.60%(3)
Ratio of Net Income to
Average Net Assets(2).. 14.21% 14.35% 12.60% 12.99% 13.30%(3)
Portfolio Turnover Rate. 87% 101% 79% 91% 49%
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets(1), End of
Period (000)............ $69,213 $62,518 $75,818 $85,225 $87,726 $80,309
Ratio of Expenses to
Average Net Assets(2)
Interest Expense......... 5.16% 4.18% 2.10% 1.14% 0.92% 1.58%
Other Expense............ 2.32% 2.47% 2.15% 1.99% 1.60% 1.65%
Ratio of Net Income to
Average Net Assets(2)... 15.11% 16.12% 14.16% 12.89% 14.38% 15.35%
Portfolio Turnover Rate.. 81% 68% 86% 93% 102% 79%
</TABLE>
- --------
(1) Exclusive of preferred shares outstanding.
(2) Calculated on the basis of the average net assets of common shareholders.
Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(3) Annualized.
8
<PAGE>
SUPPLEMENTAL SENIOR SECURITY INFORMATION (UNAUDITED)
The table below sets forth information with respect to the Outstanding
Preferred Stock, the Fund's 9.67% Cumulative Preferred Stock (which was
redeemed April 15, 1993) and the Fund's Senior Money Market Notes (which were
paid in full in 1995) for the relevant periods, as included in the Fund's
Annual Reports for each of the years then ended from March 31, 1993 to March
31, 1999, and in the Fund's September 30, 1999 Semi-Annual Report.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended March 31,
Sept. 30, ---------------------------------------
1999 1999 1998 1997 1996 1995
---------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
7.00% Cumulative Preferred
Stock(1)
Total Amount Outstanding
(000s)................... $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Asset Coverage (000s) .... 2,440 2,560 2,760 2,580 2,490 2,439
Involuntary Liquidating
Preference Per Share(3).. 1,000 1,000 1,000 1,000 1,000 1,000
Average Market Value Per
Share(3)................. 1,000 1,000 1,000 1,000 1,000 1,000
Senior Money Market Notes
Total Amount Outstanding
(000s)................... -- -- -- -- -- 25,800
Asset Coverage (000s)..... -- -- -- -- -- 135,966
</TABLE>
<TABLE>
<CAPTION>
Year Ended
March 31,
-------------
1994 1993
------ ------
<S> <C> <C>
7.00% Cumulative Preferred Stock(1)
Total Amount Outstanding (000s)................................. 30,000 30,000
Asset Coverage (000s)........................................... 2,583 2,529
Involuntary Liquidating Preference Per Share(3)................. 1,000 1,000
Average Market Value Per Share (Excludes Bank Loans)(3)......... 1,000 1,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
9.67% Cumulative Preferred Stock(2)
Total Amount Outstanding (000s)...... 0 28,750 28,750 28,750 28,750
Asset Coverage (000s)................ 2,583 2,529 2,413 2,169 2,097
Involuntary Liquidating Preference
Per Share(3)........................ 1,000 1,000 1,000 1,000 1,000
Average Market Value Per Share
(Excludes Bank Loans)(3)............ 1,000 1,000 1,000 1,000 1,000
Senior Money Market Notes(4)
Total Amount Outstanding (000s)...... 25,800 25,800 25,800 25,800 35,500
Asset Coverage Per Share (000s)...... 558,675 546,948 510,240 458,692 379,585
</TABLE>
- --------
(1) Redeemable April 15, 2000.
(2) Redeemed April 15, 1993.
(3) Excludes accrued interest or accumulated undeclared dividends.
(4) Paid in full in 1995.
9
<PAGE>
THE FUND
The Fund, which commenced operations under the name "Zenith Income Fund
Inc.," was organized as a Maryland corporation on February 11, 1988 and is a
diversified, closed-end management investment company registered with the
Securities and Exchange Commission under the Investment Company Act. On
October 19, 1989 the Fund changed its name from Zenith Income Fund Inc. to its
current name. The Fund's Common Stock is traded on the New York Stock Exchange
under the symbol "ZIF."
The Fund's principal office is located at 388 Greenwich Street, New York,
New York 10013. The Fund's investment adviser and administrator is SSB Citi
Fund Management LLC, or SSBC, a subsidiary of Salomon Smith Barney Holdings
Inc. SSBC is located at 388 Greenwich Street, New York, NY 10013. See
"Management of the Fund."
The following table provides information about the Fund's outstanding shares
as of April 5, 2000.
<TABLE>
<CAPTION>
Amount Held by
Amount the Fund or Amount
Title of Class Authorized for its Account Outstanding
- -------------- ----------- --------------- -----------
<S> <C> <C> <C>
Common Stock, par value $.01 per share. 250,000,000 0 15,971,307
Preferred Stock, par value $.01 per
share, liquidation preference $1,000
per share............................. 250,000 0 30,000
</TABLE>
USE OF PROCEEDS
The net proceeds of the sale of the Preferred Shares offered by this
Prospectus, assuming all of the Preferred Shares are sold, will be
approximately $ , after the payment of offering expenses (not expected to
exceed $ ). The Fund will use approximately $30,000,000 of the net proceeds
of the offering to redeem all of the shares of the Outstanding Preferred Stock
that are subject to mandatory redemption on April 15, 2000 and the balance of
the net proceeds of the offering to retire the Fund's $30,000,000 outstanding
amount borrowed under its line of credit with PNC Bank, N.A.
Interest on amounts borrowed under the line of credit is typically
calculated at the federal funds rate plus 40 basis points.
10
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of March 31, 2000, and as adjusted to give effect to the issuance of the
Preferred Shares offered by this Prospectus and the redemption of the
Outstanding Preferred Stock.
<TABLE>
<CAPTION>
Actual As Adjusted
------------ ------------
<S> <C> <C>
Shareholders' equity:
7.0% Cumulative Preferred Stock, par value $.01
per share,* 30,000 issued and outstanding at
$1,000 per share liquidation preference, no
shares issued and outstanding as adjusted*...... $ 30,000,000 $ 0
============ ============
Auction Rate Cumulative Preferred Stock, par value
$.01 per share,* no shares issued, 2,400 shares
issued and outstanding at $25,000 per share
liquidation preference as adjusted................ $ 0 $ 60,000,000
------------ ------------
Common Stock, $.01 par value, authorized
250,000,000 shares, 15,971,284 shares issued and
outstanding, 15,971,284 shares issued and
outstanding as adjusted**......................... $ 159,713 $ 159,713
Capital in excess of par value..................... $117,130,507 $117,130,507
------------ ------------
Balance of undistributed net investment income..... (35,481) (35,481)
Accumulated net realized gain (loss) from
investment transactions........................... (29,592,329) (29,592,329)
Net assets less liquidation value of all Preferred
Shares............................................ $ 80,234,063 $ 80,234,063
============ ============
Net assets attributable to Common Stock
outstanding....................................... $ 79,606,947 $ 79,606,947
</TABLE>
- --------
* Under the Fund's Articles of Incorporation, a total of 250,000 shares of
Cumulative Preferred Stock are authorized.
** As of March 31, 2000 no shares of Outstanding Preferred Stock or Common
Stock were held by the Fund or for its account.
PORTFOLIO COMPOSITION
As of March 31, 2000 the Fund's portfolio included 214 holdings issued by
162 different issuers having an average yield to maturity of 12.35%. The
weighted average maturity of the portfolio at this date was approximately 8.11
years.
The table below shows the allocation, on a weighted average basis, of the
Fund's assets invested in bonds, convertible preferred stock, warrants,
commercial paper and cash and options for the twelve months ended March 31,
2000. This information reflects the average composition of the Fund's assets
during the year ended March 31, 2000 and is not necessarily representative of
the Fund as of the current fiscal year or at any other time in the future.
<TABLE>
<CAPTION>
Bonds--S&P's Ratings
--------------------
<S> <C>
BB..................................................................... 13%
B...................................................................... 75%
CCC.................................................................... 8%
Nonrated............................................................... 4%
---
Total.................................................................. 100%
</TABLE>
11
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The investment objective of the Fund is to provide high current income,
which income, if any, will be distributed to holders of Common Stock only
after satisfaction of the obligation to pay dividends on the Preferred Shares.
The Fund seeks to achieve its investment objective through investment in a
diversified portfolio of high yield, lower rated fixed-income securities. No
assurance can be given that the Fund's investment objective will be achieved.
The investment objective is a fundamental policy of the Fund. Fundamental
policies of the Fund may not be changed without the affirmative vote of the
holders of a majority (as defined in the Investment Company Act) of the
outstanding shares of Common Stock and a majority of the then outstanding
Preferred Shares, voting as separate classes. "Majority" as defined in the
Investment Company Act means, for each class, the lesser of (1) more than 50%
of the class or (2) 67% or more of the class present at a meeting at which
more than 50% of the outstanding shares of the class are present or
represented by proxy. In view of this requirement, no change in the Fund's
investment objective could occur without the affirmative vote of both classes
of stock.
Under normal market conditions, the Fund invests at least 65% of its total
assets in high yield fixed-income securities. These securities are commonly
known as "junk bonds" because they are rated in the lower categories by
nationally recognized rating agencies. "High yield" fixed-income securities,
the generic name for corporate bonds rated between BB and C by S&P and between
Ba and C by Moody's, are frequently issued by corporations in the growth
stages of their development, as a result of corporate reorganizations or as
part of corporate takeovers. Risks and special considerations associated with
investing in high yield fixed-income securities are described under "Risk
Factors and Special Considerations" below.
Investment Strategies
SSBC may employ the investment strategies described below, among others. The
Fund is under no obligation to use any of these strategies at any given time
or under any particular economic condition and no assurance can be given that
the use of any strategy will have its intended result or that the use of any
practice is, or will be, available to the Fund. These instruments and certain
related risks are described more specifically under "Additional Information
About Certain Securities and Investment Strategies of the Fund" in the
Statement of Additional Information. The Fund's ability to use some of these
strategies, such as investing in foreign securities and the use of covered
call options, may be limited as a condition to S&P's and/or Moody's rating of
the Preferred Shares.
Securities Loans. To the extent permitted by S&P and Moody's, the Fund may
make secured loans of its portfolio securities amounting to not more than one-
third of the value of its total assets, thereby realizing additional income.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible delays in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Although voting
rights, or rights to consent, with respect to the loaned securities, pass to
the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment. The Fund may also call
such loans in order to sell the securities involved.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis, which means that
delivery and payment can take place a month or more after the date of the
commitment to purchase the securities. The purchase price and the interest
rate payable on the securities are fixed at the time the buyer enters into the
commitment. The securities so purchased are subject to market fluctuation, and
no interest accrues to the Fund until delivery and payment take place.
The Fund will make commitments to purchase such when-issued securities only
with the intention of actually acquiring the securities. When the Fund buys on
a when-issued or delayed delivery basis, it establishes
12
<PAGE>
a separate account that consists of cash, cash equivalents or other liquid
securities from its portfolio having a value at least equal to the amount of
the securities the Fund has committed to buy. The purchase of securities on a
when-issued or delayed delivery basis is not limited by the S&P or Moody's
guidelines.
Repurchase Agreements. To the extent permitted by S&P and Moody's, the Fund
may enter into repurchase agreements on up to 25% of the value of its total
assets. A repurchase agreement is a contract under which the Fund acquires a
security for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Fund to resell
such security at a fixed time and price representing the Fund's cost plus
interest.
If the seller defaults on a repurchase agreement, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
the sale, including accrued interest, are less than the resale price provided
in the agreement, including interest. In addition, if the seller should be
involved in bankruptcy or insolvency proceedings, the Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and is required to
return the underlying collateral to the seller's estate.
Reverse Repurchase Agreements. To the extent permitted by S&P and Moody's,
the Fund may enter into reverse repurchase agreements with respect to debt
obligations that could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund sells an underlying debt
instrument and simultaneously obtains the commitment of the purchaser
(generally a commercial bank or a broker or dealer) to sell the security back
to the Fund at an agreed upon price on an agreed upon date.
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 Fund's ability to dispose of the underlying securities.
An additional risk is that the market value of securities sold by the Fund
under a reverse repurchase agreement could decline below the price at which
the Fund is obligated to repurchase them.
Reverse repurchase agreements will be considered borrowings by the Fund and
as such will be subject to the restrictions on borrowing described under
"Investment Restrictions" in the Statement of Additional Information. The Fund
will not hold more than 5% of the value of its total assets in reverse
repurchase agreements. The Fund will not provide prior notice to its security
holders of its intention to expand the use of this practice.
Foreign Investments. The Fund may invest up to 10% of the value of its total
assets in securities principally traded in foreign markets. Securities issued
by companies organized outside the United States but registered with the U.S.
Securities and Exchange Commission and traded on a recognized U.S. securities
market are not subject to this limitation. In addition, subject to the Fund's
basic investment strategy, the Fund may also purchase Eurodollar certificates
of deposit issued by branches of U.S. and foreign banks. The Fund may buy or
sell foreign currencies or deal in forward foreign currency contracts in
connection with the purchase and sale of foreign investments.
There are certain risks involved in investing in securities of companies and
governments of foreign nations that are in addition to the usual risks
inherent in domestic investments. The risks of investing in foreign securities
include those resulting from devaluation of currencies, future adverse
political and economic developments and the possible imposition of currency
exchange restrictions or other foreign governmental laws or restrictions,
reduced availability of public information concerning issuers and the lack of
uniform accounting, auditing and financial reporting standards or of other
regulatory practices and requirements comparable to those applicable to
domestic companies. The Fund may be adversely affected, when holding foreign
securities, by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign issuers and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic issues. In addition, with respect to certain
foreign countries, there is the possibility of expropriation, nationalization,
confiscatory taxation, limitations on the use or removal of funds or other
assets of the Fund,
13
<PAGE>
including the withholding of dividends, potential difficulties enforcing
contractual obligations and extended clearance and settlement periods. Foreign
securities may be subject to foreign government taxes that could reduce the
yield on such securities. Investments in foreign securities also may result in
higher expenses due to the cost of converting foreign currency to U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, the
expense of maintaining securities with foreign custodians and the imposition
of transfer taxes or transaction charges associated with foreign exchanges.
Options. The Fund may write (sell) call options that are traded on national
securities exchanges with respect to securities in its portfolio. The Fund may
only write "covered" call options. A call option written by a Fund will be
deemed covered if (1) the Fund owns the securities underlying the call or has
an absolute and immediate right to acquire those securities without additional
cash consideration upon conversion or exchange of other securities held in its
portfolio, (2) the Fund holds a call at the same exercise price for the same
exercise period and on the same securities as the call written or (3) at the
time the call is written, an amount of cash, government securities or other
liquid securities equal to the fluctuating market value of the optioned
securities, is segregated with the Fund's custodian. The writing of call
options could result in increases in the Fund's portfolio turnover rate,
especially during periods when market prices of the underlying securities
appreciate.
Additional Leverage. The Fund has reserved the right to borrow money to the
extent the borrowing would not result in a violation of Section 18 of the
Investment Company Act. Pursuant to Section 18 of the Investment Company Act,
not more than 33 1/3% of the Fund's capital structure may consist of
borrowings representing indebtedness and not more than 50% of the Fund's
capital structure may consist of borrowings represented by indebtedness and a
senior class of stock, such as the Preferred Shares. The Fund may borrow to
the extent permitted by the Investment Company Act through the public or
private issuance of debt securities or from lenders of all types, such as
banks, savings and loan associations, insurance companies and similar
financial institutions.
It is anticipated that borrowings will be effected by the Fund primarily to
provide additional liquidity. However, the Fund reserves the right to use the
proceeds of borrowings for any other purpose, including additional investment
leverage.
The Preferred Shares are subject to mandatory redemption in certain
circumstances and may be voluntarily redeemed by the Fund under certain
circumstances. See "Description of Preferred Shares--Redemption." Should the
Preferred Shares be redeemed in whole or in part it is the Fund's intention to
leverage its structure through the further issuance of senior securities,
subject to the Fund's Board of Directors' determination that such issuance is
appropriate in light of relative interest rates, general economic conditions
and other relevant factors and subject to compliance with the Investment
Company Act.
S&P and Moody's Guidelines
The composition of the Fund's portfolio reflects guidelines (referred to
herein as the "Rating Agency Guidelines") established by S&P and Moody's in
connection with the Fund's receipt of a rating of AAA and aaa from S&P and
Moody's, respectively, for the Preferred Shares. These Rating Agency
Guidelines relate, among other things, to industry and credit quality
characteristics of issuers and specify various discount factors for debt
securities (with the level of discount greater as the rating of a security
becomes lower). Under the Rating Agency Guidelines, certain types of
securities in which the Fund may otherwise invest consistent with its
investment strategy are not eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio. Such instruments include, for
example, private placements (other than Rule 144A Securities), non-U.S.
securities, and other securities not within the investment guidelines.
Accordingly, although the Fund reserves the right to invest in such securities
to the extent set forth herein, they have not and it is anticipated that they
will not constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the Preferred
14
<PAGE>
Shares plus specified liabilities, payment obligations and other amounts, as
of periodic valuation dates. The Rating Agency Guidelines also require the
Fund to maintain asset coverage for the Preferred Shares on a non-discounted
basis of at least 200% as of the end of each month, and the Investment Company
Act requires such asset coverage as a condition to paying dividends or other
distributions on Common Stock. See "Description of Preferred Shares--Asset
Maintenance" in the Statement of Additional Information. The effect of
compliance with the Rating Agency Guidelines may be to cause the Fund to
invest in higher quality assets and/or to maintain relatively substantial
balances of highly liquid assets or to restrict the Fund's ability to make
certain investments that would otherwise be deemed potentially desirable by,
the Investment Adviser, including private placements of other than Rule 144A
Securities (as defined in the Glossary to the Statement of Additional
Information), and to limit or delay the Fund's ability to reinvest cash in a
rising "high-yield" market. The Rating Agency Guidelines are subject to change
from time to time with the consent of the relevant rating agency and would not
apply if the Fund in the future elected not to use investment leverage
consisting of senior securities rated by one or more rating agencies, although
other similar arrangements might apply with respect to other senior securities
that the Fund may issue. See "S&P and Moody's Guidelines" in the Statement of
Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Risk is inherent in all investing. Investing in any investment company
security involves risk factors and special considerations, including the risk
that you may receive little or no return on your investment or that you may
lose part or all of your investment. Therefore, before investing you should
consider carefully the following risk factors and special considerations that
you assume when you invest in Preferred Shares.
Auction Risk
The dividend rate for the Preferred Shares normally is set through an
auction process. In the auction, holders of Preferred Shares may indicate the
dividend rate at which they would be willing to hold or sell their Preferred
Shares or purchase additional Preferred Shares. The auction also provides
liquidity for the sale of Preferred Shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers. You may not be able
to sell your Preferred Shares at an auction if the auction fails. Also, if you
place hold orders (orders to retain Preferred Shares) at an auction only at a
specified dividend rate, and that rate exceeds the rate set at the auction,
you will not retain your Preferred Shares. Finally, if you buy shares or elect
to retain shares without specifying a dividend rate below which you would not
wish to buy or continue to hold those shares, you could receive a lower rate
of return on your shares than the market rate. See "Description of Preferred
Shares" and "The Auction--Summary of Auction Procedures."
Secondary Market Risk
If you try to sell your Preferred Shares between auctions, you may not be
able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period (a rate period of more than seven
days), changes in interest rates could affect the price you would receive if
you sold your shares in the secondary market. Broker-dealers that maintain a
secondary trading market for Preferred Shares are not required to maintain
this market, and the Fund is not required to redeem shares either if an
auction or an attempted secondary market sale fails because of a lack of
buyers. Preferred Shares are not listed on a stock exchange or the NASDAQ
stock market. If you sell your Preferred Shares to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially if
market interest rates have risen since the last auction.
15
<PAGE>
Ratings and Asset Coverage Risk
Preferred Shares. While it is a condition to the closing of this offering
that S&P assigns a rating of AAA and Moody's assigns a rating of aaa to the
Preferred Shares, the rating does not eliminate or necessarily mitigate the
risks of investing in Preferred Shares. S&P or Moody's could downgrade
Preferred Shares, which may make your shares less liquid at an auction or in
the secondary market. If S&P or Moody's downgrades Preferred Shares, the Fund
may alter its portfolio or redeem Preferred Shares in an effort to improve the
rating, although there is no assurance that it will be able to do so to the
extent necessary to restore the prior rating. The Fund may voluntarily redeem
Preferred Shares under certain circumstances. See "Description of Preferred
Shares--S&P and Moody's Guidelines" in the Statement of Additional Information
for a description of the asset maintenance tests the Fund must meet.
Portfolio Securities. Subsequent to its purchase by the Fund, an issue of
securities may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. In addition, it is possible that a
national statistical rating agency might not change its rating of a particular
issue to reflect subsequent events. Unless otherwise provided in the S&P or
Moody's guidelines applicable to the Preferred Shares, none of these events
will require sale of such securities by the Fund, but SSBC will consider such
events in its determination whether the Fund should continue to hold the
securities. In addition, to the extent that the ratings change as a result of
changes in such organizations or their rating systems, or due to a corporate
reorganization, unless otherwise provided in the S&P or Moody's guidelines
applicable to the Preferred Shares, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with its investment
objective and policies.
Interest Rate Risk
The Preferred Shares will generally pay dividends based on a rate set at
auction, usually held weekly. The Fund purchases fixed-income securities,
which pay interest based on long-term rates. Both long-term and short-term
interest rates may fluctuate. If short-term interest rates rise, the Preferred
Shares dividend rates may rise. Thus, it is possible that the amount of
dividends paid to holders of Preferred Shares would exceed the income from the
Fund's portfolio securities. However, Preferred Share dividend rates would
need to greatly exceed the yield on the Fund's portfolio before the Fund's
ability to pay Preferred Share dividends would be impaired. Generally, fixed-
income securities will decrease in value when interest rates rise and increase
in value when interest rates decline. If long-term rates rise, the value of
the Fund's investment portfolio will decline, reducing the amount of assets
serving as asset coverage for the Preferred Shares.
Credit Risk
Credit risk is the risk that an issuer of a security will become unable to
meet its obligation to make interest and principal payments. The Fund invests
in lower rated securities and unrated securities of comparable quality. In
general, lower rated fixed-income securities offer a higher return potential
but carry a greater degree of risk that the issuer will lose its ability to
make interest and principal payments, which could have a negative impact on
the Fund's net asset value or dividends. Fixed-income securities rated Ba/BB
or B are regarded as having predominately speculative characteristics with
respect to the issuer's capacity to pay interest and repay principal, and
these bonds are commonly referred to as "junk bonds." These securities are
subject to a greater risk of default. The prices of these lower grade
securities are more sensitive to negative developments, such as a decline in
the issuer's revenues or a general economic downturn, than are the prices of
higher grade securities. Lower grade securities tend to be less liquid than
investment grade securities. The market values of lower grade securities tend
to be more volatile than is the case for investment grade securities. These
types of factors could, in certain instances, reduce the value of securities
held by the Fund. Also, the Fund may have additional expenses if it must seek
recovery if one of its portfolio holdings defaults in the payment of principal
or interest.
Investment Strategy Risk
The high yield/lower rated securities that the Fund may purchase (commonly
known as "junk bonds") will generally be rated, at the time of investment,
below investment grade by S&P or Moody's or, if unrated, will be
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of comparable quality. These lower rated and comparable unrated securities
involve greater risk than higher rated securities.
Lower rated securities may have poor prospects of ever attaining any real
investment standing, may have a current identifiable vulnerability to default,
may be unlikely to have the capacity to pay interest and repay principal when
due in the event of adverse business, financial or economic conditions and/or
may be in default or not current in the payment of interest or principal.
The markets in which these securities are traded generally are more limited
than those in which higher rated securities are traded. Limited markets may
restrict the availability of securities for the Fund to purchase and also may
make the security less liquid and/or more difficult to value.
Lower rated securities may be particularly susceptible to economic
downturns. An economic recession could disrupt severely the market for such
securities and may have an adverse impact on the value of such securities.
Changes in economic conditions or other circumstances are also likely to
weaken the capacity of issuers of these securities to make principal and
interest payments.
While the market values of these securities tend to react less to
fluctuations in interest rate levels than do those of higher rated securities,
the marker values of the former also tend to be more sensitive to company-
specific developments and changes in economic conditions than higher rated
securities.
Fixed-income securities, including lower rated and comparable unrated
securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding
security, resulting in a decreased return to the Fund.
Securities that are rated BB by S&P or Ba by Moody's have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities that are rated B by S&P or Moody's generally lack characteristics
of a desirable investment and assurance of interest and principal payments
over any long period of time may be small. Securities that are rated CCC by
S&P or Caa by Moody's or below are of poor standing. Those issues may be in
default or present elements of danger with respect to principal or interest.
See Appendix A for a description of corporate bond ratings by S&P and Moody's.
In light of the risks of lower rated securities, SSBC, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
Reinvestment Risk
Reinvestment risk is the risk that income from the Fund's portfolio will
decline if and when the Fund invests the proceeds from matured, traded,
prepaid or called fixed-income securities at lower interest rates. A decline
in income could affect the Fund's ability to pay dividends on the Preferred
Shares. Investment risk also exists for holder of Preferred Shares because the
Shares are subject to involuntary redemption under circumstances where the
investor may not be able to achieve a comparable yield or an investment with
similar terms and quality.
Inflation Risk
Inflation is the reduction in the purchasing power of money resulting from
the increase in the prices of goods and services. Inflation risk is the risk
that the inflation adjusted (or "real") value of the Preferred Shares
investment or the income from that investment will be worth less in the
future. As inflation occurs, the real value of the Preferred Shares and
distributions declines. In an inflationary period, however, it is expected
that, through the auction process, dividend rates on the Preferred Shares
would increase, tending to offset this risk.
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"Year 2000" Risk
As the year 2000 began, there were few problems caused by the inability of
certain computer systems to tell the difference between the year 2000 and the
year 1900 (commonly known as the "Year 2000" issue). It is still possible that
some computer systems could malfunction in the future because of the Year 2000
issue or as a result of actions taken to address the Year 2000 issue. Fund
management does not anticipate that its services or those of the Fund's other
service providers will be adversely affected, but Fund management will
continue to monitor the situation. If malfunctions related to the Year 2000
issue do arise, the Fund and its investments could be negatively affected.
Futures and Options Transactions Risks
The use of options, financial futures and options on financial futures may
involve risks not associated with other types of investments that the Fund
purchases. It is possible that a fund that utilizes hedging strategies may not
perform as well as a fund that does not make use of such devices. The Fund's
positions in options and financial futures may be closed out only on an
exchange that provides a liquid secondary market for them, and there can be no
assurance that a liquid secondary market will exist for any particular option
or futures contract. If the Fund cannot close out its options and futures
positions, it could have an adverse effect on the Fund's ability to hedge its
securities effectively and might, in some cases, require the Fund to deposit
cash to meet applicable margin requirements.
The Fund's ability to hedge effectively through transactions in financial
futures or options depends on SSBC's ability to predict the direction of
interest rates and prices of securities and the degree to which price
movements in the Fund's holdings correlate with price movements of the hedging
instruments. Since the Fund's options and futures will not duplicate such
underlying securities, the correlation will probably not be perfect.
Therefore, the prices of the securities being hedged may not move in the same
amount as the hedging instrument. There could be a negative correlation
between the hedging instrument and the hedged securities, which would result
in an ineffective hedge and a loss to the Fund.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the persons or companies that furnish services
to the Fund, including agreements with its investment adviser, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to SSBC. SSBC acts as the investment adviser for, and manages the
investment and reinvestment of the assets of, the Fund. SSBC was incorporated
in 1968 and manages investment companies that had total assets in excess of
$124 billion as of December 31, 1999. SSBC is an affiliated subsidiary of
Salomon Smith Barney Inc., the Underwriter and an indirect wholly owned
subsidiary of Citigroup Inc. Citigroup businesses provide a broad range of
financial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading. SSBC is
located at 388 Greenwich Street, New York, New York 10013. One of the Fund's
Directors and all of its officers are affiliated with SSBC or its affiliates.
The Investment Advisory Agreement between SSBC and the Fund became effective
on July 30, 1993. The Investment Advisory Agreement remains in effect from
year to year if it is approved annually by (i) the Board of Directors or (ii)
a vote of the "majority" (as defined in the Investment Company Act) of the
Fund's shareholders, provided that in either event the continuance is also
approved by a majority of the non-interested members of the Board, unless
earlier terminated. It was last approved to be continued by the Fund's Board
of Directors on August 25, 1999. The Investment Advisory Agreement provides
that, subject to the direction of the Board of Directors of the Fund and the
applicable provisions of the Investment Company Act, SSBC is responsible for
the actual management of the Fund's portfolio, including decisions to buy,
sell or hold a particular investment.
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Under the Investment Advisory Agreement, SSBC receives for its advisory
services a monthly investment advisory fee calculated at an annual rate of
0.50% of the average daily net assets (defined as the average daily value of
the total assets of the Fund less total liabilities other than the outstanding
principal amount under the line of credit with PNC Bank, N.A.) of the Fund.
This fee is calculated daily and paid monthly.
SSBC also acts as the Fund's administrator, for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets, as
defined above. This fee is calculated daily and paid monthly.
Portfolio Management
John C. Bianchi, who is Vice President and Investment Officer of the Fund,
is primarily responsible for management of the Fund's assets. Mr. Bianchi has
served the Fund in these capacities since the commencement of the Fund's
operations.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
This description does not purport to be complete and is qualified by reference
to the Articles Supplementary and other charter documents, which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
General
Under the Articles of Incorporation, the Fund is authorized to issue up to
250,000 Preferred Shares. No fractional Preferred Shares may be issued. As of
the date of this Prospectus, there were 30,000 shares of Outstanding Preferred
Stock, all of which will be redeemed on or about April 15, 2000. The Board of
Directors is authorized to cause the Fund to issue additional Preferred Shares
from time to time, subject to the restrictions in the Articles of
Incorporation. Any such additional shares are to be deemed "Preferred Shares."
The Preferred Shares will not trade on the New York Stock Exchange or on any
other stock exchange. The Preferred Shares offered by this Prospectus, when
issued and paid for pursuant to the terms of this Prospectus, will be fully
paid and nonassessable and will have no preemptive, exchange or conversion
rights. Any Preferred Shares repurchased or redeemed by the Fund will be
classified as authorized but unissued Preferred Shares. The Board of Directors
may by resolution classify or reclassify any authorized but unissued Preferred
Shares from time to time by setting or changing the preferences, rights,
voting powers, restrictions, limitations as to dividends or terms or
conditions of redemption. The Fund will not issue any class of stock senior to
or on a parity with Preferred Shares.
Dividends
The following is a general description of dividends and rate periods. The
calculation of dividends and rate periods is complex and subject to special
rules. See the Statement of Additional Information and the Glossary to the
Statement of Additional Information for a description of the terms used in
this section and a more detailed discussion of this topic.
General. The initial rate period will be 12 days. Subsequent rate periods
will generally be seven days. The holders of Preferred Shares are entitled to
receive cash dividends at an annual rate that may vary for the successive
periods for such shares. The dividend payment date for the initial rate period
for Preferred Shares will be Wednesday, April 26, 2000. Dividends will
thereafter be paid, generally, on each business day immediately following the
last day of each successive seven day period. Subject to certain conditions
and with notice to the holders of Preferred Shares, rate periods may be longer
or shorter than seven days and will have such duration as the Board of
Directors specifies.
The dividend rate for the initial rate period on the Preferred Shares will
be %. For subsequent rate periods, Preferred Shares will pay dividends based
on a rate set at the auctions, normally held weekly. The rate
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set at auction will not exceed the Maximum Applicable Rate, as defined in the
Glossary appended as Exhibit C to the Statement of Additional Information. The
interest rate on the Preferred Shares will change weekly as the result of an
auction, as described in this Prospectus and the Statement of Additional
Information. Dividends on the Preferred Shares will be cumulative from the
date the shares are first issued. Dividends paid on the Preferred Shares are
not expected to qualify for the Federal dividends received deduction available
to corporations.
No dividends will be declared or paid or set apart for payment on shares of
any class of stock ranking as to dividends on a parity with or junior to the
Preferred Shares for any period or part thereof unless full accumulated but
unpaid dividends have been paid or contemporaneously are declared and paid on
the Preferred Shares.
Dividends on Preferred Shares will be paid on the dividend payment date to
holders of record as their names appear on the Fund's stock books, on the
business day next preceding the dividend payment date. If dividends are in
arrears, they may be declared and paid at any time, to holders of record as
their names appear on the Fund's stock books, on that date, not more than 15
days before the payment date, as the Fund's Board of Directors may fix.
Depository Trust and Clearing Corporation (the "Securities Depository"), in
accordance with its current procedures, is expected to credit on each dividend
payment date dividends received from the Fund to the accounts of its agent
members, in same-day funds. "Agent members" are Broker-Dealers or broker-
dealers that are members of or participants in the Securities Depository who
act on behalf of Preferred Shares shareholders. Agent members, in turn, are
expected to distribute these dividend payments to the person for whom they are
acting as agents. If a Broker-Dealer or a broker-dealer that is an agent
member of the Securities Depository does not make dividends available to
Preferred Share shareholders in same-day funds, these shareholders will not
have funds available until the following business day.
Dividend Rate Set at Auction. Preferred Shares pay dividends based on a rate
set at auction. The auction usually is held weekly, but may be held less
frequently. The auction sets the dividend rate, and Preferred Shares may be
bought and sold at the auction. Bankers Trust Company, the Auction Agent,
reviews orders from Broker-Dealers on behalf of existing shareholders that
wish to sell, hold at the auction rate, or hold only at a specified rate, and
on behalf of potential shareholders that wish to buy Preferred Shares, and
determines the lowest dividend rate that will result in all of the outstanding
Preferred Shares continuing to be held. The shares in this offering will trade
at auction starting in the week following this offering. See "The Auction" in
this Prospectus and in the Statement of Additional Information.
Determination of Dividend Rate. The Fund computes the dividends per share by
multiplying the dividend rate determined at the auction by the following
fraction: the numerator normally is seven and the denominator is 360. If the
Fund has designated a special rate period, then the numerator is the number of
days in the rate period, and the denominator is 360. In either case, this rate
is then multiplied against $25,000 to arrive at the dividend per share. The
numerator may be different if the rate period includes a holiday. If an
auction for any subsequent rate period of Preferred Shares is not held for any
reason other than as described below, the dividend rate on those shares will
be the Maximum Applicable Rate on the auction date for that subsequent rate
period.
Effect of Failure to Pay Dividends in Timely Manner. If the Fund fails to
pay, in a timely manner, the Auction Agent the full amount of any dividend on
any Preferred Shares during any rate period, but the Fund cures the failure
and pays any late charge before 12:00 noon Eastern time on the third business
day following the date the failure occurred, no auction will be held for
Preferred Shares for the first subsequent rate period thereafter, and the
dividend rate for Preferred Shares for that subsequent rate period will be the
Default Rate, as such term is defined in the Glossary to the Statement of
Additional Information.
If the Fund fails to pay, in a timely manner, the Auction Agent the full
amount of any dividend on, or the redemption price of, any Preferred Shares
during any rate period thereof, and the Fund does not cure the failure and pay
any late charge before 12:00 noon Eastern time on the third business day next
succeeding the date on which the failure occurred, no auction will be held for
Preferred Shares for the first subsequent rate period
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thereafter (or for any rate period thereafter, to and including the rate
period during which the failure is cured and the late charge is paid), and the
dividend rate for Preferred Shares for each subsequent rate period will be the
Default Rate.
If the Fund fails to pay, in a timely manner, the Auction Agent the full
amount of any dividend on, or the redemption price of, any Preferred Shares
during a special rate period of more than 364 rate period days, or during any
rate period succeeding any special rate period of more than 364 rate period
days during which a failure occurred that has not been cured, and the Fund
does not cure the failure and pay a late charge, no auction will be held for
Preferred Shares for that subsequent rate period (or for any rate period
thereafter, to and including the rate period during which the failure is cured
and the late charge paid), and the dividend rate for Preferred Shares for each
subsequent rate period will be the Default Rate.
The Fund cures a failure to pay dividends on Preferred Shares for any rate
period by paying the Auction Agent all accumulated and unpaid dividends on the
Preferred Shares.
Maximum Applicable Rate. The dividend rate that results from an auction for
Preferred Shares will not be greater than the Maximum Applicable Rate as
defined in the Glossary to the Statement of Additional Information. The
Maximum Applicable Rate is subject to upward adjustment by the Board of
Directors in consultation with the Broker-Dealers.
Restrictions on Dividends and Other Distributions. When the Fund has any
Preferred Shares outstanding, the Fund may not pay any dividend or
distribution (other than a stock dividend) to shareholders of its common stock
unless (1) it has paid all cumulative dividends on Preferred Shares; (2) it
has redeemed any Preferred Shares that it has called for mandatory redemption,
and (3) after paying the dividend, the Fund meets S&P's and Moody's asset
coverage requirements for AAA and aaa ratings, respectively, and Investment
Company Act asset coverage requirements. Holders of Preferred Shares will
acquire certain additional voting rights if the Fund fails to pay them
dividends for two years or more. See "Voting Rights" below.
Except as set forth in the next sentence, no dividends will be declared or
paid or set apart for payment on any class or series of shares of stock of the
Fund ranking, as to the payment of dividends, on a parity with Preferred
Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the Preferred Shares through their
most recent dividend payment date. When dividends are not paid in full upon
the Preferred Shares through their most recent dividend payment date or upon
any other class or series of shares ranking on a parity as to the payment of
dividends with Preferred Shares through their most recent respective dividend
payment dates, all dividends declared upon Preferred Shares and any other such
class or series of shares ranking on a parity as to the payment of dividends
with Preferred Shares will be declared pro rata so that the amount of
dividends declared per share of Preferred Shares and such other class or
series of shares will in all cases bear to each other the same ratio that
accumulated dividends per share of Preferred Shares and such other class or
series of shares bear to each other.
Voting Rights
Except as noted below, the Common Stock and the Preferred Shares have equal
voting rights of one vote per share and vote together as a single class. In
elections of Directors, the holders of Preferred Shares, as a separate class,
vote to elect two Directors, the holders of the Common Stock, as a separate
class, vote to elect two Directors and the holders of the Preferred Shares and
the Common Stock, voting together as a single class, elect the remaining
Directors. In addition, during any period ("Voting Period") in which the Fund
has not paid dividends on the Preferred Shares in an amount equal to two full
years dividends, the holders of Preferred Shares, voting as a single class,
are entitled to elect (in addition to the two Directors set forth above) the
smallest number of additional Directors as is necessary to assure that a
majority of the Directors has been elected by the holders of Preferred Shares.
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
Directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the Preferred Shares
of the number
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of Directors that such holders are entitled to elect. The persons elected by
the holders of the Preferred Shares, together with the incumbent Directors
elected by the holders of the Common Stock, will constitute the duly elected
Directors of the Fund. When all dividends in arrears on the Preferred Shares
have been paid or provided for, the terms of office of the additional
Directors elected by the holders of the Preferred Shares will terminate.
The Common Stock and Preferred Shares vote as separate classes on amendments
to the Articles of Incorporation that would adversely affect their respective
interests.
In addition, so long as any Preferred Shares are outstanding
. the Fund may not be voluntarily liquidated, dissolved, wound up, merged
or consolidated and may not sell all or substantially all of its assets,
without the approval of at least a majority of the Preferred Shares and
the shares of Common Stock, each voting as a separate class;
. the adoption of any plan of reorganization adversely affecting either
the Preferred Shares or the Common Stock requires the approval of a
majority of the outstanding shares of such class;
. the Fund may not, without the affirmative vote of at least a majority of
the Preferred Shares outstanding, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any
similar application under state law for so long as the Fund is solvent
and does not foresee becoming insolvent;
. the approval of a majority of the outstanding Preferred Shares and
Common Stock, each acting as a separate class, is required to approve
any action requiring a vote of security holders under Section 13(a) of
the Investment Company Act including, among other things, changes in the
Fund's investment objective, changes in certain investment restrictions
described under "Investment Restrictions" in the Statement of Additional
Information and changes in the Fund's subclassification as a closed-end
investment company; and
. the approval of a majority of the outstanding Preferred Shares, voting
separately as a class, is required to amend, alter or repeal any of the
preferences, rights or powers of the holders of Preferred Shares or to
increase or decrease the number of Preferred Shares authorized to be
issued.
The Common Stock and Preferred Shares will also vote separately to the
extent otherwise required under Maryland law or the Investment Company Act as
in effect from time to time, and, to the extent required under the Investment
Company Act, action by the Fund's shareholders requires a vote of a majority
of the Fund's outstanding voting securities as defined under "Investment
Objective and Policies."
For purposes of any right of the holders of Preferred Shares to vote on any
matter, whether the right is created by the Articles of Incorporation, by
statute or otherwise, a holder of a Preferred Share is not entitled to vote
and the Preferred Share will not be deemed to be outstanding for the purpose
of voting or determining the number of Preferred Shares required to constitute
a quorum, if prior to or concurrently with a determination of the Preferred
Shares entitled to vote or of Preferred Shares deemed outstanding for quorum
purposes, as the case may be, a notice of redemption was given in respect of
those Preferred Shares and sufficient Deposit Securities (as defined in the
Statement of Additional Information) for the redemption of those Preferred
Shares were deposited.
Redemption
You do not have the right to redeem your Preferred Shares. The Fund will be
required to redeem your shares in certain circumstances, and has the right to
redeem your Preferred Shares under certain conditions.
The Fund is required under the Investment Company Act to maintain a ratio of
total assets to Preferred Shares of at least two to one (200% asset coverage).
Essentially, for every two dollars of Fund assets, the Fund can issue one
dollar of Preferred Shares (measured by liquidation preference). The Fund's
Articles Supplementary for the Preferred Shares require it to redeem Preferred
Shares if it does not maintain this two-to-one ratio. The Fund also must
redeem Preferred Shares if it fails to maintain the rating agencies' Preferred
Shares Basic Maintenance Amount. See "Description of Preferred Shares--S&P and
Moody's Guidelines" in the Statement of Additional Information. The redemption
price will be $25,000 per share plus the amount of accumulated but unpaid
dividends, up to the redemption date. The Fund will redeem only the amount of
Preferred Shares necessary to comply with the Investment Company Act
restrictions, the rating agencies' requirements, or both.
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The Fund may, but is not required to, redeem Preferred Shares under certain
conditions. The redemption price will be $25,000 per share plus the amount of
accumulated but unpaid dividends, up to the redemption date. The Fund may
redeem Preferred Shares in whole or in part, on the second business day before
any dividend payment date, out of funds legally available, at the redemption
price.
Notice of redemption will be made by mailing a notice to each holder of
Preferred Shares to be redeemed, at least 30 but not more than 45 days before
the redemption date, at the address as it appears in the Fund's stock books.
The notice will state (1) the redemption date; (2) the number of Preferred
Shares to be redeemed; (3) the redemption price; (4) that the dividends on
shares to be redeemed will cease to accumulate on the redemption date; and (5)
the provisions of the Articles Supplementary under which the redemption is
made.
THE AUCTION
Summary of Auction Procedures
The following is a brief summary of the auction procedures. They are
described in more detail in the Statement of Additional Information. The
auction procedures are complicated, and there are exceptions to these
procedures. Many of the terms in this section have a special meaning. Any
terms in this section not defined have the meaning assigned to them in the
Statement of Additional Information and the Glossary appended as Exhibit C
thereto.
The auction determines the Applicable Rate (the dividend rate) for Preferred
Shares, but the Applicable Rate will not be higher than the Maximum Applicable
Rate. See "Description of Preferred Shares--Dividends and Rate Periods--
Maximum Applicable Rate" in the Statement of Additional Information. You also
may buy or sell Preferred Shares in the auction. If you own Preferred Shares,
you may instruct, orally or in writing, a Broker-Dealer, or a broker-dealer
that has entered into an agreement with a Broker-Dealer, to enter an order in
the auction. If your broker-dealer is not an agent member of the Securities
Depository, or an affiliate of an agent member, it may submit orders for
Preferred Shares to the Auction Agent. Existing Holders can enter three kinds
of orders regarding their Preferred Shares: sell, hold/sell, and hold.
Potential and Existing Holders can also enter buy orders to purchase
additional Preferred Shares.
If you enter a sell order, you indicate that you want to sell Preferred
Shares at $25,000 per share, no matter what the next rate period's Applicable
Rate will be.
If you enter a hold/sell (or "hold at a rate") order, you indicate that you
want to sell Preferred Shares only if the next rate period's Applicable Rate
is less than the rate you specify.
If you enter a hold order, you indicate that you want to continue to own
Preferred Shares, no matter what the next rate period's Applicable Rate will
be.
If a Potential or Existing Holder enters a buy order, he or she indicates
that he or she wants to buy Preferred Shares at a bid rate at or below the
Applicable Rate.
You may enter different types of orders for your Preferred Shares, as well
as orders for additional Preferred Shares. All orders must be for whole
shares. All orders you submit are irrevocable. There are a fixed number of
Preferred Shares, and the Applicable Rate likely will vary from auction to
auction depending on the number of bidders, the number of shares the bidders
seek to buy, and general economic conditions including current interest rates.
If you own Preferred Shares and submit a bid higher than the Maximum
Applicable Rate, your bid will be treated as a sell order. If you do not enter
an order, the Broker-Dealer will assume that you want to continue to hold
Preferred Shares, but if you fail to submit an order and the rate period is
longer than seven days, the Broker-Dealer will treat your failure to submit a
bid as a sell order. If you do not currently own Preferred Shares, or want to
buy more shares, you may instruct a Broker-Dealer, or a broker-dealer that has
entered into an agreement with a Broker-Dealer, to enter a bid order to buy
shares in an auction at $25,000 per share, at a specified dividend rate. If
your bid specifies a rate higher than the Maximum Applicable Rate, your order
will not be accepted.
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Broker-Dealers will submit orders from Existing Holders and Potential
Holders to the Auction Agent. The submission deadline for the Broker-Dealers
to submit the orders is 1:00 p.m. Eastern time on each auction date (or
another time the Auction Agent specifies). Neither the Fund nor the Auction
Agent will be responsible for a Broker-Dealer's failure to submit orders from
existing shareholders and potential shareholders. A Broker-Dealer's failure to
submit orders for Preferred Shares held by it or its customers will be treated
in the same manner as a shareholder's failure to submit an order to the
Broker-Dealer. A Broker-Dealer may submit orders to the Auction Agent for its
own account.
If the number of Preferred Shares subject to hold/sell orders with a
dividend rate equal to or lower than the Maximum Applicable Rate is at least
equal to the number of Preferred Shares subject to sell orders, then the
Applicable Rate for the next rate period will be the lowest rate submitted
which, taking into account that rate and all lower rates submitted in order
from Existing Holders and Potential Holders, would result in Existing Holders
and Potential Holders owning all the Preferred Shares available for purchase
in the auction. If the number of Preferred Shares subject to hold/sell orders
with a dividend rate equal to or lower than the Maximum Applicable Rate is
less than the number of Preferred Shares subject to sell orders, then the
auction is considered to be a failed auction, and the dividend rate will be
the Maximum Applicable Rate. In that event, Existing Holders that have
submitted sell orders (or are treated as having submitted sell orders) may not
be able to sell any or all the shares for which they submitted sell orders.
The Auction Agent will not accept a bid above the Maximum Applicable Rate
from a Potential Holder, and will treat such a bid from an Existing Holders as
a sell order. The purpose of the Maximum Applicable Rate is to place an upper
limit on Preferred Shares dividends and in so doing to help protect the
earnings available to pay common share dividends, and to serve as the
Applicable Rate in the event of a failed auction (that is, an auction where
there are more Preferred Shares offered for sale than there are buyers for
those shares).
If Broker-Dealers submit or are deemed to submit hold orders for all
Outstanding Preferred Shares, the Applicable Rate for the next rate period
will be the Maximum Applicable Rate. See "Additional Information Concerning
the Auction for Preferred Shares--Dividend Rates and Auction Dates" in the
Statement of Additional Information and the Glossary appended as Exhibit C
thereto for a description of this rate.
The auction procedures include a pro rata allocation of shares for purchase
and sale. This may result in an Existing Holder continuing to hold or selling,
or a Potential Holder buying, fewer shares than the number of shares in its
order. If this happens, Broker-Dealers will be required to make appropriate
pro rata allocations among their customers.
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date, through the
Securities Depository. Purchasers will pay for their shares through Broker-
Dealers in same-day funds to the Securities Depository against delivery to the
Broker-Dealers. The Securities Depository will make payment to the sellers'
Broker-Dealers in accordance with its normal procedures, which require Broker-
Dealers to make payment against delivery in same-day funds.
The following is a simplified example of how a typical auction works. Assume
that a Fund has 1,000 outstanding shares of preferred shares, and three
current shareholders. The three current shareholders and three potential
shareholders submit orders through Broker-Dealers at the auction:
<TABLE>
<S> <C> <C> <C>
Current Shareholder..... A Owns 500 shares, wants to Hold/sell order of 3.5% rate
sell all 500 shares if for all 500 shares
auction rate is less than
3.5%
Current Shareholder..... B Owns 300 shares, wants to Hold order--will take the
hold auction rate
Current Shareholder..... C Owns 200 shares, wants to Hold/sell order of 3.3% rate
sell all 200 shares if for all 200 shares
auction rate is less than
3.3%
Potential Shareholder... D Wants to buy 200 shares Places order to buy at or above
3.4%
Potential Shareholder... E Wants to buy 300 shares Places order to buy at or above
3.3%
Potential Shareholder... F Wants to buy 200 shares Places order to buy at or above
3.5%
</TABLE>
24
<PAGE>
The lowest dividend rate that will result in all 1000 preferred shares
continuing to be held is 3.4% (the offer by D). Therefore, the Applicable Rate
will be 3.4%. Current shareholders B and C will continue to own their shares,
and current shareholder A will sell its shares, because A's dividend rate bid
was higher than the Applicable Rate. Potential shareholder D will buy 200
shares, and Potential shareholder E will buy 300 shares, because their bid
rates were at or below the Applicable Rate. Potential shareholder F will not
buy any shares because its bid rate was above the Applicable Rate.
Notification of Results; Settlement
The Auction Agent will notify each Broker-Dealer that submitted an order
whether the order was accepted and of the Applicable Rate for the next
dividend period, by telephone by approximately 3:00 p.m. Eastern time on the
auction date. Each Broker-Dealer that submitted an order on behalf of an
Existing Holder or Potential Holder will as soon as practicable notify that
person whether its order was accepted and of the Applicable Rate for the next
rate period and, if the order was a hold/sell or sell order, whether the order
was accepted or rejected in whole or in part and will confirm purchases and
sales with each Existing Holder or Potential Holder purchasing or selling
shares as a result of the auction. The Auction Agent will record each transfer
of Preferred Shares on the registry of Existing Holders it maintains.
In accordance with the Securities Depository's normal procedures, on the
business day after the auction date, purchases and sales of Preferred Shares
will be executed through the Securities Depository and the accounts of the
agent members will be debited and credited and shares delivered as necessary
to effect the purchases and sales of Preferred Shares as determined in the
auction.
Purchasers will make payment through their agent members in same-day funds
to the Securities Depository against delivery through their agent members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment against delivery by its agent
members in same-day funds.
If any Existing Holder selling Preferred Shares in an auction fails to
deliver its shares, the Broker-Dealer of any buyer of shares in an auction may
deliver to that person a number of whole Preferred Shares that is less than
the number of shares that the person otherwise was to buy. In that event, the
Broker-Dealer will determine the number of Preferred Shares to be delivered,
and delivery of the lesser number of shares will constitute good delivery.
Auction Agent
The Auction Agent acts solely as an agent of the Fund and is not a trustee
for holders of Preferred Shares. Unless the Auction Agent acts in bad faith or
is grossly negligent, it will not be liable for any action taken, suffered, or
omitted or for any error of judgment it makes in the performance of its duties
under the Auction Agency Agreement, and it will not be liable for any error of
judgment it makes in good faith unless it is negligent in ascertaining the
pertinent facts. The Auction Agent may terminate the Auction Agency Agreement
as to the Fund upon 90 days' notice to the Fund. If the Auction Agent should
resign, the Fund will use its best efforts to enter into an agreement with a
successor Auction Agent that contains substantially the same terms and
conditions as the Auction Agent Agreement. The Fund may remove the Auction
Agent, but before this removal, the Fund must have entered into an agreement
with a successor Auction Agent. The Fund may also replace the Auction Agent.
Broker-Dealers; Participation Fee
A Broker-Dealer may acquire shares for its own account. If a Broker-Dealer
submits an order for its own account in an auction, it may have an advantage
over others because it would have knowledge of other orders placed through it
in that auction.
After each auction, the Auction Agent will pay to each Broker-Dealer, from
monies the Fund provides, a participation fee at the annual rate of .25 of 1%
of the purchase price of Preferred Shares the Broker-Dealer
25
<PAGE>
places at that auction for any auction immediately preceding a rate period of
less than one year. For a rate period of one year or longer, the amount will
be a percentage of the purchase price of Preferred Shares the broker-dealer
places at that auction, as the Fund and Broker-Dealers may agree. "Places at
auction" means that the shares were
. the subject of hold orders deemed to be sell orders made by Existing
Holders who acquired their shares from that Broker-Dealer, or
. the subject of an order the Broker-Dealer submitted that is
. a hold/sell order from an Existing Holder that results in the shareholder
continuing to hold those shares as a result of the auction;
. a buy order from a Potential Holder or Existing Holder that results in
the shareholder buying those shares as a result of the auction; or
. a valid hold order.
The broker-dealer agreements allow a Broker-Dealer to submit orders in
auctions for its own account, unless a Fund notifies all Broker-Dealers that
they may no longer do so. In that case, Broker-Dealers may continue to submit
hold, sell, hold/sell and buy orders for their own accounts. The Fund may
request that the Auction Agent terminate one or more broker-dealer agreements
at any time, provided that at least one broker-dealer agreement is in effect
after the termination(s).
Secondary Market
Broker-Dealers and other broker-dealers may maintain a secondary trading
market for Preferred Shares, although they are not required to do so. The
secondary trading market in Preferred Shares may not provide you with
liquidity. Preferred Shares are not registered on a stock exchange or on the
NASDAQ Stock Market.
You may sell or transfer Preferred Shares only in whole shares and only:
. pursuant to a buy or sell order placed with the Auction Agent in
accordance with the auction procedures;
. to a Broker-Dealer or other broker-dealer; or
. to other persons as a Fund may permit; provided, however, that
. a sale or transfer of your shares (if you hold your shares in the name of
a Broker-Dealer) to that Broker-Dealer, or to another customer of that
Broker-Dealer, will not be considered a sale or transfer for purposes of
the foregoing if that Broker-Dealer remains the existing holder of the
shares immediately after the transaction; and
. in the case of all transfers, other than through an auction, the Broker-
Dealer (or other person, if the Fund permits) receiving the transfer will
advise the Auction Agent of the transfer.
Further description of the auction procedures can be found in the Statement
of Additional Information.
TAXES
Taxes on Distributions
As long as the Fund continues to meet the requirements for being a tax-
qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Distributions you receive from the Fund are generally considered taxable.
Distributions from the Fund's net long-term capital gains will be taxed as
long-term capital gains, regardless of how long you have held Fund shares;
distributions from other sources will generally be taxed as ordinary income.
Because the Fund's portfolio income consists principally of interest income,
corporate investors in Preferred Shares generally will not be entitled to the
federal dividends received deduction.
26
<PAGE>
If you fail to provide your correct taxpayer identification number or you
have been notified by the IRS that you are subject to backup withholding, the
Fund may withhold 31% of all distributions to you for federal taxes.
Taxes on Transactions
A sale or exchange of Fund shares will be a taxable transaction on which you
will recognize gain or loss.
DESCRIPTION OF COMMON STOCK
The Articles of Incorporation authorize the issuance of up to 250,000,000
shares of Common Stock, $.01 par value. All shares of Common Stock have equal
rights as to voting, dividends and liquidation. All shares of Common Stock
issued and outstanding are fully paid and nonassessable. Shares of Common
Stock have no preemptive, conversion or redemption rights and are freely
transferable. The number of shares of Common Stock outstanding as of April 5,
2000 was 15,971,307. The voting rights of the Common Stock are noncumulative,
which means that the holders of more than 50% of the shares of Common Stock
voting for the election of Directors can elect 100% of those Directors that
are subject to election by the holders of the Common Stock if they choose to
do so, and, in that event, the holders of the remaining shares of Common Stock
voting for the election of Directors will not be able to elect any Directors.
The holders of the Common Stock vote as a single class with the holders of the
Preferred Shares on all matters except as described under "Description of
Preferred Shares--Voting Rights." The rights of the holders of the Common
Stock may not be amended by a vote of less than a majority of the shares of
Common Stock outstanding.
Under the Investment Company Act, the Fund may not pay dividends on or make
other distributions with respect to its Common Stock or purchase any shares of
Common Stock if, at the time of the dividend declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage with
respect to senior securities representing indebtedness would be less than 300%
(or a higher percentage as may in the future be required by law) or asset
coverage with respect to Preferred Shares would be less than 200% (or a higher
percentage as may in the future be required by law). Dividends or other
distributions by the Fund on the Common Stock also will be prohibited at any
time dividends on Preferred Shares are in arrears or the Preferred Shares
Basic Maintenance Amount is not maintained pursuant to the Articles
Supplementary. Subject to the foregoing, to the extent that the Fund's net
investment income for any year exceeds any current or accumulated dividends on
Preferred Shares, the income will be distributed to the holders of the Common
Stock. "Net investment income" includes interest, dividends, short-term
capital gains and other income received or accrued less interest payments with
respect to any then-existing line of credit, the advisory and administration
fees, bank custodian charges, taxes (except capital gains taxes) and other
expenses properly chargeable against income (including transfer taxes,
brokerage or other capital charges), but does not include net capital gains or
distributions designated as a return of capital. Any net capital gains of the
Fund are distributed annually to the holders of the Common Stock, subject to
the prior rights of the holders of Preferred Shares.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), holders of
Common Stock may elect to receive all dividends and capital gains
distributions in cash paid by check mailed directly to the Common Stock
holders by or under the direction of PFPC, as dividend paying agent. Pursuant
to the Plan, holders of Common Stock not making this election will have all
dividends and distributions automatically reinvested by PFPC, as the Plan
agent, in whole or fractional shares of Common Stock.
Restrictive Covenants
Under the Investment Company Act, the Fund may not pay dividends on or make
other distributions with respect to the Common Stock or purchase any shares of
Common Stock if, at the time of the dividend declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage with
respect to senior securities representing indebtedness would be less than 300%
(or a higher percentage as may in the future be required by law). In addition,
under the Investment Company Act, so long as any senior securities
representing
27
<PAGE>
indebtedness are outstanding, the Fund may not (1) pay dividends on the
Preferred Shares if, at the time of the dividend declaration (and after giving
effect thereto), asset coverage with respect to such senior securities
representing indebtedness would be less than 200% (or a higher percentage as
may in the future be required by law) or (2) make any other distributions with
respect to the Preferred Shares or purchase the Preferred Shares if, at the
time of the distribution or purchase, as applicable (and after giving effect
thereto), asset coverage with respect to such senior securities representing
indebtedness would be less than 300% (or a higher percentage as may in the
future be required by law). The terms of the Preferred Shares also prohibit
the payment of dividends or other distributions on or purchases of the Common
Stock under certain circumstances. Under the Code, the Fund must, among other
things, distribute at least 90% of its investment company taxable income each
year in order to maintain its qualification for conduit tax treatment.
The foregoing limitations on dividends, distributions and purchases may
under certain circumstances impair the Fund's ability to maintain such
qualification. See "Taxes."
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Shares is determined by SSBC no less
frequently than as of the close of business (generally 4:00 p.m. New York
time) on the last Business Day of each week (generally a Friday), by dividing
the value of the net assets of the Fund by the total number of shares of
Common Stock outstanding. See "Determination of Net Asset Value" in the
Statement of Additional Information for further description.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time by
an amendment to the Articles of Incorporation. The Articles of Incorporation
provide that such an amendment must be approved by the affirmative vote of the
holders of a majority of the Fund's outstanding shares of Common Stock, voting
as a separate class, and by the affirmative vote of a majority of the
preferred shares, including the Preferred Shares, voting as a separate class.
Such a vote also would also satisfy a separate requirement in the Investment
Company Act that the change be approved by the shareholders. Conversion of the
Fund to an open-end investment company would require the redemption of any
outstanding preferred shares, including the Preferred Shares. The Board of
Directors believes, however, that the closed-end structure is desirable in
light of the Fund's investment objective and policies. Therefore, you should
assume that it is not likely that the Board of Directors would vote to convert
the Fund to an open-end fund.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to their
net asset values, and the Fund's Common Shares may also trade at a discount to
their net asset value. The market price of the Common Shares will be
determined by such factors as relative demand for and supply of such common
shares in the market, the Fund's net asset value, general market and economic
conditions and other factors beyond the control of the Fund. Although the
holders of the Fund's Common Shares do not have the right to redeem their
Common Shares, the Fund may take action to repurchase Common Shares in the
open market or make tender offers for its Common Shares at their net asset
value. This may have the effect of reducing any market discount from net asset
value.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by PNC.
The principal business address of PNC is 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103. The Fund's assets are held under bank
custodianship in compliance with the Investment Company Act.
28
<PAGE>
PFPC is located at P.O. Box 9699, Providence, Rhode Island 02940, and
serves, with respect to the Preferred Shares and the Common Stock, as transfer
agent, dividend paying agent and registrar, and, with respect to the Preferred
Shares, as agent to provide notice of redemption and certain voting rights.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Salomon Smith Barney Inc. (the "Underwriter") and the Fund (the "Underwriting
Agreement") dated the date hereof, the Underwriter has agreed to purchase, and
the Fund has agreed to sell, 2,400 shares of Preferred Shares offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
to purchase the shares included in this offering are subject to the approval
of certain legal matters by counsel and to certain other conditions. The
Underwriter is obligated to purchase all of the Preferred Shares offered
hereby if it purchases any of the Preferred Shares. In the Underwriting
Agreement, the Fund has agreed to indemnify the Underwriter against certain
liabilities, including liabilities arising under the Securities Act of 1933,
as amended, or to contribute payments the Underwriter may be required to make
for any of those liabilities, and the Adviser has agreed to provide back-up
indemnification only to the extent that the Fund fails to indemnify the
Underwriter.
The Fund has been advised by the Underwriter that it proposes initially to
offer some of the Preferred Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and some of the
shares to selected dealers at the public offering price less a concession not
in excess of $ per share. The underwriting commission the Fund will pay of
$250.00 per share is equal to 1.0% of the initial offering price. After the
initial public offering, the Underwriter may change the public offering price
and the concession. Investors must pay for any Preferred Shares purchased in
the initial public offering on or before April , 2000.
The Fund anticipates that the Underwriter may from time to time act as a
broker or dealer in connection with the execution of its portfolio
transactions after it has ceased to be an underwriter. The Fund anticipates
that the Underwriter or one of its affiliates may from time to time act in
auctions as a Broker-Dealer and will receive fees as described under "The
Auction" in this Prospectus and in the Statement of Additional Information.
The underwriter is an active underwriter of, and dealer in, securities and
acts as a market maker in a number of such securities, and therefore can be
expected to engage in portfolio transactions with the Fund.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10013.
LEGAL OPINIONS
The legality of the Preferred Shares offered by this Prospectus will be
passed on by Willkie Farr & Gallagher, New York, New York, which serves as
counsel to the Fund. Certain legal matters will be passed on for the
Underwriter by Simpson Thacher & Bartlett, New York, New York. Willkie Farr &
Gallagher and Simpson Thacher & Bartlett will rely, as to certain matters of
Maryland law, on the opinion of Venable, Baetjer and Howard, LLP, Baltimore,
Maryland.
REPORTS TO SHAREHOLDERS
The Fund sends unaudited semi-annual and audited annual reports to its
shareholders, including a list of investments held.
29
<PAGE>
INDEPENDENT AUDITORS
The financial statements of the Fund for the year ended March 31, 1999 and
the selected per share data and ratios set forth under "Financial Highlights"
for each of the fiscal years ended March 31, 1996-1999 have been audited by
KPMG LLP, which is located at 757 Third Avenue, New York, NY 10017, as set
forth in their report incorporated by reference into the Statement of
Additional Information, and are included in reliance upon their authority as
experts in accounting and auditing. KPMG LLP audits and reports on the Fund's
annual financial statements, reviews certain regulatory reports and the Fund's
federal income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
FURTHER INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and the Investment Company Act with
respect to the Preferred Shares offered by this Prospectus. Further
information concerning the Preferred Shares may be found in the Registration
Statement, which is on file with the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and, in each instance, reference is made to the
copy of the contract or other document filed as an exhibit to the Registration
Statement, of which this Prospectus forms a part, each such statement being
qualified in all respects by such reference.
The Fund is subject to the information requirements of the Securities
Exchange Act of 1934, and the Investment Company Act, and in accordance
therewith files reports and other information with the Commission. Such
reports, proxy and public statements and other information can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, DC 20549. Call 1-800-SEC-0330 for
information about the public reference facilities. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549 at prescribed rates. Such reports and other
information concerning the Fund may also be inspected at the offices of the
New York Stock Exchange. The Commission maintains a Web site
(http:\\www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference into this Prospectus and the Statement of
Additional Information, and reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. In addition, reports, proxy and information statements and other
information concerning the Fund can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
The registration statement may be inspected without a charge at the
Commission's office in Washington, D.C. and copies of all or any part thereof
may be obtained from such office after payment of the fees prescribed by the
Commission.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended March 31, 1999 and
the Fund's Semi-Annual Report for the fiscal period ended September 30, 1999
(unaudited) is incorporated by reference into this Prospectus with respect to
all information other than the information set forth in the Letter to
Shareholders included therein.
30
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information........................................................ 1
Investment Objective And Policies.......................................... 1
S&P and Moody's Guidelines................................................. 4
Investment Restrictions.................................................... 16
Certain Trading Strategies of the Fund..................................... 18
Description of Preferred Shares............................................ 25
Management of the Fund..................................................... 45
Principal Stockholders..................................................... 48
Investment Adviser......................................................... 49
Determination of Net Asset Value........................................... 51
Share Repurchases.......................................................... 52
Taxes...................................................................... 53
Additional Information Concerning the Auction for Preferred Shares......... 57
Custodian, Transfer Agent, Dividend Paying Agent and Registrar............. 62
Experts.................................................................... 62
Additional Information..................................................... 63
Appendix A--Portfolio of Investments....................................... A-1
Appendix B--Ratings of Investments......................................... B-1
Appendix C--Glossary....................................................... C-1
</TABLE>
31
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer contained in this Prospectus, and, if given or made,
any information or representation must not be relied upon as having been
authorized by the Fund, the Fund's investment adviser or by the underwriter of
the offering described in this Prospectus. This Prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, any securities in any
jurisdiction to any person to whom it is unlawful to make an offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus nor
any sale made pursuant to this Prospectus, under any circumstances, is
intended to create an implication that there has been no change in the affairs
of the Fund since the date of this Prospectus or that the information in this
Prospectus is correct as of any time subsequent to its date. However, if any
material change occurs while this Prospectus is required by law to be
delivered, this Prospectus will be supplemented or amended accordingly.
Until , 2000, (25 days after the effective date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$60,000,000
Zenix Income Fund Inc.
2,400 Auction Rate Cumulative Preferred Shares
------------
PROSPECTUS
April , 2000
------------
Salomon Smith Barney
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
2,400 Shares
ZENIX INCOME FUND INC.
Auction Rate Cumulative Preferred Stock
Salomon Smith Barney
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
Registration Statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL , 2000
ZENIX INCOME FUND INC.
This Statement of Additional Information relating to this offering
does not constitute a prospectus, but should be read in conjunction with the
Prospectus relating thereto dated, 2000 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing Preferred Shares in this offering,
and investors should obtain and read the Prospectus prior to purchasing such
shares. A copy of the Prospectus may be obtained without charge by calling 1-
800-451-2010. Capitalized terms used but not defined in this Statement of
Additional Information have the meanings assigned to them in the Prospectus or
the Glossary appended as Exhibit C hereto.
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
GENERAL INFORMATION ....................................................... 1
INVESTMENT OBJECTIVE AND POLICIES ......................................... 1
S&P AND MOODY'S GUIDELINES ................................................ 4
INVESTMENT RESTRICTIONS ................................................... 16
CERTAIN TRADING STRATEGIES OF THE FUND .................................... 18
DESCRIPTION OF PREFERRED SHARES .......................................... 25
MANAGEMENT OF THE FUND .................................................... 45
PRINCIPAL STOCKHOLDERS .................................................... 48
INVESTMENT ADVISER ........................................................ 49
DETERMINATION OF NET ASSET VALUE .......................................... 51
SHARE REPURCHASES ......................................................... 52
TAXES ..................................................................... 53
ADDITIONAL INFORMATION CONCERNING THE AUCTION FOR PREFERRED SHARES......... 57
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR............. 62
EXPERTS ................................................................... 62
ADDITIONAL INFORMATION .................................................... 63
Appendix A -- Portfolio of Investments .................................... A-1
Appendix B -- Ratings of Investments ...................................... B-1
Appendix C -- Glossary .................................................... C-1
(i)
<PAGE>
GENERAL INFORMATION
The Fund is a diversified, closed-end management investment company.
The Fund changed its name from "Zenith Income Fund Inc." to "Zenix Income Fund
Inc." on October 19, 1989.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The investment objective of the Fund is to seek high current income by
investing in a portfolio of fixed-income securities. The Fund's current income,
if any, will be distributed to holders of Common Stock only after satisfaction
of the obligation to pay dividends on the Preferred Shares. No assurance can be
given that the Fund's investment objective will be achieved.
Fundamental policies of the Fund may not be changed without the
affirmative vote of the holders of a majority (as defined in the Investment
Company Act) of the outstanding shares of Common Stock and a majority of the
outstanding Preferred Shares, voting as separate classes. In view of this
requirement, no change in the Fund's investment objective could occur without
the affirmative vote of both classes of stock. The Portfolio of Investments of
the Fund as of March 31, 2000 is set forth in Appendix A to this Statement of
Additional Information.
Portfolio Investments
Under normal market conditions, the Fund invests at least 65% of its
total assets in high yield fixed-income securities. These securities are
commonly known as "junk bonds" because they are rated in the lower categories by
nationally recognized rating agencies. "High yield" fixed-income securities, the
generic name for corporate bonds rated between BB and C by S&P and between Ba
and C by Moody's, are frequently issued by corporations in the growth stages of
their development, as a result of corporate reorganizations or as part of
corporate takeovers. Risks and special considerations associated with investing
in high yield fixed-income securities are described under "Risk Factors and
Special Considerations" in the Prospectus.
Under current S&P and Moody's guidelines relating to the receipt of
ratings on the Preferred Shares, certain types of securities in which the Fund
may otherwise invest, and certain strategies in which the Fund may otherwise
engage, pursuant to the investment policies and strategies stated below, are not
eligible for inclusion in the calculation of the Discounted Value of the Fund's
portfolio. Such instruments consist of, among others: securities that are not
readily marketable; private placements (other than Rule 144A Securities);
1
<PAGE>
and securities not within S&P's diversification guidelines. Accordingly,
although the Fund reserves the right to invest in such securities and to engage
in such strategies to the extent described in the Prospectus and this Statement
of Additional Information, it is anticipated that they will not ordinarily
constitute in total more than 20% of the Fund's total assets. See "S&P and
Moody's Guidelines" and "Description of Preferred Shares -- Asset Maintenance."
The composition of the Fund's portfolio as of March 31, 2000 by rating category
is set out in the Prospectus under "Portfolio Composition." Further information
concerning the rating categories of S&P and Moody's is provided in Appendix B to
this Statement of Additional Information.
Fixed-income securities acquired by the Fund consist of preferred
stocks (limited to 20% of the Fund's total assets) and all types of debt
obligations having varying terms with respect to security or credit support,
subordination, purchase price, interest payments and maturity. These obligations
consist of bonds, debentures, notes, mortgage or other asset-backed instruments
(that is, instruments secured by receivables and other forms of collateral),
equipment lease certificates, equipment trust certificates, conditional sales
contracts, commercial paper and obligations issued or guaranteed by the United
States Government or any of its political subdivisions, agencies or
instrumentalities ("Government Securities") (including obligations, such as
repurchase agreements, secured by such instruments).
Most debt securities in which the Fund invests bear interest at fixed
rates, although the Fund reserves the right to invest without limitation in
fixed-income securities that have variable rates of interest or involve equity
features, such as contingent interests or participations based on revenues,
sales or profits (that is, interest or other payments, often in addition to a
fixed rate of return, that are based on the borrower's attainment of specified
levels of revenues, sales or profits and thus enable the holder of the security
to share in the potential success of the venture). The Fund also has the right
to acquire common stock as part of a unit in connection with the purchase of
debt securities consistent with the Fund's investment policies.
The Fund may invest up to 20% of its total assets in illiquid
securities, including securities that are not readily marketable, securities
restricted as to resales, repurchase agreements maturing in more than seven
days, interest-only and principal-only mortgage backed securities and certain
options traded in the over-the-counter market and the securities to which those
options relate. No security that is not readily marketable will be acquired by
the Fund unless (1) SSBC believes the security to be of quality comparable to
publicly traded securities and (2) the security carries rights to be registered
2
<PAGE>
under the Federal securities laws (which rights typically enable the holder of
the related security to cause the issuer to register the security for public
sale under the Federal securities laws or to include the security in a
registration initiated by the issuer or another security holder, thereby
providing additional liquidity). Securities that are not readily marketable may
offer higher yields than comparable publicly traded securities; the Fund may not
be able to sell these securities, however, when SSBC considers it desirable to
do so or, to the extent they are sold privately, may have to sell them at less
than the price of otherwise comparable securities.
The Fund may invest up to 20% of its total assets in non-rated
securities deemed by SSBC to be of quality comparable to rated securities,
whether rated investment grade or below, that the Fund may acquire.
The Fund is also permitted to invest up to 20% of its total assets in
zero coupon securities, which are securities that pay no cash income to their
holders until they mature and are issued at substantial discounts from their
value at maturity. When held to maturity, their entire return, which consists of
the amortization of discount, comes from the difference between their purchase
price and their maturity value. Because interest on zero coupon securities is
not paid on a current basis, the values of securities of this type are subject
to greater fluctuations than are the values of securities that distribute income
regularly and may be more speculative than such securities. Accordingly, the
values of these securities may be highly volatile as interest rates rise or
fall. The Fund's investments in zero coupon securities will result in special
tax consequences; although zero coupon securities do not make interest payments,
a portion of the difference between a zero coupon security's maturity value and
its purchase price is taxable income to the Fund each year. See "Taxes" below
and in the Prospectus.
Notwithstanding the investment policies stated above, when SSBC
determines that market conditions warrant a temporary "defensive" investment
strategy, the Fund may invest without limitation in money market instruments,
including commercial paper of domestic and foreign corporations, certificates of
deposit of foreign or domestic banks, bankers' acceptances and other obligations
of banks, repurchase agreements and short-term Government Securities. The yield
on these securities, which may be purchased consistent with S&P and Moody's
guidelines, will tend to be lower than the yield on other securities to be
purchased by the Fund.
The Fund may also invest in securities rated higher than BB by S&P, Ba
by Moody's, or non-rated securities of comparable quality, when SSBC determines
that the difference in yields between quality classifications is relatively
narrow in light of then current market conditions or for temporary
3
<PAGE>
defensive purposes when SSBC anticipates adverse market conditions. Investments
in higher quality issues may serve to lessen a decline in net asset value but
may also affect the amount of current income produced by the Fund, since the
yields from such issues are usually less than those from lower rated issues. To
the extent the Fund invests in money market investments, it may not be pursuing
its investment objective.
The achievement of the Fund's objective depends upon SSBC's analytical
and portfolio management skills. No assurance can be given that this objective
will be achieved. All nonfundamental investment policies of the Fund, including
those described below under "S&P and Moody's Guidelines," may be changed by the
Board of Directors of the Fund without shareholder approval.
S&P AND MOODY'S GUIDELINES
The composition of the Fund's portfolio reflects guidelines (referred
to herein as the "Rating Agency Guidelines") established by S&P and Moody's in
connection with the Fund's receipt of a rating of AAA and aaa from S&P and
Moody's, respectively, for the Preferred Shares. These Rating Agency Guidelines
relate, among other things, to industry and credit quality characteristics of
issuers and specify various discount factors for debt securities (with the level
of discount greater as the rating of a security becomes lower). Under the Rating
Agency Guidelines, certain types of securities in which the Fund may otherwise
invest consistent with its investment strategy are not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio. Such
instruments include, for example, private placements (other than Rule 144A
Securities), non-U.S. securities and other securities not within the investment
guidelines. Accordingly, although the Fund reserves the right to invest in such
securities to the extent set forth herein, they have not and it is anticipated
that they will not constitute a significant portion of the Fund's
portfolio.
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of the Guidelines,
greater than the aggregate liquidation preference of the Preferred Shares plus
specified liabilities, payment obligations and other amounts, as of periodic
valuation dates. The Rating Agency Guidelines also require the Fund to maintain
asset coverage for the Preferred Shares on a non-discounted basis of at least
200% as of the end of each month, and the Investment Company Act requires such
asset coverage as a condition to paying dividends or other distributions on
Common Stock. See "Description of Preferred Shares -- Asset Maintenance." The
effect of compliance with the
4
<PAGE>
Rating Agency Guidelines may be to cause the Fund to invest in higher quality
assets and/or to maintain relatively substantial balances of highly liquid
assets or to restrict the Fund's ability to make certain investments that would
otherwise be deemed potentially desirable by the Investment Adviser, including
private placements of other than Rule 144A securities (as defined herein), and
to limit or delay the Fund's ability to reinvest cash in a rising "high-yield"
market. The Rating Agency Guidelines are subject to change from time to time
with the consent of the relevant rating agency and would not apply if the Fund
in the future elected not to use investment leverage consisting of senior
securities rated by one or more rating agencies, although other similar
arrangements might apply with respect to other senior securities that the Fund
may issue.
"High-yield" bonds, the generic name for corporate bonds rated between
BB/Ba and C/C by S&P and Moody's, respectively, are frequently issued by
corporations in the growth stage of their development. Bonds rated BB/Ba, B/B,
CCC/Caa, CC/Ca and C/C are regarded by the rating agencies, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. Such securities are
also generally considered to be subject to greater risk than securities with
higher ratings with regard to a deterioration of general economic conditions.
"High-yield" securities held by the Fund may include securities received as a
result of a corporate reorganization or issued as part of a corporate takeover.
Securities issued to finance corporate restructurings may have special credit
risks due to the highly leveraged conditions of the issuers, and such securities
are usually subordinate to other securities issued by the issuer. In addition,
such issuers may lose experienced management as a result of the restructurings.
Finally, the market price of such securities may be more volatile to the extent
that expected benefits from restructuring do not materialize.
The Fund intends to maintain, at specified times, a Discounted Value
for its portfolio at least equal to the amount specified by each rating agency
(the "Preferred Shares Basic Maintenance Amount"), the determination of which is
as set forth under "Description of Preferred Shares -- Asset Maintenance." S&P
and Moody's have each established separate guidelines for determining Discounted
Value. To the extent any particular portfolio holding does not satisfy the
applicable rating agency's guidelines, all or a portion of such holding's value
will not be included in the calculation of Discounted Value (as defined by such
rating agency).
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
5
<PAGE>
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines.
As described by Moody's, an issue of preferred stock which is rated
aaa is considered to be top-quality preferred stock with good asset protection
and the least risk of dividend impairment within the universe of preferred
stocks. As described by S&P, a preferred stock rating of AAA indicates strong
asset protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. An S&P or Moody's
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful.
Ratings are not recommendations to purchase, hold or sell Preferred
Shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The rating is based on current
information furnished to S&P and Moody's by the Fund and obtained by S&P and
Moody's from other sources. The rating may be changed, suspended or withdrawn as
a result of changes in, or unavailability of, such information. The Preferred
Shares will be subject to mandatory redemption in the event that the AAA/aaa
Credit Rating is not available for the Preferred Shares and the Fund is unable
to obtain the AAA/aaa Credit Rating for the Preferred Shares from a substitute
rating agency or agencies within the time specified herein.
In connection with the S&P and Moody's guidelines, the Fund is also
required to meet specified minimum liquidity levels. See "Description of
Preferred Shares -- Minimum Liquidity Level.'
S&P Guidelines
S&P issues ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines described below have been
developed by S&P in connection with issuances of asset-backed and similar
securities, including debt obligations and money market preferred stocks,
generally on a case-by-case basis through discussions with the issuers of these
securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be sufficiently varied and will be of
sufficient quality and amount to justify investment grade ratings. The
guidelines do not have the force of law, but have been implemented by the Fund
in order to receive the above-described rating for the Preferred Shares, which
ratings are generally relied upon by institutional investors in purchasing such
securities. In the context of a closed-end investment company such as the Fund,
therefore, the guidelines provide a set of tests for portfolio composition and
asset coverage that supplement the applicable requirements under the Investment
Company Act (and may be more or less restrictive), but are the sole determinants
in the rating of a security. Consequently, in order to maintain (1) the ratings
described
6
<PAGE>
above from S&P with respect to the Preferred Shares and (2) compliance with the
Investment Company Act, the Fund, with respect to each of its investments,
adheres to the requirements of the S&P guidelines or the Investment Company Act,
whichever is more restrictive. Ratings issued by S&P do not eliminate or
mitigate the risks of investing in the Fund's securities.
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Shares
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the discounted value of the Fund's portfolio, and,
among the requirements, the amount of such assets included in the portfolio at
any time, if any, may vary depending upon the credit quality (and related
discounted value) of the Fund's eligible assets at such time.
The Preferred Shares Basic Maintenance Amount includes the sum of (1)
$25,000 times the number of Preferred Shares then outstanding and (2) certain
accrued and projected payment obligations of the Fund. Upon any failure to
maintain the required discounted value, the Fund would seek to alter the
composition of its portfolio to reestablish required asset coverage within the
specified eight Business Day cure period, thereby incurring additional
transaction costs and possible losses and/or gains on dispositions of portfolio
securities. To the extent any such failure is not cured in a timely manner, the
holders of the Preferred Shares will acquire certain rights. See "Description of
Preferred Shares -- Asset Maintenance." "Business Day," as used in the
Prospectus and this Statement of Additional Information, means each Monday,
Tuesday, Wednesday, Thursday and Friday that is a day on which the New York
Stock Exchange is open for trading and that is not a day on which banks in New
York City are authorized or required by law or executive order to close.
Under S&P guidelines, corporate debt obligations are not included in
the calculation of the discounted value of the Fund's portfolio unless they,
among other requirements (1) are not subject to extended settlement (2) are
rated CCC-(senior) or higher by S&P, (3) provide for the periodic payment of
interest thereon in cash, (4) except for commercial paper, have registered under
the Securities Act of 1933, as amended (the "Securities Act") or are eligible
for resale pursuant to Rule 144A and (5) have not had notice given in respect
thereof that any such corporate debt obligation is the subject of an offer by
the issuer thereof of exchange or tender for cash, securities or any other type
of consideration (except that corporate debt obligations in an amount not
exceeding 10% of the value of the Fund's portfolio at any time will be subject
to the provisions of this clause (5)). In
7
<PAGE>
addition, portfolio holdings must be within the following requirements in order
to be included in such calculation:
<TABLE>
<CAPTION>
Maximum Single Minimum Issue Size
Rating Issuer(R) (%) (1,2) Maximum Single Industry (%)(2,3) ($ in millions)
------ ------------------- -------------------------------- ---------------
Corporate Bonds Convertible Bonds (5)
--------------- --------------------
<S> <C> <C> <C> <C>
AAA 10% 50% 50% $ 100
AA 10 33 33.3 100
A 10 33 33.3 100
BBB 5 20 25 100
BB 4 12 25 50 (4)
B 3 8 25 50 (4)
B- 3 8 25 50 (4)
CCC+ 3 8 25 50 (4)
CCC 3 8 25 50 (4)
CCC- 3 8 N.A. 50 (4)
</TABLE>
See accompanying notes.
_______________
(1) Companies subject to common ownership of 25% or more are considered as one
name.
(2) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(3) Industries are determined according to S&P Industry Classifications, as
defined herein.
(4) Corporate Collateral bonds rated below BBB- by S&P and from issues ranging
from $50 million to $100 million are limited to 20% of the collateral pool.
Convertible bonds rated below BBB by S&P must have an issue size of at
least $100 million.
(5) For convertible bonds which are rated less than BBB by S&P, the minimum
capitalization is $100 million.
See the Articles Supplementary for further information on and description of the
S&P Guidelines and S&P Eligible Assets.
Moody's Guidelines
8
<PAGE>
For purposes of calculating the Discounted Value of the Fund's
portfolio under current Moody's guidelines, the fair market value of portfolio
securities eligible for consideration under such guidelines ("Moody's Eligible
Assets") must be discounted by certain discount factors set forth below
("Moody's Discount Factors"). The Discounted Value of a portfolio security under
Moody's guidelines is the Market Value thereof, determined as specified by
Moody's, divided by the Moody's Discount Factor. The Moody's Discount Factor
with respect to securities other than those described below will be the
percentage provided in writing by Moody's.
Corporate Debt Securities. Under current Moody's guidelines, portfolio
securities that are corporate debt securities not be included in the calculation
of the Discounted Value of the Fund's portfolio if (a) such securities are rated
Caa or higher by Moody's; (b) such securities provide for the periodic payment
of interest in cash in U.S. dollars; (c) for securities which provide for
conversion or exchange into equity capital at some time over their lives, the
issuer must be rated at least B3 by Moody's and the discount factor will be
250%; (d) for debt securities rated Ba1 and below, no more than 10% of the
original amount of such issue may constitute Moody's Eligible Assets; (e)
such securities have been registered under the Securities Act of 1933, as
amended, or are restricted as to resale under federal securities laws but are
eligible for resale pursuant to Rule 144A under the Securities Act as determined
by the Fund's adviser acting subject to the Supervision of the Fund's Board of
Directors and (f) such securities are not subject to extended settlement.
The Discounted Value of any Moody's Eligible Asset that is a corporate
debt security is the percentage determined by reference to the rating on such
asset (which percentage is based upon the Exposure Period) with reference to the
remaining term to maturity of such assets, in accordance with the table set
forth below:
9
<PAGE>
Moody's Discount Factors
Corporate Debt Securities+
<TABLE>
<CAPTION>
Maturity of Collateral Rating Category
Aaa Aa A Baa Ba B* Caa Unrated*
- ------------------ ----- ----- ----- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year-15 Years 150% 155% 160% 165% 170% 180% 205% 260%
Above 15 Years-20 Years 161 169 177 184 200 215 260 260%
Above 20 Years 162 170 178 185 201 216 260 260%
</TABLE>
- -------------
* If a security is unrated by Moody's but is rated by S&P, a rating two numeric
ratings below the S&P rating will be used e.g., where the S&P rating is AAA,
a Moody's rating of Aa2 will be used; where the S&P rating is AA+, a Moody's
rating of Aa3 will be used. If a security is unrated by either S&P or
Moody's, the Fund will use the percentage set forth under "Unrated" in this
table.
10
<PAGE>
The Moody's guidelines impose minimum issue size, issuer and industry
diversification and other requirements for purposes of determining Moody's
Eligible Assets. Specifically, portfolio holdings as described below must be
within the following diversification and issue size requirements in order to
constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
<TABLE>
<CAPTION>
Asset Single Issuer Single Industry Minimum Issue Size ($ in
Ratings(1) (%)(2,3) (%)(3,4) millions)(6)
----------------- ------------- --------------- ------------------------
<S> <C> <C> <C>
aaa, Aaa 100 100 100
aa, Aa 20 60 100
a, A, 10 40 100
baa, Baa 6 20 100
Ba 4 12 50(5)
B1-B2 3 8 50(5)
B3 3 8 50(5)
Caa 2 7 50(5)
</TABLE>
See accompanying notes.
- ------------------------
(1) Refers to the preferred stock and senior debt rating of collateral.
(2) Companies subject to common ownership of 25% or more are considered as one
name.
(3) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(4) Industries are determined according to industry classifications specified
by Moody's ("Moody's Industry Classification"). See the Articles
Supplementary.
(5) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50 million.
11
<PAGE>
The effect of the foregoing discount factors may be to cause the Fund
to invest in higher rated securities than it would if it were not required to
maintain specified asset coverage on a discounted basis. This may have the
effect of reducing the yield on the portfolio. See "Risk Factors and Special
Considerations" in the Prospectus.
Preferred Stock. Under current Moody's guidelines, portfolio
securities that are preferred stocks will be included in the calculation of
Discounted Value of the Fund's portfolio if (a) dividends on such preferred
stock are cumulative, (b) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars and do not provide for conversion or
exchange into, or have warrants attached entitling the holder to receive, equity
capital at any time over the respective lives of such securities, (c) the issuer
of such a preferred stock has common stock listed on either the New York Stock
Exchange or the American Stock Exchange, (d) the issuer of such a preferred
stock has a senior debt rating from Moody's of Baa1 or higher or a preferred
stock rating from Moody's of "baa3" or higher and (e) such preferred stock has
paid consistent cash dividends in U.S. dollars over the last three years or has
a minimum rating of al (if the issuer of such preferred stock has other
preferred issues outstanding that have been paying dividends consistently for
the last three years, then a preferred stock without such a dividend history
would also be eligible). In addition, the preferred stocks must have the
following diversification requirements: (x) the preferred stock issue must be
greater than $50 million and (y) the minimum holding by the Fund of each issue
of preferred stock is $500,000 and the maximum holding of preferred stock of
each issue is $5 million. In addition, preferred stocks issued by transportation
companies will not be considered as Moody's Eligible Assets.
The Moody's Discount Factors for Moody's Eligible Assets that are
preferred stock are (a) 152% for utility preferred stocks, (b) 197% for
industrial/financial preferred stocks and (c) 350% for auction rate preferred
stocks.
Other Moody's Eligible Assets. In addition to corporate debt
securities and preferred stocks which satisfy the above requirements, Moody's
Eligible Assets also include the following:
(i) cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the date on which the value of the portfolio is being
determined for purposes of determining compliance with Moody's or S&P's
12
<PAGE>
investment guidelines (a "Valuation Date"), (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within the Exposure Period and receivables for Moody's
Eligible Assets sold if the receivable is due within five Business Days of
the Valuation Date, and if the trades which generated such receivables are
(A) settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B)(1) with
counterparties having a Moody's long-term debt rating of at least Baa3 or
(2) with counterparties having a Moody's short-term money market instrument
rating of at least P-1;
(ii) short-term money market instruments (as defined by Moody's), so
long as (A) such securities are rated at least P-1, (B) in the case of
demand deposits, time deposits and overnight funds, the supporting entity
is rated at least A2, or (C) in all other cases, the supporting entity (1)
is rated A2 and the security matures within one month, (2) is rated A1 and
the security matures within three months, or (3) is rated at least Aa3 and
the security matures within six months; provided, however, that for
purposes of this definition, such instruments (other than commercial paper
rated by S&P and not rated by Moody's) need not meet any otherwise
applicable S&P rating criteria; and
(iii) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's).
A Moody's Discount Factor of 100% will be applied to cash. The Moody's
Discount Factor applied to Moody's Eligible Assets that are short term money
instruments (as defined by Moody's) will be (a) 100%, so long as portfolio
securities mature or have a demand feature at par exercisable within 49 days of
the relevant valuation date (the "Exposure Period"), (b) 115%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within the Exposure Period, and (c) 125%, if such securities are not rated by
Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-
1+/AA by S&P and mature or have a demand feature at par exercisable within the
Exposure Period.
13
<PAGE>
The Moody's Discount Factors for Moody's Eligible Assets that are U.S.
Treasury Securities and U.S. Treasury Strips are as follows:
U.S. Treasury Securities:
<TABLE>
<CAPTION>
Discount
Remaining Term to Maturity Factor
- -------------------------- ------
<S> <C>
1 year or less................................................................................. 107%
2 years or less (but longer than 1 year)....................................................... 113
3 years or less (but longer than 2 years)...................................................... 118
4 years or less (but longer than 3 years)...................................................... 123
5 years or less (but longer than 4 years)...................................................... 128
7 years or less (but longer than 5 years)...................................................... 135
10 years or less (but longer than 7 years)..................................................... 141
15 years or less (but longer than 10 years).................................................... 146
20 years or less (but longer than 15 years).................................................... 154
30 years or less (but longer than 20 years).................................................... 154
</TABLE>
U.S. Treasury Strips:
<TABLE>
<CAPTION>
Discount
Remaining Term to Maturity Factor
- -------------------------- ------
<S> <C>
1 year or less................................................................................. 107%
2 years or less (but longer than 1 year)....................................................... 114
3 years or less (but longer than 2 years)...................................................... 120
4 years or less (but longer than 3 years)...................................................... 127
5 years or less (but longer than 4 years)...................................................... 133
7 years or less (but longer than 5 years)...................................................... 145
10 years or less (but longer than 7 years)..................................................... 159
15 years or less (but longer than 10 years).................................................... 184
20 years or less (but longer than 15 years).................................................... 211
30 years or less (but longer than 20 years).................................................... 236
</TABLE>
See the Articles Supplementary of the Fund for further detail on the
above Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.
The foregoing Rating Agency Guidelines are subject to change from time
to time. The Fund may, but it is not required to, adopt any such change.
Nationally recognized rating agencies other than S&P and Moody's may also from
time to time rate the Preferred Shares; any nationally recognized rating agency
providing a rating for the Preferred Shares may, at any time, change or withdraw
any such rating.
For so long as any of the Preferred Shares are Outstanding and either
S&P, Moody's or any Other Rating Agency is rating the Preferred Shares, the Fund
will not, unless it has received written confirmation from S&P, Moody's or any
Other Rating Agency as applicable, that any such action would not impair the
respective rating then assigned by S&P, Moody's or
14
<PAGE>
such Other Rating Agency to the Preferred Shares, engage in any one or more of
the following transactions: (i) purchase or sell futures contracts or options
thereon with respect to portfolio securities or write unsecured put or uncovered
call options on portfolio securities, engage in options transactions involving
cross-hedging, or enter into any swap transaction; or (ii) borrow money, except
that the Fund may, without the written confirmation described above, borrow
money for the purpose of clearing securities transactions, provided that such
borrowings shall under any circumstances be limited to the lesser of $10 million
and an amount equal to 10% of the Market Value of the Fund's assets at the time
of such borrowings and the Preferred Shares Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and if the
borrowing matures in not more than 60 days and shall not be extended or renewed;
or (iii) except in connection with a refinancing of the Preferred Shares, issue
any class or series of stock ranking prior to or on a parity with the Preferred
Shares with respect to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the Fund, or reissue any
Preferred Shares previously purchased or redeemed by the Fund; or (iv) engage in
any short sales of securities; (v) lend portfolio securities; or (vi) merge or
consolidate into or with any other fund. For purposes of valuation of Moody's
Eligible Assets: (A) if the Fund writes a call option, the underlying asset will
be valued as follows: (1) if the option is exchange-traded and may be offset
readily or if the option expires before the earliest possible redemption of the
Preferred Shares, at the lower of the Discounted Value of the underlying
security of the option and the exercise price of the option or (2) otherwise, it
has no value; (B) if the Fund writes a put option, the underlying asset will be
valued as follows: the lesser of (1) exercise price and (2) the Discounted Value
of the underlying security; and (C) call or put option contracts which the Fund
buys have no value. For so long as Preferred Shares are rated by Moody's: (A)
the Fund will not engage in options transactions for leveraging or speculative
purposes; (B) the Fund will not write or sell any anticipatory contracts
pursuant to which the Fund hedges the anticipated purchase of an asset prior to
completion of such purchase; (C) the Fund will not enter into an option
transaction with respect to portfolio securities unless, after giving effect
thereto, the Fund would continue to have Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic Maintenance
Amount; (D) the Fund will not enter into an option transaction with respect to
portfolio securities unless after giving effect to such transaction the Fund
would continue to be in compliance with the provisions relating to the Preferred
Shares Basic Maintenance Amount; (E) for purposes of the Preferred Shares Basic
Maintenance Amount assets in margin accounts are not Eligible Assets; (F) the
Fund shall write only exchange-traded options on exchanges approved by Moody's
(if Moody's is then rating the Preferred Shares); (G) where delivery may be made
to the Fund with any of a class of securities, the Fund shall assume for
purposes of the Preferred Shares Basic Maintenance Amount that it takes delivery
of that security which yields it the least value; (H) the Fund will not engage
in forward contracts; and (I) there shall be a
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quarterly audit made of the Fund's options transactions by the Fund's
independent accountants to confirm that the Fund is in compliance with these
standards.
For so long as any Preferred Shares are rated by S&P, the Fund will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the Preferred Shares by S&P, except that the Fund may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds") and write, purchase or sell put and call options on such contracts
(collectively, "S&P Hedging Transactions"), subject to the following
limitations: 1) the Fund will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions which terminate a futures contract
or option held by the Fund by the Fund's taking an opposite position thereto
("Closing Transactions")), which would cause the Fund at the time of such
transaction to own or have sold the least of (A) more than 1,000 outstanding
futures contracts based on the Municipal Index, (B) outstanding futures
contracts based on the Municipal Index exceeding in number 25% of the quotient
of the Market Value of the Fund's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal; (2) the Fund will not engage in any S&P
Hedging Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Fund at the time of such transaction to own or have sold
the lesser of (A) outstanding futures contracts based on Treasury Bonds and on
the Municipal Index exceeding in number 25% of the quotient of the Market Value
of the Fund's total assets divided by $100,000 ($200,000 in the case of the two-
year United States Treasury Note) or (B) outstanding futures contracts based on
Treasury Bonds exceeding in number 10% of the average number of daily traded
futures contracts based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal; (3) the Fund
will engage in Closing Transactions to close out any outstanding futures
contract which the Fund owns or has sold or any outstanding option thereon owned
by the Fund in the event (A) the Fund does not have S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount on two consecutive Valuation Dates and (B) the Fund is
required to pay [Variation Margin] on the second such Valuation Date; (4) the
Fund will engage in a Closing Transaction to close out any outstanding futures
contract or option thereon in the month prior to the delivery month under the
terms of such futures contract or option thereon unless the Fund holds the
securities deliverable under such terms; and (5) when the Fund writes a futures
contract or option thereon, it will either maintain an amount of cash, cash
equivalents or high grade (rated BBB or better by S&P), fixed-income securities
in a segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in the
account of or on behalf of the Fund's broker with respect to such futures
contract or option equals the Market Value of the futures contract or option, or
, in the event the Fund writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio. For purposes of this Section 12(h), "Initial Margin"
means the amount of cash or securities deposited with a broker as a margin
payment at the time of purchase or sale of a futures contract, and "Variation
Margin" means, in connection with an outstanding futures contract owned or sold
by the Fund, the amount of cash or securities paid to or received from a broker
(subsequent to the Initial Margin payment) from time to time as the price of
such futures contract fluctuates.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund. All
percentage limitations on investments will apply at the time of the making of an
investment and will not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. The Fund
may not:
1. Borrow money (through reverse repurchase agreements or otherwise)
to the extent such borrowing would result in a violation of Section 18 of the
Investment Company Act, or issue any senior securities (as defined in the
Investment Company Act) other than the Preferred Shares, certain money market
instruments or debt instruments related to borrowings described under
"Investment Objective and Policies -- Certain Investment Strategies --
Additional Leverage" in the Prospectus and this Statement of Additional
Information to the extent such instruments are deemed to constitute senior
securities; provided that for this purpose temporary borrowings in an amount not
exceeding 5% of the Fund's total assets (not including the amount borrowed) will
not be deemed a senior security.
Pursuant to Section 18 of the Investment Company Act, not more than 33
1/3% of the Fund's capital structure may consist of borrowings representing
indebtedness, such as money market instruments, and not more than 50% of the
Fund's capital structure may consist of borrowings represented by indebtedness,
such as money market instruments, and a senior class of stock, such as the
Preferred Shares.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction No. 1 above. Collateral
arrangements with respect to margin for futures contracts and options are not
deemed to be pledges or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities and
except that the Fund may make margin payments in connection with transactions in
futures contracts and options.
4. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open the Fund
owns an equal amount of such securities or owns securities that, without payment
of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
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5. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, the Fund
may be deemed to be an underwriter under the Federal securities laws.
6. Purchase or sell real estate, although the Fund may purchase
securities of issuers that deal in real estate, securities that are secured by
interests in real estate and securities representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that
the Fund may purchase or sell financial futures contracts and related options as
provided herein.
8. Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of the value of its
total assets, or through the lending of its portfolio securities with respect to
not more than one-third of the value of its total assets.
9. With respect to 75% of the value of the Fund's assets, invest in
securities of any issuer if, immediately after such investment, more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer or the Fund would own more than 10% of the outstanding voting securities
of such issuer, provided that this limitation does not apply to Government
Securities.
10. Invest more than 25% of the value of its total assets in any one
industry, provided that this limitation does not apply to Government Securities.
11. Invest more than 20% of the market or other fair value of its
total assets in illiquid securities, including securities that are not readily
marketable, securities that are restricted as to disposition under the Federal
securities laws or otherwise, repurchase agreements maturing in more than seven
days, interest-only and principal-only mortgaged backed securities, certain
options traded in the over-the-counter market and the securities to which such
options relate.
This restriction will not apply to securities received as a result of
a corporate reorganization or similar transaction affecting readily marketable
securities already held in the portfolio of the Fund; however, the Fund will
attempt to dispose in an orderly fashion of any securities received under these
circumstances to the extent that such securities, together with other illiquid
securities, exceed 20% of the market or other fair value of the Fund's total
assets.
12. Invest in the securities of other registered investment companies,
except as they may be acquired as part of a
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merger or consolidation or acquisition of assets or by purchases in the open
market involving only customary brokers' commissions.
-----------------------
Although the provisions of restrictions No. 2 (with respect to futures
contracts), No. 3 and No. 7 permit the Fund to engage in certain practices to a
limited extent, the Fund does not have any current intention of engaging in such
practices. See "Certain Investment Strategies -- Futures Contracts and Related
Options" in the Prospectus and this Statement of Additional Information. The
Fund will not make any investment permitted by the exceptions to the Fund's
investment restrictions if the investment would adversely affect the ratings
assigned by S&P and/or Moody's to the Preferred Shares. In addition, as noted,
certain practices are subject to the prior written approval of S&P and/or
Moody's.
CERTAIN TRADING STRATEGIES OF THE FUND
The following provides a detailed description of certain trading strategies
of the Fund, some of which are more briefly described in the Prospectus.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment
objective of the Fund in relation to actual and anticipated movements in
interest rates. The Fund's holdings include issues of various maturities.
Ordinarily, the Fund emphasizes investments in intermediate- and longer-term
instruments, that is, those with remaining maturities in excess of three years,
but the weighted average maturity of portfolio holdings may be shortened or
lengthened depending primarily upon SSBC's outlook for interest rates. To the
extent the weighted average maturity of the Fund's portfolio securities is
lengthened, the value of such holdings will be more susceptible to fluctuation
in response to changes in interest rates, creditworthiness and general economic
conditions.
SSBC actively makes portfolio adjustments that reflect the Fund's
investment strategy, but does not trade securities for the Fund for the purpose
of seeking short-term profits. SSBC does, however, trade the Fund's securities,
regardless of how long they have been held, when it believes doing so will
further the Fund's investment objective. Portfolio turnover is calculated by
dividing the lesser of sales or purchases of portfolio securities for any given
year by the average monthly value of the Fund's portfolio securities for such
year. For purposes of this calculation, portfolio securities exclude purchase
and sales of debt securities having a maturity at the date of purchase of one
year or less. In periods when there are rapid changes in economic conditions or
security price levels or when investment strategy is changed significantly,
portfolio
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turnover may be significantly higher than during times of economic and market
price stability, when investment strategy remains relatively constant. A high
rate of portfolio turnover will result in increased transaction costs for the
Fund. For the fiscal years ended March 31, 1998 and 1999, the Fund's portfolio
turnover rates were 91% and 79%, respectively.
Securities Loans
To the extent permitted by S&P and Moody's, the Fund may make secured
loans of its portfolio securities amounting to not more than one-third of the
value of its total assets, thereby realizing additional income. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delays in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. As a matter of policy,
securities loans are made to unaffiliated broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or short-term
debt obligations at least equal at all times to the value of the securities
subject to the loan. The borrower pays to the Fund an amount equal to any
interest or dividends received on securities subject to the loan. The Fund
retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities, pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved.
When-Issued and Delayed-Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery
basis. When-issued and delayed-delivery transactions arise when securities are
purchased or sold with payment and delivery beyond the regular settlement date
(that is, delivery and payment can take place a month or more after the date of
the transaction). On such transactions the payment obligation and the interest
rate are fixed at the time the buyer enters into the commitment. The securities
so purchased are subject to market fluctuation, and no interest accrues to the
Fund until delivery and payment take place.
At the time the Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value of such securities in determining its net asset
value. The Fund will make commitments for such when-issued transactions only
with the intention of actually acquiring the securities. Beginning on the date
the Fund enters into a commitment to purchase securities on a when-issued or
delayed delivery basis, it is required under
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<PAGE>
rules promulgated by the Securities and Exchange Commission to maintain in a
segregated account cash or liquid assets, equal in value to the purchase price
due on the settlement date. The Fund's custodian bank will maintain, in a
separate account of the Fund, cash, cash equivalents or other liquid securities
from its portfolio, marked to market daily and having value equal to or greater
than such commitments. On delivery dates for such transactions, the Fund will
meet its obligations from maturities or sales of the securities held in the
separate account and/or from then available cash flow.
Placing securities rather than cash in the segregated account may have
a leveraging effect on the Fund's net asset value per share; that is, to the
extent that the Fund remains substantially fully invested in securities at the
same time that it has committed to purchase securities on a when-issued or
delayed delivery basis, greater fluctuations in its net asset value per share
may occur than if it had set aside cash to satisfy its purchase commitments.
If the Fund chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, it could, as with the disposition of other
portfolio obligations, incur a gain or loss due to market fluctuation. The
commitment to purchase securities on a when-issued or delayed delivery basis may
involve an element of risk because the value of the securities is subject to
market fluctuation. No interest accrues to the purchaser prior to settlement of
the transaction, and at the time of delivery the market value may be less than
cost. The purchase of securities on a when-issued or delayed delivery basis is
not limited by the S&P or Moody's guidelines.
Options
The Fund may write (sell) call options that are traded on national
securities exchanges with respect to securities in its portfolio. The Fund may
only write "covered" call options. A call option written by the Fund will be
deemed covered (1) if the Fund owns the securities underlying the call or has an
absolute and immediate right to acquire those securities without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio, (2) if the Fund holds a call at the same exercise price for the same
exercise period and on the same securities as the call written or (3) if, at the
time the call is written, an amount of cash, Government Securities or other
liquid securities equal to the fluctuating market value of the optioned
securities, is segregated with the Fund's custodian.
The Fund may write call options on its portfolio securities in an
attempt to realize a greater current return than would be realized on the
securities alone. The Fund may also write call options as a partial hedge
against a possible market decline. In view of its investment objective, the Fund
generally would write call options only in circumstances in which SSBC does
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<PAGE>
not anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a call option, the Fund receives a premium for undertaking the obligation to
sell the underlying security at a fixed price during the option period, if the
option is exercised. So long as the Fund remains obligated as a writer of a call
option, it will forego the opportunity to profit from increases in the market
price of the underlying security above the exercise price of the option, except
insofar as the premium represents such a profit (and retains the risk of loss
should the value of the underlying security decline). The Fund may also enter
into "closing purchase transactions" in order to terminate its obligation as a
writer of a call option prior to the expiration of the option. Although the
writing of call options only on national securities exchanges increases the
likelihood that the Fund will be able to make closing purchase transactions,
there is no assurance that the Fund will be able to effect such transactions at
any particular time or at an acceptable price. The writing of call options could
result in increases in the Fund's portfolio turnover rate, especially during
periods when market prices of the underlying securities appreciate. Income (or
loss) from the exercise, expiration or closing out of written or purchased
options will generally be short- or long-term capital gain (or loss).
Futures Contracts and Related Options
The Fund has reserved the right, subject to the approval of its Board
of Directors and to the extent permitted by S&P and Moody's, to enter into
transactions involving financial futures contracts and options on such futures
contracts. The Fund may, for example, undertake these transactions for the
purpose of hedging its portfolio securities (or portfolio securities that it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if SSBC anticipates that interest rates may
rise, in which event the Fund could sell a futures contract to protect against
the potential decline in the value of its portfolio securities. Conversely, if
declining interest rates were anticipated, the Fund could purchase a futures
contract to protect against a potential increase in the price of securities the
Fund intends to purchase.
Commodity Futures Trading Commission regulations permit the Fund to
enter into futures contracts and related options for bona fide hedging purposes
and, in addition, for other purposes, so long as aggregate initial margin and
premiums required to establish such non-hedge positions do not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts.
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<PAGE>
In addition, the Fund's positions in futures contracts, as well as
options on futures written by the Fund, will be collateralized with cash or
certain liquid assets held in a segregated account or covered in order to
eliminate any potential leveraging. The extent to which the Fund may enter into
transactions involving futures contracts may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code") for qualification by
the Fund as a regulated investment company.
Description of Financial Futures and Options. A futures contract is a
contract between a seller and a buyer for the sale and purchase of specified
property at a specified future date for a specified price. An option is a
contract that gives the holder of the option the right, but not the obligation,
to buy (in the case of a call option) specified property from, or to sell (in
the case of a put option) specified property to, the writer of the option for a
specified price during a specified period prior to the option's expiration.
Financial futures contracts and options cover specified debt securities (such as
U.S. Treasury securities) or indexes designed to correlate with price movements
in certain categories of debt securities. Financial futures contracts and
options on financial futures contracts are traded on exchanges regulated by the
Commodity Futures Trading Commission. Options on certain financial instruments
and financial indexes are traded on securities markets regulated by the
Securities and Exchange Commission. Although futures contracts and options on
specified financial instruments call for settlement by delivery of the financial
instruments covered by the contracts, in most cases positions in these contracts
are closed out in cash by entering into offsetting liquidating or closing
transactions. Index futures and options are designed for cash settlement only.
Repurchase Agreements
To the extent permitted by S&P and Moody's, the Fund may enter into
repurchase agreements on up to 25% of the value of its total assets. A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell the same security
on a future date at a specified price representing the Fund's cost plus
interest. Repurchase agreements are considered to be loans whose collateral is
the underlying security that is the subject of the repurchase agreement. It is
the Fund's present intention to enter into repurchase agreements only with
commercial banks and registered broker-dealers and only with respect to
Government Securities.
The risk to the Fund under this type of agreement is limited to the
ability of the other party to pay the agreed-upon repurchase price on the
delivery date; however, although the value of the underlying collateral at the
time of the transaction
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<PAGE>
always equals or exceeds the repurchase price, if the value of the collateral
declines there is a risk of loss of principal and interest. If the other party
defaults, the collateral may be sold, but the Fund may lose money if the value
of the collateral declines and may have to pay the costs of the sale or
experience delays in selling the collateral. In addition, if the seller should
be involved in bankruptcy or insolvency proceedings, the Fund may incur delay
and costs in selling the underlying security or may suffer a loss of principal
and interest if the Fund is treated as an unsecured creditor and is required to
return the underlying collateral to the seller's estate. SSBC will monitor the
value of the collateral at the time the Fund enters into a repurchase agreement
and during the term of the repurchase agreement to determine that at all times
the value of the collateral equals or exceeds the repurchase price. If the value
of the collateral is less than the repurchase price, SSBC will demand additional
collateral from the other party to increase the value of the collateral to at
least the redemption price plus interest. SSBC will also monitor, on an ongoing
basis to evaluate potential risks, the creditworthiness of those parties with
which the Fund enters into repurchase agreements.
Reverse Repurchase Agreements
To the extent permitted by S&P and Moody's, the Fund may enter into
reverse repurchase agreements with respect to debt obligations that could
otherwise be sold by the Fund. A reverse repurchase agreement is an instrument
under which the Fund sells an underlying debt instrument and simultaneously
obtains the commitment of the purchaser (a commercial bank or a broker or
dealer) to sell the security back to the Fund at an agreed upon price on an
agreed upon date. The value of underlying securities will be required to be
maintained at a level at least equal at all times to the total amount of the
resale obligation, including interest. The Fund receives payment for these
securities only upon physical delivery or evidence of book entry transfer by its
custodian. Securities sold by the Fund under a reverse repurchase agreement will
be segregated pending repurchase or the proceeds will be segregated on the
Fund's books and records pending repurchase.
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 Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them.
Reverse repurchase agreements will be considered borrowings by the
Fund and as such will be subject to the restrictions on borrowing described in
this Statement of Additional Information under "Investment Restrictions." The
Fund
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<PAGE>
will not hold more than 5% of the value of its total assets in reverse
repurchase agreements.
Foreign Investments
The Fund may invest up to 10% of the value of its total assets in
securities principally traded in foreign markets. In addition, subject to the
Fund's basic investment strategy, the Fund may also purchase Eurodollar
certificates of deposit issued by branches of U.S. and foreign banks. The Fund
may buy or sell foreign currencies or deal in forward foreign currency contracts
in connection with the purchase and sale of foreign investments. There are
certain risks involved in investing in securities of companies and governments
of foreign nations that are in addition to the usual risks inherent in domestic
investments.
The risks of investing in foreign securities include those resulting
from devaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange restrictions or
other foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The Fund may be adversely
affected, when holding foreign securities, by fluctuations in value of one or
more foreign currencies relative to the U.S. dollar. Moreover, securities of
many foreign issuers and their markets may be less liquid and their prices more
volatile than those of securities of comparable domestic issues. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation, limitations on the use or
removal of funds or other assets of the Fund, including the withholding of
dividends, potential difficulties enforcing contractual obligations and extended
clearance and settlement periods. Foreign securities may be subject to foreign
government taxes that could reduce the yield on such securities.
Investments in foreign securities also may result in higher expenses
due to the cost of converting foreign currency to U.S. dollars, the payment of
fixed brokerage commissions on foreign exchanges, the expense of maintaining
securities with foreign custodians and the imposition of transfer taxes or
transaction charges associated with foreign exchanges.
Additional Leverage
The Fund has reserved the right to borrow money to the extent the
borrowing would not result in a violation of Section 18 of the Investment
Company Act. Pursuant to Section 18 of the Investment Company Act, not more than
33 1/3% of the Fund's capital
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<PAGE>
structure may consist of borrowings representing indebtedness and not more than
50% of the Fund's capital structure may consist of borrowings represented by
indebtedness and a senior class of stock, such as the Preferred Shares.
The Fund may borrow to the extent permitted by the Investment Company
Act through the public or private issuance of debt securities or from lenders of
all types, such as banks, savings and loan associations, insurance companies and
similar financial institutions. It is anticipated that borrowings will be
effected by the Fund primarily to provide additional liquidity. However, the
Fund reserves the right to use the proceeds of borrowings for any other purpose,
including additional investment leverage. The Preferred Shares are subject to
mandatory redemption in certain circumstances.
Should the Preferred Shares be redeemed in whole or in part it is the
Fund's intention to leverage through the further issuance of senior securities,
subject to the Fund's Board of Directors' determination that such issuance is
appropriate in light of relative interest rates, general economic conditions and
other relevant factors and subject to compliance with the Investment Company
Act.
DESCRIPTION OF PREFERRED SHARES
The following provides, with respect to the Preferred Shares, a further
description of certain matters which are included under "Description of
Preferred Shares" in the Prospectus along with a description of certain matters
which are not included therein.
General
The Preferred Shares have a liquidation preference equal to their
Liquidation Value per share, plus all accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date of final distribution. The
Preferred Shares, when issued and sold through this offering, will (i) be fully
paid and non-assessable, (ii) not be convertible into Common Stock or other
capital stock of the Fund, (iii) have no preemptive rights and (iv) not be
subject to any sinking fund. The Preferred Shares will be subject to optional
and mandatory redemption as described below under "Redemption."
Holders of the Preferred Shares will not receive certificates
representing their ownership interest in such shares. The Depository Trust
Clearing Corporation will act as securities depository for the Agent Members
with respect to the Preferred Shares.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, the Auction Agent will act as the transfer
agent, registrar, and paying agent for the Preferred Shares. Furthermore, the
Auction Agent will send notices to holders of the Preferred Shares of any
25
<PAGE>
meeting at which holders of Preferred Shares have the right to vote. See
"Description of Preferred Shares -- Voting Rights" below and in the Prospectus.
However, the Auction Agent generally will serve merely as the agent of the Fund,
acting in accordance with the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any Preferred
Shares, so long as the Fund is current in the payment of dividends on the
Preferred Shares and on any other capital shares of the Fund ranking on a parity
with the Preferred Shares with respect to the payment of dividends or upon
liquidation.
Dividends and Dividend Periods
The holders of Preferred Shares will be entitled to receive out of
funds legally available therefor, cumulative cash dividends on their shares, at
the Applicable Rate determined as set forth below under "Determination of
Dividend Rate," payable on the respective dates set forth below. Dividends so
declared and payable shall be paid to the extent permitted under the Code and to
the extent available and in preference to and with priority over any dividend
declared and payable on the Common Stock.
On the Business Day next preceding each Dividend Payment Date, the
Fund is required to deposit with the Paying Agent sufficient funds for the
payment of declared dividends. The Fund does not intend to establish any
reserves for the payment of dividends.
Each dividend will be paid to the record holder, which holder is
expected to be the nominee of the Securities Depository. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depository's normal procedures. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. The
Agent Member of a beneficial owner will be responsible for holding or disbursing
such payments on the applicable Dividend Payment Date to such beneficial owner
in accordance with the instructions of such beneficial owner. Dividends in
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the nominee of the
Securities Depository. Any dividend payment shall first be credited against the
earliest declared but unpaid dividends.
Holders will not be entitled to any dividends, whether payable in
cash, property or shares, in excess of full cumulative dividends except as
described under "Determination of Dividend Rate" below. No interest will be
payable in respect of any
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dividend payment or payments which may be in arrears. See "Default Period"
below.
The amount of dividends per Outstanding share payable (if declared) on
each Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) such share was Outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by the Liquidation Value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
shall be computed as described in the preceding sentence, except that it will be
determined on the basis of a year consisting of twelve 30-day months.
Determination of Dividend Rate. The dividend rate during the period
from and including the Date of Original Issue to and including the initial
Auction Date will be the rate per annum set forth on the cover page of the
Prospectus. The first Auction Date will be as set forth on the cover page of the
Prospectus. For each subsequent Dividend Period, subject to certain exceptions,
the dividend rate will be the Applicable Rate that the Auction Agent advises the
Fund has resulted from an Auction.
Notification of Dividend Period. The Fund will designate the duration
of Dividend Periods; provided, however, that no such designation is necessary
for a Standard Term Period and that any designation of an Alternate Term Period
shall be effective only if (i) notice thereof shall have been given as provided
herein, (ii) any failure to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, the Preferred Shares
shall have been cured as set forth under "Default Period," (iii) Sufficient
Clearing Orders shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Alternate Term Period, (iv)
if the Fund shall have mailed a notice of redemption with respect to any shares,
as described under "Redemption" below, the Redemption Price with respect to such
shares shall have been deposited with the Paying Agent, and (v) the Fund has
confirmed that, as of the Auction Date next preceding the first day of such
Alternate Term Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the Preferred Shares Basic Maintenance Amount and has
consulted with the Broker-Dealers and has provided notice and a Preferred Shares
Basic Maintenance Certificate (as defined below) to S&P (if S&P is then rating
the Preferred Shares), to Moody's (if Moody's is then rating the Preferred
Shares) and any Other
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Rating Agency which is then rating the Preferred Shares and so requires.
If the Fund proposes to designate any Alternate Term Period, not fewer
than 15 (or two Business Days in the event the duration of the Dividend Period
prior to such Alternate Term Period is fewer than 15 days) nor more than 30 days
prior to the first day of such Alternate Term Period, notice shall be (i) made
by press release and (ii) communicated by the Fund by telephonic or other means
to the Auction Agent and confirmed in writing promptly thereafter. Each such
notice shall state (A) that the Fund proposes to exercise its option to
designate a succeeding Alternate Term Period, specifying the first and last days
thereof and (B) that the Fund will by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such Alternate Term Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to proceed with such
Alternate Term Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Alternate Term Period in which latter event the succeeding Dividend Period
shall be a Standard Term Period.
No later than 3:00 p.m., New York City time, on the second Business
Day next preceding the first day of any proposed Alternate Term Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the Broker-
Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as an Alternate Term Period, specifying the
first and last days thereof and (B) the terms of the Specific Redemption
Provisions, if any; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate an Alternate Term Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Alternate Term Period to the Auction Agent or is unable to make
the confirmation described above by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such proposed Alternate Term
Period, the Fund shall be deemed to have delivered a notice to the Auction Agent
with respect to such Dividend Period to the effect set forth in clause (ii)
above, thereby resulting in a Standard Term Period.
Default Period. A "Default Period" will commence on the applicable
date set forth below if the Fund fails to
(i) declare prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on, or (to the extent permitted
as described below)
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<PAGE>
within two Business Days after, such Dividend Payment Date
to the persons who held Preferred Shares as of 12:00 noon, New York City time,
on the Business Day preceding such Dividend Payment Date, the full amount of any
dividend payable on such Dividend Payment Date,
(ii) to deposit, irrevocably in trust, in same-day funds, with a
designated paying agent by 12:00 noon, New York City time, (A) on or (to the
extent permitted as described below) within two Business Days after any Dividend
Payment Date the full amount of any declared dividend on the Preferred Shares
payable on such Dividend Payment Date (together with the failure to timely
declare dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
Business Days after any date fixed for redemption of Preferred Shares called for
redemption, the applicable redemption price (a "Redemption Default"), or
(iii) to maintain the AAA/aaa Credit Rating unless the AAA/aaa Credit
Rating is restored by the Dividend Payment Date next following the date on which
the Fund fails to maintain the AAA/aaa Credit Rating (a "Rating Default").
A Default Period with respect to a Dividend Default or a Redemption
Default will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be, and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid dividends and unpaid redemption price shall have been so
deposited or shall have otherwise been made available to the applicable holders
in same day funds. A Default Period with respect to a Rating Default shall
commence as of the date on which the Fund fails to maintain the AAA/aaa Credit
Rating (provided that such Rating Default shall be deemed not to have occurred
and such Default Period shall not commence if such Rating Default is cured by
the next succeeding Dividend Payment Date) and shall end on the earlier of the
date on which such default is cured as provided herein or the date on which the
Preferred Shares mandatorily redeemed as provided herein. Holders of two-thirds
of the Preferred Shares then Outstanding may waive any Dividend Default,
Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend
Period commencing during a Default Period, will be equal to the Default Rate;
and each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Term Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Dividend
Period. Any dividend due on any Dividend Payment Date (if, prior to 12:00 noon,
New York City time, on such Dividend Payment Date, the Fund has declared such
dividend payable on or within two Business Days after such Dividend
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<PAGE>
Payment Date to the persons who held such shares as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date) or redemption
price with respect to such shares not paid to such persons when due may (if such
default is not solely due to the willful failure of the Fund) be paid to such
Persons in the same form of funds by 12:00 noon, New York City time, on any of
the first two Business Days after such Dividend Payment Date or due date, as the
case may be, provided that such amount is accompanied by an additional amount
for such period of non-payment at the Default Rate applied to the amount of such
default based on the actual number of days comprising such period divided by
360. For the purposes of the foregoing, payment to a person in same-day funds
made on or before 12:00 noon New York City time on any Business Day at any time
will be considered equivalent to payment to that person in New York Clearing
House (next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the Preferred Shares, it will be distributed to the
holders of the Common Stock. The term "net investment income" includes interest,
dividends, short-term capital gains and other income received or accrued less
the advisory fee, bank custodian charges, taxes (except capital gain taxes) and
other expenses properly chargeable against income, but does not include net
capital gains, stock dividends, transfer taxes, brokerage or other capital
charges or distributions designated as a return of capital. Any realized net
capital gains (defined as the excess of net long-term capital gains over net
short-term capital losses) of the Fund will be distributed annually to the
holders of the Common Stock (subject to the prior rights of the holders of the
Preferred Shares) subject to the foregoing and any requirements of Maryland law.
Restrictions on Dividends and Other Payments. Under the Investment
Company Act, the Fund may not declare dividends or make other distributions on
the Common Stock or purchase any Common Stock if, at the time of the
declaration, distribution or purchase, as applicable (and after giving effect
thereto), asset coverage (as defined in the Investment Company Act) with respect
to the outstanding Preferred Shares would be less than 200%. Under the Code, the
Fund must, among other things, distribute at least 90% of its investment company
taxable income each year in order to maintain its qualification for tax
treatment as a regulated investment company. The foregoing limitation on
dividends, distributions and purchases may in certain circumstances impair the
Fund's ability to maintain such qualification. The Fund intends, however, to
redeem Preferred
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<PAGE>
Shares to the extent necessary to maintain such qualification. See "Taxes" below
and in the Prospectus.
Upon failure to pay dividends for two years or more, the holders of
Preferred Shares will acquire certain additional voting rights. See "Description
of Preferred Shares -- Voting Rights" below and in the Prospectus. Such rights
shall be the exclusive remedy of the holders of Preferred Shares upon any
failure to pay dividends on the Preferred Shares.
For so long as any Preferred Shares are outstanding, the Fund will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Stock or other stock, if any,
ranking junior to the Preferred Shares as to dividends or upon liquidation) in
respect of the Common Stock or any other stock of the Fund ranking junior to the
Preferred Shares as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any shares of Common
Stock or any other junior stock (except by conversion into or exchange for stock
of the Fund ranking junior to the Preferred Shares as to dividends and upon
liquidation), unless
(1) immediately after such transaction, the Preferred Shares Basic
Maintenance Amount and the Investment Company Act Preferred Shares Asset
Coverage (see "Description of Preferred Shares -- Asset Maintenance" and --
Redemption" below) would be achieved,
(2) full cumulative dividends on Preferred Shares due on or prior to
the date of the transaction have been declared and paid (or sufficient Deposit
Securities (see "Deposit Securities Requirement") maturing on or prior to the
date fixed for their payment have been set apart for their payment) and
(3) the Fund has redeemed the full number of Preferred Shares required
to be redeemed by any provision for mandatory redemption contained in the
Articles of Incorporation.
Redemption
Optional Redemption. To the extent permitted under the Investment
Company Act and Maryland law, the Fund at its option may redeem Preferred Shares
having a Dividend Period of less than one year, in whole or in part, on the
Business Day after the last day of such Dividend Period upon not less than 15
days and not more than 25 days prior notice. The optional redemption price per
share shall be the Liquidation Value per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption.
Preferred Shares having a Dividend Period of more than one year may be
redeemable at the option of the Fund prior to the
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<PAGE>
end of the relevant Dividend Period, subject to any Specific Redemption
Provisions, which may include the payment of redemption premiums to the extent
required under any applicable Specific Redemption Provisions.
The Fund shall not effect any optional redemption unless after giving
effect thereto (i) the Fund has available certain Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to holders of Preferred Shares by reason of the
redemption of Preferred Shares on such date fixed for the redemption and (ii)
the Fund would have Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount.
The Fund also reserves the right to repurchase Preferred Shares in
market or other transactions from time to time in accordance with applicable law
and at a price that may be more or less than the liquidation preference of the
Preferred Shares, but is under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount or, as of the last
Business Day of any month, the Investment Company Act Preferred Shares Asset
Coverage, and such failure is not cured within two Business Days following the
relevant Valuation Date in the case of a failure to maintain the Preferred
Shares Basic Maintenance Amount or the last Business Day of the following month
in the case of a failure to maintain Investment Company Act Preferred Shares
Asset Coverage as of such last Business Day (each an "Asset Coverage Cure
Date"), the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. See "Description of Preferred Shares -- Asset
Maintenance."
The number of Preferred Shares to be redeemed in such circumstances
will be equal to the lesser of (i) the minimum number of Preferred Shares the
redemption of which, if deemed to have occurred immediately prior to the opening
of business on the relevant Asset Coverage Cure Date, would result in the Fund
having Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount, or sufficient to satisfy Investment
Company Act Preferred Shares Asset Coverage, as the case may be, in either case
as of the relevant Asset Coverage Cure Date (provided that, if there is no such
minimum number of shares the redemption of which would have such result, all
Preferred Shares then Outstanding will be redeemed), and (ii) the maximum number
of Preferred Shares that can be redeemed out of funds expected to be available
therefor on the Mandatory Redemption Date (as defined below) at the Mandatory
Redemption Price (as defined below).
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<PAGE>
The Fund shall allocate the number of shares required to be redeemed
to satisfy the Preferred Shares Basic Maintenance Amount or the Investment
Company Act Preferred Shares Asset Coverage, as the case may be, pro rata among
the holders of Preferred Shares in proportion to the number of shares they hold.
If the Fund at any time fails to maintain the AAA/aaa Credit Rating
for the Preferred Shares, and such failure is not cured within 90 calendar days
thereafter (the "Rating Default Cure Date"), all Preferred Shares will be
subject to mandatory redemption out of funds legally available therefor, on the
Mandatory Redemption Date, and dividends thereon will be payable at the Default
Rate until such redemption is effected as provided above under "Dividends and
Dividend Periods-Default Period." To maintain the AAA/aaa Credit Rating, the
Fund must maintain a rating for the Preferred Shares in the highest rating
category from any two nationally recognized statistical rating organizations, as
used in the rules and regulations under the Securities Exchange Act of 1934, as
amended, one of which shall be S&P or Moody's.
The Fund is required to effect such a mandatory redemption not later
than 30 days after the Asset Coverage Cure Date or the Rating Default Cure Date,
as the case may be (the "Mandatory Redemption Date"), except that if the Fund
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of Preferred Shares
which are subject to mandatory redemption, or the Fund otherwise is unable to
effect such redemption on or prior to such Mandatory Redemption Date, the Fund
will redeem those Preferred Shares on the earliest practicable date on which the
Fund will have such funds available, upon notice to record owners of Preferred
Shares and the Paying Agent. The Fund's ability to make a mandatory redemption
may be limited by the provisions of the Investment Company Act or Maryland law.
The redemption price per share in the event of any mandatory
redemption will be the Liquidation Value per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption plus (in the case of a Dividend Period of not less
than one year) any redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealer and set forth in any
applicable Specific Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the Investment
Company Act, the Fund will file a notice of its intention to redeem with the
Commission so as to provide at least the minimum notice required by such Rule or
any successor provision (notice currently must be filed with the Commission at
least 30 days prior to the redemption date). The Auction Agent will use its
reasonable efforts to provide telephonic notice to each Holder of Preferred
Shares called for redemption not later
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<PAGE>
than the close of business on the Business Day immediately following the
Business Day on which the Auction Agent determines the shares to be redeemed
(or, during a Default Period with respect to such shares, not later than the
close of business on the Business Day immediately following the day on which the
Auction Agent receives notice of redemption from the Fund). Such telephonic
notice will be confirmed promptly in writing not later than the close of
business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each Holder of record of Preferred Shares
called for redemption, the Paying Agent (if different from the Auction Agent)
and the Securities Depository ("Notice of Redemption").
Notice of Redemption will be addressed to the registered owners of the
Preferred Shares at their addresses appearing on the share records of the Fund.
Such notice will set forth (i) the redemption date, (ii) the number and identity
of Preferred Shares to be redeemed, (iii) the redemption price (specifying the
amount of accumulated dividends to be included therein), (iv) that dividends on
the shares to be redeemed will cease to accumulate on such redemption date, and
(v) the provision under which redemption shall be made.
If fewer than all of the Preferred Shares are redeemed on any date,
the shares to be redeemed on such date will be selected by the Fund on a pro
rata basis in proportion to the number of shares held by such holders, by lot or
by such other method as is determined by the Fund to be fair and equitable,
subject to the terms of any Specific Redemption Provisions. Preferred Shares may
be subject to mandatory redemption as described herein notwithstanding the terms
of any Specific Redemption Provisions. The Auction Agent will give notice to the
Securities Depository, whose nominee will be the record holder of all of the
Preferred Shares, and the Securities Depository will determine the number of
shares to be redeemed from the account of the Agent Member of each beneficial
owner. Each Agent Member will determine the number of shares to be redeemed from
the account of each beneficial owner for which it acts as agent. An Agent Member
may select for redemption shares from the accounts of some beneficial owners
without selecting for redemption any shares from the accounts of other
beneficial owners. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares, the
particular shares to be redeemed shall be selected by the Fund by lot, on a pro
rata basis or by such other method as the Fund shall deem fair and equitable, as
contemplated above.
In connection with any redemption, whether optional or mandatory, the
Fund shall pay, together with the redemption price, an amount equal to all
accumulated dividends, whether or not such dividends have been earned or
declared through the redemption date.
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<PAGE>
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be Outstanding for any purpose. The Fund shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the Preferred Shares called for redemption on such date and
(ii) such other amounts, if any, to which holders of Preferred Shares called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Fund upon its
request. Thereupon the Paying Agent will be relieved of all responsibility to
the owners of such shares and such owners may look only to the Fund for payment.
So long as any Preferred Shares are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures now provide for it to distribute the amount of
the redemption price to Agent Members who, in turn, are expected to distribute
such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no
Preferred Shares may be redeemed unless all dividends in arrears on the
Outstanding Preferred Shares, and all capital stock of the Fund ranking on a
parity with the Preferred Shares with respect to the payment of dividends or
upon liquidation, have been or are being contemporaneously paid or set aside for
payment, except in connection with the liquidation of the Fund in which case all
Preferred Shares and all shares ranking in a parity with the Preferred Shares
must receive proportionate amounts.
Except for the provisions described above, nothing contained in the
Articles Supplementary limits any legal right of the Fund to purchase or
otherwise acquire any Preferred Shares outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on or the mandatory or
optional redemption price with respect to, any Preferred Shares for which Notice
of Redemption has been given and the Fund is in compliance with the Investment
Company Act Preferred Shares Asset Coverage and has Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount after giving effect to such purchase or
35
<PAGE>
acquisition on the date thereof. Any shares which are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the outstanding Preferred Shares are redeemed or otherwise acquired by the Fund,
the Fund shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.
Restrictions on Transfer
Preferred Shares may be transferred only
(a) pursuant to an Order placed in an Auction,
(b) to or through a Broker-Dealer,
(c) to a person that has delivered a signed Master Purchaser's Letter
to the Auction Agent or
(d) to the Fund or any Affiliate.
Notwithstanding the foregoing, a transfer other than pursuant to an
Auction will not be effective unless the selling Existing Holder or the Agent
Member of such Existing Holder, in the case of an Existing Holder whose shares
are listed in its own name on the books of the Auction Agent, or the Broker-
Dealer or Agent Member of such Broker-Dealer, in the case of a transfer between
persons holding Preferred Shares through different Broker-Dealers, advises the
Auction Agent of such transfer. The certificates representing the Preferred
Shares issued to the Securities Depository will bear legends with respect to the
restrictions described above and stop-transfer instructions will be issued to
the Transfer Agent and/or Registrar.
Asset Maintenance
The Fund is required to satisfy two separate asset coverage
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
Preferred Shares Basic Maintenance Amount. The Fund is required to
maintain as of each Valuation Date Eligible Assets having in the aggregate a
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount, calculated separately for S&P (if S&P is then rating the Preferred
Shares) and Moody's (if Moody's is then rating the Preferred Shares). For this
purpose, the Market Value of the Fund's portfolio securities is (i) computed
based upon one or more pricing services agreements approved by the Board of
Directors or (ii) the lower bid price from two independent dealers in
securities, one of which bids shall be in writing. The Fund has a pricing
services agreement with Muller Data Corporation. The Fund may substitute another
pricing service, provided that it has received notice from S&P (if S&P is then
rating the Preferred Shares and only in the case that the Fund wishes to
substitute a pricing service not approved by S&P) and Moody's (if Moody's is
then rating the Preferred Shares) that such
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<PAGE>
substitution will not impair the AAA/aaa Credit Rating. If the Fund fails to
maintain Eligible Assets having in the aggregate a Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount as of any Valuation Date
and such failure is not cured on or before the related Asset Coverage Cure Date,
the Fund will be required in certain circumstances to redeem certain of the
Preferred Shares. See "Description of Preferred Shares -- Redemption."
The "Preferred Shares Basic Maintenance Amount" as of any Valuation
Date is defined as the dollar amount equal to the sum of
(1) (A) the products resulting from multiplying the number of
outstanding Preferred Shares on such date by the Liquidation Value per
share; (B) the aggregate amount of dividends that will have accumulated at
the Applicable Rate (whether or not earned or declared) to and including
the first following Dividend Payment Date for each Preferred Share
outstanding that follows such Valuation Date (or to the 49th day after such
Valuation Date, if such 49th day occurs before the first following Dividend
Payment Date); (C) the aggregate amount of dividends that would accumulate
at the then current Maximum Applicable Rate for the Exposure Period
multiplied by the Volatility Factor on any Preferred Shares outstanding
from the first day following the Dividend Payment Date referred to in (B)
above through the 49th day after such Valuation Date, but only if such 49th
day occurs after the first day following the Dividend Payment Date, except
that if such Valuation Date occurs during a Default Period, the dividend
for purposes of the calculation would accumulate at the Default Rate; (D)
the amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date; (E) any current liabilities, including, without limitation,
indebtedness due within one year and any redemption premium due with
respect to Preferred Shares for which a Notice of Redemption has been
given, as of such Valuation Date to the extent not reflected in any of
(1)(A) through (1)(D); less
(2) the sum of any cash or the value of any Fund assets irrevocably
deposited by the Fund for the payment of any of (1)(B) through (1)(D)
("value," for purposes of this clause (2), shall mean the Discounted Value
of the security, except that if the security matures prior to the relevant
redemption payment date and is either fully guaranteed by the U.S.
Government or is rated A1+ by S&P and P-1 by Moody's, it will be valued at
its face value).
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Solely for purposes of calculating the Preferred Shares Basic
Maintenance Amount, interest on borrowed funds outstanding as of any date will
be treated as dividend payments, at a deemed dividend rate equal to the interest
rate payable on such funds on the relevant date, but shall be subject to
multiplication by the larger of the factors that the Fund has been informed by
S&P (if S&P is then rating the Preferred Shares) or Moody's (if Moody's is then
rating the Preferred Shares) are applicable (as described in 1(C) above) only in
the event that interest on such borrowed funds is payable on the basis of a
variable rate of interest, and the interest rate is subject to change within the
relevant 49-day period.
The discount factors, the criteria used to determine whether the
assets held in the Fund's portfolio are Eligible Assets and guidelines for
determining the market value of the Fund's portfolio holdings have been based on
criteria established in connection with rating the Preferred Shares. These
factors include, but are not limited to, the sensitivity of the market value of
the relevant asset to changes in interest rates, the liquidity and depth of the
market for the relevant asset, the credit quality of the relevant asset (for
example, the lower the rating of a debt obligation, the higher the related
discount factor) and the frequency with which the relevant asset is marked to
market. In no event shall the Discounted Value of any asset of the Fund exceed
its unpaid principal balance or face amount as of the date of calculation.
The Discount Factor relating to any asset of the Fund, the Preferred
Shares Basic Maintenance Amount, the assets eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Fund, without stockholder approval, but only in the event that
the Fund receives written confirmation from S&P (if S&P is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred Shares) and
any Other Rating Agency which is then rating the Preferred Shares and which so
requires that any such changes would not impair the AAA/aaa Credit Rating. If
the Fund fails to maintain the AAA/aaa Credit Rating and is unable to restore
the AAA/aaa Credit Rating by the Rating Default Cure Date, the Fund will be
required to redeem the Preferred Shares. See "Description of Preferred Shares -
- - Redemption" and "S&P and Moody's Guidelines" above.
Investment Company Act Preferred Shares Asset Coverage. The Fund is
required under the Articles Supplementary to maintain Investment Company Act
Preferred Shares Asset Coverage on each Friday, or, if such day is not a
Business Day, the next preceding Business Day, in which any Preferred Shares are
outstanding. If the Fund fails to maintain Investment Company Act Preferred
Shares Asset Coverage and such failure is not cured as of the related Asset
Coverage Cure Date, the Fund will be required to
38
<PAGE>
redeem certain Preferred Shares. See "Description of Preferred Shares --
Redemption."
The Fund estimates that on the Date of Original Issue of the Preferred
Shares, based on the composition of its portfolio as of March 31, 2000, the
Investment Company Act Preferred Shares Asset Coverage, after giving effect to
the issuance of the Preferred Shares ($60 million) and the deduction of
estimated offering expenses for such shares ($ ), will be computed as
follows:
Value of Fund assets less
liabilities not constituting
senior securities
- ------------------------------- $140,234,063 234%
Senior securities $ 60,000,000
representing indebtedness ($0)
plus Liquidation Value
of the Preferred Shares
Notices. The Fund is required to deliver a certificate with respect
to the calculation of the Preferred Shares Basic Maintenance Amount and the
value of the portfolio holdings of the Fund (a "Preferred Shares Basic
Maintenance Certificate")
(i) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires as
of (a) the Business Day preceding the Date of Original Issue and (b) any
Valuation Date on which the Fund fails to have Eligible Assets with an aggregate
Discounted Value at least equal to 125% of the Preferred Shares Basic
Maintenance Amount,
(ii) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares) and any Other Rating Agency which is then rating the Preferred Shares
and which so requires (a) if the Fund fails to have Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, and (b) on request by S&P or such Other Rating Agency, as
applicable,
(iii) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires as
of (a) the Valuation Date next following the date of redemption by the Fund of
shares of Common Stock which, together with all other shares of Common Stock
purchased during the six months preceding such date, equal in excess of
1,000,000 shares of Common Stock, and (b) the last Valuation Date of each fiscal
quarter and a
39
<PAGE>
Valuation Date during such fiscal quarter randomly selected by the Fund's
independent accountants as provided below, and
(iv) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires as
of a Business Day on or before any Asset Coverage Cure Date relating to the
Fund's cure of a failure to have Eligible Assets with an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount.
Such Preferred Shares Basic Maintenance Certificate shall be delivered
in the case of clause (i)(a) as of the Valuation Date preceding the Date of
Original Issue and in the case of clauses (i)(b), (ii), (iii) and (iv) above on
or before the seventh Business Day after the relevant Valuation Date or Asset
Coverage Cure Date.
The Fund is required to deliver to the Auction Agent, S&P (if S&P is
then rating the Preferred Shares), Moody's (if Moody's is then rating the
Preferred Shares) and any Other Rating Agency which is then rating the Preferred
Shares and which so requires, a certificate with respect to the calculation of
the Investment Company Act Preferred Shares Asset Coverage and the value of the
portfolio holdings of the Fund (an "Investment Company Act Preferred Shares
Asset Coverage Certificate")
(i) as of the Valuation Date preceding the Date of Original Issue, and
(ii) as of (a) the last Valuation Date of each quarter thereafter, and
(b) as of the Business Day on or before the Asset Coverage Cure Date relating to
the failure to satisfy the Investment Company Act Asset Coverage.
Such Investment Company Act Preferred Shares Asset Coverage
Certificate shall be delivered in the case of clause (i) on the Date of Original
Issue and in the case of clause (ii) on or before the seventh Business Day after
the relevant Valuation Date or the Asset Coverage Cure Date. Such certificate
must be accompanied by a certificate from the Fund's accountants certifying as
to the accuracy of the Fund's calculations.
Within ten Business Days of the Date of Original Issue, the Fund shall
deliver to the Auction Agent, S&P (if S&P is then rating the Preferred Shares,
Moody's (if Moody's is then rating the Preferred Shares) and any Other Rating
Agency which is then rating the Preferred Shares and which so requires, a letter
prepared by the Fund's independent accountants (an "Accountant's Certificate")
regarding the accuracy of the calculations made by the Fund in the Preferred
Shares Basic Maintenance Certificate and the Investment Company Act Preferred
Shares Asset Coverage Certificate required to be delivered by the Fund.
40
<PAGE>
Within 10 Business Days after the delivery of the Preferred Shares
Basic Maintenance Certificate relating to the last Valuation Date of each fiscal
quarter of the Fund on which a Preferred Shares Basic Maintenance Certificate is
required to be delivered, the Fund (x) will deliver to the Auction Agent, S&P
(if S&P is then rating the Preferred Shares), Moody's (if Moody's is then rating
the Preferred Shares) and any Other Rating Agency which is then rating the
Preferred Shares and which so requires an Accountant's Certificate regarding the
accuracy of the calculations made by the Fund in such Preferred Shares Basic
Maintenance Certificate and in one other Preferred Shares Basic Maintenance
Certificate randomly selected by the Fund's independent accountants during such
fiscal quarter. Within 10 Business Days after delivery of the Investment Company
Act Preferred Shares Asset Coverage Certificate relating to the last Valuation
Date of each fiscal quarter of the Fund on which an Investment Company Act
Preferred Shares Asset Coverage Certificate is required to be delivered, the
Fund will deliver to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires an
Accountant's Certificate regarding the accuracy of the calculations made by the
Fund in such Investment Company Act Preferred Shares Asset Coverage Certificate.
In addition, the Fund will deliver to the relevant persons specified in the
preceding sentence an Accountant's Certificate regarding the accuracy of the
calculations made by the Fund on each Preferred Shares Basic Maintenance
Certificate and Investment Company Act Preferred Shares Asset Coverage
Certificate delivered pursuant to this section, as the case may be, within 10
days after the relevant Asset Coverage Cure Date. If an Accountant's Certificate
delivered with respect to an Asset Coverage Cure Date shows an error was made in
the Fund's report with respect to such Asset Coverage Cure Date, the calculation
or determination made by the Fund's independent accountants will be conclusive
and binding on the Fund with respect to such reports. If any other Accountant's
Certificate shows that an error was made in any such report, the calculation or
determination made by the Fund's independent accountants will be conclusive and
binding on the Fund; provided, however, any errors shown in the Accountant's
Certificate filed on a quarterly basis shall not be deemed to be a failure to
maintain the Preferred Shares Basic Maintenance Amount on any prior Valuation
Dates.
The Accountant's Certificates referred to above will confirm, based upon
the independent accountant's review, (i) the mathematical accuracy of the
calculations reflected in the related Preferred Shares Basic Maintenance Amount
and Investment Company Act Preferred Shares Asset Coverage Certificates, as the
case may be, and (ii) that the Fund determined whether the Fund had, at such
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount in accordance with the
Articles Supplementary.
In the event that a Preferred Shares Basic Maintenance Certificate or
Investment Company Act Preferred Shares Asset Coverage Certificate or the
applicable Accountant's Certificates with respect to an applicable Valuation
Date are not delivered within the time periods specified in the Articles
Supplementary, the Fund shall be deemed to have failed to have maintained the
Preferred Shares Basic Maintenance Amount or the Investment Company Act
Preferred Shares Asset Coverage, as the case may be, on such Valuation Date.
41
<PAGE>
Liquidation
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of Preferred Shares and any other
shares ranking in parity with the Preferred Shares, in preference to the holders
of Common Stock, will be entitled to payment, out of the assets of the Fund or
the proceeds thereof available for distribution to stockholders after
satisfaction of claims of creditors of the Fund, of a liquidation distribution
in the amount equal to the Liquidation Value per share of the Preferred Shares,
plus an amount equal to accumulated dividends (whether or not earned or declared
but without interest) to the date payment of such distribution is made in full
or a sum sufficient for the payment thereof is set apart with the Paying Agent.
However, holders of Preferred Shares will not be entitled to any premium to
which such Holder would be entitled to receive upon redemption of such Preferred
Shares. After payment of the full amount of such liquidation distribution, the
owners of the Preferred Shares will not be entitled to any further participation
in any distribution of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the assets of the Fund or proceeds thereof
available for distribution to stockholders after satisfaction of claims of
creditors of the Fund shall be insufficient to pay in full the liquidation
distribution to which owners of any Preferred Shares are entitled, such assets
or the proceeds thereof will be distributed among the owners of the Preferred
Shares and any other shares ranking on a parity therewith, ratably.
In the event of any such liquidation, dissolution or winding up of the
Fund, whether voluntary or involuntary, until payment in full is made to the
owners of the Preferred Shares of the liquidation distribution to which they are
entitled, no dividend or other distribution shall be made to the holders of
Common Stock and no purchase, redemption or other acquisition for any
consideration by the Fund shall be made in respect of the Common Stock.
A consolidation or merger of the Fund with or into any other company
or companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any
42
<PAGE>
designation, right, preference or limitation of the Preferred Shares or any
shares issuable in exchange for Preferred Shares in any such consolidation or
merger.
To the extent other Preferred Shares are issued by the Fund, such
shares will share equally and on a pro rata basis with the Preferred Shares then
outstanding in connection with any liquidation, dissolution or winding up of the
Fund.
Voting Rights
See "Description of Preferred Shares -- Voting Rights" in Part A of this
prospectus for a summary of the voting rights of the holders of Preferred
shares. A full description of such rights is provided in the Fund's Articles
Supplementary relating to the Preferred Shares.
43
<PAGE>
Minimum Liquidity Level
Under the Articles Supplementary, as long as Preferred Shares are
still outstanding, the Fund will be required to have, as of the Valuation Date
next preceding each Dividend Payment Date, cash and/or Deposit Securities with
maturity dates not later than the day preceding the Dividend Payment Date and
having a value not less than the Dividend Coverage Amount. The "Dividend
Coverage Amount" as of any date means (1) the product of (a) $25,000 times the
number of Preferred Shares outstanding on such date, (b) the Dividend Rate and
(c) seven divided by 360, less (2) the combined value of Deposit Securities
irrevocably deposited for the payment of dividends on the Preferred Shares (but
not including any liabilities due prior to the next Dividend Payment Date).
Deposit Securities Requirements
The Fund is obligated to deposit in a segregated custodial account a
specified amount of cash, United States Government obligations or short-term
money market instruments (collectively, "Deposit Securities") not later than
days prior to each dividend payment date and each redemption date relating
44
<PAGE>
to the Preferred Shares. These Deposit Securities, in all cases, will have an
initial combined value greater than or equal to the cash amounts payable on the
applicable dividend payment or redemption date, and will mature prior to such
date.
MANAGEMENT OF THE FUND
Directors and Officers
The Board of Directors is responsible for the management of the Fund,
including general supervision of the duties SSBC performs under the Investment
Management Agreement. There are six directors of the Fund, one of whom is an
"interested person" (as defined in the Investment Company Act) and five of whom
are "disinterested persons." The names and business addresses of the directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth below.
<TABLE>
<CAPTION>
Positions Held Principal Occupation
Name and Address (1) With the Fund During Past 5 Years
- ------------------------------------------ --------------------------------- -----------------------------------------
<S> <C> <C>
Heath B. McLendon* Chief Executive Officer, President and Director of SSBC and
SSB Citi Fund Management LLC President and Chairman of the Travelers Investment Advisor, Inc.;
Seven World Trade Center Board Managing Director of Salomon Smith
New York, New York 10048 Barney; Chairman of Salomon Smith
Barney Strategy Advisers Inc.;
Director of 64 investment companies
affiliated with Citigroup Inc.
Allan J. Bloostein Director Consultant; formerly Vice Chairman of
27 West 67th Street the Board of May Department Stores
Apt. 5FW Company, Director of Crystal Brands,
New York, New York 10023 Inc., Melville Corp., R.G. Barry
Corp. and Hechinger Co.
Martin Brody Director Consultant, HMK Associates, a
30 Columbia Turnpike financial consulting firm; retired;
Florham Park, New Jersey 07932 Vice Chairman of the Board of
Directors
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation
Name and Address (1) With the Fund During Past 5 Years
- ------------------------------------------ --------------------------------- -----------------------------------------
<S> <C> <C>
of Restaurant Associates
Corp.; Director of Taubman Realty,
CVS Drug Stores.
Dwight B. Crane Director Professor, Graduate School of
Harvard Business School Business Administration, Harvard
Soldiers Field Road University; Director of Peer Review
Boston, Massachusetts 02163 Analysis, Inc.
Robert A. Frankel Director Managing Partner of Robert A. Frankel
Robert A. Frankel Management Consultants Management Consultants; formerly
102 Grand Street Corporate Vice President of The
Croton-on-Hudson, New York Readers Digest Assoc. Inc.
10520
William R. Hutchinson Director Group Vice President, Mergers &
BP Amoco Acquisitions, BP Amoco p.l.c.;
200 E. Randolph Drive formerly Vice President Financial
Mail Code 1605 Operations AMOCO Corporation;
Chicago, Illinois Director of Associated Bank; Director
60601 of Associated Banc-Corp.
Lewis E. Daidone Senior Vice President and Managing Director of Salomon Smith
Two World Trade Center Treasurer Barney; Chief Financial Officer,
New York, New York 10048 Director and Senior Vice President of
SSBC and Travelers Investment
Advisers.
John C. Bianchi Vice President and Investment Managing Director of Salomon Smith
Two World Trade Center Officer Barney.
New York, New York 10048
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation
Name and Address (1) With the Fund During Past 5 Years
- ------------------------------------------ --------------------------------- -----------------------------------------
<S> <C> <C>
Christina Sydor Secretary Managing Director of Salomon Smith
Two World Trade Center Barney; General Counsel and Secretary
New York, New York 10048 of SSBC and Travelers Investment
Advisers.
</TABLE>
---------------------
(1) Messrs. Frankel and Hutchinson are subject to election by the holders of
the Preferred Shares, Messrs. Brody and Crane are subject to election by
the holders of the Common Stock and Messrs. Bloostein and McLendon are
subject to election by the holders of Preferred Shares and Common Stock
acting as a single class.
* Designates a Director who is an "interested person" of the Fund, as defined
in the Investment Company Act.
Under the Articles of Incorporation and the Investment Company Act, the
holders of Preferred Shares are entitled to elect two Directors, the holders of
Common Stock are entitled to elect two Directors and holders of Preferred Shares
and Common Stock, voting as a single class, are entitled to elect the remaining
directors, except in certain circumstances. See "Description of Preferred Shares
- -- Voting Rights" in the Prospectus and this Statement of Additional
Information. Election of Directors is non-cumulative; accordingly, holders of a
majority of the outstanding shares of Common Stock or a majority of the
outstanding Preferred Shares may elect all of the Directors who are subject to
election by such class.
The Fund pays each Director not affiliated with SSBC or any of its
affiliates a fee of $5,000 per year plus $500 per each in-person or committee
meeting attended and $100 per each telephonic Board meeting, together with
reimbursements for travel and out-of-pocket expenses related to attendance at
Board or committee meetings.
The table below shows, for each director who is not affiliated with SSBC,
the aggregate compensation the Fund paid for its fiscal year ended March 31,
1999 and the total compensation that SSBC affiliated funds paid to each director
during the calendar year 1999. The Fund has no retirement or pension plans. The
officers and directors affiliated with SSBC serve without compensation from the
Fund.
47
<PAGE>
<TABLE>
<CAPTION>
TOTAL NUMBER OF FUNDS
TOTAL COMPENSATION FOR WHICH DIRECTOR
AGGREGATE COMPENSATION FROM THE FUND AND FUND SERVES WITHIN FUND
NAME FROM THE FUND COMPLEX COMPLEX(1)
<S> <C> <C> <C>
Allan J. Bloostein $6,250 $ 90,500 9
Martin Brody $5,850 $132,500 20
Dwight B. Crane $6,850 $139,975 23
Robert A. Frankel $6,850 $ 72,250 9
William R. $6,750 $ 42,450 7
Hutchinson
Heath B. McLendon* 0 0 64
</TABLE>
- -----------
* Designates a director who is an "interested person" of the Fund, as defined
in the Investment Company Act.
(1) Investment companies affiliated with SSBC.
The Fund, SSBC and the Underwriter have adopted codes of ethics
pursuant to Rule 17j-1 of the Investment Company Act. These codes of ethics
permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund. These codes of ethics can
be reviewed and copied at the Public Reference Room of the Securities and
Exchange Commission in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at 1-202-942-
8090. These codes of ethics are available on the EDGAR Database on the
Commission's Internet site at http://www.sec.gov and copies of these codes of
ethics may be obtained, after paying a duplication fee, by electronic request at
the following e-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
PRINCIPAL STOCKHOLDERS
There are no persons known to the Fund to be control persons of the
Fund, as such term is defined in Section 2(a)(9) of the Investment Company Act.
There is no person known to the
48
<PAGE>
Fund to hold beneficially more than 5% of the outstanding shares of the Common
Stock. The following person is the only person holding of record more than 5% of
the outstanding shares of Common Stock as of March 31, 2000.
Name and Address Amount of Record Percent
of Record Owner Ownership of Class
- --------------- --------- --------
Cede & Co., as Nominee for
Depository Trust and Clearing
Corporation 81.8%
P.O. Box 20 Bowling Green Station
New York, New York 10004
As of March 31, 2000, the Fund's officers and directors as a group
beneficially owned less than 1% of the outstanding shares of Common Stock and no
shares of Outstanding Preferred Shares.
INVESTMENT ADVISER
SSB Citi Fund Management LLC, or SSBC, located at 388 Greenwich
Street, New York, New York 10013, acts as the investment adviser for, and
manages the investment and reinvestment of the assets of, the Fund.
Pursuant to the Investment Management Agreement and subject to the
supervision and direction of the Fund's Board of Directors, SSBC manages the
Fund's portfolio in accordance with the Fund's investment objective and
policies, makes investment decisions for the Fund, places orders to purchase and
sell securities and employs professional portfolio managers and securities
analysts who provide research services to the Fund. The Fund pays SSBC a monthly
investment advisory fee calculated at an annual rate of 0.50% of the average
daily net assets (defined as the average daily value of the total assets of the
Fund less total liabilities other than the outstanding principal amount under
the line of credit with PNC Bank, N.A.) of the Fund. This fee is calculated
daily and paid monthly. For the six months ended September 30, 1999 and for the
fiscal years ended March 31, 1999, 1998 and 1997, the Fund paid SSBC $377,331,
$789,196, $818,642 and $770,618, respectively, in administrative fees. For the
six months ended September 30, 1999 and for the fiscal years ended March 31,
1999, 1998 and 1997, the Fund paid SSBC $150,932, $315,678, $327,385 and
$305,651, respectively, in maintenance fees.
49
<PAGE>
Portfolio Trading
SSBC is responsible for decisions to buy and sell securities and other
portfolio holdings for the Fund, the selection of brokers and dealers to effect
transactions and the negotiation of brokerage commissions, if any. Fixed-income
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security will likely include a profit to the dealer. In underwritten
offerings, securities are usually purchased at a fixed price that includes an
amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities on behalf of the Fund, SSBC
is required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that SSBC seeks to execute each transaction
at a price and commission, if any, that provides the most favorable total cost
or proceeds reasonably attainable in the circumstances. While SSBC generally
seeks reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available in all
instances. Within the framework of the policy of obtaining the most favorable
price and efficient execution, SSBC considers research and investment services
provided by brokers and dealers who effect or are parties to portfolio
transactions of the Fund, SSBC or SSBC's other clients.
Research and investment services are those which brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular issues and industries. These
services are used by SSBC in connection with all of its investment activities,
and some of the services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers furnishing these services may be selected for the execution
of transactions for these other accounts, whose aggregate assets may exceed
those of the Fund, and the services furnished by the brokers may be used by SSBC
in providing investment management for the Fund. During the Fund's last fiscal
year, neither the Fund nor SSBC, pursuant to any agreement or understanding with
a broker or otherwise through an internal allocation procedure, directed the
Fund's brokerage transactions to a broker or brokers because of research
services provided.
Commission rates are established pursuant to negotiations based on the
quality and quantity of execution services provided by the broker or dealer in
light of generally prevailing rates. The allocation of orders and the commission
rates paid by the Fund will be reviewed periodically by the
50
<PAGE>
Fund's Board of Directors. SSBC reserves the right to, and does, manage other
investment accounts and investment companies for other clients which may have
investment objectives similar or identical to those of the Fund.
Subject to applicable laws and regulations, SSBC will attempt to
allocate equitably portfolio transactions among the Fund and the portfolios of
its other clients purchasing or selling securities whenever SSBC decides to
purchase or sell securities for the Fund and one or more other clients
simultaneously. In making these allocations, the main factors to be considered
will be the respective investment objectives of the Fund and such other clients,
the relative size of the portfolio holdings of the same or comparable
securities, the availability of cash for investment by the Fund and such other
clients, the size of investment commitments the Fund and other clients generally
hold, and opinions of the persons responsible for recommending investments to
the Fund and such other clients. While this procedure could have a detrimental
effect on the price or amount of the securities available to the Fund from time
to time, it is the opinion of the Board that the benefits available from SSBC's
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions.
Notwithstanding the similarity of the investment objective of the Fund
with that of other funds SSBC manages, the Fund will be separately managed and
the composition of its investment portfolio is likely to differ. Accordingly,
the investment performance of the Fund will likely not be the same as other
funds.
The Fund anticipates that, in connection with the execution of
portfolio transactions on its behalf, the Underwriter may from time to time act
as a broker or dealer. In addition, affiliated persons (as such term is defined
in the Investment Company Act) of the Fund, or affiliated persons of such
persons, may from time to time be selected to perform brokerage services for the
Fund, subject to the considerations discussed above, but are prohibited by the
Investment Company Act from dealing with the Fund as principal in the purchase
or sale of securities. In order for such an affiliated person to be permitted to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by such affiliated person must be reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. This standard would allow such an affiliated person to receive no more
than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. The Fund is prohibited by the
Investment Company Act from purchasing securities in primary offerings in which
an affiliate acts as an underwriter unless certain conditions established under
the Investment Company Act are satisfied.
The Fund paid no commissions to affiliated brokers for the fiscal
years ended March 31, 2000, 1999 and 1998.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock is determined by SSBC no less
frequently than the close of business (generally 4:00 P.M. New York time) on the
last Business Day of each week (generally Friday), by dividing the value of the
net assets of the Fund by the total number shares of Common Stock outstanding.
For the purpose of determining the net asset value per share of the Common
Stock, the value of the Fund's net assets is deemed to equal the value of the
Fund's assets less (1) the Fund's liabilities (2) accumulated and unpaid
dividends on the outstanding Preferred Shares and (3) the aggregate liquidation
value of the Preferred Shares.
51
<PAGE>
In valuing the Fund's assets for all purposes other than the
determination of the discounted value of such assets pursuant to S&P and Moody's
guidelines, portfolio securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed to be over-the-counter, are valued at the mean between the most
recently quoted bid and asked prices provided by the principal market makers.
Any security for which the primary market is on an exchange is valued
at the last sale price on the exchange on the day of valuation or, if there was
no sale on that day, the last bid price quoted on that day. Options are valued
at market value or fair value if no market exists.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities that are considered comparable in quality,
interest rate and maturity. Short-term investments that mature in 60 days or
less are valued on the basis of amortized cost (which involves valuing an
investment at cost and, thereafter, assuming a constant amortization to maturity
of any discount or premium, regardless of the effect of fluctuating interest
rates on the market value of the investment), when the Board of Directors has
determined that amortized cost represents fair value. Repurchase agreements are
valued at cost plus accrued interest.
SHARE REPURCHASES
Shares of common stock of closed-end investment companies frequently
trade at a discount from net asset value. To address this possibility, the Board
of Directors contemplates that the Fund may from time to time consider either
the repurchase of shares of the Common Stock on the open market or the making of
tender offers for the Common Stock. Repurchases of shares of Common Stock will
reduce the net assets of the Fund and, therefore, the net assets available for
purposes of the asset coverage calculations for the Preferred Shares. The Fund
may borrow money to finance the repurchase of shares, subject to compliance with
Section 18 of the Investment Company Act and the other limitations described
under "Investment Objective and Policies -- Certain Investment Strategies --
Additional Leverage."
Shares of Common Stock may not be repurchased, however
(1) if applicable asset coverage requirements under the Investment
Company Act (that is, 300% with respect to any securities representing
indebtedness and 200% with respect to the Preferred Shares) are not met or would
not be met following the repurchase or
52
<PAGE>
(2) when dividends on the Preferred Shares are in arrears or the
Preferred Shares Basic Maintenance Amount is not maintained.
See "Description of Preferred Shares --Asset Maintenance."
No assurance can be given that repurchases or tenders will result in
the Common Stock's trading at a price that is equal to its net asset value.
Although the Board of Directors believes that Common Stock repurchases and
tenders generally would have a favorable effect on the market price of the
Common Stock, it should be recognized that the acquisition of Common Stock will
decrease the total assets of the Fund and therefore have the effect of
increasing the Fund's expense ratios, as well as reducing the net assets
available for the asset coverage calculations for the Preferred Shares.
Furthermore, any interest on borrowings to finance Common Stock repurchase
transactions will reduce the Fund's net income.
TAXES
The following offers only a brief outline of the Federal income tax
consequences of investing in the Preferred Shares. Investors should consult
their own tax advisors for more detailed information and for information
regarding the effect of state and local taxes upon such an investment.
Tax Treatment of the Fund
The Fund has qualified, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Code. If the Fund
qualifies as a regulated investment company, the Fund will pay no Federal income
taxes on its taxable net investment income (that is, taxable income other than
net realized capital gains) and its net realized capital gains that are
distributed to shareholders.
To qualify under Subchapter M of the Code, the Fund must, among other
things:
(1) distribute to its shareholders at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment income
and net realized short-term capital gains);
(2) derive at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities, gains from the sale or other
disposition of securities, or other income (including, but not limited to, gains
from options, futures, and forward contracts) derived with respect to the Fund's
business of investing in securities, and
53
<PAGE>
(3) diversify its holdings so that, at the end of each fiscal quarter
of the Fund (a) at least 50% of the market value of the Fund's assets is
represented by cash, Government Securities and other securities, with those
other securities limited, with respect to any one issuer, to an amount no
greater than 5% of the value of the Fund's assets and not greater than 10% of
the outstanding voting securities of the issuer and (b) not more than 25% of the
market value of the Fund's assets is invested in the securities of any one
issuer (other than Government Securities or securities of other regulated
investment companies) or of two or more issuers that the Fund controls and that
are determined to be in the same or similar trades or businesses or related
trades or businesses.
If the Fund does not meet the asset coverage requirements of the
Investment Company Act, the Fund will be required to suspend distributions to
the holders of the Common Stock and/or the Preferred Shares until the asset
coverage is restored. Such a suspension of distributions might prevent the Fund
from distributing 90% of its investment company taxable income, as is required
in order to avoid Fund-level taxation on the Fund's distributions.
In addition, if the Fund fails to distribute in each calendar year an
amount equal to at least the sum of (1) 98% of its ordinary income for such
calendar year, (2) 98% of its capital gain net income (both long-term and short-
term) for the 12 months ended October 31 of such calendar year (or November 30
or December 31, if the Fund so elects) and (3) any portion of the respective 2%
balances not later than the end of the succeeding calendar year, the Fund will
be subject to a 4% excise tax on the undistributed income unless it is otherwise
required to pay an income tax on those amounts. The Fund's income would include
income attributable to the Fund from its investment in zero coupon securities
and other instruments issued with an original issue discount, although no cash
payments would be received for income accruing on such securities until their
respective maturities.
Upon any failure to meet the asset coverage requirements of the
Investment Company Act, the Fund will be required under certain circumstances to
partially redeem the Preferred Shares in order to maintain or restore the
requisite asset coverage. Depending on the size of the Fund's assets relative to
its outstanding senior securities, redemption under certain circumstances of the
Preferred Shares might restore asset coverage. If asset coverage were restored,
the Fund would again be able to pay dividends and might be able to avoid
Fund-level taxation of the Fund's distributions.
If the Fund fails to qualify as a regulated investment company in any
year or fails to meet the distribution requirement, it would be taxed in the
same manner as an ordinary corporation and distributions to its shareholders
would not be
54
<PAGE>
deductible by the Fund in determining its income. The Fund's dividends, to the
extent derived from its current or accumulated earnings and profits, would
constitute dividends (eligible for the corporate dividends received deduction)
which are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gain. In order to requalify as a
regulated investment company, a fund must pay out its earning and profits
accumulated in the year it fails to qualify. In addition, if the Fund fails to
qualify as a regulated investment company for a period greater than one taxable
year, it may be required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
If the Fund is the holder of record of any stock on the record date
for any dividends payable with respect to such stock, such dividend will be
included in the Fund's gross income as of the later of (1) the date such stock
became ex-dividend with respect to such dividends (that is, the date on which a
buyer of the stock would not be entitled to receive the declared, but unpaid
dividends) or (2) the date the Fund acquired such stock. Accordingly, in order
to satisfy its income distribution requirements, the Fund may be required to pay
dividends based on anticipated earnings, and shareholders may receive dividends
in an earlier year than would otherwise be the case.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (that is, may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses and
cause the Fund to be subject to hyperinflationary currency rules. These rules
could therefore affect the character, amount and timing of distributions to
shareholders.
These provisions also (1) will require the Fund to mark to market
certain types of its positions (that is, treat them as if they were closed out)
and (2) may cause the Fund to recognize income without receiving cash with which
to pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes.
The Fund will monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when it
acquires any foreign currency, forward contract, option, futures contract or
hedged investment so that (1) neither the Fund nor its shareholders will be
treated as receiving a materially greater amount of capital gains or
55
<PAGE>
distributions than actually realized or received, (2) the Fund will be able to
use substantially all of its losses for the fiscal years in which the losses
actually occur and (3) the Fund will continue to qualify as a regulated
investment company.
Tax Treatment of Holders of Preferred Shares
Distributions paid in cash to holders of Preferred Shares will be
taxable as ordinary income for Federal income tax purposes. Generally, dividends
received by corporate shareholders will not be eligible for the dividends
received deduction if the Fund qualifies as a regulated investment company.
Generally, gain or loss realized by a shareholder on the sale of shares held for
more than one year will be treated as long-term capital gain or loss. If a
shareholder holds shares primarily for sale to customers in the ordinary course
of business rather than for investment, any gain recognized on the sale of those
shares would be taxable as ordinary income. Any loss realized on a sale or
exchange of Preferred Shares will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder with respect to
such Preferred Shares. In addition, any loss realized on a sale or exchange will
be disallowed to the extent the shares disposed of are replaced within a period
of 61 days beginning 30 days before and ending 30 days after the disposition. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Backup Withholding
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is not
subject to "backup withholding," the shareholder may be subject to a 31% "backup
withholding" tax with respect to (1) taxable dividends and distributions and (2)
the proceeds of any sales or repurchases of Preferred Shares. An individual's
taxpayer identification number is his social security number. Corporate
shareholders and other shareholders specified in the Code are or may be exempt
from backup withholding. The backup withholding tax is not an additional tax and
may be credited against a taxpayer's Federal income tax liability. Additional
Federal withholding taxes at a 30% rate (or a lesser rate established by treaty)
may apply to distributions to shareholders that are nonresident aliens or
foreign partnerships, trusts or corporations.
Other Taxation
Dividends and distributions from the Fund received by a shareholder of
the Fund may be subject to state and local taxes depending on the shareholder's
particular situation.
56
<PAGE>
ADDITIONAL INFORMATION CONCERNING THE AUCTION FOR PREFERRED SHARES
Note: Capitalized terms used in the following section have the meaning
assigned to them in the Glossary, which is included as Appendix C to this
Statement of Additional Information.
The following section supplements and, with respect to certain
information, describes in greater detail the information concerning the auction
and auction procedures contained in the Prospectus.
General
The Fund will not submit an Order in any Auction.
Dividend Rates and Auction Dates
The Dividend Rate for each Dividend Period will be determined on the
Auction Date in respect of such Dividend Period. If Sufficient Clearing Orders
exist for an Auction, the Dividend Rate for the ensuing Dividend Period will be
the Winning Rate, or, if all shares in an Auction are the subject of Submitted
Hold Orders in respect of a Dividend Period of fewer than 93 days, the Minimum
Applicable Rate. If Sufficient Clearing Orders do not exist for any Auction, the
ensuing Dividend Period will be a Standard Term Period and the Dividend Rate for
that Dividend Period will be the Maximum Applicable Rate. Except in the case of
a Default or where all Preferred Shares are subject to Submitted Hold Orders, if
there is no Auction on any Auction Date, the next Dividend Period will be a
Standard Term Period, and the Dividend Rate will be the Maximum Applicable Rate
that could have resulted from an Auction in respect of a Standard Term Period on
such Auction Date. The Fund is obligated to exercise its best efforts to
maintain an Auction Agent.
Orders by Existing Holders and Potential Holders
On or prior to each Auction Date and prior to the Submission Deadline
(initially 1:00 P.M., New York City time), each Existing Holder, with respect to
shares it then holds, may submit to a Broker-Dealer by telephone or otherwise a
Hold Order, a Hold/Sell Order or a Sell Order and each Broker-Dealer will
contact Potential Holders to determine the Buy Orders, if any, to be made by
such Potential Holders.
Submission of Orders to Auction Agent
Each Order must be submitted in writing by a Broker-Dealer to the
Auction Agent prior to the Submission Deadline on each Auction Date for the
Auction to be conducted on such Auction Date and must specify (A) the name of
the Existing Holder or
57
<PAGE>
Potential Holder placing such Order, (B) the aggregate number of shares that are
the subject of such Order, (C) to the extent that such Orders are placed by an
Existing Holder, the number of shares, if any, subject to any Hold Order,
Hold/Sell Order or Sell Order and (D) the rate, if any, specified in each Order.
If any rate specified in any Order contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next higher one thousandth of 1%.
Only in the case of an Auction preceding a Dividend Period of 93 days
or fewer and following a Dividend Period of 93 days or fewer, if an Order or
Orders covering all shares held by any Existing Holder are not submitted to the
Auction Agent by the Submission Deadline, the Auction Agent will deem a Hold
Order to have been submitted on behalf of such Existing Holder covering the
number of shares held by such Existing Holder and not subject to Orders
submitted to the Auction Agent. In the case of all other Auctions, if a
Hold/Sell or Sell Order or Orders covering all shares held by any Existing
Holder are not submitted to the Auction Agent by the Submission Deadline, the
Auction Agent will deem a Sell Order to have been submitted on behalf of such
Existing Holder covering the number of shares held by such Existing Holder and
not subject to Orders submitted to the Auction Agent.
If one or more Orders covering in the aggregate more than the number
of Preferred Shares held by an Existing Holder are submitted to the Auction
Agent, such Orders will be valid in accordance with the Validity Procedures.
If more than one Order is submitted on behalf of any Existing Holder
or Potential Holder, each Order submitted will be a separate Order.
In the case of any Dividend Period of 93 days or fewer, if any rate
specified in any Order is lower than the Minimum Applicable Rate for the
Dividend Period with respect to which such Order is made, such Order will be
deemed to be an Order specifying a rate equal to such Minimum Applicable Rate.
In the case of any Dividend Period of more than 93 days, only Buy
Orders, Hold/Sell Orders or Sell Orders may be submitted and Hold Orders may not
be submitted.
Determination of Sufficient Clearing Orders and Applicable Rate
Not earlier than the Submission Deadline, on each Auction Date, the
Auction Agent will assemble all Submitted Orders and will determine whether
Sufficient Clearing Orders exist and the Applicable Rate.
Acceptance of Orders and Allocation of Shares
58
<PAGE>
Based upon the results of the Auction, the Auction Agent will
determine the aggregate number of shares to be held and sold by Existing Holders
and to be purchased by Potential Holders, and, with respect to each Broker-
Dealer, determine the extent to which such Broker-Dealer will deliver, and from
which other Broker-Dealers such Broker-Dealer will receive, shares.
If Sufficient Clearing Orders exist, subject to the Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all Submitted
Hold/Sell Orders specifying any rate higher than the Winning Rate
will be accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate lower than the
Winning Rate will be accepted as Hold Orders; (iv) all Submitted
Buy Orders specifying a rate lower than the Winning Rate will be
accepted;
(v) all Submitted Hold/Sell Orders specifying a rate equal to the
Winning Rate will be accepted as Hold Orders unless the number of
shares subject to all such Submitted Hold/Sell Orders is greater
than the number of shares remaining unaccounted for after the
acceptances described in clauses (i), (iii), and (iv) above, in
which event each such Submitted Hold/Sell Order will be accepted as
a Hold Order and a Sell Order as to the respective number of shares
determined in accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to the Winning
Rate will be accepted, unless the number of shares subject to all
such Submitted Buy Orders is greater than the number of shares
remaining unaccounted for after the acceptances described in
clauses (i), (iii), (iv) and (v) above, in which event each such
Submitted Buy Order will be accepted only as to the number of
shares determined in accordance with the Proration Procedures.
If Sufficient Clearing Orders do not exist, subject to the Rounding Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate equal to or lower
than the Maximum Applicable Rate will be accepted as Hold Orders;
(iii) all Submitted Buy Orders specifying a rate equal to or lower than
the Maximum Applicable Rate will be accepted; and
59
<PAGE>
(iv) all Submitted Hold/Sell Orders specifying a rate higher than the
Maximum Applicable Rate and all Submitted Sell Orders will be
accepted as Hold Orders and as Sell Orders as to the respective
number of Preferred Shares determined in accordance with the
Proration Procedures.
Notification of Results; Settlement
The Auction Agent will notify each Broker-Dealer that submitted an
Order whether such Order was accepted and of the Applicable Rate for the next
Dividend Period by telephone by approximately 3:00 p.m., Eastern time, on each
Auction Date. Each Broker-Dealer that submitted an Order will as soon as
practicable advise each Existing Holder and Potential Holder whether its Order
was accepted and will confirm in writing purchases and sales with each Existing
Holder and Potential Holder purchasing or selling shares as a result of an
Auction as soon as practicable on the Business Day next succeeding the Auction
Date. Each Broker-Dealer that submitted a Hold Order will advise each Existing
Holder on whose behalf such Hold Order was submitted of the Applicable Rate for
the Preferred Shares for the next Dividend Period.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales as determined in
the Auction. Purchasers will make payment through their Agent Members in same-
day funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment against delivery to their Agent
Members in same-day funds.
If any Existing Holder selling shares in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
in such Auction may deliver to such person a number of whole shares that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
Broker-Dealers; Commissions
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after any such termination.
Broker-Dealers which submit Orders for the account of others must be
authorized by law to perform such function. A
60
<PAGE>
Broker-Dealer may acquire shares for its own account. If a Broker-Dealer submits
an Order for its own account in an Auction, it may have an advantage over others
because it would have knowledge of other Orders placed through it in that
Auction.
Salomon Smith Barney Inc. ("Salomon Smith Barney" or the
"Underwriter"), the underwriter in the offering of Preferred Shares, intends to
serve as the initial Broker-Dealer for the Preferred Shares. Other firms may
serve as Broker-Dealers in connection with Auctions, although there is no
assurance that they will do so.
The Auction Agent after each Auction will initially pay to each
Broker-Dealer from funds provided by the Fund a participation fee based on the
purchase price of shares placed by the Broker-Dealer at such Auction. Initially,
the annual rate of such participation fee with respect to Dividend Periods of
less than one year shall be an annual rate of .25%, depending on the results of
the Auction and, in the case of Dividend Periods of one year or more, a
percentage agreed upon between the Fund and the Broker-Dealer. For purposes of
this paragraph, shares will be placed by a Broker-Dealer if such shares were (i)
the subject of Hold Orders deemed to have been made by Existing Holders and were
acquired by such Existing Holders through the Broker-Dealer or (ii) the subject
of an Order submitted by the Broker-Dealer that is (A) an Order of an Existing
Holder that resulted in such Existing Holder continuing to hold such shares as a
result of the Auction or (B) an Order of a Potential Holder that resulted in
such Potential Holder purchasing such shares as a result of the Auction or (C) a
valid Hold Order. In the event an Auction scheduled to occur on an Auction Date
fails to occur for any reason, a Broker-Dealer will be entitled to service
charges as if the Auction had occurred and all holders of shares placed by them
had submitted valid Hold Orders.
The Auction Agent
Bankers Trust Company will serve as Auction Agent for so long as
Preferred Shares are Outstanding. The Auction Agent is acting solely as agent of
the Fund and is not a trustee for holders of Preferred Shares. In the absence of
bad faith or gross negligence on its part, the Auction Agent will not be liable
to the Fund for any action taken, suffered or omitted or for any error of
judgment made by it in the performance of its duties as Auction Agent.
The Auction Agent may resign upon notice to the Fund, such resignation
to be effective on the earlier of the 90th day after the delivery of such notice
and the date on which a successor Auction Agent is appointed by the Fund. The
Fund may also replace the Auction Agent.
Master Purchaser's Letter
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<PAGE>
Each prospective purchaser of Preferred Shares or its Broker-Dealer
will be required to sign and deliver to the Auction Agent, as a condition to
such purchaser's purchasing Preferred Shares in any Auction or otherwise, a
Master Purchaser's Letter, the form of which is an exhibit to the Registration
Statement, in which such prospective purchaser or its Broker-Dealer will agree,
among other things:
(a) to participate in Auctions for Preferred Shares in accordance with
the Auction Procedures described in the Prospectus and this Statement of
Additional Information;
(b) to sell, transfer or otherwise dispose of Preferred Shares only
pursuant to a Bid or a Sell Order in an Auction, or to or through a Broker-
Dealer or to a person that has delivered a signed Master Purchaser's Letter to
the Auction Agent, provided that in the case of all transfers other than those
pursuant to Auctions, the Existing Holder of the shares so transferred, its
Agent Member or its Broker-Dealer advises the Auction Agent of such transfer;
and
(c) to have the ownership of the Preferred Shares as to which such
purchaser or its Broker-Dealer is the Existing Holder maintained in book entry
form by the Securities Depository for the account of its Agent Member, which in
turn will maintain records of such purchaser's beneficial ownership, and to
authorize such Agent Member to disclose to the Auction Agent such information
with respect to such purchaser's beneficial ownership as the Auction Agent may
request.
Each prospective purchaser should ask its Broker-Dealer whether such
prospective purchaser should sign a Master Purchaser's Letter. If the Broker-
Dealer submits Orders for such prospective purchaser listing the Broker-Dealer
as the Existing Holder or the Potential Holder, a Master Purchaser's Letter
signed by such prospective purchaser may not be required.
An execution copy of the Master Purchaser's Letter is an exhibit to
the Registration Statement. Execution by a prospective purchaser or its Broker-
Dealer of a Master Purchaser's Letter is not a commitment to purchase Preferred
Shares in the offering being made by the Prospectus or in any Auction or
otherwise, but is a condition precedent to such purchaser's purchasing Preferred
Shares.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
PNC. The principal business address of PNC is 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103. The Fund's assets are held under bank
custodianship in compliance with the Investment Company Act.
PFPC is located at P.O. Box 9699, Providence, Rhode Island 02940, and
serves, with respect to the Preferred Shares and the Common Stock, as transfer
agent, dividend paying agent and registrar, and, with respect to the Preferred
Shares, as agent to provide notice of redemption and certain voting rights.
EXPERTS
The audited statement of assets and liabilities, as of March 31,
1999, the related statement of operations and statement of cash flows for the
year then ended, the statement of changes in net assets for each of the years in
the two-year period then ended, the financial highlights for each of the years
in the four-year period ended March 31, 1999 have been incorporated by reference
into this Statement of Addition Information in reliance on the report
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<PAGE>
of KPMG LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing. KPMG LLP is located at 757
Third Avenue, New York, NY 10017.
ADDITIONAL INFORMATION
This Statement of Additional Information does not contain all of the
information included in the Registration Statement filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and the
Investment Company Act with respect to the Preferred Shares offered by the
Prospectus. Further information concerning the Preferred Shares may be found in
the Registration Statement, which is on file with the Commission. Statements
contained in the Prospectus and in this Statement of Additional Information as
to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Registration Statement may be inspected without a change at the
Commission's principal office in Washington, D.C. and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission.
The Fund is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act, and in
accordance therewith files and reports and other information with the
Commission. Such reports, proxy and public statements and other information can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Call 1-800-SEC-0330
for information about the public reference facilities. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549 at prescribed rates. Such reports and other
information concerning the Fund may also be inspected at the offices of the New
York Stock Exchange. The Commission maintains a Web site (http:\\www.sec.gov)
that contains the Prospectus, material incorporated by reference into this
Statement of Additional Information and the Prospectus, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
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<PAGE>
APPENDIX A
STATEMENT OF PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
ZENIX INCOME FUND
PORTFOLIO HOLDINGS BY S&P RATINGS AS OF MARCH 31, 2000
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
131347AD8 CALPINE CORP BB+ 1,350,000.00 1,419,187.50
482584AG4 K MART CORP BB+ 490,000.00 553,700.00
87970CAA4 TEMBEC FINANCE CORP BB+ 350,000.00 350,000.00
00130HAQ8 AES CORP BB 690,000.00 662,400.00
009451AH8 AIRPLANES PASS-THRU TRST BB 1,725,805.00 1,480,688.92
37931KAH4 GLOBAL CROSSING HLDG LTD BB 815,000.00 790,550.00
40423QAG2 HMH PROPERTIES, INC. BB 1,275,000.00 1,112,437.50
448924AD2 ICN PHARMACEUTICALS INC BB 2,070,000.00 2,013,075.00
741932AC1 PRIDE INTERNATIONAL INC BB 655,000.00 645,175.00
01958XAM9 ALLIED WASTE NORTH AMER BB- 230,000.00 184,000.00
053790AC5 AVIS GROUP HOLDINGS INC BB- 535,000.00 533,662.50
126304AF1 CSC HOLDINGS INC BB- 1,000,000.00 1,103,750.00
172909AF0 MANDALAY RESORT GROUP BB- 105,000.00 81,900.00
45811EAB9 INTEGRATED ELEC SERVICES BB- 255,000.00 217,387.50
52736TAC2 LEVIATHAN GAS PL/FIN CRP BB- 365,000.00 374,125.00
731095AF2 POLAROID CORPORATION BB- 430,000.00 435,375.00
74925LAF7 RBF FINANCE CO BB- 555,000.00 600,093.75
811371AA1 SEA CONTAINERS BB- 1,030,000.00 957,900.00
911363AG4 UNITED RENTALS INC BB- 180,000.00 162,900.00
911363AH2 UNITED RENTALS INC BB- 175,000.00 155,750.00
969455AB0 WILLIAMS COMM GROUP INC BB- 525,000.00 518,437.50
156503AD6 ADELPHIA COMMUNICATIONS BB- 130,000.00 130,650.00
156503AK0 ADELPHIA COMMUNICATIONS BB- 340,000.00 272,000.00
156503AN4 ADELPHIA COMMUNICATIONS BB- 255,000.00 105,825.00
775100AG5 ROGERS CABLESYSTEMS LTD BB- 775,000.00 868,000.00 BB 15,728,970.17
00130HAD7 AES CORPORATION B+ 915,000.00 901,275.00
01958XAQ0 ALLIED WASTE NORTH AMER B+ 3,000,000.00 2,227,500.00
030789AM3 AMES DEPARTMENT STORES B+ 610,000.00 565,775.00
151018AC2 CELESTICA INTL B+ 515,000.00 540,750.00
16117PAG5 CHRTR COMM HLDS/CHRT CAP B+ 235,000.00 227,362.50
16117PAJ9 CHRTR COMM HLDGS LLC B+ 1,460,000.00 799,350.00
35802W204 FRESENIUS MED CAP TR I B+ 10,900.00 1,035,500.00
365438AF7 GARDEN STATE NEWSPAPERS B+ 145,000.00 128,143.75
447012AB1 HUNTSMAN ICI CHEMICALS B+ 645,000.00 622,425.00
44701DAB7 HUNTSMAN ICI CHEMICALS B+ 3,700,000.00 1,091,500.00
460915AB7 INTRAWEST CORP B+ 510,000.00 484,500.00
460915AG6 INTRAWEST CORP B+ 685,000.00 671,300.00
465266AC8 IT GROUP INC B+ 315,000.00 300,431.25
599908AC4 MILLAR WESTERN FOREST B+ 565,000.00 532,512.50
656559AT8 NORTEK INC B+ 480,000.00 446,400.00
656559AW1 NORTEK INC B+ 135,000.00 124,200.00
670509AG3 NUEVO ENERGY CO B+ 855,000.00 829,350.00
675746AA9 OCWEN FINANCIAL CORP B+ 2,600,000.00 2,366,000.00
700677AH0 PARK-OHIO INDUSTRIES INC B+ 700,000.00 616,000.00
701081AG6 PARKER DRILLING CO B+ 980,000.00 948,150.00
74912EAP6 R&B FALCON CORP B+ 515,000.00 552,981.25
782295AA7 RUSSEL METALS INC B+ 430,000.00 424,625.00
857555AH9 STATER BROTHERS HLDGS B+ 450,000.00 446,625.00
87956PAD7 TELEWEST COMMUNICATN PLC B+ 1,250,000.00 1,293,750.00
880349AA3 TENNECO AUTOMOTIVE INC B+ 1,030,000.00 1,006,825.00
880915AE3 TERRA INDUSTRIES B+ 445,000.00 338,200.00
903236AD9 URS CORP. B+ 740,000.00 747,400.00
92923JAF6 WCI STEEL INC B+ 1,320,000.00 1,293,600.00
010375614 ESAT TELECOM GROUP PLC B+ 325,000.00 394,960.96
006848AP0 ADELPHIA COMMUNICATIONS B+ 1,010,000.00 979,700.00
130910AG7 CALL-NET ENTERPRISES INC B+ 300,000.00 231,000.00
866768AC8 SUN INTERNATIONAL HOTELS B+ 370,000.00 333,000.00
866768AD6 SUN INTL HOTELS/INTL-NA B+ 560,000.00 511,000.00
008914AB9 AINSWORTH LUMBER B 660,000.00 716,925.00
009270701 POLESTAR CORP PLC B 975,000.00 1,477,649.80
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
010043620 BSN FINANCING CO. SA B 800,000.00 799,969.38
010470676 GLOBAL TELESYSTEMS EUROP B 650,000.00 597,106.33
02311PAG9 AMATEK INDUSTRIES PTY B 295,000.00 279,143.75
04962VAE9 ATRIUM COMPANIES INC B 385,000.00 364,787.50
05354RAA9 AVECIA GROUP PLC B 685,000.00 688,425.00
055381AF4 BE AEROSPACE B 875,000.00 702,187.50
055381AH0 BE AEROSPACE B 150,000.00 129,750.00
056039AC4 BWAY CORP B 225,000.00 202,781.25
077410AC2 BELCO OIL & GAS CORP B 600,000.00 559,500.00
120075AA4 BUHRMANN US INC B 335,000.00 340,862.50
135713AC9 CANADIAN FOREST OIL LTD B 500,000.00 461,250.00
14066PAC0 AMFM INC B 130,000.00 116,837.50
165167AQ0 CHESAPEAKE ENERGY CORP B 370,000.00 346,875.00
181581AD1 CLARK USA INC B 1,195,000.00 645,300.00
191886AC4 BELCO OIL & GAS CORP B 250,000.00 254,062.50
194832AA9 COLLINS & AIKMAN PRODCTS B 1,030,000.00 1,010,687.50
228227AD6 CROWN CASTLE INTL CORP B 1,515,000.00 863,550.00
257039AB3 DOMAN INDUSTRIES LIMITED B 1,315,000.00 1,084,875.00
257039AE7 DOMAN INDUSTRIES LIMITED B 205,000.00 157,850.00
26632QAB9 DURA OPERATING CORP B 250,000.00 223,750.00
27876GAG3 ECHOSTAR DBS CORP B 40,000.00 38,700.00
303727AC5 FAIRCHILD SEMICONDUCTOR B 1,240,000.00 1,209,000.00
306075AC6 FALCON PRODUCTS INC B 405,000.00 378,168.75
344155AC0 FOCAL COMMUNICATIONS CP B 340,000.00 224,400.00
344155AD8 FOCAL COMMUNICATIONS CP B 275,000.00 277,750.00
346091AL5 FOREST OIL CORPORATION B 715,000.00 725,725.00
420781AB2 HAYES LEMMERZ INTL INC B 225,000.00 195,750.00
420804AB2 HAYES LEMMERZ INTL INC B 220,000.00 223,850.00
427516AB5 HERMES EUROPE RAILTEL BV B 1,000,000.00 945,000.00
427516AE9 HERMES EUROPE RAILTEL BV B 135,000.00 121,500.00
436132AF1 HOLLYWOOD CASINO CORP B 495,000.00 498,712.50
43613PAA1 HOLLYWD CASINO SHREVEPRT B 160,000.00 171,200.00
483008AK4 KAISER ALUMINUM & CHEM B 160,000.00 155,200.00
483008AL2 KAISER ALUMINUM & CHEM B 140,000.00 135,800.00
495582AB4 KING PHARMACEUTICAL INC B 1,045,000.00 1,039,775.00
52729NAP5 LEVEL 3 COMMUNICATIONS B 170,000.00 85,000.00
52729NAV2 LEVEL 3 COMMUNICATIONS B 1,800,000.00 1,705,197.89
590175AD7 MERRILL CORPORATION B 335,000.00 326,625.00
65332VAJ2 NEXTEL COMMUNICATIONS B 930,000.00 678,900.00
65332VAM5 NEXTEL COMMUNICATIONS B 2,210,000.00 1,524,900.00
65332VAV5 NEXTEL COMMUNICATIONS B 175,000.00 161,437.50
65333AAC2 NEXTLINK COMMUNICATIONS B 440,000.00 468,600.00
65333HAK9 NEXTLINK COMMUNICATIONS B 975,000.00 943,312.50
65333HAL7 NEXTLINK COMMUNICATIONS B 1,240,000.00 700,600.00
65333HAN3 NEXTLINK COMMUNICATIONS B 865,000.00 458,450.00
784005AD2 SC INTL SERVICES INC B 440,000.00 422,400.00
861598AA8 STONE CONTAINER FIN-CAN B 1,075,000.00 1,138,156.25
861642AC0 STONE ENERGY CORP B 700,000.00 651,000.00
883060AC9 TEXON INTERNATIONAL PLC B 799,999.99 365,949.11
911300AF8 UNITED PAN-EUROPE COMM B 4,615,000.00 2,457,487.50
199333AC9 COLUMBUS MCKINNON CORP B 275,000.00 241,656.25
417826AA2 HARVEY CASINOS RESORTS B 180,000.00 184,500.00
447013AC7 HUNTSMAN PACKAGING CORP B 575,000.00 543,375.00
92343W300 VERITAS CAPITAL TRUST B 650,000.00 396,500.00
00751KAB2 ADVANCE STORES CO INC B- 1,000,000.00 800,000.00
008540AB2 AGRILINK FOODS INC B- 385,000.00 363,825.00
010014328 PSINET INC B- 250,000.00 234,440.79
029050AB7 AMER PLUMBING & MECHANIC B- 165,000.00 150,150.00
055088AC2 B&G FOODS INC B- 850,000.00 684,250.00
095173AE0 BLOUNT INC B- 390,000.00 401,700.00
145744AD0 CARROLS CORP B- 1,000,000.00 857,500.00
15134QAB5 CENTENNIAL COMMUNICATNS B- 700,000.00 693,000.00
222746AC3 COURTYARD BY MARRIOTT II B- 2,375,000.00 2,300,781.25
265736AB4 DUNLOP STAND AERO HLDGS B- 380,000.00 387,600.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
29665WAA2 GLOBAL TELE-SYSTEMS LTD B- 700,000.00 644,000.00
29665WAB0 GLOBAL TELE-SYSTEMS LTD B- 600,000.00 278,864.97
29665WAF1 GLOBAL TELE-SYSTEMS LTD B- 400,000.00 361,000.00
302088AH2 EXODUS COMMUNICATIONS B- 800,000.00 784,000.00
41043FAB5 HANGER ORTHOPEDIC GROUP B- 855,000.00 684,000.00
449247AA3 ICG HOLDINGS INC B- 335,000.00 317,412.50
449247AB1 ICG HOLDINGS INC B- 510,000.00 422,025.00
452835AD3 IMPERIAL SUGAR CO B- 980,000.00 254,800.00
459655AC0 INTL HOME FOODS B- 245,000.00 242,550.00
461127AC6 INTERTEK FINANCE PLC B- 1,000,000.00 850,000.00
482562AA3 KMC TELECOM HOLDINGS INC B- 805,000.00 432,687.50
482562AH8 KMC TELECOM HOLDINGS INC B- 590,000.00 578,200.00
559079AD0 MAGELLAN HEALTH SERVICES B- 2,085,000.00 1,542,900.00
59501TAL0 MICROCELL TELECOMMUNICAT B- 835,000.00 532,312.50
600814AC1 MILLICOM INTL CELLULAR B- 1,155,000.00 1,014,956.25
62874LAA4 ORIUS CAPITAL CORP B- 430,000.00 432,150.00
677007BU9 OGLEBAY NORTON CO B- 320,000.00 298,400.00
690132AC9 OUTSOURCING SOLUTIONS B- 500,000.00 451,875.00
69363VAB3 PSINET INC B- 880,000.00 853,600.00
701081AD3 PARKER DRILLING CO B- 110,000.00 83,187.50
740518AD7 PREMIER INTL FOODS PLC B- 575,000.00 540,500.00
740540AE9 PREMIER PARKS INC B- 710,000.00 454,400.00
74437CAD3 PSINET INC B- 355,000.00 351,450.00
74437CAE1 PSINET INC B- 505,000.00 486,062.50
769507AM6 RIVERWOOD INTL CORP B- 345,000.00 339,825.00
84760TAE0 SPECTRASITE HOLDINGS INC B- 680,000.00 353,600.00
870426AA1 SWEETHEART CUP CO INC B- 435,000.00 412,162.50
87910PAB6 TEKNI-PLEX INC B- 1,000,000.00 1,027,500.00
87910PAD2 TEKNI-PLEX INC B- 75,000.00 71,625.00
87944KAC5 TELE1 EUROPE B.V. B- 615,000.00 645,750.00
89589TAC2 TRIARC CONSUMER/BEVERAGE B- 535,000.00 505,575.00
89708PAC6 TROPICAL SPORTSWEAR INTL B- 525,000.00 488,250.00
910734AE2 UNITEDGLOBALCOM INC B- 4,520,000.00 3,118,800.00
92264NAC1 VENETIAN CASINO/LV SANDS B- 465,000.00 439,425.00
923433AG1 VERIO INC B- 360,000.00 349,200.00
923433AL0 VERIO INC B- 380,000.00 377,150.00
923433AM8 VERIO INC B- 675,000.00 658,125.00
925301AB9 VERSATEL TELECOM BV B- 265,000.00 270,962.50
925529AG4 VIATEL INC B- 675,000.00 614,250.00
925529BJ7 VIATEL INC B- 400,000.00 368,000.00
92861LAA6 VSTR WIRE CO/VSTR WR HLD B- 545,000.00 542,275.00
92861LAC2 VSTR WIRE CO/VSTR WR HLD B- 415,000.00 249,000.00
975515AW7 WINSTAR COMM B- 175,000.00 168,437.50
975515AY3 WINSTAR COMM B- 190,000.00 89,300.00
008754578 DIAMOND HOLDINGS PLC B- 495,000.00 770,297.05
62940NAA0 NTL COMMUNICATIONS CORP B- 1,345,000.00 1,388,712.50
784178AC9 SFX ENTERTAINMENT INC B- 780,000.00 774,150.00 B 89,617,748.78
010551986 JAZZTEL PLC CCC+ 500,000.00 489,215.72
011593AA8 ALAMOSA PCS HOLDINGS INC CCC+ 995,000.00 482,575.00
126934AB4 CABLE SATISFACTION INTL CCC+ 180,000.00 177,300.00
256886AE2 DOLPHIN TELECOM PLC CCC+ 675,000.00 293,625.00
362359AA9 GT GROUP TELECOM CCC+ 495,000.00 277,200.00
483008AD0 KAISER ALUMINUM & CHEM CCC+ 1,170,000.00 1,117,350.00
591097AB6 METAL MANAGEMENT INC CCC+ 1,020,000.00 773,925.00
67574RAA3 OCWEN CAPITAL TRUST I CCC+ 1,000,000.00 590,000.00
68212DAF9 VOICESTREAM WIRELESS CRP CCC+ 330,000.00 352,687.50
68212DAH5 VOICESTREAM WIRELESS CRP CCC+ 180,000.00 195,750.00
76026QAC6 REPAP NEW BRUNSWICK CCC+ 315,000.00 282,712.50
762430AF3 RHYTHMS NETCONNECTIONS CCC+ 450,000.00 391,500.00
769507AJ3 RIVERWOOD INTERNATIONAL CCC+ 1,460,000.00 1,365,100.00
879946AE1 TELESYSTEM INTL WIRELESS CCC+ 415,000.00 229,287.50
896778AB3 TRITON PCS INC CCC+ 1,000,000.00 682,500.00
933590AB7 WAM!NET INC CCC+ 460,000.00 262,200.00
009367AA1 AIRGATE PCS INC CCC 875,000.00 476,875.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
00102PAA9 AEI RESOURCES INC/HLDG CCC- 960,000.00 211,200.00
031909AD6 AMRESCO INC CCC- 600,000.00 435,000.00
031909AE4 AMRESCO INC CCC- 135,000.00 97,875.00 CCC 9,183,878.22
009367111 AIRGATE PCS INC WRNT NA 665.00 119,700.00
05258A113 AUSTRALIS HOLDINGS WRNT NA 1,725.00 -
130214208 CALIFORNIA PREF FED NA 20,100.00 439,687.50
184902AD6 CLEARNET COMMUNICATIONS NA 750,000.00 320,292.05
195204AC6 COLO.COM NA 185,000.00 186,850.00
232503110 NABERNET INTERNET SERV-WRNT 325.00 34,125.00
232503AE2 CYBERNET INTERNET SERV NA 325,000.00 260,000.00
25607PAB4 DOBSON/SYGNET COMMUNICAT NA 405,000.00 425,250.00
37957FAB7 GLOBIX CORP NA 620,000.00 567,300.00
46268L111 IRIDIUM WRNT NA 1,000.00 10.00
472143AA4 JAZZ CASINO CO LLC NA 380,000.00 119,700.00
695534115 PAGEMART WIRELESS WRNT NA 7,130.00 110,515.00
781076112 RSL COMM WRNT NA 1,300.00 52,000.00
848636114 NALITROCK SERVICES INC-WRNT 1,625.00 390,000.00
87944K135 TELE1 EUROPE B.V.-WRNT NA 325.00 111,758.01
87944T201 TELE1 EUROPE B.V. NA 5,636.05 107,789.46
902745116 UIH AUSTRALIA WRNT NA 2,450.00 73,500.00
925301111 NARSATEL TELECOM BV-WRNT 265.00 160,325.00
933590119 WAM!NET INC-WRNT NA 2,550.00 29,643.75
98141A101 WORLD ACCESS INC NA 3,770.50 72,110.87
98141AAD3 WORLD ACCESS INC NA 1,200,000.00 1,026,000.00 NA 4,606,556.64
59501TAG1 MICROCELL TELECOMMUNICAT NR 305,000.00 271,450.00
848636AC0 SPLITROCK SERVICES INC NR 1,075,000.00 1,139,500.00 NR 1,410,950.00
120,548,103.81
-----------------
Summary
BB 15,728,970.17 13.0%
B 89,617,748.78 74.3%
CCC 9,183,878.22 7.6%
NR 1,410,950.00 1.2%
NA 4,606,556.64 3.8%
--------------------------------------------
Total 120,548,103.81 100.0%
</TABLE>
<PAGE>
APPENDIX B
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP
A brief description of the applicable Standard & Poor's Ratings Group
("S&P") rating symbols and their meanings (as published by S&P) follows:
LONG TERM DEBT
An S&P corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees. The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances. The ratings are based, in varying degrees, on the
following considerations:
1. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
B-1
<PAGE>
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CLARK CURBO" and "C" is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "B" or "B-" rating.
CLARK CURBO The rating "CLARK CURBO" typically is applied to debt
subordinated to senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
B-2
<PAGE>
CI The rating "CI" is reserved for income bonds on which no interest
is being paid.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-) The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
PROVISIONAL RATINGS The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized.
In the case of certificates of deposit the letter "L" indicates that
the deposit, combined with other deposits being held in the same right and
capacity, will be honored for principal and accrued pre-default interest up to
the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor insured
institution, upon maturity. Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:
B-3
<PAGE>
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designation.
B-4
<PAGE>
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell,
or hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
B-5
<PAGE>
MOODY'S INVESTORS SERVICE, INC.
A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings (as published by Moody's) follows:
LONG-TERM RATINGS
Aaa Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
B-6
<PAGE>
Caa Bonds that are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca Bonds that are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
CON(-) Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial
paper, bank deposits, bankers' acceptances and obligations to deliver foreign
exchange. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries
High rates of return on funds employed
Conservative capitalization structure with moderate reliance on debt
and ample asset protection
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
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Well-established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
PREFERRED STOCK RATINGS
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
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b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
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APPENDIX C
GLOSSARY
"AAA/aaa Credit Rating" means a credit rating in the highest category of
any two nationally recognized statistical rating organizations (as used in the
rules and regulations under the Securities Exchange Act of 1934), one of which
shall be S&P or Moody's.
"AA Financial Composite Commercial Paper Rate" on any date means (a) the
interest equivalent of the higher of the 7-day or the 30-day rate, in the case
of a Dividend Period which is a Standard Term Period or shorter, or the 180-day
rate, in the case of all other Dividend Periods, on commercial paper on behalf
of issuers whose corporate bonds are rated AA by S&P, or the equivalent of such
rating by another nationally recognized rating agency, as announced by the
Federal Reserve Bank of New York for the close of business on the Business Day
immediately preceding such date; or (b) if the Federal Reserve Bank of New York
does not make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the AA Financial
Composite Commercial Paper Rate, such rate shall be determined on the basis of
the quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers,
by the Auction Agent. For purposes of this definition, (i) "Commercial Paper
Dealers" shall mean (A) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (B) in lieu
of any thereof, its respective Affiliate or successor, and (C) in the event that
any of the foregoing shall cease to quote rates for commercial paper of issuers
of the sort described above, in substitution therefor, a nationally recognized
dealer in commercial paper of such issuers then making such quotations selected
by the Fund, and (ii) "interest equivalent" of a rate stated on a discount basis
for commercial paper of a given number of days' maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of 1%)
of (A) such rate expressed as a decimal, divided by (B) the difference between
(x) 1.00 and (y) a fraction, the numerator of which shall be the product of such
rate expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.
"Advisory Agreement" means the Investment Advisory Agreement dated July 30,
1993 under which SSBC serves as investment adviser for the Fund.
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"Affiliate" means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Fund; provided that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any person
controlled by, in control of or under common control with such corporation one
of the directors or executive officers of which is also a director of the Fund
be deemed to be an Affiliate solely because such director or executive officer
is also a director of the Fund.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a person placing an Order.
"Alternate Term Period" means any Dividend Period that is not a Standard
Term Period.
"Applicable Rate" means for each Dividend Period (A) if Sufficient Clearing
Orders exist for the Auction in respect thereof, the Winning Rate, (B) if
Sufficient Clearing Orders do not exist for the Auction in respect thereof, the
Maximum Applicable Rate and (C) in the case of any Dividend Period of 93 days or
fewer if all the Preferred Shares are the subject of Submitted Hold Orders for
the Auction in respect thereof, the Minimum Applicable Rate.
"Articles" means the Articles of Amendment and Restatement, as amended, and
the Articles Supplementary with respect to the Preferred Shares of the
Fund.
"Asset Coverage Cure Date" has the meaning set forth under "Description of
Preferred Shares--Redemption" in the Statement of Additional Information.
"Auction" means each periodic operation of the procedures set forth under
"Auction Procedures."
"Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Directors enters into an agreement with the Fund to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
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"Auction Date" means the first Business Day next preceding the first day of a
Dividend Period.
"Auction Procedures" means the procedures for conducting Auctions set forth
under "Auction Procedures."
"Average Net Assets" has the meaning set forth under "The Investment
Adviser" in the Prospectus.
"Board of Directors" or "Board" means the Board of Directors of the Fund or
any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" or "Broker-Dealers" means any broker-dealer or broker-
dealers, or other entity permitted by law to perform the functions required of a
Broker-Dealer by the Auction Procedures, that has been selected by the Fund and
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement entered into by the Auction
Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
"Buy Order" means the communication by a Potential Holder to a Broker-
Dealer of the number of Preferred Shares which such Potential Holder offers to
purchase on an Auction Date if the Applicable Rate for the next succeeding
Dividend Period therefor is not less than the rate per annum then specified by
such Potential Holder.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York, New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.01 per share, of the
Fund.
"Date of Original Issue" means the date on which the Preferred Shares are
originally issued by the Fund.
"Default Period" has the meaning set forth under "Description of Preferred
Shares--Dividends and Dividend Periods" in the Statement of Additional
Information.
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"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of optional
redemption, such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-1 by Moody's.
"Discount Factor" means the S&P Discount Factor (if S&P is then rating the
Preferred Shares), the Moody's Discount Factor (if Moody's is then rating the
Preferred Shares) or the discount factor established by any Other Rating Agency
which is then rating the Preferred Shares and which so requires, whichever is
applicable.
"Discounted Value" means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor provided that with respect to an
Eligible Asset that is currently callable, Discounted Value shall be equal to
the quotient as calculated above or the call price, whichever is lower, and that
with respect to an Eligible Asset that is prepayable, Discounted Value shall be
equal to the quotient as calculated above or the par value, whichever is lower.
"Dividend Payment Date" means (i) with respect to any Dividend Period of
one year or less, the Business Day next succeeding the last day thereof and, if
any, the 91st, 181st and 271st days thereof, and (ii) with respect to any
Dividend Period of more than one year, on a quarterly basis on each January 1,
April 1, July 1 and October 1 and on the Business Day following the last day of
such Dividend Period.
"Dividend Period" means the period commencing on the Date of Original Issue
and ending on the date specified on the Date of Original Issue and thereafter
the period commencing on the day following each Dividend Period and ending on
the day established by the Fund.
"Eligible Assets" means S&P Eligible Assets (if S&P is then rating the
Preferred Shares), Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and/or Other Rating Agency Eligible Assets if any Other Rating
Agency is then rating the Preferred Shares, whichever is applicable.
"Existing Holder" means (a) a person who has signed a Master Purchaser's
Letter and beneficially owns those Preferred Shares listed in that person's name
in the records of the Auction Agent or (b) the beneficial owner of those
Preferred Shares which are listed under such person's Broker-Dealer's name in
the records of the Auction Agent, which Broker-Dealer shall have signed a Master
Purchaser's Letter.
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"Exposure Period" means the period commencing on (and including) a given
Valuation Date and ending 49 calendar days/33 Business Days thereafter.
"Fund" means Zenix Income Fund Inc., a Maryland corporation that is the
issuer of the Preferred Shares.
"Holder" means, with respect to the Common Stock and the Preferred Shares
of the Fund, the registered holder of shares of such Stock as the same appears
on the stock ledger or stock records books of the Fund.
"Hold Order" means the communication by an Existing Holder to a Broker-
Dealer of the number of Outstanding Preferred Shares which such Existing Holder
desires to continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period therefor.
"Hold/Sell Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding Preferred Shares which such Existing
Holder desires to continue to hold if the Applicable Rate for the next Dividend
Period therefor is not less than the rate per annum then specified by such
Existing Holder.
"Investment Adviser" means SSB Citi Fund Management LLC, the current
investment adviser to the Fund, or such other future investment adviser to the
Fund.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
"Investment Company Act Preferred Shares Asset Coverage" means asset
coverage, as defined in Section 18(h) of the Investment Company Act, of at least
200% with respect to all outstanding senior securities of the Fund which are
stock, including all Outstanding Preferred Shares (or such other asset coverage
as may in the future be specified in or under the Investment Company Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its common stock),
determined on the basis of values calculated as of a time within 48 hours next
preceding the time of such determination.
"Liquidation Value" means $25,000 per share.
"Mandatory Redemption Date" has the meaning set forth under "Description of
Preferred Shares--Redemption" in the Statement of Additional Information.
"Mandatory Redemption Price" has the meaning set forth under "Description
of Preferred Shares--Redemption" in the Statement of Additional Information.
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"Market Value" shall mean the fair market value of an asset of the Fund as
computed based upon (i) pricing services to be provided by such pricing service
determined from time to time by the Board of Directors, provided that S&P (if
S&P is then rating Preferred Shares, Moody's (if Moody's is then rating
Preferred Shares) and any Other Rating Agency which is then rating Preferred
Shares and so requires have informed the Fund in writing that use of such
pricing service will not adversely affect such rating agency's then current
rating of the Preferred Shares or (ii) the lower of the value set forth in bids
from two independent dealers that in securities, one of which bids shall be in
writing, in each case with interest accrued added to such computation for those
assets of the Fund where such computation does not include interest accrued.
"Master Purchaser's Letter" means a letter substantially in the form of, or
containing provisions similar to those in the form, attached as an Exhibit
hereto which is required to be executed by each prospective purchaser of
Preferred Shares or the Broker-Dealer through whom the shares will be held.
"Maximum Applicable Rate" means, on any date on which the Applicable Rate
is determined, 150% of the 30-day AA Financial Composite Commercial Paper Rate
on the date of such Auction.
"Minimum Applicable Rate" means, on any Auction Date with respect to a
Dividend Period of 93 days or fewer, 80% of the AA Financial Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding such Auction Date. There shall be no Minimum Applicable Rate on any
Auction Date with respect to a Dividend Period of more than 93 days.
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"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Notice of Redemption" has the meaning provided under "Description of
Preferred Shares--Redemption" in the Statement of Additional Information.
"Offering" means the offering of 2,400 Auction Rate Cumulative Preferred
Shares issued by the Fund under its Registration Statement of which this
Statement of Additional Information is a part.
"Order" means a Hold Order, a Hold/Sell Order, a Sell Order or a Buy Order.
"Other Rating Agency" means any rating agency other than S&P or Moody's
then providing a rating for the Preferred Shares pursuant to the request of the
Fund.
"Other Rating Agency Eligible Assets" means assets of the Fund designated
by any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the Preferred Shares.
"Outstanding" means, as of any date, any Preferred Shares theretofore
issued by the Fund except, without duplication, (i) any Preferred Shares
theretofore canceled or redeemed by the Fund, or delivered to the Auction Agent
for cancellation or with respect to which the Fund has given notice of
redemption and irrevocably deposited with the Paying Agent sufficient funds to
redeem such Preferred Shares, and (ii) any Preferred Shares represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Fund. Notwithstanding the foregoing (A) for purposes of voting rights
(including the determination of the number of shares required to constitute a
quorum), any Preferred Shares to which the Fund or any Affiliate of the Fund
shall be the Existing Holder shall be disregarded and not deemed Outstanding;
(B) in connection with any Auction, any Preferred Shares as to which the Fund or
any person known to the Auction Agent to be an Affiliate of the Fund shall be
the Existing Holder thereof shall be disregarded and deemed not to be
Outstanding; and (C) for purposes of determining the Preferred Shares Basic
Maintenance Amount, any Preferred Shares held by the Fund shall be disregarded
and not deemed Outstanding but shares held by any Affiliate of the Fund shall be
deemed Outstanding].
"Paying Agent" means Bankers Trust Company unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Fund to serve as paying agent, which Paying Agent may be the same as
the Auction Agent.
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"Potential Holder" when used with respect to Preferred Shares, means any
person, including any Existing Holder of Preferred Shares, (i) who shall have
executed a Master Purchaser's Letter or whose shares will be listed under such
person's Broker-Dealer's name in the records of the Auction Agent, which Broker-
Dealer shall have executed a Master Purchaser's Letter and (ii) who may be
interested in acquiring shares of Preferred Shares (or, in the case of an
Existing Holder or such person of Preferred Shares, additional Preferred
Shares).
"Preferred Shares" means the Auction Rate Cumulative Preferred Stock, $.01
par value per share and liquidation preference $25,000 per share, of the
Fund.
"Preferred Shares Basic Maintenance Amount" has the meaning set forth under
"Rating Agency Guidelines" in the Statement of Additional Information.
"Preferred Shares Basic Maintenance Certificate" has the meaning set forth
under "Description of Preferred Shares--Asset Maintenance" in the Statement of
Additional Information.
"Proration Procedures" means:
(A) if Sufficient Clearing Orders exist, in the case of a Submitted
Hold/Sell Order specifying a rate equal to the Winning Rate
(x) the number of Preferred Shares to be the subject of an accepted
Hold Order will be (i) the number of Preferred Shares subject to such Submitted
Hold/Sell Order multiplied by (ii) the total number of Preferred Shares that are
neither the subject of a Submitted Buy Order or a Submitted Hold/Sell Order
specifying a rate lower than the Winning Rate nor the subject of a Submitted
Hold Order and divided by (iii) the total number of Preferred Shares of
Submitted Hold/Sell Orders that specified a rate equal to the Winning Rate, and
(y) the number of Preferred Shares to be the subject of an accepted
Sell Order will be the remaining number of Preferred Shares subject to such
Submitted Hold/Sell Order,
(B) if Sufficient Clearing Orders exist, in the case of a Submitted Buy
Order specifying a rate equal to the Winning Rate
(x) the number of Preferred Shares to be the subject of an accepted
Buy Order will be (i) the number of Preferred Shares subject to such Submitted
Buy Order multiplied by (ii) the difference between (1) the number of Preferred
Shares that are the subject of a Submitted Sell Order or a Submitted Hold/Sell
Order that specified a rate higher than the Winning Rate and (2) the number of
Preferred Shares that are the subject of a Submitted Buy Order that specified a
rate lower than the Winning Rate and divided by (iii) the total number of
Preferred Shares
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subject to Submitted Buy Orders that specified a rate equal to the Winning Rate,
and
(y) such Submitted Buy Order will not be accepted as to the remaining
number of Preferred Shares subject to such Submitted Buy Order, and
(C) if Sufficient Clearing Orders do not exist, in the case of a Submitted
Hold/Sell Order specifying a rate higher than the Maximum Applicable Rate and in
the case of a Submitted Sell Order
(x) the number of Preferred Shares to be the subject of an accepted
Sell Order will be (i) the number of Preferred Shares subject to such Submitted
Hold/Sell Order or Submitted Sell Order multiplied by (ii) the total number of
Preferred Shares that are the subject of a Submitted Buy Order specifying a rate
equal to or lower than the Maximum Applicable Rate and divided by (iii) the
total number of Preferred Shares subject to all Submitted Hold/Sell Orders that
specified a rate higher than the Maximum Applicable Rate and Submitted Sell
Orders, and
(y) the number of Preferred Shares to be the subject of an accepted
Hold Order will be the remaining number of Preferred Shares subject to such
Submitted Hold/Sell Order or Submitted Sell Order.
"Rating Agency Guidelines" means the guidelines established by S&P (if S&P
is then rating the Preferred Shares) and Moody's (if Moody's is then rating the
Preferred Shares) as set forth under "Rating Agency Guidelines," in the
Statement of Additional Information, as amended from time to time, or by any
Other Rating Agency that is then rating the Preferred Shares.
"Reference Rate" means, with respect to the determination of the Maximum
Applicable Rate, the applicable AA Financial Composite Commercial Paper Rate
(for a Dividend Period of fewer than 184 days) or the applicable Treasury Index
Rate for a Dividend Period of 184 days or more).
"Rounding Procedures" means, if as a result of an Auction (including the
Proration Procedures) any Existing Holder would be entitled to hold or required
to sell, or any Potential Holder would be required to purchase, a number of
Preferred Shares not evenly divisible by 1, on any Auction Date, the Auction
Agent will, in such manner as it determines, round up or down the number of
Preferred Shares to be held, purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that the number of shares held,
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date will be a number of Preferred Shares evenly divisible by 1.
"Rule 144A Securities" means securities that are restricted as to resale
under federal securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as
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amended, as determined by the Fund's Investment Adviser acting subject to the
supervision of the Fund's Board of Directors.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and its successors at law.
"Securities Depository" means the Depository Trust and Clearing Corporation
and its successors and assigns or any successor securities depository selected
by the Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the Preferred Shares.
"Sell Order" means the communication by an Existing Holder to a Broker-
Dealer of the number of Outstanding Preferred Shares which such Existing Holder
offers to sell without regard to the Dividend Rate for the next succeeding
Dividend Period therefor.
"Service" means the United States Internal Revenue Service.
"Specific Redemption Provisions" means with respect to any Alternate Term
Period of more than one year, either, or any combination of, a period (a "Non-
Call Period") determined by the Board of Directors after consultation with the
Broker-Dealers, during which the shares subject to such Alternate Term Period
are not subject to redemption at the option of the Fund pursuant to Section
3(a)(i) of the Articles Supplementary and/or Section 3(a)(ii) and/or 3(a)(iii)
of the Articles Supplementary and (ii) a period (a "Premium Call Period"),
consisting of a number of whole years as determined by the Board of Directors
after consultation with the Broker-Dealers, during each year of which the shares
subject to such Alternate Term Period shall be redeemable at the Fund's option
pursuant to Section 3(a)(i) of the Articles Supplementary and/or in connection
with any mandatory redemption pursuant to Section 3(a)(ii) and/or 3(a)(iii) of
the Articles Supplementary at a price per share equal to Liquidation Value plus
accumulated but unpaid dividends plus a premium expressed as a percentage or
percentages of Liquidation Value or expressed in a formula using specified
variables as determined by the Board of Directors after consultation with the
Broker-Dealers.
"Standard Term Period" means a Dividend Period of seven days, unless such
7th day is not a Business Day, then the number of days ending on the Business
Day next preceding such 7th day.
"Submission Deadline" means 1:00 p.m., New York City time, on each Auction
Date, or such other time on such Auction Date as may be specified from time to
time by the Auction Agent as the time by which each Broker-Dealer must submit to
the Auction Agent all Orders obtained by it for the Auction to be conducted on
such Auction Date.
"Submitted Buy Order" means each Buy Order submitted to the Auction Agent
by a Broker-Dealer.
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"Submitted Hold Order" means each Hold Order submitted to the Auction Agent
by a Broker-Dealer.
"Submitted Hold/Sell Order" means each Hold/Sell Order submitted to the
Auction Agent by a Broker-Dealer.
"Submitted Order" means each Order submitted to the Auction Agent by a
Broker-Dealer.
"Submitted Sell Order" means each Sell Order submitted to the Auction Agent
by a Broker-Dealer.
"Sufficient Clearing Orders" means that all Preferred Shares are the
subject of Submitted Hold Orders or that the number of Preferred Shares that are
the subject of Submitted Buy Orders by Potential Holders specifying one or more
rates equal to or less than the Maximum Applicable Rate exceeds or equals the
sum of (A) the number of Preferred Shares that are the subject of Submitted
Hold/Sell Orders by Existing Holders specifying one or more rates higher than
the Maximum Applicable Rate and (B) the number of Preferred Shares that are
subject to Submitted Sell Orders.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15(519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government securities selected by the Fund.
"Underwriter" means Salomon Smith Barney Inc.
"Underwriting Agreement" means the Underwriting Agreement among the
Underwriter, the Fund and the Investment Adviser, a form of which is filed as an
exhibit to the Fund's Registration Statement of which this Statement of
Additional Information is a part.
"Validity Procedures" means the following procedures and priorities:
(A) If one or more Hold Orders shall be submitted on behalf of an Existing
Holder as to a number of Preferred Shares greater than the number of Preferred
Shares held by such Existing Holder, such Hold Order or Hold Orders shall be
considered valid only as to the number of Preferred Shares held by such Existing
Holder. In the case of multiple Hold Orders, each such Hold Order shall be
considered valid pro rata.
(B) If one or more Hold/Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of Preferred Shares greater
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than the excess of the number of Preferred Shares held by such Existing Holder
over the number of Preferred Shares subject to Hold Orders submitted on behalf
of such Existing Holder, such Hold/Sell Order or Hold/Sell Orders shall be
considered valid only as to the number of Preferred Shares equal to such excess.
In the case of multiple Hold/Sell Orders specifying different rates, such
Hold/Sell Orders shall be considered valid in increasing order of such rates. In
the case of multiple Hold/Sell Orders specifying the same rate, each such
Hold/Sell Order shall be considered valid pro rata.
(C) If one or more Sell Orders shall be submitted on behalf of an Existing
Holder as to a number of Preferred Shares greater than the excess of the number
of Preferred Shares held by such Existing Holder over the number of Preferred
Shares subject to Hold Orders and Hold/Sell Orders submitted on behalf of such
Existing Holder, such Sell Order or Sell Orders shall be considered valid only
as to the number of Preferred Shares equal to such excess. In the case of
multiple Sell Orders, each such Sell Order shall be considered valid pro rata.
"Valuation Date" means every Friday, or, if such day is not a Business Day,
the next preceding Business Day; provided, however, that the first Valuation
Date may occur on any other date established by the Fund; provided, further,
however, that such date shall be not more than one week from the date on which
the Preferred Shares initially are issued.
"Winning Rate" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/Sell Order from Existing Holders specifying
such lowest rate and all other Submitted Hold/Sell Orders from Existing Holders
specifying lower rates were accepted and (B) each Submitted Buy Order from
Potential Holders specifying such lowest rate and all other Submitted Buy Orders
from Potential Holders specifying lower rates were accepted, would result in the
Existing Holders described in clause (A) above continuing to hold an aggregate
number of Preferred Shares which, when added to the number of Preferred Shares
to be purchased by the Potential Holders described in Clause (B)above and the
number of Preferred Shares subject to Submitted Hold Orders, would be equal to
the number of Preferred Shares.
C-12
<PAGE>
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Financial Statements included in Part A (Prospectus) of this
Registration Statement:
Financial Highlights for each of the years ended March 31, 1999, 1998,
1997, 1996, 1995, 1994, 1993, 1992, 1991 and 1990 and for the six months ended
September 30, 1999.
Financial Statements included in Part B (Statement of Additional
Information) of this Registration Statement:
Report of Independent Accountants.*
Statement of assets and liabilities as of March 31, 1999.*
Statement of operations for the year ended March 31, 1999.*
Statement of cash flows for the year ended March 31, 1999.*
Statement of changes in net assets for each of the years ended March
31, 1998 and 1999.*
Financial highlights for each of the years ended March 31, 1996, 1997,
1998 and 1999.*
Schedule of Investments as of March 31, 2000.
- --------------
* Incorporated by reference.
(2) Exhibits
(a) -- Articles of Amendment and Restatement of the Fund
(b)** -- Amended and Restated By-laws of the Fund
(c) -- Not applicable
(d) -- Form of Articles Supplementary for the Preferred
Shares
(e)*** -- Dividend Reinvestment Plan
(f) -- Not applicable
(g) -- Investment Advisory Agreement between the Fund and
SSB Citi Fund Management LLC
(h)* -- Form of Underwriting Agreement between the Fund, SSB
Citi Fund Management LLC and Salomon Smith
Barney Inc.
(i) -- Not applicable
<PAGE>
(j) -- Custody Agreement between the Fund and PNC Bank, N.A.
(k)(1) -- Transfer Agency Agreement between the Fund and PNC
Bank, N.A.
(2) -- Form of Auction Agency Agreement between the Fund
and Bankers Trust Company
(3) -- Form of Broker-Dealer Agreement between the Fund and
Bankers Trust Company
(4) -- Form of Master Purchaser's Letter
(l)(1)* -- Opinion and consent of Willkie Farr & Gallagher
(2)* -- Opinion and consent of Venable, Baetjer and Howard,
LLP
(m) -- Not applicable
(n) -- Consent of KPMG LLP
(o) -- Not applicable
(p) -- Not applicable
(q) -- Not applicable
(r) -- Code of Ethics of the Fund, CitiFund Management LLC
and Salomon Smith Barney Inc.
(s)**** -- Power of Attorney
(t) -- Financial Data Schedule (EDGAR version only)
(u) -- Form of Share Certificate of the Fund
- -----------------
* To be filed by amendment.
** Incorporated herein by reference to Pre-Effective Amendment No. 2 to
the Registrant's Registration Statement on Form N-2 (File Nos.
33-20342; 811-5484), Exhibits 2 and 4, filed on April 19, 1988.
*** Incorporated herein by reference to Pre-Effective Amendment No. 3 to
the Registrant's Registration Statement on Form N-2 (File Nos.
33-58410; 811-5484), Exhibit 2(e), filed on March 10, 1993.
**** Incorporated herein by reference to the Registration Statement filed on
February 11, 2000.
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the Preferred Shares
to be filed by amendment to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
Registration fees...........................$ 15,840
Printing and engraving......................
Accounting fees and expenses................ 4,000
Legal fees and expenses..................... 150,000
Rating Agency fees..........................
Miscellaneous...............................
----------
Total..................................
==========
2
<PAGE>
Item 27. Persons Controlled by or under Common Control
Not applicable.
Item 28. Number of Holders of Shares
At April 5, 2000:
Title of Class Number of Record Holders
- -------------- ------------------------
Common Stock, $.01 par value
7.00% Cumulative Preferred Stock, $.01 par value
Item 29. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland, Article V
of the Registrant's Articles of Amendment and Restatement (to be filed as an
Exhibit to this Registration Statement), Article V of the Registrant's By-laws
(filed as an Exhibit to the Registrant's Registration on Form N-2, Sec. File
Nos. 811-5484; 33-58410), the Investment Advisory Agreement (to be filed as an
Exhibit to this Registration Statement) and the Underwriting Agreement (to be
filed as an Exhibit to this Registration Statement) provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant, pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 30. Business and Other Connections of the Investment Adviser
Registrant is fulfilling the requirement of this Item 30 to provide a list of
the offices and directors of its investment
3
<PAGE>
adviser, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by that entity or
those of its officers and directors during the past two years, by incorporating
herein by reference the information contained in the current Form ADV filed with
the Securities and Exchange Commission by SSB Citi Fund Management LLC pursuant
to the Investment Advisers Act of 1940, as amended.
Item 31. Location of Accounts and Records
PNC Bank, N.A., 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103, and
PFPC Global Fund Services, P.O. Box 9699, Providence, Rhode Island, 02940
maintain the custodian and the shareholders servicing agent records respectively
required by Section 31(a).
All other records required by Section 31(a) are maintained at the offices of the
Registrant at 388 Greenwich Street, New York, New York 10013 (and preserved for
the periods specified by Rule 31a-2).
Item 32. Management Services
Not applicable.
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of its Preferred
Shares until it amends its Prospectus if (a) subsequent to the effective date of
its Registration Statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of the Registration Statement
or (b) the net asset value increases to an amount greater than its net proceeds
as stated in the Prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) The Registrant hereby undertakes that:
(a) for the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance on Rule 430A and contained in the form
of prospectus filed by the Registrant under Rule 497(h) under the Securities Act
of 1933 shall be deemed to be part of the Registration Statement as of the time
it was declared effective.
(b) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered
4
<PAGE>
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) The Registrant hereby undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, any Statement of Additional Information.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State of
New York, on the 7th day of April, 2000.
ZENIX INCOME FUND INC.
By: /s/ Heath B. McLendon
---------------------------------
Heath B. McLendon
Chief Executive Officer,
President and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Heath B. McLendon Chief Executive Officer, President and Chairman April 7, 2000
- --------------------- of the Board
Heath B. McLendon
/s/ Heath B. McLendon* Senior Vice President and Treasurer April 7, 2000
- ---------------------
Louis E. Daidone
</TABLE>
- ------------
*Pursuant to a Power of Attorney filed as Exhibit 2(s) hereto.
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Heath B. McLendon* Director April 7, 2000
- ----------------------
Allan J. Bloostein
/s/ Heath B. McLendon* Director April 7, 2000
- ----------------
Martin Brody
/s/ Heath B. McLendon* Director April 7, 2000
- ----------------
Dwight Crane
/s/ Heath B. McLendon* Director April 7, 2000
- ---------------------
Robert A. Frankel
/s/ Heath B. McLendon* Director April 7, 2000
- -------------------------
William R. Hutchinson
</TABLE>
- ----------
*Pursuant to a Power of Attorney filed as Exhibit 2(s) hereto.
<PAGE>
EXHIBIT INDEX
2A Articles of Amendment and Restatement of the Fund
2D Form of Articles Supplementary
2G Investment Advisory Agreement
2J Custody Agreement
2K1 Transfer Agency
2K2 Form of Auction Agency Agreement
2K3 Form of Broken-Dealer Agreement
2K4 Form of Master Purchaser's Letter
2N Independent Auditors' Consent
2R Code Ethics of the Fund
2U Form of Share Certificate of the Fund
27 Financial Data Schedule
<PAGE>
Exhibit 99.2A
ZENITH INCOME FUND INC.
CERTIFICATE OF CORRECTION
ZENITH INCOME FUND INC., a Maryland corporation having its principal
office in the State of Maryland in Baltimore City, certifies:
FIRST: This Certificate of Correction corrects the Articles
Supplementary of the Corporation filed with the State Department of Assessments
and Taxation of Maryland on April 19, 1988.
SECOND: Paragraph (d) of Article FIRST of the Articles Supplementary
included the date "April 26, 1938." The date as corrected is "April 27, 1988."
THIRD: This Certificate of Correction to the Articles Supplementary
conforms them to the action taken by the Board of Directors.
<PAGE>
IN WITNESS WHEREOF, ZENITH INCOME FUND INC. has caused this Certificate
of Correction to be signed in its name and on its behalf by its Chairman of the
Board and its corporate seal to be hereunder affixed and attested by its
Assistant Secretary on this 26th day of April , 1988, and its
-------------- ---------------
Chairman of the Board acknowledges that this Certificate of Correction is the
act and deed of Zenith Income Fund Inc. and, under the penalties of perjury,
that the matters and facts set forth herein with respect to authorization and
approval are true in all material respects to the best of his knowledge,
information and belief.
Zenith Income Fund Inc.
By:
-----------------------------
Heath B. McLendon
Chairman of the Board
ATTEST:
/s/Francis J. McNamara, III
- ------------------------------
Francis J. McNamara, III
Assistant Secretary
-2-
<PAGE>
IN WITNESS WHEREOF, ZENITH INCOME FUND INC. has caused this
Certificate of Correction to be signed in its name and on its behalf by its
Chairman of the Board and its corporate seal to be hereunder affixed and
attested by its Assistant Secretary on this 26th day of April
-------------- --------------
, 1988, and its Chairman of the Board acknowledges that this Certificate of
Correction is the act and deed of Zenith Income Fund Inc. and, under the
penalties of perjury, that the matters and facts set forth herein with respect
to authorization and approval are true in all material respects to the best of
his knowledge, information and belief.
ZENITH INCOME FUND INC.
By: /s/Heath B. McLendon
--------------------------
Heath B. McLendon
Chairman of the Board
ATTEST:
- --------------------------
Francis J. McNamara, III
Assistant Secretary
-3-
<PAGE>
ZENITH INCOME FUND INC.
ARTICLES SUPPLEMENTARY
ZENITH INCOME FUND INC., a Maryland corporation having its principal
office in the State of Maryland in Baltimore City, certifies:
FIRST: The terms of the Corporation's Preferred Stock as set forth in
its Charter are set or changed as follows:
(a) The designation of the Preferred Stock shall be "9.67% Cumulative
Preferred Stock" (the "Preferred Stock").
(b) The Dividend Rate on the Preferred Stock shall be 9.67% of the
Liquidation Preference per share per annum.
(c) All other preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and term and
conditions of redemption of the Preferred Stock are not changed and are as
set forth in the charter.
SECOND: The terms of the Preferred Stock have been set by the Board
of Directors prior to issuance thereof pursuant to authority granted to the
Board of Directors in the charter.
-4-
<PAGE>
IN WITNESS WHEREOF, ZENITH INCOME FUND INC. has caused these presents
to be signed in its name and an its behalf by its President and its corporate
seal to be hereunder affixed and attested by its Secretary on this 20th
-----------
day of April , 1988, and its President acknowledges that these
----------------
Articles Supplementary are the act and deed of Zenith Income Fund Inc. and,
under the penalties of perjury, that the matters and facts set forth herein with
respect to authorization and approval are true in all material respects to the
best of his knowledge, information and belief.
ZENITH INCOME FUND INC.
By: /s/Thomas A. Belshe
------------------------
Thomas A. Belshe
President
ATTEST:
/s/Stephen E. Cavan
- -----------------------
Stephen A. Cavan
Secretary
-5-
<PAGE>
ZENITH INCOME FUND INC.
ARTICLES OF AMENDMENT
Zenith Income Fund Inc., a Maryland corporation having its principal
office in the state of Maryland in Baltimore City, (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Charter of the Corporation is hereby amended by striking
out Article I and inserting in lieu thereof the following:
ARTICLE I
NAME
----
The name of the corporation is Zenix Income Fund Inc.
SECOND: The foregoing amendment to the Charter of the Corporation has
been advised by a majority of the entire Board of Directors of the Corporation
and approved by vote of the holders of a majority of the outstanding shares of
stock of the Corporation.
IN WITNESS WHEREOF, Zenith Income Fund Inc. has caused these present to
be signed in its name and on its behalf by its President, Thomas A. Belshe,
attested by its Secretary, Stephen E. Cavan, on August 31, 1989.
The President acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief the matters and facts set forth in these Articles with
respect to the authorization and approval of the amendment of the Corporation's
Charter are true in all material respects and that this statement is made under
the penalties of perjury.
ZENITH INCOME FUND INC.
By: /s/Thomas A. Belshe
-------------------------
Thomas A. Belshe
President
ATTEST:
/s/Stephen E. Cavan
- -------------------------
Stephen E. Cavan
Secretary
-6-
<PAGE>
ZENITH INCOME FUND INC.
ARTICLES OF AMENDMENT
The following action was duly authorized by the Board of Directors and
Stockholders at a meeting hold on June 12, 1989.
Zenix Income Fund Inc. (the "Corporation"), a Maryland corporation
having its principal office in the State of Maryland c/o The Corporation Trust
Company, the Corporation's resident agent, at 32 South Street, Baltimore,
Maryland 21202, hereby certifies to the State Department of Assessments and
Taxation of Maryland (the "Department") that:
FIRST: The charter of the Corporation is hereby amended by striking
Article IV C. 5.(a) in its entirety, and by substituting therefor the
followings:
ARTICLE IV
CAPITAL STOCK
-------------
C. Preferred Stock
5. Voting Rights.
--------------
(a) General. Each holder of Preferred Stock shall be entitled to one
-------
vote for each share held on each matter on which the holders of the Preferred
Stock are entitled to vote and, except as otherwise provided in these Articles
of Incorporation or by law, the holders of the Preferred Stock and the Common
Stock of the Corporation shall vote together as one class on all matters
submitted to the stockholders; provided, however, that at any meeting of the
stockholders of the Corporation held for the election of directors, (i) the
holders of a majority of the shares of Preferred Stock represented in person or
by proxy at said meeting shall be entitled as a class, to the exclusion of the
holder of the Common Stock, to elect two directors of the Corporation, the
identities of the nominees for which directorships may be fixed by the Board of
Directors, (ii) the holders of a majority of the shares of Common Stock
represented in person or by proxy at said meeting shall be entitled as a class,
to the exclusion of the holders of the Preferred Stock, to elect two directors
of the Corporation, the identities of the nominees for which directorships may
be fixed by the Board of Directors and (ii) subject to paragraph 5(b) hereof,
the holders of a majority of the shares of Common Stock and Preferred Stock
represented in person or by proxy at said meeting shall be entitled, voting
together as a single class, to elect the balance of the directors.
IN WITNESS WHEREOF, Zenix Income Fund Inc. has caused these presents
to be signed in its name and on its behalf by its President, Thomas A. Belshe,
attested to by, its Secretary, Stephen C. Cavan, on November 16, 1999.
-7-
<PAGE>
The Secretary acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief the matters and facts see forth in those Articles with
respect to the authorization and approval of the amendment of the Corporation's
Chatter are true in all material respects and that this statement is made under
the penalties of perjury.
ZENITH INCOME FUND INC.
By: /s/Thomas A. Belshe
-------------------------
Thomas A. Belshe
President
ATTEST:
/s/Stephen E. Cavan
- -------------------------
Stephen E. Cavan
Secretary
-8-
<PAGE>
ARTICLES OF REVIVAL
FOR
Zenix Income Fund Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(insert exact name of corporation as it appears on records of the State
Department of Assessments and Taxation)
FIRST: The name of the corporation at the time the charter was forfeited was
- --------------------------------------------------------------------------------
Zenix Income Fund Inc.
- --------------------------------------------------------------------------------
SECOND: The name which the corporation will use after revival is
Zenix Income Fund Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THIRD: The address of the principal offices in this state is
Same as below
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOURTH: The name and address of the resident agent is
The Corporation Trust
- --------------------------------------------------------------------------------
Incorporated
- --------------------------------------------------------------------------------
32 South Street
- --------------------------------------------------------------------------------
Baltimore, MD 21202
- --------------------------------------------------------------------------------
FIFTH: These Articles of Revival are for the purpose of reviving the charter of
the corporation.
SIXTH: At or prior to the filing of these Articles of Revival, the corporation
has (a) Paid all fees required by law; (b) Filed all annual reports which should
have been filed by the corporation if its charter had not been forfeited; (c)
Paid all state and local taxes, except taxes on real estate, and all interest
and penalties due by the corporation of which would have become due if the
charter had not been forfeited whether or not barred by limitations.
-9-
<PAGE>
(Use A for signatures. If that procedure is unavailable, use B. If A & B are
not available, use C. ONLY SIGN UNDER ONE SECTION.)
---------------------------
A. The undersigned who were respectively the last acting president (or vice
-----------
president) and secretary (or treasurer) of the corporation severally acknowledge
the Articles to be their act.
/s/ [Vice President]
---------------------------------------------
Vice President
/s/ [Last Acting Secretary/Treasurer]
---------------------------------------------
Last Acting Secretary/Treasurer
(Use if A cannot be signed/acknowledged)
B. The last acting president, vice president, secretary, and treasurer are
unwilling or unable to sign and acknowledge these Articles; therefore, the
undersigned who represent the lessor of a majority or 3 of the last acting
directors of the corporation severally acknowledge the Articles to be their act.
-----------------------------------
Last Acting Director
-----------------------------------
Last Acting Director
-----------------------------------
Last Acting Director
(Use if A and B cannot be signed/acknowledged)
C. The last acting president, vice president, secretary, and treasurer of the
corporation are unable or unwilling to sign the Articles. There are less than
the required number of directors able and willing to sign the Articles,
therefore, the undersigned who were elected as directors for the purpose of
reviving the charter of the corporation severally acknowledge the Articles to be
their act.
-----------------------------------
Director
-----------------------------------
Director
-----------------------------------
Director
-10-
<PAGE>
AFFIDAVIT FOR REVIVAL OF A CHARTER
----------------------------------
Richard H. Rose, Treasurer
I, Lee P. Augsburger, Asst. Secy. Zenix Income Fund Inc.
------------------------------ ---------------------------------
(Insert name and title) (Insert name of corporation)
hereby declare that the previously mentioned corporation has paid all State and
local taxes except taxes on real estate, and all interest and penalties due by
the corporation or which would have become due if the charter had not been
forfeited whether or not barred by limitations.
/s/Richard H. Rose /s/Lee D. Augsburger
------------------ --------------------
Richard H. Rose (print name beneath signature)
I hereby certify that on 8/11/92 before
---------------------------
(Insert date)
me the subscriber, a rotary public of the State of Maryland, in
and for Massachusetts Suffolk personally appeared
-------------------------------------
(Insert name of county for which notary is appointed)
Richard H. Rose and Lee D. Augsburger and made oath under
- -------------------------------------------
(insert name of person swearing)
the penalties of perjury that the matters and facts set forth in this affidavit
are true to the best of his knowledge, information and belief.
As witness my hand and notarial seal
/s/Mary A. Bucci
---------------------------
Signature of Notary Public
My Commission expires 7-8-99
------
-11-
<PAGE>
ZENIX INCOME FUND INC.
ARTICLES SUPPLEMENTARY
ZENIX INCOME FUND INC., a Maryland corporation having its principal
office in the State of Maryland in Baltimore City (the "Corporation"),
certifies:
FIRST: The terms of the Corporation's Preferred Stock as set forth in
its charter are set or changed as follows:
(a) The designation of the Preferred Stock shall be "7.0% Cumulative
Preferred Stock" (the "Preferred Stock").
(b) The Dividend Rate on the Preferred Stock shall be 7.0% of the
Liquidation Preference per share per annum. Holders of shares of Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available therefore, cumulative cash dividends
at the Dividend Rate payable semiannually on June 15, and December 15 in each
year (each a "Dividend Payment Date") commencing June 15, 1993 (or, if any such
day is not a Business Day, then on the next succeeding Business Day) to holders
of record of Preferred Stock as they appear on the stock register of the
Corporation at the close of business on the preceding June 1, or December 1, as
the case may be, in preference to dividends on shares of Common Stock, or any
other capital stock of the Corporation ranking junior to the Preferred Stock in
payment of dividends.
(c) Pursuant to Section C.4(a)(i) of Article IV of the charter, the
date of mandatory redemption of the Preferred Stock as a whole, unless sooner
redeemed in accordance with the charter, is established as April 15, 2000.
(d) "Basic Maintenance Amount" means, as of any date the dollar amount
equal to the sum of (a) 100% of the aggregate principal amount of the Senior
Money Market Notes (the "MMNs") then outstanding; (b) $1,000 times the number of
shares of Preferred Stock then outstanding; (c) an amount equal to interest on
the aggregate principal amount of the MMNs then outstanding from the most recent
date to which interest has been paid or duly provided for until, but not
including, such date, plus the Projected Interest Amount, as defined in the
Articles of incorporation, as amended; (d) the aggregate amount of accumulated
but unpaid dividends with respect to the Preferred Stock; (e) the amount of
dividends projected to accumulate on the Preferred Stock then outstanding from
the applicable Valuation Date until the 63rd day after such Valuation Date
______, the aggregate principal amount of any then outstanding indebtedness of
the Corporation for money borrowed (other than the MMNs); (g) an amount equal to
the expenses (not including interest expense) that the Corporation expects to
incur from the applicable Valuation Date until the 90th day after such Valuation
Date; and (h) the greater of $100,000 or the Corporation's current
-12-
<PAGE>
liabilities as of such date, to the extent not otherwise reflected in any of (a)
through (f) above, less the combined value of any Deposit Securities, as defined
in the Articles of Incorporation, as amended, irrevocably deposited by the
Corporation for the payment of principal of or interest on the MMNs or
redemptions of or dividend payments with respect to the Preferred Stock. Without
amending these Articles of Incorporation and to the extent permitted by Maryland
law, the elements comprising the Basic Maintenance Amount may be changed from
those set forth in these Articles of Incorporation if the Board of Directors of
the Corporation determines and the Rating Agency, as defined in the Articles of
Incorporation, as amended, advises the Corporation in writing that the change
will not adversely affect its then-current rating of the Preferred Stork.
(e) "Discount Factor" means for any asset held by the Corporation, the
number set forth opposite each such type of asset in the following table (it
being understood that any asset held by the Corporation and not listed in the
following table or in, amendment or supplement thereto shall have a Discounted
Value of Zero);
<TABLE>
<CAPTION>
Type of Eligible Portfolio Property Discount Factor
- ----------------------------------- ---------------
<S> <C>
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
Type IX Corporate Bonds: 2.20
GNMA Certificates with fixed interest rates: 1.40
GNMA Certificates with adjustable interest rates: 1.54
FHLMC and FNMA Certificates with fixed 1.50
interest rates:
FHLMC and FNMA Certificates with fixed 1.58
adjustable rates:
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable (1)
interest rates:
GNMA Multifamily Securities: (1)
GNMA Graduated Payment Securities (2): 1.60
Conventional Mortgage Pass-Through Certificates: 1.60
U.S. Government Obligations having a remaining 1.00
term to maturity of 1 day or less:
U.S. Government Obligations having a remaining 1.08
term to maturity of more than 1 day but not
more than 1 year:
</TABLE>
-13-
<PAGE>
<TABLE>
<S> <C>
U.S. Government Obligations having a remaining 1.28
term to maturity of more than 1 year but
not more than 5 years:
U.S. Government Obligations having a remaining 1.35
term to maturity of more than 5 years
but not more than 10 years:
U.S. Government Obligations having a remaining 1.45
term to maturity of more than 10 years but
not more than 15 years:
U.S. Government Obligations having a remaining 1.50
term to maturity of more than 15 years but
not more than 30 years:
Short-Term Money Market Instruments having a 1.00
remaining term to maturity of not more
than 1 day:
Short-Term Money Market Instruments having a 1.10
remaining term to maturity of more than
1 day but not more than 30 days:
Cash: 1.00
</TABLE>
__________________________
(1) The Discount Factor determined therefore in writing by the Rating Agency.
(2) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Corporation notifies the Notice Agent and the
Trustee that scheduled principal payments are being made to holders; in the
case of GNMA Graduated Payment securities as to which the Corporation
notifies the Notice Agent and the Trustee that scheduled principal payments
are not being made to holders, the Discount Factor shall be that which is
determined in writing by the Rating Agency.
Without amending these Articles of Incorporation and to the extent
permitted by Maryland law, the Discount Factor applied to determine the
Discounted Value of any item of Eligible Portfolio Property may be changed from
that set forth in these Articles of Incorporation or a Discount Factor may be
specified for any asset constituting Eligible Portfolio Property if the Board of
Directors of the Corporation determines and the Rating Agency advises the
Corporation in writing that the change or specification will not adversely
affect the then-current rating of the Preferred Stock.
(f) All other preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the
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<PAGE>
Preferred Stock are not changed and are as set forth in the charter.
SECOND: The terms of the Preferred Stock have been set by the Board
of Directors prior to issuance thereof pursuant to authority granted to the
Board of Directors in the charter.
THIRD: These articles shall be effective on March 26, 1995,
simultaneously with the initial issuance of the Preferred Stock above described,
which stock shall be issued simultaneously with the deposit of the purchase
price for such Preferred Stock in an amount sufficient to redeem all of the
9.67% Cumulative Preferred Stock currently outstanding and scheduled for
mandatory redemption on April 15, 1993, but not later than close of business on
such date.
-15-
<PAGE>
IN WITNESS WHEREOF, ZENIX INCOME FUND INC. has caused those presents
to be signed in its name and on its behalf by its President and its corporate
seal to be hereunder affixed and attested by its Secretary on this 15th day of
March, 1993, and its President acknowledges that these Articles Supplementary
are the act and deed of Zenix Income Fund Inc. and, under the penalties of
perjury, that the matters and facts set forth herein with respect to
authorization and approval are true in all material respects to the best of his
knowledge, information and belief.
ZENIX INCOME FUND INC.
By: /s/Richard P. Roelofs
---------------------
Richard P. Roelofs
President
ATTEST:
/s/Lee D. Augsburger
- --------------------
Lee D. Augsburger
Assistant Secretary
ZENIX INCOME FUND INC.
ARTICLES OF AMENDMENT
ZENIX INCOME FUND INC., a Maryland Corporation having its principal
office in the State of Maryland in Baltimore City (the "Corporation") certifies:
FIRST: Article IV, Section A.4 is hereby amended in its entirety to
read as follows:
"The Board of Directors shall have authority by resolution to
classify and classify any authorized but unissued shares of capital
stock from time to time by setting or changing in any one or more
respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of the capital stock, provided that if any
such classification or reclassification is contrary to the express
terms of this Charter, such classification or reclassification must be
permitted under Maryland corporate law and the 1940 Act and
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<PAGE>
rules and regulations thereunder and each of the Rating Agency and
Moody's shall have advised that any such classification or
reclassification will not adversely affect its then-current rating of
the Preferred Stock then outstanding."
SECOND: Article IV, Section C.1. is here amended by adding at the end
thereof the following:
"Notwithstanding the above, the Board of Directors may by
classification or reclassification create a second class of series of
Preferred Stock not identical and equal in all respects to then
outstanding Preferred Stock and issue such second class or series for
purposes of refunding the Preferred Stock then outstanding to the
extent permitted under the 1940 Act and applicable rules and
regulations thereunder."
THIRD: Article IV, Section C.2(a) is hereby amended in its entirety
to read as follows:
"(a) Holders of shares of Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, cumulative cash dividends at the
rate per annum, as shall be established by the Board of Directors or a
duly constituted committee thereof (the "Dividend Rate") and no more,
payable semiannually on June 15 and December 15 in each year (each a
"Dividend Payment Date") commencing June 15, 1993 (or, if any such day
is not a Business Day, then on the next succeeding Business Day) to
holders of record of Preferred Stock as they appear on the stock
register of the corporation at the close of business on the preceding
June 1 or December 1, as the case may be, in preference to dividends
on shares of Common Stock. or any other capital stock of the
Corporation ranking junior to the Preferred Stock in payment of
dividends. Dividends on shares of Preferred Stock shall accumulate
from the date on which such shares are originally issued. Each period
beginning on and including a Dividend Payment Date (or the date on
which the shares of Preferred Stock are originally issued, in the case
of the first dividend period after issuance of such shares) and ending
on but excluding the next succeeding Dividend Payment Date is referred
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<PAGE>
to herein as a "Dividend Period." Dividends on account of arrears for
any past Dividend Period may be declared and paid at any time, without
reference to any Dividend Payment Date, to holders of record on such
date, not exceeding 90 days preceding the payment date thereof, as
shall be fixed by the Board of Directors. Without amending these
Articles of Incorporation and to the extent permitted by Maryland law,
the Board of Directors shall have the authority to set different
Dividend Payment Dates for any series of Preferred Stock designated by
the Board of Directors."
FOURTH: Article IV, Section C-2(b)(ii) is hereby amended in its
entirety to read as follows:
"(ii) For so long as shares of Preferred Stock are outstanding,
the Corporation shall not declare, pay, or set apart for payment any
dividend or other distribution (other than a dividend or distribution
paid in shares of, or options, warrants or rights to subscribe for or
purchase, Common Stock or other stock ranking junior to the Preferred
Stock as to dividends or upon liquidation) in respect of the Common
Stock or any other stock of the Corporation ranking junior to the
Preferred stock as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration
any shares of Common Stock or any other stock of the Corporation
ranking junior to the Preferred Stock as to dividends or upon
liquidation (except by conversion into or exchange for stock of the
Corporation ranking junior to the Preferred Stock as to dividends and
upon liquidation), unless, in each case, (A) immediately thereafter,
the Basic Maintenance Amount and the 1940 Act Asset Coverage would be
achieved, (B) full cumulative dividends on all shares of Preferred
Stock due on or prior to the date of the transaction have been
declared and paid (or sufficient Deposit Securities maturing on or
prior to the date fixed for their payment have been set apart for
their payment) and (C) the Corporation has redeemed the full number of
shares of Preferred Stock required to be redeemed by any provision
contained herein for mandatory redemption."
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<PAGE>
FIFTH: Section C.2 of Article IV is hereby amended by adding at the
end thereof a new subsection (d) as follows:
"(d) In the event the Board of Directors fails to declare a
dividend with respect to any Dividend Period, or, if the Board of
Directors has declared a dividend with respect to any Dividend Period
but such dividend shall not have been paid when due, the Dividend Rate
thereafter in effect shall be increased to 200% of the then-current
Dividend Rate until such time as full cumulative dividends shall have
been paid on the shares of Preferred Stock whereupon the Dividend Rate
thereafter shall be decreased to the Dividend Rate in effect prior to
such increase."
SIXTH: Article IV, Section C.4(a)(ii) is hereby amended in its
entirety to read as follows:
"If the Corporation fails to maintain the Basic Maintenance
Amount pursuant to paragraph 6(a) of this Article IV as of any
Valuation Date, and such failure is not cured on or before the eighth
Business Day after such Valuation Date, the Corporation shall cause
the optional redemption, pursuant to Section 4.02 of the Indenture, of
MMNs then outstanding in an aggregate principal amount sufficient to
achieve the Basic Maintenance Amount as of such Valuation Date by
setting aside Deposit Securities in such principal amount, plus
interest accrued on such principal amount to the redemption date. If
the principal amount of MMNs, if any, so redeemed as a result of such
failure, does not result in the corporation's achieving the Basic
Maintenance Amount as of such Valuation Date, then the Corporation
shall redeem, at the Redemption Price, the number of shares of
Preferred Stock equal to the number of outstanding shares of Preferred
stock that could be redeemed using the proceeds from the deemed sale
of Special Redemption Assets (or, if such number is a fraction, the
next highest whole number). No shares of Preferred Stock may be
redeemed under this paragraph (ii) unless all outstanding MMNs have
first been redeemed."
SEVENTH: Article IV, Section C.4(a)(iii) is hereby amended in its
entirety to read as follows:
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<PAGE>
"If the Corporation fails to maintain the 1940 Act Asset Coverage
pursuant to paragraph 6(b) of this Article IV as of the last Business
Day of any month, and such failure is not cured (and notice of such
cure given to the Notice Agent and the Trustee) as of the last
Business Day of the following month (for this purpose, without
limitation, the failure will be deemed cured if, within the prescribed
period, the Corporation has instructed the Trustee under the Indenture
to call MMNs for redemption and certified to the Notice Agent and the
Trustee that such redemption, alone or together with other action
taken by the Corporation, will cause the Corporation to have the
requisite asset coverage), the Corporation shall cause the optional
redemption, pursuant to Section 4.02 of the Indenture, of MMNs then
outstanding in an aggregate principal amount sufficient to achieve the
1940 Act Asset Coverage as of the last Business Day of the month in
which the failure to meet such coverage initially occurred, by setting
aside Deposit Securities in such principal amount, plus interest
accrued on such principal amount to the redemption date. If the
principal amount of MMNs, if any, so redeemed as a result of such
failure, does not result in the Corporation's achieving the 1940 Act
Asset Coverage as of the last Business Day of the month in which the
failure to meet such coverage initially occurred, then the Corporation
shall redeem, at the Redemption Price, the number of shares of
Preferred Stock (or if such number is a fraction, the next highest
whole number) the redemption of which, together with the principal
amount of MMNs, if any, so redeemed, would have caused the Fund to
achieve such coverage on a pro forma basis as of the last Business Day
of the month in which the failure to achieve such coverage initially
occurred. No shares of Preferred Stock may be redeemed under this
paragraph (iii) unless all outstanding MMNs have first been redeemed."
EIGHTH: Section C.4(a) of Article IV is hereby amended by adding at
the end thereof a new subsection (vi) as follows:
"(vi) in the event the Corporation fails to redeem any shares of
Preferred Stock required to be redeemed under this
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<PAGE>
Section C.4(a), the Dividend Rate thereafter in effect shall be
increased to 200% of the then-current Dividend Rate, and the Preferred
Stock shall continue to accrue dividends until such time as the shares
required to be redeemed shall have been redeemed."
NINTH: The first sentence of Section C.4(b)(iii) of Article IV is
hereby amended in its entirety to read as follows:
"(iii) Whenever shares of the Preferred Stock are to be
redeemed, the Corporation shall mail, or shall cause the Notice Agent
to mail, not fewer than 30 nor more than 45 days prior to the
applicable redemption date, a written notice of redemption by first-
class mail, postage prepaid, to each holder of shares of Preferred
Stock to be redeemed (a "Notice of Redemption"), as its name and
address appear on the Corporation's stock transfer records, and to the
Notice Agent (if such mailing is performed by the Corporation) and the
Trustee."
TENTH: Article IV, Section C.4(b)(vi) is hereby amended in its
entirety to read as follows:
"(vi) Shares of Preferred Stock that have been redeemed,
purchased or otherwise acquired by the Corporation will be classified
by the Corporation as authorized but unissued shares of Preferred
Stock and may be reissued by the Corporation from time to time
provided that, after giving effect to such reissuance, the Basic
Maintenance Amount and the 1940 Act Asset Coverage would be achieved.
Shares of Preferred Stock that have been redeemed, purchased or
otherwise acquired by the Corporation or an affiliate thereof shall
not be deemed outstanding for any purposes of these Articles of
Incorporation, nor shall any such shares be entitled to any voting
rights hereunder, provided that, shares purchased or otherwise
acquired by an affiliate shall be deemed outstanding for purposes of
calculating the Basic Maintenance Amount
ELEVENTH: Article IV, Section C.5(d) is hereby amended in its
entirety to read as follows:
"Unless otherwise required by law, the holders of Preferred Stock
shall not have any relative rights or preferences or other
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<PAGE>
special rights other than those specifically set forth herein. In the
event that the Corporation fails to pay any dividends on the shares of
Preferred Stock or the Corporation fails to redeem any shares of
Preferred Stock which it is required to redeem, or any other event
occurs which requires the mandatory redemption of Preferred Stock and
the required Notice of Redemption has not been given, other than the
rights set forth in Section C.2(d) and C.4(a)(vi) of this Article IV,
the exclusive remedy of the holders of Preferred Stock shall be the
right to vote for directors pursuant to the provisions of this
paragraph 5. In no event shall the holders of Preferred Stock have any
right to sue for, or bring a proceeding with respect to, such
dividends or redemptions or damages for the failure to receive the
same."
TWELFTH: Article V, Section B.3 is hereby amended in its entirety to
read as follows:
"3. Without the assent or vote of the stockholders, to authorize
the issuance from time to time of shares of stock of any class of the
Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or
classes, whether now or hereafter authorized, for such consideration
as the Board of Directors may deem advisable, provided that the Board
of Directors determines and the Rating Agency and Moody's advise the
Corporation in writing that such issuance will not adversely affect
the then-current rating of the Preferred Stock."
THIRTEENTH: Article V, Section B.4 is hereby amended in its entirety
to read as follows:
"4. Without the assent or vote of the stockholders, to authorize
and issue obligations of the Corporation, secured and unsecured, as
the Board of Directors may determine, and to authorize and cause to be
executed mortgages and liens upon the real or personal property of the
Corporation, provided that, with respect to obligations with
maturities of more than 60 days or with maturities less than 60 days
that are extended or renewed, the Board of Directors determines and
the Rating Agency and Moody's advise the Corporation in writing that
such
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<PAGE>
issuance will not adversely affect the then-current rating of the
Preferred Stock."
FOURTEENTH: Article VI, Sections A and B are hereby amended by
deleting the last sentence of Section A, renumbering Section B as Section C and
inserting a new Section B as follows:
"B. Notwithstanding any provision of law requiring any action to
be taken or authorized by the affirmative vote of the holders of a
greater proportion of the votes of all classes or of any class of
stock of the Corporation, such action shall be effective and valid if
taken or authorized by the affirmative vote of a majority of the total
number of votes entitled to be cast thereon, except as otherwise
provided in this Charter."
FIFTEENTH: Article VII is hereby amended as follows:
(a) The definition of "Dividend Coverage Amount" is hereby amended in
its entirety to read as follows:
"'Dividend Coverage Amount' as of any date of determination
means:
(a) the product of:
(i) the number of shares of Preferred Stock outstanding
multiplied by $1,000;
(ii) the Dividend Rate, and
(iii) .50;
(b) less the combined value of any Deposit Securities
irrevocably deposited by the Corporation for the payment of
dividends on the Preferred Stock and any liabilities due prior to
the next Dividend Payment Date."
(b) The definition of "Eligible Portfolio Property" is hereby amended
in its entirety to read as follows:
"'Eligible Portfolio Property, means Corporate Bonds, Cash, U.S.
Government Obligations, Short-Term Money Market instruments, FNMA
Certificates, FHLMC Certificates, FHLMC Multifamily Securities, GNMA
Certificates, GNMA Multifamily Securities, GNMA Graduated Payment
Securities
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<PAGE>
and Conventional Mortgage Pass-Through Certificates less the combined
value of any Deposit Securities, as defined in the Articles of
Incorporation, as amended, irrevocably deposited by the Corporation
for the payment of principal of or interest on the MMNs or redemptions
of or dividend payments with respect to the Preferred Stock. Without
amending these Articles of Incorporation and to the extent permitted
by Maryland law, other assets may be specified as Eligible Portfolio
Property if the Board of Directors of the Corporation determines and
each of the Rating Agency and Moody's advises the Corporation in
writing that the Specification will not adversely affect the
then-current rating of the Preferred Stock."
SIXTEENTH: The foregoing amendments to the Charter of the Corporation
have been advised by the Board of Directors of the Corporation and approved by
the stockholders of the Corporation.
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<PAGE>
IN WITNESS WHEREOF, ZENIX INCOME FUND INC. has caused these presents to
be signed in its name and on its behalf by its President and its corporate seal
to be hereunder affixed and attested by its Secretary on this 11th day
------------------
of June , 1993, and its President acknowledges that these Articles of
--------------
Amendment are the act and deed of Zenix Income Fund Inc. and under the penalties
of perjury, that the matters and facts set forth herein with respect to
authorization and approval are true in all material respects to the best of his
knowledge, information and belief.
ZENIX INCOME FUND INC.
By: /s/Richard P. Roelofs
---------------------
Richard P. Roelofs
ATTEST:
/s/Francis J. McNamara, III
- ---------------------------
Francis J. McNamara, III
Secretary
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<PAGE>
ZENITH INCOME FUND INC.
ARTICLES SUPPLEMENTARY
ZENITH INCOME FUND Inc., a Maryland corporation having its principal
office in the State of Maryland in Baltimore City, certifies:
FIRST: The terms of the Corporation's Preferred Stock as set forth in
its charter are set or changed as follows:
(a) The designation of the Preferred Stock shall be "9.66% Cumulative
Preferred Stock" (the "Preferred Stock").
(b) The Dividend Rate on the Preferred Stock shall be 9.66% of the
Liquidation Preference per share per annum. Holders of shares of Preferred
Stock shall be entitled to receive, when, as and if declared by the Board
of Directors, out of funds legally available therefor, cumulative cash
dividends at the Dividend Rate payable semiannually on April 15 and October
15 in each year (each a "Dividend Payment Date") commencing October 15,
1988 (or, if any such day Is not a Business Day, then on the next
succeeding Business Day) to holders of record of Preferred Stock as they
appear on the stock register of the Corporation at the close of business on
the preceding April 1 or October 1, as the case may be, in preference to
dividends on shares of Common Stock, or any other capital stock of the
Corporation ranking junior to the Preferred Stock in payment of dividends.
(c) The date for mandatory redemption of the Preferred Stock as a
whole, unless sooner redeemed in accordance with the charter, is April 15,
1993.
(d) "Basic Maintenance Amount" means, as of any date, the dollar
amount equal to the sum of (a) 100% of the aggregate principal amount of
the Senior Money Market Notes (the "MMNs") then outstanding; (b) $1,000
times the number of shares of Preferred Stock then outstanding; (c) an
amount equal to Interest on the aggregate principal amount of the MMNs then
outstanding from the most recent date to which interest has been paid or
duly provided for (or, for purposes of calculating the Basic Maintenance
Amount prior to the first date on which interest to the MMNs is payable,
then from April 26, 1988) until, but not including, such date, plus the
Projected Interest Amount, as defined in the Articles of Incorporation, as
amended; (d) the aggregate
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<PAGE>
amount of accumulated but unpaid dividends with respect to the Preferred
Stock; (e) the amount of dividends projected to accumulate on the Preferred
Stock then outstanding from the applicable Valuation Date until the 63rd
day after such Valuation Date at the Dividend Rate; (f) the aggregate
principal amount of any then outstanding indebtedness of the Corporation
for money borrowed (other than the MMNs); and (g) the greater of $100,000
or the Corporation's current liabilities as of such date to the extent not
otherwise reflected in any of (a) through (f) above, less the combined
value of any Deposit Securities, as defined in the Articles of
Incorporation, as amended, irrevocably deposited by the Corporation for the
payment of principal of or interest on the MMNs or redemptions of or
dividend payments with respect to the Preferred Stock. Without amending
these Articles of Incorporation and to the extent permitted by Maryland
law, the elements comprising the Basic Maintenance Amount may be changed
from those set forth in these Articles of Incorporation if the Board of
Directors of the Corporation determines and the Rating Agency, as defined
in the Articles of Incorporation, as amended, advises the Corporation in
writing that the change will not adversely affect its then-current rating
of the Preferred Stock.
(e) All other preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Preferred Stock are not changed and are as
set forth in the charter.
SECOND: The terms of the Preferred Stock have been set by the Board
of Directors prior to issuance thereof pursuant to authority granted to the
Board of Directors in the charter.
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<PAGE>
IN WITNESS WHEREOF, ZENITH INCOME FUND INC. has caused these presents
to be signed in its name and on its behalf by its President and its corporate
seal to be hereunder affixed and attested by its Secretary on this 19th
-----------
day of April , 1983, and its President acknowledges that these Articles
---------------
Supplementary are the act and dead of Zenith Income Fund Inc. and, under the
penalties of perjury, that the matters and facts set forth with respect to
authorization and approval are true in all material respects to the best of his
knowledge, information and belief.
ZENITH INCOME FUND INC.
By: /s/Thomas A. Belshe
-------------------
Thomas A. Belshe
President
ATTEST:
/s/Stephen E. Cavan
- -------------------
Stephen A. Cavan
Secretary
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<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
ZENITH INCOME FUND INC.
Zenith Income Fund Inc. (the "Corporation"), a Maryland corporation
having its principal office in the State of Maryland c/o The Corporation Trust
Company, the Corporation's resident agent, at 32 South Street, Baltimore,
Maryland 21202, hereby certifies to the State Department of Assessments and
Taxation of Maryland (the "Department") that:
FIRST: The charter of the Corporation is hereby amended by striking
in their entirety Articles I through VII, inclusive, and by substituting
therefor the following, and the charter, as amended, is restated in its entirety
as follows. Capitalized terms not otherwise defined in Articles I through VI
are defined in Article VII.
ARTICLE I.
NAME
----
The name of the Corporation is Zenith Income Fund Inc.
ARTICLE II.
PURPOSES AND POWERS
-------------------
The Corporation is formed for the following purposes:
1. To conduct and carry on the business of an investment company.
2. To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
3. To issue and sell shares of its capital stock and other securities
in such amounts and on such terms and conditions and for such purposes and for
such amount or kind of consideration as may now or hereafter be permitted by
law.
4. To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to or conferred upon, corporations by the
Maryland General Corporation Law now or hereafter in force and the enumeration
of the
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<PAGE>
foregoing shall not be deemed to exclude any powers, rights or privileges so
granted or conferred.
ARTICLE III.
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Company Incorporated, 32
South Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in the State of Maryland is The Corporation Trust Company
Incorporated, a Maryland corporation. The post office address of the resident
agent is 32 South Street, Baltimore, Maryland 21202.
ARTICLE IV.
CAPITAL STOCK
-------------
A. Total Authorized; General Provisions.
------------------------------------
1. The total number of shares of capital stock that the Corporation
shall have authority to issue is two hundred fifty million two hundred fifty
thousand (250,250,000) shares, of the par value of one cent ($.01) per share and
of the aggregate par value of two million five hundred two thousand five hundred
dollars ($2,502,500), of which two hundred fifty million (250,000,000) shares
shall be Common Stock, $.01 par value per share (the "Common Stock"), and two
hundred fifty thousand (250,000) shares shall be Cumulative Preferred Stock,
$.0l par value per share (the "Preferred Stock").
2. All persons who shall acquire capital stock in the Corporation
shall acquire the same subject to the provisions of these Articles of
Incorporation and the By-Laws of the Corporation.
3. No holder of capital stock of the Corporation by virtue of being
such a holder shall have any right to purchase or subscribe for any shares of
the Corporation's capital stock or any other security that the Corporation may
issue or sell (whether out of the number of shares authorized by the Articles of
Incorporation of the Corporation or out of any shares of the Corporation's
capital stock that the Corporation may acquire) other than a right that the
Board of Directors in its discretion may determine to grant.
4. Except as otherwise provided in these Articles of Incorporation,
the Board of Directors shall have authority by resolution to classify and
reclassify any authorized but unissued shares of capital stock from time to time
by setting or changing in any one or more respects the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
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<PAGE>
qualifications or terms or conditions of redemption of the capital stock.
5. Notwithstanding any provision of law requiring any action to be
taken or authorized by the affirmative vote of the holders of a greater
proportion of the votes of all classes or of any class of capital stock of the
Corporation, such action shall be effective and valid if taken or authorized by
the affirmative vote of a majority of the total number of votes entitled to be
cast thereon, except as otherwise provided in these Articles of Incorporation.
B. Common Stock.
------------
The preferences, rights, voting powers, restrictions, limitations,
qualifications and terms and conditions of redemption in respect of the Common
Stock are as follows:
1. Ranking.
-------
The Common Stock shall rank junior to the Preferred Stock with respect
to payment of dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase, Common Stock or
other stock ranking junior to the Preferred Stock as to dividends or upon
liquidation) and distributions on liquidation or dissolution and shall have such
other qualifications, limitations and restrictions as provided in this Article
IV.
2. Dividends.
---------
After all accumulated and unpaid dividends upon all outstanding shares
of Preferred Stock for all previous Dividend Periods have been paid, and full
dividends on all outstanding shares of Preferred Stock for the then current
Dividend Period have been paid or declared and sufficient Deposit Securities for
the payment thereof have been set apart therefor, then and not otherwise, and
subject to any other applicable provisions of paragraph C of this Article IV, to
the extent there are funds legally available therefor, dividends or other
distributions may be declared upon and paid to the holders of shares of Common
Stock, to the exclusion of the holders of shares of Preferred Stock.
3. Liquidation Rights.
------------------
In the event of the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, after payment in full of the
amounts required to be paid to the holders of Preferred Stock as provided for in
paragraph C of this Article IV, the holders of shares of Common Stock shall be
entitled, to the exclusion of the holders of shares of Preferred Stock, to share
ratably in all remaining assets of the Corporation.
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<PAGE>
4. Redemption.
----------
The Corporation may repurchase shares of Common Stock to the extent
now or hereafter permitted by the laws of the State of Maryland, by the
Investment Company Act and by these Articles of Incorporation.
5. Voting Rights.
-------------
Each holder of Common Stock shall be entitled to one vote for each
such whole share (and a proportionate vote for each fractional share) on each
matter on which the holders of shares of Common Stock shall be entitled to vote.
Except as otherwise provided in paragraph C.5 of this Article IV or as required
by the Investment Company Act, the holders of shares of Common Stock and the
holders of Preferred Stock shall vote as a single class on all matters submitted
to the stockholders.
6. Fractional Shares.
-----------------
The Corporation may issue fractional shares of Common Stock. Any
fractional share of Common Stock shall carry proportionately the rights of a
whole share including, without limitation, the right to vote and the right to
receive dividends. A fractional share shall not, however, have the right to
receive a certificate evidencing it.
C. Preferred Stock.
---------------
The preferences, rights, voting powers, restrictions, limitations,
qualifications and terms and conditions of redemption in respect of the
Preferred Stock are as follows:
1. Designation.
-----------
The designation of the Preferred Stock shall be as established by the
Board of Directors or a duly constituted committee thereof. Except as otherwise
provided herein, each share of Preferred Stock shall be identical and equal in
all respects to every other share of Preferred Stock. The Corporation shall not
issue fractional shares of Preferred Stock.
2. Dividends.
---------
(a) Holders of shares of Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, cumulative cash dividends at the rate per annum as
shall be established by the Board of Directors or a duly constituted committee
thereof (the "Dividend Rate") and no more, payable semiannually on March 15 and
September 15 in each year (each a "Dividend Payment Date") commencing September
15, 1988 (or, if any such day is not a Business Day, then on the next succeeding
Business Day) to holders of record of Preferred Stock as they appear on the
stock
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register of the Corporation at the close of business on the preceding March 1 or
September 1, as the case may be, in preference to dividends on shares of Common
Stock, or any other capital stock of the Corporation ranking junior to the
Preferred Stock in payment of dividends. Dividends on shares of Preferred Stock
shall accumulate from the date on which such shares are originally issued. Each
period beginning on and including a Dividend Payment Date (or the date on which
the shares of Preferred Stock are originally issued, in the case of the first
dividend period after issuance of such shares) and ending on but excluding the
next succeeding Dividend Payment Date is referred to herein as a "Dividend
Period." Dividends on account of arrears for any past Dividend Period may be
declared and paid at any time, without reference to any Dividend Payment Date,
to holders of record on such date, not exceeding 90 days preceding the payment
date thereof, as shall be fixed by the Board of Directors.
(b) (i) No dividends shall be declared or paid or set apart for
payment on shares of Preferred Stock for any Dividend Period or part thereof
unless full cumulative dividends have been or contemporaneously are declared and
paid on all outstanding shares through the most recent Dividend Payment Dates
therefor. If full cumulative dividends are not paid on the shares of Preferred
Stock, all dividends on the shares of Preferred Stock shall be paid pro rata to
the holders of the outstanding shares of Preferred Stock entitled thereto. The
Corporation will not issue any other series or class of stock which is senior to
or on a parity with the Preferred Stock. No holders of shares of Preferred
Stock shall be entitled to any dividends, whether payable in Cash, property or
stock, in excess of full cumulative dividends as provided in this paragraph 2 on
shares of Preferred Stock. No interest or sum of money in lieu of interest
shall be payable in respect of any dividend payments on any shares of Preferred
Stock that may be in arrears.
(ii) For so long as shares of Preferred Stock are outstanding, the
Corporation shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Stock or other
stock ranking junior to the Preferred Stock as to dividends or upon liquidation)
in respect of the Common Stock or any other stock of the Corporation ranking
junior to the Preferred Stock as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any shares
of Common Stock or any other stock of the Corporation ranking junior to the
Preferred Stock as to dividends or upon liquidation (except by conversion into
or exchange for stock of the Corporation ranking junior to the Preferred Stock
as to dividends and upon liquidation), unless, in each case, (A) immediately
thereafter, the Basic Maintenance Amount and the 1940 Act Asset Coverage would
be achieved, (B) full cumulative dividends on all shares of Preferred Stock due
on or prior to the date of the
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transaction have been declared and paid (or sufficient Deposit Securities have
been set apart for their payment) and (C) the Corporation has redeemed the full
number of shares of Preferred Stock required to be redeemed by any provision
contained herein for mandatory redemption.
(iii) Any dividend payment made on the shares of Preferred Stock
shall first be credited against the dividends accumulated with respect to the
earliest Dividend Period for which dividends have not been paid.
(c) Not later than the thirtieth day next preceding each Dividend
Payment Date, the Corporation shall deposit with the Paying Agent Deposit
Securities having an initial combined value sufficient to pay the dividends that
are payable on such Dividend Payment Date which Deposit Securities shall mature
on or prior to such Dividend Payment Date. The Corporation may direct the
Paying Agent with respect to the investment of any such Deposit Securities,
provided that the proceeds of any such investment will be available at the
opening of business on such Dividend Payment Date.
3. Liquidation Rights.
------------------
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, after claims of
creditors (including holders of MMNs) but before any distribution or payment
shall be made in respect of the Common Stock or any other stock of the
Corporation ranking junior to the Preferred Stock as to liquidation payments, a
liquidation distribution in the amount of $1,000 per share (the "Liquidation
Preference"), plus an amount equal to all unpaid dividends accrued to and
including the date fixed for such distribution or payment (whether or not
declared by the Corporation, but excluding interest thereon), but such holders
shall be entitled to no further participation in any distribution or payment in
connection with any such liquidation, dissolution or winding up.
(b) If, upon any such liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of Preferred Stock shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then such available
assets shall be distributed among the holders of shares of Preferred Stock
ratably in any such distribution of assets according to the respective amounts
which would be payable on all such shares if all amounts thereon were paid in
full. Unless and until payment in full has been made to the holders of shares
of Preferred Stock of the liquidation distributions to which they are entitled,
no dividends or distributions will be
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made to holders of the Common Stock or any other stock of the Corporation
ranking junior to the Preferred Stock as to liquidation.
(c) Neither the consolidation nor merger of the Corporation with or
into any other corporation or corporations, nor the sale, lease, exchange or
transfer by the Corporation of all or substantially all of its property and
assets, shall be deemed to be a liquidation, dissolution or winding up of the
Corporation for purposes of this paragraph 3.
4. Redemption.
----------
Shares of the Preferred Stock shall be redeemed by the Corporation as
provided below:
(a) Mandatory Redemption.
--------------------
(i) Unless earlier redeemed as provided in this paragraph 4(a), the
Preferred Stock shall be redeemed as a whole on the date established by the
Board of Directors or a duly constituted committee thereof at a price equal to
$1,000 per share plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Corporation, but excluding interest
thereon) (the "Redemption Price") upon Notice of Redemption.
(ii) If (A) the Corporation fails to maintain the Basic Maintenance
Amount pursuant to paragraph 6(a) of this Article IV as of any Valuation Date,
and such failure is not cured on or before the eighth Business Day after such
Valuation Date and (B) the principal amount of MMNs, if any, that the Trustee
under the Indenture has declared to be due and payable as a result of such
failure does not result in the Corporation's achieving the Basic Maintenance
Amount as of such Valuation Date, then the Corporation shall redeem, at the
Redemption Price, the number of shares of Preferred Stock equal to the number of
outstanding shares of Preferred Stock that could be redeemed using the proceeds
from the deemed sale of Special Redemption Assets (or, if such number is a
fraction, the next highest whole number).
(iii) If (A) the Corporate fails to maintain the 1940 Act Asset
Coverage pursuant to paragraph 6(b) of this Article IV as of the last Business
Day of any month, and such failure is not cured (and notice of such cure given
to the Notice Agent and the Trustee) as of the last Business Day of the
following month (for this purpose, without limitation, the failure will be
deemed cured if, within the prescribed period, the Corporation has instructed
the Trustee under the Indenture to call MMNs for redemption and certified to the
Notice Agent and the Trustee that such redemption, alone or together with other
action taken by the Corporation, will cause the Corporation to have the
requisite asset coverage) and (B) the principal amount
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of MMNs, if any, which the Trustee under the Indenture has declared to be due
and payable as a result of an event of default specified in (S) 6.01(d)(ii) of
the Indenture does not result in the Corporation's achieving the 1940 Act Asset
Coverage as of the last Business Day of the month in which the failure to meet
such coverage initially occurred, then the Corporation shall redeem, at the
Redemption Price, the number of shares of Preferred Stock (or if such number is
a fraction, the next highest whole number) the redemption of which, together
with the principal amount of MMNs, if any, which the Trustee under the Indenture
has declared to be due and payable as a result of an event of default specified
in (S) 6.01(d)(ii) of the Indenture would have caused the Fund to achieve such
coverage on a pro forma basis as of the last Business Day of the month in which
the failure to achieve such coverage initially occurred.
(iv) Any redemption of Preferred Stock pursuant to this paragraph
4(a) shall be made out of funds legally available therefor (giving consideration
to all applicable legal restraints, including, without limitation, the
restraints imposed by Section 18(a) of the Investment Company Act).
(v) The Corporation shall notify the Paying Agent in writing by
the close of business on the next Business Day following the cure date referred
to in paragraph 4(a)(ii) or (iii) above, as the case may be, of its intention to
redeem the number of whole shares of Preferred Stock calculated pursuant to
paragraph 4(a)(ii) or (iii) above, as the case may be, and shall give Notice of
Redemption, as defined in paragraph C.4(b)(iii) of this Article IV, which shall
specify a mandatory redemption date not more than 45 days after (A) the
Valuation Date as of which the Corporation initially failed to maintain the
Basic Maintenance Amount as specified in paragraph 4(a)(ii) or (B) the last
Business Day of the month following the month as of which the Corporation
initially failed to maintain the 1940 Act Asset Coverage as specified in
paragraph 4(a)(iii).
(b) General Provisions for Redemption.
---------------------------------
(i) Notwithstanding the other provisions of this paragraph 4, no
shares of Preferred Stock may be redeemed other than as specified below, unless
all accumulated and unpaid dividends on all outstanding shares of Preferred
Stock for all past Dividend Periods shall have been or are contemporaneously
paid or declared and Deposit Securities maturing on or prior to the date fixed
for redemption are deposited or set apart for the payment of such dividends,
provided that the Corporation may, without regard to such limitations, redeem,
purchase or otherwise acquire shares of Preferred Stock (A) as a whole, pursuant
to a mandatory redemption or (B) pursuant to a purchase or exchange offer made
for all of the outstanding shares of Preferred Stock, to the extent permitted
under the Investment Company Act, Maryland law and these Articles of
Incorporation.
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<PAGE>
(ii) If fewer than all the outstanding shares of Preferred Stock
are to be redeemed, the shares to be redeemed shall be identified by the Board
of Directors of the Corporation by lot or by such other method as the
Corporation shall deem fair and equitable.
(iii) Whenever shares of the Preferred Stock are to be redeemed,
the Corporation shall mail, or shall cause the Notice Agent to mail, not fewer
than 15 nor more than 30 days prior to the applicable redemption date, a written
notice of redemption by first-class mail, postage prepaid, to each holder of
shares of Preferred Stock to be redeemed (a "Notice of Redemption"), as its name
and address appear on the Corporation's stock transfer records, and to the
Notice Agent (if such mailing is performed by the Corporation) and the Trustee.
The Notice of Redemption shall also be published by or on behalf of the
Corporation on or about the date thereof in The Wall Street Journal (or, if such
notice cannot be published therein, then in a comparable newspaper printed in
the English language and of general circulation in New York City). Each Notice
of Redemption shall state (A) the redemption date, (B) the Redemption Price, (C)
the number of shares of Preferred Stock to be redeemed, (D) the place or places
where such Preferred Stock is to be redeemed, (E) the date on which dividends on
the shares to be redeemed will cease to accumulate and (F) the provision of
these Articles of Amendment and Restatement under which the redemption is being
made. No defect in the Notice of Redemption or in the mailing or publication
thereof shall affect the validity of the redemption proceedings, except as
required by applicable law.
(iv) Following the giving of a Notice of Redemption with respect
to a redemption of shares of Preferred Stock pursuant to paragraph 4(a), (A)
such shares of Preferred Stock and (B) Deposit Securities identified by the
Corporation and having an initial combined value sufficient to effect the
redemption of such shares shall thereafter be excluded from the calculation of
the Basic Maintenance Amount, the Portfolio Calculation, and the 1940 Act Asset
Coverage.
(v) If the Corporation shall give a Notice of Redemption, then by
the thirtieth day next preceding the date fixed for redemption the Corporation
shall deposit with the Paying Agent Deposit Securities having an initial
combined value sufficient to redeem the shares of Preferred Stock to be redeemed
which Deposit Securities shall mature on or prior to such redemption date. In
such event the Corporation shall give the Paying Agent irrevocable instructions
and authority to pay the Redemption Price to the holders of the shares of
Preferred Stock called for redemption upon the redemption date. The Corporation
may direct the Paying Agent with respect to the investment of any Deposit
Securities so deposited provided that the proceeds of any such investment will
be available at the opening of business on such redemption date. Upon the date
of such deposit, or if no such deposit is made, then upon such date fixed for
redemption
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<PAGE>
(unless the Corporation shall default in making payment of the Redemption
Price), all rights of the holders of the shares of Preferred Stock so called for
redemption shall cease and terminate except the right of the holders thereof to
receive the Redemption Price thereof inclusive of accumulated but unpaid
dividends, but without any interest, and such shares shall no longer be deemed
outstanding for any purpose. The Corporation shall be entitled to receive,
promptly after the date fixed for redemption, any Cash in excess of the
aggregate Redemption Price of the shares of Preferred Stock called for
redemption on such date and any remaining Deposit Securities. Any assets so
deposited which are unclaimed at the end of two years from such redemption date
shall, to the extent permitted by law, be repaid to the Corporation, after which
the holders of the shares of Preferred Stock so called for redemption shall look
only to the Corporation for payment thereof. The Corporation shall be entitled
to receive, from time to time after the date fixed for redemption, any interest
on the Deposit Securities so deposited.
(vi) Shares of Preferred Stock that have been redeemed, purchased
or otherwise acquired by the Corporation will be classified by the Corporation
as authorized but unissued shares of Preferred Stock and may be reissued by the
Corporation from time to time. Shares of Preferred Stock that have been
redeemed, purchased or otherwise acquired by the Corporation or an affiliate
thereof shall not be deemed outstanding for any purposes of these Articles of
Incorporation, nor shall any such shares be entitled to any voting rights
hereunder.
(vii) In addition to redemption rights expressly established
under these Articles of Incorporation, the Corporation may repurchase shares of
Preferred Stock to the extent now or hereafter permitted by the laws of the
State of Maryland, by the Investment Company Act and by these Articles of
Amendment and Restatement.
(viii) If the Corporation shall not have funds legally available
for the redemption of, or is otherwise unable to redeem, all the shares of the
Preferred Stock to be redeemed on any redemption date, the Corporation shall
redeem on such redemption date the number of shares of Preferred Stock as it
shall have legally available funds, or is otherwise able, to redeem ratably from
each holder whose shares are to be redeemed and the remainder of the shares of
the Preferred Stock required to be redeemed shall be redeemed on the earliest
practicable date on which the Corporation shall have funds legally available for
the redemption of, or is otherwise able to redeem, such shares upon Notice of
Redemption.
5. Voting Rights.
-------------
(a) General. Each holder of Preferred Stock shall be entitled
-------
to one vote for each shares held on each matter on which the holders of the
Preferred Stock are entitled to vote and,
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<PAGE>
except as otherwise provided in these Articles of Incorporation or by law, the
holders of the Preferred Stock and the Common Stock of the Corporation shall
vote together as one class on all matters submitted to the stockholders;
provided, however, that at any meeting of the stockholders of the Corporation
held for the election of directors, (i) the holders of a majority of the shares
of Preferred Stock represented in person or by proxy at said meeting shall be
entitled as a class, to the exclusion of the holders of the Common Stock, to
elect two directors, (ii) the holders of a majority of the shares of Common
Stock represented in person or by proxy at said meeting shall be entitled as a
class, to the exclusion of the holders of the Preferred Stock, to elect two
directors of the Corporation, the identities of the nominees which directorships
may be fixed by the Board of Directors and (iii) subject to paragraph 5(b)
hereof, the holders of a majority of the shares of Common Stock and Preferred
Stock voting together as a single class shall be entitled to elect the balance
of the directors.
(b) Right to Elect Majority of Board of Directors.
---------------------------------------------
If at any time dividends on the Preferred Stock shall be
unpaid in an amount equal to two full years' dividends on the Preferred Stock (a
"Voting Period"), the number of directors constituting the Board of Directors
shall be automatically increased by the smallest number of additional directors
that, when added to the number of directors then constituting the Board of
Directors, shall (together with the two directors elected by the holders of
Preferred Stock pursuant to paragraph 5(a) hereof) constitute a majority of such
increased number, and the holders of Preferred Stock shall be entitled, voting
as a single class on a one-vote-per-share basis (to the exclusion of the holders
of all other securities and classes of capital stock of the Corporation), to
elect the smallest number of such additional directors of the Corporation that
shall constitute a majority of the total number of directors of the Corporation
so increased.
The Voting Period and the voting rights so created upon the
occurrence of the conditions set forth in this paragraph 5(b) shall continue
unless and until all dividends in arrears on the Preferred Stock shall have been
paid or declared and sufficient Deposit Securities set apart for the payment of
such dividends. Upon the termination of a Voting Period, the voting rights
described in this paragraph 5(b) shall cease, subject always, however, to the
revesting of such voting rights in the holders of Preferred Stock upon the
further occurrence of any of the events described in this paragraph 5(b).
(c) Voting Procedures.
-----------------
(i) As soon as practicable after the accrual of any
right of the holders of Preferred Stock to elect directors pursuant to paragraph
5(b) of this Article IV, the Corporation shall notify the Notice Agent and shall
call a special meeting of
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<PAGE>
the holders of Preferred Stock, by notice duly given to such holders by the
Corporation or by the Notice Agent on behalf of the Corporation, which meeting
shall be held not less than 10 nor more than 60 days after the date of mailing
of such notice. If the Corporation does not give notice of such special meeting,
or cause such notice to be given on its behalf by the Notice Agent as provided
above, the meeting may be called by any holder of Preferred Stock on like
notice. The record date for determining the holders of Preferred Stock entitled
to notice of and to vote at such special meeting shall be the close of business
on the fifth Business Day preceding the day on which such notice is given. At
any such special meeting and at each meeting at which directors are elected held
during a Voting Period, the holders of Preferred Stock, voting together as a
class (to the exclusion of the holders of all other securities and classes of
capital stock of the Corporation), shall be entitled to elect the number of
directors prescribed in paragraph 5(b) of this Article IV on a
one-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of the shares of Preferred Stock
present in person or by proxy shall have the power to adjourn the meeting
without notice, other than an announcement at the meeting, until a quorum is
present.
(ii) For purposes of determining any rights of the holders of
Preferred Stock to vote on any matter, whether such right is created by these
Articles of Incorporation, by statute or otherwise, if redemption of some or all
of the Preferred Stock is required, no holder of Preferred Stock shall be
entitled to vote and no share of Preferred Stock shall be deemed to be
"outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum, if prior to or concurrently with the time of
determination of shares of Preferred Stock entitled to vote or shares of
Preferred stock deemed outstanding for quorum purposes, as the case may be,
sufficient Deposit Securities for the redemption of such shares have been
deposited in trust with the Paying Agent for that purpose and the requisite
Notice of Redemption with respect to such shares shall have been given as
provided in paragraph 4(c)(iii) of this Article IV.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of holders of Preferred Stock to
elect directors pursuant to paragraph 5(b) of this Article IV shall continue,
notwithstanding the election at such meeting by the holders of Preferred Stock
of the number of directors that they are entitled to elect, and the persons so
elected by the holders of Preferred Stock, together with the incumbent
directors, shall constitute the duly elected directors of the Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the
terms of office of the directors elected by the holders of Preferred Stock
pursuant to paragraph 5(b) of this Article IV shall terminate, the two directors
elected by the
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holders of the Common Stock as a separate class, the two directors elected by
the holders of the Preferred Stock as a separate class and the remaining
directors elected by the holders of Common Stock and Preferred Stock together as
a single class pursuant to Section 5(a) of this Article IV and who are incumbent
shall constitute the directors of the Corporation and the voting rights of the
holders of Preferred Stock to elect directors pursuant to paragraph 5(b) shall
cease, subject to reinstatement as provided in paragraph 5(b) of this Article
IV.
(v) The directors elected by the holders of Preferred Stock
pursuant to paragraph 5(b) of this Article IV, shall (subject to the provisions
of any applicable law) be subject to removal only by the vote of the holders of
a majority of the shares of the Preferred Stock represented in person or by
proxy at a meeting at which a quorum is present. Any vacancy on the Board of
Directors occurring by reason of such removal or otherwise (in the case of
directors subject to election by the holders of Preferred Stock) may be filled
only by vote of the holders of at least a majority of shares of the Preferred
Stock represented in person or by proxy at a meeting at which a quorum is
present, and if not so filled such vacancy shall (subject to the provisions of
any applicable law) be filled by a majority of the remaining directors (or the
remaining director) who were elected by the holders of Preferred Stock. Any
other vacancy on the Board of Directors during a Voting Period shall be filled
as provided in the Corporation's By-Laws.
(d) Exclusive Remedy.
----------------
Unless otherwise required by law, the holders of Preferred
Stock shall not have any relative rights or preferences or other special rights
other than those specifically set forth herein. In the event that the
Corporation fails to pay any dividends on the shares of Preferred Stock or the
Corporation fails to redeem any shares of Preferred Stock which it is required
to redeem, or any other event occurs which requires the mandatory redemption of
Preferred Stock and the required Notice of Redemption has not been given, the
exclusive remedy of the holders of Preferred Stock shall be the right to vote
for directors pursuant to the provisions of this paragraph 5. In no event shall
the holders of Preferred Stock have any right to sue for, or bring a proceeding
with respect to, such dividends or redemptions or damages for the failure to
receive the same.
6. Asset Maintenance Requirements.
------------------------------
(a) Basic Maintenance Amount.
------------------------
(i) Subject to paragraph 6(a)(iv) of this Article IV,
for so long as any shares of Preferred Stock are outstanding, the Corporation
will maintain, as of each Valuation Date, Eligible Portfolio Property having an
aggregate Discounted Value
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at least equal to the Basic Maintenance Amount, as of each such Valuation Date.
(ii) On or before 5:00 P.M., New York City time, on the third
Business Day after each Valuation Date, the Corporation shall complete and
deliver to the Notice Agent and the Trustee a Portfolio Valuation Report, which
will be deemed to have been delivered if the Notice Agent and the Trustee
receive (A) a copy or telecopy, telex or other electronic transcription thereof,
or (B) a telecopy, telex or other electronic transcription setting forth at
least the aggregate Discounted Value of all Eligible Portfolio Property (the
"Portfolio Calculation") and the Basic Maintenance Amount each as of the
relevant Validation Date, and on the same day the Corporation mails to the
Notice Agent and the Trustee for delivery on the next Business Day the full
Portfolio Valuation Report. A failure by the Corporation to deliver a Portfolio
Valuation Report under this paragraph 6(a)(ii) shall be deemed to be delivery of
a Portfolio Valuation Report indicating a Portfolio Calculation less than the
Basic Maintenance Amount, as of the relevant Valuation Date.
(iii) Within three Business Days after the date of delivery to
the Notice Agent and the Trustee of a Portfolio Valuation Report in accordance
with paragraph 6(a)(ii) above relating to a Quarterly Valuation Date, the
Corporation shall deliver to the Notice Agent and the Trustee a letter reviewing
the Portfolio Calculation, prepared by the Corporation's Independent
Accountants, relating to such Portfolio Valuation Report substantially to the
effect that (A) the Independent Accountants have read the Portfolio Valuation
Report for the current Quarterly Valuation Date (the "Report"); (B) the assets
included in the Report as Eligible Portfolio Property conform to the
descriptions of and limitations on such assets established pursuant to the
provisions of these Articles of Incorporation; (C) with respect to the issue
size, compliance, issuer diversification and industry diversification
calculations, such calculations and the resulting eligible portfolio Market
Value and the discounted eligible portfolio Market Value calculations are
numerically correct; (D) with respect to the Basic Maintenance Amount, the
results of the calculation set forth in the Report have been recalculated and
are numerically correct; (E) with respect to the excess or deficiency of the
Discounted Value Amount when compared to the Basic Maintenance Amount, the
results of the calculation set forth in the Report have been recalculated and
are numerically correct; (F) with respect to the S&P rating on Corporate Bonds,
issuer name, issue size and coupon rate listed in the Report, that information
has been traced and agrees with the information listed in The Standard & Poor's
---------------------
Bond Guide, or similar compilation in the event of a rating by a Rating Agency
- ----------
other than S&P (in the event such information does not agree with or is not
listed in any such compilation, the Independent Accountants will inquire of the
publishers thereof what such information is, and provide a listing in their
letter
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of such differences, if any); (G) with respect to the lower of two bid prices
(or alternative permissible factors used in calculating the Market Value) for
purposes of valuing securities in the portfolio, the Independent Accountants
have traced the price used in the Report to the lower of the two bid prices and
verified that such information agrees (in the event such information does not
agree, the Independent Accountants will provide a listing in their letter of
such differences) and (H) the methods used to perform the calculations contained
in the Report comply with the requirements for such calculations contained in or
established pursuant to these Articles of Incorporation. Without amending these
Articles of Incorporation, the letter prepared by the Corporation's Independent
Accountants relating to any Portfolio Valuation Report may contain such
different information from that set forth above as may be agreed upon with the
Independent Accountants; provided that before any such different information
shall be included in such letter, the Corporation shall first be advised in
writing by the Rating Agency that the substitution of such different information
shall not adversely affect the then-current rating of the Preferred Stock.
If any letter reviewing the Portfolio Calculation delivered
pursuant to this paragraph shows that an error was made in the Portfolio
Valuation Report for such Quarterly Valuation Date, or shows that a lower
aggregate Discounted Value for the aggregate of all Eligible Portfolio Property
was determined by the Independent Accountants, the calculation or determination
made by such Independent Accountant shall be final and conclusive and shall be
binding on the Corporation and the Corporation shall promptly amend the
Portfolio Valuation Report and deliver the amended Portfolio Valuation Report to
the Notice Agent and the Trustee.
(iv) In the event the Portfolio Calculation shown in any
Portfolio Valuation Report delivered or deemed delivered to the Notice Agent and
the Trustee pursuant to this paragraph 6 is less than the Basic Maintenance
Amount, the Corporation shall have until and including the eighth Business Day
following the Valuation Date relating to such Portfolio Valuation Report to
achieve a Portfolio Calculation equal to or greater than the Basic Maintenance
Amount, and upon such achievement (and not later than such cure date) the
Corporation shall inform the Notice Agent and the Trustee of such achievement in
writing by delivery of a revised Portfolio Valuation Report showing a Portfolio
Calculation equal to or greater than the Basic Maintenance Amount as of the date
of such revised Portfolio Valuation Report together with an Officer's
Certificate to such effect.
(v) The Corporation shall deliver an Officer's Certificate
to the Notice Agent and the Trustee as of the last Business Day of each week
certifying that, to the best knowledge of the officers signing such Officer's
Certificate, the Portfolio
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Calculation as of such Business Day is at least equal to the Basic Maintenance
Amount.
(b) 1940 Act Asset Coverage.
-----------------------
(i) For so long as any shares of Preferred Stock are outstanding,
the Corporation will maintain, as of the last Business Day of each calendar
month, an asset coverage (as such term is defined in and as determined pursuant
to the Investment Company Act) with respect to its senior securities of a class
which is stock (as such phrase is defined in the Investment Company Act) of at
least 200% (or such higher percentage as may in the future be specified in the
Investment Company Act as the minimum asset coverage for senior securities of a
class which is stock of a closed-end investment company as a condition of paying
dividends on common stock) (the "1940 Act Asset Coverage").
(ii) For purposes of determining whether the 1940 Act Asset
Coverage is met as of any date, such asset coverage may be calculated on the
basis of values calculated with 48 hours (not including Sundays or holidays)
next preceding the time of the applicable determination. Within 10 days
following the end of each calendar month, the Corporation will deliver to the
Notice Agent and the Trustee an Officer's Certificate as of the Corporation's
compliance or failure to comply with this covenant. Failure by the Corporation
to deliver such Officer's Certificate shall be deemed a failure to satisfy the
1940 Act Asset Coverage.
(c) Liquidity Coverage.
------------------
(i) As long as any MMNs are outstanding, the Corporation shall
prepare and deliver a Certificate of Liquidity (as defined in the Indenture)
pursuant to and in accordance with the provisions of the Indenture.
(ii) From and after such time as no MMNs shall remain outstanding
and as long as any shares of Preferred Stock shall remain outstanding, the
Corporation shall make the following determinations and certifications:
(A) As of the fourth Valuation Date next preceding each
Dividend Payment Date, the Corporation shall determine (i) the Market Value of
the Dividend Coverage Assets owned by the Corporation as of that Valuation Date,
(ii) the Dividend Coverage Amount on that Valuation Date, and (iii) whether the
Minimum Liquidity Level is met as of that Valuation Date and such calculations
shall be set forth in a certificate (a "Preferred Stock Liquidity Certificate")
dated as of the Valuation Date.
(B) A Preferred Stock Liquidity Certificate may be combined
in one certificate with the Portfolio Valuation report relating to the same
Valuation Date. The Corporation shall cause the Preferred Stock Liquidity
Certificate to be
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delivered to the Notice Agent and the Trustee not later than the close of
business on the third Business Day after the relevant Valuation Date. The
Minimum Liquidity Level shall be deemed to be met as of any date of
determination if the Corporation has timely delivered a Preferred Stock
Liquidity Certificate relating to such date, which states that the Minimum
Liquidity Level has been met and which is not manifestly inaccurate. In the
event that a Preferred Stock Liquidity Certificate is not delivered to the
Notice Agent and the Trustee when required, the Minimum Liquidity Level shall be
deemed not to have been met as of the applicable date.
(iii) Within three Business Days after the date of delivery to the
Notice Agent of the Preferred Stock Liquidity Certificate in accordance with
paragraph 6(c)(ii) above, the Corporation shall deliver to the Notice Agent a
letter reviewing the Preferred Stock Liquidity Certificate prepared by the
Corporation's Independent Accountants substantially to the effect that (A) the
assets included in the Certificate as Dividend Coverage Assets conform to the
descriptions of and limitations on such assets established pursuant to these
Articles of Incorporation; (B) the calculations set forth in the Certificate are
numerically correct; and (C) the methods used to perform such calculation comply
with the requirements for such calculations contained in or established pursuant
to these Articles of Incorporation.
(iv) If the Minimum Liquidity Level is not met as of the fourth
Valuation Date next preceding any Dividend Payment Date, the Corporation shall
(A) purchase or otherwise acquire Dividend Coverage Assets
(with the proceeds from the liquidation of Eligible Portfolio Property or
otherwise) to the extent necessary so that the Minimum Liquidity Level is met as
of the thirtieth day next preceding such Dividend Payment Date, and
(B) by the fifth Business Day following such fourth
Valuation Date provide to the Notice Agent and the Rating Agency a certificate
identifying the assets to be liquidated or the other actions to be taken so that
the Minimum Liquidity Level will be met as of the thirtieth day next preceding
such Dividend Payment Date.
(d) Notices.
-------
The Corporation shall simultaneously provide to the
Notice Agent copies of the certificates, notices and calculations delivered to
the Trustee pursuant to Sections 6.01(a)(ii), 6.01(e), 11.06, 11.07, 11.11,
11.13 and 11.14 of the Indenture.
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<PAGE>
7. Liens.
-----
For so long as any shares of Preferred Stock are outstanding,
the Corporation shall not create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence of existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind (collectively "Liens") upon any of its Eligible Portfolio Property,
except (A) Liens the validity of which is being contested in good faith by
appropriate proceedings, (B) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered by the Manufacturers Hanover Trust Company or its successor as
auction agent for the MMNs or as Trustee and (D) at such time as the Preferred
Stock is not rated by the Rating Agency, or upon receipt of written confirmation
from the Rating Agency that the rating of the Preferred Stock will not be
impaired thereby. Liens otherwise incurred in connection with borrowings shall
be made in accordance with the Corporation's stated investment objective,
policies and restrictions.
ARTICLE I.
BOARD OF DIRECTORS
A. All corporate powers and authority of the Corporation (except as
otherwise provided by statute, the Articles of Amendment and Restatement or the
Corporation's By-Laws, as from time to time in effect) shall be vested in and
exercised by the Board of Directors. Except as may be required to give effect to
paragraph 5(b) of Article IV(C), the number of directors constituting the Board
of Directors shall be as set forth in the By-Laws. This number may be changed
pursuant to the By-Laws of the Corporation, but shall at no time be less than
the minimum number required under the Maryland General Corporation Law or, as
long as any shares of Preferred Stock are outstanding, the Investment Company
Act. The current number of directors is seven and the names of the persons
currently acting as directors are Heath B. McLendon, William J. Nutt, Thomas A.
Belshe, Robert E. Borgesen, Martin Brody, Phillip H. Burdett and Dwight B.
Crane.
At any time when the holders of Preferred Stock of the Corporation
become entitled to elect additional directors pursuant to paragraph 5(b) of
Article IV(C), the exact number of directors fixed by the By-Laws of the
Corporation or otherwise shall automatically be increased by the number of such
additional directors and the maximum number of directors of the Corporation
specified by these Articles of Incorporation shall be increased accordingly, if
required; and at such time as the holders of Preferred Stock shall no longer be
entitled to elect directors pursuant to paragraph 5(b) of Article IV(C), such
exact number
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shall automatically be decreased by the number by which they were increased by
reason of this provision.
B. In furtherance, and not in limitation, of the powers
conferred by the laws of the State of Maryland, but subject to the other
provisions of these Articles of Incorporation, the Board of Directors is
expressly authorized:
1. To make, alter or repeal the By-Laws of the corporation,
except where such power is reserved by the By-Laws to the stockholders, and
except as otherwise required by the Investment Company Act.
2. From time to time to determine whether and to what extent
and at what times and places and under what conditions and regulations the books
and accounts of the Corporation, or any of them other than the stock ledger,
shall be open to the inspection of the stockholders. No stockholder shall have
any right to inspect any account or book or document of the corporation, except
as conferred by law or authorized by resolution of the Board of Directors or of
the stockholders.
3. Without the assent or vote of the stockholders, to
authorize the issuance from time to time of shares of stock of any class of the
Corporation, whether now or hereafter authorized, and securities convertible
into shares of stock of the corporation of any class or classes, whether now or
hereafter authorized, for such consideration as the Board of Directors may deem
advisable.
4. Without the assent or vote of the stockholders, to
authorize and issue obligations of the Corporation, secured and unsecured, as
the Board of Directors may determine, and to authorize and cause to be executed
mortgages and liens upon the real or personal property of the Corporation.
5. To establish the basis or method for determining the value
of the assets belonging to any class, the value of the liabilities belonging to
any class and the net asset value of each share of any class of the
Corporation's capital stock.
6. To determine in accordance with generally accepted
accounting principals and practices what constitutes net profits, earnings,
surplus or net assets in excess of capital, and to determine what accounting
periods shall be used by the Corporation for any purpose; to set apart out of
any funds of the Corporation reserves for such purposes as it shall determine
and to abolish the same; to declare and pay any dividends and distributions in
cash, securities or other property from surplus or any funds legally available
therefor, at such intervals as it shall determine; to establish payment dates
for dividends or any other distributions and to provide for the payment of
declared dividends on a date earlier or later than the specified payment
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<PAGE>
date in the case of stockholders of the Corporation redeeming their entire
ownership of shares of any class of the Corporation.
7. In addition to the powers and authorities granted herein
and by statute expressly conferred upon it, the Board of Directors is authorized
to exercise all powers and do all acts that may be exercised or done by the
Corporation pursuant to the provisions of the laws of the State of Maryland,
these Articles of Incorporation and the By-Laws of the Corporation.
C. Any determination made in good faith, and in accordance with these
Articles of Incorporation and accepted accounting practices, if applicable, by
or pursuant to the direction of the Board of Directors, with respect to the
amount of assets, obligations or liabilities of the Corporation, as to the
amount of net income of the Corporation from dividends and interest for any
period or amounts at any time legally available for the payment of dividends, as
to the amount of any reserves or charges set up and the propriety thereof, as to
the time of or purpose for creating reserves or as to the use, alteration or
cancellation of any reserves or charges (whether or not any obligation or
liability for which the reserves or charges have been created has been paid or
discharged or is then or thereafter required to be paid or discharged), as to
the value of any security owned by the Corporation, the determination of the net
asset value of shares of any class of the Corporation's capital stock, or as to
any other matters relating to the issuance, sale, redemption or other
acquisition or disposition of securities or shares of capital stock of the
Corporation, and any reasonable determination made in good faith by the Board of
Directors whether any transaction constitutes a purchase of securities on
"margin," a sale of securities "short," or an underwriting of the sale of, or a
participation in any underwriting or selling group in connection with the public
distribution of, any securities, shall be final and conclusive, and shall be
binding upon the Corporation and all holders of its capital stock, past, present
and future, and shares of the capital stock of the Corporation are issued and
sold on the condition and understanding, evidenced by the purchase of shares of
capital stock or acceptance of share certificates, that any and all such
determinations shall be binding as aforesaid. No provision of these Articles of
Amendment and Restatement shall be effective to (i) require a waiver of
compliance with any provision of the Securities Act of 1933, as amended, or the
Investment Company Act, or of any valid rule, regulation or order of the
Securities and Exchange Commission under those Acts or (ii) protect or purport
to protect any director or officer of the Corporation against any liability to
the Corporation or its security holders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
D. 1. To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland
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General Corporation Law and the Investment Company Act, no director or officer
of the Corporation shall have any liability to the Corporation or its
stockholders for damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at the time of
any proceeding in which liability is asserted.
2. The Corporation shall indemnify and advance expenses to
its currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law and the Investment Company Act. The Corporation shall indemnify and advance
expenses to its officers to the same extent as its directors and to such further
extent as is consistent with law. The Board of Directors may by By-Law,
resolution or agreement make further provision for indemnification of directors,
officers, employees and agents to the fullest extent permitted by the Maryland
General Corporation Law and the Investment Company Act.
3. References to the Maryland General Corporation Law in this
Article are to that law as from time to time amended. No amendment to the
charter of the Corporation shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the amendment.
ARTICLE II.
AMENDMENTS, CLASS VOTING
------------------------
A. The Corporation reserves the right from time to time to amend,
alter, change or repeal any provision contained in these Articles of
Incorporation, now or hereafter authorized by law, including any amendment that
alters the contract rights, as expressly set forth in these Articles of
Incorporation, of any outstanding stock. Any amendment to these Articles of
Incorporation shall be adopted at either an annual or special meeting of the
stockholders pursuant to affirmative vote of a majority of all of the
outstanding shares of the Company's capital stock, voting as a single class,
except as provided below.
B. As long as any shares of Preferred Stock are outstanding (i) the
Corporation may not be voluntarily liquidated, dissolved, wound up, merged or
consolidated, or converted to open-end status, and may not sell all or
substantially all of its assets, without the approval of at least a majority of
the outstanding shares of Preferred Stock and a majority of the outstanding
shares of Common Stock, each voting as a separate class; (ii) the adoption of
any plan of reorganization adversely affecting either the Preferred Stock or the
Common Stock shall require the separate approval of a majority of the
outstanding shares of such class; (iii) any action requiring a vote of security
holders under Section 13(a)
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<PAGE>
of the Investment Company Act shall require the approval of at least a majority
of the outstanding shares of Common Stock, each voting as a separate class; (iv)
the approval of a majority of the outstanding shares of Preferred Stock, voting
separately as a class, shall be required to amend, alter or repeal any of the
preferences, rights or powers, or to increase or decrease the number of shares
of Preferred Stock authorized to be issued; (v) the holders of Preferred Stock
and Common Stock shall vote as separate classes in connection with the election
of directors as provided in paragraph 5 of Article IV(C); and (vi) the Common
Stock and the Preferred Stock will vote as separate classes to the extent
otherwise required under Maryland law or the Investment Company Act. To the
extent required under the Investment Company Act, any action by the stockholders
of the Corporation shall require a Vote of a Majority of the Outstanding Voting
Securities.
ARTICLE III.
------------
DEFINITIONS
Unless the context or use indicates a different meaning, the
following terms when used in these Articles of Incorporation shall have the
meanings set forth below, whether such terms are used in the singular or plural:
"1940 Act Asset Coverage" has the meaning specified in
paragraph C.6(b) of Article IV hereof.
"Alternative Industry Category" means, as to Corporate Bonds
and so long as the Preferred Stock is rated by Moody's, any of the industry
categories set forth below:
1. Aerospace and Defense
Major Contractor, Subsystems, Research, Aircraft
Manufacturing, Arms, Ammunition
2. Automobiles
Automotive Equipment, Auto Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes
3. Banking
Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco
Beer and Ale, Distillers, Wines and Liquors, Distributors,
Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned
Foods, Corn Refiners, Dairy Products, Meat, Poultry,
Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood,
Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
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<PAGE>
5. Buildings and Real Estate
Brick, Cement, Climate Controls, Contracting, Engineering,
Construction, Hardware, Forest Products (building-related
only), Plumbing, Roofing, Wallboard, Real Estate, Real
Estate Development, Real Estate Investment Trusts, Land
Development
6. Chemicals, Plastics and Rubber
Chemicals (Non-Agricultural), Industrial Gases, Sulphur,
Plastics, Plastic Products, Abrasives, Coatings, Paints,
Varnish, Fabricating
7. Containers, Packaging and Glass
Glass, Metal, Paper, Plastic, Fiberglass
8. Personal and Non Durable Consumer Products
(Manufacturing Only)
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning
Supplies, School Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals
Fabricating, Distribution, Mining and Sales
12. Ecological
Pollution Control, Waste Removal, Waste Treatment,
Waste Disposal
13. Electronics
Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information
Service Communication Systems, Radios, TVs, Tape Machines,
Speakers, Printers, Drivers, Technology
14. Finance
Investment Brokerage, Leasing, Syndication, Securities
15. Farming and Agriculture
Agriculture Chemicals, Agricultural Equipment, Fertilizers
16. Grocery
Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare
Ethical Drugs, Proprietary Drugs, Research, Health Care
Centers, Nursing Homes, Health Maintenance
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Organizations, Hospitals, Hospital Supplies, Medical Equipment
18. Home and Office Furnishings, Housewares, and Durable Consumer Products
Carpets, Floor Coverings, Furniture, Cooking, Ranges,
Housewares
19. Hotels, Motels, Inns and Gaming
20. Insurance
Life, Property and Casualty, Broker, Agent, Surety
21. Leisure, Amusement, Motion Pictures, Entertainment
Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo
Equipment, Records, Tapes, Sports, Outdoor Equipment (camping),
Tourism, Resorts, Games, Toy Manufacturing, Motion Picture
Production, Theaters, Motion Picture Distribution
22. Machinery (Non-Agricultural, Non-Construction, Non-Electronic)
Industrial, Machine Tools, Steam Generator
23. Mining, Steel, Iron and Non-Precious Metals
Coal, Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel,
Integrated Steel, Ore Production, Refractories, Steel Mill
Machinery, Mini-Mills, Fabricating, Distribution and Sales
24. Oil and Gas
Crude Producer, Retailer, Wall Supply, Service and Drilling
25. Personal Food and Miscellaneous Services
26. Printing, Publishing and Broadcasting
Graphic Arts, Paper, Paper Products, Business Forms, Magazines,
Books, Periodicals, Newspapers, Textbooks, Radio, T.V., Cable,
Broadcasting Equipment
27. Rail and Shipping
Rail, Shipping, Railroads, Rail-Car Builders, Ship Builders,
Containers, Container Builders, Parts, Overnite Mail, Trucking,
Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
28. Retail Stores
Apparel, Toy, Variety, Drugs, Department, Mail Order, Catalog,
Showroom
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<PAGE>
29. Telecommunications
Local, Long Distance, Independent, Telephone, Telegraph,
Satellite, Equipment, Research, Cellular
30. Textiles and Leather
Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes
31. Transportation
Air, Bus, Rail
32. Utilities
Electric, Water, Hydro Power, Gas, Diversified
"Auction Date" with respect to the MMNs means the Business Day
next preceding an Interest Payment Date for the MMNs.
"Basic Maintenance Amount" means, as of any date, the dollar
amount equal to the sum of (a) 100% of the aggregate principal amount of the
MMNs then outstanding; (b) $1,000 times the number of shares of Preferred Stock
then outstanding; (c) an amount equal to interest on the aggregate principal
amount of the MMNs then outstanding from the most recent date to which interest
has been paid or duly provided for (or, for purposes of calculating the Basic
Maintenance Amount prior to the first date on which interest on the MMNs is
payable, then from a date determined by the Board of Directors or a duly
constituted committee thereof) until, but not including, such date, plus the
Projected Interest Amount; (d) the aggregate amount of accumulated but unpaid
dividends with respect to the Preferred Stock; (e) the amount of dividends
projected to accumulate on the Preferred Stock then outstanding from the
applicable Valuation Date until the 63rd day after such Valuation Date at the
Dividend Rate; (f) the aggregate principal amount of any then outstanding
indebtedness of the Corporation for money borrowed (other than the MMNs); and
(g) the greater of an amount to be determined by the Board of Directors or a
duly constituted committee thereof or the Corporation's current liabilities as
of such date to the extent not otherwise reflected in any of (a) through (f)
above, less the combined value of any Deposit Securities irrevocably deposited
by the Corporation for the payment of principal of or interest on the MMNs or
redemptions of or dividend payments with respect to the Preferred Stock. Without
amending these Articles of Incorporation and to the extent permitted by Maryland
law, the elements comprising the Basic Maintenance Amount may be changed from
those set forth in these Articles of Incorporation if the Board of Directors of
the Corporation determines and the Rating Agency advises the Corporation in
writing that the change will not adversely affect its then current rating of the
Preferred Stock.
"Board of Directors" means the Board of Directors of the
Corporation.
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<PAGE>
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday that is not a day on which banking institutions in the City of New
York, New York or in the city in which the Corporate Trust Office of the Trustee
under the Indenture is located are authorized or obligated by law or executive
order to close and which is a day on which the New York Stock Exchange, Inc. is
open for trading.
"Cash" means such coin or currency of the United States as at
the time shall be legal tender for payment of public and private debts.
"Conventional Mortgage Pass-Through Certificates" means any
instrument issued in bearer or registered form, that is one of a class or series
or by its terms is divisible into a class or series, and that is of a type
commonly dealt in upon securities exchanges or markets or commonly recognized in
any area in which it is issued or dealt in as a medium for investment,
evidencing (directly or indirectly) a proportional undivided interest in
specified pools of whole mortgage loans that are secured by a valid first lien
on each mortgagor's fee or leasehold interest in related mortgaged property
(except for Permitted Tax Liens and other matters to which like properties are
commonly subject which neither individually nor in the aggregate materially
interfere with the benefits of the security intended to be provided by such
mortgages or deeds of trust, and standard exceptions and exclusions in title
insurance policies) on one- to four-unit residences (including, without
limitation, owner-occupied attached or detached single-unit residences, two- to
four-unit primary residences, condominiums, second/vacation homes and non-owner
occupied residences) and with respect to which the Required Documentation is
required to be held by a trustee or independent custodian, which mortgage loans
are serviced pursuant to servicing agreements with servicers that have either
expressed the intention to advance funds to meet deficiencies (to the extent
such servicers reasonably believe such advances are recoverable) or provided for
alternative credit enhancement in lieu thereof, and which instruments (a) have
been rated "AA" or better by S&P or (b) do not qualify pursuant to clause (a)
above, but the inclusion of which as Eligible Portfolio Property will not, in
and of itself, impair, or cause the Preferred Stock to fail to retain the rating
assigned to such Preferred Stock by the Rating Agency, as evidenced by a letter
to the Corporation to such effect from the Rating Agency which letter shall be
delivered to the Notice Agent and the Trustee at the time each such Conventional
Mortgage Pass-Through Certificate is to be included in the Eligible Portfolio
Property, provided, that a Conventional Mortgage Pass-Through Certificate shall
be eligible for inclusion in the Eligible Portfolio Property as of any Valuation
Date only if it continues to satisfy as of such Valuation Date the requirements
of at least one of clauses (a) or (b) above, as the Corporation may confirm
verbally or in writing, directly or indirectly, or by reference to a publication
of the Rating Agency, by confirmation from a nationally recognized
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<PAGE>
securities dealer having a minimum capitalization of $25 million or by such
other means as the Rating Agency shall approve. The Notice Agent and the Trustee
shall be entitled to rely on the representations of the Corporation contained in
the Portfolio Valuation Report with respect to any Valuation Date, that as of
such Valuation Date the Corporation has confirmed that the Conventional Mortgage
Pass-Through Certificates included in the Eligible Portfolio Property are within
the scope of this paragraph.
"Corporate Bonds" means corporate debt obligations (other than
Short-Term Money Market Instruments or U.S. Government Obligations) rated from
CCC to AAA by S&P, which corporate debt obligations (a) provide for the periodic
payment of interest thereon in cash, (b) do not provide for conversion or
exchange into equity capital at any time over their respective lives, (c) have
been registered under the Securities Act of 1933, as amended, and (d) have not
had notice given in respect thereof that any such corporate debt obligations are
the subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the aggregate value of the
Corporation's assets at any time shall not be subject to the provisions of this
clause (d)). In addition, no corporate debt obligation held by the Corporation
shall be deemed a Corporate Bond (i) if it fails to meet the criteria in column
(1) below or (ii) to the extent (and only to the proportionate extent) the
acquisition or holding thereof by the Corporation causes the Corporation to
exceed any applicable limitation set forth in column (2) or (3) below as of any
relevant date of determination:
<TABLE>
<CAPTION>
Column (1) Column (2) Column (3)
---------- ---------- ----------
Maximum Percent
of Value of Corp- Maximum Percent of Value of
oration Assets, Corporation Assets, Including
Including Eligible Portfolio Eligible Portfolio Property,
S&P Minimum Original Issue Size of Property, Invested in Invested in any One Industry
Rating (1) Each Issue any One Issue (2) Category (2)
- ---------- ---------- ----------------- ------------
($ in millions)
<S> <C> <C> <C>
AAA $100 10.0% 50.0%
AA 100 10.0 33.3
A 100 10.0 33.3
BBB 100 5.0 20.0
BB 100(4) 4.0 12.0
B 100(4) 3.0 8.0
CCC(3) 100(4) 3.0 8.0
</TABLE>
- ---------------------------
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<PAGE>
(1) Rating designations include (+) or (-) modifiers to the S&P rating
where appropriate except that corporate debt obligations rated CCC-
shall not constitute Corporate Bonds.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(3) Corporate debt obligations in this rating category must be subordinated
debt of the issuer to constitute Corporate Bonds and the aggregate
value of corporate debt obligations in this rating category in excess
of 20% of the aggregate value of the Corporation's assets, including
Eligible Portfolio Property, shall not be deemed within the definition
of Corporate Bonds.
(4) 20% of the aggregate value of all Corporate Bonds in these rating
categories may be from issues with an original issue size of greater
than or equal to $50 million and less than $100 million.
In addition, so long as the Preferred Stock is rated by Moody's, no corporate
debt obligation held by the Corporation shall be deemed a Corporate Bond (i) if
it fails to meet the criteria in column (1) below or (ii) to the extent (and
only to the proportionate extent) the acquisition or holding thereof by the
Corporation causes the Corporation to exceed any applicable limitation set forth
in column (2) or (3) below as of any relevant date of determination:
<TABLE>
<CAPTION>
Column (1) Column (2) Column (3)
---------- ---------- ----------
Maximum Percent of Value of Maximum Percent of Value of
Corporation Assets, Corporation Assets, Including
Including Eligible Portfolio Eligible Portfolio Property,
S&P Minimum Original Issue Size of Property, Invested in Invested in any
Rating (1) Each Issue any One Issuer(2) One Alternative Industry Category(2)
- ---------- ---------- ----------------- ------------------------------------
($ in millions)
<S> <C> <C> <C>
AAA $100 10.0% 50.0%
AA 100 10.0 33.3
A 100 10.0 33.3
BBB 100 5.0 20.0
BB 100(4) 4.0 12.0
B 100(4) 3.0 8.0
CCC(3) 100(4) 2.0 5.0
</TABLE>
- -----------------------
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<PAGE>
(1) Rating designations include (+) or (-) modifiers to the S&P rating
where appropriate except that corporate debt obligations rated CCC-
shall not constitute Corporate Bonds.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(3) Corporate debt obligations in this rating category must be subordinated
debt of the issuer to constitute Corporate Bonds and the aggregate
value of corporate debt obligations in this rating category in excess
of 20% of the aggregate value of the Corporation's assets, including
Eligible Portfolio Property, shall not be deemed within the definition
of Corporate Bonds.
(4) 20% of the aggregate value of all Corporate Bonds in these rating
categories may be from issues with an original issue size of greater
than or equal to $50 million and less than $100 million.
Without amending these Articles of Incorporation and to the extent permitted by
Maryland law, the assets (and/or the characteristics thereof) included within
the definition of Corporate Bonds for purposes of determining compliance with
the Basic Maintenance Amount may be changed to encompass other assets
constituting, and/or other characteristics of, corporate debt obligations from
those set forth in these Articles of Incorporation if the Board of Directors of
the Corporation determines and the Rating Agency or Moody's, as the case may be,
advises the Corporation in writing that the change will not adversely affect the
then-current rating of the Preferred Stock.
"Deposit Securities" means Cash, U.S. Government Obligations
and Short-Term Money Market Instruments. Except for purposes of determining
compliance with the Basic Maintenance Amount, each Deposit Security shall be
deemed to have a value equal to its principal or face amount payable at maturity
plus any interest payable thereon after delivery of such Deposit Security but
only if payable on or prior to the applicable payment date in advance of which
the relevant deposit is made.
"Discount Factor" means, for any asset held by the
Corporation, the number set forth opposite each such type of asset in the
following table (it being understood that any asset held by the Corporation and
not listed in the following table or in an amendment or supplement thereto shall
have a Discounted Value of zero):
<TABLE>
<CAPTION>
Type of Eligible Portfolio Property Discount Factor
- ----------------------------------- ---------------
<S> <C>
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
</TABLE>
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<TABLE>
<S> <C>
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
Type IX Corporate Bonds: 2.20
GNMA Certificates with fixed interest rates: 1.40
GNMA Certificates with adjustable interest rates: 1.54
FHLMC and FNMA Certificates with fixed interest rates: 1.50
FHLMC and FNMA Certificates with adjustable interest rates: 1.58
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable interest rates: (1)
GNMA Multifamily Securities: (1)
GNMA Graduated Payment Securities (2): 1.60
Conventional Mortgage Pass-Through Certificates: (1)
U.S. Government Obligations having a remaining term to maturity of 90 days or less: 1.00
U.S. Government Obligations having a remaining term to maturity of more than 90 days
but not more than five years: 1.28
U.S. Government Obligations having a remaining term to maturity of more than 5 years
but not more than ten years: 1.35
U.S. Government Obligations having a remaining term to maturity of more than 10 years
but not more than 15 years: 1.45
U.S. Government Obligations having a remaining term to maturity of more than 15 years
but not more than 30 years: 1.50
Cash and Short-Term Money Market Instruments: 1.00
</TABLE>
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(1) The Discount Factor determined therefor in writing by the Rating Agency.
(2) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Corporation notifies the Notice Agent and the Trustee
that scheduled principal payments are being made to holders; in the case of GNMA
Graduated Payment Securities as to which the Corporation notifies the Notice
Agent and the Trustee that scheduled principal payments are not being made to
holders, the Discount Factor shall be that which is determined in writing by the
Rating Agency.
Without amending these Articles of Incorporation and to the extent permitted by
Maryland law, the Discount Factor applied to determine the Discounted Value of
any item of Eligible Portfolio Property may be changed from that set forth in
these Articles of Incorporation or a Discount Factor may be specified for any
asset
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constituting Eligible Portfolio Property if the Board of Directors of the
Corporation determines and the Rating Agency advises the Corporation in writing
that the change or specification will not adversely affect the then-current
rating of the Preferred Stock.
"Discounted Value" with respect to any asset held by the
Corporation as of any date means the quotient of the Market Value of each such
asset divided by the applicable Discount Factor, provided that in no event shall
the Discounted Value of any asset constituting Eligible Portfolio Property as of
any date exceed the unpaid principal balance or face amount of such asset as of
that date. With respect to the calculation of the aggregate Discounted Value of
all Corporate Bonds included in the Corporation's Eligible Portfolio Property in
determining the aggregate Discounted Value of the Corporation's Eligible
Portfolio Property for comparison with the Basic Maintenance Amount, such
calculations shall be made using the criteria set forth in the definitions of
Corporate Bonds and Market Value and set forth herein. Notwithstanding any other
provision hereof, any Corporate Bond that has a remaining term to maturity of
more than 30 years and any asset to which a Discount Factor is not assigned
shall have a Discounted Value of zero. Without amending these Articles of
Incorporation and to the extent permitted by Maryland law, the criteria used to
determine the Discounted Value with respect to any asset held by the Corporation
as of any date may be changed from those set forth in these Articles of
Incorporation if the Board of Directors of the Corporation determines and the
Rating Agency advises the Corporation in writing that the change will not
adversely affect its then-current rating of the Preferred Stock.
"Dividend Coverage Amount" as of any date of determination
means:
(a) the product of:
(i) the number of shares of Preferred Stock
outstanding multiplied by $1,000,
(ii) the Dividend Rate, and
(iii) .50;
(b) less the combined value of any Deposit Securities
irrevocably deposited by the Corporation for the payment of dividends on the
Preferred Stock.
"Dividend Coverage Assets" as of any date of determination
means Deposit Securities having maturity dates not later than the day preceding
the next Dividend Payment Date.
"Dividend Payment Date" has the meaning specified in paragraph
C.2(a) of Article IV hereof.
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"Dividend Period" has the meaning specified in paragraph
C.2(a) of Article IV hereof.
"Eligible Portfolio Property" means Corporate Bonds, Cash,
U.S. Government Obligations, Short-Term Money Market Instruments, FNMA
Certificates, FHLMC Certificates, FHLMC Multifamily Securities, GNMA
Certificates, GNMA Multifamily Securities, GNMA Graduated Payment Securities and
Conventional Mortgage Pass-Through Certificates. Without amending these Articles
of Incorporation and to the extent permitted by Maryland law, other assets may
be specified as Eligible Portfolio Property if the Board of Directors of the
Corporation determines and the Rating Agency advises the Corporation in writing
that the specification will not adversely affect the then-current rating of the
Preferred Stock.
"FHLMC" means the Federal Home Loan Mortgage Corporation
created by Title III of the Emergency Home Finance Act of 1970 and includes any
successor thereto.
"FHLMC Certificate" means a mortgage participation certificate
in physical or book-entry form, the timely payment of interest on and the
ultimate collection of principal of which is guaranteed by FHLMC, and which
evidences a proportional undivided interest in, or participation interest in,
specified pools of fixed-, variable- or adjustable-rate, fully amortizing
mortgage loans secured by first-priority mortgages on one- to four-family
residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily
Security" in physical or book-entry form, the timely payment of interest on and
the ultimate collection of principal of which is guaranteed by FHLMC, and which
evidences a proportional undivided interest in, or participation interest in,
specified pools of fixed-, variable- or adjustable-rate mortgage loans secured
by first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Preferred Stock to fail to retain the rating assigned to the Preferred Stock by
the Rating Agency, as evidenced by a letter to such effect from the Rating
Agency.
"FNMA" means the Federal National Mortgage Association, a
United States Government-sponsored private corporation established pursuant to
Title VIII of the Housing and Urban Development Act of 1968 and includes any
successor thereto.
"FNMA Certificate" means a mortgage pass-through certificate
in physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by FNMA, and which evidences a proportional
undivided interest in specified pools of fixed-, variable- or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on
single-family residences.
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"GNMA" means the Government National Mortgage Association and
includes any successor thereto.
"GNMA Certificate" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA and which evidences a
proportional undivided interest in specified pools of fixed-, variable-, or
adjustable-rate, fully amortizing mortgage loans secured by first-priority
mortgages on single-family residences.
"GNMA Graduated Payment Security" means a fully modified
pass-through certificate in physical or book-entry form, the full and timely
payment of principal of and interest on which is guaranteed by GNMA, which
obligation is backed by the full faith and credit of the United States, and
which evidences a proportional undivided interest in specified pools of
graduated payment mortgage loans with payments that increase annually at a
predetermined rate for up to the first five or ten years of the mortgage loan
and that are secured by first-priority mortgages on one- to four-unit
residences.
"GNMA Multifamily Security" means a fully modified
pass-through certificate in physical or book-entry form, the full and timely
payment of principal of and interest on which is guaranteed by GNMA, which
obligation is backed by the full faith and credit of the United States, and
which evidences a proportional undivided interest in specified pools of
fixed-rate mortgage loans secured by first-priority mortgages on multifamily
residences, the inclusion of which in the Eligible Portfolio Property will not,
in and of itself, impair or cause the Preferred Stock to fail to retain the
rating assigned to such Preferred Stock by the Rating Agency as evidenced by a
letter to such effect from the Rating Agency.
"Indenture" means the Indenture dated as of April 1, 1988
between the Corporation and Manufacturers Hanover Trust Company, as Trustee,
relating to the MMNs.
"Independent Accountants" means the Corporation's independent
accountants, which shall be a nationally recognized accounting firm.
"Industry Category" as to any Corporate Bond means any of the
industry categories set forth in the following table:
1. Aerospace and Defense
2. Airlines
3. Automobile/Auto Parts/Truck Manufacturing
4. Banks/Savings and Loans
5. Finance Companies/Consumer Credit
6. Financial Services - Brokerage/
Syndication/Leasing
7. Building/Construction
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8. Real Estate Development/REITS
9. Broadcasting - TV, Cable, and Radio
10. Publishing
11. Electronics/Computers
12. Electrical Equipment
13. Diversified/Conglomerate Services
14. Diversified/Conglomerate Manufacturing
15. Leisure/Amusement/Motion Pictures
16. Agricultural Chemicals
17. Chemicals
18. Food
19. Beverage
20. Tobacco
21. Retail
22. Consumer Durable Goods/Home Furnishings
23. Grocery/Convenience Stores
24. Healthcare/Drugs/Hospital Supplies
25. Children/Toys
26. Personal Care Products/Cosmetics
27. Hotel/Gaming
28. Insurance Companies
29. Machinery
30. Metals/Mining
31. Oil/Natural Gas
32. Oil Services
33. Packaging/Containers
34. Paper/Forest Products/Printing
35. Pollution Control/Waste Removal
36. Electric Utilities
37. Other Utilities
38. Rail/Trucking/Overnight Delivery
39. Telephone/Communications
40. Textiles/Apparel
41. Transportation
42. Agriculture/Agricultural Equipment
43. Miscellaneous
Without amending these Articles of Amendment and Restatement and to the extent
permitted by Maryland law, the Industry Categories applicable with respect to
the Corporation may be changed from those set forth in these Articles of
Incorporation to other Industry Categories recognized by the Rating Agency if
the Board of Directors of the Corporation determines and the Rating Agency
advises the Corporation in writing that the change will not adversely affect its
then-current rating of the Preferred Stock.
"Interest Payment Date" means, with respect to the MMNs, a
date for the payment of interest on the MMNs pursuant to the Indenture.
"Interest Period" means, with respect to the MMNs, the period
beginning on and including an Interest Payment Date (or the date of original
issue of the MMNs, in the case of the first
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interest period) and ending on but excluding the next succeeding Interest
Payment Date.
"Investment Company Act" means the Investment Company Act of
1940 (15 U.S. Code ss. 80 et seq.), as amended from time to time.
"Liquidation Preference" has the meaning set forth in
paragraph C.3(a) of Article IV hereof.
"Market Value" as of any date means the amount determined with
respect to specific assets of the Corporation in the manner set forth below:
(a) as to any Corporate Bond, (i) the product of (A) the
unpaid principal balance of such Corporate Bond as of the Reporting Date and (B)
the lower of two bid prices for such Corporate Bond provided by two nationally
recognized securities dealers with a minimum capitalization of $25 million or by
one such securities dealer and any other source (provided that the utilization
of such source would not adversely affect the rating of the Preferred Stock) to
the custodian of the Corporation's assets, at least one of which shall be
provided in writing or by telecopy, telex or other electronic transcription or
similar means, and in turn provided to the Corporation by any such means by such
custodian (provided that evidence of the bid quotes furnished by such custodian
shall be provided to the Notice Agent and the Trustee by the Corporation with
the related Portfolio Valuation Report), plus (ii) accrued interest on such
Corporate Bond (unless such accrued interest is payable to the holder of such
Corporate Bond prior to the next Valuation Date), or, if two bid prices cannot
be obtained, such item of Eligible Portfolio Property shall have a Market Value
of zero;
(b) the product of (i) as to GNMA Certificates, GNMA Graduated
Payment Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the aggregate unpaid principal
amount of the mortgage loans evidenced by each such certificate or security, as
the case may be, as determined by the Corporation by any method which the
Corporation believes reliable, which may include amounts shown on the most
recent report related to the certificate of security received by the Corporation
prior to the Reporting Date, and as to U.S. Government Obligations and
Short-Term Money Market Instruments (other than qualifying demand deposits,
federal funds, bankers' acceptances and next Business Day's repurchase
obligations), the face amount or aggregate principal amount of such U.S.
Government Obligations or Short-Term Money Market Instruments, as the case may
be, and (ii) the lower of the bid prices for the same kind of certificates,
securities or instruments, as the case may be, having, as nearly as practicable,
comparable interest rates and maturities provided by two nationally recognized
securities dealers having minimum capitalization of $25 million or by one such
securities dealer
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and any other source (provided that the utilization of such source would not
adversely affect the rating of the Preferred Stock) to the custodian of the
Corporation's assets, at least one of which shall be provided in writing or by
telecopy, telex or other electronic transcription or similar means, and in turn
provided to the Corporation by any such means by such custodian (provided that
evidence of the bid quotes furnished by such custodian shall be delivered to the
Notice Agent and the Trustee with the related Portfolio Valuation Report), or,
if two bid prices cannot be obtained, such item of Eligible Portfolio Property
will have a Market Value of zero;
(c) as to Conventional Mortgage Pass-Through Certificates, the
product of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the certificates as determined by the Corporation by any method which
the Corporation believes reliable, which may include amounts based on verbal
reports of the servicers of the related mortgage loans to the Corporation, as of
the applicable Reporting Date and (ii) the dollar value of the lower of two bid
prices per dollar of outstanding principal amount as of such applicable
Reporting Date for such certificates provided by two nationally recognized
securities dealers having minimum capitalization of $25 million or by one such
securities dealer and any other source (provided that the utilization of such
source would not adversely affect the rating of the Preferred Stock) to the
custodian of the Corporation's assets, at least one of which shall be provided
in writing or by telecopy, telex or other electronic transcription or similar
means, and in turn provided to the Corporation by any such means by such
custodian (provided that evidence of the bid quotes furnished by such custodian
shall be delivered to the Notice Agent and the Trustee with the related
Portfolio Valuation Report), or, if two bid prices cannot be obtained, such item
of Eligible Portfolio Property shall have a Market Value of zero; and
(d) as to Cash, demand deposits, federal funds, bankers'
acceptances and next Business Day's repurchase agreements included in Short-Term
Money Market Instruments, the face value thereof; and
(e) as to any other asset of the Fund, such value as the
Rating Agency may prescribe.
Without amending these Articles of Incorporation and to the
extent permitted by Maryland law, (i) the calculation of the Market Value of an
asset constituting Eligible Portfolio Property may be changed to any method
recognized by the Rating Agency from that set forth in these Articles of
Incorporation and (ii) a method recognized by the Rating Agency for calculating
the Market Value of any asset identified as Eligible Portfolio Property and not
listed in these Articles of Incorporation may be specified if the Board of
Directors of the Corporation determines and the Rating Agency advises in writing
that the change or specification
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will not adversely affect the then-current rating of the Preferred Stock. As
used in this definition of Market Value, "in writing" includes telecopies,
telexes or other electronic transcription, or a computer-obtained quotation
reducible to written form. Upon any failure to obtain two bid prices as
described in paragraphs (a), (b) and (c) above with respect to any item of
Eligible Portfolio Property as of any Valuation Date, the Corporation shall
notify the Rating Agency in writing.
"MMNs(TM)" means the Corporation's Senior Money Market
Notes(TM) Due 1995 issued pursuant to the Indenture.
"Minimum Liquidity Level is met" means, as of any date of
determination, that the aggregate Market Value of the Dividend Coverage Assets
equals or exceeds the Dividend Coverage Amount.
"Moody's" means Moody's Investors Services, Inc., a New York
corporation, and includes any successor thereto.
"Notice Agent" means Boston Safe Deposit and Trust Company and
its successors or any other notice agent appointed by the Corporation.
"Notice of Redemption" has the meaning specified in paragraph
C.4(c)(iii) of Article IV hereof.
"Officer's Certificate" means a certificate of the Corporation
signed by its Chairman of the Board, any Vice Chairman, its President, any Vice
President, its Treasurer, any Assistant Treasurer, its Secretary, any Assistant
Secretary, its Controller or any Assistant Controller.
"Paying Agent" means Boston Safe Deposit and Trust Company and
its successors or any other paying agent appointed by the Corporation.
"Permitted Tax Liens" means liens of general and special taxes
and assessments on the property in question.
"Person" means any individual, corporation, company, joint
venture, voluntary association, partnership, trust, unincorporated organization
or government or any agency, instrumentality or political subdivision thereof.
"Portfolio Calculation" shall have the meaning specified in
paragraph C.6(a)(ii) of Article IV hereof.
"Portfolio Valuation Report" means an Officer's Certificate
delivered to the Notice Agent and the Trustee to the effect that, as of the
relevant Valuation Date, the Corporation has:
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(a) calculated the Market Value of each item included as
Eligible Portfolio Property, with related calculations being set forth in the
report and the bid quotes used to determine the Market Value being included in
the report;
(b) calculated the Discounted Value of each item of the
Eligible Property, the results of such calculations being set forth in the
report;
(c) calculated the Basic Maintenance Amount, such calculation
being set forth in the report;
(d) totaled the Discounted Value for all items included as
Eligible Portfolio Property, such total being set forth in the report; and that
(e) the aggregate amount referred to in clause (d) above is
equal to or in excess of the amount referred to in clause (c) above or, in the
event the aggregate amount referred to in clause (d) above is less than the
amount referred to in clause (c) above, setting forth a statement to such effect
and the amount of any such deficiency.
The information to be contained in the Portfolio Valuation
Report to be prepared and delivered pursuant to these Articles of Incorporation
may be combined in a single certificate with the information contained in the
Portfolio Valuation Report relating to the same Valuation Date prepared and
delivered pursuant to the Indenture.
"Projected Interest Amount" for the MMNs shall mean, if the
date of determination is a Valuation Date, the amount of interest, based on the
aggregate principal amount of MMNs Outstanding (as such term is defined in the
Indenture) on such Valuation Date, projected to accrue on such MMNs from such
Valuation Date until the 63rd day after such Valuation Date, at the following
interest rates:
(a) if the Valuation Date is the date of original issue of the
MMNs or an Interest Payment Date (i) for the Interest Period beginning on the
date of original issue of the MMNs or such Interest Payment Date and ending on
(but not including) the first following Interest Payment Date, the Applicable
Rate (as defined in the Indenture) with respect to the MMNs in effect on such
Valuation Date and (ii) for the period beginning on (and including) such first
following Interest Payment Date and ending on (and including) the 63rd day
following such Valuation Date, the product of 1.95 and (x) the Maximum Rate with
respect to the MMNs (as defined in the Indenture) on the date of original issue
of the MMNs (if such Valuation Date is such original issuance date) or (y) the
Maximum Rate with respect to the MMNs as of the last occurring Auction Date (or
200% of LIBOR, as defined in the Indenture, if an event of default under
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the Indenture has occurred) (if such Valuation Date is any Interest Payment
Date); and
(b) if such Valuation Date is not the date of original issue
of the MMNs or an Interest Payment Date (i) for the period beginning on such
Valuation Date and ending on (but not including) the first following Interest
Payment Date, the Applicable Rate with respect to the MMNs in effect on such
Valuation Date, and (ii) for the period beginning on (and including) such first
following Interest Payment Date and ending on (but not including) the sooner of
the second following Interest Payment Date or the 64th day following such
Valuation Date, the product of 1.95 and x) the Maximum Rate with respect to the
MMNs on the date of original issue of the MMNs (if such Valuation Date occurs
prior to the first Auction Date) or (y) the Maximum Rate with respect to the
MMNs on the last occurring Auction Date (or 200% of LIBOR, as defined in the
Indenture, if an event of default under the Indenture has occurred) (in the case
of any other Valuation Date) and (iii) for the period, if any, beginning on (and
including) such second following Interest Payment Date and ending on (but not
including) the 64th day following such Valuation Date, the product of 2.50 and
the rate specified in clause (x) or (y) of this paragraph (b), as the case may
be.
If the date of determination is not a Valuation Date, then the
Projected Interest Amount on such date of determination shall equal the
Projected Interest Amount therefor on the immediately preceding Valuation Date,
adjusted to reflect any decrease in the number of MMNs Outstanding. Without
amending these Articles of Incorporation and to the extent permitted by Maryland
law, for so long as the Rating Agency is rating the MMNs, the calculation of the
Projected Interest Amount may be made on bases other than those set forth above
if the Board of Directors of the Corporation determines and the Rating Agency
shall have advised the Corporation in writing that the revised calculation of
the Projected Interest Amount would not adversely affect the then-current rating
of the MMNs.
"Quarterly Valuation Date" means, so long as any shares of
Preferred Stock are outstanding, the last Business Day of March, June, September
and December of each year, commencing June 1988.
"Rating Agency" means S&P, for so long as S&P issues a rating
for the Preferred Stock, and, at such time as S&P no longer issues a rating for
the Preferred Stock, the successor to S&P as the primary rating agency for the
Preferred Stock.
"Redemption Price" has the meaning set forth in paragraph
C.4(b) of Article IV hereof.
"Reporting Date" with respect to any price referred to in the
definition of the Market Value of an item of Eligible
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Portfolio Property shall mean the date as of which the Market Value of such item
of Eligible Portfolio Property is to be determined or, if no such price is
available as provided above for such date, the next closest prior date as of
which such price is so available, provided, that no such price shall be deemed
--------
to be available as of a Reporting Date if such price is not available as of a
date within ten Business Days next preceding the date as of which the
determination of such Market Value is to be made.
"Required Documentation" with respect to a mortgage loan
means:
(a) the mortgage note or other evidence of indebtedness
secured by the mortgage endorsed without recourse in blank or to the trustee or
other custodian and accompanied by an assignment thereof;
(b) the mortgage, deed of trust, deed to secure debt or
similar security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other custodian, in
recordable form as may be appropriate in the jurisdiction where the property is
located and evidence that such assignment has been recorded in the name of the
trustee or other custodian, and such trustee or other custodian receives an
opinion of counsel (containing only such exceptions as may be permissible under
the indenture or other agreement pursuant to which the mortgage loan is pledged
to the trustee or other custodian in connection with the related Conventional
Mortgage Pass-Through Certificate) to the effect that, notwithstanding that the
assignment of the mortgage has not been recorded, the actions taken with respect
to the mortgage loan are sufficient to permit the trustee or other custodian to
avail itself of all protection available under applicable law against the claims
of any present or future creditors of the issuer, and are sufficient to prevent
any other sale, transfer, assignment, pledge or hypothecation of the mortgage
and the related mortgage note by the issuer from being enforceable, or will
create a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of the
issuer to the trustee or other custodian as provided in the indenture pursuant
to which the mortgage loan is pledged to the trustee or other custodian in
connection with the related Conventional Mortgage Pass-Through Certificate)
prior in right to all other security interest therein created or perfected under
the Uniform Commercial Code (as in effect in the jurisdiction where the property
is located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
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(d) a copy of the title insurance policy or an opinion or
certificate of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be subject
to exceptions for Permitted Tax Liens and other matters to which like properties
are commonly subject which neither individually nor in the aggregate materially
interfere with the benefits of the security interest intended to be provided by
such mortgage and standard exceptions and exclusions from mortgage title
insurance policies).
"S&P" means Standard & Poor's Corporation, a New York
corporation, and includes any successor thereto or, if S&P is not the Rating
Agency, then references to S&P shall be deemed to refer to the Rating Agency at
such time and references to particular ratings of S&P appearing herein shall be
deemed to refer to the equivalent rating of such Rating Agency.
"Short-Term Money Market Instruments" means the following
kinds of instruments if on the date of purchase or other acquisition by the
Corporation of such instrument the remaining term to maturity thereof is not
more than 30 days:
(a) demand deposits in, certificates of deposit of, bankers'
acceptances issued by, or federal funds sold to, any depository institution, the
deposits of which are insured by the Federal Deposit Insurance Corporation,
provided that, at the time of the Corporation's investment therein, the
commercial paper or other unsecured short-term debt obligations of such
depository institution are rated at lest A-1+ by S&P;
(b) repurchase obligations with respect to a U.S. Government
Obligation, FNMA Certificate, FHLMC Certificate or GNMA Certificate entered into
with a depository institution, the deposits of which are insured by the Federal
Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation and the commercial paper or other unsecured short-term debt
obligations of which are rated at least A-1+ by S&P, which must be repurchased
within one Business Day from the date such repurchase obligation was entered
into; and
(c) commercial paper rated at the time of the Corporation's
investment therein at least A-1+ by S&P.
"Special Redemption Assets" means portfolio holdings
identified by the Corporation in its sole discretion the deemed sale of which
for Cash on the Valuation Date on which the Discounted Value of the
Corporation's portfolio failed to equal or exceed the Basic Maintenance Amount,
together with the principal amount of MMNs, if any, which the Trustee has
declared to be due and payable as a result of such failure, would have resulted
in the Funds' achieving the required Basic Maintenance Amount on a pro forma
basis as of such Valuation Date.
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"Trustee" means Manufacturers Hanover Trust Company, a New
York corporation, and its successors and assigns, as trustee under the
Indenture.
"Type I Corporate Bonds" as of any date means Corporate Bonds
whose S&P rating is AAA as of such date.
"Type II Corporate Bonds" as of any date means Corporate Bonds
whose S&P rating is AA+ to AA- as of such date.
"Type III Corporate Bonds" as of any date means Corporate
Bonds whose S&P rating is A+ to A- as of such date.
"Type IV Corporate Bonds" as of any date means Corporate Bonds
whose S&P rating is BBB+ to BBB- as of such date.
"Type V Corporate Bonds" as of any date means Corporate Bonds
whose S&P rating is BB+ to BB- as of such date.
"Type VI Corporate Bonds" as of any date means Corporate Bonds
whose S&P rating is B+ to B- as of such date.
"Type VII Corporate Bonds" as of any date means Corporate
Bonds whose S&P rating is B- as of such date.
"Type VIII Corporate Bonds" as of any date means Corporate
Bonds whose S&P rating is CCC+ as of such date and which are subordinated debt
of the issuer.
"Type IX Corporate Bonds" as of any date means Corporate Bonds
whose S&P rating is CCC as of such date and which are subordinated debt of the
issuer.
For so long as the Rating Agency is rating the Preferred
Stock, the above classifications of corporate bonds may be amended from those
set forth above if the Board of Directors of the Corporation so determines and
the Rating Agency shall have advised the Fund in writing that such revision
would not adversely affect the then-current rating of the Preferred Stock.
"U.S. Government Obligations" means direct obligations of the
United States, provided that such direct obligations are entitled to the full
faith and credit of the United States and that any such obligations, other than
United States treasury bills, provide for the periodic payment of interest and
the full payment of principal at maturity or call for redemption.
"Valuation Date" means (a) the fifteenth day of each month or,
if such day is not a Business Day, the next succeeding Business Day and (b) the
last Business Day of such month, provided that the first Valuation Date may
occur on any other date established by the Corporation and provided further that
such date shall be not more than fifteen days from the date on which the
Preferred Stock and the MMNs initially are issued.
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Without amending these Articles of Incorporation and to the extent permitted by
Maryland law, the Corporation may establish a different method of determining
the date or dates for the Valuation Date from those set forth herein if the
Board of Directors determines and the Rating Agency shall have advised the
Corporation in writing that the Valuation Date so established would not
adversely affect the then-current rating of the MMNs.
"Vote of a Majority of the Outstanding Voting Securities"
means the vote, at the annual or a special meeting of the stockholders of the
Corporation duly called, (A) of 67 per cent or more of the voting securities
present at such meeting, if the holders of more than 50 per cent of the
outstanding voting securities of the Corporation are present or represented by
proxy; or (B) of more than 50 per cent of the outstanding voting securities of
the Corporation, whichever is less; to the extent stockholders of the
Corporation are required to vote as a separate class or classes with respect to
any matter, such requirements shall apply on a class-by-class basis.
"Voting Period" has the meaning specified in paragraph C.5(c)
of Article IV hereof.
SECOND: The provisions set forth in these Articles of
Amendment and Restatement are all of the provisions of the charter of the
Corporation as amended.
THIRD: The total number of shares of capital stock the
Corporation was authorized to issue, before the amendments effected hereby, was
twenty million (20,000,000) shares of the par value of one cent ($0.01) per
share and of the aggregate par value of two hundred thousand dollars ($200,000),
all of which twenty million (20,000,000) shares were designated Common Stock.
The total number of shares of capital stock that the Corporation shall have
authority to issue is two hundred fifty million two hundred fifty thousand
(250,250,000) shares, of the par value of one cent ($.01) per share and of the
aggregate par value of two million five hundred two thousand five hundred
dollars ($2,502,500), of which two hundred fifty million (250,000,000) shares
shall be Common Stock, $.01 par value per share (the "Common Stock"), and two
hundred fifty thousand (250,000) shares shall be Cumulative Preferred Stock,
$.01 par value per share (the "Preferred Stock").
FOURTH: A description of each class of capital stock that the
Corporation is authorized to issue is set forth in Article IV of these Articles
of Incorporation.
FIFTH: The Board of Directors of the Corporation duly adopted
a resolution setting forth these Articles of Amendment and Restatement in their
entirety, declaring them advisable and directing that the same be submitted for
consideration by the stockholders of the Corporation. These Articles of
Amendment and
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<PAGE>
Restatement have been duly approved by the sole stockholder of the Corporation
by written consent.
-72-
<PAGE>
IN WITNESS WHEREOF, ZENITH INCOME FUND INC. has caused these
presents to be signed in its name and on its behalf by its President and its
corporate seal to be hereunder affixed and attested by its Secretary on this
18th day of April, 1988, and its President acknowledges that these Articles of
Amendment and Restatement are the act and deed of Zenith Income fund Inc. and,
under the penalties of perjury, that the matters and facts set forth herein with
respect to authorization and approval are true in all material respects to the
best of his knowledge, information and belief.
ZENITH INCOME FUND INC.
By: /s/ T. A. Belshe
---------------------------
Thomas Belshe
President
ATTEST:
/s/ Stephen E. Cavan
- -----------------------------
Stephen A. Cavan
Secretary
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<PAGE>
ZENITH INCOME FUND INC.
CERTIFICATE OF CORRECTION
ZENITH INCOME FUND INC., a Maryland corporation having its principal office in
the State of Maryland in Baltimore City, certifies:
FIRST: This Certificate of Correction corrects the Articles Supplementary of
the Corporation filed with the State Department of Assessments and Taxation of
Maryland on April 19, 1988.
SECOND: Paragraph (d) of Article FIRST of the Articles Supplementary included
the date "April 26, 1938." The date as corrected is "April 27, 1988."
THIRD: This Certificate of Correction to the Articles Supplementary conforms
them to the action taken by the Board of Directors.
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<PAGE>
IN WITNESS WHEREOF, ZENITH INCOME FUND INC. has caused this Certificate of
Correction to be signed in its name and on its behalf by its Chairman of the
Board and its corporate seal to be hereunder affixed and attested by its
Assistant Secretary on this 26th day of April , 1988, and its Chairman of the
---- -----
Board acknowledges that this Certificate of Correction is the act and deed of
Zenith Income Fund Inc. and, under the penalties of perjury, that the matters
and facts set forth herein with respect to authorization and approval are true
in all material respects to the best of his knowledge, information and belief.
Zenith Income Fund Inc.
By:
------------------------------
Heath B. McLendon
Chairman of the Board
ATTEST:
/s/Francis J. McNamara, III
- -------------------------------
Francis J. McNamara, III
Assistant Secretary
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<PAGE>
IN WITNESS WHEREOF, ZENITH INCOME FUND INC. has caused this Certificate of
Correction to be signed in its name and on its behalf by its Chairman of the
Board and its corporate seal to be hereunder affixed and attested by its
Assistant Secretary on this 26th day of April , 1988, and its Chairman of the
---- -----
Board acknowledges that this Certificate of Correction is the act and deed of
Zenith Income Fund Inc. and, under the penalties of perjury, that the matters
and facts set forth herein with respect to authorization and approval are true
in all material respects to the best of his knowledge, information and belief.
ZENITH INCOME FUND INC.
By: /s/Heath B. McLendon
--------------------------
Heath B. McLendon
Chairman of the Board
ATTEST:
- ---------------------------
Francis J. McNamara, III
Assistant Secretary
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<PAGE>
EXHIBIT 99.2(d)
FORM OF ARTICLES SUPPLEMENTARY FOR THE PREFERRED SHARES
<PAGE>
ZENIX INCOME FUND INC.
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND
PREFERENCES OF SHARES OF PREFERRED STOCK
Zenix Income Fund Inc., a Maryland corporation (the "Fund"), certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in the Board of Directors of
the Fund by Article IV of its Articles of Amendment and Restatement, as
heretofore amended (which, as hereafter restated or amended from time to time,
are together with these Articles Supplementary herein called the "Articles"),
the Board of Directors has, by resolution, authorized the issuance of 2,400
shares of its Preferred Stock, par value $0.01 per share, liquidation preference
$25,000 per share, classified as Auction Rate Cumulative Preferred Stock.
SECOND: The preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the
Preferred Shares are as follows:
DESIGNATION
2,400 shares of Preferred Stock, par value $0.01 per share, liquidation
preference $25,000 per share, is hereby designated Auction Rate Cumulative
Preferred Stock ("Preferred Shares"). Each share of the Preferred Shares shall
have an Applicable Rate for its initial Dividend Period equal to _____% per
annum and an initial Dividend Payment Date of April 26, 2000; and each share of
the Preferred Shares shall have such other preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law as are
set forth in Part I and Part II of these Articles Supplementary. Subject to the
provisions of Section 12(c) of Part I hereof, the Board of Directors of the Fund
may, in the future, reclassify additional shares of the Fund's stock as
Preferred Shares, with the same preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption and other terms herein described, except that the
Applicable Rate for its initial Dividend Period, its initial Dividend Payment
Date and any other changes in the terms herein set forth shall be as set forth
in the Articles Supplementary reclassifying such shares as Preferred Shares.
As used in Part I and Part II of these Articles Supplementary, capitalized terms
shall have the meanings provided in Section 18 of Part I and Section 1 of Part
II.
<PAGE>
PART I
1. Number of Shares; Ranking.
(a) The number of authorized shares constituting the Preferred Shares is 2,400
shares. No fractional shares of the Preferred Shares shall be issued.
(b) Any shares of the Preferred Shares which at any time have been redeemed or
purchased by the Fund shall, after such redemption or purchase, have the
status of authorized but unissued shares of Preferred Shares.
(C) The Preferred Shares shall rank on a parity with any other Preferred Stock
as to the payment of dividends to which such shares are entitled and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
(d) No holder of Preferred Shares shall have, solely by reason of being such a
holder, any preemptive or other right to acquire, purchase or subscribe for
any Preferred Shares, shares of Common Stock of the Fund or other
securities of the Fund which it may hereafter issue or sell.
2. Dividends.
(a) The Holders of Preferred Shares shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available
therefor, cumulative cash dividends on their shares at the Applicable Rate,
determined as set forth in paragraph (c) of this Section 2, and no more,
payable on the respective dates determined as set forth in paragraph (b) of
this Section 2. Dividends on the Outstanding Preferred Shares issued on
the Date of Original Issue shall accumulate from the Date of Original
Issue.
(b) Dividends shall be payable when, as and if declared by the Board of
Directors following the initial Dividend Payment Date, subject to
subparagraph (b)(ii) of this Section 2, on the Preferred Shares as follows:
(i)(A) with respect to any Dividend Period of one year or less on
the Business Day next succeeding the last day thereof and, if
any, on the 91st, 181st and 271st days thereof; and
(B) with respect to any Dividend Period of more than one year, on
a quarterly basis on each January 1, April 1, July 1 and October
1 within such Dividend Period and on the Business Day following
the last day of such Dividend Period.
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<PAGE>
(ii) If a day for payment of dividends resulting from the application of
subparagraph (b)(i) above is not a Business Day, then the Dividend Payment
Date shall be the day next succeeding such day, or if the day next
succeeding such day for payment of dividends is not a Business Day, then
the Dividend Payment Date shall be the first Business Day prior to such day
for payment of dividends that is next succeeded by a Business Day;
provided, however, that if the Securities Depository pays dividends in
same-day funds, and such day for payment is not a Business Day, the
Dividend Payment Date shall be the first Business Day following such day
for payment of dividends.
(iii) The Fund shall pay to the Paying Agent not later than 3:00 p.m., New York
City time on the Business Day next preceding each Dividend Payment Date for
the Preferred Shares, an aggregate amount of funds available on the next
Business Day in the City of New York, New York, equal to the dividends to
be paid to all Holders of such shares on such Dividend Payment Date. The
Fund shall not be required to establish any reserves for the payment of
dividends.
(iv) All moneys paid to the Paying Agent for the payment of dividends shall be
held in trust for the payment of such dividends by the Paying Agent for the
benefit of the Holders specified in subparagraph (b)(v) of this Section 2.
Any moneys paid to the Paying Agent in accordance with the foregoing but
not applied by the Paying Agent to the payment of dividends, including
interest earned on such moneys, will, to the extent permitted by law, be
repaid to the Fund at the end of 90 days from the date on which such moneys
were to have been so applied.
(v) Each dividend on the Preferred Shares shall be paid on the Dividend Payment
Date therefor to the Holders as their names appear on the stock ledger or
stock records of the Fund on the Business Day next preceding such Dividend
Payment Date. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend
Payment Date, to the Holders as their names appear on the stock ledger or
stock records of the Fund on such date, not exceeding 15 days preceding the
payment date thereof, as may be fixed by the Board of Directors.
-3-
<PAGE>
(c) (i) The dividend rate on Outstanding Preferred Shares during the period
from and after the Date of Original Issue to and including the last day of
the initial Dividend Period therefor shall be equal to the rate per annum
set forth under "Designation" above. For each subsequent Dividend Period
with respect to the Preferred Shares Outstanding thereafter, the dividend
rate shall be equal to the rate per annum that results from an Auction for
Outstanding Preferred Shares on the respective Auction Date therefor next
preceding such subsequent Dividend Period; provided, however, that if an
Auction for any subsequent Dividend Period of Preferred Shares is not held
for any reason or if Sufficient Clearing Orders have not been made in an
Auction (other than as a result of all Preferred Shares being the subject
of Submitted Hold Orders), then the dividend rate on the Preferred Shares
for any such Dividend Period shall be the Maximum Applicable Rate for such
shares on the Auction Date for such Dividend Period (except (i) during a
Default Period when the dividend rate shall be the Default Rate, as set
forth in Section 2(c)(ii) below) or (ii) after a Default Period and prior
to the beginning of the next Dividend Period when the dividend rate shall
be the Maximum Applicable Rate at the close of business on the last of such
Default Period). With respect to a Dividend Period of 93 days or fewer,
the Minimum Applicable Rate will apply automatically following an Auction
in which all of the Outstanding Preferred Shares are subject (or are deemed
to be subject) to Hold Orders. The rate per annum at which dividends are
payable on Preferred Shares as determined pursuant to this Section 2(c)(i)
shall be the "Applicable Rate."
(ii) A "Default Period" will commence on the applicable date set forth
below if the Fund fails to (A) declare prior to the close of business
on the second Business Day preceding any Dividend Payment Date, for
payment on or (to the extent permitted as described below) within two
Business Days after such Dividend Payment Date to the persons who held
shares as of 12:00 noon, New York city time, on the Business Day
preceding such Dividend Payment Date, the full amount of any dividend
payable on such Dividend Payment Date, (B) deposit, irrevocably in
trust, in same-day funds, with the Paying Agent by 12:00 noon, New
York City time, (i) on or (to the extent permitted as described below)
within two Business Days after any Dividend Payment Date the full
amount of any declared dividend on the Preferred Shares payable on
such Dividend Payment Date (together with the failure to timely
declare dividends described in (A) above, hereinafter referred to as a
"Dividend
-4-
<PAGE>
Default") or (ii) on or (to the extent permitted as described below)
within two Business Days after any date fixed for redemption of
Preferred Shares called for redemption, the applicable redemption
price (a "Redemption Default") or (C) maintain the AAA/aaa Credit
Rating unless the AAA/aaa Credit Rating is restored by the Dividend
Payment Date next following the date on which the Fund fails to
maintain the AAA/aaa Credit Rating (a "Rating Default" and, together
with a Dividend Default and a Redemption Default, hereinafter referred
to as a "Default"). A Default Period with respect to a Dividend
Default or a Redemption Default will consist of the period commencing
on and including the aforementioned Dividend Payment Date or
redemption date, as the case may be and ending on and including the
Business Day on which, by 12:00 noon, New York City time, all unpaid
dividends and unpaid redemption price shall have been so deposited or
shall have otherwise been made available to the applicable holders in
same-day funds. A Default Period with respect to a Rating Default
shall commence as of the date on which the Fund fails to maintain the
AAA/aaa Credit Rating (provided that such Rating Default shall be
deemed not to have occurred and such Default Period shall not commence
if such Rating Default is cured by the next succeeding Dividend
Payment Date) and shall end on the earlier of the date on which such
default is cured as provided herein or the date on which the Preferred
Shares are mandatorily redeemed as provided herein. The Applicable
Rate for each Default Period, and each Dividend Period commencing
during a Default Period, will be equal to the Default Rate; and each
subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Term Period: provided, however, that the
commencement of a Default Period will not by itself cause the
commencement of a new Dividend Period. No Auction shall be held during
a Default Period. Any dividend due on any Dividend Payment Date (if,
prior to 12:00 noon, New York City time, on such Dividend Payment
Date, the Fund has declared such dividend payable on or within two
Business Days after such
-5-
<PAGE>
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to such shares not paid to such
Persons when due may (if such default is not solely due to the willful
failure of the Fund) be paid to such Persons in the same form of funds by
12:00 noon New York City time, on any of the first two Business Days after
such Dividend Payment Date or due date, as the case may be, provided that
such amount is accompanied by an additional amount for such period of non-
payment at the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 360. For the
purposes of the foregoing, payment to a Person in same-day funds made on or
before 12:00 noon New York City time on any Business Day at any time will
be considered equivalent to payment to that Person in New York Clearing
House (next-day) funds at the same time on the preceding Business Day, and
any payment made after 12:00 noon, New York City time, on any Business Day
shall be considered to have been made instead in the same form of funds and
to the same person before 12:00 noon, New York City time, on the next
Business Day. The Default Rate is equal to the Reference Rate multiplied by
three (3).
(iii) The amount of dividends per share payable (if declared) on each Dividend
Payment Date of each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during
such Dividend Period) shall be computed by multiplying the Applicable Rate
(or the Default Rate) for such Dividend Period (or a portion thereof) by a
fraction, the numerator of which will be the number of days in such
Dividend Period (or portion thereof) that such share was Outstanding and
for which the Applicable Rate or the Default Rate was applicable and the
denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent. During
any Dividend Period of one (1) year or more, the amount of dividends per
share payable on any Dividend Payment Date (or in respect of dividends on
another date in connection with a redemption during such Dividend Period)
shall be computed as described in the preceding sentence, except that it
will be determined on the basis of a year consisting of twelve 30-day
months.
(d) Any dividend payment made on the Preferred Shares shall first be credited
against the earliest accumulated but unpaid dividends due with respect to
the Preferred Shares.
(e) For so long as the Preferred Shares are Outstanding, except as contemplated
by Section 3(j), the Fund will not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution
paid in shares of, or options, warrants or
-6-
<PAGE>
rights to subscribe for or purchase, Common Stock or other shares, if any,
ranking junior to the Preferred Shares as to dividends or upon liquidation)
in respect to Common Stock or any other shares of the Fund ranking junior
to or on a parity with the Preferred Shares as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any Common Stock or any other such junior shares (except
by conversion into or exchange for shares of the Fund ranking junior to the
Preferred Shares as to dividends and upon liquidation) or any such parity
shares (except by conversion into or exchange for shares of the Fund
ranking junior to or on a parity with the Preferred Shares as to dividends
and upon liquidation), unless (i) immediately after such transaction, the
Fund would have Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount and the Investment
Company Act Preferred Shares Asset Coverage would be achieved, (ii) full
cumulative dividends on the Preferred Shares due on or prior to the date of
the transaction have been declared and paid and (iii) the Fund has redeemed
the full number of Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in Section 3(a)(ii).
3. Redemption.
(a) (i) After the initial Dividend Period, subject to the provisions of this
Section 3 and to the extent permitted under the Investment Company Act and
Maryland law, the Fund may, at its option, redeem in whole or in part out
of funds legally available therefor shares of the Preferred Shares herein
designated as (A) having a Dividend Period of one year or less, on the
Business Day after the last day of such Dividend Period by delivering a
notice of redemption not less than 15 calendar days and not more than 25
calendar days prior to such redemption, at a redemption price per share
equal to $25,000, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for
redemption, or (B) having a Dividend Period of more than one year, on any
Business Day prior to the end of the relevant Dividend Period by delivering
a notice of redemption not less than 15 calendar days and not more than 25
calendar days prior to the date fixed for such redemption, at a redemption
price per share equal to $25,000, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to the date
fixed for redemption, plus a redemption premium, if any, determined by the
Board of Directors after consultation with the Broker-Dealers and set forth
in any applicable Specific Redemption Provisions at the time of the
designation of such Dividend Period
-7-
<PAGE>
as set forth in Section 4 of these Articles Supplementary; provided,
however, that during a Dividend Period of more than one year no shares of
the Preferred Shares will be subject to optional redemption except in
accordance with any Specific Redemption Provisions approved by the Board of
Directors after consultation with the Broker-Dealers at the time of the
designation of such Dividend Period. Notwithstanding the foregoing, the
Fund shall not give a notice of or effect any redemption pursuant to this
Section 3(a)(i) unless, on the date on which the Fund intends to give such
notice and on the date of redemption (a) the Fund has available certain
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to Holders of the
Preferred Shares by reason of the redemption of the Preferred Shares on
such date fixed for the redemption and (b) the Fund would have Eligible
Assets with an aggregate Discounted Value at least equal to the Preferred
Shares Basic Maintenance Amount immediately subsequent to such redemption,
if such redemption were to occur on such date, it being understood that the
provisions of paragraph (d) of this Section 3 shall be applicable in such
circumstances in the event the Fund makes the deposit and takes the other
action required thereby.
(ii) If the Fund fails to maintain, as of any Valuation Date, Eligible
Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount or, as of the last Business
Day of any month, the Investment Company Act Preferred Shares Asset
Coverage, and such failure is not cured within five Business Days
following the relevant Valuation Date in the case of a failure to
maintain the Preferred Shares Basic Maintenance Amount or the last
Business Day of the following month in the case of a failure to
maintain the Investment Company
-8-
<PAGE>
Act Preferred Shares Asset Coverage as of such last Business Day
(respectively, the "Asset Coverage Cure Date"), the Preferred Shares
will be subject to mandatory redemption out of funds legally available
therefor. The number of the Preferred Shares to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the relevant Asset
Coverage Cure Date, would result in the Fund having Eligible Assets
with an aggregate Discounted Value at least equal to the Preferred
Shares Basic Maintenance Amount, or sufficient to satisfy the
Investment Company Act Preferred Shares Asset Coverage, as the case
may be, in either case as of the relevant Asset Coverage Cure Date
(provided that, if there is no such minimum number of shares the
redemption of which would have such result, all the Preferred Shares
then Outstanding will be redeemed), and (B) the maximum number of
Preferred Shares that can be redeemed out of funds expected to be
available therefor on the mandatory redemption date at the Mandatory
Redemption Price set forth in subparagraph (a)(iv) of this Section 3.
(iii) If the Fund at any time fails to maintain the AAA/aaa Credit Rating
and the Fund is unable to restore the AAA/aaa Credit Rating within 90
calendar days thereafter (the "Rating Default Cure Date"), all
Preferred Shares will be subject to mandatory redemption out of funds
legally available therefor, on the Mandatory Redemption Date at the
Mandatory Redemption Price set forth in subparagraph (a)(iv) of this
Section 3.
(iv) In determining the shares of the Preferred Shares required to be
redeemed in accordance with the foregoing Section 3(a)(ii), the Fund
shall allocate the number of shares required to be redeemed to satisfy
the Preferred Shares Basic Maintenance Amount or the Investment
Company Act Preferred Shares Asset Coverage, as the case may be, pro
rata among the Holders of Preferred Shares in proportion to the number
of shares they hold, subject to the further provisions of this
subparagraph (iv). The Fund shall effect any required mandatory
redemption pursuant to subparagraph (a)(ii) or (a) (iii) of this
Section 3 no later than 25 calendar days after the Asset Coverage Cure
Date or the Rating Default Cure Date, as the case may be (the
"Mandatory Redemption Date"), except that if the Fund does not have
funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, the number of shares of the Preferred
Shares which would be required to be redeemed by the Fund under clause
(A) of subparagraph (a)(ii) or subparagraph (a)(iii) of this Section 3
if sufficient funds were available, or the Fund otherwise is unable to
effect such redemption on or prior to such Mandatory Redemption Date,
the Fund shall redeem those shares of the Preferred Shares, on the
earliest practicable date on which the Fund will have such funds
available, upon notice pursuant to Section 3(b) to record owners of
the Preferred Shares to be redeemed and the Paying Agent. The Fund
will deposit with the Paying Agent funds
-9-
<PAGE>
sufficient to redeem the specified number of shares of the Preferred
Shares with respect to a redemption required under subparagraph
(a)(ii) or subparagraph (a)(iii) of this Section 3, by 1:00 p.m., New
York City time, of the Business Day immediately preceding the
Mandatory Redemption Date. If fewer than all of the Outstanding
Preferred Shares are to be redeemed pursuant to this Section 3(a)(iv),
the number of shares to be redeemed shall be redeemed pro rata from
the Holders of such shares in proportion to the number of such shares
held by such Holders, by lot or by such other method as the Fund shall
deem fair and equitable, subject, however, to the terms of any
applicable Specific Redemption Provisions. "Mandatory Redemption
Price" means $25,000 per share, plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption, plus (in the case of a Dividend Period
of one year or more only) a redemption premium, if any, determined by
the Board of Directors after consultation with the Broker-Dealers and
set forth in any applicable Specific Redemption Provisions.
(b) In the event of a redemption pursuant to Section 3(a), the Fund will file a
notice of its intention to redeem with the Securities and Exchange
Commission so as to provide at least the minimum notice required under Rule
23c-2 under the Investment Company Act or any successor provision. In
addition, the Fund shall deliver a notice of redemption to the Auction
Agent (the "Notice of Redemption") containing the information set forth
below (i) in the case of an optional redemption pursuant to subparagraph
(a)(i) above, one Business Day prior to the giving of notice to the
Holders, (ii) in the case of a mandatory redemption pursuant to
subparagraph (a)(ii) or subparagraph (a)(iii) above, on or prior to the
25th calendar day preceding the Mandatory Redemption Date. The Auction
Agent will use its reasonable efforts to provide telephonic notice to each
Holder of Preferred Shares called for redemption not later than the close
of business on the Business Day immediately following the day on which the
Auction Agent determines the shares to be redeemed (or, during a Default
Period with respect to such shares, not later than the close of business on
the Business Day immediately following the day on which the Auction Agent
receives Notice of Redemption from the Fund). The Auction Agent shall
confirm such telephonic notice in writing not later than the close of
business on the third Business Day preceding the date fixed for redemption
by providing the Notice of Redemption to each Holder of shares called for
redemption, the Paying
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<PAGE>
Agent (if different from the Auction Agent) and the Securities Depository.
Notice of Redemption will be addressed to the registered owners of the
Preferred Shares at their addresses appearing on the share records of the
Fund. Such Notice of Redemption will set forth (i) the date fixed for
redemption, (ii) the number and identity of the Preferred Shares to be
redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption, and
(v) the provision under which redemption shall be made. No defect in the
Notice of Redemption or in the transmittal or mailing thereof will affect
the validity of the redemption proceedings, except as required by
applicable law. If fewer than all shares held by any Holder are to be
redeemed, the Notice of Redemption mailed to such Holder shall also specify
the number of shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3 no
Preferred Shares may be redeemed unless all dividends in arrears on the
Outstanding shares of the Preferred Shares and all capital stock of the
Fund ranking on a parity with the Preferred Shares with respect to payment
of dividends or upon liquidation, have been or are being contemporaneously
paid or set aside for payment; provided, however, that the foregoing shall
not prevent the purchase or acquisition of all Outstanding Preferred Shares
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, Holders of all
Outstanding Preferred Shares.
(d) Upon the deposit of funds sufficient to redeem Preferred Shares with the
Paying Agent and the giving of the Notice of Redemption to the Auction
Agent under paragraph (b) of this Section 3, dividends on such shares shall
cease to accumulate and such shares shall no longer be deemed to be
Outstanding for any purpose (including, without limitation, for purposes of
calculating whether the Fund has maintained the requisite Preferred Shares
Basic Maintenance Amount or the Investment Company Act Preferred Shares
Asset Coverage), and all rights of the holder of the shares so called for
redemption shall cease and terminate, except the right of such holder to
receive the redemption price specified herein, but without any interest or
other additional amount. Such redemption price shall be paid by the Paying
Agent to the nominee of the Securities Depository. The Fund shall be
entitled to receive from the Paying Agent, promptly
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<PAGE>
after the date fixed for redemption, any cash deposited with the Paying
Agent in excess of (i) the aggregate redemption price of the shares of the
Preferred Shares called for redemption on such date and (ii) such other
amounts, if any, to which Holders of shares of the Preferred Shares called
for redemption may be entitled. Any funds so deposited that are unclaimed
at the end of two years from such redemption date shall, to the extent
permitted by law, be paid to the Fund, after which time the Holders of
shares of the Preferred Shares so called for redemption may look only to
the Fund for payment of the redemption price and all other amounts, if any,
to which they may be entitled. The Fund shall be entitled to receive, from
time to time after the date fixed for redemption, any interest earned on
the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption has been
given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon
as practicable to the extent such funds become legally available or such
redemption is no longer otherwise prohibited. Failure to redeem shares of
the Preferred Shares shall be deemed to exist at any time after the date
specified for redemption in a Notice of Redemption when the Fund shall have
failed, for any reason whatsoever, to deposit in trust with the Paying
Agent the redemption price with respect to any shares for which such Notice
of Redemption has been given. Notwithstanding the fact that the Fund may
not have redeemed shares of the Preferred Shares for which a Notice of
Redemption has been given, dividends may be declared and paid on shares of
the Preferred Shares and shall include those shares of the Preferred Shares
for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption price of
shares of the Preferred Shares called for redemption shall be held in trust
by the Paying Agent for the benefit of holders of shares so to be redeemed.
(g) So long as any shares of the Preferred Shares are held of record by the
nominee of the Securities Depository, the redemption price for such shares
will be paid on the date fixed for redemption to the nominee of the
Securities Depository for distribution to Agent Members for distribution to
the persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in these
Articles Supplementary limits any
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<PAGE>
right of the Fund to purchase or otherwise acquire any shares of the
Preferred Shares outside of an Auction at any price, whether higher or
lower than the price that would be paid in connection with an optional or
mandatory redemption, so long as, at the time of any such purchase, there
is no arrearage in the payment of dividends on, or the mandatory or
optional redemption price with respect to, any shares of the Preferred
Shares for which Notice of Redemption has been given and the Fund is in
compliance with the Investment Company Act Preferred Shares Asset Coverage
and has Eligible Assets with an aggregate Discounted Value at least equal
to the Preferred Shares Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Fund shall have no voting
rights. If fewer than all the Outstanding shares of the Preferred Shares
are redeemed or otherwise acquired by the Fund, the Fund shall give notice
of such transaction to the Auction Agent, in accordance with the procedures
agreed upon by the Board of Directors.
(i) In the case of any redemption pursuant to this Section 3 only whole shares
of the Preferred Shares shall be redeemed, and in the event that any
provision of the Articles would require redemption of a fractional share,
the Auction Agent shall be authorized to round up so that only whole shares
are redeemed.
(j) Notwithstanding anything herein to the contrary, including, without
limitation, Sections 2(e) and 12 of Part I hereof, the Board of
Directors may authorize, create or issue any class or series of stock
ranking prior to or on a parity with the Preferred Shares with respect to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, to the extent
permitted by the Investment Company Act, as amended, if, upon issuance, the
net proceeds from the sale of such stock (or such portion thereof needed to
redeem or repurchase the Outstanding Preferred Shares) are deposited with
the Auction Agent in accordance with Section 3(d) of Part I hereof, Notice
of Redemption as contemplated by Section 3(b) of Part I hereof has been
delivered prior thereto or is sent promptly thereafter, and such proceeds
are used to redeem all Outstanding Preferred Shares.
4. Designation of Dividend Period.
(a) The initial Dividend Period for the Preferred Shares is as set forth under
"Designation" above. The Fund will designate the duration of subsequent
Dividend Periods
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of the Preferred Shares; provided, however, that no such designation is
necessary for a Standard Term Period and, provided further, that any
designation of an Alternate Term Period shall be effective only if (i)
notice thereof shall have been given as provided herein, (ii) any failure
to pay in a timely manner to the Auction Agent the full amount of any
dividend on, or the redemption price of, the Preferred Shares shall have
been cured as provided above, (iii) Sufficient Clearing Orders shall have
existed in an Auction held on the Auction Date immediately preceding the
first day of such proposed Alternate Term Period, (iv) if the Fund shall
have mailed a Notice of Redemption with respect to any shares, the
redemption price with respect to such shares shall have been deposited with
the Paying Agent, and (v) in the case of the designation of an Alternate
Term Period, the Fund has confirmed that as of the Auction Date next
preceding the first day of such Alternate Term Period, it has Eligible
Assets with an aggregate Discounted Value at least equal to the Preferred
Shares Basic Maintenance Amount, and the Fund has consulted with the
Broker-Dealers and has provided notice of such designation and a Preferred
Shares Basic Maintenance Certificate to S&P (if S&P is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred Shares)
and any Other Rating Agency which is then rating the Preferred Shares and
so requires.
(b) If the Fund proposes to designate any Alternate Term Period, not fewer than
15 (or two Business Days in the event the duration of the Dividend Period
prior to such Alternate Term Period is fewer than 15 days) nor more than 30
days prior to the first day of such Alternate Term Period, notice shall be
(i) made by press release and (ii) communicated by the Fund by telephonic
or other means to the Auction Agent and confirmed in writing promptly
thereafter. Each such notice shall state (A) that the Fund proposes to
exercise its option to designate a succeeding Alternate Term Period,
specifying the first and last days thereof and (B) that the Fund will by
3:00 p.m., New York City time, on the second Business Day next preceding
the first day of such Alternate Term Period, notify the Auction Agent, who
will promptly notify the Broker-Dealers, of either (x) its determination,
subject to certain conditions, to proceed with such Alternate Term Period,
subject to the terms of any Specific Redemption Provisions, or (y) its
determination not to proceed with such Alternate Term Period, in which
latter event the succeeding Dividend Period shall be a Standard Term
Period. No later than 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of any proposed Alternate Term
Period, the Fund shall deliver
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<PAGE>
to the Auction Agent, who will promptly deliver to the Broker-Dealers and
Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as an Alternate Term Period,
specifying the first and last days thereof and (B) the terms of any
Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate an Alternate Term Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Alternative Term Period to the Auction
Agent or is unable to make the confirmation provided in clause (v) of
Paragraph (a) of this Section 4 by 3:00 p.m., New York City time, on
the second Business Day next preceding the first day of such proposed
Alternate Term Period, the Fund shall be deemed to have delivered a
notice to the Auction Agent with respect to such Dividend Period to
the effect set forth in clause (ii) above, thereby resulting in a
Standard Term Period.
5. Restrictions on Transfer.
The Preferred Shares may be transferred only (a) pursuant to an Order
placed in an Auction, (b) to or through a Broker-Dealer, (c) to a Person
that has delivered a signed Master Purchaser's Letter to the Auction Agent
or (d) to the Fund or any Affiliate. Notwithstanding the foregoing, a
transfer other than pursuant to an Auction will not be effective unless the
selling Existing Holder or the Agent Member of such Existing Holder, in the
case of an Existing Holder whose shares are listed in its own name on the
books of the Auction Agent, or the Broker-Dealer or Agent Member of such
Broker-Dealer, in the case of a transfer between persons holding shares of
the Preferred Shares through different Broker-Dealers, advises the Auction
Agent of such transfer. The certificates representing the shares of the
Preferred Shares issued to the Securities Depository will bear legends with
respect to the restrictions described above and stop-transfer instructions
will be issued to the Transfer Agent and/or Registrar.
6. Voting Rights.
(A) Except as otherwise provided in the Articles or as otherwise required
by applicable law, (i) each Holder of shares of the Preferred Shares
shall be entitled to one vote for each share of the Preferred Shares
held on each matter on which the Holders of the Preferred Shares are
entitled to vote, and (ii) the Holders of the Outstanding shares of the
Preferred Shares and shares of Common Stock shall vote together as a
single class on all matters submitted to the stockholders; provided,
however, that, at any meeting of the stockholders of the Fund held for
the election of directors, (a) the Holders of a majority of the
Outstanding shares of the Preferred Shares, represented in person or by
proxy at said meeting, shall be entitled, as a class, to the exclusion
of the Common Stock, to elect two directors of the Fund, each share of
the Preferred Shares entitling the Holder thereof to one vote, (b) the
holders of a majority of the outstanding shares of Common Stock,
represented in person or by proxy at said meeting, shall be entitled,
as a class, to the exclusion of the holders of the Preferred Shares, to
elect two Directors of the Fund, each share of Common Stock entitling
the holder thereof to one vote. The identities of the nominees of which
directorships may be fixed by the Board of Directors. Subject to
paragraph (b) of this Section 6, the holders of a majority of
Outstanding shares of Common Stock and Preferred Shares, voting
together as a single class, shall be entitled to elect the balance of
the directors.
(B) If at any time dividends on the Preferred Shares shall be unpaid in an
amount equal to two full years' dividends on the Preferred Shares (a
"Voting Period"), the number of directors constituting the Board of
Directors shall be automatically increased by the smallest number of
additional directors that, when added to the number of directors then
constituting the Board of Directors, shall (together with the two
directors elected by the holders of Preferred Shares pursuant to
paragraph (a) of this Section 6) constitute a majority of such
increased number, and the holders of Preferred Shares shall be
entitled, voting as a single class on a one-vote-per-share basis (to
the exclusion of the holders of all other securities and classes of
capital stock of the Fund), to elect the smallest number of such
additional directors of the Fund that shall constitute a majority of
the total number of directors of the Fund so increased.
(C) The Voting Period and the voting rights so created upon the occurrence
of the conditions set forth in paragraph (b) of this Section 6 shall
continue unless and until all dividends in arrears on the Preferred
Shares shall have been paid or declared and sufficient Deposit
Securities set apart for the payment of such dividends. Upon the
termination of a Voting Period, the voting rights described in
paragraph (b) of this Section 6 shall cease, subject always, however,
to the revesting of such voting rights in the holders of Preferred
Shares upon the further occurrence of any of the events described in
paragraph (b) of this Section 6.
(D) As soon as practicable after the accrual of any right of the holders of
Preferred Shares to elect directors pursuant to paragraph (b) of this
Section 6, the Fund shall notify the Auction Agent and shall call a
special meeting of the holders of Preferred Shares, by notice duly
given to such holders by the Fund or by the Auction Agent on behalf of
the Fund, which meeting shall be held not less than 10 nor more than 60
days after the date of mailing of such notice. If the Fund does not
give notice of such special meeting, or cause such notice to be given
on its behalf by the Auction Agent as provided above, the meeting may
be called by any holder of Preferred Shares on like notice. The record
date for determining the holders of Preferred Shares entitled to notice
of and to vote at such special meeting shall be the close of business
on the fifth Business Day preceding the day on which such notice is
given. At any such special meeting and at each meeting at which
directors are elected held during a Voting Period, the holders of
Preferred Shares, voting together as a class (to the exclusion of the
holders of all other securities and classes of capital stock of the
Fund), shall be entitled to elect the number of directors prescribed in
paragraph (b) of this Section 6 on a one-vote-per-share basis. At any
such meeting or adjournment thereof in the absence of a quorum, a
majority of the holders of the shares of Preferred Shares present in
person or by proxy shall have the power to adjourn the meeting without
notice, other than an announcement at the meeting, until a quorum is
present.
(E) The holders of the Preferred Shares shall also have the voting rights
provided for in Article VI of the Fund's Articles of Amendment and
Restatement as amended.
(F) For purposes of determining any rights of the holders of Preferred
Shares to vote on any matter, whether such right is created by the
Charter, by statute or otherwise, if redemption of some or all of the
Preferred Shares is required, no holder of Preferred Shares shall be
entitled to vote and no share of Preferred Shares shall be deemed to be
"outstanding" for the purpose of voting or determining the number of
shares required to constitute a quorum, if prior to or concurrently
with the time of determination of shares of Preferred Stock entitled to
vote or shares of Preferred Shares deemed outstanding for quorum
purposes, as the case may be, sufficient Deposit Securities for the
redemption of such shares have been deposited in trust with the
Custodian for that purpose and the requisite Notice of Redemption with
respect to such shares shall have been given as provided in paragraph
(f) of this Section 6.
(G) The terms of office of all persons who are directors of the Fund at the
time of a special meeting of holders of the Preferred Shares to elect
directors pursuant to paragraph (b) of this Section 6 shall continue,
notwithstanding the election at such meeting by the holders of the
number of directors that they are entitled to elect, and the persons so
elected by such holders, together with the incumbent directors, shall
constitute the duly elected directors of the Fund.
(H) Simultaneously with the expiration of a Voting Period, the terms of
office of the directors elected by the holders of Preferred Shares
pursuant to paragraph (b) of this Section 6 shall terminate, the two
directors elected by the holders of the Common Stock as a separate
class, the two directors elected by the holders of the Preferred Shares
as a separate class and the remaining directors elected by the holders
of Common Stock and Preferred Shares together as a single class
pursuant to paragraph (a) of this Section 6 and who are incumbent shall
constitute the directors of the Fund and the voting rights of the
holders of Preferred Shares to elect directors pursuant to paragraph
(b) shall cease, subject to reinstatement as provided in paragraph (b)
of this Section 6.
(I) Unless otherwise required by law, the holders of Preferred Shares shall
not have any relative rights or preferences or other special rights
other than those specifically set forth herein. In the event that the
Fund fails to pay any dividends on the shares of Preferred Shares or
the Fund fails to redeem any shares of Preferred Shares which it is
required to redeem, or any other event occurs which requires the
mandatory redemption of Preferred Shares and the required Notice of
Redemption has not been given, other than the rights set forth in
paragraph (a) of Section 3, the exclusive remedy of the holders of
Preferred Shares shall be the right to vote for directors pursuant to
the provisions of this paragraph 5. In no event shall the holders of
Preferred Shares have any right to sue for, or bring a proceeding with
respect to, such dividends or redemptions or damages for the failure to
receive the same.
(J) For so long as shares of Preferred Shares are outstanding, the Fund
shall not declare, pay, or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of,
or options, warrants or rights to subscribe for or purchase, Common
Stock or other stock ranking junior to the Preferred Shares as to
dividends or upon liquidation) in respect of the Common Stock or any
other stock of the Fund ranking junior to the Preferred Shares as to
dividends or upon liquidation, or call for redemption, redeem, purchase
or otherwise acquire for consideration any shares of Common Stock or
any other stock of the Fund ranking junior to the Preferred Shares as
to dividends or upon liquidation (except by conversion into or exchange
for stock of the Fund ranking junior to the Preferred Shares as to
dividends and upon liquidation), unless, in each case, (A) immediately
thereafter, the Basic Maintenance Amount and the Investment Company Act
Asset Coverage would be achieved, (B) full cumulative dividends on all
shares of Preferred Shares due on or prior to the date of the
transaction have been declared and paid (or sufficient Deposit
Securities maturing on or prior to the date fixed for their payment
have been set apart for their payment) and (C) the Fund has redeemed
the full number of shares of Preferred Shares required to be redeemed
by any provision contained in the Charter for mandatory redemption.
(K) So long as any Preferred Shares are outstanding, the Fund may not,
without the affirmative vote of the holders of a majority of the
Preferred Shares outstanding at the time, in person or by proxy, either
in writing or at a meeting, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any
similar application for relief under Federal bankruptcy law or any
similar application under state for as long as the Fund is silent and
does not foresee becoming insolvent.
(L) The Board of Directors, without the vote or consent of any Holder of
the Preferred Shares, or any other stockholder of the Fund, may from
time to time amend, alter or repeal any or all of the definitions of
the terms or provisions listed below, and any such amendment,
alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of the Preferred Shares or the Holders
thereof, provided that the Board of Directors receives written
confirmation from S&P (if S&P is then rating the Preferred Shares) and
Moody's (if Moody's is then rating the Preferred Shares) (with such
confirmation in no event being required to be obtained from a
particular rating agency in the case of the definitions relevant only
to and adopted in connection with the rating of the Preferred Shares,
if any, by any other rating agency) that such amendment, alteration or
repeal would not impair the rating then assigned by S&P or Moody's,
respectively. In addition, the Board of Directors, without the vote or
consent of any Holder of the Preferred Shares, or any other stockholder
of the Fund, may from time to time adopt, amend, alter or repeal any or
all of any additional or other definitions or add covenants and other
obligations of the Fund (e.g., maintenance of minimum liquidity level)
or confirm the applicability of covenants and other obligations set
forth herein in connection with obtaining or maintaining the rating of
S&P, Moody's or any Other Rating Agency with respect to the Preferred
Shares, and any such amendment, alteration or repeal will not be deemed
to affect the preferences, rights or powers of the Preferred Shares or
the Holders thereof, provided the Board of Directors receives written
confirmation from the relevant rating agency (such confirmation in no
event being required to be obtained from a particular rating agency
with respect to definitions or other provisions relevant only to
another rating agency's rating) that any such amendment, alteration or
repeal would not adversely affect the rating then assigned by such
rating agency.
Definitions and Provisions Subject to Change by Director Action
Asset Coverage Cure Date
Deposit Securities
Discounted Value
Exposure Period
Investment Company Act Asset Coverage Cure Date
Investment Company Act Preferred Shares Asset Coverage
Market Value
Maximum Applicable Rate
Minimum Applicable Rate
Moody's Discount Factor
Moody's Eligible Assets
Moody's Industry Classification
Preferred Shares Basic Maintenance Amount
Preferred Shares Basic Maintenance Certificate
S&P Discount Factor
S&P Eligible Assets
S&P Industry Classification
Short Term Money Market Instruments
Valuation Date
Volatility Factor
Last Paragraph of Section 12
In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Applicable Rate to increase
the percentage amount by which the Reference Rate is multiplied to
determine the Maximum Applicable Rate shown therein without the vote or
consent of the holders of the shares of the Preferred Shares, or any other
stockholder of the Fund, and without receiving any confirmation from any
rating agency after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance
with the Preferred Shares Basic Maintenance Amount.
The foregoing voting provisions will not apply with respect to the
Preferred Shares if, at or prior to the time when a vote is required, such
shares have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
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<PAGE>
7. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the affairs
of the Fund, whether voluntary or involuntary, the holders of shares of
Preferred Shares shall be entitled to receive out of the assets of the Fund
available for distribution to stockholders, after claims of creditors but
before any distribution or payment shall be made in respect of the Common
Stock or any other stock of the Fund ranking junior to the Preferred Shares
as to liquidation payments, a liquidation distribution in the amount of
$25,000 per share (the "Liquidation Preference"), plus an amount equal to
all unpaid dividends accrued to and including the date fixed for such
distribution or payment (whether or not declared by the Fund, but excluding
interest thereon), but such holders shall be entitled to no further
participation in any distribution or payment in connection with any such
liquidation, dissolution or winding up.
(b) If, upon any such liquidation, dissolution or winding up of the affairs of
the Fund, whether voluntary or involuntary, the assets of the Fund
available for distribution among the holders of all outstanding shares of
Preferred Shares shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then such available
assets shall be distributed among the holders of shares of Preferred Shares
ratably in any such distribution of assets according to the respective
amounts which would be payable on all such shares if all amounts thereon
were paid in full. Unless and until payment in full has been made to the
holders of shares of Preferred Shares of the liquidation distributions to
which they are entitled, no dividends or distributions will be made to
holders of the Common Stock or any other stock of the Fund ranking junior
to the Preferred Shares as to liquidation.
(c) Neither the consolidation nor merger of the Fund with or into any other
corporation or corporations, nor the sale, lease, exchange or transfer by
the Fund of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Fund for
purposes of this section 7.
(d) After the payment to the Holders of the Preferred Shares of the full
preferential amounts provided for in this Section 7, the Holders of the
Preferred Shares as such shall have no right or claim to any of the
remaining assets of the Fund.
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<PAGE>
8. Auction Agent.
For so long as any shares of the Preferred Shares are Outstanding, the
Auction Agent, duly appointed by the Fund to so act, shall be in each case
a commercial bank, trust company or other financial institution independent
of the Fund and its Affiliates (which, however, may engage or have engaged
in business transactions with the Fund or its Affiliates) and at no time
shall the Fund or any of its Affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or
for any reason its appointment is terminated during any period that any
shares of the Preferred Shares are Outstanding, the Fund shall use its best
efforts promptly thereafter to appoint another qualified commercial bank,
trust company or financial institution to act as the Auction Agent.
9. Investment Company Act Preferred Shares Asset Coverage.
The Fund shall maintain, as of each Valuation Date on which any share of
the Preferred Shares is Outstanding, asset coverage with respect to the
Preferred Shares which is equal to or greater than the Investment Company
Act Preferred Shares Asset Coverage; provided, however, that Section
3(a)(ii) shall be the sole remedy in the event the Fund fails to do so.
10. Preferred Shares Basic Maintenance Amount.
So long as shares of the Preferred Shares are Outstanding and S&P, Moody's
or any Other Rating Agency which so requires is then rating the Preferred
Shares, the Fund shall maintain, as of each Valuation Date, S&P Eligible
Assets (if S&P is then rating the Preferred Shares), Moody's Eligible
Assets (if Moody's is then rating the Preferred Shares) and (if applicable)
Other Rating Agency Eligible Assets having an aggregate Discounted Value
equal to or greater than the Preferred Shares Basic Maintenance Amount;
provided, however, that Section 3(a)(ii) shall be the sole remedy in the
event the Fund fails to do so.
11. [Reserved]
12. Certain Other Restrictions.
For so long as any shares of the Preferred Shares are Outstanding and S&P,
Moody's or any Other Rating Agency which so requires is then rating such
shares, the Fund will not, unless it has received written confirmation from
S&P (if S&P is then rating the Preferred Shares), Moody's (if Moody's is
then rating the Preferred Shares) and (if applicable) such Other Rating
Agency that any such action would not impair the rating then assigned by
such rating
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<PAGE>
agency to the Preferred Shares, engage in any one or more of the following
transactions:
(a) purchase or sell futures contracts or options thereon with respect to
portfolio securities or write unsecured put or uncovered call options on
portfolio securities, engage in options transactions involving cross-
hedging, or enter into any swap transaction;
(b) borrow money, except that the Fund may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
transactions in portfolio securities; provided that such borrowings shall
under any circumstances be limited to the lesser of $10 million and an
amount equal to 5% of the Market Value of the Fund's assets at the time of
such borrowings, the Preferred Shares Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and the
borrowing matures in not more than 60 days and shall not be extended or
renewed;
(c) except in connection with a refinancing of the Preferred Shares, issue any
class of stock ranking prior to or on a parity with the Preferred Shares
with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Fund, or reissue any shares
of the Preferred Shares previously purchased or redeemed by the Fund;
(d) engage in any short sales of securities;
(e) lend portfolio securities; or
(f) merge or consolidate into or with any other fund.
(g) For purposes of valuation of Moody's Eligible Assets: (A) if the Fund
writes a call option, the underlying asset will be valued as follows: (1)
if the option is exchange-traded and may be offset readily or if the option
expires before the earliest possible redemption of the Preferred Shares, at
the lower of the Discounted Value of the underlying security of the option
and the exercise price of the option or (2) otherwise, it has no value; (B)
if the Fund writes a put option, the underlying asset will be valued as
follows: the lesser of (1) exercise price and (2) the Discounted Value of
the underlying security; and (C) call or put option contracts which the
Fund buys have no value. For so long as the Preferred Shares are rated by
Moody's: (A) the Fund will not engage in options transactions for
leveraging or speculative purposes; (B) the Fund will not write or sell any
anticipatory contracts pursuant to which the Fund hedges the
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<PAGE>
anticipated purchase of an asset prior to completion of such purchase; (C)
the Fund will not enter into an option transaction with respect to
portfolio securities unless, after giving effect thereto, the Fund would
continue to have Eligible Assets with an aggregate Discounted Value equal
to or greater than the Preferred Shares Basic Maintenance Amount; (D) the
Fund will not enter into an option transaction with respect to portfolio
securities unless after giving effect to such transaction the Fund would
continue to be in compliance with the provisions relating to the Preferred
Shares Basic Maintenance Amount; (E) for purposes of the Preferred Shares
Basic Maintenance Amount assets in margin accounts are not Eligible Assets;
(F) the Fund shall write only exchange-traded options on exchanges approved
by Moody's (if Moody's is then rating the Preferred Shares); (G) where
delivery may be made to the Fund with any of a class of securities, the
Fund shall assume for purposes of the Preferred Shares Basic Maintenance
Amount that it takes delivery of that security which yields it the least
value; (H) the Fund will not engage in forward contracts; and (I) there
shall be a quarterly audit made of the Fund's options transactions by the
Fund's independent accountants to confirm that the Fund is in compliance
with these standards.
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For so long as any Preferred Shares are rated by S&P, the Fund will not
purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the Preferred Shares by S&P,
except that the Fund may purchase or sell futures contracts based on the
Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds or Notes ("Treasury Bonds") and write, purchase or sell put
and call options on such contracts (collectively, "S&P Hedging
Transactions"), subject to the following limitations: 1) the Fund will not
engage in any S&P Hedging Transaction based on the Municipal Index (other
than transactions which terminate a futures contract or option held by the
Fund by the Fund's taking an opposite position thereto ("Closing
Transactions")), which would cause the Fund at the time of such transaction
to own or have sold the least of (A) more than 1,000 outstanding futures
contracts based on the Municipal Index, (B) outstanding futures contracts
based on the Municipal Index exceeding in number 25% of the quotient of the
Market Value of the Fund's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts based on
the Municipal Index in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal; (2) the Fund will not
engage in any S&P Hedging Transaction based on Treasury Bonds (other than
Closing Transactions) which would cause the Fund at the time of such
transaction to own or have sold the lesser of (A) outstanding futures
contracts based on Treasury Bonds and on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Fund's total assets
divided by $100,000 ($200,000 in the case of the two-year United States
Treasury Note) or (B) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal; (3) the
Fund will engage in Closing Transactions to close out any outstanding
futures contract which the Fund owns or has sold or any outstanding option
thereon owned by the Fund in the event (A) the Fund does not have S&P
Eligible Assets with an aggregate Discounted Value equal to or greater than
the Preferred Shares Basic Maintenance Amount on two consecutive Valuation
Dates and (B) the Fund is required to pay Variation Margin on the second
such Valuation Date; (4) the Fund will engage in a Closing Transaction to
close out any outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures contract or
option thereon unless the Fund holds the securities deliverable under such
terms; and (5) when the Fund writes a futures contract or option thereon,
it will either maintain an amount of cash, cash equivalents or high grade
(rated BBB or better by S&P), fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus
the amount of Initial Margin and Variation Margin held in the account of or
on behalf of the Fund's broker with respect to such futures contract or
option equals the Market Value of the futures contract or option, or, in
the event the Fund writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio. For purposes of this Section 12(h), "Initial
Margin" means the amount of cash or securities deposited with a broker as a
margin payment at the time of purchase or sale of a futures contract, and
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Fund, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such futures contract fluctuates.
For purposes of determining whether the Fund has S&P Eligible Assets with a
Discounted Value that equals to exceeds the Preferred Shares Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an
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amount equal to (i) 30% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on the Municipal Index which are
owned by the Fund plus (ii) 25% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Fund.
(i) For so long as any shares of the Preferred Shares are outstanding and
S&P is then rating such shares, the Fund will not, unless it has
received written confirmation from S&P that such action would not
impair the rating then assigned to the Preferred Shares by S&P, change
the pricing service to a service other than Muller's Data Corporation
or any other S&P approved pricing service.
13. Compliance Procedures for Asset Maintenance Tests.
For so long as any shares of the Preferred Shares are Outstanding and S&P,
Moody's or any Other Rating Agency which so requires is then rating such
shares:
(a) As of each Valuation Date, the Fund shall determine in accordance with
the procedures specified herein (i) the Market Value of each Eligible
Asset owned by the Fund on that date, (ii) the Discounted Value of
each such Eligible Asset using the Discount Factors, (iii) whether the
Preferred Shares Basic Maintenance Amount is met as of that date and
(iv) the value of the portfolio holdings of the Fund.
(b) Upon any failure to maintain the required Preferred Shares Basic
Maintenance Amount or Investment Company Act Preferred Shares Asset
Coverage on any Valuation Date, the Fund may use reasonable commercial
efforts (including, without limitation, altering the composition of
its portfolio, purchasing shares of the Preferred Shares outside of an
Auction or in the event of a failure to file a certificate on a timely
basis, submitting the requisite certificate), subject to the fiduciary
obligations of the Board of Directors, to reattain (or certify in the
case of a failure to file on a timely basis, as the case may be) the
required Preferred Shares Basic Maintenance Amount or the Investment
Company Act Preferred Shares Basic Maintenance Asset Coverage on or
prior to the Preferred Shares Asset Coverage Cure Date or Investment
Company Act Preferred Shares Asset Coverage Cure Date, as the case may
be.
(c) Compliance with the Preferred Shares Basic Maintenance Amount and
Investment Company Act Asset Coverage Tests shall be determined with
reference to those shares of
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the Preferred Shares which are deemed to be Outstanding hereunder.
(d) The Fund shall deliver a certificate which sets forth a determination
of items (i)-(iii) of paragraph (a) of this Section 13 (a "Preferred
Shares Basic Maintenance Certificate") (i) to the Auction Agent, S&P
(if S&P is then rating the Preferred Shares), Moody's (if Moody's is
then rating the Preferred Shares) and any Other Rating Agency which is
then rating the Preferred Shares and which so requires as of (A) the
Valuation Date preceding the Date of Original Issue and (B) any
Valuation Date on which the Fund fails to have Eligible Assets with an
aggregate Discounted Value at least equal to 125% of the Preferred
Shares Basic Maintenance Amount, (ii) to the Auction Agent, S&P (if
S&P is then rating the Preferred Shares), Moody's (if Moody's is then
rating the Preferred Shares) and any Other Rating Agency which is then
rating the Preferred Shares and which so requires (A) if the Fund
fails to have Eligible Assets with an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount on any
Valuation Date, and (B) on request by S&P (if S&P is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred
Shares), or any Other Rating Agency which is then rating the Preferred
Shares, (iii) to the Auction Agent, S&P (if S&P is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred
Shares) and any Other Rating Agency which is then rating the Preferred
Shares and which so requires as of (A) the Valuation Date next
following the date of redemption by the Fund of shares of Common Stock
which, together with all other shares of Common Stock purchased during
the six months preceding such date, equal in excess of 1,000,000
shares of Common Stock, and (B) the last Valuation Date of each fiscal
quarter and a Valuation Date during such fiscal quarter randomly
selected by the Fund's independent accountants as provided in Section
13(g), and (iv) to the Auction Agent, S&P (if S&P is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred
Shares) and any Other Rating Agency which is then rating the Preferred
Shares and which so requires as of a Business Day on or before any
Asset Coverage Cure Date relating to the Fund's cure of a failure to
have Eligible Assets with an aggregate Discounted Value at least equal
to the Preferred Shares Basic Maintenance Amount. Such Preferred
Shares Basic Maintenance Certificate shall be delivered in the case of
clause (i)(A) as of the Valuation Date preceding the Date of Original
Issue and in the case of clauses (i)(B), (ii), (iii) and (iv) above on
or before the seventh Business Day after the relevant Valuation Date
or Asset Coverage Cure Date.
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(e) The Fund shall deliver to the Auction Agent, S&P (if S&P is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred
Shares), and any Other Rating Agency which is then rating the Preferred
Shares and which so requires a certificate with respect to the calculation
of the Investment Company Act Preferred Shares Asset Coverage and the value
of the portfolio holdings of the Fund (an "Investment Company Act Preferred
Shares Asset Coverage Certificate") (i) as of the Valuation Day preceding
the Date of Original Issue, and (ii) as of (A) the last Valuation Date of
each quarter thereafter, and (B) as of the Business Day on or before the
Asset Coverage Cure Date relating to the failure to satisfy the Investment
Company Act Preferred Shares Asset Coverage. Such Investment Company Act
Preferred Shares Asset Coverage Certificate shall be delivered in the case
of clause (i) on the Date of Original Issue and in the case of clause (ii)
on or before the seventh Business Day after the relevant Valuation Date or
the Asset Coverage Cure Date.
(f) [Reserved]
(g) Within ten Business Days of the Date of Original Issue, the Fund shall
deliver to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any
Other Rating Agency which is then rating the Preferred Shares and which so
requires a letter prepared by the Fund's independent accountants (an
"Accountant's Certificate") regarding the accuracy of the calculations made
by the Fund in the Preferred Shares Basic Maintenance Certificate and the
Investment Company Act Preferred Shares Asset Coverage Certificate required
to be delivered by the Fund. Within 10 Business Days after delivery of the
Preferred Shares Basic Maintenance Certificate relating to the last
Valuation Date of each fiscal
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quarter of the Fund on which a Preferred Shares Basic Maintenance
Certificate is required to be delivered, the Fund (x) will deliver to the
Auction Agent, S&P (if S&P is then rating the Preferred Shares), Moody's
(if Moody's is then rating the Preferred Shares) and any Other Rating
Agency which is then rating the Preferred Shares and which so requires an
Accountant's Certificate regarding the accuracy of the calculations made by
the Fund in such Preferred Shares Basic Maintenance Certificate and in one
other Preferred Shares Basic Maintenance Certificate randomly selected by
the Fund's independent accountants during such fiscal quarter. Within 10
Business Days after delivery of the Investment Company Act Preferred Shares
Asset Coverage Certificate relating to the last Valuation Date of each
fiscal quarter of the Fund on which an Investment Company Act Preferred
Shares Asset Coverage Certificate is required to be delivered, the Fund
will deliver to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any
Other Rating Agency which is then rating the Preferred Shares and which so
requires an Accountant's Certificate regarding the accuracy of the
calculations made by the Fund in such Investment Company Act Preferred
Shares Asset Coverage Certificate. In addition, the Fund will deliver to
the relevant persons specified in the preceding sentence an Accountant's
Certificate regarding the accuracy of the calculations made by the Fund on
each Preferred Shares Basic Maintenance Certificate and Investment Company
Act Preferred Shares Asset Coverage Certificate delivered pursuant to
clause (iv) of paragraph (d) or clause (ii)(B) of paragraph (e) of this
Section 13, as the case may be, within 10 days after the relevant Asset
Coverage Cure Date. If an Accountant's Certificate delivered with respect
to an Asset Coverage Cure Date shows an error was made in the Fund's report
with respect to such Asset Coverage Cure Date, the calculation or
determination made by the Fund's independent accountants will be conclusive
and binding on the Fund with respect to such reports. If any other
Accountant's Certificate shows that an error was made in any such report,
the calculation or determination made by the Fund's independent accountants
will be conclusive and binding on the Fund; provided, however, any errors
shown in the Accountant's Certificate filed on a quarterly basis shall not
be deemed to be a failure to maintain the Preferred Shares Basic
Maintenance Amount on any prior Valuation Dates.
(h) The Accountant's Certificates referred to in paragraph (g) will confirm,
based upon the independent accountant's review, (i) the mathematical
accuracy of the calculations reflected in the related Preferred Shares
Basic Maintenance Amount and Investment Company Act Preferred Shares Asset
Coverage Certificates, as the case may be, and (ii) that the Fund
determined whether the Fund had, at such Valuation Date, Eligible Assets
with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount in accordance with the Articles Supplementary.
(i) In the event that a Preferred Shares Basic Maintenance Certificate or
Investment Company Act Preferred Shares Asset Coverage Certificate with
respect to an applicable Valuation Date is not delivered within the time
periods specified in this Section 13, the Fund shall be deemed to have
failed to maintain the
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Preferred Shares Basic Maintenance Amount or the Investment Company Act
Preferred Shares Asset Coverage, as the case may be, on such Valuation Date
for purposes of Section 13(b). In the event that a Preferred Shares Basic
Maintenance Certificate or Investment Company Act Preferred Shares Asset
Coverage Certificate or the applicable Accountant's Certificates with
respect to an applicable Asset Coverage Cure Date are not delivered within
the time periods specified herein, the Fund shall be deemed to have failed
to have Eligible Assets with an aggregate Discounted Value at least equal
to the Preferred Shares Basic Maintenance Amount or the Investment Company
Act Preferred Shares Asset Coverage, as the case may be, as of the related
Valuation Date, and such failure shall be deemed not to have been cured as
of such Asset Coverage Cure Date for purposes of the mandatory redemption
provisions.
14. [Reserved]
15. Notice.
All notices or communications hereunder, unless otherwise specified in
these Articles Supplementary, shall be sufficiently given if in writing and
delivered in person, by telecopier or mailed by first-class mail, postage
prepaid. Notices delivered pursuant to this Section 15 shall be deemed
given on the earlier of the date received or the date five days after which
such notice is mailed.
16. Waiver.
To the extent permitted by Maryland law, holders of at least two-thirds of
the Outstanding shares of the Shares, acting collectively, may waive any
provision hereof intended for their respective benefit in accordance with
such procedures as may from time to time be established by the Board of
Directors.
17. Termination.
In the event that no shares of the Preferred Shares are Outstanding, all
rights and preferences of such shares established and designated hereunder
shall cease and terminate, and all obligations of the Fund under these
Articles Supplementary shall terminate.
18. Definitions.
As used in Part I and Part II of these Articles Supplementary, the
following terms shall have the following meanings (with terms defined in
the singular having comparable meanings when used in the plural and vice
versa), unless the context otherwise requires:
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(a) "AAA/aaa Credit Rating" means a credit rating in the highest category of
any two nationally recognized statistical rating organizations (as used in
the rules and regulations under the Securities Exchange Act of 1934), one
of which shall be S&P or Moody's.
(b) "AA Financial Composite Commercial Paper Rate" on any date means (a) the
interest equivalent of the higher of the 7-day or the 30-day rate, in the
case of a Dividend Period which is a Standard Term Period or shorter, or
the 180-day rate, in the case of all other Dividend Periods, on commercial
paper on behalf of issuers whose corporate bonds are rated AA by S&P, or
the equivalent of such rating by another nationally recognized rating
agency, as announced by the Federal Reserve Bank of New York for the close
of business on the Business Day immediately preceding such date; or (b) if
the Federal Reserve Bank of New York does not make available such a rate.
then the arithmetic average of the interest equivalent of such rates on
commercial paper placed on behalf of such issuers, as quoted on a discount
basis or otherwise by the Commercial Paper Dealers to the Auction Agent for
the close of business on the Business Day immediately preceding such date
(rounded to the next highest .001 of 1%). If any Commercial Paper Dealer
does not quote a rate required to determine the AA Financial Composite
Commercial Paper Rate, such rate shall be determined on the basis of the
quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer) if any, or, if there are no such Commercial Paper
Dealers, by the Auction Agent. For purposes of this definition, (i)
"Commercial Paper Dealers" shall mean (A) Salomon Smith Barney Inc., Lehman
Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Goldman Sachs & Co.; (B) in lieu of any thereof, its respective Affiliate
or successor, and (C) in the event that any of the foregoing shall cease to
quote rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper
of such issuers then making such quotations selected by the Fund, and (ii)
"interest equivalent" of a rate stated on a discount basis for commercial
paper of a given number of days' maturity shall mean a number equal to the
quotient (rounded upward to the next higher one-thousandth of 1%) of (A)
such rate expressed as a decimal, divided by (B) the difference between (x)
1.00 and (y) a fraction, the numerator of which shall be the product of
such rate expressed as a decimal, multiplied by the number of days in which
such commercial paper shall mature and the denominator of which shall be
360.
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(c) "Accountant's Certificate" has the meaning set forth in Section 13(g).
(d) "Affiliate" means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Fund; provided that no
Broker-Dealer controlled by, in control of or under common control with the
Fund shall be deemed to be an Affiliate nor shall any corporation or any
person controlled by, in control of or under common control with such
corporation one of the directors or executive officers of which is also a
director of the Fund be deemed to be an Affiliate solely because such
director or executive officer is also a director of the Fund.
(e) "Alternate Term Period" means any Dividend Period that is not a Standard
Term Period.
(f) "Applicable Rate" means for each Dividend Period (a) if Sufficient Clearing
Orders exist for the Auction in respect thereof, the Winning Rate, (b) if
Sufficient Clearing Orders do not exist for the Auction in respect thereof,
the Maximum Applicable Rate and (c) in the case of any Dividend Period of
93 days or fewer if all the Preferred Shares are the subject of Submitted
Hold Orders for the Auction in respect thereof, the Minimum Applicable
Rate.
(g) "Articles" means the Articles of Amendment and Restatement as amended, and
the Articles Supplementary with respect to the Preferred Shares of the
Fund.
(h) "Asset Coverage Cure Date" has the meaning set forth in Section 3(a)(ii).
(i) "Auction" means each periodic operation of the procedures set forth under
"Auction Procedures."
(j) "Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by
a resolution of the Board of Directors enters into an agreement with the
Fund to follow the Auction Procedures for the purpose of determining the
Applicable Rate.
(k) "Auction Date" means the first Business Day next preceding the first day of
a Dividend Period.
(l) "Auction Procedures" means the procedures for conducting Auctions set forth
in Part II hereof.
(m) "Board of Directors" or "Board" means the Board of Directors of the Fund or
any duly authorized committee thereof as permitted by applicable law.
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(n) "Broker-Dealer" or "Broker-Dealers" means any broker-dealer or broker-
dealers, or other entity permitted by law to perform the functions required
of a Broker-Dealer by the Auction Procedures, that has been selected by the
Fund and has entered into a Broker-Dealer Agreement with the Auction Agent
that remains effective.
(o) "Broker-Dealer Agreement" means an agreement entered into by the Auction
Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to
follow the Auction Procedures.
(p) "Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in
the City of New York, New York are authorized or obligated by law to close.
(q) "Code" means the Internal Revenue Code of 1986, as amended.
(r) "Commercial Paper Dealers" has the meaning set forth in the definition of
AA Financial Composite Commercial Paper Rate.
(s) "Commission" means the Securities and Exchange Commission.
(t) "Common Stock" means the common stock, par value $.01 per share, of the
Fund.
(u) "Corporate Bonds" means corporate debt securities having the
characteristics set forth in paragraph (vi) of the definition of S&P
Eligible Assets.
(v) "Date of Original Issue" means the date on which the Preferred Shares are
originally issued by the Fund.
(w) "Default Period" has the meaning set forth in Section 2(c)(ii).
(x) "Default Rate" means the Reference Rate multiplied by three (3).
(y) "Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets,
rated at least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of
optional redemption, such obligations or securities shall be considered
"Deposit Securities" only if they are also rated at least P-1 by Moody's.
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(z) "Discount Factor" means the S&P Discount Factor (if S&P is then rating the
Preferred Shares), the Moody's Discount Factor (if Moody's is then rating
the Preferred Shares) or the discount factor established by any Other
Rating Agency which is then rating the Preferred Shares and which so
requires, whichever is applicable.
(aa) "Discounted Value" means the quotient of the Market Value (plus accrued
interest) of an Eligible Asset divided by the applicable Discount Factor
provided that with respect to an Eligible Asset that is currently callable,
Discounted Value shall be equal to the quotient, calculated as set forth
above, or the call price, whichever is lower, and that with respect to an
Eligible Asset that is prepayable, Discounted Value shall be equal to the
quotient, calculated as set forth above, or the par value, whichever is
lower.
(bb) "Dividend Default" has the meaning set forth in Section 2(c)(iii).
(cc) "Dividend Payment Date" means (i) with respect to any Dividend Period of
one year or less, the Business Day next succeeding the last day thereof
and, if any, the 91st, 181st and 271st days thereof, and (ii) with respect
to any Dividend Period of more than one year, on a quarterly basis on each
January 1, April 1, July 1 and October 1 and on the Business Day following
the last day of such Dividend Period.
(dd) "Dividend Period" means the period commencing on the Date of Original Issue
thereof and ending on the date specified on the Date of Original Issue and
thereafter the period commencing on the day following each Dividend Period
and ending on the day established by the Fund.
(ee) "Eligible Assets" means S&P Eligible Assets (if S&P is then rating the
Preferred Shares), Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and/or Other Rating Agency Eligible Assets if any Other
Rating Agency is then rating the Preferred Shares, whichever is applicable.
(ff) "Exposure Period" means the period commencing on (and including) a given
Valuation Date and ending 49 calendar days/33 Business Days thereafter.
(gg) "Holder" means, with respect to the Preferred Shares, the registered holder
of shares of the Preferred Shares as the same appears on the stock ledger
or stock records of the Fund.
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(hh) "Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
(ii) "Investment Company Act Preferred Shares Asset Coverage" means asset
coverage, as defined in Section 18(h) of the Investment Company Act, of at
least 200% with respect to all Outstanding senior securities of the Fund
which are stock, including all Outstanding Preferred Shares (or such other
asset coverage as may in the future be specified in or under the Investment
Company Act as the minimum asset coverage for senior securities which are
stock of a closed-end investment company as a condition of declaring
dividends on its common stock), determined on the basis of values
calculated as of a time within 48 hours next preceding the time of such
determination.
(jj) "Investment Company Act Preferred Shares Asset Coverage Certificate" means
the certificate required to be delivered by the Fund pursuant to Section
13(e).
(kk) "Mandatory Redemption Date" has the meaning set forth in Section 3(a)(iv).
(ll) "Market Value" shall mean the fair market value of an asset of the Fund as
computed based upon (i) one or more pricing services agreements approved by
the Board of Directors or (ii) the lower bid price from two independent
dealers in securities one of which bids shall be in writing, in each case
with interest accrued added to such computation for those assets of the
Fund where such computation does not include interest accrued. The Fund
has a pricing service agreement with Muller Data Corporation. The Board
may substitute another pricing service, provided that it has received
notice from S&P (if S&P is then rating the Preferred Shares) and Moody's
(if Moody's is then rating the Preferred Shares) that such substitution
will not impair the AAA/aaa Credit Rating.
(mm) "Maximum Applicable Rate" means, on any date on which the Applicable Rate
is determined, 150% of the 30-day AA Financial Composite Commercial Paper
Rate on the date of such Auction.
(nn) "Minimum Applicable Rate" means, on any Auction Date with respect to a
Dividend Period of 93 days or fewer, 80% of the AA Financial Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding such Auction Date. There shall be no Minimum Applicable Rate on
any Auction Date with respect to a Dividend Period of more than 93 days.
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(oo) "Moody's" means Moody's Investors Service, Inc. and its successors at law.
(pp) "Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined as follows.
The Moody's Discount Factor for any Moody's Eligible Asset other than the
securities set forth below will be the percentage provided in writing by
Moody's.
(i) Corporate Debt Securities: The percentage determined by reference to
the rating on such asset (which percentage is based upon the Exposure
Period) with reference to the remaining term to maturity of such
assets, in accordance with the table set forth below.
Moody's Discount Factors -- Corporate Debt Securities Rating Category
Maturity of
Collateral Aaa Aa A Baa Ba B Caa Unrated*
- ---------- --- -- - --- -- - --- --------
1 year - 15 years 150% 155% 160% 165% 170% 180% 205% 260%
Above 15 years -
20 years 161% 169% 177% 184% 200% 215% 260% 260%
Above 20 years 162% 170% 178% 185% 201% 216% 260% 260%
_______________
* If a security is unrated by Moody's but is rated by S&P, a rating two
numeric ratings below the S&P rating will be used, e.g., where the S&P
rating is AAA, a Moody's rating of Aa2 will be used; where the STP rating
is AA+ a Moody's rating of Aa3 will be used. If a security is unrated by
either Moody's or S&P, the Fund will use the percentage set forth under
"Unrated" in this table.
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(ii) Preferred Stock: For (A) utility preferred stocks, 152%, (B)
industrial/financial preferred stocks, 197%, and (C) auction rate preferred
stocks, 350%.
(iii) Short Term, Money Market Instruments: The Moody's Discount Factor applied
to short-term portfolio securities will be (A) 100%, so long as such
portfolio securities mature or have a demand feature at par exercisable
within the Exposure Period, (B) 115%, so long as such portfolio securities
mature or have a demand feature at par not exercisable within the Exposure
Period, and (C) 125%, if such securities are not rated by Moody's, so long
as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P
and mature or have a demand feature at par exercisable within the Exposure
Period. A Moody's Discount Factor of 100% will be applied to cash.
(iv) U.S. Treasury Securities and Treasury Strips (as defined by Moody's):
<TABLE>
<CAPTION>
U.S. Treasury
U.S. Treasury Securities Strips
Remaining Term to Maturity Discount Factor Discount Factor
- -------------- ----------- --------------- ---------------
<S> <C> <C>
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113 114
3 years or less (but longer than 2 years) 118 120
4 years or less (but longer than 3 years) 123 127
5 years or less (but longer than 4 years) 128 133
7 years or less (but longer than 5 years) 135 145
10 years or less (but longer than 7 years) 141 159
15 years or less (but longer than 10 years) 146 184
20 years or less (but longer than 15 years) 154 211
30 years or less (but longer than 20 years) 154 236
</TABLE>
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<PAGE>
(v) Rule 144A Securities: The Moody's Discount Factor applied to Rule 144A
Securities for Rule 144A Securities whose terms include rights to
registration under the Securities Act within one year and Rule 144A
Securities which do not have registration rights within one year will
be 120% and 130%, respectively, of the Moody's Discount Factor which
would apply were the securities registered under the Securities Act.
(qq) "Moody's Eligible Assets" means
(i) cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is
within five Business Days of the Valuation Date, (B) A2 or higher if
the payment date is within thirty days of the Valuation Date, and (C)
A1 or higher if the payment date is within the Moody's Exposure
Period) and receivables for Moody's Eligible Assets sold if the
receivable is due within five Business Days of the Valuation Date, and
if the trades which generated such receivables are (A) settled through
clearing house firms with respect to which the Fund has received prior
written authorization from Moody's or (B) (1) with counterparties
having a Moody's long-term debt rating of at least Baa3 or (2) with
counterparties having a Moody's Short-Term Money Market Instrument
rating of at least P-1;
(ii) Short-Term Money Market Instruments so long as (A) such securities are
rated at least P-1, (B) in the case of demand deposits, time deposits
and overnight funds, the supporting entity is rated at least A2, or
(C) in all other cases, the supporting entity (1) is rated A2 and the
security matures within one month, (2) is rated A1 and the security
matures within three months or (3) is rated at least Aa3 and the
security matures within six months; provided, however, that for
purposes of this definition, such instruments (other than commercial
paper rated by S&P and not rated by Moody's) need not meet any
otherwise applicable S&P rating criteria:
(iii) U.S. Treasury Securities and Treasury Strips (as defined by Moody's);
(iv) Corporate debt securities will be included in Moody's Eligible Assets
if (A) such securities are rated Caa or higher by Moody's; (B) such
securities provide for
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<PAGE>
the periodic payment of interest in cash in U.S. dollars; (C) for
securities which provide for conversion or exchange into equity
capital at some time over their lives, the issuer must be rated at
least B3 by Moody's and the discount factor will be 250%; (D) for debt
securities rated Bal and below, no more than 10% of the original
amount of such issue may constitute Moody's Eligible Assets; and (E)
such securities have been registered under the Securities Act or are
restricted as to resale under federal securities laws but are eligible
for resale pursuant to Rule 144A under the Securities Act as
determined by the Fund's adviser acting subject to the supervision of
the Fund's Board of Directors and (F) such securities are not subject
to extended settlement.
Notwithstanding the foregoing limitations:
Corporate debt securities not rated at least Caa by Moody's
or not rated by Moody's shall be considered to be Moody's Eligible
Assets only to the extent the Market Value of such corporate debt
securities does not exceed 50% of the aggregate Market Value of
Moody's Eligible Assets; provided, however, that if the Market Value
of such corporate debt securities exceeds 50% of the aggregate Market
Value of Moody's Eligible Assets, a portion of such corporate debt
securities (selected by the Fund) shall not be considered Moody's
Eligible Assets, so that the Market Value of such corporate debt
securities (excluding such portion) does not exceed 50% of the
aggregate Market Value of Moody's Eligible Assets.
(v) Portfolio securities that are preferred stocks will be included
in Moody's Eligible Assets if (A) dividends on such preferred
stock are cumulative, (B) such securities provide for the
periodic payment of dividends thereon in cash in U.S. dollars and
do not provide for conversion or exchange into, or have warrants
attached entitling the holder to receive, equity capital at any
time over the respective lives of such securities, (C) the issuer
of such a preferred stock has common stock listed on either the
New York Stock Exchange or the American Stack Exchange, (D) the
issuer of such a preferred stock has a senior debt rating from
Moody's of Baa1 or higher or a preferred stock rating from
Moody's of "baa3" or higher and (E) such preferred stock has paid
consistent cash
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<PAGE>
dividends in U.S. dollars over the last three years or has a
minimum rating of "a1" (if the issuer of such preferred stock has
other preferred issues Outstanding that have been paying
dividends consistently for the last three years, then a preferred
stock without such a dividend history would also be eligible). In
addition, the preferred stocks must have the following
diversification requirements: (X) the preferred stock issue must
be greater than $50 million and (Y) the minimum holding by the
Fund of each issue of preferred stock is $500,000 and the maximum
holding of preferred stock of each issue is $5 million. In
addition, preferred stocks issued by transportation companies
will not be considered Moody's Eligible Assets.
(vi) In addition, portfolio holdings as described below must be within
the following diversification and issue size requirements in
order to be included in Moody's Eligible Assets:
<TABLE>
<CAPTION>
Maximum Single Maximum Single Minimum Issue Size
Issuer Industry ($ in millions)
Collateral Ratings(1) (%)(2,3) (%)(3,4) (6)
--------------------- -------- -------- ---
<S> <C> <C> <C>
"aaa", Aaa 100% 100% $100
"aa", Aa 20 60 100
"a", A 10 40 100
"baa", Baa 6 20 100
Ba 4 12 50(5)
B1-B2 3 8 50(5)
B3 2 8 50(5)
CAA 2 7 50(5)
</TABLE>
See accompanying notes.
_______________
(1) Refers to the preferred stock and senior debt rating of collateral.
(2) Companies subject to common ownership of 25% or more are considered as one
name.
(3) Percentages represent a portion of the aggregate Market Value of corporate
securities.
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<PAGE>
(4) Industries are determined according to Moody's Industry Classifications, as
defined herein.
(5) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50 million.
(vii) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company Act, may be included in
Moody's Eligible Assets, but, with respect to any financial contract,
only upon receipt by the Fund of a letter from Moody's specifying any
conditions on including such financial contract in Moody's Eligible
Assets and assuring the Fund that including such financial contract in
the manner so specified would not affect the credit rating assigned by
Moody's to the Preferred Shares.
(viii) Common stock will be included in Moody's Eligible Assets so long as
(A) no more than 3% of the Fund's portfolio holdings are common stock
and (B) the issuer may not hold any equity unless it has been listed
on an exchange or traded for more than one year and one quarter, or 15
months (eligible stock exchanges are the New York Stock Exchange,
American Stock Exchange, Philadelphia Stock Exchange, Boston Stock
Exchange, Washington Stock Exchange, Pacific Stock Exchange, NASDAQ,
and National Market Quotations.) The Moody's Discount Factor applied
to common stock will be 250%.
Where the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Moody's Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a
third party in the future, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such asset will constitute a Moody's Eligible Asset.
For the purposes of calculation of Moody's Eligible Assets, portfolio securities
which have been called for redemption by the issuer thereof shall be valued at
the lower of Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of the Preferred Shares
Basic Maintenance Amount or it is subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (A) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Fund will not
affect the status of such asset as a Moody s Eligible Asset, (B) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) Liens to secure payment for services rendered or cash advanced to
the Fund by its investment adviser, the Fund's custodian, transfer agent or
registrar or the Auction Agent and (D) Liens by virtue of any repurchase
agreement. See also Section 12 for certain information with respect to Moody's
Eligible Assets.
(rr) "Moody's Industry Classifiction" means, for the purposes of
determining Moody's Eligible Assets, each of the following industry
classifications:
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<PAGE>
1. Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
2. Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat
Products, Poultry Products, Snacks, Packaged Foods, Distributors,
Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff,
Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real
Estate, Real Estate Development, REITs, Land Development
6. Chemicals, Plastics and Rubber: Chemicals (non-agriculture),
Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers
made of : Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution, Mining and Sales.
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and
Waste Disposal
-37-
<PAGE>
12. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, TVs, Tape Machines, Speakers,
Printers, Drivers, Technology
13. Finance: Investment Brokerage, Leasing, Syndication,
Securities
14. Farming and Agriculture: Livestock, Grains, Produce, Agricultural
Chemicals, Agricultural Equipment, Fertilizers
15. Grocery: Grocery Stores, Convenience Food Stores
16. Healthcare, Education and Childcare: Ethical Drugs, Proprietary
Drugs, Research, Health Care Centers, Nursing Homes, HMOs,
Hospitals, Hospital Supplies, Medical Equipment
17. Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking,
Ranges
18. Hotels, Motels, Inns and Gaming
19. Insurance: Life, Property and Casualty, Broker, Agent,
Surety
20. Leisure, Amusement, Entertainment: Boating, Bowling, Billiards,
Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (camping), Tourism, Resorts, Games, Toy
Manufacturing
21. Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
22. Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales
23. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
24. Personal, Food and Miscellaneous
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<PAGE>
25. Printing and Publishing: Graphic Arts, Paper, Paper Products,
Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders,
Ship Builders, Containers, Container Builders, Parts, Overnight
Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air
Cargo, Transport
27. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail
Order Catalog, Showroom
28. Cellular
29. Data and Internet Services
30. Satellite
31. Telecommunications Equipment
32. Other Telecommunications
33. Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
34. Utilities: Electric, Water, Hydro Power, Gas, Diversified
35. Radio and TV Broadcasting
36. North American Cable
37. Foreign Cable, Foreign TV, Radio and Equipment
38. Other Broadcasting and Entertainment
The Fund will use its discretion in determining which industry
classification is applicable to a particular investment in consultation with the
independent auditor and the rating agencies, as necessary.
ss) "Notice of Redemption" means any notice with respect to the redemption of
shares of the Preferred Shares pursuant to Section 3.
tt) "Other Rating Agency" means any rating agency other than S&P or Moody's then
providing a rating for the Preferred Shares pursuant to the request of the
Fund.
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<PAGE>
(uu) "Other Rating Agency Eligible Assets" means assets of the Fund designated
by any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the Preferred Shares.
(vv) "Outstanding" means, as of any date, any Preferred Shares theretofore
issued by the Fund except, without duplication, (i) any Preferred Shares
theretofore canceled or redeemed or repurchased by the Fund, or delivered
to the Auction Agent for cancellation or with respect to which the Fund has
given notice of redemption and irrevocably deposited with the Paying Agent
sufficient funds to redeem such shares of the Preferred Shares Preferred
and (ii) any shares if the Preferred Shares represented by any certificate
in lieu of which a new certificate has been executed and delivered by the
Fund. Notwithstanding the foregoing, (A) for purposes of voting rights
(including the determination of the number of shares required to constitute
a quorum), any shares of the Preferred Shares to which the Fund or any
Affiliate of the Fund shall be the Existing Holder shall be disregarded and
not deemed Outstanding; (B) in connection with any Auction, any shares of
the Preferred Shares as to which the Fund or any person known to the
Auction Agent to be an Affiliate of the Fund shall be the Existing Holder
thereof shall be disregarded and deemed not to be Outstanding; and (C) for
purposes of determining the Preferred Shares Basic Maintenance Amount, any
shares of the Preferred Shares held by the Fund shall be disregarded and
not deemed Outstanding but shares held by any Affiliate of the Fund shall
be deemed Outstanding.
(ww) "Paying Agent" means Bankers Trust Company unless and until another entity
appointed by a resolution of the Board of Directors enters into an
agreement with the Fund to serve as paying agent, which paying agent may be
the same as the Auction Agent.
(xx) "Person" or "person" means and includes an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or
other entity or a government or any agency or political subdivision
thereof.
(yy) "Preferred Stock" means the preferred stock of the Fund from time to time.
(zz) "Preferred Shares" means the Auction Rate Cumulative Preferred Stock, $.01
par value per share and liquidation preference $25,000 per share, of the
Fund.
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<PAGE>
(aaa) "Preferred Shares Basic Maintenance Amount" as of any Valuation Date means
the dollar amount equal to the sum of
(i) (A) the products resulting from multiplying the number of Outstanding
Preferred Shares on such date by the Liquidation Value per share (B)
the aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) to and including
the first following Dividend Payment Date for each Preferred Share
Outstanding that follows such Valuation Date (or to the 49th day after
such Valuation Date, if such 49th day occurs before the first
following Dividend Payment Date); (C) the aggregate amount of
dividends that would accumulate at the then current Maximum Applicable
Rate for the Exposure Period multiplied by the Volatility Factor on
any Preferred Share Outstanding from the first day following the
Dividend Payment Date referred to in (B) above through the 49th day
after such Valuation Date only if such 49th day occurs after the first
day following the Dividend Payment Date, except that if such Valuation
Date occurs during a Default Period, the dividend for purposes of the
calculation would accumulate at the Default Rate; (D) the amount of
anticipated Fund expenses for the 90 days subsequent to such Valuation
Date; and (E) any current liabilities, including, without limitation,
indebtedness due within one year and any redemption premium due with
respect to Preferred Shares for which a Notice of Redemption has been
given, as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(D): less
(ii) the sum of any cash or the value of any Fund assets irrevocably
deposited by the Fund for the payment of any of (i)(B) through (i)(F)
("value" for purposes of this clause (ii) shall mean the Discounted
Value of the security, except that if the security matures prior to
the relevant redemption payment date and is either fully guaranteed by
the U.S. Government or is rated P1 by Moody's and A1+ by S&P, it will
be valued at its face value).
(bbb) "Preferred Shares Basic Maintenance Certificate" has the meaning set forth
in Section 13(d).
(ccc) "Proration Procedures" means:
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<PAGE>
(A) if Sufficient Clearing Orders exist, in the case of a
Submitted Hold/Sell Order specifying a rate equal to the Winning Rate
(x) the number of shares of Preferred Shares to be the
subject of an accepted Hold Order will be (i) the number of
Preferred Shares subject to such Submitted Hold/Sell Order
multiplied by (ii) the total number of Preferred Shares that are
neither the subject of a Submitted Buy Order or a Submitted
Hold/Sell Order specifying a rate lower than the Winning Rate nor
the subject of a Submitted Hold Order and divided by (iii) the
total number of Preferred Shares subject to Submitted Hold/Sell
Orders that specified a rate equal to the Winning Rate, and
(y) the number of Preferred Shares to be the subject of an
accepted Sell Order will be the remaining number of Preferred
Shares subject to such Submitted Hold/Sell Order,
(B) if Sufficient Clearing Orders exist, in the case of a
Submitted Buy Order specifying a rate equal to the Winning Rate
(x) the number of Preferred Shares to be the subject of an
accepted Buy Order will be (i) the number Preferred Shares
subject to such Submitted Buy Order multiplied by (ii) the
difference between (1) the number of Preferred Shares that are
the subject of a Submitted Sell Order or a Submitted Hold/Sell
Order that specified a rate higher than the Winning Rate and (2)
the number of Preferred Shares that are the subject of a
Submitted Buy Order that specified a rate lower than the Winning
Rate and divided by (iii) the total number of Preferred Shares
subject to Submitted Buy Orders that specified a rate equal to
the Winning Rate, and
(y) such Submitted Buy Order will not be accepted as to the
remaining number of shares subject to such Submitted Buy Order,
and
(C) if Sufficient Clearing Orders do not exist, in the case of a
Submitted Hold/Sell Order specifying a rate higher than the Maximum
Applicable Rate and in the case of a Submitted Sell Order.
(x) the number of Preferred Shares to be the subject of an
accepted Sell Order will be (i) the number of Preferred Shares
subject to such Submitted Hold/Sell Order or Submitted Sell Order
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<PAGE>
multiplied by (ii) the total number of Preferred Shares that are
the subject of a Submitted Buy Order specifying a rate equal to
or lower than the Maximum Applicable Rate and divided by (iii)
the total number of Preferred Shares of subject to all Submitted
Hold/Sell Orders that specified a rate higher than the Maximum
Applicable Rate and Submitted Sell Orders, and
(Y) the number of Preferred Shares to be the subject of an
accepted Hold Order will be the remaining number of Preferred
Shares subject to such Submitted Hold/Sell Order or Submitted
Sell Order.
(ddd) "Rating Default" has the meaning set forth in Section 3(c)(ii).
(eee) "Rating Default Cure Date" has the meaning set forth in Section
3(a)(iii).
(fff) "Redemption Default" has the meaning set forth in Section 3(c)(ii).
(ggg) "Registrar" means PFPC Global Fund Services unless and until another
entity appointed by a resolution of the Board of Directors enters into
an agreement with the Fund to serve as transfer agent.
(hhh) "Reference Rate" means, with respect to the determination of the
Maximum Applicable Rate, the applicable AA Financial Composite
Commercial Paper Rate (for a Dividend Period of fewer than 184 days)
or the applicable Treasury Index Rate (for a Dividend Period of 184
days or more).
(iii) "Rule 144A Securities" means securities that are restricted as to
resale under federal securities laws but are eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended, as
determined by the Fund's Investment Adviser acting subject to the
supervision of the Fund's Board of Directors.
(jjj) "S&P" means Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., and its successors at law.
(kkk) "S&P Discount Factor" means, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined
as follows. The S&P Discount Factor for any S&P Eligible Asset other
than the securities set forth below will be the percentage provided in
writing by S&P.
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<PAGE>
(A) Corporate Bonds: The percentage determined by reference to
the type and remaining term to maturity of each corporate bond in
accordance with the table set forth below.
Corporate Convertible
Rating Bonds Bonds*
- ------ ----- ------
AAA 150% 170%
AA 155 175
A 160 180
BBB 165 185
BB 170 190
B 180 195
B- 190 200
CCC+ 205 210
CCC 220 225
CCC- 220 **
*All convertible bonds having a rating below BBB must have a minimum market
capitalization of $100 million.
**All convertible bonds must have a rating of CCC or higher to be considered an
S&P Eligible Asset.
(B) Cash and Short Term Money Market Instruments: The S&P
Discount Factor applied to short-term portfolio securities will be (A)
100%, so long as such portfolio securities mature or have a demand
feature at par exercisable within 30 days or less and (B) 105.2%, for
those portfolio securities which mature in 31 to 180 calendar days and
116.3% for those portfolio securities which mature in 181 to 360
calendar days. A S&P Discount Factor of 100% will be applied to cash.
(C) U.S. Treasury Securities, including Treasury interest-only
Strips and Treasury principal-only Strips, as set forth below:
52-week Treasury Bills* 107.5%
Two-Year Treasury Notes 112.1
Three-Year Treasury Notes 115.3
Five-Year Treasury Notes 119.4
10-Year Treasury Notes 127.7
30-Year Treasury Bonds 134.3
*Treasury Bills with maturities of less than 52 weeks will be discounted at the
appropriate short-term money market instrument levels. Treasury Bills that
mature the next day are considered cash equivalents and are valued at 100%.
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<PAGE>
Treasury Strips: Treasury interest-only Strips will apply the discount factor
for the Treasury category set forth above following the maturity of the Treasury
Strip, e.g., a Treasury interest-only Strip with a maturity of seven years will
apply the discount factor for U.S. Treasury Securities with a 10-year maturity.
Treasury principal-only Strips will apply the discount factor that is two
categories greater than its maturity, e.g., a Treasury principal-only Strip with
a maturity of seven years will apply the discount factor for U.S. Treasury
Securities with a 30-year maturity.
(D) Rule 144A Securities: The S&P Discount Factor applied to Rule
144A securities will be 120% of the S&P Discount Factor which would
apply were the securities registered under the Securities Act.
(E) preferred stock as set forth below:
Sinking Fund, Fixed-Rate, Adjustable- or
Rating* Perpetual or Floating-Rate Auction-Rate Yankee
- ------- -------------------------- ------------ ------
AAA 240% 400% 234%
*Either the preferred stock issuer or the preferred issue must have a rating of
at least BBB.
(F) Common stock: The S&P Discount Factor applied to Common stock
will be 252%.
(lll) "S&P Eligible Assets" means
(i) cash (including, for this purpose, interest and dividends due on
assets rated (A) BBB or higher by S&P if the payment date is within
five Business Days of the Valuation Date, (B) either A or higher by
S&P if the payment date is within thirty days of the Valuation Date,
and (C) either A+ or higher by S&P if the payment date is within the
Exposure Period) and receivables for S&P Eligible Assets sold if the
receivable is due within five Business Days of the Valuation Date, and
if the trades which generated such receivables are (A) settled through
clearing house firms with respect to which the Fund has received prior
written authorization from S&P or (B) (1) with counterparties having a
S&P long-term debt rating of at least BBB- by S&P, if rated by S&P or,
if not rated by S&P, then rated at least Baa3 by Moody's or (2) with
counterparties having a S&P Short-Term Money Market Instrument rating
of at least A-1 by S&P, if rated by S&P or, if not rated by S&P, then
rated at least P-1 by Moody's;
(ii) Short-Term Money Market Instruments so long as (A) such securities are
issued by an institution,
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<PAGE>
which, at the time of investment, is a permitted bank (including
commercial paper issued by a corporation which complies with the
applicable assumptions that follow) ("Permitted bank" means any bank,
domestic or foreign, whose commercial paper is rated 'A-1+') provided,
however, that short-term money market instruments with maturities of
30 days or less, invested in an institution rated 'A-1' may comprise
up to 20% of eligible portfolio assets; Eurodollar deposits are
eligible securities issued by a Permitted Bank through its head office
and/or any branch whose sovereign rating is rated the same or higher
than the issuing bank. In addition, Eurodollar deposits of a permitted
bank may be deposited through its Cayman Islands branch, as long as
the Cayman Islands branch operates under a "B Operating License,"
which must be verified by the bank;
(iii) The discount factor for Short Term Money Market Instruments are as
set forth below:
Rating
-------
A-1+* 100%
A-1 100
A-2 165
* With maturities not greater than 30 days and held instead of cash
until maturity. Securities with next-day maturities invested in A-1+
rated institutions are considered cash equivalents and are valued at
100%. Cash and demand deposits in an A-1+ rated institution are valued
at 100%.
(iv) U.S. Treasury Securities;
(v) Rule 144A Securities, if (a) the securities are underwritten, (b) the
investor cannot negotiate terms or conduct due diligence with issuer
(i.e., sold on a "take-it-or-leave-it" basis) (c) adhere to public
bond market settlement conventions and (d) have mandatory registration
rights;
(vi) preferred stock if (A) the preferred stock issuer has a senior rating
from S&P of at least BBB or the preferred issue is rated at least BBB
(in the case of Yankee preferred stock, the issuer is rated at least A
by S&P, or the preferred issue is rated at least A by S&P); (B) the
issuer, or, if the issuer is a special-purpose corporation, its
parent, is listed on either the New York Stock Exchange or the
American Stock Exchange or included in the Nasdaq National or Small
Cap Market System; (C) the preferred stock is cumulative (except for
Yankee preferred stock), has no attached warrants and has an initial
issue
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<PAGE>
size of at least $50 million (or the issuer must have issues of the
same tenor of at least $50 million); (D) such preferred stock
currently pays cash dividends denominated in U.S. dollars, and paid
cash dividends consistently over the past three years, or, in the case
of new preferred issuers without a dividend history, the issuer will
have an A or higher senior or preferred stock rating from S&P; (E) the
minimum market capitalization of the issuer is $500 million; (F) in
the case of floating- rate preferred stock, holdings must be limited
to stock with a dividend period of less than or equal to 49 days,
except for a new issue, where the first dividend period may be up to
64 days, and the floating-rate preferred stock may not have been
subject to a failed auction; (G) in the case of adjustable- or
auction-rate preferred stock, the total fair market value of
adjustable-rate preferred stock held in the portfolio may not exceed
10% of S&P Eligible Assets; (H) the issuer may hold positions in a
company's preferred stock of between U.S. $100,000 and $10,000,000,
except for floating-rate preferred stock, where an auction may
restrict the holder to a smaller position;
(vii) common stock if (A) the Fund's common stock portfolio is composed of
no less than 15 equities, with 30% of the portfolio permitted to be
made up of one common stock and the remaining 70% of the portfolio
divided equally among 14 common stocks at 5% each; (B) no more than
25% of the issuer's assets are concentrated in any one Standard &
Poor's industry class; (C) the issuer holds no more than the average
weekly trading volume over the past month; (D) each stock must have a
market capitalization of at least $100 million; and (E) the issuer may
not hold any equity unless it has been listed on an exchange or traded
for more than one year and one quarter, or 15 months (eligible stock
exchanges are the New York Stock Exchange, American Stock Exchange,
Philadelphia Stock Exchange, Boston Stock Exchange, Washington Stock
Exchange, Midwest Stock Exchange, Pacific Stock Exchange, NASDAQ and
National Market Quotations. Master limited partnerships or limited
liability partnerships are ineligible.
(viii) debt securities constituting Corporate Bonds if (A) they are not
subject to extended settlement; (B) such securities are rated CCC-
(senior) or higher by S&P; (C) in the case of Yankee bonds (bonds
issued by foreign governments or provinces, supranational agencies or
foreign corporations, offered and sold in the U.S. and denominated in
U.S. dollars), such securities are rated A or higher by S&P and such
securities can constitute no more than 25% of the Fund's total
portfolio; (D) such securities provide for the periodic payment of
interest in cash; (E) such securities do not provide for conversion or
exchange into equity capital at any time over their lives, provided,
however, that convertible bonds with a S&P rating of CCC or higher
will constitute S&P Eligible Assets and will have the discount factors
set forth on page 49; (F) such securities have been registered under
the Securities Act (except that such requirements shall not apply with
respect to commercial paper) or are restricted as to resale under
federal securities laws but are eligible for resale pursuant to Rule
144A under the Securities Act as determined by the Fund's adviser
acting subject to the supervision of the Fund's Board of Directors;
(G) have not had notice given in respect thereof that any such
corporate debt obligations are the subject of an offer by
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<PAGE>
the issuer thereof of exchange or tender for cash, securities or any
other type of consideration (except that corporate debt obligations in
an amount not exceeding 10% of the aggregate value of the Fund's
assets at any time shall not be subject to the provisions of this
clause (F)) and (G) are not in default. In addition, bonds which are
issued in connection with a reorganization under U.S. federal
bankruptcy law ("Reorganization Bonds") will be considered Corporate
Bonds constituting S&P Eligible Assets if (a) they are rated CCC or
higher by S&P; (b) they provide for periodic payment of interest in
cash in U.S. dollars; (c) they have been registered under the
Securities Act or are restricted as to resale under federal securities
laws but are eligible for trading under Rule 144A promulgated pursuant
to the Securities Act as determined by the Fund's adviser acting
subject to the supervision of the Fund's Board of Directors; (d) they
were issued by a U.S. corporation; and (e) at the time of purchase at
least one year had elapsed since the issuer's reorganization.
Reorganization Bonds may also be considered Corporate Bonds
constituting S&P Eligible Assets if they have been approved by S&P,
which approval shall not be unreasonably withheld.
(ix) In addition, portfolio holdings as described below must be within
the following diversification and issue size requirements in order to
be included in S&P Eligible Assets:
Corporate Bonds, Including Convertible Bonds:
<TABLE>
<CAPTION>
Maximum Single Maximum Single Minimum Issue Size
Rating Issuer (%) (1,2) Industry (%)(2,3) ($ in millions)
- ------ ---------------- --------------------------- ------------------
Corporate Convertible
Bonds(5) Bonds(5)
--------- -----------
<S> <C> <C> <C> <C>
AAA 10% 50% 50% $100
AA 10 33 33.3 100
A 10 33 33.3 100
BBB 5 20 25 100
BB 4 12 25 50(4)
B 3 8 25 50(4)
B- 3 8 25 50(4)
CCC+ 3 8 25 50(4)
CCC 3 8 25 50(4)
CCC- 3 8 N.A. 50(4)
</TABLE>
See accompanying notes.
_______________
(1) Companies subject to common ownership of 25% or more are considered as one
name.
(2) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(3) Industries are determined according to S&P Industry Classifications, as
defined herein.
(4) For convertible bonds which are rated less than BBB by S&P, the minimum
capitalization is $100 million.
(5) Corporate Collateral bonds rated below BBB- by S&P and from issues ranging
from $50 million to $100 million are limited to 20% of the collateral pool.
Convertible bonds rated below BBB by S&P must have an issue size of at
least $100 million.
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<PAGE>
Preferred Stock: The total fair-market value of adjustable-rate preferred
stock held in the portfolio may not exceed 10% of S&P Eligible Assets. The
maximum single issuer exposure is limited to 20% of the fair market value of S&P
Eligible Assets for any issuer with a BBB- senior rating by S&P and 5% of the
fair market value of S&P Eligible Assets for any issuer with an A or higher
rating by S&P. Not more than 25% of the fair market value of such securities
may be from issuers with a BBB- senior rating. Except for the utilities
industry, maximum single
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<PAGE>
industry exposure is limited to 20%. Preferred stock has a minimum issue size of
$50 million.
In addition, debt securities constituting Corporate Bonds shall include
debt obligations satisfying such other criteria established by S&P in its sole
discretion and designated in writing to the Fund.
Where the Fund sells an asset and agrees to repurchase such asset in the
future the Discounted Value of such asset will constitute a S&P Eligible Asset
and the amount the Fund is required to pay upon repurchase of such asset will
count as a liability for the purposes of the Preferred Shares Basic Maintenance
Amount. Where the Fund purchases an asset and agrees to sell it to a third
party in the future, cash receivable by the Fund thereby will constitute a S&P
Eligible Asset if the long-term debt of such other party is rated at least A by
S&P and at least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such asset will constitute a S&P Eligible
Asset. Notwithstanding the foregoing, an asset will not be considered a S&P
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of Preferred Shares Basic
Maintenance Amount or it is subject to any material lien mortgage, pledge,
security interest or security agreement of any kind (collectively, "Liens"),
except for (A) Liens which are being contested in good faith by appropriate
proceedings and which S&P has indicated to the Fund will not affect the status
of such asset as a S&P Eligible Asset, (B) Liens for taxes that are not then due
and payable or that can be paid thereafter without penalty, (C) Liens to secure
payment for services rendered or cash advanced to the Fund by its investment
adviser, the Fund's custodian, transfer agent or registrar or the Auction Agent
and (D) Liens by virtue of any repurchase agreement. See also Section 12 for
certain information with respect to S&P Eligible Assets.
(mmm) "S&P Industry Classifications" means, for the purpose of determining
S&P Eligible Assets, each of the following industry classifications:
1. Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
2. Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat
Products, Poultry Products, Snacks, Packaged Foods, Distributors,
Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff,
Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real
Estate, Real Estate Development, REITs, Land Development
6. Chemicals, Plastics and Rubber: Chemicals (non-agriculture),
Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers
made of : Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals
Mining, Steel, Iron and Non Precious Metals: Fabricating,
Distribution, Mining and Sales: Coal, Copper, Lead, Uranium,
Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and
Waste Disposal
13. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, TVs, Tape Machines, Speakers,
Printers, Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication,
Securities
15. Farming and Agriculture: Livestock, Grains, Produce, Agricultural
Chemicals, Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary
Drugs, Research, Health Care Centers, Nursing Homes, HMOs,
Hospitals, Hospital Supplies, Medical Equipment
18. Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking,
Ranges
19. Hotels, Motels, Inns and Gaming
20. Insurance: Life, Property and Casualty, Broker, Agent,
Surety
21. Leisure, Amusement, Entertainment: Boating, Bowling, Billiards,
Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (camping), Tourism, Resorts, Games, Toy
Manufacturing
22. Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
23. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
24. Personal, Food and Vending
25. Printing and Publishing: Graphic Arts, Paper, Paper Products,
Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders,
Ship Builders, Containers, Container Builders, Parts, Overnight
Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air
Cargo, Transport
27. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail
Order Catalog, Showroom
28. Cellular
29. Data and Internet Services
30. Satellite
31. Telecommunications Equipment
32. Other Telecommunications
33. Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
34. Utilities: Electric, Water, Hydro Power, Gas, Diversified
35. Domestic Radio and TV Broadcasting and Foreign Cable, Radio and
and TV Broadcasting and Equipment
36. North American Cable
37. Other Broadcasting and Entertainment
Without amending these Articles Supplementary and to the extent permitted
by Maryland law, the S&P Industry Classifications applicable with respect to the
Fund may be changed from those set forth in these Articles Supplementary to
other S&P Industry Classifications recognized by S&P if the Board of Directors
of the Fund determines and S&P advises the Fund in writing that the change will
not adversely affect its then-current rating of the Preferred Stock.
The Fund shall use its discretion in determining which industry
classification is applicable to a particular investment.
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<PAGE>
(nnn) "Securities Act" means the Securities Act of 1933, as amended from time to
time.
(ooo) "Securities Depository" means the Depository Trust Company and Clearing
Corporation and its successors and assigns or any successor securities
depository selected by the Fund that agrees to follow the procedures
required to be followed by such securities depository in connection with
the Preferred Shares.
(ppp) "Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Fund the remaining terms to maturity thereof are not in excess of 360 days.
(i) commercial paper that is rated as of each Valuation Date either A-1+,
A-1, or A-2 by S&P, provided, however, that A-1 and A-2 rated
commercial paper can equal in the aggregate no more than 20% of all
S&P Eligible Assets, holdings of A-1 rated commercial paper must be
divided equally among at least three issuers and holdings of A-2 rated
commercial paper must be divided equally among at least five issuers;
(ii) demand or time deposits in, certificates of deposit of, bankers'
acceptance issued by, or federal funds sold to (A) a depository
institution or trust company incorporated under the laws of the United
States of America or any state thereof or the District of Columbia or
(B) a United States branch office or agency of a foreign depository
institution (provided that such branch office or agency is subject to
banking regulation under the laws of the United States any state
thereof or the District of Columbia) if, in each case, the
certificates of deposit, if any, and the long-term unsecured debt
obligations (other than such obligations the ratings of which are
based on the credit of a person or entity other than such depository
institution or trust company) of such depository institution or trust
company that have credit ratings on each Valuation Date of at least
A-2 from S&P, in the case of commercial paper or certificates of
deposit; provided, however, that the foregoing credit rating
requirement shall be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or
trust company is the principal depository institution in a holding
company system, (2) the certificates of deposit, if any, of such
depository institution or trust company are not rated on any Valuation
Date below
-51-
<PAGE>
A-l+ by S&P and there is no long-term rating, and (3) the holding
company shall meet all of the foregoing credit rating requirements
(including the preceding proviso in the case of investments that
mature in no more than one Business Day from the date of purchase or
other acquisition by the Fund);
(iii) next-day federal funds;
(iv) Eurodollar demand or time deposits in, or certificates of deposit of,
the head office or the London branch office of a depository
institution or trust company meeting the credit rating requirements of
commercial paper and long-term unsecured debt obligations specified in
clause (ii) above, provided that the interest receivable by the Fund
shall not be subject to any withholding or similar taxes;
(v) United States Treasury Bills; and
(vi) repurchase obligations with respect to a U.S. Government Obligation,
Federal National Mortgage Association Certificate, Federal Home Loan
Mortgage Corporation Certificate or Government National Mortgage
Association Certificate entered into with a depository institution,
the deposits of which are insured by the Federal Insurance Corporation
or the Federal Savings and Loan Insurance Corporation and the
commercial paper or other unsecured short-term debt obligations of
which are rated at least A-1 by Standard & Poor's, which must be
repurchased within one Business Day from the date such repurchase
obligation was entered into.
(qqq) "Specific Redemption Provisions" means, with respect to any Alternate Term
Period of more than one year, or any combination of (i) a period (a "Non-
Call Period") determined by the Board of Directors after consultation with
the Broker-Dealers, during which the shares subject to such Alternate Term
Period are not subject to redemption at the option of the Fund pursuant to
Section 3(a)(i) and/or Section 3(a)(ii) and/or Section 3(a)(iii) and (ii) a
period (a "Premium Call Period"), consisting of a number of whole years as
determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such
Alternate Term Period shall be redeemable at the Fund's option pursuant to
Section 3(a)(i) and/or in connection with any mandatory redemption pursuant
to Section 3(a)(ii) and/or 3(a),(iii) at a price per share equal to the
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Liquidation Value plus accumulated but unpaid dividends (whether or not
earned or declared) plus a premium expressed as a percentage or percentages
of the Liquidation Value or expressed as a formula using specified
variables as determined by the Board of Directors after consultation with
the Broker-Dealers.
(rrr) "Standard Term Period" means a Dividend Period of seven days, unless such
seventh day is not a Business Day, then the number of days ending on the
Business Day next succeeding such seventh day.
(sss) "Submission Deadline" means 1:00 p.m., New York City time, on each Auction
Date, or such other time on such Auction Date as may be specified from time
to time by the Auction Agent as the time by which each Broker-Dealer must
submit to the Auction Agent all Orders obtained by it for the Auction to be
conducted on such Auction Date.
(ttt) "Transfer Agent" means PFPC Global Fund Services, unless and until another
entity appointed by a resolution of the Board of Directors enters into an
agreement with the Fund to serve as Transfer Agent.
(uuu) "Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the
same number of 30-day periods to maturity as the length of the applicable
Dividend Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having the next
shorter and next longer number of 30-day periods to maturity treating all
Dividend Periods with a length greater than the longest maturity for such
securities as having a length equal to such longest maturity, in all cases
based upon data set forth in the most recent weekly statistical release
published by the Board of Governors of the Federal Reserve System
(currently in H. 15(519)); provided, however, if the most recent such
statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be
based upon the average of comparable data as quoted to the Fund by at least
three recognized dealers in U.S. Government securities selected by the
Fund.
(vvv) "U.S. Treasury Securities" means direct obligations of the United States
provided that such direct obligations are entitled to the full faith and
credit of the United States and that any such obligations, other than
United States Treasury Bills, provide for the periodic payment of interest
and the full payment of principal at maturity or call for redemption, are
free and clear of
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claims of any third parties and are registered in the name of the trustee,
who has a first perfected security interest thereto.
(www) "Valuation Date" means (a) the fifteenth day of each month or, if such day
is not a Business Day, the next succeeding Business Day and (b) the last
Business Day of such month, provided, that the first Valuation Date may
occur on any other date established by the Fund and provided, further, that
such date shall be not more than fifteen days from the date on which the
Preferred Stock initially is issued.
(xxx) "Volatility Factor" means 2.28, or such other number as determined by S&P
from time to time.
(yyy) "Voting Period" has the meaning set forth in Section 6(b).
(zzz) "Zero-Coupon Securities" means bonds that do not provide for the periodic
payment of interest.
19. Interpretation. References to sections, subsections, clauses, sub-clauses,
paragraphs and subparagraphs are to such sections, subsections, clauses,
sub- clauses, paragraphs and subparagraphs contained in this Part I or Part
II hereof, as the case may be, unless specifically identified otherwise. In
addition, capitalized terms not defined in Section 18 of this Part I shall
have the respective meanings specified in Part II hereof.
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PART II
1. Certain Definitions. As used in this Part II, the following terms shall
have the following meanings, unless the context otherwise requires and all
section references below are to this Part II except as otherwise indicated.
Capitalized terms not defined in this Section 1 of this Part II shall have
the respective meanings specified in Part I hereof.
(a) "Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a person placing an Order.
(b) "Available Preferred Shares" has the meaning specified in Section
5(a)(i).
(c) "Buy Order" has the meaning specified in Section 2(b).
(d) "Existing Holder" means (a) a person who has signed a Master
Purchaser's Letter and beneficially owns those Preferred Shares listed
in that person's name in the records of the Auction Agent or (b) the
beneficial owner of those Preferred Shares which are listed under such
person's Broker-Dealer's name in the records of the Auction Agent,
which Broker-Dealer shall have signed a Master Purchaser's Letter.
(e) "Hold Order" has the meaning specified in Section 2(b).
(f) "Hold/Sell Order" has the meaning specified in Section 2(b).
(g) "Master Purchaser's Letter" means a letter substantially in the form
of or containing provisions similar to those in the form attached as
an Exhibit to the Fund's Registration Statement on Form N-2, which is
required to be executed by each prospective purchaser of Preferred
Shares or the Broker- Dealer through whom such shares will be held.
(h) "Order" has the meaning specified in Section 2(b).
(i) "Potential Holder," when used with respect to Preferred Shares, means
any person, including any Existing Holder of Preferred Shares (i) who
shall have executed a Master Purchaser's Letter or whose shares will
be listed under such person's Broker-Dealer's name on the records of
the Auction Agent, which Broker-Dealer shall have executed a Master
Purchaser's Letter and (ii) who may be interested in acquiring shares
of Preferred Shares (or, in the case of an Existing Holder of
Preferred Shares, additional shares of Preferred Shares.
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(j) "Sell Order" has the meaning specified in Section 2(b).
(k) "Submitted Buy Order" has the meaning specified in Section 5(a).
(l) "Submitted Hold Order" has the meaning specified in Section 5(a).
(m) "Submitted Hold/Sell Order" has the meaning specified in Section 5(a).
(n) "Submitted Order" has the meaning specified in Section 5(a).
(o) "Submitted Sell Order" has the meaning specified in Section 5(a).
(p) "Sufficient Clearing Orders" means that all Preferred Shares are the
subject of Submitted Hold Orders or that the number of Preferred
Shares that are the subject of Submitted Buy Orders by Potential
Holders specifying one or more rates equal to or less than the Maximum
Applicable Rate exceeds or equals the sum of (A) the number of
Preferred Shares that are the subject of Submitted Hold/Sell Orders by
Existing Holders specifying one or more rates higher than the Maximum
Applicable Rate and (B) the number of Preferred Shares that are
subject to Submitted Sell Orders.
(q) "Winning Rate" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/Sell Order from Existing Holders
specifying such lowest rate and all other Submitted Hold/Sell Orders
from Existing Holders specifying lower rates were accepted and (B)
each Submitted Buy Order from Potential Holders specifying such lowest
rate and all other Submitted Buy Orders from Potential Holders
specifying lower rates were accepted, would result in the Existing
Holders described in clause (A) above continuing to hold an aggregate
number of Preferred Shares which, when added to the number of
Preferred Shares to be purchased by the Potential Holders described in
clause (B) above and the number of Preferred Shares subject to
Submitted Hold Orders, would be equal to the number of Preferred
Shares.
2. Orders by Existing Holders and Potential Holders.
(a) On or prior to the Submission Deadline on each Auction Date with respect to
the Preferred Shares:
(i) each Existing Holder may submit to a Broker-Dealer information as to:
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(A) the number of Outstanding shares of the Preferred
Shares, if any, held by such Existing Holder which such Existing
Holder desires to continue to hold without regard to the
Applicable Rate for the next succeeding Dividend Period;
(B) the number of Outstanding shares of the Preferred
Shares, if any, held by such Existing Holder which such Existing
Holder desires to continue to hold, provided that the Applicable
Rate for the next succeeding Dividend Period shall not be less
than the rate per annum specified by such Existing Holder;
and/or
(C) the number of Outstanding shares of the Preferred
Shares, if any, held by such Existing Holder which such Existing
Holder offers to sell without regard to the Applicable Rate for
the next succeeding Dividend Period; and
(ii) each Broker-Dealer, using a list of Potential Holders that shall
be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Holders, including
persons that are not Existing Holders, on such list to determine
the number of Outstanding shares of the Preferred Shares, if any,
which each such Potential Holder offers to purchase, provided
that the Applicable Rate for the next succeeding Dividend Period
shall not be less than the rate per annum specified by such
Potential Holder.
(b) For the purposes hereof, the communication to a Broker-Dealer of
information referred to in clause (i) or (ii) of Section 2(a) of this Part
II is hereinafter referred to as an "Order"; an Order containing the
information referred to in clause (i)(A) of Section 2(a) of this Part II is
hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (i)(B) of Section 2(a) of this Part II is
hereinafter referred to as a "Hold/Sell Order"; an Order containing the
information referred to in clause (i)(C) of Section 2(a) of this Part II
is hereinafter referred to as a "Sell Order"; and an Order containing the
information referred to in clause (ii) of Section 2(a) of this Part II is
hereinafter referred to as a "Buy Order."
(c) A Hold/Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(A) the number of Outstanding shares of the Preferred Shares
specified in such Order if the Applicable Rate determined on such
Auction Date
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<PAGE>
shall be less than the rate per annum specified in such Order; or
(B) a lesser number of Outstanding shares of the Preferred
Shares to be determined as set forth in Section 6(a)(v) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein; or
(C) a lesser number of Outstanding shares of the Preferred
Shares to be determined as set forth in Section 6(b)(iv) if such
specified rate per annum shall be higher than the Maximum
Applicable Rate and Sufficient Clearing Orders do not exist.
(ii) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell the number of Outstanding shares of the
Preferred Shares specified in such Sell Order.
(iii) A Buy Order by a Potential Holder shall constitute an
irrevocable offer to purchase:
(A) the number of Outstanding shares of the Preferred Shares
specified in such Order if the Applicable Rate determined on such
Auction Date shall be higher than the rate per annum specified in
such Order; or
(B) such number or a lesser number of Outstanding shares of
the Preferred Shares to be determined as set forth in Section
6(a)(vi) if the Applicable Rate determined on such Auction Date
shall be equal to the rate per annum specified therein.
3. [Reserved]
4. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date for the Auction to be
conducted on such Auction Date all Orders obtained by such
Broker-Dealer and specifying with respect to each Order:
(i) the aggregate number of shares of the Preferred Shares that are
the subject of such Order;
(ii) to the extent that such Order is placed by an Existing Holder:
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(A) the number of shares of the Preferred Shares, if any, subject
to any Hold Order placed by such Existing Holder;
(B) the number of shares of the Preferred Shares, if any, subject
to any Hold/Sell Order placed by such Existing Holder;
(C) the number of shares of the Preferred Shares, if any, subject
to any Sell Order placed by such Existing Holder;
(iii) to the extent that such Order is placed by an Potential Holder, the
number of shares of the Preferred Shares subject to such Order; and
(iv) the rate per annum specified in such Order.
(b) If any rate per annum specified in any Order contains more than three
figures to the right of the decimal point, the Auction Agent shall round
such rate up to the next highest one-thousandth (.0001) of 1%.
(c) If an Order or Orders covering all shares of the Preferred Shares held by
any Existing Holder are not submitted to the Auction Agent by the
Submission Deadline, the Auction Agent shall, only in the case of an
Auction preceding a Dividend Period of 93 days or fewer and at the
conclusion of a Dividend Period of 93 days or fewer, deem a Hold Order to
have been submitted on behalf of such Existing Holder covering the number
of shares held by such Existing Holder and not subject to Orders submitted
to the Auction Agent. If an Order or Orders covering all shares of the
Preferred Shares held by any Existing Holder are not submitted to the
Auction Agent by the Submission Deadline, the Auction Agent will, in the
case of all other Auctions, deem a Sell Order to have been submitted on
behalf of such Existing Holder covering the number of shares held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of shares of the Preferred Shares held by
such Existing Holder are submitted to the Auction Agent, such Orders shall
be considered valid as follows and in the following order of priority:
(i) If one or more Hold Orders shall be submitted on behalf of an Existing
Holder as to a number of shares of the Preferred Shares greater than
the number of shares of the Preferred Shares held by such Existing
Holder, such Hold Order or Hold
-59-
<PAGE>
Orders shall be considered valid only as to the number of shares of
the Preferred Shares held by such Existing Holder. In the case of
multiple Hold Orders, each such Hold Order shall be considered valid
pro rata.
(ii) If one or more Hold/Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the Preferred Shares
greater than the excess of the number of shares of the Preferred
Shares held by such Existing Holder over the number of shares of such
Preferred Shares subject to Hold Orders submitted on behalf of such
Existing Holder, such Hold/Sell Order or Hold/Sell Orders shall be
considered valid only as to the number of Preferred Shares equal to
such excess. In the case of multiple Hold/Sell Orders specifying
different rates, such Hold/Sell Orders shall be considered valid in
increasing order of such rates. In the case of multiple Hold/Sell
Orders specifying the same rate, each such Hold/Sell Order shall be
considered valid pro rata.
(iii) If one or more Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the Preferred Shares
greater than the excess of the number of shares of the Preferred
Shares held by such Existing Holder over the number of shares of the
Preferred Shares subject to Hold Orders and Hold/Sell Orders submitted
on behalf of such Existing Holder, such Sell Order or Sell Orders
shall be considered valid only as to the number of shares equal to
such excess. In the case of multiple Sell Orders, each such Sell Order
shall be considered valid pro rata.
(e) If more than one Order is submitted on behalf of any Existing Holder or
Potential Holder, each Order submitted shall be a separate Order with the
rate and shares of the Preferred Shares therein specified.
(f) In the case of any Dividend Period of 93 days or fewer, if any rate
specified in any Order is lower than the Minimum Applicable Rate for the
Dividend Period with respect to which such Order is made, such Order will
be deemed to be an Order specifying a rate equal to such Minimum Applicable
Rate.
(g) In the case of any Dividend Period of more than 93 days, only Buy Orders,
Hold/Sell Orders and Sell Orders may be submitted.
-60-
<PAGE>
5. Determination of Sufficient Clearing Orders. Winning Rate and Applicable
Rate.
(a) Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent shall assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted
Hold Order," a "Submitted Hold/Sell Order", a "Submitted Sell Order" or a
"Submitted Buy Order," as the case may be, or as a "Submitted Order") and
shall determine:
(i) the excess of the total number of Outstanding shares of the Preferred
Shares over the number of Outstanding shares of the Preferred Shares
that are the subject of Submitted Hold Orders (such excess being
hereinafter referred to as the "Available Preferred Shares");
(ii) from the Submitted Orders whether the number of Outstanding shares of
the Preferred Shares that are the subject of Submitted Buy Orders by
Potential Holders specifying one or more rates per annum equal to or
lower than the Maximum Applicable Rate exceeds or is equal to the sum
of:
(A) the number of shares of the Preferred Shares that are the
subject of Submitted Hold/Sell Orders by Existing Holders specifying
one or more rates per annum higher than the Maximum Applicable Rate,
and
(B) the number of shares of the Preferred Shares that are subject
to Submitted Sell Orders (if such excess or such equality exists
(other than because the number of Outstanding shares of such Preferred
Shares in clauses (A) and (B) above are each zero because all of the
Outstanding shares of the Preferred Shares are the subject of
Submitted Hold Orders), such Submitted Buy Orders by Potential Holders
being hereinafter referred to collectively as "Sufficient Clearing
Orders"), would result in the number of shares subject to all
Submitted Orders specifying the Winning Rate or a lower rate per annum
being at least equal to the Available Preferred Shares.
(b) Promptly after the Auction Agent has made the determinations pursuant to
Section 5(a), the Auction Agent shall advise the Fund of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for
the next succeeding Dividend Period as follows:
-61-
<PAGE>
(i) If Sufficient Clearing Orders exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Rate;
(ii) If Sufficient Clearing Orders do not exist (other than because all of
the Outstanding shares of the Preferred Shares are the subject of
Submitted Hold Orders), that the Applicable Rate for the next
succeeding Dividend Period shall be equal to the Maximum Applicable
Rate and the Dividend Period shall be a Standard Term Period; or
(iii) If all Existing Holders submit (or are deemed to have submitted) Hold
Orders in an Auction, the Dividend Period next succeeding the Auction
shall automatically be the same Dividend Period as that Dividend
Period immediately preceding the Auction and the Applicable Rate will
be the Minimum Applicable Rate (or such other rate if there is no
Minimum Applicable Rate) in effect on the date of the Auction with
respect to such Dividend Period.
6. Acceptance and Rejection of Submitted Orders and Submitted Sell Orders and
Allocation of Shares.
Based upon the results of the Auction, the Auction Agent will
determine the aggregate number of shares to be held and sold by Existing Holders
and to be purchased by Potential Holders, and, with respect to each Broker-
Dealer, determine the extent to which such Broker-Dealer will deliver, and from
which other Broker-Dealers such Broker-Dealer will receive, shares.
(a) If Sufficient Clearing Orders exist:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all Submitted Hold/Sell
Orders specifying any rate higher than the Winning Rate will be
accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate lower than the
Winning Rate will be accepted as Hold Orders;
(iv) all Submitted Buy Orders specifying a rate lower than the Winning Rate
will be accepted;
(v) all Submitted Hold/Sell Orders specifying a rate equal to the Winning
Rate will be accepted as Hold Orders unless the number of shares
subject to all such Submitted Hold/Sell Orders is greater than the
number of shares remaining unaccounted for after the acceptances
described in clauses (i),
-62-
<PAGE>
(iii) and (iv) above, in which event each such Submitted Hold/Sell
Order will be accepted as a Hold Order and a Sell Order as to the
respective number of shares determined in accordance with the
Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to the Winning Rate
will be accepted, unless the number of shares subject to all such
Submitted Buy Orders is greater than the number of shares remaining
unaccounted for after the acceptances described in clauses (i), (iii),
(iv) and (v) above, in which event each such Submitted Buy Order will
be accepted only as to the number of shares determined in accordance
with the Proration Procedures.
(b) If Sufficient Clearing Orders do not exist:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate equal to or lower
than the Maximum Applicable Rate will be accepted as Hold Orders;
(iii) all Submitted Buy Orders specifying a rate equal to or lower than the
Maximum Applicable Rate will be accepted; and
(iv) all Submitted Hold/Sell Orders specifying a rate higher than the
Maximum Applicable Rate and all Submitted Sell Orders will be accepted
as Hold Orders and as Sell Orders as to the respective number of
shares of the Preferred Shares determined in accordance with the
Proration Procedures.
(c) If as a result of the procedures described in Section 6(a) or 6(b) any
Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
the Preferred Shares in any Auction, the Auction Agent will, in such manner
as, in its sole discretion, it shall determine, round up or down the number
of shares of the Preferred Shares being sold or purchased on such Auction
Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of the Preferred Shares even if such
allocation results in one or more of such Potential Holders not purchasing
any shares of the Preferred Shares or in one or more Existing Holders no
longer holding any shares of the Preferred Shares.
-63-
<PAGE>
(d) If, as a result of the procedures described in Section 6(a), any Potential
Holder would be entitled or required to purchase a fraction of a share of
the Preferred Shares, as applicable, on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine,
allocate shares of the Preferred Shares for purchase among Potential
Holders so that only whole shares of the Preferred Shares are purchased on
such Auction Date by any Potential Holder, even if such allocation results
in one or more of such Potential Holders not purchasing any shares of the
Preferred Shares on such Auction Date or in one or more Existing Holders no
longer holding any shares of the Preferred Shares.
(e) Based on the results of each Auction, the Auction Agent shall determine,
with respect to each Broker-Dealer that submitted Orders on behalf of
Existing Holders or Potential Holders, the aggregate number of shares of
the Preferred Shares to be purchased and the aggregate number of shares of
the Preferred Shares to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of shares of the
Preferred Shares to be purchased and such aggregate number of shares of
such series of ATP to be sold differ, the Auction Agent shall determine to
which other Broker-Dealer or Broker-Dealers acting for one or more
purchasers such Broker-Dealer shall deliver, or from which other Broker-
Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer
shall receive, as the case may be, shares of the Preferred Shares.
7. Notification of Results; Settlement.
(a) The Auction Agent will advise each Broker-Dealer that submitted an Order
whether such Order was accepted and of the Applicable Rate for the next
Dividend Period by telephone by approximately 3:00 p.m., New York City
time, on each Auction Date. Each Broker-Dealer that submitted an Order will
as soon as practicable advise each Existing Holder and Potential Holder
whether its Order was accepted and will confirm in writing purchases and
sales with each Existing Holder and Potential Holder purchasing or selling
shares as a result of an auction as soon as practicable on the Business Day
next succeeding the Auction Date. Each Broker-Dealer that submitted a Hold
Order will advise each Existing Holder on whose behalf such Hold Order was
submitted of the Applicable Rate for the shares of the Preferred Shares for
the next Dividend Period.
(b) In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date,
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<PAGE>
the transactions described above will be executed through the Securities
Depository and the accounts of the respective Agent Members at the
Securities Depository will be debited and credited and shares delivered as
necessary to effect the purchases and sales as determined in the Auction.
Purchasers will make payment through their Agent Members in same-day funds
to the Securities Depository against delivery through their Agent Members;
the Securities Depository will make payment in accordance with its normal
procedures as in effect from time to time.
(c) If any Existing Holder selling shares in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased shares
in such Auction may deliver to such person a number of whole shares that is
less than the number of shares that otherwise was to be purchased by such
person. In such event, the number of shares to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares
shall constitute good delivery.
8. Miscellaneous.
The Board of Directors may interpret the provisions of these Auction
Procedures to resolve any inconsistency or ambiguity, remedy any formal defect
or make any other change or modification that does not adversely affect the
rights of Existing Holders of shares of the Preferred Shares. Except as
otherwise required by law, an Existing Holder shall have the ownership of the
shares of the Preferred Shares held by it maintained in book entry form by the
Securities Depository in the account of (a) for an Existing Holder who holds
shares of the Preferred Shares directly, its Agent Member, which in turn will
maintain records of such Existing Holder's beneficial ownership or (b) for an
Existing Holder holding shares of the Preferred Shares through a Broker-Dealer,
its Broker-Dealer's Agent Member, in which case its Broker-Dealer shall maintain
records of such Existing Holder's beneficial ownership. Neither the Fund nor any
Affiliate of the Fund shall submit an Order in any Auction. Any Existing Holder
that is such an Affiliate shall not sell, transfer or otherwise dispose of
shares of the Preferred Shares to any Person other than the Fund. All of the
shares of the Preferred Shares shall be represented by a single certificate
registered in the name of the nominee of the Securities Depository unless
otherwise required by law or unless there is no Securities Depository. If there
is no Securities Depository, at the Fund's option and upon its receipt of such
documents as it deems appropriate, any shares of the Preferred Shares may be
registered in the share register for the shares of the Preferred Shares
maintained by the Auction Agent in the name of the Existing Holder thereof or in
the name of such Existing holder's Broker-Dealer and such Existing Holder or
such Existing Holder's Broker-Dealer thereupon will be entitled to receive
certificates
-65-
<PAGE>
therefor and required to deliver certificates therefor upon transfer or exchange
thereof.
-66-
<PAGE>
EXHIBIT A
ZENIX INCOME FUND INC.
NOTICE OF AUCTION DATE FOR
AUCTION RATE CUMULATIVE PREFERRED STOCK ("PREFERRED SHARES")
NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for
the Preferred Shares of ZENIX INCOME FUND INC. (the "Fund") is scheduled to be
________ and the next Dividend Payment Date for the Fund's Preferred Shares will
be ___________.
ZENIX INCOME FUND INC.
A-1
<PAGE>
EXHIBIT B
ZENIX INCOME FUND INC.
NOTICE OF PROPOSED DESIGNATION OF
ALTERNATE TERM PERIOD FOR
AUCTION RATE CUMULATIVE PREFERRED STOCK
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the "Fund")
proposes to exercise its option to designate the Dividend Period of its Auction
Rate Cumulative Preferred Stock (the "Preferred Shares") commencing [the first
day of the proposed Alternate Term Period] and ending [the last day of the
proposed Alternate Term Period] as an Alternate Term Period.
By 9:00 A.M., New York City time, on the Business Day next preceding
the first day of such proposed Alternate Term Period, the Fund will notify the
Auction Agent for the Preferred Shares of either (a) its determination to
exercise such option, designating the length of such Alternate Term Period and
the terms of the Specific Redemption Provisions, if any, or (b) its
determination not to exercise such option.
ZENIX INCOME FUND INC.
Dated: ___________
B-1
<PAGE>
EXHIBIT C
ZENIX INCOME FUND INC.
NOTICE OF DESIGNATION OF ALTERNATE TERM PERIOD OF
AUCTION RATE CUMULATIVE PREFERRED STOCK
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the "Fund") has
determined to designate the Dividend Period of its Auction Rate Cumulative
Preferred Stock (the "Preferred Shares") commencing on [the first day of the
Alternate Term Period] and ending on [the last day of the Alternate Term Period]
as an Alternate Term Period.
The Alternate Term Period will be ___ [days] [year(s]].
The Auction Date for the Alternate Term Period is [the Business Day
next preceding the first day of such Alternate Term Period].
The scheduled Dividend Payment Dates for the Preferred Shares during
such Alternate Term Period will be __________________.
[Specific Redemption Provisions, if applicable.]
[The Alternate Term Period shall not commence if on such Auction Date
Sufficient Clearing Orders shall not exist.]
ZENIX INCOME FUND INC.
Dated: ______________
C-1
<PAGE>
EXHIBIT D
ZENIX INCOME FUND INC.
NOTICE OF DETERMINATION NOT TO DESIGNATE
ALTERNATE TERM PERIOD OF
AUCTION RATE CUMULATIVE PREFERRED STOCK
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the "Fund") has
determined not to exercise its option to designate an Alternate Term Period of
its Auction Rate Cumulative Preferred Stock. Accordingly, the next succeeding
Dividend Period will be a Standard Term Period.
ZENIX INCOME FUND INC.
Dated: ______________
D-1
<PAGE>
Exhibit 99.2(g)
INVESTMENT ADVISORY AGREEMENT
<PAGE>
ADVISORY AGREEMENT
ZENIX INCOME FUND INC.
July 30, 1993
Greenwich Street Advisors
Division of Mutual Management Corp.
Two World Trade Center
New York, New York 10048
Dear Sirs:
Zenix Income Fund Inc. (the "Company"), a corporation organized under the
laws of the state of Maryland, confirms its agreement with the Greenwich Street
Advisors Division of the Mutual Management Corp. (the "Adviser"), as follows:
1. Investment Description; Appointment
The Company desires to employ its capital by investing and reinvesting in
investments of the kind and in accordance with the investment objective(s),
policies and limitations specified in its Articles of Incorporation, as amended
from time to time (the "Charter") and in the prospectus (the "Prospectus") filed
with the Securities and Exchange Commission as part of the Company's
Registration Statement on Form N-2, as amended from time to time, and in the
manner and to the extent as may from time to time be approved by the Board of
Directors of the Company ("Board"). Copies of the Prospectus and the Charter
have been or will be submitted to the Adviser. The Company agrees to provide
copies of all amendments to the Prospectus and the Charter to the Adviser on an
on-going basis. The Company desires to employ and hereby appoints the Adviser
to act as the investment adviser to the Company. The Adviser accepts the
appointment and agrees to furnish the services for the compensation set forth
below.
2. Services as Investment Adviser
Subject to the supervision, direction and approval of the Board of the
Company, the Adviser will (a) manage the Company's holdings in accordance with
the Company's investment objective(s) and policies as stated in the Charter and
the Prospectus; (b) make investment decisions for the Company; (c) place
purchase and sale orders for portfolio transactions for the Company; and (d)
employ professional portfolio managers and securities analysts who provide
research services to the Company. In providing those services, the Adviser will
conduct a continual program of investment, evaluation and, if appropriate, sale
and reinvestment of the Company's assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of the
Company, the Adviser will seek the best overall terms available. In assessing
the best overall terms available for any transaction, the Adviser will consider
factors it deems relevant, including, but not limited to,
<PAGE>
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms available, the Adviser is
authorized to consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934), provided to
the Company and/or other accounts over which the Adviser or its affiliates
exercise investment discretion.
4. Information Provided to the Company
The Adviser will keep the Company informed of developments materially
affecting the Company's holdings, and will, on its own initiative, furnish the
Company from time to time with whatever information the Adviser believes is
appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the services
listed in paragraphs 2 and 3 above. The Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company in
connection with the matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Adviser against any liability to the Company or to its Shareholders to which the
Adviser would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Adviser's reckless disregard of its obligations and duties under this
Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement, the
Company will pay the Adviser on the first business day of each month a fee for
the previous month at the annual rate of .50 of 1.00% of the Company's average
daily net assets. The fee for the period from the Effective Date (defined
below) of the Agreement to the end of the month during which the Effective Date
occurs shall be prorated according to the proportion that such period bears to
the full monthly period. Upon any termination of this Agreement before the end
of a month, the fee for such part of that month shall be prorated according to
the proportion that such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to the Adviser, the value of the Company's net assets
shall be computed at the times and in the manner specified in the Prospectus.
7. Expenses
The Adviser will bear all expenses in connection with the performance of
its services under this Agreement. The Company will bear certain other expenses
to be incurred in its operation, including, but not limited to, investment
advisory and administration fees; fees for necessary professional and brokerage
services; fees for any pricing service; the costs of regulatory compliance; and
costs associated with maintaining the Company's legal existence and shareholder
relations.
-2-
<PAGE>
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the Company (including fees
pursuant to this Agreement and the Company's administration agreements, but
excluding interest, taxes, brokerage and extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Company, the
Adviser will reduce its fee to the Company by the proportion of such excess
expense equal to the proportion that its fee thereunder bears to the aggregate
of fees paid by the Company for investment advice and administration in that
year, to the extent required by state law. A fee reduction pursuant to this
paragraph 8, if any, will be estimated, reconciled and paid on a monthly basis.
9. Services to Other Companies or Accounts
The Company understands that the Adviser now acts, will continue to act and
may act in the future as investment adviser to fiduciary and other managed
accounts, and as investment adviser to other investment companies, and the
Company has no objection to the Adviser's so acting, provided that whenever the
Company and one or more other investment companies advised by the Adviser have
available funds for investment, investments suitable and appropriate for each
will be allocated in accordance with a formula believed to be equitable to each
company. The Company recognizes that in some cases this procedure may adversely
affect the size of the position obtainable for the Company. In addition, the
Company understands that the persons employed by the Adviser to assist in the
performance of the Adviser's duties under this Agreement will not devote their
full time to such service and nothing contained in this Agreement shall be
deemed to limit or restrict the right of the Adviser or any affiliate of the
Adviser to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
10. Term of Agreement
This Agreement shall become effective as of the "Closing Date" as that term
is defined in that certain Asset Purchase Agreement executed among Smith Barney,
Harris Upham & Co. Incorporated, Primerica Corporation and Shearson Lehman
Brothers Inc., dated March 12, 1993 (the "Effective Date") and shall continue
for an initial two-year term and shall continue thereafter so long as such
continuance is specifically approved at least annually by (i) the Board of the
Company or (ii) a vote of a "majority" (as that term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Company's
outstanding voting securities, provided that in either event the continuance is
also approved by a majority of the Board who are not "interested persons" (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. This Agreement
is terminable, without penalty, on 60 days' written notice, by the Board of the
Company or by vote of holders of a majority of the Company's shares, or upon 90
days' written notice, by the Adviser. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act and the
rules thereunder).
-3-
<PAGE>
If the foregoing is in accordance with your understanding, kindly indicate
your acceptance of this Agreement by signing and returning the enclosed copy of
this Agreement.
Very truly yours,
ZENIX INCOME FUND INC.
By: /s/ Heath B. McLendon
----------------------
Name:
Title:
Accepted:
THE GREENWICH STREET ADVISORS
DIVISION OF MUTUAL MANAGEMENT CORP.
By: /s/ Christina T. Sydor
-----------------------
Name:
Title:
-4-
<PAGE>
TRANSFER AND ASSUMPTION OF
INVESTMENT ADVISORY AGREEMENT
for
ZENIX INCOME FUND INC.
TRANSFER AND ASSUMPTION OF INVESTMENT ADVISORY AGREEMENT, made as of the
31st day of December, 1994, by and among Zenix Income Fund Inc., a Maryland
corporation (the "Company"), Mutual Management Corp., a New York corporation
("MMC"), and Smith Barney Mutual Funds Management Inc. ("SBMFM") a Delaware
corporation.
WHEREAS, the Company is registered with the Securities and Exchange
Commission as a closed-end management investment company under the Investment
Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Company, and MMC entered into an Investment Advisory Agreement
on July 30, 1993, under which MMC serves as the investment adviser (the
"Investment Adviser") for the Company; and
WHEREAS, MMC desires that its interest, rights, responsibilities and
obligations in and under the Investment Advisory Agreement be transferred to
SBMFM and SBMFM desires to assume MMC's interest, rights, responsibilities and
obligations in and under the Investment Advisory Agreement; and
WHEREAS, this Agreement does not result in a change of actual control or
management of the Investment Adviser to the Company and, therefore, is not an
"assignment" as defined in Section 2(a)(4) of the Act nor an "assignment" for
the purposes of Section 15(a)(4) of the Act.
NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Agreement and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereby agree as follows:
1. Assignment. Effective as of December 31, 1994 (the "Effective Date"),
MMC hereby transfers to SBMFM all of MMC's interest, rights, responsibilities
and obligations in and under the Investment Advisory Agreement dated July 30,
1993, to which MMC is a party with the Company.
2. Assumption and Performance of Duties. As of the Effective Date, SBMFM
hereby accepts all of MMC's interest and rights, and assumes and agrees to
perform all of MMC's responsibilities and obligations in, and under the
Investment Advisory Agreement; SBMFM agrees to be subject to all of the terms
and conditions of said Agreement; and SBMFM shall indemnify and hold harmless
MMC from any claim or demand made thereunder arising or incurred after the
Effective Date.
3. Representation of SBMFM. SBMFM represents and warrants that: (1) it is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended; and (2) Smith Barney Holdings Inc. is its sole shareholder.
<PAGE>
4. Consent. The Company hereby consents to this transfer by MMC to SBMFM of
MMC's interest, rights, responsibilities and obligations in and under the
Investment Advisory, Agreement and to the acceptance and assumption by SBMFM of
the same. The Company agrees, subject to the terms and conditions of said
Agreement, to look solely to SBMFM for the performance of the Investment
Adviser's responsibilities and obligations under said Agreement from and after
the Effective Date, and to recognize as inuring solely to SBMFM the interest and
rights heretofore held by MMC thereunder.
5. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF. the parties hereto have caused this Agreement to be
executed by their duly authorized officers hereunto duly attested.
<TABLE>
<CAPTION>
<S> <C>
Attest:
/s/ Christina T. Sydor By: /s/ Heath B. McLendon
- ---------------------------------- -------------------------------
Secretary Zenix Income Fund Inc.
Attest:
/s/ Christina T. Sydor By: /s/ Mutual Management Corp.
- ---------------------------------- --------------------------------
Secretary Mutual Management Corp.
Attest:
/s/ Christina T. Sydor By: /s/ Smith Barney Mutual Funds Management Inc.
- ---------------------------------- ---------------------------------------------
Secretary Smith Barney Mutual Funds
Management Inc.
</TABLE>
-3-
<PAGE>
Exhibit 99.2(j)
CUSTODY AGREEMENT
<PAGE>
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of July 30, 1995 by and between ZENIX INCOME FUND
INC., a Maryland corporation (the "Fund") and PNC BANK, NATIONAL ASSOCIATION, a
national banking association ("PNC Bank").
The Fund is registered as a closed-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes to
retain PNC Bank to provide custodian services and PNC Bank wishes to furnish
such services, either directly or through an affiliate or affiliates, as more
fully described herein. In consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Definitions.
------------
(a) "Authorized Person". The term "Authorized Person" shall mean any
officer of the Fund and any other person, who is duly authorized by the Fund's
Governing Board, to give Oral and Written Instructions on behalf of the Fund.
Such persons are listed in the Certificate attached hereto as the Authorized
Persons Appendix, as such Appendix may be amended in writing by the Fund's
Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry System" means Federal Reserve
Treasury book-entry system for United States and federal agency securities, its
successor or successors, and its nominee or nominees and any book-entry system
maintained by an exchange registered with the SEC under the 1934 Act.
<PAGE>
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures Trading
Commission.
(d) "Governing Board". The term "Governing Board" shall mean the Fund's
Board of Directors if the Fund is a corporation or the Fund's Board of Trustees
if the Fund is a trust, or, where duly authorized, a competent committee
thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean oral
instructions received by PNC Bank from an Authorized Person or from a person
reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(g) "Securities and Commodities Laws". The term "Securities and Commodities
Laws" shall mean the "1933 Act" which shall mean the Securities Act of 1933, the
"1934 Act" which shall mean the Securities Exchange Act of 1934, the 1940 Act,
and the "CEA" which shall mean the Commodities Exchange Act, each as amended.
(h) "Shares". The term "Shares" shall mean the shares of stock of any
series or class of the Fund, or, where appropriate, units of beneficial interest
in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items which the Fund
may from time to time deposit, or cause to be deposited, with PNC
2
<PAGE>
Bank or which PNC Bank may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or investment
items; and
(iv) all proceeds of the sale of securities issued by the Fund, which
are received by PNC Bank from time to time, from or on behalf of
the Fund.
(j) "Written Instructions". The term "Written Instructions" shall mean
written instructions signed by one Authorized Person and received by PNC Bank.
The instructions may be delivered by hand, mail, tested telegram, cable, telex
or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
-----------
services to the Fund, and PNC Bank accepts such appointment and agrees to
furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable, will
---------------------
provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the Fund's
Governing Board, approving the appointment of PNC Bank or its affiliates to
provide services;
(b) a copy of the Fund's most recent effective registration statement;
3
<PAGE>
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if PNC Bank is not
providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in respect of the
Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank undertakes to
------------------------------------------------
comply with all applicable requirements of the Securities and Commodities Laws
and any laws, rules and regulations of governmental authorities having
jurisdiction with respect to all duties to be performed by PNC Bank hereunder.
Except as specifically set forth herein, PNC Bank assumes no responsibility for
such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
------------
shall act only upon Oral and Written Instructions. PNC Bank shall be entitled to
rely upon any Oral and Written Instructions it receives from an Authorized
Person (or from a person reasonably believed by PNC Bank to be an Authorized
Person) pursuant to this Agreement. PNC Bank may assume that any Oral or Written
Instructions received hereunder are not in any way inconsistent with the
provisions of organizational documents or this Agreement or of any vote,
4
<PAGE>
resolution or proceeding of the Fund's Governing Board or of the Fund's
shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming Oral
Instructions so that PNC Bank receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PNC Bank shall in no
way invalidate the transactions or enforceability of the transactions authorized
by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the Fund
in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
-----------------------
(a) Advice of the Fund. If PNC Bank is in doubt as to any action it should
or should not take, PNC Bank may request directions or advice, including Oral or
Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any questions of
law pertaining to any action it should or should not take, PNC Bank may request
advice at its own cost from such counsel of its own choosing (who may be counsel
for the Fund, the Fund's advisor or PNC Bank, at the option of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between directions,
advice or Oral or Written Instructions PNC Bank receives from the Fund, and the
advice it receives from
5
<PAGE>
counsel, PNC Bank shall be entitled to rely upon and follow the advice of
counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in any action it
takes or does not take in reliance upon directions, advice or Oral or Written
Instructions it receives from the Fund or from counsel and which PNC Bank
believes, in good faith, to be consistent with those directions, advice or Oral
or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an obligation
upon PNC Bank (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action.
7. Records. The books and records pertaining to the Fund which are in the
-------
possession of PNC Bank, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all time
during PNC Bank's normal business hours. Upon the reasonable request of the
Fund, copies of any such books and records shall be provided by PNC Bank to the
Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records of the
---------------
Fund and information relative to the Fund and
6
<PAGE>
its shareholders (past, present and potential), unless the release of such
records or information is otherwise consented to, in writing, by the Fund. The
Fund agrees that such consent shall not be unreasonably withheld and may not be
withheld where PNC Bank may be exposed to civil or criminal contempt proceedings
or when required to divulge. The Fund further agrees that, should PNC Bank be
required to provide such information or records to duly constituted authorities
(who may institute civil or criminal contempt proceedings for failure to
comply), PNC Bank shall not be required to seek the Fund's consent prior to
disclosing such information.
9. Cooperation with Accountants. PNC Bank shall cooperate with the Fund's
----------------------------
independent public accountants and shall take all reasonable action in the
performance of its obligations under this Agreement to ensure that the necessary
information is made available to such accountants for the expression of their
opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
-----------------
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment failures,
PNC Bank shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions but shall have no liability with respect thereto.
11. Compensation. As compensation for custody services rendered by PNC Bank
------------
during the term of this Agreement, the Fund
7
<PAGE>
will pay to PNC Bank a fee or fees as may be agreed to from time to time in
writing by the Fund and PNC Bank.
12. Indemnification. The Fund agrees to indemnify and hold harmless PNC
---------------
Bank and its nominees from all taxes, charges, expenses, assessment, claims and
liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws and any state and foreign securities and blue
sky laws, and amendments thereto, and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action which PNC Bank takes or does not take (i) at the request or on the
direction of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither PNC Bank, nor any of its nominees, shall be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of PNC Bank's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to take any
--------------------------
action on behalf of the Fund except as specifically set forth herein or as may
be specifically agreed to by PNC Bank, in writing. PNC Bank shall be obligated
to exercise care and diligence in the performance of its duties hereunder, to
act in good faith and to use its best effort, within reasonable limits, in
performing services provided for under this Agreement. PNC Bank shall be
responsible for its own negligent failure to perform its duties under this
Agreement. Notwithstanding the
8
<PAGE>
foregoing, PNC Bank shall not be responsible for losses beyond its control,
provided that PNC Bank has acted in accordance with the standard of care set
forth above; and provided further that PNC Bank shall only be responsible for
that portion of losses or damages suffered by the Fund that are attributable to
the negligence of PNC Bank.
Without limiting the generality of the foregoing or of any other provision
of this Agreement, PNC Bank, in connection with its duties under this Agreement,
shall not be under any duty or obligation to inquire into and shall not be
liable for (a) the validity or invalidity or authority or lack thereof of any
Oral or Written Instruction, notice or other instrument which conforms to the
applicable requirements of this Agreement, and which PNC Bank reasonably
believes to be genuine; or (b) delays or errors or loss of data occurring by
reason of circumstances beyond PNC Bank's control, including acts of civil or
military authority, national emergencies, labor difficulties, fire, flood or
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank shall
have no liability to the Fund for any consequential, special or indirect losses
or damages which the Fund may incur or suffer by or as a consequence of PNC
Bank's performance of the services provided hereunder, whether or not the
likelihood of such losses or damages was known by PNC Bank.
9
<PAGE>
14. Description of Services.
-----------------------
(a) Delivery of the Property. The Fund will deliver or arrange for delivery
to PNC Bank, all the property owned by the Fund, including cash received as a
result of the distribution of its Shares, during the period that is set forth in
this Agreement. PNC Bank will not be responsible for such property until actual
receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon Written
Instructions, shall open and maintain separate account(s) in the Fund's name
using all cash received from or for the account of the Fund, subject to the
terms of this Agreement. In addition, upon Written Instructions, PNC Bank shall
open separate custodial accounts for each separate series, class or portfolio of
the Fund and shall hold in such account(s) all cash received from or for the
accounts of the Fund specifically designated to each separate series, class or
portfolio. PNC Bank shall make cash payments from or for the account of the Fund
only for:
(i) purchases of securities in the name of the Fund or PNC Bank or
PNC Bank's nominee as provided in sub-paragraph j and for which
PNC Bank has received a copy of the broker's or dealer's
confirmation or payee's invoice, as appropriate;
(ii) purchase or redemption of Shares of the Fund delivered to PNC
Bank;
10
<PAGE>
(iii) payment of, subject to Written Instructions, interest, taxes,
administration, accounting, distribution, advisory, management
fees or similar expenses which are to be borne by the Fund;
(iv) payment to, subject to receipt of Written Instructions, the
Fund's transfer agent, as agent for the shareholders, an amount
equal to the amount of dividends and distributions stated in the
Written Instructions to be distributed in cash by the transfer
agent to shareholders, or, in lieu of paying the Fund's transfer
agent, PNC Bank may arrange for the direct payment of cash
dividends and distributions to shareholders in accordance with
procedures mutually agreed upon from time to time by and among
the Fund, PNC Bank and the Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in connection
with the conversion, exchange or surrender of securities owned or
subscribed to by the Fund and held by or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with respect to
securities sold short; payments made to a sub-custodian pursuant
to
11
<PAGE>
provisions in sub-paragraph c of this Paragraph; and
(vii) payments, upon Written Instructions made for other proper Fund
purposes. PNC Bank is hereby authorized to endorse and collect
all checks, drafts or other orders for the payment of money
received as custodian for the account of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received by it for the account
of the Fund in a separate account that physically segregates such
securities from those of any other persons, firms or
corporations, except for securities held in a Book-Entry System.
All such securities shall be held or disposed of only upon
Written Instructions of the Fund pursuant to the terms of this
Agreement. PNC Bank shall have no power or authority to assign,
hypothecate, pledge or otherwise dispose of any such securities
or investment, except upon the express terms of this Agreement
and upon Written Instructions, accompanied by a certified
resolution of the Fund's Governing Board, authorizing the
transaction. In no case may any member of the Fund's Governing
Board, or any officer,
12
<PAGE>
employee or agent of the Fund withdraw any securities. At PNC
Bank's own expense and for its own convenience, PNC Bank may
enter into sub-custodian agreements with other banks or trust
companies to perform duties described in this sub-paragraph c.
Such bank or trust company shall have an aggregate capital,
surplus and undivided profits, according to its last published
report, of at least one million dollars ($1,000,000), if it is a
subsidiary or affiliate of PNC Bank, or at least twenty million
dollars ($20,000,000) if such bank or trust company is not a
subsidiary or affiliate of PNC Bank. In addition, such bank or
trust company must agree to comply with the relevant provisions
of the 1940 Act and other applicable rules and regulations. PNC
Bank shall remain responsible for the performance of all of its
duties as described in this Agreement and shall hold the Fund
harmless from PNC Bank's own (or any sub-custodian chosen by PNC
Bank under the terms of this sub-paragraph c) acts or omissions,
under the standards of care provided for herein.
13
<PAGE>
(d) Transactions Requiring Instructions. Upon receipt of Oral or Written
Instructions and not otherwise, PNC Bank, directly or through the use of the
Book-Entry System, shall:
(i) deliver any securities held for the Fund against the receipt of
payment for the sale of such securities;
(ii) execute and deliver to such persons as may be designated in such
Oral or Written Instructions, proxies, consents, authorizations,
and any other instruments whereby the authority of the Fund as
owner of any securities may be exercised;
(iii) deliver any securities to the issuer thereof, or its agent, when
such securities are called, redeemed, retired or otherwise become
payable; provided that, in any such case, the cash or other
consideration is to be delivered to PNC Bank;
(iv) deliver any securities held for the Fund against receipt of other
securities or cash issued or paid in connection with the
liquidation, reorganization, refinancing, tender offer, merger,
consolidation or recapitalization of any corporation, or the
exercise of any conversion privilege;
14
<PAGE>
(v) deliver any securities held for the Fund to any protective
committee, reorganization committee or other person in connection
with the reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and
receive and hold under the terms of this Agreement such
certificates of deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the assets of the Fund and
take such other steps as shall be stated in said Oral or Written
Instructions to be for the purpose of effectuating a duly
authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of the Fund;
(vii) release securities belonging to the Fund to any bank or trust
company for the purpose of a pledge or hypothecation to secure
any loan incurred by the Fund; provided, however, that securities
shall be released only upon payment to PNC Bank of the monies
borrowed, except that in cases where additional collateral is
required, to secure a borrowing already made subject to proper
prior
15
<PAGE>
authorization, further securities may be released for that
purpose; and repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon surrender of
the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in connection
with any repurchase agreement entered into on behalf of the Fund,
but only on receipt of payment therefor; and pay out moneys of
the Fund in connection with such repurchase agreements, but only
upon the delivery of the securities;
(ix) release and deliver or exchange securities owned by the Fund in
connection with any conversion of such securities, pursuant to
their terms, into other securities;
(x) release and deliver securities owned by the Fund for the purpose
of redeeming in kind shares of the Fund upon delivery thereof to
PNC Bank; and
(xi) release and deliver or exchange securities owned by the Fund for
other corporate purposes. PNC Bank must also receive a certified
resolution describing the nature of the corporate purpose and the
name and
16
<PAGE>
address of the person(s) to whom delivery shall be made when such
action is pursuant to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank certified
resolutions of the Fund's Governing Board approving, authorizing and instructing
PNC Bank on a continuous and on-going basis, to deposit in the Book-Entry System
all securities belonging to the Fund eligible for deposit therein and to utilize
the Book-Entry System to the extent possible in connection with settlements of
purchases and sales of securities by the Fund, and deliveries and returns of
securities loaned, subject to repurchase agreements or used as collateral in
connection with borrowings. PNC Bank shall continue to perform such duties until
it receives Written or Oral Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of the Fund which are maintained in
the Book-Entry system, established pursuant to this sub-paragraph
e hereof, the records of PNC Bank shall identify by Book-Entry or
otherwise those securities belonging to the Fund. PNC Bank shall
furnish the Fund a detailed statement of the Property held for
the Fund under this Agreement at least monthly and from time to
time and upon written request.
17
<PAGE>
(ii) Securities and any cash of the Fund deposited in the Book-Entry
System will at all times be segregated from any assets and cash
controlled by PNC Bank in other than a fiduciary or custodian
capacity but may be commingled with other assets held in such
capacities. PNC Bank and its sub-custodian, if any, will pay out
money only upon receipt of securities and will deliver securities
only upon the receipt of money.
(iii) All books and records maintained by PNC Bank which relate to the
Fund's participation in the Book-Entry System will at all times
during PNC Bank's regular business hours be open to the
inspection of the Fund's duly authorized employees or agents, and
the Fund will be furnished with all information in respect of the
services rendered to it as it may require.
(iv) PNC Bank will provide the Fund with copies of any report obtained
by PNC Bank on the system of internal accounting control of the
Book-Entry System promptly after receipt of such a report by PNC
Bank. PNC Bank will also provide the Fund with such reports on
its own system of internal control as the Fund may reasonably
request from time to time.
18
<PAGE>
(f) Registration of Securities. All Securities held for the Fund which are
issued or issuable only in bearer form, except such securities held in the
Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name of the Fund; PNC
Bank; the Book-Entry System; a sub-custodian; or any duly appointed nominee(s)
of the Fund, PNC Bank, Book-Entry System or sub-custodian. The Fund reserves the
right to instruct PNC Bank as to the method of registration and safekeeping of
the securities of the Fund. The Fund agrees to furnish to PNC Bank appropriate
instruments to enable PNC Bank to hold or deliver in proper form for transfer,
or to register its registered nominee or in the name of the Book-Entry System,
any securities which it may hold for the account of the Fund and which may from
time to time be registered in the name of the Fund. PNC Bank shall hold all such
securities which are not held in the Book-Entry System in a separate account for
the Fund in the name of the Fund physically segregated at all times from those
of any other person or persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee shall vote
any of the securities held pursuant to this Agreement by or for the account of
the Fund, except in accordance with Written Instructions. PNC Bank, directly or
through the use of the Book-Entry System, shall execute in blank and promptly
deliver all notice, proxies, and proxy soliciting materials to the registered
holder of such securities. If the registered
19
<PAGE>
holder is not the Fund then Written or Oral Instructions must designate the
person(s) who owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of contrary
Written Instructions, PNC Bank is authorized to take the following actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund, all income,
dividends, distributions, coupons, option premiums, other
payments and similar items, included or to be included in
the Property, and, in addition, promptly advise the Fund of
such receipt and credit such income, as collected, to the
Fund's custodian account;
(B) endorse and deposit for collection, in the name of the Fund,
checks, drafts, or other orders for the payment of money;
(C) receive and hold for the account of the Fund all securities
received as a distribution on the Fund's portfolio
securities as a result of a stock dividend, share split-up
or reorganization, recapitalization, readjustment or other
rearrangement or distribution of rights or similar
securities issued with respect to any
20
<PAGE>
portfolio securities belonging to the Fund held by PNC Bank
hereunder;
(D) present for payment and collect the amount payable upon all
securities which may mature or be called, redeemed, or
retired, or otherwise become payable on the date such
securities become payable; and
(E) take any action which may be necessary and proper in
connection with the collection and receipt of such income
and other payments and the endorsement for collection of
checks, drafts, and other negotiable instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver or cause to be delivered
Property against payment or other consideration or written
receipt therefor in the following cases:
(1) for examination by a broker or dealer selling for the
account of the Fund in accordance with street delivery
custom;
(2) for the exchange of interim receipts or temporary
securities for definitive securities; and
21
<PAGE>
(3) for transfer of securities into the name of the Fund or
PNC Bank or nominee of either, or for exchange of
securities for a different number of bonds,
certificates, or other evidence, representing the same
aggregate face amount or number of units bearing the
same interest rate, maturity date and call provisions,
if any; provided that, in any such case, the new
securities are to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral or Written
Instructions to the contrary, PNC Bank shall:
(1) pay all income items held by it which call for payment
upon presentation and hold the cash received by it upon
such payment for the account of the Fund;
(2) collect interest and cash dividends received, with
notice to the Fund, to the Fund's account;
(3) hold for the account of the Fund all stock dividends,
rights and similar securities issued with
22
<PAGE>
respect to any securities held by PNC Bank; and
(4) execute as agent on behalf of the Fund all necessary
ownership certificates required by the Internal Revenue
Code or the Income Tax Regulations of the United States
Treasury Department or under the laws of any State now
or hereafter in effect, inserting the Fund's name, on
such certificate as the owner of the securities covered
thereby, to the extent it may lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written or Oral Instructions
establish and maintain segregated account(s) on its records for
and on behalf of the Fund. Such account(s) may be used to
transfer cash and securities, including securities in the
Book-Entry System:
(A) for the purposes of compliance by the Fund with the
procedures required by a securities or option exchange,
providing such procedures comply with the 1940 Act and any
releases of the SEC relating to
23
<PAGE>
the maintenance of segregated accounts by registered
investment companies; and
(B) Upon receipt of Written Instructions, for other proper
corporate purposes.
(ii) PNC Bank may enter into separate custodial agreements with
various futures commission merchants ("FCMs") that the Fund uses
("FCM Agreement"). Pursuant to an FCM Agreement, the Fund's
margin deposits in any transactions involving futures contracts
and options on futures contracts will be held by PNC Bank in
accounts ("FCM Account") subject to the disposition by the FCM
involved in such contracts and in accordance with the customer
contract between FCM and the Fund ("FCM Contract"), SEC rules and
the rules of the applicable commodities exchange. Such FCM
Agreements shall only be entered into upon receipt of Written
Instructions from the Fund which state that:
(A) a customer agreement between the FCM and the Fund has been
entered into; and
(B) the Fund is in compliance with all the rules and regulations
of the CFTC. Transfers of initial margin shall be made into
a FCM Account only upon Written Instructions; transfers of
24
<PAGE>
premium and variation margin may be made into a FCM Account
pursuant to Oral Instructions. Transfers of funds from a FCM
Account to the FCM for which PNC Bank holds such an account
may only occur upon certification by the FCM to PNC Bank
that pursuant to the FCM Agreement and the FCM Contract, all
conditions precedent to its right to give PNC Bank such
instructions have been satisfied.
(iii) PNC Bank shall arrange for the establishment of IRA custodian
accounts for such shareholders holding Shares through IRA
accounts, in accordance with the Fund's prospectuses, the
Internal Revenue Code (including regulations), and with such
other procedures as are mutually agreed upon from time to time by
and among the Fund, PNC Bank and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased securities
upon receipt of Oral or Written Instructions from the Fund or its investment
advisor(s) that specify:
(i) the name of the issuer and the title of the securities, including
CUSIP number if applicable;
25
<PAGE>
(ii) the number of shares or the principal amount purchased and
accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through whom the
purchase was made. PNC Bank shall upon receipt of securities
purchased by or for the Fund pay out of the moneys held for the
account of the Fund the total amount payable to the person from
whom or the broker through whom the purchase was made, provided
that the same conforms to the total amount payable as set forth
in such Oral or Written Instructions.
(k) Sales of Securities. PNC Bank shall settle sold securities upon receipt
of Oral or Written Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security, including
CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued
interest, if any;
(iii) the date of trade, settlement and sale;
26
<PAGE>
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to whom the
sale was made; and
(vii) the location to which the security must be delivered and
delivery deadline, if any. PNC Bank shall deliver the securities
upon receipt of the total amount payable to the Fund upon such
sale, provided that the total amount payable is the same as was
set forth in the Oral or Written Instructions. Subject to the
foregoing, PNC Bank may accept payment in such form as shall be
satisfactory to it, and may deliver securities and arrange for
payment in accordance with the customs prevailing among dealers
in securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund may reasonably
request;
(B) a monthly statement summarizing all transactions and entries
for the account of the Fund, listing the portfolio
securities belonging to the Fund with
27
<PAGE>
the adjusted average cost of each issue and the market value
at the end of such month, and stating the cash account of
the Fund including disbursement;
(C) the reports to be furnished to the Fund pursuant to Rule
17f-4; and
(D) such other information as may be agreed upon from time to
time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any proxy statement,
proxy material, notice of a call or conversion or similar
communication received by it as custodian of the Property. PNC
Bank shall be under no other obligation to inform the Fund as to
such actions or events.
(m) Collections. All collections of monies or other property, in respect,
or which are to become part of the Property (but not the safekeeping thereof
upon receipt by PNC Bank) shall be at the sole risk of the Fund. If payment is
not received by PNC Bank within a reasonable time after proper demands have been
made, PNC Bank shall notify the Fund in writing, including copies of all demand
letters, any written responses, memoranda of all oral responses and telephonic
demands thereto, and await instructions from the Fund. PNC Bank shall not be
obliged to take legal action for collection unless and until reasonably
indemnified to its satisfaction. PNC Bank shall also notify the
28
<PAGE>
Fund as soon as reasonably practicable whenever income due on securities is not
collected in due course.
15. Duration and Termination. This Agreement shall continue until
------------------------
terminated by the Fund or by PNC Bank on sixty (60) days' prior written notice
to the other party. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders of the Fund
to dissolve or to function without a custodian of its cash, securities or other
property), PNC Bank shall not deliver cash, securities or other property of the
Fund to the Fund. It may deliver them to a bank or trust company of PNC Bank's
choice, having an aggregate capital, surplus and undivided profits, as shown by
its last published report, of not less than twenty million dollars
($20,000,000), as a custodian for the Fund to be held under terms similar to
those of this Agreement. PNC Bank shall not be required to make any such
delivery or payment until full payment shall have been made to PNC Bank of all
of its fees, compensation, costs and expenses. PNC Bank shall have a security
interest in and shall have a right of setoff against Property in the Fund's
possession as security for the payment of such fees, compensation, costs and
expenses.
16. Notices. All notices and other communications, including Written
-------
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address: Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, marked for the
29
<PAGE>
attention of the Custodian Services Department (or its successor) (b) if to the
Fund, at the address of the Fund; or (c) if to neither of the foregoing, at such
other address as shall have been notified to the sender of any such notice or
other communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately. If
notice is sent by first-class mail, it shall be deemed to have been given five
days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
----------
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. Delegation. PNC Bank may assign its rights and delegate its duties
----------
hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PNC Bank gives the
Fund thirty (30) days prior written notice; (ii) the delegate agrees with PNC
Bank to comply with all relevant provisions of the 1940 Act; and (iii) PNC Bank
and such delegate promptly provide such information as the Fund may request, and
respond to such questions as the Fund may ask, relative to the assignment,
including (without limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original,
30
<PAGE>
but all of which together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts and
---------------
execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
-------------
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated duties and/or Oral Instructions. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect.
This Agreement shall be deemed to be a contract made in Pennsylvania and
governed by Pennsylvania law, without regard to principles of conflicts of law.
If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
31
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By:/s/ PNC Bank, National Association
---------------------------------------
Title:
ZENIX INCOME FUND INC.
By:/s/ Heath B. McLendon
--------------------------
Title:
32
<PAGE>
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
___________________ ___________________
___________________ ___________________
___________________ ___________________
___________________ ___________________
___________________ ___________________
33
<PAGE>
Exhibit 99.2(k)(1)
TRANSFER AGENCY AGREEMENT
<PAGE>
TRANSFER AND NOTICE AGENCY AGREEMENT
AGREEMENT, dated as of April 5, 1988 between Zenith Income Fund Inc. a
corporation organized under the laws of Maryland and having its principal place
of business at Two World Trade Center, New York, NY 10048, and BOSTON SAFE
DEPOSIT AND TRUST COMPANY (the "Agent"), a Massachusetts trust company with
principal offices at One Boston Place, Boston, Massachusetts 02106.
W I T N E S S E T H:
-------------------
That for and in consideration of the mutual promises hereinafter set forth,
the Fund and the Agent agree as follows:
1. Definitions. Whenever used in this Agreement, the following words and
-----------
phrases, unless the context otherwise requires, shall have the following
meanings:
(a) "Articles of Incorporation" shall mean the Articles of Incorporation
of the Fund as the same may be amended from time to time;
(b) "Authorized Person" shall be deemed to include any person, whether
or not such person is an officer or employee of the Fund, duly authorized to
give Oral Instructions or Written Instructions on behalf of the Fund as
indicated in a certificate furnished to the Agent pursuant to Section 4(c)
hereof as may be received by the Agent from time to time;
(c) "Custodian" refers to the custodian and any sub-custodian of all
securities and other property which the Fund may from time to time deposit, or
cause to be deposited or held under the name or account of such custodian
pursuant to the Custodian Agreement;
(d) "Indenture" shall mean the indenture dated as of April __, 1988
between the Fund and Manufacturers Hanover Trust Company, as trustee;
(e) "Oral Instructions" shall mean instructions, other than written
instructions, actually received by the Agent from a person reasonably believed
by the Agent to be an Authorized Person;
(f) "Preferred Shares" refers to be the 9.67% Cumulative Preferred
Shares, $.01 par value per share, of the Fund;
(g) "Shares" refers collectively to the Senior Money Market Notes due
1995, the Preferred Shares and the Common Stock $.01 par value per share of the
Fund as may be issued from time to time; and
(h) "Written Instructions" shall mean a written communication signed by
a person reasonably believed by the Agent to be an Authorized Person and
actually received by the Agent.
<PAGE>
2. Appointment of the Agent. The Fund hereby appoints and constitutes the
------------------------
Agent as transfer agent for the Shares of the Fund and as shareholder servicing
agent for the Fund. In addition, the Fund hereby appoints and constitutes the
Agent as notice agent with respect to the Preferred Shares of the Fund. The
Agent accepts such appointments and agrees to perform the duties hereinafter set
forth.
3. Compensation
------------
(a) The Fund will compensate or cause the Agent to be compensated for
the performance of its obligations hereunder in accordance with the fees set
forth in the written schedule of fees annexed hereto as Schedule A and
incorporated herein. Schedule A does not include out-of-pocket disbursements of
the Agent for which the Agent shall be entitled to bill the Fund separately. The
Agent will bill the Fund as soon as practicable after the end of each calendar
month, and said billings will be detailed in accordance with Schedule A. The
Fund will promptly pay to the Agent the amount of such billing.
Out-of-pocket disbursements shall include, but shall not be limited to,
the items specified in the written schedule of out-of-pocket charges annexed
hereto as Schedule B and incorporated herein. Schedule B may be modified by the
Agent upon not less than 30 days' prior written notice to the Fund. Unspecified
out-of-pocket expenses shall be limited to those out-of-pocket expenses
reasonably incurred by the Agent in the performance of its obligations
hereunder. Reimbursement by the Fund for expenses incurred by the Agent in any
month shall be made as soon as practicable after the receipt of an itemized bill
from the Agent.
(b) Any compensation agreed to hereunder may be adjusted from time to
time by attaching to Schedule A of this Agreement a revised Fee Schedule.
4. Documents. In connection with the appointment of the Agent, the Fund
---------
shall, on or before the date this Agreement goes into effect, but in any case,
within a reasonable period of time for the Agent to prepare to perform its
duties hereunder, deliver or cause to be delivered to the Agent the following
documents:
(a) If applicable, specimens of the certificates for the Shares of the
Fund;
(b) All account application forms and other documents relating to
Shareholder accounts or to any plan, program or service offered by the Fund;
(c) A signature card bearing the signatures of any officer of the Fund
or other Authorized Person who will sign Written Instructions;
(d) All documents and papers necessary under the laws of Maryland, under
the Fund's Articles of Incorporation as may be amended from time to time, and as
may be required for the due performance of the Agent's duties under this
Agreement or for the due performance of additional duties as may from time to
time be agreed upon among the Fund and the Agent.
5. Distributions Payable in Shares. In the event that the Board of
-------------------------------
Directors of the Fund shall declare a distribution payable in Shares, the Fund
shall deliver or cause to be delivered
2
<PAGE>
to the Agent written notice of such declaration signed on behalf of the Fund by
an officer thereof, upon which the Agent shall be entitled to rely for all
purposes, certifying (i) the identity of the Shares involved, (ii) the number of
Shares involved, and (iii) that all appropriate action has been taken.
6. Duties of the Agent. The Agent shall be responsible for administering
-------------------
and/or performing transfer agent functions; for acting as service agent in
connection with dividend and distribution functions; and for performing
shareholder account and administrative agent functions in connection with the
issuance, transfer and redemption or repurchase (including coordination with the
Custodian) of the Shares. The operating standards and procedures to be followed
shall be determined from time to time by agreement among the Fund and the Agent.
In addition, the Agent shall receive all notices issued by the Fund respect to
the Preferred Shares in accordance with and pursuant to the Articles of
Incorporation and the Indenture and shall perform such other specific duties as
are set forth in the Articles of Incorporation including the giving of notice of
a special meeting and notice of redemption in the circumstances and otherwise in
accordance with all relevant provisions of the Articles of Incorporation.
7. Record Keeping and other Information. The Agent shall create and
------------------------------------
maintain all necessary records in accordance with all applicable laws and rules
and regulations.
8. Other Duties. In addition, the Agent shall perform such other duties
------------
and functions, and shall be paid such amounts therefor, as may from time to time
be agreed upon in writing among the Fund and the Agent. The compensation for
such other duties and functions shall be reflected in a written amendment to
Schedule A.
9. Reliance by Agent; Instructions
-------------------------------
(a) The Agent will be protected in acting upon Written or Oral
Instructions believed to have been executed or orally communicated by an
Authorized Person and will not be held to have any notice of any change of
authority of any person until receipt of a Written Instruction thereof from an
officer of the Fund. The Agent will also be protected in processing Share
certificates which it reasonably believes to bear the proper manual or facsimile
signatures of the officers of the Fund and the proper countersignature of the
Agent.
(b) At any time the Agent may apply to any Authorized Person of the Fund
for Written Instructions and may seek advice at the Fund's expense from legal
counsel for the Fund or its own legal counsel, with respect to any matter
arising in connection with this Agreement, and it shall not be liable for any
action taken or not taken or suffered by it in good faith in accordance with
such Written Instructions or in accordance with the opinion of counsel for the
Fund or for the Agent. Written Instructions requested by the Agent will be
provided by the Fund within a reasonable period of time. In addition, the Agent,
its officers, agents or employees, shall accept Oral Instructions or Written
Instructions given to them by any person representing or acting on behalf of the
Fund only if said representative is known by the Agent, or its officers, agents
or employees, to be an Authorized Person. The Agent shall have no duty or
obligation to inquire into, nor shall the Agent be responsible for, the legality
of any act done by it upon the request or direction of a person reasonably
believed by the Agent to be an Authorized Person.
3
<PAGE>
10. Acts of God, etc. The Agent will not be liable or responsible for
----------------
delays or errors by reason of circumstances beyond its control, including acts
of civil or military authority, national emergencies, labor difficulties, fire,
mechanical breakdown beyond its control, flood or catastrophe, acts of God,
insurrection, war, riots or failure beyond its control of transportation,
communication or power supply.
11. Duty of Care and Indemnification. The Fund will indemnify the Agent
--------------------------------
against and hold it harmless from any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses)
resulting from any claim, demand, action or suit not resulting from the bad
faith or negligence of the Agent, and arising out of, or in connection with, its
duties hereunder. In addition, the Fund will indemnify the Agent against and
hold it harmless from any and all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) resulting from any
claim, demand, action or suit as a result of: (i) any action taken in accordance
with Written or Oral Instructions, or any other instructions, or share
certificates reasonably believed by the Agent to be genuine and to be signed,
countersigned or executed, or orally communicated by an Authorized Person; (ii)
any action taken in accordance with written or oral advice reasonably believed
by the Agent to have been given by counsel for the Fund or its own counsel; or
(iii) any action taken as a result of any error or omission in any record
(including but not limited to magnetic tapes, computer printouts, hard copies
and microfilm copies) delivered, or caused to be delivered by the Fund to the
Agent in connection with this Agreement.
In any case in which the Fund may be asked to indemnify or hold the
Agent harmless, the Fund shall be advised of all pertinent facts concerning the
situation in question and the Agent will use reasonable care to identify and
notify the Fund promptly concerning any situation which presents or appears
likely to present a claim for indemnification against the Fund. The Fund shall
have the option to defend the Agent against any claim which may be the subject
of this indemnification, and, in the event that the Fund so elects, such defense
shall be conducted by counsel chosen by the Fund and satisfactory to the Agent,
and thereupon the Fund shall take over complete defense of the claim and the
Agent shall sustain no further legal or other expenses in such situation for
which it seeks indemnification under this Section 11. The Agent will not confess
any claim or make any compromise in any case in which the Fund will be asked to
provide indemnification, except with the Fund's prior written consent. The
obligations of the parties hereto under this Section shall survive the
termination of this Agreement.
12. Term and Termination. (a) This Agreement shall be effective as of
--------------------
the date first written above and shall continue until April 5, 1989, and
thereafter shall continue automatically for successive annual periods ending on
April 5 of each year, provided such continuance is specifically approved at
least annually by (i) the Fund's Board of Directors or (ii) a vote of a
"majority" (as defined in the 1940 Act) of the Fund's outstanding voting
securities, provided that in either event the continuance is also approved by a
majority of the Board of Directors who are not "interested persons" (as defined
in the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting such approval;
(b) Either party hereto may terminate this Agreement by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than 60 days after the date of receipt of such notice. In the
4
<PAGE>
event such notice is given by the Fund, it shall be accompanied by a resolution
of the Board of Directors of the Fund, certified by the Secretary of the Fund,
designating a successor transfer agent or transfer agents or a successor notice
agent or notice agents. Upon such termination and at the expense of the Fund,
the Agent will deliver to such successor a certified list of shareholders of the
Fund (with names and addresses), an historical record of the account of each
shareholder and the status thereof, and all other relevant books, records,
correspondence, and other data established or maintained by the Agent under this
Agreement in the form reasonably acceptable to the Agent, and will cooperate in
the transfer of such duties and responsibilities, including provisions for
assistance from the Agent's personnel in the establishment of books, records and
other data by such successor or successors.
13. Amendment. This Agreement may not be amended or modified in any
---------
manner except by a written agreement executed by both parties.
14. Subcontracting. The Fund agrees that the Agent may, in its
--------------
discretion, subcontract for certain of the services described under this
Agreement or the Schedules hereto; provided that the appointment of any such
Agent shall not relieve the Agent of its responsibilities hereunder.
15. Miscellaneous
-------------
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or the Agent, shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in writing.
To the Fund:
Zenith Income Fund Inc.
Two World Center
New York, New York 10285
Attention:
To the Agent:
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
Attention: Robert Radin
(b) This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable without the written consent of the other
party.
(c) This Agreement shall be construed in accordance with the laws of the
State of New York.
5
<PAGE>
(d) This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original; but such counterparts shall,
together constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate officers thereunder duly authorized as of
the day and year first above written.
ZENITH INCOME FUND INC.
By: /s/ Heath B. McLendon
---------------------
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By: /s/ Boston Safe Deposit and Trust Company
---------------------------------------------
6
<PAGE>
Transfer Agent Fee
Schedule A
The Fund shall pay the Transfer Agent an annualized fee of $8.00 per
shareholder account. Such fee shall be prorated on billed by the Transfer Agent
monthly on a prorated basis of 1/12 of the annualized fee.
7
<PAGE>
Schedule B
OUT-OF-POCKET EXPENSES
- ----------------------
The Fund shall reimburse the Agent monthly for the following out-of-pocket
expenses:
. postage and mailing
. forms
. outgoing wire charges
. telephone
. Federal Reserve charges for check clearance
. if applicable, magnetic tape and freight
. retention of records
. microfilm/microfiche
. stationery
. insurance
. if applicable, terminals, transmitting lines and any expenses incurred in
connection with such terminals and lines
. all other miscellaneous expenses reasonably incurred by the Agent
The Fund agrees that postage and mailing expenses will be paid on the day
of or prior to mailing as agreed with the Agent. In addition, the Fund will
promptly reimburse the Agent for any other expenses incurred by the Agent as to
which the Fund and the Agent mutually agree that such expenses are not otherwise
properly borne by the Agent as part of its duties and obligations under the
Agreement.
8
<PAGE>
Schedule C
DUTIES OF THE AGENT (See Exhibit 1 for Summary of Services)
- -------------------
1. Shareholder Information. The Agent or its agent shall maintain a
-----------------------
record of the number of Shares held by each holder of record which shall include
their addresses and which shall indicate whether such Shares are held in
certificated or uncertificated form.
2. Shareholder Services. The Agent or its agent will investigate all
--------------------
inquiries from shareholders of the Fund relating to Shareholder accounts and
will answer all correspondence from Shareholders and others relating to its
duties hereunder and such other correspondence as may from time to time be
mutually agreed upon between the Agent and the Fund.
3. Share Certificates
------------------
(a) At the expense of the Fund, the Agent or its agent shall maintain
an adequate supply of blank share certificates to meet the Agent or its agent's
requirements therefor. Such Share certificates shall be properly signed by
facsimile. The Fund agrees that, notwithstanding the death, resignation, or
removal of any officer of the Fund whose signature appears on such certificates,
the Agent or its agent may continue to countersign certificates which bear such
signatures until otherwise directed by Written Instructions.
(b) The Agent or its agent shall issue replacement Share certificates
in lieu of certificates which have been lost, stolen or destroyed, upon receipt
by the Agent or its agent of properly executed affidavits and lost certificate
bonds, in form satisfactory to the Agent or its agent, with the Fund and the
Agent or its agent as obligees under the bond.
(c) The Agent or its agent shall also maintain a record of each
certificate issued, the number of Shares represented thereby and the holder of
record. With respect to Shares held in open accounts or uncertificated form,
i.e., no certificate being issued with respect thereto, the Agent or its agent
- ----
shall maintain comparable records of the record holders thereof, including their
names and addresses. The Agent or its agent shall further maintain a stop
transfer record on lost and/or replaced certificates.
4. Mailing Communications to Shareholders; Proxy Materials. The Agent or
-------------------------------------------------------
its agent will address and mail to Shareholders of the Fund, all reports to
Shareholders, dividend and distribution notices and proxy material for any of
the Fund's meetings of Shareholders. In connection with meetings of
Shareholders, the Agent or its agent will prepare Shareholder lists, mail and
certify as to the mailing of proxy materials, process and tabulate returned
proxy cards, report on proxies voted prior to meetings, act as inspector of
election at meetings and certify Shares voted at meetings.
5. Sales of Shares
---------------
(a) Processing of Investment Checks or Other Investments. Upon
----------------------------------------------------
receipt of any check or other instrument drawn or endorsed to it as agent for,
9
<PAGE>
or identified as being for the account of, the Fund or drawn or endorsed to the
Distributor of the Fund's Shares for the purchase of Shares, the Agent or its
agent shall stamp the check with the date of receipt, shall forthwith process
the same for collection and shall record the number of Shares sold, the trade
date and price per Share, and the amount of money to be delivered to the
Custodian of the Fund for the sale of such Shares.
(b) Issuance of Shares. Upon receipt of notification that the
------------------
Custodian has received the amount of money specified in the immediately
preceding paragraph, the Agent or its agent shall issue to and hold in the
account of the purchaser/shareholder, or if no account is specified therein, in
a new account established in the name of the purchaser, the number of Shares
such purchaser is entitled to receive.
(c) Suspension of Sale of Shares. The Agent or its agent shall not be
----------------------------
required to issue any Shares of the Fund where it has received a Written
Instruction from the Fund or official notice from the appropriate authority that
the sale of the Shares of the Fund has been suspended or discontinued, and the
Agent or its agent shall be entitled to rely upon such Written Instructions or
such official notice.
(d) Returned Checks. In the event that any check or other order for
---------------
the payment of money is returned unpaid for any reason, the Agent or its agent
will: (i) give prompt notice of such return to the Fund or its designee; (ii)
place a stop transfer order against all Shares issued as a result of such check
or order; and (iii) take such actions as the Agent may from time to time deem
appropriate.
6. Transfer and Repurchases
------------------------
(a) Requirements for Transfer or Repurchase of Shares. The Agent or
-------------------------------------------------
its agent shall process all requests to transfer or repurchase Shares in
accordance with the transfer or repurchase procedures got forth in the Fund's
Prospectus.
The Agent or its agent will transfer or repurchase Shares upon receipt
of Written Instructions and Share certificates, if any, properly endorsed for
transfer or repurchase, accompanied by such documents as the Agent or its agent
reasonably may deem necessary.
The Agent or its agent reserves the right to refuse to transfer or
repurchase Shares until it is satisfied that the endorsement on the instructions
is valid and genuine. The Agent or its agent also reserves the right to refuse
to transfer or repurchase Shares until it is satisfied that the requested
transfer or repurchase is legally authorized, and it shall incur no liability
for the refusal, in good faith, to make transfers or repurchases which the Agent
or its agent, in its good judgment, deems improper or unauthorized, or until it
is reasonably satisfied that there is no basis to any claims adverse to such
transfer or repurchase.
(b) Notice to Custodian and Fund. When Shares are repurchased, the
----------------------------
Agent or its agent shall, upon receipt of the instructions and documents in
proper form, deliver to the Custodian and the Fund or its designee a
notification setting forth the number of Shares to be repurchased. Such
repurchased Shares shall be reflected on appropriate accounts maintained by the
10
<PAGE>
Agent or its agent reflecting outstanding Shares of the Fund and Shares
attributed to individual accounts.
(c) Payment of Repurchase Proceeds. The Agent or its agent shall,
------------------------------
upon receipt of the moneys paid to it by the Custodian for the repurchase of
Shares, pay such moneys as are received from the Custodian, all in accordance
with the procedures described in the written instruction received by the Agent
or its agent from the Fund.
The Agent or its agent shall not process or effect any repurchase with
respect to Shares of the Fund after receipt by the Agent or its agent of
notification of the suspension of the determination of the net asset value of
the Fund.
7. Dividends
---------
(a) Notice to Agent and Custodian. Upon the declaration of each
-----------------------------
dividend and each capital gains distribution by the Board of Directors of the
Fund with respect to Shares of the Fund, the Agent shall furnish or cause to be
furnished to the Agent or its agent a copy of a resolution of the Fund's Board
of Directors certified by the Secretary of the Fund setting forth the date of
the declaration of such dividend or distribution, the ex-dividend date, the date
of payment thereof, the record date as of which Shareholders entitled to payment
shall be determined, the amount payable per Share to the Shareholders of record
as of that date, the total amount payable to the Agent or its agent on the
payment date and whether such dividend or distribution is to be paid in Shares
of such class at net asset value.
On or before the payment date specified in such resolution of the
Board of Directors, the Custodian of the Fund will pay to the Agent or its agent
sufficient cash to make payment to the Shareholders of record as of such payment
date.
(b) Insufficient Funds for Payments. If the Agent or its agent does
-------------------------------
not receive sufficient cash from the Custodian to make total dividend and/or
distribution payments to all Shareholders of the Fund as of the record date, the
Agent or its agent will, upon notifying the Fund, withhold payment to all
Shareholders of record as of the record date until such sufficient cash is
provided to the Agent or its agent.
11
<PAGE>
Exhibit 1
to
Schedule C
Summary of Services
The services to be performed by the Agent or its agent shall be as follows:
A. DAILY RECORDS
-------------
Maintain daily on disc the following information with respect to each
Shareholder account as received:
. Name and Address (Zip Code)
. Class of Shares
. Balance of Shares held by Agent
. Beneficial owner code: i.e. male, female, joint tenant, etc.
. Dividend code (reinvestment)
. Number of Shares held in certificate form
B. OTHER DAILY ACTIVITY
--------------------
. Answer written inquiries relating to Shareholder accounts (matters relating to
portfolio management, distribution of Shares and other management policy
questions will be referred to the Fund).
. Process additional payments into established Shareholder accounts in
accordance with Written instruction from the Agent.
. Upon receipt of proper instructions and all required documentation, process
requests for repurchase of Shares.
. Identify repurchase requests made with respect to accounts in which Shares
have been purchased within an agreed-upon period of time for determining
whether good funds have been collected with respect to such purchase and
process as agreed by the Agent in accordance with Written Instruction set
forth by the Fund.
. Examine and process all transfers of Shares, ensuring that all transfer
requirements and legal documents have been supplied.
. Issue and mail replacement checks.
C. REPORTS PROVIDED TO THE FUND
----------------------------
Furnish the following reports to the Fund:
12
<PAGE>
. Daily financial totals
. Monthly report of outstanding Shares
. Monthly analysis of accounts by beneficial owner code
. Monthly analysis of accounts by Share range
D. DIVIDEND ACTIVITY
-----------------
. Calculate and process Share dividends and distributions as instructed by the
Fund.
. Compute, prepare and mail all necessary reports to Shareholders or various
authorities as requested by the Fund.
E. MEETINGS OF SHAREHOLDERS
------------------------
. Cause to be mailed proxy and related material for all meetings of
Shareholders. Tabulate returned proxies (proxies must be adaptable to
mechanical equipment of the Agent or its agents) and supply daily reports
when sufficient proxies have been received.
. Prepare and submit to the Fund an Affidavit of Mailing.
. At the time of the meeting, furnish a certified list of Shareholders, hard
copy, microfilm or microfiche and, if requested by the Fund, Inspectors of
Section.
F. PERIODIC ACTIVITY
-----------------
. Cause to be mailed reports, Fund, and any other enclosures requested by the
Fund (material must be adaptable to mechanical equipment of Agent or its
agents).
. Receive all notices issued by the Fund with respect to the Preferred Shares
in accordance with and pursuant to the Articles of Incorporation and the
Indenture and perform such other specific duties as are set forth in the
Articles of Incorporation including in giving of notice of a special meeting
and notice of redemption in the circumstances and otherwise in accordance
with all relevant provisions of the Articles of Incorporation.
13
<PAGE>
Transfer Agent Fee
Schedule A
The Fund shall pay the Transfer Agent an annualized fee of $8.00 per
shareholder account. Such fee shall be prorated on billed by the Transfer Agent
monthly on a prorated basis of 1/12 of the annualized fee.
14
<PAGE>
Schedule B
OUT-OF-POCKET EXPENSES
- ----------------------
The Fund shall reimburse the Agent monthly for the following out-of-pocket
expenses:
. postage and mailing
. forms
. outgoing wire charges
. telephone
. Federal Reserve charges for check clearance
. if applicable, magnetic tape and freight
. retention of records
. microfilm/microfiche
. stationery
. insurance
. if applicable, terminals, transmitting lines and any expenses incurred in
connection with such terminals and lines
. all other miscellaneous expenses reasonably incurred by the Agent
The Fund agrees that postage and mailing expenses will be paid on the day
of or prior to mailing as agreed with the Agent. In addition, the Fund will
promptly reimburse the Agent for any other expenses incurred by the Agent as to
which the Fund and the Agent mutually agree that such expenses are not otherwise
properly borne by the Agent as part of its duties and obligations under the
Agreement.
15
<PAGE>
EXHIBIT 99.2K2
================================================================================
ZENIX INCOME FUND INC.
_____________________
AUCTION AGENCY AGREEMENT
dated as of April __, 2000
Relating to
Auction Rate Cumulative Preferred Stock
of
Zenix Income Fund Inc.
_____________________
BANKERS TRUST COMPANY,
as Auction Agent
================================================================================
<PAGE>
AUCTION AGENCY AGREEMENT dated as of April __, 2000 between
ZENIX INCOME FUND INC., a Maryland corporation (the "Company"), and BANKERS
TRUST COMPANY, a New York corporation (the "Auction Agent").
WHEREAS, the Company proposes to offer, issue and sell shares
of Auction Rate Cumulative Preferred Stock ("Preferred Shares") pursuant to its
Articles of Incorporation, as amended by the Articles Supplementary (as defined
below). The Company desires that the Auction Agent perform certain duties in
connection with the Preferred Shares upon the terms and subject to the
conditions of this Agreement, and hereby appoints the Auction Agent to act in
the capacities set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the Company and the Auction Agent agree as
follows:
1. Definitions and Rules of-Construction.
-------------------------------------
1.1. Terms Defined By Reference to Articles Supplementary.
----------------------------------------------------
Capitalized terms not defined herein shall have the respective
meanings specified in Parts I and II of the Articles Supplementary.
1.2. Terms Defined Herein.
--------------------
As used herein and in the Settlement Procedures, the following
terms shall have the following meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member of, or
participant in, the Securities Depository that will act on behalf of a Person
and is identified as such in such Person's Master Purchaser's Letter.
(b) "Articles Supplementary" shall mean the Articles
Supplementary Establishing and Fixing the Rights Of Auction Rate Cumulative
Preferred Stock filed by the Company in the office of the State Department of
Assessments and Taxation of the State of Maryland, substantially in the form
attached hereto as Exhibit A.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Procedures" shall mean the auction procedures
constituting Part II of the form of Articles Supplementary as of the filing
thereof.
(e) "Authorized Officer" shall mean each Senior Vice
President, Vice President, Assistant Vice President, Trust Officer and Assistant
Manager of the Auction Agent assigned to its Corporate & Institutional Trust
Group and every other officer or employee of the Auction Agent designated as an
"Authorized Officer" for purposes hereof in a communication to the Company.
<PAGE>
(f) "Broker-Dealer Agreement" shall mean each agreement among
the Company, the Auction Agent and a Broker-Dealer substantially in the form
attached hereto as Exhibit B.
(g) "Company Officer" shall mean the Chairman of the Board of
Directors, each Vice Chairman of the Board of Directors (whether or not
designated by a number or word or words added before or after the title "Vice
Chairman of the Board of Directors"), the President, each Vice President
(whether or not designated by a number or word or words added before or after
the title "Vice President"), the Secretary, the Treasurer, each Assistant
Secretary and each Assistant Treasurer of the Company and every other officer or
employee of the Company designated as a "Company Officer" for purposes hereof in
a notice to the Auction Agent.
(h) "Master Purchaser's Letter" shall mean a letter addressed
to the Company, the Auction Agent, a Broker-Dealer and an Agent Member,
substantially in the form attached hereto as Exhibit C.
(i) "Preferred Shares" shall mean the preferred stock, par
value $.01 per share, of the Company designated as its "Auction Rate Cumulative
Preferred Stock".
(j) "Settlement Procedures" shall mean the Settlement
Procedures attached hereto as Exhibit D.
1.3. Rules of Construction.
---------------------
Unless the context or use indicates another or different
meaning or intent, the following rules shall apply to the construction of this
Agreement:
(a) Words importing the singular number shall include the
plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of this Agreement nor
shall they affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto" and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be
to New York City time.
2. The Auction.
-----------
2.1. Purpose; Incorporation by Reference of
Auction Procedures and Settlement Procedures.
--------------------------------------------
(a) The Articles Supplementary provide that the Applicable
Rate for Preferred Shares for each subsequent Dividend Period after the Initial
Dividend Period thereof shall, except
-2-
<PAGE>
under certain conditions, be the rate per annum that a bank or trust company
appointed by the Company advises results from implementation of the Auction
Procedures for Preferred Shares. The Board of Directors has adopted a resolution
appointing Bankers Trust Company as Auction Agent for purposes of the Auction
Procedures for Preferred Shares. The Auction Agent accepts such appointment and
agrees to follow the procedures set forth in this Section 2 and the Auction
Procedures for the purpose of determining the Applicable Rate for Preferred
Shares for each Subsequent Rate Period thereof for which the Applicable Rate is
to be determined by an Auction. Each periodic implementation of such procedures
is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures
and the Settlement Procedures are incorporated herein by reference in their
entirety and shall be deemed to be a part hereof to the same extent as if such
provisions were fully set forth herein.
2.2. Preparation for Each Auction; Maintenance
of Registry of Beneficial Owners.
--------------------------------
(a) Not later than the Date of Original Issue, the company
shall provide the Auction Agent with a list of the Broker-Dealers, and a
manually signed copy of each Broker/Dealer Agreement. Not later than seven days
prior to any Auction Date for Preferred Shares for which any change in such list
of Broker-Dealers is to be effective, the Company will notify the Auction Agent
in writing of such change and, if any such change involves the addition of a
Broker-Dealer to such list, shall cause to be delivered to the Auction Agent for
execution by the Auction Agent a Broker-Dealer Agreement manually signed by such
Broker-Dealer; provided, however, that if the Company proposes to designate any
Special Rate Period of Preferred Shares pursuant to Section [4] of Part I of the
Articles Supplementary, not later than 11:00 A.M. on the Business Day next
preceding the Auction next preceding the first day of such Rate Period, the
Company shall provide the Auction Agent with a list of the Broker-Dealers and a
manually signed copy of each Broker-Dealer Agreement or a new Schedule A to a
Broker-Dealer Agreement (which Schedule A shall replace and supersede any
previous Schedule A to such Broker-Dealer Agreement) with each Broker-Dealer.
The Auction Agent and the Company shall have entered into a Broker-Dealer
Agreement with each Broker-Dealer prior to the participation of any such
Broker-Dealer in any Auction.
(b) In the event that any Auction Date shall be changed after
the Auction Agent shall have given the notice referred to in [clause (vi) of
paragraph (a) of the Settlement Procedures], or, after the notice referred to in
Section 2.5(a) hereof, if applicable, the Auction Agent, by such means as the
Auction Agent deems practicable, shall give notice of such change to the
Broker-Dealers not later than the earlier of 9:15 A.M. on the new Auction Date
or 9:15 A.M. on the old Auction Date.
(c) If the Dividend Payment Date for the Preferred Shares is
adjusted as provided in Section 2(b)(ii) of Part I of the Articles
Supplementary, not later than __ days prior to the first day of the Dividend
Payment Date for the Preferred Shares for which such change is first to be
effective, the Company shall provide the Auction Agent with a form of notice
of-such change to be sent to Existing Holders by Broker-
-3-
<PAGE>
Dealers pursuant to Section 2.4 of the Broker-Dealer Agreements. The Auction
Agent shall provide each Broker-Dealer with such form of notice not later than
____ days after receipt thereof from the Company.
(d)(i) The Auction Agent shall maintain a registry of the
beneficial owners of the shares of Preferred Shares, who shall constitute
Existing Holders of shares for purposes of Auctions and shall indicate thereon
the identity of the respective Broker-Dealer of each Existing Holder, if any, on
whose behalf such Broker-Dealer submitted the most recent order in any Auction
which resulted in such Existing Holder continuing to hold or purchasing shares
of Preferred Shares. The Auction Agent shall keep such registry current and
accurate. The Company shall provide or cause to be provided to the Auction Agent
at or prior to the Date of Original Issue a list of the initial Existing Holders
of the shares of Preferred Shares, the number of shares purchased by each such
Existing Holder and the respective Broker-Dealer of each such Existing Holder or
the affiliate thereof through which each such Existing Holder purchased such
shares. The Auction Agent shall advise the Company in writing whenever the
number of Existing Holders is 500 or more. The Auction Agent may rely upon, as
conclusive evidence of the identities of the Existing Holders of shares of
Preferred Shares (A) such list, (B) the results of Auctions and (C) notices from
any Existing Holder, the Agent Member of any Existing Holder or the
Broker-Dealer of any Existing Holder as described in the first sentence of
Section 2.2 (d) (iii) hereof
(ii) In the event of any partial redemption of Preferred
Shares, the Auction Agent shall, at least two Business Days prior to the next
Auction for Preferred Shares, request the Agent Member of each Existing Holder
of shares of Preferred Shares to disclose to the Auction Agent (upon selection
by such Agent Member of the Existing Holders whose shares are to be redeemed)
the number of shares of Preferred Shares, if any, of such Existing Holder which
are subject to such redemption, provided the Auction Agent has been furnished,
at least three Business Days prior to such Auction, with the name and telephone
number of a person or department at such Agent Member from which it shall
request such information. Upon any refusal of an Agent Member to release such
information, the Auction Agent shall deliver to such Agent Member a facsimile
copy of the Existing Holder's Master Purchaser's Letter, which authorizes and
instructs such Agent Member to release such information to the Auction Agent. In
the absence of receiving any such information with respect to an Existing
Holder, from such Existing Holder's Agent Member or otherwise, the Auction Agent
may continue to treat such Existing Holder as the beneficial owner of the number
of shares of Preferred Shares shown in the Auction Agent's registry.
(iii) The Auction Agent shall be required to register a
transfer of shares of Preferred Shares from an Existing Holder to another Person
only if such transfer is made to a Person that has delivered or on whose behalf
has been delivered a signed Master Purchaser's Letter to the Auction Agent and
if (A) such transfer is pursuant to an Auction or (B) the Auction Agent has been
notified in writing (I) in a notice substantially in the form of Exhibit E to
the Broker-Dealer Agreements by such Existing Holder, the Agent Member of such
Existing Holder or the Broker-Dealer of such Existing Holder of such transfer or
(II) in a notice substantially in the form of Exhibit F to the Broker-Dealer
Agreements by the Broker-Dealer of any Person that purchased or sold such shares
of Preferred Shares in an Auction of the failure of such shares of Preferred
Shares to be transferred as a result of such Auction. The Auction Agent is not
required
-4-
<PAGE>
to accept any such notice for an Auction unless it is received by the Auction
Agent by 3:00 P.M. on the Business Day preceding such Auction.
(iv) The Auction Agent is not required to accept the Master
Purchaser's Letter of any Potential Holder who wishes to submit a Bid for the
first time in an Auction or any Potential Holder or Existing Holder who wishes
to amend its Master Purchaser's Letter intending that such amendment is to take
effect with respect to an Auction unless such letter or amendment is received by
the Auction Agent by 3:00 P.M. on the Business Day preceding such Auction.
(e) The Auction Agent may request the Broker-Dealers, as set
forth in the Broker-Dealer Agreements, to provide the Auction Agent with a list
of their respective customers that such Broker-Dealers believe are Existing
Holders of shares of Preferred Shares. The Auction Agent shall keep confidential
such registry of Existing Holders and shall not disclose the identities of the
Existing Holders of such shares of Preferred Shares to any Person other than the
Company and the Broker-Dealer that provided such information; and such
information shall not be used by the Auction Agent or its officers, employees,
agents or representatives for any purpose other than such purposes as are
described herein. The Auction Agent shall transmit any list of customers that
Broker-Dealers believe are Existing Holders of Preferred Shares and information
related thereto only to its officers, employees, agents or representatives who
need to know such information for the purposes of acting in accordance with this
Agreement and shall use its reasonable efforts to prevent transmission of such
information to others and shall cause its officers, employees, agents and
representatives to abide by the foregoing confidentiality restrictions;
provided, however, that the Auction Agent shall have no responsibility or
liability for the actions of any of its officers, employees, agents or
representatives after they have left the employ of the Auction Agent.
2.3. Information Concerning Rates.
----------------------------
(a) The Rate Multiple on the date of this Agreement for
Preferred Shares is 150%. If there is any change in the credit rating of
Preferred Shares by Moody's (or any substitute or successor rating agency)
referred to in the definition of "Rate Multiple" resulting in any change in the
Rate Multiple for Preferred Shares after the date of this Agreement, the Company
shall notify the Auction Agent in writing of such change in the Rate Multiple
prior to 9:00 A.M. on the Auction Date succeeding such change '. If the Company
designates all or a portion of any dividend on shares of Preferred Shares to
consist of an amount ineligible for the Dividends Received Deduction, it will
indicate, in its notice in the form of Exhibit K hereto to the Auction Agent
pursuant to Section 2.7 hereof, the Rate Multiple to be in effect for the
Auction Date on which the dividend rate for such dividend is to be fixed. In
determining the Maximum Rate for Preferred Shares on any Auction Date as set
forth in Section 2.3(b)(i) hereof, the Auction Agent shall be entitled to rely
on the last Rate Multiple for Preferred Shares of which it has most recently
received notice from the Company (or, in the absence of such notice, the
percentage set forth in the first sentence of this paragraph (a)), except that
if the Company shall have notified the Auction Agent of a Rate Multiple to be in
effect for an Auction Date in accordance with the preceding sentence, the Rate
Multiple in effect for the next succeeding Auction Date shall be, unless the
Company notifies the Auction Agent of a change in the Rate Multiple for such
succeeding Auction Date pursuant to this Section 2. 3 (a) , the Rate Multiple
-5-
<PAGE>
that was in effect on the first preceding Auction Date for Preferred Shares with
respect to which the dividend, the rate for which was fixed on such Auction
Date, did not include any amount ineligible for the Dividends Received
Deduction.
(b)(i) On each Auction Date for Preferred Shares, the Auction
Agent shall determine the Maximum Rate. The Maximum Rate for Preferred Shares on
any Auction Date shall be:
(A) in the case of any Auction Date which is not the Auction
Date immediately prior to the first day of any proposed Special Rate
Period designated by the Company pursuant to Section 4 of Part I of the
Articles Supplementary, the product of (1) the "AA" Financial Composite
Commercial Paper Rate on such Auction Date for the next Rate Period of
Preferred Shares and (2) the Rate Multiple on such Auction Date, unless
the Preferred Shares has or had a Special Rate Period and an Auction at
which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period of Preferred Shares after such Special Rate Period,
in which case the higher of:
(1) the dividend rate on shares of Preferred Shares
for the then-ending Rate Period, and
(2) the product of (x) the higher of (I) the "AA"
Financial Composite Commercial Paper Rate on such Auction Date
for the then-ending Rate Period of Preferred Shares, if such
Rate Period consists of less than four Dividend Periods, or
the Treasury Rate on such Auction Date for such Rate Period,
if such Rate Period consists of four or more Dividend Periods,
and (II) the "AA" Financial Composite Commercial Paper Rate on
such Auction Date for such Special Rate Period of Preferred
Shares, if such Special Rate Period consists of less than four
Dividend Periods, or the Treasury Rate on such Auction Date
for such Special Rate Period, if such Special Rate Period
consists of four or more Dividend Periods and (y) the Rate
Multiple on such Auction Date; or
(B) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the company pursuant to Section 4 of Part I of the
Articles the Supplementary, the product of (1) the highest of (x) "AA"
Financial Composite Commercial Paper Rate on such Auction Date for the
then-ending Rate Period of Preferred Shares, if such Rate Period
consists of less than four Dividend Periods, or the Treasury Rate on
such Auction Date for such Rate Period, if such Rate Period consists of
four or more Dividend Periods, (y) the "AA" Financial Composite
commercial Paper Rate on such Auction Date for the Special Rate Period
for which the Auction is being held if such Special Rate Period
consists of less than four Dividend periods or the Treasury Rate on
such Auction Date for the Special Rate Period for which the Auction is
being held if such Special Rate Period consists of four or more
Dividend Periods, and (z) the "AA" Financial Composite commercial Rate
on such Auction Date for Minimum Rate Periods and (2) the Rate Multiple
on such Auction Date.
-6-
<PAGE>
Not later than 9:30 A.M. on each Auction Date, the Auction Agent shall notify
the Company and the Broker-Dealers of the Maximum Rate so determined and the
"AA" Financial Composite Commercial Paper Rate (s) and Treasury Rate (s) , as
the case may be, used to make such determination.
(ii) From and after a Failure to Deposit by the company during
any Rate Period of Preferred Shares, until such failure is cured and a late
charge, if applicable, is paid, in accordance with subparagraph (c) (i) of
Section 2 of Part I of the Articles Supplementary, on the first day of each Rate
Period of Preferred Shares the Auction Agent shall determine the Treasury Rate
for such Rate Period if such Rate Period consists of four or more Dividend
Periods and the "AA" Financial Composite commercial Paper Rate for such Rate
Period if such Rate Period consists of less than four Dividend Periods. Not
later than 9:30 A.M. on each such first day, the Auction Agent shall notify the
Company of the applicable "AA" Financial Composite Commercial Paper Rate and
Treasury Rate.
(iii) If any "AA" Financial Composite Commercial Paper Rate or
Treasury Rate, as the case may be, is not quoted on an interest basis, the
Auction Agent shall convert the quoted rate to the interest equivalent thereof
as set forth in the definition of such rate in the Articles Supplementary if the
rate obtained by the Auction Agent is quoted on a discount basis, or if such
rate is quoted on a basis other than an interest or discount basis the Auction
Agent shall convert the quoted rate to an interest rate after consultation with
the Company as to the method of such conversion.
(iv) If any "AA" Financial Composite Commercial Paper Rate is
to be based on rates supplied by Commercial Paper Dealers and one or more of the
Commercial Paper Dealers shall not provide a quotation for the determination of
such "AA" Financial Composite Commercial Paper Rate, the Auction Agent shall
immediately notify the Company so that the Company can determine whether to
select a Substitute Commercial Paper Dealer or Substitute Commercial Paper
Dealers to provide the quotation or quotations not being supplied by any
Commercial Paper Dealer or Commercial Paper Dealers. The Company shall promptly
advise the Auction Agent of any such selection.
(v) If any Treasury Rate is to be based on rates supplied by
U.S. Government Securities Dealers and one or more U.S. Government Securities
Dealers shall not provide a quotation for the determination of such Treasury
Rate, the Auction Agent shall immediately notify the Company so that the Company
can determine whether to select a Substitute U.S. Government securities Dealer
or Substitute U.S. Government Securities Dealers to provide the quotation or
quotations not being supplied by any U.S. Government Securities Dealer or U.S.
Government Securities Dealers. The Company shall promptly advise the Auction
Agent of any such selection.
2.4. Auction Schedule.
----------------
The Auction Agent shall conduct Auctions in accordance with
the schedule set forth below. Such schedule may be changed by the Auction Agent
with the consent of the Company, which consent shall not be unreasonably
withheld or delayed. The Auction Agent shall give written notice of any such
change to each Broker-Dealer. Such notice shall be given prior to
-7-
<PAGE>
the close of business on the Business Day next preceding the first Auction Date
on which any such change shall be effective.
<TABLE>
<CAPTION>
Time Event
<S> <C>
By 9:30 A.M. Auction Agent advises the Company and Broker-
Dealers of the applicable Maximum Rate and the "AA"
Financial Composite Commercial Paper Rate(s) and
Treasury Rate(s), as the case may be, used in
determining such Maximum Rate as set forth in
Section 2.3(b)(i) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated to it by
Broker-Dealers as provided in Section 3(a) of the Auction
Procedures. Submission Deadline is 1:00 P.M.
Not earlier than 1:00 P.M. Auction Agent makes
determinations pursuant to
Section 4(a) of the Auction
Procedures.
By approximately 3:00 P.M. Auction Agent advises Company of results of Auction as
provided in Section 4(b) of the Auction Procedures.
Submitted Bids and Submitted Sell orders are accepted and
rejected and shares of Preferred Shares allocated as
provided in Section 5 of the Auction Procedures. Auction
Agent gives notice of Auction results as set forth in
paragraph(a) of the Settlement Procedures.
</TABLE>
The Auction Agent shall follow the notification procedures set forth in
paragraph (a) of the Settlement Procedures.
2.5. Designation of Special Rate Period.
----------------------------------
(a) The Articles Supplementary provide that, subject to the
Company's option to designate a Special Rate Period as referred to in paragraph
(b) of this Section 2.5, each Rate Period of Preferred Shares will be a Minimum
Rate Period (a duration of 49 days, subject to certain exceptions). Not less
than 10 nor more than 20 days prior to the last day of any such Rate Period that
is not a Minimum Rate Period, (i) the company shall deliver to the Auction Agent
a notice of the Auction Date of the next succeeding Auction for Preferred Shares
in the form of Exhibit E hereto and (ii) the Auction Agent shall deliver such
notice by first-class mail, postage prepaid, to each Existing Holder of shares
of Preferred Shares at the address specified in such Existing Holder's Master
Purchaser's Letter and to the Broker-Dealers for Preferred Shares as promptly as
practicable after its receipt of such notice from the Company.
-8-
<PAGE>
(b) Pursuant to the Articles Supplementary, the Company may,
at its option, designate a Special Rate Period for Preferred Shares in the
manner described in Section 4 of Part I of the Articles Supplementary.
(i) If the Board of Directors proposes to designate any
succeeding Subsequent Rate Period of Preferred Shares as a Special Rate
Period, (A) the-Company shall deliver to the Auction Agent a notice of
such proposed Special Rate Period in the form of Exhibit F hereto not
less than 20 nor more than 30 days prior to the first day of such
proposed Special Rate Period and (B) the Auction Agent on behalf of the
Company shall deliver such notice by first-class mail, postage prepaid,
to each Existing Holder of shares of Preferred Shares at the address
specified in such Existing Holder's Master Purchaser's Letter and to
the Broker-Dealers for Preferred Shares as promptly as practicable
after its receipt of such notice from the Company.
(ii) If the Board of Directors determines to designate such
succeeding Subsequent Rate Period as a Special Rate Period, (A) the
Company shall deliver to the Auction Agent a notice of such
determination in the form of Exhibit G hereto not later than 11:00 A.M.
on the second Business Day next preceding the first day of such
proposed Special Rate Period and (B) the Auction Agent shall deliver
such notice to the Broker-Dealers for Preferred Shares not later than
3:00 P.M. on such second Business Day.
(iii) If the Company shall deliver to the Auction Agent a
notice stating that the Company has determined not to exercise its
option to designate such succeeding Subsequent Rate Period as a Special
Rate Period with respect to which it has delivered a notice in the form
of Exhibit F hereto not later than 11:00 A.M. on the second Business
Day next preceding the first day of such proposed Special Rate Period,
or shall fail to timely deliver either such notice or a notice in the
form of Exhibit G hereto, the Auction Agent shall deliver a notice in
the form of Exhibit H hereto to the Broker-Dealers for Preferred Shares
not later than 3:00 P.M. on such second Business Day.
Such change in the length of any Rate Period shall not occur if, among other
things, (a) on the Auction Date next preceding the first day of such Rate Period
Sufficient Clearing Bids shall not exist or (b) a Failure to Deposit shall have
occurred prior to such change with respect to shares of Preferred Shares.
2.6. Failure to Deposit.
------------------
(a) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Preferred Shares during any Rate Period thereof (other than
any Special Rate Period consisting of four or more Dividend Periods or
any Rate Period succeeding any Special Rate Period consisting of four
or more Dividend Periods during which a Failure to Deposit occurred
that has not been cured); and
-9-
<PAGE>
(ii) prior to 12:00 Noon on the third Business Day next
succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall have been cured in accordance with the next
succeeding sentence and the Company shall have paid to the Auction
Agent a late charge equal to the sum of (A) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the full
amount of dividends with respect to any Dividend Period on the shares
of Preferred Shares, an amount computed by multiplying (1) 225% of the
"AA" Financial Composite Commercial Paper Rate for the Rate Period
during which such Failure to Deposit occurs on the Dividend Payment
Date for such Dividend Period by (2) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit has not
been cured in accordance with the next sentence (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit
is cured) and the denominator of which shall be 360, and applying the
rate obtained against the aggregate liquidation preference of the
outstanding shares of Preferred Shares and (B) if such Failure to
Deposit consisted of the failure timely t ' o pay to the Auction Agent
the cash Redemption Price of the shares of Preferred Shares, if any,
for which Notice of Redemption has been given by the Company pursuant
to paragraph (b) of Section 3 of Part I of the Articles Supplementary,
an amount computed by multiplying (x) 225% of the "AA" Financial
Composite Commercial Paper Rate for the Rate Period during which such
Failure to Deposit occurs on the redemption date by (y) a fraction, the
numerator of which shall be the number of days for which such Failure
to Deposit is not cured in accordance with the next succeeding sentence
(including the day such Failure to Deposit occurs and excluding the day
such Failure to Deposit is cured) and the denominator of which shall be
360, and applying the rate obtained against the aggregate liquidation
preference of the outstanding shares of Preferred Shares to be
redeemed,
then the Auction Agent shall deliver a notice in the form of Exhibit I hereto by
first-class mail, postage prepaid, to the Broker-Dealers for Preferred Shares
not later than one Business Day after its receipt of the payment from the
Company curing such Failure to Deposit and such late charge. A Failure to
Deposit with respect to Preferred Shares shall have been cured (if such Failure
to Deposit is not solely due to the willful failure of the Company to make the
required payment to the Auction Agent) with respect to any Rate Period thereof
if, not later than 12:00 Noon on the fourth Business Day preceding any Auction
Date therefor the Company shall have paid to the Auction Agent (A) all
accumulated and unpaid dividends on the shares of Preferred Shares and (B)
without duplication, the Redemption Price for the shares of Preferred Shares, if
any, for which Notice of Redemption has been given by the Company pursuant to
paragraph (b) of Section 3 of Part I of the Articles Supplementary.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to
shares of Preferred Shares during a Rate Period thereof (other than any
Special Rate Period consisting of four or more Dividend Periods or any
Rate Period succeeding any Special Rate Period consisting of four or
more Dividend Periods during which a Failure to Deposit occurred that
has not been cured), and, prior to 12:00 Noon on the third Business Day
next succeeding the date on which such Failure to Deposit occurred,
such Failure to
-10-
<PAGE>
Deposit shall not have been cured within the meaning of the last
sentence of Section 2.6(a) hereof and the Company shall not have paid
to the Auction Agent the late charge described in such Section 2.6(a),
but such Failure to Deposit shall subsequently be so cured; or
(ii) any Failure to Deposit shall have occurred with respect
to shares of Preferred Shares during a Special Rate Period consisting
of four or more Dividend Periods, or during any Rate Period succeeding
any Special Rate Period consisting of four or more Dividend Periods
during which a Failure to Deposit occurred that has not been cured, and
such Failure to Deposit shall subsequently have been cured within the
meaning of the last sentence of Section 2.6(a) hereof,
then the Auction Agent shall deliver a notice in the form of Exhibit J hereto to
the Broker-Dealers for Preferred Shares not later than one Business Day after
the receipt of the payment from the company curing such Failure to Deposit.
2.7. Notice of Income Ineligible for
the Dividends Received Deduction.
--------------------------------
The Company may, at its option, designate all or a portion of any
dividend on shares of Preferred Shares to consist of an amount ineligible for
the Dividends Received Deduction by delivering to the Auction Agent a notice in
the form of Exhibit K hereto of such designation not later than six (6) Business
Days prior to the Auction Date on which the dividend rate for such dividend is
to be fixed. The Auction Agent will deliver such notice to the Broker-Dealers
not later than the Business Day following its receipt of such notice from the
Company.
2.8. Broker-Dealers.
--------------
(a) Not later than 12:00 Noon on each Dividend Payment Date
for Preferred Shares, the Company shall pay to the Auction Agent an amount in
cash equal to the aggregate fees payable to the Broker-Dealers for Preferred
Shares pursuant to Section 2.8 of the Broker-Dealer Agreements for Preferred
Shares. The Auction Agent shall advise the Company of the amount referred to in
the preceding sentence in respect of such Auction not later than 4:00 PM on the
Business Day preceding such Dividend Payment Date. The Auction Agent shall apply
such moneys as set forth in Section 2.8 of each such Broker-Dealer Agreement. To
the extent that any such moneys are not payable to a Broker-Dealer because
Sufficient Clearing Bids did not exist in the relevant Auction and the Preferred
Shares therefore continue to be held despite being subject to a Submitted Sell
Order, the Auction Agent shall repay such money to the Company.
(b) The Auction Agent shall terminate any Broker-Dealer
Agreement as set forth therein if so directed by the Company, provided that at
least one Broker-Dealer Agreement would be in effect after such termination.
(c) The Auction Agent shall from time to time enter into such
Broker-Dealer Agreements with one or more Broker-Dealers as the Company shall
request, and shall enter into such schedules to any such Broker-Dealer
Agreements as the company shall request.
-11-
<PAGE>
(d) The Auction Agent shall maintain and update from time to
time a list of Broker-Dealers.
2.9. Ownership of Shares of Preferred Shares.
---------------------------------------
The Company shall notify the Auction Agent if the Company or any
affiliate (as such term is defined in the Investment Company Act of 1940, as
amended) of the Company acquires any shares of Preferred Shares. Neither the
Company nor any affiliate of the Company shall submit any order in any Auction
for Preferred Shares. The Auction Agent shall have no duty or liability with
respect to enforcement of this Section 2.9.
2.10. Access to and Maintenance of Auction Records.
--------------------------------------------
The Auction Agent shall, upon the written request of the Company,
afford to the Company and its agents, independent accountants and legal counsel
access at reasonable times during normal business hours to all books, records,
documents and other information concerning the Auction Agent's services
hereunder. The Auction Agent shall maintain such records for a period of six
years (for two years in an easily accessible place), at which time the Auction
Agent shall return to the Company such records, no more frequently than once
each calendar quarter, and such records shall, in reasonable detail, accurately
and fairly reflect the actions taken by the Auction Agent hereunder.
3. The Auction Agent as Preferred Shares Paying Agent.
--------------------------------------------------
3.1. Company to Provide for Dividends and Redemptions.
------------------------------------------------
(a) Not later than 12:00 Noon on the Business Day immediately
preceding each Dividend Payment Date with respect to which dividends on the
Preferred Shares have been declared (or each payment date with respect to the
declaration of Additional Distributions (an "Additional Distribution Payment
Date")), the Company shall deposit or cause to be deposited with the Auction
Agent sufficient funds (available on such Dividend Payment Date or Additional
Distribution Payment Date in New York City) for the payment of such dividends
and any Additional Distributions. The Company hereby irrevocably instructs the
Auction Agent to apply such funds deposited with the Auction Agent to the
payment of such dividends and any Additional Distributions on such Dividend
Payment Date or Additional Distribution Payment Date. The Company may direct, in
writing, the Auction Agent to invest any available funds in Short-Term Money
Market Instruments; provided that the proceeds of any such investments will be
available in New York City at the opening of business on such Dividend Payment
Date or Additional Distribution Payment Date.
(b) If the Company shall give a Notice of Redemption, then,
not later than 12:00 Noon of the Business Day immediately preceding the date
fixed for redemption, the Company shall deposit with the Auction Agent
sufficient funds (available on such redemption date in New York City) to redeem
the Preferred Shares called for redemption in such Notice of Redemption and
hereby irrevocably instructs the Auction Agent to apply such funds and, if
applicable, the income and proceeds received therefrom, to the payment of the
redemption price
-12-
<PAGE>
for such Preferred Shares upon surrender of the certificate or certificates
therefor. The Company may direct, in writing, the Auction Agent to invest any
available funds in Short-Term Money Market Instruments; provided that the
proceeds of any such investments will be available in New York City at the
opening of business on the redemption date.
(c) The Auction Agent shall not be liable or responsible for
any loss, in whole or in part, incurred or resulting from any investments made
pursuant to paragraph (a) or (b) of this Section 3.1, such investments being
solely for the account of and at the risk of the Company. The Auction Agent
shall also not be liable to the extent that investments made by the Auction
Agent at the direction of the Company pursuant to clause (a) or (b) of this
Section 3.1 do not constitute Short-Term Money Market Instruments.
(d) If pursuant to paragraph (a) or (b) of this Section 3.1
the Company directs the Auction Agent to invest in Short-Term Money Market
Instruments and the Auction Agent receives income on such investments, then the
Auction Agent shall (to the extent that such income is not required to pay
dividends, Additional Distributions or the redemption price of shares to be
redeemed, as the case may be), upon the request of the Company, transmit such
income to the Company.
3.2. Disbursing Dividend and Redemption Price.
----------------------------------------
Subject to receipt of the requisite funds, the Auction Agent shall pay
to the Holders of the Preferred Shares M on each Dividend Payment Date for the
Preferred Shares, dividends and, if applicable, on each Additional Distribution
Payment Date, Additional Distributions (to the extent that the Company has
deposited with the Auction Agent, pursuant to Section 3.1(a) hereof, funds for
the payment thereof), on such Preferred Shares, and (ii) on any date fixed for
redemption of Preferred Shares, the redemption price for any Preferred Shares
called for redemption upon presentation and surrender of the certificate or
certificates evidencing Preferred Shares held by such Holders and called for
redemption. The amount of dividends for any Rate Period or portion thereof to be
paid by the Auction Agent to the Holders will be determined by the Company as
set forth in Section 2(c) of Part I of the Articles Supplementary. The amount of
Additional Distributions to be paid by the Auction Agent to the Holders will be
determined by the Company as set forth in Section 11(c) of Part I of the
Articles Supplementary. The redemption price to be paid by the Auction Agent to
the Holders will be determined by the Company as set forth in Section 3(a) of
Part I of the Articles Supplementary. The company shall deliver to the Auction
Agent any Notice of Redemption required by Section 3(b) of Part I of the
Articles Supplementary when mailed by the Company to the Holders of the shares
to be redeemed. Such notice shall contain the information required by such
Section 3(b) to be stated in the Notice of Redemption. The Auction Agent shall
have no duty or responsibility in connection with any Notice of Redemption and
shall have no duty or responsibility to determine the redemption price and may
rely on the amount thereof set forth in such notice.
3.3. Certificates of Eligible Asset Coverage and Dividend Coverage.
-------------------------------------------------------------
(a)(i) The Company shall, no later than the close of business
on the third Business Day immediately following each Eligible Asset Evaluation
Date, deliver or cause to be
-13-
<PAGE>
delivered to the Auction Agent a fully completed Certificate of Eligible Asset
Coverage (a "Certificate of Eligible Asset coverage"), dated as of such Eligible
Asset Evaluation Date.
(ii) The Company shall, no later than the close of business on
the third Business Day immediately following each Dividend Coverage Evaluation
Date, deliver or cause to be delivered to the Auction Agent a fully completed
Certificate of Dividend Coverage (a "Certificate of Dividend Coverage"), dated
as of such Dividend Coverage Evaluation Date.
(b) If the Certificate of Eligible Asset Coverage indicates
that the Eligible Asset Coverage was not met as of any Eligible Asset Evaluation
Date, or if the Certificate of Eligible Asset Coverage is not delivered when
required, then the Company, no later than the close of business on the third
Business Day following the Eligible Asset Cure Date related to such Eligible
Asset Cure Date, shall deliver to the Auction Agent a Certificate of Eligible
Asset Coverage, dated as of such Eligible Asset Cure Date, indicating that the
Eligible Asset Coverage was met as of such Eligible Asset Cure Date.
(c) If the Certificate of Dividend Coverage indicates that the
Dividend Coverage was not met as of any Dividend Coverage Evaluation Date, or if
the Certificate of Dividend Coverage is not delivered when required, then the
Company, no later than the close of business on the third Business Day following
the Dividend Coverage Cure Date with respect to such Dividend Coverage
Evaluation Date, shall deliver to the Auction Agent a Certificate of Dividend
Coverage, dated as of such Dividend Coverage Cure Date, indicating that the
Dividend Coverage is met as of such Dividend Coverage Cure Date.
3.4. Accountants' Certificates.
-------------------------
(a) With respect to the Certificate of Eligible Asset Coverage
relating to the Eligible Asset Evaluation Date on the Date of Original Issue
and, thereafter, with respect to the Certificate of Eligible Asset Coverage
relating to every seventh Eligible Asset Evaluation Date (or, if the Eligible
Asset Coverage requirement is not met as of any such Eligible Asset Evaluation
Date, the Eligible Asset Cure Date with respect to any such Eligible Asset
Evaluation Date), the Company shall cause the Independent Accountants to deliver
an Accountants' Certificate, containing the information set forth in Section
7(b) of Part I of the Articles Supplementary, to the Auction Agent no later than
the close of business on the seventh Business Day following each such Eligible
Asset Evaluation Date (such seventh Business Day being referred to herein as the
"Confirmation Date"), and shall cause each Accountants' Certificate relating to
any Eligible Asset Cure Date to be delivered to the Auction Agent no later than
the close of business on the third Business Day following such Eligible Asset
Cure Date.
(b) With respect to the Certificate of Dividend Coverage
relating to any Dividend Coverage Cure Date, the Company shall cause the
Independent Accountants to deliver an Accountants' Certificate, containing the
information set forth in Section 7(b) of Part I of the Articles Supplementary,
to the Auction Agent no later than the close of business on the third Business
Day following such Dividend Coverage Cure Date.
-14-
<PAGE>
3.5. Notice of Special Meeting of Holders of the Preferred Shares
------------------------------------------------------------
of the Company.
---------------
(a) If an event described in Section 5(c) of part I of the
Articles Supplementary occurs resulting in the commencement of a Voting Period,
then the Auction Agent shall, upon receipt from the Company of a notice (the P
"Notice") of a special meeting of the Holders of the MM p who "Special
Meeting"), mail the Notice to all Holders of Preferred Shares who were Holders
of record at the close of business on the fifth Business Day preceding the date
of mailing of the Notice to such Holders (the "Record Date"). The Auction Agent
shall insert the Record Date, the date of the Special Meeting and the time of
day of such meeting, as specified by the Company, in the Notice.
(b) If at any time after the Auction Agent shall have mailed
the Notice but before the Special Meeting shall have been held, all accumulated
and unpaid dividends (including Additional Distributions, if any) on all then
outstanding Preferred Shares including the accumulated and unpaid dividends for
the current Rate Period for the Preferred Shares shall have been paid or
declared and a sum sufficient for the payment of such dividends deposited with
the Auction Agent, the Auction Agent shall, upon receipt from the Company of a
notice of cancellation of such Special Meeting, mail such notice as soon as
practicable to all Holders of Preferred Shares who were Holders of record at the
close of business on the Record Date.
(c) The Company shall provide a temporary chairman for any
Special Meeting. The Auction Agent shall have no obligations in connection with
such meeting, except with respect to the mailing of the Notice pursuant to this
Agreement.
4. The Auction Agent as Transfer Agent and Registrar.
-------------------------------------------------
4.1. Original Issue of Stock Certificates.
------------------------------------
Upon the Date of Original Issue of Preferred Shares, one certificate
representing all of the shares of Preferred Shares issued on such date shall be
issued by the Company and, at the request of the Company, registered in the name
of Cede & Co. and countersigned by the Auction Agent.
4.2. Registration of Transfer of Shares.
----------------------------------
Shares of Preferred Shares shall be registered solely in the name of the
Securities Depository or its nominee. If the Securities Depository shall give
notice of its intention to resign as such and if the Company shall not have
selected a substitute Securities Depository, then upon such resignation, the
Preferred Shares shall be registered for transfer or exchange, and a new
certificate or certificates shall be issued in the name or names of the
designated transferee or transferees upon surrender of the old certificate or
certificates in form deemed by the Auction Agent properly endorsed for transfer
with all necessary endorsers' signatures guaranteed, in such manner and form as
the Auction Agent may require, by a guarantor reasonably believed by the Auction
Agent to be responsible, accompanied by such assurances as the Auction Agent
shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement and satisfactory evidence of
compliance with all applicable laws relating to the collection of taxes or funds
necessary for the payment of such taxes.
-15-
<PAGE>
4.3. Removal of Legend on Restricted Shares.
--------------------------------------
All requests for removal of legends on certificates representing shares
of Preferred Shares indicating restrictions on transfer shall be accompanied by
an opinion of counsel stating that such legends may be removed and such shares
freely transferred, such opinion to be delivered under cover of a letter from a
Company Officer authorizing the Auction Agent to remove the legend on the basis
of said opinion.
4.4. Lost Stock Certificates.
-----------------------
The Auction Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed upon the
fulfillment of such requirements as shall be deemed appropriate by the Company
and the Auction Agent, subject at all times to provisions of 'law, the By-Laws
of the company governing such matters and resolutions adopted by the Company
with respect to lost securities. The Auction Agent may issue new certificates in
exchange for and upon the cancellation of mutilated certificates. Any request by
the Company to the Auction Agent to issue a replacement or new certificate
pursuant to this Section 4.4 shall be deemed to be a representation and warranty
by the Company to the Auction Agent that such issuance will comply with such
provisions of law and the By-Laws and resolutions of the Company.
4.5. Disposition of Canceled Certificates; Record-Retention.
------------------------------------------------------
The Auction Agent shall retain all stock certificates which have been
canceled in transfer or exchange and all accompanying documentation in
accordance with applicable rules and regulations of the Securities and Exchange
commission for two calendar years. Upon the expiration of this two-year period,
the Auction Agent shall deliver to the Company the canceled certificates and
accompanying documentation. The Company shall also undertake to furnish to the
Securities and Exchange Commission and to the Board of Governors of the Federal
Reserve System, upon demand, at either the principal office or at any regional
office, complete, correct and current hard copies of any and all such records.
4.6. Stock Books.
-----------
For so long as the Auction Agent is acting as the transfer agent for
Preferred Shares pursuant to this Agreement, it shall maintain a stock book
containing a list of the Holders of the shares of Preferred Shares. In case of
any request or demand for the inspection of the stock books of the Company or
any other books in the possession of the Auction Agent, the Auction Agent will
notify the Company and secure instructions as to permitting or refusing such
inspection. The Auction Agent reserves the right, however, to exhibit the stock
books or other books to any Person in case it is advised by its counsel that its
failure to do so would be unlawful.
4.7. List of Holders.
---------------
If the Company is obligated to pay Additional Distributions in respect
of any dividends paid to the Holders, the Auction Agent shall, within ten (10)
days of its receipt from the Company of a notice of its intent to pay Additional
Distributions in substantially the form set forth in Exhibit
-16-
<PAGE>
L hereto with appropriate insertions and signed by the President and the
principal financial or accounting officer of the Company, furnish the Company
with a list of the Agent Members, disclosure of which list has been requested
from the Securities Depository by the Company as of the record date for the
corresponding Dividend Payment Date for each Rate Period specified in such
notice.
4.8. Return of Funds.
---------------
Any funds deposited with the Auction Agent hereunder by the Company for
any reason (except for the redemption of shares of Preferred Shares) that remain
unpaid after twelve (12) months shall be repaid to the Company upon the written
request of the Company, together with interest, if any, received thereon. Any
funds deposited with the Auction Agent hereunder by the Company for the
redemption of shares of Preferred Shares that remain unpaid after twenty-four
(24) months shall be repaid to the Company upon the written request of the
Company, together with interest, if any, received thereon.
5. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to the Auction Agent that:
(a) the company is a duly incorporated and validly existing
corporation in good standing under the laws of the State of Maryland and has
full corporate power to execute and deliver this Agreement and to authorize,
create and issue the shares of Preferred Shares and the shares of Preferred
Shares when issued, will be duly authorized, validly issued, fully paid and
nonassessable;
(b) this Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes the legal, valid, binding
and enforceable obligation of the Company, subject, as to enforceability, to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles;
(c) the form of the certificate evidencing the shares of
Preferred Shares complies with all applicable laws of the State of Maryland;
(d) when issued, the shares of Preferred Shares will have been
duly registered under the Securities Act of 1933, as amended, and no further
action by or before any governmental body or authority of the United States or
of any state thereof is required in connection with the execution and delivery
of this Agreement or will have been required in connection with the issuance of
the shares of Preferred Shares;
(e) the execution and delivery of this Agreement, the
performance by the Company of its obligations hereunder and the issuance and
delivery of the shares of Preferred Shares do not and will not conflict with,
violate or result in a breach of, the terms, conditions or provisions of, or
constitute a default under, the Articles of Incorporation (as amended by one or
more Articles Supplementary) or the By-Laws of the Company, any law or
regulation, any order
-17-
<PAGE>
or decree of any court or public authority having jurisdiction, or any mortgage,
indenture, contract, agreement or undertaking to which the Company is a party or
by which it is bound; and
(f) no taxes are payable upon or in respect of the execution
of this Agreement or the issuance of the shares of Preferred Shares.
6. The Auction Agent.
-----------------
6.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the
Company hereunder and owes no fiduciary duties to any other Person by reason of
this Agreement.
(b) The Auction Agent undertakes to perform such duties and
only such duties as are specifically set forth in this Agreement, and no implied
covenants or obligations shall to read into this Agreement against the Auction
Agent.
(c) The Auction Agent shall have no duty or responsibility to
verify or determine the accuracy of any document delivered to it in accordance
with the terms hereof. The Auction Agent shall have no duty or responsibility to
enforce the obligations of the Company to provide the Auction Agent with any
notice or document.
(d) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered, or omitted or
for any error of judgment made by it in the performance of its duties under this
Agreement. The Auction Agent shall not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in ascertaining
the pertinent facts.
6.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely and shall be protected in
acting or refraining from acting upon any communication authorized hereby and
upon any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document believed
in good faith by it to be genuine. The Auction Agent shall not be liable for
acting upon any telephone communication authorized hereby which the Auction
Agent believes in good faith to have been given by the Company or by a
Broker-Dealer. The Auction Agent may record telephone communications with the
Company or with the Broker-Dealers or both.
(b) The Auction Agent may consult with counsel of its choice
and the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend
or risk its own funds or otherwise incur or become exposed to financial
liability in the performance of its duties hereunder.
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<PAGE>
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys.
6.3. Auction Agent's Disclaimer.
--------------------------
The Auction Agent makes no representation as to the validity or
adequacy of this Agreement, the Broker-Dealer Agreements or the shares of
Preferred Shares.
6.4. Compensation, Expenses and Indemnification.
------------------------------------------
(a) The Company shall pay the Auction Agent from time to time
reasonable compensation for all services rendered by it under this Agreement and
the Broker-Dealer Agreements.
(b) The Company shall reimburse the Auction Agent upon its
request for all reasonable out-of-pocket expenses, disbursements and advances
incurred or made by the Auction Agent in accordance with any provision of this
Agreement and the Broker-Dealer Agreements (including the reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any expense or disbursement attributable to its negligence or bad faith.
(c) The Company shall indemnify the Auction Agent for and hold
it harmless against any loss, liability or expense incurred without negligence
or bad faith on its part, arising out of or in connection with its agency under
this Agreement and the Broker-Dealer Agreements, including the costs and
expenses of defending itself against any such claim or liability in connection
with its exercise or performance of any of its duties hereunder and thereunder
for which it is entitled to indemnification hereunder or thereunder.
7. Miscellaneous.
-------------
7.1. Term of Agreement.
-----------------
(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Company may terminate this
Agreement at any time by so notifying the Auction Agent; provided that the
Company has entered into an agreement in substantially the form of this
Agreement with a successor Auction Agent or no shares of Preferred Shares remain
outstanding. The Auction Agent may terminate this Agreement upon written notice
to the Company on the date specified in such notice, which termination may be no
earlier than the Business Day after the second Dividend Payment Date for the
Preferred Shares following delivery of such notice.
(b) Except as otherwise provided in this paragraph (b), t ' he
respective rights and duties of the Company and the Auction Agent under this
Agreement with respect to Preferred Shares shall cease upon termination of this
Agreement. The Company's representations, warranties, covenants and obligations
to the Auction Agent under Sections 5 and 6.4 hereof shall survive the
termination of this Agreement. Upon termination of this Agreement, the
Broker-Dealer Agreements shall automatically terminate and the duties of the
Auction Agent under each of the Broker-Dealer Agreements shall cease and at the
Company's request, the Auction Agent
-19-
<PAGE>
shall promptly deliver to the company copies of all books and records maintained
by it with respect to Preferred Shares in connection with its duties hereunder.
7.2. Communications.
--------------
Except for (i) communications authorized to be by telephone pursuant to
this Agreement or the Auction procedures and (ii) communications in connection
with Auctions (other than those expressly required to be in writing), all
notices, requests and other communications to any party hereunder shall be in
writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its address or telecopy number set forth below:
If to the Company, Zenix Income Fund Inc.
addressed: c/o SSB Citi Fund Management Inc.
388 Greenwich Street
New York, New York
Attention:
Telecopier No.:
Telephone No.:
If to the Auction Bankers Trust Company,
Agent, addressed: as Auction Agent
[Address
Attention:,
Telecopier No.:
Telephone No.:
or such other address or telecopy number as such party may hereafter specify for
such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
communications shall be given on behalf of the Company by a Company Officer and
on behalf of the Auction Agent by an Authorized Officer.
7.3. Entire Agreement.
----------------
This Agreement contains the entire agreement between the
parties relating to the subject matter hereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or implied, between the parties relating to the subject matter hereof
except for agreements relating to the compensation of the Auction Agent.
7.4. Benefits.
--------
Nothing herein, express or implied, shall give to any Person,
other than the Company, the Auction Agent and their respective successors and
assigns, any benefit of any legal or equitable right, remedy or claim hereunder.
-20-
<PAGE>
7.5. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part, except by
a written instrument signed by the parties hereto.
(b) Failure of either party hereto to exercise any right or
remedy hereunder in the event of a breach-hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.
7.6. Successor and Assigns.
---------------------
This Agreement shall be binding upon, inure to the benefit of,
and be enforceable by, the respective successors and assigns of each of the
Company and the Auction Agent.
7.7. Severability.
------------
If any clause, provision or section hereof shall be ruled
invalid or unenforceable by any court of competent jurisdiction, the invalidity
or unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8. Execution in Counterparts.
-------------------------
This Agreement may be executed in several counterparts, each
of which shall be an original and all of which shall constitute but one and the
same instrument.
7.9. Governing-Law.
-------------
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed in New York without giving effect to the choice of law
provisions thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the date first above written.
ZENIX INCOME FUND
INC.
By:___________________________
Title: President
ZENIX INCOME FUND
INC.
-21-
<PAGE>
By:____________________________
Title:
-22-
<PAGE>
EXHIBIT D
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings
specified in the forepart of this Prospectus or the Glossary, as the case may
be.
(a) On each Auction Date, the Auction Agent shall notify by
telephone the Broker-Dealers that participated in the Auction held on such
Auction Date and submitted an Order on behalf of an Existing Holder or Potential
Holder of:
(i) the Applicable Rate fixed for the next succeeding Rate
Period;
(ii) whether Sufficient Clearing Bids existed for the
determination of the Applicable Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell order on
behalf of an Existing Holder, whether such Bid or Sell Order was
accepted or rejected, in whole or in part, and the number of shares, if
any, of Preferred Shares then outstanding to be sold by such Existing
Holder;
(iv) if such Broker-Dealer submitted a Bid on behalf of a
Potential Holder, whether such Bid was accepted or rejected, in whole
or in part, and the number of shares, if any, of Preferred Shares to be
purchased by such Potential Holder;
(v) if the aggregate number of shares of Preferred Shares to
be sold by all Existing Holders on whose behalf such Broker-Dealer
submitted Bids or Sell orders exceeds the aggregate number of shares of
Preferred Shares to be purchased by all Potential Holders on whose
behalf such Broker-Dealer submitted a Bid, the name or names of one or
more other Broker-Dealers (and the Agent member, if any, of each such
other Broker-Dealer) and the number of shares of Preferred Shares to be
(x) purchased from one or more Existing Holders on whose behalf such
other Broker-Dealers submitted Bids or Sell Orders or (y) sold to one
or more Potential Holders on whose behalf such other Broker-Dealers
submitted Bids; and
(vi) the scheduled Auction Date of the next succeeding
Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an
Order on behalf of any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder on whose
behalf such Broker-Dealer submitted a Bid or Sell Order whether such
Bid or Sell Order was accepted or rejected, in whole or in part;
(ii) instruct each Potential Holder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
to instruct such Bidder's Agent Member to pay to such Broker-Dealer (or
its Agent Member) through the Securities
<PAGE>
Depository the amount necessary to purchase the number of shares of
Preferred Shares to be purchased pursuant to such Bid against receipt
of such shares;
(iii) instruct each Existing Holder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
or a Sell Order that was accepted, in whole or in part, to instruct
such Bidder's Agent Member to deliver to such Broker-Dealer (or its
Agent Member) through the Securities Depository the number of shares of
Preferred Shares to be sold pursuant to such Bid or Sell Order against
payment therefor;
(iv) advise each Existing Holder on whose behalf such
Broker-Dealer submitted an Order and each Potential Holder on whose
behalf such Broker-Dealer submitted a Bid of the Applicable Rate for
the next succeeding Rate Period;
(v) advise each Existing Holder on whose behalf such
Broker-Dealer submitted an Order of the Auction Date of the next
succeeding Auction; and
(vi) advise each Potential Holder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
of the Auction Date of the next succeeding Auction.
(c) on the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell order shall
allocate any funds received by it pursuant to paragraph (b)(ii) above, and any
shares of Preferred Shares received by it pursuant to paragraph (b)(iii) above,
among the Potential Holders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Holders, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell orders, and any Broker-Dealers identified to it by the
Auction Agent pursuant to paragraph WM above.
(d) On the Business Day after the Auction Date, the securities
Depository shall execute the transactions described above, debiting and
crediting the accounts of the respective Agent Members as necessary to effect
the purchases and sale of shares of Preferred Shares as determined in the
Auction for such series.
(e) Any delivery or nondelivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or nondelivery in accordance with the
provisions of the Auction Agency Agreement and the Broker-Dealer Agreement.
-2-
<PAGE>
EXHIBIT E
---------
ZENIX INCOME FUND INC.
NOTICE OF AUCTION DATE FOR
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that the Auction Date of the next
Auction for the Company's Preferred Shares is scheduled to be ___________, 20__
and the next Dividend Payment Date for the Company's Preferred Shares will be
__________, 20__.
[A Failure to Deposit in respect of the-Preferred Shares
currently exists. If such Failure to Deposit is not cured prior to 12 Noon on
the fourth Business Day prior to the next scheduled Auction Date of the
Preferred Shares, the next Auction will not be held. Notice of the next Auction
for the Preferred Shares will be delivered when such Failure to Deposit is
cured./1/]
ZENIX INCOME FUND INC.
- --------
/1/ Include this language if a Failure to Deposit exists.
<PAGE>
EXHIBIT F
---------
ZENIX INCOME FUND INC.
NOTICE OF PROPOSED CHANGE OF
LENGTH OF RATE PERIOD OF
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the
"Company") may exercise its option to designate the Rate Period of its Preferred
Shares commencing [the first day of the Special Rate Period] as a Special Rate
Period.
By 11:00 A.M. on the second Business Day preceding the first
day of such proposed Special Rate Period, the Company will notify [the Auction
Agent] of either (a) its determination to exercise such option, designating the
length of such Special Rate Period for Preferred Shares or (b) its determination
not to exercise such option.
ZENIX INCOME FUND INC.
Dated: ___________,20__
<PAGE>
EXHIBIT G
---------
ZENIX INCOME FUND INC.
NOTICE OF CHANGE OF LENGTH OF RATE PERIOD OF
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the
"Company") has determined to designate the Rate Period of its Preferred Shares
commencing on [the first day of the Special Rate Period] as a Special Rate
Period.
The Special Rate Period will be ______________ [days]
[year(s]]-
The Auction Date for the Special Rate Period is (the Business
Day next preceding the first day of such Special Rate Period).
As a result of the Special Rate Period designation, the amount
of dividends payable on Preferred Shares during the special Rate Period will be
based on a 360-day year.
The Special - Rate Period shall not commence if (a) on such
Auction Date Sufficient Clearing Bids shall not exist or (b) if a Failure to
Deposit shall have occurred prior to the first day thereof with respect to
shares of Preferred Shares-
The scheduled Dividend Payment Dates for Preferred Shares
during such Special Rate Period will be _____________________.
ZENIX INCOME FUND INC.
Dated: ___________,20__
<PAGE>
EXHIBIT H
---------
ZENIX INCOME FUND INC.
NOTICE OF DETERMINATION NOT TO CHANGE
LENGTH OF RATE PERIOD OF
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the
"Company") has determined not to exercise its option to designate a Special Rate
Period of its Preferred Shares and the next succeeding Rate Period of Preferred
Shares will be a Minimum Rate period of [7] days.
ZENIX INCOME FUND INC.
Dated: __________, 20__
<PAGE>
EXHIBIT H
---------
ZENIX INCOME FUND INC.
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the "Company") has cured its
Failure to Deposit with respect to its Preferred Shares. The dividend rate on
the shares of Preferred Shares for the current Dividend Period is _ % per annum,
the Dividend Payment Date for the current Dividend Period is scheduled to be
__________ 20_ and the next Auction Date is scheduled to be __________ 20__.
ZENIX INCOME FUND INC.
Dated: ___________,20
<PAGE>
EXHIBIT J
---------
ZENIX INCOME FUND INC.
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that ZENIX INCOME FUND INC. (the
"Company") has cured its Failure to Deposit with respect to its Preferred
Shares. The next Auction Date for the Preferred Shares is scheduled to be on
______________ 20__.
ZENIX INCOME FUND INC.
Dated: ________________,20__
<PAGE>
EXHIBIT K
---------
ZENIX INCOME FUND INC.
NOTICE OF
AMOUNT OF DIVIDEND INELIGIBLE
FOR DIVIDEND RECEIVED DEDUCTION
FOR
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that the amount of the dividend payable
on ________________, 20__ for ZENIX INCOME FUND INC.'s Preferred Shares will be
determined by the Auction to be held on ________________, 20__. Up to
[$________]/1/ per share of the dividend payable on such date as determined by
such Auction will consist of an amount not eligible for the Dividends Received
Deduction (as defined in the Articles Supplementary establishing the Preferred
Shares). If the dividend amount payable on such date as determined by such
Auction is less than [$_______]/1/ per share, the entire amount of the dividend
will be ineligible for the Dividends Received Deduction. Accordingly, the
aforementioned composition of the dividend payable on ____________, 20__ should
be considered in determining Orders to be submitted with respect to the Auction
to be held on ____________, 20__. The Rate Multiple in effect for such Auction
will be ___%.
ZENIX INCOME FUND INC.
- --------------------
/1/ The maximum amount ineligible for Dividends Received Deduction to be
included in such dividend, divided by the number of shares of Preferred
Shares.
<PAGE>
EXHIBIT L
---------
ZENIX INCOME FUND INC.
NOTICE OF
INTENTION TO PAY ADDITIONAL DISTRIBUTIONS
ON
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that an Additional Distribution (as
defined in the Articles Supplementary establishing the Preferred Shares) in the
amount of $__________ [and $________] per share shall be payable on
_____________, 20___ to the holders of ZENIX INCOME FUND INC.'s Preferred Shares
as of the record date[s] for the Dividend Payment Date[s] for the Rate Period[s]
(each as defined in the Articles Supplementary establishing the Preferred
Shares) from ____________,20____ to ___________, 20__ [and ___________, 20__ to
____________, 20__, respectively]. Please provide to the Secretary of the
Company a list of the DTC Participants as of the record date for the
corresponding Dividend Payment Date for [each] [the] Rate Period specified
above.
ZENIX INCOME FUND INC.
<PAGE>
EXHIBIT 99.2K3
================================================================================
ZENIX INCOME FUND INC.
BANKERS TRUST COMPANY,
as Auction Agent
______________________
BROKER-DEALER AGREEMENT
dated as of April __, 2000
Relating to
Auction Rate Cumulative Preferred Stock
of
Zenix Income Fund Inc.
______________________
SALOMON SMITH BARNEY INC.
================================================================================
<PAGE>
BROKER-DEALER AGREEMENT dated as of April __, 2000 among ZENIX INCOME FUND
INC., a Maryland corporation (the "Company"), BANKERS TRUST COMPANY, a New York
corporation (the "Auction Agent") (not in its individual capacity but solely as
agent for the Fund pursuant to authority granted to it in the Auction Agency
Agreement (as defined below)), and SALOMON SMITH BARNEY INC., a New York
corporation (together with its successors and assigns, "SSB").
WHEREAS, the Company proposes to issue 2,400 shares of Auction Rate
Cumulative Preferred Stock pursuant to its Articles of Incorporation and the
Articles Supplementary (as defined below;
WHEREAS, the Articles Supplementary will provide that, for each subsequent
Dividend Period of Preferred Shares then outstanding, the Applicable Rate for
Preferred Shares for such subsequent Dividend Period shall, under certain
conditions, be equal to the rate per annum that results from an Auction for
Outstanding Preferred Shares on the respective date therefor next preceding such
subsequent Dividend Period. The Board of Directors has adopted a resolution
appointing Bankers Trust Company as Auction Agent for purposes of the Auction
Procedures for Preferred Shares; and
WHEREAS, the Auction Procedures require the participation of one or more
Broker-Dealers for Preferred Shares.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Company, the Auction Agent and SSB agree as follows:
1. Definitions and Rules of Construction.
-------------------------------------
1.1. Terms Defined by Reference to the Articles Supplementary.
--------------------------------------------------------
Capitalized terms not defined herein shall have the respective meanings
specified in Parts I and II of the Articles Supplementary.
1.2. Terms Defined Herein.
--------------------
As used herein and in the Settlement Procedures, the following terms shall
have the following meanings, unless the context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles Supplementary by which
the Company's Board of Directors will classify 2,400 shares of authorized and
unissued preferred stock, $.01 par value, and authorize the issuance of a series
of such preferred stock designated Auction Rate Cumulative Preferred Shares, as
such Articles Supplementary, attached hereto as Exhibit A, were filed by the
Company on April __, 2000 with the
<PAGE>
State Department of Assessments and Taxation of the State of Maryland, and as
may be amended from time to time.
(b) "Auction" shall have the meaning specified in Section 2.1 hereof.
(c) "Auction Agency Agreement" shall mean the Auction Agency Agreement,
dated as of April __, 2000, between the Company and the Auction Agent relating
to the Preferred Shares.
(d) "Auction Procedures" shall mean the auction procedures constituting
Part II of the Articles Supplementary as of the filing thereof.
(e) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Trust officer and Assistant Manager of the
Auction Agent assigned to its Corporate & Institutional Trust Group and every
other officer or employee of the Auction Agent designated as an "Authorized
officer" for purposes of this Agreement in a communication to SSB.
(f) "SSB Officer" shall mean each officer or employee of SSB designated as
a "SSB Officer" for purposes of this Agreement in a communication to the Auction
Agent.
(g) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.
(h) "Preferred Shares" shall mean the preferred stock, par value $.01 per
share, of the Company designated as its "Auction Rate Cumulative Preferred
Shares".
(i) "Master Purchaser's Letter" shall mean a letter addressed to the
Company, the Auction Agent, a Broker-Dealer and an Agent Member, substantially
in the form attached hereto as Exhibit B.
(j) "Settlement Procedures" shall mean the Settlement Procedures attached
hereto as Exhibit C.
1.3. Rules of Construction.
---------------------
Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of this Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part
-2-
<PAGE>
of this Agreement nor shall they affect its meaning, construction or
effect.
(c) The words "hereof 11, "herein", "hereto", and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New
York City time.
2. The Auction.
-----------
2.1. Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
--------------------------------------------
(a) The provisions of the Auction Procedures will be followed by the
Auction Agent for the purpose of determining the Applicable Rate for any
subsequent Dividend Period of Preferred Shares for which the Applicable Rate is
to be determined by an Auction. Each periodic operation of such procedures is
hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.
(c) SSB agrees to act as, and assumes the obligations of, and limitations
and restrictions placed upon, a Broker-Dealer under this Agreement for Preferred
Shares. SSB understands that other Persons meeting the requirements specified in
the definition of "Broker-Dealer" contained in the Auction Procedures may
execute Broker-Dealer Agreements and participate as Broker-Dealers in Auctions.
2.2. Preparation for Each Auction.
----------------------------
(a) Not later than 9:30 A.M. on each Auction Date for Preferred Shares, the
Auction Agent shall advise the Broker-Dealers for Preferred Shares by telephone
of the Maximum Rate therefor and the "AA" Financial Composite Commercial Paper
Rate(s) and Treasury Rate(s), as the case may be, used in determining such
Maximum Rate.
(b) In the event that any Auction Date shall be changed after the Auction
Agent has given the notice referred to in clause (vi) of paragraph (a) of the
Settlement Procedures, or after the notice referred to in Section 2.5(a) hereof,
if applicable, the Auction Agent, by such means as the Auction Agent deems
practicable, shall give notice of such change to SSB not later than the earlier
of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the old Auction Date.
Thereafter, SSB shall
-3-
<PAGE>
promptly notify customers of SSB that SSB believes are Existing Holders of
Preferred Shares of such change in the Auction Date.
(c) The Auction Agent from time to time may request the Broker-Dealers to
provide the Auction Agent with a list of their respective customers that such
Broker-Dealers believe are Existing Holders of shares of Preferred Shares. SSB
shall comply with any such request, and the Auction Agent shall keep
confidential any such information so provided by SSB and shall not disclose any
information so provided by SSB to any Person other than the Company and SSB. The
Auction Agent shall transmit any list of customers SSB believes are Existing
Holders of Preferred Shares and information related thereto only to its
officers, employees, agents or representatives who need to know such information
for the purposes of acting in accordance with this Agreement and shall use its
reasonable efforts to prevent the transmission of such information to others and
shall cause its officers, employees, agents and representatives to abide by the
foregoing confidentiality restrictions; provided, however, that the Auction
Agent shall have no responsibility or liability for the actions of any of its
officers, employees, agents or representatives after they have left the employ
of the Auction Agent.
(d) SSB agrees to maintain a list of Potential Holders and to use its best
efforts, subject to existing laws and regulations, to contact the Potential
Holders on such list whom SSB believes may be interested in participating in
such Auction on each Auction Date for the purposes set forth in the Auction
Procedures. Nothing herein shall require SSB to submit an Order for any customer
in any Auction.
(e) The Auction Agent's registry of Existing Holders of shares of a series
of Preferred Shares shall be conclusive and binding on SSB. SSB may inquire of
the Auction Agent between 3:00 P.M. on the Business Day preceding an Auction for
shares of Preferred Shares and 9:30 A.M. on the Auction Date for such Auction to
ascertain the number of shares in respect of which the Auction Agent has
determined SSB to be an Existing Holder. If SSB believes it is the Existing
Holder of fewer shares than specified by the Auction Agent in response to SSB's
inquiry, SSB may so inform the Auction Agent of that belief. SSB shall not, in
its capacity as Existing Holder of shares, submit Orders in such Auction in
respect of shares covering in the aggregate more than the number of shares
specified by the Auction Agent in response to SSB's inquiry.
(f) The Auction Agent is not required to accept the Master Purchaser's
Letter of any Potential Holder who wishes to submit a Bid for the first time in
an Auction or of any Potential Holder or Existing Holder who wishes to amend its
Master Purchaser's Letter intending that such amendment is to take effect with
respect to such Auction unless such letter or
-4-
<PAGE>
amendment is received by the Auction Agent by 3:00 P.M. on the Business Day
preceding such Auction.
2.3. Auction Schedule; Method of Submission of Orders; Solicitation of
Potential Holders.
-----------------------------------------
(a) The Auction Agent shall conduct Auctions for shares of Preferred
Shares in accordance with the schedule set forth below. Such schedule may be
changed by the Auction Agent with the consent of the Company, which consent
shall not be unreasonably withheld or delayed. The Auction Agent shall give
written notice of any such change to each Broker-Dealer. Such notice shall be
given prior to the close of business on the Business Day next preceding the
first Auction Date on which such change shall be effective.
<TABLE>
<CAPTION>
Time Event
---- -----
<S> <C>
By 9:30 A.M. Auction Agent advises the Company and the Broker-Dealers of the
applicable Maximum Rate and the "AA" Financial Composite Commercial
Paper Rate(s) and Treasury Rate(s), as the case may be, used in
determining such Maximum Rate as set forth in Section 2.2(a) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated to it by
Broker-Dealers as provided in Section 4(a) of the Auction Procedures.
Submission Deadline is 1:00 P.M.
Not earlier than Auction Agent makes determinations pursuant to Section 5(a) of the
1:00 P.M. Auction Procedures.
By approximately Auction Agent advises company of results of the Auction as provided in
3:00 P.M. Section 7(a) of the Auction Procedures.
Submitted Buy and Submitted Sell Orders are accepted and rejected and
shares of Preferred Shares allocated as provided in Section 6 of the
Auction Procedures.
Auction Agent gives notice of Auction results as set forth in Section
2.4(a) hereof.
</TABLE>
-5-
<PAGE>
(b) SSB agrees not to sell, assign, or dispose of any share of Preferred
Shares to any Person who has not delivered, or on whose behalf a Broker-Dealer
has not delivered, a signed Master Purchaser's Letter to the Auction Agent. SSB
agrees to maintain a list of Potential Holders and to contact the Potential
Holders on such list on each Auction Date for the purposes set forth in
paragraph (b) of the Auction Procedures. The Auction Agent shall have no duty or
liability with respect to the enforcement of this subsection 2.3(b).
(c) SSB shall submit orders to the Auction Agent writing substantially
in the form attached hereto as Exhibit D. SSB shall submit a separate Order to
the Auction Agent for each potential Holder or Existing Holder on whose behalf
SSB is submitting an order and shall not net or aggregate the orders of
different Potential Holders or Existing Holders on whose behalf SD is submitting
Orders.
(d) SSB shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit E, of transfers of shares
of Preferred Shares made through SSB by an Existing Holder to another Person
other than pursuant to an Auction and shall deliver or cause to be delivered the
related Master Purchaser's Letter executed by such Person if such Person has not
previously so delivered a Master Purchaser's Letter and (ii) a written notice,
substantially in the form attached hereto as Exhibit F, of the failure of any
shares of Preferred Shares to be transferred to or by any Person that purchased
or sold shares of Preferred Shares through SSB pursuant to an Auction. The
Auction Agent is not required to accept any such notice for an Auction unless it
is received by the Auction Agent by 3:00 P.M. on the Business Day preceding such
Auction.
(e) SSB (provided that it has delivered to the Auction Agent its
executed Master Purchaser's Letter) and other Broker-Dealers which have
delivered duly executed Master Purchaser's Letters may submit orders in Auctions
for their own accounts (including Orders for their own accounts where the order
is placed beneficially for a customer) unless the Company shall have notified
SSB and all other Broker-Dealers that they may no longer do so, in which case
Broker-Dealers may continue to submit Hold Orders and Sell Orders for their own
accounts.
(f) SSB agrees to handle its own and its customers' orders in accordance
with its duties under applicable securities laws and rules.
2.4. Notices.
-------
(a) On each Auction Date, the Auction Agent shall notify SSB by
telephone of the results of the Auction as set forth in paragraph (a) of the
Settlement Procedures. By approximately 11:30 A.M. on the Business Day next
succeeding such
-6-
<PAGE>
Auction Date, the Auction Agent shall confirm to SSB in writing the disposition
of all Orders submitted by SSB in such Auction.
(b) SSB shall notify each Existing Holder or Potential Holder on whose
behalf SSB has submitted an Order as set forth in paragraph (b) of the
Settlement Procedures and take such other action as is required of SSB pursuant
to the Settlement Procedures.
2.5. Designation of Special Rate Period.
----------------------------------
(a) If the Company delivers to the Auction Agent a notice of the Auction
Date for Preferred Shares for a Rate Period thereof that next succeeds a Rate
Period that is not a Minimum Rate Period in the form of Exhibit [E] to the
Auction Agency Agreement, the Auction Agent shall deliver such notice to SSB as
promptly as practicable after its receipt of such notice from the Company.
(b) If the Board of Directors of the Company proposes to designate any
succeeding Subsequent Rate Period of Preferred Shares as a Special Rate Period
and the Company delivers to the Auction Agent a notice of such proposed Special
Rate Period in the form of Exhibit [F] to the Auction Agency Agreement, the
Auction Agent shall deliver such notice to SSB as promptly as practicable after
its receipt of such notice from the Company.
(c) If the Board of Directors of the Company determines to designate such
succeeding Subsequent Rate Period as a Special Rate Period, and the Company
delivers to the Auction Agent a notice of such Special Rate Period in the form
of Exhibit [G] to the Auction Agency Agreement not later than 11:00 A.M. on the
second Business Day next preceding the first day of such proposed Special Rate
Period, the Auction Agent shall deliver such notice to SSB not later than 3:00
P.M. on such second Business Day (or, if the Auction Agent has agreed to a later
time or date, as promptly as practicable thereafter).
(d) If the Company shall deliver to the Auction Agent a notice stating that
the Company has determined not to exercise its option to designate such
succeeding Subsequent Rate Period as a Special Rate Period with respect to which
it has delivered a notice in the form of Exhibit [F] to the Auction Agency
Agreement not later than 11:00 A.M. on the second Business Day next preceding
the first day of such proposed Special Rate Period, or shall fail to timely
deliver either such notice or a notice in the form of Exhibit [G] to the Auction
Agency Agreement, the Auction Agent shall deliver a notice in the form of
Exhibit [H] to the Auction Agency Agreement to the Broker-Dealers for Preferred
Shares not later than 3:00 P.M. on such second Business Day.
-7-
<PAGE>
2.6. Allocation of Taxable Income.
----------------------------
If the Company delivers to the Auction Agent a notice in the form of
Exhibit [K] to the Auction Agent Agreement designating all or a portion of any
dividend on shares of Preferred Shares to consist of net capital gains or other
income taxable for Federal income tax purposes, the Auction Agent shall deliver
such notice to SSB not later than the Business Day following its receipt of such
notice from the Company. On or prior to the Auction Date referred to in such
notice, SSB will contact each of its customers that SSB believes to be an
Existing Holder of shares of Preferred Shares or a Potential Holder interested
in submitting an Order with respect to the Auction to be held on such Auction
Date, and SSB will notify such customer of the contents of such notice. SSB will
be deemed to have contacted and notified such Existing Holders and Potential
Holders if, for each such holder, (i) it makes a reasonable effort to contact
such holder by telephone, and (ii) upon failing to contact such holder by
telephone it mails or sends by telecopy written notification to such holder at
the mailing address or telecopy number, as the case may be, indicated in such
holder's most recently submitted Master Purchaser's Letter or at such other
address or telecopy number as is indicated in the account records of SSB.
The Auction Agent shall be required to notify SSB within two Business Days
after each Auction of the Auction Agent's receipt of notice from the Company
that such Auction involves an allocation of income taxable for Federal income
tax purposes as to the dollar amount per share of such taxable income and income
exempt from Federal income taxation included in the related dividend.
2.7. Failure to Deposit.
------------------
(a)
(i) any Failure to Deposit shall have occurred with respect to shares
of Preferred Shares during any Rate Period thereof (other than any Special
Rate Period consisting of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been cured);
and (ii) prior to 12:00 Noon on the third Business Day next succeeding the
date on which such Failure to Deposit occurred, such Failure to Deposit
shall have been cured as described in Section [2.6(a)] of the Auction
Agency Agreement and the Company shall have paid to the Auction Agent a
late charge as described in such Section [2.6(a)];
then, the Auction Agent shall deliver a notice in the form of Exhibit [I] to the
Auction Agency Agreement by first-class mail, postage prepaid, to SSB not later
than one Business Day after its
-8-
<PAGE>
receipt of the payment from the Company curing such Failure to Deposit and such
late charge.
(b) If:
(i) any Failure to Deposit shall have occurred with respect to shares
of Preferred Shares during any Rate Period thereof (other than any Special
Rate Period of more than 364 Rate Period Days or any Rate Period succeeding
any Special Rate Period of more than 364 Rate Period Days during which a
Failure to Deposit occurred but has not been cured), and, prior to 12:00
Noon on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall not have been
cured as described in Section [2.7] of the Auction Agency Agreement or the
Company shall not have paid to the Auction Agent the applicable late charge
described in Section [2.7] of the Auction Agency Agreement; or (ii) any
Failure to Deposit shall have occurred with respect to shares of Preferred
Shares during a Special Rate Period thereof of more than 364 Rate Period
Days, or during any Rate Period thereof succeeding any Special Rate Period
of more than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured, and, prior to 12:00 noon on the fourth
Business Day preceding the Auction Date for the Rate Period subsequent to
such Rate Period, such Failure to Deposit shall not have been cured as
described in Section [2.7] of the Auction Agency Agreement or the Company
shall not have paid to the Auction the applicable late charge described in
Section [2.7] of the Auction Agency Agreement; then the Auction Agent shall
deliver a notice in the form of Exhibit [H] to the Auction Agency Agreement
to SSB not later than one Business Day after the receipt of the payment
from the Company curing such Failure to Deposit and such late charge.
2.8. Service Charge to be Paid to BD.
-------------------------------
On the Business Day next succeeding each Auction Date for Preferred Shares,
the Auction Agent shall pay to SSB from moneys received from the Company an
amount equal to the product of (a)(i) in the case of any Auction Date
immediately preceding a Rate Period of Preferred Shares consisting of 364 Rate
Period Days or fewer, or (ii) in the case of any Auction Date immediately
preceding the Rate Period of Preferred Shares consisting of more than 364 Rate
Period Days, such percentage as may be agreed upon by the Company and SSB with
respect to such Rate Period times (b) a fraction, the numerator of which is the
number of days in the Rate Period therefor beginning on such Business Day and
the denominator of which is 365, times (c) $25,000, times (d) the sum of (i) the
aggregate number of shares of Preferred Shares placed by SSB in such Auction
that were (A) the subject Of Submitted Bids of Existing Holders submitted by SSB
and continued to be held as a result of such submission and
-9-
<PAGE>
(B) the subject of Submitted Bids of Potential Holders submitted by SSB and
purchased as a result of such submission plus (ii) the aggregate number of
shares of Preferred Shares subject to valid Hold orders (determined in
accordance with paragraph (d) of Section [3] of the Auction Procedures)
submitted to the Auction Agent by SSB plus (iii) the number of shares of
Preferred Shares deemed to be subject to Hold Orders by Holders pursuant to
paragraph (c) of Section 3 of the Auction Procedures that were acquired by SSB
for its own account or were acquired by such Existing Holders through SSB.
For purposes of subclause (d)(iii) of the foregoing paragraph, if any
Existing Holder who acquired shares of Preferred Shares through SSB transfers
those shares to another Person other than pursuant to an Auction, then the
Broker-Dealer for the shares so transferred shall continue to be SSB; provided,
however, that if the transfer was effected by, or if the transferee is, a
Broker-Dealer other than SSB, then such Broker-Dealer shall be the Broker-Dealer
for such shares.
2.9. Settlement.
----------
(a) If any Existing Holder on whose behalf SSB has submitted a Bid or Sell
Order for shares of Preferred Shares that was accepted in whole or in part fails
to instruct its Agent Member to deliver the shares of Preferred Shares subject
to such Bid or Sell Order against payment therefor, SSB shall instruct such
Agent Member to deliver such shares against payment therefor and SSB may deliver
to the potential Holder on whose behalf SSB submitted a Bid for shares of
Preferred Shares that was accepted in whole or in part a number of shares of
Preferred Shares that is less than the number of shares of Preferred Shares
specified in such Bid to be purchased by such Potential Holder.
(b) Neither the Auction Agent nor the Company shall have any responsibility
or liability with respect to the failure of an Existing Holder, a Potential
Holder or its respective Agent Member to deliver shares of Preferred Shares or
to pay for shares of Preferred Shares sold or purchased pursuant to the Auction
Procedures or otherwise.
(c) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event SSB is an Existing Holder
with respect to shares of Preferred Shares and the Auction Procedures provide
that SSB shall be deemed to have submitted a Sell Order in an Auction with
respect to such shares if SSB fails to submit an Order in that Auction with
respect to such shares, SSB shall have no liability to any Person for failing to
sell such shares pursuant to such a deemed Sell Order if (i) such shares were
transferred by the beneficial owner thereof without notification of such
transfer in compliance with the Auction Procedures or (ii) SSB has indicated to
the Auction Agent pursuant to Section 2.2(e) of this Agreement
-10-
<PAGE>
that, according to SSB's records, SSB is not the Existing Holder of such shares.
(d) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder of shares
of Preferred Shares with respect to whom a Broker-Dealer submitted a Bid to the
Auction for such shares that was accepted in whole or in part, or submitted or
is deemed to have submitted a Sell Order for such shares that was accepted in
whole or in part, fails to instruct its Agent Member to deliver such shares
against payment therefor, partial deliveries of Preferred Shares that have been
made in respect of potential Holders' Submitted Bids for shares that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders.
(e) Notwithstanding the foregoing terms of this Section, any delivery or
non-delivery of Preferred Shares which represents any departure from the results
of an Auction for shares, as determined by the Auction Agent, shall be of no
effect for purposes of the registry of Existing Holders maintained by the
Auction Agent pursuant to the Auction Agency Agreement unless and until the
Auction Agent shall have been notified of such delivery or non-delivery.
(f) The Auction Agent shall have no duty or liability with respect to
enforcement of this Section 2.10.
3. The Auction Agent.
-----------------
3.1. Duties and Responsibilities.
---------------------------
(a) The Auction Agent is acting solely as agent for the company hereunder
and owes no fiduciary duties to any other Person, other than the Company, by
reason of this Agreement.
(b) The Auction Agent undertakes to perform such duties and only such
duties as are specifically set forth in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.
(c) In the absence of bad faith or negligence on its part, the Auction
Agent shall not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under this
Agreement. The Auction Agent shall not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in ascertaining
(or failing to ascertain) the pertinent facts.
3.2. Rights of the Auction Agent.
---------------------------
(a) The Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction,
-11-
<PAGE>
notice, request, direction, consent, report, certificate, share certificate or
other instrument, paper or document believed in good faith by it to be genuine.
The Auction Agent shall not be liable for acting upon any telephone
communication authorized by this Agreement which the Auction Agent believes in
good faith to have been given by the Company or by a Broker-Dealer. The Auction
Agent may record telephone communications with the Broker-Dealers.
(b) The Auction Agent may consult with counsel of its choice and the advice
of such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or risk its
own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.
3.3. Auction Agent's Disclaimer.
--------------------------
The Auction Agent makes no representation as to the validity or adequacy of
this Agreement, the Auction Agency Agreement, the Articles Supplementary (which
include the Auction Procedures or the Preferred Shares.
4. Miscellaneous.
-------------
4.1. Termination.
-----------
Any party may terminate this Agreement at any time on five days' prior
notice to the other parties. This Agreement shall automatically terminate upon
the termination of the Auction Agency Agreement.
4.2. Participant in Securities Depository.
------------------------------------
(a) SSB is, and shall remain for the term of this agreement, a member of,
or participant in, the Securities Depository (or an affiliate of such a member
or participant).
(b) SSB represents that it (or if SSB does not act as Agent Member, one of
its affiliates) shall make all dividend payments on the Preferred Shares
available in same-day funds on each Dividend Payment Date to customers that use
SSB or an affiliate of SSB as Agent Member.
4.3. Communications.
--------------
Except for (i) communications authorized to be made by telephone pursuant
to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
-12-
<PAGE>
all notices, requests and other communications to either party hereunder shall
be in writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its address or telecopy number set forth below:
If to the Company, Zenix Income Fund Inc.
addressed: c/o SSB Citi Fund Management Inc.
338 Greenwich Street
New York, New York
Attention:
Telecopier No.:
Telephone No.:
If to SSB, Salomon Smith Barney Inc.
addressed: [Address]
Attention:
Telecopier No.:
Telephone No.:
If to the Auction Bankers Trust Company,
Agent, addressed: as Auction Agent
4 Albany Street
New York, New York
Attention: Melissa Reynolds
Telecopier No.: 212-259-6850
Telephone No.: 212-250-6688
or at such other address or telecopy number as such party may hereafter specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of SSB by a SSB officer and on behalf of
the Auction Agent by an Authorized Officer. SSB may record telephone
communications with the Auction Agent.
4.4. Entire Agreement.
----------------
This Agreement contains the entire agreement among the parties hereto
relating to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties hereto relating to the subject matter hereof.
4.5. Benefits.
--------
Nothing in this Agreement, express or implied, shall give to any person,
other than the Company, the Adviser, the Auction Agent, SSB and their respective
successors and assigns, any benefit of any legal or equitable right, remedy or
claim hereunder.
-13-
<PAGE>
4.6. Amendment; Waiver.
-----------------
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. No modification or amendment shall be effective without the written
consent of the Company effected thereby.
(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by any other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.
(c) Notwithstanding any provision to the contrary, the Company may, upon
five Business Days' notice to the Auction Agent and SSB, amend, alter or repeal
any of the provisions contained herein, it being understood that you shall be
deemed to have accepted any such amendment, alteration or repeal if, after the
expiration of such five Business Day period, you submit an order to the Auction
Agent in respect of the Preferred Shares.
4.7. Successors and Assigns.
----------------------
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the respective successors and assigns of each of the Company, the
Adviser, the Auction Agent and SSB.
4.8. Severability.
------------
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
4.9. Execution in Counterparts.
-------------------------
This Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.
4.10. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be performed
in said State without giving effect to the choice of law provisions thereof.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
ZENIX INCOME FUND INC.
By:________________________________
Name:______________________________
Title:_____________________________
BANKERS TRUST
COMPANY, as Auction Agent
By:________________________________
Name:______________________________
Title:_____________________________
SALOMON SMITH BARNEY INC.
By:________________________________
Name:______________________________
Title:_____________________________
-15-
<PAGE>
EXHIBIT D
(Submit only one Order on this Order form)
ZENIX INCOME FUND INC.
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
ORDER FORM _________________
(Date of Auction)
To: Bankers Trust Company
[Address]
Attention: [___________________]
The undersigned Broker-Dealer submits the following order on behalf of the
Bidder listed below:
Name of Bidder:
Bidder places the Order listed below covering the number of shares
indicated (complete only one blank):
shares now held by Bidder (an Existing Holder), and the order is a (check
one):
[ ] Hold Order; or
[ ] Bid at a rate of _______%; or
[ ] Sell Order;
-or-
shares not now held by Bidder (a Potential Holder), and the Order is a:
Bid at a rate of ______%.
Notes:
(1) If submitting more than one Order for one Bidder, use
additional Order forms.
(2) If one or more orders covering in the aggregate more than the number
of outstanding shares of Preferred Shares held by any Existing Holder
are submitted, such Orders shall be considered valid in the order of
priority set forth in the Auction Procedures.
(3) A Hold order may be placed only by an Existing Holder covering a
number of shares of Preferred Shares not greater than the number of
Shares of Preferred Shares currently held by such Existing Holder.
D-1
<PAGE>
(4) Potential Holders may make only Bids, each of which must specify a
rate. If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate
specified.
(5) Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%).
(6) An Order submitted must cover only whole shares of Preferred Shares.
Name of Broker-Dealer:
By:_________________________________
D-2
<PAGE>
EXHIBIT E
---------
(To be used only for transfers made
other than pursuant to an Auction)
ZENIX INCOME FUND INC.
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
TRANSFER FORM
We are (check one):
[] the Existing Holder named below;
[] the Broker-Dealer named below; or
[] the Agent Member for such Existing Holder.
We hereby notify YOU that such Existing Holder has transferred _________ shares
of Preferred Shares to:
Name/Social Security or Tax ID. No.: ____________________________________
Address: ____________________________________
____________________________________
____________________________________
____________________________________
(Name of Existing Holder)
____________________________________
(Name of Broker-Dealer)
____________________________________
(Name of Agent Member)
By:_________________________________
Printed Name:
Title:
E-1
<PAGE>
EXHIBIT F
---------
(To be used only for failures to deliver shares of
Preferred Shares sold pursuant to an Auction)
ZENIX INCOME FUND INC.
AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
- -----------------------
I. We are a Broker-Dealer for _____________________ (the "Purchaser"),
which purchased _____________ shares of Preferred Shares (the
"Purchased Shares") in the Auction held on ____________ from the
seller of such shares.
II. We are a Broker-Dealer for ______________ (the "Seller"), which sold
___________ shares of Preferred Shares (the "Sold Shares") in the
Auction held on _______________ to the purchaser of such shares.
We hereby notify you that (check one)--
[] the Seller failed to deliver the Purchased Shares to the Purchaser
[] the Purchaser failed to make payment to the Seller upon delivery of the
Sold Shares
____________________________________
(Name of Broker-Dealer)
By:________________________________
Printed Name:
Title:
<PAGE>
FORM OF SCHEDULE-A
------------------
The percentage referred to in Section 2.8 (a) (ii) Of the Agreement for
Rate Periods consisting of four or more Dividend Periods are as follows:
Rate Period Percentage
----------- ----------
This Schedule shall replace and supersede any prior Schedule A to the
Agreement.
ZENIX INCOME FUND INC.
By____________________________
Name:
Title:
BANKERS TRUST COMPANY, as Auction Agent
By____________________________
Name:
Title:
[BROKER-DEALER]
By____________________________
Name:
Title:
Dated:_________________, 20__
<PAGE>
Exhibit 99.2K4
FORM OF MASTER PURCHASER'S LETTER
<PAGE>
TO BE SUBMITTED TO YOUR BROKER-DEALER WHO WILL THEN
DELIVER COPIES ON YOUR BEHALF TO THE
AUCTION OR REMARKETING AGENT
FORM OF MASTER PURCHASER'S LETTER
Relating to Securities Involving Rate Settings Through Auctions or Remarketings
THE COMPANY
A REMARKETING AGENT
THE AUCTION AGENT
A BROKER-DEALER
AN AGENT MEMBER
OTHER PERSONS
Dear Sirs:
1. This letter is designed to apply to publicly or privately offered debt or
equity securities ("Securities") of any issuer ("Company") which are described
in any final prospectus or other offering materials relating to such Securities
as the same may be amended or supplemented (collectively, with respect to the
particular Securities concerned, the "Prospectus") and which involve periodic
rate settings through auctions ("Auctions") or remarketing procedures
("Remarketings"). This letter shall be for the benefit of any Company and of any
auction agent, paying agent (collectively, "auction agent"), remarketing agent,
broker-dealer, agent member, securities depository or other interested person in
connection with any Securities and related Auctions or Remarketings (it being
understood that such persons may be required to execute specified agreements and
nothing herein shall alter such requirements). The terminology used herein is
intended to be general in its application and not to exclude any Securities in
respect of which (in the Prospectus or otherwise) alternative terminology is
used.
2. We may from time to time offer to purchase, purchase, offer to sell and/or
sell Securities of any Company as described in the Prospectus relating thereto.
We agree that this letter shall apply to all such purchases, sales and offers
and to Securities owned by us. We understand that the dividend/interest rate on
Securities may be based from time to time on the results of Auctions or
Remarketings as set forth in the Prospectus.
3. We agree that any bid or sell order placed by us in an Auction or a
Remarketing shall constitute an irrevocable offer (except as otherwise described
in the Prospectus) by us to purchase or sell Securities subject to such bid or
sell order, or such lesser amount of Securities as we shall be required to sell
or purchase as a result of such Auction or Remarketing, at the applicable price,
all as set forth in the Prospectus, and that if we fail to
<PAGE>
place a bid or sell order with respect to Securities owned by us with a broker-
dealer on any Auction or Remarketing Date, or a broker-dealer to which we
communicate a bid or sell order fails to submit such bid or sell order to the
auction agent or remarketing agent concerned, we shall be deemed to have placed
a hold or a sell order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions or Remarketings to execute contracts for the sale of
Securities by such bid or sell order. We recognize that the payment of such
broker-dealer for Securities purchased on our behalf shall not relieve us of any
liability to such broker-dealer for payment for such Securities.
4. We understand that in a Remarketing, the dividend or interest rate or rates
on the Securities and the allocation of Securities tendered for sale between
dividend or interest periods of different lengths will be based from time to
time on the determinations of one or more remarketing agent(s), and we agree to
be conclusively bound by such determinations. We further agree to the payment of
different dividend or interest rates to different holders of Securities
depending on the length of the dividend or interest period elected by such
holders. We agree that any notice given by us to a remarketing agent (or a
broker-dealer for transmission to a remarketing agent) of our desire to tender
Securities in a Remarketing shall constitute an irrevocable (except to the
limited extent set forth in the Prospectus) offer by us to sell the securities
specified in such Notice, or such lesser number of Securities as we shall be
required to sell as a result of such Remarketing, in accordance with the terms
set forth in the Prospectus, and we authorize the remarketing agent to sell,
transfer or otherwise dispose of such Securities as set forth in the Prospectus.
5. We agree that, during the applicable period as described in the Prospectus,
dispositions of Securities can be made only in the denominations set forth in
the Prospectus and we will sell, transfer or otherwise dispose of any Securities
held by us from time to time only pursuant to a bid or sell order placed in an
Auction, in a Remarketing, to or through a broker-dealer or, when permitted in
the Prospectus, to a person that has signed and delivered to the applicable
auction agent or a remarketing agent a letter substantially in the form of this
letter (or other applicable purchaser's letter), provided that in the case of
all transfers other than pursuant to Auctions or Remarketings we or our broker-
dealer or our agent member shall advise such auction agent or a remarketing
agent of such transfer. We understand that a restrictive legend will be placed
on certificates representing the Securities and stop-transfer instructions will
be issued to the transfer agent and/or registrar, all as set forth in the
Prospectus.
6. We agree that, during the applicable period as described in the Prospectus,
ownership of Securities shall be represented by one or more global certificates
registered in the name of the
-2-
<PAGE>
applicable securities depository or its nominee, that we will not be entitled to
receive any certificate representing the Securities and that our ownership of
any Securities will be maintained in book-entry form by the securities
depository for the account of our agent member, which in turn will maintain
records of our beneficial ownership. We authorize and instruct our agent member
to disclose to the applicable auction agent or remarketing agent such
information concerning our beneficial ownership of Securities as such auction
agent or remarketing agent shall request.
7. We acknowledge that partial deliveries of Securities purchased in Auctions or
Remarketings may be made to us and such deliveries shall constitute good
delivery as set forth in the Prospectus.
8. This letter is not a commitment by us to purchase any Securities.
9. This letter supersedes any prior-dated version of this master purchaser's
letter, and supplements any prior to post-dated purchaser's letter specific to
any particular Securities, and this letter may only be revoked by a signed
writing delivered to the original recipients hereof.
10. The descriptions of Auction or Remarketing procedures set forth in each
applicable Prospectus are incorporated by reference herein and in case of any
conflict between this letter, any purchaser's letter specific to particular
Securities and any such description, such description shall control.
11. Any xerographic or other copy of this letter shall be deemed of equal effect
as a signed original.
12. Our agent member of The Depository Trust company currently is ___________.
13. Our personnel authorized to place orders with broker-dealers for the
purposes set forth in the Prospectus in Auctions or Remarketings currently
is/are ______________, telephone number (___) ___-____.
14. Our taxpayer identification number is ______________.
15. In the case of each offer to purchase, purchase, offer to sell or sale by us
of Securities not registered under the Securities Act of 1933, as amended (the
"Act"), we represent and agree as follows:
(A) We understand and expressly acknowledge that the Securities have not been
and will not be registered under the Act and, accordingly, that the Securities
may not be reoffered, resold or otherwise pledged, hypothecated or transferred
unless an applicable exemption from the registration requirements of the Act is
available.
-3-
<PAGE>
(B) We hereby confirm that any purchase of Securities made by us will be for
our own account, or for the account of one or more parties for which we are
acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which will
acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by us
or such party, as the case may be, will have previously invested in similar
types of instruments and will be able and prepared to bear the economic risk of
investing in and holding such Securities.
(C) We acknowledge that prior to purchasing any Securities we shall have
received a Prospectus (or private placement memorandum) with respect thereto and
acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions or
representatives of the Company and receive answers thereto, as we deem necessary
in connection with our decision to purchase Securities.
(D) We recognize that the Company and broker-dealers will rely upon the truth
and accuracy of the foregoing investment representations and agreements, and we
agree that each of our purchases of Securities now or in the future shall be
deemed to constitute our concurrence in all of the foregoing which shall be
binding on us and each party for which we are acting as set forth in
Subparagraph B above.
Dated:________________
_____________________________________
(Name of Purchaser)
Mailing Address of Purchaser:
_____________________________________
_____________________________________
By: _________________________________
Printed Name:
_____________________________________
Title:
_____________________________________
-4-
<PAGE>
Exhibit 99.2(n)
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Zenix Income Fund Inc.:
We consent to the incorporation by reference, in this Statement of Additional
Information, of our report dated May 12, 1999, on the statement of assets and
liabilities for the Zenix Income Fund Inc. (the Fund) as of March 31, 1999, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
the statement of cash flows for the year then ended and the financial highlights
for each of the years in the four-year period then ended. These financial
statements and financial highlights and our report thereon are included in the
Annual Report of the Fund as filed on Form N-30D.
We also consent to the references to our firm under the headings "Financial
Highlights"and "Independent Auditors"in the Prospectus and "Experts" in the
Statement of Additional Information included in this Registration Statement on
Form N-2.
/s/ KPMG LLP
KPMG LLP
New York, New York
April 6, 2000
<PAGE>
Exhibit 99.2(r)
CODE OF ETHICS OF ZENIX INCOME FUND INC., SSB CITI FUND MANAGEMENT LLC AND
SALOMON SMITH BARNEY INC.
<PAGE>
PERSONAL INVESTMENT POLICY
FOR
SSB CITI ASSET MANAGEMENT GROUP - NORTH AMERICA
AND CERTAIN REGISTERED INVESTMENT COMPANIES
SSB Citi Asset Management Group ("SSB Citi")/1/, and those U.S.-registered
investment companies advised or managed by SSB Citi that have adopted this
policy ("Funds"), have adopted this policy on securities transactions in order
to accomplish two goals: first, to minimize conflicts and potential conflicts of
interest between employees of SSB Citi and SSB Citi's clients (including the
Funds), and between Fund directors or trustees and their Funds, and second, to
provide policies and procedures consistent with applicable law, including Rule
17j-1 under the Investment Company Act of 1940, to prevent fraudulent or
manipulative practices with respect to purchases or sales of securities held or
to be acquired by client accounts. All U.S. employees of SSB Citi, including
employees who serve as Fund officers or directors, and all directors or trustees
("directors") of each Fund, are Covered Persons under this policy. Other Covered
Persons are described in Section II below.
I. Statement of Principles - All SSB Citi employees owe a fiduciary duty
to SSB Citi's clients when conducting their personal investment
transactions. Employees must place the interests of clients first and
avoid activities, interests and relationships that might interfere with
the duty to make decisions in the best interests of the clients. All
Fund directors owe a fiduciary duty to each Fund of which they are a
director and to that Fund's shareholders when conducting their personal
investment transactions. At all times and in all matters Fund directors
shall place the interests of their Funds before their personal
interests. The fundamental standard to be followed in personal
securities transactions is that Covered Persons may not take
inappropriate advantage of their positions.
All personal securities transactions by Covered Persons shall adhere to
the requirements of this policy and shall be conducted in such a manner
as to avoid any actual or potential conflict of interest, the
appearance of such a conflict, or the abuse of the person's position of
trust and responsibility. While this policy is designed to address both
identified conflicts and potential conflicts, it cannot possibly be
written broadly enough to cover all potential situations. In this
regard, Covered Persons are expected to adhere not only to the letter,
but also the spirit of the policies contained herein.
Employees are reminded that they also are subject to other Citigroup
policies, including policies on insider trading, the purchase and sale
of securities listed on any applicable SSB Citi restricted list, the
receipt of gifts and service as a director of a publicly traded
company. Employees must never trade in a security or commodity while in
possession of material, non-public information about the issuer or the
market for those securities or commodities, even if the employee has
satisfied all other requirements of this policy.
The reputation of SSB Citi and its employees for straightforward
practices and integrity is a priceless asset, and all employees have
the duty and obligation to support and maintain it when conducting
their personal securities transactions.
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/1/ The investment advisory entities of SSB Citi covered by this policy
include: Salomon Brothers Asset Management Inc.; SSB Citi Fund Management
LLC; Smith Barney Asset Management Division of Salomon Smith Barney Inc.;
Travelers Investment Management Company; and the Citibank Global Asset
Management Division of Citibank, N.A. and Citicorp Trust, N.A.-California.
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II. Applicability - SSB Citi Employees - This policy applies to all U.S.
employees of SSB Citi, including part-time employees. Each employee,
including employees who serve as Fund officers or directors, must
comply with all of the provisions of the policy applicable to SSB Citi
employees unless otherwise indicated. Certain employees are considered
to be "investment personnel" (i.e., portfolio managers, traders and
research analysts (and each of their assistants)), and as such, are
subject to certain additional restrictions outlined in the policy. All
other employees of SSB Citi are considered to be "advisory personnel."
Generally, temporary personnel and consultants working in any SSB Citi
business are subject to the same provisions of the policy as full-time
employees, and their adherence to specific requirements will be
addressed on a case-by-case basis.
The personal investment policies, procedures and restrictions referred
to herein also apply to an employee's spouse and minor children. The
policies also apply to any other account over which the employee is
deemed to have beneficial ownership. This includes: accounts of any
immediate family members sharing the same household as the employee;
accounts of persons or other third parties for whom the employee
exercises investment discretion or gives investment advice; a legal
vehicle in which the employee has a direct or indirect beneficial
interest and has power over investment decisions; accounts for the
benefit of a third party (e.g., a charity) which may be directed by the
employee (other than in the capacity of an employee); and any account
over which the employee may be deemed to have control. For a more
detailed description of beneficial ownership, see Exhibit A attached
hereto.
These policies place certain restrictions on the ability of an employee
to purchase or sell securities that are being or have been purchased or
sold by an SSB Citi managed fund or client account. The restrictions
also apply to securities that are "related" to a security being
purchased or sold by an SSB Citi managed fund or client account. A
"related security" is one whose value is derived from the value of
another security (e.g., a warrant, option or an indexed instrument).
Fund Directors - This policy applies to all directors of Funds that
have adopted this policy. The personal investment policies, procedures
and restrictions that specifically apply to Fund directors apply to all
accounts and securities in which the director has direct or indirect
beneficial ownership. See Exhibit A attached hereto for a more detailed
description of beneficial ownership.
Securities are defined as stocks, notes, bonds, closed-end mutual
funds, debentures, and other evidences of indebtedness, including
senior debt, subordinated debt, investment contracts, commodity
contracts, futures and all derivative instruments such as options,
warrants and indexed instruments, or, in general, any interest or
instrument commonly known as a "security."
III. Enforcement - It is the responsibility of each Covered Person to act in
accordance with a high standard of conduct and to comply with the
policies and procedures set forth in this document. SSB Citi takes
seriously its obligation to monitor the personal investment activities
of its employees. Any violation of this policy by employees will be
considered serious, and may result in disciplinary action, which may
include the unwinding of trades, disgorgement of profits, monetary fine
or censure, and suspension or termination of employment. Any violation
of this policy by a Fund director will be reported to the Board of
Directors of the applicable Fund, which may impose such sanctions as it
deems appropriate.
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IV. Opening and Maintaining Employee Accounts - All employee brokerage
accounts, including spouse accounts, accounts for which the employee is
deemed to have beneficial ownership, and any other accounts over which
the employee and/or spouse exercise control, must be maintained either
at Salomon Smith Barney ("SSB") or at Citicorp Investment Services
("CIS")./2/ For spouses or other persons who, by reason of their
employment, are required to conduct their securities, commodities or
other financial transactions in a manner inconsistent with this policy,
or in other exceptional circumstances, employees may submit a written
request for an exemption to the Compliance Department. If approval is
granted, copies of trade confirmations and monthly statements must be
sent to the Compliance Department. In addition, all other provisions of
this policy will apply.
V. Excluded Accounts and Transactions - The following types of
accounts/transactions need not be maintained at SSB or CIS, nor are
they subject to the other restrictions of this policy:
1. Accounts at outside mutual funds that hold only shares of
open-end funds purchased directly from that fund company.
Note: transactions relating to closed-end funds are subject to
the pre-clearance, blackout period and other restrictions of
this policy;
2. Estate or trust accounts in which an employee or related
person has a beneficial interest, but no power to affect
investment decisions. There must be no communication between
the account(s) and the employee with regard to investment
decisions prior to execution. The employee must direct the
trustee/bank to furnish copies of confirmations and statements
to the Compliance Department;
3. Fully discretionary accounts managed by either an internal or
external registered investment adviser are permitted and may
be custodied away from SSB and CIS if (i) the employee
receives permission from the Regional Director of Compliance
and the unit's Chief Investment Officer, and (ii) there is no
communication between the manager and the employee with regard
to investment decisions prior to execution. The employee must
designate that copies of trade confirmations and monthly
statements be sent to the Compliance Department;
4. Employees may participate in direct investment programs which
allow the purchase of securities directly from the issuer
without the intermediation of a broker/dealer provided that
the timing and size of the purchases are established by a
pre-arranged, regularized schedule (e.g., dividend
reinvestment plans). Employees must pre-clear the transaction
at the time that the dividend reinvestment plan is being set
up. Employees also must provide documentation of these
arrangements and direct periodic (monthly or quarterly)
statements to the Compliance Department; and
5. In addition to the foregoing, the following types of
securities are exempted from pre-clearance, blackout periods,
reporting and short-term trading requirements: open-ended
mutual funds; open-end unit investment trusts; U.S. Treasury
bills, bonds and notes; mortgage pass-throughs (e.g. Ginnie
Maes) that are direct obligations of the U.S. government;
bankers acceptances; bank
/2/ This requirement will become effective as to all employees on a date to be
determined by the Compliance Department and may be subject to a phase-in
implementation process.
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certificates of deposit; commercial paper; and high quality
short-term debt instruments (meaning any instrument that has a
maturity at issuance of less than 366 days and that is rated
in one of the two highest rating categories by a nationally
recognized statistical rating organization, such as S&P or
Moody's), including repurchase agreements.
VI. Securities Holding Period/Short-Term Trading - Securities transactions
must be for investment purposes rather than for speculation.
Consequently, employees may not profit from the purchase and sale, or
sale and purchase, of the same or equivalent securities within sixty
(60) calendar days, calculated on a First In, First Out (FIFO) basis
(i.e., the security may be sold on the 61st day). Citigroup securities
received as part of an employee's compensation are not subject to the
60-day holding period. All profits from short-term trades are subject
to disgorgement. However, with the prior written approval of both a
Chief Investment Officer and the Regional Director of Compliance, and
only in rare and/or unusual circumstances, an employee may execute a
short-term trade that results in a significant loss or in break-even
status.
VII. Pre-Clearance - All SSB Citi employees must pre-clear all personal
securities transactions (see Section V for a listing of accounts,
transactions and securities that do not require pre-clearance). A copy
of the pre-clearance form is attached as Exhibit B. In addition,
employees are prohibited from engaging in more than twenty (20)
transactions in any calendar month, except with prior written approval
from their Chief Investment Officer, or designee. A transaction must
not be executed until the employee has received the necessary approval.
Pre-clearance is valid only on the day it is given. If a transaction is
not executed on the day pre-clearance is granted, it is required that
pre-clearance be sought again on a subsequent day (i.e., open orders,
such as limit orders, good until cancelled orders and stop-loss orders,
must be pre-cleared each day until the transaction is effected). In
connection with obtaining approval for any personal securities
transaction, employees must describe in detail any factors which might
be relevant to an analysis of the possibility of a conflict of
interest. Any trade that violates the pre-clearance process may be
unwound at the employee's expense, and the employee will be required to
absorb any resulting loss and to disgorge any resulting profit.
In addition to the foregoing, the CGAM NA Director of Global Equity
Research, or his designate, must approve all personal securities
transactions for members of the CGAM Research Department prior to
pre-clearance from the Compliance Department as set forth in this
section. Pre-approval by the Director of Research, or his designate, is
in addition to and does not replace the requirement for the
pre-clearance of all personal securities transactions.
VIII. Blackout Periods - No Covered Person shall purchase or sell, directly
or indirectly, any security in which he/she has, or by reason of the
transaction acquires, any direct or indirect beneficial ownership if
he/she has knowledge at the time of such transaction that the security
is being purchased or sold, or is being considered for purchase or
sale, by a managed fund or client account or in the case of a Fund
director, by the director's Fund. In addition, the following Blackout
Periods apply to the categories of SSB Citi employees listed below:
1. Portfolio Managers and Portfolio Manager Assistants - may not
buy or sell any securities for personal accounts seven (7)
calendar days before or after managed funds or client accounts
he/she manages trade in that security.
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2. Traders and Trader Assistants - may not buy or sell any
securities for personal accounts three (3) calendar days
before or seven (7) calendar days after managed funds or
client accounts he/she executes trades for trade in that
security.
3. Research Analysts and Research Assistants - may not buy or
sell any securities for personal accounts: seven (7) calendar
days before or after the issuance of or a change in any
recommendation; or seven (7) calendar days before or after any
managed fund or client account about which the employee is
likely to have trading or portfolio information (as determined
by the Compliance Department) trades in that security.
4. Advisory Personnel (see Section II for details) - may not buy
or sell any securities for personal accounts on the same day
that a managed fund or client account about which the employee
is likely to have trading or portfolio information (as
determined by the Compliance Department) trades in that
security.
5. Unit Trust Personnel - all employees assigned to the Unit
Trust Department are prohibited from transacting in any
security when a SSB Citi-sponsored Unit Trust portfolio is
buying the same (or a related) security, until seven business
days after the later of the completion of the accumulation
period or the public announcement of the trust portfolio.
Similarly, all UIT employees are prohibited from transacting
in any security held in a UIT (or a related security) seven
business days prior to the liquidation period of the trust.
Employees in the above categories may also be considered Advisory
Personnel for other accounts about which the employee is likely to
have trading or portfolio information (as determined by the
Compliance Department).
Any violation of the foregoing provisions will require the
employee's trade to be unwound, with the employee absorbing any
resulting loss and disgorging any resulting profit. Advisory
personnel are subject to the unwinding of the trade provision;
however, they may not be required to absorb any resulting loss (at
the discretion of the Compliance Department and the employee's
supervisor). Please be reminded that, regardless of the provisions
set forth above, all employees are always prohibited from
effecting personal securities transactions based on material,
non-public information.
Blackout period requirements shall not apply to any purchase or
sale, or series of related transactions involving the same or
related securities, involving 500 or fewer shares in the aggregate
if the issuer has a market capitalization (outstanding shares
multiplied by the current price per share) greater than $10
billion and is listed on a U.S. Stock Exchange or NASDAQ. Note:
Pre-clearance is still required. Under certain circumstances, the
Compliance Department may determine that an employee may not rely
upon this "Large Cap/De Minimis" exemption. In such a case, the
employee will be notified prior to or at the time the
pre-clearance request is made.
IX. Prohibited Transactions - The following transactions by SSB Citi
employees are prohibited without the prior written approval from the
Chief Investment Officer, or designee, and the Regional Compliance
Director:
1. The purchase of private placements; and
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2. The acquisition of any securities in an initial public
offering (new issues of municipal debt securities may be
acquired subject to the other requirements of this policy
(e.g., pre-clearance).)
X. Transactions in Options and Futures - SSB Citi employees may buy or
sell derivative instruments such as individual stock options, options
and futures on indexes and options and futures on fixed-income
securities, and may buy or sell physical commodities and futures and
forwards on such commodities. These transactions must comply with all
of the policies and restrictions described in this policy, including
pre-clearance, blackout periods, transactions in Citigroup securities
and the 60-day holding period. However, the 60-day holding period does
not apply to individual stock options that are part of a hedged
position where the underlying stock has been held for more than 60 days
and the entire position (including the underlying security) is closed
out.
XI. Prohibited Recommendations - No Covered Person shall recommend or
execute any securities transaction by any managed fund or client
account, or, in the case of a Fund director, by the director's Fund,
without having disclosed, in writing, to the Chief Investment Officer,
or designee, any direct or indirect interest in such securities or
issuers, except for those securities purchased pursuant to the "Large
Cap/De Minimis" exemption described in Section VIII above. Prior
written approval of such recommendation or execution also must be
received from the Chief Investment Officer, or designee. The interest
in personal accounts could be in the form of:
1. Any direct or indirect beneficial ownership of any securities
of such issuer;
2. Any contemplated transaction by the person in such securities;
3. Any position with such issuer or its affiliates; or
4. Any present or proposed business relationship between such
issuer or its affiliates and the person or any party in which
such person has a significant interest.
XII. Transactions in Citigroup Securities - Unless an SSB Citi employee is a
member of a designated group subject to more restrictive provisions, or
is otherwise notified to the contrary, the employee may trade in
Citigroup securities without restriction (other than the pre-clearance
and other requirements of this policy), subject to the limitations set
forth below.
Employees whose jobs are such that they know about Citigroup's
quarterly earnings prior to release may not engage in any
transactions in Citigroup securities during the "blackout
periods" beginning on the first day of a calendar quarter and
ending on the second business day following the release of
earnings for the prior quarter. Members of the SSB Citi
Executive Committee and certain other senior SSB Citi
employees are subject to these blackout periods.
Stock option exercises are permitted during a blackout period
(but the simultaneous exercise of an option and sale of the
underlying stock is prohibited). With regard to exchange
traded options, no transactions in Citigroup options are
permitted except to close or roll an option position that
expires during a blackout period. Charitable contributions of
Citigroup securities may be made during the blackout period,
but an individual's private foundation may not sell donated
Citigroup common stock during
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the blackout period. "Good `til cancelled" orders on Citigroup
stock must be cancelled before entering a blackout period and
no such orders may be entered during a blackout period.
No employee may engage at any time in any personal
transactions in Citigroup securities while in possession of
material non-public information. Investments in Citigroup
securities must be made with a long-term orientation rather
than for speculation or for the generation of short-term
trading profits. In addition, please note that employees may
not engage in the following transactions:
. Short sales of Citigroup securities;
. Purchases or sales of options ("puts" or "calls") on
Citigroup securities, except writing a covered call
at a time when the securities could have been sold
under this policy;
. Purchases or sales of futures on Citigroup
securities; or
. Any transactions relating to Citigroup securities
that might reasonably appear speculative.
The number of Citigroup shares an employee is entitled to in
the Citigroup Stock Purchase Plan is not treated as a long
stock position until such time as the employee has given
instructions to purchase the shares of Citigroup. Thus,
employees are not permitted to use options to hedge their
financial interest in the Citigroup Stock Purchase Plan.
Contributions into the firm's 401(k) Plan are not subject to
the restrictions and prohibitions described in this policy.
XIII. Acknowledgment and Reporting Requirements - SSB Citi Employees - All
new SSB Citi employees must certify that they have received a copy of
this policy, and have read and understood its provisions. In addition,
all SSB Citi employees must:
1. Acknowledge receipt of the policy and any
modifications thereof, in writing (see Exhibit C for
the form of Acknowledgment);
2. Within 10 days of becoming an SSB Citi employee,
disclose in writing all information with respect to
all securities beneficially owned and any existing
personal brokerage relationships (employees must also
disclose any new brokerage relationships whenever
established). Such information should be provided on
the form attached as Exhibit D;
3. Direct their brokers to supply, on a timely basis,
duplicate copies of confirmations of all personal
securities transactions (Note: this requirement may
be satisfied through the transmission of automated
feeds);
4. Within 10 days after the end of each calendar
quarter, provide information relating to securities
transactions executed during the previous quarter for
all securities accounts (Note: this requirement may
be satisfied through the transmission of automated
feeds);
5. Submit an annual holdings report containing similar
information that must be current as of a date no more
than 30 days before the report is submitted, and
confirm at least annually all brokerage relationships
and any and all
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outside business affiliations (Note: this requirement
may be satisfied through the transmission of
automated feeds or the regular receipt of monthly
brokerage statements); and
6. Certify on an annual basis that he/she has read and
understood the policy, complied with the requirements
of the policy and that he/she has pre-cleared and
disclosed or reported all personal securities
transactions and securities accounts required to be
disclosed or reported pursuant to the requirements of
the policy.
Fund Directors - Fund Directors shall deliver the information required
by Items 1 through 6 of the immediately preceding paragraph, except
that a Fund director who is not an "interested person" of the Fund
within the meaning of Section 2(a)(19) of the Investment Company Act of
1940, and who would be required to make reports solely by reason of
being a Fund Director, is not required to make the initial and annual
holdings reports required by Items 2 and 5. Also, a "non-interested"
Fund Director need not supply duplicate copies of confirmations of
personal securities transactions required by Item 3, and need only make
the quarterly transactions reports required by Item 4 as to any
security if at the time of a transaction by the Director in that
security, he/she knew or in the ordinary course of fulfilling his/her
official duties as a Fund Director should have known that, during the
15-day period immediately preceding or following the date of that
transaction, that security is or was purchased or sold by that
Director's Fund or was being considered for purchase or sale by that
Director's Fund.
Disclaimer of Beneficial Ownership - The reports described in Items 4
and 5 above may contain a statement that the reports shall not be
construed as an admission by the person making the reports that he/she
has any direct or indirect beneficial ownership in the securities to
which the reports relate.
XIV. Handling of Disgorged Profits - Any amounts that are paid/disgorged by
an employee under this policy shall be donated by SSB Citi to one or
more charities. Amounts donated may be aggregated by SSB Citi and paid
to such charity or charities at the end of each year.
XV. Confidentiality - All information obtained from any Covered Person
pursuant to this policy shall be kept in strict confidence, except that
such information will be made available to the Securities and Exchange
Commission or any other regulatory or self-regulatory organization or
to the Fund Boards of Directors to the extent required by law,
regulation or this policy.
XVI. Other Laws, Rules and Statements of Policy - Nothing contained in this
policy shall be interpreted as relieving any person subject to the
policy from acting in accordance with the provision of any applicable
law, rule or regulation or, in the case of SSB Citi employees, any
statement of policy or procedure governing the conduct of such person
adopted by Citigroup, its affiliates and subsidiaries.
XVII. Retention of Records - All records relating to personal securities
transactions hereunder and other records meeting the requirements of
applicable law, including a copy of this policy and any other policies
covering the subject matter hereof, shall be maintained in the manner
and to the extent required by applicable law, including Rule 17j-1
under the 1940 Act. The Compliance Department shall have the
responsibility for maintaining records created under this policy.
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XVIII. Monitoring - SSB Citi takes seriously its obligation to monitor the
personal investment activities of its employees and to review the
periodic reports of all Covered Persons. Employee personal investment
transaction activity will be monitored by the Compliance Department.
All noted deviations from the policy requirements will be referred back
to the employee for follow-up and resolution (with a copy to be
supplied to the employee's supervisor). Any noted deviations by Fund
directors will be reported to the Board of Directors of the applicable
Fund for consideration and follow-up as contemplated by Section III
hereof.
XIX. Exceptions to the Policy - Any exceptions to this policy must have the
prior written approval of both the Chief Investment Officer and the
Regional Director of Compliance. Any questions about this policy should
be directed to the Compliance Department.
XX. Board Review - Fund management and SSB Citi shall provide to the Board
of Directors of each Fund, on a quarterly basis, a written report of
all material violations of this policy, and at least annually, a
written report and certification meeting the requirements of Rule 17j-1
under the 1940 Act.
XXI. Other Codes of Ethics - To the extent that any officer of any Fund is
not a Covered Person hereunder, or an investment subadviser of or
principal underwriter for any Fund and their respective access persons
(as defined in Rule 17j-1) are not Covered Persons hereunder, those
persons must be covered by separate codes of ethics which are approved
in accordance with applicable law.
XXII. Amendments - SSB Citi Employees - Unless otherwise noted herein, this
policy shall become effective as to all SSB Citi employees on March 30,
2000. This policy may be amended as to SSB Citi employees from time to
time by the Compliance Department. Any material amendment of this
policy shall be submitted to the Board of Directors of each Fund for
approval in accordance with Rule 17j-1 under the 1940 Act.
Fund Directors - This policy shall become effective as to a Fund upon
the approval and adoption of this policy by the Board of Directors of
that Fund in accordance with Rule 17j-1 under the 1940 Act or at such
earlier date as determined by the Secretary of the Fund. Any material
amendment of this policy that applies to the directors of a Fund shall
become effective as to the directors of that Fund only when the Board
of Directors of that Fund has approved the amendment in accordance with
Rule 17j-1 or at such earlier date as determined by the Secretary of
the Fund.
March 15, 2000
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EXHIBIT A
EXPLANATION OF BENEFICIAL OWNERSHIP
You are considered to have "Beneficial Ownership" of Securities if you have or
share a direct or indirect "Pecuniary Interest" in the Securities.
You have a "Pecuniary Interest" in Securities if you have the opportunity,
directly or indirectly, to profit or share in any profit derived from a
transaction in the Securities.
The following are examples of an indirect Pecuniary Interest in Securities:
1. Securities held by members of your immediate family sharing
the same household; however, this presumption may be rebutted
by convincing evidence that profits derived from transactions
in these Securities will not provide you with any economic
benefit.
"Immediate family" means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and includes any adoptive
relationship.
2. Your interest as a general partner in Securities held by a
general or limited partnership.
3. Your interest as a manager-member in the Securities held by a
limited liability company.
You do not have an indirect Pecuniary Interest in Securities held by a
corporation, partnership, limited liability company or other entity in which you
hold an equity interest, unless you are a controlling equityholder or you have
or share investment control over the Securities held by the entity.
The following circumstances constitute Beneficial Ownership by you of Securities
held by a trust:
1. Your ownership of Securities as a trustee where either you or
members of your immediate family have a vested interest in the
principal or income of the trust.
2. Your ownership of a vested interest in a trust.
3. Your status as a settlor of a trust, unless the consent of all
of the beneficiaries is required in order for you to revoke
the trust.
The foregoing is a summary of the meaning of "beneficial ownership". For
purposes of the attached policy, "beneficial ownership" shall be interpreted in
the same manner as it would be in determining whether a person is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934 and the rules
and regulations thereunder
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EXHIBIT B
SSB CITI ASSET MANAGEMENT GROUP ("SSB CITI") EMPLOYEE
TRADE PRE-APPROVAL FORM
(PAGE 1)
Instructions:
All employees are required to submit this form to the Compliance Department
prior to placing a trade. The Compliance Department will notify the employee as
to whether or not pre-approval is granted. Pre-approval is effective only on the
date granted.
<TABLE>
<CAPTION>
I. Employee Information
- -------------------------------------------------------------------------- ----------------------------
<S> <C>
Employee Name: Phone Number:
- -------------------------------------------------------------------------- ----------------------------
Account Title:
- -------------------------------------------------------------------------- ----------------------------
Account Number:
- ------------------------------------------------------------------------------------------- -----------
Managed Account(s)/Mutual Fund(s) for which employee is a Covered Person:
- ------------------------------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<CAPTION>
I. Security Information
IPO [ ] [ ] Private Placement [ ] [ ]
Yes No Yes No
- ------------------------- --------------------- --------- ----------- ----------------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Security Name Security Type-e.g., Ticker Buy/Sell If Sale, Date First No. Large Cap Stock?/2/
common stock, etc. Acquired/1/ Shares/Units
- ------------------------- --------------------- --------- ----------- ----------------------- -------------- ------------------
- ------------------------- --------------------- --------- ----------- ----------------------- -------------- ------------------
- ------------------------- --------------------- --------- ----------- ----------------------- -------------- ------------------
- ------------------------- --------------------- --------- ----------- ----------------------- -------------- ------------------
I. Your position with the Firm:
(Please check one of the following) [ ] Portfolio Manager / Portfolio Manager Assistant
[ ] Research Analyst / Research Analyst Assistant
[ ] Trader / Trader Assistant
[ ] Unit Trust Personnel
[ ] Other (Advisory Personnel)
NOTE: o All Portfolio Managers must complete the reverse side of this form.
o All Research Analysts and Research Analyst Assistants located in Connecticut must provide
an additional form signed by Rama Krishna or one of his designees.
</TABLE>
I. Certification
I certify that I will not effect the transaction(s) described above unless and
until pre-clearance approval is obtained from the Compliance Department. I
further certify that, except as described on an attached page, to the best of my
knowledge, the proposed transaction(s) will not result in a conflict of interest
with any account managed by SSB Citi (including mutual funds managed by SSB
Citi). I further certify that, to the best of my knowledge, there are no pending
orders for any security listed above or any related security for any Managed
Accounts and/or Mutual Funds for which I am considered a Covered Person. The
proposed transaction(s) are consistent with all firm policies regarding employee
personal securities transactions.
Signature Date
---------------------------------- --------------------------
12
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
For Use By the Compliance Department
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
[] [] [] [] Reason not granted:
Are Securities Restricted? Yes No Pre-approval Granted? Yes No
- ----------------------------------------------------------------------------- --------------------- ---------------------------
Compliance Department Signature: Date: Time:
- ----------------------------------------------------------------------------- --------------------- ---------------------------
</TABLE>
1. All securities sold must have been held for at least 60 days.
2. For purposes of SSB Citi's personal trading policies, a Large Cap Exemption
applies to transactions involving 500 or fewer shares in aggregate and the
stock is one that is listed on a U.S. stock exchange or NASDAQ and whose
issuer has a market capitalization (outstanding shares multiplied by
current price) of more than $10 billion.
SSB CITI ASSET MANAGEMENT GROUP ("SSB CITI")
PAGE 2 - PORTFOLIO MANAGER CERTIFICATION
All portfolio managers must answer the following questions in order to obtain
pre-approval. All questions must be answered or the form will be returned. If a
question is not applicable, please indicate "N/A".
1. Have your client accounts purchased or sold the securities (or related
securities) in the past seven calendar days? Yes [] No []
2. Do you intend to purchase or sell the securities (or related
securities) for any client accounts in the next seven calendar days?
Yes [] No []
3. Do any of your client accounts currently own the securities (or related
securities)? Yes [] No []
3a. If yes, and you are selling the securities for your personal
account, please explain why the sale of the securities was
rejected for client accounts but is appropriate for your
personal account:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. Have you, in the past 7 calendar days, considered purchasing the
securities (or related securities) for your client accounts?
Yes [] No []
4a. If yes, and you are purchasing securities for your personal
account, please explain why the purchase of the securities is
appropriate for your account but has been rejected for your
client accounts:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
13
<PAGE>
4b. If no, and you are purchasing securities for your personal account,
please explain why the purchase of the securities has not been
considered for your client accounts:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Certification
I certify that I will not effect the transaction(s) described above unless and
until pre-clearance approval is obtained from the Compliance Department. I
further certify that, except as described on an attached page, to the best of my
knowledge, the proposed transaction(s) will not result in a conflict of interest
with any account managed by SSB Citi (including mutual funds managed by SSB
Citi). I further certify that, to the best of my knowledge, there are no pending
orders for any security listed above or any related securities for any Managed
Accounts and/or Mutual Funds for which I am considered a Covered Person. The
proposed transaction(s) are consistent with all firm policies regarding employee
personal securities transactions.
Signature Date
--------------------------------- ----------------------
<TABLE>
<CAPTION>
===============================================================================================================================
For Use By the Compliance Department
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
[] [] [] [] Reason not granted:
Are Securities Restricted? Yes No Pre-approval Granted? Yes No
- ----------------------------------------------------------------------------- --------------------- ---------------------------
Compliance Department Signature: Date: Time:
- ----------------------------------------------------------------------------- --------------------- ---------------------------
</TABLE>
14
<PAGE>
EXHIBIT C
PERSONAL INVESTMENT POLICY
FOR
SSB CITI ASSET MANAGEMENT GROUP - NORTH AMERICA
AND CERTAIN REGISTERED INVESTMENT COMPANIES
ACKNOWLEDGMENT
I acknowledge that I have received and read the Personal Investment Policy for
SSB Citi Asset Management Group - North America and Certain Registered
Investment Companies dated March 15, 2000. I understand the provisions of the
Personal Investment Policy as described therein and agree to abide by them.
Employee Name (Print): ________________________
Signature: ________________________
Date: ________________________
- -----------------------------------------------------------------------
Social Security Number: Date of Hire:
- -----------------------------------------------------------------------
Job Function & Title: Supervisor:
- -----------------------------------------------------------------------
Location:
- -----------------------------------------------------------------------
Floor and/or Zone: Telephone Number:
- -----------------------------------------------------------------------
NASD Registered Employee (Please check one) [ ] Yes [_] No
- --------------------------------------------------------------------------------
If registered, list Registration \ License:
- --------------------------------------------------------------------------------
This Acknowledgment form must be completed and returned no later than March 30,
2000 to the Compliance Department - Attention: Vera Sanducci-Dendy, 388
Greenwich Street, 23rd Floor, New York, NY 10013.
15
<PAGE>
EXHIBIT D
SSB Citi Asset Management Group - North America Personal Investment Policy
Financial Services Firm Disclosure and Initial Report of Securities Holdings
This report must be signed, dated and returned within 10 days of employment to
the Compliance Department -Attention: Vera Sanducci-Dendy, 388 Greenwich Street,
23rd Floor
- --------------------------------------------------------------------------------
Employee Name: ____________________________ Date of Employment: ______________
- --------------------------------------------------------------------------------
Brokerage Accounts:
|_| I do not have a beneficial interest in any account(s) with any
financial services firm.
|_| I maintain the following account(s) with the financial services firm(s)
listed below (attach additional information if necessary-e.g., a
brokerage statement). Please include the information required below for
any broker, dealer or bank where an account is maintained which holds
securities for your direct or indirect benefit as of the date you began
your employment.
- --------------------------------------------------------------------------------
Name of Financial Service(s) Firm and Address Account Title Account Number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Securities Holdings:
Complete the following (or attach a copy of your most recent statement(s))
listing all of your securities holdings, with the exception of open-ended mutual
funds and U.S Government securities if:
o You own securities which are held by financial services firm(s) as
described above. If you submit a copy of a statement, it must include
all of the information set forth below. Please be sure to include any
additional securities purchased since the date of the brokerage
statement which is attached. Use additional sheets if necessary.
o Your securities are not held with a financial service(s) firm (e.g.,
dividend reinvestment programs and private placements).
<TABLE>
<CAPTION>
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Title of Security Ticker Symbol # of Shares Principal Amt. Held Since Financial Services Firm
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
|_| I have no securities holdings to report. I certify that I have received
the SSB Citi - North America Personal Investment Policy and have read
it and understood its contents. I further certify that the above
represents a complete and accurate description of my brokerage
account(s) and securities holdings as of my date of employment.
Signature: _____________________________ Date of Signature: _________________
17
<PAGE>
EXHIBIT 99.2(U)
FORM OF SHARE CERTIFICATE OF ZENIX INCOME FUND INC.
<PAGE>
CERTIFICATE NUMBER OF
NUMBER SHARES
- -----------
2,400
-----
ZENIX INCOME FUND INC.
Organized Under the Laws of the State of Maryland
Auction Rate Cumulative Preferred Stock
$0.01 Par Value Per Share
$25,000 Liquidation Preference Per Share
This certifies that [Cede & Co.] is the owner of fully paid
and non-assessable shares of Auction Rate Cumulative Preferred Stock, $0.01 par
value per share, $25,000 liquidation preference per share, of Zenix Income Fund
Inc. (the "Fund") transferable only on the books of the Fund by the holder
thereof in person or by duly authorized Attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid unless
countersigned by the transfer agent and registrar.
IN WITNESS WHEREOF, the Fund has caused this Certificate to be
signed by its duly authorized officers and its Seal to be hereunto affixed this
____ day of April A.D. 2000.
_____________________________ ZENIX INCOME FUND INC.
As Transfer Agent and Registrar
By: By:
- ---------------------- ----------------------
Authorized Signature Vice President
Attest:
----------------------
Assistant Secretary
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
_______________ shares of Auction Rate Cumulative
<PAGE>
Preferred Stock represented by this Certificate, and does hereby irrevocably
constitute and appoint ________________ Attorney to transfer said Stock on the
books of the within named Fund with full power of substitution in the premises.
Dated: _______________
In presence of
- ------------------------- ----------------------
Shares of Auction Rate Cumulative Preferred Stock evidenced by this
Certificate may only be sold, transferred, or otherwise disposed of
pursuant to the provisions of the Fund's Articles Supplementary
establishing and fixing the rights and preferences of the Fund's
Auction Rate Cumulative Preferred Stock, a copy of which may be
obtained at the office of the Maryland State Department of Assessments
and Taxation. The Fund will furnish information about the restrictions
on transferability to any stockholder upon request and without charge.
Any such request should be addressed to the Secretary of the Fund.
The Fund also will furnish to any stockholder, upon request and without
charge, a full statement of the designations, voting powers,
restrictions, limitations as to dividends, qualifications, and terms
and conditions of redemption and relative rights and preferences of the
stock of each class and series of capital stock of the Fund authorized
to be issued, so far as they have been determined, and the authority of
the Board of Directors to determine the relative rights and preferences
of subsequent classes or series. Any such request should be addressed
to the Secretary of the Fund.
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
N-SAR AND THE FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCES TO SUCH DOCUMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<INVESTMENTS-AT-COST> 150,481,343
<INVESTMENTS-AT-VALUE> 143,897,639
<RECEIVABLES> 4,114,675
<ASSETS-OTHER> 108
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 148,012,422
<PAYABLE-FOR-SECURITIES> 595,609
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,568,499
<TOTAL-LIABILITIES> 31,164,108
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 147,110,003
<SHARES-COMMON-STOCK> 15,936,845
<SHARES-COMMON-PRIOR> 15,690,134
<ACCUMULATED-NII-CURRENT> (222,667)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (23,340,564)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6,698,458)
<NET-ASSETS> 116,848,314
<DIVIDEND-INCOME> 71,977
<INTEREST-INCOME> 6,677,369
<OTHER-INCOME> 0
<EXPENSES-NET> 723,422
<NET-INVESTMENT-INCOME> 6,025,924
<REALIZED-GAINS-CURRENT> (4,433,436)
<APPREC-INCREASE-CURRENT> (4,069,789)
<NET-CHANGE-FROM-OPS> (2,487,301)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,228,161
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 246,711
<NET-CHANGE-IN-ASSETS> (7,333,884)
<ACCUMULATED-NII-PRIOR> (62,873)
<ACCUMULATED-GAINS-PRIOR> (18,854,685)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 528,263
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 723,422
<AVERAGE-NET-ASSETS> 120,628,277
<PER-SHARE-NAV-BEGIN> 5.96
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> (0.54)
<PER-SHARE-DIVIDEND> 0.39
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.41
<EXPENSE-RATIO> 3.45
</TABLE>
