<PAGE>
As filed with the Securities and Exchange Commission on April 11, 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. 2
[_] Post-Effective Amendment No. ____
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] Amendment No. 14
--------------------
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>
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 14, 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 14, 2000.
-----------
Salomon Smith Barney
APRIL 14, 2000
<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
Policies.................... The Fund's investment objective is to seek
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 Wednesday. If the Wednesday 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
Wednesday. 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 or about 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>
Six Months
Ended Year Ended March 31,
Sept. 30, -----------------------------------
1999 1999 1998 1997 1996
----------- ------- ------ ------ -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 5.96 $ 6.96 $ 6.45 $ 6.31 $ 5.88
Net Investment Income..... 0.38 0.82 0.87 0.92 0.86
Net Realized and
Unrealized Gain (Loss)... (0.54) (0.97) 0.56 0.08 0.45
Total from Investment
Operations............... (0.16) (0.15) 1.43 1.00 1.31
Less Distributions
Dividends (from net
investment income)
(i)To Outstanding
Preferred Stockholders. (0.06) (0.14) (0.14) (0.14) (0.15)
(ii)To Common
Shareholders........... (0.33) (0.69) (0.78) (0.72) (0.73)
Distributions (from
capital gains)
(i)To Common
Shareholders........... -- (0.02) -- -- --
Returns of Capital
(i)To Common
Shareholders........... -- -- -- -- --
Total Distributions....... (0.39) (0.85) (0.92) (0.86) (0.88)
Net Asset Value, End of
Period................... $ 5.41 $ 5.96 $ 6.96 $ 6.45 $ 6.31
Per Share Market Value,
End of Period............ $ 5.31 $ 5.88 $ 7.50 $ 7.25 $ 7.00
Total Investment Return,
Based on Market Value(2). (4.14)%(3) (12.53)% 14.81 % 15.55 % 18.35 %
Total Investment Return,
Based on Net Asset
Value(2)................. (3.78)%(3) (4.38)% 19.75 % 14.04 % 20.01 %
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 6.76 $ 6.86 $ 6.39 $ 5.58 $ 6.30 $ 8.71
Net Investment Income... 0.93 1.02 1.07 1.08 1.17 1.42
Net Realized and
Unrealized Gain (Loss). (0.78) (0.13) 0.51 0.82 (0.74) (2.37)
Total from Investment
Operations............. 0.15 0.89 1.58 1.90 0.43 (0.95)
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......... (0.16) (0.11) -- -- -- --
(ii)To 9.67% Preferred
Stockholders......... -- (0.12) (0.23) (0.24) (0.25) (0.26)
(iii)To Common
Shareholders......... (0.87) (0.82) (0.82) (0.85) (0.90) (1.20)
Change in Accumulated
Undeclared Dividends on
Preferred Stock........ -- 0.06 (0.01) -- -- --
Total Distributions..... (1.03) (0.99) (1.06) (1.09) (1.15) (1.46)
Net Asset Value, End of
Period................. $ 5.88 $ 6.76 $ 6.86 $ 6.39 $ 5.58 $ 6.30
Per Share Market Value,
End of Period.......... $ 6.63 $ 7.13 $ 7.25 $ 6.63 $ 5.50 $ 5.88
Total Investment
Return(2).............. 6.41 % 10.02 % 24.02 % 39.12 % 10.58 % (27.68)%
</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>
Year Ended March 31,
-----------------------------------
Six Months
Ended
Sept. 30,
1999 1999 1998 1997 1996
----------- ------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Assets(1), End of Period
(000)...................... $86,224 $93,561 $105,861 $95,034 $90,318
Ratio of Expenses to Average
Net Assets(2)
Interest Expense............ 1.85%(3) 1.81% 1.81% 1.92% 1.98%
Other Expense............... 1.60%(3) 1.53% 1.51% 1.59% 1.65%
Ratio of Net Income to
Average Net Assets(2)...... 13.30%(3) 12.99% 12.60% 14.35% 14.21%
Portfolio Turnover Rate..... 49% 91% 79% 101% 87%
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets(1), End of
Period (000)............ $80,309 $87,726 $85,225 $75,818 $62,518 $69,213
Ratio of Expenses to
Average Net Assets(2)
Interest Expense......... 1.58% 0.92% 1.14% 2.10% 4.18% 5.16%
Other Expense............ 1.65% 1.60% 1.99% 2.15% 2.47% 2.32%
Ratio of Net Income to
Average Net Assets(2)... 15.35% 14.38% 12.89% 14.16% 16.12% 15.11%
Portfolio Turnover Rate.. 79% 102% 93% 86% 68% 81%
</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 and other assets of the Fund 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 seek 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 15 but not more than 25 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 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) 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). In addition, under the
Investment Company Act, so long as
27
<PAGE>
any senior securities representing 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 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
indemnification to the Underwriter only to the extent that the Fund does not.
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 14, 2000
------------
Salomon Smith Barney
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
2,400 Shares
ZENIX INCOME FUND INC.
Auction Rate Cumulative Preferred Shares
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 14, 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; or (v) lend portfolio securities; or (vi) engage
in any reverse repurchase agreements; or (vii) merge or consolidate into or with
any other fund. 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. 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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 page 3 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 88.18%
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 Shares, $.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) -- 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) -- Underwriting Agreement between the Fund, SSB
Form of 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) -- Auction Agency Agreement between the Fund and Bankers
Trust Company
(3) -- 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 Registrant's Registration
Statement on Form N-2 (File Nos. 333-30248, 811-05484), Exhibit 2(s),
filed on February 11, 2000.
***** Incorporated herein by reference to the Registrant's Pre-Effectove
Amendment, No. 1 to the Registrant's Registration Statement on Form N-2
(File Nos. 333-30248; 811-05484), Exhibits 2(a), 2(j), 2(k)(1),
2(k)(4), 2(n), 2(r), 2(t), and 2(u), filed on April 7, 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...................... 40,000
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 1,130
7.00% Cumulative Preferred Stock, $.01 par value 1
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 11th 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 11, 2000
- --------------------- of the Board
Heath B. McLendon
/s/ Heath B. McLendon* Senior Vice President and Treasurer April 11, 2000
- ---------------------
Louis E. Daidone
</TABLE>
- ------------
*Pursuant to a Power of Attorney incorporated by reference as Exhibit 2(s)
hereto.
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Heath B. McLendon* Director April 11, 2000
- ----------------------
Allan J. Bloostein
/s/ Heath B. McLendon* Director April 11, 2000
- ----------------
Martin Brody
/s/ Heath B. McLendon* Director April 11, 2000
- ----------------
Dwight Crane
/s/ Heath B. McLendon* Director April 11, 2000
- ---------------------
Robert A. Frankel
/s/ Heath B. McLendon* Director April 11, 2000
- -------------------------
William R. Hutchinson
</TABLE>
- ----------
*Pursuant to a Power of Attorney incorporated by reference as Exhibit 2(s)
hereto.
<PAGE>
EXHIBIT INDEX
2D Articles Supplementary
2H Form of Underwriting Agreement
2K2 Auction Agency Agreement
2K3 Broker-Dealer Agreement
2L1 Opinion and Consent of Willkie Farr & Gallagher
2L2 Opinion and Consent of Venable, Baetjer and Howard, LLP
<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 Shares.
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 Shares ("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.
-2-
<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
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<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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<PAGE>
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 Shares 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
(b) of Section 3.
(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 (c)
of this Section 6.
(i) Unless otherwise required by law on the Fund's charter documents, 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 paragraph (b) of this Section
6. 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 solvent 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 (concerning valuation of options)
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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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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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;
(f) merge or consolidate into or with any other fund; or
(g) engage in any reverse repurchase agreeement.
(h) 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.
(i) 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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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.
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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<PAGE>
(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.
-30-
<PAGE>
(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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<PAGE>
(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.
-35-
<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 and
NASDAQ, National Market System.) 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 Shares, $.01
par value per share and liquidation preference $25,000 per share, of the
Fund.
-40-
<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
-42-
<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%.
-44-
<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
-46-
<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.
-48-
<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
-49-
<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:
Fabricating, Distribution, Mining and Sales; 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
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.
-50-
<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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
(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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<PAGE>
(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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<PAGE>
(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
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<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.
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<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:
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<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),
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<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.
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<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
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<PAGE>
therefor and required to deliver certificates therefor upon transfer or exchange
thereof.
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<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>
Auction Rate Cumulative Preferred Stock
ZENIX INCOME FUND INC.
2,400 Shares
Liquidation Preference $25,000 Per Share
UNDERWRITING AGREEMENT
----------------------
April 12, 2000
--------
SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Zenix Income Fund Inc., a Maryland corporation (the "Fund"), proposes,
of 2,400 shares of its Auction Rate Cumulative Preferred Stock (the "Preferred
Shares"), each with a liquidation preference of $25,000 per share (the Preferred
Shares to be sold hereby are referred to herein, collectively, as the "Shares").
The Shares will be authorized by, and subject to the terms and conditions of,
the Amended and Restated Articles and the Articles Supplementary of the Fund in
the forms filed as exhibits to the Registration Statement referred to in Section
1 of this agreement. The Fund and its investment adviser, SSB Citi Fund
Management LLC (the "Adviser"), wish to confirm as follows their agreement with
Salomon Smith Barney Inc. (the "Underwriter") in connection with the purchase of
the Shares by the Underwriter.
Collectively, (i) the Investment Advisory Agreement, dated July 30,
1993, between the Fund and the Adviser (the "Advisory Agreement"), (ii) the
Custodian Services Agreement, dated as of July 30, 1995, between the Fund and
-------- -------------
PNC Bank, National Association, (iii) the Auction Agency Agreement,
- ------------------------------
to be dated as of April 14, 2000, as supplemented by the Acceptance
--------------
Letter dated April 14, 2000, between the Fund and Bankers Trust Company
-------------- ------- -------------
and (iv) the Broker-Dealer Agreement, to be dated as of April 14, 2000,
--------------
as supplemented by the Acceptance Letter dated April 14, 2000, between the Fund
and Salomon Smith Barney Inc. are hereinafter referred to as the "Fund
Agreements". This Underwriting Agreement is hereinafter referred to as the
"Agreement".
1. Registration Statement and Prospectus. The Fund has prepared in
-------------------------------------
conformity
<PAGE>
2
with the provisions of the Securities Act of 1933, as amended (the "1933 Act"),
the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules
and regulations of the Securities and Exchange Commission (the "Commission")
promulgated under the 1933 Act (the "1933 Act Rules and Regulations") and the
1940 Act (the "1940 Act Rules and Regulations" and, together with the 1933 Act
Rules and Regulations, the "Rules and Regulations") a registration statement on
Form N-2, as amended (File Nos. 333-30248 and 811-05484), under the 1933 Act and
the 1940 Act (the "Registration Statement"), including a Prospectus relating to
the Shares, and has filed the Registration Statement and Prospectus in
accordance with the 1933 Act and 1940 Act. The Fund also has filed a
notification of registration of the Fund as an investment company under the 1940
Act on Form N-8A (the "1940 Act Notification"). The term "Registration
Statement" as used in this Agreement means the Registration Statement (including
all financial schedules and exhibits), as amended at the time it becomes
effective under the 1933 Act or, if the Registration Statement became effective
under the 1933 Act prior to the execution of this Agreement, as amended or
supplemented at the time it became effective, prior to the execution of this
Agreement. If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed under the
1933 Act and must be declared effective before the offering of the Shares may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If the Fund
has filed an abbreviated registration statement to register an additional amount
of Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall include such Rule 462 Registration Statement. The term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement or, if the
prospectus and statement of additional information included in the Registration
Statement omit information in reliance on Rule 430A under the 1933 Act Rules and
Regulations and such information is included in a prospectus and statement of
additional information filed with the Commission pursuant to Rule 497 under the
1933 Act, the term "Prospectus" as used in this Agreement means the prospectus
and statement of additional information in the forms included in the
Registration Statement as supplemented by the addition of the information
contained in the prospectus filed with the Commission pursuant to Rule 497. The
term "Prepricing Prospectus" as used in this Agreement means the prospectus and
statement of additional information subject to completion in the forms included
in the registration statement at the time of filing of amendment no. 1 to the
registration statement with the Commission on April 7, 2000, and as such
-------------
prospectus and statement of additional information shall have been amended from
time to time prior to the date of the Prospectus, together with any other
prospectus and statement of additional information relating to the Fund other
than the Prospectus approved in writing by or directly or indirectly prepared by
the Fund or the Adviser; it being understood that the definition of Prepricing
Prospectus above shall not include any Prepricing Prospectus prepared by the
Underwriter unless approved in writing by the Fund or the Adviser. The terms
"Registration Statement", "Prospectus" and "Prepricing Prospectus" shall also
include any financial statements incorporated by reference therein.
The Fund has furnished the Underwriter with copies of such
registration statement, each amendment to such registration statement filed with
the Commission and each Prepricing Prospectus.
<PAGE>
3
2. Agreements to Sell and Purchase. The Fund hereby agrees, subject
-------------------------------
to all the terms and conditions set forth herein, to issue and sell to the
Underwriter and, upon the basis of the representations, warranties and
agreements of the Fund and the Adviser herein contained and subject to all the
terms and conditions set forth herein, the Underwriter agrees to purchase from
the Fund, at a purchase price of $ $25,000 per Share, the number of shares of
Preferred Shares set forth opposite the name of the Underwriter in Schedule I
hereto.
3. Terms of Public Offering. The Fund and the Adviser have been
------------------------
advised by the Underwriter that the Underwriter proposes to make a public
offering of the Shares as soon after the Registration Statement and this
Agreement have become effective as in the Underwriter's judgment is advisable
and initially to offer the Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
-------------------------------------------
Underwriter of and payment for the Shares shall be made at the office of Simpson
Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, at 9:30 A.M., New
York City time, on April 14, 2000 (the "Closing Date"). The place of closing
--------
for the Shares and the Closing Date may be varied by agreement between the
Underwriter and the Fund.
5. Agreements of the Fund and the Adviser. The Fund and the Adviser,
--------------------------------------
jointly and severally, agree with the Underwriter as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective under the 1933 Act before the offering of the Shares
may commence, the Fund will endeavor to cause the Registration Statement or such
post-effective amendment to become effective under the 1933 Act as soon as
possible and will advise the Underwriter promptly and, if requested by the
Underwriter, will confirm such advice in writing when the Registration Statement
or such post-effective amendment has become effective.
(b) The Fund will advise the Underwriter promptly and, if requested
by the Underwriter, will confirm such advice in writing: (i) of any request made
by the Commission for amendment of or a supplement to the Registration
Statement, any Prepricing Prospectus or the Prospectus (or any amendment or
supplement to any of the foregoing) or for additional information, (ii) of the
issuance by the Commission, the National Association of Securities Dealers, Inc.
<PAGE>
4
(the "NASD"), any state securities commission, any national securities exchange,
any arbitrator, any court or any other governmental, regulatory, self-regulatory
or administrative agency or any official of any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any Prepricing Prospectus, or any sales material (as
hereinafter defined), of any notice pursuant to Section 8(e) of the 1940 Act, of
the suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purposes, (iii)
of receipt by the Fund, the Adviser, any affiliate of the Fund or the Adviser or
any representative or attorney of the Fund or the Adviser of any other material
communication from the Commission, the NASD, any state securities commission,
any national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Fund (if such communication relating to the Fund is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as hereinafter defined) (or any
amendment or supplement to any of the foregoing) or this Agreement or any of the
Fund Agreements and (iv) within the period of time referred to in paragraph (f)
below, of any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the Fund
or the Adviser or of the happening of any other event which makes any statement
of a material fact made in the Registration Statement or the Prospectus, or any
Prepricing Prospectus or any sales material (as hereinafter defined) (or any
amendment or supplement to any of the foregoing) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus, or any Prepricing Prospectus or any sales materials (as herein
defined) (or any amendment or supplement to any of the foregoing) in order to
state a material fact required by the 1933 Act, the 1940 Act or the Rules and
Regulations to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading or of the necessity to amend or supplement the Registration
Statement, the Prospectus, or any Prepricing Prospectus or any sales material
(as herein defined) (or any amendment or supplement to any of the foregoing) to
comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other
law or order of any court or regulatory body. If at any time the Commission,
the NASD, any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official shall issue any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) or suspending the qualification of the
Shares for offering or sale in any jurisdiction, the Fund will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Fund will furnish to the Underwriter, without charge, three
signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to the Underwriter, without charge, such
number of conformed copies of the Registration Statement as
<PAGE>
5
originally filed and of each amendment thereto, but without exhibits, as the
Underwriter may reasonably request.
(d) The Fund will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus, or any sales
material (as herein defined), of which the Underwriter shall not previously have
been advised or to which the Underwriter shall reasonably object after being so
advised or (ii) so long as, in the opinion of counsel for the Underwriter, a
Prospectus is required by the 1933 Act to be delivered in connection with sales
by the Underwriter or any dealer, file any information, documents or reports
pursuant to the Securities Exchange Act of 1934, as amended (the A1934 Act"),
without delivering a copy of such information, documents or reports to the
Underwriter prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Fund
has delivered to the Underwriter, without charge, in such quantities as the
Underwriter has requested, copies of each form of the Prepricing Prospectus.
The Fund consents to the use, in accordance with the provisions of the 1933 Act
and with the state securities or blue sky laws of the jurisdictions in which the
Shares are offered by the Underwriter and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Fund.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriter a prospectus is required by the 1933 Act to be
delivered in connection with sales by the Underwriter or any dealer, the Fund
will expeditiously deliver to the Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
the Underwriter may reasonably request. The Fund consents to the use of the
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the 1933 Act and with the state securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriter and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the 1933 Act to be delivered in connection with sales by the
Underwriter or any dealer. If during such period of time any event shall occur
that in the judgment of the Fund or in the opinion of counsel for the
Underwriter is required to be set forth in the Registration Statement or the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Registration Statement or the Prospectus to comply with the 1933 Act,
the 1940 Act, the Rules and Regulations or any other federal law, rule or
regulation, or any state securities or blue sky disclosure laws, rules or
regulations, the Fund will forthwith prepare and, subject to the provisions of
paragraph (d) above, promptly file with the Commission an appropriate supplement
or amendment thereto, and will expeditiously furnish to the Underwriter and
dealers, without charge, a reasonable number of copies thereof. In the event
that the Fund and the Underwriter agree that the Registration Statement or the
Prospectus should be amended or supplemented, the Fund, if requested by the
Underwriter, will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.
<PAGE>
6
(g) The Fund will make generally available to its security holders an
earnings statement, which need not be audited, covering a twelve-month period
ending not later than 15 months after the effective date of the Registration
Statement as soon as practicable after the end of such period, which earnings
statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule
158 of the 1933 Act Rules and Regulations.
(h) During the period of five years hereafter, the Fund will furnish
to the Underwriter (i) as soon as available, a copy of each report of the Fund
mailed to shareholders or filed with the Commission or furnished to the New York
Stock Exchange (the "NYSE") other than reports on Form N-SAR, and (ii) from time
to time such other information concerning the Fund as the Underwriter may
reasonably request.
(i) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than by notice given by
the Underwriter terminating this Agreement pursuant to Section 12 hereof or
pursuant to the second paragraph of Section 11 hereof) or if this Agreement
shall be terminated by the Underwriter because of any failure or refusal on the
part of the Fund or the Adviser to comply with the terms or fulfill any of the
conditions of this Agreement, the Fund agrees to reimburse the Underwriter for
all out-of-pocket expenses (including reasonable fees and expenses of counsel
for the Underwriter) incurred by the Underwriter in connection herewith.
(j) The Fund will apply the net proceeds from the sale of the Shares
substantially in accordance with the description set forth in the Prospectus and
in such a manner as to comply with the investment objectives, policies and
restrictions of the Fund as described in the Prospectus.
(k) The Fund will timely file the requisite copies of the Prospectus
with the Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules
and Regulations, whichever is applicable or, if applicable, will timely file the
certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and
will advise the Underwriter of the time and manner of such filing.
(l) Except as provided in this Agreement, so long as the Preferred
Shares remain outstanding, the Fund will not sell, contract to sell, or
otherwise dispose of any senior securities (as defined in the 1940 Act) of the
Fund, or grant any options or warrants to purchase senior securities of the
Fund, for a period of 120 days after the date of the Prospectus, without the
prior written consent of the Underwriter.
(m) The Fund will use its best efforts to cause the Preferred Shares,
prior to the Closing Date, to be assigned a rating of 'aaa' by Moody's Investors
Service, Inc. ("Moody's") and
<PAGE>
7
AAA by Standard & Poor's Ratings Services ("S&P" and, together with Moody's, the
"Rating Agencies").
(n) The Fund and the Adviser will each use its best efforts to
perform all of the agreements required of them and discharge all conditions to
closing as set forth in this Agreement.
6. Representations and Warranties of the Fund and the Adviser. The
----------------------------------------------------------
Fund and the Adviser, jointly and severally, represent and warrant to the
Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied
when so filed in all material respects with the provisions of the 1933 Act, the
1940 Act and the Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the applicable
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did
not or will not at any such times contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except that this representation and warranty does not
apply to (i) statements in or omissions from the registration statement or the
Prospectus made in reliance upon and in conformity with information relating to
the Underwriter furnished to the Fund in writing by or on behalf of the
Underwriter expressly for use therein or (ii) with respect to the
representations of the Fund, the description of the Adviser contained in the
Prospectus heading AManagement of the Fund" and in the statement of additional
information heading AInvestment Adviser."
(c) All the outstanding Common Stock and Preferred Stock (each as
defined in the Prospectus) of the Fund have been duly authorized and validly
issued, are fully paid and nonassessable and are free of any preemptive or
similar rights; the Shares have been duly authorized and, when issued and
delivered to the Underwriter against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free of
any preemptive or similar rights and will conform to the description thereof in
the Registration Statement and the Prospectus (and any amendment or supplement
to either of them); and the capitalization of the Fund conforms to the
description thereof in the Registration Statement and the Prospectus (and any
amendment or supplement to either of them).
(d) The Fund is a corporation duly organized and validly existing in
good standing under the laws of the State of Maryland with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and
<PAGE>
8
the Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a Material Adverse Effect (as
hereinafter defined); and the Fund has no subsidiaries.
(e) There are no legal or governmental proceedings pending or, to the
knowledge of the Fund, threatened, against the Fund, or to which the Fund or any
of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.
(f) The Fund is not in violation of its Amended and Restated Article
(the ACharter") or its amended and restated Articles Supplementary (the
"Articles Supplementary") or other organizational documents of the Fund
(together with the Charter and Articles Supplementary, the "Organizational
Documents"), or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Fund or of any decree of the Commission, the NASD,
any state securities commission, any national securities exchange, any
arbitrator, any court or governmental agency, body or official having
jurisdiction over the Fund, or in default in any respect in the performance of
any material obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Fund is a party or
by which it or any of its properties may be bound, except where such violation
does not have a Material Adverse Effect.
(g) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or any of the Fund Agreements by the
Fund, nor the consummation by the Fund of the transactions contemplated hereby
or thereby (i) requires any consent, approval, authorization or other order of
or registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may have been obtained prior to the date hereof and
such as may be required for compliance with the state securities or blue sky
laws of various jurisdictions which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Organizational Documents or (ii)
conflicts or will conflict with or constitutes or will constitute a material
breach of, or a default under, any material agreement, indenture, lease or other
instrument to which the Fund is a party or by which it or any of its properties
may be bound, or violates or will violate any statute, law, regulation or
judgment, injunction, order or decree applicable to the Fund or any of its
properties, or will result in the creation or imposition of any material lien,
charge or encumbrance upon any property or assets of the Fund pursuant to the
terms of any agreement or instrument to which it is a party or by which it may
be bound or to which any of its property or assets is subject. The Fund is not
<PAGE>
9
subject to any order of any court or of any arbitrator, governmental authority
or administrative agency.
(h) The accountants, KPMG Peat Marwick LLP, who have certified or
shall certify the audited financial statements included or incorporated by
reference in the Registration Statement and the Prospectus (or any amendment or
supplement to either of them) are independent public accountants as required by
the 1933 Act, the 1940 Act and the Rules and Regulations.
(i) The financial statements, together with related schedules and
notes, included or incorporated by reference in the Registration Statement and
the Prospectus (and any amendment or supplement to either of them), present
fairly the financial position, results of operations and changes in financial
position of the Fund on the basis stated or incorporated by reference in the
Registration Statement and the Prospectus at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and data
included in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the Fund.
(j) The execution and delivery of, and the performance by the Fund of
its obligations under, this Agreement and the Fund Agreements have been duly and
validly authorized by the Fund, and this Agreement and the Fund Agreements have
been duly executed and delivered by the Fund and assuming due authorization,
execution and delivery by the other parties thereto, constitute the valid and
legally binding agreements of the Fund, enforceable against the Fund in
accordance with their terms (subject to the qualification that the
enforceability of the Fund's obligations thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium, and similar laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity regardless of whether enforceability is considered in a
proceeding in equity or at law), except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws.
(k) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Fund has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Fund, and there has not been any change in the capitalization,
or material increase in the short-term debt or long-term debt, of the Fund, or
any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net assets or
<PAGE>
10
results of operations of the Fund, whether or not arising in the ordinary course
of business (a "Material Adverse Effect").
(l) The Fund has not distributed and, prior to the later to occur of
(i) the Closing Date and (ii) completion of the distribution of the Shares, will
not distribute any offering material in connection with the offering and sale of
the Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act, the 1940 Act
or the Rules and Regulations.
(m) (i) The Fund has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), except
for any such permits the absence of which would not have a Material Adverse
Effect, subject to such qualifications as may be set forth in the Prospectus;
(ii) the Fund has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the Fund under any such permit,
subject in each case to such qualification as may be set forth in the Prospectus
(and any amendment or supplement thereto); and (iii) except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits
contains any restriction that is materially burdensome to the Fund, except where
the failure of (i), (ii) or (iii) to be accurate would not, individually or in
the aggregate, have a Material Adverse Effect on the Fund.
(n) The Fund maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization and with the
applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and
the Internal Revenue Code of 1986, as amended (the "Code"); (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets and to maintain compliance with the books and records
requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(o) The Fund has filed all tax returns required to be filed, which
returns are complete and correct in all material respects, and the Fund is not
in material default in the payment of any taxes which were payable pursuant to
said returns or any assessments with respect thereto.
(p) No holder of any security of the Fund has any right to require
registration of any Common Shares, shares of Preferred Shares or any other
security of the Fund because of the filing of the registration statement or
consummation of the transactions contemplated by this Agreement.
<PAGE>
11
(q) The Fund, subject to the registration statement having been
declared effective and the filing of the Prospectus under Rule 497 under the
1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.
(r) The conduct by the Fund of its business (as described in the
Prospectus) does not require it to be the owner, possessor or licensee of any
patents, patent licenses, trademarks, service marks or trade names which it does
not own, possess or license.
(s) The Fund is registered under the 1940 Act as a closed-end
diversified management investment company and the 1940 Act Notification has been
duly filed with the Commission and, at the time of filing thereof and any
amendment or supplement thereto, conformed in all material respects with all
applicable provisions of the 1940 Act and the 1940 Act Rules and Regulations.
The Fund has not received any notice from the Commission pursuant to Section
8(e) of the 1940 Act with respect to the 1940 Act Notification. The Fund is,
and at all times through the completion of the transactions contemplated hereby,
will be, in compliance in all material respects with the terms and conditions of
the 1933 Act and the 1940 Act. No person is serving or acting as an officer,
director or investment Adviser of the Fund except in accordance with the
provisions of the 1940 Act and the 1940 Act Rules and Regulations and the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the rules
and regulations of the Commission promulgated under the Advisers Act (the
"Advisers Act Rules and Regulations").
(t) Except as stated in this Agreement and in the Prospectus (and any
amendment or supplement thereto), the Fund has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Fund to facilitate the sale or resale of the Shares,
and the Fund is not aware of any such action taken or to be taken by any
affiliates of the Fund.
(u) The Fund has filed in a timely manner each document or report
required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(v) All advertising, sales literature or other promotional material
(including "prospectus wrappers," "broker kits," "road show slides" and "road
show scripts") authorized in writing by or prepared by the Fund or the Adviser
for use in connection with the offering and sale of the Shares (collectively
"sales material") complied and comply in all material respects with the
applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations
and the rules and interpretations of the NASD and no such sales material
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact required to be stated
<PAGE>
12
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(w) Each of the Fund Agreements and the Fund's obligations under this
Agreement and each of the Fund Agreements comply in all material respects with
all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations,
the Advisers Act and the Advisers Act Rules and Regulations.
(x) The Fund currently complies with all requirements under the Code
to qualify as a regulated investment company under Subchapter M of the Code.
(x) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), no director of
the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or
an "affiliated person" (as defined in the 1940 Act) of the Underwriter.
(y) The Fund's Common Shares are duly listed on the NYSE.
(z) The Adviser has considered, and has taken actions to address, the
possible adverse effects of the Year 2000 on the critical computer systems used
by the Adviser and its affiliates on behalf of the Fund. Because the date has
passed, the Adviser has determined that recognition and execution of date-
sensitive functions involving certain dates after December 31, 1999 (the "Year
2000 Problem") will not pose significant problems for the computer systems used
by the Adviser on behalf of the Fund. The Adviser believes, after reasonable
inquiry, that suppliers, vendors, or financial service organizations used in the
operation of the Fund have remedied their Year 2000 Problem, except to the
extent that a failure to remedy by any such supplier, vendor, or financial
service organization would not have a Material Adverse Effect on the operations
of the Fund. The Fund is in compliance with the Commission's Release No. 33-
7558 related to Year 2000 compliance, as amended to date.
7. Representations and Warranties of the Adviser. The Adviser
---------------------------------------------
represents and warrants to the Underwriter as follows:
(a) The Adviser is a corporation duly organized and validly existing
in good standing under the laws of the State of [Delaware], with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus (and any
amendment or supplement to either of them), and is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or to
qualify does not have a material adverse effect on the condition (financial or
other), business, prospects, properties, net assets or results of operations of
the Adviser or on the ability of the Adviser to perform its obligations under
this Agreement and the Advisory Agreement.
<PAGE>
13
(b) The Adviser is duly registered with the Commission as an
Investment Adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Advisory Agreement for the Fund as
contemplated by the Prospectus (or any amendment or supplement thereto). There
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which might adversely affect the registration
of the Adviser with the Commission.
(c) There are no legal or governmental proceedings pending or, to the
knowledge of the Adviser, threatened against the Adviser, or to which the
Adviser or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Adviser or on the ability of the Adviser to perform its
obligations under this Agreement and the Advisory Agreement.
(d) Neither the execution, delivery or performance of this Agreement
or the performance of the Advisory Agreement by the Adviser, nor the
consummation by the Adviser of the transactions contemplated hereby or thereby
(A) requires the Adviser to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other governmental body, agency
or official or conflicts or will conflict with or constitutes or will constitute
a breach of or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Adviser or (B) conflicts or will conflict
with or constitutes or will constitute a material breach of or a default under,
any material agreement, indenture, lease or other instrument to which the
Adviser is a party or by which it or any of its properties may be bound, or
violates or will violate any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Adviser or any of its properties
or will result in the creation or imposition of any material lien, charge or
encumbrance upon any property or assets of the Adviser pursuant to the terms of
any agreement or instrument to which it is a party or by which it may be bound
or to which any of the property or assets of the Adviser is subject. The
Adviser is not subject to any order of any court or of any arbitrator,
governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the Adviser
of its obligations under, this Agreement and the Advisory Agreement have been
duly and validly authorized by the Adviser, and this Agreement and the Advisory
Agreement have been duly executed and delivered by the Adviser and, assuming due
authorization, execution and delivery by the other parties thereto, each
constitutes the valid and legally binding agreement of the Adviser, enforceable
against the Adviser in accordance with its terms (subject to the
<PAGE>
14
qualification that the enforceability of the Adviser's obligations thereunder
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights, and to
general principles of equity regardless of whether enforceability is considered
in a proceeding in equity or at law), except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws.
(f) The description of the Adviser in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) complies in all
material respects with the provisions of the 1933 Act, the 1940 Act, the
Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and does not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(g) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Adviser has not incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that is
material to the Adviser or the Fund and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Adviser, whether or not arising in the ordinary course of business, or
which, in each case, could have a material adverse effect on the ability of the
Adviser to perform its obligations under this Agreement and the Advisory
Agreement.
(h) (i) The Adviser has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities (Apermits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); (ii) the Adviser has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Adviser under any such permit; and (iii) except
as described in the Prospectus (and any amendment or supplement thereto), none
of such permits contains any restriction that is materially burdensome to the
Adviser, except where the failure of (i), (ii), or (iii) to be accurate would
not, individually or in the aggregate, have a Material Adverse Effect on the
Adviser.
8. Indemnification and Contribution.
--------------------------------
(a)(i) The Fund agrees to indemnify and hold harmless each of the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and reasonable expenses
(including reasonable costs of investigation), joint or several, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact
<PAGE>
15
contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
the Underwriter furnished in writing to the Fund by or on behalf of the
Underwriter expressly for use in connection therewith; provided, however, that
the indemnification contained in this paragraph (a)(i) with respect to any
Prepricing Prospectus, Prospectus or Registration Statement shall not inure to
the benefit of the Underwriter (or to the benefit of any person controlling the
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by the Underwriter to any person if a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the 1933 Act and the 1933 "ct Rules and Regulations, and
the untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Fund has delivered the Prospectus to the
Underwriter in requisite quantity on a timely basis to permit such delivery or
sending. The foregoing indemnity agreement shall be in
addition to any liability which the Fund
(ii) The Adviser agrees to indemnify and hold harmless each of the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and reasonable expenses
(including reasonable costs of investigation), joint or several, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
the Underwriter furnished in writing to the Fund by or on behalf of the
Underwriter expressly for use in connection therewith; provided, however, that
the indemnification contained in this paragraph (a)(ii) with respect to any
Prepricing Prospectus, Prospectus or Registration Statement shall not inure to
the benefit of the Underwriter (or to the benefit of any person controlling the
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by the Underwriter to any person if a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the 1933 Act and the 1933 Act Rules and Regulations, and
the untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Fund has delivered the Prospectus to the
Underwriter in requisite quantity on a timely basis to permit such delivery or
<PAGE>
16
sending; and provided further, that (i) the Adviser will not be liable to any
such indemnified party in any such case except to the extent that the Fund has
failed to indemnify and hold harmless such indemnified party pursuant to
paragraph (a)(i) in respect of any such loss, claim, damage, liability or
expense after such indemnified party has made a claim of the Fund as required
below; and (ii) the amount of the Adviser's liability hereunder shall be limited
to the amount of the net proceeds from the sale of the Shares. This indemnity
agreement shall be in addition to any liability which the Adviser may otherwise
have.
(b) Any party that proposes to assert the right to be indemnified
under this Section 8 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 8, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission to so notify such indemnifying party (i) will
not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 8 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party and (ii) will not, in any event, relieve such
indemnifying party from any other obligation (other than pursuant to the
foregoing provision of this Section 8) it may have under this Agreement. If any
action, suit or proceeding shall be brought against the Underwriter or any
person controlling the Underwriter in respect of which indemnity may be sought
against the Fund or the Adviser, the Underwriter or such controlling person
shall promptly notify the Fund or the Adviser, and the Fund or the Adviser shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. The Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Underwriter or such controlling person
unless (i) the Fund or the Adviser has agreed in writing to pay such fees and
expenses, (ii) the Fund and the Adviser have failed to assume the defense and
employ counsel, or (iii) the named parties to any such action, suit or
proceeding (including any impleaded parties) include both the Underwriter or
such controlling person and the Fund or the Adviser and the Underwriter or such
controlling person shall have been advised by its counsel that representation of
such indemnified party and the Fund or the Adviser by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Fund and the
Adviser shall not have the right to assume the defense of such action, suit or
proceeding on behalf of the Underwriter or such controlling person). It is
understood, however, that the Fund and the Adviser shall, in connection with any
one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for the Underwriter and controlling persons not having
actual or potential differing interests with the Underwriter or among
themselves, which firm shall be designated in writing by the Underwriter,
<PAGE>
17
and that all such fees and expenses shall be reimbursed as they are incurred.
The Fund and the Adviser shall not be liable for any settlement of any such
action, suit or proceeding effected without its written consent (which consent
shall not be unreasonably withheld), but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Fund and the Adviser agree to indemnify and hold harmless the
Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) The Underwriter agrees to indemnify and hold harmless the Fund
and the Adviser, their directors, trustees and officers who sign the
Registration Statement, and any person who controls the Fund or the Adviser
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
to the same extent as the foregoing indemnity from the Fund and the Adviser to
the Underwriter, but only with respect to information relating to the
Underwriter furnished in writing by or on behalf of the Underwriter expressly
for use in the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the Fund or the Adviser, any of their
directors or trustees, any such officer, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against the Underwriter pursuant to this paragraph (c), the Underwriter shall
have the rights and duties given to the Fund and the Adviser by paragraph (b)
above (except that if the Fund or the Adviser shall have assumed the defense
thereof the Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the Underwriter's expense), and the Fund
and the Adviser, their directors, trustees and any such officer, and any such
controlling person shall have the rights and duties given to the Underwriter by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which the Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or reasonable expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Fund and the Adviser on the one hand (treated jointly for this
purpose as one person) and the Underwriter on the other hand from the offering
of the Shares, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Fund and the Adviser on the one hand (treated jointly for this
purpose as one person) and the Underwriter on the other in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations
with respect to the offering of the Shares. The relative benefits received by
the Fund and the Adviser on the one hand (treated jointly for this purpose as
one person) and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses)
<PAGE>
18
received by the Fund bear to the total underwriting discounts and commissions
received by the Underwriter, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Fund and the Adviser on the
one hand (treated jointly for this purpose as one person) and the Underwriter on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Fund and the Adviser on the one hand (treated jointly for this purpose as one
person) or by the Underwriter on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action against such party in
respect of which a claim for contribution may be made under this Section 8(d),
notify such party or parties from whom contribution may be sought, but the
omission so to notify (i) will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 8(d), unless such omission results in the forfeiture of substantive
rights or defenses by the party or parties from whom contribution is being
sought and (ii) will not, in any event, relieve the party or parties from whom
contribution may be sought from any other obligation (other than pursuant to
this Section 8(d)) it or they may have under this Agreement. Except for a
settlement entered into pursuant to the last sentence of Section 8(b) hereof, no
party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent shall not be unreasonably
withheld).
(e) The Fund, the Adviser and the Underwriter agree that it would not
be just and equitable if contribution pursuant to this Section 8 were determined
by a pro rata allocation (even if the Underwriter were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities and expenses referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 8, the Underwriter shall not be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds the
amount of any damages which the Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriter's obligations to contribute pursuant to this Section 8 are several
in proportion to the respective numbers of Shares set forth opposite their names
in Schedule I hereto and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject
<PAGE>
19
matter of such action, suit or proceeding.
(g) Notwithstanding any other provisions in this Section 8, no party
shall be entitled to the benefit of any provision under this Agreement which
protects or purports to protect such person against any liability to the Fund or
its security holders to which such person would otherwise be subject by reason
of such person's willful misfeasance, bad faith, or gross negligence, in the
performance of such person's duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties hereunder.
(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Fund and the Adviser set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter, the Fund, the Adviser, their directors, trustees or
officers, or any person controlling the Fund or the Adviser, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to the Underwriter or any person controlling the
Underwriter, or to the Fund, the Adviser, their directors, trustees or officers,
or any person controlling the Fund or the Adviser, shall be entitled to the
benefits of the indemnity, contribution, and reimbursement agreements contained
in this Section 8.
9. Conditions of Underwriter's Obligations. The obligation of the
---------------------------------------
Underwriter to purchase the Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by the
Underwriter, and all filings, if any, required by Rules 497 and 430A under the
1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no
stop order suspending the effectiveness of the Registration Statement or order
pursuant to Section 8(e) of the 1940 Act shall have been issued and no
proceeding for those purposes shall have been instituted or, to the knowledge of
the Fund, the Adviser or the Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the Underwriter's reasonable satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change or any development involving a prospective
change in or affecting the condition (financial or other), business, prospects,
properties, net assets, or results of operations of the Fund or the Adviser not
contemplated by the Prospectus, which in the Underwriter's
<PAGE>
20
reasonable opinion would materially adversely affect the market for the Shares,
or (ii) any event or development relating to or involving the Fund or the
Adviser or any officer or director of the Fund or the Adviser which makes any
statement made in the Prospectus untrue or which, in the reasonable opinion of
the Fund and its counsel or the Underwriter and its counsel, requires the making
of any addition to or change in the Prospectus in order to state a material fact
required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other
law to be stated therein or necessary in order to make the statements therein
not misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in the Underwriter's opinion, materially adversely
affect the market for the Shares.
(c) The Fund shall have furnished to the Underwriter a report showing
compliance with the asset coverage requirements of the 1940 Act and a [Basic
Maintenance Report (as defined in the Articles Supplementary)], each dated the
Closing Date and in form and substance satisfactory to the Underwriter. Each
such report may use portfolio holdings and valuations as of the close of
business of any day not more than six business days preceding the Closing Date,
provided, however, that the Fund represents in such report that its total net
assets as of the Closing Date have not declined by 5% or more from such
valuation date.
(d) The Underwriter shall have received on the Closing Date, an
opinion of Willkie Farr & Gallagher, counsel for the Fund, dated the Closing
Date and addressed to the Underwriter, in form and substance satisfactory to the
Underwriter and to the effect that:
(i) The Fund has been duly organized and is validly existing and in
good standing under the laws of the State of Maryland and has full
corporate power and authority to own, lease and operate its properties, to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them);
(ii) The Shares have been duly authorized and, when issued and
delivered to the Underwriter against payment therefor in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable and free of any preemptive or similar rights and will conform
in all material respects to the description thereof in the Registration
Statement and the Prospectus (and any amendment or supplement to either of
them); the Certificate evidencing the Shares complies in all material
respects with all requirements of Maryland law; and the relative rights,
interests, powers and preferences of the Shares, and the obligation of the
Fund to redeem such Shares upon the terms and conditions set forth in the
Charter, are legal, valid, binding and enforceable under Maryland law,
subject to enforcement of bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws of general equitable principles
[and to the provisions of Section 2-311 of the Maryland General Corporation
Law];
<PAGE>
21
(iii) The Shares conform in all material respects with the statements
concerning them contained in the Prospectus under the heading
"Description of Preferred Shares", and the authorized and outstanding
---------------------------------
shares of beneficial interest of the Fund are as set forth in
the Prospectus under the heading "Capitalization";
(iv) The Registration Statement is effective under the 1933 Act and
the 1940 Act; any required filing of the Prospectus pursuant to Rule 497 of
the 1933 Act Rules and Regulations has been made within the time periods
required by Rule 497(b) or (h), as the case may be; to the knowledge of
such counsel, no stop order suspending its effectiveness or order pursuant
to Section 8(e) of the 1940 Act relating to the Fund has been issued and no
proceeding for any such purpose is pending or threatened by the Commission;
(v) The Registration Statement, the Prospectus (and each amendment
thereof or supplement thereto) comply as to form in all material respects
with the applicable requirements of the 1933 Act, the 1940 Act and the
Rules and Regulations (except that no opinion need be expressed as to the
financial statements or other financial data contained therein);
(vi) The statements made in the Prospectus (including the Statement
of Additional Information) under the captions "The Auction" and
"Description of Preferred Shares", insofar as they purport to summarize the
provisions of the Articles Supplementary or other documents or agreements
specifically referred to therein, constitute accurate summaries of the
terms of any such documents in all material respects;
(vii) The statements made in the Prospectus (including the Statement
of Additional Information) under the caption "Tax Matters," insofar as they
constitute matters of law or legal conclusions, have been reviewed by such
counsel and constitute accurate statements of any such matters of law or
legal conclusions in all material respects, and fairly present the
information called for with respect thereto by Form N-2 under the 1940 Act;
(viii) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Fund, or to
which the Fund or any of its properties is subject, that are required to be
described in the Registration Statement or the Prospectus but are not
described as required;
(ix) To such counsel's knowledge after reasonable inquiry, there are
no agreements, contracts, indentures, leases or other instruments that are
required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement by the 1933 Act
that have not been so described or filed as an exhibit, or incorporated by
reference as permitted by the 1933 Act, the 1940 Act or the Rules and
Regulations;
(x) Neither the issuance, sale or delivery of the Shares, the
execution, delivery or
<PAGE>
22
performance of this Agreement or any of the Fund Agreements by the Fund,
nor the consummation by the Fund of the transactions contemplated thereby
(A) requires any consent, approval, authorization or other order of or
registration or filing by the Fund with the Commission, the NASD, any
national securities exchange, any arbitrator, any court, regulatory body,
administrative agency or other governmental body, agency or official
(except such as may have been obtained prior to the date hereof and such as
may be required for compliance with state securities and blue sky laws) or
conflicts or will conflict with or constitutes or will constitute a breach
of, or a default under, the Charter, the Articles Supplementary or other
organizational documents of the Fund or (B) (i) conflicts or will conflict
with or constitutes or will constitute a breach of, or a default under, any
agreement, indenture, lease or other instrument known to such counsel to
which the Fund is a party or by which it or any of its properties may be
bound and that is identified, in an officer's certificate of the Fund, as
material to the business, financial condition, operations, properties or
prospects of the Fund (the "Agreements and Instruments"), (ii) violates or
will violate any statute, law or regulation (assuming compliance with state
securities and blue sky laws), except that such counsel may state that it
expresses no opinion as to the reasonableness or fairness of compensation
payable under the Advisory Agreement or as to rights to indemnity and
contribution in this Agreement or the Fund Agreements, (iii) violates or
will violate any judgment, injunction, order or decree that is applicable
to the Fund or any of its properties and that is known to such counsel, or
(iv) will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Fund pursuant to the terms
of the Agreements and Instruments;
(xi) The Fund has corporate power and authority to issue, sell and
deliver the Shares to the Underwriter as provided herein, and this
Agreement and the Fund Agreements have been duly authorized, executed and
delivered by the Fund and each complies with all applicable provisions of
the 1940 Act and the Advisers Act (except that such counsel may state that
it expresses no opinion as to the reasonableness or fairness of
compensation payable under the Advisory Agreement); assuming due
authorization, execution and delivery by the other parties thereto, this
Agreement and each Trust Fund Agreement constitutes the valid and binding
----
obligation of the Fund enforceable in accordance with its terms, except as
rights to indemnity and contribution hereunder and thereunder may be
limited by Federal or state securities laws or principles of public policy
and except that such counsel may state that it expresses no opinion as to
the reasonableness or fairness of compensation payable under the Advisory
Agreement, subject to enforcement to bankruptcy, fraudulent conveyance
insolvency, reorganization, moratorium and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles;
(xii) The Fund is duly registered under the 1940 Act as a closed-end
diversified management investment company; and
(xiii) The provisions of the Charter and Articles Supplementary and
the investment policies and restrictions described in the Prospectus
(including the Statement
<PAGE>
23
of Additional Information) under the caption "Investment Objectives and
Policies" comply with the requirements of the 1940 Act and the 1940 Act
Rules and Regulations.
Such counsel shall also have furnished to the Underwriter a statement,
addressed to the Underwriter, dated the Closing Date, to the effect that:
They have not independently verified the accuracy, completeness
or fairness of the statements made or the information contained in the
Registration Statement or the Prospectus, and, except for the statements
referred to in paragraphs (vi) and (vii) above and the information referred
to in paragraph (xiii) above, they are not passing upon and do not assume
any responsibility therefor. In the course of the preparation by the Fund
of the Registration Statement and the Prospectus, they have participated in
discussions with the representatives and employees and officers of the Fund
and the Adviser and in discussions with the Fund's independent accountants,
in which the business and the affairs of the Fund and the Adviser and the
contents of the Registration Statement and the Prospectus were discussed.
On the basis of information that they have gained in the course of their
representation of the Fund in connection with its preparation of the
Registration Statement and the Prospectus and their participation in the
discussions referred to above, no facts have come to their attention that
would lead them to believe that as of its effective date, the Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading, or that as of the Closing
Date the Prospectus contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading (in each case other than the financial
statements and schedules, the notes thereto and any schedules and other
financial data contained or incorporated by reference therein or omitted
therefrom, as to which they need express no opinion).
Insofar as the opinions expressed above are dependent upon matters
governed by Maryland law, Willkie Farr & Gallagher will be permitted to rely on
the opinion of Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
(e) The Underwriter shall have received on the Closing Date an
opinion of the General Counsel for the Adviser, dated the Closing Date and
addressed to the Underwriter, in form and substance satisfactory to the
Underwriter and to the effect that:
(i) The Adviser is a corporation duly organized and validly existing
and in good standing under the laws of the State of [Delaware], with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them),
(ii) The Adviser is duly registered with the Commission as an
investment adviser
<PAGE>
24
under the Advisers Act and is not prohibited by the Advisers Act, the
Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and
Regulations from acting as the investment Adviser to the Fund pursuant to
the Advisory Agreement as described in the Prospectus;
(iii) To the best of such counsel's knowledge after reasonable
inquiry, there are no legal or governmental proceedings pending or
threatened against the Adviser, or to which the Adviser or any of its
properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as required;
(iv) To the best of such counsel's knowledge after reasonable
inquiry, the Adviser is not in violation of its corporate charter or by-
laws, nor is the Adviser in default under any material agreement, indenture
or instrument or in breach or violation of any judgment, decree, order,
rule or regulation of any court or governmental or self-regulatory agency
or body;
(v) Neither the execution, delivery or performance of this Agreement
nor the consummation by the Adviser of the transactions contemplated hereby
(A) requires the Adviser to obtain any consent, approval, authorization or
other order of or registration or filing with, the Commission, the NASD,
any national securities exchange, any arbitrator, any court, regulatory
body, administrative agency or other governmental body, agency or official
(except such as may have been obtained prior to the date hereof and such as
may be required for compliance with state securities or blue sky laws) or
conflicts or will conflict with or constitutes or will constitute a breach
of, or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Adviser or (B) (i) conflicts or will
conflict with or constitutes or will constitute a breach of, or a default
under, any material agreement, indenture, lease or other instrument to
which the Adviser is a party or by which it or any of its properties may be
bound (the "Agreements and Instruments"), (ii) violates or will violate any
statute, law or regulation (assuming compliance with state securities and
blue sky laws), (iii) violates or will violate any judgment, injunction,
order or decree that is applicable to the Adviser or any of its properties
and that is known to such counsel, or (iv) will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Adviser pursuant to the terms of the Agreements and Instruments;
(vi) The Adviser has the corporate power and authority to enter into
this Agreement and the Advisory Agreement, and this Agreement and the
Advisory Agreement have been duly authorized, executed and delivered by the
Adviser; assuming due authorization, execution and delivery by the other
parties thereto, this Agreement and the Advisory Agreement each constitutes
the valid and binding obligation of the Adviser enforceable in accordance
with its terms (except as rights to indemnity and contribution in
<PAGE>
25
this Agreement and the Advisory Agreement may be limited by Federal or
state securities laws), subject as to enforcement to bankruptcy,
insolvency, moratorium, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles (regardless of whether enforceability is considered in a
proceeding in equity or at law); and
(vii) The description of the Adviser (other than statements as to the
Adviser's investment decisions, beliefs and strategies regarding the Fund's
portfolio as to which such counsel need express no opinion) in the
Registration Statement and the Prospectus does not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(f) The Underwriter shall have received on the Closing Date an
opinion of Simpson Thacher & Bartlett, counsel for the Underwriter, dated the
Closing Date and addressed to the Underwriter, with respect to such matters as
the Underwriter may reasonably request.
(g) The Underwriter shall have received letters addressed to the
Underwriter and dated the date hereof and the Closing Date from KPMG Peat
Marwick LLP, independent certified public accountants, substantially in the
forms heretofore approved by the Underwriter.
(h) (i) No order suspending the effectiveness of the Registration
Statement or prohibiting or suspending the use of the Prospectus (or any
amendment or supplement thereto) or any Prepricing Prospectus or any sales
material shall have been issued and no proceedings for such purpose or for the
purpose of commencing an enforcement action against the Fund, the Adviser or,
with respect to the transactions contemplated by the Prospectus (or any
amendment or supplement thereto) and this Agreement, the Underwriter, may be
pending before or, to the knowledge of the Fund, the Adviser or the Underwriter
or in the reasonable view of counsel to the Underwriter, shall be threatened or
contemplated by the Commission at or prior to the Closing Date and that any
request for additional information on the part of the Commission (to be included
in the Registration Statement, the Prospectus or otherwise) be complied with to
the satisfaction of the Underwriter; (ii) there shall not have been any change
in the shares of beneficial interest of the Fund nor any material increase in
the short-term or long-term debt of the Fund (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectus (or any amendment or supplement thereto); (iii) there shall
not have been, subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement thereto), except as may otherwise be stated in the Registration
Statement and Prospectus (or any amendment or supplement thereto), any material
adverse change in the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Fund or the Adviser; (iv)
the Fund shall not have any liabilities or obligations, direct or contingent
(whether or not in the ordinary course of business), that are material to the
Fund, other than those reflected in the Registration Statement or the Prospectus
(or any amendment or supplement to either of them); and (v) all the
representations and warranties of the Fund and the Adviser contained in this
Agreement shall be
<PAGE>
26
true and correct on and as of the date hereof and on and as of the Closing Date
as if made on and as of the Closing Date, and the Underwriter shall have
received a certificate of the Fund and the Adviser, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of each of
the Fund and the Adviser (or such other officers as are acceptable to the
Underwriter), to the effect set forth in this Section 9(h) and in Section 9(i)
hereof.
(i) Neither the Fund nor the Adviser shall have failed at or prior to
the Closing Date to have performed or complied in all material respects with any
of its agreements herein contained and required to be performed or complied with
by it hereunder at or prior to the Closing Date.
(j) The Fund shall have delivered and the Underwriter shall have
received evidence satisfactory to the Underwriter that the Shares are rated
'aaa' by Moody's and AAA by S&P as of the Closing Date, and there shall not have
been given any notice of any intended or potential downgrading, or of any review
for a potential downgrading, in the rating accorded to the Shares by any Rating
Agency.
(k) The Fund and the Adviser shall have furnished or caused to be
furnished to the Underwriter such further certificates and documents as the
Underwriter shall have reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to the Underwriter and the Underwriter's
counsel.
Any certificate or document signed by any officer of the Fund or the
Adviser and delivered to the Underwriter, or to counsel for the Underwriter,
shall be deemed a representation and warranty by the Fund or the Adviser to the
Underwriter as to the statements made therein.
10. Expenses. The Fund agrees to pay the following costs and
--------
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the
<PAGE>
27
Shares; (iv) the reproduction and delivery of this Agreement, any dealer
agreements, the preliminary blue sky memorandum, if any, and all other
agreements or documents reproduced and delivered in connection with the offering
of the Shares; (v) the registration of the Shares under the 1934 Act; (vi) the
reasonable fees, expenses and disbursements of counsel for the Underwriter
relating to the preparation, reproduction, and delivery of any preliminary blue
sky memorandum; (vii) fees paid to the Rating Agencies; (viii) the
transportation and other expenses incurred by or on behalf of Fund
representatives in connection with presentations to prospective purchasers of
the Shares; and (ix) the fees and expenses of the Fund's accountants and the
fees and expenses of counsel (including local and special counsel) for the Fund.
11. Effective Date of Agreement. This Agreement shall become
---------------------------
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such post-
effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Fund, by
notifying the Underwriter, or by the Underwriter, by notifying the Fund.
Any notice under this Section 11 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
12. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in the Underwriter's absolute discretion, without liability on the
part of the Underwriter to the Fund or the Adviser, by notice to the Fund, if
prior to the Closing Date (i) trading in securities generally on the NYSE shall
have been suspended or materially limited, (ii) a general moratorium on
commercial banking activities in New York shall have been declared by either
federal or state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis or
change in political, financial or economic conditions, the effect of which on
the financial markets of the United States is to make it, in the Underwriter's
judgment, impracticable or inadvisable to commence or continue the offering of
the Shares at the offering price to the public set forth on the cover page of
the Prospectus or to enforce contracts for the resale of the Shares by the
Underwriter. Notice of such termination may be given to the Fund by telegram,
telecopy or telephone and shall be subsequently confirmed by letter.
13. Information Furnished by the Underwriter. The statements set
----------------------------------------
forth in the last paragraph on the cover page and the statements in the first
and third sentences of the third paragraph and in the fifth paragraph under the
caption AUnderwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriter as
such information is referred to in Sections 6(b) and 8 hereof.
14. Miscellaneous. Except as otherwise provided in Sections 5, 11
-------------
and 12 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Fund or the Adviser, at the
office of the Fund at 388 Greenwich Street, New York,
<PAGE>
28
New York 10013, Attention: [Secretary]; or (ii) if to the Underwriter, to
Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Manager, Investment Banking Division.
15. Disclaimer. A copy of the document establishing the Fund is
----------
filed with the Secretary of the State of Maryland. This Agreement is executed
by officers not as individuals and is not binding upon any of the directors,
officers, or shareholders of the Fund individually but only upon the assets of
the Fund.
This Agreement has been and is made solely for the benefit of the
Underwriter, the Fund, the Adviser, their directors and officers, and the other
controlling persons referred to in Section 8 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term Asuccessor" nor the term Asuccessors and assigns" as used in this Agreement
shall include a purchaser from the Underwriter of any of the Shares in his
status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed
----------------------------
by and construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
<PAGE>
29
Please confirm that the foregoing correctly sets forth the agreement
among the Fund, the Adviser and the Underwriter.
Very truly yours,
ZENIX INCOME FUND INC.
By:
Confirmed as of the date first
above mentioned.
SALOMON SMITH BARNEY INC.
By:____________________________
Managing Director
SCHEDULE I
ZENIX INCOME FUND INC.
Number of
Underwriter Preferred Shares
-----------------
Salomon Smith Barney Inc............................. _________2,400
Total................................................ _________2,400
<PAGE>
EXHIBIT 99.2K2
================================================================================
ZENIX INCOME FUND INC.
_____________________
AUCTION AGENCY AGREEMENT
dated as of April 14, 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 14, 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 Managing Director
Vice President, Assistant Vice President and Associate 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 three 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
two 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.
(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 two
years after the Auction to which such services relate, unless requested by the
Company to maintain such records for a longer period of time and such records
shall, in reasonable detail, accurately and fairly reflect the actions taken by
the Auction Agent hereunder. At the end of such period, if so requested in
writing, the Auction Agent shall deliver such records to the Company.
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.
-18-
<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: 4 Albany Street
Mail Stop 5041
New York, New York 10006
Attention: Auction Rate Securities Group
Telecopier No.: 212-250-6215
Telephone No.: 212-250-6721
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
BANKERS TRUST COMPANY
-21-
<PAGE>
By:____________________________
Title:
-22-
<PAGE>
Exhibit A
[Form of Articles Supplementary]
<PAGE>
Exhibit B
[Form of Broker Dealer Agreement]
<PAGE>
Exhibit B
[Form of Matter Purchaser's Letter]
<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 SHARES
("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 SHARES
("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 SHARES
("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 SHARES
("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 SHARES
("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 SHARES
("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 SHARES
("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 SHARES
("Preferred Shares")
NOTICE IS HEREBY GIVEN that an Additional Distribution (as
defined in the Articles Supplementary establishing the and fixing the rights of
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 14, 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 14, 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 14, 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 Managing Director, Vice President,
Assistant Vice President and Associate of the Auction Agent assigned to its
Corporate Trust and Agency 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: Christina T. Sydor
Telecopier No.: 212-816-6474
Telephone No.: 212-816-5636
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
Mail Stop 5041
New York, New York 10006
Attention: Auction Rate Securities Group
Telecopier No.: 212-250-6215
Telephone No.: 212-250-6721
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 SHARES
("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 SHARES
("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 SHARES
("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__
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Exhibit 99.2L1
[Willkie Farr & Gallagher Letterhead]
April 11, 2000
Zenix Income Fund Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We have acted as counsel to Zenix Income Fund Inc., a corporation organized
under the laws of the State of Maryland (the "Fund"), in connection with the
preparation of a registration statement on Form N-2 (the "Registration
Statement") and the prospectus forming part of the Registration Statement (the
"Prospectus"), relating to the offer and sale of 2,400 shares of Auction Rate
Cumulative Preferred Shares of the Fund, par value $.01 per share (the
"Preferred Shares").
We have examined copies of the Fund's charter, as amended from time to time (the
"Charter"), and by-laws, the Registration Statement, resolutions adopted by the
Fund's Board of Directors (the "Board") on January 31, February 23 and April 10,
2000, the form of the Fund's Articles Supplementary relating to the Preferred
Shares (the "Articles Supplementary") and any other records, documents, papers,
statutes and authorities as we have deemed necessary to form a basis for the
opinions expressed below. In our examination, we have assumed the genuineness
of all signatures and the conformity to original documents of all copies
submitted to us. As to various questions of fact material to our opinions, we
have relied on certificates and statements of officers and representatives of
the Fund and others.
Based on and subject to the foregoing and assuming that the proposed Articles
Supplementary are filed with the Maryland State Department of Assessments and
Taxation and become effective, with the omissions in the Articles Supplementary
completed pursuant to action duly taken by the Board or a duly constituted
committee thereof in accordance with authority delegated to it by the Board, we
are of the opinion that the Preferred Shares to be offered for sale pursuant to
the Registration Statement will have been duly authorized and, when thereafter
sold, issued and paid for as
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Zenix Income Fund Inc.
April 11, 2000
Page 2
contemplated by the Registration Statement and Articles Supplementary, will have
been validly and legally issued and will be fully paid and non-assessable.
We are admitted to the Bar of the State of New York only and do not opine as to
the laws of any jurisdiction other than the laws of the State of New York and
the laws of the United States, and the opinion set forth above is accordingly
limited to the laws of those jurisdictions. As to matters governed by the laws
of the State of Maryland, we have relied on the opinion of Messrs. Venable,
Baetjer and Howard, LLP appended to this letter. This opinion is limited to the
present laws of the aforementioned jurisdictions and the United States of
America for present judicial interpretations thereof and to the facts as they
presently exist. We assume no obligation to revise or supplement this opinion
should the present laws of such jurisdictions be changed by legislative action,
judicial decision or otherwise. This opinion is rendered as of the date hereof,
and we express no opinion as to, and disclaim any undertaking or obligation to
update this opinion in respect of changes of circumstances or events which occur
subsequent to this date.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the prospectus included as
part of the Registration Statement under "Legal Opinions." We are furnishing
this opinion solely for your benefit and this opinion may not be relied upon by
any other person, except Salomon Smith Barney Inc., without our prior written
consent.
Very truly yours,
[Willkie Farr & Gallagher]
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Exhibit 99.2L2
[Venable, Baetjer and Howard, LLP Letterhead]
April 11, 2000
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
Re: Zenix Income Fund Inc.
----------------------
Ladies and Gentlemen:
We have acted as special Maryland counsel for Zenix Income Fund Inc., a Maryland
corporation (the "Fund"), in connection with its offering of 2,400 shares of
preferred stock designated "Auction Rate Cumulative Preferred Shares," each with
a par value of $0.01 and a liquidation preference of $25,000 (the "Shares").
As special Maryland counsel for the Fund, we are familiar with its Charter and
Bylaws. We have examined the prospectus included in its Registration Statement
on form N-2 with respect to the Shares (Securities Act Registration File No.
333-30248, Investment Company Act File No. 811-05484 (the "Registration
Statement"), substantially in the form in which it is to become effective (the
"Prospectus"). We are also familiar with the form of Articles Supplementary
relating to the Shares (the "Articles Supplementary") that have been filed as an
exhibit to the Registration Statement. We have further examined and relied on a
certificate of the Maryland State Department of Assessments and Taxation
("SDAT") to the effect that the Fund is duly incorporated and existing under the
laws of the State of Maryland and is in good standing and duly authorized to
transact business in the State of Maryland.
We have also examined and relied on such other corporate records of the Fund and
documents and certificates with respect to factual matters as we have deemed
necessary to render the opinion expressed herein. We have assumed, without
independent verification, the genuineness of all signatures on documents
submitted to us, the authenticity of all documents submitted to us as originals,
and the conformity with originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that when the Pricing Committee
of the Board of Directors has determined the initial Dividend Period for the
Shares and the Applicable Rate
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Willkie Farr & Gallagher
April 11, 2000
Page 2
with respect to it, all as defined in the Articles Supplementary, pursuant to
authority delegated to it by the Board of Directors, and the Articles
Supplementary have been filed with SDAT, the Shares to be offered for sale
pursuant to the Prospectus will have been duly authorized and, when thereafter,
sold, issued and paid for as contemplated by the Prospectus, will have been
validly and legally issued and will be fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities of "Blue Sky" laws
of Maryland, to federal securities laws or to other laws.
You may rely on this opinion in rendering your opinion to the Fund that is to be
filed as an exhibit to the Registration Statement. We consent to the filing of
this opinion as an exhibit to the Registration Statement and to the reference to
our firm under the heading "Legal Opinions" in the Prospectus. We do not
thereby admit that we are "experts" within the meaning of the Securities Act of
1933 and the rules and regulations thereunder. This opinion may not be relied
upon for any other purpose or by any other person without our prior written
consent.
Very truly yours,
Venable Baetjer and Howard, LLP
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