<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1996
SECURITIES ACT FILE NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-5557
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 13 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
60 State Street, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 742-3800
----------------
RICHARD E. OMOHUNDRO, JR., PRESIDENT
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
With copies to:
LAURENCE E. CRANCH, ESQ.
G. DAVID BRINTON, ESQ.
ROGERS & WELLS
200 PARK AVENUE, NEW YORK, NEW YORK 10166
----------------
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. [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 Par Value 8,450,000 shares $3.9375(1) $33,271,875(1) $11,474.00(2)
=================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. Based on the
average of the high and low sales prices reported on the New York Stock
Exchange on March 26, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
<TABLE>
<CAPTION>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
FORM N-2
CROSS-REFERENCE SHEET
PARTS A AND B OF THE PROSPECTUS*
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
---------------------------------- ----------------------
<S> <C>
1. Outside Front Cover ........................ Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page ... Inside Front and Outside Back Cover Page of Prospectus
3. Fee Table and Synopsis ..................... Fee Table; Prospectus Summary
4. Financial Highlights ....................... Financial Information Summary; Financial Highlights
5. Plan of Distribution ....................... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Offer
6. Selling Stockholders ....................... Not Applicable
7. Use of Proceeds ............................ Use of Proceeds; Investment Policies and Limitations
8. General Description of the Registrant ...... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Fund; Investment Policies and
Limitations; Risk Factors and Special
Considerations; Financial Information Summary;
Description of Capital Stock; Surety Arrangement
for Preferred Shares; Description of Notes
9. Management ................................. Prospectus Summary; Investment Adviser; Directors
and Officers; Portfolio Trading; Description of
Capital Stock; Surety Arrangement for Preferred
Shares; Description of Notes; Custodian, Transfer
Agent, Dividend Disbursing Agent, Paying Agents
and Registrars
10. Capital Stock, Long-Term Debt, and Other Description of Capital Stock; Surety Arrangement for
Securities ................................. Preferred Shares; Description of Notes; Federal
Taxation; Investment Policies and Limitations;
Dividends and Distributions; Dividend Reinvestment
Plan; Financial Highights
Not Applicable
12. Legal Proceedings .......................... Not Applicable
13. Table of Contents of the Statement of
Additional Information ..................... Not Applicable
14. Cover Page ................................. Not Applicable
15. Table of Contents .......................... Not Applicable
16. General Information and History ............ Prospectus Summary; The Fund
17. Investment Objective and Policies .......... Prospectus Summary; Investment Policies and
Limitations; Portfolio Trading
18. Management ................................. Prospectus Summary; Investment Adviser; Directors
and Officers
19. Control Persons and Principal Holders of
Securities ................................. Directors and Officers
Prospectus Summary; Investment Adviser; Custodian,
Transfer Agent, Dividend Disbursing Agent, Paying
Agents and Registrars; Experts
Portfolio Trading
22. Tax Status ................................. Federal Taxation
23. Financial Statements ....................... Financial Statements
</TABLE>
----------
*Pursuant to Part B: Statement of Additional Information, all
information required to be set forth in Part B has been included in
Part A.
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C to this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION DATED MARCH 29, 1996
8,450,000 SHARES
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
COMMON STOCK
Prospect Street(R) High Income Portfolio Inc. (the "Fund") is issuing to its
shareholders of record ("Record Date Shareholders") as of the close of business
on May , 1996 transferable rights ("Rights") entitling the holders thereof to
subscribe for an aggregate of 8,450,000 shares (the "Shares") of the Fund's
Common Stock, par value $0.01 per share (the "Offer"). Each such Record Date
Shareholder is being issued one Right for each three shares of Common Stock
owned on the Record Date and the Rights entitle Record Date Shareholders, and
other holders of Rights acquired during the Subscription Period (as defined
herein), to acquire one share of Common Stock for each Right held. In addition
the Rights entitle each Record Date Shareholder, and secondarily, holders of
Rights acquired during the Subscription Period, to subscribe, subject to certain
limitations and subject to allotment, for any Shares not acquired by exercise of
primary subscription Rights. The Rights are transferable, and the Rights and the
Shares will be listed for trading on the New York Stock Exchange (the
"Exchange"). The Shares are listed on the Exchange under the symbol "PHY." See
"The Offer." Record Date Shareholders, where the context requires, shall also
include beneficial owners whose Shares are held of record by Cede & Co.
("Cede"), nominee for The Depository Trust Company ("DTC"), or by any other
depository or nominee.
(text continued on following page)
The subscription price per share (the "Subscription Price") will be the
greater of (i) the net asset value per share as of the close of business on the
Expiration Date (as defined below) or (ii) $ .
The offer will expire at 5:00 p.m., New York time on June , 1996 unless
extended as described herein (the "Expiration Date").
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. At the date hereof, the Fund is considering various
refinancing alternatives with respect to its leverage. Additionally, following
the completion of the Offer, it is the intention of the Fund, subject to market
conditions, to add incremental leverage (to the extent permitted under the
Investment Company Act of 1940, as amended) such that the percentage of the
Fund's assets representing leverage is approximately the same as it was prior to
the Offer. See "The Fund" and "Risk Factors and Special Considerations -- Risk
of Leverage. The Fund's investment objective is to provide high current income,
while seeking to preserve shareholders" capital, through investment in a
professionally managed, diversified portfolio of "high-yield," high risk
securities (commonly referred to as "junk bonds"). INVESTMENTS IN HIGH-YIELD,
HIGH RISK SECURITIES ENTAIL RISKS THAT ARE DIFFERENT AND MORE PRONOUNCED THAN
THOSE INVOLVED IN HIGHER-RATED SECURITIES. AN INVESTMENT IN THE FUND IS NOT
APPROPRIATE FOR ALL INVESTORS, AND NO ASSURANCE CAN BE GIVEN THAT THE FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS."
Prospect Street(R) Investment Management Co., Inc. (the "Investment Adviser")
has served as the Fund's investment adviser since the Fund's inception in 1988.
Because the amounts received by the Fund with respect to the Subscription
Price per Share (after payment of soliciting fees and other expenses of the
Offer) are likely to be less than the net asset value per share of the Fund's
Common Stock and because the number of shares outstanding after the Offer is
likely to increase in a greater percentage than the increase in the size of
the Fund's assets, the Offer is likely to result in a dilution of the
aggregate net asset value of the shares owned by Record Date Shareholders who
do not fully exercise their Rights. In addition, as a result of the terms of
the Offer, Record Date Shareholders who do not fully exercise their rights
should expect that they will, upon the completion of the Offer, own a smaller
proportional interest in the Fund than would otherwise be the case. See "Risk
Factors and Special Considerations -- Dilution" and "The Offer -- Terms of the
Offer."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
ESTIMATED SALES LOAD(2)(3) PROCEEDS TO FUND(2)(4)
SUBSCRIPTION PRICE(1) MINIMUM MAXIMUM MINIMUM MAXIMUM
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share ........... $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Total................ $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------
(footnotes on following page)
</TABLE>
--------------------
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. INVESTORS ARE ADVISED TO
READ THIS PROSPECTUS AND TO RETAIN IT FOR FUTURE REFERENCE.
--------------------
The date of this Prospectus is May , 1996.
[Red Herring Legend]
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
(text continued from cover page)
All questions and inquiries relating to the Offer should be directed to the
Information Agent, Corporate Investor Communications, Inc., 111 Commerce Road,
Carlstadt, New Jersey 07072-2586, toll-free at (800) 242- 4410. The Fund's
address is 60 State Street, Boston, Massachusetts 02109, and its telephone
number is (617) 742-3800.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on March , 1996. The net asset value per share of Common
Stock at the close of business on March , 1996 and on May , 1996 was $ and $ ,
respectively, and the last reported sale price of a share of the Fund's Common
Stock on the Exchange on those dates was $ and $ , respectively.
Record Date Shareholders holding a number of shares of Common Stock that is
not an integral multiple of three will receive one additional Right. In the case
of shares held of record by Cede, the nominee for DTC, or any other depository
or nominee, additional Rights to be received by beneficial owners for whom Cede
or any other depository or nominee is the holder of record will be issued to
Cede or such other depository or nominee, only if Cede or such other depository
or nominee provides to the Fund on or before the close of business on June ,
1996 written representation of the number of additional Rights required for such
issuance.
--------------------
(footnotes from cover page)
(1) Estimated on the basis of the net asset value per share on May , 1996.
(2) In connection with the Offer, First Albany Corporation (the "Dealer
Manager") or other broker-dealers soliciting the exercise of Rights will
receive directly from the Fund soliciting fees equal to 2.00% of the
Subscription Price per Share with respect to Shares purchased by Record
Date Shareholders, and 3.75%of the Subscription Price per Share with
respect to Shares purchased by other holders of Rights (excluding Record
Date Shareholders), in each case where the exercise was solicited by the
Dealer Manager or such other soliciting broker-dealer, as the case may be.
The minimum amounts of Dealer Manager and Soliciting Fees and the maximum
amounts of Proceeds to Fund are based on the assumption that all of the
Shares sold will be purchased by the Record Date Shareholders where the
purchases were solicited by the Dealer Manager or another soliciting
broker-dealer, and the maximum amounts of Dealer Manager and Soliciting
Fees and minimum amounts of Proceeds to Fund are based on the assumption
that all of the Shares will be purchased by other holders of Rights where
the purchases were so solicited. The Fund cannot predict what portion of
any Shares sold will be purchased by Record Date Shareholders as compared
to other holders of Rights or what portion of the purchases will be
solicited by participating broker-dealers.
(3) The Fund has agreed to pay the Dealer Manager a fee for financial advisory
services in connection with the Offer equal to $150,000, and has agreed to
indemnify the Dealer Manager against certain liabilities under the U.S.
Securities Act of 1933, as amended.
(4) Before deduction of offering expenses incurred by the Fund, estimated at
$ , including up to $40,000 payable to the Dealer Manager as
reimbursement for its expenses.
<PAGE>
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed information
included elsewhere in this Prospectus.
THE OFFER
Prospect Street High Income Portfolio Inc. (the "Fund") is issuing to its
shareholders of record ("Record Date Shareholders") as of the close of business
on May , 1996 (the "Record Date") transferable rights ("Rights") to subscribe
for an aggregate of 8,450,000 shares of Common Stock (sometimes referred to
herein as the "Shares") of the Fund. Each such Record Date Shareholder is being
issued one Right for each three shares of Common Stock owned on the Record Date.
No fractional Rights will be issued. Record Date Shareholders, where the context
requires, shall also include beneficial owners whose shares are held of record
by Cede & Co. ("Cede"), nominee for The Depository Trust Company ("DTC") or by
any other depository or nominee. The Rights entitle the Record Date Shareholder
to acquire at the Subscription Price (as hereinafter defined) one Share for each
Right held. Record Date Shareholders holding a number of shares of Common Stock
that is not an integral multiple of three will receive one additional Right. In
the case of shares held of record by Cede or any other depository or nominee,
additional Rights to be received by beneficial owners for whom Cede or any other
depository or nominee is the holder of record will be issued to Cede or such
other depository or nominee, only if Cede or such other depository or nominee
provides to the Fund on or before the close of business on June , 1996 written
representation of the number of Rights required for such issuance. The
Subscription Period commences on the date of this Prospectus and ends at 5:00
p.m., New York time, on June , 1996 unless extended by the Fund until 5:00 p.m.,
New York time, on July , 1996 (the "Expiration Date"). See "Expiration of
Offer." The Rights are evidenced by subscription certificates ("Subscription
Certificates") which will be mailed to Record Date Shareholders (except as
discussed below under "Foreign Restrictions").
A Record Date Shareholder's right to acquire during the Subscription Period
at the Subscription Price one Share for each Right held is hereinafter referred
to as the "Primary Subscription." Holders of Rights who are not Record Date
Shareholders ("Rights Holders") may also purchase Shares in the Primary
Subscription. All Rights may be exercised immediately upon receipt and until
5:00 p.m., New York time, on the Expiration Date. (Record Date Shareholders and
Rights Holders purchasing Shares in the Primary Subscription including those who
purchase Shares pursuant to the Over-Subscription Privilege are hereinafter
referred to as "Exercising Rights Holders.")
The first regular monthly dividend to be paid on shares of Common Stock
acquired upon exercise of Rights will be the first monthly dividend, the record
date for which occurs after the issuance of such shares following the Expiration
Date. It is the Fund's present policy to pay dividends on the last business day
of each month to shareholders of record seven days prior to the payment date.
Assuming the Subscription Period is not extended beyond June , 1996, it is
expected that the first dividend received by shareholders acquiring shares in
this rights offering will be paid on the last business day of July 1996.
At the date hereof, the Fund is considering various refinancing alternatives
with respect to its leverage. Additionally, following the completion of the
Offer, it is the intention of the Fund, subject to market conditions, to add
incremental leverage (to the extent permitted under the Investment Company Act
of 1940, as amended (the "1940 Act")) such that the percentage of the Fund's
assets representing leverage is approximately the same as it was prior to the
Offer.
The Fund completed transferable rights offerings on March 4, 1993 and
November 23, 1993 which permitted shareholders to acquire, at a subscription
price of $3.80 and $3.60, respectively, one new share for each three rights held
as of the record date of such rights offerings. All of the rights issued by the
Fund pursuant to the rights offerings were exercised and, as a result, 4,625,000
new shares of Common Stock were issued in March 1993 with net proceeds to the
Fund of approximately $16.7 million and 6,210,000 new shares of Common Stock
were issued in December 1993 with net proceeds to the Fund of approximately
$21.3 million. All of the net proceeds from the exercise of the rights issued
pursuant to the prior rights offerings have been invested in new securities in
accordance with the Fund's investment objective.
OVER-SUBSCRIPTION PRIVILEGE
Any Record Date Shareholder who fully exercises all Rights issued to him is
entitled to subscribe for Shares which were not otherwise subscribed for by
others by Primary Subscription (the "Primary Over-Subscription Privilege"). In
addition, any Rights Holder who exercises Rights is entitled to subscribe for
Shares which are not otherwise subscribed for in the Primary Subscription or
pursuant to the Primary Over-Subscription Privilege (the "Secondary Over-
Subscription Privilege", which, together with the Primary Over-Subscription
Privilege is referred to herein as the "Over-Subscription Privilege"). Shares
acquired pursuant to the Over-Subscription Privilege are subject to allocation
and proration, which is more fully discussed under "The Offer -- Over-
Subscription Privilege."
SUBSCRIPTION PRICE
The Subscription Price per Share ("Subscription Price") will be the greater
of (i) the net asset value per share as of the close of business on the
Expiration Date or (ii) $ .
EXERCISING RIGHTS
Rights will be evidenced by Subscription Certificates (see Appendix A) and
may be exercised by completing a Subscription Certificate and delivering it,
together with payment, either by means of a Notice of Guaranteed Delivery or a
check to Boston EquiServe, Inc., c/o State Street Bank and Trust Company,
Corporate Reorganization, Two Heritage Drive, 4th Floor, North Quincy,
Massachusetts 02171 (the "Subscription Agent"). Checks sent in payment must
actually clear by 5:00 p.m., New York time, on the Expiration Date in order for
Rights to be exercised. Exercising Rights Holders will not know the Subscription
Price for Shares being acquired, at the time of exercise, and will be required
initially to pay for such Shares at the estimated Subscription Price (the
"Estimated Subscription Price") of $ (approximately the net asset value per
share on May , 1996. Exercising Rights Holders will have no right to rescind a
purchase after the Subscription Agent has received payment. See "The Offer --
Exercise of Rights" and "The Offer -- Payment for Shares."
SOLICITING FEES
The Fund has agreed to pay directly to each broker-dealer, including the
Dealer Manager, who solicits the exercise of Rights a fee equal to 2.00% of the
Subscription Price per Share with respect to Shares purchased by Record Date
Shareholders, and 3.75% of the Subscription Price per Share with respect to
Shares purchased by other holders of Rights (excluding Record Date
Shareholders), in each case where the exercise was solicited by such soliciting
broker-dealer. Soliciting Fees will not be paid with respect to the exercise of
Rights by or for the account of the Dealer Manager or broker-dealers
participating in the solicitation. See "The Offer -- Distribution Arrangements."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights and the
Shares will be listed for trading on the New York Stock Exchange (the
"Exchange"). Although no assurance can be given that a market for the Rights
will develop, trading in the Rights on the Exchange may be conducted until the
close of trading on the last Business Day (as defined below) prior to the
Expiration Date. The Fund expects that a market for the Rights will develop and
that the value of the Rights, if any, will be reflected by the market price.
Rights may be sold by individual holders or may be submitted to the Subscription
Agent for sale by the Dealer Manager. Any Rights to be submitted by the
Subscription Agent to the Dealer Manager for sale must be received by the
Subscription Agent on or before June , 1996 (or if the Offer is extended, until
two business days prior to the Expiration Date), due to normal settlement
procedures. Trading of the Rights on the Exchange will be conducted on a when
issued basis on June , 1996 and June , 1996, and thereafter on a regular way
basis until and including the last Exchange trading day prior to the Expiration
Date. If the Subscription Agent receives Rights for sale in a timely manner, the
Dealer Manager will use its best efforts to sell the Rights on the Exchange. No
brokerage commissions will be charged to holders of less than 100 Rights or to
beneficial owners of less than 100 Rights held on their behalf by Qualified
Financial Institutions (as defined below), who elect to direct the Subscription
Agent to sell such Rights, in whole but not in part. For purposes of this
Prospectus, "Qualified Financial Institution" shall mean any registered
broker-dealer, commercial bank or trust company, securities depository or
participant therein, or nominee thereof. Any commission on sales of 100 Rights
or more will be paid by the selling Rights holders. Neither the Fund, the
Subscription Agent nor the Dealer Manager will be responsible if Rights cannot
be sold and none of them has guaranteed any minimum sale price for the Rights.
For purposes of this Prospectus, a "Business Day" shall mean any day on which
trading is conducted on the Exchange.
Record Date Shareholders are urged to obtain a recent trading price for the
Rights on the Exchange from their broker, bank, financial adviser, or the
financial press. Exercising Rights Holders' inquiries should be directed to the
Information Agent. See "Information Agent" below.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the District of Columbia and the territories and possessions of the
United States) ("Foreign Record Date Shareholders"). The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for such
Foreign Record Date Shareholders' accounts until instructions are received to
exercise, sell or transfer the Rights. If no instructions have been received by
12:00 Noon, New York time, three Business Days prior to the Expiration Date, the
Rights of those Foreign Record Date Shareholders will be transferred by the
Subscription Agent to the Dealer Manager who will use its best efforts to sell
the Rights on the Exchange. The net proceeds, if any, from the sale of those
Rights by the Dealer Manager will be remitted to the Foreign Record Date
Shareholders.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its shareholders to increase the assets of the
Fund available for investment so that the Fund will be in a better position to
take advantage of available investment opportunities. In approving the rights
offering, the Board of Directors of the Fund considered, among other things, the
benefits to shareholders resulting from prior rights offerings by the Fund, the
current yield to shareholders and the impact that a rights offering would have
on such yield and the benefits and drawbacks of conducting a transferable versus
non-transferable rights offering. Additionally, the Board of Directors believes
that increasing the size of the Fund would also result in lowering the Fund's
expenses as a proportion of average net assets, to the extent that such expenses
are not calculated with reference to the amount of its assets. Further, the
Offer seeks to reward the Fund's shareholders by giving them the right to
purchase additional shares at a price that may be below the market value of the
shares without incurring any direct transaction costs. The distribution to
shareholders of transferable Rights which themselves may have a realizable value
will also afford non-participating shareholders the potential of receiving a
cash payment upon sale of such Rights, receipt of which may be viewed as
compensation for the possible dilution of their interest in the Fund.
USE OF PROCEEDS
Based on the Estimated Subscription Price of $ per Share, the net proceeds
of the Offer, assuming all Shares offered hereby are sold and the maximum Dealer
Manager and soliciting fees are paid, are estimated to be approximately $ ,
after deducting offering expenses payable by the Fund estimated at approximately
$ . The Investment Adviser anticipates, based upon current market conditions,
that investment of such proceeds in accordance with the Fund's investment
objective and policies will take up to thirty days from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities for purchase, but in no event will such investment take longer than
six months. Pending such investment in accordance with the Fund's investment
objective and policies, the proceeds will be held in U.S. Government securities
(which term includes obligations of the United States Government, its agencies
or instrumentalities) and other high-quality short-term money market
instruments.
<PAGE>
INFORMATION AGENT
Information Agent for the Offer is:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 242-4410
IMPORTANT DATES TO REMEMBER
EVENT DATE
----- ----
RECORD DATE MAY , 1996
SUBSCRIPTION PERIOD MAY , 1996 TO
JUNE , 1996
(UNLESS EXTENDED)
EXPIRATION DATE JUNE , 1996
PAYMENT FOR SHARES AND NOTICES OF
GUARANTEED DELIVERY DUE JUNE , 1996
DELIVERY OF SUBSCRIPTION CERTIFICATES TO SUBSCRIPTION
AGENT PURSUANT TO NOTICE OF GUARANTEED DELIVERY JUNE , 1996
CONFIRMATION DATE JULY , 1996
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a diversified, closed-end
management investment company since 1988. The Fund's investment objective is to
provide high current income, while seeking to preserve shareholders' capital,
through investment in a professionally managed, diversified portfolio of
"high-yield," high risk securities (commonly referred to as "junk bonds"). The
Fund seeks to achieve its objective of preserving shareholder's capital through
careful selection of the Fund's "high-yield," high risk investments, portfolio
diversification, and portfolio monitoring and repositioning. However, in the
severe adverse interest rate and economic environment of 1989 and 1990 the Fund
suffered a substantial decline in its net asset value and thus failed to meet
that objective during that period. Given the nature of the Fund's investments
and its leverage, it may be extremely difficult to achieve this objective on a
consistent basis in the future. See "Investment Policies and Limitations."
The Fund invests primarily in fixed-income securities rated in the lower
categories by established rating agencies (consisting principally of
fixed-income securities rated "BB" or lower by Standard & Poor's Corporation
("S&P") and "Ba" or lower by Moody's Investors Service, Inc. ("Moody's," and
together with S&P, the "Rating Agencies")), or nonrated fixed-income securities
deemed by the Investment Adviser to be of comparable quality. Such securities
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 obligation. In addition to investing in "high-yield," high risk
securities, the Fund may engage in certain options activities, the lending of
portfolio securities, and the use of futures contracts and options thereon,
reverse repurchase agreements and repurchase agreements. See "Investment
Policies and Limitations -- Investment Restrictions." Lower rated and nonrated
securities are subject to a greater degree of risk than higher rated securities.
See "Risk Factors and Special Considerations."
Concurrent with the Fund's initial public offering of 13,000,000 shares of
its Common Stock (the "Common Stock") in November 1988, the Fund issued
$50,000,000 aggregate principal amount of Senior Extendible Notes (the "Senior
Extendible Notes"), and 300 shares of Taxable Auction Rate Preferred Stock(R),
no par value per share, liquidation preference $100,000 per share ("Preferred
Shares"). During the fiscal years ended October 31, 1990 and 1991 the Fund
repurchased $45,000,000 of its Senior Extendible Notes. In July 1993, the Fund
repurchased the remaining $5,000,000 of Senior Extendible Notes then
outstanding, and thereafter issued, in a private placement, $20,000,000 of new
Senior Notes payable December 1, 1998 (the "Notes"), and redeemed 100 Preferred
Shares, leaving 200 Preferred Shares outstanding. The Fund's investments are
subject to diversification, liquidity and related investment guidelines (i)
established in connection with the issuance of the Notes and the Fund's receipt
from Fitch Investors Service, Inc. of a rating of "Aaa" for the Notes (the
"Notes Investment Guidelines") and (ii) agreed upon by the Fund and Financial
Security Assurance Inc. ("Financial Security") in connection with the issuance
of the Surety Bond (as defined herein) with respect to Scheduled Payments (as
defined herein) on the Preferred Shares (the "Surety Investment Guidelines" and,
together with the Notes Investment Guidelines, the "Investment Guidelines"). See
"Investment Policies and Limitations -- Investment Guidelines." Fitch Investors
Service, Inc. issued a rating of "Aaa" for the Notes because the Fund's
portfolio, although consisting principally of lower rated securities, is managed
in accordance with the Notes Investment Guidelines which are designed to ensure
that assets underlying the Notes will be sufficiently diversified and will be of
sufficient credit quality and amount to justify an investment grade rating of
"Aaa". As a result of the issuance of the Surety Bond pursuant to an insurance
agreement with Financial Security (the "Surety Arrangement"), the Fund receives
ratings from the Rating Agencies of "AAA"/"Aaa" for the Preferred Shares. See
"Description of Notes -- Asset Maintenance" and "Surety Arrangement for
Preferred Shares --Insurance Agreement."
The Fund's outstanding Common Stock, par value $0.01 per share, is listed
and traded on the Exchange. The average weekly trading volumes of the Fund's
shares on the Exchange for the Fund's fiscal years ended October 31, 1994 and
1995, and for the three month period ended January 31, 1996 were 365,703 shares,
207,673 shares and 214,526 shares, respectively. As of March 1, 1996, the Fund
had 25,287,767 shares of Common Stock outstanding and net assets applicable to
Common Stock of approximately $94.8 million. The Fund's Preferred Shares and
Notes are not traded on any stock exchange.
INFORMATION REGARDING THE INVESTMENT ADVISER
Prospect Street(R) Investment Management Co., Inc. (the "Investment
Adviser"), of Boston, Massachusetts, registered under the U.S. Investment
Advisers Act of 1940, has served as investment adviser to the Fund since its
inception. The Investment Adviser was organized in June 1988 to provide
institutional clients with investment management services.
Richard E. Omohundro, Jr., President of the Investment Adviser, served as a
"high-yield" specialist and Co-Manager of the High-yield Bond Group of Merrill
Lynch Capital Markets ("Merrill Lynch") from 1978 through 1987. During that
period, the High-yield Group raised approximately $13.6 billion in new
"high-yield" securities through 107 issues and provided one of the largest
secondary trading markets for "high-yield" securities. Mr. Omohundro provides
general advisory assistance to, analyzes certain policy considerations with, and
consults on a regular basis with, the Fund's portfolio manager. John A.
Frabotta, Vice President of the Investment Adviser, performed various research,
structuring and pricing functions involving "high-yield" securities as a Vice
President of Merrill Lynch. Mr. Frabotta serves as the portfolio manager of the
Fund (since September, 1990) and has over 20 years of experience working with
"high-yield", fixed income instruments.
The principals of the Investment Adviser are also involved in the
management of two other funds: Prospect Street(R) Senior Loan Portfolio, L.P.
and Prospect International Portfolio. Prospect Street(R) Senior Loan
Portfolio, L.P. is a $118 million portfolio investing in assignments of or
participations in U.S. senior floating rate bank loans made primarily in
connection with leveraged acquisitions and financings. These bank loan
interests are acquired in the syndication phase and in the secondary market.
Prospect International Portfolio is an offshore, closed-end fund investing in
U.S. Government securities.
The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.65% of the Fund's average weekly value of the total assets less accrued
liabilities (excluding the principal amount of the notes and the liquidation
preference of the preferred stock and including accrued and unpaid dividends on
the preferred stock) up to and including $175,000,000 of such net assets, 0.55%
on the next $50,000,000 of such net assets and 0.50% of the excess of such net
assets over $225,000,000. Since the Investment Adviser's fee is based on the
average weekly net assets of the Fund, the Investment Adviser will benefit from
an increase in the Fund's assets resulting from the Offer. However, for a period
of one-year commencing on the Expiration Date, the Investment Adviser will waive
its advisory fee with respect to any increase in the Fund's net assets resulting
from the exercise of any Rights pursuant to the Offer in order to mitigate the
impact of the offering expenses of this Offer on the Fund and its shareholders.
See "The Investment Adviser." In addition, three of the Fund's seven Directors
are "interested persons" (as such term is defined under the Investment Company
Act of 1940, as amended (the "1940 Act")), of the Fund who could benefit
indirectly from the Offer because of such Directors' affiliations with the
Investment Adviser. See "The Investment Adviser."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered, among
others, in connection with the Offer.
Dilution. An immediate dilution of the aggregate net asset value of the
shares of Common Stock owned by Record Date Shareholders who do not fully
exercise their Rights is likely to be experienced as a result of the Offer
because the amounts received by the Fund with respect to the Subscription Price
(after payment of soliciting fees and other expenses of the Offer) are likely to
be less than the Fund's net asset value per share and because the number of
shares outstanding after the Offer is likely to increase in a greater percentage
than the increase in the size of the Fund's assets. As a result, Record Date
Shareholders are likely to experience a decrease in the net asset value per
share held by them, irrespective of whether they exercise all or any portion of
their Rights. In addition, Record Date Shareholders who do not fully exercise
their Rights should expect that they will, at the completion of the Offer, own a
smaller proportional interest in the Fund than would otherwise be the case.
Although it is not possible to state precisely the amount of such a decrease in
net asset value per share (and in the case of Record Date Shareholders who do
not fully exercise their Rights, in the aggregate net asset value of their
shares), because it is not known at this time what the Subscription Price will
be, what the net asset value per share will be on the Expiration Date or what
proportion of the Shares will be subscribed for, such dilution could be
substantial. For example, assuming (i) that all Rights are exercised by Record
Date Shareholders and the purchases of Shares upon the exercise of such Rights
are solicited by the Dealer Manager or a broker dealer, as the case may be and
(ii) that the Subscription Price is $ per share which is the Fund's net asset
value per share, the Fund's net asset value per share (after payment of the
Dealer Manager and soliciting fees and estimated offering expenses) would be
reduced by approximately $ per share or %. Assuming (i) that all Rights are
exercised by other holders of Rights and the purchases of Shares upon the
exercise of such Rights are solicited by the Dealer Manager or a broker-dealer,
as the case may be and (ii) that the Subscription Price is $ per share which is
the Fund's net asset value per share, the Fund's net asset value per share
(after payment of the Dealer Manager and soliciting fees and estimated offering
expenses) would be reduced by approximately $ per share or %. The Fund cannot
predict what portion of any Shares sold will be purchased by Record Date
Shareholders as compared to other holders of Rights or what portion of the
purchases will be solicited by participating broker-dealers. The distribution to
shareholders of transferable Rights, which themselves may have realizable value,
will afford nonparticipating shareholders the potential of receiving a cash
payment upon sale of such Rights, receipt of which may be viewed as compensation
for the possible dilution of their interest in the Fund.
Risk of "Leverage". Leverage creates the opportunity for greater total
returns, but at the same time involves certain risks. Any investment income or
gains earned from the capital contributed by the purchasers of the Notes and the
Preferred Shares which is in excess of interest and dividends due thereon will
cause the value of the dividends, if any, on the Common Stock to rise more
quickly than would otherwise be the case. Conversely, if the investment
performance of the capital contributed by the purchasers of the Notes and the
Preferred Shares fails to cover the interest and dividends on such capital, the
value of the Common Stock may decrease more quickly than would otherwise be the
case and dividends thereon will be reduced or eliminated. This is the
speculative effect of leverage. During the sharp "high-yield" market decline of
1989 and 1990, the Fund's leverage contributed to a sharp decline in the net
asset value of the Common Stock. In order to remain in compliance with the 200%
asset coverage ratio required by the 1940 Act, the Fund was required to
repurchase $45.0 million of the $50.0 million of outstanding Senior Extendible
Notes. Also, to maintain compliance with the Fund's Surety Investment Guidelines
the Fund was required to sell "high-yield" assets. The selling of "high-yield"
assets below their original cost and the retirement of $45.0 million of the
Fund's Senior Extendible Notes during the fiscal years ended October 31, 1990
and 1991, resulted in a reduction of the Fund's total assets and caused the Fund
to realize substantial capital losses. The Surety Investment Guidelines and the
asset coverage ratio requirements combined to delay the Fund's reinvestment of
cash into "high-yield" securities as the market improved. The Fund's use of
leverage is currently benefiting the holders of Common Stock as the average cost
of funds (pursuant to its Preferred Share and Notes obligations) was
approximately 5.97% as of March 15, 1996 while the "high-yield" market currently
offers interest income at annualized rates of approximately 9.5% to 11.0%.
The Fund may, if market conditions are appropriate, increase its level of
debt or other senior securities or refinance the Fund's current level of debt or
other senior securities in order to maintain or increase the level of leverage
that exists prior to this offering. At the date hereof, the Fund is considering
various refinancing alternatives with respect to its leverage. Additionally,
following the completion of the Offer, it is the intention of the Fund, subject
to market conditions, to add incremental leverage (to the extent permitted under
the 1940 Act) such that the percentage of the Fund's assets representing
leverage is approximately the same as it was prior to the Offer.
Because the Notes and the Preferred Shares are senior to the Common Stock,
an investment in these securities is subject to a lesser degree of risk than an
investment in the Common Stock. In any liquidation of the Fund, first the Notes,
as Fund indebtedness, and next the Preferred Shares, as a senior class of stock,
would have to be paid in full before any payments would be made with respect to
the Common Stock. In addition, the risk of adverse changes in net asset value is
increased by the Fund's leveraged structure. See "Risk Factors and Special
Considerations."
Discount From Net Asset Value. Shares of closed-end funds frequently trade
at a market price which is less than the value of the net assets attributable
thereto. The possibility that shares of the Fund will trade at a discount from
net asset value is a risk separate and distinct from the risk that the Fund's
net asset value will decrease. It should be noted, however, that in some cases,
shares of closed-end funds trade at a premium to net asset value. The Fund's
shares have traded in the market above, at, and below net asset value since the
commencement of the Fund's operations. See "Trading and Net Asset Value
Information." In addition, the net asset value of the Fund will change with
changes in the value of its portfolio securities. Because the Fund invests
primarily in fixed-income securities, the net asset value of the shares of the
Fund can be expected to change as general levels of interest rates fluctuate.
When interest rates decline, the value of a fixed-income portfolio can be
expected to rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline.
High-Yield, High-Risk Investments. Fixed-income securities offering the high
current income sought by the Fund will ordinarily be in the lower rating
categories of recognized rating agencies or will be nonrated. These fixed-income
securities 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 obligation and will generally involve more
credit risk than securities in the higher rating categories. The values of such
securities tend to reflect individual corporate developments to a greater extent
than higher rated securities, which react primarily to fluctuations in the
general level of interest rates, and such securities are frequently subordinated
to the prior payment of senior indebtedness. In addition, the trading market for
"high-yield," high risk securities is generally less liquid than the market for
higher rated securities. As of March 15, 1996, approximately 99.71% of the
Fund's total assets was invested in fixed-income securities regarded by the
Rating Agencies as below investment grade (that is rated Ba1 or lower by Moody's
or BB+ or lower by S&P).
In the severe adverse interest rate and economic environment of 1989 and
1990 the Fund suffered a substantial decline in its net asset value. In 1988,
when the Fund commenced operations, "high-yield" securities traded at yields
approximately 500 to 550 basis points higher than comparable U.S. Treasury
securities. In 1990, this spread widened to approximately 1250 basis points
resulting in substantial price declines in the corporate "high-yield" bond
market. During the fiscal years ended October 31, 1990 and 1991, the Fund was
obligated to repay $45.0 million of the Senior Extendible Notes, which required
the liquidation of investments that were selling at prices substantially below
their original purchase prices resulting in the realization of substantial
capital losses. Also during 1989 and 1990, the level of "high-yield" debt
security defaults increased as many issuers were unable to obtain funds through
financial intermediaries or the public "high-yield" market. The effect of these
developments on the Fund was a substantial decline in the Fund's net asset value
and a substantial reduction in the Fund's monthly dividend. Also, the forced
liquidation of a substantial portion of the Fund's portfolio in order to repay
the Senior Extendible Notes resulted in the realization of substantial capital
losses, and this severely limited the ability of the Fund to return to its
original net asset value as the "high-yield" market improved. The "high-yield"
market decline reversed in the fourth quarter of 1990 and by mid year 1991,
after reinvesting a substantial amount of its cash, the Fund's net asset value
had improved substantially but to a level far less than the net asset value at
the time the Fund commenced operations.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt retirements
totaling $26.0 billion. Net new issue activity of "high-yield" debt securities
totaled $11.4 billion, $46.1 billion, $22.2 billion and $26.7 billion for the
calendar years 1992, 1993, 1994 and 1995, respectively. Net new issue activity
of "high-yield" debt securities for the two month period ended February 29, 1996
was $10.8 billion. The statistical information with respect to new issue
activity is based upon information the Fund obtained from the CS First Boston
High Yield Handbook. The spread between the yield on U.S. Treasury securities
and the high-yield market has fluctuated between 400 and 600 basis points (4.0%
to 6.0%) during the 1992 to 1995 period, which is more in line with the
historical spread relationship.
Since 1978, the historical weighted default rate on "high-yield" debt
securities has been 2.2%. The default rates on "high-yield" debt securities for
the calendar years 1990, 1991, 1992, 1993, 1994 and 1995 were 7.98%, 9.33%,
2.89%, 0.96%, 0.44% and 2.24%, respectively. The default rate on "high-yield"
debt securities for the two month period ended February 29, 1996 was 0.15%. The
defaulted amount of "high-yield" debt securities was $18.1 billion in 1990,
$20.7 billion in 1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion
in 1994 and $6.6 billion in 1995. The defaulted amount on "high-yield" debt
securities for the two month period ended February 29, 1996 was $435 million.
The statistical information with respect to historical default rates and amounts
is based on information the Fund obtained from the CS First Boston High Yield
Handbook.
For a more detailed discussion of the risks and special considerations with
respect to "high-yield," high risk securities, see "Risk Factors and Special
Considerations -- High-Yield, High Risk Investments."
Other Matters. There are additional matters which should be considered in
connection with the Offer including provisions of the Fund's Articles of
Incorporation, as amended (the "Articles of Incorporation") which may grant
certain special voting rights to holders of the Preferred Shares, limitations
on the ability of the Fund to declare dividends or other distributions
contained in the 1940 Act and in the Note Purchase Agreement (as defined
herein) governing the Notes, and the possible conversion of the Fund to an
open-end investment company. See "Risk Factors and Special Considerations" and
"Share Repurchases; Conversion to Open-End Status."
Investors should carefully consider their ability to assume the foregoing
risks before making an investment in the Fund. An investment in shares of the
Fund is not appropriate for all investors. See "Risk Factors and Special
Considerations."
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
<S> <C>
Shareholder Transaction Expenses:
Sales Load (as a percentage of offering price)(1)(2) ....................................... 3.75%
----
Annual Expenses (expenses paid by the Fund before it makes any distributions,
expressed as a percentage of the Fund's net assets at the conclusion of this
offering):
Management Fees(3) ......................................................................... 0.65%
----
Interest Expense(4) ........................................................................ %
----
Other Expenses(2) .......................................................................... %
----
Total Annual Expenses .................................................................. %
====
<CAPTION>
EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment, assuming a 5% annual
return throughout the periods(5) .............. $ $ $ $
<FN>
- ----------
(1) The Dealer Manager and other broker-dealers who have executed and delivered a Soliciting Dealer
Agreement and who have solicited the exercise of Rights will receive fees for their soliciting
efforts equal to 2.00% of the Subscription Price per Share with respect to Shares purchased by
Record Date Shareholders and 3.75% of the Subscription Price per Share with respect to Shares
purchased by other holders of Rights (excluding Record Date Shareholders), in each case where
the exercise was solicited by the Dealer Manager or such other soliciting broker-dealer, as the
case may be. The Fund has also agreed to pay the Dealer Manager a fee for financial advisory
services in connection with the Offer equal to $150,000. These fees will be borne by the Fund
and indirectly by all of the Fund's shareholders, including those who do not exercise their
Rights. The Sales Load percentage assumes that all of the Rights are exercised by Rights holders
other than Record Date Shareholders where the exercise is solicited by the Dealer Manager or a
participating broker dealer.
(2) Does not include expenses of the Fund incurred in connection with the Offer, estimated at $ .
(3) The Fund pays the Investment Adviser a monthly fee at an annual rate ranging from 0.65% to
0.50%. See "The Investment Adviser".
(4) At the date hereof, the Fund is considering various refinancing alternatives with respect to its
leverage. Additionally, following the completion of the Offer, it is the intention of the Fund,
subject to market conditions, to add incremental leverage (to the extent permitted under the
1940 Act) such that the percentage of the Fund's assets representing leverage is approximately
the same as it was prior to the Offer. Accordingly, the Interest Expense as set forth herein
assumes that the Interest Expense as a percentage of the Fund's net assets will be the same
after the Offer.
(5) The example reflects the Sales Load and other expenses of the Fund incurred in connection with
the Offer and assumes that the Rights are exercised by Rights holders other than Record Date
Shareholders where the exercise is solicited by the Dealer Manager or a participating broker
dealer.
</TABLE>
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly.
The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value and an expense ratio of _____ %. The tables
above and the assumption in the Example of a 5% annual return are required by
Securities and Exchange Commission regulations applicable to all investment
companies. THE EXAMPLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN. Actual expenses or annual rates of
return may be more or less than those assumed for purposes of the Example. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan may receive shares purchased or issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."
The figures provided under "Other Expenses" are based upon estimated
amounts for the current fiscal year. See "The Investment Adviser" for
additional information.
FINANCIAL INFORMATION SUMMARY
The table below sets forth certain specified information for a share of
Common Stock outstanding throughout each period presented. The financial
highlights for each of the fiscal years through the period ended October 31,
1995 have been audited by Arthur Andersen LLP, the Fund's independent public
accountants, whose report thereon was unqualified. The information should be
read in conjunction with the financial statements and notes thereto, which are
incorporated herein by reference, in the Fund's Annual Report as of October 31,
1995, which is available upon request from the Fund's registrar and transfer
agent, State Street Bank and Trust Company.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
DECEMBER 5, 1988
(COMMENCEMENT
FOR THE FISCAL YEARS ENDED OCTOBER 31, OF OPERATIONS)
------------------------------------------------------------------------- TO OCTOBER 31,
1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of
period ......................... $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82 $ 9.15(b)
-------- -------- -------- ------- ------- ------- --------
Net investment income ............ .45 .48# .63# .62 .55 .98 1.31
Net realized and unrealized gain
(loss) on investment ........... .03 (.38)# .39# .07 .56 (3.43) (2.32)
-------- -------- -------- ------- ------- ------- --------
Total from investment
operations ............... $ .48 $ .10 $ 1.02 $ .69 $ 1.11 $ (2.45) $ (1.01)
-------- -------- -------- ------- ------- ------- --------
Distributions:
Dividends from net investment
income
To preferred stockholders .... (.05) (.03) (.06) (.10) (.16) (.22) (.19)
To common stockholders ....... (.42) (.45) (.62) (.45) (.36) (.76) (1.12)
Dividends to common stock- -- -- -- -- -- (.09) (.01)
-------- -------- -------- ------- ------- ------- --------
Total distributions ........ $ (.47) $ (.48) $ (.68) $ (.55) $ (.52) $ (1.07) $ (1.32)
-------- -------- -------- ------- ------- ------- --------
Effect of sale of common stock and
related expenses ............... -- $ (.18) $ (.12) $ -- $ -- $ -- $ --
-------- -------- -------- ------- ------- ------- --------
Net asset value -- end of period $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82
======== ======== ======== ======= ======= ======= ========
Per share market value:
End of period .................. $ 3.88 $ 3.50 $ 4.25 $ 4.00 $ 3.50 $ 2.50 $ 6.00
======== ======== ======== ======= ======= ======= ========
28.57% (7.78)% 23.25% 27.99% 57.36% (50.21)% (31.33)%
======== ======== ======== ======= ======= ======= ========
Net assets, end of period,
applicable to common stock (a) . $ 93,309 $ 92,072 $ 79,438 $55,178 $53,040 $45,028 $ 92,487
======== ======== ======== ======= ======= ======= ========
Net assets, end of period,
applicable to preferred stock (a) $ 20,000 $ 20,000 $ 20,000 $30,000 $30,000 $30,000 $ 30,000
======== ======== ======== ======= ======= ======= ========
Net assets, end of period (a) .... $113,309 $112,072 $ 97,498 $85,178 $83,040 $75,028 $122,487
======== ======== ======== ======= ======= ======= ========
Ratio of operating expenses to
average net assets** ........... 2.28%+ 2.30%+ 2.13%+ 2.28%+ 2.93%+ 6.15%+ 4.89%*+
Ratio of net investment income to
average net assets** ........... 9.39% 8.64% 9.26% 9.33% 9.24% 13.23% 13.88%*
Portfolio turnover rate .......... 80.71% 72.00% 117.20% 97.86% 114.00% 63.50% 89.70%*
<FN>
(a) Dollars in thousands.
(b) Net of initial offering and underwriting costs.
* Annualized.
** Ratios calculated on the basis of expenses and net investment income applicable to both the common and preferred shares
relative to the average net assets of both the common and preferred shareholders.
+ Excluding interest expense, the ratio of operating expenses to average net assets is 1.29%, 1.32%, 1.50%, 1.72%, 2.23%,
2.60% and 1.279%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's
rights offerings.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPITALIZATION AT MARCH 1, 1996
AMOUNT OUTSTANDING AMOUNT HELD
EXCLUSIVE OF AMOUNT BY THE FUND
HELD BY THE FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT ACCOUNT
-------- ----------- ------------ ---------------
<S> <C> <C> <C>
Senior Notes(1) .............................. -- $20,000,000 -0-
Taxable Auction Rate Preferred Stock, no
par value, Liquidation Preference
$100,000 per share(2) ...................... 1,000 shares 200 shares -0- shares
Common Stock, $0.01 par value................. 100,000,000 shares 25,287,767 shares -0- shares
<CAPTION>
INFORMATION REGARDING SENIOR SECURITIES
The following table shows certain information regarding each class of senior security of the Fund as of the end of
each fiscal year of the Fund since its inception.
INVOLUNTARY
ASSET COVERAGE LIQUIDATION APPROXIMATE MARKET
AT TOTAL AMOUNT FOR NOTES(3) PREFERENCE VALUE PER
OCTOBER 31 OUTSTANDING OR SHARES(4) PER SHARE SHARE OR NOTE
---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Senior Extendible
Notes(1) 1989 $50,000,000 $ 3,450 -- $1,000.00
1990 15,000,000 6,002 -- 1,000.00
1991 5,000,000 17,608 -- 1,000.00
1992 5,000,000 18,036 -- 1,087.50
1993 0 -- -- --
Senior Notes(1)
1993 $20,000,000 $ 5,972 -- $ 997.50
1994 20,000,000 6,604 -- 937.10
1995 20,000,000 6,665 -- 987.50
Taxable Auction Rate
Preferred Stock(2) 1989 300 Shares $408,291 $100,000 $ 100,000
1990 300 Shares 250,094 100,000 100,000
1991 300 Shares 276,800 100,000 100,000
1992 300 Shares 283,927 100,000 100,000
1993 200 Shares 497,188 100,000 100,000
1994 200 Shares 560,358 100,000 100,000
1995 200 Shares 566,544 100,000 100,000
<FN>
- ----------
(1) In July 1993, the Fund repurchased the remaining $5,000,000 principal amount of its Senior Extendible Notes, which
carried an annual interest rate through December 31, 1993 of 10.28%, for $5,178,000. The Fund thereafter issued
$20,000,000 of new Senior Notes payable December 1, 1998, which bear interest at a fixed annual rate of 6.53%.
(2) In July 1993, the Fund redeemed 100 shares of its Taxable Auction Rate Preferred Stock for $100,000 per share plus
accrued interest, leaving 200 shares outstanding.
(3) Amount shown is per $1,000 of Senior Extendible Note or Senior Note, as the case may be. Calculated by subtracting
the Fund's total liabilities (not including senior securities) from the Fund's total assets and dividing such amount
by the quotient of (a) the principal amount of outstanding Senior Extendible Notes or the Senior Notes, as the case
may be,divided by (b) $1,000. At March 1, 1996, the asset coverage for the $20,000,000 of Senior Notes was
approximately $6,750 per $1,000 of Senior Notes.
(4) Amount shown is per share of Taxable Auction Rate Preferred Stock. Calculated by subtracting the Fund's total
liabilities (including senior securities constituting debt but not including the Taxable Auction Rate Preferred
Stock) from the Fund's total assets and dividing such amount by the number of outstanding shares of Taxable Auction
Rate Preferred Stock. At March 1, 1996, the asset coverage for the 200 outstanding shares of Taxable Auction Rate
Preferred Stock was approximately $574,000 per Preferred Share.
</TABLE>
<PAGE>
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded both at a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above net asset value, there can be no assurance
that this premium will continue after the Offer or that the shares will not
again trade at a discount. Shares of other closed-end investment companies
frequently trade at a discount from net asset value. See "Risk Factors and
Special Considerations."
The following table shows the high and low sale prices of the Fund's Common
Stock on the New York Stock Exchange Composite Tape, quarterly trading volume on
the Exchange, the high and low net asset value per share and the high and low
premium or discount at which the Fund's shares were trading for each fiscal
quarter during the two most recent fiscal years and each fiscal quarter during
the current fiscal year.
<TABLE>
<CAPTION>
QUARTERLY
TRADING PREMIUM/(DISCOUNT)
MARKET PRICE VOLUME NET ASSET VALUE TO NET ASSET VALUE(%)
------------------------ --------------- ------------------------ ------------------------
QUARTER ENDED HIGH LOW (THOUSANDS HIGH LOW HIGH LOW
- ------------- ---- --- OF SHARES) ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1994 ........... 4 3/8 3 7/8 7,028.8 4.28 4.08 3.16 (9.04)
April 30, 1994 ............. 4 3/8 3 5/8 3,548.8 4.21 3.89 3.92 (6.81)
July 31, 1994 .............. 4 3 5/8 2,544.3 3.93 3.84 1.78 (6.81)
October 31, 1994 ........... 3 3/4 3 3/8 2,069.9 3.90 3.70 (1.06) (10.24)
January 31, 1995 ........... 3 1/2 3 1/4 2,658.0 3.71 3.57 (2.23) (11.20)
April 30, 1995 ............. 3 3/4 3 3/8 2,114.9 3.66 3.59 3.59 (4.37)
July 31, 1995 .............. 3 7/8 3 1/2 2,484.4 3.73 3.68 4.45 (1.76)
October 31, 1995 ........... 3 7/8 3 5/8 2,509.7 3.74 3.70 4.73 (2.82)
January 31, 1996 ........... 4 3 3/4 2,826.5 3.73 3.67 8.70 0.81
April 30, 1996
(through March 26, 1996) . 4 1/8 3 7/8 2,186.5 3.81 3.71 7.82 1.71
</TABLE>
The closing market price and net asset value per share of the Fund's Common
Stock on May __, 1996 were $ _____ and $ ____, respectively.
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure, consisting of (i) $20,000,000 aggregate principal
amount of Notes, (ii) 200 Preferred Shares (liquidation preference $100,000 per
share) and (iii) 25,287,767 shares of Common Stock, as of March 1, 1996, The
Fund's investment objective is to provide high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high-yield," high risk securities (commonly referred
to as "junk bonds"). The Fund invests primarily in fixed-income securities rated
in the lower categories by established rating agencies (consisting principally
of fixed-income securities rated "BB"/"Ba" or lower by the Rating Agencies\1/)
or nonrated fixed-income securities deemed by the Investment Adviser to be of
comparable quality. The Fund's investments are subject to the Investment
Guidelines. See "Investment Policies and Limitations -- Investment Guidelines."
The fixed-income securities in which the Fund invests 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 obligation
and generally involve more credit risk than securities in the higher rating
categories. See "Investment Policies and Limitations" and "Risk Factors and
Special Considerations."
The Fund's portfolio consists primarily of "high-yield," high risk
fixed-income securities. "High-yield," high risk securities offer a higher yield
to maturity than comparable securities with higher ratings as compensation for
holding an obligation of an issuer perceived to be less creditworthy. In the
severe adverse interest rate and economic environment of 1989 and 1990 the Fund
suffered a substantial decline in its net asset value. In 1988, when the Fund
commenced operations, "high-yield" securities traded at yields approximately 500
to 550 basis points higher than comparable U.S. Treasury securities. In 1990,
this spread widened to approximately 1250 basis points resulting in substantial
price declines in the corporate "high-yield" bond market. During the fiscal
years ended October 31, 1990 and 1991 the Fund was obligated to repay $45.0
million of the previously outstanding Senior Extendible Notes, which required
the liquidation of investments that were selling at prices substantially below
their original purchase prices resulting in the realization of substantial
capital losses. Also during 1989 and 1990, the level of "high-yield" debt
security defaults increased as many issuers were unable to obtain funds through
financial intermediaries or the public "high-yield" market. The effect of these
developments on the Fund was a substantial decline in the Fund's net asset value
and a substantial reduction in the Fund's monthly dividend. Also, the forced
liquidation of a substantial portion of the Fund's portfolio in order to repay
the Senior Extendible Notes resulted in the realization of substantial capital
losses, and this severely limited the ability of the Fund to return to its
original net asset value as the high-yield market improved. The high-yield
market decline reversed in the fourth quarter of 1990 and by mid year 1991,
after reinvesting a substantial amount of its cash, the Fund's net asset value
had improved substantially but to a level far less than the net asset value at
the time the Fund commenced operations.
The high-yield market, as measured by the CS First Boston High Yield Index,
posted total annual returns of 43.75%, 16.66%, 18.91%, -0.97% and 17.38% for the
calendar years 1991, 1992, 1993, 1994 and 1995, respectively. For the two month
period ended February 29, 1996, the CS First Boston High Yield Index produced a
total return of 2.44% and for the trailing twelve month period produced a total
return of 16.14%. The ten year U.S. Treasury Bond produced a total return of
16.46%, 6.52%, 11.94%, -6.08% and 23.68% for the calendar years 1991, 1992,
1993, 1994 and 1995, respectively. See "Financial Information Summary" for
information concerning the Fund's return.
- ----------
\1/Throughout this Prospectus, references to ratings by the Rating Agencies will
indicate the S&P rating followed by the Moody's rating in the format shown.
<PAGE>
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt retirements
totaling $26.0 billion. Net new issue activity of "high-yield" debt securities
totaled $11.4 billion, $46.1 billion, $22.2 billion and $26.7 billion for the
calendar years 1992, 1993, 1994 and 1995, respectively. Net new issue activity
of "high-yield" debt securities for the two month period ended February 29, 1996
was $10.8 billion. The statistical information with respect to new issue
activity is based upon information the Fund obtain from the CS First Boston High
Yield Handbook. The spread between the yield on U.S. Treasury securities and the
high-yield market has fluctuated between 400 and 600 basis points (4.0% to 6.0%)
during the 1992 to 1995 period, which is more in line with the historical spread
relationship.
Since 1978, the historical weighted default rate on "high-yield" debt
securities has been 2.2%. The default rates on "high-yield" debt securities for
the calendar years 1990, 1991, 1992, 1993, 1994 and 1995 were 7.98%, 9.33%,
2.89%, 0.96%, 0.44% and 2.24%, respectively. The default rate on "high-yield"
debt securities for the two month period ended February 29, 1996 was 0.15%. The
defaulted amount of "high-yield" debt securities was $18.1 billion in 1990,
$20.7 billion in 1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion
in 1994 and $6.6 billion in 1995. The defaulted amount on "high-yield" debt
securities for the two month period ended February 29, 1996 was $435 million.
The statistical information with respect to historical default rates and amounts
is based on information the Fund obtained from the CS First Boston High Yield
Handbook.
The capital structure of the Fund has been designed to take advantage of the
historical spread in yields between "high-yield" securities and representative
U.S. Treasury securities, compared with the average default loss on "high-yield"
securities. In addition, through investment leverage, investors in the Common
Stock of the Fund receive increased yields to the extent that the rate of return
(i.e., the current interest yield on the Fund's portfolio reduced by the actual
default loss rate experienced on that portfolio) earned on the Fund's assets,
exceeds, after expenses of Fund management, the interest and dividend rates on
the Notes and Preferred Shares. Conversely, to the extent that the rate of
return on the portfolio does not exceed the interest and dividend rates on the
Notes and Preferred Shares, yield to investors in the Common Stock will be
reduced.
The Fund is a closed-end investment company. Closed-end investment companies
differ from open-end investment companies (commonly referred to as "mutual
funds") in that closed-end investment companies have a fixed capital base,
whereas open-end companies issue securities redeemable at net asset value at any
time at the option of the shareholder and typically engage in a continuous
offering of their shares. Accordingly, open-end investment companies are subject
to periodic asset in-flows and out-flows that can complicate portfolio
management. Closed-end investment companies do not face the prospect of having
to liquidate portfolio holdings to satisfy redemptions at the option of
shareholders or having to maintain cash positions to meet the possibility of
such redemptions. The Fund will, however, be required to have sufficient cash or
cash equivalents to meet interest payments on the Notes and dividend payments on
the Preferred Shares and to fund certain redemptions of these securities in
certain circumstances. See "Description of Notes," "Description of Capital
Stock" and "Surety Arrangement for Preferred Shares."
The Fund was organized as a corporation under the laws of Maryland on May
13, 1988 and has registered with the Securities and Exchange Commission (the
"SEC") under the 1940 Act. The Fund's principal office is located at 60 State
Street, Boston, Massachusetts 02109. The Fund's Investment Adviser is Prospect
Street(R) Investment Management Co., Inc., an investment management firm
registered with the SEC under the Investment Advisers Act of 1940, as amended.
See "The Investment Adviser."
THE OFFER
TERMS OF THE OFFER
The Fund is issuing Rights, as of the close of business on May __, 1996, to
subscribe for the Shares to Record Date Shareholders. Each Record Date
Shareholder is being issued one transferable Right for each three shares of
Common Stock owned on the Record Date. No fractional Rights will be issued. The
Rights entitle the holders thereof to acquire at the Subscription Price one
Share for each Right held. Record Date Shareholders holding a number of shares
of Common Stock that is not an integral multiple of three will receive one
additional Right. In the case of shares held of record by Cede or by any other
depository or nominee, additional Rights to be received by beneficial owners for
whom Cede or any other depository or nominee is the holder of record will be
issued to Cede or such other depository or nominee, only if Cede or such other
depository or nominee provides to the Fund on or before the close of business on
June __, 1996 written representation of the number of Rights required for such
issuance. The Rights are evidenced by Subscription Certificates which will be
mailed to Record Date Shareholders except that Subscription Certificates will
not be mailed to Record Date Shareholders whose record addresses are outside the
United States (the term "United States" includes the states, the District of
Columbia and the territories and possessions of the United States) ("Foreign
Record Date Shareholders"). The Rights to which such Subscription Certificates
relate will be held by the Subscription Agent for such Foreign Record Date
Shareholders' accounts until instructions are received to exercise, sell or
transfer the Rights. If no instructions have been received by 12:00 Noon, New
York time, three Business Days prior to the Expiration Date, the Rights of those
Foreign Record Date Shareholders will be transferred by the Subscription Agent
to the Dealer Manager who will use its best efforts to sell the Rights on the
Exchange. The net proceeds, if any, from the sale of those Rights by the Dealer
Manager will be remitted to the Foreign Record Date Shareholders. See "Sale of
Rights -- Sales through Subscription Agent and Dealer Manager."
Completed Subscription Certificates may be delivered to the Subscription
Agent at any time during the Subscription Period, which commences on the date of
this Prospectus and ends at 5:00 p.m., New York time, on June . 1996, unless
extended by the Fund until 5:00 p.m., New York time, on July __, 1996, See
"Expiration of Offer." Rights Holders may also purchase Shares in the Primary
Subscription. All Rights may be exercised immediately upon receipt and until
5:00 p.m. on the Expiration Date.
Any Record Date Shareholder who fully exercises all Rights initially issued
to him is entitled to subscribe for Shares which were not otherwise subscribed
for by Exercising Rights Holders in the Primary Subscription. In addition, any
Rights Holder who exercises Rights is entitled to subscribe for Shares which are
not otherwise subscribed for in the Primary Subscription or pursuant to the
Primary Over-Subscription Privilege. Shares acquired pursuant to the
Over-Subscription Privilege may be subject to allotment, which is more fully
discussed below under "The Offer -- Over-Subscription Privilege."
Rights will be evidenced by Subscription Certificates (a form of
Subscription Certificate is attached hereto as Appendix A) and may be exercised
by completing the Subscription Certificate and delivering it, together with
payment, either by means of a Notice of Guaranteed Delivery or a check, to the
Subscription Agent. The method by which Rights may be exercised and Shares paid
for is set forth below in "Exercise of Rights" and "Payment for Shares." An
Exercising Rights Holder will have no right to rescind a purchase after the
Subscription Agent has received payment. See "Payment for Shares" below. Shares
issued pursuant to an exercise of Rights will be listed on the Exchange.
The Rights are transferable until the Expiration Date and will be admitted
for trading on the Exchange. Assuming a market exists for the Rights, the Rights
may be purchased and sold through usual brokerage channels, or delivered on or
before June __, 1996 (or if the Offer is extended, until two business days prior
to the Expiration Date), to the Subscription Agent for sale through the Dealer
Manager. Although no assurance can be given that a market for the Rights will
develop, trading in the Rights on the Exchange may be conducted until and
including the close of trading on the last Exchange trading day prior to the
Expiration Date. The method by which Rights may be transferred is set forth
below in "The Offer -- Sale of Rights."
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
The distribution to Record Date Shareholders of transferable Rights which
themselves may have realizable value will also afford nonparticipating Record
Date Shareholders the potential of receiving a cash payment upon sale of such
Rights, receipt of which may be viewed as compensation for the possible dilution
of their interest in the Fund.
The first regular monthly dividend to be paid on shares of Common Stock
acquired upon exercise of Rights will be the first monthly dividend, the record
date for which occurs after the issuance of such shares following the Expiration
Date. It is the Fund's present policy to pay dividends on the last business day
of each month to shareholders of record seven days prior to the payment date.
Assuming the Subscription Period is not extended beyond June __, 1996, it is
expected that the first dividend received by shareholders acquiring shares in
this rights offering will be paid on the last business day of July 1996.
The Fund completed transferable rights offerings on March 4, 1993 and
November 23, 1993, which permitted shareholders to acquire, at a subscription
price of $3.80 and $3.60, respectively, one new share for each three rights held
as of the record date of such rights offerings. All of the rights issued by the
Fund pursuant to the rights offerings were exercised and, as a result, 4,625,000
new shares of Common Stock were issued in March 1993 with net proceeds to the
Fund of approximately $16.7 million and 6,210,000 new shares of Common Stock
were issued in December 1993 with net proceeds to the Fund of approximately
$21.3 million. All of the net proceeds from the exercise of the rights pursuant
to the prior rights offerings have been invested in new securities in accordance
with the Fund's investment objective.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its shareholders to increase the assets of the
Fund available for investment so that the Fund will be in a better position to
take advantage of available investment opportunities. In approving the rights
offering, the Board of Directors of the Fund considered, among other things, the
benefits to shareholders resulting from prior rights offerings by the Fund, the
current yield to shareholders and the impact that a rights offering would have
on such yield and the benefits and drawbacks of conducting a transferable versus
non-transferable rights offering. Additionally, the Fund believes that
increasing the size of the Fund would also result in lowering the Fund's
expenses as a proportion of average net assets, to the extent that such expenses
are not calculated with reference to the aggregate amount of its assets.
Further, the Offer seeks to reward the Fund's shareholders by giving them the
right to purchase additional shares at a price that may be below the market
value of the shares without incurring any direct transaction costs.
In the event this offering proves successful, the additional Common Stock
thereafter issued and outstanding would enable the Fund to add additional
leverage through the issuance and sale of additional Preferred Shares and/or
notes, assuming such shares and/or notes could be sold upon terms satisfactory
to the Fund, or through other financing arrangements. Such leverage would be
added in the event the Board of Directors determines such action to be in the
best interests of the holders of the Common Stock and would be subject to the
existence and anticipation of a favorable interest rate environment. At the date
hereof, the Fund is considering various refinancing alternatives.
The Investment Adviser will benefit from the Offer because the Investment
Adviser's fee is based on the average weekly net assets of the Fund. However,
for a period of one year commencing on the Expiration Date, the Investment
Adviser will waive its advisory fee with respect to any increase in the Fund's
net assets resulting from the exercise of any rights pursuant to the Offer in
order to mitigate the impact of the offering expenses of this Offer on the Fund
and its shareholders. It is not possible to state precisely the amount of
additional compensation the Investment Adviser will receive as a result of the
Offer because it is not known how many Shares will be subscribed for and because
the proceeds of the Offer will be invested in additional portfolio securities
which will fluctuate in value. However, in the event that all the Rights are
exercised in full and on the basis of the Estimated Subscription Price of
$ _____ per Share (based upon the net asset value per share on May __, 1996),
and assuming that all of the Shares are purchased by Record Date Shareholders
where the purchases were solicited by the Dealer Manager or other soliciting
broker-dealers and that the Investment Adviser had not waived a portion of its
advisory fee for one year with respect to the increase in the net assets of the
Fund resulting from the purchase of such shares, the Investment Adviser would
receive additional annual advisory fees of approximately $ ________ as a result
of the increase in assets under management (which may be more or less after such
one year period). Three of the Fund's Directors who voted to authorize the Offer
are "interested persons" of the Fund as that term is defined in the 1940 Act.
These three Directors could benefit indirectly from the Offer because of their
affiliations with the Investment Adviser. The other Directors who voted to
authorize the Offer are not "interested persons" of the Fund. See "The
Investment Adviser" and "Directors and Officers."
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Exercising Rights Holders (the "Excess Shares")
will be offered, by means of the Primary Over-Subscription Privilege, to the
Record Date Shareholders who have exercised all exercisable Rights issued to
them and who wish to acquire more than the number of Shares for which the Rights
issued to them are exercisable. Record Date Shareholders should indicate, on the
Subscription Certificate which they submit with respect to the exercise of the
Rights issued to them, how many Excess Shares they are willing to acquire
pursuant to the Primary Over-Subscription Privilege. If sufficient Excess Shares
remain, all over-subscriptions will be honored in full.
If subscriptions for Excess Shares exceed the Excess Shares available, the
available Excess Shares will be allocated first among Record Date Shareholders,
and beneficial owners for whom Qualified Financial Institutions (as defined
herein) hold Rights, who subscribe for an aggregate of 100 or fewer shares of
Common Stock (inclusive of shares subscribed for by such Record Date
Shareholders or beneficial owners in the Primary Subscription). Any Excess
Shares remaining thereafter will be allocated among all other Record Date
Shareholders. In each case, if Excess Shares are insufficient to permit such
allocation, Excess Shares will be allocated pro rata among Record Date
Shareholders being prorated, based on the number of Shares such Record Date
Shareholders subscribed for in the Primary Subscription relative to the
aggregate number of Shares subscribed for in the Primary Subscription by all
such Record Date Shareholders then being prorated. For purposes of this
Prospectus, "Qualified Financial Institution" shall mean a registered
broker-dealer, commercial bank or trust company, securities depository or
participant therein, or nominee thereof.
Any Rights Holder who exercises Rights is entitled to subscribe for Excess
Shares which are not otherwise subscribed for pursuant to the Primary
Over-Subscription Privilege. Rights Holders should indicate, in the Subscription
Certificate which they submit with respect to the exercise of any Rights, how
many Excess Shares they are willing to acquire pursuant to the Secondary
Over-Subscription Privilege. If sufficient Excess Shares remain, all
oversubscriptions by Rights Holders will be honored in full. If remaining Excess
Shares are insufficient to permit such allocation, such Excess Shares will be
allocated pro rata among Rights Holders being prorated, based on the number of
Shares such Rights Holders subscribed for in the Primary Subscription relative
to the aggregate number of Shares subscribed for in the Primary Subscription by
all such Rights Holders then being prorated.
The percentage of Excess Shares each over-subscribing Exercising Rights
Holder may acquire may be rounded up or down to result in delivery of whole
Shares. The allocation process may involve a series of allocations in order to
assure that the total number of Excess Shares available for over-subscriptions
is distributed on a pro rata basis.
The Fund will not offer or sell any Shares which are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Rights
will be the greater of (i) the net asset value per share as of the close of
business on the Expiration Date or (ii) $ ____ . Exercising Rights Holders will
not know the Subscription Price at the time of exercise and will be required
initially to pay for the Shares at the Estimated Subscription Price of $ per
Share (based on the net asset value on May __, 1996). Exercising Rights Holders
will have no right to rescind a purchase after receipt by the Subscription Agent
of their payment for Shares.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on March __, 1996 and the final terms of the Offer after
the close of trading on the Exchange on May __, 1996. The net asset value per
share of Common Stock at the close of business on March __, 1996 and on April
__, 1996 was $ _____ and $ ____ , respectively, and the last reported sale price
of a share of the Fund's Common Stock on the Exchange on those dates was $
______ and $ ____ , respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on June __, 1996, unless
extended by the Fund until 5:00 p.m., New York time, on July __, 1996 (the
"Expiration Date"). Rights will expire on the Expiration Date and may not be
exercised thereafter.
SUBSCRIPTION AGENT
The Subscription Agent is Boston EquiServe, Inc., which will receive for its
administrative, processing, invoicing and other services as subscription agent,
a fee estimated to be $34,000 and reimbursement for all out-of-pocket expenses
related to the Offer. An affiliate of the Subscription Agent is the Fund's
custodian, transfer agent, dividend-disbursing agent and registrar. Questions
regarding the Subscription Certificates should be directed to Boston EquiServe,
Inc., Corporate Reorganization, P.O. Box 9061, Boston, Massachusetts 02205
(telephone (800) 426-5523); shareholders may also consult their brokers or
nominees. Signed Subscription Certificates should be sent to Boston EquiServe,
Inc., by one of the methods described below:
<TABLE>
<CAPTION>
<C> <C>
(1) BY MAIL: (2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
c/o State Street Bank and Trust Company c/o State Street Bank and Trust Company
Corporate Reorganization Corporate Reorganization
P.O. Box 9061 Two Heritage Drive, 4th Floor
Boston, Massachusetts 02205-8686 North Quincy, Massachusetts 02171
(3) BY FACSIMILE (TELECOPIER): (4) BY HAND:
(617) 774-4519, with the original c/o State Street Bank and Trust Company
Subscription Certificate to be sent by one Corporate Reorganization
of the methods described in (1) or (2) 225 Franklin Street
above. Confirm facsimile by telephone to Concourse Level
(617) 774-4511. Boston, Massachusetts 02101
</TABLE>
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 242-4410
The Information Agent will receive a fee estimated to be $8,000 and
reimbursement for all out-of-pocket expenses related to the Offer.
EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the Subscription
Certificate which accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment for the Shares as
described below under "Payment for Shares." Completed Subscription Certificates
must be received by the Subscription Agent prior to 5:00 p.m., New York time, on
the Expiration Date (unless payment is effected by means of a Notice of
Guaranteed Delivery as described below under "Payment for Shares") at the
offices of the Subscription Agent at the address set forth above. Rights may
also be exercised through an Exercising Rights Holder's broker, who may charge
such Exercising Rights Holder a servicing fee.
Qualified Financial Institutions who hold shares of Common Stock as nominee
for the account of others should notify the respective beneficial owners of such
shares as soon as possible to ascertain such beneficial owners' intentions and
to obtain instructions with respect to the Rights. If the beneficial owner so
instructs, the nominee should complete the Subscription Certificate and submit
it to the Subscription Agent with the proper payment. In addition, beneficial
owners of Common Stock or Rights held through such a nominee should contact the
nominee and request the nominee to effect transactions in accordance with the
beneficial owner's instructions.
EXERCISE OF THE OVER-SUBSCRIPTION PRIVILEGE
Record Date Shareholders who fully exercise all Rights issued to them and
secondarily Rights Holders may participate in the Over-Subscription Privilege by
indicating on their Subscription Certificate the number of Shares they are
willing to acquire pursuant thereto. If sufficient Excess Shares remain after
the Primary Subscription, all over-subscriptions will be honored in full;
otherwise Excess Shares will be allocated first to Record Date Shareholders and
then (if any Excess Shares remain) to Rights Holders, and the number of Shares
issued to some or all Exercising Rights Holders participating in the
Over-Subscription Privilege may be reduced as described above under
"Over-Subscription Privilege."
Qualified Financial Institutions and other nominee holders of Rights will be
required to certify to the Subscription Agent, before any Primary
Over-Subscription Privilege may be exercised as to any particular beneficial
owner, as to the aggregate number of Rights exercised pursuant to the Primary
Subscription Privilege and the number of Shares subscribed for pursuant to the
Primary Over-Subscription Privilege by such beneficial owner and that such
beneficial owner's Primary Subscription was exercised in full. Before any
Secondary Over-Subscription Privilege may be exercised as to any particular
beneficial owner, such Qualified Institutions and nominee holders of Rights will
be required to certify to the Subscription Agent as to the aggregate number of
Rights exercised pursuant to the Primary Subscription Privilege and the number
of Shares subscribed for pursuant to the Secondary Over-Subscription Privilege
by such beneficial owner. A Nominee Holder Over-Subscription Form is contained
in Appendix C.
PAYMENT FOR SHARES
Exercising Rights Holders who acquire Shares pursuant to the Offer may
choose between the following methods of payment:
(1) An Exercising Rights Holder can send the Subscription Certificate
together with payment for the Shares acquired on Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege to the Subscription Agent based on the Estimated Subscription
Price of $ _____ per share (based on the net asset value per share on May
__, 1996). Subscription will be accepted when payment, together with the
properly completed and executed Subscription Certificate, is received by the
Subscription Agent at its Tender and Exchange Department; such payment and
Subscription Certificates to be received by the Subscription Agent no later
than 5:00 p.m., New York time, on the Expiration Date. The Subscription
Agent will deposit all checks received by it for the purchase of Shares into
a segregated interest-bearing account of the Fund (the interest from which
will belong to the Fund) pending proration and distribution of Shares. A
PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR
CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
PROSPECT STREET HIGH INCOME PORTFOLIO INC. AND MUST ACCOMPANY A PROPERLY
COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL
COLLECTION OF CHECKS BY 5:00 P.M. ON THE EXPIRATION DATE.
(2) Alternatively, an Exercising Rights Holder may acquire Shares, and a
subscription will be accepted by the Subscription Agent if, prior to 5:00
p.m., New York time, on the Expiration Date, the Subscription Agent has
received a Notice of Guaranteed Delivery (in the form set forth in Appendix
B) by facsimile (telecopy) or otherwise from a financial institution that is
a member of the Securities Transfer Agents Medallion Program, the Stock
Exchange Medallion Program or the New York Stock Exchange Medallion
Signature Program guaranteeing delivery of (i) payment of the full
Subscription Price for the Shares subscribed for on Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege, and (ii) a properly completed and executed Subscription
Certificate. The Subscription Agent will not honor a Notice of Guaranteed
Delivery unless a properly completed and executed Subscription Certificate
and full payment for the Shares is received by the Subscription Agent by the
close of business on the third Business Day after the Expiration Date (the
"Protect Period").
On a date within seven Business Days following the Protect Period (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee), a confirmation showing (i) the number
of Shares purchased pursuant to the Primary Subscription (and, if applicable)
the Over-Subscription Privilege, (ii) the per Share and total purchase price for
the Shares, and (iii) any additional amount payable by such Exercising Rights
Holder to the Fund or any excess to be refunded by the Fund to such Exercising
Rights Holder, in each case, based on the Subscription Price as determined on
the Expiration Date. If any Record Date Shareholder exercises his right to
acquire Shares pursuant to the Over-Subscription Privilege, any such excess
payment which would otherwise be refunded to him will be applied by the Fund
toward payment for Shares acquired pursuant to exercise of the Over-Subscription
Privilege. Any additional payment required from Exercising Rights Holder must be
received by the Subscription Agent within seven Business Days after the
Confirmation Date. Any excess payment to be refunded by the Fund to an
Exercising Rights Holder will be mailed by the Subscription Agent to him as
promptly as practicable. An Exercising Rights Holder will have no right to
rescind a purchase after the Subscription Agent has received payment, either by
means of a Notice of Guaranteed Delivery or a check.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE SHARES
PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A HOLDER OF
RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION OR
OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE, THE
SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING
ACTIONS: (I) FIND OTHER SHAREHOLDERS FOR SUCH SUBSCRIBED AND UNPAID FOR SHARES;
(II) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE
GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON
EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE, AND/OR
(III) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED,
INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY
RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., NEW YORK TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS
MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Subscription Agent, whose
determinations will be final and binding. The Subscription Agent in its sole
discretion may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as the Subscription Agent determines in its sole discretion. The
Subscription Agent will not be under any duty to give notification of any defect
or irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.
SALE OF RIGHTS
Sales through Subscription Agent and Dealer Manager. Record Date
Shareholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through the Dealer
Manager. Subscription Certificates representing the Rights to be sold by the
Dealer Manager must be received by the Subscription Agent prior to June __, 1996
(or if the Offer is extended, until two business days prior to the Expiration
Date). Upon the timely receipt by the Subscription Agent of appropriate
instructions to sell Rights, the Subscription Agent will request the Dealer
Manager to use its best efforts to complete the sale and the Subscription Agent
will remit the proceeds of sale, net of commissions, to the Record Date
Shareholders. No brokerage commissions will be charged to holders of less than
100 Rights, and beneficial owners of less than 100 Rights held on their behalf
by Qualified Financial Institutions, who elect to direct the Subscription Agent
to sell such Rights in whole but not in part. Any commissions on sales of 100
Rights or more will be paid by the selling Rights Holders. If the Rights can be
sold, sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Dealer Manager on the day such Rights are
sold. The Dealer Manager will also attempt to sell all Rights which remain
unclaimed as a result of Subscription Certificates being returned by the postal
authorities to the Subscription Agent as undeliverable as of the fourth Business
Day prior to the Expiration Date. Such sales will be made net of commissions on
behalf of the nonclaiming Record Date Shareholders. The Subscription Agent will
hold the proceeds from those sales for the benefit of such nonclaiming Record
Date Shareholders until such proceeds are either claimed or escheat. There can
be no assurance that the Dealer Manager will be able to complete the sale of any
such Rights and neither the Fund nor the Dealer Manager has guaranteed any
minimum sales price for the Rights. All such Rights will be sold at the market
price, if any, on the Exchange.
Other Transfers. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights.
In such event, a new Subscription Certificate evidencing the balance of the
Rights, if any, will be issued to the Record Date Shareholder or, if the Record
Date Shareholder so instructs, to an additional transferee. The signature on the
Subscription Certificate must correspond with the name as written upon the face
of the Subscription Certificate in every particular, without alteration or
enlargement, or any change whatever. A signature guarantee must be provided by
an eligible financial institution as defined in Rule 17Ad-15 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), subject to the standards and
procedures adopted by the Fund.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five Business Days prior to the Expiration Date for
(i) the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund nor the Subscription Agent nor the Dealer
Manager shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior to
the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund as described above), all commissions, fees and
other expenses (including brokerage commissions and transfer taxes) incurred or
charged in connection with the purchase, sale or exercise of Rights will be for
the account of the transferor of the Rights, and none of such commissions, fees
or expenses will be paid by the Fund, the Subscription Agent or the Dealer
Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the Over-Subscription
Privilege) may be effected through, the facilities of The Depository Trust
Company ("DTC"; Rights exercised through DTC are referred to as "DTC Exercised
Rights"). The holder of a DTC Exercised Right may exercise the Over-Subscription
Privilege in respect of such DTC Exercised Rights by properly executing and
delivering to the Subscription Agent, at or prior to 5:00 p.m., New York time,
on the Expiration Date, a Nominee Holder Over-Subscription Exercise Form,
together with payment of the Subscription Price for the number of Shares for
which the Over-Subscription Privilege is to be exercised. A form of the Nominee
Holder Over-Subscription Exercise Form is contained in Appendix C.
DISTRIBUTION ARRANGEMENTS
The Dealer Manager is First Albany Corporation, a broker-dealer and member
of the National Association of Securities Dealers, Inc. Under the terms and
subject to the conditions contained in a Dealer Manager Agreement dated the date
of this Prospectus, the Dealer Manager provides investment banking and financial
advisory services in connection with the Offer and, as a broker-dealer, will
solicit the exercise of Rights by Exercising Rights Holders and will assemble a
group of soliciting dealers to assist with the Offer. The Fund has agreed to pay
the Dealer Manager a fee for its advisory services in an amount equal to
$150,000, of which $25,000 has been paid prior to the date of this Prospectus
and to pay directly to each broker-dealer, including the Dealer Manager, who
solicits the exercise of Rights a fee (the "Soliciting Fee") equal to 2.00% of
the Subscription Price per Share with respect to Shares purchased by Record Date
Shareholders and 3.75% of the Subscription Price per Share with respect to
Shares purchased by other holders of Rights (excluding Record Date
Shareholders), in each case where the exercise was solicited by such soliciting
broker-dealer. The Soliciting Fees will be paid only when a broker-dealer
(including the Dealer Manager) has been designated on the applicable portion of
the Subscription Certificate. Soliciting Fees will not be paid with respect to
the exercise of Rights by or for the account of the Dealer Manager or
broker-dealers participating in the solicitation.
In addition, the Fund has agreed to reimburse the Dealer Manager for up to
$40,000 of its reasonable expenses incurred in connection with the Offer, and
will indemnify the Dealer Manager with respect to certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
The Staff of the Securities and Exchange Commission has advised the Fund that
the Staff is considering generally whether dealer managers of rights offerings
are underwriters for purposes of the Securities Act and the 1940 Act.
Under applicable law, during the Subscription Period, the Dealer Manager may
bid for and purchase Rights for certain purposes. Those purchases will be
subject to certain price and volume limitations when the Common Stock is being
stabilized by the Dealer Manager or when the Dealer Manager owns Rights without
an offsetting short position in the Common Stock. Those limitations provide,
among other things, that subject to certain exceptions, not more than one bid to
purchase Rights may be maintained in any one market at the same price at the
same time and that the initial bid for or purchase of Rights may not be made at
a price higher than the highest current independent bid price on the Exchange.
Any bid price may not be increased, subject to certain exceptions, unless the
Dealer Manager has not purchased any Rights for a full Business Day or the
independent bid price for those Rights on the Exchange has exceeded the bid
price for a full Business Day.
DELIVERY OF SHARE CERTIFICATES
Certificates representing Shares purchased pursuant to the Primary
Subscription and representing Shares purchased pursuant to the Over-Subscription
Privilege will be mailed within twelve Business Days after the Expiration Date
and after full payment for such Shares has been received and cleared.
FOREIGN SHAREHOLDERS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). The
Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Shareholders' accounts until
instructions are received to exercise, sell or transfer the Rights. If no
instructions have been received by 12:00 noon, New York time, three Business
Days prior to the Expiration Date, the Rights of those Foreign Record Date
Shareholders will be transferred by the Subscription Agent to the Dealer Manager
who will use its best efforts to sell the Rights of those Foreign Record Date
Shareholders on the Exchange. The net proceeds, if any, from the sale of those
Rights will be remitted to the Foreign Record Date Shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will not
result in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights.
2. The basis of a Right will be (a) to a holder of Common Stock to whom
it is issued and who exercises or sells the Right (i) if the fair market
value of the Right immediately after issuance is less than 15% of the fair
market value of the Common Stock with regard to which it is issued, zero
(unless the holder elects, by filing a statement with his timely filed
federal income tax return for the year in which the Rights are received, to
allocate the basis of the Common Stock between the Right and the Common
Stock based on their respective fair market values immediately after the
Right is issued), and (ii) if the fair market value of the Right immediately
after issuance is 15% or more of the fair market value of the Common Stock
with regard to which it is issued, a portion of the basis in the Common
Stock based upon their respective fair market values immediately after the
Right is issued; (b) to a holder of Common Stock to whom it is issued and
who allows the Right to expire, zero; and (c) to anyone who purchases a
Right in the market, the purchase price for a Right.
3. The holding period of a Right received by a Record Date Shareholder
includes the holding period of the Common Stock with regard to which the
Right is issued.
4. Any gain or loss on the sale of a Right will be treated as a capital
gain or loss if the Right is a capital asset in the hands of the seller.
Such a capital gain or loss will be long- or short-term, depending on how
long the Right has been held, in accordance with paragraph 7 below. A Right
issued with regard to Common Stock will be a capital asset in the hands of
the person to whom it is issued if the Common Stock was a capital asset in
the hands of that person. If a Right is allowed to expire, there will be no
loss realized unless the Right had been acquired by purchase, in which case
there will be a loss equal to the basis of the Right.
5. If the Right is exercised by the Record Date Shareholder, the basis
of the Common Stock received will include the basis, if any, allocated to
the Right and the amount paid upon exercise of the Right.
6. If the Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
7. If the Right is sold, the holding period of the Right will include
the holding period of the Common Stock with regard to which it was issued.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if the holder of the account provides the
Fund with either an incorrect taxpayer identification number or no number at all
or fails to certify that he is not subject to such withholding.
The foregoing is only a summary of the applicable federal income tax laws
and does not include any state or local tax consequences of the Offer.
Exercising Rights Holders should consult their own tax advisers concerning the
tax consequences of this transaction. See "Federal Taxation."
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this Prospectus if, subsequent to May __, 1996
(the effective date of the Fund's Registration Statement) the Fund's net asset
value declines more than 10% from its net asset value as of that date.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), (including
corporate savings and 401(k) plans), Keogh plans of self-employed individuals
and Individual Retirement Accounts (collectively, "Plans") should be aware that
additional contributions of cash (other than rollover contributions from other
Plans) in order to exercise Rights would be treated as Plan contributions and,
when taken together with contributions previously made, may subject a Plan to
excise taxes for excess or nondeductible contributions. In the case of Plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"), additional cash contributions could cause the
maximum contribution limitations of Section 415 of the Internal Revenue Code or
other qualification rules to be violated. Furthermore, it may be a reportable
distribution and there may be other adverse tax consequences if Rights are sold
or transferred by a Plan to another account. A sale of Rights by a Plan account
to an unrelated third party and retention of cash proceeds by the Plan account,
or the direct exercise of Rights by a Plan account, should not be treated as a
taxable Plan distribution. Plans contemplating making additional cash
contributions to exercise Rights should consult with their counsel prior to
making such contributions.
Plans and other tax exempt entities, including governmental plans, should
also be aware that if they borrow in order to finance their exercise of Rights,
they may become subject to the tax on unrelated business taxable income ("UBTI")
under Section 511 of the Internal Revenue Code. If any portion of an Individual
Retirement Account ("IRA") is used as security for a loan, the portion so used
is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements and ERISA and the
Internal Revenue Code contain prohibited transaction rules that may impact the
exercise of Rights. Among the prohibited transaction exemptions issued by the
Department of Labor that may exempt a Plan's exercise of Rights are Prohibited
Transaction Exemption 84-24 (covering purchases of shares in investment
companies) and Prohibited Transaction Exemption 75-1 (covering sales of
securities).
Due to the complexity of these rules and the penalties for noncompliance,
Plans should consult with their counsel regarding the consequences of their
exercise of Rights under ERISA and the Internal Revenue Code.
USE OF PROCEEDS
Based on the Estimated Subscription Price of $ _____ per Share, the net
proceeds of the Offer, assuming all Shares offered hereby are sold and the
maximum Dealer Manager and soliciting fees are paid, are estimated to be
approximately $ __________ , after deducting offering expenses payable by the
Fund estimated at approximately $ _______ . The Investment Adviser anticipates
that investment of such proceeds in accordance with the Fund's investment
objective and policies will take up to thirty days from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities for purchase, but in no event will such investment take longer than
six months. Pending such investment in accordance with the Fund's investment
objective and policies, the proceeds will be held in U.S. Government securities
(which term includes obligations of the United States Government, its agencies
or instrumentalities) and other high-quality short-term money market
instruments.
INVESTMENT POLICIES AND LIMITATIONS
The investment objective of the Fund is to provide high current income,
while seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of "high-yield," high risk
securities (commonly referred to as "junk bonds").
The Fund seeks to achieve its objective of preserving shareholders' capital
through a careful selection process for the Fund's "high-yield," high risk
investments which focuses on each issuer's financial condition and projected
ability to service its debt obligations, portfolio diversification which is
intended to minimize the impact of individual issuer defaults and adverse
economic conditions affecting particular issuers and industry segments, and
close monitoring of portfolio investments and economic developments in order to
reposition the Fund's portfolio in anticipation of negative developments which
the Investment Adviser believes are likely to occur. Given the high risk nature
and price volatility of the Fund's investments as well as the Fund's leverage,
however, it may be extremely difficult to achieve this objective on a consistent
basis in the future. In the severe adverse interest rate and economic
environment of 1989 and 1990, the Fund suffered a substantial decline in its net
asset value as a result of these factors and thus failed to achieve this
objective during that period.
During the sharp high-yield market decline of 1989 and 1990, the Fund's
leverage contributed to a sharp decline in the net asset value of the Common
Stock. In order to remain in compliance with the 200% asset coverage ratio
required by the 1940 Act, the Fund was required to repurchase $45.0 million of
the $50.0 million of previously outstanding Senior Extendible Notes. Also, to
maintain compliance with the Fund's Surety Investment Guidelines the Fund was
required to sell "high-yield" assets. The selling of "high-yield" assets below
their original cost and the retirement of $45.0 million of the Fund's Senior
Extendible Notes resulted in a reduction of the Fund's total assets and caused
the Fund to realize substantial capital losses. The Surety Investment Guidelines
and the asset coverage ratio requirements combined to delay the Fund's
reinvestment of cash into "high-yield" securities as the market improved. The
Fund's use of leverage is currently benefitting the holders of Common Stock as
the current average cost of funds (pursuant to its Preferred Share and Notes
obligations) was approximately 5.97% as of March 15, 1996 while the "high-yield"
market currently offers interest income at annualized rates of approximately
9.5% to 11.0%. There is no assurance that the Fund's investment objective will
be attained in the future.
The Fund's investment objective is a fundamental policy. Pursuant to the
1940 Act, fundamental policies may not be changed without the affirmative vote
of the holders of a majority of the outstanding shares of Common Stock and a
majority of the outstanding Preferred Shares, voting as separate classes, which,
for purposes of the 1940 Act, means for each class the lesser of (a) more than
50% of the outstanding shares of such class or (b) 67% or more of the shares of
such class present or represented at a meeting at which more than 50% of the
outstanding shares of such class are present or represented by proxy.
Accordingly, no change in the Fund's investment objective could occur without
the affirmative vote of both classes of stock.
INVESTMENT STRATEGY
It is the Fund's policy that under normal market conditions, at least 65% of
its total assets will be invested in "high-yield," high risk securities rated in
the lower categories by recognized rating agencies or nonrated fixed-income
securities deemed by the Investment Adviser to be of comparable quality,
although the Fund has invested and currently intends to continue to invest a
substantially higher percentage of its assets in such securities to the extent
permitted by market conditions. The Fund's portfolio investments have consisted
and will continue to consist principally of fixed-income securities rated
"BB"/"Ba" or lower by the Rating Agencies. The Fund reserves the right, under
normal market conditions, to invest up to 35% of its total assets in money
market instruments and fixed-income securities rated higher than "BB"/"Ba,"
although the percentage invested in such securities may increase under other
than normal market conditions, as discussed below.
The dollar weighted average of credit ratings of all bonds held by the Fund
during the four month period ended February 29, 1996, computed on a monthly
basis, is set forth below. This information reflects the average composition of
the Fund's assets during the four month period ended February 29, 1996 and is
not necessarily representative of the Fund as of the current fiscal year or at
any other time in the future.
RATED BY
MOODY'S
--------
Ba ................................................ 1.27%
B ................................................. 75.33%
Caa ............................................... 5.46%
Ca ................................................ 0.01%
NR ................................................ 13.41%
-----
Total ......................................... 95.48%
Under the Investment Guidelines, certain types of securities in which the
Fund may otherwise invest pursuant to the foregoing strategy and the investment
policies stated below are not eligible for inclusion in the calculation of the
discounted value of the Fund's portfolio. Such instruments include, for example,
securities rated "CC"/"Ca" and "C"/"C" by the Rating Agencies, preferred or
common stock, zero coupon or similar securities that do not provide for the
periodic payment of interest in cash 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. See "Investment Guidelines" below, "Description of Notes -- Asset
Maintenance" and "Surety Arrangement for Preferred Shares -- Insurance
Agreement."
"High-yield" bonds, the generic name for corporate bonds rated between
"BB"/"Ba" and "C"/"C" by the Rating Agencies, are frequently issued by
corporations in the growth stage of their development. Bonds which are 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
obligation. 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. Further information concerning the ratings of
corporate bonds, including the rating categories of the Rating Agencies, is
provided in Appendix D. "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 securities subsequently
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.
Securities acquired by the Fund may include preferred stocks (including
convertible preferred stocks) and all types of debt obligations having varying
terms with respect to security or credit support, subordination, purchase price,
interest payments and maturity. Such obligations may include, for example,
bonds, debentures, notes (including convertible debt securities), mortgage or
other asset-backed instruments, 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 (including obligations, such as
repurchase agreements, secured by such instruments). Most debt securities in
which the Fund will invest will bear interest at fixed rates. However, the Fund
reserves the right to invest without limitation in fixed-income debt securities
that have variable rates of interest or involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
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 or
warrants to purchase common stock or other equity securities 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 30% of its total assets in securities that are not
readily marketable, including securities restricted as to resale, and nonrated
securities. A security that is not readily marketable will not be acquired
unless (i) the Investment Adviser believes such security to be of comparable
quality to publicly traded securities and (ii) such security carries rights to
be registered under the federal securities laws. Securities that are not readily
marketable may offer higher yields than comparable publicly traded securities.
However, the Fund may not be able to sell these securities when the Investment
Adviser 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 also be permitted to invest up to 20% of its total assets in
zero coupon securities. Zero coupon securities pay no cash income but are
purchased at a deep discount 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.
For a discussion of certain tax consequences resulting from the inclusion of
zero coupon securities in the Fund's portfolio, see "Federal Taxation -- Federal
Income Tax Treatment of the Fund."
Notwithstanding the foregoing, if market conditions threaten to erode the
value of the Fund's assets, the Fund may adopt a temporary defensive investment
strategy and invest without limitation in high-grade money market instruments,
including commercial paper of domestic and foreign corporations, certificates of
deposit, bankers' acceptances and other obligations of banks, repurchase
agreements and short-term obligations issued or guaranteed by the United States
government or its instrumentalities or agencies, and also in fixed-income
securities rated higher than "BB"/"Ba" by the Rating Agencies. In addition,
under such market conditions, the Fund may invest in unrated commercial paper
which it deems to have risk characteristics comparable to such instruments. The
yield on these securities will tend to be lower than the yield on other
securities to be purchased by the Fund.
The Fund may also invest in fixed-income securities rated higher than
"BB"/"Ba" by the Rating Agencies or nonrated fixed-income securities deemed by
the Investment Adviser to be of comparable quality when the difference in yields
between quality classifications is relatively narrow. Investments in higher
rated 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 lower than those from lower rated issues. Accordingly,
the inclusion of such instruments in the Fund's portfolio may have the effect of
reducing the yield on the Common Stock.
The achievement of the Fund's objective depends upon the Investment
Adviser's analytical and portfolio management skills. There is no assurance that
this objective will be attained in the future. All nonfundamental investment
policies of the Fund, including those described below under "Investment
Guidelines," may be changed by the Board of Directors of the Fund without
shareholder approval.
INVESTMENT GUIDELINES
The composition of the Fund's portfolio reflects the Notes Investment
Guidelines and the Surety Investment Guidelines. Rating agencies issue ratings
for various securities reflecting the perceived creditworthiness of such
securities or, in the case of the Preferred Shares, the perceived claims-paying
ability of the surety that is guaranteeing the Scheduled Payments on the
Preferred Shares. See "Surety Arrangement for Preferred Shares -- Insurance
Agreement." The respective Investment Guidelines are designed to ensure that
assets underlying the Notes or the Preferred Shares, as the case may be, will be
sufficiently diversified and will be of sufficient credit quality and amount to
justify investment grade ratings of "Aaa" for the Notes by Fitch Investors
Services, Inc. and "AAA"/"Aaa" for the Preferred Shares. The Investment
Guidelines are not prescribed by law, but have been implemented by the Fund in
order to receive the above-described ratings for senior securities, 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 Investment Guidelines provide tests for portfolio diversification
and asset coverage that supplement the applicable requirements under the 1940
Act (and may be more or less restrictive), but are the sole determinants in the
rating of a security.
Under the respective Investment Guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Note Basic
Maintenance Amount and Surety Assets Coverage. For definitions of such terms,
see "Description of Notes -- Asset Maintenance" and "Surety Arrangement for
Preferred Shares -- Insurance Agreement." For the purpose of determining the
Fund's compliance with the respective Investment Guidelines, the market value of
the Fund's portfolio holdings will be discounted by dividing it by factors
determined by the respective rating agencies or Financial Security, as the case
may be, which vary according to the particular type of security being valued for
such purpose. To the extent any particular portfolio holding does not meet the
applicable Investment Guidelines, it would not be included for purposes of
determining compliance with the Note Basic Maintenance Amount or Surety Assets
Coverage, as the case may be. The respective Investment 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, and 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.
Upon any failure to maintain the required Note Basic Maintenance Amount or
Surety Assets Coverage, the Fund would seek to alter the composition of its
portfolio to attain required asset coverage within an 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 Notes and/or
Financial Security, as surety under the Surety Bond, will acquire certain
rights. See "Description of Notes -- Asset Maintenance" and "Surety Arrangement
for Preferred Shares -- Insurance Agreement." "Business Day" means a day on
which the Exchange is open for trading and which is not a Saturday or Sunday or
a holiday, including New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Patriots' Day, Memorial Day, Bunker Hill Day, Independence
Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas Day or any other day
on which banks in New York City or Boston are authorized or obligated by law or
executive order to close.
Under the Notes Investment Guidelines, corporate debt obligations are not
included in the calculation of the discounted value of the Fund's portfolio for
the purpose of determining compliance with the Note Basic Maintenance Amount
unless they (a) are rated "CCC" or higher by S&P or "Caa" or higher by Moody's,
(b) provide for the periodic payment of interest thereon in cash, (c) have been
registered under the Securities Act, (d) do not provide for conversion or
exchange into equity capital at any time over their respective lives, (e) have
not had notice given in respect thereof that any such corporate debt obligations
are the subject of an offer by the issuer thereof of exchange or tender for
cash, securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the Fund's total assets at any
time shall not be subject to the provisions of this clause (e)) and (f) are not
subject to call options. In addition, portfolio holdings must be within the
following diversification requirements in order to be included in the
calculation of the discounted value of the Fund's portfolio for the purpose of
determining compliance with the Note Basic Maintenance Amount:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
MINIMUM ORIGINAL VALUE OF ELIGIBLE PORTFOLIO ASSETS
ISSUE SIZE OF PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' EACH ISSUE INVESTED IN ANY ONE INDUSTRY
RATINGS(1) ($ IN MILLIONS) ONE ISSUER(2) CATEGORY(2)
- ---------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
"AAA"/"Aaa" ............................................ $100 10.0% 50.0%
"AA"/"Aa" .............................................. 100 10.0 33.3
"A"/"A" ................................................ 100 10.0 33.3
"BBB"/"Baa" ............................................ 100 5.0 20.0
"BB"/"Ba".............................................. 100(3) 4.0 12.0
"B"/"B1," "B2" and "B3" (subordinated) ................. 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa"
(unsecured subordinated)(4) .......................... 100(3) 2.0 5.0
"A-1+"/"P-1"(5) ........................................ NA 10.0 NA
"A-1"/"P-1"(5) ......................................... NA 10.0 33.3
"A-2"/"P-2"(5) ......................................... NA 5.0 20.0
<FN>
- ----------
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or (3)
modifiers to the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-" may
not be included in determining compliance with the Note Basic Maintenance Amount. In the event that a
corporate debt obligation has received a different rating from S&P than from Moody's, the restrictions
relating to the lower rating will apply. See Appendix D for further information concerning S&P's and
Moody's rating categories.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each
lower rating category, except that the calculations with respect to commercial paper investments
constituting corporate bonds shall be made separately and independently of, but on the same basis as, the
cumulative total guidelines applicable to other types of corporate debt obligations. To the extent the
relevant limitation is less restrictive than that set forth under "Investment Restrictions" below, the more
restrictive limitation shall apply.
(3) 20% of the aggregate market value of all corporate debt obligations in these rating categories may be from
issues with an original issue size of greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied
senior rating of "B-" or higher (i.e., such subordinated debt would have a rating of "B-" or higher if it
were senior debt of the issuer) if rated by S&P to be included in determining compliance with the Note
Basic Maintenance Amount. The aggregate market value of corporate debt obligations in this rating category
in excess of 20% of the aggregate market value of the Fund's assets will not be included in determining
such compliance.
(5) Represents commercial paper investments.
</TABLE>
Under the Surety Investment Guidelines, corporate debt obligations are not
included in the calculation of the discounted value of the Fund's portfolio for
the purpose of determining compliance with Surety Assets Coverage unless they
(a) are rated "CCC" or higher by S&P or "B3" or higher by Moody's, (b) provide
for the periodic payment of interest thereon in cash, (c) do not provide for
conversion or exchange into equity capital at any time over their respective
lives, (d) have been registered under the Securities Act, (e) have a remaining
term to maturity of not more than 30 years, (f) have not had notice given in
respect thereof that any such corporate debt obligations are the subject of an
offer by the issuer thereof of exchange or tender for cash, securities or any
other type of consideration (except that corporate debt obligations in an amount
not exceeding 10% of the Fund's total assets at any time shall not be subject to
the provisions of this clause (f)) and (g) are not subject to call options.
Notwithstanding the foregoing, nonrated fixed-income securities and unregistered
corporate debt securities may be included in the calculation of the discounted
value of the Fund's portfolio for the purpose of determining compliance with
Surety Assets Coverage, as long as they do not exceed 30% of the Fund's eligible
portfolio assets at any time, with certain limitations. In addition, portfolio
holdings of corporate debt obligations must be within the following
diversification requirements in order to be included in the calculation of the
discounted value of the Fund's portfolio for the purpose of determining
compliance with Surety Assets Coverage:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
MINIMUM ORIGINAL VALUE OF ELIGIBLE PORTFOLIO ASSETS
ISSUE SIZE OF PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' EACH ISSUE INVESTED IN ANY ONE INDUSTRY
RATINGS(1) ($ IN MILLIONS) ONE ISSUER(2) CATEGORY(2)
- ---------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
"AAA"/"Aaa" ............................................ $100 10.0% 50.0%
"AA"/"Aa" .............................................. 100 10.0 33.3
"A"/"A" ................................................ 100 10.0 33.3
"BBB"/"Baa" ............................................ 100 5.0 20.0
"BB"/"Ba" .............................................. 100(3) 4.0 12.0
"B"/"B1" or "B2" ....................................... 100(3) 3.0 8.0
"CCC"/"B3"(4) .......................................... 100(3) 3.0 8.0
Nonrated/unregistered corporate bonds(5) ............... 50 3.0 8.0
"A-1+"/"P-1"(6) ........................................ NA 10.0 NA
"A-1"/"P-1"(6) ......................................... NA 10.0 33.3
"A-2"/"P-2"(6) ......................................... NA 5.0 20.0
<FN>
- ----------
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or (3)
modifiers to the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-" may
not be included in determining compliance with Surety Assets Coverage. In the event that a corporate debt
obligation has received a different rating from S&P than from Moody's, the restrictions relating to the
lower rating will apply. See Appendix D for further information concerning S&P's and Moody's rating
categories. If only one of the Rating Agencies has issued a rating for such instrument, then only the
rating of such agency is required; provided, however, that not more than 15% of the aggregate market value
of the rated corporate debt obligations included in determining compliance with Surety Assets Coverage
shall be comprised of corporate debt obligations having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each
lower rating category, except that the calculations with respect to commercial paper investments
constituting corporate bonds shall be made separately and independently of, but on the same basis as, the
cumulative total guidelines applicable to other types of corporate debt obligations. To the extent the
relevant limitation is less restrictive than that set forth under "Investment Restrictions" below, the more
restrictive limitation shall apply.
(3) 20% of the aggregate value of all corporate debt obligations in these rating categories may be from issues
with an original issue size of greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied
senior rating of "B-" or higher (i.e., that such subordinated debt would have a rating of "B-" or higher if
it were senior debt of the issuer) if rated by S&P to be included in determining compliance with Surety
Assets Coverage. The aggregate market value of corporate debt obligations in this rating category in excess
of 20% of the aggregate market value of the Fund's eligible portfolio assets will not be included in
determining such compliance.
(5) Nonrated/unregistered corporate bonds may not constitute more than 30% of the aggregate market value of the
Fund's eligible portfolio assets. Not more than 18% of the aggregate market value of the Fund's eligible
portfolio assets may consist of nonrated/unregistered corporate bonds from issues with original issue sizes
of $50 million or more but less than $100 million, provided that not more than 9% of the aggregate market
value of the Fund's eligible portfolio assets may consist of nonrated/unregistered corporate bonds from
issues with an original issue size of $50 million or more but less than $75 million.
(6) Represents commercial paper investments.
</TABLE>
Additionally, under the Surety Investment Guidelines, the Fund may not (i)
acquire or otherwise invest in (A) repurchase agreements except repurchase
agreements with a remaining term to maturity of not more than 30 days, (B)
reverse repurchase agreements, (C) futures contracts or (D) options on futures
contracts except to the extent such options do not exceed 5% of the total assets
of the Fund, (ii) engage in short sales, (iii) overdraw any bank account, (iv)
write options on portfolio securities other than call options on securities held
in the Fund's portfolio or that the Fund has an immediate right to acquire
through conversion or exchange of securities held in its portfolio or (v) engage
in the lending of portfolio securities. The Fund does not currently intend to
utilize any of the prohibited investment strategies as described above. However,
the Fund could utilize any of the foregoing with the written consent of
Financial Security, and therefore, the Fund may use such strategies in the
future.
PORTFOLIO MATURITY AND TURNOVER
The Fund's holdings may include issues of various maturities. Ordinarily,
the Fund will emphasize investments in medium and longer term instruments (i.e.,
those with maturities in excess of three years), but the weighted average
maturity of portfolio holdings may be shortened or lengthened depending
primarily upon the Investment Adviser'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. As of March 8, 1996, the weighted average maturity of the Fund's
portfolio holdings was 7.35 years. The weighted average of the Fund's portfolio
will fluctuate depending on market conditions and investment opportunities. The
Fund, however, does not expect that the weighted average maturity of the Fund's
portfolio will, under normal conditions, exceed 15 years.
The Investment Adviser 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. It will, however, change the Fund's
securities, regardless of how long they have been held, when it believes doing
so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is anticipated
that the Fund's portfolio turnover rate generally will not, although it may,
from time to time, exceed 100% per annum. A 100% annual turnover rate would
occur, for example, if all the securities in the Fund's portfolio were replaced
once within a period of one year. The Fund does, however, reserve full freedom
with respect to portfolio turnover. In periods when there are rapid changes in
economic conditions or security price levels or when investment strategy is
changed significantly, portfolio 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 in the form of increased dealer spreads
and brokerage commissions. The Fund's portfolio turnover rates for the fiscal
years ended October 31, 1993, 1994 and 1995 were 117.20%, 72.00% and 80.71%,
respectively.
CERTAIN INVESTMENT STRATEGIES
The Investment Adviser reserves the right to employ the strategies described
below in order to help achieve the Fund's investment objective. Such strategies
include the lending of portfolio securities, the short sale of securities and
the use of futures contracts and options thereon, reverse repurchase agreements
and repurchase agreements (other than certain repurchase agreements with
qualified depository institutions having maturities not longer than one day).
Unless so stated below, there are no limits to the Fund's use of these
investment strategies. The Fund's Board of Directors has adopted an operating
policy under which the Fund will not subject more than 5% of its total net
assets to investment techniques such as options, futures contracts and related
options, foreign currency transactions, interest rate transactions, and similar
techniques such as hedging or investment techniques. In addition, the respective
Investment Guidelines, as well as other terms of the Surety Arrangement, may
have the effect of limiting the Fund's use of other investment strategies
described below, such as investments in foreign securities and the use of
options, to the extent such investments are not eligible for inclusion in the
discounted value of the Fund's portfolio.
Securities Loans. 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. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place a month or
more after the date of the transaction). The Fund will invest in when-issued and
delayed delivery securities in order to lock in a favorable rate of return. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. 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. To facilitate such acquisitions, the Fund's
custodian bank will maintain, in a separate account of the Fund, cash or United
States government or other high quality debt 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. 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 Fund is dependent on the other party to successfully
complete when-issued and delayed delivery transactions. If such other party
fails to complete its portion of the transaction, the Fund will have lost the
opportunity to invest the amount set aside for such transaction in the
segregated asset account.
Repurchase Agreements. 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 re-sell such security at a fixed time and price (representing
the Fund's cost plus interest). The Fund will invest in repurchase obligations
to assist in the management of its portfolio and also to obtain additional
revenue and thereby maximize shareholders' value. 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 obligations of the United
States government or its agencies or instrumentalities. Repurchase agreements
may also be viewed as loans made by the Fund which are collateralized by the
securities subject to repurchase. The Investment Adviser will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Investment Adviser will also evaluate the
creditworthiness of the repurchase agreement sellers with whom the Fund does
business and will monitor their creditworthiness during the period of any
repurchase agreement. If the seller defaults, the Fund could realize a loss on
the sale of the underlying security to the extent that the proceeds of 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 required to return the
underlying collateral to the seller's estate.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to debt obligations which could otherwise be sold by the
Fund. A reverse repurchase agreement is an instrument under which the Fund may
sell an underlying debt instrument and simultaneously obtain 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 Fund will
undertake reverse repurchase transactions to assist in the management of its
portfolio and to obtain additional liquidity in its portfolios. The value of
underlying securities will be at least equal at all times to the total amount of
the resale obligation, including the interest factor. The Fund receives payment
for such securities only upon physical delivery or evidence of book entry
transfer by its custodian. Regulations of the SEC require that if securities are
sold by the Fund under a reverse repurchase agreement, the Fund will maintain in
a segregated account of the Fund established with the Custodian, cash or United
States government or other high quality debt securities from its portfolio,
marked to market daily and having a value equal to the proceeds received on any
sale subject to repurchase plus interest. 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
would be subject to the restrictions on borrowing described below under
"Investment Restrictions." The Fund will not hold more than 5% of the value of
its total assets in reverse repurchase agreements and will enter into such
agreements only so long as it is not in violation of Section 18 of the 1940 Act.
Foreign Investments. The Fund may invest up to 10% of the value of its total
assets in securities principally traded in foreign markets and Eurodollar
certificates of deposit issued by branches of U.S. banks. Foreign investments
may involve risks not present to the same degree in domestic investments, such
as future political and economic developments, the imposition of withholding
taxes on interest income, seizure or nationalization of foreign deposits, the
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal of and
interest on such obligations. Foreign securities may be less liquid and more
volatile than U.S. securities, and foreign accounting and disclosure standards
may differ from U.S. standards. In addition, settlement of transactions in
foreign securities may be subject to delays, which could result in adverse
consequences to the Fund including restrictions on the subsequent resale of such
securities. The value of foreign investments may rise or fall because of changes
in currency exchange rates. In addition, the costs of exchanging foreign
currencies for payments in U.S. dollars and nonnegotiated brokerage commissions
in foreign countries may reduce the yield on foreign securities. In the event of
a default in payment on foreign securities, the Fund may incur increased costs
to obtain a judgment against the foreign issuer in the United States or abroad.
The Fund may buy or sell foreign currencies or deal in forward foreign currency
contracts to hedge against possible fluctuations in exchange rates that may
affect the yield of the Fund when the foreign currencies are converted in
payment in U.S. dollars. The Fund may engage in currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The Fund
will use currency transactions only for hedging and not speculation. A forward
currency contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
The Fund's dealings in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions denominated or
quoted in the currency.
The Fund may not use position hedging with respect to a particular currency
to an extent greater than the aggregate market value (at the time of entering
into the position hedge) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency. If the Fund
enters into a position hedging transaction, the Fund's custodian will place cash
or U.S. Government securities or other high grade liquid debt securities in a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to the forward contract.
Options. The Fund may write (sell) call options which are traded on national
securities exchanges with respect to securities in its portfolio. The Fund may
only write "covered" call options, that is, options on securities it holds in
its portfolio or has an immediate right to acquire through conversion or
exchange of securities held in its portfolio. 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 the Investment Adviser does 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 forgoes 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 any 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. The extent to which the Fund may enter into transactions
involving call options also may be limited by the requirements of the Internal
Revenue Code for qualification as a regulated investment company.
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will trade in futures contracts or related
options and has no experience in doing so. However, the Fund has reserved the
right, subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser 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. However, employing this
technique effectively requires skills that are different from those required to
select portfolio securities and the Investment Adviser has no experience in
using this technique.
Under the regulations of the U.S. Commodity Futures Trading Commission
("CFTC"), the Fund will not be considered a "commodity pool", as defined under
such regulations, as a result of entering into transactions in futures contracts
and options on futures contracts, provided, among other things, that: (1) such
transactions are entered into solely for bona fide hedging purposes, as defined
under CFTC regulations; or (2) the aggregate initial margin and premiums for any
other such transactions entered into does not exceed 5% of the Fund's total
assets (after taking into account any unrealized profits and losses). The extent
to which the Fund may enter into transactions involving futures contracts also
may be limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company.
Risks of Hedging Transactions. The use of options, financial futures and
options on financial futures may involve risks not associated with other types
of investments which the Fund intends to purchase and it is possible that a
portfolio that utilizes hedging strategies may not perform as well as a
portfolio that does not make use of such devices. In particular, the Fund's
positions in options and financial futures may be entered and closed out only on
a federally licensed exchange which provides a market therefor, and there can be
no assurance that a liquid market will exist for any particular option or
futures contract. Because financial futures and related options markets
generally impose limits on daily price movement, it is possible that the
Investment Adviser will not be able to close out hedge positions promptly. The
inability to close out options and futures positions could have an adverse
impact on the Fund's ability to hedge its securities effectively and might, in
some cases, require the Fund to deposit substantial amounts of additional cash
to meet applicable margin requirements. The Fund's ability to hedge effectively
through transactions in financial futures or options depends on the degree to
which price movements, which include, in part, changes in interest rates, in the
Fund's holdings correlate with price movements of the hedging instruments.
Inasmuch as the Fund's options and futures will not duplicate such underlying
securities, the correlation will probably not be perfect. Consequently, the
prices, which include, in part, changes in interest rates, of the securities
being hedged may not move in the same amount as the hedging instrument. It is
possible that there may be a negative correlation between the hedging instrument
and the hedged securities, which would prevent the Fund from achieving the
anticipated benefits of hedging transactions or may cause the Fund to realize
losses and thus be in a worse position than if such strategies had not been
used.
Additional Leverage. The Fund has reserved the right to borrow money to the
extent such borrowing would not result in a violation of the 1940 Act Asset
Coverage (as defined under "Description of Notes -- Asset Maintenance") and
would not otherwise violate Section 18 of the 1940 Act or restrictions imposed
by the Insurance Agreement (as defined below). The Fund may borrow to the extent
then permitted by the 1940 Act through the public or private issuance of debt
securities and/or from lenders of all types, such as banks, savings and loan
associations, insurance companies and similar financial institutions. In
addition, the Fund may borrow up to 5% of its total assets for temporary
purposes. To the extent permitted by the 1940 Act, the Fund may also borrow
additional amounts as it redeems Notes and Preferred Shares.
At the date hereof, the Fund is considering various refinancing alternatives
with respect to its leverage. Additionally, following the completion of the
Offer, it is the intention of the Fund, subject to market conditions, to add
incremental leverage (to the extent permitted under the 1940 Act) such that the
percentage of the Fund's assets representing leverage is approximately the same
as it was prior to the Offer. See "Risk Factors and Special Considerations" for
a discussion of certain risks associated with borrowings by the Fund.
The Fund may also elect to sell additional Preferred Shares in the event
such shares can be issued and sold upon favorable terms. See "The Offer --
Purpose of the Offer" and "Description of Capital Stock."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. All percentage
limitations on investments will apply at the time of the making of an investment
and shall 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 1940 Act Asset
Coverage or otherwise result in a violation of Section 18 of the 1940 Act,
or issue any senior securities (as defined in the 1940 Act) other than
Notes, Preferred Shares or debt instruments related to borrowings described
under "Investment Policies and Limitations -- Certain Investment Strategies
-- Additional Leverage" 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) shall not be deemed a senior security.
Pursuant to Section 18 of the 1940 Act, not more than 33 1/3% of the Fund's
capital structure may consist of borrowings representing indebtedness, such
as the Notes, and not more than 50% of the Fund's capital structure may
consist of borrowings represented by indebtedness, such as the Notes, and
senior securities of a class which is stock, such as the Preferred Shares.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 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 which,
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.
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 consistently 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. Invest in securities of any issuer, if, to the knowledge of the Fund,
officers and Directors of the Fund and officers and directors of the
Investment Adviser who beneficially own more than 0.50% of the securities of
that issuer together own more than 5% of such issuer.
10. With respect to 75% of the value of the Fund's total 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, provided that this limitation does not apply to
obligations issued or guaranteed as to interest and principal by the United
States government or its agencies or instrumentalities.
11. With respect to 75% of the value of the Fund's total assets, acquire
more than 10% of the outstanding voting securities of any issuer.
12. Invest 25% or more of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations issued
or guaranteed as to interest and principal by the United States government
or its agencies or instrumentalities.
13. Invest more than 30% of the market value or other fair value of its
total assets in securities that are not readily marketable, including those
that are restricted as to disposition under the federal securities laws or
otherwise. This restriction shall 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 or
to repurchase agreements that have a maturity of seven days or less;
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 securities that are not readily marketable,
exceed 30% of the market or other fair value of the Fund's total assets.
14. Invest in the securities of other registered investment companies,
except as they may be acquired as part of a merger or consolidation or
acquisition of assets or by purchases in the open market involving only
customary brokers' commissions.
15. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal
in, represent interests in or are secured by interests in such leases,
rights or contracts.
16. Make investments for the purpose of exercising control or
management over the issuer of any security.
17. Write, purchase or sell puts, calls or combinations thereof, or
purchase or sell futures contracts or related options, except that the Fund
may write call options and invest in futures contracts and related options
as provided in "Investment Guidelines -- Certain Investment Strategies --
Options" and "-- Futures Contracts and Related Options."
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 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 "Investment Policies and Limitations -- Certain Investment
Strategies -- Futures Contracts and Related Options." Further, as noted, certain
practices are subject to the condition that they not adversely affect the then
current ratings of the Fund's outstanding securities and are subject to the
prior written approval of Financial Security.
Because they are fundamental policies, the 1940 Act requires that the
foregoing Investment Restrictions may not be changed without the approval of the
holders of a majority of the outstanding shares of Common Stock and a majority
of the outstanding Preferred Shares, voting as separate classes, which, for
purposes of the 1940 Act, means for each class the lesser of (a) more than 50%
of the total number of outstanding shares of such class or (b) 67% or more of
the shares of such class present or represented at a meeting at which more than
50% of the outstanding shares of such class are present or represented by proxy.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An Investment in the Fund is subject to a number of risks and special
considerations, including the following:
DILUTION
An immediate dilution of the aggregate net asset value of the shares of
Common Stock owned by Record Date Shareholders who do not fully exercise their
Rights is likely to be experienced as a result of the Offer because the amounts
received by the Fund with respect to the Subscription Price (after payment of
soliciting fees and other expenses of the Offer) are likely to be less than the
Fund's net asset value per share and because the number of shares outstanding
after the Offer is likely to increase in a greater percentage than the increase
in the size of the Fund's assets. Because the amounts received by the Fund with
respect to the Subscription Price (after payment of soliciting fees and other
expenses of the Offer) are likely to be less than the net asset value per share
when shares are issued upon the exercise of Rights, as a result of the terms of
the Offer, Record Date Shareholders are likely to experience a decrease in the
net asset value per share held by them, irrespective of whether they exercise
all or any portion of their Rights. In addition, Record Date Shareholders who do
not fully exercise their Rights should expect that they will, at the completion
of the Offer, own a smaller proportional interest in the Fund than would
otherwise be the case. Although it is not possible to state precisely the amount
of such a decrease in net asset value per share (and in the case of Record Date
Shareholders who do not fully exercise their Rights, in the aggregate net asset
value of their shares), because it is not known at this time what the
Subscription Price will be, what the net asset value per share will be on the
Expiration Date or what proportion of the Shares will be subscribed for, such
dilution could be substantial. For example, assuming (i) that all Rights are
exercised by Record Date Shareholders and the purchases of Shares upon the
exercise of such Rights are solicited by the Dealer Manager or a broker-dealer,
as the case may be and (ii) that the Subscription Price is $ _____ per share
which is the Fund's net asset value per share, the Fund's net asset value per
share (after payment of the Dealer Manager and soliciting fees and estimated
offering expenses) would be reduced by approximately $ _____ per share or %.
Assuming (i) that all Rights are exercised by other holders of Rights and the
purchases of Shares upon the exercise of such Rights are solicited by the Dealer
Manager or a broker-dealer, as the case may be and (ii) that the Subscription
Price is $ _____ per share which is the Fund's net asset value per share, the
Fund's net asset value per share (after payment of the Dealer Manager and
soliciting fees and estimated offering expenses) would be reduced by
approximately $ _____ per share or _____ %. The Fund cannot predict what portion
of any Shares sold will be purchased by Record Date Shareholders as compared to
other holders of Rights or what portion of the purchases will be solicited by
participating broker-dealers. The distribution to shareholders of transferable
Rights which themselves may have a realizable value will afford
non-participating shareholders the potential of receiving a cash payment upon
sale of such Rights, receipt of which may be viewed as compensation for the
possible dilution of their interest in the Fund.
RISK OF LEVERAGE
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies,
including a higher volatility of the net asset value of the Common Stock and
potentially more volatility in the market value of the Common Stock. Because the
Fund will pay interest on the Notes and accumulated dividends on the Preferred
Shares, an increase or decrease in capital or income of the Fund will have an
increased effect on the Common Stock. For a description of the Notes and
Preferred Shares, see "Description of the Notes" and "Description of Capital
Stock." Any investment income or gains earned from the capital contributed by
the purchasers of the Notes and the Preferred Shares which is in excess of
interest and dividends due thereon will cause the value of and dividends, if
any, on the Common Stock to rise more quickly than would otherwise be the case.
Conversely, if the investment performance of the capital contributed by the
purchasers of the Notes and the Preferred Shares fails to cover the interest and
dividends on such capital, the value of the Common Stock may decrease more
quickly than would otherwise be the case and dividends thereon will be reduced
or eliminated. This is the speculative effect of "leverage."
Fluctuations in short-term dividend rates will affect the dividend rate per
annum ("Applicable Rate") on the Preferred Shares, and, in turn, will affect the
yield to holders of Common Stock, with increases in such rates decreasing such
yield. Short-term and long-term interest rates change from time to time as does
their relationship to each other (i.e., the slope of the yield curve) depending
upon such factors as supply and demand forces, monetary and tax policies and
investor expectations. Changes in such factors could cause the relationship
between short-term and long-term rates to change (i.e., to flatten or to invert
the slope of the yield curve) so that short-term rates may substantially
increase relative to the rates of longer term obligations in which the Fund may
be invested. To the extent that the Applicable Rate on the Preferred Shares
approaches the net return on the Fund's investment portfolio, the benefit of
leverage to holders of Common Stock will be reduced, and if the Applicable Rate
on the Preferred Shares were to exceed the net return on the Fund's portfolio,
the Fund's leveraged capital structure would result in a lower rate of return to
holders of Common Stock than if the Fund were not leveraged.
The interest rate on the Notes is a fixed annual rate of 6.53%, and the most
recent Applicable Rate is 5.28% on the Preferred Shares. Based on the interest
rate payable on the Notes and the current Applicable Rate payable on the
Preferred Shares, the annual return of the Fund's portfolio must equal at least
1.74% in order to cover the interest payments on the Notes and the dividend
payments on the Preferred Shares.
Since any decline in the net asset value of the Fund's investments will be
borne entirely by holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value to holders of
Common Stock than if the Fund were not leveraged, which would likely be
reflected in a greater decline in the market price for the Common Stock. In an
extreme case, if the Fund's current investment income were not sufficient to
meet dividend requirements on the Preferred Shares or interest payments on the
Notes, it could be necessary for the Fund to liquidate certain of its
investments, thereby reducing the net asset value attributable to the Common
Stock. In addition, a decline in the net asset value of the Fund's investments
may affect the ability of the Fund to make dividend payments on its Common Stock
and such failure to pay dividends or make distributions may result in the Fund
ceasing to qualify as a regulated investment company under the Internal Revenue
Code. The Notes and the Preferred Shares may constitute a substantial lien and
burden on the Common Stock by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. In addition, the
Fund may borrow up to 5% of its total assets for temporary purposes and, to the
extent that Notes or Preferred Shares are repaid or redeemed, may issue or incur
additional senior securities or indebtedness. The Fund has also reserved the
right to borrow money and to enter into reverse repurchase agreements. See
"Investment Policies and Limitations -- Certain Investment Strategies."
The Fund may, if market conditions are appropriate, increase its level of
debt or other senior securities or refinance the Fund's current level of debt or
other senior securities in order to maintain or increase the level of leverage
that exists prior to this offering. At the date hereof, the Fund is considering
various refinancing alternatives with respect to its leverage. Additionally,
following the completion of the Offer, it is the intention of the Fund, subject
to market conditions, to add incremental leverage (to the extent permitted under
the 1940 Act) such that the percentage of the Fund's assets representing
leverage is approximately the same as it was prior to the Offer.
The following table illustrates the effect of leverage (using senior
securities -- i.e., $20 million of Notes and 200 Preferred Shares with a $20
million liquidation preference) on the return of a holder of Common Stock,
assuming the annual returns set forth in such table and assuming a fixed annual
rate of 6.53% payable on the Notes and an Applicable Rate of 5.28% (which is the
most recent Applicable Rate payable on the Preferred Shares):
- --------------------------------------------------------------------------------
Assumed Return on Portfolio
(Net of Expenses) ........... -10% -5% 0% 5% 10%
Corresponding Return to
Common Stockholder .......... -16.63% -9.55% -2.46% 4.62% 11.71%
- --------------------------------------------------------------------------------
The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are hypothetical
and the actual returns to a holder of Common Stock may be greater or less than
those appearing in the table.
DISCOUNT FROM NET ASSET VALUE
Shares of closed-end funds frequently trade at a market price which is less
than the value of the net assets attributable thereto. The possibility that
shares of the Fund will trade at a discount from net asset value is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. It should be noted, however, that in some cases, shares of closed-end
funds may trade at a premium. The Fund's shares have traded in the market above,
at, and below net asset value since the commencement of the Fund's operations.
See "Trading and Net Asset Value Information." In addition, the net asset value
of the Fund will change with changes in the value of its portfolio securities.
Because the Fund invests primarily in fixed-income securities, the net asset
value of the shares of the Fund can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a
fixed-income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can be expected to decline.
HIGH-YIELD, HIGH RISK INVESTMENTS
The Fund is designed for long-term investors who can accept the risks
entailed in seeking a high level of current income available from investments in
long-term, high-yielding, medium and lower quality, fixed-income securities.
Consistent with a long-term investment approach, investors in the Fund should
not rely on the Fund for their short-term financial needs. The principal value
of the lower quality securities in which the Fund invests, will be affected by
interest rate levels, general economic conditions, specific industry conditions
and the creditworthiness of the individual issuer. Although the Fund seeks to
reduce risk by portfolio diversification, extensive credit analysis, and
attention to trends in the economy, industries and financial markets, such
efforts will not eliminate risk.
Fixed-income securities offering the high current income sought by the Fund
will ordinarily be in the lower rating categories of recognized rating agencies
or will be nonrated. The values of such securities tend to reflect individual
corporate developments or adverse economic changes to a greater extent than
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices and yields of "high-yield,"
high risk securities and thus in the Fund's net asset value. Further, these
fixed-income securities are considered 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 obligation and will generally
involve more credit risk than securities in the higher rating categories; the
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal of or interest on its portfolio
holdings. The "high-yield," high risk securities held by the Fund are frequently
subordinated to the prior payment of senior indebtedness and are traded in
markets that may be relatively less liquid than the market for higher rated
securities. Changes by recognized rating services in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of the Fund's investments.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from such securities, but will affect the Fund's net asset value.
The Fund will rely on the Investment Adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. In this evaluation, the
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
Some of the lower-rated securities in which the Fund invests were issued to
raise funds in connection with the acquisition of a company, in a so-called
"leveraged buy-out" transaction. The highly leveraged capital structure of such
issuers may make them especially vulnerable to adverse changes in economic
conditions.
Generally, when interest rates rise, the value of fixed rate debt
obligations, including "high-yield," high risk securities, tends to decrease;
when interest rates fall, the value of fixed rate debt obligations tends to
increase. If an issuer of a "high-yield," high risk security containing a
redemption or call provisions exercises either provision in a declining interest
rate market, the Fund would have to replace the security, which could result in
a decreased return for shareholders.
The market for "high-yield," high risk securities has expanded rapidly in
recent years and is relatively new. This expanded market has not yet completely
weathered an economic downturn. A further economic downturn or an increase in
interest rates could have a negative effect on the "high-yield," high risk
securities market and on the market value of the "high-yield," high risk
securities held by the Fund, as well as on the ability of the issuers of such
securities to repay principal and interest on their borrowings. During 1989 and
1990, the level of "high-yield" debt security defaults increased as many issuers
were unable to obtain funds through financial intermediaries or the public
"high-yield" market. The effect of these developments on the Fund was a
substantial decline in the Fund's net asset value and a substantial reduction in
the Fund's monthly dividend. Also, the forced liquidation of a substantial
portion of the Fund's portfolio in order to repay the Senior Extendible Notes
resulted in the realization of substantial capital losses, and this severely
limited the ability of the Fund to return to its original net asset value as the
high-yield market improved. The high-yield market decline reversed in the fourth
quarter of 1990 and by mid year 1991, after reinvesting a substantial amount of
its cash, the Fund's net asset value had improved substantially but to a level
far less than the net asset value at the time the Fund commenced operations.
The high-yield market, as measured by the CS First Boston High Yield Index,
posted total annual returns of 43.75%, 16.66%, 18.91%, -0.97% and 17.38% for the
calendar years 1991, 1992, 1993, 1994 and 1995, respectively. For the two month
period ended February 29, 1996, the CS First Boston High Yield Index produced a
total return of 2.44% and for the trailing twelve month period produced a total
return of 16.14%. The ten year U.S. Treasury Bond produced a total return of
16.46%, 6.52%, 11.94%, -6.08% and 23.68% for the calendar years 1991, 1992,
1993, 1994 and 1995, respectively. See "Financial Information Summary" for
information concerning the Fund's return.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt retirements
totaling $26.0 billion. Net new issue activity of "high-yield" debt securities
totaled $11.4 billion, $46.1 billion, $22.2 billion and $26.7 billion for the
calendar years 1992, 1993, 1994 and 1995, respectively. Net new issue activity
of "high-yield" debt securities for the two month period ended February 29, 1996
was $10.8 billion. The statistical information with respect to new issue
activity is based on information the Fund obtained from the CS First Boston High
Yield Handbook. The spread between the yield on U.S. Treasury securities and the
high-yield market has fluctuated between 400 and 600 basis points (4.0% to 6.0%)
during the 1992 to 1995 period, which is more in line with the historical spread
relationship.
Since 1978, the historical weighted default rate on "high-yield" debt
securities has been 2.2%. The default rates on "high-yield" debt securities for
the calendar years 1990, 1991, 1992, 1993, 1994 and 1995 were 7.98%, 9.33%,
2.89%, 0.96%, 0.44% and 2.24%, respectively. The default rate on "high-yield"
debt securities for the two month period ended February 29, 1996 was 0.15%. The
defaulted amount of "high-yield" debt securities was $18.1 billion in 1990,
$20.7 billion in 1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion
in 1994 and $6.6 billion in 1995. The defaulted amount on "high-yield" debt
securities for the two month period ended February 29, 1996 was $435 million.
The statistical information with respect to historical default rates and amounts
is based on information the Fund obtained from the CS First Boston High Yield
Handbook.
The credit ratings issued by credit rating services may not fully reflect
the true risks of an investment. For example, credit ratings typically evaluate
the safety of principal and interest payments, not market value risk, of
"high-yield," high risk securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Although the
Investment Adviser considers ratings of recognized rating services such as
Moody's and S&P, the Investment Adviser primarily relies on its own credit
analysis, which includes a study of existing debt, capital structure, ability to
service debt and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. The
Investment Adviser continually monitors the investments in the Fund's portfolio
and carefully evaluates whether to dispose of or retain "high-yield," high risk
securities whose credit ratings have changed (see Appendix D for a description
of Moody's and S&P's ratings of "high-yield" securities). As of March 15, 1996,
approximately 99.71% of the Fund's total assets was invested in fixed-income
securities regarded by the Rating Agencies as below investment grade (that is
rated Ba1 or lower by Moody's or BB+ or lower by S&P).
At times a major portion of an issue of lower-rated securities may be held
by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund may find it more difficult to sell such securities when the
Investment Adviser believes it advisable to do so or may be able to sell such
securities only at prices lower than if the securities were more widely held. In
such circumstances, the Fund may also find it more difficult to determine the
fair value of such securities for purposes of computing the Fund's net asset
value. The Fund, in most instances, utilizes an independent pricing service to
determine the fair value of its securities for financial statement purposes
since market quotations are not readily ascertainable. Securities for which
market quotations are not readily available will be valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will not be permitted to declare dividends or other distributions
with respect to the Common Stock or the Preferred Shares or purchase shares of
Common Stock or Preferred Shares unless at the time thereof the Fund meets
certain asset coverage requirements, including those imposed by the 1940 Act.
Failure to pay dividends or other distributions could result in the Fund ceasing
to qualify as a regulated investment company under the Internal Revenue Code.
See "Federal Taxation" and "Description of Capital Stock -- Dividends and
Distributions." Further, upon any failure to pay dividends in an amount equal to
two full years of dividends with respect to the Preferred Shares, the holders
thereof shall have the right to elect a majority of the Directors until all
accrued dividends have been provided for or paid. In the event the Fund fails to
satisfy certain asset coverage requirements, the Fund may be required to effect
mandatory partial redemptions of the Notes or (subject to certain limitations)
Preferred Shares or in certain circumstances may result in the termination of
the Surety Bond and the mandatory redemption of all of the Notes and the
Preferred Shares. Redemptions of Preferred Shares and/or further redemptions of
Notes would reduce the Fund's leverage and could negatively affect potential
returns with respect to the Common Stock.
Given the above-described investment risks inherent in the Fund, investment
in shares of the Fund should not be considered a complete investment program and
is not appropriate for all investors. Investors should carefully consider their
ability to assume these risks before making an investment in the Fund.
<PAGE>
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their addresses and their principal
occupations for at least the past five years are set forth below.
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH REGISTRANT AGE DURING PAST 5 YEARS
- ---------------- --------------- --- ---------------------
<S> <C> <C> <C>
Richard E. Omohundro, Jr.*(3) President and Director 55 President or Co-President of
Prospect Street Investment Prospect Street Investment
Management Co., Inc. Management Co., Inc. since June
60 State Street 1988.
Boston, MA 02109
John A. Frabotta*(2) ................ Vice President, Treasurer, 53 Vice President of Prospect Street
Prospect Street Investment Director and Chief Investment Management Co., Inc.
Management Co., Inc. Investment Officer since June 1988.
60 State Street
Boston, MA 02109
John S. Albanese(1)(2) .............. Director 44 Senior Counsel to Washington
7247 Kousa Lane Headquarters Services (a
Springfield, VA 22152 Department of Defense Agency)
since June 1992. Lieutenant Colonel
of the United States Army, serving on
active duty from 1977 to 1992 in
several legal positions.
C. William Carey(1)(3) .............. Director 59 Chairman and Chief Executive
Town & Country Corporation Officer of Town & Country
25 Union Street Corporation since 1965.
Chelsea, MA 02150
Joseph G. Cote*(3) .................. Director 53 Co-President of Prospect Street
Prospect Street Investment Investment Management Co., Inc.
Management Co., Inc. since August 1995 and from
60 State Street February 1989 to November 1993.
Boston, MA 02109 Shareholder of Prospect Street
Investment Management Co., Inc. from
1989 to present. Co-President of
Prospect Street Senior Loan
Management Co., Inc.
Harlan D. Platt(1)(3) ............... Director 45 Professor of Finance and Insurance,
Northeastern University College Northeastern University, College
of Business Administration of Business Administration, since
413 Hayden Hall 1981.
Boston, MA 02115
Christopher E. Roshier(3)(4) ........ Director 49 Corporate Finance Director of
120 Strawberry Vale European Capital Company Limited
Twickenham, since 1990. Director of a number
Middlesex TWI 4SH of other public and private
United Kingdom companies in the United Kingdom.
Karen J. Thelen ..................... Secretary 44 Vice President of Prospect Street
Prospect Street Investment Investment Management Co., Inc.
Management Co., Inc. since December 1992. Assistant
60 State Street Vice President of Prospect Street
Boston, MA 02109 Investment Management Co., Inc.
from December 1988 to December 1992.
<FN>
- ----------
* Directors who are "interested persons" of the Fund, as defined in the 1940 Act.
(1) Directors who are members of the Audit Committee of the Fund's Board of Directors.
(2) Elected by holders of the Preferred Shares.
(3) Elected by holders of the Common Stock and Preferred Shares voting together.
(4) Mr. Roshier is not a resident of the United States and has not authorized an agent to receive any notices.
</TABLE>
Pursuant to the Articles of Incorporation, holders of the Common Stock have
voting rights of one vote per share and holders of the Preferred Shares have
voting rights of one vote per $1,000 of liquidation preference without regard to
any liquidation preference attributable to accumulated and unpaid dividends
(i.e., 100 votes per Preferred Share); provided that all the votes represented
by a single Preferred Share must be voted together. Under the Articles of
Incorporation and the 1940 Act, the holders of the Preferred Shares, as a
separate class, are entitled to elect two directors (at least one of whom is not
an "interested person" as defined in the 1940 Act) with the other four Directors
(at least two of whom are not "interested persons" as defined in the 1940 Act)
elected by the holders of the Common Stock and the Preferred Shares, voting
together; provided, however, that the holders of the Preferred Shares (or
Financial Security pursuant to the Surety Custody Agreement), as a separate
class, will be entitled to elect as a class the smallest number of additional
Directors as shall be necessary to assure that a majority of the Directors has
been elected by the holders of the Preferred Shares if the Fund fails to pay
accumulated dividends on the Preferred Shares in an amount equal to two full
years of dividends. See "Description of Capital Stock -- Voting." Election of
Directors is noncumulative; accordingly, holders of a majority of the voting
power represented by the outstanding shares of Common Stock and Preferred
Shares, voting together as a single class, or a majority of the outstanding
Preferred Shares, voting separately as a class, may elect all of the Directors
who are subject to election by such class, as the case may be.
The Fund pays each Director not affiliated with the Investment Adviser a fee
of $10,000 per year plus $2,000 per Directors' meeting attended in person and
$1,000 per Directors' meeting attended by telephone, together with actual
out-of-pocket expenses relating to attendance at such meetings. In addition, the
members of the Fund's Audit Committee, which consists of certain of the Fund's
noninterested Directors, receive $1,000 for each Audit Committee meeting
attended, other than meetings held on days on which there is also a Directors'
meeting, together with actual out-of-pocket expenses relating to attendance at
such meetings. Directors of the Fund, other than directors who are affiliates of
the Investment Adviser, earned for the fiscal year ended October 31, 1995
aggregate remuneration of $76,500.
The following table summarizes the compensation paid to the Directors and
Officers of the Fund for the fiscal year ended October 31, 1995. The Fund is
not part of a fund complex.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
NAME OF AGGREGATE ACCRUED AS ANNUAL TOTAL
DIRECTOR COMPENSATION PART OF FUND BENEFITS UPON COMPENSATION
OR OFFICER FROM FUND EXPENSES RETIREMENT FROM FUND
- ---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Richard E. Omohundro, Jr. none none none none
Harlan D. Platt $18,500 none none $18,500
C. William Carey $18,500 none none $18,500
Christopher E. Roshier $18,000 none none $18,000
John F. Barry* none none none none
John S. Albanese $18,500 none none $18,500
John A. Frabotta none none none none
<FN>
- ------------
*Mr. Barry's term as a Director ended on March 1, 1996.
</TABLE>
The Articles of Incorporation limit the personal liability of Directors and
officers to the Fund and its shareholders for monetary damages to the fullest
extent permitted by Maryland law. Based upon Maryland law and the Articles of
Incorporation, the Fund's Directors and officers have no liability to the Fund
and its shareholders for monetary damages except (a) for, and to the extent of,
actual receipt of an improper benefit in money, property or services, or (b) in
respect of an adjudication based upon a finding of active and deliberate
dishonesty which was material to the cause of action adjudicated. In accordance
with the 1940 Act, the Articles of Incorporation do not protect or purport to
protect Directors and officers against any liability to the Fund or its security
holders to which they would be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of their office.
In addition, the Articles of Incorporation and bylaws provide that the Fund
will indemnify its Directors and officers against liabilities and expenses in
connection with the performance of their duties on behalf of the Fund to the
fullest extent permitted by Maryland law, subject to the applicable requirements
of the 1940 Act and the interpretation by the Staff of the SEC of such
requirements. Under Maryland law and the Articles of Incorporation, the Fund is
entitled and obligated to indemnify each Director or officer in connection with
any proceeding to which such Director or officer is made a party by reason of
service in his capacity as a Director or officer, unless it is established that
(1) the act or omission of the Director or officer was material to the matter
giving rise to the proceeding and was committed in bad faith or was the result
of active and deliberate dishonesty, or (2) the Director or officer actually
received an improper personal benefit in money, property or services, or (3) in
the case of any criminal proceeding, the Director or officer had reasonable
cause to believe that the act or omission was unlawful. The foregoing standards
apply both as to third party actions and derivative suits by or in the right of
the Fund. Indemnification may be against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the Director or officer
in connection with the proceeding. If the proceeding is one by or in the right
of the Fund, indemnification may not be made in respect of any proceeding in
which the Director or officer shall have been adjudged to be liable to the Fund.
In the view of the Staff of the SEC, an indemnification provision is consistent
with the 1940 Act if it (i) precludes indemnification for any liability, whether
or not there is an adjudication of liability, arising by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of duties as
described in Section 17(h) and (i) of the 1940 Act ("disabling conduct") and
(ii) sets forth reasonable and fair means for determining whether
indemnification shall be made; in the case of the Fund, "reasonable and fair
means" would include (1) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified
("indemnitee") was not liable by reason of disabling conduct (including a
dismissal for insufficiency of evidence) and (2) a reasonable determination,
based upon a review of the facts, that the indemnitee was not liable by reason
of disabling conduct, by (a) the vote of a majority of a quorum of Directors who
are neither "interested persons" of the Fund as defined in Section 2(a) (19) of
the 1940 Act nor parties to the proceeding, or (b) a written opinion of
independent legal counsel.
The indemnification rights provided or authorized by the Articles of
Incorporation or applicable law are not exclusive of any other rights to which a
person seeking indemnification may be entitled. The Fund has also obtained
liability insurance at its expense for the benefit of its Directors and officers
which includes coverage for liability arising from the performance of their
duties on behalf of the Fund which is not inconsistent with the indemnification
provisions of the Articles of Incorporation and applicable law.
HOLDINGS OF PREFERRED STOCK AND COMMON STOCK
As far as is known to the Fund, no person owned beneficially five percent or
more of the outstanding shares of Common Stock of the Fund at March 1, 1996. DTC
holds of record 76% of the outstanding shares of Common Stock at March 1, 1996.
All of the outstanding Preferred Shares, which represent less than 1% of the
voting power of the Fund's outstanding shares (i.e., to the extent that the
Common Stock and Preferred Shares are voted together), were owned of record by
one institutional holder. As far as is known to the Fund, no person other than
DTC owned of record or beneficially, shares of the Fund representing more than
five percent of the voting power of the Fund's outstanding shares. The
Investment Adviser of the Fund beneficially owned 50,464 shares of Common Stock
at March 1, 1996.
As of March 1, 1996, all Directors and officers of the Fund, owned in the
aggregate less than 1% of the Common Stock. As of that date, no Directors or
officers owned any of the Fund's Preferred Stock.
THE INVESTMENT ADVISER
THE INVESTMENT ADVISER
The Investment Adviser is Prospect Street(R) Investment Management Co.,
Inc., a Massachusetts corporation having its principal offices at 60 State
Street, Boston, Massachusetts 02109. Organized in June 1988, the Investment
Adviser provides institutional clients with investment management services.
Richard E. Omohundro, Jr., Co-President of the Investment Adviser, served as
a Vice President (1978 to 1983) and a Managing Director (1983 to 1988) of
Merrill Lynch and was Co-Manager of the Merrill Lynch High-yield Bond Group from
1978 through 1987. During that period, the Group raised approximately $13.6
billion in new "high-yield" securities through 107 issues and provided one of
the largest secondary trading markets for "high-yield" securities. In 1987, the
Group raised approximately $5.8 billion in new offerings of "high-yield"
securities and employed over 40 persons. Mr. Omohundro provides general advisory
assistance to, analyzes certain policy considerations with, and consults on a
regular basis with, the Fund's portfolio manager.
John A. Frabotta, a Vice President of the Investment Adviser, assists Mr.
Omohundro in carrying on the business of the Investment Adviser. Mr. Frabotta
was a Vice President of Merrill Lynch from 1979 through June 1988, during
which time he performed various research, structuring and marketing functions
involving "high-yield" securities. Mr. Frabotta has served as the Fund's
portfolio manager since September, 1990. The principals of the Investment
Adviser are also involved in the management of two other funds: Prospect
Street(R) Senior Loan Portfolio, L.P. and Prospect International Portfolio.
Prospect Street(R) Senior Loan Portfolio, L.P. is a $118 million portfolio
investing in assignments of or participations in U.S. senior floating rate
bank loans made primarily in connection with leveraged acquisitions and
financings. These bank loans are acquired in the syndication phase and in the
secondary market. Prospect International Portfolio is an offshore, closed-end
fund investing in U.S. Government securities.
ADVISORY AGREEMENT
The Investment Advisory Agreement between the Investment Adviser and the
Fund (the "Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the 1940 Act,
the Investment Adviser is responsible for the actual management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular investment rests with the Investment Adviser, subject to review by
the Board of Directors and compliance with the applicable provisions of the 1940
Act.
The Investment Adviser is not dependent on any other party in providing the
investment advisory services required for the management of the Fund. The
Investment Adviser may, however, consider analyses from various sources,
including broker-dealers with which the Fund does business. The Investment
Adviser is also responsible for providing the Fund with such executive, data
processing, clerical, accounting and bookkeeping services and statistical and
research data as are deemed advisable by the Fund's Board of Directors (although
the expenses thereof will be borne by the Fund as specified below), except to
the extent these services are provided by an administrator or an accounting firm
hired by the Fund.
Under the Advisory Agreement with the Fund, the Investment Adviser receives
a monthly advisory fee equal to 0.65% (on an annual basis) of the average weekly
value of the total assets of the Fund, less accrued liabilities (excluding the
principal amount of the notes and the liquidation preference of the preferred
stock and including accrued and unpaid dividends on the preferred stock) up to
and including $175,000,000 of such net assets, 0.55% on the next $50,000,000 of
such net assets and 0.50% of the excess of such net assets over $225,000,000.
However, for a period of one year commencing on the Expiration Date of the
Offer, the Investment Adviser will waive its advisory fee with respect to any
increase in the Fund's net assets resulting from the exercise of any rights
pursuant to the Offer in order to mitigate the impact of the offering expenses
of this Offer on the Fund and its shareholders. For the fiscal years ended
October 31, 1993, 1994 and 1995, the dollar value of total advisory fees earned
by the Investment Adviser aggregated approximately $527,643, $807,770 and
$874,812, respectively.
The Fund bears all costs of its operation other than those incurred by the
Investment Adviser under the Advisory Agreement. In particular, the Fund pays
investment advisory fees, fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets and the Surety Custodian under the Surety
Arrangement, the premium payable in connection with the Surety Bond, legal,
accounting and auditing fees, taxes, expenses of preparing prospectuses and
shareholder reports, registration fees and expenses, fees and expenses for the
transfer and dividend disbursing agent, the compensation and expenses of the
Directors who are not otherwise employed by or affiliated with the Investment
Adviser or any of its affiliates, and any extraordinary expenses. The Investment
Adviser will reimburse the Fund for any expenses (excluding brokerage
commissions, interest, taxes and litigation expenses) paid or incurred by the
Fund in any year in excess of the most restrictive expense limitation which is
imposed by any state and to which the Fund is then subject, if any. The Fund is
not known to be subject to any state expense limitations. Under the Advisory
Agreement, the Investment Adviser provides the Fund with office space,
facilities and business equipment and provides the services of executive and
clerical personnel for administering certain of the other affairs of the Fund.
The Investment Adviser compensates Directors of the Fund if such persons are
employed by the Investment Adviser or its affiliates.
The Advisory Agreement became effective on March 1, 1994 upon approval by
shareholders at a meeting held on March 1, 1994 and replaced the advisory
agreement in effect prior thereto. The Advisory Agreement as approved by the
shareholders included an increase in the level of advisory fees from 0.50% (on
an annual basis) of the Fund's annual net assets to the fees set forth above.
The Advisory Agreement was initially effective for a two year period and will
continue in effect from year to year thereafter if approved annually (i) by the
Board of Directors of the Fund or by the holders of a majority of the Fund's
outstanding voting securities (as defined under "Investment Policies and
Limitations"), voting as a single class, and (ii) by a majority of the Directors
who are not parties to the Advisory Agreement or interested persons (as defined
in the 1940 Act) of any such party. At a meeting held on December 12, 1995, the
Board of Directors (including all Directors who are not "interested persons" of
the Fund, as defined under the 1940 Act) unanimously approved the renewal of the
Advisory Agreement for a one year term expiring on February 28, 1997. The
Advisory Agreement terminates on its assignment by either party and may be
terminated without penalty on not less than 30 nor more than 60 days' prior
written notice at the option of either party thereto, or by the affirmative vote
of the holders of a majority of the Fund's outstanding voting securities, voting
as a single class.
The Advisory Agreement provides that the Investment Adviser shall only be
liable for willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties and obligations under the Advisory Agreement.
PORTFOLIO TRADING
The Investment Adviser is responsible for decisions to buy and sell
securities and other portfolio holdings for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. Fixed-income securities are generally traded on a "net"
basis with dealers acting as principals 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 which 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 of the Fund, the Investment
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Investment Adviser
will seek to execute each transaction at a price and commission, if any, which
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. In seeking the most favorable price and execution, the Investment
Adviser, having in mind the Fund's best interests, will consider all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions. Though the Investment Adviser generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread of commission available. Within the framework of the policy of
obtaining the most favorable price and efficient execution, the Investment
Adviser will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Investment Adviser or the Investment Adviser's other clients. Such 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 issuers and industries. Such services are used by the
Investment Adviser in connection with all of its investment activities and some
of such services obtained in connection with the execution of transactions for
the Fund may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions for
such other accounts, and the services furnished by such brokers may be used by
the Investment Adviser in providing investment management for the Fund.
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 management fee paid by the Fund will not be
reduced because the Investment Adviser and/or other clients receive such
services. The allocation of orders and the commission rates paid by the Fund
will be reviewed periodically by the Board of Directors.
As permitted by Section 28(e) of the 1934 Act, the Investment Adviser may
cause the Fund to pay a broker-dealer which provides "brokerage and research
services" (as defined in the 1934 Act) to the Investment Adviser, an amount of
disclosed commission for effecting a securities transaction for the Fund in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
For the fiscal years ended October 31, 1993, 1994 and 1995, the Fund paid no
brokerage commissions for the execution of portfolio transactions. The rate of
portfolio turnover for the fiscal years ended October 31, 1993, 1994 and 1995
was 117.20%, 72.00% and 80.71%, respectively.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less frequently
than the close of trading on the Exchange (generally 4:00 P.M. New York time) on
the last business day of each week (generally Friday). It will be determined by
dividing the value of the net assets of the Fund (for the purpose of determining
the net asset value per share of the Common Stock, the value of the Fund's net
assets shall be deemed to equal the value of the Fund's assets less (i) the
Fund's liabilities (including the outstanding principal amount of the Notes and
unpaid interest on the Notes), (ii) accumulated and unpaid dividends on the
outstanding Preferred Shares and (iii) the aggregate liquidation value (i.e.,
$100,000 per share) of the outstanding Preferred Shares), by the total number of
shares of Common Stock outstanding. In valuing the Fund's assets for all
purposes other than the determination of the discounted value of such assets
pursuant to the respective Investment 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, will be valued at
the mean between the most recently quoted bid and asked prices provided by the
principal market makers. Any security or option for which the primary market is
on an exchange will be valued at the last sale price on such exchange on the day
of valuation or, if there was no sale on such day, the last bid price quoted on
such day. Options for which the primary market is not on an exchange or which
are not listed on an exchange will be valued at market value or fair value if no
market exists. Securities and assets for which market quotations are not readily
available will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. While no single standard
for determining fair value exists, as a general rule, the current fair value of
a security would appear to be the amount which the Fund could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial condition of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same type at the time of purchase, special reports prepared by analysts,
information as to any transaction or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be valued
at amortized cost if their term to maturity from the date of acquisition by the
Fund was less than 60 days or by amortizing their value on the 61st day prior to
maturity if their term to maturity from the date of acquisition by the Fund was
more than 60 days, unless this method is determined by the Board of Directors
not to represent fair value. Repurchase agreements will be valued at cost plus
accrued interest.
SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. To address this possibility, the Board of Directors
presently contemplates that the Fund may from time to time consider either the
repurchase of shares of its Common Stock on the open market or the making of
tender offers for such Common Stock. Since commencement of the Fund's
operations, no such open market purchases or tender offers have been made. The
Fund may borrow money to finance the repurchase of shares, subject to compliance
with 1940 Act Asset Coverage, Section 18 of the 1940 Act and the other
limitations described under "Investment Policies and Limitations -- Certain
Investment Strategies -- Additional Leverage." Shares of Common Stock may not be
repurchased, however, (i) if applicable asset coverage requirements under the
1940 Act (i.e., 300% with respect to the Notes and 200% with respect to the
Preferred Shares) are not met or would not be met following such repurchase,
(ii) when payments of principal of or interest on the Notes are in default,
(iii) when dividends on the Preferred Shares are in arrears or Surety Asset
Coverage is not maintained or (iv) if otherwise prohibited by applicable law.
There can be no assurance that repurchases or tenders will result in the
Common Stock trading at a price which is equal to its net asset value. The Fund
anticipates that the market price of the Common Stock will usually vary from net
asset value. The market price of the Common Stock will be determined, among
other things, by the relative demand for and supply of the Common Stock in the
market, the Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Common Stock may be the subject of repurchases or tender offers from time to
time may enhance its attractiveness to investors and thus reduce the spread
between market price and net asset value that may otherwise exist.
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 of
the Fund will decrease the total assets of the Fund and therefore have the
effect of increasing the Fund's expense ratio. Furthermore, any interest on
borrowings to finance Common Stock repurchase transactions will reduce the
Fund's net income.
Even if a tender offer has been made, it is the Board's announced policy,
which may be changed by the Board, not to accept tenders or effect repurchases
if (1) such transactions, if consummated, would (a) result in the delisting of
the Common Stock from the Exchange (the Exchange having advised the Fund that it
would consider delisting if the aggregate market value of the Fund's outstanding
publicly held Common Stock is less than $5.0 million, the number of publicly
held shares of Common Stock falls below 600,000 or the number of round-lot
holders falls below 1,200), (b) result in a violation of applicable asset
coverage requirements, or (c) impair the Fund's status as a regulated investment
company under the Internal Revenue Code (which would make the Fund a taxable
entity, causing the Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from the Fund); (2) the
Fund would not be able to liquidate portfolio securities in an orderly manner
and consistent with the Fund's investment objective and policies in order to
repurchase Common Stock; or (3) there is, in the Board's judgement, any material
(a) legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or limitation on prices for trading securities generally on the
Exchange or any foreign exchange on which portfolio securities of the Fund are
traded, (c) declaration of a banking moratorium by federal, state or foreign
authorities or any suspension of payment by banks in the United States, New York
State or foreign countries in which the Fund invests, (d) limitation affecting
the Fund or issuers of its portfolio securities imposed by federal, state or
foreign authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, or (f) other event
or condition which would have a material adverse effect on the Fund or its
shareholders if shares of Common Stock were repurchased. The Board of Directors
may modify these conditions from time to time in light of experience and may
determine not to make a tender offer even if one of the above conditions exists.
If a tender offer is made, such tender offer shall be made in accordance with
the 1934 Act and the 1940 Act.
Any tender offer made by the Fund will be at a price equal to the net asset
value of the shares on a date subsequent to the Fund's receipt of all tenders.
Each offer will be made and shareholders notified in accordance with the
requirements of the 1934 Act and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. The Fund will
purchase all shares tendered by a shareholder at any time during the period of
the tender offer in accordance with the terms of the offer unless it determines
to accept none of them (based upon one of the conditions set forth above). Each
person tendering shares will be required to submit a check in an amount not to
exceed $25 payable to the Fund, which will be used to help defray the costs
associated with effecting the tender offer. This fee will be imposed upon each
tendering shareholder whose tendered shares are purchased in the tender offer
and will be imposed regardless of the number of shares purchased. The Fund
expects the cost to the Fund of effecting a tender offer will be greater than
the aggregate of all service charges received from those who tender their
shares. Costs associated with the tender offer will be charged against capital
of the Fund. During the period of a tender offer, the Fund's shareholders will
be able to obtain the Fund's current net asset value by use of a toll-free
telephone number.
If the Fund must liquidate portfolio securities in order to purchase shares
of Common Stock tendered, the Fund may realize gains and losses. Such gains, if
any, may be realized on securities held for less than three months ("short short
gain"). Because less than 30% of the Fund's gross income must be derived from
the sale of disposition of stock and securities held less than three months for
any taxable year in order to retain the Fund's tax status as a regulated
investment company, any such short short gains would reduce the amount of gain
on sale of other securities held for less than three months that the Fund could
realize in the ordinary course of its portfolio management. See "Federal
Taxation." The portfolio turnover rate of the Fund may or may not be affected by
the Fund's repurchases of shares of Common Stock pursuant to a tender offer.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Directors may elect to submit to the holders of the
Common Stock and the Preferred Shares at any time after December 5, 1993 a
proposal to convert the Fund to an open-end investment company and in connection
therewith to redeem or otherwise retire the Notes and the Preferred Shares as
would be required upon such conversion by the 1940 Act. In determining whether
to exercise its discretion to submit this issue to shareholders, the Board of
Directors would consider all factors then relevant, including the relationship
of the market price of the Common Stock to net asset value, the extent to which
the Fund's capital structure is leveraged and the possibility of re-leveraging,
the spread, if any, between yields on "high-yield" securities in the Fund's
portfolio as compared to interest and dividend charges on senior securities and
general market and economic conditions. In addition to any vote required by
Maryland law, conversion of the Fund to an open-end investment company would
require the affirmative vote of the holders of a majority (as defined in the
1940 Act) of each class of the shares entitled to be voted on the matter.
Shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charges, if
any, as might be in effect at the time of redemption. If the Fund converted to
an open-end investment company, it could be required to liquidate portfolio
securities to meet requests for redemption, and the Common Stock would no longer
be listed on the Exchange. In the event the Fund converts to open-end status,
the Fund would only be able to borrow through bank borrowings within certain
limits and would not be allowed to have preferred stock.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock of
investment company taxable income (but not including short-term capital gains or
"net capital gains," defined as the excess of net long-term capital gains over
net short-term capital losses), and to distribute any net short-term capital
gains and net capital gains annually. Under present law, if the Fund were to
retain net capital gains, taxes would be imposed with respect to those amounts.
See "Federal Taxation," "Description of Notes -- Asset Maintenance" and
"Description of Capital Stock -- Dividends and Distributions" for a discussion
of certain possible restrictions on the Fund's ability to declare dividends on
the Common Stock.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by State
Street Bank and Trust Company (the "Bank"), as agent under the Plan, unless a
shareholder elects to receive cash. An election to receive cash may be revoked
or reinstated at the option of the shareholder. Shareholders whose shares are
held in the name of a broker or nominee will have distributions reinvested
automatically by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee, or unless the
shareholder elects to receive distributions in cash. If the service is not
available, such distributions will be paid in cash. Shareholders whose shares
are held in the name of a broker or nominee should contact the broker or nominee
for details. All distributions to investors who elect not to participate (or
whose broker or nominee elects not to participate) in the Plan, will be paid by
check mailed directly to the record holder by the Bank, as dividend paying
agent.
The Bank will furnish each person who buys shares in the offering with
written information relating to the Plan. Included in such information will be
procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Directors of the Fund declare a dividend or capital gains
distribution payable either in shares of Common Stock or in cash, as holders of
Common Stock may have elected, then nonparticipants in the Plan will receive
cash and participants in the Plan will receive the equivalent in shares of
Common Stock valued at the lower of market price or net asset value. Whenever
market price is equal to or exceeds net asset value at the time shares are
valued for the purpose of determining the number of shares equivalent to the
cash dividend or capital gains distribution, participants will be issued shares
of Common Stock at the net asset value most recently determined as provided
under "Determination of Net Asset Value," but in no event less than 95% of the
market price. If the net asset value of the Common Stock at such time exceeds
the market price of Common Stock at such time, or if the Fund should declare a
dividend or capital gains distribution payable only in cash, the Bank will, as
agent for the participants, buy Common Stock in the open market, on the Exchange
or elsewhere, for the participants' accounts. If, before the Bank has completed
its purchases, the market price exceeds the net asset value of the Common Stock,
the average per share purchase price paid by the Bank may exceed the net asset
value of the Common Stock, resulting in the acquisition of fewer shares than if
the dividend or capital gains distribution had been paid in Common Stock issued
by the Fund. The Bank will apply all cash received as a dividend or capital
gains distribution to purchase Common Stock on the open market as soon as
practicable after the payment date of such dividend or capital gains
distribution, but in no event later than 30 days after such date, except where
necessary to comply with applicable provisions of the federal securities laws.
The Bank maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Common Stock in
the account of each Plan participant will be held by the Bank in noncertificated
form in the name of the participant, and each shareholder's proxy will include
those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Bank's fees for handling the reinvestment of dividends
and capital gains distributions will be paid by the Fund. There will be no
brokerage charges with respect to shares of Common Stock issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
stock or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Bank's open market purchases
in connection with the reinvestment of dividends and capital gains
distributions.
The automatic reinvestment of dividends and capital gains distributions will
not relieve participants of any income tax which may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid after written notice
of the change sent to the members of the Plan at least 90 days before the record
date for such dividend or capital gains distribution. The Plan also may be
amended or terminated by the Bank, with the Fund's prior written consent but,
except when necessary or appropriate to comply with applicable law or the rules
or policies of a regulatory body, only on at least 90 days' written notice to
participants in the Plan. All correspondence concerning the Plan should be
directed to the Bank at P.O. Box 8209, Boston, Massachusetts 02266.
FEDERAL TAXATION
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Common Stock. Investors should consult
their own tax advisors for more detailed information and for information
regarding the impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund qualifies and elects to be treated as a regulated investment
company of the Internal Revenue Code of 1986, as amended. To qualify as a
regulated investment company, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in stocks, securities or currencies
(including but not limited to, gains from options, futures and forward
contracts); (b) derive in each taxable year less than 30% of its gross income
from any of the following that are held for less than three months (i) stocks or
securities, (ii) options, future or forward contracts, or (iii) foreign
currencies (or foreign currency options, futures or forward contracts) that are
not directly related to its principal business of investing in stocks and
securities (or options and futures with respect to stocks or securities); and
(c) diversify its holdings so that, at the end of each quarter of each taxable
year, (i) at least 50% of the market value of the Fund's assets is represented
by cash, cash items, U.S. Government securities, securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies).
As a regulated investment company, in any fiscal year with respect to which
the Fund distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends and interest but excludes net
long-term capital gains in excess of net short-term capital losses), the Fund
(but not its shareholders) generally will be relieved of U.S. federal income tax
on its net investment income and net capital gains (net long-term capital gains
in excess of the sum of net short-term capital losses and capital loss
carryovers from prior years, if any) that it distributes to shareholders. To the
extent the Fund retains its net capital gains for investment, it will be subject
under current tax rates to a federal income tax at a maximum effective rate of
35% on the amount retained. See "Federal Income Tax Treatment of Holders of
Common Stock" below. Amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax payable by the Fund. To avoid the tax, the Fund must distribute, or
be deemed to have distributed, during each calendar year an amount equal to the
sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the twelve-month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. To prevent application of the excise tax, the Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. Compliance with the calendar year distribution requirement may
limit the extent to which the Fund will be able to retain its net capital gains
for investment.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Internal Revenue Code, the Fund will be taxed in the same
manner as an ordinary corporation, and distributions to its shareholders will
not be deductible by the Fund in computing its taxable income. In addition, in
the event of failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, will 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 gains.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Fund will be required to suspend distributions to the holders of the Common
Stock and/or the Preferred Shares until the asset coverage is restored. See
"Description of Capital Stock -- Dividends and Distributions." Such a suspension
of distributions might prevent the Fund from distributing 90% of its investment
company taxable income, as is required in order to qualify for taxation as a
regulated investment company or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on its undistributed taxable income (including
gain) or both.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund intends to repurchase or redeem Notes and/or (to the extent permitted
under the 1940 Act) Preferred Shares in order to maintain or restore the
requisite asset coverage and avoid failure to remain qualified as a regulated
investment company. The determination to repurchase or redeem Notes or Preferred
Shares and the relative amounts of each to be repurchased or redeemed, if any,
will be made in the sole discretion of the Fund. Furthermore, the Fund will be
required to make mandatory partial redemptions of the Notes in the event failure
to maintain 1940 Act Asset Coverage (as defined under "Description of Notes --
Asset Maintenance") is not cured in a timely manner. See "Description of Notes
- -- Events of Default."
Use of the Fund's cash to repurchase or redeem Notes and/or Preferred Shares
may adversely affect the Fund's ability to distribute annually at least 90% of
its investment company taxable income, which distribution is required to qualify
for taxation as a regulated investment company. The Fund may also realize income
in connection with funding repurchases or redemptions of Notes or Preferred
Shares, and such income would be taken into account in determining whether or
not the above-described distribution requirements have been met. Depending on
the size of the Fund's assets relative to its outstanding senior securities,
redemption of the Notes and/or Preferred Shares might restore asset coverage.
Payment of distributions after restoration of asset coverage could requalify (or
avoid a disqualification of) the Fund as a regulated investment company,
depending upon the facts and circumstances.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds are
original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of a
debt instrument over the issue price of the instrument. Original issue discount
on a taxable obligation is required to be currently included in the income of
the holder of the obligation (i) on a ratable basis if the obligation was issued
before July 2, 1982 and (ii) on a constant interest rate basis resembling the
economic accrual of interest if the obligation was issued after July 1, 1982.
The tax basis of the holder of an original issue discount debt instrument is
increased by the amount of original issue discount thereon properly included in
the holder's gross income as determined for federal income tax purposes. Current
inclusion in gross income of original issue discount on a taxable debt
instrument is required, even though no cash is received at the time the original
issue discount is required to be included in gross income. Because such income
may not be matched by a corresponding cash distribution to the Fund, the Fund
may be required to borrow money or dispose of other securities to be able to
make distributions to the investors. The extent to which the Fund may liquidate
securities at a gain may be limited by the 30% limitation discussed above.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures 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 realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require the Fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out) which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the 90% and 98% 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, option, futures
contract, forward contract, or hedged investment in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company and minimize the imposition of income and excise taxes.
If the Fund fails to qualify as a regulated investment company for any year,
it generally must pay out its earnings and profits accumulated in that year less
an interest charge to the Treasury on 50% of such earnings and profits before it
can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF COMMON STOCK
For any period during which the Fund qualifies as a regulated investment
company for federal income tax purposes, dividends paid out of the Fund's net
investment income and short-term capital gains to holders of Common Stock will
be taxable as ordinary income. It is expected that dividends received by
corporate shareholders will not be eligible for the dividends received
deduction. Distributions of net long-term capital gains designated by the Fund
as capital gain dividends, if any, are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund's shares and are not
eligible for the dividends received deduction. Dividends and distributions will
be taxable to shareholders as if actually distributed, even if they are
reinvested in additional shares of the Fund. Shareholders receiving
distributions in the form of newly issued shares will have a cost basis in each
share received equal to the fair market value of a share of the Fund on the
distribution date.
Generally, dividends paid by the Fund are treated as received in the taxable
year in which the distribution is made; however, any dividend declared by the
Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in such a month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
Any distribution by the Fund to a holder of Common Stock not made out of the
Fund's earnings and profits will be treated as a return of capital to each
holder of Common Stock, will reduce the basis of each share of Common Stock with
respect to which it is distributed and will be subject to tax as capital gain to
the extent that the distribution exceeds the basis of the share of Common Stock
with respect to which it is distributed. Investors should carefully consider the
tax implications of buying shares of Common Stock just prior to a distribution,
as the price of shares purchased at this time may reflect the amount of the
forthcoming distribution which will, except in unusual circumstances, be taxable
when received.
After the close of each taxable year, the Fund will identify for its holders
of Common Stock the portions of its distributions that are attributable to
capital gains and to ordinary income, respectively.
The Internal Revenue Code limits certain miscellaneous itemized deductions
by individuals, including deductions of investment expenses, to the extent the
aggregate of such deductions exceeds 2% of an individual's federal adjusted
gross income. The Internal Revenue Code would treat such expenses incurred by a
regulated investment company as being indirectly incurred by the shareholders of
the investment company. Shareholder expenses of publicly offered regulated
investment companies are exempted from the application of the 2% floor. Thus,
the limitation will not apply with respect to indirect deductions through the
Fund. Such expenses will also be fully deductible by the Fund's corporate
shareholders.
If the Fund suffers a net taxable loss in any taxable year, the holders of
Common Stock will not be permitted to utilize that loss in their tax returns.
Generally, gain realized by a shareholder on the sale of shares held for
more than one year will be taxable as long-term capital gain. 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
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 shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received or treated as having been received by the
shareholder with respect to such shares. Shareholders who acquire shares on
multiple dates should consult their tax advisers to determine how to allocate
the cost of stock for basis purposes.
In general, federal withholding taxes at a 30% rate or a lesser rate
established by treaty will apply to distributions to shareholders (except to
those distributions designated by the Fund as capital gains dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations to the extent
that such income is not "effectively connected" with a U.S. trade or business
carried on by the shareholders.
In the event the Fund retains any net capital gains, it may designate such
retained amounts as undistributed capital gains in a notice to its shareholders.
In the event such a designation is made, shareholders subject to U.S. tax would
include in income, as long-term capital gains, their proportionate share of such
undistributed amounts, but would be allowed a credit or refund, as the case may
be, for their proportionate share of the 35% tax paid by the Fund. If the
designation is made, for U.S. federal income tax purposes, the tax basis of
shares owned by a shareholder would be increased by an amount equal to 65% of
the amount of undistributed capital gains included in the shareholder's income.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31% of
all taxable distributions payable to shareholders who fail to provide the Fund
with their correct taxpayer identification number or who fail to make required
certifications or if the Fund or a shareholder has been notified by the U.S.
Internal Revenue Service that they are subject to backup withholding. Corporate
shareholders and other shareholders specified in the Internal Revenue Code are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability.
OTHER TAXATION
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the state, local or foreign tax consequences to them
of an investment in the Common Stock.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Fund consists of 1,000 Preferred Shares,
no par value, with a liquidation preference of $100,000 per share, and
100,000,000 shares of Common Stock, $.01 par value. As of March 1, 1996,
25,287,767 shares of Common Stock are outstanding and 200 Preferred Shares are
outstanding. The Board of Directors reserves the right to issue Preferred Shares
and Common Stock, from time to time, and any such shares shall be deemed
"Preferred Shares" and "Common Stock," respectively. The Preferred Shares and
the Common Stock issued are, or upon issuance will be fully paid and
nonassessable and will have no preemptive rights or conversion rights. As used
herein, the term "holder of Preferred Shares" refers to a beneficial owner of
Preferred Shares unless the context otherwise requires.
DIVIDENDS AND DISTRIBUTIONS
Dividends on the Preferred Shares are cumulative from the date on which such
shares are originally issued (the "Original Issuance Date") and are payable,
when, as and if declared by the Board of Directors of the Fund, out of funds
legally available therefor, on the last day of successive 30-day periods (each,
a "Dividend Payment Date") which commenced on January 19, 1989 (the 45th day
after the Original Issuance Date), subject to certain exceptions. Dividends will
be paid to the holders of the Preferred Shares on each Dividend Payment Date
through DTC or a successor securities depository appointed by the Fund. The
securities depository's normal procedures now provide for distribution of
dividends in next-day funds settled through the New York Clearing House to
broker-dealers acting as agent members on behalf of the holders of the Preferred
Shares, who in turn are expected to distribute such dividends to the persons for
whom they are acting as agent.
The dividend rate (the "Applicable Rate") is reset generally every 30 days
by an auction conducted on the first Business Day (an "Auction Date") next
preceding the first day of the next Dividend Period; provided, however, if such
day is a Thursday the Auction Date shall mean the Business Day next preceding
such Thursday. Accordingly, for each dividend period after the initial dividend
period, the dividend rate for the Preferred Shares will be the Applicable Rate
per annum that results from an auction. Pursuant to a broker-dealer agreement
(the "Broker-Dealer Agreement") between the Fund, Bear, Stearns & Co. Inc.
("Bear, Stearns") and Bankers Trust Company ("Bankers Trust"), Bankers Trust as
the auction agent for the Preferred Shares will pay a quarterly service charge
from funds provided by the Fund to Bear, Stearns, the Fund's exclusive
broker-dealer with respect to the Preferred Shares, of 1/8 of 1% of the purchase
price of Preferred Shares outstanding, prorated for the number of days in the
related dividend period. To the extent that the Fund does not make dividend
payments on the Preferred Shares on any Dividend Payment Date, such payments
shall be made to the holders by Financial Security pursuant to the Surety Bond
and thereafter Financial Security shall be subrogated to such holders' rights to
receive such dividend payments when, as and if declared by the Board of
Directors. See "Voting" below and "Surety Arrangement for Preferred Shares --
Surety Bond." The Fund has negotiated an extension of the Broker-Dealer
Agreement with Bear, Stearns whereby Bear, Stearns has agreed to continue to act
as the Fund's exclusive broker-dealer with respect to the Preferred Shares
through December 4, 1998.
Under the 1940 Act and the Articles of Incorporation, the Fund may not (i)
declare dividends on the Preferred Shares if at the time thereof (and after
giving effect thereto) asset coverage with respect to the Fund's senior
securities representing indebtedness, including the Notes, would be less than
200% (or such higher percentage as may in the future be required by law) or (ii)
declare any other distributions with respect to the Preferred Shares or purchase
or redeem Preferred Shares if at the time of such declaration, purchase or
redemption, as applicable (and after giving effect thereto), asset coverage with
respect to the Fund's senior securities representing indebtedness, including the
Notes, would be less than 300% (or such higher percentage as may in the future
be required by law). Further, the Fund may not declare dividends or other
distributions on the Common Stock or purchase or redeem any shares of Common
Stock if, at the time of the declaration, purchase or redemption, as applicable
(and after giving effect thereto), asset coverage with respect to the Fund's
senior securities representing indebtedness, including the Notes, would be less
than 300% (or such higher percentage as may in the future be required by law) or
asset coverage with respect to the Fund's senior securities of a class which is
stock, including the Preferred Shares, would be less than 200% (or such higher
percentage as may in the future be required by law). See "Description of Notes
- -- Restrictive Covenants" for certain definitions relating to the foregoing
restrictions. Under the Note Purchase Agreement, the declaration of dividends or
other distributions on or the purchase or the redemption of Preferred Shares or
Common Stock will be prohibited at any time payments of principal of or interest
on the Notes are in default. In addition, the declaration of dividends or other
distributions on or the purchase or redemption of Common Stock will be
prohibited at any time dividends on the Preferred Shares are in arrears or
Surety Assets Coverage is not maintained.
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
interest payments with respect to the Notes, the advisory fee, bank custodian
and surety custodian charges, the premium paid pursuant to the Surety
Arrangement, taxes (except capital gains 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 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.
REDEMPTION
To the extent permitted under the 1940 Act and Maryland law, the Fund may
redeem at its option some or all of the Preferred Shares on any Dividend Payment
Date (a "Preferred Stock Redemption"). The Fund shall be obligated (a) to
redeem, no later than the last day specified for the redemption of Preferred
Shares pursuant to a Redemption Request (as defined) from Financial Security the
number of Preferred Shares specified in such Redemption Request (a "Mandatory
Surety Redemption") and (b) to redeem all of the Preferred Shares at least one
full Business Day prior to any expiration date of the Surety Bond if, 190 days
prior to such expiration date, the Fund shall have failed to obtain from
Financial Security an extension of the term of the Surety Bond pursuant to its
terms (a "Mandatory Expiration Redemption"); provided that, under certain
circumstances, no Mandatory Expiration Redemption shall be required if the Fund
shall have obtained notice in writing from each of the Rating Agencies that such
expiration of the Surety Bond will not adversely affect the then outstanding
ratings of the Preferred Shares whether through obtaining a substitute surety
bond or otherwise. Preferred Stock Redemptions and any Mandatory Surety
Redemption or Mandatory Expiration Redemption will be made at a price equal to
$100,000 per share plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund), except that if any such
redemption is not made on a Dividend Payment Date, it will be made at a price
equal to $100,250 plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund). Such redemptions may only be
made by the Fund to the extent permitted under the 1940 Act and Maryland law,
and provided neither principal nor interest payments with respect to the Notes
are then in default. A holder of Preferred Shares may elect not to have its
shares redeemed pursuant to a Mandatory Expiration Redemption by giving notice
to the Fund or the paying agent for the Preferred Shares at least five days
prior to the redemption date of its election to continue to hold its Preferred
Shares. The Fund is obligated to meet certain Deposit Securities requirements
pursuant to the Surety Arrangement to the extent necessary to satisfy a
Mandatory Expiration Redemption. See "Surety Arrangement for Preferred Shares --
Insurance Agreement."
Pursuant to the terms of the Insurance Agreement (as defined below),
Financial Security is entitled to cause the Fund to redeem certain of the
Preferred Shares to the extent permitted under the 1940 Act and Maryland law
(and provided payments of principal of and interest on the Notes are not then in
default), in the event that the Fund fails to maintain Surety Assets Coverage
while any of the Preferred Shares are outstanding, and such failure is not cured
within eight Business Days. See "Surety Arrangement for Preferred Shares --
Insurance Agreement." If on any date on which the payment of the redemption
price would constitute a Scheduled Payment, the Fund shall default in making
payment of such redemption price, Financial Security shall make such payments to
the holders of Preferred Shares to be redeemed and shall thereafter be
subrogated to all the rights of such holders with respect to their Preferred
Shares. See "Voting" below and "Surety Arrangement for Preferred Shares --
Surety Bond."
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the Fund (whether voluntary
or involuntary), holders of the Preferred Shares then outstanding shall be
entitled to receive, out of the assets of the Fund available for distribution to
stockholders, after satisfying claims of creditors (including the holders of the
Notes) but before any distribution of assets is made to holders of the Common
Stock or any other class of stock ranking junior to the Preferred Shares as to
liquidation payments, a liquidation distribution in the amount of $100,000 per
share plus an amount equal to accumulated and unpaid dividends (whether or not
earned or declared by the Fund, but without interest) to the date of the final
distribution. If, upon any liquidation, dissolution or winding up of the Fund,
the assets of the Fund shall be insufficient to make such full payments to
holders of the Preferred Shares, then such assets shall be distributed among the
holders of Preferred Shares ratably, according to the respective amounts which
would be payable on all such Preferred Shares if all amounts thereon were paid
in full. So long as the Surety Bond is in effect, to the extent of any such
insufficiency and provided Financial Security has consented to such liquidation,
Financial Security will pay the remaining liquidation preference to the holders
of the Preferred Shares at the time of liquidation. If Financial Security has
not consented to such liquidation, it shall continue to guarantee Scheduled
Payments on the Preferred Shares (including dividend payments and the
liquidation preference to the extent thereof not paid in liquidation) until the
expiration of the Surety Bond, at which time payment of the unpaid liquidation
preference of the Preferred Shares shall be paid by Financial Security. See
"Surety Arrangement for Preferred Shares -- Surety Bond." Unless and until
payment in full has been made to the holders of the 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
junior to the Preferred Shares on liquidation. After payment to the holders of
the Preferred Shares of the full amount of the liquidation distributions to
which they are entitled, such holders will not be entitled to any further
participation in any distribution of assets of the Fund. Neither a sale, lease
or exchange of all or substantially all of the property and assets of the Fund
nor a consolidation or merger of the Fund with or into any other corporation or
business trust will be deemed to be a liquidation, dissolution or winding up of
the Fund.
Upon any liquidation, the holders of the Common Stock, after required
payments to the holders of the Preferred Shares, will be entitled to participate
equally in the remaining assets of the Fund.
VOTING
Except as noted below, the Common Stock and the Preferred Shares vote
together as a single class. Holders of shares of Common Stock have voting rights
of one vote per share and holders of the Preferred Shares have voting rights of
one vote per $1,000 of liquidation preference without regard to any liquidation
preference attributable to accumulated and unpaid dividends (i.e., 100 votes per
Preferred Share); provided that all the votes represented by a single Preferred
Share must be voted together. In elections of Directors, the holders of the
Preferred Shares, as a separate class, vote to elect two Directors and the
holders of the Common Stock and the Preferred Shares, voting together, will
elect the remaining Directors. In addition, during any period (herein referred
to as a "Voting Period") that dividends payable on Preferred Shares equal to two
full years of dividends are unpaid, the holders of such Preferred Shares have
the right to elect as a class the smallest number of additional Directors as
shall be necessary to assure that a majority of the Directors has been elected
by the holders of the Preferred Shares. 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 Preferred Shares
of the additional number of Directors which such holders are entitled to elect
as a separate class. The persons elected by the holders of Preferred Shares,
together with the incumbent Directors elected by the holders of the Common Stock
and the Preferred Shares voting together, will constitute the duly elected
Directors of the Fund. When all accumulated and unpaid dividends have been paid
or provided for, the Voting Period shall end and the terms of office of the
additional Directors shall terminate. Election of Directors is noncumulative;
accordingly, holders of a majority of the voting power represented by the
outstanding shares of Common Stock and Preferred Shares, voting together as a
single class, or a majority of the outstanding Preferred Shares, voting
separately as a class, may elect all of the Directors who are subject to
election by such class, as the case may be.
Pursuant to the Surety Custody Agreement, to the extent Scheduled Payments
are paid by Financial Security pursuant to the Surety Bond, Financial Security
shall have the right to exercise the voting rights (including any right to elect
a majority of the Board of Directors described above) of the holders of the
Preferred Shares with respect to which such Scheduled Payments have been made by
Financial Security. See "Surety Arrangement for Preferred Shares -- Insurance
Agreement." The assignment to Financial Security of the voting rights of the
holders of the Preferred Shares shall terminate when the Fund has made payments
on the Preferred Shares with respect to which Financial Security had made
Scheduled Payments pursuant to the Surety Bond or the Fund has reimbursed
Financial Security with respect to such Scheduled Payments.
The Common Stock and the Preferred Shares each vote separately as a class on
amendments to the Articles of Incorporation that would adversely affect their
respective contractual rights as expressly set forth in the Articles of
Incorporation. In addition to any other vote required by the Articles of
Incorporation or applicable law, so long as any Preferred Shares are outstanding
(1) the Fund may not be voluntarily liquidated, dissolved or wound up, or merged
into or consolidated with any other entity in a transaction in which it is not
the successor entity, or converted to open-end status, and may not sell all or
substantially all of its assets and may not engage in a statutory share exchange
in which it is not the successor entity without the approval of at least a
majority of the outstanding Preferred Shares and the outstanding shares of
Common Stock, each voting as a separate class; (2) the adoption of any plan of
reorganization adversely affecting either the Preferred Shares or the Common
Stock shall require the approval of a majority of the outstanding shares of each
such class so affected; (3) the approval of a majority of the outstanding
Preferred Shares, voting separately as a class, shall be required to amend,
alter or repeal any of the express preferences, rights or powers of holders of
the Preferred Shares as set forth in the Articles of Incorporation, or increase
or decrease the number of Preferred Shares authorized to be issued; and (4) so
long as any Preferred Shares are outstanding, the approval of a majority (as
defined under "Investment Objective and Policies") of the outstanding Preferred
Shares and the outstanding shares of Common Stock, each voting as a separate
class, shall be required to approve any action requiring a vote of security
holders under Section 13(a) of the 1940 Act including, among other things,
changes in the Fund's sub-classification as a closed-end investment company,
changes in its investment objective or changes in the investment restrictions
described under "Investment Policies and Limitations -- Investment
Restrictions." The Common Stock and the Preferred Shares will also vote
separately to the extent otherwise required under Maryland law or the 1940 Act
as in effect from time to time, and, to the extent required under the 1940 Act,
action by the Fund's shareholders shall require a vote of a majority of the
Fund's outstanding voting securities as defined under "Investment Policies and
Limitations."
For purposes of any right of the holders of the Preferred Shares to vote on
any matter, whether such right is created by the Articles of Incorporation, by
statute or otherwise, a holder of a Preferred Share will not be entitled to vote
and such 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 Preferred Shares
entitled to vote or of Preferred Shares deemed outstanding for quorum purposes,
as the case may be, a notice of redemption shall have been given in respect of
such Preferred Share and Deposit Securities for the redemption of such Preferred
Share shall have been deposited in trust, as provided above; provided, however,
that the foregoing sentence shall not be applicable to the holders of Preferred
Shares who elected to retain their Preferred Shares after notice of a Mandatory
Expiration Redemption. The Fund is required by the rules of the Exchange to hold
annual meetings of shareholders. The most recent annual meeting of shareholders
was held on March 1, 1996.
SURETY ARRANGEMENT FOR PREFERRED SHARES
FINANCIAL SECURITY
The information set forth below under this caption of this Registration
Statement was furnished by Financial Security.
General. Financial Security acts as surety under the Surety Bond by which
Financial Security unconditionally and irrevocably guarantees Scheduled Payments
on the Preferred Shares. Financial Security is a monoline insurance company
incorporated in 1984 under the laws of the State of New York. Financial Security
is licensed, directly or through its subsidiaries, to engage in financial
guaranty insurance business in all 50 states, the District of Columbia, Puerto
Rico and the United Kingdom.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -- thereby enhancing the credit rating of those securities
- -- in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Holdings is owned approximately 51% by U S WEST Capital Corporation ("U S
WEST"), 8% by Fund American Enterprises Holdings, Inc. ("Fund American") and 6%
by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). U S WEST is a
subsidiary of U S WEST, Inc., which operates businesses involved in
communications, data solutions, marketing services and capital assets, including
the provision of telephone services in 14 states in the western and midwestern
United States. Fund American is a financial services holding company whose
principal operating subsidiary is one of the nation's largest mortgage
servicers. Tokio Marine is a major Japanese property and casualty insurance
company. U S WEST has announced its intention to dispose of its interest in
Holdings as part of its strategic plan to withdraw from businesses not directly
involved in telecommunications. Fund American has certain rights to acquire and
vote additional shares of Holdings from U S WEST and Holdings. No shareholder of
Holdings is obligated to pay any debt of Financial Security or any claim under
any insurance policy issued by Financial Security or to make any additional
contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100. At December 31, 1995, Financial Security and its subsidiaries
had 164 employees.
Reinsurance. Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
or any of its domestic operating insurance company subsidiaries are reinsured
among such companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability. Financial Security's claims-paying ability
is rated "Aaa" by Moody's and "AAA" by S&P, Nippon Investors Service Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. Copies of the statutory quarterly and annual statements filed with the
State of New York Insurance Department by Financial Security are available upon
request to the State of New York Insurance Department.
Insurance Regulation. Financial Security is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, Financial Security and
its insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, Financial Security is subject to Article 69 of the New York Insurance
Law which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the size
of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
SURETY BOND
Concurrent with the issuance of the Preferred Shares in November 1988, the
Fund caused Financial Security to deliver the Surety Bond to Bankers Trust
Company, as custodian under a custody agreement (the "Surety Custody
Agreement"), for the benefit of the holders of the Preferred Shares. Under the
Surety Bond, Financial Security unconditionally and irrevocably guarantees to
each holder of Preferred Shares, the full and complete payment of: (i) Scheduled
Payments; and (ii) the amount of any payment on the Preferred Shares which
subsequently is avoided in whole or in part as a preference under applicable law
until and including such date on which the Preferred Shares are paid in full.
"Scheduled Payments" shall mean (i) payments of dividends on the Preferred
Shares which holders of the Preferred Shares would be entitled to receive on
each Dividend Payment Date during the term of the Surety Bond (see "Expiration
or Termination of the Surety Arrangement" below) in accordance with the terms of
the Articles of Incorporation, without regard to whether the Fund has declared
any such dividend or such dividend could have been legally declared by the Fund,
(ii) payment of the redemption price of the Preferred Shares, without regard to
whether such redemption could have been legally made by the Fund (a) on the last
date on which the Fund was to have redeemed the Preferred Shares as specified in
a Redemption Request (as defined) given by Financial Security under the
Insurance Agreement (as defined below) upon the occurrence of an Event of
Default (as defined) under the Insurance Agreement in the event Financial
Security has notified the Surety Custodian that such redemption is to be a
Scheduled Payment and (b) on the date on which the Preferred Shares may be
required to be redeemed upon expiration of the Surety Bond (as described under
"Description of Capital Stock -- Redemption"), and (iii) payment of the
liquidation preference on the Preferred Shares in the event of a liquidation of
the Fund during the term of the Surety Bond on the date fixed for payment of
such liquidation preference pursuant to the Articles of Incorporation, so long
as Financial Security shall have consented to such liquidation. For the purposes
of the Scheduled Payments under the Surety Bond, in the event of a liquidation
of the Fund to which Financial Security has not consented in which only a
portion of the liquidation preference on the Preferred Shares is paid, a portion
of the Preferred Shares represented by the unpaid portion of the liquidation
preference shall be deemed to remain outstanding and shall be secured by the
Surety Bond as to all Scheduled Payments without regard to whether the Fund has
any obligation with respect thereto.
Financial Security shall be subrogated to all the rights of each holder of
Preferred Shares in the event Financial Security makes a Scheduled Payment to
any such holder under the Surety Bond.
The Surety Bond is a direct, unsecured and unsubordinated obligation of
Financial Security ranking equally with any other unsecured and unsubordinated
obligations of Financial Security except for certain obligations in respect of
tax and other payments to which preference is or may become afforded by statute.
The term of the Surety Bond cannot be modified or altered by any other agreement
or instrument or by the merger, consolidation or dissolution of the Fund. The
Surety Bond may not be cancelled or revoked by Financial Security prior to the
end of its term. See "Expiration of the Surety Arrangement" below. The Surety
Bond is governed by the laws of the State of New York but is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
INSURANCE AGREEMENT
General. As a precondition to Financial Security's issuing the Surety Bond,
the Fund entered into an Insurance Agreement (the "Insurance Agreement") with
Financial Security pursuant to which the Fund is obligated to reimburse
Financial Security for amounts paid by Financial Security under the Surety Bond.
A copy of the Insurance Agreement is filed as an exhibit to the Registration
Statement, as filed with the SEC on November 28, 1988. A copy of such
Registration Statement may be obtained as described under "Further Information."
Surety Asset Coverage. At any time that Preferred Shares are outstanding,
the Fund is required under the Insurance Agreement to maintain assets in its
portfolio meeting the Surety Investment Guidelines and having a discounted value
at least equal to the Surety Asset Coverage (as defined below). If the Fund
fails to meet the Surety Asset Coverage requirement and such failure is not
cured within eight Business Days, Financial Security may seek to cause the Fund
to redeem certain of the Preferred Shares. See "Events of Default; Remedies"
below. The discount factor for and market value of any asset of the Fund, the
method of calculating Surety Asset Coverage, 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 and Financial Security.
"Surety Asset Coverage" as of any date is defined as the dollar amount equal
to (A) the sum of (i) 100% of the aggregate principal amount of the Notes then
outstanding; (ii) $100,250 times the number of Preferred Shares then
outstanding; (iii) the aggregate amount of accrued interest on the Notes then
outstanding, plus an amount equal to 63 days' interest on such principal amount
of the Notes; (iv) the aggregate amount of accumulated but unpaid dividends with
respect to the Preferred Shares to such date, plus the amount of dividends
projected to accumulate on the Preferred Shares then outstanding from such date
until the 63rd day thereafter; (v) the aggregate principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the Notes);
and (vi) the greater of $200,000 or the Fund's liabilities in existence as of
such date to the extent not otherwise reflected in any of (i) through (v) above,
less (B) the combined value of any Deposit Securities irrevocably deposited by
the Fund for payment of principal of or interest on the Notes or redemptions of
or dividend payments with respect to the Preferred Shares. See "Deposit
Securities Requirement" below.
Deposit Securities Requirement. The Fund is obligated to deposit with the
payment agent with respect to the Preferred Shares, a specified amount of
Deposit Securities not later than 20 days prior to each Dividend Payment Date
and not later than the mailing of any notice of redemption with respect to any
redemption (except in the case of a Mandatory Expiration Redemption). In
addition, in the case of a Mandatory Expiration Redemption, the Fund will be
obligated to set aside Deposit Securities ratably over a period ending not less
than 30 days prior to the applicable redemption date. Deposit Securities in all
cases shall have an initial combined value greater than or equal to liquidation
preference and/or accumulated dividends on the Preferred Shares to become due
and payable on the applicable payment date, and shall mature on or prior to such
date.
Events of Default; Remedies. An "Event of Default" is defined in the
Insurance Agreement to include any of the following: (i) any default by the Fund
in its performance of any covenant contained in the Insurance Agreement and the
continuance of such default for at least 30 days after written notice is given
to the Fund; (ii) any material representation or warranty made by the Fund in
the Insurance Agreement or in connection therewith shall prove to be incorrect
in any material respect when made or deemed made; (iii) any failure of the Fund
to maintain assets in its portfolio with a discounted value such that the Surety
Asset Coverage requirement is met, which failure is not cured within eight
Business Days; (iv) any failure by the Fund to reimburse Financial Security for
amounts paid under the Surety Bond or pay to Financial Security when due any
other amount under the Insurance Agreement; (v) any failure by the Fund, on or
prior to the date six months prior to the expiration date of the Surety Bond to
obtain from Financial Security an extension of the term of the Surety Bond
pursuant to its terms or to obtain notice in writing from each of the Rating
Agencies that such expiration of the Surety Bond will not adversely affect the
then outstanding rating, if any, of the Preferred Shares by such Rating Agency
whether through obtaining a substitute surety bond or otherwise; (vi) a final
determination by the Internal Revenue Service that the Fund does not qualify for
any taxable year as a regulated investment company (as defined in the Internal
Revenue Code); (vii) certain events of bankruptcy, insolvency or receivership of
the Fund; (viii) denial by the Fund that it has any or further liability or
obligation under the Insurance Agreement or the Articles of Incorporation, or
any finding or ruling by any governmental agency or authority that the Insurance
Agreement or the Articles of Incorporation is not valid or binding on the Fund;
(ix) the failure to comply with certain covenants with respect to the
liquidation of portfolio securities in order to pay dividends or make
redemptions on Preferred Shares when due; and (x) the failure by the Fund to
make a payment of a dividend or redemption when due on the Preferred Shares or
to declare a dividend on the Preferred Shares when contemplated under the terms
of the Fund's Articles of Incorporation and not prohibited under Maryland law or
the 1940 Act; provided that, in the case of each of clauses (i), (ii), (vi) and
(viii), such event shall not constitute an Event of Default unless, in the
reasonable judgment of Financial Security, such event would materially and
adversely affect the ability of the Fund to perform its material obligations
under the Insurance Agreement or the Articles of Incorporation or would
materially and adversely affect the material rights or benefits or the
enforcement of remedies or the practicable realization of such rights of or
benefits to Financial Security under the Insurance Agreement or of Financial
Security or any holder of Preferred Shares under the Surety Custody Agreement or
the Articles of Incorporation or otherwise with respect to the Preferred Shares.
If an Event of Default has occurred and is continuing, the Fund is required
under the Insurance Agreement, upon receipt of a written request from Financial
Security (a "Redemption Request"): (a) in the case of an Event of Default other
than as specified in clause (iii) above, to deliver a Notice of Redemption with
respect to, and redeem within a specified period, such number of Preferred
Shares, as specified by Financial Security in such Redemption Request; and (b)
in the case of the occurrence and continuance of an Event of Default specified
in clause (iii) above relating to Surety Asset Coverage, to identify in the
Fund's sole discretion, and sell for cash, certain portfolio holdings, the
proceeds from the sale of which shall be added to the portfolio and shall
thereby cause the value of the portfolio to have equalled or exceeded the Surety
Asset Coverage requirement on a pro forma basis as of the immediately preceding
date such Surety Asset Coverage was determined ("Special Surety Redemption
Assets"). In addition, Financial Security will be entitled to deliver a
Redemption Request directing the Fund to redeem Preferred Shares with the
proceeds of the sale of such Special Surety Redemption Assets or similar assets.
Any Redemption Request (other than in respect of an Event of Default specified
in clause (iii) above), once delivered, may be withdrawn by Financial Security
at any time prior to the mailing of the related Notice of Redemption.
Any amount applied to payment on the Preferred Shares as to which Financial
Security has made payment under the Surety Bond shall be deemed to satisfy the
obligation of the Fund to reimburse Financial Security in an amount equal to the
amount so applied. Alternatively, if the Fund reimburses Financial Security for
any Scheduled Payments made by it, such reimbursement will satisfy the Fund's
obligation to make the dividend, redemption or liquidation preference payment
represented by such Scheduled Payment so reimbursed.
INDEMNIFICATION AND OTHER PAYMENTS BY THE FUND
The Fund has agreed to indemnify Financial Security against certain
liabilities, losses, costs, damages, attorneys' fees and other expenses. The
Fund paid to Financial Security, upon the issuance of the Surety Bond, and in
consideration thereof, a premium equal to $510,909 which represented the present
value of 0.40% of the aggregate liquidation preference of the Preferred Shares
originally issued (the "Annual Premium Amount") times the number of years (five)
in the initial term of the Surety Bond (which was from December 1988 through
December 1993) and also paid Financial Security for certain other legal fees and
expenses incurred by Financial Security in connection with the Insurance
Agreement. The Fund now pays an annual fee to Financial Security equal to 0.40%
of the aggregate liquidation preference of the outstanding Preferred Shares.
EXPIRATION OF THE SURETY ARRANGEMENT
The Surety Bond will expire December 5, 1998; provided, however, that,
subject to certain conditions contained in the Insurance Agreement including the
conditions that there is no Event of Default and Surety Asset Coverage is met at
the time of extension, the Fund may elect to extend the expiration date for one
or more additional periods of up to five years in the aggregate at a premium
payable annually equal to 0.40% of the aggregate liquidation preference of the
Preferred Shares outstanding at the time of extension of the Surety Bond. Except
under certain circumstances, upon an expiration of the Surety Bond prior to 10
years after the original issuance thereof, the Fund shall be obligated to pay
Financial Security a fee equal to the Annual Premium Amount. Accordingly, the
Fund may not replace the Surety Bond with a substitute surety bond, financial
guaranty or other credit enhancement without payment of such fee. Upon
expiration of the Surety Bond, the Preferred Shares will be subject to mandatory
redemption under certain circumstances as described under "Description of
Capital Stock -- Redemption."
DESCRIPTION OF NOTES
GENERAL
The Fund issued $20,000,000 (principal amount) of the Notes, due in December
1998, pursuant to a note purchase agreement (the "Note Purchase Agreement")
dated as of July 15, 1993, and amended and restated as of December 16, 1993,
between the Fund and Pacific Mutual Life Insurance Company ("Pacific Mutual").
The Note Purchase Agreement does not limit the aggregate principal amount of
senior notes of the Fund (including the Notes, the "Senior Notes") that may be
issued thereunder from time to time in one or more series. The issuance of any
subsequent Senior Notes will be subject to compliance with the 1940 Act,
including Section 18 thereof. Subject to the 1940 Act, any such subsequent
Senior Notes may have certain terms, including, but not limited to, those
relating to interest rate, redemptions, repurchases and maturity which differ
from the terms of the Notes. The following summary of the principal terms of the
Notes and certain terms of the Note Purchase Agreement is qualified in its
entirety by reference to all provisions of the Note Purchase Agreement,
including the definitions therein of certain terms. A copy of the Note Purchase
Agreement has been filed with the SEC as an exhibit to the Fund's Registration
Statement on Form N-2, which this Prospectus forms a part.
INTEREST
The Notes bear interest at the rate of 6.53% per annum from July 15, 1993
through and including November 30, 1998. Interest on the Notes is payable on
June 1 and December 1 of each year, commencing December 1, 1993. The Notes will
mature on December 1, 1998 if not repurchased or redeemed prior to that date.
REDEMPTION
The Notes will not be redeemable by the Fund prior to maturity, except that
(i) the Fund may redeem the Notes on or after December 5, 1993, in whole but not
in part, in connection with the conversion of the Fund to open-end status and
(ii) the Fund may elect to redeem such amount of Notes as shall (a) enable the
Fund to maintain asset coverage (as defined in and determined pursuant to the
1940 Act) with respect to the Fund's senior securities representing indebtedness
(as defined in the 1940 Act), including the Notes, of at least 300% (or such
higher percentage as may in the future be specified in the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of paying dividends on common
stock), (b) enable the Fund to maintain asset coverage (as defined in the 1940
Act) with respect to the Fund's senior securities of a class which is stock (as
defined in the 1940 Act), including the Preferred Shares, of at least 200% or
such higher percentage as may in the future be specified in the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of paying dividends on common
stock) or (c) enable the Fund to qualify for treatment as a regulated investment
company for federal income tax purposes. The Notes shall also be subject to
mandatory partial redemption upon the occurrence of certain events of default as
described under clauses (v) and (vi) under "Events of Default," below. All
redemptions of Notes by the Fund will be at a price of 100% of the principal
amount thereof, plus accrued interest to the date of redemption.
RANKING OF NOTES
The Notes will rank pari passu with all other existing and future senior
indebtedness of the Fund and will be senior to the Common Stock and the
Preferred Shares. "Senior indebtedness" means the principal of and interest on
and other amounts due on or in connection with any existing or future unsecured
indebtedness of the Fund.
RESTRICTIVE COVENANTS
Under the 1940 Act and the Note Purchase Agreement, the Fund may not declare
dividends or other distributions on the Common Stock or purchase any shares of
Common Stock if, at the time of the declaration or purchase, as applicable (and
after giving effect thereto), asset coverage with respect to the Fund's senior
securities representing indebtedness, including the Notes, would be less than
300% (or such higher percentage as may in the future be required by law). In
addition, under the 1940 Act and the Note Purchase Agreement, the Fund may not
(i) declare any dividends with respect to the Preferred Shares if, at the time
of such declaration (and after giving effect thereto), asset coverage with
respect to the Fund's senior securities representing indebtedness, including the
Notes, would be less than 200% (or such higher percentage as may in the future
be required by law) or (ii) declare any other distributions on the Preferred
Shares or purchase or redeem Preferred Shares if at the time of the declaration,
purchase or redemption, as applicable (and after giving effect thereto), asset
coverage with respect to the Fund's senior securities representing indebtedness,
including the Notes, would be less than 300% (or such higher percentage as may
in the future be required by law). Dividends or other distributions on or
purchases or redemptions of Common Stock or Preferred Shares are further
prohibited under the Note Purchase Agreement at any time that payments of
principal of or interest on the Notes are in default. Under the Internal Revenue
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
limitations on dividends, distributions and purchases may under certain
circumstances impair the Fund's ability to maintain such qualification. See
"Federal Taxation."
The asset coverage of a class of senior securities representing
indebtedness, such as the Notes, is defined as the ratio of (i) the total assets
of the Fund, less all liabilities and indebtedness not represented by senior
securities, to (ii) the aggregate amount of senior securities representing
indebtedness of the Fund. The asset coverage of a class of senior securities
representing stock, such as the Preferred Shares (see "Description of Capital
Stock -- Dividends and Distributions"), is defined as the ratio of (i) the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities, to (ii) the aggregate amount of senior securities
representing indebtedness of the Fund, plus the aggregate of the liquidation
preference of the Preferred Shares. "Senior securities representing
indebtedness" generally means any bond, debenture, note or similar obligation or
instrument constituting a security (other than stock) and evidencing
indebtedness. For purposes of determining asset coverage for senior securities
representing indebtedness in connection with the payment of dividends or other
distributions on or purchases or redemptions of stock, the term "senior
security" does not include any promissory note or other evidence of indebtedness
issued in consideration of any loan, extension or renewal thereof, made by a
bank or other person and privately arranged, and not intended to be publicly
distributed. The term "senior security" also does not include any such
promissory note or other evidence in any case where such a loan is for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the Fund at the time when the loan is made; a loan is presumed under the 1940
Act to be for temporary purposes if it is repaid within 60 days and is not
extended or renewed; otherwise it is presumed not to be for temporary purposes.
For purposes of determining whether the 300% and 200% asset coverage
requirements described above apply in connection with dividends or distributions
on or purchases or redemptions of Common Stock or Preferred Shares and for
purposes of determining 1940 Act Asset Coverage (as defined below), such asset
coverages may be calculated on the basis of values calculated as of a time
within 48 hours (not including Sundays or holidays) next preceding the time of
the applicable determination. The foregoing definitions reflect the provisions
of the 1940 Act as in effect on the date of the Note Purchase Agreement and are
subject to change to the extent necessary to reflect changes in the 1940 Act, if
any.
Pursuant to the Notes Investment Guidelines, the Note Purchase Agreement
contains a covenant limiting the Fund's ability to incur, assume, guarantee or
otherwise become liable with respect to any indebtedness for money borrowed
unless the incurrence of such indebtedness would not result in a default in the
performance or observance of the Fund's obligation to maintain 1940 Act Asset
Coverage (as defined) or otherwise cause a violation of Section 18 of the 1940
Act.
The Notes Investment Guidelines as reflected in the Note Purchase Agreement
also prohibit the Fund from creating, incurring or suffering to exist, or
agreeing to create, incur or suffer to exist, or consenting to cause or permit
in the future (upon the happening of a contingency or otherwise) the creation,
incurrence or existence of any material lien, mortgage, pledge, charge, security
interest, security agreement, conditional sale or trust receipt or other
material encumbrance of any sort (collectively, "Liens") upon any of its assets
which are eligible for inclusion in the discounted value of its portfolio,
except for (a) Liens the validity of which is being contested in good faith by
appropriate proceedings, (b) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (c) Liens to secure payment for
services rendered by Bankers Trust Company or its successor as auction agent
with respect to the Preferred Shares and (d) Liens in respect of overnight
borrowings by the Fund not to exceed 5% of the total assets of the Fund at any
time outstanding. The terms of the Note Purchase Agreement also limit the Fund's
ability to employ certain investment strategies. See "Investment Policies and
Limitations -- Certain Investment Strategies."
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements that are incorporated into the terms of the Note Purchase
Agreement. The first of these requirements reflects the provisions of the 1940
Act with respect to asset maintenance for senior securities representing
indebtedness. The second of these requirements reflects the Notes Investment
Guidelines. These requirements are summarized below.
1940 Act Asset Maintenance. As set forth in the Note Purchase Agreement, the
Fund will agree to maintain, as of the last Business Day of each month in which
any of the Notes is outstanding, asset coverage with respect to senior
securities representing indebtedness, including the Notes, of at least 300% (or
such higher percentage as may in the future be specified in the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of paying dividends on common
stock) ("1940 Act Asset Coverage"). See "Restrictive Covenants" above for
certain definitions relating to 1940 Act Asset Coverage.
Note Basic Maintenance Amount. The Fund will be required under the Note
Purchase Agreement to maintain, on each Valuation Date (as defined), portfolio
holdings meeting the Notes Investment Guidelines (as described under "Investment
Policies and Limitations -- Investment Guidelines") having an aggregate
discounted value at least equal to the Note Basic Maintenance Amount. In the
event that the discounted value of the Fund's portfolio is less than the Note
Basic Maintenance Amount on any Valuation Date while any of the Notes is
outstanding, the Fund will seek to alter the composition of its portfolio so
that, on or before the eighth Business Day after such Valuation Date (the "Cure
Date"), the discounted value of the Fund's portfolio is at least equal to such
Note Basic Maintenance Amount. A "Valuation Date" means (i) the fifteenth day of
each month or, if such day is not a Business Day, the next succeeding Business
Day and (ii) the last Business Day of such month or, in the case of the first
Valuation Date, a date selected by the Fund no more than 15 days after the date
on which the Notes and the Preferred Shares are initially issued.
The "Note Basic Maintenance Amount" as of any date is defined as the dollar
amount equal to the sum of (i) 100% of the aggregate principal amount of the
Notes then outstanding; (ii) an amount equal to interest accrued on the
aggregate principal amount of the Notes then outstanding from the most recent
date to which interest has been paid or duly provided for through the next
succeeding Valuation Date plus all interest to accrue on the Notes during the 63
days following such Valuation Date; (iii) the principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the Notes);
and (iv) the greater of $200,000 or the Fund's current liabilities as of such
date to the extent not reflected in any of (i) through (iii) above. The
discounted value of the Fund's portfolio holdings as of any date means the
quotient of the market value (as defined in the Note Purchase Agreement, and
including accrued interest) of each such holding divided by the applicable
discount factor. Any security not in compliance with the Notes Investment
Guidelines (see "Investment Policies and Limitations -- Investment Guidelines")
shall be excluded from the calculation of the discounted value of the Fund's
portfolio holdings.
The discount factors and guidelines for determining the market value of the
Fund's portfolio holdings for purposes of determining compliance with the Note
Basic Maintenance Amount have been based upon criteria established in connection
with the expected rating of the Notes. In determining discount factors, several
factors are taken into consideration. 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
corporate 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 for
and market value of any asset of the Fund, the method of calculating the
discounted value of any such asset and the Note Basic Maintenance Amount, the
assets eligible for inclusion in the calculation of the discounted value of the
Fund's portfolio and certain related definitions, methods of calculation and
reporting requirements, may be changed without the consent of the holders of the
Notes, provided that, among other things, such changes will not adversely affect
the ratings, if any, then assigned to the Notes by the respective Rating
Agencies.
MERGER AND CONSOLIDATION
The Fund may consolidate with or merge with or into, or transfer its assets
substantially as an entirety to, another corporation, limited partnership or
business trust, or engage in a statutory share exchange under Maryland law,
provided that (i) the successor corporation, limited partnership or business
trust (if other than the Fund) formed by or resulting from any such
consolidation or merger, or the transferee of the Fund's assets, is acceptable
to Pacific Mutual and shall assume payment of the principal of and interest on
the Notes and any other series of Senior Notes and the performance and
observance of the Note Purchase Agreement and (ii) the Fund or such successor
corporation, limited partnership or business trust or transferee shall not
immediately before such transaction or thereafter be in default under the Note
Purchase Agreement.
EVENTS OF DEFAULT
The following are "Events of Default" under the Note Purchase Agreement: (i)
failure to pay principal of any Note when due; (ii) default for five Business
Days in the payment of interest on any Note; (iii) failure to maintain asset
coverage with respect to senior securities representing indebtedness (as such
terms are defined above under "Restrictive Covenants") of at least 100% as of
the last Business Day of each of 24 consecutive months; (iv) failure to have, as
of the last Business Day of any month, 1940 Act Asset Coverage, which failure is
not cured by the last Business Day of the following month (for this purpose,
without limitation, the default will be deemed cured if, within the prescribed
period, the Fund has given an irrevocable notice to the registered holder of the
Notes to call Notes for redemption and that such redemption, alone or together
with other action taken by the Fund, will cause the Fund to have the requisite
1940 Act Asset Coverage); (v) failure to maintain, on each Valuation Date, a
discounted value for the Fund's portfolio equal to at least the Note Basic
Maintenance Amount, which failure is not cured by the applicable Cure Date; (vi)
default in the performance of any other covenant of the Fund under the Note
Purchase Agreement which has continued for 30 days as provided in the Note
Purchase Agreement; (vii) default under any instrument under which the Fund has
issued indebtedness or by which there may be secured or evidenced any
indebtedness of or guaranteed by the Fund, the effect of which is to cause or
permit the holders thereof to cause the acceleration of the maturity thereof,
provided that such default or defaults relate to indebtedness with an aggregate
principal amount in excess of $500,000 and have continued for 30 days as
provided in the Note Purchase Agreement; (viii) the making by the Internal
Revenue Service of a final determination that the Fund does not qualify for any
taxable year as a "regulated investment company" (as defined in the Internal
Revenue Code); (ix) certain events of bankruptcy, insolvency or reorganization;
and (x) the existence for 60 days of unstayed or unsatisfied final judgments
against the Fund in an aggregate amount in excess of $500,000.
If an Event of Default specified in any of clauses (i) through (viii) or (x)
above occurs with respect to the Notes, then and in every such case, the
registered holders of the outstanding Notes may by written notice delivered to
the Fund declare the Notes (or in the case of an Event of Default of the type
specified in clause (iv) or (v), such portion of the Notes as shall be required
under the Note Purchase Agreement to be redeemed) to be due and payable as
provided below. Upon an Event of Default specified in clause (iv), the amount of
Notes subject to mandatory partial redemption will equal the aggregate principal
amount of outstanding Notes (rounded to the next highest increment of $1,000)
the redemption of which would have caused the Fund to meet 1940 Act Asset
Coverage on a pro forma basis as of the last Business Day of the month in which
the failure to maintain 1940 Act Asset Coverage initially occurred. Upon an
Event of Default specified in clause (v), the amount of Notes subject to
mandatory partial redemption will equal the principal amount of outstanding
Notes which could be redeemed using the proceeds from the deemed sale of Special
Note Redemption Assets (rounded to the next highest increment of $1,000).
"Special Note Redemption Assets" are defined as portfolio holdings identified by
the Fund in its sole discretion, the deemed sale of which for cash on the
Valuation Date on which the discounted value of the Fund's portfolio failed to
equal or exceed the Note Basic Maintenance Amount would have resulted in the
Fund achieving the required Note Basic Maintenance Amount on a pro forma basis
as of such Valuation Date.
In the event of a mandatory partial redemption of Notes following an Event
of Default specified in clause (iv) or (v), the payment of principal of and
interest on the Notes due as a result of such mandatory partial redemption shall
be due within 45 days after the date on which such Event of Default occurs (in
the case of clause (iv)) and within 34 days after the applicable Cure Date (in
the case of clause (v)). In the event of an acceleration in the maturity of
Notes following an Event of Default specified in any of the other clauses above
other than clause (ix), the Fund shall immediately take action to liquidate
portfolio securities sufficient to pay the principal of and interest on such
Notes. If an Event of Default specified in clause (ix) occurs, the Notes shall
become due and payable immediately without any declaration or other act on the
part of any registered holder of the Notes.
ASSIGNMENT
Pacific Mutual may assign, subject to compliance with the Securities Act of
1933, as amended or regulations thereunder or any applicable state securities
laws or regulations, all or any portion of its interest in any rights under the
Note Purchase Agreement and the Notes to any individual, corporation,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof (individually, the "Person") or grant participation or beneficial
interests in the Note Purchase Agreement and the Notes to any Person; provided
that any assignment or grant of participation or beneficial interest by Pacific
Mutual of its interest in the Notes shall be of a minimum principal amount of
$5,000,000.
Upon any assignment of Pacific Mutual's rights under the Note Purchase
Agreement or under the Notes, any action under the Note Purchase Agreement
requiring the consent of Pacific Mutual and enforcement of any remedies provided
for under the Note Purchase Agreement may only be taken with the consent or at
the direction of the registered holders of more than 50% of the principal amount
of the Notes then outstanding.
CUSTODIAN, TRANSFER AGENTS, DIVIDEND
DISBURSING AGENT, PAYING AGENTS AND REGISTRARS
The Fund's securities and cash are held by State Street Bank and Trust
Company, whose principal business address is Two Heritage Drive, North Quincy,
Massachusetts 02171, as custodian (the "Custodian") under a custodian contract.
The Fund has not selected any foreign custodians or sub-custodians. However, if
the Fund determines that it should have any foreign custodians or sub-custodians
to maintain any of its foreign securities, the Board of Directors will make such
selection following a consideration of a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to perform capably custodial services for the Fund,
the reputation of the institution in its national market, the political and
economic stability of the country in which the institution is located, and the
risks of potential nationalization or expropriation of Fund assets.
State Street Bank and Trust Company serves as dividend disbursing agent, as
agent under the Plan and as transfer agent and registrar for the Common Stock.
Bankers Trust Company, whose principal business address is 4 Albany Street, New
York, New York 10006, serves as the Surety Custodian pursuant to the Surety
Custody Agreement for the benefit of the holders of the Preferred Shares and
serves as transfer agent, paying agent and registrar for the Preferred Shares.
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed upon for the Fund
by its special counsel, Rogers & Wells, New York, New York, and by its special
Maryland counsel, Piper & Marbury LLP, Baltimore, Maryland.
REPORTS TO SHAREHOLDERS
The Fund will send audited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The audited Financial Statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said report. The address of Arthur
Andersen LLP is One International Place, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, D.C. 20549, a Registration
Statement under the Securities Act of 1933, as amended, with respect to the
shares offered hereby. Further information concerning these securities and the
Fund may be found in the Registration Statement, of which this Prospectus
constitutes a part, on file with the SEC. The Registration Statement may be
inspected without charge at the SEC'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 SEC.
The Fund is subject to the informational requirements of the 1934 Act, and
the 1940 Act, and in accordance therewith files reports and other information
with the SEC. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street,
Washington, D.C. 20549 and the SEC's regional offices at Seven World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. Such reports and other information concerning
the Fund may also be inspected at the offices of the Exchange.
INCORPORATION OF FINANCIAL STATEMENTS BY REFERENCE
The Fund's Annual Report, which includes financial statements, for the
fiscal year ended October 31, 1995, which either accompanies this Prospectus or
has previously been provided to the person to whom this Prospectus is being
sent, is incorporated herein by reference with respect to all information other
than the information set forth in the Letter to Shareholders included therein.
Any statement contained in the Fund's Annual Report that was incorporated herein
shall be deemed modified or superseded for purposes of this Prospectus to the
extent a statement contained in this Prospectus varies from such statement. Any
such statement so modified or superseded shall not, except as so modified or
superseded, be deemed to constitute a part of this Prospectus. The Fund will
furnish, without charge, a copy of its Annual Report, upon request to State
Street Bank and Trust Company, Two Heritage Drive, Corporate Stock Transfer, 4th
Floor, North Quincy, Massachusetts 02171, telephone (800) 426-5523 Monday
through Friday from 9:00 a.m. to 5:00 p.m.
<PAGE>
APPENDIX A
[FORM OF SUBSCRIPTION CERTIFICATE AND INSTRUCTIONS]
INSTRUCTIONS FOR COMPLETING THE
SUBSCRIPTION CERTIFICATE
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
The enclosed Subscription Certificate represents the number of Rights, as
set forth in the upper right hand corner of the Subscription Certificate, held
by the registered holder hereof (the "Holder"). The Holder is entitled to
acquire one (1) Share of the Common Stock of Prospect Street High Income
Portfolio Inc. (the "Fund") for each Right held.
To subscribe for Shares of Common Stock, the Holder must present to Boston
EquiServe, Inc. (the "Subscription Agent"), prior to 5:00 p.m., New York time,
on the Expiration Date, either:
(1) a properly completed and executed Subscription Certificate and a money
order or check drawn on a bank located in the United States of America and
payable to Prospect Street High Income Portfolio Inc. for an amount equal to the
number of Shares subscribed for under the Primary Subscription (and, if such
Holder is electing to exercise the Over-Subscription Privilege, under the
Over-Subscription Privilege) multiplied by the Estimated Subscription Price; or
(2) a Notice of Guaranteed Delivery guaranteeing delivery of (i) a properly
completed and executed Subscription Certificate and (ii) a money order or check
drawn on a bank located in the United States of America and payable to Prospect
Street High Income Portfolio Inc. for an amount equal to the number of Shares
subscribed for under the Primary Subscription (and, if such Holder is electing
to exercise the Over-Subscription Privilege, under the Over-Subscription
Privilege) multiplied by the Estimated Subscription Price (which certificate and
money order or check must then be delivered on or before the third Business Day
after the Expiration Date).
If the Holder of the Subscription Certificate is entitled to subscribe for
additional Shares pursuant to the Over-Subscription Privilege, Part B of Section
I of the Subscription Certificate must be completed to indicate the maximum
number of Shares for which such privilege is being exercised.
On a date within seven (7) business days following the Expiration Date (the
"Confirmation Date"), subscribers will be notified as to (i) the number of
Shares subscribed for under the Primary Subscription and, if applicable, the
Over-Subscription Privilege, (ii) the per Share and total purchase price for the
Shares, and (iii) any additional amount payable by subscribers to the Fund or
any excess to be refunded by the Fund to such subscribers, in each case, based
on the Subscription Price as determined on the Expiration Date. The Holder of
the Subscription Certificate should note that the amount payable for the Shares
subscribed for pursuant to the Subscription Certificate may be more than the
Estimated Subscription Price and that additional amounts in respect of the
Subscription Price may be payable following the Expiration Date. Any additional
payment required by subscribers must be received by the Subscription Agent
within seven (7) business days after the Confirmation Date.
If the Holder does not make payment of any amounts due in respect of Shares
subscribed for, the Subscription Agent reserves the right to (i) find other
stockholders for the subscribed and unpaid for Shares; (ii) apply any payment
actually received by it toward the purchase of the greatest whole number of
Shares which could be acquired by such holder upon exercise of the Primary
Subscription and/or Over-Subscription Privilege, and/or (iii) exercise any and
all other rights and/or remedies to which it may be entitled, including, without
limitation, the right to set-off against payments actually received by it with
respect to such subscribed Shares.
The Subscription Certificate may be transferred, in the same manner and with
the same effect as in the case of a negotiable instrument payable to specific
persons, by duly completing and signing the assignment under Section II of the
Subscription Certificate. Capitalized terms used but not defined in the
Subscription Certificate shall have the meanings assigned to them in the
Prospectus, dated May , 1996, relating to the Rights.
Any questions regarding the Subscription Certificate and the Offer may be
directed to the Fund's Information Agent, Corporate Investor Communications,
Inc., toll-free (800) 242-4410.
<PAGE>
SUBSCRIPTION CERTIFICATE No.: NUMBER OF RIGHTS:
CUSIP NO.:
Expiration Date: June , 1996,
unless extended
FORM OF
SUBSCRIPTION CERTIFICATE
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
PLEASE COMPLETE ALL APPLICABLE INFORMATION. REFER TO "INSTRUCTIONS FOR
COMPLETING THE SUBSCRIPTION CERTIFICATE" FOR ADDITIONAL DETAILS.
<TABLE>
<CAPTION>
BY MAIL: BY EXPRESS MAIL OR OVERNIGHT: BY HAND:
<S> <C> <C>
To: Boston EquiServe, Inc. Boston EquiServ, Inc. Boston EquiServe, Inc.
c/o State Street Bank and c/o State Street Bank and c/o State Street Bank and
Trust Company Trust Company Trust Company
Corporate Reorganization Corporate Reorganization Corporate Reorganization
P.O. Box 9061 Two Heritage Drive, 4th floor 225 Franklin Street
Boston, MA 02205-8686 North Quincy, MA 02171 Concourse Level
Boston, MA 02101
</TABLE>
SECTION I: TO SUBSCRIBE: I hereby irrevocably subscribe for the dollar
amount of Common Stock indicated as the total of A and B below upon the terms
and conditions specified in the Prospectus related hereto, receipt of which is
acknowledged.
TO SELL: If I have checked either the box on line C or the box on
line D, I authorize the sale of Rights by the Dealer Manager according to the
procedures described in the Prospectus. The check for the proceeds of sale will
be mailed to the address of record.
<TABLE>
<CAPTION>
PLEASE CHECK (x) BELOW:
<S> <C> <C> <C>
[ ] A. Primary Subscription _______________ = ____________ .000 X ________________________ = $___________________
(Rights Exercised) (Full Shares of (Estimated (Amount Required)
Common Stock Subscription Price)
Requested)
[ ] B. Over-Subscription
Privilege ____________ .000 X ________________________ = $___________________(*)
(Full Shares of (Estimated (Amount Required)
Common Stock Subscription Price)
Requested)
Amount of Check or Money Order Enclosed (Total of A + B)
Make check payable to "Prospect Street High Income Portfolio Inc." = $___________________
<CAPTION>
[ ] C. Sell any remaining unexercised Rights
[ ] D. Sell all of my Rights
Sell all of my Rights
(*)The Over-Subscription Privilege can be exercised by Exercising Rights Holders, as described in the Prospectus, and
with respect to Record Date Shareholders, only if the Rights issued to them are exercised to the fullest extent
possible.
E. The following Broker-Dealer is hereby designated as having been instrumental in the exercise of the Rights:
<S> <C>
[ ] First Albany Corporation Account # ---------------------------
[ ] Other Firm: ----------------------------------- Account # ---------------------------
- --------------------------------------------------- Please provide your Day [ ]
------------------------
Signature of Subscriber(s)/Seller(s) telephone number Evening [ ]
------------------------
</TABLE>
SECTION II: TO TRANSFER RIGHTS: (except pursuant to C and D above)
For value received, ----------- of the Rights represented by this
Subscription Certificate are assigned to
<TABLE>
<CAPTION>
<S> <C>
--------------- - -------- - --------------- -------------------------------------------------------------
Social Security Number or Tax ID of Assignee (Print Full Name of Assignee)
- --------------------------------------------------------- -------------------------------------------------------------
- --------------------------------------------------------- -------------------------------------------------------------
Signature(s) of Assignee(s) (Print Full Address including postal Zip Code)
</TABLE>
The signature(s) must correspond with the name(s) as written upon the face of
this Subscription Certificate, in every particular, without alteration.
IMPORTANT: For Transfer, a Signature Guarantee must be provided by an eligible
financial institution as defined in Rule 17Ad-15 of the Securities Exchange Act
of 1934, as amended, subject to the standards and procedures adopted by the
issuer.
SIGNATURE GUARANTEED BY:
- ------------------------------------
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES
UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT
AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
[] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE HEREOF AND
COMPLETE THE FOLLOWING:
NAME(S) OF REGISTERED OWNER(S): --------
WINDOW TICKET NUMBER (IF ANY): ---------
DATE OF EXECUTION OF NOTICE OF GUARANTEED DELIVERY: ---------
NAME OF INSTITUTION WHICH GUARANTEED DELIVERY:
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By: ----------------------------------
Richard E. Omohundro, Jr., President
THIS SUBSCRIPTION RIGHT IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED
(BUT ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE NUMBER
OF RIGHTS) AT THE OFFICE OF THE SUBSCRIPTION AGENT
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Information Agent, Corporate Investor Communications, Inc.,
toll-free (800) 242-4410.
<PAGE>
APPENDIX B
[FORM OF NOTICE OF GUARANTEED DELIVERY]
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF COMMON STOCK OF PROSPECT
STREET HIGH INCOME PORTFOLIO INC.
SUBSCRIBED FOR UNDER PRIMARY SUBSCRIPTION AND THE
OVER-SUBSCRIPTION PRIVILEGE
As set forth in the Prospectus under "The Offer-Payment for Shares", this
form or one substantially equivalent hereto may be used as a means of effecting
subscription and payment for all Shares of Prospect Street High Income Portfolio
Inc. Common Stock subscribed for under the Primary Subscription and the
Over-Subscription Privilege. Such form may be delivered by hand or sent by
facsimile transmission, overnight courier or mail to the Subscription Agent.
The Subscription Agent is:
BOSTON EQUISERVE, INC.
c/o State Street Bank and Trust Company
Attention: Corporate Reorganization
<TABLE>
<CAPTION>
By Facsimile By Express Mail or
By Mail: (Telecopier): Overnight Courier: By Hand:
-------- ------------- ------------------ --------
<S> <C> <C> <C>
P.O. Box 9061 Telecopier Two Heritage Drive 225 Franklin Street
Boston, MA 02205-8686 (617) 774-4519 4th Floor Concourse Level
Confirm by Telephone North Quincy, MA 02171 Boston, MA 02108
(617) 774-4511
(May Call Collect)
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION
OF INSTRUCTIONS VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN
AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY
The financial institution that completes this form must communicate the
guarantee and the number of Shares subscribed for (under both the Primary
Subscription and the Over-Subscription Privilege) to the Subscription Agent and
must deliver, this Notice of Guaranteed Delivery of Payment, guaranteeing
delivery of (i) payment in full for all subscribed Shares and (ii) a properly
completed and executed Subscription Certificate (which certificate and check
must then be delivered on or before the third business day after the Expiration
Date) to the Subscription Agent prior to 5:00 p.m., New York time, on the
Expiration Date (June , 1996 or July , 1996, if the Subscription Period is
extended). Failure to do so will result in a forfeiture of the Rights.
GUARANTEE
The undersigned, a financial institution that is a member of the Securities
Transfer Agents Medallion Program, the Stock Exchange Medallion Program or the
New York Stock Exchange Medallion Signature Program guarantees delivery to the
Subscription Agent by the close of business (5:00 p.m., New York City time) on
the third business day after the Expiration Date (June , 1996 or July , 1996, if
the Subscription Period is extended) of (A) a properly completed and executed
Subscription Certificate and (B) payment of the full Estimated Subscription
Price for Shares subscribed for on Primary Subscription and pursuant to the
Over-Subscription Privilege, as subscription for such Shares is indicated herein
or in the Subscription Certificate.
<TABLE>
<CAPTION>
- --------------------------------------------------- -----------------------------------------------
<S> <C>
Number of Primary Shares for which you are Number of Over-Subscription Shares for which
guaranteeing delivery of Rights and payment you are guaranteeing delivery of payment
Number of Rights Exercised: -----------------------------------------------
Aggregate amount: $----------------------------------------------
Method of delivery (circle one) A. Through DTC
B. Direct to Subscription Agent
Please note that if you are guaranteeing for over-subscription shares, and are a
DTC participant, you must also execute and forward to the Subscription Agent a
Nominee Holder Over-Subscription Exercise Form.
- --------------------------------------------------- -----------------------------------------------
Name of Firm Authorized Signature
- --------------------------------------------------- -----------------------------------------------
Address Title
- --------------------------------------------------- -----------------------------------------------
Zip Code Name (Please Type or Print)
- --------------------------------------------------- -----------------------------------------------
Name of Registered Holder (If Applicable) Date
- ---------------------------------------------------
Telephone Number
</TABLE>
<PAGE>
APPENDIX C
[FORM OF NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM]
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
RIGHTS OFFERING
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
BY MAIL: BY EXPRESS MAIL OR OVERNIGHT BY HAND:
To: Boston EquiServe, Inc. Boston EquiServe, Inc. Boston EquiServe, Inc.
c/o State Street Bank c/o State Street Bank c/o State Street Bank
and Trust Company and Trust Company and Trust Company
Corporate Reorganization Corporate Reorganization Corporate Reorganization
P.O. Box 9061 Two Heritage Drive, 4th floor 225 Franklin Street
Boston, MA 02205-8686 North Quincy, MA 02171 Concourse Level
Boston, MA 02101
</TABLE>
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE OVER-
SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE PRIMARY
SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF A
COMMON DEPOSITORY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE
EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION CERTIFICATES.
--------------------
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S
PROSPECTUS DATED MAY , 1996 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN
BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE
FUND.
--------------------
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00
PM, NEW YORK TIME, ON JUNE , 1996, UNLESS EXTENDED BY THE FUND (THE "EXPIRATION
DATE").
--------------------
1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in ----------------- [Name of Depository] (the "Depository") and
that it has either (i) exercised the Primary Subscription Privilege in respect
of Rights and delivered such exercised Rights to the Subscription Agent by means
of transfer to the Depository Account of the Fund or (ii) delivered to the
Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of
the Primary Subscription Privilege and will deliver the Rights called in for
such Notice of Guaranteed Delivery to the Subscription Agent by means of
transfer to such Depository Account of the Fund.
2. With respect to Record Date Shareholders, the undersigned hereby exercises
the Over-Subscription Privilege to purchase, to the extent available, ---------
shares of Common Stock and certifies to the Subscription Agent that such
Over-Subscription Privilege is being exercised for the account or accounts of
persons (which may include the undersigned) on whose behalf all primary
subscription rights have been exercised.
3. The undersigned understands that payment of the Estimated Subscription Price
of $ per share of each share of Common Stock subscribed for pursuant to the
Over-Subscription Privilege must be received by the Subscription Agent at or
before 5:00 p.m. New York time on the Expiration Date and represents that such
payment, in the aggregate amount of $--------- either (check appropriate box):
[] has been or is being delivered to the Subscription Agent pursuant
to the Notice of Guaranteed Delivery referred to above
or
[] is being delivered to the Subscription Agent herewith
or
[] has been delivered separately to the Subscription Agent;
and, in the
case of funds not delivered pursuant to a Notice of Guaranteed Delivery,
is or was delivered in the manner set forth below (check appropriate box
and complete information relating thereto):
[] uncertified check
[] certified check
[] bank draft
- ------------------------------------------ -----------------------------------
Primary Subscription Confirmation Number Name of Nominee Holder
- ------------------------------------------ -----------------------------------
Depository Participant Number Address
-----------------------------------
City State Zip Code
Contact Name: --------------------------------------- By: -------------------
Phone Number: --------------------------------------- Name: -------------
Title: ------------
Dated ------------------------, 1996
*PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION OF
PRIMARY RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES SUBSCRIBED AND THE NUMBER OF
OVER-SUBSCRIPTION SHARES REQUESTED BY EACH SUCH OWNER AND INDICATING RECORD
DATE AND NON-RECORD DATE POSITIONS.
<PAGE>
APPENDIX D
RATINGS OF CORPORATE OBLIGATIONS
Standard & Poor's Corporation describes classifications of bonds as follows:
"AAA" Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
"AA" Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from the higher 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.
"BBB" Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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.
"BB"-"B"-"CCC"-"CC"-"C" Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"C1" The rating "C1" is reserved for income bonds on which no interest is
being paid.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
"Aaa" Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt 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 which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba" Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B" Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
"Ca" Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
"C" Bonds which are rated "C" are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
<PAGE>
===============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE HEREIN, IN
CONNECTION WITH THIS OFFER, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. 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 NOT LAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN 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.
----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ............................ 3
Fee Table ..................................... 11
Financial Information Summary ................. 12
Capitalization at March 1, 1996 ............... 13
Information Regarding Senior Securities ....... 13
Trading and Net Asset Value Information ....... 14
The Fund ...................................... 15
The Offer ..................................... 16
Use of Proceeds ............................... 26
Investment Policies and Limitations ........... 26
Risk Factors and Special Considerations ....... 38
Directors and Officers ........................ 42
The Investment Adviser ........................ 46
Portfolio Trading ............................. 47
Determination of Net Asset Value .............. 48
Share Repurchases; Conversion to Open-End
Status ...................................... 49
Dividends and Distributions; Dividend
Reinvestment Plan ........................... 51
Federal Taxation .............................. 52
Description of Capital Stock .................. 56
Surety Arrangement for Preferred Shares ....... 59
Description of Notes .......................... 63
Custodian, Transfer Agents, Dividend
Disbursing Agent, Paying Agents and
Registrars .................................. 68
Legal Opinions ................................ 68
Reports to Shareholders ....................... 68
Experts ....................................... 69
Further Information ........................... 69
Incorporation of Financial Statements
by Reference ................................ 69
Appendix A .................................... A-1
Appendix B .................................... B-1
Appendix C .................................... C-1
Appendix D .................................... D-1
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
8,450,000 SHARES
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
MAY , 1996
===============================================================================
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
(i) -- Balance Sheet as of October 31, 1995*
(ii) -- Statement of Operations for the fiscal year ended October
31, 1995*
(iii) -- Statement of Cash Flows for the fiscal year ended October
31, 1995*
(iv) -- Statement of Changes in Net Assets for the fiscal years ended
October 31, 1995 and 1994*
(v) -- Financial Highlights for each Share of Common Stock
Outstanding through the fiscal years ended October 31,
1991, 1992, 1993, 1994 and 1995*
(vi) -- Notes to Financial Statements for the fiscal year ended
October 31, 1995*
(vii) -- Report of Independent Accountants dated December 1, 1995*
Statements, schedules and historical information other than these listed above
have been omitted since they are either not applicable, or not required or the
required information is shown in the financial statements or notes thereto.
- -----------------
*Incorporated by reference
(2) EXHIBITS
(a) -- Articles of Amendment and Restatement (Incorporated by
reference to Exhibit 1 to Post Effective Amendment No. 5 to
Registrant's Registration Statement on Form N- 2, File No.
33-21949)+
(b) -- Amended and Restated By-Laws of the Registrant (Incorporated
by reference to Exhibit 2 to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-2, File No.
33-21949)+
(c) -- Not applicable
(d)(1) -- Specimen certificate of Common Stock*
(2) -- Specimen certificate of Taxable Auction Rate Preferred Stock*
(3) -- Documents relating to Surety Bond issued by Financial
Security Assurance Inc. (See Exhibits (2)(k)(5) and (2)(k)(6)
below)
(4) -- Note Purchase Agreement dated as of July 15, 1993, as amended
and restated December 16, 1993, between the Registrant and
Pacific Mutual Life Insurance Company, including Form of
Promissory Note#
(5) -- Form of Subscription Certificate and Instructions (included
on pages A-1 to A-3 of the Prospectus forming part of this
Registration Statement)
(6) -- Form of Notice of Guaranteed Delivery (included on pages B-1
to B-2 of the Prospectus forming part of this Registration
Statement)
(7) -- Form of Nominee Over-Subscription Exercise Form (included on
page C-1 of the Prospectus forming part of this Registration
Statement)
(8) -- Form of Subscription Agent Agreement between the Registran
and Boston Financial Data Services, Inc.***
(e) -- Dividend Reinvestment Plan of the Registrant#
(f) -- Not applicable
(g) -- Advisory Agreement between Registrant and Prospect Street
Investment Management Co., Inc.#
(h)(1) -- Form of Dealer Manager Agreement***
(2) -- Underwriting Agreement relating to Common Stock dated
November 28, 1988 between the Registrant and Drexel Burnham
Lambert Incorporated (Incorporated by reference to Exhibit
7(a) to Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-2, File No. 33-21949)
(3) -- Preferred Stock Underwriting Agreement relating to Taxable
Auction Rate Preferred Stock dated November 28, 1988 between
the Registrant and Drexel Burnham Lambert Incorporated as
underwriter (Incorporated by reference to Exhibit 7(b) to
Post-Effective Amendment No. 5 to Registrant's Registration
Statement on Form N-2, File No. 33-21949)
(i) -- Not applicable
(j) -- Custodian Agreement between the Registrant and State Street
Bank and Trust Company***+
(k)(1) -- Registrar, Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company***+
(2) -- Auction Agent Agreement dated as of May 7, 1990 between the
Registrant and Bankers Trust Company**+
(3) -- Amendment, dated as of October 29, 1993, to a Broker-Dealer
Agreement dated as of May 7, 1990, among the Registrant,
Bankers Trust Company and Bear, Stearns & Co., Inc.#
(4) -- Letter Agreement among Registrant, Bankers Trust Company and
The Depository Trust Company**+
(5)(A)-- Insurance Agreement between the Registrant and Financial
Security Assurance Inc.*+
(B)-- Amendment No. 1 to the Insurance Agreement between the
Registrant and Financial Security Assurance Inc.#
(6) -- Custody Agreement between Bankers Trust Company and Financial
Security Assurance Inc.*+
(l)(1)-- Opinion and Consent of Rogers & Wells***
(2)-- Opinion and Consent of Piper & Marbury***
(m) -- Not applicable
(n) -- Report and Consent of Arthur Andersen LLP***
(o) -- Not applicable
(p) -- Subscription Agreement dated as of November 21, 1988 from
Prospect Street Investment Management Co., Inc.*
(q) -- Not applicable
(r) -- Not applicable
- ----------
*Exhibits incorporated by reference to Pre-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form N-2, File No. 33-21949.
**Exhibits incorporated by reference to the Registrant's Registration Statement
on Form 8-K dated May 11, 1990.
***To be filed by amendment.
#Filed herewith.
+Filed pursuant to the EDGAR (Electronic Data Gathering, Analysis, and
Retrieval) phase-in requirements.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) of this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connection
with the Offer described in this Registration Statement:
Registration fees ................................................. $ 11,474
National Association of Securities Dealers, Inc. fees ............. *
New York Stock Exchange listing fee ............................... 31,500
Printing (other than stock certificates) .......................... *
Fees and expenses of qualification under state securities laws
(including fees of counsel) ...................................... *
Accounting fees and expenses ...................................... *
Legal fees and expenses ........................................... *
Dealer Manager financial advisory fee and expense reimbursement ... 190,000
Information Agent fees and expenses ............................... *
Subscription Agent fees and expenses .............................. *
Miscellaneous ..................................................... *
-------
Total ......................................................... $ *
========
- ----------
*To be completed by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant and the following corporations (as indicated) are under common
control of Richard E. Omohundro, Jr. ("Omohundro, Jr."), Joseph G. Cote
("Cote") and John A. Frabotta ("Frabotta") by virtue of their stock ownership
and positions with such corporations which are indicated below. None of the
corporations are subsidiaries of the Registrant.
1. Prospect Street Investment Management Co., Inc.
(a Massachusetts corporation) ("PSIM")
Business: Investment adviser registered under the Investment Advisers Act
of 1940. PSIM serves as investment adviser of the Registrant and
Prospect International High Income Portfolio N.V.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 40% shareholder, Co-President, Chairman of the
Board, Chief Executive Officer, Treasurer and
Director
Cote 40% shareholder, Co-President and Director
Frabotta 20% shareholder, Vice President, Secretary and
Director
2. Prospect Street Mezzanine Management Co., Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general partner of Bridge Investors,
L.P., a private investment partnership.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 40% shareholder, Co-President, Chief Executive
Officer, Treasurer and Director
Cote 40% shareholder, Co-President and Director
Frabotta 20% shareholder, Vice President, Secretary and
Director
3. Prospect Street Senior Loan Management Co., Inc.
(a Massachusetts corporation)
Business: Investment Adviser to Prospect Street Senior Portfolio, L.P.,
("Senior Portfolio")
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 37.5% shareholder, Co-President, Chief
Executive Officer, Treasurer and Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
4. Prospect Street Senior Loan Corp.
(a Massachusetts corporation)
Business: General Partner to Senior Portfolio
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 37.5% shareholder, Co-President, Chief
Executive Officer, Treasurer and Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
5. COMO Securities, Inc.
(a Massachusetts corporation) ("COMO")
Business: COMO is a registered broker/dealer.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 30% shareholder, Co-President, Chief Executive
Officer, Treasurer and Director
Cote 30% shareholder, Co-President and Director
Frabotta 10% shareholder, Vice President, Secretary and
Director
6. Prospect Street Connecticut Capital Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general
partner of Prospect St. Financial
Developments L.P.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 27% shareholder, Co-President and Director
Cote 27% shareholder, Co-President and Director
Frabotta 13% shareholder, Vice-President, Secretary
and Director
7. Prospect Street Discovery Fund Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general
partner of Prospect St. NYC Discovery Fund L.P.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 52% shareholder, President and Director
Frabotta 10% shareholder, Vice-President and Director
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF MARCH 1, 1996)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Preferred Shares 1
Common Stock 3,721
ITEM 29. INDEMNIFICATION
Reference is made to the Registrant's Articles of Amendment and Restatement
filed as Exhibit 2(a), the Registrant's Amended and Restated Bylaws filed as
Exhibit 2(b), the Agreements filed as Exhibits 2(h)(1), 2(h)(2) and 2(h)(3), and
the Advisory Agreement filed as Exhibit 2(g), which provide for indemnification
or contribution. The Registrant's officers, Directors and agents also have the
benefit of the Maryland General Corporation law provisions regarding
indemnification and insurance, including but not limited to Section 2-418 and
Section 2-405.2 thereof, subject also to the indemnification permitted under
Sections 17(h) and 17(i) of the 1940 Act and the regulations and releases
promulgated by the SEC thereunder.
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (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 INVESTMENT ADVISER
The description of the business of Prospect Street Investment Management
Co., Inc. is set forth under the caption "The Investment Adviser" in the
Prospectus forming part of this Registration Statement.
The information as to the Directors and officers of Prospect Street
Investment Management Co., Inc. set forth in Prospect Street Investment
Management Co., Inc.'s Form ADV filed with the Securities and Exchange
Commission on July 7, 1988 (File No. 801-32529) and as amended through the
date hereof is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Registrant: Prospect Street High Income Portfolio Inc.
60 State Street
Boston, Massachusetts 02109
Investment Adviser: Prospect Street Investment Management Co., Inc.
60 State Street
Boston, Massachusetts 02109
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend the offering of its shares until it
amends its Prospectus if:
(1) subsequent to the effective date of this Registration Statement, the
net asset value per share declines more than 10% from its net asset value
per share as of the effective date of the Registration Statement; or
(2) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(b) Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) that for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(5) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, 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 Boston, Commonwealth of Massachusetts,
on the 29th day of March , 1996.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By /s/ RICHARD E. OMOHUNDRO, JR.
------------------------------------------
RICHARD E. OMOHUNDRO, JR.
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard E. Omohundro, Jr. and John A. Frabotta,
and each of them acting individually, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all Amendments
(including pre-effective and post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them acting individually,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD E. OMOHUNDRO, JR. Director and President
- -------------------------------- (Principal Executive Officer) March 29, 1996
RICHARD E. OMOHUNDRO, JR.
Director, Vice President
/s/ JOHN A. FRABOTTA Treasurer (Principal
- -------------------------------- Financial and Accounting
JOHN A. FRABOTTA Officer) March 29, 1996
/s/ JOHN S. ALBANESE Director March 29, 1996
- --------------------------------
JOHN S. ALBANESE
/s/ C. WILLIAM CAREY Director March 29, 1996
- --------------------------------
C. WILLIAM CAREY
/s/ JOSEPH G. COTE Director March 29, 1996
- --------------------------------
JOSEPH G. COTE
/s/ HARLAN D. PLATT Director March 29, 1996
- ------------------------------------
HARLAN D. PLATT
/s/ CHRISTOPHER E. ROSHIER Director March 29, 1996
- ------------------------------------
CHRISTOPHER E. ROSHIER
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
(A) Articles of Amendment and Restatement
(B) Amended and Restated By-Laws of the Registrant
(D)(4) Amended and Restated Note Purchase Agreement
(E) Dividend Reinvestment Plan
(G) Advisory Agreement
(J) Custodian Agreement
(K)(1) Registrar, Transfer Agency and Service Agreement
(K)(2) Auction Agent Agreement
(K)(3) Amendment No. 1 dated October 29, 1993 of the
Broker-Dealer Agreement
(K)(4) Letter Agreement
(K)(5)(A) Insurance Agreement
(K)(5)(B) Amendment No. 1 to the Insurance Agreement
(K)(6) Custody Agreement
<PAGE>
EXHIBIT (A)
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Prospect Street High Income Portfolio Inc. (hereinafter referred to as the
"Corporation"), a Maryland corporation having its principal office in the State
of Maryland c/o C-T Corporation System, Maryland, 32 South State Street,
Baltimore, Maryland 21202 hereby certifies to the State Department of
Assessments and Taxation of Maryland (the "Department") that:
FIRST: The Corporation desires to amend and restate its Charter as
currently in effect as hereinafter provided. The provisions set forth in these
Articles of Amendment and Restatement are all of the provisions of the Charter
of the Corporation (the "Charter") as in effect as of this 25th day of November
1988 (the "Restatement Date").
SECOND: The Charter of the Corporation is hereby amended and restated by
striking in their entirety Articles I through VIII inclusive, and by
substituting in lieu thereof the following:
ARTICLE I
NAME
The name of the Corporation is PROSPECT STREET HIGH INCOME PORTFOLIO INC.
ARTICLE II
PURPOSES AND POWERS
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company;
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash;
(3) To issue and sell shares of its capital stock and other securities in
such amounts and on such terms and conditions and for such purposes and for such
amount or kind of consideration as may now or hereafter be permitted by law; and
(4) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
Maryland General Corporation Law now or hereafter in force, and the enumeration
of the foregoing shall not be deemed to exclude any powers, rights or privileges
so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the
State of Maryland is c/o THE CORPORATION TRUST INCORPORATED, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
the State of Maryland is THE CORPORATION TRUST INCORPORATED, a corporation of
this state, and the post office address of the resident agent is 32 South
Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
(A) CAPITAL STOCK
1. Class and Amount Authorized
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is one hundred million, one thousand
(100,001,000) shares, of which one hundred million (100,000,000) shares shall be
Common Stock, $.01 par value per share, and one thousand (1000) shares shall be
Taxable Auction Rate Preferred Stock, no par value per share, liquidation
preference $100,000 per share (the "Preferred Stock").
2. No Preemptive Rights
No holder of any shares of any class of stock or any other securities of
the Corporation, whether now or hereafter authorized, shall have any preemptive
right to subscribe for or purchase any shares of any class of stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix; and any shares of any class of stock or other securities which the Board of
Directors may determine to offer for subscription may, as the Board of Directors
in its sole discretion shall determine, be offered to the holders of any class,
series or type of stock or other securities at the time outstanding to the
exclusion of the holders of any or all other classes, series or types of stock
or other securities at the time outstanding.
(B) COMMON STOCK
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption in respect of the Common
Stock are as follows:
1. Ranking
The Common Stock shall rank junior to the Preferred Stock with respect to
payment of dividends (other than dividends in Common Stock) and distributions on
liquidation or dissolution and shall have such other qualifications, limitations
or restrictions as provided in the Charter.
2. Dividends
After all accumulated and unpaid dividends upon all outstanding shares of
the Preferred Stock for all past Dividend Periods (as defined below) have been
or are contemporaneously paid in full (or declared and sufficient Deposit
Securities (as defined below) have been set apart for their payment), then and
not otherwise, and subject to any other applicable provisions of the Charter, to
the extent there are funds legally available therefor, dividends or other
distributions may be declared upon and paid to the holders of shares of the
Common Stock, to the exclusion of the holders of shares of the Preferred Stock.
3. Liquidation Rights
In the event of the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, after payment in full of the
amounts required to be paid to the holders of the Preferred Stock as provided
for in the Charter, the holders of shares of the Common Stock shall be entitled,
to the exclusion of the holders of shares of the Preferred Stock, to share
ratably in all remaining assets of the Corporation.
4. Voting Rights
Each holder of Common Stock shall be entitled to one vote for each such
whole share (and a proportional vote for each fractional share) on each matter
on which the holders of shares of the Common Stock shall be entitled to vote.
Except as otherwise provided in the Charter, the holders of shares of Common
Stock and the holders of shares of Preferred Stock shall vote as a single class
on all matters coming before the stockholders.
5. Redemption
The Corporation may redeem or repurchase shares of Common Stock to the
extent now or hereafter permitted by the General laws of the State of Maryland,
by the Investment Company Act (as defined below) and by the Charter.
(C) PREFERRED STOCK
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption in respect of the
Preferred Stock are as follows:
1. Designation
The designation of the Preferred Stock shall be "Taxable Auction Rate
Preferred Stock." Except as otherwise provided herein, each share of Preferred
Stock shall be identical and equal in all respects to every other share of
Preferred Stock.
2. Definitions
Capitalized terms not defined in this paragraph 2 shall have the respective
meanings specified in paragraph 8(a) of this Article IV(C). Unless the context
or use indicates another or different meaning, the following terms shall have
the following meanings, whether used in the singular or plural:
"Applicable Rate" has the meaning specified in paragraph 3(c)(i) below.
"Auction" means each operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Company or its successor or any other
auction agent appointed by the Corporation to perform the functions performed by
the Auction Agent.
"Auction Agent Agreement" has the meaning specified in paragraph 3(c)(i)
below.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 8 below.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York, New
York, or the City of Boston, Massachusetts are authorized or obligated by law or
executive order to close.
"Cash" means such coin or currency of the United States as at the time
shall be legal tender for payment of public and private debts.
"Conventional Mortgage Pass-Through Certificates" means an instrument
issued in bearer or registered form, that is one of a class or series or by its
terms is divisible into a class or series, and that is of a type commonly dealt
in upon securities exchanges or markets or commonly recognized in any area in
which it is issued or dealt in as a medium for investment, evidencing (directly
or indirectly) a proportional undivided interest in specified pools of whole
mortgage loans that are secured by a valid first lien on each Mortgagor's fee or
leasehold interest in related mortgaged property (except for Permitted Tax Liens
and other matters to which like properties are commonly subject which neither
individually nor in the aggregate materially interfere with the benefits of the
security intended to be provided by such mortgages or deeds of trust, and
standard exceptions and exclusions in title insurance policies) on one-to
four-unit residences (including, without limitation, owner-occupied attached or
detached single-unit residences, -two- to four-unit primary residences,
condominiums, second/vacation homes and non-owner occupied residences) and with
respect to which the Required Documentation is required to be held by a trustee
or independent custodian, which mortgage loans are serviced pursuant to
servicing agreements with servicers that have either expressed the intention to
advance funds to meet deficiencies (to the extent such servicers reasonably
believe such advances are recoverable) or provided for alternative credit
enhancement in lieu thereof, and which instruments (a) have been rated "AA/Aa"
or better by the Rating Agencies or (b) do not qualify pursuant to clause (a)
above, but the inclusion of which as Eligible Portfolio Property is permitted
pursuant to the investment guidelines agreed upon by the Corporation and the
Rating Agency, provided, that a Conventional Mortgage Pass-Through Certificate
shall be eligible for inclusion in the Eligible Portfolio Property as of any
Valuation Date only if it continues to satisfy as of such Valuation Date the
requirements of at least one of clauses (a) or (b) above as the Corporation may
confirm verbally or in writing, directly or indirectly, or by reference to a
publication of the Rating Agencies, by confirmation from a nationally recognized
securities dealer having a minimum capitalization of $25 million or by such
other means as the Financial Security shall approve. The Auction Agent shall be
entitled to rely on the representations of the Corporation contained in the
Portfolio Valuation Report with respect to any Valuation Date, that as of such
Valuation Date the Corporation has confirmed that the Conventional Mortgage
Pass-Through Certificates included in the Eligible Portfolio Property are
within the scope of this paragraph.
"Corporate Debt Obligations" means debt obligations (other than Short-Term
Money Market Instruments or U.S. Government Obligations) rated from "CCC" or
higher by S&P or "Caa" or higher by Moody's (or rated as provided below in the
case of commercial paper), which corporate debt obligations (a) provide for the
periodic payment of interest thereon in cash, (b) do not provide for conversion
or exchange into equity capital at any time over their respective lives, (c)
have been registered under the Securities Act of 1933, as amended (such
requirement shall not apply with respect to commercial paper), and (d) have not
had notice given in respect thereof that any such corporate debt obligations are
the subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the aggregate value of the
Corporation's assets at any time shall not be subject to the provisions of this
clause (d)). In addition, so long as the securities are rated by S&P or Moody's,
no corporate debt obligation held by the Corporation shall be deemed a Corporate
Debt Obligation (i) if it fails to meet the criteria in column (l) below or (ii)
to the extent (and only to the proportionate extent) the acquisition or holding
thereof by the Corporation causes the Corporation to exceed any applicable
limitation set forth in column (2) or (3) below as of any relevant date of
determination (provided that in the event that the Corporation shall exceed any
such limitation or any other percentage limitation set forth in this definition
of Corporate Debt Obligations, the Corporation shall designate, in its sole
discretion, the particular Corporate Debt Obligation(s) and/or portions thereof
which shall be deemed to have caused the Corporation to exceed such limitation):
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3
-------- -------- --------
Maximum Percent
Maximum Percent of Market Value
of Market Value of Eligible Port-
of Eligible Port- folio Property
Minimum Original folio Property Invested in any
Rating Agencies' Issue Size of Invested in any One Industry
Ratings (l) Each Issue One Issuer (2) Category (2)
- ------------------ ---------------- ----------------- -----------------
($ in millions)
<S> <C> <C> <C>
"AAA"/"Aaa"., ...................... $100 10.0% 50.0%
"AA"/"Aa" .......................... 100 10.0 33.3
"A"/"A" ............................ 100 10.0 33.3
"BBB"/"Baa" ........................ 100 5.0 20.0
"BB"/"Ba" .......................... 100(3) 4.0 12.0
"B"/"B1", "B2" and "B3"
(subordinated) ................... 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa"
(unsecured subordinated) (4)...... 100(3) 2.0 5.0
"A-l+"/"P-1" (5).................... N/A 10.0 N/A
"A-l"/"P-l""(5)..................... N/A 10.0 33.3
"A-2"/"P-2" (5)..................... N/A 5.0 20.0
- ----------
(1) References to ratings by the Rating Agencies in this definition and
throughout the Charter will indicate the S&P rating followed by the
Moody's rating in the format shown. Rating designations include (+) or
(-) modifiers to the S&P rating where appropriate and (1), (2) or (3)
modifiers to the Moody's rating where appropriate, except that
corporate debt obligations rated "CCC-" will not constitute Corporate
Debt Obligations. In the event that a Corporate Debt Obligation has
received a different rating from S&P than from Moody's, the
restrictions relating to the lower rating will apply.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category, except that
the calculations with respect to commercial paper investments
constituting Corporate Debt Obligations shall be made separately and
independently of, but on the same basis as, the cumulative total
guidelines applicable to other types of Corporate Debt Obligations.
(3) 20% of the aggregate Market Value of all Corporate Debt Obligations in
these rating categories may be from issues with an original issue size
greater than or equal to $50 million and less than $100 million,
(4) Corporate Debt Obligations in this rating category that are rated by
S&P must be subordinated debt of the issuer with an implied senior
debt rating by S&P of "B-" or higher. The aggregate Market Value of
Corporate Debt Obligations in this rating category in excess of 20% of
the aggregate Market Value of the Fund's assets will not be included
in the calculation of Preferred Stock Basic Maintenance Amount.
(5) Represents commercial paper investments.
</TABLE>
In addition, the term "Corporate Debt Obligations" shall include debt
obligations satisfying such other criteria established by the Rating Agencies in
their sole discretion and designated in writing to the Corporation.
"Cure Date" means the eighth Business Day following a Valuation Date, such
date being the last day upon which the Corporation's failure to fulfill its
obligations, if any, pursuant to paragraph 7 below could be cured.
"Deposit Securities" means Cash, U.S. Government Obligations and Short-Term
Money Market Instruments; provided that at any time as of which the Surety Bond
is in effect the term "Deposit Securities" shall have the meaning provided in
the Insurance Agreement. Except for purposes of determining compliance with the
Preferred Stock Basic Maintenance Amount requirement contained in paragraph
7(a), each Deposit Security shall be deemed to have a value equal to its
principal or face amount payable at maturity plus interest payable thereon after
the delivery of such Deposit Security but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"Discount Factor Supplied By Moody's" means, for any asset held by the
Corporation, (i) the number set forth opposite such type of asset in the
following table or (ii) such other number established by Moody's in its sole
discretion and designated in writing to the Corporation (it being understood
that any asset held by the Corporation and not listed in the following table or
in such written notice shall have a Discounted Value of zero):
Discount Factor
---------------
Type I Corporate Bonds having a remaining
term to maturity of one year or less: 1.13
Type I Corporate Bonds having a remaining term to maturity
of more than one year but not more than two years: 1.20
Type I Corporate Bonds having a remaining term to maturity
of more than two years but not more than three years: 1.25
Type I Corporate Bonds having a remaining term to maturity
of more than three years but not more than four years: 1.32
Type I Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.37
Type I Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.47
Type I Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.55
Type I Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.61
Type I Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.68
Type I Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.70
Type II Corporate Bonds having a remaining term to maturity of
one year or less: 1.19
Type II Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.26
Type II Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.31
Type II Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.38
Type II Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.44
Type II Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than seven years: 1.54
Type II Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.62
Type II Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.69
Type II Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.76
Type II Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.78
Type III Corporate Bonds having a remaining term to maturity of
one year or less: 1.24
Type III Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.32
Type III Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.37
Type III Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.44
Type III Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.50
Type III Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.61
Type III Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.69
Type III Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.76
Type III Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.84
Type III Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.86
Type IV Corporate Bonds having a remaining term to maturity of
one year or less: 1.30
Type IV Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.38
Type IV Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.43
Type IV Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.50
Type IV Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.57
Type IV Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.68
Type IV Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.77
Type IV Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.84
Type IV Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.92
Type IV Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.94
Type V Corporate Bonds having a remaining term to maturity of
one year or less: 1.40
Type V Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.49
Type V Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.55
Type V Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.63
Type V Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.70
Type V Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.82
Type V Corporate Bonds having a remaining term to maturity of
more than seven years but not more than l0 years: 1.91
Type V Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.99
Type V Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.09
Type V Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.10
Type VI Corporate Bonds having a remaining term to maturity of
one year or less: 1.51
Type VI Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.60
Type VI Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.67
Type VI Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.76
Type VI Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.83
Type VI Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.95
Type V Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 2.06
Type VI Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 2.15
Type VI Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.25
Type VI Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.26
Type VII Corporate Bonds having a remaining term to maturity of
one year or less: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: (1)
Type VI Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: (1)
Type VII Corporate Bonds having a remaining term to maturity
of more than 20 years but not more than 30 years: (1)
Type VIII Corporate Bonds having a remaining term to maturity
of one year or less: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 2.60
Tvpe VIII Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.60
Discount Discount
Factor Factor
(Fixed (Adjustable
Rate Rate
FHLMC or FNMA Certificate Mortgages) Mortgages)
- ------------------------- ---------- ----------
FHLMC or FNMA Certificates with
interest rates less than 6% but
equal to or greater than 5%: 1.66 1.64
FHLMC or FNMA Certificates with
interest rates less than 7% but
equal to or greater than 6%: 1.62 1.64
FHLMC or FNMA Certificates with
interest rates less than 8% but
equal to or greater than 7%: 1.57 1.64
FHLMC or FNMA Certificates with
interest rates less than 9% but
equal to or greater than 8%: 1.53 1.64
FHLMC or FNMA Certificates with
interest rates less than 10% but
equal to or greater than 9%: 1.50 1.65
FHLMC or FNMA Certificates with
interest rates less than 11% but
equal to or greater than 10%: 1.46 1.64
FHLMC or FNMA Certificates with
interest rates less than 12% but
equal to or greater than 11%: 1.43 1.64
FHLMC or FNMA Certificates with
interest rates less than 13% but
equal to or greater than 12%: 1.41 1.64
FHLMC or FNMA Certificates with
interest rates equal to or
greater than 13%: 1.38 1.64
GNMA Certificates Discount Factor
- ----------------- ---------------
GNMA Certificates with interest rates less than 6% but equal to
or greater than 5%: 1.68
GNMA Certificates with interest rates less than 7% but equal to
or greater than 6%: 1.60
GNMA Certificates with interest rates less than 8% but equal to
or greater than 7%: 1.56
GNMA Certificates with interest rates less than 9% but equal to
or greater than 8%: 1.51
GNMA Certificates with interest rates less than 10% but equal to
or greater than 9%: 1.48
GNMA Certificates with interest rates less than 11% but equal to
or greater than 10%: 1.46
GNMA Certificates with interest rates less than 12% but equal to
or greater than 11%: 1.47
GNMA Certificates with interest rates less than 13% but equal to
or greater than 12%: 1.45
GNMA Certificates with interest rates equal to or greater than
13%: 1.43
GNMA Certificates with adjustable interest rates: 1.67
GNMA Multifamily Securities (not rated by Moody's): 0
FHLMC Multifamily Securities: 1.64
FHLMC and FNMA Certificates with variable interest rates: (2)
GNMA Graduated Payment Securities (must be seasoned): (3)
Conventional Mortgage Pass-Through Certificates: (2)
U.S. Government Obligations having a remaining term to maturity
of 90 days or less: 1.08
U.S. Government Obligations having a remaining term to maturity
of more than 90 days but not more than five years: 1.31
U.S. Government Obligations having a remaining term to maturity
of more than five years but not more than 10 years: 1.47
U.S. Government Obligations having a remaining term to maturity
of more than 10 years but not more than 15 years: 1.53
U.S. Government Obligations having a remaining term to maturity
of more than 15 years but not more than 30 years: 1.61
Cash and Short-Term Money Market Instruments: 1.00
- ------------
(1) Type VII Corporate Bonds rated "B-3" (subordinated) or better by
Moody's shall have a Discount Factor designated in writing to the
Corporation by Moody's equal to the factor which corresponds to Type
VI Corporate Bonds of comparable maturity. Type VII Corporate Bonds
rated "Caa" (subordinated unsecured) by Moody's or unrated by Moody's
shall have a Discount Factor Supplied by Moody's of 2.60.
(2) The Discount Factor determined therefor in writing by Moody's.
(3) The same discount factor applies in the case of GNMA Graduated Payment
Securities as applies to GNMA Certificates with fixed interest rates
determined at the point the certificates become seasoned.
"Discount Factor Supplied by S&P" means, for any asset held by the
Corporation, (i) the number set forth opposite each such type of asset in the
following table or (ii) such other number established by S&P in its sole
discretion and designated in writing to the Corporation (it being understood
that any asset held by the Corporation and not listed in the following table or
in such written notice shall have a Discounted Value of zero):
Type of Eligible Portfolio Property Discount Factor
- ----------------------------------- ---------------
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
GNMA Certificates with fixed interest rates: 1.35
GNMA Certificates with adjustable interest rates: 1.54
FHLMC and FNMA Certificates with fixed interest rates: 1.45
FHLMC and FNMA Certificates with adjustable interest rates: l.58
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable interest rates: (1)
GNMA Multifamily Securities: (1)
GNMA Graduated Payment Securities: 1.55(2)
Conventional Mortgage Pass-Through Certificates: (1)
U.S. Government Obligations having a remaining term to
maturity of 90 days or less: 1.00
U.S. Government Obligations having a remaining term to
maturity of more than 90 days but not more than five years: 1.28
U.S. Government Obligations having a remaining term to
maturity of more than five years but not more than 10 years: 1.35
U.S. Government Obligations having a remaining term to
maturity of more than 10 years but not more than 15 years: 1.45
U.S. Government Obligations having a remaining term to
maturity of more than 15 years but not more than 30 years: 1.50
Cash and Short-Term Money Market Instruments: 1.00
Commercial paper having a rating of at least "A-1" but lower
than "A-1+" from S&P or "P-1" from Moody's at the time of
the Corporation's investment therein: 1.60
Commercial paper having a rating of at least "A-2" but lower
than "A-1" from S&P or "P-2" from Moody's at the time of
the Corporation's investment therein: 1.65
- ------------
(1) The Discount Factor determined therefor in writing by S&P.
(2) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Fund notifies the Auction Agent that scheduled
principal payments are being made to holders; in the case of GNMA Graduated
Payment Securities as to which the Fund notifies the Auction Agent that
scheduled principal payments are not being made to holders, the Discount
Factor shall be that which is determined in writing by S&P.
"Discounted Value" with respect to any asset held by the Corporation as of
any date means the quotient of the Market Value of such asset divided by the
applicable Discount Factor Supplied by S&P or the applicable Discount Factor
Supplied by Moody's, as the case may be, provided that in no event shall the
Discounted Value of any asset constituting Eligible Portfolio Property for the
purposes of determining compliance with Paragraph 7(a) as of any date exceed the
unpaid principal balance or face amount of such asset an of that date. With
respect to the calculation of the aggregate Discounted Value of any Corporate
Debt Obligation included in the Corporation's Eligible Portfolio Property, such
calculation shall be made using the criteria set forth in the definitions of
Corporate Debt Obligations and Market Value. With respect to the calculation of
the aggregate Discounted Value of the Corporation's Eligible Portfolio Property
for comparison to the Preferred Stock Basic Maintenance Amount, such aggregate
Discounted Value shall be the aggregate Discounted Value calculated using
Discount Factors Supplied by S&P or the aggregate Discounted Value calculated
using the Discount Factors Supplied by Moody's, whichever aggregate Discounted
Value is lower. Notwithstanding any other provision hereof, any Type V, VI, VII
or VIII Corporate Debt Obligation that has a remaining term to maturity of more
than 30 years and any asset to which a Discount Factor is not assigned either
S&P or Moody's in Article IV(C) or in an amendment hereof or supplement hereto,
shall have a Discounted Value of zero.
"Dividend Payment Date" has the meaning specified in paragraph 3(b) below.
"Dividend Period" has the meaning specified in paragraph 3(b) below.
"Eligible Portfolio Property" means (i) Corporate Debt Obligations
(including without limitation commercial paper rated at the time of the
Corporation's investment therein at least "A-2"/"P-2" but lower than
"A-l+"/"P-l" by the Rating Agencies with a maturity of at least 30 days), Cash,
U.S. Government Obligations, Short-Term Money Market Instruments, FNMA
Certificates, FHLMC Certificates, FHLMC Multifamily Securities, GNMA
Certificates, GNMA Multifamily Securities, GNMA Graduated Payment Securities and
Conventional Mortgage Pass-Through Certificates; provided that, any assets of
the Corporation subject to call option obligations shall not constitute Eligible
Portfolio Property and (ii) other assets which may be established by the Rating
Agencies in their sole discretion and designated in writing to the Company.
"FHLMC" means the Federal Home Loan Mortgage Corporation created by Title
III of the Emergency Home Finance Act of 1970, and includes any successor
thereto.
"FHLMC Certificate" means a mortgage participation certificate in physical
or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate, fully amortizing mortgage loans
secured by first-priority mortgages on one- to four-family residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily Security" in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Preferred Stock to fail to retain, the ratings assigned to such Preferred Stock
by the Rating Agencies, as evidenced by letters to such effect from the
respective Rating Agencies.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in physical or
book-entry form, the full and timely payment of principal of and interest on
which is guaranteed by FNMA, and which evidences a proportional undivided
interest in specified pools of fixed-, variable- or adjustable-rate, fully
amortizing mortgage loans secured by first-priority mortgages on single-family
residences.
"GNMA" means the Governmental National Mortgage Association, and includes
any successor thereto.
"GNMA Certificates" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-, variable or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on
single-family residences.
"GNMA Graduated Payment Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of graduated payment mortgage
loans with payments that increase annually at a predetermined rate for up to the
first five or ten years of the mortgage loan and that are secured by
first-priority mortgages on one- to four-unit residences.
"GNMA Multifamily Security" means a fully modified pass-through certificate
in physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States, and which evidences a proportional
undivided interest in specific pools of fixed-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Preferred Stock to fail to retain the rating assigned to such Preferred Stock by
the Rating Agencies or evidenced by letters to such effect from the respective
Rating Agencies.
"Holding Election" shall have the meaning set forth in paragraph 5(b).
"Indenture" means the indenture dated as of December 1, 1988 between the
Corporation and Shawmut Bank, N.A., as trustee, pursuant to which the
Corporation's Series A Senior Notes were issued.
"Independent Accountants" means the Corporation's independent accountants,
which shall be a nationally recognized accounting firm.
"Industry Category" means, at any time the Surety Bond is not in effect, as
to any Corporate Debt Obligation, any of (i) the industry categories set forth
in the following table or (ii) such other industry categories established by the
Rating Agencies in their sole discretion and designated in writing to the
Corporation.
1. Aerospace and Defense
2. Automobile/Auto Parts/Truck Manufacturing
3. Banks/Savings and Loans/Finance Companies/Consumer Credit
4. Financial Services - Brokerage/Syndication/Leasing
5. Real Estate Development/REITS/Building/ Construction
6. Broadcasting - TV, Cable, and Radio
7. Publishing
8. Electrical Equipment/Electronics/Computers
9. Diversified/Conglomerate Services
10. Diversified/Conglomerate Manufacturing
11. Leisure/Amusement/Motion Pictures
12. Agricultural Chemicals
13. Chemicals
14. Food/Tobacco
15. Beverage
16. Retail
17. Consumer Durable Goods/Home Furnishings/Childcare/Toys
18. Grocery/Convenience Stores
19. Healthcare/Drugs/Hospital Supplies
20. Personal Care Products/Cosmetics
21. Hotel/Gaming
22. Insurance Companies
23. Machinery
24. Metals/Mining
25. Oil/Natural Gas/Oil Services
26. Packaging/Containers
27. Paper/Forest Products/Printing
28. Pollution Control/Waste Removal
29. Utilities
30. Rail/Trucking/Overnight Delivery
31. Telephone/Communications
32. Textiles/Apparel
33. Transportation
34. Agriculture/Agricultural Equipment
35. Miscellaneous
"Initial Dividend Payment Date" has the meaning set forth in paragraph
3(b) below.
"Initial Dividend Period" has the meaning specified in paragraph 3(b)
below.
"Insurance Agreement" means the Insurance Agreement, dated as of December
1, 1988, by and among the Corporation and the Surety or any other similar
insurance agreement with the Surety pursuant to which the Surety Bond is issued.
"Interest and Dividend Coverage Amount," as of any date of determination,
means the sum of:
(a) the amount of interest on the Notes, if any, due to become payable
on or prior to the next Dividend Payment Date, and
(b) the product of
(i) the number of shares of Preferred Stock outstanding on such
date multiplied by $l00,000,
(ii) the Applicable Rate in effect as of such date, and
(iii) a fraction, the numerator of which is the number of days in
the Dividend Period ending on the next Dividend Payment Date
(determined by including the first day thereof but excluding the last
day thereof) and the denominator of which is 360;
less
(c) the combined value of any Deposit Securities irrevocably
deposited by the Corporation for the payment of interest on the Notes
or dividends on the Preferred Stock.
"Interest and Dividend Coverage Assets," as of any date of determination,
means Deposit Securities with maturity dates not later than the day preceding
the next Dividend Payment Date; provided that if interest on the Notes shall be
due prior to such Dividend Payment Date, then a portion of such Deposit
Securities equal to the amount of such interest shall have maturity dates on or
prior to the day preceding the applicable interest payment date; and provided,
further, that if the applicable date of determination is a Dividend Payment Date
or a date on which interest on the Notes is payable, any Deposit Securities to
be applied to the dividends payable on the Preferred Stock or to interest on the
Notes on such date shall not be included in Interest and Dividend Coverage
Assets.
"Investment Company Act" means the Investment Company Act of 1940 (15 U.S.
Code {Par} 80 et seq.), as amended and in effect from time to time.
"Lien" has the meaning set forth in paragraph 3(d)(iv), below.
"Mandatory Asset Coverage Redemption" has the meaning specified in
paragraph 5(b).
"Mandatory Expiration Redemption" has the meaning specified in paragraph
5(b).
"Mandatory Redemption" means a Mandatory Asset Coverage Redemption,
Mandatory Surety Redemption or a Mandatory Expiration Redemption.
"Mandatory Surety Redemption" has the meaning specified in paragraph 5(b).
"Market Value" means the amount determined with respect to specific assets
of the Corporation in (i) the manner set forth below or (ii) such other manner
as is established by the Rating Agencies in their sole discretion and designated
in writing to the Corporation.
(a) as to any Corporate Debt Obligations, (i) the product of (A) the
unpaid principal balance of such Corporate Debt Obligation as of the
Reporting Date, and (B) the lower of two bid prices for such Corporate Debt
Obligation provided by two nationally recognized securities dealers with a
minimum capitalization of $25 million or by one such securities dealer and
any other source (provided that the utilization of such source would not
adversely affect the ratings of the Preferred Stock) to the custodian of
the Corporation's assets, at least one of which shall be provided in
writing or by telecopy, telex, other electronic transcription, computer
obtained quotation reducible to written form or similar means, and in turn
provided to the Corporation by any such means by such custodian (provided
that evidence of the bid quotes furnished by such custodian shall be
provided to the Auction Agent by the Corporation with the related Portfolio
Valuation Report), plus (ii) accrued interest on such Corporate Debt
Obligation (unless such accrued interest is payable to the holder of such
Corporate Debt Obligation prior to the next Valuation Date), or, if two bid
prices cannot be obtained, such item of Eligible Portfolio Property shall
have a Market Value of zero;
(b) the product of (i) as to GNMA Certificates, GNMA Graduated Payment
Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the aggregate unpaid
principal amount of the mortgage loans evidenced by each such Certificate
or security, as the case may be, as determined by the Corporation by any
method which the Corporation believes reliable, which may include amounts
shown on the most recent report related to the Certificate or security
received by the Corporation prior to the Reporting Date, and as to U.S.
Government Obligations and Short-Term Money Market Instruments (other than
demand deposits, federal funds, bankers' acceptances and next Business
Day's repurchase agreements), the face amount or aggregate principal amount
of such U.S. Government Obligations or Short-Term Money Market Instruments,
as the case may be, and (ii) the lower of the bid prices for the same kind
of Certificates, securities or instruments, as the case may be, having, as
nearly as practicable, comparable interest rates and maturities provided by
two nationally recognized securities dealers having minimum capitalization
of $25 million or by one such securities dealer and any other source
(provided that the utilization of such source would not adversely affect
the ratings of the Preferred Stock) to the custodian of the Corporation's
assets, at least one of which shall be provided in writing or by telecopy,
telex, other electronic transcription, computer obtained quotation
reducible to written form or similar means, and in turn provided to the
Corporation by any such means by such custodian (provided that evidence of
the bid quotes furnished by such custodian shall be delivered to the
Auction Agent with the related Portfolio Valuation Report), or, if two bid
prices cannot be obtained, such item of Eligible Portfolio Property will
have a Market Value of zero;
(c) as to Conventional Mortgage Pass-Through Certificates, the product
of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the Certificates as determined by the Corporation by any method
which the Corporation believes reliable, which may include amounts based on
verbal reports of the servicers of the related mortgage loans to the
Corporation, as of the applicable Reporting Date and (ii) the dollar value
of the lower of two bid prices per dollar of outstanding principal amount
as of such applicable Reporting Date for such Certificates, provided by two
nationally recognized securities dealers having minimum capitalization of
$25 million or by one such securities dealer and any other source (provided
that the utilization of such source would not adversely affect the
then-current ratings of the Preferred Stock) to the custodian of the
Corporation's assets, at least one of which shall be provided in writing or
by telecopy, telex, other electronic transcription, computer obtained
quotation reducible to written form or similar means, and in turn provided
to the Corporation by any such means by such custodian (provided that
evidence of the bid quotes furnished by such custodian shall be delivered
to the Auction Agent with the related Portfolio Valuation Report), or, if
two bid prices cannot be obtained, such item of Eligible Portfolio Property
shall have a Market Value of zero; and
(d) as to Cash, demand deposits, federal funds, bankers' acceptances
and next Business Day's repurchase agreements included in Short-Term Money
Market Instruments, the face value thereof.
Upon any failure to obtain two bid prices as described in paragraphs (a),
(b) and (c) above, with respect to any item of Eligible Portfolio Property as of
any Valuation Date, the Corporation shall notify the Rating Agencies in writing.
As used in the definition of Market Value, "in writing" includes telecopies,
telexes or other electronic transcription, or a computer-obtained quotation
reducible to written form,
"Minimum Liquidity Level is met" means, as of any date of determination,
that the aggregate Market Value of the Interest and Dividend Coverage Assets
equals or exceeds the Interest and Dividend Coverage Amount.
"Moody's" means Moody's Investors Service, Inc. or any successor thereto.
"Notes" means collectively (i) the Corporation's Senior Extendible Notes
due 1998, Series A and (ii) any other Senior Notes issued pursuant to the
Indenture.
"Notice of Redemption" has the meaning specified in paragraph 5(c)(iv),
below.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of the Corporation.
"Officer's Certificate" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer, Assistant Secretary or Assistant Controller
of the Corporation.
"Optional Redemption" shall have the meaning specified in paragraph 5(a),
"Original Issuance Date" means the date on which the Corporation originally
issues shares of Preferred Stock.
"Paying Agent" means Bankers Trust Company and its successor or any other
paying agent appointed by the Corporation to perform the functions performed by
the Paying Agent.
"Permitted Bank" means any depository institution or trust company
incorporated or licensed to maintain a branch or agency under the laws of the
United States or any state thereof or the District of Columbia (i) the long-term
unsecured debt obligations (other than such obligations the ratings of which are
based on the credit of a Person other than such institution or trust company) of
which (or which is the principal banking subsidiary of a holding company the
long-term unsecured debt obligations of which), at the time of the Corporation's
investment therein, or at the time of a contractual commitment providing for
such investment, have ratings from the Rating Agencies of at least "AA"/"Aa" and
(ii) the commercial paper (other than such obligations the rating of which are
based on the credit of a Person other than such institution or trust company) of
which (or which is the principal banking subsidiary of a holding company the
commercial paper of which), at the time of the Corporation's investment therein,
or at the time a contractual commitment providing for such investment, has
ratings from the Rating Agencies of at least "A-1+"/"P-1".
"Permitted Tax Liens" means liens of general and special taxes and
assessments on the property in question.
"Person" means an individual, a corporation, a company, a voluntary
association, a partnership, a trust, an unincorporated organization or a
government or any agency, instrumentality or political subdivision thereof.
"Portfolio Calculation" shall have the meaning specified in paragraph 7(b).
"Portfolio Valuation Report" means an Officer's Certificate delivered to
the Auction Agent with the respect to the Valuation of the Eligible Portfolio
Property.
"Preferred Stock Basic Maintenance Amount" means, as of any date on which
the Surety Bond is not in effect, (x) the dollar amount equal to (a) the sum of
(i) 100% of the aggregate principal amount of the Notes then outstanding; (ii)
$100,250 times the number of shares of Preferred Stock then outstanding; (iii)
the aggregate amount of accrued interest on the Notes then outstanding, from the
most recent date to which interest has been paid or duly provided for (or, for
purposes of calculating the Preferred Stock Basic Maintenance Amount prior to
June 1, 1989 then from December 1, 1988) through the next succeeding Valuation
Date, plus all interest to accrue on the Notes then outstanding during the 63
days following such Valuation Date; (iv) the aggregate amount of accumulated but
unpaid dividends with respect to the Preferred Stock to such date; (v) the
aggregate Projected Dividend Amount; (vi) the aggregate principal amount of any
then outstanding indebtedness of the Corporation for money borrowed (other than
the Notes) and (vii) the greater of $200,000 or the Corporation's current
liabilities as of such date to the extent not otherwise reflected in any of (i)
through (vi) above, less (b) the combined value of any Deposit Securities
irrevocably deposited by the Corporation for the payment of principal of or
interest on the Notes or redemptions of or dividend payments with respect to the
Preferred Stock or (y) such other dollar amount calculated by a method
established by the Rating Agencies in their sole discretion and designated in
writing to the Corporation.
"Projected Dividend Amount" for the Preferred Stock shall mean, if the date
of determination is a Valuation Date, the amount of dividends, based on the
number of shares of Preferred Stock outstanding on such Valuation Date,
projected to accumulate on such shares from such Valuation Date through the 63rd
day after such Valuation Date, at the following dividend rates.
(a) if the Valuation Date is the Original Issuance Date or a Dividend
Payment Date, (i) for the Dividend Period beginning on the Original
Issuance Date or such Dividend Payment Date and ending on (but not
including) the first following Dividend Payment Date, the Applicable Rate
in effect on such Valuation Date, and (ii) for the period beginning on (and
including) the first following Dividend Payment Date and ending on (and
including) the 63rd day following such Valuation Date, the product of 1.95
and (x) the Maximum Applicable Rate on the Original issuance Date (in the
case of the Original Issuance Date) or (y) the Maximum Applicable Rate as
of the last occurring Auction Date (in the case of any Dividend Payment
Date); and
(b) if such Valuation Date is not the Original Issue Date or a
Dividend Payment Date, (i) for the period beginning on such Valuation Date
and ending on (but not including) the first following Dividend Payment
Date, the Applicable Rate in effect on such Valuation Date, and (ii) for
the period beginning on (and including) the first following Dividend
Payment Date and ending on (but not including) the sooner of the second
following Dividend Payment Date or the 64th day following such Valuation
Date, the product of 1.95 and (x) the Maximum Applicable Rate on the
Original Issuance Date (in the case of a Valuation Date occurring prior to
the first Auction Date) or (y) the Maximum Applicable Rate on the last
occurring Auction Date (in the case of any other Valuation Date) and (iii)
for the period, if any, beginning on (and including) the second following
Dividend Payment Date and ending on (but not including) the 64th day
following such Valuation Date, the product of 2.50 and the rate specified
in clause (x) or (y) above.
If the date of determination is not a Valuation Date, then the Projected
Dividend Amount on such date of determination shall equal the Projected Dividend
Amount therefor on the immediately preceding Valuation Date, adjusted to reflect
any decrease in the number of shares of Preferred Stock outstanding.
"Quarterly Valuation Date" means, so long as any shares of Preferred Stock
are outstanding, the last Business Day of January, April, July and October of
each year, commencing January 31, 1989.
"Rating Agencies" means, collectively, S&P and Moody's for so long as S&P
and Moody's issue ratings for the Preferred Stock, and, at such time as either
no longer issue a rating for the Preferred Stock, the remaining Rating Agency.
"Reporting Date," with respect to any price referred to in the definition
of the Market Value of an item of Eligible Portfolio Property, shall mean the
date as of which the Market Value of such item of Eligible Portfolio Property is
to be determined or, if no such price is available as provided above for such
date, the next closest prior date as of which such price is so available;
provided, that no such price shall be deemed to be available as of a Reporting
Date if such price is not available as of a date within five Business Days next
preceding the date as of which the determination of such Market Value is to be
made.
"Required Documentation," with respect to a mortgage loan means:
(a) the mortgage note or other evidence of indebtedness secured by the
mortgage endorsed without recourse in blank or to the trustee or other
custodian and accompanied by an assignment thereof
(b) the mortgage, deed of trust, deed to secure debt or similar
security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other
custodian, in recordable form as may be appropriate in the jurisdiction
where the property is located and evidence that such assignment has been
recorded in the name of the trustee or other custodian, and such trustee or
other custodian receives an opinion of counsel (containing only such
exceptions as may be permissible under the indenture or other agreement
pursuant to which the mortgage loan is pledged to the trustee in connection
with the related Conventional Mortgage Pass-Through Certificate) to the
effect that, notwithstanding that the assignment of the mortgage has not
been recorded, the actions taken with respect to the mortgage loan are
sufficient to permit the trustee or other custodian to avail itself of all
protection available under applicable law against the claims of any present
or future creditors of the issuer, and are sufficient to prevent any other
sale, transfer, assignment, pledge or hypothecation of the mortgage and the
related mortgage note by the issuer from being enforceable, or will create
a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of
the issuer to the trustee as provided in the indenture pursuant to which
the mortgage loan is pledged to the trustee in connection with the related
Conventional Mortgage Pass-Through Certificate) prior in right to all other
security interests therein created or perfected under the Uniform
Commercial Code (as in effect in the jurisdiction where the property is
located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
(d) a copy of the title insurance policy or an opinion or certificate
of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be
subject to exceptions for Permitted Tax Liens and other matters to which
like properties are commonly subject which neither individuals nor in the
aggregate materially interfere with the benefits of the security interest
intended to be provided by such mortgage and standard exceptions and
exclusions from mortgage title insurance policies).
"S&P" means Standard & Poor's Corporation or any successor thereto.
"Scheduled Payment Day" has the meaning specified in paragraph 3 (b) below.
"Scheduled Payments" means (i) payment of dividends on the Preferred Stock
which holders of shares of Preferred Stock would be entitled to receive on each
Dividend Payment Date during the term of the Surety Bond in accordance with the
terms of the Charter, without regard to whether the Corporation has declared any
such dividend or such dividend could have been legally declared by the
Corporation, (ii) payment of the redemption price of the Preferred Stock,
without regard to whether such redemption could have been legally made by the
Corporation, (a) on the last date on which the Corporation was to have redeemed
shares of the Preferred Stock as specified in a Surety Redemption Request in the
event that the Surety has notified the Surety Custodian that such redemption is
to be a Scheduled Payment and (b) on the date on which shares of the Preferred
Stock may be required to be redeemed pursuant to a mandatory expiration
redemption, and (III) payment of the liquidation preference on shares of the
Preferred Stock in the event of a liquidation of the Corporation during the term
of the Surety Bond on the dates fixed for payment of such liquidation preference
pursuant to the Charter and the Insurance Agreement.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the
Corporation which agrees to follow the procedures required to be followed by
such securities depository in connection with shares of the Preferred Stock;
provided that, at any time that the Surety Bond is in effect, any reference
herein to the Securities Depository shall be deemed to refer to the Surety
Custodian.
"Short-Term Money Market Instruments" means the following kinds of
instruments, if on the date of purchase or other acquisition by the Corporation
of any such instrument the remaining term to maturity therof is not more than 30
days:
(a) demand deposits in, certificates of deposit of bankers'
acceptances issued by, or federal funds sold to, any depository
institution, the deposits of which are insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance
Corporation, provided that, at the time of the Corporation's investment
therein, the commercial paper or other unsecured short-term debt
obligations of such depository institution are rated at least "A-1+" by S&P
and "P-1" by Moody's;
(b) repurchase obligations with respect to a U.S. Government
Obligation, FNMA Certificate, FHLMC Certificate or GNMA Certificate entered
into with a depository institution, the deposits of which are insured by
the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation and the commercial paper or other unsecured
short-term debt obligations of which are rated at least "A-1+" by S&P and
"P-1" by Moody's, which must be repurchased within one Business Day from
the date such repurchase obligation was entered into; and
(c) commercial paper rated at the time of the Corporation's investment
therein at least "A-1+" by S&P and "P-1" by Moody's.
"Special Redemption Assets" has the meaning specified in paragraph 5(b)
below.
"Subsequent Dividend Period" has the meaning specified in paragraph 3(B)
below.
"Surety" means Financial Security Assurance Inc. or any successor thereto
or any other surety under the Surety Bond.
"Surety Bond" means a surety bond (including the surety bond issued
pursuant to the Insurance Agreement) which unconditionally and irrevocably
guarantees to each holder of shares of Preferred Stock the Scheduled Payments.
"Surety Custodian" means Bankers Trust Company and any successor thereto or
any other custodian under the Surety Custody Agreement.
"Surety Custody Agreement" means a custody agreement, dated as of December
1, 1988, by and between the Surety and the Surety Custodian or any other similar
agreement in effect at any time that the Surety Bond is in effect.
"Surety Redemption Request" means a written notice from the surety to the
Corporation requesting redemption of shares of the Preferred Stock pursuant to
the terms of the Insurance Agreement.
"Type I Corporate Bonds" means Corporate Bonds whose present rating is
"AAA"/"Aaa" by the Rating Agencies.
"Type II Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "AA+"/"Aa1" and no less than " AA-"/"Aa3" by the Rating Agencies.
"Type III Corporate Bonds" means Corporate Bonds present rating is no
greater than "A+"/"A1" and no less than "A-"/"A3" by the Rating Agencies.
"Type IV Corporate Bonds" means Corporate Bonds whose present rating is
no greater than "BBB+"/"Baa1" and no less than "BBB-"/"Baa3" by the Rating
Agencies.
"Type V Corporate Bonds" Means Corporate Bonds whose present rating is no
greater than "BB+/"Ba1" and no less than "BB-"/"Ba3" by the Rating Agencies.
"Type VI Corporate Bonds" means Corporate Bonds whose present rating is no
greater then "B+"/"B1" and no less than "B-"/"B3 (subordinated)" by the Rating
Agencies.
"Type VII Corporate Bonds" means Corporate Bonds whose present rating is
"CCC+ (subordinated)" by S&P with an implied senior rating of "B-" or greater
and rated at least "Caa (subordinated)" by Moody's.
"Type VIII Corporate Bonds" Means Corporate Bonds whose present rating is
"CCC" by S&P with an implied senior rating of "B-" or higher and rated at least
"Caa (unsecured subordinated)" by Moody's.
"U.S. Government Obligations" means direct obligations of the United
States, provided that such direct obligations are entitled to the full faith and
credit of the United States and that any such obligations, other than United
States Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
"United States" means the United States of America.
"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 each month; provided, however, that the first Valuation Date may
occur on any other date established by the Corporation; provided, further,
however, that such date shall be not more than 15 days from the date on which
the Surety Bond ceases to be in effect.
"Vote of a Majority of the Outstanding Voting Securities" (for
purposes of the Investment Company Act) means the vote, at the annual or a
special meeting of the stockholders of the Corporation duly called, of the
lesser of (A) 67% or more of the voting securities present at such meeting, if
the holders of more than 50% of the outstanding voting securities of the
Corporation are present or represented by proxy; or (B) more than 50% of the
outstanding voting securities of the Corporation.
"Voting Period" has the meaning specified in paragraph 6(b) below.
2A. Registration of Preferred Stock and Issuance of Custody Receipts
(a) Except as otherwise provided by applicable law, at any time that the
Surety Bond is in effect pursuant to the Insurance Agreement, all outstanding
shares of Preferred Stock shall be represented by a stock certificate registered
in the name of the Surety Custodian and held by the Surety Custodian in a
custody account on behalf of the beneficial holders of such Preferred Stock, and
no person acquiring beneficial ownership of shares of Preferred Stock shall be
entitled to receive a certificate representing such shares of Preferred Stock.
In such event, the Surety Custodian shall issue to the Securities Depository
custody receipts evidencing the beneficial holders' ownership of the Preferred
Stock, which the Securities Depository will hold of record on behalf of the
beneficial holders of shares of Preferred Stock, all pursuant to the Surety
Custody Agreement.
(b) At any such time that the Surety Bond is not in effect, all outstanding
shares of Preferred Stock shall be represented by a stock certificate registered
in the name of the Securities Depository or its nominee, to be held on behalf of
the beneficial holders of shares of Preferred Stock.
3. Dividends
(a) Holders of shares of Preferred Stock shall be entitled to receive,
when, as, and if declared by the Board of Directors, out of funds legally
available therefor, cumulative cash dividends at the Applicable Rate per annum
(determined as set forth below) payable on the respective dates set forth below
to the holders of record of shares of Preferred Stock as of the Business Day
next preceding the payment date.
(b) Dividends on the shares of Preferred Stock shall accumulate from
and including the Original Issuance Date. Accrued dividends shall be payable
commencing on the date next succeeding the last day of the 45-day period
commencing on the Original Issuance Date (the "Initial Dividend Payment Date")
and on each day thereafter which is the date next succeeding the last day of the
successive 30-day periods after such date. If any date next succeeding such last
day (the "Scheduled Payment Day") is not a Business Day or (if the Paying Agent
does not make payments in same-day funds) the day succeeding the Scheduled
Payment Day is not a Business Day, dividends payable on such Scheduled Payment
Day shall be paid on the first Business Day succeeding such Scheduled Payment
Day that is next succeeded by a day which is also a Business Day. Any date on
which a dividend on the Preferred Stock is payable pursuant to this paragraph
3(b) is herein called a "Dividend Payment Date." The period beginning on and
including the Original Issuance Date and ending on (but not including) the
Initial Dividend Payment Date is referred to herein as the "Initial Dividend
Period." Each successive period commencing on, and including, the Dividend
Payment Date for the preceding Dividend Period and ending on (and including) the
day preceding the next succeeding Dividend Payment Date is referred to herein as
a "Subsequent Dividend Period" and the Initial Dividend Period and each
Subsequent Dividend Period together are sometimes referred to herein as
"Dividend Periods."
(c) (i) The Applicable Rate for the Initial Dividend Period shall be the
rate per annum for the Initial Dividend Period set forth in the Corporation's
Prospectus covering the initial offering of the Preferred Stock. For the purpose
of calculating the rate of dividends per annum payable on shares of Preferred
Stock (the "Applicable Rate") for each Subsequent Dividend Period the
Corporation shall enter into an agreement with the Auction Agent (the "Auction
Agent Agreement"). The Applicable Rate on the shares of Preferred Stock for each
Subsequent Dividend Period shall be determined by the Auction Agent in
accordance with the Auction Agent Agreement, which shall provide that the
Auction Agent will follow the Auction Procedures described in paragraph 8 hereof
to determine the Applicable Rate. In the event there is no Auction Agent on the
Business Day prior to the first day of a Dividend Period, the Applicable Rate
for such Dividend Period shall be equal to the Maximum Applicable Rate (as
defined in paragraph 8(a) hereof) that could have resulted pursuant to the
Auction Procedures, as determined by the Corporation, on such Business Day. The
Corporation shall exercise its best efforts to maintain an Auction Agent
pursuant to an agreement containing terms no less favorable to the Corporation
than the terms of the Auction Agent Agreement. If, due to the issuance of a
Notice of Redemption, no shares of Preferred Stock are deemed outstanding on any
Auction Date, or if no Auction is held on such date for any other reason, the
Applicable Rate for the Dividend Period beginning on the Business Day following
such Auction Date shall be equal to the Maximum Applicable Rate that could have
resulted pursuant to the Auction Procedures, as determined by the Auction Agent
(or, if there is no Auction Agent, by the Corporation), on such Business Day.
(ii) The amount of dividends per share payable on shares of Preferred Stock
for each Dividend Period or part thereof shall be determined by the Auction
Agent and shall be an amount equal to $100,000 per share of Preferred Stock
multiplied by the product of (1) the Applicable Rate for such Dividend Period
and (2) a fraction, the numerator of which shall be the actual number of days in
such Dividend Period or part thereof and the denominator of which shall be 360.
All dollar amounts used in or resulting from such calculations will be rounded
to the nearest cent (with one-half (0.5) cent being rounded up).
(d) (i) The Corporation will not issue any series of any class of stock
which is senior to or on a parity with the Preferred Stock. No holders of shares
of Preferred Stock shall be entitled to any dividends, whether payable in cash,
property or stock, in excess of full cumulative dividends, as provided in this
paragraph 3, on shares of Preferred Stock. No interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payments on any shares
of the Preferred Stock that may be in arrears.
(ii) For so long as shares of Preferred Stock are outstanding, the
Corporation shall not declare, pay or set apart for payment any dividend or
other distribution in respect of the Common Stock or any other stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any shares of the Common Stock or any other stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends or
upon liquidation (except by conversion into or exchange for stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends and
upon liquidation), unless, in each case, (A) immediately thereafter, the
Preferred Stock Basic Maintenance Amount would be achieved, if at such time the
Surety Bond is not in effect, (B) such transaction is on a Dividend Payment
Date, (C) such transaction would not violate applicable law (including, without
limitation, Section 18(a) of the Investment Company Act and Maryland law) and
(D) full cumulative dividends on all shares of Preferred Stock for all Dividend
Periods ending on or prior to such Dividend Payment Date have been declared and
paid (or sufficient Deposit Securities shall have been set apart for their
payment).
If on any Dividend Payment Date as of which the Surety Bond is in effect,
the Corporation defaults in making dividend payments on shares of Preferred
Stock and the Surety makes such payments to the holders of shares of Preferred
Stock, the Surety thereafter shall be subrogated to all rights of the holders of
shares of Preferred Stock to receive such dividend payments.
(iii) Any dividend payment made on the shares of Preferred Stock shall
first be credited against the dividends accumulated with respect to the earliest
Dividend Period for which dividends have not been paid.
(iv) At any time that shares of Preferred Stock are outstanding and the
Surety Bond is not in effect, the Corporation shall not create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust receipt
or other material encumbrance of any kind (collectively "Liens") upon any of its
Eligible Portfolio Property, except for (A) Liens the validity of which are
being contested in good faith by appropriate proceedings, (B) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) Liens to secure payment for services rendered by the Auction Agent
or the Trustee with respect to the Notes in connection with the Preferred Stock
or the Notes and (D) Liens otherwise incurred in connection with borrowings made
in the ordinary course of business in accordance with the Corporation's stated
investment objective, policies and restrictions,
(e) Not later than noon on the Business Day next preceding each Dividend
Payment Date, the Corporation shall deposit with the Paying Agent Deposit
Securities consituting immediately available funds in an amount sufficient to
pay the dividends that are payable on such Dividend Payment Date. The
Corporation may direct the Paying Agent with respect to the investment of any
such Deposit Securities, provided that the proceeds of any such investment will
be available at the opening of business on such Dividend Payment Date.
(f) Dividends in arrears for any past Dividend Period may be declared and
paid to the holders of shares of Preferred Stock at any time, without reference
to any regular Dividend Payment Date.
4. Liquidation Rights
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, after satisfying claims
of creditors (including the holders of Notes) but before any distribution or
payment shall be made in respect of the Common Stock or any other stock of the
Corporation ranking junior to the Preferred Stock as to liquidation payments, a
liquidation distribution in the amount of $100,000 per share, plus an amount
equal to all accumulated and unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not earned or declared by the
Corporation, but excluding interest thereon), but such holders shall be entitled
to no further participation in any distribution or payment in connection with
any such liquidation, dissolution or winding up.
(b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of Preferred Stock shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then such available
assets shall be distributed among the holders of shares of Preferred Stock
ratably in any such distribution of assets according to the respective amounts
which would be payable on all such shares if all amounts thereon were paid in
full.
(c) Neither the consolidation or merger of the Corporation with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer by
the Corporation of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this paragraph 4.
5. Redemption
Shares of the Preferred Stock shall be redeemable by the Corporation as
provided below:
(a) Optional Redemption. At its option, the Corporation may, out of funds
legally available therefor (giving consideration to all applicable legal
restraints, including, without limitation, the restraints imposed by Section
18(a) of the Investment Company Act and Maryland Law), upon at least 15 but not
more, than 30 days notice, or such longer notice period as is required by
applicable law, pursuant to a Notice of Redemption (as defined below), redeem
shares of Preferred Stock, in whole or in part (an "Optional Redemption"), at
$100,000 per share plus an amount equal to the accrued and unpaid dividends on
such shares (whether or not earned or declared by the Corporation, but excluding
interest thereon) to the redemption date; provided, however, it such redemption
is not made on a Dividend Payment Date, it will be made at a price equal to
$100,250 plus an amount equal to all accumumulated and unpaid dividends through
the date of redemption.
(b) Mandatory Redemption. (i) If the Surety Bond is then in effect, the
Corporation shall be obligated (A) to redeem, out of funds legally available
therefor, no later than the last day specified for redemption of shares of
Preferred Stock pursuant to a Surety Redemption Request, the number of shares of
Preferred Stock specified in such Surety Redemption Request (a "Mandatory Surety
Redemption") and (B) to redeem, out of funds legally available therefor, all
shares of Preferred Stock at least one full Business Day prior to any expiration
date of the Surety Bond if, 190 days prior to such expiration date, the
Corporation shall have failed to obtain from the Surety an extension of the term
of the Surety Bond pursuant to its terms (a "Mandatory Expiration Redemption");
provided that, subject to the terms of the Insurance Agreement, no Mandatory
Expiration Redemption shall be required if the Corporation shall have obtained
notice in writing from the respective Rating Agencies that such expiration of
the Surety Bond will not adversely affect the then-current ratings of the
Preferred Stock whether through obtaining a substitute Surety Bond or otherwise.
A Notice of Redemption shall be given to the holders of shares of Preferred
Stock being redeemed at least 15 but not more than 30 days (or such longer
notice period as is required by applicable law) prior to the date of any
Mandatory Redemption. A holder of shares of Preferred Stock may elect not to
have its shares redeemed pursuant to a Mandatory Expiration Redemption by
giving notice to the Corporation or the Paying Agent at least five days prior
to the redemption date of such Holder's election to continue to hold its shares
of Preferred Stock (the "Holding Election").
(ii) If, at any such time as the Surety Bond is not in effect, the
Corporation shall default in the performance or observance of any covenant
contained in paragraph 7(a)(i) through (iii) hereof, and such default shall not
have been cured prior to the close of business on the Cure Date, then the
Corporation shall (A) redeem, out of funds legally available therefor (giving
consideration to all applicable legal restraints, including, without limitation,
the restraints imposed by Section 18(a) of the Investment Company Act and
Maryland law), the minimum number of shares the redemption of which, if deemed
to have occurred on the Valuation Date with respect to which the requirements of
Section 7(a)(i) through (iii) were not met, could have been effected using the
proceeds from the deemed sale of "Special Redemption Assets," (B) notify the
Paying Agent in writing by the close of business on the second Business Day
following the Cure Date of its intention to redeem the number of whole shares of
Preferred Stock calculated in clause (A) above (a "Mandatory Asset Coverage
Redemption") and (C) give to the holders of such shares of Preferred Stock at
least 15 but not more than 30 days (or such longer notice period as is required
by applicable laws prior to the redemption date, a Notice of Redemption (which
shall specify a mandatory redemption date not more than 45 days after the
Valuation Date on which the Corporation defaulted in the performance or
observance of such covenant) with respect to the redemption of such shares. The
Corporation need not liquidate the Special Redemption Assets; however, assets
liquidated to effect the redemption must have the same respective Discounted
Values as the Special Redemption Assets. For purposes hereof, "Special
Redemption Assets" shall mean such portfolio holdings as are identified by the
Corporation in its sole discretion, the deemed sale of which for Cash on the
applicable Valuation Date on which the requirements of paragraph 7(a)(i) through
(iii) were not met would have caused the requirements of paragraph 7(a)(i) to
have been satisfied on a pro forma basis as of such Valuation Date.
(iii) Any Mandatory Redemption will be made at a price equal to S100,000
per share plus accumulated and unpaid dividends through the date of redemption
(whether or not earned or declared by the Corporation), except that if any such
redemption is not made on a Dividend Payment date, it will be made at a price
equal to $100,250 plus accumulated and unpaid dividends through the date of
redemption (whether or not earned or declared by the Corporation). Such
redemptions may only be made by the Corporation to the extent permitted under
the Securities Exchange Act and Maryland law and provided neither principal nor
interest payments with respect to the Notes are then in default.
(c) General Provisions for Redemptions. (i) Notwithstanding the other
provisions of this paragraph 5, the Corporation may redeem shares of Preferred
Stock only to the extent permitted under the Investment Company Act, Maryland
law and the Indenture.
(ii) Notwithstanding the other provisions of this paragraph 5, no shares of
Preferred Stock may be redeemed other than as specified in the following proviso
unless all accumulated and unpaid dividends on all outstanding shares of
Preferred Stock for all past Dividend Periods shall have been or are
contemporaneously paid or declared and Deposit Securities maturing on or prior
to the date fixed for redemption are set apart for the payment of such
dividends; provided, however, that the Corporation may, without regard to such
limitations, redeem, purchase or otherwise acquire shares of Preferred Stock (A)
as a whole, pursuant to a Mandatory Redemption or an Optional Redemption or (B)
pursuant to a purchase or exchange offer made for all of the outstanding shares
of Preferred Stock to the extent permitted under the Investment Company Act,
Maryland law and the Charter.
(iii) If fewer than all the outstanding shares of Preferred Stock are to be
redeemed by Mandatory Redemption or Optional Redemption, the shares to be
redeemed shall be identified by the Board of Directors of the Corporation by lot
or by such other method as the Corporation shall deem fair and equitable.
(iv) Whenever shares of the Preferred Stock are to be redeemed, the
Corporation shall mail, within the time periods specified in paragraphs 5(a) and
5(b), a written notice of redemption by first-class mail, postage prepaid, to
each holder of shares of Preferred Stock to be redeemed (a "Notice of
Redemption"), as its name and address appear on the Stock Books, and to the
Auction Agent. The Notice of Redemption shall also be published on or about the
date thereof in The Wall Street Journal (National Edition) or, if such notice
cannot be published therein, then in a comparable newspaper printed in the
English language and of general circulation in New York City). Each Notice of
Redemption shall state (A) the redemption date, (B) the redemption price, (C)
the number of shares of Preferred Stock to be redeemed, (D) the place or places
where such shares of Preferred Shares are to be redeemed, (E) that dividends on
the shares to be redeemed will cease to accumulate on such redemption date, (F)
the provision of the Charter under which the redemption is being made and (G) if
such redemption is a Mandatory Expiration Redemption, that any holder of shares
of Preferred Stock may elect not to have its shares redeemed by giving notice
thereof to the Corporation or the Paying Agent at least five days prior to the
redemption date. No defect in the Notice of Redemption or in the mailing or
publication thereof shall affect the validity of the redemption proceedings,
except an required by applicable law.
(v) Following delivery of notice to the Paying Agent of the Corporation's
intention to redeem shares of Preferred Stock pursuant to paragraph 5(a), (A)
such shares of Preferred Stock and (B) Special Redemption Assets identified by
the Corporation with respect to such shares of Preferred Stock shall thereafter
be excluded from the calculation of Preferred Stock Basic Maintenance Amount and
Portfolio Calculation if the provisions of paragraph 7 hereof are in effect at
such time.
(vi) On each redemption date, the Securities Depository shall surrender the
certificate evidencing the shares of Preferred Stock. Each holder of shares of
Preferred Stock that were called for redemption, and who did not exercise the
Holding Election, shall then be entitled to receive payment of the redemption
price for each such share. If less than all of the shares represented by such
certificates are to be redeemed, the Corporation shall issue a new certificate
for the shares not redeemed.
(vii) Should the Corporation give a Notice of Redemption, then no later
than the Business Day next preceding the date fixed for redemption, the
Corporation shall deposit with the Paying Agent Deposit Securities constituting
immediately available funds in an amount sufficient to redeem the shares of
Preferred Stock to be redeemed. In such event the Corporation shall give the
Paying Agent irrevocable instructions and authority to pay the redemption price
to the holders of shares of Preferred Stock called for redemption, and who did
not exercise a Holding Election, upon the redemption date. The Corporation may
direct the Paying Agent with respect to the investment of any Deposit Securities
so deposited provided that the proceeds of any such investment will be available
at the opening of business on such redemption date. The Deposit Securities
deposited with the Paying Agent pursuant to the immediately preceding sentence
and the shares of Preferred Stock to be redeemed shall be excluded from the
calculation of Preferred Stock Basic Maintenance Amount and Portfolio
Calculation (if applicable at such time). Upon the date of such deposit, or if
no such deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making payment of the redemption price), all rights
of the holders of the shares of Preferred Stock so called for redemption shall
cease and terminate except the right of the holders thereof to receive the
redemption price thereof (inclusive of accumulated but unpaid dividends, but
without any interest) against delivery by book entry of such shares of Preferred
Stock, and such shares shall no longer be deemed outstanding for any purpose;
provided, however, this sentence shall not apply to holders of shares of
Preferred Stock who have exercised the Holding Election and who shall retain all
rights granted to holders pursuant to the Charter. The Corporation shall be
entitled to receive, promptly after the date fixed for redemption, any cash in
excess of the aggregate redemption price of the shares of Preferred Stock called
for redemption and for which the Holding Election was not exercised, on such
date and any remaining Deposit Securities. Any assets so deposited which are
unclaimed at the end of two years from such redemption date shall, to the extent
permitted by law, be repaid to the Corporation, after which the holders of the
shares of Preferred Stock so called for redemption, who did not exercise the
Holding Election, may look only to the Corporation for payment thereof. The
Corporation shall be entitled to receive, from time to time after the date fixed
for redemption, any interest on the Deposit Securities so deposited.
(viii) Shares of Preferred Stock that have been redeemed, purchased or
otherwise acquired by the Corporation may not be reissued, shall not be deemed
outstanding, and shall be retired and cancelled. In no event shall such shares
of Preferred Stock have any voting rights. Shares of Preferred Stock with
respect to which a Notice of Redemption has been given as provided in paragraph
5(c)(iv) and whose holders have not elected to retain their shares pursuant to
the last sentence of Paragraph 5(b)(i) (if applicable) shall not be deemed
outstanding for purposes of the Auction Procedures set forth in paragraph 8
hereof.
(ix) In addition to redemption rights expressly established under the
Charter, the Corporation may redeem or repurchase shares of Common Stock to the
extent now or hereafter permitted by the laws of the State of Maryland, by the
Investment Company Act and by the Charter,
(x) If the Corporation shall not have funds legally available for the
redemption of all the shares of the Preferred Stock to be redeemed on any
redemption date (or is otherwise legally unable to effect such redemption), the
corporation shall redeem on such redemption date the number of shares of
Preferred Stock as it shall have legally available funds to redeem, ratably from
each holder of shares of Preferred Stock whose shares are to be redeemed and the
remainder of the shares of the Preferred Stock required to be redeemed shall be
redeemed on the earliest practicable date on which the Corporation shall first
have funds legally available for the redemption of such shares pursuant to a
Notice of Redemption given to the holders of such shares of Preferred Stock at
least 15 but not more than 30 days (or such longer notice period as is required
by applicable law) prior the redemption date.
(xi) If on any date on which the payment of the redemption price would
constitute a Scheduled Payment and the Surety Bond is in effect, the Corporation
defaults in making payment of such redemption price and the Surety makes such
Scheduled Payments to holders of shares of Preferred Stock called for
redemption, the Surety, thereafter, shall be subrogated to all the rights of
such holders with respect to their shares of Preferred Stock.
6. Voting Rights
(a) General. Each holder of shares of Preferred Stock shall be entitled to
one vote per S1000 of liquidation preference of each share of Preferred Stock
without regard to any liquidation preference related to accumulated and unpaid
dividends (i.e., 100 votes per share); provided that all the votes represented
by a single share of Preferred Stock must be voted together, on each matter
submitted to a vote of stockholders of the Corporation and, except as otherwise
provided in the Charter or by Maryland law, the holders of Preferred Stock and
the holders of Common Stock of the Corporation shall vote together as one class
on all matters submitted to the stockholders; provided, however, that at any
meeting of the stockholders of the Corporation held for the election of
directors, the holders of Preferred Stock shall be entitled as a class, to the
exclusion of the holders of the Common Stock, to elect two directors of the
Corporation; provided, further, that the identity of the two directors
representing the holders of Preferred Stock on and after the Restatement Date
until the first meeting of the Corporation's stockholders following the
Restatement Date may be designated by the Board of Directors. Subject to
paragraph 6(b) hereof, the holders of the shares of Common Stock and Preferred
Stock shall vote as a single class for the election of the balance of the
directors.
(b) Right to Elect Majority of Board of Directors. (i) During any period
commencing with the Corporation's failure to pay dividends on shares of the
Preferred Stock in an amount equal to two full years of dividends (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the number of directors then constituting
the Board of Directors, shall (together with the two directors elected by the
holders pursuant to paragraph 6(a)) constitute a majority of the total number of
the directors of the Corporation as increased, and the holders of shares of
Preferred Stock shall be entitled, voting as a single class on a
100-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), to elect the
smallest number of additional directors of the Corporation that shall constitute
a majority of the total number of directors of the Corporation so increased.
(ii) The Voting Period and the voting rights so created upon the occurrence
of the conditions set forth in this paragraph 6(b) shall continue unless and
until all accumulated and unpaid dividends on the then outstanding shares of
Preferred Stock including the accumulated and unpaid dividends as of the last
preceding Dividend Payment Date shall have been paid or declared and sufficient
funds set apart for the payment of such dividends. Upon the termination of a
Voting Period, the voting rights described in paragraph 6(b)(i) shall cease,
subject always, however, to the revesting of such voting rights in the holders
of shares of Preferred Stock upon the further occurrence of the event described
in such paragraph 6(b)(i).
(c) Voting Procedures. (i) As soon as practicable after the accrual of any
right of the holders of shares of Preferred Stock to elect directors pursuant to
paragraph 6(b)(i), the Corporation shall notify the Auction Agent and the
Auction Agent shall call a special meeting of the holders of shares of Preferred
Stock by mailing a notice of such special meeting to the holders of shares of
Preferred Stock not less than 10 nor more than 20 days after the date of mailing
of such notice. If the Corporation fails to send such notice to the Auction
Agent or if the Auction Agent does not call such a special meeting (as provided
above), it may be called by any holder of shares of Preferred Stock on like
notice. The record date for determining the holders of shares of Preferred Stock
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting at which directors are
elected held during a Voting Period, the holders of shares of Preferred Stock,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be entitled
to elect the number of directors prescribed in paragraph 6(b)(i) above on a
100-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of shares of Preferred Stock
present in person or by proxy shall have the power to adjourn the meeting
without notice, other than an announcement at the meeting, until a quorum is
present.
(ii) For purposes of determining any rights of the holders of shares of
Preferred Stock to vote on any matter, whether such right is created by the
Charter, by statute or otherwise, no holder of shares of Preferred Stock shall
be entitled to vote and no share of Preferred Stock shall be deemed to be
"outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum, if prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding for quorum
purposes, as the case may be, sufficient funds for the redemption of such shares
have been deposited in trust with the Paying Agent for that purpose, the
requisite Notice of Redemption with respect to such shares shall have been given
as provided in paragraph 5(c)(iv) and such holder shall not have exercised the
Holding Election.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of holders of shares of Preferred
Stock to elect directors pursuant to paragraph 6(b) shall continue,
notwithstanding the election at such meeting by the holders of shares of
Preferred Stock of the number of directors that they are entitled to elect, and
the persons so elected by the holders of shares of Preferred Stock, together
with the incumbent directors, shall constitute the duly elected directors of the
Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms of
office of the directors elected by the holders of shares of Preferred Stock
pursuant to paragraph 6(b)(i) shall terminate, the persons who shall have been
serving as directors immediately prior to such voting period and who are
incumbent shall constitute the directors of the Corporation and the voting
rights of the holders of shares of Preferred Stock to elect directors pursuant
to paragraph 6(b)(i) shall cease.
(v) The directors elected by the holders of shares of Preferred Stock
pursuant to paragraphs 6(a) and 6(b)(i) shall (subject to the provisions of any
applicable law) be subject to removal only by the vote of the holders of a
majority of outstanding shares of the Preferred Stock. Any vacancy on the Board
of Directors occurring by reason of such removal or otherwise (in the case of
directors subject to election by the holders of Preferred Stock) may be filled
only by vote of the holders of Preferred Stock outstanding or (subject to the
provisions of any applicable law) by a majority of the remaining directors (or
the remaining director) who were elected by the holders of shares of Preferred
Stock. Any other vacancy on the Board of Directors during a Voting Period shall,
to the extent permitted by applicable law, be filled by a vote of the remaining
directors or the holder or holders of the Corporation's outstanding Common Stock
and Preferred Stock, voting as a single class.
(d) Surety Voting. At any time that the Preferred Stock is held by the
Surety Custodian pursuant to paragraph 2A hereof and the Surety Custody
Agreement, voting rights with respect to shares of Preferred Stock will be
exercised by the Surety Custodian in accordance with instructions given by the
beneficial holders of the shares of Preferred Stock; provided, however, that at
any time that the Surety Custodian has made a claim for payment under, and the
Surety has made Scheduled Payments pursuant to, the Surety Bond, the Surety
Custodian will vote the Preferred Shares with respect to which such Scheduled
Payments have been made under the Surety Bond in accordance with instructions
given by the Surety. The right of the Surety to instruct the Surety Custodian
with respect to voting such shares of Preferred Stock shall terminate when the
Corporation has made payments on the shares of Preferred Stock with respect to
which the Scheduled Payments were made by the Surety or the Corporation has
reimbursed the Surety for such Scheduled Payments and shall be reinstated if the
Surety makes additional Scheduled Payments pursuant to the Surety Bond.
(e) Exclusive Remedy. Unless otherwise required by law, the holders of
shares of Preferred Stock shall not have any relative rights or preferences or
other special rights other than those specifically set forth herein. In the
event that the Corporation fails to pay any dividends on the shares of Preferred
Stock, the exclusive remedy of the holders of shares of Preferred Stock shall be
the right to vote for directors pursuant to the provisions of this paragraph 6.
In no event shall the holders of shares of Preferred Stock have any right to sue
for, or bring a proceeding with respect to, such dividends or damages for the
failure to receive the same.
7. Asset and Liability Coverage
(a) Preferred Stock Basic Maintenance Amount Required Under Certain
Circumstances. (i) At any such time as the Surety Bond is not in effect and any
of the shares of Preferred Stock are outstanding, the Corporation will maintain,
on each Valuation Date, Eligible Portfolio Property having an aggregate
Discounted Value at least equal to the Preferred Stock Basic Maintenance Amount,
each as of such Valuation Date.
(ii) To the extent that this paragraph 7(a) is applicable at any such time,
on or before 5:00 P.M., Boston time, on the third Business Day after each
Valuation Date, the Corporation shall complete and deliver to the Auction Agent
a Portfolio Valuation Report, which will be deemed to have been delivered to the
Auction Agent (A) if the Auction Agent receives a copy or telecopy, telex or
other electronic transcription thereof, or (B) if the Auction Agent receives a
telecopy, telex or other electronic transcription setting forth at least the
applicable Discounted Value of the aggregate of all Eligible Portfolio Property
(the "Portfolio Calculation") and the Preferred Stock Basic Maintenance Amount
each as of the relevant Valuation Date and on the same day the Corporation mails
to the Auction Agent for delivery on the next Business Day the full Portfolio
Valuation Report. A failure by the Corporation to deliver a Portfolio Valuation
Report under this paragraph 7(a)(ii) shall be deemed to be delivery of a
Portfolio Valuation Report indicating a value for all Eligible Portfolio
Property of less than the Preferred Stock Basic Maintenance Amount, as of the
relevant Valuation Date.
(iii) To the extent that this paragraph 7(a) is applicable at any such
time, within three Business Days after the date of delivery to the Auction
Agent of a Portfolio Valuation Report in accordance with paragraph 7(a)(ii)
above relating to a Quarterly Valuation Date, the Corporation shall deliver to
the Auction Agent a letter reviewing the Portfolio Calculation, prepared by the
Corporation's Independent Accountants, relating to such Portfolio Valuation
Report substantially to the effect that (A) the Independent Accountants have
read the Portfolio Valuation Report for the current Quarterly Valuation Date
(the "Report"); (3) with respect to the issue size compliance, issuer
diversification and industry diversification calculations, such calculations and
the resulting eligible portfolio market value are numerically correct; (C) with
respect to the Preferred Stock Basic Maintenance Amount, the results of the
calculation set forth in the Report have been recalculated and are numerically
correct; (D) with respect to the excess or deficiency of the Discounted Value
amount when compared to the Preferred Stock Basic Maintenance Amount, the
results of the calculation set forth in the Report have been recalculated and
are numerically correct; (E) with respect to the Rating Agencies, ratings on
Corporate Debt Obligations, issuer name, issue size and coupon rate listed in
the Report, that information has been traced and agrees with the information
listed in The Standard & Poor's Bond Guide (in the event such information does
not agree or such information is not listed in The Standard & Poor's Bond Guide,
the Independent Accountants will inquire of the Rating Agencies what such
information is, and provide a listing in their letter of such differences, if
any); and (F) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value) provided by the
custodian of the Corporation's assets to the Corporation for purposes of valuing
securities in the portfolio, the Independent Accountants have traced the price
used in the Report to the lower of the two bid prices listed in the report
provided by such custodian and verified that such information agrees (in the
event such information does not agree, the Independent Accountants will provide
a listing in their letter of such differences). If any letter reviewing the
Portfolio Calculation delivered pursuant to this paragraph shows that an error
was made in the Portfolio Valuation Report for such Quarterly Valuation Date, or
shows that a lower aggregate Discounted Value for the aggregate of all Eligible
Portfolio Property was determined by the Independent Accountants, the
calculation or determination made by such Independent Accountants shall be final
and conclusive and shall be binding on the Corporation, and the Corporation
shall promptly amend the Portfolio Valuation Report and deliver the amended
Portfolio Valuation Report to the Auction Agent.
(iv) To the extent that this paragraph 7(a) is applicable at any such time,
the Corporation shall deliver an Officers' Certificate to the Auction Agent as
of the fifteenth of each month (and if such day is not a Business Day, then the
next succeeding Business Day) and the last Business Day of each month
certifying, to the best knowledge of the Officers signing such Officers'
Certificate, the Portfolio Calculation as of such Business Day and the Preferred
Stock Basic Maintenance Amount as of such Business Day.
(b) Liquidity Coverage. (i) At any such time as the Surety Bond is not
in effect and any shares of Preferred Stock are outstanding, the Corporation
shall determine as of each Valuation Date (A) the Market Value of the Interest
and Dividend Coverage Assets owned by the Corporation as of that Valuation Date,
(B) the Interest and Dividend Coverage Amount on that Valuation Date, and (C)
whether the Minimum Liquidity Level is met as of that Valuation Date. The
calculations of the Interest and Dividend Coverage Assets, the Interest and
Dividend Coverage Amount and whether the Minimum Liquidity Level is met shall be
set forth in a certificate (a "Certificate of Minimum Liquidity") dated as of
the Valuation Date. The Portfolio Valuation Report and the Certificate of
Minimum Liquidity may be combined in one certificate. To the extent that this
paragraph 7(b) shall be applicable at any such time, the Corporation shall cause
the Certificate of Minimum Liquidity to be delivered to the Auction Agent not
later than the close of business on the third Business Day after the Valuation
Date. The Minimum Liquidity Level shall be deemed to be met as of any date of
determination if the Corporation has timely delivered a Certificate of Minimum
Liquidity relating to such date, which states that the same has been met and
which is not manifestly inaccurate. In the event that a Certificate of Minimum
Liquidity is not delivered to the Auction Agent when required pursuant to this
paragraph 7(b), the Minimum Liquidity Level shall be deemed not to have been met
as of the applicable date.
(ii) To the extent that this paragraph 7(b) shall be applicable at any such
time, if the Minimum Liquidity Level is not met as of any Valuation Date, then
the Corporation shall purchase or otherwise acquire Interest and Dividend
Coverage Assets (with the proceeds from the Liquidation of Eligible Portfolio
Property or otherwise) to the extent necessary so that the Minimum Liquidity
Level is met as of the fifth Business Day following such Valuation Date. The
Corporation shall, by such fifth Business Day, provide to the Auction Agent a
Certificate of Minimum Liquidity setting forth the calculations of the Interest
and Dividend Coverage Assets and the Interest and Dividend Coverage Amount and
showing that the Minimum Liquidity Level is met as of such fifth Business Day
together with a report of the custodian of the Corporation's assets confirming
the amount of the Corporation's Interest and Dividend Coverage Assets as of such
fifth Business Day.
8. Auction Procedures
(a) Certain Definitions. Capitalized terms not defined in this paragraph
8(a) shall have the respective meanings specified in paragraph 2. As used in
this paragraph 8, the following terms shall have the following meanings, unless
the context otherwise requires:
(i) "Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Corporation.
(ii) "Agent Members" shall mean the member of the Securities Depository
that will act on behalf of a Bidder and is identified as such in such Bidder's
Purchaser's Letter.
(iii) "Auction" shall mean the periodic operation of the procedures set
forth in this paragraph 8.
(iv) "Auction Date" shall mean the first Business Day preceding the first
day of the next Dividend Period.
(v) "Available Preferred Stock" shall have the meaning specified in
paragraph 8(d)(i)(A) below.
(vi) "Bid" and "Bids" shall have the respective meanings specified in
paragraph 8(b)(i) below.
(vii) "Bidder" and "Bidders" shall have the respective meanings specified
in paragraph 8(b)(i) below.
(viii) "Broker-Dealer" shall mean Drexel Burnham Lambert Incorporated and
any other broker-dealer, or other entity permitted by law to perform the
functions required of a Broker-Dealer in this paragraph 8, that has been
selected by the Corporation and has entered into a Broker-Dealer Agreement with
the Auction Agent that remains effective.
(ix) "Broker-Dealer Agreements" shall mean agreements between the Auction
Agent and Drexel Burnham Lambert Incorporated and similar agreements with one or
more other Broker-Dealers pursuant to which such Broker-Dealer agrees to follow
the procedures specified in this paragraph 8.
(x) "Commercial Paper Dealers" means Drexel Burnham Lambert Incorporated
and any of its Affiliates or any of their respective successors.
(xi) "Existing Holder," when used with respect to shares of Preferred
Stock, shall mean a Person who has signed a Master Purchaser's Letter and is
listed as the beneficial owner of such shares of Preferred Stock in the records
of the Auction Agent.
(xii) "Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xiii) "Master Purchaser's Letter" shall mean a letter addressed to the
Corporation, the Auction Agent and a Broker-Dealer in which a Person agrees,
among other things, to offer to purchase, purchase, offer to sell and/or sell
auction rate securities as set forth in this paragraph 8.
(xiv) "Maximum Applicable Rate" and "Minimum Applicable Rate" on any
Auction Date shall be 175% and 90%, respectively, of the 30-day "AA" Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding the Auction Date.
(xv) "Potential Holder" shall mean any Person, including any Existing
Holder, (A) who shall have executed a Purchaser's Letter and (B) who may be
interested in acquiring shares of Preferred Stock (or, in the case of an
Existing Holder, additional shares of Preferred Stock).
(xvi) "Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xvii) "Submission Deadline" shall mean 12:30 P.M., New York City time, on
any Auction Date or such other time on any Auction Date (as specified by the
Auction Agent from time to time) by which Broker-Dealers are required to submit
Orders to the Auction Agent.
(xviii) "Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xix) "Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragaph 8(d)(i) below.
(xx) "Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xxi) "Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 8(d)(i) below,
(xxii) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph 8(d)(i) below.
(xxiii) "30-day AA Composite Commercial Paper Rate" on any date, means (i)
the interest equivalent of the 30-day rate on commercial paper on behalf of
issuers whose corporate bonds are rated "AA" by S&P, or the equivalent of such
rating by another nationally recognized rating agency, as announced by the
Federal Reserve Bank of New York for the close of business on the Business Day
immediately preceding such date; or (ii) if the Federal Reserve Bank of New York
does not make available such a rate, then the arithmetic average of the interest
equivalent of the 30-day 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 30-day
"AA" Composite Commercial Paper Rate, such rate shall be determined on the basis
of the quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers,
the Auction Agent will retain a dealer to provide such quotations.
(xxiv) "Winning Bid Rate" shall have the meaning specified in paragraph
8(d)(i) below.
(b) Orders by Existing Holders and Potential Holders. (i) On or prior to
the Submission Deadline on each Auction Date:
(A) each Existing Holder, with respect to shares of Preferred Stock it
then holds, may submit to a Broker-Dealer by telephone or otherwise
information as to:
(1) the number of shares, if any, of Preferred Stock held by such
Existing Holder which such existing Holder desires to continue to hold
without regard to the Applicable Rate for the next Dividend Period;
(2) the number of shares, if any, of Preferred Stock which such
Existing Holder desires to continue to hold if the Applicable Rate for
the next Dividend Period shall not be less than the rate per annum
then specified by such Existing Holder;
(3) the number of shares, if any, of Preferred Stock 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
(B) Each Broker-Dealer, using a list of Potential Holders that shall
be maintained by such Broker-Dealer in good faith for the purposes of
conducting a competitive Auction, shall contact Potential Holders on such
lists to determine the number of shares, if any, of Preferred Stock which
such Potential Holders offer to purchase if the Applicable Rate for the
next succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of
information referred to in this paragraph 8(b) is hereinafter referred to as an
"Order" and collectively as "Orders" and each Existing Holder and each Potential
Holder placing an Order is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (A)(l) of this paragraph 8(b) is hereinafter referred to as a "Hold
Order" and collectively as "Hold Orders"; an Order containing the information
referred to in Clause (A)(2) or (B) of this paragraph 8(b) is hereinafter
referred to as "Bid" and collectively as "Bids"; and an Order containing the
information referred to in clause (A)(3) of this paragraph 8(b) is hereinafter
referred to as a "Sell Order" and collectively as "Sell Orders."
(ii) As a condition to participating in any Auction, each prospective
purchaser of shares of Preferred Stock shall be required to sign and deliver two
copies to the Auction Agent, and one copy to a Broker-Dealer, of a Master
Purchaser's Letter, in which such prospective purchaser will agree, among other
things, that:
(A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of shares of Preferred Stock specified in such Bid
if the Applicable Rate determined on such Auction Date shall be less
than the rate specified therein;
(2) such specified number or a lesser number of shares of
Preferred Stock to be determined as set forth in clause (D) of
paragraph 8(e)(i) if the Applicable Rate determined on such Auction
Date shall be equal to the rate specified therein; or
(3) such specified number or a lesser number of shares of
Preferred Stock to be determined as set forth in clause (C) of
paragraph 8(e)(ii) if the rate specified therein shall be higher than
the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of shares of Preferred Stock specified in such
Sell Order; or
(2) such specified number or a lesser number of shares of
Preferred Stock as set forth in clause (C) of paragraph 8(e)(ii) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of shares of Preferred Stock specified in such Bid
if the Applicable Rate determined on such Auction Date shall be higher
than the rate therein; or
(2) such specified number or a lesser number of shares of
Preferred Stock as set forth in clause (E) of paragraph 8(e)(i) of the
Applicable Rate determined on such Auction Date shall be equal to the
rate specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent. (i) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer for the Auction to be conducted on such Auction Date and shall
specify with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of shares of Preferred Stock that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder the number of
shares, if any, of Preferred Stock subject to any:
(1) Hold Order placed by such Existing Holder;
(2) Bid placed by such Existing Holder and the rate specified in
such Bid; and
(3) Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder the rate specified
in such Potential Holder's Bid.
(ii) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001 of 1%).
(iii) If an Order or Orders covering all of the shares of Preferred Stock
held by an Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted on behalf of such Existing Holder covering the number of shares of
Preferred Stock held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(iv) If one or more Orders covering in the aggregate more than the number
of shares of Preferred Stock held by an Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid as follows and in the
following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of outstanding shares of
Preferred Stock held by such Existing Holder; provided that if more than
one Hold Order is submitted on behalf of such Existing Holder and the
number of shares of Preferred Stock subject to such Hold Orders exceeds the
number of shares of Preferred Stock held by such Existing Holder, the
number of shares of Preferred Stock subject to each such Hold Order shall
be reduced pro rata so that such Hold Order shall cover the number of
shares of Preferred Stock held by such Existing Holder;
(B) (1) any Bid shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the number of shares of Preferred Stock subject to any Hold
Orders referred to in clause (iv)(A) of paragraph 8(c);
(2) subject to subclause (1), if more than one Bid with the same
rate is submitted on behalf of such Existing Holder and the number of
shares of Preferred Stock subject to such Bids is greater than the
excess described in subclause (1), the number of shares of Preferred
Stock subject to such Bids shall be reduced pro rata so that such Bids
shall cover the number of shares of Preferred Stock equal to such
excess;
(3) subject to subclause (1), if more than one Bid with
different rates is submitted on behalf of such Existing Holder, such
Bids shall be considered valid in the ascending order of their
respective rates; and
(4) the number, if any, of such shares of Preferred Stock subject
to Bids not valid under this clause (B) shall be treated as the
subject of a Bid by a Potential Holder at the rate therein specified;
and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the sum of the shares of Preferred Stock subject to valid Hold
Orders referred to in clause (iv)(A) of paragraph 8(c) and valid Bids by
such Existing Holder referred to in clause (iv)(B) of paragraph 8(c),
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of Preferred Stock subject to such
Sell Orders is greater than such excess, the number of shares of Preferred
Stock subject to such Sell Orders shall be reduced Pro rata so that such
Sell Orders shall cover the number of shares of Preferred Stock equal to
such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate and number of shares of
Preferred Stock therein specified.
(vi) If any rate specified in any Bid is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Bid is made, such Bid
shall be deemed to be a Bid specifying a rate equal to such Minimum Applicable
Rate.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. (i) Not earlier than the Submission Deadline, 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 as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
shall determine:
(A) the excess of the total number of shares of Preferred Stock over
the number of shares of Preferred Stock that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
Preferred Stocks");
(B) from the Submitted Orders whether the number of shares of
Preferred Stock that are subject of Submitted Bids by Potential Holders
specifying one or more rates equal to or lower than the Maximum Applicable
Rate exceeds or is equal to the sum of:
(1) the number of shares of Preferred Stock that are the subject
of Submitted Bids by Existing Holders specifying one or more rates
higher than the Maximum Rate; and
(2) the number of shares of Preferred Stock that are subject to
Submitted Sell Orders;
in the event of such excess or such equality (other than because all
of the shares of Preferred Stock are the subject of Submitted Hold Orders),
such Submitted Bids are hereinafter referred to collectively as "Sufficient
Clearing Bids"; and
(C) if Sufficient Clearing Bids exist, the lowest rate specified in
the Submitted Bids (the "Winning Bid Rate") which if:
(1) each Submitted Bid from Existing Holders specifying such
lowest rate and all other Submitted Bids from Existing Holders
specifying lower rates were accepted, thus entitling such Existing
Holders to continue to hold the shares of Preferred Stock that are the
subject of such Submitted Bids; and
(2) each Submitted Bid from Potential Holders specifying such
lowest rate and all other Submitted Bids from Potential Holders
specifying lower rates were accepted, thus entitling those Potential
Holders to purchase the shares of Preferred Stock that are the subject
of such Submitted Bids, would result in such Existing Holders
described in subclause (1) above continuing to hold an aggregate
number of shares of Preferred Stock which, when added to the number of
shares of Preferred Stock to be purchased by such Potential Holders
described in subclause (2) above, would equal not less than the
Available Preferred Stock.
(ii) Promptly after the Auction Agent has made the determination pursuant
to paragraph 8(d)(i) the Auction Agent shall advise the Corporation of the
Maximum Applicable Rate and the Minimum Applicable Rate and, based on all such
determinations, the Applicable Rate for the next succeeding Dividend Period as
follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the outstanding shares of Preferred Stock 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; or
(C) if all the shares of Preferred Stock are the subject of Submitted
Hold Orders, that the Applicable Rate for Preferred Stock for the next
succeeding Dividend Period shall be equal to the Minimum Applicable Rate.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocations of Shares. Existing Holders shall continue to hold the shares of
Preferred Stock that are the subject of Submitted Hold Orders, and, based on the
determination made pursuant to paragraph 8(d)(i), the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall
take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 8(e)(iii), Submitted Bids and Submitted Sell Orders shall be
accepted or rejected in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each Existing Holder specifying any rate that is
higher than the Winning Bid Rate shall be rejected, thus requiring each
such Existing Holder to sell the shares of Preferred Stock that are the
subject of such Submitted Sell Orders or Submitted Bids;
(B) the Submitted Bid of each Existing Holder specifying any rate that
is lower than the Winning Bid Rate shall be accepted thus entitling each
such Exisiting Holder to continue to hold the shares of Preferred Stock
that are the subject of such Submitted Bid;
(C) the Submitted Bid of each Potential Holder specifying any rate
that is lower than the Winning Bid Rate shall be accepted and such
Potential Holder shall purchase the number of shares of Preferred Stock
subject to such Submitted Bid;
(D) the Submitted Bid of each Existing Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, thus entitling such
Existing Holder to continue to hold the shares of Preferred Stock that are
subject of such Submitted Bid, unless the number of shares of Preferred
Stock subject to all such Submitted Bids shall be greater than the number
of shares of Preferred Stock equal to the excess of the Available Preferred
Stock over the number of shares of Preferred Stock subject to Submitted
Bids described in clauses (B) and (C) of this paragraph 8(e)(i) (the
"Remaining Shares"). In such event such Existing Holder shall be required
to sell shares of Preferred Stock subject to such Submitted Bid, but only
in an amount equal to the difference between (x) the number of shares of
Preferred Stock then held by such Existing Holder subject to such Submitted
Bid and (y) the number of shares of Preferred Stock obtained by multiplying
the number of Remaining Shares by a fraction the numerator of which shall
be the number of shares of Preferred Stock held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the sum
of the number of shares of Preferred Stock subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each Potential Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, but only in an amount
equal to the number of shares of Preferred Stock obtained by multiplying
the difference between the Available Preferred Stock and the number of
shares of Preferred Stock subject to Submitted Bids described in clauses
(B), (C) and (D) of this paragraph 8(e)(i) by a fraction the numerator of
which shall be the number of shares of Preferred Stock subject to such
Submitted Bid and the denominator of which shall be the sum of the number
of shares of Preferred Stock subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of Preferred Stock are the subject of Submitted Hold
Orders), subject to the provisions of paragraph 8(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate that
is equal to or lower than the Maximum Rate shall be accepted, thus
entitling such Existing Holders to continue to hold the shares of Preferred
Stock that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
accepted and such Potential Holder shall purchase the number of shares of
Preferred Stock subject to such Submitted Bid; and
(C) the Submitted Bid of each Existing Holder specifying any rate that
is higher than the Maximum Applicable Rate shall be rejected, thus
requiring each such Existing Holder to sell the shares of Preferred Stock
that are the subject of such Submitted Bid, and the Submitted Sell Order of
each Existing Holder shall be accepted, in both cases only in an amount
equal to the difference between (x) the number of shares of Preferred Stock
then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (y) the number of shares of Preferred Stock
obtained by multiplying the difference between the Available Preferred
Stock and the aggregate number of shares of Preferred Stock subject to
Submitted Bids described in clauses (A) and (B) of this paragraph 8(e)(ii)
by a fraction the numerator of which shall be the number of shares of
Preferred Stock held by such Existing Holder subject to such Submitted Bid
or Submitted Sell Order and the denominator of which shall be the aggregate
number of shares of Preferred Stock subject to all such Submitted Bids and
Submitted Sell orders.
(iii) If, as a result of the procedures described in paragraphs 8(e)(i) or
8(e)(ii), 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 Preferred Stock on any Auction Date, the Auction Agent shall, in such
manner as it shall determine, round up or down the number of shares of Preferred
Stock to be purchased or sold by any Existing Holder or Potential Holder on such
Auction Date so that the number of shares purchased or sold by each Existing
Holder or Potential Holder on such Auction Date shall be whole shares of
Preferred Stock, even if such allocation results in one or more of such
Potential Holders not purchasing shares of Preferred Stock on such Auction Date
or any Existing Holder not selling shares of Preferred Stock on such Auction
Date.
(iv) Based on the results of each Auction, the Auction Agent shall
determine the aggregate number of shares of Preferred Stock to be purchased and
the aggregate number of shares of Preferred Stock to be sold by Potential
Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids
or Sell Orders and, with respect to each Broker-Dealer, to the extent that such
aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other 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 Preferred Stock.
(f) Participation in Auctions. Neither the Corporation nor any Affiliate of
the Corporation may submit an Order in any Auction.
(g) Miscellaneous. (i) The Board of Directors of the Corporation may
interpret the provisions of this paragraph 8 to resolve any inconsistency or
ambiguity, remedy any formal defect or make any other change or modification
which does not adversely affect the rights of Existing Holders of Preferred
Stock. If such inconsistency, ambiguity or defect reflects an inaccurate
provision hereof, the Board of Directors may, in appropriate circumstances as
permitted by law, authorize the filing of a Certificate of Correction.
(ii) (A) An Existing Holder may sell, transfer or otherwise dispose of
shares of Preferred Stock only (1) pursuant to a Bid or a Sell Order placed
in an Auction in accordance with the procedures set forth in this paragraph
8, (2) to or through a Broker-Dealer or (3) to a Person that has delivered
a signed Master Purchaser's Letter to the Auction Agent, provided that as a
condition to such transfer (in the case of all transfers other than those
pursuant to Auctions), such Existing Holder, the transferee or the
transferee's Broker-Dealer or Agent Member of the Securities Depository
shall advise the Auction Agent of such transfer; and
(B) Except as otherwise provided by law, all of the outstanding
shares of Preferred Stock shall be represented by a separate
certificate or certificates registered in the name of the nominee of
the Securities Depository, and no Person acquiring shares of Preferred
Stock shall be entitled to receive a certificate representing such
shares.
(iii) The Corporation shall exercise its best efforts to maintain an
Auction Agent pursuant to an agreement containing terms not materially less
favorable to the Corporation than the terms of the Auction Agent Agreement
first entered into by the Corporation pursuant to the resolutions adopted
by the Board of Directors of the Corporation on November 11, 1988.
(h) Headings of Subdivisions. The headings of the various subdivisions of
this paragraph 8 are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
ARTICLE V
BOARD OF DIRECTORS
(A) All corporate powers and authority of the Corporation (except as
otherwise provided by statute, by the Charter or by the Corporation's By-laws)
shall be vested in and exercised by the Board of Directors. Except as may be
required to give effect to paragraph 6(b) of Article IV(C), the number of
directors constituting the Board of Directors shall be no less than three (3)
nor more than fifteen (15), with the exact number to be fixed pursuant to the
By-laws provided that the number of directors shall at no time be less than the
minimum number required under the Maryland General Corporation Law or, as long
as any shares of Preferred Stock are outstanding, the Investment Company Act.
The current number of directors is six (6) and the persons who are currently
acting as directors are Richard E. Omohundro, Jr., John A. Frabotta, C. William
Carey, Joseph G. Cote, Nathan V. Meyohas and Harlan D. Platt.
At any time when the Holders of Preferred Stock of the Corporation become
entitled to elect additional directors pursuant to paragraph 6(b) of Article
IV(C), the exact number of directors fixed by the By-laws of the Corporation or
otherwise shall automatically be increased by the number of such additional
directors and the maximum number of directors of the Corporation specified by
the Charter shall be increased accordingly, if required; and at such time as the
holders of Preferred Stock shall no longer be entitled to elect directors
pursuant to paragraph 6(b) of Article IV(C), such exact number shall
automatically be decreased by the number by which they were increased by reason
of this provision.
(B) In furtherance, and not in limitation, of the powers conferred by the
laws of the State of Maryland, but subject to the other provisions of the
Charter, the Board of Directors is expressly authorized:
1. To make, alter or repeal the By-laws of the Corporation, except
where such power is reserved by the By-laws to the stockholders, and except
as otherwise required by the Investment Company Act.
2. From time to time to determine whether and to what extent and at
what times and places and under what conditions and regulations the books
and accounts of the corporation, or any of them other than the stock
ledger, shall be open to the inspection of the stockholders. No stockholder
shall have any right to inspect any account or book or documents of the
Corporation, except as conferred by law or authorized by resolution of the
Board of Directors or of the stockholders.
3. Without the assent or vote of the stockholders, to authorize the
issuance from time to time of shares of the stock of any class of the
Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or
classes, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable.
4. Without the assent or vote of the stockholders, to authorize and
issue obligations of the Corporation, secured and unsecured, as the Board
of Directors may determine, and to authorize and cause to be executed
mortgages and liens upon the real or personal property of the Corporation.
5. To establish the basis or method for determining the value of the
assets belonging to any class, the value of the liabilities belonging to
any class and the net asset value of each share of any class of the
Corporation's stock.
6. To determine in accordance with generally accepted accounting
principles and practices what constitutes net profits, earnings, surplus or
net assets in excess of capital, and to determine what accounting periods
shall be used by the Corporation for any purpose to the extent consistent
with the By-laws of the Corporation; to set apart out of any funds of the
Corporation reserves for such purposes as it shall determine and to abolish
the same; to declare and pay any dividends and distributions in cash,
securities or other property from surplus or any funds legally available
therefor, at such intervals as it shall determine and by means of a formula
or other method of determination; and to establish payment dates for
dividends or any other distributions on any basis.
7. In addition to the powers and authorities granted herein and by
statute expressly conferred upon it, the Board of Directors is authorized
to exercise all powers and do all acts that may be exercised or done by the
Corporation pursuant to the provisions of the laws of the State of
Maryland, the Charter and the By-laws of the Corporation.
(C) Any determination made in good faith, and in accordance with the
Charter and generally accepted accounting practices, if applicable, by or
pursuant to the direction of the Board of Directors, with respect to the amount
of assets, obligations or liability of the Corporation, as to the amount of net
income of the Corporation from dividends and interest for any period or amounts
at any time legally available for the payment of dividends, as to the amount of
any reserves or charges set up and the propriety thereof, as to the time of or
purpose of creating reserves or as to the use, alteration or cancellation of any
reserves or charges (whether or not any obligations or liability for which the
reserves or charges have been created has been paid or discharged or is then or
thereafter required to be paid or discharged), as to the value of any security
owned by the Corporation, the determination of the net asset value of shares of
any class of the Corporation's capital stock, or as to any other matters
relating to the issuance, sale, redemption or other acquisition or disposition
of securities or shares of capital stock of the Corporation, shall be final and
conclusive, and shall be binding upon the Corporation and all holders of its
capital stock, past, present and future, and shares of the capital stock of the
Corporation are issued and sold on the condition and understanding, evidenced by
the purchase of shares of capital stock or acceptance of share certificates,
that any and all such determinations shall be binding as aforesaid, No provision
of the Charter shall be effective to require a waiver of compliance with any
provisions of the Securities Exchange Act of 1933, as amended, or the Investment
Company Act, or of any valid rule or regulation of the Securities and Exchange
Commission under those Acts.
(D) The Corporation shall indemnify (1) its directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (2) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
By-Laws and be permitted by law; provided, however, that nothing herein shall be
construed to provide indemnification to any director or officer of the
Corporation against any liability to which such director or officer would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. The foregoing rights of indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be entitled. The Board
of Directors may take such action as is necessary to carry out these indemnifi-
cation provisions and is expressly empowered to adopt, approve and amend from
time to time such By-laws, resolutions or contracts implementing such provisions
or such further indemnification arrangements as may be Permitted by law. No
amendment of the Charter shall limit or eliminate the right to indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
(E) To the fullest extent permitted by Maryland statutory and decisional
law and the Investment Company Act, as amended or interpreted, no director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for money damages; provided, however, that nothing herein shall be
construed to protect any director or officer of the Corporation against any
liability to which such director or officer would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office. No amendment, modification or
repeal of this Article (V), Section (E) shall adversely affect any right or
protection of a director or officer that exists at the time of such amendment,
modification or repeal,
ARTICLE VI
AMENDMENTS; CLASS VOTING
(A) The Corporation reserves the right from time to time to amend, alter,
change or repeal any provision contained in the Charter, now or hereafter
authorized by law, including any amendment that alters the contract rights, as
expressly set forth in the Charter, of any outstanding stock.
(B) In addition to any other vote required by the Charter or applicable
law, as long as any shares of Preferred Stock are outstanding (i) the
Corporation may not be voluntarily liquidated, dissolved or wound up, or merged
into or consolidated with any other entity in a transaction pursuant to which it
is not the successor entity, or converted to open-end status, and may not sell
all or substantially all of its assets and may not engage in a statutory share
exchange in which it is not the successor entity, without the approval of at
least a majority of the outstanding shares of Preferred Stock and a majority of
the outstanding shares of Common Stock, each voting as a separate class; (ii)
the Corporation may not adopt any plan of reorganization adversely affecting
either the Preferred Stock or the Common Stock without the approval of a
majority of the outstanding shares of such class so affected; (iii) no amendment
to the Charter that would adversely affect the contract rights of the Common
Stock or the Preferred Stock as expressly set forth in the Charter, including
any amendment, alteration or repeal of the express preferences, rights or powers
of holders of the Preferred Stock as set forth in the Charter, May be adopted
without the approval of majority of the outstanding shares of each such class so
affected; (iv) no increase or decrease in the number of shares of Preferred
Stock authorized by the Charter to be issued may be made without the approval of
a majority of the outstanding shares of Preferred Stock; (v) the holders of the
Preferred Stock and the Common Stock shall vote in connection with the election
of directors as provided in paragraph 6 of Article IV(c); and (vi) the Common
Stock and the Preferred Stock will vote as separate classes to the extent
otherwise required under Maryland law or the Investment Company Act (it being
understood that any action requiring a vote of security holders under the
Investment Company Act shall require the vote of a Majority of the Outstanding
Voting Securities of Preferred Stock and the Vote of a Majority of the
Outstanding Voting Securities of Common Stock, each voting as a separate class).
Except to the extent otherwise required by applicable law or the Charter, as to
any matter which requires for approval the separate vote of a class of capital
stock, only the holders of the affected class of capital stock shall be entitled
to vote.
(C) Notwithstanding any provision of law requiring the authorization of any
action by a proportion greater than a simple majority of the total number of
shares of all classes or series of capital stock or of the total number of
shares of any class or series of capital stock entitled to vote as a separate
class or series, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes or series outstanding and entitled to vote thereon or of the class
or series entitled to vote thereon as a separate class or series, as the case
may be, except as otherwise provided in the Charter.
THIRD: At a meeting held on November 21, 1988 the Board of Directors of the
Corporation duly advised and approved the foregoing Articles of Amendment and
Restatement, and by written informal action unanimously taken by the sole
stockholder of the Corporation in accordance with Section 2-505 of the
Corporations and Associations Article of the Annotated Code of Maryland, the
sole stockholder of the Corporation duly adopted and approved said Articles of
Amendment and Restatement.
FOURTH: Immediately prior to the adoption of the foregoing Articles of
Amendment and Restatement, the Corporation had authority to issue one hundred
million (100,000,000) shares of capital stock, $.01 par value per share, for an
aggregate par value of $1,000,000. Immediately following the adoption of the
Articles of Amendment and Restatement, the Corporation has authority to issue an
aggregate of one hundred million one thousand (100,001,000) shares of capital
stock, of which one hundred million (100,000,000) shares shall be Common Stock,
$.01 par value per share, and one thousand (1,000) shares shall be Taxable
Auction Rate Preferred Stock, no par value per share, for an aggregate par value
of $1,000,000 for all shares with par value. The foregoing Articles of Amendment
and Restatement include a description of each class of capital stock, including
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
<PAGE>
IN WITNESS WHEREOF, PROSPECT STREET HIGH INCOME PORTFOLIO INC. has caused
these presents to be signed in its name and on its behalf by its President and
its corporate seal to be hereunder affixed and attested by its Secretary on this
25th day of November, 1988, and its President acknowledges that these Articles
of Amendment and Restatement are the act and deed of Prospect Street High Income
Portfolio Inc., and, under the penalties of perjury, that the matters and facts
set forth herein with respect to authorization and approval are true in all
material respects to the best of his knowledge, information, and belief.
PROSPECT STREET HIGH
INCOME PORTFOLIO INC.
By: /s/ Richard E. Omohundro, Jr.
-----------------------------------
ATTEST:
/s/ John A. Frabotta
- -------------------------------------
EXHIBIT (B)
AMENDED AND RESTATED
BY-LAWS
OF
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
A Maryland Corporation
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meetings. The annual meeting of the stockholders of
PROSPECT STREET HIGH INCOME PORTFOLIO INC. (the "Corporations") shall be held on
a date fixed from time to time by the Board of Directors within the thirty-one
(31) day period ending four (4) months after the end of the Corporation's fiscal
year in each year after 1988. An annual meeting may be held at the time and at
any place within or outside of the State of Maryland as may be determined by the
Board of Directors as shall be designated in the notice of the meeting. Any
business of the Corporation may be transacted at an annual meeting without being
specifically designated in the notice unless otherwise provided by statute, the
Corporation's Articles of Incorporation (for purposes hereof, references to the
"Articles of Incorporation" shall be deemed to mean and include all amendments
and/or restatements thereof) or these By-Laws. Notwithstanding the foregoing, no
annual meeting of the stockholders shall be held in any year in which:
(a) none of the following is required to be acted upon by the
stockholders under the Investment Company Act of 1940, as amended (the "1940
Act"):
1. election of directors;
2. approval of the investment advisory agreement;
3. ratification of the selection of independent public accountants; and
4. approval of a distribution agreement; and
(b) an annual meeting is not otherwise required under the rules and
regulations of the principal exchange on which the Corporation's securities are
then traded.
SECTION 2. Special Meetings. Special meetings of the stockholders for
any purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Articles of Incorporation, may be held at any place within or
outside the State of Maryland, and may be called at any time by the Board of
Directors or by the President, and shall be called by the President or Secretary
at the request in writing of a majority of the Board of Directors, at the
request in writing of stockholders entitled to cast at least twenty-five percent
(25%) of the votes entitled to be cast at the meeting upon payment by such
stockholders to the Corporation of the reasonably estimated cost of preparing
and mailing a notice of the meeting (which estimated cost shall be provided to
such stockholders by the Secretary of the Corporation), or as otherwise provided
in the Articles of Incorporation. Notwithstanding the foregoing, unless
requested by stockholders entitled to cast a majority of the votes entitled to
be cast at the meeting, a special meeting of the stockholders need not be called
at the request of stockholders to consider any matter that is substantially the
same as a matter voted on at any special meeting of the stockholders held during
the preceding twelve (12) months. A written request of a stockholder for the
holding of a special meeting shall state the purpose or purposes of the proposed
meeting.
SECTION 3. Notice of Meetings. Written or printed notice of the purpose
or purposes and of the time and place of every meeting of the stockholders shall
be given by the Secretary of the Corporation to each stockholder of record
entitled to vote at the meeting, by placing the notice in the mail at least ten
(10) days but not more than ninety (90) days prior to the date designated for
the meeting (except as otherwise specified in the Articles of Incorporation),
addressed to each such stockholder at his address appearing on the books of the
Corporation or supplied by the stockholder to the Corporation for the purpose of
notice. The notice of any meeting of stockholders may be accompanied by a form
of proxy approved by the Board of Directors in favor of the actions or persons
as the Board of Directors may select. Notice of any meeting of stockholders
shall be deemed waived by any stockholder who attends the meeting in person or
by proxy, or who before or after the meeting submits a signed waiver of notice
that is filed with the records of the meeting.
SECTION 4. Quorum. Except as otherwise provided by statute or by the
Corporation's Article of Incorporation, the presence in person or by proxy of
stockholders of the Corporation entitled to cast at least a majority of the
votes entitled to be cast shall constitute a quorum at each meeting of the
stockholders and all questions shall be decided by majority vote of the shares
so represented in person or by proxy at the meeting and entitled to vote. In the
absence of a quorum, the stockholders present in person or by proxy at the
meeting, by majority vote and without notice other than by announcement at the
meeting, may adjourn the meeting from time to time as provided in Section 5 of
this Article I until a quorum shall attend. The stockholders present at any duly
organized meeting may continue to do business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. The absence
from any meeting in person or by proxy of holders of the number of shares of
stock of the Corporation in excess of a majority that may be required by the
laws of the State of Maryland, the 1940 Act, or other applicable statute, the
Corporation's Articles of Incorporation or these By-Laws, for action upon any
given matter shall not prevent action at the meeting on any other matter or
matters that may properly come before the meeting, so long as there are present,
in person or by proxy, holders of the number of shares of stock of the
Corporation required for action upon such other matter or matters.
SECTION 5. Adjournment. Any meeting of the stockholders may be
adjourned from time to time, without notice other than by announcement at the
meeting at which the adjournment is taken. At any adjourned meeting at which a
quorum shall be present any action may be taken that could have been taken at
the meeting originally called. A meeting of the stockholders may not be
adjourned to a date more than one-hundred twenty (120) days after the original
record date.
SECTION 6. Organization. At every meeting of the stockholders, the
Chairman of the Board, if any, or in his absence or inability to act or if there
is no Chairman of the Board, the President, or in his absence or inability to
act, a Vice President designated by the President, or in the absence or
inability to act of the Chairman of the Board, the President and all Vice
Presidents, a chairman chosen by the stockholders, shall act as chairman of the
meeting. The Secretary, or in his absence or inability to act, a person
appointed by the chairman of the meeting, shall act as secretary of the meeting
and keep the minutes of the meeting.
SECTION 7. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
SECTION 8. Voting. Except as otherwise provided by statute or the
Corporation's Articles of Incorporation, each holder of record of shares of
stock of the Corporation having voting power shall be entitled at each meeting
of the stockholders to one (1) vote for every share of stock (and a
proportionate fractional interest for each such fractional share) standing in
his name on the records of the Corporation as of the record date determined
pursuant to Section 9 of this Article I.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by the
stockholder or his attorney provided in the proxy. Every proxy shall be
revocable at the pleasure of the stockholder executing it, except in those cases
in which the proxy states that it is irrevocable and in which an irrevocable
proxy is permitted by law.
SECTION 9. Fixing of Record Date for Determining Stockholders Entitled
to Vote at Meeting. The Board of Directors may set a record date for the purpose
of determining stockholders entitled to vote at any meeting of the stockholders.
The record date for a particular meeting shall be not more than ninety (90) nor
fewer than ten (10) days before the date of the meeting. All persons who were
holders of record of shares as of the record date of a meeting, and no others,
shall be entitled to vote at such meeting and any adjournment thereof.
SECTION 10. Inspectors. The Board of Directors may, in advance of any
meeting of stockholders, appoint one (1) or more inspectors to act at the
meeting or at any adjournment of the meeting. If the inspectors shall not be so
appointed or if any of them shall fail to appear or act, the chairman of the
meeting may appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall, if required by the chairman of the meeting, take
and sign an oath to execute faithfully the duties of inspector at the meeting
with strict impartiality and according to the best of his ability. The
inspectors shall determine the number of shares outstanding and the voting power
of each share, the number of shares represented at the meeting, the existence of
a quorum and the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do those acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the chairman
of the meeting or any stockholder entitled to vote at the meeting, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be stockholders of the Corporation.
SECTION 11. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Corporation's Articles of Incorporation
(including any provisions of the Investment Company Act of 1940, as amended,
requiring a shareholder vote), any action required to be taken at any annual or
special meeting of stockholders, or any action that may be taken at any annual
or special meeting of the stockholders, may be taken without a meeting, without
prior notice and without a vote, if the following are filed with the records of
stockholders' meetings: (a) a unanimous written consent that sets forth the
action and is signed by each stockholder entitled to vote on the matter and (b)
a written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to vote at the meeting.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. General Powers. Except as otherwise provided in the
Corporation's Articles of Incorporation, the business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. All
powers of the Corporation may be exercised by or under authority of the Board of
Directors except as conferred on or reserved to the stockholders by law, by
the Corporation's Articles of Incorporation or by these By-Laws.
SECTION 2. Number, Election and Term of Directors. The number of
directors and the positions on the Board to be filled by vote of the holders of
particular classes of stock to, if applicable, the exclusion of other classes of
stock, shall be fixed from time to time by resolution of the Board of Directors
adopted by a majority of the directors then in office at all times. The
directors shall be elected at the annual meeting of the stockholders, except as
provided in Section 5 of this Article II, and each director elected shall hold
office until his successor shall have been elected and shall have qualified, or
until his death, or until he shall have resigned or have been removed as
provided in these By-Laws, or as otherwise provided by statute or the
Corporations's Articles of Incorporation. Any vacancy created by an increase in
directors may be filled in accordance with Section 5 of this Article II, the
terms of the Corporation's Articles and Incorporation and the terms of any
resolution identifying positions on the Board to be filled by the holders of
particular classes of stock, if applicable. Except as provided in the Articles
of Incorporation no reduction in the number of directors shall have the effect
of removing any director from office prior to the expiration of his term unless
the director is specifically removed pursuant to Section 4 of this Article II at
the time of the decrease. A director need not be a stockholder of the
Corporation, a citizen of the United States or a resident of the State of
Maryland.
SECTION 3. Resignation. A director of the Corporation may resign at any
time by giving written notice of his resignation to the Board of Directors or
the Chairman of the Board or to the President or the Secretary of the
Corporation. Any resignation shall take effect at the time specified in it or,
should the time when it is to become effective not be specified in it,
immediately upon its receipt. Acceptance of a resignation shall not be necessary
to make it effective unless the resignation states otherwise.
SECTION 4. Removal of Directors. Any director of the Corporation may be
removed by the stockholders, having the power to elect such director with or
without cause by a vote of a majority of the votes entitled to be case for the
election of such director, subject to the terms of the Articles of
Incorporation.
SECTION 5. Vacancies. Subject to the provisions of the 1940 Act and the
Corporation's Articles of Incorporation, any vacancies in the Board of
Directors, whether arising from the death, resignation, removal or any other
cause except an increase in the number of directors, shall be filled by the
Board of Directors pursuant to the vote of the majority of all directors then in
office and by a separate vote of a majority of the directors who were elected by
the class of stockholders, if applicable, that elected the director whose death,
resignation or removal caused the vacancy provided that no vacancy or vacancies
shall be filled by action of the remaining directors if, after the filling of
the vacancy or vacancies, fewer than two-thirds (2/3) of the directors then
holding office shall have been elected by the stockholders of the Corporation.
Except as Provided in the Articles of Incorporation, a majority of the entire
Board may fill a vacancy that results from an increase in the number of
directors. In the event that at any time a vacancy exists in any office of a
director that may not be filled by the remaining directors, a special meeting of
the stockholders shall be held for the purpose of filling the vacancy or
vacancies. Any director appointed by the Board of Directors to fill a vacancy
shall hold office only until the next annual meeting of stockholders of the
Corporation and until a successor has been elected and qualifies or until his
earlier resignation or removal. Any director elected by the stockholders to fill
a vacancy shall hold office for the balance of the term of the director whose
death, resignation or removal occasioned the vacancy and until a successor has
been elected and qualified or until his earlier resignation or removal.
SECTION 6. Place of Meetings. Meetings of the Board may be held at any
place that the Board of Directors may from time to time determine or that is
specified in the notice of the meeting.
SECTION 7. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at the time and place determined by the Board of
Directors.
SECTION 8. Special Meetings. Special meetings of the Board of Directors
may be called by two (2) or more directors of the Corporation or by the Chairman
of the Board or the President.
SECTION 9. Notice of Special Meetings. Notice of each special meeting
of the Board of Directors shall be given by the secretary or any Assistant
Secretary as hereinafter provided. Each notice shall state the time and place of
the meeting and shall be delivered to each director, either personally or by
telephone or other standard form of telecommunication, at least twenty-four (24)
hours before the time at which the meeting is to be held, or by first-class
mail, postage prepaid, addressed to the director at his residence or usual place
of business, and mailed at least three (3) days before the day on which the
meeting is to be held.
SECTION 10. Waiver of Notice of Meetings. Notice of any special meeting
need not be given to any director who shall, either before or after the meeting,
sign a written waiver of notice that is filed with the records of the meeting or
who shall attend the meeting.
SECTION 11. Quorum and Voting. Except as otherwise expressly required
by statute, the Corporation's Articles of Incorporation, these By-Laws, the 1940
Act, or any other applicable statute, one-third (1/3), but not fewer than two
(2), of the members of the entire Board of Directors shall be present in person
at any meeting of the Board so as to constitute a quorum for the transaction of
business at the meeting, and the act of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board. In the
absence of a quorum at any meeting of the Board, a majority of the directors
present may adjourn the meeting to another time and place until a quorum shall
be present. Notice of the time and place of any adjourned meeting shall be given
to the directors who were not present at the time of the adjournment and, unless
the time and place were announced at the meeting at which the adjournment was
taken, to the other directors. At any adjourned meeting at which a quorum is
present, any business may be transacted that might have been transacted at the
meeting as originally called.
SECTION 12. Organization. The Board of Directors may designate a
Chairman of the Board, who shall preside at each meeting of the Board. In the
absence or inability of the Chairman of the Board to act, the President, or, in
his absence or inability to act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting and preside at the
meeting. The Secretary (or, in his absence or inability to act, any person
appointed by the chairman) shall act as secretary of the meeting and keep the
minutes of the meeting.
SECTION 13. Committees. The Board of Directors may designate one (1) or
more committees of the Board of Directors, each consisting of two (2) or more
directors. To the extent provided in the resolution, and permitted by law, the
committee or committees shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation. Any
committee or committees shall have the name or names determined from time to
time by resolution adopted by the Board of Directors. Each committee shall keep
regular minutes of its meetings and provide those minutes to the Board of
Directors when required. The members of a committee present at any meeting,
whether or not they constitute a quorum, may appoint a director to act in the
place of an absent member.
SECTION 14. Written Consent of Directors in Lieu of a Meeting. Subject
to the provisions of the 1940 Act, any action required or permitted to be taken
at any meeting of the board of Directors or of any committee of the Board may be
taken without a meeting if all members of the Board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of the Board or committee.
SECTION 15. Telephone Conference. Members of the Board of Directors or
any committee of the Board may participate in any Board or committee meeting by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time. Participation by such means shall constitute presence in person at the
meeting, subject to the provisions of the 1940 Act.
SECTION 16. Compensation. Each director shall be entitled to receive
compensation, if any, as may from time to time be fixed by the Board of
Directors, including a fee for, each meeting of the Board or any committee
thereof, regular or special, he attends. Directors may also be reimbursed by the
Corporation for all reasonable expenses incurred in traveling to and from the
place of a Board of committee meeting.
ARTICLE III
OFFICERS
SECTION 1. Number and Qualifications. The officers of the Corporation
shall be a President, a Secretary and a Treasurer, each of whom shall be elected
by the Board of Directors. The Board of Directors may elect or appoint one (1)
or more Vice Presidents and may also appoint any other officers it deems
necessary or proper. Any two (2) or more offices may be held by the same person.
Each Officer shall hold office until his successor shall have been duly elected
and shall have qualified, or until his death, or until he shall have resigned or
have been removed, as provided in these By-Laws. Such other officers shall have
such duties and shall hold their offices for such terms as may be prescribed by
the Board or by the appointing authority.
SECTION 2. Resignations. Any officer of the Corporation may resign at
any time by giving written notice of his resignation to the Board of Directors,
the Chairman of the Board, the President or the Secretary. Any resignation shall
take effect at the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The acceptance
of a resignation shall not be necessary to make it effective unless otherwise
stated in the resignation.
SECTION 3. Removal of Officer. Any officer of the Corporation may be
removed by the Board of Directors with or without cause at any time. Removal
shall be without prejudice to the person's contract rights, if any, but the
appointment of any person as an officer of the Corporation shall not of itself
create contract rights.
SECTION 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office that shall be vacant, in the manner prescribed
in these By-Laws for the regular election or appointment to the office.
SECTION 5. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer with respect to other officers under his control.
SECTION 6. Bonds or Other Security. If required by the Board of
Directors, any officer, agent or employee of the Corporation shall give a bond
or other security for the faithful performance of his duties, in an amount and
with any surety or sureties as the Board may require.
SECTION 7. President. The President shall be the chief executive
officer of the Corporation. In the absence or inability of the Chairman of the
Board to act (or if there is none) the President shall preside at all meetings
of the stockholders and of the Board of Directors. The President shall have,
subject to the control of the Board of Directors, general charge of the business
and affairs of the Corporation, and may employ and discharge employees and
agents of the Corporation and delegate any of the foregoing powers.
SECTION 8. Vice President. Each Vice President shall have the powers
and perform the duties that the Board of Directors or the President may from
time to time prescribe.
SECTION 9. Treasurer. Subject to the provisions of any contract that
may be entered into with any custodian pursuant to authority granted by the
Board of Directors, the Treasurer shall have charge of all receipts and
disbursements of the Corporation and shall have or provide for the custody of
the Corporation's funds and securities; he shall have full authority to receive
and give receipts for all money due and payable to the Corporation, and to
endorse checks, drafts and warrants, in its name and on its behalf and to give
full discharge for the same; he shall deposit all funds of the Corporation,
except those that may be required for current use, in such banks or other places
of deposit as the Board of Directors may from time to time designate; and in
general he shall perform all duties incident to the Office of Treasurer and such
other duties as may from time to time be assigned to him by the Board of
Directors or the President.
SECTION 10. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board of Directors, the Committees
of the Board and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation (unless
the seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other documents to be
executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board of Directors or the President.
SECTION 11. Delegation of Duties. In case of the absence of any officer
of the Corporation, or for any other reason that the Board of Directors may deem
sufficient, the Board may confer for the time being the powers and duties, or
any of them, of such officer upon any other officer or upon any director.
ARTICLE IV
STOCK
SECTION 1. Stock Certificates. The Certificates representing shares of
the Corporation's stock shall be signed by or in the name of the Corporation by
the Chairman of the Board, the President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
and sealed with the seal of the Corporation. Any or all of the signatures or the
seal on the certificate may be facsimiles. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before the certificate is issued, it may be issued by the Corporation with the
same effect as if the officer, transfer agent or registrar was still in office
at the date of issue.
SECTION 2. Stock Ledger. There shall be maintained a stock ledger
containing the name and address of each stockholder and the number of shares of
stock of each class the stockholder holds. The stock ledger may be in written
form or any other form which can be converted within a reasonable time into
written form for visual inspection. The original or a duplicate of the stock
ledger shall be kept at the principal office of the Corporation or at any other
office or agency specified by the Board of Directors.
SECTION 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only by the
registered holder of the shares, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates, if
issued, for the shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of the share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions and
to vote as the owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
SECTION 4. Regulations. The Board of Directors may authorize the
issuance of uncertificated securities if permitted by law. If stock certificates
are issued, the Board of Directors may make any additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. The Board may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more transfer clerks
and one or more registrars and may require all certificates for shares of stock
to bear the signature or signatures of any of them.
SECTION 5. Lost, Destroyed or Mutilated Certificates. The holder of any
certificate representing the shares of stock of the Corporation shall
immediately notify the Corporation of its loss, destruction or mutilation and
the Corporation may issue a new certificate of stock in the place of any
certificate issued by it that has been alleged to have been lost or destroyed or
that shall have been mutilated. The Board may, in its discretion, require the
owner (or his legal representative) of a lost, destroyed or mutilated
certificate: to give to the Corporation a bond in a sum, limited or unlimited,
and in a form and with any surety or sureties, as the Board in its absolute
discretion shall determine, to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss or destruction of any such
certificate, or issuance of a new certificate. Anything herein to the contrary
notwithstanding, the Board of Directors, in its absolute discretion, may refuse
to issue any such new certificate, except pursuant to legal proceedings under
the laws of the State of Maryland.
SECTION 6. Fixing of Record Date for Dividends, Distributions, etc. The
Board may fix, in advance, a date not more than ninety (90) days preceding the
date fixed for the payment of any dividend or the making of any distribution or
the allotment of rights to subscribe for securities of the Corporation, or for
the delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record , date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
SECTION 7. Information to Stockholders and Others. Any stockholder of
the Corporation or his agent may inspect and copy during the Corporation's usual
business hours the Corporation's By-Laws, minutes of the proceedings of its
stockholders, annual statements of its affairs and voting trust agreements on
file at its principal office.
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 1. Indemnification of Officers, Directors, Employees and
Agents. The Corporation shall indemnify and advance expenses to its present and
past directors, officers, employees and agents, and any persons who are serving
or have served at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
enterprise or employee benefit plan, to the maximum extent provided and allowed
by Section 2-418 of the Annotated Code of Maryland concerning corporations, as
amended from time to time, or by any other applicable provisions of laws.
Notwithstanding anything herein to the contrary, no director, officer,
investment adviser or principal underwriter of the Corporation shall be
indemnified in violation of Section 17(h) or 17(i) of the 1940 Act.
SECTION 2. Other Rights. The indemnification provided by this Article V
shall not be deemed exclusive of any other right, with respect to
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or officer
of the Corporation in his official capacity and as to action by such person in
another capacity while holding such office or position, and shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such a person.
SECTION 3. Insurance. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or who, while a director,
officer, employee or agent of the Corporation, is or was serving at the request
of the Corporation as a director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust, enterprise
or employee benefit plan, against any liability asserted against and incurred by
him in any such capacity, or arising out of his status as such, provided that no
such insurance may be obtained by the Corporation for liabilities against which
it would not have the power to indemnify him under this Article V or applicable
law.
ARTICLE VI
SEAL
The seal of the Corporation shall be circular in form and shall bear
the name of the Corporation, the year of its incorporation, the word "Maryland"
and any emblem or device approved by the Board of Directors. The seal may be
used by causing it or a facsimile to be impressed or affixed or in any other
manner reproduced, or by placing the word "(seal)" adjacent to the signature of
the authorized officer of the Corporation.
ARTICLE VII
FISCAL YEAR
SECTION 1. Fiscal Year. The Corporation's fiscal year shall be fixed by
the Board of Directors.
SECTION 2. Accountant.
(a) The Corporation shall employ an independent public accountant or a
firm of independent public accountants of national reputation to examine the
accounts of the Corporation and to sign and certify financial statements filed
by the Corporation. Such independent public account or firm of independent
public accountants is referred to herein as the "Accountant". The Accountant's
certificates and reports shall be addressed both to the Board of Directors and
to the stockholders. The employment of the Accountant shall be conditioned upon
the right of the Corporation to terminate the employment forthwith without any
penalty by vote of a majority of the outstanding voting securities at any
stockholders' meeting called for that purpose.
(b) A majority of the members of the Board of Directors who are not
"interested persons" as that term is defined in the 1940 Act of the Corporation
shall select the Accountant at any meeting held within thirty (30) days before
or after the beginning of the fiscal year of the Corporation or before the
annual stockholders' meeting in that year. Such selection shall be submitted
for ratification or rejection at the next succeeding annual stockholders'
meeting, if any. If such meeting shall reject such selection, the Accountant
shall be selected by a majority vote of the Corporation's outstanding voting
securities, either at the meeting at which the rejection occurred or at a
subsequent meeting of stockholders called for that purpose.
(c) Any vacancy occurring between annual meetings, due to the
resignation of the Accountant, may be filled by the vote of a majority of the
members of the Board of Directors who are not "interested persons" of the
Corporation, as that term is defined in the 1940 Act, at a meeting called for
the purpose of voting on such action.
ARTICLE VIII
CUSTODY OF SECURITIES
SECTION 1. Employment of a Custodian. The Corporation shall place and
at all times maintain in the custody of a custodian (including any sub-custodian
for the custodian) (herein the "Custodian") all funds, securities and similar
investments owned by the Corporation, except to the extent that margin for
futures transactions are held by a futures commission merchant, as permitted by
the Securities and Exchange Commission's Division of Investment Management. The
Custodian (and any sub-custodian) shall be an institution conforming to the
requirements of Section 17(f) of the 1940 Act and the rules of the Securities
and Exchange Commission thereunder. The Custodian shall be appointed from time
to time by the Board of Directors, which shall fix its remuneration.
SECTION 2. Termination of Custodian Agreement. Upon termination of the
Custodian Agreement or inability of the Custodian to continue to serve, the
Board of Directors shall promptly appoint a successor Custodian, but in the
event that no successor Custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a special meeting of the stockholders to determine whether
the Corporation shall function without a Custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding shares of stock
entitled to vote of the Corporation, the Custodian shall deliver and pay over
all property of the Corporation held by it as specified in such vote.
ARTICLE IX
AMENDMENTS
These By-Laws may be amended or repealed by the affirmative vote of a
majority of the Board of Directors at any regular or special meeting of the
Board of Directors, subject to the requirements of the 1940 Act.
Amended and Restated
October 5, 1988
<PAGE>
EXHIBIT (D)(4)
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
and
PACIFIC MUTUAL LIFE INSURANCE COMPANY
----------
AMENDED AND RESTATED NOTE PURCHASE AGREEMENT
Dated as of December 16, 1993
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE 1 DEFINITIONS ............................................. 1
Section 1.1. Definitions ............................................. 1
Section 1.2. Other Definitions ....................................... 24
Section 1.3. Rules of Construction ................................... 24
ARTICLE 2 PURCHASE OF NOTE ........................................ 24
Section 2.1. Intentionally Omitted ................................... 24
Section 2.2. Intentionally Omitted ................................... 24
Section 2.3. Intentionally Omitted ................................... 24
Section 2.4. Manner of Payments ...................................... 25
ARTICLE 3 REDEMPTION .............................................. 25
Section 3.1. Applicability of Article ................................ 25
Section 3.2. Mandatory Redemption Provisions 25
Section 3.3. Notice of Redemption .................................... 25
Section 3.4. Effect of Notice of Redemption .......................... 26
Section 3.5. Note Redeemed in Part ................................... 27
Section 3.6. Special Additional Redemption Provisions ................ 27
ARTICLE 4 COVENANTS ............................................... 28
Section 4.1. Payment of Note ......................................... 28
Section 4.2. SEC Reports ............................................. 28
Section 4.3. Waiver of Usury Defense ................................. 28
Section 4.4. Limitation on Dividends and Other Distributions
and Purchases ........................................... 28
Section 4.5. Limitation on Incurrence of Indebtedness ................ 30
Section 4.6. Liquidation ............................................. 30
Section 4.7. Compliance Certificates ................................. 31
Section 4.8. Notice of Defaults ...................................... 31
Section 4.9. Payment of Taxes and Other Claims ....................... 31
Section 4.10. Corporate Existence ..................................... 32
Section 4.11. Existence as Investment Company and Maintenance
of Investment Objective ................................. 32
Section 4.12. Required Investment Company Act Asset Coverage .......... 32
Section 4.13. Note Basic Maintenance Amount Required Under Certain
Circumstances ........................................... 33
Section 4.14. Delivery of Officers' Reports ........................... 34
Section 4.15. Restrictions on Liens ................................... 34
Section 4.16. Financial Statements and Other Information .............. 34
Section 4.17. Information Required by Rule 144A ....................... 36
Section 4.18. Inspection of Property .................................. 36
Section 4.19. Compliance with Laws .................................... 36
ARTICLE 5 SUCCESSOR CORPORATION ................................... 37
Section 5.1. When Fund May Merge, etc ................................ 37
Section 5.2. Successor Corporation Substituted ....................... 37
ARTICLE 6 DEFAULTS AND REMEDIES ................................... 38
Section 6.1. Events of Default ....................................... 38
Section 6.2. Acceleration ............................................ 40
Section 6.3. Other Remedies .......................................... 40
ARTICLE 7 REPRESENTATIONS AND WARRANTIES .......................... 41
Section 7.1. Representations and Warranties of the Fund .............. 41
Section 7.2. Representations and Warranties of the Purchaser ......... 43
ARTICLE 8 MISCELLANEOUS ........................................... 44
Section 8.1. Notices ................................................. 44
Section 8.2. Business Days ........................................... 44
Section 8.3. Certificate as to Conditions Precedent .................. 44
Section 8.4. Statements Required in Certificate ...................... 45
Section 8.5. Governing Law; Submission to Jurisdiction ............... 45
Section 8.6. Payments in the Ordinary Course ......................... 45
Section 8.7. Expenses ................................................ 46
Section 8.8. Assignment; Successors .................................. 46
Section 8.9. Multiple Counterparts ................................... 47
Section 8.10. Table of Contents, Headings, etc ........................ 47
<PAGE>
AMENDED AND RESTATED NOTE PURCHASE AGREEMENT
AMENDED AND RESTATED NOTE PURCHASE AGREEMENT dated as of December 16,
1993 (this "Agreement") between PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC., a
Maryland corporation (the "Fund"), and PACIFIC MUTUAL LIFE INSURANCE COMPANY, a
California corporation ("Pacific Mutual" or "Purchaser").
R E C I T A L S
WHEREAS, pursuant to the Note Purchase Agreement dated as of July 15,
1993 (the "Existing Note Purchase Agreement") between the Fund and Pacific
Mutual, the Fund issued and Pacific Mutual purchased $20,000,000 principal
amount of Notes (as defined below);
WHEREAS, the Fund and Pacific Mutual desire to obtain a credit rating
on the Notes from Fitch Investors Service, Inc.; and
WHEREAS, the Fund and Pacific Mutual desire to amend and restate the
Existing Note Purchase Agreement in its entirety to reflect changes required to
obtain such a credit rating on the Notes.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and of other good and valuable consideration the receipt
of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1. Definitions. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the defined terms):
"Annual Financial Statements" has the meaning assigned to it in Section
4.16.
"Articles of Incorporation" means the Articles of Amendment and
Restatement of the Fund, as amended or restated from time to time.
"Bank Borrowings" means borrowings (a) from depository institutions,
the deposits of which are insured by the Federal Deposit Insurance Corporation
or the Federal Savings and Loan Insurance Corporation, (b) which are not senior
in right of payment to the Note and (c) which have been made pursuant to loan
documents containing a covenant that the lender shall not make a petition which
would result in the institution of an involuntary case or proceeding against the
Fund or the appointment of a custodian for the Fund or all or substantially all
of its property under any Bankruptcy Law prior to the date which is one year and
one day after the date upon which no Notes are outstanding.
"Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or
state law for the relief of debtors.
"Board of Directors" means the Board of Directors of the Fund or any
authorized committee of the Board.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New York,
New York or in Boston, Massachusetts are authorized or obligated by law or
executive order to close.
"Cash" means such coin or currency of the United States as at the time
shall be legal tender for payment of public and private debts.
"Certified Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Fund, under its corporate seal, to
have been duly adopted by the Board of Directors and to be in full force and
effect on the date of such certification and delivered to Holder.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the Common Stock, $.01 par value per share, of the
Fund.
"Conventional Mortgage Pass-Through Certificates" means an instrument
issued in bearer or registered form, that is one of a class or series or by its
terms is divisible into a class or series, and that is of a type commonly dealt
in upon securities exchanges or markets or commonly recognized in any area in
which it is issued or dealt in as a medium for investment, evidencing (directly
or indirectly) a proportional undivided interest in specified pools of whole
mortgage loans that are secured by a valid first lien on each mortgagor's fee or
leasehold interest in related mortgage property (except for Permitted Tax Liens
and other matters to which like properties are commonly subject which neither
individually nor in the aggregate materially interfere with the benefits of the
security intended to be provided by such mortgages or deeds of trust, and
standard exceptions and exclusions in title insurance policies) on one- to
four-unit residences (including, without limitation, owner-occupied attached or
detached single-unit residences, two- to four-unit primary residences,
condominiums, second/vacation homes and non-owner occupied residences) and with
respect to which the Required Documentation is required to be held by a trustee
or independent custodian, which mortgage loans are serviced pursuant to
servicing agreements with servicers that have either expressed the intention to
advance funds to meet deficiencies (to the extent such servicers reasonably
believe such advances are recoverable) or provided for alternative credit
enhancement in lieu thereof, and which instruments (a) have been rated AA/Aa or
better by the Rating Agencies or (b) do not qualify pursuant to clause (a)
above, but the inclusion of which as Eligible Portfolio Property will not, in
and of itself, impair, or cause the Note to fail to retain, any ratings assigned
to the Note by the Rating Agencies, as evidenced by letters to the Fund to such
effect from the Rating Agencies which letters shall be delivered to each Holder
at the time each such Conventional Mortgage Pass-Through Certificate is to be
included in the Eligible Portfolio Property, provided, that a Conventional
Mortgage Pass-Through Certificate shall be eligible for inclusion in the
Eligible Portfolio Property as of any Valuation Date only if it continues to
satisfy as of such Valuation Date the requirements of at least one of clauses
(a) or (b) above, as the Fund may confirm verbally or in writing, directly or
indirectly, or by reference to a publication of the Rating Agencies, by
confirmation from a nationally recognized securities dealer having a minimum
capitalization of $25 million or by such other means as the Rating Agencies
shall approve. Each Holder shall be entitled to rely on the representations of
the Fund contained in the Portfolio Valuation Report with respect to any
Valuation Date, that as of such Valuation Date the Fund has confirmed that the
Conventional Mortgage Pass-Through Certificates included in the Eligible
Portfolio Property are within the scope of this paragraph.
"Corporate Bonds" means corporate debt obligations (other than
Short-Term Money Market Instruments, U.S. Government Obligations or commercial
paper with a maturity of not more than 63 days) rated from CCC/B3 (senior) and
Caa (unsecured subordinated) to AAA/Aaa by the Rating Agencies (or rated as
provided below in the case of commercial paper), which corporate debt
obligations (a) provide for the periodic payment of interest thereon in cash,
(b) do not provide for conversion or exchange into equity capital at any time
over their respective lives, (c) have been registered under the Securities Act
of 1933, as amended (except that such requirement shall not apply with respect
to commercial paper), and (d) have not had notice given in respect thereof that
any such corporate debt obligations are the subject of an offer by the issuer
thereof of exchange or tender for cash, securities or any other type of
consideration (except that corporate debt obligations in an amount not exceeding
10% of the aggregate value of the Fund's assets at any time shall not be subject
to the provisions of this clause (d)). In addition, so long as the Note may be
rated by Fitch, no corporate debt obligation held by the Fund shall be deemed a
Corporate Bond (i) if it fails to meet the criteria in column (1) below or (ii)
to the extent (and only to the proportionate extent) the acquisition or holding
thereof by the Fund causes the Fund to exceed any applicable limitation set
forth in column (2) or (3) below as of any relevant date of determination
(provided that in the event that the Fund shall exceed any such limitation or
any other percentage limitation set forth in this definition of Corporate Bonds
the Fund shall designate, in its sole discretion, the particular Corporate
Bond(s) and/or portions thereof which shall be deemed to have caused the Fund to
exceed such limitations):
Column (1) Column (2) Column (3)
---------- ---------- ----------
Maximum Maximum Percent
Percent of of Market Value
Market Value of Eligible
Minimum of Eligible Portfolio
Original Portfolio Property,
Issue Size of Property, Invested in any
Each Issue Invested in any One Industry
Rating Agencies' Ratinqs(1) ($ in millions) One Issuer(2) Cateqory(2)
- ---------------------------- --------------- ------------- -----------
AAA/Aaa .................... $100 10.0% 50.0%
AA/Aa ...................... 100 10.0 33.3
A/A ........................ 100 10.0 33.3
BBB/Baa .................... 100 5.0 20.0
BB/Ba ...................... 100(3) 4.0 12.0
B/B1, B2 and B3
(subordinated) ............ 100(3) 3.0 8.0
CCC/B3 (senior) and Caa
(unsecured subordinated)(4) 100(3) 2.0 5.0
A-1+/P-1(5) ................ N/A 10.0 N/A
A-1/P-1(5) ................. N/A 10.0 33.3
A-2/P-2(5) ................. N/A 5.0 20.0
- ----------
(1) Unless indicated otherwise in this Agreement, references to ratings by the
Rating Agencies in this definition and throughout this Agreement will
indicate the Standards & Poor's rating followed by the Moody's rating in
the format shown. Unless indicated otherwise in this Agreement, rating
designations include (+) and (-) modifiers to the Standards & Poor's rating
where appropriate except that corporate debt obligations rated "CCC-" do
not constitute Corporate Bonds. In the event that a Corporate Bond has
received a different rating from Standard & Poor's than from Moody's, the
restrictions relating to the lower rating will apply.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category, except that the
calculations with respect to commercial paper investments constituting
Corporate Bonds shall be made separately and independently of but on the
same basis as the cumulative total guidelines applicable to other types of
Corporate Bonds.
(3) 20% of the aggregate Market Value of all Corporate vends in these rating
categories may be from issues with an original issue size of greater than
or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated
debt of the issuer with an implied senior rating by Standard & Poor's of
"B-" or higher to constitute Corporate Bonds. The aggregate Market Value of
corporate debt obligations in this rating category in excess of 20% of the
aggregate Market Value of the Fund's assets will not be included in the
calculation of the Note Basic Maintenance Amount.
(5) Represents commercial paper investments.
In addition, the term "Corporate Bonds" shall include debt obligations
satisfying such other criteria established by the Rating Agencies in their sole
discretion and designated in writing to the Fund.
"Cure Date" means the 8th Business Day following a Valuation Date, such
date being the last day upon which the Fund's failure to comply with its
obligations, if any, under Section 4.13 could be cured.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Deposit Securities" means Cash, U.S. Government Obligations and
Short-Term Money Market Instruments. Except for purposes of determining
compliance with the Note Basic Maintenance Amount, each Deposit Security shall
be deemed to have a value equal to its principal or face amount payable at
maturity plus any interest payable thereon after delivery of such Deposit
Security but only if payable at least one day prior to the applicable payment
date in advance of which the relevant deposit is made.
"Discount Factor Supplied by Fitch" means, for any asset held by the
Fund, (i) the number set forth opposite such type of asset in the following
table or (ii) such other number established by Fitch in its sole discretion and
designated in writing to the Fund (it being understood that any asset held by
the Fund and not listed in the following table or in an amendment hereof shall
have a Discounted Value of zero):
Discount Factor
---------------
Type I Corporate Bonds having a remaining term to maturity of two
years or less: 1.20
Type I Corporate Bonds having a remaining term to maturity of
four years or less but more than two years: 1.32
Type I Corporate Bonds having a remaining term to maturity of
seven years or less but more than four years: 1.54
Type I Corporate Bonds having a remaining term to maturity of 12
years or less but more than seven years: 1.60
Type I Corporate Bonds having a remaining term to maturity of 25
years or less but more than 12 years: 1.66
Type I Corporate Bonds having a remaining term to maturity of 30
years or less but more than 25 years: 1.73
Type II Corporate Bonds having a remaining term to maturity of
two years or less: 1.21
Type II Corporate Bonds having a remaining term to maturity of
four years or less but more than two years: 1.34
Type II Corporate Bonds having a remaining term to maturity of
seven years or less but more than four years: 1.58
Type II Corporate Bonds having a remaining term to maturity of 12
years or less but more than seven years: 1.65
Type II Corporate Bonds having a remaining term to maturity of 25
years or less but more than 12 years: 1.71
Type II Corporate Bonds having a remaining term to maturity of 30
years or less but more than 25 years: 1.79
Type III Corporate Bonds having a remaining term to maturity of
two years or less: 1.25
Type III Corporate Bonds having a remaining term to maturity of
four years or less but more than two years: 1.37
Type III Corporate Bonds having a remaining term to maturity of
seven years or less but more than four years: 1.63
Type III Corporate Bonds having a remaining term to maturity of
12 years or less but more than seven years: 1.70
Type III Corporate Bonds having a remaining term to maturity of
25 years or less but more than 12 years: 1.77
Type III Corporate Bonds having a remaining term to maturity of
30 years or less but more than 25 years: 1.86
Type IV Corporate Bonds having a remaining term to maturity of
two years or less: 1.25
Type IV Corporate Bonds having a remaining term to maturity of
four years or less but more than two years: 1.41
Type IV Corporate Bonds having a remaining term to maturity of
seven years or less but more than four years: 1.73
Type IV Corporate Bonds having a remaining term to maturity of 12
years or less but more than seven years: 1.81
Type IV Corporate Bonds having a remaining term to maturity of 25
years or less but more than 12 years: 1.91
Type IV Corporate Bonds having a remaining term to maturity of 30
years or less but more than 25 years: 2.02
Type V Corporate Bonds having a remaining term to maturity of two
years or less: 1.32
Type V Corporate Bonds having a remaining term to maturity of
four years or less but more than two years: 1.46
Type V Corporate Bonds having a remaining term to maturity of
seven years or less but more than four years: 1.84
Type V Corporate Bonds having a remaining term to maturity of 12
years or less but more than seven years: 1.95
Type V Corporate Bonds having a remaining term to maturity of 25
years or less but more than 12 years: 2.07
Type V Corporate Bonds having a remaining term to maturity of 30
years or less but more than 25 years: 2.21
Type VI Corporate Bonds having a remaining term to maturity of
two years or less: 1.37
Type VI Corporate Bonds having a remaining term to maturity of
four years or less but more than two years: 1.52
Type VI Corporate Bonds having a remaining term to maturity of
seven years or less but more than four years: 1.97
Type VI Corporate Bonds having a remaining term to maturity of 12
years or less but more than seven years: 2.10
Type VI Corporate Bonds having a remaining term to maturity of 25
years or less but more than 12 years: 2.25
Type VI Corporate Bonds having a remaining term to maturity of 30
years or less but more than 25 years: 2.44
Type VII and Type VIII Corporate Bonds having a remaining term to
maturity of two years or less: 1.37
Type VII and Type VIII Corporate Bonds having a remaining term to
maturity of four years or less but more than two years: 1.64
Type VII and Type VIII Corporate Bonds having a remaining term to
maturity of seven years or less but not more than four years: 2.28
Type VII and Type VIII Corporate Bonds having a remaining term to
maturity of 12 years or less but not more than seven years: 2.49
Type VII and Type VIII Corporate Bonds having a remaining term to
maturity of 25 years or less but not more than 12 years: 2.74
Type VII and Type VIII Corporate Bonds having a remaining term to
maturity of 30 years or less but not more than 25 years: 3.06
FHLMC or FNMA Certificate Discount Factor
- ------------------------- ---------------
FHLMC or FNMA Certificates with interest rates less 10%: 1.49
FHLMC or FNMA Certificates with interest rates equal to or
greater than 10%: 1.46
GNMA Certificates Discount Factor
- ----------------- ---------------
GNMA Certificates with interest rates less than 10%: 1.39
GNMA Certificates with interest rates equal to or
greater than 10%: 1.35
Conventional Mortgage Pass-Through Certificates Discount Factor
- ----------------------------------------------- ---------------
Conventional Mortgage Pass-Through Certificates with interest
rates less than 6% but equal to or greater than 5%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates less than 7% but equal to or greater than 6%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates less than 8% but equal to or greater than 7%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates less than 9% but equal to or greater than 8%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates less than 10% but equal to or greater than 9%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates less than 11% but equal to or greater than 10%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates less than 12% but equal to or greater than 11%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates less than 13% but equal to or greater than 12%: (1)
Conventional Mortgage Pass-Through Certificates with interest
rates equal to or greater than 13%: (1)
Other Discount Factor
- ----- ---------------
GNMA Multifamily Securities: (1)
FHLMC Multifamily Securities: (1)
FHLMC and FNMA Certificates with variable interest rates: (1)
GNMA Graduated Payment Securities: (1)
U.S. Government Obligations having a remaining term to maturity
of one year or less but not less than 63 days: 1.09
U.S. Government Obligations having a remaining term to maturity
of two years or less but more than one year: 1.18
U.S. Government Obligations having a remaining term to maturity
of five years or less but more than two years: 1.24
U.S. Government Obligations having a remaining term to maturity
of 15 years or less but more than five years: 1.40
U.S. Government Obligations having a remaining term to maturity
of 30 years or less but more than 15 years: 1.42
Type I Commercial Paper having a remaining term to maturity of
more than 63 days and less than or equal to 180 days: 1.34
Type II Commercial Paper having a remaining term to maturity of
not more than 30 days: 1.43
Cash and Short-Term Money Market Instruments: 1.00
- ----------
(1) The Discount Factor, if any, determined therefor in writing by Fitch.
"Discounted Value," with respect to any asset held by the Fund as of
any date, means the quotient of the Market Value of such asset divided by the
applicable Discount Factor Supplied by Fitch. With respect to the calculation of
the aggregate Discounted Value of any Corporate Bond included in the Fund's
Eligible Portfolio Property, such calculation shall be made using the criteria
set forth in the definitions of Corporate Bonds and Market Value. With respect
to the calculation of the aggregate Discounted Value of the Fund's Eligible
Portfolio Property for comparison with the Note Basic Maintenance Amount, such
aggregate Discounted Value shall be the aggregate Discounted Value calculated
using Discount Factors Supplied By Fitch. Notwithstanding any other provision of
this Agreement, (a) any calculation of Discounted Value shall not include Cash,
(b) Discounted Value for any assets held by the Fund in respect of which a
notice of redemption has been received by the Fund or that is currently callable
means the lower of (i) the Market Value of such assets divided by the applicable
Discount Factor(s) and (ii) the redemption/call price of such assets and (c)
Discounted Value for any assets held by the Fund that are prepayable means the
lower of (i) the Market Value of such assets divided by the applicable Discount
Factor(s) and (ii) the par value of such assets. Notwithstanding any other
provisions of this Agreement, any Corporate Bond that has a remaining term to
maturity of more than 30 years, and any asset to which a Discount Factor is not
assigned by Fitch in this Agreement or in an amendment hereof, shall have a
Discounted Value of zero.
"Eligible Portfolio Property" shall include Corporate Bonds (including,
without limitation, Type I Commercial Paper with a remaining term to maturity of
not more than 180 days and Type II Commercial Paper with a maturity of not more
than 30 days), Cash, U.S. Government Obligations, Short-Term Money Market
Instruments, FNMA Certificates, FHLMC Certificates, FHLMC Multifamily
Securities, GNMA Certificates, GNMA Multifamily Securities, GNMA Graduated
Payment Securities, Conventional Mortgage Pass-Through Certificates; provided,
however, that (i) no such Corporate Bonds that are subject to any lien may be
includable as "Eligible Portfolio Property" unless such lien is included as a
liability in determining Note Basic Maintenance Amount and (ii) the combined
value of any Deposit Securities irrevocably deposited by the Fund for the
payment of the obligations of the Fund referred to in clauses (a)-(d) of the
definition of "Note Basic Maintenance Amount" shall not be includable as
"Eligible Portfolio Property."
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) which is a member of the same controlled group as the Fund within
the meaning of Section 414(b) of the Code, or any trade or business which is
under common control with the Fund within the meaning of Section 414(c) of the
Code.
"Event of Default" has the meaning assigned to it in Section 6.1
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"FHLMC" means the Federal Home Loan Mortgage Corporation created by
Title III of the Emergency Home Finance Act of 1970, and includes any successor
thereto.
"FHLMC Certificate" means a mortgage participation certificate in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-rate, variable-rate or adjustable-rate (level pay), fully
amortizing mortgage loans secured by first-priority mortgages on one- to
four-family residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily Security" in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-rate, variable-rate or adjustable-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Note to fail to retain any rating assigned to the Notes by Fitch, as evidenced
by a letter to such effect from Fitch.
"Fitch" mean Fitch Investors Service, Inc., a New York corporation, and
includes any successor thereto.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by FNMA, and which evidences a proportional
undivided interest in specified pools or fixed-rate, variable-rate or
adjustable-rate, fully amortizing mortgage loans secured by first-priority
mortgages on single-family residences.
"Fund" means Prospect Street High Income Portfolio Inc., a Maryland
corporation, until a successor replaces it pursuant to the this Agreement and
thereafter means the successor.
"GNMA" means the Government National Mortgage Association, and includes
any successor thereto.
"GNMA Certificate" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-rate, variable-rate or
adjustable-rate, fully amortizing mortgage loans secured by first-priority
mortgages on single-family residences.
"GNMA Graduated Payment Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of graduated payment mortgage
loans with payments that increase annually at a predetermined rate for up to the
first five or ten years of the mortgage loan and that are secured by
first-priority mortgages on one- to four-unit residences.
"GNMA Multifamily Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of fixed-rate mortgage loans
secured by first-priority mortgages on multifamily residences, the inclusion of
which in the Eligible Portfolio Property will not, in and of itself, impair or
cause the Note to fail to retain, any rating assigned to the Note by Fitch as
evidenced by a letter to such effect from Fitch.
"Holder" means the Person in whose name the Note is registered on the
Fund's books.
"Industry Category" means, as to Corporate Bonds, any of the industry
categories set forth in Exhibit A.
"Interest Payment Date" means the stated maturity of an installment of
interest on the Note.
"Investment Company Act" means the Investment Company Act of 1940 (15
U.S.C. {S}{S} 80 et seq.), as amended from time to time.
"Letter Reviewing Portfolio Calculations" means a letter in
substantially the form attached hereto as Exhibit B delivered to each Holder
with respect to certain Portfolio Valuation Reports.
"Market Value" means the amount determined with respect to specific
assets of the Fund (i) in the manner set forth below or (ii) such other manner
as is established by Fitch in its sole discretion and designated in writing to
the Fund:
(a) as to any Corporate Bond, (i) the product of (A) the unpaid
principal balance of such Corporate Bond as of the applicable Reporting
Date, and (B) the lower of two bid prices for such Corporate Bond provided
by two nationally recognized securities dealers with a minimum
capitalization of $25 million or by one such securities dealer and any
other source (provided that the utilization of such source would not
adversely affect any rating assigned to the Note by Fitch) to the custodian
of the Fund's assets, at least one of which shall be provided in writing or
by telecopy, telex, other electronic transcription, computer obtained
quotation reducible to written form or similar means, and in turn provided
to the Fund by any such means by such custodian (provided that evidence of
the bid quotes furnished by such custodian shall be delivered to each
Holder by the Fund with the related Portfolio Valuation Report), plus (ii)
accrued interest on such Corporate Bond (unless such accrued interest is
payable to the holder of such Corporate Bond prior to the next Valuation
Date), or if two bid prices cannot be obtained, such time of Eligible
Portfolio Property shall have a Market Value of zero;
(b) the product of (i) as to GNMA Certificates, GNMA Graduated Payment
Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the aggregate unpaid
principal amount of the mortgage loans evidenced by each such certificate
or security, as the case may be, as determined by the Fund by any method
which the Fund believes reliable, which may include amounts shown on the
most recent report related to the Certificate or security received by the
Fund prior to the Reporting Date, and as to U.S. Government Obligations and
Short Term Money Market Instruments (other than demand deposits, federal
funds, bankers' acceptances and next Business Day's repurchase agreement),
the face amount or aggregate principal amount of such U.S. Government
Obligations or Short Term Money Market Instruments, as the case may be, and
(ii) the lower of the bid prices for the same kind of Certificates,
securities or instruments, as the case may be, having, as nearly as
practicable, comparable interest rates and maturities provided by two
nationally recognized securities dealers with a minimum capitalization of
$25 million or by one such securities dealer and any other source (provided
that the utilization of such source would not adversely affect any rating
assigned to the Note by Fitch) to the custodian of the Fund's assets, at
least one of which shall be provided in writing or by telecopy, telex,
other electronic transcription, computer obtained quotation reducible to
written form or similar means, and in turn provided to the Fund by any such
means by such custodian (provided that evidence of the bid quotes furnished
by such custodian shall be delivered to each Holder by the Fund with the
related Portfolio Valuation Report), or, if two bid prices cannot be
obtained, such time of Eligible Portfolio Property will have a Market Value
of zero;
(c) as to Conventional Mortgage Pass-Through Certificates, the product
of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the Certificates as determined by the Fund by any method which
the Fund believes reliable, which may include amounts based on verbal
reports of the servicers of the related mortgage loans to the Fund, as of
the applicable Reporting Date and (ii) the dollar value of the lower of two
bid prices per dollar of outstanding principal amount as of such applicable
Reporting Date for such certificates provided by two nationally recognized
securities dealers with a minimum capitalization of $25 million or one such
securities dealer and any other source (provided that the utilization of
such source would not adversely affect any rating assigned to the Note by
the Fitch) to the custodian of the Fund's assets, at least one of which
shall be provided in writing by telecopy, telex, other electronic
transcription, computer obtained quotation reducible to written form or
similar means, and in turn provided to the Fund by any such means by such
custodian (provided that evidence of the bid quotes furnished by such
custodian shall be delivered to each Holder by the Fund with the related
Portfolio Valuation Report), or, if two bid prices cannot be obtained, such
item of Eligible Portfolio Property shall have a Market Value of zero;
(d) as to Cash, demand deposits, federal funds, bankers' acceptances,
next Business Day's repurchase agreements included in Short Term Money
Market Instruments, and interest due and payable within 30 days in respect
of Eligible Portfolio Property rated at least A- by Standard & Poor's, A3
by Moody's and A- by Fitch (if rated by Fitch), the face value thereof; and
(e) as to any other asset of the Fund, such value as Fitch may
prescribe in writing.
Upon any failure to obtain two bid prices as described in paragraphs
(a), (b) and (c) above with respect to any item of Eligible Portfolio Property
as of any Valuation Date, the Fund shall notify Fitch in writing. As used in the
definition of Market Value, "in writing" includes telecopies, telexes or other
electronic transcription, or a computer-obtained quotation reducible to written
form.
"Maturity Date" means December 1, 1998.
"Moody's" means Moody's Investors Service, Inc., a New York
corporation, and includes any successor thereto.
"Multiemployer Plan" means any Plan which is a "multiemployer plan" (as
such term is defined in Section 4001(a)(3) of ERISA).
"Note" or "Notes" means the promissory note or notes of the Fund in the
form of Exhibit C hereto to be issued by the Fund to the Purchaser in the
aggregate amount of $20,000,000 in accordance with the terms of this Agreement.
"Note Basic Maintenance Amount" means, as of any date of determination,
(x) the dollar amount equal to (A) the sum of (a) 100% of the aggregate
principal amount of the Note then outstanding; (b) an amount equal to interest
accrued on the aggregate principal amount of the Note then outstanding from the
most recent Interest Payment Date to which interest has been paid or duly
provided for (or, in the event the Note Basic Maintenance Amount is calculated
on a date prior to the initial Interest Payment Date with respect to the Note,
then from the original issuance date thereof) through such date of determination
plus all interest to accrue on the Note then outstanding during the 63 days
following such date of determination; (c) the principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the Note)
incurred in accordance with Section 4.5 hereof; and (d) the greater of (i)
$200,000 or (ii) the Fund's liabilities (including interest on indebtedness
referred to in clause (c) above accruing during the 63 days following such date
of determination) due and payable as of such Valuation Date and such liabilities
projected to become due and payable by the Fund during the 63 days following
such date of determination, in each case to the extent not otherwise reflected
in any of clauses (a) through (c) above; less (B) the combined value of any
Deposit Securities irrevocably deposited by the Fund for the payment of the
obligations of the Fund referred to in clauses (a)-(d) of this definition.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of the Fund.
"Officers' Certificate" means a certificate signed by two Officers of
the Fund. See Sections 8.3 and 8.4.
"Opinion of Counsel" means a written opinion from Olshan Grundman Frome
& Rosenzweig or such other legal counsel who is acceptable to the holder of a
majority of the principal amount of the outstanding Notes hereunder.
"Permitted Tax Liens" means liens of general and special taxes and
assessments on the property in question.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Plan" means any "employee pension benefit plan" (as such term is
defined in Section 3 of ERISA) which is or has been established or maintained,
or to which contributions are being or have been made, by the Fund or any ERISA
Affiliate.
"Portfolio Calculation" shall have the meaning provided in Section
4.13(b).
"Portfolio Valuation Report" means an Officers' Certificate,
substantially in the form of Exhibit D hereto, delivered to Holder with respect
to the valuation of the Eligible Portfolio Property.
"Preferred Stock" means the Taxable Auction Rate Preferred Stock (No
Par Value) (Liquidation Preference $100,000 Per Share) of the Fund.
"Principal" of a debt security, including the Note, means the principal
of the security plus, when applicable, the premium, if any, on the security.
"Quarterly Valuation Date" means, so long as the Note is outstanding,
the last Business Day of January, April, July and October of each year.
"Rating Agencies" means, collectively, Fitch, Standard Poor's and
Moody'
"Redemption Date," when used with respect to the Note, means the date
fixed for redemption or repurchase pursuant to this Agreement.
"Redemption Price," when used with respect to the Note, means the price
fixed for redemption or repurchase of the Note pursuant to this Agreement and as
may be set forth in the form of Note annexed hereto as Exhibit C, as the case
may be.
"Reporting Date," with respect to any price referred to in the
definition of the Market Value of an item of Eligible Portfolio Property, shall
mean the date as of which the Market Value of such item of Eligible Portfolio
Property is to be determined pursuant to this Agreement or, if no such price is
available as provided above for such date, the next closest prior date as of
which such price is so available; provided, that no such price shall be deemed
to be available as of a Reporting Date if such price is not available as of a
date within five Business Days next preceding the date as of which the
determination of such Market Value is to be made.
"Required Documentation," with respect to a mortgage loan means:
(a) the mortgage note or other evidence of indebtedness secured by the
mortgage endorsed without recourse in blank or to the trustee or other
custodian and accompanied by an assignment thereof;
(b) the mortgage, deed of trust, deed to secure debt or similar
security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other
custodian, in recordable form as may be appropriate in the jurisdiction
where the property is located and evidence that such assignment has been
recorded in the name of the trustee or other custodian, and such trustee or
other custodian receives an opinion of counsel (containing only such
exceptions as may be permissible under the indenture or other agreement
pursuant to which the mortgage loan is pledged to the trustee in connection
with the related Conventional Mortgage Pass-Through Certificate) to the
effect that, notwithstanding that the assignment of the mortgage has not
been recorded, the actions taken with respect to the mortgage loan are
sufficient to permit the trustee or other custodian to avail itself of all
protection available under applicable law against the claims of any present
or future creditors of the issuer, and are sufficient to prevent any other
sale, transfer, assignment, pledge or hypothecation of the mortgage and the
related mortgage note by the issuer from being enforceable, or will create
a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of
the issuer to the trustee as provided in the indenture pursuant to which
the mortgage loan is pledged to the trustee in connection with the related
Conventional Mortgage Pass-Through Certificate) prior in right to all other
security interests therein created or perfected under the Uniform
Commercial Code (as in effect in the jurisdiction where the property is
located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
(d) a copy of the title insurance policy or an opinion or certificate
of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be
subject to exceptions for Permitted Tax Liens and other matters to which
like properties are commonly subject which neither individually nor in the
aggregate materially interfere with the benefits of the security interest
intended to be provided by such mortgage and standard exception and
exclusions from mortgage title insurance policies).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended from time
to time.
"Short-Term Money Market Instruments" means the following kinds of
instruments, if, on the date of determination, the remaining term to maturity
thereof is not more than 30 days:
(a) demand deposits in, certificates of deposit of, bankers'
acceptance issued by, or federal funds sold to, any depository institution,
the deposits of which are insured by the Federal Deposit Insurance
corporation or the Federal Savings and Loan Insurance Corporation, provided
that, at the time of the Fund's investment therein, certificates of deposit
of such depository institution are rated at least A-1+ by Standard & Poor's
and P-1 by Moody's and rated at least F-1 by Fitch (if rated by Fitch);
(b) repurchase obligations with respect to a U.S. Government
Obligation, FNMA Certificate, FHLMC Certificate or GNMA Certificate entered
into with a depository institution, the deposits of which are insured by
the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation and certificates of deposit of which are rated at
least A-1+ by Standard & Poor's, P-1 by Moody's and rated at least F-1 by
Fitch (if rated by Fitch), which must be repurchased within one Business
Day from the date such repurchase obligation was entered into; and
(c) commercial paper rated on the date of determination at least A-1+
by Standard & Poor's, P-1 by Moody's and rated at least F-1 by Fitch (if
rated by Fitch).
"Six Month Financial Statements" has the meaning assigned to it in
Section 4.16.
"Standard & Poor's" means Standard & Poor's Corporation, a New York
corporation, and includes any successor thereto.
"Type I Commercial Paper" means commercial paper that has a present
rating of at least A-1 by Standard & Poor's and at least P-1 by Moody's and a
rating of at least F-1 by Fitch (if rated by Fitch).
"Type II Commercial Paper" means commercial paper that has a present
rating of at least A-2 by Standard & Poor's, at least P-2 by Moody's, at least
F-2 by Fitch (if rated by Fitch) and does not constitute Type I Commercial
Paper.
"Type I Corporate Bonds" means Corporate Bonds whose present ratings
are AAA by Standard & Poor's, Aaa by Moody's and AAA by Fitch (if rated by
Fitch).
"Type II Corporate Bonds" means Corporate Bonds whose present ratings
are at least AA- by Fitch, if rated by Fitch, and if not rated by Fitch, at
least AA- by Standard & Poor's and at least Aa3 by Moody's and that do not
constitute Type I Corporate Bonds.
"Type III Corporate Bonds" means Corporate Bonds whose present ratings
are at least A- by Fitch, if rated by Fitch, and if not rated by Fitch, at least
A- by Standard & Poor's and A3 by Moody's and that do not constitute Type I or
Type II Corporate Bonds.
"Type IV Corporate Bonds" means Corporate Bonds whose present ratings
are at least BBB- by Fitch, if rated by Fitch, and if not rated by Fitch, at
least BBB- by Standard & Poor's and Baa3 by Moody's and that do not constitute
Type I, Type II or Type III Corporate Bonds.
"Type V Corporate Bonds" means Corporate Bonds whose present ratings
are at least BB- by Fitch, if rated by Fitch, and if not rated by Fitch, at
least BB- by Standard & Poor's and Ba3 by Moody's and that do not constitute
Type I, Type II, Type III or Type IV Corporate Bonds.
"Type VI Corporate Bonds" means Corporate Bonds whose present ratings
are at least B- by Fitch, if rated by Fitch, and if not rated by Fitch, at least
B- by Standard & Poor's and B3 (subordinated) by Moody's and that do not
constitute Type I, Type II, Type III, Type IV or Type V Corporate Bonds.
"Type VII Corporate Bonds" means Corporate Bonds whose present ratings
are at least CCC by Fitch, if rated by Fitch, and if not rated by Fitch, at
least CCC+ by Standard & Poor's and Caa by Moody's and that do not constitute
Type I, Type II, Type III, Type IV, Type V or Type VI Corporate Bonds.
"Type VIII Corporate Bonds" means Corporate Bonds whose present ratings
are at least CCC by Fitch, if rated by Fitch, and, if not rated by Fitch, at
least CCC by Standard & Poor's and Caa (unsecured subordinated) by Moody's and
that do not constitute Type I, Type II, Type III, Type IV, Type V, Type VI or
Type VII Corporate Bonds.
"U.S. Government Obligations" means direct obligations of the United
States; provided that such direct obligations are entitled to the full faith and
credit of the United States and that any such obligations, other than United
States Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
"United States" means the United States of America.
"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.
"Vice President" means any Vice President, whether or not designated by
a number or word before or after the title of Vice President.
Section 1.2. Other Definitions. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the defined terms):
Defined in
Term Section
---- ----------
"Bankruptcy Law" 6.1
"Lien" 4.15
"Notice of Default" 6.1
"Special Redemption Assets" 3.6(b)
Section 1.3. Rules of Construction.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles in effect
on the date hereof, and any other reference in this Agreement to "generally
accepted accounting principles" refers to generally accepted accounting
principles in effect on the date hereof;
(c) "or" is not exclusive;
(d) words in the singular include the plural, and in the plural
include the singular;
(e) "herein," "hereof" and other words of similar import refer to this
Agreement as a whole and not to any particular Article, Section or other
subdivision; and
(f) provisions apply to successive events and transactions.
ARTICLE 2
PURCHASE OF NOTE
Section 2.1. Intentionally Omitted.
Section 2.2. Intentionally Omitted.
Section 2.3. Intentionally Omitted.
Section 2.4. Manner of Payments. All payments and any prepayments, including any
payments due upon redemption, shall be made by transfer of immediately available
funds to a deposit account designated by the Purchaser, so that such funds are
available to the Purchaser on the due date of each such payment or prepayment.
The Purchaser Schedule attached hereto as Exhibit E sets forth the initial
payment instructions for the Purchaser with respect to the Note.
ARTICLE 3
REDEMPTION
Section 3.1. Applicability of Article.
The Note is redeemable in accordance with its terms and in accordance
with this Article 3.
Section 3.2. Mandatory Redemption Provisions.
(a) The Note is subject to mandatory partial redemption upon an Event
of Default of the type specified in Section 6.1(c)(ii). The aggregate principal
amount of the Note subject to such mandatory partial redemption will equal the
outstanding principal amount of the Note (rounded to the next highest increment
of $1,000) the redemption of which would have caused the Fund to have achieved
compliance with the asset coverage requirement specified in Section 4.12 on a
pro forma basis as of the last Business Day of the month in which the Fund
failed to satisfy such requirement. Any such mandatory partial redemption shall
occur within 45 days after the date of such Event of Default and shall be at a
Redemption Price equal to 100% of the principal amount of the Note to be
redeemed, together with the interest accrued thereon to the date fixed for such
redemption (exclusive of installments of interest maturing on or prior to such
date, the payment of which shall have been made or duly provided for). Holder
shall receive notice of any such mandatory redemption pursuant to Section 3.3.
(b) Upon a redemption of the Note pursuant to this Section 3.2, the
Fund shall immediately take action to liquidate portfolio securities sufficient
to pay the applicable Redemption Price on the date such Redemption Price is due
in accordance with the terms hereof.
Section 3.3. Notice of Redemption.
At least 30 days but not more than 60 days before the Redemption Date,
the Fund shall give a notice of redemption to Holder except that the Fund shall
give such notice at least five days but not more than 20 days before the
Redemption Date in the case of a redemption of the Note pursuant to clause (ii)
of the first paragraph of Section 4 of the Note or a redemption of the Note
pursuant to Section 3.2(a) or 3.6(b).
The notice shall identify the Note to be redeemed and shall state:
(a) the provision of the Note or this Agreement pursuant to which the
Note is to be redeemed;
(b) the Redemption Date;
(c) the Redemption Price;
(d) the name and address of the Fund;
(e) that the Note called for redemption must be surrendered to the
Fund to collect the Redemption Price;
(f) that, unless the Fund defaults in making the payment of the
Redemption Price, interest on the principal amount of the Note called for
redemption ceases to accrue on and after the Redemption Date; and
(g) that, upon surrender of the Note for partial redemption, the Fund
shall issue to the Holder a new Note equal in principal amount to the
unredeemed portion of the Note surrendered.
Section 3.4. Effect of Notice of Redemption.
Once notice of redemption is given, the Note shall become due and
payable on the Redemption Date and at the Redemption Price, plus accrued and
unpaid interest to the Redemption Date, and from and after the Redemption Date,
the Note (or, if less than the full principal amount of the Note is redeemed,
then the portion of the principal amount so redeemed) shall cease to bear
interest (unless the Fund shall default in the payment of the Redemption Price).
Upon surrender to the Fund, the principal amount of such Note (or the redeemed
principal amount thereof, if less) shall be paid at the Redemption Price,
together with accrued interest to the Redemption Date; provided, however, that
installments of interest payable on or prior to the Redemption Date shall be
payable to the Holder of the Note registered as such at the close of business on
the relevant record dates according to the terms of the Note.
Section 3.5. Note Redeemed in Part.
Upon surrender of the Note for partial redemption, the Fund shall issue
to the Holder a new Note in the principal amount equal to the unredeemed portion
of the redeemed Note.
Section 3.6. Special Additional Redemption Provisions.
(a) The Fund may redeem the Note at its option pursuant to clause (i)
or (ii) of the first paragraph of Section 4 of the Note, provided that, after
giving effect to such redemption, the Fund shall not be in violation of its
obligations under Section 4.13(a). If the Fund elects to redeem the Note
pursuant to any such clause, it shall notify Holder of the Redemption Date, the
principal amount of the Note to be redeemed and the clause of such first
paragraph of such Section 4 pursuant to which the Note is to be redeemed, which
notice shall be given not later than 10 days prior to the delivery of notices to
the Holder to Section 3.3 (except that such notice shall be given not later than
three Business Days prior to delivery of notices to the Holder pursuant to
Section 3.3 in the case of a redemption pursuant to clause (ii) of such first
paragraph of such Section 4 of the Note).
(b) The Note is subject to mandatory partial redemption upon a Default
of the type specified in Section 6.1(d). The principal amount of the Note
subject to such mandatory partial redemption will equal the outstanding
principal amount of the Note (rounded to the next highest increment of $1,000)
which could be redeemed using the Cash proceeds arising from the deemed sale of
"Special Redemption Assets." For purposes hereof, "Special Redemption Assets"
shall mean such portfolio holdings as are identified by the Fund in its sole
discretion, the deemed sale of which for Cash in an amount equal to the Market
Value thereof on the applicable Valuation Date on which the requirements of
Section 4.13(a) were not met would have resulted in the Fund achieving the
required Note Basic Maintenance Amount on a pro forma basis as of such Valuation
Date. The Fund need not liquidate the Special Redemption Assets; however, any
assets liquidated to effect the redemption must have the same respective
Discounted Value or Values as the Special Redemption Assets designated by the
Fund. Any such mandatory partial redemption shall occur within 34 days after the
applicable Cure Date and shall be at a Redemption Price equal to 100% of the
principal amount of the Note to be redeemed, together with the interest accrued
thereon to the date fixed for such redemption (exclusive of installments of
interest maturing on or prior to such date, the payment of which shall have been
made or duly provided for).
(c) Upon a redemption of the Note pursuant to clause (i) or (ii) of the
first paragraph of Section 4 of the Note pursuant to Section 3.6(b) hereof, the
Fund shall immediately take action to liquidate portfolio securities sufficient
to pay the applicable Redemption Price on the date such Redemption Price is due
in accordance with the terms hereof.
ARTICLE 4
COVENANTS
Section 4.1. Payment of Note.
The Fund shall pay the principal of and interest on the Note on the
dates and in the manner provided in the Note and in this Agreement. The Fund
shall pay interest on overdue principal of the Note at the higher of the rate
per annum borne by the Note on the date that the overdue principal is paid or
the rate per annum borne by the Note on the date that payment of the overdue
principal was due; it shall pay interest on overdue installments of interest at
the same rate to the extent lawful. If not earlier redeemed or repurchased
pursuant to the provisions of the Note and this Agreement, the Note will mature
and be payable in full on the Maturity Date.
Section 4.2. SEC Reports.
The Fund shall file all reports and other information and documents
which it is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act and Section 30 of the Investment Company Act. The Fund will cause
its semi-annual and annual reports as required by the SEC to be mailed to the
Holder.
Section 4.3. Waiver of Usury Defense.
The Fund covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law or any
other law which would prohibit or forgive the Fund from paying all or any
portion of the interest on the Note as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may otherwise affect the
covenants or the performance of this Agreement; and the Fund (to the extent that
it may lawfully do so) hereby expressly waives all benefit or advantage or any
such law.
Section 4.4. Limitation on Dividends and Other Distributions and Purchases.
(a) The Fund shall not declare any dividend or any other distribution
upon its Common Stock or purchase shares of Common Stock unless in every such
case (i) the Fund's "senior securities representing indebtedness" (as defined in
Section 18 of the Investment Company Act) have at the time of such declaration
or purchase, as the case may be, an "asset coverage" (as defined in and
determined pursuant to Section 18 of the Investment Company Act) of at least
300% (or such higher percentage as may in the future be required by law) after
deducting the amount of such dividend, distribution or purchase price, as the
case may be, (ii) no Default of the type specified in Section 6.1(a) or (b)
shall have occurred and be continuing at the time of such declaration or
purchase, (iii) the Fund shall not be in violation of Section 4.13(a) after
giving effect to such declaration or purchase and (iv) the Fund shall have paid
all amounts payable in respect of any mandatory partial redemption to be made
pursuant to Section 3.2 or the Fund shall have irrevocably deposited Deposit
Securities for the payment of any such mandatory partial redemption.
(b) The Fund shall not declare any dividend or any other distribution
upon its Preferred Stock or purchase any shares of Preferred Stock unless in
every such case (i) the Fund's "senior securities representing indebtedness" (as
defined in Section 18 of the Investment Company Act) have (A) at the time of the
declaration of any such dividend an "asset coverage" (as defined in and
determined pursuant to Section 18 of the Investment Company Act) of at least
200% (or such higher percentage as may in the future be required by law) after
deducting the amount of such dividend and (B) at the time of the declaration of
any such distribution or of such purchase, as the case may be, an "asset
coverage" (as defined in and determined pursuant to Section 18 of the Investment
Company Act) of at least 300% (or such higher percentage as may in the future be
required by law) after deducting the amount of such distribution or purchase
price, as the case may be, (ii) no Default of the type specified in Section
6.1(a) or (b) shall have occurred and be continuing at the time of such
declaration or purchase, (iii) the Fund shall not be in violation of Section
4.13(a) after giving effect to such declaration or purchase and (iv) the Fund
shall have paid all amounts payable in respect of any mandatory partial
redemption to be made pursuant to Section 3.2 or the Fund shall have irrevocably
deposited Deposit Securities for the payment of any such mandatory partial
redemption.
(c) For purposes of determining whether any of the asset coverages set
forth in subsections (a) and (b) above are maintained as of any date, such asset
coverage may be calculated on the basis of values calculated as of a time within
48 hours (not including Sundays or holidays) next preceding the time of the
applicable determination. An Event of Default under Section 6.1(a) or (b) shall
be deemed cured for purposes of subsections (a)(ii) and (b)(ii) above at such
time as the Fund has paid all principal of and interest on the Note then due by
reason of such Event of Default.
Section 4.5. Limitation on Incurrence of Indebtedness.
The Fund shall not create, incur, assume, guarantee or otherwise become
liable with respect to any indebtedness for money borrowed unless the incurrence
of such indebtedness would not result in a Default in the performance or
observance of the covenant contained in Section 4.12 or otherwise cause a
violation of Section 18 of the Investment Company Act.
Section 4.6. Liquidation.
(a) The Board of Directors or the shareholders of the Fund may not
adopt a plan of liquidation which plan provides for, contemplates or the
effectuation of which is preceded by (i) the transfer of all or substantially
all of the assets of the Fund, substantially as an entirety, and (ii) the
distribution of all or substantially all of the proceeds of such transfer and of
the remaining assets of the Fund to the shareholders of the Fund, unless the
Fund shall in connection with the adoption of such plan make provision for, or
agree that prior to making any liquidating distributions it will make provision
for, the satisfaction of the Fund's obligations hereunder and under the Note, in
each case subject to the reasonable satisfaction of the Purchaser. The Fund
shall be deemed to have made provision for such satisfaction only if:
(i) there is only one transferee of the Fund's assets, and such
transferee is a corporation, limited partnership or business trust
organized and existing under the laws of the United States, a state thereof
or the District of Columbia and such transferee expressly assumes in
writing, in form satisfactory to the Holder, of the obligations of the Fund
under the Note and this Agreement, in which case all such obligations of
the Fund shall terminate); and
(ii) immediately before and immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of
the Fund as a result of such transaction as having been incurred by the
Fund at the time of such transaction, no Default or Event of Default shall
have occurred and be continuing.
The Fund shall deliver to the Holder prior to making any liquidating
distribution an Officers' Certificate that shall comply with Section 8.4 and an
Opinion of Counsel, which shall state that the plan of liquidation complies with
this Section 4.6 and that all conditions precedent herein provided for relating
to the plan liquidation have been complied with.
(b) Upon any liquidation of the Fund in accordance with this Section
4.6, the corporation, limited partnership or business trust to which the
transfer contemplated by this Section 4.6 is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Fund under this
Agreement with the same effect as if such corporation, limited partnership or
business trust had been named as the Fund herein.
Section 4.7. Compliance Certificates.
The Fund shall deliver to the Holder, with each set of financial
statements delivered pursuant to Section 4.16(a) and (b), an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default. If they do know of any Default or Event of Default, the Officers'
Certificate shall describe the Default or Event of Default and the efforts to
remedy the same. The Officers' Certificate shall comply with Section 8.4 and
shall be in addition to the Officers' Certificates required under Section 4.12.
Section 4.8. Notice of Defaults.
Promptly upon the Fund obtaining information causing it to believe
there exists a Default in the performance, or a breach, of any covenant of the
Fund contained in this Agreement, the Fund will deliver to the Holder an
Officers' Certificate specifying the nature, status and period of existence
thereof.
In the event that any indebtedness of the Fund (whether for money
borrowed or otherwise) is declared due and payable before its maturity because
of the occurrence of any default under such indebtedness, the Fund will promptly
give written notice to the Holder of such declaration or of the occurrence of
any event which, with the giving of notice or the lapse of time, or both, would
entitle the holder or holders of such indebtedness to declare such indebtedness
due and payable before its maturity.
Section 4.9. Payment of Taxes and Other Claims.
The Fund will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all taxes, assessments and
governmental charges levied or imposed upon the Fund or upon the income, profits
or property of the Fund and (b) all lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a lien upon the property of the
Fund; provided, however, that the Fund shall not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which adequate provision has been made.
Section 4.10. Corporate Existence.
Subject to Section 4.6 and Article 5, the Fund will do or cause to be
done all things necessary to preserve and keep in full force and effect its
corporate existence and the rights (charter and statutory) and franchises of the
Fund; provided, however, that the Fund shall not be required to preserve any
such right or franchise if the Board of Directors shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Fund and that the loss thereof is not, and will not be, adverse in any
material respect to the Holder.
Section 4.11. Existence as Investment Company and Maintenance of Investment
Objective.
The Fund will remain a closed-end diversified management investment
company, as defined in Sections 3, 4 and 5 of the Investment Company Act, and be
registered as such pursuant to the Investment Company Act, subject to the right
of the Fund to convert to open-end status and in connection therewith to redeem
the Note pursuant to the Note (including clause (i) of the first paragraph of
Section 4 of the Note) and this Agreement. The Fund's investment objective will
continue to be to provide high current income, while seeking to preserve
shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high yield" securities.
Section 4.12. Required Investment Company Act Asset Coverage.
The Fund will maintain, as of the last Business Day of each calendar
month, an "asset coverage" (as defined in and determined pursuant to Section 18
of the Investment Company Act) with respect to its "senior securities
representing indebtedness" (as defined in Section 18 of the Investment Company
Act) of at least 300% (or such higher percentage as may in the future be
specified in Section 18 of the Investment Company Act as the minimum asset
coverage for senior securities representing indebtedness of a closed-end
investment company as a condition of paying dividends on common stock). For
purposes of determining whether such asset coverage requirement is met as of any
date, such asset coverage may be calculated on the basis of values calculated as
of a time within 48 hours (not including Sundays or holidays) next preceding the
time of the applicable determination. Within 10 days following the end of each
calendar month, the Fund shall deliver an Officers' Certificate to Holder as to
its compliance or failure to comply with this covenant. Failure by the Fund to
deliver an Officers' Certificate to Holder pursuant to this Section 4.12 shall
be deemed a failure to satisfy the "asset coverage" requirement under this
Section.
Section 4.13. Note Basic Maintenance Amount Required Under Certain
Circumstances.
(a) Subject to Section 4.13(d) below, the Fund covenants and agrees
that, for so long as the Note remains outstanding, it will maintain, on each
Valuation Date, Eligible Portfolio Property having an aggregate Discounted Value
at least equal to the Note Basic Maintenance Amount, each as of such Valuation
Date.
(b) On or before 5:00 P.M., Boston time, on the third Business Day
after each Valuation Date, the Fund shall complete and deliver to Holder a
Portfolio Valuation Report, which will be deemed to have been delivered to
Holder (i) if Holder receives a copy or telecopy, telex or other electronic
transcription thereof or (ii) if Holder receives a telecopy, telex or other
electronic transcription setting forth at least the aggregate Discounted Value
of all Eligible Portfolio Property (the "Portfolio Calculation") and the Note
Basic Maintenance Amount each as of the relevant Valuation Date and on the same
day the Fund mails to Holder for delivery on the next Business Day the full
Portfolio Valuation Report. A failure by the Fund to deliver a Portfolio
Valuation Report under this Section 4.13(b) shall be deemed to be delivery of a
Portfolio Valuation Report indicating a Portfolio Calculation less than the Note
Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within three Business Days after the date of delivery to Holder of
a Portfolio Valuation Report in accordance with Section 4.13(b) above relating
to a Quarterly Valuation Date, the Fund shall deliver to Holder a Letter
Reviewing Portfolio Calculation, prepared by the Fund's independent accountants,
relating to such Portfolio Valuation Report. If any Letter Reviewing Portfolio
Calculation delivered pursuant to this Section 4.13(c) shows that an error was
made in the Portfolio Valuation Report for such Quarterly Valuation Date, or
shows that a lower aggregate Discounted Value for the aggregate of all Eligible
Portfolio Property was determined by the independent accountants, the
calculation or determination made by such independent accountants shall be final
and conclusive and shall be binding on the Fund and Holder, and the Fund shall
accordingly amend the Portfolio Valuation Report and deliver the amended
Portfolio Valuation Report to Holder promptly following Holder's receipt of such
Letter Reviewing Portfolio Calculation.
(d) In the event the Portfolio Calculation shown in any Portfolio
Valuation Report delivered or deemed delivered to Holder pursuant to Section
4.13(b) or Section 4.13(c) is less than the applicable Note Basic Maintenance
Amount, the Fund shall have until the Cure Date to achieve a Portfolio
Calculation equal to or greater than the Note Basic Maintenance Amount, and upon
such achievement (and not later than such Cure Date) the Fund shall inform
Holder of such achievement in writing by delivery of a revised Portfolio
Valuation Report showing a Portfolio Calculation equal to or greater than the
Note Basic Maintenance Amount as of the date of such revised Portfolio Valuation
Report together with an Officers' Certificate to such effect.
(e) In the event the Fund intends or is required to pay a dividend or
make a distribution on or redeem shares of Preferred Stock, the requirements of
Section 4.13(a) shall be required to be met on a pro forma basis after giving
effect to such dividend, distribution or redemption.
Section 4.14. Delivery of Officers' Reports.
At any time that the Note is outstanding on or before 5:00 P.M., Boston
time, on the last Business Day of the last full week of each calendar quarter
(commencing March 25, 1994), the Fund shall deliver to Holder by mail, telecopy,
telex or other electronic transcription, an Officers' report stating, as of such
last Business Day, to the best knowledge of the Officers signing such Officers'
report, the Portfolio Calculation and the Note Basic Maintenance Amount each as
of such last Business Day. The Fund agrees that it will not, and will cause its
investment adviser not to, knowingly and willfully purchase a security for the
specific purpose of causing, and with actual knowledge that the effect of such
purchase will be to cause, the Portfolio Calculation as of the date of the
purchase to be less than the Note Basic Maintenance Amount as of such date.
Section 4.15. Restrictions on Liens.
For so long as the Note is outstanding, the Fund shall not create,
incur or suffer to exist, or agree to create, incur or suffer to exist, or
consent to cause or permit in the future (upon the happening of a contingency or
otherwise) the creation, incurrence or existence of any material lien, mortgage,
pledge, charge, security interest, security agreement, conditional sale or trust
receipt or other material encumbrance of any kind (collectively "Liens") upon
any of its portfolio property, except for (a) Liens the validity of which are
being contested in good faith by appropriate proceedings, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered by Bankers Trust
Company or its successor as auction agent with respect to the Preferred Stock
and (d) Liens in respect of overnight borrowings by the Fund not to exceed five
percent (5%) of the total assets of the Fund at any time outstanding.
Section 4.16. Financial Statements and Other Information.
The Fund covenants that it will deliver to any Holder of the Note, or
any portion thereof:
(a) as soon as practicable and in any event within 60 days after the
end of the first six month period in each fiscal year, statements of
operations, cash flows, changes of net assets, selected per share data and
ratios of the Fund for such six month period and a balance sheet and
schedule of investments of the Fund as at the end of such six month period,
setting forth in certain cases in comparative form corresponding figures
for the corresponding period in the preceding year, all certified by an
authorized financial officer of the Fund, subject to changes resulting from
year end adjustments (such financial statements being referred to herein as
"Six Month Financial Statements");
(b) as soon as practicable and in any event within 90 days after the
end of each fiscal year, statements of operations, cash flows, changes of
net assets, selected per share data and ratios of the Fund for such year
and a balance sheet and schedule of investments of the Fund as at the end
of such year, setting forth in certain cases in comparative form
corresponding figures from the preceding year, all in reasonable detail and
accompanied by a report thereon of independent public accountants of
recognized national standing selected by the Fund, which report shall be
unqualified as to going concern and without limitation as to the scope of
the audit and shall state that such financial statements present fairly, in
all material respects, the financial position of the Fund as at the date
indicated and the results of its operations and changes in its net assets,
its cash flows and the selected per share data and ratios for the period
presented in conformity with generally accepted auditing standards and that
the audit examination by such accountants in connection with such financial
statements has been made in accordance with generally accepted auditing
standards (such financial statements being referred to herein as "Annual
Financial Statements");
(c) promptly upon transmission thereof, copies of all such financial
statements, proxy statements, notices and reports as the Fund shall send to
its public shareholders and copies of all registration statements and all
reports which it files with the Securities and Exchange Commission (or any
governmental body or agency succeeding to the functions of the Securities
and Exchange Commission);
(d) promptly upon receipt thereof, a copy of each other report
submitted to the Fund by independent accountants in connection with any
annual, interim or special audit made by them of the books of the Fund; and
(e) with reasonable promptness, such other information as any holder
of the Note may reasonably request provided, however, that any such holder
shall first be required to enter into a confidentiality agreement (a
"Confidentiality Agreement") in form and substance reasonably acceptable to
the Fund providing for such holder's maintenance of the confidentiality in
respect of any information obtained pursuant to this clause (e) that is
identified by the Company as confidential.
Section 4.17. Information Required by Rule 144A.
The Fund covenants that it will, upon the request of any holder of the
Note, provide such holder, and any qualified institutional buyer designated by
such holder, the information required by Rule 144A(d)(4) under the Securities
Act in connection with the resale of the Note, except that the Fund shall not be
required to provide such information at such times as the Fund is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act. For purposes
of this Section 4.17, the term "qualified institutional buyer" shall have the
meaning specified in Rule 144A under the Securities Act.
Section 4.18. Inspection of Property.
The Fund covenants that it will permit any holder of the Note to
examine the corporate books and financial records of the Fund and make copies
thereof or extracts therefrom and to discuss the affairs, finances and accounts
of the Fund with, and to be advised as to the same by, the principal officers of
the Fund and its independent public accountants, all at such reasonable times
during regular business hours as such holder may reasonably request; Provided,
that such holder shall have first entered into a Confidentiality Agreement in
respect of any information to be obtained pursuant to this Section 4.18 that is
identified by the Company as confidential.
Section 4.19. Compliance with Laws.
The Fund shall comply with the requirements of all applicable laws,
rules, regulations and orders of any governmental authority, noncompliance with
which would result in a material adverse effect upon the properties, business,
prospects, condition (financial or otherwise) or operations of the Fund.
<PAGE>
ARTICLE 5
SUCCESSOR CORPORATION
Section 5.1 When Fund May Merge, etc.
The Fund shall not consolidate with or merge with or into, or transfer all
or substantially all of its assets to, any Person unless:
(a) either the Fund shall be the resulting or surviving entity (in the
case of a consolidation or merger) or the resulting or surviving entity of
such consolidation or merger or the transferee of such assets is a
corporation, limited partnership or business trust organized and existing
under the laws of the United States, a state thereof or the District of
Columbia and such resulting or surviving entity (other than the Fund) or
such transferee, as the case may be, is acceptable to the Purchaser and
expressly assumes in writing in form satisfactory to Holder, all the
obligations of the Fund under the Note and this Agreement (in which case
all such obligations of the Fund shall terminate); and
(b) immediately before and immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of
the Fund as a result of such transaction as having been incurred by the
Fund at the time of such transaction, no Default or Event of Default shall
have occurred and be continuing.
The Fund shall deliver to the Holder prior to the proposed transaction an
Officers' Certificate and an Opinion of Counsel, each of which shall comply with
Section 8.4 and shall state that such consolidation, merger or transfer complies
with this Article and that all conditions precedent herein provided for relating
to such transaction have been complied with.
Section 5.2. Successor Corporation Substituted.
Upon any consolidation or merger, or any transfer of all or substantially
all of the assets of the Fund in accordance with Section 5.1, the corporation,
limited partnership or business trust formed by such consolidation or into which
the Fund is merged or to which such transfer is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Fund under this
Agreement with the same effect as if such corporation, limited partnership or
business trust had been named as the Fund herein.
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.1. Events of Default.
An "Event of Default" with respect to the Note occurs if:
(a) the Fund fails to pay interest on the Note when the same becomes
due and payable and such failure continues for a period of five Business
Days;
(b) the Fund fails to pay the principal on the Note when the same
becomes due and payable at maturity, upon redemption or otherwise;
(c) (i) as of the last Business Day of each of 24 consecutive calendar
months asset coverage (as defined in and determined pursuant to Section 18
of the Investment Company Act) with respect to the Fund's "senior
securities representing indebtedness" (as defined in Section 18 of the
Investment Company Act) shall have been less than 100% or (ii) the Fund
fails to perform or observe its obligations under Section 4.12 and such
failure shall not have been cured (and notice of such cure given by the
Fund to Holder) by the last Business Day of the following calendar month
(it being understood that such Default will be deemed cured as of any date
if on or prior to such date the Fund shall have given an irrevocable notice
to Holder to call for the redemption of senior securities, which redemption
is then authorized under applicable law and the terms of this Agreement and
the Articles of Incorporation and which redemption, alone or together with
other action taken by the Fund, would cause the Fund to have the requisite
asset coverage and notice thereof shall have been given to Holder);
(d) at any time the Note is outstanding, the Fund fails to perform or
observe any covenant contained in Section 4.13, and such failure shall not
have been cured by the applicable Cure Date;
(e) the Fund fails to perform or observe any other covenant, condition
or agreement to be performed or observed by the Fund pursuant to the Note
or this Agreement;
(f) there shall be a default under any bond, debenture, note or other
evidence of indebtedness or under any mortgage, indenture or other
instrument under which there may be issued or by which there may be secured
or evidenced any indebtedness of or guaranteed by the Fund, whether such
indebtedness now exists or shall hereafter be created, and whether such
default involves a failure to pay any principal of or interest on any such
indebtedness or to perform an obligation other than the obligation to pay
the principal of or interest on any such indebtedness, if the effect of
such default is to cause, or to permit the holder or holders of such
indebtedness to cause, with the giving of notice if required, such
indebtedness to become due prior to its stated maturity; provided, however,
that no default under this clause (f) shall exist if all such defaults do
not relate to such indebtedness with an aggregate principal amount in
excess of $500,000;
(g) the Internal Revenue Service makes a final determination that the
Fund does not qualify for any taxable year as a "regulated investment
company" as defined in the Internal Revenue Code of 1986, as amended from
time to time;
(h) the Fund pursuant to or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case or proceeding,
(ii) consents to the entry of an order for relief against it in
an involuntary case or proceeding,
(iii) consents to the appointment of a Custodian of it or for all
or substantially all of its property, or
(iv) makes a general assignment for the benefit of its creditors;
(i) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(i) is for relief against the Fund in an involuntary case or
proceeding,
(ii) appoints a Custodian of the Fund or for all or substantially
all of its property, or
(iii) orders the liquidation of the Fund,
and, in each case, the order or decree remains unstayed and in effect
for 60 days; or
(j) final judgments for the payment of money which in the aggregate
exceed $500,000 shall be rendered against the Fund by a court of competent
jurisdiction and shall remain undischarged for a period (during which
execution shall not be effectively stayed) of 60 days after such judgments
become final.
A Default under clause (c) or (g) is not an Event of Default unless the
Default continues for more than ten days. A Default under clause (e), (f) or (j)
is not an Event of Default unless the Default continues for more than 30 days.
Any notice given pursuant to this Section 6.1 must specify the Default, demand
that it be remedied and state that the notice is a "Notice of Default."
Upon the Fund having knowledge of the occurrence of a Default or an Event
of Default, the Fund shall notify Holder promptly in writing.
Section 6.2. Acceleration.
If an Event of Default specified in Section 6.1(a), (b), (c), (d), (e),
(f), (g) or (j) occurs with respect to the Note, then and in every such case,
Holder may by written notice delivered to the Fund declare the Note (or, in the
case of an Event of Default of the type specified in Section 6.1(c)(ii) or
6.1(d), such portion of the Note as shall be required to be redeemed pursuant to
Section 3.2(a) or 3.6(b)), to be due and payable immediately upon such
declaration (or on such date as is specified pursuant to Section 3.2(a) or
3.6(b), if applicable), by notice to the Fund, and upon such declaration the
principal of and accrued interest on the Note (or portion thereof, as
applicable) to the extent not then already due and payable shall become due and
payable on such date, together with interest thereon through such date
(exclusive of installments of interest maturing on or prior to such date, the
payment of which shall have been made or duly provided for). If an Event of
Default specified in Section 6.1(h) or (i) occurs, the unpaid principal of the
Note then outstanding, together with accrued interest thereon, shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of Holder. Upon any such acceleration, the Fund shall immediately
take action to liquidate portfolio securities sufficient to pay the amount of
principal of and interest on the Note due as a result of such acceleration.
Section 6.3. Other Remedies.
If an Event of Default occurs and is continuing with respect to the Note,
Holder may pursue any available remedy by proceeding at law or in equity to
collect the payment of principal of or interest on the Note to the extent then
due hereunder or to enforce the performance of any provision of the Note or this
Agreement.
A delay or omission by Holder in exercising any right or remedy accruing
upon an event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. No remedy is exclusive of any
other remedy. All available remedies are cumulative to the extent permitted by
law.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES
Section 7.1. Representations and Warranties of the Fund. The Fund represents and
warrants as follows:
(a) The Fund is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland.
(b) The execution, delivery and performance by the Fund of this
Agreement and the Note are within the Fund's corporate powers, have been
duly authorized by all necessary corporate action, and do not contravene
(i) the Fund's charter or by-laws or (ii) law or any contractual
restriction binding on or affecting the Fund or any of its properties.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required
for the due execution, delivery and performance by the Fund of this
Agreement or the Note.
(d) This Agreement and the Note are the legal, valid and binding
obligations of the Fund enforceable against the Fund in accordance with
their respective terms.
(e) There is no pending or threatened action or proceeding affecting
the Fund which purports to affect the legality, validity or enforceability
of this Agreement or the Note.
(f) The Fund has filed all federal, state and other income tax returns
which, to the knowledge of the officers of the Fund, are required to be
filed, and has paid all taxes as shown on such returns and on all
assessments received by it to the extent that such taxes have become due,
except such taxes as are being contested in good faith by appropriate
proceedings for which adequate reserves have been established in accordance
with generally accepted accounting principles.
(g) Neither the execution nor delivery of this Agreement or the Note,
nor the offering, issuance and sale of the Note to Pacific Mutual, nor
fulfillment of nor compliance with the terms and provisions hereof and the
Note will conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, or result in any violation
of, or result in the creation of any Lien upon any of the properties or
assets of the Fund pursuant to, any award of any arbitrator or any
agreement, instrument, order, judgment, decree, statute, law, rule or
regulation to which the Fund is subject.
(h) Neither the Fund nor any agent acting on its behalf has, directly
or indirectly, offered the Note or any similar security of the Fund (except
for securities issued under the Indenture, which issuance was registered
under the Securities Act) for sale to, or solicited any offers to buy the
Note or any similar security of the Fund from, or otherwise approached or
negotiated with respect thereto with, any Person other than institutional
investors, and neither the Fund nor any agent acting on its behalf has
taken or will take any action which would subject the issuance or sale of
the Note to the provisions of Section 5 of the Securities Act or to the
provisions of any securities or Blue Sky law of any applicable
jurisdiction.
(i) No accumulated funding deficiency (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, exists with
respect to any Plan (other than a Multiemployer Plan). No liability to the
Pension Benefit Guaranty Corporation has been or is expected by the Fund or
any ERISA Affiliate to be incurred with respect to any Plan (other than a
Multiemployer Plan) by the Fund or any ERISA Affiliate which is would be
materially adverse to the business, condition (financial or otherwise) or
operations of the Fund. Neither the Fund nor any ERISA Affiliate has
incurred or presently expects to incur any withdrawal liability under Title
IV of ERISA with respect to any Multiemployer Plan which is or would be
materially adverse to the business, condition (financial or otherwise) or
operations of the Fund.
(j) The Fund has furnished the Purchaser with the following financial
statements, certified by a principal financial officer of the Fund: (a)
Annual Financial Statements for the year ended October 31, 1992, all
reported on by Arthur Andersen & Co. and (b) and Six Month Financial
Statements for the six month period ended April 30, 1993. The balance
sheets of the Fund contained in such financial statements and the related
statements of operations, cash flows, change of net assets, selected per
share date and ratios fairly present the financial condition of the Fund as
at the dates and for the periods covered thereby. Such financial statements
have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the respective periods. There
has been no material adverse change in the business, condition (financial
or otherwise) or operations of the Fund since April 30, 1993.
(k) Neither this Agreement nor any other document, certificate or
statement furnished to the Purchaser by or on behalf of the Fund in
connection herewith contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading.
Section 7.2. Representations and Warranties of the Purchaser.
The Purchaser represents and warrants as follows:
(a) The Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of the State of California.
(b) The execution, delivery and performance by the Purchaser of this
Agreement is within the Purchaser's corporate powers, have been duly
authorized by all necessary corporate action, and do not contravene (i) the
Purchaser's charter or by-laws or (ii) law or any contractual restriction
binding on or affecting the Purchaser or any of its properties.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required
for the due execution, delivery and performance by the Purchaser of this
Agreement.
(d) This Agreement is the legal, valid and binding obligations of the
Purchaser enforceable against the Purchaser in accordance with its terms.
(e) There is no pending or threatened action or proceeding affecting
the Purchaser which purports to affect the legality, validity or
enforceability of this Agreement.
(f) The Purchaser is an "accredited investor", as such term is defined
in Regulation D under the Securities Act and has such knowledge and
experience in financial and business matters so as to be capable of
evaluating the merits and risks of its investment in the Note.
(g) The Purchaser is purchasing the Note for its own account for
investment purposes only and not with a view to or for the resale or
distribution thereof.
ARTICLE 8
MISCELLANEOUS
Section 8.1. Notices.
All notices and other communications provided for hereunder shall, unless
otherwise stated herein, be in writing (including telecopier communication) and
mailed, telecopied, or delivered, as to each party hereto, as its address set
forth below or as to each party, at such other address as shall be designated by
such party in a written notice to the other party. All such notices and
communications shall, when mailed or telecopied, be effective when deposited in
the mails or telecopied:
(a) If to the Fund:
Prospect Street High Income Portfolio Inc.
Exchange Place
37th Floor
Boston, Massachusetts 02109
Attention: Secretary
Telecopier No.: (617) 742-9455
(b) If to the Purchaser:
To the Address specified in the Purchaser Schedule.
(c) If to any Holder other than the Purchaser, at such address and
telecopier number as shall be designated by such Holder in a written notice to
the Fund.
Section 8.2. Business Days.
Any action regarding this Agreement or the Note to be taken on a day that
is not a Business Day may, except as otherwise provided herein, be taken on the
next succeeding day that is a Business Day.
Section 8.3. Certificate as to Conditions Precedent.
Upon any request or application by the Fund to Holder to take any action
under this Agreement, the Fund shall furnish to Holder an Officers' Certificate
(which shall include the statements set forth in Section 8.4) stating that, in
the opinion of the signers, all conditions precedent, if any, provided for in
this Agreement relating to the proposed action have been complied with.
Nothing in this Section 8.3 shall limit the provisions of the second
sentence of Section 6.2 regarding the required acceleration of the unpaid
principal of and accrued interest on the Note (or the required amount of
outstanding principal amount of the Note, as applicable), upon an Event of
Default specified in Section 6.1(a), (b), (c), (d), (e), (g), (h) or (i).
Section 8.4. Statements Required in Certificate.
Each Officers' Certificate with respect to compliance with a covenant or
condition provided for in this Agreement shall include:
(a) a statement that the Person making such certificate has read such
covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements contained in such certificate or
opinion are based;
(c) a statement that, in the opinion of such Person, such Person has
made such examination or investigation as is necessary to enable such
Person to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether or not, in the opinion of such Person,
such covenant or condition has been complied with.
Section 8.5. Governing Law; Submission to Jurisdiction.
The laws of the State of New York shall govern this Agreement and the Note
without regard to principles of conflicts of law. The Fund hereby irrevocably
submits to the non-exclusive jurisdiction of any United States Federal or New
York State Court sitting in New York City in any action or proceeding arising
out of or relating to this Agreement or the Note and the Fund irrevocably agrees
that all claims in respect of such action or proceeding may be heard and
determined in any such United States Federal or New York State Court.
Section 8.6. Payments in the Ordinary Course.
The indebtedness of the Fund pursuant to the Note is a debt incurred by the
Fund in the ordinary course of its business and financial affairs. Payments of
principal and interest upon the Note will be made in the ordinary course of
business and financial affairs of the Fund according to ordinary business terms.
In the event that the Fund becomes subject to any bankruptcy proceeding pursuant
to Title 11, U.S. Code, or any similar bankruptcy or insolvency proceeding, it
is the intention of the Fund that payments upon the Note will not be subject to
avoidance as preferential transfers.
Section 8.7. Expenses.
The Fund agrees, whether or not the transactions contemplated hereby shall
be consummated, to pay all reasonable out-of-pocket expenses of Purchaser
arising in connection with such transactions, including (a) all document
production and duplication charges and the fees and expenses of one law firm
engaged by the Purchaser in connection with this Agreement, the transactions
contemplated hereby and any subsequent proposed modification of, or proposed
consent under, this Agreement, whether or not such proposed modification shall
be effected or proposed consent granted, and (b) the costs and expenses,
including reasonably attorneys' fees, incurred by the Purchaser or any
subsequent holder of all or any portion of the Note in enforcing (or determining
whether or how to enforce) any rights under this Agreement or the Note or in
responding to any subpoena or other legal process or informal investigative
demand issued in connection with this Agreement or by reason of the Purchaser
having acquired the Note, including without limitation costs and expenses
incurred in any bankruptcy case. The obligations of the Fund under this Section
8.7 shall survive the transfer of the Note or a portion thereof or interest
therein by the Purchaser and the payment of the Note.
Section 8.8. Assignment; Successors.
The Purchaser may assign all or any portion of its interest in any rights
under this Agreement and the Note to any Person or grant participation or
beneficial interests in this Agreement and the Note to any Person; provided that
any assignment or grant of participation or beneficial interest by the Purchaser
of its interest in the Note shall be of a minimum principal amount of
$5,000,000; and provided, further that such assignment or participation shall
not be made under such circumstances as may constitute a violation of the
Securities Act, or regulations thereunder or any applicable state securities
laws or regulations and the Fund shall be entitled to receive such certificates
of persons and opinions of legal counsel prior to such assignment or grant as
the Fund shall reasonably request to provide confirmation thereof. Upon any
assignment of the Purchaser's rights hereunder or under the Note, (a) any action
hereunder requiring the consent of the Purchaser and (b) enforcement of any
remedies provided for herein may only be taken with the consent or at the
direction of the holders of more than 50% of the principal amount of the Note
then outstanding. All agreements of the Fund in this Agreement and the Note
shall bind its permitted successors. All agreements of the Purchaser in this
Agreement shall bind its permitted successors.
Section 8.9. Multiple Counterparts.
The parties may sign multiple counterparts of this Agreement. Each signed
counterpart shall be deemed an original, all of which taken together shall
constitute but one and the same agreement.
Section 8.10. Table of Contents, Headings, etc.
The table of contents and headings of the Articles and Sections of this
Agreement have been inserted for convenience of reference only, are not to be
considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers or agents thereunto duly authorized, all
as of the date first written above.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By: /s/ John A. Frabotta
----------------------------------------
Title: Vice President
PACIFIC MUTUAL LIFE INSURANCE COMPANY
By: /s/ Raymond Thee
----------------------------------------
Title: Vice President
<PAGE>
EXHIBIT A
INDUSTRY CATEGORIES
1. Aerospace and Defense
2. Automobile/Auto Parts/Truck Manufacturing
3. Banks/Savings and Loans/Finance Companies/Consumer Credit
4. Real Estate Development/REITS/Building/Construction
5. Broadcasting - TV/Cable/Radio/Publishing
6. Electrical Equipment/Electronics/Computers
7. Diversified/Conglomerate Services
8. Diversified/Conglomerate Manufacturing
9. Leisure/Amusement/Motion Pictures
10. Agricultural Chemicals/Farming
11. Financial Services
12. Food/Tobacco
13. General & Specialty Retail
14. Grocery/Convenience Food Stores
15. Healthcare/Drugs/Hospital Supplies
16. Home Furnishings/Durable Consumer Products
17. Hotel/Gaming
18. Insurance Companies
19. Machinery
20. Metals/Mining
21. Nonagricultural Chemicals/Plastics
22. Oil/Natural Gas/Oil Services
23. Packaging/Containers
24. Paper/Forest Products/Printing
25. Personal & Miscellaneous Services
26. Pollution Control/Waste Removal
27. Public Utility/Electric Power/Hydro Power
28. Rail/Trucking/Overnight Delivery
29. Telephone/Communications
30. Textiles/Other Manufacturing/Apparel
31. Transportation/Airlines/Bus
<PAGE>
EXHIBIT B
LETTER REVIEWING PORTFOLIO CALCULATION
A letter reviewing the Portfolio Valuation Report, as required to be
delivered by the Note Purchase Agreement, shall be prepared by the independent
accountants of the Fund, shall be addressed to the Fund and the Holder and shall
be substantially to the effect that:
(i) the independent accountants have read the Portfolio Valuation
Report for the current Quarterly Valuation Date (the "Report");
(ii) with respect to the issue size compliance, issuer diversification
and industry diversification calculations, such calculations and the
resulting eligible portfolio market value and discounted eligible portfolio
market value calculations are numerically correct;
(iii) with respect to the Note Basic Maintenance Amount calculation,
such calculation has been compared with the definition of Note Basic
Maintenance Amount in the Agreement and is calculated in accordance with
such definition and the Agreement, and the results of such calculation have
been recalculated and are numerically correct;
(iv) with respect to the excess of deficiency of the Discounted Value
Amount when compared to the Note Basic Maintenance Amount, the results of
the calculation set forth in the Report have been recalculated and are
numerically correct;
(v) with respect to the Standard and Poor's and Moody's ratings on
Corporate Bonds, issuer name, issue size and coupon rate listed in the
Report, that information has been traced and agrees with the information
listed in the Bond Guides of the respective Rating Agencies (in the event
such information does not agree or such information is not listed in the
Bond Guides of the respective Rating Agencies, the independent accountants
will inquire of the Rating Agencies what such information is, and provide a
listing in their letter of such differences, if any);
(vi) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value as provided by the
Note Purchase Agreement) provided by The Bank of New York to the Fund for
purposes of valuing securities in the portfolio, the independent
accountants have traced the price used in the Report to the lower of the
two bid prices listed in the report provided by The Bank of New York and
verified that such information agrees (in the event such information does
not agree, the independent accountants will provide a listing in their
letter of such differences); and
(vii) with respect to the description of each security included in the
Report, the description of Eligible Portfolio Property has been compared to
the definition of Eligible Portfolio Property contained in the Note
Purchase Agreement, and the description as appearing in the Report agrees
with the definition of Eligible Portfolio Property as described in the Note
Purchase Agreement.
Each such letter may state that: such independent accountants have made no
independent verification of the accuracy of the description of the investment
securities listed in the Report or the market value of those securities nor have
they performed any procedures other than those specifically outlined above for
the purposes of issuing such letter; unless otherwise stated in the letter, the
procedures specified therein were limited to a comparison of numbers or a
verification of specified computations applicable to numbers appearing in the
Report and the schedule(s) thereto; the foregoing procedures do not constitute
an examination in accordance with generally accepted auditing standards and the
Report contained in the letter does not extend to any of the Fund's financial
statements taken as a whole; such independent accountants do not express an
opinion as to whether such procedures would enable such independent accountants
to determine that the methods followed in the preparation of the Report would
correctly determine the Market Value or Discounted Value of the investment
portfolio; accordingly, such independent accountants express no opinion as to
the information set forth in the Report or in the schedule(s) thereto and make
no representation as to the sufficiency of the procedures performed for the
purposes of the Agreement.
Such letter shall also state that the accountants are "independent
accountants" with respect to the fund within the meaning of the Securities Act
of 1933, as amended, and the related published rules and regulations thereunder.
<PAGE>
EXHIBIT C
PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (1) AN
EFFECTIVE REGISTRATION THEREOF UNDER SAID ACT OR
(2) AN OPINION OF COUNSEL SATISFACTORY TO THE FUND
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT
IS AVAILABLE.
No. ________________
$ __________________ Dated: ____________________________, 1993
1. Principal Amount.
FOR VALUE RECEIVED, the undersigned, PROSPECT Street(SM) HIGH INCOME
PORTFOLIO INC., a corporation organized and existing under the laws of the
Maryland (the "Fund"), HEREBY PROMISES TO PAY to the order of __________________
(the "Holder") the principal sum of ____________________ DOLLARS ($__________)
or, if less, the outstanding principal amount of this Note pursuant to the Note
Purchase Agreement (defined below), on December 1, 1998.
2. Interest.
The Borrower promises to pay interest on the principal amount hereof from
time to time outstanding from the date hereof until such principal amount is
paid in full, payable semi-annually on each June 1, and December 1 during the
term hereof, commencing December 1, 1993, and on the final day when such
principal amount becomes due, at a rate of 6.53% per annum. Interest will be
computed on the basis of a 360-day year of twelve 30-day months plus the number
of days elapsed.
3. Payment.
Both principal and interest are payable in lawful of the United State of
America to the Holder in immediately available funds at its office at _________.
All payments made on account of the principal amount of this Note shall be
recorded by the Holder.
4. Redemption by Fund.
This Note will not be redeemable by the Fund prior to maturity, except that
(i) the Fund may redeem this Note on or after December 5, 1993, as a whole but
not in part, in connection with the conversion of the Fund to open-end status
and (ii) the Fund at any time may elect to redeem such amount of this Note as
shall (a) enable the Fund to maintain "asset coverage" (as defined in and
determined pursuant to the Investment Company Act) with respect to the Fund's
"senior securities representing indebtedness" (as defined in the Investment
Company Act), including this Note, of at least 300% (or such higher percentage
as may in the future be specified in Section 18 of the Investment Company Act as
the minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of paying dividends on common
stock), (b) enable the Fund to maintain "asset coverage" (as defined in and
determined pursuant to the Investment Company Act) with respect to the Fund's
senior securities of a class which is stock (as such term is used in the
Investment Company Act), including the Fund's Preferred Stock, of at least 200%
(or such higher percentage as may in the future be specified in Section 18 of
the Investment Company Act as the minimum asset coverage for senior securities
of a class which is stock of a closed-end investment company as a condition of
paying dividends on common stock) or (c) enable the Fund to qualify for
treatment as a regulated investment company for federal income tax purposes.
In addition, the Fund shall redeem such aggregate principal amount of Notes
as is specified in Section 3.2(a) or 3.6(b) of the Note Purchase Agreement upon
an Event of Default of the type specified in Section 6.1(c)(ii) or (d) thereof,
respectively.
Any redemption of this Note by the Fund shall be made at a price equal to
100% of the principal amount thereof plus accrued interest to the Redemption
Date and shall otherwise be made in accordance with the terms of the Note
Purchase Agreement including Article 3 thereof. Notice of redemption will be
mailed not less than five days nor more than 20 days before the Redemption Date
in the case of a redemption pursuant to clause (ii) above or Section 3.2(a) or
3.6(b) of the Note Purchase Agreement and not less than 30 days nor more than 60
days before the Redemption Date in the case of a redemption pursuant to (i)
above to each Holder of this Note to be redeemed at the registered address of
such Holder. Notes in denominations larger than $1,000 may be redeemed in part,
but not in denominations of less than $1,000. On and after the Redemption Date,
interest ceases to accrue on this Note or portion of it called for redemption.
5. Certain Covenants.
Under the Note Purchase Agreement, the Fund will be required, as of the
last Business Day of each calendar month, to maintain "asset coverage" (as
defined in and determined pursuant to the Investment Company Act) with respect
to its "senior securities representing indebtedness" (as defined in the
Investment Company Act), including the Notes then outstanding, of at least 300%
(or such higher percentage as may in the future be specified in Section 18 of
the Investment Company Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
paying dividends on common stock), and to maintain on a semi-monthly basis a
Discounted Value for its Eligible Portfolio Property equal to the Note Basic
Maintenance Amount. The Note Purchase Agreement imposes certain limitations on
the ability of the Fund to, among other things, declare dividends or other
distributions with respect to its Preferred Stock or Common Stock or purchase
such Preferred Stock or Common Stock unless specified asset coverage tests are
met and interest and principal payments on the Note are not in Default and
limits the Fund's ability to incur additional indebtedness. The Fund must report
to Holder periodically on compliance with such provisions.
6. Successors.
When a successor corporation, limited partnership or business trust assumes
all the obligations of its predecessor under the Note and the Note Purchase
Agreement, the predecessor will be released from those obligations.
7. Miscellaneous.
This Note is the Note referred to in, and is entitled to the benefits of,
the Note Purchase Agreement dated as of July 15, 1993, as it may be amended from
time to time (the "Note Purchase Agreement"), between the Fund and Pacific
Mutual Life Insurance Company. Capitalized terms used in this Note that are not
otherwise defined herein shall have the meanings ascribed thereto in the Note
Purchase Agreement. The Note Purchase Agreement, among other things, contains
provisions for redemption and acceleration of the maturity hereof upon the
happening of certain stated events and upon the terms and conditions therein
specified.
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
By:
-----------------------------------------
Title:
<PAGE>
EXHIBIT D
PORTFOLIO VALUATION REPORT
Valuation as of __________________, 19__ ("Valuation Date")
This Officers' Certificate is delivered pursuant to Section 4.13 of that
certain Note Purchase Agreement dated as of _______________________, 1993 (the
"Agreement") between Prospect Street High Income Portfolio Inc., a Maryland
corporation (the "Fund"), and Pacific Mutual Life Insurance Company, a
California corporation (the "Purchaser"). Capitalized terms used herein that are
not otherwise defined shall have the meanings ascribed thereto in the Agreement.
Calculations of the Discounted Value of Eligible Portfolio Property are based on
such principal amounts as of the Valuation Date. The undersigned ______________,
a duly elected, qualified and acting of the Fund and __________________________,
a duly elected, qualified and acting _________________ of the Fund, do hereby
certify as follows:
(i) the Fund has calculated the market value of each item included as
Eligible Portfolio Property as of the Valuation Date, with the related
calculations being set forth in the attached report;
(ii) the Fund has calculated the Discounted Value of each item of the
Eligible Portfolio Property as of the Valuation Date, the results of such
calculations being set forth in the attached report;
(iii) the Fund has calculated the Note Basic Maintenance Amount as of
the Valuation Date, such calculation being set forth in the attached
report;
(iv) the Fund has totaled the Discounted Values for all items included
as Eligible Portfolio Property, such total being set forth in the attached
report;
(v) the aggregate amount referred to in clause (iv) above is equal to
or in excess of the amount referred to in clause (iii) above (or, in the
event the aggregate amount referred to in clause (iv) above is less than
the amount referred to in clause (iii) above, set forth below is a
statement to such effect and the amount of any such deficiency; and
(vi) as of the Valuation Date, the Fund knows of no Event of Default
which has occurred and is continuing under Section 6.1(d) of the Agreement
(or, if such an Event of Default is known to exist, a description thereof
shall be set forth below).
IN WITNESS WHEREOF, we have signed our names this ______ day of __________,
19__.
-------------------------------------
Authorized Officer
-------------------------------------
Authorized Officer
<PAGE>
EXHIBIT E
PURCHASER SCHEDULE
PACIFIC MUTUAL LIFE INSURANCE COMPANY
(1) All payments on account of Notes held by such purchaser shall be made by
wire transfer of Federal or other immediately available funds for credit
to:
U.S. Trust NYC
ABA No. 021001318
Account Name: Pacific Mutual General
Concentration Account
Account No. 89930714
Each such wire transfer shall set forth the name of the Issuer, a
reference to "Prospect Street Promissory Notes due 1998", and the due
date and application (as among principal, interest and premium, if any)
of the payment being made.
(2) Address for all notices relating to payments:
Pacific Mutual Life Insurance Company
700 Newport Center Drive
Post Office Box 9000
Newport Beach, California 92658-9000
Attention: Investment Administration
Tel: (714) 640-3379
Fax: (714) 640-3199
(3) Address for all physical settlements:
U.S. Trust Company of California
Attn: Securities Department
770 Broadway, 13th Floor
New York, New York 10003
A/C Name: Pacific Mutual General
Concentration Account
A/C Number: 89930714
(4) Address for all other communications and notices:
Pacific Mutual Life Insurance Company
700 Newport Center Drive
Post Office Box 9000
Newport Beach, California 92658-9000
Attention: Securities
Tel: (714) 640-3379 Fax: (714) 640-3199
with a copy to:
Pacific Mutual Life Insurance Company
Attn: Securities Administration
P.O. Box 9000
Newport Beach, California 92658-9000
(5) Tax Identification No.: 95-4229487
EXHIBIT (E)
PROSPECT STREET(R) HIGH
INCOME PORTFOLIO INC.
DIVIDEND REINVESTMENT PLAN
[LOGO]
WALL
PROSPECT STREET
<PAGE>
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
Dear Shareholder:
We have prepared this brochure in response to the questions we have received
concerning the Dividend Reinvestment Plan. This Plan is automatically available
to all shareholders of the Fund and provides a convenient way to accumulate
additional shares by reinvesting distributions paid on your shares.
State Street Bank and Trust Company acts as agent under the Plan.
We hope this brochure will be helpful in answering questions you may have about
the Dividend Reinvestment Plan.
Sincerely,
/s/ Richard E. Omohundro, Jr.
Richard E Omohundro, Jr.
President
<PAGE>
HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK?
The Dividend Reinvestment Plan (the "Plan") offers shareholders of Prospect
Street(R) High Income Portfolio Inc. (the "Fund") a convenient way to acquire
additional shares of the Fund's common stock by automatic reinvestment.
When a distribution is declared, nonparticipants in the Plan will receive cash.
Participants in the Plan will receive the equivalent in shares of common stock
of the Fund valued as described below:
1. If on the record date for the distribution, the market price is
equal to or exceeds the net asset value at the time shares are valued for the
purpose of determining the number of shares equivalent to the cash dividend or
capital gains distribution, participants will be issued shares of common stock
at the net asset value most recently determined, but in no event less than 95%
of the market price.
2. If on the record date for the distribution, the net asset value of
the common stock exceeds the market price of the common stock, or if the Fund
should declare a dividend or capital gains distribution payable only in cash,
State Street Bank and Trust company (the "Bank") will buy common stock in the
open market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before the Bank has completed its purchases, the market price
exceeds the net asset value of the common stock, the average per share purchase
price paid by the Bank may exceed the net asset value of the common stock,
resulting in the acquisition of fewer shares than if the dividend or capital
gains distribution had been paid in common stock issued by the Fund.
As a registered shareholder in the Plan, the entire amount of your distribution
will be reinvested. For any balance that is insufficient to purchase a whole
share, the Bank will credit your account with fractional shares. The fractional
share position is included in all subsequent distributions, and you have voting
rights on all full and fractional shares acquired under the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions. The Bank's fees for handling the reinvestment of dividends and
capital gains distributions will be paid by the Fund. There will be no brokerage
charges with respect to shares of common stock issued directly by the Fund as a
result of dividends or capital gains distributions payable either in stock or in
cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Bank's open market purchases in
connection with the reinvestment of dividends and capital gains distributions.
HOW OFTEN DOES THE FUND DECLARE DISTRIBUTIONS?
It is the present policy of the Fund, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of common stock.
Distributions of any short-term capital gains and long-term capital gains will
be made annually.
HOW DO SHAREHOLDERS REGISTER FOR THE PLAN?
Each shareholder is automatically considered a participant in the Plan, unless
otherwise elected.
If your Fund shares are held in the name of a broker or nominee, you will have
distributions reinvested automatically by the broker or nominee in additional
shares under the Plan, unless the service is not provided by the broker or
nominee, or unless the shareholder elects to receive distributions in cash. If
the service is not available, such distributions will be paid in cash.
Shareholders whose shares are held in the name of a broker or nominee should
contact the broker or nominee for details.
RATHER THAN REINVESTING, CAN I RECEIVE CASH?
Yes. If a shareholder wishes to receive distributions in cash, the shareholder
must notify the institution (broker or nominee) in whose name the shares are
held. If the shareholder is registered, the Bank will provide all new registered
shareholders with a withdrawal card which should be signed and returned to the
Bank only if the shareholder wants cash. Alternatively, shareholders may send
written notice to the Bank a least 10 days prior to the record date for the
distribution to withdraw from the Plan and get cash. All distributions to
shareholders who elect not to participate (or whose broker or nominee elects not
to participate) in the Plan, will be paid by check mailed directly to the record
holder by the Bank, as dividend paying agent.
HOW AM I TAXED ON REINVESTED DISTRIBUTIONS
The automatic reinvestment of dividends and capital gains distributions will not
relieve participants of any income tax which may be payable on such dividends or
distributions. Participants in the Plan and shareholders who receive cash will
each receive Form 1099 concerning the Federal tax status of distributions paid
during the year.
HOW DO I WITHDRAW FROM THE PLAN?
A shareholder who terminates his participation may choose of 1) receive a stock
certificate for "whole" shares held in his account and a check for the value of
any fractional shares in the account, or 2) instruct the Bank to sell all full
or fractional shares in the account and receive a check for the proceeds of the
sale. There will be a fee of $2.50 for termination of an account. No certificate
will be issued for fractional shares. Participants who elect to have shares sold
will receive the proceeds from the sale, less any brokerage commission related
to the sale.
If a participant disposes of the shares registered in his name on the books of
the Fund, the Bank may continue to reinvest the distributions on shares in the
Plan Account until otherwise notified in writing.
ADDITIONAL INFORMATION
The Bank maintains all shareholder accounts in the Plan and furnishes written
confirmations of all transactions in such accounts, including information needed
by shareholders for personal and tax records.
Common Stock in the account of each Plan participant will be held by the Bank in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
The price at which the Bank shall be deemed to have acquired shares in the open
market for the participants' accounts shall be the average price (including
brokerage commissions) of all shares purchased by it for all participants in the
Plan. The average price per share may, due to market fluctuations, be greater
than the net asset value per share. Under certain circumstances, the rules and
regulations of the Securities and Exchange Commission may require limitation or
temporary suspension of market purchases of shares under the Plan. The Bank will
not be accountable for its inability to make purchases during such a period.
Experience under the Plan may indicate that changes are desirable. The Plan may
be amended or terminated by the Fund and/or the Bank on at least 90 days written
notice to participants in the Plan.
QUESTIONS AND CORRESPONDENCE CONCERNING THE PLAN SHOULD BE DIRECTED TO:
STATE STREET BANK AND TRUST COMPANY
P.O. BOX 8209
TWO HERITAGE DRIVE, 4TH FLOOR
NORTH QUINCY, MA 02171
(800) 426-5523
<PAGE>
*AUTHORIZATION FOR CASH
PLEASE TERMINATE MY REINVESTMENT PLAN AND . . .(CHECK ONE)
| | Issue a certificate for all full shares and sell any fractional shares
remaining in my reinvestment account.
| | Sell all shares currently being held in my reinvestment account, and remit
a check for the proceeds.
_ _
| DO NOT MAIL IF YOU WISH TO RECEIVE BOTH YOUR DIVIDEND AND CAPITAL |
|_GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. _|
PRINT
NAME(S) __________________________________
__________________________________________
DATE _____________________________________
TAX
IDENTIFICATION
NUMBER ___________________________________
SIGNATURE(S)______________________________
__________________________________________
*NOTIFICATION MUST BE RECEIVED BY THE PLAN AGENT AT LEAST
10 BUSINESS DAYS PRIOR TO THE RECORD DATE FOR A DISTRIBUTION.
<PAGE>
PLACE
STAMP
HERE
STATE STREET BANK AND TRUST COMPANY
c/o PROSPECT STREET HIGH INCOME PORTFOLIO INC.
P.O. BOX 8209
BOSTON, MA 02266-8200
<PAGE>
EXHIBIT (G)
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this 1st day of March 1994, by and between
Prospect Street Investment Management Co., Inc., a corporation organized under
the laws of the State of Massachusetts having its principal place of business in
Boston, Massachusetts (the "Manager"), and Prospect Street High Income Portfolio
Inc., a Maryland corporation having its principal place of business in Boston,
Massachusetts (the "Fund").
WHEREAS, the Fund is engaged in business as a closed-end diversified
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Manager is engaged principally in the business of rendering
investment management services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended;
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties
hereto as follows:
1. APPOINTMENT OF MANAGER.
The Fund hereby appoints the Manager to act as manager and investment
adviser to the Fund for the period and on the terms herein set forth. The
Manager accepts such appointment and agrees to render the services herein set
forth, for the compensation herein provided.
2. DUTIES OF MANAGER.
The Manager, at its own expense, shall furnish the following services and
facilities to the Fund:
(a) Investment Program. The Manager shall (i) furnish continuously an
investment program for the Fund, (ii) determine (subject to the overall
supervision and review of the Board of Directors of the Fund) what
investments shall be purchased, held, sold or exchanged by the Fund and
what portion, if any, of the assets of the Fund shall be held uninvested,
and (iii) make changes in the investments of the Fund. The Manager shall
also manage, supervise and conduct the other affairs and business of the
Fund and matters incidental thereto, subject always to the control of the
Board of Directors of the Fund, and to the provisions of the Articles of
Amendment and Restatement (the "Articles of Incorporation") and By-laws of
the Fund, the Prospectuses of the Fund, and the 1940 Act, in each case as
from time to time amended and in effect. Subject to the foregoing, the
Manager shall have the authority to engage one or more sub-advisers in
connection with the management of the Fund, which sub-advisers may be
affiliates of the Manager.
(b) Office Space and Facilities. The Manager shall furnish the Fund
office space in the offices of the Manager, or in such other place or
places as may be agreed upon from time to time, and all necessary office
facilities, simple business equipment, supplies, utilities and telephone
service for managing the affairs and investments of the Fund.
(c) Regulatory Reports. The Manager shall furnish to the Fund
necessary assistance in:
(i) the preparation of all reports now or hereafter required by
federal or other laws; and
(ii) the preparation of prospectuses, registration statements and
amendments thereto that may be required by federal or other laws or by
the rules or regulations of any duly authorized commission or
administrative body.
(d) Services of Personnel. The Manager shall provide all necessary
executive and administrative personnel for managing the affairs of the
Fund, including personnel to perform clerical, bookkeeping, accounting and
other office functions. These services are exclusive of the bookkeeping and
accounting services of any dividend disbursing agent, transfer agent,
registrar or custodian. The Manager shall compensate all personnel,
officers and directors of the Fund if such persons are also employees of
the Manager or its affiliates.
In providing services of the type contemplated by the foregoing
paragraphs (c) and (d), the Manager shall be entitled to retain the
services of one or more accounting, consulting or similar firms, provided
that the Manager shall pay all fees and expenses of any firms so retained
and shall remain responsible for the provision of the services described
herein.
(e) Fidelity Bond. The Manager shall arrange for providing and
maintaining a bond issued by a reputable insurance company authorized to do
business in the place where the bond is issued against larceny and
embezzlement covering each officer and employee of the Fund who may singly
or jointly with others have access to funds or securities of the Fund, with
direct or indirect authority to draw upon such funds or to direct generally
the disposition of such funds. The bond shall be in such reasonable amount
as a majority of the directors who are not "interested persons" of the
Fund, as defined in the 1940 Act, shall determine, with due consideration
given to the aggregate assets of the Fund to which any such officer or
employee may have access. The premium for the bond shall be payable by the
Fund in accordance with paragraph 3(m).
(f) Portfolio Transactions. The Manager shall place all orders for the
purchase and sale of portfolio securities for the account of the Fund with
brokers or dealers selected by the Manager, although the Fund will pay the
actual brokerage commissions on portfolio transactions in accordance with
paragraph 3(d).
In placing portfolio transactions for the Fund, it is recognized that
the Manager will give primary consideration to securing the most favorable
price and efficient execution. Consistent with this policy, the Manager may
consider the financial responsibility, research and investment information
and other services provided by brokers or dealers who may effect or be a
party to any such transaction or other transactions to which other clients
of the Manager may be a party. It is understood that neither the Fund nor
the Manager has adopted a formula for allocation of the Fund's investment
transaction business. It is also understood that it is desirable for the
Fund that the Manager have access to supplemental investment and market
research and security and economic analysis provided by brokers who may
execute brokerage transactions at a higher cost to the Fund than would
otherwise result when allocating brokerage transactions to other brokers on
the basis of seeking the most favorable price and efficient execution.
Therefore, the Manager is authorized to place orders for the purchase and
sale of securities for the Fund with such brokers, subject to review by the
Fund's Board of Directors from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided
by such brokers may be useful or beneficial to the Manager in connection
with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients, the
Manager, to the extent permitted by applicable laws and regulations, may,
but shall be under no obligation to, aggregate the securities to be so sold
or purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction will be made by the Manager in the manner it considers to be
the most equitable and consistent with its fiduciary obligations to the
Fund and to such other clients.
3. ALLOCATION OF EXPENSE.
Except for the services and facilities to be provided by the Manager as set
forth in paragraph 2 above, the Fund assumes and shall pay all expenses for all
other Fund operations and activities and shall reimburse the Manager for any
such expenses incurred by the Manager. The expenses to be borne by the Fund
shall include, without limitation:
(a) all expenses of organizing the Fund;
(b) the charges and expenses of (i) any registrar, stock transfer or
dividend disbursing agent, shareholder servicing agent, custodian or
depository appointed by the Fund for the safekeeping of its cash, portfolio
securities and other property, including the costs of servicing shareholder
investment accounts and bookkeeping, accounting and pricing services,
provided to the Fund (other than those utilized by the Manager in providing
the services described in Section 2), (ii) any agent engaged for the
purposes of conducting auctions with respect to the Fund's Taxable Auction
Rate Preferred Stock, (iii) any institution serving as trustee with respect
to the Fund's Senior Extendible Notes and (iv) fees of any stock exchange
or any rating agency responsible for rating outstanding securities of the
Fund;
(c) the charges and expenses of bookkeeping, accounting and auditors;
(d) brokerage commissions and other costs incurred in connection with
transactions in the portfolio securities of the Fund, including any portion
of such commissions attributable to brokerage and research services as
defined in Section 28(e) of the Securities Exchange Act of 1934;
(e) taxes, including issuance and transfer taxes, and corporate
registration, filing or other fees payable by the Fund to federal, state or
other governmental agencies:
(f) expenses, including the cost of printing certificates, relating to
the issuance of securities of the Fund;
(g) expenses involved in registering and maintaining registrations of
the Fund and of its securities with the Securities and Exchange Commission
and various states and other jurisdictions, including reimbursement of
actual expenses incurred by the Manager or others in performing such
functions for the Fund, and including compensation of persons who are
employees of the Manager, in proportion to the relative time spent on such
matters;
(h) expenses of shareholders' and directors' meetings, including
meetings of committees, and of preparing, printing and mailing proxy
statements, quarterly reports, semi-annual reports, annual reports and
other communications to existing security holders;
(i) expenses of preparing and printing prospectuses and marketing
materials;
(j) compensation and expenses of directors who are not affiliated with
the Manager;
(k) charges and expenses of legal counsel in connection with matters
relating to the Fund, including, without limitation, legal services
rendered in connection with the Fund's corporate and financial structure
and relations with its security holders, issuance of shares of the Fund and
registration and qualification of securities under federal, state and other
laws;
(1) the cost and expense of maintaining the books and records of the
Fund, including general ledger accounting;
(m) insurance premiums on fidelity, errors and omissions and other
coverages including the expense of obtaining and maintaining a fidelity
bond as required by Section 17(g) of the 1940 Act which may also cover the
Manager;
(n) expenses incurred in obtaining and maintaining any surety bond or
similar coverage with respect to securities of the Fund;
(o) interest payable on Fund borrowings;
(p) such other non-recurring expenses of the Fund as may arise,
including expenses of actions, suits or proceedings to which the Fund is a
party and expenses resulting from the legal obligation which the Fund may
have to provide indemnity with respect thereto; and
(g) expenses and fees reasonably incidental to any of the foregoing
specifically identified expenses.
4. ADVISORY FEE.
For the services and facilities to be provided by the Manager as set forth
in paragraph 2 hereof, the Fund will pay to the Manager as full compensation
therefor a fee at an annual rate of 0.65% of the Fund's net assets up to and
including $175 million, (b) 0.55% on the next $50 million, and (c) 0.50% of the
excess over $225 million. For purposes hereof, net assets shall mean (a) the
average weekly value of the total assets of the Fund minus (b)(i) accrued
liabilities of the Fund (other than the principal amount of the Fund's "senior
securities representing indebtedness" (as defined in the 1940 Act), not to
exceed $50 million, and not including the aggregate liquidation preference of
the Fund's Taxable Auction Rate Preferred Stock or any other preferred stock or
other senior securities issued in lieu thereof (the "Preferred Stock")) and (ii)
accumulated and unpaid dividends on the Preferred Stock. The fee to the Manager
will be computed weekly and will be paid to the Manager monthly as soon as
practicable following the end of each month.
In the case of commencement or termination of this Agreement during any
month, the fee with respect to such month shall be adjusted proportionately.
5. EXPENSE LIMITATION.
The Manager agrees that if the total expenses of the Fund (exclusive of
interest, taxes, brokerage expenses and extraordinary items such as litigation
expenses) for any fiscal year of the Fund exceed the lowest expense limitation
imposed by any jurisdiction to which the Fund is then subject, if any, the
Manager will pay or reimburse the Fund for that excess up to the amount of its
advisory fees payable with respect to the Fund during that fiscal year. The
amount of the monthly advisory fee payable by the Fund under paragraph 4 hereof
shall be reduced to the extent that the monthly expenses of the Fund, on an
annualized basis, would exceed the foregoing limitation. At the end of each
fiscal year of the Fund, if the aggregate annual expenses chargeable to the Fund
for that year exceed the foregoing limitation based upon the average of the
monthly average net asset values of the Fund for the year, the Manager will
promptly reimburse the Fund for the amount of such excess to the extent not
already reimbursed by reduction of the monthly advisory fee, but if such
expenses are within the foregoing limitation, any excess amount previously
withheld from the monthly advisory fee during that fiscal year will be promptly
paid over to the Manager.
In the event that this Agreement (i) is terminated as of a date other than
the last day of the fiscal year of the Fund or (ii) commences as of a date other
than the first day of the fiscal year of the Fund, then the expenses of the Fund
shall be annualized and the Manager shall pay to, or receive from, the Fund a
pro rata portion of the amount that the Manager would have been required to pay
or would have been entitled to receive, if any, had this Agreement been in
effect with respect to the Fund for the full fiscal year.
6. RELATIONS WITH FUND.
Subject to and in accordance with the Articles of Incorporation and By-laws
of the Fund and the Articles of Organization and By-laws of the Manager, it is
understood that Directors, officers, agents and shareholders of the Fund are or
may be interested in the Manager (or any successor thereof) as directors,
officers or otherwise, that directors, officers, agents and shareholders of the
Manager (or any successor thereof) are or may be interested in the Fund as
Directors, officers, agents, shareholders or otherwise, that the Manager (or any
such successor thereof) is or may be interested in the Fund as a shareholder or
otherwise.
7. LIABILITY OF MANAGER.
The Manager shall not be liable to the Fund for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates; provided, however, that no provision of
this Agreement shall be deemed to protect the Manager against any liability to
the Fund or its shareholders to which it might otherwise be subject by reason of
any willful misfeasance, bad faith or gross negligence in the performance of its
duties or the reckless disregard of its obligations and duties under this
Agreement, nor shall any provision hereof be deemed to protect any director or
officer of the Fund against any such liability to which he might otherwise be
subject by reason of any willful misfeasance, bad faith or gross negligence in
the performance of his duties or the reckless disregard of his obligations and
duties. The Fund hereby agrees to indemnify and hold harmless the Manager and
each of its agents, employees, officers, directors and stockholders from and
against any and all liabilities arising in connection with the performance of
this Agreement other than liabilities arising as a result of any willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations
and duties on the part of the Manager or any such agent, employee, officer,
director or stockholder.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective on the date first set
forth above, such date being the date on which this Agreement has been executed.
Unless terminated as herein provided, this Agreement shall remain in full force
and effect until the date which is two years after the effective date of this
Agreement. Subsequent to such initial period of effectiveness this Agreement
shall continue in full force and effect, subject to Section 8(c), for successive
one-year periods so long as such continuance is approved at least annually (a)
by either the directors of the Fund or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund, voting as a single
class, and (b) in either event, by the vote of a majority of the directors of
the Fund who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval. Notwithstanding the foregoing
provisions of this Section 8(a), the continuance of this Agreement is subject to
the approval of this Agreement by a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, voting as a single class,
at the initial meeting of shareholders after the date of this Agreement.
(b) Amendment. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by vote of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, voting as a single class.
(c) Termination. This Agreement may be terminated at any time, without
payment of any penalty, by vote of the Directors or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, voting
as a single class, or by the Manager, in each case on not more than sixty (60)
days' nor less than thirty (30) days' prior written notice to the other party.
(d) Automatic Termination. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
9. SERVICES NOT EXCLUSIVE.
The services of the Manager to the Fund hereunder are not to be deemed
exclusive, and the Manager shall be free to render similar services to others so
long as its services hereunder are not impaired hereby.
10. PRIOR AGREEMENTS SUPERSEDED.
This Agreement supersedes any prior agreement relating to the subject
matter hereof between the parties hereto.
11. NOTICES.
Notices under this Agreement shall be in writing and shall be addressed,
and delivered or mailed postage prepaid, to the other party at such address as
such other party may designate from time to time for the receipt of such
notices. Until further notice to the other party, the address of each party to
this Agreement for this purpose shall be Exchange Place, Boston, Massachusetts.
<PAGE>
12. GOVERNING LAW; COUNTERPARTS.
This Agreement shall be construed in accordance with the laws of the State
of New York. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first set forth above.
ATTEST: PROSPECT STREET INVESTMENT
MANAGEMENT CO. INC.
/s/ KAREN J. THELEN By: /s/ RICHARD E. OMOHUNDRO, JR.
- -------------------------------------- ---------------------------------
RICHARD E. OMOHUNDRO, JR.
President
ATTEST:
PROSPECT STREET HIGH INCOME
PORTFOLIO INC.
/s/ KAREN J. THELEN By: /s/ JOHN A. FRABOTTA
- -------------------------------------- ---------------------------------
JOHN A. FRABOTTA
Vice President
<PAGE>
EXHIBIT (J)
CUSTODIAN CONTRACT
Between
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be
Held By It ..................................................... 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian ............................. 2
2.1 Holding Securities ....................................... 2
2.2 Delivery of Securities ................................... 2
2.3 Registration of Securities ............................... 7
2.4 Bank Accounts ............................................ 8
2.5 Availability of Federal Funds ............................ 8
2.6 Collection of Income ..................................... 9
2.7 Payment of Fund Monies ................................... 9
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased ................................................ 12
2.9 Appointment of Agents .................................... 13
2.10 Deposit of Fund Assets in Securities System .............. 13
2.10A Fund Assets Held in the Custodian's Direct Paper System .. 16
2.11 Segregated Account ....................................... 18
2.12 Ownership Certificates for Tax Purposes .................. l9
2.13 Proxies .................................................. l9
2.14 Communications Relating to Fund Portfolio Securities ..... l9
2.15 Proper Instructions ...................................... 20
2.16 Actions Permitted Without Express Authority .............. 21
2.17 Evidence of Authority .................................... 22
3. Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income .................. 22
4. Records ........................................................ 23
5. Opinion of Fund's Independent Accountant ....................... 24
6. Reports to Fund by Independent Public Accountants .............. 24
7. Compensation of Custodian ...................................... 24
8. Responsibility of Custodian .................................... 25
9. Effective Period, Termination and Amendment .................... 26
10. Successor Custodian ............................................ 28
11. Interpretive and Additional Provisions ......................... 29
12. Massachusetts Law to Apply ..................................... 30
13. Shareholder Communications Election ............................ 30
14. Prior Contracts ................................................ 31
<PAGE>
CUSTODIAN CONTRACT
This Contract between Prospect Street High Income Portfolio Inc., a
corporation organized and existing under the laws of Maryland, having its
principal place of business at Exchange Place, 37th Floor, Boston, Massachusetts
02109, hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets
pursuant to the provisions of the Articles of Incorporation. The Fund agrees to
deliver to the Custodian all securities and cash owned by it, and all payments
of income, payments of principal or capital distributions received by it with
respect to all securities owned by the Fund from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock,
$.01 par value, ("Shares") of the Fund as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of the Fund held
or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section 2.15),
the Custodian shall from time to time employ one or more sub-custodians, but
only in accordance with an applicable vote by the Board of Directors of the
Fund, and provided that the Custodian shall have no more or less responsibility
or liability to the Fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian,
provided that any such Custodian shall be selected with reasonable care.
2. Duties of the Custodian with Respect to Property of the Fund Held
By the Custodian
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, including all securities
owned by the Fund, other than (a) securities which are maintained pursuant
to Section 2.10 in a clearing agency which acts as a securities depository
or in a book-entry system authorized by the U.S. Department of the
Treasury, collectively referred to herein as "Securities System" and (b)
commercial paper of an issuer for which State Street Bank and Trust Company
acts as issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver securities
owned by the Fund held by the Custodian or in a Securities System account
of the Custodian or in the Custodian's Direct Paper book entry system
account ("Direct Paper System Account") only upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate
by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange for
a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to
the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided
that in any such case, the Custodian shall have no responsibility
or liability for any loss arising from the delivery of such
securities prior to receiving payment for such securities except
as may arise from the Custodian's own negligence or willful
misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Fund, but only against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the Fund, which
may be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities, except that
in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian
will not be held liable or responsible for the delivery of
securities owned by the Fund prior to the receipt of such
collateral;
11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization
or organizations, regarding account deposits in connection with
transactions by the Fund; and
14) For any other proper corporate purpose, but only upon receipt of,
in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or
an Assistant Secretary, specifying the securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other than
bearer securities) shall be registered in the name of the Fund or in the
name of any nominee of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be used in common
with other registered investment companies having the same investment
adviser as the Fund, or in the name or nominee name of any agent appointed
pursuant to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Fund under the terms of this Contract shall be in "street
name" or other good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of the Fund, subject only to draft or order
by the Custodian acting pursuant to the terms of this Contract, and shall
hold in such account or accounts, subject to the provisions hereof, all
cash received by it from or for the account of the Fund, other than cash
maintained by the Fund in a bank account established and used in accordance
with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as Custodian in
the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be qualified
to act as a custodian under the Investment Company Act of 1940 and that
each such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved by vote of a majority of the
Board of Directors of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which the Fund
shall be entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other payments
with respect to bearer securities if, on the date of payment by the issuer,
such securities are held by the Custodian or its agent thereof and shall
credit such income, as collected, to the Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach and
present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when
due on securities held hereunder. Income due the Fund on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility
of the Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such information
or data as may be necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Fund is properly
entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of securities, options, futures contracts or
options on futures contracts for the account of the Fund but only
(a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts
to the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under
the Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its agent
for this purpose) registered in the name of the Fund or in the
name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a member
of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Fund of
securities owned by the Custodian along with written evidence of
the agreement by the Custodian to repurchase such securities from
the Fund or (e) for transfer to a time deposit account of the Fund
in any bank, whether domestic or foreign; such transfer may be
effected prior to receipt of a confirmation from a broker and/or
the applicable bank pursuant to Proper Instructions from the Fund
as defined in Section 2.15;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the
account of the Fund: interest, taxes, management, accounting,
transfer agent and legal fees, and operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
4) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
5) For payment of the amount of dividends received in respect of
securities sold short;
6) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution
of the Board of Directors or of the Executive Committee of the
Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of such
payment, setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper purpose, and naming
the person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except
as specifically stated otherwise in this Contract, in any and every case
where payment for purchase of securities for the account of the Fund is
made by the Custodian in advance of receipt of the securities purchased in
the absence of specific written instructions from the Fund to so pay in
advance, the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received by the
Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent or sub-custodian
pursuant to this Section 2.11 shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall
not include any assets of the Custodian other than assets held as
a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the account
of the Fund upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The
Custodian shall transfer securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Securities System of transfers of
securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to the
Fund at its request. Upon request, the Custodian shall furnish the
Fund confirmation of each transfer to or from the account of the
Fund in the form of a written advice or notice and shall furnish
to the Fund copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of the
Fund.
4) The Custodian shall provide the Fund with any report obtained by
the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from failure
of the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may have
as a consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which
shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to
the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt
of payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written
advice or notice, of Direct Paper on the next business day
following such transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's transaction in the
Securities System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system
of internal accounting control as the Fund may reasonably request
from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper Instructions
establish and maintain a segregated account or accounts for and on behalf
of the Fund, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by the Custodian
pursuant to Section 2.10 hereof, (i) in accordance with the provisions of
any agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating
cash or government securities in connection with options purchased, sold or
written by the Fund or commodity futures contracts or options thereon
purchased or sold by the Fund, (iii) for the purposes of compliance by the
Fund with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but
only, in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of Directors or
of the Executive Committee signed by an officer of the Fund and certified
by the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to securities of the Fund held by it and in connection with
transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver to
the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of
calls and maturities of securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by the
Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall
transmit promptly to the Fund all written information received by the
Custodian from issuers of the securities whose tender or exchange is sought
and from the party (or his agents) making the tender or exchange offer. If
the Fund desires to take action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall notify the Custodian
at least three business days prior to the date on which the Custodian is to
take such action.
2.15 Proper Instructions. Proper Instructions as used throughout this Article 2
means a writing signed or initialled by one or more person or persons as
the Board of Directors shall have from time to time authorized. Each such
writing shall set forth the specific transaction or type of transaction
involved, including a specific statement of the purpose for which such
action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given
by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Directors of
the Fund accompanied by a detailed description of procedures approved by
the Board of Directors, Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices provided
that the Board of Directors and the Custodian are satisfied that such
procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by
the Custodian pursuant to any three-party agreement which requires a
segregated asset account in accordance with Section 2.11.
2.16 Actions Permitted without Express Authority. The Custodian may in its
discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under
this Contract not to exceed $1,000 per item, provided that all
such payments shall be accounted for to the Fund on a monthly
basis;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and
other dealings with the securities and property of the Fund except
as otherwise directed by the Board of Directors of the Fund.
2.17 Evidence of Authority. The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other instrument or
paper believed by it to be genuine and to have been properly executed by or
on behalf of the Fund. The Custodian may receive and accept a certified
copy of a vote of the Board of Directors of the Fund as conclusive evidence
(a) of the authority of any person to act in accordance with such vote or
(b) of any determination or of any action by the Board of Directors
pursuant to the Articles of Incorporation as described in such vote, and
such vote may be considered as in full force and effect until receipt by
the Custodian of written notice to the contrary.
3. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income. The Custodian shall cooperate with and
supply necessary information to the entity or entities appointed by the
Board of Directors of the Fund to keep the books of account of the Fund
and/or compute the net asset value per share of the outstanding shares of
the Fund or, if directed in writing to do so by the Fund, shall itself keep
such books of account and/or compute such net asset value per share. If so
directed, the Custodian shall also calculate weekly the net income of the
Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent weekly of the total amounts of such
net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such
net income among its various components. The calculations of the net asset
value per share and the weekly income of the Fund shall be made at the time
or times described from time to time in the Fund's currently effective
prospectus.
4. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
5. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-2, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
6. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
7. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian. Effective June 5, 1994 and for a period of two years such
compensation shall be as set forth on Schedule A annexed to the Registrar,
Transfer Agency and Service Agreement.
8. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
9. Effective Period. Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, however that the Custodian
shall not act under Section 2.10 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Directors of the Fund has approved the initial use of a particular Securities
System and the receipt of an annual certificate of the Secretary or an Assistant
Secretary that the Board of Directors has reviewed the use by the Fund of such
Securities System, as required in each case by Rule 17f-4 under the Investment
Company Act of 1940, as amended and that the Custodian shall not act under
Section 2.10A hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Directors has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors has
reviewed the use by the Fund of the Direct Paper System; provided further,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation, and further provided, that the Fund may at any
time by action of its Board of Directors (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
10. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
11. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
12. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
13. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
14. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 6th day of June, 1994.
ATTEST PROSPECT STREET HIGH INCOME
PORTFOLIO INC.
/s/ Karen J. Thelen By: /s/ John A Frabotta
- ----------------------------------- -------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ D. Hufnagle By: /s/ Daniel L. Lynde
- ----------------------------------- -------------------------------
Executive Vice President
<PAGE>
EXHIBIT (K)(1)
REGISTRAR,
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Article 1 Terms of Appointment; Duties of the Bank .................. 1
Article 2 Fees and Expenses ......................................... 4
Article 3 Representations and Warranties of the Bank ................ 4
Article 4 Representations and Warranties of the Fund ................ 5
Article 5 Data Access and Proprietary Information ................... 6
Article 6 Indemnification ........................................... 8
Article 7 Standard of Care .......................................... ll
Article 8 Covenants of the Fund and the Bank ........................ ll
Article 9 Termination of Agreement .................................. 12
Article 10 Assignment ................................................ 13
Article 11 Amendment ................................................. 13
Article 12 Massachusetts Law to Apply ................................ 13
Article 13 Force Majeure ............................................. 14
Article 14 Consequential Damages ..................................... 14
Article 15 Merger of Agreement ....................................... 14
<PAGE>
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 6th day of June, 1994, by and between
PROSPECT STREET HIGH INCOME PORTFOLIO INC., a Maryland corporation, having its
principal office and place of business at Exchange Place, 37th Floor, Boston,
Massachusetts 02109 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its registrar,
transfer agent, dividend disbursing agent, custodian of certain retirement plans
and agent in connection with certain other activities and the Bank desires to
accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows
Article 1 Terms of Appointment: Duties of the Bank
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to
act as registrar, transfer agent for the Fund's authorized and issued shares of
its common stock ("Shares"), dividend disbursing agent, custodian of certain
retirement plans and agent in connection with any dividend reinvestment plan as
set out in the prospectus of the Fund, corresponding to the date of this
Agreement.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and the Bank, the Bank shall:
(i) Issue and record the appropriate number of Shares as
authorized and hold such Shares in the appropriate
Shareholder account;
(ii) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate documentation;
(iii) Execute transactions directly with broker-dealers
authorized by the Fund who shall thereby be deemed to be
acting on behalf of the Fund;
(iv) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(v) Act as agent for Shareholders pursuant to the dividend
reinvestment and cash purchase plan as amended from time to
time in accordance with the terms of the agreement to be
entered into between the Shareholders and the Bank in
substantially the form attached as Exhibit A hereto;
(vi) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon receipt
by the Bank of indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank as its
option, may issue replacement certificates in place of
mutilated stock certificates upon presentation thereof and
without such indemnity.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: (i) perform all
of the customary services of a registrar, transfer agent, dividend disbursing
agent, custodian of certain retirement plans and agent of the dividend
reinvestment and cash purchase plan as described in Article 1 consistent with
those requirements in effect as at the date of this Agreement. The detailed
definition, frequency, limitations and associated costs (if any) set out in the
attached fee schedule, include but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, and mailing
Shareholder reports to current Shareholders, withholding taxes on U.S. resident
and non-resident alien accounts where applicable, preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms required with respect
to dividends and distributions by federal authorities for all registered
Shareholders.
(c) The Bank shall provide additional services on behalf of the Fund
(i.e., escheatment services) which may be agreed upon in writing between the
Fund and the Bank.
Article 2 Fees and Expenses
2.01 For the performance by the Bank pursuant to this Agreement, the
Fund agrees to pay the Bank an annual maintenance fee as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees to reimburse the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms, telephone, microfilm,
microfiche, tabulating proxies, records storage, or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. In addition, any
other expenses incurred by the Bank at the request or with the consent of the
Fund, will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
five days following the receipt of the respective billing notice. Postage and
the cost of materials for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to the Bank by the Fund
at least seven (7) days prior to the mailing date of such materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the Commonwealth
of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of .
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is a closed-end, diversified investment company registered
under the Investment Company Act of 1940, as amended.
4.05 To the extent required by federal securities laws a registration
statement under the Securities Act of 1933, as amended is currently effective
and appropriate state securities law filings have been made with respect to all
Shares of the Fund being offered for sale; information to the contrary will
result in immediate notification to the Bank.
4.06 It shall make all required filings under federal and state
securities laws.
Article 5 Data Access and Proprietary Information
5.01 The Fund acknowledges that the data bases, computer programs,
screen formats, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Bank as part of the Fund's ability to
access certain Fund-related data ("Customer Data") maintained by the Bank on
data bases under the control and ownership of the Bank or other third party
("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of substantial
value to the Bank or other third party. In no event shall Proprietary
Information be deemed Customer Data. The Fund agrees to treat all Proprietary
Information as proprietary to the Bank and further agrees that it shall not
divulge any Proprietary Information to any person or organization except as may
be provided hereunder. Without limiting the foregoing, the Fund agrees for
itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance with
the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the Proprietary
Information;
(c) to refrain from obtaining unauthorized access to any portion of
the Proprietary Information, and if such access is inadvertently
obtained, to inform in a timely manner of such fact and dispose
of such information in accordance with the Bank's instructions;
(d) to refrain from causing or allowing third-party data acquired
hereunder from being retransmitted to any other computer facility
or other location, except with the prior written consent of the
Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Article 5. The obligations of this Article
shall survive any earlier termination of this Agreement.
5.02 If the Fund notifies the Bank that any of the Data Access
Services do not operate in material compliance with the most recently issued
user documentation for such services, the Bank shall endeavor in a timely manner
to correct such failure. Organizations from which the Bank may obtain certain
data included in the Data Access Services are solely responsible for the
contents of such data and the Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information (such transactions constituting a "COEFI"), then in such
event the Bank shall be entitled to rely on the validity and authenticity of
such instruction without undertaking any further inquiry as long as such
instruction is undertaken in conformity with security procedures established by
the Bank from time to time.
Article 6 Indemnification
6.01 The Bank shall not be responsible for, and the Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors required
to be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty of the Fund
hereunder.
(c) The reliance on or use by the Bank or its agents or subcontractors
of information, records, documents or services which (i) are received by the
Bank or its agents or subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf of the Fund
including but not limited to any previous transfer agent or registrar.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares by the Fund in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state which provide that such Shares be registered in
such state or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of such Shares
in such state.
6.02 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any reasonable action taken or omitted by
it in reliance upon such instructions or upon the opinion of such counsel. The
Bank, its agents and subcontractors shall be protected and indemnified in acting
upon any paper or document furnished by or on behalf of the Fund, reasonably
believed to be genuine and to have been signed by the proper person or persons,
or upon any instruction, information, data, records or documents provided the
Bank or its agents or subcontractors by telephone, in person, machine readable
input, telex, CRT data entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or former registrar, or of a
co-transfer agent or co-registrar.
6.04 In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall promptly notify the Fund of such
assertion, and shall keep the Fund advised with respect to all developments
concerning such claim. The Fund shall have the option to participate with the
Bank in the defense of such claim or to defend against said claim in its own
name or in the name of the Bank. The Bank shall in no case confess any claim or
make any compromise in any case in which the Fund may be required to indemnify
the Bank except with the Fund's prior written consent.
Article 7 Standard of Care
7.01 The Bank shall at all times act in good faith and agrees to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall not be
liable for loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct of that of its employees or agents.
Article 8 Covenants of the Fund and the Bank
8.01 The Fund shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Directors of
the Fund authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of the Fund
and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
8.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
8.04 The Bank and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
8.05 In cases of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon sixty (60)
days written notice to the other.
9.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Fund. Additionally, the Bank reserves the right to charge for
any other reasonable and necessary out-of-pocket expenses associated with such
termination.
Article 10 Assignment
10.01 Except as provided in Section 10.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
10.03 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c)(l) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(l)"), (ii) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(l) or (iii) a BFDS affiliate;
provided, however, that the Bank shall be as fully responsible to the Fund for
the acts and omissions of any subcontractor as it is for its own acts and
omissions.
Article 11 Amendment
11.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 12 Massachusetts Law to Apply
12.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 13 Force Majeure
13.01 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
Article 14 Consequential Damages
14.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
Article 15 Merger of Agreement
15.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf by and through their
duly authorized officers, as of the day and year first above written.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BY: /s/ John A. Frabotta
------------------------
ATTEST:
/s/ Karen J. Thelen
- -----------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Daniel Lynde
------------------------
Executive Vice President
ATTEST:
/s/ D. Hufnagle
- -----------------------
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
1. Receives orders for the purchase of X
Shares.
2. Issue Shares and hold Shares in X
Shareholders accounts.
3. Receive redemption requests. X
4. Effect transactions 1-3 above X
directly with broker-dealers.
5. Pay over monies to redeeming X
Shareholders.
6. Effect transfers of Shares. X
7. Prepare and transmit dividends and X
distributions.
8. Issue Replacement Certificates. X
9. Reporting of abandoned property. X
10. Maintain records of account. X
11. Maintain and keep a current and X
accurate control book for each
issue of securities.
12. Mail proxies. X
13. Mail Shareholder reports. X
14. Mail prospectuses to current X
Shareholders.
15. Withhold taxes on U.S. resident and X
non-resident alien accounts.
16. Prepare and file U.S. Treasury X
Department forms.
17. Prepare and mail account and X
confirmation statements for
Shareholders.
18. Provide Shareholder account X
information.
19. Blue sky reporting. X
* Such services are more fully described in Article 1.02 (a), (b) and (c) of
the Agreement.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BY:
---------------------------
ATTEST:
- -------------------------
STATE STREET BANK AND TRUST COMPANY
BY:
---------------------------
Executive Vice President
ATTEST:
- -------------------------
<PAGE>
EXHIBIT (A)
PROSPECT STREET(R) HIGH
INCOME PORTFOLIO INC.
DIVIDEND REINVESTMENT PLAN
[LOGO]
WALL
PROSPECT STREET
<PAGE>
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
Dear Shareholder:
We have prepared this brochure in response to the questions we have received
concerning the Dividend Reinvestment Plan. This Plan is automatically available
to all shareholders of the Fund and provides a convenient way to accumulate
additional shares by reinvesting distributions paid on your shares.
State Street Bank and Trust Company acts as agent under the Plan.
We hope this brochure will be helpful in answering questions you may have about
the Dividend Reinvestment Plan.
Sincerely,
/s/ Richard E. Omohundro, Jr.
Richard E Omohundro, Jr.
President
<PAGE>
HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK?
The Dividend Reinvestment Plan (the "Plan") offers shareholders of Prospect
Street(R) High Income Portfolio Inc. (the "Fund") a convenient way to acquire
additional shares of the Fund's common stock by automatic reinvestment.
When a distribution is declared, nonparticipants in the Plan will receive cash.
Participants in the Plan will receive the equivalent in shares of common stock
of the Fund valued as described below:
1. If on the record date for the distribution, the market price is
equal to or exceeds the net asset value at the time shares are valued for the
purpose of determining the number of shares equivalent to the cash dividend or
capital gains distribution, participants will be issued shares of common stock
at the net asset value most recently determined, but in no event less than 95%
of the market price.
2. If on the record date for the distribution, the net asset value of
the common stock exceeds the market price of the common stock, or if the Fund
should declare a dividend or capital gains distribution payable only in cash,
State Street Bank and Trust company (the "Bank") will buy common stock in the
open market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before the Bank has completed its purchases, the market price
exceeds the net asset value of the common stock, the average per share purchase
price paid by the Bank may exceed the net asset value of the common stock,
resulting in the acquisition of fewer shares than if the dividend or capital
gains distribution had been paid in common stock issued by the Fund.
As a registered shareholder in the Plan, the entire amount of your distribution
will be reinvested. For any balance that is insufficient to purchase a whole
share, the Bank will credit your account with fractional shares. The fractional
share position is included in all subsequent distributions, and you have voting
rights on all full and fractional shares acquired under the Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions. The Bank's fees for handling the reinvestment of dividends and
capital gains distributions will be paid by the Fund. There will be no brokerage
charges with respect to shares of common stock issued directly by the Fund as a
result of dividends or capital gains distributions payable either in stock or in
cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Bank's open market purchases in
connection with the reinvestment of dividends and capital gains distributions.
HOW OFTEN DOES THE FUND DECLARE DISTRIBUTIONS?
It is the present policy of the Fund, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of common stock.
Distributions of any short-term capital gains and long-term capital gains will
be made annually.
HOW DO SHAREHOLDERS REGISTER FOR THE PLAN?
Each shareholder is automatically considered a participant in the Plan, unless
otherwise elected.
If your Fund shares are held in the name of a broker or nominee, you will have
distributions reinvested automatically by the broker or nominee in additional
shares under the Plan, unless the service is not provided by the broker or
nominee, or unless the shareholder elects to receive distributions in cash. If
the service is not available, such distributions will be paid in cash.
Shareholders whose shares are held in the name of a broker or nominee should
contact the broker or nominee for details.
RATHER THAN REINVESTING, CAN I RECEIVE CASH?
Yes. If a shareholder wishes to receive distributions in cash, the shareholder
must notify the institution (broker or nominee) in whose name the shares are
held. If the shareholder is registered, the Bank will provide all new registered
shareholders with a withdrawal card which should be signed and returned to the
Bank only if the shareholder wants cash. Alternatively, shareholders may send
written notice to the Bank a least 10 days prior to the record date for the
distribution to withdraw from the Plan and get cash. All distributions to
shareholders who elect not to participate (or whose broker or nominee elects not
to participate) in the Plan, will be paid by check mailed directly to the record
holder by the Bank, as dividend paying agent.
HOW AM I TAXED ON REINVESTED DISTRIBUTIONS
The automatic reinvestment of dividends and capital gains distributions will not
relieve participants of any income tax which may be payable on such dividends or
distributions. Participants in the Plan and shareholders who receive cash will
each receive Form 1099 concerning the Federal tax status of distributions paid
during the year.
HOW DO I WITHDRAW FROM THE PLAN?
A shareholder who terminates his participation may choose of 1) receive a stock
certificate for "whole" shares held in his account and a check for the value of
any fractional shares in the account, or 2) instruct the Bank to sell all full
or fractional shares in the account and receive a check for the proceeds of the
sale. There will be a fee of $2.50 for termination of an account. No certificate
will be issued for fractional shares. Participants who elect to have shares sold
will receive the proceeds from the sale, less any brokerage commission related
to the sale.
If a participant disposes of the shares registered in his name on the books of
the Fund, the Bank may continue to reinvest the distributions on shares in the
Plan Account until otherwise notified in writing.
ADDITIONAL INFORMATION
The Bank maintains all shareholder accounts in the Plan and furnishes written
confirmations of all transactions in such accounts, including information needed
by shareholders for personal and tax records.
Common Stock in the account of each Plan participant will be held by the Bank in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
The price at which the Bank shall be deemed to have acquired shares in the open
market for the participants' accounts shall be the average price (including
brokerage commissions) of all shares purchased by it for all participants in the
Plan. The average price per share may, due to market fluctuations, be greater
than the net asset value per share. Under certain circumstances, the rules and
regulations of the Securities and Exchange Commission may require limitation or
temporary suspension of market purchases of shares under the Plan. The Bank will
not be accountable for its inability to make purchases during such a period.
Experience under the Plan may indicate that changes are desirable. The Plan may
be amended or terminated by the Fund and/or the Bank on at least 90 days written
notice to participants in the Plan.
QUESTIONS AND CORRESPONDENCE CONCERNING THE PLAN SHOULD BE DIRECTED TO:
STATE STREET BANK AND TRUST COMPANY
P.O. BOX 8209
TWO HERITAGE DRIVE, 4TH FLOOR
NORTH QUINCY, MA 02171
(800) 426-5523
<PAGE>
*AUTHORIZATION FOR CASH
PLEASE TERMINATE MY REINVESTMENT PLAN AND . . .(CHECK ONE)
| | Issue a certificate for all full shares and sell any fractional shares
remaining in my reinvestment account.
| | Sell all shares currently being held in my reinvestment account, and remit
a check for the proceeds.
_ _
| DO NOT MAIL IF YOU WISH TO RECEIVE BOTH YOUR DIVIDEND AND CAPITAL |
|_GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. _|
PRINT
NAME(S) __________________________________
__________________________________________
DATE _____________________________________
TAX
IDENTIFICATION
NUMBER ___________________________________
SIGNATURE(S)______________________________
__________________________________________
*NOTIFICATION MUST BE RECEIVED BY THE PLAN AGENT AT LEAST
10 BUSINESS DAYS PRIOR TO THE RECORD DATE FOR A DISTRIBUTION.
<PAGE>
PLACE
STAMP
HERE
STATE STREET BANK AND TRUST COMPANY
c/o PROSPECT STREET HIGH INCOME PORTFOLIO INC.
P.O. BOX 8209
BOSTON, MA 02266-8200
<PAGE>
EXHIBIT (K)(2)
AUCTION AGENT AGREEMENT
between
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
and
BANKERS TRUST COMPANY
Dated as of May 7, 1990
Relating to
Taxable Auction Rate Preferred Stock
of
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<PAGE>
THIS AUCTION AGENT AGREEMENT dated as of May 7, 1990, between PROSPECT
STREET HIGH INCOME PORTFOLIO INC., a Maryland corporation (the "Company"), and
BANKERS TRUST COMPANY, a New York banking corporation.
The Company has issued and outstanding 300 shares of Taxable Auction Rate
Preferred Stock with a liquidation preference of $100,000 per share and without
par value (all such shares and, as the context requires, any other shares of the
same class subsequently issued by the Company being referred to as the
"Preferred Shares"), pursuant to its Articles of Incorporation (as defined
below). The Company desires that Bankers Trust Company perform certain duties as
agent in connection with the Auction (as defined below) of the Preferred Shares
(the "Auction Agent") and as the transfer agent, registrar, dividend disbursing
agent and redemption agent with respect to the Preferred Shares (in any such
capacity, the "Paying Agent") upon the terms and conditions of this Agreement,
and hereby appoints Bankers Trust Company as said Auction Agent and Paying Agent
in accordance with those terms and conditions (hereinafter generally referred to
as the "Auction Agent" except in Sections 3 and 4 below).
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 of Incorporation.
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles of Incorporation.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures (as defined below), the
following terms shall have the following meanings, unless the context otherwise
requires:
(a) "Affiliate" shall mean any Person made known to the Auction Agent
to be controlled by, in control of or under common control with, the
Company.
(b) "Agent Member" of any Person shall mean such Person's agent member
of the Securities Depository who is identified as such in such Person's
Master Purchaser's Letter.
(c) "Articles of Incorporation" shall mean the Articles of Amendment
and Restatement of the Company, filed by the Company on November 25, 1988
in the office of the Department of Assessments and Taxation of the State of
Maryland, a copy of which is attached hereto as Exhibit B and as Exhibit A
to the Broker-Dealer Agreement, as the same may be amended from time to
time.
(d) "Auction" shall have the meaning specified in Section 2.1 hereof.
(e) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Article IV(C), paragraph 8, of the Articles of Incorporation.
(f) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Assistant Secretary and Assistant
Treasurer 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 hereof in a communication to the
Company.
(g) "Broker-Dealer Agreement" shall mean the agreement among the
Auction Agent, the Company and Bear Stearns & Co., Inc. (sometimes referred
to as the "Broker-Dealer") of even date herewith.
(h) "Company Officer" shall mean 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 from the Company to the Auction Agent.
(i) "DTC" shall mean The Depositary Trust Company and its successors
or assigns or any other securities depository selected by the Company.
(j) "Holder" shall mean a Person [who has signed a Master Purchaser's
Letter and] who is the beneficial owner of Preferred Shares.
(k) "Master Purchaser's Letter" shall mean a letter addressed to the
Company, the Auction Agent and the Broker-Dealer, substantially in the form
attached hereto as Exhibit C.
(l) "Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the
Corporation which agrees to follow the procedure required to be followed by
such securities depository in connection with the shares of Preferred
Stock; provided that, at any time that the Surety Bond is in effect, any
reference herein to the Securities Depository shall be deemed to refer to
the Surety Custodian.
(m) "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 of Incorporation provide that the Applicable Rate on the
Preferred Shares for each Dividend Period after the Initial Dividend Period
shall be the rate per annum that a commercial bank, trust company, or other
financial institution appointed by the Company advises the Company results from
implementation of the Auction Procedures. The Board of Directors of the Company
has adopted a resolution appointing Bankers Trust Company as Auction Agent for
purposes of the Auction Procedures. The Auction Agent hereby 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. 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.
2.2 Preparation for Each Auction; Maintenance of Registry of Beneficial
Owners.
(a) In the event that the Auction Date for any Auction shall be changed
after the Auction Agent shall have given the notice referred to in clause (vii)
of paragraph (a) of the Settlement Procedures, the Auction Agent, by such means
as the Auction Agent deems practicable, shall give notice of such change to the
Broker-Dealer 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.
(b) (i) On each Auction Date, the Auction Agent shall determine the 30-day
"AA" Composite Commercial Paper Rate and the Maximum and Minimum Applicable
Rates. If the 30-day "AA" Composite Commercial Paper Rate obtained by the
Auction Agent is quoted on a discount basis the Auction Agent shall convert such
rate to an interest rate in accordance with the definition of 30-day "AA"
Composite Commercial Paper Rate set forth in the Articles of Incorporation, or
if the rate obtained by the Auction Agent is quoted on another 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. Not later than 9:30 A.M. on
each Auction Date the Auction Agent shall notify the Company and the
Broker-Dealer of the 30-day "AA" Composite Commercial Paper Rate so determined
and the Maximum and Minimum Applicable Rates.
(ii) If the 30-day "AA" 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 the 30-day
"AA" Composite Commercial Paper Rate, the Auction Agent shall immediately notify
the Company so that the Company can determine whether to select an alternative
Commercial Paper Dealer 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 determination.
(c) (i) The Auction Agent shall maintain a current registry of the
beneficial owners of the Preferred Shares who shall constitute the Existing
Holders for purposes of an Auction. The Company shall cause Bear, Stearns & Co.
Inc. to provide the Auction Agent on the Business Day following the date hereof
with a list of the initial Existing Holders of Preferred Shares. The Auction
Agent may rely upon, as evidence of the identities of the Existing Holders, such
list, the results of each Auction and notices from any Existing Holder, the
Agent Member of any Existing Holder or the Broker-Dealer of any Existing Holder
with respect to such Existing Holder's transfer of Preferred Shares to another
Person.
(ii) In the event of any partial redemption of Preferred Shares, upon
notice by the Company to the Auction Agent of such partial redemption, the
Auction Agent shall promptly request DTC to notify the Auction Agent of the
Agent Members whose shares have been called for redemption and the person or
department at such Agent Member to contact regarding such redemption and, at
least two Business Days prior to the next Auction, the Auction Agent shall
request each such Agent member to disclose to the Auction Agent (upon selection
by such Agent Member of the Existing Holders whose Preferred Shares are to be
redeemed) the number of Preferred Shares of each such Existing Holder, if any,
to be redeemed by the Company; provided that the Auction Agent has been
furnished with the name and telephone number of a person or department at such
Agent Member from which it is to request such information. If necessary to
procure such information, the Auction Agent shall deliver to each Agent Member a
facsimile copy of the Master Purchaser's Letter of each Existing Holder
represented by such Agent Member, 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 Preferred
Shares shown in the Auction Agent's registry of beneficial owners.
(iii) The Auction Agent shall only register a transfer of the beneficial
ownership of Preferred Shares from an Existing Holder to another Person if such
transfer is made to a Person that has delivered a signed Master Purchaser's
Letter to the Auction Agent and (A) such transfer is pursuant to an Auction or
(B) if such transfer is made other than pursuant to an Auction, the Auction
Agent has been notified in writing in a notice substantially in the form of
Exhibit D to the Broker-Dealer Agreement, by such Existing Holder, the Agent
Member of such Existing Holder, or the Broker-Dealer of such Existing Holder of
such transfer. The Auction Agent is not required to accept any notice delivered
for an Auction unless it is received by the Auction Agent by 3:00 P.M. on the
Business Day next preceding the applicable Auction Date. The Auction Agent shall
rescind a transfer made on the registry of the beneficial owners of the
Preferred Shares if the Auction Agent has been notified in writing in a notice
substantially in the form of Exhibit E to the Broker-Dealer Agreement by the
Agent Member or the Broker-Dealer of any Person that (A) purchased Preferred
Shares and the seller failed to deliver such Preferred Shares or (B) sold
Preferred Shares and the purchaser failed to make payment to such Person upon
delivery to the purchaser of such Preferred Shares.
(d) The Auction Agent may request that the Broker-Dealer, as set forth in
Section 2.2(c) of the Broker-Dealer Agreement, provide the Auction Agent with a
list of its respective customers that the Broker-Dealer believes are Existing
Holders of Preferred Shares. Such list shall be provided to the Company by the
Auction Agent upon written request. The Auction Agent shall keep confidential
any such information and shall not disclose any such information so provided to
any Person other than the Company; 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 the list of customers that Broker-Dealer believes are Existing
Holders of Preferred Shares and information related thereto only to its
officers, employees, agents or representatives in the Corporate Trust and Agency
Group who need to know such information for the purposes of acting in accordance
with this Agreement and shall 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.
2.3 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. The
Auction Agent shall give notice of any such change to the Broker-Dealer. Such
notice shall be received prior to the first Auction Date on which any such
change shall be effective.
Time Event
- ---- -----
By 9:30 A.M. Auction Agent advises the Company and Broker-Dealer of
30-day "AA" Composite Commercial Paper Rate and the
Maximum and Minimum Applicable Rates as set forth in
Section 2.2(c)(i) hereof.
9:30 A.M. - 12:30 P.M. Auction Agent assembles information communicated to it
by Broker-Dealer as provided in Article IV(C),
paragraph 8(c) of the Articles of Incorporation.
Submission Deadline is 12:30 P.M.
Not earlier than Auction Agent makes determination pursuant to Article
12:30 P.M. IV(C), paragraph 8(d)(i) of the Articles of
Incorporation.
By approximately Auction Agent advises Company of results of Auction as
3:00 P.M. provided in Article IV(C), paragraph 8(d)(ii) of the
Articles of Incorporation. Submitted bids and Sub
mitted Sell Orders are accepted and rejected in whole
or in part and Preferred Shares allocated as provided
in Article IV(C), paragraph 8(e) of the Articles of
Incorporation
Auction Agent gives notice of Auction results as set
forth in Section 2.4 hereof.
2.4 Notice of Auction Results.
On each Auction Date, the Auction Agent shall notify Broker-Dealer of the
results of the Auction held on such date by telephone as set forth in paragraph
(a) of the Settlement Procedures.
2.5 Broker-Dealers.
(a) The Auction Agent hereby confirms that it has been directed by the
Company to terminate all agreements with broker-dealers (other than the
Broker-Dealer Agreement with Bear, Stearns & Co. Inc.) entered into by the
Auction Agent prior to the date hereof and the Auction Agent further confirms
that it has terminated all such agreements with such broker-dealers pursuant to
the terms thereof.
(b) The Company shall not designate any Person to act as an Additional
Broker-Dealer without the prior written approval of each of Bear, Stearns & Co.
Inc. and the Auction Agent.
(c) The Auction Agent shall terminate the Broker-Dealer Agreement as set
forth in Section 5.1 thereof if so directed by the Company and if the Company
certifies to the Auction Agent that the provisions of Section 5.1 of the
Broker-Dealer Agreement have been satisfied.
(d) Subject to Section 2.5(b) hereof, the Auction Agent shall from time to
time enter into such agreements with Additional Broker-Dealers as the Company
shall request.
(e) The Company agrees to pay to the Auction Agent the amounts set forth in
Section 2.5(b) of the Broker-Dealer Agreement at such times and in such manner
as required by Section 2.5(b) of the Broker-Dealer Agreement and hereby directs
the Auction Agent to pay such amount to the Broker-Dealer in such manner as is
required by Section 2.5(b) of the Broker-Dealer Agreement.
2.6 Ownership of Preferred Shares and Submission of Bids by Company
and Affiliates.
Neither the Company nor any of its Affiliates may submit any Sell Order or
Bid, directly or indirectly, in any Auction. The Company shall notify the
Auction Agent if the Company or any of its respective Affiliates becomes an
Existing Holder of any Preferred Shares. The Auction Agent shall have no duty or
liability with respect to enforcement of this Section 2.6.
2.7 Access to and Maintenance of Auction Records.
The Auction Agent shall afford to the Company and any of its respective
Affiliates and their agents, independent public accountants and counsel access
at reasonable times during normal business hours to review and make extracts or
copies (at the Company's sole cost and expense) of all books, records, documents
and other information concerning the conduct and results of Auctions, provided
that any such Affiliate's agent, accountant, or counsel shall furnish the
Auction Agent with a letter from the Company requesting that the Auction Agent
afford such person access. The Auction Agent shall maintain records relating to
any Auction for a period of two years after such Auction (unless requested by
the Company to maintain such records for such longer period not in excess of
four years, then for such longer period), and such records shall, in reasonable
detail, accurately and fairly reflect the actions taken by the Auction Agent
hereunder.
3. The Auction Agent as Payinq Agent.
3.1 Paying Agent.
The Board of Directors of the Company has adopted a resolution appointing
the Paying Agent, Bankers Trust Company, as transfer agent, registrar, dividend
disbursing agent and redemption agent for the Company in connection with the
Preferred Shares. The Paying Agent hereby accepts such appointment and agrees to
act in accordance with its standard procedures and the provisions of the
Articles of Incorporation which are specified herein as Paying Agent with
respect to the Preferred Shares and as set forth in this Section 3.
3.2 The Company's Notices to Paying Agent.
Whenever Preferred Shares are to be redeemed pursuant to paragraph 5(a) or
clause (i)(B) of paragraph 5(b) of Article IV(C) of the Articles of
Incorporation, the Company shall deliver to the Paying Agent the Notice of
Redemption in the form to be delivered to Holders not later than five days prior
to the date such Notice of Redemption is delivered to the Holders. In the case
of a Mandatory Redemption pursuant to clause (i)(A) of paragraph 5(b) of Article
IV(C) of the Articles of Incorporation, the Company shall deliver to the Paying
Agent the Notice of Redemption that will be delivered to Holders not later than
the close of business on the second Business Day following the related Cure
Date. In the event of a Mandatory Redemption pursuant to clause (ii) of
paragraph 5(b) of Article IV(c) of the Articles of Incorporation the Company
shall deliver to the Paying Agent the Notice of Redemption that will be
delivered to the Holders not later than the close of business on the second
business day following the related Cure Date. The Notice of Redemption shall be
substantially in the form attached hereto as Exhibit D. The Paying Agent shall
have no responsibility to confirm or verify the accuracy of notices of the
Company so delivered.
3.3 Company to Provide Funds for Dividends and Redemptions.
(a) Not later than noon, on the Business Day immediately preceding each
Dividend Payment Date, the Company shall deposit with the Paying Agent cash or
Deposit Securities constituting immediately available funds equal to the
declared dividends to be paid to Holders on such Dividend Payment Date and shall
give the Paying Agent irrevocable instructions to apply such funds and/or the
income and proceeds of such funds to the payment of such dividends on such
Dividend Payment Date.
(b) If the Company shall give the Notice of Redemption as prescribed by
Article IV(C), paragraph 5(a) or 5(b) of the Articles of Incorporation, then, by
noon of the Business Day immediately preceding the date fixed for redemption,
the Company shall deposit with the Paying Agent cash or Deposit Securities
consisting of immediately available funds sufficient to redeem the Preferred
Shares to be redeemed and eligible for redemption and shall give the Paying
Agent irrevocable instructions and authority to pay the redemption price to the
Holders of such Preferred Shares upon surrender of the certificates therefor.
(c) The Company may direct, in writing or orally with such direction
promptly confirmed in writing, the Paying Agent to invest the funds so deposited
pursuant to paragraphs (a) or (b) of this Section 3.3 in Deposit Securities
which mature on or before the opening of business on such Dividend Payment Date
or the date fixed for redemption, as the case may be, provided that the proceeds
of such investments will be available at the opening of business on the Dividend
Payment Date or the date fixed for redemption, as the case may be. The
investments made pursuant to the foregoing sentence are solely for the account
and at the risk of the Company, and the Paying Agent shall not be liable or
responsible for any loss, in whole or in part, resulting from such investments.
Upon the request of the Company the Paying Agent shall promptly transmit any
interest received on such investments to the Company.
3.4 Disbursing Dividend and Redemption Price.
After receipt of the immediately available funds and instructions from the
Company described in Sections 3.3(a) and (b) above, the Paying Agent shall pay
to the Holders (i) on each Dividend Payment Date, dividends on the Preferred
Shares and (ii) on any date fixed for redemption, the redemption price of any
Preferred Shares subject to redemption. The amount of dividends for any Dividend
Period to be paid by the Paying Agent to the Holders will be determined by the
Company as set forth in Article IV(C), paragraph 3(c) of the Articles of
Incorporation. The redemption price to be paid by the Paying Agent to the
Holders will be determined as set forth in Article IV(C), paragraph 5(a) or
paragraph 5(b), as applicable, of the Articles of Incorporation. The Company
shall notify the Paying Agent in writing of a decision to redeem Preferred
Shares on the dates specified in Section 3.2 above, and such notice by the
Company to the Paying Agent shall contain the information required to be stated
in the Notice of Redemption required to be delivered by the Company to such
Holders, as provided in Section 3.2 above. The Paying Agent shall have no duty
to determine the Redemption Price and may rely on the amount thereof set forth
in the Notice of Redemption.
3.5 Notice of Special Meeting of Holders of Preferred Shares.
With respect to the Preferred Shares, pursuant to Article IV(C), paragraph
6 of the Articles of Incorporation, during any period commencing with the
occurrence of certain conditions (the "Voting Period"), the number of directors
constituting the Board of Directors of the Company shall be automatically
increased by the smallest number that shall enable the Holders to elect a
majority of the Board of Directors as so increased and the Holders shall possess
the full voting power (to the exclusion of the holders of all other classes of
capital stock of the Company), voting as a class and on a one-vote-per-share
basis, to elect the smallest number of directors of the Company which, together
with any other incumbent directors of the Company theretofore elected by the
Holders, shall constitute a majority of the total number of directors of the
Company as so increased. If any of such conditions exists, the Paying Agent
will, upon receipt from the Company of a Notice of Special Meeting of Holders,
in substantially the form set forth in Exhibit E hereto with insertions
completed by the Company ("Notice"), mail such Notice to all Holders who were
holders of record at the close of business on the fifth Business Day prior to
the date of mailing of the Notice. The delivery by the Company of a Notice to
the Paying Agent shall be deemed a representation and warranty by the Company
that at least one of such conditions exists.
The Company shall provide a temporary chairman for any Special Meeting and
the Paying 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 Paying Agent as Transfer Agent and Registrar.
4.1 Original Issue of Stock Certificate.
On the Original Issuance Date, one certificate for all of the Preferred
Shares was issued by the Company and registered in the name of Bankers Trust
Company, as Surety Custodian, and countersigned by the Paying Agent.
4.2 Registration of Transfer or Exchange of Preferred Shares.
Except as provided in this Section, the 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
acceptable to the Paying Agent prior to such resignation, then upon such
resignation, the Preferred Shares shall be registered for transfer or exchange,
and new certificates shall be issued in the name of the designated transferee or
transferees, upon surrender of the old certificates in form deemed by the Paying
Agent properly endorsed for transfer with (a) all necessary endorsers'
signatures guaranteed in such manner and form as the Paying Agent may require by
a guarantee reasonably believed by the Paying Agent to be responsible, (b) such
assurances as the Paying Agent shall deem necessary or appropriate to evidence
the genuineness and effectiveness of each necessary endorsement and (c)
satisfactory evidence of compliance with all applicable law relating to the
collection of taxes or funds necessary for the payment of such taxes.
4.3 Removal of Legend.
All requests for removal of legends indicating restrictions on transfer
from certificates evidencing Preferred Shares shall be accompanied by an opinion
of counsel stating that such legends may be removed and such Preferred Shares
freely transferred, said opinion to be delivered under cover of a letter from a
Company Officer authorizing the Paying Agent to remove the legend on the basis
of said opinion.
4.4 Lost Certificates.
The Paying 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 Paying 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 Paying Agent may issue new certificates in
exchange for and upon the cancellation of mutilated certificates. Any request by
the Company to the Paying 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 Paying Agent that such issuance will comply with such
provisions of applicable law and the By-Laws and resolutions of the Company.
4.5 Disposition of Cancelled Certificates; Record Retention.
The Paying Agent shall retain certificates which have been cancelled in
transfer or in exchange and accompanying documentation in accordance with
applicable rules and regulations of the Securities and Exchange Commission for
two calendar years from the date of such cancellation. The Paying Agent shall
afford to the Company and its agents and counsel access at reasonable times
during normal business hours to review and make extracts or copies (at the
Company's sole cost and expense) of such certificates and accompanying
documentation. Upon the expiration of this two-year period, the Paying Agent
shall deliver to the Company the cancelled certificates and accompanying
documentation. The Company shall, at its expense, retain such records for a
minimum additional period of four calendar years from the date of delivery of
records to the Company and shall make such records available during this period
at any time, or from time to time, for reasonable periodic, special, or other
examinations by representatives of the Securities and Exchange Commission. The
Company shall also undertake to furnish to the Securities and Exchange
Commission, upon demand, at either the principal office or at any regional
office, complete, correct and current hard copies of any and all such records.
Thereafter such records shall not be destroyed by the Company without the
approval of the Paying Agent, which shall not be unreasonably withheld, but will
be safely stored for possible future reference.
4.6 Stock Register.
The Paying Agent shall maintain the Stock Books, which shall contain a list
of the Holders, the number of Preferred Shares beneficially owned by each Holder
and the address of each Holder. The Paying Agent shall record in the Stock Books
any change of address of a Holder upon notice by such Holder. In case of any
request or demand for the inspection of the Stock Books or any other books of
the Company in the possession of the Paying Agent, the Paying Agent will notify
the Company and secure instructions as to permitting or refusing such
inspection. The Paying Agent reserves the right, however, to exhibit the Stock
Books or other records to any person in case it is advised by its counsel that
its failure to do so would (a) be unlawful or (b) expose it to liability, unless
the Company shall have offered indemnification satisfactory to the Paying Agent.
4.7 Return of Funds.
Any funds deposited with the Paying Agent by the Company for any reason
under this Agreement, including for the payment of dividends on or the
redemption of Preferred Shares, that remain with the Paying Agent after 35
months shall be repaid to the Company upon the written request of the Company.
5. Representations and Warranties.
(a) The Company represents and warrants to the Auction Agent that:
(i) the Company is a duly incorporated and validly existing
corporation in good standing under the laws of the State of Maryland and
has full power to execute and deliver this Agreement and to authorize,
create and issue the Preferred Shares;
(ii) this Agreement has been duly and validly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, subject as to such enforceability to bankruptcy,
insolvency, reorganization and other laws of general applicability relating
to or affecting creditors' rights and to general equitable principles;
(iii) the form of the certificate evidencing the Preferred Shares
complies with all applicable laws of the State of Maryland;
(iv) the Preferred Shares have been duly and validly authorized,
executed and delivered by the Company and are validly issued, fully paid
and nonassessable;
(v) the Preferred Shares have been 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 the
issuance of the Preferred Shares except as required by applicable state
securities laws, all of which have been taken and are in full force and
effect on the date hereof;
(vi) the execution and delivery of this Agreement and the issuance and
delivery of the 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 or the By-Laws
of the Company, any law or regulation applicable to the Company, any order
or decree of any court or public authority having jurisdiction over the
Company, or any mortgage, indenture, contract, agreement or undertaking to
which the Company is a party or by which it is bound; and
(vii) no taxes are payable upon or in respect of the execution of this
Agreement or the issuance of the Preferred Shares.
(b) The Auction Agent represents and warrants to the Company that the
Auction Agent is duly organized and is validly existing as a bank and trust
company in good standing under the laws of the State of New York and has the
corporate power to enter into and perform its obligations under this Agreement.
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 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 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.
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 reasonably believed 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 the Broker-Dealer. The
Auction Agent may record telephone communications with the Company or with the
Broker-Dealer 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.
(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 Agreement or the 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 Agreement.
(b) The Company shall reimburse the Auction Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Auction
Agent in accordance with any provision of this Agreement and the Broker-Dealer
Agreement (including the reasonable compensation, expenses and disbursements of
its agents and counsel), except any expense, disbursement and advances
attributable to its gross 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 Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with its exercise
or performance of any of its duties hereunder and thereunder, except such as may
result from its negligence or bad faith.
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. The Auction Agent may terminate this Agreement upon prior notice
to the Company on the date specified in such notice, which shall be no earlier
than the Business Day after the second Dividend Payment Date after delivery of
such notice. If the Auction Agent resigns, the Company shall use its best
efforts to enter into an agreement with a successor auction agent containing
substantially the same terms and conditions as this Agreement.
(b) Except as otherwise provided in this paragraph 7.1(b), the respective
rights and duties of the Company and the Auction Agent under this Agreement
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 hereof. Upon termination of this
Agreement, the Auction Agent shall (i) resign as Auction Agent under the
Broker-Dealer Agreement, (ii) at the Company's request, promptly deliver to the
Company copies of all books and records maintained by it in connection with its
duties hereunder, and (iii) at the request of the Company, promptly transfer to
the Company or any successor auction agent any funds deposited by the Company
with the Auction Agent (whether in its capacity as Auction Agent or Paying
Agent) pursuant to this Agreement which have not previously been distributed by
the Auction Agent in accordance with this Agreement.
7.2 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), all notices, requests and other communications to any party
hereunder shall be in writing (including telecopy or similar writing) given to
such party at its address or telecopy number set forth below:
If to the Company, addressed: Prospect Street High Income Portfolio Inc.
One Financial Center
Boston, Massachusetts 02111
Attention: President
Telephone No.: (617) 350-5718
If to the Auction Agent, addressed: Bankers Trust Company
4 Albany Street
Corporate Trust and Agency Group
New York, New York 10006
Attention: Auction Rate/Remarketed
Securities
Telecopier No.: (212) 250-6688 or
250-6215
Telephone No.: (212) 250-6850
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 inferred
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.
7.5 Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to be
charged. The Company shall notify the Auction Agent of any change in the
Articles of Incorporation prior to the effective date of any such change.
(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 permitted assigns of each of the
Company and the Auction Agent. This Agreement may not be assigned by either
party hereto absent the prior written consent of the other party, which consent
shall not be unreasonably withheld.
7.7 Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the validity 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.
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.
PROSPECT STREET HIGH INCOME
By: /s/ John A. Frabotta
----------------------------------
Title: Vice President
BANKERS TRUST COMPANY,
As Auction Agent
By: /s/ Illegible
----------------------------------
Title: Assistant Secretary
<PAGE>
EXHIBIT (B)
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Prospect Street High Income Portfolio Inc. (hereinafter referred to as the
"Corporation"), a Maryland corporation having its principal office in the State
of Maryland c/o C-T Corporation System, Maryland, 32 South State Street,
Baltimore, Maryland 21202 hereby certifies to the State Department of
Assessments and Taxation of Maryland (the "Department") that:
FIRST: The Corporation desires to amend and restate its Charter as
currently in effect as hereinafter provided. The provisions set forth in these
Articles of Amendment and Restatement are all of the provisions of the Charter
of the Corporation (the "Charter") as in effect as of this 25th day of November
1988 (the "Restatement Date").
SECOND: The Charter of the Corporation is hereby amended and restated by
striking in their entirety Articles I through VIII inclusive, and by
substituting in lieu thereof the following:
ARTICLE I
NAME
The name of the Corporation is PROSPECT STREET HIGH INCOME PORTFOLIO INC.
ARTICLE II
PURPOSES AND POWERS
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company;
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash;
(3) To issue and sell shares of its capital stock and other securities in
such amounts and on such terms and conditions and for such purposes and for such
amount or kind of consideration as may now or hereafter be permitted by law; and
(4) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
Maryland General Corporation Law now or hereafter in force, and the enumeration
of the foregoing shall not be deemed to exclude any powers, rights or privileges
so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the
State of Maryland is c/o THE CORPORATION TRUST INCORPORATED, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
the State of Maryland is THE CORPORATION TRUST INCORPORATED, a corporation of
this state, and the post office address of the resident agent is 32 South
Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
(A) CAPITAL STOCK
1. Class and Amount Authorized
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is one hundred million, one thousand
(100,001,000) shares, of which one hundred million (100,000,000) shares shall be
Common Stock, $.01 par value per share, and one thousand (1000) shares shall be
Taxable Auction Rate Preferred Stock, no par value per share, liquidation
preference $100,000 per share (the "Preferred Stock").
2. No Preemptive Rights
No holder of any shares of any class of stock or any other securities of
the Corporation, whether now or hereafter authorized, shall have any preemptive
right to subscribe for or purchase any shares of any class of stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix; and any shares of any class of stock or other securities which the Board of
Directors may determine to offer for subscription may, as the Board of Directors
in its sole discretion shall determine, be offered to the holders of any class,
series or type of stock or other securities at the time outstanding to the
exclusion of the holders of any or all other classes, series or types of stock
or other securities at the time outstanding.
(B) COMMON STOCK
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption in respect of the Common
Stock are as follows:
1. Ranking
The Common Stock shall rank junior to the Preferred Stock with respect to
payment of dividends (other than dividends in Common Stock) and distributions on
liquidation or dissolution and shall have such other qualifications, limitations
or restrictions as provided in the Charter.
2. Dividends
After all accumulated and unpaid dividends upon all outstanding shares of
the Preferred Stock for all past Dividend Periods (as defined below) have been
or are contemporaneously paid in full (or declared and sufficient Deposit
Securities (as defined below) have been set apart for their payment), then and
not otherwise, and subject to any other applicable provisions of the Charter, to
the extent there are funds legally available therefor, dividends or other
distributions may be declared upon and paid to the holders of shares of the
Common Stock, to the exclusion of the holders of shares of the Preferred Stock.
3. Liquidation Rights
In the event of the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, after payment in full of the
amounts required to be paid to the holders of the Preferred Stock as provided
for in the Charter, the holders of shares of the Common Stock shall be entitled,
to the exclusion of the holders of shares of the Preferred Stock, to share
ratably in all remaining assets of the Corporation.
4. Voting Rights
Each holder of Common Stock shall be entitled to one vote for each such
whole share (and a proportional vote for each fractional share) on each matter
on which the holders of shares of the Common Stock shall be entitled to vote.
Except as otherwise provided in the Charter, the holders of shares of Common
Stock and the holders of shares of Preferred Stock shall vote as a single class
on all matters coming before the stockholders.
5. Redemption
The Corporation may redeem or repurchase shares of Common Stock to the
extent now or hereafter permitted by the General laws of the State of Maryland,
by the Investment Company Act (as defined below) and by the Charter.
(C) PREFERRED STOCK
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption in respect of the
Preferred Stock are as follows:
1. Designation
The designation of the Preferred Stock shall be "Taxable Auction Rate
Preferred Stock." Except as otherwise provided herein, each share of Preferred
Stock shall be identical and equal in all respects to every other share of
Preferred Stock.
2. Definitions
Capitalized terms not defined in this paragraph 2 shall have the respective
meanings specified in paragraph 8(a) of this Article IV(C). Unless the context
or use indicates another or different meaning, the following terms shall have
the following meanings, whether used in the singular or plural:
"Applicable Rate" has the meaning specified in paragraph 3(c)(i) below.
"Auction" means each operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Company or its successor or any other
auction agent appointed by the Corporation to perform the functions performed by
the Auction Agent.
"Auction Agent Agreement" has the meaning specified in paragraph 3(c)(i)
below.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 8 below.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York, New
York, or the City of Boston, Massachusetts are authorized or obligated by law or
executive order to close.
"Cash" means such coin or currency of the United States as at the time
shall be legal tender for payment of public and private debts.
"Conventional Mortgage Pass-Through Certificates" means an instrument
issued in bearer or registered form, that is one of a class or series or by its
terms is divisible into a class or series, and that is of a type commonly dealt
in upon securities exchanges or markets or commonly recognized in any area in
which it is issued or dealt in as a medium for investment, evidencing (directly
or indirectly) a proportional undivided interest in specified pools of whole
mortgage loans that are secured by a valid first lien on each Mortgagor's fee or
leasehold interest in related mortgaged property (except for Permitted Tax Liens
and other matters to which like properties are commonly subject which neither
individually nor in the aggregate materially interfere with the benefits of the
security intended to be provided by such mortgages or deeds of trust, and
standard exceptions and exclusions in title insurance policies) on one-to
four-unit residences (including, without limitation, owner-occupied attached or
detached single-unit residences, -two- to four-unit primary residences,
condominiums, second/vacation homes and non-owner occupied residences) and with
respect to which the Required Documentation is required to be held by a trustee
or independent custodian, which mortgage loans are serviced pursuant to
servicing agreements with servicers that have either expressed the intention to
advance funds to meet deficiencies (to the extent such servicers reasonably
believe such advances are recoverable) or provided for alternative credit
enhancement in lieu thereof, and which instruments (a) have been rated "AA/Aa"
or better by the Rating Agencies or (b) do not qualify pursuant to clause (a)
above, but the inclusion of which as Eligible Portfolio Property is permitted
pursuant to the investment guidelines agreed upon by the Corporation and the
Rating Agency, provided, that a Conventional Mortgage Pass-Through Certificate
shall be eligible for inclusion in the Eligible Portfolio Property as of any
Valuation Date only if it continues to satisfy as of such Valuation Date the
requirements of at least one of clauses (a) or (b) above as the Corporation may
confirm verbally or in writing, directly or indirectly, or by reference to a
publication of the Rating Agencies, by confirmation from a nationally recognized
securities dealer having a minimum capitalization of $25 million or by such
other means as the Financial Security shall approve. The Auction Agent shall be
entitled to rely on the representations of the Corporation contained in the
Portfolio Valuation Report with respect to any Valuation Date, that as of such
Valuation Date the Corporation has confirmed that the Conventional Mortgage
Pass-Through Certificates included in the Eligible Portfolio Property are
within the scope of this paragraph.
"Corporate Debt Obligations" means debt obligations (other than Short-Term
Money Market Instruments or U.S. Government Obligations) rated from "CCC" or
higher by S&P or "Caa" or higher by Moody's (or rated as provided below in the
case of commercial paper), which corporate debt obligations (a) provide for the
periodic payment of interest thereon in cash, (b) do not provide for conversion
or exchange into equity capital at any time over their respective lives, (c)
have been registered under the Securities Act of 1933, as amended (such
requirement shall not apply with respect to commercial paper), and (d) have not
had notice given in respect thereof that any such corporate debt obligations are
the subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the aggregate value of the
Corporation's assets at any time shall not be subject to the provisions of this
clause (d)). In addition, so long as the securities are rated by S&P or Moody's,
no corporate debt obligation held by the Corporation shall be deemed a Corporate
Debt Obligation (i) if it fails to meet the criteria in column (l) below or (ii)
to the extent (and only to the proportionate extent) the acquisition or holding
thereof by the Corporation causes the Corporation to exceed any applicable
limitation set forth in column (2) or (3) below as of any relevant date of
determination (provided that in the event that the Corporation shall exceed any
such limitation or any other percentage limitation set forth in this definition
of Corporate Debt Obligations, the Corporation shall designate, in its sole
discretion, the particular Corporate Debt Obligation(s) and/or portions thereof
which shall be deemed to have caused the Corporation to exceed such limitation):
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3
-------- -------- --------
Maximum Percent
Maximum Percent of Market Value
of Market Value of Eligible Port-
of Eligible Port- folio Property
Minimum Original folio Property Invested in any
Rating Agencies' Issue Size of Invested in any One Industry
Ratings (l) Each Issue One Issuer (2) Category (2)
- ------------------ ---------------- ----------------- -----------------
($ in millions)
<S> <C> <C> <C>
"AAA"/"Aaa"., ...................... $100 10.0% 50.0%
"AA"/"Aa" .......................... 100 10.0 33.3
"A"/"A" ............................ 100 10.0 33.3
"BBB"/"Baa" ........................ 100 5.0 20.0
"BB"/"Ba" .......................... 100(3) 4.0 12.0
"B"/"B1", "B2" and "B3"
(subordinated) ................... 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa"
(unsecured subordinated) (4)...... 100(3) 2.0 5.0
"A-l+"/"P-1" (5).................... N/A 10.0 N/A
"A-l"/"P-l""(5)..................... N/A 10.0 33.3
"A-2"/"P-2" (5)..................... N/A 5.0 20.0
- ----------
(1) References to ratings by the Rating Agencies in this definition and
throughout the Charter will indicate the S&P rating followed by the
Moody's rating in the format shown. Rating designations include (+) or
(-) modifiers to the S&P rating where appropriate and (1), (2) or (3)
modifiers to the Moody's rating where appropriate, except that
corporate debt obligations rated "CCC-" will not constitute Corporate
Debt Obligations. In the event that a Corporate Debt Obligation has
received a different rating from S&P than from Moody's, the
restrictions relating to the lower rating will apply.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category, except that
the calculations with respect to commercial paper investments
constituting Corporate Debt Obligations shall be made separately and
independently of, but on the same basis as, the cumulative total
guidelines applicable to other types of Corporate Debt Obligations.
(3) 20% of the aggregate Market Value of all Corporate Debt Obligations in
these rating categories may be from issues with an original issue size
greater than or equal to $50 million and less than $100 million,
(4) Corporate Debt Obligations in this rating category that are rated by
S&P must be subordinated debt of the issuer with an implied senior
debt rating by S&P of "B-" or higher. The aggregate Market Value of
Corporate Debt Obligations in this rating category in excess of 20% of
the aggregate Market Value of the Fund's assets will not be included
in the calculation of Preferred Stock Basic Maintenance Amount.
(5) Represents commercial paper investments.
</TABLE>
In addition, the term "Corporate Debt Obligations" shall include debt
obligations satisfying such other criteria established by the Rating Agencies in
their sole discretion and designated in writing to the Corporation.
"Cure Date" means the eighth Business Day following a Valuation Date, such
date being the last day upon which the Corporation's failure to fulfill its
obligations, if any, pursuant to paragraph 7 below could be cured.
"Deposit Securities" means Cash, U.S. Government Obligations and Short-Term
Money Market Instruments; provided that at any time as of which the Surety Bond
is in effect the term "Deposit Securities" shall have the meaning provided in
the Insurance Agreement. Except for purposes of determining compliance with the
Preferred Stock Basic Maintenance Amount requirement contained in paragraph
7(a), each Deposit Security shall be deemed to have a value equal to its
principal or face amount payable at maturity plus interest payable thereon after
the delivery of such Deposit Security but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"Discount Factor Supplied By Moody's" means, for any asset held by the
Corporation, (i) the number set forth opposite such type of asset in the
following table or (ii) such other number established by Moody's in its sole
discretion and designated in writing to the Corporation (it being understood
that any asset held by the Corporation and not listed in the following table or
in such written notice shall have a Discounted Value of zero):
Discount Factor
---------------
Type I Corporate Bonds having a remaining
term to maturity of one year or less: 1.13
Type I Corporate Bonds having a remaining term to maturity
of more than one year but not more than two years: 1.20
Type I Corporate Bonds having a remaining term to maturity
of more than two years but not more than three years: 1.25
Type I Corporate Bonds having a remaining term to maturity
of more than three years but not more than four years: 1.32
Type I Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.37
Type I Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.47
Type I Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.55
Type I Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.61
Type I Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.68
Type I Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.70
Type II Corporate Bonds having a remaining term to maturity of
one year or less: 1.19
Type II Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.26
Type II Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.31
Type II Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.38
Type II Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.44
Type II Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than seven years: 1.54
Type II Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.62
Type II Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.69
Type II Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.76
Type II Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.78
Type III Corporate Bonds having a remaining term to maturity of
one year or less: 1.24
Type III Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.32
Type III Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.37
Type III Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.44
Type III Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.50
Type III Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.61
Type III Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.69
Type III Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.76
Type III Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.84
Type III Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.86
Type IV Corporate Bonds having a remaining term to maturity of
one year or less: 1.30
Type IV Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.38
Type IV Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.43
Type IV Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.50
Type IV Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.57
Type IV Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.68
Type IV Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.77
Type IV Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.84
Type IV Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.92
Type IV Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.94
Type V Corporate Bonds having a remaining term to maturity of
one year or less: 1.40
Type V Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.49
Type V Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.55
Type V Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.63
Type V Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.70
Type V Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.82
Type V Corporate Bonds having a remaining term to maturity of
more than seven years but not more than l0 years: 1.91
Type V Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.99
Type V Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.09
Type V Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.10
Type VI Corporate Bonds having a remaining term to maturity of
one year or less: 1.51
Type VI Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.60
Type VI Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.67
Type VI Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.76
Type VI Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.83
Type VI Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.95
Type V Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 2.06
Type VI Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 2.15
Type VI Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.25
Type VI Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.26
Type VII Corporate Bonds having a remaining term to maturity of
one year or less: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: (1)
Type VI Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: (1)
Type VII Corporate Bonds having a remaining term to maturity
of more than 20 years but not more than 30 years: (1)
Type VIII Corporate Bonds having a remaining term to maturity
of one year or less: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 2.60
Tvpe VIII Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.60
Discount Discount
Factor Factor
(Fixed (Adjustable
Rate Rate
FHLMC or FNMA Certificate Mortgages) Mortgages)
- ------------------------- ---------- ----------
FHLMC or FNMA Certificates with
interest rates less than 6% but
equal to or greater than 5%: 1.66 1.64
FHLMC or FNMA Certificates with
interest rates less than 7% but
equal to or greater than 6%: 1.62 1.64
FHLMC or FNMA Certificates with
interest rates less than 8% but
equal to or greater than 7%: 1.57 1.64
FHLMC or FNMA Certificates with
interest rates less than 9% but
equal to or greater than 8%: 1.53 1.64
FHLMC or FNMA Certificates with
interest rates less than 10% but
equal to or greater than 9%: 1.50 1.65
FHLMC or FNMA Certificates with
interest rates less than 11% but
equal to or greater than 10%: 1.46 1.64
FHLMC or FNMA Certificates with
interest rates less than 12% but
equal to or greater than 11%: 1.43 1.64
FHLMC or FNMA Certificates with
interest rates less than 13% but
equal to or greater than 12%: 1.41 1.64
FHLMC or FNMA Certificates with
interest rates equal to or
greater than 13%: 1.38 1.64
GNMA Certificates Discount Factor
- ----------------- ---------------
GNMA Certificates with interest rates less than 6% but equal to
or greater than 5%: 1.68
GNMA Certificates with interest rates less than 7% but equal to
or greater than 6%: 1.60
GNMA Certificates with interest rates less than 8% but equal to
or greater than 7%: 1.56
GNMA Certificates with interest rates less than 9% but equal to
or greater than 8%: 1.51
GNMA Certificates with interest rates less than 10% but equal to
or greater than 9%: 1.48
GNMA Certificates with interest rates less than 11% but equal to
or greater than 10%: 1.46
GNMA Certificates with interest rates less than 12% but equal to
or greater than 11%: 1.47
GNMA Certificates with interest rates less than 13% but equal to
or greater than 12%: 1.45
GNMA Certificates with interest rates equal to or greater than
13%: 1.43
GNMA Certificates with adjustable interest rates: 1.67
GNMA Multifamily Securities (not rated by Moody's): 0
FHLMC Multifamily Securities: 1.64
FHLMC and FNMA Certificates with variable interest rates: (2)
GNMA Graduated Payment Securities (must be seasoned): (3)
Conventional Mortgage Pass-Through Certificates: (2)
U.S. Government Obligations having a remaining term to maturity
of 90 days or less: 1.08
U.S. Government Obligations having a remaining term to maturity
of more than 90 days but not more than five years: 1.31
U.S. Government Obligations having a remaining term to maturity
of more than five years but not more than 10 years: 1.47
U.S. Government Obligations having a remaining term to maturity
of more than 10 years but not more than 15 years: 1.53
U.S. Government Obligations having a remaining term to maturity
of more than 15 years but not more than 30 years: 1.61
Cash and Short-Term Money Market Instruments: 1.00
- ------------
(1) Type VII Corporate Bonds rated "B-3" (subordinated) or better by
Moody's shall have a Discount Factor designated in writing to the
Corporation by Moody's equal to the factor which corresponds to Type
VI Corporate Bonds of comparable maturity. Type VII Corporate Bonds
rated "Caa" (subordinated unsecured) by Moody's or unrated by Moody's
shall have a Discount Factor Supplied by Moody's of 2.60.
(2) The Discount Factor determined therefor in writing by Moody's.
(3) The same discount factor applies in the case of GNMA Graduated Payment
Securities as applies to GNMA Certificates with fixed interest rates
determined at the point the certificates become seasoned.
"Discount Factor Supplied by S&P" means, for any asset held by the
Corporation, (i) the number set forth opposite each such type of asset in the
following table or (ii) such other number established by S&P in its sole
discretion and designated in writing to the Corporation (it being understood
that any asset held by the Corporation and not listed in the following table or
in such written notice shall have a Discounted Value of zero):
Type of Eligible Portfolio Property Discount Factor
- ----------------------------------- ---------------
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
GNMA Certificates with fixed interest rates: 1.35
GNMA Certificates with adjustable interest rates: 1.54
FHLMC and FNMA Certificates with fixed interest rates: 1.45
FHLMC and FNMA Certificates with adjustable interest rates: l.58
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable interest rates: (1)
GNMA Multifamily Securities: (1)
GNMA Graduated Payment Securities: 1.55(2)
Conventional Mortgage Pass-Through Certificates: (1)
U.S. Government Obligations having a remaining term to
maturity of 90 days or less: 1.00
U.S. Government Obligations having a remaining term to
maturity of more than 90 days but not more than five years: 1.28
U.S. Government Obligations having a remaining term to
maturity of more than five years but not more than 10 years: 1.35
U.S. Government Obligations having a remaining term to
maturity of more than 10 years but not more than 15 years: 1.45
U.S. Government Obligations having a remaining term to
maturity of more than 15 years but not more than 30 years: 1.50
Cash and Short-Term Money Market Instruments: 1.00
Commercial paper having a rating of at least "A-1" but lower
than "A-1+" from S&P or "P-1" from Moody's at the time of
the Corporation's investment therein: 1.60
Commercial paper having a rating of at least "A-2" but lower
than "A-1" from S&P or "P-2" from Moody's at the time of
the Corporation's investment therein: 1.65
- ------------
(1) The Discount Factor determined therefor in writing by S&P.
(2) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Fund notifies the Auction Agent that scheduled
principal payments are being made to holders; in the case of GNMA Graduated
Payment Securities as to which the Fund notifies the Auction Agent that
scheduled principal payments are not being made to holders, the Discount
Factor shall be that which is determined in writing by S&P.
"Discounted Value" with respect to any asset held by the Corporation as of
any date means the quotient of the Market Value of such asset divided by the
applicable Discount Factor Supplied by S&P or the applicable Discount Factor
Supplied by Moody's, as the case may be, provided that in no event shall the
Discounted Value of any asset constituting Eligible Portfolio Property for the
purposes of determining compliance with Paragraph 7(a) as of any date exceed the
unpaid principal balance or face amount of such asset an of that date. With
respect to the calculation of the aggregate Discounted Value of any Corporate
Debt Obligation included in the Corporation's Eligible Portfolio Property, such
calculation shall be made using the criteria set forth in the definitions of
Corporate Debt Obligations and Market Value. With respect to the calculation of
the aggregate Discounted Value of the Corporation's Eligible Portfolio Property
for comparison to the Preferred Stock Basic Maintenance Amount, such aggregate
Discounted Value shall be the aggregate Discounted Value calculated using
Discount Factors Supplied by S&P or the aggregate Discounted Value calculated
using the Discount Factors Supplied by Moody's, whichever aggregate Discounted
Value is lower. Notwithstanding any other provision hereof, any Type V, VI, VII
or VIII Corporate Debt Obligation that has a remaining term to maturity of more
than 30 years and any asset to which a Discount Factor is not assigned either
S&P or Moody's in Article IV(C) or in an amendment hereof or supplement hereto,
shall have a Discounted Value of zero.
"Dividend Payment Date" has the meaning specified in paragraph 3(b) below.
"Dividend Period" has the meaning specified in paragraph 3(b) below.
"Eligible Portfolio Property" means (i) Corporate Debt Obligations
(including without limitation commercial paper rated at the time of the
Corporation's investment therein at least "A-2"/"P-2" but lower than
"A-l+"/"P-l" by the Rating Agencies with a maturity of at least 30 days), Cash,
U.S. Government Obligations, Short-Term Money Market Instruments, FNMA
Certificates, FHLMC Certificates, FHLMC Multifamily Securities, GNMA
Certificates, GNMA Multifamily Securities, GNMA Graduated Payment Securities and
Conventional Mortgage Pass-Through Certificates; provided that, any assets of
the Corporation subject to call option obligations shall not constitute Eligible
Portfolio Property and (ii) other assets which may be established by the Rating
Agencies in their sole discretion and designated in writing to the Company.
"FHLMC" means the Federal Home Loan Mortgage Corporation created by Title
III of the Emergency Home Finance Act of 1970, and includes any successor
thereto.
"FHLMC Certificate" means a mortgage participation certificate in physical
or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate, fully amortizing mortgage loans
secured by first-priority mortgages on one- to four-family residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily Security" in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Preferred Stock to fail to retain, the ratings assigned to such Preferred Stock
by the Rating Agencies, as evidenced by letters to such effect from the
respective Rating Agencies.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in physical or
book-entry form, the full and timely payment of principal of and interest on
which is guaranteed by FNMA, and which evidences a proportional undivided
interest in specified pools of fixed-, variable- or adjustable-rate, fully
amortizing mortgage loans secured by first-priority mortgages on single-family
residences.
"GNMA" means the Governmental National Mortgage Association, and includes
any successor thereto.
"GNMA Certificates" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-, variable or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on
single-family residences.
"GNMA Graduated Payment Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of graduated payment mortgage
loans with payments that increase annually at a predetermined rate for up to the
first five or ten years of the mortgage loan and that are secured by
first-priority mortgages on one- to four-unit residences.
"GNMA Multifamily Security" means a fully modified pass-through certificate
in physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States, and which evidences a proportional
undivided interest in specific pools of fixed-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Preferred Stock to fail to retain the rating assigned to such Preferred Stock by
the Rating Agencies or evidenced by letters to such effect from the respective
Rating Agencies.
"Holding Election" shall have the meaning set forth in paragraph 5(b).
"Indenture" means the indenture dated as of December 1, 1988 between the
Corporation and Shawmut Bank, N.A., as trustee, pursuant to which the
Corporation's Series A Senior Notes were issued.
"Independent Accountants" means the Corporation's independent accountants,
which shall be a nationally recognized accounting firm.
"Industry Category" means, at any time the Surety Bond is not in effect, as
to any Corporate Debt Obligation, any of (i) the industry categories set forth
in the following table or (ii) such other industry categories established by the
Rating Agencies in their sole discretion and designated in writing to the
Corporation.
1. Aerospace and Defense
2. Automobile/Auto Parts/Truck Manufacturing
3. Banks/Savings and Loans/Finance Companies/Consumer Credit
4. Financial Services - Brokerage/Syndication/Leasing
5. Real Estate Development/REITS/Building/ Construction
6. Broadcasting - TV, Cable, and Radio
7. Publishing
8. Electrical Equipment/Electronics/Computers
9. Diversified/Conglomerate Services
10. Diversified/Conglomerate Manufacturing
11. Leisure/Amusement/Motion Pictures
12. Agricultural Chemicals
13. Chemicals
14. Food/Tobacco
15. Beverage
16. Retail
17. Consumer Durable Goods/Home Furnishings/Childcare/Toys
18. Grocery/Convenience Stores
19. Healthcare/Drugs/Hospital Supplies
20. Personal Care Products/Cosmetics
21. Hotel/Gaming
22. Insurance Companies
23. Machinery
24. Metals/Mining
25. Oil/Natural Gas/Oil Services
26. Packaging/Containers
27. Paper/Forest Products/Printing
28. Pollution Control/Waste Removal
29. Utilities
30. Rail/Trucking/Overnight Delivery
31. Telephone/Communications
32. Textiles/Apparel
33. Transportation
34. Agriculture/Agricultural Equipment
35. Miscellaneous
"Initial Dividend Payment Date" has the meaning set forth in paragraph
3(b) below.
"Initial Dividend Period" has the meaning specified in paragraph 3(b)
below.
"Insurance Agreement" means the Insurance Agreement, dated as of December
1, 1988, by and among the Corporation and the Surety or any other similar
insurance agreement with the Surety pursuant to which the Surety Bond is issued.
"Interest and Dividend Coverage Amount," as of any date of determination,
means the sum of:
(a) the amount of interest on the Notes, if any, due to become payable
on or prior to the next Dividend Payment Date, and
(b) the product of
(i) the number of shares of Preferred Stock outstanding on such
date multiplied by $l00,000,
(ii) the Applicable Rate in effect as of such date, and
(iii) a fraction, the numerator of which is the number of days in
the Dividend Period ending on the next Dividend Payment Date
(determined by including the first day thereof but excluding the last
day thereof) and the denominator of which is 360;
less
(c) the combined value of any Deposit Securities irrevocably
deposited by the Corporation for the payment of interest on the Notes
or dividends on the Preferred Stock.
"Interest and Dividend Coverage Assets," as of any date of determination,
means Deposit Securities with maturity dates not later than the day preceding
the next Dividend Payment Date; provided that if interest on the Notes shall be
due prior to such Dividend Payment Date, then a portion of such Deposit
Securities equal to the amount of such interest shall have maturity dates on or
prior to the day preceding the applicable interest payment date; and provided,
further, that if the applicable date of determination is a Dividend Payment Date
or a date on which interest on the Notes is payable, any Deposit Securities to
be applied to the dividends payable on the Preferred Stock or to interest on the
Notes on such date shall not be included in Interest and Dividend Coverage
Assets.
"Investment Company Act" means the Investment Company Act of 1940 (15 U.S.
Code {Par} 80 et seq.), as amended and in effect from time to time.
"Lien" has the meaning set forth in paragraph 3(d)(iv), below.
"Mandatory Asset Coverage Redemption" has the meaning specified in
paragraph 5(b).
"Mandatory Expiration Redemption" has the meaning specified in paragraph
5(b).
"Mandatory Redemption" means a Mandatory Asset Coverage Redemption,
Mandatory Surety Redemption or a Mandatory Expiration Redemption.
"Mandatory Surety Redemption" has the meaning specified in paragraph 5(b).
"Market Value" means the amount determined with respect to specific assets
of the Corporation in (i) the manner set forth below or (ii) such other manner
as is established by the Rating Agencies in their sole discretion and designated
in writing to the Corporation.
(a) as to any Corporate Debt Obligations, (i) the product of (A) the
unpaid principal balance of such Corporate Debt Obligation as of the
Reporting Date, and (B) the lower of two bid prices for such Corporate Debt
Obligation provided by two nationally recognized securities dealers with a
minimum capitalization of $25 million or by one such securities dealer and
any other source (provided that the utilization of such source would not
adversely affect the ratings of the Preferred Stock) to the custodian of
the Corporation's assets, at least one of which shall be provided in
writing or by telecopy, telex, other electronic transcription, computer
obtained quotation reducible to written form or similar means, and in turn
provided to the Corporation by any such means by such custodian (provided
that evidence of the bid quotes furnished by such custodian shall be
provided to the Auction Agent by the Corporation with the related Portfolio
Valuation Report), plus (ii) accrued interest on such Corporate Debt
Obligation (unless such accrued interest is payable to the holder of such
Corporate Debt Obligation prior to the next Valuation Date), or, if two bid
prices cannot be obtained, such item of Eligible Portfolio Property shall
have a Market Value of zero;
(b) the product of (i) as to GNMA Certificates, GNMA Graduated Payment
Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the aggregate unpaid
principal amount of the mortgage loans evidenced by each such Certificate
or security, as the case may be, as determined by the Corporation by any
method which the Corporation believes reliable, which may include amounts
shown on the most recent report related to the Certificate or security
received by the Corporation prior to the Reporting Date, and as to U.S.
Government Obligations and Short-Term Money Market Instruments (other than
demand deposits, federal funds, bankers' acceptances and next Business
Day's repurchase agreements), the face amount or aggregate principal amount
of such U.S. Government Obligations or Short-Term Money Market Instruments,
as the case may be, and (ii) the lower of the bid prices for the same kind
of Certificates, securities or instruments, as the case may be, having, as
nearly as practicable, comparable interest rates and maturities provided by
two nationally recognized securities dealers having minimum capitalization
of $25 million or by one such securities dealer and any other source
(provided that the utilization of such source would not adversely affect
the ratings of the Preferred Stock) to the custodian of the Corporation's
assets, at least one of which shall be provided in writing or by telecopy,
telex, other electronic transcription, computer obtained quotation
reducible to written form or similar means, and in turn provided to the
Corporation by any such means by such custodian (provided that evidence of
the bid quotes furnished by such custodian shall be delivered to the
Auction Agent with the related Portfolio Valuation Report), or, if two bid
prices cannot be obtained, such item of Eligible Portfolio Property will
have a Market Value of zero;
(c) as to Conventional Mortgage Pass-Through Certificates, the product
of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the Certificates as determined by the Corporation by any method
which the Corporation believes reliable, which may include amounts based on
verbal reports of the servicers of the related mortgage loans to the
Corporation, as of the applicable Reporting Date and (ii) the dollar value
of the lower of two bid prices per dollar of outstanding principal amount
as of such applicable Reporting Date for such Certificates, provided by two
nationally recognized securities dealers having minimum capitalization of
$25 million or by one such securities dealer and any other source (provided
that the utilization of such source would not adversely affect the
then-current ratings of the Preferred Stock) to the custodian of the
Corporation's assets, at least one of which shall be provided in writing or
by telecopy, telex, other electronic transcription, computer obtained
quotation reducible to written form or similar means, and in turn provided
to the Corporation by any such means by such custodian (provided that
evidence of the bid quotes furnished by such custodian shall be delivered
to the Auction Agent with the related Portfolio Valuation Report), or, if
two bid prices cannot be obtained, such item of Eligible Portfolio Property
shall have a Market Value of zero; and
(d) as to Cash, demand deposits, federal funds, bankers' acceptances
and next Business Day's repurchase agreements included in Short-Term Money
Market Instruments, the face value thereof.
Upon any failure to obtain two bid prices as described in paragraphs (a),
(b) and (c) above, with respect to any item of Eligible Portfolio Property as of
any Valuation Date, the Corporation shall notify the Rating Agencies in writing.
As used in the definition of Market Value, "in writing" includes telecopies,
telexes or other electronic transcription, or a computer-obtained quotation
reducible to written form,
"Minimum Liquidity Level is met" means, as of any date of determination,
that the aggregate Market Value of the Interest and Dividend Coverage Assets
equals or exceeds the Interest and Dividend Coverage Amount.
"Moody's" means Moody's Investors Service, Inc. or any successor thereto.
"Notes" means collectively (i) the Corporation's Senior Extendible Notes
due 1998, Series A and (ii) any other Senior Notes issued pursuant to the
Indenture.
"Notice of Redemption" has the meaning specified in paragraph 5(c)(iv),
below.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of the Corporation.
"Officer's Certificate" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer, Assistant Secretary or Assistant Controller
of the Corporation.
"Optional Redemption" shall have the meaning specified in paragraph 5(a),
"Original Issuance Date" means the date on which the Corporation originally
issues shares of Preferred Stock.
"Paying Agent" means Bankers Trust Company and its successor or any other
paying agent appointed by the Corporation to perform the functions performed by
the Paying Agent.
"Permitted Bank" means any depository institution or trust company
incorporated or licensed to maintain a branch or agency under the laws of the
United States or any state thereof or the District of Columbia (i) the long-term
unsecured debt obligations (other than such obligations the ratings of which are
based on the credit of a Person other than such institution or trust company) of
which (or which is the principal banking subsidiary of a holding company the
long-term unsecured debt obligations of which), at the time of the Corporation's
investment therein, or at the time of a contractual commitment providing for
such investment, have ratings from the Rating Agencies of at least "AA"/"Aa" and
(ii) the commercial paper (other than such obligations the rating of which are
based on the credit of a Person other than such institution or trust company) of
which (or which is the principal banking subsidiary of a holding company the
commercial paper of which), at the time of the Corporation's investment therein,
or at the time a contractual commitment providing for such investment, has
ratings from the Rating Agencies of at least "A-1+"/"P-1".
"Permitted Tax Liens" means liens of general and special taxes and
assessments on the property in question.
"Person" means an individual, a corporation, a company, a voluntary
association, a partnership, a trust, an unincorporated organization or a
government or any agency, instrumentality or political subdivision thereof.
"Portfolio Calculation" shall have the meaning specified in paragraph 7(b).
"Portfolio Valuation Report" means an Officer's Certificate delivered to
the Auction Agent with the respect to the Valuation of the Eligible Portfolio
Property.
"Preferred Stock Basic Maintenance Amount" means, as of any date on which
the Surety Bond is not in effect, (x) the dollar amount equal to (a) the sum of
(i) 100% of the aggregate principal amount of the Notes then outstanding; (ii)
$100,250 times the number of shares of Preferred Stock then outstanding; (iii)
the aggregate amount of accrued interest on the Notes then outstanding, from the
most recent date to which interest has been paid or duly provided for (or, for
purposes of calculating the Preferred Stock Basic Maintenance Amount prior to
June 1, 1989 then from December 1, 1988) through the next succeeding Valuation
Date, plus all interest to accrue on the Notes then outstanding during the 63
days following such Valuation Date; (iv) the aggregate amount of accumulated but
unpaid dividends with respect to the Preferred Stock to such date; (v) the
aggregate Projected Dividend Amount; (vi) the aggregate principal amount of any
then outstanding indebtedness of the Corporation for money borrowed (other than
the Notes) and (vii) the greater of $200,000 or the Corporation's current
liabilities as of such date to the extent not otherwise reflected in any of (i)
through (vi) above, less (b) the combined value of any Deposit Securities
irrevocably deposited by the Corporation for the payment of principal of or
interest on the Notes or redemptions of or dividend payments with respect to the
Preferred Stock or (y) such other dollar amount calculated by a method
established by the Rating Agencies in their sole discretion and designated in
writing to the Corporation.
"Projected Dividend Amount" for the Preferred Stock shall mean, if the date
of determination is a Valuation Date, the amount of dividends, based on the
number of shares of Preferred Stock outstanding on such Valuation Date,
projected to accumulate on such shares from such Valuation Date through the 63rd
day after such Valuation Date, at the following dividend rates.
(a) if the Valuation Date is the Original Issuance Date or a Dividend
Payment Date, (i) for the Dividend Period beginning on the Original
Issuance Date or such Dividend Payment Date and ending on (but not
including) the first following Dividend Payment Date, the Applicable Rate
in effect on such Valuation Date, and (ii) for the period beginning on (and
including) the first following Dividend Payment Date and ending on (and
including) the 63rd day following such Valuation Date, the product of 1.95
and (x) the Maximum Applicable Rate on the Original issuance Date (in the
case of the Original Issuance Date) or (y) the Maximum Applicable Rate as
of the last occurring Auction Date (in the case of any Dividend Payment
Date); and
(b) if such Valuation Date is not the Original Issue Date or a
Dividend Payment Date, (i) for the period beginning on such Valuation Date
and ending on (but not including) the first following Dividend Payment
Date, the Applicable Rate in effect on such Valuation Date, and (ii) for
the period beginning on (and including) the first following Dividend
Payment Date and ending on (but not including) the sooner of the second
following Dividend Payment Date or the 64th day following such Valuation
Date, the product of 1.95 and (x) the Maximum Applicable Rate on the
Original Issuance Date (in the case of a Valuation Date occurring prior to
the first Auction Date) or (y) the Maximum Applicable Rate on the last
occurring Auction Date (in the case of any other Valuation Date) and (iii)
for the period, if any, beginning on (and including) the second following
Dividend Payment Date and ending on (but not including) the 64th day
following such Valuation Date, the product of 2.50 and the rate specified
in clause (x) or (y) above.
If the date of determination is not a Valuation Date, then the Projected
Dividend Amount on such date of determination shall equal the Projected Dividend
Amount therefor on the immediately preceding Valuation Date, adjusted to reflect
any decrease in the number of shares of Preferred Stock outstanding.
"Quarterly Valuation Date" means, so long as any shares of Preferred Stock
are outstanding, the last Business Day of January, April, July and October of
each year, commencing January 31, 1989.
"Rating Agencies" means, collectively, S&P and Moody's for so long as S&P
and Moody's issue ratings for the Preferred Stock, and, at such time as either
no longer issue a rating for the Preferred Stock, the remaining Rating Agency.
"Reporting Date," with respect to any price referred to in the definition
of the Market Value of an item of Eligible Portfolio Property, shall mean the
date as of which the Market Value of such item of Eligible Portfolio Property is
to be determined or, if no such price is available as provided above for such
date, the next closest prior date as of which such price is so available;
provided, that no such price shall be deemed to be available as of a Reporting
Date if such price is not available as of a date within five Business Days next
preceding the date as of which the determination of such Market Value is to be
made.
"Required Documentation," with respect to a mortgage loan means:
(a) the mortgage note or other evidence of indebtedness secured by the
mortgage endorsed without recourse in blank or to the trustee or other
custodian and accompanied by an assignment thereof
(b) the mortgage, deed of trust, deed to secure debt or similar
security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other
custodian, in recordable form as may be appropriate in the jurisdiction
where the property is located and evidence that such assignment has been
recorded in the name of the trustee or other custodian, and such trustee or
other custodian receives an opinion of counsel (containing only such
exceptions as may be permissible under the indenture or other agreement
pursuant to which the mortgage loan is pledged to the trustee in connection
with the related Conventional Mortgage Pass-Through Certificate) to the
effect that, notwithstanding that the assignment of the mortgage has not
been recorded, the actions taken with respect to the mortgage loan are
sufficient to permit the trustee or other custodian to avail itself of all
protection available under applicable law against the claims of any present
or future creditors of the issuer, and are sufficient to prevent any other
sale, transfer, assignment, pledge or hypothecation of the mortgage and the
related mortgage note by the issuer from being enforceable, or will create
a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of
the issuer to the trustee as provided in the indenture pursuant to which
the mortgage loan is pledged to the trustee in connection with the related
Conventional Mortgage Pass-Through Certificate) prior in right to all other
security interests therein created or perfected under the Uniform
Commercial Code (as in effect in the jurisdiction where the property is
located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
(d) a copy of the title insurance policy or an opinion or certificate
of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be
subject to exceptions for Permitted Tax Liens and other matters to which
like properties are commonly subject which neither individuals nor in the
aggregate materially interfere with the benefits of the security interest
intended to be provided by such mortgage and standard exceptions and
exclusions from mortgage title insurance policies).
"S&P" means Standard & Poor's Corporation or any successor thereto.
"Scheduled Payment Day" has the meaning specified in paragraph 3 (b) below.
"Scheduled Payments" means (i) payment of dividends on the Preferred Stock
which holders of shares of Preferred Stock would be entitled to receive on each
Dividend Payment Date during the term of the Surety Bond in accordance with the
terms of the Charter, without regard to whether the Corporation has declared any
such dividend or such dividend could have been legally declared by the
Corporation, (ii) payment of the redemption price of the Preferred Stock,
without regard to whether such redemption could have been legally made by the
Corporation, (a) on the last date on which the Corporation was to have redeemed
shares of the Preferred Stock as specified in a Surety Redemption Request in the
event that the Surety has notified the Surety Custodian that such redemption is
to be a Scheduled Payment and (b) on the date on which shares of the Preferred
Stock may be required to be redeemed pursuant to a mandatory expiration
redemption, and (III) payment of the liquidation preference on shares of the
Preferred Stock in the event of a liquidation of the Corporation during the term
of the Surety Bond on the dates fixed for payment of such liquidation preference
pursuant to the Charter and the Insurance Agreement.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the
Corporation which agrees to follow the procedures required to be followed by
such securities depository in connection with shares of the Preferred Stock;
provided that, at any time that the Surety Bond is in effect, any reference
herein to the Securities Depository shall be deemed to refer to the Surety
Custodian.
"Short-Term Money Market Instruments" means the following kinds of
instruments, if on the date of purchase or other acquisition by the Corporation
of any such instrument the remaining term to maturity therof is not more than 30
days:
(a) demand deposits in, certificates of deposit of bankers'
acceptances issued by, or federal funds sold to, any depository
institution, the deposits of which are insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance
Corporation, provided that, at the time of the Corporation's investment
therein, the commercial paper or other unsecured short-term debt
obligations of such depository institution are rated at least "A-1+" by S&P
and "P-1" by Moody's;
(b) repurchase obligations with respect to a U.S. Government
Obligation, FNMA Certificate, FHLMC Certificate or GNMA Certificate entered
into with a depository institution, the deposits of which are insured by
the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation and the commercial paper or other unsecured
short-term debt obligations of which are rated at least "A-1+" by S&P and
"P-1" by Moody's, which must be repurchased within one Business Day from
the date such repurchase obligation was entered into; and
(c) commercial paper rated at the time of the Corporation's investment
therein at least "A-1+" by S&P and "P-1" by Moody's.
"Special Redemption Assets" has the meaning specified in paragraph 5(b)
below.
"Subsequent Dividend Period" has the meaning specified in paragraph 3(B)
below.
"Surety" means Financial Security Assurance Inc. or any successor thereto
or any other surety under the Surety Bond.
"Surety Bond" means a surety bond (including the surety bond issued
pursuant to the Insurance Agreement) which unconditionally and irrevocably
guarantees to each holder of shares of Preferred Stock the Scheduled Payments.
"Surety Custodian" means Bankers Trust Company and any successor thereto or
any other custodian under the Surety Custody Agreement.
"Surety Custody Agreement" means a custody agreement, dated as of December
1, 1988, by and between the Surety and the Surety Custodian or any other similar
agreement in effect at any time that the Surety Bond is in effect.
"Surety Redemption Request" means a written notice from the surety to the
Corporation requesting redemption of shares of the Preferred Stock pursuant to
the terms of the Insurance Agreement.
"Type I Corporate Bonds" means Corporate Bonds whose present rating is
"AAA"/"Aaa" by the Rating Agencies.
"Type II Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "AA+"/"Aa1" and no less than " AA-"/"Aa3" by the Rating Agencies.
"Type III Corporate Bonds" means Corporate Bonds present rating is no
greater than "A+"/"A1" and no less than "A-"/"A3" by the Rating Agencies.
"Type IV Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "BBB+"/"Baa1" and no less than "BBB-"/"Baa3" by the Rating
Agencies.
"Type V Corporate Bonds" Means Corporate Bonds whose present rating is no
greater than "BB+/"Ba1" and no less than "BB-"/"Ba3" by the Rating Agencies.
"Type VI Corporate Bonds" means Corporate Bonds whose present rating is no
greater then "B+"/"B1" and no less than "B-"/"B3 (subordinated)" by the Rating
Agencies.
"Type VII Corporate Bonds" means Corporate Bonds whose present rating is
"CCC+ (subordinated)" by S&P with an implied senior rating of "B-" or greater
and rated at least "Caa (subordinated)" by Moody's.
"Type VIII Corporate Bonds" Means Corporate Bonds whose present rating is
"CCC" by S&P with an implied senior rating of "B-" or higher and rated at least
"Caa (unsecured subordinated)" by Moody's.
"U.S. Government Obligations" means direct obligations of the United
States, provided that such direct obligations are entitled to the full faith and
credit of the United States and that any such obligations, other than United
States Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
"United States" means the United States of America.
"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 each month; provided, however, that the first Valuation Date may
occur on any other date established by the Corporation; provided, further,
however, that such date shall be not more than 15 days from the date on which
the Surety Bond ceases to be in effect.
"Vote of a Majority of the Outstanding Voting Securities" (for
purposes of the Investment Company Act) means the vote, at the annual or a
special meeting of the stockholders of the Corporation duly called, of the
lesser of (A) 67% or more of the voting securities present at such meeting, if
the holders of more than 50% of the outstanding voting securities of the
Corporation are present or represented by proxy; or (B) more than 50% of the
outstanding voting securities of the Corporation.
"Voting Period" has the meaning specified in paragraph 6(b) below.
2A. Registration of Preferred Stock and Issuance of Custody Receipts
(a) Except as otherwise provided by applicable law, at any time that the
Surety Bond is in effect pursuant to the Insurance Agreement, all outstanding
shares of Preferred Stock shall be represented by a stock certificate registered
in the name of the Surety Custodian and held by the Surety Custodian in a
custody account on behalf of the beneficial holders of such Preferred Stock, and
no person acquiring beneficial ownership of shares of Preferred Stock shall be
entitled to receive a certificate representing such shares of Preferred Stock.
In such event, the Surety Custodian shall issue to the Securities Depository
custody receipts evidencing the beneficial holders' ownership of the Preferred
Stock, which the Securities Depository will hold of record on behalf of the
beneficial holders of shares of Preferred Stock, all pursuant to the Surety
Custody Agreement.
(b) At any such time that the Surety Bond is not in effect, all outstanding
shares of Preferred Stock shall be represented by a stock certificate registered
in the name of the Securities Depository or its nominee, to be held on behalf of
the beneficial holders of shares of Preferred Stock.
3. Dividends
(a) Holders of shares of Preferred Stock shall be entitled to receive,
when, as, and if declared by the Board of Directors, out of funds legally
available therefor, cumulative cash dividends at the Applicable Rate per annum
(determined as set forth below) payable on the respective dates set forth below
to the holders of record of shares of Preferred Stock as of the Business Day
next preceding the payment date.
(b) Dividends on the shares of Preferred Stock shall accumulate from and
including the Original Issuance Date. Accrued dividends shall be payable
commencing on the date next succeeding the last day of the 45-day period
commencing on the Original Issuance Date (the "Initial Dividend Payment Date")
and on each day thereafter which is the date next succeeding the last day of the
successive 30-day periods after such date. If any date next succeeding such last
day (the "Scheduled Payment Day") is not a Business Day or (if the Paying Agent
does not make payments in same-day funds) the day succeeding the Scheduled
Payment Day is not a Business Day, dividends payable on such Scheduled Payment
Day shall be paid on the first Business Day succeeding such Scheduled Payment
Day that is next succeeded by a day which is also a Business Day. Any date on
which a dividend on the Preferred Stock is payable pursuant to this paragraph
3(b) is herein called a "Dividend Payment Date." The period beginning on and
including the Original Issuance Date and ending on (but not including) the
Initial Dividend Payment Date is referred to herein as the "Initial Dividend
Period." Each successive period commencing on, and including, the Dividend
Payment Date for the preceding Dividend Period and ending on (and including) the
day preceding the next succeeding Dividend Payment Date is referred to herein as
a "Subsequent Dividend Period" and the Initial Dividend Period and each
Subsequent Dividend Period together are sometimes referred to herein as
"Dividend Periods."
(c) (i) The Applicable Rate for the Initial Dividend Period shall be the
rate per annum for the Initial Dividend Period set forth in the Corporation's
Prospectus covering the initial offering of the Preferred Stock. For the purpose
of calculating the rate of dividends per annum payable on shares of Preferred
Stock (the "Applicable Rate") for each Subsequent Dividend Period the
Corporation shall enter into an agreement with the Auction Agent (the "Auction
Agent Agreement"). The Applicable Rate on the shares of Preferred Stock for each
Subsequent Dividend Period shall be determined by the Auction Agent in
accordance with the Auction Agent Agreement, which shall provide that the
Auction Agent will follow the Auction Procedures described in paragraph 8 hereof
to determine the Applicable Rate. In the event there is no Auction Agent on the
Business Day prior to the first day of a Dividend Period, the Applicable Rate
for such Dividend Period shall be equal to the Maximum Applicable Rate (as
defined in paragraph 8(a) hereof) that could have resulted pursuant to the
Auction Procedures, as determined by the Corporation, on such Business Day. The
Corporation shall exercise its best efforts to maintain an Auction Agent
pursuant to an agreement containing terms no less favorable to the Corporation
than the terms of the Auction Agent Agreement. If, due to the issuance of a
Notice of Redemption, no shares of Preferred Stock are deemed outstanding on any
Auction Date, or if no Auction is held on such date for any other reason, the
Applicable Rate for the Dividend Period beginning on the Business Day following
such Auction Date shall be equal to the Maximum Applicable Rate that could have
resulted pursuant to the Auction Procedures, as determined by the Auction Agent
(or, if there is no Auction Agent, by the Corporation), on such Business Day.
(ii) The amount of dividends per share payable on shares of Preferred Stock
for each Dividend Period or part thereof shall be determined by the Auction
Agent and shall be an amount equal to $100,000 per share of Preferred Stock
multiplied by the product of (1) the Applicable Rate for such Dividend Period
and (2) a fraction, the numerator of which shall be the actual number of days in
such Dividend Period or part thereof and the denominator of which shall be 360.
All dollar amounts used in or resulting from such calculations will be rounded
to the nearest cent (with one-half (0.5) cent being rounded up).
(d) (i) The Corporation will not issue any series of any class of stock
which is senior to or on a parity with the Preferred Stock. No holders of shares
of Preferred Stock shall be entitled to any dividends, whether payable in cash,
property or stock, in excess of full cumulative dividends, as provided in this
paragraph 3, on shares of Preferred Stock. No interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payments on any shares
of the Preferred Stock that may be in arrears.
(ii) For so long as shares of Preferred Stock are outstanding, the
Corporation shall not declare, pay or set apart for payment any dividend or
other distribution in respect of the Common Stock or any other stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any shares of the Common Stock or any other stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends or
upon liquidation (except by conversion into or exchange for stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends and
upon liquidation), unless, in each case, (A) immediately thereafter, the
Preferred Stock Basic Maintenance Amount would be achieved, if at such time the
Surety Bond is not in effect, (B) such transaction is on a Dividend Payment
Date, (C) such transaction would not violate applicable law (including, without
limitation, Section 18(a) of the Investment Company Act and Maryland law) and
(D) full cumulative dividends on all shares of Preferred Stock for all Dividend
Periods ending on or prior to such Dividend Payment Date have been declared and
paid (or sufficient Deposit Securities shall have been set apart for their
payment).
If on any Dividend Payment Date as of which the Surety Bond is in effect,
the Corporation defaults in making dividend payments on shares of Preferred
Stock and the Surety makes such payments to the holders of shares of Preferred
Stock, the Surety thereafter shall be subrogated to all rights of the holders of
shares of Preferred Stock to receive such dividend payments.
(iii) Any dividend payment made on the shares of Preferred Stock shall
first be credited against the dividends accumulated with respect to the earliest
Dividend Period for which dividends have not been paid.
(iv) At any time that shares of Preferred Stock are outstanding and the
Surety Bond is not in effect, the Corporation shall not create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust receipt
or other material encumbrance of any kind (collectively "Liens") upon any of its
Eligible Portfolio Property, except for (A) Liens the validity of which are
being contested in good faith by appropriate proceedings, (B) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) Liens to secure payment for services rendered by the Auction Agent
or the Trustee with respect to the Notes in connection with the Preferred Stock
or the Notes and (D) Liens otherwise incurred in connection with borrowings made
in the ordinary course of business in accordance with the Corporation's stated
investment objective, policies and restrictions,
(e) Not later than noon on the Business Day next preceding each Dividend
Payment Date, the Corporation shall deposit with the Paying Agent Deposit
Securities consituting immediately available funds in an amount sufficient to
pay the dividends that are payable on such Dividend Payment Date. The
Corporation may direct the Paying Agent with respect to the investment of any
such Deposit Securities, provided that the proceeds of any such investment will
be available at the opening of business on such Dividend Payment Date.
(f) Dividends in arrears for any past Dividend Period may be declared and
paid to the holders of shares of Preferred Stock at any time, without reference
to any regular Dividend Payment Date.
4. Liquidation Rights
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, after satisfying claims
of creditors (including the holders of Notes) but before any distribution or
payment shall be made in respect of the Common Stock or any other stock of the
Corporation ranking junior to the Preferred Stock as to liquidation payments, a
liquidation distribution in the amount of $100,000 per share, plus an amount
equal to all accumulated and unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not earned or declared by the
Corporation, but excluding interest thereon), but such holders shall be entitled
to no further participation in any distribution or payment in connection with
any such liquidation, dissolution or winding up.
(b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of Preferred Stock shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then such available
assets shall be distributed among the holders of shares of Preferred Stock
ratably in any such distribution of assets according to the respective amounts
which would be payable on all such shares if all amounts thereon were paid in
full.
(c) Neither the consolidation or merger of the Corporation with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer by
the Corporation of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this paragraph 4.
5. Redemption
Shares of the Preferred Stock shall be redeemable by the Corporation as
provided below:
(a) Optional Redemption. At its option, the Corporation may, out of funds
legally available therefor (giving consideration to all applicable legal
restraints, including, without limitation, the restraints imposed by Section
18(a) of the Investment Company Act and Maryland Law), upon at least 15 but not
more, than 30 days notice, or such longer notice period as is required by
applicable law, pursuant to a Notice of Redemption (as defined below), redeem
shares of Preferred Stock, in whole or in part (an "Optional Redemption"), at
$100,000 per share plus an amount equal to the accrued and unpaid dividends on
such shares (whether or not earned or declared by the Corporation, but excluding
interest thereon) to the redemption date; provided, however, it such redemption
is not made on a Dividend Payment Date, it will be made at a price equal to
$100,250 plus an amount equal to all accumumulated and unpaid dividends through
the date of redemption.
(b) Mandatory Redemption. (i) If the Surety Bond is then in effect, the
Corporation shall be obligated (A) to redeem, out of funds legally available
therefor, no later than the last day specified for redemption of shares of
Preferred Stock pursuant to a Surety Redemption Request, the number of shares of
Preferred Stock specified in such Surety Redemption Request (a "Mandatory Surety
Redemption") and (B) to redeem, out of funds legally available therefor, all
shares of Preferred Stock at least one full Business Day prior to any expiration
date of the Surety Bond if, 190 days prior to such expiration date, the
Corporation shall have failed to obtain from the Surety an extension of the term
of the Surety Bond pursuant to its terms (a "Mandatory Expiration Redemption");
provided that, subject to the terms of the Insurance Agreement, no Mandatory
Expiration Redemption shall be required if the Corporation shall have obtained
notice in writing from the respective Rating Agencies that such expiration of
the Surety Bond will not adversely affect the then-current ratings of the
Preferred Stock whether through obtaining a substitute Surety Bond or otherwise.
A Notice of Redemption shall be given to the holders of shares of Preferred
Stock being redeemed at least 15 but not more than 30 days (or such longer
notice period as is required by applicable law) prior to the date of any
Mandatory Redemption. A holder of shares of Preferred Stock may elect not to
have its shares redeemed pursuant to a Mandatory Expiration Redemption by
giving notice to the Corporation or the Paying Agent at least five days prior
to the redemption date of such Holder's election to continue to hold its shares
of Preferred Stock (the "Holding Election").
(ii) If, at any such time as the Surety Bond is not in effect, the
Corporation shall default in the performance or observance of any covenant
contained in paragraph 7(a)(i) through (iii) hereof, and such default shall not
have been cured prior to the close of business on the Cure Date, then the
Corporation shall (A) redeem, out of funds legally available therefor (giving
consideration to all applicable legal restraints, including, without limitation,
the restraints imposed by Section 18(a) of the Investment Company Act and
Maryland law), the minimum number of shares the redemption of which, if deemed
to have occurred on the Valuation Date with respect to which the requirements of
Section 7(a)(i) through (iii) were not met, could have been effected using the
proceeds from the deemed sale of "Special Redemption Assets," (B) notify the
Paying Agent in writing by the close of business on the second Business Day
following the Cure Date of its intention to redeem the number of whole shares of
Preferred Stock calculated in clause (A) above (a "Mandatory Asset Coverage
Redemption") and (C) give to the holders of such shares of Preferred Stock at
least 15 but not more than 30 days (or such longer notice period as is required
by applicable laws prior to the redemption date, a Notice of Redemption (which
shall specify a mandatory redemption date not more than 45 days after the
Valuation Date on which the Corporation defaulted in the performance or
observance of such covenant) with respect to the redemption of such shares. The
Corporation need not liquidate the Special Redemption Assets; however, assets
liquidated to effect the redemption must have the same respective Discounted
Values as the Special Redemption Assets. For purposes hereof, "Special
Redemption Assets" shall mean such portfolio holdings as are identified by the
Corporation in its sole discretion, the deemed sale of which for Cash on the
applicable Valuation Date on which the requirements of paragraph 7(a)(i) through
(iii) were not met would have caused the requirements of paragraph 7(a)(i) to
have been satisfied on a pro forma basis as of such Valuation Date.
(iii) Any Mandatory Redemption will be made at a price equal to S100,000
per share plus accumulated and unpaid dividends through the date of redemption
(whether or not earned or declared by the Corporation), except that if any such
redemption is not made on a Dividend Payment date, it will be made at a price
equal to $100,250 plus accumulated and unpaid dividends through the date of
redemption (whether or not earned or declared by the Corporation). Such
redemptions may only be made by the Corporation to the extent permitted under
the Securities Exchange Act and Maryland law and provided neither principal nor
interest payments with respect to the Notes are then in default.
(c) General Provisions for Redemptions. (i) Notwithstanding the other
provisions of this paragraph 5, the Corporation may redeem shares of Preferred
Stock only to the extent permitted under the Investment Company Act, Maryland
law and the Indenture.
(ii) Notwithstanding the other provisions of this paragraph 5, no shares of
Preferred Stock may be redeemed other than as specified in the following proviso
unless all accumulated and unpaid dividends on all outstanding shares of
Preferred Stock for all past Dividend Periods shall have been or are
contemporaneously paid or declared and Deposit Securities maturing on or prior
to the date fixed for redemption are set apart for the payment of such
dividends; provided, however, that the Corporation may, without regard to such
limitations, redeem, purchase or otherwise acquire shares of Preferred Stock (A)
as a whole, pursuant to a Mandatory Redemption or an Optional Redemption or (B)
pursuant to a purchase or exchange offer made for all of the outstanding shares
of Preferred Stock to the extent permitted under the Investment Company Act,
Maryland law and the Charter.
(iii) If fewer than all the outstanding shares of Preferred Stock are to be
redeemed by Mandatory Redemption or Optional Redemption, the shares to be
redeemed shall be identified by the Board of Directors of the Corporation by lot
or by such other method as the Corporation shall deem fair and equitable.
(iv) Whenever shares of the Preferred Stock are to be redeemed, the
Corporation shall mail, within the time periods specified in paragraphs 5(a) and
5(b), a written notice of redemption by first-class mail, postage prepaid, to
each holder of shares of Preferred Stock to be redeemed (a "Notice of
Redemption"), as its name and address appear on the Stock Books, and to the
Auction Agent. The Notice of Redemption shall also be published on or about the
date thereof in The Wall Street Journal (National Edition) or, if such notice
cannot be published therein, then in a comparable newspaper printed in the
English language and of general circulation in New York City). Each Notice of
Redemption shall state (A) the redemption date, (B) the redemption price, (C)
the number of shares of Preferred Stock to be redeemed, (D) the place or places
where such shares of Preferred Shares are to be redeemed, (E) that dividends on
the shares to be redeemed will cease to accumulate on such redemption date, (F)
the provision of the Charter under which the redemption is being made and (G) if
such redemption is a Mandatory Expiration Redemption, that any holder of shares
of Preferred Stock may elect not to have its shares redeemed by giving notice
thereof to the Corporation or the Paying Agent at least five days prior to the
redemption date. No defect in the Notice of Redemption or in the mailing or
publication thereof shall affect the validity of the redemption proceedings,
except an required by applicable law.
(v) Following delivery of notice to the Paying Agent of the Corporation's
intention to redeem shares of Preferred Stock pursuant to paragraph 5(a), (A)
such shares of Preferred Stock and (B) Special Redemption Assets identified by
the Corporation with respect to such shares of Preferred Stock shall thereafter
be excluded from the calculation of Preferred Stock Basic Maintenance Amount and
Portfolio Calculation if the provisions of paragraph 7 hereof are in effect at
such time.
(vi) On each redemption date, the Securities Depository shall surrender the
certificate evidencing the shares of Preferred Stock. Each holder of shares of
Preferred Stock that were called for redemption, and who did not exercise the
Holding Election, shall then be entitled to receive payment of the redemption
price for each such share. If less than all of the shares represented by such
certificates are to be redeemed, the Corporation shall issue a new certificate
for the shares not redeemed.
(vii) Should the Corporation give a Notice of Redemption, then no later
than the Business Day next preceding the date fixed for redemption, the
Corporation shall deposit with the Paying Agent Deposit Securities constituting
immediately available funds in an amount sufficient to redeem the shares of
Preferred Stock to be redeemed. In such event the Corporation shall give the
Paying Agent irrevocable instructions and authority to pay the redemption price
to the holders of shares of Preferred Stock called for redemption, and who did
not exercise a Holding Election, upon the redemption date. The Corporation may
direct the Paying Agent with respect to the investment of any Deposit Securities
so deposited provided that the proceeds of any such investment will be available
at the opening of business on such redemption date. The Deposit Securities
deposited with the Paying Agent pursuant to the immediately preceding sentence
and the shares of Preferred Stock to be redeemed shall be excluded from the
calculation of Preferred Stock Basic Maintenance Amount and Portfolio
Calculation (if applicable at such time). Upon the date of such deposit, or if
no such deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making payment of the redemption price), all rights
of the holders of the shares of Preferred Stock so called for redemption shall
cease and terminate except the right of the holders thereof to receive the
redemption price thereof (inclusive of accumulated but unpaid dividends, but
without any interest) against delivery by book entry of such shares of Preferred
Stock, and such shares shall no longer be deemed outstanding for any purpose;
provided, however, this sentence shall not apply to holders of shares of
Preferred Stock who have exercised the Holding Election and who shall retain all
rights granted to holders pursuant to the Charter. The Corporation shall be
entitled to receive, promptly after the date fixed for redemption, any cash in
excess of the aggregate redemption price of the shares of Preferred Stock called
for redemption and for which the Holding Election was not exercised, on such
date and any remaining Deposit Securities. Any assets so deposited which are
unclaimed at the end of two years from such redemption date shall, to the extent
permitted by law, be repaid to the Corporation, after which the holders of the
shares of Preferred Stock so called for redemption, who did not exercise the
Holding Election, may look only to the Corporation for payment thereof. The
Corporation shall be entitled to receive, from time to time after the date fixed
for redemption, any interest on the Deposit Securities so deposited.
(viii) Shares of Preferred Stock that have been redeemed, purchased or
otherwise acquired by the Corporation may not be reissued, shall not be deemed
outstanding, and shall be retired and cancelled. In no event shall such shares
of Preferred Stock have any voting rights. Shares of Preferred Stock with
respect to which a Notice of Redemption has been given as provided in paragraph
5(c)(iv) and whose holders have not elected to retain their shares pursuant to
the last sentence of Paragraph 5(b)(i) (if applicable) shall not be deemed
outstanding for purposes of the Auction Procedures set forth in paragraph 8
hereof.
(ix) In addition to redemption rights expressly established under the
Charter, the Corporation may redeem or repurchase shares of Common Stock to the
extent now or hereafter permitted by the laws of the State of Maryland, by the
Investment Company Act and by the Charter,
(x) If the Corporation shall not have funds legally available for the
redemption of all the shares of the Preferred Stock to be redeemed on any
redemption date (or is otherwise legally unable to effect such redemption), the
corporation shall redeem on such redemption date the number of shares of
Preferred Stock as it shall have legally available funds to redeem, ratably from
each holder of shares of Preferred Stock whose shares are to be redeemed and the
remainder of the shares of the Preferred Stock required to be redeemed shall be
redeemed on the earliest practicable date on which the Corporation shall first
have funds legally available for the redemption of such shares pursuant to a
Notice of Redemption given to the holders of such shares of Preferred Stock at
least 15 but not more than 30 days (or such longer notice period as is required
by applicable law) prior the redemption date.
(xi) If on any date on which the payment of the redemption price would
constitute a Scheduled Payment and the Surety Bond is in effect, the Corporation
defaults in making payment of such redemption price and the Surety makes such
Scheduled Payments to holders of shares of Preferred Stock called for
redemption, the Surety, thereafter, shall be subrogated to all the rights of
such holders with respect to their shares of Preferred Stock.
6. Voting Rights
(a) General. Each holder of shares of Preferred Stock shall be entitled to
one vote per S1000 of liquidation preference of each share of Preferred Stock
without regard to any liquidation preference related to accumulated and unpaid
dividends (i.e., 100 votes per share); provided that all the votes represented
by a single share of Preferred Stock must be voted together, on each matter
submitted to a vote of stockholders of the Corporation and, except as otherwise
provided in the Charter or by Maryland law, the holders of Preferred Stock and
the holders of Common Stock of the Corporation shall vote together as one class
on all matters submitted to the stockholders; provided, however, that at any
meeting of the stockholders of the Corporation held for the election of
directors, the holders of Preferred Stock shall be entitled as a class, to the
exclusion of the holders of the Common Stock, to elect two directors of the
Corporation; provided, further, that the identity of the two directors
representing the holders of Preferred Stock on and after the Restatement Date
until the first meeting of the Corporation's stockholders following the
Restatement Date may be designated by the Board of Directors. Subject to
paragraph 6(b) hereof, the holders of the shares of Common Stock and Preferred
Stock shall vote as a single class for the election of the balance of the
directors.
(b) Right to Elect Majority of Board of Directors. (i) During any period
commencing with the Corporation's failure to pay dividends on shares of the
Preferred Stock in an amount equal to two full years of dividends (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the number of directors then constituting
the Board of Directors, shall (together with the two directors elected by the
holders pursuant to paragraph 6(a)) constitute a majority of the total number of
the directors of the Corporation as increased, and the holders of shares of
Preferred Stock shall be entitled, voting as a single class on a
100-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), to elect the
smallest number of additional directors of the Corporation that shall constitute
a majority of the total number of directors of the Corporation so increased.
(ii) The Voting Period and the voting rights so created upon the occurrence
of the conditions set forth in this paragraph 6(b) shall continue unless and
until all accumulated and unpaid dividends on the then outstanding shares of
Preferred Stock including the accumulated and unpaid dividends as of the last
preceding Dividend Payment Date shall have been paid or declared and sufficient
funds set apart for the payment of such dividends. Upon the termination of a
Voting Period, the voting rights described in paragraph 6(b)(i) shall cease,
subject always, however, to the revesting of such voting rights in the holders
of shares of Preferred Stock upon the further occurrence of the event described
in such paragraph 6(b)(i).
(c) Voting Procedures. (i) As soon as practicable after the accrual of any
right of the holders of shares of Preferred Stock to elect directors pursuant to
paragraph 6(b)(i), the Corporation shall notify the Auction Agent and the
Auction Agent shall call a special meeting of the holders of shares of Preferred
Stock by mailing a notice of such special meeting to the holders of shares of
Preferred Stock not less than 10 nor more than 20 days after the date of mailing
of such notice. If the Corporation fails to send such notice to the Auction
Agent or if the Auction Agent does not call such a special meeting (as provided
above), it may be called by any holder of shares of Preferred Stock on like
notice. The record date for determining the holders of shares of Preferred Stock
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting at which directors are
elected held during a Voting Period, the holders of shares of Preferred Stock,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be entitled
to elect the number of directors prescribed in paragraph 6(b)(i) above on a
100-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of shares of Preferred Stock
present in person or by proxy shall have the power to adjourn the meeting
without notice, other than an announcement at the meeting, until a quorum is
present.
(ii) For purposes of determining any rights of the holders of shares of
Preferred Stock to vote on any matter, whether such right is created by the
Charter, by statute or otherwise, no holder of shares of Preferred Stock shall
be entitled to vote and no share of Preferred Stock shall be deemed to be
"outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum, if prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding for quorum
purposes, as the case may be, sufficient funds for the redemption of such shares
have been deposited in trust with the Paying Agent for that purpose, the
requisite Notice of Redemption with respect to such shares shall have been given
as provided in paragraph 5(c)(iv) and such holder shall not have exercised the
Holding Election.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of holders of shares of Preferred
Stock to elect directors pursuant to paragraph 6(b) shall continue,
notwithstanding the election at such meeting by the holders of shares of
Preferred Stock of the number of directors that they are entitled to elect, and
the persons so elected by the holders of shares of Preferred Stock, together
with the incumbent directors, shall constitute the duly elected directors of the
Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms of
office of the directors elected by the holders of shares of Preferred Stock
pursuant to paragraph 6(b)(i) shall terminate, the persons who shall have been
serving as directors immediately prior to such voting period and who are
incumbent shall constitute the directors of the Corporation and the voting
rights of the holders of shares of Preferred Stock to elect directors pursuant
to paragraph 6(b)(i) shall cease.
(v) The directors elected by the holders of shares of Preferred Stock
pursuant to paragraphs 6(a) and 6(b)(i) shall (subject to the provisions of any
applicable law) be subject to removal only by the vote of the holders of a
majority of outstanding shares of the Preferred Stock. Any vacancy on the Board
of Directors occurring by reason of such removal or otherwise (in the case of
directors subject to election by the holders of Preferred Stock) may be filled
only by vote of the holders of Preferred Stock outstanding or (subject to the
provisions of any applicable law) by a majority of the remaining directors (or
the remaining director) who were elected by the holders of shares of Preferred
Stock. Any other vacancy on the Board of Directors during a Voting Period shall,
to the extent permitted by applicable law, be filled by a vote of the remaining
directors or the holder or holders of the Corporation's outstanding Common Stock
and Preferred Stock, voting as a single class.
(d) Surety Voting. At any time that the Preferred Stock is held by the
Surety Custodian pursuant to paragraph 2A hereof and the Surety Custody
Agreement, voting rights with respect to shares of Preferred Stock will be
exercised by the Surety Custodian in accordance with instructions given by the
beneficial holders of the shares of Preferred Stock; provided, however, that at
any time that the Surety Custodian has made a claim for payment under, and the
Surety has made Scheduled Payments pursuant to, the Surety Bond, the Surety
Custodian will vote the Preferred Shares with respect to which such Scheduled
Payments have been made under the Surety Bond in accordance with instructions
given by the Surety. The right of the Surety to instruct the Surety Custodian
with respect to voting such shares of Preferred Stock shall terminate when the
Corporation has made payments on the shares of Preferred Stock with respect to
which the Scheduled Payments were made by the Surety or the Corporation has
reimbursed the Surety for such Scheduled Payments and shall be reinstated if the
Surety makes additional Scheduled Payments pursuant to the Surety Bond.
(e) Exclusive Remedy. Unless otherwise required by law, the holders of
shares of Preferred Stock shall not have any relative rights or preferences or
other special rights other than those specifically set forth herein. In the
event that the Corporation fails to pay any dividends on the shares of Preferred
Stock, the exclusive remedy of the holders of shares of Preferred Stock shall be
the right to vote for directors pursuant to the provisions of this paragraph 6.
In no event shall the holders of shares of Preferred Stock have any right to sue
for, or bring a proceeding with respect to, such dividends or damages for the
failure to receive the same.
7. Asset and Liability Coverage
(a) Preferred Stock Basic Maintenance Amount Required Under Certain
Circumstances. (i) At any such time as the Surety Bond is not in effect and any
of the shares of Preferred Stock are outstanding, the Corporation will maintain,
on each Valuation Date, Eligible Portfolio Property having an aggregate
Discounted Value at least equal to the Preferred Stock Basic Maintenance Amount,
each as of such Valuation Date.
(ii) To the extent that this paragraph 7(a) is applicable at any such time,
on or before 5:00 P.M., Boston time, on the third Business Day after each
Valuation Date, the Corporation shall complete and deliver to the Auction Agent
a Portfolio Valuation Report, which will be deemed to have been delivered to the
Auction Agent (A) if the Auction Agent receives a copy or telecopy, telex or
other electronic transcription thereof, or (B) if the Auction Agent receives a
telecopy, telex or other electronic transcription setting forth at least the
applicable Discounted Value of the aggregate of all Eligible Portfolio Property
(the "Portfolio Calculation") and the Preferred Stock Basic Maintenance Amount
each as of the relevant Valuation Date and on the same day the Corporation mails
to the Auction Agent for delivery on the next Business Day the full Portfolio
Valuation Report. A failure by the Corporation to deliver a Portfolio Valuation
Report under this paragraph 7(a)(ii) shall be deemed to be delivery of a
Portfolio Valuation Report indicating a value for all Eligible Portfolio
Property of less than the Preferred Stock Basic Maintenance Amount, as of the
relevant Valuation Date.
(iii) To the extent that this paragraph 7(a) is applicable at any such
time, within three Business Days after the date of delivery to the Auction
Agent of a Portfolio Valuation Report in accordance with paragraph 7(a)(ii)
above relating to a Quarterly Valuation Date, the Corporation shall deliver to
the Auction Agent a letter reviewing the Portfolio Calculation, prepared by the
Corporation's Independent Accountants, relating to such Portfolio Valuation
Report substantially to the effect that (A) the Independent Accountants have
read the Portfolio Valuation Report for the current Quarterly Valuation Date
(the "Report"); (3) with respect to the issue size compliance, issuer
diversification and industry diversification calculations, such calculations and
the resulting eligible portfolio market value are numerically correct; (C) with
respect to the Preferred Stock Basic Maintenance Amount, the results of the
calculation set forth in the Report have been recalculated and are numerically
correct; (D) with respect to the excess or deficiency of the Discounted Value
amount when compared to the Preferred Stock Basic Maintenance Amount, the
results of the calculation set forth in the Report have been recalculated and
are numerically correct; (E) with respect to the Rating Agencies, ratings on
Corporate Debt Obligations, issuer name, issue size and coupon rate listed in
the Report, that information has been traced and agrees with the information
listed in The Standard & Poor's Bond Guide (in the event such information does
not agree or such information is not listed in The Standard & Poor's Bond Guide,
the Independent Accountants will inquire of the Rating Agencies what such
information is, and provide a listing in their letter of such differences, if
any); and (F) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value) provided by the
custodian of the Corporation's assets to the Corporation for purposes of valuing
securities in the portfolio, the Independent Accountants have traced the price
used in the Report to the lower of the two bid prices listed in the report
provided by such custodian and verified that such information agrees (in the
event such information does not agree, the Independent Accountants will provide
a listing in their letter of such differences). If any letter reviewing the
Portfolio Calculation delivered pursuant to this paragraph shows that an error
was made in the Portfolio Valuation Report for such Quarterly Valuation Date, or
shows that a lower aggregate Discounted Value for the aggregate of all Eligible
Portfolio Property was determined by the Independent Accountants, the
calculation or determination made by such Independent Accountants shall be final
and conclusive and shall be binding on the Corporation, and the Corporation
shall promptly amend the Portfolio Valuation Report and deliver the amended
Portfolio Valuation Report to the Auction Agent.
(iv) To the extent that this paragraph 7(a) is applicable at any such time,
the Corporation shall deliver an Officers' Certificate to the Auction Agent as
of the fifteenth of each month (and if such day is not a Business Day, then the
next succeeding Business Day) and the last Business Day of each month
certifying, to the best knowledge of the Officers signing such Officers'
Certificate, the Portfolio Calculation as of such Business Day and the Preferred
Stock Basic Maintenance Amount as of such Business Day.
(b) Liquidity Coverage. (i) At any such time as the Surety Bond is not in
effect and any shares of Preferred Stock are outstanding, the Corporation shall
determine as of each Valuation Date (A) the Market Value of the Interest and
Dividend Coverage Assets owned by the Corporation as of that Valuation Date, (B)
the Interest and Dividend Coverage Amount on that Valuation Date, and (C)
whether the Minimum Liquidity Level is met as of that Valuation Date. The
calculations of the Interest and Dividend Coverage Assets, the Interest and
Dividend Coverage Amount and whether the Minimum Liquidity Level is met shall be
set forth in a certificate (a "Certificate of Minimum Liquidity") dated as of
the Valuation Date. The Portfolio Valuation Report and the Certificate of
Minimum Liquidity may be combined in one certificate. To the extent that this
paragraph 7(b) shall be applicable at any such time, the Corporation shall cause
the Certificate of Minimum Liquidity to be delivered to the Auction Agent not
later than the close of business on the third Business Day after the Valuation
Date. The Minimum Liquidity Level shall be deemed to be met as of any date of
determination if the Corporation has timely delivered a Certificate of Minimum
Liquidity relating to such date, which states that the same has been met and
which is not manifestly inaccurate. In the event that a Certificate of Minimum
Liquidity is not delivered to the Auction Agent when required pursuant to this
paragraph 7(b), the Minimum Liquidity Level shall be deemed not to have been met
as of the applicable date.
(ii) To the extent that this paragraph 7(b) shall be applicable at any such
time, if the Minimum Liquidity Level is not met as of any Valuation Date, then
the Corporation shall purchase or otherwise acquire Interest and Dividend
Coverage Assets (with the proceeds from the Liquidation of Eligible Portfolio
Property or otherwise) to the extent necessary so that the Minimum Liquidity
Level is met as of the fifth Business Day following such Valuation Date. The
Corporation shall, by such fifth Business Day, provide to the Auction Agent a
Certificate of Minimum Liquidity setting forth the calculations of the Interest
and Dividend Coverage Assets and the Interest and Dividend Coverage Amount and
showing that the Minimum Liquidity Level is met as of such fifth Business Day
together with a report of the custodian of the Corporation's assets confirming
the amount of the Corporation's Interest and Dividend Coverage Assets as of such
fifth Business Day.
8. Auction Procedures
(a) Certain Definitions. Capitalized terms not defined in this paragraph
8(a) shall have the respective meanings specified in paragraph 2. As used in
this paragraph 8, the following terms shall have the following meanings, unless
the context otherwise requires:
(i) "Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Corporation.
(ii) "Agent Members" shall mean the member of the Securities Depository
that will act on behalf of a Bidder and is identified as such in such Bidder's
Purchaser's Letter.
(iii) "Auction" shall mean the periodic operation of the procedures set
forth in this paragraph 8.
(iv) "Auction Date" shall mean the first Business Day preceding the first
day of the next Dividend Period.
(v) "Available Preferred Stock" shall have the meaning specified in
paragraph 8(d)(i)(A) below.
(vi) "Bid" and "Bids" shall have the respective meanings specified in
paragraph 8(b)(i) below.
(vii) "Bidder" and "Bidders" shall have the respective meanings specified
in paragraph 8(b)(i) below.
(viii) "Broker-Dealer" shall mean Drexel Burnham Lambert Incorporated and
any other broker-dealer, or other entity permitted by law to perform the
functions required of a Broker-Dealer in this paragraph 8, that has been
selected by the Corporation and has entered into a Broker-Dealer Agreement with
the Auction Agent that remains effective.
(ix) "Broker-Dealer Agreements" shall mean agreements between the Auction
Agent and Drexel Burnham Lambert Incorporated and similar agreements with one or
more other Broker-Dealers pursuant to which such Broker-Dealer agrees to follow
the procedures specified in this paragraph 8.
(x) "Commercial Paper Dealers" means Drexel Burnham Lambert Incorporated
and any of its Affiliates or any of their respective successors.
(xi) "Existing Holder," when used with respect to shares of Preferred
Stock, shall mean a Person who has signed a Master Purchaser's Letter and is
listed as the beneficial owner of such shares of Preferred Stock in the records
of the Auction Agent.
(xii) "Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xiii) "Master Purchaser's Letter" shall mean a letter addressed to the
Corporation, the Auction Agent and a Broker-Dealer in which a Person agrees,
among other things, to offer to purchase, purchase, offer to sell and/or sell
auction rate securities as set forth in this paragraph 8.
(xiv) "Maximum Applicable Rate" and "Minimum Applicable Rate" on any
Auction Date shall be 175% and 90%, respectively, of the 30-day "AA" Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding the Auction Date.
(xv) "Potential Holder" shall mean any Person, including any Existing
Holder, (A) who shall have executed a Purchaser's Letter and (B) who may be
interested in acquiring shares of Preferred Stock (or, in the case of an
Existing Holder, additional shares of Preferred Stock).
(xvi) "Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xvii) "Submission Deadline" shall mean 12:30 P.M., New York City time, on
any Auction Date or such other time on any Auction Date (as specified by the
Auction Agent from time to time) by which Broker-Dealers are required to submit
Orders to the Auction Agent.
(xviii) "Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xix) "Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragaph 8(d)(i) below.
(xx) "Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xxi) "Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 8(d)(i) below,
(xxii) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph 8(d)(i) below.
(xxiii) "30-day AA Composite Commercial Paper Rate" on any date, means (i)
the interest equivalent of the 30-day rate on commercial paper on behalf of
issuers whose corporate bonds are rated "AA" by S&P, or the equivalent of such
rating by another nationally recognized rating agency, as announced by the
Federal Reserve Bank of New York for the close of business on the Business Day
immediately preceding such date; or (ii) if the Federal Reserve Bank of New York
does not make available such a rate, then the arithmetic average of the interest
equivalent of the 30-day 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 30-day
"AA" Composite Commercial Paper Rate, such rate shall be determined on the basis
of the quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers,
the Auction Agent will retain a dealer to provide such quotations.
(xxiv) "Winning Bid Rate" shall have the meaning specified in paragraph
8(d)(i) below.
(b) Orders by Existing Holders and Potential Holders. (i) On or prior to
the Submission Deadline on each Auction Date:
(A) each Existing Holder, with respect to shares of Preferred Stock it
then holds, may submit to a Broker-Dealer by telephone or otherwise
information as to:
(1) the number of shares, if any, of Preferred Stock held by such
Existing Holder which such existing Holder desires to continue to hold
without regard to the Applicable Rate for the next Dividend Period;
(2) the number of shares, if any, of Preferred Stock which such
Existing Holder desires to continue to hold if the Applicable Rate for
the next Dividend Period shall not be less than the rate per annum
then specified by such Existing Holder;
(3) the number of shares, if any, of Preferred Stock 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
(B) Each Broker-Dealer, using a list of Potential Holders that shall
be maintained by such Broker-Dealer in good faith for the purposes of
conducting a competitive Auction, shall contact Potential Holders on such
lists to determine the number of shares, if any, of Preferred Stock which
such Potential Holders offer to purchase if the Applicable Rate for the
next succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of
information referred to in this paragraph 8(b) is hereinafter referred to as an
"Order" and collectively as "Orders" and each Existing Holder and each Potential
Holder placing an Order is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (A)(l) of this paragraph 8(b) is hereinafter referred to as a "Hold
Order" and collectively as "Hold Orders"; an Order containing the information
referred to in Clause (A)(2) or (B) of this paragraph 8(b) is hereinafter
referred to as "Bid" and collectively as "Bids"; and an Order containing the
information referred to in clause (A)(3) of this paragraph 8(b) is hereinafter
referred to as a "Sell Order" and collectively as "Sell Orders."
(ii) As a condition to participating in any Auction, each prospective
purchaser of shares of Preferred Stock shall be required to sign and deliver two
copies to the Auction Agent, and one copy to a Broker-Dealer, of a Master
Purchaser's Letter, in which such prospective purchaser will agree, among other
things, that:
(A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of shares of Preferred Stock specified in such Bid
if the Applicable Rate determined on such Auction Date shall be less
than the rate specified therein;
(2) such specified number or a lesser number of shares of
Preferred Stock to be determined as set forth in clause (D) of
paragraph 8(e)(i) if the Applicable Rate determined on such Auction
Date shall be equal to the rate specified therein; or
(3) such specified number or a lesser number of shares of
Preferred Stock to be determined as set forth in clause (C) of
paragraph 8(e)(ii) if the rate specified therein shall be higher than
the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of shares of Preferred Stock specified in such
Sell Order; or
(2) such specified number or a lesser number of shares of
Preferred Stock as set forth in clause (C) of paragraph 8(e)(ii) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of shares of Preferred Stock specified in such Bid
if the Applicable Rate determined on such Auction Date shall be higher
than the rate therein; or
(2) such specified number or a lesser number of shares of
Preferred Stock as set forth in clause (E) of paragraph 8(e)(i) of the
Applicable Rate determined on such Auction Date shall be equal to the
rate specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent. (i) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer for the Auction to be conducted on such Auction Date and shall
specify with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of shares of Preferred Stock that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder the number of
shares, if any, of Preferred Stock subject to any:
(1) Hold Order placed by such Existing Holder;
(2) Bid placed by such Existing Holder and the rate specified in
such Bid; and
(3) Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder the rate specified
in such Potential Holder's Bid.
(ii) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001 of 1%).
(iii) If an Order or Orders covering all of the shares of Preferred Stock
held by an Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted on behalf of such Existing Holder covering the number of shares of
Preferred Stock held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(iv) If one or more Orders covering in the aggregate more than the number
of shares of Preferred Stock held by an Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid as follows and in the
following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of outstanding shares of
Preferred Stock held by such Existing Holder; provided that if more than
one Hold Order is submitted on behalf of such Existing Holder and the
number of shares of Preferred Stock subject to such Hold Orders exceeds the
number of shares of Preferred Stock held by such Existing Holder, the
number of shares of Preferred Stock subject to each such Hold Order shall
be reduced pro rata so that such Hold Order shall cover the number of
shares of Preferred Stock held by such Existing Holder;
(B) (1) any Bid shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the number of shares of Preferred Stock subject to any Hold
Orders referred to in clause (iv)(A) of paragraph 8(c);
(2) subject to subclause (1), if more than one Bid with the same
rate is submitted on behalf of such Existing Holder and the number of
shares of Preferred Stock subject to such Bids is greater than the
excess described in subclause (1), the number of shares of Preferred
Stock subject to such Bids shall be reduced pro rata so that such Bids
shall cover the number of shares of Preferred Stock equal to such
excess;
(3) subject to subclause (1), if more than one Bid with
different rates is submitted on behalf of such Existing Holder, such
Bids shall be considered valid in the ascending order of their
respective rates; and
(4) the number, if any, of such shares of Preferred Stock subject
to Bids not valid under this clause (B) shall be treated as the
subject of a Bid by a Potential Holder at the rate therein specified;
and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the sum of the shares of Preferred Stock subject to valid Hold
Orders referred to in clause (iv)(A) of paragraph 8(c) and valid Bids by
such Existing Holder referred to in clause (iv)(B) of paragraph 8(c),
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of Preferred Stock subject to such
Sell Orders is greater than such excess, the number of shares of Preferred
Stock subject to such Sell Orders shall be reduced Pro rata so that such
Sell Orders shall cover the number of shares of Preferred Stock equal to
such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate and number of shares of
Preferred Stock therein specified.
(vi) If any rate specified in any Bid is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Bid is made, such Bid
shall be deemed to be a Bid specifying a rate equal to such Minimum Applicable
Rate.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. (i) Not earlier than the Submission Deadline, 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 as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
shall determine:
(A) the excess of the total number of shares of Preferred Stock over
the number of shares of Preferred Stock that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
Preferred Stocks");
(B) from the Submitted Orders whether the number of shares of
Preferred Stock that are subject of Submitted Bids by Potential Holders
specifying one or more rates equal to or lower than the Maximum Applicable
Rate exceeds or is equal to the sum of:
(1) the number of shares of Preferred Stock that are the subject
of Submitted Bids by Existing Holders specifying one or more rates
higher than the Maximum Rate; and
(2) the number of shares of Preferred Stock that are subject to
Submitted Sell Orders;
in the event of such excess or such equality (other than because all
of the shares of Preferred Stock are the subject of Submitted Hold Orders),
such Submitted Bids are hereinafter referred to collectively as "Sufficient
Clearing Bids"; and
(C) if Sufficient Clearing Bids exist, the lowest rate specified in
the Submitted Bids (the "Winning Bid Rate") which if:
(1) each Submitted Bid from Existing Holders specifying such
lowest rate and all other Submitted Bids from Existing Holders
specifying lower rates were accepted, thus entitling such Existing
Holders to continue to hold the shares of Preferred Stock that are the
subject of such Submitted Bids; and
(2) each Submitted Bid from Potential Holders specifying such
lowest rate and all other Submitted Bids from Potential Holders
specifying lower rates were accepted, thus entitling those Potential
Holders to purchase the shares of Preferred Stock that are the subject
of such Submitted Bids, would result in such Existing Holders
described in subclause (1) above continuing to hold an aggregate
number of shares of Preferred Stock which, when added to the number of
shares of Preferred Stock to be purchased by such Potential Holders
described in subclause (2) above, would equal not less than the
Available Preferred Stock.
(ii) Promptly after the Auction Agent has made the determination pursuant
to paragraph 8(d)(i) the Auction Agent shall advise the Corporation of the
Maximum Applicable Rate and the Minimum Applicable Rate and, based on all such
determinations, the Applicable Rate for the next succeeding Dividend Period as
follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the outstanding shares of Preferred Stock 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; or
(C) if all the shares of Preferred Stock are the subject of Submitted
Hold Orders, that the Applicable Rate for Preferred Stock for the next
succeeding Dividend Period shall be equal to the Minimum Applicable Rate.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocations of Shares. Existing Holders shall continue to hold the shares of
Preferred Stock that are the subject of Submitted Hold Orders, and, based on the
determination made pursuant to paragraph 8(d)(i), the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall
take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 8(e)(iii), Submitted Bids and Submitted Sell Orders shall be
accepted or rejected in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each Existing Holder specifying any rate that is
higher than the Winning Bid Rate shall be rejected, thus requiring each
such Existing Holder to sell the shares of Preferred Stock that are the
subject of such Submitted Sell Orders or Submitted Bids;
(B) the Submitted Bid of each Existing Holder specifying any rate that
is lower than the Winning Bid Rate shall be accepted thus entitling each
such Exisiting Holder to continue to hold the shares of Preferred Stock
that are the subject of such Submitted Bid;
(C) the Submitted Bid of each Potential Holder specifying any rate
that is lower than the Winning Bid Rate shall be accepted and such
Potential Holder shall purchase the number of shares of Preferred Stock
subject to such Submitted Bid;
(D) the Submitted Bid of each Existing Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, thus entitling such
Existing Holder to continue to hold the shares of Preferred Stock that are
subject of such Submitted Bid, unless the number of shares of Preferred
Stock subject to all such Submitted Bids shall be greater than the number
of shares of Preferred Stock equal to the excess of the Available Preferred
Stock over the number of shares of Preferred Stock subject to Submitted
Bids described in clauses (B) and (C) of this paragraph 8(e)(i) (the
"Remaining Shares"). In such event such Existing Holder shall be required
to sell shares of Preferred Stock subject to such Submitted Bid, but only
in an amount equal to the difference between (x) the number of shares of
Preferred Stock then held by such Existing Holder subject to such Submitted
Bid and (y) the number of shares of Preferred Stock obtained by multiplying
the number of Remaining Shares by a fraction the numerator of which shall
be the number of shares of Preferred Stock held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the sum
of the number of shares of Preferred Stock subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each Potential Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, but only in an amount
equal to the number of shares of Preferred Stock obtained by multiplying
the difference between the Available Preferred Stock and the number of
shares of Preferred Stock subject to Submitted Bids described in clauses
(B), (C) and (D) of this paragraph 8(e)(i) by a fraction the numerator of
which shall be the number of shares of Preferred Stock subject to such
Submitted Bid and the denominator of which shall be the sum of the number
of shares of Preferred Stock subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of Preferred Stock are the subject of Submitted Hold
Orders), subject to the provisions of paragraph 8(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate that
is equal to or lower than the Maximum Rate shall be accepted, thus
entitling such Existing Holders to continue to hold the shares of Preferred
Stock that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
accepted and such Potential Holder shall purchase the number of shares of
Preferred Stock subject to such Submitted Bid; and
(C) the Submitted Bid of each Existing Holder specifying any rate that
is higher than the Maximum Applicable Rate shall be rejected, thus
requiring each such Existing Holder to sell the shares of Preferred Stock
that are the subject of such Submitted Bid, and the Submitted Sell Order of
each Existing Holder shall be accepted, in both cases only in an amount
equal to the difference between (x) the number of shares of Preferred Stock
then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (y) the number of shares of Preferred Stock
obtained by multiplying the difference between the Available Preferred
Stock and the aggregate number of shares of Preferred Stock subject to
Submitted Bids described in clauses (A) and (B) of this paragraph 8(e)(ii)
by a fraction the numerator of which shall be the number of shares of
Preferred Stock held by such Existing Holder subject to such Submitted Bid
or Submitted Sell Order and the denominator of which shall be the aggregate
number of shares of Preferred Stock subject to all such Submitted Bids and
Submitted Sell orders.
(iii) If, as a result of the procedures described in paragraphs 8(e)(i) or
8(e)(ii), 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 Preferred Stock on any Auction Date, the Auction Agent shall, in such
manner as it shall determine, round up or down the number of shares of Preferred
Stock to be purchased or sold by any Existing Holder or Potential Holder on such
Auction Date so that the number of shares purchased or sold by each Existing
Holder or Potential Holder on such Auction Date shall be whole shares of
Preferred Stock, even if such allocation results in one or more of such
Potential Holders not purchasing shares of Preferred Stock on such Auction Date
or any Existing Holder not selling shares of Preferred Stock on such Auction
Date.
(iv) Based on the results of each Auction, the Auction Agent shall
determine the aggregate number of shares of Preferred Stock to be purchased and
the aggregate number of shares of Preferred Stock to be sold by Potential
Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids
or Sell Orders and, with respect to each Broker-Dealer, to the extent that such
aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other 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 Preferred Stock.
(f) Participation in Auctions. Neither the Corporation nor any Affiliate of
the Corporation may submit an Order in any Auction.
(g) Miscellaneous. (i) The Board of Directors of the Corporation may
interpret the provisions of this paragraph 8 to resolve any inconsistency or
ambiguity, remedy any formal defect or make any other change or modification
which does not adversely affect the rights of Existing Holders of Preferred
Stock. If such inconsistency, ambiguity or defect reflects an inaccurate
provision hereof, the Board of Directors may, in appropriate circumstances as
permitted by law, authorize the filing of a Certificate of Correction.
(ii) (A) An Existing Holder may sell, transfer or otherwise dispose of
shares of Preferred Stock only (1) pursuant to a Bid or a Sell Order placed
in an Auction in accordance with the procedures set forth in this paragraph
8, (2) to or through a Broker-Dealer or (3) to a Person that has delivered
a signed Master Purchaser's Letter to the Auction Agent, provided that as a
condition to such transfer (in the case of all transfers other than those
pursuant to Auctions), such Existing Holder, the transferee or the
transferee's Broker-Dealer or Agent Member of the Securities Depository
shall advise the Auction Agent of such transfer; and
(B) Except as otherwise provided by law, all of the outstanding
shares of Preferred Stock shall be represented by a separate
certificate or certificates registered in the name of the nominee of
the Securities Depository, and no Person acquiring shares of Preferred
Stock shall be entitled to receive a certificate representing such
shares.
(iii) The Corporation shall exercise its best efforts to maintain an
Auction Agent pursuant to an agreement containing terms not materially less
favorable to the Corporation than the terms of the Auction Agent Agreement
first entered into by the Corporation pursuant to the resolutions adopted
by the Board of Directors of the Corporation on November 11, 1988.
(h) Headings of Subdivisions. The headings of the various subdivisions of
this paragraph 8 are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
ARTICLE V
BOARD OF DIRECTORS
(A) All corporate powers and authority of the Corporation (except as
otherwise provided by statute, by the Charter or by the Corporation's By-laws)
shall be vested in and exercised by the Board of Directors. Except as may be
required to give effect to paragraph 6(b) of Article IV(C), the number of
directors constituting the Board of Directors shall be no less than three (3)
nor more than fifteen (15), with the exact number to be fixed pursuant to the
By-laws provided that the number of directors shall at no time be less than the
minimum number required under the Maryland General Corporation Law or, as long
as any shares of Preferred Stock are outstanding, the Investment Company Act.
The current number of directors is six (6) and the persons who are currently
acting as directors are Richard E. Omohundro, Jr., John A. Frabotta, C. William
Carey, Joseph G. Cote, Nathan V. Meyohas and Harlan D. Platt.
At any time when the Holders of Preferred Stock of the Corporation become
entitled to elect additional directors pursuant to paragraph 6(b) of Article
IV(C), the exact number of directors fixed by the By-laws of the Corporation or
otherwise shall automatically be increased by the number of such additional
directors and the maximum number of directors of the Corporation specified by
the Charter shall be increased accordingly, if required; and at such time as the
holders of Preferred Stock shall no longer be entitled to elect directors
pursuant to paragraph 6(b) of Article IV(C), such exact number shall
automatically be decreased by the number by which they were increased by reason
of this provision.
(B) In furtherance, and not in limitation, of the powers conferred by the
laws of the State of Maryland, but subject to the other provisions of the
Charter, the Board of Directors is expressly authorized:
1. To make, alter or repeal the By-laws of the Corporation, except
where such power is reserved by the By-laws to the stockholders, and except
as otherwise required by the Investment Company Act.
2. From time to time to determine whether and to what extent and at
what times and places and under what conditions and regulations the books
and accounts of the corporation, or any of them other than the stock
ledger, shall be open to the inspection of the stockholders. No stockholder
shall have any right to inspect any account or book or documents of the
Corporation, except as conferred by law or authorized by resolution of the
Board of Directors or of the stockholders.
3. Without the assent or vote of the stockholders, to authorize the
issuance from time to time of shares of the stock of any class of the
Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or
classes, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable.
4. Without the assent or vote of the stockholders, to authorize and
issue obligations of the Corporation, secured and unsecured, as the Board
of Directors may determine, and to authorize and cause to be executed
mortgages and liens upon the real or personal property of the Corporation.
5. To establish the basis or method for determining the value of the
assets belonging to any class, the value of the liabilities belonging to
any class and the net asset value of each share of any class of the
Corporation's stock.
6. To determine in accordance with generally accepted accounting
principles and practices what constitutes net profits, earnings, surplus or
net assets in excess of capital, and to determine what accounting periods
shall be used by the Corporation for any purpose to the extent consistent
with the By-laws of the Corporation; to set apart out of any funds of the
Corporation reserves for such purposes as it shall determine and to abolish
the same; to declare and pay any dividends and distributions in cash,
securities or other property from surplus or any funds legally available
therefor, at such intervals as it shall determine and by means of a formula
or other method of determination; and to establish payment dates for
dividends or any other distributions on any basis.
7. In addition to the powers and authorities granted herein and by
statute expressly conferred upon it, the Board of Directors is authorized
to exercise all powers and do all acts that may be exercised or done by the
Corporation pursuant to the provisions of the laws of the State of
Maryland, the Charter and the By-laws of the Corporation.
(C) Any determination made in good faith, and in accordance with the
Charter and generally accepted accounting practices, if applicable, by or
pursuant to the direction of the Board of Directors, with respect to the amount
of assets, obligations or liability of the Corporation, as to the amount of net
income of the Corporation from dividends and interest for any period or amounts
at any time legally available for the payment of dividends, as to the amount of
any reserves or charges set up and the propriety thereof, as to the time of or
purpose of creating reserves or as to the use, alteration or cancellation of any
reserves or charges (whether or not any obligations or liability for which the
reserves or charges have been created has been paid or discharged or is then or
thereafter required to be paid or discharged), as to the value of any security
owned by the Corporation, the determination of the net asset value of shares of
any class of the Corporation's capital stock, or as to any other matters
relating to the issuance, sale, redemption or other acquisition or disposition
of securities or shares of capital stock of the Corporation, shall be final and
conclusive, and shall be binding upon the Corporation and all holders of its
capital stock, past, present and future, and shares of the capital stock of the
Corporation are issued and sold on the condition and understanding, evidenced by
the purchase of shares of capital stock or acceptance of share certificates,
that any and all such determinations shall be binding as aforesaid, No provision
of the Charter shall be effective to require a waiver of compliance with any
provisions of the Securities Exchange Act of 1933, as amended, or the Investment
Company Act, or of any valid rule or regulation of the Securities and Exchange
Commission under those Acts.
(D) The Corporation shall indemnify (1) its directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (2) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
By-Laws and be permitted by law; provided, however, that nothing herein shall be
construed to provide indemnification to any director or officer of the
Corporation against any liability to which such director or officer would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. The foregoing rights of indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be entitled. The Board
of Directors may take such action as is necessary to carry out these indemnifi-
cation provisions and is expressly empowered to adopt, approve and amend from
time to time such By-laws, resolutions or contracts implementing such provisions
or such further indemnification arrangements as may be Permitted by law. No
amendment of the Charter shall limit or eliminate the right to indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
(E) To the fullest extent permitted by Maryland statutory and decisional
law and the Investment Company Act, as amended or interpreted, no director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for money damages; provided, however, that nothing herein shall be
construed to protect any director or officer of the Corporation against any
liability to which such director or officer would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office. No amendment, modification or
repeal of this Article (V), Section (E) shall adversely affect any right or
protection of a director or officer that exists at the time of such amendment,
modification or repeal,
ARTICLE VI
AMENDMENTS; CLASS VOTING
(A) The Corporation reserves the right from time to time to amend, alter,
change or repeal any provision contained in the Charter, now or hereafter
authorized by law, including any amendment that alters the contract rights, as
expressly set forth in the Charter, of any outstanding stock.
(B) In addition to any other vote required by the Charter or applicable
law, as long as any shares of Preferred Stock are outstanding (i) the
Corporation may not be voluntarily liquidated, dissolved or wound up, or merged
into or consolidated with any other entity in a transaction pursuant to which it
is not the successor entity, or converted to open-end status, and may not sell
all or substantially all of its assets and may not engage in a statutory share
exchange in which it is not the successor entity, without the approval of at
least a majority of the outstanding shares of Preferred Stock and a majority of
the outstanding shares of Common Stock, each voting as a separate class; (ii)
the Corporation may not adopt any plan of reorganization adversely affecting
either the Preferred Stock or the Common Stock without the approval of a
majority of the outstanding shares of such class so affected; (iii) no amendment
to the Charter that would adversely affect the contract rights of the Common
Stock or the Preferred Stock as expressly set forth in the Charter, including
any amendment, alteration or repeal of the express preferences, rights or powers
of holders of the Preferred Stock as set forth in the Charter, May be adopted
without the approval of majority of the outstanding shares of each such class so
affected; (iv) no increase or decrease in the number of shares of Preferred
Stock authorized by the Charter to be issued may be made without the approval of
a majority of the outstanding shares of Preferred Stock; (v) the holders of the
Preferred Stock and the Common Stock shall vote in connection with the election
of directors as provided in paragraph 6 of Article IV(c); and (vi) the Common
Stock and the Preferred Stock will vote as separate classes to the extent
otherwise required under Maryland law or the Investment Company Act (it being
understood that any action requiring a vote of security holders under the
Investment Company Act shall require the vote of a Majority of the Outstanding
Voting Securities of Preferred Stock and the Vote of a Majority of the
Outstanding Voting Securities of Common Stock, each voting as a separate class).
Except to the extent otherwise required by applicable law or the Charter, as to
any matter which requires for approval the separate vote of a class of capital
stock, only the holders of the affected class of capital stock shall be entitled
to vote.
(C) Notwithstanding any provision of law requiring the authorization of any
action by a proportion greater than a simple majority of the total number of
shares of all classes or series of capital stock or of the total number of
shares of any class or series of capital stock entitled to vote as a separate
class or series, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes or series outstanding and entitled to vote thereon or of the class
or series entitled to vote thereon as a separate class or series, as the case
may be, except as otherwise provided in the Charter.
THIRD: At a meeting held on November 21, 1988 the Board of Directors of the
Corporation duly advised and approved the foregoing Articles of Amendment and
Restatement, and by written informal action unanimously taken by the sole
stockholder of the Corporation in accordance with Section 2-505 of the
Corporations and Associations Article of the Annotated Code of Maryland, the
sole stockholder of the Corporation duly adopted and approved said Articles of
Amendment and Restatement.
FOURTH: Immediately prior to the adoption of the foregoing Articles of
Amendment and Restatement, the Corporation had authority to issue one hundred
million (100,000,000) shares of capital stock, $.01 par value per share, for an
aggregate par value of $1,000,000. Immediately following the adoption of the
Articles of Amendment and Restatement, the Corporation has authority to issue an
aggregate of one hundred million one thousand (100,001,000) shares of capital
stock, of which one hundred million (100,000,000) shares shall be Common Stock,
$.01 par value per share, and one thousand (1,000) shares shall be Taxable
Auction Rate Preferred Stock, no par value per share, for an aggregate par value
of $1,000,000 for all shares with par value. The foregoing Articles of Amendment
and Restatement include a description of each class of capital stock, including
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
<PAGE>
IN WITNESS WHEREOF, PROSPECT STREET HIGH INCOME PORTFOLIO INC. has caused
these presents to be signed in its name and on its behalf by its President and
its corporate seal to be hereunder affixed and attested by its Secretary on this
25th day of November, 1988, and its President acknowledges that these Articles
of Amendment and Restatement are the act and deed of Prospect Street High Income
Portfolio Inc., and, under the penalties of perjury, that the matters and facts
set forth herein with respect to authorization and approval are true in all
material respects to the best of his knowledge, information, and belief.
PROSPECT STREET HIGH
INCOME PORTFOLIO INC.
By: /s/ Richard E. Omohundro, Jr.
-----------------------------------
ATTEST:
/s/ John A. Frabotta
- -------------------------------------
EXHIBIT (C)
TO BE SUBMITTED TO THE BROKER-DEALER LISTED BELOW, WHO WILL THEN
DELIVER COPIES ON YOUR BEHALF TO THE AUCTION AGENT.
Bear, Stearns & Co. Inc.
Preferred Stock Sales and Trading Desk
245 Park Avenue
New York, New York 10167
Telephone number (212) 272-5098
Facsimile (212) 272-8151
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS
To: The Company
The Auction Agent
A Broker-Dealer
An Agent Member
Other Persons
1. This letter is designed to apply to auctions for publicly or
privately offered debt or equity securities ("Securities") of any issuer
("Company") which are described in any final prospectus or other offering
materials relating to such Securities as the same may be amended or supplemented
(collectively, with respect to the particular Securities concerned, the
"Prospectus") and which involve periodic rate settings through auctions
("Auctions"). This letter shall be for the benefit of any Company and of any
trust company or auction agent (collectively, "trust company"), broker-dealer,
agent member, securities depository or other interested person in connection
with any Securities and related Auctions (it being understood that such persons
may be required to execute specified agreements and nothing herein shall alter
such requirements). The terminology used herein is intended to be general in its
application and not exclude any Securities in respect of which (in the
Prospectus or otherwise) alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions as
set forth in the Prospectus.
3. We agree that any bid or sell order placed by us shall constitute an
irrevocable offer by us to purchase or sell the Securities subject to such bid
or sell order, of such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction, at the applicable price, all as
set forth in the Prospectus, and that if we fail to place a bid or sell order
with respect to Securities owned by us with a broker-dealer on any auction date,
or a brokerdealer to which we communicate a bid or sell order fails to submit
such bid or sell order to the trust company concerned, we shall be deemed to
have placed a hold order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such brokerdealer for
Securities purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, to or through a broker-dealer or, when permitted in the
Prospectus, to a person that has signed and delivered, or caused to be delivered
on its behalf, to the applicable trust company a letter substantially in the
form of this letter (or other applicable purchaser's letter), provided that in
the case of all transfers other than pursuant to Auctions we or our
broker-dealer or agent member shall advise such trust company of such transfer.
We understand that a restrictive legend will be placed on certificates
representing the Securities and stop-transfer instructions will be issued to the
transfer agent and/or registrar, all as set forth in the Prospectus. We agree to
comply with any other transfer restrictions or other related procedures as
described in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by a global certificate
registered in the name of the applicable securities depository or its nominee,
that we will not be entitled to receive any certificate representing the
Securities and that our ownership of any Securities will be maintained in book
entry form by the securities depository for the account of our agent member,
which in turn will maintain records of our beneficial ownership. We authorize
and instruct our agent member to disclose to the applicable trust company such
information concerning our beneficial ownership of Securities as such trust
company shall request.
6. We acknowledge that partial deliveries of Securities purchased in
Auctions may be made to us and such deliveries shall constitute good delivery as
set forth in the Prospectus.
7. This letter is not a commitment by us to purchase any Securities.
8. This letter supersedes any prior-dated version of this Master
Purchaser's Letter, and supplements any prior- or post-dated purchaser's letter
specific to particular Securities; any recipient of this letter may rely upon it
until such recipient has received a signed writing amending or revoking this
letter.
9. The descriptions of Auction Procedures set forth in each applicable
Prospectus are incorporated by reference herein and, in case of any conflict
between this letter and any such description, such description shall control.
10. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
11. Our agent member of the securities depository currently is .
12. Our personnel authorized to place orders in Auctions with
broker-dealers for the purposes set forth in the Prospectus currently is/are
, telephone number ( ) - .
13. Our taxpayer identification number is .
14. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Act"), we represent and agree as follows:
A. We understand and expressly acknowledge that the Securities have not
been and will not be registered under the Act and, accordingly, that the
Securities may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless an applicable exemption from the registration
requirements of the Act is available.
B. We hereby confirm that any purchase of Securities made by us will be
for our own account, or for the account of one or more parties for which we
are acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which
will acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by
us or such party, as the case may be, will have previously invested in
similar types of instruments and will be able and prepared to bear the
economic risk of investing in and holding such Securities.
C. We acknowledge that prior to purchasing any Securities we shall have
received a Prospectus (private placement memorandum) with respect thereto
and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers thereto, as we deem
necessary in connection with our decision to purchase Securities.
D. We recognize that the Company and broker-dealers will rely upon the
truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
15. The Purchaser consents to the use of custody arrangements for the
Securities, if any, on such terms as shall be necessary or appropriate in
connection with insurance arrangements, if any, for the Securities or otherwise
and agrees that custody receipts issued in connection with any such arrangements
shall be treated in the same manner as and be deemed Securities for all purposes
hereunder and under the Company's governing documents and in Auctions. Copies of
relevant documents in connection with any such arrangements may be obtained upon
request to the address or telephone number set forth above. Receipt of any such
custody receipts shall constitute acceptance of the terms thereof.
16. The Purchaser acknowledges that, pursuant to the terms of any
custody arrangement with respect to the Purchaser's Securities, to the extent
that Financial Security Assurance Inc. or any other surety under a surety bond
unconditionally and irrevocably guaranteeing scheduled payments on the
Securities (the "Surety"), makes scheduled payments on the Purchaser's
Securities, may exercise such Surety the Purchaser's voting rights with respect
to the Securities and hereby assigns the Purchaser's right to receive from the
Company any payments on the Purchaser's Securities to which such scheduled
payments made by the Surety relates; and further acknowledges that the Surety
shall be subrogated to the Purchaser's rights with respect to the Securities
until the Company makes such payments on the Purchaser's Securities to which
such scheduled payments made by the Surety relate or the Company otherwise
reimburses the Surety for any scheduled payments so made by the Surety.
------------------------------------
(Name of Purchaser)
Dated:
----------------------------
Mailing Address of Purchaser
By:
- ------------------------------------ ---------------------
Printed Name:
- ------------------------------------ ---------------------
Title:
- ------------------------------------ ---------------------
<PAGE>
EXHIBIT (D)
SETTLEMENT PROCEDURES
The following procedures are expected to be followed in connection with the
settlement of each Auction and will be incorporated by reference in the Auction
Agent Agreement and each Broker-Dealer Agreement. Capitalized terms used herein
and not otherwise defined shall have the meanings specified in this Prospectus
or Appendix E hereto, as the case may be. Nothing contained in these procedures
constitutes a representation by the Corporation that in each Auction each party
referred to herein will actually perform the procedures described therein to be
performed by such party.
(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 any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of an Existing Holder, the number of Preferred
Shares, if any, then outstanding to be sold by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Holder, the number of Preferred Shares, if any, to
be purchased by such Potential Holder;
(v) if the aggregate number of Preferred Shares to be sold by all
Existing Holders on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number 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 Buyer's Broker-Dealers (and the Agent
Member, if any, of each such Buyer's Broker-Dealer) acting for one or more
purchasers of such excess number of Preferred Shares and the number of such
shares to be purchased from one or more Existing Holders on whose behalf
such Broker-Dealer acted by one or more Existing Holders on whose behalf
each of such Seller's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by all
Potential Holders on whose behalf such Broker-Dealer submitted a Bid exceeds
the aggregate number of Preferred Shares to be sold by all Existing Holders
on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name
or names of one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess number of Preferred Shares and the number of such
shares to be sold to one or more Potential Holders on whose behalf such
Broker-Dealer acted by one or more Existing Holders on whose behalf each of
such Seller's Broker-Dealers acted; and
(vii) the 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;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Holder on whose behalf such Broker-Dealer submitted
a Bid that was accepted, in whole or in part, to instruct such Potential
Holder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to purchase the
number of Preferred Shares to be purchased pursuant to such Bid against
receipt of such shares and advise such Potential Holder of the Applicable
Rate for the next succeeding Dividend Period;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Holder on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part or a Bid that was
rejected, in whole or in part, to instruct such Existing Holder's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of Preferred Shares to be sold pursuant to
such order against payment therefor and advise any such Existing Holder that
will continue to hold Preferred Shares of the Applicable Rate for the next
succeeding Dividend Period;
(iv) advise each Existing Holder on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend 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 (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Holder or an Existing Holder shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any funds received by
it pursuant to (b)(ii) above and any Preferred Shares received by it
pursuant to (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 that were rejected or Sell Orders, and
any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder shall instruct its Agent
Member as provided in (b)(ii) or (iii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Existing Holder delivering
Preferred Shares to such Broker-Dealer pursuant to (b)(iii) above the amount
necessary to purchase such shares against receipt of such shares, and (B)
deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's
Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member )
identified pursuant to (a)(ii) above against receipt of such shares, and (B)
deliver such shares through the Securities Depository to the Agent Member of
the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described
under (b)(ii) or (iii) above, and the Securities Depository shall execute
such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in
(d)(iii) above, and the Securities Depository shall execute such
transactions.
(f) If an Existing Holder selling Preferred Shares in an Auction fails to
deliver such shares, a Broker-Dealer may deliver to the Potential Holder on
behalf of which it submitted a Bid that was accepted a number of whole Preferred
Shares that is less than the number of Preferred Shares that otherwise was to be
purchased by such Potential Holder. In such event, the number of Preferred
Shares to be so delivered shall be determined solely by such Broker-Dealer.
Delivery of such lesser number of Preferred Shares shall constitute good
delivery. Notwithstanding the foregoing terms of this section (f), any delivery
or non-delivery of Preferred 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
non-delivery in accordance with the provisions of the Auction Agent Agreement
and the Broker-Dealer Agreement.
<PAGE>
EXHIBIT (K)(3)
AMENDMENT NO. 1 dated as of October 29, 1993 (the "Amendment") of the
BROKER-DEALER AGREEMENT dated as of May 7, 1990 (the "Original Agreement") among
PROSPECT STREET HIGH INCOME PORTFOLIO INC., a Maryland corporation (the
"Company"), BANKERS TRUST COMPANY, a New York banking corporation (the "Auction
Agent") (not in its individual capacity but solely as agent of the Company,
pursuant to authority granted to it in the Auction Agent Agreement dated as of
May 7, 1990, between the Company and the Auction Agent (the "Auction Agent
Agreement") and Bear, Stearns & Co. Inc. (together with its successors and
assigns hereinafter referred to as "BD").
WHEREAS, the parties are desirous of extending the Original Agreement in
accordance with the terms and provisions of this Amendment for the period
through December 4, 1998. Pursuant to Section 2.5(d) of the Auction Agent
Agreement, the Company has directed the Auction Agent to execute and deliver
this Amendment. This Amendment constitutes a written instrument contemplated by
Section 5.7 of the Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
it is agreed as follows:
1. Except as otherwise provided herein, Section 1.1 of the Agreement
notwithstanding, all capitalized terms used herein shall have the respective
meanings given such terms herein or, if not defined herein, in the Original
Agreement. Capitalized terms not defined herein or in the Original Agreement
shall have the respective meanings specified in the Articles of Incorporation.
2. Except to the extent specifically modified or amended herein, the terms
and provisions of the Original Agreement, including the Exhibits thereto, shall
remain in full force and effect during the period covered by this Amendment.
3. The following modifications to the Original Agreement are hereby agreed
upon:
(a) Notwithstanding Paragraph (f) of Section 1.2 of the Original
Agreement, the terms "Agreement" and "Broker Dealer Agreement" shall be deemed
to refer to the Original Agreement as amended by this Amendment. Notwithstanding
Paragraph (h) of Section 1.2 of the Original Agreement, the term "Prospectus"
shall be deemed to refer to the prospectus of the Company dated November 28,
1988, relating to the Preferred Shares, in the form attached hereto as Schedule
A. Notwithstanding Paragraph (c) of Section 4.1 of the Original Agreement, the
term "Insurance Agreement" shall be deemed to refer to the Insurance Agreement
dated as of December 1, 1988 between the Company and Financial Security
Assurance Inc., as extended by the Company through December 5, 1998, and the
term "Agreements" shall be deemed to include the Insurance Agreement as so
defined. The term Amendment shall refer to this Amendment No. 1 to the Original
Agreement.
(b) The Company hereby agrees to prepare the summary description of
the Preferred Shares referred to in Paragraph (b) of Section 2.3 of the
Agreement.
(c) Paragraph (a) of Section 2.5 of the Original Agreement is hereby
deleted in its entirety and the following is hereby inserted into the Agreement
in its place:
(a) Not later than the date of execution of the Amendment,
the Company shall pay to BD same day funds in an amount equal to
$135,000. As soon as practicable after receipt by the Company of
invoices therefor, the Company shall pay (or reimburse BD if BD
has paid) for (i) the costs of preparation and printing of the
Prospectus together with any legends and wrappers thereto or the
summary description of the Preferred Shares, in each case as
referred to in Section 2.3(b) hereof, and (ii) the fees, charges
and disbursements of BD's counsel, not in excess of $7,500, in
connection with BD entering into the Amendment.
(d) The Company represents and warrants that (i) the Articles of
Incorporation and By-Laws of the Company remain in full force and effect as of
the date of the Amendment and there have been no amendments or changes to the
Articles of Incorporation since December 5, 1988 or to the By-Laws of the
Company since October 5, 1988 and (ii) the Board of Directors of the Company has
duly adopted the resolutions in substantially the form attached hereto as
Schedule B authorizing and directing the Company to enter into this Amendment
and such resolutions remain in full force and effect as of the date hereof.
(e) The Company represents and warrants that prior to the date hereof
it has duly extended the Insurance Agreement and the Surety Bond through and
including December 5, 1998 and that the Surety Custody Agreement has been
extended through and including December 5, 1998, and further represents and
warrants that, except as set forth in the following paragraph, all Other
documents and agreements referred to in the Original Agreement have not been
amended or modified since the date of the Original Agreement and remain in full
force and effect.
(f) As of the date hereof the Company hereby makes the representations
and warranties set forth in Section 4.1 of the Original Agreement as if the same
were set forth in full in this Amendment, except that (i) with respect to
Paragraph (c) of Section 4.1 of the Original Agreement, reference to the
Investment Advisory Agreement shall mean the Investment Advisory Agreement dated
November 28, 1988, as extended through November 28, 1993, between the Company
and Prospect Street Investment Management Co., Inc., and true and correct copies
of each of the Agreements and of the Surety Custody Agreement are included in
Schedule C to this Amendment and (ii) the class action lawsuit against the
Company and others referred to in Paragraph (1) of Section 4.1 of the Original
Agreement has been dismissed with prejudice by the Federal District Court, and
plaintiffs have filed a notice of appeal from the Order of the District Court.
(g) As of the date thereof, the Company hereby makes the covenants set
forth in Section 4.2 of the Original Agreement as if such covenants were set
forth in full in this Amendment, except that Paragraph (a) of Section 4.2 of the
Original Agreement is hereby deleted in its entirety and the following is hereby
inserted in its place:
(a) On or before 180 days prior to any expiration date of
the Surety Bond, if any Preferred Shares are outstanding the
Company will either (i) extend the term of the Surety Bond for
the benefit of the Preferred Shares for a period of at least one
year beyond the then applicable expiration date of the Surety
Bond or (ii) redeem all outstanding Preferred Shares in
accordance with the provisions of Article IV Section (c)(5) of
the Articles of Amendment and Restatement of the Company;
provided, however, that the Company shall have no obligation to
extend such Surety Bond or redeem the Preferred Shares in the
event that the Company shall have obtained prior written
confirmation from either of Standard & Poor's Corporation or
Moody's Investors Service that the lapse of such Surety Bond
would not adversely affect the AAA or "aaa" ratings,
respectively, of the Preferred Shares. In any of such events, the
Company will comply with all provisions of such Surety Bond and
the Insurance Agreement for so long as such Surety Bond remains
in effect and the Company shall comply with all guidelines of
Standard & Poor's Corporation and/or of Moody's Investors Service
in connection with their AAA or "aaa" ratings, respectively, of
the Preferred Shares for so long as any Preferred Shares remain
outstanding.
(h) Clause (iv) and the last two sentences of Paragraph (a) of Section
5.1 of the Original Agreement are hereby deleted.
(i) Clause (ii) of Paragraph (b) of Section 5.1 of the Original
Agreement is hereby amended by deleting the parenthetical included in such
clause (ii) and inserting the following in the place of said parenthetical:
"(other than with respect to Sections 4.2(a) or 4.2(b))".
(j) Clause (iii) of Paragraph (b) of Section 5.1 of the Original
Agreement is hereby amended by substituting therein the date "October 26, 1998"
for the date "February 14, 1994" in the two places where the latter date
appears.
4. This Amendment has been duly and validly authorized, executed and
delivered by the Company; this Amendment and the Original Agreement as amended
hereby comply with all provisions of the Investment Company Act, the Advisors
Act, the Investment Company Act Rules and the Advisors Act Rules, as the case
may be, applicable to the Company; and the Amendment and the Original Agreement
as amended hereby constitute legal, valid and binding obligations of the Company
enforceable in accordance with their terms, subject, as to enforcement, to
applicable bankruptcy, reorganization, insolvency or other similar laws relating
to or affecting creditors rights generally and to equitable principles that may
restrict the availability of remedies.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
PROSPECT STREET HIGH BANKERS TRUST COMPANY,
INCOME PORTFOLIO INC. as Auction Agent
By: /s/ John A. Frabotta /s/ S. Muncol
--------------------------------- ---------------------------------------
Title: Vice President Title: Vice President
BEAR, STEARNS & CO. INC.
/s/ J. Fichera
---------------------------------------
Title: Associate Director
<PAGE>
SCHEDULE A
300 SHARES
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK
(LIQUIDATION PREFERENCE $100,000 PER SHARE)
UNCONDITIONALLY AND IRREVOCABLY GUARANTEED AS TO SCHEDULED PAYMENTS
PURSUANT TO A SURETY BOND ISSUED BY
[LOGO] FINANCIAL
SECURITY
ASSURANCE(R)
--------------
Bear, Stearns & Co. Inc. ("Bear Stearns") has become the exclusive
Broker-Dealer on behalf of the Prospect Street High Income Portfolio Inc. (the
"Fund") in connection with Auctions of the Taxable Auction Rate Preferred Stock
(the "Preferred Shares") of the Fund pursuant to a Broker-Dealer Agreement dated
as of May 7, 1990 (the "Broker-Dealer Agreement"). This information packet is
not a prospectus and is intended solely to provide potential Bidders for
Preferred Shares with certain information about the Preferred Shares and Auction
Procedures.
The Fund, which is registered under the Investment Company Act of 1940 (the
"Investment Company Act") as a diversified, closed-end management investment
company, has issued and outstanding 300 Preferred Shares, liquidation preference
$100,000 per share. The Preferred Shares are unconditionally and irrevocably
guaranteed as to Scheduled Payments, which include both dividends and
liquidation preference, pursuant to a surety bond issued by Financial Security
Assurance Inc. ("Financial Security").
As of the date hereof the Preferred Shares are rated AAA by Standard &
Poor's Corporation ("S&P") and "aaa" by Moody's Investors Service, Inc.
("Moody's" and, together with S&P, the "Rating Agencies").
BEAR, STEARNS & CO. INC.
MAY 7, 1990
<PAGE>
Information from Bear Stearns on Bidding in the Auctions. All notices and
communications should be addressed to Bear, Stearns & Co. Inc., Preferred Stock
Sales and Trading Desk, 245 Park Avenue, New York, New York 10167, telephone
number (212) 272-5098, facsimile, (212) 272-8151.
SCHEDULE OF UPCOMING AUCTIONS
AUCTION SETTLEMENT DIVIDEND DAYS IN
DATE DATE PAYMENT DATE DIVIDEND PERIOD
1990
05/11/90 05/14/90 06/13/90 30
06/12/90 06/13/90 07/16/90 33
07/13/90 07/16/90 08/13/90 28
08/10/90 08/13/90 09/11/90 29
09/10/90 09/11/90 10/11/90 30
10/10/90 10/11/90 11/12/90 32
11/09/90 11/12/90 12/10/90 28
12/07/90 12/10/90 01/09/91 30
1991
01/08/91 01/09/91 02/11/91 33
02/08/91 02/11/91 03/11/91 28
03/08/91 03/11/91 04/09/91 29
04/08/91 04/09/91 05/09/91 30
05/08/91 05/09/91 06/10/91 32
06/07/91 06/10/91 07/08/91 28
07/05/91 07/08/91 08/07/91 30
08/06/91 08/07/91 09/09/91 33
09/06/91 09/09/91 10/07/91 28
10/04/91 10/07/91 11/05/91 29
11/04/91 11/05/91 12/05/91 30
12/04/91 12/05/91 01/06/92 32
1992
01/03/92 01/06/92 02/03/92 28
01/31/92 02/03/92 03/04/92 30
03/03/92 03/04/92 04/06/92 33
04/03/92 04/06/92 05/04/92 28
05/01/92 05/04/92 06/02/92 29
06/01/92 06/02/92 07/02/92 30
07/01/92 07/02/92 08/03/92 32
07/31/92 08/03/92 08/31/92 28
08/28/92 08/31/92 09/30/92 30
09/29/92 09/30/92 11/02/92 33
10/30/92 11/02/92 11/30/92 28
11/27/92 11/30/92 12/29/92 29
12/28/92 12/29/92 01/28/93 30
1993
01/27/93 01/28/93 03/01/93 32
02/26/93 03/01/93 03/29/93 28
03/26/93 03/29/93 04/28/93 30
04/27/93 04/28/93 06/01/93 34
05/28/93 06/01/93 06/28/93 27
06/25/93 06/28/93 07/27/93 29
07/26/93 07/27/93 08/26/93 30
08/25/93 08/26/93 09/27/93 32
09/24/93 09/27/93 10/25/93 28
10/22/93 10/25/93 11/29/93 35
11/26/93 11/29/93 12/27/93 28
12/24/93 12/27/93 01/24/94 28
Auction Agent. Bankers Trust Company is acting as Auction Agent and Paying
Agent (i.e., transfer agent, registrar, dividend disbursing agent, and
redemption agent) with respect to the Preferred Shares. The address of the
Auction Agent is 4 Albany Street, New York, New York 10006, telephone number
(212) 250-6200, facsimile (212) 250-6766.
<PAGE>
Broker-Dealer Agreement. The Broker-Dealer Agreement sets forth the
responsibilities and compensation of Bear Stearns with respect to the Preferred
Shares and the Auction Procedures. As Broker-Dealer, Bear Stearns will be
responsible for using commercially reasonable efforts to obtain Bid and Hold
Orders, notifying Existing Holders of any changes in Auction Dates, providing
the Auction Agent and the Fund with a list of Existing Holders, soliciting
Potential Holders and Existing Holders regarding Hold Orders, Bid Orders and
Sale Orders and notifying each Existing Holder or Potential Holder which submits
an Order regarding Auction results and Settlement Procedures.
Maintenance of AAA/"aaa" Rating. Pursuant to the terms of the
Broker-Dealer Agreement, in the event the Preferred Shares are rated lower than
AAA/"aaa" by both of the Rating Agencies for a period of more than 45
consecutive days, or in the event that both of the Rating Agencies shall
withdraw, rescind or revoke their ratings of the Preferred Shares for a period
of more than 45 consecutive days (or any combination of the foregoing events),
the Fund will be obligated to redeem or repurchase at liquidation preference
plus accumulated and unpaid dividends (whether or not earned or declared) all
outstanding Preferred Shares as soon as practicable in compliance with the terms
of the Preferred Shares and the Investment Company Act. Pursuant to the Surety
Bond the Fund is required to maintain certain discounted asset coverages with
respect to the Preferred Shares.
Redemption in 1993 or Thereafter. If for the Dividend Period next following
the September 24, 1993 Auction (or, if the Surety Bond is extended by the Fund,
at specified times thereafter) the Applicable Rate is the Maximum Applicable
Rate, (because, for example, Sufficient Clearing Bids do not exist), the Fund
will redeem or repurchase all of the outstanding Preferred Shares at liquidation
preference plus accumulated and unpaid dividends (whether or not earned or
declared) prior to the expiration of the Surety Bond. The Preferred Shares are
also subject to mandatory redemption in certain circumstances in accordance with
the terms of the Articles of Incorporation of the Fund and may be redeemed
thereunder by the Fund at any time in compliance with the Investment Company
Act.
Description of Financial Security. Financial Security is a monoline
property and casualty insurance company and is a wholly-owned subsidiary of U.S.
West Inc., a Colorado-based financial services and communications company.
Financial Security and its subsidiaries are engaged exclusively in the business
of writing financial guaranty insurance, principally on corporate and other
taxable securities offered in domestic and foreign markets. Financial Security's
claims-paying ability is rated "AAA" by S&P, "Aaa" by Moody's, "AAA" by Fitch
Investors Service, Inc., "AAA" by Nippon Investors Service Inc. and "D&P-I"
(triple A) by Duff & Phelps Inc. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
Description of the Fund. The Fund's investment objective is to provide high
current income, while seeking to preserve shareholders' capital, through
investment in a professionally managed, diversified portfolio of "high yield"
securities. The Fund is managed by Prospect Street Investment Management Co.,
Inc. (the "Investment Adviser"). The Fund invests primarily in fixed-income
securities rated in the lower categories by established rating agencies
(consisting principally of fixed-income securities rated BB or lower by S&P and
"Ba" or lower by Moody's or non-rated fixed-income securities deemed by the
Investment Adviser to be of comparable quality). Such securities 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
obligation. No assurance can be given that the Fund will achieve its investment
objective. In addition to the Preferred Shares, the Fund has outstanding
$30,000,000 aggregate principal amount of Senior Extendible Notes (the "Notes")
and, as of April 30, 1990, 13,608,157 shares of Common Stock, $.01 par value, of
the Fund (the "Common Stock"). As of the date hereof, the Notes are rated
AAA/"Aaa" by the Rating Agencies, and the Fund is required to maintain certain
discounted asset coverages with respect to the Notes. The Preferred Shares are
junior to outstanding indebtedness of the Fund, including the Notes, and senior
to the Common Stock.
Tax Status. Dividends are not eligible for the Dividend Received Deduction
and are therefore fully taxable. As an investment company, the Fund may pass
through to investors only the income it receives from the securities it owns.
Since it owns only taxable debt instruments, all dividend income on the
Preferred Shares will be fully taxable to Holders of the Preferred Shares as if
such dividend income were interest income.
Additional Information. The copy of the prospectus dated November 28, 1988
and attached hereto as Exhibit A is the prospectus that was used in connection
with the registration under the Securities Act of 1933 (the "Securities Act") of
the initial offering of the Preferred Shares. Capitalized terms used herein but
not otherwise defined have the meanings set forth in Exhibit A hereto. SUCH
PROSPECTUS HAS NOT BEEN UPDATED BY BEAR STEARNS OR THE FUND AND IS PROVIDED TO
PROSPECTIVE PURCHASERS OF THE PREFERRED SHARES SOLELY FOR INFORMATIONAL PURPOSES
(PARTICULARLY WITH RESPECT TO THE TERMS OF THE PREFERRED SHARES INCLUDING
AUCTION PROCEDURES) AND NOT AS A PROSPECTUS AND BEAR STEARNS MAKES NO
REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH PROSPECTUS. The Fund
is subject to the informational requirements of the Securities Exchange Act of
1934 and the Investment Company Act and in accordance therewith is required to
file reports, proxy statements and other information with the Commission.
Investors are encouraged to review such reports and information in connection
with bidding for or purchasing any Preferred Shares. Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's New York Regional
Office, Room 1029, Jacob K. Javits Building, 26 Federal Plaza, New York, New
York 10278 and Chicago Regional Office, Suite 3190, 230 South Dearborn Street,
Chicago, Illinois 60604. Copies of such materials can be obtained from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
Master Purchaser's Letter. As a condition to purchasing Preferred Shares,
each prospective purchaser of Preferred Shares will be required to sign and
deliver a Master Purchaser's Letter, attached hereto as Exhibit B, which Master
Purchaser's Letter sets forth the undertakings of a prospective purchaser with
respect to sale and transfer of the Preferred Shares and the voting thereof.
Each prospective purchaser of Preferred Shares is required to consent to the use
of custody arrangements for the Preferred Shares in connection with the Surety
Arrangement.
<PAGE>
EXHIBIT A
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
300 SHARES
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK(SM)
("TARPS(SM)")
(LIQUIDATION PREFERENCE $100,000 PER SHARE)
unconditionally and irrevocably guaranteed as to Scheduled Payments,
as defined herein, pursuant to a surety bond to be issued by
[LOGO] FINANCIAL
SECURITY
ASSURANCE(SM)
-------------
Prospect Street(SM) High Income Portfolio Inc. (the "Fund") is a newly
organized, diversified, closed-end management investment company. The Fund's
investment objective is to provide high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high yield" securities. The Fund will invest primarily
in fixed-income securities rated in the lower categories by established rating
agencies (consisting principally of fixed-income securities rated "BB" or lower
by Standard & Poor's Corporation ("S&P") and "Ba" or lower by Moody's Investors
Service, Inc. ("Moody's," and together with S&P, the "Rating Agencies")) or
non-rated fixed-income securities deemed by the Investment Adviser to be of
comparable quality. Such securities 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 obligation. See
"Investment Objective and Policies." No assurance can be given that the Fund
will achieve its investment objective.
The Fund is managed by Prospect Street(SM) Investment Management Co., Inc.
(the "Investment Adviser"). The Fund's address is One Financial Center, Boston,
Massachusetts 02111, and its telephone number is (617) 350-5718.
(text continued on following page)
----------------------------------------
Investors are advised to read this Prospectus carefully and retain it for future
reference.
----------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) FUND(2)
Per Share .............................. $100,000 $1,750 $98,250
Total(3) ............................... $30,000,000 $525,000 $29,475,000
(1) The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deduction of organization and offering expenses relating to this
offering and the concurrent offerings of the Common Stock and the Notes
payable by the Fund, estimated at $1,500,000. Underwriting discounts and
offering expenses relating to the concurrent offering of the Notes and the
Preferred Shares, estimated at $1,784,000, will reduce the net assets
attributable to the Common Stock. See "Capitalization."
(3) The Fund has granted the Underwriter an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 45 additional Preferred
Shares in order to cover over-allotments, if any. If the option is exercised
in full, the total Price to Public, Underwriting Discounts and Proceeds to
Fund will be $34,500,000, $603,750 and $33,896,250, respectively. The
exercise of such option is subject to certain conditions relating to the
simultaneous exercise of options with respect to the Notes and the Common
Stock. See "Underwriting."
----------------------------------------
The Preferred Shares offered hereby are being offered by the Underwriter
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to approval of certain legal matters by counsel. It is
expected that delivery of the certificate representing all the Preferred Shares
will be made against payment therefor through the facilities of The Depository
Trust Company on or about December 5, 1988.
----------------------------------------
November 28, 1988
<PAGE>
(text continued from cover page)
The shares of Taxable Auction Rate Preferred Stock ("TARPS") offered hereby
(the "Preferred Shares") are unconditionally and irrevocably guaranteed as to
Scheduled Payments (as defined) pursuant to a surety bond issued by Financial
Security Assurance Inc. ("Financial Security"). It is a condition of closing
that the Preferred Shares be issued with ratings of "AAA"/"Aaa" from the Rating
Agencies. The Fund is required to maintain certain discounted asset coverages
with respect to the Preferred Shares. Each prospective purchaser of Preferred
Shares is required to consent to the use of custody arrangements for the
Preferred Shares in connection with the Surety Arrangement (as defined). See
"Investment Objective and Policies" and "Surety Arrangement."
The dividend rate on the Preferred Shares for the Initial Dividend Period
will be 9.50% per annum. The Applicable Rate for each Dividend Period thereafter
will be reset generally every 30 days pursuant to an Auction conducted on the
Business Day next preceding the first day of the next Dividend Period. Dividends
on the Preferred Shares are cumulative from the Original Issuance Date and are
payable commencing on January 19, 1989 and on each day thereafter that is the
last day of successive 30-day periods after such date, subject to certain
exceptions (a "Dividend Period"). The Preferred Shares are subject to mandatory
and optional redemption in certain circumstances. See "Description of Preferred
Stock--Redemption" and "Surety Arrangement--Insurance Agreement."
In each Auction for the Preferred Shares, each Existing Holder may give an
Order to (i) continue to hold such Preferred Shares without regard to the
Applicable Rate that results from the Auction, (ii) continue to hold such
Preferred Shares if the Applicable Rate that results from the Auction is equal
to or greater than the rate bid by such Existing Holder and/or (iii) sell such
Preferred Shares without regard to the Applicable Rate that results from the
Auction. Potential Holders may offer to purchase Preferred Shares if the
Applicable Rate that results from such Auction is equal to or greater than the
rate bid by such Potential Holders. The Applicable Rate that results from an
Auction for any Dividend Period will not be lower than 90% or greater than 175%
of the 30-day "AA" Composite Commercial Paper Rate.
Prospective purchasers should carefully review the Auction Procedures
described in this Prospectus, including the Appendices, and should note that (i)
an Order constitutes an irrevocable commitment to hold, purchase or sell
Preferred Shares based upon the results of an Auction, (ii) the Auctions will be
conducted through telephone communications and (iii) settlement for purchases
and sales will be on the Business Day following the Auction.
Each prospective purchaser of Preferred Shares will be required, among
other things, to agree (i) to transfer Preferred Shares only (a) pursuant to a
Bid or a Sell Order placed in an Auction or (b) to a prospective purchaser that
has delivered a signed Master Purchaser's Letter through a Broker-Dealer to the
Auction Agent and (ii) to have ownership of Preferred Shares maintained only in
book entry form by or through the Securities Depository. Prior to this offering,
no Preferred Shares have been outstanding and, accordingly there has not been a
market for the Preferred Shares and there can be no assurance that a market will
develop.
In addition to the Preferred Shares offered hereby, the Fund is
simultaneously offering $50,000,000 aggregate principal amount of Senior
Extendible Notes (the "Notes") and 12,000,000 shares of Common Stock, $.01 par
value, of the Fund (the "Common Stock"), subject in each case to increase in the
event of the exercise of over-allotment options. It is a condition to closing
that the Notes be issued with ratings of "AAA"/"Aaa" from the Rating Agencies,
and the Fund will be required to maintain certain discounted asset coverages
with respect to the Notes. See "Investment Objective and Policies" and
"Description of Notes--Asset Maintenance." The Preferred Shares will be junior
to outstanding indebtedness of the Fund, including the Notes, and senior to the
Common Stock.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus. See "Glossary
of Terms" for information concerning definitions of certain defined terms used
herein and on the cover page.
THE FUND
Investment Objective ...... Prospect Street(SM) High Income Portfolio Inc. is
a newly organized, diversified, closed-end
management investment company. The Fund's
investment objective is to provide high current
income, while seeking to preserve shareholders'
capital, through investment in a professionally
managed, diversified portfolio of "high yield"
securities. There can be no assurance that the
Fund will achieve its investment objective.
Investment Strategy ....... The Fund will invest primarily in fixed-income
securities rated in the lower categories by
established rating agencies (consisting
principally of fixed income securities rated
"BB"/"Ba" or lower by the Rating Agencies) or
non-rated fixed-income securities deemed by the
Investment Adviser to be of comparable quality. In
addition to investing in "high yield" securities,
the Fund may engage in certain options activities,
the lending of portfolio securities, the short
sale of securities and the use of futures
contracts and options thereon, reverse repurchase
agreements and repurchase agreements. See
"Investment Objective and Policies--Investment
Guidelines." Lower rated and non-rated securities
are subject to a greater degree of risk than
higher rated securities.
The Fund's investments will be subject to
diversification, liquidity and related investment
guidelines (i) agreed upon by the Fund and
Financial Security in connection with the issuance
of the Surety Bond (as defined) with respect to
Scheduled Payments on the Preferred Shares (the
"Surety Investment Guidelines") and (ii)
established in connection with the Fund's receipt
from the Rating Agencies of ratings of "AAA"/"Aaa"
for the Notes (the "Notes Investment Guidelines"
and, together with the Surety Investment
Guidelines, the "Investment Guidelines"). See
"Investment Objective and Policies." As a result
of the issuance of the Surety Bond pursuant to an
insurance agreement with Financial Security (the
"Surety Arrangement"), the Fund will receive
ratings from the Rating Agencies of "AAA"/"Aaa"
for the Preferred Shares. See "Surety
Arrangement--Insurance Agreement." The Rating
Agencies will issue ratings of "AAA"/"Aaa" for the
Notes because the Fund's portfolio, although
consisting principally of lower rated securities,
will be managed in accordance with the Notes
Investment Guidelines and will be required to have
a value exceeding, on a discounted basis, the sum
of the principal amount of the Notes then
outstanding, $100,250 times the number of
Preferred Shares then outstanding and certain
accrued and projected payment obligations of the
Fund. See "Description of Notes--Asset
Maintenance." The receipt of such ratings is a
condition to the issuance of the Preferred Shares
and the Notes. For a description of the Rating
Agencies' ratings, see "Appendix A."
Investment Adviser ........ Prospect Street(SM) Investment Management Co.,
Inc., (the "Investment Adviser") of Boston,
Massachusetts, will serve as the Fund's investment
adviser. The Investment Adviser was organized in
June 1988 to provide institutional clients with
investment management services. Richard E.
Omohundro, Jr., President of the Investment
Adviser, served as a "high yield" specialist and
Co-Manager of the High Yield Bond Group of Merrill
Lynch Capital Markets ("Merrill Lynch") from 1978
through 1987. During that period, the High Yield
Group raised approximately $13.6 billion in new
"high yield" securities through 107 issues and
provided one of the largest secondary trading
markets for "high yield" securities. John A.
Frabotta, Vice President of the Investment
Adviser, performed various research, structuring
and pricing functions involving "high yield"
securities as a Vice President of Merrill Lynch.
James C. Rivers will serve as portfolio manager
for the Fund. Mr. Rivers was previously a Vice
President of Moseley Capital Management, Inc.
where he served as adviser to the High Income Plus
Fund. Mr. Rivers previously served as Vice
President, Portfolio Manager of The Putnam
Management Company and managed The Putnam High
Yield Trust, a fund investing in "high yield"
securities, the assets of which increased from
$250 million in January 1980 to approximately $950
million in April 1985 as a result of additional
investments in such fund.
The Investment Adviser manages Prospect
International High Income Portfolio N.V., an
offshore, closed-end investment company with
assets of approximately $203 million as of
November 18, 1988. Such fund, which commenced
operations on September 7, 1988, invests primarily
in "high yield" securities and is currently the
only other closed-end fund managed by the
Investment Adviser.
The Fund will pay the Investment Adviser a monthly
fee at the annual rate of 0.50% of the weekly net
assets (as defined). See "The Investment Adviser."
SURETY ARRANGEMENT
Financial Security ........ The Preferred Shares are unconditionally and
irrevocably guaranteed as to the Scheduled
Payments pursuant to a surety bond issued by
Financial Security for the benefit of the holders
of the Preferred Shares (the "Surety Bond").
Financial Security is a monoline property and
casualty insurance company incorporated on March
16, 1984 under the laws of the State of New York.
Financial Security and its subsidiaries are
engaged exclusively in the business of writing
financial guaranty insurance, principally on
corporate and other taxable securities offered in
domestic and foreign markets. Financial Security's
claims-paying ability is rated "AAA" by S&P, "Aaa"
by Moody's, "AAA" by Fitch Investors Service,
Inc., "AAA" by Nippon Investors Service Inc. and
"D&P-I" (triple A) by Duff & Phelps Inc. Such
ratings reflect only the views of the respective
rating agencies, are not recommendations to buy,
sell or hold securities and are subject to
revision or withdrawal at any time by such rating
agencies. See "Financial Security."
Surety Bond ............... The Fund will enter into an insurance agreement
(the "Insurance Agreement") with Financial
Security pursuant to which Financial Security will
issue the Surety Bond. During the term of the
Surety Bond, Financial Security will
unconditionally and irrevocably guarantee the
Scheduled Payments in accordance with the
provisions of the Surety Bond. The Fund will be
obligated to reimburse Financial Security for any
amounts paid under the Surety Bond. The Surety
Bond will be in effect for five years, unless
extended at the option of the Fund for one or more
additional periods of up to five years in the
aggregate. Upon the issuance of the Surety Bond,
and in consideration thereof, the Fund will pay to
Financial Security a premium equal to the present
value of .40% of the aggregate liquidation
preference of the Preferred Shares originally
issued times the number of years (five) in the
initial term. If the Surety Bond is extended, a
premium at the same annual rate will be payable to
Financial Security annually. If the Fund does not
elect to extend the Surety Bond upon any
expiration thereof prior to 10 years from its
original issuance, the Fund must pay Financial
Security an amount equal to one additional annual
premium. See "Surety Arrangement. "
Surety Custody Agreement .. Pursuant to the Surety Arrangement, the Preferred
Shares and the Surety Bond are required to be held
by Bankers Trust Company, as custodian (the
"Surety Custodian"), pursuant to a custody
agreement in a custody account established for the
benefit of the holders of the Preferred Shares.
Beneficial ownership of the Preferred Shares, in
turn, shall be evidenced by custody receipts held
by The Depository Trust Company ("DTC"). In the
event that the Fund does not make any Scheduled
Payment, the Surety Custodian is obligated to make
a claim for payment under the Surety Bond.
Financial Security shall be subrogated to the
rights of holders of Preferred Shares to receive
payments with respect to the Preferred Shares to
the extent of any payment by Financial Security
under the Surety Bond. In connection with the
payment of Scheduled Payments by Financial
Security under the Surety Bond, Financial Security
will be entitled to the rights of the holders of
Preferred Shares to the related dividend payment
or, in the case of a redemption or liquidation
payment, the related Preferred Shares, as well as
the right to exercise their voting rights with
respect to such Preferred Shares. See "Description
of Preferred Stock--Voting" and "Surety
Arrangement--Surety Custody Agreement." As used
herein, the term "holder of Preferred Shares"
refers to the beneficial owner thereof, unless the
context otherwise requires.
THE OFFERING
The Issue ................. 300 Preferred Shares (assuming no exercise of the
Underwriter's over-allotment option) with a
liquidation preference of $100,000 per share.
During the period that the underwriters of the
Fund's securities will be soliciting indications
of interest, the Fund and the underwriters will
continue to evaluate the market for such
securities as well as the market for the Fund's
contemplated investments. If as a result of a
material adverse change in existing financial,
political or economic conditions in the United
States or elsewhere it becomes impractical or
inadvisable to proceed with the offerings of the
Fund's securities, such offerings may not be made.
Dividends ................. Dividends on the Preferred Shares are cumulative
from the Original Issuance Date and are payable,
when, as and if declared by the Board of Directors
of the Fund, out of funds legally available
therefor, on January 19, 1989 (the 45th day after
the Original Issuance Date) and the last day of
successive 30-day periods after such date, subject
to certain exceptions. See "Description of
Preferred Stock--Dividends--General" for a
description of such exceptions. Dividends will be
paid to the nominee of DTC or a successor
securities depository (the "Securities
Depository") on each Dividend Payment Date ( as
defined). The Securities Depository's normal
procedures now provide for distribution of
dividends in next-day funds settled through the
New York Clearing House to Agent Members, who in
turn are expected to distribute such dividends to
the persons for whom they are acting as agent.
The dividend rate for the Initial Dividend Period
ending January 18, 1989 will be 9.50% per annum.
Thereafter, the dividend rate per annum (the
"Applicable Rate") will be reset generally every
30 days by an Auction conducted on the Business
Day (an "Auction Date") next preceding the first
day of the next Dividend Period; provided,
however, if such day is a Thursday the Auction
Date shall mean the Business Day next preceding
such Thursday. After the Initial Dividend Period,
the dividend rate for the Preferred Shares will be
the Applicable Rate per annum that the Auction
Agent advises the Fund has resulted from an
Auction. The Applicable Rate that results from an
Auction will not be lower than 90% (the "Minimum
Applicable Rate") or greater than 175% (the
"Maximum Applicable Rate") of the 30-day "AA"
Composite Commercial Paper Rate at the close of
business on the Business Day next preceding the
applicable Auction Date. See "Description of
Preferred Stock--Dividends."
To the extent that the Fund does not make dividend
payments on the Preferred Shares on any Dividend
Payment Date, such payments shall be made by
Financial Security pursuant to the Surety Bond.
See "Surety Arrangement--Surety Bond."
The Auction ............... Prior to the Submission Deadline on each Auction
Date, each Existing Holder may submit Orders
through a Broker-Dealer to the Auction Agent as
follows:
o Hold Order--indicating its desire to hold
Preferred Shares without regard to the
Applicable Rate for the next Dividend Period.
o Bid--indicating its desire to hold Preferred
Shares provided that the Applicable Rate for the
next Dividend Period is not less than the rate
specified in such Bid.
o Sell Order--indicating its desire to sell
Preferred Shares without regard to the
Applicable Rate for the next Dividend Period.
An Existing Holder may submit different types of
Orders in an Auction with respect to the Preferred
Shares then held by such Existing Holder, provided
that the total number of Preferred Shares covered
by all such Orders does not exceed the number of
Preferred Shares held by such Existing Holder. An
Existing Holder that offers to purchase additional
Preferred Shares is, for purposes of such offer to
purchase additional shares, treated as a Potential
Holder as described below. Bids submitted by
Existing Holders with rates higher than the
Maximum Applicable Rate will be treated as Sell
Orders. A Hold Order shall be deemed to have been
submitted on behalf of an Existing Holder if an
Order is not submitted on behalf of such Existing
Holder for any reason, including the failure of a
Broker-Dealer to submit such Existing Holder's
Order to the Auction Agent.
The Maximum Applicable Rate in any Auction will be
175% of the 30-day "AA" Composite Commercial Paper
Rate in effect at the close of business on the
Business Day next preceding the applicable Auction
Date.
Potential Holders of Preferred Shares may submit
Bids in which they will offer to purchase
Preferred Shares, if the Applicable Rate for the
next Dividend Period is not less than the rate
specified in such Bid. A Bid submitted by a
Potential Holder with a rate higher than the
Maximum Applicable Rate will be rejected.
If Sufficient Clearing Bids exist (that is, the
number of Preferred Shares subject to Bids by
Potential Holders is at least equal to the number
of Preferred Shares subject to Sell Orders by
Existing Holders), the Applicable Rate will be
the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower
rates bid by Existing Holders and Potential
Holders, would result in such Existing Holders and
Potential Holders owning all of the Preferred
Shares available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the
Applicable Rate will be the Maximum Applicable
Rate and, in such event, Existing Holders that
have submitted Sell Orders will not be able to
sell in the Auction any or all Preferred Shares
subject to such Sell Orders. If all Existing
Holders submit (or are deemed to have submitted)
Hold Orders, the Minimum Applicable Rate will
apply (90% of the 30-day "AA" Composite Commercial
Paper Rate in effect at the close of business on
the Business Day next preceding the applicable
Auction Date).
The Auction Procedures include a pro rata
allocation of Preferred Shares for purchase and
sale under certain circumstances which may result
in an Existing Holder selling or holding, or a
Potential Holder purchasing, a number of Preferred
Shares that is less than the number of Preferred
Shares specified in its Bid or Sell Order.
Accordingly, an Existing Holder may be obligated
to sell a portion of its Preferred Shares which
are subject to a Submitted Bid specifying a rate
which is equal to the Applicable Rate resulting
from an Auction .
A Sell Order submitted by an Existing Holder shall
constitute an irrevocable offer to sell the
Preferred Shares subject thereto, and a Bid
submitted by an Existing Holder shall also
constitute an irrevocable offer to sell the
Preferred Shares subject thereto if the rate
specified in the Bid is higher than the Applicable
Rate determined in the Auction, in each case at a
price per share equal to $100,000. A Bid submitted
by a Potential Holder shall constitute an
irrevocable offer to purchase the Preferred Shares
subject thereto, if the rate specified in such Bid
is less than or equal to the Applicable Rate
determined in the Auction, at a price per share
equal to $100,000. Settlement of purchases and
sales will be made on the next Business Day after
the Auction Date (also a Dividend Payment Date)
through the Securities Depository. Purchasers will
make payment through their Agent Members in
next-day funds settled through the New York
Clearing House to the Securities Depository
against delivery of shares by book entry to their
Agent Members. The Securities Depository will make
payment to the sellers' Agent Members in
accordance with the Securities Depository's normal
procedures, which now provide for payment in
next-day funds settled through the New York
Clearing House. See "The Auction" and the Auction
Illustrations set forth in Appendix B hereto.
Secondary Market .......... There is currently no secondary market for the
Preferred Shares. While it is not obligated to do
so, Drexel Burnham Lambert Incorporated ("Drexel
Burnham") has advised the Fund that it intends to
make a secondary market in the Preferred Shares.
There can be no assurance that an active secondary
trading market will develop. Such secondary market
activity, if commenced, may be discontinued at any
time. In addition, other Broker-Dealers may or may
not choose to make a secondary market in the
Preferred Shares, and there can be no assurance
that the trading price of Preferred Shares in any
secondary market will be $100,000. Any purchaser
of Preferred Shares in the secondary market will
be required to sign a Master Purchaser's Letter.
Asset Maintenance ......... Pursuant to the Surety Arrangement, as long as the
Surety Bond is outstanding the Fund will be
required to maintain a specified discounted asset
value for its portfolio representing Surety Assets
Coverage (as defined) with respect to the
Preferred Shares under the Surety Investment
Guidelines. See "Surety Arrangement--Insurance
Agreement." The Fund will also be required to
maintain a specified discounted asset value for
its portfolio representing the Note Basic
Maintenance Amount (as defined) under the Notes
Investment Guidelines. In addition, the terms of
the indenture governing the Notes (the
"Indenture") require that the Fund maintain, as of
the last Business Day of each calendar month,
asset coverage (as defined) with respect to
senior securities representing indebtedness (as
defined), including the Notes of at least 300%.
See "Description of Notes--Asset Maintenance" and
"--Events of Default."
Restricted Payments ....... Under the Investment Company Act of 1940, as
amended (the "1940 Act"), asset coverage with
respect to the Fund's senior securities
representing indebtedness, including the Notes,
must be at least 200% for the Fund to declare
dividends on the Preferred Shares and at least
300% for the Fund to declare other distributions
on or to redeem or purchase Preferred Shares, in
each case after giving effect to any such
dividend, distribution, redemption or purchase.
Further, under the 1940 Act, the declaration of
dividends or other distributions on or redemptions
or purchases of Common Stock will not be permitted
unless (i) asset coverage with respect to the
Fund's senior securities representing
indebtedness, including the Notes, would be at
least 300% and (ii) asset coverage with respect to
the Fund's senior securities of a class which is
stock, including the Preferred Shares, would be at
least 200%, in each case after giving effect to
any such dividend, other distribution redemption
or purchase. Dividends or other distributions on
or redemptions or purchases of Preferred Shares
are also prohibited at any time payments of
principal of or interest on the Notes are in
default pursuant to the terms of the Indenture,
and dividends or other distributions on or
redemptions or purchases of Common Stock are
prohibited at any time payments of principal of or
interest on the Notes are in default, dividends on
the Preferred Shares are in arrears or Surety
Assets Coverage is not maintained.
As of the closing of the offering made hereby,
after giving effect to the concurrent offerings of
the Notes and the Common Stock (assuming no
exercise of over-allotment options), the asset
coverages with respect to the Preferred Shares and
the Notes will be 380% and 238%, respectively, as
calculated pursuant to the 1940 Act. See
"Capitalization."
Redemption ................ The Preferred Shares will be redeemable at the
option of the Fund, in whole or from time to time
in part, on any Dividend Payment Date at a
redemption price equal to $100,000 per share plus
accumulated and unpaid dividends to the redemption
date.
In the event the Fund fails to maintain Surety
Assets Coverage and does not cure such failure
within eight Business Days, Financial Security
will be entitled to cause the Fund to effect a
partial redemption of Preferred Shares in order to
restore Surety Assets Coverage. In addition, at
the end of the term of the Surety Bond, the Fund
will be required under certain circumstances to
redeem all of the outstanding Preferred Shares,
subject to the right of the holders to elect to
continue to hold their Preferred Shares. See
"Description of Preferred Stock--Redemption" and
"Surety Arrangement--Insurance Agreement." If any
such redemption is not made on a Dividend Payment
Date, it will be made at a price equal to $100,250
plus accumulated and unpaid dividends through the
date of redemption. The Fund's ability to make
such redemptions may be restricted by the
provisions of the 1940 Act, other applicable law
and the terms of the Indenture.
Voting Rights ............. Pursuant to the Fund's Articles of Incorporation
("Articles of Incorporation"), holders of the
Common Stock have voting rights of one vote per
share and holders of the Preferred Shares have
voting rights of one vote per $1,000 of
liquidation preference without regard to any
liquidation preference attributable to accumulated
and unpaid dividends (i.e., 100 votes per
Preferred Share); provided that all the votes
represented by a single Preferred Share must be
voted together. Holders of Preferred Shares, as a
class, will normally elect two Directors of the
Fund, and the holders of the Common Stock and the
Preferred Shares, voting together, will elect the
remainder. However, upon the Fund's failure to pay
dividends on the Preferred Shares in an amount
equal to two full years of dividends, the holders
of the Preferred Shares (or Financial Security
pursuant to the Surety Custody Agreement (as
defined)) have the right to elect, as a class, the
smallest number of additional Directors as shall
be necessary to assure that a majority of the
Directors has been elected by the holders of the
Preferred Shares or Financial Security as proxy
for such holders, as the case may be. The terms of
the additional directors shall end when the Fund
pays or provides for all accumulated and unpaid
dividends.
To the extent Financial Security makes Scheduled
Payments, Financial Security shall be assigned the
voting rights of the holders of the Preferred
Shares to whom such payments were made and such
assignment shall continue until the Fund has made
payments on the Preferred Shares with respect to
which Financial Security has made Scheduled
Payments or the Fund reimburses Financial Security
for such Scheduled Payments. The holders of
Preferred Shares will vote, separately as a class,
on certain other matters, as required under the
Articles of Incorporation, the 1940 Act and
Maryland law. See "Description of Preferred
Stock--Voting" and "Surety Arrangement--Insurance
Agreement" and "--Surety Custody Agreement."
Ranking ................... Payments to holders of the Preferred Shares in
liquidation or otherwise will be subject to the
prior payment of all outstanding indebtedness of
the Fund, including the Notes and the Preferred
Shares rank senior to the Common Stock.
Master Purchaser's Letter As a condition to purchasing Preferred Shares in
and Restrictions on this offering and as a condition to participating
Transfer .................. in any Auction, each prospective purchaser of
Preferred Shares will be required to sign and
deliver a Master Purchaser's Letter, through a
Broker-Dealer, to the Auction Agent in which such
prospective purchaser will, among other things,
agree (i) to transfer Preferred Shares only (a)
pursuant to a Bid or Sell Order placed in an
Auction or (b) to a person that has delivered a
signed Master Purchaser's Letter, through a
Broker-Dealer, to the Auction Agent; provided that
in the case of all transfers other than those
pursuant to Auctions, such purchaser, its
Broker-Dealer or its Agent Member advises the
Auction Agent of such transfer and (ii) that,
except as otherwise required by law, all of the
outstanding Preferred Shares shall be represented
by a certificate registered in the name of the
Surety Custodian (as defined), and such
purchaser's ownership of any such Preferred Shares
will be maintained in book entry form by or
through the Securities Depository.
Execution of a Master Purchaser's Letter is not a
commitment to purchase Preferred Shares in the
offering being made hereby or in any Auction, but
is a condition precedent to purchasing Preferred
Shares. Any prospective purchaser which previously
delivered or caused to be delivered on its behalf
a signed Master Purchaser's Letter to a
Broker-Dealer will not be required to sign and
deliver a new Master Purchaser's Letter to
purchase Preferred Shares offered hereby or to
participate in Auctions.
Concurrent Offerings ...... Concurrently with this offering, the Fund is
offering $50,000,000 aggregate principal amount of
the Notes and 12,000,000 shares of Common Stock,
subject in each case to increase in the event of
the exercise of over-allotment options.
Consummation of the sale of the Notes and the
Common Stock is a condition to the consummation of
the sale of the Preferred Shares.
Ratings ................... It is a condition to the issuance of the Preferred
Shares and the Notes that they receive ratings of
"AAA"/"Aaa" from the Rating Agencies. Ratings of
"AAA"/"Aaa" are the highest category of ratings
that the Rating Agencies assign to debt
obligations and to preferred stock. In the event
that the Rating Agencies reduce their ratings of
Financial Security's claims-paying ability, the
ratings for the Preferred Shares could be
adversely affected. A security rating is not a
recommendation to buy, sell or hold securities and
is subject to revision or withdrawal at any time
by the rating agency granting such rating. Each
security rating should be evaluated independently
of any other security rating. For a description of
the Rating Agencies' ratings see "Appendix A."
Use of Proceeds ........... The net proceeds from the sale of the Preferred
Shares, together with the net proceeds from the
sale of the Notes and the Common Stock, will be
used for investment in accordance with the Fund's
investment objective and policies.
Federal Income Taxes ...... Because the Fund's portfolio income will consist
principally of interest income, corporate
investors in the Preferred Shares generally will
not be entitled to the 70% dividends received
deduction.
SPECIAL CONSIDERATIONS
Special Considerations .... As a newly organized entity, the Fund has no
operating history. See "The Fund." The Fund's
Investment Adviser is also recently organized, has
a limited professional staff and is dependent to a
significant degree upon the services of Richard E.
Omohundro, Jr. and John A. Frabotta. See "The
Investment Adviser."
The Fund's leveraged capital structure creates
special risks. The Notes may constitute a
substantial lien and burden on the Preferred
Shares by reason of their prior claim against the
income of the Fund and against the net assets of
the Fund in liquidation. The Fund will not be
permitted to declare dividends or other
distributions with respect to the Preferred Shares
or purchase Preferred Shares unless at the time
thereof the Fund meets certain asset coverage
requirements and payments of principal of and
interest on the Notes are not in default. See
"Description of Preferred Stock," "Description of
Notes" and "Federal Taxation."
The Fund anticipates that Drexel Burnham and
certain other underwriters of the Common Stock may
from time to time act as brokers or dealers in
connection with the execution of the Fund's
portfolio transactions after they have ceased to
be underwriters. Drexel Burnham 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. In addition,
Drexel Burnham intends, but is not obligated, to
make a market in the Preferred Shares and the
Notes.
The Fund has been advised by Drexel Burnham that
the Securities and Exchange Commission (the "SEC")
has brought a civil action against Drexel Burnham
and several of its key employees in the United
States District Court for the Southern District of
New York. The complaint alleges violations of the
Securities Exchange Act of 1934 (the "1934 Act")
and rules and regulations thereunder and of the
Securities Act of 1933 (the "1933 Act"). The
complaint charges trading on inside information,
market manipulation, fraud, failure to file
Schedule 13Ds, improper disclosure, parking,
aiding and abetting violations of the net capital
rules, and margin and record keeping violations.
The complaint seeks an injunction against further
violations of the securities laws, disgorgement of
profits and fees received and losses avoided as a
result of the alleged illegal conduct, treble any
profits realized or losses avoided on insider
trading, and all further relief, legal or
equitable, that the Court believes is warranted
under the circumstances. The Fund also has been
advised that Drexel Burnham and its parent The
Drexel Burnham Lambert Group Inc. ("DBL Group")
and several key employees of its High Yield Bond
Department are targets of a grand jury
investigation being conducted by the United States
Attorney for the Southern District of New York
with respect to certain alleged violations of the
federal criminal laws including, but not limited
to, securities fraud, mail and wire fraud and
racketeering. The staff of the United States
Attorney's office has advised Drexel Burnham and
DBL Group that Drexel Burnham, DBL Group and such
key employees may be indicted at any time. From
time to time some of the employees referred to
above may be involved in portfolio transactions
with the Fund. Drexel Burnham has advised the Fund
that no assurance can be given that the results of
the SEC action or grand jury investigation will
not have an adverse effect on Drexel Burnham
and/or the market for "high yield" securities, a
market in which Drexel Burnham is an important
participant.
THE FUND
The Fund is a newly organized, diversified, closed-end management
investment company with a leveraged capital structure, as of the closing of the
offering made hereby and the concurrent offerings, consisting of (i) $50,000,000
aggregate principal amount of Notes, (ii) 12,000,000 shares of Common Stock
having an offering price of $10.00 per share, (iii) the Preferred Shares offered
hereby, in each such case subject to increase upon the exercise of
over-allotment options, and (iv) the Fund's pre-offering capitalization of
11,000 shares of Common Stock. See "Underwriting." The Fund's investment
objective is to provide high current income, while seeking to preserve
shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high yield" securities. The Fund will invest primarily
in fixed-income securities rated in the lower categories by established rating
agencies (consisting principally of fixed-income securities rated "BB"/"Ba" or
lower by the Rating Agencies(1) or non-rated fixed-income securities deemed by
the Investment Adviser to be of comparable quality. The Fund's investments will
also be subject to the Investment Guidelines. See "Investment Objective and
Policies--Investment Guidelines." The fixed-income securities in which the Fund
will invest 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 obligation and generally involve more credit
risk than securities in the higher rating categories. See "Investment Objective
and Policies."
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at net asset value
at any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Accordingly, open-end investment companies
are subject to periodic asset in-flows and out-flows that can complicate
portfolio management. Closed-end investment companies do not face the prospect
of having to liquidate portfolio holdings to satisfy redemptions at the option
of shareholders or having to maintain cash positions to meet the possibility of
such redemptions. The Fund will, however, be required to have sufficient cash or
cash equivalents to meet interest payments on the Notes and dividend payments on
the Preferred Shares and to fund certain redemptions of these securities in
certain circumstances. See "Description of Preferred Stock," "Description of
Notes" and "Surety Arrangement."
The Fund was organized as a corporation under the laws of Maryland on May
13, 1988 and has registered with the SEC under the 1940 Act. The Fund's
principal office is located at One Financial Center, Boston, Massachusetts
02111. The Fund's Investment Adviser is Prospect StreetSM Investment Management
Co., Inc., an investment management firm registered with the SEC under the
Investment Advisers Act of 1940, as amended. See "The Investment Adviser."
- ----------------------
(1)Throughout this Prospectus, references to ratings by the Rating Agencies will
indicate the S&P rating followed by the Moody's rating in the format shown.
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of November 28, 1988, and as adjusted to give effect to the issuance of the
Preferred Shares, the Notes and the Common Stock (in each case assuming no
exercise of the over-allotment options described under "Underwriting").
ACTUAL AS ADJUSTED
------ -----------
Long-term debt:
Senior Extendible Notes(1) .......................... $ -- $ 50,000,000
======== ============
Shareholders' equity:
Taxable Auction Rate Preferred Stock, no par value,
authorized 1,000 shares, none issued, 300 shares
issued and outstanding, as adjusted ................ $ -- $ 30,000,000
======== ============
Common Stock, $.01 par value, authorized 100,000,000
shares, 11,000 shares issued and outstanding,
12,011,000 shares issued and outstanding,
as adjusted ....................................... $ 110 $ 120,110
Capital in excess of par value ...................... 102,190 110,004,124
-------- -------------
Net assets applicable to Common Stock
outstanding(2) ..................................... $102,300 $110,124,234
======== ============
- --------------------
(1)The underwriting discounts and offering expenses related to the offering of
the Notes, estimated at $761,033 will be deferred and amortized over five
years.
(2)After deduction of underwriting discounts and offering expenses, estimated at
$9,978,066, related to the offerings of the Preferred Shares and the Common
Stock.
The costs and expenses relating to the offerings of the Notes and the
Preferred Shares, estimated at $1,784,000, will reduce the net assets
attributable to the Common Stock. These costs and expenses will include the
underwriting discounts on the Notes and the Preferred Shares, the fees
associated with the registration with the Securities and Exchange Commission and
filings under state securities laws and with the National Association of
Securities Dealers, Inc. and the Rating Agencies' fees. In addition, the Fund
will have certain other ongoing expenses with respect to the Notes and the
Preferred Shares such as the amortization of the premium under the Surety Bond
and Surety Custodian, transfer agent, paying agent, registrar, auction agent and
trustee fees and legal and other administrative fees, as well as interest
payments on the Notes and dividend payments on the Preferred Shares.
The Fund will be required to maintain specified asset coverages for the
Notes and the Preferred Shares of at least 300% and 200%, respectively,
immediately following this offering. Further, asset coverage with respect to the
Notes must be at least 200% on an ongoing basis in order to declare dividends on
the Preferred Shares. See "Description of Preferred Stock--Dividends." Such
asset coverage requirements are prescribed by the 1940 Act.
The asset coverage under the 1940 Act for the Notes immediately following
completion of this offering and the concurrent offerings of Notes and Common
Stock (giving effect to the deduction of $9,978,066, representing underwriting
discounts and estimated offering expenses for the Preferred Shares and the
Common Stock, and assuming no exercise of over-allotment options) will be
computed as follows:
<PAGE>
Fund assets less
liabilities not constituting
senior securities = $190,123,333 = 3.80 = 380%
- ---------------------------- ------------ ----
Senior securities $50,000,000 1
representing indebtedness
(i.e., Notes)
The asset coverage under the 1940 Act for the Preferred Shares immediately
following completion of this offering and the concurrent offerings of Notes and
Common Stock (giving effect to the deduction of $9,978,066, representing
underwriting discounts and estimated offering expenses for the Preferred Shares
and the Common Stock, and assuming no exercise of over-allotment options) will
be computed as follows:
Fund assets less
liabilities not constituting
senior securities = $190,123,333 = 2.38 = 238%
- ---------------------------- ------------ ----
Senior securities $80,000,000 1
representing indebtedness
(i.e. Notes) plus
liquidation value of
Preferred Shares
If asset coverage with respect to the Notes declines below 200% following
this offering (as a result, for example, of a decrease in the value of the
Fund's assets), dividends on the Preferred Shares would be prohibited. See
"Description of Preferred Stock--Dividends" and "Federal Taxation." In addition,
in the event that the Fund fails to maintain, as of the last Business Day of any
month, asset coverage with respect to senior securities representing
indebtedness, including the Notes, of at least 300% (or such higher percentage
as may in the future be specified in the 1940 Act as the minimum asset coverage
for senior securities representing indebtedness of a closed-end investment
company as a condition of paying dividends on common stock), and does not cure
such failure by the last Business Day of the following month, the Notes will be
subject to a mandatory partial redemption. See "Description of Notes--
Restrictive Covenants" and "--Events of Default."
The Fund will also be required to maintain specified asset coverages for
the Preferred Shares and the Notes based on specified discounted values for its
portfolio investments. Failure to maintain such discounted values will entitle
Financial Security to cause the Fund to make partial redemptions of the
Preferred Shares pursuant to the terms of the Insurance Agreement and/or may
result in mandatory partial redemptions of the Notes pursuant to the Indenture.
See "Investment Objective and Policies--Investment Guidelines," "Surety
Arrangement--Insurance Agreement" and "Description of Notes--Asset Maintenance"
and "--Events of Default."
USE OF PROCEEDS
The net proceeds from the sale of the Preferred Shares offered hereby,
together with the net proceeds from the sale of the Notes and the Common Stock,
estimated at $190,700,000 ($219,305,000 if the over-allotment options for the
Preferred Shares, the Notes and the Common Stock are exercised in full), will
be invested in accordance with the Fund's investment objective and policies. The
Fund will be fully invested in accordance with its investment objective and
policies within six months after completion of the offering, subject to market
conditions and the availability of appropriate investment opportunities. Pending
such investment, the proceeds will be invested in short-term interest or
dividend bearing instruments consistent with the Investment Guidelines.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide high current income,
while seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of "high yield" securities. There
can be no assurance that the Fund's investment objective will be achieved. The
Fund's investment objective is a fundamental policy. Pursuant to the 1940 Act,
fundamental policies may not be changed without the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock and a majority
of the outstanding Preferred Shares, voting as separate classes, which, for
purposes of the 1940 Act, means for each class the lesser of (a) more than 50%
of the outstanding shares of such class or (b) 67% or more of the shares of
such class present or represented at a meeting at which more than 50% of the
outstanding shares of such class are present or represented by proxy.
Accordingly, no change in the Fund's investment objective could occur without
the affirmative vote of both classes of stock. In addition, under the Indenture,
the Fund may not change its investment objective without the consent of the
holders of a majority in principal amount of the Notes.
INVESTMENT STRATEGY
Under normal market conditions, the Fund will invest at least 65% of its
total assets in "high yield" securities rated in the lower categories by
recognized rating agencies or non-rated fixed-income securities deemed by the
Investment Adviser to be of comparable quality, although the Fund currently
intends to invest a substantially higher percentage of its assets in such
securities to the extent permitted by market conditions. The Fund's portfolio
investments will consist principally of fixed-income securities rated "BB"/"Ba"
or lower by the Rating Agencies. The Fund reserves the right, under normal
market conditions, to invest up to 35% of its total assets in money market
instruments and fixed-income securities rated higher than "BB"/"Ba," although
the percentage invested in such securities may increase under other than normal
market conditions, as discussed below.
Under the Investment Guidelines, certain types of securities in which the
Fund may otherwise invest pursuant to the foregoing strategy and the investment
policies stated below are not eligible for inclusion in the calculation of the
discounted value of the Fund's portfolio. Such instruments include, for example,
securities rated "CC"/"Ca" and "C"/"C" by the Rating Agencies, preferred or
common stock, zero coupon or similar securities that do not provide for the
periodic payment of interest in cash 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, it is anticipated that
they will not constitute a significant portion of the Fund's portfolio. See
"Investment Guidelines" below, "Description of Notes--Asset Maintenance" and
"Surety Arrangement--Insurance Agreement."
"High yield" bonds, the generic name for corporate bonds rated between
"BB"/"Ba" and "C"/"C" by the Rating Agencies, are frequently issued by
corporations in the growth stage of their development. Bonds which are 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
obligation. 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. Further information concerning the ratings of
corporate bonds, including the rating categories of the Rating Agencies, is
provided in Appendix A. "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 securities subsequently
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.
Securities acquired by the Fund may include preferred stocks (including
convertible preferred stock) and all types of debt obligations having varying
terms with respect to security or credit support, subordination, purchase price,
interest payments and maturity. Such obligations may include, for example,
bonds, debentures, notes (including convertible debt securities), mortgage or
other asset-backed instruments, 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 (including obligations, such as
repurchase agreements, secured by such instruments). Most debt securities in
which the Fund will invest will bear interest at fixed rates. However, the Fund
reserves the right to invest without limitation in fixed-income debt securities
that have variable rates of interest or involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
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 or
warrants to purchase common stock or other equity securities 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 30% of its total assets in securities that are
not readily marketable, including securities restricted as to resale, and
non-rated securities. A security that is not readily marketable will not be
acquired unless (i) the Investment Adviser believes such security to be of
comparable quality to publicly traded securities and (ii) such security carries
rights to be registered under the federal securities laws. Securities that are
not readily marketable may offer higher yields than comparable publicly traded
securities. However, the Fund may not be able to sell these securities when the
Investment Adviser 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 will also be permitted to invest up to 20% of its total assets in
zero coupon securities. Zero coupon securities pay no cash income but are
purchased at a deep discount 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.
For a discussion of certain tax consequences resulting from the inclusion of
zero coupon securities in the Fund's portfolio, see "Federal Taxation--Federal
Income Tax Treatment of Fund."
Notwithstanding the foregoing, if market conditions threaten to erode the
value of the Fund's assets, the Fund may adopt a temporary defensive investment
strategy and invest without limitation in high-grade money market instruments,
including commercial paper of domestic and foreign corporations, certificates of
deposit, bankers' acceptances and other obligations of banks, repurchase
agreements and short-term obligations issued or guaranteed by the United States
government or its instrumentalities or agencies, and also in fixed-income
securities rated higher than "BB"/"Ba" by the Rating Agencies. In addition,
under such market conditions, the Fund may invest in unrated commercial paper
which it deems to have risk characteristics comparable to such instruments. The
yield on these securities will tend to be lower than the yield on other
securities to be purchased by the Fund.
The Fund may also invest in fixed-income securities rated higher than
"BB"/"Ba" by the Rating Agencies or non-rated fixed-income securities deemed by
the Investment Adviser to be of comparable quality when the difference in yields
between quality classifications is relatively narrow. Investments in higher
rated 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 lower than those from lower rated issues.
The achievement of the Fund's objective will depend upon the Investment
Adviser's analytical and portfolio management skills. There is no assurance that
this objective will be achieved. All nonfundamental investment policies of the
Fund, including those described below under "Investment Guidelines," may be
changed by the Board of Directors of the Fund without shareholder approval.
INVESTMENT GUIDELINES
The composition of the Fund's portfolio will reflect the Note Investment
Guidelines and the Surety Investment Guidelines. The Rating Agencies issue
ratings for various securities reflecting the perceived creditworthiness of such
securities or, in the case of the Preferred Shares, the perceived claims-paying
ability of the surety that is guaranteeing the Scheduled Payments on the
Preferred Shares. See "Surety Arrangement--Insurance Agreement." The respective
Investment Guidelines are designed to ensure that assets underlying the Notes or
the Preferred Shares, as the case may be, will be sufficiently diversified and
will be of sufficient credit quality and amount to justify investment grade
ratings of "AAA"/"Aaa". The Investment Guidelines are not prescribed by law, but
have been implemented by the Fund in order to receive the above-described
ratings for senior securities, 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 Investment
Guidelines provide tests for portfolio diversification and asset coverage that
supplement the applicable requirements under the 1940 Act (and may be more or
less restrictive), but are the sole determinants in the rating of a security.
Under the respective Investment Guidelines, the Fund will be required to
maintain specified discounted asset values for its portfolio representing the
Note Basic Maintenance Amount and Surety Assets Coverage. For definitions of
such terms, see "Description of Notes--Asset Maintenance" and "Surety
Arrangement--Insurance Agreement." For the purpose of determining the Fund's
compliance with the respective Investment Guidelines, the market value of the
Fund's portfolio holdings will be discounted by dividing by factors determined
by the respective Rating Agencies or Financial Security, as the case may be,
which vary according to the particular type of security being valued for such
purpose. To the extent any particular portfolio holding does not meet the
applicable Investment Guidelines, it would not be included for purposes of
determining compliance with the Note Basic Maintenance Amount or Surety Assets
Coverage, as the case may be. The respective Investment 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, and 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.
Upon any failure to maintain the required Note Basic Maintenance Amount or
Surety Assets Coverage, the Fund would seek to alter the composition of its
portfolio to attain required asset coverage within an 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 Notes and/or
Financial Security, as surety under the Surety Bond, will acquire certain
rights. See "Description of Notes--Asset Maintenance" and "Surety
Arrangement--Insurance Agreement." "Business Day" means a day on which the New
York Stock Exchange (the "NYSE") is open for trading and which is not a Saturday
or Sunday or a holiday, including New Year's Day, Martin Luther King, Jr. Day,
Presidents Day, Good Friday, Patriots Day, Memorial Day, Bunker Hill Day,
Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas Day or
any other day on which banks in New York City or Boston are authorized or
obligated by law or executive order to close.
Under the Notes Investment Guidelines, corporate debt obligations will not
be included in the calculation of the discounted value of the Fund's portfolio
for the purpose of determining compliance with Note Basic Maintenance Amount
unless they (a) are rated "CCC" or higher by S&P or "Caa" or higher by Moody's,
(b) provide for the periodic payment of interest thereon in cash, (c) have been
registered under the 1933 Act, (d) do not provide for conversion or exchange
into equity capital at any time over their respective lives, (e) have not had
notice given in respect thereof that any such corporate debt obligations are the
subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the Fund's total assets at any
time shall not be subject to the provisions of this clause (e)) and (f) are not
subject to call options. In addition, portfolio holdings must be within the
following diversification requirements in order to be included in the
calculations of the discounted value of the Fund's portfolio for the purpose of
determining compliance with the Note Basic Maintenance Amount:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
VALUE OF ELIGIBLE PORTFOLIO ASSETS
MINIMUM ORIGINAL PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' ISSUE SIZE OF INVESTED IN ANY ONE INDUSTRY
RATINGS(1) EACH ISSUE ONE ISSUER(2) CATEGORY(2)
---------- ------------ ---------------- -----------------
($ IN MILLIONS)
<S> <C> <C> <C>
"AAA"/"Aaa".......................................... $100 10.0% 50.0%
"AA"/"Aa"............................................ 100 10.0 33.3
"A"/"A".............................................. 100 10.0 33.3
"BBB"/"Baa".......................................... 100 5.0 20.0
"BB"/"Ba"............................................ 100(3) 4.0 12.0
"B"/"Bl,""B2" and "B3" (subordinated) ............... 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa" (unsecured
subordinated)(4) ................................... 100(3) 2.0 5.0
"A-1 +"/"P-1"(5)..................................... NA 10.0 NA
"A-l"/"P-1"(5)....................................... NA 10.0 33.3
"A-2"/"P-2"(5) ...................................... NA 5.0 20.0
- ------------------------
<FN>
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or (3)
modifiers to the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-" may
not be included in determining compliance with the Note Basic Maintenance Amount. In the event that a
corporate debt obligation has received a different rating from S&P than from Moody's, the restrictions
relating to the lower rating will apply. See Appendix A for further information concerning S&P's and
Moody's rating categories.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each
lower rating category, except that the calculations with respect to commercial paper investments
constituting corporate bonds shall be made separately and independently of but on the same basis as the
cumulative total guidelines applicable to other types of corporate debt obligations. To the extent the
relevant limitation is less restrictive than that set forth under "Investment Restrictions" below, the more
restrictive limitation shall apply.
(3) 20% of the aggregate market value of all corporate debt obligations in these rating categories may be from
issues with an original issue size greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied
senior rating of B- or higher (i.e., such subordinated debt would have a rating of "B-" or higher if it
were senior debt of the issuer) if rated by S&P to be included in determining compliance with the Note
Basic Maintenance Amount. The aggregate market value of corporate debt obligations in this rating category
in excess of 20% of the aggregate market value of the Fund's assets will not be included in determining
such compliance.
(5) Represents commercial paper investments.
</FN>
</TABLE>
Under the Surety Investment Guidelines, corporate debt obligations will not
be included in the calculation of the discounted value of the Fund's portfolio
for the purpose of determining compliance with Surety Assets Coverage unless
they (a) are rated "CCC" or higher by S&P or "B3" or higher by Moody's, or are
non-rated fixed-income securities deemed by the Investment Adviser to be of
comparable quality (subject to the limitations described below), (b) provide for
the periodic payment of interest thereon in cash, (c) have been registered under
the 1933 Act or provide for subsequent registration under the 1933 Act, (d) have
a remaining term to maturity of not more than 30 years, (e) have not had notice
given in respect thereof that any such corporate debt obligations are the
subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the Fund's total assets at any
time shall not be subject to the provisions of this clause (e)) and (f) are not
subject to call options. Notwithstanding the foregoing, non-rated fixed-income
securities and unregistered corporate debt securities may be included in the
calculations of the discounted value of the Fund's portfolio for the purpose of
determining compliance with Surety Assets Coverage, as long as they do not
exceed 30% of the Fund's eligible portfolio assets at any time, with certain
limitations. In addition, portfolio holdings must be within the following
diversification requirements in order to be included in the calculation of the
discounted value of the Fund's portfolio for the purpose of determining
compliance with Surety Assets Coverage:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
VALUE OF ELIGIBLE PORTFOLIO ASSETS
MINIMUM ORIGINAL PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' ISSUE SIZE OF INVESTED IN ANY ONE INDUSTRY
RATINGS(1) EACH ISSUE ONE ISSUER(2) CATEGORY(2)
---------- ------------ ---------------- -----------------
($ IN MILLIONS)
<S> <C> <C> <C>
"AAA"/"Aaa".......................................... $100 10.0% 50.0%
"AA"/"Aa"............................................ 100 10.0 33.3
"A"/"A".............................................. 100 10.0 33.3
"BBB"/"Baa".......................................... 100 5.0 20.0
"BB"/"Ba"............................................ 100(3) 4.0 12.0
"B"/"B1" or "B2"..................................... 100(3) 3.0 8.0
"CCC"/"B3"(4)........................................ 100(3) 3.0 8.0
Non-rated/unregistered corporate bonds(5)............ 50 3.0 8.0
"A-1+"/"P-1"(6) ..................................... NA 10.0 NA
"A-1"/"P-1"(6) ...................................... NA 10.0 33.3
"A-2"/"P-2"(6) ...................................... NA 5.0 20.0
<FN>
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or
(3) modifiers to the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-"
may not be included in determining compliance with Surety Assets Coverage. In the event that a corporate
debt obligation has received a different rating from S&P than from Moody's, the restrictions relating to
the lower rating will apply. See Appendix A for further information concerning S&P's and Moody's rating
categories. If only one of the Rating Agencies has issued a rating for such instrument, then only the
rating of such agency is required; provided, however, that not more than 15% of the aggregate market value
of the rated corporate debt obligations included in determining compliance with Surety Assets Coverage
shall be comprised of corporate debt obligations having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each
lower rating category, except that the calculations with respect to commercial paper investments
constituting corporate bonds shall be made separately and independently of but on the same basis as the
cumulative total guidelines applicable to other types of corporate debt obligations. To the extent the
relevant limitation is less restrictive than that set forth under "Investment Restrictions" below, the more
restrictive limitation shall apply.
(3) 20% of the aggregate market value of all corporate debt obligations in these rating categories may be from
issues with an original issue size of greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied
senior rating of "B-" or higher (i.e., such subordinated debt would have a rating of "B-" or higher if it
were senior debt of the issuer) if rated by S&P to be included in determining compliance with Surety Assets
Coverage. The aggregate market value of corporate debt obligations in this rating category in excess of 20%
of the aggregate market value of the Fund's eligible portfolio assets will not be included in determining
such compliance.
(5) Non-rated/unregistered corporate bonds may not constitute more than 30% of the aggregate market value of
the Fund's eligible portfolio assets. Not more than 18% of the aggregate market value of the Fund's
eligible portfolio assets may consist of non-rated/unregistered corporate bonds from issues with original
issue sizes of $50 million or more but less than $100 million, provided that not more than 9% of the
aggregate market value of the Fund's eligible portfolio assets may consist of nonrated/unregistered
corporate bonds from issues with an original issue size of $50 million or more but less than $75 million.
(6) Represents commercial paper investments.
</FN>
</TABLE>
PORTFOLIO MATURITY AND TURNOVER
The Fund's holdings may include issues of various maturities. Ordinarily,
the Fund will emphasize investments in medium and longer term instruments, (i.e.
those with maturities in excess of three years) but the weighted average
maturity of portfolio holdings may be shortened or lengthened depending
primarily upon the Investment Adviser'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. Since the weighted average of the Fund's portfolio will fluctuate
depending on market conditions and investment opportunities, the Fund does not
believe that it can accurately generalize as to the range of the weighted
average maturity of its investments. The Fund, however, does not expect that the
weighted average maturity of the Fund's portfolio will, under normal conditions
and when it is fully invested, exceed 15 years.
The Investment Adviser will actively make portfolio adjustments that
reflect the Fund's investment strategy, but will not trade securities for the
Fund for the purpose of seeking short-term profits. It will, however, change the
Fund's securities, regardless of how long they have been held, when it believes
doing so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is anticipated
that the Fund's portfolio turnover rate generally will not exceed 100% per
annum. A 100% annual turnover rate would occur, for example, if all the
securities in the Fund's portfolio were replaced once within a period of one
year. The Fund does, however, reserve full freedom with respect to portfolio
turnover. In periods when there are rapid changes in economic conditions or
security price levels or when investment strategy is changed significantly,
portfolio 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 in the form of increased dealer spreads and brokerage commissions.
CERTAIN INVESTMENT STRATEGIES
The Investment Adviser reserves the right to employ the strategies
described below in order to help achieve the Fund's investment objective. Such
strategies include the lending of portfolio securities, the short sale of
securities and the use of futures contracts and options thereon, reverse
repurchase agreements and repurchase agreements (other than certain repurchase
agreements with qualified depository institutions having maturities not longer
than one day). Unless so stated below, there are no limits to the Fund's use of
these investment strategies. Pursuant to the terms of the Indenture, however,
the Fund may not employ certain of these strategies unless each of the Rating
Agencies provides written confirmation that the use of such strategy will not
adversely affect its rating of the Notes. Moreover, the respective Investment
Guidelines, as well as other terms of the Surety Arrangement, may have the
effect of limiting the Fund's use of other investment strategies described
below, such as investments in foreign securities and the use of options, to the
extent such investments are not eligible for inclusion in the discounted value
of the Fund's portfolio.
Securities Loans. 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. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place a month or
more after the date of the transaction). The Fund will invest in when-issued and
delayed delivery securities in order to lock in a favorable rate of return. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. 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. To facilitate such acquisitions, the Fund's
custodian bank will maintain, in a separate account of the Fund, cash or United
States government or other high quality debt 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. 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 Fund is dependent on the other party to successfully
complete when-issued and delayed delivery transactions. If such other party
fails to complete its portion of the transaction, the Fund will have lost the
opportunity to invest the amount set aside for such transaction in the
segregated asset account.
Repurchase Agreements. 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 re-sell such security at a fixed time and price (representing
the Fund's cost plus interest). The Fund will invest in repurchase obligations
to assist in the management of its portfolio and also to obtain additional
revenue and thereby maximize shareholders' value. 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 obligations of the United
States government or its agencies or instrumentalities. Repurchase agreements
may also be viewed as loans made by the Fund which are collateralized by the
securities subject to repurchase. The Investment Adviser will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Investment Adviser will also evaluate the
creditworthiness of the repurchase agreement sellers with whom the Fund does
business and will monitor their creditworthiness during the period of any
repurchase agreement. If the seller defaults, the Fund could realize a loss on
the sale of the underlying security to the extent that the proceeds of 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 required to return the
underlying collateral to the seller's estate.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to debt obligations which could otherwise be sold by the
Fund. A reverse repurchase agreement is an instrument under which the Fund may
sell an underlying debt instrument and simultaneously obtain 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 Fund will
undertake reverse repurchase transactions to assist in the management of its
portfolio and to obtain additional liquidity in its portfolios. The value of
underlying securities will be at least equal at all times to the total amount of
the resale obligation, including the interest factor. The Fund receives payment
for such securities only upon physical delivery or evidence of book entry
transfer by its custodian. Regulations of the SEC require that if securities are
sold by the Fund under a reverse repurchase agreement, the Fund will maintain in
a segregated account of the Fund, established with the Custodian, cash or United
States government or other high quality debt securities from its portfolio,
marked to market daily and having a value equal to the proceeds received on any
sale subject to repurchase plus interest. 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
would be subject to the restrictions on borrowing described below under
"Investment Restrictions." The Fund will not hold more than 5% of the value of
its total assets in reverse repurchase agreements and will enter into such
agreements only so long as it is not in violation of Section 18 of the 1940 Act.
Foreign Investments. The Fund may invest up to 10% of the value of its
total assets in securities principally traded in foreign markets and Eurodollar
certificates of deposit issued by branches of U.S. banks. Foreign investments
may involve risks not present to the same degree in domestic investments, such
as future political and economic developments, the imposition of withholding
taxes on interest income, seizure or nationalization of foreign deposits, the
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal of and
interest on such obligations. Foreign securities may be less liquid and more
volatile than U.S. securities, and foreign accounting and disclosure standards
may differ from U.S. standards. In addition, settlement of transactions in
foreign securities may be subject to delays, which could result in adverse
consequences to the Fund including restrictions on the subsequent resale of such
securities. The value of foreign investments may rise or fall because of changes
in currency exchange rates. In addition, the costs of exchanging foreign
currencies for payments in U.S. dollars and nonnegotiated brokerage commissions
in foreign countries may reduce the yield on foreign securities. In the event of
a default in payment on foreign securities, the Fund may incur increased costs
to obtain a judgment against the foreign issuer in the United States or abroad.
The Fund may buy or sell foreign currencies or deal in forward foreign currency
contracts to hedge against possible fluctuations in exchange rates that may
affect the yield of the Fund when the foreign currencies are converted in
payment in U.S. dollars. The Fund may engage in currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The Fund
will use currency transactions only for hedging and not speculation. A forward
currency contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
The Fund's dealings in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions denominated or
quoted in the currency.
The Fund may not use position hedging with respect to a particular currency
to an extent greater than the aggregate market value (at the time of entering
into the position hedge) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency. If the Fund
enters into a position hedging transaction, the Fund's custodian will place cash
or U.S. Government securities or other high grade liquid debt securities in a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to the forward contract.
Options. The Fund may write (sell) call options which are traded on
national securities exchanges with respect to securities in its portfolio. The
Fund may only write "covered" call options, that is, options on securities it
holds in its portfolio or has an immediate right to acquire through conversion
or exchange of securities held in its portfolio. 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. Although there is
no overall limitation on the percentage of the Fund's portfolio securities which
may be subject to a hedge position, in view of its investment objective, the
Fund generally would write call options only in circumstances in which the
Investment Adviser does 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 foregoes 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 any 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. The extent to which the Fund may enter into transactions
involving call options also may be limited by the requirements of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code") for qualification
as a regulated investment company.
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will invest in futures contracts or related
options and has no experience in doing so. However, the Fund has reserved the
right, subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser 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. However, employing this
technique effectively may require skills that are different than those required
to select portfolio securities and the Investment Adviser has no experience in
using this technique.
In the event the Fund determines to invest in futures contracts and options
thereon, it will not purchase or sell such instruments if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts would exceed 5% of the value of the
Fund's total assets. In addition, in accordance with the regulations of the
Commodity Futures Trading Commission (the "CFTC") under which it is expected
that the Fund will be exempted from registration as a commodity pool operator,
the Fund may only enter into futures contracts and options on futures contracts
transactions for purposes of hedging all or a part of its portfolio. There is no
overall limitation on the percentage of the Fund's portfolio securities which
may be subject to hedge position. Under an existing regulation, the Fund is
permitted, under limited circumstances, to write options on futures contracts
for purposes other than hedging without CFTC registration, and the Fund will
have the right to engage in such transactions for those purposes, subject to
compliance with such CFTC regulations and the approval of the Board of
Directors. The extent to which the the Fund may enter into transactions
involving futures contracts also may be limited by the requirements of the
Internal Revenue Code for qualification as a regulated investment company.
Risks of Hedging Transactions. The use of options, financial futures and options
on financial futures may involve risks not associated with other types of
investments which the Fund intends to purchase, and it is possible that a
portfolio that utilizes hedging strategies may not perform as well as a
portfolio that does not make use of such devices. In particular, the Fund's
positions in options and financial futures may be entered and closed out only on
a federally licensed exchange which provides a market therefor, and there can be
no assurance that a liquid market will exist for any particular option or
futures contract. Because financial futures and related options markets
generally impose limits on daily price movement, it is possible that the
Investment Adviser will not be able to close out hedge positions promptly. The
inability to close out options and futures positions could have an adverse
impact on the Fund's ability to hedge its securities effectively and might, in
some cases, require the Fund to deposit substantial amounts of additional cash
to meet applicable margin requirements. The Fund's ability to hedge effectively
through transactions in financial futures or options depends on the degree to
which price movements, which include, in part, changes in interest rates, in the
Fund's holdings correlate with price movements of the hedging instruments.
Inasmuch as the Fund's options and futures will not duplicate such underlying
securities, the correlation will probably not be perfect. Consequently, the
prices, which include, in part, changes in interest rates, of the securities
being hedged may not move in the same amount as the hedging instrument. It is
possible that there may be a negative correlation between the hedging instrument
and the hedged securities, which would prevent the Fund from achieving the
anticipated benefits of hedging transactions or may cause the Fund to realize
losses and thus be in a worse position than if such strategies had not been
used.
Additional Leverage. The Fund has reserved the right to borrow money to the
extent such borrowing would not result in a violation of the 1940 Act Asset
Coverage (as defined under "Description of Notes--Asset Maintenance") and would
not otherwise violate Section 18 of the 1940 Act or restrictions imposed by the
Insurance Agreement. The Fund may borrow to the extent then permitted by the
1940 Act through the public or private issuance of debt securities and/or from
lenders of all types, such as banks, savings and loan associations, insurance
companies and similar financial institutions. In addition, the Fund may borrow
up to 5% of its total assets for temporary purposes. To the extent permitted by
the 1940 Act, the Fund may also borrow additional amounts as it redeems Notes
and Preferred Shares.
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 permitted borrowings for any other purpose, including additional
investment leverage.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. All percentage
limitations on investments will apply at the time of the making of an investment
and shall 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 1940 Act Asset
Coverage or otherwise result in a violation of Section 18 of the 1940 Act,
or issue any senior securities (as defined in the 1940 Act) other than
Preferred Shares, Notes or debt instruments related to borrowings
described under "Investment Objective and Policies--Certain Investment
Strategies--Additional Leverage" 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) shall not be deemed a senior security.
Pursuant to Section 18 of the 1940 Act, not more than 33-1/3% of the
Fund's capital structure may consist of borrowings representing
indebtedness, such as the Notes, and not more than 50% of the Fund's
capital structure may consist of borrowings represented by indebtedness,
such as the Notes, and senior securities of a class which is stock, such
as the Preferred Shares.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 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 which,
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.
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 consistently 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. Invest in securities of any issuer, if, to the knowledge of the
Fund, officers and Directors of the Fund and officers and directors of the
Investment Adviser who beneficially own more than 0.50% of the securities
of that issuer together own more than 5% of such issuer.
10. With respect to 75% of the value of the Fund's total 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, provided that this limitation does not
apply to obligations issued or guaranteed as to interest and principal by
the United States government or its agencies or instrumentalities.
11. With respect to 75% of the value of the Fund's total assets,
acquire more than 10% of the outstanding voting securities of any issuer.
12. Invest 25% or more of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations
issued or guaranteed as to interest and principal by the United States
government or its agencies or instrumentalities.
13. Invest more than 30% of the market value or other fair value of
its total assets in securities that are not readily marketable, including
those that are restricted as to disposition under the federal securities
laws or otherwise. This restriction shall 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 or
to repurchase agreements that have a maturity of seven days or less;
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 securities that are not readily
marketable, exceed 30% of the market or other fair value of the Fund's
total assets.
14. Invest in the securities of other registered investment
companies, except as they may be acquired as part of a merger or
consolidation or acquisition of assets or by purchases in the open market
involving only customary brokers' commissions.
15. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal
in, represent interests in or are secured by interests in such leases,
rights or contracts.
16. Make investments for the purpose of exercising control or
management over the issuer of any security.
17. Write, purchase or sell puts, calls or combinations thereof, or
purchase or sell futures contracts or related options, except that the
Fund may write call options and invest in futures contracts and related
options as provided in "Investment Guidelines--Certain Investment
Strategies --Options" and "--Futures Contracts and Related Options."
---------------------------------
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 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 "Investment Objective and Policies--Certain Investment
Strategies--Futures Contracts and Related Options." Further, as noted, certain
practices are subject to the condition that they not adversely affect the then
current ratings of the Fund's outstanding securities and are subject to the
prior written approval of Financial Security.
Because they are fundamental policies, the 1940 Act requires that the
foregoing Investment Restrictions may not be changed without the approval of the
holders of a majority of the outstanding shares of Common Stock and a majority
of the outstanding Preferred Shares, voting as separate classes, which, for
purposes of the 1940 Act, means for each class the lesser of (a) more than 50%
of the total number of outstanding shares of such class or (b) 67% or more of
the shares of such class present or represented at a meeting at which more than
50% of the outstanding shares of such class are present or represented by proxy.
<PAGE>
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their addresses and their principal
occupations for at least the past five years are set forth below.
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND ADDRESS(1) WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- --------------- ----------------------
<S> <C> <C>
Richard E. Omohundro, Jr.(2).........President and Director President of Prospect Street Investment
Prospect Street Investment Management Co., Inc. since June 1988.
Management Co., Inc. Managing Director of Merrill Lynch from
One Financial Center 1983 to 1988 and Co-Manager of the
Boston, MA 02111 Merrill Lynch High Yield Bond Group
from 1978 through 1987.
John A. Frabotta(2)..................Vice President, Secretary, Vice President of Prospect Street In-
Prospect Street Investment Treasurer and Director vestment Management Co., Inc. since
Management Co., Inc. June 1988. Vice President of Merrill
One Financial Center Lynch from 1979 through June 1988.
Boston, MA 02111
C. William Carey(3) .................Director Chairman and Chief Executive Officer of
Town & Country Corporation Town & Country Corporation since 1965.
25 Union Street
Chelsea, MA 02150
Joseph G. Cote(2) ...................Director Managing Director of Merrill Lynch and
27 Beaumont Drive Co-Manager of the Merrill Lynch High
Melville, NY 11747 Yield Bond Group from 1978 to 1988.
Nathan V. Meyohas(3)(4)..............Director Chairman and Chief Executive Officer of
17 Avenue George V Transcontinental Services Group N.V.
Paris, France 75008 since May 1988. Private law practice in
France for 20 years prior to 1988. Direc-
tor of Prospect International High Income
Portfolio N.V. (since 1988), Banque
Internationale de Commerce (Paris) S.A.,
Banner Industries, Inc. (since 1985) and
several other companies in the United
States and Europe.
Harlan D. Platt(3) ..................Director Associate Professor of Finance and Insur-
Northeastern University ance, Northeastern University, College of
College of Business Business Administration, since 1981.
Administration
319 Hayden Hall
Boston, MA 02115
- ---------------------
<FN>
(1) Messrs. Frabotta and Meyohas will be elected by the holders of the Preferred Shares. The remaining
Directors will be elected by the holders of the Common Stock and the Preferred Shares, voting together as
a single class.
(2) Directors who are "interested persons" of the Fund, as defined in the 1940 Act.
(3) Directors who are members of the Audit Committee of the Fund's Board of Directors.
(4) Such Director is not a United States resident and such Director's assets may largely be located outside
of the United States. As a result, it may be difficult for United States investors to effect service upon
such Director within the United States, or to realize judgments of courts of the United States predicated
on civil liabilities of such Director under the federal securities laws. Criminal penalties under the
federal securities laws may be unenforceable against such Director.
</FN>
</TABLE>
<PAGE>
The Fund's Board of Directors consists of six members. Pursuant to the
Articles of Incorporation, the holders of Common Stock have voting rights of one
vote per share and holders of the Preferred Shares voting rights of one vote per
$1,000 of liquidation preference without regard to any liquidation preference
attributable to accumulated and unpaid dividends (i.e., 100 votes per Preferred
Share); provided that all the votes represented by a single Preferred Share must
be voted together. Under the Articles of Incorporation and the 1940 Act, the
holders of the Preferred Shares, as a separate class, are entitled to elect two
Directors (at least one of whom is not an "interested person" as defined in the
1940 Act) with the other four Directors (at least two of whom are not
"interested persons" as defined in the 1940 Act) elected by the holders of the
Common Stock and the Preferred Shares, voting together; provided, however, that
the holders of the Preferred Shares (or Financial Security pursuant to the
Surety Custody Agreement), as a separate class, will be entitled to elect the
smallest number of additional Directors as shall be necessary to assure that a
majority of the Directors has been elected by the holders of the Preferred
Shares if the Fund fails to pay accumulated dividends on the Preferred Shares in
an amount equal to two full years of dividends. See "Description of Preferred
Stock--Voting." Election of Directors is non-cumulative; accordingly, holders of
a majority of the voting power represented by the outstanding shares of Common
Stock and Preferred Shares, voting together as a single class, or a majority of
the outstanding Preferred Shares, voting separately as a class, may elect all of
the Directors who are subject to election by such class, as the case may be.
The Fund pays each Director not affiliated with the Investment Adviser a
fee of $10,000 per year plus $2,000 per Directors' meeting attended, together
with actual out-of-pocket expenses relating to attendance at such meetings. In
addition, the members of the Fund's Audit Committee, which consists of certain
of the Fund's non-interested Directors, receive $500 for each Audit Committee
meeting attended, other than meetings held on days on which there is also a
Directors' meeting, together with actual out-of-pocket expenses relating to
attendance at such meetings.
The Articles of Incorporation limit the personal liability of Directors and
officers to the Fund and its shareholders for monetary damages to the fullest
extent permitted by Maryland law. Based upon Maryland law and the Articles of
Incorporation, the Fund's Directors and officers have no liability to the Fund
and its shareholders for monetary damages except (a) for, and to the extent of,
actual receipt of an improper benefit in money, property or services, or (b)
in respect of an adjudication based upon a finding of active and deliberate
dishonesty which was material to the cause of action adjudicated. In accordance
with the 1940 Act, the Articles of Incorporation do not protect or purport to
protect Directors and officers against any liability to the Fund or its security
holders to which they would be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of their office.
In addition, the Articles of Incorporation and by-laws provide that the
Fund will indemnify its Directors and officers against liabilities and expenses
in connection with the performance of their duties on behalf of the Fund to the
fullest extent permitted by Maryland law, subject to the applicable requirements
of the 1940 Act and the interpretation of the Staff of the SEC of such
requirements. Under Maryland law and the Articles of Incorporation, the Fund is
entitled and obligated to indemnify each Director or officer in connection with
any proceeding to which such Director or officer is made a party by reason of
service in his capacity as a Director or officer unless it is proved that (1)
the act or omission of the Director or officer was material to the cause of
action adjudicated in the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty, or (2) the Director or officer
actually received an improper personal benefit in money, property or services,
or (3) in the case of any criminal proceeding, the Director or officer had
reasonable cause to believe that the act or omission was unlawful. The foregoing
standards apply both as to third party actions and derivative suits by or in the
right of the Fund. Indemnification may be against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the Director or officer
in connection with the proceeding. If the proceeding is one by or in the right
of the Fund, indemnification may not be made in respect of any proceeding in
which the Director or officer shall have been adjudged to be liable to the Fund.
In the view of the Staff of the SEC, an indemnification provision is consistent
with the 1940 Act if it (i) precludes indemnification for any liability,
whether or not there is an adjudication of liability, arising by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of duties
as described in Section 17(h) and (i) of the 1940 Act ("disabling conduct") and
(ii) sets forth reasonable and fair means for determining whether
indemnification shall be made; in the case of the Fund, "reasonable and fair
means" would include (1) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified
("indemnitee") was not liable by reason of disabling conduct (including a
dismissal for insufficiency of evidence) and (2) a reasonable determination,
based upon a review of the facts, that the indemnitee was not liable by reason
of disabling conduct, by (a) the vote of a majority of a quorum of Directors who
are neither "interested persons" of the Fund as defined in Section 2(a) (19)
of the 1940 Act nor parties to the proceeding, or (b) a written opinion of
independent legal counsel. In accordance with the 1940 Act, the Articles of
Incorporation do not protect or purport to protect Directors and officers
against any liability to the Fund or its security holders to which they would be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of duties involved in the conduct of their offices.
The indemnification rights provided or authorized by the Articles of
Incorporation or applicable law are not exclusive of any other rights to which a
person seeking indemnification may be entitled. The Fund may in the future
provide liability insurance for the benefit of its Directors and officers which
includes coverage for liability arising from the performance of their duties on
behalf of the Fund which is not inconsistent with the indemnification provisions
of the Articles of Incorporation and applicable law.
THE INVESTMENT ADVISER
THE INVESTMENT ADVISER
The Investment Adviser is Prospect Street(SM) Investment Management Co.,
Inc., a Massachusetts corporation having its principal offices at One Financial
Center, Boston, Massachusetts 02111. Organized in June 1988, the Investment
Adviser provides institutional clients with investment management services.
Richard E. Omohundro, Jr., President of the Investment Adviser, served as a
Vice President (1978 to 1983) and a Managing Director (1983 to 1988) of Merrill
Lynch and was Co-Manager of the Merrill Lynch High Yield Bond Group from 1978
through 1987. During that period, the Group raised approximately $13.6 billion
in new "high yield" securities through 107 issues and provided one of the
largest secondary trading markets for "high yield" securities. In 1987, the
Group raised approximately $5.8 billion in new offerings of "high yield"
securities and employed over 40 persons. Mr. Omohundro intends to devote as much
of his business time as is necessary and appropriate to the operations of the
Investment Adviser, which he presently anticipates will be approximately half
his business time.
John A. Frabotta, a Vice President of the Investment Adviser, assists Mr.
Omohundro in carrying on the business of the Investment Adviser. Mr. Frabotta
was a Vice President of Merrill Lynch from 1979 through June 1988, during which
time he performed various research, structuring and marketing functions
involving "high yield" securities. Mr. Frabotta intends to devote a majority of
his business time to the operations of the Investment Adviser.
James C. Rivers, a Vice President of the Investment Adviser, will serve as
the Portfolio Manager for the Fund. Mr. Rivers was previously Vice President of
Moseley Capital Management, Inc. ("Moseley") where he worked from 1986 to 1988.
While employed at Moseley, Mr. Rivers performed various selling, marketing and
research functions and served as adviser to the High Income Plus Fund, which
invested in "high yield" debt securities, convertible securities and common
stock. From 1973 to 1985, Mr. Rivers was employed by The Putnam Management
Company. From 1978 to 1985, Mr. Rivers managed The Putnam High Yield Trust, a
mutual fund investing in "high yield" securities. Between January 1980 and April
1985, the net assets of The Putnam High Yield Trust increased from $250 million
to approximately $950 million as a result of additional investments in the Fund.
Mr. Rivers intends to devote most of his business time to the operations of the
Investment Adviser.
Mr. Omohundro, Mr. Frabotta and Mr. Rivers have not entered into employment
agreements with the Investment Adviser.
The Investment Adviser manages Prospect International High Income Portfolio
N.V., an offshore, closed-end investment company with assets of approximately
$203 million as of November 18, 1988. Such fund, which commenced operations on
September 7, 1988, invests primarily in "high yield" securities and is currently
the only other closed-end fund managed by the Investment Adviser. Such fund is
eligible for investment by non-United States investors only and is not required
to be and is not registered under the 1940 Act.
ADVISORY AGREEMENT
The Investment Advisory Agreement between the Investment Adviser and the
Fund (the "Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the 1940 Act,
the Investment Adviser is responsible for the actual management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular investment rests with the Investment Adviser, subject to review by
the Board of Directors and compliance with the applicable provisions of the 1940
Act.
The Investment Adviser is not dependent on any other party in providing the
investment advisory services required for the management of the Fund. The
Investment Adviser may, however, consider analyses from various sources,
including broker-dealers with which the Fund does business. The Investment
Adviser is also responsible for providing the Fund with such executive, data
processing, clerical, accounting and bookkeeping services and statistical and
research data as are deemed advisable by the Fund's Board of Directors (although
the expenses thereof will be borne by the Fund as specified below), except to
the extent these services are provided by an administrator or an accounting firm
hired by the Fund.
Under the Advisory Agreement with the Fund, the Investment Adviser receives
a monthly advisory fee equal to 0.50% (on an annual basis) of the Fund's net
assets (which, for purposes of determining such advisory fee, shall mean the
average weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund (other than the aggregate principal amount of the Notes
and not including the aggregate liquidation preference of the Preferred Shares)
and accumulated and unpaid dividends on the Preferred Shares).
The Fund bears all costs of its operation other than those incurred by the
Investment Adviser under the Advisory Agreement. In particular, the Fund pays
investment advisory fees, fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets and the Surety Custodian under the Surety
Arrangement, the premiums payable in connection with the Surety Bond, legal,
accounting and auditing fees, taxes, expenses of preparing prospectuses and
shareholder reports, registration fees and expenses, fees and expenses for the
transfer and dividend disbursing agent, the compensation and expenses of the
Directors who are not otherwise employed by or affiliated with the Investment
Adviser or any of its affiliates, and any extraordinary expenses. The Investment
Adviser will reimburse the Fund for any expenses (excluding brokerage
commissions, interest, taxes and litigation expenses) paid or incurred by the
Fund in any year in excess of the most restrictive expense limitation which is
imposed by any state and to which the Fund is then subject, if any. The Fund is
not known to be subject to any state expense limitations. Under the Advisory
Agreement, the Investment Adviser provides the Fund with office space,
facilities and business equipment and provides the services of executive and
clerical personnel for administering certain of the other affairs of the Fund.
The Investment Adviser compensates Directors of the Fund if such persons are
employed by the Investment Adviser or its affiliates.
The Advisory Agreement was approved by a majority of the Fund's Board of
Directors, including a majority of the Directors who are not parties to the
Advisory Agreement or "interested persons" (as defined in the 1940 Act) of any
such party, at a meeting held on November 11, 1988. The Advisory Agreement will
remain in effect for a period of two years from November 23, 1988 (the date of
execution thereof) (subject to approval at the first meeting of shareholders)
and will remain in effect from year to year thereafter if approved annually (i)
by the Board of Directors of the Fund or by the holders of a majority of the
Fund's outstanding voting securities (as defined under "Investment Objective and
Policies"), voting as a single class, and (ii) by a majority of the Directors
who are not parties to the Advisory Agreement or interested persons (as defined
in the 1940 Act) of any such party. The Advisory Agreement terminates on its
assignment by either party, and may be terminated without penalty on not less
than 30 nor more than 60 days' prior written notice at the option of either
party thereto, or by the affirmative vote of the holders of a majority of the
Fund's outstanding voting securities, voting as a single class.
The Advisory Agreement provides that the Investment Adviser shall only be
liable for willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties and obligations under the Advisory Agreement.
PORTFOLIO TRADING
The Investment Adviser is responsible for decisions to buy and sell
securities and other portfolio holdings for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. Fixed-income securities are generally traded on a "net"
basis with dealers acting as principals 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 which 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 of the Fund, the Investment
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Investment Adviser
will seek to execute each transaction at a price and commission, if any, which
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. In seeking the most favorable price and execution, the Investment
Adviser, having in mind the Fund's best interests, will consider all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions. While the Investment Adviser generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available. Within the framework of the policy of
obtaining the most favorable price and efficient execution, the Investment
Adviser will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Investment Adviser or the Investment Adviser's other clients. Such 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 issuers and industries. Such services are used by the
Investment Adviser in connection with all of its investment activities, and some
of such services obtained in connection with the execution of transactions for
the Fund may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions for
such other accounts, and the services furnished by such brokers may be used by
the Investment Adviser in providing investment management for the Fund.
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 management fee paid by the Fund will not be
reduced because the Investment Adviser and/or other clients receive such
services. The allocation of orders and the commission rates paid by the Fund
will be reviewed periodically by the Board of Directors.
As permitted by Section 28(e) of the 1934 Act, the Investment Adviser may
cause the Fund to pay a broker-dealer which provides "brokerage and research
services" (as defined in the 1934 Act) to the Investment Adviser, an amount of
disclosed commission for effecting a securities transaction for the Fund in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
The Fund anticipates that Drexel Burnham and certain other underwriters of
the Common Stock may from time to time act as brokers or dealers in connection
with the execution of the Fund's portfolio transactions after they have ceased
to be underwriters of the Fund's securities. Drexel Burnham is an active
underwriter of, and dealer in, "high yield" 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. In addition, Drexel Burnham intends, but
is not obligated to, make a market in the Preferred Shares.
The Fund has been advised by Drexel Burnham that the SEC has brought a
civil action against Drexel Burnham and several of its key employees in the
United States District Court for the Southern District of New York. The
complaint alleges violations of the 1934 Act and rules and regulations
thereunder and of the 1933 Act. The complaint charges trading on inside
information, market manipulation, fraud, failure to file Schedule 13Ds, improper
disclosure, parking, aiding and abetting violations of the net capital rules,
and margin and record keeping violations. The complaint seeks an injunction
against further violations of the securities laws, disgorgement of profits and
fees received and losses avoided as a result of the alleged illegal conduct,
treble any profits realized or losses avoided on insider trading, and all
further relief, legal or equitable, that the Court believes is warranted under
the circumstances. The Fund also has been advised that Drexel Burnham and DBL
Group and several key employees of its High Yield Bond Department are targets of
a grand jury investigation being conducted by the United States Attorney for the
Southern District of New York with respect to certain alleged violations of the
federal criminal laws including, but not limited to, securities fraud, mail and
wire fraud and racketeering. The staff of the United States Attorney's office
has advised Drexel Burnham and DBL Group that Drexel Burnham, DBL Group and such
key employees may be indicted at any time. From time to time some of the
employees referred to above may be involved in portfolio transactions with the
Fund. Drexel Burnham has advised the Fund that no assurance can be given that
the results of the SEC action or grand jury investigation will not have an
adverse effect on Drexel Burnham and/or the market for "high yield" securities,
a market in which Drexel Burnham is an important participant.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less frequently
than the close of trading on the NYSE (generally 4:00 P.M. New York time) on the
last business day of each week (generally Friday). It will be determined by
dividing the value of the net assets of the Fund (for the purpose of determining
the net asset value per share of the Common Stock, the value of the Fund's net
assets shall be deemed to equal the value of the Fund's assets less (i) the
Fund's liabilities (including the outstanding principal amount of the Notes and
unpaid interest on the Notes), (ii) accumulated and unpaid dividends on the
outstanding Preferred Shares and (iii) the aggregate liquidation value (i.e.,
$100,000 per share) of the outstanding Preferred Shares), by the total number of
shares of Common Stock outstanding. In valuing the Fund's assets for all
purposes other than the determination of the discounted value of such assets
pursuant to the respective Investment 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, will be valued at
the mean between the most recently quoted bid and asked prices provided by the
principal market makers. Any security or option for which the primary market is
on an exchange will be valued at the last sale price on such exchange on the day
of valuation or, if there was no sale on such day, the last bid price quoted on
such day. Options for which the primary market is not on an exchange or which
are not listed on an exchange will be valued at market value or fair value if no
market exists. Securities and assets for which market quotations are not readily
available will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. While no single standard
for determining fair value exists, as a general rule, the current fair value of
a security would appear to be the amount which the Fund could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial condition of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same type at the time of purchase, special reports prepared by analysts,
information as to any transaction or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be valued
at amortized cost if their term to maturity from the date of acquisition by the
Fund was less than 60 days or by amortizing their value on the 61st day prior to
maturity if their term to maturity from the date of acquisition by the Fund was
more than 60 days, unless this method is determined by the Board of Directors
not to represent fair value. Repurchase agreements will be valued at cost plus
accrued interest.
SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. To address this possibility, the Board of Directors
presently contemplates that the Fund may from time to time consider either the
repurchase of shares of its Common Stock on the open market or the making of
tender offers for such Common Stock. The Fund may borrow money to finance the
repurchase of shares, subject to compliance with 1940 Act Asset Coverage,
Section 18 of the 1940 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, (i) if applicable asset
coverage requirements under the 1940 Act (i.e., 300% with respect to the Notes
and 200% with respect to the Preferred Shares) are not met or would not be met
following such repurchase, (ii) when payments of principal of or interest on the
Notes are in default, (iii) when dividends on the Preferred Shares are in
arrears or Surety Assets Coverage is not maintained or (iv) if otherwise
prohibited by applicable law.
There can be no assurance that repurchases or tenders will result in the
Common Stock trading at a price which is equal to its net asset value. The Fund
anticipates that the market price of the Common Stock will usually vary from net
asset value. The market price of the Common Stock will be determined, among
other things, by the relative demand for and supply of the Common Stock in the
market, the Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Common Stock may be the subject of repurchases or tender offers from time to
time may enhance its attractiveness to investors and thus reduce the spread
between market price and net asset value that may otherwise exist.
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 of
the Fund will decrease the total assets of the Fund and therefore have the
effect of increasing the Fund's expense ratio. Furthermore, any interest on
borrowings to finance Common Stock repurchase transactions will reduce the
Fund's net income.
Even if a tender offer has been made, it is the Board's announced policy,
which may be changed by the Board, not to accept tenders or effect repurchases
if (1) such transactions, if consummated, would (a) result in the delisting
of the Common Stock from the NYSE (the NYSE having advised the Fund that it
would consider delisting if the aggregate market value of the Fund's outstanding
publicly held Common Stock is less than $5.0 million, the number of publicly
held shares of Common Stock falls below 600,000 or the number of round-lot
holders falls below 1,200), (b) result in a violation of applicable asset
coverage requirements, or (c) impair the Fund's status as a regulated investment
company under the Internal Revenue Code (which would make the Fund a taxable
entity, causing the Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from the Fund); (2) the
Fund would not be able to liquidate portfolio securities in an orderly manner
and consistent with the Fund's investment objective and policies in order to
repurchase Common Stock; or (3) there is, in the Board's judgment, any material
(a) legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or limitation on prices for trading securities generally on the
NYSE or any foreign exchange on which portfolio securities of the Fund are
traded, (c) declaration of a banking moratorium by federal, state or foreign
authorities or any suspension of payment by banks in the United States, New York
State or foreign countries in which the Fund invests, (d) limitation affecting
the Fund or issuers of its portfolio securities imposed by federal, state or
foreign authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, or (f) other event
or condition which would have a material adverse effect on the Fund or its
shareholders if shares of Common Stock were repurchased. The Board of Directors
may modify these conditions from time to time in light of experience and may
determine not to make a tender offer even if one of the above conditions exists.
If a tender offer is made, such tender offer shall be made in accordance with
the 1934 Act and the 1940 Act.
Any tender offer made by the Fund will be at a price equal to the net asset
value of the shares on a date subsequent to the Fund's receipt of all tenders.
Each offer will be made and shareholders notified in accordance with the
requirements of the 1934 Act and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. The Fund will
purchase all shares tendered by a shareholder at any time during the period of
the tender offer in accordance with the terms of the offer unless it determines
to accept none of them (based upon one of the conditions set forth above).
Each person tendering shares will be required to submit a check in an amount not
to exceed $25 payable to the Fund, which will be used to help defray the costs
associated with effecting the tender offer. This fee will be imposed upon each
tendering shareholder whose tendered shares are purchased in the tender offer
and will be imposed regardless of the number of shares purchased. The Fund
expects the cost to the Fund of effecting a tender offer will be greater than
the aggregate of all service charges received from those who tender their
shares. Costs associated with the tender offer will be charged against capital
of the Fund. During the period of a tender offer, the Fund's shareholders will
be able to obtain the Fund's current net asset value by use of a toll-free
telephone number.
If the Fund must liquidate portfolio securities in order to purchase shares
of Common Stock tendered, the Fund may realize gains and losses. Such gains, if
any, may be realized on securities held for less than three months ("short short
gain"). Because less than 30% of the Fund's gross income must be derived from
the sale or disposition of stock and securities held less than three months for
any taxable year in order to retain the Fund's tax status as a regulated
investment company, any such short short gains would reduce the amount of gain
on sale of other securities held for less than three months that the Fund could
realize in the ordinary course of its portfolio management. See "Federal
Taxation." The portfolio turnover rate of the Fund may or may not be affected by
the Fund's repurchases of shares of Common Stock pursuant to a tender offer.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Directors may elect to submit to the holders of the
Common Stock and the Preferred Shares following the fifth anniversary of the
closing of this offering in 1993 and at any time thereafter a proposal to
convert the Fund to an open-end investment company and in connection therewith
to redeem or otherwise retire the Notes and the Preferred Shares as would be
required upon such conversion by the 1940 Act. In determining whether to
exercise its discretion to submit this issue to shareholders, the Board of
Directors would consider all factors then relevant, including the relationship
of the market price of the Common Stock to net asset value, the extent to which
the Fund's capital structure is leveraged and the possibility of re-leveraging,
the spread, if any, between yields on "high yield" securities in the Fund's
portfolio as compared to interest and dividend charges on senior securities and
general market and economic conditions. In addition to any vote required by
Maryland law, conversion of the Fund to an open-end investment company would
require the affirmative vote of the holders of a majority (as defined in the
1940 Act (see "Investment Objective and Policies")) of each class of shares
entitled to be voted on the matter. Shareholders of an open-end investment
company may require the company to redeem their shares at any time (except in
certain circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charges, if any, as might be in effect at the time
of redemption. If the Fund converted to an open-end investment company, it could
be required to liquidate portfolio securities to meet requests for redemption,
and the Common Stock would no longer be listed on the NYSE. In the event the
Fund converts to open-end status, the Fund would only be able to borrow through
bank borrowings within certain limits and would not be allowed to have preferred
stock.
FEDERAL TAXATION
The following discussion 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 impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify as and elect to be a regulated investment
company under Subchapter M of the Internal Revenue Code. Generally, to qualify
as a regulated investment company for a taxable year, the Fund must derive at
least 90% of its income from certain specified sources, including interest,
dividends, gains from the disposition of securities, and other income (including
gains from options and futures and non-cash income from the Fund's investment in
zero coupon securities and other instruments issued with an original issue
discount) derived with respect to its business of investing in such securities.
In addition, the Fund must derive less than 30% of its gross income from the
disposition of securities held for less than three months, must meet certain
diversification criteria regarding Fund investment, and must distribute annually
at least 90% of its investment company taxable income. For any year in which the
Fund qualifies for taxation as a regulated investment company, the Fund is not
taxed on income distributed to its shareholders in the form of dividends or
capital gains distributions. The Fund is subject to the alternative minimum tax
provisions of the Internal Revenue Code. Treasury regulations to be issued will
prescribe the apportionment of tax preference items between the Fund and its
shareholders. If, in any taxable year, the Fund were to fail to qualify as a
regulated investment company under the Internal Revenue Code, the Fund would be
taxed for that year in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
the Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits, would be taxable to the recipient shareholders
as ordinary income dividends, even if those distributions might otherwise have
been considered distributions of capital gains. The Tax Reform Act of 1986
eliminated the exclusion for dividends received by individuals. The Revenue Act
of 1987 reduced to 70% the dividends received deduction applicable to
corporations. Distributions by the Fund are not expected to qualify as dividends
for the purpose of this dividends received deduction.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Fund will be required to suspend distributions to the holders of the Common
Stock and/or the Preferred Shares until the asset coverage is restored. See
"Description of Preferred Stock--Dividends" and "Description of Common Stock."
Such a suspension of distributions might prevent the Fund from distributing 90%
of its investment company taxable income, as is required in order to qualify for
taxation as a regulated investment company. In addition, if the Fund fails to
distribute in 1988 and each calendar year thereafter, at least (i) 97% of its
ordinary income for such calendar year (including non-cash income attributable
to zero coupon and other original issue discount securities) and (ii) 98% of its
capital gain net income (both long-term and short-term) for the 12 months ended
October 31 of such calender year (or December 31, if the Fund so elects), the
Fund will be subject to a 4% excise tax on undistributed income if income tax on
such income has not been paid by the Fund. In addition, the Fund will be subject
to such excise tax on any portion (not taxed to the Fund) of the respective 3%
and 2% balances which are not distributed during the succeeding calendar year.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund intends to repurchase or redeem Notes and/or (to the extent permitted
under the 1940 Act) Preferred Shares in order to maintain or restore the
requisite asset coverage and avoid failure to remain qualified as a regulated
investment company. The determination to repurchase or redeem Notes or Preferred
Shares and the relative amounts of each to be repurchased or redeemed, if any,
will be made in the sole discretion of the Fund. Furthermore, the Fund will be
required to make mandatory partial redemptions of the Notes in the event a
failure to maintain 1940 Act Asset Coverage (as defined under "Description of
Notes--Asset Maintenance") is not cured in a timely manner. See "Description of
Notes--Events of Default."
Use of the Fund's cash to repurchase or redeem Notes and/or Preferred
Shares may adversely affect the Fund's ability to distribute annually at least
90% of its investment company taxable income, which distribution is required to
qualify for taxation as a regulated investment company. The Fund may also
realize income in connection with funding repurchases or redemptions of Notes or
Preferred Shares and such income would be taken into account in determining
whether or not the above-described distribution requirements have been met.
Depending on the size of the Fund's assets relative to its outstanding senior
securities, redemption of Notes and/or Preferred Shares might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds are
original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of
a debt instrument over the issue price of the instrument. Original issue
discount on a taxable obligation is required to be currently included in the
income of the holder of the obligation (i) on a ratable basis if the
obligation was issued before July 2, 1982 and (ii) on a constant interest rate
basis resembling the economic accrual of interest if the obligation was issued
after July 1, 1982. The tax cost basis of the holder of an original issue
discount debt instrument is increased by the amount of original issue discount
thereon properly included in the holder's gross income as determined for federal
income tax purposes. Current inclusion in gross income of original issue
discount on a taxable debt instrument is required, even though no cash is
received at the time the original issue discount is required to be included in
gross income.
If the Fund fails to qualify as a regulated investment company for any
year, it must pay out any earnings and profits accumulated in that year (less
the interest charge mentioned below, if applicable) and may be required to pay
an interest charge to the Treasury on 50% of such earnings and profits before it
can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF PREFERRED SHAREHOLDERS
For any period during which the Fund qualifies as a regulated investment
company for tax purposes, distributions paid in cash to holders of Preferred
Shares will be taxable as ordinary income for federal income tax purposes.
Dividends paid by the Fund are not expected to be eligible for the dividends
received deduction available to corporations.
Generally, a dividend paid by the Fund is treated as received in the
taxable year in which the distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in such a month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
Individual investors should note that the Tax Reform Act of 1986 placed a
floor of two percent of adjusted gross income on miscellaneous itemized
deductions, including investment expenses. The Tax Reform Act of 1986 directed
the Secretary of the Treasury to prescribe regulations prohibiting indirect
deduction through a pass-through entity (such as the Fund) of amounts not
allowable as a deduction under this rule if paid or incurred directly by an
individual.
Temporary Regulations applicable to "nonpublicly offered regulated
investment companies" have been issued. Under these temporary regulations, in
general, (i) specified expenses of the regulated investment company or, at the
election of the regulated investment company, 40% of its expenses, exclusive of
expenses which are specifically excluded from miscellaneous itemized deductions
if incurred by an individual, are allocated among its shareholders who are
"affected investors" (i.e., individuals, estates, trusts and pass-through
entities having such shareholders), and (ii) such investors are treated as
having received or accrued dividends in an aggregate amount equal to the
investor's share of such expenses and to have incurred investment expenses in
the same aggregate amount. These computations are made on a calendar year basis
and the allocation of such expenses among affected investors may be done by the
regulated investment company on any reasonable basis (which basis, if utilizing
distributions to affected investors, may exclude some of such distributions).
The Temporary Regulations do not address the treatment of expenses incurred by a
"publicly offered regulated investment company." The Fund is expected to qualify
as a "publicly offered regulated investment company."
The Revenue Act of 1987 provides that the two percent floor rule, to the
extent it relates to indirect deductions through a publicly offered regulated
investment company, applies only to taxable years beginning after 1987. The
Technical Corrections and Miscellaneous Revenue Act of 1988 delays treatment of
expenses of a "publicly offered regulated investment company" as itemized
deductions until taxable years beginning after 1989. The Fund cannot predict
whether or not the rule excluding a "publicly offered regulated investment
company" from pass-through treatment of investment expenses subject to the two
percent floor rule will be extended to 1990 or any later year; and, if not,
whether the above-described regulations will apply to it as such a company or
some other method for allocating expenses to its shareholders will apply. The
term "publicly offered regulated investment company" is defined as meaning a
regulated investment company the shares of which are "continuously offered" or
regularly traded on an established securities market or "held by or for no fewer
than 500 persons at all times during the taxable year."
If the Fund suffers a net taxable loss in any taxable year, the holders of
Preferred Shares will not be permitted to utilize that loss in their tax
returns.
Generally, gain realized by a shareholder on the sale of shares held for
more than one year will be taxable as long-term capital gain. 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
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 shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss on sale of a share of the Fund
held for six months or less will, to the extent of any amount which was treated
as long-term capital gain with respect to the share, be treated as a long-term
capital loss. Shareholders who acquire shares on multiple dates should consult
their tax advisers to determine how to allocate the cost of stock for basis
purposes.
Although the matter is not free from doubt, it is believed that Scheduled
Payments received pursuant to the Surety Bond should be characterized for U.S.
federal income tax purposes in the same manner as though the payments had been
made by the Fund. The tax effects of such a characterization would vary
depending on the facts and circumstances existing at the time. Thus, for
example, if the Scheduled Payment not made by the Fund consisted of a shortfall
in a redemption or liquidation payment, the holder of Preferred Shares would,
under this view, treat the compensatory payment by the Surety as though it were
a redemption or liquidation payment by the Fund. Because the U.S. federal income
tax treatment of the making of a Scheduled Payment in whole or in part by the
Surety is not clear, holders of Preferred Shares should consult their tax
advisors as to the tax effects thereof if such a situation should arise.
The Fund may be required to withhold U.S. federal income tax at the rate of
20% of all taxable distributions payable to holders of Preferred Shares who fail
to provide the Fund with their correct taxpayer identification numbers or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Backup withholding is not
an additional tax. Any amounts withheld may be credited against the U.S. federal
income tax liability of a holder of Preferred Shares.
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 and corporations.
OTHER TAXATION
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the state, local and foreign tax consequences to them
of an investment in Preferred Shares.
THE AUCTION
GENERAL
Holders of the Preferred Shares will be entitled to receive cumulative cash
dividends, when, as and if declared by the Board of Directors of the Fund out of
funds legally available therefor, on each Dividend Payment Date with respect to
a Dividend Period then ending (a period of 30 days, subject to certain
exceptions) at the rate per share equal to the Applicable Rate per annum for
each such Dividend Period. See "Description of Preferred
Stock--Dividends--General" and "--Dividends--Determination of Dividend Rate."
The Articles of Incorporation provide that the Applicable Rate per annum
for each Dividend Period after the Initial Dividend Period shall be equal to the
rate per annum that the Auction Agent advises results on the Business Day
preceding the first day of the next Dividend Period from implementation of
auction procedures (the "Auction Procedures") set forth in the Articles of
Incorporation, in which persons determine to hold or offer to purchase or sell
Preferred Shares based on the dividend rates bid by them. The Auction Procedures
are attached as Appendix E to this Prospectus.
Auction Agent Agreement. The Fund will enter into an agreement (the
"Auction Agent Agreement") with Bankers Trust Company (together with any
successor bank, trust company or other financial institution entering into a
similar agreement with the Fund, the "Auction Agent" and, in its capacity as
paying agent with respect to the Preferred Shares, the "Paying Agent") which
provides, among other things, that the Auction Agent will follow the Auction
Procedures for the purposes of determining the Applicable Rate. Each periodic
operation of such procedures is hereinafter referred to as an "Auction." The
Fund will pay the Auction Agent compensation for its services under the Auction
Agent Agreement.
The Auction Agent will act as agent for the Fund in connection with an
Auction. The Auction Agent Agreement provides that, 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 the Auction Agent Agreement and 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. The Fund will indemnify the Auction Agent for certain
liabilities.
Upon notice to the Fund, the Auction Agent may resign and terminate the
Auction Agent Agreement as of a date which may be no earlier than the Business
Day after the second Dividend Payment Date after delivery of such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agent Agreement. The Fund may remove the Auction
Agent, provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent. In the event that there is no
Auction Agent on an Auction Date, the Applicable Rate for the immediately
succeeding Dividend Period shall be the Maximum Applicable Rate (175% of the
30-day "AA" Composite Commercial Paper Rate in effect on such Auction Date).
Broker-Dealer Agreements. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into such an agreement with
Drexel Burnham and may enter into similar agreements (collectively, the
"Broker-Dealer Agreements") with one or more other broker-dealers selected by
the Fund (collectively, the "Broker-Dealers") which will provide for the
participation of such Broker-Dealers in Auctions. The Auction Agent must consent
in writing to the Fund's selection of Broker-Dealers, which consent may not be
unreasonably withheld.
Master Purchaser's Letters. As a condition to purchasing the Preferred
Shares in this offering, or participating in any Auction or otherwise acquiring
Preferred Shares, each prospective purchaser will be required to sign and
deliver to its Broker-Dealer a letter, the form of which is attached to this
Prospectus as Appendix D (the "Master Purchaser's Letter"), in which such
prospective purchaser will agree, among other things:
(i) that any Bid or Sell Order submitted by such purchaser shall
constitute an irrevocable offer to purchase or sell the Preferred Shares
subject to such Bid or Sell Order, or such lesser number of Preferred
Shares as such purchaser shall be required to sell or purchase as a result
of an Auction, in accordance with the terms set forth in this Prospectus,
and that a failure by such purchaser or its Broker-Dealer to place a Bid or
Sell Order with respect to the Preferred Shares owned by such purchaser
shall be deemed to constitute a Hold Order;
(ii) to sell, transfer or otherwise dispose of Preferred Shares only
pursuant to a Bid or a Sell Order submitted in an Auction or to a purchaser
that has delivered a signed Master Purchaser's Letter, provided that in the
case of all transfers other than those pursuant to Auctions, such
purchaser, its Broker-Dealer or its Agent Member (the "Agent Member") of
the Securities Depository (defined as DTC, together with any successor
securities depository selected by the Fund) advises the Auction Agent of
such transfer;
(iii) to have all of the outstanding Preferred Shares represented by a
certificate or certificates registered in the name of the nominee of the
Securities Depository and that such purchaser shall not be entitled to
receive any certificate representing any Preferred Shares which it
acquires, that the ownership of the Preferred Shares as to which such
purchaser is the Existing Holder shall be maintained in book entry form by
the Securities Depository, in the account of its Agent Member, which in
turn will maintain records of such purchaser's beneficial ownership, and to
authorize and instruct such Agent Member to disclose to the Auction Agent
such information with respect to such purchaser's beneficial ownership as
the Auction Agent shall require; and
(iv) that the purchaser grants to Financial Security a proxy assigning
to Financial Security, to the extent that Financial Security makes
Scheduled Payments, the purchaser's voting rights and also the right to
receive from the Fund the redemption price, liquidation preference or
dividend to which such Scheduled Payment relates and Financial Security
shall be subrogated to such purchaser's rights until the Fund pays such
redemption price, liquidation preference or accumulated and unpaid
dividends, as the case may be, to which such Scheduled Payments relate.
An execution copy of the Master Purchaser's Letter is included inside the
back cover of this Prospectus. Execution of a Master Purchaser's Letter is not a
commitment to purchase Preferred Shares in this offering, in any Auction or
otherwise, but it is a condition precedent to purchasing Preferred Shares.
As used herein, "Existing Holder" of Preferred Shares means a person who
has signed a Master Purchaser's Letter and is listed as the beneficial owner of
such Preferred Shares in the records of the Auction Agent. The Auction Agent may
rely upon, as evidence of the identities of the Existing Holders, a list of the
initial owners of the Preferred Shares provided by the Fund, the results of
Auctions and notices from any Existing Holder, the Agent Member of any Existing
Holder or the Broker-Dealer of any Existing Holder with respect to such Existing
Holder's transfer of Preferred Shares to another person. The Auction Agent shall
be required to register on a list maintained pursuant to the Auction Agent
Agreement a transfer of Preferred Shares from an Existing Holder to another
person only if such transferee has delivered a signed Master Purchaser's Letter
to the Auction Agent and if (i) such transfer is pursuant to an Auction or
(ii) in the case of a transfer made other than pursuant to an Auction, the
Auction Agent has been notified in writing by such Existing Holder, the Agent
Member of such Existing Holder or the Broker-Dealer of such Existing Holder of
such transfer. The Auction Agent shall rescind a transfer registered on such
list if the Auction Agent has been notified in writing by the Broker-Dealer or
Agent Member of any person that (i) purchased Preferred Shares, that the seller
failed to deliver such Preferred Shares or (ii) sold Preferred Shares, that the
purchaser failed to make payment to such person upon delivery to the purchaser
of such Preferred Shares. Any transfer of Preferred Shares contrary to the terms
of a Master Purchaser's Letter may affect the right of the person acquiring such
Preferred Shares to participate in future Auctions.
Securities Depository. DTC will act as Securities Depository for the Agent
Members with respect to Preferred Shares. One registered certificate for all of
the Preferred Shares will be registered in the name of the Surety Custodian.
Such certificate will bear a legend to the effect that such certificate is
issued subject to the provisions restricting transfers of Preferred Shares
contained in the Fund's Articles of Incorporation and the Master Purchaser's
Letters. The Fund will issue stop-transfer instructions to the Paying Agent for
the Preferred Shares. DTC will be the holder of record of custody receipts
representing the Preferred Shares, and Existing Holders of Preferred Shares will
not receive certificates representing their ownership interest in such shares.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants (including Agent Members), some of whom (and/or
their representatives) own shares of common stock of DTC. The Securities
Depository will maintain lists of its participants and will maintain the
positions (ownership interests) held by each Agent Member in the Preferred
Shares, whether as an Existing Holder for its own account or as a nominee for an
Existing Holder. Payments and communications made by the Fund to holders of
Preferred Shares will be duly made by making payments to, and communicating
with, the Securities Depository.
The following is a brief summary of the procedures to be used in conducting
Auctions. This summary is qualified by reference to the Auction Procedures set
forth in Appendix E hereto, which are incorporated herein by reference.
Illustrations of hypothetical Auctions and the settlement procedures to be used
with respect to auctions are set forth in Appendices B and C attached hereto,
respectively.
AUCTION DATES
An Auction to determine the Applicable Rate with respect to Preferred
Shares for each Dividend Period after the Initial Dividend Period will be held
on the Business Day preceding the first day of the next Dividend Period;
provided, however, if such day is a Thursday the Auction Date shall mean the
Business Day next preceding such Thursday (the date of each Auction being
referred to herein as an "Auction Date ").
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined below in "Submission of
Orders by Broker-Dealers to the Auction Agent") on each Auction Date:
(a) each Existing Holder may submit to a Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding Preferred Shares,
if any, that such Existing Holder desires to continue to hold without
regard to the Applicable Rate for the next Dividend Period;
(ii) Bid--indicating the number of outstanding Preferred Shares, if
any, that such Existing Holder desires to continue to hold, provided that
the Applicable Rate for the next Dividend Period shall not be less than the
rate per annum specified by such Existing Holder in such Bid; and/or
(iii) Sell Order--indicating the number of outstanding Preferred
Shares, if any, that such Existing Holder offers to sell without regard to
the Applicable Rate for the next Dividend Period; and
(b) Broker-Dealers shall contact prospective purchasers of Preferred
Shares (each such prospective purchaser is hereinafter referred to as a
"Potential Holder" and the term "Potential Holder" includes an Existing Holder
with respect to a Bid by such Existing Holder to purchase additional shares) by
telephone to determine whether such Potential Holders desire to submit Bids in
which such Potential Holders will indicate the number of Preferred Shares which
they offer to purchase, if the Applicable Rate for the next Dividend Period is
not less than the rates per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." An Existing
Holder or a Potential Holder placing an Order is hereinafter referred to as a
"Bidder" and collectively as "Bidders."
An Existing Holder may submit different types of Orders in an Auction with
respect to Preferred Shares then held by such Existing Holder, provided that the
total number of Preferred Shares covered by all such Orders does not exceed the
number of Preferred Shares held by such Existing Holder. For information
concerning the priority given to different types of Orders placed by Existing
Holders, see "Submission of Orders by Broker-Dealers to the Auction Agent"
below.
The Maximum Applicable Rate at any Auction will be 175% of the 30-day "AA"
Composite Commercial Paper Rate in effect on the Auction Date. "30-day 'AA'
Composite Commercial Paper Rate," on any date, means (i) the interest equivalent
of the 30-day rate on commercial paper placed on behalf of issuers whose
corporate bonds are rated "AA" or the equivalent of such rating by another
nationally recognized rating agency, as announced by the Federal Reserve Bank of
New York for the close of business on the Business Day immediately preceding
such date, or (ii) in the event that the Federal Reserve Bank of New York does
not make available such a rate, then the arithmetic average of the interest
equivalent of the 30-day rates on commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by Drexel Burnham and any of
its affiliates or successors that are commercial paper dealers (the "Commercial
Paper Dealers"), to the Auction Agent for the close of business on the Business
Day immediately preceding such date. In the event that the Federal Reserve Bank
of New York does not make available such a rate and if any Commercial Paper
Dealer does not quote a rate required to determine the 30-day "AA" Composite
Commercial Paper Rate, the 30-day "AA" Composite Commercial Paper Rate shall be
determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers, if any, or, if
there are no such Commercial Paper Dealers, by the Auction Agent.
Any Bid specifying a rate higher than the Maximum Applicable Rate will (i)
be treated as a Sell Order if submitted by an Existing Holder and (ii) be
rejected if submitted by a Potential Holder. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares"
below.
The Master Purchaser's Letter signed by each Existing Holder and each
Potential Holder provides that a Sell Order submitted by an Existing Holder
shall constitute an irrevocable offer to sell and a Bid submitted by an Existing
Holder shall constitute an irrevocable offer to sell the Preferred Shares
subject thereto, if the rate specified in such Bid is higher than the rate
determined in the Auction. A Bid submitted by a Potential Holder shall
constitute an irrevocable offer to purchase the number of Preferred Shares
subject thereto if the rate specified in the Bid is less than or equal to the
Applicable Rate determined in accordance with the Auction Procedures. The number
of Preferred Shares purchased or sold may be subject to proration procedures.
See "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below. Each purchase or sale shall be made for settlement
on the Business Day following the Auction Date at a price per share equal to
$100,000. See "Notification of Results; Settlement" below.
If an Order or Orders covering all of the outstanding Preferred Shares held
by an Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Existing Holder or otherwise, the Auction Agent shall deem a Hold Order to have
been submitted on behalf of such Existing Holder covering the number of
outstanding Preferred Shares held by such Existing Holder and not subject to any
Order submitted to the Auction Agent. The Auction Agent is entitled to rely upon
the terms of any Order submitted to it by a Broker-Dealer.
If all of the outstanding Preferred Shares are subject to Submitted Hold
Orders, the Applicable Rate for the next Dividend Period for all Preferred
Shares will be 90% of the 30-day "AA" Composite Commercial Paper Rate in effect
on the date of the Auction (the "Minimum Applicable Rate").
With respect to an Auction, Preferred Shares will be deemed to be not
outstanding for purposes of being included in Auctions if a Notice of Redemption
with respect to such shares has been given by the Fund; in the event the Fund
fails to effect any redemption described in a Notice of Redemption such shares
will nonetheless continue to be deemed not outstanding for purposes of being
included in Auctions and the sole remedy of the holders thereof will be to
elect, together with the other holders of Preferred Shares, a majority of the
Directors of the Fund. See "Description of Preferred Stock--Redemption" and
"--Voting". Pursuant to the Fund's Articles of Incorporation, the Fund is
required to cancel any Preferred Shares which it may purchase, redeem or
otherwise acquire. Neither the Fund nor any affiliate of the Fund may submit an
Order in any Auction.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO THE AUCTION AGENT
Prior to 12:30 P.M., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent with the consent
of the Fund (the "Submission Deadline"), each Broker-Dealer will submit to the
Auction Agent in writing all Orders obtained by it for the Auction to be
conducted on such Auction Date. If any rate specified in any Bid contains more
than three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
If one or more Orders covering in the aggregate more than the number of
the outstanding Preferred Shares held by an Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid in the following order of
priority:
(i) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of outstanding
Preferred Shares held by such Existing Holder; provided that if more than
one Hold Order is submitted on behalf of such Existing Holder and the
number of Preferred Shares subject to such Hold Orders exceeds the number
of outstanding Preferred Shares held by such Existing Holder, the number
of Preferred Shares subject to such Hold Orders shall be reduced pro rata
so that such Hold Orders shall cover the number of Preferred Shares held
by such Existing Holder;
(ii)(A) any Bid shall be considered valid up to and including the
excess of the number of outstanding Preferred Shares held by such Existing
Holder over the number of Preferred Shares subject to any Hold Order
referred to in clause (i) above, and (B) subject to subclause (A), if more
than one Bid with the same rate is submitted on behalf of such Existing
Holder and the number of Preferred Shares subject to such Bids is greater
than such excess, the number of Preferred Shares subject to such Bids
shall be reduced pro rata so that such Bids shall cover the number of
Preferred Shares equal to such excess, and (C) subject to subclause (A),
if more than one Bid with different rates is submitted on behalf of such
Existing Holder, such Bids shall be considered valid in the ascending
order of their respective rates and (D) any Preferred Shares subject to
Bids not valid under this clause (ii) shall be treated as the subject of a
Bid by a Potential Holder; and
(iii) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding Preferred Shares held by such Existing
Holder over the sum of the Preferred Shares subject to Hold Orders
referred to in clause (i) and valid Bids by such Existing Holder referred
to in clause (ii) above; provided that if more than one Sell Order is
submitted on behalf of any Existing Holder and the number of Preferred
Shares subject to such Sell Orders is greater than such excess, the number
of Preferred Shares subject to such Sell Orders shall be reduced pro rata
so that such Sell Orders shall cover the number of Preferred Shares equal
to such excess.
If more than one Bid is submitted on behalf of any Potential Holder, each
Bid submitted shall be a separate Bid with the rate and number of Preferred
Shares specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS,
WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline, the Auction Agent will assemble
all Orders submitted or deemed submitted to it by the Broker-Dealers (each such
"Hold Order," "Bid" or "Sell Order" as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order") and will determine the excess of the number of outstanding
Preferred Shares over the number of outstanding Preferred Shares subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Preferred Shares") and whether Sufficient Clearing Bids have been
made in the Auction. "Sufficient Clearing Bids" will have been made if the
number of outstanding Preferred Shares that are the subject of Submitted Bids by
Potential Holders specifying rates not higher than the Maximum Applicable Rate
equals or exceeds the number of outstanding shares that are the subject of
Submitted Sell Orders (including the number of shares subject to Bids by
Existing Holders specifying rates higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids of Existing Holders
and Potential Holders (the "Winning Bid Rate") which would result in Existing
Holders continuing to hold and Potential Holders purchasing, at such rate, an
aggregate number of Preferred Shares at least equal to the Available Preferred
Shares. If Sufficient Clearing Bids have been made, the Winning Bid Rate will be
the Applicable Rate for the next Dividend Period for all Preferred Shares then
outstanding.
If Sufficient Clearing Bids have not been made (other than because all
Submitted Orders are Submitted Hold Orders), the Applicable Rate for the next
Dividend Period for all Preferred Shares will be equal to the Maximum Applicable
Rate. Furthermore, in the event that Sufficient Clearing Bids have not been
made, Existing Holders that have Submitted Sell Orders may not be able to sell
in the Auction any or all Preferred Shares subject to such Submitted Sell
Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below. The Rating Agencies' credit rating for
the Preferred Shares does not address the likelihood that the investor resale
mechanism (i.e., auction or remarketing procedures) will be successful.
If all of the outstanding Preferred Shares are subject to Submitted Hold
Orders, the Applicable Rate for the next Dividend Period for all Preferred
Shares will be the Minimum Applicable Rate.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and subject to the
discretion of the Auction Agent to round off a fraction of a share being sold or
purchased as described below, Submitted Bids and Submitted Sell Orders shall be
accepted or rejected in the order of priority set forth in the Auction
Procedures with the result that the Existing Holders and Potential Holders of
Preferred Shares shall sell, continue to hold and/or purchase Preferred Shares
as set forth below. Existing Holders that submitted or were deemed to have
submitted Hold Orders shall continue to hold the Preferred Shares subject to
such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a
rate higher than the Winning Bid Rate or a Submitted Sell Order shall sell
the outstanding Preferred Shares subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a
rate lower than the Winning Bid Rate shall continue to hold the
outstanding Preferred Shares subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate lower than the Winning Bid Rate shall purchase the number of
Preferred Shares subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a
rate equal to the Winning Bid Rate shall continue to hold the outstanding
Preferred Shares subject to such Submitted Bid, unless the number of
outstanding Preferred Shares subject to all such Submitted Bids is greater
than the excess of the Available Preferred Shares over the number of
Preferred Shares accounted for in clauses (b) and (c) above, in which
event such Existing Holder with such a Submitted Bid shall sell a number
of outstanding Preferred Shares determined on a pro rata basis based on
the number of outstanding Preferred Shares subject to all such Submitted
Bids by such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate equal to the Winning Bid Rate shall purchase any Available Preferred
Shares not accounted for in clauses (b), (c) or (d) above on a pro rata
basis based on the number of outstanding Preferred Shares subject to all
such Submitted Bids.
If Sufficient Clearing Bids have not been made (other than because all
Submitted Orders are Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a
rate equal to or lower than the Maximum Applicable Rate shall continue to
hold the outstanding Preferred Shares subject to each Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate equal to or lower than the Maximum Applicable Rate shall purchase the
number of Preferred Shares subject to such Submitted Bid; and
(c) each Existing Holder that either placed a Submitted Bid
specifying a rate higher than the Maximum Applicable Rate or a Submitted
Sell Order (i) shall sell a number of outstanding Preferred Shares
determined on a pro rata basis based on the number of outstanding
Preferred Shares subject to all such Submitted Bids and Submitted Sell
Orders or (ii) if there shall have been no Submitted Bids specifying a
rate equal to or lower than the Maximum Applicable Rate, shall continue to
hold the outstanding Preferred Shares subject to all such Submitted Bids
and Submitted Sell Orders.
If, as a result of the Auction Procedures described above, (i) 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 Preferred Share, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, round up or down the number of Preferred Shares being sold or
purchased on such Auction Date so that the number of shares sold or purchased by
each Existing Holder or Potential Holder shall be whole Preferred Shares and
(ii) any Potential Holder would be entitled or required to purchase less than a
whole Preferred Share, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, allocate Preferred Shares for purchase among
Potential Holders so that only whole Preferred Shares are purchased by any such
Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing Preferred Shares.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will advise each Broker-Dealer that submitted a Bid or
Sell Order on behalf of a Bidder whether such Bid or Sell Order was accepted or
rejected in whole or in part and the Applicable Rate for the next Dividend
Period by telephone at approximately 3:00 P.M., New York City time, on each
Auction Date. Each Broker-Dealer that submitted a Bid or Sell Order on behalf of
a Bidder will then advise such Bidder whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each Bidder
purchasing or selling Preferred Shares as a result of the Auction and will
advise each Bidder purchasing or selling Preferred Shares to give instructions
to its Agent Member of the Securities Depository to pay the purchase price
against delivery by book-entry of such shares or to deliver such shares against
payment therefor as appropriate. Each Broker-Dealer that submitted a Hold Order
on behalf of an Existing Holder will also advise such Existing Holder of the
Applicable Rate for the next Dividend Period. The Auction Agent will record each
transfer of Preferred Shares on the registry of Existing Holders to be
maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the
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 Preferred
Shares delivered by book-entry 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 next-day funds settled through the New York
Clearing House to the Securities Depository against delivery by book entry
through their Agent Members; the Securities Depository will make payment in
accordance with its normal procedures, which now provide for payment in next-day
funds settled through the New York Clearing House.
If any Existing Holder selling Preferred Shares in an Auction fails to
deliver such Preferred Shares, the Broker-Dealer of any person that was to have
purchased such Preferred Shares in such Auction may deliver to such person a
number of whole Preferred Shares that is less than the number of shares that
otherwise was to be purchased by such person. In such event, the number of
Preferred Shares to be so delivered shall be determined by such Broker-Dealer.
Delivery of such lesser number of Preferred Shares shall constitute good
delivery.
BROKER-DEALERS
After each Auction, the Auction Agent will pay a service charge from funds
provided by the Fund to each Broker-Dealer at the annual rate of 1/4 of 1% of
the purchase price of Preferred Shares placed by such Broker-Dealer at such
Auction, prorated for the number of days in the related Dividend Period. The
Fund has been advised that the Staff of the Securities and Exchange Commission
is reviewing the appropriateness of the use of Fund assets to pay such service
charge. In the event the Fund is subsequently advised by the Staff that the
payment of such service charge by the Fund is not appropriate, it will cease
making such payments and apply to the Staff for relief from any such finding. No
assurance can be given that if such relief is required and sought, it can be
obtained. For the purposes of the preceding sentences, Preferred Shares will be
placed by a Broker-Dealer if such Preferred Shares were (i) the subject of Hold
Orders deemed to have been made by Existing Holders of Preferred Shares that
were acquired by such Existing Holders through such Broker-Dealer or (ii) the
subject of the following Orders submitted by such Broker-Dealer: (A) a Submitted
Bid of an Existing Holder that was accepted so that such Existing Holder
continues to hold such Preferred Shares as a result of the Auction, (B) a
Submitted Bid of a Potential Holder that was accepted so that a Potential Holder
purchases such Preferred Shares as a result of the Auction or (C) a Hold Order.
The Broker-Dealer Agreements will provide that a Broker-Dealer who signs a
Master Purchaser's Letter may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so;
provided that Broker-Dealers may continue to submit Hold Orders and Sell Orders.
If a Broker-Dealer submits an Order for its own account in any Auction, it may
have knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders. In the Broker-Dealer Agreements, Broker-Dealers
shall agree to handle customer orders in accordance with their respective duties
under applicable securities laws and rules.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The following summary description of the terms of the Preferred Shares
does not purport to be complete and is qualified in its entirety by the Articles
of Incorporation, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is part. A copy of the Registration Statement
of which this Prospectus is a part may be obtained as described under "Further
Information." As used herein, the term "holder" refers to a beneficial owner of
Preferred Shares unless the context otherwise requires.
The Articles of Incorporation provide that, except as otherwise provided
by law, all outstanding Preferred Shares shall be represented by a certificate
registered in the name of the Surety Custodian, and no person acquiring
Preferred Shares shall be entitled to receive a certificate representing such
Preferred Shares. Accordingly, the nominee of the Securities Depository
(initially Cede) will be the sole holder of custody receipts representing the
Preferred Shares, and each purchaser of Preferred Shares must rely on (i) the
procedures of the Securities Depository and, if such purchaser is not a member
of the Securities Depository, such purchaser's Agent Member to receive
dividends, distributions and notices and to exercise voting rights and (ii) the
records of the Securities Depository and, if such purchaser is not a member of
the Securities Depository, such purchaser's Agent Member, to evidence its
beneficial ownership of Preferred Shares. Pursuant to the Surety Arrangement,
the Preferred Shares and the Surety Bond are required to be held by the Surety
Custodian, pursuant to the Surety Custody Agreement in a custody account
established for the benefit of the holders of the Preferred Shares. Ownership of
the Preferred Shares, in turn, shall be evidenced by custody receipts held by
DTC.
Under the Articles of Incorporation, the Fund is authorized to issue up to
1,000 shares of Preferred Stock. The Preferred Shares will have no par value and
will have a liquidation preference of $100,000 per share. As of the date of this
Prospectus, there were no Preferred Shares issued and outstanding and,
accordingly, there has not been a market for Preferred Shares. The Board of
Directors reserves the right to issue Preferred Shares subsequent to this
offering from time to time.
Except in an Auction, the Fund or any affiliate of the Fund shall have the
right to purchase or otherwise acquire any Preferred Shares to the extent
permitted under Maryland law as long as (i) the Fund is current in the payment
of dividends on the Preferred Shares and (ii) the Fund is then in compliance and
after giving effect to such purchase would be in compliance with the applicable
asset coverage requirements under the 1940 Act. See "Dividends--Restrictions on
Dividends and Other Payments" below. The terms of the Indenture relating to the
Notes also restrict the payment of dividends on the Preferred Shares. See
"Description of Notes--Restrictive Covenants." The Preferred Shares are also
subject to optional redemption by the Fund. See "Redemption" below. Any
Preferred Shares redeemed, purchased or otherwise acquired by the Fund shall not
be re-issued, shall be retired and shall not be deemed outstanding.
The Preferred Shares will, upon issuance, be fully paid and nonassessable,
will not be convertible into Common Stock or any other capital stock, if any, of
the Fund and will have no preemptive rights.
DIVIDENDS
General. The holders of Preferred Shares shall be entitled to receive,
when, as and if declared by the Board of Directors of the Fund out of funds
legally available therefor, cumulative cash dividends, at the Applicable Rate
per annum, determined as set forth below under "Determination of Dividend Rate,"
payable on the respective dates set forth below. Dividends will be paid to
holders of the Preferred Shares on each Dividend Payment Date through DTC,
acting as the Securities Depository on each Dividend Payment Date. The
Securities Depository's normal procedures now provide for it to distribute
dividends in next-day funds settled through the New York Clearing House to Agent
Members who, in turn, are expected to distribute such dividends to the persons
for whom they are acting as agent.
Dividends on the Preferred Shares will accumulate from and including the
date on which the Fund originally issues the Preferred Shares (the "Original
Issuance Date") and will be payable on January 19, 1989 (the 45th day after the
Original Issuance Date) and on each day thereafter which is the last day of
successive 30-day periods after such date, or if either (i) any such last day
(the "Scheduled Payment Day") is not a Business Day or (ii) as long as the
Paying Agent continues to make payments in next-day funds, the day next
succeeding the Scheduled Payment Day is not a Business Day, then on the first
Business Day that falls after the Scheduled Payment Day and is next succeeded by
a Business Day (a "Dividend Payment Date"). Although any particular Dividend
Payment Date for the Preferred Shares may not occur on the Scheduled Payment Day
because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to the provisions of the preceding sentence, shall be the 30th day
following the Scheduled Payment Day designated for the prior Dividend Period (as
defined below). Not later than noon, New York time, on the Business Day next
preceding each Dividend Payment Date, the Fund is required to deposit with the
Paying Agent immediately available funds sufficient to pay the dividends that
are payable on such Dividend Payment Date.
Dividends will be paid to holders of the Preferred Shares on each Dividend
Payment Date through DTC, acting as the Security Depository on each Dividend
Payment Date. Each dividend shall be so paid to the holder or holders of
Preferred Shares as of the Business Day next preceding the Dividend Payment Date
for such dividend. The Securities Depository is responsible for crediting the
accounts of Existing Holders or the Agent Members of Existing Holders, as the
case may be, in accordance with the Securities Depository's normal procedures,
which now provide for payments in next-day funds settled through the New York
Clearing House. The Agent Member of an Existing Holder will be responsible for
holding or disbursing such payments to Existing Holders of Preferred Shares in
accordance with the instructions of such Existing Holders. Dividends in arrears
for any past Dividend Period may be declared and paid to the Securities
Depository at any time without reference to any regular Dividend Payment Date.
Any dividend payment made on Preferred Shares shall first be credited against
the dividends accumulated with respect to the earliest Dividend Period for which
dividends have not been paid.
If full cumulative dividends have not been paid on Preferred Shares, all
dividends declared on Preferred Shares will be paid pro rata to the holders of
outstanding Preferred Shares. Holders of Preferred Shares shall not be entitled
to any dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, on such Preferred Shares. Holders of Preferred Shares
shall not be entitled to any interest, or sum of money in lieu of interest, in
respect of any dividend payment or payments on the Preferred Shares which may be
in arrears.
The amount of declared dividends for a Preferred Share payable for each
Dividend Period shall be computed by multiplying the Applicable Rate for each
Dividend Period by a fraction, the numerator of which shall be the number of
days in the Dividend Period that such Preferred Share was outstanding and the
denominator of which shall be 360, and then multiplying the rate obtained by
$100,000 per share.
To the extent that the Fund does not make dividend payments on the
Preferred Shares on any Dividend Payment Date, such payments shall be made to
the holders by Financial Security pursuant to the Surety Bond and thereafter
Financial Security shall be subrogated to such holders' right to receive such
dividend payments and to exercise such holders' voting rights. See "Voting"
below and "Surety Arrangement--Surety Bond."
Determination of Dividend Rate. The dividend rate for the Preferred Shares
during the period from (and including) the Original Issuance Date to (but not
including) the Initial Dividend Payment Date (the "Initial Dividend Period")
shall be 9.50% per annum. The dividend rate on the Preferred Shares (the
"Applicable Rate") for each Subsequent Dividend Period shall be, except under
certain circumstances, the rate resulting from the implementation of the Auction
Procedures. Each dividend period for the Preferred Shares following the Initial
Dividend Period (herein referred to as a "Subsequent Dividend Period" and
collectively as "Subsequent Dividend Periods" and the Initial Dividend Period or
any Subsequent Dividend Period being herein referred to as a "Dividend Period"
and collectively as "Dividend Periods") shall commence on and include the
Dividend Payment Date for the previous Dividend Period and shall end on and
include the day preceding the next succeeding Dividend Payment Date. Dividends
shall be calculated as set forth in the preceding paragraph.
In the event there is no Auction Agent on the Business Day prior to the
first day of a Dividend Period for the Preferred Shares, the Applicable Rate for
such Dividend Period will be equal to the Maximum Applicable Rate that could
have resulted pursuant to the Auction Procedures, as determined by the Fund, on
the Business Day immediately preceding the first day of such Dividend Period.
The Articles of Incorporation provide that the Fund shall exercise its best
efforts to maintain an Auction Agent pursuant to an agreement containing terms
no less favorable to the Fund than the terms of the Auction Agent Agreement.
Restrictions on Dividends and Other Payments. Under the 1940 Act and the
Articles of Incorporation, the Fund will not be permitted to declare dividends
with respect to the Preferred Shares unless at the time of such declaration, and
after deducting the amount of any such dividend, asset coverage with respect to
the Fund's senior securities representing indebtedness, including the Notes,
would be at least 200% (or such higher percentage as may in the future be
required by law). Further, under the 1940 Act, the Fund may not declare
distributions (other than dividends) with respect to the Preferred Shares or
purchase or redeem Preferred Shares unless at the time of such declaration,
purchase or redemption, as applicable, and after deducting the amount of such
distribution or purchase or redemption price, as applicable, asset coverage with
respect to the Fund's senior securities representing indebtedness, including the
Notes, would be at least 300% (or such higher percentage as may in the future be
required by law). (The foregoing restrictions are also reflected as covenants
under the Indenture relating to the Notes, which also prohibits the declaration
of dividends or other distributions on, or the purchase or redemption of
Preferred Shares unless payments of principal of and interest on the Notes are
not in default.) Under the Internal Revenue 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 limitations on dividends, distributions,
redemptions and purchases may under certain circumstances impair the Fund's
ability to do so. See "Federal Taxation."
Upon any failure to pay dividends on the Preferred Shares equal to two
full years of dividends, the holders of the Preferred Shares will acquire
certain additional voting rights. See "Voting" below. Such rights shall be the
exclusive remedy of the holders of the Preferred Shares against the Fund upon
any failure by the Fund to pay dividends on the Preferred Shares, and in no
event shall holders of Preferred Shares have any right to sue the Fund for, or
bring a proceeding against the Fund with respect to, such dividends or damages
for the failure to receive the same.
No dividends or other distributions will be paid with respect to the
Common Stock unless full cumulative dividends on the Preferred Shares have been
declared and paid or provided for. In addition, the Fund will not be permitted
to declare dividends or other distributions with respect to the Common Stock or
purchase Common Stock if at the time of such declaration or the purchase of such
Common Stock the Fund fails to meet certain asset coverage requirements and
under certain other circumstances described under "Description of Common Stock."
REDEMPTION
To the extent permitted under the 1940 Act, Maryland law and the Indenture,
the Fund may redeem at its option some or all of the Preferred Shares on any
Dividend Payment Date (a "Preferred Stock Redemption"). The Fund shall be
obligated (a) to redeem, no later than the last day specified for the redemption
of Preferred Shares pursuant to a Redemption Request (as defined) from Financial
Security, the number of Preferred Shares specified in such Redemption Request (a
"Mandatory Surety Redemption") and (b) to redeem all of the Preferred Shares
at least one full Business Day prior to any expiration date of the Surety Bond
if, 190 days prior to such expiration date, the Fund shall have failed to obtain
from Financial Security an extension of the term of the Surety Bond pursuant to
its terms (a "Mandatory Expiration Redemption"); provided that, under certain
circumstances, no Mandatory Expiration Redemption shall be required if the Fund
shall have obtained notice in writing from each of the Rating Agencies that such
expiration of the Surety Bond will not adversely affect the then outstanding
ratings of the Preferred Shares whether through obtaining a substitute surety
bond or otherwise. Preferred Stock Redemptions and any Mandatory Surety
Redemption or Mandatory Expiration Redemption will be made at a price equal to
$100,000 per share plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund), except that if any such
redemption is not made on a Dividend Payment Date, it will be made at a price
equal to $100,250 plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund). Such redemptions may only be
made by the Fund to the extent permitted under the 1940 Act and Maryland law,
and provided neither principal nor interest payments with respect to the Notes
are then in default. A holder of Preferred Shares may elect not to have its
shares redeemed pursuant to a Mandatory Expiration Redemption by giving notice
to the Fund or the paying agent for the Preferred Shares at least five days
prior to the redemption date of its election to continue to hold its Preferred
Shares. The Fund will be obligated to meet certain Deposit Securities (as
defined) requirements pursuant to the Surety Arrangement to the extent necessary
to satisfy a Mandatory Expiration Redemption. See "Surety Arrangement--Insurance
Agreement. "
Pursuant to the terms of the Insurance Agreement, Financial Security will
be entitled to cause the Fund to redeem certain of the Preferred Shares to the
extent permitted under the 1940 Act and Maryland law (and provided payments of
principal of and interest on the Notes are not then in default), in the event
that the Fund fails to maintain the Surety Assets Coverage while any of the
Preferred Shares are outstanding, and such failure is not cured within eight
Business Days. See "Surety Arrangement--Insurance Agreement."
Any redemption of Preferred Shares will be subject to compliance with
asset coverage requirements under the 1940 Act as described above under
"Dividends--Restrictions on Dividends and Other Payments." If fewer than all of
the outstanding Preferred Shares are to be redeemed, the Preferred Shares to be
redeemed by the Fund shall be identified by lot or by such other method as the
Fund shall deem fair and equitable and as communicated to the Paying Agent.
Unless all accumulated and unpaid dividends for all past Dividend Periods shall
have been or are contemporaneously paid (or declared and funds set apart for the
payment thereof), no partial redemptions of Preferred Shares may be made. So
long as Preferred Shares are held of record by the nominee of the Securities
Depository, the Paying Agent shall give notice to the Securities Depository and
the Securities Depository will determine the number of Preferred Shares to be
redeemed from the account of the Agent Member of each Existing Holder. Such
Agent Member will in turn determine the number of Preferred Shares to be
redeemed from the account of each Existing Holder. An Agent Member may determine
to redeem Preferred Shares from the accounts of some Existing Holders (which
could include the Agent Member holding shares for its own account) without
redeeming Preferred Shares from the accounts of other Existing Holders. The Fund
shall give public notice of any redemption of Preferred Shares in The Wall
Street Journal (National Edition).
Written notice of a redemption ("Notice of Redemption") shall be given to
the holders of record of Preferred Shares selected for redemption not less than
15 or more than 30 days prior to the date fixed for the redemption. Each Notice
of Redemption shall state (i) the redemption date, (ii) the redemption price,
(iii) the number of Preferred Shares to be redeemed, (iv) the place or places
where such Preferred Shares are to be redeemed, and (v) that dividends on the
Preferred Shares to be redeemed will cease to accumulate on such redemption
date. No defect in the Notice of Redemption or in the mailing or publication
thereof shall affect the validity of the redemption proceedings, except as
required by applicable law.
If the Fund gives a Notice of Redemption, then the Fund will deposit with
the Paying Agent by noon, New York time, on the third Business Day next
preceding the date fixed for redemption, immediately available funds in an
amount sufficient to redeem the Preferred Shares called for redemption and will
give the Paying Agent irrevocable instructions and authority to pay the
redemption price to the holders of the Preferred Shares called for redemption
against delivery by book entry. On the date of such deposit, or if no such
deposit is made, then upon the date fixed for redemption (unless the Fund
defaults in making payment of the redemption price), all rights of the holders
of the Preferred Shares so called for redemption will cease and terminate except
for the right of the holders thereof to receive the redemption price thereof
(inclusive of accumulated but unpaid dividends, but without any interest)
against delivery by book entry of such Preferred Shares, and such Preferred
Shares shall no longer be deemed outstanding for any purpose. The Fund shall be
entitled to receive, promptly after the date fixed for redemption, any cash in
excess of the aggregate redemption price of the Preferred Shares called for
redemption on such date and any remaining funds. Any assets so deposited which
are unclaimed at the end of two years from such redemption date, shall, to the
extent permitted by law, be repaid to the Fund, after which the holders of the
Preferred Shares so called for redemption may look only to the Fund for payment
thereof. The Fund will be entitled to receive, from time to time after the date
fixed for redemption, any interest on the funds so deposited.
If on any date on which the payment of the redemption price would
constitute a Scheduled Payment, the Fund shall default in making payment of such
redemption price, Financial Security shall make such payments to the holders of
Preferred Shares to be redeemed and shall thereafter be subrogated to all the
rights of such holders with respect to their Preferred Shares. See "Voting"
below and "Surety Arrangement--Surety Bond."
So long as Preferred Shares (or while the Surety Bond is in effect, the
Custody Receipts) are held of record by the nominee of the Securities
Depository, the redemption price for such shares will be paid to the Securities
Depository on the redemption date. The Securities Depository's normal procedures
now provide for it to distribute the amount of the redemption price in next-day
funds settled through the New York Clearing House to Agent Members who, in turn,
are expected to distribute such funds to the persons for whom they are acting as
agent.
Preferred Shares which have been redeemed, purchased or otherwise acquired
by the Fund are not subject to reissuance, shall be retired and shall not be
deemed outstanding. In no event shall such Preferred Shares have any voting
rights.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the Fund (whether
voluntary or involuntary), holders of the Preferred Shares then outstanding
shall be entitled to receive, out of the assets of the Fund available for
distribution to stockholders, after satisfying claims of creditors (including
the holders of the Notes) but before any distribution of assets is made to
holders of the Common Stock or any other class of stock ranking junior to the
Preferred Shares as to liquidation payments, a liquidation distribution in the
amount of $100,000 per share plus an amount equal to accumulated and unpaid
dividends (whether or not earned or declared by the Fund, but without interest)
to the date of the final distribution. If, upon any liquidation, dissolution or
winding up of the Fund, the assets of the Fund shall be insufficient to make
such full payments to holders of the Preferred Shares, then such assets shall be
distributed among the holders of Preferred Shares ratably, according to the
respective amounts which would be payable on all such Preferred Shares if all
amounts thereon were paid in full. So long as the Surety Bond is in effect, to
the extent of any such insufficiency and provided Financial Security has
consented to such liquidation, Financial Security will pay the remaining
liquidation preference to the holders of the Preferred Shares at the time of
liquidation. If Financial Security has not consented to such liquidation, it
shall continue to guarantee Scheduled Payments on the Preferred Shares
(including dividend payments and the liquidation preference to the extent
thereof not paid in liquidation) until the expiration of the Surety Bond, at
which time payment of the unpaid liquidation preference of the Preferred Shares
shall be paid by Financial Security. See "Surety Arrangement--Surety Bond."
Unless and until payment in full has been made to the holders of the 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
junior to the Preferred Shares on liquidation. After payment to the holders of
the Preferred Shares of the full amount of the liquidation distributions to
which they are entitled, such holders will not be entitled to any further
participation in any distribution of assets of the Fund. Neither a sale, lease
or exchange of all or substantially all of the property and assets of the Fund
nor a consolidation or merger of the Fund with or into any other corporation or
business trust will be deemed to be a liquidation, dissolution or winding up of
the Fund.
Upon any liquidation, the holders of the Common Stock, after required
payments to the holders of the Preferred Shares, will be entitled to participate
equally in the remaining assets of the Fund.
As long as the Preferred Shares (or while the Surety Bond is in effect,
the Custody Receipts) are held of record by the nominee of the Securities
Depository, any liquidation distribution will be paid to the Securities
Depository in accordance with its normal procedures. The Securities Depository's
normal procedures now provide for it to distribute the amount of the liquidation
distribution in next-day funds through the New York Clearing House to Existing
Holders or the Agent Members of Existing Holders, which Agent Members, in turn,
are expected to distribute such funds to the persons for whom they are acting as
agent.
VOTING
Except as noted below, the Common Stock and the Preferred Shares vote
together as a single class. Holders of the Common Stock have voting rights of
one vote per share and the holders of the Preferred Shares have voting rights of
one vote per $1,000 of liquidation preference without regard to any liquidation
preference attributable to accumulated and unpaid dividends (i.e., 100 votes per
Preferred Share); provided that all the votes represented by a single Preferred
Share must be voted together. In elections of Directors, the holders of the
Preferred Shares, as a separate class, vote to elect two Directors and the
holders of the Common Stock and the Preferred Shares, voting together, will
elect the remaining Directors. In addition, during any period (herein referred
to as a "Voting Period") that dividends payable on Preferred Shares equal to two
full years of dividends are unpaid, the holders of such Preferred Shares have
the right to elect, as a class, the smallest number of additional Directors as
shall be necessary to assure that a majority of the Directors has been elected
by the holders of the Preferred Shares. 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 Preferred Shares
of the additional number of Directors which such holders are entitled to elect
as a separate class. The persons elected by the holders of Preferred Shares,
together with the incumbent Directors elected by the holders of the Common Stock
and the Preferred Shares voting together, will constitute the duly elected
Directors of the Fund. When all accumulated and unpaid dividends have been paid
or provided for, the Voting Period shall end and the terms of office of the
additional Directors shall terminate. Election of Directors is non-cumulative;
accordingly, holders of a majority of the voting power represented by the
outstanding shares of Common Stock and Preferred Shares, voting together as a
single class, or a majority of the outstanding Preferred Shares, voting
separately as a class, may elect all of the Directors who are subject to
election by such class.
Pursuant to the Surety Custody Agreement, to the extent Scheduled Payments
are paid by Financial Security pursuant to the Surety Bond, Financial Security
shall have the right to exercise the voting rights (including any right to elect
a majority of the Board of Directors described above) of the holders of the
Preferred Shares with respect to which such Scheduled Payments have been made by
Financial Security. See "Surety Arrangement--Surety Custody Agreement." The
assignment to Financial Security of the voting rights of the holders of the
Preferred Shares shall terminate when the Fund has made payments on the
Preferred Shares with respect to which Financial Security had made Scheduled
Payments pursuant to the Surety Bond or the Fund has reimbursed Financial
Security pursuant to such Scheduled Payments.
The Common Stock and the Preferred Shares each vote separately as a class
on amendments to the Articles of Incorporation that would adversely affect their
respective contractual rights as expressly set forth in the Articles of
Incorporation. In addition to any other vote required by the Articles of
Incorporation or applicable law, so long as any Preferred Shares are outstanding
(1) the Fund may not be voluntarily liquidated, dissolved or wound up, or
merged into or consolidated with any other entity in a transaction in which it
is not the successor entity, or converted to open-end status, and may not sell
all or substantially all of its assets, and may not engage in a statutory share
exchange in which it is not the successor entity without the approval of at
least a majority of the outstanding Preferred Shares and the outstanding shares
of Common Stock, each voting as a separate class; (2) the adoption of any plan
of reorganization adversely affecting either the Preferred Shares or the Common
Stock shall require the approval of a majority of the outstanding shares of each
such class so affected; (3) the approval of a majority of the outstanding
Preferred Shares, voting separately as a class, shall be required to amend,
alter or repeal any of the express preferences, rights or powers of holders of
the Preferred Shares as set forth in the Articles of Incorporation, or increase
or decrease the number of Preferred Shares authorized to be issued; and (4) so
long as any Preferred Shares are outstanding, the approval of a majority (as
defined under "Investment Objective and Policies") of the outstanding Preferred
Shares and the outstanding shares of Common Stock, each voting as a separate
class, shall be required to approve any action requiring a vote of security
holders under Section 13(a) of the 1940 Act including, among other things,
changes in the Fund's sub-classification as a closed-end investment company,
changes in its investment objective or changes in the investment restrictions
described under "Investment Objective and Policies--Investment Restrictions."
The Common Stock and the Preferred Shares will also vote separately to the
extent otherwise required under Maryland law or the 1940 Act as in effect from
time to time, and, to the extent required under the 1940 Act, action by the
Fund's shareholders shall require 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 the Preferred Shares to vote
on any matter, whether such right is created by the Articles of Incorporation,
by statute or otherwise, a holder of a Preferred Share will not be entitled to
vote and such 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
Preferred Shares entitled to vote or of Preferred Shares deemed outstanding for
quorum purposes, as the case may be, a notice of redemption shall have been
given in respect of such Preferred Share and Deposit Securities for the
redemption of such Preferred Share shall have been deposited in trust, as
provided above; provided, however, that the foregoing sentence shall not be
applicable to holders of Preferred Shares who elected to retain their Preferred
Shares after notice of a Mandatory Expiration Redemption.
RESTRICTIONS ON TRANSFERS
Preferred Shares may be sold, transferred or otherwise disposed of only
(i) pursuant to a Bid or Sell Order in accordance with the Auction Procedures
set forth in the Articles of Incorporation or (ii) to a person that has
delivered a signed copy of a Master Purchaser's Letter, through a Broker-Dealer,
to the Auction Agent; provided that in the case of all transfers other than
pursuant to Auctions the transferor, or the new Existing Holder's Broker-Dealer
or Agent Member, advises the Auction Agent of such transfer. As a condition to
purchasing Preferred Shares in this offering or participating in an Auction, a
prospective purchaser will be required to agree to the foregoing in its Master
Purchaser's Letter. In addition, the Fund intends that any certificate
registered in the name of the nominee of the Securities Depository will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of Preferred Shares contained in the Articles of
Incorporation and the Master Purchaser's Letters. The Fund also intends to issue
stop-transfer instructions to the transfer agent for the Preferred Shares.
Neither the Securities Depository nor any Agent Member has any obligation to
determine whether transfers of Preferred Shares maintained in book entry form
are made in accordance with the foregoing restrictions.
DESCRIPTION OF NOTES
GENERAL
As of the closing of this offering, the Fund will have outstanding up to
$57,500,000 ($7,500,000 of which amount represents the over-allotment option
granted to the underwriter of the Notes by the Fund), aggregate principal
amount of the Notes, issued under the Indenture to be dated as of December 1,
1988 between the Fund and Shawmut Bank, N.A., as trustee (the "Trustee"). The
Indenture does not limit the aggregate principal amount of senior notes of the
Fund (including the Notes, the "Senior Notes") that may be issued thereunder
from time to time in one or more series. The Notes constitute the first series
of Senior Notes issued under the Indenture. The issuance of any subsequent
series of Senior Notes will be subject to compliance with the 1940 Act,
including Section 18 thereof. Subject to the 1940 Act, any such subsequent
series of Senior Notes may have certain terms, including, but not limited to,
those relating to interest rate, redemptions, repurchases and maturity which
differ from the terms of the Notes. The following summary of the principal terms
of the Notes and certain terms of the Indenture is qualified in its entirety by
reference to all provisions of the Indenture, including the definitions therein
of certain terms and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 as in effect on the date of the Indenture. A copy of the
Indenture has been filed with the SEC as an exhibit to the Registration
Statement of which this Prospectus is a part.
INTEREST
The Notes will bear interest at the rate of 10.28% per annum from December
1, 1988 through and including November 30, 1993. The Fund may elect to extend
the Notes for one or more additional periods of one, two or three years (each
such period, and the period from December 1, 1988 through November 30, 1993, is
referred to as an "Interest Period"). The Notes will bear interest during each
Interest Period, if any, subsequent to November 30, 1993 at the applicable rate
per annum established by the Fund in its sole discretion. Interest on the Notes
is payable on June I and December I of each year, commencing June 1, 1989. The
Notes will mature on December 1, 1998 if not repurchased or redeemed prior to
that date.
REPURCHASE AND REDEMPTION
The registered holder of each Note may elect to have that Note, or any
portion thereof that is an integral multiple of $ 1,000, repurchased on the date
30 days following the first day of each Interest Period after the Initial
Interest Period (or, if such day is not a Business Day, on the next succeeding
Business Day) (the "Buy-Back Date") at 100% of the principal amount thereof to
be repurchased, plus accrued interest thereon to the repurchase date. The Notes
will not be redeemable by the Fund prior to maturity, except that (i) the Fund
may redeem the Notes, in whole or in part, on the December I following each
Interest Period, (ii) the Fund may redeem the Notes on or after December 5,
1993, in whole but not in part, in connection with the conversion of the Fund to
open-end status, and (iii) the Fund may elect to redeem such amount of the Notes
as shall (a) enable the Fund to maintain asset coverage (as defined in and
determined pursuant to the 1940 Act) with respect to the Fund's senior
securities representing indebtedness (as defined in the 1940 Act), including the
Notes, of at least 300% (or such higher percentage as may in the future be
specified in the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
paying dividends on common stock), (b) enable the Fund to maintain asset
coverage (as defined in and determined pursuant to the 1940 Act) with respect to
the Fund's senior securities of a class which is stock (as defined in the 1940
Act), including the Preferred Shares, of at least 200% (or such higher
percentage as may in the future be specified in the 1940 Act as the minimum
asset coverage for senior securities of a class which is stock of a closed-end
investment company as a condition of paying dividends on common stock) or (c)
enable the Fund to qualify for treatment as a regulated investment company for
federal income tax purposes. The Notes shall also be subject to mandatory
redemption, in whole or in part, upon the occurrence of certain events of
default as described under clauses (v) and (vi) under "Events of Default,"
below. All redemptions of Notes by the Fund will be at a price of 100% of the
principal amount thereof, plus accrued interest to the date of redemption.
DEPOSIT SECURITIES REQUIREMENT
The Fund will be obligated to deposit irrevocably with the Trustee a
specified amount of cash, U.S. government obligations or short-term money market
instruments (collectively, "Deposit Securities") not later than 30 days prior to
each interest payment date, the maturity date and each redemption or repurchase
date (in the case of redemptions on the December I following the end of an
Interest Period, redemptions made in connection with the conversion of the Fund
to open-end status and repurchases on the Buy-Back Date). Such Deposit
Securities in all cases shall have an initial combined market value greater than
or equal to the principal of and interest on the Notes to become due and payable
on the applicable payment date, and shall mature at least one day prior to such
date.
RANKING OF NOTES
The Notes will rank pari passu with all other existing or future senior
indebtedness of the Fund and will be senior to the Preferred Shares and the
Common Stock. "Senior indebtedness" means the principal of and interest on and
other amounts due on or in connection with any existing or future unsecured
indebtedness of the Fund.
RESTRICTIVE COVENANTS
Under the Indenture and the 1940 Act, the Fund may not declare dividends or
other distributions on the Common Stock or purchase any shares of Common Stock
if, at the time of such declaration or purchase, as applicable (and after giving
effect thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Notes, would be less than 300% (or such
higher percentage as may in the future be required by law). In addition, under
the 1940 Act and the Indenture, the Fund may not (i) declare dividends on the
Preferred Shares if, at the time of such declaration (and after giving effect
thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Notes, would be less than 200% (or such
higher percentage as may in the future be required by law) or (ii) declare any
other distributions on the Preferred Shares or purchase or redeem Preferred
Shares if, at the time of the declaration, purchase or redemption, as applicable
(and after giving effect thereto), asset coverage with respect to the Fund's
senior securities representing indebtedness, including the Notes, would be less
than 300% (or such higher percentage as may in the future be required by law).
Dividends or other distributions on or purchases or redemptions of the Common
Stock or Preferred Shares are further prohibited under the Indenture at any time
that payments of principal of or interest on the Notes are in default; the terms
of the Preferred Shares also prohibit the payment of dividends or other
distributions on or redemptions or purchases of the Common Stock under certain
circumstances. Under the Internal Revenue 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 limitations on dividends, distributions and
purchases may under certain circumstances impair the Fund's ability to maintain
such qualification. See "Federal Taxation."
The asset coverage of a class of senior securities representing
indebtedness, such as the Notes, is defined as the ratio of (i) the total assets
of the Fund, less all liabilities and indebtedness not represented by senior
securities, to (ii) the aggregate amount of senior securities representing
indebtedness of the Fund. The asset coverage of a class of senior securities
which is stock, such as the Preferred Shares (see "Description of Common
Stock"), is defined as the ratio of (i) the total assets of the Fund, less all
liabilities and indebtedness not represented by senior securities to (ii) the
aggregate amount of senior securities representing indebtedness of the Fund,
plus the aggregate of the liquidation preference of the Preferred Shares.
"Senior securities representing indebtedness" generally means any bond,
debenture, note or similar obligation or instrument constituting a security
(other than stock) and evidencing indebtedness. For purposes of determining
asset coverage for senior securities representing indebtedness in connection
with the payment of dividends or other distributions on or purchases or
redemptions of stock, the term "senior security" does not include any promissory
note or other evidence of indebtedness issued in consideration of any loan,
extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any such promissory note or other evidence in
any case where such a loan is for temporary purposes only and in an amount not
exceeding 5% of the value of the total assets of the Fund at the time when the
loan is made; a loan is presumed under the 1940 Act to be for temporary purposes
if it is repaid within 60 days and is not extended or renewed; otherwise it is
presumed not to be for temporary purposes. For purposes of determining whether
the 300% and 200% asset coverage requirements described above apply in
connection with dividends or distributions on or purchases or redemptions of
Common Stock or Preferred Shares and for purposes of determining 1940 Act Asset
Coverage (as defined below), such asset coverages may be calculated on the
basis of values calculated as of a time within 48 hours (not including Sundays
or holidays) next preceding the time of the applicable determination. The
foregoing definitions reflect the provisions of the 1940 Act as in effect on the
date of the Indenture and are subject to change to the extent necessary to
reflect changes in the 1940 Act, if any.
Pursuant to the Notes Investment Guidelines, the Indenture contains
covenants limiting the Fund's ability to incur, assume, guarantee or otherwise
become liable with respect to any indebtedness for money borrowed unless (a)
the incurrence of such indebtedness would not result in a default in the
performance or observance of the Fund's obligation to maintain 1940 Act Asset
Coverage (as defined below) or otherwise cause a violation of Section 18 of the
1940 Act and (b) either (i) such indebtedness shall constitute Bank Borrowings
(as defined below) or (ii) the Fund shall have received written confirmation
from each of the Rating Agencies that the incurrence of such indebtedness will
not adversely affect the rating of the Notes if the Notes are then rated by such
Rating Agency. Under the Indenture, "Bank Borrowings" means borrowings (a) from
a depository institution, the deposits of which are insured by the Federal
Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation, (b) which are not senior in right of payment to the Notes and (c)
which have been made pursuant to loan documents containing a covenant that the
lender shall not make a petition which would result in the institution of an
involuntary case or proceeding against the Fund or the appointment of a
custodian for the Fund or all or substantially all of its property under any
bankruptcy law prior to the date which is one year and one day after the first
date upon which no Notes are outstanding. The Fund will not file a voluntary
petition in bankruptcy so long as the value of its assets is, and is reasonably
foreseen as being, greater than its liabilities.
The Notes Investment Guidelines reflected in the Indenture also prohibit
the Fund from creating, incurring or suffering to exist, or agreeing to create,
incur or suffer to exist, or consenting to cause or permit in the future (upon
the happening of a contingency or otherwise) the creation, incurrence or
existence of any material lien, mortgage, pledge, charge, security interest,
security agreement, conditional sale or trust receipt or other material
encumbrance of any sort (collectively, "Liens") upon any of its assets which are
eligible for inclusion in the discounted value of its portfolio, except for (a)
Liens the validity of which is being contested in good faith by appropriate
proceedings, (b) Liens for taxes that are not then due and payable or that can
be paid thereafter without penalty, (c) Liens to secure payment for services
rendered by Bankers Trust Company or its successor as auction agent with respect
to the Preferred Shares or the Trustee and (d) at such time as the Notes are not
rated by the Rating Agencies or otherwise, or upon receipt of written
confirmation from each of the Rating Agencies (if the Notes are then rated by
such Rating Agency) that the rating of the Notes will not be impaired thereby,
Liens otherwise incurred in connection with borrowings made in accordance with
the Fund's stated investment objective, policies and restrictions. The terms of
the Indenture also limit the Fund's ability to employ certain investment
strategies. See "Investment Objective and Policies--Certain Investment
Strategies."
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements that are incorporated into the terms of the Indenture. The first of
these requirements reflects the provisions of the 1940 Act with respect to asset
maintenance for senior securities representing indebtedness. The second of these
requirements reflects the Notes Investment Guidelines. These requirements are
summarized below.
1940 Act Asset Maintenance. As set forth in the Indenture, the Fund will
agree to maintain, as of the last Business Day of each month in which any of the
Notes is outstanding, asset coverage with respect to senior securities
representing indebtedness, including the Notes, of at least 300% (or such higher
percentage as may in the future be specified in the 1940 Act as the minimum
asset coverage for senior securities representing indebtedness of a closed-end
investment company as a condition of paying dividends on common stock) ("1940
Act Asset Coverage"). See "Restrictive Covenants" above for certain definitions
relating to 1940 Act Asset Coverage.
Note Basic Maintenance Amount. The Fund will be required under the
Indenture to maintain, on each Valuation Date (as defined), portfolio holdings
conforming to the Notes Investment Guidelines (as described under "Investment
Objective and Policies--Investment Guidelines") having a discounted value at
least equal to the Note Basic Maintenance Amount. In the event that the
discounted value of the Fund's portfolio is less than the Note Basic Maintenance
Amount on any Valuation Date while any of the Notes is outstanding, the Fund
will seek to alter the composition of its portfolio so that, on or before the
eighth Business Day after such Valuation Date (the "Cure Date"), the discounted
value of the Fund's portfolio is at least equal to such Note Basic Maintenance
Amount. A "Valuation Date" means (i) the fifteenth day of each month or, if such
day is not a Business Day, the next succeeding Business Day and (ii) the last
Business Day of such month or, in the case of the first Valuation Date, a date
selected by the Fund no more than 15 days after the date on which the Notes are
initially issued.
The "Note Basic Maintenance Amount" as of any date is defined as the dollar
amount equal to (A) the sum of (i) 100% of the aggregate principal amount of the
Notes then outstanding; (ii) an amount equal to accrued interest on the
aggregate principal amount of the Notes then outstanding from the most recent
date to which interest has been paid or duly provided for (or, in the event the
Note Basic Maintenance Amount is calculated on a date prior to June 1, 1989,
then from December 1, 1988) through the next succeeding Valuation Date plus all
interest to accrue on the Notes during the 63 days following such Valuation
Date; (iii) the principal amount of any then outstanding indebtedness of the
Fund for money borrowed (other than the Notes); and (iv) the greater of $200,000
or the Fund's current liabilities as of such date to the extent not reflected in
any of (i) through (iii) above, less (B) the combined value of any Deposit
Securities irrevocably deposited by the Fund for the payment of principal of or
interest on the Notes. The discounted value of the Fund's portfolio holdings as
of any date means the quotient of the market value (as defined in the Indenture,
and including accrued interest) of each such holding divided by the applicable
discount factor. Any security not in compliance with the Notes Investment
Guidelines (see "Investment Objective and Policies--Investment Guidelines")
shall be excluded from the calculation of the discounted value of the Fund's
portfolio holdings.
The discount factors and guidelines for determining the market value of the
Fund's portfolio holdings for purposes of determining compliance with the Note
Basic Maintenance Amount have been based upon criteria established in connection
with the rating of the Notes. In determining discount factors, several factors
are taken into consideration. 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 corporate
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 balance or face amount as of
the date of calculation. The discount factor for the market value of any asset
of the Fund, the method of calculating the discounted value of any such asset
and the Note Basic Maintenance Amount, the assets eligible for inclusion in the
calculation of the discounted value of the Fund's portfolio and certain related
definitions, methods of calculation and reporting requirements, may be changed
without the consent of the holders of the Notes, provided that, among other
things, such changes will not adversely affect the ratings then assigned to the
Notes by the respective Rating Agencies.
MERGER AND CONSOLIDATION
The Fund may consolidate with or merge with or into, or transfer its assets
substantially as an entirety to, another corporation, limited partnership or
business trust, or engage in a statutory share exchange under Maryland law,
provided that (i) the successor corporation or business trust (if other than
the Fund) formed by or resulting from any such consolidation or merger, or the
transferee of the Fund's assets, shall assume by a supplemental indenture
payment of the principal of and interest on the Notes and any other series of
Senior Notes and the performance and observance of the Indenture, (ii) the Fund
or such successor corporation or business trust or transferee shall not
immediately before such transaction or thereafter be in default under the
Indenture, and (iii) the Fund shall have received written confirmation from each
of the Rating Agencies that such transactions will not adversely affect the
ratings, if any, then assigned to the Notes, if the Notes are then rated by the
respective Rating Agencies.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture (i) failure
to pay principal of any Note when due; (ii) default for five Business Days in
the payment of interest on any Note; (iii) failure to make a required deposit of
Deposit Securities when such deposit shall become due with respect to the
payment of principal of or interest on the Notes: (iv) failure to maintain asset
coverage with respect to senior securities representing indebtedness (as such
terms are defined above under "Restrictive Covenants") of at least 100% as of
the last Business Day of each of 24 consecutive months; (v) failure to have, as
of the last Business Day of any month, 1940 Act Asset Coverage, which failure is
not cured by the last Business Day of the following month (for this purpose,
without limitation, the default will be deemed cured if, within the prescribed
period, the Fund has instructed the Trustee to call Notes for redemption and
certified to the Trustee that such redemption, alone or together with other
action taken by the Fund, will cause the Fund to have the requisite 1940 Act
Asset Coverage); (vi) failure to maintain, on each Valuation Date, a
discounted value for the Fund's portfolio equal to at least the Note Basic
Maintenance Amount, which failure is not cured by the applicable Cure Date;
(vii) default in the performance of any other covenant of the Fund under the
Indenture which has continued for 60 days after written notice as provided in
the Indenture; (viii) default under any instrument under which the Fund has
issued indebtedness or by which there may be secured or evidenced any
indebtedness of or guaranteed by the Fund, the effect of which is to cause or
permit the holders thereof to cause the acceleration of the maturity thereof,
provided that such default or defaults relate to indebtedness with an aggregate
principal amount of at least $500,000 and have continued for 60 days after
written notice as provided in the Indenture; (ix) the making by the Internal
Revenue Service of a final determination that the Fund does not qualify for any
taxable year as a "regulated investment company" (as defined in the Internal
Revenue Code); (x) certain events of bankruptcy, insolvency or reorganization;
and (xi) the existence for 60 days of unstayed or unsatisfied final judgements
against the Fund in an aggregate amount in excess of $500,000.
If an Event of Default specified in any of clauses (vii), (viii) or (xi)
above occurs and is continuing, the Trustee or the registered holders of at
least 25% in principal amount of the outstanding Notes may declare the Notes due
and payable as provided below. If an Event of Default specified in any of
clauses (i) through (vi) or (ix) occurs, then and in every such case the Trustee
shall, immediately after the Trustee has knowledge of such Event of Default,
declare the Notes (or in the case of an Event of Default of the type specified
in clause (v) or (vi), such portion of the Notes as shall be required under the
Indenture to be redeemed) to be due and payable as provided below. Upon an
Event of Default specified in clause (v), the amount of Notes subject to
mandatory partial redemption will equal the aggregate principal amount of
outstanding Notes (rounded to the next highest increment of $1,000) the
redemption of which would have caused the Fund to meet 1940 Act Asset Coverage
on a pro forma basis as of the last Business Day of the month in which the
failure to maintain 1940 Act Asset Coverage initially occurred. Upon an Event of
Default specified in clause (vi), the amount of Notes subject to mandatory
partial redemption will equal the amount of outstanding Notes which could be
redeemed using the proceeds from the deemed sale of Special Note Redemption
Assets (rounded to the next highest increment of $1,000). "Special Note
Redemption Assets" are defined as portfolio holdings identified by the Fund in
its sole discretion, the deemed sale of which for cash on the Valuation Date on
which the discounted value of the Fund's portfolio failed to equal or exceed the
Note Basic Maintenance Amount would have resulted in the Fund achieving the
required Note Basic Maintenance Amount on a pro forma basis as of such Valuation
Date.
In the event of a mandatory partial redemption of Notes following an Event
of Default specified in clause (v) or (vi), the payment of principal of and
interest on the Notes due as a result of such mandatory partial redemption shall
be due within 45 days after the date on which such Event of Default occurs (in
the case of clause (v)) or the applicable Valuation Date (in the case of clause
(vi)). In the event of an acceleration in the maturity of Notes following an
Event of Default specified in any of the other clauses above other than clause
(x), the principal of and interest on such Notes shall be due and payable on the
30th day (or, if such day is not a Business Day) the next succeeding Business
Day) following the date of the declaration of such acceleration pursuant to
notice to the Fund. If an Event of Default specified in clause (x) occurs, the
Notes shall become due and payable immediately without any declaration or other
act on the part of the Trustee or any holder of the Notes.
The registered holders of a majority in principal amount of the outstanding
Notes may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee when exercising any trust or power conferred on
the Trustee, provided that such direction shall not conflict with any rule of
law or the Indenture. The Indenture provides that if a default on the Notes
occurs and is continuing and if it is known to the Trustee, the Trustee shall
mail notice thereof to each holder of the Notes within 90 days after it occurs;
provided that, except in the case of a default in payment on any of the Notes,
the Trustee may withhold the notice if and so long as it in good faith
determines that withholding the notice is in the interest of the holders.
Subject to the duty of the Trustee during a default on the Notes to act with the
required standard of care before proceeding to exercise any right or power under
the Indenture at the direction of the registered holders of the Notes, the
Trustee shall be entitled to receive from them reasonable security or indemnity
against the costs, expenses and liabilities that it may incur in complying with
any such direction. Under certain circumstances, at any time after a declaration
of acceleration with respect to the Notes has been made, but before a judgment
or decree based on acceleration has been obtained, the registered holders of a
majority in principal amount of the outstanding Notes may rescind and annul such
declaration, except that the consent of the holders of 100% in principal amount
of the outstanding Notes is required to annul a mandatory acceleration (or
redemption, as the case may be) pursuant to any of clauses (i) through (vi),
(ix) or (x) above.
The Fund will be required to furnish annually to the Trustee a statement as
to the fulfillment by the Fund of all of the Fund's obligations under the
Indenture. The Fund will also be required to furnish the Trustee statements of
compliance with 1940 Act Asset Coverage on a monthly basis and statements of
compliance with the requirement to maintain a discounted portfolio value at
least equal to the Note Basic Maintenance Amount on a semi-monthly basis.
MODIFICATION AND WAIVER
The Fund and the Trustee may supplement, amend or waive any provision of
the Indenture with the consent of the registered holders of a majority in
aggregate principal amount of the outstanding Notes, provided that no such
supplement, amendment or waiver may, without the consent of 100% of the
aggregate principal amount of the Notes outstanding: (i) reduce the principal
amount of Notes whose registered holders must consent to an amendment,
supplement or waiver; (ii) reduce the rate or change the method of calculation,
or change the time of payment of interest on any Note; (iii) reduce the
principal of or change the fixed maturity of any Note or make any Note payable
in money other than that stated in the Note; (iv) waive an Event of Default
specified above in any of clauses (i) through (vi), (ix) or (x) under "Events of
Default"; (v) make any change that adversely affects the rights of repurchase;
(vi) reduce the percentage of outstanding Notes necessary to waive any default
or Event of Default or make any changes in or modify the foregoing provisions;
or (vii) effect any other amendment adversely affecting the rating of the Notes
(if then rated by the Rating Agencies). Without the consent of any holder, the
Fund and the Trustee may amend or supplement the Indenture: (i) to evidence the
succession of another person to the Fund as obligor on the Notes in accordance
with the Indenture; (ii) to provide for uncertificated Notes in addition to
certificated Notes; (iii) to add to the covenants of the Fund for the benefit of
the holders of the Notes or to surrender any right or power conferred upon the
Fund; (iv) to cure any ambiguity in, to correct or supplement any provision that
may be defective or inconsistent with any other provision of or to make any
other provisions with respect to matters or questions arising under the
Indenture which are not inconsistent with the provisions of the Indenture,
provided that such action will not adversely affect the interests of the holders
of the Notes; and (v) to include provisions required or permitted by the Trust
Indenture Act of 1939 or the 1940 Act. In addition, the Indenture may be
modified or amended by the Fund and the Trustee, without the consent of the
holder of any Note, to provide for an alternative method of valuation of the
Fund's assets in connection with the determination of compliance with the Note
Basic Maintenance Amount coverage requirement described above and, in such
connection and otherwise, the Fund and the Trustee may adopt amendments to or
changes in the methods of calculation or definitions of certain terms relating
thereto, provided that such amendment or change will not impair the ratings then
assigned to the Notes by the Rating Agencies.
SATISFACTION AND DISCHARGE
With respect to the Notes, the Indenture may be discharged (i) upon
cancellation, payment or redemption of all the Notes or (ii) if the Notes have
matured or all of them have been called for redemption under arrangements
satisfactory to the Trustee for giving the notice of redemption, upon deposit
with the Trustee of funds or Deposit Securities sufficient for such payment or
redemption plus accrued interest to the maturity or redemption date, as the case
may be.
DESCRIPTION OF COMMON STOCK
In addition to the Preferred Shares, the Fund's Articles of Incorporation
authorize the issuance of up to 100,000,000 shares of Common Stock, $.01 par
value. As of the date hereof, 11,000 shares of Common Stock have been issued to
the Investment Adviser and up to 13,800,000 shares (including 1,800,000 shares
subject to an over-allotment option granted the underwriters thereof) will be
issued in a concurrent public offering. The Board of Directors reserves the
right to issue Common Stock subsequent to such offering from time to time, and
any such shares shall be deemed "Common Stock." All shares of Common Stock have
equal rights as to voting, dividends and liquidation. All shares of Common Stock
issued and outstanding or to be issued in the concurrent public offering are, or
upon issuance will be, fully paid and nonassessable. Shares of Common Stock have
no preemptive, conversion or redemption rights and are freely transferable.
Holders of shares of Common Stock have voting rights of one vote per share
and holders of the Preferred Shares have voting rights of one vote per $1,000 of
liquidation preference without regard to any liquidation preference attributable
to accumulated and unpaid dividends (i.e., 100 votes per Preferred Share);
provided that all the votes represented by a single Preferred Share must be
voted together. 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 Stock--Voting." In elections of Directors, the holders
of the Preferred Shares, voting as a separate class, elect two Directors and the
holders of the Common Stock and the Preferred Shares, voting together, elect the
remaining Directors. The voting rights of the Common Stock and the Preferred
Shares are noncumulative, which means that the holders of a majority of the
voting power represented by the outstanding shares of Common Stock and Preferred
Shares, voting together as a single class, or a majority of the Preferred
Shares, voting separately as a class, may elect all of the Directors who are
subject all to election by such class as the case may be.
The contractual rights of the holders of the Common Stock as expressly set
forth in the Articles of Incorporation may not be modified by a vote of less
than a majority of the shares of Common Stock outstanding.
The Common Stock has been approved for listing on the NYSE under the
symbol "PHY."
Under the Indenture and the 1940 Act, the Fund cannot declare dividends or
other distributions on the Common Stock or purchase any shares of Common Stock
if, at the time of the declaration or purchase, as applicable (and after giving
effect thereto), asset coverage with respect to senior securities representing
indebtedness, including the Notes, would be less than 300% (or such higher
percentage as may in the future be required by law) or asset coverage with
respect to the Preferred Shares would be less than 200% (or such higher
percentage as may in the future be required by law). See "Description of
Notes--Restrictive Covenants" for certain definitions relating to the foregoing
restrictions. Dividends or other distributions on or purchases of the Common
Stock also will be prohibited at any time payments of principal of or interest
on the Notes are in default pursuant to the Indenture, or at any time dividends
on the Preferred Shares are in arrears or Surety Assets Coverage is not
maintained pursuant to the Surety Arrangement.
Subject to the foregoing and to 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. "Net investment income" includes interest,
dividends, short-term capital gains and other income received or accrued less
interest payments with respect to the Notes, the advisory fee, the premium paid
pursuant to the Surety Arrangement, bank and surety custodian charges, taxes
(except capital gains taxes) and other expenses properly chargeable against
income, but does not include net capital gains, stock dividends, transfer taxes,
brokerage or other capital charges nor distributions designated as a return of
capital. Any 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 requirement of
Maryland law.
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 such holders by The Bank of New York
(the "Bank"), as dividend disbursing agent. Pursuant to the Plan, holders of
Common Stock not making such election will have all such amounts automatically
reinvested by the Bank, as the Plan agent, in whole or fractional shares of
Common Stock, as the case may be.
As of the date of this Prospectus, Prospect Street(SM) Investment
Management Co., Inc., the Investment Adviser, was the record and beneficial
owner of all of the outstanding shares of Common Stock and thus was deemed in
"control" of the Fund as "control" is defined in the 1940 Act. The Investment
Adviser has undertaken that these shares were purchased for investment purposes
only and that they will be sold only pursuant to a registration statement under
the 1933 Act or an applicable exemption from the registration requirements
thereof.
FINANCIAL SECURITY
The information set forth below under this caption and the Financial
Statements of Financial Security and Subsidiary contained in this Prospectus
were furnished by Financial Security.
GENERAL
Financial Security shall act as surety under the Surety Bond by which
Financial Security unconditionally and irrevocably guarantees the Scheduled
Payments on the Preferred Shares. Financial Security is a monoline property and
casualty insurance company incorporated on March 16, 1984 under the laws of the
State of New York. The operations of Financial Security commenced on July 25,
1985, and Financial Security received its New York State insurance license on
September 23, 1985. Financial Security and its two wholly-owned subsidiaries are
licensed to engage in surety business in 42 states and the District of Columbia.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally on corporate and
other taxable securities offered in domestic and foreign markets. Financial
Security and its subsidiaries also write financial guaranty insurance on
tax-exempt municipal obligations and reinsure financial guaranty insurance
policies written by other leading insurance companies. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities--thereby enhancing the credit rating of those
securities--in consideration for payment of a premium to the insurer. As of
September 30, 1988, Financial Security and its subsidiaries had insured or
reinsured approximately $7.6 billion principal amount of corporate and municipal
obligations (net of amounts reinsured with unaffiliated reinsurers). Pursuant
to an intercompany agreement, liabilities on surety bonds issued by Financial
Security or either of its subsidiaries are reinsured among such companies on an
agreed-upon percentage substantially proportional to their respective capital,
surplus and reserves, subject to applicable statutory risk limitations.
The registered office of Financial Security is located at 350 Park Avenue,
New York, New York 10022 and its telephone number is (212) 826-0100. At
September 30, 1988, Financial Security and its subsidiaries had 82 employees.
FINANCIAL STRUCTURE
Financial Security is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. The investors listed below own or control approximately
75% of the common equity of Financial Security Assurance Holdings Ltd. Neither
Financial Security Assurance Holdings Ltd. nor any of its investors is obligated
to pay debts of Financial Security or to pay any claim under the Surety Bonds or
to make additional capital contributions.
<TABLE>
<CAPTION>
UNITED STATES GREAT BRITAIN
<S> <C>
Tucson Electric Power Company Globe Investment Trust P.L.C.
The Equitable Life Assurance Society of the The General Electric Company p.l.c.
United States Electra Investment Trust PLC
John Hancock Mutual Life Insurance Company Gartmore Investment Management Limited
New England Mutual Life Insurance Company Kleinwort Benson Limited
Transamerica Corporation Water Authorities Superannuation Fund
First Interstate Bancorp G.T. Management PLC
McDonnell Douglas Finance Corporation CANADA
Potomac Capital Investment Corporation Canadian Imperial Bank of Commerce
Westinghouse Credit Corporation AUSTRALIA
Monumental Life Insurance Company Westpac Banking Corporation
JAPAN ITALY
Sumitomo Life Insurance Company Toro International Holding S.A.
Orient Leasing, USA, Corp. SWITZERLAND
Morval & Cie S.A.
Jean-Jacques Michel
</TABLE>
Financial Security reinsures a portion of its liabilities under certain of
its surety bonds with unaffiliated reinsurers under various quota share treaties
and on a transaction-by-transaction basis. Such reinsurance is utilized by
Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any surety bond.
Financial Security's claims-paying ability is rated "AAA" by S&P, "Aaa" by
Moody's, "AAA" by Fitch Investors Service, Inc., "AAA" by Nippon Investors
Service Inc. and "D&P-1" (triple A) by Duff & Phelps Inc. Such ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
Copies of the statutory quarterly and annual statements filed with the
State of New York Insurance Department by Financial Security are available upon
request to the State of New York Insurance Department.
CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its wholly-owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1988:
SEPTEMBER 30,
1988
-----------
(UNAUDITED)
Unearned Premium Reserve................................. $103,481,202
Other Liabilities(l) .................................... 25,741,647
Shareholders' Equity:
Common Stock.......................................... 2,500,000
Additional Paid-in Surplus ........................... 197,501,000
Retained Earnings..................................... 41,507,493
------------
Total Shareholder's Equity............................... 241,508,493
------------
Total Liabilities and Shareholder's Equity............... $370,731,342
============
- ------------
(1) Includes $16,336,633 of short-term liabilities.
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiary included as part of
this Prospectus.
INSURANCE REGULATION
Financial Security is subject to regulation by the Insurance Department of
the State of New York, where it is incorporated and licensed to do business. In
addition, Financial Security and its subsidiaries are subject to regulation by
insurance departments of the various other states in which they have been
licensed to transact business.
Principal areas of regulation include the amount of exposure that may be
retained by an insurer for any given net risk, the rate at which premiums will
be earned and the level of reserves required for unearned premiums (see Note 4
of the Notes to Consolidated Financial Statements of Financial Security and
Subsidiary herein). In addition, insurance laws regulate permissible investments
of reserves and surplus, forms of insurance contracts, limitations on the terms,
amount and treatment of transactions among affiliates within a controlled group
(generally requiring notice to and/or approval by the insurance department),
mergers, consolidations, acquisitions or dispositions of substantially all
assets (generally requiring regulatory approval) and the incurrence of liability
for borrowings. Additional legislation and regulations with respect to the
financial guaranty insurance industry are currently under consideration in the
State of New York and other jurisdictions. No prediction may be made as to the
likelihood of adoption of any such additional legislation or regulations or the
impact thereof, if any, upon Financial Security.
SURETY ARRANGEMENT
SURETY BOND
Concurrently with the issuance of the Preferred Shares, the Fund will cause
Financial Security to deliver the Surety Bond to Bankers Trust Company, as
custodian under a custody agreement (the "Surety Custody Agreement") for the
benefit of the holders of the Preferred Shares. Under the Surety Bond, Financial
Security unconditionally and irrevocably guarantees to each holder of Preferred
Shares the full and complete payment of (i) Scheduled Payments and (ii) any
dividend payment, payment of redemption price or liquidation payment which
subsequently is avoided in whole or in part as a preference payment under
applicable law until and including such date on which the Preferred Stock is
redeemed in full.
"Scheduled Payments" shall mean (i) payments of dividends on the Preferred
Shares which holders of the Preferred Shares would be entitled to receive on
each Dividend Payment Date during the term of the Surety Bond (see "Expiration
or Termination of Surety Arrangement" below) in accordance with the terms of the
Articles of Incorporation, without regard to whether the Fund has declared any
such dividend or such dividend could have been legally declared by the Fund,
(ii) payment of the redemption price of the Preferred Shares without regard to
whether such redemption could have been legally made by the Fund (a) on the
last date on which the Fund was to have redeemed the Preferred Shares as
specified in a Redemption Request (as defined) given by Financial Security under
the Insurance Agreement upon the occurrence of an Event of Default (as defined)
under the Insurance Agreement in the event Financial Security has notified the
Surety Custodian that such redemption is to be a Scheduled Payment, and (b) on
the date on which the Preferred Shares may be required to be redeemed pursuant
to a Mandatory Expiration Redemption upon expiration of the Surety Bond (as
described under "Description of Preferred Stock--Redemption"), and (iii) payment
of the liquidation preference on the Preferred Shares in the event of a
liquidation of the Fund during the term of the Surety Bond on the date fixed for
payment of such liquidation preference pursuant to the Articles of
Incorporation, so long as Financial Security shall have consented to such
liquidation. For the purposes of the Scheduled Payments under the Surety Bond,
in the event of a liquidation of the Fund to which Financial Security has not
consented in which only a portion of the liquidation preference on the Preferred
Shares is paid, a portion of the Preferred Shares represented by the unpaid
portion of the liquidation preference shall be deemed to remain outstanding and
shall be secured by the Surety Bond as to all Scheduled Payments without regard
to whether the Fund has any obligation with respect thereto.
Payment of amounts under the Surety Bond by Financial Security as described
in clause (i) above will be made on the later of (a) the second Business Day
following receipt on a Business Day by Financial Security of a notice and
certificate from the Surety Custodian or (b) the date such Scheduled Payment is
due (or if such day is not a Business Day, then on the next succeeding Business
Day). Such payments will be disbursed by Financial Security to the Surety
Custodian by wire transfer of immediately available funds. Financial Security's
obligation under the Surety Bond is discharged to the extent funds are so
transferred to the Surety Custodian, whether or not such funds are properly
applied by the Surety Custodian.
If payment of any amount avoided as a preference under applicable federal
bankruptcy law is required to be made under the Surety Bond, Financial Security
will pay any amount thereunder when due pursuant to a Court Order (as defined
in this sentence) but in any event no earlier than the first to occur of (a)
the fourth Business Day following receipt by Financial Security from the Surety
Custodian of (i) a certified copy of the Order (the "Court Order") of the court
which exercised jurisdiction to the effect that the holder is required to return
scheduled payments of redemption price, liquidation preference or dividends
constituting a Scheduled Payment and paid on the Preferred Shares because such
payment was an avoidable preference under applicable bankruptcy, insolvency,
receivership or similar law, (ii) a certificate of the holder that the Court
Order has been entered and is not subject to any stay and (iii) an assignment
duly executed by the holder, in such form as is reasonably required by Financial
Security and provided to the holder by Financial Security or the Surety
Custodian, irrevocably assigning to Financial Security all rights and claims of
the holder relating to or arising under the Preferred Shares against the estate
of the Fund (provided that, if such certified copy, certificate and assignment
are received on a day that is not a Business Day or after 12:00 noon, New York
City time, on any Business Day, Financial Security shall make such payment on
the fifth Business Day following such date) or (b) the date of receipt by
Financial Security from the Surety Custodian of the items referred to in clauses
(i), (ii) and (iii) above if, at least four Business Days prior to such date of
receipt, Financial Security shall have received written notice from the Surety
Custodian that such items were to be delivered on such date of receipt and such
date of receipt was specified in such notice (provided that, if such notice is
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, such notice shall be deemed to have been received on
the next succeeding Business Day). Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession, trustee in bankruptcy or other
person named in the Court Order and not to the holder or the Surety Custodian
directly, unless such holder or the Surety Custodian has been required
previously to disgorge all or part of such payment, as demonstrated to the
satisfaction of Financial Security, in which event such payment shall to such
extent be paid directly to the holder or the Surety Custodian, as the case may
be.
Financial Security shall be subrogated to all the rights of each holder of
Preferred Shares in the event Financial Security makes a Scheduled Payment to
any such holder under the Surety Bond.
The Surety Bond is a direct, unsecured and unsubordinated obligation of
Financial Security ranking equally with any other unsecured and unsubordinated
obligations of Financial Security, except for certain obligations in respect of
tax and other payments to which preference is or may become afforded by statute.
The term of the Surety Bond cannot be modified or altered by any other agreement
or instrument or by the merger, consolidation or dissolution of the Fund. The
Surety Bond may not be cancelled or revoked by Financial Security prior to the
end of its term. See "Expiration of Surety Arrangement" below. The Surety Bond
is governed by the laws of the State of New York.
For all references with respect to the Surety Bond (i) "Business Day"
shall mean any day other than a Saturday or Sunday or a holiday including, New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas or
any other day on which banks in the City of New York or the principal corporate
trust office of the Surety Custodian are authorized or required by law to be
closed and (ii) "receipt by Financial Security" shall mean that Financial
Security shall have received such claims, notices or documentation, as the case
may be, by 12:00 noon, New York City time, on any Business Day.
INSURANCE AGREEMENT
General. As a precondition to Financial Security's issuing the Surety Bond,
the Fund will enter into the Insurance Agreement with Financial Security
pursuant to which the Fund will be obligated to reimburse Financial Security for
amounts paid by Financial Security under the Surety Bond. A copy of the
Insurance Agreement is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. A copy of the Registration Statement of which
this Prospectus is a part may be obtained as described under "Further
Information."
Surety Assets Coverage. At any time that Preferred Shares are outstanding,
the Fund will be required under the Insurance Agreement to maintain assets in
its portfolio meeting the Surety Investment Guidelines and having a discounted
value at least equal to the Surety Assets Coverage (as defined below). If the
Fund fails to meet the Surety Assets Coverage requirement and such failure is
not cured within eight Business Days, Financial Security may seek to cause the
Fund to redeem certain of the Preferred Shares. See "Events of Default;
Remedies" below. The discount factor for and market value of any asset of the
Fund, the method of calculating Surety Assets Coverage, 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 and Financial Security.
"Surety Assets Coverage" as of any date is defined as the dollar amount
equal to (A) the sum of (i) 100% of the aggregate principal amount of the Notes
then outstanding; (ii) $100,250 times the number of Preferred Shares then
outstanding; (iii) the aggregate amount of accrued interest on the Notes then
outstanding, plus an amount equal to 63 days' interest on such principal amount
of the Notes; (iv) the aggregate amount of accumulated but unpaid dividends with
respect to the Preferred Shares to such date, plus the amount of dividends
projected to accumulate on the Preferred Shares then outstanding from such date
until the 30th day thereafter; (v) the aggregate principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the Notes)
and (vi) the greater of $200,000 or the Fund's liabilities in existence as of
such date to the extent not otherwise reflected in any of (i) through (v)
above, less (B) the combined value of any Deposit Securities irrevocably
deposited by the Fund for the payment of principal of or interest on the Notes
or redemptions of or dividend payments with respect to the Preferred Shares. See
"Deposit Securities Requirement" below.
On or before the third Business Day after each Valuation Date (as defined
below), the Fund is required to deliver to Financial Security a report with
respect to the calculation of Surety Assets Coverage and the market value of its
portfolio as of the related Valuation Date (a "Portfolio Valuation Report").
Within three Business Days after delivery of such report relating to the last
Business Day in January, April, July and October of each year, commencing
January 31, 1989, or, if any such day is not a Valuation Date, the next
preceding Valuation Date (the "Quarterly Valuation Dates"), the Fund will
deliver letters prepared by the Fund's independent accountants regarding the
accuracy of the calculations made by the Fund in its most recent Portfolio
Valuation Report. If any such letter prepared by the Fund's independent
accountants shows that an error was made in the most recent Portfolio Valuation
Report, the Fund shall be required to alter its portfolio composition to comply
with Surety Assets Coverage in accordance with the revised calculation or
determination made by the Fund's independent accountants. "Valuation Date" means
(i) the fifteenth day of each month (or, if such fifteenth day is not a Business
Day, then the next succeeding Business Day), and (ii) the last Business Day of
each month or, in the case of the first Valuation Date, a date selected by the
Fund no later than 15 days after the date on which the Preferred Shares are
originally issued. For the purposes of determining Valuation Dates, "Business
Day" means a day on which the NYSE is open for trading and which is not a
Saturday or Sunday or a day on which banks in New York City or Boston are
authorized or obligated by law or executive order to close. See "Investment
Objective and Policies--Investment Guidelines."
Deposit Securities Requirement. The Fund will be obligated to deposit with
the Paying Agent with respect to the Preferred Shares a specified amount of
Deposit Securities not later than 20 days prior to each Dividend Payment Date
and not later than the mailing of any notice of redemption with respect to any
redemption (except in the case of a Mandatory Expiration Redemption). In
addition, in the case of a Mandatory Expiration Redemption, the Fund will be
obligated to set aside Deposit Securities ratably over a period ending not less
than 30 days prior to the redemption date. Deposit Securities in all cases shall
have an initial combined value greater than or equal to the liquidation
preference and/or accumulated dividends on the Preferred Shares to become due
and payable on the applicable payment date, and shall mature on or prior to such
date.
Events of Default; Remedies. An "Event of Default" is defined in the
Insurance Agreement to include any of the following: (i) any default by the Fund
in its performance of any covenant contained in the Insurance Agreement and the
continuance of such default for at least 30 days after written notice is given
to the Fund; (ii) any material representation or warranty made by the Fund in
the Insurance Agreement or in connection therewith shall prove to be incorrect
in any material respect when made or deemed made; (iii) any failure of the
Fund to maintain assets in its portfolio with a discounted value such that the
Surety Assets Coverage requirement is met, which failure is not cured within
eight Business Days; (iv) any failure by the Fund to reimburse Financial
Security for amounts paid under the Surety Bond or pay to Financial Security
when due any other amount under the Insurance Agreement; (v) any failure by the
Fund, on or prior to the date six months prior to the expiration date of the
Surety Bond, to obtain from Financial Security an extension of the term of the
Surety Bond pursuant to its terms or to obtain notice in writing from each of
the Rating Agencies that such expiration of the Surety Bond will not adversely
affect the then outstanding rating, if any, of the Preferred Shares by such
Rating Agency whether through obtaining a substitute surety bond or otherwise;
(vi) a final determination by the Internal Revenue Service that the Fund does
not qualify for any taxable year as a regulated investment company (as defined
in the Internal Revenue Code); (vii) certain events of bankruptcy, insolvency or
receivership of the Fund; and (viii) denial by the Fund that it has any or
further liability or obligation under the Insurance Agreement or the Articles of
Incorporation, or any finding or ruling by any governmental agency or authority
that the Insurance Agreement or the Articles of Incorporation is not valid or
binding on the Fund; provided that, in the case of each of clauses (i), (ii),
(vi) and (viii), such event shall not constitute an Event of Default unless, in
the reasonable judgment of Financial Security, such event would materially and
adversely affect the ability of the Fund to perform its material obligations
under the Insurance Agreement or the Articles of Incorporation or would
materially and adversely affect the material rights or benefits or the
enforcement of remedies or the practicable realization of such rights of or
benefits to Financial Security under the Insurance Agreement or of Financial
Security or any holder of Preferred Shares under the Surety Custody Agreement or
the Articles of Incorporation or otherwise with respect to the Preferred Shares.
If an Event of Default has occurred and is continuing, the Fund is required
under the Insurance Agreement, upon receipt of a written request from Financial
Security (a "Redemption Request") (a) in the case of an Event of Default other
than as specified in clause (iii) above, to deliver a Notice of Redemption with
respect to, and redeem within a specified period, such number of Preferred
Shares as specified by Financial Security in such Redemption Request, and (b) in
the case of the occurrence and continuance of an Event of Default specified in
clause (iii) above relating to Surety Assets Coverage, to identify in the Fund's
sole discretion, and sell for cash, certain portfolio holdings, the proceeds
from the sale of which shall be added to the portfolio and shall thereby cause
the value of the portfolio to have equalled or exceeded the Surety Assets
Coverage requirement on a pro forma basis as of the immediately preceding
Valuation Date ("Special Surety Redemption Assets"). In addition, Financial
Security will be entitled to deliver a Redemption Request directing the Fund to
redeem Preferred Shares with the proceeds of the sale of such Special Surety
Redemption Assets or similar assets. Any Redemption Request (other than in
respect of the Event of Default specified in clause (iii) above), once
delivered, may be withdrawn by Financial Security at any time prior to the
mailing of the related Notice of Redemption.
Any amount applied to payment on the Preferred Shares as to which Financial
Security has made payment under the Surety Bond shall be deemed to satisfy the
obligation of the Fund to reimburse Financial Security in an amount equal to the
amount so applied. Alternatively, if the Fund reimburses Financial Security for
any Scheduled Payments made by it, such reimbursement will satisfy the Fund's
obligation to make the dividend, redemption or liquidation preference payment
represented by such Scheduled Payment so reimbursed.
INDEMNIFICATION AND OTHER PAYMENTS BY THE FUND
The Fund has agreed to indemnify Financial Security against certain
liabilities, losses, costs, damages, attorneys' fees and other expenses. The
Fund also has agreed to pay to Financial Security upon issuance of the Surety
Bond, and in consideration thereof, a premium equal to the present value of .40%
of the aggregate liquidation preference of the Preferred Shares originally
issued (the "Annual Premium Amount") times the number of years (five) in the
initial term of the Surety Bond and to pay Financial Security for certain other
legal fees and expenses incurred by Financial Security in connection with the
Insurance Agreement.
EXPIRATION OF THE SURETY ARRANGEMENT
The Surety Bond will expire December 5, 1993; provided, however, that
subject to conditions contained in the Insurance Agreement including the
conditions that there is no Event of Default and Surety Assets Coverage is met
at the time of extension, the Fund may elect to extend the expiration date for
one or more additional periods of up to five years in the aggregate at a premium
payable annually equal to .40% of the aggregate liquidation preference of the
Preferred Shares outstanding at the time of extension of the Surety Bond. Except
under certain circumstances, upon any expiration of the Surety Bond prior to 10
years after the original issuance thereof, the Fund shall be obligated to pay
Financial Security a fee equal to the Annual Premium Amount and may not replace
the Surety Bond with a substitute surety bond, financial guaranty or other
credit enhancement. Upon expiration of the Surety Bond, the Preferred Shares
will be subject to mandatory redemption under certain circumstances as described
under "Description of Preferred Stock--Redemption."
SURETY CUSTODY AGREEMENT
Pursuant to the Surety Arrangement, the Preferred Shares and the Surety
Bond are required to be held by the Surety Custodian, pursuant to the Surety
Custody Agreement in a custody account (the "Surety Custody Account")
established for the benefit of the holders of the Preferred Shares. Ownership of
the Preferred Shares, in turn, shall be evidenced by custody receipts (the
"Custody Receipts") held by DTC.
In the event that the Fund does not make any Scheduled Payment, the Surety
Custodian is obligated to make a claim for payment under the Surety Bond.
Financial Security shall be subrogated to the rights of owners of Preferred
Shares to receive payments with respect to the Preferred Shares to the extent of
any payment by Financial Security under the Surety Bond. In connection with the
making of Scheduled Payments by Financial Security under the Surety Bond, the
Surety Custodian shall assign to Financial Security the rights to the related
dividend payment or, in the case of a redemption or liquidation payment, the
related Preferred Shares. The Surety Custodian shall also appoint Financial
Security as agent for the holder in any legal proceeding with respect to the
Preferred Shares for which a payment was made under the Surety Bond (including
specifically the authority to vote such Preferred Shares) until any claims
resulting from such assignment shall have been satisfied, such appointment to be
contingent upon Financial Security's continued performance under the Surety
Bond.
Voting rights with respect to the Preferred Shares held in the Surety
Custody Account will be exercised by the Surety Custodian in accordance with
instructions given by the holders of the Preferred Shares. See "Description of
Preferred Stock--Voting." The Surety Custody Agreement provides, however, that,
at any time that the Surety Custodian has made a claim for payment under and
Financial Security has made Scheduled Payments pursuant to the Surety Bond, the
Surety Custodian will vote the Preferred Shares with respect to which such
Scheduled Payments have been made under the Surety Bond in accordance with
instructions given by Financial Security. The right of Financial Security to
instruct the Surety Custodian with respect to voting such Preferred Shares shall
terminate when the Fund has made payments on the Preferred Shares with respect
to which the Scheduled Payments were made by Financial Security or the Fund has
reimbursed Financial Security with respect to such Scheduled Payments pursuant
to the terms of the Insurance Agreement.
The Surety Custody Account will be maintained by the Surety Custodian as a
custodial account, separate and segregated, the contents of which may not be
commingled with any other assets or property held by the Surety Custodian. The
Surety Custodian will maintain separate records in connection with any moneys
which it may hold in connection with the Preferred Shares and the Surety Bond.
Under the Surety Custody Agreement, holders of Preferred Shares are liable for
payment of taxes or other governmental charges with regard to registrations of
transfers or exchanges of Custody Receipts. Except as otherwise provided in the
Surety Custody Agreement, no amendment affecting the registered holders of
Custody Receipts may be made to the Surety Custody Agreement without the consent
of the registered owners of the Custody Receipts evidencing 66 2/3% in interest
of the outstanding Preferred Shares deposited in the Surety Custody Account.
Notices with respect to the Preferred Shares that are received by the
Surety Custodian from the Fund will be promptly forwarded to the holders of
Preferred Shares. Except as expressly provided by the Surety Custody Agreement,
the Surety Custodian will not take any action on behalf of any holder of
Preferred Shares with respect to Preferred Shares or the Surety Bond, except in
accordance with written instructions from such holder and upon receipt of
reasonable indemnity from such holder for resulting costs and liabilities as
provided in the Surety Custody Agreement, whether or not such action appears to
be in the best interest of such holder.
The Surety Custodian may resign pursuant to the Surety Custody Agreement
upon appointment of a successor Surety Custodian and its acceptance of such
appointment as provided in the Surety Custody Agreement. Either Financial
Security or the registered owners of Custody Receipts evidencing a majority in
aggregate amount of the Preferred Shares deposited in the Surety Custody Account
may remove the Surety Custodian and appoint a successor thereto pursuant to the
provisions of the Surety Custody Agreement.
PREFERRED STOCK AND NOTE RATINGS
It is a condition of issuance of (i) the Preferred Shares that they be
rated "AAA"/"Aaa" by the Rating Agencies on the basis of the issuance of the
Surety Bond by Financial Security and (ii) the Notes that they be rated
"AAA"/"Aaa" on the basis that the Fund's portfolio will be managed in accordance
with the Notes Investment Guidelines. Such ratings will reflect only the views
of the Rating Agencies. When rating securities, the Rating Agencies consider the
transaction in its entirety and rely on factors in addition to the amount and
performance of the assets underlying such securities. Accordingly, future events
adversely affecting Financial Security could have an adverse impact on the
rating of the Preferred Shares. An explanation of the significance of such
ratings may be obtained from Standard & Poor's Corporation, 25 Broadway, New
York, New York 10017, telephone (212) 208-8000 and Moody's Investors Service,
Inc., 99 Church Street, New York, New York 10004, telephone (212) 533-0300.
There is no assurance that either of such ratings will continue for any period
of time or that it will not be revised or withdrawn entirely by the applicable
Rating Agency if, in its judgment, circumstances so warrant. A revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Preferred Shares and the Notes. A security rating is not a recommendation to
buy, sell or hold securities.
CUSTODIAN, TRANSFER AGENTS, DIVIDEND
DISBURSING AGENT, PAYING AGENTS AND REGISTRARS
The Fund's securities and cash are held by The Bank of New York, whose
principal business address is 19 Rector Street, New York, New York 10286, as
custodian (the "Custodian"), under a custodian contract. The Fund has not
selected any foreign custodians or sub-custodians. However, if the Fund
determines that it should have any foreign custodians or sub-custodians to
maintain any of its foreign securities, the Board of Directors will make such
election following a consideration of a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to perform capably custodial services for the Fund,
the reputation of the institution in its national market, the political and
economic stability of the country in which the institution is located, and the
risks of potential nationalization or expropriation of Fund assets.
The Bank of New York serves as dividend disbursing agent, as agent under
the Plan and as transfer agent and registrar for the Common Stock. Bankers Trust
Company serves as the Surety Custodian pursuant to the Surety Custody Agreement
for the benefit of the holders of the Preferred Shares and serves as transfer
agent, paying agent and registrar for the Preferred Shares. Shawmut Bank, N.A.
serves as the Trustee under the Indenture and serves as transfer agent, paying
agent and registrar for the Notes.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Fund, the Investment Adviser and Drexel Burnham (the "Underwriter"), the
Underwriter has agreed to purchase from the Fund, and the Fund has agreed to
sell to the Underwriter, all of the Preferred Shares offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions, any of which the underwriter has the right to waive,
including the closing of the sale of the Notes and the Common Stock, and the
absence of any indictment relating to the matters discussed in the fifth
paragraph under the caption "Portfolio Trading." The nature of the Underwriter's
obligation is such that the Underwriter is committed to purchase all of the
Preferred Shares offered hereby if any are purchased. The Fund has granted the
Underwriter a 30-day option to purchase up to an additional 45 Preferred Shares
to cover over-allotments, if any. However, such option may be exercised only to
the extent that, after giving effect thereto and to the exercise of
over-allotment options with respect to the Common Stock (in the amount of up to
1,800,000 shares) and the Notes (in the amount of up to $7,500,000 aggregate
principal amount) (in each case as provided for in the respective underwriting
agreement relating to the Common Stock or the Notes, as the case may be), asset
coverage under the 1940 Act would not be more than 399% or less than 361% with
respect to the Notes or more than 250% or less than 226% with respect to the
Preferred Shares, assuming each such over-allotment option was exercised as of
the original issuance date for the Preferred Shares and assuming that
underwriting discounts and offering expenses for the Common Stock and the
Preferred Shares were $9,978,066.
The Underwriter has advised the Fund that it proposes to offer the
Preferred Shares directly to the public at the public offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ 1,000 per share. The Underwriter may allow and
such dealers may reallow a concession not in excess of $250 per share to certain
other dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Underwriter.
The Fund and the Investment Adviser have agreed, jointly and severally, to
indemnify the Underwriter against certain liabilities, including liabilities
under the 1933 Act.
Prior to the concurrent offerings, there has been no secondary market for
the Preferred Shares or the Notes. Drexel Burnham has advised the Fund that,
while it is not obligated to do so, it currently intends to make a secondary
market in the Preferred Shares, in accordance with the Auction Procedures, and
the Notes; however, there is no assurance that an active secondary trading
market for the Preferred Shares or the Notes will develop and any such secondary
market activity, if commenced, may be discontinued at any time. In addition,
other broker-dealers may or may not choose to make a secondary market in the
Preferred Shares or the Notes. The Common Stock has been approved for listing on
the NYSE under the symbol "PHY."
The Underwriter has agreed with the Fund that it will sell Preferred Shares
only to a person who agrees to execute and deliver a Master Purchaser's Letter
in accordance with the terms of this Prospectus or to a Broker-Dealer who has
agreed with the Underwriter that it will (i) execute and deliver a Master
Purchaser's Letter in accordance with the terms of this Prospectus and (ii) only
sell Preferred Shares to such a person or to another such Broker-Dealer. The
Underwriter has also agreed with the Fund that it will execute and deliver a
Master Purchaser's Letter in accordance with the terms of this Prospectus.
During the period that the underwriters of the Fund's securities (including
the Underwriter) will be soliciting indications of interest, the Fund and the
underwriters will continue to evaluate the markets for such securities as well
as the market for the Fund's contemplated investments. If as a result of a
material adverse change in existing financial, political or economic conditions
in the United States or elsewhere it becomes impractical or inadvisable to
proceed with the offerings of the Fund's securities, such offerings may not be
made.
Drexel Burnham will act in Auctions as a Broker-Dealer and will provide
information to be used in ascertaining the 30-day "AA" Commercial Paper Rate.
LEGAL OPINIONS
Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Fund by its counsel, Cahill Gordon & Reindel,
a partnership including professional corporations, New York, New York, and by
its special Maryland counsel, Piper & Marbury, Baltimore, Maryland. Certain
legal matters will be passed upon for the Underwriter by Goodwin, Procter &
Hoar, Boston, Massachusetts.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The Balance Sheet of the Fund as of November 23, 1988 included in this
Prospectus has been audited by Arthur Andersen & Co., independent public
accountants, as indicated in their report with respect thereto, and is included
in reliance upon the authority of said firm as experts in giving said report.
The financial statements of Financial Security included in this Prospectus,
to the extent and for the periods indicated in their report, have been examined
by Touche Ross & Co., independent public accountants, and are included in
reliance on such report and upon the authority of said firm as experts in
accounting and auditing.
FURTHER INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the SEC under the 1933 Act and the 1940 Act
with respect to the Preferred Shares offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement, including exhibits filed therewith, may be examined at
the office of the SEC in Washington, D.C.
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 such 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.
<PAGE>
GLOSSARY OF TERMS
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROSPECTUS
- ---- ----------
1933 Act......................................................... 10
1934 Act ........................................................ 10
1940 Act ........................................................ 7
1940 Act Asset Coverage ......................................... 54
Advisory Agreement............................................... 29
Agent Member..................................................... 38
Applicable Rate.................................................. 5,46
Articles of Incorporation........................................ 8
Auction.......................................................... 37
Auction Agent.................................................... 37
Auction Agent Agreement.......................................... 37
Auction Date..................................................... 5,39
Auction Procedures............................................... 37
Available Preferred Shares....................................... 41
Bank............................................................. 58
Bank Borrowings.................................................. 53
Bid.............................................................. 39
Bidders.......................................................... 39
Broker-Dealer Agreements......................................... 37
Broker-Dealers................................................... 37
Business Day..................................................... 16,62,63
Buy-Back Date.................................................... 51
Cede............................................................. 44
CFTC............................................................. 22
Commercial Paper Dealers ........................................ 40
Common Stock..................................................... 2
Court Order...................................................... 61
Custodian........................................................ 66
Cure Date........................................................ 54
Custody Receipts ................................................ 65
DBL Group........................................................ 10
Deposit Securities............................................... 52
Dividend Payment Date............................................ 45
Dividend Periods................................................. 2,46
Drexel Burnham .................................................. 7
DTC.............................................................. 4
Event of Default................................................. 55,63
Existing Holder ................................................. 38
Financial Security .............................................. 2
Fund............................................................. Cover
Hold Order....................................................... 39
Indenture........................................................ 7
Initial Dividend Period.......................................... 46
Insurance Agreement.............................................. 4
Interest Period.................................................. 51
Internal Revenue Code............................................ 22
Investment Adviser............................................... Cover,3
Investment Guidelines............................................ 3
Liens............................................................ 53
Mandatory Expiration Redemption.................................. 47
Mandatory Surety Redemption...................................... 47
Master Purchaser's Letter........................................ 38
<PAGE>
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROSPECTUS
- ---- ----------
Maximum Applicable Rate.......................................... 5,40
Merrill Lynch ................................................... 3
Minimum Applicable Rate.......................................... 5,40
Moody's.......................................................... Cover
Moseley.......................................................... 28
Notes............................................................ 2
Note Basic Maintenance Amount ................................... 54
Notes Investment Guidelines...................................... 3
Notice of Redemption............................................. 48
NYSE............................................................. 16
Order............................................................ 39
Original Issuance Date .......................................... 45
Paying Agent..................................................... 37
Plan............................................................. 58
Portfolio Valuation Report....................................... 63
Potential Holder................................................. 39
Preferred Shares................................................. 2
Preferred Stock Redemption....................................... 47
Quarterly Valuation Dates........................................ 63
Rating Agencies.................................................. Cover
Redemption Request .............................................. 64
S&P.............................................................. Cover
Scheduled Payment Day............................................ 45
Scheduled Payments............................................... 61
SEC.............................................................. 10
Securities Depository ........................................... 5
Sell Order....................................................... 39
Senior Notes..................................................... 51
Special Note Redemption Assets .................................. 55
Special Surety Redemption Assets................................. 64
Submission Deadline.............................................. 41
Submitted Bid ................................................... 41
Submitted Hold Order............................................. 41
Submitted Order.................................................. 41
Submitted Sell Order............................................. 41
Subsequent Dividend Period....................................... 46
Sufficient Clearing Bids......................................... 41
Surety Arrangement............................................... 3
Surety Assets Coverage........................................... 62
Surety Bond...................................................... 4
Surety Custodian................................................. 4
Surety Custody Account .......................................... 65
Surety Custody Agreement......................................... 61
Surety Investment Guidelines .................................... 3
TARPS ........................................................... Cover, 2
30-day "AA" Composite Commercial Paper Rate...................... 40
Trustee.......................................................... 51
Underwriter...................................................... 66
Valuation Date................................................... 54,63
Voting Period ................................................... 49
Winning Bid Rate................................................. 42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Prospect Street(SM) High Income Portfolio Inc.:
We have audited the accompanying balance sheet of Prospect Street(SM) High
Income Portfolio Inc. (a Maryland corporation) as of November 23, 1988. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this statement based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above, presents fairly, in
all material respects, the financial position of Prospect Street(SM) High Income
Portfolio Inc. as of November 23, 1988, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN & CO.
Boston, Massachusetts
November 23, 1988
<PAGE>
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
NOVEMBER 23, 1988
A S S E T S
Cash ......................................................... $ 102,300
Deferred organization, registration and
financing costs (Note 3)..................................... 1,500,000
-----------
$ 1,602,300
-----------
LIABILITIES
Accrued organization, registration and
financing costs (Note 3) .................................... $ 1,500,000
- - -----------
Commitments (Notes 1, 5 and 6)
NET ASSETS
Taxable Auction Rate Preferred Stock, no par value,
authorized 1,000 shares, none issued, liquidation
preference of $100,000 per share (Note 6).................... $ --
Common Stock, $.01 par value, authorized 100,000,000
shares, 11,000 shares issued and outstanding................. 110
Capital in excess of par value ............................... 102,190
-----------
Net assets applicable to Common Stock.................... $ 102,300
===========
Net asset value per common share......................... $ 9.30
===========
The accompanying notes are an integral part of this balance sheet.
<PAGE>
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
NOTES TO BALANCE SHEET
NOVEMBER 23, 1988
1. Prospect Street(SM) High Income Portfolio Inc. (the "Fund") was
organized as a corporation in the State of Maryland on May 13, 1988 and is
registered with the Securities and Exchange Commission as a diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Fund intends to qualify for and elect the tax treatment
applicable to regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended.
2. The Fund has had no operations since its incorporation other than those
relating to organizational matters and the registration of debt and equity
securities for sale to the public. All of the initial common shares are owned by
Prospect Street(SM) Investment Management Co., Inc.
3. Deferred offering costs incurred by the Fund in connection with the
sale of the Taxable Auction Rate Preferred Stock (the "Preferred Stock") and the
Common Stock will be recorded as a reduction of the Common Stock proceeds. The
costs incurred by the Fund in connection with its organization, estimated at
$35,000, have been deferred and will be amortized over a period of five years
from the date upon which the Fund commences its investment activities. The costs
incurred by the Fund in connection with the sale of the Senior Extendible Notes,
Series A (the "Notes") will be deferred and will be amortized using the interest
method over a period of five years (initial maturity date) from the date upon
which the Fund commences its investment activities.
4. The Fund intends to enter into an Advisory Agreement with the
Investment Adviser. Under the Advisory Agreement, the Investment Adviser,
subject to the general supervision of the Fund's Board of Directors, will manage
the Fund's portfolio and provide the administration of the Fund's other affairs.
As compensation for its services under the Advisory Agreement, the Investment
Adviser will receive a monthly advisory fee equal to 0.50% (on an annual basis)
of the average weekly value of the total assets of the Fund less accrued
liabilities (excluding the principal amount of the Notes and the liquidation
preference of the Preferred Stock and including accrued and unpaid dividends on
the Preferred Stock).
5. The Fund intends to issue Notes initially due in 1993. The Notes will
be extendible for one or more periods of one, two or three years until 1998 when
they will mature if not previously redeemed or repurchased. The Fund will be
required to maintain certain asset coverages with respect to the Notes. The
interest rate will be established at the offering of the Notes.
6. The Fund intends to issue the Preferred Stock concurrently with the
issuance of the Notes. The underwriting discount and the related expenses of the
issue will be recorded as a reduction of the capital in excess of par value on
the Common Stock. Dividends are cumulative at a rate which will be established
at the offering of the Preferred Stock and thereafter, will generally be reset
every 30 days by an auction. If the Fund fails to pay dividends on the Preferred
Shares, equal to two full years of dividends thereon, the holders of the
Preferred Stock as a class will have the right to elect a majority of the Board
of Directors. The Preferred Stock are redeemable, at the option of the Fund, at
a redemption price equal to $100,000 per share plus accumulated and unpaid
dividends on any dividend payment date. The Preferred Stock is also subject to
mandatory redemption at a redemption price of $100,000 per share (or $100,250
per share, if the redemption date is other than a dividend payment date), plus
accumulated and unpaid dividends, 30 days prior to the expiration of a surety
bond issued in respect thereof or if the Fund is in default of its surety assets
coverage requirements with respect to the Preferred Stock. Holders of shares of
Common Stock have voting rights of one vote per share and holders of the
Preferred Stock have voting rights of one vote per $ 1,000 of liquidation
preference other than liquidation preference attributable to accumulated and
unpaid dividends (i.e., 100 votes per share of Preferred Stock); provided that
all votes represented by a single share of Preferred Stock must be voted
together. In general, the holders of the Preferred Stock and the Common Stock
vote together as a single class, except that the holders of the Preferred Stock,
as a separate class, vote to elect two members of the Board of Directors and
separate class votes are required on certain matters that affect the respective
interests of the Preferred Stock and the Common Stock. The Preferred Stock has a
liquidation preference of $ 100,000 per share plus accumulated and unpaid
dividends.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
Page
----
Report of Independent Public Accountants............................... 75
Financial Statements:
Consolidated Balance Sheets as of December 31, 1987 and 1986........... 76
Consolidated Statements of Income For the Years Ended
December 31, 1987 and 1986 and the Period from March 16, 1984
(date of inception) Through December 31, 1985......................... 77
Consolidated Statements of Changes in Shareholder's
Equity For the Years Ended December 31, 1987 and 1986
and the Period from March 16, 1984 (date of inception)
Through December 31, 1985............................................. 78
Consolidated Statements of Changes in Financial Position
For the Years Ended December 31, 1987 and 1986 and the
Period From March 16, 1984 (date of inception)
Through December 31, 1985............................................. 79
Notes to Consolidated Financial Statements For the Years
Ended December 31, 1987 and 1986 and the Period from
March 16, 1984 (date of inception) Through December 31, 1985 ......... 80
Consolidated Balance Sheet as of September 30, 1988 (Unaudited) ....... 86
Consolidated Statements of Income For the Nine Months
Ended September 30, 1988 and 1987 (Unaudited) ........................ 87
Consolidated Statements of Changes in Financial Position
For the Nine Months Ended September 30, 1988 and 1987 (Unaudited)..... 88
Notes to Consolidated Financial Statements For the Six
Months Ended September 30, 1988 and 1987 (Unaudited).................. 89
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Financial Security Assurance Inc.
350 Park Avenue
New York, New York
We have examined the consolidated balance sheets of Financial Security
Assurance Inc. and Subsidiary as of December 31, 1987 and 1986, and the related
consolidated statements of income, changes in shareholder's equity, and changes
in financial position for the years ended December 31, 1987 and 1986 and the
period from March 16, 1984 (date of inception) through December 31, 1985 and the
related supplemental schedules on pages 91 and 92. Our examinations were made in
accordance with generally accepted auditing standards and, accordingly, included
such tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above
present fairly the financial position of Financial Security Assurance Inc. and
Subsidiary at December 31, 1987 and 1986, and the results of their operations
and the changes in their financial position for the years ended December 31,
1987 and 1986 and the period from March 16, 1984 (date of inception) through
December 31, 1985, in conformity with generally accepted accounting principles
applied on a consistent basis. Also, in our opinion, the supplemental schedules
referred to above, when read in conjunction with the related financial
statements, present fairly the information therein set forth.
TOUCHE ROSS & CO.
New York, New York
March 7, 1988
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1987 1986
---- ----
ASSETS
<S> <C> <C>
Bonds, at amortized cost (market value of $256,066,982 and
$252,718,584, respectively) ............................................. $261,190,571 $248,760,695
Short-term Investments, at cost which approximates market.................. 6,961,072 12,028,295
Cash ...................................................................... 7,535,104 560,659
Premiums and Other Receivables (from Parent $533,989)...................... 2,211,661 6,130,373
Property and Equipment (net of accumulated depreciation of $391,922
and $2,917, respectively) ............................................... 1,464,878 52,892
Deferred Acquisition Costs................................................. 17,804,858 11,525,814
Accrued Interest........................................................... 5,223,008 4,448,515
Other Assets............................................................... 5,950,036 91,813
Goodwill................................................................... 3,753,750 3,851,250
------------ ------------
TOTAL ASSETS........................................................... $312,094,938 $287,450,306
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts Payable ($353,178 in 1986 to Parent) ............................. $ 250,340 $ 687,124
Federal Income Taxes (payable to Parent)................................... 4,747,892 5,728,242
Deferred Federal Income Taxes ............................................. 5,952,041 3,617,817
Unearned Premium Reserve................................................... 67,852,938 54,436,132
Accrued Expenses and Other Liabilities..................................... 1,510,233 2,001,800
Premiums Payable........................................................... 547,877 3,379,230
------------ ------------
TOTAL LIABILITIES...................................................... 80,861,321 69,850,345
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common Stock (1,000 shares authorized and issued, par value of $2,500) .. 2,500,000 2,500,000
Additional Paid-In Surplus .............................................. 197,501,000 197,501,000
Retained Earnings ....................................................... 31,232,617 17,598,96
------------ ------------
TOTAL SHAREHOLDER'S EQUITY............................................. 231,233,617 217,599,961
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................. $312,094,938 $287,450,306
============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1985
<TABLE>
<CAPTION>
1987 1986 1985
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Premiums Earned ..................................... $ 13,046,807 $ 9,426,741 $ 553,044
Net Investment Income ............................... 21,483,336 20,922,426 6,309,495
Ceding Commissions .................................. 824,692 1,412,808 --
Other Income ........................................ 926,301 -- --
------------ ------------ ------------
TOTAL REVENUES ..................................... 36,281,136 31,761,975 6,862,539
------------ ------------ ------------
EXPENSES:
Ceding Commissions .................................. 1,770,160 4,181,213 4,004,590
Salaries and Related Expenses ....................... 6,494,474 4,146,623 1,015,706
Advertising and Promotion ........................... 1,046,260 784,646 811,692
Underwriting Expenses ............................... 1,237,720 668,208 73,367
Travel and Related Expenses ......................... 589,912 364,596 202,893
Rent Expense ........................................ 1,229,815 1,116,027 173,328
Depreciation ........................................ 261,297 2,917 --
Legal, Auditing & Consulting ........................ 1,183,670 2,366,882 1,456,258
Taxes, Licenses and Fees ............................ 356,456 519,035 599,806
Other Operating Expenses ............................ 1,495,101 469,961 198,810
Amortization ........................................ 117,361 48,750 --
------------ ------------ ------------
TOTAL EXPENSES BEFORE DEFERRAL OF ACQUISITION COSTS 15,782,226 14,668,858 8,536,450
Acquisition Costs Deferred (net of amortization of
$2,259,489, $1,829,198 and $64,118, respectively) .. (6,279,045) (5,730,152) (5,795,662)
------------ ------------ ------------
EXPENSES AFTER DEFERRAL OF ACQUISITION COSTS ...... 9,503,181 8,938,706 2,740,788
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ........................... 26,777,955 22,823,269 4,121,751
Provision for Income Taxes .......................... 7,229,249 9,346,059 --
------------ ------------ ------------
NET INCOME ........................................ $ 19,548,706 $ 13,477,210 $ 4,121,751
============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK SURPLUS EARNINGS TOTAL
------ ---------- -------- -----
<S> <C> <C> <C> <C>
Balance, March 16, 1984 (date of inception) .. $ -- $ -- $ -- $ --
Issuance of Common Stock...................... 1,000,000 184,001,000 -- 185,001,000
Net Income for the Period..................... -- -- 4,121,751 4,121,751
---------- ------------- ----------- ------------
Balance, December 31, 1985.................... 1,000,000 184,001,000 4,121,751 189,122,751
Changes in Par Value of Common Stock.......... 1,500,000 (1,500,000) -- --
Capital Contribution from Parent ............. -- 15,000,000 -- 15,000,000
Net Income for the Year....................... -- -- 13,477,210 13,477,210
---------- ------------- ----------- ------------
Balance, December 31, 1986.................... 2,500,000 197,501,000 17,598,961 217,599,961
---------- ------------- ----------- ------------
Dividends on Common Stock..................... -- -- (5,915,050) (5,915,050)
Net Income for the Year....................... -- -- 19,548,706 19,548,706
---------- ------------- ----------- ------------
Balance, December 31, 1987.................... $2,500,000 $ 197,501,000 $31,232,617 $231,233,617
========== ============= =========== ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(a WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1985
<TABLE>
<CAPTION>
1987 1986 1985
---- ---- ----
<S> <C> <C> <C>
SOURCE OF FUNDS:
From Operations:
Net Income .................................... $ 19,548,706 $ 13,477,210 $ 4,121,751
Items not requiring use of funds:
Depreciation and Amortization ............... 4,699,139 2,205,258 162,231
Unearned Premium Reserve .................... 13,416,806 23,731,946 30,704,186
Accounts Payable Accrued Expenses and Other
Liabilities ................................. (928,351) 573,518 2,115,406
Premiums Payable .............................. (2,831,353) 3,379,230 --
Federal Income Taxes:
Currently Payable ........................... (980,350) 5,728,242 --
Deferred .................................... 2,334,224 3,617,817 --
Premiums Receivable, Accrued Interest and Other
Assets ...................................... (2,714,004) (4,321,416) (6,349,285)
Deferred Acquisition Costs .................... (8,538,534) (7,559,350) (5,859,780)
------------- ------------- -------------
Funds Provided by Operations ................ 24,006,283 40,832,455 24,894,509
Maturities and Sales of Bonds ................... 142,801,208 201,707,675 132,608,087
Other:
Capital Contribution ......................... -- 15,000,000 --
Issuance of Common Stock ..................... -- -- 185,001,000
------------- ------------- -------------
FUNDS PROVIDED .................................... 166,807,491 257,540,130 342,503,596
------------- ------------- -------------
APPLICATION OF FUNDS:
Investment in Bonds ............................. 157,311,936 425,916,651 157,582,312
Goodwill acquired ............................... -- 3,900,000 --
Dividends paid .................................. 5,915,050 -- --
Additions to Property and Equipment ............. 1,673,283 55,809 --
------------- ------------- -------------
FUNDS APPLIED ..................................... 164,900,269 429,872,460 157,582,312
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS ..................................... $ 1,907,222 $(172,332,330) $ 184,921,284
============= ============= =============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
1. ORGANIZATION
Financial Security Assurance Inc. (the "Company"), a wholly owned
subsidiary of Financial Security Assurance Holdings Ltd. (the "Parent"), is an
insurance company licensed in the State of New York. The Company, which was
incorporated on March 16, 1984, effectively commenced operations on July 25,
1985, and received its New York State License on September 23, 1985. The Company
is principally engaged in providing financial guarantees for structured
corporate-backed financings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
On June 12, 1986, the Company acquired a wholly owned subsidiary, Financial
Security Assurance of Iowa, Inc. and its wholly owned subsidiary, Financial
Security Assurance of Oklahoma, Inc. (the "Subsidiaries") whose results have
been consolidated since the date of acquisition (see Note 9). All intercompany
accounts and transactions have been eliminated.
b. Basis of Reporting
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") which differ in certain
material respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 4).
Certain amounts in the December 31, 1986 and 1985 Consolidated Financial
Statements have been reclassified to conform to the 1987 presentation.
c. Investments
Investments in fixed maturity securities are carried at amortized cost. Bond
discounts and premiums are amortized over the remaining terms of the securities.
Short-term investments are carried at cost which approximates market value.
Realized gains or losses on sale of investments are determined on the basis of
specific identification.
d. Premium Revenue Recognition
Premiums are earned in proportion to the amount of risk outstanding over the
period of coverage. Unearned premiums represent that portion of premiums which
are applicable to coverage of risk to be provided in the future on policies in
force. Consolidated premiums earned consist of:
1987 1986 1985
---- ---- ----
Gross Premiums Written ........ $ 22,004,164 $ 22,027,645 $ 12,322,323
Assumed Premiums .............. 9,129,366 17,087,078 18,934,907
Ceded Premiums ................ (4,669,917) (5,956,036) --
------------ ------------ ------------
Net Premiums Written .......... 26,463,613 33,158,687 31,257,230
(Increase) in Unearned Premiums (13,416,806) (23,731,946) (30,704,186)
------------ ------------ ------------
Premiums Earned ............... $ 13,046,807 $ 9,426,741 $ 553,044
============ ============ ============
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16,1984 (date of inception)
THROUGH DECEMBER 31, 1985
e. Claims and Claim Adjustment Expenses
A provision for unpaid claims and claim adjustment expenses is recorded when
an insured risk (which risks aggregated approximately $5.1 billion and $3.7
billion principal amount at December 31, 1987 and 1986, respectively) is in
default at the balance sheet date or when in management's opinion, the
likelihood of default is probable at the balance sheet date. The adequacy of the
provision is reviewed on an ongoing basis and changes in estimates are reflected
in income currently. As of December 31, 1987 and 1986, no claims and claim
adjustment expenses have been incurred.
f. Deferred Acquisition Costs
Deferred acquisition costs are comprised of those expenses that vary with
and are primarily related to the production of business, including ceding
commissions paid on reinsurance assumed, salaries and related costs of
underwriting and marketing personnel, rating agency fees, premium taxes and
certain other underwriting expenses, offset by ceding commission income on
premiums ceded to reinsurers. Amortization of deferred acquisition costs is
recorded over the period in which the related premiums are earned. Deferred
acquisition costs are reviewed periodically to determine that they do not exceed
recoverable amounts.
g. Property and Equipment
The cost of furniture, fixtures and equipment is depreciated on a
straight-line basis over their estimated useful lives. Leasehold improvements
are amortized over the remaining terms of the leases or the useful life of the
improvements, whichever is shorter. Maintenance and repairs are charged to
expenses as incurred.
h. Federal Income Taxes
Deferred Federal income taxes are provided for timing differences in the
recognition of revenue and expense for tax and financial reporting purposes.
i. Expenses
Allocable expenses are shared by the Company and its Parent on a fair and
equitable basis determined principally by estimates of respective usage as
stated in an expense sharing agreement. The agreement is subject to the
provisions of the New York Insurance Law.
j. Goodwill
Goodwill includes the recognition of the value of the state licenses
acquired in the purchase of the two wholly owned subsidiaries (Note 9), and is
being amortized on a straight line basis over 40 years.
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
3. INVESTMENTS
Investments in bonds carried at amortized cost of $7,102,160 at December
31, 1987 and $6,957,654 at December 31, 1986 were on deposit with state
regulatory authorities as required by law.
Consolidated net investment income consists of:
<TABLE>
<CAPTION>
1987 1986 1985
---- ---- ----
<S> <C> <C> <C>
Interest ........................................................ $ 20,699,434 $ 18,358,849 $ 5,916,211
Net Gain on Sale of Bonds ....................................... 1,387,437 3,212,386 550,375
Investment Expenses.............................................. (603,535) (648,809) (157,091)
------------ ------------ ------------
Net Investment Income ........................................... $ 21,483,336 $ 20,922,426 $ 6,309,495
============ ============ ============
Net Unrealized (Depreciation) Appreciation ...................... $ (5,123,589) $ 3,957,889 $ 216,033
============ ============ ============
</TABLE>
4. STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of generally accepted
accounting principles ("GAAP"), which differ in certain material respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The significant differences result from the following statutory
accounting practices:
-- Premiums are earned on municipal business when related risk has expired
rather than as coverage is provided;
-- Acquisition costs are charged to current operations as incurred rather
than as related premiums are earned;
-- A contingency reserve and a reserve for losses incurred but not
reported ("IBNR") are computed on the basis of statutory requirements
for the security of all policyholders, regardless of whether loss
contingencies actually exist;
-- Certain assets designated as "non-admitted assets" are charged directly
to surplus; and
-- Federal income taxes are only provided on taxable income for which
income taxes are currently payable.
A reconciliation of the Company's net income and shareholder's equity, prepared
on a GAAP basis, as included in the Consolidated Financial Statements at
December 31, 1987, 1986 and 1985, to the amounts reported on a statutory basis,
are as follows (in thousands):
Net Income:
1987 1986 1985
---- ---- ----
GAAP BASIS .................... $ 19,549 $ 13,477 $ 4,122
Premium revenue recognition ... (1,537) (2,009) (180)
Acquisition costs deferred .... (6,279) (5,730) (5,796)
Contingency and IBNR reserves . (3,641) (1,806) (1,563)
Deferred income tax ........... 2,334 3,618 --
Other ......................... 98 48 --
Subsidiary pre-acquisition loss -- (6,860) --
-------- -------- --------
STATUTORY BASIS ............... $ 10,524 $ 738 $ (3,417)
======== ======== ========
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (DATE OF INCEPTION)
THROUGH DECEMBER 31. 1985
Shareholder's equity:
1987 1986 1985
---- ---- ----
GAAP BASIS ................. $ 231,234 $ 217,600 $ 189,123
Premium revenue recognition (3,726) (2,189) (180)
Acquisition costs deferred . (17,805) (11,526) (5,796)
Contingency and IBNR reserve (7,010) (3,369) (1,563)
Non-admitted assets: other . (1,828) (591) (2)
licenses .. (3,754) (3,851) --
Deferred income tax ........ 5,952 3,618 --
Other ...................... 256 (275) --
--------- --------- ---------
STATUTORY BASIS ............ $ 203,319 $ 199,417 $ 181,582
========= ========= =========
5. INCOME TAXES
The Company, its Subsidiaries and its Parent file a consolidated federal
income tax return. Under a tax sharing agreement, income tax allocation is based
upon separate return calculations with current credit for losses to the extent
utilized in the consolidated tax return.
The components of the Company's consolidated federal income tax provision are as
follows:
1987 1986
---- ----
Current.................... $4,895,025 $5,728,242
Deferred .................. 2,334,224 3,617,817
---------- ----------
Total.................... $7,229,249 $9,346,059
========== ==========
Differences exist between the effective tax rates of 27% and 41% for the
years ending December 31, 1987 and 1986, respectively and the statutory rates of
40% and 46% because approximately $8.7 million and $2.3 million of interest
income is tax exempt. The deferred tax liability relates primarily to deferred
acquisition costs which are deducted currently for tax purposes and timing
differences in the recognition of premiums earned.
6. SHAREHOLDER'S EQUITY
At December 31, 1987 and 1986, the Company had capital stock authorized and
issued as follows:
NUMBER OF SHARES
ISSUED AND OUTSTANDING
----------------------
1987 1986
---- ----
Class A common, 1,000 shares authorized............ 1,000 1,000
Par value.......................................... $2,500 $2,500
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
Under New York Insurance Law, the maximum amount of dividends which can be
paid by the Company to the Parent without prior approval of the Superintendent
of Insurance is subject to restrictions relating to statutory unassigned
surplus. At December 31, 1987 the unassigned surplus was $3,318,069.
7. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory defined contribution pension plan
for the benefit of all eligible employees. Employer contributions are based upon
a fixed percentage of employee salaries determined at the discretion of the
Company. Pension expense, which is funded as accrued, amounted to $320,917,
$204,913 and $110,422 for the periods ended December 31, 1987, 1986 and 1985,
respectively.
The Company also maintains an employee retirement savings plan for the
benefit of all eligible employees. The plan permits employees to contribute a
percentage of their salaries up to limits prescribed by the Internal Revenue
Service. Employer contributions to the plan are discretionary, and none have
been made.
The Company has adopted and sponsored the Non-Qualified Executive Stock
Bonus Plan to advance the interests of the Company by rewarding the services of
eligible individuals, which include officers, directors, executives, supervisory
personnel as well as other employees. Designated employees are eligible to
receive Bonus Share Units (which represents 1/1000 of a Bonus Share) which
vest during each of years 3, 4, and 5 of participation in the plan. At December
31, 1987, 14,590 Bonus Share Units had been awarded. Compensation expense is
recognized at the date the units are awarded based on the estimated fair market
value of the Company's stock at the date of award.
8. COMMITMENTS
The Company and its Parent lease office space under a noncancelable lease
which expires in 1995. The lease provides for escalations resulting from
increased assessments for taxes, utilities and maintenance, in addition to base
rent. Future minimum rental payments, net of sublease income ($558,791 in 1988,
$390,182 in 1989, $367,552 in 1990 and $313,402 in 1991), are as follows:
YEAR ENDING DECEMBER 31,
------------------------
1988......................................................$ 1,112,692
1989...................................................... 1,320,641
1990...................................................... 1,396,001
1991...................................................... 1,514,201
1992...................................................... 1,514,201
Thereafter................................................ 4,368,438
-----------
$11,226,174
===========
Rent expense was $1,229,815, $1,116,027, and $173,328 for the periods
ending December 31, 1987, 1986 and 1985, respectively (including $316,783,
$286,208, and $27,611 paid to the Parent for the periods ending December 31,
1987, 1986 and 1985, respectively).
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
9. ACQUISITION OF SUBSIDIARIES
The Company acquired on June 12, 1986, from an investor in its Parent, two
insurance companies (Equitable Casualty Insurance Company, now known as
Financial Security Assurance of Iowa, Inc., and its subsidiary Equitable General
Insurance Company of Oklahoma, now known as Financial Security Assurance of
Oklahoma, Inc.) whose only assets, besides certain investment securities, were
licenses to do business in states where the Company was not previously licensed.
The purchase price was $69.5 million in cash. As of the date of
acquisition, the balance sheet of the acquired companies reflected bonds and
short-term investments of approximately $65.6 million and no liabilities. The
acquisition was accounted for by the purchase method, and the amount
(approximately $3.9 million) by which the purchase price exceeded the net
tangible assets was assigned to licenses (shown on the balance sheet as
goodwill) and is being amortized over 40 years. The statements of income and
changes in financial position for 1986 include the operations of the
subsidiaries from June 12, 1986.
10. REINSURANCE
Pursuant to a Quota Share Reinsurance Pooling Agreement dated July 1, 1986
(the "Pooling Agreement") among the Company and its subsidiaries, liabilities on
policies written by the Company or any of its subsidiaries are ceded among the
companies on an agreed upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable risk
limitations. The Company also reinsures portions of its risks with unaffiliated
reinsurers under variable quota share treaties and on a transaction-by-
transaction basis.
In the event (which Management considers to be highly unlikely) that any or
all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The amount
deducted from the unearned premiums for reinsurance ceded to other companies was
approximately $9.6 million and $5.8 million at December 31, 1987 and 1986,
respectively. Unearned premiums included approximately $32.6 million and $29.1
million related to reinsurance assumed at December 31, 1987 and 1986,
respectively.
11. RELATED PARTY TRANSACTIONS
On September 1, and November 30, 1987, Financial Security Assurance of
Iowa, Inc. loaned $2,864,000 and $2,019,500 to the Parent. The notes mature on
March 1, and June 1, 1988, respectively and bear interest at the prime rate in
effect on the date of the loan (8.25% and 8.75%, respectively).
During 1987, the Company acquired from the Parent property and equipment
with a book value of $1.6 million which approximated the fair value of the
assets on the date of acquisition.
12. LIQUIDITY ARRANGEMENTS
During 1987, the Company obtained credit facilities and other liquidity
arrangements from a number of commercial banks, ranging in size up to $300
million. These facilities and arrangements are intended either for general
application to transactions benefiting from the Company's insurance or are
assigned to specific insured transactions. As of December 31, 1987, there have
been no borrowings under any such facilities or arrangements. Aggregate fees
paid by the Company for such facilities and arrangements for the year ended
December 31, 1987 were $184,000.
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
1988
--------------
ASSETS
Bonds, at amortized cost (market value of $263,681,971) .. $266,015,448
Short-term Investments, at cost which approximates market 52,730,364
Cash ..................................................... 1,967,133
Premiums and Other Receivables ($1,440,490 from Parent) .. 2,439,201
Property and Equipment (net of accumulated depreciation
of $761,005) ........................................... 2,020,810
Deferred Acquisition Costs ............................... 19,912,640
Accrued Interest ......................................... 5,593,861
Other Assets ............................................. 16,371,260
Goodwill ................................................. 3,680,625
------------
TOTAL ASSETS ........................................... $370,731,342
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts Payable ($47,907 to Parent) ..................... $ 160,911
Federal Income Taxes (Payable to Parent) ................. 8,178,803
Deferred Federal Income Taxes ............................ 9,405,014
Unearned Premium Reserve ................................. 103,481,202
Accrued Expenses and Other Liabilities ................... 7,103,731
Premiums Payable ......................................... 893,188
------------
TOTAL LIABILITIES ...................................... 129,222,849
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common Stock (1,000 shares authorized and issued;
par value--$2,500) ..................................... 2,500,000
Additional Paid-In Surplus ............................... 197,501,000
Retained Earnings ........................................ 41,507,493
------------
TOTAL SHAREHOLDER'S EQUITY ............................. 241,508,493
------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ............. $370,731,342
============
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------
1988 1987
------------ ------------
<S> <C> <C>
REVENUES:
Premiums Earned ............................................................. $ 15,423,088 $ 10,453,978
Net Investment Income ....................................................... 17,622,279 16,423,374
Ceding Commissions .......................................................... 4,421,479 762,579
Other Income ................................................................ 367,119 100,000
------------ ------------
TOTAL REVENUES ............................................................ 37,833,965 27,739,931
------------ ------------
EXPENSES:
Ceding Commissions .......................................................... 717,353 1,447,559
Salaries and Related Expenses ............................................... 5,047,173 4,863,545
Advertising and Promotion ................................................... 728,692 914,145
Underwriting Expenses ....................................................... 251,245 1,100,132
Travel and Related Expenses ................................................. 562,774 409,183
Rent Expense ................................................................ 1,209,387 968,551
Depreciation ................................................................ 369,013 176,004
Legal, Auditing & Consulting ................................................ 2,687,173 1,053,030
Taxes, Licenses and Fees .................................................... 993,894 139,709
Other Operating Expenses .................................................... 803,155 1,227,070
Amortization ................................................................ 73,125 73,125
------------ ------------
TOTAL EXPENSES BEFORE DEFERRAL OF ACQUISITION COSTS ....................... 13,442,984 12,372,053
Acquisition Costs Deferred (net of amortization of $1,651,577 and $1,260,469,
respectively) ............................................................. (2,107,782) (4,525,855)
------------ ------------
EXPENSES AFTER DEFERRAL OF ACQUISITION COSTS .............................. 11,335,202 7,846,198
INCOME BEFORE INCOME TAXES .................................................... 26,498,763 19,893,733
Provision for Income Taxes .................................................. 6,883,887 5,236,920
------------ ------------
NET INCOME ................................................................ $ 19,614,876 $ 14,656,813
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
1988 1987
------------- -------------
<S> <C> <C>
SOURCES OF FUNDS:
From Operations:
Net Income ............................................................................... $ 19,614,876 $ 14,656,813
Items not requiring use of funds:
Depreciation and Amortization .......................................................... 3,753,269 3,654,216
Unearned Premium Reserve ............................................................... 35,628,264 12,536,797
Accounts Payable, Accrued Expenses and Other Liabilities ................................. 332,077 (798,948)
Premiums Payable ......................................................................... 345,311 1,314,057
Federal Income Taxes:
Currently Payable ...................................................................... 3,430,911 (2,615,106)
Deferred ............................................................................... 3,452,973 1,451,196
Premiums Receivable, Accrued Interest and Other Assets.................................... (11,019,617) (1,075,373)
Deferred Acquisition Costs................................................................ (3,759,358) (5,786,324)
------------- -------------
Funds Provided by Operations ............................................................. 51,778,706 23,337,328
Maturities and Sales of Bonds ................................................................ 94,502,537 120,674,562
------------- -------------
FUNDS PROVIDED ............................................................................... 146,281,243 144,011,890
------------- -------------
APPLICATION OF FUNDS:
Investment in Bonds ........................................................................ 95,646,810 129,629,655
Dividends Paid ............................................................................. 9,340,000 2,934,550
Additions to Property and Equipment ........................................................ 1,093,112 1,731,664
------------- -------------
FUNDS APPLIED ................................................................................ 106,079,922 134,295,869
------------- -------------
INCREASE IN CASH AND SHORT-TERM
INVESTMENTS .............................................................................. $ 40,201,321 $ 9,716,021
============= =============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1988, the consolidated
statements of income for the nine-month periods ended September 30, 1988 and
1987, and the consolidated statements of changes in financial position for the
nine-month periods then ended have been prepared without audit by Financial
Security Assurance Inc. (the "Company"), a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in financial position
at September 30, 1988 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1987 financial statements.
The results of operations for the periods ended September 30, 1988 and 1987 are
not necessarily indicative of the operating results for the full year.
Certain amounts in the September 30, 1987 consolidated financial statements
have been reclassified to conform to the 1988 presentation.
2. PREMIUM REVENUE RECOGNITION
Premiums are earned in proportion to the amount of risk outstanding over the
period of coverage. Unearned premium represents that portion of premium which is
applicable to coverage of risk to be provided in the future on policies in
force. Consolidated premiums earned consist of:
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1988 1987
------------ ------------
Gross Premiums Written ............. $ 65,745,660 $ 21,173,775
Assumed Premiums ................... 2,288,588 6,901,001
Ceded Premiums ..................... (16,982,896) (5,084,001)
------------ ------------
Net Premiums Written ............... 51,051,352 22,990,775
Increase in Unearned Premium Reserve (35,628,264) (12,536,797)
------------ ------------
Premiums Earned .................. $ 15,423,088 $ 10,453,978
============ ============
3. CLAIMS AND CLAIM ADJUSTMENT EXPENSES
A provision for unpaid claims and claim adjustment expenses will be recorded
when an insured risk (which risk aggregated approximately $7.6 billion principal
amount at September 30, 1988) is in default at the balance sheet date or when in
management's opinion, the likelihood of default is probable at the balance sheet
date. The adequacy of the provision will be reviewed on an ongoing basis and
changes in estimates will be reflected in income currently. As September June
30, 1988, no claims and claim adjustment expenses have been incurred.
4. STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of generally accepted
accounting principles ("GAAP"), which differ in certain material respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The significant differences result from the following statutory
basis accounting practices:
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
-- Premiums are earned on municipal business when related risk has expired
rather than as coverage is provided;
-- Acquisition costs are charged to current operations as incurred rather
than as related premiums are earned;
-- A contingency reserve and a reserve for losses incurred but not
reported ("IBNR") are computed on the basis of statutory requirements
for the security of all policyholders, regardless of whether loss
contingencies actually exist;
-- Certain assets designated as "non-admitted assets" are charged directly
to surplus; and
-- Federal income taxes are only provided on taxable income for which
income taxes are currently payable.
The Company's statutory-basis net income for the periods ended September 30,
1988 and 1987 and statutory shareholder's equity at September 30, 1988 were as
follows:
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1988 1987
----------- ----------
Net Income--Statutory Basis...................... $16,421,872 $9,476,548
=========== ==========
SEPTEMBER 30, 1988
--------------------------
Shareholder's Equity--Statutory Basis................ $208,079,998
============
5. REINSURANCE
Pursuant to a Quota Share Reinsurance Pooling Agreement (the "Pooling
Agreement") among the Company and its subsidiaries, liabilities on policies
written by the Company or any of its subsidiaries are ceded among the companies
on an agreed upon percentage substantially proportional to their respective
capital, surplus and reserves, subject to applicable risk limitations. The
Company also reinsures portions of its risks with unaffiliated reinsurers under
variable quota share treaties and on a transaction-by-transaction basis.
In the event (which Management considers to be highly unlikely) that any or
all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The amount
deducted from the unearned premiums for reinsurance ceded to other companies was
$24.4 million at September 30, 1988. Unearned premiums included approximately
$31.2 million related to reinsurance assumed at September 30, 1988.
6. RELATED PARTY TRANSACTIONS
On September 1, 1987, and at various times thereafter, Financial Security
Assurance of Iowa, Inc. loaned varying sums of money to Financial Security
Assurance Holdings Ltd.; such amounts are included in Other Assets. The maturity
dates, amounts and related interest rates, are as follows:
MATURITY DATE AMOUNT INTEREST RATE
------------ ------ -------------
November 25, 1988................................ $2,019,500 8.75%
February 24, 1989................................ $2,864,000 8.25%
February 24, 1989................................ $3,290,000 8.50%
November 27, 1988................................ $5,230,000 9.00%
February 28, 1989................................ $1,623,828 10.00%
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
AT DECEMBER 31, 1987
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE STREET
------------------ ---- ----- ---------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. Government and government
agencies and authorities .................. $ 94,988,854 $ 94,688,246 $ 94,988,854
States, municipalities and political
subdivisions .............................. 144,376,376 140,161,722 144,376,376
Public utilities .......................... 8,670,522 8,376,578 8,670,522
All other corporate bonds ................... 13,154,819 12,840,436 13,154,819
------------ ------------ ------------
Total fixed maturities .................... 261,190,571 256,066,982 261,190,571
Short-term investments .......................... 6,961,072 6,961,072 6,961,072
------------ ------------ ------------
Total investments ......................... $268,151,643 $263,028,054 $268,151,643
============ ============ ============
</TABLE>
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
SCHEDULE II
GUARANTEES OF SECURITIES OF OTHER ISSUERS
AT DECEMBER 31, 1987
(000'S OMITTED)
<TABLE>
<CAPTION>
TERM TO FINAL MATURITY DATES**
----------------------------------------------------------------------------------
1/1/88 1/1/93 1/1/98 1/1/03 ON OR
TYPE OF PRINCIPAL THROUGH THROUGH THROUGH THROUGH AFTER
OBLIGATION AMOUNT* 12/31/92 12/31/97 12/31/02 12/31/07 1/1/08
- ---------- ------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Written (Direct)
Corporate*** ...................... $2,502,845 $837,007 $483,280 $117,724 $ -- $1,064,834
Municipals .......................... -- -- -- -- -- --
---------- -------- -------- -------- -------- ----------
Total Net Written
(Direct) .......................... 2,502,845 $837,007 $483,280 $117,724 $ -- $1,064,834
======== ======== ======== ======== ==========
Total Assumed**** ................... 2,643,083
----------
Grand Total ......................... $5,145,928
==========
- ----------------
<FN>
* Principal Amount determined as follows:
-- Net Written (Direct)--original principal amount reduced by principal paydowns through December 31, 1987 and by principal
amount of insurance ceded to unaffiliated insurance carriers.
-- Assumed--principal amount of insurance assumed from unaffiliated insurance carriers, reduced by principal paydowns through
December 31, 1987.
** Term to Final Maturity is determined as of December 31, 1987, for the full principal amount of each issue, outstanding as of
December 31, 1987, without regard to any subsequent principal amortization or possible prepayment.
*** Includes structured financings and tax exempt issues involving corporate credits.
**** The assumed principal amount consists of $10,000,000 of corporate obligations maturing in May 1988, and $2,633,083,000 of
municipals with various maturity dates, from 1988 through the year 2027.
</TABLE>
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
SCHEDULE II
GUARANTEES OF SECURITIES OF OTHER ISSUERS
AT SEPTEMBER 30, 1988
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
TERM TO FINAL MATURITY DATES**
------------------------------------------------------------------------
10/1/88 10/1/93 10/1/98 10/1/03 ON OR
PRINCIPAL THROUGH THROUGH THROUGH THROUGH AFTER
TYPE OF OBLIGATION AMOUNT* 9/30/93 9/30/98 9/30/03 9/30/08 10/1/08
------------------ --------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Written (Direct)
Corporate*** .............................. $5,026,979 $1,394,279 $831,119 $116,656 $1,030,799 $1,654,126
Municipals ................................ -- -- -- -- -- --
---------- ---------- -------- -------- ---------- ----------
Total Net Written
(Direct) .................................. 5,026,979 $1,394,279 $831,119 $116,656 $1,030,799 $1,654,126
========== ======== ======== ========== ==========
Total Assumed**** ........................... 2,606,862
----------
Grand Total.................................. $7,633,841
==========
<FN>
* Principal Amount determined as follows:
-- Net Written (Direct)--original principal amount reduced by principal paydowns through September 30, 1988 and by principal
amount of insurance ceded to unaffiliated insurance carriers.
-- Assumed--principal amount of insurance assumed from unaffiliated insurance carriers, reduced by principal paydowns through
September 30, 1988.
** Term to Final Maturity is determined as of September 30, 1988, for the full principal amount of each issue, outstanding as of
September 30, 1988, without regard to any subsequent principal amortization or possible prepayment.
*** Includes structured financings and tax exempt issues involving corporate credits.
**** The assumed principal amount consists of $10,000,000 of corporate obligations maturing in May 1989, and $2,596,862,000 of
municipals with various maturity dates, from 1988 through the year 2027.
</TABLE>
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
Standard & Poor's Corporation describes classifications of bonds as follows:
"AAA" Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
"AA" Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from the higher 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.
"BBB" Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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.
"BB"-"B"-"CCC"-"C" Debt rated "BB", "B", "CCC", and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"C1" The rating "C1" is reserved for income bonds on which no interest is
being paid.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
"Aaa" Bonds 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 which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba" Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B" Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
"Ca" Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
"C" Bonds which are rated "C" are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
<PAGE>
APPENDIX B
AUCTION ILLUSTRATIONS
The following illustrations reflect certain simplifying assumptions,
including, without limitation, assumptions as to the 30-day "AA" Composite
Commercial Paper Rate and number of shares of Preferred Stock outstanding. These
assumptions have been made for the purpose of illustration only.
Capitalized terms used herein shall have the respective meanings specified
in the forepart of this Prospectus.
ILLUSTRATION A
THE FIRST AUCTION FOR THE PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for the Preferred Stock is 12.250%, which is 175% of the 30-day
"AA" Composite Commercial Paper Rate. There are 330 shares of Preferred Stock
outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OF ORDERS BY
BROKER-DEALERS TO THE AUCTION AGENT
Broker-Dealers obtain the following Bids and Sell Orders from Existing
Holders of Preferred Stock:
BIDDER ORDER
- ------ -----
#1 Continue to hold 22 shares if the new rate is at least 7.000%
#2 Sell 44 shares
#3 Continue to hold 66 shares if the new rate is at least 7.250%
#4 Continue to hold 66 shares if the new rate is at least 7.300%
#5 Continue to hold 22 shares if the new rate is at least 7.250%
Since Bidder #6, who holds 220 shares, did not submit an Order to a
Broker-Dealer, Bidder #6 is deemed to have submitted a Hold Order with respect
to its shares.
Broker-Dealers obtain the following Bids from Potential Holders of Preferred
Stock:
BIDDER ORDER
- ------ -----
#1 Buy an additional 44 shares if the new rate is at least 7.000%
#7 Buy 44 shares if the new rate is at least 7.125%
#8 Buy 33 shares if the new rate is at least 7.100%
#9 Buy 110 shares if the new rate is at least 7.350%
#10 Buy 132 shares if the new rate is at least 7.400%
#11 Buy 88 shares if the new rate is at least 7.275%
By 12:30 p.m., New York City time, the Broker-Dealers have submitted the
above Orders to the Auction Agent. Such Orders are, therefore, Submitted Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number
of shares of Preferred Stock then outstanding minus the number of shares
of Preferred Stock that are the subject of Hold Orders--
330 - 110 = 220 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or
lower than 175% of the 30-day "AA" Composite Commercial Paper Rate is
equal to or exceeds the sum of the number of shares of Preferred Stock
offered to be sold by Existing Holders regardless of the Applicable Rate
for the next Dividend Period plus the number of shares of Preferred Stock
bid by Existing Holders at rates higher than 175% of the 30-day "AA"
Composite Commercial Paper Rate--
(A) 44 shares bid for by Bidder #1 plus
44 shares bid for by Bidder #7 plus
33 shares bid for by Bidder #8 plus
110 shares bid for by Bidder #9 plus
132 shares bid for by Bidder #10 plus
88 shares bid for by Bidder #11
---
451 shares bid for
===
exceeds
(B) 44 shares offered to be sold by Bidder #2.
Sufficient Clearing Bids, therefore, exist.
The Winning Bid Rate is the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower rates bid by Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owning all of the Available Preferred Stock.
BIDDER SHARES ORDER
- ------ ------ -----
#1 22 Continue to hold if the new rate is at least 7.000%
#1 44 Buy if the new rate is at least 7.000%
#8 33 Buy if the new rate is at least 7.100%
#7 44 Buy if the new rate is at least 7.125%
#3 66 Continue to hold if the new rate is at least 7.250%
#5 22 Continue to hold if the new rate is at least 7.250%
---
231 shares
===
The Winning Bid Rate is 7.250%, because at the next lowest rate, 7.125%,
only 143 shares of Preferred Stock would continue to be held or be purchased,
and that number of shares is less than the Available Preferred Stock. The
Winning Bid Rate, 7.250%, is the Applicable Rate for the next Dividend Period
for all shares of Preferred Stock.
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted and rejected in the
order or priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying any rate that
is higher than the Winning Bid Rate or that offered to sell shares of
Preferred Stock without regard to the Applicable Rate for the next Dividend
Period shall sell the shares of Preferred Stock subject to such Submitted
Bid or Submitted Sell Order.
Bidder #4 sells 66 shares. (Bidder #4 had bid 7.300%.)
Bidder #2 sells 44 shares. (Bidder #2 was a seller at any rate.)
(ii) Each Existing Holder with a Submitted Bid specifying a rate that
is lower than the Winning Bid Rate shall continue to hold the shares of
Preferred Stock subject to such Submitted Bid.
Bidder #1 continues to hold 22 shares.
(iii) Each Potential Holder with a Submitted Bid specifying a rate that
is lower than the Winning Bid Rate shall purchase the number of shares of
Preferred Stock subject to such Submitted Bid.
Bidder #1 purchases an additional 44 shares.
Bidder #7 purchases 44 shares.
Bidder #8 purchases 33 shares.
(iv) Each Existing Holder with a Submitted Bid specifying a rate equal
to the Winning Bid Rate shall continue to hold the shares of Preferred Stock
subject to such Submitted Bid, unless the number of shares of Preferred
Stock subject to all such Submitted Bids placed by existing Holders is
greater than the Available Preferred Stock less the number of shares of
Preferred Stock accounted for in clauses (ii) and (iii) above, in which
event each Existing Holder with such a Submitted Bid shall sell a number of
shares of Preferred Stock determined on a pro rata basis based on the shares
of Preferred Stock subject to all such Submitted Bids.
(A) 88(66 shares bid by Bidder #3 and 22 by Bidder #5, both
Existing Holders, at the Winning Bid Rate)
exceeds
(B) 154 (number of remaining shares, 220 - 143 = 77).
Therefore, Bidder #3 (66 shares) and Bidder #5 (22 shares) that collectively
own 88 shares must sell a total of 11 of these shares by application of the
following formula:
Bidder's Shares Involved in Tie Bidder's
Bidder's Shares - Remaining X ------------------------------- = Shares
Involved in Tie Shares All Shares Involved in Tie Sold
Bidder #3:
66 - (77 X 66/88) = 8.25
Bidder #3 sells 8 of its 66 shares and remains a holder of 58 shares.
Bidder #5:
22 - (77 X 22/88) = 2.75
Bidder #5 sells 3 of its 22 shares and remains a holder of 19 shares.
Pursuant to the Auction Procedures, the Auction Agent has rounded down with
respect to Bidder #3 and rounded up with respect to Bidder #5.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #2 sells 44 shares
Bidder #3 sells 9 shares
Bidder #4 sells 66 shares
Bidder #5 sells 2 shares
---
121 shares sold
===
Bidder #l buys 44 shares
Bidder #7 buys 44 shares
Bidder #8 buys 33 shares
---
121 shares bought
===
After settlement the Preferred Stock is held as follows:
Bidder #l holds 66 shares
Bidder #2 holds 0 shares
Bidder #3 holds 58 shares
Bidder #4 holds 0 shares
Bidder #5 holds 19 shares
Bidder #6 holds 110 shares
Bidder #7 holds 44 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 0 shares
Bidder #11 holds 0 shares
---
330 shares
===
<PAGE>
ILLUSTRATION B
THE SECOND AUCTION FOR PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for the Preferred Stock is 12.250% which is 175% of the 30-day
"AA" Composite Commercial Paper Rate. 330 shares of Preferred Stock are
outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OF ORDERS BY
BROKER-DEALERS TO THE AUCTION AGENT
Broker-Dealers obtain the following Bids and Sell Orders from Existing
Holders of Preferred Stock:
BIDDER ORDER
- ------ -----
#1 Continue to hold 66 shares if the new rate is at least 7.150%
#3 Sell 58 shares
#5 Sell 19 shares
#7 Continue to hold 44 shares if the new rate is at least 7.200%
Since Bidders #6 and #8, who hold 110 and 33 shares, respectively, did not
submit Orders to a Broker-Dealer, Bidders #6 and #8 are deemed to have submitted
a Hold Order with respect to their shares.
Broker-Dealers obtain the following Bids from Potential Holders of Preferred
Stock:
BIDDER ORDER
- ------ -----
#2 Buy 66 shares if the new rate is at least 7.200%
#4 Buy 44 shares if the new rate is at least 7.250%
#7 Buy an additional 77 shares if the new rate is at least 7.200%
#9 Buy 110 shares if the new rate is at least 7.250%
#10 Buy 22 shares if the new rate is at least 7.400%
#11 Buy 88 shares if the new rate is at least 7.275%
By 12:30 P.M., New York City time, the Broker-Dealers have submitted the
above Orders to the Auction Agent. Such Orders are, therefore, Submitted Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number of
shares of Preferred Stock then outstanding minus the number of shares of
Preferred Stock that are the subject of Hold Orders--
330 - 143 = 187 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or lower than
175% of the 30-day "AA" Composite Commercial Paper Rate is equal to or exceeds
the sum of the number of shares of Preferred Stock offered to be sold by
Existing Holders regardless of the Applicable Rate fixed for the next Dividend
Period plus the number of shares of Preferred Stock bid by Existing Holders at
rates higher than 175% of the 30-day "AA" Composite Commercial Paper Rate--
(A) 66 shares bid for by Bidder #2 plus
44 shares bid for by Bidder #4 plus
77 shares bid for by Bidder #7 plus
110 shares bid for by Bidder #9 plus
132 shares bid for by Bidder #10 plus
88 shares bid for by Bidder #11
---
517 shares bid for
===
exceeds
(B ) 58 shares offered to be sold by Bidder #3 plus
19 shares offered to be sold by Bidder #5
---
77 shares offered to be sold
===
Sufficient Clearing Bids, therefore, exist.
The Winning Bid Rate is the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower rates bid by Existing Holders
and Potential Holders, would result in such Existing Holders and Potential
Holders owning all of the Available Preferred Stock.
BIDDER SHARES ORDER
- ------ ------ -----
#1 66 Continue to hold if the new rate is at least 7.150%
#7 44 Continue to hold if the new rate is at least 7.200%
#2 66 Buy if the new rate is at least 7.200%
#7 77 Buy if the new rate is at least 7.200%
---
253 shares
===
The Winning Bid Rate is 7.200%, because at the next lowest rate, 7.150%,
only 66 shares of Preferred Stock would continue to be held or be purchased, and
that number of shares is less than the Available Preferred Stock. The Winning
Bid Rate, 7.200%, is the Applicable Rate for the next Dividend Period for all
shares of Preferred Stock.
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted and rejected in the
order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying a rate that is
higher than the Winning Bid Rate or that offered to sell shares of Preferred
Stock without regard to the Applicable Rate fixed for the next Dividend Period
shall sell the shares of Preferred Stock subject to such Submitted Bid or
Submitted Sell Order.
Bidder #3 sells 58 shares.
Bidder #5 sells 19 shares.
(Bidder #3 and Bidder #5 were sellers at any rate.)
(ii) Each Existing Holder with a Submitted Bid specifying a rate that is
lower than the Winning Bid Rate shall continue to hold the shares of Preferred
Stock subject to such Submitted Bid.
Bidder #1 continues to hold 66 shares.
(iii) Each Potential Holder with a Submitted Bid specifying a rate that is
lower than the Winning Bid Rate shall purchase the number of shares of Preferred
Stock subject to such Submitted Bid.
None.
(iv) Each Existing Holder with a Submitted Bid specifying a rate equal to
the Winninng Bid Rate shall continue to hold the shares of Preferred Stock
subject to such Submitted Bid, unless the number of shares of Preferred Stock
subject to all such Submitted Bids placed by Existing Holders is greater than
the Available Preferred Stock less the number of shares of Preferred Stock
accounted for in clauses (ii) and (iii) above, in which event each Existing
Holder with such a Submitted Bid shall sell a number of shares of Preferred
Stock determined on a pro rate basis based on the shares of Preferred Stock
subject to all such Submitted Bids.
(A) 44 (number of shares bid by Bidder #7, an Existing Holder, at the
Winning Bid Rate)
is less than
(B) 121 (number or remaining shares, 187 - 66 - 121)
Bidder #7 continues to hold 44 shares.
(v) Each Potential Holder with a Submitted Bid specifying a rate equal to
the Winning Bid Rate shall purchase any Available Preferred Stock not accounted
for in clauses (ii), (iii) and (iv) above on a pro rata basis bases on the
shares of Preferred Stock subject to all such Submitted Bids placed by Potential
Holders.
Shares Subject to Bid
Remaining Shares X ------------------------------- = Shares
Shares Subject to All Such Bids Purchased
Bidder #2
(187 - 110) X 66/143 = 35.5
Bidder #2 purchases 36 shares.
Bidder #7
(187 - 110) X 77/143 = 41.5
Bidder #7 purchases 41 shares.
Pursuant to the Auction Procedures the Auction Agent has rounded up with
respect to Bidder #2 and rounded down with respect to Bidder #7.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #3 sells 58 shares
Bidder #5 sells 19 shares
---
77 shares sold
===
Bidder #2 buys 36 shares
Bidder #7 buys 41 shares
---
77 shares bought
===
After settlement the Preferred Stock is held as follows:
Bidder #1 holds 66 shares
Bidder #2 holds 36 shares
Bidder #3 holds 0 shares
Bidder #4 holds 0 shares
Bidder #5 holds 0 shares
Bidder #6 holds 110 shares
Bidder #7 holds 85 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 0 shares
Bidder #11 holds 0 shares
---
330 shares
===
<PAGE>
ILLUSTRATION C
THE THIRD AUCTION FOR PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for the Preferred Stock is 12.250% which is 175% of the 30-day
"AA" Composite Commercial Paper Rate. 330 shares of Preferred Stock are
outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OR ORDERS BY
BROKER-DEALERS TO AUCTION AGENT
Broker-Dealers obtain the following Hold Orders, Bids and Sell Orders from
Existing Holders of Preferred Stock:
BIDDER ORDER
----- -----
#1 Hold 66 shares
#2 Sell 36 shares
#7 Sell 85 shases
#8 Continue to hold 33 shares if the new rate is at least 7.200%
Since Bidder #6 who holds 110 shares did not submit an Order to a
Broker-Dealer, Bidder #6 is deemed to have submitted a Hold Order with respect
to its shares.
Broker-Dealers obtain the following Bids from Potential Holders of Preferred
Stock:
BIDDER ORDER
----- -----
#3 Buy 132 shares if the new rate is at least 7.200%
#4 Buy 44 shares if the new rate is at least 7.200%
#5 Buy 22 shares if the new rate is at least 7.150%
#9 Buy 11 shares if the new rate is at least 7.200%
#10 Buy 88 shares if the new rate is at least 7.150%
#11 Buy 110 shares if the new rate is at leat 7.250%
#12 Buy 132 shares if the new rate is at least 7.400%
#13 Buy 88 shares if the new rate is at least 7.275%
By 12:30 P.M., New York City time, the Broker-Dealers have submitted the
above Orders to the Auction Agent. Such Orders are, therefore, Submitted Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number
of shares of Preferred Stock then outstanding minus the number of shares of
Preferred Stock that are the subject of Hold Orders--
330 - 176 = 154 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or
lower than 175% of the 30-day "AA" Composite Commercial Paper Rate is equal
to or exceeds the sum of the number of shares of Preferred Stock offered to
be sold by Existing Holders regardless of the Applicable Rate for the next
Dividend Period plus the number of shares of Preferred Stock bid by Existing
Holders at rates higher than 175% of the 30-day "AA" Composite Commercial
Paper Rate--
(A) 132 shares bid for by Bidder #3 plus
44 shares bid for by Bidder #4 plus
22 shares bid for by Bidder #5 plus
11 shares bid for by Bidder #9 plus
88 shares bid for by Bidder #10 plus
110 shares bid for by Bidder #11 plus
132 shares bid for by Bidder #12 plus
88 shares bid for by Bidder #13
---
627 shares bid for
===
exceeds
(B) 36 shares offered to be sold by Bidder #2 plus
85 shares offered to be sold by Bidder #7
---
121 shares offered to be sold
===
Sufficient Clearing Bids, therefore, exist.
The Winning Bid Rate is the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower rates bid by Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owing all of the Available Preferred Stock.
BIDDER SHARES ORDER
- ------ ------ -----
#5 22 Buy if the new rate is at least 7.150%
#10 88 Buy if the new rate is at least 7.150%
#8 33 Continue to hold if the new rate is at least 7.200%
#3 132 Buy if the new rate is at least 7.200%
#4 44 Buy if the new rate is at least 7.200%
#9 22 Buy if the new rate is at least 7.200%
---
341 shares
===
The Winning Bid Rate is 7.200%, because at the next lowest rate,
7.150%, only 110 shares of Preferred Stock would continue to be held or be
purchased, and that number of shares is less than the Available Preferred Stock.
The Winning Bid Rate, 7.200%, is the Applicable Rate for the next Dividend
Period for all shares of Preferred Stock.
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted and rejected in the
order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying any rate that
is higher than the Winning Bid Rate or that offered to sell shares of
Preferred Stock without regard to the Applicable Rate fixed for the next
Dividend Period shall sell the shares of Preferred Stock subject to such
Submitted Bid or Submitted Sell Order.
Bidder #2 sells 36 shares.
Bidder #7 sells 85 shares.
(Bidder #2 and Bidder #7 were sellers at any rate.)
(ii) Each Existing Holder with a Submitted Bid specifying any rate that
is lower than the Winning Bid Rate shall continue to hold the shares of
Preferred Stock subject to such Submitted Bid.
None.
(iii) Each Potential Holder with a Submitted Bid specifying any rate
that is lower than the Winning Bid Rate shall purchase the number of shares
of Preferred Stock subject to such Submitted Bid.
Bidder #5 buys 22 shares.
Bidder #10 buys 88 shares.
(iv) Each Existing Holder with a Submitted Bid specifying a rate equal
to the Winning Bid Rate shall continue to hold the shares of Preferred Stock
subject to such Submitted Bid, unless the number of shares of Preferred
Stock subject to all such Submitted Bids placed by Existing Holders is
greater than the Available Preferred Stock less the number of shares of
Preferred Stock accounted for in clauses (ii) and (iii) above, in which
event each Existing Holder with such a Submitted Bid shall sell a number of
shares of Preferred Stock determined on a pro rata basis based on the shares
of Preferred Stock subject to all such Submitted Bids.
(A) 33 (number of shares bid by Bidder #8, an Existing Holder, at the
Winning Bid Rate)
is less than
(B) 44 (number of remaining shares, 154 - 110 = 44). Bidder #8 continues
to hold 33 shares.
(v) Each Potential Holder with a Submitted Bid specifying a rate equal
to the Winning Bid Rate shall purchase any Available Preferred Stock not
accounted for in clauses (ii), (iii) and (iv) above on a pro rata basis
based on the shares of Preferred Stock subject to all such Submitted Bids
placed by Potential Holders.
Shares Subject to Bid
Remaining shares X ------------------------------ = Shares
Shares Subject to All Such Bids Purchased
Bidder #3:
(154 - 143) X 132/187 = 7.8
Bidder #3 purchases 8 shares.
Bidder #4:
(154 - 143) X 44/187 = 2.6
Bidder #4 purchases 3 shares.
Bidder #9:
(154 - 143) X 11/187 = .6
Bidder #9 purchases 0 shares.
Pursuant to the Auction Procedures, the Auction Agent has rounded up with
respect to Bidders #3 and #4 and down with respect to Bidder #9.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #2 sells 36 shares
Bidder #7 sells 85 shares
---
121 shares sold
===
Bidder #3 buys 8 shares
Bidder #4 buys 3 shares
Bidder #5 buys 22 shares
Bidder #9 buys 0 shares
Bidder #10 buys 88 shares
---
121 shares bought
===
After settlement Preferred Stock is held as follows:
Bidder #l holds 66 shares
Bidder #2 holds 0 shares
Bidder #3 holds 8 shares
Bidder #4 holds 3 shares
Bidder #5 holds 22 shares
Bidder #6 holds 110 shares
Bidder #7 holds 0 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 88 shares
Bidder #11 holds 0 shares
Bidder #12 holds 0 shares
Bidder #13 holds 0 shares
---
330 shares
===
<PAGE>
ILLUSTRATION D
HYPOTHETICAL FAILED AUCTION
THE FOURTH AUCTION FOR PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for Preferred Stock is 12.250%, which is 175% of the 30-day "AA"
Composite Commercial Paper Rate. 330 shares of Preferred Stock are outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OF ORDERS BY
BROKER-DEALERS TO THE AUCTION AGENT
Broker-Dealers obtain the following Bids and Sell Orders from Existing
Holders of Preferred Stock:
BIDDER ORDER
------ -----
#1 Sell 66 shares
#3 Continue to hold 8 shares if the new rate is at least 7.250%
#4 Continue to hold 3 shares if the new rate is at least 12.500%
#5 Continue to hold 22 shares if the new rate is at least 7.250%
Since Bidders #6, #8, #9 and #10 who hold shares did not submit Orders
to a Broker-Dealer, they are deemed to have submitted Hold Orders with respect
to their shares.
Broker-Dealers obtain the following Bids from Potential Holders of
Preferred Stock:
BIDDER ORDER
------ -----
#7 Buy 46 shares if the new rate is at least 7.125%
By 12:30 P.M., New York City time, the Broker-Dealers have submitted
the above Orders to the Auction Agent. Such Orders are, therefore, Submitted
Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number of
shares of Preferred Stock then outstanding minus the number of shares of
Preferred Stock that are the subject of Hold Orders--
330 - 216 = 114 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or lower
than 175% of the 30-day "AA" Composite Commercial Paper Rate is equal to or
exceeds the sum of the number of shares of Preferred Stock offered to be
sold by Existing Holders regardless of the Applicable Rate for the next
Dividend Period plus the number of shares of Preferred Stock bid by Existing
Holders at rate higher than 175% of the 30-day "AA" Composite Commercial
Paper Rate--
(A) 46 shares bid by Bidder #7 is less than
(B) 66 shares offered to be sold by Bidder #1 plus
3 shares bid for by Bidder #4 at a rate above 175%
of the 30-day "AA" Composite Commercial Paper Rate
---
69 shares offered to be sold
===
Sufficient Clearing Bids, therefore, do not exist. As a result, the
Applicable Rate for the next Dividend Period is 12.250% (175% of the 30-day "AA"
Composite Commercial Paper Rate).
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted or rejected in
the order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying any rate that
is equal to or lower than 175% of the 30-day "AA" Composite Commercial Paper
Rate shall continue to hold the shares of Preferred Stock subject to such
Submitted Bid.
Bidder #3 continues to hold 8 shares.
Bidder #5 continues to hold 22 shares.
(ii) Each Potential Holder with a Submitted Bid specifying any rate that
is equal to or lower than 175% of the 30-day "AA" Composite Commercial Paper
Rate shall purchase the number of shares of Preferred Stock subject to such
Submitted Bid.
Bidder #7 purchases 24 shares.
(iii) Each Existing Holder with a Submitted Bid specifying any rate
higher than 175% of the 30-day "AA" Composite Commercial Paper Rate or that
offered to sell shares of Preferred Stock without regard to the Applicable
Rate fixed for the next Dividend Period shall sell a number of Shares of
Preferred Stock determined on a pro rata basis on the number of shares of
Preferred Stock subject to all such Submitted Bids or Submitted Sell Orders
placed by Existing Holders.
Shares Shares Subject to Order
Subject - Remaining Shares X --------------------------------- = Shares
to Order Shares Subject to All Such Orders Sold
Bidder #1:
66 - [(114 - 68) X 66/69] = 44.0
Bidder #1 sells 23 shares and remains a holder of 43 shares.
Bidder #4:
3 - [(114 - 68) X 3/69] = 2.0
Bidder #4 sells I share and remains a holder of 2 shares.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #l sells 24 shares
Bidder #4 sells 0 shares
---
24 shares sold
===
Bidder #7 buys 24 shares
---
24 shares bought
===
After settlement Preferred Stock is held as follows:
Bidder #1 holds 43 shares
Bidder #2 holds 0 shares
Bidder #3 holds 8 shares
Bidder #4 holds 2 shares
Bidder #5 holds 22 shares
Bidder #6 holds 110 shares
Bidder #7 holds 24 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 88 shares
---
330 shares
===
<PAGE>
APPENDIX C
SETTLEMENT PROCEDURES
The following procedures are expected to be followed in connection with the
settlement of each Auction and will be incorporated by reference in the Auction
Agent Agreement and each Broker-Dealer Agreement. Capitalized terms used herein
and not otherwise defined shall have the meanings specified in this Prospectus
or Appendix E hereto, as the case may be. Nothing contained in these procedures
constitutes a representation by the Corporation that in each Auction each party
referred to herein will actually perform the procedures described therein to be
performed by such party.
(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 any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of an Existing Holder, the number of Preferred
Shares, if any, then outstanding to be sold by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Holder, the number of Preferred Shares, if any, to
be purchased by such Potential Holder;
(v) if the aggregate number of Preferred Shares to be sold by all
Existing Holders on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number 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 Buyer's Broker-Dealers (and the Agent
Member, if any, of each such Buyer's Broker-Dealer) acting for one or more
purchasers of such excess number of Preferred Shares and the number of such
shares to be purchased from one or more Existing Holders on whose behalf
such Broker-Dealer acted by one or more Existing Holders on whose behalf
each of such Seller's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by all
Potential Holders on whose behalf such Broker-Dealer submitted a Bid exceeds
the aggregate number of Preferred Shares to be sold by all Existing Holders
on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name
or names of one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess number of Preferred Shares and the number of such
shares to be sold to one or more Potential Holders on whose behalf such
Broker-Dealer acted by one or more Existing Holders on whose behalf each of
such Seller's Broker-Dealers acted; and
(vii) the 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;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Holder on whose behalf such Broker-Dealer submitted
a Bid that was accepted, in whole or in part, to instruct such Potential
Holder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to purchase the
number of Preferred Shares to be purchased pursuant to such Bid against
receipt of such shares and advise such Potential Holder of the Applicable
Rate for the next succeeding Dividend Period;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Holder on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part or a Bid that was
rejected, in whole or in part, to instruct such Existing Holder's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of Preferred Shares to be sold pursuant to
such order against payment therefor and advise any such Existing Holder that
will continue to hold Preferred Shares of the Applicable Rate for the next
succeeding Dividend Period;
(iv) advise each Existing Holder on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend 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 (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Holder or an Existing Holder shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any funds received by
it pursuant to (b)(ii) above and any Preferred Shares received by it
pursuant to (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 that were rejected or Sell Orders, and
any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder shall instruct its Agent
Member as provided in (b)(ii) or (iii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Existing Holder delivering
Preferred Shares to such Broker-Dealer pursuant to (b)(iii) above the amount
necessary to purchase such shares against receipt of such shares, and (B)
deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's
Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member )
identified pursuant to (a)(ii) above against receipt of such shares, and (B)
deliver such shares through the Securities Depository to the Agent Member of
the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described
under (b)(ii) or (iii) above, and the Securities Depository shall execute
such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in
(d)(iii) above, and the Securities Depository shall execute such
transactions.
(f) If an Existing Holder selling Preferred Shares in an Auction fails to
deliver such shares, a Broker-Dealer may deliver to the Potential Holder on
behalf of which it submitted a Bid that was accepted a number of whole Preferred
Shares that is less than the number of Preferred Shares that otherwise was to be
purchased by such Potential Holder. In such event, the number of Preferred
Shares to be so delivered shall be determined solely by such Broker-Dealer.
Delivery of such lesser number of Preferred Shares shall constitute good
delivery. Notwithstanding the foregoing terms of this section (f), any delivery
or non-delivery of Preferred 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
non-delivery in accordance with the provisions of the Auction Agent Agreement
and the Broker-Dealer Agreement.
<PAGE>
APPENDIX D
TO BE SUBMITTED TO THE BROKER-DEALER LISTED BELOW, WHO WILL THEN DELIVER
COPIES ON YOUR BEHALF TO THE AUCTION AGENTS.
Drexel Burnham Lambert Incorporated
55 Broad Street, 2nd Floor
New York, New York 10014
Attention: Calvin Clark
Telecopier No. (212) 968-9881
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS
To: The Company
The Auction Agent
A Broker-Dealer
An Agent Member
Other Persons
1. This letter is designed to apply to auctions for publicly or
privately offered debt or equity securities ("Securities") of any issuer
("Company") which are described in any final prospectus or other offering
materials relating to such Securities as the same may be amended or supplemented
(collectively, with respect to the particular Securities concerned, the
"Prospectus") and which involve periodic rate settings through auctions
("Auctions"). This letter shall be for the benefit of any Company and of any
trust company or auction agent (collectively, "trust company"), broker-dealer,
agent member, securities depository or other interested person in connection
with any Securities and related Auctions (it being understood that such persons
may be required to execute specified agreements and nothing herein shall alter
such requirements). The terminology used herein is intended to be general in its
application and not exclude any Securities in respect of which (in the
Prospectus or otherwise) alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions as
set forth in the Prospectus.
3. We agree that any bid or sell order placed by us shall constitute an
irrevocable offer by us to purchase or sell the Securities subject to such bid
or sell order, of such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction, at the applicable price, all as
set forth in the Prospectus, and that if we fail to place a bid or sell order
with respect to Securities owned by us with a broker-dealer on any auction date,
or a broker-dealer to which we communicate a bid or sell order fails to submit
such bid or sell order to the trust company concerned, we shall be deemed to
have placed a hold order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such broker-dealer for
Securities purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, to or through a broker-dealer or, when permitted in the
Prospectus, to a person that has signed and delivered, or caused to be delivered
on its behalf, to the applicable trust company a letter substantially in the
form of this letter (or other applicable purchaser's letter), provided that in
the case of all transfers other than pursuant to Auctions we or our
broker-dealer or agent member shall advise such trust company of such transfer.
We understand that a restrictive legend will be placed on certificates
representing the Securities and stop-transfer instructions will be issued to the
transfer agent and/or registrar, all as set forth in the Prospectus. We agree to
comply with any other transfer restrictions or other related procedures as
described in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by a global certificate
registered in the name of the applicable securities depository or its nominee,
that we will not be entitled to receive any certificate representing the
Securities and that our ownership of any Securities will be maintained in book
entry form by the securities depository for the account of our agent member,
which in turn will maintain records of our beneficial ownership. We authorize
and instruct our agent member to disclose to the applicable trust company such
information concerning our beneficial ownership of Securities as such trust
company shall request.
6. We acknowledge that partial deliveries of Securities purchased in
Auctions may be made to us and such deliveries shall constitute good delivery as
set forth in the Prospectus.
7. This letter is not a commitment by us to purchase any Securities.
8. This letter supersedes any prior-dated version of this Master
Purchaser's Letter, and supplements any prior- or post-dated purchaser's letter
specific to particular Securities; any recipient of this letter may rely upon it
until such recipient has received a signed writing amending or revoking this
letter.
9. The descriptions of Auction Procedures set forth in each applicable
Prospectus are incorporated by reference herein and, in case of any conflict
between this letter and any such description, such description shall control.
10. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
11. Our agent member of the securities depository currently is .
12. Our personnel authorized to place orders in Auctions with
broker-dealers for the purposes set forth in the Prospectus currently is/are
, telephone number ( ) - .
13. Our taxpayer indentification number is .
14. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Act"), we represent and agree as follows:
A. We understand and expressly acknowledge that the Securities have not
been and will not be registered under the Act and, accordingly, that the
Securities may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless an applicable exemption from the registration
requirements of the Act is available.
B. We hereby confirm that any purchase of Securities made by us will be
for our own account, or for the account of one or more parties for which we
are acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which
will acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by
us or such party, as the case may be, will have previously invested in
similar types of instruments and will be able and prepared to bear the
economic risk of investing in and holding such Securities.
C. We acknowledge that prior to purchasing any Securities we shall have
received a Prospectus (private placement memorandum) with respect thereto
and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers thereto, as we deem
necessary in connection with our decision to purchase Securities.
D. We recognize that the Company and broker-dealers will rely upon the
truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
15. The Purchaser consents to the use of custody arrangements for the
Securities, if any, on such terms as shall be necessary or appropriate in
connection with insurance arrangements, if any, for the Securities or otherwise
and agrees that custody receipts issued in connection with any such arrangement
shall be treated in the same manner as and be deemed Securities for all purposes
hereunder and under the Company's governing documents and in Auctions. Copies of
relevant documents in connection with any such arrangements may be obtained upon
request to the address or telephone number set forth above. Receipt of any such
custody receipts shall constitute acceptance of the terms thereof.
16. The Purchaser acknowledges that, pursuant to the terms of any
custody arrangement with respect to the Purchaser's Securities, to the extent
that Financial Security Assurance Inc. or any other surety under a surety bond
unconditionally and irrevocably guaranteeing scheduled payments on the
Securities (the "Surety"), makes scheduled payments on the Purchaser's
Securities, such Surety may exercise the Purchaser's voting rights with respect
to the Securities and hereby assigns the Purchaser's right to receive from the
Company any payments on the Purchaser's Securities to which such scheduled
payments made by the Surety relates; and further acknowledges that the Surety
shall be subrogated to the Purchaser's rights with respect to the Securities
until the Company makes such payments on the Purchaser's Securities to which
such scheduled payments made by the Surety relate or the Company otherwise
reimburses the Surety for any scheduled payments so made by the Surety.
------------------------------------
(Name of Purchaser)
Dated:
-----------------------
Mailing Address of Purchaser:
By:
- ------------------------------- ----------------------------------
Printed Name:
- ------------------------------- -----------------------
Title:
- ------------------------------- ------------------------------
<PAGE>
APPENDIX E
AUCTION PROCEDURES
The following procedures will be set forth in paragraph 8 of Article IV(C)
of the Fund's Articles of Incorporation and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. Nothing contained
in this Appendix E constitutes a representation by the Fund that in each Auction
each party referred to herein will actually perform the procedures described
herein to be performed by such party. The terms not defined below are defined in
the forepart of this Prospectus, except that the term "Corporation" means the
Fund.
(a) Certain Definitions. Capitalized terms not defined in this paragraph
8(a) shall have the respective meanings specified in paragraph 2. As used in
this paragraph 8, the following terms shall have the following meanings, unless
the context otherwise requires:
(i) "Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Corporation.
(ii) "Agent Member" shall mean the member of the Securities Depository
that will act on behalf of a Bidder and is identified as such in such
Bidder's Master Purchaser's Letter.
(iii) "Auction" shall mean the periodic operation of the procedures set
forth in this paragraph 8.
(iv) "Auction Date" shall mean the first Business Day next preceding the
first day of a Dividend Period.
(v) "Available Preferred Stock" shall have the meaning specified in
paragraph 8(d)(i)(A) below.
(vi) "Bid" and "Bids" shall have the respective meanings specified in
paragraph 8(b)(i) below.
(vii) "Bidder" and "Bidders" shall have the respective meanings
specified in paragraph 8(b)(i) below
(viii) "Broker-Dealer" shall mean Drexel Burnham Lambert Incorporated
and any other broker-dealer, or other entity permitted by law to perform the
functions required of a Broker-Dealer in this paragraph 8, that has been
selected by the Corporation and has entered into a Broker-Dealer Agreement
with the Auction Agent that remains effective.
(ix) "Broker-Dealer Agreements" shall mean the agreement between the
Auction Agent and Drexel Burnham Lambert Incorporated and similar agreements
with one or more other BrokerDealers pursuant to which such Broker-Dealer
agrees to follow the procedures specified in this paragraph 8.
(x) "Existing Holder," when used with respect to shares of Preferred
Stock, shall mean a Person who has signed a Master Purchaser's Letter and is
listed as the beneficial owner of such shares of Preferred Stock in the
records of the Auction Agent.
(xi) "Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xii) "Master Purchaser's Letter" shall mean a letter addressed to the
Corporation, the Auction Agent and a Broker-Dealer in which a Person agrees,
among other things, to offer to purchase, purchase, offer to sell and/or
sell auction rate securities as set forth in this paragraph 8.
(xiii) "Maximum Applicable Rate" and "Minimum Applicable Rate" on any
Auction Date shall be 175% and 90%, respectively, of the 30-day "AA"
Composite Commercial Paper Rate at the close of business on the Business Day
next preceding the Auction Date.
(xiv) "Potential Holder" shall mean any Person, including any Existing
Holder, (A) who shall have executed a Master Purchaser's Letter and (B) who
may be interested in acquiring shares of Preferred Stock (or, in the case of
an Existing Holder, additional shares of Preferred Stock).
(xv) "Securities Depository" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by
the Corporation which agrees to follow the procedures required to be
followed by such securities depository in connection with shares of
Preferred Stock.
(xvi) "Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraphs 8(b)(i) below.
(xvii) "Submission Deadline" shall mean 12:30 p.m., New York City time,
on any Auction Date or such other time on any Auction Date (as specified by
the Auction Agent from time to time) by which Broker-Dealers are required to
submit Orders to the Auction Agent.
(xviii) "Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xix) "Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph 8(d)(i) below.
(xx) "Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xxi) "Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 8(d)(i) below.
(xxii) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph 8(d)(i) below.
(xxiii) "Winning Bid Rate" shall have the meaning specified in paragraph
8(d)(i) below.
(b) Orders by Existing Holders and Potential Holders.
(i) On or prior to the Submission Deadline on each Auction Date:
(A) each Existing Holder, with respect to shares of Preferred Stock it
then holds, may submit to a Broker-Dealer by telephone or otherwise
information as to:
(1) the number of shares, if any, of Preferred Stock held by such
Existing Holder which such Existing Holder desires to continue to hold
without regard to the Applicable Rate for the next Dividend Period
therefor;
(2) the number of shares, if any, of Preferred Stock which such
Existing Holder desires to continue to hold if the Applicable Rate for
the next Dividend Period therefor shall not be less than the rate per
annum then specified by such Existing Holder; and/or
(3) the number of shares, if any, of Preferred Stock held by such
Existing Holder which such Existing Holder offers to sell without regard
to the Applicable Rate for the next succeeding Dividend Period therefor;
and
(B) each Broker-Dealer, using a list of Potential Holders that shall be
maintained by such Broker-Dealer in good faith for the purposes of
conducting a competitive Auction, shall contact Potential Holders on such
lists to determine the number of shares, if any, of Preferred Stock which
such Potential Holders offer to purchase if the Applicable Rate for the next
succeeding Dividend Period therefor shall not be less than the rate per
annum specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of information
referred to in this paragraph 8(b) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Existing Holder and each Potential Holder
placing an Order is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (A)(1) of
this paragraph 8(b) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the information referred to
in clause (A)(2) or (B) of this paragraph 8(b) is hereinafter referred to as a
"Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (A)(3) of this paragraph 8(b) is hereinafter referred to
as a "Sell Order" and collectively as "Sell Orders."
(ii) As a condition to participating in any Auction, each prospective
purchaser of shares of Preferred Stock shall be required to sign and deliver two
copies to the Auction Agent, and one copy to a Broker-Dealer, of a Master
Purchaser's Letter, in which such prospective purchaser will agree, among other
things, that:
(A) Bid by an Existing Holder shall constitute an irrevocable offer to
sell:
(1) the number of shares of Preferred Stock specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than
the rate specified therein;
(2) such specified number or a lesser number of shares of Preferred
Stock to be determined as set forth in clause (D) of paragraph 8(e)(i)
if the Applicable Rate determined on such Auction Date shall be equal to
the rate specified therein; or
(3) such specified number or a lesser number of shares of Preferred
Stock to be determined as set forth in clause (C) of paragraph 8(e)(ii)
if the rate specified therein shall be higher than the Maximum
Applicable Rate and Sufficient Clearing Bids do not exist.
(B) Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of shares of Preferred Stock specified in such Sell
Order; or
(2) such specified number or a lesser number of shares of Preferred
Stock as set forth in clause (C) of paragraph 8(e)(ii) if Sufficient
Clearing Bids do not exist.
(C) Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of shares of Preferred Stock specified in such Bid if
the Applicable Rate determined on such Auction Date shall be higher than
the rate therein; or
(2) such specified number or a lesser number of shares of Preferred
Stock as set forth in clause (E) of paragraph 8(e)(i) if the Applicable
Rate determined on such Auction Date shall be equal to the rate
specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer for the Auction to be conducted on such Auction Date and shall
specify with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of shares of Preferred Stock that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder the number of
shares, if any, of Preferred Stock subject to any:
(1) Hold Order placed by such Existing Holder;
(2) Bid placed by such Existing Holder and the rate specified in
such Bid; and
(3) Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder the rate specified
in such Potential Holder's Bid.
(ii) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the shares of Preferred Stock
held by any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted on behalf of such Existing Holder covering the number of shares of
Preferred Stock held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(iv) If one or more Orders covering in the aggregate more than the number of
shares of Preferred Stock held by an Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid as follows and in the
following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding shares of
Preferred Stock held by such Existing Holder; provided that if more than one
Hold Order is submitted on behalf of such Existing Holder and the number of
shares of Preferred Stock subject to such Hold Orders exceeds the number of
shares of Preferred Stock held by such Existing Holder, the number of shares
of Preferred Stock subject to each such Hold Order shall be reduced pro rata
so that such Hold Order shall cover the number of shares of Preferred Stock
held by such Existing Holder;
(B)(1) any Bid shall be considered valid up to and including the excess
of the number of shares of Preferred Stock held by such Existing Holder over
the number of shares of Preferred Stock subject to any Hold Orders referred
to in clause (iv)(A) of paragraph 8(c);
(2) subject to subclause (1), if more than one Bid with the same rate is
submitted on behalf of such Existing Holder and the number of shares of
Preferred Stock subject to such Bids is greater than the excess described in
subclause (1), the number of shares of Preferred Stock subject to such Bids
shall be reduced pro rata so that such Bids shall cover the number of shares
of Preferred Stock equal to such excess;
(3) subject to subclause (1), if more than one Bid with different rates
is submitted on behalf of such Existing Holder, such Bids shall be
considered valid in the ascending order of their respective rates; and
(4) the number, if any, of such shares of Preferred Stock subject to
Bids not valid under this clause (B) shall be treated as the subject of a
Bid by a Potential Holder at the rate therein specified; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the sum of the shares of Preferred Stock subject to valid Hold
Orders referred to in clause (iv)(A) of paragraph 8(c) and valid Bids by
such Existing Holder referred to in clause (iv)(B) of paragraph 8(c),
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of Preferred Stock subject to such
Sell Orders is greater than such excess, the number of shares of Preferred
Stock subject to such Sell Orders shall be reduced pro rata so that such
Sell Orders shall cover the number of shares of Preferred Stock equal to
such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate and number of shares of
Preferred Stock therein specified.
(vi) If any rate specified in any Bid is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Bid is made, such Bid
shall be deemed to be a Bid specifying a rate equal to such Minimum Applicable
Rate.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) 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 as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
shall determine:
(A) the excess of the total number of shares of Preferred Stock over the
number of outstanding shares of Preferred Stock that are the subject of
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Preferred Stock");
(B) from the Submitted Orders whether the number of shares of Preferred
Stock that are subject of Submitted Bids by Potential Holders specifying one
or more rates equal to or lower than the Maximum Applicable Rate exceeds or
is equal to the sum of:
(1) the number of shares of Preferred Stock that are the subject of
Submitted Bids by Existing Holders specifying one or more rates higher
than the Maximum Applicable Rate; and
(2) the number of shares of Preferred Stock that are subject to
Submitted Sell Orders;
in the event of such excess or such equality (other than because all of the
outstanding shares of Preferred Stock are the subject of Submitted Hold
Orders), such Submitted Bids are hereinafter referred to collectively as
"Sufficient Clearing Bids"; and
(C) if Sufficient Clearing Bids exist, the lowest rate specified in the
Submitted Bids (the "Winning Bid Rate") which if:
(1) each Submitted Bid from Existing Holders specifying such lowest rate
and all other Submitted Bids from Existing Holders specifying lower rates
were accepted, thus entitling such Existing Holders to continue to hold the
shares of Preferred Stock that are the subject of such Submitted Bids; and
(2) each Submitted Bid from Potential Holders specifying such lowest
rate and all other Submitted Bids from Potential Holders specifying lower
rates were accepted, thus entitling those Potential Holders to purchase the
shares of Preferred Stock that are the subject of such Submitted Bids,
would result in such Existing Holders described in subclause (1) above
continuing to hold an aggregate number of shares of Preferred Stock which,
when added to the number of shares of Preferred Stock to be purchased by
such Potential Holders described in subclause (2) above, would equal not
less than the Available Preferred Stock.
(ii) Promptly after the Auction Agent has made the determination pursuant to
paragraph 8(d)(i) the Auction Agent shall advise the Corporation of the Maximum
Applicable Rate and the Minimum Applicable Rate and, based on all such
determinations, the Applicable Rate for the next succeeding Dividend Period as
follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding shares of Preferred Stock 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; or
(C) if all the shares of Preferred Stock are the subject of Submitted
Hold Orders, that the Applicable Rate for Preferred Stock for the next
succeeding Dividend Period shall be equal to the Minimum Applicable Rate.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocations of Shares. Existing Holders shall continue to hold the shares of
Preferred Stock that are the subject of Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph 8(d)(i), the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall
take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 8(e)(iii), Submitted Bids and Submitted Sell Orders shall be
accepted or rejected in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each Existing Holder specifying any rate that
is higher than the Winning Bid Rate shall be rejected, thus requiring
each such Existing Holder to sell the shares of Preferred Stock that are
the subject of such Submitted Sell Orders or Submitted Bids;
(B) the Submitted Bid of each Existing Holder specifying any rate
that is lower than the Winning Bid Rate shall be accepted, thus
entitling each such Existing Holder to continue to hold the shares of
Preferred Stock that are the subject of such Submitted Bid;
(C) the Submitted Bid of each Potential Holder specifying any rate
that is lower than the Winning Bid Rate shall be accepted and such
Potential Holder shall purchase the number of shares of Preferred Stock
subject to such Submitted Bid;
(D) the Submitted Bid of each Existing Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, thus entitling such
Existing Holder to continue to hold the shares of Preferred Stock that
are subject of such Submitted Bid, unless the number of shares of
Preferred Stock subject to all such Submitted Bids shall be greater than
the number of shares of Preferred Stock equal to the excess of the
Available Preferred Stock over the number of shares of Preferred Stock
subject to Submitted Bids described in clauses (B) and (C) of this
paragraph 8(e)(i) (the "Remaining Shares"). In such event such Existing
Holder shall be required to sell shares of Preferred Stock subject to
such Submitted Bid, but only in an amount equal to the difference
between (x) the number of shares of Preferred Stock then held by such
Existing Holder subject to such Submitted Bid and (y) the number of
shares of Preferred Stock obtained by multiplying the number of
Remaining Shares by a fraction the numerator of which shall be the
number of shares of Preferred Stock held by such Existing Holder subject
to such Submitted Bid and the denominator of which shall be the sum of
the number of shares of Preferred Stock subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each Potential Holder specifying a rate
that is equal to the Winning Bid Rate shall be accepted, but only in an
amount equal to the number of shares of Preferred Stock obtained by
multiplying the difference between the Available Preferred Stock and the
number of shares of Preferred Stock subject to Submitted Bids described
in clauses (B), (C) and (D) of this paragraph 8(e)(i) by a fraction
the numerator of which shall be the number of shares of Preferred Stock
subject to such Submitted Bid and the denominator of which shall be the
sum of the number of shares of Preferred Stock subject to such Submitted
Bids made by all such Potential Holders that specified a rate equal to
the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the outstanding shares of Preferred Stock are the subject of
Submitted Hold Orders), subject to the provisions of paragraph 8(e)(iii),
Submitted Orders shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus entitling such Existing Holders to continue to hold the
shares of Preferred Stock that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
accepted and such Potential Holder shall purchase the number of shares
of Preferred Stock subject to such Submitted Bid; and
(C) the Submitted Bid of each Existing Holder specifying any rate
that is higher than the Maximum Applicable Rate shall be rejected, thus
requiring each such Existing Holder to sell the shares of Preferred
Stock that are the subject of such Submitted Bid, and the Submitted Sell
Order of each Existing Holder shall be accepted, in both cases only in
an amount equal to the difference between (x) the number of shares of
Preferred Stock then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (y) the number of shares of
Preferred Stock obtained by multiplying the difference between the
Available Preferred Stock and the aggregate number of shares of
Preferred Stock subject to Submitted Bids described in clauses (A) and
(B )of this paragraph 8(e)(ii) by a fraction the numerator of which
shall be the number of shares of Preferred Stock held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the aggregate number of shares of
Preferred Stock subject to all such Submitted Bids and Submitted Sell
Orders.
(iii) If, as a result of the procedures described in paragraphs 8(e)(i)
or 8(e)(ii), 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 Preferred Stock on any Auction Date, the Auction Agent shall,
in such manner as it shall determine, round up or down the number of shares
of Preferred Stock to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that the number of shares purchased
or sold by each Existing Holder or Potential Holder on such Auction Date
shall be whole shares of Preferred Stock, even if such allocation results in
one or more of such Potential Holders not purchasing shares of Preferred
Stock on such Auction Date or any Existing Holder not selling shares of
Preferred Stock on such Auction Date.
(iv) Based on the results of each Auction, the Auction Agent shall
determine the aggregate number of shares of Preferred Stock to be purchased
and the aggregate number of shares of Preferred Stock to be sold by
Potential Holders and Existing Holders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to
the extent that such aggregate number of shares to be purchased and such
aggregate number of shares to be sold differ, determine to which other
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 Preferred Stock
(f) Participation in Auctions. Neither the Corporation nor any Affiliate of
the Corporation may submit an Order in any Auction.
(g) Miscellaneous.
(i) The Board of Directors of the Corporation may interpret the
provisions of this paragraph 8 to resolve any inconsistency or ambiguity,
remedy any formal defect or make any other change or modification which does
not adversely affect the rights of Existing Holders of Preferred Stock. If
such inconsistency, ambiguity or defect reflects an inaccurate provision
hereof, the Board of Directors may, in appropriate circumstances, as
permitted by law, authorize the filing of a Certificate of Correction.
(ii) (A) An Existing Holder may sell, transfer or otherwise dispose of
shares of Preferred Stock only (1) pursuant to a Bid or a Sell Order placed
in an Auction in accordance with the procedures set forth in this paragraph
8, (2) to or through a Broker-Dealer or (3) to a Person that has delivered a
signed Purchaser's Letter to the Auction Agent, provided that as a condition
to such transfer (in the case of all transfers other than those pursuant to
Auctions), such Existing Holder, the transferee or the transferee's
Broker-Dealer or Agent Member of the Securities Depository shall advise the
Auction Agent of such transfer; and
(B) except as otherwise provided by law, all of the outstanding
shares of Preferred Stock shall be represented by a separate certificate or
certificates registered in the name of the nominee of the Securities
Depository, and no Person acquiring shares of Preferred Stock shall be
entitled to receive a certificate representing such shares.
(iii) The Corporation shall exercise its best efforts to maintain an
Auction Agent pursuant to an agreement containing terms not materially less
favorable to the Corporation than the terms of the Auction Agent Agreement
first entered into by the Corporation pursuant to the resolutions adopted by
the Board of Directors of the Corporation on November 11, 1988.
(iv) The Corporation shall use its best efforts to maintain the Surety
Bond issued by Financial Security Assurance, Inc.
(h) Headings of Subdivisions. The headings of the various subdivisions of
this paragraph 8 are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
<PAGE>
TO BE SUBMITTED TO THE BROKER-DEALER LISTED BELOW, WHO WILL
THEN DELIVER COPIES ON YOUR BEHALF TO THE AUCTION AGENT.
Drexel Burnham Lambert Incorporated
55 Broad Street, 2nd Floor
New York, New York 10004
Attention: Calvin Clark
Telecopier No. (212) 968-9881
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS
To: The Company
The Auction Agent
A Broker-Dealer
An Agent Member
Other Persons
1. This letter is designed to apply to auctions for publicly or privately
offered debt or equity securities ("Securities") of any issuer ("Company") which
are described in any final prospectus or other offering materials relating to
such Securities as the same may be amended or supplemented (collectively, with
respect to the particular Securities concerned, the "Prospectus") and which
involve periodic rate settings through auctions ("Auctions"). This letter shall
be for the benefit of any Company and of any trust company or auction agent
(collectively, "trust company"), broker-dealer, agent member, securities
depository or other interested person in connection with any Securities and
related Auctions (it being understood that such persons may be required to
execute specified agreements and nothing herein shall alter such requirements).
The terminology used herein is intended to be general in its application and not
exclude any Securities in respect of which (in the Prospectus or otherwise)
alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions as
set forth in the Prospectus.
3. We agree that any bid or sell order placed by us shall constitute an
irrevocable offer by us to purchase or sell the Securities subject to such bid
or sell order, of such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction, at the applicable price, all as
set forth in the Prospectus, and that if we fail to place a bid or sell order
with respect to Securities owned by us with a broker-dealer on any auction date,
or a brokerdealer to which we communicate a bid or sell order fails to submit
such bid or sell order to the trust company concerned, we shall be deemed to
have placed a hold order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such brokerdealer for
Securities purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, to or through a broker-dealer or, when permitted in the
Prospectus, to a person that has signed and delivered, or caused to be delivered
on its behalf to the applicable trust company a letter substantially in the form
of this letter (or other applicable purchaser's letter), provided that in the
case of all transfers other than pursuant to Auctions we or our broker-dealer or
agent member shall advise such trust company of such transfer. We understand
that a restrictive legend will be placed on certificates representing the
Securities and stop-transfer instructions will be issued to the transfer agent
and/or registrar, all as set forth in the Prospectus. We agree to comply with
any other transfer restrictions or other related procedures as described in the
Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by a global certificate
registered in the name of the applicable securities depository or its nominee,
that we will not be entitled to receive any certificate representing the
Securities and that our ownership of any Securities will be maintained in book
entry form by the securities depository for the account of our agent member,
which in turn will maintain records of our beneficial ownership. We authorize
and instruct our agent member to disclose to the applicable trust company such
information concerning our beneficial ownership of Securities as such trust
company shall request.
6. We acknowledge that partial deliveries of Securities purchased in
Auctions may be made to us and such deliveries shall constitute good delivery as
set forth in the Prospectus.
7. This letter is not a commitment by us to purchase any Securities.
8. This letter supersedes any prior-dated version of this Master Purchaser's
Letter, and supplements any prior- or post-dated purchaser's letter specific to
particular Securities; any recipient of this letter may rely upon it until such
recipient has received a signed writing amending or revoking this letter.
9. The descriptions of Auction Procedures set forth in each applicable
Prospectus are incorporated by reference herein and, in case of any conflict
between this letter and any such description, such description shall control.
10. Any xerographic or other copy of this letter shall be deemed of equal
effect as a signed original.
11. Our agent member of the securities depository currently is .
12. Our personnel authorized to place orders in Auctions with broker-dealers
for the purposes set forth in the Prospectus currently is/are ,
telephone number ( ) - .
13. Our taxpayer identification number is .
14. In the case of each offer to purchase, purchase, offer to sell or sale
by us of Securities not registered under the Securities Act of 1933, as amended
(the "Act"), we represent and agree as follows:
A. We understand and expressly acknowledge that the Securities have not
been and will not be registered under the Act and, accordingly, that the
Securities may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless an applicable exemption from the registration
requirements of the Act is available.
B. We hereby confirm that any purchase of Securities made by us will be
for our own account, or for the account of one or more parties for which we
are acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which
will acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by
us or such party, as the case may be, will have previously invested in
similar types of instruments and will be able and prepared to bear the
economic risk of investing in and holding such Securities.
C. We acknowledge that prior to purchasing any Securities we shall have
received a Prospectus (private placement memorandum) with respect thereto
and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers thereto, as we deem
necessary in connection with our decision to purchase Securities.
D. We recognize that the Company and broker-dealers will rely upon the
truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
15. The Purchaser consents to the use of custody arrangements for the
Securities, if any, on such terms as shall be necessary or appropriate in
connection with insurance arrangements, if any, for the Securities or otherwise
and agrees that custody receipts issued in connection with any such arrangements
shall be treated in the same manner as and be deemed Securities for all purposes
hereunder and under the Company's governing documents and in Auctions. Copies of
relevant documents in connection with any such arrangements may be obtained upon
request to the address or telephone number set forth above. Receipt of any such
custody receipts shall constitute acceptance of the terms thereof.
16. The Purchaser acknowledges that, pursuant to the terms of any custody
arrangement with respect to the Purchaser's Securities, to the extent that
Financial Security Assurance Inc. or any other surety under a surety bond
unconditionally and irrevocably guaranteeing scheduled payments on the
Securities (the "Surety"), makes scheduled payments on the Purchaser's
Securities, may exercise such Surety the Purchaser's voting rights with respect
to the Securities and hereby assigns the Purchaser's right to receive from the
Company any payments on the Purchaser's Securities to which such scheduled
payments made by the Surety relates; and further acknowledges that the Surety
shall be subrogated to the Purchaser's rights with respect to the Securities
until the Company makes such payments on the Purchaser's Securities to which
such scheduled payments made by the Surety relate or the Company otherwise
reimburses the Surety for any scheduled payments so made by the Surety.
-------------------------
(Name of Purchaser)
Dated:
-----------------------------------
Mailing Address of Purchaser
By:
- -------------------------------------- ---------------------
Printed Name:
- -------------------------------------- ---------------------
Title:
- ------------------------------------- ---------------------
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE HEREIN, IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. 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 NOT LAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN 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.
TABLE OF CONTENTS
Page
Prospectus Summary ................................... 3
The Fund ............................................. 11
Capitalization ....................................... 12
Use of Proceeds ...................................... 13
Investment Objective and Policies .................... 13
Directors and Officers ............................... 26
The Investment Adviser ............................... 28
Portfolio Trading .................................... 30
Determination of Net Asset Value ..................... 31
Share Repurchases; Conversion to Open-End Status ..... 32
Federal Taxation ..................................... 34
The Auction .......................................... 37
Description of Preferred Stock ....................... 44
Description of Notes ................................. 51
Description of Common Stock .......................... 57
Financial Security ................................... 58
Surety Arrangement ................................... 61
Preferred Stock and Note Ratings ..................... 66
Custodian, Transfer Agents, Dividend Disbursing
Agent, Paying Agents and Registrars ................ 66
Underwriting ......................................... 66
Legal Opinions ....................................... 67
Reports to Shareholders .............................. 67
Experts .............................................. 68
Further Information .................................. 68
Glossary of Terms .................................... 69
Report of Independent Public Accountants ............. 71
Balance Sheet ........................................ 72
Report of Independent Public Accountants of
Financial Security Assurance Inc. .................. 75
Financial Security Assurance Inc. and Subsidiary
Consolidated Financial Statements .................. 76
Appendix A: Ratings of Corporate Obligations ......... A-1
Appendix B: Auction Illustrations ................... B-1
Appendix C: Settlement Procedures .................... C-1
Appendix D: Master Purchaser's Letter ................ D-1
Appendix E: Auction Procedures ....................... E-1
UNTIL DECEMBER 23, 1988 (25 DAYS AFTER THE EFFECTIVENESS DATE), 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.
<PAGE>
300 SHARES
PROSPECT STREET(SM)
HIGH INCOME
PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED
STOCKS(SM)
("TARPS(SM)")
unconditionally and irrevocably
guaranteed as to Scheduled
Payments, as defined
herein, pursuant to a
surety bond to be issued by
[LOGO] FINANCIAL
SECURITY
ASSURANCE(SM)
PROSPECTUS
November 28, 1988
<PAGE>
EXHIBIT B
<PAGE>
TO BE SUBMITTED TO THE BROKER-DEALER LISTED BELOW, WHO WILL THEN
DELIVER COPIES ON YOUR BEHALF TO THE AUCTION AGENT.
Bear, Stearns & Co. Inc.
Preferred Stock Sales and Trading Desk
245 Park Avenue
New York, New York 10167
Telephone number (212) 272-5098
Facsimile (212) 272-8151
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS
To: The Company
The Auction Agent
A Broker-Dealer
An Agent Member
Other Persons
1. This letter is designed to apply to auctions for publicly or
privately offered debt or equity securities ("Securities") of any issuer
("Company") which are described in any final prospectus or other offering
materials relating to such Securities as the same may be amended or supplemented
(collectively, with respect to the particular Securities concerned, the
"Prospectus") and which involve periodic rate settings through auctions
("Auctions"). This letter shall be for the benefit of any Company and of any
trust company or auction agent (collectively, "trust company"), broker-dealer,
agent member, securities depository or other interested person in connection
with any Securities and related Auctions (it being understood that such persons
may be required to execute specified agreements and nothing herein shall alter
such requirements). The terminology used herein is intended to be general in its
application and not exclude any Securities in respect of which (in the
Prospectus or otherwise) alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions as
set forth in the Prospectus.
3. We agree that any bid or sell order placed by us shall constitute an
irrevocable offer by us to purchase or sell the Securities subject to such bid
or sell order, of such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction, at the applicable price, all as
set forth in the Prospectus, and that if we fail to place a bid or sell order
with respect to Securities owned by us with a broker-dealer on any auction date,
or a brokerdealer to which we communicate a bid or sell order fails to submit
such bid or sell order to the trust company concerned, we shall be deemed to
have placed a hold order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such brokerdealer for
Securities purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, to or through a broker-dealer or, when permitted in the
Prospectus, to a person that has signed and delivered, or caused to be delivered
on its behalf, to the applicable trust company a letter substantially in the
form of this letter (or other applicable purchaser's letter), provided that in
the case of all transfers other than pursuant to Auctions we or our
broker-dealer or agent member shall advise such trust company of such transfer.
We understand that a restrictive legend will be placed on certificates
representing the Securities and stop-transfer instructions will be issued to the
transfer agent and/or registrar, all as set forth in the Prospectus. We agree to
comply with any other transfer restrictions or other related procedures as
described in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by a global certificate
registered in the name of the applicable securities depository or its nominee,
that we will not be entitled to receive any certificate representing the
Securities and that our ownership of any Securities will be maintained in book
entry form by the securities depository for the account of our agent member,
which in turn will maintain records of our beneficial ownership. We authorize
and instruct our agent member to disclose to the applicable trust company such
information concerning our beneficial ownership of Securities as such trust
company shall request.
6. We acknowledge that partial deliveries of Securities purchased in
Auctions may be made to us and such deliveries shall constitute good delivery as
set forth in the Prospectus.
7. This letter is not a commitment by us to purchase any Securities.
8. This letter supersedes any prior-dated version of this Master
Purchaser's Letter, and supplements any prior- or post-dated purchaser's letter
specific to particular Securities; any recipient of this letter may rely upon it
until such recipient has received a signed writing amending or revoking this
letter.
9. The descriptions of Auction Procedures set forth in each applicable
Prospectus are incorporated by reference herein and, in case of any conflict
between this letter and any such description, such description shall control.
10. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
11. Our agent member of the securities depository currently is .
12. Our personnel authorized to place orders in Auctions with
broker-dealers for the purposes set forth in the Prospectus currently is/are
, telephone number ( ) - .
13. Our taxpayer identification number is .
14. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Act"), we represent and agree as follows:
A. We understand and expressly acknowledge that the Securities have not
been and will not be registered under the Act and, accordingly, that the
Securities may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless an applicable exemption from the registration
requirements of the Act is available.
B. We hereby confirm that any purchase of Securities made by us will be
for our own account, or for the account of one or more parties for which we
are acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which
will acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by
us or such party, as the case may be, will have previously invested in
similar types of instruments and will be able and prepared to bear the
economic risk of investing in and holding such Securities.
C. We acknowledge that prior to purchasing any Securities we shall have
received a Prospectus (private placement memorandum) with respect thereto
and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers thereto, as we deem
necessary in connection with our decision to purchase Securities.
D. We recognize that the Company and broker-dealers will rely upon the
truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
15. The Purchaser consents to the use of custody arrangements for the
Securities, if any, on such terms as shall be necessary or appropriate in
connection with insurance arrangements, if any, for the Securities or otherwise
and agrees that custody receipts issued in connection with any such arrangements
shall be treated in the same manner as and be deemed Securities for all purposes
hereunder and under the Company's governing documents and in Auctions. Copies of
relevant documents in connection with any such arrangements may be obtained upon
request to the address or telephone number set forth above. Receipt of any such
custody receipts shall constitute acceptance of the terms thereof.
16. The Purchaser acknowledges that, pursuant to the terms of any
custody arrangement with respect to the Purchaser's Securities, to the extent
that Financial Security Assurance Inc. or any other surety under a surety bond
unconditionally and irrevocably guaranteeing scheduled payments on the
Securities (the "Surety"), makes scheduled payments on the Purchaser's
Securities, may exercise such Surety the Purchaser's voting rights with respect
to the Securities and hereby assigns the Purchaser's right to receive from the
Company any payments on the Purchaser's Securities to which such scheduled
payments made by the Surety relates; and further acknowledges that the Surety
shall be subrogated to the Purchaser's rights with respect to the Securities
until the Company makes such payments on the Purchaser's Securities to which
such scheduled payments made by the Surety relate or the Company otherwise
reimburses the Surety for any scheduled payments so made by the Surety.
------------------------------------
(Name of Purchaser)
Dated:
----------------------------
Mailing Address of Purchaser
By:
- ------------------------------------ ---------------------
Printed Name:
- ------------------------------------ ---------------------
Title:
- ------------------------------------ ---------------------
<PAGE>
SCHEDULE B
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
RESOLUTIONS ADOPTED AT A BOARD MEETING HELD
OCTOBER 13, 1993
RESOLVED, that an Amendment and Extension (the "Amendment") of up to five years
of the Broker-Dealer Agreement dated as of May 7, 1990 entered into by and among
the Fund and The Bank of New York, as Auction Agent and Bear, Stearns & Co. Inc.
with respect to the Fund's outstanding Taxable Auction Rate Preferred Stock be
and hereby is, in all respects authorized and approved; and it is further
RESOLVED, that the Fund elects to extend the term of the Insurance Agreement
dated as of December 1, 1988 between Financial Security Assurance Inc.
("Financial Security") and the Fund and the Surety Bond issued by Financial
Security to December 5, 1998, such Surety Bond as extended to cover up to
$20,000,000 (200 Taxable Auction Rate Preferred Shares) and all actions taken by
officers of the Fund in connection with the foregoing extension be, and they
hereby are, ratified, approved and confirmed.
RESOLVED, that the President and the Treasurer of this Fund be, and each of them
hereby is, authorized and empowered in the name and on behalf of this Fund to
negotiate, execute and deliver the Amendment to the aforesaid Broker-Dealer
Agreement together with such amendments and modifications as the officer
executing the same shall approve, with such approval to be conclusively
evidenced by such execution.
RESOLVED, that all actions taken by the President of the Fund in connection with
the execution and delivery of a Notice to Extend Insurance Agreement which
extends the term of the Insurance Agreement and the Surety Bond be and they
hereby are ratified, approved and confirmed (except that the Surety Bond as
extended will cover up to $20,000,000 (200 Taxable Auction Rate Preferred
Shares)).
RESOLVED, that the officers of this Fund be, and each of them hereby is,
authorized and empowered to take such further actions and execute such
additional documents as they may deem necessary or advisable, upon the advice of
counsel, to effect the transactions contemplated by the Amendment to the
Broker-Dealer Agreement and the Notice to Extend Insurance Agreement and to
carry out the foregoing resolutions, the transactions contemplated thereby and
the terms and provisions of such documents.
/s/ Karen J. Thelen
------------------------
Karen J. Thelen
Secretary
<PAGE>
SCHEDULE C
================================================================================
BROKER-DEALER AGREEMENT
among
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
and
BANKERS TRUST COMPANY
and
BEAR, STEARNS & CO. INC.
Dated as of May 7, 1990
Relating to
TAXABLE AUCTION RATE PREFERRED STOCK
of
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
================================================================================
<PAGE>
BROKER-DEALER AGREEMENT dated as of May 7, 1990 among PROSPECT STREET HIGH
INCOME PORTFOLIO INC., a Maryland corporation (the "Company"), BANKERS TRUST
COMPANY, a New York banking corporation (the "Auction Agent") (not in its
individual capacity but solely as agent of the Company, pursuant to authority
granted to it in the Auction Agent Agreement dated as of May 7, 1990, between
the Company and the Auction Agent (the "Auction Agent Agreement") and Bear,
Stearns & Co. Inc. (together with its successors and assigns hereinafter
referred to as "BD").
The Company has issued 300 shares of Taxable Auction Rate Preferred Stock,
with a liquidation preference of $100,000 per share and without par value (all
such shares and, as the context requires, any other shares of the same class
subsequently issued by the Company being referred to as the "Preferred Shares"),
pursuant to its Articles of Incorporation (as defined below).
The Articles of Incorporation provide that the dividend rate on the
Preferred Shares for each Dividend Period after the Initial Dividend Period
shall be the Applicable Rate, which, under certain conditions, shall be the rate
per annum that a commercial bank, trust company or other financial institution
appointed by the Company advises results from implementation of the Auction
Procedures (as defined below). The Board of Directors of the Company has adopted
a resolution appointing Bankers Trust Company as Auction Agent for purposes of
the Auction Procedures, and pursuant to Section 2.5(d) of the Auction Agent
Agreement, the Company has requested and directed the Auction Agent to execute
and deliver this Agreement.
The Auction Procedures require the participation of one or more
Broker-Dealers.
The Board of Directors of the Company has adopted a resolution authorizing
and directing the Company to enter into this Agreement pursuant to which BD will
become the exclusive Broker-Dealer with respect to the Preferred Shares, subject
to the terms and conditions hereof.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Auction Agent and BD agree as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined by Reference to Articles of Incorporation. Capitalized
terms not defined herein shall have the respective meanings specified in the
Articles of Incorporation.
1.2 Terms Defined Herein. As used herein and in the Settlement Procedures
(as defined below), the following terms shall have the following meanings,
unless the context otherwise requires:
(a) "Articles of Incorporation" shall mean the Articles of Amendment
and Restatement of the Company, filed by the Company on November 25, 1988 in the
Office of the Department of Assessments and Taxation of the State of Maryland, a
copy of which is attached hereto as Exhibit A, as the same may be amended from
time to time.
(b) "Auction" shall have the meaning specified in Section 2.1 hereof.
(c) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Article IV(C), paragraph 8 of the Articles of Incorporation.
(d) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Assistant Secretary and Assistant Treasurer
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 BD.
(e) "BD Officer" shall mean each officer or employee of BD designated
as a "BD Officer" for purposes of this Agreement in a communication to the
Auction Agent.
(f) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.
(g) "Master Purchaser's Letter" shall mean a letter addressed to the
Company, the Auction Agent and a Broker-Dealer, substantially in the form
attached hereto as Exhibit B.
(h) "Prospectus" shall mean the last prospectus with respect to the
Preferred Shares, including any sticker supplement thereto not theretofore
consolidated into a post-effective amendment, filed by the Company pursuant to
either Rule 497(h) or Rule 430A of the rules and regulations of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
(i) "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 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 provisions of the Auction Procedures will be followed by the
Auction Agent for the purpose of determining the Applicable Rate. Such 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 of this Agreement as if such provisions were fully
set forth herein.
(c) BD is delivering herewith a Master Purchaser's Letter executed by BD.
(d) To the extent permitted by law, BD may participate in Auctions for its
own accounts, provided that BD has executed a Master Purchaser's Letter.
2.2 Preparation of Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date, the Auction Agent shall
advise BD by telephone of the 30-day "AA" Composite Commercial Paper Rate and
the Maximum and Minimum Applicable Rates in effect on such Auction Date.
(b) In the event that the Auction Date for any Auction shall be changed
after the Auction Agent has given the notice referred to in clause (vii) of
paragraph (a) of the Settlement Procedures, the Auction Agent, by such means as
the Auction Agent deems practicable, shall give notice of such change to BD 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, BD shall promptly notify customers of BD who BD
believes are Existing Holders of Preferred Shares of such change in the Auction
Date.
(c) The Auction Agent or the Company from time to time may request BD to
provide either of them with a list of the respective customers BD believes are
Existing Holders of Preferred Shares. BD shall comply with any such request, and
the Auction Agent shall keep confidential any such information, including
information received as to the identify of Bidders in any Auction, and shall not
disclose any such information so provided to any Person other than the Company;
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 the list of customers BD
believes are Existing Holders of Preferred Shares and information related
thereto only to its officers, employees, agents or representatives in the
Corporate Trust and Agency Group who need to know such information for the
purposes of acting in accordance with this Agreement and shall 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) The Auction Agent is not required to accept the Master Purchaser's
Letter for any Potential Holder for an Auction unless it is received by the
Auction Agent by 3:00 P.M. on the Business Day next preceding the Auction.
2.3 Auction Schedule; Method of Submission of Orders.
(a) The Company and the Auction Agent shall conduct Auctions in accordance
with the schedule set forth below. Such schedule may be changed at any time by
the Auction Agent with the consent of the Company, which consent shall not be
unreasonably withheld. The Auction Agent shall give notice of any such change to
BD. Such notice shall be received prior to the first Auction Date on which any
such change shall be effective.
Time Event
- ---- -----
By 9:30 A.M. Auction Agent advises the Company and BD of
30-day "AA" Composite Commercial Paper Rate
and the Maximum and Minimum Applicable Rates
as set forth in Section 2.2(a) hereof.
9:30 A.M. - 12:30 P.M. Auction Agent assembles information
communicated to it by BD as provided in
Article IV(C), paragraph 8(c) of the Articles
of Incorporation. Submission Deadline is
12:30 P.M.
Not earlier than Auction Agent makes determinations pursuant
12:30 P.M. to Article IV(C), paragraph 8(d)(i) of the
Articles of Incorporation.
By approximately Auction Agent advises Company of results of
3:00 P.M. Auction as provided in Article IV(c),
paragraph 8(d)(ii) of the Articles of Incorpo
ration.
Submitted Bids and Submitted Sell Orders are
accepted and rejected in whole or in part
and Preferred Shares allocated as provided
in Article IV(C), paragraph 8(e) of the
Articles of Incorporation.
Auction Agent gives notice of Auction results
as set forth in Section 2.4(a) hereof.
(b) BD agrees to maintain a list of Potential Holders and to contact the
Potential Holders on such list on or prior to each Auction Date for the purposes
set forth in Article IV(C), paragraph 8(b) of the Articles of Incorporation.
Subject to Section 4.2(d) hereof, for as long as the Preferred Shares are rated
AAA by Standard & Poor's Corporation or "aaa" by Moody's Investor Service, BD
agrees to use commercially reasonable efforts to seek to obtain with respect to
each Auction during the term hereof Hold Orders and Bid Orders from Existing
Holders and Potential Holders. BD agrees, upon the request of a Potential
Holder, to deliver to such Potential Holder either (i) a Prospectus with such
legends or stamps regarding non-reliance by Potential Holders on certain
information therein (other than with respect to information concerning the
Preferred Shares and Settlement and Auction Procedures) as BD deems appropriate
or (ii) the Company's summary description of the Preferred Shares and the
Settlement Procedures and Auction Procedures.
(c) BD agrees not to sell, assign or dispose of any Preferred Shares to any
Person who has not delivered a signed Master Purchaser's Letter to the Auction
Agent.
(d) BD shall submit Orders to the Auction Agent in writing in substantially
the form attached hereto as Exhibit D. BD shall submit separate Orders to the
Auction Agent for each Potential Holder or Existing Holder on whose behalf BD is
submitting an Order and shall not net or aggregate the Orders of Potential
Holders or Existing Holders on whose behalf BD is submitting Orders.
(e) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit E, of transfer of Preferred
Shares made through BD by an Existing Holder to another Person other than
pursuant to an Auction, and (ii) a written notice, substantially in the form
attached hereto as Exhibit F. of the failure of any Preferred Shares to be
transferred to or by any Person that purchased or sold Preferred Shares through
BD pursuant to an Auction. The Auction Agent is not required to accept any
notice delivered pursuant to the terms of the foregoing sentence with respect to
an Auction unless it is received by the Auction Agent by 3:00 P.M. on the
Business Day next preceding the applicable Auction Date.
2.4 Notice of Auction Results.
(a) On each Auction Date, the Auction Agent shall notify BD by telephone as
set forth in paragraph (a) of the Settlement Procedures. On the Business Day
next succeeding such Auction Date, the Auction Agent shall notify BD in writing
of the disposition of all Orders submitted by BD in the Auction held on such
Auction Date.
(b) BD shall notify each Existing Holder or Potential Holder on whose
behalf BD has submitted an Order as set forth in paragraph (b) of the Settlement
Procedures and take such other action as is required of BD pursuant to the
Settlement Procedures.
If any Existing Holder selling Preferred Shares in an Auction fails to
deliver such shares, the BD of any Person that was to have purchased Preferred
Shares in such Auction may deliver to such Person a number of whole Preferred
Shares that is less than the number of Preferred Shares that otherwise was to be
purchased by such Person. In such event, the number of Preferred Shares to be so
delivered shall be determined by such BD. Delivery of such lesser number of
Preferred Shares shall constitute good delivery. Upon the occurrence of any such
failure to deliver Preferred Shares, such BD shall deliver to the Auction Agent
the notice required by Section 2.3(e)(ii) hereof. Notwithstanding the foregoing
terms of this Section 2.4(b), any delivery or non-delivery of Preferred Shares
which represents 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
terms of Section 2.3(e)(ii) hereof. The Auction Agent shall have no duty or
liability with respect to enforcement of this Section 2.4.
2.5 Fees and Service Charges to be Paid to BD.
(a) Not later than the date of execution hereof, the Company shall pay to
BD same-day funds in an amount equal to the product of (x) 1/2 of 1%, (y)
$100,000 and (z) the aggregate number of Preferred Shares outstanding on the
date hereof. As soon as practicable after receipt by the Company of invoices
therefor, the Company shall pay (or reimburse BD if BD has paid) for (i) the
costs of preparation and printing of the Prospectus with appropriate legends or
the summary description of the Preferred Shares, in each case as referred to in
Section 2.3(b) hereof, to be used by BD in seeking to obtain Hold Orders and Bid
Orders for the Preferred Shares and (ii) the fees and charges and disbursements
of BD's counsel, not in excess of $25,000 in connection with BD entering into
this Agreement.
(b) On May 15, 1990 and on each August 15, November 15 and February 15
thereafter during the term of this Agreement (or if any such day is not a
Business Day then on the next preceding Business Day) the Company shall direct
the Auction Agent to pay to BD (out of funds previously paid to the Auction
Agent for such purpose by the Company) same-day funds in an amount equal to the
product of (i) one-quarter (or, in the case of the first such payment
twenty-eight one hundredths), (ii) 1/2 of 1%, (iii) $100,000 and (iv) the
aggregate number of Preferred Shares outstanding on each such date.
(c) Within five business days after the end of each quarterly period
described in paragraph (b) above, in the event that any of the Preferred Shares
shall have been redeemed, repurchased or exchanged for securities other than
shares the dividend rate of which is determined by auction procedures on one or
more occasions during such period, BD shall pay same day funds to the Company in
an amount equal to the sum, for each Preferred Share so redeemed, repurchased or
exchanged and not offset by the issuance of a new Preferred Share during such
period, of the product for each such Preferred Share of (i) one-quarter (or, in
the case of the first such payment twenty-eight one hundredths), (ii) 1/2 of 1%,
(iii) $100,000 and (iv) a fraction the numerator of which is the number of days
during such period on which such Preferred Share was not outstanding and the
denominator of which is the number of days during such period.
(d) At the end of each quarterly period described in paragraph (b) above,
in the event that for any Dividend Period during such quarter the Applicable
Rate shall be greater than 150% of the 30 Day "AA" Composite Commercial Paper
Rate there shall be determined (i) a fraction the numerator of which is the
number of days during any Dividend Period(s) on which the Applicable Rate was
greater than 150% and not more than 165% of the 30 Day "AA" Composite Commercial
Paper Rate and the denominator of which is the number of days during such period
and (ii) a fraction the numerator of which is the number of days during any
Dividend Period(s) on which the Applicable Rate was greater than 165% of the 30
Day "AA" Composite Commercial Paper Rate and the denominator of which is the
number of days during such period. Any such fraction determined pursuant to
clause (i) above shall be multiplied by one-half of the quarterly fee as
determined in paragraph (b) above, as the case may be, and the dollar amount
resulting from such multiplication shall be rebated by BD to the Company in
same-day funds. Any such fraction determined pursuant to clause (ii) above shall
be multiplied by the quarterly fee as determined in paragraph (b) above, and the
dollar amount resulting from such multiplication shall be rebated by BD to the
Company in same-day funds.
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 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 gross 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 Action Agent shall have been grossly 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 by this Agreement and
upon any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document believed
by it to be genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized by this Agreement which the Action Agent
believes in good faith to have been given by the Company or BD. The Auction
Agent may record telephone communications with BD.
(b) The Auction Agent may consult with counsel of its own 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.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.
3.3 Auction Agent's Disclaimer. The Auction Agent makes no representation
as to the validity or adequacy of this Agreement or the Preferred Shares.
4. Agreements of the Company.
4.1 Representations and Warranties of the Company. The Company represents
to BD as follows:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation, with full
power and authority to conduct all activities conducted by it, to own or lease
all assets owned or leased by it and to conduct its business as described in the
Prospectus and is duly licensed and qualified to do business and in good
standing as a foreign corporation in each jurisdiction in which its ownership or
leasing of property or its conducting of business requires such qualification
and in which the failure to qualify would have a material adverse effect on its
business or operations.
(b) The Preferred Shares have been duly authorized and are duly and validly
issued and are fully paid and nonassessable.
(c) Each of this Agreement, the Auction Agent Agreement, the Investment
Advisory Agreement dated November 28, 1988 between the Company and Prospect
Street Investment Management Co., Inc., a Massachusetts corporation, the
Insurance Agreement (as amended, the "Insurance Agreement") dated as of December
1, 1988 between the Company and Financial Security Assurance Inc., a New York
corporation, (collectively, the "Agreements") has been duly and validly
authorized, executed and delivered by the Company; each of the Agreements, the
Surety Custody Agreement dated November 28, 1988 between Financial Security
Assurance Inc. and Bankers Trust Company, and the rights and preferences of the
Preferred Shares set forth in Article IV(C) of the Articles of Incorporation
complies with all provisions of the Investment Company Act of 1940, as amended
(the "Investment Company Act"), the Investment Advisers Act of 1940, as amended
(the "Advisers Act") and the published rules and regulations adopted by the
Securities and Exchange Commission under the Investment Company Act (the
"Investment Company Act Rules") and the Advisers Act (the "Advisers Act Rules"),
as the case may be, applicable to the Company; true and correct copies of each
of the Agreements and of the Surety Custody Agreements are included in Schedule
A hereto; and each of the Agreements constitutes the legal, valid and binding
obligation of the Company enforceable in accordance with its terms, subject, as
to enforcement, to applicable bankruptcy, reorganization, insolvency or other
similar laws relating to or affecting creditors' rights generally and to
equitable principles that may restrict the availability of remedies.
(d) Neither (i) the execution and delivery by the Company of the
Agreements, or (ii) the consummation by the Company of the transactions as
contemplated by the Agreements conflicts or will conflict with, or results or
will result in a breach of, the Articles of Incorporation or the By-laws of the
Company or any material agreement or instrument to which the Company is a party
or by which the Company is bound, or any law or regulation or any order or
regulation of any court, governmental instrumentality or arbitrator applicable
to the Company.
(e) The Company is not currently in breach of, or in default under, any
written agreement or instrument to which it is a party or by which it or its
property is bound or affected.
(f) No consent, approval, authorization or order of any court or
governmental agency or body or securities exchange or securities association is
required by the Company for the consummation by the Company of the transactions
contemplated in the Agreements, except such as have been obtained.
(g) The Company is duly registered with the Securities and Exchange
Commission under the Investment Company Act as a closed-end diversified
management investment company.
(h) Arthur Andersen & Co., whose report appears in the most recent
amendment to the Company's registration statement under the Investment Company
Act, are independent public accountants with respect to the Company as required
by the Securities Act, the Investment Company Act, the Securities Act Rules and
the Investment Company Act Rules.
(i) The financial statements included in the most recent amendment to the
Company's registration statement under the Investment Company Act present fairly
the financial position of the Fund as at the date or for the periods indicated
and such statements have been prepared in conformity with generally accepted
accounting principles in the United States applied on a consistent basis.
(j) Since the date of the most recent amendment to the Company's
registration statement under the Investment Company Act, except as otherwise
stated therein, (i) there has been no material adverse change in the condition,
financial or otherwise, of the Company, whether or not arising in the ordinary
course of business, and (ii) there have been no transactions entered into by the
Company which are material to the Company other than those in the ordinary
course of business.
(k) The Company owns or possesses or has obtained all material governmental
licenses, permits, consents, orders, approvals and other authorizations, whether
foreign or domestic, necessary to carry on its business.
(l) Except as described in the Company's Report on Form 8-K filed on or
about April 25, 1990, there is no action, suit or proceeding before or by any
court or governmental agency or body, foreign or domestic, now pending, or, to
the knowledge of the Company, threatened against or affecting, the Company,
which might result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Company, or might
materially and adversely affect the properties or assets of the Company or is of
a character required to be described in the registration statement of the
Company under the Investment Company Act; and there are no contracts, franchises
or other documents that are of a character required to be described in, or that
are required to be filed as exhibits to the registration statement of the
Company under the Investment Company Act which have not been adequately
described or filed as required.
(m) The Company has directed the investment of its assets in such a manner
as to comply with the requirements of Subchapter M of the Internal Revenue Code
of 1986, as amended.
(n) Since November 28, 1988 the Company has been, and as of the date hereof
the Company continues to be, in full compliance with all provisions of the
Investment Company Act and the Investment Company Act Rules, including, but not
limited to, the asset coverage requirements of Section 18.
4.2 Covenants of the Company.
(a) If any Preferred Shares are outstanding at the time the Company will,
pursuant to the terms of the Insurance Agreement, extend the term of the Surety
Bond issued by Financial Security Assurance Inc. for the benefit of the
Preferred Shares through December 5, 1998; provided, however, that the Company
shall have no obligation to so extend such Surety Bond in the event that the
Company shall have obtained prior written confirmation from either of Standard &
Poor's Corporation or Moody's Investors Service that the lapse of such Surety
Bond would not adversely affect the AAA or "aaa" ratings, respectively, of the
Preferred Shares. In either event, the Company will comply with all provisions
of such Surety Bond and the Insurance Agreement for so long as such Surety Bond
remains in effect and the Company shall comply with all guidelines of Standard &
Poor's Corporation and/or of Moody's Investors Service in connection with their
AAA or "aaa" ratings, respectively, of the Preferred Shares.
(b) The Company will notify BD in writing within two Business Days after
the Company has knowledge that any of the representations and warranties set
forth in Section 4.1 shall in any way be untrue or incorrect or after a breach
by the Company of any of its covenants or agreements set forth in this Agreement
or in the Auction Agreement.
(c) The Company shall deliver to BD copies of all Portfolio Valuation
Reports, Certificate of Minimum Liquidity and all other reports and letters as
are required to be delivered to the Auction Agent pursuant to Section 7 of
Article IV (C) of the Articles of Incorporation. Such reports shall be delivered
to BD within the time period and in the manner set forth in such Section with
respect to deliveries to the Auction Agent.
(d) In the event that at any time during the term hereof (i) the Preferred
Shares shall be rated for a period of more than 45 consecutive days lower than
AAA by Standard & Poor's Corporation and lower than "Aaa" by Moody's Investors
Service, (ii) both Standard & Poor's Corporation and Moody's Investors Service
shall withdraw, rescind or revoke its rating of the Preferred Shares for a
period of more than 45 consecutive days or (iii) the event specified in clause
(i) above shall be true with respect to one of Standard & Poor's Corporation or
Moody's Investors Service and the event specified in clause (ii) above shall be
true with respect to the other of them, in each case for the time period stated
therein, then the Company shall, as soon as practicable and pursuant to and in
accordance with Section 5(a) of Article IV(C) of the Articles of Incorporation,
redeem or repurchase at liquidation preference plus accumulated and unpaid
dividends (whether or not earned or declared) all Preferred Shares then
outstanding.
(e) In the event that during the last year of effectiveness of the Surety
Bond, as it may be extended by the Company, the Applicable Rate shall be the
Maximum Applicable Rate in the last Auction that occurs during such year with
respect to which, after giving effect to any required notice period pursuant to
Section 5 of Article IV(C) of the Articles of Incorporation (or such other
notice period as is required by applicable law), the Company could effect a
redemption prior to the expiration of the term of the Surety Bond, then the
Company shall give any required notice of redemption or repurchase and shall,
prior to the expiration of the terms of the Surety Bond, redeem in the manner
provided for in Article IV(C) of the Articles of Incorporation or repurchase at
liquidation preference plus accumulated and unpaid dividends (whether or not
earned or declared) all Preferred Shares then outstanding.
(f) If the Company would be prohibited by the Investment Company Act from
redeeming or repurchasing any Preferred Shares as required herein and if any
senior securities representing indebtedness of the Company are then outstanding,
the Company will redeem, repurchase or repay as soon as practicable under the
terms of such indebtedness sufficient principal amount of such indebtedness as
shall permit the redemption or repurchase of Preferred Shares required hereby to
proceed. After the date hereof, the Company shall not incur any such
indebtedness which cannot be redeemed, repurchased or repaid in sufficient
amount and time frame to permit such redemption or repurchase of Preferred
Shares required hereby to proceed.
(g) The Company shall not designate any Person to act as an Additional
Broker-Dealer (as such term is defined in the Auction Agent Agreement or the
Articles of Incorporation) without the prior written approval of BD.
5. Miscellaneous.
5.1 Termination.
(a) This Agreement may be terminated by the Company only if (i) the Company
shall have redeemed or repurchased at liquidation value plus accumulated and
unpaid dividends all of the previously issued and outstanding Preferred Shares
or the Company shall have exchanged at liquidation value plus accumulated and
unpaid dividends all of the previously issued and outstanding Preferred Shares
for some other instrument or security having a AAA rating by Standard & Poor's
Corporation or a "aaa" rating by Moody's Investors Service; provided, however,
that if within twelve months after such termination the Company shall issue any
preferred stock the dividend rate of which is established periodically pursuant
to an auction or remarketing procedure, BD shall be entitled to serve as (x) the
lead managing underwriter or placement agent, as the case may be, in connection
with the initial issuance of such preferred stock, for such compensation as
shall be mutually agreed upon by the Company and BD and (y) the exclusive
Broker-Dealer therefor on substantially the same terms as set forth herein; (ii)
BD shall be insolvent or make a general assignment for the benefit of creditors;
(iii) another entity shall become the successor by operation of law to BD and
such entity shall have materially lower capital or materially lower standing in
the marketing and trading of preferred stocks than does BD immediately prior to
such succession; or (iv) the Applicable Rate established at the first Auction
occurring after the date hereof shall exceed 130% of the 30 Day "AA" Composite
Commercial Paper Rate. Any termination pursuant to clause (iv) above must be
made within three months after the Auction Date of such first Auction. If the
Company terminates this Agreement pursuant to clause (iv) above and the
preceding sentence, BD will rebate to the Company in same day funds the fee paid
by the Company pursuant to Section 2.5(a) hereof.
(b) This Agreement may be terminated by BD at any time upon not less than
25 business days' prior notice to each of the Company and the Auction Agent (i)
in the event that the events specified in any of Section 4.2(d)(i), (ii) or
(iii) shall occur and continue for the time period stated therein; (ii) in the
event that any of the representations and warranties of the Company set forth in
Section 4.1 shall be untrue in any material respect for a period of more than 45
consecutive days or the Company shall fail to observe in any material respect
any of its covenants in Section 4.2 and such failure (other than with respect to
Section 4.2(b)) shall continue for a period of more than 45 days after such
failure commences; or (iii) after February 14, 1994, it being understood and
agreed that contingent notice may be given at any time prior to the passage of
the cure periods applicable in clauses (i) and (ii) above and at any time prior
to February 14, 1994, such notices to take effect on the later of (x)
twenty-five business days after the giving of such notice or (y) the passage of
the specified time period without cure or, in the case of clause (iii) above,
the date specified therein.
(c) This Agreement may be terminated by the Auction Agent only as to itself
upon its resignation as Auction Agent upon not less than 25 calendar days prior
notice to the Company and BD.
5.2 Indemnification.
(a) The Company shall, to the extent permitted by law, indemnify and hold
harmless BD and its affiliates, directors, officers, employees and agents from
and against any and all losses, liabilities (including punitive or exemplary
damages and fines or penalties and any interest thereon), expenses (including
reasonable fees and disbursements of counsel and expenses of investigation and
defense), liens and other obligations (hereinafter individually, a "Loss" and,
collectively, "Losses") that BD or any of its affiliates directors, officers or
employees may suffer or incur which arise out of or result from (i) any breach
of any representation or warranty by the Company in this Agreement; (ii) any
breach of any covenant or agreement of the Company contained in this Agreement
or in the Auction Agent Agreement; (iii) the exercise or performance of any of
BD's duties hereunder, except Losses which are the result of gross negligence,
bad faith, reckless disregard or wilful and wanton misconduct on the part of BD
or its affiliates, directors, officers, employees and agents; and (iv) any
litigation, claim, grievance, action, suit, investigation or proceeding in any
court or before any administrative agency or other tribunal, but only to the
extent such Losses arise from the transactions contemplated by the Agreements
and only to the extent that the Losses are not the result of gross negligence,
bad faith or wilful and wanton misconduct on the part of BD or its affiliates,
directors, officers, employees and agents.
(b) In case any action, suit or proceeding (including any governmental or
regulatory investigation or proceeding) shall be brought against BD or its
affiliates, directors, officers and employees (the "indemnified parties") with
respect to which indemnity may be sought against the Company pursuant to the
terms hereof, the indemnified party shall promptly notify the Company in
writing, and the Company shall assume the defense thereof, including the
employment of counsel and the payment of all expenses. Any indemnified party
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 separate counsel shall be at the expense of such indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the Company, (ii) the Company shall 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) shall include both
such indemnified party and the Company, and such indemnified party shall have
been advised by counsel authorized by the Company (unless the Company has failed
to authorize counsel or assume the defense thereof) that there may be one or
more legal defenses available to it which are different from, or additional to,
those available to the Company (in which case, if such indemnified party
notifies the Company in writing that it elects to employ separate counsel at the
expense of the Company, the Company shall not have the right to assume the
defense of such action, suit or proceeding on behalf of such indemnified party,
it being understood, however, that the Company shall not, in connection with any
one such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for such indemnified party or
parties, which firm shall be designated in writing by BD). The Company shall not
be liable for any settlement of any such action, suit or proceeding effected
without its written consent, but, if such action, suit or proceeding shall be
settled with the written consent of the Company, or if there shall be a final
judgment for the plaintiff in any such action, suit or proceeding, the Company
agrees, as provided in the preceding paragraph, to indemnify and hold harmless
the indemnified parties from and against any loss or liability by reason of such
settlement or judgment.
5.3 Agent Member. At the date hereof, BD is a participant of the Securities
Depository.
5.4 Communications. Except for (i) communications authorized to be by
telephone by this Agreement or the Auction Procedures and (ii) communications in
connection with the 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 a telecopy or similar writing) and shall be given
to such party, addressed to it, at its address or telex or telecopy number set
forth below:
If to BD, Bear, Stearns & Co., Inc.
addressed: 245 Park Avenue
New York, New York 10167
Attention: Preferred Stock Sales and
Trading Desk
Telephone No.: (212) 272-5098
Telecopier No.: (212) 272-8151
If to the Auction Bankers Trust Company
Agent, addressed: Corporate Trust and Agency Group
4 Albany Street
New York, New York 10006
Attention: Auction Rate/
Remarketed Securities
Telephone No.: (212) 250-6850
Telecopier No.: (212) 250-6688
or
(212) 250-6215
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 BD by a BD Officer and on behalf of
the Auction Agent by an Authorized Officer. BD may record telephone
communications with the Auction Agent.
5.5 Entire Agreement. This Agreement and the Auction Agent Agreement
contain 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 inferred, between the parties
relating to the subject matter hereof.
5.6 Benefits. Nothing in this Agreement, express or implied, shall give to
any Person, other than the Company, the Auction Agent and BD and their
respective successors and assigns, any benefit of any legal or equitable right,
remedy or claim under this Agreement.
5.7 Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to be
charged.
(b) Failure of either party to this Agreement to exercise any right or
remedy hereunder in the event of a breach of this Agreement by the other party
shall not constitute a waiver of any such right or remedy with respect to any
subsequent breach.
5.8 Successors and Assigns. This Agreement shall be binding upon, inure to
the benefit of, and be enforceable by, the respective successors and permitted
assigns of BD and the Auction Agent. This Agreement may not be assigned by any
party hereto absent the prior written consent of the other parties; provided,
however, that this Agreement may be assigned by the Auction Agent to a successor
Auction Agent selected by the Company without the consent of BD.
5.9 Severability. If any clause, provision or section of this Agreement
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 remaining clause, provision or section hereof.
5.10 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.
5.11 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
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.
PROSPECT STREET HIGH BANKERS TRUST COMPANY,
INCOME PORTFOLIO INC. as Auction Agent
By: /s/ John A. Frabotta By: /s/ S. Muncol
--------------------------------- -----------------------------------
Title: Vice President Title: Vice President
BEAR, STEARNS & CO. INC.
By: /s/ J. Fichera
-----------------------------------
Title: Associate Director
<PAGE>
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of this 23rd day of November, 1988, by and
between Prospect Street Investment Management Co., Inc., a corporation organized
under the laws of the State of Massachusetts having its principal place of
business in Boston, Massachusetts (the "Manager"), and Prospect Street High
Income Portfolio Inc., a Maryland corporation having its principal place of
business in Boston, Massachusetts (the "Fund").
WHEREAS, the Fund is engaged in business as a closed-end diversified
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Manager is engaged principally in the business of
rendering investment management services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended;
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the
parties hereto as follows:
1. APPOINTMENT OF MANAGER.
The Fund hereby appoints the Manager to act as manager and investment
adviser to the Fund for the period and on the terms herein set forth. The
Manager accepts such appointment and agrees to render the services herein set
forth, for the compensation herein provided.
2. DUTIES OF MANAGER.
The Manager, at its own expense, shall furnish the following services
and facilities to the Fund:
(a) Investment Program. The Manager shall (i) furnish continuously an
investment program for the Fund, (ii) determine (subject to the overall
supervision and review of the Board of Directors of the Fund) what investments
shall be purchased, held, sold or exchanged by the Fund and what portion, if
any, of the assets of the Fund shall be held uninvested, and (iii) make changes
in the investments of the Fund. The Manager shall also manage, supervise and
conduct the other affairs and business of the Fund and matters incidental
thereto, subject always to the control of the Board of Directors of the Fund and
to the provisions of the Articles of Amendment and Restatement (the "Articles of
Incorporation) and By-laws of the Fund, the Prospectuses of the Fund, and the
1940 Act, in each case as from time to time amended and in effect. Subject to
the foregoing, the Manager shall have the authority to engage one or more
sub-advisers in connection with the management of the Fund, which sub-advisers
may be affiliates of the Manager.
(b) Office Space and Facilities. The Manager shall furnish the Fund
office space in the offices of the Manager, or in such other place or places as
may be agreed upon from time to time, and all necessary office facilities,
simple business equipment, supplies, utilities and telephone service for
managing the affairs and investments of the Fund.
(c) Regulatory Reports. The Manager shall furnish to the Fund necessary
assistance in:
(i) the preparation of all reports now or hereafter required
by federal or other laws; and
(ii) the preparation of prospectuses, registration statements
and amendments thereto that may be required by federal or other laws or
by the rules or regulations of any duly authorized commission or
administrative body.
(d) Services of Personnel. The Manager shall provide all necessary
executive and administrative personnel for managing the affairs of the Fund,
including personnel to perform clerical, bookkeeping, accounting and other
office functions. These services are exclusive of the bookkeeping and accounting
services of any dividend disbursing agent, transfer agent, registrar or
custodian. The Manager shall compensate all personnel, officers and directors of
the Fund if such persons are also employees of the Manager or its affiliates.
In providing services of the type contemplated by the foregoing
paragraphs (c) and (d), the Manager shall be entitled to retain the services of
one or more accounting, consulting or similar firms, provided that the Manager
shall pay all fees and expenses of any firms so retained and shall remain
responsible for the provision of the services described herein.
(e) Fidelity Bond. The Manager shall arrange for providing and
maintaining a bond issued by a reputable insurance company authorized to do
business in the place where the bond is issued against larceny and embezzlement
covering each officer and employee of the Fund who may singly or jointly with
others have access to funds or securities of the Fund, with direct or indirect
authority to draw upon such funds or to direct generally the disposition of such
funds. The bond shall be in such reasonable amount as a majority of the
directors who are not "interested persons" of the Fund, as defined in the 1940
Act, shall determine, with due consideration given to the aggregate assets of
the Fund to which any such officer or employee may have access. The premium for
the bond shall be payable by the Fund in accordance with paragraph 3(m).
(f) Portfolio Transactions. The Manager shall place all orders for the
purchase and sale of portfolio securities for the account of the Fund with
brokers or dealers selected by the Manager, although the Fund will pay the
actual brokerage commissions on portfolio transactions in accordance with
paragraph 3(d).
In placing portfolio transactions for the Fund, it is recognized that
the Manager will give primary consideration to securing the most favorable price
and efficient execution. Consistent with this policy, the Manager may consider
the financial responsibility, research and investment information and other
services provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party. It is understood that neither the Fund nor the Manager has adopted a
formula for allocation of the Fund's investment transaction business. It is also
understood that it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and economic analysis
provided by brokers who may execute brokerage transactions at a higher cost to
the Fund than would otherwise result when allocating brokerage transactions to
other brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Manager is authorized to place orders for the purchase
and sale of securities for the Fund with such brokers, subject to review by the
Fund's Board of Directors from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers may be useful or beneficial to the Manager in connection with its
services to other clients.
On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients, the Manager, to
the extent permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be so sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction will be made by the Manager in
the manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
3. ALLOCATION OF EXPENSE.
Except for the services and facilities to be provided by the Manager as
set forth in paragraph 2 above, the Fund assumes and shall pay all expenses for
all other Fund operations and activities and shall reimburse the Manager for any
such expenses incurred by the Manager. The expenses to be borne by the Fund
shall include, without limitation:
(a) all expenses of organizing the Fund;
(b) the charges and expenses of (i) any registrar, stock transfer or
dividend disbursing agent, shareholder servicing agent, custodian or depository
appointed by the Fund for the safekeeping of its cash, portfolio securities and
other property, including the costs of servicing shareholder investment accounts
and bookkeeping, accounting and pricing services, provided to the Fund (other
than those utilized by the Manager in providing the services described in
Section 2), (ii) any agent engaged for the purposes of conducting auctions with
respect to the Fund's Taxable Auction Rate Preferred Stock, (iii) any
institution serving as trustee with respect to the Fund's Senior Extendible
Notes and (iv) fees of any stock exchange or any rating agency responsible for
rating outstanding securities of the Fund;
(c) the charges and expenses of bookkeeping, accounting and auditors;
(d) brokerage commissions and other costs incurred in connection with
transactions in the portfolio securities of the Fund, including any portion of
such commissions attributable to brokerage and research services as defined in
Section 28(e) of the Securities Exchange Act of 1934;
(e) taxes, including issuance and transfer taxes, and corporate
registration, filing or other fees payable by the Fund to federal, state, or
other governmental agencies;
(f) expenses, including the cost of printing certificates, relating to
the issuance of securities of the Fund;
(g) expenses involved in registering and maintaining registrations of
the Fund and of its securities with the Securities and Exchange Commission and
various states and other jurisdictions, including reimbursement of actual
expenses incurred by the Manager or others in performing such functions for the
Fund, and including compensation of persons who are employees of the Manager, in
proportion to the relative time spent on such matters;
(h) expenses of shareholders' and directors' meetings, including
meetings of committees, and of preparing, printing and mailing proxy statements,
quarterly reports, semi-annual reports, annual reports and other communications
to existing securityholders;
(i) expenses of preparing and printing prospectuses and marketing
materials;
(j) compensation and expenses of directors who are not affiliated with
the Manager;
(k) charges and expenses of legal counsel in connection with matters
relating to the Fund, including, without limitation, legal services rendered in
connection with the Fund's corporate and financial structure and relations with
its securityholders, issuance of shares of the Fund and registration and
qualification of securities under federal, state and other laws;
(l) the cost and expense of maintaining the books and records of the
Fund, including general ledger accounting;
(m) insurance premiums on fidelity, errors and omissions and other
coverages including the expense of obtaining and maintaining a fidelity bond as
required by Section 17(g) of the 1940 Act which may also cover the Manager;
(n) expenses incurred in obtaining and maintaining any surety bond or
similar coverage with respect to securities of the Fund;
(o) interest payable on Fund borrowings;
(p) such other non-recurring expenses of the Fund as may arise,
including expenses of actions, suits or proceedings to which the Fund is a party
and expenses resulting from the legal obligation which the Fund may have to
provide indemnity with respect thereto; and
(q) expenses and fees reasonably incidental to any of the foregoing
specifically identified expenses.
4. ADVISORY FEE.
For the services and facilities to be provided by the Manager as set
forth in paragraph 2 hereof, the Fund will pay to the Manager as full
compensation therefor a fee at an annual rate of 0.50% of the Fund's net assets
(which, for purposes hereof, shall mean (a) the average weekly value of the
total assets of the Fund, minus (b)(i) accrued liabilities of the Fund (other
than the principal amount of the Fund's Senior Extendible Notes and not
including the aggregate liquidation preference of the Fund's Taxable Auction
Rate Preferred Stock (the "Preferred Stock")) and (ii) accumulated and unpaid
dividends on the Preferred Stock. The fee to the Manager will be computed weekly
and will be paid to the Manager monthly as soon as practicable following the end
of each month.
In the case of commencement or termination of this Agreement during any
month, the fee with respect to such month shall be adjusted proportionately.
5. EXPENSE LIMITATION.
The Manager agrees that if the total expenses of the Fund (exclusive of
interest, taxes, brokerage expenses and extraordinary items such as litigation
expenses) for any fiscal year of the Fund exceed the lowest expense limitation
imposed by any jurisdiction to which the Fund is then subject, if any, the
Manager will pay or reimburse the Fund for that excess up to the amount of its
advisory fees payable with respect to the Fund during that fiscal year. The
amount of the monthly advisory fee payable by the Fund under paragraph 4 hereof
shall be reduced to the extent that the monthly expenses of the Fund, on an
annualized basis, would exceed the foregoing limitation. At the end of each
fiscal year of the Fund, if the aggregate annual expenses chargeable to the Fund
for that year exceed the foregoing limitation based upon the average of the
monthly average net asset values of the Fund for the year, the Manager will
promptly reimburse the Fund for the amount of such excess to the extent not
already reimbursed by reduction of the monthly advisory fee, but if such
expenses are within the foregoing limitation, any excess amount previously
withheld from the monthly advisory fee during that fiscal year will be promptly
paid over to the Manager.
In the event that this Agreement (i) is terminated as of a date other
than the last day of the fiscal year of the Fund or (ii) commences as of a date
other than the first day of the fiscal year of the Fund, then the expenses of
the Fund shall be annualized and the Manager shall pay to, or receive from, the
Fund a pro rata portion of the amount that the Manager would have been required
to pay or would have been entitled to receive, if any, had this Agreement been
in effect with respect to the Fund for the full fiscal year.
6. RELATIONS WITH FUND.
Subject to and in accordance with the Articles of Incorporation and
By-laws of the Fund and the Articles of Organization and By-laws of the Manager,
it is understood that Directors, officers, agents and shareholders of the Fund
are or may be interested in the Manager (or any successor thereof), as
directors, officers or otherwise, that directors, officers, agents and
shareholders of the Manager (or any successor thereof) are or may be interested
in the Fund as Directors, officers, agents, shareholders or otherwise, that the
Manager (or any such successor thereof) is or may be interested in the Fund as a
shareholder or otherwise.
7. LIABILITY OF MANAGER.
The Manager shall not be liable to the Fund for any error of judgment
or mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates; provided, however, that no provision of
this Agreement shall be deemed to protect the Manager against any liability to
the Fund or its shareholders to which it might otherwise be subject by reason of
any willful misfeasance, bad faith or gross negligence in the performance of its
duties or the reckless disregard of its obligations and duties under this
Agreement, nor shall any provision hereof be deemed to protect any director or
officer of the Fund against any such liability to which he might otherwise be
subject by reason of any willful misfeasance, bad faith or gross negligence in
the performance of his duties or the reckless disregard of his obligations and
duties. The Fund hereby agrees to indemnify and hold harmless the Manager and
each of its agents, employees, officers, directors and stockholders from and
against any and all liabilities arising in connection with the performance of
this Agreement other than liabilities arising as a result of any willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations
and duties on the part of the Manager or any such agent, employee, officer,
director or stockholder.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective on the date first
set forth above, such date being the date on which this Agreement has been
executed and the date on which the Fund's initial Registration Statement on Form
N-2 has been declared effective by the Securities and Exchange Commission.
Unless terminated as herein provided, this Agreement shall remain in full force
and effect until the date which is two years after the effective date of this
Agreement. Subsequent to such initial period of effectiveness this Agreement
shall continue in full force and effect, subject to Section 8(c), for successive
one-year periods so long as such continuance is approved at least annually (a)
by either the directors of the Fund or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund, voting as a single
class, and (b) in either event, by the vote of a majority of the directors of
the Fund who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval. Notwithstanding the foregoing
provisions of this Section 8(a), the continuance of this Agreement is subject to
the approval of this Agreement by a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, voting as a single class,
at the initial meeting of shareholders after the date of this Agreement.
(b) Amendment. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by vote of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, voting as a single class.
(c) Termination. This Agreement may be terminated at any time, without
payment of any penalty, by vote of the Directors or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, voting
as a single class, or by the Manager, in each case on not more than sixty (60)
days' nor less than thirty (30) days' prior written notice to the other party.
(d) Automatic Termination. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
9. SERVICES NOT EXCLUSIVE.
The services of the Manager to the Fund hereunder under not to be
deemed exclusive, and the Manager shall be free to render similar services to
others so long as its services hereunder are not impaired thereby.
10. PRIOR AGREEMENTS SUPERSEDED.
This Agreement supersedes any prior agreement relating to the subject
matter hereof between the parties hereto.
11. NOTICES.
Notices under this Agreement shall be in writing and shall be
addressed, and delivered or mailed postage prepaid, to the other party at such
address as such other party may designate from time to time for the receipt of
such notices. Until further notice to the other party, the address of each party
to this Agreement for this purpose shall be One Financial Plaza, Boston,
Massachusetts.
12. GOVERNING LAW; COUNTERPARTS.
This Agreement shall be construed in accordance with the laws of the
State of New York. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
such counterparts shall, together, constitute only one instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above.
ATTEST: PROSPECT STREET INVESTMENT
MANAGEMENT CO., INC.
By: /s/ Richard E. Omohundro, Jr.
---------------------------------------
Richard E. Omohundro, Jr.
President
Attest: PROSPECT STREET HIGH INCOME
PORTFOLIO INC.
/s/ Ruth Ann Lehman
- --------------------------------- By: /s/ John A. Frabotta
---------------------------------------
Ruth Ann Lehman John A. Frabotta
My commission expires Vice President
July 27, 1995
<PAGE>
AUCTION AGENT AGREEMENT
between
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
and
BANKERS TRUST COMPANY
Dated as of May 7, 1990
Relating to
Taxable Auction Rate Preferred Stock
of
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<PAGE>
THIS AUCTION AGENT AGREEMENT dated as of May 7, 1990, between PROSPECT
STREET HIGH INCOME PORTFOLIO INC., a Maryland corporation (the "Company"), and
BANKERS TRUST COMPANY, a New York banking corporation.
The Company has issued and outstanding 300 shares of Taxable Auction Rate
Preferred Stock with a liquidation preference of $100,000 per share and without
par value (all such shares and, as the context requires, any other shares of the
same class subsequently issued by the Company being referred to as the
"Preferred Shares"), pursuant to its Articles of Incorporation (as defined
below). The Company desires that Bankers Trust Company perform certain duties as
agent in connection with the Auction (as defined below) of the Preferred Shares
(the "Auction Agent") and as the transfer agent, registrar, dividend disbursing
agent and redemption agent with respect to the Preferred Shares (in any such
capacity, the "Paying Agent") upon the terms and conditions of this Agreement,
and hereby appoints Bankers Trust Company as said Auction Agent and Paying Agent
in accordance with those terms and conditions (hereinafter generally referred to
as the "Auction Agent" except in Sections 3 and 4 below).
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 of Incorporation.
Capitalized terms not defined herein shall have the respective meanings
specified in the Articles of Incorporation.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures (as defined below), the
following terms shall have the following meanings, unless the context otherwise
requires:
(a) "Affiliate" shall mean any Person made known to the Auction Agent
to be controlled by, in control of or under common control with, the
Company.
(b) "Agent Member" of any Person shall mean such Person's agent member
of the Securities Depository who is identified as such in such Person's
Master Purchaser's Letter.
(c) "Articles of Incorporation" shall mean the Articles of Amendment
and Restatement of the Company, filed by the Company on November 25, 1988
in the office of the Department of Assessments and Taxation of the State of
Maryland, a copy of which is attached hereto as Exhibit B and as Exhibit A
to the Broker-Dealer Agreement, as the same may be amended from time to
time.
(d) "Auction" shall have the meaning specified in Section 2.1 hereof.
(e) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Article IV(C), paragraph 8, of the Articles of Incorporation.
(f) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Assistant Secretary and Assistant
Treasurer 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 hereof in a communication to the
Company.
(g) "Broker-Dealer Agreement" shall mean the agreement among the
Auction Agent, the Company and Bear Stearns & Co., Inc. (sometimes referred
to as the "Broker-Dealer") of even date herewith.
(h) "Company Officer" shall mean 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 from the Company to the Auction Agent.
(i) "DTC" shall mean The Depositary Trust Company and its successors
or assigns or any other securities depository selected by the Company.
(j) "Holder" shall mean a Person [who has signed a Master Purchaser's
Letter and] who is the beneficial owner of Preferred Shares.
(k) "Master Purchaser's Letter" shall mean a letter addressed to the
Company, the Auction Agent and the Broker-Dealer, substantially in the form
attached hereto as Exhibit C.
(l) "Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the
Corporation which agrees to follow the procedure required to be followed by
such securities depository in connection with the shares of Preferred
Stock; provided that, at any time that the Surety Bond is in effect, any
reference herein to the Securities Depository shall be deemed to refer to
the Surety Custodian.
(m) "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 of Incorporation provide that the Applicable Rate on the
Preferred Shares for each Dividend Period after the Initial Dividend Period
shall be the rate per annum that a commercial bank, trust company, or other
financial institution appointed by the Company advises the Company results from
implementation of the Auction Procedures. The Board of Directors of the Company
has adopted a resolution appointing Bankers Trust Company as Auction Agent for
purposes of the Auction Procedures. The Auction Agent hereby 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. 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.
2.2 Preparation for Each Auction; Maintenance of Registry of Beneficial
Owners.
(a) In the event that the Auction Date for any Auction shall be changed
after the Auction Agent shall have given the notice referred to in clause (vii)
of paragraph (a) of the Settlement Procedures, the Auction Agent, by such means
as the Auction Agent deems practicable, shall give notice of such change to the
Broker-Dealer 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.
(b) (i) On each Auction Date, the Auction Agent shall determine the 30-day
"AA" Composite Commercial Paper Rate and the Maximum and Minimum Applicable
Rates. If the 30-day "AA" Composite Commercial Paper Rate obtained by the
Auction Agent is quoted on a discount basis the Auction Agent shall convert such
rate to an interest rate in accordance with the definition of 30-day "AA"
Composite Commercial Paper Rate set forth in the Articles of Incorporation, or
if the rate obtained by the Auction Agent is quoted on another 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. Not later than 9:30 A.M. on
each Auction Date the Auction Agent shall notify the Company and the
Broker-Dealer of the 30-day "AA" Composite Commercial Paper Rate so determined
and the Maximum and Minimum Applicable Rates.
(ii) If the 30-day "AA" 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 the 30-day
"AA" Composite Commercial Paper Rate, the Auction Agent shall immediately notify
the Company so that the Company can determine whether to select an alternative
Commercial Paper Dealer 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 determination.
(c) (i) The Auction Agent shall maintain a current registry of the
beneficial owners of the Preferred Shares who shall constitute the Existing
Holders for purposes of an Auction. The Company shall cause Bear, Stearns & Co.
Inc. to provide the Auction Agent on the Business Day following the date hereof
with a list of the initial Existing Holders of Preferred Shares. The Auction
Agent may rely upon, as evidence of the identities of the Existing Holders, such
list, the results of each Auction and notices from any Existing Holder, the
Agent Member of any Existing Holder or the Broker-Dealer of any Existing Holder
with respect to such Existing Holder's transfer of Preferred Shares to another
Person.
(ii) In the event of any partial redemption of Preferred Shares, upon
notice by the Company to the Auction Agent of such partial redemption, the
Auction Agent shall promptly request DTC to notify the Auction Agent of the
Agent Members whose shares have been called for redemption and the person or
department at such Agent Member to contact regarding such redemption and, at
least two Business Days prior to the next Auction, the Auction Agent shall
request each such Agent member to disclose to the Auction Agent (upon selection
by such Agent Member of the Existing Holders whose Preferred Shares are to be
redeemed) the number of Preferred Shares of each such Existing Holder, if any,
to be redeemed by the Company; provided that the Auction Agent has been
furnished with the name and telephone number of a person or department at such
Agent Member from which it is to request such information. If necessary to
procure such information, the Auction Agent shall deliver to each Agent Member a
facsimile copy of the Master Purchaser's Letter of each Existing Holder
represented by such Agent Member, 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 Preferred
Shares shown in the Auction Agent's registry of beneficial owners.
(iii) The Auction Agent shall only register a transfer of the beneficial
ownership of Preferred Shares from an Existing Holder to another Person if such
transfer is made to a Person that has delivered a signed Master Purchaser's
Letter to the Auction Agent and (A) such transfer is pursuant to an Auction or
(B) if such transfer is made other than pursuant to an Auction, the Auction
Agent has been notified in writing in a notice substantially in the form of
Exhibit D to the Broker-Dealer Agreement, by such Existing Holder, the Agent
Member of such Existing Holder, or the Broker-Dealer of such Existing Holder of
such transfer. The Auction Agent is not required to accept any notice delivered
for an Auction unless it is received by the Auction Agent by 3:00 P.M. on the
Business Day next preceding the applicable Auction Date. The Auction Agent shall
rescind a transfer made on the registry of the beneficial owners of the
Preferred Shares if the Auction Agent has been notified in writing in a notice
substantially in the form of Exhibit E to the Broker-Dealer Agreement by the
Agent Member or the Broker-Dealer of any Person that (A) purchased Preferred
Shares and the seller failed to deliver such Preferred Shares or (B) sold
Preferred Shares and the purchaser failed to make payment to such Person upon
delivery to the purchaser of such Preferred Shares.
(d) The Auction Agent may request that the Broker-Dealer, as set forth in
Section 2.2(c) of the Broker-Dealer Agreement, provide the Auction Agent with a
list of its respective customers that the Broker-Dealer believes are Existing
Holders of Preferred Shares. Such list shall be provided to the Company by the
Auction Agent upon written request. The Auction Agent shall keep confidential
any such information and shall not disclose any such information so provided to
any Person other than the Company; 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 the list of customers that Broker-Dealer believes are Existing
Holders of Preferred Shares and information related thereto only to its
officers, employees, agents or representatives in the Corporate Trust and Agency
Group who need to know such information for the purposes of acting in accordance
with this Agreement and shall 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.
2.3 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. The
Auction Agent shall give notice of any such change to the Broker-Dealer. Such
notice shall be received prior to the first Auction Date on which any such
change shall be effective.
Time Event
- ---- -----
By 9:30 A.M. Auction Agent advises the Company and Broker-Dealer of
30-day "AA" Composite Commercial Paper Rate and the
Maximum and Minimum Applicable Rates as set forth in
Section 2.2(c)(i) hereof.
9:30 A.M. - 12:30 P.M. Auction Agent assembles information communicated to it
by Broker-Dealer as provided in Article IV(C),
paragraph 8(c) of the Articles of Incorporation.
Submission Deadline is 12:30 P.M.
Not earlier than Auction Agent makes determination pursuant to Article
12:30 P.M. IV(C), paragraph 8(d)(i) of the Articles of
Incorporation.
By approximately Auction Agent advises Company of results of Auction as
3:00 P.M. provided in Article IV(C), paragraph 8(d)(ii) of the
Articles of Incorporation. Submitted bids and Sub
mitted Sell Orders are accepted and rejected in whole
or in part and Preferred Shares allocated as provided
in Article IV(C), paragraph 8(e) of the Articles of
Incorporation
Auction Agent gives notice of Auction results as set
forth in Section 2.4 hereof.
2.4 Notice of Auction Results.
On each Auction Date, the Auction Agent shall notify Broker-Dealer of the
results of the Auction held on such date by telephone as set forth in paragraph
(a) of the Settlement Procedures.
2.5 Broker-Dealers.
(a) The Auction Agent hereby confirms that it has been directed by the
Company to terminate all agreements with broker-dealers (other than the
Broker-Dealer Agreement with Bear, Stearns & Co. Inc.) entered into by the
Auction Agent prior to the date hereof and the Auction Agent further confirms
that it has terminated all such agreements with such broker-dealers pursuant to
the terms thereof.
(b) The Company shall not designate any Person to act as an Additional
Broker-Dealer without the prior written approval of each of Bear, Stearns & Co.
Inc. and the Auction Agent.
(c) The Auction Agent shall terminate the Broker-Dealer Agreement as set
forth in Section 5.1 thereof if so directed by the Company and if the Company
certifies to the Auction Agent that the provisions of Section 5.1 of the
Broker-Dealer Agreement have been satisfied.
(d) Subject to Section 2.5(b) hereof, the Auction Agent shall from time to
time enter into such agreements with Additional Broker-Dealers as the Company
shall request.
(e) The Company agrees to pay to the Auction Agent the amounts set forth in
Section 2.5(b) of the Broker-Dealer Agreement at such times and in such manner
as required by Section 2.5(b) of the Broker-Dealer Agreement and hereby directs
the Auction Agent to pay such amount to the Broker-Dealer in such manner as is
required by Section 2.5(b) of the Broker-Dealer Agreement.
2.6 Ownership of Preferred Shares and Submission of Bids by Company
and Affiliates.
Neither the Company nor any of its Affiliates may submit any Sell Order or
Bid, directly or indirectly, in any Auction. The Company shall notify the
Auction Agent if the Company or any of its respective Affiliates becomes an
Existing Holder of any Preferred Shares. The Auction Agent shall have no duty or
liability with respect to enforcement of this Section 2.6.
2.7 Access to and Maintenance of Auction Records.
The Auction Agent shall afford to the Company and any of its respective
Affiliates and their agents, independent public accountants and counsel access
at reasonable times during normal business hours to review and make extracts or
copies (at the Company's sole cost and expense) of all books, records, documents
and other information concerning the conduct and results of Auctions, provided
that any such Affiliate's agent, accountant, or counsel shall furnish the
Auction Agent with a letter from the Company requesting that the Auction Agent
afford such person access. The Auction Agent shall maintain records relating to
any Auction for a period of two years after such Auction (unless requested by
the Company to maintain such records for such longer period not in excess of
four years, then for such longer period), and such records shall, in reasonable
detail, accurately and fairly reflect the actions taken by the Auction Agent
hereunder.
3. The Auction Agent as Payinq Agent.
3.1 Paying Agent.
The Board of Directors of the Company has adopted a resolution appointing
the Paying Agent, Bankers Trust Company, as transfer agent, registrar, dividend
disbursing agent and redemption agent for the Company in connection with the
Preferred Shares. The Paying Agent hereby accepts such appointment and agrees to
act in accordance with its standard procedures and the provisions of the
Articles of Incorporation which are specified herein as Paying Agent with
respect to the Preferred Shares and as set forth in this Section 3.
3.2 The Company's Notices to Paying Agent.
Whenever Preferred Shares are to be redeemed pursuant to paragraph 5(a) or
clause (i)(B) of paragraph 5(b) of Article IV(C) of the Articles of
Incorporation, the Company shall deliver to the Paying Agent the Notice of
Redemption in the form to be delivered to Holders not later than five days prior
to the date such Notice of Redemption is delivered to the Holders. In the case
of a Mandatory Redemption pursuant to clause (i)(A) of paragraph 5(b) of Article
IV(C) of the Articles of Incorporation, the Company shall deliver to the Paying
Agent the Notice of Redemption that will be delivered to Holders not later than
the close of business on the second Business Day following the related Cure
Date. In the event of a Mandatory Redemption pursuant to clause (ii) of
paragraph 5(b) of Article IV(c) of the Articles of Incorporation the Company
shall deliver to the Paying Agent the Notice of Redemption that will be
delivered to the Holders not later than the close of business on the second
business day following the related Cure Date. The Notice of Redemption shall be
substantially in the form attached hereto as Exhibit D. The Paying Agent shall
have no responsibility to confirm or verify the accuracy of notices of the
Company so delivered.
3.3 Company to Provide Funds for Dividends and Redemptions.
(a) Not later than noon, on the Business Day immediately preceding each
Dividend Payment Date, the Company shall deposit with the Paying Agent cash or
Deposit Securities constituting immediately available funds equal to the
declared dividends to be paid to Holders on such Dividend Payment Date and shall
give the Paying Agent irrevocable instructions to apply such funds and/or the
income and proceeds of such funds to the payment of such dividends on such
Dividend Payment Date.
(b) If the Company shall give the Notice of Redemption as prescribed by
Article IV(C), paragraph 5(a) or 5(b) of the Articles of Incorporation, then, by
noon of the Business Day immediately preceding the date fixed for redemption,
the Company shall deposit with the Paying Agent cash or Deposit Securities
consisting of immediately available funds sufficient to redeem the Preferred
Shares to be redeemed and eligible for redemption and shall give the Paying
Agent irrevocable instructions and authority to pay the redemption price to the
Holders of such Preferred Shares upon surrender of the certificates therefor.
(c) The Company may direct, in writing or orally with such direction
promptly confirmed in writing, the Paying Agent to invest the funds so deposited
pursuant to paragraphs (a) or (b) of this Section 3.3 in Deposit Securities
which mature on or before the opening of business on such Dividend Payment Date
or the date fixed for redemption, as the case may be, provided that the proceeds
of such investments will be available at the opening of business on the Dividend
Payment Date or the date fixed for redemption, as the case may be. The
investments made pursuant to the foregoing sentence are solely for the account
and at the risk of the Company, and the Paying Agent shall not be liable or
responsible for any loss, in whole or in part, resulting from such investments.
Upon the request of the Company the Paying Agent shall promptly transmit any
interest received on such investments to the Company.
3.4 Disbursing Dividend and Redemption Price.
After receipt of the immediately available funds and instructions from the
Company described in Sections 3.3(a) and (b) above, the Paying Agent shall pay
to the Holders (i) on each Dividend Payment Date, dividends on the Preferred
Shares and (ii) on any date fixed for redemption, the redemption price of any
Preferred Shares subject to redemption. The amount of dividends for any Dividend
Period to be paid by the Paying Agent to the Holders will be determined by the
Company as set forth in Article IV(C), paragraph 3(c) of the Articles of
Incorporation. The redemption price to be paid by the Paying Agent to the
Holders will be determined as set forth in Article IV(C), paragraph 5(a) or
paragraph 5(b), as applicable, of the Articles of Incorporation. The Company
shall notify the Paying Agent in writing of a decision to redeem Preferred
Shares on the dates specified in Section 3.2 above, and such notice by the
Company to the Paying Agent shall contain the information required to be stated
in the Notice of Redemption required to be delivered by the Company to such
Holders, as provided in Section 3.2 above. The Paying Agent shall have no duty
to determine the Redemption Price and may rely on the amount thereof set forth
in the Notice of Redemption.
3.5 Notice of Special Meeting of Holders of Preferred Shares.
With respect to the Preferred Shares, pursuant to Article IV(C), paragraph
6 of the Articles of Incorporation, during any period commencing with the
occurrence of certain conditions (the "Voting Period"), the number of directors
constituting the Board of Directors of the Company shall be automatically
increased by the smallest number that shall enable the Holders to elect a
majority of the Board of Directors as so increased and the Holders shall possess
the full voting power (to the exclusion of the holders of all other classes of
capital stock of the Company), voting as a class and on a one-vote-per-share
basis, to elect the smallest number of directors of the Company which, together
with any other incumbent directors of the Company theretofore elected by the
Holders, shall constitute a majority of the total number of directors of the
Company as so increased. If any of such conditions exists, the Paying Agent
will, upon receipt from the Company of a Notice of Special Meeting of Holders,
in substantially the form set forth in Exhibit E hereto with insertions
completed by the Company ("Notice"), mail such Notice to all Holders who were
holders of record at the close of business on the fifth Business Day prior to
the date of mailing of the Notice. The delivery by the Company of a Notice to
the Paying Agent shall be deemed a representation and warranty by the Company
that at least one of such conditions exists.
The Company shall provide a temporary chairman for any Special Meeting and
the Paying 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 Paying Agent as Transfer Agent and Registrar.
4.1 Original Issue of Stock Certificate.
On the Original Issuance Date, one certificate for all of the Preferred
Shares was issued by the Company and registered in the name of Bankers Trust
Company, as Surety Custodian, and countersigned by the Paying Agent.
4.2 Registration of Transfer or Exchange of Preferred Shares.
Except as provided in this Section, the 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
acceptable to the Paying Agent prior to such resignation, then upon such
resignation, the Preferred Shares shall be registered for transfer or exchange,
and new certificates shall be issued in the name of the designated transferee or
transferees, upon surrender of the old certificates in form deemed by the Paying
Agent properly endorsed for transfer with (a) all necessary endorsers'
signatures guaranteed in such manner and form as the Paying Agent may require by
a guarantee reasonably believed by the Paying Agent to be responsible, (b) such
assurances as the Paying Agent shall deem necessary or appropriate to evidence
the genuineness and effectiveness of each necessary endorsement and (c)
satisfactory evidence of compliance with all applicable law relating to the
collection of taxes or funds necessary for the payment of such taxes.
4.3 Removal of Legend.
All requests for removal of legends indicating restrictions on transfer
from certificates evidencing Preferred Shares shall be accompanied by an opinion
of counsel stating that such legends may be removed and such Preferred Shares
freely transferred, said opinion to be delivered under cover of a letter from a
Company Officer authorizing the Paying Agent to remove the legend on the basis
of said opinion.
4.4 Lost Certificates.
The Paying 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 Paying 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 Paying Agent may issue new certificates in
exchange for and upon the cancellation of mutilated certificates. Any request by
the Company to the Paying 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 Paying Agent that such issuance will comply with such
provisions of applicable law and the By-Laws and resolutions of the Company.
4.5 Disposition of Cancelled Certificates; Record Retention.
The Paying Agent shall retain certificates which have been cancelled in
transfer or in exchange and accompanying documentation in accordance with
applicable rules and regulations of the Securities and Exchange Commission for
two calendar years from the date of such cancellation. The Paying Agent shall
afford to the Company and its agents and counsel access at reasonable times
during normal business hours to review and make extracts or copies (at the
Company's sole cost and expense) of such certificates and accompanying
documentation. Upon the expiration of this two-year period, the Paying Agent
shall deliver to the Company the cancelled certificates and accompanying
documentation. The Company shall, at its expense, retain such records for a
minimum additional period of four calendar years from the date of delivery of
records to the Company and shall make such records available during this period
at any time, or from time to time, for reasonable periodic, special, or other
examinations by representatives of the Securities and Exchange Commission. The
Company shall also undertake to furnish to the Securities and Exchange
Commission, upon demand, at either the principal office or at any regional
office, complete, correct and current hard copies of any and all such records.
Thereafter such records shall not be destroyed by the Company without the
approval of the Paying Agent, which shall not be unreasonably withheld, but will
be safely stored for possible future reference.
4.6 Stock Register.
The Paying Agent shall maintain the Stock Books, which shall contain a list
of the Holders, the number of Preferred Shares beneficially owned by each Holder
and the address of each Holder. The Paying Agent shall record in the Stock Books
any change of address of a Holder upon notice by such Holder. In case of any
request or demand for the inspection of the Stock Books or any other books of
the Company in the possession of the Paying Agent, the Paying Agent will notify
the Company and secure instructions as to permitting or refusing such
inspection. The Paying Agent reserves the right, however, to exhibit the Stock
Books or other records to any person in case it is advised by its counsel that
its failure to do so would (a) be unlawful or (b) expose it to liability, unless
the Company shall have offered indemnification satisfactory to the Paying Agent.
4.7 Return of Funds.
Any funds deposited with the Paying Agent by the Company for any reason
under this Agreement, including for the payment of dividends on or the
redemption of Preferred Shares, that remain with the Paying Agent after 35
months shall be repaid to the Company upon the written request of the Company.
5. Representations and Warranties.
(a) The Company represents and warrants to the Auction Agent that:
(i) the Company is a duly incorporated and validly existing
corporation in good standing under the laws of the State of Maryland and
has full power to execute and deliver this Agreement and to authorize,
create and issue the Preferred Shares;
(ii) this Agreement has been duly and validly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, subject as to such enforceability to bankruptcy,
insolvency, reorganization and other laws of general applicability relating
to or affecting creditors' rights and to general equitable principles;
(iii) the form of the certificate evidencing the Preferred Shares
complies with all applicable laws of the State of Maryland;
(iv) the Preferred Shares have been duly and validly authorized,
executed and delivered by the Company and are validly issued, fully paid
and nonassessable;
(v) the Preferred Shares have been 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 the
issuance of the Preferred Shares except as required by applicable state
securities laws, all of which have been taken and are in full force and
effect on the date hereof;
(vi) the execution and delivery of this Agreement and the issuance and
delivery of the 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 or the By-Laws
of the Company, any law or regulation applicable to the Company, any order
or decree of any court or public authority having jurisdiction over the
Company, or any mortgage, indenture, contract, agreement or undertaking to
which the Company is a party or by which it is bound; and
(vii) no taxes are payable upon or in respect of the execution of this
Agreement or the issuance of the Preferred Shares.
(b) The Auction Agent represents and warrants to the Company that the
Auction Agent is duly organized and is validly existing as a bank and trust
company in good standing under the laws of the State of New York and has the
corporate power to enter into and perform its obligations under this Agreement.
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 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 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.
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 reasonably believed 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 the Broker-Dealer. The
Auction Agent may record telephone communications with the Company or with the
Broker-Dealer 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.
(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 Agreement or the 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 Agreement.
(b) The Company shall reimburse the Auction Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Auction
Agent in accordance with any provision of this Agreement and the Broker-Dealer
Agreement (including the reasonable compensation, expenses and disbursements of
its agents and counsel), except any expense, disbursement and advances
attributable to its gross 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 Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with its exercise
or performance of any of its duties hereunder and thereunder, except such as may
result from its negligence or bad faith.
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. The Auction Agent may terminate this Agreement upon prior notice
to the Company on the date specified in such notice, which shall be no earlier
than the Business Day after the second Dividend Payment Date after delivery of
such notice. If the Auction Agent resigns, the Company shall use its best
efforts to enter into an agreement with a successor auction agent containing
substantially the same terms and conditions as this Agreement.
(b) Except as otherwise provided in this paragraph 7.1(b), the respective
rights and duties of the Company and the Auction Agent under this Agreement
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 hereof. Upon termination of this
Agreement, the Auction Agent shall (i) resign as Auction Agent under the
Broker-Dealer Agreement, (ii) at the Company's request, promptly deliver to the
Company copies of all books and records maintained by it in connection with its
duties hereunder, and (iii) at the request of the Company, promptly transfer to
the Company or any successor auction agent any funds deposited by the Company
with the Auction Agent (whether in its capacity as Auction Agent or Paying
Agent) pursuant to this Agreement which have not previously been distributed by
the Auction Agent in accordance with this Agreement.
7.2 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), all notices, requests and other communications to any party
hereunder shall be in writing (including telecopy or similar writing) given to
such party at its address or telecopy number set forth below:
If to the Company, addressed: Prospect Street High Income Portfolio Inc.
One Financial Center
Boston, Massachusetts 02111
Attention: President
Telephone No.: (617) 350-5718
If to the Auction Agent, addressed: Bankers Trust Company
4 Albany Street
Corporate Trust and Agency Group
New York, New York 10006
Attention: Auction Rate/Remarketed
Securities
Telecopier No.: (212) 250-6688 or
250-6215
Telephone No.: (212) 250-6850
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 inferred
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.
7.5 Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to be
charged. The Company shall notify the Auction Agent of any change in the
Articles of Incorporation prior to the effective date of any such change.
(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 permitted assigns of each of the
Company and the Auction Agent. This Agreement may not be assigned by either
party hereto absent the prior written consent of the other party, which consent
shall not be unreasonably withheld.
7.7 Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the validity 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.
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.
PROSPECT STREET HIGH INCOME
By: /s/ John A. Frabotta
----------------------------------
Title: Vice President
BANKERS TRUST COMPANY,
As Auction Agent
By: /s/ Illegible
----------------------------------
Title: Assistant Secretary
<PAGE>
INSURANCE AGREEMENT
Between
FINANCIAL SECURITY ASSURANCE INC.
and
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
Dated as of December 1, 1988
<PAGE>
TABLE OF CONTENTS
(This Table of Contents is for convenience of reference only and shall
not be deemed to be a part of this Insurance Agreement.)
Page
ARTICLE I
DEFINITIONS .......................................................... 1
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 2.01. Representations and Warranties of the Fund ............. 2
SECTION 2.02. Affirmative Covenants of the Fund ...................... 6
SECTION 2.03. Negative Covenants of the Fund ......................... 13
SECTION 2.04. Special Covenants of the Fund .......................... 16
ARTICLE III
THE SURETY BOND; INDEMNIFICATION; SECURITY
SECTION 3.01. Agreement To Issue Surety Bond ........................ 20
SECTION 3.02. Conditions Precedent to Issuance of the Surety Bond ... 20
SECTION 3.03. Payment of Fees and Premiums .......................... 21
SECTION 3.04. Reimbursement Obligation .............................. 22
SECTION 3.05. Indemnification ....................................... 22
SECTION 3.06. Payment Procedure ..................................... 23
SECTION 3.07. Subrogation ........................................... 24
ARTICLE IV
FURTHER AGREEMENTS
SECTION 4.01. Effective Date; Term of Agreement ..................... 24
SECTION 4.02. Obligations Absolute .................................. 26
SECTION 4.03. Assignments; Reinsurance; Third-Party Rights .......... 26
SECTION 4.04. Liability of Financial Security and Fund .............. 27
ARTICLE V
DEFAULTS; REMEDIES
SECTION 5.01. Defaults .............................................. 28
SECTION 5.02. Remedies; No Remedy Exclusive ......................... 30
SECTION 5.03. Waivers ............................................... 32
SECTION 5.04. Agreement To Pay Fees and Expenses of Enforcement ..... 32
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Amendments, Changes and Modifications ................. 32
SECTION 6.02. Notices ............................................... 32
SECTION 6.03. Severability .......................................... 34
SECTION 6.04. Governing Law ......................................... 34
SECTION 6.05. Consent of Financial Security ......................... 34
SECTION 6.06. Counterparts .......................................... 34
SECTION 6.07. Recitals .............................................. 34
SECTION 6.08. Headings .............................................. 34
SECTION 6.09. Custody Receipts ...................................... 35
APPENDIX I - Definitions
ANNEX I - Form of Surety Bond
ANNEX II - Form of Surety Assets Coverage Report
ANNEX III - Letter Reviewing Surety Assets
Coverage Calculation
<PAGE>
INSURANCE AGREEMENT
THIS INSURANCE AGREEMENT is made as of December 1, 1988 by and between
Financial Security Assurance Inc. ("Financial Security") and Prospect Street(SM)
High Income Portfolio Inc. (the "Fund").
WITNESSETH:
WHEREAS, the Fund proposes to issue up to 345 shares of its Preferred Stock,
with an aggregate liquidation preference of $34,500,000, to finance the purchase
by the Fund of certain assets; and
WHEREAS, the Fund desires that Financial Security issue its Surety Bond
guaranteeing certain payments of dividends on and redemption or liquidation
preference amounts for the Preferred Stock; and
WHEREAS, Financial Security has agreed to issue and deliver its Surety Bond
upon the terms and subject to the conditions set forth herein; and
WHEREAS, as consideration for the issuance of the Surety Bond, the Fund has
agreed under the terms provided in this Agreement to reimburse Financial
Security (with interest at the Late Payment Rate) for any amounts paid by
Financial Security under the Surety Bond and to indemnify or reimburse Financial
Security for certain other costs as more fully set forth herein and has
acknowledged certain subrogation rights of Financial Security in respect of
amounts paid by Financial Security under the Surety Bond and agreed to take
certain actions as more fully set forth herein; and
WHEREAS, the parties hereto desire to specify the conditions precedent to
the issuance of the Surety Bond by Financial Security and to provide for certain
other matters;
NOW, THEREFORE, in consideration of the premises and of the agreements
herein contained, Financial Security and the Fund agree as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used herein shall have the meanings assigned thereto
in Appendix I hereto.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01. Representations and Warranties of the Fund. The Fund
represents and warrants to, and covenants with, Financial Security as follows:
(a) Due Organization. The Fund is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Maryland.
(b) Power and Authority. The Fund has all necessary corporate power and
authority to conduct its business as a diversified closed-end management
investment company, to enter into, deliver and perform the Fund Documents
and to perform all of its obligations thereunder.
(c) Due Qualification. The Fund is duly qualified to do business and is
in good standing as a foreign corporation (or is exempt from such
requirements) in all jurisdictions in which the nature of its business
requires such qualification other than those jurisdictions in which the
failure to be so qualified would not have a material adverse effect upon the
business or financial condition of the Fund.
(d) Due Authorization. The issuance of the Preferred Stock and the
execution, delivery and performance of the Fund Documents by the Fund and
the consummation of the transactions contemplated thereby (i) are within the
corporate powers of the Fund, (ii) have been duly authorized by all
necessary corporate action, (iii) do not require (or have not required) the
Fund to obtain any additional approvals or consents or to take other action
or give any notice to or make any filing with any Person or governmental
agency or department except such as have been obtained and remain in full
force and effect, and (iv) do not and will not result in or require the
creation of any Lien upon or in respect of any of the Fund's properties.
(e) Noncontravention. The issuance of the Preferred Stock and the
execution, delivery and performance of the Fund Documents by the Fund and
the consummation by the Fund of the transactions contemplated hereby or
thereby and the fulfillment by the Fund of or compliance by the Fund with
the terms and conditions of the Fund Documents will not:
(i) conflict with or result in any breach or violation of any of the
terms, conditions or provisions of any existing law, rule, regulation
(including, without limitation, the provisions of the Investment Company
Act, the Securities Act and Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Fund or of the Certificate or Bylaws or any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Fund is a party or by which it or any of its
properties may be bound or affected, or
(ii) constitute a default (or an event which, with the giving of
notice or lapse of time or both, would constitute a default) by the Fund
under any of the foregoing;
which conflict, breach, violation or default would materially and adversely
affect the ability of the Fund to perform its obligations under the Fund
Documents or would materially and adversely affect the rights, benefits or
enforcement of remedies or practicable realization of such rights benefits
or remedies of Financial Security hereunder or of Financial Security or any
Holder under the Custody Agreement, or the Certificate or otherwise with
respect to the Preferred Stock.
(f) Pending Litigation or Other Proceeding. There is no pending action,
proceeding or investigation before any court, governmental or administrative
agency or arbitrator against or affecting the Fund, or any properties or
rights of the Fund, or, to the Fund's knowledge after reasonable inquiry,
any threatened action or proceeding before any of the foregoing, which, if
decided adversely to the Fund, would materially and adversely affect the
ability of the Fund to perform its obligations under the Fund Documents or
would materially and adversely affect the rights, benefits or enforcement of
remedies or practicable realization of such rights or benefits of Financial
Security hereunder or of Financial Security or any Holder under the Custody
Agreement or the Certificate or otherwise with respect to the Preferred
Stock.
(g) Valid and Binding Agreement. The Fund Documents constitute legal,
valid and binding agreements of the Fund enforceable in accordance with
their respective terms, except as the enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or limiting creditors' rights generally or general equitable
principles.
(h) Liabilities. Except with respect to the Notes and fees incurred in
connection with the issuance of the Preferred Stock, the Common Stock and
the Notes and the execution of this Agreement, the Fund has not incurred any
indebtedness for borrowed money or, other than in the ordinary course of
business, any other liabilities.
(i) Compliance With Law, Regulations, Etc. The Fund has no notice nor
any reason to believe that any practice, procedure or policy employed by the
Fund in the conduct of its business violates any law, regulation, judgment,
order, decree or agreement applicable to the Fund which, if enforced, would
(i) have a material adverse effect on the Fund's ability to do business,
(ii) have a material adverse impact on the Fund's earnings or financial
condition or (iii) constitute grounds for the revocation of any license,
charter, permit or registration which is material to the conduct of the
Fund's business.
(j) Taxes. The Fund has had no income to date that would require the
filing of any income tax returns of any jurisdiction.
(k) ERISA. The Fund does not maintain or contribute to any Plan subject
to ERISA and does not expect to implement any such Plan.
(1) Delivery of Information. None of the documents, reports, notices,
leases, operating agreements, schedules, certificates, statements or other
writings, including without limitation the Registration Statement and the
Prospectuses (collectively, the "Documents"), furnished to Financial
Security by the Fund contain any statement of a material fact by the Fund
which was untrue or misleading in any material respect when made; provided,
however, the Fund makes no representations or warranties as to the
information contained in the Preferred Stock Prospectus on page 4 in the
Section entitled "PROSPECTUS SUMMARY - Surety Arrangement Financial
Security," on page 7 in the section entitled "PROSPECTUS SUMMARY - The
Offering - Secondary Market," on pages 9 and 10 in the third and fourth
paragraphs in the section entitled "PROSPECTUS SUMMARY - Special
Considerations," on pages 30 and 31 in the fourth and fifth paragraphs in
the section entitled "PORTFOLIO TRADING," in the section entitled
"UNDERWRITING," in the section entitled "FINANCIAL SECURITY," or the
financial statements relating to Financial Security or the information
contained in the Note Prospectus on page 6 in the section entitled
"PROSPECTUS SUMMARY - Surety Arrangement for Preferred Shares - Financial
Security," on page 7 in the second and third paragraphs in the section
entitled "PROSPECTUS SUMMARY - Special Considerations," the information on
pages 27 and 28 in the fourth and fifth paragraphs in the section entitled
"PORTFOLIO TRADING," in the section entitled "UNDERWRITING," or on pages 45
and 46 in the section entitled "SURETY ARRANGEMENT FOR PREFERRED SHARES -
Financial Security" or the information contained in the Common Stock
Prospectus on page 7 in the section entitled "PROSPECTUS SUMMARY Surety
Arrangement for Preferred Shares - Financial Security," on pages 8 and 9 in
the sixth and seventh paragraphs in the section entitled "PROSPECTUS SUMMARY
Special Considerations," on page 10 in the second, third and fourth
paragraphs in the section entitled "THE FUND," on pages 32 and 33 in the
fourth and fifth paragraphs in the section entitled "PORTFOLIO TRADING," in
the section entitled "UNDERWRITING" or on pages 50 and 51 in the section
entitled "SURETY ARRANGEMENT FOR PREFERRED SHARES - Financial Security."
Except as disclosed in writing to Financial Security, there is no fact known
to the Fund (relating specifically to the Fund and not to national or local
economic conditions generally) which could materially adversely affect the
Fund or the Fund's ability to meet its obligations. Since the furnishing of
the Documents, there has been no material change nor any development or
event involving a prospective material change which would render any of the
Documents untrue or misleading in a material respect.
(m) Securities Laws Compliance; Registration Statement; Prospectuses.
The Registration Statement and the Prospectuses, and all supplements or
amendments thereto, comply in all material respects with the provisions of
the Securities Act and the Investment Company Act, and the Indenture
complies in all material respects with the Trust Indenture Act of 1939, as
amended, and the Registration Statement and the Prospectuses do not contain
an untrue statement of a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made. Neither the offer nor sale of the
Preferred Stock, Common Stock or Notes in the Transaction will be in
violation of the Securities Act or any state "blue sky" or securities laws.
The Fund is in compliance in all material respects with all provisions of
the Investment Company Act applicable to it.
(n) Federal Reserve Board Regulations. No part of the initial proceeds o
the sale of the Preferred Stock will be used to purchase or carry "Margin
Securities" within the meaning of Regulation G of the Board of Governors of
the Federal Reserve System.
(o) True and Complete Copies. All agreements and other material
delivered to Financial Security or its counsel by or on behalf of the Fund
are true and correct copies of what they purport to be.
Section 2.02. Affirmative Covenants of the Fund. The Fund hereby covenants
and agrees that during the Term of the Agreement:
(a) Compliance With Agreements. The Fund shall comply in all material
respects with the terms and conditions of the Fund Documents.
(b) Corporate Existence. The Fund shall maintain its corporate existence
and shall at all times continue to be duly organized, duly qualified and
duly authorized (as described in Section 2.01(a), (c) and (d) hereof) and
will not liquidate or dissolve nor consolidate or merge with or into any
other corporation or other entity.
(c) Fund To Provide Financial Statements; Accountants' Reports; Other
Information. The Fund shall keep or cause to be kept in reasonable detail
books and records of account of the Fund's assets and business, including,
but not limited to, books and records relating to the Transaction. The books
of the Fund shall be kept on an accrual basis and the Fund shall report its
operations for tax purposes on an accrual basis.
(i) Annual Financial Statements. The Fund shall furnish to Financial
Security as soon as available, and in any event within 90 days after the
close of each fiscal year of the Fund, the audited balance sheet of the
Fund as of the end of such fiscal year and the audited statement of
operations and an audited statement of changes in net assets of the Fund
for such fiscal year, all in reasonable detail and stating in
comparative form the respective figures for the corresponding date and
period in the prior fiscal year, prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by
the report of the Fund's independent public accountants (who shall be
reasonably acceptable to Financial Security) and by the certificate
described in paragraph (d) below.
(ii) Semiannual Financial Statements. The Fund shall furnish to
Financial Security as soon as available, and in any event within 60 days
after the first six months of each fiscal year of the Fund, an unaudited
balance sheet of the Fund as of the end of such six months, an unaudited
statement of operations of the Fund for such six-month period and an
unaudited statement of changes in net assets of the Fund for such
six-month period, all in reasonable detail and stating in comparative
form the respective figures for the corresponding date and period in the
previous fiscal year, accompanied by the certificate described in
paragraph (d) below and a certificate of the chief financial officer of
the Fund to the effect that such financial statements have been prepared
in accordance with generally accepted accounting principles consistently
applied (except as noted therein) and that such financial statements
fairly present the results of operations and financial condition of the
Fund for the dates and periods indicated.
(iii) Accountants' Reports. The Fund shall furnish to Financial
Security, promptly upon receipt thereof, copies of any reports submitted
to the Fund by its independent public accountants in connection with any
examination of the financial statements of Fund made by such
accountants.
(iv) Valuation of Eligible Portfolio Property; Periodic Reports and
Certificates.
(A) Valuation Dates. The Bank of New York, as the Fund's
custodian, is appointed the initial Collateral Evaluator and shall
determine the Market Value and Surety Assets Value of each item of
Eligible Portfolio Property and in the aggregate for all Eligible
Portfolio Property on each Valuation Date.
(B) Submission of Surety Assets Coverage Report. On or before
5:00 p.m., New York City time, on the third Business Day after each
Valuation Date, the Fund shall, and on any other date the Fund may,
deliver to Financial Security a Surety Assets Coverage Report. On a
quarterly basis (the last Business Day of January, April, July and
October, commencing January 31, 1989), such Surety Assets Coverage
Report shall be confirmed by a letter in the form attached to Annex
3 hereto from the Fund's independent accountants delivered to
Financial Security within three Business Days of the delivery of the
Surety Assets Coverage Report. If any such letter shows that an
error was made in the Surety Assets Coverage Report reviewed or
shows that a lower aggregate Surety Assets Value for the Eligible
Portfolio Property was determined by the independent accountants,
the calculation or determination made by such independent
accountants shall be final and conclusive and shall be binding on
the Fund and Financial Security, and the Collateral Evaluator shall
accordingly amend the Surety Assets Coverage Report and deliver the
amended Surety Assets Coverage Report to Financial Security.
(C) Failure To Submit Surety Assets Coverage Report. At any time
that the Fund has failed to deliver any Surety Assets Coverage
Report required by Section 2.02(c)(iv)(B) or Section 2.02(c)(iv)(D)
hereof, the Fund hereby authorizes Financial Security to direct, on
behalf of the Fund, the Fund's independent accountants to prepare,
execute and deliver to Financial Security (at Financial Security's
expense in the case of a report required by Section 2.02(c)(iv)(D))
on behalf of the Fund the Surety Assets Coverage Report, as the case
may be (prepared on the same basis as is required of the Fund
pursuant to this Agreement). The Fund hereby agrees to cooperate to
the fullest extent with Financial Security and such independent
accountants in such preparation. At any time that the Fund's
independent accountants have failed to deliver confirmations and/or
verifications of the Surety Assets Coverage Report pursuant to the
terms hereof, the Fund hereby authorizes Financial Security to
contact and direct, on behalf of the Fund, such independent
accountants to deliver such confirmations and/or verifications (at
Financial Security's expense in the case of a report required by
Section 2.02(c)(iv)(D)). The Fund hereby confirms that it has given
written authorization to such accountants to take directions from
Financial Security in the situations described in this Section
2.02(c). A failure by the Fund or its independent accountants to
deliver a Surety Assets Coverage Report as required pursuant to
Section 2.02(c)(iv) shall be deemed for all purposes of this
Agreement as the delivery by the Fund of a Surety Assets Coverage
Report showing a Surety Assets Value of Eligible Portfolio Property
equal to $0.
(D) Additional Determinations of Market Value and Surety
Assets Value. At the expense of Financial Security, the Collateral
Evaluator shall make additional determinations of the Market Value
and the Surety Assets Value of the Eligible Portfolio Property and
shall deliver a Surety Assets Coverage Report within three Business
Days following the Collateral Evaluator's receipt of any written
request from Financial Security that such amounts be determined,
which request shall not be delivered more frequently than twice
during any 12-month period. Any such determination shall be done at
the expense of Financial Security unless a Default or Event of
Default shall have occurred and is continuing. To the extent
requested by and at the expense of Financial Security (unless a
Default or Event of Default shall have occurred and is continuing),
the Fund shall provide Financial Security with an executed Surety
Assets Coverage Report and the accountants' letter required by the
last sentence of Section 2.02(c)(iv)(B) hereof in connection
therewith.
(E) The Fund will provide Financial Security with a copy
of any other report or certificate that the Fund is required to
deliver, or cause to be delivered, to the Trustee under the
Indenture, the holders of the Notes or the Holders of the Preferred
Stock or the holders of the Common Stock.
(v) Other Reports and Information. Promptly after the filing or
sending thereof, copies of all proxy statements, financial statements
and reports, and copies of all regular periodic and special reports and
all registration statements which the Fund files with its public
stockholders or the Securities and Exchange Commission or any other
federal government agency, authority or body which supervises the
issuance of securities by the Fund or any national securities exchange,
as well as copies of all reports filed with the Fund pursuant to any of
the Fund Documents. If available, the Fund shall provide, or otherwise
make available, to Financial Security the registry or other listing of
the names and addresses of the Holders of the Preferred Stock on an
annual basis (or as frequently as quarterly, at the request of Financial
Security) to the extent required by Financial Security to comply with
regulation, law or court order or to comply with any request by
appropriate governmental authorities.
(d) Certificate of Compliance. The Fund shall deliver to Financial
Security concurrently with the delivery of the financial statements required
pursuant to paragraph (c)(i) and (c)(ii) above a certificate signed by the
chief financial officer of the Fund stating that:
(i) a review of such Fund's performance under this Agreement and the
Fund Documents during such period has been made under such officer's
supervision; and
(ii) to such chief financial officer's knowledge following
reasonable inquiry, no Event of Default or Default has occurred and is
continuing, or if an Event of Default or Default has occurred and is
continuing, specifying the nature thereof and, in the case of an Event
of Default or Default if the Fund has a right to cure pursuant to
Section 5.01 or otherwise, stating in reasonable detail the steps, if
any, being taken by the Fund promptly to cure such event or to otherwise
comply with the terms of this Agreement.
(e) Access to Records; Discussions With Officers and Accountants. The
Fund shall, upon the request of Financial Security (but without any
liability for expenses of Financial Security), permit Financial Security, or
its authorized agent, at reasonable times:
(i) to inspect such books and records of the Fund as they may relate
to the Preferred Stock, the obligations of the Fund under the Fund
Documents, the Fund's business and the transactions consummated in
connection herewith but not the names of ultimate beneficial holders of
the Preferred Stock except to the extent required by Financial Security
to comply with regulation, law or court order or to comply with any
request by any appropriate governmental authorities;
(ii) to discuss the affairs, finances and accounts of the Fund with
any of its officers and directors; and
(iii) to discuss the affairs, finances and accounts of the Fund with
the Fund's independent accountants, provided that an officer of the Fund
(or his designee) shall have the right to be present during such
discussions.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the Fund.
Such requests will not be made more frequently than semiannually until such
time, if any, as Financial Security determines, in its sole discretion, that
increased access is reasonably necessary under the circumstances which then
exist and provides the Fund a written statement to that effect, specifying
such circumstances. The books and records of the Fund will be maintained at
the address of the Fund designated herein for receipt of notices, unless the
Fund shall otherwise advise the parties hereto in writing.
Financial Security shall keep confidential any matter of which it
becomes aware through such inspections or discussions, except as may be
otherwise required by regulation, law or court order or requested by
appropriate governmental authorities or as necessary to enforce this
Agreement, the Custody Agreement or the other Fund Documents. If Financial
Security is requested or required (by oral questions, interrogatories,
requests for information or documents subpoena, civil investigative demand
or similar process) to disclose any information of which it becomes aware
through such inspections or discussions, Financial Security will promptly
notify the Fund of such request(s) so that the Fund may seek an appropriate
protective order and/or waive Financial Security's compliance with the
provisions of this Agreement. If, in the absence of a protective order or
the receipt of a waiver hereunder, Financial Security is legally required,
in the opinion of its counsel, to disclose such information, Financial
Security may disclose such information without liability hereunder.
(f) Inform Financial Security of Material Events. The Fund shall
promptly inform Financial Security in writing of the following:
(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation against
the Fund involving an uninsured amount in excess of $100,000 in any one
instance or $500,000 in the aggregate;
(ii) the occurrence of any Default or Event of Default;
(iii) the occurrence of any event of default (or event which with
notice or the lapse of time or both would constitute an event of
default) under the Indenture;
(iv) any proceedings instituted by or against the Fund in any
federal, state or local court or before any governmental body or agency,
or before any arbitration board, or any such proceedings threatened by
any governmental agency, which, if adversely determined, would have a
material adverse effect upon the Fund's ability to perform its
obligations under any Fund Document; and
(v) the receipt of notice from any agency or governmental body
having authority over the conduct of the Fund's business that (A) the
Fund is being placed under regulatory supervision, (B) any license,
permit, charter, membership or registration material to the conduct of
the Fund's business is to be suspended or revoked, or (C) the Fund is to
cease and desist any practice, procedure or policy employed by the Fund
in the conduct of its business, and such cessation will materially
adversely affect the conduct of the Fund's business or materially
adversely affect the financial affairs of the Fund.
(g) Further Assurances. Subject to Section 6.01, the Fund shall, upon
the request of Financial Security, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such
further instruments and take such further action as may be reasonably
necessary to effectuate the intention, performance and provisions of this
Agreement. In addition, the Fund agrees to cooperate with S&P and Moody's in
connection with any review of the Transaction which may be undertaken by S&P
or Moody's after the date hereof and take such actions as may reasonably be
required thereby to confirm the initial "AAA/Aaa" ratings on the Preferred
Stock provided that the Fund shall not be required to take any action with
respect to such ratings if in the reasonable judgment of the Fund such
action would be adverse to the Fund or the holders of the Common Stock of
the Fund or to obtain or maintain a Shadow Rating on the Preferred Stock of
an investment grade provided that the Fund shall not be required to take any
action with respect to a Shadow Rating if in its sole judgment such action
would be detrimental to the Fund or the holders of the Common Stock of the
Fund.
(h) Compliance With Investment Company Act. The Fund shall comply in all
material respects with provisions of the Investment Company Act applicable
to it and the related regulations and rules promulgated by the Commission
under the Investment Company Act.
(i) ERISA. The Fund shall comply in all material respects with ERISA and
shall not incur any liabilities to the PBGC or to any multiemployer plan
under ERISA in connection with any Plan which would have a material adverse
effect upon the financial condition of the Fund.
(j) Custody Agreement. The Fund agrees to recognize, and hereby
acknowledges, the rights of the Holders as described in Section 3.04 of the
Custody Agreement.
(k) Paying Agent Agreement. The Fund shall cause the Paying Agent to
execute an agreement in such form and substance as shall be acceptable to
Financial Security in which the Paying Agent agrees to give notices to
Financial Security and the Custodian regarding moneys received from the Fund
to pay amounts due under the Preferred Stock.
Section 2.03. Negative Covenants of the Fund. The Fund agrees and covenants
with Financial Security that at all times during the Term of the Agreement:
(a) Amendments to Organic Documents; Changes in Nature or Conduct of
Business. Without the prior written consent of Financial Security, which
consent shall not be unreasonably withheld, the Fund shall not (i) amend,
supplement or otherwise modify its Certificate or Bylaws (or permit any of
the foregoing); (ii) change the nature of its business or operations from
that of a closed-end management investment company incorporated in the State
of Maryland and subject to regulation by the Commission under the Investment
Company Act; or (iii) employ or pursue an investment strategy inconsistent
with or in violation of the fundamental policies described in the Preferred
Stock Prospectus under the heading "INVESTMENT OBJECTIVE AND
POLICIES--Investment Restrictions"; provided, however, in the event that the
claims paying ability of Financial Security is rated less than "AA+" by
Standard & Poor's or "Aal" by Moody's, Financial Security agrees to provide
such written consent if (A) reasonably required to maintain for the
Preferred Stock a "AA+" or higher rating from SOP or a "Aal" or higher
rating from Moody's and (B) the effect of the proposed action for which
consent is required would not materially and adversely affect the rights,
benefits or enforcement of remedies or practicable realization of such
rights or benefits of Financial Security hereunder or of Financial Security
or any Holder under the Custody Agreement or the Certificate or otherwise
with respect to the Preferred Stock.
(b) Creation of Indebtedness. Without the prior written consent of
Financial Security, the Fund shall not create, incur, assume or suffer to
exist any Indebtedness other than Permitted Indebtedness.
(c) Restrictions on Liens. The Fund will not create, incur or suffer to
exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence, of any Lien on any of its assets except
for (i) Liens the validity of which are being contested in good faith by
appropriate proceedings, (ii) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (iii) Liens to
secure payment for services rendered by the Auction Agent or the Trustee
with respect to the Notes in connection with the Preferred Stock or the
Notes and (iv) Liens otherwise incurred in connection with borrowings made
in the ordinary course of business in accordance with the Fund's stated
investment objective, policies and restrictions.
(d) Subsidiaries. The Fund shall not form, or cause to be formed, any
subsidiaries.
(e) Restrictions on Dividends. The Fund shall not declare or pay any
dividends, or apply any of its property or assets to purchase, redeem or
retire, or make any distribution by reduction of capital or otherwise in
respect of, shares of capital stock of the Fund (other than the Preferred
Stock) (all of the foregoing, "Restricted Payments"), unless such Restricted
Payment is permitted by the Certificate and the Surety Assets Coverage is
met immediately following such payment or application based upon the most
recent Surety Assets Coverage Report.
(f) Issuance of Stock. Without the prior written consent of Financial
Security, the Fund shall not issue any capital stock other than (i) the
Preferred Stock issued on the Date of Issuance or authorized to be issued
under Section 4.01(b) hereof and (ii) the Common Stock.
(g) Insolvency. The Fund shall not (i) commence any case, proceeding or
other actions under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or
(ii) seek appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or make a
general assignment for the benefit of its creditors; the Fund shall not take
any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth above; the Fund shall generally
pay its debts as they become due and shall not admit in writing its
inability to pay its debts as they become due.
(h) Impairment of Rights. Without the prior written consent of Financial
Security, the Fund shall not take any action, or fail to take any action, if
such action or failure to take action will interfere with the enforcement of
any rights under the Fund Documents that are material to the rights,
benefits or obligations of Financial Security.
(i) Waiver, Amendments, Etc. Subject to Section 2.03(a) above, without
the prior written consent of Financial Security, the Fund shall not waive,
modify or amend, or consent to any waiver, modification or amendment of any
of the terms, provisions or conditions of the Fund Documents that are
material to the rights, benefits or obligations of Financial Security.
(j) Purchase or Sale of Securities. The Fund shall not, and shall cause
its Investment Adviser not to, purchase or sell a security with knowledge
that the effect of such purchase or sale will be to cause, or be likely to
cause, the Surety Assets Coverage not to be met immediately subsequent to
the consummation of such purchase or sale.
(k) Investment Adviser. The Fund shall not designate a new Investment
Adviser unless the Person to be designated as Investment Adviser has been
approved by Financial Security which approval shall not be unreasonably
withheld.
(l) ERISA. The Fund shall not contribute or incur any obligation to
contribute to any Plan.
Section 2.04. Special Covenants of the Fund.
(a) Redemption of Preferred Stock or Notes. Upon redemption of any
shares of Preferred Stock pursuant to the Certificate and upon redemption of
any Notes pursuant to the Indenture during the Term of the Agreement, the
Fund shall furnish or cause to be furnished to Financial Security a notice
of such redemption.
(b) Maintenance of Surety Assets Value. The Fund shall maintain Eligible
Portfolio Property having a Surety Assets Value at least equal to the Surety
Assets Coverage at all times during the Term of the Agreement.
(c) Optional Redemptions by the Fund.
(i) Unless otherwise approved in writing by Financial Security, the
Fund shall not give any Notice of Redemption to effect any optional
redemption of the Preferred Stock unless, prior to the mailing of such
notice, the Fund shall have Deposit Securities in an amount available to
pay in full the cash redemption price on the Redemption Date. Following
the mailing of such Notice of Redemption, the Fund shall not reinvest
the moneys so invested in Deposit Securities without the prior written
consent of Financial Security.
(ii) Without in any way affecting its obligations hereunder, this
Section 2.04(c) shall not be deemed to limit the Fund's right to effect
optional redemptions of Preferred Stock in its own discretion to the
extent authorized by law and the Certificate.
(d) Redemption Date and Redemption Notice. Unless Financial Security
shall otherwise consent or request in writing, the Fund shall set the
redemption date for any mandatory redemption of the Preferred Stock required
under the Certificate at the latest Business Day possible under the
provision of Section 5 of Article IV(C) of the Certificate.
(e) Sale of Eligible Portfolio Property to Financial Security. Prior to
liquidating any portion of its Eligible Portfolio Property pursuant to this
Section 2.04, the Fund shall offer and sell such Eligible Portfolio Property
to Financial Security if Financial Security offers a price which is equal to
or greater than the price at which the Fund proposed to sell such Eligible
Portfolio Property. Financial Security shall accept or reject each such
offer as promptly as practicable and in any event not later than 24 hours
after receipt thereof; provided, however, that in the event Financial
Security fails to respond to any such offer by the close of business on the
date such offer is received, the applicable price shall be the price at
which the Fund proposes to sell such Eligible Portfolio Property on the
following day.
(f) Periodic Liquidation of Property.
(i) The Fund shall liquidate property to the extent required to
provide Deposit Securities available to pay the redemption price of any
Preferred Stock on any Redemption Date. Unless Financial Security shall
otherwise direct, such property will be liquidated at a rate no slower
than equal weekly installments during the applicable Liquidation Period.
"Liquidation Period" shall commence upon the occurrence of an event
requiring redemption and shall expire on the date of mailing of the
Notice of Redemption. Proceeds from such liquidation of property shall
be invested in Deposit Securities.
(ii) The Fund shall liquidate Eligible Portfolio Property consisting
of Other Corporate Bonds and invest the proceeds thereof in Deposit
Securities not later than a date 90 days after the occurrence of the
Event of Default stated in Section 5.01(e) (the "First Deposit Date")
unless on such date the Fund shall otherwise have Deposit Securities
sufficient to redeem the Preferred Stock required to be redeemed in full
on the date redemption of such Preferred Stock is required pursuant to
this Agreement. Unless Financial Security shall otherwise direct, such
Other Corporate Bonds will be liquidated at a rate no slower than equal
weekly installments between the occurrence of such Event of Default and
the First Deposit Date. The Fund shall liquidate remaining Eligible
Portfolio Property and invest in Deposit Securities in an amount
sufficient, when added to Deposit Securities held resulting from the
liquidation required in the second preceding sentence, to pay the
redemption price of the Preferred Stock not later than a date 30 days
prior to the redemption of the Preferred Stock (the "Second Deposit
Date"). Unless Financial Security shall otherwise direct, such Eligible
Portfolio Property will be liquidated at a rate no slower than equal
weekly installments between the First Deposit Date and the Second
Deposit Date. Proceeds from such liquidation of Eligible Portfolio
Property shall be invested in Deposit Securities.
(iii) The Fund shall liquidate property to the extent required to
provide Deposit Securities available to pay dividends on the Preferred
Stock no later than 20 days prior to each Dividend Payment Date.
(iv) On or before 12:00 noon, New York time, on the third Business
Day prior to each Dividend Payment Date or a Redemption Date
constituting a Scheduled Payment, but no earlier than five Business Days
prior to each Dividend Payment Date or a Redemption Date constituting a
Scheduled Payment of the Preferred Stock, as applicable, and on the
Business Day preceding any other Redemption Date, the Fund shall deliver
to the Paying Agent Cash out of the Deposit Securities sufficient to
make the required payment with respect to the Preferred Stock.
(v) The Fund shall specify on each Surety Assets Coverage Report the
Deposit Securities that satisfy the requirements of Section 2.04(c) or
Section 2.04(f) as of the related Valuation Date.
(g) Certain Investment Limitations. The Fund shall not (i) acquire or
otherwise invest in (A) repurchase agreements except those described in
paragraph (b) of the definition of Short Term Money Market Instruments, (B)
reverse repurchase agreements, (C) futures contracts or (D) options on
futures contracts except to the extent such options do not exceed five
percentum of the value of the total assets of the Fund, (ii) engage in short
sales, (iii) overdraw any bank account, (iv) write options on portfolio
securities other than call options on securities held in the Fund's
portfolio or that the Fund has an immediate right to acquire through
conversion or exchange of securities held in its portfolio or (v) engage in
the lending of portfolio securities unless such lending would be permitted
pursuant to the terms of the Indenture or, unless, in any such case, the
Fund shall have received written consent from Financial Security.
(h) Redemption of the Notes. If the Fund is prohibited from redeeming
shares of Preferred Stock in connection with any Redemption Request by the
provisions of the Investment Company Act, the Fund shall redeem as soon as
practicable under the Indenture and from time to time the maximum principal
amount of the Notes permitted to be redeemed under the Indenture as shall
permit redemption of the Preferred Stock to proceed.
(i) Redemption Prior to Stated Termination Date. The Fund agrees for the
benefit of the Holders to call for redemption all outstanding shares of the
Preferred Stock so that the Redemption Date for such redemption is on the
Dividend Payment Date next preceding the Stated Termination Date unless the
Fund shall have received written evidence from S&P, if the Preferred Stock
is then rated by S&P, and from Moody's, if the Preferred Stock is then rated
by Moody's, that the termination of the Surety Bond would not, of itself,
result in a reduction or withdrawal of the ratings then applicable to the
Preferred Stock.
ARTICLE III
THE SURETY BOND; INDEMNIFICATION; SECURITY
Section 3.01. Agreement To Issue Surety Bond. Financial Security agrees,
subject to the conditions set forth in Section 3.02 hereof, to issue the Surety
Bond.
Section 3.02. Conditions Precedent to Issuance of the Surety Bond. As
conditions precedent to the obligation of Financial Security to issue the Surety
Bond, the Fund shall have complied with the terms and satisfied the conditions
precedent set forth below, which compliance and satisfaction may be simultaneous
with the delivery of the Surety Bond:
(a) Financial Security shall have received a fully executed copy of each
of this Agreement, the Indenture, the Custody Agreement, the Auction Agent
Agreement, the Certificate, the agreement referred to in Section 2.02(k)
hereof, the Premium Side Letter and the DTC Letter.
(b) Financial Security shall have received a copy of the resolutions of
the Fund's Board of Directors authorizing the execution and delivery and
performance by the Fund of the Fund Documents and other matters contemplated
thereby, and of all other documents evidencing any other necessary action of
the Fund to enter into the Fund Documents certified by the Secretary or
Assistant Secretary of the Fund accompanied by a certified copy of the
Bylaws empowering the Board of Directors to authorize the foregoing (which
certificate shall state that such resolutions are in full force and effect
on the Date of Issuance).
(c) Financial Security shall have received a certificate of the
Secretary or an Assistant Secretary of the Fund certifying the name and true
signatures of the officers of the Fund authorized to sign the Fund Documents
and that stockholder consent to the execution and delivery of such documents
and instruments is not necessary.
(d) Financial Security shall have received a certificate of appropriate
officers of the Fund to the effect that the representations and warranties
of the Fund in this Agreement are true and correct in all material respects.
(e) Financial Security shall have received all favorable opinions of
counsel reasonably requested by Financial Security in form and substance
reasonably acceptable to Financial Security and its counsel.
(f) Financial Security shall have received true and correct copies of
all governmental approvals, if any, necessary for the transactions
contemplated by this Agreement.
(g) Financial Security shall have received a copy of the written
authorization given by the Fund to its independent accountants in connection
with Section 2.02(c) hereof.
(h) Financial Security shall have received such other documents,
instruments, approvals or opinions requested by Financial Security as may be
reasonably necessary to effect the Transaction.
(i) There shall have been received from S&P and Moody's ratings of "AAA"
and "aaa," respectively, on the Preferred Stock.
(j) Financial Security shall have received payment in full of the
portion of the Premium due on the Date of Issuance.
Section 3.03. Payment of Fees and Premiums.
(a) Legal Fees. The Fund (i) shall pay or cause to be paid legal fees
and expenses (not to exceed $80,000) incurred to and including the Date of
Issuance by Financial Security in connection with the issuance of the Surety
Bond and (ii) shall reimburse Financial Security for all legal fees and
expenses reasonably incurred after the Date of Issuance in connection with
any amendment, waiver or other action of or with respect to the Agreement or
any Fund Document or the Transaction.
(b) Rating Agency Fees. The initial fees of S&P and Moody's with respect
to the Preferred Stock and the transactions contemplated hereby shall be
paid by the Fund in full on the date of issuance of the Surety Bond. All
periodic and subsequent fees of S&P or Moody's with respect to the Preferred
Stock shall be for the account of the Fund or, if paid by Financial
Security, reimbursed by the Fund to Financial Security upon demand. The fees
for any other rating agency shall be paid by the party requesting such other
agency's rating, unless such other agency is a substitute for S&P or Moody's
in the event that S&P or Moody's is no longer rating securities, in which
case the cost for such agency shall be paid by the Fund.
(c) Premium. The Premium shall be paid by the Fund pursuant to the terms
of the Premium Side Letter.
(d) Custodial Fees. The Fund shall pay or cause to be paid all fees and
other amounts payable to the Custodian under the Custody Agreement.
Section 3.04. Reimbursement Obligation. The Fund shall reimburse and
indemnify Financial Security and shall immediately be liable for payment in full
to Financial Security in accordance with this Agreement of the amount of any
payment by Financial Security under the Surety Bond and the Fund shall pay
interest on such amounts at the late Payment Rate until paid; provided that such
payment obligation may be satisfied pursuant to the provisions of Section 3.07
hereof. The Fund agrees to pay to Financial Security any and all reasonable
charges and expenses which Financial Security may pay or incur relative to the
performance of this Agreement including, but not limited to, attorneys'
(including up to $80,000 of attorneys' fees in connection with the issuance of
the Surety Bond) and accountants' fees and expenses (including fees for any
consent provided in connection with the Registration Statement or Prospectuses,
any periodic reports or any materials used in connection with the auction of the
Preferred Stock), payments of any fees and charges in connection with any
accounts established to facilitate payments under the Surety Bond and any costs
and expenses incurred by Financial Security in connection with the
administration and enforcement of the Custody Agreement or the Fund Documents.
All such amounts are to be immediately due and payable without demand.
Section 3.05. Indemnification. In addition to any and all rights of
indemnification, subrogation or any other rights pursuant hereto or under law or
equity, the Fund agrees to pay, and to protect, indemnify and save harmless,
Financial Security and its officers, directors, shareholders, employees and
agents from and against any and all losses, liabilities (including penalties),
actions, suits, judgments, demands, damages, costs or expenses of any nature
arising out of or relating to the transactions contemplated by the Custody
Agreement or the Fund Documents by reason of:
(a) any omission or action (other than of or by Financial Security) in
connection with the offering, issuance, sale, remarketing, auction or
delivery of the Preferred Stock, the Common Stock or the Notes;
(b) the negligence, willful misconduct, misfeasance, malfeasance or
theft committed by any director, officer, employee or agent of the Fund in
connection with any transaction arising from or relating to the Custody
Agreement or any of the Fund Documents;
(c) the violation by the Fund of any federal or state securities,
banking or antitrust laws, rules or regulations in connection with any
transaction arising from or relating to the Custody Agreement or any of the
Fund Documents;
(d) the violation by the Fund of any federal or state laws, rules or
regulations relating to the maximum amount of interest permitted to be
received on account of the loan of money in connection with any transaction
arising from or relating to the Custody Agreement or any of the Fund
Documents;
(e) the breach by the Fund of its obligations under any of the Fund
Documents; and
(f) the breach by the Fund of any representation or warranty or
misrepresentation on the part of the Fund contained in any of the Fund
Documents or in any certificate furnished or delivered to Financial Security
in connection herewith or therewith or pursuant hereto or thereto.
This indemnity provision, as well as the payment obligation set forth in Section
3.04, shall survive the termination of this Agreement and shall survive until
the statute of limitations has run on any causes of action which arise from one
of these reasons and until all suits filed as a result thereof have been finally
concluded.
Section 3.06. Payment Procedure. In the event of any payment by Financial
Security, the Fund agrees to accept the voucher or other evidence of payment as
prima facie evidence of the propriety thereof and the liability therefor to
Financial Security to the extent provided herein. All payments to be made to
Financial Security under this Agreement shall be made to Financial Security in
lawful currency of the United States of America in immediately available funds
at the address of Financial Security, provided in Section 6.02 hereof, before
1:00 p.m. (New York, New York time) on the date when due. Payments to be made
to Financial Security under this Agreement shall bear interest at the Late
Payment Rate from the date when due to the date paid.
Section 3.07. Subrogation. The Fund acknowledges that, to the extent of
any payment made by Financial Security pursuant to the Surety Bond, Financial
Security is to be fully subrogated to the extent of such payment, to the rights
of the Fund and the Holders to any moneys paid or payable under the Fund
Documents. The Fund agrees to such subrogation and, further, agrees to execute
such instruments and to take such actions as, in the sole judgment of Financial
Security, are necessary to evidence such subrogation and to perfect the rights
of Financial Security to receive any moneys paid or payable under the Fund
Documents. Any amount applied to payment on the shares of Preferred Stock as to
which Financial Security has made payment under the Surety Bond shall be deemed
to satisfy the obligation of the Fund pursuant to Section 3.04 to reimburse
Financial Security in an amount equal to the amount so applied. To the extent
the Fund fully reimburses Financial Security pursuant to Section 3.04 hereof,
the payment obligations of the Fund pursuant to the Fund Documents shall be
deemed satisfied and Financial Security agrees to execute such instruments as
may be necessary to demonstrate such satisfaction.
ARTICLE IV
FURTHER AGREEMENTS
Section 4.01. Effective Date; Term of Agreement.
(a) This Agreement shall take effect on the Date of Issuance and shall
remain in effect until such time as Financial Security is no longer subject
to a claim under the Surety Bond (or Financial Security shall have received
an opinion in form and substance and from counsel acceptable to Financial
Security to the effect that Financial Security is no longer subject to a
claim under the Surety Bond) and all amounts payable by the Fund hereunder,
under the Premium Side Letter, under the Fund Documents and under the
Preferred Stock have been paid in full.
(b) At the request of the Fund, Financial Security shall deliver to the
Custodian an endorsement to the Surety Bond to increase the coverage thereof
in connection with an increase in the number of shares of Preferred Stock up
to the number set forth in the first WHEREAS clause, provided (1) the
conditions for the purchase of such Preferred Stock set forth in the
Underwriting Agreement with respect to the Preferred Stock are satisfied,
(2) the conditions set forth in Sections 4.01(c)(ii) and 4.01(c)(iii) (A),
(B) and (D) hereof are met and (3) the ratio of the number of shares of
Common Stock and Preferred Stock and the principal amount of Notes
outstanding on the Date of Issuance and immediately following such issuance
of additional Preferred Stock shall be the same.
(c) The Surety Bond shall expire on December 5, 1993; provided however,
that such expiration date shall be extended in one or more successive terms
of one, two, three, four or five years as designated by the Fund but in no
event later than December 5, 1998, such extension to be effective six months
prior to the Stated Termination Date, in the event that (i) Financial
Security has received no later than 190 days prior to the Stated Termination
Date a written request from the Fund requesting such extension and
specifying such new expiration date, (ii) the Fund has paid all premiums due
hereunder and under the Premium Side Letter and (iii) as of the date of such
request and the date of such extension (A) there has not occurred and is not
continuing a Default or Event of Default, (B) the Surety Assets Coverage is
met, (C) the ratio of the outstanding principal of Notes plus the aggregate
liquidation value of the Preferred Stock to the Fund "assets" less
"liabilities" not constituting "senior securities" (as such terms are used
in Section 18 of the Investment Company Act) does not exceed 45% and (D) the
Fund is not in violation of any material provision of the Investment Company
Act of 1940. In consideration for the agreement by Financial Security to
such extension of the term of the Surety Bond and provided that the claims
paying ability of Financial Security is not then rated "AA+" or less by S&P
or "Aa" or less by Moody's, the Fund shall not replace the Surety Bond at
any time prior to December 5, 1998 with any surety bond, financial guaranty
or other credit enhancement. In the event the conditions described in the
preceding sentence are met and the conditions described in (ii) and (iii) of
the preceding sentence are met, Financial Security shall deliver to the
Custodian an endorsement to the Surety Bond providing for such extension of
the expiration date.
Section 4.02. Obligations Absolute. The obligations of the Fund hereunder
during the Term of the Agreement shall be absolute and unconditional, and will
be paid or performed strictly in accordance with this Agreement irrespective of:
(i) any lack of validity or enforceability of, or any amendment or
other modifications of, or waiver with respect to any agreement of the
Fund relating to the Fund Documents, the Custody Agreement, the Surety
Bond or this Agreement;
(ii) any exchange or release of any other obligations hereunder; or
(iii) any other circumstances, other than payment in full, which
might otherwise constitute a defense available to, or discharge of, the
Fund in respect to this Agreement or any other Fund Document and the
Fund hereby waives its rights of, abatement, diminution, postponement or
deduction, or to any defense other than payment, or to any right of
setoff or recoupment arising out of any breach under any of the Fund
Documents, by any party thereto or any beneficiary thereof, or out of
any obligation at any time owing to the Fund.
Nothing herein shall be construed as prohibiting the Fund from pursuing any
rights or remedies it may have against any other Person in a separate legal
proceeding.
Section 4.03. Assignments; Reinsurance; Third-Party Rights.
(a) This Agreement shall be a continuing obligation of the Fund and
shall (i) be binding upon the Fund and its respective successors and
assigns, and (ii) inure to the benefit of and be enforceable by Financial
Security and its successors, transferees and assigns. The Fund may not
assign this Agreement, or delegate any of its duties hereunder, without the
prior written consent of Financial Security. Nothing contained herein shall
restrict Financial Security from assigning to any lender or lenders under
any liquidity facility any rights of Financial Security under this Agreement
or with respect to any real or personal property or other interests pledged
to Financial Security, or in which Financial Security has a security
interest, in connection with the transaction contemplated hereby. No
assignment by Financial Security of any of its rights or obligations under
this Agreement shall discharge any obligation of Financial Security under
the Surety Bond or give any party other than Financial Security the right to
exercise rights, consents and waivers hereunder.
(b) Financial Security shall have the right to give participations in
its rights under this Agreement and to enter into contracts of reinsurance
with respect to the Surety Bond and each such participant or reinsurer shall
be entitled to the benefit of any representation, warranty, covenant and
obligation of the Fund hereunder as if such participant or reinsurer was a
party hereto.
(c) Except as provided herein with respect to participants and
reinsurers and as provided in the Surety Bond, nothing in this Agreement
shall confer any right, remedy or claim, express or implied, upon any
Person, including, particularly, any Holder, other than Financial Security,
against the Fund, and all the terms, covenants, conditions, promises and
agreements contained herein shall be for the sole and exclusive benefit of
the parties hereto and their successors and permitted assigns. No Holder
shall have any right to payment from any premiums paid or payable hereunder
or from any amounts paid by the Fund pursuant to Section 3.04 or 3.05
hereof.
Section 4.04. Liability of Financial Security and Fund. Neither Financial
Security nor the Fund shall be responsible for any act or omission of the
Custodian with respect to its use of the Surety Bond. Neither Financial
Security, the Fund nor any of their respective officers, directors or employees
shall be liable or responsible for: (a) the use which may be made of the Surety
Bond by the Custodian or for any acts or omissions of the Custodian in
connection therewith; or (b) the validity, sufficiency, accuracy or genuineness
of documents, or of any endorsement(s) thereon (other than signatures or other
endorsements actually signed by Financial Security or the Fund), even if such
documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged. In furtherance and not in limitation of the
foregoing, Financial Security may accept documents that appear on their face to
be in order, without responsibility for further investigation.
ARTICLE V
DEFAULTS; REMEDIES
Section 5.01. Defaults. The occurrence of any of the following events shall
constitute an Event of Default hereunder:
(a) the Fund shall fail to pay to Financial Security when due any amount
payable by the Fund hereunder or under any other Fund Document;
(b) any default by the Fund in its performance of any covenant contained
herein (other than as set forth in Section 2.04(b), (e) or (f) hereof) and
such default shall continue for at least 30 days after written notice
thereof by Financial Security to the Fund requesting that such default be
cured if such default would, in the reasonable judgment of Financial
Security, materially and adversely affect the ability of the Fund to perform
its material obligations under any Fund Document or would materially and
adversely affect the material rights, material benefits or enforcement of
remedies or the practicable realization of such material rights or material
benefits of Financial Security hereunder or of Financial Security or any
Holder under the Custody Agreement or the Certificate or otherwise with
respect to the Preferred Stock;
(c) any material representation or warranty made by the Fund herein or
in connection herewith shall prove to be incorrect in any material respect
when made or deemed made if such breach would, in the reasonable judgment of
Financial Security, materially and adversely affect the ability of the Fund
to perform its material obligations under any Fund Document or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Custody Agreement or the Certificate or
otherwise with respect to the Preferred Stock;
(d) any failure by the Fund to maintain Eligible Portfolio Assets having
a Surety Assets Value at least equal to the Surety Assets Coverage, which
failure is not cured within eight Business Days;
(e) any failure by the Fund, on or prior to the date six months prior to
the Stated Termination Date of the Surety Bond, to either (A) obtain from
Financial Security an extension to the term of the Surety Bond or (B) obtain
notice in writing from each of Moody's and S&P that termination of the
Surety Bond will not adversely affect the then outstanding ratings of the
Preferred Stock;
(f) the Internal Revenue Service makes a final determination that the
Fund does not qualify for any taxable year for exemption from federal income
taxation and such determination would, in the reasonable judgment of
Financial Security, materially and adversely affect the ability of the Fund
to perform its material obligations under any Fund Document or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Custody Agreement or the Certificate or
otherwise with respect to the Preferred Stock;
(g) the Fund commences a voluntary case concerning it under Title 11 of
the United States Code entitled "Bankruptcy" as now or hereafter in effect,
or any successor thereto (the "Bankruptcy Code"); or an involuntary case is
commented against the Fund under any the Bankruptcy Code and relief is
ordered against the Fund or the petition is controverted but is not
dismissed within 60 days after the commencement of the case; or the Fund is
not generally paying its debts as such debts become due; or a custodian (as
defined in the Bankruptcy Code) is appointed for, or takes charge of, all or
substantially all of the property of the Fund; or a decree or order is
entered by a court or agency or supervisory authority having jurisdiction in
the premises for the appointment of a conservator, receiver or liquidator
for the Fund in any insolvency, readjustment of debt, marshalling of assets
and liabilities, or similar proceeding, or for the winding up or liquidation
of the affairs of the Fund, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or the Fund
consents to the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and liabilities,
or similar proceeding, or relating to the Fund or of or relating to
substantially all of its property; or the Fund makes a general assignment
for the benefit of creditors; or any action is taken by the Fund for the
purpose of effecting any of the foregoing;
(h) the Fund shall have denied that it has any or further liability or
obligation under any Fund Document, or the Preferred Stock or any
governmental agency or authority shall find or rule that any Fund Document
or the Preferred Stock are not valid or binding on the Fund, if such denial,
finding or ruling would, in the reasonable judgment of Financial Security,
materially and adversely affect the ability of the Fund to perform its
material obligations under any Fund Document or the Preferred Stock or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Certificate or otherwise with respect to
the Preferred Stock;
(i) the Fund shall fail to perform or observe any of its covenants or
agreements set forth in, or to take any action required by, Section 2.04(e)
or (f) hereof; or
(j) the failure by the Fund to make a payment of dividend or redemption
price when due on the Preferred Stock or to declare a dividend on the
Preferred Stock when contemplated by the Certificate and not prohibited by
applicable corporate law or the Investment Company Act.
Section 5.02. Remedies; No Remedy Exclusive.
(a) Upon the occurrence of an Event of Default (other than a Surety
Assets Coverage Event of Default), Financial Security may take whatever
action at law or in equity as may appear necessary or desirable in its
judgment to collect the amounts then due and thereafter to become due under
the Fund Documents or to enforce performance and observance of any
obligation, agreement or covenant of the Fund under the Fund Documents.
(b) If an Event of Default shall have occurred and be continuing, the
Fund shall, upon receipt of a written request from Financial Security (a
"Redemption Request"), deliver a Notice of Redemption pursuant to Section
5(b) of Article IV(C) of the Certificate with respect to, and shall redeem,
such number of shares of Preferred Stock as shall be specified by Financial
Security in such Redemption Request on a date designated by Financial
Security not earlier than 15 days after the giving of such Redemption
Request or such longer period as may be required by applicable law, provided
that in the case of a Surety Assets Coverage Event of Default, Financial
Security shall, within one Business Day, deliver a Redemption Request and
the redemption date for such Redemption Request shall not be later than 35
days following the giving of such Redemption Request; however, the maximum
number of shares of Preferred Stock that the Fund shall be required to
redeem shall be the least number of whole shares of Preferred Stock the
redemption of which, if deemed to have occurred on the Valuation Date as of
which the Fund had failed to maintain such Surety Assets Coverage, could
have been effected using the deemed proceeds (i.e., assuming sale at the
Market Value) from the deemed sale of "Special Redemption Assets." For
purposes hereof, Special Redemption Assets shall mean such portfolio
holdings as are identified by the Fund in its sole discretion, the deemed
sale of which for cash on the applicable Valuation Date on which the Surety
Assets Coverage was not met would have caused the Surety Assets Coverage on
a pro forma basis to have been met on such Valuation Date. The Fund need not
liquidate the Special Redemption Assets; however, assets liquidated to
effect the redemption must have the same Discount Factor or Factors as the
Special Redemption Assets identified by the Fund. Any Redemption Request
(other than a Redemption Request given pursuant to a Surety Assets Coverage
Event of Default), once delivered, may be withdrawn by Financial Security at
any time prior to the mailing of the related Notice of Redemption. Financial
Security may deliver one or more Redemption Requests with respect to a
single Event of Default.
(c) Unless otherwise expressly provided, no remedy herein conferred upon
or reserved is intended to be exclusive of any other available remedy, but
each remedy shall be cumulative and shall be in addition to other remedies
given under the Fund Documents or existing at law or in equity. No delay or
omission to exercise any right or power accruing under the Fund Documents
upon the happening of any event set forth in Section 5.01 hereof shall
impair any such right or power or shall be construed to be a waiver thereof,
but any such right and power may be exercised from time to time and as often
as may be deemed expedient. In order to entitle Financial Security to
exercise any remedy reserved to Financial Security in this Article, it shall
not be necessary to give any notice, other than such notice as may be
required in this Article.
Section 5.03. Waivers.
(a) No failure by Financial Security to exercise, and no delay by
Financial Security in exercising, any right hereunder shall operate as a
waiver thereof. The exercise by Financial Security of any right hereunder
shall not preclude the exercise of any other right, and the remedies
provided herein to Financial Security are declared in every case to be
cumulative and not exclusive of any remedies provided by law or equity.
(b) Financial Security shall have the right, to be exercised in its
complete discretion, to waive any Event of Default hereunder, by a writing
setting forth the terms, conditions and extent of such waiver signed by
Financial Security and delivered to the Fund. Unless such writing expressly
provides to the contrary, any waiver so granted shall extend only to the
specific event or occurrence which gave rise to the Event of Default so
waived and not to any other similar event or occurrence which occurs
subsequent to the date of such waiver.
Section 5.04. Agreement To Pay Fees and Expenses of Enforcement. Upon
the occurrence of an Event of Default hereunder, the Fund agrees that it will
pay or reimburse Financial Security on demand for all costs and expenses,
including, without limitation, the reasonable fees and expenses of attorneys for
the enforcement of performance or observance of any obligation or agreement on
the part of the Fund herein contained.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Amendments, Changes and Modifications. This Agreement may
be amended, changed, modified, altered or terminated only by written instrument
or written instruments signed by Financial Security and the Fund. A copy of each
amendment, change, modification or alteration shall be provided to the Rating
Agencies.
Section 6.02. Notices. All demands, notices and other communications to
be given hereunder shall be in writing (except as otherwise specifically
provided herein) and shall be mailed or personally delivered or telexed or
telecopied to the recipient as follows:
(a) To Financial Security: Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Surveillance Department
Telex No.: (212) 688-3101
Confirmation: (212) 826-0100
Telecopy No.: (212) 755-5165
(In each case in which notice or other
communication to Financial Security
refers to an Event of Default, a Surety
Assets Coverage Event of Default, a
claim on the Surety Bond or with respect
to which failure on the part of
Financial Security to respond shall be
deemed to constitute consent or
acceptance, then a copy of such notice
or other communication should also be
sent to the attention of Senior Vice
President-Surveillance.)
(b) To the Fund: Prospect Street(SM) High Income
Portfolio Inc.
One Financial Center
Boston, MA 02111
Attention: President
Telephone No.: (617) 350-5718
Telecopy No.: (617) 350-5725
(c) To the Custodian: Bankers Trust Company
Corporate Trust and Agency Group
4 Albany Street
New York, NY 10006
A party may specify an additional or different address or addresses by
writing mailed or delivered to the other parties as aforesaid. All such notices
and other communications shall be effective upon delivery, except when telexed
or telecopied, in which case they shall be effective upon telex or telecopy
against receipt of answerback or written confirmation.
Section 6.03. Severability. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
the parties hereto agree that such holding shall not invalidate or render
unenforceable any other provision hereof. The parties hereto further agree that
the holding by any court of competent jurisdiction that any remedy pursued by
Financial Security hereunder is unavailable or unenforceable shall not affect in
any way the ability of Financial Security to pursue any other remedy available
to it.
Section 6.04. Governing Law. This Agreement shall be construed and governed
by, and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with, the laws of the State of New York.
Section 6.05. Consent of Financial Security. In the event that Financial
Security's consent is required under the terms hereof or any other Fund
Document, it is understood and agreed that, except as otherwise provided
expressly herein, the determination whether to grant or withhold such consent
shall be made solely by Financial Security in its absolute discretion. Without
intending to limit any other bases for withholding consent, it shall not be
unreasonable for Financial Security to withhold any consent or approval required
pursuant to the Agreement if the proposed change would result in the downgrading
of a Shadow Rating. Financial Security shall inform the Rating Agencies of any
proposed change or alternate procedures for which consent or approval of
Financial Security is required in the investment guidelines described in the
Preferred Stock Prospectus or the definitions.
Section 6.06. Counterparts. This Agreement may be executed in counterparts
by the parties hereto, and each such counterpart shall be considered an original
and all such counterparts shall constitute one and the same instrument.
Section 6.07. Recitals. All of the recitals hereinabove set forth are
incorporated in this Agreement by reference.
Section 6.08. Headings. The headings of articles, sections and subsections
contained in this Agreement are provided for convenience only. They form no part
of this Agreement and shall not affect its construction or interpretation. All
references to articles, sections or subsections of this Agreement refer to the
corresponding sections or subsections of this Agreement.
Section 6.09. Custody Receipts. For all purposes hereof, a holder of a
Custody Receipt with respect to any Preferred Stock shall be deemed to be the
holder of such Preferred Stock.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, all as
of the day and year first above mentioned.
FINANCIAL SECURITY: FINANCIAL SECURITY ASSURANCE INC.
By: /s/ Robert P. Cochran
--------------------
Senior Vice President
FUND: PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
By: Richard E. Omohundro, Jr.
---------------------------
Title President
----------------------------
<PAGE>
APPENDIX I
DEFINITIONS
General Definitions. The terms defined in this Article I shall have the
meanings provided herein for all purposes of this Agreement, unless the context
clearly requires otherwise, in both singular and plural form, as appropriate.
"Additional Indebtedness" shall have the meaning provided in the Premium
Side Letter.
"Agreement" means the Insurance Agreement dated as of December 1, 1988,
between the Fund and Financial Security to which this Appendix I is attached,
including any amendments or any supplements hereto as herein permitted.
"Auction Agent" shall have the meaning provided in the Certificate.
"Auction Agent Agreement" shall have the meaning provided in the
Certificate.
"Auction Date" shall have the meaning provided in the Certificate.
"Auction Procedures" shall have the meaning provided in the Certificate.
"Bankers' Acceptances" means U.S. dollar-denominated bankers' acceptances
issued by foreign or domestic banks having (or being the principal operating
subsidiary of a bank holding company having) a long-term unsecured debt rating
of "AA" or better by S&P and "Aa" or better by Moody's and having a short-term
unsecured debt rating of "A-1+" by S&P and "P-1" by Moody's and having a
maturity when delivered of less than six months.
"Business Day" means any day excluding Saturday, Sunday and a day on which
commercial banks in New York City or Boston, Massachusetts are authorized or
required by law to close under the laws of the State of New York or the
Commonwealth of Massachusetts, as the case may be, or a day on which the New
York Stock Exchange is closed for trading.
"Bylaws" means the Bylaws of the Fund as approved by its board of directors,
including any amendments or any supplements thereto as herein provided.
"Cash" means such coin or currency of the United States of America as at the
time shall be legal tender for payment of public and private debts.
"Certificate" means the Fund's Articles of Amendment and Restatement as in
effect on the date hereof and as subsequently amended, changed or modified with
the prior written consent of Financial Security.
"Collateral Evaluator" means a broker-dealer, government securities dealer,
municipal securities dealer, investment advisor or a bank regularly making a
market in the Eligible Portfolio Property being valued, or a Person regularly
engaged in evaluating the same or similar collateral, who is selected by
Financial Security with respect to each type of Eligible Portfolio Property.
"Commercial Paper" means dollar-denominated commercial paper of a foreign or
domestic issuer rated "A-1+" by S&P and "P-1" by Moody's (if only one of such
agencies has issued a rating for such commercial paper, then only the rating of
such agency will be required), having a maturity of not more than 270 days.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, $.01 par value, of the Fund.
"Common Stock Prospectus" means the Prospectus dated November 28, 1988 with
respect to the Common Stock, as supplemented or amended from time to time, filed
on behalf of the Fund under the Securities Act and the Investment Company Act.
"Conventional Mortgage Pass-Through Certificates" means an instrument issued
in bearer or registered form, that is one of a class or series or by its terms
is divisible into a class or series, and that is of a type commonly dealt in
upon securities exchanges or markets or commonly recognized in any area in which
it is issued or dealt in as a medium for investment, evidencing (directly or
indirectly) a proportional undivided interest in specified pools of whole
mortgage loans that are secured by a valid first lien on each mortgagor's fee or
leasehold interest in related mortgaged property (except for Permitted Tax Liens
and other matters to which like properties are commonly subject which neither
individually nor in the aggregate materially interfere with the benefits of the
security intended to be provided by such mortgages or deeds of trust, and
standard exceptions and exclusions in title insurance policies) on one- to
four-unit residences (including, without limitation, owner-occupied attached or
detached single-unit residences, two- to four-unit primary residences,
condominiums, second/vacation homes and nonowner occupied residences) and with
respect to which the Required Documentation is required to be held by a trustee
or independent custodian, which mortgage loans are serviced pursuant to
servicing agreements with servicers that have either expressed the intention to
advance funds to meet deficiencies (to the extent such servicers reasonably
believe such advances are recoverable) or provided for alternative credit
enhancement in lieu thereof, and which instruments have been rated "AA" or
higher by S&P and "Aa" or higher by Moody's (if only one of such agencies has
issued a rating for such instrument, then only the rating of such agency will be
required), provided that a Conventional Mortgage Pass-Through Certificate shall
be eligible for inclusion as Eligible Portfolio Property only so long as it
meets the above requirements, as the Fund shall confirm in writing, or by
reference to publications of Moody's and S&P, by confirmation from a nationally
recognized securities dealer having a minimum capitalization of $25 million or
by such other means as Financial Security shall approve.
"Corporate Bonds" means (a) Rated Public Corporate Bonds, (b) Other
Corporate Bonds and (c) World Bank Securities.
"Custodian" means Bankers Trust Company, a New York banking corporation,
until a successor replaces it pursuant to the Custody Agreement and, thereafter,
means the successor.
"Custody Agreement" means the Custody Agreement dated as of December 1, 1988
between Bankers Trust Company, as custodian, and Financial Security relating to
the Preferred Stock.
"Date of Issuance" means the date on which the Surety Bond is issued.
"Default" means any fact or event which results or which, with notice or the
passage of time, or both, would result in an Event of Default.
"Demand Deposit" means a demand deposit account (i) with a depositary
institution having an unsecured short-term debt rating of "A-1+" by S&P and
"P-1" by Moody's payable to, or at the direction of, the account holder without
the requirement to give, or the right of the depositary to demand, notice and
the expiration of a period of time prior to honoring any direction of the
account holder or (ii) fully insured as to principal and interest with an FDIC-
or FSLIC-insured depositary institution, provided that the Fund at any time has
no more than $100,000 in such an account and any other FDIC- or FSLIC-insured
account or certificate of such institution, and provided further that, if the
depositary institution, to the best of knowledge of the Fund, is at any time
insolvent, such demand deposit account shall cease to be Eligible Portfolio
Property for all purposes herein.
"Deposit Securities" means Cash and U.S. Government Securities (having a
remaining term to maturity that is not more than 30 days) and Short Term Money
Market Instruments (which Short Term Money Market Instruments are issued by an
entity having an unsecured long-term debt rating of: "A2" or higher by Moody's
and "A" or higher by S&P) which mature prior to the time the payment is due for
which such Deposit Securities have been deposited.
"Discount Factor" means, for any Eligible Portfolio Property (other than
World Bank Securities, which shall have a number assigned as a Discount Factor
as shall be agreed to by Financial Security), the number set forth below
opposite such type of Eligible Portfolio Property (it being understood that any
asset held as Eligible Portfolio Property and not listed below shall have a
Surety Assets Value of zero):
Type of Property(l) Discount Factor
- ------------------ ---------------
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
Type IX Corporate Bonds: 2.20
Other Corporate Bonds: 2.25
GNMA Certificates with fixed interest rates: 1.35
GNMA Certificates with adjustableb interest rates: 1.54
FHLMC and FNMA Certificates with fixed interest rates: 1.45
FHLMC and FNMA Certificates with adjustable interest rates: 1.58
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable interest rates: 1.65
GNMA Multifamily Securities: (2)
GNMA Graduated Payment Securities(3): 1.55
Conventional Mortgage Pass-Through Certificates: (2)
U.S. Government Securities having a remaining
term to maturity of one day: 1.00
U.S. Government Securities having a remaining
term to maturity of 90 days or less but more than one day: 1.10
U.S. Government Securities having a remaining term to maturity
of more than 90 days but not more than five years: 1.28
U.S. Government Securities having a remaining term to maturity
of more than five years but not more than 10 years: 1.35
U.S. Government Securities having a remaining term to
maturity of more than 10 years but not more than 15 years: 1.45
U.S. Government Securities having a remaining term to maturity
of more than 15 years but not more than 30 years: 1.50
Cash and Short Term Money Market Instruments with a term
of one day: 1.00
Short Term Money Market Instruments with a term of more
than one day: 1.10
Commercial Paper rated "A-1+" by S&P and "P-1" by Moody's
with a term of one day: 1.00
Commercial Paper rated "A-1+" by S&P and "P-1" by Moody's
with a term of more than one day: 1.10
Commercial Paper rated "A-1" by S&P and "P-1" by Moody's 1.60
Commercial Paper rated "A-2" by S&P and "P-2" by Moody's 1.65
- ----------
(1) If a security is rated by only one of Moody's and S&P, then only the
rating of such agency shall be used to determine the Discount Factor; provided,
however, that the Discount Factor shall be increased by adding .10 to the
Discount Factor shown above. A security with a "split" rating by S&P and Moody's
shall be deemed to fall under the lower of the two ratings for purposes of
determining the Discount Factor.
(2) The Discount Factor shall be that which is agreed to by Financial
Security.
(3) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Fund notifies the Collateral Evaluator that scheduled
principal payments are being made to holders; in the case of GNMA Graduated
Payment Securities as to which the Fund notifies the Collateral Evaluator that
scheduled principal payments are not being made to holders, the Discount Factor
shall be that which is agreed to by Financial Security.
"Dividend Payment Date" shall have the meaning provided in the Certificate.
"DTC Letter" means the Letter Agreement dated December 5, 1988 to the
Depository Trust Company from the Fund and the Auction Agent, as amended and
supplemented.
"Eligible Portfolio Property" means Corporate Bonds, Cash, Government
Securities, Short Term Money Market Instruments and Conventional Mortgage
Pass-Through Certificates owned by the Fund, provided that Deposit Securities
irrevocably deposited by the Fund with the Trustee for the payment of principal
of, or interest on, the Notes or with the Paying Agent for redemption of or
dividend payments with respect to the Preferred Stock shall not be included as
Eligible Portfolio Property and, provided further, that a Corporate Bond shall
not be included as Eligible Portfolio Property (i) if it fails to meet the
criteria in column (1) below or (ii) it has a remaining term to maturity of more
than 30 years or (iii) to the extent (and only to the proportionate extent) the
acquisition or holding thereof by the Fund as Eligible Portfolio Property causes
any applicable limitation set forth in column (2) or (3) below to be exceeded as
of any relevant date of determination (provided that in the event that any such
limitation or any other percentage limitation set forth in this definition of
Eligible Portfolio Property is exceeded, the Fund (or, if the Fund shall fail to
do so, Financial Security) shall designate, in its sole discretion, the
particular Corporate Bond(s) and/or portions thereof which shall be deemed to
have caused such limitation to be exceeded) or (iv) such Corporate Bond is
subject to a covered call option:
<TABLE>
<CAPTION>
Column (1) Column (2) Column (3)
---------- ---------- ----------
Maximum percent
Maximum percent of Market Value of
of Market Value of Eligible Portfolio
Minimum original Eligible Portfolio Property invested
Standard & Poor's/ issue size of Property invested in in any one Industry
Moody's Rating (1) each issue any one issuer(2) Category(2)
------------------- --------------- -------------------- -------------------
($ in millions)
<S> <C> <C> <C>
AAA/Aaa $100 10.0% 50.0%
AA/Aa 100 10.0 33.3
A/A 100 10.0 33.3
BBB/Baa 100 5.0 20.0
BB/Ba 100(3) 4.0 12.0
B/B1 or B2 100(3) 3.0 8.0
CCC(4)/B3 100(3) 3.0 8.0
Other Corporate Bonds 50(5) 3.0 8.0
A-1+/P1(6) N/A 10.0 N/A
A-l/Pl(6) N/A 10.0 33.3
A-2/P2(6) N/A 5.0 20.0
- ----------
<FN>
(1) Rating designations include (+) or (-) modifiers to the S&P rating and (1), (2) or (3) modifiers to the Moody's
rating where appropriate except that corporate debt obligations rated "CCC-" by S&P shall not constitute Eligible
Portfolio Property. An issue with a "split" rating by S&P and Moody's shall be deemed to fall under the lower of
the two ratings for purposes hereof. If only one of such agencies has issued a rating for such instrument, then
only the rating of such agency is required; provided, however, that not more than 15% of the aggregate value of the
Rated Corporate Bonds shall be comprised of Corporate Bonds having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each lower
rating category, except that the calculations with respect to commercial paper investments constituting Corporate
Bonds shall be made separately and independently of but on the same basis as the cumulative total guidelines
applicable to other types of Corporate Bonds.
(3) 20% of the aggregate value of all Corporate Bonds in these rating categories may be from issues with an original
issue size of greater than or equal to $50 million and less than $100 million.
(4) To constitute Corporate Bonds, corporate debt obligations in this rating category that are rated by S&P must be
subordinated debt of the issuer and the issuer must have an implied senior debt rating of "B-" or better. The
aggregate Market Value of corporate debt obligations in this rating category may not constitute more than 20% of
the aggregate Market Value of Eligible Portfolio Property.
(5) Other Corporate Bonds may not constitute more than 30% of the aggregate Market Value of the Eligible Portfolio
Property. Not more than 18% of the aggregate value of the Eligible Portfolio Property may consist of Other
Corporate Bonds having an original issue size of $50 million or more but less than $100 million, provided that not
more than 9% of the aggregate value of the Eligible Portfolio Property may consist of Other Corporate Bonds having
an original issue size of $50 million or more but less than $75 million.
(6) Represents commercial paper investments.
</FN>
</TABLE>
Other assets may be specified as Eligible Portfolio Property with the written
consent of Financial Security.
"ERISA" means the Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time, and, unless the context otherwise
requires, the regulations thereunder.
"Event of Default" means any event of default set forth in Section 5.01
hereof.
"FDIC" means the Federal Deposit Insurance Corporation, and includes any
successor thereto.
"Federal Funds" means a transfer of funds in accordance with Subpart B of
Regulation J of the Board of Governors of the Federal Reserve System and
Operating Circular No. 8 of the Federal Reserve Bank of New York, as both are in
effect from time to time.
"FHLMC" means the Federal Home Loan Mortgage Corporation or other agency,
corporation or instrumentality of the United States to which the duties and
powers of the Federal Home Loan Mortgage Corporation have been transferred.
"FHLMC Certificate" means a mortgage participation certificate in physical
or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate, level pay, fully amortizing
mortgage loans secured by first-priority mortgages on one- to four-family
residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily Security" in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which as
Eligible Portfolio Property has been approved by Financial Security.
"Financial Security" means Financial Security Assurance Inc., a New York
stock insurance company, its successors and assigns.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in physical or
book-entry form, the full and timely payment of principal of and interest on
which is guaranteed by FNMA, and which evidences a proportional undivided
interest in specified pools of fixed-, variable- or adjustable-rate, fully
amortizing mortgage loans secured by first-priority mortgages on single-family
residences.
"FSLIC" means the Federal Savings and Loan Insurance Corporation and
includes any successor thereto.
"Fund" means Prospect Street(SM) High Income Portfolio Inc., a Maryland
corporation.
"Fund Documents" means the Indenture, the Certificate, the Auction Agent
Agreement, the Indemnification Agreement, the DTC Letter and this Agreement.
"GNMA" means the Government National Mortgage Association or other agency,
corporation or instrumentality of the United States to which the duties and
powers of the Government National Mortgage Association have been transferred.
"GNMA Certificate" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-, variable- or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on
single-family residences.
"GNMA Graduated Payment Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of graduated payment mortgage
loans with payments that increase annually at a predetermined rate for up to the
first five or 10 years of the mortgage loan and that are secured by
first-priority mortgages on one- to four-unit residences.
"GNMA Multifamily Security" means a fully modified pass-through certificate
in physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States, and which evidences a proportional
undivided interest in specified pools of fixed-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which as
Eligible Portfolio Property has been approved by Financial Security.
"Government Securities" means U.S. Government Securities, GNMA Certificates,
GNMA Graduated Payment Securities, GNMA Multifamily Securities, FNMA
Certificates, FHLMC Certificates and FHLMC Multifamily Securities.
"Holders" shall have the meaning provided in the Certificate.
"Indebtedness" means (i) indebtedness or liability for borrowed money, or
for the deferred purchase price of property or services (including trade
obligations); (ii) obligations as lessee under leases which should have been or
should be, in accordance with generally accepted accounting principles, recorded
as capital leases; (iii) current liabilities in respect of unfunded vested
benefits under plans covered by Title IV of ERISA; (iv) obligations issued for
the account of any Person; (v) all obligations arising under acceptance
facilities; (vi) all guarantees, endorsements (other than for collection or
deposit in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any Person
or otherwise to assure a creditor against loss; and (vii) obligations secured by
any Lien on property of the Fund, whether or not the obligations have been
assumed.
"Indemnification Agreement" means the Indemnification Agreement dated
December 5, 1988 among the Fund, Financial Security and Drexel Burnham Lambert
Incorporated.
"Indenture" means the Indenture dated as of December 1, 1988 between the
Fund and Shawmut Bank, N.A., as Trustee, as amended or supplemented from time to
time in accordance with this Agreement.
"Industry Category" means, as to any Corporate Bond, any of the industry
categories set forth in the following table:
1. Aerospace and Defense
2. Automobile/Auto Parts/Truck Manufacturing
3. Banks/Savings and Loans/Finance Companies/Consumer Credit
4. Financial Services-Brokerage/Syndication/Leasing
5. Real Estate Development/REITS/Building/Construction
6. Broadcasting--TV, Cable and Radio
7. Publishing
8. Electrical Equipment/Electronics/Computers
9. Diversified/Conglomerate Services
10. Diversified/Conglomerate Manufacturing
11. Leisure/Amusement/Motion Pictures
12. Agricultural Chemicals
13. Chemicals
14. Food/Tobacco
15. Beverage
16. Retail
17. Consumer Durable Goods/Home Furnishings/Childcare/Toys
18. Grocery/Convenience Stores
19. Healthcare/Drugs/Hospital Supplies
20. Personal Care Products/Cosmetics
21. Hotel/Gaming
22. Insurance Companies
23. Machinery
24. Metals/Mining
25. Oil/Natural Gas/Oil Services
26. Packaging/Containers
27. Paper/Forest Products/Printing
28. Pollution Control/Waste Removal
29. Utilities
30. Rail/Trucking/Overnight Delivery
31. Telephone/Communications
32. Textiles/Apparel
33. Transportation/Airlines
34. Agriculture/Agricultural Equipment
35. Miscellaneous
"Initial Dividend Period" means the period beginning on the Date of Issuance
and ending on but not including January 19, 1989.
"Insured Certificate of Deposit" means a U.S. dollar-denominated
current-interest-paying negotiable certificate of deposit fully insured as to
principal and interest by the FDIC or FSLIC, provided that no more than 25% of
the face amount of Pledged Property shall be comprised of such certificates, and
provided, further, that (i) the Fund at any time owns no more than $100,000 of
such certificates and other FDIC- or FSLIC-insured accounts of such issuing
institution and (ii) such insured institution is not, to the best knowledge of
the Fund, at any time, insolvent or being liquidated under the auspices of the
FDIC or FSLIC.
"Investment Adviser" means the investment adviser under contract with the
Fund to provide investment management services, initially Prospect Street
Investment Management Co., Inc.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
"Late Payment Rate" means a per annum rate equal to 3% in excess of the
prime or reference lending rate publicly announced by Morgan Guaranty Trust
Company of New York, as in effect from time to time, but in no event shall the
Late Payment Rate be greater than the maximum rate permitted by law or the
Maximum Applicable Rate as defined in the Certificate.
"Lien" means any lien, mortgage, security interest, pledge, charge or other
encumbrance of any kind whatsoever.
"Liquidation Period" shall have the meaning set forth in Section 2.04(f)
hereof.
"Market Value" means the amount determined by the Collateral Evaluator with
respect to Eligible Portfolio Property in the manner set forth below, provided
that any property (i) that does not constitute Eligible Portfolio Property or
(ii) that is in default shall be deemed to have a Market Value of zero:
(a) as to any Corporate Bond, the lower of (i) the applicable
redemption price for such Corporate Bond as of the Reporting Date or, if
such Corporate Bond is not then subject to redemption, the unpaid principal
balance of such Corporate Bond as of the Reporting Date and (ii) the lower
of two bid prices for such Corporate Bond provided by two nationally
recognized securities dealers with a minimum capitalization of $25 million
or by one such securities dealer and any other source consented to in
writing by Financial Security to the custodian of the Fund's assets, at
least one of which shall be provided in writing or by telecopy, telex,
other electronic transcription, computer obtained quotation reducible to
written form or similar means, and in turn provided to the Collateral
Evaluator by any such means by the custodian of the Fund's assets, plus
(iii) accrued and unpaid interest on such Corporate Bond if such interest
is not included in the above prices; provided, however, that if two bid
prices cannot be obtained, such Corporate Bond shall have a Market Value of
zero;
(b) as to any Other Corporate Bond, the lower of (i) the applicable
redemption price for such Corporate Bond as of the Reporting Date or, if
such Corporate Bond is not then subject to redemption, the unpaid principal
balance of such Corporate Bond as of the Reporting Date and (ii) the
average bid price on such Other Corporate Bond, as quoted to the Fund as of
such Reporting Date during normal trading hours on the New York Stock
Exchange, Inc. by two nationally recognized securities dealers with a
minimum capitalization of $25 million regularly making a market in such
Other Corporate Bond selected by the Collateral Evaluator; provided,
however, that, if the lower of the two bids is not within 5% of the higher
bid, the lower bid shall be used; provided, however, that if the Collateral
Evaluator is able to obtain only one bid quotation in accordance with
clause (ii) above, the Collateral Evaluator may request from Financial
Security a second bid price obtained by Financial Security at its own
expense from any nationally recognized securities dealer with a minimum
capitalization of $25 million, which bid quotation obtained shall be
averaged with the bid quotation obtained by the Collateral Evaluator in
clause (ii) above; provided, further, however, that, if such second bid
quotation is obtained but the lower of the two bids is not within 5% of the
higher bid, the lower bid shall be used; and provided, further, that, if no
second bid quotation can be or is obtained from Financial Security as
provided herein, the single bid quotation shall be used to determine Market
Value of such Other Corporate Bond; plus (iii) accrued interest on such
Other Corporate Bond (if such interest is not included in the above price);
(c) as to any U.S. Government Securities having a remaining term to
maturity of more than 30 days, GNMA Certificates, GNMA Graduated Payment
Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the lower of (i) the face
amount or aggregate principal amount of such U.S. Government Security or
the aggregate unpaid principal amount of the mortgage loans evidenced by
each such certificate or security, as the case may be, as determined by the
Collateral Evaluator by any method which the Collateral Evaluator believes
reliable (unless Financial Security shall otherwise require), which may
include amounts shown on the most recent report related to the Certificate
or security received by the Fund prior to the Reporting Date, and (ii) the
lower of the bid prices for the same kind of certificates, securities or
instruments, as the case may be, having, as nearly as practicable,
comparable interest rates and maturities provided by two nationally
recognized securities dealers having minimum capitalization of $25 million
or by one such securities dealer and any other source consented to in
writing by Financial Security to the Fund, at least one of which shall be
provided in writing or by telecopy, telex, other electronic transcription,
computer obtained quotation reducible to written form or similar means, and
in turn provided to the Collateral Evaluator by any such means by the Fund;
plus (iii) accrued and unpaid interest thereon if such interest is not
included in the above prices; provided, however, that if two bid prices
cannot be obtained, such item will have a Market Value of zero;
(d) as to any U.S. Government Securities having a remaining term to
maturity of 30 days or less and Short Term Money Market Instruments (other
than Demand Deposits, federal funds, Bankers' Acceptances and next Business
Day's Repurchase Agreements), the face amount or aggregate principal amount
of such U.S. Government Securities or Short Term Money Market Instruments,
as the case may be, plus accrued and unpaid interest thereon;
(e) as to Conventional Mortgage Pass-Through Certificates, the lower
of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the certificates as determined by the Collateral Evaluator by
any method which the Collateral Evaluator believes reliable, which may
include amounts based on verbal reports of the servicers of the related
mortgage loans to the Collateral Evaluator, as of the applicable Reporting
Date and (ii) the dollar value of the lower of two bid prices per dollar of
outstanding principal amount as of such applicable Reporting Date for such
certificates, provided by two nationally recognized securities dealers
having minimum capitalization of $25 million or by one such securities
dealer and any other source consented to in writing by Financial Security
to the Fund, at least one of which shall be provided in writing or by
telecopy, telex, other electronic transcription, computer obtained
quotation reducible to written form or similar means, and in turn provided
to the Collateral Evaluator by any such means by the Fund; plus (iii)
accrued and unpaid interest thereon if such interest is not included in the
above prices; provided, however, that if two bid prices cannot be obtained,
such item shall have a Market Value of zero; and
(f) as to Cash, Demand Deposits, Federal Funds, Bankers' Acceptances
and next Business Day's Repurchase Agreements included in Short Term Money
Market Instruments, the face value thereof.
"Maximum Applicable Rate" means such term as defined in the Certificate.
"Moody's" means Moody's Investors Service, Inc., a corporation organized
and existing under the laws of the State of Delaware, its successors and their
assigns, and, if such corporation shall for any reason no longer perform the
functions of a securities rating agency, "Moody's" shall be deemed to refer to
any other nationally recognized rating agency designated by Financial Security.
"Note Prospectus" means the Prospectus dated November 28, 1988 with respect
to the Notes, as supplemented or amended from time to time, filed on behalf of
the Fund under the Securities Act and the Investment Company Act.
"Notes" means the Fund's Series A Senior Notes issued pursuant to the
Indenture on the Date of Issuance and any additional debt securities issued
under the Indenture and qualifying as Additional Indebtedness.
"Notice of Redemption" shall have the meaning provided in the Certificate.
"Other Corporate Bonds" means corporate debt obligations (other than (a)
Short-Term Money Market Instruments, (b) U.S. Government Securities, (c)
Commercial Paper, (d) corporate debt obligations that are both registered under
the Securities Act and rated by S&P and/or Moody's, (e) corporate debt
obligations rated lower than "CCC" by S&P or lower than "B3" by Moody's, (f)
corporate debt obligations rated "CCC" by S&P that are not subordinated debt of
the issuer of such obligations and (g) World Bank Securities), which corporate
debt obligations (i) were issued by a Person whose financial statements were the
subject of an opinion prepared by a nationally recognized independent public
accounting firm at the time of purchase of the applicable corporate debt
obligation; (ii) have been registered under the Securities Act or, if a security
exempt from registration under Section 3 of the Securities Act or a security
issued in a transaction exempt from the registration requirements of Section 5
of the Securities Act, are not a Restricted Security in the hands of the Fund,
as of the relevant date of determination, as applicable; (iii) are
interest-paying obligations which provide for the regularly scheduled payment of
interest thereon and the payment of principal thereof at a stated date or dates
in Cash and were issued in the United States; and (iv) do not provide for
conversion or exchange into equity capital at any time over its life.
Notwithstanding the foregoing, any corporate debt obligation (or portion
thereof, if applicable) otherwise within the provisions of the preceding
sentence shall not be deemed an Other Corporate Bond if (and, if applicable,
only to the extent that) (i) as of the relevant date of determination (A) it has
an unpaid principal balance of less than $100,000; (B) it has had notice given
to the holders thereof which has not expired or been rescinded (of which notice
the Fund shall have reasonable knowledge) that such corporate debt obligation is
the subject of an offer by the issuer of such corporate debt obligation 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 Eligible Portfolio Property (including Rated Public
Corporate Bonds) shall not be subject to the provisions of this clause (B)); (C)
to the reasonable knowledge of the Fund, the Fund owns, directly or indirectly,
more than 10% of the aggregate principal amount of the issue of which such
corporate debt obligation is a part at the time out-standing; or (D) to the
reasonable knowledge of the Fund, such corporate debt obligation is in default
under the terms of its governing instruments; or (ii) at the time of purchase,
the Fund owned, directly or indirectly, more than 10% of the aggregate principal
amount of the issue of which such corporate debt obligation is a part. In the
event that the Fund shall exceed any percentage limitation set forth in this
definition of Other Corporate Bonds, the Fund (or, if the Fund shall fail to do
so, Financial Security) shall designate, in its sole discretion, the particular
Other Corporate Bonds) and/or portions thereof which shall be deemed to have
caused the Fund to exceed such limitation and therefore shall not be deemed
within the definition of Other Corporate Bonds.
"Paying Agent" means Bankers Trust Company, a New York banking corporation.
"Permitted Indebtedness" means (i) the Notes, (ii) any Indebtedness
(including, without limitation, reverse repurchase agreements) in any case where
such Indebtedness is for temporary purposes (within the meaning of Section 18 of
the Investment Company Act) only and in an amount not exceeding five per centum
of the Market Value of the total assets of the Fund at the time when the
Indebtedness is incurred and with a banking institution that agrees not to
institute bankruptcy proceedings against the Fund for a period of one year and a
day after the repayment of such indebtedness, (iii) Additional Indebtedness and
any other Indebtedness approved by Financial Security, (iv) Indebtedness
incurred in the ordinary course of business and which is represented by fees for
services, taxes, directors' fees or similar expenses, provided that such other
similar expenses shall not exceed $75,000 at any one time in the aggregate or
(v) Indebtedness during a customary settlement period for the deferred purchase
price for securities purchased.
"Permitted Tax Liens" means liens of general and special taxes and
assessments on the property in question.
"Person" means an individual, joint stock company, trust, unincorporated
association, joint venture, corporation, business or owner trust, partnership or
other organization or entity (whether governmental or private).
"Plan" means a pension plan maintained for employees of the Fund which is
subject to Title IV of ERISA.
"Preferred Stock" means the 300 shares of Taxable Auction Rate Preferred
Stock, aggregate liquidation preference of $30,000,000, issued by the Fund on
the Date of Issuance and any additional shares of Taxable Auction Rate Preferred
Stock issued thereafter up to 45 shares, with an aggregate liquidation
preference of not more than $4,500,000, and covered by the Surety Bond pursuant
to the terms of this Agreement or such lesser number of shares as may be
outstanding at any time.
"Preferred Stock Prospectus" means the Prospectus dated
November 28, 1988 with respect to the Preferred Stock, as supplemented or
amended from time to time, filed on behalf of the Fund under the Securities Act
and the Investment Company Act.
"Premium" means the premium calculated as set forth in the Premium Side
Letter.
"Premium Side Letter" means the side letter between Financial Security and
the Fund dated the Date of Issuance setting forth the payment provisions with
respect to the premium payable by the Fund in consideration of the issuance of
the Surety Bond.
"Projected Dividend Amount" for the Preferred Stock means, if the date of
determination is a Valuation Date, the amount of dividends, based on the number
of shares of Preferred Stock outstanding on such Valuation Date, projected to
accumulate on such shares from such Valuation Date through the sixty-third day
after such Valuation Date, at the following dividend rates:
(a) If the Valuation Date is the Date of Issuance or a Dividend
Payment Date, (i) for the Dividend Period beginning on the Original
Issuance Date or such Dividend Payment Date and ending on (but not
including) the first following Dividend Payment Date, the Applicable Rate
in effect on such Valuation Date and (ii) for the period beginning on (and
including) the first following Dividend Payment Date and ending on (and
including) the sixty-second day following such Valuation Date, the product
of 1.95 and (x) the Maximum Applicable Rate on the Date of Issuance (in the
case of the Date of Issuance) or (y) the Maximum Applicable Rate as of the
last occurring Auction Date (in the case of any Dividend Payment Date); and
(b) If such Valuation Date is not the Date of Issuance or a Dividend
Payment Date, (i) for the period beginning on such Valuation Date and
ending on (but not including) the first following Dividend Payment Date,
the Applicable Rate in effect on such Valuation Date, and (ii) for the
period beginning on (and including) the first following Dividend Payment
Date and ending on (but not including) the sooner of the second following
Dividend Payment Date or the sixty-third day following such Valuation Date,
the product of 1.95 and (x) the Maximum Applicable Rate on the Date of
Issuance (in the case of a Valuation Date occurring prior to the first
Auction Date) or (y) the Maximum Applicable Rate on the last occurring
Auction Date (in the case of any other Valuation Date) and (iii) for the
period, if any, beginning on (and including) the second following Dividend
Payment Date and ending on (but not including) the sixty-third day
following such Valuation Date, the product of 2.50 and the rate specified
in clause (x) or (y) above.
If the date of determination is not a Valuation Date, then the Projected
Dividend Amount on such date of determination shall equal the Projected Dividend
Amount therefor on the immediately preceding Valuation Date, adjusted to reflect
any decrease in the number of shares of Preferred Stock outstanding.
"Prospectuses" means, collectively, the Common Stock Prospectus, the
Preferred Stock Prospectus and the Note Prospectus.
"Rated Public Corporate Bonds" means corporate debt obligations (other than
Short Term Money Market Instruments, U.S. Government Securities, Other Corporate
Bonds and World Bank Securities) rated from "CCC" to "AAA" by S&P and/or from
"B3" to "Aaa" by Moody's (or in the case of commercial paper rated as provided
in the definition of Eligible Portfolio Property) which corporate debt
obligations (i) provide for the periodic payment of interest thereon in Cash and
were issued in the United States, (ii) do not provide for conversion or exchange
into equity capital at any time over their respective lives, (iii) have been
registered under the Securities Act (such requirement shall not apply with
respect to commercial paper), and (iv) have not had notice given in respect
thereof that any such corporate debt obligations are the subject of an offer by
the issuer thereof of exchange or tender for cash, securities or other type of
consideration (except that corporate debt obligations including Other Corporate
Bonds in an amount not exceeding 10% of the aggregate value of the Eligible
Portfolio Property at any time shall not be subject to the provisions of this
clause (iv).
"Redemption Date" means the date specified in a Notice of Redemption given
by the Fund in respect of the Preferred Stock or a date on which the Preferred
Stock is required to be redeemed pursuant to Section 5(b)(i) of Article IV C of
the Certificate.
"Redemption Request" shall have the meaning provided in Section 5.02(b).
"Registration Rights" means a right in favor of the holders of a majority
or less than a majority of the principal amount of securities of a particular
issue of securities to require registration of such securities under the
Securities Act or an obligation of the issuer of such securities (subject to
customary limitations relating to the amount sold, market conditions and the
like) to file or cause to be filed a registration statement under the Securities
Act within a specified period of time not to exceed 12 months either from the
date of issuance of such securities or the date of such demand.
"Registration Statement" means the Registration Statement on Form N-2 filed
under the Securities Act and the Investment Company Act with respect to the
Preferred Stock, the Notes and the Common Stock as declared effective by the
Commission.
"Reporting Date" means, with respect to any price referred to in the
definition of "Market Value," the date as of which the Market Value of an item
of Eligible Portfolio Property is to be determined pursuant to this Agreement
or, if no such price is available as provided above for such date, the next
closest prior date as of which such price is so available, provided that if such
price is not available as of a date within five Business Days next preceding the
date as of which the determination of such Market Value is to be made, then the
Market Value shall be deemed to be zero as of the Reporting Date.
"Repurchase Agreement" means a repurchase obligation with respect to a U.S.
Government Security, FNMA Certificate, FHLMC Certificate or GNMA Certificate
entered into with a depository institution, the deposits of which are insured by
the FDIC or FSLIC, and that has an unsecured short-term debt rating of "A-1+" by
S&P and "P-1" by Moody's (if only one of such agencies has issued a rating for
such institution, then only the rating of such agency shall be required) which
obligation must be repurchased within one Business Day from the date such
repurchase obligation was executed.
"Required Documentation," with respect to a mortgage loan, means:
(a) the mortgage note or other evidence of indebtedness secured by the
mortgage endorsed without recourse in blank or to the trustee or other
custodian and accompanied by an assignment thereof;
(b) the mortgage, deed of trust, deed to secure debt or similar
security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other
custodian, in recordable form as may be appropriate in the jurisdiction
where the property is located and evidence that such assignment has been
recorded in the name of the trustee or other custodian, and such trustee or
other custodian receives an opinion of counsel (containing only such
exceptions as may be permissible under the indenture or other agreement
pursuant to which the mortgage loan is pledged to the trustee in connection
with the related Conventional Mortgage Pass-Through Certificate) to the
effect that, notwithstanding that the assignment of the mortgage has not
been recorded, the actions taken with respect to the mortgage loan are
sufficient to permit the trustee or other custodian to avail itself of all
protection available under applicable law against the claims of any present
or future creditors of the issuer, and are sufficient to prevent any other
sale, transfer, assignment, pledge or hypothecation of the mortgage and the
related mortgage note by the issuer from being enforceable, or will create
a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of
the issuer to the trustee as provided in the indenture pursuant to which
the mortgage loan is pledged to the trustee in connection with the related
Conventional Mortgage Pass-Through Certificate) prior in right to all other
security interests therein created or perfected under the Uniform
Commercial Code (as in effect in the jurisdiction where the property is
located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
(d) a copy of the title insurance policy or an opinion or certificate
of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be
subject to exceptions for Permitted Tax Liens and other matters to which
like properties are commonly subject which neither individually nor in the
aggregate materially interfere with the benefits of the security interest
intended to be provided by such mortgage and standard exceptions and
exclusions from mortgage title insurance policies)
"Restricted Security" is a corporate debt obligation which (a) is a
"restricted security" as defined in Rule 144(a)(3) under the Securities Act or
any successor rule, law or interpretation; provided, however, that such meaning
shall not apply with respect to any corporate debt obligation if there exists
Registration Rights with respect to the issue of which such corporate debt
obligation is a part or (b) is subject to any further material condition to, or
restriction on, the ability of the Fund to sell, assign, transfer or otherwise
liquidate such corporate debt obligation in a commercially reasonable time and
manner or which would otherwise materially deprive the Fund of the benefits of
such corporate debt obligation intended to be provided hereunder; provided,
however, that, notwithstanding the foregoing limitations, any requirement of
registration or qualification applicable with respect to a corporate debt
obligation pursuant to federal and any applicable state or other securities laws
and any requirement of delivery of any certificate, consent, agreement,
approval, opinion of counsel, notice or any other document of any Person
reasonably necessary or appropriate in connection with the sale of such
corporate debt obligation pursuant to any exemption from registration or
qualification under federal and any applicable state or other securities laws
and/or the registration or qualification of such corporate debt obligation under
such federal and applicable state or other securities laws and the delivery of
any certificate or other document usual or customary in connection with the
transfer or registration of transfer of securities shall not be deemed to cause
such corporate debt obligations to be deemed a "Restricted Security" under the
foregoing clause (b).
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Shadow Rating" means the rating that would be assigned by Moody's or S&P
to the Preferred Stock if the Surety Bond were not in effect.
"Short Term Money Market Instruments" means the following kinds of
instruments, if on the date of purchase or other acquisition by the Fund of such
instrument the remaining term to maturity thereof is not more than 30 days:
(a) Demand Deposits, Insured Certificates of Deposit or Bankers'
Acceptances or Federal Funds sold to any depositary institution, the
deposits of which are insured by the FDIC or the FSLIC, provided that, at
the time of the Fund's investment therein or on any Valuation Date, the
commercial paper or other unsecured short-term debt obligations of such
depositary institution are rated as least "A-1+" by S&P and "P-1" by
Moody's;
(b) Repurchase Agreements; and
(c) Commercial Paper.
"S&P" means Standard & Poor's Corporation, a corporation organized and
existing under the laws of the State of Delaware, its successors and their
assigns, and, if such corporation shall for any reason no longer perform the
functions of a securities rating agency, "S&P" shall be deemed to refer to any
other nationally recognized rating agency designated by Financial Security.
"State" means the State of New York.
"Stated Termination Date" means December 5, 1993 or such later date as
indicated in an endorsement to the Surety Bond issued by Financial Security
extending the expiration date of the initial Surety Bond.
"Surety Assets Coverage Event of Default" means an Event of Default
specified in Section 5.01(d) hereof.
"Surety Assets Coverage" means, as of any date, the dollar amount equal to
(A) the sum of (i) 100% of the aggregate principal amount of the Notes then
outstanding; (ii) $100,250 times the number of shares of Preferred Stock then
outstanding; (iii) the aggregate amount of accrued interest on the Notes then
outstanding, plus an amount equal to 63 days' interest on such principal amount
of the Notes; (iv) the aggregate amount of accumulated but unpaid dividends with
respect to the Preferred Stock to such date, plus the Projected Dividend Amount
of the Preferred Stock then outstanding from such date until the sixty-third day
thereafter; (v) the aggregate principal amount of any then outstanding
indebtedness of the Fund for money borrowed (other than the Notes); and (vi) the
greater of $200,000 or the Fund's liabilities in existence as of such date to
the extent not otherwise reflected in any of (i) through (v) above, less (B) the
combined value of any Deposit Securities irrevocably deposited by the Fund with
the Trustee for the payment of principal of or interest on the Notes or with the
Paying Agent for redemptions of or dividend payments with respect to the
Preferred Stock.
"Surety Assets Coverage Report" means a Surety Assets Coverage Report
delivered pursuant to Section 2.02(c)(iv)(B) or Section 2.02(c)(iv)(D) hereof in
form attached hereto as Annex III.
"Surety Assets Value" means, with respect to any Eligible Portfolio
Property, the quotient of the Market Value of such Eligible Portfolio Property
divided by the applicable Discount Factor.
"Surety Bond" means the Surety Bond, including any endorsements thereto,
issued by Financial Security with respect to the Preferred Stock, substantially
in the form attached hereto as Annex I.
"Term of the Agreement" shall be determined as provided in Section 4.01 of
this Agreement.
"Transaction" means the issuance of the Preferred Stock, Common Stock and
Notes as described in the Prospectuses and the Registration Statement, the
issuance of the Surety Bond as described herein and the respective transactions
contemplated thereby.
"Trustee" means Shawmut Bank, N.A., a national banking association having
its principal place of business in Boston, Massachusetts, until a successor
replaces it pursuant to the Indenture and, thereafter, means the successor.
"Type I Corporate Bonds" as of any date means Corporate Bonds whose rating
is "AAA"/"Aaa" by the Rating Agencies as of such date.
"Type II Corporate Bonds" as of any date means Corporate Bonds whose rating
is "AA+"/"Aal" to "AA-"/"Aa3" by the Rating Agencies as of such date.
"Type III Corporate Bonds" as of any date means Corporate Bonds whose
rating is "A+"/"A1" to "A-"/"A3" by the Rating Agencies as of such date.
"Type IV Corporate Bonds" as of any date means Corporate Bonds whose rating
is "BBB+"/"Baal" to "BBB-"/"Ba3" by the Rating Agencies as of such date.
"Type V Corporate Bonds" as of any date means Corporate Bonds whose rating
is "BB+"/"Bal" to "BB-"/"Ba3" by the Rating Agencies as of such date.
"Type VI Corporate Bonds" as of any date means Corporate Bonds whose rating
is "B+"/"B1" to "B"/"B2" by the Rating Agencies as of such date.
"Type VII Corporate Bonds" as of any date means Corporate Bonds whose
rating is "B-"/"B3" by the Rating Agencies as of such date.
"Type VIII Corporate Bonds" as of any date means Corporate Bonds whose S&P
rating is "CCC+" as of such date and which are subordinated debt of the issuer
and the issuer of which has an implied senior debt rating of "B" or higher.
"Type IX Corporate Bonds" as of any date means Corporate Bonds whose S&P
rating is "CCC" as of such date and which are subordinated debt of the issuer
and the issuer of which has an implied senior debt rating of B or higher.
"Uniform Commercial Code" means the Uniform Commercial Code as in
effect in the relevant state, as the same may be amended from time to time.
"U.S. Government Securities" means a direct obligation of the United States
of America, provided that such direct obligation is entitled to the full faith
and credit of the United States and that any such obligation, other than a
United States Treasury bill, provides for the periodic payment of interest and
the full payment of principal at maturity or call for redemption.
"Valuation Date" means (a) the fifteenth day of each month, or if such day
is not a Business Day, the next succeeding Business Day and (b) the last
Business Day of such month and (c) the next Business Day following the Fund's
receipt of any written request from Financial Security that Surety Assets Value
be determined. For purposes of this definition, Business Day shall mean a day on
which the New York Stock Exchange is open for trading and which is not a day on
which banks in New York City or Boston, Massachusetts are authorized or
obligated by law or executive order to close.
"World Bank Securities" means securities issued by the International Bank
for Reconstruction and Development meeting the requirements of clauses (i), (ii)
and (iv) under the definition of Rated Public Corporate Bonds.
Generic Terms. All words used herein shall be construed to be of such
gender or number as the circumstances require. This "Agreement" shall mean this
Agreement as a whole and as the same may, from time to time hereafter, be
amended, supplemented or modified. The words "herein," "hereby," "hereof,"
"hereto," "hereinabove" and "hereinbelow," and words of similar import, refer to
this Agreement as a whole and not to any particular paragraph, clause or other
subdivision hereof, unless otherwise specifically noted.
<PAGE>
ANNEX I
FORM OF SURETY BOND
OBLIGOR: Prospect Street(SM) High Surety Bond No.: 50074-N
Income Portfolio Inc.
OBLIGATIONS: 300 Shares of Taxable Date of Issuance: December 5, 1988
Auction Rate Preferred Stock.
(Liquidation Preference $100,000 per Share)
FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), for consideration
received, hereby UNCONDITIONALLY AND IRREVOCABLY GUARANTEES to each Holder,
subject only to the terms of this Surety Bond (which includes Endorsement 1
hereto), the full and complete payment by the Obligor of Scheduled Payments on
the Obligations.
For the further protection of each Holder, Financial Security irrevocably
and unconditionally guarantees:
(a) payment of the amount of any payment of Scheduled Payments on the
Obligations made during the Term of this Surety Bond to such Holder that is
subsequently avoided in whole or in part as a preference payment under
applicable federal bankruptcy law (such payment to be made by Financial
Security in accordance with Endorsement 1 hereto); and
(b) payment of any amount required to be paid under this Surety Bond
by Financial Security following Financial Security's receipt of notice as
described in Endorsement 1 hereto.
Financial Security shall be subrogated to the rights of each Holder to
receive payments under the Obligations to the extent of any payment by Financial
Security hereunder.
Except to the extent expressly modified by Endorsement 1 hereto, the
following terms shall have the meanings specified for all purposes of this
Surety Bond. "Certificate" means the Obligor's Articles of Amendment and
Restatement as amended and in effect on the Date of Issuance and as subsequently
amended from time to time with the written consent of Financial Security.
"Insurance Agreement" means the Insurance Agreement between Financial Security
and the Obligor dated as of December 1, 1988. "Scheduled Payments" means (i)
payments of dividends on the Obligations which Holders of the Obligations would
be entitled to receive on each Dividend Payment Date as defined in the
Certificate during the Term of this Surety Bond in accordance with the terms of
the Certificate, without regard to whether the Obligor has declared any such
dividend or such dividend could have been legally declared by the Obligor, (ii)
payment of the redemption price of Obligations without regard to whether such
redemption could have been legally made by the Obligor (a) on the last date upon
which the Obligor was to have redeemed the Obligations as specified in a
Redemption Request pursuant to Section 5.02(b) of the Insurance Agreement in the
event Financial Security has notified the Custodian that such redemption is to
be a Scheduled Payment and (b) on the date upon which the Obligor is required to
redeem the Obligations as a mandatory redemption pursuant to Section 5(b)(i) of
Article IV C of the Certificate and (iii) payment of the liquidation preference
on the Obligations in the event of a liquidation of the Obligor during the Term
of this Surety Bond on the date fixed for payment of such liquidation preference
pursuant to the Certificate, provided that Financial Security shall have
consented to such liquidation. For the purposes of making Scheduled Payments
hereunder in the event of a liquidation of the Obligor to which Financial
Security has not consented in which only a portion of the liquidation preference
on the Obligations is paid, a portion of the liquidation preference shall be
deemed to remain outstanding and shall be secured by this Surety Bond as to all
Scheduled Payments without regard to whether the Obligor has any obligation with
respect thereto. "Term of this Surety Bond" shall have the meaning set forth in
Endorsement 1 hereto. "Notice of Redemption" shall mean the term as defined in
the Certificate. "Redemption Request" shall mean the term as defined in the
Insurance Agreement.
This Surety Bond sets forth in full the undertaking of Financial Security,
and shall not be modified, altered or affected by any other agreement or
instrument, including any modification or amendment thereto, or by the merger,
consolidation or dissolution of the Obligor. The premiums paid in respect of
this Surety Bond are nonrefundable for any reason, including payment, or
provision being made for payment, of the Obligations. This Surety Bond may not
be cancelled or revoked during the Term of this Surety Bond.
In Witness Whereof, FINANCIAL SECURITY ASSURANCE INC. has caused this
Surety Bond to be executed on its behalf by its Senior Vice President.
FINANCIAL SECURITY ASSURANCE INC.
By
------------------------------
Senior Vice President
<PAGE>
ENDORSEMENT NO. 1
TO SURETY BOND
FINANCIAL SECURITY ASSURANCE INC.
OBLIGOR: Prospect Street(SM) High Income Surety Bond No.: 50074-N
Portfolio Inc.
OBLIGATIONS: 300 Shares of Taxable Date of Issuance: December 5, 1988
Auction Rate Preferred Stock
(Liquidation Preference $100,000 per Share)
1. "Term of This Surety Bond." The phrase "Term of this Surety Bond" means
the period from and including the Date of Issuance to and including the earlier
of (i) the date on which the Obligations are paid in full, (ii) the date on
which all Scheduled Payments due on or prior to December 5, 1993 are paid in
full or (iii) the date on which the Surety Bond is delivered to Financial
Security pursuant to Section 3.03(e) of the Custody Agreement. This date may be
extended pursuant to the terms of the Insurance Agreement by means of an
endorsement to this Surety Bond.
2. "Paid in Full." For purposes of the first paragraph of this Endorsement,
any Obligation shall be "paid in full" when all Scheduled Payments (as defined
in the Surety Bond) have been paid and any period during which any such payment
could have been avoided in whole or in part as a preference payment under
applicable federal bankruptcy law shall have expired before any proceeding
requisite to such avoidance shall have been commenced.
3. "Holder." The term "Holder" as used in this Surety Bond means, with
respect to an Obligation, the person in whose name the Custody Receipt
evidencing such Obligation is registered on the registration books maintained by
the Custodian pursuant to the Custody Agreement but shall not include the Fund
or any affiliates or successors thereof.
4. "Obligations." The term "Obligations" as used in this Surety Bond means
the obligations identified on the face of the Surety Bond following the heading
"OBLIGATIONS" and held by the Custodian pursuant to the Custody Agreement. The
number of shares of preferred stock included in the Obligations may be increased
by means of an endorsement to this Surety Bond.
5. "Business Day." The term "Business Day," as used in this Surety Bond,
means a day on which banks are not authorized or required by law to be closed in
either the city in which the principal office of Financial Security is located
or the city in which the principal office of the Custodian is located.
6. The term "Custodian," as used in this Surety Bond, means Bankers Trust
Company, as Custodian pursuant to the Custody Agreement or any successor thereto
with respect to the Custody Receipts.
7. The term "Custody Agreement," as used in this Surety Bond, means the
Custody Agreement dated as of December 1, 1988 between the Custodian and
Financial Security as amended or supplemented from time to time.
8. The term "Custody Receipt," as used in this Surety Bond, means a receipt
issued by the Custodian pursuant to the Custody Agreement evidencing beneficial
ownership of an Obligation or Obligations.
9. Notices and Conditions to Payment in Respect of Scheduled Payments.
Financial Security will pay any amount payable hereunder in respect of Scheduled
Payments on the later to occur of (a) the second Business Day following receipt
on a Business Day by Financial Security of a notice and certificate from the
Custodian in the form set forth as Exhibit A to this Endorsement and (b) the
date on which such Scheduled Payment was due (or, if such day is not a Business
Day, then on the next succeeding Business Day). Payments due hereunder in
respect of Scheduled Payments will be disbursed by Financial Security to the
Custodian by wire transfer of immediately available funds. If any notice given
hereunder is not in materially proper form or is otherwise insufficient for the
purpose of making claim hereunder, it shall be deemed not to have been received
for purposes of this paragraph, and Financial Security or the Fiscal Agent, as
defined below, shall promptly so advise the Custodian, and the Custodian may
submit an amended notice. Financial Security's obligations hereunder in respect
of Scheduled Payments shall be discharged to the extent funds are transferred to
the Custodian as provided herein whether or not such funds are properly applied
by the Custodian; provided, however, that Financial Security shall act promptly,
reasonably and in good faith in obtaining from the Custodian, acting as
attorney-in-fact for the Holders, or from other Holders, as necessary, the
certificates and instrument of assignment required to be delivered to Financial
Security as contemplated herein and in the Custody Agreement as a condition to
the Custodian's release to Holders of funds drawn under the Surety Bond.
10. Notices and Conditions to Payment of Preferences. If payment of any
Scheduled Payment avoided in whole or in part as a preference payment under
applicable federal bankruptcy law is required to be made under the Surety Bond,
Financial Security will disburse such payment when due to be paid pursuant to
the Order referred to below and in any event no earlier than the first to occur
of (a) the fourth Business Day following receipt by Financial Security from the
Custodian of (i) a certified copy of the order of the court which exercised
jurisdiction to the effect that the Holder is required to return a payment of
redemption price, liquidation preference or dividend constituting a Scheduled
Payment and paid on the Obligation during the Term of this Surety Bond because
such payment was an avoidable preference under applicable federal bankruptcy law
(the "Order"), (ii) a certificate of the Holder that the Order has been entered
and is not subject to any stay and (iii) an assignment duly executed and
delivered by the Holder, in such form as is reasonably required by Financial
Security and provided to the Holder by Financial Security or the Custodian,
irrevocably assigning to Financial Security all rights and claims of the Holder
relating to or arising under the Obligation against the estate of Obligor or
otherwise (provided that if such certified copy, certificate and assignment are
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, Financial Security shall make such payment on the
fifth Business Day following such date), and (b) the date of receipt by
Financial Security from the Custodian of the items referred to in clauses (i),
(ii) and (iii) above if, at least four Business Days prior to such date of
receipt, Financial Security shall have received written notice from the
Custodian that such items were to be delivered on such date of receipt and such
date of receipt was specified in such notice (provided that if such notice is
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, such notice shall be deemed to have been received on
the next succeeding Business Day). Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession, trustee in bankruptcy or other
person named in the Order and not to the Custodian or any Holder directly unless
the Custodian or such Holder has been required previously to disgorge all or
part of such payment, as demonstrated to the satisfaction of Financial Security,
in which event such payment shall to such extent be paid directly to the
Custodian or the Holder, as the case may be. In connection with the foregoing,
Financial Security shall have the rights provided pursuant to Section 3.09 of
the Custody Agreement.
12. Governing Law. The Surety Bond is being issued under and pursuant to,
and shall be construed under and governed by, the laws of the State of New York.
13. Fiscal Agent. At any time during the Term of this Surety Bond,
Financial Security may appoint a fiscal agent (the "Fiscal Agent") for purposes
of this Surety Bond by written notice to the Custodian specifying the name and
notice address of the Fiscal Agent. From and after the date of receipt of such
notice by the Custodian, (i) copies of all notices and documents required to be
delivered to Financial Security pursuant to this Surety Bond shall be
simultaneously delivered to the Fiscal Agent and to Financial Security and shall
not be deemed received until received by both and (ii) all payments required to
be made by Financial Security under this Surety Bond may be made directly by
Financial Security or by the Fiscal Agent on behalf of Financial Security. The
Fiscal Agent is the agent of Financial Security only and the Fiscal Agent shall
in no event be liable to Holders for any acts of the Fiscal Agent or any failure
of Financial Security to deposit, or cause to be deposited, sufficient funds to
make payments due under the Surety Bond.
14. Waiver of Defenses. To the fullest extent permitted by applicable law,
Financial Security agrees not to assert, and hereby waives, for the benefit of
each Holder, all rights (whether by counterclaim, setoff or otherwise) and
defenses (including the defense of fraud, including fraud in the inducement),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to Financial Security to avoid payment
of its obligations under this Surety Bond in accordance with the express
provisions of this Surety Bond.
15. Increase in Coverage. Financial Security may, by endorsement to this
Surety Bond, increase the number of shares of Obligations to be covered by this
Surety Bond.
IN WITNESS WHEREOF, FINANCIAL SECURITY ASSURANCE INC. has caused this
Endorsement No. 1 to be executed by its Senior Vice President.
FINANCIAL SECURITY ASSURANCE INC.
By
------------------------------
Senior Vice President
<PAGE>
Exhibit A
To Endorsement No. 1
NOTICE FOR PAYMENT
UNDER THE SURETY BOND
Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
The undersigned, a duly authorized officer of Bankers Trust Company
(the "Custodian"), hereby certifies to Financial Security Assurance Inc.
("Financial Security"), with reference to Surety Bond No. 50074-N dated
December 5, 1988 (the "Surety Bond") issued by Financial Security in respect
of shares of Taxable Auction Rate Preferred Stock (Liquidation Preference
$100,000 per share) issued by Prospect Street(SM) High Income Portfolio Inc.
(the "Obligations"), that:
(i) the Custodian is the Custodian under the Custody Agreement dated
as of December 1, 1988 between the Surety and the Custodian, as amended or
supplemented from time to time;
(ii) either (a) the Custodian has not received by [insert due date of
Scheduled Payment] the full amount of the Scheduled Payment on the
Obligations due on such date and has been notified by the Paying Agent for
the Obligations (the "Paying Agent") that it will not receive such payment
or (b) the Custodian has been notified by the Paying Agent, prior to the
due date, that the Custodian will not receive the full amount of such
Scheduled Payment due on such date, and the additional amount necessary for
the Custodian to have an amount equal to the Scheduled Payment is (the
"Shortfall");
(iii) the Custodian is making a claim under the Surety Bond for the
Shortfall to be applied to the payment of the Scheduled Payment referred to
in (ii) above;
(iv) the Custodian (or its nominee or its agent's nominee) is the
registered owner of the Obligations and holds evidence of the Custodian's
right to receive payment of the Scheduled Payment and, upon delivery of the
appropriate instruments of assignment from Holders pursuant to (v) hereof,
will assign to Financial Security the Custodian's rights as registered
owner with respect to the Obligations to the same extent as provided in
such instruments of assignment from the Holders, such assignment to be
contingent upon Financial Security's continued performance of its
obligations under the Surety Bond; provided, however, that any assignment
of rights with respect to Shortfalls which have been paid by Financial
Security shall continue until such amounts have been recovered by Financial
Security; and
(v) the Custodian shall as to each Holder for whom the Custodian shall
act as attorney-in-fact pursuant to Section 3.03(b) of the Custody
Agreement, present to Financial Security (x) appropriate instruments of
assignment in a form satisfactory to and provided by Financial Security to
the effect provided in Section 3.03(b) of the Custody Agreement and (y)
appropriate instruments in a form satisfactory to and provided by Financial
Security to effect the appointment of Financial Security as agent for such
Holder to the extent set forth in the Surety Bond and in the Custody
Agreement in any legal proceeding with respect to the Obligations including
specifically the right to vote with respect to the Obligations.
Upon such disbursement, Financial Security shall be subrogated to the
extent of any payments made by it pursuant to the Surety Bond to all of the
Custodian's rights and the rights of the Holders with respect to the
Scheduled Payment to which such disbursement relates.
Any capitalized term used in this Notice for Payment under the Surety Bond
and not defined herein shall have the meaning assigned thereto in the Surety
Bond.
<PAGE>
IN WITNESS WHEREOF, the Custodian has executed and delivered this Notice
for Payment under the Surety Bond as of the day of , .
_________________________________
By __________________________
Title __________________________
For Fiscal Agent Use Only
Wire transfer sent on ________________________by ______________________________
Confirmation Number ____________________________________-
<PAGE>
ANNEX II
FORM OF SURETY ASSETS COVERAGE REPORT
Valuation as of , 19 ("Valuation Date")
This Surety Assets Coverage Report is delivered pursuant to [Section
2.02(iv)(B)] or [Section 2.02(iv)(D)] of that certain Insurance Agreement dated
as of December 1, 1988 (the "Agreement") between Financial Security Assurance
Inc. ("Financial Security") and Prospect Street(SM) High Income Portfolio Inc.
(the "Fund"). Capitalized terms used herein that are not otherwise defined shall
have the meanings ascribed thereto in the Agreement Calculations of the Surety
Assets Value of Eligible Portfolio Property are based on such principal amounts
as of the Valuation Date. The undersigned, acting as a duly authorized
representative of the Fund, does hereby certify as follows:
(i) the Fund has calculated the Market Value of each item included as
Eligible Portfolio Property as of the Valuation Date, with the related
calculations being set forth in the attached report which schedule sets
forth separately the principal balance of each such item (each of which has
been determined pursuant to the definition of Market Value) and the
Discount Factor applied thereto (determined by the Fund in accordance with
the applicable definition of "Discount Factor");
(ii) the Fund has calculated the Discounted Value of each item of the
Eligible Portfolio Property as of the Valuation Date, the results of such
calculations being set forth in Schedule I attached hereto;
(iii) the Fund has calculated the Surety Assets Coverage as of the
Valuation Date, such calculation being set forth in the attached schedule;
(iv) the Fund has totaled the Surety Assets Values for all items
included as Eligible Portfolio Property, such total being set forth in the
attached schedule;
(v) the aggregate amount referred to in clause (iv) above is equal to
or in excess of the amount referred to in clause (iii) above, and
therefore, the Surety Assets Coverage has been met, or, in the event the
aggregate amount referred to in clause (v) above is less than the amount
referred to in clause (iv) above, set forth below is a statement to such
effect and the amount of any such deficiency;
(vi) as of , each item of the Eligible Portfolio Property
as set forth in Schedule I attached hereto, is Eligible Portfolio
Property and each such item of the Eligible Portfolio Property set forth in
Schedule I attached hereto conforms in all material respects to the
definition of such item contained in the Eligible Portfolio Property;
(vii) as of the Valuation Date, Deposit Securities are required by
Section 2.04(c) or 2.04(f) of the Agreement in the amount of $
and are identified in Schedule I hereto; and
(viii) as of the Valuation Date, the Fund knows of no Event of Default
or Default which has occurred. IN WITNESS WHEREOF, I have hereunto signed
my name this day of , 19.
______________________________________
Authorized Officer
<PAGE>
ANNEX III
LETTER REVIEWING SURETY ASSETS COVERAGE REPORT
A letter reviewing the Surety Assets Coverage Report, as required to be
delivered by the Insurance Agreement (the "Agreement") dated as of December 1,
1988, between Financial Security Assurance Inc. and Prospect Street(SM) High
Income Portfolio Inc. (terms used herein and not defined shall have the meaning
set forth in the Agreement), shall be prepared by the independent public
accountants of the Fund, shall be addressed to the Fund and shall be
substantially to the effect that:
(i) the independent public accountants have read the Surety Assets
Coverage Report for the current Valuation Date (the "Report");
(ii) with respect to the issue size compliance, issuer diversification
and industry diversification calculations, such calculations and the
resulting eligible portfolio market value and discounted eligible portfolio
market value calculations are numerically correct;
(iii) with respect to the Surety Assets Coverage calculation, such
calculation has been compared with the definition of Surety Assets Coverage
in the Insurance Agreement and is calculated in accordance with such
definition, and the results of such calculation have been recalculated and
are numerically correct;
(iv) with respect to the S&P's rating on Corporate Bonds, issuer name,
issue size and coupon rate listed in the Report, that information has been
traced and agrees with the information listed in The Standard & Poor's Bond
Guide (in the event such information does not agree or such information is
not listed in The Standard & Poor's Bond Guide, the independent accountants
will inquire of S&P's what such information is, and provide a listing in
their letter of such differences, if any);
(v) with respect to the Moody's rating on Corporate Bonds, issuer
name, issue size and coupon rate listed in the Report, that information has
been traced and agrees with the information listed in the Moody's Bond
Survey (in the event such information does not agree or such information is
not listed in Moody's Bond Survey, the independent accountants will inquire
of Moody's what such information is, and provide a listing in their letter
of such differences, if any);
(vi) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value as provided in the
Agreement) provided by to the Fund for purposes of
valuing securities in the portfolio, the independent public accountants
have traced the price used in the Report to the lower of the two bid prices
listed in the report provided by and verified that
such information agrees with the bid prices contained in the report (in the
event such information does not agree, the independent public accountants
will provide a listing in their letter of such differences); and
(vii) with respect to the description of each security included in the
Report, the description of Eligible Portfolio Property has been compared to
the definition of Eligible Portfolio Property contained in the Agreement,
and the description as appearing in the Report agrees with the definition
of Eligible Portfolio Property as described in the Agreement.
Each such letter may state that: such independent public accountants have
made no independent verification of the accuracy of the description of the
investment securities listed in the Report or the market value of those
securities nor have they performed any procedures other than those specifically
outlined above for the purposes of issuing such letter; unless otherwise stated
in the letter, the procedures specified therein were limited to a comparison of
numbers or a verification of specified computations applicable to numbers
appearing in the Report and the schedule(s) thereto; the foregoing procedures do
not constitute an examination in accordance with generally accepted auditing
standards and the Report contained in the letter does not extend to any of the
Fund's financial statements taken as a whole; such independent accountants do
not express an opinion as to whether such procedures would enable such
independent accountants to determine that the methods followed in the
preparation of the Report would correctly determine the Market Value or Surety
Assets Value of the investment portfolio; accordingly, such independent
accountants express no opinion as to the information set forth in the Report or
in the schedule(s) thereto and make no representations as to the sufficiency of
the procedures performed for the purposes of the Agreement.
Such letter shall also state that the accountants are "independent public
accountants" with respect to the Fund within the meaning of Rule 101 of the
Rules of Conduct of the American Institute of Certified Public Accountants.
<PAGE>
AMENDMENT NO. 1
to
INSURANCE AGREEMENT
between
FINANCIAL SECURITY ASSURANCE INC.
and
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
AMENDMENT NO. 1 dated as of March 14, 1990, to the Insurance
Agreement dated as of December 1, 1988 (the "Insurance Agreement"),
between FINANCIAL SECURITY ASSURANCE INC., a New York stock insurance
company ("Financial Security"), and PROSPECT STREET HIGH INCOME
PORTFOLIO INC., a Maryland corporation (the "Fund").
WITNESSETH:
WHEREAS, the fund has issued 300 shares of its Preferred Stock, with an
aggregate Liquidation Preference of $30,000,000;
WHEREAS, Financial Security, at the request of the Fund, has issued its
Surety Bond No. 50074-N guarantying, upon the terms provided therein, payment of
dividends on, and redemption or liquidation preference amounts in respect of,
the Preferred Stock; and
WHEREAS, the Fund and Financial Security desire to amend the Insurance
Agreement to provide for a redemption or repurchase of the Preferred Stock by
the Fund in the event of a failed auction upon the terms specified herein;
NOW, THEREFORE, in consideration of the premises and of other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, Financial Security and the Fund hereby agree as follows:
1. Amendment to Appendix I to the Insurance Agreement. Appendix
I to the Insurance Agreement is amended by the addition of the following
immediately following the first sentence thereof:
"Applicable Rate:, "Auction Date", "Dividend Payment date", "Dividend
Period", "Maximum Applicable Rate' and "Sufficient Clearing Bids" shall
have the meanings provided in the Certificate.
2. Amendment to Section 2.04 of the Insurance Agreement.
Section 2.04 of the Insurance Agreement is hereby amended by the addition
of the following paragraph immediately following Section 2.04 (1):
(j) The Fund agrees for the benefit of the Holders to call for
redemption or to repurchase all outstanding shares of the Preferred
Stock in the event that the Applicable Rate for the Dividend Period
next succeeding the Auction Date in September 1993 is determined to be
the Maximum Applicable Rate due to a lack of Sufficient Clearing Bids,
with such redemption or repurchase to be completed no later than the
second Dividend Payment Date succeeding such Auction Date. Upon the
completion of such redemption or repurchase, the Fund agrees to
surrender, or cause to be surrendered, the Surety Bond to Financial
Security for cancellation.
3. Amendment to Section 5.01 of the Insurance Agreement.
Section 5.01 of the Insurance Agreement is hereby amended by deleting
paragraph (a) thereof and inserting, in lieu thereof, the following:
(a) the Fund shall fail to pay to Financial Security when due
any amount payable by the Fund hereunder or under any other Fund
Document or shall fail to effect a redemption or repurchase of all
outstanding shares of the Preferred Stock in the time period required
by Section 2.04(j) hereof.
4. Redemption Request. If an Event of default has occurred as a result
of failure by the Fund to perform its obligations under Section f2.04(j) of the
Insurance Agreement, Financial Security intends to submit a Redemption Request
pursuant to section 5.02(b) of the Insurance Agreement requesting the Fund to
redeem all outstanding shares of Preferred stock, designating a date for such
redemption no later than the second Dividend Payment Date following the date of
delivery of such Redemption Request to the Fund.
5. Miscellaneous. Unless the context otherwise requires,
capitalized terms used herein shall have the meanings provided in the
Insurance Agreement. Except as expressly amended hereby, the Insurance
Agreement shall remain in full force and effect, and all references in the
Insurance Agreement to "this Agreement" or to "the Insurance Agreement"
shall mean the Insurance Agreement as amended by this Amendment No. 1.
This amendment No. 1 may be executed in counterparts by the parties
hereto, and each such counterpart shall be deemed an original and all such
counterparts shall constitute one and the same instrument. This Amendment
No. 1 shall be governed by and construed in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
AMENDMENT NO. 1, all as of the day and year first above written.
FINANCIAL SECURITY ASSURANCE INC.
By /S/ Illegible
-----------------------------
Managing Director
PROSPECT STREET HIGH INCOME
PORTFOLIO, INC.
By /S/ John A. Frabotta
-----------------------------
Title: Vice President
<PAGE>
- -------------------------------------------------------------------------------
CUSTODY AGREEMENT
Between
BANKERS TRUST COMPANY,
as Custodian
and
FINANCIAL SECURITY ASSURANCE INC.
Dated as of December l, 1988
- -------------------------------------------------------------------------------
4636f
<PAGE>
TABLE OF CONTENTS
Page
PREAMBLE ....................................................................1
ARTICLE I
DEFINITIONS .................................................................2
ARTICLE II
CUSTODY ACCOUNT AND CUSTODY RECEIPTS
SECTION 2.01. Creation of Custody Account ...................................4
SECTION 2.02. Custody Receipts ..............................................5
SECTION 2.03. Delivery of Custody Receipts ..................................5
SECTION 2.04. Mutilated, Lost, Stolen or Destroyed Custody Receipts .........6
SECTION 2.05. Registration and Transfer of Ownership; Persons Treated
as Owners .....................................................7
SECTION 2.06. Deposits With Depository ......................................9
ARTICLE III
ADMINISTRATION OF CUSTODY ACCOUN
SECTION 3.01. Payments of Redemption Price, Liquidation Preference and
Dividends on Preferred Stock .................................10
SECTION 3.02. Notices ......................................................11
SECTION 3.03. Duties With Respect to Surety Bond ...........................11
SECTION 3.04. Defaults by Fund .............................................14
SECTION 3.05. Unclaimed Moneys .............................................16
SECTION 3.06. Obligation of Owners With Respect to Certain Taxes and
Filings ......................................................16
SECTION 3.07. Transfers of Surety Bond or Preferred Stock by Custodian .....16
SECTION 3.08. Termination of Custody Account ...............................16
SECTION 3.09. Insolvency Proceedings .......................................17
<PAGE>
ARTICLE IV
THE CUSTODIAN
SECTION 4.01. Standard of Liability ........................................18
SECTION 4.02. Resignation and Removal of the Custodian; Appointment
of Successor .................................................18
SECTION 4.03. Charges and Expenses .........................................19
ARTICLE V
MISCELLANEOUS
SECTION 5.01. Amendments, Etc. .............................................20
SECTION 5.02. Counterparts .................................................21
SECTION 5.03. Exclusive Benefit of Parties; Effective Date .................21
SECTION 5.04. Invalidity of Provisions .....................................21
SECTION 5.05. Notices ......................................................21
SECTION 5.06. Business Day .................................................22
SECTION 5.07. Governing Law ................................................22
SECTION 5.08. Shareholder Rights ...........................................22
SECTION 5.09. Headings .....................................................22
SIGNATURES .................................................................22
EXHIBIT 1 - Form of Custody Receipt
EXHIBIT 2 - Form of Opinion of Counsel of Issuer of Surety Bond
<PAGE>
CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT dated as of December 1, 1988 is being executed
by BANKERS TRUST COMPANY, a New York banking corporation, as custodian (the
"Custodian"), and FINANCIAL SECURITY ASSURANCE INC., a New York stock insurance
company ("Financial Security"), for the benefit of the Owners from time to time
of Custody Receipts. (All capitalized terms used herein and not otherwise
defined shall have the meaning set forth in Article I hereof.)
WHEREAS, Financial Security and the Custodian desire to enter into this
Custody Agreement to provide for the issuance from time to time of Custody
Receipts, each such Custody Receipt to evidence (i) the Owner's beneficial
ownership of the share or shares of Preferred Stock indicated on the Custody
Receipts Register, and (ii) the Owner's rights with respect to such Custody
Receipt under this Custody Agreement and under the Surety Bond; and
WHEREAS, the parties hereto desire to establish the terms pursuant to
which the Surety Bond and the Preferred Stock are deposited with, and held in
custody by, the Custodian, the terms and conditions for the issuance, transfer
and exchange of Custody Receipts and the terms for the payment of certain fees
and expenses associated with this Custody Agreement; and
WHEREAS, the Preferred Stock represents an indirect ownership interest
in certain securities and other assets held in trust on behalf of the Fund, and
dividends, the redemption price and any liquidation preference with respect to
the Preferred Stock are payable in accordance with the Certificate from assets
owned by the Fund and the earnings therefrom; and
WHEREAS, upon any payment by Financial Security under the Surety Bond,
Financial Security will receive certain rights with respect to the Preferred
Stock which is held in trust by the Custodian for such purpose;
NOW, THEREFORE, the parties hereto do hereby agree, for the benefit of
the Owners from time to time of Custody Receipts, as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used in this Custody Agreement shall have the
meanings provided in this Article I, in both singular and plural form, as
appropriate.
"Authorized Officer" means any officer or officers of the Custodian
designated as such by the Custodian in a written notice delivered by the
Custodian to Financial Security.
"Business Day" means a day on which banks are not authorized or
required by law to be closed in either the city in which the principal office of
Financial Security is located or the city in which the principal office of the
Custodian is located.
"Certificate" means the Fund's Articles of Amendment and Restatement,
as in effect on the date hereof and as subsequently amended from time to time.
"Custodian" means Bankers Trust Company, a New York banking
corporation, or any successor Custodian hereunder.
"Custody Accounts" means the account established and maintained
pursuant to Section 2.01 of this Custody Agreement.
"Custody Agreement" means this Custody Agreement, as amended or
supplemented from time to time.
"Custody Receipt" means a receipt substantially in the form set forth
in Exhibit 1 hereto and executed and delivered pursuant to Sections 2.02 and
2.03 of this Custody Agreement.
"Custody Receipts Register" means the records maintained by the
Custodian pursuant to Section 2.05 of this Custody Agreement.
"Depository" means The Depository Trust Company or any successor
thereto.
"Financial Security" means Financial Security Assurance Inc., a New
York stock insurance company, or any successor thereto, and the issuer of any
Qualified Surety Bond.
"Fund" means Prospect StreetSm High Income Portfolio Inc., a Maryland
corporation, and its successors and assigns.
"Holder" has the meaning specified in the Certificate.
"Insolvency Proceeding" means any of the events or proceedings
described in Section 5.01(g) of the Insurance Agreement.
"Insurance Agreement" means the Insurance Agreement dated as of
December 1, 1988 between Financial Security and the Fund, as amended or
supplemented from time to time.
"Mail" means mail by first-class postage to specified Owners at their
addresses set forth in the Custody Receipts Register.
"Moody's" means Moody's Investors Service, Inc., a corporation
organized and existing under the laws of the State of Delaware, or any successor
thereto until such corporation or successor no longer rates the Preferred Stock.
"Notice of Transfer or Exchange" means the Notice of Transfer or
Exchange printed on a Custody Receipt.
"Owner" means, with respect to a Custody Receipt, the person in whose
name such Custody Receipt is registered on the Custody Receipts Register.
"Paying Agent" means Bankers Trust Company and the successors or any
other paying agent appointed by the Fund to perform the functions performed by
the Paying Agent under the Certificate.
"Preferred Stock" means the Taxable Auction Rate Preferred Stock (No
Par Value) (Liquidation Preference $100,000 per Share) of the Fund covered by
the Surety Bond.
"Principal Office" means 4 Albany Street, Corporate Trust and Agency
Group, New York, New York 10006, or such other office designated as such by the
Custodian in a written notice delivered by the Custodian to Financial Security
and the Fund.
"Qualified Surety Bond" means any surety bond substantially in the
form of the Surety Bond issued by an entity having a claims-paying ability
rating by Moody's and S&P no lower than that of Financial Security.
"Record Date" means, with respect to a Scheduled Payment on the
Preferred Stock, any record date established for such Scheduled Payment pursuant
to applicable law.
"Scheduled Payment" has the meaning specified in the Surety Bond.
"S&P" means Standard and Poor's Corporation, a corporation organized
and existing under the laws of the State of New York, or any successor thereto,
until such corporation or successor no longer rates the Preferred Stock.
"Stock Books" means the stock transfer books of the Fund maintained by
the Paying Agent with respect to the Preferred Stock.
"Surety Bond" means the Surety Bond delivered by Financial Security to
the Custodian pursuant to, and substantially in the form set forth in, the
Insurance Agreement and held by the Custodian in the Custody Account and any
Qualified Surety Bond.
"Surety Bond Expiration Date" means the later of (i) [ ],
1993 and (ii) any date to which the Surety Bond shall have been extended as
confirmed in an endorsement to the Surety Bond delivered by Financial Security
to the Custodian.
<PAGE>
ARTICLE II
CUSTODY ACCOUNT AND CUSTODY RECEIPTS
Section 2.01. Creation of Custody Account. The Custodian shall
establish and maintain a separate Custody Account to be designated "Prospect
Street(SM) High Income Portfolio Inc. Taxable Auction Rate Preferred Stock
Custody Account." The Custodian shall deposit into such Custody Account the
Preferred Stock, the Surety Bond and any moneys received in connection
therewith. The Preferred Stock shall at all times be registered in the name of
the Custodian (or its nominee or its agent's nominee) on the Stock Books. The
Custody Account shall at all times be maintained as a custodial account for the
benefit of the Owners, separated and segregated from all other accounts, funds
and property in the possession of the bank or trust company acting as Custodian.
The Preferred Stock, the Surety Bond and any moneys held in the Custody Account
shall not at any time be commingled with any other assets or property held by
the Custodian. The Custodian shall maintain separate records in connection with
any moneys which it may hold, in such Custody Account or otherwise, in
connection with the Preferred Stock and the Surety Bond. To the extent
practicable, the Custodian shall arrange for payments of dividends on Preferred
Stock to be transferred by wire in immediately available funds to the Custodian.
The Preferred Stock physically held by the Custodian shall be represented by one
certificate. Without limitation of the foregoing, the Preferred Stock shall be
held in trust by the Custodian to secure the rights of Financial Security
provided in Section 3.03 of this Agreement.
Section 2.02. Custody Receipts. The Custodian shall issue the initial
Custody Receipts in the form of one Custody Receipt to the Depository, who shall
hold such certificate for the beneficial owners of the Preferred Stock until
such time as the Fund determines that such beneficial owners should receive
certificated Custody Receipts in which event the Custodian shall issue, transfer
and exchange Custody Receipts as required in appropriate amounts as indicated by
the Depository, each such Custody Receipt to evidence beneficial ownership by
the Owner named therein of the Preferred Stock represented thereby (as set forth
in the Custody Receipt Register) and the rights relating to such Custody Receipt
under this Custody Agreement and the Surety Bond. Custody Receipts shall be
substantially in the form set forth in Exhibit 1 hereto and shall be assigned
consecutive registration numbers from CR-1. Each Custody Receipt shall be
executed by the Custodian by the manual signature of an Authorized Officer and
no Custody Receipt shall be entitled to any benefits under this Custody
Agreement, or be valid or obligatory for any purpose, unless so executed by the
Custodian. In case any Authorized Officer whose signature shall appear on any
Custody Receipt shall cease to be an Authorized Officer, such signature shall
nevertheless be valid and sufficient for all purposes as if such person had
remained in office. The Custody Receipts shall not evidence any financial
obligation of the Custodian except that the Custodian shall be required, as
provided in Section 3.01 hereof, to apply all payments received in respect of
the Preferred Stock deposited hereunder to the Custody Receipts evidencing
ownership of such Preferred Stock without making any deduction whatsoever, other
than as explicitly provided in this Custody Agreement.
Section 2.03. Delivery of Custody Receipts. The Custodian shall
deliver the initial Custody Receipt as specified in Section 2.02 hereof, upon
receipt by the Custodian of the following:
(a) the original Surety Bond;
(b) a certificate representing [ ] shares of the Preferred
Stock registered in the name of the Custodian (or its nominee or its
agent's nominee) or endorsed by the registered owner thereof for
transfer to the Custodian (or its nominee or its agent's nominee) or
in blank;
(c) an opinion of counsel to Financial Security in
substantially the form set forth in Exhibit 2 hereto;
(d) a list of the names, addresses and, unless not required
to be obtained under applicable laws and regulations, taxpayer
identification numbers of the persons in whose names, and the number
of shares in which, such Custody Receipts are to be registered; and
(e) a certified copy of the Certificate.
The Custodian may accept additional shares of the Preferred Stock for
deposit in the Custody Account and deliver an initial Custody Receipt as
specified in Section 2.02 hereof upon receipt of the following:
(a) an endorsement to the Surety Bond increasing the coverage
of the Surety Bond to cover such additional shares of Preferred Stock;
(b) a certificate representing such additional shares of the
Preferred Stock registered in the name of the Custodian (or its
nominee or its agent's nominee) or endorsed by the registered owner
thereof for transfer to the Custodian (or its nominee or its agent's
nominee) or in blank;
(c) an opinion of counsel to Financial Security in
substantially the form set forth in Exhibit 2 hereto; and
(d) a list of the names, addresses and, unless not required
to be obtained under applicable laws and regulations, taxpayer
identification numbers of the persons in whose names, and the number
of shares in which, such Custody Receipts are to be registered.
The initial Custody Receipts to be executed and delivered by the
Custodian as provided in this Section 2.03 shall be delivered to or upon the
order of the Depository at a location specified by the Depository and agreed
upon by the Custodian. Such delivery shall be made on the date that the
Preferred Stock is delivered to the Custodian as provided in paragraph (b) of
this Section 2.03.
Section 2.04. Mutilated, Lost, Stolen or Destroyed Custody Receipts.
In the event a Custody Receipt is mutilated, lost, stolen or destroyed, the
Custodian shall execute and deliver in lieu thereof a new Custody Receipt,
provided that:
(a) in the case of any mutilated Custody Receipt, such
mutilated Custody Receipt shall be first surrendered to the Custodian;
and
(b) in the case of any lost, stolen or destroyed Custody
Receipt, there shall first be delivered to the Custodian evidence of
such loss, theft or destruction satisfactory to the Custodian and
Financial Security, together with indemnity satisfactory to each of
them, and neither Financial Security nor the Custodian shall have
received notice that such Custody Receipt has been acquired by a bona
fide purchaser.
In the event that any such mutilated, lost, stolen or destroyed Custody Receipt
evidences one or more shares of Preferred Stock that have been called for
redemption, the Custodian in its discretion may, if the conditions set forth in
clause (a) or (b), as applicable, have been satisfied, instead of issuing a new
Custody Receipt, remit the amount received on behalf of the Owner of such
mutilated, lost, stolen or destroyed Custody Receipt in connection with such
redemption or payment without surrender of the Custody Receipt otherwise
required by Section 3.01 hereof. All replacement Custody Receipts issued
pursuant to this Section shall be entitled to the full benefits hereunder,
whether or not, in the case of clause (b), any lost, stolen or destroyed
Custody Receipt shall be found at any time.
Section 2.05. Registration and Transfer of Ownership; Persons Treated
as Owners.
(a) The Custodian shall maintain a Custody Receipts Register
for the Custody Receipts at the Custodian's Principal Office to
provide for the registration of the Custody Receipts and the
registration of transfers of the Custody Receipts entitled to be
registered or transferred as herein provided. The Custody Receipts
Register may, at reasonable times and under reasonable regulations
established by the Custodian, be inspected and copied by Financial
Security (or its designee), the Fund or by a designated representative
of Owners of Custody Receipts evidencing more than 25% of the
outstanding shares of the Preferred Stock. The Custodian shall
maintain on the Custody Receipts Register, with respect to each such
Custody Receipt, (i) the name, address and, unless not required to be
maintained under applicable laws and regulations, taxpayer
identification number of the Owner of such Custody Receipt, (ii) the
registration number of such Custody Receipt, (iii) the liquidation
preference amount or amounts and registered number or numbers, if
available, of the Preferred Stock evidenced by such Custody Receipt
and (iv) such other information as the Custodian may deem necessary or
appropriate for the performance of its duties hereunder.
(b) The initial Custody Receipt shall be recorded on the
Custody Receipts Register in the name of Cede & Co. Thereafter, the
Custody Receipts may be transferred only on the Custody Receipts
Register. Upon surrender for transfer of any Custody Receipt to the
Custodian at its Principal Office, with the Notice of Transfer or
Exchange for such Custody Receipt fully completed, the Custodian shall
(i) execute and deliver to the transferee or transferees named in such
Notice at the address or addresses thereof set forth in such Notice a
new Custody Receipt or Receipts representing such aggregate number of
shares of Preferred Stock equal to the portion of the surrendered
Custody Receipt so transferred, registered in the name or names of
such transferee or transferees, provided that the conditions of the
Certificate with respect to beneficial owners of the Preferred Stock
are fulfilled and (ii) execute and deliver to the Owner of the
surrendered Custody Receipt at the address thereof set forth in the
Notice of Transfer or Exchange for such Custody Receipt a new Custody
Receipt or Receipts representing such aggregate number of shares of
Preferred Stock equal to the portion of the surrendered Custody
Receipt not so transferred. Each Custody Receipt issued upon such a
transfer shall bear a registration number not assigned previously and
shall represent a whole share or any integral number of shares of
Preferred Stock. The Custodian shall record in the Custody Receipts
Register the respective number of shares, aggregate liquidation
preference and stock certificate numbers, if any, of the Preferred
Stock evidenced by each Custody Receipt issued upon a transfer as
provided herein.
(c) A Custody Receipt or Receipts may be exchanged for a
Custody Receipt or Receipts representing the same aggregate number of
shares but different denominations upon surrender of such Custody
Receipt or Receipts to the Custodian at its Principal Office with the
Notice of Transfer or Exchange for such Custody Receipt fully
completed. The Custodian shall execute and deliver to the Owner of the
exchanged Custody Receipt, at the address thereof set forth in such
Notice of Transfer or Exchange, a Custody Receipt or Receipts that
such Owner making the exchange is entitled to receive, denominated in
whole shares of Preferred Stock and bearing registration numbers not
assigned previously. The Custodian shall record in the Custody
Receipts Register the respective number of shares, aggregate
liquidation preference and stock certificate numbers, if any, of the
Preferred Stock evidenced by each Custody Receipt issued upon an
exchange of Custody Receipts.
(d) The Custodian may require payment by the Owner of a
Custody Receipt of a sum sufficient to cover any tax, governmental fee
or other governmental charge that may be imposed in connection with
any registration of a transfer or exchange of such Custody Receipt,
and may require that such taxes, fees or other charges be paid prior
to the issuance of a new Custody Receipt. The Custodian shall not be
required to issue or register the transfer of any Custody Receipt
during the period when the Paying Agent would not be required to issue
or register the transfer of any Preferred Stock pursuant to the terms
of the Certificate.
(e) Financial Security and the Custodian may treat the person
in whose name a Custody Receipt is registered as the absolute owner
thereof, for all purposes whatsoever, and shall not be bound or
affected by any notice to the contrary, other than an order of a court
having jurisdiction in the premises.
(f) Whenever any Custody Receipt shall be delivered to the
Custodian for transfer, exchange or payment, upon transfer, exchange
or payment, the Custodian shall cancel and destroy such Custody
Receipt, and shall maintain a record of such cancellation and
destruction.
Section 2.06. Deposits With Depository. The Custodian is authorized to
take such actions with the Depository as will enable Custody Receipts to be
deposited with such Depository. The Depository as the Owner of the Custody
Receipt representing all the shares of Preferred Stock may take any action
pursuant to this Custody Agreement with respect to any one or more shares of
the Preferred Stock represented by the Custody Receipt as may be directed by
the beneficial owners of such Preferred Stock.
ARTICLE III
ADMINISTRATION OF CUSTODY ACCOUNT
Section 3.01. Payments of Redemption Price, Liquidation Preference and
Dividends on Preferred Stock.
(a) The Custodian shall remit to each Owner of record of a
Custody Receipt on the Record Date preceding any Scheduled Payment the
dividend component of such Scheduled Payment on Preferred Stock
represented by such Custody Receipt. The Custodian shall use its best
efforts to make such remittance immediately upon receipt of such
payment by the Custodian. Payment of such dividend to the Depository
shall be by wire transfer of immediately available funds, otherwise
such payment shall be made by bank check payable in currency of the
United States of America sent by Mail to such Owner or by such other
method requested by an Owner and consented to in writing by the Fund.
(b) The Custodian (or its agent) shall duly present (or cause
to be presented) each share of Preferred Stock for payment on or prior
to its redemption date or date fixed for payment of any liquidation
preference with respect thereto, in each case in accordance with the
provisions of the Certificate. A payment received by the Custodian of
all or a portion of the redemption price or liquidation preference of
a share of Preferred Stock upon redemption or liquidation shall be
remitted by the Custodian to the Owner of the Custody Receipt
evidencing such Preferred Stock at the Principal Office of the
Custodian immediately upon presentation of such Custody Receipt. Upon
such a presentation and remittance in connection with a payment of a
portion of the redemption price or liquidation preference of a share
of a Preferred Stock, the Custodian shall issue, in exchange for the
Custody Receipt presented, a Custody Receipt representing the
remaining liquidation preference of the Preferred Stock evidenced
thereby. Payments of such redemption price or liquidation preference
shall be made by transfer of immediately available funds to the
Depository or otherwise by bank check payable in currency of the
United States of America or by such other method requested by an Owner
and consented to in writing by the Fund.
Section 3.02. Notices.
(a) Upon receipt of any notice of redemption of, or payment
of liquidation preference with respect to, Preferred Stock, the
Custodian shall promptly transmit such notice by Mail, by hand or by
telecopy to the Owner of the Custody Receipt evidencing such Preferred
Stock. The Custodian (or its agent) shall present the Preferred Stock
so called for redemption or payment of liquidation preference on or
prior to the date of such redemption or to the Paying Agent on behalf
of such Owner for redemption payment in accordance with the terms of
the Certificate. The redemption price or liquidation preference
received by the Custodian shall be paid to such Owner in accordance
with the provisions of Section 3.01 hereof.
(b) Upon receipt from the Fund of any other notice with
respect to the Preferred Stock including specifically a notice of a
matter that requires or permits a vote by an Owner, the Custodian
shall promptly transmit such notice by Mail to each Owner of a Custody
Receipt. In the event such notice requests or requires any action by
any such Owner, the Custodian shall not take any action on behalf of
such Owner, except in accordance with written instructions from such
Owner and upon receipt of reasonable indemnity from such Owner for
resulting costs and liabilities, whether or not any action appears to
be in the best interest of such Owner, provided that the Custodian
will exercise voting rights as directed by an Owner without requiring
such indemnity and provided further that such voting rights are
subject to the rights of Financia1 Security set forth in 3.03(b)
hereof. Any record date established by such notice for purposes
specified in such notice shall be the record date for the purpose of
determining the Owners of record for such purposes. If no record date
is established by the Fund or applicable law, the Custodian may
establish an appropriate date as a record date if in its judgment such
a date is required.
Section 3.03. Duties With Respect to Surety Bond.
(a) In the event that the Custodian has received notice from
the Paying Agent for the Preferred Stock that the Fund has failed to
deposit funds with the Paying Agent by 12:00 p.m. on the third
Business Day next preceding the date the Fund is required to make all
or a portion of a Scheduled Payment, the Custodian shall promptly and
in any event prior to 4:30 p.m., New York City time, on such Business
Day file a Notice for Payment under the Surety Bond and make the
assignment required in Section 3.03(b) hereof. In the event the
Custodian receives from an Owner the Order, certificate and executed
assignment referred to in Paragraph 10 of the Endorsement to the
Surety Bond, the Custodian shall promptly file a Notice for Payment
under the Surety Bond and make the assignment required in Section
3.03(b) hereof.
(b) By acceptance of a Custody Receipt, each Owner
irrevocably designates, appoints, authorizes and directs the Custodian
to act as his attorney-in-fact as follows:
(i) if and to the extent a Shortfall (as defined in
Exhibit A to Endorsement No. 1 to the Surety Bond) exists in
amounts required to pay dividends on the Preferred Stock, to
execute and deliver an appropriate instrument of assignment
to Financial Security for each of the claims for dividend to
which such Shortfall relates contemporaneously with the
delivery to Financial Security of the notice demanding
payment under the Surety Bond;
(ii) if and to the extent a Shortfall exists in
amounts required to pay redemption price or liquidation
preference for the Preferred Stock, to execute and deliver an
appropriate instrument of assignment to Financial Security of
any of the Preferred Stock the redemption price or
liquidation preference for which has not previously been paid
or for which moneys are not held by the Custodian and
available for payment contemporaneously with the delivery to
Financial Security of the notice demanding payment under the
Surety Bond; and
(iii) if and so long as any Shortfall exists with
respect to the Preferred Stock, to appoint Financial Security
as agent for the Owner and the Custodian in any legal
proceeding with respect to the Preferred Stock including
specifically the right to vote such Preferred Stock until any
claims resulting from the assignments in (i) or (ii) above
shall have been satisfied, such appointment to be made
contemporaneously with the delivery of the notice to
Financial Security demanding payment under the Surety Bond
and to be contingent upon Financial Security's continued
performance under the Surety Bond.
If the Custodian delivers to Financial Security any such
instrument of assignment with respect to a Scheduled Payment and
Financial Security fails to make full payment with respect to such
Scheduled Payment pursuant to the Surety Bond, such instrument of
assignment shall be without effect and shall be canceled and returned,
on the date such payment is due, by Financial Security to the
Custodian. In each case in which the Custodian shall receive, in
accordance with the Surety Bond, payment from Financial Security with
respect to the claims for dividend so assigned or, with respect to
redemption price or liquidation preference, the assignment of
Preferred Stock, whichever is applicable, the Custodian shall disburse
such sums to the Owner in accordance with Section 3.01 of this Custody
Agreement. Payments disbursed by the Custodian from proceeds of the
Surety Bond shall not be considered to be made by the Fund, and
Financial Security shall become the owner of such rights to dividends
or redemption price or liquidation preference in accordance with the
tenor of the assignment made to it. Irrespective of whether any
assignment is executed and delivered, the Custodian and each Owner
hereby agree for the benefit of Financial Security that (a) they
recognize that, to the extent Financial Security pays the amount of
any Shortfall with respect to the Preferred Stock to the Owners,
Financial Security will be subrogated to the rights of such Owners to
receive from the Fund the redemption price, liquidation preference or
dividend to which such Shortfall relates, as provided in this Section
and (b) the Custodian will accordingly pay to Financial Security such
redemption price, liquidation preference and dividend as shall be
received by it, but only from sources and in the manner provided
herein, and will otherwise treat Financial Security as the owner of
the rights to such redemption price, liquidation preference and
dividend.
(c) To the extent the Custodian shall hold funds drawn under
the Surety Bond, it shall hold such funds for the benefit of Financial
Security until the required instruments of assignment are presented to
Financial Security in accordance with the Surety Bond. Such funds
shall not be invested by the Custodian. Except for the actions set
forth in (a) and (b) of this Section 3.03, the Custodian shall not
take any action with respect to the Surety Bond on behalf of any Owner
other than in accordance with written instructions from such Owner and
upon receipt of reasonable indemnity from such Owner for resulting
costs and liabilities, whether or not such action appears to be in the
best interest of such Owner.
(d) Upon default by Financial Security in the payment of any
amounts due under the Surety Bond, each Owner, as the real party in
interest, shall have the right to proceed directly and individually
against Financial Security, in whatever manner such Owner deems to be
appropriate. In such event, such Owner shall not be required to act in
concert with other Owners or with the Custodian.
(e) In the event the Custodian has received written notice
from S&P, if the Preferred Stock is rated by S&P, and from Moody's, if
the Preferred Stock is rated by Moody's, that the claims-paying
ability of Financial Security is rated by such rating agency "AA+" or
less with respect to S&P, and "Aal" or less with respect to Moody's,
and the Custodian (i) has received (A) a Qualified Surety Bond and
written evidence from S&P, if the Preferred Stock is then rated by
S&P, and from Moody's, if the Preferred Stock is then rated by
Moody's, that the substitution of such Qualified Surety Bond for the
Surety Bond then held would not, of itself, result in a reduction or
withdrawal of the ratings then applicable to the Preferred Stock, (B)
an opinion of counsel to the issuer of the Qualified Surety Bond in
substantially the form set forth in Exhibit 2 hereto and (C) an
agreement by the issuer of the Qualified Surety Bond in form
acceptable to the Custodian agreeing to and assuming the obligations
of Financial Security hereunder or (ii) has received written evidence
from S&P, if the Preferred Stock is then rated by S&P, and from
Moody's, if the Preferred Stock is then rated by Moody's, that the
termination of the Surety Bond then held would not, of itself, result
in a reduction or withdrawal of the ratings then applicable to the
Preferred Stock, then the Custodian shall upon and as of the Surety
Bond Expiration Date, in the case of (i) above, accept the Qualified
Surety Bond and deposit it into the Custody Account and, in the case
of either (i) or (ii) above, shall surrender the Surety Bond then held
to the issuer thereof.
Section 3.04. Defaults by Fund.
(a) The Fund is the obligor with respect to payment of
redemption price, liquidation preference and declared dividends for
the Preferred Stock and with respect to the performance of all other
obligations set forth or implied in the Preferred Stock and the
Certificate. The Custodian is not authorized hereunder to proceed
against the Fund in the event of a default under the Preferred Stock
and the Certificate, and has no power or obligation hereunder to
assert any of the rights and privileges of the Owners.
(b) In the event of any default in payment by the Fund and by
Financial Security, each Owner will have the right to proceed directly
and individually against the Fund in whatever manner is deemed
appropriate by such Owner either by withdrawing the Preferred Stock
evidenced by such Owner's Custody Receipt from the Custody Account or
by directing the Custodian to take specific actions on behalf of such
Owner pursuant to Section 3.04(c) of this Custody Agreement, and such
Owner will not be required to act in concert with the Custodian
(unless such Owner so directs) or other Owners. The issuance of a
Custody Receipt shall not in any manner: (i) alter, modify or increase
the rights of the Owner of such Custody Receipt with respect to the
Preferred Stock evidenced by such Custody Receipt (provided that
payments of dividends on and redemption price or liquidation
preference for such Preferred Stock and proceeds of the Surety Bond
held by the Custodian shall be paid to such Owner as provided herein),
(ii) grant to any Owners of other Custody Receipts rights with respect
to such Custody Receipt or the Preferred Stock evidenced thereby or
(iii) grant to such Owner, through ownership of such Custody Receipt,
any rights with respect to any other Custody Receipt or the Preferred
Stock evidenced thereby. The parties hereto understand and agree that
each Owner of a Custody Receipt is the sole beneficial owner (subject
to any obligations to the beneficial holders on whose behalf the
Custody Receipt is held) of the Preferred Stock evidenced thereby (but
shall have no interest in any Preferred Stock evidenced by Custody
Receipts held by any other Owner) and that the Custodian shall hold
Preferred Stock as custodian for the Owners of Custody Receipts
evidencing such Preferred Stock.
(c) Notwithstanding anything in this Section 3.04 to the
contrary, the Custodian will proceed promptly pursuant to Section 3.03
hereof to demand payment pursuant to the Surety Bond in the
circumstances specified in Section 3.03(a) hereof and, upon receipt of
indemnity satisfactory to it for resulting costs and liability, if
any, will undertake to perform such other ministerial acts as may be
reasonably necessary to assist the Owners in proceeding against
Financial Security, if necessary, or for enforcing rights hereunder or
under the Certificate.
Section 3.05. Unclaimed Moneys. In the event any moneys constituting
payment of redemption price, liquidation preference or dividend for any
Preferred Stock (including any proceeds from a draw on a Surety Bond) are not
claimed by the Owner of the Custody Receipt evidencing such Preferred Stock (or,
in the case of Surety Bond proceeds, are required to be held by the Custodian
and not released to the Owner), the Custodian shall segregate and hold such
moneys in a subaccount within the Custody Account, without liability for
interest thereon, for the account of the Owner entitled thereto. Such moneys
shall not be invested by the Custodian, but shall be held in trust for the
benefit of such Owner. All such moneys that remain in any such subaccount on the
date that is two (2) years and eleven (11) months after the date on which such
moneys were originally due, and as to which such Owner has not indicated an
interest as evidenced by a memorandum on file with the Custodian, shall be
disbursed to Financial Security, if such moneys were provided by Financial
Security, or to the Fund, if such moneys were provided by the Fund, and such
Owner shall thereafter look only to such respective party for payment.
Section 3.06. Obligation of Owners With Respect to Certain Taxes and
Filings. If any tax or other governmental charge shall become payable by or on
behalf of the Custodian, including any tax or charge required to be withheld
from any payment to or by the Custodian under the provisions of any applicable
law or regulation, with respect to any Custody Receipt or any Preferred Stock
evidenced thereby, such tax or charge shall be payable by the Owner of such
Custody Receipt and may, following written notice from the Custodian to such
Owner, be withheld by the Custodian.
Section 3.07. Transfers of Surety Bond or Preferred Stock by
Custodian. The Custodian shall hold the Preferred Stock and the Surety Bond in
custody only and shall not assign, transfer, pledge, set off or otherwise
dispose of the Surety Bond, Preferred Stock or interest therein except as
specifically provided hereunder or as required by an order of a court having
jurisdiction in the premises.
Section 3.08. Termination of Custody Account. During the term of this
Custody Agreement, the Custodian shall have the following obligations:
(a) The Custodian shall maintain in the Custody Account each
share of Preferred Stock until the earliest to occur of: (i)
redemption of such Preferred Stock in full, including all accrued
dividends, by the Fund and/or payments of amounts with respect
thereto by Financial Security pursuant to the Surety Bond, (ii)
payment of the full liquidation preference of such Preferred Stock,
including all accrued dividends, by the Fund and/or payments of
amounts with respect thereto by Financial Security pursuant to the
Surety Bond upon redemption in whole or liquidation of such Preferred
Stock, (iii) the Surety Bond Expiration Date and (iv) the receipt of
the written evidence from Moody's and S&P referred to in Section
3.03(e)(ii) hereof. Upon termination of the Custody Account pursuant
to clause (iii) above, any shares of Preferred Stock shall be
delivered to or at the direction of the Owner thereof. The Custodian
hereby disclaims any equitable or beneficial interest in the Preferred
Stock. No Preferred Stock will be available to the Custodian for its
own use or profit, nor will any Preferred Stock be deemed to be part
of the general assets of the Custodian. The Preferred Stock will not
be subject to any right, charge, security interest, lien or claim of
any kind in favor of the Custodian.
(b) The Custodian shall maintain the Surety Bond in the
Custody Account until the earlier of (a) the Term of the Surety Bond
(as defined therein) shall have expired or (b) receipt of those items
required by Section 3.03(e)(i) or Section 3.03(e)(ii), whereupon such
Surety Bond shall be returned to Financial Security.
Section 3.09. Insolvency Proceedings. The Custodian shall promptly
notify Financial Security of (i) the commencement of any Insolvency Proceeding
by the Fund known to the Custodian and (ii) the making of any claim in
connection with any Insolvency Proceeding seeking the avoidance as a
preferential transfer (a "Preference Claim") of any payment of any redemption
price, liquidation preference or dividend with respect to any Preferred Stock.
Financial Security may at any time during the continuation of an Insolvency
Proceeding direct all matters relating to such Insolvency Proceeding, including
(i) all matters relating to any Preference Claim, (ii) the direction of any
appeal of any order relating to Preference Claim and (iii) the posting of any
surety, supersedeas or performance bond pending any such appeal. Financial
Security shall be subrogated to the rights of the Custodian and each Owner in
the conduct of any Insolvency Proceeding, including all rights of any party to
an adversary proceeding action with respect to any court order issued in
connection with any such Insolvency Proceeding so long as any action so taken is
not adverse to such Owner's right to payment pursuant to the Surety Bond.
ARTICLE IV
THE CUSTODIAN
Section 4.01. Standard of Liability. The Custodian shall not be liable
under this Custody Agreement other than by reason of bad faith or gross
negligence in the performance of such duties as are specifically set forth in
this Custody Agreement. The Custodian undertakes to perform such duties and only
such duties as are set forth in the Custody Agreement and no implied covenants
or obligations shall be read into this Custody Agreement against the Custodian.
The Custodian shall not be liable for any damages resulting from any
distribution from the Custody Account to an Owner at the address of record of
such Owner in the Custody Receipts Register. The Custodian shall not be liable
for any action or inaction by it done in reasonable reliance upon the
unqualified written opinion of its legal counsel or the written advice of its
accountants. The Custodian may rely and shall be protected in acting upon any
written notice, request, direction or other document reasonably believed by it
to be genuine and to have been signed or presented by the proper party or
parties.
The Custodian shall not incur any liability to any Owner if by reason
of any provision of any present or future law, or regulation thereunder, of any
governmental authority, or by court order or by reason of any act of God or war
or other circumstance beyond the control of the Custodian, the Custodian shall
be prevented or forbidden from doing or performing any act or thing which the
terms of this Custody Agreement provide shall be done or performed, and the
Custodian shall not incur any liability to any Owner by reason of any
nonperformance or delay, caused as aforesaid, in the performance of any act or
thing which the terms of this Custody Agreement provide shall or may be done or
performed.
Section 4.02. Resignation and Removal of the Custodian; Appointment of
Successor. The Custodian may resign with respect to all of its duties hereunder
at any time by written notice thereof delivered to Financial Security and given
by Mail to each Owner, such resignation to take effect upon the appointment of a
successor Custodian and its acceptance of such appointment as hereinafter
provided.
Financial Security or the Owners of Custody Receipts evidencing a
majority of outstanding shares of the Preferred Stock may, upon 30 days' written
notice to the Custodian, remove the Custodian and appoint a successor Custodian
meet ing the qualifications set forth in the succeeding paragraph. In the event
of such removal, the Custodian shall pay over to its successor Custodian any
fees or charges previously paid to the Custodian with respect to such Custody
Receipts in respect of duties not yet performed under this Custody Agreement
which remain to be performed by a successor Custodian.
In case at any time the Custodian acting hereunder shall resign,
Financial Security shall, within 90 days after the delivery of the notice of
resignation, appoint a successor Custodian. Any successor Custodian shall be a
bank or trust company having its principal office in the United States of
America and having a combined capital and surplus of at least $50,000,000. If no
successor Custodian has been appointed within such 90 days, the resigning
Custodian may petition any court of competent jurisdiction for the appointment
of a successor Custodian.
Any successor Custodian shall execute and deliver to its predecessor
and to Financial Security an instrument in writing accepting its appointment
hereunder, and thereupon such successor Custodian, without any further act or
deed, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor and for all purposes shall be the Custodian under
this Custody Agreement, and such predecessor, upon payment of all sums due it
and on the written request of Financial Security, shall execute and deliver an
instrument transferring to such successor all rights, obligations and powers of
such predecessor hereunder, and shall duly assign, transfer and deliver all
right, title and interest in the Custody Account and all records relating
thereto to such successor. Any successor Custodian shall promptly give notice of
its appointment to the Owners by Mail and to Moody's and S&P by first-class mail
or hand delivery.
Any corporation into or with which the Custodian may be merged,
consolidated or converted shall be the successor of such Custodian without the
execution or filing of any document or any further act. Notice of such merger,
consolidation or conversion shall be given by first-class mail or hand delivery
to Moody's and S&P.
Section 4.03. Charges and Expenses. Except as expressly provided in
this Custody Agreement, no charges or expenses of the Custodian or any other
person shall be payable by or withheld from any Owner. The Fund shall be
responsible for the payment of all other charges and expenses of the Custodian
(including, in each case, reasonable fees and expenses of counsel) incidental to
the performance of its obligations hereunder.
ARTICLE V
MISCELLANEOUS
Section 5.01. Amendments, Etc. Without notice to or consent of any
Owners, any provisions of this Custody Agreement may be amended (i) to cure any
formal defect, omission, inconsistency or ambiguity in this Custody Agreement,
(ii) to add to the covenants and agreements of the Custodian or Financial
Security or to surrender any right or power herein conferred upon the Custodian,
the Fund or Financial Security, (iii) to effectuate the assignment of the
Custodian's rights and duties hereunder to a qualified successor as provided
herein, (iv) to comply with the Trust Indenture Act of 1939, as from time to
time amended, or the Investment Company Act of 1940, as from time to time
amended, (v) to increase the number of shares of Preferred Stock held in custody
under this Custody Agreement or (vi) to modify, alter, amend or supplement this
Custody Agreement in any other respect not inconsistent herewith which, in the
opinion of counsel acceptable to the Custodian, is not adverse to the Custodian
or any of the Owners. Except for amendments made pursuant to clause (i), (ii),
(iii), (iv), (v) or (vi) above, no amendment affecting the Owners of Custody
Receipts may be made to this Custody Agreement without the consent of Owners of
Custody Receipts evidencing 66-2/3% of the outstanding shares of the Preferred
Stock, provided that no amendment may be made which would directly or indirectly
have the effect of interfering with the rights of any Owner to make a claim
under the Surety Bond without the consent of such Owner or which would modify
any of the provisions of this Section 5.01 except to increase the 66-2/3%
percentage figure referred to above (or any percentage substituted therefor
pursuant to a prior amendment) or to provide that certain other provisions of
this Custody Agreement cannot be modified without the consent of any Owner
affected thereby. No amendment or waiver of any provision of this Custody
Agreement nor consent to any departure herefrom shall in any event be effective
unless the same shall be in writing and signed by the Custodian and Financial
Security, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. Notice of any
such amendment and a copy thereof shall be given by first-class mail or hand
delivery to Moody's and S&P.
Section 5.02. Counterparts. This Custody Agreement may be executed in
any number of counterparts by the parties thereto on separate counterparts, each
of which, when so executed and delivered, shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument. Copies
of this Custody Agreement shall be filed with the Custodian and shall be open to
inspection during business hours at the Custodian's Principal Office by any
Owner.
Section 5.03. Exclusive Benefit of Parties; Effective Date. This
Custody Agreement is for the exclusive benefit of the Custodian, the Fund,
Financial Security and the Owners of the Custody Receipts from time to time, and
their respective successors hereunder, and shall not be deemed to give any legal
or equitable right, remedy or claim to any other person whatsoever.
The Owners shall be the beneficiaries of this Custody Agreement and,
pursuant to the terms of the Custody Receipts, shall acknowledge and accept all
of the terms and conditions and agree to be bound by all of the provisions
hereof and of the Custody Receipts by acceptance of delivery of the Custody
Receipts without the necessity of any written acknowledgement or signature. This
Custody Agreement shall become effective as to the Custodian with respect to any
Custody Receipts upon execution of this Custody Agreement and the receipt by the
Custodian of the items specified in Section 2.03 hereof with respect to such
Custody Receipts.
Section 5.04. Invalidity of Provisions. In case any one or more of the
provisions contained in this Custody Agreement or in the Custody Receipts should
be or become invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein or
therein shall in no way be affected, prejudiced or disturbed thereby.
Section 5.05. Notices. Notices given Owners shall be given by Mail and
shall be effective two Business Days following the date so marked. All other
communications shall be mailed, sent or delivered, if to Financial Security, to
Financial Security Assurance Inc., 350 Park Avenue, New York, New York 10022,
Attention: Surveillance, and if to the Custodian, to Bankers Trust Company, 4
Albany Street, Corporate Trust and Agency Group, New York, New York 10006, or as
to each party at such other address as shall be designated by such party in a
written notice to the other parties.
Any communication so addressed and mailed to Financial Security or the
Custodian shall be deemed to be given when received, and any notice sent by
rapid transmission shall be deemed to be given when receipt of such transmission
is acknowledged, and any communication delivered in person shall be deemed to be
given when receipted for or actually received by an authorized officer of the
recipient.
Section 5.06. Business Day. In any case where the date on which any
action is required to be taken hereunder shall not be a Business Day (as defined
in Exhibit 1 hereto), then such action shall be taken on the next succeeding
Business Day with the same force and effect as if made on the date that such
action is otherwise required to be taken hereunder.
Section 5.07. Governing Law. This Custody Agreement and the Custody
Receipts shall be governed by and construed in accordance with the laws of the
State of New York.
Section 5.08. Shareholder Rights. Any rights to be made available to a
shareholder under applicable law shall be deemed incorporated in this Custody
Agreement and made available to the Owners as the beneficial owners of the
Preferred Stock.
Section 5.09. Headings. The headings of articles and sections in this
Custody Agreement have been inserted and the table of contents has been provided
for convenience only and are not to be regarded as a part of this Custody
Agreement or to have any bearing upon the meaning or interpretation of any
provision contained herein.
DATED as of December 1, 1988.
FINANCIAL SECURITY ASSURANCE INC.
By /s/ Robert P. Cochran
---------------------------
Senior Vice President
BANKERS TRUST COMPANY
By /s/ Eugene B. Mahrie
---------------------------
Vice President
<PAGE>
THIS CUSTODY RECEIPT IS ISSUED SUBJECT TO THE SAME PROVISIONS
RESTRICTING TRANSFERS OF SHARES OF TAXABLE AUCTION RATE PREFERRED STOCK ISSUED
BY PROSPECT STREETSM HIGH INCOME PORTFOLIO INC. (THE "FUND") CONTAINED IN
ARTICLE IV OF THE FUND'S ARTICLES OF INCORPORATION, AS AMENDED AND RESTATED (THE
"ARTICLES OF INCORPORATION") AND IN THE MASTER PURCHASER'S LETTER REQUIRED TO BE
EXECUTED BY EACH PERSON WHO ACQUIRES ANY OF THE SHARES REPRESENTED BY THIS
CUSTODY RECEIPT. A COPY OF EACH SUCH MASTER PURCHASER'S LETTER, WHICH ALSO
AFFECTS OTHER RIGHTS OF EACH OWNER OF THIS CUSTODY RECEIPT, IS ON FILE WITH THE
CUSTODIAN. A COPY OF ARTICLE IV OF THE ARTICLES OF INCORPORATION AND A COPY OF
THE MASTER PURCHASER'S LETTER SETTING FORTH THE RESTRICTIONS ON TRANSFER WILL BE
FURNISHED TO THE OWNER UPON REQUEST AND WITHOUT CHARGE.
EXHIBIT 1
FORM OF CUSTODY RECEIPT
CR-[ ] Evidencing Shares
of Preferred Stock
Liquidation Value $100,000/Share
CUSTODY RECEIPT CUSIP: [ ]
CUSTODY RECEIPT EVIDENCING OWNERSHIP OF
SHARES OF PROSPECT STREET(SM) HIGH INCOME
PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK
Registered Owner:
General. Pursuant to a Custody Agreement dated as of December 1, 1988,
as from time to time amended (the "Custody Agreement"), between Bankers Trust
Company (the "Custodian") and Financial Security Assurance Inc. ("Financial
Security"), the Custodian holds as custodian (i) the amount specified above of
the above-referenced Preferred Stock (the "Preferred Stock"), on behalf of the
registered holder of this Custody Receipt (the "Owner") and (ii) a surety bond
(the "Surety Bond") of Financial Security guaranteeing Scheduled Payments (as
defined in the Surety Bond) of redemption price, liquidation preference and
dividends on the Preferred Stock.
THE FOLLOWING INFORMATION CONCERNING THE PREFERRED STOCK, THE SURETY
BOND AND THE CUSTODY AGREEMENT IS MERELY DESCRIPTIVE OF CERTAIN PROVISIONS OF
THOSE INSTRUMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE
INSTRUMENTS, COPIES OF WHICH ARE AVAILABLE AT THE PRINCIPAL OFFICE OF THE
CUSTODIAN.
The Preferred Stock has been issued by Prospect Street(SM) High Income
Portfolio Inc. (the "Fund") pursuant to its Articles of Incorporation (the
"Certificate") and the sole obligor with respect to the Surety Bond is Financial
Security. If the Fund fails to make a Scheduled Payment on the Preferred Stock,
the Custodian has no right or obligation to take any action for the Owner with
respect to the Preferred Stock referred to above except (i) to proceed to make a
demand for payment pursuant to the Surety Bond, or (ii) in accordance with
written instructions from such Owner and upon receipt of reasonable indemnity
for resulting costs and liabilities, whether or not such action appears to be in
the best interest of such Owner. If Financial Security defaults with respect to
a payment on the Surety Bond, the Custodian has no right or obligation to take
any action for the Owner except in accordance with written instructions from
such Owner and upon receipt of reasonable indemnity for resulting costs and
liabilities, whether or not any action appears to be in the best interest of
such Owner.
The Preferred Stock has been delivered to the Custodian or its nominee
to be held in a custody account (the "Custody Account") established pursuant to
the Custody Agreement. The Preferred Stock has been registered on the stock
books of the Fund maintained by the paying agent (the "Paying Agent") appointed
by the Fund under the Certificate in the name of the Custodian (or its nominee
or its agent's nominee) and not in the name of the Owner. This Custody Receipt
and all other custody receipts issued from time to time to evidence the
Preferred Stock which have been deposited in the Custody Account will be
referred to herein as "Custody Receipts."
THE SURETY BOND
Financial Security has issued the Surety Bond, consisting of a surety
bond and certain endorsements thereto, and the Surety Bond may not be cancelled
or revoked during its term. The Surety Bond unconditionally and irrevocably
guarantees to the Owner, as beneficial owner of the Preferred Stock as indicated
on the registration books maintained by the Custodian (other than the Fund and
any affiliates or successors thereof), (i) the full and complete payment of
Scheduled Payments ("Scheduled Payments" as defined in the Surety Bond) on the
dates on which such Scheduled Payments are guaranteed pursuant to the Surety
Bond in accordance with such Surety Bond and the terms of the Certificate as
amended and in effect as of the date of the issuance of the Surety Bond and
subsequently amended from time to time with the written consent of Financial
Security including the date on which the Preferred Stock is paid in full and
(ii) payment of any such amount that is subsequently avoided in whole or in part
as a preference payment under applicable federal bankruptcy law. As set forth in
the Surety Bond, the Preferred Stock shall be "paid in full" when all payments
guaranteed by the Surety Bond have been paid and any period during which any
such payment could have been avoided in whole or in part as a preference payment
under applicable federal bankruptcy law shall have expired before any
bankruptcy, insolvency or similar proceeding requisite to such avoidance shall
have been commenced.
Payment of amounts under the Surety Bond by Financial Security as
described in clause (i) above shall be made on the later of (a) the second
Business Day following receipt on a Business Day by Financial Security of a
notice and certificate from the Custodian in the form set forth as Exhibit A to
Endorsement No. I of the Surety Bond or (b) the date such Scheduled Payment is
scheduled to be made pursuant to the terms of the Surety Bond. Such payments
will be disbursed by Financial Security to the Custodian by wire transfer of
immediately available funds. Financial Security's obligation under the Surety
Bond is discharged to the extent funds are so transferred to the Custodian
whether or not such funds are properly applied by the Custodian.
Financial Security will pay any amount payable under the Surety Bond
as described in clause (ii) above on the earlier of (a) the fourth Business Day
following receipt by Financial Security from the Custodian of (x) a certified
copy of the order (the "Order") of the court which exercised jurisdiction to the
effect that the Owner is required to return scheduled payments of redemption
price, liquidation preference or dividends paid on the Preferred Stock which
were guaranteed by the Surety Bond because such payments were avoidable
preferences under applicable federal bankruptcy law, (y) a certificate of the
Owner that the Order has been entered and is not subject to any stay and (z) an
assignment duly executed by the Owner in such form as is reasonably required by
Financial Security, irrevocably assigning to Financial Security all rights and
claims of the Owner relating to or arising under the Preferred Stock against the
estate of the Fund, provided that if such notice and certificate are received on
a day that is not a Business Day or after 12:00 noon, New York City time, on any
Business Day, Financial Security shall make such payment on the fifth Business
Day following such date, and (b) the date of receipt by Financial Security of
the items referred to in clauses (x), (y) and (z) above, if at least four
Business Days prior to the date of such receipt, Financial Security shall have
received written notice from the Custodian that such items were to be delivered
on such date of receipt and such date of receipt was specified in such notice
(provided that if such notice is received on a day that is not a Business Day or
after 12:00 noon, New York City time, on any Business Day, such notice shall be
deemed to have been received on the next succeeding Business Day). Such payment
shall be disbursed to the receiver, conservator, debtor in possession or trustee
in bankruptcy named in the Order and not to the Owner directly unless the Owner
has been required previously to disgorge all or a part of such payment, as
demonstrated to the satisfaction of Financial Security, in which event such
payment shall to such extent be paid directly to the Custodian or the Holder, as
the case may be.
The Owner agrees, in consideration of the issuance of the Surety Bond,
that in the event that the Fund does not make Scheduled Payments on the
Preferred Stock covered by this Custody Receipt, the Custodian shall make a
claim for payment under the Surety Bond with respect to the Preferred Stock
covered by this Custody Receipt. In order to obtain payments under the Surety
Bond with respect to payment of dividends on the Preferred Stock, the Custodian,
as attorney-in-fact of said Owner, shall execute and deliver an appropriate
instrument of assignment to Financial Security of each scheduled dividend on the
Preferred Stock to be paid by Financial Security. In order to obtain payments
under the Surety Bond with respect to payment of redemption price or liquidation
preference for the Preferred Stock, the Custodian, as attorney-in-fact of said
Owner, shall execute and deliver an appropriate instrument of assignment to
Financial Security of each share of Preferred Stock, the redemption price or
liquidation preference for which is to be paid by Financial Security. The
Custodian, as attorney-in-fact of said Owner, shall also appoint Financial
Security as agent for the Owner and the Custodian in any legal proceeding with
respect to the Preferred Stock (including specifically any proceedings involving
the right of any Owners to vote such Preferred Stock represented by such Owner's
Custody Receipt) until any claims resulting from the above assignments shall
have been satisfied, such appointment to be contingent upon Financial Security's
continued performance under the Surety Bond. Upon any such payment of redemption
price or liquidation preference by Financial Security, Financial Security shall
become the owner of the Preferred Stock or right to payment of redemption price
or liquidation preference for such Preferred Stock so paid and the Owner hereof
shall have no further rights with respect to such Preferred Stock or such right
to payment.
Upon any default by Financial Security in the payment of any amounts
due under the Surety Bond, the Owner shall have the right to proceed directly
and individually against Financial Security in whatever manner the Owner deems
appropriate and shall not be required to act in concert with other Owners or
with the Custodian.
THE CUSTODY AGREEMENT
Custody Account. The Custody Agreement creates the Custody Account
into which the Preferred Stock, the Surety Bond and any moneys held in
connection therewith will be deposited. The Custody Account will be maintained
by the Custodian as a custodial account, separate and segregated, whose contents
may not be commingled with any other assets or property held by the Custodian.
The Custodian will maintain separate records in connection with any moneys which
it may hold in connection with the Preferred Stock and the Surety Bond.
The Owner is liable for payment of taxes or other governmental charges
with regard to registrations of transfers or exchanges of this Custody Receipt,
and the Custodian may require payment of such amounts prior to the issuance of a
new Custody Receipt. Moreover, under current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), unless the Owner completes a Form W-9,
Payer's Request for Taxpayer Identification Number and Certification, or
provides the Custodian with evidence that it is an Exempt Payee within the
meaning of the Code, the Custodian will deduct 20% of certain payments to the
Owner from the Custody Account pursuant to Section 3406 of the Code. The
Custodian will forward by Mail to the Owner of record of this Custody Receipt on
the Record Date preceding any Scheduled Payment the dividend component of such
Scheduled Payment on the Preferred Stock promptly upon receipt by the Custodian.
The Custodian will remit payments of redemption price or liquidation preference
on the Preferred Stock upon presentation of the Custody Receipt by the Owner at
the principal office of the Custodian.
Ministerial Duties. The Custodian will take such actions as are
expressly required under the Surety Bond to make a drawing under the Surety
Bond, including transmitting notices to the Owner, making a demand for payment
pursuant to the Surety Bond and delivering Preferred Stock or assignments to
Financial Security. Notices with respect to the Preferred Stock that are
received by the Custodian from the Fund will be promptly forwarded to the Owner.
Except as expressly provided by the Custody Agreement, the Custodian will not
take any action on behalf of the Owner with respect to the Preferred Stock or
the Surety Bond, except in accordance with written instructions from the Owner
and upon receipt of reasonable indemnity from the Owner for resulting costs and
liabilities as provided in the Custody Agreement, whether or not such action
appears to be in the best interest of the Owner. The Custodian may resign
pursuant to the Custody Agreement upon appointment of a successor Custodian and
its acceptance of such appointment as provided in the Custody Agreement. Either
Financial Security or the registered owners of Custody Receipts evidencing a
majority in aggregate amount of the Preferred Stock deposited in the Custody
Account may remove the Custodian and appoint a successor thereto pursuant to the
provisions of the Custody Agreement.
Miscellaneous. Except as otherwise provided in the Custody Agreement,
no amendment affecting the registered owners of custody receipts as this Custody
Receipt may be made to the Custody Agreement without the consent of the
registered owners of the Custody Receipts evidencing 66-2/3% in of the shares of
Preferred Stock deposited in the Custody Account. The Custodian will not have
any right or obligation to enforce any rights of the Owner with respect to the
Preferred Stock under the Certificate. By acceptance of delivery of the
Preferred Stock evidenced by this Custody Receipt, the Owner acknowledges and
accepts all of the terms and conditions and agrees to be bound by all of the
provisions of the Custody Agreement. This Custody Receipt is transferable by the
Owner in person, or by an attorney duly authorized in writing, at the principal
office of the Custodian, upon surrender and cancellation of this Custody Receipt
and due execution of the Notice of Transfer or Exchange attached to this Custody
Receipt, except that such a registration of transfer is not required to be made
either during any period when the Fund would not be required to issue or
register the transfer of any shares of Preferred Stock pursuant to the terms of
the Certificate and the conditions specified in the Certificate as to the
transfer of beneficial ownership of the Preferred Stock is satisfied. Upon any
such registration of transfer, a new Custody Receipt or Receipts in authorized
denominations will be issued to the transferee or transferees in exchange for
this Custody Receipt.
Certain Definitions. For purposes hereof, the following terms shall
have the meanings set forth below:
"Business Day" means a day on which banks are not required or
authorized by law to be closed in either the city in which the principal office
of Financial Security is located or the city in which the principal office of
the Custodian is located.
"Mail" means first-class mail to the Owner at the address shown in the
registration books maintained by the Custodian pursuant to the Custody
Agreement.
This Custody Receipt shall not be valid for any purpose unless
executed by the Custodian by the manual signature of its authorized officer.
IN WITNESS WHEREOF, the Custodian has caused this Custody Receipt to
be executed.
Dated:
BANKERS TRUST COMPANY,
as Custodian
By
----------------------------
<PAGE>
NOTICE OF TRANSFER OR EXCHANGE
Please be advised, pursuant to the terms of the Custody Agreement
between Bankers Trust Company and Financial Security Assurance Inc. with respect
to the Custody Receipt on which this Notice of Transfer or Exchange is printed,
that the undersigned hereby notifies you, as of the date received by you, of the
following transaction(s) and requests you to process the transaction(s) as
required by the Custody Agreement. This notice may also be used for exchanges of
Custody Receipts or in connection with the redemption of or payment of the
liquidation preference with respect to a portion of such Preferred Stock in
which event the Transferee should be noted to be the same as the Transferor.
Name of Transferor: _____________________________________________________
Registration Number of Custody Receipt: _________________________________
Aggregate Liquidation Preference and Number of Shares of Preferred Stock:
$ _________________ ____________________ Shares
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Retained: $ _____________ ___________________ Shares
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Transferred: $ ________________ __________________ Shares
1. Name of Transferee: __________________________________________________
Address of such Transferee: _____________________________________________
_________________________________________________________________________
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Transferred to Such Transferee: $ _________________ _________________ Shares
2. Name of Transferee: __________________________________________________
Address of such Transferee: _____________________________________________
_________________________________________________________________________
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Transferred to Such Transferee: $ _____________ _________________ Shares
<PAGE>
(Add additional page if more than two Transferees.)
In making this notice, I am aware of, among others, the following
requirements for and limitations upon my exercise of transfer rights imposed by
said Custody Agreement:
(1) all transfers must be made in authorized denominations as
permitted by the Custody Agreement;
(2) the transferee must sign a Master Purchaser's Letter as
specified in the Certificate (as defined in the Custody Agreement);
(3) dividend payments on the Preferred Stock due on a
particular dividend payment date accrue to the benefit of the Owner of
record of the related Custody Receipt on the Record Date (as defined
in the Custody Agreement) preceding such dividend payment date;
(4) any notice of transfer not made in accordance with the
above requirements and other terms and conditions of the Custody
Agreement will be returned to me accompanied by an explanation of the
variance; and
(5) this Notice of Transfer or Exchange must be accompanied
by the Custody Receipt to be transferred.
Dated:
By ________________________
Its _______________________
GUARANTY OF SIGNATURE
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and
transfers this Custody Receipt to the person or persons indicated on the Notice
of Transfer or Exchange printed on this Custody Receipt. In the case of a
transfer to a third party, the undersigned hereby authorizes and instructs the
Custodian to immediately record the transferees listed on the Notice of
Transfer or Exchange as the Owner of such Custody Receipt.
Dated:
______________________________
(Authorized Signature)
Notice: The signature on this
assignment must correspond with
the name of the registered owner
as it appears on the Custody
Receipt in every particular and
must be guaranteed by an officer
of a national or state commercial
bank or trust company or a member
of a registered national
securities exchange or the
National Association of
Securities Dealers, Inc.
GUARANTY OF SIGNATURE
<PAGE>
EXHIBIT 2
FORM OF OPINION OF
COUNSEL OF ISSUER OF SURETY BOND
Dear Sirs:
I am the General Counsel of Financial Security Assurance Inc., a New
York stock insurance company ("Financial Security"). You have requested my
opinion in such capacity as to the matters set forth below in connection with
the issuance by Financial Security of its surety bond no. (the "Surety
Bond") with respect to the above-referenced securities issued by Prospect
Street(SM) High Income Portfolio, Inc. (the "Fund"). The Surety Bond is issued
pursuant to the Insurance Agreement dated as of December 1, 1988 (the
"Insurance Agreement") between Financial Security and the Fund.
In that regard, and for purposes of this opinion, I have examined such
corporate records, documents and proceedings as I have deemed necessary and
appropriate, including (i) the Surety Bond and (ii) the Insurance Agreement.
Based upon the foregoing, I am of the opinion that:
1. Financial Security is a stock insurance company duly
organized, validly existing and authorized to transact financial
guarantee insurance business under the laws of the State of New York.
2. Each of the Surety Bond and the Insurance Agreement has
been duly authorized, executed and delivered by Financial Security.
3. Each of the Surety Bond and the Insurance Agreement
constitutes the legal, valid and binding obligation of Financial
Security, enforceable against Financial Security in accordance with
its terms, subject, as to the enforcement of remedies, to bankruptcy,
insolvency, reorganization, moratorium and other similar laws
affecting the enforceability of creditors' rights generally applicable
in the event of the bankruptcy or insolvency of Financial Security and
by the application of general principles of equity.
4. The Surety Bond is exempt from registration under the
Securities Act of 1933, as amended.
5. Neither the execution or delivery by Financial Security of
the Surety Bond or the Insurance Agreement, nor the performance by
Financial Security of its obligations thereunder, will conflict with
any provision of the certificate of incorporation or the bylaws of
Financial Security nor, to the best of my knowledge, result in a
breach of, or constitute a default under, any agreement or other
instrument to which Financial Security is a party or by which any of
its property is bound nor, to the best of my knowledge violate any
judgment, order or decree applicable to Financial Security of any
governmental or regulatory body, administrative agency, court or
arbitrator having jurisdiction over Financial Security.
EXHIBIT (K)(4)
December 5, 1988
The Depository Trust Company
55 Water Street
49th Floor
New York, New York 10041
Attention: General Counsel's Office
Gentlemen:
The purpose of this letter is to set out certain matters in connection with
the (i) issuance by Prospect Street High Income Portfolio Inc. (the "Issuer") of
up to 345 shares of its Taxable Auction Rate Preferred Stock, without par value
and with a liquidation preference of $100,000 per share (all such shares and, as
the context requires, any other shares of the same {class subsequently issued by
the Issuer being referred to as the "Preferred Shares"), and (ii) the issuance
of a Surety Bond with respect to the Preferred Shares (the "Surety Bond")
pursuant to the Insurance Agreement, dated as of December 1, 1988, between
Financial Surety Assurance Inc. ("Financial Security") and the Issuer.
In accordance with (i) the Custody Agreement dated as of December 1, 1988
between Bankers Trust Company ("Bankers Trust"), and Financial Security pursuant
to which Bankers Trust will act as Surety Custodian under the Surety Bond
(hereinafter referred to in such capacity as the "Surety Custodian") and (ii)
the Auction Agent Agreement, dated as of December 1, 1988, between Bankers Trust
and the Issuer, Bankers Trust will also act as agent in connection with the
Auction and as the transfer agent with respect to the Preferred Shares
(hereinafter referred to when acting in such capacity as "Auction Agent").
Pursuant to an Underwriting Agreement dated November 25, 1988 (the
"Underwriting Agreement"), by and among the Issuer, Prospect Street Investment
Management Co., Inc., a Massachusetts corporation and the Issuer's investment
adviser, and Drexel Burnham Lambert Incorporated (the "Underwriter"), the
Underwriter has agreed to purchase, and the Issuer has agreed to issue, up to
345 Preferred Shares (including up to 45 shares subject to an over-allotment
option). Pursuant to the requirements of the Securities Act of 1933, as amended,
the Issuer has filed with the Securities and Exchange Commission a registration
statement on Form F-2 (Registration No. 33-21949) which includes a prospectus
relating to the Preferred Shares, a copy of which is attached hereto as Exhibit
A (the "Prospectus"), concerning the issuance of the Preferred Shares which
includes, among other things, a description of the role of The Depository Trust
Company ("DTC"). Capitalized terms not defined herein shall have the respective
meanings set forth in the Issuer's Articles of Amendment and Restatement filed
by the Issuer on November 25, 1988, in the office of the Department of
Assessments and Taxation of the State of Maryland (the "Articles of
Incorporation"), a copy of which is attached hereto as Exhibit B.
In order to induce DTC to accept the Custody Receipt (as defined) as
eligible for deposit at DTC and to act in accordance with its normal procedures
with respect to the Custody Receipt, the Issuer and Bankers Trust, as Surety
Custodian and Auction Agent make the following representations to DTC:
1. As of the date of original issue, which is December 5, 1988, the Issuer
shall cause the Underwriter and the Surety Custodian to deposit with DTC one
certificate for the Custody Receipt (the "Custody Receipt") registered in the
name of DTC's nominee, Cede & Co., which represents the beneficial ownership of
the total number of Preferred Shares issued by the Issuer, and the Custody
Receipt shall remain in DTC's custody except as provided below.
2. As provided in Article IV(C), paragraph 6 and Article VI of the Articles
of Incorporation, the Issuer shall solicit the vote of and consents from holders
of Preferred Shares under certain circumstances. The Issuer shall establish a
record date for such purposes, and the Issuer shall give DTC notice of such
record date not less than five calendar days in advance of such record date to
the extent possible.
3. In the event of a full or partial redemption of the outstanding
Preferred Shares, the Issuer or the Auction Agent shall give DTC notice of such
redemption date not less than 15 days nor more than 30 days (or such longer
notice period as is required by applicable law) prior to the redemption date.
4. In the event of a partial redemption of the Preferred Shares
outstanding, the Issuer or the Auction Agent shall send DTC a notice specifying:
the number of shares to be redeemed and the date the notice of redemption is to
be mailed to the beneficial owners of the Preferred Shares (the "Mailing Date")
to be redeemed. Such notice shall be sent to DTC by a secure means (e.g.,
legible facsimile transmission, registered or certified mail, overnight
express delivery or receipted hand delivery) in a timely manner designed to
assure that such notice is in DTC's possession no later than the close of
business on the business day before the Mailing Date. (The Issuer or the Auction
Agent sending such notice shall verify the timely receipt of the notice.) In the
event of a partial redemption, the Mailing Date shall not be less than 15 days
nor more than 30 days (or such longer notice period as is required by applicable
law) prior to the redemption date.
5. The Articles of Incorporation provide that the dividend rate for the
Preferred Shares may vary from time to time based upon the results of the
implementation of Auction Procedures set forth in Article IV(C), paragraph 8 of
the Articles of Incorporation. The Issuer or the Auction Agent shall give DTC
notice of the dividend rate on each Auction Date after implementation of such
procedures. Such notice shall be telephoned to the supervisor of the Dividend
Announcement Section ((212) 709-1270) and such notice shall be followed by
prompt written confirmation sent by a secure means as described in paragraph 4
above to:
Manager, Announcements
Dividends Department
The Depository Trust Company
7 Hanover Square - 22nd Floor
New York, New York 10004
6. The Prospectus indicates that each purchaser of the Preferred Shares
must sign a Master Purchaser's Letter (a copy of which appears as Appendix D of
the Prospectus) which contains provisions restricting transfer of the Preferred
Shares purchased. The Issuer and the Auction Agent and Surety custodian
acknowledge that, so long as Cede & Co. is the sole record owner of the Custody
Receipt evidencing the Preferred Shares, it shall be entitled to all voting
rights applicable to the Preferred Shares and to receive the full amount of all
dividends, liquidation distributions and redemption proceeds payable with
respect to the Preferred Shares. The Issuer and the Auction Agent and Surety
Custodian acknowledge that DTC shall treat any participant in DTC
("Participant") who has Preferred Shares credited to its DTC account as entitled
to the full benefits of ownership of such Preferred Shares even if the credit of
Custody Receipt evidencing the Preferred Shares to the DTC account of such
Participant result from transfers or failures to transfer in violation of the
provisions of the Master Purchaser's Letter. Without limiting the generality of
the preceding sentence, the Issuer and the Auction Agent and Surety Custodian
acknowledge that DTC shall treat any Participant having Custody Receipt
evidencing the Preferred Shares credited to its DTC account as entitled to
receive dividends, liquidation distributions and redemption proceeds and to
possess voting rights, if any, in respect of the Preferred Shares and, subject
to Section 13 hereof, to receive Custody Receipts evidencing Preferred Shares if
such certificates are to be issued in accordance with the Articles of
Incorporation. (The treatment by DTC of the effects of the crediting by it of
Preferred Shares to the accounts of Participants described in the preceding two
sentences shall not affect the rights of the Issuer, participants in Auctions
relating to the Preferred Shares, or purchasers, sellers or of holders of
Preferred Shares against any Participant.) DTC shall have no responsibility to
ascertain that any transfer of Custody Receipts or Preferred Shares is made in
accordance with the provisions of the Master Purchaser's Letter. Notwithstanding
anything to the contrary, the parties acknowledge and agree that the Issuer and
the Auction Agent shall have no responsibility or liability whatsoever for DTC's
actions or omissions to act in respect of the Preferred Shares.
7. All notices and payments addressed or sent to DTC shall contain the
CUSIP number set forth in the Share Certificate.
8. Except as provided in paragraph 5 hereof, notices to DTC shall be in
writing and shall be sent to:
Manager, Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square - 23rd Floor
New York, New York 10004
Notices to DTC by facsimile transmission shall be sent to (212) 709-1093 or
(212) 709-1094.
9. Dividend payments shall be received by Cede & Co., as nominee of DTC, or
its registered assigns in same day funds ("Fed Funds") on each Dividend Payment
Date. Such payments shall be made payable to the order of Cede & Co., and shall
be addressed as follows:
Manager, Cash Receipts Section,
Dividends
The Depository Trust Company
7 Hanover Square - 22nd Floor
New York, New York 10004
10. Redemption payments shall be made in same day funds by the Surety
Custodian in the manner set forth in the SDFS Paying Agent Operating Procedure
(a copy of which previously has been furnished to the surety Custodian).
11. DTC may direct the Issuer or Auction Agent or Surety Custodian to use
any other address or department of DTC as the address or department to which
payments of dividends or redemption proceeds or notices may be sent.
12. In the event of a partial redemption which effects a reduction in the
number of Preferred Shares outstanding, the Issuer shall, at its option, either
(a) issue a new Preferred Share certificate to the Surety Custodian and direct
the Surety Custodian to issue and authenticate a new Custody Receipt
representing the number of outstanding Preferred Shares not then redeemed in
exchange for surrender of the old Custody Receipt, or (b) if permitted by
applicable law, direct the Surety Custodian to make an appropriate notation on
the Preferred Share certificate and cause the Surety Custodian to direct DTC to
make an appropriate notation on the Custody Receipt indicating the date and
amounts of such reduction in the number of Preferred Shares evidenced by such
Custody Receipt.
13. In the event the Issuer determines that the Holders of positions in the
Preferred Shares shall obtain certificated Custody Receipts, the Auction Agent
may notify Participants of the availability through DTC of Custody Receipts. In
such event, the Surety Custodian will issue, transfer and exchange Custody
Receipts as required in appropriate amounts as indicated by DTC.
14. This Agreement may be terminated at any time by any party upon written
notice to the other parties. Whenever DTC requests such termination, the Auction
Agent, Surety Custodian and the Issuer will cooperate with DTC in taking
appropriate action, at the Issuer's option, either (a) to arrange for another
securities depository to maintain custody of a single Custody Receipt evidencing
the Preferred Shares or (b) to make available one or more separate Custody
Receipt evidencing the Preferred Shares to any Participant.
15. DTC will maintain lists of Participants and will maintain the positions
(ownership interest) held by each Participant in the Preferred Shares whether as
an Existing Holder for its own account or as a nominee for an Existing Holder.
The Issuer hereby authorizes DTC to provide to the Auction Agent position
listings of its Participants with respect to the Preferred Shares from time to
time at the request of the Auction Agent, and also authorizes DTC, in the event
of a partial redemption of Preferred Shares, to provide the Auction Agent, upon
request, with the names of those Participants whose positions in the Preferred
Shares are selected for redemption by DTC. In the event of a partial redemption
of Preferred Shares, DTC agrees to use its best efforts to notify the Auction
Agent of those Participants whose positions in the Preferred Shares are selected
for redemption by DTC and to provide the Auction Agent with the names of the
person or department at such Participants to contact regarding such redemption.
The Issuer authorizes the Auction Agent to provide DTC with such signatures,
exemplars of signatures and authorizations to act as may be deemed necessary by
DTC to permit DTC to discharge its obligations to its Participants and
appropriate regulatory authorities. This authorization, unless revoked by the
Issuer, shall continue while the Custody Receipt is on deposit at DTC, until and
unless the Auction Agent shall no longer be acting on behalf of the Issuer. In
such event, the Issuer shall provide DTC with similar evidence of the
authorization of any such successor so to act.
<PAGE>
Your acceptance hereon shall constitute your agreement to the terms
provided herein.
Very truly yours,
BANKERS TRUST COMPANY, as
Surety Custodian
By: /s/ Fernanda M. Lynch
-----------------------------
BANKERS TRUST COMPANY, as Auction Agent
By: /s/ Fernanda M. Lynch
-----------------------------
PROSPECT STREET HIGH INCOME
PORTFOLIO INC.
By: /s/ Richard E. Omohundro, Jr.
-----------------------------
Enclosures
Acknowledged and Agreed to as of this
5th day of December 1988.
THE DEPOSITORY TRUST COMPANY
By: /s/ Carl H. Uriet
- -----------------------------
cc: Drexel Burnham Lambert Incorporated
<PAGE>
EXHIBIT (A)
300 SHARES
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK
(LIQUIDATION PREFERENCE $100,000 PER SHARE)
UNCONDITIONALLY AND IRREVOCABLY GUARANTEED AS TO SCHEDULED PAYMENTS
PURSUANT TO A SURETY BOND ISSUED BY
[LOGO] FINANCIAL
SECURITY
ASSURANCE(R)
--------------
Bear, Stearns & Co. Inc. ("Bear Stearns") has become the exclusive
Broker-Dealer on behalf of the Prospect Street High Income Portfolio Inc. (the
"Fund") in connection with Auctions of the Taxable Auction Rate Preferred Stock
(the "Preferred Shares") of the Fund pursuant to a Broker-Dealer Agreement dated
as of May 7, 1990 (the "Broker-Dealer Agreement"). This information packet is
not a prospectus and is intended solely to provide potential Bidders for
Preferred Shares with certain information about the Preferred Shares and Auction
Procedures.
The Fund, which is registered under the Investment Company Act of 1940 (the
"Investment Company Act") as a diversified, closed-end management investment
company, has issued and outstanding 300 Preferred Shares, liquidation preference
$100,000 per share. The Preferred Shares are unconditionally and irrevocably
guaranteed as to Scheduled Payments, which include both dividends and
liquidation preference, pursuant to a surety bond issued by Financial Security
Assurance Inc. ("Financial Security").
As of the date hereof the Preferred Shares are rated AAA by Standard &
Poor's Corporation ("S&P") and "aaa" by Moody's Investors Service, Inc.
("Moody's" and, together with S&P, the "Rating Agencies").
BEAR, STEARNS & CO. INC.
MAY 7, 1990
<PAGE>
Information from Bear Stearns on Bidding in the Auctions. All notices and
communications should be addressed to Bear, Stearns & Co. Inc., Preferred Stock
Sales and Trading Desk, 245 Park Avenue, New York, New York 10167, telephone
number (212) 272-5098, facsimile, (212) 272-8151.
SCHEDULE OF UPCOMING AUCTIONS
AUCTION SETTLEMENT DIVIDEND DAYS IN
DATE DATE PAYMENT DATE DIVIDEND PERIOD
1990
05/11/90 05/14/90 06/13/90 30
06/12/90 06/13/90 07/16/90 33
07/13/90 07/16/90 08/13/90 28
08/10/90 08/13/90 09/11/90 29
09/10/90 09/11/90 10/11/90 30
10/10/90 10/11/90 11/12/90 32
11/09/90 11/12/90 12/10/90 28
12/07/90 12/10/90 01/09/91 30
1991
01/08/91 01/09/91 02/11/91 33
02/08/91 02/11/91 03/11/91 28
03/08/91 03/11/91 04/09/91 29
04/08/91 04/09/91 05/09/91 30
05/08/91 05/09/91 06/10/91 32
06/07/91 06/10/91 07/08/91 28
07/05/91 07/08/91 08/07/91 30
08/06/91 08/07/91 09/09/91 33
09/06/91 09/09/91 10/07/91 28
10/04/91 10/07/91 11/05/91 29
11/04/91 11/05/91 12/05/91 30
12/04/91 12/05/91 01/06/92 32
1992
01/03/92 01/06/92 02/03/92 28
01/31/92 02/03/92 03/04/92 30
03/03/92 03/04/92 04/06/92 33
04/03/92 04/06/92 05/04/92 28
05/01/92 05/04/92 06/02/92 29
06/01/92 06/02/92 07/02/92 30
07/01/92 07/02/92 08/03/92 32
07/31/92 08/03/92 08/31/92 28
08/28/92 08/31/92 09/30/92 30
09/29/92 09/30/92 11/02/92 33
10/30/92 11/02/92 11/30/92 28
11/27/92 11/30/92 12/29/92 29
12/28/92 12/29/92 01/28/93 30
1993
01/27/93 01/28/93 03/01/93 32
02/26/93 03/01/93 03/29/93 28
03/26/93 03/29/93 04/28/93 30
04/27/93 04/28/93 06/01/93 34
05/28/93 06/01/93 06/28/93 27
06/25/93 06/28/93 07/27/93 29
07/26/93 07/27/93 08/26/93 30
08/25/93 08/26/93 09/27/93 32
09/24/93 09/27/93 10/25/93 28
10/22/93 10/25/93 11/29/93 35
11/26/93 11/29/93 12/27/93 28
12/24/93 12/27/93 01/24/94 28
Auction Agent. Bankers Trust Company is acting as Auction Agent and Paying
Agent (i.e., transfer agent, registrar, dividend disbursing agent, and
redemption agent) with respect to the Preferred Shares. The address of the
Auction Agent is 4 Albany Street, New York, New York 10006, telephone number
(212) 250-6200, facsimile (212) 250-6766.
<PAGE>
Broker-Dealer Agreement. The Broker-Dealer Agreement sets forth the
responsibilities and compensation of Bear Stearns with respect to the Preferred
Shares and the Auction Procedures. As Broker-Dealer, Bear Stearns will be
responsible for using commercially reasonable efforts to obtain Bid and Hold
Orders, notifying Existing Holders of any changes in Auction Dates, providing
the Auction Agent and the Fund with a list of Existing Holders, soliciting
Potential Holders and Existing Holders regarding Hold Orders, Bid Orders and
Sale Orders and notifying each Existing Holder or Potential Holder which submits
an Order regarding Auction results and Settlement Procedures.
Maintenance of AAA/"aaa" Rating. Pursuant to the terms of the
Broker-Dealer Agreement, in the event the Preferred Shares are rated lower than
AAA/"aaa" by both of the Rating Agencies for a period of more than 45
consecutive days, or in the event that both of the Rating Agencies shall
withdraw, rescind or revoke their ratings of the Preferred Shares for a period
of more than 45 consecutive days (or any combination of the foregoing events),
the Fund will be obligated to redeem or repurchase at liquidation preference
plus accumulated and unpaid dividends (whether or not earned or declared) all
outstanding Preferred Shares as soon as practicable in compliance with the terms
of the Preferred Shares and the Investment Company Act. Pursuant to the Surety
Bond the Fund is required to maintain certain discounted asset coverages with
respect to the Preferred Shares.
Redemption in 1993 or Thereafter. If for the Dividend Period next following
the September 24, 1993 Auction (or, if the Surety Bond is extended by the Fund,
at specified times thereafter) the Applicable Rate is the Maximum Applicable
Rate, (because, for example, Sufficient Clearing Bids do not exist), the Fund
will redeem or repurchase all of the outstanding Preferred Shares at liquidation
preference plus accumulated and unpaid dividends (whether or not earned or
declared) prior to the expiration of the Surety Bond. The Preferred Shares are
also subject to mandatory redemption in certain circumstances in accordance with
the terms of the Articles of Incorporation of the Fund and may be redeemed
thereunder by the Fund at any time in compliance with the Investment Company
Act.
Description of Financial Security. Financial Security is a monoline
property and casualty insurance company and is a wholly-owned subsidiary of U.S.
West Inc., a Colorado-based financial services and communications company.
Financial Security and its subsidiaries are engaged exclusively in the business
of writing financial guaranty insurance, principally on corporate and other
taxable securities offered in domestic and foreign markets. Financial Security's
claims-paying ability is rated "AAA" by S&P, "Aaa" by Moody's, "AAA" by Fitch
Investors Service, Inc., "AAA" by Nippon Investors Service Inc. and "D&P-I"
(triple A) by Duff & Phelps Inc. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
Description of the Fund. The Fund's investment objective is to provide high
current income, while seeking to preserve shareholders' capital, through
investment in a professionally managed, diversified portfolio of "high yield"
securities. The Fund is managed by Prospect Street Investment Management Co.,
Inc. (the "Investment Adviser"). The Fund invests primarily in fixed-income
securities rated in the lower categories by established rating agencies
(consisting principally of fixed-income securities rated BB or lower by S&P and
"Ba" or lower by Moody's or non-rated fixed-income securities deemed by the
Investment Adviser to be of comparable quality). Such securities 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
obligation. No assurance can be given that the Fund will achieve its investment
objective. In addition to the Preferred Shares, the Fund has outstanding
$30,000,000 aggregate principal amount of Senior Extendible Notes (the "Notes")
and, as of April 30, 1990, 13,608,157 shares of Common Stock, $.01 par value, of
the Fund (the "Common Stock"). As of the date hereof, the Notes are rated
AAA/"Aaa" by the Rating Agencies, and the Fund is required to maintain certain
discounted asset coverages with respect to the Notes. The Preferred Shares are
junior to outstanding indebtedness of the Fund, including the Notes, and senior
to the Common Stock.
Tax Status. Dividends are not eligible for the Dividend Received Deduction
and are therefore fully taxable. As an investment company, the Fund may pass
through to investors only the income it receives from the securities it owns.
Since it owns only taxable debt instruments, all dividend income on the
Preferred Shares will be fully taxable to Holders of the Preferred Shares as if
such dividend income were interest income.
Additional Information. The copy of the prospectus dated November 28, 1988
and attached hereto as Exhibit A is the prospectus that was used in connection
with the registration under the Securities Act of 1933 (the "Securities Act") of
the initial offering of the Preferred Shares. Capitalized terms used herein but
not otherwise defined have the meanings set forth in Exhibit A hereto. SUCH
PROSPECTUS HAS NOT BEEN UPDATED BY BEAR STEARNS OR THE FUND AND IS PROVIDED TO
PROSPECTIVE PURCHASERS OF THE PREFERRED SHARES SOLELY FOR INFORMATIONAL PURPOSES
(PARTICULARLY WITH RESPECT TO THE TERMS OF THE PREFERRED SHARES INCLUDING
AUCTION PROCEDURES) AND NOT AS A PROSPECTUS AND BEAR STEARNS MAKES NO
REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH PROSPECTUS. The Fund
is subject to the informational requirements of the Securities Exchange Act of
1934 and the Investment Company Act and in accordance therewith is required to
file reports, proxy statements and other information with the Commission.
Investors are encouraged to review such reports and information in connection
with bidding for or purchasing any Preferred Shares. Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's New York Regional
Office, Room 1029, Jacob K. Javits Building, 26 Federal Plaza, New York, New
York 10278 and Chicago Regional Office, Suite 3190, 230 South Dearborn Street,
Chicago, Illinois 60604. Copies of such materials can be obtained from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
Master Purchaser's Letter. As a condition to purchasing Preferred Shares,
each prospective purchaser of Preferred Shares will be required to sign and
deliver a Master Purchaser's Letter, attached hereto as Exhibit B, which Master
Purchaser's Letter sets forth the undertakings of a prospective purchaser with
respect to sale and transfer of the Preferred Shares and the voting thereof.
Each prospective purchaser of Preferred Shares is required to consent to the use
of custody arrangements for the Preferred Shares in connection with the Surety
Arrangement.
<PAGE>
EXHIBIT A
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
300 SHARES
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK(SM)
("TARPS(SM)")
(LIQUIDATION PREFERENCE $100,000 PER SHARE)
unconditionally and irrevocably guaranteed as to Scheduled Payments,
as defined herein, pursuant to a surety bond to be issued by
[LOGO] FINANCIAL
SECURITY
ASSURANCE(SM)
-------------
Prospect Street(SM) High Income Portfolio Inc. (the "Fund") is a newly
organized, diversified, closed-end management investment company. The Fund's
investment objective is to provide high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high yield" securities. The Fund will invest primarily
in fixed-income securities rated in the lower categories by established rating
agencies (consisting principally of fixed-income securities rated "BB" or lower
by Standard & Poor's Corporation ("S&P") and "Ba" or lower by Moody's Investors
Service, Inc. ("Moody's," and together with S&P, the "Rating Agencies")) or
non-rated fixed-income securities deemed by the Investment Adviser to be of
comparable quality. Such securities 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 obligation. See
"Investment Objective and Policies." No assurance can be given that the Fund
will achieve its investment objective.
The Fund is managed by Prospect Street(SM) Investment Management Co., Inc.
(the "Investment Adviser"). The Fund's address is One Financial Center, Boston,
Massachusetts 02111, and its telephone number is (617) 350-5718.
(text continued on following page)
----------------------------------------
Investors are advised to read this Prospectus carefully and retain it for future
reference.
----------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) FUND(2)
Per Share .............................. $100,000 $1,750 $98,250
Total(3) ............................... $30,000,000 $525,000 $29,475,000
(1) The Fund and the Investment Adviser have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deduction of organization and offering expenses relating to this
offering and the concurrent offerings of the Common Stock and the Notes
payable by the Fund, estimated at $1,500,000. Underwriting discounts and
offering expenses relating to the concurrent offering of the Notes and the
Preferred Shares, estimated at $1,784,000, will reduce the net assets
attributable to the Common Stock. See "Capitalization."
(3) The Fund has granted the Underwriter an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 45 additional Preferred
Shares in order to cover over-allotments, if any. If the option is exercised
in full, the total Price to Public, Underwriting Discounts and Proceeds to
Fund will be $34,500,000, $603,750 and $33,896,250, respectively. The
exercise of such option is subject to certain conditions relating to the
simultaneous exercise of options with respect to the Notes and the Common
Stock. See "Underwriting."
----------------------------------------
The Preferred Shares offered hereby are being offered by the Underwriter
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to approval of certain legal matters by counsel. It is
expected that delivery of the certificate representing all the Preferred Shares
will be made against payment therefor through the facilities of The Depository
Trust Company on or about December 5, 1988.
----------------------------------------
November 28, 1988
<PAGE>
(text continued from cover page)
The shares of Taxable Auction Rate Preferred Stock ("TARPS") offered hereby
(the "Preferred Shares") are unconditionally and irrevocably guaranteed as to
Scheduled Payments (as defined) pursuant to a surety bond issued by Financial
Security Assurance Inc. ("Financial Security"). It is a condition of closing
that the Preferred Shares be issued with ratings of "AAA"/"Aaa" from the Rating
Agencies. The Fund is required to maintain certain discounted asset coverages
with respect to the Preferred Shares. Each prospective purchaser of Preferred
Shares is required to consent to the use of custody arrangements for the
Preferred Shares in connection with the Surety Arrangement (as defined). See
"Investment Objective and Policies" and "Surety Arrangement."
The dividend rate on the Preferred Shares for the Initial Dividend Period
will be 9.50% per annum. The Applicable Rate for each Dividend Period thereafter
will be reset generally every 30 days pursuant to an Auction conducted on the
Business Day next preceding the first day of the next Dividend Period. Dividends
on the Preferred Shares are cumulative from the Original Issuance Date and are
payable commencing on January 19, 1989 and on each day thereafter that is the
last day of successive 30-day periods after such date, subject to certain
exceptions (a "Dividend Period"). The Preferred Shares are subject to mandatory
and optional redemption in certain circumstances. See "Description of Preferred
Stock--Redemption" and "Surety Arrangement--Insurance Agreement."
In each Auction for the Preferred Shares, each Existing Holder may give an
Order to (i) continue to hold such Preferred Shares without regard to the
Applicable Rate that results from the Auction, (ii) continue to hold such
Preferred Shares if the Applicable Rate that results from the Auction is equal
to or greater than the rate bid by such Existing Holder and/or (iii) sell such
Preferred Shares without regard to the Applicable Rate that results from the
Auction. Potential Holders may offer to purchase Preferred Shares if the
Applicable Rate that results from such Auction is equal to or greater than the
rate bid by such Potential Holders. The Applicable Rate that results from an
Auction for any Dividend Period will not be lower than 90% or greater than 175%
of the 30-day "AA" Composite Commercial Paper Rate.
Prospective purchasers should carefully review the Auction Procedures
described in this Prospectus, including the Appendices, and should note that (i)
an Order constitutes an irrevocable commitment to hold, purchase or sell
Preferred Shares based upon the results of an Auction, (ii) the Auctions will be
conducted through telephone communications and (iii) settlement for purchases
and sales will be on the Business Day following the Auction.
Each prospective purchaser of Preferred Shares will be required, among
other things, to agree (i) to transfer Preferred Shares only (a) pursuant to a
Bid or a Sell Order placed in an Auction or (b) to a prospective purchaser that
has delivered a signed Master Purchaser's Letter through a Broker-Dealer to the
Auction Agent and (ii) to have ownership of Preferred Shares maintained only in
book entry form by or through the Securities Depository. Prior to this offering,
no Preferred Shares have been outstanding and, accordingly there has not been a
market for the Preferred Shares and there can be no assurance that a market will
develop.
In addition to the Preferred Shares offered hereby, the Fund is
simultaneously offering $50,000,000 aggregate principal amount of Senior
Extendible Notes (the "Notes") and 12,000,000 shares of Common Stock, $.01 par
value, of the Fund (the "Common Stock"), subject in each case to increase in the
event of the exercise of over-allotment options. It is a condition to closing
that the Notes be issued with ratings of "AAA"/"Aaa" from the Rating Agencies,
and the Fund will be required to maintain certain discounted asset coverages
with respect to the Notes. See "Investment Objective and Policies" and
"Description of Notes--Asset Maintenance." The Preferred Shares will be junior
to outstanding indebtedness of the Fund, including the Notes, and senior to the
Common Stock.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus. See "Glossary
of Terms" for information concerning definitions of certain defined terms used
herein and on the cover page.
THE FUND
Investment Objective ...... Prospect Street(SM) High Income Portfolio Inc. is
a newly organized, diversified, closed-end
management investment company. The Fund's
investment objective is to provide high current
income, while seeking to preserve shareholders'
capital, through investment in a professionally
managed, diversified portfolio of "high yield"
securities. There can be no assurance that the
Fund will achieve its investment objective.
Investment Strategy ....... The Fund will invest primarily in fixed-income
securities rated in the lower categories by
established rating agencies (consisting
principally of fixed income securities rated
"BB"/"Ba" or lower by the Rating Agencies) or
non-rated fixed-income securities deemed by the
Investment Adviser to be of comparable quality. In
addition to investing in "high yield" securities,
the Fund may engage in certain options activities,
the lending of portfolio securities, the short
sale of securities and the use of futures
contracts and options thereon, reverse repurchase
agreements and repurchase agreements. See
"Investment Objective and Policies--Investment
Guidelines." Lower rated and non-rated securities
are subject to a greater degree of risk than
higher rated securities.
The Fund's investments will be subject to
diversification, liquidity and related investment
guidelines (i) agreed upon by the Fund and
Financial Security in connection with the issuance
of the Surety Bond (as defined) with respect to
Scheduled Payments on the Preferred Shares (the
"Surety Investment Guidelines") and (ii)
established in connection with the Fund's receipt
from the Rating Agencies of ratings of "AAA"/"Aaa"
for the Notes (the "Notes Investment Guidelines"
and, together with the Surety Investment
Guidelines, the "Investment Guidelines"). See
"Investment Objective and Policies." As a result
of the issuance of the Surety Bond pursuant to an
insurance agreement with Financial Security (the
"Surety Arrangement"), the Fund will receive
ratings from the Rating Agencies of "AAA"/"Aaa"
for the Preferred Shares. See "Surety
Arrangement--Insurance Agreement." The Rating
Agencies will issue ratings of "AAA"/"Aaa" for the
Notes because the Fund's portfolio, although
consisting principally of lower rated securities,
will be managed in accordance with the Notes
Investment Guidelines and will be required to have
a value exceeding, on a discounted basis, the sum
of the principal amount of the Notes then
outstanding, $100,250 times the number of
Preferred Shares then outstanding and certain
accrued and projected payment obligations of the
Fund. See "Description of Notes--Asset
Maintenance." The receipt of such ratings is a
condition to the issuance of the Preferred Shares
and the Notes. For a description of the Rating
Agencies' ratings, see "Appendix A."
Investment Adviser ........ Prospect Street(SM) Investment Management Co.,
Inc., (the "Investment Adviser") of Boston,
Massachusetts, will serve as the Fund's investment
adviser. The Investment Adviser was organized in
June 1988 to provide institutional clients with
investment management services. Richard E.
Omohundro, Jr., President of the Investment
Adviser, served as a "high yield" specialist and
Co-Manager of the High Yield Bond Group of Merrill
Lynch Capital Markets ("Merrill Lynch") from 1978
through 1987. During that period, the High Yield
Group raised approximately $13.6 billion in new
"high yield" securities through 107 issues and
provided one of the largest secondary trading
markets for "high yield" securities. John A.
Frabotta, Vice President of the Investment
Adviser, performed various research, structuring
and pricing functions involving "high yield"
securities as a Vice President of Merrill Lynch.
James C. Rivers will serve as portfolio manager
for the Fund. Mr. Rivers was previously a Vice
President of Moseley Capital Management, Inc.
where he served as adviser to the High Income Plus
Fund. Mr. Rivers previously served as Vice
President, Portfolio Manager of The Putnam
Management Company and managed The Putnam High
Yield Trust, a fund investing in "high yield"
securities, the assets of which increased from
$250 million in January 1980 to approximately $950
million in April 1985 as a result of additional
investments in such fund.
The Investment Adviser manages Prospect
International High Income Portfolio N.V., an
offshore, closed-end investment company with
assets of approximately $203 million as of
November 18, 1988. Such fund, which commenced
operations on September 7, 1988, invests primarily
in "high yield" securities and is currently the
only other closed-end fund managed by the
Investment Adviser.
The Fund will pay the Investment Adviser a monthly
fee at the annual rate of 0.50% of the weekly net
assets (as defined). See "The Investment Adviser."
SURETY ARRANGEMENT
Financial Security ........ The Preferred Shares are unconditionally and
irrevocably guaranteed as to the Scheduled
Payments pursuant to a surety bond issued by
Financial Security for the benefit of the holders
of the Preferred Shares (the "Surety Bond").
Financial Security is a monoline property and
casualty insurance company incorporated on March
16, 1984 under the laws of the State of New York.
Financial Security and its subsidiaries are
engaged exclusively in the business of writing
financial guaranty insurance, principally on
corporate and other taxable securities offered in
domestic and foreign markets. Financial Security's
claims-paying ability is rated "AAA" by S&P, "Aaa"
by Moody's, "AAA" by Fitch Investors Service,
Inc., "AAA" by Nippon Investors Service Inc. and
"D&P-I" (triple A) by Duff & Phelps Inc. Such
ratings reflect only the views of the respective
rating agencies, are not recommendations to buy,
sell or hold securities and are subject to
revision or withdrawal at any time by such rating
agencies. See "Financial Security."
Surety Bond ............... The Fund will enter into an insurance agreement
(the "Insurance Agreement") with Financial
Security pursuant to which Financial Security will
issue the Surety Bond. During the term of the
Surety Bond, Financial Security will
unconditionally and irrevocably guarantee the
Scheduled Payments in accordance with the
provisions of the Surety Bond. The Fund will be
obligated to reimburse Financial Security for any
amounts paid under the Surety Bond. The Surety
Bond will be in effect for five years, unless
extended at the option of the Fund for one or more
additional periods of up to five years in the
aggregate. Upon the issuance of the Surety Bond,
and in consideration thereof, the Fund will pay to
Financial Security a premium equal to the present
value of .40% of the aggregate liquidation
preference of the Preferred Shares originally
issued times the number of years (five) in the
initial term. If the Surety Bond is extended, a
premium at the same annual rate will be payable to
Financial Security annually. If the Fund does not
elect to extend the Surety Bond upon any
expiration thereof prior to 10 years from its
original issuance, the Fund must pay Financial
Security an amount equal to one additional annual
premium. See "Surety Arrangement. "
Surety Custody Agreement .. Pursuant to the Surety Arrangement, the Preferred
Shares and the Surety Bond are required to be held
by Bankers Trust Company, as custodian (the
"Surety Custodian"), pursuant to a custody
agreement in a custody account established for the
benefit of the holders of the Preferred Shares.
Beneficial ownership of the Preferred Shares, in
turn, shall be evidenced by custody receipts held
by The Depository Trust Company ("DTC"). In the
event that the Fund does not make any Scheduled
Payment, the Surety Custodian is obligated to make
a claim for payment under the Surety Bond.
Financial Security shall be subrogated to the
rights of holders of Preferred Shares to receive
payments with respect to the Preferred Shares to
the extent of any payment by Financial Security
under the Surety Bond. In connection with the
payment of Scheduled Payments by Financial
Security under the Surety Bond, Financial Security
will be entitled to the rights of the holders of
Preferred Shares to the related dividend payment
or, in the case of a redemption or liquidation
payment, the related Preferred Shares, as well as
the right to exercise their voting rights with
respect to such Preferred Shares. See "Description
of Preferred Stock--Voting" and "Surety
Arrangement--Surety Custody Agreement." As used
herein, the term "holder of Preferred Shares"
refers to the beneficial owner thereof, unless the
context otherwise requires.
THE OFFERING
The Issue ................. 300 Preferred Shares (assuming no exercise of the
Underwriter's over-allotment option) with a
liquidation preference of $100,000 per share.
During the period that the underwriters of the
Fund's securities will be soliciting indications
of interest, the Fund and the underwriters will
continue to evaluate the market for such
securities as well as the market for the Fund's
contemplated investments. If as a result of a
material adverse change in existing financial,
political or economic conditions in the United
States or elsewhere it becomes impractical or
inadvisable to proceed with the offerings of the
Fund's securities, such offerings may not be made.
Dividends ................. Dividends on the Preferred Shares are cumulative
from the Original Issuance Date and are payable,
when, as and if declared by the Board of Directors
of the Fund, out of funds legally available
therefor, on January 19, 1989 (the 45th day after
the Original Issuance Date) and the last day of
successive 30-day periods after such date, subject
to certain exceptions. See "Description of
Preferred Stock--Dividends--General" for a
description of such exceptions. Dividends will be
paid to the nominee of DTC or a successor
securities depository (the "Securities
Depository") on each Dividend Payment Date ( as
defined). The Securities Depository's normal
procedures now provide for distribution of
dividends in next-day funds settled through the
New York Clearing House to Agent Members, who in
turn are expected to distribute such dividends to
the persons for whom they are acting as agent.
The dividend rate for the Initial Dividend Period
ending January 18, 1989 will be 9.50% per annum.
Thereafter, the dividend rate per annum (the
"Applicable Rate") will be reset generally every
30 days by an Auction conducted on the Business
Day (an "Auction Date") next preceding the first
day of the next Dividend Period; provided,
however, if such day is a Thursday the Auction
Date shall mean the Business Day next preceding
such Thursday. After the Initial Dividend Period,
the dividend rate for the Preferred Shares will be
the Applicable Rate per annum that the Auction
Agent advises the Fund has resulted from an
Auction. The Applicable Rate that results from an
Auction will not be lower than 90% (the "Minimum
Applicable Rate") or greater than 175% (the
"Maximum Applicable Rate") of the 30-day "AA"
Composite Commercial Paper Rate at the close of
business on the Business Day next preceding the
applicable Auction Date. See "Description of
Preferred Stock--Dividends."
To the extent that the Fund does not make dividend
payments on the Preferred Shares on any Dividend
Payment Date, such payments shall be made by
Financial Security pursuant to the Surety Bond.
See "Surety Arrangement--Surety Bond."
The Auction ............... Prior to the Submission Deadline on each Auction
Date, each Existing Holder may submit Orders
through a Broker-Dealer to the Auction Agent as
follows:
o Hold Order--indicating its desire to hold
Preferred Shares without regard to the
Applicable Rate for the next Dividend Period.
o Bid--indicating its desire to hold Preferred
Shares provided that the Applicable Rate for the
next Dividend Period is not less than the rate
specified in such Bid.
o Sell Order--indicating its desire to sell
Preferred Shares without regard to the
Applicable Rate for the next Dividend Period.
An Existing Holder may submit different types of
Orders in an Auction with respect to the Preferred
Shares then held by such Existing Holder, provided
that the total number of Preferred Shares covered
by all such Orders does not exceed the number of
Preferred Shares held by such Existing Holder. An
Existing Holder that offers to purchase additional
Preferred Shares is, for purposes of such offer to
purchase additional shares, treated as a Potential
Holder as described below. Bids submitted by
Existing Holders with rates higher than the
Maximum Applicable Rate will be treated as Sell
Orders. A Hold Order shall be deemed to have been
submitted on behalf of an Existing Holder if an
Order is not submitted on behalf of such Existing
Holder for any reason, including the failure of a
Broker-Dealer to submit such Existing Holder's
Order to the Auction Agent.
The Maximum Applicable Rate in any Auction will be
175% of the 30-day "AA" Composite Commercial Paper
Rate in effect at the close of business on the
Business Day next preceding the applicable Auction
Date.
Potential Holders of Preferred Shares may submit
Bids in which they will offer to purchase
Preferred Shares, if the Applicable Rate for the
next Dividend Period is not less than the rate
specified in such Bid. A Bid submitted by a
Potential Holder with a rate higher than the
Maximum Applicable Rate will be rejected.
If Sufficient Clearing Bids exist (that is, the
number of Preferred Shares subject to Bids by
Potential Holders is at least equal to the number
of Preferred Shares subject to Sell Orders by
Existing Holders), the Applicable Rate will be
the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower
rates bid by Existing Holders and Potential
Holders, would result in such Existing Holders and
Potential Holders owning all of the Preferred
Shares available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the
Applicable Rate will be the Maximum Applicable
Rate and, in such event, Existing Holders that
have submitted Sell Orders will not be able to
sell in the Auction any or all Preferred Shares
subject to such Sell Orders. If all Existing
Holders submit (or are deemed to have submitted)
Hold Orders, the Minimum Applicable Rate will
apply (90% of the 30-day "AA" Composite Commercial
Paper Rate in effect at the close of business on
the Business Day next preceding the applicable
Auction Date).
The Auction Procedures include a pro rata
allocation of Preferred Shares for purchase and
sale under certain circumstances which may result
in an Existing Holder selling or holding, or a
Potential Holder purchasing, a number of Preferred
Shares that is less than the number of Preferred
Shares specified in its Bid or Sell Order.
Accordingly, an Existing Holder may be obligated
to sell a portion of its Preferred Shares which
are subject to a Submitted Bid specifying a rate
which is equal to the Applicable Rate resulting
from an Auction .
A Sell Order submitted by an Existing Holder shall
constitute an irrevocable offer to sell the
Preferred Shares subject thereto, and a Bid
submitted by an Existing Holder shall also
constitute an irrevocable offer to sell the
Preferred Shares subject thereto if the rate
specified in the Bid is higher than the Applicable
Rate determined in the Auction, in each case at a
price per share equal to $100,000. A Bid submitted
by a Potential Holder shall constitute an
irrevocable offer to purchase the Preferred Shares
subject thereto, if the rate specified in such Bid
is less than or equal to the Applicable Rate
determined in the Auction, at a price per share
equal to $100,000. Settlement of purchases and
sales will be made on the next Business Day after
the Auction Date (also a Dividend Payment Date)
through the Securities Depository. Purchasers will
make payment through their Agent Members in
next-day funds settled through the New York
Clearing House to the Securities Depository
against delivery of shares by book entry to their
Agent Members. The Securities Depository will make
payment to the sellers' Agent Members in
accordance with the Securities Depository's normal
procedures, which now provide for payment in
next-day funds settled through the New York
Clearing House. See "The Auction" and the Auction
Illustrations set forth in Appendix B hereto.
Secondary Market .......... There is currently no secondary market for the
Preferred Shares. While it is not obligated to do
so, Drexel Burnham Lambert Incorporated ("Drexel
Burnham") has advised the Fund that it intends to
make a secondary market in the Preferred Shares.
There can be no assurance that an active secondary
trading market will develop. Such secondary market
activity, if commenced, may be discontinued at any
time. In addition, other Broker-Dealers may or may
not choose to make a secondary market in the
Preferred Shares, and there can be no assurance
that the trading price of Preferred Shares in any
secondary market will be $100,000. Any purchaser
of Preferred Shares in the secondary market will
be required to sign a Master Purchaser's Letter.
Asset Maintenance ......... Pursuant to the Surety Arrangement, as long as the
Surety Bond is outstanding the Fund will be
required to maintain a specified discounted asset
value for its portfolio representing Surety Assets
Coverage (as defined) with respect to the
Preferred Shares under the Surety Investment
Guidelines. See "Surety Arrangement--Insurance
Agreement." The Fund will also be required to
maintain a specified discounted asset value for
its portfolio representing the Note Basic
Maintenance Amount (as defined) under the Notes
Investment Guidelines. In addition, the terms of
the indenture governing the Notes (the
"Indenture") require that the Fund maintain, as of
the last Business Day of each calendar month,
asset coverage (as defined) with respect to
senior securities representing indebtedness (as
defined), including the Notes of at least 300%.
See "Description of Notes--Asset Maintenance" and
"--Events of Default."
Restricted Payments ....... Under the Investment Company Act of 1940, as
amended (the "1940 Act"), asset coverage with
respect to the Fund's senior securities
representing indebtedness, including the Notes,
must be at least 200% for the Fund to declare
dividends on the Preferred Shares and at least
300% for the Fund to declare other distributions
on or to redeem or purchase Preferred Shares, in
each case after giving effect to any such
dividend, distribution, redemption or purchase.
Further, under the 1940 Act, the declaration of
dividends or other distributions on or redemptions
or purchases of Common Stock will not be permitted
unless (i) asset coverage with respect to the
Fund's senior securities representing
indebtedness, including the Notes, would be at
least 300% and (ii) asset coverage with respect to
the Fund's senior securities of a class which is
stock, including the Preferred Shares, would be at
least 200%, in each case after giving effect to
any such dividend, other distribution redemption
or purchase. Dividends or other distributions on
or redemptions or purchases of Preferred Shares
are also prohibited at any time payments of
principal of or interest on the Notes are in
default pursuant to the terms of the Indenture,
and dividends or other distributions on or
redemptions or purchases of Common Stock are
prohibited at any time payments of principal of or
interest on the Notes are in default, dividends on
the Preferred Shares are in arrears or Surety
Assets Coverage is not maintained.
As of the closing of the offering made hereby,
after giving effect to the concurrent offerings of
the Notes and the Common Stock (assuming no
exercise of over-allotment options), the asset
coverages with respect to the Preferred Shares and
the Notes will be 380% and 238%, respectively, as
calculated pursuant to the 1940 Act. See
"Capitalization."
Redemption ................ The Preferred Shares will be redeemable at the
option of the Fund, in whole or from time to time
in part, on any Dividend Payment Date at a
redemption price equal to $100,000 per share plus
accumulated and unpaid dividends to the redemption
date.
In the event the Fund fails to maintain Surety
Assets Coverage and does not cure such failure
within eight Business Days, Financial Security
will be entitled to cause the Fund to effect a
partial redemption of Preferred Shares in order to
restore Surety Assets Coverage. In addition, at
the end of the term of the Surety Bond, the Fund
will be required under certain circumstances to
redeem all of the outstanding Preferred Shares,
subject to the right of the holders to elect to
continue to hold their Preferred Shares. See
"Description of Preferred Stock--Redemption" and
"Surety Arrangement--Insurance Agreement." If any
such redemption is not made on a Dividend Payment
Date, it will be made at a price equal to $100,250
plus accumulated and unpaid dividends through the
date of redemption. The Fund's ability to make
such redemptions may be restricted by the
provisions of the 1940 Act, other applicable law
and the terms of the Indenture.
Voting Rights ............. Pursuant to the Fund's Articles of Incorporation
("Articles of Incorporation"), holders of the
Common Stock have voting rights of one vote per
share and holders of the Preferred Shares have
voting rights of one vote per $1,000 of
liquidation preference without regard to any
liquidation preference attributable to accumulated
and unpaid dividends (i.e., 100 votes per
Preferred Share); provided that all the votes
represented by a single Preferred Share must be
voted together. Holders of Preferred Shares, as a
class, will normally elect two Directors of the
Fund, and the holders of the Common Stock and the
Preferred Shares, voting together, will elect the
remainder. However, upon the Fund's failure to pay
dividends on the Preferred Shares in an amount
equal to two full years of dividends, the holders
of the Preferred Shares (or Financial Security
pursuant to the Surety Custody Agreement (as
defined)) have the right to elect, as a class, the
smallest number of additional Directors as shall
be necessary to assure that a majority of the
Directors has been elected by the holders of the
Preferred Shares or Financial Security as proxy
for such holders, as the case may be. The terms of
the additional directors shall end when the Fund
pays or provides for all accumulated and unpaid
dividends.
To the extent Financial Security makes Scheduled
Payments, Financial Security shall be assigned the
voting rights of the holders of the Preferred
Shares to whom such payments were made and such
assignment shall continue until the Fund has made
payments on the Preferred Shares with respect to
which Financial Security has made Scheduled
Payments or the Fund reimburses Financial Security
for such Scheduled Payments. The holders of
Preferred Shares will vote, separately as a class,
on certain other matters, as required under the
Articles of Incorporation, the 1940 Act and
Maryland law. See "Description of Preferred
Stock--Voting" and "Surety Arrangement--Insurance
Agreement" and "--Surety Custody Agreement."
Ranking ................... Payments to holders of the Preferred Shares in
liquidation or otherwise will be subject to the
prior payment of all outstanding indebtedness of
the Fund, including the Notes and the Preferred
Shares rank senior to the Common Stock.
Master Purchaser's Letter As a condition to purchasing Preferred Shares in
and Restrictions on this offering and as a condition to participating
Transfer .................. in any Auction, each prospective purchaser of
Preferred Shares will be required to sign and
deliver a Master Purchaser's Letter, through a
Broker-Dealer, to the Auction Agent in which such
prospective purchaser will, among other things,
agree (i) to transfer Preferred Shares only (a)
pursuant to a Bid or Sell Order placed in an
Auction or (b) to a person that has delivered a
signed Master Purchaser's Letter, through a
Broker-Dealer, to the Auction Agent; provided that
in the case of all transfers other than those
pursuant to Auctions, such purchaser, its
Broker-Dealer or its Agent Member advises the
Auction Agent of such transfer and (ii) that,
except as otherwise required by law, all of the
outstanding Preferred Shares shall be represented
by a certificate registered in the name of the
Surety Custodian (as defined), and such
purchaser's ownership of any such Preferred Shares
will be maintained in book entry form by or
through the Securities Depository.
Execution of a Master Purchaser's Letter is not a
commitment to purchase Preferred Shares in the
offering being made hereby or in any Auction, but
is a condition precedent to purchasing Preferred
Shares. Any prospective purchaser which previously
delivered or caused to be delivered on its behalf
a signed Master Purchaser's Letter to a
Broker-Dealer will not be required to sign and
deliver a new Master Purchaser's Letter to
purchase Preferred Shares offered hereby or to
participate in Auctions.
Concurrent Offerings ...... Concurrently with this offering, the Fund is
offering $50,000,000 aggregate principal amount of
the Notes and 12,000,000 shares of Common Stock,
subject in each case to increase in the event of
the exercise of over-allotment options.
Consummation of the sale of the Notes and the
Common Stock is a condition to the consummation of
the sale of the Preferred Shares.
Ratings ................... It is a condition to the issuance of the Preferred
Shares and the Notes that they receive ratings of
"AAA"/"Aaa" from the Rating Agencies. Ratings of
"AAA"/"Aaa" are the highest category of ratings
that the Rating Agencies assign to debt
obligations and to preferred stock. In the event
that the Rating Agencies reduce their ratings of
Financial Security's claims-paying ability, the
ratings for the Preferred Shares could be
adversely affected. A security rating is not a
recommendation to buy, sell or hold securities and
is subject to revision or withdrawal at any time
by the rating agency granting such rating. Each
security rating should be evaluated independently
of any other security rating. For a description of
the Rating Agencies' ratings see "Appendix A."
Use of Proceeds ........... The net proceeds from the sale of the Preferred
Shares, together with the net proceeds from the
sale of the Notes and the Common Stock, will be
used for investment in accordance with the Fund's
investment objective and policies.
Federal Income Taxes ...... Because the Fund's portfolio income will consist
principally of interest income, corporate
investors in the Preferred Shares generally will
not be entitled to the 70% dividends received
deduction.
SPECIAL CONSIDERATIONS
Special Considerations .... As a newly organized entity, the Fund has no
operating history. See "The Fund." The Fund's
Investment Adviser is also recently organized, has
a limited professional staff and is dependent to a
significant degree upon the services of Richard E.
Omohundro, Jr. and John A. Frabotta. See "The
Investment Adviser."
The Fund's leveraged capital structure creates
special risks. The Notes may constitute a
substantial lien and burden on the Preferred
Shares by reason of their prior claim against the
income of the Fund and against the net assets of
the Fund in liquidation. The Fund will not be
permitted to declare dividends or other
distributions with respect to the Preferred Shares
or purchase Preferred Shares unless at the time
thereof the Fund meets certain asset coverage
requirements and payments of principal of and
interest on the Notes are not in default. See
"Description of Preferred Stock," "Description of
Notes" and "Federal Taxation."
The Fund anticipates that Drexel Burnham and
certain other underwriters of the Common Stock may
from time to time act as brokers or dealers in
connection with the execution of the Fund's
portfolio transactions after they have ceased to
be underwriters. Drexel Burnham 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. In addition,
Drexel Burnham intends, but is not obligated, to
make a market in the Preferred Shares and the
Notes.
The Fund has been advised by Drexel Burnham that
the Securities and Exchange Commission (the "SEC")
has brought a civil action against Drexel Burnham
and several of its key employees in the United
States District Court for the Southern District of
New York. The complaint alleges violations of the
Securities Exchange Act of 1934 (the "1934 Act")
and rules and regulations thereunder and of the
Securities Act of 1933 (the "1933 Act"). The
complaint charges trading on inside information,
market manipulation, fraud, failure to file
Schedule 13Ds, improper disclosure, parking,
aiding and abetting violations of the net capital
rules, and margin and record keeping violations.
The complaint seeks an injunction against further
violations of the securities laws, disgorgement of
profits and fees received and losses avoided as a
result of the alleged illegal conduct, treble any
profits realized or losses avoided on insider
trading, and all further relief, legal or
equitable, that the Court believes is warranted
under the circumstances. The Fund also has been
advised that Drexel Burnham and its parent The
Drexel Burnham Lambert Group Inc. ("DBL Group")
and several key employees of its High Yield Bond
Department are targets of a grand jury
investigation being conducted by the United States
Attorney for the Southern District of New York
with respect to certain alleged violations of the
federal criminal laws including, but not limited
to, securities fraud, mail and wire fraud and
racketeering. The staff of the United States
Attorney's office has advised Drexel Burnham and
DBL Group that Drexel Burnham, DBL Group and such
key employees may be indicted at any time. From
time to time some of the employees referred to
above may be involved in portfolio transactions
with the Fund. Drexel Burnham has advised the Fund
that no assurance can be given that the results of
the SEC action or grand jury investigation will
not have an adverse effect on Drexel Burnham
and/or the market for "high yield" securities, a
market in which Drexel Burnham is an important
participant.
THE FUND
The Fund is a newly organized, diversified, closed-end management
investment company with a leveraged capital structure, as of the closing of the
offering made hereby and the concurrent offerings, consisting of (i) $50,000,000
aggregate principal amount of Notes, (ii) 12,000,000 shares of Common Stock
having an offering price of $10.00 per share, (iii) the Preferred Shares offered
hereby, in each such case subject to increase upon the exercise of
over-allotment options, and (iv) the Fund's pre-offering capitalization of
11,000 shares of Common Stock. See "Underwriting." The Fund's investment
objective is to provide high current income, while seeking to preserve
shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high yield" securities. The Fund will invest primarily
in fixed-income securities rated in the lower categories by established rating
agencies (consisting principally of fixed-income securities rated "BB"/"Ba" or
lower by the Rating Agencies(1) or non-rated fixed-income securities deemed by
the Investment Adviser to be of comparable quality. The Fund's investments will
also be subject to the Investment Guidelines. See "Investment Objective and
Policies--Investment Guidelines." The fixed-income securities in which the Fund
will invest 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 obligation and generally involve more credit
risk than securities in the higher rating categories. See "Investment Objective
and Policies."
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at net asset value
at any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Accordingly, open-end investment companies
are subject to periodic asset in-flows and out-flows that can complicate
portfolio management. Closed-end investment companies do not face the prospect
of having to liquidate portfolio holdings to satisfy redemptions at the option
of shareholders or having to maintain cash positions to meet the possibility of
such redemptions. The Fund will, however, be required to have sufficient cash or
cash equivalents to meet interest payments on the Notes and dividend payments on
the Preferred Shares and to fund certain redemptions of these securities in
certain circumstances. See "Description of Preferred Stock," "Description of
Notes" and "Surety Arrangement."
The Fund was organized as a corporation under the laws of Maryland on May
13, 1988 and has registered with the SEC under the 1940 Act. The Fund's
principal office is located at One Financial Center, Boston, Massachusetts
02111. The Fund's Investment Adviser is Prospect StreetSM Investment Management
Co., Inc., an investment management firm registered with the SEC under the
Investment Advisers Act of 1940, as amended. See "The Investment Adviser."
- ----------------------
(1)Throughout this Prospectus, references to ratings by the Rating Agencies will
indicate the S&P rating followed by the Moody's rating in the format shown.
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of November 28, 1988, and as adjusted to give effect to the issuance of the
Preferred Shares, the Notes and the Common Stock (in each case assuming no
exercise of the over-allotment options described under "Underwriting").
ACTUAL AS ADJUSTED
------ -----------
Long-term debt:
Senior Extendible Notes(1) .......................... $ -- $ 50,000,000
======== ============
Shareholders' equity:
Taxable Auction Rate Preferred Stock, no par value,
authorized 1,000 shares, none issued, 300 shares
issued and outstanding, as adjusted ................ $ -- $ 30,000,000
======== ============
Common Stock, $.01 par value, authorized 100,000,000
shares, 11,000 shares issued and outstanding,
12,011,000 shares issued and outstanding,
as adjusted ....................................... $ 110 $ 120,110
Capital in excess of par value ...................... 102,190 110,004,124
-------- -------------
Net assets applicable to Common Stock
outstanding(2) ..................................... $102,300 $110,124,234
======== ============
- --------------------
(1)The underwriting discounts and offering expenses related to the offering of
the Notes, estimated at $761,033 will be deferred and amortized over five
years.
(2)After deduction of underwriting discounts and offering expenses, estimated at
$9,978,066, related to the offerings of the Preferred Shares and the Common
Stock.
The costs and expenses relating to the offerings of the Notes and the
Preferred Shares, estimated at $1,784,000, will reduce the net assets
attributable to the Common Stock. These costs and expenses will include the
underwriting discounts on the Notes and the Preferred Shares, the fees
associated with the registration with the Securities and Exchange Commission and
filings under state securities laws and with the National Association of
Securities Dealers, Inc. and the Rating Agencies' fees. In addition, the Fund
will have certain other ongoing expenses with respect to the Notes and the
Preferred Shares such as the amortization of the premium under the Surety Bond
and Surety Custodian, transfer agent, paying agent, registrar, auction agent and
trustee fees and legal and other administrative fees, as well as interest
payments on the Notes and dividend payments on the Preferred Shares.
The Fund will be required to maintain specified asset coverages for the
Notes and the Preferred Shares of at least 300% and 200%, respectively,
immediately following this offering. Further, asset coverage with respect to the
Notes must be at least 200% on an ongoing basis in order to declare dividends on
the Preferred Shares. See "Description of Preferred Stock--Dividends." Such
asset coverage requirements are prescribed by the 1940 Act.
The asset coverage under the 1940 Act for the Notes immediately following
completion of this offering and the concurrent offerings of Notes and Common
Stock (giving effect to the deduction of $9,978,066, representing underwriting
discounts and estimated offering expenses for the Preferred Shares and the
Common Stock, and assuming no exercise of over-allotment options) will be
computed as follows:
<PAGE>
Fund assets less
liabilities not constituting
senior securities = $190,123,333 = 3.80 = 380%
- ---------------------------- ------------ ----
Senior securities $50,000,000 1
representing indebtedness
(i.e., Notes)
The asset coverage under the 1940 Act for the Preferred Shares immediately
following completion of this offering and the concurrent offerings of Notes and
Common Stock (giving effect to the deduction of $9,978,066, representing
underwriting discounts and estimated offering expenses for the Preferred Shares
and the Common Stock, and assuming no exercise of over-allotment options) will
be computed as follows:
Fund assets less
liabilities not constituting
senior securities = $190,123,333 = 2.38 = 238%
- ---------------------------- ------------ ----
Senior securities $80,000,000 1
representing indebtedness
(i.e. Notes) plus
liquidation value of
Preferred Shares
If asset coverage with respect to the Notes declines below 200% following
this offering (as a result, for example, of a decrease in the value of the
Fund's assets), dividends on the Preferred Shares would be prohibited. See
"Description of Preferred Stock--Dividends" and "Federal Taxation." In addition,
in the event that the Fund fails to maintain, as of the last Business Day of any
month, asset coverage with respect to senior securities representing
indebtedness, including the Notes, of at least 300% (or such higher percentage
as may in the future be specified in the 1940 Act as the minimum asset coverage
for senior securities representing indebtedness of a closed-end investment
company as a condition of paying dividends on common stock), and does not cure
such failure by the last Business Day of the following month, the Notes will be
subject to a mandatory partial redemption. See "Description of Notes--
Restrictive Covenants" and "--Events of Default."
The Fund will also be required to maintain specified asset coverages for
the Preferred Shares and the Notes based on specified discounted values for its
portfolio investments. Failure to maintain such discounted values will entitle
Financial Security to cause the Fund to make partial redemptions of the
Preferred Shares pursuant to the terms of the Insurance Agreement and/or may
result in mandatory partial redemptions of the Notes pursuant to the Indenture.
See "Investment Objective and Policies--Investment Guidelines," "Surety
Arrangement--Insurance Agreement" and "Description of Notes--Asset Maintenance"
and "--Events of Default."
USE OF PROCEEDS
The net proceeds from the sale of the Preferred Shares offered hereby,
together with the net proceeds from the sale of the Notes and the Common Stock,
estimated at $190,700,000 ($219,305,000 if the over-allotment options for the
Preferred Shares, the Notes and the Common Stock are exercised in full), will
be invested in accordance with the Fund's investment objective and policies. The
Fund will be fully invested in accordance with its investment objective and
policies within six months after completion of the offering, subject to market
conditions and the availability of appropriate investment opportunities. Pending
such investment, the proceeds will be invested in short-term interest or
dividend bearing instruments consistent with the Investment Guidelines.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide high current income,
while seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of "high yield" securities. There
can be no assurance that the Fund's investment objective will be achieved. The
Fund's investment objective is a fundamental policy. Pursuant to the 1940 Act,
fundamental policies may not be changed without the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock and a majority
of the outstanding Preferred Shares, voting as separate classes, which, for
purposes of the 1940 Act, means for each class the lesser of (a) more than 50%
of the outstanding shares of such class or (b) 67% or more of the shares of
such class present or represented at a meeting at which more than 50% of the
outstanding shares of such class are present or represented by proxy.
Accordingly, no change in the Fund's investment objective could occur without
the affirmative vote of both classes of stock. In addition, under the Indenture,
the Fund may not change its investment objective without the consent of the
holders of a majority in principal amount of the Notes.
INVESTMENT STRATEGY
Under normal market conditions, the Fund will invest at least 65% of its
total assets in "high yield" securities rated in the lower categories by
recognized rating agencies or non-rated fixed-income securities deemed by the
Investment Adviser to be of comparable quality, although the Fund currently
intends to invest a substantially higher percentage of its assets in such
securities to the extent permitted by market conditions. The Fund's portfolio
investments will consist principally of fixed-income securities rated "BB"/"Ba"
or lower by the Rating Agencies. The Fund reserves the right, under normal
market conditions, to invest up to 35% of its total assets in money market
instruments and fixed-income securities rated higher than "BB"/"Ba," although
the percentage invested in such securities may increase under other than normal
market conditions, as discussed below.
Under the Investment Guidelines, certain types of securities in which the
Fund may otherwise invest pursuant to the foregoing strategy and the investment
policies stated below are not eligible for inclusion in the calculation of the
discounted value of the Fund's portfolio. Such instruments include, for example,
securities rated "CC"/"Ca" and "C"/"C" by the Rating Agencies, preferred or
common stock, zero coupon or similar securities that do not provide for the
periodic payment of interest in cash 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, it is anticipated that
they will not constitute a significant portion of the Fund's portfolio. See
"Investment Guidelines" below, "Description of Notes--Asset Maintenance" and
"Surety Arrangement--Insurance Agreement."
"High yield" bonds, the generic name for corporate bonds rated between
"BB"/"Ba" and "C"/"C" by the Rating Agencies, are frequently issued by
corporations in the growth stage of their development. Bonds which are 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
obligation. 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. Further information concerning the ratings of
corporate bonds, including the rating categories of the Rating Agencies, is
provided in Appendix A. "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 securities subsequently
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.
Securities acquired by the Fund may include preferred stocks (including
convertible preferred stock) and all types of debt obligations having varying
terms with respect to security or credit support, subordination, purchase price,
interest payments and maturity. Such obligations may include, for example,
bonds, debentures, notes (including convertible debt securities), mortgage or
other asset-backed instruments, 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 (including obligations, such as
repurchase agreements, secured by such instruments). Most debt securities in
which the Fund will invest will bear interest at fixed rates. However, the Fund
reserves the right to invest without limitation in fixed-income debt securities
that have variable rates of interest or involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
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 or
warrants to purchase common stock or other equity securities 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 30% of its total assets in securities that are
not readily marketable, including securities restricted as to resale, and
non-rated securities. A security that is not readily marketable will not be
acquired unless (i) the Investment Adviser believes such security to be of
comparable quality to publicly traded securities and (ii) such security carries
rights to be registered under the federal securities laws. Securities that are
not readily marketable may offer higher yields than comparable publicly traded
securities. However, the Fund may not be able to sell these securities when the
Investment Adviser 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 will also be permitted to invest up to 20% of its total assets in
zero coupon securities. Zero coupon securities pay no cash income but are
purchased at a deep discount 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.
For a discussion of certain tax consequences resulting from the inclusion of
zero coupon securities in the Fund's portfolio, see "Federal Taxation--Federal
Income Tax Treatment of Fund."
Notwithstanding the foregoing, if market conditions threaten to erode the
value of the Fund's assets, the Fund may adopt a temporary defensive investment
strategy and invest without limitation in high-grade money market instruments,
including commercial paper of domestic and foreign corporations, certificates of
deposit, bankers' acceptances and other obligations of banks, repurchase
agreements and short-term obligations issued or guaranteed by the United States
government or its instrumentalities or agencies, and also in fixed-income
securities rated higher than "BB"/"Ba" by the Rating Agencies. In addition,
under such market conditions, the Fund may invest in unrated commercial paper
which it deems to have risk characteristics comparable to such instruments. The
yield on these securities will tend to be lower than the yield on other
securities to be purchased by the Fund.
The Fund may also invest in fixed-income securities rated higher than
"BB"/"Ba" by the Rating Agencies or non-rated fixed-income securities deemed by
the Investment Adviser to be of comparable quality when the difference in yields
between quality classifications is relatively narrow. Investments in higher
rated 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 lower than those from lower rated issues.
The achievement of the Fund's objective will depend upon the Investment
Adviser's analytical and portfolio management skills. There is no assurance that
this objective will be achieved. All nonfundamental investment policies of the
Fund, including those described below under "Investment Guidelines," may be
changed by the Board of Directors of the Fund without shareholder approval.
INVESTMENT GUIDELINES
The composition of the Fund's portfolio will reflect the Note Investment
Guidelines and the Surety Investment Guidelines. The Rating Agencies issue
ratings for various securities reflecting the perceived creditworthiness of such
securities or, in the case of the Preferred Shares, the perceived claims-paying
ability of the surety that is guaranteeing the Scheduled Payments on the
Preferred Shares. See "Surety Arrangement--Insurance Agreement." The respective
Investment Guidelines are designed to ensure that assets underlying the Notes or
the Preferred Shares, as the case may be, will be sufficiently diversified and
will be of sufficient credit quality and amount to justify investment grade
ratings of "AAA"/"Aaa". The Investment Guidelines are not prescribed by law, but
have been implemented by the Fund in order to receive the above-described
ratings for senior securities, 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 Investment
Guidelines provide tests for portfolio diversification and asset coverage that
supplement the applicable requirements under the 1940 Act (and may be more or
less restrictive), but are the sole determinants in the rating of a security.
Under the respective Investment Guidelines, the Fund will be required to
maintain specified discounted asset values for its portfolio representing the
Note Basic Maintenance Amount and Surety Assets Coverage. For definitions of
such terms, see "Description of Notes--Asset Maintenance" and "Surety
Arrangement--Insurance Agreement." For the purpose of determining the Fund's
compliance with the respective Investment Guidelines, the market value of the
Fund's portfolio holdings will be discounted by dividing by factors determined
by the respective Rating Agencies or Financial Security, as the case may be,
which vary according to the particular type of security being valued for such
purpose. To the extent any particular portfolio holding does not meet the
applicable Investment Guidelines, it would not be included for purposes of
determining compliance with the Note Basic Maintenance Amount or Surety Assets
Coverage, as the case may be. The respective Investment 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, and 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.
Upon any failure to maintain the required Note Basic Maintenance Amount or
Surety Assets Coverage, the Fund would seek to alter the composition of its
portfolio to attain required asset coverage within an 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 Notes and/or
Financial Security, as surety under the Surety Bond, will acquire certain
rights. See "Description of Notes--Asset Maintenance" and "Surety
Arrangement--Insurance Agreement." "Business Day" means a day on which the New
York Stock Exchange (the "NYSE") is open for trading and which is not a Saturday
or Sunday or a holiday, including New Year's Day, Martin Luther King, Jr. Day,
Presidents Day, Good Friday, Patriots Day, Memorial Day, Bunker Hill Day,
Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas Day or
any other day on which banks in New York City or Boston are authorized or
obligated by law or executive order to close.
Under the Notes Investment Guidelines, corporate debt obligations will not
be included in the calculation of the discounted value of the Fund's portfolio
for the purpose of determining compliance with Note Basic Maintenance Amount
unless they (a) are rated "CCC" or higher by S&P or "Caa" or higher by Moody's,
(b) provide for the periodic payment of interest thereon in cash, (c) have been
registered under the 1933 Act, (d) do not provide for conversion or exchange
into equity capital at any time over their respective lives, (e) have not had
notice given in respect thereof that any such corporate debt obligations are the
subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the Fund's total assets at any
time shall not be subject to the provisions of this clause (e)) and (f) are not
subject to call options. In addition, portfolio holdings must be within the
following diversification requirements in order to be included in the
calculations of the discounted value of the Fund's portfolio for the purpose of
determining compliance with the Note Basic Maintenance Amount:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
VALUE OF ELIGIBLE PORTFOLIO ASSETS
MINIMUM ORIGINAL PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' ISSUE SIZE OF INVESTED IN ANY ONE INDUSTRY
RATINGS(1) EACH ISSUE ONE ISSUER(2) CATEGORY(2)
---------- ------------ ---------------- -----------------
($ IN MILLIONS)
<S> <C> <C> <C>
"AAA"/"Aaa".......................................... $100 10.0% 50.0%
"AA"/"Aa"............................................ 100 10.0 33.3
"A"/"A".............................................. 100 10.0 33.3
"BBB"/"Baa".......................................... 100 5.0 20.0
"BB"/"Ba"............................................ 100(3) 4.0 12.0
"B"/"Bl,""B2" and "B3" (subordinated) ............... 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa" (unsecured
subordinated)(4) ................................... 100(3) 2.0 5.0
"A-1 +"/"P-1"(5)..................................... NA 10.0 NA
"A-l"/"P-1"(5)....................................... NA 10.0 33.3
"A-2"/"P-2"(5) ...................................... NA 5.0 20.0
- ------------------------
<FN>
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or (3)
modifiers to the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-" may
not be included in determining compliance with the Note Basic Maintenance Amount. In the event that a
corporate debt obligation has received a different rating from S&P than from Moody's, the restrictions
relating to the lower rating will apply. See Appendix A for further information concerning S&P's and
Moody's rating categories.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each
lower rating category, except that the calculations with respect to commercial paper investments
constituting corporate bonds shall be made separately and independently of but on the same basis as the
cumulative total guidelines applicable to other types of corporate debt obligations. To the extent the
relevant limitation is less restrictive than that set forth under "Investment Restrictions" below, the more
restrictive limitation shall apply.
(3) 20% of the aggregate market value of all corporate debt obligations in these rating categories may be from
issues with an original issue size greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied
senior rating of B- or higher (i.e., such subordinated debt would have a rating of "B-" or higher if it
were senior debt of the issuer) if rated by S&P to be included in determining compliance with the Note
Basic Maintenance Amount. The aggregate market value of corporate debt obligations in this rating category
in excess of 20% of the aggregate market value of the Fund's assets will not be included in determining
such compliance.
(5) Represents commercial paper investments.
</FN>
</TABLE>
Under the Surety Investment Guidelines, corporate debt obligations will not
be included in the calculation of the discounted value of the Fund's portfolio
for the purpose of determining compliance with Surety Assets Coverage unless
they (a) are rated "CCC" or higher by S&P or "B3" or higher by Moody's, or are
non-rated fixed-income securities deemed by the Investment Adviser to be of
comparable quality (subject to the limitations described below), (b) provide for
the periodic payment of interest thereon in cash, (c) have been registered under
the 1933 Act or provide for subsequent registration under the 1933 Act, (d) have
a remaining term to maturity of not more than 30 years, (e) have not had notice
given in respect thereof that any such corporate debt obligations are the
subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the Fund's total assets at any
time shall not be subject to the provisions of this clause (e)) and (f) are not
subject to call options. Notwithstanding the foregoing, non-rated fixed-income
securities and unregistered corporate debt securities may be included in the
calculations of the discounted value of the Fund's portfolio for the purpose of
determining compliance with Surety Assets Coverage, as long as they do not
exceed 30% of the Fund's eligible portfolio assets at any time, with certain
limitations. In addition, portfolio holdings must be within the following
diversification requirements in order to be included in the calculation of the
discounted value of the Fund's portfolio for the purpose of determining
compliance with Surety Assets Coverage:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
VALUE OF ELIGIBLE PORTFOLIO ASSETS
MINIMUM ORIGINAL PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' ISSUE SIZE OF INVESTED IN ANY ONE INDUSTRY
RATINGS(1) EACH ISSUE ONE ISSUER(2) CATEGORY(2)
---------- ------------ ---------------- -----------------
($ IN MILLIONS)
<S> <C> <C> <C>
"AAA"/"Aaa".......................................... $100 10.0% 50.0%
"AA"/"Aa"............................................ 100 10.0 33.3
"A"/"A".............................................. 100 10.0 33.3
"BBB"/"Baa".......................................... 100 5.0 20.0
"BB"/"Ba"............................................ 100(3) 4.0 12.0
"B"/"B1" or "B2"..................................... 100(3) 3.0 8.0
"CCC"/"B3"(4)........................................ 100(3) 3.0 8.0
Non-rated/unregistered corporate bonds(5)............ 50 3.0 8.0
"A-1+"/"P-1"(6) ..................................... NA 10.0 NA
"A-1"/"P-1"(6) ...................................... NA 10.0 33.3
"A-2"/"P-2"(6) ...................................... NA 5.0 20.0
<FN>
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or
(3) modifiers to the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-"
may not be included in determining compliance with Surety Assets Coverage. In the event that a corporate
debt obligation has received a different rating from S&P than from Moody's, the restrictions relating to
the lower rating will apply. See Appendix A for further information concerning S&P's and Moody's rating
categories. If only one of the Rating Agencies has issued a rating for such instrument, then only the
rating of such agency is required; provided, however, that not more than 15% of the aggregate market value
of the rated corporate debt obligations included in determining compliance with Surety Assets Coverage
shall be comprised of corporate debt obligations having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each
lower rating category, except that the calculations with respect to commercial paper investments
constituting corporate bonds shall be made separately and independently of but on the same basis as the
cumulative total guidelines applicable to other types of corporate debt obligations. To the extent the
relevant limitation is less restrictive than that set forth under "Investment Restrictions" below, the more
restrictive limitation shall apply.
(3) 20% of the aggregate market value of all corporate debt obligations in these rating categories may be from
issues with an original issue size of greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied
senior rating of "B-" or higher (i.e., such subordinated debt would have a rating of "B-" or higher if it
were senior debt of the issuer) if rated by S&P to be included in determining compliance with Surety Assets
Coverage. The aggregate market value of corporate debt obligations in this rating category in excess of 20%
of the aggregate market value of the Fund's eligible portfolio assets will not be included in determining
such compliance.
(5) Non-rated/unregistered corporate bonds may not constitute more than 30% of the aggregate market value of
the Fund's eligible portfolio assets. Not more than 18% of the aggregate market value of the Fund's
eligible portfolio assets may consist of non-rated/unregistered corporate bonds from issues with original
issue sizes of $50 million or more but less than $100 million, provided that not more than 9% of the
aggregate market value of the Fund's eligible portfolio assets may consist of nonrated/unregistered
corporate bonds from issues with an original issue size of $50 million or more but less than $75 million.
(6) Represents commercial paper investments.
</FN>
</TABLE>
PORTFOLIO MATURITY AND TURNOVER
The Fund's holdings may include issues of various maturities. Ordinarily,
the Fund will emphasize investments in medium and longer term instruments, (i.e.
those with maturities in excess of three years) but the weighted average
maturity of portfolio holdings may be shortened or lengthened depending
primarily upon the Investment Adviser'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. Since the weighted average of the Fund's portfolio will fluctuate
depending on market conditions and investment opportunities, the Fund does not
believe that it can accurately generalize as to the range of the weighted
average maturity of its investments. The Fund, however, does not expect that the
weighted average maturity of the Fund's portfolio will, under normal conditions
and when it is fully invested, exceed 15 years.
The Investment Adviser will actively make portfolio adjustments that
reflect the Fund's investment strategy, but will not trade securities for the
Fund for the purpose of seeking short-term profits. It will, however, change the
Fund's securities, regardless of how long they have been held, when it believes
doing so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is anticipated
that the Fund's portfolio turnover rate generally will not exceed 100% per
annum. A 100% annual turnover rate would occur, for example, if all the
securities in the Fund's portfolio were replaced once within a period of one
year. The Fund does, however, reserve full freedom with respect to portfolio
turnover. In periods when there are rapid changes in economic conditions or
security price levels or when investment strategy is changed significantly,
portfolio 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 in the form of increased dealer spreads and brokerage commissions.
CERTAIN INVESTMENT STRATEGIES
The Investment Adviser reserves the right to employ the strategies
described below in order to help achieve the Fund's investment objective. Such
strategies include the lending of portfolio securities, the short sale of
securities and the use of futures contracts and options thereon, reverse
repurchase agreements and repurchase agreements (other than certain repurchase
agreements with qualified depository institutions having maturities not longer
than one day). Unless so stated below, there are no limits to the Fund's use of
these investment strategies. Pursuant to the terms of the Indenture, however,
the Fund may not employ certain of these strategies unless each of the Rating
Agencies provides written confirmation that the use of such strategy will not
adversely affect its rating of the Notes. Moreover, the respective Investment
Guidelines, as well as other terms of the Surety Arrangement, may have the
effect of limiting the Fund's use of other investment strategies described
below, such as investments in foreign securities and the use of options, to the
extent such investments are not eligible for inclusion in the discounted value
of the Fund's portfolio.
Securities Loans. 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. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place a month or
more after the date of the transaction). The Fund will invest in when-issued and
delayed delivery securities in order to lock in a favorable rate of return. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. 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. To facilitate such acquisitions, the Fund's
custodian bank will maintain, in a separate account of the Fund, cash or United
States government or other high quality debt 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. 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 Fund is dependent on the other party to successfully
complete when-issued and delayed delivery transactions. If such other party
fails to complete its portion of the transaction, the Fund will have lost the
opportunity to invest the amount set aside for such transaction in the
segregated asset account.
Repurchase Agreements. 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 re-sell such security at a fixed time and price (representing
the Fund's cost plus interest). The Fund will invest in repurchase obligations
to assist in the management of its portfolio and also to obtain additional
revenue and thereby maximize shareholders' value. 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 obligations of the United
States government or its agencies or instrumentalities. Repurchase agreements
may also be viewed as loans made by the Fund which are collateralized by the
securities subject to repurchase. The Investment Adviser will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Investment Adviser will also evaluate the
creditworthiness of the repurchase agreement sellers with whom the Fund does
business and will monitor their creditworthiness during the period of any
repurchase agreement. If the seller defaults, the Fund could realize a loss on
the sale of the underlying security to the extent that the proceeds of 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 required to return the
underlying collateral to the seller's estate.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to debt obligations which could otherwise be sold by the
Fund. A reverse repurchase agreement is an instrument under which the Fund may
sell an underlying debt instrument and simultaneously obtain 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 Fund will
undertake reverse repurchase transactions to assist in the management of its
portfolio and to obtain additional liquidity in its portfolios. The value of
underlying securities will be at least equal at all times to the total amount of
the resale obligation, including the interest factor. The Fund receives payment
for such securities only upon physical delivery or evidence of book entry
transfer by its custodian. Regulations of the SEC require that if securities are
sold by the Fund under a reverse repurchase agreement, the Fund will maintain in
a segregated account of the Fund, established with the Custodian, cash or United
States government or other high quality debt securities from its portfolio,
marked to market daily and having a value equal to the proceeds received on any
sale subject to repurchase plus interest. 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
would be subject to the restrictions on borrowing described below under
"Investment Restrictions." The Fund will not hold more than 5% of the value of
its total assets in reverse repurchase agreements and will enter into such
agreements only so long as it is not in violation of Section 18 of the 1940 Act.
Foreign Investments. The Fund may invest up to 10% of the value of its
total assets in securities principally traded in foreign markets and Eurodollar
certificates of deposit issued by branches of U.S. banks. Foreign investments
may involve risks not present to the same degree in domestic investments, such
as future political and economic developments, the imposition of withholding
taxes on interest income, seizure or nationalization of foreign deposits, the
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal of and
interest on such obligations. Foreign securities may be less liquid and more
volatile than U.S. securities, and foreign accounting and disclosure standards
may differ from U.S. standards. In addition, settlement of transactions in
foreign securities may be subject to delays, which could result in adverse
consequences to the Fund including restrictions on the subsequent resale of such
securities. The value of foreign investments may rise or fall because of changes
in currency exchange rates. In addition, the costs of exchanging foreign
currencies for payments in U.S. dollars and nonnegotiated brokerage commissions
in foreign countries may reduce the yield on foreign securities. In the event of
a default in payment on foreign securities, the Fund may incur increased costs
to obtain a judgment against the foreign issuer in the United States or abroad.
The Fund may buy or sell foreign currencies or deal in forward foreign currency
contracts to hedge against possible fluctuations in exchange rates that may
affect the yield of the Fund when the foreign currencies are converted in
payment in U.S. dollars. The Fund may engage in currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The Fund
will use currency transactions only for hedging and not speculation. A forward
currency contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
The Fund's dealings in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions denominated or
quoted in the currency.
The Fund may not use position hedging with respect to a particular currency
to an extent greater than the aggregate market value (at the time of entering
into the position hedge) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency. If the Fund
enters into a position hedging transaction, the Fund's custodian will place cash
or U.S. Government securities or other high grade liquid debt securities in a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to the forward contract.
Options. The Fund may write (sell) call options which are traded on
national securities exchanges with respect to securities in its portfolio. The
Fund may only write "covered" call options, that is, options on securities it
holds in its portfolio or has an immediate right to acquire through conversion
or exchange of securities held in its portfolio. 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. Although there is
no overall limitation on the percentage of the Fund's portfolio securities which
may be subject to a hedge position, in view of its investment objective, the
Fund generally would write call options only in circumstances in which the
Investment Adviser does 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 foregoes 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 any 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. The extent to which the Fund may enter into transactions
involving call options also may be limited by the requirements of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code") for qualification
as a regulated investment company.
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will invest in futures contracts or related
options and has no experience in doing so. However, the Fund has reserved the
right, subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser 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. However, employing this
technique effectively may require skills that are different than those required
to select portfolio securities and the Investment Adviser has no experience in
using this technique.
In the event the Fund determines to invest in futures contracts and options
thereon, it will not purchase or sell such instruments if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts would exceed 5% of the value of the
Fund's total assets. In addition, in accordance with the regulations of the
Commodity Futures Trading Commission (the "CFTC") under which it is expected
that the Fund will be exempted from registration as a commodity pool operator,
the Fund may only enter into futures contracts and options on futures contracts
transactions for purposes of hedging all or a part of its portfolio. There is no
overall limitation on the percentage of the Fund's portfolio securities which
may be subject to hedge position. Under an existing regulation, the Fund is
permitted, under limited circumstances, to write options on futures contracts
for purposes other than hedging without CFTC registration, and the Fund will
have the right to engage in such transactions for those purposes, subject to
compliance with such CFTC regulations and the approval of the Board of
Directors. The extent to which the the Fund may enter into transactions
involving futures contracts also may be limited by the requirements of the
Internal Revenue Code for qualification as a regulated investment company.
Risks of Hedging Transactions. The use of options, financial futures and options
on financial futures may involve risks not associated with other types of
investments which the Fund intends to purchase, and it is possible that a
portfolio that utilizes hedging strategies may not perform as well as a
portfolio that does not make use of such devices. In particular, the Fund's
positions in options and financial futures may be entered and closed out only on
a federally licensed exchange which provides a market therefor, and there can be
no assurance that a liquid market will exist for any particular option or
futures contract. Because financial futures and related options markets
generally impose limits on daily price movement, it is possible that the
Investment Adviser will not be able to close out hedge positions promptly. The
inability to close out options and futures positions could have an adverse
impact on the Fund's ability to hedge its securities effectively and might, in
some cases, require the Fund to deposit substantial amounts of additional cash
to meet applicable margin requirements. The Fund's ability to hedge effectively
through transactions in financial futures or options depends on the degree to
which price movements, which include, in part, changes in interest rates, in the
Fund's holdings correlate with price movements of the hedging instruments.
Inasmuch as the Fund's options and futures will not duplicate such underlying
securities, the correlation will probably not be perfect. Consequently, the
prices, which include, in part, changes in interest rates, of the securities
being hedged may not move in the same amount as the hedging instrument. It is
possible that there may be a negative correlation between the hedging instrument
and the hedged securities, which would prevent the Fund from achieving the
anticipated benefits of hedging transactions or may cause the Fund to realize
losses and thus be in a worse position than if such strategies had not been
used.
Additional Leverage. The Fund has reserved the right to borrow money to the
extent such borrowing would not result in a violation of the 1940 Act Asset
Coverage (as defined under "Description of Notes--Asset Maintenance") and would
not otherwise violate Section 18 of the 1940 Act or restrictions imposed by the
Insurance Agreement. The Fund may borrow to the extent then permitted by the
1940 Act through the public or private issuance of debt securities and/or from
lenders of all types, such as banks, savings and loan associations, insurance
companies and similar financial institutions. In addition, the Fund may borrow
up to 5% of its total assets for temporary purposes. To the extent permitted by
the 1940 Act, the Fund may also borrow additional amounts as it redeems Notes
and Preferred Shares.
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 permitted borrowings for any other purpose, including additional
investment leverage.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. All percentage
limitations on investments will apply at the time of the making of an investment
and shall 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 1940 Act Asset
Coverage or otherwise result in a violation of Section 18 of the 1940 Act,
or issue any senior securities (as defined in the 1940 Act) other than
Preferred Shares, Notes or debt instruments related to borrowings
described under "Investment Objective and Policies--Certain Investment
Strategies--Additional Leverage" 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) shall not be deemed a senior security.
Pursuant to Section 18 of the 1940 Act, not more than 33-1/3% of the
Fund's capital structure may consist of borrowings representing
indebtedness, such as the Notes, and not more than 50% of the Fund's
capital structure may consist of borrowings represented by indebtedness,
such as the Notes, and senior securities of a class which is stock, such
as the Preferred Shares.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 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 which,
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.
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 consistently 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. Invest in securities of any issuer, if, to the knowledge of the
Fund, officers and Directors of the Fund and officers and directors of the
Investment Adviser who beneficially own more than 0.50% of the securities
of that issuer together own more than 5% of such issuer.
10. With respect to 75% of the value of the Fund's total 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, provided that this limitation does not
apply to obligations issued or guaranteed as to interest and principal by
the United States government or its agencies or instrumentalities.
11. With respect to 75% of the value of the Fund's total assets,
acquire more than 10% of the outstanding voting securities of any issuer.
12. Invest 25% or more of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations
issued or guaranteed as to interest and principal by the United States
government or its agencies or instrumentalities.
13. Invest more than 30% of the market value or other fair value of
its total assets in securities that are not readily marketable, including
those that are restricted as to disposition under the federal securities
laws or otherwise. This restriction shall 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 or
to repurchase agreements that have a maturity of seven days or less;
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 securities that are not readily
marketable, exceed 30% of the market or other fair value of the Fund's
total assets.
14. Invest in the securities of other registered investment
companies, except as they may be acquired as part of a merger or
consolidation or acquisition of assets or by purchases in the open market
involving only customary brokers' commissions.
15. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal
in, represent interests in or are secured by interests in such leases,
rights or contracts.
16. Make investments for the purpose of exercising control or
management over the issuer of any security.
17. Write, purchase or sell puts, calls or combinations thereof, or
purchase or sell futures contracts or related options, except that the
Fund may write call options and invest in futures contracts and related
options as provided in "Investment Guidelines--Certain Investment
Strategies --Options" and "--Futures Contracts and Related Options."
---------------------------------
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 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 "Investment Objective and Policies--Certain Investment
Strategies--Futures Contracts and Related Options." Further, as noted, certain
practices are subject to the condition that they not adversely affect the then
current ratings of the Fund's outstanding securities and are subject to the
prior written approval of Financial Security.
Because they are fundamental policies, the 1940 Act requires that the
foregoing Investment Restrictions may not be changed without the approval of the
holders of a majority of the outstanding shares of Common Stock and a majority
of the outstanding Preferred Shares, voting as separate classes, which, for
purposes of the 1940 Act, means for each class the lesser of (a) more than 50%
of the total number of outstanding shares of such class or (b) 67% or more of
the shares of such class present or represented at a meeting at which more than
50% of the outstanding shares of such class are present or represented by proxy.
<PAGE>
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their addresses and their principal
occupations for at least the past five years are set forth below.
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND ADDRESS(1) WITH REGISTRANT DURING PAST 5 YEARS
- -------------------- --------------- ----------------------
<S> <C> <C>
Richard E. Omohundro, Jr.(2).........President and Director President of Prospect Street Investment
Prospect Street Investment Management Co., Inc. since June 1988.
Management Co., Inc. Managing Director of Merrill Lynch from
One Financial Center 1983 to 1988 and Co-Manager of the
Boston, MA 02111 Merrill Lynch High Yield Bond Group
from 1978 through 1987.
John A. Frabotta(2)..................Vice President, Secretary, Vice President of Prospect Street In-
Prospect Street Investment Treasurer and Director vestment Management Co., Inc. since
Management Co., Inc. June 1988. Vice President of Merrill
One Financial Center Lynch from 1979 through June 1988.
Boston, MA 02111
C. William Carey(3) .................Director Chairman and Chief Executive Officer of
Town & Country Corporation Town & Country Corporation since 1965.
25 Union Street
Chelsea, MA 02150
Joseph G. Cote(2) ...................Director Managing Director of Merrill Lynch and
27 Beaumont Drive Co-Manager of the Merrill Lynch High
Melville, NY 11747 Yield Bond Group from 1978 to 1988.
Nathan V. Meyohas(3)(4)..............Director Chairman and Chief Executive Officer of
17 Avenue George V Transcontinental Services Group N.V.
Paris, France 75008 since May 1988. Private law practice in
France for 20 years prior to 1988. Direc-
tor of Prospect International High Income
Portfolio N.V. (since 1988), Banque
Internationale de Commerce (Paris) S.A.,
Banner Industries, Inc. (since 1985) and
several other companies in the United
States and Europe.
Harlan D. Platt(3) ..................Director Associate Professor of Finance and Insur-
Northeastern University ance, Northeastern University, College of
College of Business Business Administration, since 1981.
Administration
319 Hayden Hall
Boston, MA 02115
- ---------------------
<FN>
(1) Messrs. Frabotta and Meyohas will be elected by the holders of the Preferred Shares. The remaining
Directors will be elected by the holders of the Common Stock and the Preferred Shares, voting together as
a single class.
(2) Directors who are "interested persons" of the Fund, as defined in the 1940 Act.
(3) Directors who are members of the Audit Committee of the Fund's Board of Directors.
(4) Such Director is not a United States resident and such Director's assets may largely be located outside
of the United States. As a result, it may be difficult for United States investors to effect service upon
such Director within the United States, or to realize judgments of courts of the United States predicated
on civil liabilities of such Director under the federal securities laws. Criminal penalties under the
federal securities laws may be unenforceable against such Director.
</FN>
</TABLE>
<PAGE>
The Fund's Board of Directors consists of six members. Pursuant to the
Articles of Incorporation, the holders of Common Stock have voting rights of one
vote per share and holders of the Preferred Shares voting rights of one vote per
$1,000 of liquidation preference without regard to any liquidation preference
attributable to accumulated and unpaid dividends (i.e., 100 votes per Preferred
Share); provided that all the votes represented by a single Preferred Share must
be voted together. Under the Articles of Incorporation and the 1940 Act, the
holders of the Preferred Shares, as a separate class, are entitled to elect two
Directors (at least one of whom is not an "interested person" as defined in the
1940 Act) with the other four Directors (at least two of whom are not
"interested persons" as defined in the 1940 Act) elected by the holders of the
Common Stock and the Preferred Shares, voting together; provided, however, that
the holders of the Preferred Shares (or Financial Security pursuant to the
Surety Custody Agreement), as a separate class, will be entitled to elect the
smallest number of additional Directors as shall be necessary to assure that a
majority of the Directors has been elected by the holders of the Preferred
Shares if the Fund fails to pay accumulated dividends on the Preferred Shares in
an amount equal to two full years of dividends. See "Description of Preferred
Stock--Voting." Election of Directors is non-cumulative; accordingly, holders of
a majority of the voting power represented by the outstanding shares of Common
Stock and Preferred Shares, voting together as a single class, or a majority of
the outstanding Preferred Shares, voting separately as a class, may elect all of
the Directors who are subject to election by such class, as the case may be.
The Fund pays each Director not affiliated with the Investment Adviser a
fee of $10,000 per year plus $2,000 per Directors' meeting attended, together
with actual out-of-pocket expenses relating to attendance at such meetings. In
addition, the members of the Fund's Audit Committee, which consists of certain
of the Fund's non-interested Directors, receive $500 for each Audit Committee
meeting attended, other than meetings held on days on which there is also a
Directors' meeting, together with actual out-of-pocket expenses relating to
attendance at such meetings.
The Articles of Incorporation limit the personal liability of Directors and
officers to the Fund and its shareholders for monetary damages to the fullest
extent permitted by Maryland law. Based upon Maryland law and the Articles of
Incorporation, the Fund's Directors and officers have no liability to the Fund
and its shareholders for monetary damages except (a) for, and to the extent of,
actual receipt of an improper benefit in money, property or services, or (b)
in respect of an adjudication based upon a finding of active and deliberate
dishonesty which was material to the cause of action adjudicated. In accordance
with the 1940 Act, the Articles of Incorporation do not protect or purport to
protect Directors and officers against any liability to the Fund or its security
holders to which they would be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of their office.
In addition, the Articles of Incorporation and by-laws provide that the
Fund will indemnify its Directors and officers against liabilities and expenses
in connection with the performance of their duties on behalf of the Fund to the
fullest extent permitted by Maryland law, subject to the applicable requirements
of the 1940 Act and the interpretation of the Staff of the SEC of such
requirements. Under Maryland law and the Articles of Incorporation, the Fund is
entitled and obligated to indemnify each Director or officer in connection with
any proceeding to which such Director or officer is made a party by reason of
service in his capacity as a Director or officer unless it is proved that (1)
the act or omission of the Director or officer was material to the cause of
action adjudicated in the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty, or (2) the Director or officer
actually received an improper personal benefit in money, property or services,
or (3) in the case of any criminal proceeding, the Director or officer had
reasonable cause to believe that the act or omission was unlawful. The foregoing
standards apply both as to third party actions and derivative suits by or in the
right of the Fund. Indemnification may be against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the Director or officer
in connection with the proceeding. If the proceeding is one by or in the right
of the Fund, indemnification may not be made in respect of any proceeding in
which the Director or officer shall have been adjudged to be liable to the Fund.
In the view of the Staff of the SEC, an indemnification provision is consistent
with the 1940 Act if it (i) precludes indemnification for any liability,
whether or not there is an adjudication of liability, arising by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of duties
as described in Section 17(h) and (i) of the 1940 Act ("disabling conduct") and
(ii) sets forth reasonable and fair means for determining whether
indemnification shall be made; in the case of the Fund, "reasonable and fair
means" would include (1) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified
("indemnitee") was not liable by reason of disabling conduct (including a
dismissal for insufficiency of evidence) and (2) a reasonable determination,
based upon a review of the facts, that the indemnitee was not liable by reason
of disabling conduct, by (a) the vote of a majority of a quorum of Directors who
are neither "interested persons" of the Fund as defined in Section 2(a) (19)
of the 1940 Act nor parties to the proceeding, or (b) a written opinion of
independent legal counsel. In accordance with the 1940 Act, the Articles of
Incorporation do not protect or purport to protect Directors and officers
against any liability to the Fund or its security holders to which they would be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of duties involved in the conduct of their offices.
The indemnification rights provided or authorized by the Articles of
Incorporation or applicable law are not exclusive of any other rights to which a
person seeking indemnification may be entitled. The Fund may in the future
provide liability insurance for the benefit of its Directors and officers which
includes coverage for liability arising from the performance of their duties on
behalf of the Fund which is not inconsistent with the indemnification provisions
of the Articles of Incorporation and applicable law.
THE INVESTMENT ADVISER
THE INVESTMENT ADVISER
The Investment Adviser is Prospect Street(SM) Investment Management Co.,
Inc., a Massachusetts corporation having its principal offices at One Financial
Center, Boston, Massachusetts 02111. Organized in June 1988, the Investment
Adviser provides institutional clients with investment management services.
Richard E. Omohundro, Jr., President of the Investment Adviser, served as a
Vice President (1978 to 1983) and a Managing Director (1983 to 1988) of Merrill
Lynch and was Co-Manager of the Merrill Lynch High Yield Bond Group from 1978
through 1987. During that period, the Group raised approximately $13.6 billion
in new "high yield" securities through 107 issues and provided one of the
largest secondary trading markets for "high yield" securities. In 1987, the
Group raised approximately $5.8 billion in new offerings of "high yield"
securities and employed over 40 persons. Mr. Omohundro intends to devote as much
of his business time as is necessary and appropriate to the operations of the
Investment Adviser, which he presently anticipates will be approximately half
his business time.
John A. Frabotta, a Vice President of the Investment Adviser, assists Mr.
Omohundro in carrying on the business of the Investment Adviser. Mr. Frabotta
was a Vice President of Merrill Lynch from 1979 through June 1988, during which
time he performed various research, structuring and marketing functions
involving "high yield" securities. Mr. Frabotta intends to devote a majority of
his business time to the operations of the Investment Adviser.
James C. Rivers, a Vice President of the Investment Adviser, will serve as
the Portfolio Manager for the Fund. Mr. Rivers was previously Vice President of
Moseley Capital Management, Inc. ("Moseley") where he worked from 1986 to 1988.
While employed at Moseley, Mr. Rivers performed various selling, marketing and
research functions and served as adviser to the High Income Plus Fund, which
invested in "high yield" debt securities, convertible securities and common
stock. From 1973 to 1985, Mr. Rivers was employed by The Putnam Management
Company. From 1978 to 1985, Mr. Rivers managed The Putnam High Yield Trust, a
mutual fund investing in "high yield" securities. Between January 1980 and April
1985, the net assets of The Putnam High Yield Trust increased from $250 million
to approximately $950 million as a result of additional investments in the Fund.
Mr. Rivers intends to devote most of his business time to the operations of the
Investment Adviser.
Mr. Omohundro, Mr. Frabotta and Mr. Rivers have not entered into employment
agreements with the Investment Adviser.
The Investment Adviser manages Prospect International High Income Portfolio
N.V., an offshore, closed-end investment company with assets of approximately
$203 million as of November 18, 1988. Such fund, which commenced operations on
September 7, 1988, invests primarily in "high yield" securities and is currently
the only other closed-end fund managed by the Investment Adviser. Such fund is
eligible for investment by non-United States investors only and is not required
to be and is not registered under the 1940 Act.
ADVISORY AGREEMENT
The Investment Advisory Agreement between the Investment Adviser and the
Fund (the "Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the 1940 Act,
the Investment Adviser is responsible for the actual management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular investment rests with the Investment Adviser, subject to review by
the Board of Directors and compliance with the applicable provisions of the 1940
Act.
The Investment Adviser is not dependent on any other party in providing the
investment advisory services required for the management of the Fund. The
Investment Adviser may, however, consider analyses from various sources,
including broker-dealers with which the Fund does business. The Investment
Adviser is also responsible for providing the Fund with such executive, data
processing, clerical, accounting and bookkeeping services and statistical and
research data as are deemed advisable by the Fund's Board of Directors (although
the expenses thereof will be borne by the Fund as specified below), except to
the extent these services are provided by an administrator or an accounting firm
hired by the Fund.
Under the Advisory Agreement with the Fund, the Investment Adviser receives
a monthly advisory fee equal to 0.50% (on an annual basis) of the Fund's net
assets (which, for purposes of determining such advisory fee, shall mean the
average weekly value of the total assets of the Fund, minus the sum of accrued
liabilities of the Fund (other than the aggregate principal amount of the Notes
and not including the aggregate liquidation preference of the Preferred Shares)
and accumulated and unpaid dividends on the Preferred Shares).
The Fund bears all costs of its operation other than those incurred by the
Investment Adviser under the Advisory Agreement. In particular, the Fund pays
investment advisory fees, fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets and the Surety Custodian under the Surety
Arrangement, the premiums payable in connection with the Surety Bond, legal,
accounting and auditing fees, taxes, expenses of preparing prospectuses and
shareholder reports, registration fees and expenses, fees and expenses for the
transfer and dividend disbursing agent, the compensation and expenses of the
Directors who are not otherwise employed by or affiliated with the Investment
Adviser or any of its affiliates, and any extraordinary expenses. The Investment
Adviser will reimburse the Fund for any expenses (excluding brokerage
commissions, interest, taxes and litigation expenses) paid or incurred by the
Fund in any year in excess of the most restrictive expense limitation which is
imposed by any state and to which the Fund is then subject, if any. The Fund is
not known to be subject to any state expense limitations. Under the Advisory
Agreement, the Investment Adviser provides the Fund with office space,
facilities and business equipment and provides the services of executive and
clerical personnel for administering certain of the other affairs of the Fund.
The Investment Adviser compensates Directors of the Fund if such persons are
employed by the Investment Adviser or its affiliates.
The Advisory Agreement was approved by a majority of the Fund's Board of
Directors, including a majority of the Directors who are not parties to the
Advisory Agreement or "interested persons" (as defined in the 1940 Act) of any
such party, at a meeting held on November 11, 1988. The Advisory Agreement will
remain in effect for a period of two years from November 23, 1988 (the date of
execution thereof) (subject to approval at the first meeting of shareholders)
and will remain in effect from year to year thereafter if approved annually (i)
by the Board of Directors of the Fund or by the holders of a majority of the
Fund's outstanding voting securities (as defined under "Investment Objective and
Policies"), voting as a single class, and (ii) by a majority of the Directors
who are not parties to the Advisory Agreement or interested persons (as defined
in the 1940 Act) of any such party. The Advisory Agreement terminates on its
assignment by either party, and may be terminated without penalty on not less
than 30 nor more than 60 days' prior written notice at the option of either
party thereto, or by the affirmative vote of the holders of a majority of the
Fund's outstanding voting securities, voting as a single class.
The Advisory Agreement provides that the Investment Adviser shall only be
liable for willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties and obligations under the Advisory Agreement.
PORTFOLIO TRADING
The Investment Adviser is responsible for decisions to buy and sell
securities and other portfolio holdings for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. Fixed-income securities are generally traded on a "net"
basis with dealers acting as principals 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 which 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 of the Fund, the Investment
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Investment Adviser
will seek to execute each transaction at a price and commission, if any, which
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. In seeking the most favorable price and execution, the Investment
Adviser, having in mind the Fund's best interests, will consider all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions. While the Investment Adviser generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available. Within the framework of the policy of
obtaining the most favorable price and efficient execution, the Investment
Adviser will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Investment Adviser or the Investment Adviser's other clients. Such 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 issuers and industries. Such services are used by the
Investment Adviser in connection with all of its investment activities, and some
of such services obtained in connection with the execution of transactions for
the Fund may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions for
such other accounts, and the services furnished by such brokers may be used by
the Investment Adviser in providing investment management for the Fund.
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 management fee paid by the Fund will not be
reduced because the Investment Adviser and/or other clients receive such
services. The allocation of orders and the commission rates paid by the Fund
will be reviewed periodically by the Board of Directors.
As permitted by Section 28(e) of the 1934 Act, the Investment Adviser may
cause the Fund to pay a broker-dealer which provides "brokerage and research
services" (as defined in the 1934 Act) to the Investment Adviser, an amount of
disclosed commission for effecting a securities transaction for the Fund in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
The Fund anticipates that Drexel Burnham and certain other underwriters of
the Common Stock may from time to time act as brokers or dealers in connection
with the execution of the Fund's portfolio transactions after they have ceased
to be underwriters of the Fund's securities. Drexel Burnham is an active
underwriter of, and dealer in, "high yield" 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. In addition, Drexel Burnham intends, but
is not obligated to, make a market in the Preferred Shares.
The Fund has been advised by Drexel Burnham that the SEC has brought a
civil action against Drexel Burnham and several of its key employees in the
United States District Court for the Southern District of New York. The
complaint alleges violations of the 1934 Act and rules and regulations
thereunder and of the 1933 Act. The complaint charges trading on inside
information, market manipulation, fraud, failure to file Schedule 13Ds, improper
disclosure, parking, aiding and abetting violations of the net capital rules,
and margin and record keeping violations. The complaint seeks an injunction
against further violations of the securities laws, disgorgement of profits and
fees received and losses avoided as a result of the alleged illegal conduct,
treble any profits realized or losses avoided on insider trading, and all
further relief, legal or equitable, that the Court believes is warranted under
the circumstances. The Fund also has been advised that Drexel Burnham and DBL
Group and several key employees of its High Yield Bond Department are targets of
a grand jury investigation being conducted by the United States Attorney for the
Southern District of New York with respect to certain alleged violations of the
federal criminal laws including, but not limited to, securities fraud, mail and
wire fraud and racketeering. The staff of the United States Attorney's office
has advised Drexel Burnham and DBL Group that Drexel Burnham, DBL Group and such
key employees may be indicted at any time. From time to time some of the
employees referred to above may be involved in portfolio transactions with the
Fund. Drexel Burnham has advised the Fund that no assurance can be given that
the results of the SEC action or grand jury investigation will not have an
adverse effect on Drexel Burnham and/or the market for "high yield" securities,
a market in which Drexel Burnham is an important participant.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less frequently
than the close of trading on the NYSE (generally 4:00 P.M. New York time) on the
last business day of each week (generally Friday). It will be determined by
dividing the value of the net assets of the Fund (for the purpose of determining
the net asset value per share of the Common Stock, the value of the Fund's net
assets shall be deemed to equal the value of the Fund's assets less (i) the
Fund's liabilities (including the outstanding principal amount of the Notes and
unpaid interest on the Notes), (ii) accumulated and unpaid dividends on the
outstanding Preferred Shares and (iii) the aggregate liquidation value (i.e.,
$100,000 per share) of the outstanding Preferred Shares), by the total number of
shares of Common Stock outstanding. In valuing the Fund's assets for all
purposes other than the determination of the discounted value of such assets
pursuant to the respective Investment 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, will be valued at
the mean between the most recently quoted bid and asked prices provided by the
principal market makers. Any security or option for which the primary market is
on an exchange will be valued at the last sale price on such exchange on the day
of valuation or, if there was no sale on such day, the last bid price quoted on
such day. Options for which the primary market is not on an exchange or which
are not listed on an exchange will be valued at market value or fair value if no
market exists. Securities and assets for which market quotations are not readily
available will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. While no single standard
for determining fair value exists, as a general rule, the current fair value of
a security would appear to be the amount which the Fund could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial condition of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same type at the time of purchase, special reports prepared by analysts,
information as to any transaction or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be valued
at amortized cost if their term to maturity from the date of acquisition by the
Fund was less than 60 days or by amortizing their value on the 61st day prior to
maturity if their term to maturity from the date of acquisition by the Fund was
more than 60 days, unless this method is determined by the Board of Directors
not to represent fair value. Repurchase agreements will be valued at cost plus
accrued interest.
SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. To address this possibility, the Board of Directors
presently contemplates that the Fund may from time to time consider either the
repurchase of shares of its Common Stock on the open market or the making of
tender offers for such Common Stock. The Fund may borrow money to finance the
repurchase of shares, subject to compliance with 1940 Act Asset Coverage,
Section 18 of the 1940 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, (i) if applicable asset
coverage requirements under the 1940 Act (i.e., 300% with respect to the Notes
and 200% with respect to the Preferred Shares) are not met or would not be met
following such repurchase, (ii) when payments of principal of or interest on the
Notes are in default, (iii) when dividends on the Preferred Shares are in
arrears or Surety Assets Coverage is not maintained or (iv) if otherwise
prohibited by applicable law.
There can be no assurance that repurchases or tenders will result in the
Common Stock trading at a price which is equal to its net asset value. The Fund
anticipates that the market price of the Common Stock will usually vary from net
asset value. The market price of the Common Stock will be determined, among
other things, by the relative demand for and supply of the Common Stock in the
market, the Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Common Stock may be the subject of repurchases or tender offers from time to
time may enhance its attractiveness to investors and thus reduce the spread
between market price and net asset value that may otherwise exist.
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 of
the Fund will decrease the total assets of the Fund and therefore have the
effect of increasing the Fund's expense ratio. Furthermore, any interest on
borrowings to finance Common Stock repurchase transactions will reduce the
Fund's net income.
Even if a tender offer has been made, it is the Board's announced policy,
which may be changed by the Board, not to accept tenders or effect repurchases
if (1) such transactions, if consummated, would (a) result in the delisting
of the Common Stock from the NYSE (the NYSE having advised the Fund that it
would consider delisting if the aggregate market value of the Fund's outstanding
publicly held Common Stock is less than $5.0 million, the number of publicly
held shares of Common Stock falls below 600,000 or the number of round-lot
holders falls below 1,200), (b) result in a violation of applicable asset
coverage requirements, or (c) impair the Fund's status as a regulated investment
company under the Internal Revenue Code (which would make the Fund a taxable
entity, causing the Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from the Fund); (2) the
Fund would not be able to liquidate portfolio securities in an orderly manner
and consistent with the Fund's investment objective and policies in order to
repurchase Common Stock; or (3) there is, in the Board's judgment, any material
(a) legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or limitation on prices for trading securities generally on the
NYSE or any foreign exchange on which portfolio securities of the Fund are
traded, (c) declaration of a banking moratorium by federal, state or foreign
authorities or any suspension of payment by banks in the United States, New York
State or foreign countries in which the Fund invests, (d) limitation affecting
the Fund or issuers of its portfolio securities imposed by federal, state or
foreign authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, or (f) other event
or condition which would have a material adverse effect on the Fund or its
shareholders if shares of Common Stock were repurchased. The Board of Directors
may modify these conditions from time to time in light of experience and may
determine not to make a tender offer even if one of the above conditions exists.
If a tender offer is made, such tender offer shall be made in accordance with
the 1934 Act and the 1940 Act.
Any tender offer made by the Fund will be at a price equal to the net asset
value of the shares on a date subsequent to the Fund's receipt of all tenders.
Each offer will be made and shareholders notified in accordance with the
requirements of the 1934 Act and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. The Fund will
purchase all shares tendered by a shareholder at any time during the period of
the tender offer in accordance with the terms of the offer unless it determines
to accept none of them (based upon one of the conditions set forth above).
Each person tendering shares will be required to submit a check in an amount not
to exceed $25 payable to the Fund, which will be used to help defray the costs
associated with effecting the tender offer. This fee will be imposed upon each
tendering shareholder whose tendered shares are purchased in the tender offer
and will be imposed regardless of the number of shares purchased. The Fund
expects the cost to the Fund of effecting a tender offer will be greater than
the aggregate of all service charges received from those who tender their
shares. Costs associated with the tender offer will be charged against capital
of the Fund. During the period of a tender offer, the Fund's shareholders will
be able to obtain the Fund's current net asset value by use of a toll-free
telephone number.
If the Fund must liquidate portfolio securities in order to purchase shares
of Common Stock tendered, the Fund may realize gains and losses. Such gains, if
any, may be realized on securities held for less than three months ("short short
gain"). Because less than 30% of the Fund's gross income must be derived from
the sale or disposition of stock and securities held less than three months for
any taxable year in order to retain the Fund's tax status as a regulated
investment company, any such short short gains would reduce the amount of gain
on sale of other securities held for less than three months that the Fund could
realize in the ordinary course of its portfolio management. See "Federal
Taxation." The portfolio turnover rate of the Fund may or may not be affected by
the Fund's repurchases of shares of Common Stock pursuant to a tender offer.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Directors may elect to submit to the holders of the
Common Stock and the Preferred Shares following the fifth anniversary of the
closing of this offering in 1993 and at any time thereafter a proposal to
convert the Fund to an open-end investment company and in connection therewith
to redeem or otherwise retire the Notes and the Preferred Shares as would be
required upon such conversion by the 1940 Act. In determining whether to
exercise its discretion to submit this issue to shareholders, the Board of
Directors would consider all factors then relevant, including the relationship
of the market price of the Common Stock to net asset value, the extent to which
the Fund's capital structure is leveraged and the possibility of re-leveraging,
the spread, if any, between yields on "high yield" securities in the Fund's
portfolio as compared to interest and dividend charges on senior securities and
general market and economic conditions. In addition to any vote required by
Maryland law, conversion of the Fund to an open-end investment company would
require the affirmative vote of the holders of a majority (as defined in the
1940 Act (see "Investment Objective and Policies")) of each class of shares
entitled to be voted on the matter. Shareholders of an open-end investment
company may require the company to redeem their shares at any time (except in
certain circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charges, if any, as might be in effect at the time
of redemption. If the Fund converted to an open-end investment company, it could
be required to liquidate portfolio securities to meet requests for redemption,
and the Common Stock would no longer be listed on the NYSE. In the event the
Fund converts to open-end status, the Fund would only be able to borrow through
bank borrowings within certain limits and would not be allowed to have preferred
stock.
FEDERAL TAXATION
The following discussion 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 impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify as and elect to be a regulated investment
company under Subchapter M of the Internal Revenue Code. Generally, to qualify
as a regulated investment company for a taxable year, the Fund must derive at
least 90% of its income from certain specified sources, including interest,
dividends, gains from the disposition of securities, and other income (including
gains from options and futures and non-cash income from the Fund's investment in
zero coupon securities and other instruments issued with an original issue
discount) derived with respect to its business of investing in such securities.
In addition, the Fund must derive less than 30% of its gross income from the
disposition of securities held for less than three months, must meet certain
diversification criteria regarding Fund investment, and must distribute annually
at least 90% of its investment company taxable income. For any year in which the
Fund qualifies for taxation as a regulated investment company, the Fund is not
taxed on income distributed to its shareholders in the form of dividends or
capital gains distributions. The Fund is subject to the alternative minimum tax
provisions of the Internal Revenue Code. Treasury regulations to be issued will
prescribe the apportionment of tax preference items between the Fund and its
shareholders. If, in any taxable year, the Fund were to fail to qualify as a
regulated investment company under the Internal Revenue Code, the Fund would be
taxed for that year in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
the Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits, would be taxable to the recipient shareholders
as ordinary income dividends, even if those distributions might otherwise have
been considered distributions of capital gains. The Tax Reform Act of 1986
eliminated the exclusion for dividends received by individuals. The Revenue Act
of 1987 reduced to 70% the dividends received deduction applicable to
corporations. Distributions by the Fund are not expected to qualify as dividends
for the purpose of this dividends received deduction.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Fund will be required to suspend distributions to the holders of the Common
Stock and/or the Preferred Shares until the asset coverage is restored. See
"Description of Preferred Stock--Dividends" and "Description of Common Stock."
Such a suspension of distributions might prevent the Fund from distributing 90%
of its investment company taxable income, as is required in order to qualify for
taxation as a regulated investment company. In addition, if the Fund fails to
distribute in 1988 and each calendar year thereafter, at least (i) 97% of its
ordinary income for such calendar year (including non-cash income attributable
to zero coupon and other original issue discount securities) and (ii) 98% of its
capital gain net income (both long-term and short-term) for the 12 months ended
October 31 of such calender year (or December 31, if the Fund so elects), the
Fund will be subject to a 4% excise tax on undistributed income if income tax on
such income has not been paid by the Fund. In addition, the Fund will be subject
to such excise tax on any portion (not taxed to the Fund) of the respective 3%
and 2% balances which are not distributed during the succeeding calendar year.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund intends to repurchase or redeem Notes and/or (to the extent permitted
under the 1940 Act) Preferred Shares in order to maintain or restore the
requisite asset coverage and avoid failure to remain qualified as a regulated
investment company. The determination to repurchase or redeem Notes or Preferred
Shares and the relative amounts of each to be repurchased or redeemed, if any,
will be made in the sole discretion of the Fund. Furthermore, the Fund will be
required to make mandatory partial redemptions of the Notes in the event a
failure to maintain 1940 Act Asset Coverage (as defined under "Description of
Notes--Asset Maintenance") is not cured in a timely manner. See "Description of
Notes--Events of Default."
Use of the Fund's cash to repurchase or redeem Notes and/or Preferred
Shares may adversely affect the Fund's ability to distribute annually at least
90% of its investment company taxable income, which distribution is required to
qualify for taxation as a regulated investment company. The Fund may also
realize income in connection with funding repurchases or redemptions of Notes or
Preferred Shares and such income would be taken into account in determining
whether or not the above-described distribution requirements have been met.
Depending on the size of the Fund's assets relative to its outstanding senior
securities, redemption of Notes and/or Preferred Shares might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds are
original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of
a debt instrument over the issue price of the instrument. Original issue
discount on a taxable obligation is required to be currently included in the
income of the holder of the obligation (i) on a ratable basis if the
obligation was issued before July 2, 1982 and (ii) on a constant interest rate
basis resembling the economic accrual of interest if the obligation was issued
after July 1, 1982. The tax cost basis of the holder of an original issue
discount debt instrument is increased by the amount of original issue discount
thereon properly included in the holder's gross income as determined for federal
income tax purposes. Current inclusion in gross income of original issue
discount on a taxable debt instrument is required, even though no cash is
received at the time the original issue discount is required to be included in
gross income.
If the Fund fails to qualify as a regulated investment company for any
year, it must pay out any earnings and profits accumulated in that year (less
the interest charge mentioned below, if applicable) and may be required to pay
an interest charge to the Treasury on 50% of such earnings and profits before it
can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF PREFERRED SHAREHOLDERS
For any period during which the Fund qualifies as a regulated investment
company for tax purposes, distributions paid in cash to holders of Preferred
Shares will be taxable as ordinary income for federal income tax purposes.
Dividends paid by the Fund are not expected to be eligible for the dividends
received deduction available to corporations.
Generally, a dividend paid by the Fund is treated as received in the
taxable year in which the distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in such a month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
Individual investors should note that the Tax Reform Act of 1986 placed a
floor of two percent of adjusted gross income on miscellaneous itemized
deductions, including investment expenses. The Tax Reform Act of 1986 directed
the Secretary of the Treasury to prescribe regulations prohibiting indirect
deduction through a pass-through entity (such as the Fund) of amounts not
allowable as a deduction under this rule if paid or incurred directly by an
individual.
Temporary Regulations applicable to "nonpublicly offered regulated
investment companies" have been issued. Under these temporary regulations, in
general, (i) specified expenses of the regulated investment company or, at the
election of the regulated investment company, 40% of its expenses, exclusive of
expenses which are specifically excluded from miscellaneous itemized deductions
if incurred by an individual, are allocated among its shareholders who are
"affected investors" (i.e., individuals, estates, trusts and pass-through
entities having such shareholders), and (ii) such investors are treated as
having received or accrued dividends in an aggregate amount equal to the
investor's share of such expenses and to have incurred investment expenses in
the same aggregate amount. These computations are made on a calendar year basis
and the allocation of such expenses among affected investors may be done by the
regulated investment company on any reasonable basis (which basis, if utilizing
distributions to affected investors, may exclude some of such distributions).
The Temporary Regulations do not address the treatment of expenses incurred by a
"publicly offered regulated investment company." The Fund is expected to qualify
as a "publicly offered regulated investment company."
The Revenue Act of 1987 provides that the two percent floor rule, to the
extent it relates to indirect deductions through a publicly offered regulated
investment company, applies only to taxable years beginning after 1987. The
Technical Corrections and Miscellaneous Revenue Act of 1988 delays treatment of
expenses of a "publicly offered regulated investment company" as itemized
deductions until taxable years beginning after 1989. The Fund cannot predict
whether or not the rule excluding a "publicly offered regulated investment
company" from pass-through treatment of investment expenses subject to the two
percent floor rule will be extended to 1990 or any later year; and, if not,
whether the above-described regulations will apply to it as such a company or
some other method for allocating expenses to its shareholders will apply. The
term "publicly offered regulated investment company" is defined as meaning a
regulated investment company the shares of which are "continuously offered" or
regularly traded on an established securities market or "held by or for no fewer
than 500 persons at all times during the taxable year."
If the Fund suffers a net taxable loss in any taxable year, the holders of
Preferred Shares will not be permitted to utilize that loss in their tax
returns.
Generally, gain realized by a shareholder on the sale of shares held for
more than one year will be taxable as long-term capital gain. 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
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 shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss on sale of a share of the Fund
held for six months or less will, to the extent of any amount which was treated
as long-term capital gain with respect to the share, be treated as a long-term
capital loss. Shareholders who acquire shares on multiple dates should consult
their tax advisers to determine how to allocate the cost of stock for basis
purposes.
Although the matter is not free from doubt, it is believed that Scheduled
Payments received pursuant to the Surety Bond should be characterized for U.S.
federal income tax purposes in the same manner as though the payments had been
made by the Fund. The tax effects of such a characterization would vary
depending on the facts and circumstances existing at the time. Thus, for
example, if the Scheduled Payment not made by the Fund consisted of a shortfall
in a redemption or liquidation payment, the holder of Preferred Shares would,
under this view, treat the compensatory payment by the Surety as though it were
a redemption or liquidation payment by the Fund. Because the U.S. federal income
tax treatment of the making of a Scheduled Payment in whole or in part by the
Surety is not clear, holders of Preferred Shares should consult their tax
advisors as to the tax effects thereof if such a situation should arise.
The Fund may be required to withhold U.S. federal income tax at the rate of
20% of all taxable distributions payable to holders of Preferred Shares who fail
to provide the Fund with their correct taxpayer identification numbers or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Backup withholding is not
an additional tax. Any amounts withheld may be credited against the U.S. federal
income tax liability of a holder of Preferred Shares.
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 and corporations.
OTHER TAXATION
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the state, local and foreign tax consequences to them
of an investment in Preferred Shares.
THE AUCTION
GENERAL
Holders of the Preferred Shares will be entitled to receive cumulative cash
dividends, when, as and if declared by the Board of Directors of the Fund out of
funds legally available therefor, on each Dividend Payment Date with respect to
a Dividend Period then ending (a period of 30 days, subject to certain
exceptions) at the rate per share equal to the Applicable Rate per annum for
each such Dividend Period. See "Description of Preferred
Stock--Dividends--General" and "--Dividends--Determination of Dividend Rate."
The Articles of Incorporation provide that the Applicable Rate per annum
for each Dividend Period after the Initial Dividend Period shall be equal to the
rate per annum that the Auction Agent advises results on the Business Day
preceding the first day of the next Dividend Period from implementation of
auction procedures (the "Auction Procedures") set forth in the Articles of
Incorporation, in which persons determine to hold or offer to purchase or sell
Preferred Shares based on the dividend rates bid by them. The Auction Procedures
are attached as Appendix E to this Prospectus.
Auction Agent Agreement. The Fund will enter into an agreement (the
"Auction Agent Agreement") with Bankers Trust Company (together with any
successor bank, trust company or other financial institution entering into a
similar agreement with the Fund, the "Auction Agent" and, in its capacity as
paying agent with respect to the Preferred Shares, the "Paying Agent") which
provides, among other things, that the Auction Agent will follow the Auction
Procedures for the purposes of determining the Applicable Rate. Each periodic
operation of such procedures is hereinafter referred to as an "Auction." The
Fund will pay the Auction Agent compensation for its services under the Auction
Agent Agreement.
The Auction Agent will act as agent for the Fund in connection with an
Auction. The Auction Agent Agreement provides that, 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 the Auction Agent Agreement and 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. The Fund will indemnify the Auction Agent for certain
liabilities.
Upon notice to the Fund, the Auction Agent may resign and terminate the
Auction Agent Agreement as of a date which may be no earlier than the Business
Day after the second Dividend Payment Date after delivery of such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agent Agreement. The Fund may remove the Auction
Agent, provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent. In the event that there is no
Auction Agent on an Auction Date, the Applicable Rate for the immediately
succeeding Dividend Period shall be the Maximum Applicable Rate (175% of the
30-day "AA" Composite Commercial Paper Rate in effect on such Auction Date).
Broker-Dealer Agreements. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into such an agreement with
Drexel Burnham and may enter into similar agreements (collectively, the
"Broker-Dealer Agreements") with one or more other broker-dealers selected by
the Fund (collectively, the "Broker-Dealers") which will provide for the
participation of such Broker-Dealers in Auctions. The Auction Agent must consent
in writing to the Fund's selection of Broker-Dealers, which consent may not be
unreasonably withheld.
Master Purchaser's Letters. As a condition to purchasing the Preferred
Shares in this offering, or participating in any Auction or otherwise acquiring
Preferred Shares, each prospective purchaser will be required to sign and
deliver to its Broker-Dealer a letter, the form of which is attached to this
Prospectus as Appendix D (the "Master Purchaser's Letter"), in which such
prospective purchaser will agree, among other things:
(i) that any Bid or Sell Order submitted by such purchaser shall
constitute an irrevocable offer to purchase or sell the Preferred Shares
subject to such Bid or Sell Order, or such lesser number of Preferred
Shares as such purchaser shall be required to sell or purchase as a result
of an Auction, in accordance with the terms set forth in this Prospectus,
and that a failure by such purchaser or its Broker-Dealer to place a Bid or
Sell Order with respect to the Preferred Shares owned by such purchaser
shall be deemed to constitute a Hold Order;
(ii) to sell, transfer or otherwise dispose of Preferred Shares only
pursuant to a Bid or a Sell Order submitted in an Auction or to a purchaser
that has delivered a signed Master Purchaser's Letter, provided that in the
case of all transfers other than those pursuant to Auctions, such
purchaser, its Broker-Dealer or its Agent Member (the "Agent Member") of
the Securities Depository (defined as DTC, together with any successor
securities depository selected by the Fund) advises the Auction Agent of
such transfer;
(iii) to have all of the outstanding Preferred Shares represented by a
certificate or certificates registered in the name of the nominee of the
Securities Depository and that such purchaser shall not be entitled to
receive any certificate representing any Preferred Shares which it
acquires, that the ownership of the Preferred Shares as to which such
purchaser is the Existing Holder shall be maintained in book entry form by
the Securities Depository, in the account of its Agent Member, which in
turn will maintain records of such purchaser's beneficial ownership, and to
authorize and instruct such Agent Member to disclose to the Auction Agent
such information with respect to such purchaser's beneficial ownership as
the Auction Agent shall require; and
(iv) that the purchaser grants to Financial Security a proxy assigning
to Financial Security, to the extent that Financial Security makes
Scheduled Payments, the purchaser's voting rights and also the right to
receive from the Fund the redemption price, liquidation preference or
dividend to which such Scheduled Payment relates and Financial Security
shall be subrogated to such purchaser's rights until the Fund pays such
redemption price, liquidation preference or accumulated and unpaid
dividends, as the case may be, to which such Scheduled Payments relate.
An execution copy of the Master Purchaser's Letter is included inside the
back cover of this Prospectus. Execution of a Master Purchaser's Letter is not a
commitment to purchase Preferred Shares in this offering, in any Auction or
otherwise, but it is a condition precedent to purchasing Preferred Shares.
As used herein, "Existing Holder" of Preferred Shares means a person who
has signed a Master Purchaser's Letter and is listed as the beneficial owner of
such Preferred Shares in the records of the Auction Agent. The Auction Agent may
rely upon, as evidence of the identities of the Existing Holders, a list of the
initial owners of the Preferred Shares provided by the Fund, the results of
Auctions and notices from any Existing Holder, the Agent Member of any Existing
Holder or the Broker-Dealer of any Existing Holder with respect to such Existing
Holder's transfer of Preferred Shares to another person. The Auction Agent shall
be required to register on a list maintained pursuant to the Auction Agent
Agreement a transfer of Preferred Shares from an Existing Holder to another
person only if such transferee has delivered a signed Master Purchaser's Letter
to the Auction Agent and if (i) such transfer is pursuant to an Auction or
(ii) in the case of a transfer made other than pursuant to an Auction, the
Auction Agent has been notified in writing by such Existing Holder, the Agent
Member of such Existing Holder or the Broker-Dealer of such Existing Holder of
such transfer. The Auction Agent shall rescind a transfer registered on such
list if the Auction Agent has been notified in writing by the Broker-Dealer or
Agent Member of any person that (i) purchased Preferred Shares, that the seller
failed to deliver such Preferred Shares or (ii) sold Preferred Shares, that the
purchaser failed to make payment to such person upon delivery to the purchaser
of such Preferred Shares. Any transfer of Preferred Shares contrary to the terms
of a Master Purchaser's Letter may affect the right of the person acquiring such
Preferred Shares to participate in future Auctions.
Securities Depository. DTC will act as Securities Depository for the Agent
Members with respect to Preferred Shares. One registered certificate for all of
the Preferred Shares will be registered in the name of the Surety Custodian.
Such certificate will bear a legend to the effect that such certificate is
issued subject to the provisions restricting transfers of Preferred Shares
contained in the Fund's Articles of Incorporation and the Master Purchaser's
Letters. The Fund will issue stop-transfer instructions to the Paying Agent for
the Preferred Shares. DTC will be the holder of record of custody receipts
representing the Preferred Shares, and Existing Holders of Preferred Shares will
not receive certificates representing their ownership interest in such shares.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants (including Agent Members), some of whom (and/or
their representatives) own shares of common stock of DTC. The Securities
Depository will maintain lists of its participants and will maintain the
positions (ownership interests) held by each Agent Member in the Preferred
Shares, whether as an Existing Holder for its own account or as a nominee for an
Existing Holder. Payments and communications made by the Fund to holders of
Preferred Shares will be duly made by making payments to, and communicating
with, the Securities Depository.
The following is a brief summary of the procedures to be used in conducting
Auctions. This summary is qualified by reference to the Auction Procedures set
forth in Appendix E hereto, which are incorporated herein by reference.
Illustrations of hypothetical Auctions and the settlement procedures to be used
with respect to auctions are set forth in Appendices B and C attached hereto,
respectively.
AUCTION DATES
An Auction to determine the Applicable Rate with respect to Preferred
Shares for each Dividend Period after the Initial Dividend Period will be held
on the Business Day preceding the first day of the next Dividend Period;
provided, however, if such day is a Thursday the Auction Date shall mean the
Business Day next preceding such Thursday (the date of each Auction being
referred to herein as an "Auction Date ").
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined below in "Submission of
Orders by Broker-Dealers to the Auction Agent") on each Auction Date:
(a) each Existing Holder may submit to a Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding Preferred Shares,
if any, that such Existing Holder desires to continue to hold without
regard to the Applicable Rate for the next Dividend Period;
(ii) Bid--indicating the number of outstanding Preferred Shares, if
any, that such Existing Holder desires to continue to hold, provided that
the Applicable Rate for the next Dividend Period shall not be less than the
rate per annum specified by such Existing Holder in such Bid; and/or
(iii) Sell Order--indicating the number of outstanding Preferred
Shares, if any, that such Existing Holder offers to sell without regard to
the Applicable Rate for the next Dividend Period; and
(b) Broker-Dealers shall contact prospective purchasers of Preferred
Shares (each such prospective purchaser is hereinafter referred to as a
"Potential Holder" and the term "Potential Holder" includes an Existing Holder
with respect to a Bid by such Existing Holder to purchase additional shares) by
telephone to determine whether such Potential Holders desire to submit Bids in
which such Potential Holders will indicate the number of Preferred Shares which
they offer to purchase, if the Applicable Rate for the next Dividend Period is
not less than the rates per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." An Existing
Holder or a Potential Holder placing an Order is hereinafter referred to as a
"Bidder" and collectively as "Bidders."
An Existing Holder may submit different types of Orders in an Auction with
respect to Preferred Shares then held by such Existing Holder, provided that the
total number of Preferred Shares covered by all such Orders does not exceed the
number of Preferred Shares held by such Existing Holder. For information
concerning the priority given to different types of Orders placed by Existing
Holders, see "Submission of Orders by Broker-Dealers to the Auction Agent"
below.
The Maximum Applicable Rate at any Auction will be 175% of the 30-day "AA"
Composite Commercial Paper Rate in effect on the Auction Date. "30-day 'AA'
Composite Commercial Paper Rate," on any date, means (i) the interest equivalent
of the 30-day rate on commercial paper placed on behalf of issuers whose
corporate bonds are rated "AA" or the equivalent of such rating by another
nationally recognized rating agency, as announced by the Federal Reserve Bank of
New York for the close of business on the Business Day immediately preceding
such date, or (ii) in the event that the Federal Reserve Bank of New York does
not make available such a rate, then the arithmetic average of the interest
equivalent of the 30-day rates on commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by Drexel Burnham and any of
its affiliates or successors that are commercial paper dealers (the "Commercial
Paper Dealers"), to the Auction Agent for the close of business on the Business
Day immediately preceding such date. In the event that the Federal Reserve Bank
of New York does not make available such a rate and if any Commercial Paper
Dealer does not quote a rate required to determine the 30-day "AA" Composite
Commercial Paper Rate, the 30-day "AA" Composite Commercial Paper Rate shall be
determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers, if any, or, if
there are no such Commercial Paper Dealers, by the Auction Agent.
Any Bid specifying a rate higher than the Maximum Applicable Rate will (i)
be treated as a Sell Order if submitted by an Existing Holder and (ii) be
rejected if submitted by a Potential Holder. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares"
below.
The Master Purchaser's Letter signed by each Existing Holder and each
Potential Holder provides that a Sell Order submitted by an Existing Holder
shall constitute an irrevocable offer to sell and a Bid submitted by an Existing
Holder shall constitute an irrevocable offer to sell the Preferred Shares
subject thereto, if the rate specified in such Bid is higher than the rate
determined in the Auction. A Bid submitted by a Potential Holder shall
constitute an irrevocable offer to purchase the number of Preferred Shares
subject thereto if the rate specified in the Bid is less than or equal to the
Applicable Rate determined in accordance with the Auction Procedures. The number
of Preferred Shares purchased or sold may be subject to proration procedures.
See "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below. Each purchase or sale shall be made for settlement
on the Business Day following the Auction Date at a price per share equal to
$100,000. See "Notification of Results; Settlement" below.
If an Order or Orders covering all of the outstanding Preferred Shares held
by an Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Existing Holder or otherwise, the Auction Agent shall deem a Hold Order to have
been submitted on behalf of such Existing Holder covering the number of
outstanding Preferred Shares held by such Existing Holder and not subject to any
Order submitted to the Auction Agent. The Auction Agent is entitled to rely upon
the terms of any Order submitted to it by a Broker-Dealer.
If all of the outstanding Preferred Shares are subject to Submitted Hold
Orders, the Applicable Rate for the next Dividend Period for all Preferred
Shares will be 90% of the 30-day "AA" Composite Commercial Paper Rate in effect
on the date of the Auction (the "Minimum Applicable Rate").
With respect to an Auction, Preferred Shares will be deemed to be not
outstanding for purposes of being included in Auctions if a Notice of Redemption
with respect to such shares has been given by the Fund; in the event the Fund
fails to effect any redemption described in a Notice of Redemption such shares
will nonetheless continue to be deemed not outstanding for purposes of being
included in Auctions and the sole remedy of the holders thereof will be to
elect, together with the other holders of Preferred Shares, a majority of the
Directors of the Fund. See "Description of Preferred Stock--Redemption" and
"--Voting". Pursuant to the Fund's Articles of Incorporation, the Fund is
required to cancel any Preferred Shares which it may purchase, redeem or
otherwise acquire. Neither the Fund nor any affiliate of the Fund may submit an
Order in any Auction.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO THE AUCTION AGENT
Prior to 12:30 P.M., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent with the consent
of the Fund (the "Submission Deadline"), each Broker-Dealer will submit to the
Auction Agent in writing all Orders obtained by it for the Auction to be
conducted on such Auction Date. If any rate specified in any Bid contains more
than three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.001) of 1%.
If one or more Orders covering in the aggregate more than the number of
the outstanding Preferred Shares held by an Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid in the following order of
priority:
(i) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of outstanding
Preferred Shares held by such Existing Holder; provided that if more than
one Hold Order is submitted on behalf of such Existing Holder and the
number of Preferred Shares subject to such Hold Orders exceeds the number
of outstanding Preferred Shares held by such Existing Holder, the number
of Preferred Shares subject to such Hold Orders shall be reduced pro rata
so that such Hold Orders shall cover the number of Preferred Shares held
by such Existing Holder;
(ii)(A) any Bid shall be considered valid up to and including the
excess of the number of outstanding Preferred Shares held by such Existing
Holder over the number of Preferred Shares subject to any Hold Order
referred to in clause (i) above, and (B) subject to subclause (A), if more
than one Bid with the same rate is submitted on behalf of such Existing
Holder and the number of Preferred Shares subject to such Bids is greater
than such excess, the number of Preferred Shares subject to such Bids
shall be reduced pro rata so that such Bids shall cover the number of
Preferred Shares equal to such excess, and (C) subject to subclause (A),
if more than one Bid with different rates is submitted on behalf of such
Existing Holder, such Bids shall be considered valid in the ascending
order of their respective rates and (D) any Preferred Shares subject to
Bids not valid under this clause (ii) shall be treated as the subject of a
Bid by a Potential Holder; and
(iii) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding Preferred Shares held by such Existing
Holder over the sum of the Preferred Shares subject to Hold Orders
referred to in clause (i) and valid Bids by such Existing Holder referred
to in clause (ii) above; provided that if more than one Sell Order is
submitted on behalf of any Existing Holder and the number of Preferred
Shares subject to such Sell Orders is greater than such excess, the number
of Preferred Shares subject to such Sell Orders shall be reduced pro rata
so that such Sell Orders shall cover the number of Preferred Shares equal
to such excess.
If more than one Bid is submitted on behalf of any Potential Holder, each
Bid submitted shall be a separate Bid with the rate and number of Preferred
Shares specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS,
WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline, the Auction Agent will assemble
all Orders submitted or deemed submitted to it by the Broker-Dealers (each such
"Hold Order," "Bid" or "Sell Order" as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order") and will determine the excess of the number of outstanding
Preferred Shares over the number of outstanding Preferred Shares subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Preferred Shares") and whether Sufficient Clearing Bids have been
made in the Auction. "Sufficient Clearing Bids" will have been made if the
number of outstanding Preferred Shares that are the subject of Submitted Bids by
Potential Holders specifying rates not higher than the Maximum Applicable Rate
equals or exceeds the number of outstanding shares that are the subject of
Submitted Sell Orders (including the number of shares subject to Bids by
Existing Holders specifying rates higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids of Existing Holders
and Potential Holders (the "Winning Bid Rate") which would result in Existing
Holders continuing to hold and Potential Holders purchasing, at such rate, an
aggregate number of Preferred Shares at least equal to the Available Preferred
Shares. If Sufficient Clearing Bids have been made, the Winning Bid Rate will be
the Applicable Rate for the next Dividend Period for all Preferred Shares then
outstanding.
If Sufficient Clearing Bids have not been made (other than because all
Submitted Orders are Submitted Hold Orders), the Applicable Rate for the next
Dividend Period for all Preferred Shares will be equal to the Maximum Applicable
Rate. Furthermore, in the event that Sufficient Clearing Bids have not been
made, Existing Holders that have Submitted Sell Orders may not be able to sell
in the Auction any or all Preferred Shares subject to such Submitted Sell
Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below. The Rating Agencies' credit rating for
the Preferred Shares does not address the likelihood that the investor resale
mechanism (i.e., auction or remarketing procedures) will be successful.
If all of the outstanding Preferred Shares are subject to Submitted Hold
Orders, the Applicable Rate for the next Dividend Period for all Preferred
Shares will be the Minimum Applicable Rate.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and subject to the
discretion of the Auction Agent to round off a fraction of a share being sold or
purchased as described below, Submitted Bids and Submitted Sell Orders shall be
accepted or rejected in the order of priority set forth in the Auction
Procedures with the result that the Existing Holders and Potential Holders of
Preferred Shares shall sell, continue to hold and/or purchase Preferred Shares
as set forth below. Existing Holders that submitted or were deemed to have
submitted Hold Orders shall continue to hold the Preferred Shares subject to
such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a
rate higher than the Winning Bid Rate or a Submitted Sell Order shall sell
the outstanding Preferred Shares subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a
rate lower than the Winning Bid Rate shall continue to hold the
outstanding Preferred Shares subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate lower than the Winning Bid Rate shall purchase the number of
Preferred Shares subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a
rate equal to the Winning Bid Rate shall continue to hold the outstanding
Preferred Shares subject to such Submitted Bid, unless the number of
outstanding Preferred Shares subject to all such Submitted Bids is greater
than the excess of the Available Preferred Shares over the number of
Preferred Shares accounted for in clauses (b) and (c) above, in which
event such Existing Holder with such a Submitted Bid shall sell a number
of outstanding Preferred Shares determined on a pro rata basis based on
the number of outstanding Preferred Shares subject to all such Submitted
Bids by such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate equal to the Winning Bid Rate shall purchase any Available Preferred
Shares not accounted for in clauses (b), (c) or (d) above on a pro rata
basis based on the number of outstanding Preferred Shares subject to all
such Submitted Bids.
If Sufficient Clearing Bids have not been made (other than because all
Submitted Orders are Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a
rate equal to or lower than the Maximum Applicable Rate shall continue to
hold the outstanding Preferred Shares subject to each Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate equal to or lower than the Maximum Applicable Rate shall purchase the
number of Preferred Shares subject to such Submitted Bid; and
(c) each Existing Holder that either placed a Submitted Bid
specifying a rate higher than the Maximum Applicable Rate or a Submitted
Sell Order (i) shall sell a number of outstanding Preferred Shares
determined on a pro rata basis based on the number of outstanding
Preferred Shares subject to all such Submitted Bids and Submitted Sell
Orders or (ii) if there shall have been no Submitted Bids specifying a
rate equal to or lower than the Maximum Applicable Rate, shall continue to
hold the outstanding Preferred Shares subject to all such Submitted Bids
and Submitted Sell Orders.
If, as a result of the Auction Procedures described above, (i) 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 Preferred Share, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, round up or down the number of Preferred Shares being sold or
purchased on such Auction Date so that the number of shares sold or purchased by
each Existing Holder or Potential Holder shall be whole Preferred Shares and
(ii) any Potential Holder would be entitled or required to purchase less than a
whole Preferred Share, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, allocate Preferred Shares for purchase among
Potential Holders so that only whole Preferred Shares are purchased by any such
Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing Preferred Shares.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will advise each Broker-Dealer that submitted a Bid or
Sell Order on behalf of a Bidder whether such Bid or Sell Order was accepted or
rejected in whole or in part and the Applicable Rate for the next Dividend
Period by telephone at approximately 3:00 P.M., New York City time, on each
Auction Date. Each Broker-Dealer that submitted a Bid or Sell Order on behalf of
a Bidder will then advise such Bidder whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each Bidder
purchasing or selling Preferred Shares as a result of the Auction and will
advise each Bidder purchasing or selling Preferred Shares to give instructions
to its Agent Member of the Securities Depository to pay the purchase price
against delivery by book-entry of such shares or to deliver such shares against
payment therefor as appropriate. Each Broker-Dealer that submitted a Hold Order
on behalf of an Existing Holder will also advise such Existing Holder of the
Applicable Rate for the next Dividend Period. The Auction Agent will record each
transfer of Preferred Shares on the registry of Existing Holders to be
maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the
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 Preferred
Shares delivered by book-entry 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 next-day funds settled through the New York
Clearing House to the Securities Depository against delivery by book entry
through their Agent Members; the Securities Depository will make payment in
accordance with its normal procedures, which now provide for payment in next-day
funds settled through the New York Clearing House.
If any Existing Holder selling Preferred Shares in an Auction fails to
deliver such Preferred Shares, the Broker-Dealer of any person that was to have
purchased such Preferred Shares in such Auction may deliver to such person a
number of whole Preferred Shares that is less than the number of shares that
otherwise was to be purchased by such person. In such event, the number of
Preferred Shares to be so delivered shall be determined by such Broker-Dealer.
Delivery of such lesser number of Preferred Shares shall constitute good
delivery.
BROKER-DEALERS
After each Auction, the Auction Agent will pay a service charge from funds
provided by the Fund to each Broker-Dealer at the annual rate of 1/4 of 1% of
the purchase price of Preferred Shares placed by such Broker-Dealer at such
Auction, prorated for the number of days in the related Dividend Period. The
Fund has been advised that the Staff of the Securities and Exchange Commission
is reviewing the appropriateness of the use of Fund assets to pay such service
charge. In the event the Fund is subsequently advised by the Staff that the
payment of such service charge by the Fund is not appropriate, it will cease
making such payments and apply to the Staff for relief from any such finding. No
assurance can be given that if such relief is required and sought, it can be
obtained. For the purposes of the preceding sentences, Preferred Shares will be
placed by a Broker-Dealer if such Preferred Shares were (i) the subject of Hold
Orders deemed to have been made by Existing Holders of Preferred Shares that
were acquired by such Existing Holders through such Broker-Dealer or (ii) the
subject of the following Orders submitted by such Broker-Dealer: (A) a Submitted
Bid of an Existing Holder that was accepted so that such Existing Holder
continues to hold such Preferred Shares as a result of the Auction, (B) a
Submitted Bid of a Potential Holder that was accepted so that a Potential Holder
purchases such Preferred Shares as a result of the Auction or (C) a Hold Order.
The Broker-Dealer Agreements will provide that a Broker-Dealer who signs a
Master Purchaser's Letter may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so;
provided that Broker-Dealers may continue to submit Hold Orders and Sell Orders.
If a Broker-Dealer submits an Order for its own account in any Auction, it may
have knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders. In the Broker-Dealer Agreements, Broker-Dealers
shall agree to handle customer orders in accordance with their respective duties
under applicable securities laws and rules.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The following summary description of the terms of the Preferred Shares
does not purport to be complete and is qualified in its entirety by the Articles
of Incorporation, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is part. A copy of the Registration Statement
of which this Prospectus is a part may be obtained as described under "Further
Information." As used herein, the term "holder" refers to a beneficial owner of
Preferred Shares unless the context otherwise requires.
The Articles of Incorporation provide that, except as otherwise provided
by law, all outstanding Preferred Shares shall be represented by a certificate
registered in the name of the Surety Custodian, and no person acquiring
Preferred Shares shall be entitled to receive a certificate representing such
Preferred Shares. Accordingly, the nominee of the Securities Depository
(initially Cede) will be the sole holder of custody receipts representing the
Preferred Shares, and each purchaser of Preferred Shares must rely on (i) the
procedures of the Securities Depository and, if such purchaser is not a member
of the Securities Depository, such purchaser's Agent Member to receive
dividends, distributions and notices and to exercise voting rights and (ii) the
records of the Securities Depository and, if such purchaser is not a member of
the Securities Depository, such purchaser's Agent Member, to evidence its
beneficial ownership of Preferred Shares. Pursuant to the Surety Arrangement,
the Preferred Shares and the Surety Bond are required to be held by the Surety
Custodian, pursuant to the Surety Custody Agreement in a custody account
established for the benefit of the holders of the Preferred Shares. Ownership of
the Preferred Shares, in turn, shall be evidenced by custody receipts held by
DTC.
Under the Articles of Incorporation, the Fund is authorized to issue up to
1,000 shares of Preferred Stock. The Preferred Shares will have no par value and
will have a liquidation preference of $100,000 per share. As of the date of this
Prospectus, there were no Preferred Shares issued and outstanding and,
accordingly, there has not been a market for Preferred Shares. The Board of
Directors reserves the right to issue Preferred Shares subsequent to this
offering from time to time.
Except in an Auction, the Fund or any affiliate of the Fund shall have the
right to purchase or otherwise acquire any Preferred Shares to the extent
permitted under Maryland law as long as (i) the Fund is current in the payment
of dividends on the Preferred Shares and (ii) the Fund is then in compliance and
after giving effect to such purchase would be in compliance with the applicable
asset coverage requirements under the 1940 Act. See "Dividends--Restrictions on
Dividends and Other Payments" below. The terms of the Indenture relating to the
Notes also restrict the payment of dividends on the Preferred Shares. See
"Description of Notes--Restrictive Covenants." The Preferred Shares are also
subject to optional redemption by the Fund. See "Redemption" below. Any
Preferred Shares redeemed, purchased or otherwise acquired by the Fund shall not
be re-issued, shall be retired and shall not be deemed outstanding.
The Preferred Shares will, upon issuance, be fully paid and nonassessable,
will not be convertible into Common Stock or any other capital stock, if any, of
the Fund and will have no preemptive rights.
DIVIDENDS
General. The holders of Preferred Shares shall be entitled to receive,
when, as and if declared by the Board of Directors of the Fund out of funds
legally available therefor, cumulative cash dividends, at the Applicable Rate
per annum, determined as set forth below under "Determination of Dividend Rate,"
payable on the respective dates set forth below. Dividends will be paid to
holders of the Preferred Shares on each Dividend Payment Date through DTC,
acting as the Securities Depository on each Dividend Payment Date. The
Securities Depository's normal procedures now provide for it to distribute
dividends in next-day funds settled through the New York Clearing House to Agent
Members who, in turn, are expected to distribute such dividends to the persons
for whom they are acting as agent.
Dividends on the Preferred Shares will accumulate from and including the
date on which the Fund originally issues the Preferred Shares (the "Original
Issuance Date") and will be payable on January 19, 1989 (the 45th day after the
Original Issuance Date) and on each day thereafter which is the last day of
successive 30-day periods after such date, or if either (i) any such last day
(the "Scheduled Payment Day") is not a Business Day or (ii) as long as the
Paying Agent continues to make payments in next-day funds, the day next
succeeding the Scheduled Payment Day is not a Business Day, then on the first
Business Day that falls after the Scheduled Payment Day and is next succeeded by
a Business Day (a "Dividend Payment Date"). Although any particular Dividend
Payment Date for the Preferred Shares may not occur on the Scheduled Payment Day
because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to the provisions of the preceding sentence, shall be the 30th day
following the Scheduled Payment Day designated for the prior Dividend Period (as
defined below). Not later than noon, New York time, on the Business Day next
preceding each Dividend Payment Date, the Fund is required to deposit with the
Paying Agent immediately available funds sufficient to pay the dividends that
are payable on such Dividend Payment Date.
Dividends will be paid to holders of the Preferred Shares on each Dividend
Payment Date through DTC, acting as the Security Depository on each Dividend
Payment Date. Each dividend shall be so paid to the holder or holders of
Preferred Shares as of the Business Day next preceding the Dividend Payment Date
for such dividend. The Securities Depository is responsible for crediting the
accounts of Existing Holders or the Agent Members of Existing Holders, as the
case may be, in accordance with the Securities Depository's normal procedures,
which now provide for payments in next-day funds settled through the New York
Clearing House. The Agent Member of an Existing Holder will be responsible for
holding or disbursing such payments to Existing Holders of Preferred Shares in
accordance with the instructions of such Existing Holders. Dividends in arrears
for any past Dividend Period may be declared and paid to the Securities
Depository at any time without reference to any regular Dividend Payment Date.
Any dividend payment made on Preferred Shares shall first be credited against
the dividends accumulated with respect to the earliest Dividend Period for which
dividends have not been paid.
If full cumulative dividends have not been paid on Preferred Shares, all
dividends declared on Preferred Shares will be paid pro rata to the holders of
outstanding Preferred Shares. Holders of Preferred Shares shall not be entitled
to any dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, on such Preferred Shares. Holders of Preferred Shares
shall not be entitled to any interest, or sum of money in lieu of interest, in
respect of any dividend payment or payments on the Preferred Shares which may be
in arrears.
The amount of declared dividends for a Preferred Share payable for each
Dividend Period shall be computed by multiplying the Applicable Rate for each
Dividend Period by a fraction, the numerator of which shall be the number of
days in the Dividend Period that such Preferred Share was outstanding and the
denominator of which shall be 360, and then multiplying the rate obtained by
$100,000 per share.
To the extent that the Fund does not make dividend payments on the
Preferred Shares on any Dividend Payment Date, such payments shall be made to
the holders by Financial Security pursuant to the Surety Bond and thereafter
Financial Security shall be subrogated to such holders' right to receive such
dividend payments and to exercise such holders' voting rights. See "Voting"
below and "Surety Arrangement--Surety Bond."
Determination of Dividend Rate. The dividend rate for the Preferred Shares
during the period from (and including) the Original Issuance Date to (but not
including) the Initial Dividend Payment Date (the "Initial Dividend Period")
shall be 9.50% per annum. The dividend rate on the Preferred Shares (the
"Applicable Rate") for each Subsequent Dividend Period shall be, except under
certain circumstances, the rate resulting from the implementation of the Auction
Procedures. Each dividend period for the Preferred Shares following the Initial
Dividend Period (herein referred to as a "Subsequent Dividend Period" and
collectively as "Subsequent Dividend Periods" and the Initial Dividend Period or
any Subsequent Dividend Period being herein referred to as a "Dividend Period"
and collectively as "Dividend Periods") shall commence on and include the
Dividend Payment Date for the previous Dividend Period and shall end on and
include the day preceding the next succeeding Dividend Payment Date. Dividends
shall be calculated as set forth in the preceding paragraph.
In the event there is no Auction Agent on the Business Day prior to the
first day of a Dividend Period for the Preferred Shares, the Applicable Rate for
such Dividend Period will be equal to the Maximum Applicable Rate that could
have resulted pursuant to the Auction Procedures, as determined by the Fund, on
the Business Day immediately preceding the first day of such Dividend Period.
The Articles of Incorporation provide that the Fund shall exercise its best
efforts to maintain an Auction Agent pursuant to an agreement containing terms
no less favorable to the Fund than the terms of the Auction Agent Agreement.
Restrictions on Dividends and Other Payments. Under the 1940 Act and the
Articles of Incorporation, the Fund will not be permitted to declare dividends
with respect to the Preferred Shares unless at the time of such declaration, and
after deducting the amount of any such dividend, asset coverage with respect to
the Fund's senior securities representing indebtedness, including the Notes,
would be at least 200% (or such higher percentage as may in the future be
required by law). Further, under the 1940 Act, the Fund may not declare
distributions (other than dividends) with respect to the Preferred Shares or
purchase or redeem Preferred Shares unless at the time of such declaration,
purchase or redemption, as applicable, and after deducting the amount of such
distribution or purchase or redemption price, as applicable, asset coverage with
respect to the Fund's senior securities representing indebtedness, including the
Notes, would be at least 300% (or such higher percentage as may in the future be
required by law). (The foregoing restrictions are also reflected as covenants
under the Indenture relating to the Notes, which also prohibits the declaration
of dividends or other distributions on, or the purchase or redemption of
Preferred Shares unless payments of principal of and interest on the Notes are
not in default.) Under the Internal Revenue 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 limitations on dividends, distributions,
redemptions and purchases may under certain circumstances impair the Fund's
ability to do so. See "Federal Taxation."
Upon any failure to pay dividends on the Preferred Shares equal to two
full years of dividends, the holders of the Preferred Shares will acquire
certain additional voting rights. See "Voting" below. Such rights shall be the
exclusive remedy of the holders of the Preferred Shares against the Fund upon
any failure by the Fund to pay dividends on the Preferred Shares, and in no
event shall holders of Preferred Shares have any right to sue the Fund for, or
bring a proceeding against the Fund with respect to, such dividends or damages
for the failure to receive the same.
No dividends or other distributions will be paid with respect to the
Common Stock unless full cumulative dividends on the Preferred Shares have been
declared and paid or provided for. In addition, the Fund will not be permitted
to declare dividends or other distributions with respect to the Common Stock or
purchase Common Stock if at the time of such declaration or the purchase of such
Common Stock the Fund fails to meet certain asset coverage requirements and
under certain other circumstances described under "Description of Common Stock."
REDEMPTION
To the extent permitted under the 1940 Act, Maryland law and the Indenture,
the Fund may redeem at its option some or all of the Preferred Shares on any
Dividend Payment Date (a "Preferred Stock Redemption"). The Fund shall be
obligated (a) to redeem, no later than the last day specified for the redemption
of Preferred Shares pursuant to a Redemption Request (as defined) from Financial
Security, the number of Preferred Shares specified in such Redemption Request (a
"Mandatory Surety Redemption") and (b) to redeem all of the Preferred Shares
at least one full Business Day prior to any expiration date of the Surety Bond
if, 190 days prior to such expiration date, the Fund shall have failed to obtain
from Financial Security an extension of the term of the Surety Bond pursuant to
its terms (a "Mandatory Expiration Redemption"); provided that, under certain
circumstances, no Mandatory Expiration Redemption shall be required if the Fund
shall have obtained notice in writing from each of the Rating Agencies that such
expiration of the Surety Bond will not adversely affect the then outstanding
ratings of the Preferred Shares whether through obtaining a substitute surety
bond or otherwise. Preferred Stock Redemptions and any Mandatory Surety
Redemption or Mandatory Expiration Redemption will be made at a price equal to
$100,000 per share plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund), except that if any such
redemption is not made on a Dividend Payment Date, it will be made at a price
equal to $100,250 plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund). Such redemptions may only be
made by the Fund to the extent permitted under the 1940 Act and Maryland law,
and provided neither principal nor interest payments with respect to the Notes
are then in default. A holder of Preferred Shares may elect not to have its
shares redeemed pursuant to a Mandatory Expiration Redemption by giving notice
to the Fund or the paying agent for the Preferred Shares at least five days
prior to the redemption date of its election to continue to hold its Preferred
Shares. The Fund will be obligated to meet certain Deposit Securities (as
defined) requirements pursuant to the Surety Arrangement to the extent necessary
to satisfy a Mandatory Expiration Redemption. See "Surety Arrangement--Insurance
Agreement. "
Pursuant to the terms of the Insurance Agreement, Financial Security will
be entitled to cause the Fund to redeem certain of the Preferred Shares to the
extent permitted under the 1940 Act and Maryland law (and provided payments of
principal of and interest on the Notes are not then in default), in the event
that the Fund fails to maintain the Surety Assets Coverage while any of the
Preferred Shares are outstanding, and such failure is not cured within eight
Business Days. See "Surety Arrangement--Insurance Agreement."
Any redemption of Preferred Shares will be subject to compliance with
asset coverage requirements under the 1940 Act as described above under
"Dividends--Restrictions on Dividends and Other Payments." If fewer than all of
the outstanding Preferred Shares are to be redeemed, the Preferred Shares to be
redeemed by the Fund shall be identified by lot or by such other method as the
Fund shall deem fair and equitable and as communicated to the Paying Agent.
Unless all accumulated and unpaid dividends for all past Dividend Periods shall
have been or are contemporaneously paid (or declared and funds set apart for the
payment thereof), no partial redemptions of Preferred Shares may be made. So
long as Preferred Shares are held of record by the nominee of the Securities
Depository, the Paying Agent shall give notice to the Securities Depository and
the Securities Depository will determine the number of Preferred Shares to be
redeemed from the account of the Agent Member of each Existing Holder. Such
Agent Member will in turn determine the number of Preferred Shares to be
redeemed from the account of each Existing Holder. An Agent Member may determine
to redeem Preferred Shares from the accounts of some Existing Holders (which
could include the Agent Member holding shares for its own account) without
redeeming Preferred Shares from the accounts of other Existing Holders. The Fund
shall give public notice of any redemption of Preferred Shares in The Wall
Street Journal (National Edition).
Written notice of a redemption ("Notice of Redemption") shall be given to
the holders of record of Preferred Shares selected for redemption not less than
15 or more than 30 days prior to the date fixed for the redemption. Each Notice
of Redemption shall state (i) the redemption date, (ii) the redemption price,
(iii) the number of Preferred Shares to be redeemed, (iv) the place or places
where such Preferred Shares are to be redeemed, and (v) that dividends on the
Preferred Shares to be redeemed will cease to accumulate on such redemption
date. No defect in the Notice of Redemption or in the mailing or publication
thereof shall affect the validity of the redemption proceedings, except as
required by applicable law.
If the Fund gives a Notice of Redemption, then the Fund will deposit with
the Paying Agent by noon, New York time, on the third Business Day next
preceding the date fixed for redemption, immediately available funds in an
amount sufficient to redeem the Preferred Shares called for redemption and will
give the Paying Agent irrevocable instructions and authority to pay the
redemption price to the holders of the Preferred Shares called for redemption
against delivery by book entry. On the date of such deposit, or if no such
deposit is made, then upon the date fixed for redemption (unless the Fund
defaults in making payment of the redemption price), all rights of the holders
of the Preferred Shares so called for redemption will cease and terminate except
for the right of the holders thereof to receive the redemption price thereof
(inclusive of accumulated but unpaid dividends, but without any interest)
against delivery by book entry of such Preferred Shares, and such Preferred
Shares shall no longer be deemed outstanding for any purpose. The Fund shall be
entitled to receive, promptly after the date fixed for redemption, any cash in
excess of the aggregate redemption price of the Preferred Shares called for
redemption on such date and any remaining funds. Any assets so deposited which
are unclaimed at the end of two years from such redemption date, shall, to the
extent permitted by law, be repaid to the Fund, after which the holders of the
Preferred Shares so called for redemption may look only to the Fund for payment
thereof. The Fund will be entitled to receive, from time to time after the date
fixed for redemption, any interest on the funds so deposited.
If on any date on which the payment of the redemption price would
constitute a Scheduled Payment, the Fund shall default in making payment of such
redemption price, Financial Security shall make such payments to the holders of
Preferred Shares to be redeemed and shall thereafter be subrogated to all the
rights of such holders with respect to their Preferred Shares. See "Voting"
below and "Surety Arrangement--Surety Bond."
So long as Preferred Shares (or while the Surety Bond is in effect, the
Custody Receipts) are held of record by the nominee of the Securities
Depository, the redemption price for such shares will be paid to the Securities
Depository on the redemption date. The Securities Depository's normal procedures
now provide for it to distribute the amount of the redemption price in next-day
funds settled through the New York Clearing House to Agent Members who, in turn,
are expected to distribute such funds to the persons for whom they are acting as
agent.
Preferred Shares which have been redeemed, purchased or otherwise acquired
by the Fund are not subject to reissuance, shall be retired and shall not be
deemed outstanding. In no event shall such Preferred Shares have any voting
rights.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the Fund (whether
voluntary or involuntary), holders of the Preferred Shares then outstanding
shall be entitled to receive, out of the assets of the Fund available for
distribution to stockholders, after satisfying claims of creditors (including
the holders of the Notes) but before any distribution of assets is made to
holders of the Common Stock or any other class of stock ranking junior to the
Preferred Shares as to liquidation payments, a liquidation distribution in the
amount of $100,000 per share plus an amount equal to accumulated and unpaid
dividends (whether or not earned or declared by the Fund, but without interest)
to the date of the final distribution. If, upon any liquidation, dissolution or
winding up of the Fund, the assets of the Fund shall be insufficient to make
such full payments to holders of the Preferred Shares, then such assets shall be
distributed among the holders of Preferred Shares ratably, according to the
respective amounts which would be payable on all such Preferred Shares if all
amounts thereon were paid in full. So long as the Surety Bond is in effect, to
the extent of any such insufficiency and provided Financial Security has
consented to such liquidation, Financial Security will pay the remaining
liquidation preference to the holders of the Preferred Shares at the time of
liquidation. If Financial Security has not consented to such liquidation, it
shall continue to guarantee Scheduled Payments on the Preferred Shares
(including dividend payments and the liquidation preference to the extent
thereof not paid in liquidation) until the expiration of the Surety Bond, at
which time payment of the unpaid liquidation preference of the Preferred Shares
shall be paid by Financial Security. See "Surety Arrangement--Surety Bond."
Unless and until payment in full has been made to the holders of the 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
junior to the Preferred Shares on liquidation. After payment to the holders of
the Preferred Shares of the full amount of the liquidation distributions to
which they are entitled, such holders will not be entitled to any further
participation in any distribution of assets of the Fund. Neither a sale, lease
or exchange of all or substantially all of the property and assets of the Fund
nor a consolidation or merger of the Fund with or into any other corporation or
business trust will be deemed to be a liquidation, dissolution or winding up of
the Fund.
Upon any liquidation, the holders of the Common Stock, after required
payments to the holders of the Preferred Shares, will be entitled to participate
equally in the remaining assets of the Fund.
As long as the Preferred Shares (or while the Surety Bond is in effect,
the Custody Receipts) are held of record by the nominee of the Securities
Depository, any liquidation distribution will be paid to the Securities
Depository in accordance with its normal procedures. The Securities Depository's
normal procedures now provide for it to distribute the amount of the liquidation
distribution in next-day funds through the New York Clearing House to Existing
Holders or the Agent Members of Existing Holders, which Agent Members, in turn,
are expected to distribute such funds to the persons for whom they are acting as
agent.
VOTING
Except as noted below, the Common Stock and the Preferred Shares vote
together as a single class. Holders of the Common Stock have voting rights of
one vote per share and the holders of the Preferred Shares have voting rights of
one vote per $1,000 of liquidation preference without regard to any liquidation
preference attributable to accumulated and unpaid dividends (i.e., 100 votes per
Preferred Share); provided that all the votes represented by a single Preferred
Share must be voted together. In elections of Directors, the holders of the
Preferred Shares, as a separate class, vote to elect two Directors and the
holders of the Common Stock and the Preferred Shares, voting together, will
elect the remaining Directors. In addition, during any period (herein referred
to as a "Voting Period") that dividends payable on Preferred Shares equal to two
full years of dividends are unpaid, the holders of such Preferred Shares have
the right to elect, as a class, the smallest number of additional Directors as
shall be necessary to assure that a majority of the Directors has been elected
by the holders of the Preferred Shares. 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 Preferred Shares
of the additional number of Directors which such holders are entitled to elect
as a separate class. The persons elected by the holders of Preferred Shares,
together with the incumbent Directors elected by the holders of the Common Stock
and the Preferred Shares voting together, will constitute the duly elected
Directors of the Fund. When all accumulated and unpaid dividends have been paid
or provided for, the Voting Period shall end and the terms of office of the
additional Directors shall terminate. Election of Directors is non-cumulative;
accordingly, holders of a majority of the voting power represented by the
outstanding shares of Common Stock and Preferred Shares, voting together as a
single class, or a majority of the outstanding Preferred Shares, voting
separately as a class, may elect all of the Directors who are subject to
election by such class.
Pursuant to the Surety Custody Agreement, to the extent Scheduled Payments
are paid by Financial Security pursuant to the Surety Bond, Financial Security
shall have the right to exercise the voting rights (including any right to elect
a majority of the Board of Directors described above) of the holders of the
Preferred Shares with respect to which such Scheduled Payments have been made by
Financial Security. See "Surety Arrangement--Surety Custody Agreement." The
assignment to Financial Security of the voting rights of the holders of the
Preferred Shares shall terminate when the Fund has made payments on the
Preferred Shares with respect to which Financial Security had made Scheduled
Payments pursuant to the Surety Bond or the Fund has reimbursed Financial
Security pursuant to such Scheduled Payments.
The Common Stock and the Preferred Shares each vote separately as a class
on amendments to the Articles of Incorporation that would adversely affect their
respective contractual rights as expressly set forth in the Articles of
Incorporation. In addition to any other vote required by the Articles of
Incorporation or applicable law, so long as any Preferred Shares are outstanding
(1) the Fund may not be voluntarily liquidated, dissolved or wound up, or
merged into or consolidated with any other entity in a transaction in which it
is not the successor entity, or converted to open-end status, and may not sell
all or substantially all of its assets, and may not engage in a statutory share
exchange in which it is not the successor entity without the approval of at
least a majority of the outstanding Preferred Shares and the outstanding shares
of Common Stock, each voting as a separate class; (2) the adoption of any plan
of reorganization adversely affecting either the Preferred Shares or the Common
Stock shall require the approval of a majority of the outstanding shares of each
such class so affected; (3) the approval of a majority of the outstanding
Preferred Shares, voting separately as a class, shall be required to amend,
alter or repeal any of the express preferences, rights or powers of holders of
the Preferred Shares as set forth in the Articles of Incorporation, or increase
or decrease the number of Preferred Shares authorized to be issued; and (4) so
long as any Preferred Shares are outstanding, the approval of a majority (as
defined under "Investment Objective and Policies") of the outstanding Preferred
Shares and the outstanding shares of Common Stock, each voting as a separate
class, shall be required to approve any action requiring a vote of security
holders under Section 13(a) of the 1940 Act including, among other things,
changes in the Fund's sub-classification as a closed-end investment company,
changes in its investment objective or changes in the investment restrictions
described under "Investment Objective and Policies--Investment Restrictions."
The Common Stock and the Preferred Shares will also vote separately to the
extent otherwise required under Maryland law or the 1940 Act as in effect from
time to time, and, to the extent required under the 1940 Act, action by the
Fund's shareholders shall require 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 the Preferred Shares to vote
on any matter, whether such right is created by the Articles of Incorporation,
by statute or otherwise, a holder of a Preferred Share will not be entitled to
vote and such 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
Preferred Shares entitled to vote or of Preferred Shares deemed outstanding for
quorum purposes, as the case may be, a notice of redemption shall have been
given in respect of such Preferred Share and Deposit Securities for the
redemption of such Preferred Share shall have been deposited in trust, as
provided above; provided, however, that the foregoing sentence shall not be
applicable to holders of Preferred Shares who elected to retain their Preferred
Shares after notice of a Mandatory Expiration Redemption.
RESTRICTIONS ON TRANSFERS
Preferred Shares may be sold, transferred or otherwise disposed of only
(i) pursuant to a Bid or Sell Order in accordance with the Auction Procedures
set forth in the Articles of Incorporation or (ii) to a person that has
delivered a signed copy of a Master Purchaser's Letter, through a Broker-Dealer,
to the Auction Agent; provided that in the case of all transfers other than
pursuant to Auctions the transferor, or the new Existing Holder's Broker-Dealer
or Agent Member, advises the Auction Agent of such transfer. As a condition to
purchasing Preferred Shares in this offering or participating in an Auction, a
prospective purchaser will be required to agree to the foregoing in its Master
Purchaser's Letter. In addition, the Fund intends that any certificate
registered in the name of the nominee of the Securities Depository will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of Preferred Shares contained in the Articles of
Incorporation and the Master Purchaser's Letters. The Fund also intends to issue
stop-transfer instructions to the transfer agent for the Preferred Shares.
Neither the Securities Depository nor any Agent Member has any obligation to
determine whether transfers of Preferred Shares maintained in book entry form
are made in accordance with the foregoing restrictions.
DESCRIPTION OF NOTES
GENERAL
As of the closing of this offering, the Fund will have outstanding up to
$57,500,000 ($7,500,000 of which amount represents the over-allotment option
granted to the underwriter of the Notes by the Fund), aggregate principal
amount of the Notes, issued under the Indenture to be dated as of December 1,
1988 between the Fund and Shawmut Bank, N.A., as trustee (the "Trustee"). The
Indenture does not limit the aggregate principal amount of senior notes of the
Fund (including the Notes, the "Senior Notes") that may be issued thereunder
from time to time in one or more series. The Notes constitute the first series
of Senior Notes issued under the Indenture. The issuance of any subsequent
series of Senior Notes will be subject to compliance with the 1940 Act,
including Section 18 thereof. Subject to the 1940 Act, any such subsequent
series of Senior Notes may have certain terms, including, but not limited to,
those relating to interest rate, redemptions, repurchases and maturity which
differ from the terms of the Notes. The following summary of the principal terms
of the Notes and certain terms of the Indenture is qualified in its entirety by
reference to all provisions of the Indenture, including the definitions therein
of certain terms and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 as in effect on the date of the Indenture. A copy of the
Indenture has been filed with the SEC as an exhibit to the Registration
Statement of which this Prospectus is a part.
INTEREST
The Notes will bear interest at the rate of 10.28% per annum from December
1, 1988 through and including November 30, 1993. The Fund may elect to extend
the Notes for one or more additional periods of one, two or three years (each
such period, and the period from December 1, 1988 through November 30, 1993, is
referred to as an "Interest Period"). The Notes will bear interest during each
Interest Period, if any, subsequent to November 30, 1993 at the applicable rate
per annum established by the Fund in its sole discretion. Interest on the Notes
is payable on June I and December I of each year, commencing June 1, 1989. The
Notes will mature on December 1, 1998 if not repurchased or redeemed prior to
that date.
REPURCHASE AND REDEMPTION
The registered holder of each Note may elect to have that Note, or any
portion thereof that is an integral multiple of $ 1,000, repurchased on the date
30 days following the first day of each Interest Period after the Initial
Interest Period (or, if such day is not a Business Day, on the next succeeding
Business Day) (the "Buy-Back Date") at 100% of the principal amount thereof to
be repurchased, plus accrued interest thereon to the repurchase date. The Notes
will not be redeemable by the Fund prior to maturity, except that (i) the Fund
may redeem the Notes, in whole or in part, on the December I following each
Interest Period, (ii) the Fund may redeem the Notes on or after December 5,
1993, in whole but not in part, in connection with the conversion of the Fund to
open-end status, and (iii) the Fund may elect to redeem such amount of the Notes
as shall (a) enable the Fund to maintain asset coverage (as defined in and
determined pursuant to the 1940 Act) with respect to the Fund's senior
securities representing indebtedness (as defined in the 1940 Act), including the
Notes, of at least 300% (or such higher percentage as may in the future be
specified in the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
paying dividends on common stock), (b) enable the Fund to maintain asset
coverage (as defined in and determined pursuant to the 1940 Act) with respect to
the Fund's senior securities of a class which is stock (as defined in the 1940
Act), including the Preferred Shares, of at least 200% (or such higher
percentage as may in the future be specified in the 1940 Act as the minimum
asset coverage for senior securities of a class which is stock of a closed-end
investment company as a condition of paying dividends on common stock) or (c)
enable the Fund to qualify for treatment as a regulated investment company for
federal income tax purposes. The Notes shall also be subject to mandatory
redemption, in whole or in part, upon the occurrence of certain events of
default as described under clauses (v) and (vi) under "Events of Default,"
below. All redemptions of Notes by the Fund will be at a price of 100% of the
principal amount thereof, plus accrued interest to the date of redemption.
DEPOSIT SECURITIES REQUIREMENT
The Fund will be obligated to deposit irrevocably with the Trustee a
specified amount of cash, U.S. government obligations or short-term money market
instruments (collectively, "Deposit Securities") not later than 30 days prior to
each interest payment date, the maturity date and each redemption or repurchase
date (in the case of redemptions on the December I following the end of an
Interest Period, redemptions made in connection with the conversion of the Fund
to open-end status and repurchases on the Buy-Back Date). Such Deposit
Securities in all cases shall have an initial combined market value greater than
or equal to the principal of and interest on the Notes to become due and payable
on the applicable payment date, and shall mature at least one day prior to such
date.
RANKING OF NOTES
The Notes will rank pari passu with all other existing or future senior
indebtedness of the Fund and will be senior to the Preferred Shares and the
Common Stock. "Senior indebtedness" means the principal of and interest on and
other amounts due on or in connection with any existing or future unsecured
indebtedness of the Fund.
RESTRICTIVE COVENANTS
Under the Indenture and the 1940 Act, the Fund may not declare dividends or
other distributions on the Common Stock or purchase any shares of Common Stock
if, at the time of such declaration or purchase, as applicable (and after giving
effect thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Notes, would be less than 300% (or such
higher percentage as may in the future be required by law). In addition, under
the 1940 Act and the Indenture, the Fund may not (i) declare dividends on the
Preferred Shares if, at the time of such declaration (and after giving effect
thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Notes, would be less than 200% (or such
higher percentage as may in the future be required by law) or (ii) declare any
other distributions on the Preferred Shares or purchase or redeem Preferred
Shares if, at the time of the declaration, purchase or redemption, as applicable
(and after giving effect thereto), asset coverage with respect to the Fund's
senior securities representing indebtedness, including the Notes, would be less
than 300% (or such higher percentage as may in the future be required by law).
Dividends or other distributions on or purchases or redemptions of the Common
Stock or Preferred Shares are further prohibited under the Indenture at any time
that payments of principal of or interest on the Notes are in default; the terms
of the Preferred Shares also prohibit the payment of dividends or other
distributions on or redemptions or purchases of the Common Stock under certain
circumstances. Under the Internal Revenue 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 limitations on dividends, distributions and
purchases may under certain circumstances impair the Fund's ability to maintain
such qualification. See "Federal Taxation."
The asset coverage of a class of senior securities representing
indebtedness, such as the Notes, is defined as the ratio of (i) the total assets
of the Fund, less all liabilities and indebtedness not represented by senior
securities, to (ii) the aggregate amount of senior securities representing
indebtedness of the Fund. The asset coverage of a class of senior securities
which is stock, such as the Preferred Shares (see "Description of Common
Stock"), is defined as the ratio of (i) the total assets of the Fund, less all
liabilities and indebtedness not represented by senior securities to (ii) the
aggregate amount of senior securities representing indebtedness of the Fund,
plus the aggregate of the liquidation preference of the Preferred Shares.
"Senior securities representing indebtedness" generally means any bond,
debenture, note or similar obligation or instrument constituting a security
(other than stock) and evidencing indebtedness. For purposes of determining
asset coverage for senior securities representing indebtedness in connection
with the payment of dividends or other distributions on or purchases or
redemptions of stock, the term "senior security" does not include any promissory
note or other evidence of indebtedness issued in consideration of any loan,
extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any such promissory note or other evidence in
any case where such a loan is for temporary purposes only and in an amount not
exceeding 5% of the value of the total assets of the Fund at the time when the
loan is made; a loan is presumed under the 1940 Act to be for temporary purposes
if it is repaid within 60 days and is not extended or renewed; otherwise it is
presumed not to be for temporary purposes. For purposes of determining whether
the 300% and 200% asset coverage requirements described above apply in
connection with dividends or distributions on or purchases or redemptions of
Common Stock or Preferred Shares and for purposes of determining 1940 Act Asset
Coverage (as defined below), such asset coverages may be calculated on the
basis of values calculated as of a time within 48 hours (not including Sundays
or holidays) next preceding the time of the applicable determination. The
foregoing definitions reflect the provisions of the 1940 Act as in effect on the
date of the Indenture and are subject to change to the extent necessary to
reflect changes in the 1940 Act, if any.
Pursuant to the Notes Investment Guidelines, the Indenture contains
covenants limiting the Fund's ability to incur, assume, guarantee or otherwise
become liable with respect to any indebtedness for money borrowed unless (a)
the incurrence of such indebtedness would not result in a default in the
performance or observance of the Fund's obligation to maintain 1940 Act Asset
Coverage (as defined below) or otherwise cause a violation of Section 18 of the
1940 Act and (b) either (i) such indebtedness shall constitute Bank Borrowings
(as defined below) or (ii) the Fund shall have received written confirmation
from each of the Rating Agencies that the incurrence of such indebtedness will
not adversely affect the rating of the Notes if the Notes are then rated by such
Rating Agency. Under the Indenture, "Bank Borrowings" means borrowings (a) from
a depository institution, the deposits of which are insured by the Federal
Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation, (b) which are not senior in right of payment to the Notes and (c)
which have been made pursuant to loan documents containing a covenant that the
lender shall not make a petition which would result in the institution of an
involuntary case or proceeding against the Fund or the appointment of a
custodian for the Fund or all or substantially all of its property under any
bankruptcy law prior to the date which is one year and one day after the first
date upon which no Notes are outstanding. The Fund will not file a voluntary
petition in bankruptcy so long as the value of its assets is, and is reasonably
foreseen as being, greater than its liabilities.
The Notes Investment Guidelines reflected in the Indenture also prohibit
the Fund from creating, incurring or suffering to exist, or agreeing to create,
incur or suffer to exist, or consenting to cause or permit in the future (upon
the happening of a contingency or otherwise) the creation, incurrence or
existence of any material lien, mortgage, pledge, charge, security interest,
security agreement, conditional sale or trust receipt or other material
encumbrance of any sort (collectively, "Liens") upon any of its assets which are
eligible for inclusion in the discounted value of its portfolio, except for (a)
Liens the validity of which is being contested in good faith by appropriate
proceedings, (b) Liens for taxes that are not then due and payable or that can
be paid thereafter without penalty, (c) Liens to secure payment for services
rendered by Bankers Trust Company or its successor as auction agent with respect
to the Preferred Shares or the Trustee and (d) at such time as the Notes are not
rated by the Rating Agencies or otherwise, or upon receipt of written
confirmation from each of the Rating Agencies (if the Notes are then rated by
such Rating Agency) that the rating of the Notes will not be impaired thereby,
Liens otherwise incurred in connection with borrowings made in accordance with
the Fund's stated investment objective, policies and restrictions. The terms of
the Indenture also limit the Fund's ability to employ certain investment
strategies. See "Investment Objective and Policies--Certain Investment
Strategies."
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements that are incorporated into the terms of the Indenture. The first of
these requirements reflects the provisions of the 1940 Act with respect to asset
maintenance for senior securities representing indebtedness. The second of these
requirements reflects the Notes Investment Guidelines. These requirements are
summarized below.
1940 Act Asset Maintenance. As set forth in the Indenture, the Fund will
agree to maintain, as of the last Business Day of each month in which any of the
Notes is outstanding, asset coverage with respect to senior securities
representing indebtedness, including the Notes, of at least 300% (or such higher
percentage as may in the future be specified in the 1940 Act as the minimum
asset coverage for senior securities representing indebtedness of a closed-end
investment company as a condition of paying dividends on common stock) ("1940
Act Asset Coverage"). See "Restrictive Covenants" above for certain definitions
relating to 1940 Act Asset Coverage.
Note Basic Maintenance Amount. The Fund will be required under the
Indenture to maintain, on each Valuation Date (as defined), portfolio holdings
conforming to the Notes Investment Guidelines (as described under "Investment
Objective and Policies--Investment Guidelines") having a discounted value at
least equal to the Note Basic Maintenance Amount. In the event that the
discounted value of the Fund's portfolio is less than the Note Basic Maintenance
Amount on any Valuation Date while any of the Notes is outstanding, the Fund
will seek to alter the composition of its portfolio so that, on or before the
eighth Business Day after such Valuation Date (the "Cure Date"), the discounted
value of the Fund's portfolio is at least equal to such Note Basic Maintenance
Amount. A "Valuation Date" means (i) the fifteenth day of each month or, if such
day is not a Business Day, the next succeeding Business Day and (ii) the last
Business Day of such month or, in the case of the first Valuation Date, a date
selected by the Fund no more than 15 days after the date on which the Notes are
initially issued.
The "Note Basic Maintenance Amount" as of any date is defined as the dollar
amount equal to (A) the sum of (i) 100% of the aggregate principal amount of the
Notes then outstanding; (ii) an amount equal to accrued interest on the
aggregate principal amount of the Notes then outstanding from the most recent
date to which interest has been paid or duly provided for (or, in the event the
Note Basic Maintenance Amount is calculated on a date prior to June 1, 1989,
then from December 1, 1988) through the next succeeding Valuation Date plus all
interest to accrue on the Notes during the 63 days following such Valuation
Date; (iii) the principal amount of any then outstanding indebtedness of the
Fund for money borrowed (other than the Notes); and (iv) the greater of $200,000
or the Fund's current liabilities as of such date to the extent not reflected in
any of (i) through (iii) above, less (B) the combined value of any Deposit
Securities irrevocably deposited by the Fund for the payment of principal of or
interest on the Notes. The discounted value of the Fund's portfolio holdings as
of any date means the quotient of the market value (as defined in the Indenture,
and including accrued interest) of each such holding divided by the applicable
discount factor. Any security not in compliance with the Notes Investment
Guidelines (see "Investment Objective and Policies--Investment Guidelines")
shall be excluded from the calculation of the discounted value of the Fund's
portfolio holdings.
The discount factors and guidelines for determining the market value of the
Fund's portfolio holdings for purposes of determining compliance with the Note
Basic Maintenance Amount have been based upon criteria established in connection
with the rating of the Notes. In determining discount factors, several factors
are taken into consideration. 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 corporate
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 balance or face amount as of
the date of calculation. The discount factor for the market value of any asset
of the Fund, the method of calculating the discounted value of any such asset
and the Note Basic Maintenance Amount, the assets eligible for inclusion in the
calculation of the discounted value of the Fund's portfolio and certain related
definitions, methods of calculation and reporting requirements, may be changed
without the consent of the holders of the Notes, provided that, among other
things, such changes will not adversely affect the ratings then assigned to the
Notes by the respective Rating Agencies.
MERGER AND CONSOLIDATION
The Fund may consolidate with or merge with or into, or transfer its assets
substantially as an entirety to, another corporation, limited partnership or
business trust, or engage in a statutory share exchange under Maryland law,
provided that (i) the successor corporation or business trust (if other than
the Fund) formed by or resulting from any such consolidation or merger, or the
transferee of the Fund's assets, shall assume by a supplemental indenture
payment of the principal of and interest on the Notes and any other series of
Senior Notes and the performance and observance of the Indenture, (ii) the Fund
or such successor corporation or business trust or transferee shall not
immediately before such transaction or thereafter be in default under the
Indenture, and (iii) the Fund shall have received written confirmation from each
of the Rating Agencies that such transactions will not adversely affect the
ratings, if any, then assigned to the Notes, if the Notes are then rated by the
respective Rating Agencies.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture (i) failure
to pay principal of any Note when due; (ii) default for five Business Days in
the payment of interest on any Note; (iii) failure to make a required deposit of
Deposit Securities when such deposit shall become due with respect to the
payment of principal of or interest on the Notes: (iv) failure to maintain asset
coverage with respect to senior securities representing indebtedness (as such
terms are defined above under "Restrictive Covenants") of at least 100% as of
the last Business Day of each of 24 consecutive months; (v) failure to have, as
of the last Business Day of any month, 1940 Act Asset Coverage, which failure is
not cured by the last Business Day of the following month (for this purpose,
without limitation, the default will be deemed cured if, within the prescribed
period, the Fund has instructed the Trustee to call Notes for redemption and
certified to the Trustee that such redemption, alone or together with other
action taken by the Fund, will cause the Fund to have the requisite 1940 Act
Asset Coverage); (vi) failure to maintain, on each Valuation Date, a
discounted value for the Fund's portfolio equal to at least the Note Basic
Maintenance Amount, which failure is not cured by the applicable Cure Date;
(vii) default in the performance of any other covenant of the Fund under the
Indenture which has continued for 60 days after written notice as provided in
the Indenture; (viii) default under any instrument under which the Fund has
issued indebtedness or by which there may be secured or evidenced any
indebtedness of or guaranteed by the Fund, the effect of which is to cause or
permit the holders thereof to cause the acceleration of the maturity thereof,
provided that such default or defaults relate to indebtedness with an aggregate
principal amount of at least $500,000 and have continued for 60 days after
written notice as provided in the Indenture; (ix) the making by the Internal
Revenue Service of a final determination that the Fund does not qualify for any
taxable year as a "regulated investment company" (as defined in the Internal
Revenue Code); (x) certain events of bankruptcy, insolvency or reorganization;
and (xi) the existence for 60 days of unstayed or unsatisfied final judgements
against the Fund in an aggregate amount in excess of $500,000.
If an Event of Default specified in any of clauses (vii), (viii) or (xi)
above occurs and is continuing, the Trustee or the registered holders of at
least 25% in principal amount of the outstanding Notes may declare the Notes due
and payable as provided below. If an Event of Default specified in any of
clauses (i) through (vi) or (ix) occurs, then and in every such case the Trustee
shall, immediately after the Trustee has knowledge of such Event of Default,
declare the Notes (or in the case of an Event of Default of the type specified
in clause (v) or (vi), such portion of the Notes as shall be required under the
Indenture to be redeemed) to be due and payable as provided below. Upon an
Event of Default specified in clause (v), the amount of Notes subject to
mandatory partial redemption will equal the aggregate principal amount of
outstanding Notes (rounded to the next highest increment of $1,000) the
redemption of which would have caused the Fund to meet 1940 Act Asset Coverage
on a pro forma basis as of the last Business Day of the month in which the
failure to maintain 1940 Act Asset Coverage initially occurred. Upon an Event of
Default specified in clause (vi), the amount of Notes subject to mandatory
partial redemption will equal the amount of outstanding Notes which could be
redeemed using the proceeds from the deemed sale of Special Note Redemption
Assets (rounded to the next highest increment of $1,000). "Special Note
Redemption Assets" are defined as portfolio holdings identified by the Fund in
its sole discretion, the deemed sale of which for cash on the Valuation Date on
which the discounted value of the Fund's portfolio failed to equal or exceed the
Note Basic Maintenance Amount would have resulted in the Fund achieving the
required Note Basic Maintenance Amount on a pro forma basis as of such Valuation
Date.
In the event of a mandatory partial redemption of Notes following an Event
of Default specified in clause (v) or (vi), the payment of principal of and
interest on the Notes due as a result of such mandatory partial redemption shall
be due within 45 days after the date on which such Event of Default occurs (in
the case of clause (v)) or the applicable Valuation Date (in the case of clause
(vi)). In the event of an acceleration in the maturity of Notes following an
Event of Default specified in any of the other clauses above other than clause
(x), the principal of and interest on such Notes shall be due and payable on the
30th day (or, if such day is not a Business Day) the next succeeding Business
Day) following the date of the declaration of such acceleration pursuant to
notice to the Fund. If an Event of Default specified in clause (x) occurs, the
Notes shall become due and payable immediately without any declaration or other
act on the part of the Trustee or any holder of the Notes.
The registered holders of a majority in principal amount of the outstanding
Notes may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee when exercising any trust or power conferred on
the Trustee, provided that such direction shall not conflict with any rule of
law or the Indenture. The Indenture provides that if a default on the Notes
occurs and is continuing and if it is known to the Trustee, the Trustee shall
mail notice thereof to each holder of the Notes within 90 days after it occurs;
provided that, except in the case of a default in payment on any of the Notes,
the Trustee may withhold the notice if and so long as it in good faith
determines that withholding the notice is in the interest of the holders.
Subject to the duty of the Trustee during a default on the Notes to act with the
required standard of care before proceeding to exercise any right or power under
the Indenture at the direction of the registered holders of the Notes, the
Trustee shall be entitled to receive from them reasonable security or indemnity
against the costs, expenses and liabilities that it may incur in complying with
any such direction. Under certain circumstances, at any time after a declaration
of acceleration with respect to the Notes has been made, but before a judgment
or decree based on acceleration has been obtained, the registered holders of a
majority in principal amount of the outstanding Notes may rescind and annul such
declaration, except that the consent of the holders of 100% in principal amount
of the outstanding Notes is required to annul a mandatory acceleration (or
redemption, as the case may be) pursuant to any of clauses (i) through (vi),
(ix) or (x) above.
The Fund will be required to furnish annually to the Trustee a statement as
to the fulfillment by the Fund of all of the Fund's obligations under the
Indenture. The Fund will also be required to furnish the Trustee statements of
compliance with 1940 Act Asset Coverage on a monthly basis and statements of
compliance with the requirement to maintain a discounted portfolio value at
least equal to the Note Basic Maintenance Amount on a semi-monthly basis.
MODIFICATION AND WAIVER
The Fund and the Trustee may supplement, amend or waive any provision of
the Indenture with the consent of the registered holders of a majority in
aggregate principal amount of the outstanding Notes, provided that no such
supplement, amendment or waiver may, without the consent of 100% of the
aggregate principal amount of the Notes outstanding: (i) reduce the principal
amount of Notes whose registered holders must consent to an amendment,
supplement or waiver; (ii) reduce the rate or change the method of calculation,
or change the time of payment of interest on any Note; (iii) reduce the
principal of or change the fixed maturity of any Note or make any Note payable
in money other than that stated in the Note; (iv) waive an Event of Default
specified above in any of clauses (i) through (vi), (ix) or (x) under "Events of
Default"; (v) make any change that adversely affects the rights of repurchase;
(vi) reduce the percentage of outstanding Notes necessary to waive any default
or Event of Default or make any changes in or modify the foregoing provisions;
or (vii) effect any other amendment adversely affecting the rating of the Notes
(if then rated by the Rating Agencies). Without the consent of any holder, the
Fund and the Trustee may amend or supplement the Indenture: (i) to evidence the
succession of another person to the Fund as obligor on the Notes in accordance
with the Indenture; (ii) to provide for uncertificated Notes in addition to
certificated Notes; (iii) to add to the covenants of the Fund for the benefit of
the holders of the Notes or to surrender any right or power conferred upon the
Fund; (iv) to cure any ambiguity in, to correct or supplement any provision that
may be defective or inconsistent with any other provision of or to make any
other provisions with respect to matters or questions arising under the
Indenture which are not inconsistent with the provisions of the Indenture,
provided that such action will not adversely affect the interests of the holders
of the Notes; and (v) to include provisions required or permitted by the Trust
Indenture Act of 1939 or the 1940 Act. In addition, the Indenture may be
modified or amended by the Fund and the Trustee, without the consent of the
holder of any Note, to provide for an alternative method of valuation of the
Fund's assets in connection with the determination of compliance with the Note
Basic Maintenance Amount coverage requirement described above and, in such
connection and otherwise, the Fund and the Trustee may adopt amendments to or
changes in the methods of calculation or definitions of certain terms relating
thereto, provided that such amendment or change will not impair the ratings then
assigned to the Notes by the Rating Agencies.
SATISFACTION AND DISCHARGE
With respect to the Notes, the Indenture may be discharged (i) upon
cancellation, payment or redemption of all the Notes or (ii) if the Notes have
matured or all of them have been called for redemption under arrangements
satisfactory to the Trustee for giving the notice of redemption, upon deposit
with the Trustee of funds or Deposit Securities sufficient for such payment or
redemption plus accrued interest to the maturity or redemption date, as the case
may be.
DESCRIPTION OF COMMON STOCK
In addition to the Preferred Shares, the Fund's Articles of Incorporation
authorize the issuance of up to 100,000,000 shares of Common Stock, $.01 par
value. As of the date hereof, 11,000 shares of Common Stock have been issued to
the Investment Adviser and up to 13,800,000 shares (including 1,800,000 shares
subject to an over-allotment option granted the underwriters thereof) will be
issued in a concurrent public offering. The Board of Directors reserves the
right to issue Common Stock subsequent to such offering from time to time, and
any such shares shall be deemed "Common Stock." All shares of Common Stock have
equal rights as to voting, dividends and liquidation. All shares of Common Stock
issued and outstanding or to be issued in the concurrent public offering are, or
upon issuance will be, fully paid and nonassessable. Shares of Common Stock have
no preemptive, conversion or redemption rights and are freely transferable.
Holders of shares of Common Stock have voting rights of one vote per share
and holders of the Preferred Shares have voting rights of one vote per $1,000 of
liquidation preference without regard to any liquidation preference attributable
to accumulated and unpaid dividends (i.e., 100 votes per Preferred Share);
provided that all the votes represented by a single Preferred Share must be
voted together. 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 Stock--Voting." In elections of Directors, the holders
of the Preferred Shares, voting as a separate class, elect two Directors and the
holders of the Common Stock and the Preferred Shares, voting together, elect the
remaining Directors. The voting rights of the Common Stock and the Preferred
Shares are noncumulative, which means that the holders of a majority of the
voting power represented by the outstanding shares of Common Stock and Preferred
Shares, voting together as a single class, or a majority of the Preferred
Shares, voting separately as a class, may elect all of the Directors who are
subject all to election by such class as the case may be.
The contractual rights of the holders of the Common Stock as expressly set
forth in the Articles of Incorporation may not be modified by a vote of less
than a majority of the shares of Common Stock outstanding.
The Common Stock has been approved for listing on the NYSE under the
symbol "PHY."
Under the Indenture and the 1940 Act, the Fund cannot declare dividends or
other distributions on the Common Stock or purchase any shares of Common Stock
if, at the time of the declaration or purchase, as applicable (and after giving
effect thereto), asset coverage with respect to senior securities representing
indebtedness, including the Notes, would be less than 300% (or such higher
percentage as may in the future be required by law) or asset coverage with
respect to the Preferred Shares would be less than 200% (or such higher
percentage as may in the future be required by law). See "Description of
Notes--Restrictive Covenants" for certain definitions relating to the foregoing
restrictions. Dividends or other distributions on or purchases of the Common
Stock also will be prohibited at any time payments of principal of or interest
on the Notes are in default pursuant to the Indenture, or at any time dividends
on the Preferred Shares are in arrears or Surety Assets Coverage is not
maintained pursuant to the Surety Arrangement.
Subject to the foregoing and to 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. "Net investment income" includes interest,
dividends, short-term capital gains and other income received or accrued less
interest payments with respect to the Notes, the advisory fee, the premium paid
pursuant to the Surety Arrangement, bank and surety custodian charges, taxes
(except capital gains taxes) and other expenses properly chargeable against
income, but does not include net capital gains, stock dividends, transfer taxes,
brokerage or other capital charges nor distributions designated as a return of
capital. Any 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 requirement of
Maryland law.
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 such holders by The Bank of New York
(the "Bank"), as dividend disbursing agent. Pursuant to the Plan, holders of
Common Stock not making such election will have all such amounts automatically
reinvested by the Bank, as the Plan agent, in whole or fractional shares of
Common Stock, as the case may be.
As of the date of this Prospectus, Prospect Street(SM) Investment
Management Co., Inc., the Investment Adviser, was the record and beneficial
owner of all of the outstanding shares of Common Stock and thus was deemed in
"control" of the Fund as "control" is defined in the 1940 Act. The Investment
Adviser has undertaken that these shares were purchased for investment purposes
only and that they will be sold only pursuant to a registration statement under
the 1933 Act or an applicable exemption from the registration requirements
thereof.
FINANCIAL SECURITY
The information set forth below under this caption and the Financial
Statements of Financial Security and Subsidiary contained in this Prospectus
were furnished by Financial Security.
GENERAL
Financial Security shall act as surety under the Surety Bond by which
Financial Security unconditionally and irrevocably guarantees the Scheduled
Payments on the Preferred Shares. Financial Security is a monoline property and
casualty insurance company incorporated on March 16, 1984 under the laws of the
State of New York. The operations of Financial Security commenced on July 25,
1985, and Financial Security received its New York State insurance license on
September 23, 1985. Financial Security and its two wholly-owned subsidiaries are
licensed to engage in surety business in 42 states and the District of Columbia.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally on corporate and
other taxable securities offered in domestic and foreign markets. Financial
Security and its subsidiaries also write financial guaranty insurance on
tax-exempt municipal obligations and reinsure financial guaranty insurance
policies written by other leading insurance companies. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities--thereby enhancing the credit rating of those
securities--in consideration for payment of a premium to the insurer. As of
September 30, 1988, Financial Security and its subsidiaries had insured or
reinsured approximately $7.6 billion principal amount of corporate and municipal
obligations (net of amounts reinsured with unaffiliated reinsurers). Pursuant
to an intercompany agreement, liabilities on surety bonds issued by Financial
Security or either of its subsidiaries are reinsured among such companies on an
agreed-upon percentage substantially proportional to their respective capital,
surplus and reserves, subject to applicable statutory risk limitations.
The registered office of Financial Security is located at 350 Park Avenue,
New York, New York 10022 and its telephone number is (212) 826-0100. At
September 30, 1988, Financial Security and its subsidiaries had 82 employees.
FINANCIAL STRUCTURE
Financial Security is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. The investors listed below own or control approximately
75% of the common equity of Financial Security Assurance Holdings Ltd. Neither
Financial Security Assurance Holdings Ltd. nor any of its investors is obligated
to pay debts of Financial Security or to pay any claim under the Surety Bonds or
to make additional capital contributions.
<TABLE>
<CAPTION>
UNITED STATES GREAT BRITAIN
<S> <C>
Tucson Electric Power Company Globe Investment Trust P.L.C.
The Equitable Life Assurance Society of the The General Electric Company p.l.c.
United States Electra Investment Trust PLC
John Hancock Mutual Life Insurance Company Gartmore Investment Management Limited
New England Mutual Life Insurance Company Kleinwort Benson Limited
Transamerica Corporation Water Authorities Superannuation Fund
First Interstate Bancorp G.T. Management PLC
McDonnell Douglas Finance Corporation CANADA
Potomac Capital Investment Corporation Canadian Imperial Bank of Commerce
Westinghouse Credit Corporation AUSTRALIA
Monumental Life Insurance Company Westpac Banking Corporation
JAPAN ITALY
Sumitomo Life Insurance Company Toro International Holding S.A.
Orient Leasing, USA, Corp. SWITZERLAND
Morval & Cie S.A.
Jean-Jacques Michel
</TABLE>
Financial Security reinsures a portion of its liabilities under certain of
its surety bonds with unaffiliated reinsurers under various quota share treaties
and on a transaction-by-transaction basis. Such reinsurance is utilized by
Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any surety bond.
Financial Security's claims-paying ability is rated "AAA" by S&P, "Aaa" by
Moody's, "AAA" by Fitch Investors Service, Inc., "AAA" by Nippon Investors
Service Inc. and "D&P-1" (triple A) by Duff & Phelps Inc. Such ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
Copies of the statutory quarterly and annual statements filed with the
State of New York Insurance Department by Financial Security are available upon
request to the State of New York Insurance Department.
CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its wholly-owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1988:
SEPTEMBER 30,
1988
-----------
(UNAUDITED)
Unearned Premium Reserve................................. $103,481,202
Other Liabilities(l) .................................... 25,741,647
Shareholders' Equity:
Common Stock.......................................... 2,500,000
Additional Paid-in Surplus ........................... 197,501,000
Retained Earnings..................................... 41,507,493
------------
Total Shareholder's Equity............................... 241,508,493
------------
Total Liabilities and Shareholder's Equity............... $370,731,342
============
- ------------
(1) Includes $16,336,633 of short-term liabilities.
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiary included as part of
this Prospectus.
INSURANCE REGULATION
Financial Security is subject to regulation by the Insurance Department of
the State of New York, where it is incorporated and licensed to do business. In
addition, Financial Security and its subsidiaries are subject to regulation by
insurance departments of the various other states in which they have been
licensed to transact business.
Principal areas of regulation include the amount of exposure that may be
retained by an insurer for any given net risk, the rate at which premiums will
be earned and the level of reserves required for unearned premiums (see Note 4
of the Notes to Consolidated Financial Statements of Financial Security and
Subsidiary herein). In addition, insurance laws regulate permissible investments
of reserves and surplus, forms of insurance contracts, limitations on the terms,
amount and treatment of transactions among affiliates within a controlled group
(generally requiring notice to and/or approval by the insurance department),
mergers, consolidations, acquisitions or dispositions of substantially all
assets (generally requiring regulatory approval) and the incurrence of liability
for borrowings. Additional legislation and regulations with respect to the
financial guaranty insurance industry are currently under consideration in the
State of New York and other jurisdictions. No prediction may be made as to the
likelihood of adoption of any such additional legislation or regulations or the
impact thereof, if any, upon Financial Security.
SURETY ARRANGEMENT
SURETY BOND
Concurrently with the issuance of the Preferred Shares, the Fund will cause
Financial Security to deliver the Surety Bond to Bankers Trust Company, as
custodian under a custody agreement (the "Surety Custody Agreement") for the
benefit of the holders of the Preferred Shares. Under the Surety Bond, Financial
Security unconditionally and irrevocably guarantees to each holder of Preferred
Shares the full and complete payment of (i) Scheduled Payments and (ii) any
dividend payment, payment of redemption price or liquidation payment which
subsequently is avoided in whole or in part as a preference payment under
applicable law until and including such date on which the Preferred Stock is
redeemed in full.
"Scheduled Payments" shall mean (i) payments of dividends on the Preferred
Shares which holders of the Preferred Shares would be entitled to receive on
each Dividend Payment Date during the term of the Surety Bond (see "Expiration
or Termination of Surety Arrangement" below) in accordance with the terms of the
Articles of Incorporation, without regard to whether the Fund has declared any
such dividend or such dividend could have been legally declared by the Fund,
(ii) payment of the redemption price of the Preferred Shares without regard to
whether such redemption could have been legally made by the Fund (a) on the
last date on which the Fund was to have redeemed the Preferred Shares as
specified in a Redemption Request (as defined) given by Financial Security under
the Insurance Agreement upon the occurrence of an Event of Default (as defined)
under the Insurance Agreement in the event Financial Security has notified the
Surety Custodian that such redemption is to be a Scheduled Payment, and (b) on
the date on which the Preferred Shares may be required to be redeemed pursuant
to a Mandatory Expiration Redemption upon expiration of the Surety Bond (as
described under "Description of Preferred Stock--Redemption"), and (iii) payment
of the liquidation preference on the Preferred Shares in the event of a
liquidation of the Fund during the term of the Surety Bond on the date fixed for
payment of such liquidation preference pursuant to the Articles of
Incorporation, so long as Financial Security shall have consented to such
liquidation. For the purposes of the Scheduled Payments under the Surety Bond,
in the event of a liquidation of the Fund to which Financial Security has not
consented in which only a portion of the liquidation preference on the Preferred
Shares is paid, a portion of the Preferred Shares represented by the unpaid
portion of the liquidation preference shall be deemed to remain outstanding and
shall be secured by the Surety Bond as to all Scheduled Payments without regard
to whether the Fund has any obligation with respect thereto.
Payment of amounts under the Surety Bond by Financial Security as described
in clause (i) above will be made on the later of (a) the second Business Day
following receipt on a Business Day by Financial Security of a notice and
certificate from the Surety Custodian or (b) the date such Scheduled Payment is
due (or if such day is not a Business Day, then on the next succeeding Business
Day). Such payments will be disbursed by Financial Security to the Surety
Custodian by wire transfer of immediately available funds. Financial Security's
obligation under the Surety Bond is discharged to the extent funds are so
transferred to the Surety Custodian, whether or not such funds are properly
applied by the Surety Custodian.
If payment of any amount avoided as a preference under applicable federal
bankruptcy law is required to be made under the Surety Bond, Financial Security
will pay any amount thereunder when due pursuant to a Court Order (as defined
in this sentence) but in any event no earlier than the first to occur of (a)
the fourth Business Day following receipt by Financial Security from the Surety
Custodian of (i) a certified copy of the Order (the "Court Order") of the court
which exercised jurisdiction to the effect that the holder is required to return
scheduled payments of redemption price, liquidation preference or dividends
constituting a Scheduled Payment and paid on the Preferred Shares because such
payment was an avoidable preference under applicable bankruptcy, insolvency,
receivership or similar law, (ii) a certificate of the holder that the Court
Order has been entered and is not subject to any stay and (iii) an assignment
duly executed by the holder, in such form as is reasonably required by Financial
Security and provided to the holder by Financial Security or the Surety
Custodian, irrevocably assigning to Financial Security all rights and claims of
the holder relating to or arising under the Preferred Shares against the estate
of the Fund (provided that, if such certified copy, certificate and assignment
are received on a day that is not a Business Day or after 12:00 noon, New York
City time, on any Business Day, Financial Security shall make such payment on
the fifth Business Day following such date) or (b) the date of receipt by
Financial Security from the Surety Custodian of the items referred to in clauses
(i), (ii) and (iii) above if, at least four Business Days prior to such date of
receipt, Financial Security shall have received written notice from the Surety
Custodian that such items were to be delivered on such date of receipt and such
date of receipt was specified in such notice (provided that, if such notice is
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, such notice shall be deemed to have been received on
the next succeeding Business Day). Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession, trustee in bankruptcy or other
person named in the Court Order and not to the holder or the Surety Custodian
directly, unless such holder or the Surety Custodian has been required
previously to disgorge all or part of such payment, as demonstrated to the
satisfaction of Financial Security, in which event such payment shall to such
extent be paid directly to the holder or the Surety Custodian, as the case may
be.
Financial Security shall be subrogated to all the rights of each holder of
Preferred Shares in the event Financial Security makes a Scheduled Payment to
any such holder under the Surety Bond.
The Surety Bond is a direct, unsecured and unsubordinated obligation of
Financial Security ranking equally with any other unsecured and unsubordinated
obligations of Financial Security, except for certain obligations in respect of
tax and other payments to which preference is or may become afforded by statute.
The term of the Surety Bond cannot be modified or altered by any other agreement
or instrument or by the merger, consolidation or dissolution of the Fund. The
Surety Bond may not be cancelled or revoked by Financial Security prior to the
end of its term. See "Expiration of Surety Arrangement" below. The Surety Bond
is governed by the laws of the State of New York.
For all references with respect to the Surety Bond (i) "Business Day"
shall mean any day other than a Saturday or Sunday or a holiday including, New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas or
any other day on which banks in the City of New York or the principal corporate
trust office of the Surety Custodian are authorized or required by law to be
closed and (ii) "receipt by Financial Security" shall mean that Financial
Security shall have received such claims, notices or documentation, as the case
may be, by 12:00 noon, New York City time, on any Business Day.
INSURANCE AGREEMENT
General. As a precondition to Financial Security's issuing the Surety Bond,
the Fund will enter into the Insurance Agreement with Financial Security
pursuant to which the Fund will be obligated to reimburse Financial Security for
amounts paid by Financial Security under the Surety Bond. A copy of the
Insurance Agreement is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. A copy of the Registration Statement of which
this Prospectus is a part may be obtained as described under "Further
Information."
Surety Assets Coverage. At any time that Preferred Shares are outstanding,
the Fund will be required under the Insurance Agreement to maintain assets in
its portfolio meeting the Surety Investment Guidelines and having a discounted
value at least equal to the Surety Assets Coverage (as defined below). If the
Fund fails to meet the Surety Assets Coverage requirement and such failure is
not cured within eight Business Days, Financial Security may seek to cause the
Fund to redeem certain of the Preferred Shares. See "Events of Default;
Remedies" below. The discount factor for and market value of any asset of the
Fund, the method of calculating Surety Assets Coverage, 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 and Financial Security.
"Surety Assets Coverage" as of any date is defined as the dollar amount
equal to (A) the sum of (i) 100% of the aggregate principal amount of the Notes
then outstanding; (ii) $100,250 times the number of Preferred Shares then
outstanding; (iii) the aggregate amount of accrued interest on the Notes then
outstanding, plus an amount equal to 63 days' interest on such principal amount
of the Notes; (iv) the aggregate amount of accumulated but unpaid dividends with
respect to the Preferred Shares to such date, plus the amount of dividends
projected to accumulate on the Preferred Shares then outstanding from such date
until the 30th day thereafter; (v) the aggregate principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the Notes)
and (vi) the greater of $200,000 or the Fund's liabilities in existence as of
such date to the extent not otherwise reflected in any of (i) through (v)
above, less (B) the combined value of any Deposit Securities irrevocably
deposited by the Fund for the payment of principal of or interest on the Notes
or redemptions of or dividend payments with respect to the Preferred Shares. See
"Deposit Securities Requirement" below.
On or before the third Business Day after each Valuation Date (as defined
below), the Fund is required to deliver to Financial Security a report with
respect to the calculation of Surety Assets Coverage and the market value of its
portfolio as of the related Valuation Date (a "Portfolio Valuation Report").
Within three Business Days after delivery of such report relating to the last
Business Day in January, April, July and October of each year, commencing
January 31, 1989, or, if any such day is not a Valuation Date, the next
preceding Valuation Date (the "Quarterly Valuation Dates"), the Fund will
deliver letters prepared by the Fund's independent accountants regarding the
accuracy of the calculations made by the Fund in its most recent Portfolio
Valuation Report. If any such letter prepared by the Fund's independent
accountants shows that an error was made in the most recent Portfolio Valuation
Report, the Fund shall be required to alter its portfolio composition to comply
with Surety Assets Coverage in accordance with the revised calculation or
determination made by the Fund's independent accountants. "Valuation Date" means
(i) the fifteenth day of each month (or, if such fifteenth day is not a Business
Day, then the next succeeding Business Day), and (ii) the last Business Day of
each month or, in the case of the first Valuation Date, a date selected by the
Fund no later than 15 days after the date on which the Preferred Shares are
originally issued. For the purposes of determining Valuation Dates, "Business
Day" means a day on which the NYSE is open for trading and which is not a
Saturday or Sunday or a day on which banks in New York City or Boston are
authorized or obligated by law or executive order to close. See "Investment
Objective and Policies--Investment Guidelines."
Deposit Securities Requirement. The Fund will be obligated to deposit with
the Paying Agent with respect to the Preferred Shares a specified amount of
Deposit Securities not later than 20 days prior to each Dividend Payment Date
and not later than the mailing of any notice of redemption with respect to any
redemption (except in the case of a Mandatory Expiration Redemption). In
addition, in the case of a Mandatory Expiration Redemption, the Fund will be
obligated to set aside Deposit Securities ratably over a period ending not less
than 30 days prior to the redemption date. Deposit Securities in all cases shall
have an initial combined value greater than or equal to the liquidation
preference and/or accumulated dividends on the Preferred Shares to become due
and payable on the applicable payment date, and shall mature on or prior to such
date.
Events of Default; Remedies. An "Event of Default" is defined in the
Insurance Agreement to include any of the following: (i) any default by the Fund
in its performance of any covenant contained in the Insurance Agreement and the
continuance of such default for at least 30 days after written notice is given
to the Fund; (ii) any material representation or warranty made by the Fund in
the Insurance Agreement or in connection therewith shall prove to be incorrect
in any material respect when made or deemed made; (iii) any failure of the
Fund to maintain assets in its portfolio with a discounted value such that the
Surety Assets Coverage requirement is met, which failure is not cured within
eight Business Days; (iv) any failure by the Fund to reimburse Financial
Security for amounts paid under the Surety Bond or pay to Financial Security
when due any other amount under the Insurance Agreement; (v) any failure by the
Fund, on or prior to the date six months prior to the expiration date of the
Surety Bond, to obtain from Financial Security an extension of the term of the
Surety Bond pursuant to its terms or to obtain notice in writing from each of
the Rating Agencies that such expiration of the Surety Bond will not adversely
affect the then outstanding rating, if any, of the Preferred Shares by such
Rating Agency whether through obtaining a substitute surety bond or otherwise;
(vi) a final determination by the Internal Revenue Service that the Fund does
not qualify for any taxable year as a regulated investment company (as defined
in the Internal Revenue Code); (vii) certain events of bankruptcy, insolvency or
receivership of the Fund; and (viii) denial by the Fund that it has any or
further liability or obligation under the Insurance Agreement or the Articles of
Incorporation, or any finding or ruling by any governmental agency or authority
that the Insurance Agreement or the Articles of Incorporation is not valid or
binding on the Fund; provided that, in the case of each of clauses (i), (ii),
(vi) and (viii), such event shall not constitute an Event of Default unless, in
the reasonable judgment of Financial Security, such event would materially and
adversely affect the ability of the Fund to perform its material obligations
under the Insurance Agreement or the Articles of Incorporation or would
materially and adversely affect the material rights or benefits or the
enforcement of remedies or the practicable realization of such rights of or
benefits to Financial Security under the Insurance Agreement or of Financial
Security or any holder of Preferred Shares under the Surety Custody Agreement or
the Articles of Incorporation or otherwise with respect to the Preferred Shares.
If an Event of Default has occurred and is continuing, the Fund is required
under the Insurance Agreement, upon receipt of a written request from Financial
Security (a "Redemption Request") (a) in the case of an Event of Default other
than as specified in clause (iii) above, to deliver a Notice of Redemption with
respect to, and redeem within a specified period, such number of Preferred
Shares as specified by Financial Security in such Redemption Request, and (b) in
the case of the occurrence and continuance of an Event of Default specified in
clause (iii) above relating to Surety Assets Coverage, to identify in the Fund's
sole discretion, and sell for cash, certain portfolio holdings, the proceeds
from the sale of which shall be added to the portfolio and shall thereby cause
the value of the portfolio to have equalled or exceeded the Surety Assets
Coverage requirement on a pro forma basis as of the immediately preceding
Valuation Date ("Special Surety Redemption Assets"). In addition, Financial
Security will be entitled to deliver a Redemption Request directing the Fund to
redeem Preferred Shares with the proceeds of the sale of such Special Surety
Redemption Assets or similar assets. Any Redemption Request (other than in
respect of the Event of Default specified in clause (iii) above), once
delivered, may be withdrawn by Financial Security at any time prior to the
mailing of the related Notice of Redemption.
Any amount applied to payment on the Preferred Shares as to which Financial
Security has made payment under the Surety Bond shall be deemed to satisfy the
obligation of the Fund to reimburse Financial Security in an amount equal to the
amount so applied. Alternatively, if the Fund reimburses Financial Security for
any Scheduled Payments made by it, such reimbursement will satisfy the Fund's
obligation to make the dividend, redemption or liquidation preference payment
represented by such Scheduled Payment so reimbursed.
INDEMNIFICATION AND OTHER PAYMENTS BY THE FUND
The Fund has agreed to indemnify Financial Security against certain
liabilities, losses, costs, damages, attorneys' fees and other expenses. The
Fund also has agreed to pay to Financial Security upon issuance of the Surety
Bond, and in consideration thereof, a premium equal to the present value of .40%
of the aggregate liquidation preference of the Preferred Shares originally
issued (the "Annual Premium Amount") times the number of years (five) in the
initial term of the Surety Bond and to pay Financial Security for certain other
legal fees and expenses incurred by Financial Security in connection with the
Insurance Agreement.
EXPIRATION OF THE SURETY ARRANGEMENT
The Surety Bond will expire December 5, 1993; provided, however, that
subject to conditions contained in the Insurance Agreement including the
conditions that there is no Event of Default and Surety Assets Coverage is met
at the time of extension, the Fund may elect to extend the expiration date for
one or more additional periods of up to five years in the aggregate at a premium
payable annually equal to .40% of the aggregate liquidation preference of the
Preferred Shares outstanding at the time of extension of the Surety Bond. Except
under certain circumstances, upon any expiration of the Surety Bond prior to 10
years after the original issuance thereof, the Fund shall be obligated to pay
Financial Security a fee equal to the Annual Premium Amount and may not replace
the Surety Bond with a substitute surety bond, financial guaranty or other
credit enhancement. Upon expiration of the Surety Bond, the Preferred Shares
will be subject to mandatory redemption under certain circumstances as described
under "Description of Preferred Stock--Redemption."
SURETY CUSTODY AGREEMENT
Pursuant to the Surety Arrangement, the Preferred Shares and the Surety
Bond are required to be held by the Surety Custodian, pursuant to the Surety
Custody Agreement in a custody account (the "Surety Custody Account")
established for the benefit of the holders of the Preferred Shares. Ownership of
the Preferred Shares, in turn, shall be evidenced by custody receipts (the
"Custody Receipts") held by DTC.
In the event that the Fund does not make any Scheduled Payment, the Surety
Custodian is obligated to make a claim for payment under the Surety Bond.
Financial Security shall be subrogated to the rights of owners of Preferred
Shares to receive payments with respect to the Preferred Shares to the extent of
any payment by Financial Security under the Surety Bond. In connection with the
making of Scheduled Payments by Financial Security under the Surety Bond, the
Surety Custodian shall assign to Financial Security the rights to the related
dividend payment or, in the case of a redemption or liquidation payment, the
related Preferred Shares. The Surety Custodian shall also appoint Financial
Security as agent for the holder in any legal proceeding with respect to the
Preferred Shares for which a payment was made under the Surety Bond (including
specifically the authority to vote such Preferred Shares) until any claims
resulting from such assignment shall have been satisfied, such appointment to be
contingent upon Financial Security's continued performance under the Surety
Bond.
Voting rights with respect to the Preferred Shares held in the Surety
Custody Account will be exercised by the Surety Custodian in accordance with
instructions given by the holders of the Preferred Shares. See "Description of
Preferred Stock--Voting." The Surety Custody Agreement provides, however, that,
at any time that the Surety Custodian has made a claim for payment under and
Financial Security has made Scheduled Payments pursuant to the Surety Bond, the
Surety Custodian will vote the Preferred Shares with respect to which such
Scheduled Payments have been made under the Surety Bond in accordance with
instructions given by Financial Security. The right of Financial Security to
instruct the Surety Custodian with respect to voting such Preferred Shares shall
terminate when the Fund has made payments on the Preferred Shares with respect
to which the Scheduled Payments were made by Financial Security or the Fund has
reimbursed Financial Security with respect to such Scheduled Payments pursuant
to the terms of the Insurance Agreement.
The Surety Custody Account will be maintained by the Surety Custodian as a
custodial account, separate and segregated, the contents of which may not be
commingled with any other assets or property held by the Surety Custodian. The
Surety Custodian will maintain separate records in connection with any moneys
which it may hold in connection with the Preferred Shares and the Surety Bond.
Under the Surety Custody Agreement, holders of Preferred Shares are liable for
payment of taxes or other governmental charges with regard to registrations of
transfers or exchanges of Custody Receipts. Except as otherwise provided in the
Surety Custody Agreement, no amendment affecting the registered holders of
Custody Receipts may be made to the Surety Custody Agreement without the consent
of the registered owners of the Custody Receipts evidencing 66 2/3% in interest
of the outstanding Preferred Shares deposited in the Surety Custody Account.
Notices with respect to the Preferred Shares that are received by the
Surety Custodian from the Fund will be promptly forwarded to the holders of
Preferred Shares. Except as expressly provided by the Surety Custody Agreement,
the Surety Custodian will not take any action on behalf of any holder of
Preferred Shares with respect to Preferred Shares or the Surety Bond, except in
accordance with written instructions from such holder and upon receipt of
reasonable indemnity from such holder for resulting costs and liabilities as
provided in the Surety Custody Agreement, whether or not such action appears to
be in the best interest of such holder.
The Surety Custodian may resign pursuant to the Surety Custody Agreement
upon appointment of a successor Surety Custodian and its acceptance of such
appointment as provided in the Surety Custody Agreement. Either Financial
Security or the registered owners of Custody Receipts evidencing a majority in
aggregate amount of the Preferred Shares deposited in the Surety Custody Account
may remove the Surety Custodian and appoint a successor thereto pursuant to the
provisions of the Surety Custody Agreement.
PREFERRED STOCK AND NOTE RATINGS
It is a condition of issuance of (i) the Preferred Shares that they be
rated "AAA"/"Aaa" by the Rating Agencies on the basis of the issuance of the
Surety Bond by Financial Security and (ii) the Notes that they be rated
"AAA"/"Aaa" on the basis that the Fund's portfolio will be managed in accordance
with the Notes Investment Guidelines. Such ratings will reflect only the views
of the Rating Agencies. When rating securities, the Rating Agencies consider the
transaction in its entirety and rely on factors in addition to the amount and
performance of the assets underlying such securities. Accordingly, future events
adversely affecting Financial Security could have an adverse impact on the
rating of the Preferred Shares. An explanation of the significance of such
ratings may be obtained from Standard & Poor's Corporation, 25 Broadway, New
York, New York 10017, telephone (212) 208-8000 and Moody's Investors Service,
Inc., 99 Church Street, New York, New York 10004, telephone (212) 533-0300.
There is no assurance that either of such ratings will continue for any period
of time or that it will not be revised or withdrawn entirely by the applicable
Rating Agency if, in its judgment, circumstances so warrant. A revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Preferred Shares and the Notes. A security rating is not a recommendation to
buy, sell or hold securities.
CUSTODIAN, TRANSFER AGENTS, DIVIDEND
DISBURSING AGENT, PAYING AGENTS AND REGISTRARS
The Fund's securities and cash are held by The Bank of New York, whose
principal business address is 19 Rector Street, New York, New York 10286, as
custodian (the "Custodian"), under a custodian contract. The Fund has not
selected any foreign custodians or sub-custodians. However, if the Fund
determines that it should have any foreign custodians or sub-custodians to
maintain any of its foreign securities, the Board of Directors will make such
election following a consideration of a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to perform capably custodial services for the Fund,
the reputation of the institution in its national market, the political and
economic stability of the country in which the institution is located, and the
risks of potential nationalization or expropriation of Fund assets.
The Bank of New York serves as dividend disbursing agent, as agent under
the Plan and as transfer agent and registrar for the Common Stock. Bankers Trust
Company serves as the Surety Custodian pursuant to the Surety Custody Agreement
for the benefit of the holders of the Preferred Shares and serves as transfer
agent, paying agent and registrar for the Preferred Shares. Shawmut Bank, N.A.
serves as the Trustee under the Indenture and serves as transfer agent, paying
agent and registrar for the Notes.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Fund, the Investment Adviser and Drexel Burnham (the "Underwriter"), the
Underwriter has agreed to purchase from the Fund, and the Fund has agreed to
sell to the Underwriter, all of the Preferred Shares offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions, any of which the underwriter has the right to waive,
including the closing of the sale of the Notes and the Common Stock, and the
absence of any indictment relating to the matters discussed in the fifth
paragraph under the caption "Portfolio Trading." The nature of the Underwriter's
obligation is such that the Underwriter is committed to purchase all of the
Preferred Shares offered hereby if any are purchased. The Fund has granted the
Underwriter a 30-day option to purchase up to an additional 45 Preferred Shares
to cover over-allotments, if any. However, such option may be exercised only to
the extent that, after giving effect thereto and to the exercise of
over-allotment options with respect to the Common Stock (in the amount of up to
1,800,000 shares) and the Notes (in the amount of up to $7,500,000 aggregate
principal amount) (in each case as provided for in the respective underwriting
agreement relating to the Common Stock or the Notes, as the case may be), asset
coverage under the 1940 Act would not be more than 399% or less than 361% with
respect to the Notes or more than 250% or less than 226% with respect to the
Preferred Shares, assuming each such over-allotment option was exercised as of
the original issuance date for the Preferred Shares and assuming that
underwriting discounts and offering expenses for the Common Stock and the
Preferred Shares were $9,978,066.
The Underwriter has advised the Fund that it proposes to offer the
Preferred Shares directly to the public at the public offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ 1,000 per share. The Underwriter may allow and
such dealers may reallow a concession not in excess of $250 per share to certain
other dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Underwriter.
The Fund and the Investment Adviser have agreed, jointly and severally, to
indemnify the Underwriter against certain liabilities, including liabilities
under the 1933 Act.
Prior to the concurrent offerings, there has been no secondary market for
the Preferred Shares or the Notes. Drexel Burnham has advised the Fund that,
while it is not obligated to do so, it currently intends to make a secondary
market in the Preferred Shares, in accordance with the Auction Procedures, and
the Notes; however, there is no assurance that an active secondary trading
market for the Preferred Shares or the Notes will develop and any such secondary
market activity, if commenced, may be discontinued at any time. In addition,
other broker-dealers may or may not choose to make a secondary market in the
Preferred Shares or the Notes. The Common Stock has been approved for listing on
the NYSE under the symbol "PHY."
The Underwriter has agreed with the Fund that it will sell Preferred Shares
only to a person who agrees to execute and deliver a Master Purchaser's Letter
in accordance with the terms of this Prospectus or to a Broker-Dealer who has
agreed with the Underwriter that it will (i) execute and deliver a Master
Purchaser's Letter in accordance with the terms of this Prospectus and (ii) only
sell Preferred Shares to such a person or to another such Broker-Dealer. The
Underwriter has also agreed with the Fund that it will execute and deliver a
Master Purchaser's Letter in accordance with the terms of this Prospectus.
During the period that the underwriters of the Fund's securities (including
the Underwriter) will be soliciting indications of interest, the Fund and the
underwriters will continue to evaluate the markets for such securities as well
as the market for the Fund's contemplated investments. If as a result of a
material adverse change in existing financial, political or economic conditions
in the United States or elsewhere it becomes impractical or inadvisable to
proceed with the offerings of the Fund's securities, such offerings may not be
made.
Drexel Burnham will act in Auctions as a Broker-Dealer and will provide
information to be used in ascertaining the 30-day "AA" Commercial Paper Rate.
LEGAL OPINIONS
Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Fund by its counsel, Cahill Gordon & Reindel,
a partnership including professional corporations, New York, New York, and by
its special Maryland counsel, Piper & Marbury, Baltimore, Maryland. Certain
legal matters will be passed upon for the Underwriter by Goodwin, Procter &
Hoar, Boston, Massachusetts.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The Balance Sheet of the Fund as of November 23, 1988 included in this
Prospectus has been audited by Arthur Andersen & Co., independent public
accountants, as indicated in their report with respect thereto, and is included
in reliance upon the authority of said firm as experts in giving said report.
The financial statements of Financial Security included in this Prospectus,
to the extent and for the periods indicated in their report, have been examined
by Touche Ross & Co., independent public accountants, and are included in
reliance on such report and upon the authority of said firm as experts in
accounting and auditing.
FURTHER INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the SEC under the 1933 Act and the 1940 Act
with respect to the Preferred Shares offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement, including exhibits filed therewith, may be examined at
the office of the SEC in Washington, D.C.
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 such 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.
<PAGE>
GLOSSARY OF TERMS
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROSPECTUS
- ---- ----------
1933 Act......................................................... 10
1934 Act ........................................................ 10
1940 Act ........................................................ 7
1940 Act Asset Coverage ......................................... 54
Advisory Agreement............................................... 29
Agent Member..................................................... 38
Applicable Rate.................................................. 5,46
Articles of Incorporation........................................ 8
Auction.......................................................... 37
Auction Agent.................................................... 37
Auction Agent Agreement.......................................... 37
Auction Date..................................................... 5,39
Auction Procedures............................................... 37
Available Preferred Shares....................................... 41
Bank............................................................. 58
Bank Borrowings.................................................. 53
Bid.............................................................. 39
Bidders.......................................................... 39
Broker-Dealer Agreements......................................... 37
Broker-Dealers................................................... 37
Business Day..................................................... 16,62,63
Buy-Back Date.................................................... 51
Cede............................................................. 44
CFTC............................................................. 22
Commercial Paper Dealers ........................................ 40
Common Stock..................................................... 2
Court Order...................................................... 61
Custodian........................................................ 66
Cure Date........................................................ 54
Custody Receipts ................................................ 65
DBL Group........................................................ 10
Deposit Securities............................................... 52
Dividend Payment Date............................................ 45
Dividend Periods................................................. 2,46
Drexel Burnham .................................................. 7
DTC.............................................................. 4
Event of Default................................................. 55,63
Existing Holder ................................................. 38
Financial Security .............................................. 2
Fund............................................................. Cover
Hold Order....................................................... 39
Indenture........................................................ 7
Initial Dividend Period.......................................... 46
Insurance Agreement.............................................. 4
Interest Period.................................................. 51
Internal Revenue Code............................................ 22
Investment Adviser............................................... Cover,3
Investment Guidelines............................................ 3
Liens............................................................ 53
Mandatory Expiration Redemption.................................. 47
Mandatory Surety Redemption...................................... 47
Master Purchaser's Letter........................................ 38
<PAGE>
PAGE ON WHICH TERM
IS DEFINED IN THE
TERM PROSPECTUS
- ---- ----------
Maximum Applicable Rate.......................................... 5,40
Merrill Lynch ................................................... 3
Minimum Applicable Rate.......................................... 5,40
Moody's.......................................................... Cover
Moseley.......................................................... 28
Notes............................................................ 2
Note Basic Maintenance Amount ................................... 54
Notes Investment Guidelines...................................... 3
Notice of Redemption............................................. 48
NYSE............................................................. 16
Order............................................................ 39
Original Issuance Date .......................................... 45
Paying Agent..................................................... 37
Plan............................................................. 58
Portfolio Valuation Report....................................... 63
Potential Holder................................................. 39
Preferred Shares................................................. 2
Preferred Stock Redemption....................................... 47
Quarterly Valuation Dates........................................ 63
Rating Agencies.................................................. Cover
Redemption Request .............................................. 64
S&P.............................................................. Cover
Scheduled Payment Day............................................ 45
Scheduled Payments............................................... 61
SEC.............................................................. 10
Securities Depository ........................................... 5
Sell Order....................................................... 39
Senior Notes..................................................... 51
Special Note Redemption Assets .................................. 55
Special Surety Redemption Assets................................. 64
Submission Deadline.............................................. 41
Submitted Bid ................................................... 41
Submitted Hold Order............................................. 41
Submitted Order.................................................. 41
Submitted Sell Order............................................. 41
Subsequent Dividend Period....................................... 46
Sufficient Clearing Bids......................................... 41
Surety Arrangement............................................... 3
Surety Assets Coverage........................................... 62
Surety Bond...................................................... 4
Surety Custodian................................................. 4
Surety Custody Account .......................................... 65
Surety Custody Agreement......................................... 61
Surety Investment Guidelines .................................... 3
TARPS ........................................................... Cover, 2
30-day "AA" Composite Commercial Paper Rate...................... 40
Trustee.......................................................... 51
Underwriter...................................................... 66
Valuation Date................................................... 54,63
Voting Period ................................................... 49
Winning Bid Rate................................................. 42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Prospect Street(SM) High Income Portfolio Inc.:
We have audited the accompanying balance sheet of Prospect Street(SM) High
Income Portfolio Inc. (a Maryland corporation) as of November 23, 1988. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this statement based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above, presents fairly, in
all material respects, the financial position of Prospect Street(SM) High Income
Portfolio Inc. as of November 23, 1988, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN & CO.
Boston, Massachusetts
November 23, 1988
<PAGE>
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
NOVEMBER 23, 1988
A S S E T S
Cash ......................................................... $ 102,300
Deferred organization, registration and
financing costs (Note 3)..................................... 1,500,000
-----------
$ 1,602,300
-----------
LIABILITIES
Accrued organization, registration and
financing costs (Note 3) .................................... $ 1,500,000
- - -----------
Commitments (Notes 1, 5 and 6)
NET ASSETS
Taxable Auction Rate Preferred Stock, no par value,
authorized 1,000 shares, none issued, liquidation
preference of $100,000 per share (Note 6).................... $ --
Common Stock, $.01 par value, authorized 100,000,000
shares, 11,000 shares issued and outstanding................. 110
Capital in excess of par value ............................... 102,190
-----------
Net assets applicable to Common Stock.................... $ 102,300
===========
Net asset value per common share......................... $ 9.30
===========
The accompanying notes are an integral part of this balance sheet.
<PAGE>
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
NOTES TO BALANCE SHEET
NOVEMBER 23, 1988
1. Prospect Street(SM) High Income Portfolio Inc. (the "Fund") was
organized as a corporation in the State of Maryland on May 13, 1988 and is
registered with the Securities and Exchange Commission as a diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Fund intends to qualify for and elect the tax treatment
applicable to regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended.
2. The Fund has had no operations since its incorporation other than those
relating to organizational matters and the registration of debt and equity
securities for sale to the public. All of the initial common shares are owned by
Prospect Street(SM) Investment Management Co., Inc.
3. Deferred offering costs incurred by the Fund in connection with the
sale of the Taxable Auction Rate Preferred Stock (the "Preferred Stock") and the
Common Stock will be recorded as a reduction of the Common Stock proceeds. The
costs incurred by the Fund in connection with its organization, estimated at
$35,000, have been deferred and will be amortized over a period of five years
from the date upon which the Fund commences its investment activities. The costs
incurred by the Fund in connection with the sale of the Senior Extendible Notes,
Series A (the "Notes") will be deferred and will be amortized using the interest
method over a period of five years (initial maturity date) from the date upon
which the Fund commences its investment activities.
4. The Fund intends to enter into an Advisory Agreement with the
Investment Adviser. Under the Advisory Agreement, the Investment Adviser,
subject to the general supervision of the Fund's Board of Directors, will manage
the Fund's portfolio and provide the administration of the Fund's other affairs.
As compensation for its services under the Advisory Agreement, the Investment
Adviser will receive a monthly advisory fee equal to 0.50% (on an annual basis)
of the average weekly value of the total assets of the Fund less accrued
liabilities (excluding the principal amount of the Notes and the liquidation
preference of the Preferred Stock and including accrued and unpaid dividends on
the Preferred Stock).
5. The Fund intends to issue Notes initially due in 1993. The Notes will
be extendible for one or more periods of one, two or three years until 1998 when
they will mature if not previously redeemed or repurchased. The Fund will be
required to maintain certain asset coverages with respect to the Notes. The
interest rate will be established at the offering of the Notes.
6. The Fund intends to issue the Preferred Stock concurrently with the
issuance of the Notes. The underwriting discount and the related expenses of the
issue will be recorded as a reduction of the capital in excess of par value on
the Common Stock. Dividends are cumulative at a rate which will be established
at the offering of the Preferred Stock and thereafter, will generally be reset
every 30 days by an auction. If the Fund fails to pay dividends on the Preferred
Shares, equal to two full years of dividends thereon, the holders of the
Preferred Stock as a class will have the right to elect a majority of the Board
of Directors. The Preferred Stock are redeemable, at the option of the Fund, at
a redemption price equal to $100,000 per share plus accumulated and unpaid
dividends on any dividend payment date. The Preferred Stock is also subject to
mandatory redemption at a redemption price of $100,000 per share (or $100,250
per share, if the redemption date is other than a dividend payment date), plus
accumulated and unpaid dividends, 30 days prior to the expiration of a surety
bond issued in respect thereof or if the Fund is in default of its surety assets
coverage requirements with respect to the Preferred Stock. Holders of shares of
Common Stock have voting rights of one vote per share and holders of the
Preferred Stock have voting rights of one vote per $ 1,000 of liquidation
preference other than liquidation preference attributable to accumulated and
unpaid dividends (i.e., 100 votes per share of Preferred Stock); provided that
all votes represented by a single share of Preferred Stock must be voted
together. In general, the holders of the Preferred Stock and the Common Stock
vote together as a single class, except that the holders of the Preferred Stock,
as a separate class, vote to elect two members of the Board of Directors and
separate class votes are required on certain matters that affect the respective
interests of the Preferred Stock and the Common Stock. The Preferred Stock has a
liquidation preference of $ 100,000 per share plus accumulated and unpaid
dividends.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
Page
----
Report of Independent Public Accountants............................... 75
Financial Statements:
Consolidated Balance Sheets as of December 31, 1987 and 1986........... 76
Consolidated Statements of Income For the Years Ended
December 31, 1987 and 1986 and the Period from March 16, 1984
(date of inception) Through December 31, 1985......................... 77
Consolidated Statements of Changes in Shareholder's
Equity For the Years Ended December 31, 1987 and 1986
and the Period from March 16, 1984 (date of inception)
Through December 31, 1985............................................. 78
Consolidated Statements of Changes in Financial Position
For the Years Ended December 31, 1987 and 1986 and the
Period From March 16, 1984 (date of inception)
Through December 31, 1985............................................. 79
Notes to Consolidated Financial Statements For the Years
Ended December 31, 1987 and 1986 and the Period from
March 16, 1984 (date of inception) Through December 31, 1985 ......... 80
Consolidated Balance Sheet as of September 30, 1988 (Unaudited) ....... 86
Consolidated Statements of Income For the Nine Months
Ended September 30, 1988 and 1987 (Unaudited) ........................ 87
Consolidated Statements of Changes in Financial Position
For the Nine Months Ended September 30, 1988 and 1987 (Unaudited)..... 88
Notes to Consolidated Financial Statements For the Six
Months Ended September 30, 1988 and 1987 (Unaudited).................. 89
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Financial Security Assurance Inc.
350 Park Avenue
New York, New York
We have examined the consolidated balance sheets of Financial Security
Assurance Inc. and Subsidiary as of December 31, 1987 and 1986, and the related
consolidated statements of income, changes in shareholder's equity, and changes
in financial position for the years ended December 31, 1987 and 1986 and the
period from March 16, 1984 (date of inception) through December 31, 1985 and the
related supplemental schedules on pages 91 and 92. Our examinations were made in
accordance with generally accepted auditing standards and, accordingly, included
such tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances.
In our opinion, the consolidated financial statements referred to above
present fairly the financial position of Financial Security Assurance Inc. and
Subsidiary at December 31, 1987 and 1986, and the results of their operations
and the changes in their financial position for the years ended December 31,
1987 and 1986 and the period from March 16, 1984 (date of inception) through
December 31, 1985, in conformity with generally accepted accounting principles
applied on a consistent basis. Also, in our opinion, the supplemental schedules
referred to above, when read in conjunction with the related financial
statements, present fairly the information therein set forth.
TOUCHE ROSS & CO.
New York, New York
March 7, 1988
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1987 1986
---- ----
ASSETS
<S> <C> <C>
Bonds, at amortized cost (market value of $256,066,982 and
$252,718,584, respectively) ............................................. $261,190,571 $248,760,695
Short-term Investments, at cost which approximates market.................. 6,961,072 12,028,295
Cash ...................................................................... 7,535,104 560,659
Premiums and Other Receivables (from Parent $533,989)...................... 2,211,661 6,130,373
Property and Equipment (net of accumulated depreciation of $391,922
and $2,917, respectively) ............................................... 1,464,878 52,892
Deferred Acquisition Costs................................................. 17,804,858 11,525,814
Accrued Interest........................................................... 5,223,008 4,448,515
Other Assets............................................................... 5,950,036 91,813
Goodwill................................................................... 3,753,750 3,851,250
------------ ------------
TOTAL ASSETS........................................................... $312,094,938 $287,450,306
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts Payable ($353,178 in 1986 to Parent) ............................. $ 250,340 $ 687,124
Federal Income Taxes (payable to Parent)................................... 4,747,892 5,728,242
Deferred Federal Income Taxes ............................................. 5,952,041 3,617,817
Unearned Premium Reserve................................................... 67,852,938 54,436,132
Accrued Expenses and Other Liabilities..................................... 1,510,233 2,001,800
Premiums Payable........................................................... 547,877 3,379,230
------------ ------------
TOTAL LIABILITIES...................................................... 80,861,321 69,850,345
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common Stock (1,000 shares authorized and issued, par value of $2,500) .. 2,500,000 2,500,000
Additional Paid-In Surplus .............................................. 197,501,000 197,501,000
Retained Earnings ....................................................... 31,232,617 17,598,96
------------ ------------
TOTAL SHAREHOLDER'S EQUITY............................................. 231,233,617 217,599,961
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................. $312,094,938 $287,450,306
============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1985
<TABLE>
<CAPTION>
1987 1986 1985
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Premiums Earned ..................................... $ 13,046,807 $ 9,426,741 $ 553,044
Net Investment Income ............................... 21,483,336 20,922,426 6,309,495
Ceding Commissions .................................. 824,692 1,412,808 --
Other Income ........................................ 926,301 -- --
------------ ------------ ------------
TOTAL REVENUES ..................................... 36,281,136 31,761,975 6,862,539
------------ ------------ ------------
EXPENSES:
Ceding Commissions .................................. 1,770,160 4,181,213 4,004,590
Salaries and Related Expenses ....................... 6,494,474 4,146,623 1,015,706
Advertising and Promotion ........................... 1,046,260 784,646 811,692
Underwriting Expenses ............................... 1,237,720 668,208 73,367
Travel and Related Expenses ......................... 589,912 364,596 202,893
Rent Expense ........................................ 1,229,815 1,116,027 173,328
Depreciation ........................................ 261,297 2,917 --
Legal, Auditing & Consulting ........................ 1,183,670 2,366,882 1,456,258
Taxes, Licenses and Fees ............................ 356,456 519,035 599,806
Other Operating Expenses ............................ 1,495,101 469,961 198,810
Amortization ........................................ 117,361 48,750 --
------------ ------------ ------------
TOTAL EXPENSES BEFORE DEFERRAL OF ACQUISITION COSTS 15,782,226 14,668,858 8,536,450
Acquisition Costs Deferred (net of amortization of
$2,259,489, $1,829,198 and $64,118, respectively) .. (6,279,045) (5,730,152) (5,795,662)
------------ ------------ ------------
EXPENSES AFTER DEFERRAL OF ACQUISITION COSTS ...... 9,503,181 8,938,706 2,740,788
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ........................... 26,777,955 22,823,269 4,121,751
Provision for Income Taxes .......................... 7,229,249 9,346,059 --
------------ ------------ ------------
NET INCOME ........................................ $ 19,548,706 $ 13,477,210 $ 4,121,751
============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK SURPLUS EARNINGS TOTAL
------ ---------- -------- -----
<S> <C> <C> <C> <C>
Balance, March 16, 1984 (date of inception) .. $ -- $ -- $ -- $ --
Issuance of Common Stock...................... 1,000,000 184,001,000 -- 185,001,000
Net Income for the Period..................... -- -- 4,121,751 4,121,751
---------- ------------- ----------- ------------
Balance, December 31, 1985.................... 1,000,000 184,001,000 4,121,751 189,122,751
Changes in Par Value of Common Stock.......... 1,500,000 (1,500,000) -- --
Capital Contribution from Parent ............. -- 15,000,000 -- 15,000,000
Net Income for the Year....................... -- -- 13,477,210 13,477,210
---------- ------------- ----------- ------------
Balance, December 31, 1986.................... 2,500,000 197,501,000 17,598,961 217,599,961
---------- ------------- ----------- ------------
Dividends on Common Stock..................... -- -- (5,915,050) (5,915,050)
Net Income for the Year....................... -- -- 19,548,706 19,548,706
---------- ------------- ----------- ------------
Balance, December 31, 1987.................... $2,500,000 $ 197,501,000 $31,232,617 $231,233,617
========== ============= =========== ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(a WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1985
<TABLE>
<CAPTION>
1987 1986 1985
---- ---- ----
<S> <C> <C> <C>
SOURCE OF FUNDS:
From Operations:
Net Income .................................... $ 19,548,706 $ 13,477,210 $ 4,121,751
Items not requiring use of funds:
Depreciation and Amortization ............... 4,699,139 2,205,258 162,231
Unearned Premium Reserve .................... 13,416,806 23,731,946 30,704,186
Accounts Payable Accrued Expenses and Other
Liabilities ................................. (928,351) 573,518 2,115,406
Premiums Payable .............................. (2,831,353) 3,379,230 --
Federal Income Taxes:
Currently Payable ........................... (980,350) 5,728,242 --
Deferred .................................... 2,334,224 3,617,817 --
Premiums Receivable, Accrued Interest and Other
Assets ...................................... (2,714,004) (4,321,416) (6,349,285)
Deferred Acquisition Costs .................... (8,538,534) (7,559,350) (5,859,780)
------------- ------------- -------------
Funds Provided by Operations ................ 24,006,283 40,832,455 24,894,509
Maturities and Sales of Bonds ................... 142,801,208 201,707,675 132,608,087
Other:
Capital Contribution ......................... -- 15,000,000 --
Issuance of Common Stock ..................... -- -- 185,001,000
------------- ------------- -------------
FUNDS PROVIDED .................................... 166,807,491 257,540,130 342,503,596
------------- ------------- -------------
APPLICATION OF FUNDS:
Investment in Bonds ............................. 157,311,936 425,916,651 157,582,312
Goodwill acquired ............................... -- 3,900,000 --
Dividends paid .................................. 5,915,050 -- --
Additions to Property and Equipment ............. 1,673,283 55,809 --
------------- ------------- -------------
FUNDS APPLIED ..................................... 164,900,269 429,872,460 157,582,312
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS ..................................... $ 1,907,222 $(172,332,330) $ 184,921,284
============= ============= =============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
1. ORGANIZATION
Financial Security Assurance Inc. (the "Company"), a wholly owned
subsidiary of Financial Security Assurance Holdings Ltd. (the "Parent"), is an
insurance company licensed in the State of New York. The Company, which was
incorporated on March 16, 1984, effectively commenced operations on July 25,
1985, and received its New York State License on September 23, 1985. The Company
is principally engaged in providing financial guarantees for structured
corporate-backed financings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
On June 12, 1986, the Company acquired a wholly owned subsidiary, Financial
Security Assurance of Iowa, Inc. and its wholly owned subsidiary, Financial
Security Assurance of Oklahoma, Inc. (the "Subsidiaries") whose results have
been consolidated since the date of acquisition (see Note 9). All intercompany
accounts and transactions have been eliminated.
b. Basis of Reporting
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") which differ in certain
material respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 4).
Certain amounts in the December 31, 1986 and 1985 Consolidated Financial
Statements have been reclassified to conform to the 1987 presentation.
c. Investments
Investments in fixed maturity securities are carried at amortized cost. Bond
discounts and premiums are amortized over the remaining terms of the securities.
Short-term investments are carried at cost which approximates market value.
Realized gains or losses on sale of investments are determined on the basis of
specific identification.
d. Premium Revenue Recognition
Premiums are earned in proportion to the amount of risk outstanding over the
period of coverage. Unearned premiums represent that portion of premiums which
are applicable to coverage of risk to be provided in the future on policies in
force. Consolidated premiums earned consist of:
1987 1986 1985
---- ---- ----
Gross Premiums Written ........ $ 22,004,164 $ 22,027,645 $ 12,322,323
Assumed Premiums .............. 9,129,366 17,087,078 18,934,907
Ceded Premiums ................ (4,669,917) (5,956,036) --
------------ ------------ ------------
Net Premiums Written .......... 26,463,613 33,158,687 31,257,230
(Increase) in Unearned Premiums (13,416,806) (23,731,946) (30,704,186)
------------ ------------ ------------
Premiums Earned ............... $ 13,046,807 $ 9,426,741 $ 553,044
============ ============ ============
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16,1984 (date of inception)
THROUGH DECEMBER 31, 1985
e. Claims and Claim Adjustment Expenses
A provision for unpaid claims and claim adjustment expenses is recorded when
an insured risk (which risks aggregated approximately $5.1 billion and $3.7
billion principal amount at December 31, 1987 and 1986, respectively) is in
default at the balance sheet date or when in management's opinion, the
likelihood of default is probable at the balance sheet date. The adequacy of the
provision is reviewed on an ongoing basis and changes in estimates are reflected
in income currently. As of December 31, 1987 and 1986, no claims and claim
adjustment expenses have been incurred.
f. Deferred Acquisition Costs
Deferred acquisition costs are comprised of those expenses that vary with
and are primarily related to the production of business, including ceding
commissions paid on reinsurance assumed, salaries and related costs of
underwriting and marketing personnel, rating agency fees, premium taxes and
certain other underwriting expenses, offset by ceding commission income on
premiums ceded to reinsurers. Amortization of deferred acquisition costs is
recorded over the period in which the related premiums are earned. Deferred
acquisition costs are reviewed periodically to determine that they do not exceed
recoverable amounts.
g. Property and Equipment
The cost of furniture, fixtures and equipment is depreciated on a
straight-line basis over their estimated useful lives. Leasehold improvements
are amortized over the remaining terms of the leases or the useful life of the
improvements, whichever is shorter. Maintenance and repairs are charged to
expenses as incurred.
h. Federal Income Taxes
Deferred Federal income taxes are provided for timing differences in the
recognition of revenue and expense for tax and financial reporting purposes.
i. Expenses
Allocable expenses are shared by the Company and its Parent on a fair and
equitable basis determined principally by estimates of respective usage as
stated in an expense sharing agreement. The agreement is subject to the
provisions of the New York Insurance Law.
j. Goodwill
Goodwill includes the recognition of the value of the state licenses
acquired in the purchase of the two wholly owned subsidiaries (Note 9), and is
being amortized on a straight line basis over 40 years.
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
3. INVESTMENTS
Investments in bonds carried at amortized cost of $7,102,160 at December
31, 1987 and $6,957,654 at December 31, 1986 were on deposit with state
regulatory authorities as required by law.
Consolidated net investment income consists of:
<TABLE>
<CAPTION>
1987 1986 1985
---- ---- ----
<S> <C> <C> <C>
Interest ........................................................ $ 20,699,434 $ 18,358,849 $ 5,916,211
Net Gain on Sale of Bonds ....................................... 1,387,437 3,212,386 550,375
Investment Expenses.............................................. (603,535) (648,809) (157,091)
------------ ------------ ------------
Net Investment Income ........................................... $ 21,483,336 $ 20,922,426 $ 6,309,495
============ ============ ============
Net Unrealized (Depreciation) Appreciation ...................... $ (5,123,589) $ 3,957,889 $ 216,033
============ ============ ============
</TABLE>
4. STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of generally accepted
accounting principles ("GAAP"), which differ in certain material respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The significant differences result from the following statutory
accounting practices:
-- Premiums are earned on municipal business when related risk has expired
rather than as coverage is provided;
-- Acquisition costs are charged to current operations as incurred rather
than as related premiums are earned;
-- A contingency reserve and a reserve for losses incurred but not
reported ("IBNR") are computed on the basis of statutory requirements
for the security of all policyholders, regardless of whether loss
contingencies actually exist;
-- Certain assets designated as "non-admitted assets" are charged directly
to surplus; and
-- Federal income taxes are only provided on taxable income for which
income taxes are currently payable.
A reconciliation of the Company's net income and shareholder's equity, prepared
on a GAAP basis, as included in the Consolidated Financial Statements at
December 31, 1987, 1986 and 1985, to the amounts reported on a statutory basis,
are as follows (in thousands):
Net Income:
1987 1986 1985
---- ---- ----
GAAP BASIS .................... $ 19,549 $ 13,477 $ 4,122
Premium revenue recognition ... (1,537) (2,009) (180)
Acquisition costs deferred .... (6,279) (5,730) (5,796)
Contingency and IBNR reserves . (3,641) (1,806) (1,563)
Deferred income tax ........... 2,334 3,618 --
Other ......................... 98 48 --
Subsidiary pre-acquisition loss -- (6,860) --
-------- -------- --------
STATUTORY BASIS ............... $ 10,524 $ 738 $ (3,417)
======== ======== ========
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (DATE OF INCEPTION)
THROUGH DECEMBER 31. 1985
Shareholder's equity:
1987 1986 1985
---- ---- ----
GAAP BASIS ................. $ 231,234 $ 217,600 $ 189,123
Premium revenue recognition (3,726) (2,189) (180)
Acquisition costs deferred . (17,805) (11,526) (5,796)
Contingency and IBNR reserve (7,010) (3,369) (1,563)
Non-admitted assets: other . (1,828) (591) (2)
licenses .. (3,754) (3,851) --
Deferred income tax ........ 5,952 3,618 --
Other ...................... 256 (275) --
--------- --------- ---------
STATUTORY BASIS ............ $ 203,319 $ 199,417 $ 181,582
========= ========= =========
5. INCOME TAXES
The Company, its Subsidiaries and its Parent file a consolidated federal
income tax return. Under a tax sharing agreement, income tax allocation is based
upon separate return calculations with current credit for losses to the extent
utilized in the consolidated tax return.
The components of the Company's consolidated federal income tax provision are as
follows:
1987 1986
---- ----
Current.................... $4,895,025 $5,728,242
Deferred .................. 2,334,224 3,617,817
---------- ----------
Total.................... $7,229,249 $9,346,059
========== ==========
Differences exist between the effective tax rates of 27% and 41% for the
years ending December 31, 1987 and 1986, respectively and the statutory rates of
40% and 46% because approximately $8.7 million and $2.3 million of interest
income is tax exempt. The deferred tax liability relates primarily to deferred
acquisition costs which are deducted currently for tax purposes and timing
differences in the recognition of premiums earned.
6. SHAREHOLDER'S EQUITY
At December 31, 1987 and 1986, the Company had capital stock authorized and
issued as follows:
NUMBER OF SHARES
ISSUED AND OUTSTANDING
----------------------
1987 1986
---- ----
Class A common, 1,000 shares authorized............ 1,000 1,000
Par value.......................................... $2,500 $2,500
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
Under New York Insurance Law, the maximum amount of dividends which can be
paid by the Company to the Parent without prior approval of the Superintendent
of Insurance is subject to restrictions relating to statutory unassigned
surplus. At December 31, 1987 the unassigned surplus was $3,318,069.
7. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory defined contribution pension plan
for the benefit of all eligible employees. Employer contributions are based upon
a fixed percentage of employee salaries determined at the discretion of the
Company. Pension expense, which is funded as accrued, amounted to $320,917,
$204,913 and $110,422 for the periods ended December 31, 1987, 1986 and 1985,
respectively.
The Company also maintains an employee retirement savings plan for the
benefit of all eligible employees. The plan permits employees to contribute a
percentage of their salaries up to limits prescribed by the Internal Revenue
Service. Employer contributions to the plan are discretionary, and none have
been made.
The Company has adopted and sponsored the Non-Qualified Executive Stock
Bonus Plan to advance the interests of the Company by rewarding the services of
eligible individuals, which include officers, directors, executives, supervisory
personnel as well as other employees. Designated employees are eligible to
receive Bonus Share Units (which represents 1/1000 of a Bonus Share) which
vest during each of years 3, 4, and 5 of participation in the plan. At December
31, 1987, 14,590 Bonus Share Units had been awarded. Compensation expense is
recognized at the date the units are awarded based on the estimated fair market
value of the Company's stock at the date of award.
8. COMMITMENTS
The Company and its Parent lease office space under a noncancelable lease
which expires in 1995. The lease provides for escalations resulting from
increased assessments for taxes, utilities and maintenance, in addition to base
rent. Future minimum rental payments, net of sublease income ($558,791 in 1988,
$390,182 in 1989, $367,552 in 1990 and $313,402 in 1991), are as follows:
YEAR ENDING DECEMBER 31,
------------------------
1988......................................................$ 1,112,692
1989...................................................... 1,320,641
1990...................................................... 1,396,001
1991...................................................... 1,514,201
1992...................................................... 1,514,201
Thereafter................................................ 4,368,438
-----------
$11,226,174
===========
Rent expense was $1,229,815, $1,116,027, and $173,328 for the periods
ending December 31, 1987, 1986 and 1985, respectively (including $316,783,
$286,208, and $27,611 paid to the Parent for the periods ending December 31,
1987, 1986 and 1985, respectively).
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
FOR THE YEARS ENDED DECEMBER 31, 1987 AND 1986
AND THE PERIOD FROM MARCH 16, 1984 (date of inception)
THROUGH DECEMBER 31, 1985
9. ACQUISITION OF SUBSIDIARIES
The Company acquired on June 12, 1986, from an investor in its Parent, two
insurance companies (Equitable Casualty Insurance Company, now known as
Financial Security Assurance of Iowa, Inc., and its subsidiary Equitable General
Insurance Company of Oklahoma, now known as Financial Security Assurance of
Oklahoma, Inc.) whose only assets, besides certain investment securities, were
licenses to do business in states where the Company was not previously licensed.
The purchase price was $69.5 million in cash. As of the date of
acquisition, the balance sheet of the acquired companies reflected bonds and
short-term investments of approximately $65.6 million and no liabilities. The
acquisition was accounted for by the purchase method, and the amount
(approximately $3.9 million) by which the purchase price exceeded the net
tangible assets was assigned to licenses (shown on the balance sheet as
goodwill) and is being amortized over 40 years. The statements of income and
changes in financial position for 1986 include the operations of the
subsidiaries from June 12, 1986.
10. REINSURANCE
Pursuant to a Quota Share Reinsurance Pooling Agreement dated July 1, 1986
(the "Pooling Agreement") among the Company and its subsidiaries, liabilities on
policies written by the Company or any of its subsidiaries are ceded among the
companies on an agreed upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable risk
limitations. The Company also reinsures portions of its risks with unaffiliated
reinsurers under variable quota share treaties and on a transaction-by-
transaction basis.
In the event (which Management considers to be highly unlikely) that any or
all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The amount
deducted from the unearned premiums for reinsurance ceded to other companies was
approximately $9.6 million and $5.8 million at December 31, 1987 and 1986,
respectively. Unearned premiums included approximately $32.6 million and $29.1
million related to reinsurance assumed at December 31, 1987 and 1986,
respectively.
11. RELATED PARTY TRANSACTIONS
On September 1, and November 30, 1987, Financial Security Assurance of
Iowa, Inc. loaned $2,864,000 and $2,019,500 to the Parent. The notes mature on
March 1, and June 1, 1988, respectively and bear interest at the prime rate in
effect on the date of the loan (8.25% and 8.75%, respectively).
During 1987, the Company acquired from the Parent property and equipment
with a book value of $1.6 million which approximated the fair value of the
assets on the date of acquisition.
12. LIQUIDITY ARRANGEMENTS
During 1987, the Company obtained credit facilities and other liquidity
arrangements from a number of commercial banks, ranging in size up to $300
million. These facilities and arrangements are intended either for general
application to transactions benefiting from the Company's insurance or are
assigned to specific insured transactions. As of December 31, 1987, there have
been no borrowings under any such facilities or arrangements. Aggregate fees
paid by the Company for such facilities and arrangements for the year ended
December 31, 1987 were $184,000.
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
1988
--------------
ASSETS
Bonds, at amortized cost (market value of $263,681,971) .. $266,015,448
Short-term Investments, at cost which approximates market 52,730,364
Cash ..................................................... 1,967,133
Premiums and Other Receivables ($1,440,490 from Parent) .. 2,439,201
Property and Equipment (net of accumulated depreciation
of $761,005) ........................................... 2,020,810
Deferred Acquisition Costs ............................... 19,912,640
Accrued Interest ......................................... 5,593,861
Other Assets ............................................. 16,371,260
Goodwill ................................................. 3,680,625
------------
TOTAL ASSETS ........................................... $370,731,342
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts Payable ($47,907 to Parent) ..................... $ 160,911
Federal Income Taxes (Payable to Parent) ................. 8,178,803
Deferred Federal Income Taxes ............................ 9,405,014
Unearned Premium Reserve ................................. 103,481,202
Accrued Expenses and Other Liabilities ................... 7,103,731
Premiums Payable ......................................... 893,188
------------
TOTAL LIABILITIES ...................................... 129,222,849
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common Stock (1,000 shares authorized and issued;
par value--$2,500) ..................................... 2,500,000
Additional Paid-In Surplus ............................... 197,501,000
Retained Earnings ........................................ 41,507,493
------------
TOTAL SHAREHOLDER'S EQUITY ............................. 241,508,493
------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ............. $370,731,342
============
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------
1988 1987
------------ ------------
<S> <C> <C>
REVENUES:
Premiums Earned ............................................................. $ 15,423,088 $ 10,453,978
Net Investment Income ....................................................... 17,622,279 16,423,374
Ceding Commissions .......................................................... 4,421,479 762,579
Other Income ................................................................ 367,119 100,000
------------ ------------
TOTAL REVENUES ............................................................ 37,833,965 27,739,931
------------ ------------
EXPENSES:
Ceding Commissions .......................................................... 717,353 1,447,559
Salaries and Related Expenses ............................................... 5,047,173 4,863,545
Advertising and Promotion ................................................... 728,692 914,145
Underwriting Expenses ....................................................... 251,245 1,100,132
Travel and Related Expenses ................................................. 562,774 409,183
Rent Expense ................................................................ 1,209,387 968,551
Depreciation ................................................................ 369,013 176,004
Legal, Auditing & Consulting ................................................ 2,687,173 1,053,030
Taxes, Licenses and Fees .................................................... 993,894 139,709
Other Operating Expenses .................................................... 803,155 1,227,070
Amortization ................................................................ 73,125 73,125
------------ ------------
TOTAL EXPENSES BEFORE DEFERRAL OF ACQUISITION COSTS ....................... 13,442,984 12,372,053
Acquisition Costs Deferred (net of amortization of $1,651,577 and $1,260,469,
respectively) ............................................................. (2,107,782) (4,525,855)
------------ ------------
EXPENSES AFTER DEFERRAL OF ACQUISITION COSTS .............................. 11,335,202 7,846,198
INCOME BEFORE INCOME TAXES .................................................... 26,498,763 19,893,733
Provision for Income Taxes .................................................. 6,883,887 5,236,920
------------ ------------
NET INCOME ................................................................ $ 19,614,876 $ 14,656,813
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
1988 1987
------------- -------------
<S> <C> <C>
SOURCES OF FUNDS:
From Operations:
Net Income ............................................................................... $ 19,614,876 $ 14,656,813
Items not requiring use of funds:
Depreciation and Amortization .......................................................... 3,753,269 3,654,216
Unearned Premium Reserve ............................................................... 35,628,264 12,536,797
Accounts Payable, Accrued Expenses and Other Liabilities ................................. 332,077 (798,948)
Premiums Payable ......................................................................... 345,311 1,314,057
Federal Income Taxes:
Currently Payable ...................................................................... 3,430,911 (2,615,106)
Deferred ............................................................................... 3,452,973 1,451,196
Premiums Receivable, Accrued Interest and Other Assets.................................... (11,019,617) (1,075,373)
Deferred Acquisition Costs................................................................ (3,759,358) (5,786,324)
------------- -------------
Funds Provided by Operations ............................................................. 51,778,706 23,337,328
Maturities and Sales of Bonds ................................................................ 94,502,537 120,674,562
------------- -------------
FUNDS PROVIDED ............................................................................... 146,281,243 144,011,890
------------- -------------
APPLICATION OF FUNDS:
Investment in Bonds ........................................................................ 95,646,810 129,629,655
Dividends Paid ............................................................................. 9,340,000 2,934,550
Additions to Property and Equipment ........................................................ 1,093,112 1,731,664
------------- -------------
FUNDS APPLIED ................................................................................ 106,079,922 134,295,869
------------- -------------
INCREASE IN CASH AND SHORT-TERM
INVESTMENTS .............................................................................. $ 40,201,321 $ 9,716,021
============= =============
</TABLE>
See notes to consolidated financial statements
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1988, the consolidated
statements of income for the nine-month periods ended September 30, 1988 and
1987, and the consolidated statements of changes in financial position for the
nine-month periods then ended have been prepared without audit by Financial
Security Assurance Inc. (the "Company"), a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in financial position
at September 30, 1988 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1987 financial statements.
The results of operations for the periods ended September 30, 1988 and 1987 are
not necessarily indicative of the operating results for the full year.
Certain amounts in the September 30, 1987 consolidated financial statements
have been reclassified to conform to the 1988 presentation.
2. PREMIUM REVENUE RECOGNITION
Premiums are earned in proportion to the amount of risk outstanding over the
period of coverage. Unearned premium represents that portion of premium which is
applicable to coverage of risk to be provided in the future on policies in
force. Consolidated premiums earned consist of:
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1988 1987
------------ ------------
Gross Premiums Written ............. $ 65,745,660 $ 21,173,775
Assumed Premiums ................... 2,288,588 6,901,001
Ceded Premiums ..................... (16,982,896) (5,084,001)
------------ ------------
Net Premiums Written ............... 51,051,352 22,990,775
Increase in Unearned Premium Reserve (35,628,264) (12,536,797)
------------ ------------
Premiums Earned .................. $ 15,423,088 $ 10,453,978
============ ============
3. CLAIMS AND CLAIM ADJUSTMENT EXPENSES
A provision for unpaid claims and claim adjustment expenses will be recorded
when an insured risk (which risk aggregated approximately $7.6 billion principal
amount at September 30, 1988) is in default at the balance sheet date or when in
management's opinion, the likelihood of default is probable at the balance sheet
date. The adequacy of the provision will be reviewed on an ongoing basis and
changes in estimates will be reflected in income currently. As September June
30, 1988, no claims and claim adjustment expenses have been incurred.
4. STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of generally accepted
accounting principles ("GAAP"), which differ in certain material respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The significant differences result from the following statutory
basis accounting practices:
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1988 AND 1987
(UNAUDITED)
-- Premiums are earned on municipal business when related risk has expired
rather than as coverage is provided;
-- Acquisition costs are charged to current operations as incurred rather
than as related premiums are earned;
-- A contingency reserve and a reserve for losses incurred but not
reported ("IBNR") are computed on the basis of statutory requirements
for the security of all policyholders, regardless of whether loss
contingencies actually exist;
-- Certain assets designated as "non-admitted assets" are charged directly
to surplus; and
-- Federal income taxes are only provided on taxable income for which
income taxes are currently payable.
The Company's statutory-basis net income for the periods ended September 30,
1988 and 1987 and statutory shareholder's equity at September 30, 1988 were as
follows:
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1988 1987
----------- ----------
Net Income--Statutory Basis...................... $16,421,872 $9,476,548
=========== ==========
SEPTEMBER 30, 1988
--------------------------
Shareholder's Equity--Statutory Basis................ $208,079,998
============
5. REINSURANCE
Pursuant to a Quota Share Reinsurance Pooling Agreement (the "Pooling
Agreement") among the Company and its subsidiaries, liabilities on policies
written by the Company or any of its subsidiaries are ceded among the companies
on an agreed upon percentage substantially proportional to their respective
capital, surplus and reserves, subject to applicable risk limitations. The
Company also reinsures portions of its risks with unaffiliated reinsurers under
variable quota share treaties and on a transaction-by-transaction basis.
In the event (which Management considers to be highly unlikely) that any or
all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The amount
deducted from the unearned premiums for reinsurance ceded to other companies was
$24.4 million at September 30, 1988. Unearned premiums included approximately
$31.2 million related to reinsurance assumed at September 30, 1988.
6. RELATED PARTY TRANSACTIONS
On September 1, 1987, and at various times thereafter, Financial Security
Assurance of Iowa, Inc. loaned varying sums of money to Financial Security
Assurance Holdings Ltd.; such amounts are included in Other Assets. The maturity
dates, amounts and related interest rates, are as follows:
MATURITY DATE AMOUNT INTEREST RATE
------------ ------ -------------
November 25, 1988................................ $2,019,500 8.75%
February 24, 1989................................ $2,864,000 8.25%
February 24, 1989................................ $3,290,000 8.50%
November 27, 1988................................ $5,230,000 9.00%
February 28, 1989................................ $1,623,828 10.00%
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
AT DECEMBER 31, 1987
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE STREET
------------------ ---- ----- ---------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. Government and government
agencies and authorities .................. $ 94,988,854 $ 94,688,246 $ 94,988,854
States, municipalities and political
subdivisions .............................. 144,376,376 140,161,722 144,376,376
Public utilities .......................... 8,670,522 8,376,578 8,670,522
All other corporate bonds ................... 13,154,819 12,840,436 13,154,819
------------ ------------ ------------
Total fixed maturities .................... 261,190,571 256,066,982 261,190,571
Short-term investments .......................... 6,961,072 6,961,072 6,961,072
------------ ------------ ------------
Total investments ......................... $268,151,643 $263,028,054 $268,151,643
============ ============ ============
</TABLE>
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
SCHEDULE II
GUARANTEES OF SECURITIES OF OTHER ISSUERS
AT DECEMBER 31, 1987
(000'S OMITTED)
<TABLE>
<CAPTION>
TERM TO FINAL MATURITY DATES**
----------------------------------------------------------------------------------
1/1/88 1/1/93 1/1/98 1/1/03 ON OR
TYPE OF PRINCIPAL THROUGH THROUGH THROUGH THROUGH AFTER
OBLIGATION AMOUNT* 12/31/92 12/31/97 12/31/02 12/31/07 1/1/08
- ---------- ------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Written (Direct)
Corporate*** ...................... $2,502,845 $837,007 $483,280 $117,724 $ -- $1,064,834
Municipals .......................... -- -- -- -- -- --
---------- -------- -------- -------- -------- ----------
Total Net Written
(Direct) .......................... 2,502,845 $837,007 $483,280 $117,724 $ -- $1,064,834
======== ======== ======== ======== ==========
Total Assumed**** ................... 2,643,083
----------
Grand Total ......................... $5,145,928
==========
- ----------------
<FN>
* Principal Amount determined as follows:
-- Net Written (Direct)--original principal amount reduced by principal paydowns through December 31, 1987 and by principal
amount of insurance ceded to unaffiliated insurance carriers.
-- Assumed--principal amount of insurance assumed from unaffiliated insurance carriers, reduced by principal paydowns through
December 31, 1987.
** Term to Final Maturity is determined as of December 31, 1987, for the full principal amount of each issue, outstanding as of
December 31, 1987, without regard to any subsequent principal amortization or possible prepayment.
*** Includes structured financings and tax exempt issues involving corporate credits.
**** The assumed principal amount consists of $10,000,000 of corporate obligations maturing in May 1988, and $2,633,083,000 of
municipals with various maturity dates, from 1988 through the year 2027.
</TABLE>
<PAGE>
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.)
SCHEDULE II
GUARANTEES OF SECURITIES OF OTHER ISSUERS
AT SEPTEMBER 30, 1988
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
TERM TO FINAL MATURITY DATES**
------------------------------------------------------------------------
10/1/88 10/1/93 10/1/98 10/1/03 ON OR
PRINCIPAL THROUGH THROUGH THROUGH THROUGH AFTER
TYPE OF OBLIGATION AMOUNT* 9/30/93 9/30/98 9/30/03 9/30/08 10/1/08
------------------ --------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Written (Direct)
Corporate*** .............................. $5,026,979 $1,394,279 $831,119 $116,656 $1,030,799 $1,654,126
Municipals ................................ -- -- -- -- -- --
---------- ---------- -------- -------- ---------- ----------
Total Net Written
(Direct) .................................. 5,026,979 $1,394,279 $831,119 $116,656 $1,030,799 $1,654,126
========== ======== ======== ========== ==========
Total Assumed**** ........................... 2,606,862
----------
Grand Total.................................. $7,633,841
==========
<FN>
* Principal Amount determined as follows:
-- Net Written (Direct)--original principal amount reduced by principal paydowns through September 30, 1988 and by principal
amount of insurance ceded to unaffiliated insurance carriers.
-- Assumed--principal amount of insurance assumed from unaffiliated insurance carriers, reduced by principal paydowns through
September 30, 1988.
** Term to Final Maturity is determined as of September 30, 1988, for the full principal amount of each issue, outstanding as of
September 30, 1988, without regard to any subsequent principal amortization or possible prepayment.
*** Includes structured financings and tax exempt issues involving corporate credits.
**** The assumed principal amount consists of $10,000,000 of corporate obligations maturing in May 1989, and $2,596,862,000 of
municipals with various maturity dates, from 1988 through the year 2027.
</TABLE>
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
Standard & Poor's Corporation describes classifications of bonds as follows:
"AAA" Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
"AA" Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from the higher 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.
"BBB" Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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.
"BB"-"B"-"CCC"-"C" Debt rated "BB", "B", "CCC", and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"C1" The rating "C1" is reserved for income bonds on which no interest is
being paid.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
"Aaa" Bonds 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 which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba" Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B" Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
"Ca" Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
"C" Bonds which are rated "C" are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
<PAGE>
APPENDIX B
AUCTION ILLUSTRATIONS
The following illustrations reflect certain simplifying assumptions,
including, without limitation, assumptions as to the 30-day "AA" Composite
Commercial Paper Rate and number of shares of Preferred Stock outstanding. These
assumptions have been made for the purpose of illustration only.
Capitalized terms used herein shall have the respective meanings specified
in the forepart of this Prospectus.
ILLUSTRATION A
THE FIRST AUCTION FOR THE PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for the Preferred Stock is 12.250%, which is 175% of the 30-day
"AA" Composite Commercial Paper Rate. There are 330 shares of Preferred Stock
outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OF ORDERS BY
BROKER-DEALERS TO THE AUCTION AGENT
Broker-Dealers obtain the following Bids and Sell Orders from Existing
Holders of Preferred Stock:
BIDDER ORDER
- ------ -----
#1 Continue to hold 22 shares if the new rate is at least 7.000%
#2 Sell 44 shares
#3 Continue to hold 66 shares if the new rate is at least 7.250%
#4 Continue to hold 66 shares if the new rate is at least 7.300%
#5 Continue to hold 22 shares if the new rate is at least 7.250%
Since Bidder #6, who holds 220 shares, did not submit an Order to a
Broker-Dealer, Bidder #6 is deemed to have submitted a Hold Order with respect
to its shares.
Broker-Dealers obtain the following Bids from Potential Holders of Preferred
Stock:
BIDDER ORDER
- ------ -----
#1 Buy an additional 44 shares if the new rate is at least 7.000%
#7 Buy 44 shares if the new rate is at least 7.125%
#8 Buy 33 shares if the new rate is at least 7.100%
#9 Buy 110 shares if the new rate is at least 7.350%
#10 Buy 132 shares if the new rate is at least 7.400%
#11 Buy 88 shares if the new rate is at least 7.275%
By 12:30 p.m., New York City time, the Broker-Dealers have submitted the
above Orders to the Auction Agent. Such Orders are, therefore, Submitted Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number
of shares of Preferred Stock then outstanding minus the number of shares
of Preferred Stock that are the subject of Hold Orders--
330 - 110 = 220 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or
lower than 175% of the 30-day "AA" Composite Commercial Paper Rate is
equal to or exceeds the sum of the number of shares of Preferred Stock
offered to be sold by Existing Holders regardless of the Applicable Rate
for the next Dividend Period plus the number of shares of Preferred Stock
bid by Existing Holders at rates higher than 175% of the 30-day "AA"
Composite Commercial Paper Rate--
(A) 44 shares bid for by Bidder #1 plus
44 shares bid for by Bidder #7 plus
33 shares bid for by Bidder #8 plus
110 shares bid for by Bidder #9 plus
132 shares bid for by Bidder #10 plus
88 shares bid for by Bidder #11
---
451 shares bid for
===
exceeds
(B) 44 shares offered to be sold by Bidder #2.
Sufficient Clearing Bids, therefore, exist.
The Winning Bid Rate is the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower rates bid by Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owning all of the Available Preferred Stock.
BIDDER SHARES ORDER
- ------ ------ -----
#1 22 Continue to hold if the new rate is at least 7.000%
#1 44 Buy if the new rate is at least 7.000%
#8 33 Buy if the new rate is at least 7.100%
#7 44 Buy if the new rate is at least 7.125%
#3 66 Continue to hold if the new rate is at least 7.250%
#5 22 Continue to hold if the new rate is at least 7.250%
---
231 shares
===
The Winning Bid Rate is 7.250%, because at the next lowest rate, 7.125%,
only 143 shares of Preferred Stock would continue to be held or be purchased,
and that number of shares is less than the Available Preferred Stock. The
Winning Bid Rate, 7.250%, is the Applicable Rate for the next Dividend Period
for all shares of Preferred Stock.
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted and rejected in the
order or priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying any rate that
is higher than the Winning Bid Rate or that offered to sell shares of
Preferred Stock without regard to the Applicable Rate for the next Dividend
Period shall sell the shares of Preferred Stock subject to such Submitted
Bid or Submitted Sell Order.
Bidder #4 sells 66 shares. (Bidder #4 had bid 7.300%.)
Bidder #2 sells 44 shares. (Bidder #2 was a seller at any rate.)
(ii) Each Existing Holder with a Submitted Bid specifying a rate that
is lower than the Winning Bid Rate shall continue to hold the shares of
Preferred Stock subject to such Submitted Bid.
Bidder #1 continues to hold 22 shares.
(iii) Each Potential Holder with a Submitted Bid specifying a rate that
is lower than the Winning Bid Rate shall purchase the number of shares of
Preferred Stock subject to such Submitted Bid.
Bidder #1 purchases an additional 44 shares.
Bidder #7 purchases 44 shares.
Bidder #8 purchases 33 shares.
(iv) Each Existing Holder with a Submitted Bid specifying a rate equal
to the Winning Bid Rate shall continue to hold the shares of Preferred Stock
subject to such Submitted Bid, unless the number of shares of Preferred
Stock subject to all such Submitted Bids placed by existing Holders is
greater than the Available Preferred Stock less the number of shares of
Preferred Stock accounted for in clauses (ii) and (iii) above, in which
event each Existing Holder with such a Submitted Bid shall sell a number of
shares of Preferred Stock determined on a pro rata basis based on the shares
of Preferred Stock subject to all such Submitted Bids.
(A) 88(66 shares bid by Bidder #3 and 22 by Bidder #5, both
Existing Holders, at the Winning Bid Rate)
exceeds
(B) 154 (number of remaining shares, 220 - 143 = 77).
Therefore, Bidder #3 (66 shares) and Bidder #5 (22 shares) that collectively
own 88 shares must sell a total of 11 of these shares by application of the
following formula:
Bidder's Shares Involved in Tie Bidder's
Bidder's Shares - Remaining X ------------------------------- = Shares
Involved in Tie Shares All Shares Involved in Tie Sold
Bidder #3:
66 - (77 X 66/88) = 8.25
Bidder #3 sells 8 of its 66 shares and remains a holder of 58 shares.
Bidder #5:
22 - (77 X 22/88) = 2.75
Bidder #5 sells 3 of its 22 shares and remains a holder of 19 shares.
Pursuant to the Auction Procedures, the Auction Agent has rounded down with
respect to Bidder #3 and rounded up with respect to Bidder #5.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #2 sells 44 shares
Bidder #3 sells 9 shares
Bidder #4 sells 66 shares
Bidder #5 sells 2 shares
---
121 shares sold
===
Bidder #l buys 44 shares
Bidder #7 buys 44 shares
Bidder #8 buys 33 shares
---
121 shares bought
===
After settlement the Preferred Stock is held as follows:
Bidder #l holds 66 shares
Bidder #2 holds 0 shares
Bidder #3 holds 58 shares
Bidder #4 holds 0 shares
Bidder #5 holds 19 shares
Bidder #6 holds 110 shares
Bidder #7 holds 44 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 0 shares
Bidder #11 holds 0 shares
---
330 shares
===
<PAGE>
ILLUSTRATION B
THE SECOND AUCTION FOR PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for the Preferred Stock is 12.250% which is 175% of the 30-day
"AA" Composite Commercial Paper Rate. 330 shares of Preferred Stock are
outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OF ORDERS BY
BROKER-DEALERS TO THE AUCTION AGENT
Broker-Dealers obtain the following Bids and Sell Orders from Existing
Holders of Preferred Stock:
BIDDER ORDER
- ------ -----
#1 Continue to hold 66 shares if the new rate is at least 7.150%
#3 Sell 58 shares
#5 Sell 19 shares
#7 Continue to hold 44 shares if the new rate is at least 7.200%
Since Bidders #6 and #8, who hold 110 and 33 shares, respectively, did not
submit Orders to a Broker-Dealer, Bidders #6 and #8 are deemed to have submitted
a Hold Order with respect to their shares.
Broker-Dealers obtain the following Bids from Potential Holders of Preferred
Stock:
BIDDER ORDER
- ------ -----
#2 Buy 66 shares if the new rate is at least 7.200%
#4 Buy 44 shares if the new rate is at least 7.250%
#7 Buy an additional 77 shares if the new rate is at least 7.200%
#9 Buy 110 shares if the new rate is at least 7.250%
#10 Buy 22 shares if the new rate is at least 7.400%
#11 Buy 88 shares if the new rate is at least 7.275%
By 12:30 P.M., New York City time, the Broker-Dealers have submitted the
above Orders to the Auction Agent. Such Orders are, therefore, Submitted Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number of
shares of Preferred Stock then outstanding minus the number of shares of
Preferred Stock that are the subject of Hold Orders--
330 - 143 = 187 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or lower than
175% of the 30-day "AA" Composite Commercial Paper Rate is equal to or exceeds
the sum of the number of shares of Preferred Stock offered to be sold by
Existing Holders regardless of the Applicable Rate fixed for the next Dividend
Period plus the number of shares of Preferred Stock bid by Existing Holders at
rates higher than 175% of the 30-day "AA" Composite Commercial Paper Rate--
(A) 66 shares bid for by Bidder #2 plus
44 shares bid for by Bidder #4 plus
77 shares bid for by Bidder #7 plus
110 shares bid for by Bidder #9 plus
132 shares bid for by Bidder #10 plus
88 shares bid for by Bidder #11
---
517 shares bid for
===
exceeds
(B ) 58 shares offered to be sold by Bidder #3 plus
19 shares offered to be sold by Bidder #5
---
77 shares offered to be sold
===
Sufficient Clearing Bids, therefore, exist.
The Winning Bid Rate is the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower rates bid by Existing Holders
and Potential Holders, would result in such Existing Holders and Potential
Holders owning all of the Available Preferred Stock.
BIDDER SHARES ORDER
- ------ ------ -----
#1 66 Continue to hold if the new rate is at least 7.150%
#7 44 Continue to hold if the new rate is at least 7.200%
#2 66 Buy if the new rate is at least 7.200%
#7 77 Buy if the new rate is at least 7.200%
---
253 shares
===
The Winning Bid Rate is 7.200%, because at the next lowest rate, 7.150%,
only 66 shares of Preferred Stock would continue to be held or be purchased, and
that number of shares is less than the Available Preferred Stock. The Winning
Bid Rate, 7.200%, is the Applicable Rate for the next Dividend Period for all
shares of Preferred Stock.
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted and rejected in the
order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying a rate that is
higher than the Winning Bid Rate or that offered to sell shares of Preferred
Stock without regard to the Applicable Rate fixed for the next Dividend Period
shall sell the shares of Preferred Stock subject to such Submitted Bid or
Submitted Sell Order.
Bidder #3 sells 58 shares.
Bidder #5 sells 19 shares.
(Bidder #3 and Bidder #5 were sellers at any rate.)
(ii) Each Existing Holder with a Submitted Bid specifying a rate that is
lower than the Winning Bid Rate shall continue to hold the shares of Preferred
Stock subject to such Submitted Bid.
Bidder #1 continues to hold 66 shares.
(iii) Each Potential Holder with a Submitted Bid specifying a rate that is
lower than the Winning Bid Rate shall purchase the number of shares of Preferred
Stock subject to such Submitted Bid.
None.
(iv) Each Existing Holder with a Submitted Bid specifying a rate equal to
the Winninng Bid Rate shall continue to hold the shares of Preferred Stock
subject to such Submitted Bid, unless the number of shares of Preferred Stock
subject to all such Submitted Bids placed by Existing Holders is greater than
the Available Preferred Stock less the number of shares of Preferred Stock
accounted for in clauses (ii) and (iii) above, in which event each Existing
Holder with such a Submitted Bid shall sell a number of shares of Preferred
Stock determined on a pro rate basis based on the shares of Preferred Stock
subject to all such Submitted Bids.
(A) 44 (number of shares bid by Bidder #7, an Existing Holder, at the
Winning Bid Rate)
is less than
(B) 121 (number or remaining shares, 187 - 66 - 121)
Bidder #7 continues to hold 44 shares.
(v) Each Potential Holder with a Submitted Bid specifying a rate equal to
the Winning Bid Rate shall purchase any Available Preferred Stock not accounted
for in clauses (ii), (iii) and (iv) above on a pro rata basis bases on the
shares of Preferred Stock subject to all such Submitted Bids placed by Potential
Holders.
Shares Subject to Bid
Remaining Shares X ------------------------------- = Shares
Shares Subject to All Such Bids Purchased
Bidder #2
(187 - 110) X 66/143 = 35.5
Bidder #2 purchases 36 shares.
Bidder #7
(187 - 110) X 77/143 = 41.5
Bidder #7 purchases 41 shares.
Pursuant to the Auction Procedures the Auction Agent has rounded up with
respect to Bidder #2 and rounded down with respect to Bidder #7.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #3 sells 58 shares
Bidder #5 sells 19 shares
---
77 shares sold
===
Bidder #2 buys 36 shares
Bidder #7 buys 41 shares
---
77 shares bought
===
After settlement the Preferred Stock is held as follows:
Bidder #1 holds 66 shares
Bidder #2 holds 36 shares
Bidder #3 holds 0 shares
Bidder #4 holds 0 shares
Bidder #5 holds 0 shares
Bidder #6 holds 110 shares
Bidder #7 holds 85 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 0 shares
Bidder #11 holds 0 shares
---
330 shares
===
<PAGE>
ILLUSTRATION C
THE THIRD AUCTION FOR PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for the Preferred Stock is 12.250% which is 175% of the 30-day
"AA" Composite Commercial Paper Rate. 330 shares of Preferred Stock are
outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OR ORDERS BY
BROKER-DEALERS TO AUCTION AGENT
Broker-Dealers obtain the following Hold Orders, Bids and Sell Orders from
Existing Holders of Preferred Stock:
BIDDER ORDER
----- -----
#1 Hold 66 shares
#2 Sell 36 shares
#7 Sell 85 shases
#8 Continue to hold 33 shares if the new rate is at least 7.200%
Since Bidder #6 who holds 110 shares did not submit an Order to a
Broker-Dealer, Bidder #6 is deemed to have submitted a Hold Order with respect
to its shares.
Broker-Dealers obtain the following Bids from Potential Holders of Preferred
Stock:
BIDDER ORDER
----- -----
#3 Buy 132 shares if the new rate is at least 7.200%
#4 Buy 44 shares if the new rate is at least 7.200%
#5 Buy 22 shares if the new rate is at least 7.150%
#9 Buy 11 shares if the new rate is at least 7.200%
#10 Buy 88 shares if the new rate is at least 7.150%
#11 Buy 110 shares if the new rate is at leat 7.250%
#12 Buy 132 shares if the new rate is at least 7.400%
#13 Buy 88 shares if the new rate is at least 7.275%
By 12:30 P.M., New York City time, the Broker-Dealers have submitted the
above Orders to the Auction Agent. Such Orders are, therefore, Submitted Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number
of shares of Preferred Stock then outstanding minus the number of shares of
Preferred Stock that are the subject of Hold Orders--
330 - 176 = 154 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or
lower than 175% of the 30-day "AA" Composite Commercial Paper Rate is equal
to or exceeds the sum of the number of shares of Preferred Stock offered to
be sold by Existing Holders regardless of the Applicable Rate for the next
Dividend Period plus the number of shares of Preferred Stock bid by Existing
Holders at rates higher than 175% of the 30-day "AA" Composite Commercial
Paper Rate--
(A) 132 shares bid for by Bidder #3 plus
44 shares bid for by Bidder #4 plus
22 shares bid for by Bidder #5 plus
11 shares bid for by Bidder #9 plus
88 shares bid for by Bidder #10 plus
110 shares bid for by Bidder #11 plus
132 shares bid for by Bidder #12 plus
88 shares bid for by Bidder #13
---
627 shares bid for
===
exceeds
(B) 36 shares offered to be sold by Bidder #2 plus
85 shares offered to be sold by Bidder #7
---
121 shares offered to be sold
===
Sufficient Clearing Bids, therefore, exist.
The Winning Bid Rate is the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower rates bid by Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owing all of the Available Preferred Stock.
BIDDER SHARES ORDER
- ------ ------ -----
#5 22 Buy if the new rate is at least 7.150%
#10 88 Buy if the new rate is at least 7.150%
#8 33 Continue to hold if the new rate is at least 7.200%
#3 132 Buy if the new rate is at least 7.200%
#4 44 Buy if the new rate is at least 7.200%
#9 22 Buy if the new rate is at least 7.200%
---
341 shares
===
The Winning Bid Rate is 7.200%, because at the next lowest rate,
7.150%, only 110 shares of Preferred Stock would continue to be held or be
purchased, and that number of shares is less than the Available Preferred Stock.
The Winning Bid Rate, 7.200%, is the Applicable Rate for the next Dividend
Period for all shares of Preferred Stock.
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted and rejected in the
order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying any rate that
is higher than the Winning Bid Rate or that offered to sell shares of
Preferred Stock without regard to the Applicable Rate fixed for the next
Dividend Period shall sell the shares of Preferred Stock subject to such
Submitted Bid or Submitted Sell Order.
Bidder #2 sells 36 shares.
Bidder #7 sells 85 shares.
(Bidder #2 and Bidder #7 were sellers at any rate.)
(ii) Each Existing Holder with a Submitted Bid specifying any rate that
is lower than the Winning Bid Rate shall continue to hold the shares of
Preferred Stock subject to such Submitted Bid.
None.
(iii) Each Potential Holder with a Submitted Bid specifying any rate
that is lower than the Winning Bid Rate shall purchase the number of shares
of Preferred Stock subject to such Submitted Bid.
Bidder #5 buys 22 shares.
Bidder #10 buys 88 shares.
(iv) Each Existing Holder with a Submitted Bid specifying a rate equal
to the Winning Bid Rate shall continue to hold the shares of Preferred Stock
subject to such Submitted Bid, unless the number of shares of Preferred
Stock subject to all such Submitted Bids placed by Existing Holders is
greater than the Available Preferred Stock less the number of shares of
Preferred Stock accounted for in clauses (ii) and (iii) above, in which
event each Existing Holder with such a Submitted Bid shall sell a number of
shares of Preferred Stock determined on a pro rata basis based on the shares
of Preferred Stock subject to all such Submitted Bids.
(A) 33 (number of shares bid by Bidder #8, an Existing Holder, at the
Winning Bid Rate)
is less than
(B) 44 (number of remaining shares, 154 - 110 = 44). Bidder #8 continues
to hold 33 shares.
(v) Each Potential Holder with a Submitted Bid specifying a rate equal
to the Winning Bid Rate shall purchase any Available Preferred Stock not
accounted for in clauses (ii), (iii) and (iv) above on a pro rata basis
based on the shares of Preferred Stock subject to all such Submitted Bids
placed by Potential Holders.
Shares Subject to Bid
Remaining shares X ------------------------------ = Shares
Shares Subject to All Such Bids Purchased
Bidder #3:
(154 - 143) X 132/187 = 7.8
Bidder #3 purchases 8 shares.
Bidder #4:
(154 - 143) X 44/187 = 2.6
Bidder #4 purchases 3 shares.
Bidder #9:
(154 - 143) X 11/187 = .6
Bidder #9 purchases 0 shares.
Pursuant to the Auction Procedures, the Auction Agent has rounded up with
respect to Bidders #3 and #4 and down with respect to Bidder #9.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #2 sells 36 shares
Bidder #7 sells 85 shares
---
121 shares sold
===
Bidder #3 buys 8 shares
Bidder #4 buys 3 shares
Bidder #5 buys 22 shares
Bidder #9 buys 0 shares
Bidder #10 buys 88 shares
---
121 shares bought
===
After settlement Preferred Stock is held as follows:
Bidder #l holds 66 shares
Bidder #2 holds 0 shares
Bidder #3 holds 8 shares
Bidder #4 holds 3 shares
Bidder #5 holds 22 shares
Bidder #6 holds 110 shares
Bidder #7 holds 0 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 88 shares
Bidder #11 holds 0 shares
Bidder #12 holds 0 shares
Bidder #13 holds 0 shares
---
330 shares
===
<PAGE>
ILLUSTRATION D
HYPOTHETICAL FAILED AUCTION
THE FOURTH AUCTION FOR PREFERRED STOCK
The 30-day "AA" Composite Commercial Paper Rate is 7.000%. The Maximum
Applicable Rate for Preferred Stock is 12.250%, which is 175% of the 30-day "AA"
Composite Commercial Paper Rate. 330 shares of Preferred Stock are outstanding.
A. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS; SUBMISSION OF ORDERS BY
BROKER-DEALERS TO THE AUCTION AGENT
Broker-Dealers obtain the following Bids and Sell Orders from Existing
Holders of Preferred Stock:
BIDDER ORDER
------ -----
#1 Sell 66 shares
#3 Continue to hold 8 shares if the new rate is at least 7.250%
#4 Continue to hold 3 shares if the new rate is at least 12.500%
#5 Continue to hold 22 shares if the new rate is at least 7.250%
Since Bidders #6, #8, #9 and #10 who hold shares did not submit Orders
to a Broker-Dealer, they are deemed to have submitted Hold Orders with respect
to their shares.
Broker-Dealers obtain the following Bids from Potential Holders of
Preferred Stock:
BIDDER ORDER
------ -----
#7 Buy 46 shares if the new rate is at least 7.125%
By 12:30 P.M., New York City time, the Broker-Dealers have submitted
the above Orders to the Auction Agent. Such Orders are, therefore, Submitted
Orders.
B. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE
The Auction Agent determines:
(i) the Available Preferred Stock, which is equal to the total number of
shares of Preferred Stock then outstanding minus the number of shares of
Preferred Stock that are the subject of Hold Orders--
330 - 216 = 114 shares of Available Preferred Stock
and
(ii) from the total Submitted Orders, whether the number of shares of
Preferred Stock bid by Potential Holders specifying rates equal to or lower
than 175% of the 30-day "AA" Composite Commercial Paper Rate is equal to or
exceeds the sum of the number of shares of Preferred Stock offered to be
sold by Existing Holders regardless of the Applicable Rate for the next
Dividend Period plus the number of shares of Preferred Stock bid by Existing
Holders at rate higher than 175% of the 30-day "AA" Composite Commercial
Paper Rate--
(A) 46 shares bid by Bidder #7 is less than
(B) 66 shares offered to be sold by Bidder #1 plus
3 shares bid for by Bidder #4 at a rate above 175%
of the 30-day "AA" Composite Commercial Paper Rate
---
69 shares offered to be sold
===
Sufficient Clearing Bids, therefore, do not exist. As a result, the
Applicable Rate for the next Dividend Period is 12.250% (175% of the 30-day "AA"
Composite Commercial Paper Rate).
C. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Submitted Bids and Submitted Sell Orders are accepted or rejected in
the order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of Preferred Stock shall sell, continue
to hold and/or purchase shares as follows:
(i) Each Existing Holder with a Submitted Bid specifying any rate that
is equal to or lower than 175% of the 30-day "AA" Composite Commercial Paper
Rate shall continue to hold the shares of Preferred Stock subject to such
Submitted Bid.
Bidder #3 continues to hold 8 shares.
Bidder #5 continues to hold 22 shares.
(ii) Each Potential Holder with a Submitted Bid specifying any rate that
is equal to or lower than 175% of the 30-day "AA" Composite Commercial Paper
Rate shall purchase the number of shares of Preferred Stock subject to such
Submitted Bid.
Bidder #7 purchases 24 shares.
(iii) Each Existing Holder with a Submitted Bid specifying any rate
higher than 175% of the 30-day "AA" Composite Commercial Paper Rate or that
offered to sell shares of Preferred Stock without regard to the Applicable
Rate fixed for the next Dividend Period shall sell a number of Shares of
Preferred Stock determined on a pro rata basis on the number of shares of
Preferred Stock subject to all such Submitted Bids or Submitted Sell Orders
placed by Existing Holders.
Shares Shares Subject to Order
Subject - Remaining Shares X --------------------------------- = Shares
to Order Shares Subject to All Such Orders Sold
Bidder #1:
66 - [(114 - 68) X 66/69] = 44.0
Bidder #1 sells 23 shares and remains a holder of 43 shares.
Bidder #4:
3 - [(114 - 68) X 3/69] = 2.0
Bidder #4 sells I share and remains a holder of 2 shares.
D. SETTLEMENT
The transfer of Preferred Stock is as follows:
Bidder #l sells 24 shares
Bidder #4 sells 0 shares
---
24 shares sold
===
Bidder #7 buys 24 shares
---
24 shares bought
===
After settlement Preferred Stock is held as follows:
Bidder #1 holds 43 shares
Bidder #2 holds 0 shares
Bidder #3 holds 8 shares
Bidder #4 holds 2 shares
Bidder #5 holds 22 shares
Bidder #6 holds 110 shares
Bidder #7 holds 24 shares
Bidder #8 holds 33 shares
Bidder #9 holds 0 shares
Bidder #10 holds 88 shares
---
330 shares
===
<PAGE>
APPENDIX C
SETTLEMENT PROCEDURES
The following procedures are expected to be followed in connection with the
settlement of each Auction and will be incorporated by reference in the Auction
Agent Agreement and each Broker-Dealer Agreement. Capitalized terms used herein
and not otherwise defined shall have the meanings specified in this Prospectus
or Appendix E hereto, as the case may be. Nothing contained in these procedures
constitutes a representation by the Corporation that in each Auction each party
referred to herein will actually perform the procedures described therein to be
performed by such party.
(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 any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid
or a Sell Order on behalf of an Existing Holder, the number of Preferred
Shares, if any, then outstanding to be sold by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Holder, the number of Preferred Shares, if any, to
be purchased by such Potential Holder;
(v) if the aggregate number of Preferred Shares to be sold by all
Existing Holders on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number 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 Buyer's Broker-Dealers (and the Agent
Member, if any, of each such Buyer's Broker-Dealer) acting for one or more
purchasers of such excess number of Preferred Shares and the number of such
shares to be purchased from one or more Existing Holders on whose behalf
such Broker-Dealer acted by one or more Existing Holders on whose behalf
each of such Seller's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by all
Potential Holders on whose behalf such Broker-Dealer submitted a Bid exceeds
the aggregate number of Preferred Shares to be sold by all Existing Holders
on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name
or names of one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess number of Preferred Shares and the number of such
shares to be sold to one or more Potential Holders on whose behalf such
Broker-Dealer acted by one or more Existing Holders on whose behalf each of
such Seller's Broker-Dealers acted; and
(vii) the 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;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Holder on whose behalf such Broker-Dealer submitted
a Bid that was accepted, in whole or in part, to instruct such Potential
Holder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to purchase the
number of Preferred Shares to be purchased pursuant to such Bid against
receipt of such shares and advise such Potential Holder of the Applicable
Rate for the next succeeding Dividend Period;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Holder on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part or a Bid that was
rejected, in whole or in part, to instruct such Existing Holder's Agent
Member to deliver to such Broker-Dealer (or its Agent Member) through the
Securities Depository the number of Preferred Shares to be sold pursuant to
such order against payment therefor and advise any such Existing Holder that
will continue to hold Preferred Shares of the Applicable Rate for the next
succeeding Dividend Period;
(iv) advise each Existing Holder on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding
Dividend 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 (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Holder or an Existing Holder shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any funds received by
it pursuant to (b)(ii) above and any Preferred Shares received by it
pursuant to (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 that were rejected or Sell Orders, and
any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder shall instruct its Agent
Member as provided in (b)(ii) or (iii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Existing Holder delivering
Preferred Shares to such Broker-Dealer pursuant to (b)(iii) above the amount
necessary to purchase such shares against receipt of such shares, and (B)
deliver such shares through the Securities Depository to a Buyer's
Broker-Dealer (or its Agent Member) identified to such Seller's
Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member )
identified pursuant to (a)(ii) above against receipt of such shares, and (B)
deliver such shares through the Securities Depository to the Agent Member of
the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described
under (b)(ii) or (iii) above, and the Securities Depository shall execute
such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in
(d)(iii) above, and the Securities Depository shall execute such
transactions.
(f) If an Existing Holder selling Preferred Shares in an Auction fails to
deliver such shares, a Broker-Dealer may deliver to the Potential Holder on
behalf of which it submitted a Bid that was accepted a number of whole Preferred
Shares that is less than the number of Preferred Shares that otherwise was to be
purchased by such Potential Holder. In such event, the number of Preferred
Shares to be so delivered shall be determined solely by such Broker-Dealer.
Delivery of such lesser number of Preferred Shares shall constitute good
delivery. Notwithstanding the foregoing terms of this section (f), any delivery
or non-delivery of Preferred 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
non-delivery in accordance with the provisions of the Auction Agent Agreement
and the Broker-Dealer Agreement.
<PAGE>
APPENDIX D
TO BE SUBMITTED TO THE BROKER-DEALER LISTED BELOW, WHO WILL THEN DELIVER
COPIES ON YOUR BEHALF TO THE AUCTION AGENTS.
Drexel Burnham Lambert Incorporated
55 Broad Street, 2nd Floor
New York, New York 10014
Attention: Calvin Clark
Telecopier No. (212) 968-9881
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS
To: The Company
The Auction Agent
A Broker-Dealer
An Agent Member
Other Persons
1. This letter is designed to apply to auctions for publicly or
privately offered debt or equity securities ("Securities") of any issuer
("Company") which are described in any final prospectus or other offering
materials relating to such Securities as the same may be amended or supplemented
(collectively, with respect to the particular Securities concerned, the
"Prospectus") and which involve periodic rate settings through auctions
("Auctions"). This letter shall be for the benefit of any Company and of any
trust company or auction agent (collectively, "trust company"), broker-dealer,
agent member, securities depository or other interested person in connection
with any Securities and related Auctions (it being understood that such persons
may be required to execute specified agreements and nothing herein shall alter
such requirements). The terminology used herein is intended to be general in its
application and not exclude any Securities in respect of which (in the
Prospectus or otherwise) alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions as
set forth in the Prospectus.
3. We agree that any bid or sell order placed by us shall constitute an
irrevocable offer by us to purchase or sell the Securities subject to such bid
or sell order, of such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction, at the applicable price, all as
set forth in the Prospectus, and that if we fail to place a bid or sell order
with respect to Securities owned by us with a broker-dealer on any auction date,
or a broker-dealer to which we communicate a bid or sell order fails to submit
such bid or sell order to the trust company concerned, we shall be deemed to
have placed a hold order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such broker-dealer for
Securities purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, to or through a broker-dealer or, when permitted in the
Prospectus, to a person that has signed and delivered, or caused to be delivered
on its behalf, to the applicable trust company a letter substantially in the
form of this letter (or other applicable purchaser's letter), provided that in
the case of all transfers other than pursuant to Auctions we or our
broker-dealer or agent member shall advise such trust company of such transfer.
We understand that a restrictive legend will be placed on certificates
representing the Securities and stop-transfer instructions will be issued to the
transfer agent and/or registrar, all as set forth in the Prospectus. We agree to
comply with any other transfer restrictions or other related procedures as
described in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by a global certificate
registered in the name of the applicable securities depository or its nominee,
that we will not be entitled to receive any certificate representing the
Securities and that our ownership of any Securities will be maintained in book
entry form by the securities depository for the account of our agent member,
which in turn will maintain records of our beneficial ownership. We authorize
and instruct our agent member to disclose to the applicable trust company such
information concerning our beneficial ownership of Securities as such trust
company shall request.
6. We acknowledge that partial deliveries of Securities purchased in
Auctions may be made to us and such deliveries shall constitute good delivery as
set forth in the Prospectus.
7. This letter is not a commitment by us to purchase any Securities.
8. This letter supersedes any prior-dated version of this Master
Purchaser's Letter, and supplements any prior- or post-dated purchaser's letter
specific to particular Securities; any recipient of this letter may rely upon it
until such recipient has received a signed writing amending or revoking this
letter.
9. The descriptions of Auction Procedures set forth in each applicable
Prospectus are incorporated by reference herein and, in case of any conflict
between this letter and any such description, such description shall control.
10. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
11. Our agent member of the securities depository currently is .
12. Our personnel authorized to place orders in Auctions with
broker-dealers for the purposes set forth in the Prospectus currently is/are
, telephone number ( ) - .
13. Our taxpayer indentification number is .
14. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Act"), we represent and agree as follows:
A. We understand and expressly acknowledge that the Securities have not
been and will not be registered under the Act and, accordingly, that the
Securities may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless an applicable exemption from the registration
requirements of the Act is available.
B. We hereby confirm that any purchase of Securities made by us will be
for our own account, or for the account of one or more parties for which we
are acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which
will acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by
us or such party, as the case may be, will have previously invested in
similar types of instruments and will be able and prepared to bear the
economic risk of investing in and holding such Securities.
C. We acknowledge that prior to purchasing any Securities we shall have
received a Prospectus (private placement memorandum) with respect thereto
and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers thereto, as we deem
necessary in connection with our decision to purchase Securities.
D. We recognize that the Company and broker-dealers will rely upon the
truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
15. The Purchaser consents to the use of custody arrangements for the
Securities, if any, on such terms as shall be necessary or appropriate in
connection with insurance arrangements, if any, for the Securities or otherwise
and agrees that custody receipts issued in connection with any such arrangement
shall be treated in the same manner as and be deemed Securities for all purposes
hereunder and under the Company's governing documents and in Auctions. Copies of
relevant documents in connection with any such arrangements may be obtained upon
request to the address or telephone number set forth above. Receipt of any such
custody receipts shall constitute acceptance of the terms thereof.
16. The Purchaser acknowledges that, pursuant to the terms of any
custody arrangement with respect to the Purchaser's Securities, to the extent
that Financial Security Assurance Inc. or any other surety under a surety bond
unconditionally and irrevocably guaranteeing scheduled payments on the
Securities (the "Surety"), makes scheduled payments on the Purchaser's
Securities, such Surety may exercise the Purchaser's voting rights with respect
to the Securities and hereby assigns the Purchaser's right to receive from the
Company any payments on the Purchaser's Securities to which such scheduled
payments made by the Surety relates; and further acknowledges that the Surety
shall be subrogated to the Purchaser's rights with respect to the Securities
until the Company makes such payments on the Purchaser's Securities to which
such scheduled payments made by the Surety relate or the Company otherwise
reimburses the Surety for any scheduled payments so made by the Surety.
------------------------------------
(Name of Purchaser)
Dated:
-----------------------
Mailing Address of Purchaser:
By:
- ------------------------------- ----------------------------------
Printed Name:
- ------------------------------- -----------------------
Title:
- ------------------------------- ------------------------------
<PAGE>
APPENDIX E
AUCTION PROCEDURES
The following procedures will be set forth in paragraph 8 of Article IV(C)
of the Fund's Articles of Incorporation and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. Nothing contained
in this Appendix E constitutes a representation by the Fund that in each Auction
each party referred to herein will actually perform the procedures described
herein to be performed by such party. The terms not defined below are defined in
the forepart of this Prospectus, except that the term "Corporation" means the
Fund.
(a) Certain Definitions. Capitalized terms not defined in this paragraph
8(a) shall have the respective meanings specified in paragraph 2. As used in
this paragraph 8, the following terms shall have the following meanings, unless
the context otherwise requires:
(i) "Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Corporation.
(ii) "Agent Member" shall mean the member of the Securities Depository
that will act on behalf of a Bidder and is identified as such in such
Bidder's Master Purchaser's Letter.
(iii) "Auction" shall mean the periodic operation of the procedures set
forth in this paragraph 8.
(iv) "Auction Date" shall mean the first Business Day next preceding the
first day of a Dividend Period.
(v) "Available Preferred Stock" shall have the meaning specified in
paragraph 8(d)(i)(A) below.
(vi) "Bid" and "Bids" shall have the respective meanings specified in
paragraph 8(b)(i) below.
(vii) "Bidder" and "Bidders" shall have the respective meanings
specified in paragraph 8(b)(i) below
(viii) "Broker-Dealer" shall mean Drexel Burnham Lambert Incorporated
and any other broker-dealer, or other entity permitted by law to perform the
functions required of a Broker-Dealer in this paragraph 8, that has been
selected by the Corporation and has entered into a Broker-Dealer Agreement
with the Auction Agent that remains effective.
(ix) "Broker-Dealer Agreements" shall mean the agreement between the
Auction Agent and Drexel Burnham Lambert Incorporated and similar agreements
with one or more other BrokerDealers pursuant to which such Broker-Dealer
agrees to follow the procedures specified in this paragraph 8.
(x) "Existing Holder," when used with respect to shares of Preferred
Stock, shall mean a Person who has signed a Master Purchaser's Letter and is
listed as the beneficial owner of such shares of Preferred Stock in the
records of the Auction Agent.
(xi) "Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xii) "Master Purchaser's Letter" shall mean a letter addressed to the
Corporation, the Auction Agent and a Broker-Dealer in which a Person agrees,
among other things, to offer to purchase, purchase, offer to sell and/or
sell auction rate securities as set forth in this paragraph 8.
(xiii) "Maximum Applicable Rate" and "Minimum Applicable Rate" on any
Auction Date shall be 175% and 90%, respectively, of the 30-day "AA"
Composite Commercial Paper Rate at the close of business on the Business Day
next preceding the Auction Date.
(xiv) "Potential Holder" shall mean any Person, including any Existing
Holder, (A) who shall have executed a Master Purchaser's Letter and (B) who
may be interested in acquiring shares of Preferred Stock (or, in the case of
an Existing Holder, additional shares of Preferred Stock).
(xv) "Securities Depository" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by
the Corporation which agrees to follow the procedures required to be
followed by such securities depository in connection with shares of
Preferred Stock.
(xvi) "Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraphs 8(b)(i) below.
(xvii) "Submission Deadline" shall mean 12:30 p.m., New York City time,
on any Auction Date or such other time on any Auction Date (as specified by
the Auction Agent from time to time) by which Broker-Dealers are required to
submit Orders to the Auction Agent.
(xviii) "Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xix) "Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph 8(d)(i) below.
(xx) "Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xxi) "Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 8(d)(i) below.
(xxii) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph 8(d)(i) below.
(xxiii) "Winning Bid Rate" shall have the meaning specified in paragraph
8(d)(i) below.
(b) Orders by Existing Holders and Potential Holders.
(i) On or prior to the Submission Deadline on each Auction Date:
(A) each Existing Holder, with respect to shares of Preferred Stock it
then holds, may submit to a Broker-Dealer by telephone or otherwise
information as to:
(1) the number of shares, if any, of Preferred Stock held by such
Existing Holder which such Existing Holder desires to continue to hold
without regard to the Applicable Rate for the next Dividend Period
therefor;
(2) the number of shares, if any, of Preferred Stock which such
Existing Holder desires to continue to hold if the Applicable Rate for
the next Dividend Period therefor shall not be less than the rate per
annum then specified by such Existing Holder; and/or
(3) the number of shares, if any, of Preferred Stock held by such
Existing Holder which such Existing Holder offers to sell without regard
to the Applicable Rate for the next succeeding Dividend Period therefor;
and
(B) each Broker-Dealer, using a list of Potential Holders that shall be
maintained by such Broker-Dealer in good faith for the purposes of
conducting a competitive Auction, shall contact Potential Holders on such
lists to determine the number of shares, if any, of Preferred Stock which
such Potential Holders offer to purchase if the Applicable Rate for the next
succeeding Dividend Period therefor shall not be less than the rate per
annum specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of information
referred to in this paragraph 8(b) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Existing Holder and each Potential Holder
placing an Order is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (A)(1) of
this paragraph 8(b) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the information referred to
in clause (A)(2) or (B) of this paragraph 8(b) is hereinafter referred to as a
"Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (A)(3) of this paragraph 8(b) is hereinafter referred to
as a "Sell Order" and collectively as "Sell Orders."
(ii) As a condition to participating in any Auction, each prospective
purchaser of shares of Preferred Stock shall be required to sign and deliver two
copies to the Auction Agent, and one copy to a Broker-Dealer, of a Master
Purchaser's Letter, in which such prospective purchaser will agree, among other
things, that:
(A) Bid by an Existing Holder shall constitute an irrevocable offer to
sell:
(1) the number of shares of Preferred Stock specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than
the rate specified therein;
(2) such specified number or a lesser number of shares of Preferred
Stock to be determined as set forth in clause (D) of paragraph 8(e)(i)
if the Applicable Rate determined on such Auction Date shall be equal to
the rate specified therein; or
(3) such specified number or a lesser number of shares of Preferred
Stock to be determined as set forth in clause (C) of paragraph 8(e)(ii)
if the rate specified therein shall be higher than the Maximum
Applicable Rate and Sufficient Clearing Bids do not exist.
(B) Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of shares of Preferred Stock specified in such Sell
Order; or
(2) such specified number or a lesser number of shares of Preferred
Stock as set forth in clause (C) of paragraph 8(e)(ii) if Sufficient
Clearing Bids do not exist.
(C) Bid by a Potential Holder shall constitute an irrevocable offer to
purchase:
(1) the number of shares of Preferred Stock specified in such Bid if
the Applicable Rate determined on such Auction Date shall be higher than
the rate therein; or
(2) such specified number or a lesser number of shares of Preferred
Stock as set forth in clause (E) of paragraph 8(e)(i) if the Applicable
Rate determined on such Auction Date shall be equal to the rate
specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer for the Auction to be conducted on such Auction Date and shall
specify with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of shares of Preferred Stock that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder the number of
shares, if any, of Preferred Stock subject to any:
(1) Hold Order placed by such Existing Holder;
(2) Bid placed by such Existing Holder and the rate specified in
such Bid; and
(3) Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder the rate specified
in such Potential Holder's Bid.
(ii) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the shares of Preferred Stock
held by any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted on behalf of such Existing Holder covering the number of shares of
Preferred Stock held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(iv) If one or more Orders covering in the aggregate more than the number of
shares of Preferred Stock held by an Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid as follows and in the
following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of outstanding shares of
Preferred Stock held by such Existing Holder; provided that if more than one
Hold Order is submitted on behalf of such Existing Holder and the number of
shares of Preferred Stock subject to such Hold Orders exceeds the number of
shares of Preferred Stock held by such Existing Holder, the number of shares
of Preferred Stock subject to each such Hold Order shall be reduced pro rata
so that such Hold Order shall cover the number of shares of Preferred Stock
held by such Existing Holder;
(B)(1) any Bid shall be considered valid up to and including the excess
of the number of shares of Preferred Stock held by such Existing Holder over
the number of shares of Preferred Stock subject to any Hold Orders referred
to in clause (iv)(A) of paragraph 8(c);
(2) subject to subclause (1), if more than one Bid with the same rate is
submitted on behalf of such Existing Holder and the number of shares of
Preferred Stock subject to such Bids is greater than the excess described in
subclause (1), the number of shares of Preferred Stock subject to such Bids
shall be reduced pro rata so that such Bids shall cover the number of shares
of Preferred Stock equal to such excess;
(3) subject to subclause (1), if more than one Bid with different rates
is submitted on behalf of such Existing Holder, such Bids shall be
considered valid in the ascending order of their respective rates; and
(4) the number, if any, of such shares of Preferred Stock subject to
Bids not valid under this clause (B) shall be treated as the subject of a
Bid by a Potential Holder at the rate therein specified; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the sum of the shares of Preferred Stock subject to valid Hold
Orders referred to in clause (iv)(A) of paragraph 8(c) and valid Bids by
such Existing Holder referred to in clause (iv)(B) of paragraph 8(c),
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of Preferred Stock subject to such
Sell Orders is greater than such excess, the number of shares of Preferred
Stock subject to such Sell Orders shall be reduced pro rata so that such
Sell Orders shall cover the number of shares of Preferred Stock equal to
such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate and number of shares of
Preferred Stock therein specified.
(vi) If any rate specified in any Bid is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Bid is made, such Bid
shall be deemed to be a Bid specifying a rate equal to such Minimum Applicable
Rate.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(i) 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 as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
shall determine:
(A) the excess of the total number of shares of Preferred Stock over the
number of outstanding shares of Preferred Stock that are the subject of
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Preferred Stock");
(B) from the Submitted Orders whether the number of shares of Preferred
Stock that are subject of Submitted Bids by Potential Holders specifying one
or more rates equal to or lower than the Maximum Applicable Rate exceeds or
is equal to the sum of:
(1) the number of shares of Preferred Stock that are the subject of
Submitted Bids by Existing Holders specifying one or more rates higher
than the Maximum Applicable Rate; and
(2) the number of shares of Preferred Stock that are subject to
Submitted Sell Orders;
in the event of such excess or such equality (other than because all of the
outstanding shares of Preferred Stock are the subject of Submitted Hold
Orders), such Submitted Bids are hereinafter referred to collectively as
"Sufficient Clearing Bids"; and
(C) if Sufficient Clearing Bids exist, the lowest rate specified in the
Submitted Bids (the "Winning Bid Rate") which if:
(1) each Submitted Bid from Existing Holders specifying such lowest rate
and all other Submitted Bids from Existing Holders specifying lower rates
were accepted, thus entitling such Existing Holders to continue to hold the
shares of Preferred Stock that are the subject of such Submitted Bids; and
(2) each Submitted Bid from Potential Holders specifying such lowest
rate and all other Submitted Bids from Potential Holders specifying lower
rates were accepted, thus entitling those Potential Holders to purchase the
shares of Preferred Stock that are the subject of such Submitted Bids,
would result in such Existing Holders described in subclause (1) above
continuing to hold an aggregate number of shares of Preferred Stock which,
when added to the number of shares of Preferred Stock to be purchased by
such Potential Holders described in subclause (2) above, would equal not
less than the Available Preferred Stock.
(ii) Promptly after the Auction Agent has made the determination pursuant to
paragraph 8(d)(i) the Auction Agent shall advise the Corporation of the Maximum
Applicable Rate and the Minimum Applicable Rate and, based on all such
determinations, the Applicable Rate for the next succeeding Dividend Period as
follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding shares of Preferred Stock 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; or
(C) if all the shares of Preferred Stock are the subject of Submitted
Hold Orders, that the Applicable Rate for Preferred Stock for the next
succeeding Dividend Period shall be equal to the Minimum Applicable Rate.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocations of Shares. Existing Holders shall continue to hold the shares of
Preferred Stock that are the subject of Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph 8(d)(i), the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall
take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 8(e)(iii), Submitted Bids and Submitted Sell Orders shall be
accepted or rejected in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each Existing Holder specifying any rate that
is higher than the Winning Bid Rate shall be rejected, thus requiring
each such Existing Holder to sell the shares of Preferred Stock that are
the subject of such Submitted Sell Orders or Submitted Bids;
(B) the Submitted Bid of each Existing Holder specifying any rate
that is lower than the Winning Bid Rate shall be accepted, thus
entitling each such Existing Holder to continue to hold the shares of
Preferred Stock that are the subject of such Submitted Bid;
(C) the Submitted Bid of each Potential Holder specifying any rate
that is lower than the Winning Bid Rate shall be accepted and such
Potential Holder shall purchase the number of shares of Preferred Stock
subject to such Submitted Bid;
(D) the Submitted Bid of each Existing Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, thus entitling such
Existing Holder to continue to hold the shares of Preferred Stock that
are subject of such Submitted Bid, unless the number of shares of
Preferred Stock subject to all such Submitted Bids shall be greater than
the number of shares of Preferred Stock equal to the excess of the
Available Preferred Stock over the number of shares of Preferred Stock
subject to Submitted Bids described in clauses (B) and (C) of this
paragraph 8(e)(i) (the "Remaining Shares"). In such event such Existing
Holder shall be required to sell shares of Preferred Stock subject to
such Submitted Bid, but only in an amount equal to the difference
between (x) the number of shares of Preferred Stock then held by such
Existing Holder subject to such Submitted Bid and (y) the number of
shares of Preferred Stock obtained by multiplying the number of
Remaining Shares by a fraction the numerator of which shall be the
number of shares of Preferred Stock held by such Existing Holder subject
to such Submitted Bid and the denominator of which shall be the sum of
the number of shares of Preferred Stock subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each Potential Holder specifying a rate
that is equal to the Winning Bid Rate shall be accepted, but only in an
amount equal to the number of shares of Preferred Stock obtained by
multiplying the difference between the Available Preferred Stock and the
number of shares of Preferred Stock subject to Submitted Bids described
in clauses (B), (C) and (D) of this paragraph 8(e)(i) by a fraction
the numerator of which shall be the number of shares of Preferred Stock
subject to such Submitted Bid and the denominator of which shall be the
sum of the number of shares of Preferred Stock subject to such Submitted
Bids made by all such Potential Holders that specified a rate equal to
the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the outstanding shares of Preferred Stock are the subject of
Submitted Hold Orders), subject to the provisions of paragraph 8(e)(iii),
Submitted Orders shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus entitling such Existing Holders to continue to hold the
shares of Preferred Stock that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
accepted and such Potential Holder shall purchase the number of shares
of Preferred Stock subject to such Submitted Bid; and
(C) the Submitted Bid of each Existing Holder specifying any rate
that is higher than the Maximum Applicable Rate shall be rejected, thus
requiring each such Existing Holder to sell the shares of Preferred
Stock that are the subject of such Submitted Bid, and the Submitted Sell
Order of each Existing Holder shall be accepted, in both cases only in
an amount equal to the difference between (x) the number of shares of
Preferred Stock then held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and (y) the number of shares of
Preferred Stock obtained by multiplying the difference between the
Available Preferred Stock and the aggregate number of shares of
Preferred Stock subject to Submitted Bids described in clauses (A) and
(B )of this paragraph 8(e)(ii) by a fraction the numerator of which
shall be the number of shares of Preferred Stock held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the aggregate number of shares of
Preferred Stock subject to all such Submitted Bids and Submitted Sell
Orders.
(iii) If, as a result of the procedures described in paragraphs 8(e)(i)
or 8(e)(ii), 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 Preferred Stock on any Auction Date, the Auction Agent shall,
in such manner as it shall determine, round up or down the number of shares
of Preferred Stock to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that the number of shares purchased
or sold by each Existing Holder or Potential Holder on such Auction Date
shall be whole shares of Preferred Stock, even if such allocation results in
one or more of such Potential Holders not purchasing shares of Preferred
Stock on such Auction Date or any Existing Holder not selling shares of
Preferred Stock on such Auction Date.
(iv) Based on the results of each Auction, the Auction Agent shall
determine the aggregate number of shares of Preferred Stock to be purchased
and the aggregate number of shares of Preferred Stock to be sold by
Potential Holders and Existing Holders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to
the extent that such aggregate number of shares to be purchased and such
aggregate number of shares to be sold differ, determine to which other
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 Preferred Stock
(f) Participation in Auctions. Neither the Corporation nor any Affiliate of
the Corporation may submit an Order in any Auction.
(g) Miscellaneous.
(i) The Board of Directors of the Corporation may interpret the
provisions of this paragraph 8 to resolve any inconsistency or ambiguity,
remedy any formal defect or make any other change or modification which does
not adversely affect the rights of Existing Holders of Preferred Stock. If
such inconsistency, ambiguity or defect reflects an inaccurate provision
hereof, the Board of Directors may, in appropriate circumstances, as
permitted by law, authorize the filing of a Certificate of Correction.
(ii) (A) An Existing Holder may sell, transfer or otherwise dispose of
shares of Preferred Stock only (1) pursuant to a Bid or a Sell Order placed
in an Auction in accordance with the procedures set forth in this paragraph
8, (2) to or through a Broker-Dealer or (3) to a Person that has delivered a
signed Purchaser's Letter to the Auction Agent, provided that as a condition
to such transfer (in the case of all transfers other than those pursuant to
Auctions), such Existing Holder, the transferee or the transferee's
Broker-Dealer or Agent Member of the Securities Depository shall advise the
Auction Agent of such transfer; and
(B) except as otherwise provided by law, all of the outstanding
shares of Preferred Stock shall be represented by a separate certificate or
certificates registered in the name of the nominee of the Securities
Depository, and no Person acquiring shares of Preferred Stock shall be
entitled to receive a certificate representing such shares.
(iii) The Corporation shall exercise its best efforts to maintain an
Auction Agent pursuant to an agreement containing terms not materially less
favorable to the Corporation than the terms of the Auction Agent Agreement
first entered into by the Corporation pursuant to the resolutions adopted by
the Board of Directors of the Corporation on November 11, 1988.
(iv) The Corporation shall use its best efforts to maintain the Surety
Bond issued by Financial Security Assurance, Inc.
(h) Headings of Subdivisions. The headings of the various subdivisions of
this paragraph 8 are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
<PAGE>
TO BE SUBMITTED TO THE BROKER-DEALER LISTED BELOW, WHO WILL
THEN DELIVER COPIES ON YOUR BEHALF TO THE AUCTION AGENT.
Drexel Burnham Lambert Incorporated
55 Broad Street, 2nd Floor
New York, New York 10004
Attention: Calvin Clark
Telecopier No. (212) 968-9881
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS
To: The Company
The Auction Agent
A Broker-Dealer
An Agent Member
Other Persons
1. This letter is designed to apply to auctions for publicly or privately
offered debt or equity securities ("Securities") of any issuer ("Company") which
are described in any final prospectus or other offering materials relating to
such Securities as the same may be amended or supplemented (collectively, with
respect to the particular Securities concerned, the "Prospectus") and which
involve periodic rate settings through auctions ("Auctions"). This letter shall
be for the benefit of any Company and of any trust company or auction agent
(collectively, "trust company"), broker-dealer, agent member, securities
depository or other interested person in connection with any Securities and
related Auctions (it being understood that such persons may be required to
execute specified agreements and nothing herein shall alter such requirements).
The terminology used herein is intended to be general in its application and not
exclude any Securities in respect of which (in the Prospectus or otherwise)
alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions as
set forth in the Prospectus.
3. We agree that any bid or sell order placed by us shall constitute an
irrevocable offer by us to purchase or sell the Securities subject to such bid
or sell order, of such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction, at the applicable price, all as
set forth in the Prospectus, and that if we fail to place a bid or sell order
with respect to Securities owned by us with a broker-dealer on any auction date,
or a brokerdealer to which we communicate a bid or sell order fails to submit
such bid or sell order to the trust company concerned, we shall be deemed to
have placed a hold order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such brokerdealer for
Securities purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, to or through a broker-dealer or, when permitted in the
Prospectus, to a person that has signed and delivered, or caused to be delivered
on its behalf to the applicable trust company a letter substantially in the form
of this letter (or other applicable purchaser's letter), provided that in the
case of all transfers other than pursuant to Auctions we or our broker-dealer or
agent member shall advise such trust company of such transfer. We understand
that a restrictive legend will be placed on certificates representing the
Securities and stop-transfer instructions will be issued to the transfer agent
and/or registrar, all as set forth in the Prospectus. We agree to comply with
any other transfer restrictions or other related procedures as described in the
Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by a global certificate
registered in the name of the applicable securities depository or its nominee,
that we will not be entitled to receive any certificate representing the
Securities and that our ownership of any Securities will be maintained in book
entry form by the securities depository for the account of our agent member,
which in turn will maintain records of our beneficial ownership. We authorize
and instruct our agent member to disclose to the applicable trust company such
information concerning our beneficial ownership of Securities as such trust
company shall request.
6. We acknowledge that partial deliveries of Securities purchased in
Auctions may be made to us and such deliveries shall constitute good delivery as
set forth in the Prospectus.
7. This letter is not a commitment by us to purchase any Securities.
8. This letter supersedes any prior-dated version of this Master Purchaser's
Letter, and supplements any prior- or post-dated purchaser's letter specific to
particular Securities; any recipient of this letter may rely upon it until such
recipient has received a signed writing amending or revoking this letter.
9. The descriptions of Auction Procedures set forth in each applicable
Prospectus are incorporated by reference herein and, in case of any conflict
between this letter and any such description, such description shall control.
10. Any xerographic or other copy of this letter shall be deemed of equal
effect as a signed original.
11. Our agent member of the securities depository currently is .
12. Our personnel authorized to place orders in Auctions with broker-dealers
for the purposes set forth in the Prospectus currently is/are ,
telephone number ( ) - .
13. Our taxpayer identification number is .
14. In the case of each offer to purchase, purchase, offer to sell or sale
by us of Securities not registered under the Securities Act of 1933, as amended
(the "Act"), we represent and agree as follows:
A. We understand and expressly acknowledge that the Securities have not
been and will not be registered under the Act and, accordingly, that the
Securities may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless an applicable exemption from the registration
requirements of the Act is available.
B. We hereby confirm that any purchase of Securities made by us will be
for our own account, or for the account of one or more parties for which we
are acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which
will acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by
us or such party, as the case may be, will have previously invested in
similar types of instruments and will be able and prepared to bear the
economic risk of investing in and holding such Securities.
C. We acknowledge that prior to purchasing any Securities we shall have
received a Prospectus (private placement memorandum) with respect thereto
and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers thereto, as we deem
necessary in connection with our decision to purchase Securities.
D. We recognize that the Company and broker-dealers will rely upon the
truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
15. The Purchaser consents to the use of custody arrangements for the
Securities, if any, on such terms as shall be necessary or appropriate in
connection with insurance arrangements, if any, for the Securities or otherwise
and agrees that custody receipts issued in connection with any such arrangements
shall be treated in the same manner as and be deemed Securities for all purposes
hereunder and under the Company's governing documents and in Auctions. Copies of
relevant documents in connection with any such arrangements may be obtained upon
request to the address or telephone number set forth above. Receipt of any such
custody receipts shall constitute acceptance of the terms thereof.
16. The Purchaser acknowledges that, pursuant to the terms of any custody
arrangement with respect to the Purchaser's Securities, to the extent that
Financial Security Assurance Inc. or any other surety under a surety bond
unconditionally and irrevocably guaranteeing scheduled payments on the
Securities (the "Surety"), makes scheduled payments on the Purchaser's
Securities, may exercise such Surety the Purchaser's voting rights with respect
to the Securities and hereby assigns the Purchaser's right to receive from the
Company any payments on the Purchaser's Securities to which such scheduled
payments made by the Surety relates; and further acknowledges that the Surety
shall be subrogated to the Purchaser's rights with respect to the Securities
until the Company makes such payments on the Purchaser's Securities to which
such scheduled payments made by the Surety relate or the Company otherwise
reimburses the Surety for any scheduled payments so made by the Surety.
-------------------------
(Name of Purchaser)
Dated:
-----------------------------------
Mailing Address of Purchaser
By:
- -------------------------------------- ---------------------
Printed Name:
- -------------------------------------- ---------------------
Title:
- ------------------------------------- ---------------------
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE HEREIN, IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. 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 NOT LAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN 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.
TABLE OF CONTENTS
Page
Prospectus Summary ................................... 3
The Fund ............................................. 11
Capitalization ....................................... 12
Use of Proceeds ...................................... 13
Investment Objective and Policies .................... 13
Directors and Officers ............................... 26
The Investment Adviser ............................... 28
Portfolio Trading .................................... 30
Determination of Net Asset Value ..................... 31
Share Repurchases; Conversion to Open-End Status ..... 32
Federal Taxation ..................................... 34
The Auction .......................................... 37
Description of Preferred Stock ....................... 44
Description of Notes ................................. 51
Description of Common Stock .......................... 57
Financial Security ................................... 58
Surety Arrangement ................................... 61
Preferred Stock and Note Ratings ..................... 66
Custodian, Transfer Agents, Dividend Disbursing
Agent, Paying Agents and Registrars ................ 66
Underwriting ......................................... 66
Legal Opinions ....................................... 67
Reports to Shareholders .............................. 67
Experts .............................................. 68
Further Information .................................. 68
Glossary of Terms .................................... 69
Report of Independent Public Accountants ............. 71
Balance Sheet ........................................ 72
Report of Independent Public Accountants of
Financial Security Assurance Inc. .................. 75
Financial Security Assurance Inc. and Subsidiary
Consolidated Financial Statements .................. 76
Appendix A: Ratings of Corporate Obligations ......... A-1
Appendix B: Auction Illustrations ................... B-1
Appendix C: Settlement Procedures .................... C-1
Appendix D: Master Purchaser's Letter ................ D-1
Appendix E: Auction Procedures ....................... E-1
UNTIL DECEMBER 23, 1988 (25 DAYS AFTER THE EFFECTIVENESS DATE), 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.
<PAGE>
300 SHARES
PROSPECT STREET(SM)
HIGH INCOME
PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED
STOCKS(SM)
("TARPS(SM)")
unconditionally and irrevocably
guaranteed as to Scheduled
Payments, as defined
herein, pursuant to a
surety bond to be issued by
[LOGO] FINANCIAL
SECURITY
ASSURANCE(SM)
PROSPECTUS
November 28, 1988
<PAGE>
EXHIBIT (B)
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Prospect Street High Income Portfolio Inc. (hereinafter referred to as the
"Corporation"), a Maryland corporation having its principal office in the State
of Maryland c/o C-T Corporation System, Maryland, 32 South State Street,
Baltimore, Maryland 21202 hereby certifies to the State Department of
Assessments and Taxation of Maryland (the "Department") that:
FIRST: The Corporation desires to amend and restate its Charter as
currently in effect as hereinafter provided. The provisions set forth in these
Articles of Amendment and Restatement are all of the provisions of the Charter
of the Corporation (the "Charter") as in effect as of this 25th day of November
1988 (the "Restatement Date").
SECOND: The Charter of the Corporation is hereby amended and restated by
striking in their entirety Articles I through VIII inclusive, and by
substituting in lieu thereof the following:
ARTICLE I
NAME
The name of the Corporation is PROSPECT STREET HIGH INCOME PORTFOLIO INC.
ARTICLE II
PURPOSES AND POWERS
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company;
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash;
(3) To issue and sell shares of its capital stock and other securities in
such amounts and on such terms and conditions and for such purposes and for such
amount or kind of consideration as may now or hereafter be permitted by law; and
(4) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
Maryland General Corporation Law now or hereafter in force, and the enumeration
of the foregoing shall not be deemed to exclude any powers, rights or privileges
so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the
State of Maryland is c/o THE CORPORATION TRUST INCORPORATED, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
the State of Maryland is THE CORPORATION TRUST INCORPORATED, a corporation of
this state, and the post office address of the resident agent is 32 South
Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
(A) CAPITAL STOCK
1. Class and Amount Authorized
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is one hundred million, one thousand
(100,001,000) shares, of which one hundred million (100,000,000) shares shall be
Common Stock, $.01 par value per share, and one thousand (1000) shares shall be
Taxable Auction Rate Preferred Stock, no par value per share, liquidation
preference $100,000 per share (the "Preferred Stock").
2. No Preemptive Rights
No holder of any shares of any class of stock or any other securities of
the Corporation, whether now or hereafter authorized, shall have any preemptive
right to subscribe for or purchase any shares of any class of stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix; and any shares of any class of stock or other securities which the Board of
Directors may determine to offer for subscription may, as the Board of Directors
in its sole discretion shall determine, be offered to the holders of any class,
series or type of stock or other securities at the time outstanding to the
exclusion of the holders of any or all other classes, series or types of stock
or other securities at the time outstanding.
(B) COMMON STOCK
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption in respect of the Common
Stock are as follows:
1. Ranking
The Common Stock shall rank junior to the Preferred Stock with respect to
payment of dividends (other than dividends in Common Stock) and distributions on
liquidation or dissolution and shall have such other qualifications, limitations
or restrictions as provided in the Charter.
2. Dividends
After all accumulated and unpaid dividends upon all outstanding shares of
the Preferred Stock for all past Dividend Periods (as defined below) have been
or are contemporaneously paid in full (or declared and sufficient Deposit
Securities (as defined below) have been set apart for their payment), then and
not otherwise, and subject to any other applicable provisions of the Charter, to
the extent there are funds legally available therefor, dividends or other
distributions may be declared upon and paid to the holders of shares of the
Common Stock, to the exclusion of the holders of shares of the Preferred Stock.
3. Liquidation Rights
In the event of the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, after payment in full of the
amounts required to be paid to the holders of the Preferred Stock as provided
for in the Charter, the holders of shares of the Common Stock shall be entitled,
to the exclusion of the holders of shares of the Preferred Stock, to share
ratably in all remaining assets of the Corporation.
4. Voting Rights
Each holder of Common Stock shall be entitled to one vote for each such
whole share (and a proportional vote for each fractional share) on each matter
on which the holders of shares of the Common Stock shall be entitled to vote.
Except as otherwise provided in the Charter, the holders of shares of Common
Stock and the holders of shares of Preferred Stock shall vote as a single class
on all matters coming before the stockholders.
5. Redemption
The Corporation may redeem or repurchase shares of Common Stock to the
extent now or hereafter permitted by the General laws of the State of Maryland,
by the Investment Company Act (as defined below) and by the Charter.
(C) PREFERRED STOCK
The preferences, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption in respect of the
Preferred Stock are as follows:
1. Designation
The designation of the Preferred Stock shall be "Taxable Auction Rate
Preferred Stock." Except as otherwise provided herein, each share of Preferred
Stock shall be identical and equal in all respects to every other share of
Preferred Stock.
2. Definitions
Capitalized terms not defined in this paragraph 2 shall have the respective
meanings specified in paragraph 8(a) of this Article IV(C). Unless the context
or use indicates another or different meaning, the following terms shall have
the following meanings, whether used in the singular or plural:
"Applicable Rate" has the meaning specified in paragraph 3(c)(i) below.
"Auction" means each operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Company or its successor or any other
auction agent appointed by the Corporation to perform the functions performed by
the Auction Agent.
"Auction Agent Agreement" has the meaning specified in paragraph 3(c)(i)
below.
"Auction Procedures" means the procedures for conducting Auctions set forth
in paragraph 8 below.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York, New
York, or the City of Boston, Massachusetts are authorized or obligated by law or
executive order to close.
"Cash" means such coin or currency of the United States as at the time
shall be legal tender for payment of public and private debts.
"Conventional Mortgage Pass-Through Certificates" means an instrument
issued in bearer or registered form, that is one of a class or series or by its
terms is divisible into a class or series, and that is of a type commonly dealt
in upon securities exchanges or markets or commonly recognized in any area in
which it is issued or dealt in as a medium for investment, evidencing (directly
or indirectly) a proportional undivided interest in specified pools of whole
mortgage loans that are secured by a valid first lien on each Mortgagor's fee or
leasehold interest in related mortgaged property (except for Permitted Tax Liens
and other matters to which like properties are commonly subject which neither
individually nor in the aggregate materially interfere with the benefits of the
security intended to be provided by such mortgages or deeds of trust, and
standard exceptions and exclusions in title insurance policies) on one-to
four-unit residences (including, without limitation, owner-occupied attached or
detached single-unit residences, -two- to four-unit primary residences,
condominiums, second/vacation homes and non-owner occupied residences) and with
respect to which the Required Documentation is required to be held by a trustee
or independent custodian, which mortgage loans are serviced pursuant to
servicing agreements with servicers that have either expressed the intention to
advance funds to meet deficiencies (to the extent such servicers reasonably
believe such advances are recoverable) or provided for alternative credit
enhancement in lieu thereof, and which instruments (a) have been rated "AA/Aa"
or better by the Rating Agencies or (b) do not qualify pursuant to clause (a)
above, but the inclusion of which as Eligible Portfolio Property is permitted
pursuant to the investment guidelines agreed upon by the Corporation and the
Rating Agency, provided, that a Conventional Mortgage Pass-Through Certificate
shall be eligible for inclusion in the Eligible Portfolio Property as of any
Valuation Date only if it continues to satisfy as of such Valuation Date the
requirements of at least one of clauses (a) or (b) above as the Corporation may
confirm verbally or in writing, directly or indirectly, or by reference to a
publication of the Rating Agencies, by confirmation from a nationally recognized
securities dealer having a minimum capitalization of $25 million or by such
other means as the Financial Security shall approve. The Auction Agent shall be
entitled to rely on the representations of the Corporation contained in the
Portfolio Valuation Report with respect to any Valuation Date, that as of such
Valuation Date the Corporation has confirmed that the Conventional Mortgage
Pass-Through Certificates included in the Eligible Portfolio Property are
within the scope of this paragraph.
"Corporate Debt Obligations" means debt obligations (other than Short-Term
Money Market Instruments or U.S. Government Obligations) rated from "CCC" or
higher by S&P or "Caa" or higher by Moody's (or rated as provided below in the
case of commercial paper), which corporate debt obligations (a) provide for the
periodic payment of interest thereon in cash, (b) do not provide for conversion
or exchange into equity capital at any time over their respective lives, (c)
have been registered under the Securities Act of 1933, as amended (such
requirement shall not apply with respect to commercial paper), and (d) have not
had notice given in respect thereof that any such corporate debt obligations are
the subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the aggregate value of the
Corporation's assets at any time shall not be subject to the provisions of this
clause (d)). In addition, so long as the securities are rated by S&P or Moody's,
no corporate debt obligation held by the Corporation shall be deemed a Corporate
Debt Obligation (i) if it fails to meet the criteria in column (l) below or (ii)
to the extent (and only to the proportionate extent) the acquisition or holding
thereof by the Corporation causes the Corporation to exceed any applicable
limitation set forth in column (2) or (3) below as of any relevant date of
determination (provided that in the event that the Corporation shall exceed any
such limitation or any other percentage limitation set forth in this definition
of Corporate Debt Obligations, the Corporation shall designate, in its sole
discretion, the particular Corporate Debt Obligation(s) and/or portions thereof
which shall be deemed to have caused the Corporation to exceed such limitation):
<TABLE>
<CAPTION>
Column 1 Column 2 Column 3
-------- -------- --------
Maximum Percent
Maximum Percent of Market Value
of Market Value of Eligible Port-
of Eligible Port- folio Property
Minimum Original folio Property Invested in any
Rating Agencies' Issue Size of Invested in any One Industry
Ratings (l) Each Issue One Issuer (2) Category (2)
- ------------------ ---------------- ----------------- -----------------
($ in millions)
<S> <C> <C> <C>
"AAA"/"Aaa"., ...................... $100 10.0% 50.0%
"AA"/"Aa" .......................... 100 10.0 33.3
"A"/"A" ............................ 100 10.0 33.3
"BBB"/"Baa" ........................ 100 5.0 20.0
"BB"/"Ba" .......................... 100(3) 4.0 12.0
"B"/"B1", "B2" and "B3"
(subordinated) ................... 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa"
(unsecured subordinated) (4)...... 100(3) 2.0 5.0
"A-l+"/"P-1" (5).................... N/A 10.0 N/A
"A-l"/"P-l""(5)..................... N/A 10.0 33.3
"A-2"/"P-2" (5)..................... N/A 5.0 20.0
- ----------
(1) References to ratings by the Rating Agencies in this definition and
throughout the Charter will indicate the S&P rating followed by the
Moody's rating in the format shown. Rating designations include (+) or
(-) modifiers to the S&P rating where appropriate and (1), (2) or (3)
modifiers to the Moody's rating where appropriate, except that
corporate debt obligations rated "CCC-" will not constitute Corporate
Debt Obligations. In the event that a Corporate Debt Obligation has
received a different rating from S&P than from Moody's, the
restrictions relating to the lower rating will apply.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category, except that
the calculations with respect to commercial paper investments
constituting Corporate Debt Obligations shall be made separately and
independently of, but on the same basis as, the cumulative total
guidelines applicable to other types of Corporate Debt Obligations.
(3) 20% of the aggregate Market Value of all Corporate Debt Obligations in
these rating categories may be from issues with an original issue size
greater than or equal to $50 million and less than $100 million,
(4) Corporate Debt Obligations in this rating category that are rated by
S&P must be subordinated debt of the issuer with an implied senior
debt rating by S&P of "B-" or higher. The aggregate Market Value of
Corporate Debt Obligations in this rating category in excess of 20% of
the aggregate Market Value of the Fund's assets will not be included
in the calculation of Preferred Stock Basic Maintenance Amount.
(5) Represents commercial paper investments.
</TABLE>
In addition, the term "Corporate Debt Obligations" shall include debt
obligations satisfying such other criteria established by the Rating Agencies in
their sole discretion and designated in writing to the Corporation.
"Cure Date" means the eighth Business Day following a Valuation Date, such
date being the last day upon which the Corporation's failure to fulfill its
obligations, if any, pursuant to paragraph 7 below could be cured.
"Deposit Securities" means Cash, U.S. Government Obligations and Short-Term
Money Market Instruments; provided that at any time as of which the Surety Bond
is in effect the term "Deposit Securities" shall have the meaning provided in
the Insurance Agreement. Except for purposes of determining compliance with the
Preferred Stock Basic Maintenance Amount requirement contained in paragraph
7(a), each Deposit Security shall be deemed to have a value equal to its
principal or face amount payable at maturity plus interest payable thereon after
the delivery of such Deposit Security but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"Discount Factor Supplied By Moody's" means, for any asset held by the
Corporation, (i) the number set forth opposite such type of asset in the
following table or (ii) such other number established by Moody's in its sole
discretion and designated in writing to the Corporation (it being understood
that any asset held by the Corporation and not listed in the following table or
in such written notice shall have a Discounted Value of zero):
Discount Factor
---------------
Type I Corporate Bonds having a remaining
term to maturity of one year or less: 1.13
Type I Corporate Bonds having a remaining term to maturity
of more than one year but not more than two years: 1.20
Type I Corporate Bonds having a remaining term to maturity
of more than two years but not more than three years: 1.25
Type I Corporate Bonds having a remaining term to maturity
of more than three years but not more than four years: 1.32
Type I Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.37
Type I Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.47
Type I Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.55
Type I Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.61
Type I Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.68
Type I Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.70
Type II Corporate Bonds having a remaining term to maturity of
one year or less: 1.19
Type II Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.26
Type II Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.31
Type II Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.38
Type II Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.44
Type II Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than seven years: 1.54
Type II Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.62
Type II Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.69
Type II Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.76
Type II Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.78
Type III Corporate Bonds having a remaining term to maturity of
one year or less: 1.24
Type III Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.32
Type III Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.37
Type III Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.44
Type III Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.50
Type III Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.61
Type III Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.69
Type III Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.76
Type III Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.84
Type III Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.86
Type IV Corporate Bonds having a remaining term to maturity of
one year or less: 1.30
Type IV Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.38
Type IV Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.43
Type IV Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.50
Type IV Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.57
Type IV Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.68
Type IV Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 1.77
Type IV Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.84
Type IV Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 1.92
Type IV Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 1.94
Type V Corporate Bonds having a remaining term to maturity of
one year or less: 1.40
Type V Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.49
Type V Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.55
Type V Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.63
Type V Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.70
Type V Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.82
Type V Corporate Bonds having a remaining term to maturity of
more than seven years but not more than l0 years: 1.91
Type V Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 1.99
Type V Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.09
Type V Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.10
Type VI Corporate Bonds having a remaining term to maturity of
one year or less: 1.51
Type VI Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 1.60
Type VI Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 1.67
Type VI Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 1.76
Type VI Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 1.83
Type VI Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 1.95
Type V Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 2.06
Type VI Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 2.15
Type VI Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.25
Type VI Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.26
Type VII Corporate Bonds having a remaining term to maturity of
one year or less: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: (1)
Type VI Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: (1)
Type VII Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: (1)
Type VII Corporate Bonds having a remaining term to maturity
of more than 20 years but not more than 30 years: (1)
Type VIII Corporate Bonds having a remaining term to maturity
of one year or less: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than one year but not more than two years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than two years but not more than three years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than three years but not more than four years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than four years but not more than five years: 2.60
Tvpe VIII Corporate Bonds having a remaining term to maturity of
more than five years but not more than seven years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than seven years but not more than 10 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 10 years but not more than 15 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 15 years but not more than 20 years: 2.60
Type VIII Corporate Bonds having a remaining term to maturity of
more than 20 years but not more than 30 years: 2.60
Discount Discount
Factor Factor
(Fixed (Adjustable
Rate Rate
FHLMC or FNMA Certificate Mortgages) Mortgages)
- ------------------------- ---------- ----------
FHLMC or FNMA Certificates with
interest rates less than 6% but
equal to or greater than 5%: 1.66 1.64
FHLMC or FNMA Certificates with
interest rates less than 7% but
equal to or greater than 6%: 1.62 1.64
FHLMC or FNMA Certificates with
interest rates less than 8% but
equal to or greater than 7%: 1.57 1.64
FHLMC or FNMA Certificates with
interest rates less than 9% but
equal to or greater than 8%: 1.53 1.64
FHLMC or FNMA Certificates with
interest rates less than 10% but
equal to or greater than 9%: 1.50 1.65
FHLMC or FNMA Certificates with
interest rates less than 11% but
equal to or greater than 10%: 1.46 1.64
FHLMC or FNMA Certificates with
interest rates less than 12% but
equal to or greater than 11%: 1.43 1.64
FHLMC or FNMA Certificates with
interest rates less than 13% but
equal to or greater than 12%: 1.41 1.64
FHLMC or FNMA Certificates with
interest rates equal to or
greater than 13%: 1.38 1.64
GNMA Certificates Discount Factor
- ----------------- ---------------
GNMA Certificates with interest rates less than 6% but equal to
or greater than 5%: 1.68
GNMA Certificates with interest rates less than 7% but equal to
or greater than 6%: 1.60
GNMA Certificates with interest rates less than 8% but equal to
or greater than 7%: 1.56
GNMA Certificates with interest rates less than 9% but equal to
or greater than 8%: 1.51
GNMA Certificates with interest rates less than 10% but equal to
or greater than 9%: 1.48
GNMA Certificates with interest rates less than 11% but equal to
or greater than 10%: 1.46
GNMA Certificates with interest rates less than 12% but equal to
or greater than 11%: 1.47
GNMA Certificates with interest rates less than 13% but equal to
or greater than 12%: 1.45
GNMA Certificates with interest rates equal to or greater than
13%: 1.43
GNMA Certificates with adjustable interest rates: 1.67
GNMA Multifamily Securities (not rated by Moody's): 0
FHLMC Multifamily Securities: 1.64
FHLMC and FNMA Certificates with variable interest rates: (2)
GNMA Graduated Payment Securities (must be seasoned): (3)
Conventional Mortgage Pass-Through Certificates: (2)
U.S. Government Obligations having a remaining term to maturity
of 90 days or less: 1.08
U.S. Government Obligations having a remaining term to maturity
of more than 90 days but not more than five years: 1.31
U.S. Government Obligations having a remaining term to maturity
of more than five years but not more than 10 years: 1.47
U.S. Government Obligations having a remaining term to maturity
of more than 10 years but not more than 15 years: 1.53
U.S. Government Obligations having a remaining term to maturity
of more than 15 years but not more than 30 years: 1.61
Cash and Short-Term Money Market Instruments: 1.00
- ------------
(1) Type VII Corporate Bonds rated "B-3" (subordinated) or better by
Moody's shall have a Discount Factor designated in writing to the
Corporation by Moody's equal to the factor which corresponds to Type
VI Corporate Bonds of comparable maturity. Type VII Corporate Bonds
rated "Caa" (subordinated unsecured) by Moody's or unrated by Moody's
shall have a Discount Factor Supplied by Moody's of 2.60.
(2) The Discount Factor determined therefor in writing by Moody's.
(3) The same discount factor applies in the case of GNMA Graduated Payment
Securities as applies to GNMA Certificates with fixed interest rates
determined at the point the certificates become seasoned.
"Discount Factor Supplied by S&P" means, for any asset held by the
Corporation, (i) the number set forth opposite each such type of asset in the
following table or (ii) such other number established by S&P in its sole
discretion and designated in writing to the Corporation (it being understood
that any asset held by the Corporation and not listed in the following table or
in such written notice shall have a Discounted Value of zero):
Type of Eligible Portfolio Property Discount Factor
- ----------------------------------- ---------------
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
GNMA Certificates with fixed interest rates: 1.35
GNMA Certificates with adjustable interest rates: 1.54
FHLMC and FNMA Certificates with fixed interest rates: 1.45
FHLMC and FNMA Certificates with adjustable interest rates: l.58
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable interest rates: (1)
GNMA Multifamily Securities: (1)
GNMA Graduated Payment Securities: 1.55(2)
Conventional Mortgage Pass-Through Certificates: (1)
U.S. Government Obligations having a remaining term to
maturity of 90 days or less: 1.00
U.S. Government Obligations having a remaining term to
maturity of more than 90 days but not more than five years: 1.28
U.S. Government Obligations having a remaining term to
maturity of more than five years but not more than 10 years: 1.35
U.S. Government Obligations having a remaining term to
maturity of more than 10 years but not more than 15 years: 1.45
U.S. Government Obligations having a remaining term to
maturity of more than 15 years but not more than 30 years: 1.50
Cash and Short-Term Money Market Instruments: 1.00
Commercial paper having a rating of at least "A-1" but lower
than "A-1+" from S&P or "P-1" from Moody's at the time of
the Corporation's investment therein: 1.60
Commercial paper having a rating of at least "A-2" but lower
than "A-1" from S&P or "P-2" from Moody's at the time of
the Corporation's investment therein: 1.65
- ------------
(1) The Discount Factor determined therefor in writing by S&P.
(2) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Fund notifies the Auction Agent that scheduled
principal payments are being made to holders; in the case of GNMA Graduated
Payment Securities as to which the Fund notifies the Auction Agent that
scheduled principal payments are not being made to holders, the Discount
Factor shall be that which is determined in writing by S&P.
"Discounted Value" with respect to any asset held by the Corporation as of
any date means the quotient of the Market Value of such asset divided by the
applicable Discount Factor Supplied by S&P or the applicable Discount Factor
Supplied by Moody's, as the case may be, provided that in no event shall the
Discounted Value of any asset constituting Eligible Portfolio Property for the
purposes of determining compliance with Paragraph 7(a) as of any date exceed the
unpaid principal balance or face amount of such asset an of that date. With
respect to the calculation of the aggregate Discounted Value of any Corporate
Debt Obligation included in the Corporation's Eligible Portfolio Property, such
calculation shall be made using the criteria set forth in the definitions of
Corporate Debt Obligations and Market Value. With respect to the calculation of
the aggregate Discounted Value of the Corporation's Eligible Portfolio Property
for comparison to the Preferred Stock Basic Maintenance Amount, such aggregate
Discounted Value shall be the aggregate Discounted Value calculated using
Discount Factors Supplied by S&P or the aggregate Discounted Value calculated
using the Discount Factors Supplied by Moody's, whichever aggregate Discounted
Value is lower. Notwithstanding any other provision hereof, any Type V, VI, VII
or VIII Corporate Debt Obligation that has a remaining term to maturity of more
than 30 years and any asset to which a Discount Factor is not assigned either
S&P or Moody's in Article IV(C) or in an amendment hereof or supplement hereto,
shall have a Discounted Value of zero.
"Dividend Payment Date" has the meaning specified in paragraph 3(b) below.
"Dividend Period" has the meaning specified in paragraph 3(b) below.
"Eligible Portfolio Property" means (i) Corporate Debt Obligations
(including without limitation commercial paper rated at the time of the
Corporation's investment therein at least "A-2"/"P-2" but lower than
"A-l+"/"P-l" by the Rating Agencies with a maturity of at least 30 days), Cash,
U.S. Government Obligations, Short-Term Money Market Instruments, FNMA
Certificates, FHLMC Certificates, FHLMC Multifamily Securities, GNMA
Certificates, GNMA Multifamily Securities, GNMA Graduated Payment Securities and
Conventional Mortgage Pass-Through Certificates; provided that, any assets of
the Corporation subject to call option obligations shall not constitute Eligible
Portfolio Property and (ii) other assets which may be established by the Rating
Agencies in their sole discretion and designated in writing to the Company.
"FHLMC" means the Federal Home Loan Mortgage Corporation created by Title
III of the Emergency Home Finance Act of 1970, and includes any successor
thereto.
"FHLMC Certificate" means a mortgage participation certificate in physical
or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate, fully amortizing mortgage loans
secured by first-priority mortgages on one- to four-family residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily Security" in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Preferred Stock to fail to retain, the ratings assigned to such Preferred Stock
by the Rating Agencies, as evidenced by letters to such effect from the
respective Rating Agencies.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in physical or
book-entry form, the full and timely payment of principal of and interest on
which is guaranteed by FNMA, and which evidences a proportional undivided
interest in specified pools of fixed-, variable- or adjustable-rate, fully
amortizing mortgage loans secured by first-priority mortgages on single-family
residences.
"GNMA" means the Governmental National Mortgage Association, and includes
any successor thereto.
"GNMA Certificates" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-, variable or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on
single-family residences.
"GNMA Graduated Payment Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of graduated payment mortgage
loans with payments that increase annually at a predetermined rate for up to the
first five or ten years of the mortgage loan and that are secured by
first-priority mortgages on one- to four-unit residences.
"GNMA Multifamily Security" means a fully modified pass-through certificate
in physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States, and which evidences a proportional
undivided interest in specific pools of fixed-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which in
the Eligible Portfolio Property will not, in and of itself, impair or cause the
Preferred Stock to fail to retain the rating assigned to such Preferred Stock by
the Rating Agencies or evidenced by letters to such effect from the respective
Rating Agencies.
"Holding Election" shall have the meaning set forth in paragraph 5(b).
"Indenture" means the indenture dated as of December 1, 1988 between the
Corporation and Shawmut Bank, N.A., as trustee, pursuant to which the
Corporation's Series A Senior Notes were issued.
"Independent Accountants" means the Corporation's independent accountants,
which shall be a nationally recognized accounting firm.
"Industry Category" means, at any time the Surety Bond is not in effect, as
to any Corporate Debt Obligation, any of (i) the industry categories set forth
in the following table or (ii) such other industry categories established by the
Rating Agencies in their sole discretion and designated in writing to the
Corporation.
1. Aerospace and Defense
2. Automobile/Auto Parts/Truck Manufacturing
3. Banks/Savings and Loans/Finance Companies/Consumer Credit
4. Financial Services - Brokerage/Syndication/Leasing
5. Real Estate Development/REITS/Building/ Construction
6. Broadcasting - TV, Cable, and Radio
7. Publishing
8. Electrical Equipment/Electronics/Computers
9. Diversified/Conglomerate Services
10. Diversified/Conglomerate Manufacturing
11. Leisure/Amusement/Motion Pictures
12. Agricultural Chemicals
13. Chemicals
14. Food/Tobacco
15. Beverage
16. Retail
17. Consumer Durable Goods/Home Furnishings/Childcare/Toys
18. Grocery/Convenience Stores
19. Healthcare/Drugs/Hospital Supplies
20. Personal Care Products/Cosmetics
21. Hotel/Gaming
22. Insurance Companies
23. Machinery
24. Metals/Mining
25. Oil/Natural Gas/Oil Services
26. Packaging/Containers
27. Paper/Forest Products/Printing
28. Pollution Control/Waste Removal
29. Utilities
30. Rail/Trucking/Overnight Delivery
31. Telephone/Communications
32. Textiles/Apparel
33. Transportation
34. Agriculture/Agricultural Equipment
35. Miscellaneous
"Initial Dividend Payment Date" has the meaning set forth in paragraph
3(b) below.
"Initial Dividend Period" has the meaning specified in paragraph 3(b)
below.
"Insurance Agreement" means the Insurance Agreement, dated as of December
1, 1988, by and among the Corporation and the Surety or any other similar
insurance agreement with the Surety pursuant to which the Surety Bond is issued.
"Interest and Dividend Coverage Amount," as of any date of determination,
means the sum of:
(a) the amount of interest on the Notes, if any, due to become payable
on or prior to the next Dividend Payment Date, and
(b) the product of
(i) the number of shares of Preferred Stock outstanding on such
date multiplied by $l00,000,
(ii) the Applicable Rate in effect as of such date, and
(iii) a fraction, the numerator of which is the number of days in
the Dividend Period ending on the next Dividend Payment Date
(determined by including the first day thereof but excluding the last
day thereof) and the denominator of which is 360;
less
(c) the combined value of any Deposit Securities irrevocably
deposited by the Corporation for the payment of interest on the Notes
or dividends on the Preferred Stock.
"Interest and Dividend Coverage Assets," as of any date of determination,
means Deposit Securities with maturity dates not later than the day preceding
the next Dividend Payment Date; provided that if interest on the Notes shall be
due prior to such Dividend Payment Date, then a portion of such Deposit
Securities equal to the amount of such interest shall have maturity dates on or
prior to the day preceding the applicable interest payment date; and provided,
further, that if the applicable date of determination is a Dividend Payment Date
or a date on which interest on the Notes is payable, any Deposit Securities to
be applied to the dividends payable on the Preferred Stock or to interest on the
Notes on such date shall not be included in Interest and Dividend Coverage
Assets.
"Investment Company Act" means the Investment Company Act of 1940 (15 U.S.
Code {Par} 80 et seq.), as amended and in effect from time to time.
"Lien" has the meaning set forth in paragraph 3(d)(iv), below.
"Mandatory Asset Coverage Redemption" has the meaning specified in
paragraph 5(b).
"Mandatory Expiration Redemption" has the meaning specified in paragraph
5(b).
"Mandatory Redemption" means a Mandatory Asset Coverage Redemption,
Mandatory Surety Redemption or a Mandatory Expiration Redemption.
"Mandatory Surety Redemption" has the meaning specified in paragraph 5(b).
"Market Value" means the amount determined with respect to specific assets
of the Corporation in (i) the manner set forth below or (ii) such other manner
as is established by the Rating Agencies in their sole discretion and designated
in writing to the Corporation.
(a) as to any Corporate Debt Obligations, (i) the product of (A) the
unpaid principal balance of such Corporate Debt Obligation as of the
Reporting Date, and (B) the lower of two bid prices for such Corporate Debt
Obligation provided by two nationally recognized securities dealers with a
minimum capitalization of $25 million or by one such securities dealer and
any other source (provided that the utilization of such source would not
adversely affect the ratings of the Preferred Stock) to the custodian of
the Corporation's assets, at least one of which shall be provided in
writing or by telecopy, telex, other electronic transcription, computer
obtained quotation reducible to written form or similar means, and in turn
provided to the Corporation by any such means by such custodian (provided
that evidence of the bid quotes furnished by such custodian shall be
provided to the Auction Agent by the Corporation with the related Portfolio
Valuation Report), plus (ii) accrued interest on such Corporate Debt
Obligation (unless such accrued interest is payable to the holder of such
Corporate Debt Obligation prior to the next Valuation Date), or, if two bid
prices cannot be obtained, such item of Eligible Portfolio Property shall
have a Market Value of zero;
(b) the product of (i) as to GNMA Certificates, GNMA Graduated Payment
Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the aggregate unpaid
principal amount of the mortgage loans evidenced by each such Certificate
or security, as the case may be, as determined by the Corporation by any
method which the Corporation believes reliable, which may include amounts
shown on the most recent report related to the Certificate or security
received by the Corporation prior to the Reporting Date, and as to U.S.
Government Obligations and Short-Term Money Market Instruments (other than
demand deposits, federal funds, bankers' acceptances and next Business
Day's repurchase agreements), the face amount or aggregate principal amount
of such U.S. Government Obligations or Short-Term Money Market Instruments,
as the case may be, and (ii) the lower of the bid prices for the same kind
of Certificates, securities or instruments, as the case may be, having, as
nearly as practicable, comparable interest rates and maturities provided by
two nationally recognized securities dealers having minimum capitalization
of $25 million or by one such securities dealer and any other source
(provided that the utilization of such source would not adversely affect
the ratings of the Preferred Stock) to the custodian of the Corporation's
assets, at least one of which shall be provided in writing or by telecopy,
telex, other electronic transcription, computer obtained quotation
reducible to written form or similar means, and in turn provided to the
Corporation by any such means by such custodian (provided that evidence of
the bid quotes furnished by such custodian shall be delivered to the
Auction Agent with the related Portfolio Valuation Report), or, if two bid
prices cannot be obtained, such item of Eligible Portfolio Property will
have a Market Value of zero;
(c) as to Conventional Mortgage Pass-Through Certificates, the product
of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the Certificates as determined by the Corporation by any method
which the Corporation believes reliable, which may include amounts based on
verbal reports of the servicers of the related mortgage loans to the
Corporation, as of the applicable Reporting Date and (ii) the dollar value
of the lower of two bid prices per dollar of outstanding principal amount
as of such applicable Reporting Date for such Certificates, provided by two
nationally recognized securities dealers having minimum capitalization of
$25 million or by one such securities dealer and any other source (provided
that the utilization of such source would not adversely affect the
then-current ratings of the Preferred Stock) to the custodian of the
Corporation's assets, at least one of which shall be provided in writing or
by telecopy, telex, other electronic transcription, computer obtained
quotation reducible to written form or similar means, and in turn provided
to the Corporation by any such means by such custodian (provided that
evidence of the bid quotes furnished by such custodian shall be delivered
to the Auction Agent with the related Portfolio Valuation Report), or, if
two bid prices cannot be obtained, such item of Eligible Portfolio Property
shall have a Market Value of zero; and
(d) as to Cash, demand deposits, federal funds, bankers' acceptances
and next Business Day's repurchase agreements included in Short-Term Money
Market Instruments, the face value thereof.
Upon any failure to obtain two bid prices as described in paragraphs (a),
(b) and (c) above, with respect to any item of Eligible Portfolio Property as of
any Valuation Date, the Corporation shall notify the Rating Agencies in writing.
As used in the definition of Market Value, "in writing" includes telecopies,
telexes or other electronic transcription, or a computer-obtained quotation
reducible to written form,
"Minimum Liquidity Level is met" means, as of any date of determination,
that the aggregate Market Value of the Interest and Dividend Coverage Assets
equals or exceeds the Interest and Dividend Coverage Amount.
"Moody's" means Moody's Investors Service, Inc. or any successor thereto.
"Notes" means collectively (i) the Corporation's Senior Extendible Notes
due 1998, Series A and (ii) any other Senior Notes issued pursuant to the
Indenture.
"Notice of Redemption" has the meaning specified in paragraph 5(c)(iv),
below.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of the Corporation.
"Officer's Certificate" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer, Assistant Secretary or Assistant Controller
of the Corporation.
"Optional Redemption" shall have the meaning specified in paragraph 5(a),
"Original Issuance Date" means the date on which the Corporation originally
issues shares of Preferred Stock.
"Paying Agent" means Bankers Trust Company and its successor or any other
paying agent appointed by the Corporation to perform the functions performed by
the Paying Agent.
"Permitted Bank" means any depository institution or trust company
incorporated or licensed to maintain a branch or agency under the laws of the
United States or any state thereof or the District of Columbia (i) the long-term
unsecured debt obligations (other than such obligations the ratings of which are
based on the credit of a Person other than such institution or trust company) of
which (or which is the principal banking subsidiary of a holding company the
long-term unsecured debt obligations of which), at the time of the Corporation's
investment therein, or at the time of a contractual commitment providing for
such investment, have ratings from the Rating Agencies of at least "AA"/"Aa" and
(ii) the commercial paper (other than such obligations the rating of which are
based on the credit of a Person other than such institution or trust company) of
which (or which is the principal banking subsidiary of a holding company the
commercial paper of which), at the time of the Corporation's investment therein,
or at the time a contractual commitment providing for such investment, has
ratings from the Rating Agencies of at least "A-1+"/"P-1".
"Permitted Tax Liens" means liens of general and special taxes and
assessments on the property in question.
"Person" means an individual, a corporation, a company, a voluntary
association, a partnership, a trust, an unincorporated organization or a
government or any agency, instrumentality or political subdivision thereof.
"Portfolio Calculation" shall have the meaning specified in paragraph 7(b).
"Portfolio Valuation Report" means an Officer's Certificate delivered to
the Auction Agent with the respect to the Valuation of the Eligible Portfolio
Property.
"Preferred Stock Basic Maintenance Amount" means, as of any date on which
the Surety Bond is not in effect, (x) the dollar amount equal to (a) the sum of
(i) 100% of the aggregate principal amount of the Notes then outstanding; (ii)
$100,250 times the number of shares of Preferred Stock then outstanding; (iii)
the aggregate amount of accrued interest on the Notes then outstanding, from the
most recent date to which interest has been paid or duly provided for (or, for
purposes of calculating the Preferred Stock Basic Maintenance Amount prior to
June 1, 1989 then from December 1, 1988) through the next succeeding Valuation
Date, plus all interest to accrue on the Notes then outstanding during the 63
days following such Valuation Date; (iv) the aggregate amount of accumulated but
unpaid dividends with respect to the Preferred Stock to such date; (v) the
aggregate Projected Dividend Amount; (vi) the aggregate principal amount of any
then outstanding indebtedness of the Corporation for money borrowed (other than
the Notes) and (vii) the greater of $200,000 or the Corporation's current
liabilities as of such date to the extent not otherwise reflected in any of (i)
through (vi) above, less (b) the combined value of any Deposit Securities
irrevocably deposited by the Corporation for the payment of principal of or
interest on the Notes or redemptions of or dividend payments with respect to the
Preferred Stock or (y) such other dollar amount calculated by a method
established by the Rating Agencies in their sole discretion and designated in
writing to the Corporation.
"Projected Dividend Amount" for the Preferred Stock shall mean, if the date
of determination is a Valuation Date, the amount of dividends, based on the
number of shares of Preferred Stock outstanding on such Valuation Date,
projected to accumulate on such shares from such Valuation Date through the 63rd
day after such Valuation Date, at the following dividend rates.
(a) if the Valuation Date is the Original Issuance Date or a Dividend
Payment Date, (i) for the Dividend Period beginning on the Original
Issuance Date or such Dividend Payment Date and ending on (but not
including) the first following Dividend Payment Date, the Applicable Rate
in effect on such Valuation Date, and (ii) for the period beginning on (and
including) the first following Dividend Payment Date and ending on (and
including) the 63rd day following such Valuation Date, the product of 1.95
and (x) the Maximum Applicable Rate on the Original issuance Date (in the
case of the Original Issuance Date) or (y) the Maximum Applicable Rate as
of the last occurring Auction Date (in the case of any Dividend Payment
Date); and
(b) if such Valuation Date is not the Original Issue Date or a
Dividend Payment Date, (i) for the period beginning on such Valuation Date
and ending on (but not including) the first following Dividend Payment
Date, the Applicable Rate in effect on such Valuation Date, and (ii) for
the period beginning on (and including) the first following Dividend
Payment Date and ending on (but not including) the sooner of the second
following Dividend Payment Date or the 64th day following such Valuation
Date, the product of 1.95 and (x) the Maximum Applicable Rate on the
Original Issuance Date (in the case of a Valuation Date occurring prior to
the first Auction Date) or (y) the Maximum Applicable Rate on the last
occurring Auction Date (in the case of any other Valuation Date) and (iii)
for the period, if any, beginning on (and including) the second following
Dividend Payment Date and ending on (but not including) the 64th day
following such Valuation Date, the product of 2.50 and the rate specified
in clause (x) or (y) above.
If the date of determination is not a Valuation Date, then the Projected
Dividend Amount on such date of determination shall equal the Projected Dividend
Amount therefor on the immediately preceding Valuation Date, adjusted to reflect
any decrease in the number of shares of Preferred Stock outstanding.
"Quarterly Valuation Date" means, so long as any shares of Preferred Stock
are outstanding, the last Business Day of January, April, July and October of
each year, commencing January 31, 1989.
"Rating Agencies" means, collectively, S&P and Moody's for so long as S&P
and Moody's issue ratings for the Preferred Stock, and, at such time as either
no longer issue a rating for the Preferred Stock, the remaining Rating Agency.
"Reporting Date," with respect to any price referred to in the definition
of the Market Value of an item of Eligible Portfolio Property, shall mean the
date as of which the Market Value of such item of Eligible Portfolio Property is
to be determined or, if no such price is available as provided above for such
date, the next closest prior date as of which such price is so available;
provided, that no such price shall be deemed to be available as of a Reporting
Date if such price is not available as of a date within five Business Days next
preceding the date as of which the determination of such Market Value is to be
made.
"Required Documentation," with respect to a mortgage loan means:
(a) the mortgage note or other evidence of indebtedness secured by the
mortgage endorsed without recourse in blank or to the trustee or other
custodian and accompanied by an assignment thereof
(b) the mortgage, deed of trust, deed to secure debt or similar
security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other
custodian, in recordable form as may be appropriate in the jurisdiction
where the property is located and evidence that such assignment has been
recorded in the name of the trustee or other custodian, and such trustee or
other custodian receives an opinion of counsel (containing only such
exceptions as may be permissible under the indenture or other agreement
pursuant to which the mortgage loan is pledged to the trustee in connection
with the related Conventional Mortgage Pass-Through Certificate) to the
effect that, notwithstanding that the assignment of the mortgage has not
been recorded, the actions taken with respect to the mortgage loan are
sufficient to permit the trustee or other custodian to avail itself of all
protection available under applicable law against the claims of any present
or future creditors of the issuer, and are sufficient to prevent any other
sale, transfer, assignment, pledge or hypothecation of the mortgage and the
related mortgage note by the issuer from being enforceable, or will create
a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of
the issuer to the trustee as provided in the indenture pursuant to which
the mortgage loan is pledged to the trustee in connection with the related
Conventional Mortgage Pass-Through Certificate) prior in right to all other
security interests therein created or perfected under the Uniform
Commercial Code (as in effect in the jurisdiction where the property is
located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
(d) a copy of the title insurance policy or an opinion or certificate
of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be
subject to exceptions for Permitted Tax Liens and other matters to which
like properties are commonly subject which neither individuals nor in the
aggregate materially interfere with the benefits of the security interest
intended to be provided by such mortgage and standard exceptions and
exclusions from mortgage title insurance policies).
"S&P" means Standard & Poor's Corporation or any successor thereto.
"Scheduled Payment Day" has the meaning specified in paragraph 3 (b) below.
"Scheduled Payments" means (i) payment of dividends on the Preferred Stock
which holders of shares of Preferred Stock would be entitled to receive on each
Dividend Payment Date during the term of the Surety Bond in accordance with the
terms of the Charter, without regard to whether the Corporation has declared any
such dividend or such dividend could have been legally declared by the
Corporation, (ii) payment of the redemption price of the Preferred Stock,
without regard to whether such redemption could have been legally made by the
Corporation, (a) on the last date on which the Corporation was to have redeemed
shares of the Preferred Stock as specified in a Surety Redemption Request in the
event that the Surety has notified the Surety Custodian that such redemption is
to be a Scheduled Payment and (b) on the date on which shares of the Preferred
Stock may be required to be redeemed pursuant to a mandatory expiration
redemption, and (III) payment of the liquidation preference on shares of the
Preferred Stock in the event of a liquidation of the Corporation during the term
of the Surety Bond on the dates fixed for payment of such liquidation preference
pursuant to the Charter and the Insurance Agreement.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the
Corporation which agrees to follow the procedures required to be followed by
such securities depository in connection with shares of the Preferred Stock;
provided that, at any time that the Surety Bond is in effect, any reference
herein to the Securities Depository shall be deemed to refer to the Surety
Custodian.
"Short-Term Money Market Instruments" means the following kinds of
instruments, if on the date of purchase or other acquisition by the Corporation
of any such instrument the remaining term to maturity therof is not more than 30
days:
(a) demand deposits in, certificates of deposit of bankers'
acceptances issued by, or federal funds sold to, any depository
institution, the deposits of which are insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance
Corporation, provided that, at the time of the Corporation's investment
therein, the commercial paper or other unsecured short-term debt
obligations of such depository institution are rated at least "A-1+" by S&P
and "P-1" by Moody's;
(b) repurchase obligations with respect to a U.S. Government
Obligation, FNMA Certificate, FHLMC Certificate or GNMA Certificate entered
into with a depository institution, the deposits of which are insured by
the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation and the commercial paper or other unsecured
short-term debt obligations of which are rated at least "A-1+" by S&P and
"P-1" by Moody's, which must be repurchased within one Business Day from
the date such repurchase obligation was entered into; and
(c) commercial paper rated at the time of the Corporation's investment
therein at least "A-1+" by S&P and "P-1" by Moody's.
"Special Redemption Assets" has the meaning specified in paragraph 5(b)
below.
"Subsequent Dividend Period" has the meaning specified in paragraph 3(B)
below.
"Surety" means Financial Security Assurance Inc. or any successor thereto
or any other surety under the Surety Bond.
"Surety Bond" means a surety bond (including the surety bond issued
pursuant to the Insurance Agreement) which unconditionally and irrevocably
guarantees to each holder of shares of Preferred Stock the Scheduled Payments.
"Surety Custodian" means Bankers Trust Company and any successor thereto or
any other custodian under the Surety Custody Agreement.
"Surety Custody Agreement" means a custody agreement, dated as of December
1, 1988, by and between the Surety and the Surety Custodian or any other similar
agreement in effect at any time that the Surety Bond is in effect.
"Surety Redemption Request" means a written notice from the surety to the
Corporation requesting redemption of shares of the Preferred Stock pursuant to
the terms of the Insurance Agreement.
"Type I Corporate Bonds" means Corporate Bonds whose present rating is
"AAA"/"Aaa" by the Rating Agencies.
"Type II Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "AA+"/"Aa1" and no less than " AA-"/"Aa3" by the Rating Agencies.
"Type III Corporate Bonds" means Corporate Bonds present rating is no
greater than "A+"/"A1" and no less than "A-"/"A3" by the Rating Agencies.
"Type IV Corporate Bonds" means Corporate Bonds whose present rating is no
greater than "BBB+"/"Baa1" and no less than "BBB-"/"Baa3" by the Rating
Agencies.
"Type V Corporate Bonds" Means Corporate Bonds whose present rating is no
greater than "BB+/"Ba1" and no less than "BB-"/"Ba3" by the Rating Agencies.
"Type VI Corporate Bonds" means Corporate Bonds whose present rating is no
greater then "B+"/"B1" and no less than "B-"/"B3 (subordinated)" by the Rating
Agencies.
"Type VII Corporate Bonds" means Corporate Bonds whose present rating is
"CCC+ (subordinated)" by S&P with an implied senior rating of "B-" or greater
and rated at least "Caa (subordinated)" by Moody's.
"Type VIII Corporate Bonds" Means Corporate Bonds whose present rating is
"CCC" by S&P with an implied senior rating of "B-" or higher and rated at least
"Caa (unsecured subordinated)" by Moody's.
"U.S. Government Obligations" means direct obligations of the United
States, provided that such direct obligations are entitled to the full faith and
credit of the United States and that any such obligations, other than United
States Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
"United States" means the United States of America.
"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 each month; provided, however, that the first Valuation Date may
occur on any other date established by the Corporation; provided, further,
however, that such date shall be not more than 15 days from the date on which
the Surety Bond ceases to be in effect.
"Vote of a Majority of the Outstanding Voting Securities" (for
purposes of the Investment Company Act) means the vote, at the annual or a
special meeting of the stockholders of the Corporation duly called, of the
lesser of (A) 67% or more of the voting securities present at such meeting, if
the holders of more than 50% of the outstanding voting securities of the
Corporation are present or represented by proxy; or (B) more than 50% of the
outstanding voting securities of the Corporation.
"Voting Period" has the meaning specified in paragraph 6(b) below.
2A. Registration of Preferred Stock and Issuance of Custody Receipts
(a) Except as otherwise provided by applicable law, at any time that the
Surety Bond is in effect pursuant to the Insurance Agreement, all outstanding
shares of Preferred Stock shall be represented by a stock certificate registered
in the name of the Surety Custodian and held by the Surety Custodian in a
custody account on behalf of the beneficial holders of such Preferred Stock, and
no person acquiring beneficial ownership of shares of Preferred Stock shall be
entitled to receive a certificate representing such shares of Preferred Stock.
In such event, the Surety Custodian shall issue to the Securities Depository
custody receipts evidencing the beneficial holders' ownership of the Preferred
Stock, which the Securities Depository will hold of record on behalf of the
beneficial holders of shares of Preferred Stock, all pursuant to the Surety
Custody Agreement.
(b) At any such time that the Surety Bond is not in effect, all outstanding
shares of Preferred Stock shall be represented by a stock certificate registered
in the name of the Securities Depository or its nominee, to be held on behalf of
the beneficial holders of shares of Preferred Stock.
3. Dividends
(a) Holders of shares of Preferred Stock shall be entitled to receive,
when, as, and if declared by the Board of Directors, out of funds legally
available therefor, cumulative cash dividends at the Applicable Rate per annum
(determined as set forth below) payable on the respective dates set forth below
to the holders of record of shares of Preferred Stock as of the Business Day
next preceding the payment date.
(b) Dividends on the shares of Preferred Stock shall accumulate from and
including the Original Issuance Date. Accrued dividends shall be payable
commencing on the date next succeeding the last day of the 45-day period
commencing on the Original Issuance Date (the "Initial Dividend Payment Date")
and on each day thereafter which is the date next succeeding the last day of the
successive 30-day periods after such date. If any date next succeeding such last
day (the "Scheduled Payment Day") is not a Business Day or (if the Paying Agent
does not make payments in same-day funds) the day succeeding the Scheduled
Payment Day is not a Business Day, dividends payable on such Scheduled Payment
Day shall be paid on the first Business Day succeeding such Scheduled Payment
Day that is next succeeded by a day which is also a Business Day. Any date on
which a dividend on the Preferred Stock is payable pursuant to this paragraph
3(b) is herein called a "Dividend Payment Date." The period beginning on and
including the Original Issuance Date and ending on (but not including) the
Initial Dividend Payment Date is referred to herein as the "Initial Dividend
Period." Each successive period commencing on, and including, the Dividend
Payment Date for the preceding Dividend Period and ending on (and including) the
day preceding the next succeeding Dividend Payment Date is referred to herein as
a "Subsequent Dividend Period" and the Initial Dividend Period and each
Subsequent Dividend Period together are sometimes referred to herein as
"Dividend Periods."
(c) (i) The Applicable Rate for the Initial Dividend Period shall be the
rate per annum for the Initial Dividend Period set forth in the Corporation's
Prospectus covering the initial offering of the Preferred Stock. For the purpose
of calculating the rate of dividends per annum payable on shares of Preferred
Stock (the "Applicable Rate") for each Subsequent Dividend Period the
Corporation shall enter into an agreement with the Auction Agent (the "Auction
Agent Agreement"). The Applicable Rate on the shares of Preferred Stock for each
Subsequent Dividend Period shall be determined by the Auction Agent in
accordance with the Auction Agent Agreement, which shall provide that the
Auction Agent will follow the Auction Procedures described in paragraph 8 hereof
to determine the Applicable Rate. In the event there is no Auction Agent on the
Business Day prior to the first day of a Dividend Period, the Applicable Rate
for such Dividend Period shall be equal to the Maximum Applicable Rate (as
defined in paragraph 8(a) hereof) that could have resulted pursuant to the
Auction Procedures, as determined by the Corporation, on such Business Day. The
Corporation shall exercise its best efforts to maintain an Auction Agent
pursuant to an agreement containing terms no less favorable to the Corporation
than the terms of the Auction Agent Agreement. If, due to the issuance of a
Notice of Redemption, no shares of Preferred Stock are deemed outstanding on any
Auction Date, or if no Auction is held on such date for any other reason, the
Applicable Rate for the Dividend Period beginning on the Business Day following
such Auction Date shall be equal to the Maximum Applicable Rate that could have
resulted pursuant to the Auction Procedures, as determined by the Auction Agent
(or, if there is no Auction Agent, by the Corporation), on such Business Day.
(ii) The amount of dividends per share payable on shares of Preferred Stock
for each Dividend Period or part thereof shall be determined by the Auction
Agent and shall be an amount equal to $100,000 per share of Preferred Stock
multiplied by the product of (1) the Applicable Rate for such Dividend Period
and (2) a fraction, the numerator of which shall be the actual number of days in
such Dividend Period or part thereof and the denominator of which shall be 360.
All dollar amounts used in or resulting from such calculations will be rounded
to the nearest cent (with one-half (0.5) cent being rounded up).
(d) (i) The Corporation will not issue any series of any class of stock
which is senior to or on a parity with the Preferred Stock. No holders of shares
of Preferred Stock shall be entitled to any dividends, whether payable in cash,
property or stock, in excess of full cumulative dividends, as provided in this
paragraph 3, on shares of Preferred Stock. No interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payments on any shares
of the Preferred Stock that may be in arrears.
(ii) For so long as shares of Preferred Stock are outstanding, the
Corporation shall not declare, pay or set apart for payment any dividend or
other distribution in respect of the Common Stock or any other stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any shares of the Common Stock or any other stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends or
upon liquidation (except by conversion into or exchange for stock of the
Corporation ranking junior to the shares of Preferred Stock as to dividends and
upon liquidation), unless, in each case, (A) immediately thereafter, the
Preferred Stock Basic Maintenance Amount would be achieved, if at such time the
Surety Bond is not in effect, (B) such transaction is on a Dividend Payment
Date, (C) such transaction would not violate applicable law (including, without
limitation, Section 18(a) of the Investment Company Act and Maryland law) and
(D) full cumulative dividends on all shares of Preferred Stock for all Dividend
Periods ending on or prior to such Dividend Payment Date have been declared and
paid (or sufficient Deposit Securities shall have been set apart for their
payment).
If on any Dividend Payment Date as of which the Surety Bond is in effect,
the Corporation defaults in making dividend payments on shares of Preferred
Stock and the Surety makes such payments to the holders of shares of Preferred
Stock, the Surety thereafter shall be subrogated to all rights of the holders of
shares of Preferred Stock to receive such dividend payments.
(iii) Any dividend payment made on the shares of Preferred Stock shall
first be credited against the dividends accumulated with respect to the earliest
Dividend Period for which dividends have not been paid.
(iv) At any time that shares of Preferred Stock are outstanding and the
Surety Bond is not in effect, the Corporation shall not create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust receipt
or other material encumbrance of any kind (collectively "Liens") upon any of its
Eligible Portfolio Property, except for (A) Liens the validity of which are
being contested in good faith by appropriate proceedings, (B) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) Liens to secure payment for services rendered by the Auction Agent
or the Trustee with respect to the Notes in connection with the Preferred Stock
or the Notes and (D) Liens otherwise incurred in connection with borrowings made
in the ordinary course of business in accordance with the Corporation's stated
investment objective, policies and restrictions,
(e) Not later than noon on the Business Day next preceding each Dividend
Payment Date, the Corporation shall deposit with the Paying Agent Deposit
Securities consituting immediately available funds in an amount sufficient to
pay the dividends that are payable on such Dividend Payment Date. The
Corporation may direct the Paying Agent with respect to the investment of any
such Deposit Securities, provided that the proceeds of any such investment will
be available at the opening of business on such Dividend Payment Date.
(f) Dividends in arrears for any past Dividend Period may be declared and
paid to the holders of shares of Preferred Stock at any time, without reference
to any regular Dividend Payment Date.
4. Liquidation Rights
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, after satisfying claims
of creditors (including the holders of Notes) but before any distribution or
payment shall be made in respect of the Common Stock or any other stock of the
Corporation ranking junior to the Preferred Stock as to liquidation payments, a
liquidation distribution in the amount of $100,000 per share, plus an amount
equal to all accumulated and unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not earned or declared by the
Corporation, but excluding interest thereon), but such holders shall be entitled
to no further participation in any distribution or payment in connection with
any such liquidation, dissolution or winding up.
(b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of Preferred Stock shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then such available
assets shall be distributed among the holders of shares of Preferred Stock
ratably in any such distribution of assets according to the respective amounts
which would be payable on all such shares if all amounts thereon were paid in
full.
(c) Neither the consolidation or merger of the Corporation with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer by
the Corporation of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this paragraph 4.
5. Redemption
Shares of the Preferred Stock shall be redeemable by the Corporation as
provided below:
(a) Optional Redemption. At its option, the Corporation may, out of funds
legally available therefor (giving consideration to all applicable legal
restraints, including, without limitation, the restraints imposed by Section
18(a) of the Investment Company Act and Maryland Law), upon at least 15 but not
more, than 30 days notice, or such longer notice period as is required by
applicable law, pursuant to a Notice of Redemption (as defined below), redeem
shares of Preferred Stock, in whole or in part (an "Optional Redemption"), at
$100,000 per share plus an amount equal to the accrued and unpaid dividends on
such shares (whether or not earned or declared by the Corporation, but excluding
interest thereon) to the redemption date; provided, however, it such redemption
is not made on a Dividend Payment Date, it will be made at a price equal to
$100,250 plus an amount equal to all accumumulated and unpaid dividends through
the date of redemption.
(b) Mandatory Redemption. (i) If the Surety Bond is then in effect, the
Corporation shall be obligated (A) to redeem, out of funds legally available
therefor, no later than the last day specified for redemption of shares of
Preferred Stock pursuant to a Surety Redemption Request, the number of shares of
Preferred Stock specified in such Surety Redemption Request (a "Mandatory Surety
Redemption") and (B) to redeem, out of funds legally available therefor, all
shares of Preferred Stock at least one full Business Day prior to any expiration
date of the Surety Bond if, 190 days prior to such expiration date, the
Corporation shall have failed to obtain from the Surety an extension of the term
of the Surety Bond pursuant to its terms (a "Mandatory Expiration Redemption");
provided that, subject to the terms of the Insurance Agreement, no Mandatory
Expiration Redemption shall be required if the Corporation shall have obtained
notice in writing from the respective Rating Agencies that such expiration of
the Surety Bond will not adversely affect the then-current ratings of the
Preferred Stock whether through obtaining a substitute Surety Bond or otherwise.
A Notice of Redemption shall be given to the holders of shares of Preferred
Stock being redeemed at least 15 but not more than 30 days (or such longer
notice period as is required by applicable law) prior to the date of any
Mandatory Redemption. A holder of shares of Preferred Stock may elect not to
have its shares redeemed pursuant to a Mandatory Expiration Redemption by
giving notice to the Corporation or the Paying Agent at least five days prior
to the redemption date of such Holder's election to continue to hold its shares
of Preferred Stock (the "Holding Election").
(ii) If, at any such time as the Surety Bond is not in effect, the
Corporation shall default in the performance or observance of any covenant
contained in paragraph 7(a)(i) through (iii) hereof, and such default shall not
have been cured prior to the close of business on the Cure Date, then the
Corporation shall (A) redeem, out of funds legally available therefor (giving
consideration to all applicable legal restraints, including, without limitation,
the restraints imposed by Section 18(a) of the Investment Company Act and
Maryland law), the minimum number of shares the redemption of which, if deemed
to have occurred on the Valuation Date with respect to which the requirements of
Section 7(a)(i) through (iii) were not met, could have been effected using the
proceeds from the deemed sale of "Special Redemption Assets," (B) notify the
Paying Agent in writing by the close of business on the second Business Day
following the Cure Date of its intention to redeem the number of whole shares of
Preferred Stock calculated in clause (A) above (a "Mandatory Asset Coverage
Redemption") and (C) give to the holders of such shares of Preferred Stock at
least 15 but not more than 30 days (or such longer notice period as is required
by applicable laws prior to the redemption date, a Notice of Redemption (which
shall specify a mandatory redemption date not more than 45 days after the
Valuation Date on which the Corporation defaulted in the performance or
observance of such covenant) with respect to the redemption of such shares. The
Corporation need not liquidate the Special Redemption Assets; however, assets
liquidated to effect the redemption must have the same respective Discounted
Values as the Special Redemption Assets. For purposes hereof, "Special
Redemption Assets" shall mean such portfolio holdings as are identified by the
Corporation in its sole discretion, the deemed sale of which for Cash on the
applicable Valuation Date on which the requirements of paragraph 7(a)(i) through
(iii) were not met would have caused the requirements of paragraph 7(a)(i) to
have been satisfied on a pro forma basis as of such Valuation Date.
(iii) Any Mandatory Redemption will be made at a price equal to S100,000
per share plus accumulated and unpaid dividends through the date of redemption
(whether or not earned or declared by the Corporation), except that if any such
redemption is not made on a Dividend Payment date, it will be made at a price
equal to $100,250 plus accumulated and unpaid dividends through the date of
redemption (whether or not earned or declared by the Corporation). Such
redemptions may only be made by the Corporation to the extent permitted under
the Securities Exchange Act and Maryland law and provided neither principal nor
interest payments with respect to the Notes are then in default.
(c) General Provisions for Redemptions. (i) Notwithstanding the other
provisions of this paragraph 5, the Corporation may redeem shares of Preferred
Stock only to the extent permitted under the Investment Company Act, Maryland
law and the Indenture.
(ii) Notwithstanding the other provisions of this paragraph 5, no shares of
Preferred Stock may be redeemed other than as specified in the following proviso
unless all accumulated and unpaid dividends on all outstanding shares of
Preferred Stock for all past Dividend Periods shall have been or are
contemporaneously paid or declared and Deposit Securities maturing on or prior
to the date fixed for redemption are set apart for the payment of such
dividends; provided, however, that the Corporation may, without regard to such
limitations, redeem, purchase or otherwise acquire shares of Preferred Stock (A)
as a whole, pursuant to a Mandatory Redemption or an Optional Redemption or (B)
pursuant to a purchase or exchange offer made for all of the outstanding shares
of Preferred Stock to the extent permitted under the Investment Company Act,
Maryland law and the Charter.
(iii) If fewer than all the outstanding shares of Preferred Stock are to be
redeemed by Mandatory Redemption or Optional Redemption, the shares to be
redeemed shall be identified by the Board of Directors of the Corporation by lot
or by such other method as the Corporation shall deem fair and equitable.
(iv) Whenever shares of the Preferred Stock are to be redeemed, the
Corporation shall mail, within the time periods specified in paragraphs 5(a) and
5(b), a written notice of redemption by first-class mail, postage prepaid, to
each holder of shares of Preferred Stock to be redeemed (a "Notice of
Redemption"), as its name and address appear on the Stock Books, and to the
Auction Agent. The Notice of Redemption shall also be published on or about the
date thereof in The Wall Street Journal (National Edition) or, if such notice
cannot be published therein, then in a comparable newspaper printed in the
English language and of general circulation in New York City). Each Notice of
Redemption shall state (A) the redemption date, (B) the redemption price, (C)
the number of shares of Preferred Stock to be redeemed, (D) the place or places
where such shares of Preferred Shares are to be redeemed, (E) that dividends on
the shares to be redeemed will cease to accumulate on such redemption date, (F)
the provision of the Charter under which the redemption is being made and (G) if
such redemption is a Mandatory Expiration Redemption, that any holder of shares
of Preferred Stock may elect not to have its shares redeemed by giving notice
thereof to the Corporation or the Paying Agent at least five days prior to the
redemption date. No defect in the Notice of Redemption or in the mailing or
publication thereof shall affect the validity of the redemption proceedings,
except an required by applicable law.
(v) Following delivery of notice to the Paying Agent of the Corporation's
intention to redeem shares of Preferred Stock pursuant to paragraph 5(a), (A)
such shares of Preferred Stock and (B) Special Redemption Assets identified by
the Corporation with respect to such shares of Preferred Stock shall thereafter
be excluded from the calculation of Preferred Stock Basic Maintenance Amount and
Portfolio Calculation if the provisions of paragraph 7 hereof are in effect at
such time.
(vi) On each redemption date, the Securities Depository shall surrender the
certificate evidencing the shares of Preferred Stock. Each holder of shares of
Preferred Stock that were called for redemption, and who did not exercise the
Holding Election, shall then be entitled to receive payment of the redemption
price for each such share. If less than all of the shares represented by such
certificates are to be redeemed, the Corporation shall issue a new certificate
for the shares not redeemed.
(vii) Should the Corporation give a Notice of Redemption, then no later
than the Business Day next preceding the date fixed for redemption, the
Corporation shall deposit with the Paying Agent Deposit Securities constituting
immediately available funds in an amount sufficient to redeem the shares of
Preferred Stock to be redeemed. In such event the Corporation shall give the
Paying Agent irrevocable instructions and authority to pay the redemption price
to the holders of shares of Preferred Stock called for redemption, and who did
not exercise a Holding Election, upon the redemption date. The Corporation may
direct the Paying Agent with respect to the investment of any Deposit Securities
so deposited provided that the proceeds of any such investment will be available
at the opening of business on such redemption date. The Deposit Securities
deposited with the Paying Agent pursuant to the immediately preceding sentence
and the shares of Preferred Stock to be redeemed shall be excluded from the
calculation of Preferred Stock Basic Maintenance Amount and Portfolio
Calculation (if applicable at such time). Upon the date of such deposit, or if
no such deposit is made, then upon such date fixed for redemption (unless the
Corporation shall default in making payment of the redemption price), all rights
of the holders of the shares of Preferred Stock so called for redemption shall
cease and terminate except the right of the holders thereof to receive the
redemption price thereof (inclusive of accumulated but unpaid dividends, but
without any interest) against delivery by book entry of such shares of Preferred
Stock, and such shares shall no longer be deemed outstanding for any purpose;
provided, however, this sentence shall not apply to holders of shares of
Preferred Stock who have exercised the Holding Election and who shall retain all
rights granted to holders pursuant to the Charter. The Corporation shall be
entitled to receive, promptly after the date fixed for redemption, any cash in
excess of the aggregate redemption price of the shares of Preferred Stock called
for redemption and for which the Holding Election was not exercised, on such
date and any remaining Deposit Securities. Any assets so deposited which are
unclaimed at the end of two years from such redemption date shall, to the extent
permitted by law, be repaid to the Corporation, after which the holders of the
shares of Preferred Stock so called for redemption, who did not exercise the
Holding Election, may look only to the Corporation for payment thereof. The
Corporation shall be entitled to receive, from time to time after the date fixed
for redemption, any interest on the Deposit Securities so deposited.
(viii) Shares of Preferred Stock that have been redeemed, purchased or
otherwise acquired by the Corporation may not be reissued, shall not be deemed
outstanding, and shall be retired and cancelled. In no event shall such shares
of Preferred Stock have any voting rights. Shares of Preferred Stock with
respect to which a Notice of Redemption has been given as provided in paragraph
5(c)(iv) and whose holders have not elected to retain their shares pursuant to
the last sentence of Paragraph 5(b)(i) (if applicable) shall not be deemed
outstanding for purposes of the Auction Procedures set forth in paragraph 8
hereof.
(ix) In addition to redemption rights expressly established under the
Charter, the Corporation may redeem or repurchase shares of Common Stock to the
extent now or hereafter permitted by the laws of the State of Maryland, by the
Investment Company Act and by the Charter,
(x) If the Corporation shall not have funds legally available for the
redemption of all the shares of the Preferred Stock to be redeemed on any
redemption date (or is otherwise legally unable to effect such redemption), the
corporation shall redeem on such redemption date the number of shares of
Preferred Stock as it shall have legally available funds to redeem, ratably from
each holder of shares of Preferred Stock whose shares are to be redeemed and the
remainder of the shares of the Preferred Stock required to be redeemed shall be
redeemed on the earliest practicable date on which the Corporation shall first
have funds legally available for the redemption of such shares pursuant to a
Notice of Redemption given to the holders of such shares of Preferred Stock at
least 15 but not more than 30 days (or such longer notice period as is required
by applicable law) prior the redemption date.
(xi) If on any date on which the payment of the redemption price would
constitute a Scheduled Payment and the Surety Bond is in effect, the Corporation
defaults in making payment of such redemption price and the Surety makes such
Scheduled Payments to holders of shares of Preferred Stock called for
redemption, the Surety, thereafter, shall be subrogated to all the rights of
such holders with respect to their shares of Preferred Stock.
6. Voting Rights
(a) General. Each holder of shares of Preferred Stock shall be entitled to
one vote per S1000 of liquidation preference of each share of Preferred Stock
without regard to any liquidation preference related to accumulated and unpaid
dividends (i.e., 100 votes per share); provided that all the votes represented
by a single share of Preferred Stock must be voted together, on each matter
submitted to a vote of stockholders of the Corporation and, except as otherwise
provided in the Charter or by Maryland law, the holders of Preferred Stock and
the holders of Common Stock of the Corporation shall vote together as one class
on all matters submitted to the stockholders; provided, however, that at any
meeting of the stockholders of the Corporation held for the election of
directors, the holders of Preferred Stock shall be entitled as a class, to the
exclusion of the holders of the Common Stock, to elect two directors of the
Corporation; provided, further, that the identity of the two directors
representing the holders of Preferred Stock on and after the Restatement Date
until the first meeting of the Corporation's stockholders following the
Restatement Date may be designated by the Board of Directors. Subject to
paragraph 6(b) hereof, the holders of the shares of Common Stock and Preferred
Stock shall vote as a single class for the election of the balance of the
directors.
(b) Right to Elect Majority of Board of Directors. (i) During any period
commencing with the Corporation's failure to pay dividends on shares of the
Preferred Stock in an amount equal to two full years of dividends (such period
being referred to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically increased by the
smallest number that, when added to the number of directors then constituting
the Board of Directors, shall (together with the two directors elected by the
holders pursuant to paragraph 6(a)) constitute a majority of the total number of
the directors of the Corporation as increased, and the holders of shares of
Preferred Stock shall be entitled, voting as a single class on a
100-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), to elect the
smallest number of additional directors of the Corporation that shall constitute
a majority of the total number of directors of the Corporation so increased.
(ii) The Voting Period and the voting rights so created upon the occurrence
of the conditions set forth in this paragraph 6(b) shall continue unless and
until all accumulated and unpaid dividends on the then outstanding shares of
Preferred Stock including the accumulated and unpaid dividends as of the last
preceding Dividend Payment Date shall have been paid or declared and sufficient
funds set apart for the payment of such dividends. Upon the termination of a
Voting Period, the voting rights described in paragraph 6(b)(i) shall cease,
subject always, however, to the revesting of such voting rights in the holders
of shares of Preferred Stock upon the further occurrence of the event described
in such paragraph 6(b)(i).
(c) Voting Procedures. (i) As soon as practicable after the accrual of any
right of the holders of shares of Preferred Stock to elect directors pursuant to
paragraph 6(b)(i), the Corporation shall notify the Auction Agent and the
Auction Agent shall call a special meeting of the holders of shares of Preferred
Stock by mailing a notice of such special meeting to the holders of shares of
Preferred Stock not less than 10 nor more than 20 days after the date of mailing
of such notice. If the Corporation fails to send such notice to the Auction
Agent or if the Auction Agent does not call such a special meeting (as provided
above), it may be called by any holder of shares of Preferred Stock on like
notice. The record date for determining the holders of shares of Preferred Stock
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting at which directors are
elected held during a Voting Period, the holders of shares of Preferred Stock,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be entitled
to elect the number of directors prescribed in paragraph 6(b)(i) above on a
100-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of shares of Preferred Stock
present in person or by proxy shall have the power to adjourn the meeting
without notice, other than an announcement at the meeting, until a quorum is
present.
(ii) For purposes of determining any rights of the holders of shares of
Preferred Stock to vote on any matter, whether such right is created by the
Charter, by statute or otherwise, no holder of shares of Preferred Stock shall
be entitled to vote and no share of Preferred Stock shall be deemed to be
"outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum, if prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding for quorum
purposes, as the case may be, sufficient funds for the redemption of such shares
have been deposited in trust with the Paying Agent for that purpose, the
requisite Notice of Redemption with respect to such shares shall have been given
as provided in paragraph 5(c)(iv) and such holder shall not have exercised the
Holding Election.
(iii) The terms of office of all persons who are directors of the
Corporation at the time of a special meeting of holders of shares of Preferred
Stock to elect directors pursuant to paragraph 6(b) shall continue,
notwithstanding the election at such meeting by the holders of shares of
Preferred Stock of the number of directors that they are entitled to elect, and
the persons so elected by the holders of shares of Preferred Stock, together
with the incumbent directors, shall constitute the duly elected directors of the
Corporation.
(iv) Simultaneously with the expiration of a Voting Period, the terms of
office of the directors elected by the holders of shares of Preferred Stock
pursuant to paragraph 6(b)(i) shall terminate, the persons who shall have been
serving as directors immediately prior to such voting period and who are
incumbent shall constitute the directors of the Corporation and the voting
rights of the holders of shares of Preferred Stock to elect directors pursuant
to paragraph 6(b)(i) shall cease.
(v) The directors elected by the holders of shares of Preferred Stock
pursuant to paragraphs 6(a) and 6(b)(i) shall (subject to the provisions of any
applicable law) be subject to removal only by the vote of the holders of a
majority of outstanding shares of the Preferred Stock. Any vacancy on the Board
of Directors occurring by reason of such removal or otherwise (in the case of
directors subject to election by the holders of Preferred Stock) may be filled
only by vote of the holders of Preferred Stock outstanding or (subject to the
provisions of any applicable law) by a majority of the remaining directors (or
the remaining director) who were elected by the holders of shares of Preferred
Stock. Any other vacancy on the Board of Directors during a Voting Period shall,
to the extent permitted by applicable law, be filled by a vote of the remaining
directors or the holder or holders of the Corporation's outstanding Common Stock
and Preferred Stock, voting as a single class.
(d) Surety Voting. At any time that the Preferred Stock is held by the
Surety Custodian pursuant to paragraph 2A hereof and the Surety Custody
Agreement, voting rights with respect to shares of Preferred Stock will be
exercised by the Surety Custodian in accordance with instructions given by the
beneficial holders of the shares of Preferred Stock; provided, however, that at
any time that the Surety Custodian has made a claim for payment under, and the
Surety has made Scheduled Payments pursuant to, the Surety Bond, the Surety
Custodian will vote the Preferred Shares with respect to which such Scheduled
Payments have been made under the Surety Bond in accordance with instructions
given by the Surety. The right of the Surety to instruct the Surety Custodian
with respect to voting such shares of Preferred Stock shall terminate when the
Corporation has made payments on the shares of Preferred Stock with respect to
which the Scheduled Payments were made by the Surety or the Corporation has
reimbursed the Surety for such Scheduled Payments and shall be reinstated if the
Surety makes additional Scheduled Payments pursuant to the Surety Bond.
(e) Exclusive Remedy. Unless otherwise required by law, the holders of
shares of Preferred Stock shall not have any relative rights or preferences or
other special rights other than those specifically set forth herein. In the
event that the Corporation fails to pay any dividends on the shares of Preferred
Stock, the exclusive remedy of the holders of shares of Preferred Stock shall be
the right to vote for directors pursuant to the provisions of this paragraph 6.
In no event shall the holders of shares of Preferred Stock have any right to sue
for, or bring a proceeding with respect to, such dividends or damages for the
failure to receive the same.
7. Asset and Liability Coverage
(a) Preferred Stock Basic Maintenance Amount Required Under Certain
Circumstances. (i) At any such time as the Surety Bond is not in effect and any
of the shares of Preferred Stock are outstanding, the Corporation will maintain,
on each Valuation Date, Eligible Portfolio Property having an aggregate
Discounted Value at least equal to the Preferred Stock Basic Maintenance Amount,
each as of such Valuation Date.
(ii) To the extent that this paragraph 7(a) is applicable at any such time,
on or before 5:00 P.M., Boston time, on the third Business Day after each
Valuation Date, the Corporation shall complete and deliver to the Auction Agent
a Portfolio Valuation Report, which will be deemed to have been delivered to the
Auction Agent (A) if the Auction Agent receives a copy or telecopy, telex or
other electronic transcription thereof, or (B) if the Auction Agent receives a
telecopy, telex or other electronic transcription setting forth at least the
applicable Discounted Value of the aggregate of all Eligible Portfolio Property
(the "Portfolio Calculation") and the Preferred Stock Basic Maintenance Amount
each as of the relevant Valuation Date and on the same day the Corporation mails
to the Auction Agent for delivery on the next Business Day the full Portfolio
Valuation Report. A failure by the Corporation to deliver a Portfolio Valuation
Report under this paragraph 7(a)(ii) shall be deemed to be delivery of a
Portfolio Valuation Report indicating a value for all Eligible Portfolio
Property of less than the Preferred Stock Basic Maintenance Amount, as of the
relevant Valuation Date.
(iii) To the extent that this paragraph 7(a) is applicable at any such
time, within three Business Days after the date of delivery to the Auction
Agent of a Portfolio Valuation Report in accordance with paragraph 7(a)(ii)
above relating to a Quarterly Valuation Date, the Corporation shall deliver to
the Auction Agent a letter reviewing the Portfolio Calculation, prepared by the
Corporation's Independent Accountants, relating to such Portfolio Valuation
Report substantially to the effect that (A) the Independent Accountants have
read the Portfolio Valuation Report for the current Quarterly Valuation Date
(the "Report"); (3) with respect to the issue size compliance, issuer
diversification and industry diversification calculations, such calculations and
the resulting eligible portfolio market value are numerically correct; (C) with
respect to the Preferred Stock Basic Maintenance Amount, the results of the
calculation set forth in the Report have been recalculated and are numerically
correct; (D) with respect to the excess or deficiency of the Discounted Value
amount when compared to the Preferred Stock Basic Maintenance Amount, the
results of the calculation set forth in the Report have been recalculated and
are numerically correct; (E) with respect to the Rating Agencies, ratings on
Corporate Debt Obligations, issuer name, issue size and coupon rate listed in
the Report, that information has been traced and agrees with the information
listed in The Standard & Poor's Bond Guide (in the event such information does
not agree or such information is not listed in The Standard & Poor's Bond Guide,
the Independent Accountants will inquire of the Rating Agencies what such
information is, and provide a listing in their letter of such differences, if
any); and (F) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value) provided by the
custodian of the Corporation's assets to the Corporation for purposes of valuing
securities in the portfolio, the Independent Accountants have traced the price
used in the Report to the lower of the two bid prices listed in the report
provided by such custodian and verified that such information agrees (in the
event such information does not agree, the Independent Accountants will provide
a listing in their letter of such differences). If any letter reviewing the
Portfolio Calculation delivered pursuant to this paragraph shows that an error
was made in the Portfolio Valuation Report for such Quarterly Valuation Date, or
shows that a lower aggregate Discounted Value for the aggregate of all Eligible
Portfolio Property was determined by the Independent Accountants, the
calculation or determination made by such Independent Accountants shall be final
and conclusive and shall be binding on the Corporation, and the Corporation
shall promptly amend the Portfolio Valuation Report and deliver the amended
Portfolio Valuation Report to the Auction Agent.
(iv) To the extent that this paragraph 7(a) is applicable at any such time,
the Corporation shall deliver an Officers' Certificate to the Auction Agent as
of the fifteenth of each month (and if such day is not a Business Day, then the
next succeeding Business Day) and the last Business Day of each month
certifying, to the best knowledge of the Officers signing such Officers'
Certificate, the Portfolio Calculation as of such Business Day and the Preferred
Stock Basic Maintenance Amount as of such Business Day.
(b) Liquidity Coverage. (i) At any such time as the Surety Bond is not in
effect and any shares of Preferred Stock are outstanding, the Corporation shall
determine as of each Valuation Date (A) the Market Value of the Interest and
Dividend Coverage Assets owned by the Corporation as of that Valuation Date, (B)
the Interest and Dividend Coverage Amount on that Valuation Date, and (C)
whether the Minimum Liquidity Level is met as of that Valuation Date. The
calculations of the Interest and Dividend Coverage Assets, the Interest and
Dividend Coverage Amount and whether the Minimum Liquidity Level is met shall be
set forth in a certificate (a "Certificate of Minimum Liquidity") dated as of
the Valuation Date. The Portfolio Valuation Report and the Certificate of
Minimum Liquidity may be combined in one certificate. To the extent that this
paragraph 7(b) shall be applicable at any such time, the Corporation shall cause
the Certificate of Minimum Liquidity to be delivered to the Auction Agent not
later than the close of business on the third Business Day after the Valuation
Date. The Minimum Liquidity Level shall be deemed to be met as of any date of
determination if the Corporation has timely delivered a Certificate of Minimum
Liquidity relating to such date, which states that the same has been met and
which is not manifestly inaccurate. In the event that a Certificate of Minimum
Liquidity is not delivered to the Auction Agent when required pursuant to this
paragraph 7(b), the Minimum Liquidity Level shall be deemed not to have been met
as of the applicable date.
(ii) To the extent that this paragraph 7(b) shall be applicable at any such
time, if the Minimum Liquidity Level is not met as of any Valuation Date, then
the Corporation shall purchase or otherwise acquire Interest and Dividend
Coverage Assets (with the proceeds from the Liquidation of Eligible Portfolio
Property or otherwise) to the extent necessary so that the Minimum Liquidity
Level is met as of the fifth Business Day following such Valuation Date. The
Corporation shall, by such fifth Business Day, provide to the Auction Agent a
Certificate of Minimum Liquidity setting forth the calculations of the Interest
and Dividend Coverage Assets and the Interest and Dividend Coverage Amount and
showing that the Minimum Liquidity Level is met as of such fifth Business Day
together with a report of the custodian of the Corporation's assets confirming
the amount of the Corporation's Interest and Dividend Coverage Assets as of such
fifth Business Day.
8. Auction Procedures
(a) Certain Definitions. Capitalized terms not defined in this paragraph
8(a) shall have the respective meanings specified in paragraph 2. As used in
this paragraph 8, the following terms shall have the following meanings, unless
the context otherwise requires:
(i) "Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Corporation.
(ii) "Agent Members" shall mean the member of the Securities Depository
that will act on behalf of a Bidder and is identified as such in such Bidder's
Purchaser's Letter.
(iii) "Auction" shall mean the periodic operation of the procedures set
forth in this paragraph 8.
(iv) "Auction Date" shall mean the first Business Day preceding the first
day of the next Dividend Period.
(v) "Available Preferred Stock" shall have the meaning specified in
paragraph 8(d)(i)(A) below.
(vi) "Bid" and "Bids" shall have the respective meanings specified in
paragraph 8(b)(i) below.
(vii) "Bidder" and "Bidders" shall have the respective meanings specified
in paragraph 8(b)(i) below.
(viii) "Broker-Dealer" shall mean Drexel Burnham Lambert Incorporated and
any other broker-dealer, or other entity permitted by law to perform the
functions required of a Broker-Dealer in this paragraph 8, that has been
selected by the Corporation and has entered into a Broker-Dealer Agreement with
the Auction Agent that remains effective.
(ix) "Broker-Dealer Agreements" shall mean agreements between the Auction
Agent and Drexel Burnham Lambert Incorporated and similar agreements with one or
more other Broker-Dealers pursuant to which such Broker-Dealer agrees to follow
the procedures specified in this paragraph 8.
(x) "Commercial Paper Dealers" means Drexel Burnham Lambert Incorporated
and any of its Affiliates or any of their respective successors.
(xi) "Existing Holder," when used with respect to shares of Preferred
Stock, shall mean a Person who has signed a Master Purchaser's Letter and is
listed as the beneficial owner of such shares of Preferred Stock in the records
of the Auction Agent.
(xii) "Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xiii) "Master Purchaser's Letter" shall mean a letter addressed to the
Corporation, the Auction Agent and a Broker-Dealer in which a Person agrees,
among other things, to offer to purchase, purchase, offer to sell and/or sell
auction rate securities as set forth in this paragraph 8.
(xiv) "Maximum Applicable Rate" and "Minimum Applicable Rate" on any
Auction Date shall be 175% and 90%, respectively, of the 30-day "AA" Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding the Auction Date.
(xv) "Potential Holder" shall mean any Person, including any Existing
Holder, (A) who shall have executed a Purchaser's Letter and (B) who may be
interested in acquiring shares of Preferred Stock (or, in the case of an
Existing Holder, additional shares of Preferred Stock).
(xvi) "Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph 8(b)(i) below.
(xvii) "Submission Deadline" shall mean 12:30 P.M., New York City time, on
any Auction Date or such other time on any Auction Date (as specified by the
Auction Agent from time to time) by which Broker-Dealers are required to submit
Orders to the Auction Agent.
(xviii) "Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xix) "Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragaph 8(d)(i) below.
(xx) "Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 8(d)(i) below.
(xxi) "Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 8(d)(i) below,
(xxii) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph 8(d)(i) below.
(xxiii) "30-day AA Composite Commercial Paper Rate" on any date, means (i)
the interest equivalent of the 30-day rate on commercial paper on behalf of
issuers whose corporate bonds are rated "AA" by S&P, or the equivalent of such
rating by another nationally recognized rating agency, as announced by the
Federal Reserve Bank of New York for the close of business on the Business Day
immediately preceding such date; or (ii) if the Federal Reserve Bank of New York
does not make available such a rate, then the arithmetic average of the interest
equivalent of the 30-day 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 30-day
"AA" Composite Commercial Paper Rate, such rate shall be determined on the basis
of the quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers,
the Auction Agent will retain a dealer to provide such quotations.
(xxiv) "Winning Bid Rate" shall have the meaning specified in paragraph
8(d)(i) below.
(b) Orders by Existing Holders and Potential Holders. (i) On or prior to
the Submission Deadline on each Auction Date:
(A) each Existing Holder, with respect to shares of Preferred Stock it
then holds, may submit to a Broker-Dealer by telephone or otherwise
information as to:
(1) the number of shares, if any, of Preferred Stock held by such
Existing Holder which such existing Holder desires to continue to hold
without regard to the Applicable Rate for the next Dividend Period;
(2) the number of shares, if any, of Preferred Stock which such
Existing Holder desires to continue to hold if the Applicable Rate for
the next Dividend Period shall not be less than the rate per annum
then specified by such Existing Holder;
(3) the number of shares, if any, of Preferred Stock 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
(B) Each Broker-Dealer, using a list of Potential Holders that shall
be maintained by such Broker-Dealer in good faith for the purposes of
conducting a competitive Auction, shall contact Potential Holders on such
lists to determine the number of shares, if any, of Preferred Stock which
such Potential Holders offer to purchase if the Applicable Rate for the
next succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of
information referred to in this paragraph 8(b) is hereinafter referred to as an
"Order" and collectively as "Orders" and each Existing Holder and each Potential
Holder placing an Order is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (A)(l) of this paragraph 8(b) is hereinafter referred to as a "Hold
Order" and collectively as "Hold Orders"; an Order containing the information
referred to in Clause (A)(2) or (B) of this paragraph 8(b) is hereinafter
referred to as "Bid" and collectively as "Bids"; and an Order containing the
information referred to in clause (A)(3) of this paragraph 8(b) is hereinafter
referred to as a "Sell Order" and collectively as "Sell Orders."
(ii) As a condition to participating in any Auction, each prospective
purchaser of shares of Preferred Stock shall be required to sign and deliver two
copies to the Auction Agent, and one copy to a Broker-Dealer, of a Master
Purchaser's Letter, in which such prospective purchaser will agree, among other
things, that:
(A) A Bid by an Existing Holder shall constitute an irrevocable offer
to sell:
(1) the number of shares of Preferred Stock specified in such Bid
if the Applicable Rate determined on such Auction Date shall be less
than the rate specified therein;
(2) such specified number or a lesser number of shares of
Preferred Stock to be determined as set forth in clause (D) of
paragraph 8(e)(i) if the Applicable Rate determined on such Auction
Date shall be equal to the rate specified therein; or
(3) such specified number or a lesser number of shares of
Preferred Stock to be determined as set forth in clause (C) of
paragraph 8(e)(ii) if the rate specified therein shall be higher than
the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of shares of Preferred Stock specified in such
Sell Order; or
(2) such specified number or a lesser number of shares of
Preferred Stock as set forth in clause (C) of paragraph 8(e)(ii) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of shares of Preferred Stock specified in such Bid
if the Applicable Rate determined on such Auction Date shall be higher
than the rate therein; or
(2) such specified number or a lesser number of shares of
Preferred Stock as set forth in clause (E) of paragraph 8(e)(i) of the
Applicable Rate determined on such Auction Date shall be equal to the
rate specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent. (i) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer for the Auction to be conducted on such Auction Date and shall
specify with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of shares of Preferred Stock that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder the number of
shares, if any, of Preferred Stock subject to any:
(1) Hold Order placed by such Existing Holder;
(2) Bid placed by such Existing Holder and the rate specified in
such Bid; and
(3) Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder the rate specified
in such Potential Holder's Bid.
(ii) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001 of 1%).
(iii) If an Order or Orders covering all of the shares of Preferred Stock
held by an Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted on behalf of such Existing Holder covering the number of shares of
Preferred Stock held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(iv) If one or more Orders covering in the aggregate more than the number
of shares of Preferred Stock held by an Existing Holder are submitted to the
Auction Agent, such Orders shall be considered valid as follows and in the
following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of outstanding shares of
Preferred Stock held by such Existing Holder; provided that if more than
one Hold Order is submitted on behalf of such Existing Holder and the
number of shares of Preferred Stock subject to such Hold Orders exceeds the
number of shares of Preferred Stock held by such Existing Holder, the
number of shares of Preferred Stock subject to each such Hold Order shall
be reduced pro rata so that such Hold Order shall cover the number of
shares of Preferred Stock held by such Existing Holder;
(B) (1) any Bid shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the number of shares of Preferred Stock subject to any Hold
Orders referred to in clause (iv)(A) of paragraph 8(c);
(2) subject to subclause (1), if more than one Bid with the same
rate is submitted on behalf of such Existing Holder and the number of
shares of Preferred Stock subject to such Bids is greater than the
excess described in subclause (1), the number of shares of Preferred
Stock subject to such Bids shall be reduced pro rata so that such Bids
shall cover the number of shares of Preferred Stock equal to such
excess;
(3) subject to subclause (1), if more than one Bid with
different rates is submitted on behalf of such Existing Holder, such
Bids shall be considered valid in the ascending order of their
respective rates; and
(4) the number, if any, of such shares of Preferred Stock subject
to Bids not valid under this clause (B) shall be treated as the
subject of a Bid by a Potential Holder at the rate therein specified;
and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of shares of Preferred Stock held by such Existing
Holder over the sum of the shares of Preferred Stock subject to valid Hold
Orders referred to in clause (iv)(A) of paragraph 8(c) and valid Bids by
such Existing Holder referred to in clause (iv)(B) of paragraph 8(c),
provided that if more than one Sell Order is submitted on behalf of any
Existing Holder and the number of shares of Preferred Stock subject to such
Sell Orders is greater than such excess, the number of shares of Preferred
Stock subject to such Sell Orders shall be reduced Pro rata so that such
Sell Orders shall cover the number of shares of Preferred Stock equal to
such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate and number of shares of
Preferred Stock therein specified.
(vi) If any rate specified in any Bid is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Bid is made, such Bid
shall be deemed to be a Bid specifying a rate equal to such Minimum Applicable
Rate.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. (i) Not earlier than the Submission Deadline, 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 as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
shall determine:
(A) the excess of the total number of shares of Preferred Stock over
the number of shares of Preferred Stock that are the subject of Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
Preferred Stocks");
(B) from the Submitted Orders whether the number of shares of
Preferred Stock that are subject of Submitted Bids by Potential Holders
specifying one or more rates equal to or lower than the Maximum Applicable
Rate exceeds or is equal to the sum of:
(1) the number of shares of Preferred Stock that are the subject
of Submitted Bids by Existing Holders specifying one or more rates
higher than the Maximum Rate; and
(2) the number of shares of Preferred Stock that are subject to
Submitted Sell Orders;
in the event of such excess or such equality (other than because all
of the shares of Preferred Stock are the subject of Submitted Hold Orders),
such Submitted Bids are hereinafter referred to collectively as "Sufficient
Clearing Bids"; and
(C) if Sufficient Clearing Bids exist, the lowest rate specified in
the Submitted Bids (the "Winning Bid Rate") which if:
(1) each Submitted Bid from Existing Holders specifying such
lowest rate and all other Submitted Bids from Existing Holders
specifying lower rates were accepted, thus entitling such Existing
Holders to continue to hold the shares of Preferred Stock that are the
subject of such Submitted Bids; and
(2) each Submitted Bid from Potential Holders specifying such
lowest rate and all other Submitted Bids from Potential Holders
specifying lower rates were accepted, thus entitling those Potential
Holders to purchase the shares of Preferred Stock that are the subject
of such Submitted Bids, would result in such Existing Holders
described in subclause (1) above continuing to hold an aggregate
number of shares of Preferred Stock which, when added to the number of
shares of Preferred Stock to be purchased by such Potential Holders
described in subclause (2) above, would equal not less than the
Available Preferred Stock.
(ii) Promptly after the Auction Agent has made the determination pursuant
to paragraph 8(d)(i) the Auction Agent shall advise the Corporation of the
Maximum Applicable Rate and the Minimum Applicable Rate and, based on all such
determinations, the Applicable Rate for the next succeeding Dividend Period as
follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the outstanding shares of Preferred Stock 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; or
(C) if all the shares of Preferred Stock are the subject of Submitted
Hold Orders, that the Applicable Rate for Preferred Stock for the next
succeeding Dividend Period shall be equal to the Minimum Applicable Rate.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocations of Shares. Existing Holders shall continue to hold the shares of
Preferred Stock that are the subject of Submitted Hold Orders, and, based on the
determination made pursuant to paragraph 8(d)(i), the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall
take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of paragraph 8(e)(iii), Submitted Bids and Submitted Sell Orders shall be
accepted or rejected in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each Existing Holder specifying any rate that is
higher than the Winning Bid Rate shall be rejected, thus requiring each
such Existing Holder to sell the shares of Preferred Stock that are the
subject of such Submitted Sell Orders or Submitted Bids;
(B) the Submitted Bid of each Existing Holder specifying any rate that
is lower than the Winning Bid Rate shall be accepted thus entitling each
such Exisiting Holder to continue to hold the shares of Preferred Stock
that are the subject of such Submitted Bid;
(C) the Submitted Bid of each Potential Holder specifying any rate
that is lower than the Winning Bid Rate shall be accepted and such
Potential Holder shall purchase the number of shares of Preferred Stock
subject to such Submitted Bid;
(D) the Submitted Bid of each Existing Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, thus entitling such
Existing Holder to continue to hold the shares of Preferred Stock that are
subject of such Submitted Bid, unless the number of shares of Preferred
Stock subject to all such Submitted Bids shall be greater than the number
of shares of Preferred Stock equal to the excess of the Available Preferred
Stock over the number of shares of Preferred Stock subject to Submitted
Bids described in clauses (B) and (C) of this paragraph 8(e)(i) (the
"Remaining Shares"). In such event such Existing Holder shall be required
to sell shares of Preferred Stock subject to such Submitted Bid, but only
in an amount equal to the difference between (x) the number of shares of
Preferred Stock then held by such Existing Holder subject to such Submitted
Bid and (y) the number of shares of Preferred Stock obtained by multiplying
the number of Remaining Shares by a fraction the numerator of which shall
be the number of shares of Preferred Stock held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall be the sum
of the number of shares of Preferred Stock subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each Potential Holder specifying a rate that
is equal to the Winning Bid Rate shall be accepted, but only in an amount
equal to the number of shares of Preferred Stock obtained by multiplying
the difference between the Available Preferred Stock and the number of
shares of Preferred Stock subject to Submitted Bids described in clauses
(B), (C) and (D) of this paragraph 8(e)(i) by a fraction the numerator of
which shall be the number of shares of Preferred Stock subject to such
Submitted Bid and the denominator of which shall be the sum of the number
of shares of Preferred Stock subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of Preferred Stock are the subject of Submitted Hold
Orders), subject to the provisions of paragraph 8(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate that
is equal to or lower than the Maximum Rate shall be accepted, thus
entitling such Existing Holders to continue to hold the shares of Preferred
Stock that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
that is equal to or lower than the Maximum Applicable Rate shall be
accepted and such Potential Holder shall purchase the number of shares of
Preferred Stock subject to such Submitted Bid; and
(C) the Submitted Bid of each Existing Holder specifying any rate that
is higher than the Maximum Applicable Rate shall be rejected, thus
requiring each such Existing Holder to sell the shares of Preferred Stock
that are the subject of such Submitted Bid, and the Submitted Sell Order of
each Existing Holder shall be accepted, in both cases only in an amount
equal to the difference between (x) the number of shares of Preferred Stock
then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (y) the number of shares of Preferred Stock
obtained by multiplying the difference between the Available Preferred
Stock and the aggregate number of shares of Preferred Stock subject to
Submitted Bids described in clauses (A) and (B) of this paragraph 8(e)(ii)
by a fraction the numerator of which shall be the number of shares of
Preferred Stock held by such Existing Holder subject to such Submitted Bid
or Submitted Sell Order and the denominator of which shall be the aggregate
number of shares of Preferred Stock subject to all such Submitted Bids and
Submitted Sell orders.
(iii) If, as a result of the procedures described in paragraphs 8(e)(i) or
8(e)(ii), 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 Preferred Stock on any Auction Date, the Auction Agent shall, in such
manner as it shall determine, round up or down the number of shares of Preferred
Stock to be purchased or sold by any Existing Holder or Potential Holder on such
Auction Date so that the number of shares purchased or sold by each Existing
Holder or Potential Holder on such Auction Date shall be whole shares of
Preferred Stock, even if such allocation results in one or more of such
Potential Holders not purchasing shares of Preferred Stock on such Auction Date
or any Existing Holder not selling shares of Preferred Stock on such Auction
Date.
(iv) Based on the results of each Auction, the Auction Agent shall
determine the aggregate number of shares of Preferred Stock to be purchased and
the aggregate number of shares of Preferred Stock to be sold by Potential
Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids
or Sell Orders and, with respect to each Broker-Dealer, to the extent that such
aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other 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 Preferred Stock.
(f) Participation in Auctions. Neither the Corporation nor any Affiliate of
the Corporation may submit an Order in any Auction.
(g) Miscellaneous. (i) The Board of Directors of the Corporation may
interpret the provisions of this paragraph 8 to resolve any inconsistency or
ambiguity, remedy any formal defect or make any other change or modification
which does not adversely affect the rights of Existing Holders of Preferred
Stock. If such inconsistency, ambiguity or defect reflects an inaccurate
provision hereof, the Board of Directors may, in appropriate circumstances as
permitted by law, authorize the filing of a Certificate of Correction.
(ii) (A) An Existing Holder may sell, transfer or otherwise dispose of
shares of Preferred Stock only (1) pursuant to a Bid or a Sell Order placed
in an Auction in accordance with the procedures set forth in this paragraph
8, (2) to or through a Broker-Dealer or (3) to a Person that has delivered
a signed Master Purchaser's Letter to the Auction Agent, provided that as a
condition to such transfer (in the case of all transfers other than those
pursuant to Auctions), such Existing Holder, the transferee or the
transferee's Broker-Dealer or Agent Member of the Securities Depository
shall advise the Auction Agent of such transfer; and
(B) Except as otherwise provided by law, all of the outstanding
shares of Preferred Stock shall be represented by a separate
certificate or certificates registered in the name of the nominee of
the Securities Depository, and no Person acquiring shares of Preferred
Stock shall be entitled to receive a certificate representing such
shares.
(iii) The Corporation shall exercise its best efforts to maintain an
Auction Agent pursuant to an agreement containing terms not materially less
favorable to the Corporation than the terms of the Auction Agent Agreement
first entered into by the Corporation pursuant to the resolutions adopted
by the Board of Directors of the Corporation on November 11, 1988.
(h) Headings of Subdivisions. The headings of the various subdivisions of
this paragraph 8 are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
ARTICLE V
BOARD OF DIRECTORS
(A) All corporate powers and authority of the Corporation (except as
otherwise provided by statute, by the Charter or by the Corporation's By-laws)
shall be vested in and exercised by the Board of Directors. Except as may be
required to give effect to paragraph 6(b) of Article IV(C), the number of
directors constituting the Board of Directors shall be no less than three (3)
nor more than fifteen (15), with the exact number to be fixed pursuant to the
By-laws provided that the number of directors shall at no time be less than the
minimum number required under the Maryland General Corporation Law or, as long
as any shares of Preferred Stock are outstanding, the Investment Company Act.
The current number of directors is six (6) and the persons who are currently
acting as directors are Richard E. Omohundro, Jr., John A. Frabotta, C. William
Carey, Joseph G. Cote, Nathan V. Meyohas and Harlan D. Platt.
At any time when the Holders of Preferred Stock of the Corporation become
entitled to elect additional directors pursuant to paragraph 6(b) of Article
IV(C), the exact number of directors fixed by the By-laws of the Corporation or
otherwise shall automatically be increased by the number of such additional
directors and the maximum number of directors of the Corporation specified by
the Charter shall be increased accordingly, if required; and at such time as the
holders of Preferred Stock shall no longer be entitled to elect directors
pursuant to paragraph 6(b) of Article IV(C), such exact number shall
automatically be decreased by the number by which they were increased by reason
of this provision.
(B) In furtherance, and not in limitation, of the powers conferred by the
laws of the State of Maryland, but subject to the other provisions of the
Charter, the Board of Directors is expressly authorized:
1. To make, alter or repeal the By-laws of the Corporation, except
where such power is reserved by the By-laws to the stockholders, and except
as otherwise required by the Investment Company Act.
2. From time to time to determine whether and to what extent and at
what times and places and under what conditions and regulations the books
and accounts of the corporation, or any of them other than the stock
ledger, shall be open to the inspection of the stockholders. No stockholder
shall have any right to inspect any account or book or documents of the
Corporation, except as conferred by law or authorized by resolution of the
Board of Directors or of the stockholders.
3. Without the assent or vote of the stockholders, to authorize the
issuance from time to time of shares of the stock of any class of the
Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or
classes, whether now or hereafter authorized, for such consideration as the
Board of Directors may deem advisable.
4. Without the assent or vote of the stockholders, to authorize and
issue obligations of the Corporation, secured and unsecured, as the Board
of Directors may determine, and to authorize and cause to be executed
mortgages and liens upon the real or personal property of the Corporation.
5. To establish the basis or method for determining the value of the
assets belonging to any class, the value of the liabilities belonging to
any class and the net asset value of each share of any class of the
Corporation's stock.
6. To determine in accordance with generally accepted accounting
principles and practices what constitutes net profits, earnings, surplus or
net assets in excess of capital, and to determine what accounting periods
shall be used by the Corporation for any purpose to the extent consistent
with the By-laws of the Corporation; to set apart out of any funds of the
Corporation reserves for such purposes as it shall determine and to abolish
the same; to declare and pay any dividends and distributions in cash,
securities or other property from surplus or any funds legally available
therefor, at such intervals as it shall determine and by means of a formula
or other method of determination; and to establish payment dates for
dividends or any other distributions on any basis.
7. In addition to the powers and authorities granted herein and by
statute expressly conferred upon it, the Board of Directors is authorized
to exercise all powers and do all acts that may be exercised or done by the
Corporation pursuant to the provisions of the laws of the State of
Maryland, the Charter and the By-laws of the Corporation.
(C) Any determination made in good faith, and in accordance with the
Charter and generally accepted accounting practices, if applicable, by or
pursuant to the direction of the Board of Directors, with respect to the amount
of assets, obligations or liability of the Corporation, as to the amount of net
income of the Corporation from dividends and interest for any period or amounts
at any time legally available for the payment of dividends, as to the amount of
any reserves or charges set up and the propriety thereof, as to the time of or
purpose of creating reserves or as to the use, alteration or cancellation of any
reserves or charges (whether or not any obligations or liability for which the
reserves or charges have been created has been paid or discharged or is then or
thereafter required to be paid or discharged), as to the value of any security
owned by the Corporation, the determination of the net asset value of shares of
any class of the Corporation's capital stock, or as to any other matters
relating to the issuance, sale, redemption or other acquisition or disposition
of securities or shares of capital stock of the Corporation, shall be final and
conclusive, and shall be binding upon the Corporation and all holders of its
capital stock, past, present and future, and shares of the capital stock of the
Corporation are issued and sold on the condition and understanding, evidenced by
the purchase of shares of capital stock or acceptance of share certificates,
that any and all such determinations shall be binding as aforesaid, No provision
of the Charter shall be effective to require a waiver of compliance with any
provisions of the Securities Exchange Act of 1933, as amended, or the Investment
Company Act, or of any valid rule or regulation of the Securities and Exchange
Commission under those Acts.
(D) The Corporation shall indemnify (1) its directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (2) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
By-Laws and be permitted by law; provided, however, that nothing herein shall be
construed to provide indemnification to any director or officer of the
Corporation against any liability to which such director or officer would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. The foregoing rights of indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be entitled. The Board
of Directors may take such action as is necessary to carry out these indemnifi-
cation provisions and is expressly empowered to adopt, approve and amend from
time to time such By-laws, resolutions or contracts implementing such provisions
or such further indemnification arrangements as may be Permitted by law. No
amendment of the Charter shall limit or eliminate the right to indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
(E) To the fullest extent permitted by Maryland statutory and decisional
law and the Investment Company Act, as amended or interpreted, no director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for money damages; provided, however, that nothing herein shall be
construed to protect any director or officer of the Corporation against any
liability to which such director or officer would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office. No amendment, modification or
repeal of this Article (V), Section (E) shall adversely affect any right or
protection of a director or officer that exists at the time of such amendment,
modification or repeal,
ARTICLE VI
AMENDMENTS; CLASS VOTING
(A) The Corporation reserves the right from time to time to amend, alter,
change or repeal any provision contained in the Charter, now or hereafter
authorized by law, including any amendment that alters the contract rights, as
expressly set forth in the Charter, of any outstanding stock.
(B) In addition to any other vote required by the Charter or applicable
law, as long as any shares of Preferred Stock are outstanding (i) the
Corporation may not be voluntarily liquidated, dissolved or wound up, or merged
into or consolidated with any other entity in a transaction pursuant to which it
is not the successor entity, or converted to open-end status, and may not sell
all or substantially all of its assets and may not engage in a statutory share
exchange in which it is not the successor entity, without the approval of at
least a majority of the outstanding shares of Preferred Stock and a majority of
the outstanding shares of Common Stock, each voting as a separate class; (ii)
the Corporation may not adopt any plan of reorganization adversely affecting
either the Preferred Stock or the Common Stock without the approval of a
majority of the outstanding shares of such class so affected; (iii) no amendment
to the Charter that would adversely affect the contract rights of the Common
Stock or the Preferred Stock as expressly set forth in the Charter, including
any amendment, alteration or repeal of the express preferences, rights or powers
of holders of the Preferred Stock as set forth in the Charter, May be adopted
without the approval of majority of the outstanding shares of each such class so
affected; (iv) no increase or decrease in the number of shares of Preferred
Stock authorized by the Charter to be issued may be made without the approval of
a majority of the outstanding shares of Preferred Stock; (v) the holders of the
Preferred Stock and the Common Stock shall vote in connection with the election
of directors as provided in paragraph 6 of Article IV(c); and (vi) the Common
Stock and the Preferred Stock will vote as separate classes to the extent
otherwise required under Maryland law or the Investment Company Act (it being
understood that any action requiring a vote of security holders under the
Investment Company Act shall require the vote of a Majority of the Outstanding
Voting Securities of Preferred Stock and the Vote of a Majority of the
Outstanding Voting Securities of Common Stock, each voting as a separate class).
Except to the extent otherwise required by applicable law or the Charter, as to
any matter which requires for approval the separate vote of a class of capital
stock, only the holders of the affected class of capital stock shall be entitled
to vote.
(C) Notwithstanding any provision of law requiring the authorization of any
action by a proportion greater than a simple majority of the total number of
shares of all classes or series of capital stock or of the total number of
shares of any class or series of capital stock entitled to vote as a separate
class or series, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes or series outstanding and entitled to vote thereon or of the class
or series entitled to vote thereon as a separate class or series, as the case
may be, except as otherwise provided in the Charter.
THIRD: At a meeting held on November 21, 1988 the Board of Directors of the
Corporation duly advised and approved the foregoing Articles of Amendment and
Restatement, and by written informal action unanimously taken by the sole
stockholder of the Corporation in accordance with Section 2-505 of the
Corporations and Associations Article of the Annotated Code of Maryland, the
sole stockholder of the Corporation duly adopted and approved said Articles of
Amendment and Restatement.
FOURTH: Immediately prior to the adoption of the foregoing Articles of
Amendment and Restatement, the Corporation had authority to issue one hundred
million (100,000,000) shares of capital stock, $.01 par value per share, for an
aggregate par value of $1,000,000. Immediately following the adoption of the
Articles of Amendment and Restatement, the Corporation has authority to issue an
aggregate of one hundred million one thousand (100,001,000) shares of capital
stock, of which one hundred million (100,000,000) shares shall be Common Stock,
$.01 par value per share, and one thousand (1,000) shares shall be Taxable
Auction Rate Preferred Stock, no par value per share, for an aggregate par value
of $1,000,000 for all shares with par value. The foregoing Articles of Amendment
and Restatement include a description of each class of capital stock, including
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
<PAGE>
IN WITNESS WHEREOF, PROSPECT STREET HIGH INCOME PORTFOLIO INC. has caused
these presents to be signed in its name and on its behalf by its President and
its corporate seal to be hereunder affixed and attested by its Secretary on this
25th day of November, 1988, and its President acknowledges that these Articles
of Amendment and Restatement are the act and deed of Prospect Street High Income
Portfolio Inc., and, under the penalties of perjury, that the matters and facts
set forth herein with respect to authorization and approval are true in all
material respects to the best of his knowledge, information, and belief.
PROSPECT STREET HIGH
INCOME PORTFOLIO INC.
By: /s/ Richard E. Omohundro, Jr.
-----------------------------------
ATTEST:
/s/ John A. Frabotta
- -------------------------------------
EXHIBIT (K)(5)(A)
INSURANCE AGREEMENT
Between
FINANCIAL SECURITY ASSURANCE INC.
and
PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
Dated as of December 1, 1988
<PAGE>
TABLE OF CONTENTS
(This Table of Contents is for convenience of reference only and shall
not be deemed to be a part of this Insurance Agreement.)
Page
ARTICLE I
DEFINITIONS .......................................................... 1
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 2.01. Representations and Warranties of the Fund ............. 2
SECTION 2.02. Affirmative Covenants of the Fund ...................... 6
SECTION 2.03. Negative Covenants of the Fund ......................... 13
SECTION 2.04. Special Covenants of the Fund .......................... 16
ARTICLE III
THE SURETY BOND; INDEMNIFICATION; SECURITY
SECTION 3.01. Agreement To Issue Surety Bond ........................ 20
SECTION 3.02. Conditions Precedent to Issuance of the Surety Bond ... 20
SECTION 3.03. Payment of Fees and Premiums .......................... 21
SECTION 3.04. Reimbursement Obligation .............................. 22
SECTION 3.05. Indemnification ....................................... 22
SECTION 3.06. Payment Procedure ..................................... 23
SECTION 3.07. Subrogation ........................................... 24
ARTICLE IV
FURTHER AGREEMENTS
SECTION 4.01. Effective Date; Term of Agreement ..................... 24
SECTION 4.02. Obligations Absolute .................................. 26
SECTION 4.03. Assignments; Reinsurance; Third-Party Rights .......... 26
SECTION 4.04. Liability of Financial Security and Fund .............. 27
ARTICLE V
DEFAULTS; REMEDIES
SECTION 5.01. Defaults .............................................. 28
SECTION 5.02. Remedies; No Remedy Exclusive ......................... 30
SECTION 5.03. Waivers ............................................... 32
SECTION 5.04. Agreement To Pay Fees and Expenses of Enforcement ..... 32
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Amendments, Changes and Modifications ................. 32
SECTION 6.02. Notices ............................................... 32
SECTION 6.03. Severability .......................................... 34
SECTION 6.04. Governing Law ......................................... 34
SECTION 6.05. Consent of Financial Security ......................... 34
SECTION 6.06. Counterparts .......................................... 34
SECTION 6.07. Recitals .............................................. 34
SECTION 6.08. Headings .............................................. 34
SECTION 6.09. Custody Receipts ...................................... 35
APPENDIX I - Definitions
ANNEX I - Form of Surety Bond
ANNEX II - Form of Surety Assets Coverage Report
ANNEX III - Letter Reviewing Surety Assets
Coverage Calculation
<PAGE>
INSURANCE AGREEMENT
THIS INSURANCE AGREEMENT is made as of December 1, 1988 by and between
Financial Security Assurance Inc. ("Financial Security") and Prospect Street(SM)
High Income Portfolio Inc. (the "Fund").
WITNESSETH:
WHEREAS, the Fund proposes to issue up to 345 shares of its Preferred Stock,
with an aggregate liquidation preference of $34,500,000, to finance the purchase
by the Fund of certain assets; and
WHEREAS, the Fund desires that Financial Security issue its Surety Bond
guaranteeing certain payments of dividends on and redemption or liquidation
preference amounts for the Preferred Stock; and
WHEREAS, Financial Security has agreed to issue and deliver its Surety Bond
upon the terms and subject to the conditions set forth herein; and
WHEREAS, as consideration for the issuance of the Surety Bond, the Fund has
agreed under the terms provided in this Agreement to reimburse Financial
Security (with interest at the Late Payment Rate) for any amounts paid by
Financial Security under the Surety Bond and to indemnify or reimburse Financial
Security for certain other costs as more fully set forth herein and has
acknowledged certain subrogation rights of Financial Security in respect of
amounts paid by Financial Security under the Surety Bond and agreed to take
certain actions as more fully set forth herein; and
WHEREAS, the parties hereto desire to specify the conditions precedent to
the issuance of the Surety Bond by Financial Security and to provide for certain
other matters;
NOW, THEREFORE, in consideration of the premises and of the agreements
herein contained, Financial Security and the Fund agree as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used herein shall have the meanings assigned thereto
in Appendix I hereto.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01. Representations and Warranties of the Fund. The Fund
represents and warrants to, and covenants with, Financial Security as follows:
(a) Due Organization. The Fund is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Maryland.
(b) Power and Authority. The Fund has all necessary corporate power and
authority to conduct its business as a diversified closed-end management
investment company, to enter into, deliver and perform the Fund Documents
and to perform all of its obligations thereunder.
(c) Due Qualification. The Fund is duly qualified to do business and is
in good standing as a foreign corporation (or is exempt from such
requirements) in all jurisdictions in which the nature of its business
requires such qualification other than those jurisdictions in which the
failure to be so qualified would not have a material adverse effect upon the
business or financial condition of the Fund.
(d) Due Authorization. The issuance of the Preferred Stock and the
execution, delivery and performance of the Fund Documents by the Fund and
the consummation of the transactions contemplated thereby (i) are within the
corporate powers of the Fund, (ii) have been duly authorized by all
necessary corporate action, (iii) do not require (or have not required) the
Fund to obtain any additional approvals or consents or to take other action
or give any notice to or make any filing with any Person or governmental
agency or department except such as have been obtained and remain in full
force and effect, and (iv) do not and will not result in or require the
creation of any Lien upon or in respect of any of the Fund's properties.
(e) Noncontravention. The issuance of the Preferred Stock and the
execution, delivery and performance of the Fund Documents by the Fund and
the consummation by the Fund of the transactions contemplated hereby or
thereby and the fulfillment by the Fund of or compliance by the Fund with
the terms and conditions of the Fund Documents will not:
(i) conflict with or result in any breach or violation of any of the
terms, conditions or provisions of any existing law, rule, regulation
(including, without limitation, the provisions of the Investment Company
Act, the Securities Act and Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Fund or of the Certificate or Bylaws or any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Fund is a party or by which it or any of its
properties may be bound or affected, or
(ii) constitute a default (or an event which, with the giving of
notice or lapse of time or both, would constitute a default) by the Fund
under any of the foregoing;
which conflict, breach, violation or default would materially and adversely
affect the ability of the Fund to perform its obligations under the Fund
Documents or would materially and adversely affect the rights, benefits or
enforcement of remedies or practicable realization of such rights benefits
or remedies of Financial Security hereunder or of Financial Security or any
Holder under the Custody Agreement, or the Certificate or otherwise with
respect to the Preferred Stock.
(f) Pending Litigation or Other Proceeding. There is no pending action,
proceeding or investigation before any court, governmental or administrative
agency or arbitrator against or affecting the Fund, or any properties or
rights of the Fund, or, to the Fund's knowledge after reasonable inquiry,
any threatened action or proceeding before any of the foregoing, which, if
decided adversely to the Fund, would materially and adversely affect the
ability of the Fund to perform its obligations under the Fund Documents or
would materially and adversely affect the rights, benefits or enforcement of
remedies or practicable realization of such rights or benefits of Financial
Security hereunder or of Financial Security or any Holder under the Custody
Agreement or the Certificate or otherwise with respect to the Preferred
Stock.
(g) Valid and Binding Agreement. The Fund Documents constitute legal,
valid and binding agreements of the Fund enforceable in accordance with
their respective terms, except as the enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or limiting creditors' rights generally or general equitable
principles.
(h) Liabilities. Except with respect to the Notes and fees incurred in
connection with the issuance of the Preferred Stock, the Common Stock and
the Notes and the execution of this Agreement, the Fund has not incurred any
indebtedness for borrowed money or, other than in the ordinary course of
business, any other liabilities.
(i) Compliance With Law, Regulations, Etc. The Fund has no notice nor
any reason to believe that any practice, procedure or policy employed by the
Fund in the conduct of its business violates any law, regulation, judgment,
order, decree or agreement applicable to the Fund which, if enforced, would
(i) have a material adverse effect on the Fund's ability to do business,
(ii) have a material adverse impact on the Fund's earnings or financial
condition or (iii) constitute grounds for the revocation of any license,
charter, permit or registration which is material to the conduct of the
Fund's business.
(j) Taxes. The Fund has had no income to date that would require the
filing of any income tax returns of any jurisdiction.
(k) ERISA. The Fund does not maintain or contribute to any Plan subject
to ERISA and does not expect to implement any such Plan.
(1) Delivery of Information. None of the documents, reports, notices,
leases, operating agreements, schedules, certificates, statements or other
writings, including without limitation the Registration Statement and the
Prospectuses (collectively, the "Documents"), furnished to Financial
Security by the Fund contain any statement of a material fact by the Fund
which was untrue or misleading in any material respect when made; provided,
however, the Fund makes no representations or warranties as to the
information contained in the Preferred Stock Prospectus on page 4 in the
Section entitled "PROSPECTUS SUMMARY - Surety Arrangement Financial
Security," on page 7 in the section entitled "PROSPECTUS SUMMARY - The
Offering - Secondary Market," on pages 9 and 10 in the third and fourth
paragraphs in the section entitled "PROSPECTUS SUMMARY - Special
Considerations," on pages 30 and 31 in the fourth and fifth paragraphs in
the section entitled "PORTFOLIO TRADING," in the section entitled
"UNDERWRITING," in the section entitled "FINANCIAL SECURITY," or the
financial statements relating to Financial Security or the information
contained in the Note Prospectus on page 6 in the section entitled
"PROSPECTUS SUMMARY - Surety Arrangement for Preferred Shares - Financial
Security," on page 7 in the second and third paragraphs in the section
entitled "PROSPECTUS SUMMARY - Special Considerations," the information on
pages 27 and 28 in the fourth and fifth paragraphs in the section entitled
"PORTFOLIO TRADING," in the section entitled "UNDERWRITING," or on pages 45
and 46 in the section entitled "SURETY ARRANGEMENT FOR PREFERRED SHARES -
Financial Security" or the information contained in the Common Stock
Prospectus on page 7 in the section entitled "PROSPECTUS SUMMARY Surety
Arrangement for Preferred Shares - Financial Security," on pages 8 and 9 in
the sixth and seventh paragraphs in the section entitled "PROSPECTUS SUMMARY
Special Considerations," on page 10 in the second, third and fourth
paragraphs in the section entitled "THE FUND," on pages 32 and 33 in the
fourth and fifth paragraphs in the section entitled "PORTFOLIO TRADING," in
the section entitled "UNDERWRITING" or on pages 50 and 51 in the section
entitled "SURETY ARRANGEMENT FOR PREFERRED SHARES - Financial Security."
Except as disclosed in writing to Financial Security, there is no fact known
to the Fund (relating specifically to the Fund and not to national or local
economic conditions generally) which could materially adversely affect the
Fund or the Fund's ability to meet its obligations. Since the furnishing of
the Documents, there has been no material change nor any development or
event involving a prospective material change which would render any of the
Documents untrue or misleading in a material respect.
(m) Securities Laws Compliance; Registration Statement; Prospectuses.
The Registration Statement and the Prospectuses, and all supplements or
amendments thereto, comply in all material respects with the provisions of
the Securities Act and the Investment Company Act, and the Indenture
complies in all material respects with the Trust Indenture Act of 1939, as
amended, and the Registration Statement and the Prospectuses do not contain
an untrue statement of a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made. Neither the offer nor sale of the
Preferred Stock, Common Stock or Notes in the Transaction will be in
violation of the Securities Act or any state "blue sky" or securities laws.
The Fund is in compliance in all material respects with all provisions of
the Investment Company Act applicable to it.
(n) Federal Reserve Board Regulations. No part of the initial proceeds o
the sale of the Preferred Stock will be used to purchase or carry "Margin
Securities" within the meaning of Regulation G of the Board of Governors of
the Federal Reserve System.
(o) True and Complete Copies. All agreements and other material
delivered to Financial Security or its counsel by or on behalf of the Fund
are true and correct copies of what they purport to be.
Section 2.02. Affirmative Covenants of the Fund. The Fund hereby covenants
and agrees that during the Term of the Agreement:
(a) Compliance With Agreements. The Fund shall comply in all material
respects with the terms and conditions of the Fund Documents.
(b) Corporate Existence. The Fund shall maintain its corporate existence
and shall at all times continue to be duly organized, duly qualified and
duly authorized (as described in Section 2.01(a), (c) and (d) hereof) and
will not liquidate or dissolve nor consolidate or merge with or into any
other corporation or other entity.
(c) Fund To Provide Financial Statements; Accountants' Reports; Other
Information. The Fund shall keep or cause to be kept in reasonable detail
books and records of account of the Fund's assets and business, including,
but not limited to, books and records relating to the Transaction. The books
of the Fund shall be kept on an accrual basis and the Fund shall report its
operations for tax purposes on an accrual basis.
(i) Annual Financial Statements. The Fund shall furnish to Financial
Security as soon as available, and in any event within 90 days after the
close of each fiscal year of the Fund, the audited balance sheet of the
Fund as of the end of such fiscal year and the audited statement of
operations and an audited statement of changes in net assets of the Fund
for such fiscal year, all in reasonable detail and stating in
comparative form the respective figures for the corresponding date and
period in the prior fiscal year, prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by
the report of the Fund's independent public accountants (who shall be
reasonably acceptable to Financial Security) and by the certificate
described in paragraph (d) below.
(ii) Semiannual Financial Statements. The Fund shall furnish to
Financial Security as soon as available, and in any event within 60 days
after the first six months of each fiscal year of the Fund, an unaudited
balance sheet of the Fund as of the end of such six months, an unaudited
statement of operations of the Fund for such six-month period and an
unaudited statement of changes in net assets of the Fund for such
six-month period, all in reasonable detail and stating in comparative
form the respective figures for the corresponding date and period in the
previous fiscal year, accompanied by the certificate described in
paragraph (d) below and a certificate of the chief financial officer of
the Fund to the effect that such financial statements have been prepared
in accordance with generally accepted accounting principles consistently
applied (except as noted therein) and that such financial statements
fairly present the results of operations and financial condition of the
Fund for the dates and periods indicated.
(iii) Accountants' Reports. The Fund shall furnish to Financial
Security, promptly upon receipt thereof, copies of any reports submitted
to the Fund by its independent public accountants in connection with any
examination of the financial statements of Fund made by such
accountants.
(iv) Valuation of Eligible Portfolio Property; Periodic Reports and
Certificates.
(A) Valuation Dates. The Bank of New York, as the Fund's
custodian, is appointed the initial Collateral Evaluator and shall
determine the Market Value and Surety Assets Value of each item of
Eligible Portfolio Property and in the aggregate for all Eligible
Portfolio Property on each Valuation Date.
(B) Submission of Surety Assets Coverage Report. On or before
5:00 p.m., New York City time, on the third Business Day after each
Valuation Date, the Fund shall, and on any other date the Fund may,
deliver to Financial Security a Surety Assets Coverage Report. On a
quarterly basis (the last Business Day of January, April, July and
October, commencing January 31, 1989), such Surety Assets Coverage
Report shall be confirmed by a letter in the form attached to Annex
3 hereto from the Fund's independent accountants delivered to
Financial Security within three Business Days of the delivery of the
Surety Assets Coverage Report. If any such letter shows that an
error was made in the Surety Assets Coverage Report reviewed or
shows that a lower aggregate Surety Assets Value for the Eligible
Portfolio Property was determined by the independent accountants,
the calculation or determination made by such independent
accountants shall be final and conclusive and shall be binding on
the Fund and Financial Security, and the Collateral Evaluator shall
accordingly amend the Surety Assets Coverage Report and deliver the
amended Surety Assets Coverage Report to Financial Security.
(C) Failure To Submit Surety Assets Coverage Report. At any time
that the Fund has failed to deliver any Surety Assets Coverage
Report required by Section 2.02(c)(iv)(B) or Section 2.02(c)(iv)(D)
hereof, the Fund hereby authorizes Financial Security to direct, on
behalf of the Fund, the Fund's independent accountants to prepare,
execute and deliver to Financial Security (at Financial Security's
expense in the case of a report required by Section 2.02(c)(iv)(D))
on behalf of the Fund the Surety Assets Coverage Report, as the case
may be (prepared on the same basis as is required of the Fund
pursuant to this Agreement). The Fund hereby agrees to cooperate to
the fullest extent with Financial Security and such independent
accountants in such preparation. At any time that the Fund's
independent accountants have failed to deliver confirmations and/or
verifications of the Surety Assets Coverage Report pursuant to the
terms hereof, the Fund hereby authorizes Financial Security to
contact and direct, on behalf of the Fund, such independent
accountants to deliver such confirmations and/or verifications (at
Financial Security's expense in the case of a report required by
Section 2.02(c)(iv)(D)). The Fund hereby confirms that it has given
written authorization to such accountants to take directions from
Financial Security in the situations described in this Section
2.02(c). A failure by the Fund or its independent accountants to
deliver a Surety Assets Coverage Report as required pursuant to
Section 2.02(c)(iv) shall be deemed for all purposes of this
Agreement as the delivery by the Fund of a Surety Assets Coverage
Report showing a Surety Assets Value of Eligible Portfolio Property
equal to $0.
(D) Additional Determinations of Market Value and Surety
Assets Value. At the expense of Financial Security, the Collateral
Evaluator shall make additional determinations of the Market Value
and the Surety Assets Value of the Eligible Portfolio Property and
shall deliver a Surety Assets Coverage Report within three Business
Days following the Collateral Evaluator's receipt of any written
request from Financial Security that such amounts be determined,
which request shall not be delivered more frequently than twice
during any 12-month period. Any such determination shall be done at
the expense of Financial Security unless a Default or Event of
Default shall have occurred and is continuing. To the extent
requested by and at the expense of Financial Security (unless a
Default or Event of Default shall have occurred and is continuing),
the Fund shall provide Financial Security with an executed Surety
Assets Coverage Report and the accountants' letter required by the
last sentence of Section 2.02(c)(iv)(B) hereof in connection
therewith.
(E) The Fund will provide Financial Security with a copy
of any other report or certificate that the Fund is required to
deliver, or cause to be delivered, to the Trustee under the
Indenture, the holders of the Notes or the Holders of the Preferred
Stock or the holders of the Common Stock.
(v) Other Reports and Information. Promptly after the filing or
sending thereof, copies of all proxy statements, financial statements
and reports, and copies of all regular periodic and special reports and
all registration statements which the Fund files with its public
stockholders or the Securities and Exchange Commission or any other
federal government agency, authority or body which supervises the
issuance of securities by the Fund or any national securities exchange,
as well as copies of all reports filed with the Fund pursuant to any of
the Fund Documents. If available, the Fund shall provide, or otherwise
make available, to Financial Security the registry or other listing of
the names and addresses of the Holders of the Preferred Stock on an
annual basis (or as frequently as quarterly, at the request of Financial
Security) to the extent required by Financial Security to comply with
regulation, law or court order or to comply with any request by
appropriate governmental authorities.
(d) Certificate of Compliance. The Fund shall deliver to Financial
Security concurrently with the delivery of the financial statements required
pursuant to paragraph (c)(i) and (c)(ii) above a certificate signed by the
chief financial officer of the Fund stating that:
(i) a review of such Fund's performance under this Agreement and the
Fund Documents during such period has been made under such officer's
supervision; and
(ii) to such chief financial officer's knowledge following
reasonable inquiry, no Event of Default or Default has occurred and is
continuing, or if an Event of Default or Default has occurred and is
continuing, specifying the nature thereof and, in the case of an Event
of Default or Default if the Fund has a right to cure pursuant to
Section 5.01 or otherwise, stating in reasonable detail the steps, if
any, being taken by the Fund promptly to cure such event or to otherwise
comply with the terms of this Agreement.
(e) Access to Records; Discussions With Officers and Accountants. The
Fund shall, upon the request of Financial Security (but without any
liability for expenses of Financial Security), permit Financial Security, or
its authorized agent, at reasonable times:
(i) to inspect such books and records of the Fund as they may relate
to the Preferred Stock, the obligations of the Fund under the Fund
Documents, the Fund's business and the transactions consummated in
connection herewith but not the names of ultimate beneficial holders of
the Preferred Stock except to the extent required by Financial Security
to comply with regulation, law or court order or to comply with any
request by any appropriate governmental authorities;
(ii) to discuss the affairs, finances and accounts of the Fund with
any of its officers and directors; and
(iii) to discuss the affairs, finances and accounts of the Fund with
the Fund's independent accountants, provided that an officer of the Fund
(or his designee) shall have the right to be present during such
discussions.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the Fund.
Such requests will not be made more frequently than semiannually until such
time, if any, as Financial Security determines, in its sole discretion, that
increased access is reasonably necessary under the circumstances which then
exist and provides the Fund a written statement to that effect, specifying
such circumstances. The books and records of the Fund will be maintained at
the address of the Fund designated herein for receipt of notices, unless the
Fund shall otherwise advise the parties hereto in writing.
Financial Security shall keep confidential any matter of which it
becomes aware through such inspections or discussions, except as may be
otherwise required by regulation, law or court order or requested by
appropriate governmental authorities or as necessary to enforce this
Agreement, the Custody Agreement or the other Fund Documents. If Financial
Security is requested or required (by oral questions, interrogatories,
requests for information or documents subpoena, civil investigative demand
or similar process) to disclose any information of which it becomes aware
through such inspections or discussions, Financial Security will promptly
notify the Fund of such request(s) so that the Fund may seek an appropriate
protective order and/or waive Financial Security's compliance with the
provisions of this Agreement. If, in the absence of a protective order or
the receipt of a waiver hereunder, Financial Security is legally required,
in the opinion of its counsel, to disclose such information, Financial
Security may disclose such information without liability hereunder.
(f) Inform Financial Security of Material Events. The Fund shall
promptly inform Financial Security in writing of the following:
(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation against
the Fund involving an uninsured amount in excess of $100,000 in any one
instance or $500,000 in the aggregate;
(ii) the occurrence of any Default or Event of Default;
(iii) the occurrence of any event of default (or event which with
notice or the lapse of time or both would constitute an event of
default) under the Indenture;
(iv) any proceedings instituted by or against the Fund in any
federal, state or local court or before any governmental body or agency,
or before any arbitration board, or any such proceedings threatened by
any governmental agency, which, if adversely determined, would have a
material adverse effect upon the Fund's ability to perform its
obligations under any Fund Document; and
(v) the receipt of notice from any agency or governmental body
having authority over the conduct of the Fund's business that (A) the
Fund is being placed under regulatory supervision, (B) any license,
permit, charter, membership or registration material to the conduct of
the Fund's business is to be suspended or revoked, or (C) the Fund is to
cease and desist any practice, procedure or policy employed by the Fund
in the conduct of its business, and such cessation will materially
adversely affect the conduct of the Fund's business or materially
adversely affect the financial affairs of the Fund.
(g) Further Assurances. Subject to Section 6.01, the Fund shall, upon
the request of Financial Security, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such
further instruments and take such further action as may be reasonably
necessary to effectuate the intention, performance and provisions of this
Agreement. In addition, the Fund agrees to cooperate with S&P and Moody's in
connection with any review of the Transaction which may be undertaken by S&P
or Moody's after the date hereof and take such actions as may reasonably be
required thereby to confirm the initial "AAA/Aaa" ratings on the Preferred
Stock provided that the Fund shall not be required to take any action with
respect to such ratings if in the reasonable judgment of the Fund such
action would be adverse to the Fund or the holders of the Common Stock of
the Fund or to obtain or maintain a Shadow Rating on the Preferred Stock of
an investment grade provided that the Fund shall not be required to take any
action with respect to a Shadow Rating if in its sole judgment such action
would be detrimental to the Fund or the holders of the Common Stock of the
Fund.
(h) Compliance With Investment Company Act. The Fund shall comply in all
material respects with provisions of the Investment Company Act applicable
to it and the related regulations and rules promulgated by the Commission
under the Investment Company Act.
(i) ERISA. The Fund shall comply in all material respects with ERISA and
shall not incur any liabilities to the PBGC or to any multiemployer plan
under ERISA in connection with any Plan which would have a material adverse
effect upon the financial condition of the Fund.
(j) Custody Agreement. The Fund agrees to recognize, and hereby
acknowledges, the rights of the Holders as described in Section 3.04 of the
Custody Agreement.
(k) Paying Agent Agreement. The Fund shall cause the Paying Agent to
execute an agreement in such form and substance as shall be acceptable to
Financial Security in which the Paying Agent agrees to give notices to
Financial Security and the Custodian regarding moneys received from the Fund
to pay amounts due under the Preferred Stock.
Section 2.03. Negative Covenants of the Fund. The Fund agrees and covenants
with Financial Security that at all times during the Term of the Agreement:
(a) Amendments to Organic Documents; Changes in Nature or Conduct of
Business. Without the prior written consent of Financial Security, which
consent shall not be unreasonably withheld, the Fund shall not (i) amend,
supplement or otherwise modify its Certificate or Bylaws (or permit any of
the foregoing); (ii) change the nature of its business or operations from
that of a closed-end management investment company incorporated in the State
of Maryland and subject to regulation by the Commission under the Investment
Company Act; or (iii) employ or pursue an investment strategy inconsistent
with or in violation of the fundamental policies described in the Preferred
Stock Prospectus under the heading "INVESTMENT OBJECTIVE AND
POLICIES--Investment Restrictions"; provided, however, in the event that the
claims paying ability of Financial Security is rated less than "AA+" by
Standard & Poor's or "Aal" by Moody's, Financial Security agrees to provide
such written consent if (A) reasonably required to maintain for the
Preferred Stock a "AA+" or higher rating from SOP or a "Aal" or higher
rating from Moody's and (B) the effect of the proposed action for which
consent is required would not materially and adversely affect the rights,
benefits or enforcement of remedies or practicable realization of such
rights or benefits of Financial Security hereunder or of Financial Security
or any Holder under the Custody Agreement or the Certificate or otherwise
with respect to the Preferred Stock.
(b) Creation of Indebtedness. Without the prior written consent of
Financial Security, the Fund shall not create, incur, assume or suffer to
exist any Indebtedness other than Permitted Indebtedness.
(c) Restrictions on Liens. The Fund will not create, incur or suffer to
exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence, of any Lien on any of its assets except
for (i) Liens the validity of which are being contested in good faith by
appropriate proceedings, (ii) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (iii) Liens to
secure payment for services rendered by the Auction Agent or the Trustee
with respect to the Notes in connection with the Preferred Stock or the
Notes and (iv) Liens otherwise incurred in connection with borrowings made
in the ordinary course of business in accordance with the Fund's stated
investment objective, policies and restrictions.
(d) Subsidiaries. The Fund shall not form, or cause to be formed, any
subsidiaries.
(e) Restrictions on Dividends. The Fund shall not declare or pay any
dividends, or apply any of its property or assets to purchase, redeem or
retire, or make any distribution by reduction of capital or otherwise in
respect of, shares of capital stock of the Fund (other than the Preferred
Stock) (all of the foregoing, "Restricted Payments"), unless such Restricted
Payment is permitted by the Certificate and the Surety Assets Coverage is
met immediately following such payment or application based upon the most
recent Surety Assets Coverage Report.
(f) Issuance of Stock. Without the prior written consent of Financial
Security, the Fund shall not issue any capital stock other than (i) the
Preferred Stock issued on the Date of Issuance or authorized to be issued
under Section 4.01(b) hereof and (ii) the Common Stock.
(g) Insolvency. The Fund shall not (i) commence any case, proceeding or
other actions under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or
(ii) seek appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or make a
general assignment for the benefit of its creditors; the Fund shall not take
any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth above; the Fund shall generally
pay its debts as they become due and shall not admit in writing its
inability to pay its debts as they become due.
(h) Impairment of Rights. Without the prior written consent of Financial
Security, the Fund shall not take any action, or fail to take any action, if
such action or failure to take action will interfere with the enforcement of
any rights under the Fund Documents that are material to the rights,
benefits or obligations of Financial Security.
(i) Waiver, Amendments, Etc. Subject to Section 2.03(a) above, without
the prior written consent of Financial Security, the Fund shall not waive,
modify or amend, or consent to any waiver, modification or amendment of any
of the terms, provisions or conditions of the Fund Documents that are
material to the rights, benefits or obligations of Financial Security.
(j) Purchase or Sale of Securities. The Fund shall not, and shall cause
its Investment Adviser not to, purchase or sell a security with knowledge
that the effect of such purchase or sale will be to cause, or be likely to
cause, the Surety Assets Coverage not to be met immediately subsequent to
the consummation of such purchase or sale.
(k) Investment Adviser. The Fund shall not designate a new Investment
Adviser unless the Person to be designated as Investment Adviser has been
approved by Financial Security which approval shall not be unreasonably
withheld.
(l) ERISA. The Fund shall not contribute or incur any obligation to
contribute to any Plan.
Section 2.04. Special Covenants of the Fund.
(a) Redemption of Preferred Stock or Notes. Upon redemption of any
shares of Preferred Stock pursuant to the Certificate and upon redemption of
any Notes pursuant to the Indenture during the Term of the Agreement, the
Fund shall furnish or cause to be furnished to Financial Security a notice
of such redemption.
(b) Maintenance of Surety Assets Value. The Fund shall maintain Eligible
Portfolio Property having a Surety Assets Value at least equal to the Surety
Assets Coverage at all times during the Term of the Agreement.
(c) Optional Redemptions by the Fund.
(i) Unless otherwise approved in writing by Financial Security, the
Fund shall not give any Notice of Redemption to effect any optional
redemption of the Preferred Stock unless, prior to the mailing of such
notice, the Fund shall have Deposit Securities in an amount available to
pay in full the cash redemption price on the Redemption Date. Following
the mailing of such Notice of Redemption, the Fund shall not reinvest
the moneys so invested in Deposit Securities without the prior written
consent of Financial Security.
(ii) Without in any way affecting its obligations hereunder, this
Section 2.04(c) shall not be deemed to limit the Fund's right to effect
optional redemptions of Preferred Stock in its own discretion to the
extent authorized by law and the Certificate.
(d) Redemption Date and Redemption Notice. Unless Financial Security
shall otherwise consent or request in writing, the Fund shall set the
redemption date for any mandatory redemption of the Preferred Stock required
under the Certificate at the latest Business Day possible under the
provision of Section 5 of Article IV(C) of the Certificate.
(e) Sale of Eligible Portfolio Property to Financial Security. Prior to
liquidating any portion of its Eligible Portfolio Property pursuant to this
Section 2.04, the Fund shall offer and sell such Eligible Portfolio Property
to Financial Security if Financial Security offers a price which is equal to
or greater than the price at which the Fund proposed to sell such Eligible
Portfolio Property. Financial Security shall accept or reject each such
offer as promptly as practicable and in any event not later than 24 hours
after receipt thereof; provided, however, that in the event Financial
Security fails to respond to any such offer by the close of business on the
date such offer is received, the applicable price shall be the price at
which the Fund proposes to sell such Eligible Portfolio Property on the
following day.
(f) Periodic Liquidation of Property.
(i) The Fund shall liquidate property to the extent required to
provide Deposit Securities available to pay the redemption price of any
Preferred Stock on any Redemption Date. Unless Financial Security shall
otherwise direct, such property will be liquidated at a rate no slower
than equal weekly installments during the applicable Liquidation Period.
"Liquidation Period" shall commence upon the occurrence of an event
requiring redemption and shall expire on the date of mailing of the
Notice of Redemption. Proceeds from such liquidation of property shall
be invested in Deposit Securities.
(ii) The Fund shall liquidate Eligible Portfolio Property consisting
of Other Corporate Bonds and invest the proceeds thereof in Deposit
Securities not later than a date 90 days after the occurrence of the
Event of Default stated in Section 5.01(e) (the "First Deposit Date")
unless on such date the Fund shall otherwise have Deposit Securities
sufficient to redeem the Preferred Stock required to be redeemed in full
on the date redemption of such Preferred Stock is required pursuant to
this Agreement. Unless Financial Security shall otherwise direct, such
Other Corporate Bonds will be liquidated at a rate no slower than equal
weekly installments between the occurrence of such Event of Default and
the First Deposit Date. The Fund shall liquidate remaining Eligible
Portfolio Property and invest in Deposit Securities in an amount
sufficient, when added to Deposit Securities held resulting from the
liquidation required in the second preceding sentence, to pay the
redemption price of the Preferred Stock not later than a date 30 days
prior to the redemption of the Preferred Stock (the "Second Deposit
Date"). Unless Financial Security shall otherwise direct, such Eligible
Portfolio Property will be liquidated at a rate no slower than equal
weekly installments between the First Deposit Date and the Second
Deposit Date. Proceeds from such liquidation of Eligible Portfolio
Property shall be invested in Deposit Securities.
(iii) The Fund shall liquidate property to the extent required to
provide Deposit Securities available to pay dividends on the Preferred
Stock no later than 20 days prior to each Dividend Payment Date.
(iv) On or before 12:00 noon, New York time, on the third Business
Day prior to each Dividend Payment Date or a Redemption Date
constituting a Scheduled Payment, but no earlier than five Business Days
prior to each Dividend Payment Date or a Redemption Date constituting a
Scheduled Payment of the Preferred Stock, as applicable, and on the
Business Day preceding any other Redemption Date, the Fund shall deliver
to the Paying Agent Cash out of the Deposit Securities sufficient to
make the required payment with respect to the Preferred Stock.
(v) The Fund shall specify on each Surety Assets Coverage Report the
Deposit Securities that satisfy the requirements of Section 2.04(c) or
Section 2.04(f) as of the related Valuation Date.
(g) Certain Investment Limitations. The Fund shall not (i) acquire or
otherwise invest in (A) repurchase agreements except those described in
paragraph (b) of the definition of Short Term Money Market Instruments, (B)
reverse repurchase agreements, (C) futures contracts or (D) options on
futures contracts except to the extent such options do not exceed five
percentum of the value of the total assets of the Fund, (ii) engage in short
sales, (iii) overdraw any bank account, (iv) write options on portfolio
securities other than call options on securities held in the Fund's
portfolio or that the Fund has an immediate right to acquire through
conversion or exchange of securities held in its portfolio or (v) engage in
the lending of portfolio securities unless such lending would be permitted
pursuant to the terms of the Indenture or, unless, in any such case, the
Fund shall have received written consent from Financial Security.
(h) Redemption of the Notes. If the Fund is prohibited from redeeming
shares of Preferred Stock in connection with any Redemption Request by the
provisions of the Investment Company Act, the Fund shall redeem as soon as
practicable under the Indenture and from time to time the maximum principal
amount of the Notes permitted to be redeemed under the Indenture as shall
permit redemption of the Preferred Stock to proceed.
(i) Redemption Prior to Stated Termination Date. The Fund agrees for the
benefit of the Holders to call for redemption all outstanding shares of the
Preferred Stock so that the Redemption Date for such redemption is on the
Dividend Payment Date next preceding the Stated Termination Date unless the
Fund shall have received written evidence from S&P, if the Preferred Stock
is then rated by S&P, and from Moody's, if the Preferred Stock is then rated
by Moody's, that the termination of the Surety Bond would not, of itself,
result in a reduction or withdrawal of the ratings then applicable to the
Preferred Stock.
ARTICLE III
THE SURETY BOND; INDEMNIFICATION; SECURITY
Section 3.01. Agreement To Issue Surety Bond. Financial Security agrees,
subject to the conditions set forth in Section 3.02 hereof, to issue the Surety
Bond.
Section 3.02. Conditions Precedent to Issuance of the Surety Bond. As
conditions precedent to the obligation of Financial Security to issue the Surety
Bond, the Fund shall have complied with the terms and satisfied the conditions
precedent set forth below, which compliance and satisfaction may be simultaneous
with the delivery of the Surety Bond:
(a) Financial Security shall have received a fully executed copy of each
of this Agreement, the Indenture, the Custody Agreement, the Auction Agent
Agreement, the Certificate, the agreement referred to in Section 2.02(k)
hereof, the Premium Side Letter and the DTC Letter.
(b) Financial Security shall have received a copy of the resolutions of
the Fund's Board of Directors authorizing the execution and delivery and
performance by the Fund of the Fund Documents and other matters contemplated
thereby, and of all other documents evidencing any other necessary action of
the Fund to enter into the Fund Documents certified by the Secretary or
Assistant Secretary of the Fund accompanied by a certified copy of the
Bylaws empowering the Board of Directors to authorize the foregoing (which
certificate shall state that such resolutions are in full force and effect
on the Date of Issuance).
(c) Financial Security shall have received a certificate of the
Secretary or an Assistant Secretary of the Fund certifying the name and true
signatures of the officers of the Fund authorized to sign the Fund Documents
and that stockholder consent to the execution and delivery of such documents
and instruments is not necessary.
(d) Financial Security shall have received a certificate of appropriate
officers of the Fund to the effect that the representations and warranties
of the Fund in this Agreement are true and correct in all material respects.
(e) Financial Security shall have received all favorable opinions of
counsel reasonably requested by Financial Security in form and substance
reasonably acceptable to Financial Security and its counsel.
(f) Financial Security shall have received true and correct copies of
all governmental approvals, if any, necessary for the transactions
contemplated by this Agreement.
(g) Financial Security shall have received a copy of the written
authorization given by the Fund to its independent accountants in connection
with Section 2.02(c) hereof.
(h) Financial Security shall have received such other documents,
instruments, approvals or opinions requested by Financial Security as may be
reasonably necessary to effect the Transaction.
(i) There shall have been received from S&P and Moody's ratings of "AAA"
and "aaa," respectively, on the Preferred Stock.
(j) Financial Security shall have received payment in full of the
portion of the Premium due on the Date of Issuance.
Section 3.03. Payment of Fees and Premiums.
(a) Legal Fees. The Fund (i) shall pay or cause to be paid legal fees
and expenses (not to exceed $80,000) incurred to and including the Date of
Issuance by Financial Security in connection with the issuance of the Surety
Bond and (ii) shall reimburse Financial Security for all legal fees and
expenses reasonably incurred after the Date of Issuance in connection with
any amendment, waiver or other action of or with respect to the Agreement or
any Fund Document or the Transaction.
(b) Rating Agency Fees. The initial fees of S&P and Moody's with respect
to the Preferred Stock and the transactions contemplated hereby shall be
paid by the Fund in full on the date of issuance of the Surety Bond. All
periodic and subsequent fees of S&P or Moody's with respect to the Preferred
Stock shall be for the account of the Fund or, if paid by Financial
Security, reimbursed by the Fund to Financial Security upon demand. The fees
for any other rating agency shall be paid by the party requesting such other
agency's rating, unless such other agency is a substitute for S&P or Moody's
in the event that S&P or Moody's is no longer rating securities, in which
case the cost for such agency shall be paid by the Fund.
(c) Premium. The Premium shall be paid by the Fund pursuant to the terms
of the Premium Side Letter.
(d) Custodial Fees. The Fund shall pay or cause to be paid all fees and
other amounts payable to the Custodian under the Custody Agreement.
Section 3.04. Reimbursement Obligation. The Fund shall reimburse and
indemnify Financial Security and shall immediately be liable for payment in full
to Financial Security in accordance with this Agreement of the amount of any
payment by Financial Security under the Surety Bond and the Fund shall pay
interest on such amounts at the late Payment Rate until paid; provided that such
payment obligation may be satisfied pursuant to the provisions of Section 3.07
hereof. The Fund agrees to pay to Financial Security any and all reasonable
charges and expenses which Financial Security may pay or incur relative to the
performance of this Agreement including, but not limited to, attorneys'
(including up to $80,000 of attorneys' fees in connection with the issuance of
the Surety Bond) and accountants' fees and expenses (including fees for any
consent provided in connection with the Registration Statement or Prospectuses,
any periodic reports or any materials used in connection with the auction of the
Preferred Stock), payments of any fees and charges in connection with any
accounts established to facilitate payments under the Surety Bond and any costs
and expenses incurred by Financial Security in connection with the
administration and enforcement of the Custody Agreement or the Fund Documents.
All such amounts are to be immediately due and payable without demand.
Section 3.05. Indemnification. In addition to any and all rights of
indemnification, subrogation or any other rights pursuant hereto or under law or
equity, the Fund agrees to pay, and to protect, indemnify and save harmless,
Financial Security and its officers, directors, shareholders, employees and
agents from and against any and all losses, liabilities (including penalties),
actions, suits, judgments, demands, damages, costs or expenses of any nature
arising out of or relating to the transactions contemplated by the Custody
Agreement or the Fund Documents by reason of:
(a) any omission or action (other than of or by Financial Security) in
connection with the offering, issuance, sale, remarketing, auction or
delivery of the Preferred Stock, the Common Stock or the Notes;
(b) the negligence, willful misconduct, misfeasance, malfeasance or
theft committed by any director, officer, employee or agent of the Fund in
connection with any transaction arising from or relating to the Custody
Agreement or any of the Fund Documents;
(c) the violation by the Fund of any federal or state securities,
banking or antitrust laws, rules or regulations in connection with any
transaction arising from or relating to the Custody Agreement or any of the
Fund Documents;
(d) the violation by the Fund of any federal or state laws, rules or
regulations relating to the maximum amount of interest permitted to be
received on account of the loan of money in connection with any transaction
arising from or relating to the Custody Agreement or any of the Fund
Documents;
(e) the breach by the Fund of its obligations under any of the Fund
Documents; and
(f) the breach by the Fund of any representation or warranty or
misrepresentation on the part of the Fund contained in any of the Fund
Documents or in any certificate furnished or delivered to Financial Security
in connection herewith or therewith or pursuant hereto or thereto.
This indemnity provision, as well as the payment obligation set forth in Section
3.04, shall survive the termination of this Agreement and shall survive until
the statute of limitations has run on any causes of action which arise from one
of these reasons and until all suits filed as a result thereof have been finally
concluded.
Section 3.06. Payment Procedure. In the event of any payment by Financial
Security, the Fund agrees to accept the voucher or other evidence of payment as
prima facie evidence of the propriety thereof and the liability therefor to
Financial Security to the extent provided herein. All payments to be made to
Financial Security under this Agreement shall be made to Financial Security in
lawful currency of the United States of America in immediately available funds
at the address of Financial Security, provided in Section 6.02 hereof, before
1:00 p.m. (New York, New York time) on the date when due. Payments to be made
to Financial Security under this Agreement shall bear interest at the Late
Payment Rate from the date when due to the date paid.
Section 3.07. Subrogation. The Fund acknowledges that, to the extent of
any payment made by Financial Security pursuant to the Surety Bond, Financial
Security is to be fully subrogated to the extent of such payment, to the rights
of the Fund and the Holders to any moneys paid or payable under the Fund
Documents. The Fund agrees to such subrogation and, further, agrees to execute
such instruments and to take such actions as, in the sole judgment of Financial
Security, are necessary to evidence such subrogation and to perfect the rights
of Financial Security to receive any moneys paid or payable under the Fund
Documents. Any amount applied to payment on the shares of Preferred Stock as to
which Financial Security has made payment under the Surety Bond shall be deemed
to satisfy the obligation of the Fund pursuant to Section 3.04 to reimburse
Financial Security in an amount equal to the amount so applied. To the extent
the Fund fully reimburses Financial Security pursuant to Section 3.04 hereof,
the payment obligations of the Fund pursuant to the Fund Documents shall be
deemed satisfied and Financial Security agrees to execute such instruments as
may be necessary to demonstrate such satisfaction.
ARTICLE IV
FURTHER AGREEMENTS
Section 4.01. Effective Date; Term of Agreement.
(a) This Agreement shall take effect on the Date of Issuance and shall
remain in effect until such time as Financial Security is no longer subject
to a claim under the Surety Bond (or Financial Security shall have received
an opinion in form and substance and from counsel acceptable to Financial
Security to the effect that Financial Security is no longer subject to a
claim under the Surety Bond) and all amounts payable by the Fund hereunder,
under the Premium Side Letter, under the Fund Documents and under the
Preferred Stock have been paid in full.
(b) At the request of the Fund, Financial Security shall deliver to the
Custodian an endorsement to the Surety Bond to increase the coverage thereof
in connection with an increase in the number of shares of Preferred Stock up
to the number set forth in the first WHEREAS clause, provided (1) the
conditions for the purchase of such Preferred Stock set forth in the
Underwriting Agreement with respect to the Preferred Stock are satisfied,
(2) the conditions set forth in Sections 4.01(c)(ii) and 4.01(c)(iii) (A),
(B) and (D) hereof are met and (3) the ratio of the number of shares of
Common Stock and Preferred Stock and the principal amount of Notes
outstanding on the Date of Issuance and immediately following such issuance
of additional Preferred Stock shall be the same.
(c) The Surety Bond shall expire on December 5, 1993; provided however,
that such expiration date shall be extended in one or more successive terms
of one, two, three, four or five years as designated by the Fund but in no
event later than December 5, 1998, such extension to be effective six months
prior to the Stated Termination Date, in the event that (i) Financial
Security has received no later than 190 days prior to the Stated Termination
Date a written request from the Fund requesting such extension and
specifying such new expiration date, (ii) the Fund has paid all premiums due
hereunder and under the Premium Side Letter and (iii) as of the date of such
request and the date of such extension (A) there has not occurred and is not
continuing a Default or Event of Default, (B) the Surety Assets Coverage is
met, (C) the ratio of the outstanding principal of Notes plus the aggregate
liquidation value of the Preferred Stock to the Fund "assets" less
"liabilities" not constituting "senior securities" (as such terms are used
in Section 18 of the Investment Company Act) does not exceed 45% and (D) the
Fund is not in violation of any material provision of the Investment Company
Act of 1940. In consideration for the agreement by Financial Security to
such extension of the term of the Surety Bond and provided that the claims
paying ability of Financial Security is not then rated "AA+" or less by S&P
or "Aa" or less by Moody's, the Fund shall not replace the Surety Bond at
any time prior to December 5, 1998 with any surety bond, financial guaranty
or other credit enhancement. In the event the conditions described in the
preceding sentence are met and the conditions described in (ii) and (iii) of
the preceding sentence are met, Financial Security shall deliver to the
Custodian an endorsement to the Surety Bond providing for such extension of
the expiration date.
Section 4.02. Obligations Absolute. The obligations of the Fund hereunder
during the Term of the Agreement shall be absolute and unconditional, and will
be paid or performed strictly in accordance with this Agreement irrespective of:
(i) any lack of validity or enforceability of, or any amendment or
other modifications of, or waiver with respect to any agreement of the
Fund relating to the Fund Documents, the Custody Agreement, the Surety
Bond or this Agreement;
(ii) any exchange or release of any other obligations hereunder; or
(iii) any other circumstances, other than payment in full, which
might otherwise constitute a defense available to, or discharge of, the
Fund in respect to this Agreement or any other Fund Document and the
Fund hereby waives its rights of, abatement, diminution, postponement or
deduction, or to any defense other than payment, or to any right of
setoff or recoupment arising out of any breach under any of the Fund
Documents, by any party thereto or any beneficiary thereof, or out of
any obligation at any time owing to the Fund.
Nothing herein shall be construed as prohibiting the Fund from pursuing any
rights or remedies it may have against any other Person in a separate legal
proceeding.
Section 4.03. Assignments; Reinsurance; Third-Party Rights.
(a) This Agreement shall be a continuing obligation of the Fund and
shall (i) be binding upon the Fund and its respective successors and
assigns, and (ii) inure to the benefit of and be enforceable by Financial
Security and its successors, transferees and assigns. The Fund may not
assign this Agreement, or delegate any of its duties hereunder, without the
prior written consent of Financial Security. Nothing contained herein shall
restrict Financial Security from assigning to any lender or lenders under
any liquidity facility any rights of Financial Security under this Agreement
or with respect to any real or personal property or other interests pledged
to Financial Security, or in which Financial Security has a security
interest, in connection with the transaction contemplated hereby. No
assignment by Financial Security of any of its rights or obligations under
this Agreement shall discharge any obligation of Financial Security under
the Surety Bond or give any party other than Financial Security the right to
exercise rights, consents and waivers hereunder.
(b) Financial Security shall have the right to give participations in
its rights under this Agreement and to enter into contracts of reinsurance
with respect to the Surety Bond and each such participant or reinsurer shall
be entitled to the benefit of any representation, warranty, covenant and
obligation of the Fund hereunder as if such participant or reinsurer was a
party hereto.
(c) Except as provided herein with respect to participants and
reinsurers and as provided in the Surety Bond, nothing in this Agreement
shall confer any right, remedy or claim, express or implied, upon any
Person, including, particularly, any Holder, other than Financial Security,
against the Fund, and all the terms, covenants, conditions, promises and
agreements contained herein shall be for the sole and exclusive benefit of
the parties hereto and their successors and permitted assigns. No Holder
shall have any right to payment from any premiums paid or payable hereunder
or from any amounts paid by the Fund pursuant to Section 3.04 or 3.05
hereof.
Section 4.04. Liability of Financial Security and Fund. Neither Financial
Security nor the Fund shall be responsible for any act or omission of the
Custodian with respect to its use of the Surety Bond. Neither Financial
Security, the Fund nor any of their respective officers, directors or employees
shall be liable or responsible for: (a) the use which may be made of the Surety
Bond by the Custodian or for any acts or omissions of the Custodian in
connection therewith; or (b) the validity, sufficiency, accuracy or genuineness
of documents, or of any endorsement(s) thereon (other than signatures or other
endorsements actually signed by Financial Security or the Fund), even if such
documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged. In furtherance and not in limitation of the
foregoing, Financial Security may accept documents that appear on their face to
be in order, without responsibility for further investigation.
ARTICLE V
DEFAULTS; REMEDIES
Section 5.01. Defaults. The occurrence of any of the following events shall
constitute an Event of Default hereunder:
(a) the Fund shall fail to pay to Financial Security when due any amount
payable by the Fund hereunder or under any other Fund Document;
(b) any default by the Fund in its performance of any covenant contained
herein (other than as set forth in Section 2.04(b), (e) or (f) hereof) and
such default shall continue for at least 30 days after written notice
thereof by Financial Security to the Fund requesting that such default be
cured if such default would, in the reasonable judgment of Financial
Security, materially and adversely affect the ability of the Fund to perform
its material obligations under any Fund Document or would materially and
adversely affect the material rights, material benefits or enforcement of
remedies or the practicable realization of such material rights or material
benefits of Financial Security hereunder or of Financial Security or any
Holder under the Custody Agreement or the Certificate or otherwise with
respect to the Preferred Stock;
(c) any material representation or warranty made by the Fund herein or
in connection herewith shall prove to be incorrect in any material respect
when made or deemed made if such breach would, in the reasonable judgment of
Financial Security, materially and adversely affect the ability of the Fund
to perform its material obligations under any Fund Document or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Custody Agreement or the Certificate or
otherwise with respect to the Preferred Stock;
(d) any failure by the Fund to maintain Eligible Portfolio Assets having
a Surety Assets Value at least equal to the Surety Assets Coverage, which
failure is not cured within eight Business Days;
(e) any failure by the Fund, on or prior to the date six months prior to
the Stated Termination Date of the Surety Bond, to either (A) obtain from
Financial Security an extension to the term of the Surety Bond or (B) obtain
notice in writing from each of Moody's and S&P that termination of the
Surety Bond will not adversely affect the then outstanding ratings of the
Preferred Stock;
(f) the Internal Revenue Service makes a final determination that the
Fund does not qualify for any taxable year for exemption from federal income
taxation and such determination would, in the reasonable judgment of
Financial Security, materially and adversely affect the ability of the Fund
to perform its material obligations under any Fund Document or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Custody Agreement or the Certificate or
otherwise with respect to the Preferred Stock;
(g) the Fund commences a voluntary case concerning it under Title 11 of
the United States Code entitled "Bankruptcy" as now or hereafter in effect,
or any successor thereto (the "Bankruptcy Code"); or an involuntary case is
commented against the Fund under any the Bankruptcy Code and relief is
ordered against the Fund or the petition is controverted but is not
dismissed within 60 days after the commencement of the case; or the Fund is
not generally paying its debts as such debts become due; or a custodian (as
defined in the Bankruptcy Code) is appointed for, or takes charge of, all or
substantially all of the property of the Fund; or a decree or order is
entered by a court or agency or supervisory authority having jurisdiction in
the premises for the appointment of a conservator, receiver or liquidator
for the Fund in any insolvency, readjustment of debt, marshalling of assets
and liabilities, or similar proceeding, or for the winding up or liquidation
of the affairs of the Fund, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or the Fund
consents to the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and liabilities,
or similar proceeding, or relating to the Fund or of or relating to
substantially all of its property; or the Fund makes a general assignment
for the benefit of creditors; or any action is taken by the Fund for the
purpose of effecting any of the foregoing;
(h) the Fund shall have denied that it has any or further liability or
obligation under any Fund Document, or the Preferred Stock or any
governmental agency or authority shall find or rule that any Fund Document
or the Preferred Stock are not valid or binding on the Fund, if such denial,
finding or ruling would, in the reasonable judgment of Financial Security,
materially and adversely affect the ability of the Fund to perform its
material obligations under any Fund Document or the Preferred Stock or would
materially and adversely affect the material rights, material benefits or
enforcement of remedies or the practicable realization of such material
rights or material benefits of Financial Security hereunder or of Financial
Security or any Holder under the Certificate or otherwise with respect to
the Preferred Stock;
(i) the Fund shall fail to perform or observe any of its covenants or
agreements set forth in, or to take any action required by, Section 2.04(e)
or (f) hereof; or
(j) the failure by the Fund to make a payment of dividend or redemption
price when due on the Preferred Stock or to declare a dividend on the
Preferred Stock when contemplated by the Certificate and not prohibited by
applicable corporate law or the Investment Company Act.
Section 5.02. Remedies; No Remedy Exclusive.
(a) Upon the occurrence of an Event of Default (other than a Surety
Assets Coverage Event of Default), Financial Security may take whatever
action at law or in equity as may appear necessary or desirable in its
judgment to collect the amounts then due and thereafter to become due under
the Fund Documents or to enforce performance and observance of any
obligation, agreement or covenant of the Fund under the Fund Documents.
(b) If an Event of Default shall have occurred and be continuing, the
Fund shall, upon receipt of a written request from Financial Security (a
"Redemption Request"), deliver a Notice of Redemption pursuant to Section
5(b) of Article IV(C) of the Certificate with respect to, and shall redeem,
such number of shares of Preferred Stock as shall be specified by Financial
Security in such Redemption Request on a date designated by Financial
Security not earlier than 15 days after the giving of such Redemption
Request or such longer period as may be required by applicable law, provided
that in the case of a Surety Assets Coverage Event of Default, Financial
Security shall, within one Business Day, deliver a Redemption Request and
the redemption date for such Redemption Request shall not be later than 35
days following the giving of such Redemption Request; however, the maximum
number of shares of Preferred Stock that the Fund shall be required to
redeem shall be the least number of whole shares of Preferred Stock the
redemption of which, if deemed to have occurred on the Valuation Date as of
which the Fund had failed to maintain such Surety Assets Coverage, could
have been effected using the deemed proceeds (i.e., assuming sale at the
Market Value) from the deemed sale of "Special Redemption Assets." For
purposes hereof, Special Redemption Assets shall mean such portfolio
holdings as are identified by the Fund in its sole discretion, the deemed
sale of which for cash on the applicable Valuation Date on which the Surety
Assets Coverage was not met would have caused the Surety Assets Coverage on
a pro forma basis to have been met on such Valuation Date. The Fund need not
liquidate the Special Redemption Assets; however, assets liquidated to
effect the redemption must have the same Discount Factor or Factors as the
Special Redemption Assets identified by the Fund. Any Redemption Request
(other than a Redemption Request given pursuant to a Surety Assets Coverage
Event of Default), once delivered, may be withdrawn by Financial Security at
any time prior to the mailing of the related Notice of Redemption. Financial
Security may deliver one or more Redemption Requests with respect to a
single Event of Default.
(c) Unless otherwise expressly provided, no remedy herein conferred upon
or reserved is intended to be exclusive of any other available remedy, but
each remedy shall be cumulative and shall be in addition to other remedies
given under the Fund Documents or existing at law or in equity. No delay or
omission to exercise any right or power accruing under the Fund Documents
upon the happening of any event set forth in Section 5.01 hereof shall
impair any such right or power or shall be construed to be a waiver thereof,
but any such right and power may be exercised from time to time and as often
as may be deemed expedient. In order to entitle Financial Security to
exercise any remedy reserved to Financial Security in this Article, it shall
not be necessary to give any notice, other than such notice as may be
required in this Article.
Section 5.03. Waivers.
(a) No failure by Financial Security to exercise, and no delay by
Financial Security in exercising, any right hereunder shall operate as a
waiver thereof. The exercise by Financial Security of any right hereunder
shall not preclude the exercise of any other right, and the remedies
provided herein to Financial Security are declared in every case to be
cumulative and not exclusive of any remedies provided by law or equity.
(b) Financial Security shall have the right, to be exercised in its
complete discretion, to waive any Event of Default hereunder, by a writing
setting forth the terms, conditions and extent of such waiver signed by
Financial Security and delivered to the Fund. Unless such writing expressly
provides to the contrary, any waiver so granted shall extend only to the
specific event or occurrence which gave rise to the Event of Default so
waived and not to any other similar event or occurrence which occurs
subsequent to the date of such waiver.
Section 5.04. Agreement To Pay Fees and Expenses of Enforcement. Upon
the occurrence of an Event of Default hereunder, the Fund agrees that it will
pay or reimburse Financial Security on demand for all costs and expenses,
including, without limitation, the reasonable fees and expenses of attorneys for
the enforcement of performance or observance of any obligation or agreement on
the part of the Fund herein contained.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Amendments, Changes and Modifications. This Agreement may
be amended, changed, modified, altered or terminated only by written instrument
or written instruments signed by Financial Security and the Fund. A copy of each
amendment, change, modification or alteration shall be provided to the Rating
Agencies.
Section 6.02. Notices. All demands, notices and other communications to
be given hereunder shall be in writing (except as otherwise specifically
provided herein) and shall be mailed or personally delivered or telexed or
telecopied to the recipient as follows:
(a) To Financial Security: Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
Attention: Surveillance Department
Telex No.: (212) 688-3101
Confirmation: (212) 826-0100
Telecopy No.: (212) 755-5165
(In each case in which notice or other
communication to Financial Security
refers to an Event of Default, a Surety
Assets Coverage Event of Default, a
claim on the Surety Bond or with respect
to which failure on the part of
Financial Security to respond shall be
deemed to constitute consent or
acceptance, then a copy of such notice
or other communication should also be
sent to the attention of Senior Vice
President-Surveillance.)
(b) To the Fund: Prospect Street(SM) High Income
Portfolio Inc.
One Financial Center
Boston, MA 02111
Attention: President
Telephone No.: (617) 350-5718
Telecopy No.: (617) 350-5725
(c) To the Custodian: Bankers Trust Company
Corporate Trust and Agency Group
4 Albany Street
New York, NY 10006
A party may specify an additional or different address or addresses by
writing mailed or delivered to the other parties as aforesaid. All such notices
and other communications shall be effective upon delivery, except when telexed
or telecopied, in which case they shall be effective upon telex or telecopy
against receipt of answerback or written confirmation.
Section 6.03. Severability. In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
the parties hereto agree that such holding shall not invalidate or render
unenforceable any other provision hereof. The parties hereto further agree that
the holding by any court of competent jurisdiction that any remedy pursued by
Financial Security hereunder is unavailable or unenforceable shall not affect in
any way the ability of Financial Security to pursue any other remedy available
to it.
Section 6.04. Governing Law. This Agreement shall be construed and governed
by, and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with, the laws of the State of New York.
Section 6.05. Consent of Financial Security. In the event that Financial
Security's consent is required under the terms hereof or any other Fund
Document, it is understood and agreed that, except as otherwise provided
expressly herein, the determination whether to grant or withhold such consent
shall be made solely by Financial Security in its absolute discretion. Without
intending to limit any other bases for withholding consent, it shall not be
unreasonable for Financial Security to withhold any consent or approval required
pursuant to the Agreement if the proposed change would result in the downgrading
of a Shadow Rating. Financial Security shall inform the Rating Agencies of any
proposed change or alternate procedures for which consent or approval of
Financial Security is required in the investment guidelines described in the
Preferred Stock Prospectus or the definitions.
Section 6.06. Counterparts. This Agreement may be executed in counterparts
by the parties hereto, and each such counterpart shall be considered an original
and all such counterparts shall constitute one and the same instrument.
Section 6.07. Recitals. All of the recitals hereinabove set forth are
incorporated in this Agreement by reference.
Section 6.08. Headings. The headings of articles, sections and subsections
contained in this Agreement are provided for convenience only. They form no part
of this Agreement and shall not affect its construction or interpretation. All
references to articles, sections or subsections of this Agreement refer to the
corresponding sections or subsections of this Agreement.
Section 6.09. Custody Receipts. For all purposes hereof, a holder of a
Custody Receipt with respect to any Preferred Stock shall be deemed to be the
holder of such Preferred Stock.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, all as
of the day and year first above mentioned.
FINANCIAL SECURITY: FINANCIAL SECURITY ASSURANCE INC.
By: /s/ Robert P. Cochran
--------------------
Senior Vice President
FUND: PROSPECT STREET(SM) HIGH INCOME PORTFOLIO INC.
By: Richard E. Omohundro, Jr.
---------------------------
Title President
----------------------------
<PAGE>
APPENDIX I
DEFINITIONS
General Definitions. The terms defined in this Article I shall have the
meanings provided herein for all purposes of this Agreement, unless the context
clearly requires otherwise, in both singular and plural form, as appropriate.
"Additional Indebtedness" shall have the meaning provided in the Premium
Side Letter.
"Agreement" means the Insurance Agreement dated as of December 1, 1988,
between the Fund and Financial Security to which this Appendix I is attached,
including any amendments or any supplements hereto as herein permitted.
"Auction Agent" shall have the meaning provided in the Certificate.
"Auction Agent Agreement" shall have the meaning provided in the
Certificate.
"Auction Date" shall have the meaning provided in the Certificate.
"Auction Procedures" shall have the meaning provided in the Certificate.
"Bankers' Acceptances" means U.S. dollar-denominated bankers' acceptances
issued by foreign or domestic banks having (or being the principal operating
subsidiary of a bank holding company having) a long-term unsecured debt rating
of "AA" or better by S&P and "Aa" or better by Moody's and having a short-term
unsecured debt rating of "A-1+" by S&P and "P-1" by Moody's and having a
maturity when delivered of less than six months.
"Business Day" means any day excluding Saturday, Sunday and a day on which
commercial banks in New York City or Boston, Massachusetts are authorized or
required by law to close under the laws of the State of New York or the
Commonwealth of Massachusetts, as the case may be, or a day on which the New
York Stock Exchange is closed for trading.
"Bylaws" means the Bylaws of the Fund as approved by its board of directors,
including any amendments or any supplements thereto as herein provided.
"Cash" means such coin or currency of the United States of America as at the
time shall be legal tender for payment of public and private debts.
"Certificate" means the Fund's Articles of Amendment and Restatement as in
effect on the date hereof and as subsequently amended, changed or modified with
the prior written consent of Financial Security.
"Collateral Evaluator" means a broker-dealer, government securities dealer,
municipal securities dealer, investment advisor or a bank regularly making a
market in the Eligible Portfolio Property being valued, or a Person regularly
engaged in evaluating the same or similar collateral, who is selected by
Financial Security with respect to each type of Eligible Portfolio Property.
"Commercial Paper" means dollar-denominated commercial paper of a foreign or
domestic issuer rated "A-1+" by S&P and "P-1" by Moody's (if only one of such
agencies has issued a rating for such commercial paper, then only the rating of
such agency will be required), having a maturity of not more than 270 days.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, $.01 par value, of the Fund.
"Common Stock Prospectus" means the Prospectus dated November 28, 1988 with
respect to the Common Stock, as supplemented or amended from time to time, filed
on behalf of the Fund under the Securities Act and the Investment Company Act.
"Conventional Mortgage Pass-Through Certificates" means an instrument issued
in bearer or registered form, that is one of a class or series or by its terms
is divisible into a class or series, and that is of a type commonly dealt in
upon securities exchanges or markets or commonly recognized in any area in which
it is issued or dealt in as a medium for investment, evidencing (directly or
indirectly) a proportional undivided interest in specified pools of whole
mortgage loans that are secured by a valid first lien on each mortgagor's fee or
leasehold interest in related mortgaged property (except for Permitted Tax Liens
and other matters to which like properties are commonly subject which neither
individually nor in the aggregate materially interfere with the benefits of the
security intended to be provided by such mortgages or deeds of trust, and
standard exceptions and exclusions in title insurance policies) on one- to
four-unit residences (including, without limitation, owner-occupied attached or
detached single-unit residences, two- to four-unit primary residences,
condominiums, second/vacation homes and nonowner occupied residences) and with
respect to which the Required Documentation is required to be held by a trustee
or independent custodian, which mortgage loans are serviced pursuant to
servicing agreements with servicers that have either expressed the intention to
advance funds to meet deficiencies (to the extent such servicers reasonably
believe such advances are recoverable) or provided for alternative credit
enhancement in lieu thereof, and which instruments have been rated "AA" or
higher by S&P and "Aa" or higher by Moody's (if only one of such agencies has
issued a rating for such instrument, then only the rating of such agency will be
required), provided that a Conventional Mortgage Pass-Through Certificate shall
be eligible for inclusion as Eligible Portfolio Property only so long as it
meets the above requirements, as the Fund shall confirm in writing, or by
reference to publications of Moody's and S&P, by confirmation from a nationally
recognized securities dealer having a minimum capitalization of $25 million or
by such other means as Financial Security shall approve.
"Corporate Bonds" means (a) Rated Public Corporate Bonds, (b) Other
Corporate Bonds and (c) World Bank Securities.
"Custodian" means Bankers Trust Company, a New York banking corporation,
until a successor replaces it pursuant to the Custody Agreement and, thereafter,
means the successor.
"Custody Agreement" means the Custody Agreement dated as of December 1, 1988
between Bankers Trust Company, as custodian, and Financial Security relating to
the Preferred Stock.
"Date of Issuance" means the date on which the Surety Bond is issued.
"Default" means any fact or event which results or which, with notice or the
passage of time, or both, would result in an Event of Default.
"Demand Deposit" means a demand deposit account (i) with a depositary
institution having an unsecured short-term debt rating of "A-1+" by S&P and
"P-1" by Moody's payable to, or at the direction of, the account holder without
the requirement to give, or the right of the depositary to demand, notice and
the expiration of a period of time prior to honoring any direction of the
account holder or (ii) fully insured as to principal and interest with an FDIC-
or FSLIC-insured depositary institution, provided that the Fund at any time has
no more than $100,000 in such an account and any other FDIC- or FSLIC-insured
account or certificate of such institution, and provided further that, if the
depositary institution, to the best of knowledge of the Fund, is at any time
insolvent, such demand deposit account shall cease to be Eligible Portfolio
Property for all purposes herein.
"Deposit Securities" means Cash and U.S. Government Securities (having a
remaining term to maturity that is not more than 30 days) and Short Term Money
Market Instruments (which Short Term Money Market Instruments are issued by an
entity having an unsecured long-term debt rating of: "A2" or higher by Moody's
and "A" or higher by S&P) which mature prior to the time the payment is due for
which such Deposit Securities have been deposited.
"Discount Factor" means, for any Eligible Portfolio Property (other than
World Bank Securities, which shall have a number assigned as a Discount Factor
as shall be agreed to by Financial Security), the number set forth below
opposite such type of Eligible Portfolio Property (it being understood that any
asset held as Eligible Portfolio Property and not listed below shall have a
Surety Assets Value of zero):
Type of Property(l) Discount Factor
- ------------------ ---------------
Type I Corporate Bonds: 1.50
Type II Corporate Bonds: 1.55
Type III Corporate Bonds: 1.60
Type IV Corporate Bonds: 1.65
Type V Corporate Bonds: 1.70
Type VI Corporate Bonds: 1.80
Type VII Corporate Bonds: 1.90
Type VIII Corporate Bonds: 2.05
Type IX Corporate Bonds: 2.20
Other Corporate Bonds: 2.25
GNMA Certificates with fixed interest rates: 1.35
GNMA Certificates with adjustableb interest rates: 1.54
FHLMC and FNMA Certificates with fixed interest rates: 1.45
FHLMC and FNMA Certificates with adjustable interest rates: 1.58
FHLMC Multifamily Securities: 1.65
FHLMC and FNMA Certificates with variable interest rates: 1.65
GNMA Multifamily Securities: (2)
GNMA Graduated Payment Securities(3): 1.55
Conventional Mortgage Pass-Through Certificates: (2)
U.S. Government Securities having a remaining
term to maturity of one day: 1.00
U.S. Government Securities having a remaining
term to maturity of 90 days or less but more than one day: 1.10
U.S. Government Securities having a remaining term to maturity
of more than 90 days but not more than five years: 1.28
U.S. Government Securities having a remaining term to maturity
of more than five years but not more than 10 years: 1.35
U.S. Government Securities having a remaining term to
maturity of more than 10 years but not more than 15 years: 1.45
U.S. Government Securities having a remaining term to maturity
of more than 15 years but not more than 30 years: 1.50
Cash and Short Term Money Market Instruments with a term
of one day: 1.00
Short Term Money Market Instruments with a term of more
than one day: 1.10
Commercial Paper rated "A-1+" by S&P and "P-1" by Moody's
with a term of one day: 1.00
Commercial Paper rated "A-1+" by S&P and "P-1" by Moody's
with a term of more than one day: 1.10
Commercial Paper rated "A-1" by S&P and "P-1" by Moody's 1.60
Commercial Paper rated "A-2" by S&P and "P-2" by Moody's 1.65
- ----------
(1) If a security is rated by only one of Moody's and S&P, then only the
rating of such agency shall be used to determine the Discount Factor; provided,
however, that the Discount Factor shall be increased by adding .10 to the
Discount Factor shown above. A security with a "split" rating by S&P and Moody's
shall be deemed to fall under the lower of the two ratings for purposes of
determining the Discount Factor.
(2) The Discount Factor shall be that which is agreed to by Financial
Security.
(3) A Discount Factor of 1.55 applies in the case of GNMA Graduated Payment
Securities as to which the Fund notifies the Collateral Evaluator that scheduled
principal payments are being made to holders; in the case of GNMA Graduated
Payment Securities as to which the Fund notifies the Collateral Evaluator that
scheduled principal payments are not being made to holders, the Discount Factor
shall be that which is agreed to by Financial Security.
"Dividend Payment Date" shall have the meaning provided in the Certificate.
"DTC Letter" means the Letter Agreement dated December 5, 1988 to the
Depository Trust Company from the Fund and the Auction Agent, as amended and
supplemented.
"Eligible Portfolio Property" means Corporate Bonds, Cash, Government
Securities, Short Term Money Market Instruments and Conventional Mortgage
Pass-Through Certificates owned by the Fund, provided that Deposit Securities
irrevocably deposited by the Fund with the Trustee for the payment of principal
of, or interest on, the Notes or with the Paying Agent for redemption of or
dividend payments with respect to the Preferred Stock shall not be included as
Eligible Portfolio Property and, provided further, that a Corporate Bond shall
not be included as Eligible Portfolio Property (i) if it fails to meet the
criteria in column (1) below or (ii) it has a remaining term to maturity of more
than 30 years or (iii) to the extent (and only to the proportionate extent) the
acquisition or holding thereof by the Fund as Eligible Portfolio Property causes
any applicable limitation set forth in column (2) or (3) below to be exceeded as
of any relevant date of determination (provided that in the event that any such
limitation or any other percentage limitation set forth in this definition of
Eligible Portfolio Property is exceeded, the Fund (or, if the Fund shall fail to
do so, Financial Security) shall designate, in its sole discretion, the
particular Corporate Bond(s) and/or portions thereof which shall be deemed to
have caused such limitation to be exceeded) or (iv) such Corporate Bond is
subject to a covered call option:
<TABLE>
<CAPTION>
Column (1) Column (2) Column (3)
---------- ---------- ----------
Maximum percent
Maximum percent of Market Value of
of Market Value of Eligible Portfolio
Minimum original Eligible Portfolio Property invested
Standard & Poor's/ issue size of Property invested in in any one Industry
Moody's Rating (1) each issue any one issuer(2) Category(2)
------------------- --------------- -------------------- -------------------
($ in millions)
<S> <C> <C> <C>
AAA/Aaa $100 10.0% 50.0%
AA/Aa 100 10.0 33.3
A/A 100 10.0 33.3
BBB/Baa 100 5.0 20.0
BB/Ba 100(3) 4.0 12.0
B/B1 or B2 100(3) 3.0 8.0
CCC(4)/B3 100(3) 3.0 8.0
Other Corporate Bonds 50(5) 3.0 8.0
A-1+/P1(6) N/A 10.0 N/A
A-l/Pl(6) N/A 10.0 33.3
A-2/P2(6) N/A 5.0 20.0
- ----------
<FN>
(1) Rating designations include (+) or (-) modifiers to the S&P rating and (1), (2) or (3) modifiers to the Moody's
rating where appropriate except that corporate debt obligations rated "CCC-" by S&P shall not constitute Eligible
Portfolio Property. An issue with a "split" rating by S&P and Moody's shall be deemed to fall under the lower of
the two ratings for purposes hereof. If only one of such agencies has issued a rating for such instrument, then
only the rating of such agency is required; provided, however, that not more than 15% of the aggregate value of the
Rated Corporate Bonds shall be comprised of Corporate Bonds having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each lower
rating category, except that the calculations with respect to commercial paper investments constituting Corporate
Bonds shall be made separately and independently of but on the same basis as the cumulative total guidelines
applicable to other types of Corporate Bonds.
(3) 20% of the aggregate value of all Corporate Bonds in these rating categories may be from issues with an original
issue size of greater than or equal to $50 million and less than $100 million.
(4) To constitute Corporate Bonds, corporate debt obligations in this rating category that are rated by S&P must be
subordinated debt of the issuer and the issuer must have an implied senior debt rating of "B-" or better. The
aggregate Market Value of corporate debt obligations in this rating category may not constitute more than 20% of
the aggregate Market Value of Eligible Portfolio Property.
(5) Other Corporate Bonds may not constitute more than 30% of the aggregate Market Value of the Eligible Portfolio
Property. Not more than 18% of the aggregate value of the Eligible Portfolio Property may consist of Other
Corporate Bonds having an original issue size of $50 million or more but less than $100 million, provided that not
more than 9% of the aggregate value of the Eligible Portfolio Property may consist of Other Corporate Bonds having
an original issue size of $50 million or more but less than $75 million.
(6) Represents commercial paper investments.
</FN>
</TABLE>
Other assets may be specified as Eligible Portfolio Property with the written
consent of Financial Security.
"ERISA" means the Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time, and, unless the context otherwise
requires, the regulations thereunder.
"Event of Default" means any event of default set forth in Section 5.01
hereof.
"FDIC" means the Federal Deposit Insurance Corporation, and includes any
successor thereto.
"Federal Funds" means a transfer of funds in accordance with Subpart B of
Regulation J of the Board of Governors of the Federal Reserve System and
Operating Circular No. 8 of the Federal Reserve Bank of New York, as both are in
effect from time to time.
"FHLMC" means the Federal Home Loan Mortgage Corporation or other agency,
corporation or instrumentality of the United States to which the duties and
powers of the Federal Home Loan Mortgage Corporation have been transferred.
"FHLMC Certificate" means a mortgage participation certificate in physical
or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate, level pay, fully amortizing
mortgage loans secured by first-priority mortgages on one- to four-family
residences.
"FHLMC Multifamily Security" means a "Plan B Multifamily Security" in
physical or book-entry form, the timely payment of interest on and the ultimate
collection of principal of which is guaranteed by FHLMC, and which evidences a
proportional undivided interest in, or participation interest in, specified
pools of fixed-, variable- or adjustable-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which as
Eligible Portfolio Property has been approved by Financial Security.
"Financial Security" means Financial Security Assurance Inc., a New York
stock insurance company, its successors and assigns.
"FNMA" means the Federal National Mortgage Association, a United States
Government-sponsored private corporation established pursuant to Title VIII of
the Housing and Urban Development Act of 1968, and includes any successor
thereto.
"FNMA Certificate" means a mortgage pass-through certificate in physical or
book-entry form, the full and timely payment of principal of and interest on
which is guaranteed by FNMA, and which evidences a proportional undivided
interest in specified pools of fixed-, variable- or adjustable-rate, fully
amortizing mortgage loans secured by first-priority mortgages on single-family
residences.
"FSLIC" means the Federal Savings and Loan Insurance Corporation and
includes any successor thereto.
"Fund" means Prospect Street(SM) High Income Portfolio Inc., a Maryland
corporation.
"Fund Documents" means the Indenture, the Certificate, the Auction Agent
Agreement, the Indemnification Agreement, the DTC Letter and this Agreement.
"GNMA" means the Government National Mortgage Association or other agency,
corporation or instrumentality of the United States to which the duties and
powers of the Government National Mortgage Association have been transferred.
"GNMA Certificate" means a fully modified pass-through certificate in
physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA and which evidences a proportional
undivided interest in specified pools of fixed-, variable- or adjustable-rate,
fully amortizing mortgage loans secured by first-priority mortgages on
single-family residences.
"GNMA Graduated Payment Security" means a fully modified pass-through
certificate in physical or book-entry form, the full and timely payment of
principal of and interest on which is guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States, and which evidences a
proportional undivided interest in specified pools of graduated payment mortgage
loans with payments that increase annually at a predetermined rate for up to the
first five or 10 years of the mortgage loan and that are secured by
first-priority mortgages on one- to four-unit residences.
"GNMA Multifamily Security" means a fully modified pass-through certificate
in physical or book-entry form, the full and timely payment of principal of and
interest on which is guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States, and which evidences a proportional
undivided interest in specified pools of fixed-rate mortgage loans secured by
first-priority mortgages on multifamily residences, the inclusion of which as
Eligible Portfolio Property has been approved by Financial Security.
"Government Securities" means U.S. Government Securities, GNMA Certificates,
GNMA Graduated Payment Securities, GNMA Multifamily Securities, FNMA
Certificates, FHLMC Certificates and FHLMC Multifamily Securities.
"Holders" shall have the meaning provided in the Certificate.
"Indebtedness" means (i) indebtedness or liability for borrowed money, or
for the deferred purchase price of property or services (including trade
obligations); (ii) obligations as lessee under leases which should have been or
should be, in accordance with generally accepted accounting principles, recorded
as capital leases; (iii) current liabilities in respect of unfunded vested
benefits under plans covered by Title IV of ERISA; (iv) obligations issued for
the account of any Person; (v) all obligations arising under acceptance
facilities; (vi) all guarantees, endorsements (other than for collection or
deposit in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any Person
or otherwise to assure a creditor against loss; and (vii) obligations secured by
any Lien on property of the Fund, whether or not the obligations have been
assumed.
"Indemnification Agreement" means the Indemnification Agreement dated
December 5, 1988 among the Fund, Financial Security and Drexel Burnham Lambert
Incorporated.
"Indenture" means the Indenture dated as of December 1, 1988 between the
Fund and Shawmut Bank, N.A., as Trustee, as amended or supplemented from time to
time in accordance with this Agreement.
"Industry Category" means, as to any Corporate Bond, any of the industry
categories set forth in the following table:
1. Aerospace and Defense
2. Automobile/Auto Parts/Truck Manufacturing
3. Banks/Savings and Loans/Finance Companies/Consumer Credit
4. Financial Services-Brokerage/Syndication/Leasing
5. Real Estate Development/REITS/Building/Construction
6. Broadcasting--TV, Cable and Radio
7. Publishing
8. Electrical Equipment/Electronics/Computers
9. Diversified/Conglomerate Services
10. Diversified/Conglomerate Manufacturing
11. Leisure/Amusement/Motion Pictures
12. Agricultural Chemicals
13. Chemicals
14. Food/Tobacco
15. Beverage
16. Retail
17. Consumer Durable Goods/Home Furnishings/Childcare/Toys
18. Grocery/Convenience Stores
19. Healthcare/Drugs/Hospital Supplies
20. Personal Care Products/Cosmetics
21. Hotel/Gaming
22. Insurance Companies
23. Machinery
24. Metals/Mining
25. Oil/Natural Gas/Oil Services
26. Packaging/Containers
27. Paper/Forest Products/Printing
28. Pollution Control/Waste Removal
29. Utilities
30. Rail/Trucking/Overnight Delivery
31. Telephone/Communications
32. Textiles/Apparel
33. Transportation/Airlines
34. Agriculture/Agricultural Equipment
35. Miscellaneous
"Initial Dividend Period" means the period beginning on the Date of Issuance
and ending on but not including January 19, 1989.
"Insured Certificate of Deposit" means a U.S. dollar-denominated
current-interest-paying negotiable certificate of deposit fully insured as to
principal and interest by the FDIC or FSLIC, provided that no more than 25% of
the face amount of Pledged Property shall be comprised of such certificates, and
provided, further, that (i) the Fund at any time owns no more than $100,000 of
such certificates and other FDIC- or FSLIC-insured accounts of such issuing
institution and (ii) such insured institution is not, to the best knowledge of
the Fund, at any time, insolvent or being liquidated under the auspices of the
FDIC or FSLIC.
"Investment Adviser" means the investment adviser under contract with the
Fund to provide investment management services, initially Prospect Street
Investment Management Co., Inc.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
"Late Payment Rate" means a per annum rate equal to 3% in excess of the
prime or reference lending rate publicly announced by Morgan Guaranty Trust
Company of New York, as in effect from time to time, but in no event shall the
Late Payment Rate be greater than the maximum rate permitted by law or the
Maximum Applicable Rate as defined in the Certificate.
"Lien" means any lien, mortgage, security interest, pledge, charge or other
encumbrance of any kind whatsoever.
"Liquidation Period" shall have the meaning set forth in Section 2.04(f)
hereof.
"Market Value" means the amount determined by the Collateral Evaluator with
respect to Eligible Portfolio Property in the manner set forth below, provided
that any property (i) that does not constitute Eligible Portfolio Property or
(ii) that is in default shall be deemed to have a Market Value of zero:
(a) as to any Corporate Bond, the lower of (i) the applicable
redemption price for such Corporate Bond as of the Reporting Date or, if
such Corporate Bond is not then subject to redemption, the unpaid principal
balance of such Corporate Bond as of the Reporting Date and (ii) the lower
of two bid prices for such Corporate Bond provided by two nationally
recognized securities dealers with a minimum capitalization of $25 million
or by one such securities dealer and any other source consented to in
writing by Financial Security to the custodian of the Fund's assets, at
least one of which shall be provided in writing or by telecopy, telex,
other electronic transcription, computer obtained quotation reducible to
written form or similar means, and in turn provided to the Collateral
Evaluator by any such means by the custodian of the Fund's assets, plus
(iii) accrued and unpaid interest on such Corporate Bond if such interest
is not included in the above prices; provided, however, that if two bid
prices cannot be obtained, such Corporate Bond shall have a Market Value of
zero;
(b) as to any Other Corporate Bond, the lower of (i) the applicable
redemption price for such Corporate Bond as of the Reporting Date or, if
such Corporate Bond is not then subject to redemption, the unpaid principal
balance of such Corporate Bond as of the Reporting Date and (ii) the
average bid price on such Other Corporate Bond, as quoted to the Fund as of
such Reporting Date during normal trading hours on the New York Stock
Exchange, Inc. by two nationally recognized securities dealers with a
minimum capitalization of $25 million regularly making a market in such
Other Corporate Bond selected by the Collateral Evaluator; provided,
however, that, if the lower of the two bids is not within 5% of the higher
bid, the lower bid shall be used; provided, however, that if the Collateral
Evaluator is able to obtain only one bid quotation in accordance with
clause (ii) above, the Collateral Evaluator may request from Financial
Security a second bid price obtained by Financial Security at its own
expense from any nationally recognized securities dealer with a minimum
capitalization of $25 million, which bid quotation obtained shall be
averaged with the bid quotation obtained by the Collateral Evaluator in
clause (ii) above; provided, further, however, that, if such second bid
quotation is obtained but the lower of the two bids is not within 5% of the
higher bid, the lower bid shall be used; and provided, further, that, if no
second bid quotation can be or is obtained from Financial Security as
provided herein, the single bid quotation shall be used to determine Market
Value of such Other Corporate Bond; plus (iii) accrued interest on such
Other Corporate Bond (if such interest is not included in the above price);
(c) as to any U.S. Government Securities having a remaining term to
maturity of more than 30 days, GNMA Certificates, GNMA Graduated Payment
Securities, GNMA Multifamily Securities, FNMA Certificates, FHLMC
Certificates and FHLMC Multifamily Securities, the lower of (i) the face
amount or aggregate principal amount of such U.S. Government Security or
the aggregate unpaid principal amount of the mortgage loans evidenced by
each such certificate or security, as the case may be, as determined by the
Collateral Evaluator by any method which the Collateral Evaluator believes
reliable (unless Financial Security shall otherwise require), which may
include amounts shown on the most recent report related to the Certificate
or security received by the Fund prior to the Reporting Date, and (ii) the
lower of the bid prices for the same kind of certificates, securities or
instruments, as the case may be, having, as nearly as practicable,
comparable interest rates and maturities provided by two nationally
recognized securities dealers having minimum capitalization of $25 million
or by one such securities dealer and any other source consented to in
writing by Financial Security to the Fund, at least one of which shall be
provided in writing or by telecopy, telex, other electronic transcription,
computer obtained quotation reducible to written form or similar means, and
in turn provided to the Collateral Evaluator by any such means by the Fund;
plus (iii) accrued and unpaid interest thereon if such interest is not
included in the above prices; provided, however, that if two bid prices
cannot be obtained, such item will have a Market Value of zero;
(d) as to any U.S. Government Securities having a remaining term to
maturity of 30 days or less and Short Term Money Market Instruments (other
than Demand Deposits, federal funds, Bankers' Acceptances and next Business
Day's Repurchase Agreements), the face amount or aggregate principal amount
of such U.S. Government Securities or Short Term Money Market Instruments,
as the case may be, plus accrued and unpaid interest thereon;
(e) as to Conventional Mortgage Pass-Through Certificates, the lower
of (i) the outstanding aggregate principal balance of the mortgage loans
underlying the certificates as determined by the Collateral Evaluator by
any method which the Collateral Evaluator believes reliable, which may
include amounts based on verbal reports of the servicers of the related
mortgage loans to the Collateral Evaluator, as of the applicable Reporting
Date and (ii) the dollar value of the lower of two bid prices per dollar of
outstanding principal amount as of such applicable Reporting Date for such
certificates, provided by two nationally recognized securities dealers
having minimum capitalization of $25 million or by one such securities
dealer and any other source consented to in writing by Financial Security
to the Fund, at least one of which shall be provided in writing or by
telecopy, telex, other electronic transcription, computer obtained
quotation reducible to written form or similar means, and in turn provided
to the Collateral Evaluator by any such means by the Fund; plus (iii)
accrued and unpaid interest thereon if such interest is not included in the
above prices; provided, however, that if two bid prices cannot be obtained,
such item shall have a Market Value of zero; and
(f) as to Cash, Demand Deposits, Federal Funds, Bankers' Acceptances
and next Business Day's Repurchase Agreements included in Short Term Money
Market Instruments, the face value thereof.
"Maximum Applicable Rate" means such term as defined in the Certificate.
"Moody's" means Moody's Investors Service, Inc., a corporation organized
and existing under the laws of the State of Delaware, its successors and their
assigns, and, if such corporation shall for any reason no longer perform the
functions of a securities rating agency, "Moody's" shall be deemed to refer to
any other nationally recognized rating agency designated by Financial Security.
"Note Prospectus" means the Prospectus dated November 28, 1988 with respect
to the Notes, as supplemented or amended from time to time, filed on behalf of
the Fund under the Securities Act and the Investment Company Act.
"Notes" means the Fund's Series A Senior Notes issued pursuant to the
Indenture on the Date of Issuance and any additional debt securities issued
under the Indenture and qualifying as Additional Indebtedness.
"Notice of Redemption" shall have the meaning provided in the Certificate.
"Other Corporate Bonds" means corporate debt obligations (other than (a)
Short-Term Money Market Instruments, (b) U.S. Government Securities, (c)
Commercial Paper, (d) corporate debt obligations that are both registered under
the Securities Act and rated by S&P and/or Moody's, (e) corporate debt
obligations rated lower than "CCC" by S&P or lower than "B3" by Moody's, (f)
corporate debt obligations rated "CCC" by S&P that are not subordinated debt of
the issuer of such obligations and (g) World Bank Securities), which corporate
debt obligations (i) were issued by a Person whose financial statements were the
subject of an opinion prepared by a nationally recognized independent public
accounting firm at the time of purchase of the applicable corporate debt
obligation; (ii) have been registered under the Securities Act or, if a security
exempt from registration under Section 3 of the Securities Act or a security
issued in a transaction exempt from the registration requirements of Section 5
of the Securities Act, are not a Restricted Security in the hands of the Fund,
as of the relevant date of determination, as applicable; (iii) are
interest-paying obligations which provide for the regularly scheduled payment of
interest thereon and the payment of principal thereof at a stated date or dates
in Cash and were issued in the United States; and (iv) do not provide for
conversion or exchange into equity capital at any time over its life.
Notwithstanding the foregoing, any corporate debt obligation (or portion
thereof, if applicable) otherwise within the provisions of the preceding
sentence shall not be deemed an Other Corporate Bond if (and, if applicable,
only to the extent that) (i) as of the relevant date of determination (A) it has
an unpaid principal balance of less than $100,000; (B) it has had notice given
to the holders thereof which has not expired or been rescinded (of which notice
the Fund shall have reasonable knowledge) that such corporate debt obligation is
the subject of an offer by the issuer of such corporate debt obligation 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 Eligible Portfolio Property (including Rated Public
Corporate Bonds) shall not be subject to the provisions of this clause (B)); (C)
to the reasonable knowledge of the Fund, the Fund owns, directly or indirectly,
more than 10% of the aggregate principal amount of the issue of which such
corporate debt obligation is a part at the time out-standing; or (D) to the
reasonable knowledge of the Fund, such corporate debt obligation is in default
under the terms of its governing instruments; or (ii) at the time of purchase,
the Fund owned, directly or indirectly, more than 10% of the aggregate principal
amount of the issue of which such corporate debt obligation is a part. In the
event that the Fund shall exceed any percentage limitation set forth in this
definition of Other Corporate Bonds, the Fund (or, if the Fund shall fail to do
so, Financial Security) shall designate, in its sole discretion, the particular
Other Corporate Bonds) and/or portions thereof which shall be deemed to have
caused the Fund to exceed such limitation and therefore shall not be deemed
within the definition of Other Corporate Bonds.
"Paying Agent" means Bankers Trust Company, a New York banking corporation.
"Permitted Indebtedness" means (i) the Notes, (ii) any Indebtedness
(including, without limitation, reverse repurchase agreements) in any case where
such Indebtedness is for temporary purposes (within the meaning of Section 18 of
the Investment Company Act) only and in an amount not exceeding five per centum
of the Market Value of the total assets of the Fund at the time when the
Indebtedness is incurred and with a banking institution that agrees not to
institute bankruptcy proceedings against the Fund for a period of one year and a
day after the repayment of such indebtedness, (iii) Additional Indebtedness and
any other Indebtedness approved by Financial Security, (iv) Indebtedness
incurred in the ordinary course of business and which is represented by fees for
services, taxes, directors' fees or similar expenses, provided that such other
similar expenses shall not exceed $75,000 at any one time in the aggregate or
(v) Indebtedness during a customary settlement period for the deferred purchase
price for securities purchased.
"Permitted Tax Liens" means liens of general and special taxes and
assessments on the property in question.
"Person" means an individual, joint stock company, trust, unincorporated
association, joint venture, corporation, business or owner trust, partnership or
other organization or entity (whether governmental or private).
"Plan" means a pension plan maintained for employees of the Fund which is
subject to Title IV of ERISA.
"Preferred Stock" means the 300 shares of Taxable Auction Rate Preferred
Stock, aggregate liquidation preference of $30,000,000, issued by the Fund on
the Date of Issuance and any additional shares of Taxable Auction Rate Preferred
Stock issued thereafter up to 45 shares, with an aggregate liquidation
preference of not more than $4,500,000, and covered by the Surety Bond pursuant
to the terms of this Agreement or such lesser number of shares as may be
outstanding at any time.
"Preferred Stock Prospectus" means the Prospectus dated
November 28, 1988 with respect to the Preferred Stock, as supplemented or
amended from time to time, filed on behalf of the Fund under the Securities Act
and the Investment Company Act.
"Premium" means the premium calculated as set forth in the Premium Side
Letter.
"Premium Side Letter" means the side letter between Financial Security and
the Fund dated the Date of Issuance setting forth the payment provisions with
respect to the premium payable by the Fund in consideration of the issuance of
the Surety Bond.
"Projected Dividend Amount" for the Preferred Stock means, if the date of
determination is a Valuation Date, the amount of dividends, based on the number
of shares of Preferred Stock outstanding on such Valuation Date, projected to
accumulate on such shares from such Valuation Date through the sixty-third day
after such Valuation Date, at the following dividend rates:
(a) If the Valuation Date is the Date of Issuance or a Dividend
Payment Date, (i) for the Dividend Period beginning on the Original
Issuance Date or such Dividend Payment Date and ending on (but not
including) the first following Dividend Payment Date, the Applicable Rate
in effect on such Valuation Date and (ii) for the period beginning on (and
including) the first following Dividend Payment Date and ending on (and
including) the sixty-second day following such Valuation Date, the product
of 1.95 and (x) the Maximum Applicable Rate on the Date of Issuance (in the
case of the Date of Issuance) or (y) the Maximum Applicable Rate as of the
last occurring Auction Date (in the case of any Dividend Payment Date); and
(b) If such Valuation Date is not the Date of Issuance or a Dividend
Payment Date, (i) for the period beginning on such Valuation Date and
ending on (but not including) the first following Dividend Payment Date,
the Applicable Rate in effect on such Valuation Date, and (ii) for the
period beginning on (and including) the first following Dividend Payment
Date and ending on (but not including) the sooner of the second following
Dividend Payment Date or the sixty-third day following such Valuation Date,
the product of 1.95 and (x) the Maximum Applicable Rate on the Date of
Issuance (in the case of a Valuation Date occurring prior to the first
Auction Date) or (y) the Maximum Applicable Rate on the last occurring
Auction Date (in the case of any other Valuation Date) and (iii) for the
period, if any, beginning on (and including) the second following Dividend
Payment Date and ending on (but not including) the sixty-third day
following such Valuation Date, the product of 2.50 and the rate specified
in clause (x) or (y) above.
If the date of determination is not a Valuation Date, then the Projected
Dividend Amount on such date of determination shall equal the Projected Dividend
Amount therefor on the immediately preceding Valuation Date, adjusted to reflect
any decrease in the number of shares of Preferred Stock outstanding.
"Prospectuses" means, collectively, the Common Stock Prospectus, the
Preferred Stock Prospectus and the Note Prospectus.
"Rated Public Corporate Bonds" means corporate debt obligations (other than
Short Term Money Market Instruments, U.S. Government Securities, Other Corporate
Bonds and World Bank Securities) rated from "CCC" to "AAA" by S&P and/or from
"B3" to "Aaa" by Moody's (or in the case of commercial paper rated as provided
in the definition of Eligible Portfolio Property) which corporate debt
obligations (i) provide for the periodic payment of interest thereon in Cash and
were issued in the United States, (ii) do not provide for conversion or exchange
into equity capital at any time over their respective lives, (iii) have been
registered under the Securities Act (such requirement shall not apply with
respect to commercial paper), and (iv) have not had notice given in respect
thereof that any such corporate debt obligations are the subject of an offer by
the issuer thereof of exchange or tender for cash, securities or other type of
consideration (except that corporate debt obligations including Other Corporate
Bonds in an amount not exceeding 10% of the aggregate value of the Eligible
Portfolio Property at any time shall not be subject to the provisions of this
clause (iv).
"Redemption Date" means the date specified in a Notice of Redemption given
by the Fund in respect of the Preferred Stock or a date on which the Preferred
Stock is required to be redeemed pursuant to Section 5(b)(i) of Article IV C of
the Certificate.
"Redemption Request" shall have the meaning provided in Section 5.02(b).
"Registration Rights" means a right in favor of the holders of a majority
or less than a majority of the principal amount of securities of a particular
issue of securities to require registration of such securities under the
Securities Act or an obligation of the issuer of such securities (subject to
customary limitations relating to the amount sold, market conditions and the
like) to file or cause to be filed a registration statement under the Securities
Act within a specified period of time not to exceed 12 months either from the
date of issuance of such securities or the date of such demand.
"Registration Statement" means the Registration Statement on Form N-2 filed
under the Securities Act and the Investment Company Act with respect to the
Preferred Stock, the Notes and the Common Stock as declared effective by the
Commission.
"Reporting Date" means, with respect to any price referred to in the
definition of "Market Value," the date as of which the Market Value of an item
of Eligible Portfolio Property is to be determined pursuant to this Agreement
or, if no such price is available as provided above for such date, the next
closest prior date as of which such price is so available, provided that if such
price is not available as of a date within five Business Days next preceding the
date as of which the determination of such Market Value is to be made, then the
Market Value shall be deemed to be zero as of the Reporting Date.
"Repurchase Agreement" means a repurchase obligation with respect to a U.S.
Government Security, FNMA Certificate, FHLMC Certificate or GNMA Certificate
entered into with a depository institution, the deposits of which are insured by
the FDIC or FSLIC, and that has an unsecured short-term debt rating of "A-1+" by
S&P and "P-1" by Moody's (if only one of such agencies has issued a rating for
such institution, then only the rating of such agency shall be required) which
obligation must be repurchased within one Business Day from the date such
repurchase obligation was executed.
"Required Documentation," with respect to a mortgage loan, means:
(a) the mortgage note or other evidence of indebtedness secured by the
mortgage endorsed without recourse in blank or to the trustee or other
custodian and accompanied by an assignment thereof;
(b) the mortgage, deed of trust, deed to secure debt or similar
security instruments encumbering real property or related documentation,
with evidence of recording or filing thereof, in each case accompanied by
assignments thereof, executed in blank or to the trustee or other
custodian, in recordable form as may be appropriate in the jurisdiction
where the property is located and evidence that such assignment has been
recorded in the name of the trustee or other custodian, and such trustee or
other custodian receives an opinion of counsel (containing only such
exceptions as may be permissible under the indenture or other agreement
pursuant to which the mortgage loan is pledged to the trustee in connection
with the related Conventional Mortgage Pass-Through Certificate) to the
effect that, notwithstanding that the assignment of the mortgage has not
been recorded, the actions taken with respect to the mortgage loan are
sufficient to permit the trustee or other custodian to avail itself of all
protection available under applicable law against the claims of any present
or future creditors of the issuer, and are sufficient to prevent any other
sale, transfer, assignment, pledge or hypothecation of the mortgage and the
related mortgage note by the issuer from being enforceable, or will create
a valid assignment of and a valid and perfected lien upon and security
interest in a mortgage and related mortgage note, which lien and security
interest is (except for the trustee's lien securing certain obligations of
the issuer to the trustee as provided in the indenture pursuant to which
the mortgage loan is pledged to the trustee in connection with the related
Conventional Mortgage Pass-Through Certificate) prior in right to all other
security interests therein created or perfected under the Uniform
Commercial Code (as in effect in the jurisdiction where the property is
located);
(c) in the case of mortgage notes covered by private mortgage
insurance, evidence that such mortgage notes are so insured; and
(d) a copy of the title insurance policy or an opinion or certificate
of counsel stating that the mortgage constitutes a first lien on the
premises described in such mortgage (which opinion or certificate may be
subject to exceptions for Permitted Tax Liens and other matters to which
like properties are commonly subject which neither individually nor in the
aggregate materially interfere with the benefits of the security interest
intended to be provided by such mortgage and standard exceptions and
exclusions from mortgage title insurance policies)
"Restricted Security" is a corporate debt obligation which (a) is a
"restricted security" as defined in Rule 144(a)(3) under the Securities Act or
any successor rule, law or interpretation; provided, however, that such meaning
shall not apply with respect to any corporate debt obligation if there exists
Registration Rights with respect to the issue of which such corporate debt
obligation is a part or (b) is subject to any further material condition to, or
restriction on, the ability of the Fund to sell, assign, transfer or otherwise
liquidate such corporate debt obligation in a commercially reasonable time and
manner or which would otherwise materially deprive the Fund of the benefits of
such corporate debt obligation intended to be provided hereunder; provided,
however, that, notwithstanding the foregoing limitations, any requirement of
registration or qualification applicable with respect to a corporate debt
obligation pursuant to federal and any applicable state or other securities laws
and any requirement of delivery of any certificate, consent, agreement,
approval, opinion of counsel, notice or any other document of any Person
reasonably necessary or appropriate in connection with the sale of such
corporate debt obligation pursuant to any exemption from registration or
qualification under federal and any applicable state or other securities laws
and/or the registration or qualification of such corporate debt obligation under
such federal and applicable state or other securities laws and the delivery of
any certificate or other document usual or customary in connection with the
transfer or registration of transfer of securities shall not be deemed to cause
such corporate debt obligations to be deemed a "Restricted Security" under the
foregoing clause (b).
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Shadow Rating" means the rating that would be assigned by Moody's or S&P
to the Preferred Stock if the Surety Bond were not in effect.
"Short Term Money Market Instruments" means the following kinds of
instruments, if on the date of purchase or other acquisition by the Fund of such
instrument the remaining term to maturity thereof is not more than 30 days:
(a) Demand Deposits, Insured Certificates of Deposit or Bankers'
Acceptances or Federal Funds sold to any depositary institution, the
deposits of which are insured by the FDIC or the FSLIC, provided that, at
the time of the Fund's investment therein or on any Valuation Date, the
commercial paper or other unsecured short-term debt obligations of such
depositary institution are rated as least "A-1+" by S&P and "P-1" by
Moody's;
(b) Repurchase Agreements; and
(c) Commercial Paper.
"S&P" means Standard & Poor's Corporation, a corporation organized and
existing under the laws of the State of Delaware, its successors and their
assigns, and, if such corporation shall for any reason no longer perform the
functions of a securities rating agency, "S&P" shall be deemed to refer to any
other nationally recognized rating agency designated by Financial Security.
"State" means the State of New York.
"Stated Termination Date" means December 5, 1993 or such later date as
indicated in an endorsement to the Surety Bond issued by Financial Security
extending the expiration date of the initial Surety Bond.
"Surety Assets Coverage Event of Default" means an Event of Default
specified in Section 5.01(d) hereof.
"Surety Assets Coverage" means, as of any date, the dollar amount equal to
(A) the sum of (i) 100% of the aggregate principal amount of the Notes then
outstanding; (ii) $100,250 times the number of shares of Preferred Stock then
outstanding; (iii) the aggregate amount of accrued interest on the Notes then
outstanding, plus an amount equal to 63 days' interest on such principal amount
of the Notes; (iv) the aggregate amount of accumulated but unpaid dividends with
respect to the Preferred Stock to such date, plus the Projected Dividend Amount
of the Preferred Stock then outstanding from such date until the sixty-third day
thereafter; (v) the aggregate principal amount of any then outstanding
indebtedness of the Fund for money borrowed (other than the Notes); and (vi) the
greater of $200,000 or the Fund's liabilities in existence as of such date to
the extent not otherwise reflected in any of (i) through (v) above, less (B) the
combined value of any Deposit Securities irrevocably deposited by the Fund with
the Trustee for the payment of principal of or interest on the Notes or with the
Paying Agent for redemptions of or dividend payments with respect to the
Preferred Stock.
"Surety Assets Coverage Report" means a Surety Assets Coverage Report
delivered pursuant to Section 2.02(c)(iv)(B) or Section 2.02(c)(iv)(D) hereof in
form attached hereto as Annex III.
"Surety Assets Value" means, with respect to any Eligible Portfolio
Property, the quotient of the Market Value of such Eligible Portfolio Property
divided by the applicable Discount Factor.
"Surety Bond" means the Surety Bond, including any endorsements thereto,
issued by Financial Security with respect to the Preferred Stock, substantially
in the form attached hereto as Annex I.
"Term of the Agreement" shall be determined as provided in Section 4.01 of
this Agreement.
"Transaction" means the issuance of the Preferred Stock, Common Stock and
Notes as described in the Prospectuses and the Registration Statement, the
issuance of the Surety Bond as described herein and the respective transactions
contemplated thereby.
"Trustee" means Shawmut Bank, N.A., a national banking association having
its principal place of business in Boston, Massachusetts, until a successor
replaces it pursuant to the Indenture and, thereafter, means the successor.
"Type I Corporate Bonds" as of any date means Corporate Bonds whose rating
is "AAA"/"Aaa" by the Rating Agencies as of such date.
"Type II Corporate Bonds" as of any date means Corporate Bonds whose rating
is "AA+"/"Aal" to "AA-"/"Aa3" by the Rating Agencies as of such date.
"Type III Corporate Bonds" as of any date means Corporate Bonds whose
rating is "A+"/"A1" to "A-"/"A3" by the Rating Agencies as of such date.
"Type IV Corporate Bonds" as of any date means Corporate Bonds whose rating
is "BBB+"/"Baal" to "BBB-"/"Ba3" by the Rating Agencies as of such date.
"Type V Corporate Bonds" as of any date means Corporate Bonds whose rating
is "BB+"/"Bal" to "BB-"/"Ba3" by the Rating Agencies as of such date.
"Type VI Corporate Bonds" as of any date means Corporate Bonds whose rating
is "B+"/"B1" to "B"/"B2" by the Rating Agencies as of such date.
"Type VII Corporate Bonds" as of any date means Corporate Bonds whose
rating is "B-"/"B3" by the Rating Agencies as of such date.
"Type VIII Corporate Bonds" as of any date means Corporate Bonds whose S&P
rating is "CCC+" as of such date and which are subordinated debt of the issuer
and the issuer of which has an implied senior debt rating of "B" or higher.
"Type IX Corporate Bonds" as of any date means Corporate Bonds whose S&P
rating is "CCC" as of such date and which are subordinated debt of the issuer
and the issuer of which has an implied senior debt rating of B or higher.
"Uniform Commercial Code" means the Uniform Commercial Code as in
effect in the relevant state, as the same may be amended from time to time.
"U.S. Government Securities" means a direct obligation of the United States
of America, provided that such direct obligation is entitled to the full faith
and credit of the United States and that any such obligation, other than a
United States Treasury bill, provides for the periodic payment of interest and
the full payment of principal at maturity or call for redemption.
"Valuation Date" means (a) the fifteenth day of each month, or if such day
is not a Business Day, the next succeeding Business Day and (b) the last
Business Day of such month and (c) the next Business Day following the Fund's
receipt of any written request from Financial Security that Surety Assets Value
be determined. For purposes of this definition, Business Day shall mean a day on
which the New York Stock Exchange is open for trading and which is not a day on
which banks in New York City or Boston, Massachusetts are authorized or
obligated by law or executive order to close.
"World Bank Securities" means securities issued by the International Bank
for Reconstruction and Development meeting the requirements of clauses (i), (ii)
and (iv) under the definition of Rated Public Corporate Bonds.
Generic Terms. All words used herein shall be construed to be of such
gender or number as the circumstances require. This "Agreement" shall mean this
Agreement as a whole and as the same may, from time to time hereafter, be
amended, supplemented or modified. The words "herein," "hereby," "hereof,"
"hereto," "hereinabove" and "hereinbelow," and words of similar import, refer to
this Agreement as a whole and not to any particular paragraph, clause or other
subdivision hereof, unless otherwise specifically noted.
<PAGE>
ANNEX I
FORM OF SURETY BOND
OBLIGOR: Prospect Street(SM) High Surety Bond No.: 50074-N
Income Portfolio Inc.
OBLIGATIONS: 300 Shares of Taxable Date of Issuance: December 5, 1988
Auction Rate Preferred Stock.
(Liquidation Preference $100,000 per Share)
FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), for consideration
received, hereby UNCONDITIONALLY AND IRREVOCABLY GUARANTEES to each Holder,
subject only to the terms of this Surety Bond (which includes Endorsement 1
hereto), the full and complete payment by the Obligor of Scheduled Payments on
the Obligations.
For the further protection of each Holder, Financial Security irrevocably
and unconditionally guarantees:
(a) payment of the amount of any payment of Scheduled Payments on the
Obligations made during the Term of this Surety Bond to such Holder that is
subsequently avoided in whole or in part as a preference payment under
applicable federal bankruptcy law (such payment to be made by Financial
Security in accordance with Endorsement 1 hereto); and
(b) payment of any amount required to be paid under this Surety Bond
by Financial Security following Financial Security's receipt of notice as
described in Endorsement 1 hereto.
Financial Security shall be subrogated to the rights of each Holder to
receive payments under the Obligations to the extent of any payment by Financial
Security hereunder.
Except to the extent expressly modified by Endorsement 1 hereto, the
following terms shall have the meanings specified for all purposes of this
Surety Bond. "Certificate" means the Obligor's Articles of Amendment and
Restatement as amended and in effect on the Date of Issuance and as subsequently
amended from time to time with the written consent of Financial Security.
"Insurance Agreement" means the Insurance Agreement between Financial Security
and the Obligor dated as of December 1, 1988. "Scheduled Payments" means (i)
payments of dividends on the Obligations which Holders of the Obligations would
be entitled to receive on each Dividend Payment Date as defined in the
Certificate during the Term of this Surety Bond in accordance with the terms of
the Certificate, without regard to whether the Obligor has declared any such
dividend or such dividend could have been legally declared by the Obligor, (ii)
payment of the redemption price of Obligations without regard to whether such
redemption could have been legally made by the Obligor (a) on the last date upon
which the Obligor was to have redeemed the Obligations as specified in a
Redemption Request pursuant to Section 5.02(b) of the Insurance Agreement in the
event Financial Security has notified the Custodian that such redemption is to
be a Scheduled Payment and (b) on the date upon which the Obligor is required to
redeem the Obligations as a mandatory redemption pursuant to Section 5(b)(i) of
Article IV C of the Certificate and (iii) payment of the liquidation preference
on the Obligations in the event of a liquidation of the Obligor during the Term
of this Surety Bond on the date fixed for payment of such liquidation preference
pursuant to the Certificate, provided that Financial Security shall have
consented to such liquidation. For the purposes of making Scheduled Payments
hereunder in the event of a liquidation of the Obligor to which Financial
Security has not consented in which only a portion of the liquidation preference
on the Obligations is paid, a portion of the liquidation preference shall be
deemed to remain outstanding and shall be secured by this Surety Bond as to all
Scheduled Payments without regard to whether the Obligor has any obligation with
respect thereto. "Term of this Surety Bond" shall have the meaning set forth in
Endorsement 1 hereto. "Notice of Redemption" shall mean the term as defined in
the Certificate. "Redemption Request" shall mean the term as defined in the
Insurance Agreement.
This Surety Bond sets forth in full the undertaking of Financial Security,
and shall not be modified, altered or affected by any other agreement or
instrument, including any modification or amendment thereto, or by the merger,
consolidation or dissolution of the Obligor. The premiums paid in respect of
this Surety Bond are nonrefundable for any reason, including payment, or
provision being made for payment, of the Obligations. This Surety Bond may not
be cancelled or revoked during the Term of this Surety Bond.
In Witness Whereof, FINANCIAL SECURITY ASSURANCE INC. has caused this
Surety Bond to be executed on its behalf by its Senior Vice President.
FINANCIAL SECURITY ASSURANCE INC.
By
------------------------------
Senior Vice President
<PAGE>
ENDORSEMENT NO. 1
TO SURETY BOND
FINANCIAL SECURITY ASSURANCE INC.
OBLIGOR: Prospect Street(SM) High Income Surety Bond No.: 50074-N
Portfolio Inc.
OBLIGATIONS: 300 Shares of Taxable Date of Issuance: December 5, 1988
Auction Rate Preferred Stock
(Liquidation Preference $100,000 per Share)
1. "Term of This Surety Bond." The phrase "Term of this Surety Bond" means
the period from and including the Date of Issuance to and including the earlier
of (i) the date on which the Obligations are paid in full, (ii) the date on
which all Scheduled Payments due on or prior to December 5, 1993 are paid in
full or (iii) the date on which the Surety Bond is delivered to Financial
Security pursuant to Section 3.03(e) of the Custody Agreement. This date may be
extended pursuant to the terms of the Insurance Agreement by means of an
endorsement to this Surety Bond.
2. "Paid in Full." For purposes of the first paragraph of this Endorsement,
any Obligation shall be "paid in full" when all Scheduled Payments (as defined
in the Surety Bond) have been paid and any period during which any such payment
could have been avoided in whole or in part as a preference payment under
applicable federal bankruptcy law shall have expired before any proceeding
requisite to such avoidance shall have been commenced.
3. "Holder." The term "Holder" as used in this Surety Bond means, with
respect to an Obligation, the person in whose name the Custody Receipt
evidencing such Obligation is registered on the registration books maintained by
the Custodian pursuant to the Custody Agreement but shall not include the Fund
or any affiliates or successors thereof.
4. "Obligations." The term "Obligations" as used in this Surety Bond means
the obligations identified on the face of the Surety Bond following the heading
"OBLIGATIONS" and held by the Custodian pursuant to the Custody Agreement. The
number of shares of preferred stock included in the Obligations may be increased
by means of an endorsement to this Surety Bond.
5. "Business Day." The term "Business Day," as used in this Surety Bond,
means a day on which banks are not authorized or required by law to be closed in
either the city in which the principal office of Financial Security is located
or the city in which the principal office of the Custodian is located.
6. The term "Custodian," as used in this Surety Bond, means Bankers Trust
Company, as Custodian pursuant to the Custody Agreement or any successor thereto
with respect to the Custody Receipts.
7. The term "Custody Agreement," as used in this Surety Bond, means the
Custody Agreement dated as of December 1, 1988 between the Custodian and
Financial Security as amended or supplemented from time to time.
8. The term "Custody Receipt," as used in this Surety Bond, means a receipt
issued by the Custodian pursuant to the Custody Agreement evidencing beneficial
ownership of an Obligation or Obligations.
9. Notices and Conditions to Payment in Respect of Scheduled Payments.
Financial Security will pay any amount payable hereunder in respect of Scheduled
Payments on the later to occur of (a) the second Business Day following receipt
on a Business Day by Financial Security of a notice and certificate from the
Custodian in the form set forth as Exhibit A to this Endorsement and (b) the
date on which such Scheduled Payment was due (or, if such day is not a Business
Day, then on the next succeeding Business Day). Payments due hereunder in
respect of Scheduled Payments will be disbursed by Financial Security to the
Custodian by wire transfer of immediately available funds. If any notice given
hereunder is not in materially proper form or is otherwise insufficient for the
purpose of making claim hereunder, it shall be deemed not to have been received
for purposes of this paragraph, and Financial Security or the Fiscal Agent, as
defined below, shall promptly so advise the Custodian, and the Custodian may
submit an amended notice. Financial Security's obligations hereunder in respect
of Scheduled Payments shall be discharged to the extent funds are transferred to
the Custodian as provided herein whether or not such funds are properly applied
by the Custodian; provided, however, that Financial Security shall act promptly,
reasonably and in good faith in obtaining from the Custodian, acting as
attorney-in-fact for the Holders, or from other Holders, as necessary, the
certificates and instrument of assignment required to be delivered to Financial
Security as contemplated herein and in the Custody Agreement as a condition to
the Custodian's release to Holders of funds drawn under the Surety Bond.
10. Notices and Conditions to Payment of Preferences. If payment of any
Scheduled Payment avoided in whole or in part as a preference payment under
applicable federal bankruptcy law is required to be made under the Surety Bond,
Financial Security will disburse such payment when due to be paid pursuant to
the Order referred to below and in any event no earlier than the first to occur
of (a) the fourth Business Day following receipt by Financial Security from the
Custodian of (i) a certified copy of the order of the court which exercised
jurisdiction to the effect that the Holder is required to return a payment of
redemption price, liquidation preference or dividend constituting a Scheduled
Payment and paid on the Obligation during the Term of this Surety Bond because
such payment was an avoidable preference under applicable federal bankruptcy law
(the "Order"), (ii) a certificate of the Holder that the Order has been entered
and is not subject to any stay and (iii) an assignment duly executed and
delivered by the Holder, in such form as is reasonably required by Financial
Security and provided to the Holder by Financial Security or the Custodian,
irrevocably assigning to Financial Security all rights and claims of the Holder
relating to or arising under the Obligation against the estate of Obligor or
otherwise (provided that if such certified copy, certificate and assignment are
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, Financial Security shall make such payment on the
fifth Business Day following such date), and (b) the date of receipt by
Financial Security from the Custodian of the items referred to in clauses (i),
(ii) and (iii) above if, at least four Business Days prior to such date of
receipt, Financial Security shall have received written notice from the
Custodian that such items were to be delivered on such date of receipt and such
date of receipt was specified in such notice (provided that if such notice is
received on a day that is not a Business Day or after 12:00 noon, New York City
time, on any Business Day, such notice shall be deemed to have been received on
the next succeeding Business Day). Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession, trustee in bankruptcy or other
person named in the Order and not to the Custodian or any Holder directly unless
the Custodian or such Holder has been required previously to disgorge all or
part of such payment, as demonstrated to the satisfaction of Financial Security,
in which event such payment shall to such extent be paid directly to the
Custodian or the Holder, as the case may be. In connection with the foregoing,
Financial Security shall have the rights provided pursuant to Section 3.09 of
the Custody Agreement.
12. Governing Law. The Surety Bond is being issued under and pursuant to,
and shall be construed under and governed by, the laws of the State of New York.
13. Fiscal Agent. At any time during the Term of this Surety Bond,
Financial Security may appoint a fiscal agent (the "Fiscal Agent") for purposes
of this Surety Bond by written notice to the Custodian specifying the name and
notice address of the Fiscal Agent. From and after the date of receipt of such
notice by the Custodian, (i) copies of all notices and documents required to be
delivered to Financial Security pursuant to this Surety Bond shall be
simultaneously delivered to the Fiscal Agent and to Financial Security and shall
not be deemed received until received by both and (ii) all payments required to
be made by Financial Security under this Surety Bond may be made directly by
Financial Security or by the Fiscal Agent on behalf of Financial Security. The
Fiscal Agent is the agent of Financial Security only and the Fiscal Agent shall
in no event be liable to Holders for any acts of the Fiscal Agent or any failure
of Financial Security to deposit, or cause to be deposited, sufficient funds to
make payments due under the Surety Bond.
14. Waiver of Defenses. To the fullest extent permitted by applicable law,
Financial Security agrees not to assert, and hereby waives, for the benefit of
each Holder, all rights (whether by counterclaim, setoff or otherwise) and
defenses (including the defense of fraud, including fraud in the inducement),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to Financial Security to avoid payment
of its obligations under this Surety Bond in accordance with the express
provisions of this Surety Bond.
15. Increase in Coverage. Financial Security may, by endorsement to this
Surety Bond, increase the number of shares of Obligations to be covered by this
Surety Bond.
IN WITNESS WHEREOF, FINANCIAL SECURITY ASSURANCE INC. has caused this
Endorsement No. 1 to be executed by its Senior Vice President.
FINANCIAL SECURITY ASSURANCE INC.
By
------------------------------
Senior Vice President
<PAGE>
Exhibit A
To Endorsement No. 1
NOTICE FOR PAYMENT
UNDER THE SURETY BOND
Financial Security Assurance Inc.
350 Park Avenue
New York, NY 10022
The undersigned, a duly authorized officer of Bankers Trust Company
(the "Custodian"), hereby certifies to Financial Security Assurance Inc.
("Financial Security"), with reference to Surety Bond No. 50074-N dated
December 5, 1988 (the "Surety Bond") issued by Financial Security in respect
of shares of Taxable Auction Rate Preferred Stock (Liquidation Preference
$100,000 per share) issued by Prospect Street(SM) High Income Portfolio Inc.
(the "Obligations"), that:
(i) the Custodian is the Custodian under the Custody Agreement dated
as of December 1, 1988 between the Surety and the Custodian, as amended or
supplemented from time to time;
(ii) either (a) the Custodian has not received by [insert due date of
Scheduled Payment] the full amount of the Scheduled Payment on the
Obligations due on such date and has been notified by the Paying Agent for
the Obligations (the "Paying Agent") that it will not receive such payment
or (b) the Custodian has been notified by the Paying Agent, prior to the
due date, that the Custodian will not receive the full amount of such
Scheduled Payment due on such date, and the additional amount necessary for
the Custodian to have an amount equal to the Scheduled Payment is (the
"Shortfall");
(iii) the Custodian is making a claim under the Surety Bond for the
Shortfall to be applied to the payment of the Scheduled Payment referred to
in (ii) above;
(iv) the Custodian (or its nominee or its agent's nominee) is the
registered owner of the Obligations and holds evidence of the Custodian's
right to receive payment of the Scheduled Payment and, upon delivery of the
appropriate instruments of assignment from Holders pursuant to (v) hereof,
will assign to Financial Security the Custodian's rights as registered
owner with respect to the Obligations to the same extent as provided in
such instruments of assignment from the Holders, such assignment to be
contingent upon Financial Security's continued performance of its
obligations under the Surety Bond; provided, however, that any assignment
of rights with respect to Shortfalls which have been paid by Financial
Security shall continue until such amounts have been recovered by Financial
Security; and
(v) the Custodian shall as to each Holder for whom the Custodian shall
act as attorney-in-fact pursuant to Section 3.03(b) of the Custody
Agreement, present to Financial Security (x) appropriate instruments of
assignment in a form satisfactory to and provided by Financial Security to
the effect provided in Section 3.03(b) of the Custody Agreement and (y)
appropriate instruments in a form satisfactory to and provided by Financial
Security to effect the appointment of Financial Security as agent for such
Holder to the extent set forth in the Surety Bond and in the Custody
Agreement in any legal proceeding with respect to the Obligations including
specifically the right to vote with respect to the Obligations.
Upon such disbursement, Financial Security shall be subrogated to the
extent of any payments made by it pursuant to the Surety Bond to all of the
Custodian's rights and the rights of the Holders with respect to the
Scheduled Payment to which such disbursement relates.
Any capitalized term used in this Notice for Payment under the Surety Bond
and not defined herein shall have the meaning assigned thereto in the Surety
Bond.
<PAGE>
IN WITNESS WHEREOF, the Custodian has executed and delivered this Notice
for Payment under the Surety Bond as of the day of , .
_________________________________
By __________________________
Title __________________________
For Fiscal Agent Use Only
Wire transfer sent on ________________________by ______________________________
Confirmation Number ____________________________________-
<PAGE>
ANNEX II
FORM OF SURETY ASSETS COVERAGE REPORT
Valuation as of , 19 ("Valuation Date")
This Surety Assets Coverage Report is delivered pursuant to [Section
2.02(iv)(B)] or [Section 2.02(iv)(D)] of that certain Insurance Agreement dated
as of December 1, 1988 (the "Agreement") between Financial Security Assurance
Inc. ("Financial Security") and Prospect Street(SM) High Income Portfolio Inc.
(the "Fund"). Capitalized terms used herein that are not otherwise defined shall
have the meanings ascribed thereto in the Agreement Calculations of the Surety
Assets Value of Eligible Portfolio Property are based on such principal amounts
as of the Valuation Date. The undersigned, acting as a duly authorized
representative of the Fund, does hereby certify as follows:
(i) the Fund has calculated the Market Value of each item included as
Eligible Portfolio Property as of the Valuation Date, with the related
calculations being set forth in the attached report which schedule sets
forth separately the principal balance of each such item (each of which has
been determined pursuant to the definition of Market Value) and the
Discount Factor applied thereto (determined by the Fund in accordance with
the applicable definition of "Discount Factor");
(ii) the Fund has calculated the Discounted Value of each item of the
Eligible Portfolio Property as of the Valuation Date, the results of such
calculations being set forth in Schedule I attached hereto;
(iii) the Fund has calculated the Surety Assets Coverage as of the
Valuation Date, such calculation being set forth in the attached schedule;
(iv) the Fund has totaled the Surety Assets Values for all items
included as Eligible Portfolio Property, such total being set forth in the
attached schedule;
(v) the aggregate amount referred to in clause (iv) above is equal to
or in excess of the amount referred to in clause (iii) above, and
therefore, the Surety Assets Coverage has been met, or, in the event the
aggregate amount referred to in clause (v) above is less than the amount
referred to in clause (iv) above, set forth below is a statement to such
effect and the amount of any such deficiency;
(vi) as of , each item of the Eligible Portfolio Property
as set forth in Schedule I attached hereto, is Eligible Portfolio
Property and each such item of the Eligible Portfolio Property set forth in
Schedule I attached hereto conforms in all material respects to the
definition of such item contained in the Eligible Portfolio Property;
(vii) as of the Valuation Date, Deposit Securities are required by
Section 2.04(c) or 2.04(f) of the Agreement in the amount of $
and are identified in Schedule I hereto; and
(viii) as of the Valuation Date, the Fund knows of no Event of Default
or Default which has occurred. IN WITNESS WHEREOF, I have hereunto signed
my name this day of , 19.
______________________________________
Authorized Officer
<PAGE>
ANNEX III
LETTER REVIEWING SURETY ASSETS COVERAGE REPORT
A letter reviewing the Surety Assets Coverage Report, as required to be
delivered by the Insurance Agreement (the "Agreement") dated as of December 1,
1988, between Financial Security Assurance Inc. and Prospect Street(SM) High
Income Portfolio Inc. (terms used herein and not defined shall have the meaning
set forth in the Agreement), shall be prepared by the independent public
accountants of the Fund, shall be addressed to the Fund and shall be
substantially to the effect that:
(i) the independent public accountants have read the Surety Assets
Coverage Report for the current Valuation Date (the "Report");
(ii) with respect to the issue size compliance, issuer diversification
and industry diversification calculations, such calculations and the
resulting eligible portfolio market value and discounted eligible portfolio
market value calculations are numerically correct;
(iii) with respect to the Surety Assets Coverage calculation, such
calculation has been compared with the definition of Surety Assets Coverage
in the Insurance Agreement and is calculated in accordance with such
definition, and the results of such calculation have been recalculated and
are numerically correct;
(iv) with respect to the S&P's rating on Corporate Bonds, issuer name,
issue size and coupon rate listed in the Report, that information has been
traced and agrees with the information listed in The Standard & Poor's Bond
Guide (in the event such information does not agree or such information is
not listed in The Standard & Poor's Bond Guide, the independent accountants
will inquire of S&P's what such information is, and provide a listing in
their letter of such differences, if any);
(v) with respect to the Moody's rating on Corporate Bonds, issuer
name, issue size and coupon rate listed in the Report, that information has
been traced and agrees with the information listed in the Moody's Bond
Survey (in the event such information does not agree or such information is
not listed in Moody's Bond Survey, the independent accountants will inquire
of Moody's what such information is, and provide a listing in their letter
of such differences, if any);
(vi) with respect to the lower of two bid prices (or alternative
permissible factors used in calculating the Market Value as provided in the
Agreement) provided by to the Fund for purposes of
valuing securities in the portfolio, the independent public accountants
have traced the price used in the Report to the lower of the two bid prices
listed in the report provided by and verified that
such information agrees with the bid prices contained in the report (in the
event such information does not agree, the independent public accountants
will provide a listing in their letter of such differences); and
(vii) with respect to the description of each security included in the
Report, the description of Eligible Portfolio Property has been compared to
the definition of Eligible Portfolio Property contained in the Agreement,
and the description as appearing in the Report agrees with the definition
of Eligible Portfolio Property as described in the Agreement.
Each such letter may state that: such independent public accountants have
made no independent verification of the accuracy of the description of the
investment securities listed in the Report or the market value of those
securities nor have they performed any procedures other than those specifically
outlined above for the purposes of issuing such letter; unless otherwise stated
in the letter, the procedures specified therein were limited to a comparison of
numbers or a verification of specified computations applicable to numbers
appearing in the Report and the schedule(s) thereto; the foregoing procedures do
not constitute an examination in accordance with generally accepted auditing
standards and the Report contained in the letter does not extend to any of the
Fund's financial statements taken as a whole; such independent accountants do
not express an opinion as to whether such procedures would enable such
independent accountants to determine that the methods followed in the
preparation of the Report would correctly determine the Market Value or Surety
Assets Value of the investment portfolio; accordingly, such independent
accountants express no opinion as to the information set forth in the Report or
in the schedule(s) thereto and make no representations as to the sufficiency of
the procedures performed for the purposes of the Agreement.
Such letter shall also state that the accountants are "independent public
accountants" with respect to the Fund within the meaning of Rule 101 of the
Rules of Conduct of the American Institute of Certified Public Accountants.
EXHIBIT (K)(5)(B)
AMENDMENT NO. 1
to
INSURANCE AGREEMENT
between
FINANCIAL SECURITY ASSURANCE INC.
and
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
AMENDMENT NO. 1 dated as of March 14, 1990, to the Insurance
Agreement dated as of December 1, 1988 (the "Insurance Agreement"),
between FINANCIAL SECURITY ASSURANCE INC., a New York stock insurance
company ("Financial Security"), and PROSPECT STREET HIGH INCOME
PORTFOLIO INC., a Maryland corporation (the "Fund").
WITNESSETH:
WHEREAS, the fund has issued 300 shares of its Preferred Stock, with an
aggregate Liquidation Preference of $30,000,000;
WHEREAS, Financial Security, at the request of the Fund, has issued its
Surety Bond No. 50074-N guarantying, upon the terms provided therein, payment of
dividends on, and redemption or liquidation preference amounts in respect of,
the Preferred Stock; and
WHEREAS, the Fund and Financial Security desire to amend the Insurance
Agreement to provide for a redemption or repurchase of the Preferred Stock by
the Fund in the event of a failed auction upon the terms specified herein;
NOW, THEREFORE, in consideration of the premises and of other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, Financial Security and the Fund hereby agree as follows:
1. Amendment to Appendix I to the Insurance Agreement. Appendix
I to the Insurance Agreement is amended by the addition of the following
immediately following the first sentence thereof:
"Applicable Rate:, "Auction Date", "Dividend Payment date", "Dividend
Period", "Maximum Applicable Rate' and "Sufficient Clearing Bids" shall
have the meanings provided in the Certificate.
2. Amendment to Section 2.04 of the Insurance Agreement.
Section 2.04 of the Insurance Agreement is hereby amended by the addition
of the following paragraph immediately following Section 2.04 (1):
(j) The Fund agrees for the benefit of the Holders to call for
redemption or to repurchase all outstanding shares of the Preferred
Stock in the event that the Applicable Rate for the Dividend Period
next succeeding the Auction Date in September 1993 is determined to be
the Maximum Applicable Rate due to a lack of Sufficient Clearing Bids,
with such redemption or repurchase to be completed no later than the
second Dividend Payment Date succeeding such Auction Date. Upon the
completion of such redemption or repurchase, the Fund agrees to
surrender, or cause to be surrendered, the Surety Bond to Financial
Security for cancellation.
3. Amendment to Section 5.01 of the Insurance Agreement.
Section 5.01 of the Insurance Agreement is hereby amended by deleting
paragraph (a) thereof and inserting, in lieu thereof, the following:
(a) the Fund shall fail to pay to Financial Security when due
any amount payable by the Fund hereunder or under any other Fund
Document or shall fail to effect a redemption or repurchase of all
outstanding shares of the Preferred Stock in the time period required
by Section 2.04(j) hereof.
4. Redemption Request. If an Event of default has occurred as a result
of failure by the Fund to perform its obligations under Section f2.04(j) of the
Insurance Agreement, Financial Security intends to submit a Redemption Request
pursuant to section 5.02(b) of the Insurance Agreement requesting the Fund to
redeem all outstanding shares of Preferred stock, designating a date for such
redemption no later than the second Dividend Payment Date following the date of
delivery of such Redemption Request to the Fund.
5. Miscellaneous. Unless the context otherwise requires,
capitalized terms used herein shall have the meanings provided in the
Insurance Agreement. Except as expressly amended hereby, the Insurance
Agreement shall remain in full force and effect, and all references in the
Insurance Agreement to "this Agreement" or to "the Insurance Agreement"
shall mean the Insurance Agreement as amended by this Amendment No. 1.
This amendment No. 1 may be executed in counterparts by the parties
hereto, and each such counterpart shall be deemed an original and all such
counterparts shall constitute one and the same instrument. This Amendment
No. 1 shall be governed by and construed in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
AMENDMENT NO. 1, all as of the day and year first above written.
FINANCIAL SECURITY ASSURANCE INC.
By /S/ Illegible
-----------------------------
Managing Director
PROSPECT STREET HIGH INCOME
PORTFOLIO, INC.
By /S/ John A. Frabotta
-----------------------------
Title: Vice President
<PAGE>
EXHIBIT (K)(6)
- -------------------------------------------------------------------------------
CUSTODY AGREEMENT
Between
BANKERS TRUST COMPANY,
as Custodian
and
FINANCIAL SECURITY ASSURANCE INC.
Dated as of December l, 1988
- -------------------------------------------------------------------------------
4636f
<PAGE>
TABLE OF CONTENTS
Page
PREAMBLE ....................................................................1
ARTICLE I
DEFINITIONS .................................................................2
ARTICLE II
CUSTODY ACCOUNT AND CUSTODY RECEIPTS
SECTION 2.01. Creation of Custody Account ...................................4
SECTION 2.02. Custody Receipts ..............................................5
SECTION 2.03. Delivery of Custody Receipts ..................................5
SECTION 2.04. Mutilated, Lost, Stolen or Destroyed Custody Receipts .........6
SECTION 2.05. Registration and Transfer of Ownership; Persons Treated
as Owners .....................................................7
SECTION 2.06. Deposits With Depository ......................................9
ARTICLE III
ADMINISTRATION OF CUSTODY ACCOUN
SECTION 3.01. Payments of Redemption Price, Liquidation Preference and
Dividends on Preferred Stock .................................10
SECTION 3.02. Notices ......................................................11
SECTION 3.03. Duties With Respect to Surety Bond ...........................11
SECTION 3.04. Defaults by Fund .............................................14
SECTION 3.05. Unclaimed Moneys .............................................16
SECTION 3.06. Obligation of Owners With Respect to Certain Taxes and
Filings ......................................................16
SECTION 3.07. Transfers of Surety Bond or Preferred Stock by Custodian .....16
SECTION 3.08. Termination of Custody Account ...............................16
SECTION 3.09. Insolvency Proceedings .......................................17
<PAGE>
ARTICLE IV
THE CUSTODIAN
SECTION 4.01. Standard of Liability ........................................18
SECTION 4.02. Resignation and Removal of the Custodian; Appointment
of Successor .................................................18
SECTION 4.03. Charges and Expenses .........................................19
ARTICLE V
MISCELLANEOUS
SECTION 5.01. Amendments, Etc. .............................................20
SECTION 5.02. Counterparts .................................................21
SECTION 5.03. Exclusive Benefit of Parties; Effective Date .................21
SECTION 5.04. Invalidity of Provisions .....................................21
SECTION 5.05. Notices ......................................................21
SECTION 5.06. Business Day .................................................22
SECTION 5.07. Governing Law ................................................22
SECTION 5.08. Shareholder Rights ...........................................22
SECTION 5.09. Headings .....................................................22
SIGNATURES .................................................................22
EXHIBIT 1 - Form of Custody Receipt
EXHIBIT 2 - Form of Opinion of Counsel of Issuer of Surety Bond
<PAGE>
CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT dated as of December 1, 1988 is being executed
by BANKERS TRUST COMPANY, a New York banking corporation, as custodian (the
"Custodian"), and FINANCIAL SECURITY ASSURANCE INC., a New York stock insurance
company ("Financial Security"), for the benefit of the Owners from time to time
of Custody Receipts. (All capitalized terms used herein and not otherwise
defined shall have the meaning set forth in Article I hereof.)
WHEREAS, Financial Security and the Custodian desire to enter into this
Custody Agreement to provide for the issuance from time to time of Custody
Receipts, each such Custody Receipt to evidence (i) the Owner's beneficial
ownership of the share or shares of Preferred Stock indicated on the Custody
Receipts Register, and (ii) the Owner's rights with respect to such Custody
Receipt under this Custody Agreement and under the Surety Bond; and
WHEREAS, the parties hereto desire to establish the terms pursuant to
which the Surety Bond and the Preferred Stock are deposited with, and held in
custody by, the Custodian, the terms and conditions for the issuance, transfer
and exchange of Custody Receipts and the terms for the payment of certain fees
and expenses associated with this Custody Agreement; and
WHEREAS, the Preferred Stock represents an indirect ownership interest
in certain securities and other assets held in trust on behalf of the Fund, and
dividends, the redemption price and any liquidation preference with respect to
the Preferred Stock are payable in accordance with the Certificate from assets
owned by the Fund and the earnings therefrom; and
WHEREAS, upon any payment by Financial Security under the Surety Bond,
Financial Security will receive certain rights with respect to the Preferred
Stock which is held in trust by the Custodian for such purpose;
NOW, THEREFORE, the parties hereto do hereby agree, for the benefit of
the Owners from time to time of Custody Receipts, as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used in this Custody Agreement shall have the
meanings provided in this Article I, in both singular and plural form, as
appropriate.
"Authorized Officer" means any officer or officers of the Custodian
designated as such by the Custodian in a written notice delivered by the
Custodian to Financial Security.
"Business Day" means a day on which banks are not authorized or
required by law to be closed in either the city in which the principal office of
Financial Security is located or the city in which the principal office of the
Custodian is located.
"Certificate" means the Fund's Articles of Amendment and Restatement,
as in effect on the date hereof and as subsequently amended from time to time.
"Custodian" means Bankers Trust Company, a New York banking
corporation, or any successor Custodian hereunder.
"Custody Accounts" means the account established and maintained
pursuant to Section 2.01 of this Custody Agreement.
"Custody Agreement" means this Custody Agreement, as amended or
supplemented from time to time.
"Custody Receipt" means a receipt substantially in the form set forth
in Exhibit 1 hereto and executed and delivered pursuant to Sections 2.02 and
2.03 of this Custody Agreement.
"Custody Receipts Register" means the records maintained by the
Custodian pursuant to Section 2.05 of this Custody Agreement.
"Depository" means The Depository Trust Company or any successor
thereto.
"Financial Security" means Financial Security Assurance Inc., a New
York stock insurance company, or any successor thereto, and the issuer of any
Qualified Surety Bond.
"Fund" means Prospect StreetSm High Income Portfolio Inc., a Maryland
corporation, and its successors and assigns.
"Holder" has the meaning specified in the Certificate.
"Insolvency Proceeding" means any of the events or proceedings
described in Section 5.01(g) of the Insurance Agreement.
"Insurance Agreement" means the Insurance Agreement dated as of
December 1, 1988 between Financial Security and the Fund, as amended or
supplemented from time to time.
"Mail" means mail by first-class postage to specified Owners at their
addresses set forth in the Custody Receipts Register.
"Moody's" means Moody's Investors Service, Inc., a corporation
organized and existing under the laws of the State of Delaware, or any successor
thereto until such corporation or successor no longer rates the Preferred Stock.
"Notice of Transfer or Exchange" means the Notice of Transfer or
Exchange printed on a Custody Receipt.
"Owner" means, with respect to a Custody Receipt, the person in whose
name such Custody Receipt is registered on the Custody Receipts Register.
"Paying Agent" means Bankers Trust Company and the successors or any
other paying agent appointed by the Fund to perform the functions performed by
the Paying Agent under the Certificate.
"Preferred Stock" means the Taxable Auction Rate Preferred Stock (No
Par Value) (Liquidation Preference $100,000 per Share) of the Fund covered by
the Surety Bond.
"Principal Office" means 4 Albany Street, Corporate Trust and Agency
Group, New York, New York 10006, or such other office designated as such by the
Custodian in a written notice delivered by the Custodian to Financial Security
and the Fund.
"Qualified Surety Bond" means any surety bond substantially in the
form of the Surety Bond issued by an entity having a claims-paying ability
rating by Moody's and S&P no lower than that of Financial Security.
"Record Date" means, with respect to a Scheduled Payment on the
Preferred Stock, any record date established for such Scheduled Payment pursuant
to applicable law.
"Scheduled Payment" has the meaning specified in the Surety Bond.
"S&P" means Standard and Poor's Corporation, a corporation organized
and existing under the laws of the State of New York, or any successor thereto,
until such corporation or successor no longer rates the Preferred Stock.
"Stock Books" means the stock transfer books of the Fund maintained by
the Paying Agent with respect to the Preferred Stock.
"Surety Bond" means the Surety Bond delivered by Financial Security to
the Custodian pursuant to, and substantially in the form set forth in, the
Insurance Agreement and held by the Custodian in the Custody Account and any
Qualified Surety Bond.
"Surety Bond Expiration Date" means the later of (i) [ ],
1993 and (ii) any date to which the Surety Bond shall have been extended as
confirmed in an endorsement to the Surety Bond delivered by Financial Security
to the Custodian.
<PAGE>
ARTICLE II
CUSTODY ACCOUNT AND CUSTODY RECEIPTS
Section 2.01. Creation of Custody Account. The Custodian shall
establish and maintain a separate Custody Account to be designated "Prospect
Street(SM) High Income Portfolio Inc. Taxable Auction Rate Preferred Stock
Custody Account." The Custodian shall deposit into such Custody Account the
Preferred Stock, the Surety Bond and any moneys received in connection
therewith. The Preferred Stock shall at all times be registered in the name of
the Custodian (or its nominee or its agent's nominee) on the Stock Books. The
Custody Account shall at all times be maintained as a custodial account for the
benefit of the Owners, separated and segregated from all other accounts, funds
and property in the possession of the bank or trust company acting as Custodian.
The Preferred Stock, the Surety Bond and any moneys held in the Custody Account
shall not at any time be commingled with any other assets or property held by
the Custodian. The Custodian shall maintain separate records in connection with
any moneys which it may hold, in such Custody Account or otherwise, in
connection with the Preferred Stock and the Surety Bond. To the extent
practicable, the Custodian shall arrange for payments of dividends on Preferred
Stock to be transferred by wire in immediately available funds to the Custodian.
The Preferred Stock physically held by the Custodian shall be represented by one
certificate. Without limitation of the foregoing, the Preferred Stock shall be
held in trust by the Custodian to secure the rights of Financial Security
provided in Section 3.03 of this Agreement.
Section 2.02. Custody Receipts. The Custodian shall issue the initial
Custody Receipts in the form of one Custody Receipt to the Depository, who shall
hold such certificate for the beneficial owners of the Preferred Stock until
such time as the Fund determines that such beneficial owners should receive
certificated Custody Receipts in which event the Custodian shall issue, transfer
and exchange Custody Receipts as required in appropriate amounts as indicated by
the Depository, each such Custody Receipt to evidence beneficial ownership by
the Owner named therein of the Preferred Stock represented thereby (as set forth
in the Custody Receipt Register) and the rights relating to such Custody Receipt
under this Custody Agreement and the Surety Bond. Custody Receipts shall be
substantially in the form set forth in Exhibit 1 hereto and shall be assigned
consecutive registration numbers from CR-1. Each Custody Receipt shall be
executed by the Custodian by the manual signature of an Authorized Officer and
no Custody Receipt shall be entitled to any benefits under this Custody
Agreement, or be valid or obligatory for any purpose, unless so executed by the
Custodian. In case any Authorized Officer whose signature shall appear on any
Custody Receipt shall cease to be an Authorized Officer, such signature shall
nevertheless be valid and sufficient for all purposes as if such person had
remained in office. The Custody Receipts shall not evidence any financial
obligation of the Custodian except that the Custodian shall be required, as
provided in Section 3.01 hereof, to apply all payments received in respect of
the Preferred Stock deposited hereunder to the Custody Receipts evidencing
ownership of such Preferred Stock without making any deduction whatsoever, other
than as explicitly provided in this Custody Agreement.
Section 2.03. Delivery of Custody Receipts. The Custodian shall
deliver the initial Custody Receipt as specified in Section 2.02 hereof, upon
receipt by the Custodian of the following:
(a) the original Surety Bond;
(b) a certificate representing [ ] shares of the Preferred
Stock registered in the name of the Custodian (or its nominee or its
agent's nominee) or endorsed by the registered owner thereof for
transfer to the Custodian (or its nominee or its agent's nominee) or
in blank;
(c) an opinion of counsel to Financial Security in
substantially the form set forth in Exhibit 2 hereto;
(d) a list of the names, addresses and, unless not required
to be obtained under applicable laws and regulations, taxpayer
identification numbers of the persons in whose names, and the number
of shares in which, such Custody Receipts are to be registered; and
(e) a certified copy of the Certificate.
The Custodian may accept additional shares of the Preferred Stock for
deposit in the Custody Account and deliver an initial Custody Receipt as
specified in Section 2.02 hereof upon receipt of the following:
(a) an endorsement to the Surety Bond increasing the coverage
of the Surety Bond to cover such additional shares of Preferred Stock;
(b) a certificate representing such additional shares of the
Preferred Stock registered in the name of the Custodian (or its
nominee or its agent's nominee) or endorsed by the registered owner
thereof for transfer to the Custodian (or its nominee or its agent's
nominee) or in blank;
(c) an opinion of counsel to Financial Security in
substantially the form set forth in Exhibit 2 hereto; and
(d) a list of the names, addresses and, unless not required
to be obtained under applicable laws and regulations, taxpayer
identification numbers of the persons in whose names, and the number
of shares in which, such Custody Receipts are to be registered.
The initial Custody Receipts to be executed and delivered by the
Custodian as provided in this Section 2.03 shall be delivered to or upon the
order of the Depository at a location specified by the Depository and agreed
upon by the Custodian. Such delivery shall be made on the date that the
Preferred Stock is delivered to the Custodian as provided in paragraph (b) of
this Section 2.03.
Section 2.04. Mutilated, Lost, Stolen or Destroyed Custody Receipts.
In the event a Custody Receipt is mutilated, lost, stolen or destroyed, the
Custodian shall execute and deliver in lieu thereof a new Custody Receipt,
provided that:
(a) in the case of any mutilated Custody Receipt, such
mutilated Custody Receipt shall be first surrendered to the Custodian;
and
(b) in the case of any lost, stolen or destroyed Custody
Receipt, there shall first be delivered to the Custodian evidence of
such loss, theft or destruction satisfactory to the Custodian and
Financial Security, together with indemnity satisfactory to each of
them, and neither Financial Security nor the Custodian shall have
received notice that such Custody Receipt has been acquired by a bona
fide purchaser.
In the event that any such mutilated, lost, stolen or destroyed Custody Receipt
evidences one or more shares of Preferred Stock that have been called for
redemption, the Custodian in its discretion may, if the conditions set forth in
clause (a) or (b), as applicable, have been satisfied, instead of issuing a new
Custody Receipt, remit the amount received on behalf of the Owner of such
mutilated, lost, stolen or destroyed Custody Receipt in connection with such
redemption or payment without surrender of the Custody Receipt otherwise
required by Section 3.01 hereof. All replacement Custody Receipts issued
pursuant to this Section shall be entitled to the full benefits hereunder,
whether or not, in the case of clause (b), any lost, stolen or destroyed
Custody Receipt shall be found at any time.
Section 2.05. Registration and Transfer of Ownership; Persons Treated
as Owners.
(a) The Custodian shall maintain a Custody Receipts Register
for the Custody Receipts at the Custodian's Principal Office to
provide for the registration of the Custody Receipts and the
registration of transfers of the Custody Receipts entitled to be
registered or transferred as herein provided. The Custody Receipts
Register may, at reasonable times and under reasonable regulations
established by the Custodian, be inspected and copied by Financial
Security (or its designee), the Fund or by a designated representative
of Owners of Custody Receipts evidencing more than 25% of the
outstanding shares of the Preferred Stock. The Custodian shall
maintain on the Custody Receipts Register, with respect to each such
Custody Receipt, (i) the name, address and, unless not required to be
maintained under applicable laws and regulations, taxpayer
identification number of the Owner of such Custody Receipt, (ii) the
registration number of such Custody Receipt, (iii) the liquidation
preference amount or amounts and registered number or numbers, if
available, of the Preferred Stock evidenced by such Custody Receipt
and (iv) such other information as the Custodian may deem necessary or
appropriate for the performance of its duties hereunder.
(b) The initial Custody Receipt shall be recorded on the
Custody Receipts Register in the name of Cede & Co. Thereafter, the
Custody Receipts may be transferred only on the Custody Receipts
Register. Upon surrender for transfer of any Custody Receipt to the
Custodian at its Principal Office, with the Notice of Transfer or
Exchange for such Custody Receipt fully completed, the Custodian shall
(i) execute and deliver to the transferee or transferees named in such
Notice at the address or addresses thereof set forth in such Notice a
new Custody Receipt or Receipts representing such aggregate number of
shares of Preferred Stock equal to the portion of the surrendered
Custody Receipt so transferred, registered in the name or names of
such transferee or transferees, provided that the conditions of the
Certificate with respect to beneficial owners of the Preferred Stock
are fulfilled and (ii) execute and deliver to the Owner of the
surrendered Custody Receipt at the address thereof set forth in the
Notice of Transfer or Exchange for such Custody Receipt a new Custody
Receipt or Receipts representing such aggregate number of shares of
Preferred Stock equal to the portion of the surrendered Custody
Receipt not so transferred. Each Custody Receipt issued upon such a
transfer shall bear a registration number not assigned previously and
shall represent a whole share or any integral number of shares of
Preferred Stock. The Custodian shall record in the Custody Receipts
Register the respective number of shares, aggregate liquidation
preference and stock certificate numbers, if any, of the Preferred
Stock evidenced by each Custody Receipt issued upon a transfer as
provided herein.
(c) A Custody Receipt or Receipts may be exchanged for a
Custody Receipt or Receipts representing the same aggregate number of
shares but different denominations upon surrender of such Custody
Receipt or Receipts to the Custodian at its Principal Office with the
Notice of Transfer or Exchange for such Custody Receipt fully
completed. The Custodian shall execute and deliver to the Owner of the
exchanged Custody Receipt, at the address thereof set forth in such
Notice of Transfer or Exchange, a Custody Receipt or Receipts that
such Owner making the exchange is entitled to receive, denominated in
whole shares of Preferred Stock and bearing registration numbers not
assigned previously. The Custodian shall record in the Custody
Receipts Register the respective number of shares, aggregate
liquidation preference and stock certificate numbers, if any, of the
Preferred Stock evidenced by each Custody Receipt issued upon an
exchange of Custody Receipts.
(d) The Custodian may require payment by the Owner of a
Custody Receipt of a sum sufficient to cover any tax, governmental fee
or other governmental charge that may be imposed in connection with
any registration of a transfer or exchange of such Custody Receipt,
and may require that such taxes, fees or other charges be paid prior
to the issuance of a new Custody Receipt. The Custodian shall not be
required to issue or register the transfer of any Custody Receipt
during the period when the Paying Agent would not be required to issue
or register the transfer of any Preferred Stock pursuant to the terms
of the Certificate.
(e) Financial Security and the Custodian may treat the person
in whose name a Custody Receipt is registered as the absolute owner
thereof, for all purposes whatsoever, and shall not be bound or
affected by any notice to the contrary, other than an order of a court
having jurisdiction in the premises.
(f) Whenever any Custody Receipt shall be delivered to the
Custodian for transfer, exchange or payment, upon transfer, exchange
or payment, the Custodian shall cancel and destroy such Custody
Receipt, and shall maintain a record of such cancellation and
destruction.
Section 2.06. Deposits With Depository. The Custodian is authorized to
take such actions with the Depository as will enable Custody Receipts to be
deposited with such Depository. The Depository as the Owner of the Custody
Receipt representing all the shares of Preferred Stock may take any action
pursuant to this Custody Agreement with respect to any one or more shares of
the Preferred Stock represented by the Custody Receipt as may be directed by
the beneficial owners of such Preferred Stock.
ARTICLE III
ADMINISTRATION OF CUSTODY ACCOUNT
Section 3.01. Payments of Redemption Price, Liquidation Preference and
Dividends on Preferred Stock.
(a) The Custodian shall remit to each Owner of record of a
Custody Receipt on the Record Date preceding any Scheduled Payment the
dividend component of such Scheduled Payment on Preferred Stock
represented by such Custody Receipt. The Custodian shall use its best
efforts to make such remittance immediately upon receipt of such
payment by the Custodian. Payment of such dividend to the Depository
shall be by wire transfer of immediately available funds, otherwise
such payment shall be made by bank check payable in currency of the
United States of America sent by Mail to such Owner or by such other
method requested by an Owner and consented to in writing by the Fund.
(b) The Custodian (or its agent) shall duly present (or cause
to be presented) each share of Preferred Stock for payment on or prior
to its redemption date or date fixed for payment of any liquidation
preference with respect thereto, in each case in accordance with the
provisions of the Certificate. A payment received by the Custodian of
all or a portion of the redemption price or liquidation preference of
a share of Preferred Stock upon redemption or liquidation shall be
remitted by the Custodian to the Owner of the Custody Receipt
evidencing such Preferred Stock at the Principal Office of the
Custodian immediately upon presentation of such Custody Receipt. Upon
such a presentation and remittance in connection with a payment of a
portion of the redemption price or liquidation preference of a share
of a Preferred Stock, the Custodian shall issue, in exchange for the
Custody Receipt presented, a Custody Receipt representing the
remaining liquidation preference of the Preferred Stock evidenced
thereby. Payments of such redemption price or liquidation preference
shall be made by transfer of immediately available funds to the
Depository or otherwise by bank check payable in currency of the
United States of America or by such other method requested by an Owner
and consented to in writing by the Fund.
Section 3.02. Notices.
(a) Upon receipt of any notice of redemption of, or payment
of liquidation preference with respect to, Preferred Stock, the
Custodian shall promptly transmit such notice by Mail, by hand or by
telecopy to the Owner of the Custody Receipt evidencing such Preferred
Stock. The Custodian (or its agent) shall present the Preferred Stock
so called for redemption or payment of liquidation preference on or
prior to the date of such redemption or to the Paying Agent on behalf
of such Owner for redemption payment in accordance with the terms of
the Certificate. The redemption price or liquidation preference
received by the Custodian shall be paid to such Owner in accordance
with the provisions of Section 3.01 hereof.
(b) Upon receipt from the Fund of any other notice with
respect to the Preferred Stock including specifically a notice of a
matter that requires or permits a vote by an Owner, the Custodian
shall promptly transmit such notice by Mail to each Owner of a Custody
Receipt. In the event such notice requests or requires any action by
any such Owner, the Custodian shall not take any action on behalf of
such Owner, except in accordance with written instructions from such
Owner and upon receipt of reasonable indemnity from such Owner for
resulting costs and liabilities, whether or not any action appears to
be in the best interest of such Owner, provided that the Custodian
will exercise voting rights as directed by an Owner without requiring
such indemnity and provided further that such voting rights are
subject to the rights of Financia1 Security set forth in 3.03(b)
hereof. Any record date established by such notice for purposes
specified in such notice shall be the record date for the purpose of
determining the Owners of record for such purposes. If no record date
is established by the Fund or applicable law, the Custodian may
establish an appropriate date as a record date if in its judgment such
a date is required.
Section 3.03. Duties With Respect to Surety Bond.
(a) In the event that the Custodian has received notice from
the Paying Agent for the Preferred Stock that the Fund has failed to
deposit funds with the Paying Agent by 12:00 p.m. on the third
Business Day next preceding the date the Fund is required to make all
or a portion of a Scheduled Payment, the Custodian shall promptly and
in any event prior to 4:30 p.m., New York City time, on such Business
Day file a Notice for Payment under the Surety Bond and make the
assignment required in Section 3.03(b) hereof. In the event the
Custodian receives from an Owner the Order, certificate and executed
assignment referred to in Paragraph 10 of the Endorsement to the
Surety Bond, the Custodian shall promptly file a Notice for Payment
under the Surety Bond and make the assignment required in Section
3.03(b) hereof.
(b) By acceptance of a Custody Receipt, each Owner
irrevocably designates, appoints, authorizes and directs the Custodian
to act as his attorney-in-fact as follows:
(i) if and to the extent a Shortfall (as defined in
Exhibit A to Endorsement No. 1 to the Surety Bond) exists in
amounts required to pay dividends on the Preferred Stock, to
execute and deliver an appropriate instrument of assignment
to Financial Security for each of the claims for dividend to
which such Shortfall relates contemporaneously with the
delivery to Financial Security of the notice demanding
payment under the Surety Bond;
(ii) if and to the extent a Shortfall exists in
amounts required to pay redemption price or liquidation
preference for the Preferred Stock, to execute and deliver an
appropriate instrument of assignment to Financial Security of
any of the Preferred Stock the redemption price or
liquidation preference for which has not previously been paid
or for which moneys are not held by the Custodian and
available for payment contemporaneously with the delivery to
Financial Security of the notice demanding payment under the
Surety Bond; and
(iii) if and so long as any Shortfall exists with
respect to the Preferred Stock, to appoint Financial Security
as agent for the Owner and the Custodian in any legal
proceeding with respect to the Preferred Stock including
specifically the right to vote such Preferred Stock until any
claims resulting from the assignments in (i) or (ii) above
shall have been satisfied, such appointment to be made
contemporaneously with the delivery of the notice to
Financial Security demanding payment under the Surety Bond
and to be contingent upon Financial Security's continued
performance under the Surety Bond.
If the Custodian delivers to Financial Security any such
instrument of assignment with respect to a Scheduled Payment and
Financial Security fails to make full payment with respect to such
Scheduled Payment pursuant to the Surety Bond, such instrument of
assignment shall be without effect and shall be canceled and returned,
on the date such payment is due, by Financial Security to the
Custodian. In each case in which the Custodian shall receive, in
accordance with the Surety Bond, payment from Financial Security with
respect to the claims for dividend so assigned or, with respect to
redemption price or liquidation preference, the assignment of
Preferred Stock, whichever is applicable, the Custodian shall disburse
such sums to the Owner in accordance with Section 3.01 of this Custody
Agreement. Payments disbursed by the Custodian from proceeds of the
Surety Bond shall not be considered to be made by the Fund, and
Financial Security shall become the owner of such rights to dividends
or redemption price or liquidation preference in accordance with the
tenor of the assignment made to it. Irrespective of whether any
assignment is executed and delivered, the Custodian and each Owner
hereby agree for the benefit of Financial Security that (a) they
recognize that, to the extent Financial Security pays the amount of
any Shortfall with respect to the Preferred Stock to the Owners,
Financial Security will be subrogated to the rights of such Owners to
receive from the Fund the redemption price, liquidation preference or
dividend to which such Shortfall relates, as provided in this Section
and (b) the Custodian will accordingly pay to Financial Security such
redemption price, liquidation preference and dividend as shall be
received by it, but only from sources and in the manner provided
herein, and will otherwise treat Financial Security as the owner of
the rights to such redemption price, liquidation preference and
dividend.
(c) To the extent the Custodian shall hold funds drawn under
the Surety Bond, it shall hold such funds for the benefit of Financial
Security until the required instruments of assignment are presented to
Financial Security in accordance with the Surety Bond. Such funds
shall not be invested by the Custodian. Except for the actions set
forth in (a) and (b) of this Section 3.03, the Custodian shall not
take any action with respect to the Surety Bond on behalf of any Owner
other than in accordance with written instructions from such Owner and
upon receipt of reasonable indemnity from such Owner for resulting
costs and liabilities, whether or not such action appears to be in the
best interest of such Owner.
(d) Upon default by Financial Security in the payment of any
amounts due under the Surety Bond, each Owner, as the real party in
interest, shall have the right to proceed directly and individually
against Financial Security, in whatever manner such Owner deems to be
appropriate. In such event, such Owner shall not be required to act in
concert with other Owners or with the Custodian.
(e) In the event the Custodian has received written notice
from S&P, if the Preferred Stock is rated by S&P, and from Moody's, if
the Preferred Stock is rated by Moody's, that the claims-paying
ability of Financial Security is rated by such rating agency "AA+" or
less with respect to S&P, and "Aal" or less with respect to Moody's,
and the Custodian (i) has received (A) a Qualified Surety Bond and
written evidence from S&P, if the Preferred Stock is then rated by
S&P, and from Moody's, if the Preferred Stock is then rated by
Moody's, that the substitution of such Qualified Surety Bond for the
Surety Bond then held would not, of itself, result in a reduction or
withdrawal of the ratings then applicable to the Preferred Stock, (B)
an opinion of counsel to the issuer of the Qualified Surety Bond in
substantially the form set forth in Exhibit 2 hereto and (C) an
agreement by the issuer of the Qualified Surety Bond in form
acceptable to the Custodian agreeing to and assuming the obligations
of Financial Security hereunder or (ii) has received written evidence
from S&P, if the Preferred Stock is then rated by S&P, and from
Moody's, if the Preferred Stock is then rated by Moody's, that the
termination of the Surety Bond then held would not, of itself, result
in a reduction or withdrawal of the ratings then applicable to the
Preferred Stock, then the Custodian shall upon and as of the Surety
Bond Expiration Date, in the case of (i) above, accept the Qualified
Surety Bond and deposit it into the Custody Account and, in the case
of either (i) or (ii) above, shall surrender the Surety Bond then held
to the issuer thereof.
Section 3.04. Defaults by Fund.
(a) The Fund is the obligor with respect to payment of
redemption price, liquidation preference and declared dividends for
the Preferred Stock and with respect to the performance of all other
obligations set forth or implied in the Preferred Stock and the
Certificate. The Custodian is not authorized hereunder to proceed
against the Fund in the event of a default under the Preferred Stock
and the Certificate, and has no power or obligation hereunder to
assert any of the rights and privileges of the Owners.
(b) In the event of any default in payment by the Fund and by
Financial Security, each Owner will have the right to proceed directly
and individually against the Fund in whatever manner is deemed
appropriate by such Owner either by withdrawing the Preferred Stock
evidenced by such Owner's Custody Receipt from the Custody Account or
by directing the Custodian to take specific actions on behalf of such
Owner pursuant to Section 3.04(c) of this Custody Agreement, and such
Owner will not be required to act in concert with the Custodian
(unless such Owner so directs) or other Owners. The issuance of a
Custody Receipt shall not in any manner: (i) alter, modify or increase
the rights of the Owner of such Custody Receipt with respect to the
Preferred Stock evidenced by such Custody Receipt (provided that
payments of dividends on and redemption price or liquidation
preference for such Preferred Stock and proceeds of the Surety Bond
held by the Custodian shall be paid to such Owner as provided herein),
(ii) grant to any Owners of other Custody Receipts rights with respect
to such Custody Receipt or the Preferred Stock evidenced thereby or
(iii) grant to such Owner, through ownership of such Custody Receipt,
any rights with respect to any other Custody Receipt or the Preferred
Stock evidenced thereby. The parties hereto understand and agree that
each Owner of a Custody Receipt is the sole beneficial owner (subject
to any obligations to the beneficial holders on whose behalf the
Custody Receipt is held) of the Preferred Stock evidenced thereby (but
shall have no interest in any Preferred Stock evidenced by Custody
Receipts held by any other Owner) and that the Custodian shall hold
Preferred Stock as custodian for the Owners of Custody Receipts
evidencing such Preferred Stock.
(c) Notwithstanding anything in this Section 3.04 to the
contrary, the Custodian will proceed promptly pursuant to Section 3.03
hereof to demand payment pursuant to the Surety Bond in the
circumstances specified in Section 3.03(a) hereof and, upon receipt of
indemnity satisfactory to it for resulting costs and liability, if
any, will undertake to perform such other ministerial acts as may be
reasonably necessary to assist the Owners in proceeding against
Financial Security, if necessary, or for enforcing rights hereunder or
under the Certificate.
Section 3.05. Unclaimed Moneys. In the event any moneys constituting
payment of redemption price, liquidation preference or dividend for any
Preferred Stock (including any proceeds from a draw on a Surety Bond) are not
claimed by the Owner of the Custody Receipt evidencing such Preferred Stock (or,
in the case of Surety Bond proceeds, are required to be held by the Custodian
and not released to the Owner), the Custodian shall segregate and hold such
moneys in a subaccount within the Custody Account, without liability for
interest thereon, for the account of the Owner entitled thereto. Such moneys
shall not be invested by the Custodian, but shall be held in trust for the
benefit of such Owner. All such moneys that remain in any such subaccount on the
date that is two (2) years and eleven (11) months after the date on which such
moneys were originally due, and as to which such Owner has not indicated an
interest as evidenced by a memorandum on file with the Custodian, shall be
disbursed to Financial Security, if such moneys were provided by Financial
Security, or to the Fund, if such moneys were provided by the Fund, and such
Owner shall thereafter look only to such respective party for payment.
Section 3.06. Obligation of Owners With Respect to Certain Taxes and
Filings. If any tax or other governmental charge shall become payable by or on
behalf of the Custodian, including any tax or charge required to be withheld
from any payment to or by the Custodian under the provisions of any applicable
law or regulation, with respect to any Custody Receipt or any Preferred Stock
evidenced thereby, such tax or charge shall be payable by the Owner of such
Custody Receipt and may, following written notice from the Custodian to such
Owner, be withheld by the Custodian.
Section 3.07. Transfers of Surety Bond or Preferred Stock by
Custodian. The Custodian shall hold the Preferred Stock and the Surety Bond in
custody only and shall not assign, transfer, pledge, set off or otherwise
dispose of the Surety Bond, Preferred Stock or interest therein except as
specifically provided hereunder or as required by an order of a court having
jurisdiction in the premises.
Section 3.08. Termination of Custody Account. During the term of this
Custody Agreement, the Custodian shall have the following obligations:
(a) The Custodian shall maintain in the Custody Account each
share of Preferred Stock until the earliest to occur of: (i)
redemption of such Preferred Stock in full, including all accrued
dividends, by the Fund and/or payments of amounts with respect
thereto by Financial Security pursuant to the Surety Bond, (ii)
payment of the full liquidation preference of such Preferred Stock,
including all accrued dividends, by the Fund and/or payments of
amounts with respect thereto by Financial Security pursuant to the
Surety Bond upon redemption in whole or liquidation of such Preferred
Stock, (iii) the Surety Bond Expiration Date and (iv) the receipt of
the written evidence from Moody's and S&P referred to in Section
3.03(e)(ii) hereof. Upon termination of the Custody Account pursuant
to clause (iii) above, any shares of Preferred Stock shall be
delivered to or at the direction of the Owner thereof. The Custodian
hereby disclaims any equitable or beneficial interest in the Preferred
Stock. No Preferred Stock will be available to the Custodian for its
own use or profit, nor will any Preferred Stock be deemed to be part
of the general assets of the Custodian. The Preferred Stock will not
be subject to any right, charge, security interest, lien or claim of
any kind in favor of the Custodian.
(b) The Custodian shall maintain the Surety Bond in the
Custody Account until the earlier of (a) the Term of the Surety Bond
(as defined therein) shall have expired or (b) receipt of those items
required by Section 3.03(e)(i) or Section 3.03(e)(ii), whereupon such
Surety Bond shall be returned to Financial Security.
Section 3.09. Insolvency Proceedings. The Custodian shall promptly
notify Financial Security of (i) the commencement of any Insolvency Proceeding
by the Fund known to the Custodian and (ii) the making of any claim in
connection with any Insolvency Proceeding seeking the avoidance as a
preferential transfer (a "Preference Claim") of any payment of any redemption
price, liquidation preference or dividend with respect to any Preferred Stock.
Financial Security may at any time during the continuation of an Insolvency
Proceeding direct all matters relating to such Insolvency Proceeding, including
(i) all matters relating to any Preference Claim, (ii) the direction of any
appeal of any order relating to Preference Claim and (iii) the posting of any
surety, supersedeas or performance bond pending any such appeal. Financial
Security shall be subrogated to the rights of the Custodian and each Owner in
the conduct of any Insolvency Proceeding, including all rights of any party to
an adversary proceeding action with respect to any court order issued in
connection with any such Insolvency Proceeding so long as any action so taken is
not adverse to such Owner's right to payment pursuant to the Surety Bond.
ARTICLE IV
THE CUSTODIAN
Section 4.01. Standard of Liability. The Custodian shall not be liable
under this Custody Agreement other than by reason of bad faith or gross
negligence in the performance of such duties as are specifically set forth in
this Custody Agreement. The Custodian undertakes to perform such duties and only
such duties as are set forth in the Custody Agreement and no implied covenants
or obligations shall be read into this Custody Agreement against the Custodian.
The Custodian shall not be liable for any damages resulting from any
distribution from the Custody Account to an Owner at the address of record of
such Owner in the Custody Receipts Register. The Custodian shall not be liable
for any action or inaction by it done in reasonable reliance upon the
unqualified written opinion of its legal counsel or the written advice of its
accountants. The Custodian may rely and shall be protected in acting upon any
written notice, request, direction or other document reasonably believed by it
to be genuine and to have been signed or presented by the proper party or
parties.
The Custodian shall not incur any liability to any Owner if by reason
of any provision of any present or future law, or regulation thereunder, of any
governmental authority, or by court order or by reason of any act of God or war
or other circumstance beyond the control of the Custodian, the Custodian shall
be prevented or forbidden from doing or performing any act or thing which the
terms of this Custody Agreement provide shall be done or performed, and the
Custodian shall not incur any liability to any Owner by reason of any
nonperformance or delay, caused as aforesaid, in the performance of any act or
thing which the terms of this Custody Agreement provide shall or may be done or
performed.
Section 4.02. Resignation and Removal of the Custodian; Appointment of
Successor. The Custodian may resign with respect to all of its duties hereunder
at any time by written notice thereof delivered to Financial Security and given
by Mail to each Owner, such resignation to take effect upon the appointment of a
successor Custodian and its acceptance of such appointment as hereinafter
provided.
Financial Security or the Owners of Custody Receipts evidencing a
majority of outstanding shares of the Preferred Stock may, upon 30 days' written
notice to the Custodian, remove the Custodian and appoint a successor Custodian
meet ing the qualifications set forth in the succeeding paragraph. In the event
of such removal, the Custodian shall pay over to its successor Custodian any
fees or charges previously paid to the Custodian with respect to such Custody
Receipts in respect of duties not yet performed under this Custody Agreement
which remain to be performed by a successor Custodian.
In case at any time the Custodian acting hereunder shall resign,
Financial Security shall, within 90 days after the delivery of the notice of
resignation, appoint a successor Custodian. Any successor Custodian shall be a
bank or trust company having its principal office in the United States of
America and having a combined capital and surplus of at least $50,000,000. If no
successor Custodian has been appointed within such 90 days, the resigning
Custodian may petition any court of competent jurisdiction for the appointment
of a successor Custodian.
Any successor Custodian shall execute and deliver to its predecessor
and to Financial Security an instrument in writing accepting its appointment
hereunder, and thereupon such successor Custodian, without any further act or
deed, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor and for all purposes shall be the Custodian under
this Custody Agreement, and such predecessor, upon payment of all sums due it
and on the written request of Financial Security, shall execute and deliver an
instrument transferring to such successor all rights, obligations and powers of
such predecessor hereunder, and shall duly assign, transfer and deliver all
right, title and interest in the Custody Account and all records relating
thereto to such successor. Any successor Custodian shall promptly give notice of
its appointment to the Owners by Mail and to Moody's and S&P by first-class mail
or hand delivery.
Any corporation into or with which the Custodian may be merged,
consolidated or converted shall be the successor of such Custodian without the
execution or filing of any document or any further act. Notice of such merger,
consolidation or conversion shall be given by first-class mail or hand delivery
to Moody's and S&P.
Section 4.03. Charges and Expenses. Except as expressly provided in
this Custody Agreement, no charges or expenses of the Custodian or any other
person shall be payable by or withheld from any Owner. The Fund shall be
responsible for the payment of all other charges and expenses of the Custodian
(including, in each case, reasonable fees and expenses of counsel) incidental to
the performance of its obligations hereunder.
ARTICLE V
MISCELLANEOUS
Section 5.01. Amendments, Etc. Without notice to or consent of any
Owners, any provisions of this Custody Agreement may be amended (i) to cure any
formal defect, omission, inconsistency or ambiguity in this Custody Agreement,
(ii) to add to the covenants and agreements of the Custodian or Financial
Security or to surrender any right or power herein conferred upon the Custodian,
the Fund or Financial Security, (iii) to effectuate the assignment of the
Custodian's rights and duties hereunder to a qualified successor as provided
herein, (iv) to comply with the Trust Indenture Act of 1939, as from time to
time amended, or the Investment Company Act of 1940, as from time to time
amended, (v) to increase the number of shares of Preferred Stock held in custody
under this Custody Agreement or (vi) to modify, alter, amend or supplement this
Custody Agreement in any other respect not inconsistent herewith which, in the
opinion of counsel acceptable to the Custodian, is not adverse to the Custodian
or any of the Owners. Except for amendments made pursuant to clause (i), (ii),
(iii), (iv), (v) or (vi) above, no amendment affecting the Owners of Custody
Receipts may be made to this Custody Agreement without the consent of Owners of
Custody Receipts evidencing 66-2/3% of the outstanding shares of the Preferred
Stock, provided that no amendment may be made which would directly or indirectly
have the effect of interfering with the rights of any Owner to make a claim
under the Surety Bond without the consent of such Owner or which would modify
any of the provisions of this Section 5.01 except to increase the 66-2/3%
percentage figure referred to above (or any percentage substituted therefor
pursuant to a prior amendment) or to provide that certain other provisions of
this Custody Agreement cannot be modified without the consent of any Owner
affected thereby. No amendment or waiver of any provision of this Custody
Agreement nor consent to any departure herefrom shall in any event be effective
unless the same shall be in writing and signed by the Custodian and Financial
Security, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. Notice of any
such amendment and a copy thereof shall be given by first-class mail or hand
delivery to Moody's and S&P.
Section 5.02. Counterparts. This Custody Agreement may be executed in
any number of counterparts by the parties thereto on separate counterparts, each
of which, when so executed and delivered, shall be deemed an original, but all
such counterparts shall together constitute one and the same instrument. Copies
of this Custody Agreement shall be filed with the Custodian and shall be open to
inspection during business hours at the Custodian's Principal Office by any
Owner.
Section 5.03. Exclusive Benefit of Parties; Effective Date. This
Custody Agreement is for the exclusive benefit of the Custodian, the Fund,
Financial Security and the Owners of the Custody Receipts from time to time, and
their respective successors hereunder, and shall not be deemed to give any legal
or equitable right, remedy or claim to any other person whatsoever.
The Owners shall be the beneficiaries of this Custody Agreement and,
pursuant to the terms of the Custody Receipts, shall acknowledge and accept all
of the terms and conditions and agree to be bound by all of the provisions
hereof and of the Custody Receipts by acceptance of delivery of the Custody
Receipts without the necessity of any written acknowledgement or signature. This
Custody Agreement shall become effective as to the Custodian with respect to any
Custody Receipts upon execution of this Custody Agreement and the receipt by the
Custodian of the items specified in Section 2.03 hereof with respect to such
Custody Receipts.
Section 5.04. Invalidity of Provisions. In case any one or more of the
provisions contained in this Custody Agreement or in the Custody Receipts should
be or become invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein or
therein shall in no way be affected, prejudiced or disturbed thereby.
Section 5.05. Notices. Notices given Owners shall be given by Mail and
shall be effective two Business Days following the date so marked. All other
communications shall be mailed, sent or delivered, if to Financial Security, to
Financial Security Assurance Inc., 350 Park Avenue, New York, New York 10022,
Attention: Surveillance, and if to the Custodian, to Bankers Trust Company, 4
Albany Street, Corporate Trust and Agency Group, New York, New York 10006, or as
to each party at such other address as shall be designated by such party in a
written notice to the other parties.
Any communication so addressed and mailed to Financial Security or the
Custodian shall be deemed to be given when received, and any notice sent by
rapid transmission shall be deemed to be given when receipt of such transmission
is acknowledged, and any communication delivered in person shall be deemed to be
given when receipted for or actually received by an authorized officer of the
recipient.
Section 5.06. Business Day. In any case where the date on which any
action is required to be taken hereunder shall not be a Business Day (as defined
in Exhibit 1 hereto), then such action shall be taken on the next succeeding
Business Day with the same force and effect as if made on the date that such
action is otherwise required to be taken hereunder.
Section 5.07. Governing Law. This Custody Agreement and the Custody
Receipts shall be governed by and construed in accordance with the laws of the
State of New York.
Section 5.08. Shareholder Rights. Any rights to be made available to a
shareholder under applicable law shall be deemed incorporated in this Custody
Agreement and made available to the Owners as the beneficial owners of the
Preferred Stock.
Section 5.09. Headings. The headings of articles and sections in this
Custody Agreement have been inserted and the table of contents has been provided
for convenience only and are not to be regarded as a part of this Custody
Agreement or to have any bearing upon the meaning or interpretation of any
provision contained herein.
DATED as of December 1, 1988.
FINANCIAL SECURITY ASSURANCE INC.
By /s/ Robert P. Cochran
---------------------------
Senior Vice President
BANKERS TRUST COMPANY
By /s/ Eugene B. Mahrie
---------------------------
Vice President
<PAGE>
THIS CUSTODY RECEIPT IS ISSUED SUBJECT TO THE SAME PROVISIONS
RESTRICTING TRANSFERS OF SHARES OF TAXABLE AUCTION RATE PREFERRED STOCK ISSUED
BY PROSPECT STREETSM HIGH INCOME PORTFOLIO INC. (THE "FUND") CONTAINED IN
ARTICLE IV OF THE FUND'S ARTICLES OF INCORPORATION, AS AMENDED AND RESTATED (THE
"ARTICLES OF INCORPORATION") AND IN THE MASTER PURCHASER'S LETTER REQUIRED TO BE
EXECUTED BY EACH PERSON WHO ACQUIRES ANY OF THE SHARES REPRESENTED BY THIS
CUSTODY RECEIPT. A COPY OF EACH SUCH MASTER PURCHASER'S LETTER, WHICH ALSO
AFFECTS OTHER RIGHTS OF EACH OWNER OF THIS CUSTODY RECEIPT, IS ON FILE WITH THE
CUSTODIAN. A COPY OF ARTICLE IV OF THE ARTICLES OF INCORPORATION AND A COPY OF
THE MASTER PURCHASER'S LETTER SETTING FORTH THE RESTRICTIONS ON TRANSFER WILL BE
FURNISHED TO THE OWNER UPON REQUEST AND WITHOUT CHARGE.
EXHIBIT 1
FORM OF CUSTODY RECEIPT
CR-[ ] Evidencing Shares
of Preferred Stock
Liquidation Value $100,000/Share
CUSTODY RECEIPT CUSIP: [ ]
CUSTODY RECEIPT EVIDENCING OWNERSHIP OF
SHARES OF PROSPECT STREET(SM) HIGH INCOME
PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK
Registered Owner:
General. Pursuant to a Custody Agreement dated as of December 1, 1988,
as from time to time amended (the "Custody Agreement"), between Bankers Trust
Company (the "Custodian") and Financial Security Assurance Inc. ("Financial
Security"), the Custodian holds as custodian (i) the amount specified above of
the above-referenced Preferred Stock (the "Preferred Stock"), on behalf of the
registered holder of this Custody Receipt (the "Owner") and (ii) a surety bond
(the "Surety Bond") of Financial Security guaranteeing Scheduled Payments (as
defined in the Surety Bond) of redemption price, liquidation preference and
dividends on the Preferred Stock.
THE FOLLOWING INFORMATION CONCERNING THE PREFERRED STOCK, THE SURETY
BOND AND THE CUSTODY AGREEMENT IS MERELY DESCRIPTIVE OF CERTAIN PROVISIONS OF
THOSE INSTRUMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE
INSTRUMENTS, COPIES OF WHICH ARE AVAILABLE AT THE PRINCIPAL OFFICE OF THE
CUSTODIAN.
The Preferred Stock has been issued by Prospect Street(SM) High Income
Portfolio Inc. (the "Fund") pursuant to its Articles of Incorporation (the
"Certificate") and the sole obligor with respect to the Surety Bond is Financial
Security. If the Fund fails to make a Scheduled Payment on the Preferred Stock,
the Custodian has no right or obligation to take any action for the Owner with
respect to the Preferred Stock referred to above except (i) to proceed to make a
demand for payment pursuant to the Surety Bond, or (ii) in accordance with
written instructions from such Owner and upon receipt of reasonable indemnity
for resulting costs and liabilities, whether or not such action appears to be in
the best interest of such Owner. If Financial Security defaults with respect to
a payment on the Surety Bond, the Custodian has no right or obligation to take
any action for the Owner except in accordance with written instructions from
such Owner and upon receipt of reasonable indemnity for resulting costs and
liabilities, whether or not any action appears to be in the best interest of
such Owner.
The Preferred Stock has been delivered to the Custodian or its nominee
to be held in a custody account (the "Custody Account") established pursuant to
the Custody Agreement. The Preferred Stock has been registered on the stock
books of the Fund maintained by the paying agent (the "Paying Agent") appointed
by the Fund under the Certificate in the name of the Custodian (or its nominee
or its agent's nominee) and not in the name of the Owner. This Custody Receipt
and all other custody receipts issued from time to time to evidence the
Preferred Stock which have been deposited in the Custody Account will be
referred to herein as "Custody Receipts."
THE SURETY BOND
Financial Security has issued the Surety Bond, consisting of a surety
bond and certain endorsements thereto, and the Surety Bond may not be cancelled
or revoked during its term. The Surety Bond unconditionally and irrevocably
guarantees to the Owner, as beneficial owner of the Preferred Stock as indicated
on the registration books maintained by the Custodian (other than the Fund and
any affiliates or successors thereof), (i) the full and complete payment of
Scheduled Payments ("Scheduled Payments" as defined in the Surety Bond) on the
dates on which such Scheduled Payments are guaranteed pursuant to the Surety
Bond in accordance with such Surety Bond and the terms of the Certificate as
amended and in effect as of the date of the issuance of the Surety Bond and
subsequently amended from time to time with the written consent of Financial
Security including the date on which the Preferred Stock is paid in full and
(ii) payment of any such amount that is subsequently avoided in whole or in part
as a preference payment under applicable federal bankruptcy law. As set forth in
the Surety Bond, the Preferred Stock shall be "paid in full" when all payments
guaranteed by the Surety Bond have been paid and any period during which any
such payment could have been avoided in whole or in part as a preference payment
under applicable federal bankruptcy law shall have expired before any
bankruptcy, insolvency or similar proceeding requisite to such avoidance shall
have been commenced.
Payment of amounts under the Surety Bond by Financial Security as
described in clause (i) above shall be made on the later of (a) the second
Business Day following receipt on a Business Day by Financial Security of a
notice and certificate from the Custodian in the form set forth as Exhibit A to
Endorsement No. I of the Surety Bond or (b) the date such Scheduled Payment is
scheduled to be made pursuant to the terms of the Surety Bond. Such payments
will be disbursed by Financial Security to the Custodian by wire transfer of
immediately available funds. Financial Security's obligation under the Surety
Bond is discharged to the extent funds are so transferred to the Custodian
whether or not such funds are properly applied by the Custodian.
Financial Security will pay any amount payable under the Surety Bond
as described in clause (ii) above on the earlier of (a) the fourth Business Day
following receipt by Financial Security from the Custodian of (x) a certified
copy of the order (the "Order") of the court which exercised jurisdiction to the
effect that the Owner is required to return scheduled payments of redemption
price, liquidation preference or dividends paid on the Preferred Stock which
were guaranteed by the Surety Bond because such payments were avoidable
preferences under applicable federal bankruptcy law, (y) a certificate of the
Owner that the Order has been entered and is not subject to any stay and (z) an
assignment duly executed by the Owner in such form as is reasonably required by
Financial Security, irrevocably assigning to Financial Security all rights and
claims of the Owner relating to or arising under the Preferred Stock against the
estate of the Fund, provided that if such notice and certificate are received on
a day that is not a Business Day or after 12:00 noon, New York City time, on any
Business Day, Financial Security shall make such payment on the fifth Business
Day following such date, and (b) the date of receipt by Financial Security of
the items referred to in clauses (x), (y) and (z) above, if at least four
Business Days prior to the date of such receipt, Financial Security shall have
received written notice from the Custodian that such items were to be delivered
on such date of receipt and such date of receipt was specified in such notice
(provided that if such notice is received on a day that is not a Business Day or
after 12:00 noon, New York City time, on any Business Day, such notice shall be
deemed to have been received on the next succeeding Business Day). Such payment
shall be disbursed to the receiver, conservator, debtor in possession or trustee
in bankruptcy named in the Order and not to the Owner directly unless the Owner
has been required previously to disgorge all or a part of such payment, as
demonstrated to the satisfaction of Financial Security, in which event such
payment shall to such extent be paid directly to the Custodian or the Holder, as
the case may be.
The Owner agrees, in consideration of the issuance of the Surety Bond,
that in the event that the Fund does not make Scheduled Payments on the
Preferred Stock covered by this Custody Receipt, the Custodian shall make a
claim for payment under the Surety Bond with respect to the Preferred Stock
covered by this Custody Receipt. In order to obtain payments under the Surety
Bond with respect to payment of dividends on the Preferred Stock, the Custodian,
as attorney-in-fact of said Owner, shall execute and deliver an appropriate
instrument of assignment to Financial Security of each scheduled dividend on the
Preferred Stock to be paid by Financial Security. In order to obtain payments
under the Surety Bond with respect to payment of redemption price or liquidation
preference for the Preferred Stock, the Custodian, as attorney-in-fact of said
Owner, shall execute and deliver an appropriate instrument of assignment to
Financial Security of each share of Preferred Stock, the redemption price or
liquidation preference for which is to be paid by Financial Security. The
Custodian, as attorney-in-fact of said Owner, shall also appoint Financial
Security as agent for the Owner and the Custodian in any legal proceeding with
respect to the Preferred Stock (including specifically any proceedings involving
the right of any Owners to vote such Preferred Stock represented by such Owner's
Custody Receipt) until any claims resulting from the above assignments shall
have been satisfied, such appointment to be contingent upon Financial Security's
continued performance under the Surety Bond. Upon any such payment of redemption
price or liquidation preference by Financial Security, Financial Security shall
become the owner of the Preferred Stock or right to payment of redemption price
or liquidation preference for such Preferred Stock so paid and the Owner hereof
shall have no further rights with respect to such Preferred Stock or such right
to payment.
Upon any default by Financial Security in the payment of any amounts
due under the Surety Bond, the Owner shall have the right to proceed directly
and individually against Financial Security in whatever manner the Owner deems
appropriate and shall not be required to act in concert with other Owners or
with the Custodian.
THE CUSTODY AGREEMENT
Custody Account. The Custody Agreement creates the Custody Account
into which the Preferred Stock, the Surety Bond and any moneys held in
connection therewith will be deposited. The Custody Account will be maintained
by the Custodian as a custodial account, separate and segregated, whose contents
may not be commingled with any other assets or property held by the Custodian.
The Custodian will maintain separate records in connection with any moneys which
it may hold in connection with the Preferred Stock and the Surety Bond.
The Owner is liable for payment of taxes or other governmental charges
with regard to registrations of transfers or exchanges of this Custody Receipt,
and the Custodian may require payment of such amounts prior to the issuance of a
new Custody Receipt. Moreover, under current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), unless the Owner completes a Form W-9,
Payer's Request for Taxpayer Identification Number and Certification, or
provides the Custodian with evidence that it is an Exempt Payee within the
meaning of the Code, the Custodian will deduct 20% of certain payments to the
Owner from the Custody Account pursuant to Section 3406 of the Code. The
Custodian will forward by Mail to the Owner of record of this Custody Receipt on
the Record Date preceding any Scheduled Payment the dividend component of such
Scheduled Payment on the Preferred Stock promptly upon receipt by the Custodian.
The Custodian will remit payments of redemption price or liquidation preference
on the Preferred Stock upon presentation of the Custody Receipt by the Owner at
the principal office of the Custodian.
Ministerial Duties. The Custodian will take such actions as are
expressly required under the Surety Bond to make a drawing under the Surety
Bond, including transmitting notices to the Owner, making a demand for payment
pursuant to the Surety Bond and delivering Preferred Stock or assignments to
Financial Security. Notices with respect to the Preferred Stock that are
received by the Custodian from the Fund will be promptly forwarded to the Owner.
Except as expressly provided by the Custody Agreement, the Custodian will not
take any action on behalf of the Owner with respect to the Preferred Stock or
the Surety Bond, except in accordance with written instructions from the Owner
and upon receipt of reasonable indemnity from the Owner for resulting costs and
liabilities as provided in the Custody Agreement, whether or not such action
appears to be in the best interest of the Owner. The Custodian may resign
pursuant to the Custody Agreement upon appointment of a successor Custodian and
its acceptance of such appointment as provided in the Custody Agreement. Either
Financial Security or the registered owners of Custody Receipts evidencing a
majority in aggregate amount of the Preferred Stock deposited in the Custody
Account may remove the Custodian and appoint a successor thereto pursuant to the
provisions of the Custody Agreement.
Miscellaneous. Except as otherwise provided in the Custody Agreement,
no amendment affecting the registered owners of custody receipts as this Custody
Receipt may be made to the Custody Agreement without the consent of the
registered owners of the Custody Receipts evidencing 66-2/3% in of the shares of
Preferred Stock deposited in the Custody Account. The Custodian will not have
any right or obligation to enforce any rights of the Owner with respect to the
Preferred Stock under the Certificate. By acceptance of delivery of the
Preferred Stock evidenced by this Custody Receipt, the Owner acknowledges and
accepts all of the terms and conditions and agrees to be bound by all of the
provisions of the Custody Agreement. This Custody Receipt is transferable by the
Owner in person, or by an attorney duly authorized in writing, at the principal
office of the Custodian, upon surrender and cancellation of this Custody Receipt
and due execution of the Notice of Transfer or Exchange attached to this Custody
Receipt, except that such a registration of transfer is not required to be made
either during any period when the Fund would not be required to issue or
register the transfer of any shares of Preferred Stock pursuant to the terms of
the Certificate and the conditions specified in the Certificate as to the
transfer of beneficial ownership of the Preferred Stock is satisfied. Upon any
such registration of transfer, a new Custody Receipt or Receipts in authorized
denominations will be issued to the transferee or transferees in exchange for
this Custody Receipt.
Certain Definitions. For purposes hereof, the following terms shall
have the meanings set forth below:
"Business Day" means a day on which banks are not required or
authorized by law to be closed in either the city in which the principal office
of Financial Security is located or the city in which the principal office of
the Custodian is located.
"Mail" means first-class mail to the Owner at the address shown in the
registration books maintained by the Custodian pursuant to the Custody
Agreement.
This Custody Receipt shall not be valid for any purpose unless
executed by the Custodian by the manual signature of its authorized officer.
IN WITNESS WHEREOF, the Custodian has caused this Custody Receipt to
be executed.
Dated:
BANKERS TRUST COMPANY,
as Custodian
By
----------------------------
<PAGE>
NOTICE OF TRANSFER OR EXCHANGE
Please be advised, pursuant to the terms of the Custody Agreement
between Bankers Trust Company and Financial Security Assurance Inc. with respect
to the Custody Receipt on which this Notice of Transfer or Exchange is printed,
that the undersigned hereby notifies you, as of the date received by you, of the
following transaction(s) and requests you to process the transaction(s) as
required by the Custody Agreement. This notice may also be used for exchanges of
Custody Receipts or in connection with the redemption of or payment of the
liquidation preference with respect to a portion of such Preferred Stock in
which event the Transferee should be noted to be the same as the Transferor.
Name of Transferor: _____________________________________________________
Registration Number of Custody Receipt: _________________________________
Aggregate Liquidation Preference and Number of Shares of Preferred Stock:
$ _________________ ____________________ Shares
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Retained: $ _____________ ___________________ Shares
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Transferred: $ ________________ __________________ Shares
1. Name of Transferee: __________________________________________________
Address of such Transferee: _____________________________________________
_________________________________________________________________________
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Transferred to Such Transferee: $ _________________ _________________ Shares
2. Name of Transferee: __________________________________________________
Address of such Transferee: _____________________________________________
_________________________________________________________________________
Aggregate Liquidation Preference and Number of Shares of Preferred Stock To Be
Transferred to Such Transferee: $ _____________ _________________ Shares
<PAGE>
(Add additional page if more than two Transferees.)
In making this notice, I am aware of, among others, the following
requirements for and limitations upon my exercise of transfer rights imposed by
said Custody Agreement:
(1) all transfers must be made in authorized denominations as
permitted by the Custody Agreement;
(2) the transferee must sign a Master Purchaser's Letter as
specified in the Certificate (as defined in the Custody Agreement);
(3) dividend payments on the Preferred Stock due on a
particular dividend payment date accrue to the benefit of the Owner of
record of the related Custody Receipt on the Record Date (as defined
in the Custody Agreement) preceding such dividend payment date;
(4) any notice of transfer not made in accordance with the
above requirements and other terms and conditions of the Custody
Agreement will be returned to me accompanied by an explanation of the
variance; and
(5) this Notice of Transfer or Exchange must be accompanied
by the Custody Receipt to be transferred.
Dated:
By ________________________
Its _______________________
GUARANTY OF SIGNATURE
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and
transfers this Custody Receipt to the person or persons indicated on the Notice
of Transfer or Exchange printed on this Custody Receipt. In the case of a
transfer to a third party, the undersigned hereby authorizes and instructs the
Custodian to immediately record the transferees listed on the Notice of
Transfer or Exchange as the Owner of such Custody Receipt.
Dated:
______________________________
(Authorized Signature)
Notice: The signature on this
assignment must correspond with
the name of the registered owner
as it appears on the Custody
Receipt in every particular and
must be guaranteed by an officer
of a national or state commercial
bank or trust company or a member
of a registered national
securities exchange or the
National Association of
Securities Dealers, Inc.
GUARANTY OF SIGNATURE
<PAGE>
EXHIBIT 2
FORM OF OPINION OF
COUNSEL OF ISSUER OF SURETY BOND
Dear Sirs:
I am the General Counsel of Financial Security Assurance Inc., a New
York stock insurance company ("Financial Security"). You have requested my
opinion in such capacity as to the matters set forth below in connection with
the issuance by Financial Security of its surety bond no. (the "Surety
Bond") with respect to the above-referenced securities issued by Prospect
Street(SM) High Income Portfolio, Inc. (the "Fund"). The Surety Bond is issued
pursuant to the Insurance Agreement dated as of December 1, 1988 (the
"Insurance Agreement") between Financial Security and the Fund.
In that regard, and for purposes of this opinion, I have examined such
corporate records, documents and proceedings as I have deemed necessary and
appropriate, including (i) the Surety Bond and (ii) the Insurance Agreement.
Based upon the foregoing, I am of the opinion that:
1. Financial Security is a stock insurance company duly
organized, validly existing and authorized to transact financial
guarantee insurance business under the laws of the State of New York.
2. Each of the Surety Bond and the Insurance Agreement has
been duly authorized, executed and delivered by Financial Security.
3. Each of the Surety Bond and the Insurance Agreement
constitutes the legal, valid and binding obligation of Financial
Security, enforceable against Financial Security in accordance with
its terms, subject, as to the enforcement of remedies, to bankruptcy,
insolvency, reorganization, moratorium and other similar laws
affecting the enforceability of creditors' rights generally applicable
in the event of the bankruptcy or insolvency of Financial Security and
by the application of general principles of equity.
4. The Surety Bond is exempt from registration under the
Securities Act of 1933, as amended.
5. Neither the execution or delivery by Financial Security of
the Surety Bond or the Insurance Agreement, nor the performance by
Financial Security of its obligations thereunder, will conflict with
any provision of the certificate of incorporation or the bylaws of
Financial Security nor, to the best of my knowledge, result in a
breach of, or constitute a default under, any agreement or other
instrument to which Financial Security is a party or by which any of
its property is bound nor, to the best of my knowledge violate any
judgment, order or decree applicable to Financial Security of any
governmental or regulatory body, administrative agency, court or
arbitrator having jurisdiction over Financial Security.
