<PAGE>
As filed with the Securities and Exchange Commission on August 4, 2000
Securities Act Registration No. 333-37008
Investment Company Registration No. 811-07390
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. 2 |X|
Post-Effective Amendment No. | |
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 8 |X|
------------------
Boulder Total Return Fund, Inc.
(Exact Name of Registrant as Specified In Charter)
1680 38th Street, Suite 800
Boulder, Colorado 80301
(Address of Principal Executive Offices)
(303) 444-5483
(Registrant's Telephone Number, including Area Code)
Stephen C. Miller
1680 38th Street, Suite 800
Boulder, Colorado 80301
(Name and Address of Agent for Service)
Copies to:
Rose F. DiMartino, Esq. Richard T. Prins, Esq.
Willkie Farr and Gallagher Skadden, Arps, Slate, Meagher & Flom LLP
787 Seventh Avenue Four Times Square
New York, NY 10019-6099 New York, NY 10036
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement.
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
--------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Title of Securities Amount Being Maximum Offering Maximum Aggregate Amount of
Being Registered Registered Price per Unit Offering Price Registration Fee
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Taxable Auction Market
Preferred Stock........... 775 shares $100,000 $77,500,000 $20,460.00
previously paid
--------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BOULDER TOTAL RETURN FUND, INC.
CROSS REFERENCE SHEET
Part A Prospectus
Items in Part A of Form N-2
Specified in Prospectus Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover......................... Cover page
Item 2. Cover Pages; Other Offering Information..... Front Cover Page;
Outside Back Cover Page
Item 3. Fee Table and Synopsis...................... Prospectus Summary
Item 4. Financial Highlights........................ Financial Highlights
Item 5. Plan of Distribution........................ Cover Page; Prospectus
Summary; Underwriting
Item 6. Selling Shareholders........................ Inapplicable
Item 7. Use of Proceeds............................. Use of Proceeds;
Investment Objective and
Policies
Item 8. General Description of the Registrant....... Cover Page; Prospectus
Summary; The Company;
Investment Objective and
Policies
Item 9. Management.................................. Prospectus Summary;
Management of the
Company
Item 10. Capital Stock, Long-Term Debt,
and Other Securities........................ The Company; Investment
Objective and Policies;
Description of AMPS; the
Auction; Taxes
Item 11. Defaults and Arrears on Senior Securities... Inapplicable
Item 12. Legal Proceedings........................... Inapplicable
Item 13. Table of Contents of the Statement
of Additional Information................... Table of Contents of the
Statement of Additional
Information
Part B Statement of Additional Information
Location in Statement of
Items In Part B of Form N-2 Additional Information
--------------------------- --------------------------
Item 14. Cover Page................................. Cover Page
Item 15. Table of Contents.......................... Back Cover Page
Item 16. General Information and History............ Inapplicable
Item 17. Investment Objective and Policies.......... Investment Objective and
Policies; Investment
Policies and Techniques
Item 18. Management................................. Management of the Company
Item 19. Control Persons and Principal Holders
of Securities.............................. Management of the Company
Item 20. Investment Advisory and Other Services..... Management of the Company
Item 21. Brokerage Allocation and Other Practices... Portfolio Transactions
Item 22. Tax Status................................. Tax Matters
Item 23. Financial Statements....................... Financial Statements
(incorporated by
reference)
Part C Other Information
Items 24-33 have been answered in Part C of this Registration Statement
<PAGE>
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 4, 2000
PROSPECTUS
$77,500,000
BOULDER TOTAL RETURN FUND, INC.
Taxable Auction Market Preferred Stock (the "AMPS")
775 Shares
Liquidation Preference $100,000 Per Share
Boulder Total Return Fund, Inc., or the Company, is a closed-end,
diversified management investment company. The Company's investment objective is
total return. The Company seeks to produce both long-term capital appreciation
through investment in common stocks and current income consistent with
preservation of capital through investments in income producing securities. The
Company typically invests in securities of U.S.-based companies, though it is
not limited to investing in the U.S. stock market. The Company anticipates a low
turnover rate in its portfolio of common stocks and, with respect to common
stocks held for capital appreciation rather than income, seeks to invest in
stocks that have a proven track record of earnings and the prospect of increased
future value through growth in revenues and profits. The Company has the
flexibility to invest in companies of any size; however, it is expected that it
will not make significant investments in start-up companies, initial public
offerings, non-public companies, or companies with little or no operating
history.
Boulder Investment Advisers, LLC (the "Adviser") acts as the investment
adviser to the Company. The address of the Company and the Adviser is 1680 38th
Street, Suite 800, Boulder, Colorado 80301 and their common telephone number is
(303) 444-5483. Stewart West Indies Trading Company, Ltd. doing its investment
advisory business under the name Stewart Investment Advisers ("SIA") acts as a
sub-adviser to the Company and its address is Bellerive, Queen Street, St.
Peter, Barbados.
The AMPS will not be listed on an exchange. You may only buy or sell AMPS
through an order placed at an auction with or through a broker-dealer that has
entered into an agreement with the auction agent and the Company, or in a
secondary market maintained by certain broker-dealers. These broker-dealers are
not required to maintain this market, and it may not provide you with liquidity.
This prospectus sets forth concisely the information about the Company you
should know before investing. You should read the prospectus before deciding
whether to invest and retain it for future reference. A statement of additional
information, dated August __, 2000, containing additional information about the
Company, has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference in its entirety into this prospectus. You can
review the table of contents of the statement of additional information on page
of this prospectus. You may request a free copy of the statement of additional
information by calling 1-800 331-1710. You may also obtain the statement of
additional information and other information regarding the Company on the SEC's
web site (http://www.sec.gov).
Investing in the AMPS involves certain risks. See "Risks" beginning on page
___. The minimum purchase amount of the AMPS is $100,000.
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price $100,000 $77,500,000
Sales Load $ 375 $ 290,625
Proceeds to Company (before expenses) 1 $ 99,625 $77,209,375
</TABLE>
-----------------
1 Offering expenses payable by the Company are estimated to be $250,000.
The underwriter is offering the AMPS subject to various conditions. The
underwriter expects to deliver the AMPS to purchasers, in book-entry form,
through the facilities of The Depository Trust Company on or about August 15,
2000.
August , 2000
MERRILL LYNCH & CO.
<PAGE>
The Company is offering 775 newly issued shares of Taxable Auction Market
Preferred Stock (the "Offering"). We refer to these shares as the "AMPS"
throughout this prospectus and the related statement of additional information.
The dividend rate for the initial rate period (the period from the date of issue
through September 12, 2000) will be ___%, and will be paid on September 13,
2000. After the initial rate period, the dividend rate on the AMPS for each
subsequent rate period generally will be determined pursuant to auctions held
every 28 days. Prospective purchasers should carefully review the auction
procedures described in this prospectus and in the statement of additional
information and should note:
o a buy order or sell order is a commitment to buy or sell AMPS based on
the results of an auction;
o auctions will be conducted by telephone; and
o purchases and sales will be settled on the next business day after the
auction.
The Company is required to allocate net capital gains and other taxable
income, if any, proportionately between common shares and preferred shares,
including the AMPS, based on the percentage of total dividends distributed to
each class for that year.
Dividends on the AMPS are cumulative. The AMPS are redeemable, in whole or
in part, at the option of the Company on any date dividends are paid on the
AMPS, and will be subject to mandatory redemption, in certain circumstances, at
a redemption price of $100,000 per share plus accumulated but unpaid dividends
to the redemption date (whether or not declared), plus a premium in certain
circumstances.
You should rely only on the information contained in this prospectus. The
Company has not authorized anyone to provide you with different information. The
Company is not making an offer of these securities in any state where the offer
is not permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY..........................................................4
FINANCIAL HIGHLIGHTS........................................................8
THE COMPANY.................................................................9
USE OF PROCEEDS............................................................10
INVESTMENT OBJECTIVE AND POLICIES..........................................10
OTHER INVESTMENT PRACTICES.................................................11
Leverage................................................................11
Hedging.................................................................11
Other Investment Techniques.............................................11
RISKS......................................................................11
Interest Rate and Hedging Risks.........................................11
Investments In Common Stocks............................................12
Investments in Real Estate Investment Trusts ("REITs")..................12
Investments in Other Registered Investment Companies ("RICs")...........13
Investments in Preferred Stocks and Bonds...............................13
Auction Risk............................................................13
Secondary Market Risk...................................................13
Ratings and Asset Coverage Risk.........................................14
MANAGEMENT OF THE COMPANY..................................................14
Directors and Officers..................................................14
Investment Advisers.....................................................14
Beneficial Ownership and Control Persons................................16
Investment Philosophy...................................................18
The Investment Advisory Agreements......................................18
The Administration and Co-Administration Agreements.....................19
Expenses of The Company.................................................20
DESCRIPTION OF AMPS........................................................20
General.................................................................21
Dividends and Rate Periods..............................................21
Redemption..............................................................23
Liquidation.............................................................24
Rating Agency Guidelines and Asset Coverage.............................24
Voting Rights...........................................................25
THE AUCTION................................................................26
General.................................................................27
Auction Procedures......................................................27
Secondary Market Trading and Transfer of AMPS...........................29
TAXES......................................................................29
Federal Income Tax Matters..............................................29
State and Local Tax Matters.............................................30
DETERMINATION OF NET ASSET VALUE...........................................30
REPURCHASE OF COMMON SHARES................................................30
DESCRIPTION OF CAPITAL STOCK...............................................30
Common Shares...........................................................30
Preferred Stock.........................................................31
Anti-takeover Provisions of the Charter and By-Laws.....................31
OTHER SERVICE PROVIDERS....................................................33
UNDERWRITING...............................................................33
LEGAL OPINIONS.............................................................33
EXPERTS....................................................................34
REPORTS TO STOCKHOLDERS....................................................34
AVAILABLE INFORMATION......................................................34
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION..............35
<PAGE>
PROSPECTUS SUMMARY
The following information is a summary of, and is qualified in its
entirety by reference to, more detailed information included in this prospectus
and the Company's statement of additional information.
The Company.............. Boulder Total Return Fund, Inc. is a diversified,
closed-end management investment company. The
Company's investment objective is total return. The
Company seeks to produce both long-term capital
appreciation through investment in common stocks
and current income consistent with preservation of
capital through investments in income producing
securities. The Company typically invests in
securities of U.S.-based companies. See "Investment
Objective and Policies". As of June 30, 2000, the
Company had 9,416,743 shares of common stock
outstanding and 775 preferred shares outstanding.
The 775 preferred shares are Money Market Cumulative
Preferred Stock (the "MMP Shares") which will be
redeemed in their entirety in conjunction with the
Offering out of the proceeds of the Offering. The
Company's common shares are traded on the New York
Stock Exchange under the symbol "BTF."
The Offering............. The Company is offering 775 shares of AMPS (the
"Offering"). The purchase price for each AMPS Share
is $100,000 plus accumulated dividends, if any,
from the date the share is first issued. The AMPS are
being offered by Merrill Lynch & Co. ("Merrill
Lynch").
Investment Objective
and Policies............ The Company's investment objective is total return.
The Company seeks to produce both long-term capital
appreciation through investment in common stocks and
current income consistent with preservation of capital
through investments in income producing securities
such as dividend paying closed-end funds, real estate
investment trusts, U.S. Government securities,
preferred stocks and bonds. No assurance can be given
that the Company will achieve its investment objective.
The Company operates as a "diversified" management
investment company, as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). Under
this definition, at least 75% of the value of the
Company's total assets must at the time of investment
consist of cash and cash items (including receivables),
U.S. Government securities, securities of other
investment companies, and other securities limited in
respect of any one issuer to an amount not greater in
value than 5% of the value of the Company's total
assets and to not more than 10% of the voting
securities of a single issuer. This limit does not
apply, however, to 25% of the Company's assets, which
may be invested in a single issuer. The Company
intends to concentrate its common stock investments in
a few issuers and to take large positions in those
issuers, consistent with being a "diversified" fund.
As a result, the Company is subject to a greater risk
of loss than a fund that diversified its investments
more broadly. Taking larger positions is also likely to
increase the volatility of the Company's net asset
value reflecting fluctuation in the value of its large
holdings.
4
<PAGE>
Under normal market conditions, the Company
intends to invest at least 80% of its net assets
in common stocks and income securities. The term
"common stocks" includes income-producing closed-end
funds and real estate investment trusts ("REITs").
The term "income securities" includes preferred stocks,
bonds, notes, bills, debentures, convertible
securities, bank debt obligations, repurchase
agreements and short-term money market obligations.
Investment Advisers......Boulder Investment Advisers, L.L.C. (the
"Adviser") acts as the investment adviser to the
Company and Stewart Investment Advisers (the "Sub-
Adviser" or "SIA") is the Company's sub-
investment adviser. The Adviser has delegated to
SIA full authority to make investment decisions for
the Company and to determine the Company's asset
allocation. The address of the Company and the
Adviser is 1680 38th Street, Suite 800, Boulder
Colorado 80301 and their common telephone number is
(303) 444-5483. SIA's address is Bellerive, Queen
Street, St. Peter, Barbados.
Risk Factors.............Before investing in AMPS, you should consider carefully
the following risks of such an investment:
o If an auction fails you may not be able to
sell some or all of your shares;
o The Company holds a substantial position
(more than 25% of its assets) in the common
stock of a single issuer, Berkshire
Hathaway, Inc. and thus, the volatility of
the Company's common stock, and the Company's
net asset value and its performance in
general, depends disproportionately more on
the performance of such single issuer than
might a more diversified fund;
o The Company has substantial investments
in non-income producing common stocks (e.g.,
Berkshire Hathaway as described above);
o Because of the nature of the market for AMPS,
you may receive less than the price you paid
for your shares if you sell them outside of
the auction, especially when market interest
rates are rising;
o A rating agency could downgrade the rating
assigned to the AMPS, which could affect
liquidity;
o The Company may be forced to redeem your
shares to meet regulatory or rating agency
requirements and may voluntarily redeem
your shares without your consent;
o In certain circumstances the Company may not
earn sufficient income from its investments to
pay dividends out of income;
o Market factors, such as declines in the
value of its stock holdings or increases
in interest rates, may result in a decline
in the value of the Company's investment
portfolio thus reducing the asset coverage
for the AMPS; and
5
<PAGE>
o Adverse developments in the business affairs
of issuers of securities in which the Company
invests may have a negative impact on the
value of the Company's portfolio and its
income.
Secondary Market
Trading................The AMPS will not be listed on a stock exchange.
Instead, you may buy or sell AMPS at a periodic
auction by submitting orders to a broker-dealer
(a "Broker-Dealer") that has entered into a separate
agreement with the auction agent and the Company or to a
broker-dealer that has entered into an
agreement with a Broker-Dealer. In addition to the
auctions, Broker-Dealers and other broker-dealers may
maintain a separate secondary trading market in
AMPS, but may discontinue this activity at any
time. You may transfer shares outside of
auctions only to or through a Broker-Dealer, a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer, or other persons as
the Company may agree. There can be no assurance that a
secondary trading market for the AMPS will develop,
or if it does develop, that it will provide you with
liquidity.
Dividends and Rate
Periods...............After the initial rate period, the AMPS normally will
have a rate period consisting of twenty-eight (28) days.
The Board of Directors of the Company (the "Board") may,
from time to time, declare a different rate period upon
giving notice to the holders of the AMPS.
Dividends on the AMPS offered hereby are cumulative from
the date they are first issued and are payable when, as
and if declared by the Board, out of funds legally
available therefor. The Company will pay the initial
dividend for the AMPS on September 13, 2000 and thereafter
generally on the business day following each auction,
subject to certain exceptions.
After the initial rate period, the dividend rate
for the AMPS will be determined by auction. The dividend
rate for the initial rate period is ___% and the first
auction will be held on September 12, 2000.
In the event the Company wishes to designate a special
rate period, the Company will provide prior notice to the
auction agent and each Broker- Dealer and will not
designate such period if the lead broker for the auctions,
initially Merrill Lynch, Pierce, Fenner and Smith
Incorporated, objects. See "Dividends and Rate
Periods--Calculation of Dividend Payment".
Taxes.................Because in normal circumstances the Company will invest
substantially all of its assets in securities that pay
dividends or interest that is not exempt from regular
Federal income tax, the income you receive will ordinarily
be subject to regular Federal income tax. In addition,
your income may be subject to state and local
taxes. Taxable income or net realized capital gains
earned by the Company will be allocated proportionately
to holders of the Company's preferred shares and common
shares, based on the percentage of total dividends paid
to each class for that year. In addition, income
eligible for the "dividends received deduction" will
be allocated proportionally to holders of the AMPS
and the Company's common shares. Accordingly, a
portion of the dividends paid on the AMPS may be taxable
at long-term capital gains rates, which are lower for
individuals than rates on ordinary income and short-term
capital gain.
6
<PAGE>
Liquidation
Preference...........The liquidation preference of each AMPS share will be
$100,000, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) plus the
premium, if any, resulting from the designation of a
premium call period.
Ratings.............It is a condition to their issuance that the AMPS be
issued with a rating of "aa1" from Moody's Investor
Services, Inc. ("Moody's") and "AA" from Standard & Poor's
Ratings Group ("S&P"). These ratings are an assessment of
the capacity and willingness of an issuer to pay preferred
stock obligations. The ratings are not a recommendation to
purchase, hold or sell those shares, inasmuch as the rating
does not comment as to market price or suitability for a
particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of
AMPS will be able to sell such shares in an auction or
otherwise. The ratings are based on current information
furnished to Moody's and S&P by the Company and the Adviser
and information obtained from other sources. The ratings may
be changed, suspended or withdrawn, in the rating agencies'
discretion, as a result of changes in, or the unavailability
of, such information.
Redemption..........Holders of AMPS will not have the right to cause the
Company to redeem their shares. The Company may, however,
be required by applicable law or by rating agency guidelines
to redeem the AMPS if, for example, the Company does not
meet an asset coverage ratio required by law or correct a
failure to meet a rating agency guideline in a timely
manner. The Company may also voluntarily redeem the AMPS
without your consent.
Voting Rights.......The 1940 Act requires that the holders of any preferred
shares, voting together as a single class separate from the
holders of common shares, have the right to elect at least
two directors of the Company at all times and to elect a
majority of the directors at any time if two years'
dividends on the AMPS have not been paid and the Company
has not eliminated all dividend arrearages. The holders of
AMPS and any other outstanding preferred shares will vote
as a separate class on certain other matters as required
under the Company's charter, the 1940 Act and Maryland law.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below set forth certain specified information for an outstanding
share of common stock and an outstanding share of MMP stock of the Company
throughout each period presented. The financial highlights for fiscal years
ended November 30 have been audited by PricewaterhouseCoopers LLP, the Company's
independent auditors, whose report covering each of the five years in the period
ended November 30, 1999, is included in the Company's most recent Annual Report
and is incorporated by reference in the statement of additional information. The
Company's unaudited financial statements in its May 30, 1999 Semi-Annual Report
are also incorporated by reference in the statement of additional information.
On August 27, 1999 the Company changed its objective from income to total
return. The financial highlights should be read in conjunction with the
financial statements and notes thereto included in the Company's most recent
Annual Report and Semi-Annual Report, which are available without charge from
the Company by calling the Company at 1-800 331-1710.
<TABLE>
<CAPTION>
Year Ended November 30
Six Months
Ended
May 31, 1999 1998 1997 1996 1995 1994 1993****
2000
<S> <C> <C> <C> <C> <C> <C> <C>
(Unaudited)
OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.32 $16.06 $16.33 $15.31 $14.54 $12.22 $14.36 $13.95
Net investment income............ 0.38 1.29 1.33 1.36 1.41 1.39 1.40 0.83
Net realized and unrealized
gain/(loss) on investments....... 0.11 (1.93) 0.13 10 0.72 2.46 (1.94) 0.54
Total from investment operations. 0.49 (0.64) 1.46 2.46 2.13 3.85 (0.54) 1.37
(.22)
DISTRIBUTIONS:
Dividends paid from net investment
income to MMP* Shareholders...... (0.24) (0.35) (0.25) (0.26) (0.34) (0.36) (0.28) (0.09)
Distributions paid from net
realized capital gains to MMP* -- (0.03) (0.14) (0.06) (0.02) -- -- (0.01)
Shareholders.....................
Dividends paid from net investment
income to Common Shareholders.... (0.14) (1.02) (1.07) (1.05) (1.02) (1.15) (1.09) (0.61)
Distributions paid from net
realized capital gains to Common -- (0.64) (0.29) (0.05) -- -- (0.24) --
Shareholders.....................
Change in accumulated undeclared
dividends on MMP* Shareholders...
----- ------- ----- ------ ----- ------ ---- ------
0.03 (0.06)+ 0.02 (0.02) 0.02 (0.02) 0.01 (0.03)
---- ------- ----- ------- ----- ------ ---- ------
Total distributions ............. (0.35) (2.10) (1.73) (1.44) (1.36) (1.53) (1.60) (0.74)
Net asset value, end of period... $13.46 $13.32+ $16.06 $ 16.33 $ 15.31 $ 14.54 $12.22 $14.35
Market value, end of period...... $10.75 $10.188 $13.625 $15.625 $14.625 $13.125 $11.125 $14.25
Total investment return based on
net asset value** ............... 2.47% (5.17)% 7.65% 14.66% 13.89% 30.38% (5.79)% 7.40%
Total investment return based on
market value**................... 7.01% (14.51)% (4.55)% 14.84% 20.50% 29.28% (13.55)% (.89)%
RATIOS TO AVERAGE NET ASSETS
AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Operating expenses (a) .......... 2.67% 1.97% 1.83% 1.60% 1.84% 1.89% 1.91% 1.66%
Net investment income (a)***..... 2.51% 6.08% 5.92% 6.51% 7.44% 7.81% 8.35% 6.59%
SUPPLEMENTAL DATA:
Portfolio turnover rate ......... 45% 69% 86% 77% 98% 93% 110% 135%
Net assets, end of period (in
000's)........................... $204,708 $228,829 $231,572 $221,840 $212,827 $192,795 $212,577 $203,609
Ratio of operating expenses to
Total Average Net Assets including 1.62% 1.26% 1.22% 1.05% 1.17% 1.16% 1.17% 1.07%
MMP*.............................
</TABLE>
* Money Market Cumulative Preferred(TM)Stock.
** Assumes reinvestment of distributions at the price obtained by the
Company's Dividend Reinvestment Plan.
*** The net investment income ratios reflect income net of operating expenses
and payments to MMP(TM) Shareholders.
**** The Company commenced operations on February 19, 1993.
+ Includes effect of additional distribution available to MMP(TM)
Shareholders ($0.04 per Common share).
(a) Annualized for the six months ended May 31, 2000.
8
<PAGE>
<TABLE>
<CAPTION>
Money Market Cumulative Preferred(TM) Stock
Total Shares Asset Coverage Involuntary Average Market
Outstanding per Share Liquidating Value per Share(1)
Preference Per
Share (1)
<S> <C> <C> <C> <C>
5/31/00* 775 $264,165 $100,000 $100,000
11/30/99 775 $262,733 $100,000 $100,000
11/30/98 775 $295,263 $100,000 $100,000
11/30/97 775 $298,802 $100,000 $100,000
11/30/96 775 $286,246 $100,000 $100,000
11/30/95 775 $277,196 $100,000 $100,000
11/30/94 775 $248,767 $100,000 $100,000
11/30/93 775 $274,293 $100,000 $100,000
</TABLE>
(1) Excludes accumulated undeclared dividends.
* Unaudited
THE COMPANY
Boulder Total Return Fund, Inc. is a diversified, closed-end management
investment company. The Company was incorporated under the laws of the State of
Maryland on December 21, 1992, and is registered under the 1940 Act. The address
of the Company is 1680 38th Street, Suite 800, Boulder, Colorado 80301 and its
telephone number is (303) 444-5483.
The Company commenced investment operations on February 19, 1993, upon the
closing of the initial public offering of 8,000,000 of its common shares. The
net proceeds of such offering were approximately $111.6 million.
Prior to August, 1999, the Company's investment objective was "high current
income consistent with preservation of capital". On August 27, 1999, a special
shareholders meeting was held at which the Company's shareholders approved,
among other things:
o A change in the Company's investment objective from "high current income
consistent with preservation of capital" to total return;
o Three new advisers for the Company (Boulder Investment Advisers, LLC,
Stewart Investment Advisers and Spectrum Asset Management, Inc.);
o A new name for the Company (from Preferred Income Management Fund
Incorporated to Boulder Total Return Fund, Inc.); and
o The amendment of certain investment restrictions consistent with the
Company's new investment objective.
The Company has outstanding 775 shares of Money Market Cumulative Preferred
Shares (the "MMP Shares"). The MMP Shares were issued with a liquidation
preference per share of $100,000, plus accumulated and unpaid dividends. The MMP
Shares will be redeemed in conjunction with the Offering out of the proceeds
from the Offering.
9
<PAGE>
As of June 30, 2000, the Company's issued and outstanding shares were as
follows:
<TABLE>
<CAPTION>
Title and Class Amount Authorized Amount Held by Company Amount Outstanding
or for Its Account
<S> <C> <C> <C>
Common Stock 240,000,000 0 9,416,743
Preferred Stock 10,000,000 0 775
</TABLE>
The Company's common shares are traded on the New York Stock Exchange under
the symbol "BTF."
USE OF PROCEEDS
The net proceeds of the Offering will be approximately $76,959,375 after
payment of offering expenses (estimated to be $250,000) and the sales load.
The net proceeds of the Offering will be used to redeem the MMP Shares and
thus will be invested in accordance with the Company's investment objective and
policies as stated below.
INVESTMENT OBJECTIVE AND POLICIES
The Company's investment objective is total return. The Company seeks to
produce both long-term capital appreciation through investment in common stocks
and current income consistent with preservation of capital through investments
in income producing securities, such as dividend-paying closed-end funds
("RICs"), real estate investment trusts ("REITs"), U.S. Government securities,
preferred stocks and bonds. No assurance can be given that the Company will
achieve its investment objective.
The Company operates as a "diversified" management investment company, as
defined in the 1940 Act. Under this definition, at least 75% of the value of the
Company's total assets must at the time of investment consist of cash and cash
items (including receivables), U.S. Government securities, securities of other
investment companies, and other securities limited in respect of any one issuer
to an amount not greater in value than 5% of the value of the Company's total
assets and to not more than 10% of the voting securities of a single issuer.
This limit does not apply, however, to 25% of the Company's assets, which may be
invested in a single issuer. The Company intends to concentrate its common stock
investments in a few issuers and to take large positions in those issuers,
consistent with being a "diversified" fund. As a result, the Company is subject
to a greater risk of loss than a fund that diversified its investments more
broadly. Taking larger positions is also likely to increase the volatility of
the Company's net asset value reflecting fluctuation in the value of its large
holdings.
Under normal market conditions, the Company intends to invest in a
portfolio of common stocks and income securities. The portion of the Company's
assets invested in each can vary depending on market conditions. The term
"common stocks" includes both stocks acquired primarily for their appreciation
potential and stocks acquired for their income potential, such as
dividend-paying RICs and REITs. The term "income securities" includes bonds,
U.S. Government securities, notes, bills, debentures, preferred stocks,
convertible securities, bank debt obligations, repurchase agreements and
short-term money market obligations. The term "preferred stocks" or "preferreds"
includes traditional preferred stocks as well as so-called "hybrid," or taxable,
preferred securities and other similar or related investments. These hybrid
securities, which currently are marketed under such acronyms as TOPrS, TIPS,
QUIPS, MIPS, QUIDS, QUICS and Capital Securities, may be debt-like in key
characteristics.
As of June 30, 2000 the Company's portfolio is invested primarily in common
stocks (53.4%), with 16.2% invested in preferred stocks and 30.4% in cash
equivalents. The Company currently intends to invest in RICs and REITs in order
to generate sufficient income to pay interest on the AMPS when due. Under
current market conditions, these investments and investments in hybrid preferred
securities generally are generating higher income than traditional preferred
stocks that had comprised most of the Company's portfolio prior to the change in
the Company's investment objective described above. Under the 1940 Act, the
Company must limit to 10% the portion of its assets invested in RICs and, absent
an amendment to the Company's industry concentration policy, must limit to 25%
the portion of its assets invested in REITs. Each of these percentage
limitations is calculated at the time of
10
<PAGE>
investment, and the Company will not be required to dispose of assets if
holdings increase above these levels due to appreciation. Under current market
conditions, it is expected that the Company will have investments in RICs and
REITs close to such 10% and 25% limitations as long as the AMPS or other
leverage is outstanding.
The volatility of common stock prices has historically been greater than
fixed-income securities, and as the Company continues to shift a greater portion
of its assets into common stocks, the volatility of the Company's net asset
value may also increase. The time horizon for the Company to achieve its
objective of total return will likely be longer than for a fund that invests
solely for income.
The Company may, for temporary defensive purposes, allocate a higher
portion of its assets to cash and cash equivalents. For this purpose, cash
equivalents consist of short-term (less than twelve months to maturity) U.S.
Government securities, certificates of deposit and other bank obligations,
investment grade corporate bonds and other debt instruments, and repurchase
agreements. Under normal market circumstances, the Company will not have more
than 10% of its assets in cash and cash equivalents.
Except for the Company's investment objective and the Company's industry
concentration and issuer diversification policies described above, the
percentage limitations and investment policies set forth in this Prospectus can
be changed by the Board without shareholder approval.
OTHER INVESTMENT PRACTICES
Leverage
Since February 1993, the Company has been leveraged with $77.5 million of
the MMP Shares and, after redemption of the MMP Shares and issuance of the AMPS,
it is intended that the Company will remain leveraged to the same degree with
the AMPS (i.e., $77.5 million). It is expected that as long as the Company
utilizes the leverage, it will maintain an investment in income-producing
securities sufficient to pay the expenses of the Company and to service the
dividends payable on the AMPS.
Hedging
Historically the Company had entered into certain hedging transactions to
offset some of the interest rate risk associated with its preferred stock
portfolio when 100% of the Company's assets were in preferred stocks. However,
due to the cost of hedging, and the smaller percentage of the Company's assets
invested in fixed income securities, the Company has discontinued hedging its
portfolio.
Other Investment Techniques
The Company may engage in other types of transactions, including, but not
limited to, investment in restricted and illiquid securities, RICs or REITs,
repurchase and reverse repurchase agreements, when-issued and forward commitment
transactions, borrowing, securities lending and other transactions. For a
description of such types of transactions, see "Investment Policies and
Techniques" in the statement of additional information.
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or that you may lose part or all of your investment.
Therefore, before investing you should consider carefully the following risks
that you assume when you invest in AMPS.
Interest Rate and Hedging Risks
Since August 27, 1999, at which time the Company changed its investment
objective from "income" to "total return", the Company has steadily reduced its
holdings in preferred stocks in an effort to make cash available to purchase
common stocks. As a result of implementing the Company's change in investment
objective, the
11
<PAGE>
income available for servicing the dividends payable to holders of the AMPS will
decrease significantly from its historical levels, although it is contemplated
that such income will be more than adequate to pay the expenses of the Company
while at the same time servicing the dividend payable to holders of the AMPS.
Nonetheless, if short-term interest rates rise, the dividend rates on the AMPS,
which are expected to correlate with short-term interest rates, may rise so that
the amount of dividends paid to holders of the AMPS approaches or exceeds the
income from the entire portfolio. If that occurs, the Company may have to
liquidate a portion of its holdings in order to service dividends to holders of
the AMPS, which may have adverse tax consequences and generate transaction
costs.
Dividend rates on fixed rate preferred stocks held by the Company, as their
name implies, would be fixed regardless of the direction of interest rates. In
addition, the market prices of such fixed rate preferred stocks would tend to
(1) decline as interest rates rose and (2) rise as interest rates fell. See
"Risk Factors."
Investments In Common Stocks
Common stocks generally have greater risk exposure and reward potential
over time than bonds. The volatility of common stock prices has historically
been greater than bonds, and as the Company shifts a greater portion of its
assets into common stocks, the volatility of the Company's net asset value may
also increase. Further, because the time horizon for the Company's investments
in common stock is longer, the time necessary for the Company to achieve its
objective of total return will likely be longer than for a fund that invests
solely for income.
The Company presently has invested a significant percentage (41.4% as of
June 30, 2000) of its portfolio in low-dividend or non-dividend paying common
stocks such as Berkshire Hathaway, Inc. Accordingly, once the Company's recently
approved investment objective (i.e., total return) is fully implemented, the
Company will not generate income at its historic levels thus resulting in a
decreased distribution of investment income to the holders of the Company's
common stock. As of June 30, 2000, the Company held 750 Berkshire Hathaway, Inc.
"A" shares and 9010 "B" shares. At the time of investment, this represented less
than 25% of the Company's assets. However, because of appreciation, as of June
30, 2000 these positions represented 29% of the Company's assets. The Adviser
does not currently intend to liquidate any portion of its position in Berkshire
Hathaway, Inc. Though not an insurance company itself, Berkshire Hathaway owns
Geico Insurance and General Re Insurance companies, and therefore derives a
significant portion of its income, and its value, from these two insurance
companies. Insurance companies can be significantly affected by interest rates
as well as price competition within the industry. In addition, an insurance
company may experience significant changes in its year to year operating
performance based both on claims paid and on performance of invested assets.
Insurance companies can also be affected by government regulations and tax laws,
which may change from time to time. A significant decline in the market price of
Berkshire Hathaway, Inc. or other company in which the Company has made a
significant common stock investment may result in (i) the Company's failing the
coverage ratio thresholds imposed on the Company by the 1940 Act or by Moody's
and S&P, (ii) a decline in the market price of the Company's common shares and
(iii) greater risk and market fluctuation than a fund that has securities
representing a broader range of investment alternatives.
Investments in Real Estate Investment Trusts ("REITs")
REITs, or Real Estate Investment Trusts, are securities of companies whose
primary objective is investment in real property or providing services to real
property interests. The Company may invest up to 25% of its assets in REIT
securities. The Company intends to invest in REIT securities primarily for
income. As of June 30, 2000, the Company had 10.4% of its assets invested in
REITs.
There are risks associated with investing in REITs, including the
potential for loss of value if the underlying properties in which the REIT
invests decline in value. Property valuations may rise and fall with either the
local economy conditions or with the national economy. Furthermore, the dividend
income paid out by the REIT may be reduced or eliminated. In addition, the
Company bears its ratable share of a REIT's expenses while still paying
management fees on the Company assets so invested.
12
<PAGE>
Investments in Other Registered Investment Companies ("RICs")
The Company may invest up to 10% of its assets in other investment
companies registered under the 1940 Act. The Company intends to invest in other
closed-end RICs having an income objective when they are trading at a discount,
and when market conditions seem appropriate to the Adviser. As of June 30, 2000,
the Company had 5.0% of its assets invested in RICs.
The Company intends to normally invest in RICs that pay dividends. There
are risks associated with investments in RICs, including the risk that the
dividend paid by the RIC could be reduced or eliminated. As a shareholder in
another fund, the Company will pay double fees, by bearing its ratable share of
that fund's expenses, including management fees, and remaining subject to the
Company's advisory and administrative fees with respect to the assets so
invested.
Investments in Preferred Stocks and Bonds
Preferred stocks constituted approximately 16.2% of the Company's assets as
of June 30, 2000. This is down significantly from August 27, 1999 (the date
shareholders approved the change in objective from income to total return), when
the Company held almost 100% of its assets in preferred stocks. Preferred stock,
along with common stock, is one of the two major types of equity securities.
Generally, preferred stock receives dividends prior to distributions on common
stock and usually has a priority claim over common stockholders if the issuer of
the stock is liquidated. Since 1993, a hybrid preferred security was introduced
to the market which had both equity and debt characteristics. Such hybrid
preferred securities pay dividends that are not eligible for the corporate
Dividends Received Deduction. The Company had approximately 15% of its assets
invested in such hybrid preferred securities as of June 30, 2000. On June 23,
2000, the Board approved a management proposal to substantially curtail or
eliminate entirely the Company's remaining holdings in preferred stocks.
Preferred stocks and corporate bonds may be substantially less liquid than
many other securities such as common stocks or U.S. Government securities. In
addition, preferred stocks and bonds purchased by the Company may be subject to
risk with respect to the issuing entity and to market fluctuations. In
particular, such preferred stocks and bonds may be subject to "credit risk",
which refers to an issuer's ability to make timely payments of interest and
principal. The Company does not expect to make substantial investments in
preferred stocks. Lower-quality securities in the Company's portfolio may be
subject to greater risk than higher rated securities. The Company limits to 15%
of its assets the portion of its portfolio invested in preferred stocks and
bonds rated below investment grade, which securities will be rated at least
either "ba" by Moody's or "BB" by S&P at the time of purchase and will have been
issued by an issuer having a class of outstanding senior debt that is rated at
least investment grade by Moody's or S&P.
Auction Risk
The dividend rate for the AMPS normally is set through an auction process.
In the auction, holders of AMPS indicate the dividend rate at which they would
be willing to hold or sell their AMPS or purchase additional AMPS and potential
investors indicate the rate at which they would be willing to purchase AMPS. The
auction also provides liquidity for the sale of AMPS. An auction fails if there
are more AMPS offered for sale than there are buyers. You may not be able to
sell your AMPS at an auction if the auction fails. In the event of a failed
auction, the applicable rate for the next rate period (except in the event of an
auction for a special rate period) will be the maximum rate on the auction date.
Also, if you place hold orders (orders to retain AMPS) at an auction only at a
specified dividend rate, and that rate exceeds the rate set at the auction, you
will be obligated to sell your AMPS to investors who bid a lower rate. Finally,
if you and enough other investors place bid or hold orders without specifying a
dividend rate below which you and such other investors would not wish to buy or
continue to hold those AMPS, you would receive a lower dividend rate on your
shares for the next rate period than the market rate. See "The Auction".
Secondary Market Risk
If you try to sell your AMPS between auctions, you may not be able to sell
any or all of your shares, or you may not be able to sell them for $100,000 per
share plus accumulated dividends. If the Company has designated a
13
<PAGE>
special rate period of more than 28 days, changes in interest rates could affect
the price you would receive if you sold your shares in the secondary market more
than if the Company were utilizing the normal rate period. Broker-dealers that
maintain a secondary trading market for AMPS are not required to maintain this
market, and the Company is not required to redeem shares either if an auction or
an attempted secondary market sale fails because of a lack of buyers. AMPS are
not listed on a stock exchange or the NASDAQ stock market. If you sell your AMPS
to a broker-dealer between auctions, you may receive less than the price you
paid for them, especially if market interest rates have risen since the last
auction.
Ratings and Asset Coverage Risk
While it is a condition to the issuance of the AMPS that Moody's assign a
rating of "aa1" and S&P a rating of "AA" to the AMPS, such ratings do not
eliminate or necessarily mitigate the risks of investing in AMPS. Moody's or S&P
could downgrade the AMPS, which may make your shares less liquid at an auction
or in the secondary market. If Moody's or S&P downgrades the AMPS, the Company
may alter its portfolio or redeem AMPS in an effort to improve the rating,
although there is no assurance that it will be able to do so to the extent
necessary to restore the prior rating. The Company may voluntarily redeem the
AMPS without your consent. See "Rating Agency Guidelines and Asset Coverage" for
a description of the asset maintenance tests the Company must meet. Further
information concerning the rating categories of S&P and Moody's is provided in
Appendix A to the statement of additional information.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Company's Board is responsible for oversight of the overall management
of the Company, including supervision of the Adviser and Sub-Adviser. There are
five directors of the Company. Two of the directors are "interested persons" (as
defined in the 1940 Act). The names and business addresses of the directors and
officers of the Company and their principal occupations and other affiliations
during the past five years are set forth under "Management of the Company" in
the statement of additional information.
Investment Advisers
The Company engages the investment advisory services of the following
registered investment advisers:
o Boulder Investment Advisers, L.L.C. (referred to herein as the
"Adviser") is the investment adviser to the Company. The Adviser has
delegated to Stewart Investment Advisers ("SIA") full authority to
make investment decisions for the Company and to determine the
Company's asset allocation. The Adviser was formed on April 8, 1999 as
a Colorado limited liability company; its principal place of business
is 1680 38th Street, Boulder, Colorado 80301. The Adviser, which is
registered as an investment adviser under the Investment Advisers Act
of 1940, as amended (the "Investment Advisers Act") had not prior to
August 1999 previously served as adviser to a registered investment
company or managed assets on a discretionary or non-discretionary
basis. The equity owners of the Adviser are Evergreen Atlantic, L.L.C.
("EALLC"), and the Lola Brown Trust No.1B (the "Lola Brown Trust"),
each an "affiliated person" with respect to the Company (as that term
is defined in the 1940 Act). Carl D. Johns, the Company's Vice
President and Treasurer, is responsible for the Adviser's day-to-day
activities. Mr. Johns received a Bachelors degree in Mechanical
Engineering at the University of Colorado in 1985, and a Masters
degree in Finance from the University of Colorado in 1991. He worked
at Flaherty & Crumrine Incorporated, the former adviser for the
Company, from 1992 to 1998. During that period he was an Assistant
Treasurer for the Preferred Income Fund Incorporated, the Preferred
Income Opportunity Fund Incorporated, and the Company. The executive
officers of the Adviser and the principal occupation of each are set
forth below:
14
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------- ------------------------------------------------------
Name and Position
with the Adviser Principal Occupation
----------------------------------------------------- ------------------------------------------------------
<S> <C>
Stephen C. Miller - Director, General Counsel, President, Chief Executive Officer and Chairman of
Chairman of the Board, President and Chief the Board of the Company since April 1, 1999; Vice
Executive Officer President and Secretary of SIA; Director and
President of Horejsi, Inc. (dissolved in 1999);
Director, Vice President and Assistant Secretary of
Badlands Trust Company; of Counsel to Krassa, Madsen
& Miller, LLC since 1991; Manager of Boulder
Administrative Services, L.L.C., the
Co-Administrator of the Company
----------------------------------------------------- ------------------------------------------------------
Carl D. Johns - Investment Manager, Vice President Chief Financial Officer, Chief Accounting Officer,
and Treasurer Vice President and Treasurer of the Company;
Assistant Manager of the Co-Administrator
---------------------------------------------------- ------------------------------------------------------
Laura Rhodenbaugh - Secretary Secretary of the Co-Administrator; Treasurer of SIA;
Secretary and Treasurer of various Horejsi family
entities
----------------------------------------------------- ------------------------------------------------------
</TABLE>
o Stewart West Indies Trading Company, Ltd., doing business as Stewart
Investment Advisers (referred to herein as the "Sub-Adviser" or "SIA")
acts as the sub-adviser to the Company. SIA manages the Company's
portfolio and determines the Company's asset allocation. Stewart R.
Horejsi, an employee of SIA and its primary investment manager, is
responsible for the day-to-day strategic management of the Company's
assets. Mr. Horejsi has full discretion regarding specific investment
decisions and the Company's asset allocation among cash, common stocks
and fixed income investments. Mr. Horejsi has been a Director of the
Company since July 1997; General Manager, Brown Welding Supply, LLC,
since April 1994; and the President or Manager of various subsidiaries
associated with the Horejsi family since June, 1986. Mr. Horejsi has
been the investment adviser for the Horejsi family trusts (i.e., the
Lola Brown Trust, the Ernest Horejsi Trust No. 1B, the Stewart R.
Horejsi Trust No. 2 and certain other related trusts and affiliates)
since 1982. As of August 4, 2000, the size of these trusts' and
affiliates' common stock portfolio was approximately $481.7 million.
Mr. Horejsi has been the Director and President of the Horejsi Family
Charitable Foundation, Inc. since 1997. Mr. Horejsi received a Masters
Degree in Economics from Indiana University in 1961 and a Bachelor of
Science Degree in Industrial Management from the University of Kansas
in 1959. The principal place of business for SIA is Bellerive House,
Queen Street, St. Peter, Barbados. SIA, a Barbados international
business company incorporated on November 12, 1996, is wholly owned by
the Stewart West Indies Trust, a South Dakota trust established by
Stewart R. Horejsi in 1996 primarily to benefit his issue. SIA, which
is registered as an investment adviser under the Investment Advisers
Act, prior to August 1999 had not served as adviser to a registered
investment company or managed assets on a discretionary or
non-discretionary basis except for Horejsi family interests. However,
as described above, Stewart R. Horejsi, a principal of SIA, has
extensive experience managing common stocks for his family interests.
SIA currently has no investment advisory clients other than the
Company.
SIA is not a U.S. company and substantially all of its assets
are located outside the United States. As a result, it may be
difficult for investors to realize judgments of courts of the United
States predicated upon civil liabilities under federal securities
laws of the United States. The Company has been advised that there is
substantial doubt as to the enforceability in Barbados of such civil
remedies and criminal penalties as are afforded by the federal
securities laws of the United States. Nonetheless, pursuant to the
sub-advisory agreement between SIA, the Adviser and the Company, SIA
has agreed to have an agent for service of process in any legal
action in the United States and to be subject to the jurisdiction of
the U.S. courts. The executive officers and directors of SIA and the
principal occupation of each are set forth below:
15
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------- ------------------------------------------------------
Name and Position with SIA Principal Occupation
----------------------------------------------------- ------------------------------------------------------
<S> <C>
Glade Christensen - President and Resident General Sales Manager for SIA. Mr. Christensen does not
Sales Manager participate in the investment advisory business of
SIA.
----------------------------------------------------- ------------------------------------------------------
Stephen C. Miller - Vice President and Secretary President, Chief Executive Officer and Chairman of
the Board of the Company; Vice President and
Secretary of SIA; Director, Vice President and
Assistant Secretary of Badlands Trust Company; of
Counsel to Krassa, Madsen & Miller, LLC since 1991;
Manager of the Co-Administrator
----------------------------------------------------- ------------------------------------------------------
Laura Rhodenbaugh - Treasurer Secretary of Co-Administrator; Treasurer of SIA;
Secretary and Treasurer of various Horejsi family
entities
----------------------------------------------------- ------------------------------------------------------
Stewart R. Horejsi - Investment Manager Investment manager for SIA and investment and
business consultant for the Horejsi Affiliates
----------------------------------------------------- ------------------------------------------------------
</TABLE>
o Spectrum Asset Management, Inc. (referred to herein as "Spectrum"),
will act as a sub-adviser to the Company managing the Company's
preferred stock portfolio until August 15, 2000. Spectrum has its
principal offices at 4 High Ridge Park, Stamford, Connecticut 06905.
On June 23, 2000, the Board approved a management proposal to
substantially curtail or eliminate entirely, in SIA's discretion, the
Company's holdings in preferred stocks. This decision necessarily
contemplated the eventual resignation of Spectrum. On June 30, 2000,
management held discussions with Spectrum and the parties mutually
agreed to terminate the sub-advisory agreement effective as of August
15, 2000.
Beneficial Ownership and Control Persons
The following table sets forth certain information regarding the beneficial
ownership of the Company's shares as of July 1, 2000, by each person who is
known by the Company to beneficially own 5% or more of the Company's common
stock. To the Company's knowledge, there are no 5% or greater beneficial owners
of MMP Shares.
16
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------- -------------------------
Name of Owner Number of Shares
Beneficially Owned
--------------------------------------- -------------------------
<S> <C>
EALLC(1) 257,811
--------------------------------------- -------------------------
John S. Horejsi Trust(1)(2) 65,747
--------------------------------------- -------------------------
Susan L. Ciciora Trust(1)(2) 131,475
--------------------------------------- -------------------------
Stewart West Indies Trust(1)(2) 191,907
--------------------------------------- -------------------------
The Evergreen Trust(1)(2) 47,632
--------------------------------------- -------------------------
Lola Brown Trust No. 1B(1) 1,028,001
--------------------------------------- -------------------------
Ernest Horejsi Trust No. 1B(1) 2,498,053
--------------------------------------- -------------------------
Badlands Trust Company(3) 3,975,550
--------------------------------------- -------------------------
Stewart R. Horejsi Trust No. 2(4) 3,975,550
--------------------------------------- -------------------------
Aggregate Shares Owned 3,975,550
--------------------------------------- -------------------------
</TABLE>
* The address of EALLC is 1680 38th Street, Suite 800, Boulder, Colorado
80301. The address for each of the other listed owners is 614 Broadway,
P.O. Box 801, Yankton, South Dakota 57078.
** Aggregate number and percentage are less than the sum total of amounts
shown for each owner because the same shares may be deemed beneficially
owned by more than one party (see Footnotes 1 through 4).
(1) DIRECT OWNERSHIP. Evergreen Atlantic, L.L.C. ("EALLC"), John S. Horejsi
Trust ("John Trust"), Susan L. Ciciora Trust ("Susan Trust"), Stewart West
Indies Trust ("SWIT"), Lola Brown Trust No. 1B ("Lola Brown Trust"), the
Ernest Horejsi Trust No. 1B ("Ernest Trust") and Badlands Trust Company
("Badlands") directly own 257,811; 27,075; 54,132; 78,470; 1,028,001;
2,498,053; and 12,735, respectively, of the Company's common stock shares,
totaling 3,975,550 shares or 42.22% of the outstanding shares of the
Company.
(2) INDIRECT OWNERSHIP THROUGH EVERGREEN. Numbers shown in the table include
shares held directly (see Footnote No. 1) and shares that may be deemed to
be beneficially owned indirectly through ownership of EALLC. The
outstanding equity membership of EALLC is owned by SWIT, the John Trust,
the Susan Trust and the Evergreen Trust in the following percentages - 44%,
15%, 30% and 11%. The sole trustee of SWIT, the John Trust and the Susan
Trust is Badlands. Mr. Horejsi is not a beneficiary under any of these
trusts. The trustees of Evergreen Trust are Badlands, Stephen C. Miller and
Larry Dunlap. Any action by the Evergreen Trust requires a majority vote of
the trustees.
(3) OWNERSHIP BY BADLANDS. Numbers shown in the table includes shares held
directly by Badlands (see Footnote No. 1) and shares that may be deemed to
be beneficially owned indirectly by Badlands through direct or indirect
ownership by the Lola Brown Trust, the Ernest Trust, SWIT, the John Trust,
the Susan Trust and the Evergreen Trust. Badlands is the sole trustee of
three of the four trusts that control EALLC (see Footnote No. 2) and,
together with Larry Dunlap and Susan Ciciora, one of three trustees of the
Lola Brown Trust and the Ernest Trust. Badlands is a trust company
organized under the laws of South Dakota, which is wholly owned by the SRH
Trust, an irrevocable trust organized by Mr. Stewart Horejsi for the
benefit of his children. The directors of Badlands are Larry Dunlap,
Stephen C. Miller, Robert Ciciora, who is the brother of Mr. Horejsi's
son-in-law (John Ciciora), Daniel Loveland and Marty Jans.
(4) INDIRECT OWNERSHIP BY SRH TRUST. Numbers shown in the table reflects shares
that may be deemed to be beneficially owned indirectly through ownership of
Badlands. The trustees of the SRH Trust are Badlands, Robert Ciciora and
Robert Kastner.
EALLC, the John Trust, the Susan Trust, SWIT, the Lola Brown Trust, the
Ernest Trust, Badlands, the Stewart R. Horejsi Trust No. 2 ("SRH Trust") and
Stewart R. Horejsi are, as a group, considered to be a "control person" of the
Company (as that term is defined in Section 2(a)(9) of the 1940 Act). These
entities and other trusts
17
<PAGE>
or companies with interlocking management and/or common ownership, including the
Co-Administrator (collectively, the "Horejsi Affiliates") may be deemed to
indirectly own additional Company shares, which are included in the table above.
Further, Stewart R. Horejsi, the investment manager for SIA, is also the primary
investment consultant for the Horejsi Affiliates and, on a discretionary basis,
implements and directs their investment objective and asset allocation.
Investment Philosophy
Common Stocks. With respect to the common stock portfolio (other than
common stocks purchased primarily for their income-producing potential), SIA
uses an "intrinsic value" approach to selecting and managing the Company's
assets. SIA defines intrinsic value as the discounted value of the cash that can
be taken out of a business during its remaining life. Accordingly, in its
securities selection process, SIA put primary emphasis on analysis of balance
sheets, cash flows, the quality of management and their ability to efficiently
and effectively allocate capital, various internal returns which indicate
profitability, and the relationships that these factors have to the price of a
given security. The intrinsic value approach is based on the belief that the
securities of certain companies may sell at a discount from SIA's estimate of
such companies' "intrinsic value". The Company will seek to invest at reasonable
prices in companies having a high return on assets where the companies use such
return to benefit their shareholders either by reinvesting in other high yield
assets or by distributing such returns to their owners.
Cash and Cash Equivalents. As of June 30, 2000, the Company had a
significant cash position (30.4% of assets), including investments in U.S.
Treasury securities. The cash position is higher than it would normally be due
to the transition from being an income fund to a total return fund. It is
expected that a significant portion of this cash will be used for common stock
investments. Once the Company has fully implemented its total return objective,
under normal market conditions, the Company's cash position is expected
typically to be less than 10% of the Company's total assets.
RICS and REITS. In seeking its total return objective, the Company expects
to invest a portion of its assets in RICS and REITS. In selecting individual
investments in RICS, SIA will consider, among other things, current yield, the
discount that the RIC is trading to its net asset value, the underlying assets
in the RIC and the investment quality of such assets, whether or not the RIC is
leveraged and the RIC's ability to maintain its dividend rate. In selecting
individual investments in REITs, SIA will consider, among other things, the
types of investment properties owned by the REIT, the capital structure and the
use of debt, funds from operations, the current yield and the ability to
maintain such dividend rate, the location of properties owned and the percentage
leased. Although the Company currently has approximately 16% of its assets
invested in preferred stocks, the Company currently intends to emphasize RICs
and REITs as the Company's primary income source.
The Investment Advisory Agreements
The Adviser and the Company are parties to an investment advisory agreement
dated as of August 27, 1999 (the "Adviser Agreement"). The Sub-Adviser, the
Adviser and the Company are parties to a sub-advisory agreement dated August 27,
1999 (the "Sub-Adviser Agreement"). Under the terms of the Adviser Agreement,
the Adviser manages the investment of the Company's assets and provides such
investment research, advice and supervision, in conformity with the Company's
investment objective and policies, as necessary for the operations of the
Company. Under the terms of the Sub-Adviser Agreement, the Adviser has engaged,
on behalf of the Company, the investment sub-advisory services of SIA. Under the
Sub-Adviser Agreement, under the general direction of the Adviser, SIA manages
the investments of the Company and provides such investment research, advice and
supervision, in conformity with the Company's investment objective and policies,
as necessary for the selection and monitoring of the portfolio. SIA also
determines the Company's asset allocation. The Adviser Agreement and the
Sub-Adviser Agreement are referred to herein as the "Advisory Agreements".
The Advisory Agreements provide, among other things, that the Adviser and
Sub-Adviser will bear all expenses in connection with the performance of their
services under the Advisory Agreements, although the Company will bear certain
other expenses to be incurred in its operation, including organizational
expenses, taxes, interest, brokerage costs and commissions and stock exchange
fees; fees of Directors of the Company who are not also officers, directors or
employees of the Adviser or Sub-Adviser; Securities and Exchange Commission
fees; state
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Blue Sky qualification fees; charges of any custodian, any sub-custodians and
transfer and dividend-paying agents; insurance premiums; outside auditing and
legal expenses; costs of maintenance of the Company's existence; membership fees
in trade associations; stock exchange listing fees and expenses; and litigation
and other extraordinary or non-recurring expenses.
The Adviser Agreement provides that the Company shall pay to the Adviser
for its services a monthly fee at the annual rate of 1.00% of the Company's
average monthly net asset value (the "Adviser Fee"). Under the terms of the
Sub-Adviser Agreement, the Adviser is required to pay SIA 80% of all fees
received by the Adviser pursuant to the Adviser Agreement net of fees paid to
any other sub-adviser. The liquidation value of any outstanding preferred stock
is included in determining the Company's net asset value.
Although the Adviser and Sub-Adviser intend to devote such time and effort
to the business of the Company as is reasonably necessary to perform their
respective duties to the Company, the services of the Adviser and Sub-Adviser
are not exclusive and the Adviser and Sub-Adviser may provide similar services
to other investment companies and/or other clients and may engage in other
activities.
The Advisory Agreements provide that the Adviser and Sub-Adviser shall not
be liable for any error of judgment or mistake of law or omission or any loss
suffered by the Company in connection with the matters to which the agreements
relate, although the agreements do not protect or purport to protect the Adviser
or Sub-Adviser against any liability to the Company to which the Adviser or
Sub-Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on their part in the performance of their duties or
from reckless disregard by them of their obligations and duties under the
agreements. Each Advisory Agreement also provides for indemnification by the
Company of the Adviser or Sub-Adviser, as the case may be, and its partners,
members, officers, employees, agents and control persons for liabilities
incurred by them in connection with their services to the Company, subject to
certain limitations and conditions.
Each Advisory Agreement is in effect for an initial two-year term, and
thereafter will continue in effect without a term so long as its continuation is
specifically approved at least annually by both (i) the vote of a majority of
the Board or the vote of a majority of the outstanding voting securities of the
Company (as such term is defined in the 1940 Act) and (ii) by the vote of a
majority of the directors who are not parties to such Agreement or interested
persons (as such term is defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval. Any of
the Advisory Agreements may be terminated as a whole at any time by the Company,
without the payment of any penalty, upon the vote of a majority of the Board or
a majority of the outstanding voting securities of the Company or by the Adviser
or Sub-Adviser, on 60 days' written notice by either party to the other. Except
as otherwise provided by order of the SEC or any rule or provision of the 1940
Act, all of the Advisory Agreements will terminate automatically in the event of
their assignment (as such term is defined in the 1940 Act and the rules
thereunder).
The Administration and Co-Administration Agreements
The Administration Agreement. PFPC, Inc. (the "Administrator"), located at
P.O. Box 1376, Boston, MA 02104, acts as administrator for the Company. Under
the Administration Agreement with the Company (the "Administration Agreement"),
the Administrator calculates the net asset value of the Company's common stock
and generally assists in all aspects of the administration and operation of the
Company, subject to the supervision of the Board.
In connection with its administration of the corporate affairs of the
Company, the Administrator bears the following expenses: (i) the salaries and
expenses of all personnel of the Administrator; and (ii) all expenses incurred
by the Administrator in connection with administering the ordinary course of the
Company's business, other than those assumed by the Company, as described below.
The Administration Agreement provides that the Company shall pay to the
Administrator a monthly fee for the services furnished by the Administrator at
the annual rate of 0.12% of the Company's average monthly net asset value. The
liquidation value of any outstanding AMPS is included in determining the
Company's average weekly net asset value. The Administration Agreement is
terminable on 60 days' prior written notice by either party to the other.
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The Co-Administration Agreement. Boulder Administrative Services, L.L.C.
(the "Co-Administrator"), located at 1680 38th Street, Suite 800, acts as
co-administrator for the Company. Under the Co-Administration Agreement with the
Company (the "Co-Administration Agreement"), the Co-Administrator provides
specific administration and executive management services to the Company
including, but not limited to: officers and staffing and general office services
and equipment (e.g., phones, copy machines, computers, fax, etc.) for the
Company; provides the Company's general offices and associated facilities;
negotiates and monitors all contracts with service providers; negotiates and
monitors all insurance policies of the Company as well as the rating agency
agreements with Moody's and S&P; provides shareholder relations and shareholder
support; conducts weekly backup calculation of the Company's net asset value;
prepares all shareholder communications and oversees the preparation of the
Company's periodic reports to the SEC; reviews and authorizes all expenses of
the Company; makes recommendations to the Board regarding policies of the
Company; and provides in house counsel and compliance personnel to the Company.
In connection with its co-administration of the corporate affairs of the
Company, the Co-Administrator bears the following expenses: (i) the salaries and
expenses of all personnel of the Co-Administrator; and (ii) all expenses
incurred by the Co-Administrator in connection with administering the ordinary
course of the Company's business, other than those assumed by the Company, as
described below. However, the Company bears travel-related expenses (1) of
employees of the Co-Administrator (including interested directors) engaged in
rendering services pursuant to their employment by the Co-Administrator other
than in connection with attendance at Board meetings and (2) of employees of the
Co-Administrator (other than Company directors and/or representatives of the
Adviser or BIA) primarily engaged in rendering administrative services under the
Co-Administration Agreement.
The Co-Administration Agreement provides that the Company shall pay to the
Co-Administrator a monthly fee for its services furnished by the
Co-Administrator at the annual rate of 0.10% of the Company's average monthly
net asset value. The liquidation value of any outstanding AMPS is included in
determining the Company's net asset value. The Co-Administration Agreement is
terminable on 60 days' prior written notice by either party to the other.
Expenses of The Company
Except as indicated above, the Company pays all of its expenses, including
fees of the directors not affiliated with the Adviser or the Sub-Adviser and
board meeting expenses; fees of the Adviser, Sub-Adviser, Administrator and
Co-Administrator; interest charges; taxes; charges and expenses of the Company's
legal counsel and independent accountants, and of the transfer agent, registrar
and dividend disbursing agent of the Company; expenses of repurchasing shares;
expenses of issuing any preferred shares (including the AMPS) or indebtedness;
expenses of printing and mailing share certificates, stockholder reports,
notices, proxy statements and reports to governmental offices; brokerage and
other expenses connected with the execution, recording and settlement of
portfolio security transactions; expenses connected with negotiating, effecting
purchase or sale, or registering privately issued portfolio securities;
custodial fees and expenses for all services to the Company, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating and publishing the net asset value of the Company's
shares; expenses of membership in investment company associations; expenses of
fidelity bonding and other insurance expenses including insurance premiums;
expenses of stockholders meetings; SEC and state registration fees; New York
Stock Exchange listing fees; and fees payable to the National Association of
Securities Dealers, Inc. in connection with this Offering and fees of any rating
agencies retained to rate any preferred shares (including the AMPS) issued by
the Company.
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. This
description does not purport to be complete and is qualified by reference to the
Articles Supplementary and other charter documents, which have been filed as
exhibits to the Registration Statement of which this prospectus is a part. For
the complete terms of the AMPS, including definitions of terms used herein but
not defined, please refer to the detailed description of the AMPS in the
Articles Supplementary. We refer to the Articles of Incorporation of the Company
in this prospectus as the "Articles" and the Articles Supplementary as the
"Articles Supplementary."
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General
The Articles currently authorize the issuance of 240 million shares of
common stock and 10 million shares of preferred stock, par value $.01 per share
(which may be issued from time to time in such series and with such
designations, preferences, and other rights, qualifications, limitations and
restrictions as are determined in a resolution of the Board). As of June 30,
2000, there were issued and outstanding 9,416,743 shares of common stock and 775
MMP Shares. Under the Articles Supplementary, the Company will be authorized to
issue up to 1,000 shares of the AMPS with a liquidation preference of $100,000
per share plus an amount equal to dividends on each share (whether or not earned
or declared) accumulated and unpaid thereon. Each AMP Share carries one vote
with respect to matters on which AMPS can be voted. AMPS, when issued against
payment therefor, will be fully paid and non-assessable and have no preemptive,
conversion or cumulative voting rights.
As of the date of this prospectus, there are 775 MMP Shares issued and
outstanding but there are no AMPS issued or outstanding. It is expected and is a
condition precedent to issuance of the AMPS that the MMP Shares will be redeemed
in conjunction with the issuance of the AMPS and that the entirety of the
proceeds from the sale of the AMPS will be used, together with other assets of
the Company, if necessary, to fund such redemption.
The AMPS are shares of preferred stock of the Company. AMPS entitle their
holders to receive dividends when, as and if declared by the Board, out of funds
legally available therefor. The rate per annum on which dividends are paid may
vary from rate period to rate period for the AMPS. In general, the applicable
rate for a particular rate period for the AMPS will be determined by an auction
conducted on the day before the start of the rate period. Existing holders and
potential holders of AMPS may participate in the auctions. Existing holders
desiring to continue to hold all of their AMPS regardless of the applicable rate
resulting from the auction need not participate. For an explanation of auctions
and the method of determining the applicable rate, see "The Auction".
After the fixed initial rate period, the AMPS will generally have a rate
period of 28 days in length although the AMPS may have a different rate period
if the Company declares a special rate period and certain conditions are
satisfied.
The AMPS have a liquidation preference of $100,000 per share plus an amount
equal to accumulated but unpaid dividends. The AMPS are fully paid and
non-assessable. The AMPS are not convertible into common shares or other capital
stock of the Company. Holders of AMPS have no preemptive rights. The AMPS are
not subject to any sinking fund. The AMPS are generally subject to redemption at
the option of the Company on any dividend payment date for the respective series
and, in certain circumstances, are subject to mandatory redemption by the
Company. In connection with the auction procedures described below, Bankers
Trust Company is the auction agent, the transfer agent, registrar, dividend
disbursing agent and redemption agent for the AMPS.
Dividends and Rate Periods
General. The following is a general description of dividends and rate
periods for the AMPS. The initial rate period for the AMPS will be twenty-nine
days and the dividend rate for this period will be __%. Subsequent rate periods
generally will be twenty-eight days and the dividend rates for those periods
will be determined by auction. The Company, subject to certain conditions, may
change the length of subsequent rate periods by designating them as special rate
periods. See "Designation of Special Rate Periods" below.
Dividend Payment Dates. Dividends on AMPS will be payable, when, as and if
declared by the Board, out of legally available funds in accordance with the
Company's charter and applicable law. The initial dividend will be paid on
September 13, 2000 (the "Initial Dividend Payment Date"). Subsequent dividends
generally will be paid on each fourth Wednesday after the Initial Dividend
Payment Date. If dividends are payable on a Wednesday that is not a business
day, then dividends will generally be payable on the next day, if such day is a
business day, or as otherwise specified in the Articles Supplementary. In the
case of a special rate period of 56 days, dividends are generally payable on the
eighth Wednesday after the first day of such special rate period. In the case of
a special rate period of 91 days, dividends are generally payable on the
thirteenth Wednesday after the first day of such special rate period. In the
case of a special rate period of 182 days, dividends are generally payable on
each of the thirteenth and twenty-sixth Wednesday of such special rate period.
In the case of a special rate period of 365 days
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or more, dividends are generally payable on the first day of the fourth month
after the first day of such special rate period, and on the first day of each
succeeding third month thereafter.
Dividends will be paid through The Depository Trust Company ("DTC") on each
dividend payment date. DTC, in accordance with its current procedures, is
expected to distribute dividends received from the auction agent in same-day
funds on each dividend payment date to Agent Members (members of DTC that will
act on behalf of existing or potential holders of AMPS). These Agent Members are
in turn expected to distribute such dividends to the persons for whom they are
acting as agents. However, each of the current Broker-Dealers has indicated to
the Company that dividend payments will be available in same-day funds on each
dividend payment date to customers that use a Broker-Dealer or a Broker-Dealer's
designee as Agent Member.
Calculation of Dividend Payment. The Company computes the dividend per AMP
Share by multiplying the applicable rate in effect by a fraction. The numerator
of this fraction will normally be twenty-eight (i.e., the number of days in the
rate period) and the denominator will normally be 360. If the Company has
designated a special rate period of 56 days or more, then the numerator will be
the number of days in the rate period, and the denominator will be 360. In
either case, this rate is then multiplied by $100,000 to arrive at the dividends
per share.
Dividends on AMPS will accumulate from the date of their original issue.
For each dividend payment period after the initial rate period, the dividend
rate will be the dividend rate determined at auction. The dividend rate that
results from an auction will not be greater than the maximum rate described
below.
The maximum applicable rate for any regular rate period will be the
applicable percentage (set forth in the table below) of the 30-day "AA"
Composite Commercial Paper Rate. In the case of a special rate period, the
maximum applicable rate will be the applicable percentage of the Special
Dividend Period Reference Rate (which will ordinarily be specified by the
Company in the notice of the special dividend period) for such dividend payment
period. The applicable percentage is determined on the day that a notice of a
special dividend period is delivered if the notice specifies a maximum
applicable rate for a special rate period. The applicable percentage will be
determined based on the lower of the credit rating or ratings assigned to the
AMPS by Moody's and S&P. If Moody's or S&P or both shall not make such rating
available, the rate shall be determined by reference to equivalent ratings
issued by a substitute rating agency.
Credit Ratings Applicable
Percentage:
Moody's S&P No Notification
-------- ------ -------------------
"aa3" or higher AA- or higher 150%
"a3" to "al" A- to A+ 200%
"baa3" to "baal" BBB- to BBB+ 225%
Below "baa3" Below BBB- 275%
Prior to each dividend payment date, the Company is required to deposit
with the auction agent sufficient funds for the payment of declared dividends.
The failure to make such deposit will not result in the cancellation of any
auction. The Company does not intend to establish any reserves for the payment
of dividends.
Restrictions on Dividends and Other Distributions. While any of the shares
of the AMPS are outstanding, the Company generally may not declare, pay or set
apart for payment, any dividend or other distribution in respect of its common
shares (other than in additional shares of common stock or rights to purchase
common stock) or repurchase any of its common shares unless each of the
following conditions have been satisfied:
o In the case of the Moody's coverage requirements, immediately after
such transaction, the aggregate Moody's Coverage Value (i.e., the
aggregate value of the Company's portfolio discounted according to
Moody's criteria) would be equal to or greater than the Eligible Asset
Coverage Amount (i.e., the amount necessary to pay all outstanding
obligations of the Company with respect to the AMPS, any other
preferred stock outstanding, expenses for the next 90 days and any
other liabilities of the Company) (see "Rating Agency Guidelines and
Asset Coverage" below);
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o In the case of S&P's coverage requirements, immediately after such
transaction, the Aggregate S&P Value (i.e., the aggregate value of the
Company's portfolio discounted according to S&P criteria) would be
equal to or greater than the Eligible Asset Coverage Amount;
o Immediately after such transaction, the 1940 Act Asset Coverage (as
defined in this Prospectus under "Rating Agency Guidelines and Asset
Coverage" below) is met;
o Full cumulative dividends on the AMPS due on or prior to the date of
the transaction have been declared and paid or shall have been
declared and sufficient funds for the payment thereof deposited with
the auction agent; and
o The Company has redeemed the full number of AMPS required to be
redeemed by any provision for mandatory redemption contained in the
Articles Supplementary.
The Company generally will not declare, pay or set apart for payment any
dividend on any shares of the Company ranking, as to the payment of dividends,
on a parity with AMPS unless the Company has declared and paid or
contemporaneously declares and pays full cumulative dividends on the AMPS
through its most recent dividend payment date. However, when the Company has not
paid dividends in full on the AMPS through the most recent dividend payment date
or upon any shares of the Company ranking, as to the payment of dividends, on a
parity with AMPS through their most recent respective dividend payment dates,
the amount of dividends declared per share on AMPS and such other class or
series of shares will in all cases bear to each other the same ratio that
accumulated dividends per share on the AMPS and such other class or series of
shares bear to each other.
Designation of Special Rate Periods. The Company may, in certain
situations, at its sole option, declare a special rate period. Prior to
declaring a special rate period, the Company will give notice (a "notice of
special rate period") to the auction agent and to each Broker-Dealer. The notice
will state that the next succeeding rate period for the AMPS will be a number of
days (other than twenty-eight) as specified in such notice. The Company may not
designate a special rate period unless sufficient clearing bids were made in the
most recent auction. In addition, full cumulative dividends, any amounts due
with respect to mandatory redemptions and any additional dividends payable prior
to such date must be paid in full. The Company also must have received
confirmation from Moody's and S&P or any substitute rating agency that the
proposed special rate period will not adversely affect such agency's
then-current rating on the AMPS and the lead broker-dealer designated by the
Company, initially Merrill Lynch, Pierce, Fenner and Smith Incorporated, must
not have objected to declaration of a special rate period. A notice of special
rate period also will specify whether the shares of AMPS will be subject to
optional redemption during such special rate period and, if so, the redemption
premium, if any, required to be paid by the Company in connection with such
optional redemption.
Redemption
Mandatory Redemption. The Company is required to maintain
(a) An aggregate Coverage Value (i.e., the Moody's coverage value) of its
portfolio equal to the Eligible Asset Coverage Amount;
(b) An Aggregate S&P Value of its portfolio equal to the Eligible Asset
Coverage Amount; and
(c) The 1940 Act Asset Coverage.
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The Company is required under the Articles Supplementary to have prior to
each dividend payment date, an aggregate amount of funds equal to the dividends
to be paid to all holders of AMPS on such dividend payment date.
If the Company fails to maintain such asset coverage amounts and does not
timely cure such failure in accordance with the requirements of the rating
agencies that rate the AMPS, the Company must redeem all or a portion of the
AMPS. This mandatory redemption will take place on a date that the Board
specifies out of legally available funds in accordance with the Company's
charter and applicable law, at the redemption price of $100,000 per share plus
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption. The mandatory redemption will be limited to the number of
AMPS necessary to restore the required Coverage Value (i.e., the Moody's
coverage value), Aggregate S&P Value and 1940 Act Asset Coverage, as the case
may be.
Optional Redemption. The Company, at its option and upon notice to the
holders of the AMPS, may redeem the AMPS, in whole or in part, out of funds
legally available therefor. Any optional redemption will occur on a dividend
payment date at the optional redemption price per share of $100,000 per share
plus an amount equal to accumulated but unpaid dividends to the date fixed for
redemption. No AMPS may be redeemed if the redemption would cause the Company to
violate the 1940 Act or Maryland law.
Optional redemption during a special rate period consisting of seven or
more rate periods may also be subject to a redemption premium, which will be an
amount, if any, as determined by the Board after consultation with the lead
Broker-Dealer selcted by The Company, initially Merrill Lynch, Pierce, Fenner
and Smith Incorporated, or such other Broker-Dealer as the Board deems reliable.
Liquidation
If the Company is liquidated, the holders of outstanding AMPS will receive
$100,000 per share, plus all accumulated but unpaid dividends (whether or not
earned or declared). The holders of AMPS will be entitled to receive these
amounts from the assets of the Company available for distribution to its
shareholders in preference to the holders of the Company's common shares. After
the payment to the holders of AMPS of the full preferential amounts as
described, the holders of AMPS will have no right or claim to any of the
remaining assets of the Company.
For purposes of the foregoing paragraph, a voluntary or involuntary
liquidation of the Company does not include:
o The sale, lease or exchange of all or substantially all the property
or business of the Company;
o The merger or consolidation of the Company into or with any other
entity;
o The merger or consolidation of any other entity into or with the
Company; or
o A share exchange between the Company and any other entity.
Rating Agency Guidelines and Asset Coverage
The Company is required under guidelines of Moody's and S&P to maintain
assets having in the aggregate a Coverage Value (i.e., the Moody's coverage
value) and Aggregate S&P Value at least equal to the Eligible Asset Coverage
Amount. The aggregate Coverage Value and the Aggregate S&P Value are
collectively referred to herein as the "Aggregate Coverage Values". Moody's and
S&P have each established separate guidelines for calculating their respective
Aggregate Coverage Values. To the extent any particular portfolio holding does
not satisfy a rating agency's guidelines, all or a portion of the holding's
value will not be included in the rating agency's calculation of its respective
Aggregate Coverage Value. The Moody's and S&P guidelines do not impose any
limitations on the
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percentage of the Company's assets that may be invested in holdings not eligible
for inclusion in the calculation of the Aggregate Coverage Value. The amount of
ineligible assets included in the Company's portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
eligible assets included in the portfolio. The Eligible Asset Coverage Amount
includes the sum of (a) the aggregate liquidation preference of the AMPS then
outstanding and (b) certain accrued and projected payment obligations of the
Company.
The Company is also required under the Articles Supplementary to maintain
asset coverage (as defined in the 1940 Act) of at least 200% with respect to
senior securities which are equity shares, including the AMPS (referred to
herein as the "1940 Act Asset Coverage"). The 1940 Act Asset Coverage is tested
as of the last business day of each month in which any senior equity securities
are outstanding. The minimum required 1940 Act Asset Coverage amount of 200% may
be increased or decreased if the 1940 Act is amended. Based on the composition
of the portfolio of the Company and market conditions as of June 30, 2000, the
1940 Act Asset Coverage with respect to all of the AMPS, assuming the issuance
on that date of all AMPS offered hereby and giving effect to the deduction of
related sales load and related offering costs estimated at $540,625 would have
been computed as follows:
Value of Company assets less liabilities
not constituting senior securities = $ 195,891,000 = 252.7 %
---------------------------------- -----------------
Senior securities representing indebtedness $ 77,500,000
plus
liquidation value of the preferred shares
The Company will be required to redeem AMPS as described under
"--Redemption--Mandatory Redemption" if the Company does not timely cure a
failure to maintain:
(a) An aggregate Coverage Value equal to or greater than the Eligible
Asset Coverage Amount (in the case of Moody's coverage requirements);
(b) An Aggregate S&P Value equal to or greater than the Eligible Asset
Coverage Amount (in the case of S&P's coverage requirements); and
(c) 1940 Act Asset Coverage.
The Company is required under the Articles Supplementary to have prior to
each dividend payment date Deposit Securities with maturity or tender payment
dates not later than the next dividend payment date for the AMPS and having in
the aggregate a value not less than the Projected Dividend Amount (the "Minimum
Liquidity Level"). The "Projected Dividend Amount," as of any Eligible Asset
Evaluation Date, means the amount of cash dividends, based on the number of AMPS
outstanding on such Eligible Asset Evaluation Date, which (whether or not earned
or declared) are accumulated on such shares up to but not including such
Eligible Asset Evaluation Date and unpaid and which are projected to accumulate
on such shares from such Eligible Asset Evaluation Date until the 35th day after
such Eligible Asset Evaluation Date, at the rates set forth in the Articles
Supplementary. The term "Deposit Securities" means cash, short-term money market
instruments that mature within 360 days, and U.S. Government Obligations. The
definition of "Deposit Securities," may be changed from time to time by the
Company without shareholder approval, but only in the event the Company receives
confirmation from S&P and Moody's, as the case may be, that any such change
would not impair the ratings then assigned by S&P or Moody's, as the case may
be, to the AMPS. The Company needs to comply with the Minimum Liquidity Level
only for so long as S&P and/or Moody's rates the AMPS. The Minimum Liquidity
Level is tested as of each Eligible Asset Evaluation Date (ordinarily every
Friday).
The Company may, but is not required to, adopt any modifications to any
guidelines that may be established by Moody's or S&P. Failure to adopt any such
modifications, however, may result in a change in the ratings described above or
a withdrawal of ratings altogether. In addition, any rating agency providing a
rating for the AMPS may, at any time, change or withdraw any such rating. The
Board may, without shareholder approval, amend, alter or repeal certain of the
definitions and related provisions which have been adopted by the Company
pursuant to the rating agency guidelines in the event the Company receives
written confirmation from Moody's or S&P, as the case may be, that any such
amendment, alteration or repeal would not impair the rating then assigned to the
AMPS. To the extent permitted by applicable law, the Board also may, without
shareholder approval, amend, alter or repeal any provision of the Articles
Supplementary if such is at the request of S&P or Moody's or other rating agency
which the Company seeks to rate the AMPS and the Board determines that such
amendment, alteration or repeal will not adversely affect the rights of the
holders of AMPS or adversely affect the AMPS or the ratings of the AMPS.
A rating agency's guidelines will apply to AMPS only so long as the rating
agency is rating the shares. The Company will pay certain fees to Moody's and
S&P for rating the AMPS.
Voting Rights
Except as otherwise indicated in this prospectus and in the statement of
additional information, or as provided in the Articles and the Articles
Supplementary or as otherwise required by law, holders of AMPS will have
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equal voting rights with holders of common shares and any other preferred shares
of the Company (one vote per share) and will vote together with holders of
common shares and any other preferred shares as a single class.
Holders of outstanding preferred shares of the Company, including AMPS,
voting as a separate class, are entitled to elect two of the Company's
directors. The remaining directors are elected by holders of outstanding common
shares of the Company voting as a separate class. In addition, if at any time
dividends (whether or not earned or declared) on AMPS are due and unpaid in an
amount equal to two full years of dividends, and sufficient cash or specified
securities have not been deposited with the auction agent for the payment of
such dividends, the sole remedy of holders of outstanding preferred shares of
the Company is that the number of directors constituting the Board will be
automatically increased by the smallest number that, when added to the two
directors elected exclusively by the holders of preferred shares as described
above, would constitute a majority of the Board. The holders of preferred shares
of the Company will be entitled to elect that smallest number of additional
directors at a special meeting of shareholders held as soon as possible and at
all subsequent meetings at which directors are to be elected, unless such
special voting rights are terminated as explained below. The terms of office of
the persons who are directors at the time of that election will continue unless
the election of additional directors by holders of preferred stock would cause
the number of directors to exceed 12. If the Company thereafter pays in full all
accumulated and unpaid dividends on all outstanding preferred shares of the
Company, the special voting rights stated above will cease and the terms of
office of the additional directors elected by the holders of the preferred
shares will automatically terminate.
The affirmative vote of a majority of the votes entitled to be cast by the
holders of the outstanding shares of AMPS or such higher percentage as may be
required by the Articles, voting as a separate class, will be required to amend
the Articles so as to adversely affect in any material respect any contract
right of the AMPS or the holders thereof expressly set forth in the Articles.
The affirmative vote of at least 80% of the votes entitled to be cast by the
outstanding holders of AMPS, voting as a separate class, will be required to
issue any shares of preferred stock ranking prior to or on a parity with the
AMPS as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Company (other than
previously authorized and unissued shares of AMPS, including any shares of AMPS
purchased or redeemed by the Company), or increase the authorized amount of AMPS
or any other preferred stock. The affirmative vote of a majority of the votes
entitled to be cast by holders of the AMPS, voting as a separate class with
holders of other preferred stock entitled to vote on the matter, will be
required to approve certain other matters which, under the Articles, require the
approval of a majority of the votes entitled to be cast by stockholders if 80%
of the "Continuing Directors" (defined as a Director who (1) is not a person or
affiliate of a person who enters or proposes to enter a Business Combination (as
defined in the Articles) with the Company (such person or affiliate, an
"Interested Party"), (2) has been a member of the Board of Directors for a
period of at least 12 months or (3) is a successor to a Continuing Director who
is unaffiliated with an Interested Party and is recommended to succeed a
Continuing Director by a majority of Continuing Directors then on the Board) or
certain other requirements specified in the Articles are met. Unless a higher
percentage is provided for in the Articles, the affirmative vote of a majority
of the votes entitled to be cast by holders of the AMPS (as determined in
accordance with the 1940 Act), voting as a separate class, will be required to
approve any plan or reorganization adversely affecting the shares or any action
requiring a vote of security holders under Section 13(a) of the 1940 Act
including, among other things, changes in the Company's investment objective or
changes in certain restrictions described above under "Investment Objective and
Policies" and "Investment Restrictions". The class vote of holders of shares of
AMPS described above will in each case be in addition to a separate vote of the
requisite percentage of the votes entitled to be cast by holders of shares of
common stock and outstanding AMPS, voting as a single class, necessary to
authorize the action in question.
The voting provisions with respect to the AMPS described in this prospectus
will not apply if at, or prior to, the time at which the act with respect to
which the vote would otherwise be required is effected, all outstanding AMPS
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemptions.
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THE AUCTION
General
The Articles Supplementary provide that, except as otherwise described in
this prospectus, the applicable rate for the AMPS for each rate period after the
initial rate period will be the rate that results from an auction conducted as
set forth in the Articles Supplementary and summarized below. In such an
auction, persons determine to hold or offer to sell or, based on dividend rates
bid by them, offer to purchase or sell AMPS. See the Articles Supplementary for
a more complete description of the auction process.
Auction Agency Agreement. The Company will enter into an auction agency
agreement with the auction agent (currently, Bankers Trust Company) which
provides, among other things, that the auction agent will follow the auction
procedures to determine the applicable rate for AMPS so long as the applicable
rate for AMPS is to be based on the results of an auction.
The auction agent may terminate the auction agency agreement upon notice to
the Company no earlier than the business day after the second dividend payment
date for the AMPS following delivery of such notice. If the auction agent should
resign, the Company 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 agency agreement. The Company may remove the auction agent
provided that prior to such removal the Company has entered into such an
agreement with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Company, which provide for the participation of
those Broker-Dealers in auctions for AMPS.
The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Company, a service charge at the annual rate of 1/4 of 1%
of the stated value ($100,000 per share) of the AMPS held by a Broker-Dealer's
customer upon settlement in an auction.
Auction Procedures
Prior to the submission deadline on each auction date for the AMPS, each
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the auction agent) as a beneficial owner of AMPS may submit
the following types of orders with respect to AMPS to that Broker-Dealer:
1. Hold Order--indicating its desire to hold AMPS without regard to the
applicable rate for the next rate period.
2. Bid--indicating its desire to purchase or hold the indicated number of
AMPS at $100,000 per share if the applicable rate for shares of such
series for the next rate period is not less than the rate or spread
specified in the bid and which shall be deemed an irrevocable offer to
sell AMPS at $100,000 per share if the applicable rate for shares of
such series for the next rate period is less than the rate or spread
specified in the bid.
3. Sell Order--indicating its desire to sell AMPS at $100,000 per share
without regard to the applicable rate for shares of such series for
the next rate period.
A beneficial owner of AMPS may submit different types of orders to its
Broker-Dealer with respect to AMPS then held by the beneficial owner. A
beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the maximum applicable rate on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have submitted
a hold order to its Broker-Dealer. However, if a beneficial owner fails to
submit an order for some or all of its shares to its Broker-Dealer for an
auction relating to a rate period of more than 91 days, such beneficial owner
will be deemed to have submitted a sell order for such shares to its
Broker-Dealer. A sell order constitutes an
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irrevocable offer to sell the AMPS subject to the sell order. A beneficial owner
that offers to become the beneficial owner of additional AMPS is, for purposes
of such offer, a potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of AMPS but that wishes to purchase AMPS or a beneficial owner
that wishes to purchase additional AMPS. A potential holder may submit bids to
its Broker-Dealer in which it offers to purchase AMPS at $100,000 per share if
the applicable rate for the next rate period is not less than the rate specified
in such bid. A bid placed by a potential holder specifying a rate higher than
the maximum applicable rate on the auction date will not be accepted.
Any bid by an existing holder that specifies a spread with respect to an
auction in which a spread is not included in any bid requirements or in which
there are no bid requirements and an order that does not specify a spread with
respect to an auction in which a spread is included in any bid requirements will
be treated as a sell order.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
However, neither the Company nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of AMPS held
by it. A Broker-Dealer may also submit orders to the auction agent for its own
account as an existing holder or potential holder, provided it is not an
affiliate of the Company.
There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to the number of AMPS subject
to sell orders submitted or deemed submitted to the auction agent by
Broker-Dealers for existing holders. If there are sufficient clearing bids, the
applicable rate for AMPS for the next succeeding rate period thereof will be the
lowest rate specified in the submitted bids which, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of existing holders
and potential holders, would result in existing holders and potential holders
owning the AMPS available for purchase in the auction.
If there are not sufficient clearing bids, the applicable rate for the next
rate period will be the maximum rate on the auction date. However, if the
Company has declared a special rate period and there are not sufficient clearing
bids, the applicable rate for the next rate period will be the same as during
the current rate period. If there are not sufficient clearing bids, beneficial
owners of AMPS that have submitted or are deemed to have submitted sell orders
may not be able to sell in the auction all shares subject to such sell orders.
If all of the outstanding AMPS are the subject of submitted hold orders, then
the rate period following the auction will automatically be the same length as
the preceding rate period and the applicable rate for the next rate period will
be the 30-day "AA" Composite Commercial Paper Rate. The 30-day "AA" Composite
Commercial Paper Rate is the 30-day rate on commercial paper issued by
corporations whose bonds are rated AA by S&P as made available by the Federal
Reserve Bank of New York or, if such rate is not made available by the Federal
Reserve Bank of New York, the arithmetical average of such rates as quoted to
the auction agent by Merrill Lynch, Pierce, Fenner & Smith Incorporated or such
other commercial paper dealer as may be appointed by the Company.
The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of AMPS that is different than the
number of shares specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as existing
holders or potential holders in respect of customer orders will be required to
make appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their Agent Members in same-day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
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The auctions for AMPS will normally be held every fourth Tuesday, and each
subsequent rate period will normally begin on the following Wednesday.
Secondary Market Trading and Transfer of AMPS
The Broker-Dealers are expected to maintain a secondary trading market in
AMPS outside of auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that any secondary trading
market in AMPS will provide owners with liquidity of investment. The AMPS are
not registered on any stock exchange or on the NASDAQ system.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of AMPS only in whole shares and only (a) pursuant to a bid or sell
order placed with the auction agent in accordance with the auction procedures;
(b) to a Broker-Dealer; or (c) to such other persons as may be permitted by the
Company; provided, however, that (1) a sale, transfer or other disposition of
AMPS from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition if such Broker-Dealer remains the existing holder of the
shares; and (2) in the case of all transfers other than pursuant to auctions,
the Broker-Dealer (or other person, if permitted by the Company) to whom such
transfer is made will advise the auction agent of such transfer.
TAXES
Federal Income Tax Matters
The Company has qualified and elected, and intends to continue to qualify,
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended, and intends to distribute at least 90% of its net
investment income (including taxable income and net short-term capital gain, but
not net capital gain, which is the excess of net long-term capital gain over net
short-term capital loss) and substantially all of its net capital gain to its
shareholders. The Company will not be subject to Federal income tax on any net
investment income and net capital gain that it distributes to its shareholders,
but will be subject to Federal income tax at the regular corporate income tax
rate on any net investment income and net capital gains that it retains.
The Company expects that a substantial portion of the Company's dividends
to the common shareholders and the holders of the AMPS will be fully taxable as
ordinary income. In addition, the Company also intends to distribute to its
shareholders amounts that are treated as long-term capital gain. The Company
will allocate distributions to shareholders that are treated as long-term
capital gain and ordinary income, if any, proportionately among the common
shares and AMPS.
The sale or other disposition of common shares or AMPS of the Company will
normally result in capital gain or loss to shareholders. Present law taxes both
long-term and short-term capital gains of corporations at the rates applicable
to ordinary income. For non-corporate taxpayers, under current law short-term
capital gains and ordinary income will be taxed at a maximum rate of 39.6%,
while long-term capital gains will generally be taxed at a maximum rate of 20%.
Because of certain limitations on itemized deductions and the deduction for
personal exemptions applicable to higher income taxpayers, the effective rate of
tax may be higher in certain circumstances. Losses realized by a shareholder on
the sale or exchange of shares of the Company held for six months or less are
disallowed to the extent of any exempt-interest dividends received with respect
to such shares, and, if not disallowed, such losses are treated as long-term
capital losses to the extent of any distribution of net capital gain received
with respect to such shares. A shareholder's holding period is suspended for any
periods during which the shareholder's risk of loss is diminished as a result of
holding one or more other positions in substantially similar or related
property, or through certain options or short sales. Any loss realized on a sale
or exchange of shares of the Company will be disallowed to the extent those
shares of the Company are replaced by other shares within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition of the
original shares. In that event, the basis of the replacement shares of the
Company will be adjusted to reflect the disallowed loss.
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The statement of additional information contains a more detailed summary of
the Federal income tax rules that apply to the Company and its shareholders.
Legislative, judicial or administrative action may change the tax rules that
apply to the Company or its shareholders, and any such change may be
retroactive. You should consult with your tax advisor about Federal income tax
matters.
State and Local Tax Matters
You should consult with your tax advisor about state and local tax matters.
DETERMINATION OF NET ASSET VALUE
The net asset value of common shares of the Company will be computed based
upon the value of the Company's portfolio securities and other assets. Net asset
value per common share of the Company will be determined as of the close of the
regular trading session on the New York Stock Exchange no less frequently than
Friday of each week and the last business day of each month, provided, however,
that if any such day is a holiday or determination of net asset value on such
day is impracticable, the net asset value shall be calculated on such earlier or
later day as determined by the Adviser. The Company calculates net asset value
per common share of the Company by subtracting the Company's liabilities
(including accrued expenses, dividends payable and any borrowings of the
Company) and the liquidation value of any outstanding preferred shares
(including AMPS) of the Company from the Company's total assets (the value of
the securities the Company holds plus cash or other assets, including interest
accrued but not yet received) and dividing the result by the total number of
common shares of the Company outstanding.
The Company values its common and preferred securities by using market
quotations provided by pricing services, prices provided by market makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics in accordance with procedures
established by the Board. Short-term securities having a maturity of 60 days or
less are valued at amortized cost, which approximates market value. Any
securities or other assets for which current market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Board.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to
their net asset values, and the Company's common shares may also trade at a
discount to their net asset value. The market price of the Company's common
shares will be determined by such factors as relative demand for and supply of
such common shares in the market, the Company's net asset value, general market
and economic conditions and other factors beyond the control of the Company.
Although the Company's common shareholders will not have the right to have the
Company redeem their common shares, the Company may, subject to the restrictions
described above under "Description of AMPS", take action to repurchase common
shares in the open market or make tender offers for its common shares at their
net asset value. Nonetheless, the Company's largest shareholders have expressed
their opposition to attempts to manage the Company's discount through share
repurchases, tender offers or open-ending. In view of this and certain other
factors (such as the adverse impact of certain of these strategies on the
Company's asset coverage ratios and their failure to have a long-term impact on
the discount), the Board does not currently intend to pursue strategies to
narrow the discount at which the Company's shares trade. See "Repurchase of
Common Shares" in the statement of additional information.
DESCRIPTION OF CAPITAL STOCK
The Articles currently authorize the issuance of 240 million shares of
common stock and 10 million shares of preferred stock, par value $.01 per share
(which may be issued from time to time in such series and with such
designations, preferences, and other rights, qualifications, limitations and
restrictions as are determined in a resolution of the Board). In connection with
the offering of AMPS described herein, the Company will offer 775 AMPS.
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Common Shares
The Company has no present intention of offering any additional shares of
capital stock other than AMPS as described herein. Any additional offerings of
shares of capital stock, if made, will require approval by the Board. Any
additional offering of common shares will be subject to the requirements of the
1940 Act that common shares may not be issued at a price below the then current
net asset value (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing stockholders or with the consent of a
majority of the Company's common shareholders.
So long as any AMPS or any other preferred shares of the Company are
outstanding, holders of common shares of the Company will not be entitled to
receive any net income of or other distributions from the Company unless all
accumulated dividends on outstanding preferred shares (including the AMPS) have
been paid, and unless asset coverage (as defined in the 1940 Act) with respect
to such preferred shares would be at least 200% after giving effect to such
distributions. See "Description of AMPS-Dividends and Rate Periods" for other
restrictions on dividends to holders of common shares which will be applicable
for so long as any preferred shares of the Company are outstanding.
The common shares have traded on the New York Stock Exchange (the
"Exchange") from between February 19, 1993 to August 27, 1999, under the symbol
"PFM". From August 28, 1999 to the present, the common shares have traded on the
Exchange under the symbol "BTF". On June 30, 2000, there were 9,416,743 common
shares of the Company issued and outstanding and the net asset value per common
share was $12.62 and the closing price per common share on the NYSE was
$10.1825.
Preferred Stock
Under the Company's charter, the Company is authorized to issue 10 million
shares of preferred stock, $.01 par value. The Board is authorized to classify
and reclassify any unissued shares of capital stock from time to time by setting
or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of stock. Under the 1940 Act, the Company is
permitted to have outstanding more than one series of preferred shares so long
as no single series has a priority over another series as to the distribution of
assets of the Company or the payment of dividends. Holders of common shares and
outstanding preferred shares (i.e., the MMP Shares) of the Company have no
preemptive right to purchase any preferred shares (including the AMPS) that
might be issued. It is anticipated that the net asset value per share of the
AMPS will equal its original purchase price per share plus accrued dividends per
share. See "Description of AMPS" for a description of the rights, preferences,
privileges and other terms of the AMPS.
Anti-takeover Provisions of the Charter and By-Laws
The Company presently has provisions in its charter and By-Laws (commonly
referred to as "antitakeover" provisions) which may have the effect of limiting
the ability of other entities or persons to acquire control of the Company, to
cause it to engage in certain transactions or to modify its structure:
o A director elected by the holders of the common shares or by the
holders of AMPS and any other preferred shares may be removed from
office with or without cause only by vote of the holders of at least
80% of the shares of common stock or preferred shares, as the case may
be, of the Company entitled to be voted in an election to fill that
directorship.
o The affirmative vote of at least 80% of the directors and of the
holders of at least 80% of the Company's outstanding shares of common
stock and preferred shares (including the AMPS) entitled to be voted
on the matter, voting as a single class, and the affirmative vote of
80% of the outstanding preferred shares (including the AMPS) voting as
a separate class, will be required to authorize the Company's
conversion from a closed-end to an open-end investment company, which
conversion would result in delisting of the common shares from the
NYSE. If an amendment providing for the conversion of the Company to
an open-end investment company has been previously approved by a vote
of 80% of the Continuing Directors of the Company, only a majority of
the votes entitled to be
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cast by the holders of outstanding shares of common stock and
preferred shares (including the AMPS), voting as a single class, and a
majority of the votes entitled to be cast by the holders of
outstanding shares of preferred stock (including the AMPS), voting as
a separate class, would be required to approve the conversion.
Conversion to an open-end investment company would require redemption
of all outstanding preferred shares of the Company.
o The Board is classified into three classes, each with a term of three
years, with only one class of directors standing for election in any
year. Such classification may prevent replacement of a majority of the
directors for up to a two year period. The affirmative vote of at
least 80% of the Company's outstanding shares of capital stock
entitled to be voted on the matter, voting as a single class, and the
affirmative vote of at least 80% of outstanding AMPS, voting as a
separate class, will be required to amend the Charter to change any of
the provisions in this subparagraph. If, however, any such action is
authorized by at least 80% of the Continuing Directors, the vote
required to approve such action is a majority of the votes entitled to
be cast by the holders of the Company's common stock and preferred
stock to be voted on the matter, voting as a single class, unless
otherwise provided in the Charter or applicable law.
o Subject to certain limited exceptions provided in the Articles, the
Articles also require the favorable vote of at least 80% of the
directors and at least 80% of the votes entitled to be cast by holders
of common stock and any outstanding preferred stock voting as a single
class, and at least 80% of the votes entitled to be cast by holders of
any outstanding preferred stock (including the AMPS), voting as a
separate class, to approve, adopt or authorize the following:
1. merger, consolidation or share exchange of the Company with or
into any other person;
2. issuance or transfer by the Company (in one or a series of
transactions in any 12 month period) of any securities of the
Company to any other person or entity for cash, securities or
other property (or combination thereof) having an aggregate fair
market value of $1,000,000 or more excluding sales of securities
of the Company in connection with a public offering or private
placement, issuances of securities of the Company pursuant to a
dividend reinvestment and cash purchase plan adopted by the
Company and issuances of securities of the Company upon the
exercise of any stock subscription rights distributed by the
Company;
3. sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Company (in one or a series of transactions in
any 12 month period) to or with any person of any assets of the
Company having an aggregate fair market value of $1,000,000 or
more except for portfolio transactions effected by the Company in
the ordinary course of its business ((1), (2) and (3) each being
a "Business Combination");
4. any proposal as to the voluntary liquidation or dissolution of
the Company or any amendment to the Articles to terminate its
existence; and
5. any shareholder proposal as to specific investment decisions made
or to be made with respect to the Company's assets.
However, separate 80% votes of the holders of shares of Common Stock and
any outstanding Preferred Stock (including shares of AMPS), voting as a single
class, and of the holders of any Preferred Stock (including shares of AMPS)
outstanding, voting as a separate class, will not be required with respect to
the transactions described in (1) through (4) above (A) if they are approved by
a vote of at least 80% of the Continuing Directors or (B) if certain conditions
regarding the consideration paid by the person entering into, or proposing to
enter into, a Business Combination with the Company and various other
requirements are satisfied, in which case (x) the affirmative vote of a majority
of the votes entitled to be cast by shareholders shall be required to approve a
transaction within (1), (3) (if the transfer or other disposition constitutes a
transfer of all or substantially all of the assets of the Company with respect
to which a shareholder vote is required under applicable state law) or (4) above
unless otherwise required by the charter or otherwise required by law and (y) no
shareholder vote is required to
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approve a transaction within (2) above or any other transaction within (3) above
unless otherwise provided in the Articles or required by law. The Company's
Bylaws contain provisions the effect of which is to prevent matters, including
nominations of Directors, from being considered at shareholders' meetings where
the Company has not received sufficient prior notice of the matters.
The percentage of votes required under these provisions, which are greater
than the minimum requirements under Maryland law or in the 1940 Act, will make
more difficult a change in the Company's business or management and may have the
effect of depriving holders of common shares of an opportunity to sell shares at
a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Company in a tender offer or similar
transaction. The Board, however, has considered these antitakeover provisions
and believes they are in the best interests of shareholders.
OTHER SERVICE PROVIDERS
Custodian. The Company's securities and cash are held under a Custodial
Agreement with Boston Safe Deposit and Trust Company, located at One Boston
Place, Boston, MA 02108.
Transfer Agent, Dividend Disbursing Agent and Registrar. The transfer
agent, dividend disbursing agent and registrar for the AMPS will be Bankers
Trust Company, located at 4 Albany Street, New York, NY 10006. The transfer
agent, dividend disbursing agent and registrar for the common shares of the
Company is PFPC Inc., located at P.O. Box 1376, Boston, MA 02104.
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated the
date hereof, Merrill Lynch, Pierce, Fenner and Smith Incorporated (the
"Underwriter") has agreed to purchase, and the Company has agreed to sell all of
the AMPS offered hereby.
The purchase agreement provides that the obligations of the Underwriter to
purchase the shares included in this Offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
Underwriter is obligated to purchase all the AMPS if it purchases any of the
shares. In the purchase agreement, the Company and the Adviser have agreed to
indemnify the Underwriter against certain liabilities, including liabilities
arising under the Securities Act of 1933, or to contribute payments the
Underwriter may be required to make for any of those liabilities.
The Underwriter proposes to initially offer some of the AMPS directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not in excess of $ per share. The sales load the Company will
pay of per share is equal to % of the initial offering price. The Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ per
share on sales to certain other dealers. After the initial public offering, the
Underwriter may change the public offering price and the concession. Investors
must pay for any AMPS purchased in the initial public offering on or before ,
2000.
The Company anticipates that the Underwriter may from time to time act as
broker or dealer in executing the Company's portfolio transactions after it has
ceased to be an Underwriter. The Underwriter is an active underwriter of, and
dealer in, securities and acts as a market maker in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the
Company.
The Company anticipates that the Underwriter or its affiliates may, from
time to time, act in auctions as Broker-Dealers and receive fees as set forth
under "The Auction." The Underwriter engages in transactions with, and performs
services for, the Company in the ordinary course of business.
The principal business address of the Underwriter is 4 World Financial
Center, New York, NY 10080.
33
<PAGE>
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby will be
passed upon for the Company by Willkie Farr & Gallagher, New York, New York and
for the Underwriter by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Each of such counsel will rely, as to certain matters of Maryland law, on
the opinion of Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The data in the "Financial Highlights" section of this prospectus are based
upon financial statements that have been audited by PricewaterhouseCoopers, LLP,
located at One Post Office Square, Boston, MA 02109, independent auditors, as
indicated in their reports with respect thereto, and are incorporated by
reference herein in reliance on their reports given on their authority as
experts in auditing and accounting.
REPORTS TO STOCKHOLDERS
The Company sends unaudited semiannual reports and audited annual reports,
including a list of investments held, to stockholders.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the SEC. Any such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the SEC, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and the SEC's New York Regional Office, Seven
World Trade Center, New York, New York 10048 and its Chicago Regional Office,
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. Reports, proxy statements and other information concerning the
Company can also be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Additional information regarding the Company and the AMPS is contained in
the Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Company with the SEC.
This prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Company and the shares
offered hereby, reference is made to the Registration Statement. 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, each such statement being qualified in all respects
by such reference.
A copy of the Registration Statement may be inspected without charge at the
SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC. The SEC maintains a web site (http://www.sec.gov) that contains the
Registration Statement, other documents incorporated by reference, and other
information the Company has filed electronically with the SEC, including proxy
statements and reports filed under the Securities Exchange Act of 1934.
34
<PAGE>
TABLE OF CONTENTS FOR THE STATEMENT OF
ADDITIONAL INFORMATION
Page
INVESTMENT OBJECTIVE AND POLICIES.........................................S-2
INVESTMENT POLICIES AND TECHNIQUES........................................S-3
MANAGEMENT OF THE COMPANY.................................................S-6
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................S-9
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS..................S-10
REPURCHASE OF COMMON SHARES..............................................S-11
TAX MATTERS..............................................................S-13
FINANCIAL STATEMENTS.....................................................S-15
ADDITIONAL INFORMATION...................................................S-15
APPENDIX A-RATINGS OF INVESTMENTS.........................................A-1
35
<PAGE>
Until , 2000, 25 days after the effective date of this prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
36
<PAGE>
Subject to completion, dated August 4, 2000
BOULDER TOTAL RETURN FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Boulder Total Return Fund, Inc. (the "Company") is a closed-end, diversified
management investment company. This statement of additional information does not
constitute a prospectus, but should be read in conjunction with the prospectus
relating hereto dated August __, 2000 (the "Prospectus"). This statement of
additional information does not include all information that a prospective
investor should consider before purchasing the Company's Taxable Auction Market
Preferred Stock ("AMPS"), and investors should obtain and read the Prospectus
prior to purchasing such shares. A copy of the Prospectus may be obtained
without charge by calling 1-800-331-1710. You may also obtain a copy of the
Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this statement
of additional information have the meanings given to them in the Prospectus.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
This statement of additional information is dated August __, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVE AND POLICIES............................................S-2
Investment Objective................................................S-2
Investment Restrictions.............................................S-2
INVESTMENT POLICIES AND TECHNIQUES...........................................S-3
Portfolio Investments...............................................S-3
Borrowings..........................................................S-6
Lending of Securities...............................................S-6
Short Sales Against the Box.........................................S-7
MANAGEMENT OF THE COMPANY....................................................S-7
Officers and Directors..............................................S-7
Audit Committee.....................................................S-8
Nominating Committee................................................S-9
Compensation to Directors...........................................S-9
Code of Ethics......................................................S-9
Compensation to the Adviser, Sub-Advisers and Co-Administrators....S-10
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................S-10
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS.....................S-11
General............................................................S-11
Concerning the Auction Agent.......................................S-12
Broker-Dealers.....................................................S-12
REPURCHASE OF COMMON SHARES.................................................S-12
TAX MATTERS.................................................................S-14
FINANCIAL STATEMENTS........................................................S-16
Independent Auditors...............................................S-16
Incorporation by Reference.........................................S-16
ADDITIONAL INFORMATION......................................................S-16
APPENDIX A - RATING OF INVESTMENTS...........................................A-1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Company was organized in 1992 under the name "Preferred Income Management
Fund Incorporated", which was changed to the current name on August 27, 1999.
Investment Objective
The Company's investment objective is total return. The Company seeks to produce
both long-term capital appreciation through investment in common stocks and
current income consistent with preservation of capital through investments in
income producing securities, such as real estate investment trusts ("REITs"),
registered closed end investment companies ("RICs"), preferred stocks, bonds and
other income-producing securities. No assurance can be given that the Company
will achieve its investment objective.
The Company operates as a "diversified" management investment company, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
Under this definition, at least 75% of the value of the Company's total assets
must consist of cash and cash items (including receivables), U.S. Government
securities, securities of other investment companies and other securities
limited in respect of any one issuer to an amount not greater in value than 5%
of the value of the Company's total assets and to not more than 10% of the
voting securities of a single issuer. This limit does not apply, however, to 25%
of the Company's assets, which may be invested in a single issuer. The Company
intends to concentrate its common stock investments in a few issuers and to take
large positions in those issuers, consistent with being a "diversified" fund. As
a result, the Company is subject to a greater risk of loss than a fund that
diversifies its investments more broadly. Taking larger positions is also likely
to increase the volatility of the Company's net asset value reflecting
fluctuation in the value of its large holdings.
Investment Restrictions
A number of the Company's investment policies are "fundamental" policies
("Fundamental Policies"). No Fundamental Policy may be changed without approval
by the vote of a majority of the Company's outstanding voting securities, voting
as a single class, and a majority of the Company's outstanding shares of
preferred stock, voting as a separate class. A "majority of the Fund's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the shares of common stock and shares of preferred stock present at a
meeting of shareholders, voting as a single class, if the holders of more than
50% of such shares are present or represented by proxy at the meeting, or (2)
more than 50% of the outstanding shares of common stock and shares of the
preferred stock, voting as a single class. A majority of the Company's
outstanding shares of preferred stock for this purpose is determined in a
similar manner, by applying the percentages in the previous sentence to shares
of preferred stock. With the exception of the Fundamental Policies and the
Company's investment objective, all other policies, statements, terms and
conditions may be changed by the Company's Board of Directors without
shareholder approval, unless provided to the contrary in the Company's Articles
of Incorporation.
Pursuant to the Fundamental Policies:
1. The Company may not purchase securities (other than Government
Securities) of any issuer if as a result of the purchase more
than 5% of the value of the Company's total assets would be
invested in the securities of that issuer, except that up to
25% of the value of the Company's total assets may be invested
without regard to this 5% limitation.
2. The Company may not purchase more than 10% of the voting
securities of any one issuer, or more than 10% of the
securities of any class of any one issuer, except that (i)
this limitation is not applicable to the Company's investments
in Government Securities and (ii) up to 25% of the value of
the Company's total assets may be invested without regard to
this 10% limitation.
3. The Company may not borrow except as permitted by law;
provided that, as long as the Company's money market
cumulative preferred stock ("MMP(R)") are outstanding, the
Company may not borrow except (1) (a) for temporary or
emergency purposes or (b) in connection with repurchases of
its shares or (c) for clearance of transactions, and then
only in amounts not
S-2
<PAGE>
exceeding 10% of its total assets (not including the amount
borrowed) and as otherwise described in the Prospectus or
(2) for the purpose of redeeming all of the outstanding MMP.
When the Company's borrowings under (1)(a), (b) and (c)
exceed 5% of the value of its total assets, the Company will
not make any additional investments.
4. The Company may not sell securities short or purchase
securities on margin, except for such short-term credits as
are necessary for the clearance of transactions, but the
Company may make margin deposits in connection with
transactions in futures contracts, options on futures
contracts and options on securities and securities indices,
and may make short sales of securities "against the box."
5. The Company may not underwrite any issue of securities, except
to the extent that the sale of portfolio securities may be
deemed to be an underwriting.
6. The Company may not purchase, hold or deal in real estate or
oil and gas interests, except that the Company may invest in
securities secured by real estate or interests in real estate.
7. The Company may not invest in commodities, except that the
Company may enter into futures contracts, including interest
rate and stock index futures contracts, and may purchase
options and write covered options on futures contracts,
securities and stock indices, as described in the Prospectus.
8. The Company may not lend any funds or other assets, except
through purchasing debt securities, lending portfolio
securities and entering into repurchase agreements consistent
with the Company's investment objective.
9. The Company may not issue senior securities other than
preferred stock or as permitted by the Company's borrowing
limitation.
10. The Company may not invest more than 25% of its total assets
in the securities of issuers in any single industry, except
that this limitation will not be applicable to the purchase of
Government Securities.
Although certain investment techniques are permitted by the restrictions set
forth above, the Company's ability to engage in them may nonetheless be limited
or prohibited by the Company's Articles of Incorporation or guidelines of
organizations rating the AMPS.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Company's investment
objective, policies and techniques in the Prospectus.
Portfolio Investments
Under normal market conditions, the Company invests primarily in a portfolio of
common stocks and income producing securities such as REITs, RICs, bonds and
preferred stocks.
Common Stocks. The Company may invest all or any portion of its assets in common
stock. Common stock is defined as shares of a corporation that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other shareholder or class of shareholders, including
holders of the corporation's preferred stock and other senior equity. Common
stock usually carries with it the right to vote and frequently an exclusive
right to do so. Holders of common stock also have the right to participate in
the assets of the corporation after all other claims are paid.
S-3
<PAGE>
In selecting investments, the Company expects to focus primarily on U.S.
companies, although there are no prohibitions on possible investment
opportunities outside the United States. Generally, target companies (other than
those common stocks purchased primarily for their income-producing potential)
will have a consistent high return on equity, while using modest amounts of debt
relative to their industry. The Company will seek investments in businesses SIA
understands, which have fairly predictable and improving future earnings, and
most importantly, are priced reasonably relative to the business' earnings and
anticipated growth in earnings. The Company will not necessarily focus its
investments in "large-cap", "mid-cap" or "small-cap" companies since SIA
believes it would be unwise to impose such investment restrictions. When the
Company makes an investment in a common stock, it will likely make a significant
investment and typically hold onto it for a long period of time. These
investment criteria will preclude the Company's investing in some of the
market's latest high flyers, but in the long run, the Company believes that
value-type investing will produce the best overall total return.
Investments in Real Estate Investment Trusts ("REITs"). REITs, or real estate
investment trusts, are securities of companies whose primary objective is
investment in real property or providing services to real property interests.
Most REITs are trusts under Sections 856 through 860 of the Internal Revenue
Code of 1986 (the "Code"). The Company may invest up to 25% of its assets in
REIT securities. The Company intends to invest in REIT securities primarily for
income. As of June 30, 2000, the Company had 10.4% of its assets invested in
REITs.
There are risks associated with investing in REITs, including the potential for
loss of value if the underlying properties in which the REIT invests decline in
value. Property valuations may rise and fall with either the local economy
conditions or with the national economy. Furthermore, the dividend income paid
out by the REIT may be reduced or eliminated, depending on the income produced
by the underlying properties owned by the REITs.
In the normal course of business, REITs face risks that are either non-financial
or non-quantifiable. These risks principally include credit risk as well as
legal risk. Because most REITs are typically financed with debt instruments,
they are also interest rate sensitive.
Investments in Other Registered Investment Companies ("RICs"). The Company may
invest up to 10% of its assets in other investment companies registered under
the 1940 Act. The Company intends to invest in closed-end RICs having an income
objective when they are trading at a discount, and when market conditions seem
appropriate to SIA. As of June 30, 2000, the Company had 5.0% of its assets
invested in RICs.
The Company intends to normally invest in RICs that pay dividends. There are
risks associated with investments in RICs, including the risk that the dividend
paid by the RIC could be reduced or eliminated. Dividend paying closed-end RICs
can also trade at substantial discounts to their net asset value. RICs typically
own interest rate sensitive securities, which tend to increase in value when
interest rates decline, and decrease in value when interest rates increase. RICs
also have expenses associated with their management and administration. To the
extent that the Company invests in other RICs, the Company's shareholders will
be incurring expenses for both the Company and, indirectly, for that portion of
the Company's assets invested in other RICs. However, even operating companies
also incur expenses in their daily operations. Profits are reported net of these
expenses, and RICs are no different in that respect. RICs fall under the
auspices of the 1940 Act, which requires disclosure of expenses and calculation
of net asset value ("NAV") net of expenses.
Additionally, in the case of bond fund RICs, the primary risk is interest rate
risk. The NAV and market value of RICs will fluctuate with the value of the
underlying assets.
Preferred Stocks. Prior to August 27, 1999, the Company was called "Preferred
Income Management Fund" and was virtually 100% invested in preferred stocks. As
of June 30, 2000, the Company had only [25%] of its assets in preferred stocks.
Generally, preferred stock receives dividends prior to distributions on common
stock and usually has a priority of claim over common stockholders if the issuer
of the stock is liquidated. Unlike common stock, preferred stock does not
usually have voting rights; preferred stock, in some instances, is convertible
into common stock.
Credit Quality of Preferred Issuers. Preferred stock that the Company owns will
be rated investment grade (at least "baa" by Moody's or "BBB" by S&P) at the
time of investment or will be preferred stocks of issuers whose senior debt is
rated investment grade by Moody's or by S&P. In addition, the Company may
acquire unrated issues that the
S-4
<PAGE>
Adviser deems to be comparable in quality to rated issues in which the Company
is authorized to invest. The Company will limit to 15% of its assets the portion
of its portfolio invested in preferred stock rated below investment grade (which
preferred stock must be rated at least "ba" by Moody's or "BB" by S&P) or judged
to be comparable in quality at the time of purchase; however, any such
securities must be issued by an issuer having a class of senior debt rated
investment grade outstanding. Securities rated "baa" by Moody's or "BBB" by S&P,
although investment grade, are considered to have speculative elements and a
greater vulnerability to default than higher rated securities. Further
information concerning the rating categories of S&P and Moody's is provided in
Appendix A to this Statement of Additional Information.
Money Market Instruments. Under normal conditions, the Company may hold up to
10% of its assets in cash or money market instruments. The Company intends to
invest in money market instruments to help defray operating expenses, to serve
as collateral in connection with certain investment techniques, to hold as a
reserve pending the payment of dividends to investors and to meet the liquidity
requirements of Moody's, S&P or other rating agencies that rate the Company's
outstanding auction rate preferred stock. When SIA believes that economic
circumstances warrant a temporary defensive posture, the Company may invest
without limitation in short-term money market instruments.
Money market instruments that the Company may acquire will be securities rated
in the highest short-term rating category by Moody's or S&P or the equivalent
from another major rating service, securities of issuers that have received such
ratings with respect to other short-term debt or comparable unrated securities.
Money market instruments in which the Company typically expects to invest
include: Government Securities; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of U.S. or foreign banks);
commercial paper rated P-l by Moody's or A-I by S&P; and repurchase agreements.
Repurchase Agreements. The Company may invest temporarily, without limitation,
in repurchase agreements, which are agreements pursuant to which securities are
acquired by the Company from a third party with the understanding that they will
be repurchased by the seller at a fixed price on an agreed date. These
agreements may be made with respect to any of the portfolio securities in which
the Company is authorized to invest. Repurchase agreements may be characterized
as loans secured by the underlying securities. The Company may enter into
repurchase agreements with (i) member banks of the Federal Reserve System having
total assets in excess of $500 million and (ii) securities dealers, provided
that such banks or dealers meet certain creditworthiness standards established.
The Adviser will monitor the continued creditworthiness of qualified
institutions. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. The collateral is marked to market daily.
Such agreements permit the Company to keep all its assets earning interest while
retaining "overnight" flexibility in pursuit of investments of a longer-term
nature.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Company will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Company's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Company may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the Company may suffer a loss
to the extent proceeds from the sale of the underlying securities are less than
the repurchase price.
Government Securities. The Company may invest in government securities that
include direct obligations of the United States and obligations issued by U.S.
Government agencies and instrumentalities ("Government Securities"). Included
among direct obligations of the United States are Treasury Bills, Treasury Notes
and Treasury Bonds, which differ principally in terms of their maturities.
Included among the securities issued by U.S. Government agencies and
instrumentalities are: securities that are supported by the full faith and
credit of the United States (such as Government National Mortgage Association
certificates); securities that are supported by the right of the issuer to
borrow from the U.S. Treasury (such as securities of Federal Home Loan Banks);
and securities that are supported by the credit of the instrumentality (such as
Federal National Mortgage Association and Federal Home Loan Mortgage Corporation
bonds).
S-5
<PAGE>
Zero Coupon Securities. The Company may invest up to 10% of its total assets in
zero coupon securities issued by the U.S. Government, its agencies or
instrumentalities as well as custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain government securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Because interest on zero coupon securities is not paid on
a current basis, the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income regularly
and may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall. In
addition, the Company's investments in zero coupon securities will result in
special tax consequences. Although zero coupon securities do not make interest
payments, for tax purposes a portion of the difference between a zero coupon
security's maturity value and its purchase price is taxable income of the
Company each year.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon Government Securities but are not
considered to be Government Securities. Although typically under the terms of a
custodial receipt the Company is authorized to assert its rights directly
against the issuer of the underlying obligation, the Company may be required to
assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, the Company may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Company had purchased a direct obligation of the issuer. In addition, in the
event that the trust or custodial account in which the underlying security has
been deposited is determined to be an association taxable as a corporation,
instead of a non-taxable entity, the yield on the underlying security would be
reduced in respect of any taxes paid.
Borrowings
Although it has no present intention of doing so, the Company reserves the right
to borrow funds to the extent permitted as described under the caption
"Investment Objective and Policies--Investment Restrictions." The proceeds of
borrowings may be used for any valid purpose including, without limitation,
liquidity, investing and repurchases of capital stock of the Company. Borrowing
is a form of leverage and, in that respect, entails risks, including volatility
in net asset value, market value and income available for distribution.
Lending of Securities
The Company is authorized to lend securities it holds to brokers, dealers and
other financial organizations, although it has no current intention of doing so.
Loans of the Company's securities, if and when made, may not exceed 33 1/3% of
the Company's assets taken at value. The Company's loans of securities will be
collaterized by cash, letters of credit or Government Securities that will be
maintained at all times in a segregated account with the Company's custodian in
an amount at least equal to the current market value of the loaned securities.
From time to time, the Company may pay a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or a
third party that is unaffiliated with the Company and that is acting as a
"finder."
By lending its portfolio securities, the Company can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when Government Securities are used as collateral.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible delay in recovery of the securities or the possible
loss of rights in the collateral should the borrower fail financially. The
Company will adhere to the following conditions whenever it lends its
securities: (i) the Company must receive at least 100% cash collateral or
equivalent securities from the borrower, which will be maintained by daily
marking-to-market; (ii) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the collateral;
(iii) the Company must be able to terminate the loan at any time; (iv) the
Company must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities and any increase in
market value; (v) the Company may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower, except that, if a material event adversely affecting the
investment in the loaned securities occurs, the Board must terminate the loan
and regain the Company's right to vote the securities.
S-6
<PAGE>
Short Sales Against the Box
The Company may make short sales of securities in order to reduce market
exposure and/or to increase its income if at all times when a short position is
open, the Company owns an equal or greater amount of such securities or owns
preferred stock, debt or warrants convertible or exchangeable into an equal or
greater number of the shares of common stocks sold short. Short sales of this
kind are referred to as short sales "against the box." The broker-dealer that
executes a short sale generally invests the cash proceeds of the sale until they
are paid to the Company. Arrangements may be made with the broker-dealer to
obtain a portion of the interest earned by the broker on the investment of short
sale proceeds. The Company will segregate the securities against which short
sales against the box have been made in a special account with its custodian.
Not more than 10% of the Company's net assets (taken at current value) may be
held as collateral for such sales at any one time.
MANAGEMENT OF THE COMPANY
Officers and Directors
The officers of the Company manage its day-to-day operations. The officers are
directly responsible to the Board, which sets broad policies for the Company and
chooses its officers. The following is a list of the members of the Board and
officers of the Company and a brief statement of their present positions and
principal occupations during the past five years. Board members who are
interested persons of the Company (as defined in the 1940 Act) are denoted by an
asterisk (*). The business address of the Adviser, the Company, members of the
Board and officers is 1680 38th Street, Suite 800, Boulder, Colorado 80301,
unless specified otherwise below.
<TABLE>
<CAPTION>
Name, Address and Age Position held with Principal Occupations
--------------------- the Company During the Past Five
----------- Years and Other Affiliations
----------------------------
<S> <C> <C>
Stephen C. Miller * Director, Chairman of President, Chief Executive Officer and Chairman of
Age: 47 the Board, President the Board of the Company since April 1999; vice
and Chief Executive president and secretary of SIA, sub-adviser to the
Officer Company; Director and President of Horejsi, Inc.
(liquidated in 1999); Director, Vice President and
Assistant Secretary of Badlands Trust Company; Of
Counsel to Krassa, Madsen & Miller, LLC since 1991;
Manager of Boulder Administrative Services, L.L.C.,
the co-administrator to the Company. Mr. Miller
received a Bachelor of Science Degree from the
University of Georgia in 1976 and a law degree from
the University of Denver Law School in 1987.
Stewart R. Horejsi * Director Investment Manager for Stewart Investment Advisers,
Bellerive a sub-adviser to the Company; Director of the
Queen Street Company since July 1997; General Manager, Brown
St. Peter Barbados Welding Supply, LLC (dissolved in 1999) since April
Age: 62 1994; Director, Sunflower Bank (resigned in June
2000); President or Manager of various subsidiaries
of Horejsi, Inc. since June, 1986; investment
adviser for the Horejsi family trusts (i.e., the
Lola Brown Trust, the Ernest Horejsi Trust, the
Stewart R. Horejsi Trust No. 2, and certain related
trusts) since 1982; Director and President of the
Horejsi Charitable Foundation, Inc. since 1997.
Mr. Horejsi received a Masters Degree in Economics
from Indiana University in 1961 and a Bachelor of
Science Degreein
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Industrial Management from the University of Kansas
in 1959.
James G. Duff Director Director of the Company since 1997; retired since
7544 South Dunn's Farm Road January 1997; prior to January 1997, Chairman and
Maple City MI 49644 CEO of USL Capital, Inc. (commercial financing).
Age: 62
Alfred G. Aldridge, Jr. Director Director of the Company since April 1999; Sales
6831 E. Presidio Road Manager of Shamrock Foods Company since 1982;
Scottsdale AZ 85254 Director of the Fiesta Bowl, Tempe AZ; retired
Age: 63 Brigadier General, CA Air National Guard.
Richard I. Barr Director Director of the Company since January 1999; Manager
2502 E. Solano Drive of Advantage Sales and Marketing since 1963 (retired
Phoenix AZ 85016 in 2000).
Age: 62
Carl D. Johns Chief Financial Chief Financial Officer, Chief Accounting Officer,
Age: 37 Officer, Chief Vice President and Treasurer of the Company since
Accounting Officer, January 1999; Vice President and Treasurer of
Vice President, and Boulder Investment Advisers, LLC, sub-adviser to
Treasurer the Company; prior to December 1998, employee of
Flaherty & Crumrine
Incorporated, former adviser to the Company;
Assistant Treasurer to the Company, Preferred Income
Fund and Preferred Income Opportunity Fund prior to
December 1998. Mr. Johns received a Bachelors Degree
in Mechanical Engineering at the University of
Colorado in 1985, and a Masters Degree in Finance
from the University of Colorado in 1991.
Laura Rhodenbaugh Secretary Secretary of the Company since January 1999;
200 S. Santa Fe secretary and treasurer of various Horejsi family
Salina, KS 67401 affiliates since June 1986.
Age: 49
</TABLE>
As of August 1, 2000, except as set forth in the Prospectus (see "Beneficial
Ownership and Control Persons"), no person is known to the Company to own of
record or beneficially 5% or more of the Company's outstanding common shares or
preferred shares. As of August 1, 2000, all directors and executive offices of
the Company as a group owned 0.2% directly and 42.22% indirectly of the
outstanding common stock (see "Beneficial Ownership and Control Persons" in the
Prospectus); none of such persons owned any of the Company's preferred shares.
Audit Committee
The Board has an Audit Committee consisting of Messrs. Aldridge, Barr and Duff,
who were appointed to the Audit Committee on January 15, 1999. The Audit
Committee reviews the scope and results of the Company's annual audit with the
Company's independent accountants and recommends the engagement of such
accountants. The Audit Committee met twice during the fiscal year ended November
30, 1999.
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Nominating Committee
The Board has a Nominating Committee consisting of Messrs. Aldridge, Barr and
Duff which is responsible for considering candidates for election to the Board
in the event a position is vacated or created. The Nominating Committee would
consider recommendations by shareholders if a vacancy were to exist. Such
recommendations should be forwarded to the Secretary of the Company. The
Nominating Committee did not meet during the fiscal year ended November 30,
1999.
Compensation to Directors
No officer or employee of the Company, or officer or employee of the Adviser or
Sub-adviser to the Company, receives any compensation from the Company for
serving as an officer or director of the Company. Mr. Horejsi's compensation was
paid for services as a Director of the Company prior to the date that Boulder
Administrative Services, L.L.C. became co-administrator of the Company. The
annual fee paid to each Director is $6,000; the fee for each attended in-person
meeting is $2,000 per meeting; and the fee for each meeting attended by
telephone is $1,000. The aggregate remuneration paid to the members of the Board
for acting as such during the fiscal year ended November 30, 1999 amounted to
$65,574.97. Directors and executive officers of the Company do not receive
pension or retirement benefits from the Company. Independent directors receive
reimbursement for travel and other out-of-pocket expenses incurred in connection
with board meetings.
COMPENSATION TABLE
Name of person and Aggregate Compensation
Position with the Fund from the Fund Paid to Directors*
---------------------- --------------------------------
Alfred G. Aldridge, Jr. $17,652.17
Director
Richard I. Barr $21,148.90
Director
James G. Duff $22,573.90
Director
Steward R. Horejsi $4,200.00
Director
Stephen C. Miller $0
Director,
Chairman of the Board,
President and Chief Executive Officer
-------------------------------------
* Reflects information relating to the Company (and not of two other
funds that, until August 1999, had had the same investment adviser as
the Company), because the Company is no longer in the same fund complex
as those funds. In addition to the amounts shown above that were paid
to persons currently serving as Directors, the Company paid Morgan Gust
and Robert F. Wulf $1,450 each for their services as Directors of the
Fund prior to their resignations effective January 15, 1999.
Code of Ethics
The Company and its investment adviser and sub-adviser have each adopted a Code
of Ethics under Rule 17j-1 under the 1940 Act, which permits personnel subject
to the Code to invest in securities, including securities that may be purchased
or held by the Company. Each Code also contains pre-clearance and reporting
requirements and other
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restrictions designed to prevent conduct by personnel disadvantageous to the
Company. These Codes of Ethics can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling the
Commission at 1-202-942-8090. These Codes are also available on the EDGAR
Database on the Commission's Internet site at http://www.sec.gov. Copies of
these Codes may be obtained, after paying a duplicating fee, by electronic
request at the following E-mail address: [email protected], or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Compensation to the Adviser, Sub-Advisers and Co-Administrators
Information is provided in the Prospectus concerning the adviser, sub-advisers
and co-administrators and their agreements with the Company. The amounts paid to
such persons during the last three fiscal years or, if shorter, the period
during which the entity was retained to provide services to the Company are as
follows:
Fees Paid
(For Fiscal Year
Ending
November 30)
-------------------------------
Name of Entity 1997 1998 1999
-------------- ---- ---- ----
Boulder Investment Advisers, L.L.C.* 0 0 $38,130
Stewart Investment Advisers, Ltd.* 0 0 $152,522
Flaherty & Crumrine Incorporated** $1,361,148 $1,394,302 $726,056
Spectrum Asset Management, Inc.* 0 0 $319,726
Boulder Administrative Services, L.L.C.* 0 0 $148,985
PFPC Inc. $271,669 $276,939 $259,792
* Retained to provide services to the Company beginning in fiscal year 1999.
** Contract to provide services to the Company was terminated during fiscal
year 1999.
PORTFOLIO TRANSACTIONS AND BROKERAGE
SIA is responsible for decisions to buy and sell securities for the Company, the
selection of brokers and dealers to effect the transactions and the negotiation
of prices and any brokerage commissions. The Company may purchase certain money
market instruments directly from an issuer in which case no commissions or
discounts are paid. Purchases and sales of debt securities on a stock exchange
are effected through brokers who charge a commission for their services. During
the last three fiscal years, the Company paid $3962 for fiscal year 1999, and
only nominal amounts for fiscal year 1998 and 1997 in brokerage commissions. The
increase in brokerage commissions in the last fiscal year is due to the change
in the Company's investment focus from primarily preferred stocks to a
combination of common stocks and preferred stocks. No separate brokerage
commission is typically paid on preferred stock transactions, which are
typically executed on a principal basis, in contrast to common stock
transactions, where brokerage commissions are the norm.
SIA will effect securities transactions of the Company in a manner deemed fair
and reasonable to shareholders of the Company and not according to any formula.
The primary considerations in selecting the manner of executing securities
transactions for the Company will be prompt execution of orders, the size and
breadth of the market for the security, the reliability, integrity and financial
condition and execution capability of the firm, the amount of difficulty in
executing the order, and the best net price. There are many instances when, in
the judgment of the Adviser or Sub-Adviser, as the case may be, more than one
firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. Consideration may also be given to the sale
of shares of the Company. However, it is not the policy of the Adviser or the
Sub-Adviser, absent special circumstances, to pay higher commissions to a firm
because it has supplied such research or other services.
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The Adviser and SIA are able to fulfill their obligations to furnish a
continuous investment program to the Company without receiving research from
brokers; however, they consider access to such information to be an important
element of financial management. Although such information is considered useful,
its value is not determinable, as it must be reviewed and assimilated by the
Adviser and SIA, and does not reduce the Adviser's or SIA's normal research
activities in rendering investment advice. It is possible that the Adviser's or
SIA's expenses could be materially increased if either attempted to purchase
this type of information or generate it through its own staff.
Currently, the Adviser and SIA manage only the Company's assets. However, if
either were to manage another account, investment decisions for the Company
would be made independently from those of such other accounts; however, from
time to time, the same investment decision might be made for more than one
company or account. If two or more accounts were to seek to purchase or sell the
same securities, the securities actually purchased or sold would be allocated
among the companies and accounts on a good faith equitable basis by the Adviser
or Sub-Adviser, as the case may be, in its discretion in accordance with the
accounts' various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable for the Company.
In other cases, however, the ability of the Company to participate in volume
transactions may produce better execution for the Company.
Although the Company has no restrictions on portfolio turnover, it is not the
Company's policy to engage in transactions with the objective of seeking profits
from short-term trading. It is expected that the annual portfolio turnover rate
of the Company will be less than 100% excluding securities having a maturity of
one year or less. Because it is difficult to accurately predict portfolio
turnover rates, actual turnover may be higher or lower. Higher portfolio
turnover results in increased Company expenses, including brokerage commissions,
dealer mark-ups and other transaction costs on the sale of securities and on the
reinvestment in other securities. For the fiscal years ended November 30, 1998
and 1999, the Company's portfolio turnover rates were 86% and 69%.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS
General
Auction Agency Agreement. The Company will enter into an auction agency
agreement with the auction agent (currently, Bankers Trust Company) which
provides, among other things, that the auction agent will follow the auction
procedures for purposes of determining the applicable rate for the AMPS shares
so long as the applicable rate for the AMPS shares is to be based on the results
of an auction.
Broker-Dealer Agreements. Each auction requires the participation of one or more
Broker-Dealers. The auction agent will enter into broker-dealer agreements with
several Broker-Dealers selected by the Company, which provide for the
participation of those Broker-Dealers in auctions for AMPS shares.
Securities Depository. The Depository Trust Company ("DTC") will act as
securities depository for the Agent Members with respect to the AMPS. One
certificate for all of the AMPS shares will be registered in the name of Cede &
Co., as nominee of DTC. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions restricting transfers of
shares of AMPS contained in the Articles Supplementary. The Company will also
issue stop-transfer instructions to the transfer agent for AMPS. Prior to the
commencement of the right of holders of preferred shares of the Company to elect
a majority of the Board, as described under "Description of AMPS - Voting
Rights" in the Prospectus, Cede & Co. will be the holder of record of all AMPS
shares and owners of such shares will not be entitled to receive certificates
representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services for
its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such participant (the
"Agent Member") in AMPS, whether for its own account or as a nominee for another
person.
S-11
<PAGE>
Concerning the Auction Agent
The auction agent will act as agent for the Company in connection with auctions.
In the absence of bad faith or negligence on its part, the auction agent will
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 agency
agreement and will not be liable for any error of judgment made in good faith
unless the auction agent will have been negligent in ascertaining the pertinent
facts.
The auction agent may rely upon, as evidence of the identities of the existing
holders of AMPS, the auction agent's registry of existing holders, the results
of auctions and notices from any Broker-Dealer (or other person, if permitted by
the Company) with respect to transfers described under "The Auction" in the
Prospectus. The auction agent is not required to accept any such notice for an
auction unless it is received by the auction agent by 3:00 p.m., New York City
time, on the business day preceding such auction.
The auction agent may terminate the auction agency agreement upon notice to the
Company on a date no earlier than the business day after the second dividend
payment date for the AMPS following delivery of such notice. If the auction
agent should resign, the Company 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 agency agreement. The Company may remove the
auction agent provided that prior to such removal the Company shall have entered
into such an agreement with a successor auction agent.
Broker-Dealers
After each auction for AMPS, the auction agent will pay to each Broker-Dealer,
from funds provided by the Company, a service charge at the annual rate of 0.25%
of the aggregate liquidation preference of shares of AMPS placed by such
Broker-Dealer at such auction. For the purposes of the preceding sentence, AMPS
will be placed by a Broker-Dealer if such shares were (a) the subject of hold
orders deemed to have been submitted to the auction agent by the Broker-Dealer
and were acquired by such Broker-Dealer for its own account or were acquired by
such Broker-Dealer for its customers who are beneficial owners or (b) the
subject of an order submitted by such Broker-Dealer that is (i) a submitted bid
of an existing holder that resulted in such existing holder continuing to hold
such shares as a result of the auction or (ii) a submitted bid of a potential
holder that resulted in such potential holder purchasing such shares as a result
of the auction or (iii) a valid hold order. The Company may request the auction
agent to terminate one or more Broker-Dealer Agreements at any time, provided
that at least one Broker-Dealer Agreement is in effect after such termination.
If an auction was not held on an auction date, the auction agent will pay to
each Broker-Dealer a service charge at an annual rate of 0.25% of the aggregate
liquidation preference of the shares of AMPS acquired by existing holders
through such Broker-Dealer.
The Broker-Dealer agreements provide that a Broker-Dealer may submit orders in
auctions for its own account, unless the Company notifies such Broker-Dealer
that it may no longer do so, in which case such Broker-Dealer may continue to
submit hold orders and sell orders for its own account. Any Broker-Dealer that
is an affiliate of the Company may submit orders in auctions, but only if such
orders are not for its own account. If a Broker-Dealer submits an order for its
own account in any auction, it might have an advantage over other bidders
because it would have knowledge of all orders submitted by it in that auction;
such Broker-Dealer, however, would not have knowledge of orders submitted by
other Broker-Dealers in that auction.
REPURCHASE OF COMMON SHARES
The Company is a closed-end investment company and as such its common
shareholders do not have the right to cause the Company to redeem their shares.
Instead, the Company's common shares trade in the open market at a price that is
a function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, dividend stability, relative demand for
and supply of such shares in the market, general market and economic conditions
and other factors. Because shares of a closed-end investment company may
frequently trade at prices lower than net asset value, the Board may consider
actions that might be taken to reduce or eliminate any material discount from
net asset value in respect of common shares, which may include the repurchase of
such shares in the open market or in private transactions, the making of a
tender offer for such shares at net asset value, or the conversion of the
Company to an open-end investment company. The Board may not decide to take any
of these
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<PAGE>
actions. In addition, there can be no assurance that share repurchases or tender
offers, if undertaken, will reduce market discount.
The Prospectus describes the Company's current policy with respect to
repurchasing shares of the Company's common stock in the open market or in
private transactions, or tendering for shares, in an attempt to reduce or
eliminate a market value discount from net asset value. Upon the issuance of the
AMPS, the Company's ability to repurchase shares of, or tender for, its common
stock may be limited by the asset coverage requirements of the 1940 Act and by
asset coverage and other requirements imposed by Moody's and S&P as a condition
to rating the AMPS. No assurance can be given that the Board will decide to
undertake share repurchases or tenders or, if undertaken, that repurchases
and/or tender offers will result in the Company's common stock trading at a
price that is close to, equal to or above net asset value. The Company may
borrow to finance repurchases and/or tender offers. Any tender offer made by the
Company for its shares may be at a price equal to or less than the net asset
value of such shares. Any service fees incurred in connection with any tender
offer made by the Company will be borne by the Company and will not reduce the
stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Company may borrow to finance any
repurchase of common shares or to make any tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Company in anticipation of share repurchases or tenders will reduce the
Company's net income. Any share repurchase, tender offer or borrowing that might
be approved by the Board would have to comply with the Securities Exchange Act
of 1934 and the 1940 Act and the rules and regulations under each of those acts.
Although the decision to take action in response to a discount from net asset
value will be made by the Board at the time it considers such issue, it is the
Board's present policy, which may be changed by the Board, not to authorize
repurchases of common shares or a tender offer for such shares if (1) such
transactions, if consummated, would (a) result in the delisting of the common
shares from the NYSE, or (b) impair the Company's status as a regulated
investment company under the Internal Revenue Code (which would make the Company
a taxable entity, causing the Company's income to be taxed at the corporate
level in addition to the taxation of shareholders who receive dividends from the
Company) or as a registered closed-end investment company under the 1940 Act;
(2) the Company would not be able to liquidate portfolio securities in an
orderly manner and consistent with the Company's investment objective and
policies in order to repurchase shares; or (3) there is, in the board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Company, (b) general suspension of or limitation on prices for trading
securities on the NYSE, (c) declaration of a banking moratorium by Federal or
state authorities or any suspension of payment by United States banks in which
the Company invests, (d) material limitation affecting the Company or the
issuers of its portfolio securities by Federal or state 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 (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Company or its shareholders if shares were
repurchased. The Board may in the future modify these conditions in light of
experience.
The repurchase by the Company of its common shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Company's common shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Company's shares may be the subject of repurchase or tender offers at net
asset value from time to time, or that the Company may be converted to an
open-end company, may be helpful in reducing any spread between market price and
net asset value that might otherwise exist.
In addition, a purchase by the Company of its common shares will decrease the
Company's total assets which would likely have the effect of increasing the
Company's expense ratio. Any purchase by the Company of its common shares at a
time when preferred shares are outstanding will increase the leverage applicable
to the outstanding common shares then remaining and decrease the asset coverage
of the preferred shares.
Before deciding whether to take any action if the common shares trade below net
asset value, the Board would likely consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Company's portfolio,
the impact of any action that might be taken on the Company or its shareholders
and market
S-13
<PAGE>
considerations. Based on these considerations, even if the Company's shares
should trade at a discount, the Board may determine that, in the interest of the
Company and its shareholders, no action should be taken.
TAX MATTERS
The Company has qualified and elected, and intends to continue to qualify under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company. To qualify for tax treatment as a regulated
investment company, the Company must, among other things: (a) distribute to its
shareholders at least an amount equal to the sum of (i) 90% of its net
investment income (which is its investment company taxable income as that term
is defined in the Code but determined without regard to the deduction for
dividends paid) and (ii) 90% of its net tax-exempt interest income and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Company
(i) at least 50% of the market value of the Company's assets is represented by
cash, cash items, U.S. government securities and securities of other regulated
investment companies, and other securities, with these other securities limited,
with respect to any one issuer, to an amount not greater in value than 5% of the
Company's total assets, and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the market value of the
Company's assets is invested in the securities of any one issuer (other than
U.S. government securities or securities of other regulated investment
companies). In meeting these requirements, the Company may be restricted in the
utilization of certain of the investment techniques described above and in the
Prospectus. If in any year the Company should fail to qualify for tax treatment
as a regulated investment company, the Company would incur a regular Federal
corporate income tax upon its taxable income for that year, and distributions to
its shareholders would be taxable to such holders as ordinary income to the
extent of the Company's earnings and profits. A regulated investment company
that fails to distribute, by the close of each calendar year, at least an amount
equal to the sum of 98% of its ordinary taxable income for such year and 98% of
its capital gain net income for the one year period ending October 31 in such
year, plus any shortfalls from the prior year's required distribution, is liable
for a 4% excise tax on the portion of the undistributed amount of such income
that is less than the required amount for such distributions. To avoid the
imposition of this excise tax, the Company generally makes the required
distributions of its ordinary taxable income, if any, and its capital gain net
income, to the extent possible, by the close of each calendar year.
Certain of the Company's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain deductions or
losses of the Company, affect the holding period of securities held by the
Company and alter the character of the gains or losses realized by the Company.
These provisions may also require the Company to recognize income or gain
without receiving cash with which to make distributions in the amounts necessary
to satisfy the requirements for maintaining regulated investment company status
and for avoiding income and excise taxes. The Company will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Company as a regulated
investment company.
Distributions to shareholders by the Company of net income received, if any,
from taxable temporary investments and net short-term capital gains, if any,
realized by the Company will be taxable to its shareholders as ordinary income.
Distributions by the Company of net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss), if any, are taxable as
long-term capital gain, regardless of the length of time the shareholder has
owned common shares or AMPS. Distributions, if any, in excess of the Company's
earnings and profits will first reduce the adjusted tax basis of a shareholder's
shares and, after that basis has been reduced to zero, will constitute capital
gains to the shareholder (assuming the shares are held as a capital asset).
The Internal Revenue Service (the "IRS") requires that a regulated investment
company that has two or more classes of shares designate to each such class
proportionate amounts of each type of its income for each tax year based upon
the percentage of total dividends distributed to each class for such year. The
Company intends each year to allocate, to the fullest extent practicable, net
interest income, net capital gain and other taxable income, if any, between its
common shares and preferred shares, including the AMPS, in proportion to the
total dividends paid to each class with respect to such year. To the extent
permitted under applicable law, the Company reserves the right to make special
allocations of income within a class, consistent with the objective of the
Company. The Company may, at its election, notify the auction agent of the
amount of any net capital gain or other income taxable for Federal income tax
purposes to be included in any dividend on shares of its AMPS prior to the
auction establishing the applicable rate for such dividend.
S-14
<PAGE>
If at any time when the AMPS are outstanding the Company fails to meet the
Eligible Asset Coverage and the 1940 Act Asset Coverage, the Company will be
required to suspend distributions to holders of its common shares until such
maintenance amount or asset coverage, as the case may be, is restored. This may
prevent the Company from distributing at least an amount equal to the sum of 90%
of its investment company taxable income and 90% of its net tax-exempt interest
income, and may therefore jeopardize the Company's qualification for taxation as
a regulated investment company or cause the Company to incur a tax liability or
a non-deductible 4% excise tax on the undistributed taxable income (including
gain), or both. Upon failure to meet the Eligible Asset Coverage or the 1940 Act
Asset Coverage, the Company will be required to redeem its AMPS in order to
maintain or restore such maintenance amount or asset coverage and avoid the
adverse consequences to the Company and its shareholders of failing to qualify
as a regulated investment company. There can be no assurance, however, that any
such redemption would achieve such objective.
The Company may, at its option, redeem the AMPS in whole or in part, and is
required to redeem AMPS to the extent required to maintain the Eligible Asset
Coverage Amount and the 1940 Act Asset Coverage. Gain or loss, if any, resulting
from a redemption of AMPS will be taxed as gain or loss from the sale or
exchange of the AMPS under Section 302 of the Code rather than as a dividend,
but only if the redemption distribution (a) is deemed not to be essentially
equivalent to a dividend, (b) is in complete redemption of an owner's interest
in the Company, (c) is substantially disproportionate with respect to the owner,
or (d) with respect to a non-corporate owner, is in partial liquidation of the
owner's interest in the Company. For purposes of (a), (b) and (c) above, a
shareholder's ownership of common shares will be taken into account and AMPS and
common shares held by parties who are related to the redeemed shareholder may
also have to be taken in to account.
The sale or other disposition of common shares or AMPS will normally result in
capital gain or loss to shareholders. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, under current law short-term
capital gains and ordinary income will be taxed at a maximum rate of 39.6% while
long-term capital gains generally will be taxed at a maximum rate of 20%.
However, because of the limitations on itemized deductions and the deduction for
personal exemptions applicable to higher income taxpayers, the effective rate of
tax may be higher in certain circumstances. Losses realized by a shareholder on
the sale or exchange of shares of the Company held for six months or less are
disallowed to the extent of any distribution of exempt- interest dividends
received with respect to such shares, and, if not disallowed, such losses are
treated as long-term capital losses to the extent of any distribution of net
capital gain received with respect to such shares. A shareholder's holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. Any loss realized on a sale or exchange of shares of the Company will be
disallowed to the extent those shares of the Company are replaced by other
shares within a period of 61 days beginning 30 days before and ending 30 days
after the date of disposition of the original shares. In that event, the basis
of the replacement shares of the Company will be adjusted to reflect the
disallowed loss.
Nonresident alien individuals and certain foreign corporations and other
entities ("foreign investors") generally are subject to U.S. withholding tax at
the rate of 30% (or possibly a lower rate provided by an applicable tax treaty)
on distributions of net investment income (which includes net short-term capital
gain). To the extent received by foreign investors, exempt-interest dividends,
distributions of net capital gain and gain from the sale or other disposition of
the AMPS generally are exempt from United States Federal income taxation.
Different tax consequences may result if the owner is engaged in a trade or
business in the United States or, in the case of an individual, is present in
the United States for 183 or more days during a taxable year.
The Company is required in certain circumstances to backup withhold 31% of
taxable dividends and certain other payments paid to non-corporate holders of
the Company's shares who do not furnish to the Company their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from payments
made to a shareholder may be refunded or credited against such shareholder's
United States Federal income tax liability, if any, provided that the required
information is furnished to the IRS.
The foregoing is a general summary of the provisions of the Code and regulations
thereunder presently in effect as they directly govern the taxation of the
Company and its shareholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Moreover, the foregoing does not address many of the factors that may be
determinative of whether an investor will be liable for the Federal
S-15
<PAGE>
alternative minimum tax. Shareholders are advised to consult their own tax
advisers for more detailed information concerning the Federal income tax
consequences and any state, local or foreign tax consequences of purchasing,
holding and disposing of Company shares.
FINANCIAL STATEMENTS
Independent Auditors
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), at One Post Office
Square, Boston, Massachusetts 02109, has served as independent accountants for
the Company since its commencement of operations and has been selected to serve
in such capacity for the Company's fiscal year ending November 30, 2000. The
financial statements and independent auditors report incorporated by reference
into this statement of additional information have been so incorporated and the
financial highlights included in the Prospectus have been so included in
reliance upon the report of PricewaterhouseCoopers given on their authority as
experts in auditing and accounting.
Incorporation by Reference
The Company's Portfolio of Investments, dated November 30, 1999 (audited);
Statement of Assets and Liabilities, dated November 30, 1999 (audited);
Statement of Operations for the year ended November 30, 1999 (audited);
Statement of Changes in Net Investment Assets for the two years ended November
30, 1999 (audited); the independent auditors report included in the Company's
Annual Report for the fiscal year ended November 30, 1999, are incorporated
herein by reference. The Company will furnish, without charge, a copy of the
Annual Report and the Semi-Annual Report upon written request to PFPC Inc., P.O.
Box 1376, Boston, Massachusetts 02104 or by calling 1-800-331-1710.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to
the shares offered hereby, has been filed by the Company with the Securities and
Exchange Commission, Washington, D.C. The Prospectus and this statement of
additional information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Company and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
Prospectus and this statement of additional information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Registration Statement may be inspected without a charge at the Commission's
principal office in Washington, D.C. and copies of all or any part thereof may
be obtained from such office after payment of the fees prescribed by the
Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files and reports and other information with the Commission. Such reports, proxy
and public statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, DC 20549. Call 1-800-SEC-0330 for information about the public
reference facilities. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates. Such reports and other information concerning the
Company may also be inspected at the offices of the New York Stock Exchange. The
Commission maintains a web site (http://www.sec.gov) that contains the
Prospectus, material incorporated by reference into this statement of additional
information and the Prospectus, and reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
S-16
<PAGE>
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP
A brief description of the applicable Standard & Poor's Ratings Group ("S&P")
rating symbols and their meanings (as published by S&P) follows:
LONG TERM DEBT
An S&P corporate debt rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. The debt rating
is not a recommendation to purchase, sell, or hold a security, inasmuch as it
does not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other
circumstances. The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A-Debt rated "All 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 it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CLARK CURBO" and "IC" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
'IC" the highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.
BB-Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
A-1
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inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B-Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC-Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CLARK CURBO-The rating "CLARK CURB0" typically is applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" debt rating.
C-The rating "C" typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI-The rating "CI" is reserved for income bonds on which no interest is being
paid.
D-Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-)-The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS-The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely o entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
L-The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized.
In the case of certificates of deposit the letter "L" indicates that the
deposit, combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the federal
insurance limits within 30 days after closing of the insured institution or, in
the event that the deposit is assumed by a successor insured institution, upon
maturity. Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flow.
NR-Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
A-2
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-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1-Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
designation.
SP-2-Satisfactory capacity to pay principal and interest.
SP-3-Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-111 for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2-Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
A-3-Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designation.
B-Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C-This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D-Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-3
<PAGE>
MOODY'S INVESTORS SERVICE, INC.
A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings (as published by Moody's) follows:
LONG-TERM RATINGS
Aaa-Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds that are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds that are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds that are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B-Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds that are rated Caa are of poor standing. such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds that are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C-Bonds that are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
CON(-)-Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aal,
Al, Baal, Bal and Bl.
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<PAGE>
SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year.
Among the obligations covered are commercial paper, Eurocommercial paper, bank
deposits, bankers' acceptances and obligations to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and bonds
of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
Leading market positions in well-established industries;
High rates of return on funds employed;
Conservative capitalization structure with moderate reliance on debt and ample
asset protection;
Broad margins in earnings coverage of fixed financial charges and high internal
cash generation; and
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
PREFERRED STOCK RATINGS
Preferred stock rating symbols and their definitions are as follows:
aaa-An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa-An issue which is rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a-An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
baa-An issue which is rated "baa" is considered to be medium grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
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ba-An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b-An issue which is rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa-An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca-An issue which is rated "ca" is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payment.
c-This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. The modifier I indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
A-6
<PAGE>
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Financial Statements included in Part A (Prospectus) of this
Registration Statement:
Financial Highlights for each of the years ended November 30, 1999,
1998, 1997, 1996, 1995, 1994 and 1993 and for the six months ended May
31, 2000.
Financial Statements included in Part B (Statement of Additional
Information) of this Registration Statement:
Report of Independent Accountants.*
Statement of assets and liabilities as of November 30, 1999.*
Statement of operations for the year ended November 30, 1999.*
Statement of cash flows for the year ended November 30, 1999.*
Statement of changes in net assets for each of the years ended November
30, 1998 and 1999.*
Financial highlights for each of the years ended November 30, 1996,
1997, 1998 and 1999.*
Schedule of Investments as of May 31, 2000.**
------------------
* Incorporated by reference.
** To be filed by amendment.
(2) Exhibits
(a)(1) --Articles of Incorporation of the Company
(a)(2) --Articles of Amendment to the Articles of
Incorporation of the Company
(b) --Amended and Restated By-laws of the Company
(c) --Not applicable
(d)(1)* --Form of Articles Supplementary for the AMPS
(d)(2) --Form of Share Certificate for the AMPS
(e)** --Dividend Reinvestment Plan
<PAGE>
(f) --Not applicable
(g)(1) --Investment Advisory Agreement between the Company
and Boulder Investment Advisers, L.L.C. ("BIA")
(2) --Investment Sub-Advisory Agreement between the
Company, BIA and Stewart Investment Advisers,
Ltd. ("SIA")
(h) --Form of Purchase Agreement between the Company,
BIA and Merrill Lynch & Co.
(i) --Not Applicable
(j) --Custody Agreement between the Company and Boston
Safe Deposit and Trust Company Bank, N.A.
(k)(1) --Transfer Agency Agreement between the Company and
The Shareholder Services Group Inc.
(2) --Amended and Restated Administration Agreement
between the Company and First Data Investor
Services Group, Inc. ("FDISG") (The
"Administration Agreements")
(3) --Amendment to the Administration Agreement between
the Company and FDISG
(4) --Co-Administration Agreement between the Company
and Boulder Administrative Services, LLC
(5) --Fee Agreement among the Boston Company Advisers,
Inc., Boston Safe Deposit and Trust Company and
the Company
(6) --Form of Auction Agency Agreement between the
Company and Bankers Trust Company
(7)* --Form of Broker-Dealer Agreement between the
Company and Merrill Lynch & Co.
(8)* --Form of Master Purchaser's Letter
(l)(1)* --Opinion and consent of Willkie Farr & Gallagher
(2)* --Opinion and consent of Venable, Baetjer and
Howard, LLP
(m) --Not applicable
(n)* --Consent of PricewaterhouseCoopers L.L.P.
(o) --Not applicable
(p) --Not applicable
(q) --Not applicable
(r)(1)* --Code of Ethics of the Company, BIA and SIA
(s)*** --Power of Attorney
(t)* --Financial Data Schedule (EDGAR version only)
-----------------
* To be filed by amendment.
** Incorporated herein by reference to the Registrant's Form N-30D filed
on July 29, 1997.
*** Incorporated herein by reference to the Registrant's Pre-effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-2
(File Nos. 333-37008, 811-07390), Exhibit 2(s), filed on July 3, 2000.
Item 25. Marketing Arrangements
Reference is made to the Form of Purchase Agreement for the AMPS to be filed by
amendment to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
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Registration fees........................... $ 20,460
Printing and engraving...................... *
Accounting fees and expenses................ *
Legal fees and expenses..................... *
Rating Agency fees.......................... *
Miscellaneous............................... *
------------------
Total....................................... *
==================
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*To be completed by amendment.
Item 27. Persons controlled by or under common control with the Fund
The following table sets forth certain information regarding the beneficial
ownership of the Company's shares as of May 31, 2000, by each person who is
known by the Company to beneficially own 5% or more of the Company's common
stock. To the Company's knowledge, there are no 5% or greater beneficial owners
of MMP Shares.
Number and % of Shares
Name of Owner* Beneficially Owned**
------------- --------------------
EALLC (1) 257,811 (2.74%)
John S. Horejsi Trust (1)(2) 65,747 (0.70%)
Susan L. Ciciora Trust (1)(2) 131,475 (1.40%)
Stewart West Indies Trust (1)(2) 191,907 (2.04%)
Evergreen Trust (2) 47,632
Lola Brown Trust (1) 1,028,001 (10.92%)
Ernest Horejsi Trust No. 1B (1) 2,468,053 (26.21%)
Badlands Trust Company (3) 3,975,550 (41.9%)
Stewart R. Horejsi Trust No. 2 (4) 3,975,550 (41.9%)
Aggregate Shares Owned 3,975,550 (41.9%)
* The address of EALLC is 1680 38th Street, Suite 800, Boulder, Colorado 80301.
The address for each of the other listed owners is 614 Broadway, P.O. Box 801,
Yankton, South Dakota 57078.
** Aggregate number and percentage are less than the sum total of amounts shown
for each owner because the same shares may be deemed beneficially owned by more
than one party (see Footnotes 1 through 4).
(1) DIRECT OWNERSHIP. Evergreen Atlantic, L.L.C. ("EALLC"), John S. Horejsi
Trust ("John Trust"), Susan L. Ciciora Trust ("Susan Trust"), Stewart West
Indies Trust ("SWIT"), Lola Brown Trust No. 1B ("Lola Brown Trust"), the Ernest
Horejsi Trust No. 1B ("Ernest
3
<PAGE>
Trust") and Badlands Trust Company ("Badlands") directly own 257,811; 27,075;
54,132; 78,470; 1,028,001; 2,498,053; and 12,735, respectively, of the Company's
common stock shares, totaling 3,975,550 shares or 42.22% of the outstanding
shares of the Company.
(2) INDIRECT OWNERSHIP THROUGH EVERGREEN. Numbers shown in the table include
shares held directly and shares that may be deemed to be beneficially owned
indirectly through ownership of EALLC. The outstanding equity membership of
EALLC is owned by SWIT, the John Trust, the Susan Trust and the Evergreen Trust
in the following percentages - 44%, 15%, 30% and 11%. The sole trustee of SWIT,
the John Trust and the Susan Trust is Badlands. Mr. Horejsi is not a beneficiary
under any of these trusts. The trustees of Evergreen Trust are Badlands, Stephen
C. Miller and Larry Dunlap. Any action by the Evergreen Trust requires a
majority vote of the trustees.
(3) OWNERSHIP BY BADLANDS. Numbers shown in the table includes shares held
directly by Badlands (see Footnote No. 1) and shares that may be deemed to be
beneficially owned indirectly by Badlands through direct or indirect ownership
by the Lola Brown Trust, the Ernest Trust, SWIT, the John Trust, the Susan Trust
and the Evergreen Trust. Badlands is the sole trustee of three of the four
trusts that control EALLC (see Footnote No. 2) and, together with Larry Dunlap
and Susan Ciciora, one of three trustees of the Lola Brown Trust and the Ernest
Trust. Badlands is a trust company organized under the laws of South Dakota,
which is wholly owned by the SRH Trust, an irrevocable trust organized by Mr.
Stewart Horejsi for the benefit of his children. The directors of Badlands are
Larry Dunlap, Stephen C. Miller, Robert Ciciora, who is the brother of Mr.
Horejsi's son-in-law (John Ciciora).
(4) INDIRECT OWNERSHIP BY SRH TRUST. Numbers shown in the table reflects shares
that may be deemed to be beneficially owned indirectly through ownership of
Badlands. The trustees of the SRH Trust are Badlands, Robert Ciciora and Robert
Kastner.
EALLC, the John Trust, the Susan Trust, SWIT, the Lola Brown Trust, the
Ernest Trust, Badlands, the Stewart R. Horejsi Trust No. 2 ("SRH Trust") and
Stewart R. Horejsi are, as a group, considered to be a "control person" of the
Company (as that term is defined in Section 2(a)(9) of the 1940 Act). These
entities and other trusts or companies with interlocking management and/or
common ownership, including the Co-Administrator (collectively, the "Horejsi
Affiliates") may be deemed to indirectly own additional Company shares, which
are included in the table above. Further, Stewart R. Horejsi, the investment
manager for SIA, is
4
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also the primary investment consultant for the Horejsi Affiliates and, on a
discretionary basis, implements and directs their investment objective and asset
allocation.
Each of EALLC, the John Trust, the Susan Trust, SWIT, the Lola Brown Trust, the
Earnest Trust, Badlands and the SRH Trust are organized or formed under the laws
of the state of South Dakota.
Except for the persons noted above that may be deemed to control the Registrant,
no other person is under common control with the Registrant.
The financial statements of the Registrant are not consolidated with those of
any of the persons noted above that may be deemed to control or be under common
control with the Registrant.
Item 28. Number of Holders of Shares
At June 30, 2000 (within 90 days prior to filing):
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, $.01 par value 9,416,743
Cumulative Money Market 775
Preferred Stock, $.01 par value
Item 29. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland, Article
VIII of the Registrant's Articles of Incorporation (to be filed as an Exhibit to
this Registration Statement), Article 5.2 of the Registrant's By-laws (to be
filed as an Exhibit to this Registration), the Investment Advisory Agreement (to
be filed as an Exhibit to this Registration Statement) and the Purchase
Agreement (to be filed as an Exhibit to this Registration Statement) provide for
indemnification. In addition, the Registrant has entered into an agreement with
each director providing for indemnification and has purchased directors and
officers disability insurance.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant, pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
5
<PAGE>
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 30. Business and Other Connections of the Investment Adviser
Registrant is fulfilling the requirement of this Item 30 to provide a list of
the officers and directors of its investment advisers, together with information
as to any other business, profession, vocation or employment of a substantial
nature engaged in by that entity or those of its officers and directors during
the past two years, by incorporating herein by reference the information
contained in the current Form ADV filed with the Securities and Exchange
Commission by each of BIA, SIA and Spectrum pursuant to the Investment Advisers
Act of 1940, as amended.
Item 31. Location of Accounts and Records
PFPC Inc. Administrator and Common
P.O. Box 1376 Stock Transfer Agent
Boston, MA 02104
Boulder Administrative Services, L.L.C. Co-Administrator
1680 38th Street (Suite 800)
Boulder, CO 80301
Boston Safe Deposit and Trust Company Custodian
One Boston Place
Boston, MA 02108
Bankers Trust Company AMPS Transfer Agent
4 Albany Street
New York, New York 10006
Item 32. Management Services
Not applicable.
6
<PAGE>
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of AMPS until it
amends its Prospectus if (a) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the Prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) The Registrant hereby undertakes that:
(a) for the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance on Rule 430A and contained in the form of
prospectus filed by the Registrant under Rule 497(h) under the Securities Act of
1933 shall be deemed to be part of the Registration Statement as of the time it
was declared effective.
(b) for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) The Registrant hereby undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, any Statement of Additional Information.
7
<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 Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver and the State of
Colorado, on the 4th day of August, 2000.
BOULDER TOTAL RETURN FUND ,INC.
By:/s/ Stephen C. Miller
---------------------------------
Stephen C. Miller
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen C. Miller Director, Chief Executive August 4, 2000
--------------------- Officer, President and
Stephen C. Miller Chairman of the Board
/s/ / Stephen C. Miller* Director August 4, 2000
-----------------------
Steward R. Horejsi
/s/ / Stephen C. Miller* Director August 4, 2000
-----------------------
James G. Duff
/s/ / Stephen C. Miller* Director August 4, 2000
-----------------------
Alfred G. Aldridge, Jr.
/s/ / Stephen C. Miller* Director August 4, 2000
-----------------------
Richard I. Barr
/s/ / Stephen C. Miller* Chief Financial Officer, August 4, 2000
----------------------- Chief Accounting Officer,
Carl D. Johns Vice President and Treasurer
*Pursuant to a Power of Attorney incorporated by reference as Exhibit 2(s)
hereto.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page in
Sequential
Numbering
System
------
<S> <C> <C>
(a)(1) --Articles of Incorporation of the Company...............................................
(a)(2) --Articles of Amendment to the Articles of Incorporation of the Fund.....................
(b) --Amended and Restated By-laws of the Company............................................
(c) --Not applicable.........................................................................
(d)(1) * --Form of Articles Supplementary for the AMPS............................................
(d)(2) --Form of Share Certificate of the AMPS..................................................
(e) ** --Dividend Reinvestment Plan.............................................................
(f) --Not applicable.........................................................................
(g) (1) --Investment Advisory Agreement between the Company and BIA..............................
(2) --Investment Sub-Advisory Agreement between the Company, BIA and SIA.....................
(h) --Form of Purchase Agreement between the Company, BIA and Merrill Lynch & Co.............
(i) --Not Applicable.........................................................................
(j) --Custody Agreement between the Company and Mellon Bank, N.A.............................
(k) (1) --Transfer Agency Agreement between the Company and The Shareholder Services Group, Inc..
(2) --Amended and Restated Administration Agreement between the Company and First Data
Investor Services Group, Inc. ("FDISG") (The "Administration Agreements")..............
(3) --Amendment to the Administration Agreement between the Company and FDISG................
(4) --Co-Administration Agreement between the Company and Boulder Administrative
Services, LLC..........................................................................
(5) --Fee Agreement among the Boston Company Advisers, Inc., Boston Safe Deposit and Trust
Company and the Company................................................................
(6) --Form of Auction Agency Agreement between the Company and Bankers Trust Company.........
(7) --Form of Broker-Dealer Agreement between the Company and Merrill Lynch & Co.............
(8)* --Form of Master Purchaser's Letter......................................................
(l) (1)* --Opinion and consent of Willkie Farr & Gallagher........................................
(2)* --Opinion and consent of Venable, Baetjer and Howard, LLP................................
(m) --Not applicable.........................................................................
(n)* --Consent of Pricewaterhouse Coopers L.L.P...............................................
(o) --Not applicable.........................................................................
(p) --Not applicable.........................................................................
(q) --Not applicable.........................................................................
(r) (1)* --Code of Ethics of the Fund, BIA and SIA................................................
(s)*** --Power of Attorney......................................................................
(t)* --Financial Data Schedule (EDGAR version only)...........................................
</TABLE>
* To be filed by amendment.
** Incorporated herein by reference to the Registrant's Form N-30D filed on
July 29, 1997.
*** Incorporated herein by reference to the Registrant's Pre-effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-2
(File Nos. 333-37008, 811-07390), Exhibit 2(s), filed on July 3, 2000.
<PAGE>
Exhibit (a)(1)
ARTICLES OF INCORPORATION
OF
PREFERRED INCOME MANAGEMENT FUND
INCORPORATED
ARTICLE I
The undersigned, Kimberly A. Gordon, whose address is One Citicorp Center,
153 East 53rd Street, New York, New York 10022, being at least eighteen years of
age, acting as incorporator, does hereby form a corporation under and by virtue
of the Maryland General Corporation Law:
ARTICLE II
NAME
----
The name of the Corporation is Preferred Income Management Fund
Incorporated (the "Corporation").
ARTICLE III
PURPOSES AND POWERS
-------------------
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of a closed-end investment company
registered under the Investment Company Act of 1940, as amended.
(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 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 hereinafter be permitted by law.
(4) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
Maryland General Corporation law now or hereinafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
<PAGE>
ARTICLE IV
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. The post office
address of the resident agent is 32 South Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock that the Corporation shall
have authority to issue is two hundred fifty million (250,000,000) shares, of
which 240,000,000 shares are classified as Common Stock, par value one cent
($.01) per share, and 10,000,000 shares are classified as Preferred Stock, par
value one cent ($.01) per share. The aggregate par value of all shares of all
classes that the Corporation is authorized to issue is $2,500,000.
(2) The Board of Directors is authorized to determine the designation of
and to set the terms of the Preferred Stock, including the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms and conditions of redemption, prior to
issuance. The Preferred Stock may be issued in series.
(3) The Board of Directors is authorized, from time to time, to fix the
price or the minimum price of the consideration or minimum consideration for,
and to issue, the shares of stock of the Corporation.
(4) The Corporation may issue fractional shares. Any fractional share shall
carry proportionately the rights of a whole share including, without limitation,
the right to vote and the right to receive dividends. A fractional share shall
not, however, carry the right to receive a certificate evidencing it.
(5) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of these Articles of Incorporation and the
Bylaws of the Corporation, as from time to time amended.
(6) No holder of stock of the Corporation by virtue of being such a holder
shall have any preemptive or preferential right to purchase or subscribe for any
shares of the Corporation's capital stock or any other security that the
Corporation may issue or sell other than a right that the Board of Directors in
its discretion may determine to grant.
(7) The Board of Directors shall have authority by resolution to classify
and reclassify any authorized but unissued shares of capital stock from time to
time by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of the capital
stock.
-2-
<PAGE>
(8) Notwithstanding any provision of law requiring any action to be taken
or authorized by the affirmative vote of the holders of a greater proportion of
the votes of all classes or of any class of stock of the Corporation, such
action shall be effective and valid if taken or authorized by the affirmative
vote of a majority of the total number of votes entitled to be cast thereon,
except as otherwise provided in the Charter.
(9) The presence in person or by proxy of the holders of shares of stock of
the Corporation entitled to cast a majority of the votes entitled to be cast
(without regard to class) shall constitute a quorum at any meeting of the
stockholders, except with respect to any such matter that, under applicable
statutes or regulatory requirements, requires approval by a separate vote of one
or more classes of stock, in which case the presence in person or by proxy of
the holders of shares entitled to cast a majority of the votes entitled to be
cast by each such class on such a matter shall constitute a quorum.
ARTICLE VI
BOARD OF DIRECTORS
------------------
(1) The initial number of directors of the Corporation shall be two. The
number of directors may be changed by the Bylaws or by the Board of Directors
pursuant to the Bylaws, except that the number of directors shall in no event be
less than the minimum number required under the Maryland General Corporation Law
or greater than twelve. The names of the directors who shall act until the first
annual meeting of shareholders or until their successors are duly chosen and
qualified are:
Robert T. Flaherty
Donald F. Crumrine
(2) Beginning with the first annual meeting of stockholders held after the
initial public offering of the shares of the Corporation (the "initial annual
meeting"), the Board of Directors shall be divided into three classes: Class I,
Class II and Class III. The terms of office of the classes of Directors elected
at the initial annual meeting shall expire at the times of the annual meetings
of the stockholders as follows: Class I on the next annual meeting, Class II on
the second next annual meeting and Class III on the third next annual meeting,
or thereafter in each case when their respective successors are elected and
qualified. At each subsequent annual election, the Directors chosen to succeed
those whose terms are expiring shall be identified as being of the same class as
the Directors whom they succeed, and shall be elected for a term expiring at the
time of the third succeeding annual meeting of stockholders, or thereafter in
each case when their respective successors are elected and qualified. Subject to
the following paragraph, the number of directorships shall be apportioned among
the classes so as to maintain the classes as nearly equal in number as possible,
but in no case shall a decrease in the number of directors shorten the term of
any incumbent director.
If the Corporation issues Preferred Stock entitling the holders to elect
additional Directors in specified circumstances, and the election of such
additional Directors would cause the number of Directors to exceed 12, then the
terms of office of a number of Directors elected by the other stockholders
(excluding any Directors which the holders of the Preferred Stock are
-3-
<PAGE>
entitled to elect in all events) shall terminate at the time of the meeting of
the holders of the Preferred Stock called to elect the additional Directors such
that the sum of the number of remaining Directors and the number of additional
Directors to be elected by the holders of the Preferred Stock does not exceed
12. The Directors whose terms shall expire will be determined in inverse order
of their initial election to the Board of Directors. The additional Directors
will be apportioned among the classes of Directors so that the number of
Directors in each class will be as nearly equal as possible.
(3) A Director may be removed with or without cause, but only by a vote of
at least 80% of the class of the shares of capital stock of the Corporation then
entitled to vote in an election to fill that directorship and the stockholders
of the class entitled to elect the Director by plurality vote may elect a
successor or successors to fill any resulting vacancies for the unexpired term
of the removed Director.
(4) In furtherance, and not in limitation, of the powers conferred by the
laws of the State of Maryland, the Board of Directors is expressly authorized:
(i) To make, alter or repeal the Bylaws of the Corporation,
except as otherwise required by the 1940 Act.
(ii) From time to time to determine whether and to what extent
and at what times and places and under what conditions and regulations
the books and accounts of the Corporation, or any of them other than
the stock ledger, shall be open to the inspection of the stockholders.
No stockholder shall have any right to inspect any account or book or
document of the Corporation, except as conferred by law or authorized
by resolution of the Board of Directors.
(iii) 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.
(iv) 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.
(v) In addition to the powers and authorities granted herein and
by statute expressly conferred upon it, the Board of Directors is
authorized to exercise all powers and do all acts that may be
exercised or done by the Corporation pursuant to the provisions of the
laws of the State of Maryland, these Articles of Incorporation and the
Bylaws of the Corporation.
(5) Any determination made in good faith and in accordance with these
Articles of Incorporation by or pursuant to the direction of the Board of
Directors, with respect to the amount of assets, obligations or liabilities of
the Corporation, as to the amount of net income of the Corporation from
dividends and interest for any period or amounts at any time legally
-4-
<PAGE>
available for the payment of dividends, as to the amount of any reserves or
charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which the reserves or
charges have been created has been paid or discharged or is then or thereafter
required to be paid or discharged), as to the value of any security owned by the
Corporation, as to 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 or other acquisition or disposition of securities or shares
of capital stock of the Corporation, and any reasonable determination made in
good faith by the Board of Directors whether any transaction constitutes a
purchase of securities on "margin," a sale of securities "short," or an
underwriting or the sale of, or a participation in any underwriting or selling
group in connection with the public distribution of, any securities, shall be
final and conclusive, and shall be binding upon the Corporation and all holders
of its capital stock, past, present and future, and shares of the capital stock
of the Corporation are issued and sold on the condition and understanding,
evidenced by the purchase of shares of capital stock or acceptance of share
certificates, that any and all such determinations shall be binding as
aforesaid. No provision of these Articles of Incorporation of the Corporation
shall be effective to (i) require a waiver of compliance with any provision of
the Securities Act of 1933, as amended, or the Investment Company Act of 1940,
as amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission under those Acts or (ii) protect or purport to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
ARTICLE VII
CERTAIN TRANSACTIONS
--------------------
(1) Except as otherwise provided in this Article VII, at least eighty
percent (80%) of the votes of the Corporation's Common Stock and Preferred Stock
entitled to be cast by stockholders, voting as a single class, and at least
eighty percent (80%) of the votes of the Corporation's Preferred Stock entitled
to be cast by stockholders, voting as a separate class, in addition to the
affirmative vote of at least eighty percent (80%) of the entire Board of
Directors, shall be necessary to effect any of the following actions:
(i) Any amendment to these Articles to make the Corporation's
Common Stock a "redeemable security" or to convert the corporation
from a "closed-end company" to an "open-end company" (as such terms
are defined in the Investment Company Act of 1940, as amended) or any
amendment to paragraph (1) of Article III, unless the Continuing
Directors (as hereinafter defined) of the Corporation, by a vote of at
least eighty percent (80%) of such Directors, approve such amendment
in which case the affirmative vote of a majority of the votes entitled
to be cast by the holders of the Corporation's Common Stock and
Preferred Stock to be voted on the matter, voting as a single class,
and a majority of the votes entitled to be cast by the holders of the
Corporation's Preferred Stock to be voted on the matter, voting as a
separate class,
-5-
<PAGE>
shall be required to approve such actions unless otherwise provided in
the Charter or unless otherwise required by law;
(ii) Any stockholder proposal as to specific investment decisions
made or to be made with respect to the Corporation's assets;
(iii) Any proposal as to the voluntary liquidation or dissolution
of the Corporation or any amendment to these Articles of Incorporation
to terminate the existence of the Corporation, unless the Continuing
Directors of the Corporation, by a vote of at least eighty percent
(80%) of such Directors, approve such proposal in which case the
affirmative vote of a majority of the votes entitled to be cast by
stockholders shall be required to approve such actions unless
otherwise provided in the Charter or unless otherwise required by law;
or
(iv) Any Business Combination (as hereinafter defined) unless
either the condition in clause (A) below is satisfied, or all of the
conditions in clauses (B), (C), (D), (E) and (F) below are satisfied,
in which case paragraph (3) below shall apply:
(A) The Business Combination shall have been approved by a
vote of at least eighty percent (80%) of the Continuing
Directors.
(B) The aggregate amount of cash and the Fair Market Value
(as hereinafter defined), as of the date of the consummation of
the Business Combination, of consideration other than cash to be
received per share by holders of any class of outstanding Voting
Stock (as hereinafter defined) in such Business Combination shall
be at least equal to the higher of the following:
(x) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by an Interested Party (as hereinafter
defined) for any shares of such Voting Stock acquired by it
(aa) within the two-year period immediately prior to the
first public announcement of the proposal of the Business
Combination (the "Announcement Date"), or (bb) (i) in the
Threshold Transaction (as hereinafter defined), or (ii) in
any period between the Threshold Transaction and the
consummation of the Business Combination, whichever is
higher; and
(y) the net asset value per share of such Voting Stock
on the Announcement Date or on the date of the Threshold
Transaction, whichever is higher.
(C) The consideration to be received by holders of the
particular class of outstanding Voting Stock shall be in cash or
in the same form as the Interested Party has previously paid for
shares of any class of Voting Stock. If the Interested Party has
paid for shares of any class of
-6-
<PAGE>
Voting Stock with varying forms of consideration, the form of
consideration for such class of Voting Stock shall be either cash
or the form used to acquire the largest number of shares of such
class of Voting Stock previously acquired by it.
(D) After the occurrence of the Threshold Transaction, and
prior to the consummation of such Business Combination, such
Interested Party shall not have become the beneficial owner of
any additional shares of Voting Stock except by virtue of the
Threshold Transaction.
(E) After the occurrence of the Threshold Transaction, such
Interested Party shall not have received the benefit, directly or
indirectly (except proportionately as a shareholder of the
Corporation), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax
advantages provided by the Corporation, whether in anticipation
of or in connection with such Business Combination or otherwise,
(F) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the Investment Company Act of
1940, as amended, and the rules and regulations thereunder (or
any subsequent provisions replacing such Acts, rules or
regulations) shall be prepared and mailed by the Interested
Party, at such Interested Party's expense, to the shareholders of
the Corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such
Acts or subsequent provisions).
(2) For the purposes of this Article:
(i) "Business Combination" shall mean any of the transactions
described or referred to in any one or more of the following
subparagraphs:
(A) any merger, consolidation or share exchange of the
Corporation with or into any other person;
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions
in any 12 month period) to or with any other person of any assets
of the Corporation having an aggregate Fair Market Value of
$1,000,000 or more except for portfolio transactions of the
Corporation effected in the ordinary course of the Corporation's
business;
(C) the issuance or transfer by the Corporation (in one
transaction or a series of transactions in any 12 month period)
of any securities of the Corporation to any other person in
exchange for cash, securities or other property (or a combination
thereof) having an aggregate
-7-
<PAGE>
Fair Market Value of $1,000,000 or more excluding (x) sales of
any securities of the Corporation in connection with a public
offering or private placement thereof, (y) issuances of any
securities of the Corporation pursuant to a dividend reinvestment
and cash purchase plan adopted by the Corporation and (z)
issuances of any securities of the Corporation upon the exercise
of any stock subscription rights distributed by the Corporation;
(ii) "Continuing Director" means any member of the Board of
Directors of the Corporation who is not an Interested Party or an
Affiliate (as hereinafter defined) of an Interested Party and has been
a member of the Board of Directors for a period of at least 12 months
(or since the Corporation's commencement of operations, if that period
is less than 12 months), or is a successor of a Continuing Director
who is unaffiliated with an Interested Party and is recommended to
succeed a Continuing Director by a majority of the Continuing
Directors then on the Board of Directors.
(iii) "Interested Party" shall mean any person, other than an
investment company advised by the Corporation's initial investment
manager or any of its Affiliates, which enters, or proposes to enter,
into a Business Combination with the Corporation.
(iv) "Person" shall mean an individual, a corporation, a trust or
a partnership.
(v) "Voting Stock" shall mean capital stock of the Corporation
entitled to vote generally in the election of directors.
(vi) A person shall be a "beneficial owner" of any Voting Stock:
(A) which such person or any of its Affiliates or Associates
(as hereinafter defined) beneficially owns, directly or
indirectly; or
(B) which such person or any of its Affiliates or Associates
has the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
(C) which is beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates
or Associates has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of any
shares of Voting Stock.
(vii) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934.
-8-
<PAGE>
(viii) "Fair Market Value" means:
(A) in the case of stock, the highest closing sale price
during the 30-day period immediately preceding the relevant date
of a share of such stock on the New York Stock Exchange, or if
such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Securities
Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, the highest closing
sale price (if such stock is a National Market System security)
or the highest closing bid quotation (if such stock is not a
National Market System security) with respect to a share of such
stock during the 30-day period preceding the relevant date on the
National Association of Securities Dealers, Inc. Automated
Quotation System (NASDAQ) or any system then in use, or if no
such quotations are available, the fair market value on the
relevant date of the share of such stock as determined by at
least eighty percent (80%) of the Continuing Directors in good
faith, and
(B) in the case of property other than cash or stock, the
fair market value of such property on the relevant date as
determined by at least eighty percent (80%) of the Continuing
Directors in good faith.
(ix) "Threshold Transaction" means the transaction by or as a
result of which an Interested Party first becomes the beneficial owner
of Voting Stock.
(x) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be
received" as used in subparagraph (1)(iv)(B) above shall include the
shares of Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such shares.
(xi) Continuing Directors of the Corporation, acting by a vote of
at least 80% of the Continuing Directors, shall have the power and
duty to determine, on the basis of information known to them after
reasonable inquiry, all facts necessary to determine (a) the number of
shares of Voting Stock beneficially owned by any person, (b) whether a
person is an Affiliate or Associate of another, (c) whether the
requirements of subparagraph (1)(iv) above have been met with respect
to any Business Combination, and (d) whether the assets which are the
subject of any Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the Corporation
in any Business Combination has, an aggregate Fair Market Value of
$1,000,000 or more.
(3) If any Business Combination described in subparagraph (2)(i)(A) or (B)
(if the transfer or other disposition constitutes a transfer of all or
substantially all of the assets of the Corporation with respect to which
shareholder approval is required under the Maryland General Corporation Law) is
approved by a vote of eighty percent (80%) of the Continuing Directors or all of
the conditions in subparagraph (1)(iv)(B), (C), (D), (E) and (F) are satisfied,
a majority of the votes entitled to be cast by stockholders shall be required to
approve such transaction unless
-9-
<PAGE>
otherwise provided in the Charter or unless otherwise required by law. If any
other Business Combination is approved by a vote of eighty percent (80%) of the
Continuing Directors or all of the conditions in subparagraph (1)(iv)(B, (C),
(D), (E) and (F) are satisfied, no stockholder vote shall be required to approve
such transaction unless otherwise provided in the Charter or unless otherwise
required by law.
ARTICLE VIII
LIMITATIONS ON LIABILITY; INDEMNIFICATION
-----------------------------------------
(1) To the fullest extent that limitations on the liability of directors
and officers are permitted by the Maryland General Corporation Law, no director
or officer of the Corporation shall have any liability to the Corporation or its
stockholders for damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at the time of
any proceeding in which liability is asserted.
(2) Any person who was or is a party or is threatened to be made a party in
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is a current or former director or officer of the Corporation, or is or
was serving while a director or officer of the Corporation 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, shall be indemnified by the Corporation against
judgments, penalties, fines, excise taxes, settlements and reasonable expenses
(including attorneys' fees) actually incurred by such person in connection with
such action, suit or proceeding to the fullest extent permissible under the
Maryland General Corporation Law, the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, as such statutes are now or
hereinafter in force. In addition, the Corporation shall also advance expenses
to its currently acting and its former directors and officers to the fullest
extent that indemnification of directors is permitted by the Maryland General
Corporation Law, the Securities Act of 1933, and the Investment Company Act of
1940, as amended. The Board of Directors may by Bylaw, resolution or agreement
make further provision for indemnification of directors, officers, employees and
agents to the fullest extent permitted by the Maryland General Corporation Law.
(3) No provision of this Article VIII shall be effective to protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
(4) References to the Maryland General Corporation Law in this Article VIII
are to that law as from time to time amended. No amendment to the Charter of the
Corporation shall affect any right of any person under this Article based on any
event, omission or proceeding prior to the amendment.
-10-
<PAGE>
ARTICLE IX
AMENDMENTS
----------
(1) The Corporation reserves the right to make, from time to time, any
amendment to its Charter now or hereafter authorized by law (including any
amendment that alters the contract rights, as expressly set forth in the
Charter, of any class of outstanding stock) and all rights at any time conferred
upon the stockholders of the Corporation by the Charter are granted subject to
the provisions of this Article IX.
(2) With the exception of Articles III, VI, VII and IX, any of the
provisions of the Articles of Incorporation may be amended, altered or repealed
upon the vote of a majority of the votes entitled to be cast by stockholders.
The provisions of Articles III, VI, VII and IX may be amended, altered or
repealed only upon the vote of at least eighty percent (80%) of the votes of the
Corporation's Common Stock and Preferred Stock entitled to be cast by
stockholders, voting as a single class, and of at least eighty percent (80%) of
the votes of the Corporation's Preferred Stock entitled to be cast by
stockholders, voting as a separate class, unless such action previously has been
approved, adopted or authorized by the affirmative vote of eighty percent (80%)
of the total number of Continuing Directors, in which case the affirmative vote
of a majority of the votes entitled to be cast by the holders of the
Corporation's Common Stock and Preferred Stock to be voted on the matter, voting
as a single class, unless otherwise provided in the Charter or unless otherwise
required by law shall be required to approve, adopt, or authorize such an
amendment.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act, on December 15, 1992.
By: /s/ Kimberly A. Gordon
-------------------------------
Kimberly A. Gordon
Incorporator
<PAGE>
Exhibit (a)(2)
PREFERRED INCOME MANAGEMENT FUND INCORPORATED
ARTICLES OF AMENDMENT
Preferred Income Management Fund Incorporated, a Maryland corporation,
having its principal office in the State of Maryland in Baltimore City
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: Article II of the Articles of Incorporation of the Corporation is
amended by deleting the present Article II in its entirety and inserting the
following:
"Article II.
The name of the Corporation is Boulder Total Return Fund, Inc. (the
"Corporation")."
SECOND: The amendment to the Charter of the Corporation as set forth above
has been advised by the Board of Directors of the Corporation and has been duly
approved by the shareholders of the Corporation at a special meeting of the
shareholders held on August 27, 1999.
THIRD: These Articles of Amendment will become effective at 5:00 p.m. on
August 27, 1999.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be executed by its President and witnessed by its Secretary as of the 27th
day of August, 1999. The President of the Corporation who signed these Articles
of Amendment acknowledges them to be the act of the Corporation and states under
penalties of perjury that, to the best of his knowledge, information and belief,
the matters and facts set forth herein relating to authorization and approval
hereof are true in all material respects.
WITNESS: PREFERRED INCOME MANAGEMENT
FUND INCORPORATED
By: /s/ Laura Rhodenbaugh By: /s/ Stephen C. Miller
--------------------------- ---------------------------
Name: Laura Rhodenbaugh Name: Stephen C. Miller
Title: Secretary Title: President
<PAGE>
Exhibit (b)
AMENDED AND RESTATED BY-LAWS OF
-------------------------------
PREFERRED INCOME MANAGEMENT FUND INCORPORATED
---------------------------------------------
BYLAW-ONE: NAME OF COMPANY, LOCATION OF OFFICES AND SEAL.
----------------------------------------------
Article 1.1. Name. The name of the Company is Preferred Income Management
Fund Incorporated.
Article 1.2. Principal Offices. The principal office of the Company in the
State of Maryland shall be located in Baltimore, Maryland. The Company may, in
addition, establish and maintain such other offices and places of business
within or outside the State of Maryland as the Board of Directors may from time
to time determine.
Article 1.3. Seal. The corporate seal of the Company shall be circular in
form and shall bear the name of the Company, the year of its incorporation and
the words "Corporate Seal, Maryland." The form of the seal shall be subject to
alteration by the Board of Directors and the seal may be used by causing it or a
facsimile to be impressed or affixed or printed or otherwise reproduced. Any
Officer or Director of the Company shall have authority to affix the corporate
seal of the Company to any document requiring the same.
BYLAW-TWO: STOCKHOLDERS.
-------------
Article 2.1. Place of Meetings. All meetings of the Stockholders shall be
held at such place within the United States, whether within or outside the State
of Maryland, as the Board of Directors shall determine, which shall be stated in
the notice of the meeting or in a duly executed waiver of notice thereof.
Article 2.2. Annual Meeting. Commencing in 1993, the annual meeting of the
Stockholders of the Company shall be held at such place as the Board of
Directors shall select on
<PAGE>
such date, during the 31-day period ending six months after the end of the
Company's fiscal year, as may be fixed by the Board of Directors each year, at
which time the Stockholders shall elect Directors by plurality vote, and
transact such other business as may properly come before the meeting. Any
business of the Company may be transacted at the annual meeting without being
specially designated in the notice except as otherwise provided by statute, by
the Articles of Incorporation or by these By-Laws.
Article 2.3. Special Meetings. Special meetings of the Stockholders for any
purpose or purposes, unless otherwise prescribed by statute or by the Articles
of Incorporation, may be called by resolution of the Board of Directors or by
the President, and shall be called by the Secretary at the request, in writing,
of a majority of the Board of Directors or at the request, in writing, of
Stockholders owning at least 25% of the votes entitled to be cast at the meeting
upon payment by such Stockholders to the Company 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 Company).
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 12 months. A written
request shall state the purpose or purposes of the proposed meeting.
Article 2.4. Notice. Written notice of every meeting of Stockholders,
stating the purpose or purposes for which the meeting is called, the time when
and the place where it is to be held, shall be served, either personally or by
mail, not less than 10 nor more than 90 days before the meeting, upon each
Stockholder as of the record date fixed for the meeting who is entitled to
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<PAGE>
notice of or to vote at such meeting. If mailed (i) such notice shall be
directed to a Stockholder at his address as it shall appear on the books of the
Company (unless he shall have filed with the Transfer Agent of the Company a
written request that notices intended for him be mailed to some other address,
in which case it shall be mailed to the address designated in such request) and
(ii) such notice shall be deemed to have been given as of the date when it is
deposited in the United States mail with first-class postage thereon prepaid.
Article 2.5. Notice of Stockholder Business. At any annual or special
meeting of the Stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual or special meeting, the business must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (iii) otherwise properly brought before
the meeting by a Stockholder.
For business to be properly brought before an annual or special meeting by
a Stockholder, the Stockholder must have given timely notice thereof in writing
to the Secretary of the Company. To be timely, any such notice must be delivered
to or mailed and received at the principal executive offices of the Company not
later than 60 days prior to the date of the meeting; provided, however, that if
less than 70 days' notice or prior public disclosure of the date of the meeting
is given or made to Stockholders, any such notice by a Stockholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which notice of the date of the annual or special meeting
was given or such public disclosure was made.
Any such notice by a Stockholder shall set forth as to each matter the
Stockholder proposes to bring before the annual or special meeting (i) a brief
description of the business
3
<PAGE>
desired to be brought before the annual or special meeting and the reasons for
conducting such business at the annual or special meeting, (ii) the name and
address, as they appear on the Company's books, of the Stockholder proposing
such business, (iii) the class and number of shares of the capital stock of the
Company which are beneficially owned by the Stockholder, and (iv) any material
interest of the Stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at any annual or special meeting except in accordance with the
procedures set forth in this Article 2.5. The chairman of the annual or special
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Article 2.5, and, if he should so determine, he shall so
declare to the meeting that any such business not properly brought before the
meeting shall not be considered or transacted.
Article 2.6. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote, present in person or represented by proxy,
shall be requisite and shall constitute a quorum at all meetings of the
Stockholders for the transaction of business except as otherwise provided by
statute, by the Articles of Incorporation or by these Bylaws. If a quorum shall
not be present or represented, the Stockholders entitled to vote thereat,
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, to a date not more than 120 days after the original record date, until
a quorum shall be present or represented. At such adjourned meeting, at which a
quorum shall be present or represented, any business which might have been
transacted at the original meeting may be transacted.
4
<PAGE>
Article 2.7. Vote of the Meeting. When a quorum is present or represented
at any meeting, a majority of the votes cast thereat shall decide any question
brought before such meeting (except for the election of directors, which shall
be by plurality vote), unless the question is one upon which, by express
provisions of applicable statutes, of the Articles of Incorporation or of these
Bylaws, a different vote is required, in which case such express provisions
shall govern and control the decision of such question.
Article 2.8. Voting Rights of Stockholders. Each Stockholder of record
having the right to vote shall be entitled at every meeting of the Stockholders
of the Company to one vote for each share of stock having voting power standing
in the name of such Stockholder on the books of the Company on the record date
fixed in accordance with Article 6.5 of these Bylaws, with pro rata voting
rights for any fractional shares, and such votes may be cast either in person or
by written proxy.
Article 2.9. Organization. At every meeting of the Stockholders, the
Chairman of the Board, or in his absence or inability to act, the Vice Chairman
of the Board, if any, or in his absence or inability to act, 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.
Article 2.10. Proxies. Every proxy must be in writing and signed by the
Stockholder or by his duly authorized attorney-in-fact. No proxy shall be valid
after the expiration of eleven months from the date of its execution unless it
provides otherwise. Every proxy shall be revocable at the pleasure of the person
executing it or of his personal representatives or assigns. Proxies shall be
delivered prior to the meeting to the Secretary of the Company or to the person
acting as Secretary of the meeting before being voted. A proxy with respect to
stock held in the
5
<PAGE>
name of two or more persons shall be valid if executed by one of them unless, at
or prior to exercise of such proxy, the Company receives a specific written
notice to the contrary from any one of them. A proxy purporting to be executed
by or on behalf of a Stockholder shall be deemed valid unless challenged at or
prior to its exercise.
Article 2.11. Stock Ledger and List of Stockholders. It shall be the duty
of the Secretary or Assistant Secretary of the Company to cause an original or
duplicate stock ledger to be maintained at the office of the Company's Transfer
Agent.
Article 2.12. Action without Meeting. Any action to be taken by
Stockholders may be taken without a meeting if (i) all Stockholders entitled to
vote on the matter consent to the action in writing, (ii) all Stockholders
entitled to notice of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent and (iii) such consents and waivers are filed
with the records of the meetings of Stockholders. A consent shall be treated for
all purposes as a vote at a meeting.
BYLAW-THREE: BOARD OF DIRECTORS.
-------------------
Article 3.1. General Powers. Except as otherwise provided in the 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 Company 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 Articles of Incorporation or by
these Bylaws.
Article 3.2. Board of Three to Twelve Directors. The Board of Directors
shall consist of not less than three (3) nor more than twelve (12) Directors;
provided that if there are less than three stockholders, the number of Directors
may be the same number as the number of stockholders but not less than one.
Directors need not be Stockholders. Subject to the first
6
<PAGE>
sentence of this Article 3.2, a majority of the entire Board of Directors shall
have power from time to time, and at any time when the Stockholders as such are
not assembled in a meeting, regular or special, to increase or decrease the
number of Directors. If the number of Directors is increased, the additional
Directors may be elected by a majority of the Directors in office at the time of
the increase. If such additional Directors are not so elected by the Directors
in office at the time they increase the number of places on the Board, or if the
additional Directors are elected by the existing Directors prior to the first
meeting of the Stockholders of the Company, then in either of such events the
additional Directors shall be elected or re-elected by the Stockholders at their
next annual meeting or at an earlier special meeting called for that purpose.
Beginning with the first annual meeting of Stockholders held after the
initial public offering of the shares of the Company (the "initial annual
meeting"), the Board of Directors shall be divided into three classes: Class I,
Class II and Class III. The terms of office of the classes of Directors elected
at the initial annual meeting shall expire at the times of the annual meetings
of the Stockholders as follows: Class I on the next annual meeting, Class II on
the second next annual meeting and Class III on the third next annual meeting,
or thereafter in each case when their respective successors are elected and
qualified. At each subsequent annual election, the Directors chosen to succeed
those whose terms are expiring shall be identified as being of the same class as
the Directors whom they succeed, and shall be elected for a term expiring at the
time of the third succeeding annual meeting of Stockholders, or thereafter in
each case when their respective successors are elected and qualified. The number
of directorships shall be apportioned among the classes so as to maintain the
classes as nearly equal in number as possible. If the Corporation issues
Preferred Stock entitling the holders to elect additional Directors in special
circumstances and those special circumstances arise, then the number of
directors that the holders
7
<PAGE>
of the Common Stock are entitled to elect shall be reduced to a number such
that, when the requisite number of directors has been elected by Preferred Stock
holders, the total number of directors shall not exceed 12 in number.
Article 3.3. Director Nominations.
---------------------
(a) Only persons who are nominated in accordance with the procedures set
forth in this Article 3.3 shall be eligible for election or re-election as
Directors. Nominations of persons for election or re-election to the Board of
Directors of the Company may be made at a meeting of Stockholders by or at the
direction of the Board of Directors or by any Stockholder of the Company who is
entitled to vote for the election of such nominee at the meeting and who
complies with the notice procedures set forth in this Article 3.3.
(b) Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made pursuant to timely notice delivered in writing
to the Secretary of the Company. To be timely, any such notice by a Stockholder
must be delivered to or mailed and received at the principal executive offices
of the Company not later than 60 days prior to the meeting; provided, however,
that if less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to Stockholders, any such notice by a Stockholder to be
timely must be so received not later than the close of business on the 10th day
following the day on which notice of the date of the meeting was given or such
public disclosure was made.
(c) Any such notice by a Stockholder shall set forth (i) as to each person
whom the Stockholder proposes to nominate for election or re-election as a
Director, (A) the name, age, business address and residence address of such
person, (B) the principal occupation or employment of such person, (C) the class
and number of shares, if any, of the capital stock of the Company which are
beneficially owned by such person and (D) any other information relating to
8
<PAGE>
such person that is required to be disclosed in solicitations of proxies for the
election of Directors pursuant to Section 20(a) of the Investment Company Act of
1940, as amended, and the rules and regulations thereunder, or Regulation 14A
under the Securities Exchange Act of 1934 or any successor regulation thereto
(including without limitation such person's written consent to being named in
the proxy statement as a nominee and to serving as a Director if elected and
whether any person intends to seek reimbursement from the Company of the
expenses of any solicitation of proxies should such person be elected a Director
of the Company); and (ii) as to the Stockholder giving the notice, (A) the name
and address, as they appear on the Company's books, of such Stockholder and (B)
the class and number of shares of the capital stock of the Company which are
beneficially owned by such Stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Company the information required
to be set forth in a Stockholder's notice of nomination which pertains to the
nominee.
(d) If a notice by a Stockholder is required to be given pursuant to this
Article 3.3, no person shall be entitled to receive reimbursement from the
Company of the expenses of a solicitation of proxies for the election as a
Director of a person named in such notice unless such notice states that such
reimbursement will be sought from the Company. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the
Bylaws, and, if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded for all purposes.
Article 3.4. Vacancies. Subject to the provisions of the Investment Company
Act of 1940, as amended, if the office of any Director or Directors becomes
vacant for any reason (other
9
<PAGE>
than an increase in the number of Directors), the Directors in office, although
less than a quorum, shall continue to act and may choose a successor or
successors, who shall hold office until the next election of Directors, or any
vacancy may be filled by the Stockholders at any meeting thereof.
Article 3.5. Removal. At any meeting of Stockholders duly called and at
which a quorum is present, the Stockholders may, by the affirmative vote of the
holders of at least 80% of the votes entitled to be cast thereon, remove any
Director or Directors from office, with or without cause, and may by a plurality
vote elect a successor or successors to fill any resulting vacancies for the
unexpired term of the removed Director.
Article 3.6. Resignation. A Director may resign at any time by giving
written notice of his resignation to the Board of Directors or the Chairman or
the Vice Chairman, if any, of the Board or the Secretary of the Company. 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.
Article 3.7. Place of Meetings. The Directors may hold their meetings at
the principal office of the Company or at such other places, either within or
outside the State of Maryland, as they may from time to time determine.
Article 3.8. Regular Meetings. Regular meetings of the Board may be held at
such date and time as shall from time to time be determined by resolution of the
Board.
Article 3.9. Special Meetings. Special meetings of the Board may be called
by order of the Chairman or Vice Chairman, if any, of the Board on one day's
notice given to each Director either in person or by mail, telephone, telegram,
cable or wireless to each Director at his
10
<PAGE>
residence or regular place of business. Special meetings will be called by the
Chairman or Vice Chairman, if any, of the Board or Secretary in a like manner on
the written request of a majority of the Directors.
Article 3.10. Quorum. At all meetings of the Board, the presence of a
majority of the entire Board of Directors shall be necessary to constitute a
quorum and sufficient for the transaction of business, and any act of a majority
present at a meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute, by the
Articles of Incorporation or by these Bylaws. If a quorum shall not be present
at any meeting of Directors, the Directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Article 3.11. Organization. The Board of Directors shall designate one of
its members to serve as Chairman of the Board. The Chairman of the Board shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board 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.
Article 3.12. Informal Action by Directors and Committees. Any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may, except as otherwise required by statute, be taken
without a meeting if a written consent to such action is signed by all members
of the Board, or of such committee, as the case may be, and filed with the
minutes of the proceedings of the Board or committee. Subject to the Investment
Company Act of 1940, as amended, members of the Board of Directors or a
committee thereof
11
<PAGE>
may participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time.
Article 3.13. Executive Committee. There may be an Executive Committee of
two or more Directors appointed by the Board who may meet at stated times or on
notice to all by any of their own number. The Executive Committee shall consult
with and advise the Officers of the Company in the management of its business
and exercise such powers of the Board of Directors as may be lawfully delegated
by the Board of Directors. Vacancies shall be filled by the Board of Directors
at any regular or special meeting. The Executive Committee shall keep regular
minutes of its proceedings and report the same to the Board when required.
Article 3.14. Audit Committee. There shall be an Audit Committee of two or
more Directors who are not "interested persons" of the Company (as defined in
the Investment Company Act of 1940, as amended) appointed by the Board who may
meet at stated times or on notice to all by any of their own number. The
Committee's duties shall include reviewing both the audit and other work of the
Company's independent accountants, recommending to the Board of Directors the
independent accountants to be retained, and reviewing generally the maintenance
and safekeeping of the Company's records and documents.
Article 3.15. Other Committees. The Board of Directors may appoint other
committees which shall in each case consist of such number of members (but not
less than two) and shall have and may exercise, to the extent permitted by law,
such powers as the Board may determine in the resolution appointing them. A
majority of all members of any such committee may determine its action, and fix
the time and place of its meetings, unless the Board of Directors shall
otherwise provide. The Board of Directors shall have power at any time to change
the
12
<PAGE>
members and, to the extent permitted by law, to change the powers of any such
committee, to fill vacancies and to discharge any such committee.
Article 3.16. Compensation of Directors. The Board may, by resolution,
determine what compensation and reimbursement of expenses of attendance at
meetings, if any, shall be paid to Directors in connection with their service on
the Board or on various committees of the Board. Nothing herein contained shall
be construed to preclude any Director from serving the Company in any other
capacity or from receiving compensation therefor.
BYLAW-FOUR: OFFICERS.
---------
Article 4.1. Officers. The Officers of the Company shall be fixed by the
Board of Directors and shall include a President, Secretary and Treasurer. Any
two offices may be held by the same person except the offices of President and
Vice President. A person who holds more than one office in the Company may not
act in more than one capacity to execute, acknowledge or verify an instrument
required by law to be executed, acknowledged or verified by more than one
officer.
Article 4.2. Appointment of Officers. The Directors shall appoint the
Officers, who need not be members of the Board.
Article 4.3. Additional Officers. The Board may appoint such other Officers
and agents as it shall deem necessary who shall exercise such powers and perform
such duties as shall be determined from time to time by the Board.
Article 4.4. Salaries of Officers. The salaries of all Officers of the
Company shall be fixed by the Board of Directors.
Article 4.5. Term, Removal, Vacancies. The Officers of the Company shall
serve at the pleasure of the Board of Directors and hold office for one year and
until their successors are
13
<PAGE>
chosen and qualify in their stead. Any Officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the entire Board of Directors. If the office of any Officer becomes vacant for
any reason, the vacancy shall be filled by the Board of Directors.
Article 4.6. President. The President shall be the chief executive officer
of the Company. The President shall, subject to the supervision of the Board of
Directors, have general responsibility for the management of the business of the
Company. The President shall see that all orders and resolutions of the Board
are carried into effect.
Article 4.7. Vice President. Any Vice President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President and shall perform such other duties as the Board of Directors shall
prescribe.
Article 4.8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board of Directors. He
shall disburse the funds of the Company as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board and Directors at the regular meetings of the Board, or whenever they may
require it, an account of the financial condition of the Company.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
14
<PAGE>
Article 4.9. Secretary. The Secretary shall attend meetings of the Board
and meetings of the Stockholders and record all votes and the minutes of all
proceedings in a book to be kept for those purposes, and shall perform like
duties for the Executive Committee, or other committees, of the Board when
required. He shall give or cause to be given notice of all meetings of
Stockholders and special meetings of the Board of Directors and shall perform
such other duties as may be prescribed by the Board of Directors. He shall keep
in safe custody the seal of the Company and affix it to any instrument when
authorized by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
Article 4.10. Subordinate Officers. The Board of Directors from time to
time may appoint such other officers or agents as it may deem advisable, each of
whom shall serve at the pleasure of the Board of Directors and have such title,
hold office for such period, have such authority and perform such duties as the
Board of Directors may determine. The Board of Directors from time to time may
delegate to one or more officers or agents the power to appoint any such
subordinate officers or agents and to prescribe their respective rights, terms
of office, authorities and duties.
Article 4.11. Surety Bonds. The Board of Directors may require any officer
or agent of the Company to execute a bond (including, without limitation, any
bond required by the Investment Company Act of 1940, as amended, and the rules
and regulations of the Securities and Exchange Commission) to the Company in
such sum and with such surety or sureties as the Board of Directors may
determine, conditioned upon the faithful performance of his duties to the
15
<PAGE>
Company, including responsibility for negligence and for the accounting of any
of the Company's property, funds or securities that may come into his hands.
BYLAW-FIVE: GENERAL PROVISIONS.
-------------------
Article 5.1. Waiver of Notice. Whenever the Stockholders or the Board of
Directors are authorized by statute, the provisions of the Articles of
Incorporation or these Bylaws to take any action at any meeting after notice,
such notice may be waived, in writing, before or after the holding of the
meeting, by the person or persons entitled to such notice, or, in the case of a
Stockholder, by his duly authorized attorney-in-fact.
Article 5.2. Indemnity.
(a) The Company shall indemnify its directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Company shall indemnify its officers to the same extent as its
directors and to such further extent as is consistent with law. The Company
shall indemnify its directors and officers who, while serving as directors or
officers, also serve at the request of the Company as a director, officer,
partner, trustee, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan to
the fullest extent consistent with law. The indemnification and other rights
provided by this Article 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. This Article shall not protect any such person
against any liability to the Company or any Stockholder thereof to which such
person 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 ("disabling conduct").
16
<PAGE>
(b) Any current or former director or officer of the Company seeking
indemnification within the scope of this Article shall be entitled to advances
from the Company for payment of the reasonable expenses incurred by him in
connection with the matter as to which he is seeking indemnification in the
manner and to the fullest extent permissible under the Maryland General
Corporation Law without a preliminary determination of entitlement to
indemnification (except as provided below). The person seeking indemnification
shall provide to the Company a written affirmation of his good faith belief that
the standard of conduct necessary for indemnification by the Company has been
met and a written undertaking to repay any such advance if it should ultimately
be determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (i) the person
seeking indemnification shall provide security in form and amount acceptable to
the Company for his undertaking; (ii) the Company is insured against losses
arising by reason of the advance; or (iii) a majority of a quorum of directors
of the Company who are neither "interested persons" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the
proceeding ("disinterested non-party directors"), or independent legal counsel,
in a written opinion, shall have determined, based on a review of facts readily
available to the Company at the time the advance is proposed to be made, that
there is reason to believe that the person seeking indemnification will
ultimately be found to be entitled to indemnification.
(c) At the request of any person claiming indemnification under this
Article, the Board of Directors shall determine, or cause to be determined, in a
manner consistent with the Maryland General Corporation Law, whether the
standards required by this Article have been met. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified was not
17
<PAGE>
liable by reason of disabling conduct or (ii) in the absence of such a decision,
a reasonable determination, based upon a review of the facts, that the person to
be indemnified was not liable by reason of disabling conduct by (A) the vote of
a majority of a quorum of disinterested non-party directors or (B) an
independent legal counsel in a written opinion.
(d) Employees and agents who are not officers or directors of the Company
may be indemnified, and reasonable expenses may be advanced to such employees or
agents, as may be provided by action of the Board of Directors or by contract,
subject to any limitations imposed by the Investment Company Act of 1940, as
amended.
(e) The Board of Directors may make further provision consistent with law
for indemnification and advance of expenses to directors, officers, employees
and agents by resolution, agreement or otherwise. The indemnification provided
by this Article shall not be deemed exclusive of any other right, with respect
to indemnification or otherwise, to which those seeking indemnification may be
entitled under any insurance or other agreement or resolution of stockholders or
disinterested directors or otherwise.
(f) References in this Article are to the Maryland General Corporation Law
and to the Investment Company Act of 1940, as amended. No amendment of these
Bylaws shall affect any right of any person under this Article based on any
event, omission or proceeding prior to the amendment.
Article 5.3. Insurance. The Company may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Company or who, while a director, officer, employee or agent of the Company, is
or was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan,
against
18
<PAGE>
any liability asserted against and incurred by such person in any such capacity
or arising out of such person's position; provided that no insurance may be
purchased by the Company on behalf of any person against any liability to the
Company or to its Stockholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Article 5.4. Checks. All checks or demands for money and notes of the
Company shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Article 5.5. Fiscal Year. The fiscal year of the Company shall be
determined by resolution of the Board of Directors.
BYLAW-SIX: CERTIFICATES OF STOCK.
----------------------
Article 6.1. Certificates of Stock. The interest, except fractional
interests, of each Stockholder of the Company shall be evidenced by certificates
for shares of stock in such form as the Board of Directors may from time to time
prescribe. The certificates shall be numbered and entered in the books of the
Company as they are issued. They shall exhibit the holder's name and the number
of whole shares and no certificate shall be valid unless it has been signed 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
of the Corporation and sealed with its seal, or bears the facsimile signatures
of such officers and a facsimile of such seal. In case any of the officers of
the Company whose manual or facsimile signature appears on any stock certificate
delivered to a Transfer Agent of the Company shall cease to be such Officer
prior to the issuance of such certificate, the Transfer Agent may nevertheless
countersign and deliver such certificate as though the person signing the same
or whose facsimile signature appears thereon had not
19
<PAGE>
ceased to be such officer, unless written instructions of the Company to the
contrary are delivered to the Transfer Agent.
Article 6.2. Lost, Stolen or Destroyed Certificates. The Board of
Directors, or the President together with the Treasurer or Secretary, may direct
a new certificate to be issued in place of any certificate theretofore issued by
the Company, alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed, or by his legal representative. When authorizing such
issue of a new certificate, the Board of Directors, or the President and
Treasurer or Secretary, may, in its or their discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as it or they shall require and/or give the Company a bond in such
sum and with such surety or sureties as it or they may direct as indemnity
against any claim that may be made against the Company with respect to the
certificate alleged to have been lost, stolen or destroyed for such newly issued
certificate.
Article 6.3. Transfer of Stock. Shares of the Company shall be transferable
on the books of the Company by the holder thereof in person or by his duly
authorized attorney or legal representative upon surrender and cancellation of a
certificate or certificates for the same number of shares of the same class,
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, with such proof of the authenticity of the transferor's
signature as the Company or its agents may reasonably require. The shares of
stock of the Company may be freely transferred, and the Board of Directors may,
from time to time, adopt rules and regulations with reference to the method of
transfer of the shares of stock of the Company.
20
<PAGE>
Article 6.4. Registered Holder. The Company shall be entitled to treat the
holder of record of any share or shares of stock as the holder in fact thereof
and, accordingly, shall not be bound to recognize any equitable or other claim
to or interest in such share or shares on the part of any other person whether
or not it shall have express or other notice thereof, except as expressly
provided by statute.
Article 6.5. Record Date. The Board of Directors may fix a time not less
than 10 nor more than 90 days prior to the date of any meeting of Stockholders
as the time as of which Stockholders are entitled to notice of, and to vote at,
such a meeting; and all such persons who were holders of record of voting stock
at such time, and no other, shall be entitled to notice of, and to vote at, such
meeting or to express their consent or dissent, as the case may be. If no record
date has been fixed, the record date for the determination of Stockholders
entitled to notice of, or to vote at, a meeting of Stockholders shall be the
later of the close of business on the day on which notice of the meeting is
mailed or the thirtieth day before the meeting, or, if notice is waived by all
Stockholders, at the close of business on the tenth day immediately preceding
the day on which the meeting is held. The Board of Directors may also fix a time
not exceeding 90 days preceding the date fixed for the payment of any dividend
or the making of any distribution, or for the delivery of evidences of rights,
or evidences of interests arising out of any change, conversion or exchange of
capital stock, as a record time for the determination of the Stockholder
entitled to receive any such dividend, distribution, rights or interests.
Article 6.6. Stock Ledgers. The stock ledgers of the Company, containing
the names and addresses of the Stockholders and the number of shares held by
them respectively, shall be kept at the principal offices of the Company or at
such other location as may be authorized by the
21
<PAGE>
Board of Directors from time to time, except that an original or duplicate stock
ledger shall be maintained at the office of the Company's Transfer Agent.
Article 6.7. Transfer Agents and Registrars. The Board of Directors may
from time to time appoint or remove Transfer Agents and/or Registrars of
transfers (if any) of shares of stock of the Company, and it may appoint the
same person as both Transfer Agent and Registrar. Upon any such appointment
being made, all certificates representing shares of capital stock thereafter
issued shall be countersigned by one of such Transfer Agents or by one of such
Registrars of transfers (if any) or by both and shall not be valid unless so
countersigned. If the same person shall be both Transfer Agent and Registrar,
only one countersignature by such person shall be required.
BYLAW-SEVEN: SPECIAL PROVISIONS.
-------------------
Article 7.1. Actions Relating to Discount in Price of the Company's Shares.
In the event that at any time after the third year following the initial public
offering of shares of the Company's Common Stock, such shares publicly trade for
a substantial period of time at a significant discount from the Company's then
current net asset value per share, the Board of Directors shall consider, at its
next regularly scheduled meeting and regularly thereafter (not less frequently
than annually) as long as such discount persists, taking various actions
designed to reduce or eliminate the discount, including recommending to
Shareholders amendments to the Company's Articles of Incorporation to make the
Company's Common Stock a "redeemable security" (as such term is defined in the
Investment Company Act of 1940), subject in all events to compliance with all
applicable provisions of the Company's Articles of Incorporation, these Bylaws,
the Maryland General Corporation Law and the Investment Company Act of 1940. The
22
<PAGE>
Board may consider, however, taking actions designed to eliminate the discount
whenever it deems it to be appropriate.
BYLAW-EIGHT: AMENDMENTS.
-----------
Article 8.1. General. Except as provided in the next succeeding sentence
and in the Articles of Incorporation, all Bylaws of the Company, whether adopted
by the Board of Directors or the Stockholders, shall be subject to amendment,
alteration or repeal, and new Bylaws may be made, by the affirmative vote of a
majority of either: (a) the holders of record of the outstanding shares of stock
of the Company entitled to vote, at any annual or special meeting, the notice or
waiver of notice of which shall have specified or summarized the proposed
amendment, alteration, repeal or new Bylaw; or (b) the Directors, at any regular
or special meeting, the notice or waiver of notice of which shall have specified
or summarized the proposed amendment, alteration, repeal or new Bylaw. The
provisions of Articles 2.5, 3.2, 3.3, 3.5, 7.1 and 8.1 of these Bylaws shall be
subject to amendment, alteration or repeal by (i) the affirmative vote of the
holders of record of eighty percent (80%) of the outstanding shares of stock of
the Company entitled to vote, at any annual or special meeting, the notice or
waiver of notice of which shall have specified or summarized the proposed
amendment, alteration or repeal or (ii) the Board of Directors including the
affirmative vote of eighty percent (80%) of the Continuing Directors (as such
term is defined in Article VI of the Company's Articles of Incorporation), at
any regular or special meeting, the notice or waiver of notice of which shall
have specified or summarized the proposed amendment, alteration or repeal.
Dated: January 22, 1993
23
<PAGE>
Exhibit (d)(2)
CERTIFICATE NO. NUMBER OF SHARES
-1- -775-
BOULDER TOTAL RETURN FUND, INC.
Incorporated Under the Laws of the State of Maryland
Auction Market Preferred Stock
Par Value of $.01 per share
$100,000 Liquidation Preference Per Share
CUSIP No. ________________
This certifies that __________________ is the owner of _________________________
________________ fully paid and non-assessable shares of Auction Market
Preferred Stock, par value $.01 per share, $100,000 liquidation preference per
share, of Boulder Total Return Fund, Inc. (the "Corporation") transferable only
on the books of the Corporation by the holder thereof in person or by duly
authorized Attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned by the transfer agent and
registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by
its duly authorized officers and its Corporate Seal to be hereunto fixed this
_______ day of ____________, 2000.
BANKERS TRUST COMPANY BOULDER TOTAL RETURN FUND, INC.
As Transfer Agent and Registrar [Seal]
By: ______________________________ By: ______________________________
Authorized Signature President
Attest: __________________________
Secretary
<PAGE>
FOR VALUE RECEIVED, __________ hereby sell, assign and transfer unto
________________________________________________________________________
_______________________________________________________ shares represented by
the within Certificate, and do irrevocably constitute and appoint ______________
Attorney to transfer the said Shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated: _____________________
In presence of
--------------------------------- -----------------------------------
Shares of Auction Market Preferred Stock evidenced by this Certificate may be
sold, transferred, or otherwise disposed of only pursuant to the provisions of
the Corporation's charter. The Corporation will furnish to the shareholder, upon
request and without charge, a full statement of the designations, preferences,
conversion and other rights, voting powers, restriction, limitations as to
dividends, qualifications and terms and conditions of redemption of each class
of stock which the Corporation is authorized to issue, so far as they have been
determined, and a full statement of the authority of the Board of Directors to
determine the relative rights and preferences of subsequent classes or series.
Any such request should be addressed to the Secretary of the Corporation.
<PAGE>
Exhibit (g)(1)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT (this "Agreement") is made as of
the 27th day of August, 1999, by and among BOULDER INVESTMENT ADVISERS, L.L.C.,
a Colorado limited liability company (the "Adviser") and BOULDER TOTAL RETURN
FUND, INC., a Maryland corporation (the "Fund").
1. Investment Description; Appointment. The Fund desires to employ its
capital by investing and reinvesting in investments of the kind and in such
manner and to such extent as may from time to time be approved by the Board of
Directors of the Fund. The Fund desires to employ and hereby appoints the
Adviser to act as investment adviser to the Fund. Adviser hereby accepts the
appointment and agrees to furnish the services described herein for the
compensation set forth below.
2. Services as Investment Adviser. Subject to the supervision and
direction of the Board of Directors of the Fund, the Adviser will (a) act in
accordance with the Investment Company Act of 1940 (the "1940 Act") and the
Investment Advisers Act of 1940, as the same may be from time to time amended,
(b) manage the Fund's portfolio on a discretionary basis in accordance with its
investment objectives and policies, (c) make investment decisions and exercise
voting rights in respect of portfolio securities for the Fund, (d) place
purchase and sale orders on behalf of the Fund, (e) employ, at its own expense,
professional portfolio managers and securities analysts to provide research
services to the Fund, (f) determine the portion of the Fund's assets to be
invested, from time to time, in various asset classes (e.g., common stocks,
fixed income securities, cash equivalents), (g) determine the portion of the
Fund's assets to be leveraged, from time to time, and the form that such
leverage will take, and (h) monitor and evaluate the services provided by the
Fund's investment sub-adviser(s), if any, under the terms of the applicable
investment sub-advisory agreement(s).
Subject to the approval of the Board of Directors of the Fund and
where required, the Fund's shareholders, the Adviser may engage an investment
sub-adviser or sub-advisers to provide advisory services in respect of all or a
portion of the Fund's assets (the "Sub-Advised Portion") and may delegate to
such investment sub-adviser(s) the responsibilities described in subparagraphs
(b), (c), (d), (e), (f) and (g) above and Paragraph 4 below with respect to the
Sub-Advised Portion. In the event that an investment sub-adviser's engagement
has been terminated, the Adviser shall be responsible for furnishing the Fund
with the services required to be performed by such investment sub-adviser(s)
under the applicable investment sub-advisory agreements or arranging for a
successor investment sub-adviser(s) to provide such services under terms and
conditions acceptable to the Fund and the Fund's Board of Directors and subject
to the requirements of the 1940 Act. In providing these services, the Adviser
will provide investment research and supervision of the Fund's evaluation and,
if appropriate, sale and reinvestment of the Fund's assets. In addition, the
Adviser will furnish the Fund with whatever statistical information the Fund may
reasonably request with respect to the securities that the Fund may hold or
contemplate purchasing.
3. Brokerage. In executing transactions for the Fund and selecting
brokers or dealers, the Adviser will use its best efforts to seek the best
overall terms available. In assessing the best overall terms available for any
Fund transaction, the Adviser will consider all factors it deems relevant
including, but not limited to, breadth of the market in the security, the price
of the security, the financial condition and execution capability of the broker
or dealer and the reasonableness of any commission for the specific transaction
and on a continuing basis. In selecting brokers or dealers to execute any
transaction and in evaluating the best overall terms available, the Adviser may
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund
and/or other accounts over which the Adviser or any affiliate exercises
investment discretion.
4. Information Provided to the Fund. The Adviser will use its best
efforts to keep the Fund informed of developments materially affecting the Fund,
and will, on its own initiative, furnish the Fund from time to time with
whatever information the Adviser believes is appropriate for this purpose.
5. Standard of Care. The Adviser shall exercise its best judgment in
rendering the services described herein. The Adviser shall not be liable for any
error of judgment or mistake of law or omission or any loss suffered by the Fund
in connection with the matters to which this Agreement relates, provided that
nothing herein
<PAGE>
shall be deemed to protect or purport to protect the Adviser against any
liability to the Fund to which the Adviser would otherwise be subject by reason
of wilful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement ("disabling conduct"). The Fund will indemnify
the Adviser against, and hold it harmless from, any and all losses, claims,
damages, liabilities or expenses (including reasonable counsel fees and
expenses), including any amounts paid in satisfaction of judgments, in
compromise or as fines or penalties, not resulting from disabling conduct by the
Adviser. Indemnification shall be made only following (i) a final decision on
the merits by a court or other body before whom the proceeding was brought that
the Adviser was not liable by reason of disabling conduct, or (ii) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the Adviser was not liable by reason of disabling conduct by (a)
the vote of a majority of the Directors of the Fund who are neither "interested
persons" of the Fund nor parties to the proceeding ("disinterested non-party
Directors"), or (b) independent legal counsel in a written opinion. The Adviser
shall be entitled to advances from the Fund for payment of the reasonable
expenses incurred by it in connection with the matter to which it is seeking
indemnification in the manner and to the fullest extent permissible under the
law. The Adviser shall provide to the Fund a written affirmation of its good
faith belief that the standard of conduct necessary for indemnification by the
Fund has been met and a written undertaking to repay any such advance if it
should ultimately be determined that the standard of conduct has not been met.
In addition, at least one of the following additional conditions shall be met:
(a) the Adviser shall provide a security in form and amount acceptable to the
Fund for its undertaking; (b) the Fund is insured against losses arising by
reason of the advance; or (c) a majority of disinterested non-party Directors,
or independent legal counsel, in a written opinion, shall have determined, based
on a review of facts readily available to the Fund at the time the advance is
proposed to be made, that there is reason to believe that the Adviser will
ultimately be found to be entitled to indemnification.
6. Compensation. In consideration of the services rendered pursuant to
this Agreement, the Fund will pay the Adviser an annual fee, such amount to be
paid monthly, in the amount agreed to among the parties from time to time. For
the one-year period commencing upon the "Effective Date" (as defined below), the
Adviser will be paid by the Fund according to the Fee Schedule attached hereto
as "Exhibit A". The fee payable to Adviser for any period shorter than a full
calendar month shall be prorated according to the proportion that such payment
bears to the full monthly payment.
7. Expenses. The Adviser will bear all expenses in connection with the
performance of its services under this Agreement, including the fees payable to
any investment sub-adviser engaged pursuant to Paragraph 2 of this Agreement.
The Fund will bear certain other expenses to be incurred in its operation,
including organizational expenses, taxes, interest, brokerage costs and
commissions and stock exchange fees; fees of Directors of the Fund who are not
also officers, directors or employees of Adviser; Securities and Exchange
Commission fees; state Blue Sky qualification fees; charges of any custodian,
any sub-custodians and transfer and dividend-paying agents; insurance premiums;
outside auditing and legal expenses; costs of maintenance of the Fund's
existence; membership fees in trade associations; stock exchange listing fees
and expenses; litigation and other extraordinary or non-recurring expenses.
8. Services to other Companies or Accounts. The Fund understands that
the Adviser now acts, or may act in the future as an investment adviser to
fiduciary and other managed accounts or other trusts, or as investment adviser
to one or more other investment companies, and the Fund has no objection to the
Adviser so acting. The Fund understands that the persons employed by Adviser to
assist in the performance of the Adviser's duties hereunder will not devote
their full time to such service and nothing contained herein shall be deemed to
limit or restrict the right of the Adviser or any affiliate of the Adviser to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
9. Term of Agreement. This Agreement shall become effective as of the
date it is approved by a vote of a "majority" (as defined in the 1940 Act) of
the Fund's outstanding voting securities (the "Effective Date") and shall
continue for an initial two-year term and shall remain in effect from year to
year so long as such continuance is specifically approved by (a) a majority of
the Directors who are not "interested persons" of the Fund (as defined in the
1940 Act) and a majority of the full Board of Directors or (b) a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). This
Agreement is terminable by a party hereto on sixty (60) days' written notice to
the other party. Any termination shall be without penalty and any notice of
termination shall be deemed given when received by the addressee.
-2-
<PAGE>
10. No Assignment. This Agreement may not be transferred, assigned,
sold or in any manner hypothecated or pledged by any party hereto and will
terminate automatically in the event of its assignment (as defined in the 1940
Act). It may be amended by mutual agreement, in writing, by the parties hereto.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto.
12. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Colorado.
13. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original for all purposes, and together shall
constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
-3-
<PAGE>
ADVISER:
BOULDER INVESTMENT ADVISERS, L.L.C., a Colorado
limited liability company
By: ________________________________
Carl D. Johns
Its: Assistant Manager
FUND:
BOULDER TOTAL RETURN FUND, INC., a
Maryland corporation
By: ________________________________
Stephen C. Miller
Its: President
-4-
<PAGE>
Exhibit A
FEE SCHEDULE
Adviser shall be paid after the end of each calendar month, a fee for
the previous month computed at the annual rate of 1.00% of the value of the
Fund's average monthly net assets; provided, that Adviser agrees to waive 0.40
or 1.00% on the Fund's average monthly net assets not included in the Stock
Portfolio (as defined below) until such time as 50% or more of the Fund's net
assets are invested in the Stock Portfolio. The Stock Portfolio consists of all
securities other than the preferred stocks (including so-called "hybrid" or
taxable preferreds, including those such as capital securities that have certain
characteristics of debt securities), related hedging instruments and cash and
cash equivalents held for investment in preferreds or related hedging
instruments under the management of Spectrum Asset Management, Inc., or its
successor (the "Preferred Stock Manager") For the avoidance of doubt, it is
recognized that cash and cash equivalents held by the Preferred Stock Manager
for investment in preferreds or related hedging instruments will not be deemed
part of the Stock Portfolio, and that cash and cash equivalents that result from
liquidation of securities by the Preferred Stock Manager at the request of
Adviser for investment by the Adviser shall be a part of the Stock Portfolio.
(For purposes of calculating Adviser's fee, the Fund's average monthly net
assets will be deemed to be the average monthly value of the Fund's total assets
minus the sum of the Fund's liabilities (which liabilities exclude the aggregate
liquidation preference of the Fund's outstanding preferred stock and the amount
of any senior securities representing indebtedness) and dividends.)
<PAGE>
Exhibit (g)(2)
INVESTMENT SUB-ADVISORY AGREEMENT
THIS INVESTMENT SUB-ADVISORY AGREEMENT (this "Agreement") is made as
of the 27th day of August, 1999, by and among BOULDER INVESTMENT ADVISERS,
L.L.C., a Colorado limited liability company (the "Adviser") and STEWART
INVESTMENT ADVISERS, LTD., a Barbados international business corporation (the
"Sub-Adviser"); and PREFERRED INCOME MANAGEMENT FUND, INCORPORATED, a Maryland
corporation (the "Fund").
1. Investment Description; Appointment. The Adviser has been
authorized by the Board of Directors of the Fund to engage Sub-Adviser to assist
in the management of the Fund's assets. The Adviser desires to employ and hereby
appoints the Sub-Adviser to act as investment sub-adviser with respect to the
portion of the Fund's assets allocated to it for management by the Adviser from
time to time (the "Portfolio"). Sub-Adviser hereby accepts the appointment and
agrees to furnish the services described herein for the compensation set forth
below.
2. Services as Sub-Adviser. Subject to the supervision and direction
of Adviser, the Sub-Adviser will (a) act in accordance with the Investment
Company Act of 1940 (the "1940 Act") and the Investment Advisers Act of 1940, as
the same may be from time to time amended, (b) manage the Portfolio on a
discretionary basis in accordance with the objectives set forth in "Exhibit A"
hereto and such instructions as provided to the Sub-Adviser by the Adviser from
time to time, (c) make investment decisions and exercise voting rights in
respect of securities in the Portfolio, (d) place purchase and sale orders on
behalf of the Portfolio, (e) employ, at its own expense, professional portfolio
managers and securities analysts to provide research services to the Fund, (f)
determine the portion of the Fund's assets invested, from time to time, in
various asset classes (e.g., common stocks, fixed income securities, cash
equivalents) and (g) determine the portion of the Fund's assets to be leveraged,
from time to time, and form that such leverage will take. In providing these
services, the Sub-Adviser will provide investment research and supervision of
the Portfolio's evaluation and, if appropriate, sale and reinvestment of the
Portfolio's assets. In addition, the Sub-Adviser will furnish the Adviser with
whatever statistical information the Adviser may reasonably request with respect
to the securities that the Portfolio may hold or contemplate purchasing.
3. Brokerage. In executing transactions for the Portfolio and
selecting brokers or dealers, the Sub-Adviser will use its best efforts to seek
the best overall terms available. In assessing the best overall terms available
for any Portfolio transaction, the Sub-Adviser will consider all factors it
deems relevant including, but not limited to, breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of any commission for
the specific transaction and on a continuing basis. In selecting brokers or
dealers to execute any transaction and in evaluating the best overall terms
available, the Sub-Adviser may consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Portfolio and/or other accounts over which the Sub-Adviser or
any affiliate exercises investment discretion.
4. Information Provided to the Adviser and the Fund. The Sub-Adviser
will use its best efforts to keep the Adviser and the Fund informed of
developments materially affecting the Portfolio, and will, on its own
initiative, furnish the Adviser from time to time with whatever information the
Sub-Adviser believes is appropriate for this purpose.
5. Standard of Care. Sub-Adviser shall exercise its best judgment in
rendering the services described herein. The Sub-Adviser shall not be liable for
any error of judgment or mistake of law or omission or any loss suffered by the
Adviser or the Fund in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport to
protect the Sub-Adviser against any liability to the Adviser or the Fund to
which the Sub-Adviser would otherwise be subject by reason of wilful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement ("disabling conduct"). The Sub-Adviser will look to the Fund for
indemnification with respect to, and the Fund will indemnify Sub-Adviser
against, and hold it harmless from, any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses),
including any amounts paid in satisfaction of judgments, in compromise or as
fines or penalties, not resulting from disabling conduct by Sub-Adviser.
Indemnification shall be made only following (i) a final decision on the merits
by a court or other body before whom the proceeding was brought that the
Sub-Adviser was not liable by reason of disabling conduct, or (ii) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the Sub-Adviser was not liable by reason of disabling conduct by
(a) the vote of a majority of the Directors of the Fund who
<PAGE>
are neither "interested persons" of the Fund nor parties to the proceeding
("disinterested non-party Directors"), or (b) independent legal counsel in a
written opinion. Sub-Adviser shall be entitled to advances from the Fund for
payment of the reasonable expenses incurred by it in connection with the matter
to which it is seeking indemnification in the manner and to the fullest extent
permissible under the law. The Sub-Adviser shall provide to the Fund a written
affirmation of its good faith belief that the standard of conduct necessary for
indemnification by the Fund has been met and a written undertaking to repay any
such advance if it should ultimately be determined that the standard of conduct
has not been met. In addition, at least one of the following additional
conditions shall be met: (a) the Sub-Adviser shall provide a security in form
and amount acceptable to the Fund for its undertaking; (b) the Fund is insured
against losses arising by reason of the advance; or (c) a majority of
disinterested non-party Directors of the Fund, or independent legal counsel, in
a written opinion, shall have determined, based on a review of facts readily
available to the Fund at the time the advance is proposed to be made, that there
is reason to believe that the Sub-Adviser will ultimately be found to be
entitled to indemnification.
6. Compensation. In consideration of the services rendered pursuant to
this Agreement, the Adviser will pay the Sub-Adviser an annual fee, such amount
to be paid monthly, in the amount agreed to among the parties from time to time.
For the one-year period commencing upon the "Effective Date" (as defined below),
the Sub-Adviser will be paid by the Adviser an annual fee according to the Fee
Schedule attached hereto as "Exhibit B". The fee payable to Sub-Adviser for any
period shorter than a full calendar month shall be prorated according to the
proportion that such payment bears to the full monthly payment.
7. Expenses. Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear certain
other expenses to be incurred in its operation, including investment advisory
fees, taxes, interest, brokerage costs and commissions and stock exchange fees;
fees of Directors of the Fund who are not also officers, directors or employees
of Adviser; Securities and Exchange Commission fees, state Blue Sky
qualification fees, charges of any custodian, any sub-custodians and transfer
and dividend-paying agents, insurance premiums, outside auditing and legal
expenses, costs of maintenance of the Fund's existence, membership fees in trade
associations, stock exchange listing fees and expenses, litigation and other
extraordinary or non-recurring expenses.
8. Services to other Companies or Accounts. The Adviser and the Fund
understand that the Sub-Adviser now acts, or may act, in the future as
investment adviser to fiduciary and other managed accounts or other trusts, or
as investment adviser to one or more other investment companies, and the Adviser
and the Fund have no objection to the Sub-Adviser so acting. The Adviser and the
Fund understand that the persons employed by Sub-Adviser to assist in the
performance of the Sub-Adviser's duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict the right of the Sub-Adviser or any affiliate of the Sub-Adviser to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
9. Term of Agreement. This Agreement shall become effective as of the
date it is approved by a vote of a "majority" (as defined in the 1940 Act) of
the Fund's outstanding voting securities (the "Effective Date") and shall
continue for an initial two-year term and shall remain in effect from year to
year so long as such continuance is specifically approved by (a) a majority of
the Directors who are not "interested persons" of the Fund (as defined in the
1940 Act and a majority of the full Board of Directors or (b) a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). This
Agreement is terminable by either any party hereto on sixty (60) days' written
notice to the other party. Any termination shall be without penalty and any
notice of termination shall be deemed given when received by the addressee.
10. No Assignment. This Agreement may not be transferred, assigned,
sold or in any manner hypothecated or pledged by any party hereto and will
terminate automatically in the event of its assignment (as defined in the 1940
Act). It may be amended by mutual agreement, in writing, by the parties hereto.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto.
12. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Colorado.
13. Consent to Jurisdiction and Service of Process. The Sub-Adviser
irrevocably submits to the jurisdiction of any Colorado State or United States
Federal court sitting in Colorado, over any suit, action or proceeding arising
out of or relating to this Agreement. The Sub-Adviser irrevocably waives, to the
fullest extent
-2-
<PAGE>
permitted by law, any objection which it may have to the laying of the venue of
any such suit, action or proceeding brought in such a court and any claim that
any such suit, action or proceeding brought in such a court has been brought in
an inconvenient forum. The Sub-Adviser agrees that final judgment in any such
suit, action or proceeding brought in such a court shall be conclusive and
binding upon the Sub-Adviser, and may be enforced to the extent permitted by
applicable law in any court of the jurisdiction of which the Sub-Adviser is
subject by a suit upon such judgment, provided that service of process is
effected upon the Sub-Adviser in the manner specified in the following paragraph
or as otherwise permitted by law.
As long as this Agreement remains in effect, the Sub-Adviser will at
all times have an authorized agent in the State of Colorado upon whom process
may be served in any legal action or proceeding in a Colorado State or United
States Federal Court sitting in the State of Colorado. Over any suit, action or
proceeding arising out of or relating to this Agreement. The Sub-Adviser hereby
appoints the Secretary of the Fund as its agent for such purpose, and covenants
and agrees that service of process in any such legal action or proceeding may be
made upon it at the office of such agent at 1680 38th Street, Suite 800,
Boulder, Colorado 80301 (or at such other address in the State of Colorado, as
said agent may designate by written notice to the Fund and the Adviser). The
Sub-Adviser hereby consents to process being served in any suit, action or
proceeding of the nature referred in the preceding paragraph by service upon
such agent together with the mailing of a copy thereof by registered or
certified mail, postage prepaid, return receipt requested, to the office of the
Sub-Adviser at Bellerive House, Queen Street, St. Peter, Barbados or to any
other address of which the Sub-Adviser shall have given written notice to the
Fund and the Adviser. The Sub-Adviser irrevocably waives, to the fullest extent
permitted by law, all claim of error by reason of any such service (but does not
waive any right assert lack of subject matter jurisdiction) and agrees that such
service (i) shall be deemed in every respect effective service of process upon
the Sub-Adviser in any suit, action or proceeding, and (ii) shall, to the
fullest extent permitted by law, be taken and held to be valid personal service
upon and personal delivery to the Sub-Adviser.
Nothing in this section shall affect the right of the Fund or the
Adviser to serve process in any manner permitted by law or limit the right of
the Fund or the Adviser to bring proceedings against the Sub-Adviser in the
courts of any jurisdiction or jurisdictions.
14. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original for all purposes, and together shall
constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
-3-
<PAGE>
THE ADVISER:
BOULDER INVESTMENT ADVISERS, L.L.C., a
Colorado limited liability company
By: _________________________________________
Carl D. Johns
Its: Assistant Manager
-4-
<PAGE>
THE SUB-ADVISER:
STEWART INVESTMENT ADVISERS, LTD., a
Barbados international business corporation
By: ________________________________________
Glade Christensen
Its: President
THE FUND:
PREFERRED INCOME MANAGMEENT FUND
INCORPORATED, a Maryland corporation
By: _________________________________________
Stephen C. Miller
Its: President
<PAGE>
EXHIBIT A
The Portfolio shall consist of common stock and cash and cash equivalents
held for investments in common stocks or for temporary defensive purposes and,
if delegated to the Portfolio by BIA and approved by the Fund's Board of
Directors, fixed income or other securities.
<PAGE>
Exhibit B
Fee Schedule
Sub-Adviser shall be paid by Boulder Investment Advisers, L.L.C. ("BIA")
after the end of each calendar month, a fee for the previous month equal to 80%
of the fees retained by BIA from the payments received by BIA pursuant to the
Investment Advisory Agreement between the Fund and BIA after BIA has made
required payments to any other sub-adviser or sub-advisers.
<PAGE>
Exhibit 2(g)(2)
INVESTMENT SUB-ADVISORY AGREEMENT
THIS INVESTMENT SUB-ADVISORY AGREEMENT (this "Agreement") is made as
of the 27th day of August, 1999, by and among BOULDER INVESTMENT ADVISERS,
L.L.C., a Colorado limited liability company (the "Adviser") and STEWART
INVESTMENT ADVISERS, LTD., a Barbados international business corporation (the
"Sub-Adviser"); and PREFERRED INCOME MANAGEMENT FUND, INCORPORATED, a Maryland
corporation (the "Fund").
1. Investment Description; Appointment. The Adviser has been
authorized by the Board of Directors of the Fund to engage Sub-Adviser to assist
in the management of the Fund's assets. The Adviser desires to employ and hereby
appoints the Sub-Adviser to act as investment sub-adviser with respect to the
portion of the Fund's assets allocated to it for management by the Adviser from
time to time (the "Portfolio"). Sub-Adviser hereby accepts the appointment and
agrees to furnish the services described herein for the compensation set forth
below.
2. Services as Sub-Adviser. Subject to the supervision and direction
of Adviser, the Sub-Adviser will (a) act in accordance with the Investment
Company Act of 1940 (the "1940 Act") and the Investment Advisers Act of 1940, as
the same may be from time to time amended, (b) manage the Portfolio on a
discretionary basis in accordance with the objectives set forth in "Exhibit A"
hereto and such instructions as provided to the Sub-Adviser by the Adviser from
time to time, (c) make investment decisions and exercise voting rights in
respect of securities in the Portfolio, (d) place purchase and sale orders on
behalf of the Portfolio, (e) employ, at its own expense, professional portfolio
managers and securities analysts to provide research services to the Fund, (f)
determine the portion of the Fund's assets invested, from time to time, in
various asset classes (e.g., common stocks, fixed income securities, cash
equivalents) and (g) determine the portion of the Fund's assets to be leveraged,
from time to time, and form that such leverage will take. In providing these
services, the Sub-Adviser will provide investment research and supervision of
the Portfolio's evaluation and, if appropriate, sale and reinvestment of the
Portfolio's assets. In addition, the Sub-Adviser will furnish the Adviser with
whatever statistical information the Adviser may reasonably request with respect
to the securities that the Portfolio may hold or contemplate purchasing.
3. Brokerage. In executing transactions for the Portfolio and
selecting brokers or dealers, the Sub-Adviser will use its best efforts to seek
the best overall terms available. In assessing the best overall terms available
for any Portfolio transaction, the Sub-Adviser will consider all factors it
deems relevant including, but not limited to, breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of any commission for
the specific transaction and on a continuing basis. In selecting brokers or
dealers to execute any transaction and in evaluating the best overall terms
available, the Sub-Adviser may consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Portfolio and/or other accounts over which the Sub-Adviser or
any affiliate exercises investment discretion.
4. Information Provided to the Adviser and the Fund. The Sub-Adviser
will use its best efforts to keep the Adviser and the Fund informed of
developments materially affecting the Portfolio, and will, on its own
initiative, furnish the Adviser from time to time with whatever information the
Sub-Adviser believes is appropriate for this purpose.
5. Standard of Care. Sub-Adviser shall exercise its best judgment in
rendering the services described herein. The Sub-Adviser shall not be liable for
any error of judgment or mistake of law or omission or any loss suffered by the
Adviser or the Fund in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport to
protect the Sub-Adviser against any liability to the Adviser or the Fund to
which the Sub-Adviser would otherwise be subject by reason of wilful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement ("disabling conduct"). The Sub-Adviser will look to the Fund for
indemnification with respect to, and the Fund will indemnify Sub-Adviser
against, and hold it harmless from, any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses),
including any amounts paid in satisfaction of judgments, in compromise or as
fines or penalties, not resulting from disabling conduct by Sub-Adviser.
Indemnification shall be made only following (i) a final decision on the merits
by a court or other body before whom the proceeding was brought that the
Sub-Adviser was not liable by reason of disabling conduct, or (ii) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the Sub-Adviser was not liable by reason of disabling conduct by
(a) the vote of a majority of the Directors of the Fund who
<PAGE>
are neither "interested persons" of the Fund nor parties to the proceeding
("disinterested non-party Directors"), or (b) independent legal counsel in a
written opinion. Sub-Adviser shall be entitled to advances from the Fund for
payment of the reasonable expenses incurred by it in connection with the matter
to which it is seeking indemnification in the manner and to the fullest extent
permissible under the law. The Sub-Adviser shall provide to the Fund a written
affirmation of its good faith belief that the standard of conduct necessary for
indemnification by the Fund has been met and a written undertaking to repay any
such advance if it should ultimately be determined that the standard of conduct
has not been met. In addition, at least one of the following additional
conditions shall be met: (a) the Sub-Adviser shall provide a security in form
and amount acceptable to the Fund for its undertaking; (b) the Fund is insured
against losses arising by reason of the advance; or (c) a majority of
disinterested non-party Directors of the Fund, or independent legal counsel, in
a written opinion, shall have determined, based on a review of facts readily
available to the Fund at the time the advance is proposed to be made, that there
is reason to believe that the Sub-Adviser will ultimately be found to be
entitled to indemnification.
6. Compensation. In consideration of the services rendered pursuant to
this Agreement, the Adviser will pay the Sub-Adviser an annual fee, such amount
to be paid monthly, in the amount agreed to among the parties from time to time.
For the one-year period commencing upon the "Effective Date" (as defined below),
the Sub-Adviser will be paid by the Adviser an annual fee according to the Fee
Schedule attached hereto as "Exhibit B". The fee payable to Sub-Adviser for any
period shorter than a full calendar month shall be prorated according to the
proportion that such payment bears to the full monthly payment.
7. Expenses. Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear certain
other expenses to be incurred in its operation, including investment advisory
fees, taxes, interest, brokerage costs and commissions and stock exchange fees;
fees of Directors of the Fund who are not also officers, directors or employees
of Adviser; Securities and Exchange Commission fees, state Blue Sky
qualification fees, charges of any custodian, any sub-custodians and transfer
and dividend-paying agents, insurance premiums, outside auditing and legal
expenses, costs of maintenance of the Fund's existence, membership fees in trade
associations, stock exchange listing fees and expenses, litigation and other
extraordinary or non-recurring expenses.
8. Services to other Companies or Accounts. The Adviser and the Fund
understand that the Sub-Adviser now acts, or may act, in the future as
investment adviser to fiduciary and other managed accounts or other trusts, or
as investment adviser to one or more other investment companies, and the Adviser
and the Fund have no objection to the Sub-Adviser so acting. The Adviser and the
Fund understand that the persons employed by Sub-Adviser to assist in the
performance of the Sub-Adviser's duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict the right of the Sub-Adviser or any affiliate of the Sub-Adviser to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
9. Term of Agreement. This Agreement shall become effective as of the
date it is approved by a vote of a "majority" (as defined in the 1940 Act) of
the Fund's outstanding voting securities (the "Effective Date") and shall
continue for an initial two-year term and shall remain in effect from year to
year so long as such continuance is specifically approved by (a) a majority of
the Directors who are not "interested persons" of the Fund (as defined in the
1940 Act and a majority of the full Board of Directors or (b) a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). This
Agreement is terminable by either any party hereto on sixty (60) days' written
notice to the other party. Any termination shall be without penalty and any
notice of termination shall be deemed given when received by the addressee.
10. No Assignment. This Agreement may not be transferred, assigned,
sold or in any manner hypothecated or pledged by any party hereto and will
terminate automatically in the event of its assignment (as defined in the 1940
Act). It may be amended by mutual agreement, in writing, by the parties hereto.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto.
12. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Colorado.
13. Consent to Jurisdiction and Service of Process. The Sub-Adviser
irrevocably submits to the jurisdiction of any Colorado State or United States
Federal court sitting in Colorado, over any suit, action or proceeding arising
out of or relating to this Agreement. The Sub-Adviser irrevocably waives, to the
fullest extent
-2-
<PAGE>
permitted by law, any objection which it may have to the laying of the venue of
any such suit, action or proceeding brought in such a court and any claim that
any such suit, action or proceeding brought in such a court has been brought in
an inconvenient forum. The Sub-Adviser agrees that final judgment in any such
suit, action or proceeding brought in such a court shall be conclusive and
binding upon the Sub-Adviser, and may be enforced to the extent permitted by
applicable law in any court of the jurisdiction of which the Sub-Adviser is
subject by a suit upon such judgment, provided that service of process is
effected upon the Sub-Adviser in the manner specified in the following paragraph
or as otherwise permitted by law.
As long as this Agreement remains in effect, the Sub-Adviser will at
all times have an authorized agent in the State of Colorado upon whom process
may be served in any legal action or proceeding in a Colorado State or United
States Federal Court sitting in the State of Colorado. Over any suit, action or
proceeding arising out of or relating to this Agreement. The Sub-Adviser hereby
appoints the Secretary of the Fund as its agent for such purpose, and covenants
and agrees that service of process in any such legal action or proceeding may be
made upon it at the office of such agent at 1680 38th Street, Suite 800,
Boulder, Colorado 80301 (or at such other address in the State of Colorado, as
said agent may designate by written notice to the Fund and the Adviser). The
Sub-Adviser hereby consents to process being served in any suit, action or
proceeding of the nature referred in the preceding paragraph by service upon
such agent together with the mailing of a copy thereof by registered or
certified mail, postage prepaid, return receipt requested, to the office of the
Sub-Adviser at Bellerive House, Queen Street, St. Peter, Barbados or to any
other address of which the Sub-Adviser shall have given written notice to the
Fund and the Adviser. The Sub-Adviser irrevocably waives, to the fullest extent
permitted by law, all claim of error by reason of any such service (but does not
waive any right assert lack of subject matter jurisdiction) and agrees that such
service (i) shall be deemed in every respect effective service of process upon
the Sub-Adviser in any suit, action or proceeding, and (ii) shall, to the
fullest extent permitted by law, be taken and held to be valid personal service
upon and personal delivery to the Sub-Adviser.
Nothing in this section shall affect the right of the Fund or the
Adviser to serve process in any manner permitted by law or limit the right of
the Fund or the Adviser to bring proceedings against the Sub-Adviser in the
courts of any jurisdiction or jurisdictions.
14. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original for all purposes, and together shall
constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
-3-
<PAGE>
THE ADVISER:
BOULDER INVESTMENT ADVISERS, L.L.C., a
Colorado limited liability company
By: _________________________________________
Carl D. Johns
Its: Assistant Manager
-4-
<PAGE>
THE SUB-ADVISER:
STEWART INVESTMENT ADVISERS, LTD., a
Barbados international business corporation
By: ________________________________________
Glade Christensen
Its: President
THE FUND:
PREFERRED INCOME MANAGMEENT FUND
INCORPORATED, a Maryland corporation
By: _________________________________________
Stephen C. Miller
Its: President
<PAGE>
EXHIBIT A
The Portfolio shall consist of common stock and cash and cash equivalents
held for investments in common stocks or for temporary defensive purposes and,
if delegated to the Portfolio by BIA and approved by the Fund's Board of
Directors, fixed income or other securities.
<PAGE>
Exhibit B
Fee Schedule
Sub-Adviser shall be paid by Boulder Investment Advisers, L.L.C. ("BIA")
after the end of each calendar month, a fee for the previous month equal to 80%
of the fees retained by BIA from the payments received by BIA pursuant to the
Investment Advisory Agreement between the Fund and BIA after BIA has made
required payments to any other sub-adviser or sub-advisers.
<PAGE>
Exhibit (j)
CUSTODY AGREEMENT
THIS AGREEMENT is made of as of February 11, 1993 PREFERRED INCOME
MANAGEMENT FUND INCORPORATED ( the "Fund"), a Maryland corporation having its
principal office and place of business at 301 E. Colorado Blvd., Suite 720,
Pasadena, California 91101, and BOSTON SAFE DEPOSIT AND TRUST COMPANY (the
"Custodian"), a Massachusetts trust company having its principal place of
business at One Boston Place, Massachusetts 02108.
W I T N E S S E T H:
- - - - - - - - - -
That for and in consideration of the mutual premises and covenants
hereinafter set forth, the Fund and the Custodian agree as follows:
1. Definitions.
------------
Whenever used in this Agreement or in any Schedules to this Agreement, the
following words and phrases, unless the context otherwise requires, shall have
the following meanings.
(a) "Articles of Incorporation" shall mean the Articles of Incorporation of
the Fund dated December 21, 1992 as now in effect and as the same may be amended
from time to time.
(b) "Authorized Person" shall be deemed to include the President, any Vice
President, the Secretary, any Assistant Secretary, the Treasurer or Assistant
Treasurer or any other person, whether or not any such person is an officer or
employee of the Fund, duly authorized by the Board of Directors of the Fund to
give Oral Instructions and Written Instructions on behalf of the Fund and listed
in a certification in the form annexed hereto as Appendix A or such other
certification as may be received by the Custodian from time to time.
(c) "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
(d) "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") its successor or successors and its nominee or nominees, in which the
Custodian is specifically authorized by the Fund's Board to make deposits. The
term "Depository" shall further mean and include any other person to be named in
Written Instructions authorized to act as a depository under the 1940 Act, its
successor or successors and its nominee or nominees.
(e) "Money Market Securities" shall be deemed to include, without
limitation, debt obligations issued or guaranteed as to interest and principal
by the Government of the United States or agencies or instrumentalities thereof,
commercial paper, bank certificate of deposits, bankers acceptances and
short-term corporate obligations, where the purchase or sale of such securities
normally requires settlement in federal funds on the same day as such purchase
or
<PAGE>
sale, and repurchase and reverse repurchase agreements with respect to any of
the foregoing types of securities.
(f) "Oral Instructions" shall mean verbal instructions actually received by
the Custodian from an Authorized Person or person reasonably believed by the
Custodian to be an Authorized Person.
(g) "Prospectus" shall mean the Fund's current prospectus relating to the
registration of the Shares under the Securities Act of 1933, as amended.
(h) "Shares" refers to the Shares of Common Stock $.01 par value, and
preferred stock, $.01 par value as may be issued by the Fund from time to time.
(i) "Security" or "Securities" shall be deemed to include bonds,
debentures, notes, stocks, shares, warrants, options, evidence of indebtedness,
and other securities and investments from time to time of the Fund, including
forward currency contracts, futures contracts and options on futures contracts.
(j) "Transfer Agent" shall mean the person which performs the transfer
agent, dividend disbursing agent and shareholder servicing agent functions for
the Fund.
(k) "Written Instructions" shall mean a written communication actually
received by the Custodian from an Authorized Person or from a person reasonably
believed by the Custodian to be an Authorized Person by telex or facsimile
machine or any other such system whereby the receiver of such communication is
able to verify through codes or otherwise with a reasonable degree of certainty
the authenticity of the sender of such communication.
(l) The "1940 Act" refers to the Investment Company Act of 1940, and the
rules and regulations thereunder, all as amended from time to time.
2. Appointment of Custodian.
-------------------------
(a) The Fund hereby constitutes and appoints the Custodian as custodian of
all of the Securities and monies at any time owned by or in the possession of
the Fund during the period of this Agreement.
(b) The Custodian hereby accepts appointment as such custodian of the Fund
and agrees to perform the duties thereof as hereinafter set forth.
3. Compensation.
-------------
(a) The Fund will compensate the Custodian for its services rendered under
this Agreement in accordance with the fees set forth in the Fee Agreement among
the Fund, the Custodian and The Boston Company Advisors, Inc. dated February 11,
1993 and, annexed hereto as Schedule A. Such Fee Agreement does not include
out-of-pocket disbursements of the Custodian or transaction costs for which the
Custodian shall be entitled to bill separately. Out-of-pocket disbursements
shall include, but shall not be limited to, the items specified in Appendix C
and transaction costs shall include the items specified in Appendix D. Appendix
C
2
<PAGE>
and Appendix D are incorporated herein and may be modified by the Custodian upon
not less than thirty days' prior written notice to the Fund.
(b) Unless otherwise specified any compensation agreed to hereunder may be
adjusted from time to time by attaching to Schedule A of this Agreement a
revised Fee Agreement, dated and signed by an Authorized Person or authorized
representative of each party hereto.
(c) The Custodian will bill the Fund as soon as practicable after the end
of each calendar month, and said billing will be detailed in accordance with
Schedule A. The Fund will promptly pay to the Custodian the amount of such
billing.
4. Custody of Cash and Securities.
-------------------------------
(a) Receipt and Holdings of Assets. The Fund will deliver or cause to be
delivered to the Custodian all Securities and monies owned by it, including cash
received from the issuance of its Shares, at any time during the period of this
Agreement. The Custodian will not be responsible for such Securities and monies
until actually received by it. The Fund shall instruct the Custodian from time
to time in its sole discretion, by means of Written Instructions, or in
connection with the purchase or sale of Money Market Securities, by means of
Oral Instructions or Written Instructions, as to the manner in which and in what
amounts Securities and monies of the Fund are to be deposited on behalf of the
Fund in the Book-Entry System or a Depository and specifically allocated on the
books of the Custodian to the Fund; provided, however, that prior to the initial
deposit of Securities of the Fund in the Book-Entry System or the Depository,
the Custodian shall have received Written Instructions specifically approving
such deposit by the Custodian in the Book-Entry System or a Depository.
(b) Accounts and Disbursements. The Custodian shall establish and maintain
a separate account for the Fund and shall credit to the separate account of the
Fund all monies received by it for the account of such Fund and shall disburse
the same only:
1. In payment for Securities purchased for the Fund, as provided in Section
5 hereof;
2. 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,
in whole or in part, to be capitalized or treated as deferred expenses;
3. For payment of the amount of dividends received in respect of Securities
sold short;
4. In payment of dividends or distribution with respect to the Shares of
the Fund, as provided in Section 7 hereof;
5. In payment of original issue or other taxes with respect to the Shares
of the Fund;
3
<PAGE>
6. In payment for Shares which have been repurchased by the Fund, in the
open market or otherwise;
7. Pursuant to Written Instructions or, with respect to Money Market
Securities, Oral Instructions or Written Instructions, setting forth the
name and address of the person to whom the payment is to be made, the
amount to be paid and the purpose for which payment is to be made; or
8. In payment of fees and in reimbursement of the expenses and liabilities
of the Custodian attributable to the Fund, as provided in Section 3(a) and
Section 10(h) hereof.
(c) Confirmation and Statements. Promptly after the close of business on
each day, the Custodian shall furnish the Fund with confirmations and a summary
of all transfers to or from the account of the Fund during said day. Where
securities purchased by the Fund are in a fungible bulk of securities registered
in the name of the Custodian (or its nominee) or shown on the Custodian's
account on the books of the Depository or the Book-Entry system, the Custodian
shall by book entry or otherwise identify the quantity of those securities
belonging to the Fund. At least monthly, the Custodian shall furnish the Fund
with a detailed statement of the Securities and monies held for the Fund under
this Agreement.
(d) Registration of Securities and Physical Separation. All Securities held
for the Fund which are issued or assumable only in bearer form, except such
Securities as are held in the Book-Entry System, shall be held by the Custodian
in that form; all other Securities held for the Fund may be registered in the
name of the Fund, in the name of any duly appointed registered nominee of the
Custodian as the Custodian may from time to time determine, or in name of the
Book-Entry System or a depository or their successor or successors, or their
nominee or nominees. The Fund reserves the right to instruct the Custodian as to
the method of registration and safekeeping of the Securities of the Fund. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or a
Depository, or any Securities which it may hold for the account of the Fund and
which may from time to time be registered in the name of the Fund. The Custodian
shall hold all such Securities which are not held in the Book-Entry System or
the Depository in a separate account for the Fund in the name of the Fund
physically segregated at all times from those of any other person or persons.
(e) Segregated Accounts. Upon receipt of Written Instructions the Custodian
will establish segregated accounts on behalf of the Fund to hold liquid or other
assets as shall be directed, and shall increase or decrease the assets in such
segregated accounts as shall be directed in Written Instructions.
(f) Collection of Income and Other Matters Affecting Securities. Unless
otherwise instructed to the contrary by Written Instructions, the Custodian by
itself, or through the use of the Book-Entry System or Depository with respect
to Securities therein deposited, shall with respect to all Securities held for
the Fund in accordance with this Agreement:
4
<PAGE>
1. Collect on a timely basis all income due or payable;
2. Present on a timely basis for payment and collect the amount payable
upon all Securities which may mature or be called, redeemed or retired, or
otherwise become payable. Notwithstanding the foregoing, the Custodian
shall have no responsibility to the Fund for monitoring or ascertaining any
call, redemption or retirement dates with respect to any put bonds which
are owned by the Fund and held by the Custodian or its nominee, nor shall
the Custodian have any responsibility or liability to the Fund for any loss
by the Fund for any missed payment or other default resulting therefrom,
unless the Custodian received timely notification from the Fund specifying
the time, place and manner for the presentment of any such put bond owned
by the Fund and held by the Custodian or its nominees. The Custodian shall
not be responsible and assumes no liability to the Fund for the accuracy or
completeness of any notification the Custodian may furnish to the Fund with
respect to put bonds;
3. Surrender Securities in temporary form for definitive Securities;
4. Execute any necessary declarations or certificates of ownership under
the Federal income tax laws or the laws or regulations of any other taxing
authority now or hereafter in effect; and
5. Hold directly, or through the Book-Entry System or a Depository with
respect to Securities therein deposited, for the account of the Fund all
rights and similar Securities issued with respect to any Securities held by
the Custodian hereunder for the Fund.
(g) Delivery of Securities and Evidence of Authority. Upon receipt of
Written Instructions and not otherwise, except for subparagraphs 5, 7, 8, 9 and
10 which may be effected by Oral or Written Instructions, the Custodian,
directly or through the use of the Book-Entry System or a Depository, shall:
1. Execute and deliver or cause to be executed and delivered to such
persons as may be designated in such Written Instructions proxies,
consents, authorizations and any other instruments whereby the authority of
the Fund as owner of any Securities may be exercised;
2. Deliver or cause to be delivered any Securities held for the Fund in
exchange for other Securities or cash issued or paid in connection with the
liquidation, reorganization, refinancing, merger, consolidation or
recapitalization of any corporation, or the exercise of any conversion
privilege;
3. Deliver or cause to be delivered any Securities held for the Fund to any
protective committee, reorganization committee or other person in
connection with the reorganization, refinancing, merger, consolidation or
recapitalization or sale of assets of any corporation, and receive and hold
under the terms of this Agreement in the separate account for the Fund such
certificates of deposit,
5
<PAGE>
interim receipts or other instruments or documents as may be issued to it
to evidence such delivery;
4. Make or cause to be made such transfers or exchanges of the assets of
the Fund and take such other steps as shall be stated in said Written
Instructions to be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or recapitalization
of the Fund;
5. Deliver Securities owned by the Fund upon sale of such Securities for
the account of the Fund pursuant to Section 5;
6. Deliver Securities owned by the Fund upon the receipt of payment in
connection with any repurchase agreement related to such Securities entered
into by the Fund;
7. Deliver Securities owned by the Fund to the issuer thereof or its agent
when such Securities are called, redeemed, retired or otherwise become
payable; provided, however, that in any such case the cash or other
consideration is to be delivered to the Custodian. Notwithstanding the
foregoing, the Custodian shall have no responsibility to the Fund for
monitoring or ascertaining any call, redemption or retirement dates with
respect to any put bonds which are owned by the Fund and held by the
Custodian or its nominee, nor shall the Custodian have any responsibility
or liability to the Fund for any loss by the Fund for any missed payment or
other default resulting therefrom unless the Custodian received timely
notification from the Fund specifying the time, place and manner for the
presentment of any such put bond owned by the Fund and held by the
Custodian or its nominee. The Custodian shall not be responsible and
assumes no liability to the Fund for the accuracy or completeness of any
notification the Custodian may furnish to the Fund with respect to put
bonds;
8. Deliver Securities owned by the Fund to the issuer thereof, or its
agent, for transfer into the name of the Fund or into the name of any
nominee or nominee of the Custodian or into the name or nominee name of any
agent appointed pursuant to Section 10(f) or into the name or nominee name
of any sub-custodian appointed pursuant to Section 10(e); or for exchange
for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units; provided,
however, that in any such case, the new Securities are to be delivered to
the Custodian;
9. Deliver Securities owned by the Fund to the broker for examination in
accordance with "street delivery" custom;
10. Deliver Securities owned by the Fund 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 National Association
of Securities Dealers, Inc. (the "NASD"), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange, or of any
6
<PAGE>
similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
11. Deliver Securities owned by the Fund 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;
12. Deliver Securities owned by the Fund 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;
13. Deliver Securities owned by the Fund for delivery as security in
connection with any borrowings by the Fund requiring a pledge of Fund
assets, but only against receipt of amounts borrowed; and
14. Deliver Securities owned by the Fund for any other proper business
purpose, but only upon receipt of, in addition to Written Instructions, a
certified copy of a resolution of the Board of Directors signed by an
Authorized Person and certified by the Secretary of the Fund 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 business
purpose, and naming the person or persons to whom delivery of such
Securities shall be made.
(h) Endorsement and Collection of Checks, Etc. The Custodian is hereby
authorized to endorse and collect all checks, drafts or other orders for the
payment of money received by the Custodian for the account of the Fund;
provided, however, that the Custodian shall not be liable for any money, whether
or not represented by any check, draft or other instrument for the payment of
money, received by it on behalf of the Fund until the Custodian actually
receives and collects such money directly or by the final crediting of the
account representing the Fund's interest in the Book-Entry System or a
Depository.
5. Purchase and Sale of Investments of the Fund.
---------------------------------------------
(a) Promptly after each purchase of Securities for the Fund, the Fund shall
deliver to the Custodian (i) with respect to each purchase of Securities which
are not Money Market Securities, Written Instructions, and (ii) with respect to
each purchase of Money Market Securities, either Written Instructions or Oral
Instructions, in either case specifying with respect to each purchase: (1) the
name of the issuer and the title of the Securities; (2) the number of shares or
the principal amount purchased and accrued interest, if any; (3) the date of
purchase and settlement; (4) the purchase price per unit; (5) the total amount
payable upon such purchase; (6) the name of the person from whom or the broker
through whom the purchase was made, if any; (7) whether or not such purchase is
to be settled through the Book-Entry System or the
7
<PAGE>
Depository; and (8) whether the Securities purchased are to be deposited in the
Book-Entry System or the Depository. The Custodian shall receive the Securities
purchased by or for the Fund and upon receipt of such Securities shall pay out
of the moneys held for the account of the Fund the total amount payable upon
such purchase; provided that the same conforms to the total amount payable as
set forth in such Written Instructions or Oral Instructions.
(b) Promptly after each sale of Securities owned by the Fund, the Fund
shall deliver to the Custodian (i) with respect to each sale of Securities which
are not Money Market Securities, Written Instructions, and (ii) with respect to
each sale of Money Market Securities, either Written Instructions or Oral
Instructions, in either case specifying with respect to such sale: (1) the name
of the issuer and the title of the Securities; (2) the number of shares or
principal amount sold, and accrued interest, if any; (3) the date of sale; (4)
the sale price per unit; (5) the total amount payable to the Fund upon such
sale; (6) the name of the broker through whom or the person to whom the sale was
made; and (7) whether or not such sale is to be settled through the Book-Entry
System or a Depository. The Custodian shall deliver or cause to be delivered the
Securities to the broker or other person designated by the Fund upon receipt of
the total amount payable to the Fund upon such sale; provided that the same
conforms to the total amount payable to the Fund as set forth in such Written or
such Oral Instructions. Subject to the foregoing, the Custodian may accept
payment in such form as shall be satisfactory to it, and may deliver Securities
and arrange for payment in accordance with the customs prevailing among dealers
in securities.
6. Lending of Securities.
----------------------
Within 24 hours after each loan of Securities by the Fund as disclosed in
its Prospectus, the Fund shall deliver or cause to be delivered to the Custodian
Written Instructions specifying with respect to each such loan: (1) the name of
the issuer and the title of the Securities; (2) the number of shares or the
principal amount loaned; (3) the date of the loan and delivery; (4) the total
amount to be delivered to the Custodian, including the amount of cash collateral
and the premium, if any, separately identified; (5) the name of the broker,
dealer or financial institution to which the loan was made; and (6) whether the
Securities loaned are to be delivered through the Book-Entry System or a
Depository.
Promptly after each termination of a loan of Securities, the Fund shall
deliver to the Custodian Written Instructions specifying with respect to each
such loan termination and return of Securities: (1) the name of the issuer and
the title of the Securities to be returned; (2) the number of shares or the
principal amount to be returned; (3) the date of termination; (4) the total
amount to be delivered by the Custodian (including the cash collateral for such
Securities minus any offsetting credits as described in said Written
Instructions); (5) the name of the broker, dealer or financial institution from
which the Securities will be returned; and (6) whether such return is to be
effected through the Book-Entry System or a Depository. The Custodian shall
receive all Securities returned from the broker, dealer or financial institution
to which such Securities were loaned and upon receipt thereof shall pay, out of
the moneys held for the account of the Fund, the total amount payable upon such
return of Securities as set forth in the Written Instructions. Securities
returned to the Custodian shall be held as they were prior to such loan.
8
<PAGE>
7. Payment of Dividends or Distributions.
--------------------------------------
(a) The Fund shall furnish to the Custodian a copy of the resolution of the
Board of Directors of the Fund certified by the Secretary or Assistant Secretary
(i) authorizing the declaration of dividends or distributions with respect to
the Fund on a specified periodic basis and authorizing the Custodian to rely on
Oral or Written Instructions specifying the date of the declaration of such
dividend or distribution, the date of payment thereof, the record date as of
which shareholders entitled to payment shall be determined and the amount
payable per share to the shareholders of record as of the record date, or (ii)
setting forth the date of declaration of any dividend or distribution by the
Fund, the date of payment thereof, the record date as of which shareholders
entitled to payment shall be determined and the amount payable per share to the
shareholders of record as of the record date.
(b) Prior to the payment date specified in such resolution, Oral
Instructions or Written Instructions, as the case may be, the Fund shall deliver
to the Custodian Oral Instructions or Written Instructions specifying the total
amount payable to the Transfer Agent.
(c) Upon the payment date specified in such resolution, Oral Instructions
or Written Instructions, as the case may be, the Custodian shall pay to the
Transfer Agent out of monies specifically allocated to and held for the account
of the Fund the total amount payable to the Transfer Agent.
8. Indebtedness.
-------------
(a) The Fund will cause to be delivered to the Custodian by any bank
(excluding the Custodian) from which the Fund borrows money using Securities as
collateral for such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such bank will loan to
the Fund against delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian Written or Oral Instructions stating with
respect to each such borrowing: (1) the name of the bank, (2) the amount and
terms of the borrowing, which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Fund, or other loan agreement;
(3) the time and date, if known, on which the loan is to be entered into (the
"borrowing date"); (4) the date on which the loan becomes due and payable; (5)
the total amount payable to the Fund on the borrowing date; (6) the market value
of Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities; (7) whether the Custodian is to deliver such collateral
through the Book-Entry System or a Depository; and (8) a statement that such
loan is in conformance with the 1940 Act and the Fund's Prospectus.
(b) Upon receipt of the Written or Oral Instructions referred to in
subparagraph (a) above, the Custodian shall deliver on the borrowing date the
specified collateral and the executed promissory note, if any, against delivery
by the lending bank of the total amount of the loan payable, provided that the
same conforms to the total amount payable as set forth in the Written or Oral
Instructions. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall
9
<PAGE>
deliver as additional collateral in the manner directed by the Fund from time to
time such Securities as may be specified in Written or Oral Instructions to
collateralize further any transaction described in this Section 8. The Fund
shall cause all Securities released from collateral status to be returned
directly to the Custodian, and the Custodian shall receive from time to time
such return of collateral as may be tendered to it. In the event that the Fund
fails to specify in Written or Oral Instructions all of the information required
to by this Section 8, the Custodian shall not be under any obligation to deliver
any Securities or to seek the return of the collateral; provided, however, that
the Custodian shall promptly notify the Fund of any information required by this
Section 8 and not specified in Written or Oral Instructions. Collateral returned
to the Custodian shall be held hereunder as it was prior to being used as
collateral.
9. Persons Having Access to Assets of the Fund.
--------------------------------------------
(a) No Director, employee or agent of the Fund, and no officer, director,
employee or agent of the Fund's investment adviser, shall have physical access
to the assets of the Fund held by the Custodian or be authorized or permitted to
withdraw any investments of the Fund, nor shall the Custodian deliver any assets
of the Fund to any such person. No officer, director, employee or agent of the
Custodian who holds any similar position with the Fund or its investment adviser
shall have access to the assets of the Fund.
(b) Nothing in this Section shall prohibit any officer, employee or agent
of the Fund, or any officer, director, employee or agent of the Fund's
investment adviser, from giving Oral Instructions or Written Instructions to the
Custodian or executing a certificate so long as it does not result in delivery
of or access to assets of the Fund as prohibited by paragraph (a) of this
Section.
10. Concerning the Custodian.
-------------------------
(a) Standard of Conduct. Except as otherwise provided herein, neither the
Custodian nor its nominee shall be liable for any loss or damage, including
counsel fees, resulting from its action or omission to act or otherwise, except
for any such loss or damage arising out of its own negligence, or willful
misconduct. The Custodian may, with respect to any questions of law, apply for
and obtain the advice and opinion of counsel to the Fund (at the expense of the
Fund) or of its own counsel and shall be fully protected with respect to
anything done or omitted by it in good faith in conformity with such advise or
opinion. The Custodian shall be liable to the Fund for any loss or damage
resulting from the use of the Book-Entry System or a Depository or from the use
of any sub-custodian or agent pursuant to (e) or (f) below, arising by reason of
any negligence, misfeasance or misconduct on the part of the Custodian or any of
its employees, sub-custodians or agents.
(b) Limit of Duties. Without limiting the generality of the foregoing, the
Custodian shall be under no obligation to inquire into, and shall not be liable
for:
1. The validity of the issue of any Securities purchased by the Fund, the
legality of the purchase thereof or the propriety of the amount paid
therefor;
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<PAGE>
2. The legality of the sale of any Securities by the Fund or the propriety
of the amount for which the same are sold;
3. The legality of the issue or sale of any Shares, or the sufficiency of
the amount to be received therefor;
4. The legality of the repurchase of any Shares, or the propriety of the
amount paid therefor;
5. The legality of the declaration or payment of any dividend or other
distribution of the Fund; or
6. The legality of any borrowing for temporary or emergency purposes.
(c) No Liability Until Receipt. The Custodian shaft not be liable for, or
considered to the Custodian of, any money, whether or not represented by any
check, draft, or other instrument for the payment of money received by it on
behalf of the Fund until the Custodian actually receives and collects such money
directly or by the final crediting of the account representing the Fund's
interest in the Book-Entry System or a Depository.
(d) Amounts Due from Transfer Agent. The Custodian shall not be under any
duty or obligation to take action to effect collection of any amount due to the
Fund from the Transfer Agent nor to take any action to effect payment or
distribution by the Transfer Agent of any amount paid by the Custodian to the
Transfer Agent in accordance with this Agreement.
(e) Collection Where Payment Refused. The Custodian shall not be under any
duty or obligation to take action to effect collection of any amount, if the
Securities upon which such amount is payable are in default, or if payment is
refused after due demand or presentation, unless and until (i) it shall be
directed to take such action by Written Instructions and (ii) it shall be
assured to its satisfaction of reimbursement of its costs and expenses in
connection with any such action.
(f) Appointment of Sub-Custodians. The Custodian may appoint one or more
qualified institutions, including but not limited to banking institutions, to
act as Depository or Depositories or as Sub-Custodian or Sub-Custodians of
Securities and monies at any time owned by the Fund, upon terms and conditions
specified in a Board Resolution, the terms of which have been mutually agreed
upon from time to time by the Custodian and the Fund. The Custodian shall use
reasonable care in selecting any such Depository and/or Sub-Custodian and shall
oversee the maintenance of any Securities or monies of the Fund by the
Sub-Custodian.
(g) 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 1940 Act to act as a custodian, as its agent
to carry out such of the provisions of this Agreement as the Custodian may from
time to time direct.
(h) No Duty to Ascertain Authority. The Custodian shall not be under any
duty or obligation to ascertain whether any Securities at any time delivered to
or held by it for
11
<PAGE>
the Fund are such as may properly be held by the Fund under the provisions of
its Charter and the Prospectus.
(i) Payments to the Custodian. The Custodian may charge against any money
held by it for the account of the Fund any expenses incurred by the Custodian in
the performance of its duties pursuant to this Agreement with respect to the
Fund. The Custodian shall also be entitled to charge against any money of the
Fund held by it the amount of any loss, damage, liability or expense incurred
with respect to the Fund including counsel fees, for which it shall be entitled
to reimbursement under the provisions of this Agreement.
(j) Reliance on Certificate and Instructions. The Custodian shall be
entitled to rely upon any certificate, notice or other instrument in writing
received by the Custodian and reasonably believed by the Custodian to be genuine
and to be signed by an Authorized Person. The Custodian shall be entitled to
rely upon any Written Instructions or Oral Instructions actually received by the
Custodian pursuant to the applicable Sections of this Agreement and reasonably
believed by the Custodian to be genuine and to be given by an Authorized Person.
The Fund agrees to forward to the Custodian Written Instructions from an
Authorized Person confirming such Oral Instructions in such manner so that such
Written Instructions are received by the Custodian, whether by hand delivery,
telex or otherwise, by the close of business on the same day that such Oral
Instructions are given to the Custodian. The Fund agrees that the fact that such
confirming instructions are not received by the Custodian shall in no way affect
the validity of the transactions or the enforceability of the transactions
hereby authorized by the Fund. The Fund agrees that the Custodian shall incur no
liability to the Fund in acting upon Oral Instructions given to the Custodian
hereunder concerning such transactions, provided such instructions reasonably
appear to have been received from a duly Authorized Person.
11. Records.
--------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Agreement in such a manner as will meet
the obligations of the Fund under the 1940 Act, with particular attention to
Section 31 thereof, Rules 31a-1 and 31a-2 thereunder, applicable federal and
state tax laws and any law or administrative rules or procedures which may be
applicable to the Fund. All such records shall be the property of the Fund and
shall at all times during 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.
12. Opinion of Fund's Independent Accountants.
------------------------------------------
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 accountant with respect to the activities hereunder in connection
with the preparation of Amendments to the Fund's Registration Statement, and
Form N-SAR or other reports to the Securities and Exchange Commission, and with
respect to any other requirements of such Commission.
12
<PAGE>
13. Reports to Fund by Independent Public Accountants.
--------------------------------------------------
The Custodian shall provide the Fund with reports by the independent public
accountants on the accounting system, internal accounting controls and
procedures for safeguarding Securities and monies held by it, including
securities deposited and/or maintained in a Depository or Book-Entry System,
relating to the services provided by the Custodian under this Agreement.
14. Miscellaneous.
--------------
(a) Annexed hereto as Appendix A is a certification signed by the Secretary
or an Assistant Secretary of the Fund setting forth the names and the signatures
of the present Authorized Persons. The Fund agrees to furnish to the Custodian a
new certification in similar form in the event that any such present Authorized
Person ceases to be such an Authorized Person or in the event that other or
additional Authorized Persons are elected or appointed. Until such new
certification shall be received, the Custodian shall be fully protected in
acting under the provisions of this Agreement upon Oral Instructions or
signatures of the present Authorized Persons as set forth in the last delivered
certification.
(b) Annexed hereto as Appendix B is a certification signed by the Secretary
of an Assistant Secretary of the Fund setting forth the names and the signatures
of the present officers of the Fund. The Fund agrees to furnish to the Custodian
a new certification in similar form in the event that any such present officer
ceases to be an officer of the Fund or in the event that other or additional
officers are elected or appointed. Until such new certification shall be
received, the Custodian shall be fully protected in acting under the provisions
of this Agreement upon the signature of the officer as set forth in the last
delivered certification.
(c) Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given of
addresses to the Custodian and mailed or delivered to it at its offices at 31
St. James Avenue, Boston, Massachusetts 02116, Attention: Mert Thompson, or at
such other place as the Custodian may from time to time designate in writing.
(d) Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund, shall be sufficiently given if addressed
to the Fund and mailed or delivered to at its offices at 301 E. Colorado Blvd.,
Suite 720, Pasadena, California, 91101, Attention: Robert T. Flaherty, or at
such other place as the Fund may from time to time designate in writing.
(e) This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties with the same formality as this
Agreement.
(f) This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Fund without the written consent of the
Custodian, or by the Custodian without the written resolution of the Board of
Directors of the Fund, and any attempted assignment without such written consent
shall be null and void.
13
<PAGE>
(g) This Agreement shall be construed in accordance with the laws of The
Commonwealth of Massachusetts.
(h) 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 agreement.
(i) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
15. Termination of Agreement.
-------------------------
(a) This Agreement shall become effective on the date hereof and shall
remain in force from year to year so long as such continuance is specifically
approved at least annually by the Board of Directors of the Fund or unless
terminated pursuant to the provisions of sub-section (b) of this Section 15.
(b) This Agreement may be terminated at any time without payment of any
penalty, upon 60 days' prior written notice, by vote of the holders of a
majority of the outstanding voting securities of the Fund, by vote of a majority
of the Board Of Directors of the Fund, or by the Custodian. In the event such
notice is given by the Fund, it shall be accompanied by a certified resolution
of the Board of Directors of the Fund, electing a successor custodian or
custodians. In the event such notice is given by the Custodian, the Fund shall,
on or before the termination date, deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, designating a successor
custodian or custodians. In the absence of such designation, the Custodian may
designate a successor custodian which shall be qualified to so act under the
1940 Act. under the 1940 Act. If the Fund fails to designate a successor
custodian designated by the Custodian, the Custodian shall thereby be relieved
of all duties and responsibilities pursuant to this Agreement.
(c) Upon the date set forth in such notice under this Section 15, this
Agreement shall terminate to the extent specified in such notice, and the
Custodian shall upon receipt of a notice of acceptance by the successor
custodian on that date deliver directly to the successor custodian all
Securities and monies then held by the Custodian, after deducting all fees,
expenses and other amounts for the payment or reimbursement of which it shall
then be entitled.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized officers as of the date
first set forth above.
PREFERRED INCOME MANAGEMENT
FUND INCORPORATED
By: /s/ Donald F. Crumrine
------------------------------
Donald F. Crumrine
Title: Vice President and Secretary
14
<PAGE>
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By: /s/
------------------------------
Title:
15
<PAGE>
SCHEDULE A
FEE AGREEMENT
Agreement, dated as of February 11, 1993 among THE BOSTON COMPANY ADVISORS,
INC., a Massachusetts corporation ("Boston Advisors"), BOSTON SAFE DEPOSIT AND
TRUST COMPANY, a Massachusetts trust company ("Boston Safe"), and PREFERRED
INCOME MANAGEMENT FUND INCORPORATED, a Maryland corporation (the "Fund").
In consideration of the services which Boston Advisors shall perform for
the Fund pursuant to an Administration Agreement dated Feb. 11, 1993, and the
services which Boston Safe shall perform for the Fund pursuant to a Custody
Agreement dated Feb. 11, 1993 the Fund hereby agrees to pay Boston Advisors an
aggregate monthly fee, on behalf of Boston Advisors and Boston Safe, under the
foregoing agreements at the annual rate of:
0.21 of 1.00% of the value of the Fund's average monthly net assets which,
for the purposes of calculating such fee, will be deemed to be the average
monthly value of the Fund's total assets minus the sum of the Fund's
liabilities (excluding aggregate liquidation preference on the outstanding
shares of the Fund's auction rate preferred stock and accumulated
dividends, if any, thereon).
This Agreement may be executed in any number of counterparts each of which
shall be deemed to be an original and which collectively shall be deemed to
constitute only one instrument.
The fee for the period from the date the Registration Statement is declared
effective by the Securities and Exchange Commission to the end on the month
during which the Registration Statement is declared effective shall be prorated
according to the proportion that such period bears to the full monthly period.
Upon any termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which such
period bears to the full monthly period and shall be payable upon the date of
termination of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered by their duly authorized officers, as of the day and
year first above written.
PREFERRED INCOME MANAGEMENT
FUND INCORPORATED
By:
------------------------------
Title:
THE BOSTON COMPANY ADVISORS, INC.
By:
------------------------------
Title:
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By:
------------------------------
Title:
<PAGE>
CUSTODY AGREEMENT
APPENDIX A
I, Lee D. Augsburger, Assistant Secretary of PREFERRED INCOME MANAGEMENT
FUND INCORPORATED (the "Fund"), do hereby certify that the following individuals
have been duly authorized by the Board of Directors of the Fund in conformity
with the Fund's Articles of Incorporation and By-Laws to give Oral Instructions
and Written Instructions on behalf of the Fund to Boston Safe Deposit and Trust
Company as Custodian: Roland Caron and Louise O'Leary, and the signatures set
forth opposite their respective names are their true and correct signatures:
Name Signature
Roland Caron /s/ Roland Caron
-----------------------------
Louise O'Leary /s/ Louise O'Leary
-----------------------------
/s/ Lee D. Augsburger
-----------------------------
Lee D. Augsburger
Assistant Secretary
<PAGE>
CUSTODY AGREEMENT
APPENDIX B
I, Lee D. Augsburger, Assistant Secretary of PREFERRED INCOME MANAGEMENT
FUND INCORPORATED (the "Fund"), do hereby certify that the following individuals
serve in the following positions with the Fund and each individual has been duly
elected or appointed by the Board of Directors of the Fund to each such position
and qualified therefor in conformity with the Fund's Articles of the
Incorporation and By-Laws, and the signature set forth opposite their respective
names are their true and correct signatures:
<TABLE>
<CAPTION>
Name Position Signature
---- -------- ---------
<S> <C> <C>
Robert T. Flaherty Chairman of the Board /s/ Robert T. Flaherty
of Directors -----------------------------
President and Chief
Executive Officer
Donald F. Crumrine Chief Financial /s/ Donald F. Crumrine
Officer, Chief -----------------------------
Accounting Officer,
Vice President and
Secretary
Robert M. Ettinger Vice President and /s/ Robert M. Ettinger
Assistant Treasurer -----------------------------
Peter C. Stimes Vice President, /s/ Peter C. Stimes
Treasurer and Assistant -----------------------------
Secretary
Francis J. McNamara, III Assistant Secretary /s/ Francis J. McNamara, III
-----------------------------
Lee D. Augsburger Assistant Secretary /s/ Lee D. Augsburger
-----------------------------
Vincent Nave Assistant Treasurer /s/ Vincent Nave
-----------------------------
Richard H. Rose Assistant Treasurer /s/ Richard H. Rose
-----------------------------
/s/ Lee D. Augsburger
Lee D. Augsburger
Assistant Secretary
</TABLE>
<PAGE>
APPENDIX C
PREFERRED INCOME MANAGEMENT FUND INCORPORATED
Out-of-Pocket Expenses
Custody Agreement
--------------------------------------------------------------------------------
Out of pocket expenses include, but are not limited to, the following:
-Telephone and telecommunications charges
-Postage
-Insurance
-Single Audit Letter
-Shipping, certified and overnight mail
-Pricing and Corporate Action Services
<PAGE>
APPENDIX D
PREFERRED INCOME MANAGEMENT FUND INCORPORATED
Transaction Costs
Custody Agreement
--------------------------------------------------------------------------------
Type Per Transaction
---- ---------------
DTC/Fed Book Entry $12
Repurchase Agreement - depository eligible $12
Repurchase Agreement - non-depository eligible $17
Options/Futures $25
Physical Settlement $30
Commercial Paper $30
Euro CD's (London) $30
<PAGE>
Exhibit (k)(1)
TRANSFER AGENCY AND REGISTRAR AGREEMENT
AGREEMENT dated as of February 11, 1993 between PREFERRED INCOME MANAGEMENT
FUND INCORPORATED (the "Fund"), a corporation organized under the laws of
Maryland and having its principal place of business at 301 E. Colorado
Boulevard, Pasadena, California 91101, and THE SHAREHOLDER SERVICES GROUP, INC.
(MA) (the "Transfer Agent"), a corporation organized under the laws of
Massachusetts and having its principal offices at One Exchange Place, 53 State
Street, Boston, Massachusetts 02109.
W I T N E S S E T H
- - - - - - - - - -
That for and in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and the Transfer Agent agree as
follows:
1. Definitions. Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the following
meanings:
(a) "Articles of Incorporation" shall mean the Articles of Incorporation,
Declaration of Trust, Partnership Agreement, or similar organizational document
as the case may be, of the Fund as the same may be amended from time to time.
(b) "Authorized Person" shall be deemed to include any person, whether or
not such person is an officer or employee of the Fund, duly authorized to give
Oral Instructions or Written Instructions on behalf of the Fund as indicated in
a certificate furnished to the Transfer Agent pursuant to Section 4(c) hereof as
may be received by the Transfer Agent from time to time.
(c) "Board of Directors" shall mean the Board of Directors, Board of
Trustees or, if the Fund is a limited partnership, the General Partner(s) of the
Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange Commission.
(e) "Custodian" refers to any custodian or subcustodian of securities and
other property which the Fund may from time to time deposit, or cause to be
deposited or held under the name or account of such a custodian pursuant to a
Custodian Agreement.
(f) "Fund" shall mean the entity executing this Agreement, and if it is a
series fund, as such term is used in the 1940 Act, such term shall mean each
series of the Fund hereafter created, except that appropriate documentation with
respect to each series must be presented to the Transfer Agent before this
Agreement shall become effective with respect to each such series.
(g) "1940 Act" shall mean the Investment Company Act of 1940.
<PAGE>
(h) "Oral Instructions" shall mean instructions, other than Written
Instructions, actually received by the Transfer Agent from a person reasonably
believed by the Transfer Agent to be an Authorized Person.
(i) "Prospectus" shall mean the most recently dated Fund Prospectus,
including any supplements thereto, which has become effective under the
Securities Act of 1933 and the 1940 Act.
(j) "Shares" refers collectively to such shares of common stock of the Fund
as may be issued from time to time.
(k) "Shareholder" shall mean a holder of Shares.
(l) "Written Instructions" shall mean a written communication signed by a
person reasonably believed by the Transfer Agent to be an Authorized Person and
actually received by the Transfer Agent. Written Instructions shall include
manually executed originals and authorized electronic transmissions, including
telefacsimile of a manually executed original or other process.
2. Appointment of the Transfer Agent. The Fund hereby appoints and
constitutes the Transfer Agent as transfer agent, registrar and dividend
disbursing agent for Shares of the Fund, as shareholder servicing agent for the
Fund, and as plan agent under the Fund's Dividend Reinvestment and Cash Purchase
Plan. The Transfer Agent accepts such appointments and agrees to perform the
duties hereinafter set forth.
3. Compensation.
(a) The Fund will compensate or cause the Transfer Agent to be compensated
for the performance of its obligations hereunder in accordance with the fees set
forth in the Fee Agreement between the Fund and the Transfer Agent dated
February 11, 1993 (the "Fee Agreement") and attached hereto as Schedule A and
incorporated herein. The Transfer Agent will transmit an invoice to the Fund as
soon as practicable after the end of each calendar month, and the Fund will pay
to the Transfer Agent the amount of such invoice within fifteen (15) days after
the Fund's receipt of the invoice.
In addition, the Fund agrees to pay, and will be billed separately for,
out-of-pocket expenses incurred by the Transfer Agent in the performance of its
duties hereunder. Out-of-pocket expenses shall include, but shall not be limited
to, the items specified in the written schedule of out-of-pocket charges annexed
hereto as Schedule B and incorporated herein. Unspecified out-of-pocket expenses
shall be limited to those out-of-pocket expenses reasonably incurred by the
Transfer Agent in the performance of its obligations hereunder. Reimbursement by
the Fund for expenses incurred by the Transfer Agent in any month shall be made
as soon as practicable but no later than 15 days after the receipt of an
itemized bill from the Transfer Agent.
(b) Any compensation agreed to hereunder may be adjusted from time to time
by attaching a written amendment to the Fee Agreement executed and dated by the
parties to the Fee Agreement.
-2-
<PAGE>
4. Documents. In connection with the appointment of the Transfer Agent the
Fund shall deliver or cause to be delivered to the Transfer Agent the following
documents on or before the date this Agreement goes into effect, but in any case
within a reasonable period of time for the Transfer Agent to prepare to perform
its duties hereunder:
(a) If applicable, specimens of the certificates for Shares of the Fund;
(b) All account application forms and other documents relating to
Shareholder accounts or to any plan, program or service offered by the Fund;
(c) A signature card bearing the signatures of any officer of the Fund or
other Authorized Person who will sign Written Instructions or is authorized to
give Oral Instructions;
(d) A certified copy of the Articles of Incorporation, as amended;
(e) A certified copy of the By-laws of the Fund, as amended;
(f) A copy of the resolution of the Board of Directors authorizing the
execution and delivery of this Agreement;
(g) A certified list of Shareholders of the Fund with the name, address and
taxpayer identification number of each Shareholder, and the number of Shares of
the Fund held by each, certificate numbers and denominations (if any
certificates have been issued), lists of any accounts against which stop
transfer orders have been placed, together with the reasons therefore, and the
number of Shares redeemed by the Fund; and
(h) An opinion of counsel for the Fund with respect to the validity of the
Shares and the status of such Shares under the Securities Act of 1933, as
amended.
5. Further Documentation. The Fund will also furnish the Transfer Agent
with copies of the following documents promptly after the same shall become
available:
(a) each resolution of the Board of Directors authorizing the issuance of
Shares;
(b) any registration statements filed on behalf of the Fund and all
pre-effective and post-effective amendments thereto filed with the Commission;
(c) a certified copy of each amendment to the Articles of Incorporation or
the By-laws of the Fund;
(d) certified copies of each resolution of the Board of Directors or other
authorization designating Authorized Persons; and
(e) such other certificates, documents or opinions as the Transfer Agent
may reasonably request in connection with the performance of its duties
hereunder.
-3-
<PAGE>
6. Representations of the Fund. The Fund represents to the Transfer Agent
that all outstanding Shares are validly issued, fully paid and non-assessable.
When Shares are hereafter issued in accordance with the terms of the Fund's
Articles of Incorporation and its Prospectus, such Shares shall be validly
issued, fully paid and non-assessable.
7. Distributions Payable in Shares. In the event that the Board of
Directors of the Fund shall declare a distribution payable in Shares, the Fund
shall deliver or cause to be delivered to the Transfer Agent written notice of
such declaration signed on behalf of the Fund by an officer thereof, upon which
the Transfer Agent shall be entitled to rely for all purposes, certifying (i)
the identity of the Shares involved, (ii) the number of Shares involved, and
(iii) that all appropriate action has been taken.
8. Duties of the Transfer Agent. The Transfer Agent shall be responsible
for administering and/or performing those functions typically performed by a
transfer agent; for acting as service agent in connection with dividend and
distribution functions and as plan agent under the Fund's Dividend Reinvestment
and Cash Purchase Plan; and for performing shareholder account and
administrative agent functions in connection with the issuance, transfer and
redemption or repurchase (including coordination with the Custodian) of Shares
in accordance with the terms of the Prospectus and applicable law. The operating
standards and procedures to be followed shall be determined from time to time by
agreement between the Fund and the Transfer Agent and shall initially be as
described in Schedule C attached hereto. In addition, the Fund shall deliver to
the Transfer Agent all notices issued by the Fund with respect to the Shares in
accordance with and pursuant to the Articles of Incorporation or By-laws of the
Fund or as required by law and shall perform such other specific duties as are
set forth in the Articles of Incorporation including the giving of notice of any
special or annual meetings of shareholders and any other notices required
thereby.
9. Record Keeping and Other Information. The Transfer Agent shall create
and maintain all records required of it pursuant to its duties hereunder and as
set forth in Schedule C in accordance with all applicable laws, rules and
regulations, including records required by Section 31(a) of the 1940 Act. All
records shall be available during regular business hours for inspection and use
by the Fund. Where applicable, such records shall be maintained by the Transfer
Agent for the periods and in the places required by Rule 3la-2 under the 1940
Act.
Upon reasonable notice by the Fund, the Transfer Agent shall make available
during regular business hours such of its facilities and premises employed in
connection with the performance of its duties under this Agreement for
reasonable visitation by the Fund, or any person retained by the Fund as may be
necessary for the Fund to evaluate the quality of the services performed by the
Transfer Agent pursuant hereto.
10. Other Duties. In addition to the duties set forth in Schedule C, the
Transfer Agent shall perform such other duties and functions, and shall be paid
such amounts therefor, as may from time to time be agreed upon in writing
between the Fund and the Transfer Agent. The compensation for such other duties
and functions shall be reflected in a written amendment to Schedule A or
Schedule B and the duties and functions shall be reflected in an amendment to
Schedule C, both dated and signed by authorized persons of the parties hereto.
-4-
<PAGE>
11. Reliance by Transfer Agent; Instructions.
(a) The Transfer Agent will have no liability when acting upon Written or
Oral Instructions reasonably believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice of
any change of authority of any person until receipt of a Written Instruction
thereof from the Fund pursuant to Section 4(c). The Transfer Agent will also
have no liability when processing Share certificates which it reasonably
believes to bear the proper manual or facsimile signatures of the officers of
the Fund and the proper countersignature of the Transfer Agent.
(b) At any time, the Transfer Agent may apply to any Authorized Person of
the Fund for Written Instructions and may seek advice from legal counsel for the
Fund, or its own legal counsel, with respect to any matter arising in connection
with this Agreement, and it shall not be liable for any action taken or not
taken or suffered by it in good faith in accordance with such Written
Instructions or in accordance with the opinion of counsel for the Fund or for
the Transfer Agent. Written Instructions requested by the Transfer Agent will be
provided by the Fund within a reasonable period of time. In addition, the
Transfer Agent, its officers, agents or employees, shall accept Oral
Instructions or Written Instructions given to them by any person representing or
acting on behalf of the Fund only if said representative is an Authorized
Person. The Fund agrees that all Oral Instructions shall be followed within one
business day by confirming Written Instructions, and that the Fund's failure to
so confirm shall not impair in any respect the Transfer Agent's right to rely on
Oral Instructions. The Transfer Agent shall have no duty or obligation to
inquire into, nor shall the Transfer Agent be responsible for, the legality of
any act done by it upon the request or direction of a person reasonably believed
by the Transfer Agent to be an Authorized Person.
(c) Notwithstanding any of the foregoing provisions of this Agreement, the
Transfer Agent shall be under no duty or obligation to inquire into, and shall
not be liable for: (i) the legality of the issuance or sale of any Shares or the
sufficiency of the amount to be received therefor; (ii) the legality of the
redemption of any Shares, or the propriety of the amount to be paid therefor;
(iii) the legality of the declaration of any dividend by the Board of Directors,
or the legality of the issuance of any Shares in payment of any dividend; or
(iv) the legality of any recapitalization or readjustment of the Shares.
12. Acts of God, etc. The Transfer Agent will not be liable or responsible
for delays or errors by acts of God or by reason of circumstances beyond its
control, including acts of civil or military authority, national emergencies,
labor difficulties, mechanical breakdown, insurrection, war, riots, or failure
or unavailability of transportation, communication or power supply, fire, flood
or other catastrophe.
13. Duty of Care and Indemnification. Each party hereto (the "Indemnifying
Party") will indemnify the other party (the "Indemnified Party") against and
hold it harmless from any and all losses, claims, damages, liabilities or
expenses of any sort or kind (including reasonable counsel fees and expenses )
resulting from any claim, demand, action or suit or other proceeding (a "Claim")
unless such Claim has resulted from a negligent failure to act or omission to
act or bad faith of the Indemnified Party in the performance of its duties
hereunder. In addition, the Fund will indemnify the Transfer Agent against and
hold it harmless from any
-5-
<PAGE>
Claim, damages, liabilities or expenses (including reasonable counsel fees) that
is a result of: (i) any action taken in accordance with Written or Oral
Instructions, or any other instructions, or share certificates reasonably
believed by the Transfer Agent to be genuine and to be signed, countersigned or
executed, or orally communicated by an Authorized Person; (ii) any action taken
in accordance with written or oral advice reasonably believed by the Transfer
Agent to have been given by counsel for the Fund or its own counsel; or (iii)
any action taken as a result of any error or omission in any record (including
but not limited to magnetic tapes, computer printouts, hard copies and microfilm
copies) delivered, or caused to be delivered by the Fund to the Transfer Agent
in connection with this Agreement.
In any case in which the Indemnifying Party may be asked to indemnify or
hold the Indemnified Party harmless, the Indemnifying Party shall be advised of
all pertinent facts concerning the situation in question. The Indemnified Party
will notify the Indemnifying Party promptly after identifying any situation
which it believes presents or appears likely to present a claim for
indemnification against the Indemnifying Party although the failure to do so
shall not prevent recovery by the Indemnified Party. The Indemnifying Party
shall have the option to defend the Indemnified Party against any Claim which
may be the subject of this indemnification, and, in the event that the
Idemnifying Party so elects, such defense shall be conducted by counsel chosen
by the Indemnifying Party and satisfactory to the Indemnified Party, and
thereupon the Indemnifying Party shall take over complete defense of the Claim
and the Indemnified Party shall sustain no further legal or other expenses in
respect of such Claim. The Indemnified Party will not confess any Claim or make
any compromise in any case in which the Indemnifying Party will be asked to
provide indemnification, except with the Indemnifying Party's prior written
consent. The obligations of the parties hereto under this Section shall survive
the termination of this Agreement.
14. Consequential Damages. In no event and under no circumstances shall
either party under this Agreement be liable to the other party for consequential
or indirect loss of profits, reputation or business or any other special damages
under any provision of this Agreement or for any act or failure to act
hereunder.
15. Term and Termination.
(a) This Agreement shall be effective on the date first written above and
shall continue in effect from year to year so long as such continuance is
specifically approved at least annually by the Board of Directors of the Fund,
provided that it may be terminated by either party upon 90 days prior written
notice.
(b) In the event a termination notice is given by the Fund, it shall be
accompanied by a resolution of the Board of Directors, certified by the
Secretary of the Fund, designating a successor transfer agent or transfer
agents. Upon such termination and at the expense of the Fund, the Transfer Agent
will deliver to such successor a certified list of shareholders of the Fund
(with names and addresses), and all other relevant books, records,
correspondence and other Fund records or data in the possession of the Transfer
Agent, and the Transfer Agent will cooperate with the Fund and any successor
transfer agent or agents in the substitution process.
-6-
<PAGE>
16. Confidentiality. Both parties hereto agree that any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other party,
except as may be required by applicable law or at the request of the Commission
or other governmental agency. The parties further agree that a breach of this
provision would irreparably damage the other party and accordingly agree that
each of them is entitled, without bond or other security, to an injunction or
injunctions to prevent breaches of this provision.
17. Amendment. This Agreement may only be amended or modified by a written
instrument executed by both parties.
18. Subcontracting. The Fund agrees that the Transfer Agent may, in its
discretion, subcontract for certain of the services described under this
Agreement or the Schedules hereto; provided that the appointment of any such
Transfer Agent shall not relieve the Transfer Agent of its responsibilities
hereunder.
19. Miscellaneous.
(a) Notices. Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or the Transfer Agent, shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
Preferred Income Management Fund Incorporated
301 E. Colorado Blvd., Suite 720
Pasadena, California 91101
Attention: Robert T. Flaherty
To the Transfer Agent:
The Shareholder Services Group, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: Robert F. Radin, President
with a copy to TSSG Counsel.
(b) Successors. This Agreement shall extend to and shall be binding upon
the parties hereto, and their respective successors and assigns, provided,
however, that this Agreement shall not be assigned to any person other than a
person controlling, controlled by or under common control with the assignor
without the written consent of the other party, which consent shall not be
unreasonably withheld.
(c) Governing Law. This Agreement shall be governed exclusively by the laws
of the State of New York without reference to the choice of law provisions
thereof.
-7-
<PAGE>
Each party hereto hereby (i) agrees that the Supreme Court of New York sitting
in New York County shall have exclusive jurisdiction over any and all disputes
arising hereunder; (ii) consents to the personal jurisdiction of such court over
the parties hereto, hereby waiving any defense of lack of personal jurisdiction;
and (iii) appoints the person to whom notices hereunder are to be sent as agent
for service of process.
(d) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
(e) Captions. The captions of this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect.
(f) Use of Transfer Agent's Name. Fund shall not use the name of the
Transfer Agent in any Prospectus, Statement of Additional Information,
shareholders' report, sales literature or other material relating to the Fund in
a manner not approved prior thereto in writing; provided, that the Transfer
Agent need only receive notice of all reasonable uses of its name which merely
refer in accurate terms to its appointment hereunder or which are required by
any government agency or applicable law or rule. Notwithstanding the foregoing,
any reference to the Transfer Agent shall include a statement to the effect that
it is a wholly owned subsidiary of First Data Corporation.
(g) Use of Fund's Name. The Transfer Agent shall not use the name of the
Fund or material relating to the Fund on any documents or forms for other than
internal use in a manner not approved prior thereto in writing; provided, that
the Fund need only receive notice of all reasonable uses of its name which
merely refer in accurate terms to the appointment of the Transfer Agent or which
are required by any government agency or applicable law or rule.
(h) Independent Contractors. The parties agree that they are independent
contractors and not partners or co-venturers.
(i) Entire Agreement; Severability. This Agreement and the Schedules
attached hereto constitute the entire agreement of the parties hereto relating
to the matters covered hereby and supersede any previous agreements. If any
provision is held to be illegal, unenforceable or invalid for any reason, the
remaining provisions shall not be affected or impaired thereby.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
PREFERRED INCOME MANAGEMENT FUND
INCORPORATED
By: /s/ Donald F. Crumrine
------------------------------
Title: Donald F. Crumrine
Vice President and Secretary
THE SHAREHOLDER SERVICES
GROUP, INC.
By:
------------------------------
Title:
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
PREFERRED INCOME MANAGEMENT FUND
INCORPORATED
By:
------------------------------
Title:
THE SHAREHOLDER SERVICES
GROUP, INC.
By:
------------------------------
Title:
-10-
<PAGE>
FEE AGREEMENT
Agreement, dated as of February 11, 1993 among THE SHAREHOLDER SERVICES
GROUP, INC., a Massachusetts corporation ("TSSG"), and PREFERRED INCOME
MANAGEMENT FUND INCORPORATED, a Maryland corporation (the "Fund").
In consideration of the services which TSSG shall perform for the Fund
pursuant to the Fund's Transfer Agency and Registrar Agreement, the Fund hereby
agrees to pay a monthly fee to TSSG under the foregoing agreements as follows:
an annual fee equal to .04% (four basis points) of the value of the
Fund's average monthly net assets which for the purposes of
calculating such fee, will be deemed to be the average monthly value
of the Fund's total assets minus the sum of the Fund's liabilities
(excluding aggregate liquidation preference on the outstanding shares
of the Fund's auction rate preferred stock and accumulated dividends,
if any, thereon); provided, however, that if the value of the Fund's
average monthly net assets shall fall below $166 million, then the
annual rate of the fee shall equal .05% (five basis points) of the
value of the Fund's average monthly net assets.
The increase in the above fee if the Fund's average monthly net assets are
below $166 million is hereby waived by TSSG for the period from the date of the
Agreement to August 31, 1993.
IN WITNESS WHEREOF, the parties hereto have caused the instrument to be
duly executed and delivered by their duly authorized officers, as of the date
and year first written above.
THE SHAREHOLDER SERVICES
GROUP, INC.
By:
------------------------------
Title:
PREFERRED INCOME MANAGEMENT
FUND INCORPORATED
By: /s/ Donald F. Crumrine
------------------------------
Title: Donald F. Crumrine,
Vice President and Secretary
<PAGE>
B-1
Schedule B
OUT-OF-POCKET EXPENSES
----------------------
The Fund shall reimburse the Transfer Agent monthly for applicable
out-of-pocket expenses, including, but not limited to the following items:
o Microfiche/microfilm production
o Magnetic media tapes and freight
o Printing costs, including certificates, envelopes, checks and
stationery
o Postage (bulk, pre-sort, ZIP+4, barcoding, first class) direct pass
through to the Fund
o Due diligence mailings
o Telephone and telecommunication costs, including all lease,
maintenance and line costs
o Proxy solicitations, mailings and tabulations
o Daily & Distribution advice mailings
o Shipping, Certified and Overnight mail and insurance
o Year-end form production and mailings
o Terminals, communication lines, printers and other equipment and any
expenses incurred in connection with such terminals and lines
o Duplicating services
o Courier services
o Incoming and outgoing wire charges
o Federal Reserve charges for check clearance
o Record retention, retrieval and destruction costs, including, but not
limited to, exit fees charged by third party record keeping vendors
o Third party audit reviews
o Insurance
o Such other miscellaneous expenses reasonably incurred by the Transfer
Agent in performing its duties and responsibilities under this
Agreement
<PAGE>
B-2
The Fund agrees that postage and mailing expenses will be paid on the day
of or prior to mailing as agreed with the Transfer Agent. In addition, the Fund
will promptly reimburse the Transfer Agent for any other unscheduled expenses
incurred by the Transfer Agent whenever the Fund and the Transfer Agent mutually
agree that such expenses are not otherwise properly borne by the Transfer Agent
as part of its duties and obligations under the Agreement.
B-2
<PAGE>
C-1
Schedule C
DUTIES OF THE TRANSFER AGENT
----------------------------
1. Shareholder Information. The Transfer Agent or its agent shall maintain
a record of the number of Shares held by each holder of record which shall
include name, address, taxpayer identification and which shall indicate whether
such Shares are held in certificates or uncertificated form.
2. Shareholder Services. The Transfer Agent or its agent will investigate
all inquiries from Shareholders of the Fund relating to Shareholder accounts and
will respond to all communications from Shareholders and others relating to its
duties hereunder and such other correspondence as may from time to time be
mutually agreed upon between the Transfer Agent and the Fund. The Transfer Agent
shall provide the Fund with reports concerning shareholder inquiries and the
responses thereto by the Transfer Agent, in such form and at such time as are
agreed to by the Fund and the Transfer Agent.
3. Share Certificates.
(a) At the expense of the Fund, it shall supply the Transfer Agent or its
agent with an adequate supply of blank share certificates to meet the Transfer
Agent or its agent's requirements therefor. Such Share certificates shall be
properly signed by facsimile. The Fund agrees that, notwithstanding the death,
resignation, or removal of any officer of the Fund whose signature appears on
such certificates, the Transfer Agent or its agent may continue to countersign
certificates which bear such signatures until otherwise directed by Written
Instructions.
(b) The Transfer Agent or its agent shall issue replacement Share
certificates in lieu of certificates which have been lost, stolen or destroyed,
upon receipt by the Transfer Agent or its agent of properly executed affidavits
and lost certificate bonds, in form satisfactory to the Transfer Agent or its
agent, with the Fund and the Transfer Agent or its agent as obligees under the
bond.
(c) The Transfer Agent or its agent shall also maintain a record of each
certificate issued, the number of Shares represented thereby and the holder of
record. With respect to Shares held in open accounts or uncertified form, i.e.,
no certificate being issued with respect thereto, the Transfer Agent or its
agent shall maintain comparable records of the record holders thereof, including
their names, addresses and taxpayer identification. The Transfer Agent or its
agent shall further maintain a stop transfer record on lost and/or replaced
certificates.
4. Mailing Communications to Shareholder; Proxy Materials. The Transfer
Agent or its agent will address and mail to Shareholders of the Fund all reports
to Shareholders, dividend and distribution notices and proxy material for the
Fund's meetings of Shareholders. In connection with meetings of Shareholders,
the Transfer Agent or its agent will prepare Shareholder lists, mail and certify
as to the mailing of proxy materials, process and tabulate
<PAGE>
returned proxy cards, report on proxies voted prior to meetings, act as
inspector of election at meetings and certify Shares voted at meetings.
5. Dividend Reinvestment and Cash Purchase Plan. The Transfer Agent agrees
to perform the services required to be performed by the plan agent, as set forth
in the Fund's Dividend Reinvestment and Cash Purchase Plan.
6. Transfer and Repurchase.
(a) Requirements for Transfer or Repurchase of Shares. The Transfer Agent
or its agent shall process all requests to transfer or redeem Shares in
accordance with the transfer or repurchase procedures determined by the Fund.
The Transfer Agent or its agent will transfer or repurchase Shares upon
receipt of Oral or Written Instructions or otherwise pursuant to the Prospectus
and Share certificates, if any, properly endorsed for transfer or redemption,
accompanied by such documents as the Transfer Agent or its agent reasonably may
deem necessary.
The Transfer Agent or its agent reserves the right to refuse to transfer or
repurchase Shares until it is satisfied that the endorsement on the instructions
is valid and genuine. The Transfer Agent or its agent also reserves the right to
refuse to transfer or repurchase Shares until it is satisfied that the requested
transfer or repurchase is legally authorized, and it shall incur no liability
for the refusal, in good faith, to make transfers or repurchases which the
Transfer Agent or its agent, in its good judgment, deems improper or
unauthorized, or until it is reasonably satisfied that there is no basis to any
claims adverse to such transfer or repurchase.
(b) Notice to Custodian and Fund. When Shares are redeemed, the Transfer
Agent or its agent shall, upon receipt of the instructions and documents in
proper form, deliver to the Custodian and the Fund or its designee a
notification setting forth the number of Shares to be repurchased. Such
repurchased Shares shall be reflected on appropriate accounts maintained by the
Transfer Agent or its agent reflecting outstanding Shares of the Fund and Shares
attributed to individual accounts.
(c) Payment of Repurchase Proceeds. The Transfer Agent or its agent shall,
upon receipt of moneys paid to it by the Custodian for the repurchase of Shares,
pay such moneys as are received from the Custodian, all in accordance with the
procedures described in the Written Instructions received by the Transfer Agent
or its agent from the Fund.
The Transfer Agent or its agent shall not process or effect any repurchase
with respect to Shares of the Fund after receipt by the Transfer Agent or its
agent of notification of the suspension of the determination of net asset value
of the Fund.
7. Dividends.
(a) Notice to Agent and Custodian. Upon the declaration of each dividend
and each capital gains distribution by the Board of Directors of the Fund with
respect to Shares of the Fund, the Fund shall furnish or cause to be furnished
to the Transfer Agent or its
C-2
<PAGE>
agent a copy of a resolution of the Fund's Board of Directors certified by the
Secretary of the Fund setting forth the date of the declaration of such dividend
or distribution, the ex-dividend date, the date of payment thereof, the record
date as of which shareholders entitled to payment shall be determined, the
amount payable per Share to the shareholders of record as of that date, the
total amount payable to the Transfer Agent or its agent on the payment date and
whether such dividend or distribution is to be paid in Shares of such class at
net asset value.
On or before the payment date specified in such resolution of the Board of
Directors, the Custodian of the Fund will pay to the Transfer Agent sufficient
cash to make payment to the Shareholders of record as of such payment date that
are not participating in the Fund's Dividend Reinvestment and Cash Purchase
Plan.
(b) Insufficient Funds for Payments. If the Transfer Agent or its agent
does not receive sufficient cash from the Custodian to make total dividend
and/or distribution payments to all Shareholders of the Fund as of the record
date that are not participating in the Fund's Dividend Reinvestment and Cash
Purchase Plan, the Transfer Agent or its agent will, upon notifying the Fund,
withhold payment to all Shareholders of record as of the record date until
sufficient cash is provided to the Transfer Agent or its agent.
C-3
<PAGE>
C-4
Exhibit 1
to
Schedule C
Summary of Services
The services to be performed by the Transfer Agent or its agent shall be as
follows:
A. DAILY RECORDS
-------------
Maintain daily the following information with respect to each Shareholder
account as received:
o Name and Address (Zip Code)
o Class of Shares
o Taxpayer Identification Number
o Balance of Shares held by Agent
o Beneficial owner code: i.e., male, female, joint tenant, etc.
o Dividend code (reinvestment)
o Number of Shares held in certificate form
B. OTHER DAILY ACTIVITY
--------------------
o Answer written inquiries relating to Shareholder accounts (matters
relating to portfolio management, distribution of Shares and other
management policy questions will be referred to the Fund).
o Process additional payments into established Shareholder accounts in
accordance with Written Instruction from the Fund.
o Upon receipt of proper instructions and all required documentation,
process requests for repurchase of Shares.
o Identify redemption requests made with respect to accounts in which
Shares have been purchased within an agreed-upon period of time for
determining whether good funds have been collected with respect to
such purchase and process as agreed by the Transfer Agent in
accordance with written instructions set forth by the Fund.
o Examine and process all transfers of Shares, ensuring that all
transfer requirements and legal documents have been supplied.
o Issue and mail replacement checks.
C-4
<PAGE>
o Open new accounts and maintain records of exchanges between accounts.
C. DIVIDEND ACTIVITY
-----------------
o Calculate and process Share dividends and distributions as instructed
by the Fund.
o Compute, prepare and mail all necessary reports to Shareholders or
various authorities as requested by the Fund. Report to the Fund
reinvestment plan share purchases and determination of the
reinvestment price.
D. MEETINGS OF SHAREHOLDERS
------------------------
o Cause to be mailed proxy and related material for all meetings of
Shareholders. Tabulate returned proxies (proxies must be adaptable to
mechanical equipment of the Transfer Agent or its agents) and supply
daily reports when sufficient proxies have been received.
o Prepare and submit to the Fund an Affidavit of Mailing.
o At the time of the meeting, furnish a certified list of Shareholders,
hard copy, microfilm or microfiche and, if requested by the Fund,
Inspection of Election.
E. PERIODIC ACTIVITIES
-------------------
o Cause to be mailed reports, Prospectuses, and any other enclosures
requested by the Fund (material must be adaptable to mechanical
equipment of the Transfer Agent or its agents).
o Receive all notices issued by the Fund with respect to the Preferred
Shares in accordance with and pursuant to the Articles of
Incorporation and the Indenture and perform such other specific duties
as are set forth in the Articles of Incorporation including a giving
of notice of a special meeting and notice of redemption in the
circumstances and otherwise in accordance with all relevant provisions
of the Articles of Incorporation.
C-5
<PAGE>
Exhibit (k)(2)
AMENDED AND RESTATED
ADMINISTRATION AGREEMENT
The Administration Agreement of Preferred Income MANAGEMENT Fund
Incorporated, a Maryland corporation (the "Fund") made and agreed to by and
between the Fund and THE BOSTON COMPANY ADVISORS, INC., a Massachusetts
corporation ("Boston Advisors"), on February 11, 1993, and as assigned by Boston
Advisors to FIRST DATA INVESTOR SERVICES GROUP, INC., a Massachusetts
corporation ("FDISG"), (then known as The Shareholder Services Group, Inc.) on
April 29, 1994, is hereby further amended and restated as of December 1, 1996 to
read in its entirety as follows:
WHEREAS, the Fund is registered as a diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund desires to retain FDISG to render certain administrative
services to the Fund and FDISG is willing to render such services;
WITNESSETH:
NOW, THEREFORE, in consideration of the premises and mutual convenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints FDISG to act as Administrator of
the Fund on the terms set forth in this Agreement. FDISG accepts such
appointment and agrees to render the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. The Fund has furnished FDISG with copies properly
certified or authenticated of each of the following:
(a) Resolutions of the Fund's Board of Directors authorizing the
appointment of FDISG to provide certain administrative services to the Fund and
approving this Agreement;
(b) The Fund's Articles of Incorporation filed with the Maryland Department
of Assessments and Taxation on December 1, 1992 and all amendments thereto (the
"Articles");
(c) The Fund's By-Laws and all amendments thereto (the "By-Laws");
(d) The Investment Advisory Agreement between Flaherty & Crumrine
Incorporated (the "Adviser") and the Fund dated as of February 11, 1993 as
amended and restated from time to time (the "Advisory Agreement");
(e) The Custody Agreement between Boston Safe Deposit and Trust Company
(the "Custodian") and the Fund dated as of February 11, 1993 as amended and
restated from time to time (the "Custody Agreement");
<PAGE>
(f) The Transfer Agency and Registrar Agreement between The Shareholder
Services Group, Inc. (the "Transfer Agent") and the Fund dated as of February
11, 1993 as amended and restated from time to time;
(g) The Fund's most recent Registration Statement on Form N-2 (the
"Registration Statement") under the Securities Act of 1933 and under the 1940
Act (File Nos. 33-56102 and 811-7390), as filed with the Securities and Exchange
Commission ("SEC") on December 21, 1992 relating to shares of the Fund's Common
Stock, $.01 par value per share, and all amendments thereto; and
(h) The Fund's most recent prospectus (the "Prospectus").
The Fund will furnish FDISG from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing. Furthermore, the Fund will provide FDISG with any other documents
that FDISG may reasonably request and will notify FDISG as soon as possible of
any matter materially affecting the performance of FDISG of its services under
this agreement.
3. Duties as Administrator. Subject to the supervision and direction of the
Board of directors of the Fund, FDISG, as Administrator, will assist in
supervising various aspects of the Fund's administrative operations and
undertakes to perform the following specific services:
(a) Maintaining office facilities (which may be in the offices of FDISG or
a corporate affiliate);
(b) Furnishing statistical and research data, data processing services,
clerical services, and internal legal, executive the administrative services and
stationery and office supplies in connection with the foregoing;
(c) Furnishing corporate secretarial services including preparation and
distribution of materials for Board of Directors meetings;
(d) Accounting and bookkeeping services (including the maintenance of such
accounts, books and records of the Fund as may be required by section 31(a) of
the 1940 Act and the rules thereunder);
(e) Internal auditing;
(f) Valuing the Fund's assets and calculating the net asset value of the
shares of the Fund at the close of trading on the New York Stock Exchange (the
"NYSE") on the last day on which the NYSE is open for trading of each week and
month and at such other times as the Board of Directors may reasonably request;
2
<PAGE>
(g) Accumulating information for and, subject to approval by the Fund's
Treasurer, preparing reports to the Fund's shareholders of record and the SEC
including, but not necessarily limited to, Annual Reports and Semi-Annual
Reports on Form N-SAR;
(h) Preparing and filing various reports or other documents required by
federal, state and other applicable laws and regulations and by stock exchanges
on which the shares of the Fund are listed, other than those filed or required
to be filed by the Adviser or Transfer Agent;
(i) Preparing and filing the Fund's tax returns;
(j) Assisting the Adviser, at the Adviser's request, in monitoring and
developing compliance procedures for the Fund which will include, among other
matter, procedures to assist the Adviser in monitoring compliance with the
Fund's investment objective, policies, restrictions, tax matters and applicable
laws and regulations; and
(k) Preparing and furnishing the Fund (at the Fund's request) with the
performance information (including yield and total return information)
calculated in accordance with applicable U.S. securities laws and reporting to
external databases such information as may reasonably be requested.
In performing all services under this Agreement, FDISG shall act in
conformity with the Fund's Articles and By-Laws; the 1940 Act and the Investment
Advisers Act of 1940, as the same may be amended from time to time; and the
investment objective, investment policies and other practices and policies set
forth in the Fund's Registration Statement as such Registration Statement and
practices and policies may be amended from time to time.
4. Allocation of Expenses. FDISG shall bear all expenses in connection with
the performance of its services under this Agreement.
(a) FDISG will from time to time employ or associate with itself such
person or persons as FDISG may believe to be particularly suited to assist it in
performing services under this Agreement. Such person or persons may be officers
and employees who are employed by both FDISG and the Fund. The compensation of
such person or persons shall be paid by FDISG and no obligation shall be
incurred on behalf of the Fund in such respect.
(b) FDISG shall not be required to pay any of the following expenses
incurred by the Fund: membership dues in the Investment Company Institute or any
similar organization; investment advisory expenses; costs of printing and
mailing stock certificates, prospectuses, reports and notices; interest on
borrowed money; brokerage commissions; taxes and fees payable to Federal, state
and other governmental agencies; fees of Directors of the Fund who are not
affiliated with FDISG; outside auditing expenses; outside legal expenses; or
other expenses not specified in this Section 4 which may be properly payable by
the Fund.
3
<PAGE>
(c) For the services to be rendered, the facilities to be furnished and the
payments to be made by FDISG, as provided for in this Agreement, the Fund will
pay FDISG the fees in accordance with the Amended and Restated Fee Agreement
among the Fund, Boston Safe Deposit and Trust Company and FDISG dated March 1,
1993 and attached hereto as Schedule A.
(d) The Fund will compensate FDISG for its services rendered pursuant to
this Agreement in accordance with the fees set forth above. Such fees do not
include out-of-pocket disbursements of FDISG for which FDISG shall be entitled
to bill separately. Out-of-pocket disbursements shall include, but shall not be
limited to, the items specified in Schedule B, annexed hereto and incorporated
herein, which schedule may be modified by FDISG upon not less than thirty days'
prior written notice to the Fund.
(e) FDISG will bill the Fund as soon as practicable after the end of each
calendar month, and said billings will be detailed in accordance with the
out-of-pocket schedule. The Fund will promptly pay to FDISG the amount of such
billing.
5. Limitation of Liability. FDISG shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of its obligations and duties under this Agreement, except
a loss resulting from FDISG' willful misfeasance, bad faith or gross negligence
in the performance of such obligations and duties, or by reason of its reckless
disregard thereof. The Fund will indemnify FDISG against and hold it harmless
from any and all losses, claims, damages, liabilities of expenses (including
reasonable counsel fees and expenses) resulting from any claim, demand, action
or suit not resulting from the willful misfeasance, bad faith or gross
negligence of FDISG in the performance of such obligations and duties or by
reason of its reckless disregard thereof.
6. Termination of Agreement.
(a) This Agreement shall become effective on the date hereof and shall
remain in force from year to year so long as such continuance is specifically
approved at least annually by the Board of Directors of the Fund or unless
terminated pursuant to the provisions of subsection (b) of this Section 6.
(b) This Agreement may be terminated at any time without payment of any
penalty, upon 60 days' written notice, by vote of the holders of a majority of
the outstanding voting securities of the Fund, or by vote of a majority of the
Board of Directors of the Fund, or by the FDISG.
7. Amendment to this Agreement. No provisions of this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, discharge or
termination is sought.
8. Miscellaneous.
4
<PAGE>
(a) Any notice or other instrument authorized or required by this Agreement
to be given in writing to the Fund or FDISG shall be sufficiently given if
addressed to that party and received by it at its office set forth below or at
such other place as it may from time to time designate in writing.
To the Fund:
Preferred Income Management Fund Incorporated
c/o Flaherty & Crumrine Incorporated
301 E. Colorado Blvd., Suite 720
Pasadena, CA 91101
Attention: Robert T. Flaherty
To FDISG:
First Data Investor Services Group, Inc.
4400 Computer Drive, 2AW45
Westborough, Massachusetts 01581
Attention: Christine P. Ritch, Esquire
(b) This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable without the written consent of the other
party.
(c) This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
(d) This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original and which collectively shall be deemed
to constitute shall be deemed to constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
9. Confidentiality. All books, records, information and data pertaining to
the business of the Fund that are exchanged or received pursuant to the
performance of FDISG' duties under this Agreement shall remain confidential and
shall not be voluntarily disclosed to any other person, except as specifically
authorized by the Fund or as may be required by law.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered by their duly authorized officers as of the date,
first written above.
FIRST DATA INVESTOR SERVICES GROUP, INC.
By:
------------------------------
Title:
PREFERRED INCOME MANAGEMENT FUND
INCORPORATED
By:
------------------------------
Title:
6
<PAGE>
SCHEDULE A
FEE SCHEDULE
In consideration of the services which FDISG shall perform for the Fund
pursuant to this Agreement, the Fund hereby agrees to pay FDISG an aggregate
monthly fee at the annual rate of: 0.12 of 1.00% of the value of the Fund's
average monthly net assets which, for the purposes of calculating such fee, will
be deemed to be the average monthly value of the Fund's total assets minus the
sum of the Fund's liabilities (excluding aggregate liquidation preference on the
outstanding shares of the Fund's auction rate preferred stock and accumulated
dividends, if any, thereon).
The fee for the period from the date the Registration Statement is declared
effective by the Securities and Exchange Commission to the end on the month
during which the Registration Statement is declared effective shall be prorated
according to the proportion that such period bears to the full monthly period.
Upon any termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which such
period bears to the full monthly period and shall be payable upon the date of
termination of this Agreement.
7
<PAGE>
SCHEDULE B
PREFERRED INCOME MANAGEMENT FUND INCORPORATED
Out-Of-Pocket Expenses
Administration Agreement
Out-of Pocket expenses include, but are not limited to, the following:
o Postage
o Telephone and telecommunications charges
o Pricing services
o Travel to/from Board meetings
8
<PAGE>
Exhibit (k)(3)
AMENDMENT TO THE AMENDED AND
RESTATED ADMINISTRATION AGREEMENT
This Amendment dated as of October 7, 1998, is entered into by PREFERRED
INCOME MANAGEMENT FUND INCORPORATED (the "Fund") and FIRST DATA INVESTOR
SERVICES GROUP, INC. ("FDISG").
WHEREAS, the Fund and The Boston Company Advisors, Inc. ("Boston Advisors")
entered into an Administration Agreement dated as of February 11, 1993, which
Agreement was assigned by Boston Advisors to FDISG (then known as The
Shareholder Services Group, Inc.) on April 24, 1994, and amended and restated by
the parties on December 1, 1996 (the "Agreement");
WHEREAS, the Fund and FDISG wish to further amend the Agreement;
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
I. Section 4(d) of the Agreement is deleted in its entirety and replaced
with the following:
(d) The Fund will compensate FDISG for its services rendered pursuant
to this Agreement in accordance with the fees set forth above. Such fees do
not include out-of-pocket disbursements of FDISG. FDISG shall be entitled
to bill the Fund for such out-of-pocket expenses only upon the prior
written approval of the Fund.
II. Schedule B to the Agreement is deleted in its entirety.
III. Except to the extent amended hereby, the Agreement shall remain
unchanged and in full force and effect and is hereby ratified and confirmed in
all respects as amended.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date and year first written above.
PREFERRED INCOME MANAGEMENT
FUND INCORPORATED
By: __________________________
FIRST DATA INVESTOR SERVICES
GROUP, INC.
By: __________________________
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Exhibit (k)(4)
CO-ADMINISTRATION AGREEMENT
This CO-ADMINISTRATIVE AGREEMENT is dated as of March 22, 1999, and is
between PREFERRED INCOME MANAGEMENT FUND, INCORPORATED, a Maryland corporation
(the "Fund") whose principal offices are located at 1680 38TH Street, Suite 800,
Boulder, CO. 80301, and BOULDER ADMINISTRATIVE SERVICES, LLC, a Colorado limited
liability company (the "Co-Administrator"), whose principal offices are located
at 1680 38th Street, Suite 800, Boulder, CO. 80301.
RECITALS
A. The Fund is a closed-end investment management company organized as
a Maryland Corporation. The Fund has retained First Data Investor Services
Group, Inc. to act as Fund administrator (the "Administrator").
B. The Fund desires to retain the Co-Administrator to provide
administrative services to the Fund that are not required to be provided by the
Administrator, and the Co-Administrator is willing to provide such services on
the terms and subject to the conditions set forth in this Agreement.
COVENANTS
NOW, THEREFORE, in consideration of the premises and the mutual
promises contained herein, and for other good and valuable consideration, the
parties agree as follows:
1. Officers and Staff. The Co-Administrator shall provide personnel to act
as officers of the Fund, to do such things as are permitted in the Fund's
Articles of Incorporation and By-laws, as each is amended to the date hereof.
2. Administrative Services. The Co-Administrator shall provide the
following administrative services to the Fund to the extent such services are
not provided by the Administrator (collectively, the "Administrative Services").
It is intended that the Administrative Services provided by the Co-Administrator
shall be of an administrative nature only and shall under no circumstances
include services associated with the provision of investment advisory services.
a. NEGOTIATION OF SERVICE PROVIDER CONTRACTS. The Co-Administrator
shall negotiate all contracts with Service Providers, supervise their
obligations, and make periodic reports to the Board on their respective
performance. For this purpose, "Service Provider" means the Fund's Investment
Adviser(s), the Administrator, the Fund's transfer agent and registrar, the
Fund's custodian, the Fund's economic adviser, and all other service providers
and vendors of the Fund.
b. OVERSIGHT OF SERVICE PROVIDERS. The Co-Administrator shall maintain
oversight with respect to the activities of the Service Providers and shall
review all relevant reports, documentation and other work product prepared by
the Service Providers including but not limited to:
i. Documentation regarding the current investments of the Fund
and all trades executed by such investment adviser(s) as the Fund may engage
from time to time (the "Adviser(s)"),
ii. Monthly, quarterly and annual total returns,
iii. Net realized and unrealized gains (losses) of the Fund,
iv. Weekly and month-end calculation of the Fund's NAV,
v. The Fund's asset allocation, and
vi. Any and all other reports produced by Service Providers in
regards to the Fund.
c. REPORTS TO THE BOARD. The Co-Administrator shall make periodic
reports to the Board and insure that all relevant information regarding the Fund
is made available to shareholders, analysts, investors, and the like through
shareholder reports, proxy statements, press releases, and other public
documents and filings.
d. DIVIDEND RECOMMENDATIONS AND COMPLIANCE WITH FUND POLICIES. The
Co-Administrator shall, at the request of the Directors, study and make
recommendations to the Directors regarding the Fund's
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dividend payout of income and capital gains, and the Fund's compliance with its
policies and organizational documents, with the Investment Company Act of 1940,
as amended (the "1940 Act"), and with IRS tax codes and regulations.
e. GENERAL MANAGEMENT AND SHAREHOLDER COMMUNICATION. The
Co-Administrator shall provide general management and oversight for the Fund, to
the extent not provided by the Administrator or the Adviser. The
Co-Administrator shall provide such necessary personnel and equipment to
adequately receive and respond to all inquiries of the Fund's shareholders.
f. DIRECTORS & OFFICERS LIABILITY INSURANCE. At least annually, the
Co-Administrator shall solicit proposals and make recommendations to the Board
regarding the availability, cost and acquisition of errors and
omissions/directors and officers liability insurance, fidelity bonds, and such
other insurance as might be required or prudent, as the Board may determine.
g. DISBURSEMENT SERVICES. The Co-Administrator shall review and
approve all Fund expenses and cause them to be paid in a timely manner.
h. ADMINISTRATION OF MMP. The Co-Administrator shall review the Fund's
Money Market Cumulative (TM) Preferred Stock ("leverage"), its impact to the
common shareholder, the Moody's asset coverage reports, dividend coverage
reports, 1940 Act coverage reports, and the periodic rate payable on the
leverage relative to the earning capabilities of the Fund's assets.
i. PERSONNEL. The Co-Administrator shall, at its sole cost and
expense, employ, engage or associate with itself such persons as it believes
appropriate to assist it in performing its obligations under this Agreement.
j. OTHER SERVICES REQUESTED BY THE BOARD. The Co-Administrator shall
provide such other administrative services as may be reasonably requested from
time to time by the Board.
3. Best Efforts. The Co-Administrator shall give the Fund the benefit of
the Co-Administrator's best judgment and efforts in rendering services under
this Agreement. As an inducement to the Co-Administrator's undertaking to render
these services, the Fund agrees that the Co-Administrator shall not be liable
under this Agreement for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of its obligations and
duties under this Agreement, except a loss resulting from the Co-Administrator's
willful misfeasance, bad faith or negligence in the performance of such
obligations and duties, or by reason of its reckless disregard thereof.
4. Compensation. In consideration of the responsibilities assumed and the
Administrative Services to be rendered by the Co-Administrator under this
Agreement, the Fund shall pay the Co-Administrator a monthly fee (commencing on
the date the requisite approval of this Agreement pursuant to Section 5 is
obtained) calculated at an annual rate of ten (10) basis points applied against
the value of the Fund's average monthly net assets which, for the purposes of
calculating such fee, will be deemed to be the average monthly value of the
Fund's total assets minus the sum of the Fund's liabilities (excluding aggregate
liquidation preference on the outstanding shares of the Fund's auction rate
preferred stock and accumulated dividends, if any, thereon). If the fees payable
to the Co-Administrator pursuant to this Section begin to accrue before the end
of any month or if this Agreement terminates before the end of any month, the
fees for the period from that date to the end of that month or from the
beginning of that month to the date of termination, as the case may be, shall be
prorated according to the proportion that the period bears to the full month in
which the effectiveness or termination occurs.
5. Approval of Agreement. This Agreement shall become effective as of March
22, 1999, the date on which the Agreement was approved by vote of a majority of:
a. The Board of Directors of the Fund and
b. The Directors who are not "interested persons" (as defined in the
1940 Act) of the Fund and who have no direct or indirect financial interest in
this Agreement (the "Non-Interested Directors");
c. cast in person at a meeting called for the purpose of voting on
such approval (the "Board Approval"). This Agreement shall continue in effect
with respect to the Fund until the last day of the calendar year next following
the date of effectiveness specified herein, and thereafter shall continue
automatically for successive annual periods ending on the last day of each
calendar year, subject to the immediately following sentence, and provided such
continuance receives Board Approval, including approval by the Non-Interested
Directors.
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This Agreement may be terminated with respect to the Fund at any time, without
payment of any penalty, by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by a vote of a majority
of the Fund's Board of Directors on 60 days' written notice to the
Co-Administrator or by the Co-Administrator on 60 days' written notice to the
Fund. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
d. No Restrictions on Other Business. Except to the extent necessary
to perform the Co-Administrator's obligations under this Agreement, nothing
herein shall be deemed to limit or restrict the right of the Co-Administrator,
or any affiliate of the Co-Administrator, or any employee of the
Co-Administrator, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services to any other corporation,
firm, individual or association.
e. Miscellaneous Provisions.
f. Articles of Incorporation; Binding Effect. The Articles of
Incorporation, establishing the Fund, together with all amendments thereto, is
on file in the office of the Secretary of the State of Maryland. The obligations
of the Fund are not personally binding upon, nor shall resort be had to the
private property of, any of the officers, directors or shareholders of the Fund
or any of their agents, but only the Fund's property shall be bound.
g. Governing Law. This Agreement shall be construed and its provisions
interpreted in accordance with the laws of the State of Maryland.
h. Binding Agreement; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their successors. This
Agreement shall not be assignable by either party under any circumstances.
i. Severability. If any term or provision hereunder, or any portion
thereof, is held to be invalid or unenforceable, it shall not affect any other
term or provision hereunder or any part thereof.
j. Survival. All promises, covenants, agreements, representations and
warranties contained herein shall survive the execution and delivery, and the
subsequent termination, of this Agreement and the transactions contemplated
hereunder.
k. Entire Agreement. This Agreement contains the full, entire, and
integrated agreement and understanding between the parties with respect to the
covenants, promises and agreements herein described, and no representations,
warranties, provisions, covenants, agreements or understandings, written or
oral, not herein contained or referred to shall be of any force or effect.
Except as otherwise provided herein, this Agreement may not be modified or
amended except in writing signed by both of the parties hereto.
l. Counterparts. This Agreement may be executed in counterparts, all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first written above.
THE FUND: THE CO-ADMINISTRATOR
PREFERRED INCOME MANAGEMENT FUND BOULDER ADMINISTRATIVE SERVICES,
INCORPORATED, a Maryland L.L.C., a Colorado limited liability
corporation company
By: ____________________________ By: _________________________________
Stephen C. Miller, President Carl D. Johns, Assistant Manager
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Exhibit (k)(5)
FEE AGREEMENT
Agreement, dated as of February 11, 1993 among THE BOSTON COMPANY ADVISORS,
INC., a Massachusetts corporation ("Boston Advisors"), BOSTON SAFE DEPOSIT AND
TRUST COMPANY, a Massachusetts trust company ("Boston Safe"), and PREFERRED
INCOME MANAGEMENT FUND INCORPORATED, a Maryland corporation (the "Fund').
In consideration of the services which Boston Advisors shall perform for
the Fund pursuant to an Administration Agreement dated February 11, 1993, and
the services which Boston Safe shall perform for the Fund pursuant to a Custody
Agreement dated February 11, 1993 the Fund hereby agrees to pay Boston Advisors
an aggregate monthly fee, on behalf of Boston Advisors and Boston Safe, under
the foregoing agreements at the annual rate of:
0.21 of 1.00% of the value of the Fund's average monthly net assets
which, for the purposes of calculating such fee, will be deemed to be
the average monthly value of the Fund's total assets minus the sum of
the Fund's liabilities (excluding aggregate liquidation preference on
the outstanding shares of the Fund's auction rate preferred stock and
accumulated dividends, if any, thereon).
This Agreement may be executed in any number of counterparts each of which
shall be deemed to be an original and which collectively shall be deemed to
constitute only one instrument.
The fee for the period from the date the Registration Statement is declared
effective by the Securities and Exchange Commission to the end on the month
during which the Registration Statement is declared effective shall be prorated
according to the proportion that such period bears to the full monthly period.
Upon any termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which such
period bears to the full monthly period and shall be payable upon the date of
termination of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered by their duly authorized officers, as of the day and
year first above written.
PREFERRED INCOME MANAGEMENT
FUND INCORPORATED
By: /s/ Donald Crumrine
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Title: Donald F. Crumrine
Vice President and Secretary
THE BOSTON COMPANY ADVISORS INC.
By: /s/ Francis J. McNamara, III
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Title:
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By: /s/ Vincent Nave
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Title:
