BATTERY PARK(SM)
HIGH YIELD FUND
1-888-848-7800
PROSPECTUS DATED NOVEMBER 30, 1998
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ABOUT THE FUND. Battery Park(SM) High Yield Fund (the "Fund") is the only
existing series of Battery Park Funds, Inc., a diversified, open-end series-
type investment company. The Fund's investment objective is to provide
shareholders with high total return, consisting of current income and capital
appreciation. The Fund attempts to achieve its objective by investing
principally in fixed income securities of U.S. companies which are rated in the
lower rating categories of the established rating services or are unrated
securities of comparable quality. See "Investment Objective and Policies." No
assurance can be given that the Fund's investment objective will be realized.
The Fund's Investment Adviser is Nomura Corporate Research and Asset Management
Inc.
RISK FACTORS. The Fund may invest up to 100% of its assets in lower rated or
unrated securities (commonly referred to as "junk bonds"). Investment in junk
bonds involves special considerations and certain risks, including risks of
default and price volatility, and such securities are regarded as being
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investors should consider these risks carefully before
investing. See "Risk Factors and Special Considerations" and "Appendix A--
Ratings of High Yield Debt Securities."
PURCHASING SHARES. The Fund offers two classes of shares with different fees
and other features. Shares may be purchased from securities dealers which have
entered into selected dealer agreements with Nomura Securities International,
Inc. ("NSI" or the "Distributor"), 2 World Financial Center, Building B, New
York, New York 10281-1198. The minimum initial purchase for Class A shares is
$1,000 and the minimum subsequent purchase is $100. The minimum initial
purchase for Class Y shares is $1 million. See "Purchase of Shares."
ABOUT THIS PROSPECTUS. This Prospectus is a concise statement of information
about the Fund that a prospective investor should know before investing in the
Fund. This Prospectus should be retained for future reference. A statement
containing additional information about the Fund dated November 30, 1998, (the
"Statement of Additional Information") has been filed with the Securities and
Exchange Commission (the "SEC") and is available, without charge, by calling the
Transfer Agent toll-free at 1-888-254-2874 or writing to the Transfer Agent at
its address on the back cover of this Prospectus. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses.................................................... 3
Financial Highlights--Class A Shares........................................ 4
Financial Highlights--Class Y Shares........................................ 5
The Fund.................................................................... 6
The Investment Adviser...................................................... 6
Notes to Investment Performance............................................. 8
Investment Objective and Policies........................................... 9
Other Investment Policies and Practices.................................... 10
Investment Restrictions.................................................... 14
Risk Factors and Special Considerations..................................... 14
Management of the Fund...................................................... 16
Directors.................................................................. 16
Management and Advisory Arrangements....................................... 17
Administrative Services.................................................... 17
Transfer Agency Services................................................... 18
Purchase of Shares.......................................................... 18
Class A Shares............................................................. 19
Class Y Shares............................................................. 22
Systematic Investment Plans................................................ 22
Redemption of Shares........................................................ 22
Systematic Withdrawal Plans................................................ 23
Shareholder Services........................................................ 24
Investment Account......................................................... 24
Reinvestment of Dividends and Capital Gains Distributions.................. 24
Retirement Plans........................................................... 24
Exchange Privilege......................................................... 25
Taxes....................................................................... 25
Performance Data............................................................ 27
Portfolio Transactions...................................................... 28
Additional Information...................................................... 30
Dividends and Distributions................................................ 30
Determination of Net Asset Value........................................... 30
Organization of the Fund................................................... 31
Shareholder Inquiries...................................................... 31
Shareholder Reports........................................................ 32
Financial Statements........................................................ 33
Independent Auditors' Report................................................ 43
Appendix A--Ratings of High Yield Debt Securities........................... A-1
Appendix B--Hedging Techniques.............................................. B-1
</TABLE>
BATTERY PARK(SM) HIGH YIELD FUND
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS Y(1)
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<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases (as a percent-
age of offering price) 4.50%(2) None
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Maximum Sales Charge Imposed on Reinvested Dividends (as
a percentage of offering price) None None
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Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) None None
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Redemption Fee (as a percentage of amount redeemed, if
applicable) None None
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Exchange Fee None None
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ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
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Management Fees (after waiver)(3) 0.00% 0.00%
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Rule 12b-1 Fees 0.25% None
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Total Other Expenses 1.00% 1.00%
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Total Annual Fund Operating Expenses (4) 1.25% 1.00%
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</TABLE>
(1) Class Y shares are sold only to certain specified investors. See "Purchase
of Shares--Class Y Shares."
(2)Class A shares of the Fund held in accounts of financial planners or
individuals will convert to Class Y shares when the aggregate value of the
Class A shares in such account reaches $1 million or more. See "Purchase of
Shares--Class A Shares--Conversion of Class A Shares to Class Y Shares."
(3)The management fee has been reduced to reflect the voluntary waiver of the
management fee by the investment adviser. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.65%.
(4) Total Fund Operating Expenses for the Class A and Class Y Shares would have
been 2.92% and 2.67% respectively, absent the voluntary waiver of the
management fee and the voluntary reimbursement of other operating expenses
by the Adviser.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear either directly or indirectly.
For more complete descriptions of the various costs and expenses, see "Purchase
of Shares."
LONG-TERM SHAREHOLDERS OF CLASS A SHARES MAY PAY MORE THAN THE ECONOMIC
EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment of
the maximum sales charge, if applicable. The Fund charges no redemption fees.
<TABLE>
<CAPTION>
CLASS A CLASS Y
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<S> <C> <C>
1 Year $ 57 $ 10
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3 Years $ 83 $ 32
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5 Years $111 $ 55
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10 Years $189 $122
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</TABLE>
The above example should not be considered a representation of past or future
performance. Actual expenses may be greater or less than those shown.
BATTERY PARK(SM) HIGH YIELD FUND
Financial Highlights--Class A Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 43.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
1998 1997(A)
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<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.40 $10.00
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Income from investment operations
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Net investment income 0.89 0.84
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Net realized and unrealized gain (loss) on investments (0.70) 1.40
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Total from investment operations 0.19 2.24
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Less distributions
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Distributions from net investment income (0.91) (0.84)
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Distributions from net realized gain on investments (0.58) --
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Total distributions (1.49) (0.84)
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NET ASSET VALUE, END OF PERIOD $10.10 $11.40
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Total return (b) 1.50% 23.13%
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Ratios to average net assets
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Expenses 1.25% 1.25%*
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Net investment income 8.44% 8.66%*
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Expense waiver/reimbursement (c) 1.67% 2.79%*
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Supplemental Data
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Net assets, end of period (000 omitted) $3,894 $1,829
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Portfolio turnover 190% 236%
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</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 28, 1996 (date of initial
public offering) to September 30, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998, WHICH CAN BE
OBTAINED FREE OF CHARGE.
BATTERY PARK(SM) HIGH YIELD FUND
Financial Highlights--Class Y Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 43.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------
1998 1997(A)
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<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.40 $10.00
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Income from investment operations
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Net investment income 0.93 0.86
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Net realized and unrealized gain (loss) on investments (0.71) 1.40
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Total from investment operations 0.22 2.26
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Less distributions
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Distributions from net investment income (0.94) (0.86)
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Distributions from net realized gain on investments (0.58) --
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Total distributions (1.52) (0.86)
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NET ASSET VALUE, END OF PERIOD $10.10 $11.40
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Total return (b) 1.76% 23.41%
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Ratios to average net assets
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Expenses 1.00% 1.00%*
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Net investment income 8.63% 8.73%*
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Expense waiver/reimbursement (c) 1.67% 2.87%*
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Supplemental Data
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Net assets, end of period (000 omitted) $16,158 $13,361
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Portfolio turnover 190% 236%
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</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 28, 1996 (date of initial
public offering) to September 30, 1997. For the period from September 19,
1996 (start of business) to October 27, 1996, the investment income was
distributed to the Fund's Adviser.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998, WHICH CAN BE
OBTAINED FREE OF CHARGE.
THE FUND
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Battery Park(SM) High Yield Fund is a diversified, open-end investment company.
The Fund is the only existing series of Battery Park Funds, Inc. (the
"Company"), a series-type investment company that was incorporated under the
laws of the State of Maryland on June 4, 1996, and is registered under the
Investment Company Act of 1940 (the "Investment Company Act"). The Fund's
principal office is located at 2 World Financial Center, Building B, New York,
New York 10281-1198 and its telephone number is 1-888-848-7800. The Fund's
investment objective is to provide shareholders with high total return,
consisting of current income and capital appreciation. The Fund attempts to
achieve its objective by investing principally in fixed income securities of
U.S. companies which are rated in the lower rating categories of the established
rating services or are unrated securities of comparable quality. There can be no
assurance that the Fund's investment objective will be realized. See "Investment
Objective and Policies." Investment in lower rated or unrated securities
(commonly referred to as "junk bonds") involves special considerations and
certain risks, including risks of failure to pay interest and principal, default
and price volatility. Investors should carefully consider these risks before
investing. See "Risk Factors and Special Considerations."
THE INVESTMENT ADVISER
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The Fund's Investment Adviser is Nomura Corporate Research and Asset Management
Inc. (the "Investment Adviser" or "NCRAM"). As of September 30, 1998, NCRAM
managed $2.5 billion in high yield bonds.
HISTORICAL INVESTMENT RESULTS OF THE INVESTMENT ADVISER. Set forth below is
certain performance data provided by the Investment Adviser relating to
investment results of a composite of all client accounts whose portfolios were
managed by the Investment Adviser during a seven year period commencing in 1991,
which had the same investment objective as the Fund and were managed using
substantially similar, though not necessarily identical, investment strategies
and techniques as those contemplated by the Fund (the "Advisory Accounts"). See
"Investment Objective and Policies." Because of the similarities in investment
strategies and techniques, the Investment Adviser believes that the Advisory
Accounts are sufficiently comparable to the Fund to make performance data listed
below relevant to investors in the Fund. The results presented (the "Total
Return Composite") are not intended to predict or suggest the returns that will
be experienced by the Fund or the return an investor will achieve by investing
in the Fund. Different methods of determining performance from those described
in the footnotes to the charts below may result in different performance
figures. An investor should not rely on the following performance figures as an
indication of future performance of either the Investment Adviser's separate
Advisory Accounts or the Fund. Additional performance information is included in
the Fund's annual shareholder report, which is available to investors at no
charge. See "Shareholder Reports."
<TABLE>
<CAPTION>
NCRAM HIGH YIELD TOTAL RETURN FIGURES
TOTAL RETURN COMPOSITE OCTOBER 1, 1991 TO SEPTEMBER 30, 1998
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ANNUAL TOTAL RETURN NET OF FEES
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<S> <C>
1991 (Fourth Quarter) 4.22%
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1992 18.70%
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1993 25.37%
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1994 8.39%
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1995 22.43%
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1996 19.59%
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1997 19.34%
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1998 (First, Second, and Third Quarters) -2.04%
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Annualized Total Return Since Inception 16.30%
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</TABLE>
Another way to consider the above schedule is as follows: $10,000 invested in an
Advisory Account on October 1, 1991 which received a return based on the Total
Return Composite would have grown to $28,773, including reinvestment of
dividends, by September 30, 1998.
<TABLE>
<CAPTION>
PERFORMANCE OF NCRAM HIGH YIELD TOTAL RETURN COMPOSITE VS. LIPPER HIGH CURRENT YIELD FUND INDEX
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[NET OF FEES] Q1 Q2 Q3 Q4 ANNUAL
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<S> <C> <C> <C> <C> <C>
1998
NCRAM +5.55% +0.49% -7.64% N/A N/A
Lipper High Yield Index* +4.40% +0.38% -7.55% N/A N/A
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1997
NCRAM +1.83% +7.45% +7.36% +1.59% +19.34%
Lipper High Yield Index* +0.46% +5.29% +5.39% +1.51% +13.17%
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1996
NCRAM +2.43% +2.69% +6.73% +6.52% +19.59%
Lipper High Yield Index* +2.55% +1.66% +4.74% +3.47% +12.98%
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1995
NCRAM +5.97% +6.19% +3.64% +4.99% +22.43%
Lipper High Yield Index* +4.88% +5.27% +3.45% +2.77% +17.38%
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1994
NCRAM +3.60% +1.22% +0.51% +2.83% +8.39%
Lipper High Yield Index* -1.06% -1.34% -0.03% -1.30% -3.68%
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1993
NCRAM +9.41% +5.17% +2.79% +6.00% +25.37%
Lipper High Yield Index* +6.95% +4.80% +1.87% +4.97% +19.84%
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1992
NCRAM +5.45% +2.98% +7.29% +1.89% +18.70%
Lipper High Yield Index* +9.05% +3.23% +3.95% +1.14% +18.36%
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1991
NCRAM N/A N/A N/A +4.22% N/A
Lipper High Yield Index* N/A N/A N/A +5.21% N/A
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</TABLE>
* Source: Lipper Analytical Services, Inc.
Lipper figures represent the average of the total returns for the 30 largest
high yield mutual funds monitored by Lipper Analytical Services, Inc.
("Lipper"). These figures do not reflect sales charges.
The indices above each represent past performance, are shown solely for
comparative purposes and may not be indicative of future returns. Past
performance is no guarantee of future results. Mutual funds, including the Fund
and those funds comprising the Lipper High Current Yield Fund Index, typically
are subject to portfolio management restrictions, investment limitations and
diversification requirements imposed by the Investment Company Act and the
Internal Revenue Code of 1986, as amended (the "Code") that are not applicable
to private accounts. The imposition of such restrictions may result in lower
returns than reflected in the above table for the NCRAM High Yield Total Return
Composite, as discussed in note 6, below. See "Investment Objective and
Policies--Other Investment Policies and Practices--Portfolio Turnover."
NOTES TO INVESTMENT PERFORMANCE
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The schedule on page 7 of this Prospectus represents the average investment
results for the periods ending after October 1, 1991 for all clients whose
portfolios were included in the Advisory Accounts managed by the Investment
Adviser.
1. TYPES OF ACCOUNTS AND ELIGIBLE ACCOUNTS FOR COMPOSITE
The Total Return Composite contains accounts that are aggressively managed for a
high level of current income and capital appreciation. Accounts in the Total
Return Composite invest primarily in fixed income securities of U.S. issuers
which are rated in the lower rating categories of the established rating
services or are unrated securities of comparable quality. Investments in fixed
income securities include cash pay securities, pay-in-kind and zero coupon
notes, convertible debt securities and increasing rate and resettable notes.
These investments include both new issues and issues traded in the secondary
market.
New accounts are eligible for inclusion in the composite rate of return
calculations upon completion of the first full quarter under management. Closed
accounts are eligible for inclusion in the composite rate of return calculations
through the completion of the last full quarter under management. All existing
accounts under management are reevaluated for possible inclusion in the
composite on a quarterly basis.
2. CALCULATION OF RATES OF RETURN
All rate of return calculations conform to standards established by the
Association for Investment Management and Research. All accounts are valued
monthly based on principal market values plus accrued income. Account returns
are calculated monthly utilizing the modified Dietz methodology where security
and cash flows are "day-weighted" during the month. All amounts are rounded to
the nearest one-hundredth of one percent. Monthly returns are geometrically
linked to determine quarterly returns.
3. COMPOSITE CHANGES AND OTHER MATTERS
No alteration of Total Return Composite as presented here has occurred at any
time because of changes in personnel. The composition of the composite has been
amended only where a change in the investment mandates of an account so
dictates. Leverage has not been used in portfolios included in the Total Return
Composite. An affiliated account which represents an average of approximately
7.58% of the total assets of the Total Return Composite (for the period October
1, 1992 through March 31, 1994) was a non-fee paying account. Due to a change of
investment strategy, this account was removed from the Total Return Composite as
of April 1, 1994.
There has been no linkage with simulated portfolios.
4. TOTAL RETURN COMPOSITE
During the term of its existence, the Total Return Composite comprised five or
fewer separate accounts. As of September 30, 1998, assets in the Total Return
Composite Accounts aggregated approximately $263 million (approximately 9% of
the Investment Adviser's total assets under management). As of September 30,
1998, the Investment Adviser managed approximately $1.5 billion of assets in a
high yield mutual fund registered in Japan.
5. FEES
Fees range from 0.50% to 1.25% of assets under management.
6. LIPPER HIGH CURRENT YIELD FUND INDEX
The Lipper High Current Yield Fund Index is a published average total return net
of fees figure for the 30 largest high yield mutual funds monitored by Lipper
Analytical Services. Lipper defines "High Yield Bond" Funds as those that "aim
at high (relative) current yield from fixed income securities." The Lipper High
Current Yield Fund Index has no quality or maturity restrictions and the funds
tend to invest in lower-grade debt securities. Typically, such funds have
concentration, diversification, liquidity, portfolio turnover and distribution
restrictions which may result in lower returns than aggressively traded accounts
such as those in the Total Return Composite.
INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide shareholders with high total
return, consisting of current income and capital appreciation. The foregoing
investment objective is a fundamental policy of the Fund and may not be changed
without a vote of a majority of the outstanding shares of the Fund. The Fund
attempts to achieve its objective by investing principally in fixed income
securities which are rated in the lower rating categories of the established
rating services or are unrated securities of comparable quality. No assurance
can be given that the Fund's investment objective will be realized.
Under normal circumstances, the Fund will invest at least 80% of its total
assets in fixed income securities rated Ba1 or lower by Moody's Investors
Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's ("S&P"), or
unrated securities of comparable quality. The Fund has established no minimum
acceptable rating for the securities in which it will invest, and the Fund may,
from time to time, purchase or hold securities in the lowest rating categories.
Securities rated below Baa by Moody's or below BBB by S&P, and unrated
securities of comparable quality, are commonly known as "junk bonds." See
Appendix A--"Ratings of High Yield Debt Securities" for a description of these
rating categories. The high yield market is generally defined as including bonds
with ratings below investment grade. However, when prevailing economic
conditions cause a narrowing of spreads between the yields derived from medium
to lower rated or comparable non-rated securities and those derived from higher
rated securities, the Fund may invest in higher rated fixed income securities
which provide similar yields with less risk. Since some issuers do not seek
ratings for their securities, unrated securities also will be considered for
investment, but only when the Investment Adviser believes that the financial
condition of the issuers of such securities and/or the protection afforded by
the terms of the securities themselves limit the risk to the Fund to a degree
comparable to that of the rated securities which are consistent with the Fund's
investment objective and policies.
The Fund will seek to achieve its objective of high total return by investing in
a variety of high yield, high current income securities including both
convertible and non-convertible debt securities, preferred stock, units of high
yield securities (including warrants), pay-in-kind bonds or notes, contingent
interest securities and increasing rate and resettable and extendable notes. In
seeking capital appreciation, the Fund also may invest in zero coupon bonds or
notes, or common stock, rights or other equity securities which do not provide
high current income but offer the potential for capital appreciation. See "Risk
Factors and Special Considerations."
The average maturity of the Fund's portfolio securities will vary based upon the
Investment Adviser's assessment of economic and market conditions. The Fund
reserves the right, as a temporary defensive measure or in anticipation of
purchasing high yield securities, to hold cash or short-term, high quality
securities such as U.S. government securities, U.S. government agency or
instrumentality securities, domestic bank or savings institution certificates of
deposit and bankers' acceptances, short-term debt securities such as commercial
paper and other corporate debt, and repurchase agreements.
OTHER INVESTMENT POLICIES AND PRACTICES
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, which
include any corporate debt security or preferred stock which may be converted
into underlying shares of common stock. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege. Although the Fund generally expects that it will sell
convertible securities rather than convert such securities into common stock,
the Fund may, at various times, exercise conversion rights on convertible
securities.
NON-U.S. SECURITIES. The Fund may invest up to 25% of its total assets in
securities issued by non-U.S. issuers. Included within such investments, the
Fund may invest up to 15% of its total assets in securities of issuers in
emerging markets. All of the Fund's investments in securities of non-U.S.
issuers will be U.S. dollar-denominated. Investment in securities of foreign
issuers involves risks not typically related to domestic investment. See "Risk
Factors and Special Considerations."
CORPORATE LOANS. The Fund may invest in corporate loans made by banks or other
financial institutions either at origination or by acquiring participations in,
assignments of or novations of corporate loans. Corporate loans generally are
not readily marketable and may be subject to restrictions on resale and are
therefore subject to the Fund's limitation on illiquid securities, as set forth
below. The corporate loans in which the Fund invests typically are originated,
negotiated and structured by a syndicate of co-lenders, one or more of which
administers the loan on behalf of the syndicate. The value of a corporate loan
depends primarily on the creditworthiness of the borrower. The Fund will invest
in a corporate loan only if, in the Investment Adviser's judgment, the borrower
can meet debt service on such loan; however, the Investment Adviser has set no
minimum credit rating criteria regarding the borrowers. Although the Investment
Adviser will continue to monitor the creditworthiness of the borrowers of
corporate loans in which the Fund invests, there can be no assurance that such
analysis will disclose factors that will impair the value of a corporate loan.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities, which
are securities that directly or indirectly represent an interest in, or are
backed by and payable from, receivables (including lease receivables) on pools
of assets such as (but not limited to) mortgage loans secured by real property,
notes secured by property, equipment or lease payments, credit card debt,
automobile loans or student loans. Asset-backed securities are issued in
structured financings wherein the sponsor is often a special purpose entity
established for the purpose of securitizing the underlying assets in order to
increase the liquidity of those assets or to achieve certain other financial
goals. In choosing asset-backed securities in which the Fund will invest, the
Investment Adviser will take into consideration, among other things, the
underwriting standards of the originator of the underlying obligations,
applicable loan-to-value ratios and the general sensitivity of the securities to
economic conditions and trends.
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to repurchase
agreements. U.S. dollar-denominated repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or a primary dealer in
U.S. government securities or an affiliate thereof. Under such agreements, the
bank or primary dealer or an affiliate thereof agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
As a purchaser, the Fund will require the seller to provide additional
collateral if the market value of the securities that are the subject of the
repurchase agreement falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with disposition of
the collateral.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may purchase and
sell portfolio securities on a "when-issued" and "delayed delivery" basis. No
income accrues to the Fund in such securities in connection with such
transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the securities at delivery may be more or less than their purchase price, and
yields generally available on such securities when delivery occurs may be higher
or lower than yields on the securities obtained pursuant to such transactions.
Failure of the buyer or seller, as the case may be, to consummate the
transaction may result in a missed opportunity to obtain the best price or yield
available on the purchase or sale of the subject security.
LENDING OF PORTFOLIO SECURITIES. The Fund may from time to time lend securities
from its portfolio with a value not exceeding 33 1/3% of its total assets, to
banks, brokers and other financial institutions and receive collateral in cash
or securities issued or guaranteed by the U.S. government which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. During the period of this loan, the Fund
receives the income on the loaned securities and either receives the income on
the collateral or other compensation (i.e., negotiated loan premium or fee) for
entering into the loan and thereby increases its yield. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
securities that are not readily marketable, including securities that are
restricted as to disposition under the federal securities laws or otherwise. If
registration of such securities under the Securities Act of 1933 (the
"Securities Act") is required, such registration may not be readily
accomplished, and if such securities may be resold without registration, such
resale may be permissible only in limited quantities. In either event, the
inability to sell securities at the most opportune time may affect negatively
the net asset value of the Fund. Notwithstanding the foregoing, the Fund may
purchase certain restricted securities ("Rule 144A securities") for which there
is a secondary market of qualified institutional buyers as defined by Rule 144A
under the Securities Act. Rule 144A securities held by the Fund that are
determined to be liquid securities, either by the Fund's Board of Directors or
by the Investment Adviser pursuant to guidelines approved by the Fund's Board,
will not be subject to the Fund's limitation on illiquid securities. See
"Investment Objective and Policies--Rule 144A Securities" in the Statement of
Additional Information for additional information regarding Rule 144A
securities.
PORTFOLIO TURNOVER. Generally, the Fund does not purchase securities for
short-term trading profits. However, the Fund may dispose of securities without
regard to the time they have been held when such actions, for defensive or other
reasons, appear advisable to the Investment Adviser in light of a change in
circumstances in general market, economic or financial conditions. As a result
of its investment policies, the Fund may engage in a substantial number of
portfolio transactions. Accordingly, while the Fund anticipates that its annual
portfolio turnover rate should not exceed 200% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. Higher
portfolio turnover (over 100%) involves correspondingly greater transaction
costs and may result in the realization of greater net short-term capital gains.
LEVERAGE. Although the Fund does not presently intend to utilize leverage to
purchase portfolio securities, it is authorized to borrow from banks amounts of
up to 33 1/3% of its total assets (including the amount borrowed). The Fund may
also utilize its borrowing authority to obtain funds to meet redemption requests
or settle investment transactions or for temporary or emergency purposes.
Borrowings by the Fund create an opportunity for greater total return but, at
the same time, increase exposure to capital risk. For example, leveraging may
exaggerate changes in the net asset value of Fund shares and in the yield on the
Fund's portfolio. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets attributable to the borrowed funds. To the
extent the income derived from securities purchased with borrowed funds exceeds
the interest the Fund will have to pay, the Fund's net income will be greater
than if borrowing were not used. Conversely, if the income from the assets
acquired with borrowed funds is not sufficient to cover the cost of borrowing,
the net income of the Fund will be less than if borrowing were not used, and
therefore the amount available for distribution to shareholders as dividends
will be reduced.
OPTIONS AND FUTURES TRANSACTIONS. The Fund is authorized, but does not
currently intend, to engage in various portfolio strategies to hedge its
portfolio against investment and interest rate risks, including the utilization
of options and futures. See Appendix B--"Hedging Techniques."
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
Investors are referred to the Statement of Additional Information for a complete
description of such restrictions and policies.
RISK FACTORS AND SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------
JUNK BONDS. Junk bonds (sometimes referred to as "high yield securities") are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. In purchasing such junk bonds, the Fund will rely on the Investment
Adviser's judgment, analysis and experience in evaluating the creditworthiness
of an issuer of such securities. The Investment Adviser will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The market values of junk bonds tend to reflect individual issuer developments
to a greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Issuers of junk bonds may
be highly leveraged and may not have available to them more traditional methods
of financing. Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is the case with higher-rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of junk bonds may be more likely to experience financial
stress, especially if such issuers are highly leveraged. During periods of
economic recession, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments or
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
Junk bonds may have call or redemption features which would permit an issuer to
repurchase the securities from the Fund. If a call were exercised by the issuer
during a period of declining interest rates, the Fund likely would have to
replace such called securities with lower-yielding securities, thus decreasing
the net investment income to the Fund and dividends to shareholders.
As with all fixed income securities, changes in the market yield will affect the
Fund's net asset value as the prices of junk bonds generally increase when
interest rates decline and decrease when interest rates rise. Prices of longer
term securities generally fluctuate more in response to interest rate changes
than do shorter term securities.
The Fund may have difficulty disposing of certain junk bonds because there may
be a thin trading market for such securities. To the extent that a secondary
trading market for junk bonds does exist, it is generally not as liquid as the
secondary market for higher-rated securities. Reduced secondary market liquidity
may have an adverse effect on market price and the Fund's ability to dispose of
particular issues which is necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
junk bonds also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many junk bonds only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. The Fund's Directors, or the Investment Adviser pursuant to
guidelines which may be adopted by the Directors, will carefully consider the
factors affecting the market for junk bonds in determining whether any
particular security is liquid or illiquid and whether market quotations are
readily available for purposes of valuing portfolio securities.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of junk bonds are likely to affect adversely the Fund's net asset value.
In addition, the Fund may incur additional expenses to the extent it is required
to seek recovery upon a default on a portfolio holding or participate in the
restructuring of the obligation.
FOREIGN AND EMERGING MARKET SECURITIES. Investment in the securities of foreign
issuers involves special considerations that are not typically associated with
investment in the securities of U.S. issuers. These risks include adverse
political, economic and social developments, trading restrictions, low trading
volume, greater price volatility, settlement delays and less governmental
supervision and regulation. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rates of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position. Other risks include imposition of foreign
withholding taxes on Fund income, the possible seizure or nationalization of
foreign assets and the possible establishment of exchange controls,
expropriation, confiscatory taxation, or other foreign laws or restrictions that
might affect adversely payments due on securities held by the Fund. Moreover,
brokerage commissions and other transaction costs on foreign securities are
generally higher than in the U.S. In addition, in the event of a default on a
foreign obligation, it may be more difficult for the Fund to obtain or enforce a
judgment against the issuer of such obligation.
There may be less publicly available information about a foreign issuer than a
U.S. issuer, and foreign issuers may not be subject to the same auditing and
financial recordkeeping standards and requirements as U.S. issuers. Often
foreign issuers are not subject to uniform accounting, auditing and financial
reporting standards or to practices comparable to those applicable to U.S.
companies, and therefore a foreign issuer's financial statements may not reflect
its financial position or results of operations as they would be reflected had
the financial statements been prepared in accordance with U.S. generally
accepted accounting principles.
These risks may be heightened in connection with investments in issuers in
emerging markets. Investment in certain emerging market securities is restricted
or controlled to varying degrees which may at times limit or preclude investment
in or disposal of those securities and may increase the costs and expenses of
trading in those securities to the Fund. In addition, certain emerging market
countries may significantly restrict foreign investment, require governmental
approval for investment by foreign investors or to repatriate investment income,
capital or the proceeds of sales of securities by foreign investors, which also
may adversely affect the Fund.
In addition to the risks described above, investors will be subject to risks
resulting from the Fund's investment policies described under "Investment
Objective and Policies--Other Investment Policies and Practices."
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
DIRECTORS
The Directors of the Fund consist of four individuals, two of whom are not
"interested persons" as defined in the Investment Company Act. The Directors are
responsible for the overall supervision of the operations of the Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act.
The Directors of the Fund are:
Robert Levine*--Founder, President and Chief Executive Officer of the
Investment Adviser and an Executive Managing Director of Nomura Holding America
Inc. ("NHA").
Francis L. Fraenkel--President of Delta Capital Management Inc.
Lance B. Fraser*--Managing Director of the Investment Adviser.
Frank K. Reilly--Bernard J. Hank Professor of Business Administration,
University of Notre Dame College of Business Administration.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Subject to the direction of the Directors, the Investment Adviser is responsible
for the actual management of the Fund's portfolio and constantly reviews the
Fund's holdings in light of its own research analysis and that from other
relevant sources. The responsibilities for making decisions to buy, sell or hold
a particular security rest with the Investment Adviser. The Investment Adviser
performs certain of the other administrative services and provides office space,
facilities, equipment and personnel necessary for management of the Fund.
Pursuant to the management agreement between the Investment Adviser and the Fund
(the "Investment Advisory Agreement"), the Investment Adviser is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at an annual rate of 0.65%. The Investment Adviser has agreed to waive
that portion of the investment advisory fee necessary to limit the total
operating expenses of each class of the Fund to 1.25% of average daily net
assets. The Investment Adviser may discontinue this waiver any time at its sole
discretion.
The Investment Advisory Agreement obligates the Fund to pay certain expenses
incurred in the Fund's operations, including, among other things, the management
fee, legal and audit fees, unaffiliated Directors' fees and expenses,
registration fees, custodian and transfer agency fees, accounting and pricing
costs, and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. To the extent that
accounting services are provided to the Fund by the Investment Adviser, the Fund
will reimburse the Investment Adviser for its costs in connection with such
services.
Mr. Richard A. Buch has been the Senior Portfolio Manager of the Fund since the
Fund's inception. Mr. Buch joined NCRAM in 1993 as Senior Vice President. Mr.
Buch has been a Board Member of NCRAM since 1996 and a Managing Director of
NCRAM since 1995. From 1993 through 1995, Mr. Buch served as a Director of the
Investment Adviser. He has extensive experience in credit selection and the
management of high yield portfolios. Prior to 1993, Mr. Buch was a Senior Vice
President and High Yield Portfolio Manager for Kidder, Peabody & Co., Inc. Mr.
Buch received his MBA from Cornell University in 1985 and a B.S. in Management
from the State University of New York at Binghamton. He is a Chartered
Financial Analyst and a member of the Financial Analyst Federation (FAF).
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, Inc., provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors, Inc. as
specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
- -------------------------------------------------------
<S> <C>
0.100% on the first $150 million
- -------------------------------------------------------
0.075% on assets in excess of $150 million
- -------------------------------------------------------
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per portfolio. Federated Services Company may choose voluntarily to waive a
portion of its fee.
TRANSFER AGENCY SERVICES
Federated Shareholder Services Company ("FSS"), acts as the Fund's transfer
agent (the "Transfer Agent") pursuant to an agreement (the "Transfer Agency
Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening
and maintenance of shareholder accounts.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are offered continuously for sale by the Distributor and
other eligible securities dealers. The minimum initial purchase for Class A
shares is $1,000 and the minimum subsequent purchase is $100; the minimum
initial purchase for Class Y shares is $1 million.
The Fund offers its shares in two classes at a public offering price equal to
the next determined net asset value per share plus, in the case of Class A
shares, a sales charge imposed at the time of purchase. Class A shares may be
purchased through securities dealers that have entered into selected dealer
agreements with the Distributor. Class Y investors not purchasing through a
securities dealer should contact the Fund's Transfer Agent at 1-888-254-2874
prior to sending a purchase wire. Failure to notify the Transfer Agent in
advance may result in a delay in processing the purchase. Purchase wires should
be sent to The Bank of New York, New York, NY, ABA# 021-000-018, Nomura
Securities Deposit Account, Account #8900312076, c/o Federated Shareholder
Services Company, For Further Credit To: Battery Park(SM) High Yield Fund; an
investor should indicate his or her account number and the name under which the
account is registered. In addition, funds may be withdrawn from the
shareholder's bank account at an Automated Clearing House ("ACH") member for the
purchase of Fund shares. Purchase orders for Class A shares of the Fund must be
submitted through a securities dealer to the Fund's Transfer Agent. Purchase
orders must be received by securities dealers prior to the close of business on
the New York Stock Exchange (the "NYSE") which is normally 4:00 p.m. e.s.t. and
will include orders received after the close of business on the previous day.
The applicable offering price will be based on the net asset value determined as
of the close of business on the NYSE that day, provided the Transfer Agent in
turn receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day (normally 4:30 p.m. e.s.t.). If the
purchase orders are not received by the Transfer Agent prior to 30 minutes after
the close of business on the NYSE, such orders shall be deemed received on the
next business day.
The Fund or the Distributor may suspend the continuous offering of any class of
the Fund's shares at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Any order may be rejected by the Distributor or the Fund. Neither the
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change.
Each Class A share and Class Y share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that Class A shares bear the expenses of the ongoing distribution fees and Class
A shares may convert to Class Y shares. See "Class A Shares-- Conversion of
Class A Shares to Class Y Shares." The distribution fees that are imposed on
Class A shares will be imposed directly against the assets represented by Class
A shares and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of Class Y shares or have any impact on
investors choosing Class Y shares. Dividends paid by the Fund for both classes
of shares will be calculated in the same manner at the same time and will differ
only to the extent that distribution fees and any incremental costs relating to
a particular class are borne exclusively by that class. Class A shares have
exclusive voting rights with respect to the Class A Rule 12b-1 distribution
plan. See "Distribution Plan" below. Each class has an exchange privilege with
the Liberty U.S. Government Money Market Trust. See "Shareholder
Services--Exchange Privilege."
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus varying sales charges (i.e., sales loads) as set forth in the table
below:
<TABLE>
<CAPTION>
SALES CHARGE AS A DISCOUNT TO
SALES CHARGE AS A PERCENTAGE* OF THE SELECTED DEALERS AS
PERCENTAGE OF NET AMOUNT A PERCENTAGE OF THE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OFFERING PRICE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
- ----------------------------------------------------------------------------
$50,000--$99,999 4.00% 4.17% 3.50%
- ----------------------------------------------------------------------------
$100,000--$249,999 3.25% 3.36% 2.75%
- ----------------------------------------------------------------------------
$250,000--$499,999 2.50% 2.56% 2.25%
- ----------------------------------------------------------------------------
$500,000--$999,999 2.00% 2.04% 1.80%
- ----------------------------------------------------------------------------
$1,000,000 or more 0.00% 0.00% N/A
- ----------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.
Class A shares may be sold at net asset value to registered representatives and
employees of broker-dealers that are parties to dealer agreements with the
Distributor. Class A shares may also be purchased without sales charges by
investors who participate in certain broker-dealer wrap fee investment programs.
Class A shares of the Fund may be sold at net asset value without any sales
charge under a NAV Transfer Program. To qualify for the NAV Transfer Program, an
investor must provide adequate proof that within 90 days prior to the purchase
of Class A shares of the Fund an investor redeemed shares from a load or no-load
mutual fund other than the Fund or any money market fund. To provide adequate
proof, an investor must complete a qualification form and provide a statement
showing the value liquidated from the other mutual fund.
Reduced initial sales charges are applicable to Class A share purchases
aggregating $50,000 or more made within a 13-month period starting with the
first purchase pursuant to a letter of intention. The letter of intention is not
a binding obligation to purchase any amount of Class A shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity level. For details regarding letters of intention, see
"Purchase of Shares--Letter of Intention" in the Statement of Additional
Information.
The Distributor may reallow discounts to selected dealers and retain the balance
over such discounts. At times the Distributor may reallow the entire sales
charge to such dealers. Since securities dealers selling Class A shares of the
Fund will receive a concession equal to a substantial portion of the sales
charge, they may be deemed underwriters under the Securities Act.
Class A shares are available to certain qualified investors and other entities
(herein referred to as "Qualified Investors") without a sales charge. Qualified
Investors include:
. U.S. purchasers which place orders through a broker that maintains an omnibus
account with the Fund and makes such purchases: (i) through U.S. investment
advisers or financial planners placing trades for their accounts or the
accounts of their clients, and who charge a fee for their services; (ii) for
U.S. clients of such investment adviser or financial planner who place trades
for their own accounts if the accounts are linked to a master account of such
investment adviser or financial planner on the books and records of the broker
or agent; (iii) for U.S. retirement and deferred compensation plans, and
trusts used to fund those plans, including but not limited to those defined in
section 401(a), 403(b) or 457 of the Code or "rabbi trusts" or (iv) using the
proceeds of a redemption of shares of another registered open-end investment
company; charitable organizations (as defined in section 501(c) of the Code)
investing $100,000 or more;
. any U.S. pension fund, corporation, state or local government, Taft Hartley
plan, foundation and/or endowment which is a client of a consulting firm, if
that firm has made appropriate arrangements with the Fund, NHA, NCRAM or any
affiliate of NHA or NCRAM with respect to furnishing advice to the client or
with respect to the purchase of Fund shares by such client;
. accounts as to which a U.S. bank or broker-dealer charges an account
management fee, provided the bank or broker-dealer has an agreement with
NCRAM or NHA relating to investment in the Fund;
. U.S. investors, and their spouses and minor children, who are investment
advisory clients of NCRAM or NHA or any of their affiliates or who are
affiliated persons or sponsoring companies of those clients; and
. employees (and their spouses and minor children) of the Investment Adviser.
DISTRIBUTION PLAN. The Fund has adopted a distribution plan for Class A shares
pursuant to Rule 12b-1 under the Investment Company Act (the "Distribution
Plan") with respect to the distribution fees paid by the Fund to the Distributor
with respect to such class.
Under the Distribution Plan, the Distributor will be paid a fee in an amount
computed at an annual rate of .25 of 1% of the average daily net assets of Class
A shares, accrued daily and paid monthly, to finance any activity which is
principally intended to result in the sale of Class A shares. Under the
Distribution Plan, all or part of this fee will be paid to financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers and broker/dealers that have entered into agreements with the Fund or
the Distributor to provide sales services or distribution-related support
services to the Fund. In addition, the Investment Adviser may also make payments
out of its own resources to such financial institutions.
SHAREHOLDER SERVICES AGREEMENT. The Fund has entered into a Shareholder Services
Agreement with FSS under which the Fund may make additional payments up to .25
of 1% of the average daily net asset value of Class A shares to obtain certain
personal services for certain shareholders and the maintenance of certain
shareholder accounts. Under this Shareholder Services Agreement, FSS would
either perform shareholder services directly or will select financial
institutions to perform shareholder services, and financial institutions would
receive fees based upon Class A shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees would be paid will be
determined from time to time by the Fund and FSS. The Fund has not made any
payments pursuant to the Shareholder Services Agreement and has no current
intention of making any such payments.
CONVERSION OF CLASS A SHARES TO CLASS Y SHARES. When the aggregate net
investments of clients of a securities dealer or fee-based financial planner
with appropriate arrangements with the Fund or NCRAM or the investment of a
single investor in Class A shares reaches $1 million, such Class A shares will
convert to Class Y shares upon written request by the securities dealer or
investor. Thereafter, such securities dealer or individual investor will be
offered Class Y shares of the Fund so long as such investor has at least $1
million invested in the Fund at the date the purchase order is accepted by the
Transfer Agent. Eligible shares will be transferred from Class A to Class Y at
net asset value on the day that the written request is received by the Transfer
Agent without the imposition of any fee or other charge.
If share certificates were issued, the share certificates for Class A shares of
the Fund to be converted must be delivered to the Transfer Agent with the
written request to transfer the shares. In the event such certificates are not
received by the Transfer Agent together with the request, the related Class A
shares will convert to Class Y shares after such certificates are delivered.
REINSTATEMENT PRIVILEGE. Shareholders who have redeemed their Class A shares
have a one-time privilege to reinstate their accounts by purchasing Class A
shares of the Fund, at net asset value without a sales charge, up to the dollar
amount redeemed. The reinstatement privilege may be exercised by sending a
notice of exercise along with a check for the amount to be reinstated to the
Transfer Agent within 90 days of the date the request for redemption was
accepted by the Transfer Agent. The reinstatement will be made at the net asset
value per share next determined after the notice of reinstatement is received
and cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised only the first time a
Class A shareholder makes a redemption.
CLASS Y SHARES
Class Y shares are offered at net asset value without a sales charge to an
investor that invests at least $1 million in the Fund or purchases shares
through a fee-based financial planner whose clients have a current investment in
the Fund aggregating at least $1 million. Class Y shares also are offered for
purchases of less than $1 million to Directors of the Fund and to retirement
plans administered by the Investment Adviser or its affiliates for the benefit
of employees of the Investment Adviser and/or its affiliates.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. The Investment Adviser and/or
the Distributor also may pay financial institutions a fee for providing certain
services to both Class A and Class Y shareholders. This fee is in addition to
the amounts paid under the Distribution Plan and/or Shareholder Services
Agreement and, to the extent paid, will be reimbursed by the Investment Adviser
and not the Fund.
SYSTEMATIC INVESTMENT PLANS
Regular additions of shares may be made to an investor's Investment Account by
prearranged charge of $50 or more to his or her regular bank account on either a
monthly or quarterly basis. For further information about this Plan, contact the
Transfer Agent at 1-888-254-2874.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund is required to redeem for cash all shares of the Fund upon receipt of a
written request in proper form. Class A shares and Class Y shares of the Fund
may be redeemed through securities dealers, or when appropriate in the case of
Class Y shares, by contacting the Transfer Agent at 1-888-254-2874. The
redemption price is the net asset value per share next determined after the
initial receipt of proper notice of redemption. There will be no charge for
redemption. Shareholders liquidating their holdings will receive on redemption
all dividends declared through the date of redemption. The value of shares at
the time of redemption may be more or less than the shareholder's cost,
depending on the market value of the securities held by the Fund at such time.
A shareholder may redeem shares by sending a written request to the Transfer
Agent. The written request should include the shareholder's name, the Fund name,
the account number, the share or dollar amount requested and, if share
certificates were issued, the share certificates. Shareholders should call the
Transfer Agent for assistance in redeeming by mail. Proceeds from redeemed Fund
shares may be deposited into the shareholder's bank account at an ACH member.
Shareholders requesting a redemption of $50,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to a shareholder of record must have signatures on
written redemption requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
. a member of the New York, American, Boston, Midwest or Pacific Stock
Exchange;
. a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund, which is administered by the FDIC; or
. any other "eligible guarantor institution" as defined by the Securities
Exchange Act of 1934.
The Transfer Agent does not accept signatures guaranteed by a notary public. The
Fund and its Transfer Agent have adopted standards for accepting signature
guarantees from the above institutions. The Transfer Agent may elect in the
future to limit eligible signature guarantees to institutions that are members
of a signature guarantee program. The Fund and its Transfer Agent reserve the
right to amend these standards at any time without notice.
At various times the Fund may be requested to redeem shares for which it has not
yet received good payment (e.g., cash, federal funds or certified check drawn on
a U.S. bank). The Fund may delay or cause to be delayed the mailing of a
redemption check until such time as it has assured itself that good payment has
been collected for the purchase of such Fund shares, which will not exceed seven
days.
Due to the relatively high cost of maintaining accounts of less than $500, the
Fund reserves the right to redeem shares in any Class A share account for their
then current net asset value (which will be promptly paid to the shareholder),
if at any time the total investment does not have a value of at least $500.
Shareholders will be notified that the value of their account is less than $500
and allowed 60 days to make an additional investment before the redemption is
processed. In such event, the $100 minimum on subsequent investment will not be
applicable.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his or
her Investment Account through automatic payment by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. To be eligible to participate in this program, a shareholder
must have an account value of at least $10,000. For further information about
this Plan, contact the Transfer Agent at 1-888-254-2874.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers a number of shareholder services and investment plans described
below which are designed to facilitate investment in shares of the Fund. Full
details as to each of such services can be obtained from the Fund by calling the
telephone number on the cover page hereof or from the Transfer Agent.
Included in such services are the following:
INVESTMENT ACCOUNT
An Investment Account is established by the Transfer Agent for each shareholder.
The shareholder will receive statements with respect to share transactions
showing the activity in the shareholder's Investment Account. Share certificates
for full shares will be issued without charge upon the request of the
shareholder to the Transfer Agent.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will automatically be reinvested in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund, without
sales charge, as of the close of business on the last business day of each
month. Shareholders may elect in writing to receive either their income
dividends or capital gains distributions, or both, in cash, in which event
shareholders may elect payment by check or deposit to their bank account via ACH
on the payment date. Amounts reinvested will be taxable as described under
"Taxes."
Shareholders may, at any time, notify the Transfer Agent in writing that they no
longer wish to have their dividends and/or distributions reinvested in shares of
the Fund or vice versa, and commencing ten days after the receipt by the
Transfer Agent of such notice, those instructions will be effected.
RETIREMENT PLANS
Shares of the Fund may be purchased in connection with individual retirement
accounts. Copies of plans establishing such accounts are available from dealers
offering shares of the Fund.
Capital gains and income received in retirement plans are generally exempt from
federal taxation until distributed from the plans. Investors considering
participation in any such plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege with
Liberty U.S. Government Money Market Trust (the "Money Fund"), a money market
mutual fund advised by Federated Advisers, an affiliate of FSS. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the SEC. The exchange privilege is available only
to U.S. shareholders in states where the exchange legally may be made. Exchanges
of Class A shares and Class Y shares for shares of the Money Fund are made on
the basis of the relative net asset values per Class A share or Class Y share,
respectively, without the imposition of any fee or other charge. Shareholders of
the Money Fund who wish to exchange their Money Fund shares for Class A shares
of the Fund and who did not acquire their Money Fund shares in exchange for
Class A shares will be required to pay the sales charge applicable to the Class
A shares acquired in exchange for those Money Fund shares.
Should the relationship between the Fund and FSS terminate, the Fund will seek
to enter into arrangements with another similar money market fund to continue to
provide the exchange privilege. Should FSS be replaced, former Fund shareholders
who exchanged their shares of the Fund for shares of the Money Fund will be
given a one-time opportunity to exchange their shares of the Money Fund for
shares of the new money market fund and thus preserve the ability to exchange
their money market fund shares for shares of the Fund at a future date.
TAXES
- --------------------------------------------------------------------------------
The Fund intends to continue to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Code. If it so qualifies, the
Fund (but not its shareholders) will not be subject to federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A and Class Y shareholders (together, the "shareholders").
The Fund intends to distribute all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from certain
transactions in futures and options) ("capital gain dividends") are taxable to
shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Certain
categories of capital gains are taxable at different rates. The categories of
gain and related rates will be passed through to shareholders in capital gain
dividends. Any loss upon the sale or exchange of Fund shares held for six months
or less will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of the
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends, as well as any amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the Fund, whether
from ordinary income or capital gains, generally will not be eligible for the
dividends received deduction allowed to corporations under the Code. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized on the conversion of Class A shares into
Class Y shares in the circumstances described in this Prospectus. A
shareholder's basis in the shares acquired will be the same as such
shareholder's basis in the shares converted, and the holding period of the
acquired shares will include the holding period for the converted shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring the
shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have owed
upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury regulations presently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and the
Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. government obligations. State law varies as to
whether dividend income attributable to U.S. government obligations is exempt
from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time, the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A and Class Y shares in accordance
with formulas specified by the SEC.
Average annual total return quotations for the specified period will be computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, and the maximum sales charge in the case of Class A
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
distribution fees and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund. In addition, advertisements
may include performance data that does not take the Class A sales charge into
account and therefore may reflect greater total return since a lower amount of
expenses is deducted. See "Purchase of Shares." The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a) net
income based on the yield of each security earned during the period by (b) the
average daily number of shares outstanding during that period that were entitled
to receive dividends multiplied by the maximum offering price per share on the
last day of the period.
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return and
yield will vary depending on market conditions, the securities comprising the
Fund's portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to performance data published
by the Merrill Lynch High Yield Bond Index, Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune
Magazine. From time to time, the Fund may include the Fund's Morningstar risk-
adjusted performance ratings in advertisements or supplemental sales literature.
As with other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates or
spreads, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, securities firms which provided supplemental investment research to
the Investment Adviser, including NSI, may receive orders for transactions by
the Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the Investment
Advisory Agreement, and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. In addition, consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc. and policies established by the
Directors of the Fund, the Investment Adviser may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
The securities in which the Fund invests are traded primarily in the
over-the-counter market. Since portfolio transactions will generally not be
effected on foreign securities exchanges, the Fund does not expect typically to
incur potential settlement delays which may occur on certain of such exchanges.
Where possible, the Fund will deal directly with the dealers who make a market
in the securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and do
not normally involve either brokerage commissions or transfer taxes. Securities
firms may receive brokerage commissions on certain portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon exercise of options. Under the Investment
Company Act, persons affiliated with the Fund, including NSI, are prohibited
from dealing with the Fund as a principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the SEC.
An affiliated person of the Fund may serve as its broker in transactions
conducted on an exchange and in over-the-counter transactions conducted on an
agency basis.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income. Dividends from
such net investment income will be declared daily prior to the determination of
net asset value on that day and paid monthly. Shares will accrue dividends as
long as they are issued and outstanding. Shares are issued and outstanding from
the settlement date of a purchase order to the settlement date of a redemption
order. All net realized long-term and short-term capital gains, if any, will be
distributed to the Fund's shareholders at least annually.
The per share dividends and distributions on each class of shares will be
reduced as a result of any fees or expenses applicable with respect to such
class of shares. See "Additional Information--Determination of Net Asset Value."
Dividends and distributions may be reinvested automatically in shares of the
Fund at net asset value. Shareholders may elect to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed under "Taxes" whether they are reinvested in shares of
the Fund or received in cash.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined as of the close of trading
(normally 4:00 p.m. e.s.t.) on the NYSE, Monday through Friday, except on: (i)
days on which there is not sufficient change in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; or (iii) the following holidays: New Year's Day,
Martin Luther King Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share is computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued but
not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Investment Adviser and any account
maintenance and/or distribution fees payable to the Distributor, are accrued
daily.
The per share net asset value of the Class Y shares generally will be higher
than the per share net asset value of the Class A shares, reflecting the daily
expense accruals of the distribution fees applicable to Class A shares. It is
expected, however, that the per share net asset value of the classes will tend
to converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differentials between the classes.
ORGANIZATION OF THE FUND
The Fund is the only existing series of the Company, a series-type investment
company incorporated under Maryland law on June 4, 1996. The Company has an
authorized capital of 200,000,000 shares of common stock, par value $0.001 per
share, of which 50,000,000 shares are initially classified as one series, namely
the Fund, consisting of two classes, designated Class A and Class Y common
stock, each of which consists of 25,000,000 shares and the remainder of
150,000,000 shares are not classified as to any class or series. Shares of Class
A and Class Y common stock represent interests in the same assets of the Fund
and are identical in all respects except that the Class A shares bear certain
expenses related to the shareholder services and distribution associated with
such shares and may cease to be subject to such expenses if they are converted
to Class Y shares. Class A shareholders have exclusive voting rights with
respect to matters relating to that class' shareholder services and distribution
expenditures, as applicable. See "Purchase of Shares." The Directors of the
Company may classify and reclassify the shares of the Fund and of the Company
into additional classes or series of common stock at a future date.
Shareholders are entitled to one vote for each share held and fractional votes
for fractional shares held and will vote on the election of Directors and any
other matter submitted to a shareholder vote. The Fund does not intend to hold
meetings of shareholders in any year in which the Investment Company Act does
not require shareholders to act upon the election of directors. Also, the Bylaws
of the Fund require that a special meeting of stockholders be held upon the
written request of shareholders of the Fund as required by Maryland corporate
law and the Investment Company Act. Voting rights for Directors are not
cumulative. Shares issued are fully paid and nonassessable and have no
preemptive rights. Shares have the conversion features described in this
Prospectus. Each share of common stock is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities except, as noted above, the Class A shares bear certain additional
expenses.
As of October 31, 1998, Nomura Holding America Inc., New York, New York, owned
77.02% of the Class Y shares of the Fund, and, therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or telephone
number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder communications
will be mailed to each identified shareholder regardless of the number of
accounts such shareholder has. If a shareholder wishes to receive separate
copies of each report and communication for each of the shareholder's related
accounts, the shareholder should notify in writing:
Battery Park Funds, Inc.
P.O. Box 1226
Pittsburgh, PA 15230-1226
The written notification should include the shareholder's name, address, tax
identification number and account numbers. If you have any questions regarding
this, please call 1-888-254-2874.
BATTERY PARK(SM) HIGH YIELD FUND
Portfolio of Investments
September 30, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS--91.8%
- -------------------------------------------------------------------------------
AUTOMOTIVE--2.6%
- -------------------------------------------------------------------------------
$ 500,000 Collins & Aikman Products Co., Sr. Sub. Note, 11.50%,
4/15/2006 $ 525,000
- -------------------------------------------------------------------------------
BROADCAST RADIO & TV--14.0%
- -------------------------------------------------------------------------------
600,000 Allbritton Communication Co., Sr. Sub. Note, 8.875%,
2/1/2008 588,000
- -------------------------------------------------------------------------------
600,000 Cumulus Media, Inc., Sr. Note, 10.375%, 7/1/2008 609,000
- -------------------------------------------------------------------------------
600,000 Fox Family Worldwide, Inc., Sr. Note, 9.25%,
11/1/2007 588,000
- -------------------------------------------------------------------------------
500,000 Gray Communications, Sr. Note, 10.625%, 10/1/2006 528,750
- -------------------------------------------------------------------------------
500,000 Sinclair Broadcast Group, Inc., Company Guarantee,
9.00%, 7/15/2007 500,000
- -------------------------------------------------------------------------------
Total 2,813,750
- -------------------------------------------------------------------------------
BUSINESS EQUIPMENT & SERVICES--3.2%
- -------------------------------------------------------------------------------
1,000,000 IPC Information Systems, Inc., Sr. Disc. Note,
0/10.875%, 5/1/2008 640,000
- -------------------------------------------------------------------------------
CABLE TV--4.4%
- -------------------------------------------------------------------------------
1,000,000 Knology Holdings, Sr. Disc. Note, 0/11.875%,
10/15/2007 465,000
- -------------------------------------------------------------------------------
750,000 RCN Corp., Sr. Disc. Note, 0/11.125%, 10/15/2007 420,000
- -------------------------------------------------------------------------------
Total 885,000
- -------------------------------------------------------------------------------
CONGLOMERATES--2.5%
- -------------------------------------------------------------------------------
500,000 Insilco Corp., Sr. Sub. Note, 10.25%, 8/15/2007 502,500
- -------------------------------------------------------------------------------
FINANCIAL INTERMEDIARIES--5.0%
- -------------------------------------------------------------------------------
500,000 CB Richard Ellis Services, Sr. Sub. Note, 8.875%,
6/1/2006 491,250
- -------------------------------------------------------------------------------
575,000 Wilshire Financial Services Group, Note, 13.00%,
8/15/2004 514,625
- -------------------------------------------------------------------------------
Total 1,005,875
- -------------------------------------------------------------------------------
FOOD PRODUCTS--3.2%
- -------------------------------------------------------------------------------
700,000 Eagle Family Foods, Inc., Sr. Sub. Note, 8.75%,
1/15/2008 633,500
- -------------------------------------------------------------------------------
FOOD SERVICE--2.5%
- -------------------------------------------------------------------------------
500,000 SC International Services, Inc., Company Guarantee,
9.25%, 9/1/2007 488,750
- -------------------------------------------------------------------------------
FOOD/DRUG RETAILERS--2.9%
- -------------------------------------------------------------------------------
600,000 Duane Reade, Inc., Sr. Sub. Note, 9.25%, 2/15/2008 585,000
- -------------------------------------------------------------------------------
HEALTHCARE--5.1%
- -------------------------------------------------------------------------------
500,000 Alaris Medical Systems, Company Guarantee, 9.75%,
12/1/2006 482,500
- -------------------------------------------------------------------------------
250,000 Kinetic Concepts, Inc., Company Guarantee, 9.625%,
11/1/2007 250,000
- -------------------------------------------------------------------------------
500,000 Mariner Post-Acute Network, Inc., Sr. Sub. Note,
0/10.50%, 11/1/2007 277,500
- -------------------------------------------------------------------------------
Total 1,010,000
- -------------------------------------------------------------------------------
HOME FURNISHINGS--3.2%
- -------------------------------------------------------------------------------
590,000 Simmons Co., Sr. Sub. Note, 10.75%, 4/15/2006 643,100
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------------
HOTELS/CASINOS--4.7%
- -------------------------------------------------------------------------------
$ 500,000 HMH Properties, Inc., Sr. Note, Series B, 7.875%,
8/1/2008 $ 496,250
- -------------------------------------------------------------------------------
500,000 Venetian Casino/LV Sands, Company Guarantee, 12.25%,
11/15/2004 452,500
- -------------------------------------------------------------------------------
Total 948,750
- -------------------------------------------------------------------------------
LEISURE--3.3%
- -------------------------------------------------------------------------------
700,000 Bally Total Fitness Holding Corp., Sr. Sub. Note,
9.875%, 10/15/2007 654,500
- -------------------------------------------------------------------------------
OIL & GAS--3.6%
- -------------------------------------------------------------------------------
500,000 Dailey Petroleum Services Corp., Company Guarantee,
9.50%, 2/15/2008 292,500
- -------------------------------------------------------------------------------
250,000 Parker Drilling Co., Company Guarantee, 9.75%,
11/15/2006 232,500
- -------------------------------------------------------------------------------
250,000 United Refining Co., Sr. Note, 10.75%, 6/15/2007 201,250
- -------------------------------------------------------------------------------
Total 726,250
- -------------------------------------------------------------------------------
PUBLISHING--2.4%
- -------------------------------------------------------------------------------
500,000 Ziff-Davis, Inc., Sr. Sub. Note, 8.50%, 5/1/2008 482,500
- -------------------------------------------------------------------------------
RETAILER--5.0%
- -------------------------------------------------------------------------------
550,000 Finlay Enterprises, Inc., Sr. Deb., 9.00%, 5/1/2008 497,750
- -------------------------------------------------------------------------------
600,000 United Auto Group, Inc., Sr. Sub. Note, 11.00%,
7/15/2007 504,000
- -------------------------------------------------------------------------------
Total 1,001,750
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS--21.3%
- -------------------------------------------------------------------------------
500,000 Call-Net Enterprises, Inc., Sr. Disc. Note, 0/9.27%,
8/15/2007 327,500
- -------------------------------------------------------------------------------
600,000 MGC Communications, Inc., Sr. Secured, 13.00%,
10/1/2004 456,000
- -------------------------------------------------------------------------------
600,000 McLeod, Inc., Sr. Note, 9.25%, 7/15/2007 615,000
- -------------------------------------------------------------------------------
500,000 NEXTLINK Communications, Inc., Sr. Note, 9.625%,
10/1/2007 487,500
- -------------------------------------------------------------------------------
600,000 Paging Network, Inc., Sr. Sub. Note, 10.00%,
10/15/2008 598,500
- -------------------------------------------------------------------------------
500,000 PsiNet, Inc., Sr. Note, 10.00%, 2/15/2005 505,000
- -------------------------------------------------------------------------------
600,000 Rogers Cantel Mobile, Inc., Sr. Sub. Note, 8.80%,
10/1/2007 580,500
- -------------------------------------------------------------------------------
700,000 Time Warner Telecom LLC, Sr. Note, 9.75%, 7/15/2008 707,000
- -------------------------------------------------------------------------------
Total 4,277,000
- -------------------------------------------------------------------------------
TEXTILES--2.9%
- -------------------------------------------------------------------------------
550,000 William Carter Co., Sr. Sub. Note, 10.375%, 12/1/2006 577,500
- -------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $19,963,397) 18,400,725
- -------------------------------------------------------------------------------
COMMERCIAL PAPER--5.3%
- -------------------------------------------------------------------------------
FINANCE--5.3%
- -------------------------------------------------------------------------------
1,068,000 General Electric Capital Corp., Discount Note, 5.25%,
10/5/1998 (at amortized cost) 1,067,377
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -----------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--0.0%
- -----------------------------------------------------------------------------
CABLE TV--0.0%
- -----------------------------------------------------------------------------
$ 500 (a)Optel, Inc. (identified cost $2) $ 10,000
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST $21,030,776)(B) $19,478,102
- -----------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
(b) The cost of investments for federal tax purposes amounts to $21,030,776. The
net unrealized depreciation of investments on a federal tax basis amounts to
$1,552,674 which is comprised of $57,673 appreciation and $1,610,347
depreciation at September 30, 1998.
Note: The categories of investments are shown as a percentage of net assets
($20,052,201) at September 30, 1998.
The following acronym is used throughout this portfolio:
LLC--Limited Liability Corporation
(See Notes which are an integral part of the Financial Statements)
BATTERY PARK(SM) HIGH YIELD FUND
Statement of Assets and Liabilities
September 30, 1998
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------
Total investments in securities, at
value (identified and tax cost
$21,030,776) $19,478,102
- -----------------------------------------------------------------
Cash 6,038
- -----------------------------------------------------------------
Income receivable 525,951
- -----------------------------------------------------------------
Receivable for shares sold 6,300
- -----------------------------------------------------------------
Deferred organizational costs 140,097
- -----------------------------------------------------------------
Total assets 20,156,488
- -----------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------
Payable for shares redeemed $ 2,855
- -----------------------------------------------------------------
Income distribution payable 14,894
- -----------------------------------------------------------------
Accrued expenses 86,538
- -----------------------------------------------------------------
Total liabilities 104,287
- -----------------------------------------------------------------
Net Assets for 1,985,517 shares
outstanding $20,052,201
- -----------------------------------------------------------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------
Paid in capital $20,674,329
- -----------------------------------------------------------------
Net unrealized depreciation of
investments (1,552,674)
- -----------------------------------------------------------------
Accumulated net realized gain on
investments 832,477
- -----------------------------------------------------------------
Undistributed Net Income 98,069
- -----------------------------------------------------------------
Total Net Assets $20,052,201
- -----------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------
CLASS A SHARES:
- -----------------------------------------------------------------
Net Asset Value Per Share ($3,893,961 /
385,570 shares outstanding) $10.10
- -----------------------------------------------------------------
Offering Price Per Share (100/95.50 of
$10.10)* $10.58
- -----------------------------------------------------------------
Redemption Proceeds Per Share
($3,893,961 / 385,570 shares
outstanding) $10.10
- -----------------------------------------------------------------
CLASS Y SHARES:
- -----------------------------------------------------------------
$16,158,240 / 1,599,947 shares
outstanding $10.10
- -----------------------------------------------------------------
</TABLE>
* See "Purchase of Shares--Class A Shares" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
BATTERY PARK(SM) HIGH YIELD FUND Statement of Operations Year Ended September
30, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------
Interest $ 1,719,663
- ----------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------
Investment advisory fee $ 115,986
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and
expenses 77,678
- ----------------------------------------------------------------------------------------
Portfolio accounting fees 57,383
- ----------------------------------------------------------------------------------------
Administrative personnel and services fee 50,001
- ----------------------------------------------------------------------------------------
Amortization of organization costs 45,437
- ----------------------------------------------------------------------------------------
Directors fees 30,001
- ----------------------------------------------------------------------------------------
Share registration costs 25,793
- ----------------------------------------------------------------------------------------
Printing and postage 23,735
- ----------------------------------------------------------------------------------------
Legal fees 22,786
- ----------------------------------------------------------------------------------------
Auditing fees 10,107
- ----------------------------------------------------------------------------------------
Distribution services fee--Class A Shares 7,079
- ----------------------------------------------------------------------------------------
Miscellaneous 6,637
- ----------------------------------------------------------------------------------------
Custodian fees 6,595
- ----------------------------------------------------------------------------------------
Insurance premiums 2,783
- ----------------------------------------------------------------------------------------
Taxes 1,000
- ----------------------------------------------------------------------------------------
Total expenses 483,001
- ----------------------------------------------------------------------------------------
Waivers and reimbursements--
- ----------------------------------------------------------------------------------------
Waiver of investment advisory fee $(115,986)
- ----------------------------------------------------------------------------------------
Reimbursement of other operating expenses (181,496)
- ----------------------------------------------------------------------------------------
Total waivers and reimbursements (297,482)
- ----------------------------------------------------------------------------------------
Net expenses 185,519
- ----------------------------------------------------------------------------------------
Net investment income 1,534,144
- ----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------
Net realized gain on investments 932,771
- ----------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments (2,450,720)
- ----------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (1,517,949)
- ----------------------------------------------------------------------------------------
Change in net assets resulting from operations $ 16,195
- ----------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BATTERY PARK(SM) HIGH YIELD FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997(A)
- -------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------
Net investment income $ 1,534,144 $ 1,001,841
- -------------------------------------------------------------------------------
Net realized gain (loss) on investments ($932,771
and $702,862, respectively, as computed for
federal tax purposes) 932,771 702,862
- -------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation (2,450,720) 898,046
- -------------------------------------------------------------------------------
Change in net assets resulting from operations 16,195 2,602,749
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------------
Class A Shares (247,673) (80,857)
- -------------------------------------------------------------------------------
Class Y Shares (1,277,127) (919,344)
- -------------------------------------------------------------------------------
Distributions from net realized gains
- -------------------------------------------------------------------------------
Class A Shares (99,753) --
- -------------------------------------------------------------------------------
Class Y Shares (703,403) --
- -------------------------------------------------------------------------------
Change in net assets resulting from
distributions to shareholders (2,327,956) (1,000,201)
- -------------------------------------------------------------------------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------------
Proceeds from sale of shares 5,596,793 12,722,126
- -------------------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of distributions declared 2,213,982 977,217
- -------------------------------------------------------------------------------
Cost of shares redeemed (636,250) (112,454)
- -------------------------------------------------------------------------------
Change in net assets resulting from share
transactions 7,174,525 13,586,889
- -------------------------------------------------------------------------------
Change in net assets 4,862,764 15,189,437
- -------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------
Beginning of period 15,189,437 --
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $98,069 and $1,640,
respectively) $20,052,201 $15,189,437
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period from September 19, 1996 (start of business) to September 30,
1997.
(See Notes which are an integral part of the Financial Statements)
BATTERY PARK(SM) HIGH YIELD FUND
Notes to Financial Statements
September 30, 1998
1. ORGANIZATION
Battery Park Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-ended management
investment company. The Company consists of one portfolio. The financial
statements included herein are only those of Battery Park High Yield Fund (the
"Fund"), a diversified portfolio. The Fund offers two classes of shares: Class A
Shares and Class Y Shares. The Fund's investment objective is to provide
shareholders with high total return, consisting of current income and capital
appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS. U.S. government securities, listed corporate bonds,
(other fixed income and asset-backed securities), and unlisted securities and
private placement securities are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days or less
at the time of purchase may be valued at amortized cost, which approximates fair
market value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS. Interest income and expenses are
accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Distributions
to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for the
deductibility of organizational costs. The following reclassifications have been
made to the financial statements.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
- -------------------------------------------------
UNDISTRIBUTED NET
PAID-IN CAPITAL INVESTMENT INCOME
- -------------------------------------------------
<C> <S>
($87,085) $87,085
- -------------------------------------------------
</TABLE>
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES. It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders
each year substantially all of its income. Accordingly, no provisions for
Federal income tax is necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may engage in when-
issued or delayed delivery transactions. The Fund records when-issued securities
on the trade date and maintains security positions such that sufficient liquid
assets will be available to make payment for the securities purchased.
Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ from
those estimated.
OTHER. Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997(A)
- ---------------------------------------------------------------------------------------------------------------
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Shares sold 247,220 $2,709,647 164,628 $1,763,523
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 20,933 225,919 5,519 60,261
- ---------------------------------------------------------------------------------------------------------------
Shares redeemed (42,955) (450,347) (9,775) (106,271)
- ---------------------------------------------------------------------------------------------------------------
Net change resulting from Class A share transactions 225,198 $2,485,219 160,372 $1,717,513
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from October 28, 1996 (date of initial public offering) to
September 30, 1997.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997(A)
- -------------------------------------------------------------------------------
CLASS Y SHARES SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 262,525 $2,887,146 1,087,480 $10,958,603
- -------------------------------------------------------------------------------
Shares issued to shareholders in
payment of
distributions declared 183,323 1,988,063 84,653 916,956
- -------------------------------------------------------------------------------
Shares redeemed (17,483) (185,903) (551) (6,183)
- -------------------------------------------------------------------------------
Net change resulting from Class Y
share transactions 428,365 $4,689,306 1,171,582 $11,869,376
- -------------------------------------------------------------------------------
Net change resulting from Class A
shares and
Class Y shares transactions 653,563 $7,174,525 1,331,954 $13,586,889
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period from September 19, 1996 (start of business) to September 30,
1997.
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE. Nomura Corporate Research and Asset Management Inc.,
the Fund's investment adviser (the "Adviser"), is entitled to receive for its
services an annual investment advisory fee equal to 0.65% of the Fund's average
daily net assets. The Adviser may voluntarily choose to waive any portion of its
fee and reimburse certain operating expenses of the Fund. The Adviser can modify
or terminate this voluntary waiver and reimbursement at any time at its sole
discretion.
ADMINISTRATIVE FEE. Federated Services Company ("FServ") provides the Fund with
certain administrative personnel and services. The fee paid to FServ is based on
the level of average aggregate net assets of the Company for the period.
DISTRIBUTION SERVICES FEE. The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Nomura Securities International, Inc., (the "distributor"), of the
Fund's shares, from the net assets of the Fund's Class A shares to finance
activities intended to result in the sale of the Fund's Class A shares. The Plan
provides that the Fund may incur distribution expenses up to 0.25% of the
average daily net assets of Class A shares annually to compensate the
distributor. The distributor may voluntarily choose to waive any portion of its
fee. The distributor can modify or terminate any such voluntary waiver at any
time at its sole discretion.
SHAREHOLDER SERVICES FEE. The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services Company ("FSSC") under which the
Fund may make additional payments up to 0.25% of the average daily net asset
value of Class A shares to obtain certain personal services for certain
shareholders and the maintenance of certain shareholder accounts. Under this
Shareholder Services Agreement, FSSC would either perform shareholder service
directly or will select financial institutions to perform shareholder services,
and financial institutions would receive fees based upon Class A shares owned by
their clients or customers. The schedules of such fees and the basis upon which
such fees would be paid will be determined from time to time by the Fund and
FSSC. The Fund has not made any payments pursuant to the Shareholder Services
Agreement and has no current intention of making any such payments.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES. FServ, through its
subsidiary, FSSC serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES. FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES. Organizational and/or start-up administrative service
expenses of $213,984 and $13,290 were borne initially by Adviser and FServ,
respectively. The Fund has reimbursed the Adviser and FServ for these expenses.
For the period ended September 30, 1998, the Fund expensed $45,437 of
organizational and start-up expenses.
GENERAL. Certain of the Officers of the Company are Officers of FServ and/or
FSSC.
5. YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended September 30, 1998, were as follows:
<TABLE>
- ----------------------
<S> <C>
PURCHASES $36,116,779
- ----------------------
SALES $31,546,547
- ----------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of BATTERY PARK HIGH YIELD FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Battery Park High Yield Fund as of September
30, 1998, the related statement of operations for the year then ended, the
statements of changes in net assets for the year ended September 30, 1998 and
the period ended September 30, 1997, and the financial highlights for the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1998, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Battery Park High
Yield Fund as of September 30, 1998, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
November 13, 1998
APPENDIX A--RATINGS OF HIGH YIELD DEBT SECURITIES
- --------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. CORPORATE RATINGS
Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well-safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers l, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
An S&P corporate or municipal 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 for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. 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;
II. nature of and provisions of the obligation; and
III. 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.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions would 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 payments 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.
CC--The rating CC is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC rating.
C--The rating C is typically 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 also 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 with the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or 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 insured by
the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance
Corp. and interest is adequately collateralized.
*--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 flows.
NR--Indicates that 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.
Debt obligations of issuers outside the U.S. and its territories are rated on
the same basis as domestic corporate and municipal issues. The ratings measure
the creditworthiness of the obligor but do not take into account currency
exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, Bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain rating
or other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
The ratings are based on current information furnished to S&P by the issuer, and
obtained by S&P from other sources it considers reliable. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability of
such information.
APPENDIX B--HEDGING TECHNIQUES
- --------------------------------------------------------------------------------
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate risks. These strategies include use of options on
portfolio positions, futures and options on such futures. The Fund may enter
into such transactions only in connection with its hedging strategies. While the
Fund's use of hedging strategies is intended to reduce the volatility of the net
asset value of Fund shares, the Fund's net asset value will fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective and the
Fund may not necessarily be engaging in hedging activities when movements in
interest rates occur. See "Investment Objective and Policies" in the Fund's
Prospectus for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will only engage in these
transactions for hedging purposes, the options and futures portfolio strategies
of the Fund will not subject the Fund to the risks frequently associated with
the speculative use of options and futures transactions. Tax requirements may
limit the Fund's ability to engage in the hedging transactions and strategies
described below. See "Taxes" in the Statement of Additional Information.
The Fund may use the hedging instruments described below to hedge against
interest rate risks:
OPTIONS. The Fund may purchase and write (i.e., sell) call options and put
options on securities and engage in transactions in financial futures and
related options, as described below.
The Fund may write covered call options with respect to securities it owns and
enter into closing purchase transactions with respect to such options. A covered
call option provides the holder of the option with the right to buy the
underlying security covered by the option at the stated exercise price until the
option expires. A covered call option is an option where the Fund, in return for
a premium, gives another party a right to buy particular securities held by the
Fund at a specified price for a certain period of time. In return for the
premium income realized from the sale of the option, the Fund gives up the
opportunity to profit from a price increase in the underlying security above the
option exercise price while the option is in effect. In addition, the Fund's
ability to sell the underlying security will be limited until the option is
closed or expires. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. The Fund
also may purchase call options on securities held in its portfolio on which it
has written call options or on securities which it intends to purchase. There is
no percentage limitation with respect to portfolio securities on which the Fund
may write call options.
The Fund may purchase put options on portfolio securities. In return for payment
of a premium, the purchase of a put option gives the holder thereof the right to
sell the security underlying the option to another party at a specified price
until the put option is closed out, expires or is exercised. The Fund will
purchase put options to seek to reduce the risk of a decline in value of the
underlying security owned by the Fund. The Fund does not intend to purchase
uncovered puts in excess of 10% of its total assets. The total return on the
security may be reduced by the amount of the premium paid for the option. The
Fund may write put options which give the holder of the option the right to sell
the underlying security to the Fund at the stated exercise price. The Fund will
receive a premium for writing a put option which increases the Fund's return.
The Fund writes only covered put options which means that so long as the Fund is
obligated as the writer of the option it will have deposited and maintained with
its custodian cash or liquid securities with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, the Fund will
be obligated to purchase the underlying security at a price that may be higher
than the market value of that security at the time of exercise for as long as
the option is outstanding. The Fund may engage in closing transactions in order
to terminate put options that it has written or purchased. The Fund intends to
limit its writing of covered puts so that the aggregate value of the obligations
underlying the puts will not exceed 5% of its net assets.
FUTURES. The Fund also may purchase and sell financial futures contracts
("futures contracts") as a hedge against adverse changes in interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. The Fund
may effect transactions in futures contracts in U.S. and foreign agency and
government securities and corporate debt securities. Transactions by the Fund in
futures contracts are subject to limitation as described below under
"Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of securities held by the Fund will fall, thus reducing the net asset
value of the Fund. As interest rates rise, however, the value of the Fund's
short position in the futures contract also will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, these commissions are
generally less than the transaction expenses which would have been incurred had
the Fund sold portfolio securities in order to reduce its exposure to increases
in interest rates.
The Fund may purchase futures contracts in anticipation of a decline in interest
rates when it is not fully invested in a particular market in which it intends
to make investments to gain market exposure that may in part or entirely offset
an increase in the cost of securities it intends to purchase. The Fund does not
consider purchases of futures contracts to be a speculative practice under these
circumstances. In a substantial majority of these transactions, the Fund will
purchase securities upon termination of the futures contract.
The Fund also may purchase and write call and put options on futures contracts
in connection with its hedging activities. Generally, these strategies are
utilized under the same market and market sector conditions (i.e., conditions
relating to specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options on futures
contracts rather than selling the underlying futures contract in anticipation of
an increase in interest rates. Similarly, the Fund may purchase call options or
write put options on futures contracts as a substitute for the purchase of such
futures to hedge against the increased cost resulting from a decline in interest
rates of securities which the Fund intends to purchase. Limitations on
transactions in options on futures contracts are described below.
The Fund may engage in options and futures transactions on exchanges and in the
over-the-counter ("OTC") markets. In general, exchange-traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC transactions are two-party contracts with price
and terms negotiated by the buyer and seller. The Fund will engage in OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. government securities or with affiliates of such banks or dealers which
have capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million.
The staff of the SEC has taken the position that purchased OTC options and the
assets used as cover for written OTC options are illiquid securities. Therefore,
the Fund has adopted an investment policy pursuant to which it will not purchase
or sell OTC options (including OTC options on futures contracts) if, as a result
of such transaction, the sum of the market value of OTC options currently
outstanding which are held by the Fund, the market value of the underlying
securities covered by OTC call options currently outstanding which were sold by
the Fund and margin deposits on the Funds existing OTC options on futures
contracts exceed 15% of the net assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. government securities dealer recognized by the Federal Reserve
Bank of New York and the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying security minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option plus the amount by which the option is "in-the-money." This policy as to
OTC options is not a fundamental policy of the Fund and may be amended by the
Directors of the Fund without the approval of the Fund's shareholders. However,
the Fund will not change or modify this policy prior to the change or
modification by the SEC staff of its position.
To trade futures contracts, the Fund is not required to deposit funds equal to
the value of the futures contract. The Fund need only make a deposit, called an
"initial margin deposit," equal to a percentage (typically 15% or less) of the
value of the futures contract. As a result, a relatively small adverse move in
the price of a futures contract may result in a substantial loss. For example,
if at the time of purchase 10% of the price of a futures contract is deposited
as margin, a 10% decrease in the price of that contract would, if the contract
were then closed out, result in a total loss of the initial margin deposit
before any deduction for brokerage commissions and other transaction costs. A
decrease of more than 10% would result in a loss of more than the total initial
margin deposit. Options on futures contracts are generally similarly or even
more highly leveraged. However, when the Fund purchases a futures contract, or
writes a put option or purchases a call option thereon, an amount of cash and
cash equivalents will be deposited in a segregated account with the Fund's
custodian so that the amount so segregated, plus the amount of initial and
variation margin held in the account of its broker, equals the market value of
the futures contract, thereby minimizing the effect of leverage from such
futures contract.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. Regulations of the Commodity
Futures Trading Commission (the "CFTC") applicable to the Fund Permit the Fund's
futures and options on futures transactions to include (i) bona fide hedging
transactions without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) non-hedging transactions, provided that the
Fund not enter into such non-hedging transactions if, immediately thereafter,
the sum of the amount of initial margin and option premiums required to
establish non-hedging transactions would exceed 5% of the market value of the
Fund's liquidation value, after taking into account unrealized profits and
unrealized losses on any such transactions. However, as stated above, the Fund
intends to engage in options and futures transactions only for hedging purposes.
When the Fund purchases a futures contract or writes a put option or purchases a
call option thereon, it will maintain an amount of cash, cash equivalents (e.g.,
high grade commercial paper and daily tender adjustable notes) or short-term
high grade fixed income securities in a segregated account with the Fund's
custodian so that the amount so segregated, plus the amount of initial and
variation margin held in the account of its broker, equals the market value of
the futures contract, thereby ensuring that the use of such futures is
unleveraged.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts and movements in the price of the securities and
currencies which are the subject of the hedge. If the price of the futures
contract moves more or less than the price of the security or currency, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of the debt securities which are the subject of the hedge. There is
also a risk of imperfect correlations where the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
Transactions in options on futures contracts involve similar risks.
The Fund intends to enter into options and futures transactions, on an exchange
or in the OTC market, only if there appears to be a liquid secondary market for
such options or futures or, in the case of OTC transactions, management believes
the Fund can receive on each business day a bid or offer. There can be no
assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or related option.
The exchanges on which options on portfolio securities are traded have generally
established limitations governing the maximum number of call or put options on
the same underlying security (whether or not covered) which may be written by a
single investor, whether acting alone or in concert with others (regardless of
whether such options are written on the same or different exchanges or are held
or written on one or more accounts or through one or more brokers). "Trading
limits" are imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Investment Adviser does not believe that
these trading and position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.
INTEREST RATE HEDGING TRANSACTIONS. In order to hedge the value of the Fund's
portfolio against interest rate fluctuations, the Fund may enter into various
hedging transactions, such as interest rate swaps and the purchase or sale of
interest rate caps and floors. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio or to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
In an interest rate swap, the Fund exchanges with another party their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The net amount of the excess, if any, of the
Fund's obligations over its entitlement with respect to each interest rate swap
will be accrued on a daily basis and an amount of cash, cash equivalents or high
grade liquid debt securities having an aggregate net asset value at least equal
to the accrued excess will be maintained in a segregated account by the Fund's
custodian.
The Fund will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in one of the highest two rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction or whose creditworthiness is believed by the Investment
Adviser to be equivalent to such rating. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transaction. The Investment Adviser believes that
the swap market is relatively liquid. Caps and floors, however, are less liquid
than swaps. The Fund will not enter into a cap or floor transaction in an amount
which, together with other illiquid investments of the Fund, exceeds 15% of the
Fund's total assets.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus and, if given or made, such other
information or representation must not be relied upon as having been authorized
by the Fund, the Investment Adviser or Distributor. This Prospectus does not
constitute an offering in any state in which such offering may not lawfully be
made.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus and, if given or made, such other
information or representation must not be relied upon as having been authorized
by the Fund, the Investment Adviser or Distributor. This Prospectus does not
constitute an offering in any state in which such offering may not lawfully be
made.
------------
BATTERY PARK(SM)
HIGH YIELD FUND
- -------------------------------------
<TABLE>
- -------------------------------------
<S> <C>
Investment Adviser NOMURA CORPORATE RESEARCH
AND ASSET MANAGEMENT INC.
2 World Financial Center
Building B, 25th Floor
New York, NY 10281-1198
- -------------------------------------------------
Distributor NOMURA SECURITIES
INTERNATIONAL, INC.
2 World Financial Center
Building B, 25th Floor
New York, NY 10281-1198
- -------------------------------------------------
Transfer Agent FEDERATED SHAREHOLDER
SERVICES COMPANY
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3775
- -------------------------------------------------
Custodian THE BANK OF NEW YORK
48 Wall Street
New York, NY 10286
- -------------------------------------------------
Independent Auditors DELOITTE & TOUCHE LLP
2500 One PPG Place
Pittsburgh, PA 15222
- -------------------------------------------------
Counsel BROWN & WOOD LLP
One World Trade Center
New York, NY 10048-0557
</TABLE>
Cusip 07132Q108
Cusip 07132Q207
G01843-01 (11/98)
BATTERY PARK(SM)
HIGH YIELD FUND
PROSPECTUS DATED
NOVEMBER 30, 1998
This Prospectus should be retained for future reference.
<PAGE>
BATTERY PARK SM HIGH YIELD FUND
STATEMENT OF ADDITIONAL INFORMATION
Battery ParkSM High Yield Fund (the "Fund") is the only existing series of
Battery Park Funds, Inc., a diversified, open-end series-type investment
company. The Fund's investment objective is to provide shareholders with
high total return, consisting of current income and capital appreciation.
The Fund attempts to achieve its objective by investing principally in fixed
income securities of U.S. companies which are rated in the lower rating
categories of the established rating services or are unrated securities of
comparable quality. No assurance can be given that the Fund's investment
objective will be realized.
The Fund offers two classes of shares with different fees and other
features. Shares may be purchased from securities dealers which have entered
into selected dealer agreements with Nomura Securities International, Inc.
(the "Distributor"). The minimum initial purchase for Class A shares is
$1,000 and the minimum subsequent purchase is $100. The minimum initial
purchase for Class Y shares is $1 million.
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated
November 30, 1998, which has been filed with the Securities and Exchange
Commission (the "SEC") and can be obtained, without charge, by writing the
Transfer Agent at Federated Shareholder Services Company, Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3775, or by
calling the Transfer Agent toll-free at 1-888-254-2874. This Statement of
Additional Information has been incorporated by reference into the
Prospectus.
BATTERY PARK HIGH YIELD FUND
2 WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10281-1198
The date of this Statement of Additional
Information is November 30, 1998.
Nomura Corporate Research and Asset Management Inc.
Investment Adviser
Nomura Securities International, Inc. -- Distributor
G01843-02 (11/98)
<PAGE>
II
<PAGE>
TABLE OF CONTENTS
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES 1
Investment Restrictions 2
MANAGEMENT OF THE FUND 3
Directors and Officers 3
Directors' Compensation 5
Fund Ownership 5
Management and Advisory Arrangements 6
PURCHASE OF SHARES 7
Purchases Through Agents of the Fund 7
Reduced Initial Sales Charges 7
Distribution Plan 8
REDEMPTION OF SHARES 8
PORTFOLIO TRANSACTIONS 9
Portfolio Turnover 9
DETERMINATION OF NET ASSET VALUE 9
SHAREHOLDER SERVICES 10
Automatic Reinvestment of Dividends and Capital Gains Distributions 11
Systematic Withdrawal and Systematic Investment Plans 11
Supplemental Payments to Financial Institutions 11
TAXES 11
Tax Treatment of Options and Futures Transactions 12
PERFORMANCE DATA 13
Total Return 14
Yield 14
GENERAL INFORMATION 14
Dividends and Distributions 14
Description of Shares 14
Computation of Offering Price Per Share 15
Independent Auditors 16
Custodian 16
Fund Administration 14
Transfer Agent 16
Legal Counsel 16
Reports to Shareholders 16
Additional Information 16
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Reference is made to "Investment Objective and Policies" in the Prospectus for a
discussion of the investment objective and policies of the Fund.
The Fund's investment objective is to provide shareholders with high total
return, consisting of current income and capital appreciation. The Fund attempts
to achieve its objective by investing principally in fixed income securities of
U.S. companies which securities are rated in the lower rating categories of the
established rating services or are unrated securities of comparable quality.
Under normal circumstances, the Fund will invest at least 80% of the Fund's
total assets in fixed income securities rated Ba1 or lower by Moody's Investors
Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's ("S&P"). The Fund
is authorized to, but does not currently intend to, engage in various portfolio
strategies to enhance income and to hedge its portfolio against investment and
interest rate risks, including the utilization of leverage and the use of
options and futures. See "Risk Factors and Special Considerations" in the
Prospectus for a discussion of these risks.
INVESTMENT IN FOREIGN AND EMERGING MARKETS. Investment in the securities
of foreign markets involve certain risk factors and special considerations
in addition to those discussed under "Risk Factors and Special
Considerations--Foreign and Emerging Market Securities" in the Fund's
Prospectus, and these risks are often amplified in connection with
investments in emerging markets. Certain emerging market countries require
prior governmental approval of foreign investors, limit the amount of
investment by foreign investors in a particular issuer, limit the
investment by foreign investors only to a specified class of securities
that may have less advantageous rights than other classes, restrict
investment opportunities in issuers in industries deemed important to
national interests and/or impose additional taxes on foreign investors. It
may be difficult to find qualified subcustodians in emerging market
countries with extensive operating experience, and the Fund may be more
limited in its ability to recover assets in the event of a subcustodian's
bankruptcy than it would be in more developed countries. Investing in
local markets in emerging market countries may require the Fund to adopt
special procedures, seek local government approvals or take other actions,
each of which may involve additional costs to the Fund. See "Risk Factors
and Special Considerations--Foreign and Emerging Market Securities" in the
Prospectus for additional information regarding foreign and emerging
market securities.
The securities markets of emerging market countries are not as large as
the U.S. securities markets and have substantially less trading volume,
resulting in a lack of liquidity with high price volatility. Certain
markets are in only the earliest stages of development. There is also a
high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as
a high concentration of investors and financial intermediaries. Many of
such markets also may be affected by developments with respect to more
established markets in the region. Brokers in emerging market countries
typically are fewer in number and less capitalized than brokers in the
United States. These factors, combined with the U.S. regulatory
requirements for open-end investment companies and the restrictions on
foreign investment discussed in the Prospectus, may result in potentially
fewer investment opportunities for the Fund and may have an adverse effect
on the investment performance of the Fund.
RULE 144A SECURITIES. In promulgating Rule 144A under the Securities Act,
the SEC stated that the ultimate responsibility for liquidity
determinations rests with a fund's board of directors; however, the board
may delegate the day-to-day function of determining liquidity to the
investment adviser provided the board retains sufficient oversight. The
Board of Directors (the "Directors") of the Fund has adopted policies and
procedures for the purpose of determining whether securities that are
eligible for resale under Rule 144A are liquid or illiquid and has
approved guidelines under these policies and procedures pursuant to which
the Investment Adviser makes these determinations on an ongoing basis. In
making these determinations, consideration is given to, among other
things, the frequency of trades and quotes for the security, the number of
dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The
Directors periodically review Fund purchases and sales of Rule 144A
securities.
To the extent that liquid Rule 144A securities become illiquid, due to the
lack of sufficient qualified institutional buyers or market or other
conditions, the percentage of the Fund's assets invested in illiquid
assets would increase. The Investment Adviser, under the supervision of
the Directors, will monitor Fund investments in Rule 144A securities and
will consider appropriate measures to enable the Fund to maintain
sufficient liquidity for operating purposes and to meet redemption
requests.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the Fund
has adopted both fundamental and nonfundamental restrictions and policies
relating to the investment of its assets and its activities. Fundamental
restrictions and policies may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities (which for this
purpose and under the Investment Company Act of 1940, as amended (the
"Investment Company Act") means the lesser of (a) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are represented or
(b) more than 50% of the outstanding shares). Under these fundamental
restrictions, the Fund may not:
o Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
government and its agencies and instrumentalities).
o Make investments for the purpose of exercising control or management.
o Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or
indirectly secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
o Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a
loan, and except further that the Fund may lend its portfolio
securities, provided that the lending of portfolio securities may be
made only in accordance with applicable law and the guidelines set
forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, provided that
purchases of assignments or participations in loans (including bridge
loans) will not be prohibited by this paragraph.
o Issue senior securities to the extent such issuance would violate
applicable law.
o Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow
up to an additional 5% of its total assets for temporary purposes,
(iii) the Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of portfolio securities and
(iv) the Fund may purchase securities on margin to the extent
permitted by applicable law. The Fund may not pledge its assets other
than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time
to time, in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar investment
strategies.
o Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of
1933, as amended (the "Securities Act"), in selling portfolio
securities.
o Purchase or sell commodities or contracts on commodities, except to the
extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they
may be amended from time to time, and without registering as a
commodity pool operator under the Commodity Exchange Act.
o Make any investment inconsistent with the Fund's classification as a
diversified investment company under the Investment Company Act.
Non-fundamental restrictions may be amended by a majority vote of the Directors
of the Fund. Under the non-fundamental investment restrictions, the Fund may
not:
o Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law or by order of the SEC.
o Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales.
o Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. This restriction shall not apply to securities which
mature within seven days or securities which the Board of Directors of
the Fund has otherwise determined to be liquid pursuant to applicable
law. Securities purchased in accordance with Rule 144A under the
Securities Act and determined to be liquid by the Fund's Board of
Directors are not subject to the limitations set forth in this
investment restriction.
o Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof, except to the extent permitted in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time
to time.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Investment Adviser or its affiliates or any of their directors,
officers or employees, acting as principal, unless pursuant to a rule or
exemptive order under the Investment Company Act.
Because of the affiliation of the Investment Adviser with the Fund and the
Distributor, the Fund is prohibited from engaging in portfolio transactions with
the Distributor or its affiliates acting as principal and from purchasing
securities in public offerings which are not registered under the Securities Act
in which the Distributor or any of its affiliates participate as an underwriter
or dealer. See "Portfolio Transactions."
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their dates of birth and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is 2
World Financial Center, New York, New York 10281-1198.
ROBERT LEVINE* (SEPTEMBER 19, 1944)--CHAIRMAN, PRESIDENT, DIRECTOR AND CHIEF
INVESTMENT OFFICER--Founder, President and Chief Executive Officer of the
Investment Adviser and an Executive Managing Director of Nomura Holding America
Inc .
FRANCIS L. FRAENKEL (JULY 3, 1932)--DIRECTOR--President of Delta Capital
Management Inc. from 1992 to present; Managing Director of Salomon Brothers Inc.
and President of Salomon Brothers Asset Management Inc. prior to 1992.
LANCE B. FRASER* (DECEMBER 2, 1960)--TREASURER AND DIRECTOR--Managing Director
of the Investment Adviser since 1997 and employed in various financial positions
with the Investment Adviser since 1991.
<PAGE>
FRANK K. REILLY (DECEMBER 30, 1935)--DIRECTOR--Bernard J. Hank Professor of
Business Administration, University of Notre Dame College of Business
Administration.
RICHARD A. BUCH* (FEBRUARY 18, 1959)--VICE PRESIDENT AND PORTFOLIO
MANAGER--Managing Director of the Investment Adviser from 1993 to present;
Portfolio Manager for Kidder, Peabody & Co., Inc. prior to 1993.
C. CHRISTINE THOMSON (SEPTEMBER 1, 1957)--ASSISTANT TREASURER--Vice
President and Assistant Treasurer of some of the Funds of Federated Investors,
Inc.
DEBORAH A. MONTICK* (DECEMBER 10, 1957)--SECRETARY--Counsel to the Investment
Adviser from 1993 to present; Associate Counsel to Kemper Financial Services,
Inc. prior to 1993.
* Interested person, as defined in the Investment Company Act, of the Fund.
DIRECTORS' COMPENSATION
AGGREGATE
NAME, COMPENSATION
POSITION WITH THE FROM THE
COMPANY COMPANY*
Robert Levine, $0
Chairman, President, Director
and Chief Investment Officer
Lance B. Fraser, $0
Treasurer and Director
Francis L. Fraenkel, $10,000
Director
Frank K. Reilly, $10,000
Director
*Information is furnished for the fiscal year ended September 30, 1998. The
Fund is the only investment company in the Fund Complex.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding shares.
As of October 31, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A shares of the Fund: John B. Edgerton, Jr., Trustee,
Mendota Heights, MN, owned approximately 65,648 (15.33%) Class A shares; Charles
Schwab & Co., San Francisco, CA, owned approximately 62,041 (15.43%) Class A
shares; Yasushi Akashi, c/o N. Akashi-Reed, Hartsdale, NY, owned approximately
33,484 (8.33%) Class A shares; Sakae Nishioka, New York, NY, owned approximately
31,659 (7.88%) Class A shares; and Reiko Onaya, c/o Masako Kondo, Red Bank, NJ,
owned approximately 21,815 (5.43%) Class A shares.
As of October 31, 1998, the following shareholder of record owned 5% or more of
the outstanding Class Y shares of the Fund: Nomura Holding America Inc., New
York, NY, owned approximately 1,243,351 (77.02%) Class Y shares and Charles
Schwab & Co. Inc., San Francisco, CA, owned approximately 357,060 shares
(22.12%) Class Y shares.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
The Investment Advisory Agreement provides that, subject to the direction of the
Directors of the Fund, the Investment Adviser is responsible for the actual
management of the Fund and for the review of the Fund's holdings in light of its
own research analysis and analyses from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Directors. The
Investment Adviser supplies the portfolio managers for the Fund, who consider
analyses from various sources, make the necessary investment decisions and place
transactions accordingly. The Investment Adviser also is obligated to perform
certain administrative and management services for the Fund and is required to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement. As compensation for
its services to the Fund, the Investment Adviser will receive from the Fund a
monthly fee based on the average daily value of the Fund's net assets at an
annual rate of 0.65%.
Securities held by the Fund also may be held by or be appropriate investments
for other funds for which the Investment Adviser or its affiliates act as
adviser or by investment advisory clients of the Investment Adviser. Because of
different investment objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which the Investment Adviser or its affiliates act as investment adviser or for
their advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Investment Adviser or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an adverse
effect on price.
The Investment Advisory Agreement obligates the Investment Adviser to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as the
fees of all Directors of the Fund who are affiliated persons of the Investment
Adviser or the Distributor or any of their subsidiaries. The Fund pays all other
expenses incurred in its operation, including redemption expenses, expenses of
portfolio transactions, shareholder servicing costs, expenses of registering the
shares under federal and state securities laws, pricing costs (including the
daily calculation of net asset value), interest, certain taxes, charges of the
Custodian and Transfer Agent, directors' fees, legal expenses, state franchise
taxes, auditing services, costs of printing proxies, stock certificates,
shareholder reports and prospectuses (except to the extent paid by the
Distributor), SEC fees, accounting costs and other expenses properly payable by
the Fund. To the extent accounting services are provided for the Fund by the
Investment Adviser, the Fund will reimburse the Investment Adviser for its costs
in connection with such services. As required by the Distribution Agreement, the
Distributor will pay certain of the expenses of the Fund incurred in connection
with the offering of shares of the Fund, including the expenses of printing the
prospectuses and statements of additional information used in connection with
the continuous offering of shares by the Fund.
For the fiscal year ended September 30, 1998 and for the period from September
19, 1996 (start of business) to September 30, 1997, the Investment Adviser
earned management and advisory fees of $115,986 and $74,637, respectively, of
which all were waived.
DURATION AND TERMINATION. The Investment Advisory Agreement for the Fund will
remain in effect from year to year if approved annually (a) by the Directors of
the Fund or by a majority of the outstanding shares of the Fund and (b) by a
majority of the Directors who are not parties to such contract or interested
persons (as defined in the Investment Company Act) of any such party. Such
contract is not assignable and may be terminated without penalty on 60 days'
written notice by the majority vote of the Directors or of the outstanding
voting securities of the Fund or on 120 days' written notice by the Investment
Adviser.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" and "Redemption of Shares" in the
Prospectus for certain information as to the purchase of shares of the Fund.
The term "purchase," as used in the Prospectus and this Statement of Additional
Information in connection with an investment in Class A and Class Y shares of
the Fund, refers to a single purchase by an individual or to concurrent
purchases, which in the aggregate are at least equal to the prescribed amounts,
by an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company," as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
PURCHASES THROUGH AGENTS OF THE FUND
The Fund has authorized one or more brokers to accept on its behalf purchase and
redemption orders. The Fund will be deemed to have received a purchase or
redemption order when an authorized broker accepts the order. Customer orders
will be priced at the Fund's net asset value next computed after they are
accepted by an authorized broker or the broker's designee.
REDUCED INITIAL SALES CHARGES
LETTER OF INTENTION. Reduced sales charges are applicable to purchases
aggregating $50,000 or more of the Class A shares of the Fund made within a
13-month period starting with the first purchase pursuant to the Letter of
Intention in the form provided in the Prospectus. The Letter of Intention is not
a binding obligation to purchase any amount of Class A shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Transfer Agent is informed in
writing of this intent within such 90-day period. The value of Class A shares of
the Fund may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will be
applied only to new purchases. If the total amount of shares does not equal the
amount stated in the Letter of Intention (minimum of $50,000), the investor will
be notified within 20 days of the expiration of such Letter. Class A shares
equal to up to 4.5% of the intended amount will be held in escrow during the
13-month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at least
5.0% of the dollar amount of such Letter. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under such
Letter. If the amount specified in the Letter of Intention is not purchased, an
appropriate number of escrowed shares will be redeemed to realize the difference
between the sales charge on the Class A shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of Class
A shares may be reduced to the net asset value per Class A share in connection
with the acquisition of the assets of or merger or consolidation with a personal
holding company or a public or private investment company. The issuance of Class
A shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio securities
which (i) meet the investment objective and policies of the Fund; (ii) are
acquired for investment and not for resale (subject to the understanding that
the disposition of the Fund's portfolio securities shall at all times remain
within its control); and (iii) are liquid securities, the value of which is
readily ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to the
nature of the investors and/or the reduced sales efforts that will be needed in
obtaining such investments. Under such programs, the Fund realizes economies of
scale and reduction of sales related expenses by virtue of familiarity with the
Fund.
DISTRIBUTION PLAN
Reference is made to "Purchase of Shares--Class A Shares--Distribution Plan" in
the Prospectus for certain information with respect to the distribution plan for
Class A shares pursuant to Rule 12b-1 under the Investment Company Act (the
"Distribution Plan") with respect to the distribution fees paid by the Fund to
the Distributor with respect to such class.
Payments of the distribution fees are subject to the provisions of Rule 12b-1
under the Investment Company Act. Among other things, the Distribution Plan
provides that the Distributor shall provide and the Directors shall review
quarterly reports of the disbursement of the distribution fees paid to the
Distributor. In their consideration of the Distribution Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to the Fund and its shareholders. The
Distribution Plan further provides that so long as the Distribution Plan remains
in effect, the selection and nomination of Directors who are not "interested
persons" of the Fund, as defined in the Investment Company Act, (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving the Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. The Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors,
or the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund or by the Distributor upon 60 days' written notice
to the Fund. The Distribution Plan cannot be amended to increase materially the
amount to be spent by the Fund without the approval of the related class of
shareholders, and all material amendments are required to be approved by the
vote of Directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in such Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plan and any reports made pursuant to the
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
For the fiscal year ended September 30, 1998 , the Class A shares incurred
$7,079 in distribution fees, none of which was waived.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of shares of the Fund.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the SEC or such Exchange is
closed (other than customary weekend and holiday closings), for any period
during which an emergency exists as defined by the SEC as a result of which
disposal of portfolio securities or determination of the net asset value of any
Fund is not reasonably practicable, and for such other periods as the SEC may by
order permit for the protection of shareholders of the Fund.
PORTFOLIO TRANSACTIONS
Reference is made to "Portfolio Transactions" in the Prospectus. Subject to
policies established by the Directors of the Fund, the Investment Adviser is
primarily responsible for the portfolio decisions of the Fund and the placing of
the portfolio transactions for the Fund. With respect to such transactions, the
Investment Adviser seeks to obtain the best net results for the Fund, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund will not necessarily be paying the lowest
commission or spread available. Transactions with respect to the high yield
securities in which the Fund invests may involve specialized services on the
part of the broker or dealer and thereby entail higher commissions or spreads
than would be the case with transactions involving more widely traded
securities. The Fund has no obligation to deal with any broker in the execution
of transactions for its portfolio securities.
The securities in which the Fund invests are traded primarily in the
over-the-counter market. Transactions in the over-the-counter market generally
are principal transactions with dealers and the costs of such transactions
involve dealer spreads. With respect to over-the-counter transactions, the Fund,
where possible, will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually act as principals for
their own account. On occasion, securities may be purchased directly from the
issuer. Bonds and money market securities are generally traded on a net basis
and do not normally involve either brokerage commissions or transfer taxes. The
cost of portfolio securities transactions of the Fund will consist primarily of
dealer or underwriter spreads.
Under the Investment Company Act, persons affiliated with the Fund are
prohibited from dealing with the Fund as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the SEC. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principal for their own account, affiliated
persons of the Fund, including the Distributor, may not serve as the Fund's
dealer in connection with such transactions. See "Investment Objective and
Policies--Investment Restrictions." However, with certain limitations, an
affiliated person of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
The Directors of the Fund has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions, dealer spreads and
other expenses of possible portfolio transactions, such as underwriting
commissions and tender offer solicitation fees, by conducting such portfolio
transactions through affiliated entities, including the Distributor. For
example, brokerage commissions received by the Distributor could be offset
against the advisory fee payable by the Fund to the Investment Adviser. The
Board of Directors will reconsider this matter from time to time. The Investment
Adviser has arranged for the Fund's custodian to receive any tender offer
solicitation fees on behalf of the Fund payable with respect to portfolio
securities of the Fund.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.
The portfolio turnover rate for the fiscal year ended September 30, 1998 and
1997 was 190% and 236%, respectively. DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information - Determination of Net Asset Value"
in the Prospectus concerning the determination of net asset value. Normally, the
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 4:00 p.m., e.s.t., on each day during which the New York
Stock Exchange is open for trading. The New York Stock Exchange is not open on
New Year's Day, Martin Luther King Jr., Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund also will determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might be
affected materially, but only if on any such day the Fund is required to sell or
redeem shares. The net asset value per share of the Fund is computed by dividing
the sum of the value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
investment advisory fees and distribution fees, are accrued daily. The per share
net asset value of the Class A shares of the Fund generally will be lower than
the per share net asset value of the Class Y shares of the Fund reflecting the
daily expense accruals of the distribution or shareholder service fees
applicable with respect to the Class A shares. It is expected, however, that the
per share net asset value of the two classes will tend to converge immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differential between the
classes.
Market and fair values of the Fund's portfolio securities are determined as
follows:
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost;
o for equity securities, according to the last sale price on a national
securities exchange, if applicable;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, latest bid prices; or
o for all other securities, at fair value as determined in good faith by
the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data.
The Fund will value futures contracts at their market value established by the
exchanges at the close of options trading on such exchanges unless the Directors
determine in good faith that another method of valuing option positions is
necessary.
Over-the-counter put options will be valued at the mean between the bid and
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
OPTION ACCOUNTING PRINCIPLES. When a Fund sells an option, an amount equal to
the premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as a deferred credit. The amount of such liability will be
subsequently marked to market to reflect the current market value of the option
written. If current market value exceeds the premium received there is an
unrealized loss; conversely, if the premium exceeds current market value there
is an unrealized gain. If an option expires on its stipulated expiration date or
if a Fund enters into a closing purchase transaction, the Fund will realize a
gain (or loss if the cost of a closing purchase transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain or loss
on the underlying security, and the liability related to such option will be
extinguished. If an option is exercised, the Fund will realize a gain or loss
from the sale of the underlying security and the proceeds of sale are increased
by the premium originally received.
SHAREHOLDER SERVICES
A number of shareholder services and investment plans are available which are
designed to facilitate investment in the Fund's shares. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund by calling the
telephone number on the cover page hereof or from the Transfer Agent.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions of the Fund are reinvested
automatically in full and fractional shares of the Fund, at the net asset value
per share next determined on the ex-dividend date of such dividend or
distribution. A shareholder may, at any time, by written notification to the
Transfer Agent, elect to have subsequent dividends or both dividends and capital
gains distributions paid in cash.
SYSTEMATIC WITHDRAWAL AND SYSTEMATIC INVESTMENT PLANS
A Class A or Class Y shareholder may elect to receive systematic redemption
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on either
a monthly or quarterly basis.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
The Investment Adviser and/or Distributor may pay financial institutions a fee
for providing certain services to both Class A and Class Y shareholders and for
services involved in connection with the distribution of shares of the Fund.
These fees are in addition to the amounts paid under the Distribution Plan
and/or Shareholder Services Agreement and, to the extent paid by the
Distributor, such fees will be reimbursed to the Distributor by the Investment
Adviser and not the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Code. If it so qualifies, the
Fund (but not its shareholders) will not be subject to federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A and Class Y shareholders (together, the "shareholders").
The Fund intends to distribute all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from certain
transactions in futures and options) ("capital gain dividends") are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has owned Fund shares. Certain categories of capital gains are
taxable at different rates. The categories of gain and related rates will be
passed through to shareholders in capital gain dividends. Any loss upon the sale
or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends as well as any amount of capital gain dividends in the different
categories of capital gain referred to above. Distributions by the Fund, whether
from ordinary income or capital gains, generally will not be eligible for the
dividends received deduction allowed to corporations under the Code. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
To the extent the Fund invests in securities issued by issuers in foreign
countries, dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes.
Under certain provisions of the Code, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized on the conversion of Class A shares into
Class Y shares in the circumstances described in the Prospectus. A shareholder's
basis in the shares acquired will be the same as such shareholder's basis in the
shares converted, and the holding period of the acquired shares will include the
holding period for the converted shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
such shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have owed
upon the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the
RIC does not distribute, during each calendar year, 98% of its ordinary income,
determined on a calendar year basis, and 98% of its capital gains, determined,
in general, on an October 31 year end, plus certain undistributed amounts from
previous years. While the Fund intends to distribute its income and capital
gains in the manner necessary to minimize imposition of the 4% excise tax, there
can be no assurance that sufficient amounts of the Fund's taxable income and
capital gains will be distributed to avoid entirely the imposition of the tax.
In such event, the Fund will be liable for the tax only on the amount by which
it does not meet the foregoing distribution requirements.
The Fund will invest in securities rated in the lower rating categories of
nationally recognized rating organizations, and in unrated securities ("junk
bonds" or "high yield securities"), as described in the Prospectus. Some of
these high yield securities may be purchased at a discount and may therefore
cause the Fund to accrue and distribute income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
high yield securities may be treated as dividends for federal income tax
purposes; in such case, if the issuer of such high yield securities is a
domestic corporation, dividend payments by the Fund will be eligible for the
dividends received deduction to the extent of the deemed dividend portion of
such interest payments.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may write, purchase or sell options and futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
federal income tax purposes at the end of each taxable year, I.E., each such
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless an election is available to
the Fund or an exception applies, options and futures contracts that are
"Section 1256 contracts" will be "marked to market" for federal income tax
purposes at the end of each taxable year, I.E., each such option or futures
contract will be treated as sold for its fair market value on the last day of
the taxable year, and any gain or loss attributable to Section 1256 contracts
will be 60% long-term and 40% short-term capital gain or loss. Application of
these rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, may not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the taxation
of the Fund's sales of securities and transactions in options and futures
contracts. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain sales of securities and certain
closing transactions in options and futures contracts.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury regulations presently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and the
Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states are exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. government obligations. State law varies
as to whether dividend income attributable to U.S. government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average total return and other total
return data, as well as yield, in advertisements or information furnished to
present or prospective shareholders. Total return and yield figures will be
based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A and Class Y shares of the Fund in accordance with
formulae specified by the SEC.
Average annual total return quotations for the Fund for the specified periods
will be computed by finding the average annual compounded rates of return (based
on net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A shares.
The Fund also may quote total return and aggregate total return performance data
for various specified time periods. Such data will be computed as described
above, except that (1) the rates of return calculated will not be average annual
rates, but rather, actual annual, annualized or aggregate rates of return and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return since the aggregate rates of return
reflect compounding over a longer period of time. The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
the effect of such total return on a hypothetical $1,000 investment in a Fund at
the beginning of each specified period.
Yield quotations for the Fund will be computed based on a 30-day period by
dividing (a) the net income based on the yield of each security earned during
the period by (b) the average daily number of shares outstanding in the Fund
during the period that were entitled to receive dividends multiplied by the
maximum offering price/net asset value per share of the Fund on the last day of
the period.
Total return figures and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return will vary depending on market conditions, the securities comprising
the Fund's holdings, operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to that of the Merrill Lynch
High Yield Master Index, the Standard & Poor's 500 Composite Stock Price Index,
the Dow Jones Industrial Average, or performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc., MONEY MAGAZINE, U.S.
NEWS & WORLD REPORT, BUSINESS WEEK, CDA Investment Technology, Inc., FORBES
MAGAZINE and FORTUNE MAGAZINE. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
TOTAL RETURN
The Fund's total return for Class A shares for the fiscal year ended September
30, 1998, and for the period from October 28, 1996 (date of initial public
investment) to September 30, 1998, was (3.09%), and 9.62%, respectively.
The Fund's total return for Class Y shares for the fiscal year ended September
30, 1998, and for the period from October 28, 1996 (date of initial public
investment) to September 30, 1998, was 1.76% and 12.55%, respectively.
YIELD
The Fund's yield for Class A shares for the thirty-day period ended September
30, 1998 was 8.96%.
The Fund's yield for Class Y shares for the thirty-day period ended September
30, 1998 was 9.65%.
GENERAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Additional Information--Dividends and Distributions" in
the Prospectus.
DESCRIPTION OF SHARES
The Fund is the only existing series of Battery Park Funds, Inc. (the
"Company"), a series-type investment company incorporated under Maryland law on
June 4, 1996. The Company has an authorized capital of 200,000,000 shares of
common stock, par value $0.001 per share, of which 50,000,000 shares are
initially classified as one series, namely the Fund, consisting of two classes,
designated Class A and Class Y Common Stock, each of which consists of
25,000,000 shares, and the remainder of 150,000,000 shares are not classified as
to any class or series. Shares of Class A and Class Y Common Stock represent
interests in the same assets of the Fund and are identical in all respects
except that the Class A shares bear certain expenses related to the distribution
associated with such shares. Class A shareholders each have exclusive voting
rights with respect to matters relating to expenditures made under that class's
Rule 12b-1 plan, as applicable.
Shareholders are entitled to one vote for each share held and fractional votes
for fractional shares held and will vote on the election of Directors and any
other matter submitted to a shareholder vote. The Fund does not intend to hold
meetings of shareholders in any year in which the Investment Company Act does
not require shareholders to act upon election of Directors. The By-laws of the
Company provide that a special meeting of shareholders may be called for any
purpose on the written request of the holders of at least 10% of the outstanding
shares of the Fund. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive or conversion
rights. Redemption rights are discussed elsewhere herein and in the Prospectus.
Each share is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund on liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
are issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the initial offering price for Fund
shares, based on the projected value of the Fund's estimated net assets and
projected number of shares outstanding on the date its shares are first offered
for sale to public investors is as follows:
CLASS A CLASS Y
Net Assets...................................... $50,000 $50,000
======= =======
Number of Shares Outstanding.................... 5,000 5,000
===== =====
Net Asset Value Per Share (net assets divided
by number of shares outstanding).............. $10.00 $10.00
Sales Charge (4.5% on Class A only; 4.71% of
amount invested).............................. $ .47 $ --
-------- ------
Offering Price $10.47 $10.00
====== ======
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 2500 One PPG Place, Pittsburgh, PA 15222-5401, has been
selected as the independent auditors of the Fund.
CUSTODIAN
The Bank of New York, 48 Wall Street, New York, NY 10286, acts as custodian of
the Fund's assets. The Custodian is responsible for safeguarding and controlling
the Fund's cash and securities, handling the receipt and delivery of securities
and collecting interest and dividends on the Fund's investments.
FUND ADMINISTRATION
Federated Services Company (the "Administrator"), a subsidiary of Federated
Investors, Inc. provides administrative personnel and services to the Fund for a
fee as described in the prospectus. For the fiscal year ended September 30,
1998, and 1997, the Administrator earned $50,001 and $46,164, respectively.
TRANSFER AGENT
Federated Shareholder Services Company, Federated Investors Tower, Pittsburgh,
PA 15222-3775, acts as the Fund's transfer agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "Management of the
Fund--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, NY 10048-0557, is counsel
for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on September 30 of each year. The Fund will
send to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each calendar year, shareholders will receive federal income
tax information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain all
the information set forth in the Registration Statement and the exhibits
relating thereto which the Fund has filed with the SEC, Washington, D.C., under
the Securities Act of 1933 and the Investment Company Act, to which reference is
hereby made.
