<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1999
SECURITIES ACT REGISTRATION NO. 333-__________
INVESTMENT COMPANY ACT FILE NO. 811-09251
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-effective Amendment No. __________
[ ] Post-effective Amendment No. __________
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment no. __________
PHOENIX DUFF & PHELPS UTILITIES BOND FUND, INC.
(Exact name of Registrant as specified in charter)
55 EAST MONROE STREET
CHICAGO, ILLINOIS 60603
(Address of principal executive offices)
(312) 630-4600
(Registrant's Telephone Number, including Area Code)
PHILIP R. MCLOUGHLIN
PHOENIX INVESTMENT PARTNERS, LTD.
56 PROSPECT STREET
HARTFORD, CONNECTICUT 06115
(860) 403-5365
(Name and address of Agent for Service)
With a copy to:
PHILIP J. NIEHOFF STEVEN N. ROBINSON
MAYER, BROWN & PLATT CLEARY, GOTTLIEB, STEEN & HAMILTON
190 SOUTH LASALLE STREET 2000 PENNSYLVANIA AVENUE, N.W.
CHICAGO, ILLINOIS 60603 WASHINGTON, D.C. 20006
_______________
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of the Registration Statement.
If any securities on this form are to be offered on a delayed or continuous
basis in reliance on Rule 415 under the Securities Act of 1933, other than
securities offered in connection with a dividend reinvestment plan, check the
following box...........................[_]
[_] this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is 333-__________.
_______________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED AMOUNT REGISTERED SHARE PRICE FEE
<S> <C> <C> <C> <C> <C>
Common stock, $.001 par
value per share.............. 4,600,000 shares (1) $15.00 $69,000,000 $19,182
(1) Includes 600,000 shares which may be purchased by the underwriters to cover over-allotments, if any.
</TABLE>
_______________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE FUND
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS SUBJECT TO COMPLETION -- MARCH __, 1999
4,000,000 SHARES OF COMMON STOCK
PHOENIX DUFF & PHELPS UTILITIES BOND FUND, INC.
Phoenix Duff & Phelps Utilities Bond Fund, Inc. (the "Fund") is offering
4,000,000 shares of its common stock in an initial public offering. The
objective of this newly organized closed-end fund is to generate high current
income. We will invest our assets primarily in investment grade rated debt
securities issued by domestic and foreign companies in the utilities industry.
We may invest the remainder of our assets in below investment grade debt
securities, which are rated lower than "Baa" by Moody's Investors Service, Inc.
or lower than "BBB" by Standard & Poor's Ratings Group or, if not rated, are
believed to be of comparable quality by the Fund's investment sub-adviser. There
is, of course, no guarantee that we will achieve our investment objective.
The Fund will be advised by affiliates of Phoenix Investment Partners, Ltd., an
investment management organization which managed approximately $53.5 billion
through its investment subsidiaries as of December 31, 1998. Of these
affiliates, Duff & Phelps Investment Management Co. ("Duff & Phelps"), will
implement our investment program as is necessary for the operations of the Fund
and manage the utilities portion of the Fund's portfolio. Another affiliate,
Phoenix Investment Counsel, Inc. ("Phoenix"), will serve as our investment
sub-adviser and will manage the high risk, high yield portion of our portfolio.
W.S. Griffith & Co. ("W.S. Griffith"), another affiliate of Phoenix Investment
Partners, Ltd., will determine the Fund's asset allocation strategy.
W.S. Griffith will pay the sales load on the shares you buy. We estimate that
the expenses for this Offering will be $[ ], including approximately $250,000 to
be paid to the underwriters as reimbursement of certain of their expenses in
connection with this offering. The Fund will pay the first $0.02 per share of
offering expenses from its assets. W.S. Griffith has agreed to pay or to
reimburse the underwriters for all expenses in excess of $0.02 per share.
Prior to this offering, there has been no public market for shares of the Fund.
The shares of the Fund will be listed on the New York Stock Exchange under the
symbol ["___"]. You should be aware that shares of closed-end funds have often
traded at a discount to their net asset values and the shares of the Fund may
likewise trade at such a discount.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Price to Public............................................. $ 15.00 $ 60,000,000
Sales Load.................................................. None None
Proceeds, before expenses, to the Fund...................... $ 15.00 $ 60,000,000
</TABLE>
SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" ON PAGES ___ TO ___ FOR FACTORS
THAT SHOULD BE CONSIDERED BEFORE INVESTING IN SHARES OF THE FUND.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The underwriters may, under certain circumstances, for a period of 45-days
purchase up to 600,000 additional shares from the Fund at the public offering
price less the sales load. Delivery and payment for the shares will be on March
[__] , 1999.
PRUDENTIAL SECURITIES
March __, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
Prospectus Summary........................................ 3 Taxes.................................................... 46
Fund Expenses............................................. 12 Automatic Dividend Reinvestment Plan..................... 49
The Fund.................................................. 14 Custodian and Transfer and Dividend Disbursing Agent..... 50
Use of Proceeds........................................... 14 Description of Shares.................................... 51
Investment Objectives and Policies........................ 14 Underwriting............................................. 54
Other Investment Practices and Portfolio Management Additional Information................................... 55
Techniques................................................ 22 Legal Opinions........................................... 55
Risk Factors and Special Considerations................... 29 Experts.................................................. 56
Dividends and Distributions............................... 37 Report of Independent Accountants........................ 56
Investment Restrictions................................... 37 Statement of Assets and Liabilities......................
Management of the Fund.................................... 38 Appendix A: Ratings of Corporate Bonds................. A-1
Directors and Officers of the Fund........................ 42 Appendix B: Ratings of Commercial Paper................ B-1
Portfolio Transactions.................................... 44 Appendix C: General Characteristics and Risks
Determination of Net Asset Value.......................... 45 of Strategic Transactions.................. C-1
</TABLE>
The terms "Fund," "Company," "we," "our," and "us" refer to the Phoenix
Duff & Phelps Utilities Bond Fund, Inc., unless the context suggests otherwise.
The term "you" refers to a prospective investor.
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to
risks, uncertainties and assumptions about the Phoenix Duff & Phelps Utilities
Bond Fund, Inc., including, among other things:
- general national and international economic and business
conditions in the utilities industry;
- our investment opportunities;
- our expectations and estimates concerning future financial
performance, financing plans and the impact of competition;
- anticipated trends in the utilities industry;
- existing and future regulations affecting the utilities industry;
and
- other risk factors set forth under "Risk Factors and Special
Considerations" in this prospectus.
In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to the Fund or its management, are intended to
identify forward-looking statements.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this prospectus may not
occur and actual results could differ materially from those anticipated in the
forward-looking statements.
- --------------------------------------------------------------------------------
You should rely on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any other date than the date on the front cover of
this prospectus.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This
summary is not complete and may not contain all of the information that
investors should consider before investing in the Fund. Investors should read
the entire prospectus carefully.
THE FUND Our investment objective is to generate high current
income. We will invest our assets primarily in
investment grade rated debt securities issued by
domestic and foreign issuers in the utilities
industry. We may invest the remainder of our assets
in below investment grade debt securities and in
debt securities issued by issuers in emerging market
countries. The Fund is a closed-end fund. The Fund
will be advised by affiliates of Phoenix Investment
Partners, Ltd., an investment management
organization which managed approximately $53.5
billion through its investment subsidiaries as of
December 31, 1998. Of these affiliates, Duff &
Phelps Investment Management Co. ("Duff & Phelps"),
will implement our investment program as is
necessary for the operations of the Fund and manage
the utilities portion of the Fund's portfolio.
Another affiliate, Phoenix Investment Counsel, Inc.
("Phoenix"), will serve as our investment
sub-adviser and will manage the high risk, high
yield portion of our portfolio. W.S. Griffith & Co.
("W.S. Griffith"), another affiliate of Phoenix
Investment Partners, Ltd., will determine the Fund's
asset allocation strategy. Duff & Phelps, Phoenix
and W.S. Griffith are, collectively, the "Advisers."
THE OFFERING We are offering shares of common stock of the Fund
at a price of $15.00 per share. The Fund will pay
the first $0.02 per share of offering expenses from
its assets. W.S. Griffith will pay the sales load on
the shares you buy equal to 4.75% of the per share
offering price. In addition, W.S. Griffith will pay
all offering expenses that exceed $.02 per share.
See "Underwriting."
THE OFFERING
<TABLE>
<S> <C>
Shares offered by the Fund.............. 4,000,000 shares
Total shares outstanding after
this offering........................ 4,000,000 shares(1)
Use of proceeds......................... The net proceeds will be invested in accordance
with the Fund's investment objectives and
policies during a period not to exceed six months
from the closing of this offering. Pending such
investment, the net proceeds may be invested in
short-term investment grade, interest bearing
debt securities. See "Use of Proceeds."
Proposed NYSE symbol.................... [_________________]
-----------------
(1) Does not include up to 600,000 shares that the
underwriters may purchase if they exercise their
over-allotment option.
</TABLE>
INVESTMENT OBJECTIVES
AND POLICIES INVESTMENT OBJECTIVE. Our investment objective is to
generate high current income. The Fund is designed
for investors who are interested in a fund with an
emphasis on investment grade debt securities in the
utilities sector, but who are also willing to assume
3
<PAGE> 5
the risks associated with a portfolio that invests a
portion of its assets in high risk, high yield debt
securities. There is no guarantee or assurance that
the Fund will achieve its objective.
INVESTMENT POLICIES. In line with our investment
objective, we will invest our assets primarily in
investment grade rated debt securities issued by
domestic and foreign issuers in the utilities
industry. Under normal market conditions, we will
invest at least 65% of our total assets in investment
grade rated debt securities of issuers engaged in the
production, transmission or distribution of electric
energy, telecommunications services, gas or water.
These issuers are generally referred to as "utility
companies." In addition, to attain higher income than
may be available in investment grade securities, we
may invest up to 35% of our total assets in high
risk, high yield debt securities, which are debt
securities rated lower than "Baa" by Moody's
Investors Services, Inc. ("Moody's"), "BBB" by
Standard & Poors Ratings Group ("S&P") or, if not
rated, are believed to be of comparable quality by
Phoenix. Debt securities rated Baa/BBB and higher are
described as "investment grade," while lower grade
securities are classified as "below investment grade"
or "junk bonds." Generally, the securities in our
portfolio will include the following:
- DEBT SECURITIES. Debt securities generally
involve the obligation of an issuer to pay
interest or, in the case of preferred securities,
dividends, on a current basis and to pay the
principal amount or liquidation preference of the
securities at a future date. The debt securities
that we will invest in include investment grade
rated short, medium and long term bonds, as well
as preferred stock, notes, debentures and other
interest-bearing securities issued by utility
companies. The Fund may also invest up to 35% of
its total assets in below investment grade rated
debt securities, which are regarded as
predominantly speculative.
- FOREIGN DEBT SECURITIES. Foreign debt securities
are debt securities issued by non-U.S. entities.
The Fund may invest up to 30% of its total assets
in U.S. dollar denominated debt securities of
foreign issuers, including up to 15% of its total
assets in U.S. dollar denominated debt securities
issued by the governments of and issuers located
in so-called emerging markets (or lesser
developed countries).
- COLLATERALIZED BOND OBLIGATIONS. Collateralized
Bond Obligations (or "CBOs") are structured
securities backed by a pool of debt securities.
CBOs are typically separated into tranches, or
classes, representing differing degrees of credit
quality. The top tranche represents the highest
credit quality, has the greatest
collateralization from the underlying pool of
income securities and has the lowest interest
rate. Lower CBO tranches have lower credit
quality and have higher interest rates intended
to compensate for the increased risks. The Fund
will not invest more than 15% of its total assets
in CBOs. The Fund will not invest in the bottom
tranche of CBOs, which receives the residual
interest payments (i.e., money that is left over
after the higher tranches have been paid) rather
than a fixed interest rate and involves a greater
risk of default.
- OTHER SECURITIES. For a description of other
securities in which the Fund may invest, see
"Investment Objectives and Policies."
INVESTMENT STRATEGY. In selecting debt securities for
the Fund's portfolio, the Advisers will seek to
identify issuers that they believe have strong
financial characteristics. The Advisers believe this
strategy should enhance the Fund's ability to earn
high current
4
<PAGE> 6
income. The Advisers will consider a number of
factors in their analysis, including, but not limited
to:
- general industry trends;
- the issuer's managerial strength and management
quality;
- the regulatory environment;
- the issuer's financial condition and resources;
- the issuer's rates of return on capital;
- assessment of the issuer's ability to meet
principal and interest payments;
- changing economic and financial conditions; and
- credit research on the issuer's financial
strength.
Under certain market conditions, the Fund may
implement a temporary "defensive" strategy at times
when the Advisers determine that market conditions
make pursuing the Fund's basic investment strategy
inconsistent with the best interests of shareholders.
This strategy may include investing all or a portion
of the Fund's assets in higher-quality, short-term
securities, such as securities issued or guaranteed
by the United States Government and its agencies and
instrumentalities.
For a discussion of the services provided by each
Adviser, please read the "Management of the Fund"
Section of this prospectus on pages [ ] to [ ].
RISK MANAGEMENT. The Advisers use proprietary
technology and value-oriented security selection to
identify the securities that are expected to deliver
the highest yield for the least amount of assumed
risk. The Fund's investment strategy emphasizes risk
management through the following processes:
- creating a diversified portfolio;
- performing individual, company-by-company credit
research to select securities of issuers that the
Advisers believe will be able to meet their debt
obligations; and
- utilizing the expertise and experience of the
management team to make investment decisions.
INVESTMENT PRACTICES. In seeking to achieve our
investment objective, the Advisers may also use a
number of other investment practices and techniques,
including:
- LEVERAGE. We expect to use leverage to purchase
additional securities, which means that the Fund
will borrow money, issue preferred shares or
engage in other transactions such as reverse
repurchase agreements. We expect that as the Fund
becomes fully invested, we will use leverage in
an amount up to 33 1/3% of our total assets
(including the amount obtained through leverage).
The use of leverage creates the opportunity for
higher income for shareholders but, at the same
time, magnifies the effect of any losses,
increases the Fund's expenses and involves other
risks described below.
- OTHER INVESTMENT MANAGEMENT TECHNIQUES. Although
not intended to be a significant element in the
Fund's basic investment strategy, from time to
time the Fund may use various other investment
management techniques that involve certain risks
and special considerations, including:
- engaging in interest rate and credit
derivatives transactions;
- using options and financial futures;
5
<PAGE> 7
- making forward commitments; and
- lending the Fund's portfolio securities.
MANAGEMENT OF THE
FUND Affiliates of Phoenix Investment Partners, Ltd.,
including Duff & Phelps, will serve as our investment
advisers. Duff & Phelps will implement the Fund's
investment program as is necessary for the operations
of the Fund and manage the utilities portion of the
Fund's portfolio. Phoenix will serve as the Fund's
investment sub-adviser and will manage the high risk,
high yield portion of the Fund's portfolio. W.S.
Griffith also will serve as an investment adviser to
the Fund and will determine the Fund's asset
allocation strategy. W.S. Griffith is an affiliate,
and Duff & Phelps and Phoenix are subsidiaries, of
Phoenix Investment Partners, Ltd., an investment
management organization, which managed approximately
$53.5 billion through its investment subsidiaries as
of December 31, 1998, of which $29 billion was
invested in debt securities, including utilities,
high yield, emerging markets and other fixed income
securities. Duff & Phelps and Phoenix manage a broad
spectrum of debt, equity and money market securities
with particular expertise in the utilities and high
yield sectors of the debt securities market. As of
December 31, 1998, Duff & Phelps had approximately
$15.9 billion in assets under management, including
$3.5 billion of closed-end funds and $7.6 billion of
institutional debt accounts. Phoenix had
approximately $12.6 billion in assets under
management, including approximately $10.1 billion of
open-end funds and $2.5 billion of institutional
accounts. Together, Duff & Phelps and Phoenix manage
a total of 3 closed-end funds, all of which have
substantial investment in utility securities.
MANAGEMENT FEES The Fund will pay the Advisers a total monthly fee at
the annual rate of 1.00% of the Fund's "Managed
Assets." Managed Assets are the average weekly value
of the Fund's assets, including assets purchased with
leverage, computed weekly, minus the average value of
the Fund's accrued liabilities, other than
indebtedness attributable to leverage. The management
fee will be paid by the Fund to Duff & Phelps and
W.S. Griffith in the amount of .60% and .40%,
respectively, of the Fund's Managed Assets. Duff &
Phelps, in turn, will pay Phoenix a monthly fee for
providing investment sub-advisory services at the
annual rate of [____%] of the Fund's Managed Assets.
This fee is an obligation of Duff & Phelps, not of
the Fund.
ADMINISTRATOR Zweig/Glaser Advisers LLC will act as the Fund's
Administrator. The Fund will pay the Administrator a
monthly fee based on the Fund's Managed Assets at the
annual rate of 0.10%.
LISTING Prior to this Offering, there has been no public
market for the shares. The shares will be listed on
the New York Stock Exchange under the symbol "___."
DIVIDENDS AND OTHER
DISTRIBUTIONS We intend to pay monthly distributions to
shareholders from our net investment income. The
initial distribution is expected to be paid
approximately 60 days after the date of this
prospectus.
AUTOMATIC DIVIDEND
REINVESTMENT PLAN We have established an Automatic Dividend
Reinvestment Plan (the "Plan"). Shareholders will
have all distributions from their shares of the Fund
automatically reinvested in additional shares of the
Fund unless they elect not to participate in the
Plan. These additional shares will either be
purchased in the open market or will be newly issued
by the Fund. Shareholders who would like their
distributions to be paid in cash must elect
6
<PAGE> 8
this manner of payment. Shareholders who intend to
hold their shares through a broker should contact
their broker to determine whether or how they may
participate in the Plan. See "Automatic Dividend
Reinvestment Plan."
CLOSED-END FUND
STRUCTURE The Fund is a newly-organized closed-end fund.
Closed-end funds differ from open-end funds (which
are commonly referred to as mutual funds) in that
closed-end funds, unlike mutual funds, generally list
their shares for trading on a stock exchange and do
not redeem their shares at the request of
shareholders. This means that if you wish to sell
your shares of the Fund you must sell them, like any
other stock, at the price prevailing in the market at
that time. See the "Description of Shares" section of
this prospectus on pages [___] through [___] for an
explanation of the differences between closed-end
funds and mutual funds. In addition, shares of
closed-end funds frequently trade at a discount to
their net asset value. See "Market Price, Discount
and Net Asset Value of Shares," below.
RISK FACTORS AND
SPECIAL CONSIDERATIONS Investment in the Fund involves risks.
You should carefully consider the following risk
factors, in addition to other information set forth
in this prospectus, before purchasing shares of the
Fund. An investment in shares of the Fund may not be
appropriate for all investors and should not be
considered a complete investment program. You should
also read carefully the "Risk Factors and Special
Considerations" section of this prospectus on pages
[__] to [__].
GENERAL. As a newly-organized fund, the Fund has no
operating history. The shares are designed primarily
for investors who plan to invest and hold their
investment for the long term. Therefore, you should
not consider the shares as a vehicle for trading
purposes nor do they constitute a complete investment
program. The net asset value of the shares will
fluctuate with changes in interest rates, as well as
with changes in the prices of the securities owned by
the Fund. These fluctuations are likely to be greater
when the Fund is using leverage. Reduced income can
result in lower distributions by the Fund and reduced
credit quality can result in a reduced net asset
value, which can adversely affect the market price
for the Fund's shares.
UTILITY SECURITIES. Our concentration in debt
securities issued by utility companies will expose us
to certain risks. These risks include:
- SECTOR RISK. Sector risk is the risk that we will
be affected by the performance of issuers in one
industry more than a broadly diversified fund
would be. As a sector fund that invests in
utility companies, we are subject to the risks
associated with this sector. This makes the Fund
more vulnerable to price changes in the
securities of utility companies and to market
factors that affect the utilities industry than a
more broadly diversified fund would be.
- GOVERNMENT REGULATION. In most countries and
localities, utilities are regulated by government
entities. Government regulation can result in
increased costs and can make it difficult to pass
increased costs on to consumers, thereby reducing
the profitability of the issuers. Reduced
profitability may result in a lower credit rating
and reduced income.
7
<PAGE> 9
- DEREGULATION. In certain areas, the deregulation
of utilities has resulted in increased
competition and reduced profitability for utility
companies, which can result in lower credit
ratings and reduced income to the Fund.
- FINANCING. Historically, companies in the utility
industry have encountered difficulties in
obtaining financing for construction programs
during inflationary periods. Issuers experiencing
difficulties in financing construction programs
may also experience lower profitability, which
can result in reduced income to the Fund.
- EQUIPMENT AND SUPPLIES. Utility companies face
the risk of lengthy delays and increased costs
associated with the design, construction,
licensing and operation of their facilities.
Moreover, technological innovations may render
existing plants or equipment obsolete. Increased
costs and a reduction in the availability of fuel
(such as oil, coal, nuclear or natural gas) may
also adversely affect the profitability of
utility companies.
DEBT SECURITIES. The Fund's investments in debt
securities involve certain risks. While these risks
apply to investment grade debt securities, they are
heightened in connection with the Fund's investment
in high risk, high yield debt securities of lower
credit quality, which are commonly referred to as
"junk bonds." These risks include:
- CREDIT RISK. Credit risk refers to an issuer's
ability to make principal and interest payments
when they are due. Because we may own lower rated
securities, we will be subject to a high level of
credit risk. The credit quality of lower grade
securities is considered speculative by rating
agencies with respect to the issuer's ability to
pay interest or principal, thereby exposing the
Fund to the risk of reduced income and a reduced
net asset value.
- MARKET RISK. The prices of debt securities tend
to fall as interest rates rise. Securities that
have longer maturities tend to fluctuate more in
price in response to changes in market interest
rates. A decline in the prices of the debt
securities owned by the Fund would cause a
decline in the net asset value of the Fund.
- INCOME RISK. The income investors receive from
the Fund is based primarily on the interest the
Fund earns from its investments, which can vary
widely over the short and long-term. If interest
rates drop, the Fund may have to purchase
securities with lower interest coupons (or
payments), which, in turn, may decrease
investors' income from the Fund.
- CALL RISK. If interest rates fall, it is possible
that issuers of callable bonds with high interest
coupons will "call", or prepay, their bonds
before their maturity date. If a call were
exercised by an issuer during a period of
declining interest rates, we would likely have to
replace such called securities with lower
yielding securities, which could decrease our net
investment income.
- LIQUIDITY RISK. We may invest in certain debt
securities for which there is no readily
available trading market or which are otherwise
illiquid. We may not be able to readily sell such
securities at prices comparable to more
widely-traded securities. As a result of such
illiquidity, we may have to sell other
investments or engage in borrowing transactions
if we need to raise cash to meet our obligations.
8
<PAGE> 10
MEZZANINE INVESTMENTS. "Mezzanine Investments" are
typically unsecured subordinated debt securities. The
issuer's ability to repay a Mezzanine Investment
often depends on the issuer's ability to "refinance"
or replace the Mezzanine Investment with another
income security. Issuers of Mezzanine Investments
often are highly leveraged and may have difficulty in
refinancing. Because Mezzanine Investments may
experience high default rates, the Fund may lose
money on its Mezzanine Investments.
COLLATERALIZED BOND OBLIGATIONS. Income from the pool
of debt securities collateralizing the CBOs is
typically separated into tranches, or classes,
representing different degrees of credit quality. The
top tranche of CBOs, which represents the highest
credit quality in the pool, has the greatest
collateralization and pays the lowest interest rate.
Lower CBO tranches represent lower degrees of credit
quality and pay higher interest rates to compensate
for the attendant risks. The return on the lower
tranches of CBOs are especially sensitive to the rate
of defaults in the collateral pool, which increases
the risk of the Fund losing money if it invests in
lower CBO tranches.
FOREIGN SECURITIES. Investment in foreign securities
involves special risks that may increase the
likelihood that the Fund will lose money. In
particular, foreign markets are not as developed,
efficient or liquid as U.S. markets and prices often
are more volatile. Certain foreign countries may
impose restrictions on the ability of issuers to make
payments of principal and interest to investors
located outside the country. In addition, if the Fund
invests in the securities of foreign issuers, it will
be subject to risks associated with the political and
economic developments in foreign countries, which
could cause the Fund to lose money.
EMERGING MARKETS. Securities issued by issuers in
emerging markets are considered speculative.
Investment in emerging markets entails risks to the
Fund in addition to the risks associated with foreign
securities. Emerging markets are substantially
smaller, less developed, less liquid and more
volatile than developed securities markets. Emerging
markets involve heightened risks relating to
potential political and economic instability.
LEVERAGE. Although the use of leverage by the Fund
may create an opportunity for increased net income,
it may also result in additional risks and can
magnify the effect of any losses. If the income or
gains from the securities purchased with the proceeds
of leverage do not cover the cost of leverage, the
return to the Fund will be less than if leverage had
not been used. There is no assurance that a
leveraging strategy will be successful. Leverage
involves risks and special considerations for
shareholders including:
- the likelihood of greater volatility in the net
asset value and market price of the shares than a
comparable portfolio without leverage;
- the risk that increases in interest rates on
borrowings will reduce the return to
shareholders;
- the effect of leverage in a declining market,
which is likely to cause a greater decline in the
net asset value of the shares than if the Fund
were not leveraged, which may result in a greater
decline in the market price of the shares; and
- when the Fund uses leverage, the investment
advisory fees payable to the Advisers and the
administrative fee payable to the Administrator
will be higher than if the Fund did not use
leverage, thus increasing the Fund's expenses and
decreasing the Fund's return.
9
<PAGE> 11
OTHER INVESTMENT MANAGEMENT TECHNIQUES. The Fund may
use various other investment management techniques
that also involve certain risks and special
considerations, including engaging in hedging and
risk management transactions (which we refer to as
"Strategic Transactions") including interest rate
transactions, options, futures, swaps and other
derivatives transactions. Strategic Transactions will
be entered into to manage risk, but may have the
effect of limiting the gains from favorable market
movements. In addition, these Strategic Transactions
may not succeed in hedging the Fund's positions and
managing risk and may instead create losses for the
Fund.
MARKET PRICE, DISCOUNT AND NET ASSET VALUE OF SHARES.
Whether investors will realize gains or losses on the
sale of shares will not depend directly upon the
Fund's net asset value, but will depend upon the
market price of the shares at the time of sale. If
the Fund's investment strategy is unsuccessful, the
market price for the Fund's shares may decrease.
There has been no public market for the shares prior
to this offering. Since the market price of the
shares will be affected by such factors as the
relative demand for and supply of the shares in the
market, general market and economic conditions and
other factors beyond the control of the Fund, the
Fund cannot predict whether the shares will trade at,
below or above net asset value or at, below or above
the public offering price. Shares of closed-end funds
often trade at discounts to their net asset values
and the Fund's shares may trade at such a discount.
This risk may be greater for investors expecting to
sell their shares of the Fund soon after completion
of the public offering.
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of
Incorporation (the "Articles of Incorporation")
contain provisions limiting (i) the ability of other
entities or persons to acquire control of the Fund
and (ii) the ability of the Fund's Board of Directors
or shareholders to amend the Articles of
Incorporation. These provisions of the Articles of
Incorporation may be regarded as "anti-takeover"
provisions. These provisions could have the effect of
depriving the shareholders of opportunities to sell
their shares at a premium over prevailing market
prices by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or
similar transaction.
YEAR 2000 RISKS. The Year 2000 issue exists because
many computer systems and applications use two-digit
fields to designate a year. Date-sensitive computer
systems and programs may fail to recognize or
correctly process the Year 2000 as the century date
change approaches or occurs. This inability to
properly recognize or treat the Year 2000 may cause
systems errors or failures that could disrupt or
prevent normal business operations.
The Advisers are evaluating all of their internal
computer systems with regard to Year 2000 concerns.
Although the Advisers believe their planning efforts
are adequate to address Year 2000 concerns, it is
still possible that the Fund could experience
negative consequences and material costs caused by
undetected errors or defects in the technology used
in the internal systems of the Advisers. The Advisers
intend to monitor and improve the Year 2000
preparedness of their internal systems and to
implement alternative solutions, if necessary.
The Fund's operations also could be negatively
affected by the inability of third party service
providers to manage the Year 2000 issue in a timely
manner. Accordingly, the Advisers are working with
the Fund's third party service providers to assess
the adequacy of their compliance efforts and are
developing contingency plans intended to assure that
third party noncompliance will not materially affect
the Fund's operations.
10
<PAGE> 12
Interruption of the delivery of electric power,
telecommunications services, or natural gas could
have substantial effects on consumers and could also
affect investors, including the Fund. These concerns
have moved the utility industry to take action to
prevent potential Year 2000 problems. The problems
are complex. Larger utility companies generally have
a better grasp of the problem and more resources to
deal with it than smaller companies. Foreign
companies generally appear to be less prepared than
domestic companies. Well prepared organizations are
exposed to the problem through interactions with the
less prepared. It is possible, for example, that the
failure of a major industrial electricity company's
systems could shut down a regional electricity system
temporarily and affect an issuer's ability to make
timely payments of interest or principal on debt
securities held by the Fund. While there are no
guarantees, the Advisers will use their best efforts
to invest only in those issuers they believe are most
able to meet the challenges of the future.
EURO CONVERSION. On January 1, 1999, eleven countries
in the European Monetary Union adopted the euro as a
single European Union currency. However, their
current currencies (for example, the Franc, the Mark,
and the Lire) will also continue in use until January
1, 2002. After that date, it is expected that only
the euro will be used in those eleven countries.
The Advisers will monitor the effects of the
conversion on the issuers in which the Fund invests.
The possible effect of these factors on the Fund's
investments cannot be determined with certainty at
this time, but they may reduce the value of some of
the Fund's holdings and increase its expenses,
thereby decreasing the Fund's return.
11
<PAGE> 13
FUND EXPENSES
The following tables are intended to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear, directly
or indirectly.
<TABLE>
<CAPTION>
ASSUMING
33 1/3% LEVERAGE(1)
------------------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load (as a Percentage of Offering Price)....... None
Dividend Reinvestment Plan Fees...................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF NET ASSETS ATTRIBUTABLE TO SHARES)
Management Fee(2).................................... 1.50%
Administration Fees.................................. .15%
Interest Payments on Borrowed Funds.................. 2.75%
Other Expenses(3).................................... .30%
---------------------
Total Annual Fund Expenses(4)..................... 4.70%
=====================
</TABLE>
- ---------------
(1) The Fund intends to use leverage only if the Advisers believe that it
would result in higher income to shareholders over time. See "Other
Investment Practices--Leverage" and "Risk Factors and Special
Considerations--Leverage."
(2) The Fund will pay a Management Fee to Duff & Phelps and to W.S. Griffith
at the annual rate of .60% and .40%, respectively, of the Fund's Managed
Assets.
(3) Reflects estimated amounts for the Fund's first year of operations. Under
the terms of an agreement dated _________, Duff & Phelps and W.S.
Griffith agreed to reimburse the Fund to the extent that actual other
expenses (as defined) incurred by the Fund exceed .20% of the Managed
Assets as long as the Advisory Agreements are in effect.
(4) The total annual fund expenses do not include the one time payment by the
Fund of certain offering expenses, which are estimated to be
approximately $80,000. Expenses in excess of $.02 per share will be paid
by W.S. Griffith.
The table above assumes borrowings of 33 1/3% of total assets
(including the amount borrowed) at an annualized interest rate of 5.50%, which
is based upon the Fund's estimation of current market conditions. The actual
rate could be higher or lower. At times when the Fund does not use leverage, the
estimated annual operating expenses would be:
<TABLE>
<CAPTION>
ASSUMING
NO LEVERAGE
-----------
<S> <C>
Management Fee(1)........................................ 1.00%
Administration Fees...................................... .10%
Other Expenses(2)........................................ .20%
----------------
Total Annual Fund Expenses(3)......................... 1.30%
================
</TABLE>
- ---------------
(1) The Fund will pay a Management Fee to Duff & Phelps and to W.S. Griffith at
the annual rate of .60% and .40%, respectively, of the Fund's Managed
Assets.
(2) Reflects estimated amounts for the Fund's first year of operations. Under
the terms of an agreement dated _________, Duff & Phelps and W.S. Griffith
agreed to reimburse the Fund to the extent that actual other expenses (as
defined) incurred by the Fund exceed .20% of the Managed Assets as long as
the Advisory Agreements are in effect.
(3) The total annual fund expenses do not include the one time payment by the
Fund of certain offering expenses, which are estimated to be approximately
$80,000. Expenses in excess of $.02 per share will be paid by W.S. Griffith.
12
<PAGE> 14
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expense that would be incurred over various periods with respect to a
hypothetical investment in the Fund. These amounts are based upon payment by the
Fund of operating expenses at the levels set forth in the aforementioned tables.
An investor would directly or indirectly pay the following expenses on a $1,000
investment in the Fund, assuming (i) total annual expenses of 1.30% (assuming no
leverage) and 4.70% (assuming leverage of 33 1/3% of the Fund's total assets)
and (ii) a 5% annual return throughout the periods and reinvestment of all
dividends and other distributions at net asset value.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Assuming No Leverage.................................. $13 $41 $71 $157
Assuming 33 1/3% Leverage............................. $47 $142 $237 $477
</TABLE>
This example assumes that the percentage amounts listed under Total
Annual Expenses remain the same in the years shown. The above tables and the
assumption in the example of a 5% annual return and reinvestment at net asset
value are required by regulation of the Securities and Exchange Commission
("SEC"); the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the shares. Actual expenses
and annual rates of return may be higher or lower than those assumed for
purposes of the example. In addition, although the example assumes reinvestment
of all dividends and other distributions at net asset value, participants in the
Fund's Automatic Dividend Reinvestment Plan may receive shares obtained by the
Plan Agent at or based on the market price in effect at that time, which may be
at, above or below net asset value.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE
SHOWN.
13
<PAGE> 15
THE FUND
The Phoenix Duff & Phelps Utilities Bond Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a diversified, closed-end
management investment company. The Fund was incorporated under the laws of
Maryland on February __, 1999 and has no operating history. The Fund's principal
office is located at 55 East Monroe Street, Chicago, Illinois 60603, and its
telephone number is [____________]. Duff & Phelps will serve as one of the
Fund's investment advisers. Duff & Phelps will implement the Fund's investment
program as is necessary for the operations of the Fund and manage the utilities
portion of the Fund's portfolio. Phoenix will serve as the Fund's investment
sub-adviser and will manage the high risk, high yield portion of the Fund's
portfolio. W.S. Griffith also will serve as an investment adviser to the Fund
and will determine the Fund's asset allocation strategy. W.S. Griffith is an
affiliate, and Duff & Phelps and Phoenix are subsidiaries, of Phoenix Investment
Partners, Ltd., an investment management organization which managed
approximately $53.5 billion through its investment subsidiaries, as of December
31, 1998, of which approximately $29 billion was invested in fixed income
securities, including utilities, high yield, emerging markets and other fixed
income securities. See "Management of the Fund."
USE OF PROCEEDS
The net proceeds to the Fund from this Offering, before deducting
offering expenses, are estimated to be approximately $60,000,000 ($69,000,000 if
the underwriters' over-allotment option is exercised in full). The net proceeds
will be invested in accordance with the Fund's investment objective and policies
during a period not to exceed six months from the closing of this offering.
Pending such investment, the net proceeds may temporarily be invested in
short-term, investment grade, interest-bearing securities. The Fund will pay the
first $0.02 per share of offering expenses from its assets. W.S. Griffith, one
of the Fund's investment advisers, will pay all offering expenses of the Fund
that exceed $.02 per share.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVE
In line with our investment objective, we will invest our assets
primarily in investment grade rated debt securities issued by domestic and
foreign issuers in the utilities industry. Under typical market conditions, the
Fund will invest at least 65% of its total assets in investment grade rated debt
securities of issuers engaged in the production, transmission, or distribution
of electric energy, telecommunications services, gas or water. These issuers are
generally referred to as "utility companies."
The Fund may also invest, without regard to industry, up to 35% of its
total assets in securities rated lower than "Baa" by Moody's Investors Services,
Inc. ("Moody's"), "BBB" by Standard & Poor's Ratings Group ("S&P") or, if not
rated, are believed to be of comparable quality by Phoenix. Debt securities
rated Baa/BBB and higher are described as investment grade, while those with
ratings lower than Baa/BBB are classified as "below investment grade" or "junk
bonds." The Fund may also invest up to 30% of its assets in U.S. Dollar
denominated foreign securities, including up to 15% of its assets in securities
issued by issuers in emerging markets.
The Fund may invest, without regard to industry, up to 10% of its total
assets in the equity securities of U.S. and foreign issuers. However, in
connection with its investments in debt securities, the Fund may receive
warrants or other non-income producing equity securities. The Fund may retain
such securities, including equity shares received upon conversion of convertible
securities, even if doing so causes the Fund's investment in equity securities
to exceed 10% of its total assets, until the Advisers determine that it is
appropriate in light of current market conditions to sell such securities.
The Fund may implement a temporary "defensive" strategy at times when
the Advisers determine that market conditions make pursuing the Fund's basic
investment policies inconsistent with the best interests of shareholders. This
strategy may include investing all or a portion of the Fund's assets in
higher-quality, short-term securities, such as securities issued or guaranteed
by the United States Government and its agencies or instrumentalities.
14
<PAGE> 16
THE UTILITIES INDUSTRY AND UTILITY BOND MARKET
The Fund has developed its investment objective and policies to take
advantage of the characteristics and historical performance of securities of
companies in the utilities industry. Many of these companies have developed a
reputation for making regular interest and dividend payments on their debt and
equity securities, respectively, and, in certain cases, increasing their
dividends over time. In evaluating particular companies, Duff & Phelps considers
a number of factors, including historical growth rates, rates of return on
invested capital, financial condition, resources, and management quality. Duff &
Phelps also considers factors specific to the utilities industry, including
regulatory issues.
Duff & Phelps believes that the U.S. market for debt securities
experienced a dramatic "flight to quality" in the second half of 1998. As the
markets became increasingly concerned that the financial turmoil in Asia, Russia
and Latin America would ultimately translate into slower economic growth in the
United States, the yield on 10-year U.S. Treasury bonds fell by 79 basis points
(.79%) from 5.44% on June 30, 1998 to 4.65% on December 31, 1998. The following
table presents the historical ratio of the yield on the Lehman Brothers Utility
Bond Index relative to the yield on the Lehman Brothers Government Bond Index.
At the present time, the current yields of utility bonds relative to the yields
of similar term U.S. Treasury bonds are higher than historical averages.
Investors may also believe that utilities, which provide basic services such as
electric energy, telecommunications services, gas and water, also generally are
perceived as less susceptible to changes in economic growth rates than are many
other industries facing more discretionary consumer expenditures.
<TABLE>
<CAPTION>
RATIO OF THE YIELD ON THE LEHMAN BROTHERS UTILITY BOND INDEX
RELATIVE TO THE YIELD ON THE LEHMAN BROTHERS GOVERNMENT BOND INDEX
SEPT. MAR. SEPT. MAR. SEPT. MAR. SEPT. MAR. SEPT.
1990 1991 1991 1992 1992 1993 1993 1994 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of the Yield
on the Lehman
Brothers Utility
Bond Index
Relative to the
Yield on the
Lehman Brothers
Government
Bond Index 1.15% 1.18% 1.23% 1.24% 1.40% 1.33% 1.29% 1.24% 1.18%
</TABLE>
<TABLE>
<CAPTION>
MAR. SEPT. MAR. SEPT. MAR. SEPT. MAR. SEPT. OCT. NOV. DEC.
1995 1995 1996 1996 1997 1997 1998 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of the Yield
on the Lehman
Brothers Utility
Bond Index
Relative to the
Yield on the
Lehman Brothers
Government
Bond Index 1.14% 1.16% 1.17% 1.15% 1.13% 1.13% 1.15% 1.23% 1.31% 1.25% 1.26%
</TABLE>
The Lehman Brothers Government Bond Index is an unmanaged index comprised of all
public obligations of the U.S. Treasury, excluding flower bonds and
foreign-targeted issues, all publicly issued debt of U.S. Government agencies
and quasi-federal corporations, and corporate debt guaranteed by the U.S.
Government. The Lehman Brothers Utility Bond Index is an unmanaged index
comprised of all publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered debt issued by utility sector corporations.
All issues included in the Lehman Brothers Government Bond Index and the Lehman
Brothers Utility Bond Index have at least one year to maturity and an
outstanding par value of at least $100 million. Price, coupon, and yield are
reported on a month end market value weighted basis. Source: Lehman Brothers
Fixed Income Research, Global Family of Indices.
15
<PAGE> 17
The utilities industry includes domestic and foreign companies engaged
in the production, transmission or distribution of electric energy,
telecommunications services, gas or water. The utilities industry is generally
subject to government regulation in the United States and in foreign countries.
Government regulation of utility companies is intended to ensure appropriate
standards of service and adequate capacity to meet public demand. Regulation of
utility companies is generally designed to ensure that the rates of return
earned by utility companies are sufficient for them to provide services to the
public, and to grow to meet expected future demands. Changes in the rates
charged by utility companies ordinarily lag behind changes in financing costs
and, therefore, may affect the earnings or dividend pay-outs made by utility
companies and possibly the credit ratings of their debt securities.
The nature of utility regulation is evolving both in the United States
and in foreign countries. In recent years, changes in the regulation of utility
companies in the United States have allowed utility companies to provide
services and products outside their traditional geographic areas and lines of
business, creating new areas of competition. In some instances, utility
companies are operating on an unregulated basis. Trends toward deregulation have
resulted in the evolution of independent power producers. Duff & Phelps believes
that the emergence of competition and deregulation may enable certain utility
companies to earn more than their traditional regulated rates of return, while
others may be forced to defend their core business from increased competition
and may become less profitable. Utility companies may also be adversely affected
by the development and implementation of a national energy policy; the
differences between regulatory policies of different jurisdictions (or different
regulators which have concurrent jurisdiction); shifts in regulatory policies;
and future regulatory legislation.
The Fund's investment policies are designed to enable it to capitalize
on evolving investment opportunities in utility companies worldwide. For
example, Duff & Phelps believes that the rapid growth of certain foreign
economies will necessitate the expansion of the utility industries in those
countries. Although many foreign utility companies currently are
government-owned, Duff & Phelps believes that, in order to attract significant
capital for growth, foreign governments are likely to seek global investors
through the privatization of their utility industries. Privatization refers to
the trend toward investor ownership of assets rather than government ownership.
Of course, there is no assurance that such developments will occur or that
investment opportunities in foreign markets for the Fund will increase.
In addition to the foregoing, other considerations affect specific
sectors within the utilities industry.
ELECTRIC. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. In the past, electric
utility companies, in general, have been favorably affected by lower fuel and
financing costs and the full or near completion of major construction programs.
In addition, many of these companies have generated cash flows in excess of
current operating expenses and construction expenditures, permitting some degree
of diversification into unregulated businesses. Many electric utilities have
also taken advantage of the right to sell power outside of their traditional
geographic areas and diversify into unregulated businesses. Electric utility
companies have historically been subject to the risks associated with increases
in fuel and other operating costs, high interest costs on borrowings needed for
capital construction programs, costs associated with compliance with
environmental and safety regulations and changes in the regulatory climate. As
interest rates declined, many electric utility companies refinanced high cost
debt and, in doing so, improved their fixed charge coverage ratio. Regulators,
however, lowered allowed rates of return as interest rates declined and thereby
caused the benefits of the rate declines to be shared wholly or in part with
customers.
The construction and operation of nuclear power facilities in the
United States is subject to regulation by the Nuclear Regulatory Commission and
state agencies having comparable jurisdiction. Regulatory action could result in
higher operating costs and higher capital expenditures, with the attendant risks
that these costs may not be included in rate increases or that a company may not
be permitted to operate or complete construction of a facility. In addition,
operators of nuclear power plants may be subject to significant costs for
disposal of nuclear fuel and for decommissioning such plants.
16
<PAGE> 18
In October 1993, S&P revised its debt-ratings formula for the electric
utility industry, stating that the industry was in long-term decline, while
Moody's stated that it expected a drop in its average credit ratings for the
industry in the next three years. In January 1999, however, S&P reported that
electric utility industry ratings activity has been mostly positive.
Upgrades to the credit ratings of electric utilities reflect continued
strengthening in key financial measures, and positive regulatory actions.
Overall, the electric utility industry is maintaining a strong credit profile
supported by strong free cash flow, declining debt levels, cost containment, and
supportive state regulatory and legislative bodies. Recently, the rating
agencies have been taking a closer look at the business profile of electric
utility companies. Electric utility companies that focus on the generation of
electricity may be assigned less favorable ratings than companies that focus on
transmission and distribution because the generation of electric power is
expected to be less regulated and more competitive than the transmission and
distribution of electric power.
Currently, several states within the United States, are considering
deregulation proposals for electric utility companies. The introduction of
competition into the industry as a result of deregulation may result in lower
revenue, lower credit ratings, increased default risk, and lower electric
utility security prices. In anticipation of increasing competition, some
domestic electric utility companies have acquired interests in electric utility
companies or invested in projects overseas to diversify, enhance earnings and
gain experience in operating in a deregulated environment. In some instances,
such acquisitions have involved significant borrowings, which have burdened the
acquirer's balance sheet. There is no assurance that current deregulation
proposals will be adopted, but deregulation in any form could significantly
impact the electric utilities industry.
In recent years investors also have grown increasingly concerned about
growing competitive pressures in the electric utility industry. Electric
utilities typically have had large investments in plant and equipment, but have
benefitted from captive markets. Investors have been fearful that higher levels
of competition might challenge the ability of electric utilities to recover
their investments and force them to restructure their operations through asset
sales, business diversification, and expansion into new markets.
Duff & Phelps is optimistic about the outlook for the electric utility
industry because it believes that deregulation is guiding the transition of the
industry to a competitive market environment. Duff & Phelps expects that
strategic positioning among electric utility companies will define the future of
the industry. Duff & Phelps believes that some electric utility companies will
specialize in specific segments of the business, including electricity
generation, transmission, or distribution. Other electric utility companies are
likely to operate not only within a certain state or region, but on a national
or even a global scale. Duff & Phelps believes that company financials are
likely to improve on average and management is likely to focus corporate
strategies more clearly on opportunities to maintain and improve their
businesses. Duff & Phelps is confident in its ability to identify those
companies that have both the management and the strategy required to achieve
positive returns.
TELECOMMUNICATIONS. The telecommunications industry today includes both
traditional telephone companies, with a history of broad market coverage and
highly regulated businesses, and cable companies, which began as small, lightly
regulated businesses focused on limited markets. Today, these two historically
different businesses are converging in one industry which is trending toward
larger, competitive, national and international markets with an emphasis on
deregulation.
Like the electric utility industry, the telecommunications industry
also has been experiencing deregulation and competitive changes. In February
1996, the Telecommunications Act of 1996 became law. The Act removed regulatory
restrictions that prevented local and long-distance telephone companies and
cable television companies from competing against one another. The Act also
removed most cable rate controls and allows broadcasters to own more radio and
television stations. Litigation concerning the constitutionality of certain
major provisions of the Act has slowed the implementation of such provisions.
Companies that distribute telephone services and provide access to the
telephone networks still comprise the greatest portion of this segment, but
non-regulated activities such as cellular telephone services, digital personal
communications services, Internet services, paging, data processing, equipment
retailing, computer software and
17
<PAGE> 19
hardware services are becoming increasingly significant components as well. The
presence of unregulated companies in this industry and the entry of traditional
telephone companies into unregulated or less regulated businesses provide
significant investment opportunities. Still, increasing competition,
technological innovations and other structural changes could adversely affect
the profitability of such utilities. Given the high degree of consolidation in
the telecommunications industry occurring through mergers, certain marketing
tests currently underway and proposed legislative and regulatory changes, it is
likely that both traditional telephone companies and cable companies will soon
provide a greatly expanded range of utility services, including two-way video
and informational services to residential, corporate and government customers.
Because telecommunications companies provide the critical link between
consumers and the Internet, Duff & Phelps is optimistic about the prospects for
growth in the industry. Overall, Duff & Phelps believes that the investment
outlook for telecommunications companies remains quite positive as technology
opens new markets and dramatically increases volumes passing through electronic
and digital media.
GAS. Gas transmission companies and gas distribution companies are also
undergoing significant changes. The Federal Energy Regulatory Commission, which
regulates interstate gas transmission companies in the United States, is
reducing regulatory restrictions on the operations of these companies. As a
result, many domestic gas utility companies have diversified into exploration
and development. However, in the last decade, gas utility companies have been
adversely affected by disruptions in the oil industry and increased
concentration and competition. Nevertheless, in the opinion of Duff & Phelps,
the possibility exists for environmental considerations to improve the gas
industry outlook in the future. Because natural gas is the cleanest of the
hydrocarbon fuels, environmental considerations could result in incremental
shifts in fuel consumption toward natural gas and away from oil and coal, both
in the consumer sector and in electricity generation.
Duff & Phelps believes that gas utility companies provide investment
opportunities. In Duff & Phelps' opinion, there will be an increase in the
demand for natural gas spurned by new gas fired electric generation capacity and
the return of more normal seasonal weather patterns. Duff & Phelps believes that
by carefully monitoring management and analyzing developments in the gas utility
industry, it can select as investments for the Fund those gas utility companies
with the potential to provide superior returns over the long-term.
WATER. Water supply utility companies collect, purify, distribute and
sell water. In the United States and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth. Duff & Phelps believes that in the near future
there may be a consolidation of water utility companies in the United States and
abroad, which may result in favorable investment opportunities.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
STATISTICAL INFORMATION REGARDING LOWER GRADE DEBT SECURITIES
Phoenix believes that historical yields of lower grade securities have
exceeded those of higher grade securities of similar maturities, in light of the
higher degree of risk associated with investing in lower grade securities. This
difference in yields attributable to differing credit quality is commonly
referred to as a "credit spread." Such spreads are influenced by the general
credit quality of the lower grade securities outstanding at any time, economic
conditions, default rates and other factors influencing the secondary market for
lower grade securities, such as the number of issues outstanding and the level
of participation of investment banks and other financial institutions in the
issuance and trading of lower grade securities. The following table presents the
historical credit spreads on lower grade securities, measured by the weighted
average yield to maturity (assuming exercise of issuers' options to prepay) of
the lower grade securities included in the DLJ High Yield Index, relative to the
yield on the U.S. Treasury securities of a comparable maturity at that time, as
determined by Donaldson, Lufkin & Jenrette
18
<PAGE> 20
Securities Corporation. Although Phoenix believes that the spreads over U.S.
Treasuries are representative of the historical average spreads in the overall
lower grade securities market, the Fund will have no direct investment in, nor
will its performance be indicative of, the DLJ High Yield Index. The following
comparison should not be considered a representation of future market rates,
spreads of lower grade securities over U.S. Treasury securities nor what an
investment the Fund may earn or what an investor's yield or total return may be
in the future.
COMPARISON OF SPREADS OF YIELD TO MATURITY (ASSUMING EXERCISE OF
ISSUERS' MARKET CALL OPTIONS) OF THE LOWER GRADE SECURITIES
INCLUDED IN THE DLJ HIGH YIELD INDEX RELATIVE TO
YIELDS OF COMPARABLE MATURITY U.S. TREASURIES
<TABLE>
<CAPTION>
SEPT. MAR. SEPT. MAR. SEPT. MAR. SEPT. MAR. SEPT.
1990 1991 1991 1992 1992 1993 1993 1994 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spread of Yield of
DLJ High Yield
Index Relative to
Yields of
Comparable
Maturity U.S.
Treasuries..... 9.70% 8.02% 7.54% 4.90% 5.63% 4.33% 4.52% 3.90% 4.06%
</TABLE>
<TABLE>
<CAPTION>
MAR. SEPT. MAR. SEPT. MAR. SEPT. MAR. SEPT. OCT. NOV. DEC.
1995 1995 1996 1996 1997 1997 1998 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spread of Yield of
DLJ High Yield
Index Relative to
Yields of
Comparable
Maturity U.S.
Treasuries..... 4.41% 4.51% 4.13% 3.53% 3.29% 3.13% 3.45% 6.87% 7.35% 6.18% 6.41%
</TABLE>
- -----------------
The DLJ High Yield Index is an unmanaged index designed to mirror the investible
universe of the U.S. dollar-denominated high yield debt market. All issues
included in the DLJ High Yield Index have an outstanding par value of at least
$75 million. Source: Donaldson, Lufkin & Jenrette Securities Corporation.
Default loss rates, for U.S. lower grade bonds by year for the years
1990 through 1998 were as follows:
<TABLE>
<CAPTION>
DEFAULT LOSS RATES (1)
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9.80% 10.45% 4.83% 3.50% 1.93% 3.30% 1.66% 2.02% 3.31%
</TABLE>
- -----------------
(1) Defined as the number of issuers of lower grade bonds that defaulted in
a given year as a percentage of the number of issuers that could have
defaulted on such securities in that time period. Source: Moody's
Investors Service.
The statistical information with respect to historical default loss
rates is based on information contained in moody's default rates on Lower Grade
Income Securities, and is intended to demonstrate default loss rate trends over
the period indicated. It should not be viewed as a definitive indication of the
relative magnitude of changes in credit quality from year to year and is not a
prediction of future rates of default. Although other methods of analyzing
default experience, such as comparing default experience of seasoned issues,
would produce different relative figures, Phoenix believes that the foregoing
default loss-rate data evidence a general trend of declining default rates.
For the period January 1, 1989 through December 31, 1998, The
cumulative gross default rate for lower grade bonds was 41.19%. This figure
represents the probability that a high yield bond outstanding on January 1,
19
<PAGE> 21
1989 would default by December 31, 1998, and does not take into account any
recovery of lost principal or interest. The rate is based on the ratio of the
number of issuers that defaulted on high yield bonds outstanding on january 1,
1989 to the number of issuers at risk of defaulting on such bonds as of such
date and is based only on bonds that have been rated by moody's. The foregoing
is derived from information obtained by the fund from the february 1999 issue of
a moody's publication entitled "historical default rates of corporate bond
issuers, 1920-1998."
Past performance is no guarantee of future performance. The statistical
information described above does not reflect the past or future performance of
the Fund.
PORTFOLIO SECURITIES
DEBT SECURITIES. The Fund will invest more than 65% of its total assets
in investment grade rated debt securities issued by utility companies. Bonds are
one type of debt security. Debt securities generally involve the obligation of
an issuer to pay interest or, in the case of preferred securities, dividends, on
a current basis and to pay the principal amount or liquidation preference of the
securities at a future date. The debt securities that we will invest in include
investment grade short, medium and long term bonds, as well as, notes,
debentures and other interest-bearing securities issued by utility companies.
Debt securities may have fixed, variable or floating interest rates. The
maturity of debt securities is considered long term, if it exceeds ten years,
medium term, if it ranges from one to ten years, and short term if it is
thirteen months or less. Generally, investment grade debt securities (i.e.,
securities rated at least Baa by Moody's or BBB by S&P) are considered to have
an adequate capacity to pay principal and interest. By contrast, below
investment grade debt securities are regarded as high risk and predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments.
COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The commercial paper
purchased by the Fund will consist only of direct obligations which, at the time
of their purchase, are (a) rated not lower than Prime-1 by Moody's or A-1 by
S&P, (b) issued by issuers having an outstanding unsecured debt issue currently
rated at least A3 by Moody's or A- by S&P, or (c) if unrated, determined by Duff
& Phelps to be of comparable quality to those rated obligations which may be
purchased by the Fund. The commercial paper purchased by the Fund will not
necessarily be issued by utility companies.
LOWER GRADE DEBT SECURITIES. The Fund may invest up to 35% of its total
assets in debt securities rated below investment grade (i.e., Ba or lower by
Moody's, BB or lower by S&P, or unrated securities determined by Phoenix to be
of comparable quality). Securities rated Ba by Moody's or BB by S&P are judged
to have speculative elements; their future cannot be considered as well assured
and often the protection of interest and principal payments may be very
moderate. Securities rated B by Moody's or S&P are regarded as having
predominantly speculative characteristics and, while such obligations have less
near-term vulnerability to default than other speculative grade debt, they face
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. Securities rated C by Moody's are regarded as
having extremely poor prospects of ever attaining any real investment standing.
Securities rated D by S&P are in default and the payment of interest and/or
repayment of principal is in arrears. See "Appendix A--Description of Corporate
Bond Ratings" for additional information concerning rating categories. Although
these ratings may be an initial criterion for selection of portfolio
investments, Phoenix also will independently evaluate these securities and the
ability of the issuers of such securities to pay interest and principal.
As part of the 35% of its total assets that may be invested in
high-yield securities, the Fund may invest up to 10% of its total assets in
Zero-Coupon, Pay-In-Kind and Deferred Payment Securities combined. Zero-Coupon
Securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. While interest
payments are not made on such securities, holders of such securities are
required each year, for federal income tax purposes, to accrue income with
respect to these securities as if it were actually received. Pay-In-Kind
Securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. Deferred Payment Securities are securities that remain
Zero-Coupon
20
<PAGE> 22
Securities until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals.
In addition, the Fund may invest up to 10% of its total assets in
certain lower grade securities known as "Mezzanine Investments," which are
subordinated debt securities that are generally issued in private placements in
connection with an equity security (e.g., with attached warrants) or may be
convertible into equity securities.
COLLATERALIZED BOND OBLIGATIONS. The Fund may invest up to 15% of its
total assets in CBOs, which are structured securities backed by a diversified
pool of public or private debt securities. These may be fixed pools or may be
"market value" (or managed) pools of collateral. The pool of high yield
securities is typically separated into segments, known as tranches, representing
different degrees of credit quality. The top tranche of CBOs, which represents
the highest credit quality in the pool, has the greatest collateralization and
pays the lowest interest rate. Lower CBO tranches represent lower degrees of
credit quality and pay higher interest rates intended to compensate for the
increased risks. The Fund will not invest in the bottom tranche of CBOs, which
receives the residual interest payments (i.e., money that is left over after the
higher tranches have been paid) rather than a fixed interest rate and involves a
greater risk of default.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. Mortgage-Related
Securities are a form of derivative securities -- securities created by
combining other securities. Mortgage-Related Securities are created by pooling
commercial or residential mortgages. Pools of residential and commercial
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. These securities may
include complex instruments such as collateralized mortgage obligations,
stripped mortgage-backed securities, mortgage pass-through securities, interests
in real estate mortgage investment conduits ("REMICs"), adjustable rate
mortgages, real estate investment trusts ("REITs"), including debt and preferred
stock issued by REITs, as well as other real estate-related securities. The
Mortgage-Related Securities in which the Fund may invest include those with
fixed, floating or variable interest rates, those with interest rates that
change based on multiples of changes in a specified index of interest rates and
those with interest rates that change inversely to changes in interest rates, as
well as those that do not bear interest. Asset-Backed Securities are another
form of derivative securities. The securitization techniques used for creating
asset-backed securities are similar to those used for Mortgage-Related
Securities. The collateral for these securities may include home equity loans,
automobile and credit card receivables, boat loans, computer leases, airplane
leases, mobile home loans, recreational vehicle loans and hospital account
receivables. The Fund may invest in these and other types of asset-backed
securities that may be developed in the future. The Fund will not invest more
than 5% of its total assets in Mortgage-Related and Asset-Backed Securities.
MUNICIPAL OBLIGATIONS. Municipal obligations are debt obligations
issued by or on behalf of states, cities, municipalities and other public
authorities. The two principal classifications of municipal obligations that may
be held by the Fund are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of a
facility being financed. Revenue securities may include private activity bonds.
Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities and are not payable from the unrestricted
revenues of the issuer. As a result, the credit quality of private activity
bonds is frequently related directly to the credit standing of private
corporations or other entities.
FOREIGN DEBT SECURITIES. The Fund may invest up to 30% of its total
assets in the U.S. dollar denominated investment grade or below investment grade
debt securities of foreign debt issuers, without regard to industry. Investment
in foreign debt securities involves special risks that can increase the chances
that the Fund will lose money.
EMERGING MARKETS SECURITIES. The Fund may invest up to 15% of its
assets in U.S. dollar denominated investment grade or below investment grade
debt securities issued by the governments of and issuers located in so-
21
<PAGE> 23
called emerging markets (or lesser developed countries). The Fund may also
invest in U.S. dollar denominated Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets.
CONVERTIBLE SECURITIES. The Fund may invest up to 5% of its assets in
convertible securities, which are income securities that may, at the holder's
option, be converted into or exchanged for a prescribed amount of equity
securities of the same or a different issuer within a particular period of time.
Convertible securities may be converted at either a stated price or stated rate
into underlying shares of common stock. Convertible securities have
characteristics similar to both fixed-income and equity securities. Convertible
securities generally are subordinated to other similar but non-convertible
securities of the same issuer, although convertible bonds, as corporate debt
obligations, enjoy seniority in right of payment to all equity securities, and
convertible preferred stock is senior to shares of common stock, of the same
issuer. Because of the subordination feature, however, convertible securities
typically have lower ratings than similar non-convertible securities.
EQUITY SECURITIES AND WARRANTS. The Fund also may invest up to 10% of
its total assets in warrants or other equity securities of U.S. and foreign
issuers. The Fund may hold such investments as a result of an actual or proposed
conversion or exchange of debt securities, or may purchase equity securities
that are not associated with debt securities when, in the opinion of Duff &
Phelps, such a purchase is appropriate. If the Fund purchases a warrant, it will
have the right, until the warrant expires, to purchase a given number of shares
of a particular issuer at a specified price.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
securities. Interest rates are adjusted periodically based upon an interest rate
adjustment index. The adjustment intervals may be regular, and range from daily
up to annually, or may be event-based, such as based on a change in the prime
rate.
The Fund may invest in floating rate debt instruments ("floaters"). The
interest rate on a floater is a variable rate which is tied to another interest
rate, such as a money-market index or Treasury bill rate. The interest rate on a
floater resets periodically, typically every six months. Because of the interest
rate reset feature, floaters provide the Fund with a certain degree of
protection against rises in interest rates, although the Fund will participate
in any declines in interest rates as well. The Fund plans to invest in floaters
for hedging and risk management purposes and not as a speculative investment.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury securities
that differ in their interest rates, maturities and times of issuance. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the right of the issuer to borrow from the Treasury; others
by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others only by the credit of
the agency or instrumentality. These securities bear fixed, floating or variable
rates of interest. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies and instrumentalities, no assurance can be
given that it will always do so since it is not so obligated by law.
22
<PAGE> 24
OTHER INVESTMENT PRACTICES
AND PORTFOLIO MANAGEMENT TECHNIQUES
The Fund may use other investment practices and portfolio management
techniques as set forth below.
LEVERAGE
The Fund expects to use leverage to purchase additional securities,
which means the Fund will borrow money, issue preferred shares or engage in
other transactions, such as repurchase agreements, in an amount equal to
approximately 33 1/3% of its total assets (including the amount obtained from
leverage). The Fund generally will not use leverage if it anticipates that the
Fund's leveraged capital structure would result in a lower return to
shareholders than that obtainable if the shares were unleveraged for any
significant amount of time. The use of leverage by the Fund creates an
opportunity for increased net income for the shares, but, at the same time,
creates special risks. The Fund also may borrow money as a temporary measure for
extraordinary or emergency purposes, including the payment of dividends and the
settlement of securities transactions which otherwise may require untimely sales
of portfolio securities. Subject to applicable regulatory requirements, the Fund
at times may borrow from affiliates of the Advisers, provided that the terms of
such borrowings are no less favorable than those available from comparable
sources of funds in the marketplace.
The concept of leverage is based on the premise that the cost of the
assets obtained with borrowed funds will be lower than the return earned by the
Fund on its portfolio investments. To the extent the income or capital
appreciation derived from securities purchased with funds received from leverage
exceeds the cost of leverage, the Fund's return will be greater than if leverage
had not been used. Conversely, if the income or capital appreciation from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the return on the Fund will be less than if leverage had not been
used. In this event, the amount available for distribution to shareholders as
dividends and other distributions will be reduced. In the latter case, the
Advisers in their best judgment nevertheless may determine to maintain the
Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return. As discussed under "Management of the Fund," the fees paid to
the Advisers will be calculated on the basis of the Fund's assets including
proceeds from borrowings for leverage. During periods in which the Fund is using
leverage, the investment advisory fees payable to the Advisers will be higher
than if the Fund did not use leverage. Higher investment advisory fees increase
the Fund's expenses and decrease the Fund's return. The use of leverage creates
risks and involves special considerations. See "Risk Factors and Special
Considerations--Leverage."
Under the Investment Company Act of 1940, the Fund is not permitted to
incur indebtedness unless immediately after such incurrence the Fund has an
asset coverage of at least 300% of the aggregate outstanding principal balance
of indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the Fund's
total assets). Additionally, under the Investment Company Act of 1940, the Fund
may not declare any dividend or other distribution upon any class of its capital
shares, or purchase any such capital shares, unless the aggregate indebtedness
of the Fund has, at the time of the declaration of any such dividend or
distribution or at the time of any such purchase, an asset coverage of at least
300% after deducting the amount of such dividend, distribution, or purchase
price, as the case may be. Under the Investment Company Act of 1940, the Fund is
not permitted to issue preferred shares unless immediately after such issuance
the net asset value of the Fund's portfolio is at least 200% of the liquidation
value of the outstanding preferred shares (i.e., such liquidation value may not
exceed 50% of the Fund's total assets). In addition, the Fund is not permitted
to declare any cash dividend or other distribution on its shares unless, at the
time of such declaration, the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or distribution) is at
least 200% of such liquidation value. In the event preferred shares are issued,
the Fund intends, to the extent possible, to purchase or redeem preferred shares
from time to time to maintain coverage of any preferred shares of at least 200%.
In addition, during any period when preferred shares are outstanding, the
Investment Company Act of 1940 requires that two of the Fund's Directors be
elected by holders of the preferred shares, voting separately as a class, and
that during any period in which the Fund is in arrears in
23
<PAGE> 25
an amount equal to two full years' dividends on such preferred shares, a
majority of the Fund's Directors be so elected.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount the Fund will borrow or issue, will depend
on many factors, the most important of which are investment outlook, market
conditions and interest rates. Successful use of a leveraging strategy depends
on the Advisers' ability to predict correctly interest rates and market
movements, and there is no assurance that a leveraging strategy will be
successful.
Assuming the use of leverage by borrowings in the amount of
approximately 33 1/3% of the Fund's total assets and an annual interest rate of
5.50% payable on such leverage based on market rates as of the date of this
prospectus, the annual return on assets attributable to the shares that the
portfolio must experience in order to cover such interest payments would be
1.83%. The Fund's actual cost of leverage will be based on market rates at the
time the Fund undertakes a leveraging strategy, and such actual cost of leverage
may be higher or lower than that assumed.
The following table is designed to illustrate the effect on the return
to a Fund shareholder of leverage by borrowings in the amount of approximately
33 1/3% of the Fund's total assets, assuming hypothetical annual returns of the
Fund's portfolio of minus 10% to plus 10%. As the table shows, leverage
generally increases the return to shareholders when portfolio return is positive
and greater than the cost of leverage and decreases the return when the
portfolio return is negative or less than the cost of leverage. The figures
appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of expenses)................ (10)% (5)% 0% 5% 10%
Corresponding Share Return................................ (17.75)% (10.25)% (2.75)% 4.25% 12.25%
</TABLE>
Until the Fund borrows or issues preferred shares, the Fund's shares
will not be leveraged, and the risks and special considerations related to
leverage described in this Prospectus will not apply. The objective of
leveraging cannot be fully achieved until the proceeds resulting from the use of
leverage have been invested in longer-term debt instruments in accordance with
the Fund's investment objectives and policies.
STRATEGIC TRANSACTIONS
Consistent with its investment objective and policies, the Fund may
also enter into certain hedging and risk management transactions. In particular,
the Fund may purchase and sell futures contracts, exchange-listed and
over-the-counter put and call options on securities, financial indices and
futures contracts, forward foreign currency contracts and may enter into various
interest rate transactions (collectively, "Strategic Transactions"). Strategic
Transactions may be used to attempt to protect against possible changes in the
market value of the Fund's portfolio resulting from fluctuations in the debt
securities markets and changes in interest rates, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes or to establish a position in
the securities markets as a temporary substitute for purchasing particular
securities. Any or all of these techniques may be used at any time. There is no
particular strategy that requires use of one technique rather than another. The
Strategic Transactions that the Fund may use are described below. The ability of
the Fund to hedge successfully will depend on the Advisers' ability to predict
pertinent market movements, which cannot be assured.
Interest Rate Transactions. Among the Strategic Transactions into which
the Fund may enter are 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 for hedging and risk management purposes and not as a speculative
investment. The Fund will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by the Fund with another
24
<PAGE> 26
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. 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.
The Fund may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending on whether it is hedging its
assets or liabilities, and will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments on the
payment dates. In as much as these hedging transactions are entered into for
good faith hedging purposes, the Advisers and the Fund believe such obligations
do not constitute senior securities and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will accrue the net amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap on a daily basis and will segregate with a
custodian an amount of cash or liquid securities having an aggregate net asset
value at least equal to the accrued excess. 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 is rated in the highest rating
category by at least one nationally recognized rating organization at the time
of entering into such transaction. 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 swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents using standardized swap documentation. Caps and
floors are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps.
Futures Contracts and Options on Futures Contracts. In connection with
its hedging and other risk management strategies, the Fund may also enter into
contracts for the purchase or sale for future delivery ("futures contracts") of
debt securities, aggregates of debt securities, financial indices, and U.S.
Government securities or options on the foregoing to hedge the value of its
portfolio securities that might result from a change in interest rates or market
movements. The Fund will engage in such transactions only for bona fide hedging,
risk management and other appropriate portfolio management purposes. In each
case the Fund will engage in such transactions in accordance with the rules and
regulations of the Commodity Futures Trading Commission.
Credit Derivatives. The Fund may engage in credit derivative
transactions. There are two broad categories of credit derivatives: default
price risk derivatives and market spread derivatives. Default price risk
derivatives are linked to the reference securities or loans after a default by
the issuer or borrower, respectively. Market spread derivatives are based on the
risk that changes in market factors, such as credit spreads, can cause a decline
in the value of a security, loan or index. There are three basic transactional
forms for credit derivatives: swaps, options and structured instruments. The use
of credit derivatives is a highly specialized activity which involves strategies
and risks different from those associated with ordinary portfolio security
transactions. If the Advisers are incorrect in their forecasts of default risks,
market spreads or other applicable factors, the investment performance of the
Fund would diminish compared with what it would have been if these techniques
were not used. Moreover, even if the Advisers are correct in their forecasts,
there is a risk that a credit derivative position may correlate imperfectly with
the price of the asset or liability being hedged. There is no limit on the
amount of credit derivative transactions that may be entered into by the Fund.
The Fund's risk of loss in a credit derivative transaction varies with the form
of the transaction. For example, if the Fund purchases a default option on a
security, and if no default occurs with respect to the security, the Fund's loss
is limited to the premium it paid for the default option. In contrast, if there
is a default by the grantor of a default option, the Fund's loss will include
both the premium that it paid for the option and the decline in value of the
underlying security that the default option hedged.
Calls on Securities, Indices and Futures Contracts. In order to enhance
income or reduce fluctuations in net asset value, the Fund may sell or purchase
call options ("calls") on securities and indices based upon the prices of debt
securities that are traded on U.S. securities exchanges and on the over-the-
counter markets. A call option
25
<PAGE> 27
gives the purchaser of the option the right to buy, and obligates the seller to
sell, the underlying security, futures contract or index at the exercise price
at any time or at a specified time during the option period. All such calls sold
by the Fund must be "covered" as long as the call is outstanding (i.e., the Fund
must own the instrument subject to the call or other securities or assets
acceptable for applicable segregation and coverage requirements). A call sold by
the Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security, index or futures contract and may require the Fund to hold an
instrument which it might otherwise have sold. The purchase of a call gives the
Fund the right to buy the underlying instrument or index at a fixed price. Calls
on futures contracts or securities written by the Fund must also be covered by
assets or instruments acceptable under applicable segregation and coverage
requirements.
Puts on Securities, Indices and Futures Contracts. As with calls, the
Fund may purchase put options ("puts") on securities (whether or not it holds
such securities in its portfolio). The Fund may also sell puts on securities,
financial indices and puts on futures contracts on securities if the Fund's
contingent obligations on such puts are secured by segregated assets consisting
of cash or liquid high grade debt securities having a value not less than the
exercise price. The Fund will not sell puts if, as a result, more than 50% of
the Fund's assets would be required to cover its potential obligation under its
hedging and other investment transactions. In selling puts, there is a risk that
the Fund may be required to buy the underlying instrument or index at higher
than the current market price.
Appendix B contains further information about the characteristics, risk
and possible benefits of Strategic Transactions and the Fund's other policies
and limitations (which are not fundamental policies) relating to investment by
the Fund in futures contracts and options. The principal risks relating to the
use of futures and other Strategic Transactions are: (i) less than perfect
correlation between the prices of the hedging instrument and the market value of
the securities in the Fund's portfolio; (ii) possible lack of a liquid secondary
market for closing out a position in such instruments; (iii) losses resulting
from interest rate or other market movements not anticipated by Duff & Phelps;
and (iv) the obligation to meet additional variation margin or other payment
requirements.
Certain provisions of the Code may restrict or affect the ability of
the Fund to engage in Strategic Transactions. See "Taxes."
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with brokers, dealers,
banks or other financial institutions that meet the credit guidelines approved
by the Board of Directors. In connection with a repurchase agreement, the Fund
will buy a security from a seller that has agreed to repurchase the same
security at a mutually agreed upon date and price. The resale price normally is
in excess of the purchase price, reflecting an agreed upon interest rate. This
interest rate is effective for the period of time the Fund is invested in the
agreement and is not related to the coupon rate on the underlying security. A
repurchase agreement may also be viewed as a fully collateralized loan of money
by the Fund to the seller. The period of repurchase agreements will usually be
short, from overnight to one week, and at no time will the Fund invest in
repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. The Fund
will always receive as collateral securities whose market value is, and during
the entire term of the agreement remains, at least equal to 100% of the dollar
amount invested by the Fund in each agreement plus accrued interest, and the
Fund will make payment for such securities only upon physical delivery or upon
evidence of book entry transfer to the account of the Fund's custodian.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with respect to
its portfolio investments subject to the Fund's investment restrictions. Reverse
repurchase agreements involve the sale of securities held by the Fund with an
agreement by the Fund to repurchase the securities at an agreed upon price, date
and interest payment. At the time the Fund enters into a reverse repurchase
agreement, it may establish and maintain a segregated account with the custodian
containing liquid instruments having a value not less than the repurchase price
(including accrued
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interest). If the Fund establishes and maintains such a segregated account, a
reverse repurchase agreement will not be considered a borrowing by the Fund;
however, under circumstances in which the Fund does not establish and maintain
such a segregated account, such reverse repurchase agreement will be considered
a borrowing for the purpose of the Fund's limitation on borrowings. The use by
the Fund of reverse repurchase agreements involves many of the same risks of
leverage described under "Risk Factors and Special Considerations--Leverage"
since the proceeds derived from such reverse repurchase agreements may be
invested in additional securities.
LENDING OF SECURITIES
The Fund may lend its portfolio securities to brokers, dealers and
other financial institutions which meet the creditworthiness standards
established by the Board of Directors of the Fund ("qualified institutions"). By
lending its portfolio securities, the Fund attempts to increase its income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that may occur during the term of the loan will
be for the account of the Fund. The Fund may lend its portfolio securities so
long as the terms and the structure of such loans are not inconsistent with
requirements of the Investment Company Act of 1940, which currently require that
(i) the borrower pledge and maintain with the Fund collateral consisting of
cash, a letter of credit issued by a domestic U.S. bank, or securities issued or
guaranteed by the U.S. government having a value at all times not less than 100%
of the value of the securities loaned, (ii) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the value of the loan
is "marked to the market" on a daily basis), (iii) the loan be made subject to
termination by the Fund at any time and (iv) the Fund receive reasonable
interest on the loan (which may include the Fund's investing any cash collateral
in interest bearing short term investments), any distributions on the loaned
securities and any increase in their market value. The Fund will not lend
portfolio securities if, as a result, the aggregate of such loans exceeds 33
1/3% of the value of the Fund's total assets (including such loans). Loan
arrangements made by the Fund will comply with all other applicable regulatory
requirements, including the rules of the New York Stock Exchange, which rules
presently require the borrower, after notice, to redeliver the securities within
the normal settlement time of five business days. All relevant facts and
circumstances, including the creditworthiness of the qualified institution, will
be monitored by the Advisers, and will be considered in making decisions with
respect to lending securities, subject to review by the Fund's Board of
Directors.
The Fund may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Fund's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event were to occur affecting such
a loan, the loan must be called and the securities voted.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase debt securities on a "when-issued" basis and may
purchase or sell debt securities on a "forward commitment" basis in order to
acquire the security or to hedge against anticipated changes in interest rates
and prices. When such transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. At the time
the Fund enters into a transaction on a when-issued or forward commitment basis,
it will segregate with the custodian cash or liquid debt securities equal to at
least the value of the when-issued or forward commitment securities. The value
of these assets will be monitored daily to ensure that their marked to market
value will at all times equal or exceed the corresponding obligations of the
Fund. Settlements in the ordinary course, which may take substantially more than
five business days, are not treated by the Fund as when-issued or forward
commitment transactions and accordingly are not subject to the foregoing
restrictions.
ILLIQUID SECURITIES
When purchasing securities that have not been registered under the
Securities Act of 1933, and are not readily marketable, the Fund will endeavor,
to the extent practicable, to obtain the right to register the purchased
securities at the expense of the issuer. The Fund may purchase certain
securities for which there is no readily
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<PAGE> 29
available trading market or which are otherwise illiquid, including securities
that are eligible for resale only to qualified institutional buyers as
contemplated by Rule 144A under the Securities Act ("Rule 144A Securities").
Rule 144A provides an exemption from the registration requirements of the
Securities Act for the resale of certain restricted securities to certain
qualified institutional buyers. One effect of Rule 144A is that certain
restricted securities may be considered liquid, though no assurance can be given
that a liquid market for Rule 144A Securities will develop or be maintained.
However, where a substantial market of qualified institutional buyers has
developed for certain unregistered securities purchased by the Fund pursuant to
Rule 144A under the Securities Act, the Fund intends to treat such securities as
liquid securities in accordance with procedures approved by the Fund's Board of
Directors. Because it is not possible to predict with assurance how the market
for Rule 144A Securities will develop, the Fund's Board of Directors has
directed the Advisers to monitor carefully the Fund's investments in such
securities with particular regard to trading activity, availability of reliable
price information and other relevant information. To the extent that, for a
period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, the Fund's investing in such securities may
have the effect of increasing the level of illiquidity in its investment
portfolio during such period.
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<PAGE> 30
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risks. You should carefully consider
the following risk factors in addition to the other information set forth in
this prospectus before purchasing shares of the Fund. An investment in shares of
the Fund may not be appropriate for all investors and should not be considered a
complete investment program.
GENERAL. As a newly-organized fund, the Fund has no operating history.
The shares are designed primarily for investors who plan to invest and hold
their investment for the long term. Therefore, you should not consider the
shares as a vehicle for trading purposes. The net asset value of the shares will
fluctuate with changes in interest rates, as well as with changes in the prices
of the securities owned by the Fund. These fluctuations are likely to be greater
when the Fund is using leverage. Reduced income can result in lower
distributions by the Fund and reduced credit quality can result in reduced net
asset value, which can adversely affect the market price for the Fund's shares.
UTILITY SECURITIES. There are certain risks and considerations
affecting utility companies and the holders of utility company securities, which
will affect the Fund since we will be invested primarily in the debt securities
issued by utility companies. The Fund's concentration in the debt securities of
utility companies will expose us to certain risks related to this sector. These
risks include:
- SECTOR RISK. Sector risk is the risk that we will be affected by
corporate developments of issuers in one industry more than a
broadly diversified fund would be. As a sector fund that invests
in utility companies, we are subject to the risks associated with
this sector. This makes the Fund more vulnerable to price changes
in the securities of utility companies and market factors that
affect the utilities industry than a more broadly diversified fund
would be. The prices of securities issued by utility companies may
change in response to interest rate changes. Generally, when
interest rates go up, the value of securities issued by utility
companies does down. Conversely, when interest rates go down, the
value of securities issued by utility companies goes up. There is
no guarantee that this relationship will hold in the future.
- GOVERNMENT REGULATION. In most countries and localities, utilities
are regulated by government entities. Government regulation can
result in increased costs and can make it difficult to pass
increased costs on to consumers, thereby reducing the
profitability of the issuers. Reduced profitability may result in
a lower credit rating and reduced income.
- DEREGULATION. In certain areas, the deregulation of utilities has
resulted in increased competition and reduced profitability for
utility companies, which can result in lower credit ratings and
reduced income to the Fund.
- FINANCING. Historically, companies in the utility industry have
encountered difficulties in obtaining financing for construction
programs during inflationary periods. Issuers experiencing
difficulties in financing construction programs may also
experience lower profitability, which can result in reduced income
to the Fund.
- EQUIPMENT AND SUPPLIES. Utility companies face the risk of lengthy
delays and increased costs associated with the design,
construction, licensing and operation of their facilities.
Moreover, technological innovations may render existing plants,
equipment or products obsolete. Increased costs and a reduction in
the availability of fuel (such as oil, coal, nuclear or natural
gas) also may adversely affect the profitability of utility
companies.
INVESTMENT GRADE AND NON-INVESTMENT GRADE DEBT SECURITIES. Debt
securities, and lower grade debt securities in particular, are subject to risks.
Therefore, you could lose money on your investment in shares of the Fund, both
in the short-term and the long-term. You should consider the following risks:
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<PAGE> 31
- CREDIT RISK. Credit risk refers to an issuer's ability to make
principal and interest payments when they are due. Because we may
own securities with low credit quality, we will be subject to a
higher level of credit risk than if we did not own lower grade
securities. The credit quality of lower grade securities, also
known as junk bonds, is considered speculative by rating agencies
with respect to the issuer's ability to pay interest or principal,
thereby exposing the Fund to the risk of reduced income and a
reduced net asset value. The prices of lower grade securities are
more sensitive to negative corporate developments, such as a
decline in profits, or adverse economic conditions, such as a
recession, than are the prices of higher grade securities.
Securities that have longer maturities or that do not make regular
interest payments also fluctuate more in price in response to
negative corporate or economic news. Therefore, lower grade
securities, which generally have longer maturities, may experience
high default rates, which means that the Fund could lose some of
its investment in such securities, which, in turn, could adversely
affect the Fund's net asset value and ability to make
distributions.
- MARKET RISK. The prices of debt securities tend to fall as
interest rates rise. Securities that have longer maturities tend
to fluctuate more in price in response to changes in market
interest rates. A decline in the prices of debt securities owned
by the Fund would cause a decline in the net asset value of the
Fund. This "market risk" is usually greater among income
securities with longer maturities or durations. Market risk is
often greater among certain types of debt securities, such as
zero-coupon bonds, which do not make regular interest payments. As
interest rates change, these debt securities often fluctuate in
price more than higher quality bonds that make regular interest
payments. Because we may invest in these types of debt, we may be
subject to greater market risk than a fund that invests only in
current interest paying securities.
- INCOME RISK. The income investors receive from the Fund is based
primarily on the interest the Fund earns from its investments,
which can vary widely over the short and long-term. If interest
rates drop, the Fund may have to purchase securities with lower
interest coupons (or payments) which, in turn, may decrease
investors' income from the Fund.
- CALL RISK. If interest rates fall, it is possible that issuers of
callable debt securities with high interest coupons will "call",
or prepay, their debt securities before their maturity date. If a
call were exercised by an issuer during a period of declining
interest rates, we would likely to have to replace such called
securities with lower yielding securities, which could decrease
our net investment income.
- LIQUIDITY RISK. We may invest in securities for which there is no
readily available trading market or which are otherwise illiquid.
We may not be able to sell such securities at prices comparable to
more widely traded securities. As a result of such illiquidity, we
may have to sell other investments or engage in borrowing
transactions if we need to raise cash to meet our obligations. In
addition, the limited liquidity could affect the market price of
the securities, thereby adversely affecting our net asset value
and ability to make dividend distributions.
MEZZANINE INVESTMENTS. "Mezzanine Investments" entail special risks,
including the risk that an issuer's ability to repay a Mezzanine Investment
often depends on the issuer's ability to "refinance" or replace the Mezzanine
Investment with another income security. Issuers of Mezzanine Investments often
are highly leveraged and may have difficulty in refinancing. Because Mezzanine
Investments may experience high default rates, the Fund may lose money on its
Mezzanine Investments. The rights to purchase equity that are sometimes
associated with Mezzanine Investments involve additional risks, including the
risk that the Fund could lose the purchase value of a right or warrant if the
right to subscribe to additional shares is not exercised prior to the rights'
and warrants' expirations or if the effective price paid for the right or
warrant added to the subscription price of the related security exceeds the
value of the underlying security.
COLLATERALIZED BOND OBLIGATIONS. Lower CBO tranches represent lower
degrees of credit quality and pay higher interest rates to compensate for the
attendant risks. The return on the lower tranches of CBOs is especially
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<PAGE> 32
sensitive to the rate of defaults in the collateral pool. The Fund will not
invest in the bottom tranche of CBOs, which receives the residual interest
payments (i.e. money that is left over after the higher tranches have been paid)
rather than a fixed interest rate and involves a greater risk of default.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The risks associated with
Mortgage-Related Securities include: credit risks associated with the
performance of the underlying mortgage properties and of the borrowers owning
these properties; adverse changes in economic conditions and circumstances;
prepayment risk, which can lead to significant fluctuations in the value of the
mortgage-related security; and loss of all or part of the premium, if any, paid
if there is a decline in the market value of the security, whether resulting
from changes in interest rates or prepayments on the underlying mortgage
collateral. Non-mortgage Asset-Backed Securities involve certain risks. These
securities do not have the benefit of the same security interest in the
underlying collateral as Mortgage-Related Securities and are more dependent on
the borrower's ability to pay. In addition, in the case of Asset-Backed
Securities involving credit card receivables, the credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and Federal consumer credit laws, many of which give debtors the right
to set off certain amounts owed on the credit cards, thereby reducing the
balance due.
CONVERTIBLE SECURITIES. Although to a lesser extent than with debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stock. A unique feature of convertible securities is that
as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer. Convertible securities are
investments designed to provide a stable stream of income with generally higher
yields than common stock. There can be no assurance of current income because
the issuers of the convertible securities may default on their obligations. A
convertible security, in addition to providing debt, offers the potential for
capital appreciation through the conversion feature, which enables the holder to
benefit from increases in the market price of the underlying common stock. There
can be no assurance of capital appreciation, however, because securities prices
fluctuate. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the potential for capital appreciation.
FOREIGN DEBT SECURITIES. Investing in foreign securities involves
certain risks not involved in domestic investments. These risks, which are
heightened in connection with investments in debt securities issued by foreign
governments, include:
- fluctuation in foreign exchange rates
- future foreign economic, financial, political and social
developments
- different legal systems
- the possible imposition of exchange controls or other foreign
governmental laws or restrictions
- lower trading volume
- much greater price volatility and illiquidity of certain foreign
securities markets
- different trading and settlement practices
- less governmental supervision
- changes in governmental regulation of currency exchange rates
- high and volatile rates of inflation
- fluctuation in interest rates
- less publicly available information
- different accounting, auditing and financial record-keeping
standards and requirements.
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In addition, individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as:
- growth of gross domestic product
- rates of inflation
- capital reinvestment
- resources
- self-sufficiency
- balance of payments position
- certain investments in foreign securities also may be subject to
foreign withholding taxes.
EMERGING MARKETS. Within its investments in foreign securities, the
Fund may invest up to 15% of its total assets in U.S. dollar denominated debt
securities issued by issuers and governments located in emerging market
countries. In addition to the risks described above with respect to foreign
securities, investing in emerging markets securities may entail special risks
relating to potential political and economic instability including:
- the possibility of expropriation of assets
- confiscatory taxation
- difficulty in obtaining or enforcing a court judgment
- diplomatic developments that could affect investments in those
countries
- government action, hostile to private enterprise which may impair
investment or economic growth
- rapid fluctuations in inflation rates and corresponding currency
devaluation.
Emerging securities markets are substantially smaller, less developed,
less liquid and more volatile than the major securities markets. The limited
size of emerging securities markets and limited trading value compared to the
volume of trading in the United States could cause prices to be erratic for
reasons apart from factors that affect the quality of the securities. Adverse
publicity and investors' perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of portfolio securities in these
markets. In addition, securities traded in certain emerging markets may be
subject to risks due to the inexperience of financial intermediaries, less
efficient settlement mechanisms, the lack of a sufficient capital base to expand
business operations, and the possibility of temporary or permanent termination
of trading.
As a result of these potential risks, the Advisers may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. However, the Fund
may invest in countries in which foreign investors, including The Advisers, have
had no or limited prior experience.
EQUITY SECURITIES AND WARRANTS. The value of equity securities can rise
and fall over long and short periods of time. Generally, equity securities are
subject to the risk that their value will decline as a result of economic
political or market conditions or an issuer's financial circumstances. In
addition, warrants can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. However, the prices of
warrants do not necessarily move in tandem with the prices of the underlying
securities and, therefore, warrants are considered speculative investments.
Warrants pay no dividends and confer no rights other than a purchase option.
Thus, if a warrant held by the Fund were not exercised by the date of its
expiration, the Fund would lose the entire purchase price of the warrant. These
factors can make warrants more speculative than other types of investments.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. If the Fund sells the
right to acquire a when-issued debt security prior to its acquisition or sells
its right to deliver or receive against a forward commitment, it might incur a
gain or loss. There is always a risk that the securities may not be delivered
and that the Fund may incur a loss.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value based upon the public's perception of the
creditworthiness of the issuer and changes, actual or anticipated, in the level
of
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<PAGE> 34
interest rates. Securities purchased with a forward commitment or when-issued
basis may expose the Fund to risks because they may experience such fluctuations
prior to their actual delivery. Purchasing securities on a when-issued basis can
involve the additional risks that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself. Purchasing securities on a forward commitment or when-issued
basis when the Fund is fully invested may result in greater potential
fluctuation in the value of the Fund's net assets and its net asset value per
share.
LEVERAGE. The Fund may use leverage to create an opportunity for
increased net income and capital appreciation for the shares, but this may
result in additional risks and can magnify the effect of any losses. If the
income or gains from the securities purchased with such proceeds do not cover
the cost of leverage, the return to the Fund will be less than if leverage had
not been used. There is no assurance that a leveraging strategy will be
successful. Leverage involves risks and special considerations for shareholders
including:
- the likelihood of greater volatility in the net asset value and
market price of the shares than a comparable portfolio without
leverage;
- the risk that fluctuations in interest rates on borrowings and
short term debt or in the dividend rates on any preferred stock
that the Fund must pay will reduce the return to the shareholders;
- the effect of leverage in a declining market, which is likely to
cause greater decline in the net asset value of the shares than if
the Fund were not leveraged, which may result in a greater decline
in the market price of the shares; and
- when the Fund uses financial leverage, the investment advisory
fees payable to the Advisers and the administrative fee payable to
the Administrator will be higher than if the Fund did not use
leverage, thus increasing the Fund's expenses and decreasing the
Fund's return.
Any requirement that the Fund sell assets at a loss, in order to redeem
or pay any leverage, or for other reasons would reduce the Fund's net asset
value and also make it difficult for the net asset value to recover. The
Advisers in their best judgment nevertheless may determine to continue to use
leverage if it expects that the benefits to the Fund's shareholders of
maintaining the leveraged position will outweigh the current reduced return.
Capital raised through leverage will be subject to interest costs or
dividend payments which may be more than the income and capital appreciation on
the assets purchased. The Fund also may be required to maintain minimum average
balances in connection with borrowings or to pay a commitment or other fee to
maintain a line of credit; either of these requirements will increase the cost
of borrowing over the stated interest rate. The issuance of preferred stock
involves offering expenses and other costs, which may limit the Fund's ability
to pay dividends on the shares. Borrowings having priority over the Fund's
shares create an opportunity for greater return per share, but at the same time,
such borrowing is a speculative technique that increases the Fund's exposure to
capital risk.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage and Fund
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by the guidelines of rating agencies, which may rate
preferred stock issued by the Fund. These guidelines may impose asset coverage
or portfolio composition requirements that are more stringent than those imposed
by the Investment Company Act of 1940. The Fund may borrow from affiliates of
the Advisers, provided that the terms of such borrowings are no less favorable
than those available from comparable sources of funds in the marketplace.
OTHER INVESTMENT MANAGEMENT TECHNIQUES. The Fund may use Strategic
Transactions which involve certain risks and special considerations. Strategic
Transactions will be entered into to seek to manage the risks of the Fund's
portfolio of securities, but may have the effect of limiting the gains from
favorable market movements. Strategic Transactions involve risks, including (i)
that the loss on the Strategic Transaction position may be larger than the gain
in the portfolio position being hedged and (ii) that the derivative instruments
used in Strategic Transactions may not be liquid and may require the Fund to pay
additional amounts of money. Successful use of Strategic Transactions depends on
The Advisers' ability to predict correctly market movements which, of course,
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<PAGE> 35
cannot be assured. Losses on Strategic Transactions may reduce the Fund's net
asset value and its ability to pay dividends if they are not offset by gains on
the portfolio positions being hedged. The Fund may also lend the securities it
owns to others, which allows the Fund the opportunity to earn additional income.
Although the Fund will require the borrower of the securities to post collateral
for the loan and the terms of the loan will require that the Fund be able to
reacquire the loaned securities if certain events occur, the Fund is still
subject to the risk that the borrower of the securities may default, which could
result in the Fund losing money, which would result in a decline in the Fund's
net asset value. The Fund may also purchase securities for delayed settlement.
This means that the Fund is generally obligated to purchase the securities at a
future date for a set purchase price, regardless of whether the value of the
securities is more or less than the purchase price at the time of settlement.
REPURCHASE AGREEMENTS. If the seller of a security in connection
with a repurchase agreement defaults, the Fund might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
costs in connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, the Fund's
ability to realize proceeds from the sale of collateral may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve
the risk that the market value of the securities acquired in connection with the
reverse repurchase agreement may decline below the price of the securities the
Fund has sold but is obligated to repurchase. Also, reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by the Fund in connection with the reverse repurchase agreement may
decline in price.
If the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
ILLIQUID SECURITIES. Generally, there will be a lapse of time between
the Fund's decision to sell securities that have not been registered under the
Securities Act of 1933 and the registration of the security permitting sale.
During any such period, the price of the securities will be subject to market
fluctuations. In addition, the Fund may not be able to readily sell such
securities at prices that approximate those at which the Fund could sell such
securities if they were more widely traded and, as a result of such illiquidity,
the Fund may have to sell other investments or engage in borrowing transactions
if necessary to raise cash to meet its obligations.
MARKET PRICE, DISCOUNT AND NET ASSET VALUE OF SHARES. Whether investors
will realize gains or losses upon the sale of shares will not depend directly
upon the Fund's net asset value, but will depend upon the market price of the
shares at the time of sale. There has been no public market for the shares prior
to this offering. Since the market price of the shares will be affected by such
factors as the relative demand for and supply of the shares in the market,
general market and economic conditions and other factors beyond the control of
the Fund, the Fund cannot predict whether the shares will trade at, below or
above net asset value or at, below or above the public offering price. Shares of
closed-end funds often trade at a discount to their net asset values and the
Fund's shares may trade at such a discount. This risk may be greater for
investors expecting to sell their shares of the Fund soon after completion of
the public offering. The shares are designed primarily for long-term investors,
and investors in the shares should not view the Fund as a vehicle for trading
purposes.
ANTI-TAKEOVER PROVISIONS. The Fund's Articles of Incorporation contain
provisions limiting (i) the ability of other entities or persons to acquire
control of the Fund and (ii) the ability of the Fund's Board of Directors or
shareholders to amend the Articles of Incorporation. These provisions of the
Articles of Incorporation may be regarded as "anti-takeover" provisions. These
provisions could have the effect of depriving the shareholders of opportunities
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Fund in a tender offer or
similar transaction.
34
<PAGE> 36
YEAR 2000 RISKS. The Year 2000 issue exists because many computer
systems and applications use two-digit fields to designate a year.
Date-sensitive computer systems and programs may fail to recognize or correctly
process the Year 2000 as the century date change approaches or occurs. This
inability to properly recognize or treat the Year 2000 may cause systems errors
or failures that could disrupt or prevent normal business operations.
The Advisers are evaluating all of their internal computer systems with
regard to Year 2000 concerns. Although the Advisers believe their planning
efforts are adequate to address Year 2000 concerns, it is still possible that
the Fund could experience negative consequences and increased costs caused by
undetected errors or defects in the technology used in the internal systems of
the Advisers. The Advisers intend to monitor and improve the Year 2000
preparedness of their internal systems and to implement alternative solutions,
if necessary.
The President's Council on Year 2000 Conversion ("Council") was
established early in 1998 to coordinate the Federal Government's efforts to
address the Year 2000 problem. The North American Electric Reliability Council,
at the request of the Department of Energy and the Council has assumed
responsibility for assessing individual electric utility progress and guiding
companies to an industry wide coordinated solution. The Federal Energy
Regulatory Commission has assumed such responsibility for the gas utility
industry, and the Federal Communications Commission for the telecommunications
industries.
On January 7, 1999, the Council issued its First Quarterly Summary of
Assessment Information. According to the assessment, the electric utility
industry has properly coordinated contingency planning and accelerated
preparations. Also, the assessment concluded that electric power supply and
delivery systems will be able to operate reliably into the Year 2000.
Information about the telecommunications industry included in the assessment
indicates that major telecommunications service providers have active Year 2000
programs and have made substantial progress toward updating their systems.
According to the assessment, the gas utility industry is making good progress in
implementing Year 2000 plans, but the rate of progress needs to increase. The
assessment's summary indicated that virtually all utility industries show high
awareness of the problem and its consequences and are mounting aggressive
efforts to combat the problem.
Interruption of the delivery of electric power, telecommunications
services, or natural gas could have substantial effects on consumers and could
also affect investors, including the Fund. Foreign companies generally appear to
be less prepared than domestic companies. It is possible that the failure of a
major industrial electricity company's systems could shut down a regional
electricity system temporarily and affect an issuer's ability to make timely
payments of interest or principal on debt securities held by the Fund. While
there are no guarantees, the Advisers will use their best efforts to invest only
in those issuers they believe are most able to meet the challenges of the
future.
The Fund's operations could also be negatively affected by the
inability of third party service providers to manage the Year 2000 issue in a
timely manner. Accordingly, the Advisers are working with the Fund's third party
service providers to assess the adequacy of their compliance efforts and are
developing contingency plans intended to assure that third party and/or issuer
noncompliance will not materially affect the Fund's operations.
EURO CONVERSION RISK. On January 1, 1999, eleven countries in the
European Monetary Union adopted the euro as a single European Union currency.
However, their current currencies (for example, the Franc, the Mark, and the
Lire) will also continue in use until January 1, 2002. After that date, it is
expected that only the euro will be used in those eleven countries. Like other
investment companies and business organizations, including issuers in which the
Fund invests, the Fund could be adversely affected:
- If the euro, or EMU as a whole, does not take effect as
planned.
- If a participating country withdraws from EMU.
35
<PAGE> 37
- If the computing, accounting and trading systems used by the
Fund's service providers, or by other entities with which the
Fund or its service providers do business, are not capable of
recognizing the euro as a distinct currency beginning with the
euro conversion.
The Advisers will monitor the effects of the conversion on the issuers
in which the Fund invests. The possible effect of these factors on the Fund's
investments cannot be determined with certainty at this time, but they may
reduce the value of some of the Fund's holdings and increase its expenses,
thereby decreasing the Fund's return.
36
<PAGE> 38
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's present policy, which may be changed by the Board of
Directors, to make monthly distributions of its net investment income. All net
realized capital gains, if any, either will be distributed to the Fund's
shareholders at least annually or will be retained by the Fund, and subject to
Fund-level associated tax liabilities. As a result of the Fund's ability to
invest in Zero-Coupon Securities and Pay-In-Kind Securities, the Fund expects to
make distributions of net investment income in amounts greater than the total
amount of cash income actually received in order to satisfy certain federal
income tax law requirements. See "Taxes." The Fund may change the foregoing
distribution policy if its experience indicates, or its Board of Directors for
any reason determines, that changes are desirable.
Under the Investment Company Act of 1940, the Fund is not permitted to
incur indebtedness unless after such incurrence the Fund has an asset coverage
of at least 300% of the aggregate outstanding principal balance of indebtedness.
Additionally, under the Investment Company Act of 1940, the Fund may not declare
any dividend or other distribution upon any class of its capital shares, or
purchase any such capital shares, unless the aggregate indebtedness of the Fund
has, at the time of the declaration of any such dividend or distribution or at
the time of any such purchase, an asset coverage of at least 300% after
deducting the amount of such dividend, distribution, or purchase price, as the
case may be. While any preferred shares are outstanding, the Fund may not
declare any cash dividend or other distribution on its shares, unless at the
time of such declaration, (1) all accumulated preferred stock dividends have
been paid and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of the outstanding preferred shares (expected to be equal
to the original purchase price per share plus any accumulated and unpaid
dividends thereon). In addition to the limitations imposed by the Investment
Company Act of 1940 as described in this paragraph, certain lenders may impose
additional restrictions on the payment of dividends or distributions on the
Fund's shares in the event of a default on the Fund's borrowings. Any limitation
on the Fund's ability to make distributions on its shares could in certain
circumstances impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Other Investment
Practices--Leverage" and "Taxes."
See "Automatic Dividend Reinvestment Plan" for information concerning
the manner in which dividends and distributions to holders of shares may be
automatically reinvested in shares of the Fund. Dividends and distributions may
be taxable to shareholders whether they are reinvested in shares of the Fund or
received in cash.
The Fund expects that it will commence paying dividends within 60 days
of the date of this Prospectus.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions as
fundamental policies, which cannot be changed without approval by the holders of
a majority of the Fund's outstanding voting shares (as defined in the Investment
Company Act of 1940). All other investment policies of the Fund are considered
non-fundamental and may be changed by the Board of Directors of the Fund without
prior approval of the Fund's outstanding voting shares. The Fund may not:
(1) Borrow money, except as permitted by the Investment Company Act of
1940;
(2) Issue senior securities, as defined in the Investment Company Act
of 1940, other than (i) preferred shares which immediately after
issuance will have asset coverage of at least 200%; (ii)
indebtedness which immediately after issuance will have asset
coverage of at least 300%; or (iii) the borrowings permitted by
investment restriction (1) above;
(3) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities). The purchase of investment
37
<PAGE> 39
assets with the proceeds of a permitted borrowing or securities
offering will not be deemed to be the purchase of securities on
margin;
(4) Underwrite securities of other issuers, except insofar as the Fund
may technically be deemed an underwriter under the Securities Act
of 1933 in selling or disposing of portfolio securities;
(5) Make loans to other persons, except by (a) the acquisition of loan
interests, debt securities and other obligations in which the Fund
is authorized to invest in accordance with its investment
objective and policies; (b) entering into repurchase agreements;
and (c) lending its portfolio securities;
(6) Purchase or sell real estate, although it may purchase and sell
securities which are secured by interests in real estate and
securities of issuers which invest or deal in real estate. The
Fund reserves the freedom of action to hold and to sell real
estate acquired as a result of the ownership of securities (e.g.,
real estate acquired through foreclosure); or
(7) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities. Physical commodities do
not include futures contracts and options thereon with respect to
securities, securities indices or other financial instruments.
MANAGEMENT OF THE FUND
Duff & Phelps will serve as one of the Fund's investment advisers. Duff
& Phelps will implement the Fund's investment program as is necessary for the
operations of the Fund and manage the utilities portion of the Fund's portfolio.
Phoenix will serve as the Fund's investment sub-adviser and will manage the high
risk, high yield portion of the Fund's portfolio. W.S. Griffith also will serve
as an investment adviser to the Fund and will determine the Fund's asset
allocation strategy. W.S. Griffith is an affiliate, and Duff & Phelps and
Phoenix are subsidiaries, of Phoenix Investment Partners, Ltd., an investment
management organization, which managed approximately $53.5 billion through its
investment subsidiaries as of December 31, 1998, of which approximately $29
billion was invested in debt securities, including utilities, high yield,
emerging markets and other fixed income securities. Duff & Phelps and Phoenix
manage a broad spectrum of debt, equity and money market securities, with
particular expertise in the utilities and high yield sectors of the debt
securities market. As of December 31, 1998, Duff & Phelps had approximately
$15.9 billion in assets under management, including $3.5 billion of closed-end
funds and $7.6 billion institutional debt accounts. Phoenix had approximately
$12.6 billion in assets under management, including approximately $10.1 billion
of open-end funds and $2.5 billion of institutional accounts. Duff & Phelps
manages a total of 3 closed-end funds, all of which are utility funds.
Duff & Phelps is located at 55 East Monroe Street, Chicago, Illinois,
60603. W.S. Griffith is located at One American Row, Hartford, Connecticut
06115. Phoenix is located at 56 Prospect Street, Hartford, Connecticut 06115.
INVESTMENT ADVISORY AGREEMENT
Pursuant to separate Investment Advisory Agreements (the "Advisory
Agreements"), the Fund has retained Duff & Phelps to implement the Fund's
investment program and to provide such investment research, advice and
supervision, in conformity with the Fund's investment objective and policies, as
is necessary for the operations of the Fund, and W.S. Griffith to determine
the Fund's asset allocation strategy.
The Advisory Agreements provide, among other things, that Duff & Phelps
and W.S. Griffith each will bear all expenses of its employees and overhead
incurred in connection with its duties under an Advisory Agreement (including
its fees and expenses) and will pay all directors' fees and salaries of the
Fund's directors and officers who are affiliated persons (as such term is
defined in the Investment Company Act of 1940) of Duff & Phelps or W.S.
Griffith, respectively. The Advisory Agreements provide that the Fund shall pay
to Duff & Phelps and W.S. Griffith a monthly fee for their services at the
annual rates of 0.60% and 0.40%, respectively, of the Fund's
38
<PAGE> 40
"Managed Assets." Managed Assets are the average weekly value of the Fund's
assets, including assets purchased with leverage, minus the average value of the
Fund's accrued liabilities, other than indebtedness attributable to leverage.
This means that during periods in which the Fund is using financial leverage,
the fees paid to Duff & Phelps and W.S. Griffith will be higher than if the Fund
did not use leverage because the fee is calculated as a percentage of the Fund's
Managed Assets, including those purchased with leverage.
Although Duff & Phelps and W.S. Griffith intend to devote such time and
effort to the business of the Fund as is reasonably necessary to perform their
duties to the Fund, the services of Duff & Phelps and W.S. Griffith are not
exclusive and Duff & Phelps and W.S. Griffith provide similar services to other
investment companies and other clients and may engage in other activities.
The Advisory Agreements also provide that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, Duff & Phelps and W.S. Griffith are not liable to the
Fund or any of the Fund's shareholders for any act or omission by Duff & Phelps
or W.S. Griffith with respect to their responsibilities under their respective
Advisory Agreements or for any loss sustained by the Fund or the Fund's
shareholders.
The Advisory Agreements were approved by the Fund's Board of Directors,
on [____________], 1999, including a majority of the Directors who are not
parties to the agreement or interested persons of any such party (as such term
is defined in the Investment Company Act of 1940). The Advisory Agreements will
be submitted to shareholders for their approval at the first meeting of
shareholders of the Fund. Each Advisory Agreement will continue in effect for a
period of two years from its effective date, and if not sooner terminated, will
continue in effect for successive periods of 12 months thereafter, provided that
each continuance is specifically approved at least annually by both (1) the vote
of a majority of the Fund's Board of Directors or the vote of a majority of the
outstanding voting securities of the Fund (as such term is defined in the
Investment Company Act of 1940) and (2) by the vote of a majority of the
Directors, who are not parties to such Agreement or interested persons (as such
term is defined in the Investment Company Act of 1940) of any such party, cast
in person at a meeting called for the purpose of voting on such approval. Each
of the Advisory Agreements may be terminated at any time by the Fund, without
the payment of any penalty, upon the vote of a majority of the Fund's Board of
Directors or a majority of the outstanding voting securities of the Fund or by
Duff & Phelps or W.S. Griffith, as appropriate, on 60 days' written notice by
either party to the other. An Advisory Agreement will terminate automatically in
the event of its assignment (as such term is defined in the Investment Company
Act of 1940 and the rules thereunder).
Under a separate agreement dated ________, Duff & Phelps and W.S.
Griffith agreed to reimburse the Fund to the extent that actual other expenses
(as defined) incurred by the Fund exceed .20% of the Managed Assets as long as
the Advisory Agreements are in effect.
INVESTMENT SUB-ADVISORY AGREEMENT
Pursuant to an Investment Sub-Advisory Agreement ("Sub-Advisory
Agreement"), Duff & Phelps has appointed Phoenix as investment sub-adviser to
handle the day-to-day investment management of the high yield, high risk portion
of the Fund. Phoenix will receive a portion of the advisory fee paid by the Fund
to Duff & Phelps.
The Sub-Advisory Agreement also provides that in the absence of willful
misfeasance, bad faith, gross negligence, breach of the Fund's investment
objective or policies or other disregard of its obligations thereunder, Phoenix
will not be liable to the Fund or any of the Fund's shareholders for any act or
omission by Phoenix in the supervision or management of its respective
investment activities or for any loss sustained by the Fund or the Fund's
shareholders.
Although Phoenix intends to devote such time and effort to the business
of the Fund as is reasonably necessary to perform its duties to the Fund, the
services of Phoenix are not exclusive and Phoenix provides similar services to
other investment companies and other clients and may engage in other activities.
39
<PAGE> 41
The Investment Sub-Advisory Agreement was approved by the Fund's Board
of Directors on [ ], 1999, including a majority of the Directors who
are not parties to the agreement or interested persons of any such party (as
such term is defined in the Investment Company Act of 1940). The Investment
Sub-Advisory Agreement will be submitted to shareholders for their approval at
the first meeting of shareholders of the Fund. The Investment Sub-Advisory
Agreement will continue in effect for a period of two years from its effective
date, and if not sooner terminated, will continue in effect for successive
periods of 12 months thereafter, provided that each continuance is specifically
approved at least annually by both (1) the vote of a majority of the Fund's
Board of Directors or the vote of a majority of the outstanding voting
securities of the Fund (as such term is defined in the Investment Company Act of
1940) and (2) by the vote of a majority of the Directors, who are not parties to
such Agreement or interested persons (as such term is defined in the Investment
Company Act of 1940) of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Investment Sub-Advisory Agreement
may be terminated as a whole at any time by the Fund, without the payment of any
penalty, upon the vote of a majority of the Fund's Board of Directors or a
majority of the outstanding voting securities of the Fund or by Duff & Phelps or
Phoenix on 60 days' written notice by either party to the other. The Investment
Sub-Advisory Agreement will terminate automatically in the event of its
assignment (as such term is defined in the Investment Company Act of 1940 and
the rules thereunder).
PORTFOLIO MANAGEMENT TEAMS
A team of Duff & Phelps investment professionals will manage the
utilities portion of the Fund's portfolio. The Duff & Phelps team includes
portfolio managers with an average of [__] years of investment management
experience and research analysts specializing in the utilities sector of the
debt securities market. The team responsible for managing this Fund is the same
team primarily responsible for managing the three other closed-end funds advised
by Duff & Phelps, which have significant investments in utilities securities.
A team of W.S. Griffith professionals will determine the Fund's asset
allocation strategy. The W.S. Griffith team includes professionals with an
average of [ ] years of asset allocation experience.
Phoenix also will use a team approach in connection with the management
of the high risk, high yield portion of the Fund's portfolio. The Phoenix team
includes portfolio managers with an average of 14 years of investment management
experience and research analysts specializing in the high yield, high risk and
emerging markets sectors of the debt securities market.
THE ADMINISTRATION AGREEMENT
Zweig/Glaser Advisers LLC will act as the Fund's administrator (the
"Administrator"). Under an Administration Agreement with the Fund (the
"Administration Agreement"), the Administrator administers the Fund's corporate
affairs subject to the supervision of the Fund's Board of Directors, including
furnishing the Fund with office facilities together with such ordinary clerical
and bookkeeping services (e.g., preparation of annual and other reports to
stockholders and the SEC and filing of federal, state and local income tax
returns) as are not being furnished by the Custodian. In connection with its
administration of the corporate affairs of the Fund, the Administrator will bear
the following expenses:
- salaries and expenses of all personnel of the Administrator; and
- all expenses incurred by the Administrator or by the Fund in
connection with administering the ordinary course of the Fund's
business, other than those assumed by the Fund, as described
below.
The Administration Agreement provides that the Fund shall pay to the
Administrator a monthly fee for its services at an annual rate of .10% of the
Fund's average weekly Managed Assets (as described above).
During periods in which the Fund is using leverage, the fee paid to the
Administrator will be higher than if the Fund did not use leverage because the
fee is calculated as a percentage of the Fund's Managed Assets, including those
purchased with leverage.
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<PAGE> 42
The Administration Agreement was approved by the Fund's Board of
Directors on [ ], 1999 and is effective until terminated. It
terminates automatically if it is assigned (as defined in the Investment Company
Act of 1940 and the rules thereunder) and is otherwise terminable on 60 days'
notice by either party to the other.
EXPENSES OF THE FUND
Except as indicated above, the Fund will pay all of its expenses,
including fees of the Directors not affiliated with the Advisers and board
meeting expenses; fees of the Advisers and the Administrator; interest charges;
taxes; charges and expenses of the Fund's legal counsel and independent
accountants, and of the transfer agent, registrar and dividend disbursing agent
of the Fund; expenses of repurchasing shares; expenses in connection with the
Fund's Automatic Dividend Reinvestment Plan; expenses of printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental offices; brokerage and other expenses connected with
negotiating, effecting purchase or sale, or registering privately issued
portfolio securities; fees and expenses of the Custodian for all services to
the Fund, including safekeeping trusts and securities and maintaining required
books and accounts; expenses in calculating and publishing the net asset value
of the Fund's shares; expenses of membership in investment company
associations; expenses of fidelity bonding and other insurance expenses
including insurance premiums; expenses of shareholders meetings; SEC and state
blue sky registration fees; New York Stock Exchange listing fees; fees payable
to the National Association of Securities Dealers, Inc. in connection with this
offering; and its other business and operating expenses.
We estimate that the expenses for this Offering will be $[ ], including
approximately $250,000 to be paid to the underwriters as reimbursement of
certain of their expenses in connection with this offering. We will pay the
first $0.02 per share of offering expenses from our assets. W.S. Griffith has
agreed to pay or to reimburse the underwriters for all such expenses in excess
of $0.02 per share.
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<PAGE> 43
DIRECTORS AND OFFICERS OF THE FUND
The overall management of the business and affairs of the Fund is
vested with its Board of Directors. The officers of the Fund manage its day to
day operations. The following is a list of the Directors and officers of the
Fund and a brief statement of their present positions and principal occupations
during the past five years. Directors who are interested persons of the Fund (as
defined in the Investment Company Act of 1940) are denoted by an asterisk (*).
The business address of the Fund and its Board members and officers is 55 East
Monroe Street, Chicago, Illinois 60603, unless specified otherwise below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE PAST
NAME AND ADDRESS AGE TITLE FIVE YEARS AND OTHER AFFILIATIONS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Philip R. McLoughlin 51 Chairman of the Chairman (1997-present), Director (1995-present),
Board, President Vice Chairman (1995-1997) and Chief Executive
and Chief Officer (1995-present), Phoenix Investment Partners,
Executive Officer Ltd. Director (1994-present) and Executive Vice
President, Investments (1988-present), Phoenix Home
Life Mutual Insurance Company. Director/Trustee and
President, Phoenix Funds (1989-present). Trustee and
President, Phoenix-Aberdeen Series Fund and Phoenix
Duff & Phelps Institutional Mutual Funds (1996-
present). Director, Duff & Phelps Utilities Tax-Free
Income Inc. (1995-present) and Duff & Phelps Utility
and Corporate Bond Trust Inc. (1995-present).
Director (1983-present) and Chairman (1995-present),
Phoenix Investment Counsel, Inc. Director (1984-
present) and President (1990-present), Phoenix Equity
Planning Corporation. Director (1993-present),
Chairman (1993-present) and Chief Executive Officer
(1993-1995), National Securities & Research
Corporation. Director, Phoenix Realty Group, Inc.
(1994-present), Phoenix Realty Advisors, Inc. (1987-
present), Phoenix Realty Investors, Inc. (1994-present).
Phoenix Realty Securities, Inc. (1994-present), PXRE
Corporation (Delaware) (1985-present), and World
Trust Fund (1991-present). Director and Executive
Vice President, Phoenix Life and Annuity Company
(1996-present). Director and Executive Vice
President, PHL Variable Insurance Company (1995-
present). Director, Phoenix Charter Oak Trust
Company (1996-present). Director and Vice President,
PM Holdings, Inc. (1985-present). Director, PHL
Associates, Inc. (1995-present). Director and
President, Phoenix Securities Group, Inc. (1993-1995).
Director (1992-present) and President (1992-1994),
W.S. Griffith & Co., Inc. Director/Trustee, the
National Affiliated Investment Companies (until 1993).
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE PAST
NAME AND ADDRESS AGE TITLE FIVE YEARS AND OTHER AFFILIATIONS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Allen Weintraub 63 Director Chairman, (1993-present), Chief Executive Officer,
42 Foothills Drive (1990-present), The Advest Group. Director, Advest
Avon, Connecticut 06001 Bank. Director, Phoenix Real Estate Securities,
Inc. Director, Bushnell Memorial ( -present), Director, Jewish
Federation of Greater Hartford ( -present), Director, The
Greater Hartford Arts Council ( - present), Director, Hartford
Downtown Council ( - present), Director, the Capital Region
Growth Council ( -present) and Director, Greater Hartford
Millennium Management Committee ( -present). [Director], the
Philadelphia Stock Exchange ( - _), Member, Regional Firms
Advisory Committee of the New York Stock Exchange ( - _).
Chairman, National Business Conduct Committee, National
Association of Securities Dealers, Inc. ( - ), Vice Chairman
( - ), Chairman, the Advest Advantage Family of Funds
( - ).
Everett L. Morris 70 Director Vice President, W.H. Reaves and Company (1993-
164 Laird Road present). Director/Trustee, Phoenix Funds (1995-
Colts Neck, NJ 07722 present). Trustee, Phoenix-Aberdeen Series Fund and
Phoenix Duff & Phelps Institutional Mutual Funds
(1996-present). Director, Duff & Phelps Utilities Tax-
Free Income Inc. (1991-present) and Duff & Phelps
Utility and Corporate Bond Trust Inc. (1993-present).
Donald Lee Rome 69 Director Senior Counsel, Robinson & Cole LLP (1998-present),
250 Trumbull Street Partner, Robinson & Cole LLP (1983-1997).
Hartford, CT 06103-3997
James W. Rosenberger 36 Vice President, Controller-Institutional Business (1998-present),
Secretary and Phoenix Investment Partners, Ltd., Associate Director-
Treasurer Information Technology Business Management and Associate
Director-Finance and Control (1994 to 1998), SBC Warburg Dillon
Read (a division of Swiss Bank Corp.), General Accounting Manager-
Docusystems Division (1/94-11/94), Rand McNally.
</TABLE>
Prior to this offering, all of the outstanding shares of the Fund were owned by
[ ].
No officer or employee of the Fund receives any compensation from the
Fund for serving as an officer or Director of the Fund. The Fund pays each
Director who is not an "interested person" of the Fund (as defined in the
Investment Company Act of 1940) $ per year plus $ per Board meeting
attended in person or by telephone, and reimburses each such Director for travel
and out-of-pocket expenses.
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<PAGE> 45
During the year ended December 31, 1998, the non-interested Directors
of the Fund earned the compensation set forth below in their capacities as
Directors/Trustees of funds in the Phoenix fund complex, which, as of December
31, 1998, consisted of [ ] registered management investment companies or series
thereof. Total compensation from the Fund and the Phoenix fund complex paid to
each Board member is capped at [$ ]. It is estimated that the non-interested
Directors will receive from the Fund the amounts set forth below for the fiscal
year ending December 31, 1999.
<TABLE>
<CAPTION>
1999 Estimated
Aggregate Aggregate
Compensation Compensation
Name of Board Member From the Fund From Fund Complex
-------------------- ----------------- -----------------
<S> <C> <C>
Philip R. McLoughlin [TO COME] [TO COME]
Allen Weintraub [TO COME] [TO COME]
Everett L. Morris [TO COME] [TO COME]
Donald Lee Rome [TO COME] [TO COME]
</TABLE>
PORTFOLIO TRANSACTIONS
The Advisers are responsible for the Fund's asset allocation
determinations, decisions to buy and sell securities for the Fund, the selection
of brokers and dealers to effect the transactions and the negotiation of prices
and any brokerage commissions. The securities in which the Fund invests are
traded principally in the over-the-counter market. In the over-the-counter
market, securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a mark-up to the dealer. Securities purchased
in underwritten offerings generally include, in the price, a fixed amount of
compensation for the manager(s), underwriter(s) and dealer(s). The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Advisers' primary considerations in selecting brokers to effect
securities transactions for the Fund will be prompt execution of orders, the
size and breadth of the market for the security, the reliability, integrity and
financial condition and execution capability of the firm, the size of and
difficulty in executing the order, and the best net price. There may be many
instances when, in the judgment of the Advisers, more than one firm can offer
comparable execution services. In selecting among such firms, consideration will
be given to those firms which supply research and other services in addition to
execution services. However, it is not the policy of the Advisers, absent
special circumstances, to pay higher commissions to a firm because it has
supplied such services.
The Advisers are able to fulfill their obligations to furnish a
continuous investment program to the Fund without receiving such information
from brokers; however, they consider access to such information to be an
important element of financial management. Although such information is
considered useful, its value is not determinable, as it must be reviewed and
assimilated by the Advisers, and does not reduce the Advisers' normal research
activities in rendering investment advice. It is possible that the Advisers'
expenses could be materially increased if it attempted to purchase this type of
information or generate it through its own staff.
One or more of the other accounts which the Advisers manage may own
from time to time the same investments as the Fund. Investment decisions for the
Fund are made independently from those of such other accounts; however, from
time to time, the same investment decision may be made for more than one company
or account. When two or more issuers or accounts seek to purchase or sell the
same securities, the securities actually purchased or sold will be allocated
among the issuers and accounts on a good faith equitable basis by the Advisers
in their discretion in accordance with the accounts' various investment
objectives. In some cases, this system may
44
<PAGE> 46
adversely affect the price or size of the position obtainable for the Fund. In
other cases, however, the ability of the Fund to participate in volume
transactions may produce better execution for the Fund. It is the opinion of the
Fund's Board of Directors that this advantage, when combined with the other
benefits available due to the Advisers' organizations, outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
Although the Advisory Agreements contain no restrictions on portfolio
turnover, under normal market conditions, it is not the Fund's policy to engage
in transactions with the objective of seeking profits from short term trading.
The portfolio turnover rate is expected to vary from year to year. Higher
portfolio turnover (100% or more) results in increased Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities.
DETERMINATION OF NET ASSET VALUE
The Fund's investments are valued after the close of business on the
New York Stock Exchange no less frequently than Thursday of each week (except
where such Thursday is not a business day, in which case the first business day
immediately preceding such Thursday) and the last business day of each month,
using available market quotations or at fair value. Substantially all of the
Fund's fixed-income investments (excluding short term investments) are valued by
one or more independent pricing services ("Services") approved by the Board of
Directors. Securities valued by the Services for which quoted bid prices in the
judgment of the Services are readily available and are representative of the bid
side of the market are valued at the mean between the quoted bid prices (as
obtained by the Services from dealers in such securities) and asked prices (as
calculated by the Services based upon its evaluation of the market for such
securities). Other investments valued by the Services are carried at fair value
as determined by the Services, based on methods which include consideration of:
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short term
investments are valued on an amortized cost basis. Other investments that are
not valued by the Services are valued at the last sales price for securities
traded primarily on an exchange or the national securities market or otherwise
at the average of the most recent bid and asked prices. Bid price is used when
no ask price is available. Other Fund investments will be valued at a fair
value, as determined by the Board of Directors. Expenses and fees, including the
management fee, are accrued weekly and taken into account for the purpose of
determining the net asset value of the Fund's shares.
Options, futures contracts and options thereon which are traded on
exchanges are valued at their last sale or settlement price as of the close of
the exchanges or, if no sales are reported, at the average of the quoted bid and
ask prices as of the close of the exchange. Portfolio securities underlying
listed call options will be valued at their market price and reflected in net
assets accordingly. Premiums received on call options written by the Fund will
be included in the liability section of the financial statements as a deferred
credit and subsequently adjusted (marked-to-market) to the current market value
of the option written.
Illiquid securities, as well as securities or other assets for which
recent market quotations are not readily available, or are not valued by the
Services, are valued at fair value as determined in good faith by the Board of
Directors. The Board will review the method of valuation on a current basis. In
making their good faith valuation of illiquid securities, the Board members
generally will take the following factors into consideration: illiquid
securities which are, or are convertible into, securities of the same class of
securities for which a public market exists usually will be valued at market
value less the same percentage discount at which purchased. This discount will
be revised periodically by the Board if it believes that the discount no longer
reflects the value of the illiquid securities. Illiquid securities not of the
same class as securities for which a public market exists usually will be valued
initially at cost. Any subsequent adjustment from cost will be based upon
considerations deemed relevant by the Board.
The holidays on which the New York Stock Exchange is closed, and on
which the Fund's shares will not be traded on the NYSE currently are: New Year's
Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
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TAXES
The following discussion is a general summary of certain U.S. federal
income tax considerations relating to the Fund and to the acquisition, ownership
and disposition of shares. The discussion is based on the Internal Revenue Code
of 1986, as amended (the "Code"), applicable Treasury regulations and rulings
now in effect, all of which are subject to change, possibly retroactively. This
summary does not purport to discuss all the income tax consequences applicable
to the Fund or to investors that may be subject to special tax rules, such as
foreign investors, banks, tax-exempt organizations, insurance issuers, dealers
in securities or currencies, persons that will hold the shares as part of an
integrated investment (including a "straddle") comprised of shares and one or
more other positions, or persons having a "functional currency" other than the
U.S. dollar. Investors considering the purchase of shares should consult their
own tax advisers regarding the application of U.S. federal income tax laws to
their particular situations, as well as any tax consequences arising under the
laws of any state, local, or foreign taxing jurisdiction.
The Fund intends to qualify and to elect to be treated as a regulated
investment company ("RIC") under the Code. For each taxable year that the Fund
so qualifies, the Fund (but not shareholders) will be relieved of federal income
tax on that part of its investment company taxable income (consisting generally
of net investment income, net short term capital gain and net gains from certain
foreign currency transactions) and net capital gain that is distributed to
shareholders.
In order to qualify for treatment as a RIC under the Code, the Fund
must make an election to be so treated and must distribute to shareholders for
each taxable year at least 90% of its investment company taxable income
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"); (2) at the close of
each quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities that are limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of the Fund's
total assets and does not constitute more than 10% of the voting securities of
such issuer; and (3) at the close of each quarter of the Fund's taxable year,
not more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer.
The Fund will be subject to a non-deductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31st of that year, plus certain
other amounts. For these purposes, any such income retained by the Fund, and on
which it pays federal income tax, will be treated as having been distributed.
The Fund may acquire zero-coupon or other securities issued with
original issue discount. As the holder of such securities, the Fund must include
in its gross income the original issue discount that accrues on the securities
during the taxable year, even if it receives no corresponding payment on the
securities during the year. The Fund also must include in its gross income each
year any "interest" distributed in the form of additional securities on
payment-in-kind securities. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
accrued original issue discount and other non-cash income, to satisfy the
Distribution Requirement and to avoid imposition of the Excise Tax, the Fund may
be required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain.
The use of certain Strategic Transactions, such as selling (writing)
and purchasing options and futures and entering into forward currency contracts,
involves complex rules that will determine for federal income tax purposes
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<PAGE> 48
the character and timing of recognition of the gains and losses the Fund
realizes in connection therewith. These rules also may require the Fund to
recognize income or gain without receiving cash with which to make distributions
necessary to satisfy the Distribution Requirement and to avoid imposition of the
Excise Tax.
Certain constructive sale provisions in the Code generally will apply
if the Fund either (1) holds an appreciated financial position with respect to
stock, certain debt obligations, or partnership interests ("appreciated
financial position") and then enters into a short sale, futures, forward, or
offsetting notional principal contract (each, a "Contract") with respect to the
same or substantially identical property or (2) holds an appreciated financial
position that is a Contract and then acquires property that is the same as, or
substantially identical to, the underlying property. In each instance, with
certain exceptions, the Fund generally will be taxed as if the appreciated
financial position were sold at its fair market value on the date the Fund
enters into the financial position or acquires the property, respectively.
Transactions that are identified hedging or straddle transactions under other
provisions of the Code can be subject to the constructive sale provisions.
Income from foreign currencies, and income from transactions in
options, futures and forward currency contracts and other income derived by the
Fund with respect to its business of investing in securities or foreign
currencies, will be treated as qualifying income under the Income Requirement.
Under section 988 of the Code, foreign currency gains or losses from certain
forward contracts not traded in the interbank market as well as certain other
gains or losses attributable to currency exchange rate fluctuations are
typically treated as ordinary income or loss. Such income or loss may increase
or decrease (or possibly eliminate) the Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, the Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gain. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
Income received and gains realized by the Fund from investments in
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions that would reduce its yield and/or
total return thereon. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.
Dividends from the Fund's investment company taxable income (whether
received in cash or reinvested in additional shares) generally are taxable to
shareholders as ordinary income to the extent of the Fund's earnings and
profits. Distributions of the Fund's net capital gain ("capital gain
dividends"), whether received in cash or reinvested in additional shares, when
designated as such, are taxable to shareholders as long term capital gain,
regardless of how long they have held their Fund shares. See below for a summary
of the tax rates applicable to capital gains dividends. A participant in the
Automatic Dividend Reinvestment Plan will be treated as having received a
distribution in the amount of the cash used to purchase shares on his or her
behalf, including a pro rata portion of the brokerage fees incurred by the
Transfer Agent. Distributions by the Fund to shareholders in any year that
exceed the Fund's earnings and profits generally may be applied by each
shareholder against his or her basis for the shares and will be taxable at
capital gains rates (assuming such shares are held as a capital asset) to any
shareholder only to the extent the distributions to the shareholder exceed the
shareholder's basis for his or her shares. See below for a discussion of capital
gains rates. The Fund will notify shareholders following the end of each
calendar year of the amounts of dividends and capital gain dividends paid (or
deemed paid) that year.
The Internal Revenue Service has taken the position in a revenue ruling
that if a RIC has two classes of shares, it may designate distributions made to
each class in any year as consisting of no more than such class's proportionate
share of particular types of income based on the total distributions paid to
each class for such year, including distributions out of net capital gain.
Consequently, if both common shares and preferred shares are outstanding, the
Fund intends to designate distributions made to the classes as consisting of
particular types of income in accordance with the classes' proportionate shares
of such income. Thus, distributions of net capital gain will be allocated
between holders of common shares and holders of preferred shares, if any, in
proportion to the total
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distributions made to each class during the taxable year, or otherwise as
required by applicable law. Dividends and other distributions declared by the
Fund in October, November or December of any year and payable to shareholders of
record on a date in any of those months will be deemed to have been paid by the
Fund and received by the shareholders on December 31st of that year if the
distributions are paid by the Fund during the following January. Accordingly,
those distributions will be taxed to shareholders for the year in which that
December 31st falls.
An investor should also be aware that, if shares are purchased shortly
before the record date for any dividend or other distribution, the investor will
pay full price for the shares and will receive some portion of the purchase
price back as a taxable distribution.
The Fund may elect in the future to retain net realized long term
capital gains and pay corporate income tax thereon. In such event, the Fund
would most likely make an election which would require each shareholder of
record on the last day of the Fund's taxable year to include in income for tax
purposes his proportionate share of the Fund's undistributed net realized long
term capital gains. If such an election is made, each shareholder would be
entitled to credit his proportionate share of the tax paid by the Fund against
his federal income tax liability and to claim a refund to the extent that the
credit exceeds such liability. In addition, the shareholder would be entitled to
increase the basis of his shares for federal income tax purposes by an amount
equal to the difference between (i) the amount included in such shareholder's
income as long-term capital gains and (ii) such shareholder's proportionate
share of the tax paid by the Fund.
Upon the sale or exchange of shares (including a sale pursuant to a
share repurchase or tender offer by the Fund), a shareholder generally will
recognize a taxable gain or loss equal to the difference between his or her
adjusted basis in the shares and the amount received. Any such gain or loss will
be treated as a capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long term capital gain or loss if the shares
have been held for more than one year. See below for a discussion of the tax
rates applicable to capital gains. Any loss recognized on a sale or exchange of
shares that were held for six months or less will be treated as long term,
rather than short term, capital loss to the extent of any capital gain dividends
previously received thereon. A loss recognized on a sale or exchange of shares
will be disallowed to the extent those shares are replaced by other shares
within a period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the shares (which could occur, for example, as a result
of participation in the Automatic Dividend Reinvestment Plan). In that event,
the basis of the replacement shares will be adjusted to reflect the disallowed
loss.
The maximum tax rate applicable to net capital gains by individuals and
other non-corporate taxpayers is the same as the maximum ordinary income tax
rate for capital assets held for one year or less and 20% (10% for taxpayers in
the 15% marginal tax bracket) for capital assets held for more than one year.
The maximum long term capital gains rate for corporations is 35%.
The Fund is required to withhold 31% of all dividends, capital gains
dividends and repurchase proceeds payable to any individual shareholders and
certain other non-corporate shareholders who do not provide the Fund with a
correct taxpayer identification number. The Fund is also required to withhold
31% of all dividends and capital gain dividends paid to such shareholders who
otherwise are subject to backup withholding.
Foreign persons, including non-resident aliens, who invest in shares
may be subject to United States withholding tax on certain distributions
(whether received in cash or in shares) at a rate of 30% or such lower rate as
prescribed by an applicable treaty. President Clinton's 1999 Budget includes a
provision that would exempt dividends paid by RICs from U.S. withholding tax if
substantially all of the RIC's assets consist of U.S. debt whose interest is
exempt from U.S. withholding tax. It is unclear at this time whether the
proposal will be enacted or, if enacted, whether dividends paid by the Fund
would qualify for exemption. Prospective foreign investors should consult their
United States tax advisers concerning the tax consequences to them of an
investment in shares.
The foregoing is only a brief summary of some of the important federal
income tax considerations generally affecting the Fund and shareholders. There
may be other federal, state, local or foreign tax considerations applicable
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to a particular investor. Prospective investors are urged to consult their tax
advisers regarding the specific federal income tax consequences of purchasing,
holding and disposing of shares, as well as the effects of state, local and
foreign tax laws and any proposed tax law changes.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The Fund has established an Automatic Dividend Reinvestment Plan (the
"Plan"). Unless you elect to receive cash, all dividend and capital gains
distributions declared for your shares of the Fund will be automatically
reinvested by The Bank of New York, the agent for shareholders in administering
the Plan (the "Plan Agent"), in additional shares of the Fund. If you do not
elect to participate in the Plan, you will receive all dividends and
distributions in cash paid by check mailed directly to you (or, if the shares
are held in street or other nominee name, then to such nominee) by The Bank of
New York, as dividend disbursing agent. You may elect not to participate in the
Plan and to receive all distributions of dividends and capital gains in cash by
sending written instructions to The Bank of New York at the address set forth
below. Participation in the Plan is completely voluntary and may be terminated
or resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares an ordinary income dividend or a capital
gain dividend (collectively referred to in this section as "dividends") payable
either in shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares. The number of
shares is determined as follows:
(i) If the Fund's shares are trading at net asset value or
at a premium above net asset value at the valuation date, the Fund
issues new shares at the greater of net asset value or 95% of the then
current market price.
(ii) If the Fund's shares are trading at a discount from
net asset value at the valuation date, the Plan Agent receives the
dividend or distribution in cash and uses it to purchase shares in the
open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts. Shares are allocated to participants' accounts
at the average price per share, plus commissions, paid by the Plan
Agent for all shares purchased by it. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value
of a share, the average purchase price per share paid by the Plan Agent
may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had
been paid in shares issued by the Fund.
The valuation date is the business day immediately preceding the date
of payment of the dividend or distribution. On that date, the Plan Agent
compares that day's net asset value per share and the closing price per share on
the New York Stock Exchange and determines which of the two alternative
procedures described above will be followed.
In the event of a market discount on the dividend payment date, the
Plan Agent will have until the last business day before the next date on which
the shares trade on an "ex-dividend" basis or in no event more than 30 days
after the dividend payment date (the "last purchase date") to invest the
dividend amount in shares acquired in open-market purchases. It is contemplated
that the Fund will pay monthly income dividends. Therefore, the period during
which open- market purchases can be made will exist only from the payment date
on the dividend through the date before the next "ex-dividend" date, which
typically will be approximately ten days. The Plan provides that if the Plan
Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period or if the market discount shifts to a market premium
during the purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend amount in newly
issued shares at the close of business on the last purchase date.
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The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each shareholder proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares held pursuant
to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time to
time by the record shareholder's name and held for the account of beneficial
owners who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains distributions
payable either in shares or in cash. However, each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open-market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "Taxes."
If you participate in the Plan, you may receive benefits not available
to shareholders who do not participate in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the
participants.
All correspondence concerning the Plan should be directed to the Plan
Agent at [ ].
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
The Bank of New York will act as the Fund's Custodian. The Custodian
may employ sub-custodians outside the U.S. approved by the Board of Directors in
accordance with regulations under the Investment Company Act of 1940. The Bank
of New York also will act as the Fund's Transfer and Dividend Disbursing Agent.
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DESCRIPTION OF SHARES
The Fund is a newly organized corporation, incorporated under the laws
of Maryland pursuant to its Articles of Incorporation. The Fund is authorized to
issue 110,000,000 shares of stock, consisting of 100,000,000 shares of common
stock and 10,000,000 shares of preferred stock, par value $.001 per share. The
Fund is issuing only common stock in this offering. Each share of common stock
has one vote and, when issued and paid for in accordance with the terms of this
offering, will be fully paid and non-assessable. If the Fund issues preferred
stock, the preferred stock will have rights as to dividends or liquidation or
both that will be superior to the rights of the common stock. Except as may be
provided by the Board of Directors in setting the terms of classified or
reclassified stock, or as may be provided by contract, the Fund's common stock
has no preemptive, subscription or conversion rights and is freely transferable.
The Fund will send annual and semi-annual financial statements to all
shareholders.
The Fund has no present intention of offering additional shares, except
as described herein and under the Automatic Dividend Reinvestment Plan, as it
may be amended from time to time. See "Automatic Dividend Reinvestment Plan."
Other offerings of its shares, if made, will require approval of the Fund's
Board of Directors. Any additional offering will not be sold at a price per
share below the then current net asset value (exclusive of underwriting
discounts and commissions) except in connection with an offering to existing
shareholders or with the consent of a majority of the Fund's outstanding shares.
The shares will be listed on the New York Stock Exchange under the
symbol [" ."]
ANTI-TAKEOVER PROVISIONS
The Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors, and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. These provisions may have the effect of
discouraging attempts to acquire control of the Fund, which attempts could have
the effect of increasing the expenses of the Fund and interfering with the
normal operation of the Fund. The Board of Directors is divided into three
classes, with the terms of one class expiring at each annual meeting of
shareholders. At each annual meeting, one class of Directors is elected to a
three-year term. This provision could delay for up to two years the replacement
of a majority of the Board of Directors. Subject to the rights of holders of
preferred stock to remove directors, a Director may be removed from office only
for cause by the affirmative vote of the holders of at least two-thirds of the
shares entitled to be cast in the election of directors.
BUSINESS COMBINATIONS
The Fund is subject to the business combination statute of the Maryland
General Corporation Law ("MGCL"). Under this statute, certain "business
combinations" (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns
ten percent or more of the voting power of the corporation's shares or an
affiliate or associate (as defined in the MGCL) of the corporation who, at any
time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of such an Interested Stockholder are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected or by an affiliate or
associate of the Interested Stockholder, voting together as a single group,
unless, among other conditions, the corporation's common stockholders receive at
least a minimum price (as defined in the MGCL) for their shares and the
consideration is
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received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder.
CLOSED-END FUND STRUCTURE
The Fund is a newly-organized closed-end fund. Closed-end funds differ
from open-end funds (which are commonly referred to as mutual funds) in that
closed-end funds, unlike mutual funds, generally list their shares for trading
on a stock exchange and do not redeem their shares at the request of the
shareholder. This means that if you wish to sell your shares of a closed-end
fund you must trade them on the market like any other stock at the price
prevailing in the market for the shares at that time. In a mutual fund, shares
may be redeemed or bought back by the mutual fund at "net asset value" if the
shareholder wishes to sell the shares of the fund. Also, mutual funds generally
offer new shares on a continuous basis to new investors, whereas closed-end
funds do not. The continuous inflows and outflows of assets in a mutual fund can
make it difficult to manage the investments. By comparison, closed-end funds are
generally able to stay more fully invested in securities that are consistent
with their investment objectives, and also have greater flexibility to make
certain types of investments, and to use certain investment strategies, such as
financial leverage.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time
by an amendment to the Articles of Incorporation. Such an amendment would
require the favorable vote of the holders of at least 662/3% of all the votes
entitled to be cast on the matter, including any preferred stock unless the
terms of the preferred stock provide otherwise. Under the Investment Company Act
of 1940, conversion of the Fund to an open-end investment company would require
the redemption of any outstanding preferred shares and any indebtedness not
constituting bank loans, which could eliminate or alter the leveraged capital
structure of the Fund with respect to the shares. Following any such conversion,
it is also possible that certain of the Fund's investment policies and
strategies would have to be modified to assure sufficient portfolio liquidity.
In particular, the Fund would be required to maintain its portfolio such that
not more than 15% of its net assets would be invested in illiquid securities, or
other illiquid assets, or securities which are restricted as to resale. Such
requirement could cause the Fund to dispose of portfolio securities or other
assets at a time when it is not advantageous to do so, and could adversely
affect the ability of the Fund to meet its investment objectives. In the event
of conversion, the shares would cease to be listed on the New York Stock
Exchange or other national securities exchanges or market systems and
shareholders may experience adverse tax consequences. Shareholders of an
open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the
Investment Company Act of 1940) at their net asset value, less such redemption
charge, if any, as might be in effect at the time of a redemption. The Fund
would expect to pay all such redemption requests in cash, but would reserve the
right to pay redemption requests in a combination of cash or securities. If such
partial payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Fund were converted to an open-end
fund, it is likely that new shares would be sold at net asset value plus a sales
load.
The Board of Directors believes that the closed-end structure is
desirable, in light of the Fund's investment objectives and policies. Therefore,
you should assume that it is not likely that the Board of Directors would vote
to convert the Fund to an open-end fund.
REPURCHASE OF SHARES
Shares of closed-end investment companies often trade at a discount to
their net asset value, and the Fund's shares may likewise trade at a discount to
their net asset value, although it is possible that they may trade at a premium
above net asset value. The market price of the Fund's shares will be determined
by such factors as relative demand for and supply of such shares in the market,
the Fund's net asset value, general market and economic conditions and other
factors beyond the control of the Fund.
52
<PAGE> 54
The Fund's Board of Directors might consider, from time to time,
engaging in open market repurchases, tender offers for shares at net asset value
or other programs intended to reduce the discount. There is, of course, no
guarantee or assurance that the Board of Directors will decide to engage in any
of these actions. Nor is there any guarantee or assurance that such actions, if
undertaken, would result in the shares trading at a price equal or close to net
asset value per share.
Although these actions could have a favorable effect on the market
price of the Fund's shares, it should be recognized that the acquisition of
shares by the Fund will decrease the total assets of the Fund and, therefore,
have the effect of increasing the Fund's expense ratio. Any share repurchases or
tender offers will be made in accordance with requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act of 1940.
53
<PAGE> 55
UNDERWRITING
We have entered into an underwriting agreement with the underwriters
named below, for whom Prudential Securities Incorporated and [NAME OF
CO-MANAGER[S]] are acting as representatives. We are obligated to sell, and the
underwriters are obligated to purchase, all of the shares offered on the cover
page of this prospectus, if any are purchased. Subject to certain conditions of
the underwriting agreement, each underwriter has severally agreed to purchase
the shares indicated opposite its name.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Prudential Securities Incorporated
[name of co-manager] ..............................................
[name of co-manager] ..............................................
Total .............................................................
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 45
days, an over-allotment option to purchase up to 600,000 additional shares from
us. If any additional shares are purchased, the underwriters will severally
purchase the shares in the same proportion as per the table above.
The representatives of the underwriters have advised us that the shares
will be offered to the public at the offering price indicated on the cover page
of this prospectus. The underwriters may allow to selected dealers a concession
of $[ ] per share and such dealers may reallow a concession of $[ ] per share to
certain other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and the concessions. The
representatives have informed us that the underwriters do not intend to sell
shares to any investor who has granted them discretionary authority.
W.S. Griffith, one of the Fund's investment advisers, out of its own
assets, has agreed to pay to the underwriters the following fees, assuming both
no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
-------------------------------------------------
FEE Without Exercise of FULL EXERCISE OF
PER SHARE Over-Allotment Option OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by W.S. Griffith
</TABLE>
In addition, we estimate that the expenses for this offering will be
$[ ], including approximately $250,000 to be paid to the underwriters as
reimbursement of certain of their expenses in connection with this offering. We
will pay the first $0.02 per share of offering expenses from our assets. W.S.
Griffith has agreed to pay or to reimburse the underwriters for all expenses in
excess of $0.02 per share. We and the Advisers have each agreed to indemnify the
underwriters or contribute to losses against certain liabilities, including
liabilities under the Securities Act.
We, our officers and trustees have entered into lock-up agreements
pursuant to which we, our officers and trustees have agreed not to offer or sell
any shares of common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period of 180 days from the date of
this prospectus. Prudential Securities may, at any time and without notice,
waive the terms of these lock-up agreements specified in the underwriting
agreement.
Prior to the offering, there has been no public market for the shares
of our Fund. The public offering price, negotiated between the Fund and the
representatives, is based upon various factors such as the yields and financial
54
<PAGE> 56
characteristics of investment companies that the Fund and the representatives
believe are comparable to this Fund, the Fund's expected performance and yield,
estimates of future earnings prospects of the Fund as a whole, the current state
of the relevant bond markets and the prevailing market conditions.
In order to meet the requirements for listing the shares on the New
York Stock Exchange, the underwriters have undertaken to sell lots of 100 shares
to a minimum of 2,000 beneficial holders.
Prudential Securities, some of the other underwriters and their
respective affiliates have, from time to time, performed, or may in the future
perform, various investment banking and financial advisory services on a fee for
services basis for the Fund, the Advisers and their affiliates.
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with the securities rules:
- Over-allotments involving sales in excess of the offering size,
creating a short position. Prudential Securities may elect to
reduce this short position by exercising some or all of the
over-allotment option;
- Stabilizing and short covering: stabilizing bids to purchase the
shares are permitted if they do not exceed a specified maximum
price. After the distribution of shares has been completed, short
covering purchases in the open market may also reduce the short
position. These activities may cause the price of the shares to be
higher than would otherwise exist in the open market.
- Penalty bids to permit the representatives to reclaim commissions
from a syndicate member for the shares purchased in the
stabilizing or short covering transactions.
Such activities, which may be commenced and discontinued at any time,
may be effected on the NYSE, in the over-the-counter market or otherwise.
ADDITIONAL INFORMATION
Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Fund's Registration Statement. Each such statement is qualified
in all respects by such reference and the exhibits and schedules thereto. The
Fund's Registration Statement and such exhibits and schedules may be obtained
from the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the SEC. The SEC maintains a
website at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the Fund, that
file electronically with the SEC. The Fund's shares have been approved for
listing on the NYSE under the symbol "____," subject to official notice of
issuance and, as such, similar information concerning the Fund will be available
for inspection and copy at the offices of the NYSE, 20 Broad Street, New York,
New York 10005.
The Fund intends to furnish shareholders with annual reports containing
audited financial statements and a report thereon by independent certified
public accountants.
LEGAL OPINIONS
Mayer, Brown & Platt will render legal opinions with respect to
certain matters on behalf of the Fund. Certain legal matters in connection with
the shares offered hereby will be passed upon for the Fund and its affiliated
entities and the underwriters with respect to Maryland law by Ballard Spahr
Andrews & Ingersoll LLP, and for the underwriters by Cleary, Gottlieb, Steen &
Hamilton.
55
<PAGE> 57
EXPERTS
The statement of assets and liabilities of the Fund included in this
Prospectus has been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing herein and is included in reliance upon the report of such firm given
upon their authority as experts in auditing and accounting.
REPORT OF INDEPENDENT ACCOUNTANTS
[TO COME]
56
<PAGE> 58
APPENDIX A
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S RATINGS GROUP:
AAA--Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB--Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. However, they face 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.
B--Bonds rated B have a greater vulnerability to default but presently have 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.
CCC--Bonds rated CCC have a current identifiable vulnerability to default and
are 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, they are not likely to have the
capacity to pay interest and repay principal.
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.
D--Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or a
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
DESCRIPTION OF BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and generally are referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
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<PAGE> 59
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what generally are known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and, therefore, 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 present 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.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a ranking for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
58
<PAGE> 60
APPENDIX B
RATINGS OF COMMERCIAL PAPER
DESCRIPTION OF COMMERCIAL PAPER RATINGS OF STANDARD & POORS RATINGS GROUP:
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding
timely payment is very strong. A "plus" (+) designation
indicates an even stronger likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
DESCRIPTION OF COMMERCIAL PAPER RATINGS OF MOODY'S INVESTORS SERVICES, INC.
Moody's commercial paper ratings, which are also applicable to municipal paper
investments, are opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designations, all judged to be investment grade,
to indicate the relative repayment capacity of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
59
<PAGE> 61
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF STRATEGIC TRANSACTIONS
In order to seek to hedge against changes in the value of its portfolio
securities, the Fund may from time to time engage in certain hedging and risk
management strategies. The Fund will engage in such activities from time to time
in The Advisers' discretion, and may not necessarily be engaging in such
activities when movements in interest rates that could affect the value of the
assets of the Fund occur. The Fund's ability to pursue certain of these
strategies may be limited by the Commodity Exchange Act, applicable regulations
of the Commodity Futures Trading Commission ("CFTC") and the federal income tax
requirements applicable to regulated investment companies.
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Fund may purchase and sell put and call options on securities and
financial indices. A put option gives the purchaser of the option the right to
sell and the seller the obligation to buy the underlying security at the
exercise price during the option period. Index options are similar to options on
securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option gives
the holder the right to receive cash upon exercise of the option if the level of
the index upon which the option is based is greater, in the case of a call, or
less, in the case of a put, than the exercise price of the option. The purchase
of a put option on a debt security would be designed to protect the Fund's
holdings in a security against a substantial decline in the market value. A call
option gives the purchaser of the option the right to buy and the seller the
obligation to sell the underlying security at the exercise price during the
option period. The purchase of a call option on a security would be intended to
protect the Fund against an increase in the price of a security that it intended
to purchase in the future. In the case of either put or call options that it has
purchased, if the option expires without being sold or exercised, the Fund will
experience a loss in the amount of the option premium plus any related
commissions. When the Fund sells put and call options, it receives a premium as
the seller of the option. The premium that the Fund receives for selling the
option will serve as a partial hedge, in the amount of the option premium,
against changes in the value of the securities in its portfolio. During the term
of the option, however, a covered call seller has, in return for the premium on
the option, given up the opportunity for capital appreciation above the exercise
price of the option if the value of the underlying security increases, but has
retained the risk of loss should the price of the underlying security decline.
Conversely, a secured put seller retains the risk of loss should the market
value of the underlying security decline below the exercise price of the option,
less the premium received on the sale of the option. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
Options") which are privately negotiated with the counterparty to such contract.
Listed options are issued by the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
All put and call options written by the Fund will be covered.
The Fund's ability to close out its position as a purchaser or seller
of an exchange-listed put or call option is dependent upon the existence of a
liquid secondary market. Among the possible reasons for the absence of a liquid
secondary market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been listed by the OCC as
a result of trades on that exchange would generally continue to be exercisable
in accordance with their terms. OTC Options are purchased from or sold to
dealers, financial institutions or other counterparties which have entered into
direct agreements with the Fund. With OTC Options, such variables as expiration
date, exercise price and premium will be agreed upon between the Fund and the
counterparty, without the intermediation of a third party such as the OCC. If
the counterparty fails to make
60
<PAGE> 62
or take delivery of the securities underlying an option it has written, or
otherwise settle the transaction in accordance with the terms of that option as
written, the Fund would lose the premium paid for the option as well as any
anticipated benefit of the transaction. As the Fund must rely on the credit
quality of the counterparty rather than the guarantee of the OCC, it will only
enter into OTC Options with counterparties with the highest long term credit
ratings, and with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to
the hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Characteristics. The Fund may purchase and sell futures contracts and
purchase put and call options on such futures contracts traded on recognized
domestic exchanges as a hedge against anticipated interest rate changes or other
market movements and future risk management. The sale of a futures contract
creates an obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specified future time for a
specified price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
(a long position if the option is a call and a short position if the option is a
put).
Margin Requirements. At the time a futures contract is purchased or
sold, the Fund must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Fund will pay may
range from approximately 1% to approximately 5% of the value of the instruments
underlying the contract. In certain circumstances, however, such as periods of
high volatility, the Fund may be required by an exchange to increase the level
of its initial margin payment. Additionally, initial margin requirements may be
increased in the future pursuant to regulatory action. An outstanding futures
contract is valued daily and the payment in cash of "variation margin" may be
required, a process known as "marking to the market." Transactions in listed
options and futures are usually settled by entering into an offsetting
transaction, and are subject to the risk that the position may not be able to be
closed if no offsetting transaction can be arranged.
Limitations on Use of Futures Contracts and Options on Futures
Contracts. The Fund's use of futures contracts and options on futures contracts
will in all cases be consistent with applicable regulatory requirements and in
particular, the rules and regulations of the CFTC and will be entered into only
for bona fide hedging purposes or other appropriate risk management and duration
management or other appropriate portfolio strategies. In addition, the Fund may
not sell futures contracts if the value of such futures contracts exceeds the
total market value of the Fund's portfolio securities.
The Fund will not engage in transactions in futures contracts or
options thereon for speculative purposes but only for hedging or to manage
against changes resulting from market conditions in the values of securities in
its portfolio. In addition, the Fund will not enter into a futures contract or
option thereon if, immediately thereafter, the sum of the amount of its initial
deposits and premiums on open contracts and options would exceed 5% of the
Fund's total assets (taken at current value); provided, however, that in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. Also, when
required, a segregated account of cash or cash equivalents will be maintained
and marked to market in an amount equal to the market value of the contract. The
Advisers reserve the right to comply with such different standards as may be
established from time to time by CFTC rules and regulations with respect to the
purchase and sale of futures contracts and options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate
swaps, caps, floors and collars, and options on securities, indices and futures
contracts sold by the Fund are generally subject to segregation and coverage
requirements established by either the CFTC or the Commission, with the result
that, if the Fund does not hold the
61
<PAGE> 63
instrument underlying the futures contract or option, the Fund will be required
to segregate on an ongoing basis with its custodian, cash, U.S. Government
securities, or other liquid high grade debt obligations in an amount at least
equal to the Fund's obligations with respect to such instruments. Such amounts
will fluctuate as the market value of the obligations increases or decreases.
The segregation requirement can result in the Fund maintaining positions it
would otherwise liquidate and consequently segregating assets with respect
thereto at a time when it might be disadvantageous to do so.
Strategic Transactions present certain risks. In particular, the
variable degree of correlation between price movements of hedging instruments
and price movements in the position being hedged creates the possibility that
losses on the hedge may be greater than gains in the value of the Fund's
positions. In addition, certain hedging instruments and markets may not be
liquid in all circumstances. As a result, in volatile markets, the Fund may not
be able to close out a transaction in certain of these instruments without
incurring losses substantially greater than the initial deposit. Although the
contemplated use of these instruments should tend to minimize the risk of loss
due to a decline in the value of the hedged position, at the same time they tend
to limit any potential gain which might result from an increase in the value of
such position. The ability of the Fund to hedge successfully will depend on The
Advisers' ability to predict pertinent market movements, which cannot be
assured. Finally, the daily variation margin deposit requirements in futures
contracts that the Fund has sold create an ongoing greater potential financial
risk than do options transactions, where the exposure is limited to the cost of
the initial premium and transaction costs paid by the Fund. Losses due to
Strategic Transactions will reduce net asset value.
The Fund's investments in Strategic Transactions may be limited or
affected by certain provisions of the Code.
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<PAGE> 64
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
UFF & PHELPS UTILITIES
BOND FUND, INC.
[LOGO]
PRUDENTIAL SECURITIES
63
<PAGE> 65
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
Part A--Report of Independent Accountants.
Statement of Assets and Liabilities.
*To be furnished by amendment.
Part B--None.
(2) EXHIBITS
A list of exhibits filed with this registration statement is contained on the
Exhibit Index immediately preceding the exhibits and is incorporated herein by
reference.
ITEM 25. MARKETING ARRANGEMENTS
Reference is made to the Form of Underwriting Agreement for Registrant's shares
of beneficial interest to be filed by amendment to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration Fee................................................. $
New York Stock Exchange listing fee..............................
Printing (other than certificates)...............................
Engraving and printing certificates..............................
Fees and expenses of qualification under state securities laws
(excluding fees of counsel)...................................
Accounting fees and expenses.....................................
Legal fees and expenses..........................................
NASD fee.........................................................
Miscellaneous....................................................
---------------
Total............................................................ $
===============
</TABLE>
- -------------------
* To be furnished by amendment.
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Prior to March [ ], 1999 the Fund had no existence. As of the effective date,
the Fund will have entered into a Subscription Agreement for [ ] shares with [ ]
and an Underwriting Agreement with respect to [ ] shares with the underwriters.
*Organization Table to be furnished by amendment.
64
<PAGE> 66
ITEM 28. NUMBER OF HOLDERS OF SHARES
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
- -------------- --------------
Common Shares....................................... 0
ITEM 29. INDEMNIFICATION
*To be furnished by amendment.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Not Applicable
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Fund's accounts, books and other documents are currently located at the
offices of the Registrant, [Address] and at the offices of [ ], the
Registrant's Custodian and [ ], the Registrant's Transfer Agent and
Dividend Disbursing Agent.
ITEM 32. MANAGEMENT SERVICES
Not Applicable
ITEM 33. UNDERTAKINGS
The Registrant hereby undertakes to suspend offering of its units until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
The Registrant hereby undertakes that (i) for the purpose of determining any
liability under the Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 497(h)
under the Act shall be deemed to be part of this registration statement as of
the time it was declared effective; (ii) for the purpose of determining any
liability under the Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering thereof.
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<PAGE> 67
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Hartford, and State of Connecticut, on March 9, 1999.
PHOENIX DUFF & PHELPS UTILITIES BOND, INC.
/s/ Philip R. McLoughlin
------------------------------------------------
Philip R. McLoughlin
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities on March 9,
1999.
Signature Capacity Date
--------- -------- ----
/s/ Philip R. McLoughlin Chairman, Chief Executive March 9, 1999
- ----------------------------
Philip R. McLoughlin Officer and President
/s/ James W. Rosenberger Principal Financial Officer March 9, 1999
- ----------------------------
James W. Rosenberger
/s/ James W. Rosenberger Comptroller March 9, 1999
- ----------------------------
James W. Rosenberger
/s/ Philip R. McLoughlin Director March 9, 1999
- ----------------------------
Philip R. McLoughlin
/s/ Donald Lee Rome Director March 9, 1999
- ----------------------------
Donald Lee Rome
/s/ Allen Weintraub Director March 9, 1999
- ----------------------------
Allen Weintraub
/s/ Everett L. Morris Director March 9, 1999
- ----------------------------
Everett L. Morris
66
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
(a) Articles of Incorporation
(b) By-Laws*
(c) Inapplicable
(d) Form of Specimen Certificate*
(e) Form of Dividend Reinvestment Plan*
(f) Inapplicable
(g) Form of Investment Management Agreement*
(h) Form of Underwriting Agreement*
(i) Inapplicable
(j) Form of Custodian Agreement*
(k) Form of Administration Agreement*
(l)(i) Opinion and Consent of Counsel to the Fund*
(l)(ii) Tax Opinion of Counsel to the Fund (Consent contained in Exhibits (l)(i))*
(m) Inapplicable
(n) Consent of Independent Public Accountants*
(o) Inapplicable
(p) Initial Subscription Agreement*
(q) Inapplicable
(r) Financial Data Schedule*
</TABLE>
- ---------------
*To be Filed by Amendment
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EXHIBIT 1
PHOENIX DUFF & PHELPS UTILITIES BOND FUND, INC.
ARTICLES OF INCORPORATION
ARTICLE I.
INCORPORATOR AND NAME
The undersigned, William A. Agee, whose address is c/o Ballard Spahr
Andrews & Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland 21202,
being at least 18 years of age, does hereby form a corporation under the general
laws of the State of Maryland.
The name of the corporation (which is hereinafter called the
"Corporation") is:
Phoenix Duff & Phelps Utilities Bond Fund, Inc.
ARTICLE II.
PURPOSES
The purposes for which the Corporation is formed are to act as
a closed-end management investment company under the Investment Company Act of
1940 and to engage in any or all lawful business for which corporations may be
organized under the Maryland General Corporation Law.
ARTICLE III.
POWERS
The Corporation is expressly empowered as follows:
(1) To hold, invest and reinvest its assets in securities
and other investments, including assets in cash.
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(2) To issue and sell shares of its capital stock in such
amounts and on such terms and conditions and for such purposes and for
such amount or kind of consideration as may now or hereafter be
permitted by law.
(3) To purchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of
the stockholders of the Corporation) shares of its capital stock, in
any manner and to the extent now or hereafter permitted by law and by
the charter of the Corporation.
(4) To do any and all such further acts or things and to
exercise any and all such further powers or rights as may be necessary,
incidental, relative, conducive, appropriate or desirable for the
accomplishment, carrying out or attainment of the purposes stated in
this Article III.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
general laws of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
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ARTICLE IV.
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is c/o The Corporation Trust Incorporated, 300 East Lombard Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
the State of Maryland is The Corporation Trust Incorporated, whose post office
address is 300 East Lombard Street, Baltimore, Maryland 21202. The resident
agent is a Maryland corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number and Classification of Directors. The business and
affairs of the Corporation shall be managed under the direction of the Board of
Directors. The number of directors of the Corporation initially shall be four,
which number may be increased or decreased pursuant to the Bylaws, but shall
never be less than the minimum number required by the Maryland General
Corporation Law. The names of the directors who shall serve until their
successors are duly elected and qualify and the classes into which they are
assigned in accordance with the following paragraph are:
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Name Class
---- -----
Philip R. McLoughlin 1
Allen Weintraub 2
Donald Lee Rome 3
Everett L. Morris 1
These directors may increase the number of directors and may fill any vacancy,
whether resulting from an increase in the number of directors or otherwise, on
the Board of Directors occurring before the first annual meeting of stockholders
in the manner provided in the Bylaws.
The directors (other than any director elected solely by holders of one
or more classes or series of Preferred Stock) are classified, with respect to
the terms for which they severally hold office, into three classes, Class 1 to
hold office initially for a term expiring at the annual meeting of stockholders
in 2000, Class 2 to hold office initially for a term expiring at the annual
meeting of stockholders in 2001 and Class 3 to hold office initially for a term
expiring at the annual meeting of stockholders in 2002, with the members of each
class to hold office until their successors are duly elected and qualify. At
each annual meeting of the stockholders, the successors to the class of
directors whose term expires at such meeting shall be elected to hold office for
a term expiring at the annual meeting of stockholders held in the third year
following the year of their election and until their successors are duly elected
and qualify.
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Section 5.2 Authorization by Board of Stock Issuance. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in the charter or the Bylaws.
Section 5.3 Preemptive Rights. Except as may be provided by the Board
of Directors in setting the terms of classified or reclassified shares of stock
pursuant to Section 6.4 or as may otherwise be provided by contract, no holder
of shares of stock of the Corporation shall, as such holder, have any preemptive
right to purchase or subscribe for any additional shares of stock of the
Corporation or any other security of the Corporation which it may issue or sell.
Section 5.4 Indemnification. The Corporation shall have the power, to
the maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former director or officer of the Corporation or (b) any individual
who, while a director of the Corporation and at the request of the Corporation,
serves or has served as a director,
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officer, partner or trustee of another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or any other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his service in such
capacity. The Corporation shall have the power, with the approval of the Board
of Directors, to provide such indemnification and advancement of expenses to a
person who served a predecessor of the Corporation in any of the capacities
described in (a) or (b) above and to any employee or agent of the Corporation or
a predecessor of the Corporation.
Section 5.5 Determinations by Board. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; the amount, purpose, time of creation, increase or decrease,
alteration
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or cancellation of any reserves or charges and the propriety thereof (whether or
not any obligation or liability for which such reserves or charges shall have
been created shall have been paid or discharged); the fair value, or any sale,
bid or asked price to be applied in determining the fair value, of any asset
owned or held by the Corporation; any matter relating to the acquisition,
holding and disposition of any assets by the Corporation; or any other matter
relating to the business and affairs of the Corporation. Any reasonable
determination made in good faith by the Board of Directors as to whether any
transaction constitutes a purchase of securities on "margin," a sale of
securities "short," or an underwriting of the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of, any
securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of its capital stock, past, present and future, and
shares of the stock of the Corporation evidenced by the purchase of shares of
stock or acceptance of stock certificates, that any and all such determinations
shall be binding as aforesaid. No provision of the charter of the Corporation
shall be effective to (i) require a waiver of compliance with any provision of
the Securities Act of 1933, as amended, or the Investment Company Act of 1940,
as amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission thereunder or (ii) protect or purport to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to
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which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
Section 5.6 Removal of Directors. Subject to the rights of holders of
one or more classes or series of Preferred Stock to elect or remove one or more
directors, any director, or the entire Board of Directors, may be removed from
office at any time, but only for cause and then only by the affirmative vote of
at least two-thirds of the votes entitled to be cast generally in the election
of directors. For the purpose of this paragraph, "cause" shall mean, with
respect to any particular director, (a) conviction of a felony or a final
judgment of a court of competent jurisdiction holding that such director caused
demonstrable, material harm to the Corporation through bad faith or active and
deliberate dishonesty or (b) a determination by two-thirds of all other
directors that cause exists for removal of the director.
ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The Corporation has authority to issue
110,000,000 shares of stock, consisting of 100,000,000 shares of Common Stock,
$.001 par value per share ("Common Stock"), and 10,000,000 shares of Preferred
Stock, $.001 par value per share ("Preferred Stock"). The aggregate par value of
all authorized shares of stock having par value is $110,000.00. If shares of one
class of stock are classified or reclassified into
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shares of another class of stock pursuant to Sections 6.2, 6.3 or 6.4 of this
Article VI, the number of authorized shares of the former class shall be
automatically decreased and the number of shares of the latter class shall be
automatically increased, in each case by the number of shares so classified or
reclassified, so that the aggregate number of shares of stock of all classes
that the Corporation has authority to issue shall not be more than the total
number of shares of stock set forth in the first sentence of this paragraph. To
the extent permitted by Maryland law, the Board of Directors, without any action
by the stockholders of the Corporation, may amend the charter from time to time
to increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the Corporation has authority to
issue.
Section 6.2 Common Stock. Each share of Common Stock shall entitle the
holder thereof to one vote. The Board of Directors may reclassify any unissued
shares of Common Stock from time to time in one or more classes or series of
stock.
Section 6.3 Preferred Stock. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more classes or series of stock.
Section 6.4 Classified or Reclassified Shares. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and
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series of stock of the Corporation; (b) specify the number of shares to be
included in the class or series; (c) set or change, subject to the provisions of
Section 5.3 and subject to the express terms of any class or series of stock of
the Corporation outstanding at the time, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption for each
class or series; and (d) cause the Corporation to file articles supplementary
with the State Department of Assessments and Taxation of Maryland ("SDAT"). Any
of the terms of any class or series of stock set or changed pursuant to clause
(c) of this Section 6.4 may be made dependent upon facts or events ascertainable
outside the charter (including determinations by the Board of Directors or other
facts or events within the control of the Corporation) and may vary among
holders thereof, provided that the manner in which such facts, events or
variations shall operate upon the terms of such class or series of stock is
clearly and expressly set forth in the articles supplementary for other charter
documents filed with the SDAT.
Section 6.5 Charter and Bylaws. All persons who shall acquire stock in
the Corporation shall acquire the same subject to the provisions of the charter
and the Bylaws.
ARTICLE VII
DURATION
The duration of this Corporation shall be perpetual.
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ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment to its charter, now or hereafter authorized by law, including any
amendment altering the terms or contract rights, as expressly set forth in the
charter, of any shares of outstanding stock. All rights and powers conferred by
the charter on stockholders, directors and officers are granted subject to this
reservation.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a corporation,
no director or officer of the Corporation shall be liable to the Corporation or
its stockholders for money damages. Neither the amendment nor repeal of this
Article IX, nor the adoption or amendment of any other provision of the charter
or Bylaws inconsistent with this Article IX, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption. No
provision of this Article shall be effective to protect or purport to protect
any director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence
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or reckless disregard of the duties involved in the conduct of his office.
ARTICLE X
CERTAIN VOTING REQUIREMENTS
Subject to the rights of holders of any outstanding shares of Preferred
Stock, the affirmative vote or consent of the holders of two-thirds of the
outstanding shares of Common Stock of the Corporation is required to authorize
any of the following actions:
(A) change in the classification of the Corporation from a
diversified to a non-diversified management investment company as
defined under the Investment Company Act of 1940;
(B) change in the nature of the business of the Corporation so
that it would cease to be an investment company registered under the
Investment Company Act of 1940; or
(C) amendment to the charter of the Corporation which makes the
Common Stock a redeemable security (as such term is defined in the
Investment Company Act of 1940) or which reduces the two-thirds vote
required to authorize the actions in (A) through (B) above or this
subparagraph (C).
ARTICLE XI
NON-WAIVER
No provision of the charter of the Corporation shall be effective to
require a waiver of compliance with any provision of
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the Securities Act of 1933, as amended, or the Investment Company Act of 1940,
as amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission thereunder.
ARTICLE XII
MARYLAND BUSINESS COMBINATION STATUTE
Pursuant to Section 3-603(e)(l)(iv), the Corporation elects to be
subject to the provisions of Title 3, Subtitle 6 of the Maryland General
Corporation Law.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act this 5th day of March, 1999.
/S/ William A. Agee
-----------------------------------
William A. Agee
13
