<PAGE>
PROSPECTUS
BEA INCOME FUND, INC.
8,128,456 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SUCH SHARES
-----------
BEA Income Fund, Inc. (the "Fund") is issuing to its shareholders of record
("Record Date Shareholders") as of the close of business on September 27, 1996
(the "Record Date") non-transferable rights ("Rights") entitling the holders
thereof to subscribe for an aggregate of 8,128,456 shares ("Shares") of the
Fund's common stock ( the "Offer"). Each Record Date Shareholder is being issued
one Right for each whole share of the Fund's common stock ("Common Stock") owned
on the Record Date. The Rights entitle the Record Date Shareholder to acquire at
the Subscription Price (as hereinafter defined) one Share for every three Rights
held (one for three). Shareholders who fully exercise their Rights will be
entitled to subscribe for additional shares of Common Stock pursuant to an
Over-Subscription Privilege, as described herein. The Fund may increase at its
discretion the number of shares of Common Stock subject to subscription by up to
25% of the Shares, or 2,032,114 Shares, for an aggregate total of 10,160,570
Shares. Fractional Shares will not be issued upon the exercise of Rights.
Accordingly, Shares may be purchased only pursuant to the exercise of Rights in
integral multiples of three. The Rights are non-transferable and will not be
admitted for trading on the New York Stock Exchange or any other exchange. See
"The Offer." THE SUBSCRIPTION PRICE PER SHARE (THE "SUBSCRIPTION PRICE") WILL BE
95% OF THE LOWER OF (i) THE AVERAGE OF THE LAST REPORTED SALES PRICE OF A SHARE
OF THE FUND'S COMMON STOCK ON THE NEW YORK STOCK EXCHANGE ON THE DATE OF THE
EXPIRATION OF THE OFFER (THE "PRICING DATE") AND ON THE FOUR PRECEDING BUSINESS
DAYS THEREOF AND (ii) THE NET ASSET VALUE PER SHARE AS OF THE CLOSE OF BUSINESS
ON THE PRICING DATE.
The Fund announced the Offer after the close of trading on the New York
Stock Exchange on August 22, 1996. Shares of the Common Stock trade on that
exchange under the symbol "FBF." The last reported net asset value per share of
Common Stock at the close of business on August 22, 1996 and September 24, 1996
was $8.50 and $8.54, respectively, and the last reported sales price of a share
of the Fund's Common Stock on that exchange on those dates was $8.25 and $8.37,
respectively.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 22, 1996
(THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED HEREIN.
Upon the completion of the Offer, Record Date Shareholders who do not fully
exercise their Rights will own a smaller proportional interest in the Fund than
would otherwise be the case if the Offer had not been made. In addition, because
the Subscription Price per Share will be less than the current net asset value
per share, the Offer will result in dilution of net asset value per share for
all shareholders. If the Subscription Price per Share were to be substantially
less than the current net asset value per share, such dilution would be
substantial. Shareholders will have no right to rescind their subscriptions
after receipt of their payment for Shares by the Subscription Agent. See "Risk
Factors and Special Considerations--Certain Effects of the Offer."
If you have questions or need further information about the Offer, please
call Shareholder Communications Corporation, the Fund's information agent for
the Offer (the "Information Agent"), at (800) 733-8481, extension 349.
(CONTINUED ON THE FOLLOWING PAGE)
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
SUBSCRIPTION ESTIMATED PROCEEDS TO
PRICE (1) SALES LOAD (2) THE FUND (3)(4)
<S> <C> <C> <C>
Per Share................................. $7.96 $0.30 $7.66
Total Maximum (5)......................... $64,702,510 $2,438,537 $62,263,973
</TABLE>
(FOOTNOTES ON THE FOLLOWING PAGE)
SMITH BARNEY INC.
The date of this Prospectus is September 27, 1996
<PAGE>
(CONTINUED FROM THE PREVIOUS PAGE)
The Fund is a closed-end, diversified management investment company that
seeks current income consistent with the preservation of capital by investing
primarily in fixed-income securities. Under normal circumstances, the Fund will
invest at least 75% of its total assets in fixed-income securities, such as
bonds, debentures and preferred stocks. All or substantially all of the Fund's
assets may be invested in securities rated below investment grade and in unrated
securities of comparable quality. Securities of this type are subject to greater
risk of loss of principal or nonpayment of interest than higher-rated securities
and are predominantly speculative. There can be no assurance that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
BEA Associates serves as the Fund's investment adviser. The address of the Fund
is One Citicorp Center, 57th Floor, 153 East 53rd Street, New York, New York
10022, and the Fund's telephone number is (212) 832-2626.
Investment in lower-rated securities involves certain risks and special
considerations not typically associated with investment in higher-rated
securities and should be considered speculative. See "Risk Factors and Special
Considerations."
This Prospectus sets forth information about the Fund that a prospective
investor ought to know before investing and should be retained for future
reference. A Statement of Additional Information dated September 27, 1996 (the
"SAI") containing additional information about the Fund has been filed with the
Securities and Exchange Commission (the "Commission") and is incorporated by
reference in its entirety into this Prospectus. A copy of the SAI, the table of
contents of which appears on page 31 of this Prospectus, may be obtained without
charge by contacting the Information Agent at (800) 733-8481, extension 349.
--------------
(FOOTNOTES FROM THE PREVIOUS PAGE)
(1) Estimated on the basis of 95% of the market price per share on September 24,
1996. See "The Offer-- Subscription Price."
(2) In connection with the Offer, Smith Barney Inc. (the "Dealer Manager") and
other broker-dealers soliciting the exercise of Rights will receive
soliciting fees equal to 2.50% of the Subscription Price per Share for each
Share issued upon exercise of the Rights and the Over-Subscription
Privilege. The Fund has also agreed to pay the Dealer Manager a fee for
financial advisory services and marketing assistance in connection with the
Offer equal to 1.25% of the Subscription Price per Share for Shares issued
upon exercise of the Rights and the Over-Subscription Privilege and has
agreed to indemnify the Dealer Manager against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
(3) Before deduction of offering expenses incurred by the Fund, estimated at
$550,000, including an aggregate of up to $100,000 to be paid to the Dealer
Manager as partial reimbursement for its expenses.
(4) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest bearing account (which interest will be
paid to the Fund regardless of whether shares are issued or not by the Fund)
pending proration and distribution of Shares.
(5) Assumes all Rights are exercised at the Estimated Subscription Price.
Pursuant to the Over-Subscription Privilege, the Fund may at its discretion
increase the number of Shares subject to subscription by up to 25% of the
Shares offered hereby. If the Fund increases the number of Shares subject to
subscription by 25%, the aggregate maximum Estimated Subscription Price,
Estimated Sales Load and Estimated Proceeds to the Fund will be $80,878,137,
$3,048,171 and $77,829,966, respectively.
--------------
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS AND THE STATEMENT OF
ADDITIONAL INFORMATION ("SAI").
PURPOSE OF THE OFFER
The Board of Directors of BEA Income Fund, Inc. (the "Fund") has determined
that it would be in the best interest of the Fund and its shareholders to
increase the assets of the Fund available for investment, thereby allowing
better positioning of the Fund to more fully take advantage of available
investment opportunities consistent with the Fund's investment objective of
realizing current income. In reaching its decision, the Board of Directors was
advised by BEA Associates that the availability of new funds would provide the
Fund with additional investment flexibility as well as increase the Fund's
ability to take advantage of what BEA Associates believes to be timely
opportunities in the high yield bond market as a result of interest rate
stability and a strong economy.
The Board of Directors also considered that a well-subscribed rights
offering may reduce the Fund's expense ratio, which may be of long-term benefit
to shareholders. In addition, the Board of Directors considered that such a
rights offering could result in an improvement in the liquidity of the trading
market for shares of the Fund's common stock ("Common Stock") on the New York
Stock Exchange, where the shares are listed and traded. The Board of Directors
also considered the proposed terms of the Offer (as defined below), including
the expenses of the Offer, and its dilutive effect, including the effect on non-
exercising shareholders of the Fund. After careful consideration, the Fund's
Board of Directors unanimously voted to approve the Offer.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the Investment Company Act of 1940, as amended (the "1940
Act").
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record ("Record Date
Shareholders") as of the close of business on September 27, 1996 (the "Record
Date") non-transferable rights ("Rights") to subscribe for an aggregate of
8,128,456 shares ("Shares") of the Fund's Common Stock, par value $0.001 per
share (the "Offer"). Each Record Date Shareholder is being issued one Right for
each whole share of Common Stock owned on the Record Date. The Rights entitle
the Record Date Shareholder to acquire at the Subscription Price (as hereinafter
defined) one Share for every three Rights held (one for three). Rights may be
exercised at any time during the offering period (the "Subscription Period"),
which commences on September 27, 1996 and ends at 5:00 p.m., New York City time,
on October 22, 1996 (the "Expiration Date"), unless extended by the Fund until
5:00 p.m., New York City time, on a date no later than October 25, 1996. The
right to acquire one Share for every three Rights held during the Subscription
Period at the Subscription Price is hereinafter referred to as the "Primary
Subscription."
OVER-SUBSCRIPTION PRIVILEGE
Any Record Date Shareholder who fully exercises all Rights issued to such
shareholder is entitled to subscribe for Shares which were not otherwise
subscribed for by others on Primary Subscription (the "Over-Subscription
Privilege"). If sufficient Shares are not available to honor all requests for
over-subscriptions, the Fund may, at its discretion, issue shares of Common
Stock up to an additional 25% of the Shares available pursuant to the Offer (up
to 2,032,114 Shares) in order to satisfy such over-subscription requests. Shares
requested pursuant to the Over-Subscription Privilege may be subject to
allotment, which is more fully discussed under "The Offer--Over-Subscription
Privilege."
SUBSCRIPTION PRICE
The subscription price per Share (the "Subscription Price") will be 95% of
the lower of (i) the average of the last reported sales price of a share of the
Fund's Common Stock on the New York Stock Exchange on the Expiration Date (the
"Pricing Date") and on the four preceding business days thereof and (ii) the net
asset value per share as of the close of business on the Pricing Date. See "The
Offer--Subscription Price."
3
<PAGE>
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the New York Stock Exchange
or any other exchange. However, the Shares to be issued pursuant to the Rights
will be admitted for trading on the New York Stock Exchange.
METHOD OF EXERCISE OF RIGHTS
Rights will be evidenced by subscription certificates ("Subscription
Certificates") that will be mailed to Record Date Shareholders, or if shares are
held by Cede & Co. ("Cede"), the nominee for The Depository Trust Company, or
any other depository or nominee, to Cede or such other depository or nominee.
Rights may be exercised by completing and signing a Subscription Certificate and
delivering it, together with payment, either by means of a notice of guaranteed
delivery or a check, to The Chase Manhattan Bank (the "Subscription Agent").
Shareholders who exercise their Rights will have no right to rescind their
subscription after the Subscription Agent has received payment. See "The
Offer--Subscription Agent" and "The Offer--Method of Exercise of Rights."
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia) ("Foreign Record Date Shareholders"). The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for such
Foreign Record Date Shareholder's accounts until instructions are received to
exercise the Rights. If no instructions are received prior to the Expiration
Date, such Rights will expire.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
- --------------------------------------------------------------- -------------------------------------------------
<S> <C>
Record Date.................................................... September 27, 1996
Subscription Period............................................ September 27, 1996 to October 22, 1996*
Payment for Shares or Notice of Guaranteed Delivery Due........ October 22, 1996*
Expiration and Pricing Date.................................... October 22, 1996*
Payment for Guarantees of Delivery Due......................... October 25, 1996*
Confirmation to Participants................................... November 1, 1996*
Final Payment for Shares....................................... November 15, 1996*
</TABLE>
- ---------
* Unless the Offer is extended to a date not later than October 25, 1996.
INFORMATION AGENT
The Information Agent for the Offer (the "Information Agent") is:
[LOGO]
Toll Free: (800) 733-8481, Extension 349.
Shareholders calling from outside the United States may call collect (212)
805-7000.
DISTRIBUTION ARRANGEMENTS
Smith Barney Inc. (the "Dealer Manager") will act as the dealer manager for
the Offer. The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory services and marketing assistance equal to 1.25% of the Subscription
Price per Share for Shares issued upon exercise of the Rights and the Over-
Subscription Privilege, and to pay broker-dealers, including the Dealer Manager,
fees for their soliciting efforts equal to 2.50% of the Subscription Price per
Share for each Share issued upon exercise of the Rights and the
Over-Subscription Privilege. See "Distribution Arrangements."
4
<PAGE>
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a closed-end, diversified
management investment company since March 23, 1987. The Fund's investment
objective is current income consistent with the preservation capital. The Fund
seeks to achieve this objective primarily through investment in fixed-income
securities, such as bonds, debentures and preferred stocks. Under normal
circumstances, at least 75% of the Fund's total assets will be invested in
fixed-income securities. The Fund's investments in fixed-income securities are
not subject to any rating quality limitation and, accordingly, a substantial
portion or all of the Fund's portfolio may be invested in securities that are
rated below investment grade by a nationally recognized rating service or
unrated and of comparable quality in the opinion of BEA Associates. Lower-rated
securities generally provide yields superior to those of more highly rated
securities, but involve greater risks and are speculative in nature ("high yield
securities"). See "Risk Factors and Special Considerations-- Lower-Rated
Securities." The Fund may also invest up to 25% of its assets in money market
instruments such as certificates of deposit, commercial paper, bankers'
acceptances and repurchase agreements. There can be no assurance that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
BEA Associates anticipates that investment of the net proceeds of the Offer, in
accordance with the Fund's investment objective and policies, will take
approximately up to one month from their receipt by the Fund, depending on
market conditions and the availability of appropriate securities. See "Use of
Proceeds." The Common Stock is listed and traded on the New York Stock Exchange
under the symbol "FBF." As of June 30, 1996, the net assets of the Fund were
approximately $208 million.
INVESTMENT ADVISER AND ADMINISTRATORS
BEA Associates, a U.S. investment counseling firm ("BEA Associates"), serves
as the Fund's investment adviser. BEA Associates emphasizes a global investment
strategy and, as of June 30, 1996, acted as adviser for assets in excess of
$28.7 billion, including as of that date approximately $10.9 billion of assets
invested in fixed-income securities and money market instruments.
Chase Global Funds Services Company serves as the Fund's administrator (the
"Administrator"). See "Management of the Fund."
ADVISORY, ADMINISTRATIVE AND CONSULTING FEES
The aggregate annual fees payable by the Fund for investment advice equal
0.50% of the Fund's average weekly net assets. See "Management of the Fund."
For administrative services, the Fund pays the Administrator a fee at an
annual rate of 0.15% of the first $100 million of the Fund's average weekly net
assets, 0.10% of the Fund's next $300 million of average weekly net assets and
0.05% of the Fund's average weekly net assets in excess of $400 million.
Since the Fund's investment adviser's and administrator's fees are based on
the net assets of the Fund, the Fund's investment adviser and administrator will
benefit from an increase in the Fund's assets resulting from the Offer. In
addition, one director who is an "interested person" (as such term is defined
under the 1940 Act) of the Fund because of his position as a director and
officer of BEA Associates could benefit indirectly from the Offer because of
such director's affiliation. See "The Offer--Certain Impact on Fees."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered, among
others, in connection with an exercise of Rights and an additional investment in
the Fund.
CERTAIN EFFECTS OF THE OFFER. Upon the completion of the Offer,
shareholders who do not fully exercise their Rights will own a smaller
proportional interest in the Fund than would be the case if the Offer had not
been made. In addition, an immediate dilution of the net asset value per share
will be experienced by all shareholders as a result of the Offer because the
Subscription Price will be less than the then current net asset value per share,
the Fund will bear the expenses of the Offer and the number of shares
outstanding after the Offer will have increased proportionately more than the
increase in the size of the Fund's net assets. Although it is not possible to
state precisely the amount of such a decrease in net asset value, because it is
not
5
<PAGE>
known at this time how many Shares will be subscribed for or what the
Subscription Price will be, such dilution might be substantial. The dilution in
net asset value will disproportionately affect shareholders who do not exercise
their rights. See "Risk Factors and Special Considerations."
RISKS ASSOCIATED WITH INVESTMENTS IN FIXED-INCOME SECURITIES. Bond prices
generally vary inversely in relation to changes in the level of interest rates,
as well as in response to other market factors and changes in the
creditworthiness of the issuers of the securities. The value of a portfolio of
fixed-income securities will generally be expected to rise when interest rates
decline and to decline when interest rates rise. In addition, the market value
of certain securities in which the Fund may invest, such as mortgage-backed
securities, zero coupon securities, securities that are purchased at a discount
to their par value and stripped income securities tend to be more volatile in
response to changes in interest rates than that of traditional fixed-income
securities. Longer-term securities in which the Fund may invest generally offer
a higher current yield than is offered by shorter-term securities, but also
generally involve greater volatility of price and risk of capital than
shorter-term securities. See "Risk Factors and Special Considerations."
LOWER-RATED SECURITIES. At any time, all or substantially all of the Fund's
portfolio may be invested in medium-grade or below investment grade fixed-income
securities as determined by a nationally recognized rating service and in
unrated securities of comparable quality. Investment in lower-rated securities
typically involves risks not associated with higher-rated securities, including,
among others, overall greater risk that timely and ultimate payment of interest
and principal will not occur, potentially greater sensitivity to general
economic conditions, greater market price volatility and potential illiquidity.
In addition, ratings are relative and subjective and not absolute standards of
quality. See "Risk Factors and Special Considerations."
NON PUBLICLY-TRADED SECURITIES; RULE 144A SECURITIES. The Fund may purchase
securities that are not registered under the Securities Act but that can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
Securities Act ("Rule 144A Securities"). Non publicly-traded securities,
including Rule 144A Securities, may involve a high degree of business and
financial risk and may result in substantial losses. These securities may be
less liquid than publicly-traded securities, and the Fund may take longer to
liquidate these positions than would be the case for publicly-traded securities.
Further, companies whose securities are not publicly-traded may not be subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly-traded. A Fund's investment in
illiquid securities is subject to the risk that, should the Fund desire to sell
any of these securities when a ready buyer is not available at a price that is
deemed to be representative of their value, the value of the Fund's net assets
could be adversely affected. See "Risk Factors and Special Considerations."
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. The Fund may invest a
substantial portion of its total assets in mortgage-backed securities. The value
of mortgaged-backed securities is subject to change due to shifts in the
market's perception of issuers, and regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Foreclosures and prepayments,
which occur when unscheduled or early payments are made on the underlying
mortgages, may shorten the effective maturities on these securities. The Fund's
yield may be affected by reinvestment of prepayments at higher or lower rates
than the original investment. Prepayments tend to increase due to refinancing of
mortgages as interest rates decline. In addition, like other debt securities,
the values of mortgage-backed securities will generally fluctuate in response to
changes in interest rates. See "Risk Factors and Special Considerations."
SHORT SALES. The Fund's investment policies may include short selling.
Short sales can, in certain circumstances, substantially increase the impact of
adverse price movements on the Fund's portfolio. The Fund, however, is
restricted from engaging in uncovered short selling. See "Investment Objective
and Policies--Short Sales" below and "Investment Restrictions" in the SAI.
RISKS OF TRANSACTIONS IN INTEREST RATE FUTURES CONTRACTS AND OPTIONS
THEREON. The Fund may, for bona fide hedging purposes, purchase and sell
interest rate futures contracts and options thereon that are traded on U.S.
futures exchanges. There are several risks in connection with the use of
interest rate futures contracts as a hedge for transactions and anticipated
transactions, including the risk of unlimited loss and significant distortions
between the prices of futures contracts and those of the securities being
hedged. Although the Fund intends to purchase or sell interest rate futures
contracts only on exchanges or boards of
6
<PAGE>
trade where there appears to be an active market for such contracts, there is no
assurance that a liquid market on an exchange or board of trade will exist for
any particular contract or at any particular time. The Fund is not required to
hedge interest rate risk. In addition, there are special risks relating to
options on interest rate futures contracts. The ability to establish and close
out positions on such options is subject to the maintenance of a liquid
secondary market. The Fund will only purchase or write options on futures
contracts which, in the opinion of BEA Associates, are traded in sufficiently
developed markets such that the risks of illiquidity in connection with such
options are not greater than the risks of illiquidity in connection with
transactions in the underlying interest rate futures contracts. See "Risk
Factors and Special Considerations."
RISKS ASSOCIATED WITH REPURCHASE AGREEMENTS. The Fund may invest in
repurchase agreements collateralized by U.S. Government securities, certificates
of deposit and certain bankers' acceptances for the purpose of realizing
additional income. The use of repurchase agreements involves certain risks not
associated with direct investment in securities. For example, if the seller of
securities under an agreement defaults on its obligation to repurchase the
underlying securities at the agreed upon repurchase price at a time when the
value of these securities has declined, the Fund may incur a loss upon their
disposition. If such a defaulting seller were to become insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws,
disposition of the underlying securities could involve certain costs or delays
pending court action. Also, it is not certain whether the Fund would be
entitled, as against a claim of the seller or its receiver, trustee in
bankruptcy or creditors, to retain the underlying securities. While BEA
Associates acknowledges these risks, the Fund expects that they can be
controlled by limiting the institutions with which the Fund will enter into
repurchase agreements to the Federal Reserve Bank, Reporting Government
Securities Dealers and member banks of the Federal Reserve System and by
carefully monitoring the creditworthiness of such institutions, other than the
Federal Reserve Bank, by BEA Associates. See "Risk Factors and Special
Considerations."
MARKET VALUE AND NET ASSET VALUE. Shares of closed-end investment companies
frequently trade at a discount to net asset value. This characteristic of shares
of a closed-end fund is a risk separate and distinct from the risk that the
Fund's net asset value may decrease. The Fund cannot predict whether its shares
will trade at, below or above net asset value. In addition, changes in market
yields will affect the Fund's net asset value as prices of fixed-income
securities generally increase when interest rates decline and decrease when
interest rates rise. Since the commencement of the Fund's operations, the Fund's
shares have generally traded in the market at a discount to net asset value. See
"Net Asset Value" and "Common Stock."
7
<PAGE>
FEE TABLE
The following table sets forth certain fees and expenses of the Fund.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of the Subscription Price per Share)(1)............. 3.75%
ANNUAL EXPENSES (as a percentage of net assets)
Management Fees................................................................. .50%
Other Expenses(2)............................................................... .31%
TOTAL ANNUAL EXPENSES(2)............................................................ .81%
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- -------------------------------------------------- ----- ----- ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming a 5% annual
return(3)..................................... $45 $62 $81 $134
</TABLE>
- ---------
(1) The Dealer Manager and the other broker-dealers soliciting the exercise of
Rights will receive soliciting fees equal to 2.50% of the Subscription Price
per Share for each Share issued upon exercise of the Rights and the
Over-Subscription Privilege. The Fund has also agreed to pay the Dealer
Manager a fee for financial advisory and marketing services in connection
with the Offer equal to 1.25% of the Subscription Price per Share for Shares
issued upon exercise of the Rights and the Over-Subscription Privilege.
These fees will be borne by the Fund and indirectly by all of the Fund's
shareholders, including those shareholders who do not exercise their Rights.
(2) Based upon estimated amounts for the current fiscal year and on the net
assets of the Fund after giving effect to the anticipated net proceeds of
the Offer including proceeds from the issuance of up to 25% of the Shares
pursuant to the Over-Subscription Privilege. Does not include expenses of
the Fund incurred in connection with the Offer, estimated at $550,000. Total
annual expenses for the fiscal year ended December 31, 1995 were .92% as a
percentage of average net assets.
(3) The example reflects the Sales Load and other expenses of the Fund incurred
in connection with the Offer and assumes that all of the Rights are
exercised.
THE PURPOSE OF THE FOREGOING TABLE AND EXAMPLE IS TO ASSIST RIGHTS HOLDERS
IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND
BEARS, DIRECTLY OR INDIRECTLY, BUT SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR RATE OF RETURN. THE ACTUAL EXPENSES OF THE FUND MAY
BE GREATER OR LESS THAN THOSE SHOWN. For more complete descriptions of certain
of the Fund's costs and expenses, see "Management of the Fund" below and in the
SAI.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of Common
Stock outstanding throughout each period presented. The per share operating
performance and ratios for each of the periods, other than the six-month period
ended June 30, 1996, have been derived from financial statements audited by
Price Waterhouse LLP, the Fund's independent accountants, as stated in their
report which is incorporated by reference into the SAI. The following
information should be read in conjunction with the Financial Statements and
Notes thereto, which are incorporated by reference into the SAI.
PER SHARE OPERATING PERFORMANCE
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
6/30/96(1) 12/31/95(2) 12/31/94 12/31/93 12/31/92
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $ 8.63 $ 8.05 $ 9.00 $ 8.42 $ 8.28
Offering Costs.................................... -- -- -- -- --
Net Investment Income............................. 0.40 0.86 0.83 0.91 0.89
Net Realized and Unrealized Gains or Losses on
Investments...................................... 0.02 0.48 (1.06) 0.57 0.08
----------- ----------- ----------- ----------- -----------
Total from Investment Activities.................. 0.42 1.34 (0.23) 1.48 0.97
----------- ----------- ----------- ----------- -----------
Distributions:
From Net Investment Income........................ (0.54) (0.76) (0.72) (0.90) (0.83)
----------- ----------- ----------- ----------- -----------
From Realized Gain.............................. -- -- -- -- --
From Capital Surplus............................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Distribution............................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period.................... $ 8.51 $ 8.63 $ 8.05 $ 9.00 $ 8.42
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Per Share Market Value, End of Period............. $ 7.88 $ 7.88 $ 7.00 $ 8.50 $ 8.38
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total Investment Return
Net Asset Value(4).............................. 5.06%(6) 17.41% (2.67)% 18.47% 11.95%
Market Value.................................... 6.83%(6) 24.34% (9.48)% 12.46% 12.09%
<CAPTION>
PERIOD FROM
3/23/87(3)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
12/31/91 12/31/90 12/31/89 12/31/88 12/31/87
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $ 7.25 $ 8.32 $ 8.58 $ 8.71 $ 9.30
Offering Costs.................................... -- -- -- -- (0.01)
Net Investment Income............................. 0.89 0.87 0.92 0.87 0.59
Net Realized and Unrealized Gains or Losses on
Investments...................................... 1.04 (1.04) (0.28) (0.10) (0.51)
----------- ----------- ----------- ----------- ------------
Total from Investment Activities.................. 1.93 (0.17) 0.64 0.77 0.08
----------- ----------- ----------- ----------- ------------
Distributions:
From Net Investment Income........................ (0.90) (0.90) (0.90) (0.90) (0.59)
----------- ----------- ----------- ----------- ------------
From Realized Gain.............................. -- -- -- -- (0.01)
From Capital Surplus............................ -- -- -- -- (0.06)
----------- ----------- ----------- ----------- ------------
Total Distribution............................ -- -- -- -- (0.66)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Net Asset Value, End of Period.................... $ 8.28 $ 7.25 $ 8.32 $ 8.58 $ 8.71
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Per Share Market Value, End of Period............. $ 8.38 $ 6.38 $ 7.88 $ 7.88 $ 8.325
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Total Investment Return
Net Asset Value(4).............................. 27.71% (2.06)% 7.69% 9.14% 1.01%
Market Value.................................... 50.81% (6.12)% 13.58% 7.80% (10.91)%
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
6/30/96(1) 12/31/95(2) 12/31/94 12/31/93 12/31/92 12/31/91
------------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period (thousands).......... $207,551 $210,441 $196,379 $219,355 $203,846 $199,857
Ratio of Expenses to Average Net Assets........ 0.98%(5) 0.92% 0.83% 0.88% 0.86% 0.87%
Ratio of Net Investment Income to
Average Net Assets............................ 9.44%(5) 10.22% 9.75% 10.34% 10.38% 11.12%
Portfolio Turnover........................... 44.1%(6) 44.1% 70.6% 117.5% 115.2% 53.3%
<CAPTION>
PERIOD FROM
3/23/87(3)
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
12/31/90 12/31/89 12/31/88 12/31/87
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net Assets, End of Period (thousands).......... $175,390 $201,297 $207,293 $209,060
Ratio of Expenses to Average Net Assets........ 0.89% 0.92% 0.91% 0.77%(5)
Ratio of Net Investment Income to
Average Net Assets............................ 11.26% 10.67% 9.96% 9.40%(5)
Portfolio Turnover........................... 61.4% 95.8% 113.5% 42.0%
</TABLE>
- ------------
<TABLE>
<S> <C>
(1) Unaudited.
(2) BEA Associates replaced CS First Boston Investment Management Corporation ("CSIM") as the Fund's investment adviser
effective June 13, 1995.
(3) Commencement of investment operations.
(4) Total investment return based on per share net asset value reflects the effects of change in net asset value on the
performance of the Fund during each period, and assumes dividends and capital gains distributions, if any, were
reinvested. These percentages are not an indication of the performance of a shareholder's investment in the Fund based on
market value due to differences between the market value of the stock and the net asset value of the Fund.
(5) Annualized.
(6) Not Annualized.
</TABLE>
9
<PAGE>
THE OFFER
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interest of the Fund and its shareholders to increase the assets of the
Fund available for investment, thereby allowing better positioning of the Fund
to more fully take advantage of available investment opportunities consistent
with the Fund's investment objective of realizing current income. In reaching
its decision, the Board of Directors was advised by BEA Associates that the
availability of new funds would provide the Fund with additional investment
flexibility as well as increase the Fund's ability to take advantage of what BEA
Associates believes to be timely opportunities in the high yield bond market as
a result of interest rate stability and a strong economy.
The Board of Directors also considered that a well-subscribed rights
offering may reduce the Fund's expense ratio, which may be of long-term benefit
to shareholders. In addition, the Board of Directors considered that such a
rights offering could result in an improvement in the liquidity of the trading
market for shares of the Fund's Common Stock on the New York Stock Exchange,
where the shares are listed and traded. The Board of Directors also considered
the proposed terms of the Offer, including the expenses of the Offer, and its
dilutive effect, including the effect on non-exercising shareholders of the
Fund. After careful consideration, the Fund's Board of Directors unanimously
voted to approve the Offer.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to Record Date Shareholders Rights to subscribe for
Shares pursuant to the exercise of such Rights. Each Record Date Shareholder is
being issued one Right for each whole share of Common Stock owned on the Record
Date. The Rights entitle the Record Date Shareholder to acquire at the
Subscription Price one Share for every three Rights held (one for three).
Fractional Shares will not be issued upon the exercise of Rights. Accordingly,
Shares may be purchased only pursuant to the exercise of Rights in integral
multiples of three. Rights may be exercised at any time during the Subscription
Period, which commences on September 27, 1996 and ends at 5:00 p.m., New York
City time, on October 22, 1996, unless extended by the Fund until 5:00 p.m., New
York City time, to a date not later than October 25, 1996. A Record Date
Shareholder's right to acquire one Share for every three Rights held during the
Subscription Period at the Subscription Price is hereinafter referred to as the
"Primary Subscription." The Rights are evidenced by Subscription Certificates,
which will be mailed to Record Date Shareholders, except as discussed below
under "Foreign Restrictions."
Any Record Date Shareholder who fully exercises all Rights issued to such
shareholder will be entitled to subscribe for additional Shares pursuant to the
Over-Subscription Privilege. Shares requested pursuant to the Over-Subscription
Privilege are subject to allotment and may be subject to increase in the event
the Fund increases the number of shares available pursuant to the
Over-Subscription Privilege, which is more fully discussed below under
"Over-Subscription Privilege." For purposes of determining the maximum number of
Shares a Record Date Shareholder may acquire pursuant to the Offer, shareholders
whose shares are held of record by Cede, the nominee for The Depository Trust
Company, or by any other depository or nominee will be deemed to be the holders
of the Rights that are issued to Cede or such other depository or nominee on
their behalf.
As fractional Shares will not be issued, Record Date Shareholders who
receive or have remaining fewer than three Rights will be unable to purchase
Shares upon the exercise of such Rights and will not be entitled to receive any
cash in lieu thereof. Such shareholders, however, may subscribe for Shares
pursuant to the Over-Subscription Privilege provided such shareholders have
fully exercised the Rights issued to them. Shareholders will have no right to
rescind their subscriptions after receipt of their payment for Shares by the
Subscription Agent.
10
<PAGE>
OVER-SUBSCRIPTION PRIVILEGE
To the extent Record Date Shareholders do not exercise all of the Rights
issued to them, the underlying Shares represented by such Rights will be offered
by means of the Over-Subscription Privilege to Record Date Shareholders who have
exercised all the Rights issued to them pursuant to the Primary Subscription and
who desire to acquire additional Shares. Only Record Date Shareholders who
exercise all such Rights may indicate on the Subscription Certificate the number
of additional Shares desired pursuant to the Over-Subscription Privilege. If
sufficient Shares remain as a result of unexercised Rights, all
over-subscriptions may be honored in full. If sufficient Shares are not
available to honor all requests for over-subscriptions, the Fund may, at its
discretion, issue shares of Common Stock up to an additional 25% of the Shares
available pursuant to the Offer (up to 2,032,114 Shares) in order to satisfy
such over-subscription requests. Regardless of whether the Fund issues such
additional Shares, to the extent Shares are not available to honor all over-
subscriptions, the available Shares will be allocated among those who
over-subscribe based on the number of Rights originally issued to them by the
Fund, so that the number of Shares issued to Record Date Shareholders who
subscribe pursuant to the Over-Subscription Privilege will generally be in
proportion to the number of shares owned by them in the Fund on the Record Date.
The allocation process may involve a series of allocations in order to assure
that the total number of Shares available for over-subscriptions is distributed
on a pro rata basis.
The Fund will not sell any Shares that are not subscribed for pursuant to
the Primary Subscription or the Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for each Share to be issued pursuant to the Rights
will be 95% of the lower of (i) the average of the last reported sales price of
a share of the Fund's Common Stock on the New York Stock Exchange on the Pricing
Date and on the four preceding business days thereof and (ii) the net asset
value per share as of the close of business on the Pricing Date. For example, if
the average of the last reported sales price on the New York Stock Exchange on
the Pricing Date and on the four preceding business days thereof of a share of
the Fund's Common Stock is $8.42, and the net asset value as of the close of
business on the Pricing Date is $8.54, the Subscription Price will be $8.00 (95%
of $8.42). If, however, the average of the last reported sales price of a share
on that exchange on the Pricing Date and on the four preceding business days
thereof is $8.40, and the net asset value as of the close of business on the
Pricing Date is $8.32, the Subscription Price will be $7.90 (95% of $8.32). See
"Common Stock."
The Fund announced the Offer after the close of trading on the New York
Stock Exchange on August 22, 1996. The last reported net asset value per share
of Common Stock at the close of business on August 22, 1996 and September 24,
1996 was $8.50 and $8.54, respectively, and the last reported sales price of a
share of the Fund's Common Stock on the New York Stock Exchange on those dates
was $8.25 and $8.37, respectively.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the New York Stock Exchange
or any other exchange. However, the Shares to be issued pursuant to the Rights
will be admitted for trading on the New York Stock Exchange.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on October 22, 1996,
unless extended by the Fund until 5:00 p.m., New York City time, to a date not
later than October 25, 1996. Rights will expire on the Expiration Date and
thereafter may not be exercised. Since the Expiration Date and the Pricing Date
will be the same date, Record Date Shareholders who decide to acquire Shares
during the Primary Subscription or pursuant to the Over-Subscription Privilege
will not know, when they make such decision, the purchase price for such Shares.
Any extension of the Offer will be followed as promptly as practical by an
announcement thereof. Without limiting the manner in which the Fund may choose
to make such announcement, the Fund will not, unless otherwise required by law,
have any obligation to publish, advertise or otherwise communicate any such
announcement other than by making a release to the Dow Jones News Service or
such other means of announcement as the Fund deems appropriate.
11
<PAGE>
SUBSCRIPTION AGENT
The Subscription Agent is The Chase Manhattan Bank ("Chase Manhattan"), 770
Broadway, New York, New York, which will receive, for its administrative,
processing, invoicing and other services as subscription agent, a fee estimated
to be $15,000, plus reimbursement for its out-of-pocket expenses related to the
Offer. The Subscription Agent is also the Fund's Transfer Agent, Dividend-Paying
Agent and Registrar with respect to the Common Stock. An affiliate of the
Subscription Agent also acts as the Fund's administrator. SIGNED SUBSCRIPTION
CERTIFICATES TOGETHER WITH PAYMENT OF THE ESTIMATED SUBSCRIPTION PRICE MUST BE
SENT TO CHASE MANHATTAN by one of the methods described below. The Fund will
accept only Subscription Certificates actually received on a timely basis at the
address listed below:
<TABLE>
<S> <C>
(1) BY FIRST CLASS MAIL/HAND/OVERNIGHT COURIER:
The Chase Manhattan Bank
Retail Processing
770 Broadway
7th Floor
New York, New York 10003
(2) BY FACSIMILE (TELECOPY):
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(212) 979-0658 with the original Subscription Certificate to be sent
by method (1) above. Confirm facsimile by telephone at (212)
388-5764.
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN THOSE SET FORTH ABOVE DOES NOT CONSTITUTE
GOOD DELIVERY.
METHOD OF EXERCISE OF RIGHTS
Rights will be evidenced by Subscription Certificates that will be mailed to
Record Date Shareholders, or if shares are held by Cede or any other depository
or nominee, to Cede or such other depository or nominee except as discussed
under "Foreign Restrictions" below. Rights may be exercised by completing and
signing the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate, together
with payment for the Shares as described below under "Payment for Shares," to
the Subscription Agent. Rights may also be exercised by contacting your broker,
banker or trust company, which can arrange, on your behalf, to guarantee
delivery of payment and of a properly completed and executed Subscription
Certificate (a "Notice of Guaranteed Delivery"), as set forth below under
"Payment for Shares." A fee may be charged for this service. Fractional Shares
will not be issued, and shareholders who receive, or who have remaining, fewer
than three Rights will not be able to purchase any Shares upon the exercise of
such Rights. Such shareholders may, however, subscribe for Shares pursuant to
the Over-Subscription Privilege provided such shareholders have fully exercised
the Rights issued to them. Completed Subscription Certificates or Notices of
Guaranteed Delivery must be received by the Subscription Agent prior to 5:00
p.m., New York City time, on the Expiration Date at the office of the
Subscription Agent at the address set forth above.
SHAREHOLDERS WHO ARE RECORD OWNERS. Shareholders who are record owners can
choose between either option set forth under "Payment for Shares" below. If time
is of the essence, option (2) will permit delivery of the completed Subscription
Certificate and payment after the Expiration Date.
INVESTORS WHOSE SHARES ARE HELD BY A NOMINEE. Shareholders whose shares are
held by a nominee, such as a broker or trustee, must contact that nominee to
exercise their Rights. In that case, the nominee will complete the Subscription
Certificate on behalf of the investor and arrange for proper payment by one of
the methods set forth under "Payment for Shares" below.
NOMINEES. Nominees who hold shares for the account of others should notify
the beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with
12
<PAGE>
respect to the Rights. If the beneficial owner so instructs, the nominee should
complete the Subscription Certificate and submit it to the Subscription Agent
with the proper payment described under "Payment for Shares" below.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia). The Rights to which those Subscription Certificates relate will be
held by the Subscription Agent for such Foreign Record Date Shareholders'
accounts until instructions are received to exercise the Rights. If no
instructions are received prior to the Expiration Date, such Rights will expire.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number listed below:
THE INFORMATION AGENT FOR THE OFFER IS:
[LOGO]
TOLL FREE: (800) 733-8481, EXTENSION 349
Shareholders calling from outside the United States may call collect (212)
805-7000. Shareholders may also contact their brokers or nominees for
information with respect to the Offer.
The Information Agent will receive a fee estimated to be $10,000 plus
reimbursement for its out-of-pocket expenses related to the Offer.
PAYMENT FOR SHARES
Shareholders who acquire Shares during the Primary Subscription or pursuant
to the Over-Subscription Privilege may choose between the following methods of
payment:
(1) A shareholder can send the completed Subscription Certificate
together with payment for the Shares acquired during the Primary
Subscription and for additional Shares subscribed for pursuant to the
Over-Subscription Privilege to the Subscription Agent, calculating the total
payment on the basis of an estimated Subscription Price of $7.96 per Share
(the "Estimated Subscription Price"). To be accepted, such payment, together
with the properly executed and completed Subscription Certificate, must be
received by the Subscription Agent at one of the Subscription Agent's
offices at the addresses set forth above prior to 5:00 p.m., New York City
time, on the Expiration Date. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN
UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE
UNITED STATES OF AMERICA, MUST BE PAYABLE TO BEA INCOME FUND, INC. AND MUST
ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED.
(2) Alternatively, a subscription will be accepted by the Subscription
Agent, if, prior to 5:00 p.m., New York City time, on the Expiration Date,
the Subscription Agent has received a Notice of Guaranteed Delivery by
facsimile (telecopy) or otherwise from a bank, trust company, or New York
Stock Exchange member guaranteeing delivery to the Subscription Agent of (i)
payment of the full Subscription Price for the Shares subscribed for during
the Primary Subscription and any additional Shares subscribed for pursuant
to the Over-Subscription Privilege, and (ii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not honor a
Notice of Guaranteed Delivery if a properly completed and executed
Subscription Certificate, together with payment, is not received by the
Subscription Agent by the close of business on the third business day after
the Expiration Date.
Within eight business days following the Pricing Date (the "Confirmation
Date"), a confirmation will be sent by the Subscription Agent to each Record
Date Shareholder (or, if the shareholder's shares are held by
13
<PAGE>
Cede or any other depository or nominee, to Cede or such depository or nominee),
showing (i) the number of Shares acquired pursuant to the Primary Subscription,
(ii) the number of Shares, if any, acquired pursuant to the Over-Subscription
Privilege, (iii) the per Share and total purchase price for the Shares, and (iv)
any additional amount payable by such shareholder to the Fund or any excess to
be refunded by the Fund to such shareholder, in each case based on the
Subscription Price as determined on the Pricing Date. No other evidence of title
will be sent to shareholders unless delivery of a stock certificate has been
requested at the time of exercise of the Rights. See "Delivery of Stock
Certificates" below. Any additional payment required from a shareholder must be
received by the Subscription Agent within ten business days after the
Confirmation Date. Any excess payment to be refunded by the Fund to a
shareholder will be mailed by the Subscription Agent to such shareholder within
a reasonable time after the Expiration Date. No interest shall be paid by the
Fund on any such excess payment. All payments by a shareholder must be in U.S.
Dollars by money order or check drawn on a bank located in the United States of
America and payable to BEA INCOME FUND, INC.
The Subscription Agent will deposit all checks received by it prior to the
final due date into a segregated interest bearing account (which interest will
accrue to the benefit of the Fund regardless of whether shares are issued or not
by the Fund) pending distribution of the Shares.
Whichever of the two payment methods described above is used, issuance and
delivery of evidence of title for the Shares purchased are subject to collection
of checks and actual payment pursuant to any Notice of Guaranteed Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER RECEIPT
OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.
If a shareholder who acquires Shares pursuant to the Primary Subscription or
the Over-Subscription Privilege does not make payment of any additional amounts
due, the Fund reserves the right to take any or all of the following actions:
(i) sell such subscribed and unpaid-for Shares to other shareholders, (ii) apply
any payment actually received by it toward the purchase of the greatest whole
number of Shares which could be acquired by such holder upon exercise of the
Primary Subscription and/or Over-Subscription Privilege, and/or (iii) exercise
any and all other rights or remedies to which it may be entitled, including,
without limitation, set-offs against payments actually received by it with
respect to such subscribed Shares and/or to enforce the relevant guaranty of
payment.
The method of delivery of Subscription Certificates and payment of the
Subscription Price to the Fund will be at the election and risk of the Rights
holders, but if sent by mail it is recommended that such certificates and
payment be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery to
the Fund and clearance of payment prior to 5:00 p.m., Eastern time, on the
Expiration Date. Because uncertified personal checks may take at least five
business days to clear, subscribing shareholders are strongly urged to pay, or
arrange for payment, by means of certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. The Fund will not be under any duty to give notification
of any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
DELIVERY OF STOCK CERTIFICATES
Stock certificates for Shares acquired during the Primary Subscription and
pursuant to the Over-Subscription Privilege will be issued only upon request
made at the time of exercise of the Rights. Stock certificates requested to be
delivered will be mailed promptly after the Confirmation Date and after payment
for the Shares subscribed for has cleared. Participants in the Fund's Dividend
Reinvestment and Cash Purchase Plan (the "Plan") will have any Shares acquired
during the Primary Subscription or pursuant
14
<PAGE>
to the Over-Subscription Privilege credited to their accounts in the Plan. Stock
certificates will not be issued for Shares credited to Plan accounts.
Shareholders whose shares of Common Stock are held of record by Cede or by any
other depository or nominee on their behalf or their broker-dealers' behalf will
have any Shares acquired during the Primary Subscription or pursuant to the
Over-Subscription Privilege credited to the account of Cede or such other
depository or nominee.
FEDERAL INCOME TAX CONSEQUENCES
For United States federal income tax purposes, neither the receipt nor the
exercise of the Rights by Record Date Shareholders will result in taxable income
to holders of Common Stock, and no loss will be realized if the Rights expire
without exercise. A shareholder's holding period for a Share acquired upon
exercise of a Right begins with the date of exercise. A shareholder's basis for
determining gain or loss upon the sale of a Share acquired upon the exercise of
a Right will be equal to the sum of the Subscription Price per Share, any
servicing fee charged to the shareholder by the shareholder's broker, bank or
trust company and the shareholder's basis, if any, in the Rights exercised (as
discussed below). A shareholder's gain or loss recognized upon a sale of a Share
acquired upon the exercise of a Right will be a capital gain or loss (assuming
the Share is held as a capital asset at the time of sale) and will be a
long-term capital gain or loss if the Share has been held at the time of sale
for more than one year.
If the fair market value of the Rights on the date of distribution is less
than 15% of the fair market value of the shares of Common Stock with respect to
which they are issued, on that date the basis of a Right will be zero unless a
Record Date Shareholder elects to allocate his basis in those shares of the Fund
which he originally owned between such shares and the Rights issued in the
Offer. This allocation is based upon the relative fair market value of such
shares and the Rights as of the date of distribution of the Rights. Thus, if
such an election is made, the shareholder's basis in the shares originally owned
will be reduced by an amount equal to the basis allocated to the Rights. This
election must be made in a statement attached to the shareholder's federal
income tax return for the year in which the Offer occurs. If the fair market
value of the Rights on the date of distribution is equal to or greater than 15%
of the fair market value of the shares of Common Stock with regard to which they
are issued, a Record Date Shareholder will allocate his basis in those shares of
the Fund which he originally owned between such shares and the Rights issued in
the Offer based upon their relative fair market values on the date of
distribution. However, if a shareholder does not exercise the Rights, no loss
will be recognized and no portion of the shareholder's basis in the shares will
be allocated to the unexercised Rights. If a shareholder exercises the Rights,
the basis of any Shares acquired through exercise of the Rights will be
increased by the basis allocated to such Rights. Accordingly, shareholders
should consider the advisability of making the election described above if the
shareholder intends to exercise the Rights.
The foregoing is a general summary of the material United States federal
income tax consequences of the receipt and exercise of Rights by a Record Date
Shareholder. The discussion is based upon applicable provisions of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury
regulations and other authorities currently in effect, and does not cover state,
local or foreign taxes. The Code and regulations are subject to change by
legislative or administrative action. Shareholders should consult their tax
advisors regarding specific questions as to federal, state, local or foreign
taxes. See "Taxation" in the SAI.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
Shareholders that hold their shares through employee benefit plans that are
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (including corporate savings and 401(k) plans, Keogh Plans of
self-employed individuals and Individual Retirement Accounts (collectively,
"Benefit Plans")) should be aware of the complexity of the rules and regulations
governing Benefit Plans and the penalties for noncompliance, and should consult
their counsel and tax advisors regarding the consequences under ERISA and the
Code of their exercise of the Rights.
CERTAIN EFFECTS OF THE OFFER
Upon the completion of the Offer, shareholders who do not fully exercise
their Rights will own a smaller proportional interest in the Fund than would be
the case if the Offer had not been made. In addition, because the Subscription
Price per Share will be less than the then current net asset value per share of
the
15
<PAGE>
Fund's Common Stock, the Offer will result in a dilution of net asset value per
share for all shareholders, which will disproportionately affect shareholders
who do not exercise their Rights. Although it is not possible to state precisely
the amount of such decrease in net asset value because it is not known at the
date of this Prospectus how many Shares will be subscribed for, or what the
Subscription Price will be, such dilution might be substantial. For example,
assuming all Rights are exercised at the Estimated Subscription Price, including
up to an additional 25% of the Shares which may be issued to satisfy
over-subscriptions, the Fund's current net asset value of $8.54 per share would
be reduced by approximately $.28 or 3.28%, taking into account the expenses of
the Offer.
It is expected that no dividends or other distributions will be payable with
respect to the Shares offered hereby until November 20, 1996.
CERTAIN IMPACT ON FEES
The Fund's investment adviser and administrator will benefit from the Offer
because the investment advisory and administration fees are based on the net
assets of the Fund. See "Management of the Fund." It is not possible to state
precisely the amount of additional compensation the Fund's investment adviser or
administrator will receive as a result of the Offer because it is not known how
many Shares will be subscribed for and because the proceeds of the Offer will be
invested in additional portfolio securities which will fluctuate in value.
However, assuming all Rights are exercised at the Estimated Subscription Price,
including up to an additional 25% of the Shares which may be issued to satisfy
over-subscriptions, the annual compensation to be received by the Fund's
investment adviser and administrator would be increased by approximately
$386,400 and $77,280, respectively. One of the Fund's directors who voted to
authorize the Offer is an "interested person" of the Fund within the meaning of
the 1940 Act because of his position as a director and an officer of BEA
Associates. This director could benefit indirectly from the Offer because of his
affiliation. The other three directors are not "interested persons" of the Fund.
See "Management of the Fund" in the SAI.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
- --------------------------------------------------------------- -------------------------------------------------
<S> <C>
Record Date.................................................... September 27, 1996
Subscription Period............................................ September 27, 1996 to October 22, 1996*
Payment for Shares or Notices of Guaranteed Delivery Due....... October 22, 1996*
Expiration and Pricing Date.................................... October 22, 1996*
Payment for Guarantees of Delivery Due......................... October 25, 1996*
Confirmation to Participants................................... November 1, 1996*
Final Payment for Shares....................................... November 15, 1996*
</TABLE>
- ---------
* Unless the Offer is extended to a date not later than October 25, 1996.
THE FUND
The Fund, incorporated in Maryland on February 10, 1987, is a diversified,
closed-end management investment company registered under the 1940 Act. The
Fund's Common Stock is traded on the New York Stock Exchange under the symbol
"FBF."
The Fund commenced operations on March 23, 1987 after an initial public
offering of 24,000,000 shares of the Common Stock, the net proceeds to the Fund
of which were approximately $222,902,000.
The Fund's investment objective is current income consistent with the
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in fixed-income securities, such as bonds, debentures and preferred
stocks. Under normal circumstances, the Fund will invest at least 75% of its
total assets in fixed-income securities. The Fund may also invest up to 25% of
its assets in money market instruments, such as certificates of deposit,
commercial paper, bankers' acceptances and repurchase agreements. The Fund may
hold securities deemed to be Temporary Investments (as defined below).
16
<PAGE>
At June 30, 1996, the Fund's portfolio of investments was composed as
follows (as a percentage of net assets): corporate obligations (78.5%);
government and agency securities (8.4%); collateralized securities (3.7%); asset
backed obligations (3.3%); common stocks (1.8%); preferred stocks (0.8%);
warrants (0.3%); rights (0.0%) and units (2.1%). At the same date, 67.2% of the
Fund's net assets were invested in high yield fixed-income securities.
The table below sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1995 in the various Standard & Poor's
Rating Group ("S&P") and Moody's Investors Service, Inc. ("Moody's") rating
categories and in unrated securities determined by BEA Associates to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings of all securities held by the Fund during the 1995 fiscal year,
computed on a monthly basis. For information regarding the various ratings of
Moody's and S&P, see the Appendix to this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
--------------------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE TOTAL
- -------------------------------------------------------------- ------------------- ---------------------- -----------
<S> <C> <C> <C>
AAA/Aaa....................................................... 4.13% 4.13%
AA/Aa......................................................... -- -- --
A/A........................................................... 8.33% 8.33%
BBB/Baa....................................................... 9.20% 9.20%
BB/Ba......................................................... 5.50% 5.50%
B/B........................................................... 55.30% 2.21% 57.51%
CCC/Caa....................................................... 6.72% 1.17% 7.89%
CC/Ca......................................................... 0.21% -- 0.21%
C/C........................................................... -- -- --
D............................................................. 0.00% 0.78% 0.78%
Subtotal................................................ 89.39% 4.16% 93.55%
U.S. Government, Equities and Other........................... 6.45% n/a 6.45%
Total................................................... 95.84% 4.16% 100.00%
</TABLE>
- ---------
n/a: not applicable
The percentage of the Fund's assets invested in securities of various grades
may from time to time vary substantially from those set forth above. Under
current market conditions, BEA Associates anticipates that a substantial portion
of the net proceeds of the offer will be invested in securities rated B or lower
by S&P or Moody's (or unrated but deemed of comparable quality by BEA
Associates), which would cause the percentage of the Fund's portfolio invested
in securities rated B or lower (or unrated but deemed of comparable quality by
BEA Associates) to increase from its current level. See "Risk Factors and
Special Considerations--Lower Rated Securities."
At June 30, 1996 the Fund's assets were invested in the following industries
and financial instruments:
<TABLE>
<CAPTION>
% OF FUND'S NET
INDUSTRY ASSETS
- ----------------------------------------------------------------------- ---------------------
<S> <C>
Communications 21.32%
Services 11.51%
Industrial Goods & Materials 10.99%
Manufacturing 10.92%
Finance 10.03%
U.S. Gvts. (including Mortgage-Backed Securities) 8.42%
CMOs & Asset Backed Securities 6.99%
Consumer Products 6.10%
Retail Trade 5.67%
Transportation 2.64%
Rights, Warrants & Units 2.49%
Oil, Gas & Electric 1.81%
------
Total Investments 98.89%
Net Other Assets 1.11%
------
Net Assets 100.00%
</TABLE>
17
<PAGE>
The Fund's ten largest holdings at June 30, 1996 (as a percentage of net
assets) were:
<TABLE>
<CAPTION>
% OF FUND'S
POSITION NET ASSETS
--------------------------------------------------------------------------- --------------
<S> <C> <C>
1) Drexel, Burnham & Lambert Trust
Remic-PAC Series S, Class 2, 9.00%, 8/01/18 3.12%
2) U.S. Treasury Note
5.375%, 5/31/98 2.92%
3) Federal National Mortgage Association
Remic-PAC Series 1989-23, Class D, 10.20%, 9/25/18 1.98%
4) American Express Co. Eurobond
Zero Coupon, 12/12/00 1.79%
5) Ferrovie dello Stato Notes
9.125%, 7/6/09 1.64%
6) Meditrust Convertible Debentures
7.50%, 3/01/01 1.45%
7) Goldman Sachs Group L.P. MTN
6.20%, 2/15/01 1.40%
8) U.S. Treasury Note
7.25%, 5/15/04 1.30%
9) Household Affinity Credit Card Master Trust I
Series 1993-S, Class B, 4.95%, 3/15/99 1.20%
10) Merrill Lynch Home Equity Acceptance Trust
Series 1994-A, Class A-2, 6.25%, 7/17/22 0.99%
</TABLE>
USE OF PROCEEDS
Assuming all Shares offered pursuant to the Primary Subscription are sold at
the Estimated Subscription Price, the net proceeds of the Offer are estimated to
be $61,713,973, after payment of the Dealer Manager's fees, the soliciting fees
and the estimated offering expenses. These expenses will be borne by the Fund
and will reduce the net asset value of the Common Stock. If the Fund increases
the number of Shares subject to the Offer by 25%, or 2,032,114 Shares, in order
to satisfy over-subscription requests, the additional net proceeds will be
approximately $15,565,993. The Fund expects that, subject to market conditions,
substantially all of the net proceeds of the Offer will be invested in
accordance with the Fund's investment objective and policies approximately
within one month from the date of their receipt by the Fund. Pending such
investment, the proceeds will be invested in certain short-term debt
instruments, as described under "Investment Objective and Policies--Temporary
Investments."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following special considerations associated
with an exercise of Rights and an additional investment in the Fund.
CERTAIN EFFECTS OF THE OFFER
Upon the completion of the Offer, shareholders who do not fully exercise
their Rights will own a smaller proportional interest in the Fund than would be
the case if the Offer had not been made. In addition, an immediate dilution of
the net asset value per share will be experienced by all shareholders as a
result of the Offer because the Subscription Price will be less than the then
current net asset value per share, the Fund will bear the expenses of the Offer
and the number of shares outstanding after the Offer will have increased
proportionately more than the increase in the size of the Fund's net assets.
Although it is not possible to state precisely the amount of such a decrease in
value, because it is not known at this time how many Shares will be subscribed
for or what the Subscription Price will be, such dilution might be substantial.
For example, if the Subscription Price per Share is $8.11, representing a price
that is 95% of an assumed net asset value per share of $8.54, assuming that all
Rights are exercised, including an additional 25% of the Shares which may be
issued to satisfy over-subscription requests, the Fund's net asset value per
share would be reduced by
18
<PAGE>
approximately $.23 per share. If, on the other hand, the Subscription Price
represents a price that is less than 95% of the Fund's then net asset value,
which would be the case if the Subscription Price is set at a time when the
market price per share is lower than the net asset value per share, the dilution
would be greater. For example, if the Subscription Price per Share is $7.96,
representing a price which is only 93% of the net asset value per share,
assuming that all Rights are exercised, including an additional 25% of the
Shares which may be issued to satisfy over-subscription requests, the Fund's net
asset value per share would be reduced by approximately $.28 per share. The
foregoing examples assumed Subscription Prices of $8.11 and $7.96 per Share,
respectively. The actual Subscription Price may be greater or less than such
assumed Subscription Price. This dilution of net asset value per share will
disproportionately affect shareholders who do not exercise their Rights.
RISKS ASSOCIATED WITH INVESTMENTS IN FIXED-INCOME SECURITIES
Bond prices generally vary inversely in relation to changes in the level of
interest rates, as well as in response to other market factors and changes in
the creditworthiness of the issuers of the securities. The value of a portfolio
of fixed-income securities can generally be expected to rise when interest rates
decline and to decline when interest rates rise. Longer-term securities in which
the Fund may invest generally offer a higher current yield than is offered by
shorter-term securities, but also generally involve greater volatility of price
and risk of capital than shorter-term securities. Securities in which the Fund
invests include zero coupon bonds and other securities that do not produce
current income which may reduce the Fund's ability to generate current income in
accordance with its investment objective. In addition, the market value of
certain securities in which the Fund may invest, such as mortgage-backed
securities, zero coupon securities, securities that are purchased at a discount
to their par value and stripped income securities tend to be more volatile in
response to changes in interest rates than that of traditional fixed-income
securities.
LOWER-RATED SECURITIES
At any time, a substantial portion of the Fund's assets may be invested in
medium-grade or below investment grade fixed-income securities as determined by
a nationally recognized rating service and in unrated securities deemed of
comparable quality by BEA Associates. Investment in lower-rated securities
typically involves risks not associated with higher-rated securities, including,
among others, overall greater risk that timely and ultimate payment of interest
and principal will not occur, potentially greater sensitivity to general
economic conditions, greater market price volatility and potential illiquidity.
In addition, ratings are relative and subjective and not absolute standards of
quality. Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition.
Securities rated in the lowest investment grade (Baa or BBB) have
speculative characteristics and securities rated below investment grade have
speculative elements and a greater vulnerability to default than higher-rated
securities. Lower-rated and comparable unrated securities (commonly referred to
as "junk bonds") (i) will likely have some quality and protective
characteristics that, in the judgment of the rating service, are outweighed by
large uncertainties or major-risk exposures to adverse economic conditions and
(ii) are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Medium- and lower-rated securities and comparable unrated securities generally
present a higher degree of credit risk. The risk of loss due to default by such
issuers is significantly greater because medium- and lower-rated securities and
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. These risks are significantly
increased for securities having the lowest below investment grade ratings and,
as a result, such securities are generally considered to have extremely poor
prospects of ever attaining any real investment standing. In addition, the Fund
may purchase securities that are in default or not current in the payment of
interest or principal. No assurance can be given that the securities purchased
by the Fund will continue to earn yields comparable to those earned
historically, nor can any assurance be given that issuers whose obligations the
Fund acquires will make payments on such obligations as they become due.
19
<PAGE>
Lower-rated securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher-rated securities.
Economic downturns or increases in interest rates may result in higher rates of
default for lower-rated securities than for higher-rated securities. The prices
of lower-rated securities have been found to be less sensitive to interest rate
changes than those of higher-rated securities, but to be more sensitive to
adverse economic downturns or individual corporate developments.
The market value of securities in lower-rated categories is more volatile
than that of higher-quality securities. The markets in which lower-rated
securities are traded are more limited than those in which higher-rated
securities are traded. Adverse publicity and investors' perceptions, whether or
not based on fundamental analyses, may decrease the values and liquidity of
lower-rated securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of lower-rated securities may be more complex than
for issuers of higher-rated securities, and the ability of the Fund to achieve
its investment objective may, to the extent of investment in lower-rated
securities, be more dependent upon such creditworthiness analysis than would be
the case if the Fund were investing in higher-rated securities.
The more limited size of the markets in which lower-rated securities are
traded may result in reducing the Fund's ability to dispose of certain of its
investments. The lack of a liquid secondary market for certain securities may
have an adverse impact on the Fund's ability to dispose of particular issues and
may make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing the Fund assets and calculating its net asset value.
In addition, certain of the Fund's investments in high yield securities may
be subject to special tax considerations. Interest on high yield securities
structured as zero coupon or paid-in-kind securities must be reported as income
by the Fund, although no cash is received until such securities' maturity or
payment date. Under the Code, the Fund is required to distribute all its
investment income. In order to maintain its status as a regulated investment
company, the Fund could therefore be required to dispose of portfolio securities
or leverage its portfolio to generate cash for distribution. There is no
assurance that any such disposition could be made at favorable market
conditions.
For a complete description of rating systems of Moody's and S&P, see the
Appendix to this Prospectus.
NON PUBLICLY-TRADED SECURITIES; RULE 144A SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act but that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the Securities Act ("Rule 144A Securities").
Nonpublicly-traded securities, including Rule 144A Securities, may involve a
high degree of business and financial risk and may result in substantial losses.
These securities may be less liquid than publicly-traded securities, and the
Fund may take longer to liquidate these positions than would be the case for
publicly-traded securities. Further, companies whose securities are not
publicly-traded may not be subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly-traded. The Fund's investment in illiquid securities is subject to the
risk that, should the Fund desire to sell any of these securities when a ready
buyer is not available at a price that is deemed to be representative of their
value, the value of the Fund's net assets could be adversely affected.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES
The Fund may invest a substantial portion of its total assets in
mortgage-backed securities. The value of mortgaged-backed securities is subject
to change due to shifts in the market's perception of issuers, and regulatory or
tax changes may adversely affect the mortgage securities market as a whole.
Foreclosures and prepayments, which occur when unscheduled or early payments are
made on the underlying mortgages, may shorten the effective maturities on these
securities. Like other debt securities, the values of mortgage-backed securities
will generally fluctuate in response to changes in interest rates. No assurance
can be given as to the liquidity of the market for mortgage-backed securities.
The yield characteristics of mortgage-backed securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently and that principal
20
<PAGE>
may be prepaid at any time because the underlying mortgage loans generally may
be prepaid at any time. As a result, if the Fund purchases a security at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if the Fund
purchases the securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity.
Certain types of derivative mortgage-backed securities are designed to be highly
sensitive to changes in prepayment and interest rates and can subject the
holders thereof to extreme reduction of yield and possibly loss of principal.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographical, social and other factors. Generally, however, prepayments on fixed
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during periods
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates. Adjustable rate mortgages are subject to prepayment risk in a
manner similar to fixed rate mortgages although to a lesser degree.
SHORT SALES
The Fund's investment policies may include short selling. Short sales can,
under certain circumstances, substantially increase the impact of adverse price
movements on the Fund's portfolio. The Fund, however, is restricted from
engaging in uncovered short selling. See "Investment Objective and
Policies--Short Sales" below and "Investment Restrictions" in the SAI.
RISKS OF TRANSACTIONS IN INTEREST RATE FUTURES CONTRACTS
The Fund may, for bona fide hedging purposes, purchase and sell interest
rate futures contracts and options thereon that are traded on U.S. futures
exchanges. There are several risks in connection with the use of interest rate
futures contracts as a hedge for transactions and anticipated transactions,
including the potential risk of unlimited loss. Due to the imperfect correlation
between movements in the prices of interest rate futures contracts and movements
in the prices of the underlying securities, the price of a futures contract may
move more than or less than the price of the securities being hedged. In
addition, there is the risk that movements in the prices of interest rate
futures contracts will not correlate with interest rate movements. The Fund is
not required to hedge interest rate risk.
In addition to the possibility that there may be an imperfect correlation
between movements in prices of interest rate futures contracts and portfolio
securities being hedged, the market prices of futures contracts
may be affected by various other factors which may result in significant price
distortions. If participants in the interest rate futures market elect to close
out their contracts through offsetting transactions rather than meet margin
deposit requirements, distortions in the normal relationship between the debt
securities and futures markets could result. Price distortions could also result
if investors in futures contracts opt to make or take delivery of underlying
securities rather than engage in closing transactions due to the resultant
reduction in the liquidity of the interest rate futures market. In addition, due
to the fact that, from the point of view of speculators, the deposit
requirements in the interest rate futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
interest rate futures market could cause temporary price distortions. Due to the
possibility of price distortions in the interest rate futures market and because
of the imperfect correlation between movements in the prices of securities and
movements in the prices of interest rate futures contracts, a correct forecast
of interest rate trends by BEA Associates may still not result in a successful
hedging transaction. If BEA Associates' predictions of movements in the
direction of overall interest rate markets are inaccurate, the adverse
consequences to the Fund may place the Fund in a worse position than if hedging
strategies were not employed.
Positions in interest futures contracts may be closed out only on an
exchange or board of trade which provides a market for such interest rate
futures contracts. Although the Fund intends to purchase or sell interest rate
futures contracts only on exchanges or boards of trade where there appears to be
an active market for such contracts, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract or at
any particular time. In the event a liquid market does not exist, it may not be
possible to close an interest rate futures position at an advantageous price,
and in the event of adverse
21
<PAGE>
price movements, the Fund would continue to be required to make daily cash
payments of maintenance margin. In addition, limitations imposed by an exchange
or board of trade on which interest futures contracts are traded may compel or
prevent the Fund from closing out a contract which may result in reduced gain or
increased loss to the Fund. The absence of a liquid market in futures contracts
might cause the Fund to make or take delivery of the underlying securities at a
time when it may be disadvantageous to do so.
RISKS OF TRANSACTIONS IN OPTIONS ON INTEREST RATE FUTURES CONTRACTS
In addition to the risks which apply to all options transactions and the
risks that apply to futures contracts, there are several special risks relating
to options on interest rate futures contracts. The ability to establish and
close out positions on such options is subject to the maintenance of a liquid
secondary market. The Fund will only purchase or write options on futures
contracts which, in the opinion of BEA Associates, are traded on sufficiently
developed markets such that the risks of illiquidity in connection with such
options are not greater than the risks of illiquidity in connection with
transactions in the underlying interest rate futures contracts.
Compared to the purchase or sale of interest rate futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Fund when the purchase or sale of an interest rate futures contract would
not result in a loss, such as when there is no movement in the prices of the
underlying securities.
Because of an income-tax related limitation on the amount of certain types
of short-term gain that the Fund can recognize in any year, there is a risk that
the Fund may need to defer closing out certain futures contracts and options
thereon in order to continue to qualify for beneficial tax treatment. See
"Taxation."
RISKS ASSOCIATED WITH REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements collateralized by U.S.
Government securities, certificates of deposit and certain bankers' acceptances
for the purpose of realizing additional income. The use of repurchase agreements
involves certain risks not associated with direct investment in securities. For
example, if the seller of securities under an agreement defaults on its
obligation to repurchase the underlying securities at the agreed upon repurchase
price at a time when the value of these securities has declined, the Fund may
incur a loss upon their disposition. If such a defaulting seller were to become
insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, disposition of the underlying securities could involve
certain costs or delays pending court action. Finally, it is not certain whether
the Fund would be entitled, as against a claim of the seller or its receiver,
trustee in bankruptcy or creditors, to retain the underlying securities. While
BEA Associates acknowledges these risks, it is expected that they can be
controlled by limiting the institutions with which the Fund will enter into
repurchase agreements to the Federal Reserve Bank, Reporting Government
Securities Dealers and member banks of the Federal Reserve System and by
carefully monitoring the creditworthiness of such institutions, other than the
Federal Reserve Bank, by BEA Associates.
MARKET VALUE AND NET ASSET VALUE
Shares of closed-end investment companies frequently trade at a discount to
net asset value. This characteristic of shares of a closed-end fund is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. In addition, changes in market yields will affect the Fund's net asset
value as prices of fixed-income securities generally increase when interest
rates decline and decrease when interest rates rise. The Fund cannot predict
whether its shares will trade at, below or above net asset value. Since the
commencement of the Fund's operations, the Fund's shares have generally traded
in the market at a discount to net asset value. See "Net Asset Value" and
"Common Stock." The risk of purchasing shares of a closed-end fund that might
trade at a discount is more pronounced for investors who wish to sell their
shares in a relatively short period of time because for those investors,
realization of a gain or loss on their investments is likely to be more
dependent upon the existence of a premium or discount than upon portfolio
performance. The Fund's shares are not subject to redemption. Investors desiring
liquidity may, subject to applicable securities laws, trade their shares in the
Fund on any exchange where such shares are then listed at the then
22
<PAGE>
current market value, which may differ from the then current net asset value.
If, at any time, the average discount from net asset value at which shares of
the Fund's Common Stock have traded for any fiscal quarter is substantial in the
determination of the Board of Directors, the Board of Directors will consider,
at its next regularly scheduled quarterly meeting, taking actions designed to
eliminate the discount, including periodic repurchases of shares. See "Common
Stock."
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The Fund's investment objective is current income consistent with the
preservation of capital. The Fund seeks to achieve this objective by investing
primarily in fixed-income securities, such as bonds, debentures and preferred
stock. The Fund's investment portfolio will not be managed for capital
appreciation. The Fund's investment objective is a fundamental policy and cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities. As used herein, a "majority of the Fund's
outstanding voting securities" means the lesser of (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares. No assurance can be
given that the Fund's investment objective will be achieved. For a more detailed
discussion of the Fund's investment objective and policies, see "Investment
Objective and Policies" in the SAI.
INVESTMENT POLICIES
Under normal circumstances, the Fund will invest at least 75% of its total
assets in fixed-income securities. In January 1992, the Board of Directors
removed the requirement that two-thirds of the Fund's fixed-income securities be
comprised of investment grade securities. Accordingly, the Fund's investments in
fixed-income securities are no longer subject to any rating quality limitation
and a substantial portion or all of the Fund's portfolio may consist of
securities that are rated below investment grade by a nationally recognized
rating service or that are unrated and of comparable quality in the opinion of
BEA Associates. Lower-rated securities generally provide yields superior to
those of more highly rated securities, but involve greater risks and are
speculative in nature. See "Risk Factors and Special Considerations--Lower-Rated
Securities." The market value of lower-rated securities may be more volatile
than the market value of higher-rated securities and generally tends to reflect
the market's perception of the creditworthiness of the issuer and short-term
market developments to a greater extent than more highly rated securities, which
reflect primarily fluctuations in general levels of interest rates. For a
description of the corporate bond ratings of Moody's and S&P, see the Appendix
to the Prospectus.
Depending on market conditions, the Fund may also invest a substantial
portion of its assets in mortgage-backed securities. Mortgage-backed securities
are collateralized by mortgages or interests in mortgages and may be issued by
government or non-government entities. Mortgage-backed securities issued by
government entities typically provide a monthly payment consisting of interest
and principal payments, and additional payments will be made out of unscheduled
prepayments of principal. Non-government issued mortgage-backed securities may
offer higher yields than those issued by government entities, but may be subject
to greater price fluctuations.
Subject to the limitations described under "Other Investment Techniques"
below, the Fund may also invest up to 25% of its total assets in money market
instruments such as certificates of deposit, commercial paper, bankers'
acceptances and repurchase agreements; the Fund, however, currently does not
intend to invest more than 5% in such assets. The Fund may also, for bona fide
hedging purposes, invest in interest rate futures and related options. It is
expected that the average weighted maturity of the Fund investment portfolio
will be 5 to 10 years.
The Fund's policy is to diversify its investments among various securities
and industries only to the extent such diversification appears to enhance the
opportunity to achieve its investment objective. Under the 1940 Act and the
Code, the Fund is also subject to certain portfolio diversification
requirements. The Fund may not invest in a security if after such investment 25%
or more of its total assets, at market value, would be invested in any one
industry.
23
<PAGE>
OTHER INVESTMENT TECHNIQUES
The Fund may enter into repurchase agreements, lend portfolio securities,
purchase securities on a when-issued basis and invest in interest rate futures
and related options.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements
collateralized by U.S. Government securities, certificates of deposit and
certain bankers' acceptances for the purpose of realizing additional income.
Repurchase agreements are transactions by which the Fund purchases a security
and simultaneously commits to resell that security to the seller (a bank or
securities dealer) at an agreed upon price on an agreed upon date (usually
within seven days of purchase). Use of repurchase agreements can permit the Fund
to keep its assets at work while retaining short-term flexibility in pursuit of
investments of a longer-term nature. BEA Associates will continually monitor the
value of the underlying securities to ensure that their value always equals or
exceeds the repurchase price.
LENDING OF SECURITIES. The Fund may lend its portfolio securities to banks,
brokers, dealers and other financial institutions who need to borrow securities
in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities or completing arbitrage operations. 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 lent that might occur during the term of the loan would
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 the
1940 Act or the rules and regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder. 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. Loan arrangements made by the
Fund will comply with all other applicable regulatory requirements, including
the rules of the New York Stock Exchange. All relevant facts and circumstances,
including the creditworthiness of the borrower, will be considered by BEA
Associates in making decisions with respect to the lending of securities,
subject to review by the Fund's Board of Directors. The creditworthiness of such
bank, broker, dealer or other financial institution will be monitored by BEA
Associates during the time any securities are loaned. In addition, voting rights
may pass with the loaned securities but if a material event were to occur
affecting an investment on a loan, the loan must be called and the securities
voted by the Fund.
SHORT SALE. The Fund may engage in short sales (the sale of securities that
it does not own), but only when it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short ("short sales against the box"), and only if not more than
5% of the Fund's net assets (taken at current value) is held as collateral for
such sales at any one time.
INTEREST RATE FUTURES AND RELATED OPTIONS. The Fund may purchase and sell
interest rate futures contracts and options thereon that are traded on U.S.
futures exchanges. When the Fund attempts to hedge its portfolio by selling an
interest rate futures contract, purchasing a put option thereon, or writing a
call option thereon, it will own an amount of U.S. Government securities
corresponding to the open futures or option position. The Fund only intends to
engage in futures contracts or options for bona fide hedging purposes. In
instances where the Fund purchases futures, the Fund will segregate with its
custodian an amount of cash, U.S. Government securities or other high-grade,
liquid debt securities equal to the market value of the interest rate futures
contracts and thereby insure that the use of interest rate futures contracts is
unleveraged.
In accordance with the current rules of the Commodity Futures Trading
Commission (the "CFTC"), the Fund will not enter into any interest rate futures
contract or option thereon if, immediately thereafter, the aggregate initial
margin for all existing futures contracts and options thereon not entered into
for bona fide hedging purposes and for premiums paid for such options would
exceed 5% of the Fund's total assets. The Fund will not enter into any such
contract or option thereon, if, as a result thereof, more than 50% of the Fund's
total assets would be hedged.
In contrast to the purchase or sale of a security, the full purchase price
of the futures contract is not paid or received by the Fund upon its purchase or
sale. Instead, the Fund will deposit in a segregated custodial account as
initial margin an amount of cash or U.S. Treasury bills equal to approximately
5% of the value of
24
<PAGE>
the contract. At any time prior to expiration of the futures contract, the Fund
may elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund, and the Fund realizes a loss or gain. No
assurance can be given that the Fund will be able to take an opposite position.
The selection of futures and options strategies requires skills different
from those needed to select portfolio securities; however, BEA Associates does
have experience in the use of futures and options.
DIRECT PLACEMENT. As noted under "Investment Restrictions" in the SAI, the
Fund may invest up to 10% of its assets in securities that are not readily
marketable. The portion of the Fund's portfolio that may be invested in such
securities (other than in repurchase agreements) may be purchased in placements
from the securities' issuer or in the secondary market for such directly placed
securities ("Direct Placement Securities"). The purchase of Direct Placement
Securities will depend on the relative attractiveness of those securities as
compared to securities which have been publicly offered.
TEMPORARY INVESTMENTS
The Fund may, for temporary defensive purposes, invest its assets in money
market instruments and interest rate futures and related options without regard
to any percentage limitation on total assets invested or hedged, as the case may
be. The Fund may also, for temporary defensive purposes, invest in short-term
(less than twelve months to maturity) debt securities rated at least A by
Moody's or S&P. Subject to its limitation on investments in money market
instruments, the Fund may also invest in short-term debt securities rated at
least Baa by Moody's or BBB by S&P to commit overnight cash balances.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors, and the day to day operations of the Fund are
conducted through or under the direction of the officers of the Fund. For
certain information regarding the directors and officers of the Fund, see
"Management of the Fund--Directors and Officers" in the SAI.
BEA ASSOCIATES
BEA Associates serves as the Fund's investment adviser pursuant to an
Advisory Agreement with the Fund (the "Advisory Agreement") which became
effective on June 13, 1995. Prior to that date, CS First Boston Investment
Management Corporation ("CSIM") provided investment advisory services to the
Fund.
BEA Associates is a general partnership organized under the laws of the
State of New York and, together, with its predecessor firms, has been engaged in
the investment advisory business for over 50 years. BEA Associates is located at
One Citicorp Center, 57th Floor, 153 East 53rd Street, New York, New York 10022.
Credit Suisse Capital Corporation ("CS Capital") is an 80% partner and CS
Advisors Corp., a New York corporation and a wholly owned subsidiary of CS
Capital, is a 20% partner in BEA Associates. CS Capital is a wholly owned
subsidiary of Credit Suisse Investment Corporation, which is a wholly owned
subsidiary of Credit Suisse, the second largest Swiss bank, which in turn is a
subsidiary of CS Holding, a Swiss corporation. BEA Associates is registered as
an investment adviser under the Investment Advisers Act of 1940, as amended.
BEA Associates is a diversified asset manager, handling global equity,
balanced, fixed income and derivative securities accounts for private
individuals, as well as corporate pension and profit-sharing plans, state
pension funds, union funds, endowments and other charitable institutions. As of
June 30, 1996, BEA Associates managed in excess of $28.7 billion of assets.
BEA Associates has sole investment discretion for the Fund with respect to
the Fund's portfolio under the supervision of the Fund's Board of Directors and
in accordance with the Fund's stated policies. BEA Associates will select
investments for the Fund and will place purchase and sale orders on behalf of
the Fund. For its services, BEA Associates is paid a quarterly fee computed at
an annual rate of 0.50% of the Fund's average weekly net assets.
25
<PAGE>
PORTFOLIO MANAGEMENT
Robert Moore, who has been an Executive Director and the Chief Operating
Officer of BEA Associates since 1995, is primarily responsible for management of
the Fund's assets. Mr. Moore has served the Fund in such capacity since June
1995. Mr. Moore joined BEA Associates in 1987. He is President and Chief
Investment Officer of the Fund and is also President and Chief Investment
Officer of BEA Strategic Income Fund, Inc.
ADMINISTRATOR
Chase Global Funds Services Company, a Delaware corporation, serves as the
Fund's administrator pursuant to an agreement with the Fund (the "Administration
Agreement"). The Administrator's principal offices are located at 73 Tremont
Street, Boston, Massachusetts. Under the Administration Agreement, the Fund pays
the Administrator a monthly fee that is computed weekly at an annual rate of
0.15% of the Fund's first $100 million of average weekly net assets, 0.10% of
the Fund's next $300 million of average weekly net assets and 0.05% of the
Fund's average weekly net assets in excess of $400 million.
The Administrator provides office facilities and personnel adequate to
perform services for the Fund, including without limitation the following:
oversight of the determination and publication of the Fund's net asset value in
accordance with the Fund's policy as adopted from time to time by the Board of
Directors; oversee the maintenance of the books and records of the Fund as
required under the 1940 Act; assist in preparation and filing of the Fund's U.S.
federal, state and local income tax returns; preparation of financial
information for the Fund's proxy statements and semiannual and annual reports to
shareholders; and preparation of certain of the Fund's reports to the Securities
and Exchange Commission.
ESTIMATED EXPENSES
BEA Associates and the Administrator are each obligated to pay expenses
associated with providing the services contemplated by the agreements to which
they are parties, including compensation of and office space for their
respective officers and employees connected with investment and economic
research, trading and investment management and administration of the Fund, as
well as the fees of all directors of the Fund who are affiliated with those
companies or any of their affiliates. The Fund pays all other expenses incurred
in the operation of the Fund including, among other things, expenses for legal
and independent accountants' services, costs of printing proxies, stock
certificates and shareholder reports, charges of the custodians, any
sub-custodians and the transfer and dividend-paying agent, expenses in
connection with the Plan, Securities and Exchange Commission fees, fees and
expenses of unaffiliated directors, accounting and pricing costs, membership
fees in trade associations, fidelity bond coverage for the Fund's officers and
employees, directors' and officers' errors and omissions insurance coverage,
interest, brokerage costs and stock exchange fees, taxes, stock exchange listing
fees and expenses, expenses of qualifying the Fund's shares for sale in various
states, litigation and other extraordinary or non-recurring expenses and other
expenses properly payable by the Fund.
PORTFOLIO TRANSACTIONS
The Fund may utilize CS First Boston Corporation and other affiliates of
Credit Suisse in connection with the purchase or sale of securities in
accordance with rules or exemptive orders adopted by the Securities and Exchange
Commission when BEA Associates believes that the charge for the transaction does
not exceed usual and customary levels. For a more detailed discussion of the
Fund's brokerage allocation practice, see the SAI under "Portfolio
Transactions."
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN
The Fund's policy is to make distributions of net investment income to
shareholders monthly on or about the fifteenth day of each month and to make
distributions at least annually of any net capital gains in excess of applicable
capital losses, including capital loss carryforwards.
26
<PAGE>
All dividends and distributions, net of any applicable U.S. withholding tax,
are automatically reinvested in additional shares of the Fund unless a
shareholder has instructed Chase Manhattan, as the Plan Agent (the "Plan
Agent"), otherwise in writing. A shareholder whose shares are held by a broker
or nominee that does not provide a dividend reinvestment program may be required
to have his shares registered in his own name to participate in the Plan. The
receipt of dividends and distributions in shares under the Plan will not relieve
participants of any income tax (including withholding tax) that may be payable
on such dividends or distributions.
Certain distributions of cash attributable to (a) some of the dividends and
interest amounts paid to the Fund and (b) certain capital gains earned by the
Fund that are derived from securities of certain foreign issuers are subject to
taxes payable by the Fund at the time amounts are remitted. Such taxes, if any,
will be borne by the Fund and allocated to all shareholders in proportion to
their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Board of Directors of the Fund declares an income dividend or a
capital gains distribution payable either in Common Stock or in cash, as
shareholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive Common Stock. Whenever the market
price per share on the valuation date equals or exceeds net asset value per
share at the time shares are valued for the purpose of determining the number of
shares equivalent to the cash dividend or distribution, the Fund will issue new
shares to participants valued at net asset value or, if the net asset value is
less than 95% of the market price on that date, then valued at 95% of the market
price. If net asset value per share as determined at the time of purchase
exceeds the market price per share on that date, or if the Fund should declare a
dividend or other distribution payable only in cash, the Plan Agent, as agent
for the participants, will buy shares of Common Stock on the open market, on the
New York Stock Exchange or elsewhere, for the participants' accounts. The
valuation date generally is the dividend or distribution payment date or, if
that date is not a New York Stock Exchange trading day, the next preceding
trading day. If the Fund should declare an income dividend or capital gains
distribution payable only in cash, the Plan Agent will, as agent for the
participants, buy Fund shares in the open market, on the New York Stock Exchange
or elsewhere, for the participants' accounts on, or shortly after, the payment
date.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, monthly, in any amount from $100 to $3,000, for investment in
the Fund's Common Stock through purchases on the open market.
There is no charge to participants for reinvesting dividends or capital
gains distributions payable in either shares or cash. However, each participant
will be charged by the Plan Agent a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with voluntary cash payments made by the participant or the reinvestment of
dividends or capital gains distributions payable only in cash. All
correspondence concerning the Plan should be directed to The Chase Manhattan
Bank, Dividend Reinvestment Department--Retail Processing, 770 Broadway, 7th
Floor, New York, New York 10003-9598 or by telephone at 1-800-428-8890. For a
more complete description of the Plan, see "Dividend Reinvestment and Cash
Purchase Plan" in the SAI.
TAXATION
The Fund has qualified and intends to continue to qualify and elect to be
treated as a regulated investment company for each taxable year under the Code.
The Fund pays monthly dividends of net investment income and makes distributions
at least annually of any net realized long-term and short-term capital gains in
excess of applicable capital losses, including capital loss carryforwards. The
Board of Directors of the Fund will determine annually whether to distribute any
net realized long-term capital gains in excess of net realized short-term
capital losses (including any capital loss carryovers). The Fund currently
expects to distribute any excess annually to its shareholders. However, if the
Fund retains for investment an amount equal to its net realized long-term
capital gains in excess of its net realized short-term capital losses and
capital loss carryovers, it will be subject to a corporate tax (currently at a
rate of 35%) on the amount retained. In that event, the Fund expects to
designate such retained amounts as undistributed capital gains in
27
<PAGE>
a notice to its shareholders who (a) will be required to include in income for
United States federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (b) will be entitled to credit
their proportionate shares of the 35% tax paid by the Fund on the undistributed
amount against their United States federal income tax liabilities, if any, and
to claim refunds to the extent their credits exceed their liabilities, if any,
and (c) will be entitled to increase their tax basis, for United States federal
income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income.
Shareholders will be notified annually by the Fund as to the United States
federal income tax status of the dividends, distributions and deemed
distributions made by the Fund to its shareholders. Furthermore, shareholders
will also receive, if appropriate, various written notices after the close of
the Fund's taxable year regarding the United States federal income tax status of
certain dividends, distributions and deemed distributions that were paid (or
that are treated as having been paid) by the Fund to its shareholders during the
preceding taxable year. For a more detailed discussion of tax matters affecting
the Fund and its shareholders, see "Taxation" in the SAI.
NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange on the last business day of each week, by dividing the value of
the Fund's net assets (the value of its assets less its liabilities, exclusive
of capital stock and surplus) by the total number of shares of Common Stock
outstanding. Net asset value includes interest on fixed-income securities which
is accrued daily. Securities which are traded over-the-counter and on a stock
exchange will be valued according to the broadest and most representative
market, and it is expected that for bonds and other fixed-income securities this
ordinarily will be the over-the-counter market. Notwithstanding the above, bonds
and other fixed-income securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to reflect the fair market
value of such securities. The prices provided by a pricing service are
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities and any developments
related to specific securities. Securities not priced in this manner are valued
at the most recent current quoted bid price, or when stock exchange valuations
are used, at the latest quoted sale price on the date of valuation. Short-term
debt securities which mature in less than 60 days are valued at amortized cost
if their term to maturity from date of purchase by the Fund was less than 60
days, or by amortizing their value on the 61st day if their term to maturity on
the date acquired by the Fund was more than 60 days, unless this is determined
by the Board of Directors not to represent fair value. The value of other assets
and securities for which no current quotations are readily available are
determined in good faith at fair value using methods approved by the Directors.
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock, $.001 par value per share. All shares of Common Stock have equal rights
as to dividends and voting privileges and, when issued, will be fully paid and
nonassessable. There are no conversion, preemptive or other subscription rights.
In the event of liquidation, each share of Common Stock is entitled to its
proportion of the Fund's assets after debts and expenses. Shareholders are
entitled to one vote per share and do not have cumulative voting rights.
Set forth below is information with respect to the Common Stock as of August
31, 1996:
<TABLE>
<CAPTION>
AMOUNT HELD BY FUND
AMOUNT AUTHORIZED FOR ITS OWN ACCOUNT AMOUNT OUTSTANDING
- --------------------- -------------------- -------------------
<S> <C> <C>
100,000,000 Shares 0 Shares 24,385,367
</TABLE>
The number of shares outstanding as of August 31, 1996, adjusted to give
effect to the issuance of all the Shares pursuant to the Offer, including up to
25% of the Shares available for issuance pursuant to the Over-Subscription
Privilege, would be 34,545,937.
The Fund's shares are listed and traded on the New York Stock Exchange. The
average weekly trading volume of the Common Stock on the New York Stock Exchange
during the year ended December 31, 1995 was 124,877 shares. The following table
sets forth for the quarters indicated the high and low sales prices on
28
<PAGE>
the New York Stock Exchange per share of Common Stock and the net asset value
and the premium or discount from net asset value at which the Common Stock was
trading, expressed as a percentage of net asset value, at each of the high and
low sales prices provided.
<TABLE>
<CAPTION>
DISCOUNT AS % OF NAV(2)
MARKET PRICE(1) NET ASSET VALUE
-------------------- -------------------- ------------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ---------------------------------------------------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994...................................... $ 8.50 $ 7.75 $ 9.08 $ 8.91 6.39% 13.02%
June 30, 1994....................................... 8.00 7.38 8.67 8.48 7.73 13.03
September 30, 1994.................................. 7.75 7.00 8.36 8.17 7.30 14.32
December 31, 1994................................... 7.25 6.75 8.11 8.11 10.60 16.77
March 31, 1995...................................... 7.63 7.00 8.24 7.95 7.46 11.95
June 30, 1995....................................... 7.75 7.25 8.54 8.36 9.25 13.28
September 30, 1995.................................. 7.75 7.50 8.55 8.59 9.36 12.69
December 31, 1995................................... 8.00 7.50 8.63 8.58 7.30 12.59
March 31, 1996...................................... 8.50 7.88 8.60 8.49 1.16 7.24
June 30, 1996....................................... 8.25 7.75 8.51 8.53 3.06 9.14
September 30, 1996*................................. 8.63 8.00 8.54 8.42 (1.05) 4.99
</TABLE>
- ---------
(1) As reported by the New York Stock Exchange.
(2) Based on the Fund's computations.
* Through September 20, 1996.
The Fund's By-laws provide that if, for any fiscal quarter, the average
discount from net asset value at which shares of the Fund's Common Stock have
traded is substantial in the determination of the Board of Directors, the Board
of Directors of the Fund will consider, at its next regularly scheduled
quarterly meeting, taking actions designed to eliminate the discount, including
periodic repurchases of shares or amendments to the Fund's Articles of
Incorporation to convert the Fund to an open-end investment company. Any such
amendment would require a favorable vote of a majority of the shares entitled to
vote on the matter and the amendment would have to be declared advisable by the
Board of Directors prior to its submission to shareholders. Shareholders of an
open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the 1940
Act) at their net asset value, less such redemption charge, if any, as might be
in effect at the time of a redemption.
The Fund's Board of Directors has approved a share repurchase program
authorizing the Fund from time to time to make open-market purchases of shares
of the Fund on the New York Stock Exchange up to 10% of the number of shares of
the Fund that were outstanding as of December 11, 1990. There were no
repurchases of shares during the year ended December 31, 1995.
CUSTODIAN AND TRANSFER AND DIVIDEND-PAYING AGENT AND REGISTRAR
The Chase Manhattan Bank, 770 Broadway, New York, New York 10003, acts as
the custodian for the Fund's assets. The Chase Manhattan Bank, 73 Tremont
Street, Boston, Massachusetts 02108, also acts as the Fund's accounting agent,
dividend-paying agent, transfer agent and registrar.
29
<PAGE>
DISTRIBUTION ARRANGEMENTS
Smith Barney Inc., located at 388 Greenwich Street, New York, New York
10013, will act as Dealer Manager for the Offer. Under the terms and subject to
the conditions contained in a Dealer Manager Agreement, the Dealer Manager will
provide financial advisory services and marketing assistance in connection with
the Offer and will solicit the exercise of Rights by Record Date Shareholders.
The Offer is not contingent upon any number of Rights being exercised. The Fund
has agreed to pay the Dealer Manager a fee for financial advisory and marketing
services equal to 1.25% of the Subscription Price per Share for shares issued
upon exercise of the Rights and the Over-Subscription Privilege and to pay
broker-dealers, including the Dealer Manager, fees for their soliciting efforts
("Soliciting Fees") of 2.50% of the Subscription Price per Share for each Share
issued upon exercise of the Rights and the Over-Subscription Privilege.
Soliciting Fees will be paid to the broker-dealer designated on the applicable
portion of the Subscription Certificates, or if no broker-dealer is so
designated, to the Dealer Manager.
The Fund has also agreed to reimburse the Dealer Manager up to $100,000 for
its reasonable expenses incurred in connection with the Offer.
The Fund and BEA Associates have agreed to indemnify the Dealer Manager or
to contribute for losses arising out of certain liabilities including
liabilities under the Securities Act. The Dealer Manager Agreement also provides
that the Dealer Manager will not be subject to any liability to the Fund in
rendering the services contemplated by the Agreement except in instances
involving the bad faith, willful misfeasance, or gross negligence of the Dealer
Manager or the reckless disregard by the Dealer Manager of its obligations and
duties under the Agreement.
The Fund has agreed, subject to certain exceptions, not to offer or sell, or
enter into any agreement to sell, any equity or equity related securities of the
Fund or securities convertible into such securities for a period of 180 days
after the date of the Dealer Manager Agreement without the prior consent of the
Dealer Manager.
LEGAL MATTERS
With respect to matters of United States law, the validity of the shares
offered hereby will be passed on for the Fund by Willkie Farr & Gallagher, New
York, New York. Certain legal matters will be passed on for the Dealer Manager
by Skadden, Arps, Slate, Meagher & Flom, Boston, Massachusetts. Counsel for the
Fund and the Dealer Manager may rely, as to matters of Maryland law, on Venable,
Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The financial statements of the Fund as of December 31, 1995 have been
incorporated by reference into the SAI in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of that firm as
experts in accounting and auditing. Price Waterhouse LLP is located at 1177
Avenue of the Americas, New York, New York 10036.
FURTHER INFORMATION
Further information concerning these securities and their issuer may be
found in the Registration Statement of which this Prospectus constitutes a part
on file with the Securities and Exchange Commission. The Commission maintains a
World Wide Web site on the Internet at http://www.sec.gov. that contains the
Prospectus, material incorporated by reference and other information regarding
registrants, such as the Fund, that file electronically with the Commission.
30
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
General Information........................................................................................ 2
Investment Objectives and Policies......................................................................... 2
Investment Restrictions.................................................................................... 6
Management of the Fund..................................................................................... 8
Portfolio Transactions..................................................................................... 11
Dividend Reinvestment and Cash Purchase Plan............................................................... 12
Taxation................................................................................................... 13
Net Asset Value............................................................................................ 17
Common Stock............................................................................................... 17
Financial Statements....................................................................................... 18
</TABLE>
31
<PAGE>
APPENDIX
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
<TABLE>
<S> <C>
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or exceptionally stable margin and
principal is secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
</TABLE>
Moody's applies numerical modifiers (1, 2, and 3) with respect to the bonds
rated "Aa" through "B." The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
<TABLE>
<S> <C>
Ba Bonds that are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa Bonds that are rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
STANDARD & POOR'S RATINGS GROUP
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
AA Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from AAA issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
</TABLE>
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the lowest degree of speculation, and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Debt rated D is in payment default.
<TABLE>
<S> <C>
BB Debt rated 'BB' has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The 'BB' rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the capacity
to pay interest and repay principal. The 'CCC' rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied 'B' or 'B-'
rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that is
assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior debt which is
assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
</TABLE>
In July 1994, Standard & Poor's initiated an "r" symbol to its ratings. The
"r" symbol is attached to derivative, hybrid and certain other obligations that
Standard & Poor's believes may experience high variability in expected returns
due to non-credit risks created by the terms of the obligation.
A-2
<PAGE>
MODIFIERS
Standard & Poor's may apply plus (+) or minus (-) modifiers with respect to
bonds rated "AA" through "CCC." These modifiers show the bond's relative
standing within the major rating categories.
A-3
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, THE FUND'S INVESTMENT ADVISER OR THE DEALER
MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
AS SET FORTH IN THE PROSPECTUS OR IN THE AFFAIRS OF THE FUND SINCE THE DATE
HEREOF. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED
BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
Fee Table........................................ 8
Financial Highlights............................. 9
The Offer........................................ 10
The Fund......................................... 16
Use of Proceeds.................................. 18
Risk Factors and Special Considerations.......... 18
Investment Objective and Policies................ 23
Management of the Fund........................... 25
Portfolio Transactions........................... 26
Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan............. 26
Taxation......................................... 27
Net Asset Value.................................. 28
Common Stock..................................... 28
Custodian and Transfer and Dividend-Paying Agent
and Registrar................................... 29
Distribution Arrangements........................ 30
Legal Matters.................................... 30
Experts.......................................... 30
Further Information.............................. 30
Table of Contents of Statement of Additional
Information..................................... 31
Appendix......................................... A-1
</TABLE>
BEA INCOME FUND, INC.
8,128,456 SHARES OF
COMMON STOCK ISSUABLE UPON
EXERCISE OF RIGHTS TO SUBSCRIBE
TO SUCH SHARES
---------
PROSPECTUS
SEPTEMBER 27, 1996
---------
SMITH BARNEY INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
BEA INCOME FUND, INC.
------------
STATEMENT OF ADDITIONAL INFORMATION
BEA Income Fund, Inc. (the "Fund") is a diversified, closed-end management
investment company seeking current income consistent with the preservation of
capital. The Fund seeks to achieve this objective primarily through investment
in fixed-income securities, such as bonds, debentures and preferred stocks.
Under normal circumstances, at least 75% of the Fund's total assets will be
invested in fixed-income securities.
This Statement of Additional Information ("SAI") is not a prospectus, but
should be read in conjunction with the Prospectus for the Fund dated September
27, 1996 (the "Prospectus"). This SAI does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling (800)
733-8481, extension 349, and from ouside the United States, by calling (212)
805-7000. This SAI incorporates by reference the entire prospectus.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GENERAL INFORMATION........................................................................................ 2
INVESTMENT OBJECTIVE AND POLICIES.......................................................................... 2
INVESTMENT RESTRICTIONS.................................................................................... 6
MANAGEMENT OF THE FUND..................................................................................... 8
PORTFOLIO TRANSACTIONS..................................................................................... 11
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN............................................................... 12
TAXATION................................................................................................... 13
NET ASSET VALUE............................................................................................ 17
COMMON STOCK............................................................................................... 17
FINANCIAL STATEMENTS....................................................................................... 18
</TABLE>
-------------------
The Prospectus and this SAI omit certain of the information contained in the
registration statement filed with the Securities and Exchange Commission,
Washington, D.C. The registration statement may be obtained from the Securities
and Exchange Commission upon payment of the fee prescribed, or inspected at the
Securities and Exchange Commission's office at no charge.
-------------------
This Statement of Additional Information is dated
September 27, 1996.
<PAGE>
GENERAL INFORMATION
The Fund changed its name from First Boston Income Fund, Inc. to CS First
Boston Income Fund, Inc. in June 1994 and to BEA Income Fund, Inc. in June 1995.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is current income consistent with the
preservation of capital. The Fund seeks to achieve this objective by investing
primarily in fixed-income securities, such as bonds, debentures and preferred
stocks. The Fund's investment portfolio will not be managed for capital
appreciation. The Fund's investment objective and the investment limitations
described below under the caption "Investment Restrictions" are fundamental and
may not be changed without the approval of a majority of the Fund's outstanding
voting securities, as such term is defined in the Investment Company Act of 1940
(the "Act"). All other policies and percentage limitations of the Fund as
described below may be modified by the Board of Directors if, in the reasonable
exercise of the Board's business judgment, modification is determined to be
necessary or appropriate to carry out the Fund's investment objective.
INVESTMENT POLICIES
Under normal circumstances, the Fund will invest at least 75% of its total
assets in fixed-income securities, such as bonds, debentures and preferred
stocks. In January 1992, the Board of Directors removed the requirement that
two-thirds of the Fund's fixed-income securities be comprised of investment
grade securities. Accordingly, the Fund's investments in fixed-income securities
are no longer subject to any rating quality limitation and may consist of
securities that are rated below investment grade by a nationally recognized
rating service or that are unrated and of comparable quality in the opinion of
BEA Associates. Lower rated securities generally provide yields superior to
those of more highly rated securities, but involve greater risks and are
speculative in nature. See "Risk Factors and Special Considerations--Lower-Rated
Securities" in the Prospectus. The market value of lower-rated securities may be
more volatile than the market value of higher-rated securities and generally
tends to reflect the market's perception of the creditworthiness of the issuer
and short-term market developments to a greater extent than more highly rated
securities, which reflect primarily fluctuations in general levels of interest
rates. For a description of the corporate bond ratings of Moody's Investors
Service, Inc. ("Moodys") and Standard & Poor's Ratings Group ("S&P"), see the
Appendix to the Prospectus.
Depending on market conditions, the Fund may also invest a substantial
portion of its assets in mortgage-backed securities. Mortgage-backed securities
are collateralized by mortgages or interests in mortgages and may be issued by
government or non-government entities. Mortgage-backed securities issued by
government entities typically provide a monthly payment consisting of interest
and principal payments, and additional payments will be made out of unscheduled
prepayments of principal. Non-government issued mortgage backed securities may
offer higher yields than those issued by government entities, but may be subject
to greater price fluctuations.
The Fund intends that its portfolio, under normal market conditions, will
consist principally of fixed-income securities. Subject to the limitations
described under "Other Investment Techniques" below, the Fund may also invest up
to 25% of its total assets in money market instruments such as certificates of
deposit, commercial paper, bankers' acceptances and repurchase agreements; the
Fund, however, currently does not intend to invest more than 5% in such assets.
The Fund may also, for bona fide hedging purposes, invest in interest rate
futures and related options. It is expected that the average weighted maturity
of the Fund's investment portfolio will be 5 to 10 years.
The Fund's policy is to diversify its investments among various securities
and industries only to the extent such diversification appears to enhance the
opportunity to achieve its investment objective. Under the 1940 Act and the
Internal Revenue Code (the "Code"), the Fund is also subject to certain asset
diversification requirements. The Fund may not invest in a security if after
such investment 25% or more of its total assets, at market value, would be
invested in any one industry.
2
<PAGE>
Under the 1940 Act, the Fund is restricted in its ability to purchase any
security of which BEA Associates or any of its affiliate is a principal
underwriter during the public offering of such security.
OTHER INVESTMENT TECHNIQUES
The Fund may enter into repurchase agreements, lend portfolio securities,
purchase securities on a when-issued basis and invest in interest rate futures
and related options.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements
collateralized by U.S. Government securities, certificates of deposit and
certain bankers' acceptances for the purpose of realizing additional income.
Repurchase agreements are transactions by which the Fund purchases a security
and simultaneously commits to resell that security to the seller (a bank or
securities dealer) at an agreed upon price on an agreed upon date (usually
within seven days of purchase). The resale price reflects the purchase price
plus an agreed-upon market rate of interest which is unrelated to the coupon
rate or date of maturity of the purchased security. In these transactions, the
seller is required to deliver additional securities to the Fund, if necessary,
so that the current total market value of the securities subject to the
repurchase agreement will be at all times in excess of the agreed upon
repurchase price including any accrued interest earned on the repurchase
agreement. Securities subject to such repurchase agreements will be held by the
Fund's custodian bank until repurchased. Use of repurchase agreements can permit
the Fund to keep its assets at work while retaining short-term flexibility in
pursuit of investments of a longer-term nature. BEA Associates will continually
monitor the value of the underlying securities to ensure that their value always
equals or exceeds the repurchase price.
LENDING OF SECURITIES. The Fund may lend its portfolio securities to banks,
brokers, dealers and other financial institutions who need to borrow securities
in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities or completing arbitrage operations. 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 lent that might occur during the term of the loan would
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 the
1940 Act or the rules and regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder, which currently require that
(a) 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 United States Government or its agencies having a value at all
times not less than 102% of the value of the securities lent, (b) the borrower
adds to such collateral whenever the price of the securities lent rises (i.e.,
the borrower "marks to the market" on a daily basis), (c) the loan be made
subject to termination by the Fund at any time and (d) the Fund receives
reasonable interest on the loan (which may include the Fund's investing any cash
collateral in interest-bearing short-term investments), any distribution on the
securities lent 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. 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 three business days. All relevant facts and circumstances, including the
creditworthiness of the borrower, will be considered by BEA Associates in making
decisions with respect to the lending of securities, subject to review by the
Fund's Board of Directors. The creditworthiness of such bank, broker, dealer or
other financial institution will be monitored by the Adviser during the time any
securities are loaned. In addition, voting rights may pass with the loaned
securities but if a material event were to occur affecting an investment on a
loan, the loan must be called and the securities voted by the Fund.
SHORT SALE. The Fund may engage in short sales (the sale of securities that
it does not own), but only when it owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short ("short sales against the box"), and only if not more than
5% of the Fund's net assets (taken at current value) is held as collateral for
such sales at any one time.
3
<PAGE>
INTEREST RATE FUTURES AND RELATED OPTIONS. The Fund may purchase and sell
interest rate futures contracts and options thereon that are traded on U.S.
futures exchanges. Futures contracts are commodities contracts that obligate the
buyer to take and the seller to make delivery at a future date of a specified
quantity of the underlying financial instrument. However, some interest rate
futures contracts provide for settlement in cash rather than by delivery of the
securities underlying the contract. Each futures contract is traded on a
commodity exchange that has been designated a "contract market" by the Commodity
Futures Trading Commission (the "CFTC"). A call option for a futures contract is
a short term contract (having a duration of nine months or less) pursuant to
which a purchaser, in return for a premium paid, has the right to buy the
futures contract underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying futures contract against payment of the exercise price. A put option
for a futures contract is a similar contract which gives the purchaser, in
return for a premium, the right to sell the underlying futures contract at a
specified price during the term of the option. The writer of the put, who
receives the premium, has the obligation to buy the underlying futures contract,
upon exercise, at the exercise price. The Fund only intends to engage in futures
contracts or options for bona fide hedging purposes. In instances where the Fund
purchases futures, the Fund will segregate with its custodian an amount of cash,
U.S. Government securities or other high-grade, liquid debt securities equal to
the market value of the interest rate futures contracts and thereby insure that
the use of interest rate futures contracts is unleveraged.
In accordance with current CFTC rules, the Fund will not enter into any
interest rate futures contract or option thereon if, immediately thereafter, the
aggregate initial margin for all existing futures contracts and options thereon
and for premiums paid for such options not entered into for bona fide hedging
purposes would exceed 5% of the Fund's total assets. The Fund will not enter
into any such contract or option thereon, if, as a result thereof, more than 50%
of the Fund's total assets would be hedged.
In contrast to the purchase or sale of a security, the full purchase price
of the futures contract is not paid or received by the Fund upon its purchase or
sale. Instead, the Fund will deposit in a segregated custodial account as an
initial margin an amount of cash or U.S. Treasury bills equal to approximately
5% of the value of the contract. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract assuming all contractual
obligations have been satisfied. Subsequent payments to and from the broker,
called variation margin, will be made on a daily basis as the price of the
underlying security fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as "mark to the market."
For example, when the Fund has purchased an interest rate futures contract and
the price of the futures contract has risen, that position will have increased
in value and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased an
interest rate futures contract and the price of the futures contract has
declined, the position would be less valuable and the Fund would be required to
make a variation margin payment to the broker. At any time prior to expiration
of the futures contract, the Fund may elect to terminate the position by taking
an opposite position. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain. No assurance can be given that the Fund will be able to
take an opposite position.
Interest rate futures contracts are currently available on several types of
fixed-income securities, including U.S. Treasury Bonds, U.S. Treasury Notes and
GNMA securities on The Chicago Board of Trade, and on U.S. Treasury Bills on the
International Monetary Market Division of The Chicago Mercantile Exchange. The
Fund may enter into interest rate futures contracts consistent with the Fund's
investment objectives and in compliance with applicable regulations of the CFTC.
The purpose of selling an interest rate futures contract is to protect the
Fund's portfolio from fluctuations in asset value resulting from interest rate
changes. Selling a futures contract has an effect similar to selling a portion
of the Fund's portfolio securities. If interest rates were to increase, the
value of the
4
<PAGE>
securities in the portfolio would decline, but the gains on the Fund's futures
strategy would increase, thereby keeping the net asset value of the Fund from
declining as much as it otherwise might have. In this way, selling futures
contracts acts as a hedge against the effects of rising interest rates. However,
a decline in interest rates resulting in an increase in the value of portfolio
securities tends to be offset by losses resulting from the Funds' futures
strategy.
Similarly, when interest rates are expected to decline, futures contracts
may be purchased to hedge against anticipated subsequent purchases of portfolio
securities at higher prices. By buying futures, the Fund could effectively hedge
against an increase in the price of the securities it intends to purchase at a
later date in order to permit the purchase to be effected in an orderly manner.
At that time, the futures contracts could be liquidated at a profit if rates had
in fact declined as expected, and the Fund's cash position could be used to
purchase securities.
Although most interest rate futures contracts call for making or taking
delivery of the underlying securities, these obligations are typically canceled
or closed out before the scheduled settlement date. The closing is accomplished
by purchasing (or selling) an identical futures contract to offset a short (or
long) position. Such an offsetting transaction cancels the contractual
obligations established by the original futures transaction. Other financial
futures contracts call for cash settlements rather than delivery of securities.
If the price of an offsetting futures transaction varies from the price of
the original futures transaction, the Fund will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities transaction, but may not always
or completely do so.
The selection of futures and option strategies requires skills different
than those needed to select portfolio securities; however, BEA Associates does
have experience in the use of futures and options.
DIRECT PLACEMENT. As noted under "Investment Restrictions," the Fund may
invest up to 10% of its assets in securities that are not readily marketable.
The portion of the Fund's portfolio that may be invested in such securities
(other than in repurchase agreements) may be purchased in placements from the
securities' issuer or in the secondary market for such directly placed
securities ("Direct Placement Securities"). The purchase of Direct Placement
Securities will depend on the relative attractiveness of those securities as
compared to securities which have been publicly offered.
Direct Placement Securities have frequently resulted in higher yields and
restrictive covenants providing greater protection for the purchaser, such as
longer call or refunding protection, than typically would be available with
publicly offered securities of the same type. An issuer is often willing to
create more attractive features in its securities issued privately, because it
has avoided the expense and delay involved in a public offering of its
securities. For various reasons, an issuer may prefer or be required as a
practical matter to obtain private financing. At certain times adverse
conditions in the public securities markets may preclude a public offering of an
issuer's securities.
On the other hand, Direct Placement Securities are subject to statutory or
contractual restrictions and delays on resale. They are, therefore, often
referred to as "restricted securities." Restricted securities may generally be
resold only in a privately negotiated transaction with a limited number of
purchasers or in a public offering registered under the Securities Act of 1933.
Such securities are therefore unlike securities which are traded in the open
market and which can be expected to be sold immediately if the market is
adequate.
TEMPORARY INVESTMENTS
The Fund may, for temporary defensive purposes, invest its assets in money
market instruments and interest rate futures and related options without regard
to any percentage limitation on total assets invested or hedged, as the case may
be. The Fund may also, for temporary defensive purposes, invest in short-term
(less than twelve months to maturity) debt securities rated at least A by
Moody's or S&P. Subject to its limitation on investments in money market
instruments, the Fund will also invest in short-term debt securities rated at
least Baa by Moody's or BBB by S&P to commit overnight cash balances.
5
<PAGE>
PORTFOLIO TURNOVER
The Fund has no restrictions on portfolio turnover, but it is not the Fund's
policy to engage in transactions with the objective of seeking profits from
short-term trading. It is anticipated that the Fund's annual portfolio turnover
will not exceed 100%. For information regarding the Fund's portfolio turnover
rate, see "Financial Highlights" in the Prospectus. This rate is calculated by
dividing the lesser of sales or purchases of portfolio securities for any given
year by the average monthly value of the Fund's portfolio securities for such
year. For purposes of this calculation, portfolio securities exclude purchase
and sales of debt securities having a maturity at the date of purchase of one
year or less. The rate of portfolio turnover will not be a limiting factor when
BEA Associates deems it appropriate to purchase or sell securities for the Fund.
Portfolio turnover, however, directly affects the amount of transaction costs
that will be borne by the Fund. In addition, the sale of securities held by the
Fund for not more than one year will give rise to short-term capital gain or
loss for U.S. federal income tax purposes. The U.S. federal income tax
requirement that the Fund derive less than 30% of its gross income from the sale
or other disposition of stock or securities held less than three months may
limit the Fund's ability to dispose of its securities. See "Taxation--United
States Federal Income Taxes."
INVESTMENT RESTRICTIONS
The Fund is subject to the following restrictions which may not be changed
without the approval of at least a majority of the outstanding voting securities
of the Fund, as defined in the 1940 Act. The Fund will not (1) invest more than
5% of the value of its total assets in the securities of any one issuer,
excluding obligations of the U.S. Government or any agency or instrumentality
thereof and except that up to 25% of the value of its total assets may be
invested without regard to this limitation; (2) own more than 10% of the
outstanding voting stock or other securities (other than securities of the U.S.
Government or any agency or instrumentality thereof), or both, of any one
issuer; (3) purchase shares of other investment companies except as part of a
plan of reorganization, merger, consolidation or an offer of exchange; (4)
borrow money except as a temporary measure for extraordinary or emergency
purposes, and in no event in excess of 10% of the lower of the market value or
cost of its total assets, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are not
considered borrowings (the Fund will not purchase any securities at any time
while such borrowings exceed 5% of total assets); (5) purchase securities on
margin; (6) sell securities short unless at all times when a short position is
open it owns an equal amount of such securities or securities convertible into
or exchangeable, with payment of any further consideration, for securities of
the same issue as, and equal in amount, to the securities sold short, and unless
not more than 5% of the Fund's net assets (taken at current value) are held as
collateral for such sales at any one time; (7) invest in the aggregate more than
5% of the value of its total assets in securities denominated in a currency
other than the United States dollar; (8) invest for the purpose of exercising
control over management of any company; (9) make loans, except (i) by purchasing
bonds, debentures or similar obligations (including repurchase agreements,
subject to the limitation described in (11) below), which are either publicly
distributed or customarily purchased by institutional investors, and (ii) by
lending its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act or the
rules and regulations or interpretations of the Commission thereunder; (10)
underwrite the securities of other issuers, except to the extent that in
connection with the disposition of portfolio securities the Fund may be deemed
to be an underwriter; (11) invest more than 10% of its total assets in
securities subject to legal or contractual restrictions on resale or in
securities which are not readily marketable, including repurchase agreements
having maturities of more than 7 days and Direct Placement Securities (as
defined under Investment Objective and Policies--Other Investment Techniques);
(12) except as described under "Investment Objective and Policies", purchase
real estate, commodities or commodity contracts, although the Fund may purchase
or sell securities of companies which deal in real estate or interests therein;
(13) except as described under "Investment Objective and Policies", invest in or
write put, call, straddle or spread options; (14) invest directly in interests
in oil, gas or other mineral exploration development programs; or (15) invest in
non-dividend paying equity securities if after such investment, total non-
6
<PAGE>
dividend paying equity securities would comprise more than 10% of the Fund's
total assets. The deposit of initial and variation margin in connection with
interest rate futures contracts and related options shall not be deemed to be in
violation of any of the foregoing investment restrictions.
If a percentage restriction on investment or use of assets set forth above
is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
Under the 1940 Act, the Fund may neither invest more than 5% of its total
assets in the securities of any one investment fund, nor acquire more than 3% of
the outstanding voting securities of any such fund. In addition, the Fund may
not invest more than 10% of its total assets in securities issued by all
investment funds. As a shareholder in any investment company, the Fund will bear
its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's advisory, sub-advisory and administrative fees
with respect to assets so invested. See "Taxation--United States Federal Income
Taxes."
7
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The names of the directors and principal officers of the Fund are set forth
below, together with their positions and their principal occupations during the
past five years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND
- --------------------------------------- -----------------------------------------------------
<S> <C>
Daniel H. Sigg (40) ................... Director, Chairman of the Board and Chief Executive
One Citicorp Center Officer
153 East 53rd Street
New York, New York 10022
Prof. Enrique R. Arzac (54) ........... Director
Columbia University
Graduate School of Business
New York, New York 10027
Lawrence J. Fox (53) .................. Director
110 PNB Building
Broad and Chestnut Streets
Philadelphia, Pennsylvania 19107
James S. Pasman, Jr. (65) ............. Director
29 The Trillium
Pittsburgh, Pennsylvania 15238
Robert Moore (39) ..................... President and Chief Investment Officer
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Richard J. Lindquist (35) ............. Vice President
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Paul P. Stamler (35) .................. Treasurer
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Michael A. Pignataro (36) ............. Secretary
One Citicorp Center
153 East 53rd Street
New York, New York 10022
</TABLE>
- ---------
* Mr. Sigg is an "interested person" of the Fund within the meaning of the 1940
Act by virtue of his position as a director and officer of BEA Associates.
Daniel H. Sigg is a member of the Executive Committee, Chief Financial
Officer, and an Executive Director of BEA Associates (since May 1995). From
February 1992 to April 1995, Mr. Sigg was a member of the Executive Committee
and a Managing Director of BEA Associates. He was Vice President of Marketing of
BEA Associates from January 1991 to January 1992. Mr. Sigg has been President of
Credit Suisse Advisors Corporation since December 1995 and President of Credit
Suisse Capital Corporation since December 1994. He was Director and Vice
President of Credit Suisse Capital Corporation from December 1990 to November
1994. From 1987 to December 1990, Mr. Sigg was Vice President and Head of
International Equity Sales and Trading at Swiss American Securities. Mr. Sigg is
also a Director and Senior Vice President of The Brazilian Equity Fund, Inc.,
The Latin America Investment Fund, Inc., The Latin America Equity Fund, Inc.,
The Portugal Fund, Inc., The Indonesia Fund, Inc., The Chile Fund, Inc., The
8
<PAGE>
Emerging Markets Telecommunications Fund, Inc., The First Israel Fund, Inc. and
The Emerging Markets Infrastructure Fund, Inc. and is Chairman of the Board,
Chief Executive Officer and a Director of BEA Strategic Income Fund, Inc.
Prof. Enrique R. Arzac is Professor of Finance and Director of the Financial
Management Program at the Graduate School of Business of Columbia University
(since 1971). He is also a Director of The Adam Express Company and Petroleum
and Resources Corp. Dr. Arzac is also a director of The Brazilian Equity Fund,
Inc., The Latin America Investment Fund, Inc., The Latin America Equity Fund,
Inc., The Portugal Fund, Inc., The Chile Fund, Inc., The Emerging Markets
Telecommunications Fund, Inc., The First Israel Fund, Inc., The Emerging Markets
Infrastructure Fund, Inc. and BEA Strategic Income Fund, Inc.
Lawrence J. Fox is Managing Partner and Chairman of Professional
Responsibility Committee of the law firm of Drinker Biddle & Reath (since
January 1992). He has been a partner of Drinker Biddle & Reath since 1976. He is
a director of BEA Strategic Income Fund, Inc.
James S. Pasman, Jr. was the President and Chief Operating Officer of
National InterGroup, Inc. from April 1989 to March 1991. He is a director of BEA
Strategic Income Fund, Inc., of ADT, Ltd. and a trustee of BT Insurance Funds
Trust.
Robert Moore is a member of the Executive Committee, Executive Director and
Chief Operating Officer of BEA Associates (since December 1995). From February
1992 to December 1995, Mr. Moore was a Managing Director and Portfolio Manager
of BEA Associates, and from December 1990 to January 1992 he was Vice President
and Portfolio Manager of BEA Associates.
Richard J. Lindquist is a Managing Director of BEA Associates (since April
1995) and a Vice President of BEA Strategic Income Fund, Inc. From March 1993 to
March 1995, he was Chief Compliance Officer of CS First Boston Investment
Management Corporation ("CSIM"). He was director of CSIM from April 1992 to
February 1993 and Vice President of CSIM from July 1989 to March 1992.
Paul P. Stamler is a Vice President of BEA Associates (since June 1993) and
the Treasurer of BEA Strategic Income Fund, Inc. From April 1992 to May 1993,
Mr. Stamler was self-employed as a certified public accountant. From June 1988
to March 1992, Mr. Stamler was Vice President of Bear, Stearns & Co. Inc. Mr.
Stamler is also a Senior Vice President of The Brazilian Equity Fund, Inc., The
Latin America Investment Fund, Inc., The Latin America Equity Fund, Inc., The
Portugal Fund, Inc., The Indonesia Fund, Inc., The Chile Fund, Inc., The
Emerging Markets Telecommunications Fund, Inc., The First Israel Fund, Inc. and
The Emerging Markets Infrastructure Fund, Inc. and Treasurer of BEA Strategic
Income Fund, Inc.
Michael A. Pignataro has been Vice President of BEA Associates since
December 1995. He was Assistant Vice President and Chief Administrative Officer
for Investment Companies of BEA Associates from September 1989 to December 1995.
Mr. Pignataro is also the Chief Financial Officer and Secretary of The Brazilian
Equity Fund, Inc., The Latin America Investment Fund, Inc., The Latin America
Equity Fund, Inc., The Portugal Fund, Inc., The Chile Fund, Inc., The Emerging
Markets Telecommunications Fund, Inc., The First Israel Fund, Inc. and The
Emerging Markets Infrastructure Fund, Inc. and Chief Financial Officer and
Assistant Secretary of The Indonesia Fund, Inc. and Secretary of BEA Strategic
Income Fund, Inc.
The Fund pays each of its directors who is not a director, officer or
employee of BEA Associates or any affiliate thereof an annual fee of $10,000
plus $500 for each Board of Directors meeting attended. In addition, the Fund
will reimburse those directors for travel and out-of-pocket expenses incurred in
connection with Board of Directors meetings. The aggregate remuneration paid to
all such unaffiliated directors by the Fund during the fiscal year ended
December 31, 1995 was $39,358.
9
<PAGE>
The following table shows certain compensation information for the directors
of the Fund for the fiscal year ended December 31, 1995. None of the Fund's
executive officers or directors who are also officers or directors of BEA
Associates received any compensation from the Fund for such period. The Fund has
no bonus, profit sharing, pension or retirement plans.
<TABLE>
<CAPTION>
TOTAL
PENSION OR ESTIMATED COMPENSATION
AGGREGATE RETIREMENT BENEFITS ANNUAL BENEFITS FROM FUND AND
COMPENSATION ACCRUED AS PART OF UPON FUND COMPLEX
NAME OF DIRECTOR FROM FUND FUND EXPENSES RETIREMENT PAID TO DIRECTORS
- ------------------------------------ ------------- ------------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Enrique R. Arzac *.................. $ 13,000 0 0 $ 26,000
Lawrence J. Fox..................... $ 13,000 0 0 $ 26,000
James S. Pasman, Jr................. $ 13,000 0 0 $ 26,000
<CAPTION>
TOTAL NUMBER OF
BOARDS OF BEA
ASSOCIATES
ADVISED
INVESTMENT
COMPANIES
NAME OF DIRECTOR SERVED
- ------------------------------------ ---------------------
<S> <C>
Enrique R. Arzac *.................. 10
Lawrence J. Fox..................... 2
James S. Pasman, Jr................. 2
</TABLE>
- ---------
* On February 13, 1996, Prof. Arzac was elected as a director of eight other
BEA Associates-advised investment companies. Because the election took place
after the 1995 fiscal year-end, Prof. Arzac did not receive any compensation
with respect to these BEA-advised investment companies for the year ended
December 31, 1995.
The Articles of Incorporation and Bylaws of the Fund provide that the Fund
will indemnify directors, officers, of the Fund against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their positions with the Fund to the fullest extent permitted by law. In
addition, the Fund's Articles of Incorporation provide that the Fund's directors
and officers will not be liable to the shareholders for money damages, except in
limited instances. However, nothing in the Articles of Incorporation or the
Bylaws of the Fund protects or indemnifies a director, officer, employee or
agent against any liability to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office.
ADVISORY ARRANGEMENTS
BEA Associates acts as the Fund's investment adviser pursuant to an Advisory
Agreement with the Fund (the "Advisory Agreement") which became effective on
June 13, 1995. Prior to this date, CSIM provided investment advisory services to
the Fund under substantially the same terms, conditions and fees.
The Advisory Agreement provides that BEA Associates shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the Advisory Agreement relates, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of BEA Associates in the performance of its duties or from reckless
disregard of its obligations and duties under the Advisory Agreement.
For the fiscal period from June 13, 1995 (effective date of the Advisory
Agreement) through December 31, 1995, BEA Associates was paid $568,039 for
advisory services rendered to the Fund. For the fiscal period from January 1,
1995 through June 12, 1995 and the fiscal years ended December 31, 1994 and
December 31, 1993, CSIM was paid for advisory services rendered to the Fund
$458,394, $1,032,360 and $1,066,979, respectively.
ADMINISTRATIVE ARRANGEMENT
Chase Global Funds Services Company (the "Administrator") serves as the
Fund's administrator pursuant to an agreement with the Fund (the "Administration
Agreement").
DURATION AND TERMINATION; NON-EXCLUSIVE SERVICES
The Advisory Agreement became effective on June 13, 1995. Unless earlier
terminated as described below, the Advisory Agreement remains in effect if
approved annually (a) by the Board of Directors of the Fund or by the holders of
a majority of the Fund's outstanding voting securities (as defined in the 1940
Act) and (b) by a majority of the directors who are not parties to the Advisory
Agreement or "interested persons"
10
<PAGE>
(as defined in the 1940 Act) of any such party. The Advisory Agreement
terminates on its assignment by any party and may be terminated without penalty
on 60 days' written notice at the option of the Board of Directors of the Fund
or by the vote of the majority of the holders of the Fund's shares, or upon 90
days' written notice, by BEA Associates.
The Administration Agreement is terminable upon 60 days' notice by either
party.
The services of BEA Associates and the Administrator are not deemed to be
exclusive, and nothing in the relevant service agreements will prevent any of
them or their affiliates from providing similar services to other investment
companies and other clients (whether or not such clients' investment objectives
and policies are similar to those of the Fund) or from engaging in other
activities.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund are made by BEA
Associates, subject to the overall review of the Fund's Board of Directors.
Portfolio securities transactions for the Fund are placed on behalf of the Fund
by persons authorized by BEA Associates. BEA Associates manages other investment
companies and accounts (the "BEA Accounts") that invest in fixed-income
securities. Although investment decisions for the Fund are made independently
from those of the other BEA Accounts, investments of the type the Fund may make
may also be made on behalf of the BEA Accounts. When the Fund and one or more of
the BEA Accounts is prepared to invest in, or desires to dispose of, the same
security, available investments or opportunities for each will be allocated in a
manner believed by BEA Associates to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or disposed of by the Fund. The Fund may utilize
CS First Boston Corporation and other affiliates of Credit Suisse in connection
with the purchase or sale of securities in accordance with rules or exemptive
orders adopted by the Securities and Exchange Commission when BEA Associates
believes that the charge for the transaction does not exceed usual and customary
levels.
Transactions on U.S. and some foreign stock exchanges involve the payment of
negotiated brokerage commissions, which may vary among different brokers. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased from
and sold to dealers in the over-the-counter markets include a dealer's mark-up
or mark-down, which normally is not disclosed. Fixed-income securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security will
likely include a profit to the dealer.
In selecting brokers or dealers to execute portfolio transactions on behalf
of the Fund, BEA Associates will seek the best overall terms available. In
addition, unless otherwise directed by the Board of Directors of the Fund, the
Advisory Agreement authorizes BEA Associates, in selecting brokers or dealers to
execute a particular transaction and in evaluating the best overall terms
available, to consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) and cause the
Fund to pay a broker-dealer which furnishes such services a higher commission
than that which might be charged by another broker-dealer for effecting the same
transaction, provided that such commission is deemed reasonable in terms of
either that particular transaction or the overall responsibilities of BEA
Associates to the Fund. The fees payable under the Advisory Agreement are not
reduced as a result of BEA Associates' receiving such brokerage and research
services.
It is currently the Fund's policy that BEA Associates may at times pay
higher commissions than might otherwise be obtainable in recognition of
brokerage services felt necessary for the achievement of best available price
and most favorable execution of certain securities transactions. BEA Associates
will only pay such higher commissions if it believes this to be in the best
interest of the Fund. Some brokers or dealers who may receive such higher
commissions in recognition of brokerage services related to execution of
securities transactions are also providers of research information to BEA
Associates and/or the Fund. Subject to the primary objective set forth above,
BEA Associates has informed the Fund that it may pay higher commission rates
specifically for the purpose of obtaining research services. The Fund will not
pay to any affiliates of BEA Associates a higher commission rate specifically
for the purpose of obtaining research services.
11
<PAGE>
The Fund paid no affiliated brokerage commissions in any of the fiscal years
ended December 31, 1995, December 31, 1994 and December 31, 1993.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), each shareholder will be deemed to have elected, unless The Chase
Manhattan Bank ("Chase Manhattan") as the Plan Agent (the "Plan Agent"), is
otherwise instructed by the shareholder in writing, to have all distributions,
net of any applicable U.S. withholding tax, automatically reinvested in
additional shares of the Fund. Shareholders who do not participate in the Plan
will receive all dividends and distributions in cash, net of any applicable U.S.
withholding tax, paid in dollars by check mailed directly to the shareholder by
the Plan Agent, as dividend-paying agent. Shareholders who do not wish to have
dividends and distributions automatically reinvested should notify Chase
Manhattan, as the Plan Agent for BEA Income Fund, Inc., Dividend Reinvestment
Department - Retail Processing, 770 Broadway, 7th Floor, New York, New York
10003-9598 or by telephone at 1-800-428-8890. Dividends and distributions with
respect to shares registered in the name of a broker-dealer or other nominee
(i.e., in "street name") will be reinvested under the Plan unless such service
is not provided by the broker or nominee or the shareholder elects to receive
dividends and distributions in cash. A shareholder whose shares are held by a
broker or nominee that does not provide a dividend reinvestment program may be
required to have his shares registered in his own name to participate in the
Plan. Investors who own shares of the Fund's Common Stock registered in street
name should contact the broker or nominee for details concerning participation
in the Plan.
Certain distributions of cash attributable to (a) some of the dividends and
interest amounts paid to the Fund and (b) certain capital gains earned by the
Fund that are derived from securities of certain foreign issuers are subject to
taxes payable by the Fund at the time amounts are remitted. Such taxes, if any,
will be borne by the Fund and allocated to all shareholders in proportion to
their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Board of Directors of the Fund declares an income dividend or a
capital gains distribution payable either in the Fund's common stock or in cash,
as shareholders may have elected, nonparticipants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares of the Fund
valued at the lower of market price or net asset value as determined at the time
of purchase (generally on the payable date of the dividend) as set forth below.
Whenever market price is equal to or exceeds net asset value at the time shares
are valued for the purpose of determining the number of shares equivalent to the
cash dividend or distribution, participants will be issued shares of the Fund at
a price equal to net asset value but not less than 95% of the then current
market price of the Fund shares. The Fund will not issue shares under the Plan
below net asset value. If net asset value determined as at the time of purchase
exceeds the market price of Fund shares at such time, or if the Fund should
declare a dividend or other distribution payable only in cash (i.e., if the
Board of Directors should preclude reinvestment at net asset value), the Agent
will, as agent for the participants, endeavor to buy Fund shares in the open
market, on the New York Stock Exchange or elsewhere, on behalf of all
participants, and will allocate to each shareholder its pro rata portion based
on the average price paid (including brokerage commissions) for all shares
purchased. Shares acquired on behalf of participants in the open market will be
purchased at the prevailing market price. If, before the Agent has completed its
purchases, the market price exceeds the net asset value of a Fund share, the
average per share purchase price paid by the 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. For all
purposes of the Plan, (a) the market price of the Common Stock on a dividend
payment date shall be the last sale price on the New York Stock Exchange on that
date, or, if there is no such sale, then the mean between the closing bid and
asked quotations for such stock, and (b) net asset value per share of the Common
Stock on a particular date shall be as determined by or on behalf of the Fund.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, monthly, in any amount from $100 to $3,000, for investment in
the Fund's Common Stock. Cash contributions are used to purchase shares of
Common Stock in the open market regardless of whether such shares are selling
above, at or below the net asset value of the Fund. As a result, shareholders
may be purchasing shares at a
12
<PAGE>
market price that reflects a premium to the Fund's net asset value. Voluntary
cash payments received after five business days before the dividend payment date
will be invested by the Plan Agent on the next succeeding dividend payment date.
Dividend payment dates are expected to be the 15th (or next business day) of
each month. A participant may withdraw a voluntary cash payment by written
notice, if the notice is received by the Plan Agent not less than 48 hours
before the next succeeding dividend payment. A participant's tax basis in his
shares acquired through this optional investment right will equal his cash
payments to the Plan, including any cash payments used to pay brokerage
commissions allocable to his acquired shares.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in the name of the
participant and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
In the case of a shareholder, such as a bank, broker or nominee, that holds
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
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are to participate in the
Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions payable in either stock or cash. The Plan Agent's fees for
the handling of reinvestment of such dividends and capital gains distributions
will be paid by the Fund. 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 stock or in cash. However, each participant will
be charged by the Plan Agent a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with
voluntary cash payments made by the participant or the reinvestment of dividends
or capital gains distributions. Brokerage charges for purchasing small amounts
of stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the lower
commission thus obtainable. Brokerage commissions will vary based on, among
other things, the broker selected to effect a particular purchase and the number
of participants on whose behalf such purchase is being made. The Fund cannot
predict, therefore, whether the cost to a participant who makes a voluntary cash
payment will be less than if a participant were to make an open market purchase
of the Fund's Common Stock on his own behalf.
The receipt of dividends and distributions in stock under the Plan will not
relieve participants of any income tax (including withholding tax) that may be
payable on such dividends or distributions.
The Fund reserves the right to terminate the Plan as applied to any
voluntary cash payments made and any dividend or distribution paid subsequent to
notice of the termination sent to the members of the Plan at least 30 days
before the record date for such dividend or distributions. The Plan also may be
amended by the Fund or the Plan Agent, but (except when necessary or appropriate
to comply with applicable law, rules or policies of a regulatory authority) only
by at least 30 days' written notice to members of the Plan. All correspondence
concerning the Plan should be directed to The Chase Manhattan Bank, Dividend
Reinvestment Department - Retail Processing, 770 Broadway, 7th Floor, New York,
New York 10003-9598.
TAXATION
The following is a summary of the material United States federal income tax
considerations, regarding the purchase, ownership and disposition of shares in
the Fund. Each prospective shareholder is urged to consult his own tax adviser
with respect to the specific federal, state, local and foreign tax consequences
of investing in the Fund. The summary is based on the laws in effect on the date
of this SAI, which are subject to change.
UNITED STATES FEDERAL INCOME TAXES
THE FUND AND ITS INVESTMENTS. The Fund has qualified and intends to
continue to qualify and elect to be treated as a regulated investment company
for each taxable year under the Code. To so qualify, the Fund
13
<PAGE>
must, among other things: (a) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of (i) stock or
securities held for less than three months, (ii) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies) held for less than three months and (iii) foreign currencies (or
options, futures or forward contracts on such foreign currencies) held for less
than three months but only if such currencies (or options, futures or forward
contracts) are not directly related to the Fund's principal business of
investing in stock or securities (or options or futures with respect to stock or
securities); and (c) diversify its holdings so that, at the end of each quarter
of the Fund's taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, securities of other regulated investment
companies, United States government securities and other securities, with such
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the Fund's assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its assets
is invested in the securities (other than United States government securities or
securities of other regulated investment companies) of any one issuer or any two
or more issuers that the Fund controls and are determined to be engaged in the
same or similar trades or businesses or related trades or businesses. The Fund
expects that all of its foreign currency gains will be directly related to its
principal business of investing in stocks and securities.
Although legislation that would repeal the 30% limitation on a regulated
investment company's ability to make short-term investments has been proposed in
Congress, it is unclear when, if ever, such legislation will be enacted or the
form of such legislation if enacted.
As a regulated investment company, the Fund will not be subject to United
States federal income tax on its net investment income (i.e., income other than
its net realized long- and short-term capital gains) and its net realized long-
and short-term capital gains, if any, that it distributes to its shareholders,
provided that an amount equal to at least 90% of the sum of its investment
company taxable income (i.e., 90% of its taxable income minus the excess, if
any, of its net realized long-term capital gains over its net realized
short-term capital losses (including any capital loss carryovers), plus or minus
certain other adjustments as specified in section 852 of the Code) and its net
tax-exempt income for the taxable year is distributed, but will be subject to
tax at regular corporate rates on any taxable income or gains that it does not
distribute. Furthermore, the Fund will be subject to a United States corporate
income tax with respect to such distributed amounts in any year that it fails to
qualify as a regulated investment company or fails to meet this distribution
requirement. Any dividend declared by the Fund in October, November or December
of any calendar year and payable to shareholders of record on a specified date
in such a month shall be deemed to have been received by each shareholder on
December 31 of such calendar year and to have been paid by the Fund not later
than such December 31, provided that such dividend is actually paid by the Fund
during January of the following calendar year.
The Fund pays dividends of net investment income monthly and makes
distributions at least annually of any net realized long-term and short-term
capital gains in excess of applicable capital losses, including capital loss
carryforwards. The Board of Directors of the Fund will determine annually
whether to distribute any net realized long-term capital gains in excess of net
realized short-term capital losses (including any capital loss carryovers). The
Fund currently expects to distribute any excess annually to its shareholders.
However, if the Fund retains for investment an amount equal to all or a portion
of its net realized long-term capital gains in excess of its net realized
short-term capital losses and capital loss carryovers, it will be subject to a
corporate tax (currently at a rate of 35%) on the amount retained. In that
event, the Fund expects to designate such retained amounts as undistributed
capital gains in a notice to its shareholders who (a) will be required to
include in income for United States federal income tax purposes, as long-term
capital gains, their proportionate shares of the undistributed amount, (b) will
be entitled to credit their proportionate shares of the 35% tax paid by the Fund
on the undistributed amount against their United States federal income tax
14
<PAGE>
liabilities, if any, and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to increase their tax basis,
for United States federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed capital gains included in the
shareholder's income.
The Code imposes a 4% nondeductible excise tax on the Fund to the extent the
Fund does not distribute by the end of any calendar year at least 98% of its net
investment income for that year and 98% of the net amount of its capital gains
(both long-and short-term) for the one-year period ending, as a general rule, on
October 31 of that year. For this purpose, however, any income or gain retained
by the Fund that is subject to corporate income tax will be considered to have
been distributed by year-end. In addition, the minimum amounts that must be
distributed in any year to avoid the excise tax will be increased or decreased
to reflect any underdistribution or overdistribution, as the case may be, from
the previous year. The Fund anticipates that it will pay such dividends and will
make such distributions as are necessary in order to avoid the application of
this tax.
If, in any taxable year, the Fund fails to qualify as a regulated investment
company under the Code, the Fund would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholders' hands
as long-term capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as a regulated investment
company. In addition, if the Fund failed to qualify as a regulated investment
company for a period greater than one taxable year, the Fund may be required to
recognize any net built-in gains (the excess of the aggregate gains, including
items of income, over aggregate losses that would have been realized if it had
been liquidated) in order to qualify as a regulated investment company in a
subsequent year.
The Fund's transactions in options and futures contracts will be subject to
special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Fund (i.e., may affect whether
gains or losses are ordinary or capital), accelerate recognition of income to
the Fund and defer Fund losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also (a) will require the Fund to mark-to-market certain types of the positions
in its portfolio (i.e., treat them as if they were closed out) and (b) may cause
the Fund to recognize income without receiving cash with which to pay dividends
or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any option,
futures contract or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
DIVIDENDS AND DISTRIBUTIONS. Dividends of net investment income and
distributions of net realized short-term capital gains are taxable to a United
States shareholder as ordinary income, whether paid in cash or in shares.
Distributions of net long-term capital gains, if any, that the Fund designates
as capital gains dividends are taxable as long-term capital gains, whether paid
in cash or in shares and regardless of how long a shareholder has held shares of
the Fund. Dividends and distributions paid by the Fund (except for the portion
thereof, if any, attributable to dividends on stock of U.S. corporations
received by the Fund) will not qualify for the deduction for dividends received
by corporations. Distributions in excess of the Fund's current and accumulated
earnings and profits will, as to each shareholder, be treated as a tax-free
return of capital, to the extent of a shareholder's basis in his shares of the
Fund, and as a capital gain thereafter (if the shareholder holds his shares of
the Fund as capital assets).
Shareholders receiving dividends or distributions in the form of additional
shares pursuant to the Plan should be treated for United States federal income
tax purposes as receiving a distribution in the amount equal to the amount of
money that the shareholders receiving cash dividends or distributions will
receive, and should have a cost basis in the shares received equal to such
amount.
15
<PAGE>
Investors considering buying shares just prior to a dividend or capital gain
distribution should be aware that, although the price of shares just purchased
at that time may reflect the amount of the forthcoming distribution, such
dividend or distribution may nevertheless be taxable to them.
If the Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends are included in the
Fund's gross income not as of the date received but as of the later of (a) the
date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
SALES OF SHARES. Upon the sale or exchange of his shares, a shareholder
will realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be treated as
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 are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be disallowed
to the extent the shares disposed of are replaced, including replacement through
the reinvesting of dividends and capital gains distributions in the Fund under
the Plan, within a 61-day period beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the basis of the shares
acquired will be increased to reflect the disallowed loss. Any loss realized by
a shareholder on the sale of a Fund share held by the shareholder for six months
or less will be treated for United States federal income tax purposes as a long-
term capital loss to the extent of any distributions or deemed distributions of
long-term capital gains received by the shareholder with respect to such share.
BACKUP WITHHOLDING. The Fund may be required to withhold, for United States
federal income tax purposes, 31% of the dividends and distributions payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders are or may be
exempt from backup withholding. Backup withholding is not an additional tax and
any amount withheld may be credited against a shareholder's United States
federal income tax liabilities. Additional tax withholding requirements which
apply with respect to foreign investors are discussed below.
FOREIGN SHAREHOLDERS. Taxation of a shareholder who, as to the United
States, is a foreign investor (such as a nonresident alien individual, a foreign
trust or estate, a foreign corporation or a foreign partnership) depends, in
part, on whether the shareholder's income from the Fund is "effectively
connected" with a United States trade or business carried on by the shareholder.
If the foreign investor is not a resident alien and the income from the Fund
is not effectively connected with a United States trade or business carried on
by the foreign investor, distributions of net investment income and net realized
short-term capital gains will be subject to a 30% (or lower treaty rate) United
States withholding tax. Distributions to a non-resident alien of net realized
long-term capital gains, amounts retained by the Fund which are designated as
undistributed capital gains, and gains realized upon the sale of shares of the
Fund generally will not be subject to United States tax unless the foreign
investor who is a nonresident alien individual is physically present in the
United States for more than 182 days during the taxable year and, in the case of
gain realized upon the sale of Fund shares, unless (a) such gain is attributable
to an office or fixed place of business in the United States or (b) such
nonresident alien individual has a tax home in the United States and such gain
is not attributable to an office or fixed place of business located outside the
United States. However, a determination by the Fund not to distribute long-term
capital gains will cause the Fund to incur a U.S. federal tax liability with
respect to retained long-term capital gains, thereby reducing the amount of cash
held by the Fund that is available for investment, and the foreign investor may
not be able to claim a credit or deduction with respect to such taxes.
In general, if a foreign investor is a resident alien or if dividends or
distributions from the Fund are effectively connected with a United States trade
or business carried on by the foreign investor, then
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dividends of net investment income, distributions of net short-term and
long-term capital gains, amounts retained by the Fund that are designated as
undistributed capital gains and any gains realized upon the sale of shares of
the Fund will be subject to United States income tax at the rates applicable to
United States citizens or domestic corporations. If the income from the Fund is
effectively connected with a United States trade or business carried on by a
foreign investor that is a corporation, then such foreign investor may also be
subject to the 30% (or lower treaty rate) branch profits tax.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described in this
section. Shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign investors
are advised to consult their own tax advisers with respect to (a) whether their
income from the Fund is or is not effectively connected with a United States
trade or business carried on by them, (b) whether they may claim the benefits of
an applicable tax treaty, and (c) any other tax consequences to them of an
investment in the Fund.
NOTICES. Shareholders will be notified annually by the Fund as to the
United States federal income tax status of the dividends, distributions and
deemed distributions made by the Fund to its shareholders. Furthermore,
shareholders will also receive, if appropriate, various written notices after
the close of the Fund's taxable year regarding the United States federal income
tax status of certain dividends, distributions and deemed distributions that
were paid (or that are treated as having been paid) by the Fund to its
shareholders during the preceding taxable year.
OTHER TAXATION. Distributions also may be subject to additional state,
local and foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING THE FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF AN INVESTMENT IN THE FUND.
NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange on the last business day of each week, by dividing the value of
the Fund's net assets (the value of its assets less its liabilities, exclusive
of capital stock and surplus) by the total number of shares of Common Stock
outstanding. Net asset value includes interest on fixed-income securities which
is accrued daily. Securities which are traded over-the-counter and on a stock
exchange will be valued according to the broadest and most representative
market, and it is expected that for bonds and other fixed income securities this
ordinarily will be the over-the-counter market. Notwithstanding the above, bonds
and other fixed-income securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to reflect the fair market
value of such securities. The prices provided by a pricing service are
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities and any developments
related to specific securities. Securities not priced in this manner are valued
at the most recent current quoted bid price, or when stock exchange valuations
are used, at the latest quoted sale price on the date of valuation. Short-term
debt securities which mature in less than 60 days are valued at amortized cost
if their term to maturity from date of purchase by the Fund was less than 60
days, or by amortizing their value on the 61st day if their term to maturity on
the date acquired by the Fund was more than 60 days, unless this is determined
by the Board of Directors not to represent fair value. The value of other assets
and securities for which no current quotations are readily available are
determined in good faith at fair value using methods determined by the
Directors.
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock. The Fund has no present intention of offering additional shares other
than pursuant to the Offer, except that additional shares may be issued under
the Plan. See "Dividend Reinvestment and Cash Purchase Plan." Other offerings of
shares, if made, will require approval of the Fund's Board of Directors. Any
additional offering will be
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subject to the requirement of the 1940 Act that shares not be sold at a price
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 the holders of a majority of the Fund's outstanding voting
securities, as such term is defined under the 1940 Act.
BENEFICIAL OWNER
There are no persons known to the Fund who may be deemed beneficial owners
of 5% or more of the shares of the Fund's Common Stock because they possessed or
shared voting or investment power with respect to shares of the Fund's Common
Stock. The officers and directors of the Fund, in the aggregate, own less than
1% of the outstanding shares of the Fund's Common Stock.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended December 31, 1995 and its
unaudited Semi-Annual Report for the fiscal period ended June 30, 1996 (the
"Reports"), which either accompany this SAI or have previously been provided to
the person to whom this Prospectus is being sent, are incorporated herein by
reference with respect to all information other than the information set forth
in the Letter to Shareholders included therein. The Fund will furnish, without
charge, a copy of its Reports upon request to Shareholder Relations at BEA
Associates, One Citicorp Center, 153 East 53rd Street, New York, New York 10022,
(800) 293-1232.
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