As filed with the Securities and Exchange Commission on January 31, 1997
1933 Act File No. 333-17619
1940 Act File No. 811-5399
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-2
(Check appropriate box or boxes)
|_| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|X| Pre-Effective Amendment No. 1
|_| Post-Effective Amendment No. __
and
|_| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Amendment No. 20
--------------------
THE NEW AMERICA HIGH INCOME FUND, INC.
Exact Name of Registrant as Specified in Charter
10 Winthrop Square, Fifth Floor, Boston, Massachusetts 02110
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(617) 350-8610
Registrant's Telephone Number, including Area Code
Richard E. Floor, Secretary
The New America High Income Fund, Inc.
10 Winthrop Square, Fifth Floor
Boston, Massachusetts 02110
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
With a copy to:
Geoffrey R.T. Kenyon, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement
--------------------
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a
dividend reinvestment plan, check the following box. |X|
--------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=======================================================================================================================
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of Securities Being Amount Being Offering Price Aggregate Offering Amount of
Registered Registered Per Share Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 11,982,048 shares $5.3125(1) $63,654,630(1) $19,289.28
Subscription Rights 11,982,048 shares -- -- --
========================================================================================================================
(1) Estimated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, on the basis of the average of the high and low prices
reported on the New York Stock Exchange on December 6, 1996.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
=========================================================================================================================
</TABLE>
<PAGE>
THE NEW AMERICA HIGH INCOME FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
<TABLE>
<S> <C>
Item Number of Form N-2 Location or Heading in Prospectus
----------------------- ---------------------------------
1. Outside Front Cover........................... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Page............................... Inside Front Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis........................ Summary; Fee Table
4. Financial Highlights.......................... Financial Information Summary--Financial Highlights;
Capitalization and Information Regarding Senior
Securities
5. Plan of Distribution ......................... Not applicable
6. Selling Stockholders.......................... Not applicable
7. Use of Proceeds............................... Use of Proceeds; Investment Objective and Policies
8. General Description of the Registrant ........ Cover Page; The Fund; Investment Objective and
Policies; Rating Agency Guidelines; Risk Factors and
Special Considerations; Description of Capital Stock
9. Management.................................... The Fund; Management of the Fund; Dividends and
Distributions; Dividend Reinvestment Plan
10. Capital Stock, Long-Term Debt
and Other Securities........................ Description of Capital Stock
11. Defaults and Arrears on Senior
Securities.................................. Not applicable
12. Legal Proceedings............................. Not applicable
13. Table of Contents of the Statement
of Additional Information................... Not applicable
14. Cover Page.................................... Not applicable
15. Table of Contents............................. Not applicable
16. General Information and History .............. The Fund
17. Investment Objective and Policies ............ The Fund; Investment Objective and Policies; Rating
Agency Guidelines; Portfolio Maturity and Turnover
18. Management.................................... Management of the Fund
19. Control Persons and Principal Holders
of Securities............................... Management of the Fund
20. Investment Advisory and Other Services ....... The Offer; The Fund; Management of the Fund
(i)
<PAGE>
21. Brokerage Allocation and Other Policies ...... Management of the Fund; Portfolio Maturity and
Turnover
22. Tax Status.................................... Dividends and Distributions; Dividend Reinvestment
Plan; Taxation
23. Financial Statements.......................... Financial Statements
</TABLE>
(ii)
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION,
DATED JANUARY 31, 1997
PROSPECTUS
THE NEW AMERICA HIGH INCOME FUND, INC.
11,982,048 Transferable Rights to Subscribe for
11,982,048 Shares of Common Stock
----------------
The New America High Income Fund, Inc. (the "Fund") is issuing to its
common stockholders of record ("Record Date Stockholders") as of the close of
business on February 11, 1997 (the "Record Date"), transferable rights
("Rights") entitling the holders thereof to subscribe for an aggregate of
11,982,048 shares (the "Shares") of Common Stock, par value $0.01 per share (the
"Common Stock"), of the Fund (the "Offer"). Record Date Stockholders, where the
context requires, shall include beneficial owners whose shares are held of
record by Cede & Co. ("Cede"), nominee for The Depository Trust Company ("DTC"),
or by any other depository or nominee. Each Record Date Stockholder will receive
one transferable Right for each three shares of Common Stock beneficially owned
on the Record Date, and the Rights entitle Record Date Stockholders and holders
of Rights acquired during the Subscription Period (together "Rightholders") to
acquire one share of Common Stock for each Right held. Because the Subscription
Price per share will be less than the then net asset value per share, the Offer
will result in a substantial dilution to stockholders who do not fully exercise
their Rights. In addition, the Rights entitle each Rightholder to subscribe,
subject to certain limitations and subject to allotment, for any Shares not
acquired by exercise of Rights in the primary subscription. The Rights are
transferable and both the Rights and the Shares will be admitted for trading on
the New York Stock Exchange (the "Exchange"). See "The Offer." THE SUBSCRIPTION
PRICE PER SHARE IS THE LOWER OF (A) 95% OF THE AVERAGE OF THE LAST REPORTED
SALES PRICES OF A SHARE OF THE FUND'S COMMON STOCK ON THE EXCHANGE ON THE
EXPIRATION DATE (AS DEFINED BELOW) AND THE NINE PRECEDING BUSINESS DAYS AND (B)
90% OF THE NET ASSET VALUE PER SHARE AS OF THE CLOSE OF BUSINESS ON THE
EXPIRATION DATE (THE "SUBSCRIPTION PRICE").
The Fund announced its intention to make the Offer after the close of
trading on the New York Stock Exchange on December 11, 1996. The net asset value
per share of Common Stock at the close of business on December 11, 1996 and on
February 7, 1997 was $5.00 and $_____, respectively, and the closing market
price of a share of the Fund's Common Stock on such Exchange on those dates was
$5.13 and $_____, respectively. The Fund's Common Stock trades under the symbol
"HYB."
THE OFFER WILL EXPIRE AT 5:00 P.M. EASTERN TIME ON MARCH 18, 1997,
unless extended as described herein (the "Expiration Date").
Investment in such securities and in the Fund entails significant and
substantial risks, which are increased due to the Fund's leveraged capital
structure, and no assurance can be given that the Fund will achieve its
investment objective. See "Capitalization and Information Regarding Senior
Securities," "The Fund," "Investment Objective and Policies" and "Risk Factors
and Special Considerations."
(text continued on following page)
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Estimated
Estimated Proceeds
Subscription Price(1) Sales Load to Fund (2)(3)
- -------------------------------------------------------------------------------
Per Share ............ $_____ None $___________
- -------------------------------------------------------------------------------
Total(4).............. $___________ None $___________
===============================================================================
(1) This is an estimated price. The actual Subscription Price will be
determined as set forth above on the Expiration Date.
(2) Reflects deduction of offering expenses incurred by the Fund, estimated
at $500,000, and is based on the Estimated Subscription Price (as
defined below). Wellington Management has agreed to voluntarily waive
$100,000 of its fees.
<PAGE>
(3) 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 accrue to the benefit of the Fund) pending proration and
distribution of Shares. Interest on such Funds is not reflected in the
Estimated Proceeds to the Fund.
(4) Assumes all Rights are exercised at the Estimated Subscription Price.
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know
before investing. Prospective investors should carefully review the information
set forth in this Prospectus and should retain this Prospectus for future
reference.
----------------
The date of this Prospectus is February __, 1997
2
<PAGE>
The Fund is a diversified, closed-end management investment company with
a leveraged capital structure. Additionally, following the completion of the
Offer, it is the intention of the Fund, subject to market conditions, to add
incremental leverage (to the extent permitted under the Investment Company Act
of 1940, as amended, and certain restrictions imposed under its Charter and
By-Laws) such that the percentage of the Fund's assets representing leverage is
approximately the same as it was prior to the Offer. See "Capitalization and
Information Regarding Series Securities," "The Fund," "Risk Factors and Special
Considerations" and "Description of Capital Stock." Wellington Management
Company, LLP (the "Investment Adviser" or "Wellington Management") currently
serves as the investment adviser for the Fund. The Fund's investment objective
is to provide high current income, while seeking to preserve stockholders'
capital, through investment in a professionally managed, diversified portfolio
of "high-yield" fixed-income securities (commonly referred to as "junk bonds").
Such securities are regarded by rating agencies as predominantly speculative
with respect to capacity to pay interest and repay principal.
------------------
All questions and inquiries related to the Offer should be directed to
the Information Agent, Corporate Investors Communications, Inc., toll free at
1-888-805-6299.
The Fund's address is 10 Winthrop Square, Fifth Floor, Boston,
Massachusetts 02110 and its telephone number is (617) 350-8610.
Record Date Stockholders holding a number of shares of Common Stock that
is not an integral multiple of three will receive one additional Right. In the
case of shares held of record by Cede, the nominee for DTC, or any other
depository or nominee, additional Rights to be received by beneficial owners for
whom Cede or such other depository or nominee is the holder of record will be
issued to Cede or such other depository or nominee only if Cede or such other
depository or nominee provides to the Fund, on or before the close of business
on February 18, 1997, written representation as to the number of additional
Rights required for such issuance.
------------------
The Subscription Price will be less than the current net asset value per
share of Common Stock at the time the Shares are issued and the Offer will
consequently reduce the Fund's net asset value per share of Common Stock. The
financial impact of the dilution sustained by Record Date Stockholders may be
mitigated by either exercising the Rights or by selling the Rights (or some
combination thereof). To the extent stockholders neither exercise their rights
nor sell their rights, substantial dilution in the aggregate net asset value of
their investment in the Fund will occur as a result of the Offer. See "Risk
Factors and Special Considerations - Dilution and Other Investment
Considerations."
------------------
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Prospectus.
The Fund is issuing Rights which allow stockholders to buy newly issued
Shares at a price equal to the lower of (a) 95% of the average of the last
reported sales prices of a share of the Fund's Common Stock on the Exchange on
the Expiration Date and the nine preceding business days and (b) 90% of the net
asset value per share as of the close of business on the Expiration Date.
Stockholders of record will receive one Right for each three shares of Common
Stock of the Fund owned on the Record Date, subject to rounding. Rightholders
can then purchase one newly issued Share for each Right. Thus, if a stockholder
owns 300 shares on the Record Date, he or she will have the opportunity to
purchase up to 100 new Shares. Rightholders may request the right to purchase
additional Shares through an over-subscription privilege as described under "The
Offer--Over-Subscription Privilege." Rightholders may also elect to sell their
Rights as described under "The Offer--Sale of Rights." Stockholders who do not
exercise their Rights will suffer dilution as a result of the Offer and should
take steps to sell the Rights to avoid losing the market value, if any,
represented by such Rights. See "The Offer--Sale of Rights" and "Risk Factors
and Special Considerations--Dilution and Other Investment Considerations."
Important Terms of the Offering
February 7, 1997 market price per share ...... $_____
February 7, 1997 net asset value per share ... $_____
Estimated Subscription Price................... $_____
Shares outstanding at February 7, 1997 ....... ______
Transferable Rights issued..................... 11,982,048
Subscription ratio............................. 1 Right to buy 1 Share
Maximum number of Shares to be issued ......... 11,982,048
How to Exercise Rights
[bullet] Complete, sign and date the enclosed Subscription Certificate.
[bullet] Make your check or money order for $_____ for each Share
subscribed for, including any Shares subscribed for pursuant
to the over-subscription privilege. This payment may be more
or less than the actual Subscription Price. Additional payment
may be required for the Primary Subscription Shares, and any
Over-Subscription Privilege Shares, when the actual
Subscription Price is determined.
[bullet] Registered stockholders should mail the Subscription
Certificate and payment in the enclosed envelope to State
Street Bank and Trust Company in a manner that will ensure
receipt prior to 5:00 p.m. on March 18, 1997, unless extended.
[bullet] If shares are held in a brokerage account or by a custodian
bank, contact your broker or financial adviser.
Important Dates to Remember
Event Date
----- ----
<TABLE>
<S> <C>
Record Date February 11, 1997
Expiration Date (Payment for Shares and
Notices of Guaranteed Delivery Due) March 18, 1997 (unless extended)
Confirmation Date; Delivery of Subscription
Certificates to Subscription Agent pursuant
to Notice of Guaranteed Delivery March 21, 1997 (unless extended)
Mailing of Shares Not later than April 8, 1997 (unless extended)
</TABLE>
Shareholder inquiries should be directed to the Information Agent:
Corporate Investors Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (888) 805-6299
4
<PAGE>
Terms of the Offer
The Fund is issuing to stockholders of record as of the close of
business on February 11, 1997, Rights to subscribe for an aggregate of
11,982,408 shares of Common Stock, $.01 par value per share of the Fund. The
Rights entitle a stockholder to acquire at the Subscription Price one Share for
each Right held (the "Primary Subscription"). One Right is being issued for each
three full shares of Common Stock held on the Record Date. For example, if you
own 300 shares of the Fund's Common Stock, you will receive 100 transferable
Rights entitling you to purchase up to 100 additional Common Shares at the
Subscription Price. Rights may be exercised at any time from the date of this
Prospectus until 5:00 p.m., Eastern time, on March 18, 1997, unless extended.
In addition, holders of Rights who subscribe for the maximum number of
Shares to which they are entitled through the Primary Subscription are entitled
to subscribe for Shares which were not otherwise subscribed for through the
Primary Subscription (the "Over-Subscription Privilege"). Shares acquired
pursuant to the Over-Subscription Privilege are subject to allotment which is
more fully discussed below under "The Offer--Over-Subscription Privilege." For
purposes of determining the number of Shares a holder may acquire pursuant to
the Offer, stockholders whose shares are held of record on the Record Date by
Cede, nominee for DTC, 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.
The Subscription Price is the lower of (a) 95% of the average of the
last reported sales prices of a share of the Fund's Common Stock on the Exchange
on the Expiration Date and the nine preceding business days and (b) 90% of the
net asset value per share as of the close of business on the Expiration Date.
EXCEPT AS DESCRIBED BELOW UNDER "THE OFFER--NOTICE OF NET ASSET VALUE DECLINE,"
A STOCKHOLDER WILL HAVE NO RIGHT TO RESCIND A PURCHASE AFTER RECEIPT OF HIS OR
HER SUBSCRIPTION CERTIFICATE OR NOTICE OF GUARANTEED DELIVERY BY THE
SUBSCRIPTION AGENT. There is no minimum number of Rights which must be exercised
for the Offer to close.
Rights may be exercised by completing and executing the enclosed
Subscription Certificate and mailing it, together with payment to State Street
Bank and Trust Company, as Subscription Agent. Alternatively, a Rightholder may
exercise Rights by completing and executing a Notice of Guaranteed Delivery
(which may be obtained from the Information Agent) and delivering it to the
Subscription Agent (as defined below). The Notice of Guaranteed Delivery must be
executed by a commercial bank or trust company having an office, branch or
agency in the Untied States or a New York Stock Exchange member firm, and must
guarantee delivery of (a) payment of the full Subscription Price and (b) a
properly completed and executed Subscription Certificate. Rightholders must
return the Subscription Certificate or Notice of Guaranteed Delivery to the
Subscription Agent in a manner that ensures delivery prior to 5:00 p.m., Eastern
time, on the Expiration Date. Rightholders who choose to exercise their Rights
will not know the final Subscription Price for Shares being acquired at the time
of exercise and will be required initially to pay for such Shares at the
estimated Subscription Price (the "Estimated Subscription Price") of $______
(approximately 90% of the net asset value per share on February 7, 1997 [95% of
the average of the last reported sales prices of a share of the Fund's Common
Stock on the Exchange on February 7, 1997 and the nine preceding business
days]). Exercising Rightholders will have no right to rescind a purchase after
the Subscription Agent has received payment. See "The Offer--Exercise of Rights"
and "The Offer--Payment for Shares."
The Rights are transferable and will be admitted for trading on the New
York Stock Exchange. See "The Offer--Sale of Rights."
The Fund
The Fund is a diversified, closed-end management investment company with
a leveraged capital structure. The Fund's investment objective is to provide
high current income, while seeking to preserve stockholders' capital, through
investment in a professionally managed, diversified portfolio of "high yield"
fixed-income securities, commonly known as "junk bonds." The Fund invests
primarily in "high yield" fixed-income
5
<PAGE>
securities rated in the lower categories by established rating agencies,
consisting principally of fixed income securities rated "BB" or lower by
Standard & Poor's Corporation ("S&P") or "Ba" or lower by Moody's Investors
Service, Inc. ("Moody's"), and, subject to applicable rating agency guidelines
("Rating Agency Guidelines"), non-rated securities deemed by the Investment
Adviser to be of comparable quality. See "Investment Objective and Policies" and
"Management of the Fund--The Investment Adviser." The fixed-income securities in
which the Fund invests are regarded by the rating agencies, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. Such securities may
also be subject to greater market price fluctuations than lower yielding, higher
rated debt securities; credit ratings do not reflect this market risk. An
investment in the Fund involves a number of significant risks, which are
increased due to the Fund's leveraged capital structure. No assurance can be
given that the Fund will achieve its investment objective. See "Risk Factors and
Special Considerations."
The Fund has had a leveraged capital structure since its inception. The
Fund is subject to various portfolio diversification and related asset coverage
requirements under guidelines established by Moody's and Fitch Investors
Service, Inc. ("Fitch") in connection with such rating agencies' issuance of
ratings of "aaa" and AAA, respectively, with respect to the Fund's Auction Term
Preferred Stock (the "ATP"). Compliance with these guidelines limits to some
degree the Fund's flexibility to invest in certain types of portfolio
securities, that might otherwise be attractive investments, including private
placements. See "The Fund," "Investment Objective and Policies" and "Rating
Agency Guidelines."
The Fund currently intends to issue additional preferred stock following
completion of the Offer, subject to market conditions and rating agency
requirements, with the goal of maintaining a degree of leverage equivalent to
that which existed immediately prior to the Offer. As of February 7, 1997, the
Fund's leverage ratio (the ratio of the Fund's senior securities to the sum of
its net assets and its senior securities) was approximately ____%, which would
be reduced to approximately ___% in the event all Rights are exercised and no
additional leverage is incurred. Incurring additional leverage will reduce any
investment flexibility gained by the Fund as a result of the availability of
additional assets from the exercise of Rights pursuant to the Offer. See "The
Fund" and "Risk Factors and Special Considerations--Leverage" for discussion of
the risks and possible benefits associated with a leveraged capital structure.
The Investment Adviser
Wellington Management Company, LLP, ("Wellington Management") with its
principal offices at 75 State Street, Boston, Massachusetts 02109, was selected
by the Fund's Board of Directors to serve as the Fund's investment adviser
starting February 19, 1992. As of December 31, 1996, Wellington Management held
discretionary authority over approximately $133.2 billion of assets, including
$50.9 billion of fixed income securities of which $4.2 billion represented
"high-yield" investments. Wellington Management and its predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960. As an accommodation
to the Fund and based on the Board's determination that the Offer is in the best
interests of the stockholders, Wellington Management has agreed to voluntarily
waive $100,000 of its fees.
Risk Factors
Investment in the Fund involves a number of significant and substantial
risks, which are increased due to the Fund's leveraged capital structure, and no
assurance can be given that the Fund will achieve its investment objective. The
net asset value and market price of the Fund's Common Stock has declined sharply
at times and may do so in the future.
Before exercising the Rights pursuant to the Offer, potential investors
should consider the factors described herein, including without limitation, the
factors described under "The Fund," "Investment Objective and Policies" and
"Risk Factors and Special Considerations." These factors include the dilutive
effects of the Offer, the effects of the Fund's leveraged capital structure, the
significant and substantial risks involved in investing in high yield, high risk
securities, the limitations on the ability of the Fund to pay dividends if it
fails
6
<PAGE>
to meet certain asset coverage requirements, and the fact that shares of the
Fund's Common Stock trade at times at a discount from, and at times at a premium
to, net asset value.
7
<PAGE>
FEE TABLE
Stockholder Transaction Expenses
- --------------------------------
<TABLE>
<S> <C>
Sales Load (as a percentage of offering price)(1)(2).................................... None
Dividend Reinvestment and Cash Purchase Plan Fees(3).................................... None
Annual Expenses (as a percentage of average net assets under management including amounts
- --------------- represented by the liquidation value of the ATP)(4)
Investment Advisory Fee(5).............................................................. .31%
-------
Leverage Related Expenses......................................... .10%
---
Other Expenses.................................................... .42%
---
Total Other Expenses(2)................................................................. .52%
-------
Total Annual Expenses............................................................................ .83%
======
</TABLE>
- -------------------------
(1) The Fund has agreed to pay First Albany Corporation a fee of $125,000
for financial advisory services in connection with the Offer.
(2) Does not include expenses of the Fund incurred in connection with the
Offer, estimated at $500,000, including the fee payable to First Albany
described above which will be reduced by a $100,000 voluntary fee
waiver by Wellington Management. Such expenses will be borne by the
Fund and indirectly by all of the Fund's common stockholders, including
those who do not exercise their Rights, and will reduce the Fund's net
asset value per share. The reduction in net asset value per share
caused by expenses associated with the Offer will be increased to the
extent that a substantial number of Rightholders do not exercise their
Rights.
(3) Each participant, however, will pay a pro rata share of brokerage
commissions if shares of Common Stock are purchased by the Fund's
dividend paying agent in the open market, which occurs only when the
net asset value of shares of Common Stock exceeds the market price.
There is a $.75 fee for each cash purchase under the Fund's Cash
Purchase Plan. See "Dividends and Distributions; Dividend Reinvestment
Plan."
(4) See "Management of the Fund--The Investment Adviser" for additional
information.
Example:
<TABLE>
<S> <C>
Cumulative Expenses Paid for the Period of:
--------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
An investor would pay the following expenses
on a $1,000 investment assuming a 5%
annual return throughout the periods ..... $9 $27 $47 $105
</TABLE>
The purpose of the foregoing table is to assist investors in
understanding the various costs and expenses associated with investing in the
Fund.
The Example set forth above assumes reinvestment of all dividends and
other distributions at net asset value and an expense ratio of .83%, .10%
attributable to leverage expenses and .73% attributable to operating expenses.
The tables above and the assumption in the Example of a 5% annual return are
required by Securities and Exchange Commission ("Commission") regulations
applicable to all investment companies. The Example and Fee Table should not be
considered a representation of past or future expenses or annual rates of
return. Actual expenses or annual rates of return may be more or less than those
assumed for purposes of the Example and Fee Table. In addition, while the
example assumes reinvestment of all dividends and distributions at net asset
value, participants in the Fund's Dividend Reinvestment Plan may receive shares
purchased or issued at a price or value different from net asset value. See
"Dividends and Distributions; Dividend Reinvestment Plan."
8
<PAGE>
FINANCIAL INFORMATION SUMMARY
The following data with respect to a share of Common Stock of the Fund
outstanding during the periods indicated has been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report thereto
included with the Fund's audited financial statements herein and should be read
in conjunction with the audited financial statements and related notes included
therein.
Financial Highlights
<TABLE>
<CAPTION>
For the
Period From
February 26, 1988
(Commencement
For the Years Ended December 31, of Operations) to
-------------------------------------------------------------------
1996 1995 1994(c) 1993 1992(a) 1991 1990 1989 December 31, 1988
---- ---- ---- ---- ---- ---- ---- ---- -----------------
(For Each Share of Common Stock Outstanding Throughout the Period)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value:
Beginning of period................ $4.71 $4.13 $5.15 $4.32 $ 3.79 $ 3.42 $ 6.23 $ 8.60 $ 9.25
----- ----- ----- ------ ------ ------ ------ ------ ------
Net Investment Income................. .69 .67 .72# .59 .57 .65 92 1.54 1.42
Net Realized and Unrealized
Gain (Loss) on Investments......... .22 .62 (.82)# .89 .57 .38 (2.82) (2.26) (.66)
---- ---- ----- ---- ---- ---- ------ ----- -----
Total From Investment
Operations................... .91 1.29 (.10) 1.48 1.14 1.03 (1.90) (.72) .76
Distributions:
Dividends from net investment income:
To preferred stockholders(including
swap settlement payments)....... (.16) (.17) (.17) (.05) (.06) (.10) (.16) (.30) (.23)
To common stockholders.......... (.52) (.50) (.53) (.53) (.55) (.56) (.75) (1.25) (1.18)
Dividends in excess of net
investment income:
To common stockholders.......... -- (.04) -- (.07) -- -- -- -- --
Returns of capital:
To common stockholders.......... -- -- -- -- -- -- -- (.10) --
Total Distributions................ (.68) (.71) (.70) (.65) (.61) (.66) (.91) (1.65) (1.41)
Effect of rights offering and related
expenses; and Auction Term Preferred
Stock offering costs and sales load -- -- (.22) -- -- -- -- -- --
Net Asset Value:
End of period...................... $4.94 $4.71 $4.13 $5.15 $4.32 $3.79 $3.42 $6.23 $8.60
Per Share Market Value:
End of period...................... $5.13 $4.75 $4.00 $5.13 $4.13 $3.63 $2.50 $5.88 $ 10.00
Total Investment Return+............... 19.89% 33.50% (11.88)% 40.08% 29.70% 70.77% (47.94)%(30.04)% 13.28%
Net Assets, End of Period,
Applicable to Common Stock(b) $176,408 $164,823 $141,590 $130,673 $107,897 $93,227 $ 83,813 $152,156 $ 202,363
Net Assets, End of Period,
Applicable to Preferred
Stock(b)........................... $100,000 $100,000 $100,000 $ 35,000 $ 35,000 $ 35,000 $ 35,000 $ 58,500 $ 79,000
Net Assets, End of Period(b).......... 276,408 $264,823 $241,590 $165,673 $142,897 $128,227 $118,813 $210,656 $ 281,363
Expense Ratios
Ratio of interest expense to
average net assets**............... -- -- .01% 1.42% 2.95% 3.25% 4.17% 3.56% 3.29%*
Ratio of preferred and other
debt expenses to average
net assets**....................... .10% .11% .13% .40% .65% .78% .62% .24% .23%*
Ratio of operating expenses to
average net assets**............... .73% .84% .75% 1.56% 1.22% 1.19% 1.10% .69% .70%*
Ratio of litigation settlement expense
to average net assets**........... -- .49% -- -- -- -- -- -- --
Ratio of Total Expenses
to Average Net Assets**............ .83% 1.44% .89% 3.38% 4.82% 5.22% 5.89% 4.49% 4.22%*
Ratio of Net Investment
Income to Average Net
Assets**........................... 9.05% 8.90% 9.06% 9.21% 10.09% 12.62% 14.50% 14.48% 13.56%*
Portfolio Turnover Rate............... 53.45% 62.66% 58.56% 85.76% 129.86% 121.15% 49.98% 65.39% 149.00%*
- ----------------------------
</TABLE>
9
<PAGE>
(a) Prior to the appointment on February 19, 1992 of Wellington Management
Company, LLP as the Fund's investment adviser, the Fund was advised by
Ostrander Capital Management, L.P.
(b) Dollars in thousands.
(c) The Fund entered into a refinancing transaction on January 4, 1994, and the
per share data and ratios for the year ended December 31, 1994 reflect this
transaction.
* Annualized.
** Ratios calculated on the basis of expenses and net investment income
applicable to both the Common Stock and preferred stock relative to the
average net assets of both the common and preferred stockholders. The
expense ratio and net investment income ratio do not reflect the effect
of dividend payments (including swap settlement payments) to preferred
stockholders.
# Calculation is based on average shares outstanding during the indicated
period due to the per share effect of the Fund's June 1994 rights
offering.
+ Total investment return is calculated assuming a purchase of common stock
at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be reinvested
at prices obtained under the dividend reinvestment plan. This calculation
does not reflect brokerage commissions.
10
<PAGE>
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
Capitalization as of February 7, 1997
The following table sets forth the capitalization of the Fund as of
February 7, 1997.
<TABLE>
<CAPTION>
Amount Held Amount Outstanding
by the Fund Exclusive of Amount
or for its Held by the Fund
Title of Class Amount Authorized Account or for its Account
-------------- ----------------- ----------- -------------------
<S> <C> <C> <C>
Preferred Stock, $1.00 par value ... 1,000,000 shares -0- shares 2,000 shares
Common Stock, $0.01 par value ...... 200,000,000 shares -0- shares [35,660,984 shares]
</TABLE>
Pro Forma Capitalization
The following table sets forth the total assets and liabilities of the Fund
and the net assets of the Fund, as of February 7, 1997 and as adjusted to give
effect to the issuance of all of the Shares offered hereby at the Estimated
Subscription Price. To the extent fewer than all of the Rights are exercised,
both the increase in net assets attributable to Common Stock outstanding and the
reduction in net asset value per share of Common Stock would be less.
<TABLE>
<CAPTION>
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Total Assets................................................................. $ [271,469] $
Total Liabilities............................................................ [105,317]
------- -------
Net Assets................................................................... $ [166,152] $
========== =======
NET ASSETS REPRESENTS:
Auction Term Preferred Stock Series A, $1.00 par value, liquidation
preference $50,000 per share, 1,200 shares authorized,
1,200 shares issued and outstanding ....................................... $ 60,000 $ 60,000
Auction Term Preferred Stock Series B, $1.00 par value, liquidation
preference $50,000 per share, 800 shares authorized,
800 shares issued and outstanding ......................................... $ 40,000 $ 40,000
Common Stock, $.01 par value, 200,000,000 shares authorized,
[35,660,984] shares issued and outstanding, [47,547,860] shares
issued and outstanding as adjusted......................................... [500]
Capital in excess of par value............................................... [268,599]
Accumulated net realized loss from security transactions [(100,323)]
Net unrealized depreciation on investments................................... [(4,070)]
Accumulated undistributed net investment income.............................. [1,592]
----------- -------
NET ASSETS................................................................... $ [226,152] $
----------- -------
Less liquidation value of Auction Term Preferred Stock 100,000 100,000
Net assets attributable to Common Stock outstanding $[166,152] $
=========== =======
Net asset value per share of Common Stock.................................... $ [4.70] $
=========== =======
</TABLE>
11
<PAGE>
Senior Securities
The following table shows certain information regarding each class of
senior security of the Fund as of the dates indicated. In connection with its
initial public offering in February 1988, the Fund issued senior securities
consisting of $105 million aggregate principal amount of 9% Senior Extendible
Notes ("Notes") and $79 million (aggregate liquidation preference) of Taxable
Auction Rate Preferred Stock ("TARPS"), the dividends on which were set in
monthly auctions with reference to short term interest rates. The Fund
repurchased substantial amounts of these securities during the severe decline in
the high yield securities market which occurred in 1989-1990 and by December 31,
1991 had $45.5 million aggregate principal amount of Notes and $35 million
(aggregate liquidation preference) of TARPS outstanding. See "The Fund." The
Notes were refinanced in January 1993 with the proceeds of a credit facility
from The First National Bank of Boston (the "Credit Facility") in the aggregate
principal amount of $45.5 million. The Credit Facility was repaid and the
outstanding TARPS were redeemed in January 1994 with the proceeds from an
offering of two series of newly authorized Auction Term Preferred Stock having
an aggregate liquidation preference of $100 million. See "Description of Capital
Stock," "The Fund" and "Financial Statements."
<TABLE>
<CAPTION>
As of December 31
1996 1995 1994 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Total Amount
Outstanding
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Notes.............. $ -- $ -- $ -- $ -- $45,490,000 $45,490,000 $47,990,000 $96,100,000 $105,000,000
Preferred Stock.... 100,000,000 100,000,000 100,000,000 35,000,000 35,000,000 35,000,000 35,000,000 58,500,000 79,000,000
Short-term Loan.... $ -- $ -- $ -- 45,000,000 -- -- -- -- --
Asset Coverage
Per $1,000 of Note (1). $ -- -- -- $ -- $4,141 $3,819 $3,476 $3,192 $3,680
Per Preferred Stock
Share (2)............ 138,204 132,411 109,630 473,351 408,277 366,363 339,466 360,096 356,156
Per $1,000 of
Short-Term Loan...... -- -- -- 4,682 -- -- -- -- --
Involuntary Liquidation
Preference
Preferred Stock Share.. $50,000 $50,000 $50,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Approximate Market Value
(Unaudited)
Per Note............... $ -- $ -- $-- $ -- $1,000 $1,000 $1,000 $1,000 $1,000
Per Preferred Stock
Share................ 50,000 50,000 $50,000 100,000 100,000 100,000 100,000 100,000 100,000
Per $1,000 of
Short-Term Loan...... -- -- -- 1,000 -- -- -- -- --
- ----------------------------
</TABLE>
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such
amount by the principal amount of senior securities constituting debt
outstanding.
(2) Calculated by subtracting the Fund's total liabilities (including
senior securities constituting debt but not including preferred stock)
from the Fund's total assets and dividing such amount by the number of
shares of preferred stock outstanding.
12
<PAGE>
NET ASSET VALUE AND MARKET PRICE INFORMATION
The shares of Common Stock of the Fund are listed on the Exchange. The
following table shows, for each calendar quarter since the inception of the Fund
in 1988 (i) the high and low net asset values per share of the Fund, (ii) the
high and low sale prices per share of Common Stock, as reported on the New York
Stock Exchange Composite Tape, and (iii) for 1991 through 1996, the largest
premium (or, if applicable, smallest discount) and the largest discount (or, if
applicable, the smallest premium) at which the Common Stock traded relative to
the Fund's net asset values per share during the periods indicated.
<TABLE>
<CAPTION>
Premium(Discount)
As A Percentage Of
Net Asset Value Market Price Net Asset Value*
--------------- ------------ -------------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31, 1988 (from $9.31 $9.25 $10.50 $9.75
February 26, 1988)
June 30, 1988 9.32 8.94 10.38 9.88
September 30, 1988 9.01 8.81 10.38 9.63
December 31, 1988 8.90 8.73 10.25 9.63
March 31, 1989 $8.62 $8.31 $10.13 $8.88
June 30, 1989 8.37 7.71 9.63 8.63
September 30, 1989 7.69 7.20 9.13 6.63
December 31, 1989 7.18 6.23 6.88 5.25
March 31, 1990 $6.23 $4.83 $5.50 $3.88
June 30, 1990 4.79 4.68 4.63 3.75
September 30, 1990 4.79 4.25 4.38 2.25
December 31, 1990 4.19 3.42 3.00 2.00
March 31, 1991 $3.81 $2.35 $3.75 $3.50 (4.9) (27.1)
June 30, 1991 3.87 3.65 3.88 3.38 (2.3) (8.5)
September 30, 1991 3.77 3.64 3.75 3.38 0.0 (10.2)
December 31, 1991 3.91 3.75 3.88 3.50 (0.8) (10.5)
March 31, 1992 $4.08 $3.82 $4.25 $3.50 5.7 (4.3)
June 30, 1992 4.19 4.05 4.38 3.88 6.7 (3.2)
September 30, 1992 4.45 4.22 3.50 3.13 4.2 (4.5)
December 31, 1992 4.42 4.15 4.38 3.75 4.2 (7.6)
March 31, 1993 $4.68 $4.38 $4.88 $4.00 1.9 (3.8)
June 30, 1993 4.90 4.62 4.88 4.63 4.7 (1.0)
September 30, 1993 4.93 4.87 5.13 4.75 4.6 (2.3)
December 31, 1993 5.29 4.92 5.13 4.63 (3.5) (10.7)
March 31, 1994 5.31 4.67 5.38 4.75 4.4 (1.8)
June 30, 1994 4.68 4.43 5.00 4.38 11.6 (2.3)
September 30, 1994 4.47 4.32 4.38 4.00 (0.6) (5.8)
December 31, 1994 4.31 4.09 4.13 3.88 (0.7) (5.5)
March 31, 1995 4.32 4.13 4.50 3.88 4.9 (3.6)
June 30, 1995 4.64 4.37 5.13 4.38 9.0 0.3
September 30, 1995 4.60 4.67 5.13 4.63 8.7 0.3
December 31, 1995 4.74 4.62 5.00 4.63 4.8 0.1
March 31, 1996 4.88 4.73 5.13 4.75 4.6 (1.2)
June 30, 1996 4.75 4.64 5.00 4.75 6.6 0.0
September 30, 1996 4.91 4.67 5.25 4.75 6.8 0.9
December 31, 1996 5.00 4.80 5.38 5.00 7.7 (1.3)
</TABLE>
13
<PAGE>
- -----------------
* The data shown in this column generally is as of different dates than
the data appearing under "Net Asset Value" and "Market Price" and cannot
be calculated from that data.
The Fund's Common Stock has sometimes traded at a premium and sometimes
at a discount to net asset value. See "Risk Factors and Special
Considerations--Premium/Discount from Net Asset Value." At the close of business
on December 11, 1996, and February 7, 1997 the Fund's net asset values per share
of Common Stock at the close of business were $5.00 and $_______, respectively,
while the closing market prices of a share of Common Stock on the Exchange on
such dates were $5.13 and $________, respectively. The premiums/discounts as a
percentage of net asset value on such dates were 2.5% and ___%, respectively.
14
<PAGE>
THE OFFER
Terms of the Offer
The Fund is issuing to Record Date Stockholders, as of the close of
business on February 11, 1997, Rights to subscribe for the Shares. Each Record
Date Stockholder will receive one transferable Right for each three shares of
Common Stock owned on the Record Date. No fractional Rights will be issued. The
Rights entitle the holders thereof to acquire, at the Subscription Price, one
Share for each Right held. Record Date Stockholders holding a number of shares
of Common Stock that is not an integral multiple of three will receive one
additional Right. In the case of shares held of record by Cede or by any other
depository or nominee, additional Rights to be received by beneficial owners for
whom Cede or any other depository or nominee is the holder of record will be
issued to Cede or such other depository or nominee only if Cede or such other
depository or nominee provides to the Fund on or before the close of business on
February 18, 1997, written representation as to the number of additional Rights
required for such issuance. The Rights are evidenced by subscription
certificates ("Subscription Certificates") which will be mailed to Record Date
Stockholders, except that Subscription Certificates will not be mailed to Record
Date Stockholders whose record addresses are outside the United States. See "The
Offer--Foreign Stockholders."
The Subscription Price of the Shares to be issued pursuant to the Rights
is the lower of (a) 95% of the average of the last reported sales prices of the
share of the Fund's Common Stock in the Exchange on the Expiration Date and the
nine preceding business days and (b) 90% of the net asset value per share as of
the close of business on the Expiration Date. Exercising Rightholders, including
both Rightholders purchasing Shares in the Primary Subscription and those who
purchase Shares pursuant to the Over-Subscription Privilege (collectively,
"Exercising Rightholders"), will not know the actual Subscription Price at the
time of exercise and will be required initially to pay for the Shares at the
Estimated Subscription Price of $______ per Share (based on the net asset value
on February 7, 1997). The actual Subscription Price may be more than the
Estimated Subscription Price. Exercising Rightholders will have no right to
rescind a purchase after receipt by the Subscription Agent of their payment for
Shares.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on December 11, 1996. The net asset values per share of
Common Stock at the close of business on December 11, 1996 and February 7, 1997
were $5.00 and $_____, respectively, and the closing market prices per share of
Common Stock on the Exchange on those dates were $5.13 and $______,
respectively. There can be no assurance that the Subscription Price will be less
than the last reported market sale price of a share of Common Stock on the
Expiration Date.
Completed Subscription Certificates may be delivered to the Subscription
Agent at any time during the Subscription Period, which commences on the date of
this Prospectus and ends at 5:00 p.m., Eastern time, on March 18, 1997, unless
extended by the Fund until a time not later than 5:00 p.m., Eastern time, on
April 17, 1997. See "Expiration of the Offer." All Rightholders may purchase
Shares in the Primary Subscription. All Rights may be exercised immediately upon
receipt and until 5:00 p.m. on the Expiration Date.
Any Rightholder who fully exercises all Rights held by such Rightholder
in the Primary Subscription is entitled to subscribe for Shares which were not
otherwise subscribed for in the Primary Subscription pursuant to the
Over-Subscription Privilege. Shares acquired pursuant to the Over-Subscription
Privilege may be subject to allotment, which is more fully discussed below in
"Over-Subscription Privilege."
Rights may be exercised by completing the Subscription Certificate and
delivering it, together with payment, to the Subscription Agent. The method by
which Rights may be exercised and Shares paid for is set forth below in
"Exercise of Rights" and "Payment for Shares." Interest will accrue to the
benefit of the Fund on payments received by the Subscription Agent prior to the
Expiration Date. An Exercising Rightholder will have no right to rescind a
purchase after the Subscription Agent has received payment. See "Payment for
Shares" below. Shares issued pursuant to an exercise of Rights will be listed on
the Exchange.
15
<PAGE>
The Rights are transferable until the Expiration Date and will be
admitted for trading on the Exchange. Assuming a market for the Rights exists,
the Rights may be purchased and sold through usual brokerage channels, or
delivered on or before March 14, 1997 (or, if the Offer is extended, until two
business days prior to the Expiration Date), to the Subscription Agent, for sale
through First Albany. Although no assurance can be given that a market for the
Rights will develop, if such a market does develop on the Exchange, trading in
the Rights on the Exchange may be conducted until and including the close of
trading on the last Exchange trading day prior to the Expiration Date. The
method by which the Rights may be transferred is set forth below in "Sale of
Rights."
There is no minimum number of Rights which must be exercised in order
for the Offer to close.
The Fund believes that the distribution to Record Date Stockholders of
transferable Rights which themselves may have realizable value will afford
nonparticipating Record Date Stockholders the potential of receiving a cash
payment upon sale of such Rights. Stockholders who do not exercise their Rights
in full will suffer a greater level of dilution of their interest in the Fund
than stockholders who do. See "Risk Factors and Special Considerations--Dilution
and Other Investment Considerations."
The first regular monthly dividend to be paid on shares of Common Stock
acquired upon exercise of Rights will be the first monthly dividend the record
date for which occurs after the issuance of such shares following the Expiration
Date. It is the Fund's present policy to pay dividends on the last business day
of each month to stockholders of record fourteen days prior to the payment date.
Assuming that the Subscription Period is not extended beyond March 18, 1997, it
is expected that the first dividend received by Rightholders acquiring shares
pursuant to the Offer will be paid on the last business day of April 1997. See
"Dividends and Distributions; Dividend Reinvestment Plan."
Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will
be issued Rights for the shares of Common Stock held in their accounts in the
Plan as of the Record Date. Participants wishing to exercise such Rights must
exercise such Rights in accordance with the procedures set forth below in
"Exercise of Rights" and "Payment for Shares." Such Rights will not be exercised
automatically by the Plan.
For purposes of determining whether a stockholder has fully exercised
such stockholder's Rights and for purposes of allotment, shares of Common Stock
and Rights held of record by Cede, nominee for DTC, or any other depository or
nominee will be deemed to be held by the broker-dealer on whose behalf they are
held (or, if there is no broker-dealer, by the stockholder on whose behalf they
are held).
Purpose of the Offer
The Fund is seeking through the Offer to allow existing stockholders of
the Fund an opportunity to purchase additional Shares at a price that will be
below market value without paying a brokerage commission. The Board of Directors
of the Fund has determined that it would be in the best interest of the Fund and
its stockholders to increase the assets of the Fund available for investment. In
reaching its decision, the Board of Directors concluded that an increase in the
assets of the Fund would enable the Fund to take advantage of investment and
leverage opportunities. The Board also concluded that an increase in the assets
of the Fund through a well-subscribed Offer could tend to reduce the Fund's
expense ratio in the future, after the expenses associated with the Offer have
been recouped. The Board observed that a lower expense ratio, if achieved, would
be of long term benefit to holders of Common Stock, although no assurance can be
given that the Fund will in fact achieve lower expenses in the future as the
Fund cannot predict with certainty its expenses over time. See "The Fund" and
"Description of Capital Stock--Asset Maintenance." The Board considered that a
well- subscribed Offer could also tend to increase liquidity on the Exchange,
where the Fund's shares of Common Stock are traded, by increasing the number of
outstanding shares. In connection with its analysis, the Board also considered
the effect of the Fund's previous rights offering which was completed on July
22, 1994. This offering permitted shareholders to acquire, at a subscription
price of $4.13, one new share for each right exercised in such rights offering.
All of the rights issued by the Fund pursuant to the rights offering were
exercised and, as a result, approximately 8,568,000 new shares of Common Stock
were issued in August 1994
16
<PAGE>
with the net proceeds to the Fund of approximately $35.4 million. All of the
proceeds from the exercise of rights in the offering have been invested in new
securities in accordance with the Fund's investment objective.
In considering the Offer, the Board considered that the Offer will
reduce the net asset value of the Fund's Common Stock and will adversely affect
any holder of Common Stock who fails or is unable to exercise his or her Rights.
The Board also took note of the fact that the possible beneficial effects of the
Offer would be reduced to the extent expenses associated with the Offer were
high and the Offer was not well subscribed.
Reflecting the foregoing considerations, the Board has established the
terms of the Offer on a basis which is intended to provide all existing
stockholders with an equal opportunity to exercise Rights and to achieve full or
substantial subscription. The Board has specified that Rights will be
transferable in order to give non- exercising Rightholders an opportunity to
receive partial compensation for the dilution they will suffer through
non-exercise by selling their Rights, and has established the Subscription Price
and the one-for-one exchange ratio with a view toward providing both an
incentive to exercise Rights and an opportunity to obtain value for the sale of
Rights. In this regard, the Board has noted that an existing stockholder who
seeks to maintain rather than increase his or her investment in the Fund may, in
lieu of selling Rights, sell a portion of his or her shares of the Fund
sufficient to provide, after expenses including commissions, funds for the
exercise of Rights. The Board has also sought to reduce costs associated with
the Offer by, among other things, engaging an information agent rather than
paying commissions to a broker or a dealer-manager, and has sought to
facilitate, through its arrangements with First Albany, the existence of an
adequate trading market for Rightholders who do not exercise their Rights.
There can, of course, be no assurance that the Offer will be successful
or that the objectives sought by the Board will be achieved, as in the case of
any rights offer. However, following analysis and discussion of the Offer and
consideration of its terms at a series of meetings over the past year, the Board
of Directors has determined that the Offer, if successful, would result in a net
benefit to existing stockholders. The Offer was approved unanimously by all the
Directors, present and voting at a meeting of the Board of Directors at which a
quorum was present and acting throughout, and by all of including the Directors
who are not "interested persons" of the Fund. None of the members of the Fund's
Board of Directors is affiliated with the Investment Adviser. It should be noted
that the Investment Adviser will benefit from the Offer because its fee is based
on the level of the Fund's net assets attributable to Common Stock, which will
increase as a result of the issuance of Shares in connection with the Offer. The
benefit to the Investment Adviser was not a material element of the Board's
deliberations.
The Fund intends to issue additional preferred stock following the
completion of the Offer subject to rating agency consent and applicable asset
coverage requirements such that the percentage of the Fund's assets represented
by the liquidation value of the ATP (leverage) will be either the same or
somewhat higher than immediately prior to the Offer. As of December 31, 1996,
the Fund's leverage ratio (the ratio of the Fund's total senior securities to
the sum of its total net assets and its senior securities) was approximately
____%, which would be reduced to approximately ___% in the event all Rights are
exercised and no additional leverage is incurred. The incurrence of additional
leverage would reduce the investment flexibility gained by the Fund through the
increase in assets that will result from the Offer. See "The Fund" and "Risk
Factors Special Considerations--Leverage" for discussion of the risks and
possible benefits associated with a leveraged capital structure.
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 this Offer. Any such further rights
offering will be made in accordance with the 1940 Act.
Expiration of the Offer
The Offer will expire at 5:00 p.m., Eastern time, on March 18, 1997,
unless extended by the Fund until a time not later than 5:00 p.m., Eastern time,
on April 17, 1997. Rights will expire on the Expiration Date and may not be
exercised thereafter.
17
<PAGE>
Subscription Agent
The Subscription Agent is State Street Bank and Trust Company, P.O. Box
9061, Boston, Massachusetts 02266-8686, which will receive, for its
administrative, processing, invoicing and other services as subscription agent,
a fee estimated to be $80,000, and reimbursement for all out-of-pocket expenses
related to the Offer. The Subscription Agent is also the Fund's Custodian,
Dividend Paying Agent, Transfer Agent and Registrar with respect to the Common
Stock. Questions regarding the Subscription Certificates should be directed to
State Street Bank and Trust Company, P.O. Box 9061, Boston, Massachusetts
02205-9061 (telephone 1 (800) 426- 5523). SIGNED SUBSCRIPTION CERTIFICATES
SHOULD BE SENT TO STATE STREET BANK AND TRUST COMPANY, ATTENTION: CORPORATE
STOCK TRANSFER DEPARTMENT, by one of the methods described below. The Fund
reserves the right to accept Subscription Certificates actually received on a
timely basis at any of the addresses listed.
(1) BY FIRST CLASS MAIL:
P.O. Box 9061
Boston, Massachusetts 02205-8686
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
Corporate Reorganization
55 Broadway - 3rd Floor
New York, NY 10006
(3) BY HAND:
225 Franklin Street - Concourse Level
Boston, Massachusetts 02110
or
c/o Boston EquiServe LP
Corporate Reorganization
55 Broadway - 3rd Floor
New York, NY 10006
DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE GOOD
DELIVERY.
Information Agent
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (888) 805-6299
The Information Agent will receive a fee estimated to be $22,500 and
reimbursement for all out-of-pocket expenses related to the Offer.
Stockholders may also contact their brokers or nominees for information
with respect to the Offer.
18
<PAGE>
Exercise of Rights
Rights may be exercised by filling in and signing the Subscription
Certificate and mailing it in the envelope provided, or otherwise delivering the
completed and signed Subscription Certificate to the Subscription Agent,
together with payment for the Shares as described below under "Payment for
Shares." Rightholders may also exercise Rights by contacting a broker, bank or
trust company who can arrange, on behalf of the Rightholder, to guarantee
delivery of payment and of a properly completed and executed Subscription
Certificate. A fee may be charged for this service. Completed Subscription
Certificates and full payment for the Shares subscribed for must be received by
the Subscription Agent prior to 5:00 p.m., Eastern time, on the Expiration Date
(unless payment is effected by means of a notice of guaranteed delivery as
described below under "Payment for Shares") at one of the offices of the
Subscription Agent at the addresses set forth above.
Qualified Financial Institutions who hold shares of Common Stock as
nominee for the account of others should notify the respective beneficial owners
of such shares as soon as possible to ascertain such beneficial owners'
intentions and to obtain instructions with respect to the Rights. For purposes
of this Prospectus, "Qualified Financial Institution" shall mean a registered
broker-dealer, commercial bank or trust company, securities depository or
participant therein, or nominee thereof. If the beneficial owner so instructs,
the nominee should complete the Subscription Certificate and submit it to the
Subscription Agent with the proper payment. In addition, beneficial owners of
Common Stock or Rights held through such a nominee should contact the nominee
and request the nominee to effect transactions in accordance with the beneficial
owner's instructions.
Stockholders who are registered holders can choose between either option
set forth under "Payment for Shares" below.
Over-Subscription Privilege
If Rightholders do not exercise all of the Rights held by them on
Primary Subscription, any Shares for which subscriptions have not been received
(the "Excess Shares") will be offered by means of the Over-Subscription
Privilege to those Rightholders (including those Rightholders who acquired their
Rights during the Subscription Period) who have exercised all the Rights held by
them on Primary Subscription and who wish to acquire more than the number of
Shares for which the Rights held by them are exercisable. Rightholders who
exercise on Primary Subscription all of the Rights held by them will be asked to
indicate on their Subscription Certificates how many Shares they would desire to
purchase pursuant to the Over-Subscription Privilege. If sufficient Excess
Shares remain as a result of unexercised Rights, all over-subscriptions will be
honored in full. If sufficient Excess Shares are not available to honor all
over-subscriptions, the available Shares will be allocated first among
Rightholders who subscribe for an aggregate of 1,000 or fewer Shares (inclusive
of Shares subscribed for by such Rightholders in the Primary Subscription).
Shares remaining thereafter will be allocated among those who over-subscribe
based on the number of Rights originally exercised by them in the Primary
Subscription. The percentage of Excess Shares each over-subscribing Exercising
Rightholder may acquire may be rounded up or down to result in delivery of whole
Shares. The allocation process may involve a series of allocations in order to
assure that the total number of Shares available for over-subscriptions is
distributed on a pro rata basis. Each Rightholder is required to purchase all
allocated Over-Subscription Shares requested on the Subscription Certificate.
The Fund will not otherwise offer or sell any Shares which are not
subscribed for pursuant to the Primary Subscription or the Over-Subscription
Privilege pursuant to the Offer.
Qualified Financial Institutions and other nominee holders of Rights
will be required to certify to the Subscription Agent, before any
Over-Subscription Privilege may be exercised as to any particular beneficial
owner, as to the aggregate number of Rights exercised pursuant to the Primary
Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full.
19
<PAGE>
Payment for Shares
Exercising Rightholders who acquire Shares on Primary Subscription or
pursuant to the Over-Subscription Privilege may choose between the following
methods of payment:
(1) An exercising Rightholder may send the Subscription
Certificate, together with payment for the Shares acquired on Primary
Subscription and for any additional Shares subscribed for pursuant to
the Over-Subscription Privilege, to the Subscription Agent, calculating
the total payment on the basis of the Estimated Subscription Price of
$______ per Share (based on the net asset value per share on February 7,
1997). To be accepted, such payment, together with the properly
completed and executed 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., Eastern time, on the
Expiration Date. Exercise of the Rights by this method is subject to
actual collection of checks by 5:00 p.m. on the third business day after
the Expiration Date. The Subscription Agent will deposit all share
purchase checks and any orders received by it prior to the final payment
date into a segregated interest bearing account pending proration and
distribution of Shares or return of funds. All interest earned on such
funds will accrue to the benefit of the Fund. 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, MUST BE PAYABLE TO THE NEW AMERICA
HIGH INCOME FUND, INC. AND MUST ACCOMPANY A PROPERLY COMPLETED AND
EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO
BE ACCEPTED.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTHOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE
ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT PRIOR TO 5:00 P.M.,
EASTERN TIME, ON THE EXPIRATION DATE AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., EASTERN TIME, ON THE THIRD BUSINESS DAY AFTER THE EXPIRATION
DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE FIVE BUSINESS DAYS OR
MORE TO CLEAR, RIGHTHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
(2) Alternatively, a subscription will be accepted by the
Subscription Agent if, prior to 5:00 p.m., Eastern time, on the
Expiration Date, the Subscription Agent has received a notice of
guaranteed delivery by facsimile (telecopy) or otherwise from a bank, a
trust company, or an Exchange member guaranteeing delivery of (i)
payment of the full Subscription Price for the Shares subscribed for on
Primary Subscription and any additional Shares subscribed for pursuant
to the Over-Subscription Privilege, and (ii) a properly completed and
executed Subscription Certificate, and, if applicable, a Nominee Holder
Over-Subscription Form. The Subscription Agent will not honor a notice
of guaranteed delivery if a properly completed and executed Subscription
Certificate together with full payment is not received by the
Subscription Agent by the close of business on the third business day
after the Expiration Date (the "Confirmation Date").
On or before the Confirmation Date, the Subscription Agent will send to
each Exercising Rightholder (or, if shares are held by Cede or any other
depository or nominee, to Cede or such other depository or nominee), a
confirmation showing (i) the number of Shares purchased pursuant to the Primary
Subscription and, if applicable, the Over-Subscription Privilege, (ii) the per
Share and total purchase price for the Shares, (iii) any excess to be refunded
by the Fund to such Rightholder as a result of payment for Shares pursuant to
the Over-Subscription Privilege which the Rightholder is not acquiring and (iv)
any additional amount payable by such Rightholder to the Fund or any excess to
be refunded by the Fund to such Rightholder, in each case, based on the actual
Subscription Price as determined on the Expiration Date. Any additional payment
required from Rightholders must be received by the Subscription Agent within ten
business days after the Confirmation Date.
20
<PAGE>
Any excess payment to be refunded by the Fund to a Rightholder will be mailed by
the Subscription Agent as promptly as practicable. An Exercising Rightholder
will have no right to rescind a purchase after the Subscription Agent has
received payment, either by means of a notice of guaranteed delivery or a check.
See "Delivery of Shares."
Whichever of the two methods described above is used, issuance of the
Shares purchased is subject to collection of checks and actual full payment. If
a Rightholder who subscribes for Shares pursuant to the Primary Subscription or
Over-Subscription Privilege does not make payment of any amounts due, the
Subscription Agent reserves the right to take any or all of the following
actions: (i) find other stockholders for such subscribed and unpaid for Shares;
(ii) apply any payment actually received by it toward the purchase of the
greatest whole number of Shares which could be acquired by such holder upon
exercise of the Primary Subscription and/or Over-Subscription Privilege, and/or
(iii) exercise any and all other rights or remedies to which it may be entitled,
including, without limitation, the right to set off against payments actually
received by it with respect to such subscribed Shares.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of Rights will be determined by the Subscription Agent, whose
determinations will be final and binding. The Subscription Agent in its sole
discretion may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as the Subscription Agent determines in its sole discretion. The
Subscription Agent will not be under any duty to give notification of any defect
or irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.
Sale of Rights
Sales through Subscription Agent. Rightholders who do not wish to
exercise any or all of their Rights may instruct the Subscription Agent to sell
any unexercised Rights. Subscription Certificates representing the Rights to be
sold by the Subscription Agent must be received by the Subscription Agent prior
to March 14, 1997 (or if the Offer is extended, until two business days prior to
the Expiration Date). Upon the timely receipt by the Subscription Agent of
appropriate instructions to sell Rights, the Subscription Agent will use its
best efforts to complete the sale; and the Subscription Agent will remit the
proceeds of sale, net of any commissions, to the Rightholders. No brokerage
commissions will be charged to holders in connection with any sale of fewer than
100 Rights who elect to direct the Subscription Agent to sell such Rights in
whole but not in part. Any commission on sales of 100 Rights or more will be
paid by the selling Rightholders. If the Rights can be sold, sales of such
Rights will be deemed to have been effected at the weighted-average price
received by the Subscription Agent on the day such Rights are sold. The
Subscription Agent will also attempt to sell all Rights which remain unclaimed
as a result of Subscription Certificates being returned by the postal
authorities to the Subscription Agent as undeliverable as of the fourth business
day prior to the Expiration Date. Such sales will be made net of commissions on
behalf of the nonclaiming stockholders. The Subscription Agent will hold the
proceeds from those sales for the benefit of such nonclaiming stockholder until
such proceeds are either claimed or escheat. There can be no assurance that the
Subscription Agent will be able to complete the sale of any such Rights, and
neither the Fund nor the Subscription Agent has guaranteed any minimum sales
price for the Rights. All such Rights will be sold at the market price, if any,
on the Exchange.
Other Transfers. The Rights are transferable on the Exchange until the
close of business on the last business day prior to the Expiration Date. The
Rights evidenced by a single Subscription Certificate may be transferred in
whole or in part by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register such
portion of the Rights evidenced thereby in the name of the transferee and to
issue a new Subscription Certificate to the transferee evidencing such
transferred Rights. In such event, a new Subscription Certificate evidencing the
balance of the Rights will be issued to the transferring Rightholder or, if the
transferring Rightholder so instructs, to an additional transferee.
Rightholders wishing to transfer all or a portion of their Rights should
allow at least five business days prior to the Expiration Date for (i) the
transfer instructions to be received and processed by the Subscription
21
<PAGE>
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund nor the Subscription Agent shall have any
liability to a transferee or transferor of Rights if Subscription Certificates
are not received in time for exercise or sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent and brokerage
commissions on the sale of fewer than 100 Rights (which will be paid by the Fund
as described above), all commissions, fees and other expenses (including
brokerage commissions and transfer taxes) incurred in connection with the
purchase, sale or exercise of Rights will be for the account of the transferor
of the Rights, and none of such commissions, fees or expenses will be paid by
the Fund or the Subscription Agent.
The Fund anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription (but not the
Over-Subscription Privilege) may be effected through, the facilities of DTC;
Rights exercised through DTC are referred to as "DTC Exercised Rights". The
holder of a DTC Exercised Right may exercise the Over-Subscription Privilege in
respect of such DTC Exercised Right by properly executing and delivering to the
Subscription Agent, at or prior to 5:00 p.m., Eastern time, on the Expiration
Date, a Nominee Holder Over-Subscription Form, together with payment of the
Subscription Price for the number of Shares for which the Over-Subscription
Privilege is to be exercised. Copies of the Nominee Holder Over-Subscription
Form may be obtained from the Subscription Agent.
Financial Advisor
First Albany Corporation, a broker-dealer and member of the National
Association of Securities Dealers, Inc. has been retained by the Fund to provide
financial advisory services in connection with the Offer. The Fund has agreed to
pay First Albany a fee for its advisory services in an amount equal to $125,000.
In addition, the Fund has agreed to reimburse First Albany, without prior
approval, for up to $5,000 of its reasonable expenses incurred in connection
with the Offer.
Delivery of Share Certificates
Participants in the Fund's Dividend Reinvestment Plan will have any
Shares acquired with respect to Shares held in their stockholder dividend
reinvestment accounts in the Plan on Primary Subscription and pursuant to the
Over-Subscription Privilege credited to such accounts. Stockholders whose Shares
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 on Primary
Subscription and pursuant to the Over-Subscription Privilege credited to the
account of Cede or such other depository or nominee. With respect to all other
stockholders, certificates for all Shares acquired on Primary Subscription and
pursuant to the Over-Subscription Privilege will be mailed within fifteen
business days after the Confirmation Date and after full payment for the Shares
subscribed for has been received and cleared, which clearance may take up to
fifteen days from the date of receipt of the payment.
Foreign Stockholders
Subscription Certificates will not be mailed to Record Date Stockholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Stockholders"). The
Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Stockholders' accounts until
instructions are received to exercise, sell or transfer the Rights. If no
instructions have been received by 12:00 noon, Eastern time, three business days
prior to the Expiration Date regarding the Rights of those Foreign Record Date
Stockholders, the Subscription Agent will use its best efforts to sell the
Rights of those Foreign Record Date Stockholders on the Exchange. The net
proceeds, if any, from the sale of those Rights will be remitted to the Foreign
Record Date Stockholder.
22
<PAGE>
Federal Income Tax Consequences of the Other
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Stockholders will
not result in taxable income to such holders nor will such holders
realize taxable income as a result of the exercise of the Rights.
2. The basis of a Right will be (a) to a holder of Common Stock
to whom it is issued and who exercises or sells the Right (i) if the
fair market value of the Right immediately after issuance is less than
15% of the fair market value of the Common Stock with regard to which it
is issued, zero (unless the holder elects, by filing a statement with
his timely filed federal income tax return for the year in which the
Rights are received, to allocate the basis of the Common Stock between
the Right and the Common Stock based on their respective fair market
values immediately after the Right is issued), and (ii) if the fair
market value of the Right immediately after issuance is 15% or more of
the fair market value of the Common Stock with regard to which it is
issued, a portion of the basis in the Common Stock based upon their
respective fair market values immediately after the Right is issued; (b)
to a holder of Common Stock to whom it is issued and who allows the
Right to expire, zero; and (c) to anyone who purchases a Right in the
market, the purchase price for a Right.
3. The holding period of a Right received by a Record Date
Stockholder includes the holding period of the Common Stock with regard
to which the Right is issued.
4. Any gain or loss on the sale of a Right will be treated as a
capital gain or loss if the Right is a capital asset in the hands of the
seller. Such a capital gain or loss will be long- or short-term,
depending on how long the Right has been held, in accordance with
paragraph 7 below. A Right issued with regard to Common Stock will be a
capital asset in the hands of the person to whom it is issued if the
Common Stock was a capital asset in the hands of that person. If a Right
is allowed to expire, there will be no loss realized unless the Right
had been acquired by purchase, in which case there will be a loss equal
to the basis of the Right.
5. If the Right is exercised by the Record Date Stockholder, the
basis of the Common Stock received will include the basis, if any,
allocated to the Right and the amount paid upon exercise of the Right.
6. If the Right is exercised, the holding period of the Common
Stock acquired begins on the date the Right is exercised.
7. If the Right is sold, the holding period of the Right will
include the holding period of the Common Stock with regard to which it
was issued.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if the holder of the account provides the
Fund with either an incorrect taxpayer identification number or no number at all
or fails to certify that he is not subject to such withholding.
The foregoing is only a summary of applicable federal income tax laws
and does not include any state or local tax consequences of the Offer.
Rightholders should consult their own tax advisers concerning the tax
consequences of this transaction. See "Taxation."
Considerations for Certain Tax-Deferral Arrangements and Employee Plans
Special considerations apply with respect to Record Date Stockholders
that are tax-deferral arrangements such as plans qualified under Section 401(a)
of the Internal Revenue Service Code of 1986, as amended ("Code") (including
corporate savings and 401(k) plans and Keogh plans of self-employed
individuals), individual retirement accounts under Section 408(a) of the Code
("IRAs"), and custodial accounts under Section
23
<PAGE>
403(b) of the Code (collectively, "Plans"). For example, additional
contributions to a Plan (other than permitted rollover contributions or
trustee-to-trustee transfers from other Plans) in order to exercise Rights, when
taken together with other contributions made to the Plan, may exceed limits
under the Code, resulting in (among other things) excise taxes for excess or
nondeductible contributions, or the Plan's loss of its tax-favored status.
Furthermore, the sale or transfer of Rights may be treated as a distribution or
result in other adverse tax consequences.
Plans and other tax exempt entities should also be aware that if they
borrow in order to finance their exercise of Rights, they may become subject to
the tax on unrelated business taxable income ("UBTI") under Section 511 of the
Code. If any portion of an IRA is used as security for a loan, the portion so
used is also treated as distributed to the IRA depositor, which may result in
current income taxation and penalty taxes.
Certain Plans may be subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which is a broad statutory framework that
governs most employer-maintained retirement plans ("ERISA Plans') and imposes
certain fiduciary obligations on the persons who manage such plans
("Fiduciaries"). In determining whether to exercise or transfer Rights,
Fiduciaries of Record Date Stockholders that are ERISA Plans must determine that
such actions are consistent with their fiduciary duties under ERISA and do not
result in transactions which are prohibited under Section 406 of ERISA. Further,
Record Date Stockholders which are Plans that are subject to Section 4975 of the
Code must determine that the exercise or transfer of Rights does not result in
transactions which are prohibited and subject to excise taxes under Section 4975
(under rules which generally parallel the prohibited transaction provisions of
Section 406 of ERISA). Employee benefit plans that are not ERISA Plans (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights.
The Fund is an investment company registered under the Investment
Company Act of 1940, as amended, and intends to continue to qualify as such.
Therefore, under ERISA the assets of an ERISA Plan which is a stockholder of the
Fund will include only the equity interest owned by such ERISA Plan and not the
underlying assets of the Fund. The Investment Adviser will therefore not be a
Fiduciary with respect to stockholders which are ERISA Plans and the operation
of the Fund will not be subject to ERISA.
Due to the complexity of the foregoing rules and the taxes, penalties,
and potential liability for noncompliance, stockholders which are Plans should
consult with their counsel and other advisors before their exercise or transfer
of Rights.
Notice of Net Asset Value Decline
The Fund has, as required by the staff of the Commission, undertaken to
suspend the Offer until it amends this Prospectus if subsequent to February 7,
1997, the effective date of the Fund's Registration Statement, the Fund's net
asset value declines more than 10% from its net asset value as of that date. In
such event, the Fund will notify stockholders of any such decline and thereby
permit them to cancel their exercise of Rights.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the Estimated
Subscription Price of $____ per Share, the net proceeds of the Offer are
estimated to be approximately $_________ (after deducting offering expenses
payable by the Fund estimated at approximately $500,000; Wellington Management
has agreed to voluntarily waive $100,000 of its fees). The Fund anticipates that
investment of such net proceeds in accordance with the Fund's investment
objective and policies will take up to eight weeks from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities, but in no event will such investment take longer than six months.
Pending such investment in accordance with the Fund's investment objective and
policies, the proceeds will be held in U.S. Government securities (which include
obligations of the United States Government and its agencies and
instrumentalities) and other high-quality short-term money market instruments.
24
<PAGE>
THE FUND
The New America High Income Fund, Inc. is a diversified, closed-end
management investment company with a leveraged capital structure. Wellington
Management Company, LLP currently serves as the Fund's investment adviser. The
Fund's investment objective is to provide high current income, while seeking to
preserve stockholders' capital, through investment in a professionally managed,
diversified portfolio of "high yield" fixed-income securities, commonly known as
"junk bonds."
The Fund invests primarily in "high yield" fixed-income securities rated
in the lower categories by established rating agencies, consisting principally
of fixed income securities rated "BB" or lower by S&P or "Ba" or lower by
Moody's, and, subject to applicable rating agency guidelines (see "Rating Agency
Guidelines"), non-rated securities deemed by the Investment Adviser to be of
comparable quality. See "Investment Objective and Policies" and "Management of
the Fund--The Investment Adviser." The fixed-income securities in which the Fund
invests are regarded by the rating agencies, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. Such securities may also be subject
to greater market price fluctuations than lower yielding, higher rated debt
securities; credit ratings do not reflect this market risk.
The Fund is subject to various portfolio diversification and related
asset coverage requirements under guidelines established by Moody's and Fitch in
connection with such rating agencies' issuance of ratings of "aaa" and AAA,
respectively, with respect to the Fund's ATP. These guidelines require specific
assets coverage ratios to be maintained on the basis of the discounted values of
eligible securities in the Fund's portfolio, which discounts are directly
correlated to the ratings assigned to the securities. The guidelines generally
cause the Fund to invest in higher quality assets and/or to maintain relatively
substantial balances of highly liquid assets than would otherwise be the case in
order to remain in compliance with applicable asset coverage requirements. See
"Investment Objective and Policies," "Rating Agency Guidelines," "Risk Factors
and Special Considerations--Leverage" and "Description of Capital Stock--Asset
Maintenance." An investment in the Fund involves a number of significant risks,
which are increased due to the Fund's leveraged capital structure, and no
assurance can be given that the Fund will achieve its investment objective. See
"Risk Factors and Special Considerations."
The Fund has had a leveraged capital structure since its inception.
Through the use of leverage, the Fund seeks to increase dividend yields to
holders of Common Stock over those that would be available in the absence of
leverage by investing in securities which pay interest at a higher rate than the
rates of required dividend payments on its outstanding ATP after related
expenses. By issuing senior securities having a "aaa"/AAA rating and agreeing to
various portfolio diversification guidelines established by the relevant rating
agencies in connection therewith, the Fund seeks to obtain a lower cost of
leverage than it believes would be available with lower rated or unrated senior
securities. However, the use of leverage can, under certain circumstances,
adversely affect the Fund's performance and generally will cause the net asset
value of the Common Stock to decline more rapidly when the value of portfolio
holdings declines than would be the case for an unleveraged fund. The asset
coverage requirements applicable to the Fund's senior securities affect the
management of its portfolio, as described in the preceding paragraph. Also, in
the event of a decline in the value of the Fund's portfolio securities, the Fund
may be forced to redeem or repurchase senior securities in order to reduce
investment leverage and thereby remain in compliance with applicable asset
coverage requirements, which may require the liquidation of portfolio securities
at prices below the prices at which they were purchased. Events such as
increases in short-term interest rates which increase the dividends required to
be paid on the Fund's outstanding ATP or increases in expenses associated with
the ATP, will, absent a corresponding increase in the rate of return of
portfolio holdings or a decrease in other expenses, result in a decrease in
dividends paid to holders of Common Stock. See "Risk Factors and Special
Considerations--Leverage," "Investment Objective and Policies" and "Description
of Capital Stock."
The Fund's performance since inception illustrates the significant risks
(and potential rewards) associated with investing in "high yield, high risk"
securities on a leveraged basis. The Fund commenced operations in 1988 with
total assets of $396,386,000, a net asset value per share of Common Stock of
$9.25 and outstanding
25
<PAGE>
senior securities of $184 million. At December 31, 1990, following a significant
decline in the high yield market during 1989 and 1990, the Fund's total assets
were $169,059,000 (a decline of 57.4% from total assets at inception), its net
asset value per share of Common Stock was $3.42 (a decline of 63.0% from net
asset value per share at inception), and outstanding senior securities
aggregated $82,990,000 (a decline of 54.9% relative to outstanding senior
securities at inception). Total return on an investment in Common Stock from
inception through December 31, 1990 was -58.74%. At December 31, 1996, the
Fund's total assets were $276,408,000, net asset value per share of Common Stock
was $4.94 and outstanding senior securities aggregated $100 million. Cumulative
total investment return for an investment in Common Stock for the one-, three-
and five-year periods ended December 31, 1996 was 19.89%, 41.04% and
156.24%, respectively. Past performance is, of course, no guarantee of future
results.
Existing Leverage
During 1993, the Fund had outstanding senior securities having an
aggregate principal amount/liquidation preference of $80 million of which $45
million consisted of short term debt and $35 million consisted of credit
enhanced, auction preferred stock. In January 1994 the Fund refinanced its
outstanding senior securities through the issuance of two series of ATP having
an aggregate liquidation preference of $100 million and no credit enhancement.
Dividends on both series of the ATP are established in periodic auctions
generally held every 28 days (subject to the right of the Fund to establish
longer or shorter dividend periods), and generally reflect short-term interest
rates during short-term dividend periods. See "Description of Capital
Stock--Dividends and Dividend Periods."
In connection with the refinancing of the Fund's senior securities
through the issuance of the ATP, the Fund (i) added $20 million of additional
investment leverage and became obliged to maintain required asset coverages with
respect to the outstanding ATP, (ii) eliminated certain fees and expenses
previously associated with its outstanding preferred stock, (iii) agreed to
relatively more stringent rating agency investment guidelines than had applied
to the redeemed senior securities, and (iv) incurred substantial transaction
costs. Subsequently, in February 1994, the Fund entered into a five-year
interest payment swap arrangement effective through February 1999 ($65 million
notional amount) with The First National Bank of Boston ("FNBB"). The effect of
this arrangement is to hedge the Fund's dividend payment obligations with
respect to 65% of the ATP outstanding as of April 29, 1994. Under this
arrangement, the Fund makes monthly payments to FNBB at the annual rate of 5.25%
of the notional swap amount while receiving from FNBB payments at a floating
rate determined with reference to the level of short-term interest rates from
time to time (and which was ____% at February 7, 1997). See "Investment
Objective and Policies" and "Description of Capital Stock--Dividends and
Dividend Periods." The Fund makes dividend payments to the holders of the ATP
based on the results of periodic auctions without regard to the swap.
The Fund is registered under the 1940 Act and was organized as a
corporation under the laws of the State of Maryland on November 19, 1987. The
Fund's address is 10 Winthrop Square, Fifth Floor, Boston, Massachusetts 02110,
and its telephone number is (617) 350-8610. The Investment Adviser's address is
75 State Street, Boston, Massachusetts 02109, and its telephone number is (617)
951-5000.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide high current income,
while seeking to preserve stockholders' capital, through investment in a
professionally managed, diversified portfolio of "high yield" fixed-income
securities, commonly known as "junk bonds." The Fund's investment objective and
the restrictions described below under "Investment Restrictions" are fundamental
policies and thus may not be changed without the affirmative vote of the holders
of a majority of the outstanding shares of the Fund's Common Stock and a
majority of the outstanding shares of the ATP, voting as separate classes, which
means for each class the lesser of (a) more than 50% of such class or (b) 67% or
more of such class present at a meeting at which more than 50% of the
outstanding shares of such class are present or represented by proxy.
26
<PAGE>
No assurance can be given that the Fund will attain its investment
objective. Specifically, given the high risk nature and price volatility of the
Fund's investments as well as the Fund's leverage, it may be difficult to
achieve capital preservation on a consistent basis in the future. As described
above, in the high yield securities market of 1989 and 1990, the Fund suffered a
substantial decline in its net asset value as a result of these factors and thus
failed to achieve this objective during that period and, while the Fund's
cumulative total investment returns for the one-, three-, and five-year periods
ended December 31, 1996 were 19.89%, 41.04%, and 156.24%, respectively,
past performance is no guarantee of future results. See "The Fund" and "Risk
Factors and Special Considerations."
Investment Strategy
The policies described below may be changed by the Fund without the
approval of the Fund's stockholders.
The Fund seeks to achieve its investment objective by investing
primarily in "high yield" fixed-income securities rated in the lower categories
by recognized rating agencies, consisting principally of fixed-income securities
rated "Ba" or lower by Moody's or "BB" or lower by S&P and, subject to
applicable rating agency guidelines, (see "Rating Agency Guidelines") non-rated
securities deemed by the Investment Adviser to be of comparable quality. Because
non-rated securities are not eligible for inclusion in the calculation of the
discounted value of the Fund's assets under the current rating agency guidelines
to which the Fund is subject, however, it is not presently anticipated that such
securities will comprise a significant percentage of the Fund's investments,
although the Fund reserves full flexibility in this regard. See "Rating Agency
Guidelines." Under normal market conditions, the Fund will have at least 65% of
its total assets invested in securities rated BB or lower by S&P or Ba or lower
by Moody's or non-rated securities deemed by the Investment Adviser to be of
comparable quality, and the average maturity of the Fund's portfolio is expected
to be between eight and fifteen years. The dollar weighted average of credit
ratings of all bonds held by the Fund during the year ended December 31, 1996,
computed on a monthly basis, is set forth below. This information reflects the
average composition of the Fund's assets during the year ended December 31, 1996
and is not necessarily representative of the Fund as of the current fiscal year
or at any other time in the future.
Moody's Percentage
Rating of Portfolio
------ ------------
Baa......................................... 1.01%
Ba.......................................... 22.05%
B........................................... 73.46%
Caa......................................... 0.80%
Ca.......................................... 0.37%
C........................................... 0.04%
NR.......................................... 2.27%
--------
Total............................... 100.00%
As of December 31, 1996, the weighted average maturity of the Fund's portfolio
was approximately 7.42 years.
The Fund's portfolio reflects requirements established by Moody's and
Fitch in connection with the issuance by such agencies of investment grade
ratings for the Fund's ATP (referred to herein as the "Rating Agency
Guidelines"). These guidelines relate, among other things, to industry and
credit quality characteristics of issuers and specify various "discount factors"
for debt securities (with the level of discount greater as the rating of a
security becomes lower). Under the Rating Agency Guidelines, certain types of
securities in which the Fund may otherwise invest consistent with its investment
strategy are not eligible for inclusion in the calculation of the discounted
value of the Fund's portfolio. Such instruments include, for example, securities
rated "CC"/"Ca" or lower by the Rating Agencies, non-rated securities, private
placements, non-U.S. securities, preferred or common stock, zero coupon or
similar securities that do not provide for the periodic payment of interest in
cash and other securities not within the investment guidelines. Accordingly,
although
27
<PAGE>
the Fund reserves the right to invest in such securities to the extent set forth
herein, they have not and it is anticipated that they will not constitute a
significant portion of the Fund's portfolio. See "Rating Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate discounted value, determined on the basis of the guidelines,
greater than the aggregate liquidation preference of the ATP plus specified
liabilities, payment obligations and other amounts, as of periodic valuation
dates. The Rating Agency Guidelines also require the Fund to maintain asset
coverage for the ATP on a non-discounted basis of at least 200% as of the end of
each month, and the 1940 Act requires such asset coverage as a condition to
paying dividends on Common Stock. See "Description of Capital Stock--Asset
Maintenance." The effect of compliance with these guidelines may be to cause the
Fund to invest in higher quality assets and/or to maintain relatively
substantial balances of highly liquid assets or to restrict the Fund's ability
to make certain investments that would otherwise be deemed potentially desirable
by the Investment Adviser, including private placements of other than Rule 144A
securities, and to limit or delay the Fund's ability to reinvest cash in a
rising "high-yield" market. See "The Fund" and "Risk Factors and Special
Considerations--Leverage." The Rating Agency Guidelines are subject to change
from time to time with the consent of the relevant rating agency and would not
apply if the Fund in the future elected not to use investment leverage
consisting of senior securities rated by one or more rating agencies, although
other similar arrangements might apply with respect to other senior securities
that the Fund may issue.
There is no minimum rating requirement applicable to the fixed-income
securities which may be acquired by the Fund. However, compliance with the
Rating Agency Guidelines, under which securities rated below "CCC/Caa" are not
eligible for inclusion in the calculation of the discounted value of the Fund's
assets and other lower rated securities are heavily discounted in such
calculation, may have the effect of precluding or limiting investments in such
issues.
"High-yield" bonds, the generic name for corporate bonds rated between
"BB"/"Ba" and "C"/"C" by the Rating Agencies, are frequently issued by
corporations in the growth stage of their development. Bonds which rated
"BB"/"Ba," "B"/"B," "CCC"/"Caa," "CC"/"Ca" and "C"/"C" are regarded by the
rating agencies, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. Such securities are also generally considered to be subject to
greater risk than securities with higher ratings with regard to a deterioration
of general economic conditions. Further information concerning the ratings of
corporate bonds, including the rating categories of Moody's, Fitch and S&P) is
provided in Appendix A. "High-yield" securities held by the Fund may include
securities received as a result of a corporate reorganization or issued as part
of a corporate takeover. Securities issued to finance corporate restructurings
may have special credit risks due to the highly leveraged conditions of the
issuers, and such securities are usually subordinate to other securities issued
by the issuer. In addition, such issuers may lose experienced management as a
result of the restructurings. Finally, the market price of such securities may
be more volatile to the extent that expected benefits from restructuring do not
materialize.
Fixed-income securities which the Fund has the right to acquire include
preferred stocks (limited to 20% of the Fund's total assets and subject to
compliance with the Rating Agency Guidelines as described above) and all types
of debt obligations having varying terms with respect to security or credit
support, subordination, purchase price, interest payments and maturity. Such
obligations may include, for example, bonds, debentures, notes, mortgage or
other asset-backed instruments, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper, zero coupon
securities and obligations issued or guaranteed by the United States government
or any of its political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by such instruments). Most
debt securities in which the Fund will invest will bear interest at fixed rates.
However, the Fund reserves the right to invest without limitation in
fixed-income securities that have variable rates of interest or involve equity
features, such as contingent interest or participations based on revenues, sales
or profits (i.e., interest or other payments, often in addition to a fixed rate
of return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture). The Fund also has the right to acquire
common stock as part of a unit in connection with the purchase of debt
28
<PAGE>
securities consistent with the Fund's investment policies, although such
investments are not eligible for inclusion in the calculation of the Fund's
discounted value under the Rating Agency Guidelines.
The Fund has the right to invest up to 20% of its total assets in
securities that are not readily marketable (determined as of the time of
investment), including securities restricted as to resale, or so-called private
placements. Securities that are not readily marketable may offer higher yields
than comparable publicly traded securities. However, the Fund may not be able to
sell these securities when the Investment Adviser considers it desirable to do
so or, to the extent they are sold privately, may have to sell them at less than
the price of otherwise comparable securities. Also, like preferred stock,
private placements, unless they involve securities which may be resold pursuant
to Rule 144A, are not eligible for inclusion in the discounted value of the
portfolio for purposes of the Rating Agency Guidelines of Moody's or Fitch in
effect as of the date of this Prospectus. See "Rating Agency Guidelines."
The Fund is permitted to invest up to 20% of its total assets in zero
coupon securities, although such securities also may not be included in
calculating the discounted value of the Fund's portfolio under the Rating Agency
Guidelines. Zero coupon securities pay no cash income but are purchased at a
discount from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and their maturity
value. There may be special tax considerations associated with investing in
securities structured as deferred interest, zero coupon or payment-in-kind
securities. The Fund records the interest on these securities as income even
though it receives no cash interest until each security's maturity date. The
Fund will be required to distribute all or substantially all such amounts
annually and may have to obtain the cash to do so by selling securities. Thus,
to meet cash distribution obligations, the Fund may be required to liquidate a
portion of its assets, which it would otherwise continue to hold, at a
disadvantageous time. These distributions will be taxable to stockholders as
ordinary income. In the case of securities structured as deferred interest, zero
coupon or payment-in-kind securities, the market prices of such securities are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash.
The Fund may invest in U.S. dollar-denominated bonds sold in the United
States by non-U.S. issuers ("Yankee bonds"). As compared with bonds issued in
the United States, such bond issues normally carry a higher interest rate but
are less actively traded.
Notwithstanding any of the foregoing, when market conditions warrant a
temporary defensive investment strategy, including when it is necessary to
maintain compliance with the Rating Agency Guidelines (under which the Fund's
ability to invest in lower rated securities having relatively low discounted
values may be restricted, particularly as the market values of portfolio
holdings decline), the Fund may invest without limitation in money market
instruments, including rated and (subject to compliance with the Rating Agency
Guidelines) unrated commercial paper of domestic and foreign corporations,
certificates of deposit, bankers' acceptances and other obligations of banks,
repurchase agreements and short-term obligations issued or guaranteed by the
United States government or its instrumentalities or agencies. The yield on
these securities will tend to be lower than the yield on other securities to be
purchased by the Fund. The Fund may also invest in securities rated higher than
"Ba" by Moody's or "BB" by S&P or non-rated fixed-income securities of
comparable quality when the difference in yields between quality classifications
is relatively narrow or for temporary defensive purposes, including maintenance
of applicable asset coverage requirements, when the Investment Adviser
anticipates adverse market conditions. Investments in higher rated issues may
serve to lessen a decline in net asset value but may also affect the amount of
current income produced by the Fund, since the yields from such issues are
usually lower than those from lower rated issues.
As noted herein, the Fund has had a leveraged capital structure since
its inception and, as of December 31, 1996, had outstanding 2,000 shares of
preferred stock issued in two series, the ATP, having an aggregate liquidation
preference of $100 million. The ATP is subject to optional redemption by the
Fund. The Fund is required to redeem the ATP in whole or in part in the event
the Fund fails to satisfy applicable asset coverage requirements and is required
to redeem the ATP in whole in the event the Fund fails to maintain the "aaa"/AAA
Credit Rating (as defined below) for the ATP and such rating is not restored on
a timely basis. See "Description of Capital Stock--Mandatory Redemption." The
"aaa"/AAA Credit Rating is a rating for the ATP
29
<PAGE>
in the highest rating category of any two nationally recognized statistical
rating organizations (as used in the Securities Exchange Act of 1934, as
amended), one of which must be Moody's or S&P. Any such redemption will result
in a loss of investment leverage and a reduction in Fund income, the effect of
which will be borne exclusively by the holders of Common Stock. See "The Fund."
Investment Restrictions
The following investment restrictions are fundamental policies of the
Fund, and may not be amended without the affirmative vote of the holders of a
majority of the outstanding shares of the Fund's Common Stock and a majority of
the outstanding shares of the ATP, voting as separate classes, which means for
each class the lesser of (a) more than 50% of such class or (b) 67% or more of
such class present at a meeting at which more than 50% of the outstanding shares
of such class are present or represented by proxy. Under these restrictions, the
Fund may not:
1. Borrow money (through reverse repurchase agreements or otherwise) or
issue senior securities, except as permitted by Section 18 of the 1940 Act.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 1 above. Collateral
arrangements with respect to margins for futures contracts and options are not
deemed to be pledges or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities and except
that the Fund may make margin payments in connection with transactions in
futures contracts and options.
4. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open the Fund
owns an equal amount of such securities or owns securities which, without
payment of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
5. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, the Fund
may be deemed to be an underwriter under the federal securities laws.
6. Purchase or sell real estate (including real estate mortgage loans),
although the Fund may purchase securities of issuers that deal in real estate,
securities that are secured by interests in real estate and securities
representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that the
Fund may purchase or sell financial futures contracts and related options.
8. Make loans, except by purchase of debt obligations in which the Fund
may invest consistently with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of the value of its
total assets, or through the lending of its portfolio securities with respect to
not more than one-third of the value of its total assets.
9. Invest in securities of any issuer, if, to the knowledge of the Fund,
officers and Directors of the Fund and officers and partners of the Fund's
investment adviser who beneficially own more than 0.5% of the value of the
Fund's securities together own more than 5% of such issuer.
10. Invest in securities of any issuer if, immediately after such
investment, more than 5% of the value of the Fund's total assets would be
invested in the securities of such issuer, provided that this limitation does
not apply to obligations issued or guaranteed as to interest and principal by
the United States government or its agencies or instrumentalities.
30
<PAGE>
11. Acquire more than 10% of the voting securities of any issuer.
12. Invest more than 25% of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations issued or
guaranteed as to interest and principal by the United States government or its
agencies or instrumentalities.
13. Invest more than 20% of the market or other fair value of its total
assets in securities that are not readily marketable, including those that are
restricted as to disposition under the federal securities laws or otherwise.
This restriction shall not apply to securities received as a result of a
corporate reorganization or similar transaction affecting readily marketable
securities already held in the portfolio of the Fund or to repurchase agreements
that have a maturity of seven days or less; however, the Fund will attempt to
dispose in an orderly fashion of any securities received under these
circumstances to the extent that such securities, together with other securities
that are not readily marketable, exceed 20% of the market or other fair value of
the Fund's total assets.
14. Invest in the securities of other registered investment companies,
except as they may be acquired as part of a merger or consolidation or
acquisition of assets or by purchases in the open market involving only
customary brokers' commissions.
15. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal in,
represent interests in or are secured by interests in such leases, rights or
contracts.
16. Make investments for the purpose of exercising control or management
over the issuer of any security.
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 7 permit the Fund to engage in certain practices to a limited
extent, [the Fund does not currently engage in such practices]. See "Certain
Investment Policies" below.
The Fund also will be subject to certain investment restrictions so long
as the ATP remains outstanding, which may prohibit or limit certain practices
that are otherwise authorized. See "Certain Investment Practices" below and
"Rating Agency Guidelines."
Certain Investment Practices
The Fund and the Investment Adviser reserve the right to engage in
certain investment practices described below in order to help achieve the Fund's
investment objective. So long as the ATP is outstanding, the Fund may not
utilize certain of the practices described below, such as entering into swap
agreements, the making of securities loans and buying or selling futures
contracts and options thereon, unless the Fund receives written confirmation
from Moody's, Fitch or any other rating agency which is then rating the ATP and
which so requires, that any such action will not impair the "aaa"/AAA Credit
Rating. Further, the Rating Agency Guidelines limit or have the effect of
limiting the Fund's use of other investment practices described below, such as
investments in non-U.S. securities, private placements (except Rule 144A
Securities as discussed below) and options to the extent such investments are
not eligible for inclusion in the discounted value of the Fund's portfolio or
the Rating Agency Guidelines specify terms and restrictions on such investments.
Rating Agency Restrictions. While the Fund has reserved the right to
employ the investment practices described below, for so long as any of the ATP
is outstanding and either Moody's or Fitch is rating the ATP, the Fund will not,
unless it has received written confirmation from Moody's and/or Fitch, as
applicable, that any such action would not impair the respective rating then
assigned by Moody's or Fitch to the ATP, engage in any one or more of the
following transactions: (i) purchase or sell futures contracts or options
thereon with respect to portfolio securities or write unsecured put or uncovered
call options on portfolio securities, engage in options transactions involving
cross-hedging, or enter into any swap arrangement, other than the arrangement
described herein for which the Fund has obtained consent of Moody's and Fitch;
(ii) borrow money, except that
31
<PAGE>
the Fund may, without obtaining the written confirmation described above, borrow
money for the purpose of clearing securities transactions; provided that the ATP
Basic Maintenance Amount (as defined below under "Description of Capital Stock")
would continue to be satisfied after giving effect to such borrowing and if the
borrowing matures in not more than 60 days and is non-redeemable; (iii) except
in connection with a refinancing of the ATP, issue any class or series of stock
ranking prior to or on a parity with the ATP with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund, or reissue any shares of ATP previously purchased or redeemed by
the Fund; (iv) engage in any short sales of securities; (v) lend portfolio
securities; or (vi) merge or consolidate into or with any other corporation.
In addition, for so long as the ATP are rated by Moody's or Fitch: (a)
for purposes of the applicable rating agency asset coverage requirements, assets
in margin accounts are not eligible for inclusion in the determination of
discounted asset coverage, (b) where delivery of a security may be made to the
Fund with any of a class of securities, the Fund shall assume for purposes of
the rating agency coverage requirements that it takes delivery of that security
which yields it the least value, and (c) the Fund will not engage in forward
contracts.
Repurchase Agreements. The Fund may enter into repurchase agreements on
up to 25% of the value of its total assets. A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller to repurchase
and the Fund to re-sell such security at a fixed time and price (representing
the Fund's cost plus interest). It is the Fund's present intention to enter into
repurchase agreements only with commercial banks and registered broker-dealers
and only with respect to obligations of the United States government or its
agencies or instrumentalities. Repurchase agreements may also be viewed as loans
made by the Fund which are collateralized by the securities subject to
repurchase. The Investment Adviser will monitor such transactions to ensure that
the value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor. If
the seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with respect to debt obligations which could otherwise be
sold by the Fund. A reverse repurchase agreement is an instrument under which
the Fund may sell an underlying debt instrument and simultaneously obtain the
commitment of the purchaser (a commercial bank or a broker or dealer) to sell
the security back to the Fund at an agreed upon price on an agreed upon date.
The value of underlying securities will be at least equal at all times to the
total amount of the resale obligation, including the interest factor. The Fund
receives payment for such securities only upon physical delivery or evidence of
book entry transfer by its custodian. Securities sold by the Fund under a
reverse repurchase agreement must be either segregated pending repurchase or the
proceeds must be segregated on the Fund's books and records pending repurchase.
Reverse repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. The Fund will not hold more than 5% of the value
of its total assets in reverse repurchase agreements.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e, delivery and payment can take place a month or
more after the date of the transaction). The purchase price and the interest
rate payable on the securities are fixed on the transaction date. The securities
so purchased are subject to market fluctuation, and no interest accrues to the
Fund until delivery and payment take place. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis, it
will record the transaction and thereafter reflect the value of such securities
in determining its net asset value. The Fund will make commitments for such
when-issued transactions only with the intention of actually acquiring the
securities. To
32
<PAGE>
facilitate such acquisitions, the Fund's custodian bank will maintain, in a
separate account of the Fund, liquid assets from its portfolio, marked to market
daily and having value equal to or greater than such commitments. On the
delivery dates for such transactions, the Fund will meet its obligations from
maturities or sales of the securities held in the separate account and/or from
then available cash flow. If the Fund chooses to dispose of the right to acquire
a when-issued security prior to its acquisition, it could, as with the
disposition of other portfolio obligations, incur a gain or loss due to market
fluctuation.
Permitted Investments in Direct Placement Securities. The Fund is
permitted by its investment objective and policies to invest without limitation
in direct placement securities. Direct placement securities are restricted
securities and therefore are subject to certain of the following risks which
would not apply to securities that were free for immediate public sale. In a
private sale of restricted securities, which may involve protracted negotiations
and a limited number of purchasers, the possibility of delay and the necessity
of obtaining a commitment of investment intent from the purchasers might
adversely affect the price of the securities. In a public offering, the delay
resulting from registration may make it impossible for the Fund to sell
securities at the most desirable time, and the price of the securities may
decline between the time of the decision to sell and the time when the sale is
accomplished. Since only the issuer of the securities can prepare and file a
registration statement under the Securities Act of 1933, as amended, the Fund
may not be able to obtain registration at the most desirable time.
In view of the above risks, the proceeds to the Fund from the sale of
restricted securities acquired by direct placement could be less than the
proceeds from the sale of similar securities which were free for immediate
public resale. If the Fund is required to liquidate portfolio investments to
satisfy applicable asset coverage requirements, it may be required to dispose of
direct placement securities at times or prices which are disadvantageous to the
Fund.
Direct placement securities, unless eligible for resale under Rule 144A,
are generally ineligible for inclusion in the calculation of the discounted
value of the Fund's investment portfolio under the Rating Agency Guidelines with
which the Fund will be required to comply for so long as the shares of ATP
remain outstanding. The guidelines require the Fund to maintain portfolio assets
eligible for inclusion in such calculation which have an aggregate discounted
value in excess of the specified asset coverage levels and may therefore limit
the Fund's ability to invest in direct placement securities.
Foreign Investments. The Fund may invest up to 10% of the value of its
total assets in securities principally traded in foreign markets. In addition,
subject to the Fund's basic investment strategy, the Fund may also purchase
Eurodollar certificates of deposit issued by branches of U.S. banks. Foreign
investments may involve risks not present to the same degree in domestic
investments, such as future political and economic developments, the imposition
of withholding taxes on interest income, seizure or nationalization of foreign
deposits, the establishment of exchange controls and the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal of and interest on such obligations. Foreign securities may be less
liquid and more volatile than U.S. securities, and foreign accounting and
disclosure standards may differ from U.S. standards. In addition, settlement of
transactions in foreign securities may be subject to delays, which could result
in adverse consequences to the Fund including restrictions on the subsequent
resale of such securities. The value of foreign investments may rise or fall
because of changes in currency exchange rates. The Fund may buy or sell foreign
currencies or deal in forward foreign currency contracts in connection with the
purchase and sale of foreign investments.
Interest Rate Transactions. The Fund may enter into interest rate
transactions, such as swaps, caps, collars and floors for the purpose or with
the effect of hedging its portfolio and/or its payment obligations with respect
to senior securities. The costs of any such interest rate transaction and the
payment made or received by the Fund thereunder would be borne by or inure to
the benefit of the Fund's common stockholders. If there is a default by the
other party to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated
33
<PAGE>
with ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these investment techniques were not used. Moreover,
even if the Investment Adviser is correct in its forecasts, there is a risk that
the swap position may correlate imperfectly with the price of the asset or
liability being hedged.
In February 1994, the Fund entered into a five-year interest payment
swap arrangement having a $65 million notional amount with The First National
Bank of Boston. The effect of this arrangement is to hedge the Fund's dividend
payment obligations with respect to 65% of the ATP presently outstanding. Under
the swap arrangement, the Fund makes monthly payments to FNBB at the annual rate
of 5.25% of the notional swap amount while receiving from FNBB payments at a
floating rate determined with reference to the level of short-term interest
rates from time to time (and which was ____% at February 7, 1997). See
"Investment Objective and Policies." The Fund makes dividend payments to the
holders of the ATP on the basis of the results of periodic auctions in
accordance with its terms without regard to the swap and would continue to do so
in the event the swap is terminated. The Fund has agreed to terminate the
arrangement in the event it fails to maintain certain asset coverage
requirements. See "Rating Agency Guidelines."
Options. The Fund may write (sell) call options which are traded on
national securities exchanges with respect to securities in its portfolio. The
Fund may only write "covered" call options, that is, options on securities it
holds in its portfolio or has an immediate right to acquire through conversion
or exchange of securities held in its portfolio. The Fund reserves the right to
write call options on its portfolio securities in an attempt to realize a
greater current return than would be realized on the securities alone. The Fund
may also write call options as a partial hedge against a possible market
decline. In view of its investment objective, the Fund generally would write
call options only in circumstances in which the Investment Adviser does not
anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a call option, the Fund receives a premium for undertaking the obligation to
sell the underlying security at a fixed price during the option period, if the
option is exercised. So long as the Fund remains obligated as a writer of a call
option, it forgoes the opportunity to profit from increases in the market price
of the underlying security above the exercise price of the option, except
insofar as the premium represents such a profit (and retains the risk of loss
should the value of the underlying security decline). The Fund may also enter
into "closing purchase transactions" in order to terminate its obligation as a
writer of a call option prior to the expiration of the option. Although the
writing of call options only on national securities exchanges increases the
likelihood that the Fund will be able to make closing purchase transactions,
there is no assurance that the Fund will be able to effect such transactions at
any particular time or at any acceptable price. The writing of call options
could result in increases in the Fund's portfolio turnover rate, especially
during periods when market prices of the underlying securities appreciate.
For purposes of valuation of the Fund's assets under the Rating Agency
Guidelines (see "Description of Capital Stock--Asset Maintenance"): (i) if the
Fund writes a call option, the underlying asset will be valued as follows: (a)
if the option is exchange-traded and may be offset readily or if the option
expires before the earliest possible redemption of the ATP, at the lower of the
discounted value of the underlying security of the option and the exercise price
of the option or (b) otherwise, it has no value; (ii) if the Fund writes a put
option, the underlying asset will be valued as follows: the lesser of (a)
exercise price and (b) the discounted value of the underlying security
determined in accordance with Rating Agency Guidelines; and (iii) call or put
option contracts which the Fund buys have no value. For so long as the ATP are
rated by Moody's or Fitch: (i) the Fund will not engage in options transactions
for leveraging or speculative purposes; (ii) the Fund will not write or sell any
anticipatory contracts pursuant to which the Fund hedges the anticipated
purchase of an asset prior to completion of such purchase; (iii) the Fund will
not enter into an option transaction with respect to portfolio securities
unless, after giving effect thereto, the Fund would continue to be in compliance
with applicable rating agency asset coverage requirements (see "Description of
Capital Stock--Asset Maintenance"); (iv) the Fund shall write only
exchange-traded options on exchanges approved by Moody's (if Moody's is then
rating the ATP) and Fitch (if Fitch is then rating the ATP); and (v) there shall
be a quarterly audit made of the Fund's options transactions, if any, by the
Fund's independent accountants to confirm that the Fund is in compliance with
these standards.
34
<PAGE>
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will invest in futures contracts or related
options with respect to the portfolio. However, the Fund has reserved the right,
subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser anticipates that
interest rates may rise, in which event the Fund could sell a futures contract
to protect against the potential decline in the value of its portfolio
securities. Conversely, if declining interest rates were anticipated, the Fund
could purchase a futures contract to protect against a potential increase in the
price of securities the Fund intends to purchase.
In the event the Fund determines to invest in futures contracts and
options thereon, it will not purchase or sell such instruments if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts would exceed 5% of the value of the
Fund's total assets. In addition, in accordance with the regulations of the
Commodity Futures Trading Commission (the "CFTC") under which the Fund will be
exempted from registration as a commodity pool operator, the Fund may only enter
into futures contracts and options on futures contracts transactions for other
than hedging purposes if immediately thereafter the sum of the amount of the
initial margin deposits and premiums on open positions with respect to futures
and options used for non-hedging purposes would exceed 5% of the market value of
the Fund's net assets. There is no overall limitation on the percentage of the
Fund's portfolio securities which may be subject to a hedge position. If the
CFTC were to amend its regulations such that the Fund would be permitted to
write options on futures contracts for income purposes without CFTC
registration, the Fund would have the right to engage in such transactions for
those purposes, subject to the approval of the Board of Directors. The extent to
which the Fund may enter into transactions involving futures contracts also may
be limited by the requirements of the Internal Revenue Code of 1986, as amended
(the "Code") for qualification as a regulated investment company.
Risks of Hedging Transactions. The use of options, financial futures and
options on financial futures may involve risks not associated with other types
of investments which the fund intends to purchase, and it is possible that a
portfolio that utilizes hedging strategies may perform less well than a
portfolio that does not make use of such devices. Use of put and call options
may result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts and the sale of options thereon would create
a greater ongoing potential financial risk than would purchases of options,
where the exposure is limited to the cost of the initial premium.
Incurrence of Indebtedness. For so long as any of the ATP are
outstanding, the Fund will not borrow money or issue senior securities
representing indebtedness unless it has received written notice from Moody's (if
Moody's is then rating the ATP) and Fitch (if Fitch is then rating the ATP) and
any other rating agency which is then rating the ATP which so requires that such
action would not impair the "aaa"/AAA Credit Rating. For so long as any of the
Fund's preferred stock, including the ATP, is outstanding, the lesser of (a) 67%
of the shares of the Fund's preferred stock, voting as a separate class, present
at a meeting at which more than 50% of the outstanding shares of preferred stock
entitled to vote is present or (b) more than 50% of the outstanding shares of
preferred stock, must approve any Fund borrowing. Preferred stockholder approval
is not, however, required if the Fund borrows for temporary or emergency
purposes in accordance with its investment policies and restrictions or for the
purpose of clearing transactions. To the extent that the Fund does
35
<PAGE>
incur any borrowings, such borrowings would typically be senior in right of
payment to the ATP and the Common Stock upon liquidation of the Fund.
Securities Loans. The Fund reserves the right to make secured loans of
its portfolio securities amounting to not more than one-third of the value of
its total assets, thereby realizing additional income. The risks in lending
portfolio securities, as with other extensions of credit, consist of possible
delays in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. As a matter of policy
securities loans are made to unaffiliated broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or short-term
debt obligations at least equal at all times to the value of the securities
subject to the loan. The borrower pays to the Fund an amount equal to any
interest or dividends received on the securities subject to the loan. The Fund
retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved.
RATING AGENCY GUIDELINES
The Fund intends at all times that, so long as any ATP are outstanding
and Moody's and Fitch are then rating the ATP, the composition of its portfolio
will reflect guidelines established by Moody's and Fitch in connection with
obtaining the "aaa"/AAA Credit Rating with respect to the ATP. Should the Fund
determine to seek (and be successful in obtaining) a rating from any other
rating agency or issue senior securities other than the ATP which are rated or
otherwise subject to portfolio diversification or similar requirements, the
composition of its portfolio would also reflect the guidelines and requirements
established by any rating agency rating such securities or by the purchaser or
purchasers of such securities. Moody's and Fitch, nationally recognized
statistical rating organizations, issue ratings for various securities
reflecting the perceived creditworthiness of such securities. The Fund has paid
certain fees to Moody's and Fitch for rating shares of the ATP. The guidelines
described below have been developed independently by Moody's and Fitch in
connection with issuance of asset-backed and similar securities, including debt
obligations and adjustable rate preferred stocks, generally on a case-by-case
basis through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or preferred
stock will be sufficiently varied and will be of sufficient quality and amount
to justify investment-grade ratings. The guidelines do not have the force of
law, but have been adopted by the Fund in order to satisfy current requirements
necessary for Moody's and Fitch to issue the above-described ratings for the
ATP, which ratings are generally relied upon by institutional investors in
purchasing such securities. In the context of a closed-end investment company
such as the Fund, therefore, the guidelines provide a set of tests for portfolio
composition and asset coverage which supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act, and which
accordingly affect significantly the management of the Fund's portfolio. A
rating agency's guidelines will apply to the ATP only so long as such rating
agency is rating such shares and such guidelines are subject to amendment with
the consent of the relevant rating agency.
The Fund intends to maintain a discounted value for its portfolio
("Discounted Value") at least equal to the amount specified by each rating
agency (the "ATP Basic Maintenance Amount"), the determination of which is as
set forth under "Description of Capital Stock--Asset Maintenance." Moody's and
Fitch have each established separate guidelines for determining Discounted
Value. To the extent any particular portfolio holding does not satisfy the
applicable rating agency's guidelines, all or a portion of such holding's value
will not be included in the calculation of Discounted Value (as defined by such
rating agency). The Moody's and Fitch guidelines do not impose any limitations
on the percentage of Fund assets that may be invested in holdings not eligible
for inclusion in the calculation of the Discounted Value of the Fund's
portfolio. The amount of such assets included in the portfolio at any time may
vary depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines ("Eligible
Assets").
36
<PAGE>
Moody's "aaa" Rating Guidelines
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Moody's Eligible Assets")
must be discounted by certain discount factors set forth below ("Moody's
Discount Factors"). The Discounted Value of a portfolio security under Moody's
guidelines is the market value thereof determined in accordance with criteria
provided by the relevant rating agency ("Market Value") divided by the Moody's
Discount Factor. The Moody's Discount Factor with respect to securities other
than those described below will be the percentage provided in writing by
Moody's.
Corporate Debt Securities. Under current Moody's guidelines, portfolio
securities that are corporate debt securities will not be included in the
calculation of the Discounted Value of the Fund's portfolio unless (a) such
securities are rated Caa or higher by Moody's; (b) the senior unsecured rating
of the issuer's corporate bonds is higher than B3; (c) such securities provide
for the periodic payment of interest in cash in U.S. dollars; (d) such
securities do not provide for conversion or exchange into equity capital at any
time over their lives; (e) for debt securities rated Ba1 and below, no more than
10% of the original amount of such issue may constitute Moody's Eligible Assets;
and (f) such securities have been registered under the Securities Act of 1933,
as amended, or are restricted as to resale under federal securities laws but are
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended, as determined by the Fund's adviser acting subject to the supervision
of the Fund's Board of Directors ("Rule 144A Securities"). Thus, the Moody's
guidelines have the effect of prohibiting or significantly restricting
investments in securities other than fixed-income obligations of U.S. issuers
which are rated Caa or higher.
The Discounted Value of any Moody's Eligible Asset that is a corporate
debt security is the percentage determined by reference to the rating on such
asset with reference to the remaining term to maturity of such assets, in
accordance with the table set forth below:
Moody's Discount Factors --
Corporate Debt Securities+
<TABLE>
<CAPTION>
Remaining Term
to Rating Category
Maturity Asset Aaa Aa A Baa Ba B* Caa
- -------------- --- -- - --- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year................. 112% 118% 123% 128% 139% 150% 260%
2 Years................ 118 124 130 135 147 158 260
3 Years................ 123 129 135 141 153 165 260
4 Years................ 139 135 141 148 160 172 260
5 Years................ 134 141 147 154 166 179 260
7 Years................ 142 149 155 162 176 189 260
10 Years................ 148 156 163 170 184 198 260
15 Years................ 153 161 168 175 190 205 260
20 Years................ 161 169 177 184 200 215 260
30 Years................ 162 170 178 185 201 216 260
- --------------
* Senior debt securities of an issuer rated B3 shall be deemed to be Caa
rated securities for purposes of determining the applicable Moody's
Discount Factor.
+ The Moody's Discount Factor applied to Rule 144A Securities is 160% of
the Moody's Discount Factor which would apply were the securities
registered under the 1933 Act.
</TABLE>
The Moody's guidelines impose minimum issue size, issuer and industry
diversification and other requirements for purposes of determining Moody's
Eligible Assets. Specifically, portfolio holdings as described below must be
within the following diversification and issue size requirements in order to
constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
37
<PAGE>
<TABLE>
<CAPTION>
Maximum Maximum
Single Single Minimum
Issuer Industry Issue Size
Asset Ratings(1) (%)(2,3) (%)(3,4) ($ in millions)(6)
---------------- -------- -------- ------------------
<S> <C> <C> <C>
"aaa", Aaa............................. 100 100 100
"aa", Aa............................... 20 60 100
"a", A, P-1............................ 10 40 100
"baa", Baa............................. 6 20 100
Ba..................................... 4 12 50(5)
B1-B2.................................. 3 8 50(5)
B3 (Caa subordinate)................... 2 5 50(5)
</TABLE>
See accompanying notes
- --------------
(1) Refers to the senior debt rating of asset.
(2) Companies subject to common ownership of 25% or more are considered as
one name.
(3) Percentages represent a portion of the aggregate Market Value of
corporate securities.
(4) Industries are determined according to industry classifications
specified by Moody's ("Moody's Industry Classification"). See below.
(5) Bonds from issues ranging from $50 million to $100 million are limited
to 20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50
million.
The Moody's Industry Classifications, for the purposes of determining
Moody's Eligible Assets, mean each of the following industry classifications,
determined with respect to particular issues in the discretion of the Fund:
Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft
Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar,
Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry
Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood,
Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real Estate,
Real Estate Development, REITs, Land Development
Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial
Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings,
Paints, Varnish, Fabricating
38
<PAGE>
Containers, Packaging and Glass: Glass, Fiberglass, Containers made of:
Glass, Metal, Paper, Plastic, Wood, or Fiberglass
Personal and Non Durable Consumer Products (Manufacturing Only): Soaps,
Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies
Diversified/Conglomerate Manufacturing
Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution
Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste
Disposal
Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers,
Drivers, Technology
Finance: Investment Brokerage, Leasing, Syndication, Securities
Farming and Agriculture: Livestock, Grains, Produce; Agricultural
Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores
Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment
Home and Office Furnishings, Housewares and Durable Consumer Products:
Carpets, Floor Coverings, Furniture, Cooking, Ranges
Hotels, Motels, Inns and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records,
Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing), Motion Picture Production Theaters, Motion Picture
Distribution
Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills, Fabricating,
Distribution and Sales
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
Personal, Food and Miscellaneous Services
Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks, Radio, T.V., Cable Broadcasting Equipment
39
<PAGE>
Cargo Transport: Rail, Shipping, Railroads, Rail-car builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail,
Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo,
Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
Personal Transportation: Air, Bus, Rail, Car Rental
Utilities: Electric, Water, Hydro Power, Gas, Diversified
Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national Agencies
Where the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Moody's Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the ATP Basic Maintenance Amount.
Where the Fund purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a Moody's Eligible
Asset if the long-term debt of such other party is rated at least A2 by Moody's
and such agreement has a term of 30 days or less; otherwise the Discounted Value
of such asset will constitute a Moody's Eligible Asset. For the purposes of
calculation of Moody's Eligible Assets, portfolio securities which have been
called for redemption by the issuer thereof are valued at the lower of Market
Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of ATP Basic Maintenance
Amount (see "Description of Capital Stock--Asset Maintenance") or it is subject
to any material lien, mortgage, pledge, security interest or security agreement
of any kind (collectively, "Liens"), except for (a) Liens which are being
contested in good faith by appropriate proceedings and which Moody's has
indicated to the Fund will not affect the status of such asset as a Moody's
Eligible Asset, (b) Liens for taxes that are not then due and payable or that
can be paid thereafter without penalty, (c) Liens to secure payment for services
rendered or cash advanced to the Fund by its investment adviser, the Fund's
custodian, transfer agent or registrar or the auction agent for the ATP (the
"Auction Agent") and (d) Liens by virtue of any repurchase agreement.
The effect of the foregoing discount factors may be to cause the Fund to
invest in higher rated securities than it would if it were not required to
maintain specified asset coverage on a discounted basis. This may have the
effect of reducing the yield on the portfolio. See "Risk Factors and Special
Considerations."
Preferred Stock. Under current Moody's guidelines, portfolio securities
that are preferred stocks will not be included in the calculation of Discounted
Value of the Fund's portfolio unless (a) dividends on such preferred stock are
cumulative, (b) such securities provide for the periodic payment of dividends
thereon in cash in U.S. dollars and do not provide for conversion or exchange
into, or have warrants attached entitling the holder to receive, equity capital
at any time over the respective lives of such securities, (c) the issuer of such
a preferred stock has common stock listed on either the New York Stock Exchange
or the American Stock Exchange, (d) the issuer of such a preferred stock has a
senior debt rating from Moody's of Baa1 or higher or a preferred stock rating
from Moody's of "baa3" or higher and (e) such preferred stock has paid
consistent cash dividends in U.S. dollars over the last three years or has a
minimum rating of "al" (if the issuer of such preferred stock has other
preferred issues outstanding that have been paying dividends consistently for
the last three years, then a preferred stock without such a dividend history
would also be eligible). In addition, the preferred stocks must have the
following diversification requirements: (x) the preferred stock issue must be
greater than $50 million and (y) the minimum holding by the Fund of each issue
of preferred stock is $500,000
40
<PAGE>
and the maximum holding of preferred stock of each issue is $5 million. In
addition, preferred stocks issued by transportation companies will not be
considered as Moody's Eligible Assets.
The Moody's Discount Factors for Moody's Eligible Assets that are
preferred stock are (a) 152% for utility preferred stocks, (b) 197% for
industrial/financial preferred stocks and (c) 350% for auction rate preferred
stocks.
Other Moody's Eligible Assets. In addition to corporate debt securities
and preferred stocks which satisfy the above requirements, Moody's Eligible
Assets also include the following:
(i) cash (including, for this purpose, interest and
dividends due on assets rated (A) Baa3 or higher by Moody's if the
payment date is within five business days of the date on which the value
of the portfolio is being determined for purposes of determining
compliance with Moody's or Fitch's investment guidelines (a "Valuation
Date"), (B) A2 or higher if the payment date is within thirty days of
the Valuation Date, and (C) A1 or higher if the payment date is within
the Exposure Period) and receivables for Moody's Eligible Assets sold if
the receivable is due within five business days of the Valuation Date,
and if the trades which generated such receivables are (A) settled
through clearing house firms with respect to which the Fund has received
prior written authorization from Moody's or (B)(1) with counterparties
having a Moody's long-term debt rating of at least Baa3 or (2) with
counterparties having a Moody's short-term money market instrument
rating of at least P-1;
(ii) short-term money market instruments (as defined by
Moody's), so long as (A) such securities are rated at least P-1, (B) in
the case of demand deposits, time deposits and overnight funds, the
supporting entity is rated at least A2, or (C) in all other cases, the
supporting entity (1) is rated A2 and the security matures within one
month, (2) is rated A1 and the security matures within three months, or
(3) is rated at least Aa3 and the security matures within six months;
provided, however, that for purposes of this definition, such
instruments (other than commercial paper rated by S&P and not rated by
Moody's) need not meet any otherwise applicable S&P rating criteria; and
(iii) U.S. Treasury Securities and Treasury Strips (as
defined by Moody's).
A Moody's Discount Factor of 100% will be applied to cash. The Moody's
Discount Factor applied to Moody's Eligible Assets that are short term money
instruments (as defined by Moody's) will be (a) 100%, so long as portfolio
securities mature or have a demand feature at par exercisable within 41 days of
the relevant valuation date (the "Exposure Period"), (b) 115%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within the Exposure Period, and (c) 125%, if such securities are not rated by
Moody's, so long as such portfolio securities are rated at least A-1+/AA or
SP-1+/AA by S&P and mature or have a demand feature at par exercisable within
the Exposure Period.
The Moody's Discount factors for Moody's Eligible Assets that are U.S.
Treasury Securities and U.S. Treasury Strips are as follows:
41
<PAGE>
U.S. Treasury Securities:
Discount
Remaining Term to Maturity Factor
--------------------------
1 year or less................................................. 107%
2 years or less (but longer than 1 year)....................... 113
3 years or less (but longer than 2 years)...................... 118
4 years or less (but longer than 3 years)...................... 123
5 years or less (but longer than 4 years)...................... 128
7 years or less (but longer than 5 years)...................... 135
10 years or less (but longer than 7 years)..................... 141
15 years or less (but longer than 10 years).................... 146
20 years or less (but longer than 15 years).................... 154
30 years or less (but longer than 20 years).................... 154
U.S. Treasury Strips:
Discount
Remaining Term to Maturity Factor
--------------------------
1 year or less................................................. 107%
2 years or less (but longer than 1 year)....................... 114
3 years or less (but longer than 2 years)...................... 120
4 years or less (but longer than 3 years)...................... 127
5 years or less (but longer than 4 years)...................... 133
7 years or less (but longer than 5 years)...................... 145
10 years or less (but longer than 7 years)..................... 159
15 years or less (but longer than 10 years).................... 184
20 years or less (but longer than 15 years).................... 211
30 years or less (but longer than 20 years).................... 236
Fitch "AAA" Rating Guidelines
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Fitch guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Fitch Eligible Assets") must
be discounted by certain discount factors set forth below ("Fitch Discount
Factors"). The discounted value of a portfolio security under the Fitch
guidelines ("Discounted Value") is the market value thereof determined as
specified by Fitch ("Market Value") divided by the Fitch Discount Factor. The
Fitch Discount Factor with respect to securities other than those described
below will be the percentage provided in writing by Fitch.
Corporate Debt Securities. Under current Fitch guidelines, portfolio
securities that are corporate debt securities will not be deemed "Corporate
Bonds" includable in the calculation of the Discounted Value of the Fund's
portfolio unless (a) such securities are rated either CCC or higher by Fitch or
Caa or higher by Moody's and CCC or higher by S&P; (b) such securities provide
for the periodic payment of interest in cash in U.S. dollars; (c) such
securities do not provide for conversion or exchange into equity capital at any
time over their lives; (d) such securities have been registered under the
Securities Act of 1933, as amended or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended, as determined by the Fund's adviser acting
subject to the supervision of the Fund's Board of Directors; and (e) such
securities are issued by a U.S. corporation. In addition, bonds which are issued
in connection with a reorganization under U.S. federal bankruptcy law
("Reorganization Bonds") will be considered Corporate Bonds constituting Fitch
Eligible Assets, if (a) they are rated CCC or higher by Fitch or, if unrated by
Fitch, rated Caa or higher by Moody's and CCC or higher by S&P; (b) they provide
for periodic payment of interest in cash in U.S. dollars; (c) they do not
provide for conversion or exchange into equity capital at any time over their
lives; (d) they have been registered under the Securities Act or are restricted
as to resale under federal securities laws but are eligible for trading under
Rule 144A promulgated pursuant to
42
<PAGE>
the Securities Act as determined by the Fund's adviser acting subject to the
supervision of the Fund's Board of Directors; (e) they were issued by a U.S.
corporation; and (f) at the time of purchase at least one year had elapsed since
the issuer's reorganization. Reorganization Bonds may also be considered
Corporate Bonds constituting Fitch Eligible Assets if they have been approved by
Fitch, which approval shall not be unreasonably withheld.
The discounted value of any Fitch Eligible Assets that is a corporate
debt security constituting a Fitch Eligible Asset (see "Corporate Debt
Securities," above) is the percentage determined by reference to (i) the rating
on such asset (i.e., whether it is a Type I, Type II, Type III, Type IV, Type V,
Type VI or Type VII Corporate Bond as defined below) and (ii) the remaining term
to maturity of such assets, in accordance with the table set forth below, except
that the Fitch Discount Factor applied to Rule 144A Securities will be 110% of
the Fitch Discount Factor which would apply were the securities registered under
the 1933 Act:
Type I Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.16
greater than 2 years, but less than or equal to 4 years 1.26
greater than 4 years, but less than or equal to 7 years 1.40
greater than 7 years, but less than or equal to 12 years 1.44
greater than 12 years, but less than or equal to 25 years 1.48
greater than 25 years, but less than or equal to 30 years 1.52
Type II Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.26
greater than 4 years, but less than or equal to 7 years 1.43
greater than 7 years, but less than or equal to 12 years 1.44
greater than 12 years, but less than or equal to 25 years 1.51
greater than 25 years, but less than or equal to 30 years 1.56
Type III Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.29
greater than 4 years, but less than or equal to 7 years 1.46
greater than 7 years, but less than or equal to 12 years 1.50
greater than 12 years, but less than or equal to 25 years 1.55
greater than 25 years, but less than or equal to 30 years 1.60
Type IV Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.22
greater than 2 years, but less than or equal to 4 years 1.32
greater than 4 years, but less than or equal to 7 years 1.52
greater than 7 years, but less than or equal to 12 years 1.57
greater than 12 years, but less than or equal to 25 years 1.63
greater than 25 years, but less than or equal to 30 years 1.69
43
<PAGE>
Type V Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.32
greater than 2 years, but less than or equal to 4 years 1.36
greater than 4 years, but less than or equal to 7 years 1.59
greater than 7 years, but less than or equal to 12 years 1.65
greater than 12 years, but less than or equal to 25 years 1.72
greater than 25 years, but less than or equal to 30 years 1.80
Type VI Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.40
greater than 4 years, but less than or equal to 7 years 1.67
greater than 7 years, but less than or equal to 12 years 1.74
greater than 12 years, but less than or equal to 25 years 1.82
greater than 25 years, but less than or equal to 30 years 1.91
Type VII Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.64
greater than 4 years, but less than or equal to 7 years 2.28
greater than 7 years, but less than or equal to 12 years 2.49
greater than 12 years, but less than or equal to 25 years 2.74
greater than 25 years, but less than or equal to 30 years 3.06
For purposes of the foregoing:
"Type I Corporate bonds" means Corporate Bonds (as defined above) rated
either AAA by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by
Moody's;
"Type II Corporate Bonds" means Corporate Bonds rated either at least
AA- by Fitch or, if not rated by Fitch, rated at least AA- by S&P and at least
Aa3 by Moody's which do not constitute Type I Corporate Bonds;
"Type III Corporate Bonds" means Corporate Bonds rated either at least
A- by Fitch or, if not rated by Fitch, rated at least A- by S&P and at least A3
by Moody's which do not constitute Type I or Type II Corporate Bonds
"Type IV Corporate Bonds" means Corporate Bonds rated either at least
BBB- by Fitch or, if not rated by Fitch, rated at least BBB- by S&P and at least
Baa3 by Moody's which do not constitute Type I, Type II or Type III Corporate
Bonds;
"Type V Corporate Bonds" means Corporate Bonds rated either at least BB-
by Fitch or, if not rated by Fitch, rated at least BB- by S&P and at least Ba3
by Moody's which do not constitute Type I, Type II, Type III or Type IV
Corporate Bonds;
"Type VI Corporate Bonds" means Corporate Bonds rated either at least B-
by Fitch or, if not rated by Fitch, rated at least B- by S&P and at least B3 by
Moody's which do not constitute Type I, Type II, Type III, Type IV or Type V
Corporate Bonds; and
"Type VII Corporate Bonds" means Corporate Bonds rated either at least
CCC by Fitch or, if not rated by Fitch, rated at least CCC by S&P and at least
Caa by Moody's which do not constitute Type I, Type II, Type III, Type IV, Type
V or Type VI Corporate Bonds.
44
<PAGE>
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included in
Fitch Eligible Assets:
<TABLE>
<CAPTION>
Maximum Maximum
Single Single Minimum
Issuer Industry Issue in Size
Type of Corporate Bond (%) (1,2) (%) (2,3) ($ in millions)
- ---------------------- ----------- ----------- ---------------
<S> <C> <C> <C>
Type I................................. 100% 100% $100
Type II................................ 20 75 100
Type III (4)........................... 10 50 100
Type IV................................ 6 25 100
Type V................................. 4 16 50 (5)
Type VI................................ 3 12 50 (5)
Type VII............................... 2 8 50 (5)
</TABLE>
See accompanying notes
- ------------------
(1) Companies subject to common ownership of 25% or more are considered as one
name.
(2) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(3) Industries are determined according to industry classifications specified
by Fitch ("Fitch Industry Classifications") (see below).
(4) Includes Short Term Money Market Instruments which do not constitute Type
I or Type II Corporate Bonds and which have a maturity greater than the
Exposure Period.
(5) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
The Fitch Industry Classifications, for the purposes of determining Fitch
Eligible Assets, mean the following industry classifications, determined with
respect to particular issues in the discretion of the Fund:
Aerospace & Defense
Automobiles
Banking, Finance & Insurance
Building & Materials
Chemicals
Computers & Electronics
Consumer Products
Energy
Environmental Services
Farming & Agriculture
Food, Beverage & Tobacco
Healthcare & Pharmaceutical
Industrial Machinery
Media, Leisure & Entertainment
Metals & Mining
Miscellaneous
Paper & Forest Products
Retail
Sovereigns
45
<PAGE>
Textiles & Furniture
Transportation
Utilities
Other Fitch Eligible Assets. Other Fitch Eligible Assets include cash,
certain receivables for Fitch Eligible Assets, interest and dividends due on
certain assets rated not lower than Baa3 by Moody's or BBB- by S&P, U.S.
Treasury Securities (as defined by Fitch) and Short-Term Money Market
Instruments (as defined by Fitch). The Fitch Discount Factors for Fitch Eligible
Assets that are U.S. Treasury Securities are as follows:
U.S. Treasury Securities with remaining maturities of:
- ------------------------
less than or equal to 1 year 1.06
greater than 1 year, but less than or equal to 2 years 1.11
greater than 2 years, but less than or equal to 5 years 1.16
greater than 5 years, but less than or equal to 15 years 1.24
greater than 25 years, but less than or equal to 30 years 1.26
The Fitch Discount Factor applied to short-term portfolio securities
will be (A) 100%, so long as such portfolio securities mature or have a demand
feature at par exercisable within the Exposure Period and, (B) 125%, so long as
such portfolio securities neither mature nor have a demand feature at par
exercisable within the Exposure Period. A Fitch Discount Factor of 100% will be
applied to cash.
Under Fitch's current guidelines, portfolio securities that are
preferred stocks will not be deemed Fitch Eligible Assets.
When the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the ATP Basic Maintenance Amount.
Where the Fund purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a Fitch's Eligible
Asset if the long-term debt of such other party is rated at least A2 by Moody's
and A by S&P and such agreement has a term of 30 days or less; otherwise the
Discounted Value of such asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of ATP Basic Maintenance
Amount (see "Description of Capital Stock--Asset Maintenance") or it is subject
to any material Lien, except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Fitch has indicated to the Fund will
not affect the status of such asset as a Fitch Eligible Asset, (b) Liens for
taxes that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Fund by its investment adviser, the Fund's custodian, transfer agent or
registrar or the Auction Agent and (d) Liens by virtue of any repurchase
agreement.
* * *
The Board of Directors may, without approval of the Fund's stockholders,
from time to time amend, alter or repeal any or all of the definitions which
relate to the Moody's and Fitch guidelines and which generally establish the
investment guidelines for the Fund's portfolio in the event the Fund receives
written confirmation from the appropriate rating agency that any such amendment,
alteration or repeal would not impair the rating then assigned to the ATP by
such rating agency. In addition, the Board of Directors, without the vote or
consent of the Fund's stockholders, may from time to time adopt, amend, alter or
repeal any or all of additional or other definitions or add covenants and other
obligations of the Fund (e.g., maintenance of a minimum liquidity level) or
confirm the applicability of covenants and other obligations in connection with
obtaining or maintaining the rating of Moody's, Fitch or any other rating agency
with respect to the ATP. See "Description of Capital Stock--Voting Rights."
46
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Dilution and Other Investment Considerations
Because the Subscription Price will be less than the net asset value per
share on the Expiration Date, the net asset value, on a per share basis, of the
Common Stock outstanding prior to the Offer will be reduced as a result of the
Offer. Although it is not possible to state precisely the amount of such a
decrease in value, because it is not known at this time what the net asset value
per share will be at the Expiration Date or what proportion of the Shares will
be subscribed for, such dilution could be substantial. For example, assuming
that all Rights are exercised at the Estimated Subscription Price of $____,
expenses associated with the Offer were $500,000, and the Fund's net asset value
otherwise remained constant, the Fund's net asset value per share on such date
would be reduced by approximately $____ per share. Stockholders on the Record
Date will experience a decrease in the net asset value per share held by them,
irrespective of whether they exercise all or any portion of their Rights. In
addition, as a result of the terms of the Offer, stockholders on the Record Date
who do not fully exercise their Rights will, at the completion of the Offer,
suffer significant dilution and own a smaller proportional interest in the Fund
than they owned prior to the Offer. The Fund cannot predict what portion of any
shares sold will be purchased by Record Date Stockholders as compared to other
Rightholders. The Fund believes that the distribution to stockholders of
transferable Rights which themselves may have a realizable value may afford
non-participating stockholders the potential of receiving a cash payment upon
sale of such Rights, receipt of which may be viewed as compensation for the
dilution of their interest in the Fund. In addition, a stockholder may
participate in the Offer without increasing his or her investment in the Fund by
selling a sufficient number of shares of the Fund to provide (after expenses)
the necessary funds to exercise Rights.
Leverage
The Fund is subject to a number of significant risks as a result of its
focus on investments in so called "junk bonds." See "High Yield, High Risk
Securities," below. As evidenced by its historical performance, the Fund's
leveraged capital structure magnifies and enhances these risks, particularly in
a declining market environment, while increasing the possibility for superior
performance in a rising market environment. See "The Fund." The Fund's leveraged
capital structure results in a higher volatility of the net asset value of the
Common Stock and potentially more volatility in the market value of the Common
Stock. Because the Fund will pay accumulated dividends on the ATP, an increase
or decrease in capital or income of the Fund will have an increased effect on
the Common Stock. Any investment income or gains earned from the capital
contributed by the purchasers of the ATP which is in excess of dividends due
thereon and associated expenses will be available for distribution to the
holders of the Fund's Common Stock and may cause the value of and dividends on
the Common Stock to rise more quickly than would be the case if the Fund were
unleveraged. Conversely, if the investment performance of the capital
contributed by the purchasers of the ATP fails to cover the dividends on such
capital, the value of the Common Stock may decrease more quickly than would
otherwise be the case and dividends thereon will be reduced or eliminated. This
is the speculative effect of "leverage." See "The Fund." In addition, the Fund
is required to meed certain asset coverage requirements imposed by the 1940 Act
and the rating agencies. Upon any failure to meet such requirements, the Fund
may seek to alter the composition of its portfolio to reattain compliance with
such requirements, thereby incurring additional transaction costs and possible
losses and/or gains on disposition of portfolio securities. Because higher
quality assets are given greater credit under the Rating Agency Guidelines, the
overall portfolio quality of the Fund may be higher, and the overall rate of
return on portfolio holdings may be lower, than if the Fund were unleveraged.
The Fund's capital structure is designed to take advantage of the
"spread" between the rate of return on the longer-term "high yield" securities
in which the Fund invests and the dividends required to be paid on the ATP,
which generally are determined with reference to short-term interest rates for
investment grade obligations. To the extent this "spread" decreases due to
increases in short term rates, decreases in the rate of return on portfolio
holdings, defaults, or increased Fund expenses, the incremental returns accruing
to holders of the Fund's Common Stock will be correspondingly reduced.
Short-term and long-term interest rates change from time to time as does their
relationship to each other (i.e., the slope of the yield curve) depending upon
such factors as supply and demand forces, monetary and tax policies and investor
expectations. Changes in such
47
<PAGE>
factors could cause the relationship between short-term and long-term rates to
change (i.e., to flatten or to invert the slope of the yield curve) so that
short-term rates may substantially increase relative to the rates of longer term
obligations in which the Fund may be invested. To the extent that the applicable
rate plus expenses on the ATP approaches the net return on the Fund's investment
portfolio, the benefit of leverage to holders of Common Stock will be reduced,
and if the applicable rate plus expenses on the ATP were to exceed the net
return on the Fund's portfolio, the Fund's leveraged capital structure would
result in a lower rate of return to holders of Common Stock than if the Fund
were not leveraged. The Fund, however, has entered into an interest rate swap
arrangement through February 1999 having a $65 million notional amount, as
described under "The Fund" and "Description of Capital Stock--Dividends and
Dividend Periods." This arrangement has the effect of partially hedging against
increases in short-term interest rates.
The following table may assist the investor in understanding the effects
of leverage by illustrating the effect of leverage on return to a stockholder.
The figures appearing in the table are hypothetical and actual returns may be
greater or less than those appearing in the table.
- --------------------------------------------------------------------------------
Assumed
Return on -10% -5% 0% 5% 10%
Portfolio (net
of expenses
and costs of
leverage)
- --------------------------------------------------------------------------------
Corresponding
Return to -15.2% -7.6% 0% 7.6% 15.2%
Holder of
Common
Stock*
- --------------------------------------------------------------------------------
* Assuming $100 million aggregate liquidation preference of leverage
outstanding, 35.7 million Shares of Common Stock outstanding and a
market value of the Fund's portfolio of $270 million.
The terms of the Fund's arrangements with Moody's and Fitch, which have
been agreed to in order to obtain investment grade ratings for the ATP, require
that the Fund maintain (i) asset coverage with respect to the ATP at least
equal, on a discounted basis to the liquidation preference of the ATP plus
certain accrued and projected payment obligations of the Fund and other amounts
on an on-going basis and (ii) non-discounted asset coverage of at least 200% of
the aggregate liquidation preference of the ATP as of the last business day of
each month. See "Description of Capital Stock-Asset Maintenance." The 1940 Act
also requires that the Fund maintain asset coverage of at least 200% on a
non-discounted basis as a condition of paying dividends to the holders of the
Common Stock. As market conditions and the value of portfolio securities decline
(as occurred in 1989-1990 and as described under "The Fund"), one effect of the
foregoing requirements is to cause the Fund to invest in higher quality assets
and/or to maintain relatively substantial balances of highly liquid assets
having low discount factors assigned by the rating agencies in order to remain
in compliance with asset coverage requirements, which may tend to reduce
portfolio yield. In addition, the value of higher quality assets may react with
greater volatility to interest rate changes than would lower quality assets.
Under some circumstances, a decline in the value of portfolio securities may
force the Fund to redeem or repurchase senior securities in order to remain in
compliance with applicable asset coverage requirements, which requires the
liquidation of portfolio securities, the related realization of substantial
capital losses and the incurrence of transaction costs. Thereafter, as market
conditions improve and market opportunities arise, the discounted asset coverage
requirements tend to restrict the redeployment of assets from cash and higher
quality assets having lower discount factors to lower quality, higher yielding
assets having higher discount factors, even when such securities are available
at attractive prices. Also, redeploying cash as the value of the Fund's assets
rise involves significant transaction costs and possible delays, which further
inhibits the Fund's ability to take advantage of a favorable investment
environment. See "The Fund."
48
<PAGE>
Since any decline in the net asset value of the Fund's investments will
be borne entirely by holders of Common Stock, the effect of leverage in a
declining market would result in a greater decrease in net asset value and yield
to holders of Common Stock than if the Fund were not leveraged, which would
likely be reflected in a greater decline in the market price for the Common
Stock. In an extreme case, the Fund's investment leverage and related asset
coverage requirements could prevent or adversely effect the ability of the Fund
to make dividend payments on its Common Stock, and such failure to pay dividends
or make distributions may result in the Fund ceasing to qualify as a regulated
investment company under the Internal Revenue Code. See "Description of Capital
Stock--Dividends and Dividend Periods" and "Taxation." The ATP may constitute a
substantial lien and burden on the Common Stock by reason of its prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation.
If all of the Common Stock offered hereby is sold, the Fund could
thereafter consider incurring additional investment leverage, although there is
no assurance that it will do so. Any such additional leverage would not require
stockholder approval. See "The Offer" and "Description of Capital Stock."
High-Yield, High Risk Investments
As indicated by its historical results, the Fund is designed for
long-term investors who can accept the risks entailed in seeking the highest
level of current income available from investments in long-term high yielding,
medium and lower quality, fixed-income securities and who are willing to assume
the particular risks associated with the Fund's investment objective and
leveraged structure. Investors in the Fund should not rely on the Fund for their
short-term financial needs. The principal value of the lower quality securities
in which the Fund invests will be affected by interest rate levels, general
economic conditions, specific industry conditions and the creditworthiness of
the individual issuer. Although the Fund seeks to reduce risk by portfolio
diversification, extensive credit analysis and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate risk.
Fixed-income securities offering the high current income sought by the
Fund will ordinarily be in the lower rating categories of recognized rating
agencies or will be non-rated. The values of such securities tend to reflect
individual corporate developments or adverse economic changes to a greater
extent than higher rated securities, which react primarily to fluctuations in
the general level of interest rates. Periods of economic uncertainty and change
generally result in increased volatility in the market prices and yields of
"high yield," high risk securities and thus in the Fund's net asset value.
Further, these fixed-income securities are considered by rating agencies, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation and such
securities are generally considered to involve greater credit risk than
securities in the higher rating categories; the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal of or interest on its portfolio holdings. The "high yield,"
high risk securities held by the Fund are frequently subordinated to the prior
payment of senior indebtedness and are traded in markets that may be relatively
less liquid than the market for higher rated securities. Changes by recognized
rating agencies in their ratings of any security in the Fund's portfolio and in
the ability of an issuer to make payments of interest and principal may also
affect the value of the Fund's investments. Changes in the value of portfolio
securities will not necessarily affect cash income derived from such securities,
but will affect the Fund's net asset value. The Fund will rely on the Investment
Adviser's judgment, analysis and experience in evaluating the creditworthiness
of an issue. In this evaluation, the Investment Adviser will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
Some of the lower-rated securities in which the Fund invests were issued
to raise funds in connection with the acquisition of companies in so-called
"leveraged buy-out" transactions. The highly leveraged capital structure of such
issuers may make them especially vulnerable to adverse changes in economic
conditions.
Generally, when interest rates rise, the value of fixed rate debt
obligations, including "high yield," high risk securities, tends to decrease;
when interest rates fall, the value of fixed rate debt obligations tends to
increase. If an issuer of a "high yield," high risk security containing
redemption or call provisions exercises
49
<PAGE>
either provision in a declining interest rate market, the Fund would have to
reinvest the proceeds from such redemption or call at current interest rates,
which could result in a decreased return for common stockholders.
The credit ratings issued by credit rating services may not fully
reflect the true risks of an investment. For example, credit ratings typically
evaluate the safety of principal and interest payments, not market value risk,
of "high yield," high risk securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Although the
Investment Adviser considers ratings of recognized rating agencies such as
Moody's and S&P, the Investment Adviser primarily relies on its own credit
analysis, which includes a study of existing debt, capital structure, ability to
service debt and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. The
Investment Adviser continually monitors the investments in the Fund's portfolio
and carefully evaluates whether to dispose of or retain "high yield," high risk
securities whose credit ratings have changed (see Appendix A for a description
of ratings of "high yield," high risk securities).
At times a major portion of an issue of lower-rated securities may be
held by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund may find it more difficult to sell such securities when the
Investment Adviser believes it advisable to do so or may be able to sell such
securities only at prices lower than if the securities were more widely held. In
such circumstances, the Fund may also find it more difficult to determine the
fair value of such securities for purposes of computing the Fund's net asset
value. The Fund, in most instances, utilizes an independent pricing service to
determine the fair value of its securities for financial statement purposes
since market quotations are not readily ascertainable. Securities for which
market quotations are not readily available will be valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund.
Dividends and Distributions
The Fund will not be permitted to declare dividends or other
distributions with respect to the shares of Common Stock or the ATP or purchase
shares of Common Stock or the ATP unless at the time thereof the Fund meets
certain asset coverage requirements, including those imposed by the 1940 Act and
under the Fund's Articles of Amendment and Restatement, as amended (including
any Articles Supplementary of the Fund, the "Articles"). Failure to pay
dividends or other distributions could result in the Fund ceasing to qualify as
a regulated investment company under the Code. See "Taxation" and "Description
of Capital Stock--Dividends and Dividend Periods." Further, upon any failure to
pay dividends in an amount equal in two full years of dividends with respect to
the ATP, the holders thereof shall have the right to elect a majority of the
Directors until all accrued dividends have been provided for or paid. In the
event the Fund fails to satisfy certain asset coverage requirements, the Fund
may be required to effect mandatory partial redemptions of the ATP (subject to
certain limitations) or in certain circumstances may result in the mandatory
redemption of all of the ATP. Redemption of ATP would reduce the Fund's leverage
and could negatively affect potential returns with respect to the Common Stock.
The Fund intends, however, to the extent possible to redeem shares of ATP from
time to time to maintain compliance with applicable asset coverage requirements.
See "Taxation."
Premium/Discount From Net Asset Value
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at net asset value
at any time at the option of the stockholder and typically engage in a
continuous offering of their shares. Shares of closed-end funds frequently trade
at a market price which is less than the value of the net assets attributable
thereto. The possibility that shares of the Fund will trade at a discount from
net asset value is a risk separate and distinct from the risk that the Fund's
net asset value will decrease. It should be noted, however, that in some cases,
shares of closed-end funds may trade at a premium. The Fund's shares have traded
in the market above, at, and below net asset value since the commencement of the
Fund's operations. During the past two years, the
50
<PAGE>
Fund's shares have generally traded in the market at a [premium/discount] to net
asset value. See "Net Asset Value and Market Price Information." In addition,
the net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed-income
securities, the net asset value of the shares of the Fund can be expected to
change as general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio can
be expected to decline. See "Net Asset Value and Market Price Information" for
the ranges of the market prices and the ranges of the net asset values of the
shares of Common Stock for each calendar quarter since inception.
Given the above-described investment risks inherent in the Fund,
investment in shares of Common Stock of the Fund should not be considered a
complete investment program and is not appropriate for all investors. Investors
should carefully consider their ability to assume these risks before exercising
Rights.
MANAGEMENT OF THE FUND
Board Of Directors
The management of the Fund, including general supervision of the duties
performed by the Investment Adviser, is the responsibility of the Board of
Directors. The Directors and officers of the Fund, their addresses and their
principal occupations for at least the past five years are set forth below.
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With Fund During Past 5 Years
---------------- ------------- -------------------
<S> <C> <C> <C>
Robert F. Birch*................ President and Director Mr. Birch, a private investor,
10 Winthrop Square, Fifth Floor joined the Fund as
Boston, MA 02110 President, Treasurer and a
Director in August 1992 and
since May 1993 has served as
President and a Director. Mr.
Birch served as Chairman and
Chief Executive Officer of
Memtek Corporation, a
manufacturer of capital
equipment utilized in the
treatment of liquid toxic waste,
from 1990 to July 1991, and was
associated with Finn Wishengrad
Warnke & Geyton, a consulting
firm specializing in work-outs
of financially distressed
companies, from 1988 through
1989. Prior to that time, Mr.
Birch was President and Chief
Executive Officer of Gardner and
Preston Moss, Inc., a
Boston-based investment
management firm.
51
<PAGE>
Joseph L. Bower..................... Director Professor since 1963, Donald K.
Harvard Business School David Professor of Business
Boston, MA 02138 Administration since 1986, and
Chairman of the Doctoral
Programs since 1990, Harvard
Business School. Mr. Bower also
has been a member and research
fellow at the Institute of
Politics since 1966 and a
faculty member of the Kennedy
School of Government since 1969.
He is a director of Ainka
Research, Inc., Sonesta
International Hotels Corporation
and Brown Group, Inc. and a
general partner of ML-Lee
Acquisition Fund, L.P.
Richard E. Floor*................... Secretary and Director Partner with the law firm of Goodwin,
Exchange Place Procter & Hoar LLP, Boston,
Boston, MA 02109 Massachusetts, since 1975 (individually
and through his professional corporation).
Mr. Floor also serves as a director of
Town & Country Corporation.
Bernard J. Korman................... Director Chairman and Chief Executive Officer
Graduate Health System, Inc. of Graduate Health System, Inc;
22nd and Chestnut Streets President, Chief Executive Officer and
Philadelphia, PA 19103 a Director of MEDIQ Incorporated from
1980 to 1996. Mr. Korman is a director
of Innoserv Technologies, Inc., Kapson
Senior Quarters Corp.; Nutramax
Products, Inc., Omega Healthcare
Investors, Inc., The Pep Boys, Inc. and
Today's Man, Inc.
Franco Modigliani................... Director Professor of Finance and
Massachusetts Institute Economics from 1962 to 1970,
of Technology Institute Professor from 1970 to
77 Massachusetts Avenue 1988, and Professor Emeritus
Cambridge, MA 02139 since 1988, Massachusetts
Institute of Technology. Mr.
Modigliani is a member of the
National Academy of Sciences,
the American Academy of Arts and
Sciences, and the Academia dei
Lincei. In 1985 he was awarded
the James Killan, Jr. Faculty
Achievement Award from MIT and
the Alfred Nobel Memorial Prize
in Economic Sciences. He is an
Honorary President of the
International Economic
Association and a former
President of the American
Econometric Association, the
American Finance Association and
the Econometric Society, and has
served as a consultant to the
Federal Reserve System, the U.S.
Treasury Department and a number
of European banks.
52
<PAGE>
Ernest E. Monrad.................... Director Trustee since 1960 and Chairman
50 Congress Street of the Trustees since 1969,
Boston, MA 02109 Northeast Investors Trust;
Chairman, Assistant Treasurer
and Director since 1981,
Northeast Investors Growth Fund,
Inc. Mr. Monrad also serves as a
vice president and director of
Guild, Monrad & Oates, Inc., a
registered investment adviser,
and as a director of Century
Shares Trust and Furman Lumber,
Inc.
Ellen E. Terry*..................... Vice President and Vice President of the Fund from
10 Winthrop Square, Fifth Floor Treasurer Treasurer December 1992 to
Boston, MA 02110 present and Treasurer from May
1993 to present; Acting
President and Treasurer of the
Fund from October 1991 through
February 1992; and Vice
President of the Fund from
February 1988 through February
1992. From 1987 to February
1992, Ms. Terry was employed by
Ostrander Capital Management,
L.P., the former investment
adviser of the Fund.
</TABLE>
- ---------------------
* Directors and officers who are "interested persons" of the Fund, as
defined in the 1940 Act.
The Fund's Board of Directors consists of six members. Under the Fund's
Articles and the 1940 Act, holders of the ATP are entitled to elect two
Directors with the other four Directors elected by the holders of the Common
Stock and the ATP voting as a single class, except in certain circumstances. In
the event the Fund has no outstanding preferred stock, all of the Directors will
be elected by the holders of the Common Stock. Since the Fund's inception,
Messrs. Bower and Korman have been nominated for election as Directors by, and
have been elected as Directors by the holders of, the Fund's outstanding
preferred stock. Election of Directors is non-cumulative; accordingly, holders
of a majority of the outstanding shares of Common Stock and ATP or a majority of
the outstanding ATP may elect all of the Directors who are subject to election
by them.
The Fund pays each Director a fee of $20,000 per year plus $2,000 per
Directors' meeting attended in person and $1,000 per telephonic Directors'
meeting in which the Director participates, together with actual out-of-pocket
expenses relating to attendance at such meetings. In addition, Mr. Birch
received a fee of $55,000 for his services rendered to the Fund in his capacity
as President for the calendar year ended December 31, 1996, and currently
receives an annual retainer of $40,000 for his services to the Fund as
President. The members of the Fund's Audit Committee, which consists of the
Fund's non-interested Directors, receive $2,000 for each Audit Committee meeting
attended, other than meetings held on days on which there is also a Directors'
meeting. Directors of the Fund received for the fiscal year ended December 31,
1996 aggregate remuneration of $174,000 exclusive of compensation paid to Mr.
Birch for his services rendered to the Fund in his capacity as President. The
aggregate remuneration paid by the Fund to each of the Directors during its
fiscal year ended December 31, 1996, is set forth in the chart below. The Fund
does not provide remuneration in the form of pension or retirement benefits to
any of its Directors.
53
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Annual
Name of Person, Compensation as Part of Fund Benefits Upon Total Compensation
Position From Fund Expenses Retirement from Fund
- ------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Robert F. Birch,
President and
Director $84,000 none none $84,000*
Joseph L. Bower,
Director $29,000 none none $29,000
Richard E. Floor,
Secretary and
Director $29,000 none none $29,000
Bernard J.
Korman,
Director $28,000 none none $28,000
Franco
Modigliani,
Director $29,000 none none $29,000
Ernest E.
Monrad,
Director $29,000 none none $29,000
Ellen E. Terry,
Vice President
and Treasurer $98,500 none none $98,500
</TABLE>
*Of this amount, $55,000 was paid for service as President and $29,000
was paid for service as a Director.
The Fund's Articles and By-Laws provide that the Fund will indemnify
its Directors and officers against liabilities and expenses incurred in
connection with the performance of their duties on behalf of the Fund to the
full extent permitted by Maryland law, subject to the applicable requirements of
the 1940 Act. Maryland law generally permits a director or officer to be
indemnified with respect to any proceeding to which he was made a party by
reason of service in his capacity as a director or officer, provided that the
director or officer must have (i) acted in good faith, (ii) reasonably believed
his conduct, if undertaken in his official capacity, was in the best interests
of the corporation, or in any other case was at least not opposed to the best
interests of the corporation, and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe that his conduct was unlawful. No
indemnification is permitted, however, with respect to any proceeding by or in
the right of the corporation in which the director or officer has been adjudged
liable on the basis that he improperly received personal benefit. Further, under
the 1940 Act as interpreted by the staff of the Commission, an indemnification
provision is consistent with the 1940 Act if it (i) precludes indemnification
for any liability, whether or not there is an adjudication of liability, arising
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of duties as described in Section 17(h) and (i) of the 1940 Act
("disabling conduct") and (ii) sets forth reasonable and fair means for
determining whether indemnification shall be made; in the case of the Fund
"reasonable and fair means" would include (1) a final decision on the merits by
a court or other body before whom the proceeding was brought that the person to
be indemnified ("indemnitee") was not liable by reason
54
<PAGE>
of disabling conduct (including a dismissal for insufficiency of evidence) and
(2) a reasonable determination, based upon a review of the facts, that the
indemnitee was not liable by reason of disabling conduct, by (a) the vote of a
majority of a quorum of Directors who are neither "interested persons" of the
Fund as defined in Section 2(a)(10) of the 1940 Act nor parties to the
proceeding, or (b) an independent legal counsel in written opinion.
The Fund, at its expense, may in the future provide liability insurance
for the benefit of its Directors and officers.
Holdings of ATP and Common Stock
The Fund does not know of any person who beneficially owned more than
5% of the outstanding shares of the Common Stock or ATP at December 31, 1996. As
of such date, all Directors and officers of the Fund owned less than 1% of the
Common Stock of the Fund, and no Director or officer owned any of the ATP.
The Investment Adviser
Wellington Management Company, LLP ("Wellington Management") with its
principal offices at 75 State Street, Boston, Massachusetts 02109, has served as
the Fund's investment adviser since February 19, 1992, when the Fund's
investment management agreement with Ostrander Capital Management, L.P. expired
without renewal. Wellington Management, a Massachusetts limited liability
partnership of which Robert W. Doran, Duncan M. McFarland and John R. Ryan are
Managing Partners, is a professional investment counseling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of December 31,
1996, Wellington Management held discretionary authority over approximately
$133.2 billion of assets, including $50.9 billion of fixed income securities of
which $4.2 billion represented "high-yield" investments. Wellington Management
and its predecessor organizations have provided investment advisory services to
investment companies since 1933 and to investment counseling clients since 1960.
As an accommodation to the Fund and based on the Board's determination that the
Offer is in the best interests of the stockholders, Wellington Management has
agreed to voluntarily waive $100,000 of its fees.
Catherine A. Smith, a Senior Vice President of the Investment Adviser,
is primarily responsible for the day-to-day management of the Fund's portfolio.
Ms. Smith has served in such capacity since the Investment Adviser succeeded to
the management of the Fund's portfolio on February 19, 1992. In addition to
serving as the portfolio manager of the Fund, Ms. Smith serves as the portfolio
manager of several other high yield bond portfolios, including The High Yield
Plus Fund, Inc., a closed-end management investment company. After receiving her
Bachelor of Arts degree from Harvard College in 1983, Ms. Smith worked as a
securities analyst for Fred Alger Management, Inc. in New York and subsequently
joined Wellington Management in 1985. Ms. Smith is a CFA and a member of the
Boston Security Analysts Society.
Wellington Management managed the following other investment companies
as of December 31, 1996: AFL-CIO (American Federation of Labor and Congress of
Industrial Organizations) Housing Investment Trust, Anchor Series Trust, The
Arbor Fund Golden Oak Prime Obligation Money Market Portfolio, The Arbor Fund
OVB Prime Obligations Portfolio, Bishop Street Money Market Fund, Bishop Street
Treasury Money Market Fund, First Financial Fund, First Investors Global Fund,
First Investors Series Fund II; Growth and Income Fund, First Investors Life
Series Fund, Frank Russell Investment Company, Global Utility Fund, Hartford VA
Advisers Fund, Hartford VA Capital Appreciation Fund, Hartford VA Dividend and
Growth Fund, Hartford VA International Opportunities Fund, Hartford VA Stock
Fund, Hartford MF Advisers Fund, Hartford MF Capital Appreciation Fund, Hartford
MF Dividend and Growth Fund, Hartford MF International Opportunities Fund,
Hartford MF Small Company Fund, Hartford MF Stock Fund, The High Yield Plus
Fund, Horace Mann Balanced Fund, Horace Mann Growth Fund, Horace Mann Income
Fund, Horace Mann Short-Term Investment Fund, Mentor Income and Growth
Portfolio, NASL Series Trust, North American Funds, PBHG Cash Reserves Fund, The
Pillar International Growth Fund, SEI Daily Income Trust, SEI Liquid Asset
Trust, Target Portfolio Trust (Mortgage Backed Securities Portfolio and U.S.
Government Money Market Portfolio), TIFF Investment Program (TIFF Multi-Asset
Fund), Vanguard Explorer
55
<PAGE>
Fund, Vanguard Fixed Income Securities Fund, Vanguard/Morgan Growth Fund,
Vanguard Preferred Stock Fund, Vanguard Specialized Portfolios (Energy
Portfolio, Health Care Portfolio, and Utilities Income Portfolio), Vanguard
Variable Insurance Fund (Balanced Portfolio and High Yield Bond Portfolio),
Vanguard/Wellesley Income Fund, Vanguard/Wellington Fund and Vanguard/Windsor
Fund.
Advisory Agreement. The Investment Advisory Agreement between the
Investment Adviser and the Fund (the "Advisory Agreement") became effective on
February 19, 1992 following the expiration of the advisory agreement with
Ostrander Capital Management, L.P., the former adviser. The Advisory Agreement
provides that, subject to the direction of the Board of Directors of the Fund
and the applicable provisions of the 1940 Act, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular investment
rests with the Investment Adviser, subject to review by the Board of Directors
and compliance with the applicable provisions of the 1940 Act.
The Investment Adviser is not dependent on any other party in providing
the investment advisory services required for the management of the Fund. The
Investment Adviser may, however, consider analyses from various sources,
including broker-dealers with which the Fund does business. The Advisory
Agreement provides that the Investment Adviser will, upon request of the Fund
but subject to availability, make available to the Fund office facilities,
equipment, personnel and services (other than as specifically set forth in the
Advisory Agreement). Such office facilities, equipment, personnel and services
are to be provided to the Fund at cost.
Under the Advisory Agreement, the Investment Adviser receives a monthly
investment advisory fee equal to .50% (on an annual basis) of the Fund's
"Average Net Assets," based on the average weekly net asset value of the Fund.
For purposes of the computation of such fee, the Fund's "Average Net Assets" is
defined as the Fund's total assets minus (a) the Fund's accrued liabilities
(including the aggregate principal amount of and the amount of the accrued
interest on any senior securities of the Fund constituting debt within the
meaning of Section 18 of the 1940 Act or under any credit facility with any bank
or other lender) and, without duplication of (a), (b) the aggregate liquidation
preference of and the amount of accumulated dividends on any senior securities
of the Fund constituting stock within the meaning of Section 18 of the 1940 Act.
At December 31, 1996, the Fund's Average Net Assets were $177.3 million under
this definition. The aggregate dollar amount paid by the Fund to Wellington
Management under the terms of the Advisory Agreement for the periods January 1,
1994 through December 31, 1994, January 1, 1995 through December 31, 1995 and
January 1, 1996 through December 31, 1996 were $665,000, $782,000, and $851,000,
respectively.
The Fund bears all costs of its operation other than those incurred by
the Investment Adviser under the Advisory Agreement. In particular, the Fund
pays investment advisory fees, the fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets, legal, accounting and auditing fees, taxes,
expenses of preparing prospectuses and stockholder reports, registration fees
and expenses, fees and expenses for the transfer and dividend disbursing agent,
the compensation and expenses of the Directors who are not otherwise employed by
or affiliated with the Investment Adviser or any of its affiliates, and any
extraordinary expenses.
At a meeting held on February 18, 1992, the Board of Directors
(including all Directors who are not "interested persons" of the Fund, as
defined in the 1940 Act) unanimously approved the Advisory Agreement for a
two-year period commencing February 19, 1992. The Advisory Agreement was
subsequently approved by the Fund's stockholders at a meeting held on May 11,
1992. The Advisory Agreement was last approved by the Board of Directors and by
a majority of the Directors who are not parties to the Advisory Agreement or
interested persons of any such party on February 15, 1996. The Advisory
Agreement will remain in effect from year to year if approved annually (i) by
the Board of Directors of the Fund or by the holders of a majority of the Fund's
outstanding voting securities restrictions, voting as a single class, and (ii)
by a majority of the Directors who are not parties to the Advisory Agreement or
interested persons (as defined in the 1940 Act) of any such party. The Advisory
Agreement may be terminated at any time, without payment of any penalty, by vote
of the Board of Directors, by vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act and as further described
below), or by the Investment Adviser, in each case on sixty (60) days prior
written notice, and will terminate automatically in the event of its assignment.
Under the 1940 Act, a vote
56
<PAGE>
of a majority of the outstanding voting securities of the Fund means the lesser
of either (a) the vote of 67% or more of the shares of the applicable class or
classes present at the relevant meeting, if the holders of more than 50% of the
outstanding shares of the applicable class or classes are present or represented
by proxy, or (b) the vote of more than 50% of the outstanding shares of the
applicable class or classes. For purposes of voting on any approval,
continuation or termination of the Advisory Agreement, holders of the ATP and
the Common Stock vote as a single class.
Under the terms of the Advisory Agreement, the Investment Adviser is
not liable for any error of judgment or for any loss suffered by the Fund in
connection with performance of its obligations under the Advisory Agreement,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of, or from reckless disregard by it of its
obligations and duties under, the Advisory Agreement, or damages resulting from
a breach of fiduciary duty with respect to receipt of compensation for services.
Portfolio Execution. The Advisory Agreement authorizes Wellington
Management to arrange for the execution of the Fund's portfolio transactions by
selecting the brokers or dealers that will execute the purchases and sales of
portfolio securities of the Fund and directs Wellington Management to use its
best efforts to obtain the best net results, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved.
Wellington Management may, in its discretion, purchase and sell portfolio
securities through brokers who provide Wellington Management or the Fund with
research, analysis, advice and similar services, and Wellington Management may
pay to these brokers, in return for research and analysis, a higher commission
than may be charged by other brokers, provided that Wellington Management
determines in good faith that such commission is reasonable in terms either of
that particular transaction or of the overall responsibility of Wellington
Management to the Fund and Wellington Management's other clients and that the
total commission paid by the Fund will be reasonable in relation to the benefits
to the Fund over the long term.
In selecting a broker or dealer for each specific transaction,
Wellington Management will use its best judgment to choose the broker or dealer
most capable of providing the brokerage services necessary to obtain the best
available price and most favorable execution. The full range and quality of
brokerage services available will be considered in making these determinations.
For example, brokers may be selected on the basis of the quality of such
brokerage services related to the requirements of the specific transaction such
as the following: capable floor brokers or traders, competent block trading
coverage, good communication, ability to position, retail distribution and
underwriting, use of automation, research contracts, arbitrage skills,
administrative ability, or provision of market information relating to the
security. Wellington Management will make periodic evaluations of the quality of
these brokerage services as provided by various firms and measure these services
against its own standards of execution. Brokerage services will be obtained only
from those firms which meet its standards, maintain a reasonable capital
position and can be expected to reliably and continuously supply these services.
On occasions when Wellington Management deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients,
Wellington Management, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be so purchased or sold in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction will be made by Wellington Management in the manner it considers to
be the most equitable and consistent with its fiduciary obligations to the Fund
and to such other clients. In some instances, this procedure may affect the
price and size of the positions obtainable for the Fund. Research services
furnished by brokers through which the Fund effects securities transactions may
be used by Wellington Management in servicing all of its clients, and not all
such services may be used by Wellington Management in connection with the Fund.
For the fiscal years ended December 31, 1994, 1995 and 1996, the Fund
paid brokerage commissions for the execution of portfolio transactions of $0,
$3,000 and $0, respectively.
57
<PAGE>
Administrative Services. Wellington Management provides only investment
advisory services to clients and does not provide administrative and managerial
services that generally are required by a publicly held investment company such
as the Fund. Accordingly, since February 1992 the Fund has engaged Ellen E.
Terry, Vice President and Treasurer, to perform administrative services. Subject
to the supervision of the Board of Directors and officers of the Fund, Ms.
Terry, among other things, coordinates the preparation of the Fund's
semi-annual, annual and other periodic reports, proxy statements and other
communications with stockholders; oversees the preparation of the Fund's
periodic reports required to be filed with the Commission and the rating
agencies; and assists in responding to stockholder/retail broker inquiries and
disseminating information to the same based on information provided. Since
February 1992 the Fund has also engaged Paul E. Saidnawey to provide certain
related administrative services subject to the supervision of the Board of
Directors and Ms. Terry. Ms. Terry and Mr. Saidnawey previously performed these
administrative services for the Fund as employees of the Fund's former
investment adviser.
Ms. Terry receives $6,250 per month for the services set forth above
and her services are terminable by either party on ninety (90) days' notice. Mr.
Saidnawey receives $3,500 per month for the services set forth above and his
services are terminable by either party on ninety (90) days' notice. Unlike
other funds that are affiliated with larger organizations, the Fund relies on
Ms. Terry, Mr. Saidnawey and Robert F. Birch, its President, for its
administrative and related services. In the event of a departure of these
individuals, the Fund would likely be forced to replace them with others or with
a larger organization, which could result in an increase in the Fund's annual
expenses.
PORTFOLIO MATURITY AND TURNOVER
The Fund's holdings may include issues of various maturities.
Ordinarily, the Fund will emphasize investments in medium and longer term
instruments (i.e., those with maturities in excess of three years), but the
weighted average maturity of portfolio holdings may be shortened or lengthened
depending on the Investment Adviser's general investment outlook or changes in
the characteristics of high-yield securities. To the extent the weighted average
maturity of the Fund's portfolio securities is lengthened, the value of such
holdings will be more susceptible to fluctuation in response to changes in
interest rates and general economic conditions. As of December 31, 1996, the
weighted average maturity of the Fund's portfolio holdings was approximately
7.42 years. The weighted average of the Fund's portfolio will fluctuate
depending on market conditions and investment opportunities. The Fund, however,
does not expect that the weighted average maturity of the Fund's portfolio will,
under normal conditions, exceed 15 years.
The Investment Adviser actively makes portfolio adjustments that
reflect the Fund's investment strategy, but generally does not trade securities
for the Fund for the purpose of seeking short-term profits. It will, however,
change the Fund's securities, regardless of how long they have been held, when
it believes doing so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is
anticipated that the Fund's portfolio turnover rate may, from time to time,
exceed 100% per annum. A 100% annual turnover rate would occur, for example, if
all the securities in the Fund's portfolio were replaced once within a period of
one year. The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy is changed significantly, portfolio turnover
may be significantly higher than during times of economic and market price
stability, when investment strategy remains relatively constant. A high rate of
portfolio turnover will result in increased transaction costs for the Fund in
the form of increased dealer spreads and brokers commissions. The Fund's
portfolio turnover rates for the fiscal years ended December 31, 1994, 1995 and
1996 were 58.6%, 62.7% and 53.5%, respectively.
58
<PAGE>
TAXATION
The following discussion offers only a brief outline of the federal
income tax consequences of investing in the Common Stock. Investors should
consult their own tax advisors for more detailed information and for information
regarding the impact of state and local taxes upon such an investment.
Federal Income Tax Treatment of the Fund
The Fund qualifies and elects to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code. To qualify as a
regulated investment company, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in stocks, securities or currencies;
(b) derive in each taxable year less than 30% of its gross income from the sale
or disposition of stock, securities, and certain other assets held less than
three months; and (c) diversify its holdings so that, at the end of each quarter
of the taxable year, (i) at least 50% of the market value of the Fund's assets
is represented by cash, U.S. Government securities and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities).
As a regulated investment company, in any fiscal year with respect to
which the Fund distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends and interest but excludes net
long-term capital gains in excess of net short-term capital losses), the Fund
(but not its stockholders) generally will be relieved of U.S. federal income
taxes on its net investment income and net capital gains (net long-term capital
gains in excess of the sum of net short-term capital losses and capital loss
carryovers from prior years, if any) that it distributes to stockholders. To the
extent the Fund retains its net capital gains for investment, it will be subject
under current tax rates to a federal income tax at a maximum effective rate of
35% on the amount retained. See "Federal Income Tax Treatment of Holders of
Common Stock" below. Amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax payable by the Fund. To avoid the tax, the Fund must distribute, or
be deemed to have distributed, during each calendar year an amount equal to the
sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the twelve-month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. To prevent application of the excise tax, the Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. Compliance with the calendar year distribution requirement may
limit the extent to which the Fund will be able to retain its net capital gains
for investment.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Internal Revenue Code, the Fund will be taxed in
the same manner as an ordinary corporation, and distributions to its
stockholders will not be deductible by the Fund in computing its taxable income.
In addition, in the event of failure to qualify, the Fund's distributions, to
the extent derived from the Fund's current or accumulated earnings and profits,
will constitute dividends (eligible for the corporate dividends-received
deduction) which are taxable to stockholders as ordinary income, even though
those distributions might otherwise (at least in part) have been treated in the
stockholder's hands as long-term capital gains.
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of the
Common Stock and/or the ATP until the asset coverage is restored. See
"Description of Capital Stock--Dividends and Dividend Periods." Such a
suspension of distributions might prevent the Fund from distribution 90% of its
investment company taxable income, as is required in order to qualify for
taxation as a regulated investment company or cause the Fund to incur a tax
liability or a non-deductible 4% excise tax on its undistributed table income
(including gain) or both.
59
<PAGE>
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) ATP in order to maintain or restore the requisite asset coverage and
avoid failure to remain qualified as a regulated investment company. The
determination to repurchase or redeem ATP and the amounts to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem ATP may adversely affect
the Fund's ability to distribute annually at least 90% of its investment company
taxable income, which distribution is required to qualify for taxation as a
regulated investment company. The Fund may also realize income in connection
with funding repurchases or redemptions of ATP, and such income would be taken
into account in determining whether or not the above-described distribution
requirements have been met. Depending on the size of the Fund's assets relative
to its outstanding senior securities, redemption of the ATP might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances. The Fund's ability to
liquidate portfolio securities may be limited by the requirement for
qualification as a regulated investment company that less than 30% of the Fund's
annual gross income be derived from the disposition of securities held for less
than three months.
Investments of the Fund in securities issued at a discount or providing
for deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
stockholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to satisfy the 90%
distribution requirement and the distribution requirements for avoiding income
and excise taxes. In order to generate sufficient cash to make distributions
necessary to satisfy the 90% distribution requirement and to avoid income and
excise taxes, the Fund may have to borrow money or dispose of securities that it
would otherwise have continued to hold. The extent to which the Fund may
liquidate securities at a gain may be limited by the 30% limitation discussed
above.
The Fund's transactions in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) will be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to stockholders. These provisions
also may require the Fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out) which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the 90% and 98% distribution requirements for
avoiding income and excise taxes. The Fund will monitor its transactions, will
make the appropriate tax elections, and will make the appropriate entries in its
books and records when it acquires any foreign currency, option, futures
contract, forward contract, or hedged investment in order to mitigate the effect
of these rules and prevent disqualifications of the Fund as a regulated
investment company and minimize the imposition of income and excise taxes.
If the Fund fails to qualify as a regulated, investment company for any
year, it generally must pay out its earnings and profits accumulated in that
year less an interest charge to the Treasury on 50% of such earnings and profits
before it can again qualify as a regulated investment company.
Federal Income Tax Treatment of Holders of Common Stock
For any period during which the Fund qualifies as a regulated
investment company for federal income tax purposes, dividends paid out of the
Fund's net investment income and short-term capital gains to holders of Common
Stock will be taxable as ordinary income. It is expected that dividends received
by corporate stockholders will not be eligible for the dividends received
deduction. Distributions of net long-term capital gains designated by the Fund
as capital gain dividends, if any, are taxable as long-term capital gains,
regardless of how long the stockholder has held the Fund's shares and are not
eligible for the dividends received deduction.
60
<PAGE>
Dividends and distributions will be taxable to stockholders as if actually
distributed, even if they are reinvested in additional shares of the Fund.
Stockholders receiving distributions in the form of newly issued shares will
have a cost basis in each share received equal to the fair market value of a
share of the Fund on the distribution date.
Generally, dividends paid by the Fund are treated as received in the
taxable year in which the distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
stockholders of record on a specified date in such a month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
Any distribution by the Fund to a holder of Common Stock not made out
of the Fund's earnings and profits will be treated as a return of capital to
each holder of Common Stock, will reduce the basis of each share of Common Stock
with respect to which it is distributed and will be subject to tax as capital
gain to the extent that the distribution exceeds the basis of the share of
Common Stock with respect to which it is distributed. Investors should carefully
consider the tax implications of buying shares of Common Stock just prior to a
distribution, as the price of shares purchased at this time may reflect the
amount of the forthcoming distribution which will, except in unusual
circumstances, be taxable when received.
After the close of each taxable year, the Fund will identify for its
holders of Common Stock the portions of its distributions that are attributable
to capital gains and to ordinary income, respectively.
The Internal Revenue Code limits certain miscellaneous itemized
deductions by individuals, including deductions of investment expenses, to the
extent the aggregate of such deductions exceeds 2% of an individual's federal
adjusted gross income. The Internal Revenue Code would treat such expenses
incurred by a regulated investment company as being indirectly incurred by the
stockholders of the investment company. Stockholder expenses of publicly offered
regulated investment companies are exempted from the application of the 2%
floor. Thus, the limitation will not apply with respect to indirect deductions
through the Fund. Such expenses will also be fully deductible by the Fund's
corporate stockholders.
If the Fund suffers a net taxable loss in any taxable year, the holders
of Common Stock will not be permitted to utilize that loss in their tax returns.
Generally, gain realized by a stockholder on the sale of shares held
for more than one year will be taxable as long-term capital gain. If a
stockholder holds shares primarily for sale to customers in the ordinary course
of business rather than for investment, any gain recognized on the sale of those
shares would be taxable as ordinary income. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a stockholder on a
disposition of Fund shares held by the stockholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received or treated as having been received by the
stockholder with respect to such shares. Stockholders who acquire shares on
multiple dates should consult their tax advisers to determine how to allocate
the cost of stock for basis purposes.
In general, federal withholding taxes at a 30% rate or a lesser rate
established by treaty may apply to distributions to stockholders (except to
those distributions designated by the Fund as capital gains dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations.
In the event the Fund retains any net capital gains, it may designate
such retained amounts as undistributed capital gains in a notice to its
stockholders. In the event such a designation is made, stockholders subject to
U.S. tax would include in income, as long-term capital gains, their
proportionate share of such undistributed amounts, but would be allowed a credit
or refund, as the case may be, for their proportionate share of the 35% tax paid
by the Fund. If the designation is made, for U.S. federal income tax purposes,
the tax basis of shares owned by a stockholder would be increased by an amount
equal to 65% of the amount of undistributed capital gains included in the
stockholder's income.
61
<PAGE>
Backup Withholding
The Fund may be required to withhold for U.S. federal income taxes 31%
of all taxable distributions payable to stockholders who fail to provide the
Fund with their correct taxpayer identification number or who fail to make
required certifications or if the Fund or a stockholder has been notified by the
U.S. Internal Revenue Service that they are subject to backup withholding.
Corporate stockholders and other stockholders specified in the Internal Revenue
Code are exempt from such backup withholding. Backup withholding is not an
additional tax, Any amounts withheld may be credited against the stockholder's
U.S. federal income tax liability.
Other Taxation
Investors are advised to consult their own tax advisors with respect to
the application to their own circumstances of the above-described general
taxation rules and with respect to the state, local or foreign tax consequences
to them of an investment in the Common Stock.
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the terms of the capital stock
of the Fund. This description does not purport to be complete and is subject to
qualification in its entirety by reference to the Articles which establish and
fix the rights and preferences of the Common Stock and the shares of ATP. A copy
of the Articles, including a copy of the Articles Supplementary establishing the
ATP, is filed as an exhibit to the Registration Statement of which this
Prospectus is a part and may be inspected and copies thereof may be obtained as
described under "Additional Information."
General
The authorized capital stock of the Fund consists of 1,000,000 shares
of preferred stock, $1.00 par value, issuable in one or more series and
200,000,000 shares of Common Stock, par value $.01 per share. All shares of
Common Stock have equal rights as to voting, dividends and liquidation. At
February 7, 1997, there were __________ outstanding shares of Common Stock of
the Fund and 2,000 outstanding shares of preferred stock of which 1,200 are
classified as ATP Series A and 800 are classified as ATP Series B. All shares of
Common Stock and ATP issued and outstanding are fully paid and nonassessable.
Shares of Common Stock have no preemptive, conversion or redemption rights and
are freely transferable. Subject to confirmation from the rating agencies that
its rating of the ATP will not change, the Fund may issue additional shares of
either series or additional series of preferred stock in the future, which
additional series may have substantially different terms than the terms of the
ATP. The description herein of the Fund's capital structure relates to its
capital structure at the date hereof.
The following description refers to each series of ATP separately as
and when the context so requires.
Dividends and Dividend Periods
Dividends on shares of ATP are cumulative from the date on which such
shares were originally issued and are payable, when, as and if declared by the
Board of Directors of the Fund out of funds legally available therefor, on each
Dividend Payment Date thereafter. "Dividend Payment Date" for either series of
ATP, means (i) with respect to any Dividend Period of one year or less, the
business day next succeeding the last day thereof and, if any, the 91st, 181st
and 271st days thereof, and (ii) with respect to any Dividend Period of more
than one year, on a quarterly basis on each January 1, April 1, July 1 and
October 1 and on the business day following the last day of such Dividend
Period. For Dividend Periods of one year or less, Dividend Payment Dates occur
on the business day next succeeding the last day of such Dividend Period and, if
any, on the 91st, 181st and 271st days thereof. "Dividend Period" means, with
respect to the relevant series of ATP, the period commencing on the day
following each Dividend Period for such series and ending on the day established
for such series by the Fund. For Dividend Periods of more than one year,
Dividend Payment Dates occur on a
62
<PAGE>
quarterly basis on each January 1, April 1, July 1 and October 1 within such
Dividend Period and on the business day following the last day of such Dividend
Period. Dividends are paid through a securities depository (DTC or a successor
securities depository) (a "Securities Depository") on each Dividend Payment
Date. The Securities Depository's current procedures provide for it to
distribute dividends in same-day funds to members of or participants in the
Securities Depository that will act on behalf of a holder of ATP or person
placing an order for ATP ("Agent Member"), who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. For
each Dividend Period, subject to certain exceptions, the dividend rates will be
the rate (the "Applicable Rate") that the Auction Agent advises the Fund has
resulted from a periodic auction ("Auction") of the ATP in accordance with the
auction procedures.
Dividend Periods are either standard term periods of 28 days (unless
such 28th day is not a business day, then the number of days ending on the
business day next preceding such 28th day) (a "Standard Term Period") or,
subject to certain conditions and with notice to holders, periods longer or
shorter than 28 days and having such duration as the Board of Directors shall
specify (each, an "Alternate Term Period").
An Alternate Term Period will not be effective unless, among other
things, sufficient clearing orders exist at the Auction in respect of such
Alternate Term Period (that is, in general, the number of shares of ATP subject
to buy orders by potential holders is at least equal to the number of shares
subject to sell orders by existing holders). If sufficient clearing orders do
not exist at any Auction in respect of an Alternate Term Period, the Dividend
Period commencing on the business day succeeding such Auction will be a Standard
Term Period and the holders of the shares of the affected series will be
required to continue to hold such shares for such Standard Term Period.
Except during a "Default Period" as described below, the Applicable
Rate resulting from an Auction will not be greater than the "Maximum Applicable
Rate," which is equal to 150% of the applicable AA Composite Commercial Paper
Rate (for a Dividend Period of fewer than 184 days) or the applicable Treasury
Index Rate (as defined below) (for a Dividend Period of 184 days or more (each,
a "Reference Rate")), in each case subject to upward but not downward adjustment
in the discretion of the Board of Directors after consultation with the
broker-dealers who place orders on behalf of their clients in connection with
the Auction ("Broker-Dealers"), provided that immediately following any such
increase the Fund would be in compliance with the ATP Basic Maintenance Amount.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15(519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government securities selected by the Fund.
The Maximum Applicable Rate for the shares of ATP will apply
automatically following an Auction for such shares in which sufficient clearing
orders have not been made (other than because all shares of ATP were the subject
of hold orders by existing holders) or following the failure to hold an Auction
for any reason on the first business day next preceding the first day of a
Dividend Period for the relevant series of ATP ("Auction Date") scheduled to
occur (except for circumstances in which the dividend rate for the ATP is the
Default Rate, as described below).
The "Minimum Applicable Rate" will apply automatically following an
Auction in respect of a Dividend Period of 93 days or fewer in which all of the
outstanding shares are subject to (or are deemed to be subject to) hold orders.
The Minimum Applicable Rate is 80% of the applicable AA Composite Commercial
Paper Rate. No minimum rate is specified for Auctions in respect of Dividend
Periods of more than 93 days.
63
<PAGE>
Default Period. A "Default Period" will commence on the applicable date
set forth below if the Fund fails to (i) declare prior to the close of business
on the second business day preceding any Dividend Payment Date, for payment on
or (to the extent permitted as described below) within two business days after
such Dividend Payment Date to the persons who held shares of ATP as of 12:00
noon, New York City time, on the business day preceding such Dividend Payment
Date, the full amount of any dividend payable on such Dividend Payment Date,
(ii) to deposit, irrevocably in trust, in same-day funds, with a designated
paying agent by 12:00 noon, New York City time, (A) on or (to the extent
permitted as described below) within two business days after any Dividend
Payment Date the full amount of any declared dividend on the relevant series of
ATP payable on such Dividend Payment Date (together with the failure to timely
declare dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
business days after any date fixed for redemption of shares of ATP called for
redemption, the applicable redemption price (a "Redemption Default"), or (iii)
to maintain the "aaa"/AAA Credit Rating unless the "aaa"/AAA Credit Rating is
restored by the Dividend Payment Date next following the date on which the Fund
fails to maintain the "aaa"/AAA Credit Rating (a "Rating Default"). A Default
Period with respect to a Dividend Default or a Redemption Default will consist
of the period commencing on and including the aforementioned Dividend Payment
Date or redemption date, as the case may be, and ending on and including the
business day on which, by 12:00 noon, New York City time, all unpaid dividends
and unpaid redemption price shall have been so deposited or shall have otherwise
been made available to the applicable holders in same day funds. A Default
Period with respect to a Rating Default shall commence as of the date on which
the Fund fails to maintain the "aaa"/AAA Credit Rating (provided that such
Rating Default shall be deemed not to have occurred and such Default Period
shall not commence if such Rating Default is cured by the next succeeding
Dividend Payment Date) and shall end on the earlier of the date on which such
default is cured as provided herein or the date on which the ATP is mandatorily
redeemed as provided herein. Holders of two-thirds of the ATP then outstanding
may waive any Dividend Default, Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend
Period commencing during a Default Period, will be equal to the Reference Rate
multiplied by three (3) (the "Default Rate"); and each subsequent Dividend
Period commencing after the beginning of a Default Period shall be a Standard
Term Period; provided, however, that the commencement of a Default Period will
not by itself cause the commencement of a new Dividend Period. Any dividend due
on any Dividend Payment Date (if, prior to 12:00 noon, New York City time, on
such Dividend Payment Date, the Fund has declared such dividend payable on or
within three business days after such Dividend Payment Date to the persons who
held such shares as of 12:00 noon, New York City time, on the business day
preceding such Dividend Payment Date) or redemption price with respect to such
shares not paid to such persons when due may (if such default is not solely due
to the willful failure of the Fund) be paid to such Persons in the same form of
funds by 12:00 noon, New York City time, on any of the first three business days
after such Dividend Payment Date or due date, as the case may be, provided that
such amount is accompanied by an additional amount for such period of
non-payment at the Default Rate applied to the amount of such default based on
the actual number of days comprising such period divided by 360. For the
purposes of the foregoing, payment to a person in same-day funds made on or
before 12:00 noon New York City time on any business day at any time will be
considered equivalent to payment to that person in New York Clearing House
(next-day) funds at the same time on the preceding business day, and any payment
made after 12:00 noon, New York City time, on any business day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next business day.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the ATP, it will be distributed to the holders of the
Common Stock. The term "net investment income" includes interest, dividends,
short-term capital gains and other income received or accrued less the advisory
fee, bank custodian charges, taxes (except capital gain taxes) and other
expenses properly chargeable against income, but does not include net capital
gains, stock dividends, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. Any realized net capital gains
(defined as the excess of net long-term capital gains over net short-term
capital losses) of the Fund will be distributed annually to the holders of the
Common Stock (subject to the prior rights of the holders of the ATP) subject to
the foregoing and any requirements of Maryland law.
64
<PAGE>
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), holders
of Common Stock may elect to receive all dividends and capital gains
distributions in cash paid by check mailed directly to such holders by State
Street Bank and Trust Company, as dividend disbursing agent. Pursuant to the
Plan, holders of Common Stock not making such election will have all such
amounts automatically reinvested by the bank serving as Plan agent, in whole or
fractional shares of Common Stock, as the case may be. See "Dividends and
Distributions; Dividend Reinvestment Plan."
Swap Arrangement. The Fund has entered into a five-year interest
payment swap arrangement (the "Swap Arrangement") with The First National Bank
of Boston dated as of February 3, 1994. Pursuant to the Swap Arrangement the
Fund makes payments to FNBB on a monthly basis at the annual rate of 5.25% of
the $65 million notional amount of the Swap Arrangement. In exchange for such
payments FNBB makes payments to the Fund on a monthly basis at a variable rate
determined with reference to short-term interest rates.
The effect of the Swap Arrangement is to hedge the Fund's dividend
payment obligations with respect to $65 million of the ATP. For example, if the
dividend rate on the ATP and the short-term interest rate used to determine the
Fund's payment obligation under the Swap Arrangement were 8%, the Fund would (i)
receive a payment from FNBB in an amount equal to 8% (per annum) of the $65
million notional amount of the Swap Arrangement, (ii) make a payment to FNBB in
an amount equal to 5.25% (per annum) of the $65 million notional amount of the
Swap Arrangement, and (iii) pay dividends to the holders of the outstanding ATP
in an amount equal to 8% (per annum) of the $100 million aggregate liquidation
preference of the ATP. Conversely, if the dividend rate on the ATP and the
short-term interest rate used to determine the Fund's payment obligation under
the Swap Arrangement were 4%, the Fund would (i) receive a payment from FNBB in
an amount equal to 4% (per annum) of the $65 million notional amount of the Swap
Arrangement, (ii) make a payment to FNBB in an amount equal to 5.25% (per annum)
of the $65 million notional amount of the Swap Arrangement, and (iii) pay
dividends to the holders of the outstanding ATP in an amount equal to 4% (per
annum) of the $100 million dollar aggregate liquidation preference of the ATP.
It should be noted that the relationship between the Swap Arrangement and the
ATP has been simplified in the foregoing examples for purposes of illustration.
The Fund's payment obligation under the Swap Arrangement and rate of dividends
on the two series of ATP are likely to differ, particularly if the Fund elects
to establish a dividend period for the ATP which is longer than 28 days,
although each generally should be determined with reference to short-term
interest rates (except to the extent the Fund establishes relatively long ATP
dividend periods). See "Description of Capital Stock." The Fund makes dividend
payments to the holders of ATP on the basis of the results of periodic auctions
in accordance with its terms without regard to the Swap Arrangement and will
continue to do so in the event the Swap Arrangement is terminated. The Fund is
subject to the risk that FNBB will not make its required payments under the Swap
Arrangement. In such event, the Fund will have contractual remedies pursuant to
the agreements related to the Swap Arrangement.
The Fund obtained consents from Moody's and Fitch to enter into the
Swap Arrangement. In connection with obtaining such consent, the Fund agreed to
an increase in its discounted asset coverage requirement as described below
under "--Asset Maintenance." The Swap Arrangement will remain in effect through
February 1999, subject to early termination in certain circumstances, such as a
default in payment obligations under the Swap Arrangement, a breach by either
party of any agreement or obligation under the Swap Arrangement, the bankruptcy
of either party to the Swap Arrangement, certain changes in tax laws, and
illegality. Upon any such early termination the Fund will be required to make a
payment to, or will receive a payment from, FNBB, based on the market value of
the Swap Arrangement at that time. In the event that the Fund fails to satisfy
certain asset coverage requirements that give rise to a mandatory redemption of
ATP, the Fund has agreed with Moody's and Fitch that it will terminate the Swap
Arrangement to the extent the notional amount of the Swap Arrangement following
such redemption would exceed the aggregate liquidation preference of the ATP
that would remain outstanding following such redemption, or in such greater
amount as the Fund may determine, subject to deferral to the extent the value of
the Swap Arrangement then exceeds a specified benchmark.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
Fund may not declare dividends or make other distributions on the Common Stock
or purchase any Common Stock if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
65
<PAGE>
defined in the 1940 Act) with respect to the outstanding shares of ATP would be
less than 200%. Under the Code, the Fund must, among other things, distribute at
least 90% of its investment company taxable income each year in order to
maintain its qualification for tax treatment as a regulated investment company.
The foregoing limitation on dividends, distributions and purchases may in
certain circumstances impair the Fund's ability to maintain such qualification.
The Fund intends, however, to redeem shares of ATP to the extent necessary to
maintain such qualification. See "Taxation."
Upon failure to pay dividends for two (2) years or more, the holders of
ATP will acquire certain additional voting rights. See "Voting Rights" below.
Such rights shall be the exclusive remedy of the holders of ATP upon any failure
to pay dividends on the ATP.
For so long as any shares of ATP are outstanding, except in connection
with the liquidation the Fund, or a refinancing of the ATP as provided in the
Articles, the Fund will not declare, pay or set apart for payment any dividend
or other distribution (other than a dividend or distribution paid in shares of,
or options, warrants or rights to subscribe for or purchase, Common Stock or
other shares, if any, ranking junior to the ATP as to dividends or upon
liquidation) in respect to Common Stock or any other shares of the Fund ranking
junior to or on a parity with the ATP as to dividends or upon liquidation, or
call for redemption, redeem, purchase or otherwise acquire for consideration any
Common Stock or any other such junior shares (except by conversion into or
exchange for shares of the Fund ranking junior to the ATP as to dividends and
upon liquidation) or any such parity shares (except by conversion into or
exchange for shares of the Fund ranking junior to or on a parity with the ATP as
to dividends and upon liquidation), unless (i) immediately after such
transaction, the Fund would have Eligible Assets with an aggregate Discounted
Value at least equal to the ATP Basic Maintenance Amount and the 1940 Act ATP
Asset Coverage (see "Asset Maintenance" and "Redemption" below) would be
achieved, (ii) full cumulative dividends on the ATP due on or prior to the date
of the transaction have been declared and paid and (iii) the Fund has redeemed
the full number of shares of ATP required to be redeemed by any provision for
mandatory redemption contained in the Articles.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and
Maryland Law, the Fund at its option may redeem shares of ATP having a Dividend
Period of less than one year, in whole or in part, on the business day after the
last day of such Dividend Period upon not less than 15 days and not more than 40
days prior notice. The optional redemption price shall be $50,000 per share,
plus an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to the date fixed for redemption. Shares of ATP having a
Dividend Period of more than one year may be redeemable at the option of the
Fund prior to the end of the relevant Dividend Period, subject to any Specific
Redemption Provisions (as defined below), which may include the payment of
redemption premiums to the extent required under any applicable Specific
Redemption Provisions. The Fund shall not effect any optional redemption unless
after giving effect thereto the Fund would have Eligible Assets with an
aggregate Discounted Value at least equal to the ATP Basic Maintenance Amount.
"Specific Redemption Provisions" means with respect to any Alternate
Term Period of more than one year, either, or any combination of (i) a period (a
"Non-Call Period") determined by the Board of Directors after consultation with
the Broker-Dealers, during which the shares subject to such Alternate Term
Period are not subject to redemption at the option of the Fund pursuant to
Section 3(a)(i) of the Articles and/or Section 3(a)(ii) and/or 3(a)(iii) of the
Articles and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years as determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such Alternate
Term Period shall be redeemable at the Fund's option pursuant to Section 3a(i)
of the Articles and/or in connection with any mandatory redemption pursuant to
Section 3(a)(ii) and/or 3(a)(iii) of the Articles at a price per share equal to
$50,000 plus accumulated but unpaid dividends plus a premium expressed as a
percentage or percentages of $50,000 or expressed in a formula using specified
variables as determined by the Board of Directors after consultation with the
Broker-Dealers.
66
<PAGE>
The Fund also reserves the right to repurchase ATP in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the ATP, but is
under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the ATP Basic Maintenance Amount or, as of the last business day of any
month, the 1940 Act ATP Asset Coverage, and such failure is not cured within two
business days following the relevant Valuation Date in the case of a failure to
maintain the ATP Basic Maintenance Amount or the last business day of the
following month in the case of a failure to maintain 1940 Act ATP Asset Coverage
as of such last business day (each an "Asset Coverage Cure Date"), the ATP will
be subject to mandatory redemption out of funds legally available therefor. See
"Asset Maintenance." The number of shares of ATP to be redeemed in such
circumstances will be equal to the lesser of (i) the minimum number of shares of
ATP the redemption of which, if deemed to have occurred immediately prior to the
opening of business on the relevant Asset Coverage Cure Date, would result in
the Fund having Eligible Assets with an aggregate Discounted Value at least
equal to the ATP Basic Maintenance Amount, or sufficient to satisfy 1940 Act ATP
Asset Coverage, as the case may be, in either case as of the relevant Asset
Coverage Cure Date (provided that, if there is no such minimum number of shares
the redemption of which would have such result, all shares of ATP then
outstanding will be redeemed), and (ii) the maximum number of shares of ATP that
can be redeemed out of funds expected to be available therefor on the Mandatory
Redemption Date (as defined below).
If the Fund at any time fails to maintain the "aaa"/AAA Credit Rating
for the ATP, and such failure is not cured within 90 calendar days thereafter
(the "Rating Default Cure Date"), all shares of ATP will be subject to mandatory
redemption out of funds legally available therefor, on the Mandatory Redemption
Date, and dividends thereon will be payable at the Default Rate until such
redemption is effected as provided above under "Dividends and Dividend
Periods-Default Period." To maintain the "aaa"/AAA Credit Rating, the Fund must
maintain a rating for the ATP in the highest rating category from any two
nationally recognized statistical rating organizations, as used in the
Securities Exchange Act of 1934, as amended, one of which shall be Moody's or
S&P.
Shares of ATP may be subject to mandatory redemption in accordance with
the foregoing redemption provision notwithstanding the terms of any Specific
Redemption Provisions.
The Fund is required to effect such a mandatory redemption not later
than 30 days after the Asset Coverage Cure Date or the Rating Default Cure Date,
as the case may be (the "Mandatory Redemption Date"), except that if the Fund
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of shares of ATP which
are subject to mandatory redemption, together with shares of other ATP which are
subject to mandatory redemption under provisions similar to the ATP, or the Fund
otherwise is unable to effect such redemption on or prior to such Mandatory
Redemption Date, the Fund will redeem those shares of ATP and shares of other
ATP which it was unable to redeem on the earliest practicable date on which the
Fund will have such funds available, upon notice to record owners of shares of
ATP and the Auction Agent. The Fund's ability to make a mandatory redemption may
be limited by the provisions of the 1940 Act or Maryland law.
The redemption price in the event of any mandatory redemption will be
$50,000 per share, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for redemption
plus (in the case of a Dividend Period of not less than one year only) any
redemption premium specified in any applicable Specific Redemption Provisions.
In connection with any redemption, whether optional or mandatory, the
Fund shall pay, together with the redemption price, an amount equal to all
accumulated dividends, whether or not such dividends have been declared through
the redemption date.
Notwithstanding the provisions for redemption described above, no
shares of ATP may be redeemed unless all dividends in arrears on the outstanding
shares of ATP, and all capital stock of the Fund ranking on a parity with the
ATP with respect to the payment of dividends or upon liquidation, have been or
are being
67
<PAGE>
contemporaneously paid or set aside for payment, except in connection with the
liquidation of the Fund in which case all shares of ATP and all shares ranking
in a parity with the ATP must receive proportionate amounts.
Except for the provisions described above, nothing contained in the
Articles limits any right of the Fund to purchase or otherwise acquire any
shares of ATP outside of an Auction at any price, whether higher or lower than
the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any shares of ATP for which Notice of Redemption has been given
and the Fund is in compliance with the 1940 Act ATP Asset Coverage and has
Eligible Assets with an aggregate Discounted Value at least equal to the ATP
Basic Maintenance Amount after giving effect to such purchase or acquisition on
the date thereof. Any shares which are purchased, redeemed or otherwise acquired
by the Fund shall have no voting rights. If fewer than all the outstanding
shares of ATP are redeemed or otherwise acquired by the Fund, the Fund shall
give notice of such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Directors.
Ratings
The Fund has obtained the "aaa"/AAA Credit Rating from Moody's and
Fitch for the ATP. While there is no assurance that the "aaa"/AAA Credit Rating
with respect to the ATP will not be changed, suspended or withdrawn, the Fund
will endeavor to maintain such rating and any failure to maintain such rating
would, subject to cure and certain exceptions, result in mandatory redemption of
the ATP. See "Mandatory Redemption" above. While the Fund does not presently
intend to seek a rating from a rating agency other than Moody's and Fitch, it
reserves the right to do so.
Asset Maintenance
The Fund is required to satisfy two separate asset coverage
requirements under the terms of the Articles. These requirements are summarized
below.
ATP Basic Maintenance Amount. The Fund is required to maintain as of
each Valuation Date Eligible Assets having in the aggregate a Discounted Value
at least equal to the ATP Basic Maintenance Amount, calculated separately for
Moody's (if Moody's is then rating the ATP) and Fitch (if Fitch is rating the
ATP). For this purpose, the Market Value of the Fund's portfolio securities is
(i) computed based upon one or more pricing services agreements approved by the
Board of Directors or (ii) the lower bid price from two independent dealers in
securities, one of which bids shall be in writing. The Fund has a pricing
services agreement with each of Kenny S&P Evaluation Services and Merrill Lynch
Capital Markets Securities Pricing Service. The Fund may substitute another
pricing service, provided that it has received notice from Moody's (if Moody's
is then rating the ATP) and Fitch (if Fitch is rating the ATP) that such
substitution will not impair the "aaa"/AAA Credit Rating. If the Fund fails to
maintain Eligible Assets having in the aggregate a Discounted Value at least
equal to the ATP Basic Maintenance Amount as of any Valuation Date and such
failure is not cured on or before the second business day after such Valuation
Date, the Fund will be required in certain circumstances to redeem certain of
the shares of ATP. See "Redemption."
The "ATP Basic Maintenance Amount" as of any Valuation Date is defined
as the dollar amount equal to the sum of
(1) (A) the product of the number of outstanding shares of ATP
on such date multiplied by $50,000; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or
not earned or declared) to and including the first following Dividend
Payment Date for each share of ATP outstanding that follows such
Valuation Date (or to the 42nd day after such Valuation Date, if such
42nd day occurs before the first following Dividend Payment Date); (C)
the aggregate amount of dividends that would accumulate at the then
current Maximum Applicable Rate for a Standard Term Period multiplied
by the Volatility Factor on any shares of ATP outstanding from the
first day following the Dividend Payment Date referred to in (B) above
through the 42nd day after such Valuation Date, but only if such 42nd
day occurs after the first day following the Dividend
68
<PAGE>
Payment Date, except that if such Valuation Date occurs during a
Default Period, the dividend for purposes of the calculation would
accumulate at the Default Rate; (D) the amount of anticipated Fund
expenses for the 90 days subsequent to such Valuation Date; (E) any
current liabilities, including, without limitation, indebtedness due
within one year and any redemption premium due with respect to shares
of ATP for which a Notice of Redemption has been given, as of such
Valuation Date to the extent not reflected in any of (1)(A) through
(1)(D), and (F) without duplication, 10% of the exercise price of any
call option written by the Fund and the exercise price of any put
option written by the Fund; less
(2) the sum of any cash or the value of any Fund assets
irrevocably deposited by the Fund for the payment of any of (1)(B)
through (1)(F) ("value" for purposes of this clause (2) shall mean the
Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated P-1 by Moody's and A-1+
by S&P, it will be valued at its face value).
Pursuant to the Fund's arrangements with Moody's and Fitch in
connection with the Swap Arrangement, the Fund has agreed that the Basic
Maintenance Amount will include (i) a fixed amount which was equal to $2,630,215
at the time the Fund entered into the Swap Arrangement and which declines on a
proportionate basis thereafter through February 1999, plus the amount the Fund
would pay, or minus the amount the Fund would receive, upon termination of the
Swap Arrangement, in either case based on mark-to-market quotations obtained by
the Fund as of each Valuation Date (provided that the amount determined under
this clause will not be a negative number) and (ii) amounts which are payable by
the Fund under the swap during the 17-day period following the relevant
Valuation Date. Amounts received by the Fund within 31 calendar days of the
relevant Valuation Date may be included as assets in determining compliance with
the Basic Maintenance Amount requirement only if FNBB has issued securities with
a rating of at least A by Fitch, if rated by Fitch or if not rated by Fitch,
then rated at least A by S&P and A2 by Moody's (if Fitch is then rating the
ATP). Currently FNBB does not satisfy this rating standard.
Solely for purposes of calculating the ATP Basic Maintenance Amount,
interest on borrowed funds outstanding as of any date will be treated as
dividend payments, at a deemed dividend rate equal to the interest rate payable
on such funds on the relevant date, but shall be subject to multiplication by
the larger of the factors that the Fund has been informed by Moody's (if Moody's
is then rating the ATP) or Fitch (if Fitch is then rating the ATP) are
applicable (as described in 1(C) above) only in the event that interest on such
borrowed funds is payable on the basis of a variable rate of interest, and the
interest rate is subject to change within the relevant 43-day period.
The discount factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets and guidelines for determining
the market value of the Fund's portfolio holdings have been based on criteria
established in connection with rating the ATP. These factors include, but are
not limited to, the sensitivity of the market value of the relevant asset to
changes in interest rates, the liquidity and depth of the market for the
relevant asset, the credit quality of the relevant asset (for example, the lower
the rating of a debt obligation, the higher the related discount factor) and the
frequency with which the relevant asset is marked to market. In no event shall
the Discounted Value of any asset of the Fund exceed its unpaid principal
balance or face amount as of the date of calculation. The Discount Factor
relating to any asset of the Fund, the ATP Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Discounted Value of the Fund's
portfolio and certain definitions and methods of calculation relating thereto
may be changed from time to time by the Fund, without stockholder approval, but
only in the event that the Fund receives written confirmation from Moody's (if
Moody's is then rating the ATP), Fitch (if Fitch is then rating the ATP) and any
other rating agency which is then rating the ATP and which so requires that any
such changes would not impair the "aaa"/AAA Credit Rating. If the Fund fails to
maintain the "aaa"/AAA Credit Rating and is unable to restore the "aaa"/AAA
Credit Rating by the Rating Default Cure Date, the Fund will be required to
redeem the ATP. See "Redemption," above.
1940 Act ATP Asset Coverage. The Fund is required under the Articles to
maintain 1940 Act ATP Asset Coverage as of the last business day of each month
in which any shares of ATP are outstanding. If the
69
<PAGE>
Fund fails to maintain 1940 Act ATP Asset Coverage and such failure is not cured
as of the last business day of the following month, the Fund will be required to
redeem certain shares of the ATP. See "Redemption."
On January 31, 1997, the 1940 Act ATP Asset Coverage was:
Value of Fund assets less
liabilities not constituting
senior securities [$278,347,919]
- ---------------------------- -------------- = [278%]
Senior securities $100,000,000
representing indebtedness ($0)
plus liquidation value
of the ATP
Notices. The Fund is required to deliver a certificate with respect to
the calculation of the ATP Basic Maintenance Amount and the value of the
portfolio holdings of the Fund (a "ATP Basic Maintenance Certificate") to the
Auction Agent, and any rating agency which is then rating the ATP and which so
requires as of (a) any Valuation Date on which the Fund fails to have Eligible
Assets with an aggregate Discounted Value at least equal to 125% of the ATP
Basic Maintenance Amount, (b) every fourth Valuation Date for the first year
following the date of original issue of the ATP, (c) if the Fund fails to have
Eligible Assets with an aggregate Discounted Value at least equal to the ATP
Basic Maintenance Amount, (d) the Valuation Date next following the date of
redemption by the Fund of shares of Common Stock which, together with all other
shares of Common Stock purchased during the six months preceding such date,
equal in excess of 1,000,000 shares of Common Stock, and (e) the last Valuation
Date of each fiscal quarter and a Valuation Date during such fiscal quarter
randomly selected by the Fund's independent accountants as provided below, (f) a
business day on or before any cure date relating to the Fund's cure of a failure
to have Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount, and at any time upon the request of a rating
agency then rating the ATP. Such certificate must be accompanied by a
certificate from the Fund's accountants certifying as to the accuracy of the
Fund's calculations.
The Fund is required to deliver to the Auction Agent, and any rating
agency which is then rating the ATP and which so requires, a certificate with
respect to the calculation of the 1940 Act ATP Asset Coverage and the value of
the portfolio holdings of the Fund (a "1940 Act ATP Asset Coverage Certificate")
as of (a) the last Valuation Date of each quarter thereafter, and (b) as of the
business day on or before the Asset Coverage Cure Date relating to the failure
to satisfy the 1940 Act Asset Coverage. Such 1940 Act ATP Asset Coverage
Certificate shall be delivered on or before the third business day after the
relevant Valuation Date or the Asset Coverage Cure Date. Such certificate must
be accompanied by a certificate from the Fund's accountants certifying as to the
accuracy of the Fund's calculations.
In the event that a ATP Basic Maintenance Certificate or 1940 Act ATP
Asset Coverage Certificate or the applicable accountant's certificates with
respect thereto are not delivered within the time periods specified in the
Articles, the Fund shall be deemed to have failed to have Eligible Assets with
an aggregate Discounted Value at least equal to the ATP Basic Maintenance Amount
or the 1940 Act ATP Asset Coverage, as the case may be, as of the related
Valuation Date, and such failure shall be deemed not to have been cured as of
such cure date for purposes of the mandatory redemption provisions.
Liquidation
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of ATP and any other shares
ranking in parity with the ATP, in preference to the holders of Common Stock,
will be entitled to payment, out of the assets of the Fund or the proceeds
thereof available for distribution to stockholders after satisfaction of claims
of creditors of the Fund, of a liquidation distribution in the amount of $50,000
per share, plus an amount equal to accumulated dividends (whether or not earned
or declared but without interest) to the date payment of such distribution is
made in full or a sum sufficient for the payment thereof is set apart with the
paying agent. However, holders of ATP will not be entitled to any premium to
which such holder would be entitled to receive upon redemption of such shares of
ATP. After
70
<PAGE>
payment of the full amount of such liquidation distribution, the owners of the
ATP will not be entitled to any further participation in any distribution of
assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the assets of the Fund or proceeds thereof available
for distribution to stockholders after satisfaction of claims of creditors of
the Fund shall be insufficient to pay in full the liquidation distribution to
which owners of any shares of ATP are entitled, such assets or the proceeds
thereof will be distributed among the owners of the shares of ATP and any other
shares ranking on a parity therewith, ratably.
In the event of any such liquidation, dissolution or winding up of the
Fund, whether voluntary or involuntary, until payment in full is made to the
owners of the shares of ATP of the liquidation distribution to which they are
entitled, no dividend or other distribution shall be made to the holders of
Common Stock and no purchase, redemption or other acquisition for any
consideration by the Fund shall be made in respect of the Common Stock.
A consolidation or merger of the Fund with or into any other company or
companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any designation, right,
preference or limitation of the ATP or any shares issuable in exchange for
shares of ATP in any such consolidation or merger.
To the extent other shares of ATP are issued by the Fund, including
additional series of ATP or additional shares of the ATP Series A or the ATP
Series B, such shares will share equally and on a pro rata basis with the ATP
then outstanding in connection with any liquidation, dissolution or winding up
of the Fund.
Voting Rights
Except as otherwise indicated herein and except as otherwise required by
applicable law, holders of shares of ATP have equal voting rights with holders
of Common Stock (one vote per share) and vote together with holders of shares of
Common Stock as a single class. Under applicable rules of Exchange, the Fund is
currently required to hold annual meetings of stockholders.
In connection with the election of the Fund's Board, Holders of shares
of preferred stock, including the ATP, voting as a separate class, are entitled
to elect two of the Fund's Directors, and the remaining Directors will be
elected by holders of Common Stock and the holders of shares of preferred stock,
including the ATP, voting as a single class. In addition, if at any time
dividends on outstanding shares of ATP, including the ATP, shall be unpaid in an
amount equal to two full years' dividends thereon, then the number of members
constituting the Board shall automatically be increased by the smallest number
that, when added to the two Directors elected exclusively by the holders of
shares of preferred stock as described above, would constitute a majority of the
Board as so increased by such smallest number; and at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the holders of shares
of preferred stock, including the ATP, voting as a separate class, will be
entitled to elect the smallest number of additional Directors that, together
with the two Directors which such holders will be in any event entitled to
elect, constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding shares
of preferred stock, including the ATP, for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease, and the terms of office of
all of the additional Directors elected by the holders of shares of preferred
stock including the ATP (but not of the Directors with respect to whose election
the holders of Common Stock were entitled to vote or the two Directors the
holders of shares of preferred stock including the ATP, have the right to elect
in any event) will terminate automatically. Any shares of ATP issued after the
date hereof shall vote with the ATP as a single class on the matters described
above, and the issuance of any other shares of ATP by the Fund may reduce the
voting power of the ATP.
71
<PAGE>
The voting rights of the Common Stock are noncumulative, which means
that the holders of more than 50% of the shares of Common Stock and ATP voting
for the election of those Directors subject to election by the Common Stock and
ATP can elect 100% of the Directors subject to election by them if they choose
to do so, and, in such event, the holders of the remaining shares of Common
Stock and ATP voting for the election of Directors will not be able to elect any
Directors. The holders of the Common Stock vote as a single class with the
holders of the ATP on all matters except as described.
The rights of the holders of the Common Stock as set forth in the
Articles may not be modified by a vote of less than a majority of the shares of
Common Stock outstanding.
Also, the affirmative vote of the holders of a majority of the
outstanding preferred stock, including the ATP, voting as a class, is required
to (i) amend, alter or repeal any of the preferences, rights or powers of such
class so as to affect materially and adversely such preferences, rights or
powers; (ii) increase the authorized number of shares of ATP; (iii) create,
authorize or issue shares of any class of capital stock ranking senior to or on
a parity with the ATP with respect to the payment of dividends or the
distribution of assets, or any securities convertible into, or warrants, options
or similar rights to purchase, acquire or receive, such shares of capital stock
ranking senior to or on parity with the ATP or reclassify any authorized shares
of capital stock of the Fund into any shares ranking senior to or on parity with
the ATP (except that, the Board of Directors, without the vote or consent of the
holders of ATP, may from time to time authorize, create and classify, and the
Fund may from time to time issue, series or shares of preferred stock, including
ATP, ranking on a parity with the ATP with respect to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up to
the affairs of the Fund, subject to continuing compliance by the Fund with 1940
Act ATP Asset Coverage and ATP Basic Maintenance Amount requirements, or in
connection with a refinancing of the ATP); (iv) institute any proceedings to be
adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy
or insolvency proceedings against it, or file a petition seeking or consenting
to reorganization or relief under any applicable federal or state law relating
to bankruptcy or insolvency, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Fund or a substantial part of its property, or make any assignment for the
benefit of creditors, or, except as may be required by applicable law, admit in
writing its inability to pay its debts generally as they become due or take any
corporate action in furtherance of any such action; (v) create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust receipt
or other material encumbrance of any kind upon any of the Fund's assets as a
whole, except (A) liens the validity of which are being contested in good faith
by appropriate proceedings, (B) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) liens, pledges,
charges, security interests, security agreements or other encumbrances arising
in connection with any indebtedness permitted under clause (vi) below and (D)
liens to secure payment for services rendered including, without limitation,
services rendered by the Fund's custodian and the Auction Agent, or (vi) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money
or any direct or indirect guarantee of such indebtedness for borrowed money or
any direct or indirect guarantee of such indebtedness, except the Fund may
borrow from banks for temporary or emergency purposes or as may be permitted by
the Fund's investment restrictions; provided, however, that transfers of assets
by the Fund subject to an obligation to repurchase shall not be deemed to be
indebtedness for purposes of this provision to the extent that after any such
transaction the Fund has Eligible Assets with an aggregate Discounted Value at
least equal to the ATP Basic Maintenance Amount as of the immediately preceding
Valuation Date.
The affirmative vote of the Holders of a majority of the outstanding
shares of ATP, voting as a separate class, will also be required to approve any
plan of reorganization adversely affecting such shares or any action requiring a
vote of security holders under Section 13(a) of the 1940 Act including, among
other things, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Restrictions." The class vote of Holders of shares of ATP described above will
in each case be in addition to a separate vote of the requisite percentage of
shares of Common Stock necessary to authorize the action in question. In
addition, the affirmative vote of the holders of a majority of the outstanding
shares of each series of ATP, voting separately from any other series, shall be
required with respect to any matter that materially and adversely affects the
rights, preferences, or powers of such series in a manner different from that
72
<PAGE>
of other series of classes of the Fund's shares of capital stock. For purposes
of the foregoing, no matter shall be deemed to adversely affect any right,
preference or power unless such matter (i) alters or abolishes any preferential
right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish)
any restriction on transfer applicable to such series.
The Board of Directors may amend certain provisions of the Articles
without any vote or consent of the holders of ATP or any other stockholder of
the Fund. See "Rating Agency Guidelines" and Section 6(j), Part I of the form of
Articles filed as an Exhibit to the Registration Statement of which this
Prospectus is a part. Definitions and provisions in the Articles subject to
amendment by action of the Board (subject to rating agency approval) include the
following:
ATP Basic Maintenance Amount Maximum Applicable Rate
ATP Basic Maintenance Certificate Minimum Applicable Rate
Asset Coverage Cure Date Moody's Discount Factor
Deposit Securities Moody's Eligible Assets
Discounted Value Moody's Industry Classification
Exposure Period 1940 Act Asset Coverage Cure Date
Fitch Discount Factor 1940 Act ATP Asset Coverage
Fitch Eligible Assets Short Term Money Market
Fitch Industry Classification Instruments
Market Value (including certain Volatility Factor
provisions relevant to futures Last Paragraph of Section 12
and options transactions)
In addition, the Board of Directors may amend the definition of Maximum
Applicable Rate to increase the percentage amount by which the Reference Rate is
multiplied to determine the Maximum Applicable Rate shown therein without the
vote or consent of the holders of shares of the ATP, including the ATP, or any
other stockholder of the Fund and without confirmation of Moody's, Fitch or any
Other Rating Agency, after consultation with the Broker-Dealers.
The foregoing voting provisions will not apply with respect to the ATP
if, at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less
frequently than the close of trading on the Exchange (generally 4:00 p.m. New
York time) on the last business day of each week (generally Friday). It will be
determined by dividing the value of the net assets of the Fund (for the purpose
of determining the net asset value per share of the Common Stock, the value of
the Fund's net assets shall be deemed to equal the value of the Fund's assets
less (i) the Fund's liabilities, (ii) accumulated and unpaid dividends on the
outstanding ATP and (iii) the aggregate liquidation value (i.e., $50,000 per
share, plus accrued and unpaid dividends to the date of liquidation) of the
outstanding ATP) by the total number of shares of Common Stock outstanding. In
valuing the Fund's assets for all purposes other than the determination of the
Discounted Value of such assets pursuant to the investment guidelines of the
rating agencies then rating the ATP, portfolio securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, will be valued at the mean
between the most recently quoted bid and asked prices provided by the principal
market makers. The Fund has a pricing service agreement with each of [Kenny S&P
Evaluation Services and Merrill Lynch Capital Markets Securities Pricing
Service.] Any security or option for which the primary market is on an exchange
will be valued at the last sale price on such exchange on the day of valuation
or, if there was no sale on such day, the last bid price quoted on such day.
Options for which the primary market is not on an exchange or which are not
listed on an exchange will be valued at market value or fair value if no market
exists. Securities and assets for which market quotations are not readily
available will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the
73
<PAGE>
Fund. While no single standard for determining fair value exists, as a general
rule, the current fair value of a security would appear to be the amount which
the Fund could expect to receive upon its current sale. Some, but not
necessarily all, of the general factors which may be considered in determining
fair value include: (i) the fundamental analytical data relating to the
investments; (ii) the nature and duration of restrictions on disposition of the
securities; and (iii) an evaluation of the forces which influence the market in
which these securities are purchased and sold. Without limiting or including all
of the specific factors which may be considered in determining fair value, some
of the specific factors include: type of security, financial condition of the
issuer, cost at date of purchase, special reports prepared by analysts,
information as to any transaction or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be
valued at amortized cost if their term to maturity from the date of acquisition
by the Fund was less than 60 days or by amortizing their value on the 61st day
prior to maturity if their term to maturity from the date of acquisition by the
Fund was more than 60 days, unless this method is determined by the Board of
Directors not to represent fair value. Repurchase agreements will be valued at
cost plus accrued interest.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Fund distributes to stockholders substantially all of its net
investment income in monthly dividends on or about the last day of each month.
Capital gains, if any, net of capital losses, are distributed annually, with
such distribution to be declared in December of each year, or otherwise as
required by Treasury regulations then in effect. Stockholders are informed of
the tax consequences of the Fund's distributions after the end of the Fund's
fiscal year. See "Taxation."
Stockholders may elect to have all distributions of dividends and
capital gains paid in cash, which will be paid by check and mailed directly to
the stockholder by State Street Bank and Trust Company (the "Dividend Paying
Agent"). Stockholders who fail to elect not to participate in the Plan will have
all distributions from the Fund automatically reinvested by the Dividend Paying
Agent under the Automatic Dividend and Distribution Investment Plan (the
"Plan"). Stockholders may elect not to participate in the Plan and to have all
distributions of dividends and capital gains paid in cash by sending written
instructions to the Dividend Paying Agent at the address set forth below.
If the Directors of the Fund declare a dividend or determine to make a
capital gains distribution payable either in shares of the Fund or in cash, as
stockholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares. If the
market price of the shares on the payment date for the dividend or distribution
is equal to or exceeds their net asset value as determined on the payment date,
participants will be issued shares of the Fund at a value equal to the higher of
net asset value or 95% of the market price. If net asset value exceeds the
market price of the shares at such time, or if the Fund declares a dividend or
other distribution payable only in cash, the Dividend Paying Agent will, as
agent for Plan participants, buy shares in the open market, on the Exchange or
elsewhere, for the participants' accounts. If, before the Dividend Paying Agent
has completed its purchases, the market price exceeds the net asset value of the
shares of Common Stock, the average per share of Common Stock purchase price
paid by the Dividend Paying Agent may exceed the asset value of the shares,
resulting in the acquisition of fewer shares than if the dividend or
contribution had been paid in shares issued by the Fund.
In connection with the Offer, participants in the Fund's Dividend
Reinvestment Plan (the "Plan") will be issued Rights for the shares of Common
Stock held in their accounts in the Plan as of the Record Date. Participants
wishing to exercise such Rights must exercise such Rights in accordance with the
procedures set forth below in "Exercise of Rights" and "Payment for Shares."
Such Rights will not be exercised automatically by the Plan.
Participants in the Plan have the option of making additional cash
payments to the Dividend Paying Agent, quarterly, in any amount of $100 to $500
for investment in the Fund's shares. The Dividend Paying
74
<PAGE>
Agent uses all funds received from participants to purchase Fund shares in the
open market on or about the last day of each calendar quarter. Participant's
cash payments are also used to acquire Fund shares under the same procedure as
that used for reinvestment of dividends and distributions. To allow ample time
for receipt and processing by the Dividend Paying Agent, participants should
send voluntary cash payments to be received by the Dividend Paying Agent not
later than five business days before the last day of each calendar quarter. To
avoid unnecessary cash accumulations, cash payments received after that time and
cash payments received more than 30 days prior to these dates will be returned
by the Dividend Paying Agent and interest will not be paid on any uninvested
cash payments. A participant may withdraw a voluntary cash payment by written
notice, if the notice is received by the Dividend Paying Agent not less than 48
hours before such payment is to be invested. There is a $.75 fee for each cash
purchase under the Plan.
Participants in the Plan may withdraw from the Plan upon written notice
to the Dividend Paying Agent. When a participant withdraws from the Plan or upon
termination of the Plan as provided below, certificates for whole shares of
Common Stock credited to his account under the Plan will be issued and a cash
payment will be made for any fraction of a share of Common Stock credited to
such account.
The Dividend Paying Agent will maintain all stockholders' accounts in
the Plan and will furnish written confirmation of all transactions in the
account, including information needed by stockholders for tax records. Shares of
Common Stock in the account of each Plan participant (other than participants
whose shares of Common Stock are registered in the name of banks, brokers,
nominees or other third parties) will be held by the Dividend Paying Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy will include those shares of Common Stock purchased pursuant to the Plan.
In the case of stockholders such as banks, brokers or nominees which
hold shares of Common Stock for others who are the beneficial owners, the
Dividend Paying Agent administers the Plan on the basis of the number of shares
of Common Stock certified from time to time by the record stockholders as
representing the total amount registered in the record stockholder's name and
held for the account of beneficial owners who are to participate in the Plan.
Investors whose shares of Common Stock are held in the name of banks, brokers or
nominees must confirm with such entities that participation in the Plan is
possible. Those who participate in the Plan may subsequently elect not to
participate by notifying such entities.
There is no charge to participants for reinvesting dividends or
distributions, except for certain brokerage commissions, as described below. The
Dividend Paying Agent's fees for the handling of the reinvestment of dividends
and distributions will be paid by the Fund. There will be no brokerage
commissions charged with respect to shares issued directly by the Fund. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Dividend Paying Agent's open market purchases in connection
with the reinvestment of dividends or distributions.
Participants in the Plan should be aware that they will realize capital
gains and income for tax purposes upon dividends and distributions although they
will not receive any payment of cash. Experience under the Plan may indicate
that changes are desirable. Accordingly, the Fund reserves the right to amend or
terminate the Plan as applied to any dividend or distribution paid subsequent to
written notice of the change sent to the participants in the Plan at least 90
days before the record date for such dividend or distribution. The Plan also may
be amended or terminated by the Dividend Paying Agent on at least 90 days'
written notice to participants in the Plan. All correspondence or inquiries
concerning the Plan should be directed to State Street Bank and Trust Company,
Stock Transfer Department, P.O. Box 8200, Boston, Massachusetts 02266-8200 or by
telephone call to 1-800-426-5523.
CONVERSION TO OPEN-END STATUS AND REPURCHASE OF SHARES
Conversion to Open-End Status
The Fund's Board of Directors may elect at any time to submit to the
holders of the Common Stock and the ATP a proposal to convert the Fund to an
open-end investment company and in connection therewith to
75
<PAGE>
redeem or otherwise retire the ATP (subject to any Specific Redemption
Provisions) as would be required upon such conversion by the 1940 Act. In
determining whether to exercise its discretion to submit this issue to
stockholders, the Board of Directors would consider all factors then relevant,
including the relationship of the market price of the Common Stock to net asset
value, the extent to which the Fund's capital structure is leveraged and the
possibility of re-leveraging, the spread, if any, between yields on "high yield"
securities in the Fund's portfolio as compared to interest and dividend charges
on senior securities and general market and economic conditions. In addition to
any vote required by Maryland law, conversion of the Fund to an open-end
investment company would require the affirmative vote of the holders of a
majority (as defined in the 1940 Act) of each class of the shares entitled to be
voted on the matter. Stockholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less such
redemption charges, if any, as might be in effect at the time of redemption. If
the Fund converted to an open-end investment company, it could be required to
liquidate portfolio securities to meet requests for redemption, and the Common
Stock would no longer be listed on the Exchange. In the event the Fund converts
to open-end status, the Fund would only be able to borrow through bank
borrowings within certain limits and would not be allowed to have preferred
stock, thus requiring a redemption of the ATP.
Repurchase of Common Stock
Shares of closed-end management investment companies frequently trade at
a discount from net asset value but in some cases trade at a premium. In
recognition of the possibility that the Fund's Common Stock might similarly
trade at a discount, the Fund may from time to time take action to attempt to
reduce or eliminate a market value discount from net asset value by repurchasing
its Common Stock in the open market or by tendering for its own shares at net
asset value. There can be no assurance that the Board will, in fact, decide to
undertake either of these actions or, if undertaken, that such actions will
result in the Fund's Common Stock trading at a price which is equal to or
approximates its net asset value. The Board does not have a policy with respect
to a periodic consideration of the appropriateness of taking action to
repurchase or tender for the Fund's shares. In addition, the Board will not
necessarily announce when it has given consideration to these matters.
Notwithstanding the foregoing, so long as any shares of ATP are outstanding, the
Fund may not purchase, redeem or otherwise acquire any Common Stock unless (1)
all accumulated dividends on the ATP have been paid or set aside for payment
through the date of such purchase, redemption or other acquisition and (2) at
the time of such purchase, redemption or acquisition the ATP Basic Maintenance
Amount and the 1940 Act ATP Asset Coverage (determined after deducting the
acquisition price of the Common Stock) are met. Any tender offer will be made
and holders of Common Stock notified in accordance with the requirements of the
Securities Exchange Act of 1934 and the 1940 Act, either by publication or
mailing or both.
Although the Board of Directors believes that share repurchases and
tenders generally would have a favorable effect on the market price of the
Fund's Common Stock, it should be recognized that the acquisition of shares by
the Fund will decrease the total assets of the Fund and, therefore, have the
effect of increasing the Fund's expense ratio. In addition, any purchase by the
Fund of its Common Stock as at a time when the shares of ATP are outstanding
will increase the leverage applicable to the outstanding Common Stock then
remaining. Repurchases of Common Stock may result in the Fund being required to
redeem shares of ATP to satisfy asset coverage requirements.
CUSTODIAN, AUCTION AGENT, REGISTRAR,
TRANSFER AGENT AND PAYING AGENT
The Fund's securities and cash are held under a Custodian Agreement by
State Street Bank and Trust Company, whose principal place of business is
located at 225 Franklin Street, Boston, Massachusetts 02110. State Street Bank
and Trust Company is authorized to establish and has established separate
accounts in foreign currencies and to cause securities of the Fund to be held in
separate accounts outside the United States in the custody of non-U.S. banks.
Rules adopted under the 1940 Act permit the Fund to maintain its securities and
cash in the custody of certain eligible banks and securities depositories.
Pursuant to those rules, the Fund's portfolio of securities and cash, when and
if invested in securities of foreign countries, is held by its
76
<PAGE>
subcustodians who are approved by the Board of Directors of the Fund in
accordance with the rules of the SEC. Selection of the subcustodians is made by
the directors of the Fund following a consideration of a number of factors,
including, but not limited to, the reliability and financial stability of the
institution, the ability of the institution to capably perform custodial
services for the Fund, the reputation of the institution in its national market,
and the political and economic stability of the countries in which the
subcustodians will be located. In addition, the 1940 Act requires that foreign
subcustodians, among other things, have stockholder equity in excess of $200
million, have no lien on the Fund's assets and maintain adequate and accessible
records. State Street Bank and Trust Company serves as transfer agent, registrar
and dividend disbursing agent for the Fund's Common Stock.
Bankers Trust Company acts as the Registrar, Transfer Agent, Paying
Agent and Auction Agent for the ATP.
REPORTS TO STOCKHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to
stockholders, including a list of the portfolio investments held by the Fund.
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the Offer will be passed upon by
Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Richard E. Floor, a Director
and the Secretary of the Fund, is a partner of Goodwin, Procter & Hoar LLP
through a professional corporation. An opinion regarding the valid issuance of
the Common Stock and certain other matters of Maryland law will be rendered by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland. Goodwin, Procter & Hoar
LLP will rely as to matters of Maryland law upon such opinion.
EXPERTS
The audited balance sheet of the Fund, including the schedule of
investments, as of December 31, 1996, and the related statement of operations
for the year then ended, and the statement of changes in net assets for each of
the two years in the period then ended and the financial highlights for the
periods presented appearing in the Fund's Annual Report and incorporated herein
by reference to the extent and for the periods indicated in their report have
been audited by Arthur Andersen LLP, independent auditors, as set forth in their
report thereon incorporated herein by reference, and are included herein upon
the authority of said firm as experts in accounting and auditing in giving said
report.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith
is required to file reports, proxy statements and other information with the
Commission. Any such reports, proxy statements and other information can be
inspected without charge at the public reference facilities of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at Seven World Trade Center,
New York, New York 10048 and Suite 1400, 500 W. Madison Street, Chicago,
Illinois 60621-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in New
York, New York, and Chicago, Illinois, at prescribed rates. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
77
<PAGE>
Additional information regarding the Fund is contained in the
Registration Statement on Form N-2, including the Statement of Additional
Information comprising a part thereof and any amendments, exhibits and schedules
thereto, relating to such shares filed by the Fund with the Commission. This
Prospectus does not contain all of the information set forth in the Registration
Statement, including the Statement of Additional Information comprising a part
thereof and any amendments, exhibits and schedules thereto. For further
information with respect to the Fund and the shares offered hereby, reference is
made to the Registration Statement. Statements contained in this Prospectus as
to the contents of the Articles or any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
FINANCIAL STATEMENTS
The Fund's Annual Report, which includes financial statements and the
related report of Arthur Andersen LLP, independent public accountants, for the
fiscal year ended December 31, 1996, which accompanies this Prospectus, is
incorporated herein by reference with respect to all information other than the
information set forth in the Letter to Shareholders included therein. Any
statement contained in the Fund's Annual Report that was incorporated herein
shall be deemed modified or superseded for purposes of this Prospectus to the
extent a statement contained in this Prospectus varies from such statement. Any
such statement so modified or superseded shall not, except as so modified or
superseded, be deemed to constitute a part of this Prospectus. The Fund will
furnish, without charge, a copy of its Annual Report, upon written request to
the Fund at 10 Winthrop Square, Fifth Floor, Boston, Massachusetts or request by
phone at (617) 350-8610.
78
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
MOODY'S INVESTORS SERVICE
Long-Term Debt
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuations or protective elements may be of greater amplitude or
there may be other elements present which make long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are Baa rated are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Absence
of Where no rating has been assigned or where a rating has
Rating been suspended or withdrawn, it may be for reasons unrelated
to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities
or companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed, in which case the
rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
A-1
<PAGE>
Note Moody's applies numerical modifiers 1, 2 and 3 in each generic range
classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Short-Term Debt
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial
paper, bank deposits, bankers' acceptances and obligations to deliver foreign
exchange. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Preferred Stock
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
<PAGE>
FITCH
Investment Grade Bond Ratings
AAA Bonds considered to be investment grade and of the highest credit
quality. the obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonable foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short term debt of these
issuers is generally rated 'F--1+'.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. the likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+)
Minus(--) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the
'AAA' category.
NR Indicated that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.
Withdrawn A rating will be withdrawn when an issue natures or is called
or refinanced, and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive", indicating a potential upgrade, "Negative", for
potential downgrade, or "Evolving", where ratings may be
raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
Credit Trend Credit trend indicators are not predictions that any
rating change will occur, and have a longer-term time frame
than issuers placed on FitchAlert.
Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. the obligator's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
A-3
<PAGE>
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD,
DD, and D Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. 'DDD' represents
the highest potential for recovery on these bonds, and 'D'
represents the lowest potential for recovery.
Plus (+)
Minus (--) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the
'DDD', 'DD', or 'D'; categories.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally
Strong Credit
Quality Issues assigned this rating are regarded as having
the strongest degree of assurance for timely payment.
F-1 Very Strong
Credit Quality Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than
issues rated 'F-1+'.
F-2: Good
Credit Quality Issues assigned this rating have a
satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for
issues assigned 'F-1+' and 'F-1' ratings.
F-3 Fair
Credit Quality Issues assigned this rating have
characteristics suggesting that the degree of
assurance for timely payment is adequate, however,
near-term adverse changes could cause these
securities to be rated below investment grade.
F-5 Weak
Credit Quality Issues assigned this rating have
characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
D Default Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on
a letter of credit issued by a commercial bank.
Preferred Stock Ratings
Preferred stock ratings should be viewed in the universe of quality
(preferred and preference) and not in relationship to bonds. Although certain
preferred stock issues may carry the same rating as an issuer's bond
obligations, preferred stocks by definition are junior to debt obligations.
Preferred capital is basically permanent capital which in certain instances may
be retired via sinking funds or called. The rating of a preferred stock issue is
on indication of the company's ability to pay the preferred dividends and any
sinking fund obligations on a timely basis. Preferred dividends are payable only
when declared; they are not contractually guaranteed.
A-4
<PAGE>
AAA Preferred stock assigned this rating are the highest quality. Strong
asset protection, conservative balance sheet ratios, and positive
indications of continued protection of preferred dividend requirements
are prerequisites for an 'AAA' rating.
AA Preferred or preference issues assigned this rating are very high
quality. Maintenance of asset protection and dividend paying ability
appears assured but not quite to the extent of the 'AAA'
classification.
A Preferred or preference issues assigned this rating are good quality.
Asset protection and coverages of preferred dividends are considered
adequate and are expected to be maintained.
BBB Preferred or preference issues assigned this rating are reasonably safe
but lack the protections of the 'A' to 'AAA' categories. Current
results should be watched for possible signs of deterioration.
BB Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to aide
fluctuations. The longer term financial capacities of the enterprises
cannot be predicted with assurance.
B Issues assigned this rating are considered highly speculative. While
earnings should normally cover dividends, directors may reduce or omit
payment due to unfavorable developments, inability to finance, or wide
fluctuations in earnings.
CCC Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend
payments may be in arrears with the status of the current dividend
uncertain.
CC Dividends are not currently being paid and may be in arrears. The
outlook for future payments cannot be assured.
C Dividends are not currently being paid and may be in arrears. Prospects
for future payments are remote.
D Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
D Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
Plus (+)
Minus Plus and minus signs are used with a rating symbol to indicate the
(--) relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA', 'CCC', 'CC', 'C',
and 'D' categories.
Euro Issuers/Euro Dollars
These securities have not been and will not be registered under the
U.S. Securities Act of 1933. Any offer or sale of notes in the U.S. (including
its territories and possessions and all areas subject to it jurisdiction or to
nationals or residents thereof, including any corporation or other entity
created or organized therein) may constitute a violation of U.S. law.
Claims-Paying Ability Ratings
Fitch claims-paying ability ratings provide an assessment of an
insurance company's financial strength and, therefore, its ability to pay policy
and contract claims under the terms indicated. The rating does not apply to
non-policy obligations of the insurer, such as debt obligations (which are
addressed under Fitch's bond ratings), nor does it apply to the suitability or
terms of any individual policy or contract.
AAA The ability to pay claims is extremely strong for insurance companies
with this highest rating. Foreseeable business and economic risk
factors should not have any material adverse impact on the ability of
these insurers to pay claims. Profitability, overall balance sheet
strength, capitalization, and liquidity are all at very secure levels
and are unlikely to be affected by potential adverse underwriting,
investment, or cyclical events.
AA Insurance companies with this rating are very strong and only slightly
more susceptible to exhibiting any weakening of financial strength due
to adverse business and economic developments. Any foreseeable
deterioration in financial strength would still leave carriers in this
category with a strong claims-paying ability.
A Issuers in this category are strong companies with no immediate
expectations for encountering events significant enough to weaken their
claims-paying ability. However, major business or cyclical pressures
are more likely to have an adverse impact on profitability, liquidity,
and capitalization and, therefore, on the ability to pay claims.
BBB Companies in this category have adequate financial strength and
claims-paying capability. For insurers with this rating, longer-term
obligations would be more susceptible to claims-paying concerns under
adverse circumstances that for higher rated companies.
A-5
<PAGE>
BB For insurers rated in this category, the ability to pay claims is
vulnerable to company-specific adverse financial events or stressful
cyclical downturns. It will be more difficult for carriers with this
rating to maintain adequate claims-paying ability under severe business
and economic circumstances.
B There is significant risk that companies in this category will not be
able to pay claims when due. Liquidity and capital adequacy are likely
to be impaired under even moderately negative business and economic
developments.
CCC, CC,
and C Insurance companies with one of these ratings are considered very
weak with respect to their ability to pay claims. The carrier may be
under the supervision of a state insurance department and already may
not be making all policy claims payments in a timely fashion.
D Insurance carriers have been placed in liquidation by state insurance
departments and policy claims payments are being controlled, delayed,
or reduced.
Plus (+)
Minus (--) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the
'AAA' and 'D' categories.
Servicer Ratings
Servicers are key to maintaining the credit quality of a pool of
nonperforming commercial mortgages and real estate owned assets. In assessing
and analyzing a servicer's capabilities, Fitch reviews several key factors,
including the servicer's management team, organizational structure, track
record, and workout and asset disposition experience and strategies.
Superior Servicer considered to be of the highest quality. A servicer
in this category possesses a strong, seasoned management team,
extensive workout and disposition experience, and, typically,
significant financial resources.
Above Average Servicer considered to be of very high quality. A servicer in
this category possesses a strong management team, with good
workout and disposition experience, and may have significant
financial resources.
Average Servicer considered to be of high quality. A servicer in this
category possesses adequate workout and disposition experience
but may lack significant financial resources.
Below Average Servicer considered to be of acceptable, but sub-par,
quality. Senior management is relatively unseasoned, workout
experience is minimal, and typically lacks significant
financial resources.
Unacceptable Servicer unacceptable to Fitch. Use of such a servicer
probably would preclude Fitch's rating the transaction's debt
securities at 'BBB' or higher levels.
A-6
<PAGE>
STANDARD & POOR'S CORPORATION
Long-Term Debt
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a 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 the
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.
BB, B,
CCC,
CC,C Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
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.
C1 The rating C1 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
Standard & Poor's believes that such payments will be made during such
grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or
Minus (--) The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing
within the major rating categories.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
A-7
<PAGE>
Commercial Paper
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. The top two
categories are as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issued determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated B are regarded as having only a speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating 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 Standard & Poor's
believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investment. These ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by Standard
& Poor's from other sources it considers reliable. Standard & Poor's does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in or unavailability of such information or
based on circumstances.
Variable Rate Demand Bonds
Standard & Poor's assigns "dual" ratings to all long-term debt issues
that have as part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1") or if the nominal maturity is short, a rating of
"SP-1+/AAA" is assigned.
Municipal Notes
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the longer the final maturity relative
to other maturities the more likely it will be treated as a
note).
-- Source of payment (the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A-8
<PAGE>
Preferred Stock
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer
to meet the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for preferred stock in this category than for issues in the
'A' category.
BB,B Preferred stock rated 'BB', 'B', or 'CCC' is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations.
CCC 'BB' indicates the lowest degree of speculation and 'CCC' the highest
degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or
Minus (--) To provide more detailed indications of preferred stock
quality, the ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing
within the major rating categories.
A-9
<PAGE>
===============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Fund or the Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.
---------------------------
TABLE OF CONTENTS
Page
----
Summary..........................................
Fee Table........................................
Financial Information Summary....................
Capitalization and Information
Regarding Senior Securities....................
Net Asset Value and
Market Price Information.......................
The Offer........................................
Use of Proceeds..................................
The Fund.........................................
Investment Objective and Policies
Rating Agency Guidelines.........................
Risk Factors and Special Considerations
Management of the Fund...........................
Portfolio Maturity and Turnover..................
Taxation.........................................
Description of Capital Stock.....................
Determination of Net Asset Value.................
Dividends and Distributions;
Dividend Reinvestment Plan.....................
Conversion to Open-End Status and
Repurchase of Shares...........................
Custodian, Auction Agent, Registrar,
Transfer Agent and Paying Agent................
Reports to Stockholders..........................
Certain Legal Matters............................
Experts..........................................
Available Information............................
Financial Statements.............................
Appendix A.......................................A-1
-------------------
===============================================================================
===============================================================================
The New America
High Income Fund, Inc.
11,982,048 Transferable
Rights to Subscribe
for
11,982,048 Shares of
Common Stock
- ----------------
PROSPECTUS
- ----------------
February___,1997
===============================================================================
<PAGE>
THE NEW AMERICA HIGH INCOME FUND, INC.
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements
Financial Statements included in PART A (Prospectus) of this
Registration Statement:
Financial Highlights For Each Share of Common Stock
outstanding Throughout the Period (For the Years Ended
December 31, 1996, 1995, 1994, 1993, 1992, 1991, 1990 and
1989and For the Period from February 26, 1988
(Commencement of Operations) to December 31, 1988)
Schedule of Investments, December 31, 1996
Balance Sheet, December 31, 1996
Statement of Operations For the Year Ended December 31,
1996 Statement of Changes in Net Assets (For the Years
Ended December 31, 1996 and December 31, 1995) Statement
of Cash Flows For the year Ended December 31, 1996
Financial Highlights For Each Share of Common Stock
outstanding Throughout the Period (For the Years Ended
December 31, 1996, December 31, 1995, December 31, 1994,
December 31, 1993, December 31, 1992, December 31, 1991,
December 31, 1990 and December 31, 1989 and For the Period
from February 26, 1988 (Commencement of Operations) to
December 31, 1988) Notes to Financial Statements, December
31, 1996 Report of Independent Public Accountants
2. Exhibits
(a)(1) Articles of Amendment and Restatement of The New
America High Income Fund, Inc. dated as of February
19, 1988 together with First, Second and Third
Certificates of Changes of Definitions set forth
therein dated as of March 8, 1988, May 3, 1988 and
October 14, 1988, respectively. (iii)
(a)(2) Articles of Amendment of The New America High
Income Fund, Inc. dated as of June 15, 1989. (iii)
(a)(3) Articles of Amendment of The New America High
Income Fund, Inc., as filed with the State
Department of Assessments and Taxation of the State
of Maryland on December 28, 1993. (iii)
(a)(4) Articles Supplementary of The New America High
Income Fund, Inc. Establishing and Defining the
Rights and Preferences of Two Series of Shares of
Auction Term Preferred Stock, as filed with the
State Department of Assessments and Taxation of the
State of Maryland on December 29, 1993. (iii)
(a)(5) Certificate of Correction of The New America High
Income Fund, Inc., as filed with the State
Department of Assessments and Taxation of the State
of Maryland on February 1, 1996. (iii)
C-1
<PAGE>
(a)(6) Articles of Amendment of The New America High
Income Fund, Inc., as filed with the State
Department of Assessments and Taxation of the State
of Maryland on October 31, 1996. (iii)
(a)(7) Articles of Amendment of The New America High
Income Fund, Inc., as filed with the State
Department of Assessments and Taxation of the State
of Maryland on October 31, 1996. (iii)
(b) By-Laws, as amended, of the Registrant. (iii)
(c) Not applicable.
(d) Not applicable.
(e) Dividend Reinvestment Plan, as modified. (iii)
(f) Not applicable.
(g) Investment Advisory Agreement dated as of February
19, 1992 between the Registrant and Wellington
Management Company, LLP. (iii)
(h)(1) Underwriting Agreement dated December 20, 1993
between the Registrant and Bear, Stearns & Co. Inc.
with respect to the Auction Term Preferred Stock,
Series A and Series B, of the Registrant. (iii)
(h)(2) Form of Selected Dealer Agreement. (iii)
(i) Not applicable.
(j) Custodian Contract dated as of February 11, 1988
between the Registrant and State Street Bank and
Trust Company. (iii)
(k)(1) Registrar, Transfer Agency and Service Agreement
dated as of February 11, 1988 between the
Registrant and State Street Bank and Trust Company.
(iii)
(k)(2) Auction Agent Agreement dated as of January 4, 1994
between the Registrant and Bankers Trust Company
with respect to the Auction Term Preferred Stock,
Series A and Series B, of the Registrant. (iii)
(k)(3) Letter of Representation Agreements dated as of
January 4, 1994 among the Registrant, Bankers Trust
Company and The Depository Trust Company with
respect to the Auction Term Preferred Stock, Series
A and Series B, of the Registrant. (iii)
(k)(4) Broker-Dealer Agreement dated as of January 4, 1994
between the Registrant and Bear, Stearns & Co. Inc.
with respect to the Auction Term Preferred Stock,
Series A and Series B, of the Registrant. (iii)
(k)(5) Affirmation and Undertaking dated August 13, 1990
executed by certain directors and executive
officers of the Registrant. (i)
(k)(6) Agreement dated as of November 15, 1993 between the
Registrant and Ellen E. Terry. (ii)
C-2
<PAGE>
(k)(7) Agreement dated as of November 15, 1993 between the
Registrant and Paul E. Saidnawey. (ii)
(k)(8) Interest payment swap arrangement between the
Registrant and First National Bank of Boston, N.A.
(iii)
(k)(9) Engagement Letter between the Registrant and First
Albany Corporation. (iii)
(k)(10) Subscription Rights Agency Agreement dated January
31, 1997 between the Registrant and State Street
Bank and Trust Company.
(k)(11) Information Agency Agreement dated December 18,
1996 between Registrant and Corporate Investor
Communications, Inc.
(l) Opinion of Venable, Baetjer and Howard, LLP as to
legality of securities being registered and consent
to its use.
(m) Not applicable.
(n) Consent of Arthur Andersen LLP.
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Financial Data Schedule reflecting Registrant's
financial statements for the fiscal year ending
December 31, 1996.
(s) Powers of Attorney for Robert F. Birch, Richard E.
Floor, Bernard J. Korman, Ernest E. Monrad, Franco
Modigliani, and Ellen E. Terry (included as part of
the signature pages to this Registration
Statement). (iv)
- ---------------
Footnote
Reference Description
- -------- -----------
(i) Filed as an exhibit under Amendment No. 8 (filed June 21, 1990)
to the Registrant's Registration Statement on Form N-2,
Registration No. 33-18664, under the same exhibit number and
incorporated herein by reference.
(ii) Filed as an exhibit under Amendment No. 16 (filed December 7,
1993) to the Registrant's Registration Statement on Form N-2,
Registration No. 33-61674, under the same exhibit number and
incorporated herein by reference.
(iii) Filed as an exhibit to the Registrant's Registration Statement on
Form N-2 (filed December 11, 1996), Registration No. 333-17619,
under the same exhibit number and incorporated herein by
reference.
(iv) Filed as Exhibit (r) to the Registrant's Registration Statement
on Form N-2 (filed December 11, 1996), Registration No. 333-17619
and incorporated herein by reference.
Item 25: Marketing Arrangements
Not Applicable.
C-3
<PAGE>
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees.................. $19,289.00
New York Stock Exchange listing fee...................... 42,000.00
Printing and engraving expenses.......................... 33,500.00
Legal fees and expenses.................................. 77,500.00
Accounting fees and expenses............................. 22,000.00
Blue Sky filing fees and expenses........................ 0.00
Financial Adviser fee and expenses....................... 130,000.00
Subscription Agent fee and mailing expenses.............. 117,000.00
Information Agent fee and expenses....................... 22,500.00
Miscellaneous expenses................................... 36,211.00
Third Party Fee Waiver................................... ($100,000.00)
-----------
Total........................................... $ 400,000.00
==========
Item 27: Persons Controlled by or under Common Control with Registrant
None.
Item 28: Number of Holders of Securities
At October 31, 1996 the numbers of recordholders of shares of the
Registrant were as follows:
Number of
---------
Title of Class Record Holders
-------------- --------------
Common Shares, $.01 par value per share..................... 5,113
Series A Auction Term Preferred Stock, $1.00 par value
per share.............................................. 1
Series B Auction Term Preferred Stock, $1.00 par value
per share.............................................. 1
Item 29: Indemnification
Article V, paragraph (D) of the Registrant's Articles provides that the
Registrant shall indemnify its directors to the full extent permitted by the
Registrant's By-Laws and Maryland law.
Article V, Section 1 of the Registrant's By-Laws provides that the
Registrant shall indemnify its directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law and shall indemnify its officers to the same extent as its directors and to
such further extent as is consistent with law. Section 2-418 of the Maryland
General Corporation Law empowers a corporation, subject to certain limitations,
to indemnify its directors against judgments, penalties, fines, settlements, and
reasonable expenses (including attorneys' fees) actually incurred by the
director in connection with any suit or proceeding to which they are a party
unless it is established that the director's act or omission was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty, the director received an
improper personal benefit in money, property or services or, in a criminal
proceeding, the director had reasonable cause to believe the act or omission was
unlawful.
The Registrant's By-Laws further provide that the Registrant shall
indemnify its directors and officers who while serving as directors or officers
also serve at the request of the Registrant as a director, officer, partner,
trustee, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan to the fullest extent
consistent with law. The indemnification and other rights provided by the
Registrant's By-Laws continue as to a person who has ceased to be a director or
officer
C-4
<PAGE>
and shall inure to the benefit of the heirs, executors and administrators of
such a person, and do not protect any such person against any liability to the
Registrant or any stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office
("disabling conduct").
Under the Registrant's By-Laws, any current or former director or
officer of the Registrant seeking indemnification within the scope of the
By-Laws shall be entitled to advances from the Registrant for payment of the
reasonable expenses incurred by him in connection with the matter as to which he
is seeking indemnification in the manner and to the fullest extent permissible
under the Maryland General Corporation Law. The person seeking indemnification
must provide to the Registrant a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Registrant has
been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met. In
addition, at least one of the following additional conditions shall be met: (i)
the person seeking indemnification shall provide a security in form and amount
acceptable to the Registrant for his undertaking; (ii) the Registrant is insured
against losses arising by reason of the advance; or (iii) a majority of a quorum
of directors of the Registrant who are neither "interested persons" as defined
in Section 2(a)(19) of the 1940 Act nor parties to the proceeding
("disinterested non-party directors"), or independent legal counsel in a written
opinion, shall have determined, based on a review of the facts readily available
to the Registrant at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
At the request of any person claiming indemnification under the
Registrant's By-Laws, the Board of Directors shall determine, or cause to be
determined, in a manner consistent with the Maryland General Corporation Law,
whether the standards required by the By-Laws have been met. Indemnification
shall be made only following: (i) a final decision on the merits by a court or
other body before which the proceeding was brought that the person to be
indemnified was not liable by reason of disabling conduct or (ii) in the absence
of such a decision, a reasonable determination, based upon a review of the
facts, that the person to be indemnified was not liable by reason of disabling
conduct by (A) the vote of a majority of a quorum of disinterested non-party
directors or (B) an independent legal counsel in a written opinion.
Employees and agents who are not officers or directors of the
Registrant may be indemnified, and reasonable expenses may be advanced to such
employees or agents, as may be provided by action of the Board of Directors or
by contract, subject to any limitations imposed by the 1940 Act.
In connection with certain actions filed against the directors and
executive officers of the Registrant, the Registrant has, subject to the terms
and conditions outlined above, authorized the advancement of reasonable
attorneys' fees and related costs arising from the defense of such actions.
Under the terms of an Affirmation and Undertaking entered into by each of the
directors and executive officers, each such person has agreed to repay to the
Registrant all amounts advanced for expenses (including attorneys' fees) on his
or her behalf if it is ultimately determined that the director or executive
officer is not entitled to indemnification.
In addition to the foregoing, Article V(E) to Registrant's charter
provides as follows:
"(E) To the fullest extent that limitations on the liability
of directors and officers are permitted by the Maryland General
Corporation Law, as from time to time amended, no director or officer
of the Corporation shall have any liability to the Corporation or its
stockholders for damages. This limitation on liability applies to
events occurring at the time a person serves as a director or officer
of the Corporation whether or not such person is a director or officer
at the time of any proceeding in which liability is asserted. No
provision of this Article V(E) shall be effective to protect or purport
to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. No future amendment to this Article V(E)
shall affect any right of any person under this Article V(E) based on
any event, omission or proceeding prior to such amendment."
C-5
<PAGE>
Section 2-405.2 of the Maryland General Corporation Law together with
Section 5-349 of the Courts and Judicial Proceedings Article of the Maryland
Code provides that a charter provision limiting the liability of a director or
officer may not include a provision which limits or restricts the liability of a
director or officer to the corporation's stockholders to the extent it is proved
that the person actually received an improper personal benefit to the extent of
the value of such benefit or an adverse final adjudication is entered in a
proceeding based on a finding that the person's act or failure to act was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated.
As permitted by Section 2-418(k) of the Maryland General Corporation
Law, Article V, Section 3 of the Registrant's By-Laws provides that the
Registrant shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant or who, while a director, officer, employee or agent of the
Registrant, is or was serving at the request of the Registrant as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan against any liability asserted against and incurred by such person
in any such capacity or arising out of such person's positions.
The Investment Advisory Agreement between the Registrant and Wellington
Management Company, LLP provides that the Registrant will indemnify Wellington
Management Company, LLP for all liabilities and expenses, including defense
costs, in connection with any litigation pertaining to the period prior to
Wellington Management's relationship with the Registrant under such agreement,
other than liabilities resulting from willful misfeasance, bad faith or gross
negligence on the part of Wellington Management Company, LLP.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1940 Act and
will be governed by the final adjudication of such issues.
Item 30: Business and Other Connections of Investment Adviser
Wellington Management Company, LLP (the Registrant's investment
adviser), a Massachusetts limited liability partnership, is a registered
investment adviser primarily engaged in the investment advisory business.
Information as to the general partners of Wellington Management Company, LLP is
included in its Form ADV, as amended, filed with the Securities and Exchange
Commission (File No. 801-15908), and is incorporated herein by reference thereto
together with all amendments thereto subsequently filed, which amendments shall
be deemed to be incorporated by reference in this registration statement and be
a part hereof from the date of filing of such amendments to the extent permitted
by the applicable rules and regulations of the Securities and Exchange
Commission.
Item 31: Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
(17 CFR 270.31a-1 to 31a-3) promulgated thereunder are maintained at the offices
of the custodian of the Registrant at One Heritage Drive, North Quincy,
Massachusetts 02171, except that the corporate records of the Registrant
(including its Articles of Incorporation and By-Laws) are maintained at the
offices of the Registrant at 10 Winthrop Square, Fifth Floor, Boston,
Massachusetts 02110.
C-6
<PAGE>
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. The Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The Registrant undertakes:
a. to file, during any period in which offers or sales
are being made, a post-effective amendment to the
registration statement:
(1) to include any prospectus required by Section
10(a)(3) of the 1933 Act [15 U.S.C. 77j(a)(3)];
(2) to reflect in the prospectus any facts or events
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(3) to include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
b. that, for the purpose of determining any liability under
the 1933 Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
therein, and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof; and
c. to remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the Securities Act of 1933 shall be
deemed to be part of the Registration Statement as of the time it was
declared effective.
b. For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering thereof.
6. Not applicable.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement on Form N-2 to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Boston and the Commonwealth of Massachusetts, on
the 31st day of January, 1997.
THE NEW AMERICA HIGH INCOME
FUND, INC.
By: /s/ Robert F. Birch
-------------------
Robert F. Birch
President
Know all men by these presents that each person whose signature appears
below hereby severally constitutes and appoints Robert F. Birch and Ellen E.
Terry, and each of them singly, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution, for the undersigned and in the
undersigned's name, place and stead, in any and all capacities, to sign and
affix the undersigned's name to any and all amendments to this registration
statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing necessary or incidental
to the performance and execution of the powers herein granted, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-2 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert F. Birch President and Director January 31, 1997
- ----------------------------------------
Robert F. Birch (Principal Executive Officer)
/s/ Ellen E. Terry Vice President and Treasurer January 31, 1997
- ---------------------------------------- (Principal Financial and
Ellen E. Terry Accounting Officer)
* Director January 31, 1997
- ----------------------------------------
Joseph L. Bower
* Director January 31, 1997
- ----------------------------------------
Richard E. Floor
* Director January 31, 1997
- ----------------------------------------
Bernard J. Korman
* Director January 31, 1997
- ----------------------------------------
Franco Modigliani
* Director January 31, 1997
- ----------------------------------------
Ernest E. Monrad
<PAGE>
*By: /s/ Ellen E. Terry
- --------------------------
Ellen E. Terry
(Attorney-in-Fact under Powers of
Attorney incorporated herein by reference).
</TABLE>
<PAGE>
1933 Act File No. 333-17619
1940 Act File No. 811-5399
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 | |
Pre-Effective Amendment No. 1 |X|
--
Post-Effective Amendment No. | |
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 | |
Amendment No. 20 |X|
--------------------
THE NEW AMERICA HIGH INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
--------------------
EXHIBITS
===============================================================================
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number: Exhibit: Numbered Page:
--------------
1 Registrant's Annual Report for the fiscal year ended
December 31, 1996
K10 Subscription Rights Agency Agreement
K11 Information Agency Agreement
L Opinion of Venable, Baetjer and Howard, LLP as to the
legality of securities being registered and consent
to its use.
N Consent of Arthur Andersen LLP.
R Financial Data Schedule for the Registrant
(2)
Exhibit 1
January 17, 1997
Dear Shareholder:
Paralleling its performance during the first half of the year, the high yield
market again showed favorable total returns relative to the investment grade
fixed income market, although the margin of outperformance shrank from the
earlier period. The high yield market, as measured by the Lehman Brothers
High Yield Bond Index, returned 7.6% for the six months ended December 31,
1996, versus 4.9% for the Lehman Brothers Aggregate Index, a standard measure
of performance for the investment grade bond market. For the twelve month
period, the differential is quite dramatic: 11.3% versus 3.6%. The factors
that contributed to positive performance for the credit-driven high yield
market were generally offsets for the interest-rate driven investment grade
market; specifically, the economic environment proved to be healthier than
expected in 1996, thereby driving interest rates higher, but fostering a
conducive market environment for high yield companies.
In addition, demand for high yield securities from a broad array of
constituencies was exceptionally strong throughout the year, further
enhancing market conditions despite higher interest rates. In fact, through
the end of November, open-end mutual funds, which represent a key portion of
the high yield investor base, were the recipients of $13.3 billion in net
inflows, according to data compiled by the Investment Company Institute, a
record amount relative to prior years' experience. New issue supply of $77.5
billion (Credit Suisse/First Boston) for 1996 also ran at record levels, with
over half the issuance offered via Rule 144A. Looking forward, we expect
demand and supply to remain healthy, assuming no major dislocations in
interest rates or the stock market.
Our outlook on the general state of the economy remains favorable: growth
should be moderate, but not inflationary. Generically speaking, high yield
issuers should benefit from these positive operating conditions. One risk
that could develop is that corporations may become overly comfortable with
present conditions, and therefore rationalize unnecessary expenditures or
costly acquisitions. To the extent that high yield issuers use equity capital
as their source of funds, high yield investors should remain copacetic
nevertheless. The most pressing concern in the current environment has been
the availability of attractively valued merchandise, given the positive
factors cited above.
During 1996, the genre of new issuers in the high yield market changed
somewhat. According to data compiled by Credit Suisse/First Boston, one-third
of all new issues in 1996 was derived from companies involved in or related
to the "information superhighway." Many of these issues are deferred interest
securities (e.g., bonds which have no initial cash coupon). To date, we have
generally avoided investment in this sector for several reasons. First, many
of these issuers do not generate positive cash flow from operations given the
start-up nature of their businesses, such as wireless cable television or
personal communications services. Second, many of these industries have not
been tested commercially and the ultimate consumer demand for these services
is unknown. Third, at present valuations, we have not felt that the
risk/reward trade-off for these instruments has been attractive.
Nevertheless, these types of companies were active issuers in 1996, and it
will be interesting to see if this venture capital venue continues in 1997.
The Fund's total returns, based on net asset value and reinvestment of
dividends, are shown below for the periods ended December 31, 1996. (We also
include performance of the shares based on stock price and dividend income.)
We would note that the Fund remains highly leveraged. Leverage amplifies the
Fund's
1
<PAGE>
returns both on the upside and on the downside; therefore, holding other
factors constant, a leveraged portfolio should outperform in a strong market
environment and underperform in a weak market environment.
<TABLE>
<CAPTION>
Total Returns for the Periods Ended
December 31, 1996
--------------------------------------------------
Six Months One Year Three Years
------------- ----------- -----------------------
Cumulative Avg. Annual
---------- -----------
<S> <C> <C> <C> <C>
New America High Income Fund (NAV and Dividends) 12.1% 16.7% 39.5% 11.7%
Lipper Closed-End Fund Leveraged High Yield Average 9.6 15.2 33.9 10.2
New America High Income Fund (Stock and Dividends) 6.4 19.9 41.0 12.1
</TABLE>
Source: Lipper Analytical Services, Inc., Bloomberg, and New America
The Fund's stock closed the quarter at $5.125 per share. This price
represented a premium of 3.7% to the Fund's net asset value of $4.94 per
share.
The Fund remains highly diversified with holdings in 132 different issuers.
As of December 31, 1996, the average quality of the Fund's investment
portfolio was B1/B+. In addition, the average effective yield, maturity and
duration (all of which incorporate potential call expectations, and are
therefore sensitive to changes in market conditions and interest rates) of
the Fund's holdings were 9.0%, 5.7 years and 3.8 respectively at year end.
Thank you for your interest in The New America High Income Fund.
Sincerely yours,
/s/ Catherine Smith /s/ Robert F. Birch
Catherine Smith Robert F. Birch
Senior Vice President President
Wellington Management Company, LLP The New America High Income Fund, Inc.
2
<PAGE>
The New America High Income Fund, Inc.
Schedule of Investments -- December 31, 1996 (Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating (Note 1(a))
- --------------------------------------------------------- -------- -----------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- 91.55% (e)
Aerospace and Defense -- 7.43%
$3,200 Howmet Corporation, Senior Subordinated Notes,
10%, 12/01/03 B2 $ 3,496
1,250 K&F Industries, Inc., Senior Secured Notes,
11.875%, 12/01/03 B1 1,347
2,500 K&F Industries, Inc., Senior Subordinated
Notes, Series B, 10.375%, 09/01/04 B2 2,637
3,065 Moog, Inc., Senior Subordinated Notes, Series
B, 10%, 05/01/06 B2 3,218
615 Newport News Shipbuilding Inc., Senior Notes,
8.625%, 12/01/06 (i) Ba2 630
1,460 Northrop Grumman Corporation, Debentures,
9.375%, 10/15/24 Baa3 1,614
3,000 Rohr, Inc., Senior Notes, 11.625%, 05/15/03 Ba3 3,307
4,245 Wyman-Gordon Company, Senior Notes, 10.75%,
03/15/03 Ba3 4,569
-----------
20,818
-----------
Automobile -- 5.91%
4,000 Collins & Aikman Products Co., Senior
Subordinated Notes, 11.50%, 04/15/06 B3 4,360
1,250 Delco Remy International, Inc., Senior
Subordinated Notes, 10.625%, 08/01/06 (i) B2 1,316
500 Exide Corporation, Senior Notes, 10%, 04/15/05 B1 519
1,900 Exide Corporation, Senior Notes, 10.75%,
12/15/02 B1 1,986
960 Hayes Wheels International, Inc., Senior
Subordinated Notes, 11%, 07/15/06 B3 1,048
1,000 Lear Seating Corporation, Senior Subordinated
Notes, 11.25%, 07/15/00 Ba3 1,026
750 Lear Seating Corporation, Subordinated Notes,
8.25%, 02/01/02 B1 756
$2,000 Penda Corporation, Senior Notes, Series B,
10.75%, 03/01/04 B2 $ 1,955
3,500 Walbro Corporation, Senior Notes, Series B,
9.875%, 07/15/05 Ba3 3,605
-----------
16,571
-----------
Banking -- 2.74%
500 Anchor Bancorp, Inc., Senior Notes, 8.9375%,
07/09/03 Ba3 513
510 Chevy Chase Bank, F.S.B., Subordinated
Debentures, 9.25%, 12/01/08 B1 520
1,250 Dime Bancorp, Inc., Senior Notes, 10.50%,
11/15/05 Ba3 1,377
325 First Nationwide Escrow Corp., Senior
Subordinated Notes, 10.625%, 10/01/03 (i) Ba3 351
2,000 First Nationwide (Parent) Holdings, Senior
Notes, 12.50%, 04/15/03 B2 2,240
1,500 FirstFed Financial Corp., Notes, 11.75%,
10/01/04 B2 1,530
2,064 WestFed Holdings, Inc., Split Coupon Senior
Debentures, 15.50%, 09/15/99 (a)(c) (f) 1,135
-----------
7,666
-----------
Beverages, Food and Tobacco -- .49%
1,350 GRUMA, S.A. de C.V., Notes, 9.75%, 03/09/98 (f) 1,384
-----------
Buildings and Real Estate -- 3.22%
1,170 Associated Materials Incorporated, Senior
Subordinated Notes 11.50%, 08/15/03 B3 1,193
500 Del Webb Corporation, Senior Notes, 10.875%,
03/31/00 Ba3 515
1,750 Del Webb Corporation, Senior Subordinated
Debentures, 9%, 02/15/06 B2 1,706
2,500 Kaufman and Broad Home Corporation, Senior
Subordinated Notes, 9.625%, 11/15/06 Ba3 2,506
3,000 Toll Corp., Senior Subordinated Notes, 10.50%,
03/15/02 Ba3 3,112
-----------
9,032
</TABLE>
The accompanying notes are an integral
part of these financial statements.
3
<PAGE>
The New America High Income Fund, Inc.
Schedule of Investments -- December 31, 1996 -- (Dollar Amounts in Thousands)
Continued
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating (Note 1(a))
- --------------------------------------------------------- -------- -----------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- continued
Chemicals, Plastics and Rubber -- 3.89%
$1,540 Acetex Corporation, Senior Secured Notes,
9.75%, 10/01/03 B1 $ 1,532
1,000 General Chemical, Senior Subordinated Notes,
9.25%, 08/15/03 B2 1,022
2,500 Great Lakes Carbon Corporation, Senior Secured
Notes, 10%, 01/01/06 Ba3 2,678
1,000 Harris Chemical North America, Inc., Senior
Secured Discount Notes, 10.25%, 07/15/01 B2 1,039
1,500 Rexene Corp., Senior Notes, 11.75%, 12/01/04 B1 1,684
1,350 Sterling Chemicals, Inc., Senior Subordinated
Notes, 11.75% 08/15/06 B3 1,431
535 Texas Petrochemicals Corporation, Senior
Subordinated Notes, 11.125%, 07/01/06, B3 575
825 UCAR Global Enterprises Inc., Senior
Subordinated Notes, 12%, 01/15/05 B1 951
-----------
10,912
-----------
Containers, Packaging and Glass -- 5.99%
1,250 Container Corporation of America, Senior Notes,
Series B, 10.75%, 05/01/02 B1 1,350
5,000 Container Corporation of America, Senior Notes,
9.75%, 04/01/03 B1 5,250
340 Domtar Inc., Notes, 8.75%, 08/01/06 Ba1 360
460 Grupo Industrial Durango, S.A. de C.V. Notes,
12.625%, 08/01/03 B1 501
1,500 Owens-Illinois, Inc., Senior Debentures, 11%,
12/01/03 Ba3 1,669
1,750 Rainy River Forest Products Inc., Senior
Secured Notes, 10.75%, 10/15/01 Ba1 1,886
845 Repap New Brunswick Inc., First Priority Senior
Secured Notes, 9.875%, 07/15/00 B1 862
$ 390 Repap New Brunswick, Inc., Second Priority
Senior Secured Notes, 10.625%, 04/15/05 B3 $ 406
300 Silgan Corporation, Senior Subordinated Notes,
11.75%, 06/15/02 B3 320
138 Silgan Holdings Inc., Senior Discount
Debentures, 13.25%, 12/15/02 (g) B3 139
3,000 Tembec Finance Corp., Senior Notes, 9.875%,
09/30/05 B1 2,805
1,150 S.D. Warren Company, Senior Subordinated Notes,
Series B, 12%, 12/15/04 B1 1,242
-----------
16,790
-----------
Diversified/Conglomerate Manufacturing -- 6.12%
1,750 American Standard Inc., Senior Subordinated
Discount Debentures, 10.50%, 06/01/05, (g) B1 1,628
875 Amtrol Acquisition, Inc., Senior Subordinated
Notes, 10.625%, 12/31/06 (i) B3 901
2,500 Bell & Howell Company, Senior Notes, 9.25%,
07/15/00 B1 2,544
3,915 Bell & Howell Holdings Company, Series B,
Senior Discount Debentures, 11.50%,
03/01/05, (g) B3 2,838
3,500 Essex Group, Inc., Senior Notes, 10%, 05/01/03 B1 3,588
2,290 Johnstown America Industries, Inc., Senior
Subordinated Notes, 11.75%, 08/15/05 B3 2,187
2,000 Specialty Equipment Companies, Inc., Senior
Subordinated Notes, 11.375%, 12/01/03 B3 2,185
1,250 Thermadyne Holdings Corp., Senior Notes,
10.25%, 05/01/02 B1 1,281
-----------
17,152
-----------
Diversified/Conglomerate Service -- .19%
500 Heritage Media Services, Inc., Senior Secured
Notes, 11%, 06/15/02 Ba1 531
</TABLE>
The accompanying notes are an integral
part of these financial statements.
4
<PAGE>
The New America High Income Fund, Inc.
Schedule of Investments -- December 31, 1996 -- (Dollar Amounts in Thousands)
Continued
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating (Note 1(a))
- --------------------------------------------------------- -------- -----------
<S> <C> <C>
CORPORATE DEBT SECURITIES -- continued
Ecological -- .34%
$1,000 EnviroSource, Inc., Senior Notes, 9.75%,
06/15/03 B3 $ 941
-----------
Electronics -- 2.41%
1,500 Advanced Micro Devices, Inc. Senior Secured
Notes, 11%, 08/01/03 Ba1 1,626
2,250 Digital Equipment Corporation, Debentures,
7.75%, 04/01/23 Ba1 1,930
500 Unisys Corporation, Senior Notes, 11.75%,
10/15/04 B1 534
2,500 Unisys Corporation, Senior Notes, Series B,
12%, 04/15/03 B1 2,663
-----------
6,753
-----------
Farming and Agriculture -- 2.10%
500 Agriculture Minerals And Chemicals Inc., Senior
Notes, 10.75%, 09/30/03 Ba3 544
3,000 Arcadian Partners, L.P., Senior Notes, Series
B, 10.75%, 05/01/05 B2 3,292
2,000 PMI Acquisition Corporation, Senior
Subordinated Notes, 10.25%, 09/01/03 B2 2,040
-----------
5,876
-----------
Finance -- .64%
1,750 Imperial Credit Industries, Inc., Senior Notes,
9.75%, 01/15/04 B1 1,794
-----------
Grocery -- 1.21%
335 Bruno's, Senior Subordinated Notes, 10.50%,
08/01/05 B3 355
750 Dominick's Finer Foods, Inc., Senior
Subordinated Notes, 10.875%, 05/01/05 B2 831
2,000 Smith's Food & Drug Centers, Inc., Senior
Subordinated Notes, 11.25%, 05/15/07 B3 2,210
-----------
3,396
-----------
Healthcare, Education and Childcare -- 4.65%
750 Beverly Enterprises, Inc., Senior Notes, 9%,
02/15/06 B1 754
$ 975 Dade International Inc., Senior Subordinated
Notes, 11.125%, 05/01/06 B3 $ 1,058
1,050 Graphic Controls Corporation, Senior
Subordinated Notes, Series A, 12%, 09/15/05 B3 1,163
1,500 Integrated Health Services, Inc., Senior
Subordinated Notes, 10.25%, 04/30/06 (i) B1 1,575
3,500 OrNda Healthcorp, Senior Subordinated Notes,
11.375%, 08/15/04 B2 4,042
2,675 Owens & Minor, Inc., Senior Subordinated Notes,
10.875%, 06/01/06 B1 2,869
1,000 Quorum Health Group, Inc., Senior Subordinated
Notes, 8.75%, 11/01/05 B1 1,025
500 Tenet Healthcare Corp., Senior Notes, 9.625%,
09/01/02 Ba1 548
-----------
13,034
-----------
Hotels, Motels, Inns and Gaming -- 2.31%
1,500 GB Property Funding Corp., First Mortgage
Notes, 10.875%, 01/15/04 B3 1,260
1,000 Harrah's Operating Inc., Senior Subordinated
Notes, 10.875%, 04/15/02 Ba3 1,055
1,250 Hollywood Casino Corporation, Senior Secured
Notes, 12.75%, 11/01/03 B2 1,200
3,000 Trump Atlantic City Associates, First Mortgage
Notes, 11.25%, 05/01/06 B1 2,970
-----------
6,485
-----------
Leisure, Amusement, Pictures, Entertainment -- 1.92%
750 Cobb Theatres, Senior Secured Notes, 10.625%,
03/01/03 B2 793
2,500 Muzak Limited Partnership, Senior Notes, 10%,
10/01/03 Ba3 2,556
2,000 Plitt Theatres, Inc., Senior Subordinated
Notes, 10.875%, 06/15/04 B3 2,015
-----------
5,364
</TABLE>
The accompanying notes are an integral
part of these financial statements.
5
<PAGE>
The New America High Income Fund, Inc.
Schedule of Investments -- December 31, 1996 -- (Dollar Amounts in Thousands)
Continued
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating (Note 1(a))
- --------------------------------------------------------- -------- -----------
<S> <C> <C>
CORPORATE DEBT SECURITIES -- continued
Machinery -- 1.23%
$ 525 IDEX Corporation, Senior Subordinated Notes,
9.75%, 09/15/02 Ba3 $ 549
1,000 The Interlake Corporation, Senior Notes, 12%,
11/15/01 B2 1,070
1,000 The Interlake Corporation, Senior Subordinated
Debentures, 12.125%, 03/01/02 B3 1,035
750 Mettler-Toledo, Inc., Senior Subordinated
Notes, 9.75%, 10/01/06 B2 788
-----------
3,442
-----------
Mining, Steel, Iron and Nonprecious Metals -- 9.81%
2,115 AK Steel Corporation, Senior Notes, 9.125%,
12/15/06 (i) Ba2 2,173
2,500 AK Steel Corporation, Senior Notes, 10.75%,
04/01/04 Ba2 2,731
4,500 Armco Inc., Senior Notes, 9.375%, 11/01/00 B2 4,523
3,000 Bethlehem Steel Corporation, Senior Notes,
10.375%, 09/01/03 B1 3,173
2,000 Companhia Vale do Rio Doce, Notes, 10%,
04/02/04 (i) (f) 2,067
725 Metalurgica Gerdau S.A., Notes, 11.125%,
05/24/04 (i) (f) 749
3,500 Northwestern Steel and Wire Company, Senior
Notes, 9.50%, 06/15/01 B1 3,430
2,000 NS Group, Inc., Senior Secured Notes, 13.50%,
07/15/03 B3 2,080
500 Oregon Steel Mills, Inc., First Mortgage Notes,
11%, 06/15/03 B1 535
1,750 Weirton Steel Corporation, Senior Notes,
10.875%, 10/15/99 B2 1,820
2,500 Weirton Steel Corporation, Senior Notes,
11.375%, 07/01/04 B2 2,538
1,685 Wheeling-Pittsburgh Corporation, Senior Notes,
9.375%, 11/15/03 B1 1,668
-----------
27,487
-----------
Oil and Gas -- 4.12%
$1,500 Energy Ventures, Inc., Senior Notes, 10.25%,
03/15/04 B1 $ 1,624
780 Flores & Rucks, Inc., Senior Subordinated
Notes, 9.75%, 10/01/06 B3 827
500 Global Marine Inc., Senior Secured Notes,
12.75%, 12/15/99 Ba1 537
625 Mesa Operating Company, Senior Subordinated
Discount Notes, 11.625%, 07/01/06 (g) B2 431
1,050 Mesa Operating Company, Senior Subordinated
Notes, 10.625%, 07/01/06 B2 1,139
2,500 Plains Resources Inc., Senior Subordinated
Notes, Series B, 10.25%, 03/15/06 B2 2,675
3,000 Santa Fe Energy Resources, Inc., Senior
Subordinated Debentures, 11%, 05/15/04 B1 3,300
1,000 Seagull Energy Corporation, Senior Subordinated
Notes, 8.625%, 08/01/05 B1 1,015
-----------
11,548
-----------
Personal and Nondurable Consumer Products -- 6.10%
1,000 American Safety Razor Company, Series B, Senior
Notes, 9.875%, 08/01/05 B1 1,063
1,700 Cabot Safety Acquisition Co., Senior
Subordinated Notes, 12.50%, 07/15/05 B3 1,895
400 Fort Howard Corp., Senior Notes, 8.25%,
02/01/02 B1 401
5,000 Fort Howard Corp., Senior Notes, 9.25%,
03/15/01 B1 5,212
1,000 Fort Howard Corp., Senior Subordinated Notes,
9%, 02/01/06 B2 1,010
5,000 Sweetheart Cup Company Inc., Guaranteed Senior
Subordinated Notes, 10.50%, 09/01/03 B3 5,200
2,250 Westpoint Stevens Inc., Senior Notes, 8.75%,
12/15/01 Ba3 2,312
-----------
17,093
</TABLE>
The accompanying notes are an integral
part of these financial statements.
6
<PAGE>
The New America High Income Fund, Inc.
Schedule of Investments -- December 31, 1996 -- (Dollar Amounts in Thousands)
Continued
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating (Note 1(a))
- --------------------------------------------------------- -------- -----------
<S> <C> <C>
CORPORATE DEBT SECURITIES -- continued
Personal Transportation -- 0.00%
$5,000 Braniff, Inc., Senior Reset Notes, 15%,
04/01/99 (a)(b)(c)(d) (f) $ 0
-----------
Printing, Publishing and Broadcasting -- 12.40%
3,800 Benedek Communications Corporation, Senior
Subordinated Discount Notes, 13.25%, 05/15/06
(g) B3 2,185
1,500 Big Flower Press, Inc. Senior Subordinated
Notes, 10.75% 08/01/03 B2 1,586
1,000 Cablevision Systems Corporation, Senior
Subordinated Debentures, 10.75%, 04/01/04 B2 1,040
2,750 Cablevision Systems Corporation, Senior
Subordinated Notes, 9.25%, 11/01/05 B2 2,723
715 Cablevision Systems Corporation, Senior
Subordinated Notes, 9.875%, 05/15/06 B2 733
2,500 Chancellor Broadcasting Company, Senior
Subordinated Notes, 9.375%, 10/01/04 B3 2,525
1,500 Comcast Corporation, Senior Subordinated
Debentures, 9.125%, 10/15/06 B1 1,538
850 Comcast Corporation, Senior Subordinated
Debentures, 9.375%, 05/15/05 B1 882
1,000 Galaxy Telecom Capital Corp., Senior
Subordinated Notes, 12.375%, 10/01/05 B3 1,065
1,000 Granite Broadcasting Corporation, Senior
Subordinated Debentures, 12.75%, 09/01/02 B3 1,090
1,000 Granite Broadcasting Corporation, Senior
Subordinated Notes, Series B, 10.375%, 05/15/05 B3 1,025
1,525 Jacor Communications Company, Senior
Subordinated Notes, 9.75%, 12/15/06 B2 1,554
750 JCAC, Inc., Senior Subordinated Notes, 10.125%,
06/15/06 B2 773
$1,000 Lenfest Communications, Inc., Senior Notes,
8.375%, 11/01/05 Ba3 $ 966
750 Marcus Cable Company, L.P. Senior Discount
Notes, 14.25%, 12/15/05, (g) Caa 530
500 Marcus Cable Operating Company, L.P., Senior
Subordinated Guaranteed Discount Notes, 13.50%,
08/01/04 (g) B3 410
2,500 Rifkin Acquisition Partners, L.L.L.P., Senior
Subordinated Notes, 11.125%, 01/15/06 B3 2,606
1,000 Tele-Communications, Inc., Senior Debentures,
9.25%, 01/15/23 Ba1 972
3,000 Videotron Ltd., Senior Subordinated Notes,
10.25%, 10/15/02 Ba3 3,187
3,000 World Color Press, Senior Subordinated Notes,
9.125%, 03/15/03 B1 3,030
500 Young Broadcasting, Inc., Senior Subordinated
Notes, 10.125%, 02/15/05 B2 512
3,500 Young Broadcasting, Inc., Senior Subordinated
Notes, 11.75%, 11/15/04 B2 3,815
-----------
34,747
-----------
Retail Stores -- .57%
1,500 Guitar Center Management Company, Inc., Senior
Notes, 11%, 07/01/06 B2 1,584
-----------
Telecommunications -- 2.28%
4,500 MobileMedia Communications, Inc., Senior
Subordinated Notes, 9.375%, 11/01/07 (c) C 1,215
750 Paging Network, Inc., Senior Subordinated
Notes, 11.75%, 05/15/02 B2 808
1,000 Rogers Cantel Mobile Inc., Senior Subordinated
Guaranteed Notes, 11.125%, 07/15/02 B2 1,060
</TABLE>
The accompanying notes are an integral
part of these financial statements.
7
<PAGE>
The New America High Income Fund, Inc.
Schedule of Investments -- December 31, 1996 -- (Dollar Amounts in Thousands)
Continued
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating (Note 1(a))
- --------------------------------------------------------- -------- -----------
<S> <C> <C>
CORPORATE DEBT SECURITIES -- continued
$3,000 Telefonica de Argentina S.A., Notes, 11.875%,
11/01/04 B1 $ 3,315
-----------
6,398
-----------
Textiles and Leather -- .59%
750 Dominion Textile (USA) Inc., Guaranteed Senior
Notes, 8.875%, 11/01/03 Ba2 752
885 Dominion Textile (USA) Inc., Guaranteed Senior
Notes, 9.25%, 04/01/06 Ba2 899
-----------
1,651
-----------
Utilities -- 2.89%
1,000 Cleveland Electric Illuminating Company, First
Mortgage Bonds, Series B, 9.50%, 05/15/05 Ba2 1,054
1,500 El Paso Electric Company, First Mortgage Bonds,
Series D, 8.90%, 02/01/06 Ba3 1,564
3,000 Texas-New Mexico Power Company, Secured
Debentures, 10.75%, 09/15/03 Ba3 3,216
1,200 Transportadora de Gas del Sur S.A., Medium Term
Notes, 7.75%, 12/23/98 (f) 1,200
1,000 Transportadora de Gas del Sur S.A., Notes,
10.25%, 04/25/01 B1 1,063
-----------
8,097
-----------
Total Corporate Debt Securities
(Total cost of $249,014) 256,546
-----------
- -------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS (FOREIGN) -- 1.87% (e)
Sovereigns -- 1.87%
2,500 Federal Republic of Brazil, Bonds, 6%, 09/15/13 B1 1,791
2,000 Republic of Argentina, Bonds, 8.375%, 12/20/03 B1 1,883
1,500 Republic of Argentina, Global Bonds, 11%,
10/09/06 B1 1,575
-----------
Total Government Obligations (Foreign) (Total
cost of $4,503) 5,249
-----------
</TABLE>
<TABLE>
<CAPTION>
Moody's Value
Shares Rating (Note 1(a))
- --------- ----------------------------------------------- -------- -----------
<S> <C> <C> <C>
PREFERRED STOCK -- 1.30% (e)
Banking -- .86%
2,200 California Federal Bank, Noncumulative
Perpetual, Series B, 10.625% b2 $ 242
41,435 Chevy Chase Preferred Capital Corporation,
Noncumulative Exchangeable, Series A, 10.375% b1 2,160
62,935 WestFed Holdings, Inc., Cumulative, Series A,
15.50% (a)(d)(h) ca 0
-----------
2,402
-----------
Printing, Publishing and Broadcasting -- .44%
12,500 Benedek Communications Corporation,
Exchangeable Redeemable, Senior, 15% b3 1,231
-----------
Total Preferred Stock
(Total cost of $8,316) 3,633
-----------
- -------------------------------------------------------------------------------
COMMON STOCK and WARRANTS -- .05% (e)
12,500 Benedek Communications Corporation, Warrants,
exp. 07/01/07 (b)(h) 38
17,431 Haynes Acquisition Corp. (b)(h) 70
42,222 Triangle Wire & Cable, Inc. (b)(h) 42
27,474 WestFed Holdings, Inc., Series B (a)(d)(h) 0
-----------
Total Common Stock and Warrants
(Total cost of $806) 150
-----------
Units
- -------------------------------------------------------------------------------
PARTNERSHIP AND TRUST INTEREST -- .00% (e)
1,000 Thompson Capital Partners, L.P. (b)(d)(h) 0
-----------
Total Partnership And Trust Interest (Total
Cost of $427) 0
-----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
8
<PAGE>
The New America High Income Fund, Inc.
Schedule of Investments -- December 31, 1996 -- (Dollar Amounts in Thousands)
Continued
<TABLE>
<CAPTION>
Principal Value
Amount (Note 1(a))
------------------------------------------------------------ -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 2.79% (e)
$7,824 J.P. Morgan Securities Repurchase Agreement,
6.60%, 01/02/97, (Collateral U.S. Treasury Bonds,
12.50%, 08/15/14, $5,170 principal) $ 7,824
-----------
Total Short-Term Investments (Total cost of
$7,824) 7,824
-----------
Total Investments (Total cost of $270,890) $273,402
===========
</TABLE>
(a) Denotes issuer is in bankruptcy proceedings.
(b) Restricted as to public resale. At the date of acquisition, these
securities were valued at cost. The total value of restricted securities
owned at December 31, 1996 was $150 or 0.05% of total assets.
(c) Nonincome-producing security which is on nonaccrual and which has
defaulted on interest payments.
(d) Security is valued at fair value using methods determined by the Board of
Directors. The total value of these securities at December 31, 1996 was
$0.
(e) Percentages indicated are based on total assets of $280,227.
(f) Not rated.
(g) Security is a step interest bond. Interest on this bond accrues based
upon the effective interest rate.
(h) Nonincome-producing.
(i) Securities are exempt from registration under Rule 144A of the Securities
Act of 1933. Such securities may be resold, normally to qualified
institutional buyers in transactions exempt from registration. See Note
1-a of the Notes to Financial Statements for valuation policy. Total
market value of Rule 144A securities amounted to $9,762 as of December
31, 1996.
The accompanying notes are an integral
part of these financial statements.
9
<PAGE>
The New America High Income Fund, Inc.
Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets: (Dollars in thousands, except per share amounts)
INVESTMENTS IN SECURITIES, at value (Identified cost of
$270,890, see Schedule of Investments and Notes 1 and 2) $273,402
RECEIVABLES:
Interest and dividends 6,287
OTHER ASSETS 13
PREPAID EXPENSES 25
DEFERRED OFFERING EXPENSES (Note 12) 500
-----------
Total assets $280,227
-----------
Liabilities:
PAYABLES:
Dividend payable on common stock $ 2,963
Other payables 104
ACCRUED EXPENSES (Note 3) 300
ACCRUED OFFERING EXPENSES (Note 12) 452
-----------
Total liabilities $ 3,819
-----------
Net Assets:
AUCTION TERM PREFERRED STOCK:
$1.00 par value, 1,000,000 shares authorized, 2,000 shares
issued and outstanding, liquidation preference of $50,000
per share
(Notes 4, 5, and 6) $100,000
-----------
COMMON STOCK:
$0.01 par value, 200,000,000 shares authorized,
35,716,882 shares issued and outstanding $ 357
CAPITAL IN EXCESS OF PAR VALUE 270,345
UNDISTRIBUTED NET INVESTMENT INCOME (Note 2) 371
ACCUMULATED NET REALIZED LOSS FROM SECURITIES TRANSACTIONS
(Note 2) (97,177)
NET UNREALIZED APPRECIATION ON INVESTMENTS 2,512
-----------
Net assets applicable to common stock (Equivalent to $4.94
per share, based on 35,716,882 shares outstanding) $176,408
-----------
Total Net Assets $276,408
===========
</TABLE>
Statement of Operations
For the Year Ended
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investment Income: (Note 1) (Dollars in thousands, except per
share amounts)
Interest income $26,444
Dividend income 131
Other Income 110
-----------
Total investment income $26,685
-----------
Expenses:
Cost of Leverage:
Preferred and auction fees $ 270
-----------
Total cost of leverage $ 270
-----------
Professional services expenses:
Management fees (Note 3) $ 851
Custodian and transfer agent fees 244
Legal fees 136
Audit fees 73
Litigation fees (Note 11) 24
Total professional services expenses $ 1,328
-----------
Administrative expenses:
General administrative fees $ 271
Directors' fees 172
Miscellaneous expenses 108
Shareholder meeting expenses 93
-----------
Total administrative expenses $ 644
-----------
Total expenses $ 2,242
-----------
Net investment income $24,443
-----------
Realized and Unrealized Gain on Investments:
Realized gain on investments, net $ 3,613
Change in net unrealized depreciation on investments 3,745
-----------
Net gain on investments $ 7,358
-----------
Net increase in net assets resulting from operations $31,801
-----------
Cost of Preferred Leverage:
Distributions to preferred stockholders $(5,645)
Net swap settlement receipts (Note 7) 131
-----------
Total cost of preferred leverage $(5,514)
-----------
Net increase in net assets resulting from operations less
distributions to preferred stockholders $26,287
===========
--------------------------------------------------------------------------
Amount Available for Distribution to Common Stockholders
Net investment income $24,443
Total cost of preferred leverage (5,514)
-----------
Net amount available for distribution to common stockholders $18,929
===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
10
<PAGE>
The New America High Income Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995
--------------- ----------------
<S> <C> <C>
From Operations: (Dollars in thousands, except per share amounts)
Net investment income $ 24,443 $ 22,802
Realized gain on investments 3,613 565
Change in net unrealized depreciation on investments 3,745 21,138
--------------- ----------------
Net increase in net assets resulting from operations $ 31,801 $ 44,505
--------------- ----------------
From Fund Share Transactions:
Net asset value of 738,917 shares and 705,577 shares issued to common
shareholders for reinvestment of dividends in 1996 and 1995, respectively $ 3,565 $ 3,230
--------------- ----------------
Increase in net assets resulting from fund share transactions $ 3,565 $ 3,230
--------------- ----------------
Distributions to Stockholders:
Preferred dividends ($2,823 and $3,126 per share, respectively) $ (5,645) $ (6,252)
Net swap settlement receipts 131 464
Common Dividends:
From net investment income ($.52 and $.50 per share, respectively) (18,078) (17,410)
In excess of net investment income ($0 and $.04 per share, respectively) (189) (1,304)
--------------- ----------------
Decrease in net assets resulting from distributions to stockholders $(23,781) $(24,502)
--------------- ----------------
Total net increase in net assets $ 11,585 $ 23,233
--------------- ----------------
Net Assets Applicable to Common and Preferred Stock:
Beginning of period $264,823 $241,590
--------------- ----------------
End of period (Including $398 and $(851) of undistributed net investment
income/(distributions in excess of net investment income) at
December 31, 1996 and December 31, 1995, respectively) $276,408 $264,823
=============== ================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
11
<PAGE>
The New America High Income Fund, Inc.
Financial Highlights
Selected Per Share Data and Ratios
For Each Share of Common Stock Outstanding Throughout the Period
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994 (c) 1993
--------- --------------------- ----------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 4.71 $ 4.13 $ 5.15 $ 4.32
--------- --------------------- ----------
NET INVESTMENT INCOME .69 .67 .72# .59
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS .22 .62 (.82)# .89
--------- --------------------- ----------
TOTAL FROM INVESTMENT OPERATIONS .91 1.29 (.10) 1.48
--------- --------------------- ----------
DISTRIBUTIONS:
Dividends from net investment income:
To preferred stockholders (including swap
settlement payments) (.16) (.17) (.17) (.05)
To common stockholders (.52) (.50) (.53) (.53)
Dividends in excess of net investment income:
To common stockholders -- (.04) -- (.07)
Returns of capital:
To common stockholders -- -- -- --
--------- --------------------- ----------
TOTAL DISTRIBUTIONS (.68) (.71) (.70) (.65)
--------- --------------------- ----------
Effect of rights offering and related expenses; and
Auction Term Preferred Stock offering costs and sales
load -- -- (.22) --
--------- --------------------- ----------
NET ASSET VALUE:
End of period $ 4.94 $ 4.71 $ 4.13 $ 5.15
========= ===================== ==========
PER SHARE MARKET VALUE:
End of period $ 5.13 $ 4.75 $ 4.00 $ 5.13
========= ===================== ==========
TOTAL INVESTMENT RETURN+ 19.89% 33.50% (11.88)% 40.08%
========= ===================== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Period From
February 26, 1988
(Commencement
For the Years Ended December 31, of Operations) to
1992 (a) 1991 1990 1989 December 31, 1988
----------- ------------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 3.79 $ 3.42 $ 6.23 $ 8.60 $ 9.25
----------- ------------------- ----------- ---------------------
NET INVESTMENT INCOME .57 .65 .92 1.54 1.42
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS .57 .38 (2.82) (2.26) (.66)
----------- ------------------- ----------- ---------------------
TOTAL FROM INVESTMENT OPERATIONS 1.14 1.03 (1.90) (.72) .76
----------- ------------------- ----------- ---------------------
DISTRIBUTIONS:
Dividends from net investment income:
To preferred stockholders (including swap
settlement payments) (.06) (.10) (.16) (.30) (.23)
To common stockholders (.55) (.56) (.75) (1.25) (1.18)
Dividends in excess of net investment income:
To common stockholders -- -- -- -- --
Returns of capital:
To common stockholders -- -- -- (.10) --
----------- ------------------- ----------- ---------------------
TOTAL DISTRIBUTIONS (.61) (.66) (.91) (1.65) (1.41)
----------- ------------------- ----------- ---------------------
Effect of rights offering and related expenses; and
Auction Term Preferred Stock offering costs and sales
load -- -- -- -- --
----------- ------------------- ----------- ---------------------
NET ASSET VALUE:
End of period $ 4.32 $ 3.79 $ 3.42 $ 6.23 $ 8.60
=========== =================== =========== =====================
PER SHARE MARKET VALUE:
End of period $ 4.13 $ 3.63 $ 2.50 $ 5.88 $10.00
=========== =================== =========== =====================
TOTAL INVESTMENT RETURN+ 29.70% 70.77% (47.94)% (30.04)% 13.28%
=========== =================== =========== =====================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
12
<PAGE>
The New America High Income Fund, Inc.
Financial Highlights
Selected Per Share Data and Ratios
For Each Share of Common Stock Outstanding Throughout the Period -- Continued
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994 (c) 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD,
APPLICABLE TO COMMON STOCK (b) $176,408 $164,823 $141,590 $130,673
=========== =========== =========== ===========
NET ASSETS, END OF PERIOD,
APPLICABLE TO PREFERRED STOCK (b) $100,000 $100,000 $100,000 $ 35,000
=========== =========== =========== ===========
TOTAL NET ASSETS, END OF PERIOD (b) $276,408 $264,823 $241,590 $165,673
=========== =========== =========== ===========
EXPENSE RATIOS:
Ratio of interest expense to
average net assets** -- -- .01% 1.42%
Ratio of preferred and other debt
expenses to average net assets** .10% .11% .13% .40%
Ratio of operating expenses to
average net assets** .73% .84% .75% 1.56%
Ratio of litigation settlement
expense to average net assets** -- .49% -- --
----------- ----------- ----------- -----------
RATIO OF TOTAL EXPENSES TO
AVERAGE NET ASSETS** .83% 1.44% .89% 3.38%
=========== =========== =========== ===========
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS** 9.05% 8.90% 9.06% 9.21%
PORTFOLIO TURNOVER RATE 53.45% 62.66% 58.56% 85.76%
</TABLE>
<TABLE>
<CAPTION>
For the Period From
February 26, 1988
(Commencement
For the Years Ended December 31, of Operations) to
1992 (a) 1991 1990 1989 December 31, 1988
----------- ----------- ----------- -------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD,
APPLICABLE TO COMMON STOCK (b) $107,897 $ 93,227 $ 83,813 $152,156 $202,363
=========== =========== =========== ===============================
NET ASSETS, END OF PERIOD,
APPLICABLE TO PREFERRED STOCK (b) $ 35,000 $ 35,000 $ 35,000 $ 58,500 $ 79,000
=========== =========== =========== ===============================
TOTAL NET ASSETS, END OF PERIOD (b) $142,897 $128,227 $118,813 $210,656 $281,363
=========== =========== =========== ===============================
EXPENSE RATIOS:
Ratio of interest expense to
average net assets** 2.95% 3.25% 4.17% 3.56% 3.29%*
Ratio of preferred and other debt
expenses to average net assets** .65% .78% .62% .24% .23%*
Ratio of operating expenses to
average net assets** 1.22% 1.19% 1.10% .69% .70%*
Ratio of litigation settlement
expense to average net assets** -- -- -- -- --
----------- ----------- ----------- -------------------------------
RATIO OF TOTAL EXPENSES TO
AVERAGE NET ASSETS** 4.82% 5.22% 5.89% 4.49% 4.22%*
=========== =========== =========== ===============================
RATIO OF NET INVESTMENT
INCOME TO AVERAGE NET ASSETS** 10.09% 12.62% 14.50% 14.48% 13.56%*
PORTFOLIO TURNOVER RATE 129.86% 121.15% 49.98% 65.39% 149.00%*
</TABLE>
(a) Prior to the appointment on February 19, 1992 of Wellington Management
Company, LLP, the Fund was advised by Ostrander Capital Management, L.P.
(b) Dollars in thousands.
(c) As discussed in Note 4 and Note 5, the Fund entered into a refinancing
transaction on January 4, 1994, and the per share data and ratios for the
year ended December 31, 1994 reflect this transaction.
* Annualized.
** Ratios calculated on the basis of expenses and net investment income
applicable to both the common and preferred shares relative to the
average net assets of both the common and preferred stockholders. The
expense ratio and net investment income ratio do not reflect the effect
of dividend payments (including swap settlement payments) to preferred
stockholders.
# Calculation is based on average shares outstanding during the indicated
period due to the per share effect of the Fund's June 1994 rights
offering.
+ Total investment return is calculated assuming a purchase of common stock
at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be
reinvested at prices obtained under the dividend reinvestment plan. This
calculation does not reflect brokerage commissions.
The accompanying notes are an integral
part of these financial statements.
13
<PAGE>
The New America High Income Fund, Inc.
Information Regarding
Senior Securities
<TABLE>
<CAPTION>
As of December 31,
1996 1995 1994 1993
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
TOTAL AMOUNT OUTSTANDING:
Notes $ - $ - $ - $ -
Preferred Stock 100,000,000 100,000,000 100,000,000 35,000,000
Short-term Loan -- -- -- 45,000,000
ASSET COVERAGE:
Per Note (1) $ - $ - $ - $ -
Per Preferred Stock Share (2) 138,204 132,411 120,795 473,351
Per $1,000 of Short-term Loan (1) -- -- -- 4,682
INVOLUNTARY LIQUIDATION PREFERENCE:
Preferred Stock Share (3) $ 50,000 $ 50,000 $ 50,000 $ 100,000
APPROXIMATE MARKET VALUE:
Per Note $ - $ - $ - $ -
Per Preferred Stock Share (3) 50,000 50,000 50,000 100,000
Per $1,000 of Short-term Loan -- -- -- 1,000
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
TOTAL AMOUNT OUTSTANDING:
Notes $45,490,000 $45,490,000 $47,990,000 $96,100,000 $105,000,000
Preferred Stock 35,000,000 35,000,000 35,000,000 58,500,000 79,000,000
Short-term Loan -- -- -- -- --
ASSET COVERAGE:
Per Note (1) $ 4,141 $ 3,819 $ 3,476 $ 3,192 $ 3,680
Per Preferred Stock Share (2) 408,277 366,363 339,466 360,096 356,156
Per $1,000 of Short-term Loan (1) -- -- -- -- --
INVOLUNTARY LIQUIDATION PREFERENCE:
Preferred Stock Share (3) $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
APPROXIMATE MARKET VALUE:
Per Note $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Per Preferred Stock Share (3) 100,000 100,000 100,000 100,000 100,000
Per $1,000 of Short-term Loan -- -- -- -- --
</TABLE>
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such amounts
by the number of Notes outstanding.
(2) Calculated by subtracting the Fund's total liabilities (including the
Notes but not including the Preferred Stock) from the Fund's total assets
and dividing such amount by the number of Preferred Shares outstanding.
(3) Plus accumulated and unpaid dividends.
The accompanying notes are an integral
part of these financial statements.
14
<PAGE>
The New America High Income Fund, Inc.
Notes to Financial Statements
December 31, 1996
(1) Significant Accounting and Other Policies
The New America High Income Fund, Inc. (the Fund) was organized as a
corporation in the state of Maryland on November 19, 1987 and is registered
with the Securities and Exchange Commission as a diversified, closed-end
investment company under the Investment Company Act of 1940. The Fund
commenced operations on February 26, 1988. The investment objective of the
Fund is to provide high current income while seeking to preserve
stockholders' capital through investment in a professionally managed,
diversified portfolio of "high yield" fixed-income securities.
The Fund invests primarily in fixed maturity corporate debt securities
that are rated less than investment grade. Risk of loss upon default by the
issuer is significantly greater with respect to such securities compared to
investment grade securities because these securities are generally unsecured
and are often subordinated to other creditors of the issuer and because these
issuers usually have high levels of indebtedness and are more sensitive to
adverse economic conditions, such as a recession, than are investment grade
issuers. In some cases, the collection of principal and timely receipt of
interest is dependent upon the issuer attaining improved operating results,
selling assets or obtaining additional financing.
See the schedule of investments for information on individual securities
as well as industry diversification and credit quality ratings.
The Fund's financial statements have been prepared in conformity with
generally accepted accounting principles that require the management of the
Fund to, among other things, make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted
in the investment company industry.
(a) Valuation of Investments--Investments for which market quotations are
readily available are stated at market value, which is determined by using
the mean of the most recently quoted bid and asked prices provided by a
principal market maker. Short-term investments having maturities of 60 days
or less are stated at amortized cost, which approximates market value.
Following procedures approved by the Board of Directors, investments for
which market quotations are not readily available (primarily fixed-income
corporate bonds and notes) are stated at fair value on the basis of
subjective valuations furnished by securities dealers and brokers.
Independent pricing services also provide market quotations based primarily
on quotations from dealers and brokers, market transactions, accessing data
from quotations services, offering sheets obtained from dealers and various
relationships between securities. Other investments, with a cost of
approximately $8,122,000 and a value of $0, are valued in good faith at fair
market value using methods determined by the Board of Directors.
(b) Interest and Dividend Income--Interest income is accrued on a daily
basis. Discount on short-term investments is amortized to investment income.
Market discounts or premiums on corporate debt securities are not amortized
for financial statement purposes. All income on original issue discount and
step interest bonds is accrued based on the effective interest method for
both financial reporting and tax reporting purposes as required by federal
income tax regulations. Dividend payments received in additional securities
are recorded on the ex-dividend date in an amount equal to the value of the
security on such date.
(c) Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code of 1986, as amended, applicable to
regulated
15
<PAGE>
The New America High Income Fund, Inc.
Notes to Financial Statements -- Continued
December 31, 1996
investment companies and to distribute substantially all of its taxable
income to its shareholders each year. Accordingly, no federal income tax
provision is required.
(2) Tax Matters and Distributions
At December 31, 1996, the total cost of securities (excluding temporary
cash investments) for federal income tax purposes was approximately
$263,066,000. Aggregate gross unrealized gain on securities in which there
was an excess of value over tax cost was approximately $14,833,000. Aggregate
unrealized loss on securities in which there was an excess of tax cost over
value was approximately $12,321,000. Net unrealized gain for tax purposes at
December 31, 1996 was approximately $2,512,000.
At December 31, 1996, the Fund had capital loss carryovers available to
offset future capital gain, if any, to the extent provided by regulations:
<TABLE>
<CAPTION>
Carryover Available Expiration Date
------------------------------------ ------------------------------------
<S> <C>
$3,833,267 December 31, 1997
56,935,249 December 31, 1998
34,425,546 December 31, 1999
2,226,638 December 31, 2002
------------------------------------
$97,420,700
====================================
</TABLE>
To the extent that capital loss carryovers are used to offset realized
capital gains, it is unlikely that gains so offset will be distributed to
shareholders.
Distributions on common stock are declared based upon annual projections
of the Fund's investment company taxable income. The Fund records all
dividends and distributions payable to shareholders on the ex-dividend date
and declares and distributes income dividends monthly.
In accordance with Statement of Position 93-2, the Fund has recorded
several reclassifications in the capital accounts. These reclassifications
have no impact on the net asset value of the Fund and are designed generally
to present undistributed net investment income or accumulated net realized
gains and losses on a tax basis, which is considered to be more informative
to the shareholder. As of December 31, 1996, the Fund has reclassified
approximately $587,000 primarily related to amortization of market discounts
on corporate bonds from accumulated net realized loss from securities
transactions to undistributed net investment income.
The difference between earnings for financial statement purposes and
earnings for tax purposes is primarily due to the tax treatment of the
amortization of market discounts on corporate bonds and the recognition of
interest income on corporate bonds that have defaulted on their interest
payments.
(3) Investment Advisory Agreement
Wellington Management Company, LLP, the Fund's Investment Advisor, earned
approximately $851,000 in management fees during the year ended December 31,
1996. Management fees paid by the Fund to Wellington are calculated at .50 of
1% (on an annual basis) of the average weekly value of the Fund's net assets
attributable to common stock ($176.4 million at December 31, 1996). At
December 31, 1996, the fee payable to the Investment Advisor was
approximately $75,000, which was included in accrued expenses on the
accompanying balance sheet.
(4) Repayment of Term Loan and Redemption of Taxable Auction Rate Preferred
Stock (TARPS)
The Fund completed a refinancing transaction on January 4, 1994 whereby
the Fund's existing senior securities were redeemed with the proceeds of the
offering of $100,000,000 of Auction Term Preferred Stock (ATP) Series A and B
(see Note 5). Accordingly, as of January 4, 1994, the Fund's Broker-Dealer
agreement with Bear Stearns for auctions on the TARPS was canceled, as was
the Surety Bond covering the TARPS.
In connection with the above refinancing, the Fund repaid the $45,000,000
term loan with The First National Bank of Boston (FNBB) in full, plus accrued
16
<PAGE>
The New America High Income Fund, Inc.
Notes to Financial Statements -- Continued
December 31, 1996
interest through January 4, 1994. The Fund also redeemed the 350 shares of
TARPS outstanding at December 31, 1993 for approximately $35,094,000,
including payment of accumulated and unpaid dividends thereon through January
4, 1994.
(5) Auction Term Preferred Stock (ATP)
On January 4, 1994, the Fund issued 1,200 shares of Series A ATP and 800
shares of Series B ATP. The underwriting discount of $1,500,000 and offering
expenses of $336,000 associated with the ATP offering were recorded as a
reduction of the capital in excess of par value on common stock. The ATP's
dividends are cumulative at a rate determined at an auction, and dividend
periods will typically be 28 days unless notice is given for periods to be
longer or shorter than 28 days. Dividend rates ranged from 5.37% to 6.25% for
the year ended December 31, 1996. The ATP is redeemable, at the option of the
Fund, or subject to mandatory redemption (if the Fund is in default of
certain coverage requirements) at a redemption price equal to $50,000 per
share, plus accumulated and unpaid dividends. The ATP has a liquidation
preference of $50,000 plus accumulated and unpaid dividends. The Fund is
required to maintain certain asset coverages with respect to the ATP under
the Fund's Charter and the 1940 Act.
(6) ATP Auction-Related Matters
Bankers Trust Company (BTC) serves as the ATP's auction agent pursuant to
an agreement entered into on January 4, 1994. The term of the agreement is
unlimited and may be terminated by either party. BTC may resign upon notice
to the Fund, such resignation to be effective on the earlier of the 90th day
after the delivery of such notice and the date on which a successor auction
agent is appointed by the Fund. The Fund may also replace BTC as auction
agent at any time.
After each auction, BTC as auction agent will pay to each broker-dealer,
from funds provided by the Fund, a service charge at the annual rate of .25
of 1% or such other percentage subsequently agreed to by the Fund and the
broker-dealers, of the purchase price of shares placed by such broker-dealers
at such auction. In the event an auction scheduled to occur on an auction
date fails to occur for any reason, the broker-dealers will be entitled to
service charges as if the auction had occurred and all holders of shares
placed by them had submitted valid hold orders. The Fund incurred
approximately $250,000 for service charges earned by Bear Stearns through
December 31, 1996. This amount is included under the caption preferred and
auction fees in the accompanying statement of operations.
(7) Interest Rate Swap
On February 3, 1994, the Fund entered into an interest rate swap
transaction with FNBB for the purpose of partially hedging its dividend
payment obligations with respect to the ATP through February 7, 1999. Under
the terms of the interest rate swap agreement, the Fund makes fixed payments
to FNBB at the rate of 5.25% per annum on the notional amount of the interest
rate swap ($65 million) and receives a variable payment from FNBB equivalent
to the 30-day, AA rated commercial paper rate in respect of such notional
amounts. Interest rates on the 30-day AA rated commercial paper ranged from
5.30% to 5.87% for the year ended December 31, 1996. The interest rate swap
agreement was effective on February 7, 1994 and terminates on February 7,
1999.
The Fund follows hedge accounting (off-balance-sheet) with respect to the
swap agreement and settles the net amount receivable or payable from each
party every 30 days. For the year ended December 31, 1996, the Fund's
obligation under the swap agreement was less than the amount receivable from
FNBB by approximately $131,000 and is included in the accompanying statement
of operations.
The Fund is exposed to credit loss in the event of nonperformance by
counterparties on interest rate swaps, but the Fund does not anticipate
nonperformance by any counterparty. While notional contract amounts are used
to
17
<PAGE>
The New America High Income Fund, Inc.
Notes to Financial Statements -- Continued
December 31, 1996
express the volume of interest rate swap agreements, the amounts potentially
subject to credit risk, in the event of nonperformance by counterparties are
substantially smaller. The estimated fair value of the interest rate swap
agreement at December 31, 1996 amounted to approximately $797,000 unrealized
gain. This value is not included in total net assets.
(8) Repurchase Agreements
At the time the Fund enters into a repurchase agreement, the value of the
underlying security, including accrued interest, will be equal to or exceed
the value of the repurchase agreement, and, in the case of repurchase
agreements exceeding one day, the value of the underlying security, including
accrued interest, is required during the term of the agreement to be equal to
or exceed the value of the repurchase agreement.
The underlying securities for all repurchase agreements are held in
safekeeping in an investment account of State Street Bank and Trust Company
(SSBT), the Fund's custodian, at the Federal Reserve Bank of Boston. In the
case of repurchase agreements exceeding one day, SSBT's Money Market
Department monitors the market value of the underlying securities by pricing
them daily, and in the event any individual repurchase agreement is not fully
collateralized, SSBT advises the Fund and additional collateral is obtained.
(9) Purchase and Sales of Securities
Purchases and proceeds of sales or maturities of long-term securities
during the year ended December 31, 1996 were as follows:
Purchases of securities $140,880,000
Sales of securities $139,371,000
(10) Certain Transactions
A partner of Goodwin, Procter & Hoar, general counsel to the Fund, serves
as a Director of the Fund. Fees earned by Goodwin, Procter & Hoar amounted to
approximately $130,000 for the year ended December 31, 1996. The Fund paid
approximately $145,000 during the year ended December 31, 1996 to two
officers of the Fund for the provision of certain administrative services.
(11) Litigation Settlement
On January 8, 1992, the United States District Court for the District of
Massachusetts dismissed, in their entirety, four separate actions filed in
each case against the Fund, its former Investment Advisor, certain of its
officers, its directors and certain other parties. The actions purported to
be class actions on behalf of the named plaintiffs and other persons
allegedly similarly situated who purchased common stock of the Fund within a
specified period. The actions alleged that the Fund and the other defendants,
including the Fund's underwriters, in connection with its February 1988
public offering, violated certain federal securities laws by reason of their
alleged failure to adequately disclose material facts in the Fund's
prospectus and/or other documents published by the Fund. Plaintiffs were
granted leave to amend their complaint, limited to certain disclosure
obligations under the Securities Act of 1933, and did so. All of the
defendants, including the Fund, jointly moved for summary judgment on July 8,
1992. By memorandum and order dated August 26, 1993, the court granted the
defendants' motion for summary judgment in favor of all defendants on all
claims and entered judgment for defendants on August 27, 1993, and the
plaintiffs appealed. On September 28, 1994, the United States Court of
Appeals for the First Circuit issued an opinion affirming the decision of the
district court in part and reversing it in part. The Court held that the
district court properly entered summary judgment for the defendants as to all
disclosure issues except one. It reversed the district court's decision with
respect to that one issue and remanded the case for further proceedings. The
one remaining issue is whether it was misleading to purchasers in the initial
public offering for the original prospectus to include certain statistics
regarding the average performance of the high yield bond market for a
ten-year period without also including different statistics, alleged by the
plaintiffs to exist and
18
<PAGE>
The New America High Income Fund, Inc.
Notes to Financial Statements -- Continued
December 31, 1996
to be material, for the six-year period prior to the offering. The defendants
jointly moved for summary judgment on this remaining issue on March 31, 1995.
On November 16, 1995, the parties executed a Stipulation and Agreement of
Compromise, Settlement and Release providing for the settlement of the
action. The settlement was approved by the Court pursuant to a Final Order
and Judgment entered on June 13, 1996. Pursuant to the settlement, the
defendants have created a Settlement Fund amounting in the aggregate to
$2,500,000 for distribution, after deduction of certain fees and expenses, to
a class consisting of all persons who purchased shares of the Fund's common
stock between February 19, 1988 and March 26, 1990, other than the
defendants. The Fund contributed $1,250,000 to the Settlement Fund on June
21, 1996, and the balance was contributed by certain of the underwriters of
the Fund's initial public offering. In addition, the Fund contributed $7,500
to a Notice and Administration Fund, to be used for mailing notice to class
members and other administrative purposes.
The Fund established a reserve for its share of the Settlement Fund and
charged $1,250,000 to operations for the year ended December 31, 1995. The
Fund charged $7,500 to operations for the year ended December 31, 1996 for
its share of the Notice and Administration Fund.
(12) Rights Offering
On December 11, 1996, the Fund filed a Registration Statement with the
Securities and Exchange Commission regarding a transferable rights offering
to the holders of the Fund's common stock. Under the expected terms of the
offering, as described in the Registration Statement, the Fund will issue to
its common stockholders rights to subscribe for an aggregate of approximately
11,982,000 shares of the Fund's common stock. Each stockholder will be issued
one right for each three full shares of common stock owned on the record
date. The method of pricing and the record date will be determined and
announced shortly before the commencement of the offering, which the Fund
presently anticipates will occur in February 1997. Deferred offering expenses
of approximately $500,000 will be netted against the rights offering
proceeds. At December 31, 1996, the Fund had approximately $452,000 in
outstanding liabilities associated with the offering.
The rights offering will entitle shareholders, and other rightholders
purchasing rights in the market, to acquire one new share of stock for each
right held. In addition, holders of rights who subscribe for the maximum
number of shares to which they are entitled will be permitted to subscribe
for additional shares. The Fund intends to apply to list the rights for
trading on the New York Stock Exchange.
From time to time in the future, the Fund may effect redemptions and/or
repurchases of its ATP as provided in the applicable constituent instruments
or as agreed upon by the Fund and sellers. The Fund intends to effect such
redemptions and/or repurchases to the extent necessary to maintain applicable
asset coverage requirements.
19
<PAGE>
The New America High Income Fund, Inc.
Directors
Robert F. Birch
Joseph L. Bower
Richard E. Floor
Bernard J. Korman
Franco Modigliani
Ernest E. Monrad
Officers
Robert F. Birch - President
Ellen E. Terry - Vice President, Treasurer
Richard E. Floor - Secretary
Investment Advisor
Wellington Management Company, LLP
75 State Street
Boston, MA 02109
Administrator
The New America High Income Fund, Inc.
Ten Winthrop Square
Boston, MA 02110
(617) 350-8610
Custodian and Transfer Agent
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
(617) 328-5000 ext. 6406
(800) 426-5523
Listed: NYSE
Symbol: HYB
Independent Public Accountants
Arthur Andersen LLP
Boston, MA
20
<PAGE>
The New America High Income Fund, Inc.
Report of Independent Public Accountants
To the Shareholders and Board of Directors of The New America High Income
Fund, Inc.:
We have audited the accompanying balance sheet of The New America High
Income Fund, Inc. (the Fund) (a Maryland Corporation), including the schedule
of investments, as of December 31, 1996, and the related statement of
operations for the year then ended, and the statement of changes in net
assets for each of the two years in the period then ended and the financial
highlights for the periods presented. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of The New America High Income Fund, Inc. as of December 31, 1996,
and the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
Boston, Massachusetts ARTHUR ANDERSEN LLP
January 17, 1997
21
<PAGE>
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
The New
America
High Income
Fund, Inc.
Annual
Report
December 31, 1996
22
Exhibit K10
NEW AMERICA HIGH INCOME FUND, INC.
SUBSCRIPTION RIGHTS AGENCY AGREEMENT
This Subscription Rights Agency Agreement (the "Agreement") is made as
of this 31st day of January, 1997, by and between New America High Income Fund,
a Maryland Corporation (the "Fund"); and State Street Bank and Trust Company, a
national banking association, as subscription and distribution agent ("Agent").
WHEREAS, the Fund proposes to make a subscription offer by issuing
certificates or other evidences of subscription rights, in the form designated
by the Fund (the "Subscription Certificates") to shareholders of record (the
"Shareholders") of its Common Stock, par value $.01 per share (the "Common
Stock"), as of a record date specified by the Fund (the "Record Date"), pursuant
to which each Shareholder will have certain rights (the "Rights") to subscribe
for shares of Common Stock, as described in and upon such terms as are set forth
in the final prospectus (the "Prospectus") included in the Form N-2 Registration
Statement originally filed by the Fund with the Securities and Exchange
Commission on , as amended (as amended, the "Registration Statement"), in
accordance with the applicable requirements of the Securities Act of 1933, as
amended (the "Act");
WHEREAS, the Fund wishes the Agent to perform certain acts on its
behalf and the Agent is willing to so act, in connection with the distribution
of the Subscription Certificates and the issuance and exercise of the Rights to
subscribe therein set forth, all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Pursuant to resolution of its Board of Directors, the Fund hereby
appoints and authorizes the Agent to act on its behalf in accordance
with the provisions hereof, and the Agent hereby accepts such
appointment and agrees to so act.
2. (a) Each Subscription Certificate shall evidence the Rights
of the Shareholder therein named to purchase Common Stock upon
the terms and conditions therein and herein set forth.
(b) Upon the written advice of the Fund signed by its
Chairman, President, Secretary or Assistant Secretary, as to
the Record Date, the agent shall, from a list of Shareholders
as of the Record Date to be prepared by the Agent in its
capacity as Transfer Agent of the Fund, prepare and record
Subscription Certificates in the names of the Shareholders,
setting forth the number of Rights to subscribe to Common Stock
calculated on the basis of one Right for each
<PAGE>
share of Common Stock recorded on the books of the Fund in the
name of each such Shareholder as of the Record Date.
3. Rights and Issuance of Subscription Certificates.
(a) Each Subscription Certificate shall be transferable and
shall, unless exercised by the holder thereof in the manner
set forth in the Prospectus expire upon the expiration of the
offer. The Agent shall, in its capacity as transfer agent for
the Fund, maintain a register of Subscription Certificates and
the holders of record thereof (each of whom shall be deemed a
"Rightholder" hereunder for purposes of determining the rights
of holders of Subscription Certificates). Each Subscription
Certificate shall, subject to the provisions thereof, entitle
the Rightholder in whose name it is recorded to the following:
(1) The right (the "Basic Subscription
Right") to purchase a number of shares of Common Stock equal
to one share of Common Stock for every one Right; provided,
however, that no fractional shares of Common Stock shall be
issued; and
(2) The right (the "Oversubscription Right")
to purchase additional shares of Common Stock, subject to the
availability of such shares and to allotment of such shares as
may be available among Rightholders who exercise
Oversubscription Rights on the basis specified in the
Prospectus; provided, however, that a Rightholder who has not
exercised his Basic Subscription Right with respect to the
full number of shares that such Rightholder is entitled to
purchase by virtue of his Basic Subscription Right as of the
Expiration Date, if any, shall not be entitled to any
Oversubscription Right.
(b) A Rightholder may exercise his Basic Subscription Right
and Oversubscription Right by delivery to the Agent at its
corporate office specified in the Prospectus of (i) the
Subscription Certificate with respect thereto, duly executed
by such Rightholder in accordance with and as provided by the
terms and conditions of the Subscription Certificate, together
with (ii) the estimated subscription price for each share of
Common Stock subscribed for by exercise of such Rights, in
United States dollars by money order or check drawn on a bank
located in the U.S. and in each case payable to the order of
New America High Income Fund.
(c) Rights may be exercised at any time after the date of
issuance of the Subscription Certificates with respect thereto
but no later than 5:00 P.M. New York City Time on such date as
the Fund shall designate to the Agent in writing (the
"Expiration Date"). For the purpose of determining the time of
the exercise of any Rights, delivery of any material to the
Agent shall be deemed to occur when such materials are
received at the corporate office of the Agent specified in the
Prospectus.
2
<PAGE>
(d) Not withstanding the provisions of Section 3(b) and 3(c)
above regarding delivery of an executed Subscription
Certificate to the Agent prior to 5:00 P.M. New York City Time
on the Expiration Date, if prior to such time the Agent
receives a properly completed and executed notice of
guaranteed delivery in the form accompanying the Prospectus by
facsimile (telecopier) or otherwise from a financial
institution that is a member of the Securities Transfer Agents
Medallion Program, the Stock Exchange Medallion Program or the
New York Stock Exchange Medallion Signature Program,
guaranteeing delivery of (i) payment of the full subscription
price for shares purchased and subscribed for by virtue of a
Subscription Certificate, and (ii) a properly completed and
executed Subscription Certificate, then such exercise of Basic
Subscription Rights and Oversubscription Rights shall be
regarded as timely, subject, however, to receipt of the
duly-executed Subscription Certificate by the Agent within
five business days after the Expiration Date and receipt of
full payment within ten business days after the Confirmation
Date (as defined below).
(e) On a date (the "Confirmation Date") that is no later than
ten business days after the Pricing Date (as defined in the
Prospectus), the Agent shall send a confirmation to each
Rightholder (or, for shares of Common Stock on the Record Date
held by Cede & Co. or any other depository or nominee, to Cede
& Co. or such other depository or nominee), showing (i) the
number of shares acquired pursuant to the Basic Subscription
Rights, (ii) the number of shares, if any, acquired pursuant
to the Oversubscription Rights, (iii) the per share and total
purchase price for the shares, (iv) any amount payable to the
Rightholder pursuant to Section 8 below, and (v) any
additional amount payable by the Rightholder to the Fund or
any excess to be refunded by the Fund to the Rightholder, on
the Pricing Date. Any additional payment required from a
Rightholder must be received by the Agent within ten business
days after the Confirmation Date. Any excess payment to be
refunded by the Fund to a Rightholder shall be mailed by the
Agent to the Rightholder as provided in Section 6 below.
4. If, after allocation of shares of Common Capital Stock to persons
exercising Basic Subscription Rights, there remain unexercised Rights,
then the Agent shall allot the shares issuable upon exercise of such
unexercised Rights (the "Remaining Shares") to persons exercising
Oversubscription Rights, in the amounts of such oversubscriptions. If
the number of shares for which Oversubscription Rights have been
exercised is greater than the Remaining Shares, the Agent shall allot
the available Shares first among the Rightholders who subscribe for an
aggregate of 1,000 or fewer Shares (inclusive of such Shares subscribed
for under such Rightholders' Basic Subscription Rights). The Agent
shall allot the Shares remaining thereafter among those Rightholders
who over-subscribed based on the number of Rights originally exercised
by them under their Basic Subscription Rights.
3
<PAGE>
5. All proceeds from the exercise of Rights shall be held by the Agent in
a segregated, interest-bearing account in the name of the Fund. The
Agent shall advise the Fund immediately upon the completion of the
allocation set forth above as to the total number of shares subscribed
and distributable.
6. (a) The Agent shall mail to the Rightholders as soon as
practicable after the Confirmation Date and after full
payment for the shares subscribed for has cleared: (i)
certificates representing those shares purchased pursuant to
exercise of Basic Subscription Rights and those shares
purchased pursuant to the exercise of Oversubscription Rights;
and (ii) in the case of each Rightholder who subscribed and
paid for shares at an estimated Subscription Price greater
than the actual Subscription Price, a refund in the amount of
the difference between the estimated Subscription Price and
the actual Subscription Price.
(b) The Agent shall deliver the proceeds of the exercise of
Rights to the Fund as promptly as practicable, but in no event
later than five business days after the Confirmation Date.
Notwithstanding the preceding, if the price per share of the
subscription offer is greater than the estimated price per
share of the subscription offer and the Rightholders owe
additional proceeds to the Fund, the Agent shall deliver such
additional proceeds as promptly as practicable, but in no
event later than 20 business days after the Confirmation Date.
7. The Agent shall account promptly to the Fund with respect to Rights
exercised and concurrently account for all monies received and returned
by the Agent with respect to the purchase of shares of Common Stock
upon the exercise of Rights.
8. In the event the Agent does not receive, within ten business days after
the Confirmation Date, any amount due from a Rightholder as specified
in Section 3 (e), then it shall take such action with respect to such
Rightholder's Rights as may be instructed in writing by the Fund,
including without limitation (i) applying any payment actually received
by it toward the purchase of the greatest whole number of shares of
Common Stock which could be acquired with such payment, (ii) allocating
the shares subject to such Subscription Rights to one or more other
Rightholders, and (iii) selling all or a portion of the shares of
Common Stock deliverable upon exercise of such Rights on the open
market, and applying the proceeds thereof to the amount owed.
9. No Subscription Certificate shall entitle a Rightholder to vote or
receive dividends or be deemed the holder of shares of Common Stock for
any purpose, nor shall anything contained in any Subscription
Certificate be construed to confer upon any Rightholder any of the
rights of a shareholder of the Fund or any right to vote, give or
withhold consent to any action by the Fund (whether upon any
recapitalization, issue of stock, reclassification of stock,
consolidation, merger, conveyance or otherwise), receive notice of
meetings of other action affecting shareholders or receive dividends or
otherwise, until the Rights evidenced thereby shall have been exercised
and the shares of Common Capital Stock purchasable upon the exercise
thereof shall have become deliverable as provided in this Agreement and
in the Prospectus.
4
<PAGE>
10. (a) The Fund covenants that all shares of Common Stock issued
on exercise of Rights will be validly issued, fully paid,
non-assessable and free of preemptive rights.
(b) Upon request, the Fund shall furnish to the Agent an
opinion of counsel or other evidence satisfactory to the Agent
to the effect that a registration statement is then in effect
with respect to its shares of Common Stock issuable upon
exercise of the Rights set forth in the Subscription Rights.
Upon written advice to the Agent that the Securities and
Exchange Commission shall have issued or threatened to have
issued any order preventing or suspending the use of the
Prospectus, or if for any reason it shall be necessary to
amend or supplement the Prospectus in order to comply with the
Act, the Agent shall cease acting hereunder until receipt of
written instructions from the Fund and such assurances as it
may reasonably request that it may comply with such
instruction without violations of the Act.
11. (a) Any corporation into which the Agent may be merged or
converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or
consolidation to which the Agent shall be a party, or any
corporation succeeding to the corporate trust business of
the Agent, shall be the successor to the Agent hereunder
without the execution or filing of any document by any of the
parties hereto, provided that such corporation would be
eligible for appointment as a successor to the Agent. In case
at the time such successor to the Agent shall succeed to the
agency created by this Agreement, any of the Subscription
Certificates shall have been countersigned but not elivered,
any such successor to the Agent may adopt the countersignature
of the Agent and deliver such Subscription Certificates as
countersigned, and in case at that time any of the
Subscription Certificates shall not have been countersigned,
the successor to the Agent may countersign such Subscription
Certificates either in the name of the Agent or in the name
of the successor Agent, and in all such cases such
Subscription Certificates shall have the full force and legal
effect provided in the Subscription Certificates and in this
Agreement.
(b) If, at any time, the name of the Agent shall be changed
and at such time any of the Subscription Certificates shall
have been countersigned but not delivered, the Agent may adopt
the countersignature under its prior name and deliver
Subscription Certificates so countersigned, and in case at
that time any of the Subscription Certificates shall not have
been countersigned, the Agent may countersign such
Subscription Certificates either in its prior name or in its
changed name, and in all such cases such Subscription
Certificates shall have the full force provided in the
Subscription Certificates and in this Agreement.
12. The Fund agrees to pay to the Agent at the completion of the offering,
on demand of the Agent, reasonable compensation for all services
rendered by it hereunder and also
5
<PAGE>
its reasonable out-of-pocket expenses and other disbursements incurred
in the administration and execution of this Agreement and the exercise
and performance of its duties hereunder.
13. The Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions:
(a) Whenever in the performance of its duties under this
Agreement the Agent shall deem it necessary or desirable that
any fact or matter be proved or established, prior to taking
or suffering any action hereunder, such fact or matter (unless
prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the
Board or President or a Vice President or the Secretary or
Assistant Secretary or the Treasurer of the Fund delivered to
the Agent, and such certificate shall be full authorization to
the Agent for any action taken or suffered in good faith by it
under the provisions of this Agreement in reliance upon such
certificate.
(b) The Agent shall not be responsible for and the Fund shall
indemnify and hold the Agent harmless from and against, any
and all losses, damages, costs, charges, counsel feels,
payments, expenses and liability arising out of or
attributable to all actions of the Agent or its agents or
subcontractors required to be taken pursuant to this
Agreement, provided that such actions are taken in good faith
and without negligence or willful misconduct.
(c) The Agent shall be liable hereunder only for its own
negligence or misconduct, and for the negligence or misconduct
of its agents or subcontractors.
(d) Nothing herein shall preclude the Agent from acting in any
other capacity for the Fund or for any other legal entity;
(e) The Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties
hereunder from any officer or assistant officer of the Fund
and to apply to any such officer or assistant officer of the
Fund for advice or instructions in connection with its duties,
and shall be indemnified and not be liable for any action
taken or suffered by it in good faith in accordance with
instructions of any officer or assistant officer of the Fund;
and
(f) The Agent shall be indemnified and shall incur no
liability for or in respect of any action taken, suffered, or
omitted by it in reliance upon any Subscription Certificate or
Certificate for Common Stock, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement or other
paper or document that it reasonably believes to be genuine
and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons.
6
<PAGE>
14. The Agent may, without the consent or concurrence of the Rightholders
in whose names Subscription Certificates are registered, by
supplemental agreement or otherwise, concur with the Fund in making any
changes or corrections in a Subscription Certificate that it shall have
been advised by counsel (who may be counsel for the Fund) is
appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest
error therein or herein contained, and which shall not be inconsistent
with the provisions of the Subscription Certificate or the Prospectus
except insofar as any such change may confer additional rights upon the
Rightholders.
15. All the covenants and provisions of this Agreement by or for the
benefit of the Fund or the Agent shall bind and inure to the benefit of
their respective successors and assigns hereunder.
16. The validity, interpretation and performance of this Agreement shall be
governed by the law of the Commonwealth of Massachusetts.
STATE STREET BANK AND NEW AMERICA HIGH INCOME
TRUST COMPANY FUND
/s/Joseph Idzal /s/Ellen E. Terry
- -------------------------------------- -------------------------------
Signature Signature
Vice President Vice President
- -------------------------------------- -------------------------------
Title Title
7
Exhibit K11
[CIC Letterhead]
December 11, 1996
Ms. Ellen Terry
The New America High Income Fund, Inc.
10 Winthrop Square
Boston, Massachusetts 02110
Dear Ellen:
Re: Contract Agreement
This agreement will confirm that Corporate Investor Communications, Inc. has
been retained to act as information agent in connection with the upcoming rights
offering to the shareholders of The New America High Income Fund, Inc. As
information agent, CIC will conduct a broker/nominee inquiry to ascertain the
number of beneficial owners, provide for the distribution of the offering
documents to the reorganization departments of each institution and forward
additional materials, as requested. CIC will respond to the volume of
shareholder inquiries regarding the terms of the offer and proper execution of
the documents and will monitor the response rate for the duration of the offer.
CIC can, if requested, pro-actively contact registered shareholders and
non-objecting beneficial owners (NOBOs) to help promote a high level of
participation.
Our fee to act as information agent based on a distribution of 15,0000 sets of
offering documents and the duration of the offer will be $7,500 plus $3.00 for
each registered and NOBO holder contacted if requested. CIC will be reimbursed
for all reasonable out-of-pocket disbursements including postage, telephone and
courier charges, data transmissions and other expenses approved by your company.
A retainer in the amount of $3,750 is required to cover initial expenses and
will be credited to your final service charges.
The company above hereby agrees to indemnify Corporate Investor Communications,
Inc.'s officers and employees against any and all losses, claims and expenses
incurred by CIC in conjunction with the services provided except to the extent
any such loss, claim or expense is the result of the negligence of any CIC
officer or employee. Reimbursement will be made to indemnified persons at the
time they are incurred. The company shall not be responsible for any losses,
claims and expenses incurred by CIC which result from CIC's gross negligence or
willful misconduct.
Please forward an executed agreement to our office and retain the other copy.
----------------------------------------------------------------------------
THE NEW AMERICA HIGH INCOME FUND, INC. CORPORATE INVESTOR COMMUNICATIONS, INC.
- -------------------------------------- --------------------------------------
SIGNED: /s/ Ellen E. Terry SIGNED: /s/ Virginia Porcaro
---------------------------- -------------------------------
NAME: Ellen E. Terry NAME: Virginia Porcaro
---------------------------- -------------------------------
TITLE: Vice President and Treasurer TITLE: Vice President, Solicitation Group
---------------------------- -------------------------------
DATE: December 18, 1996 DATE: December 11, 1996
---------------------------- -------------------------------
Exhibit L
[Venable, Baetjer and Howard, LLP letterhead]
January 31, 1997
The New America High Income Fund, Inc.
Ten Winthrop Square, Fifth Floor
Boston, MA 02110
Ladies and Gentlemen:
We have acted as special Maryland counsel for The New America High
Income Fund, Inc., a Maryland corporation (the "Fund"), in connection with the
issuance of up to 11,982,048 additional shares of the Fund's common stock, par
value $.01 per share (the "Additional Common Stock") pursuant to the Fund's
rights offering (the "Offering") as described in its Registration Statement
filed with the Securities and Exchange Commission on Form N-2, Securities Act
File No. 333-17619 and Investment Company Act No. 811- 5399 (the "Registration
Statement"). All capitalized terms not otherwise herein defined shall have the
meaning set forth in the Registration Statement.
As special Maryland counsel for the Fund, we are familiar with its
Charter and Bylaws, as amended. We have examined its Registration Statement on
Form N-2, including the prospectus contained therein, substantially in the form
in which it is to become effective (the "Registration Statement"). We have
further examined and relied upon a certificate of the Maryland State Department
of Assessments and Taxation to the effect that the Fund is duly incorporated and
existing under the laws of the State of Maryland and is in good standing and
duly authorized to transact business in the State of Maryland.
We have also examined and relied upon such corporate records of the
Fund and other documents and certificates with respect to factual matters as we
have deemed necessary to render the opinion expressed herein. We have assumed,
without independent
<PAGE>
The New America High Income Fund, Inc.
January 31, 1997
Page 2
verification, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity with originals of all
documents submitted to us as copies.
Based on such examination, we are of the opinion:
1. The Fund is duly organized and validly existing as a
corporation in good standing under the laws of the State
of Maryland.
2. The issuance and sale of the Additional Common Stock pursuant
to the Offering have been duly authorized by all necessary
corporate actions on the part of the Corporation.
3. Upon the issuance and sale of the Additional Common Stock
pursuant to the Offering, the Additional Common Stock will be
validly issued, fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities or "blue sky" laws
of Maryland, to federal securities laws or to other laws.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Certain
Legal Matters" in the Prospectus. We do not thereby admit that we are "experts"
as that term is used in the Securities Act of 1993, as amended, and the
regulations thereunder.
Very truly yours,
/s/Venable, Baetjer and Howard LLP
Exhibit N
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report for The New America High Income Fund, Inc. dated January
17, 1997 (and to all references to our firm) included or incorporated by
reference in Pre-Effective Amendment No. 1 and Amendment No. 20 to Registration
Statement File Nos. 333-17619 and 811-5399, respectively.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 31, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000825345
<NAME> New America High Income Fund
<MULTIPLIER> 1000
<CURRENCY> US-Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 270,890
<INVESTMENTS-AT-VALUE> 273,402
<RECEIVABLES> 6,287
<ASSETS-OTHER> 13
<OTHER-ITEMS-ASSETS> 525
<TOTAL-ASSETS> 280,227
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,819
<TOTAL-LIABILITIES> 3,819
<SENIOR-EQUITY> 100,000
<PAID-IN-CAPITAL-COMMON> 270,702
<SHARES-COMMON-STOCK> 35,717
<SHARES-COMMON-PRIOR> 34,978
<ACCUMULATED-NII-CURRENT> 371
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (97,177)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,512
<NET-ASSETS> 276,408
<DIVIDEND-INCOME> 131
<INTEREST-INCOME> 26,444
<OTHER-INCOME> 110
<EXPENSES-NET> 2,242
<NET-INVESTMENT-INCOME> 24,443
<REALIZED-GAINS-CURRENT> 3,613
<APPREC-INCREASE-CURRENT> 3,745
<NET-CHANGE-FROM-OPS> 31,801
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 23,912
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (131)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 3,565
<NET-CHANGE-IN-ASSETS> 11,585
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 851
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 851
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,242
<AVERAGE-NET-ASSETS> 270,214
<PER-SHARE-NAV-BEGIN> 4.71
<PER-SHARE-NII> .69
<PER-SHARE-GAIN-APPREC> .22
<PER-SHARE-DIVIDEND> .68
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.94
<EXPENSE-RATIO> .83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
