As filed with the Securities and Exchange Commission on December 24, 1997
1933 Act File No. 333-_____
1940 Act File No. 811-5399
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-2
(Check appropriate box or boxes)
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No.
|_| Post-Effective Amendment No. __
and
|_| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Amendment No. 23
--------------------
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. / /
--------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
========================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Being Amount Being Offering Price Aggregate Offering Amount of
Registered Registered Per Share Price Registration Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 16,241,851 shares $5.625(1) $91,360,412(1) $26,951.32
Subscription Rights 16,241,851 rights -- -- --
========================================================================================================================
</TABLE>
(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 19, 1997.
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.
================================================================================
<PAGE>
THE NEW AMERICA HIGH INCOME FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
<TABLE>
<CAPTION>
Item Number of Form N-2 Location or Heading in Prospectus
----------------------- ---------------------------------
<S> <C> <C>
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
21. Brokerage Allocation and Other Policies Management of the Fund; Portfolio Maturity and
Turnover
(i)
<PAGE>
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 DECEMBER 24, 1997
THE NEW AMERICA HIGH INCOME FUND, INC.
16,241,851 Transferable Rights to Subscribe for
16,241,851 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 ____, 1998 (the "Record Date"), transferable rights
("Rights") entitling the holders thereof to subscribe for an aggregate of
16,241,851 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 ______ 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 __, 1997. The net asset value
per share of Common Stock at the close of business on December __, 1997 and on
February __, 1998 was $_____ and $_____, respectively, and the closing market
price of a share of the Fund's Common Stock on such Exchange on those dates was
$_____ 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 __, 1998,
unless extended as described herein (the "Expiration Date").
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). See "Capitalization and Information Regarding Senior 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. 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."
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.
<TABLE>
<CAPTION>
====================================================================================================================================
Estimated
Estimated Proceeds
Subscription Price(1) Sales Load to Fund (2)(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ................................. $____ None $____
- ------------------------------------------------------------------------------------------------------------------------------------
Total(4).................................... $____ None $____
====================================================================================================================================
</TABLE>
(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
$____, and is based on the Estimated Subscription Price (as defined below).
(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 __, 1998
<PAGE>
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 __, 1998, 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."
------------------
2
<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 _________ 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." A business day is a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which banks
in the City of New York, New York are authorized or obligated by law to close.
Important Terms of the Offering
<TABLE>
<S> <C>
February __, 1998 market price per share................. $__________
February __, 1998 net asset value per share.............. $__________
Estimated Subscription Price............................. $__________
Shares outstanding at February __, 1998.................. ___________
Transferable Rights issued............................... ___________
Subscription ratio....................................... 1 Right to buy 1 Share
Maximum number of Shares to be issued.................... ___________
</TABLE>
How to Exercise Rights
o Complete, sign and date the enclosed Subscription Certificate.
o 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.
o 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., Eastern time, on March __, 1998,
unless extended.
o If shares are held in a brokerage account or by a custodian
bank, contact your broker or financial adviser.
Important Dates to Remember
<TABLE>
<CAPTION>
Event Date
----- ----
<S> <C>
Record Date February __, 1998
Expiration Date (Payment for Shares and
Notices of Guaranteed Delivery Due) March __, 1998 (unless extended)
Due Date for Delivery of Subscription
Certificates to Subscription Agent pursuant
to Notice of Guaranteed Delivery March __, 1998 (unless extended)
Mailing of Shares Not later than April __, 1998 (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
3
<PAGE>
Terms of the Offer
The Fund is issuing to stockholders of record as of the close of
business on February_____, 1998, Rights to subscribe for an aggregate of
16,241,851 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 __, 1998, 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 _________ 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
$__________. 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 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. As of December 31, 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, 1997, Wellington Management held
discretionary authority over approximately $__________ billion of assets,
including $__________ billion of fixed income securities of which $__________
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.
4
<PAGE>
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 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.
5
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
Stockholder Transaction Expenses
<S> <C> <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.................................................................[____%]
Leverage Related Expenses......................................... [____%]
Other Expenses.................................................... [____%]
Total Other Expenses(2)................................................................. [____%]
Total Annual Expenses............................................................................ [____%]
</TABLE>
- -------------------------
(1) The Fund has agreed to pay First Albany Corporation ("First Albany") a fee
of $[__________] 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 $[__________], including the fee payable to First
Albany described above. 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>
<CAPTION>
Cumulative Expenses Paid for the Period of:
---------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
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%] of which
[.10%] is attributable to leverage expenses and [.73%] is 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."
6
<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 Years Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994(c) 1993
---- ---- ---- ---- ----
(For Each Share of Common Stock Outstanding Throughout the Period)
<S> <C> <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%
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
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>
Period From
February 26, 1988
(Commencement
For the Years Ended December 31, of Operations) to
1992(a) 1991 1990 1989 December 31, 1988
---- ---- ---- ---- -----------------
(For Each Share of Common Stock Outstanding Throughout the Period)
<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%
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
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 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.
7
<PAGE>
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
Capitalization as of December 31, 1997
The following table sets forth the Fund's capitalization as of December
31, 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 6,000 shares
Common Stock, $0.01 par value........ 200,000,000 shares -0- shares [__________] 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 , 1998 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> <C>
Total Assets................................................................. $[ ] $
Total Liabilities............................................................ [ ] ________
Net Assets................................................................... $[ ] $
=========== ========
NET ASSETS REPRESENTS:
Auction Term Preferred Stock Series A, $1.00 par value, liquidation
preference $25,000 per share, 2,400 shares authorized,
2,400 shares issued and outstanding ....................................... $ 60,000 $ 60,000
Auction Term Preferred Stock Series B, $1.00 par value, liquidation
preference $25,000 per share, 1,600 shares authorized,
1,600 shares issued and outstanding ....................................... $ 40,000 $ 40,000
Auction Term Preferred Stock Series C, $1.00 par value, liquidation
preference $25,000 per share, 2,000 shares authorized,
2,000 shares issued and outstanding ....................................... $ 50,000 $ 50,000
Common Stock, $.01 par value, 200,000,000 shares authorized,
[35,880,537] shares issued and outstanding, [47,862,585] shares
issued and outstanding as adjusted......................................... [ ]
Capital in excess of par value............................................... [ ]
Accumulated net realized loss from security transactions..................... [ ]
Net unrealized appreciation on investments................................... [ ]
Accumulated undistributed net investment income.............................. [ ]
-----------
NET ASSETS................................................................... $[ ] $
---------- ---------
Less liquidation value of Auction Term Preferred Stock..................... 100,000 100,000
Net assets attributable to Common Stock outstanding.......................... $[ ] $
========== =========
Net asset value per share of Common Stock.................................... $[ ] $
========== =========
</TABLE>
8
<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 BankBoston, N.A. (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 plus accumulated and unpaid dividends. See
"Description of Capital Stock," "The Fund" and "Financial Statements."
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <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 $1,000 of Note (1) $ -- $ -- $ -- $ --
Per Preferred Stock
Share (2)......... 138,204 132,411 120,795 473,351
Per $1,000 of
Short-Term Loan... -- -- -- 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>
As of December 31,
---------------------------------------------------------
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 $1,000 of 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... -- -- -- -- --
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 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.
(3) Plus accumulated and unpaid dividends.
9
<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 1997, 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 (0.6) (8.0)
March 31, 1995 4.32 4.13 4.50 3.88 4.9 (3.6)
June 30, 1995 4.64 4.36 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 1.0
March 31, 1997
June 30, 1997
September 30, 1997
December 31, 1997
</TABLE>
- -----------------
* 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 __________, 1997, and February____, 1998 the Fund's net asset values per
share of Common Stock at the close of business were $__________and $__________,
respectively, while the closing market prices of a share of Common Stock on the
Exchange on such dates were $__________ and $__________, respectively. The
premiums/(discounts) as a percentage of net asset value on such dates were
_____% and (_____)%, respectively.
10
<PAGE>
THE OFFER
Terms of the Offer
The Fund is issuing to Record Date Stockholders, as of the close of
business on February ____ , 1998, 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___, 1998, 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 __________ as of the close of business on the Expiration Date. [A business
day is a day on which the New York Stock Exchange is open for trading and which
is not a Saturday, Sunday or other day on which banks in the City of New York,
New York are authorized or obligated by law to close]. 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. 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____, 1997. The net asset values per share of
Common Stock at the close of business on December , 1997 and February____, 1998
were $__________and $__________, respectively, and the closing market prices per
share of Common Stock on the Exchange on those dates were $ 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___, 1998, unless
extended by the Fund until a time not later than 5:00 p.m., Eastern time, on
__________, 1998. 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.
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 , 1998 (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____, 1998, 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 __________1998.
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.
11
<PAGE>
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 two previous rights offering which were completed on
July 22, 1994 and March 18, 1997. All of the rights issued by the Fund pursuant
to these rights offering were exercised. As a result of the first offering,
approximately 8,568,000 new shares of Common Stock were issued with the net
proceeds to the Fund of approximately $35.4 million. As a result of the second
offering, approximately 11,982,000 new shares of Common Stock were issued with
the net proceeds to the Fund of approximately $54 million. All of the proceeds
from these 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. As of February_____, 1998, 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_____, 1998,
unless extended by the Fund until a time not later than 5:00 p.m., Eastern time,
on April_____, 1998. Rights will expire on the Expiration Date and may not be
exercised thereafter.
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 $[__________], 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:
CST - CORPORATE REORGANIZATION 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:
c/o Boston EquiServe, L.P.
70 Campanelli Drive
Braintree, MA 02184
(3) BY HAND:
c/o Boston EquiServe, L.P.
Corporate Reorganization
55 Broadway - 8th 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: _______________
The Information Agent will receive a fee estimated to be $[__________]
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.
12
<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.
13
<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. 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 an
Exchange member, a bank, a trust company, or other 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 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.
On or before fourth business day after the Expiration Date (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. 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.
14
<PAGE>
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_____, 1998 (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.
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 ("First Albany"), 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 $______.
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 twelve
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.
15
<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 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.
16
<PAGE>
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____,
1998, 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 $__________). 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.
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 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, 1997, the Fund's total assets were $__________, net asset value per share of
Common Stock was $__________ and outstanding senior securities aggregated
$[__________] million. Cumulative total investment return for an investment in
Common Stock for the one-, three- and five-year periods
17
<PAGE>
ended December 31, 1997 was ______%, _____% and _____%, 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 plus accumulated and unpaid
dividends and no credit enhancement. In May 1997, the Fund issued an additional
series of ATP having an aggregate liquidation preference of $50 million plus
accumulated and unpaid dividends and no credit enhancement. Dividends on all
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."
The Fund has entered into three interest payment swap arrangements with
BankBoston, N.A. ("BankBoston"). The aggregate effect of these arrangements is
to hedge the fund's dividend payment obligations with respect to 63 1/3 % of the
ATP presently outstanding. Pursuant to each of the Swap Arrangements the Fund
makes payments to BankBoston on a monthly basis at fixed annual rates while
receiving BankBoston payments at a variable rate determined with reference to
the level of short-term interest rates from time to time.
See" Description of Capital Stock."
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.
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, 1997,
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, 1997
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, 1997, the weighted average maturity of the Fund's portfolio
was approximately __________ years.
18
<PAGE>
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 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
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
19
<PAGE>
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").
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, 1997, had outstanding [6,000] shares of
preferred stock issued in three series, the ATP, having an aggregate liquidation
preference of $150 million plus accumulated and unpaid dividends. 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 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.
20
<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 practice. 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 arrangements
described herein for which the Fund has obtained consent of Moody's and Fitch;
(ii) borrow money, except that 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 is 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
21
<PAGE>
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 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 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.
The Fund has entered into three interest payment swap arrangements with
BankBoston. The aggregate effect of these arrangements is to hedge the fund's
dividend payment obligations with respect to 63 1/3 % of the ATP presently
outstanding. Pursuant to each of the Swap Arrangements the Fund makes payments
to BankBoston on a monthly basis at fixed annual rates while receiving
BankBoston payments at a variable rate determined with reference to the level of
short-term interest rates from time to time.
See" Description of Capital Stock."
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.
22
<PAGE>
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.
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 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.
23
<PAGE>
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").
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"). Rule 144A Securities
held by the Fund will qualify as Moody's Eligible Assets only up to a maximum of
25% of the aggregate Market Value of all assets constituting Moody's Eligible
Assets. 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.
24
<PAGE>
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 Rating Category
to ----------------------------------------------------------------------------
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
</TABLE>
- ------------
* 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 130% of
the Moody's Discount Factor which would apply were the securities
registered under the 1933 Act.
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:
<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,
25
<PAGE>
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
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
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."
26
<PAGE>
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 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;
(iii) U.S. Treasury Securities and Treasury Strips (as
defined by Moody's); and
(iv) financial contracts, as such term is defined in
Section 3(c)(2)(B)(ii) of the Investment Company of Act of 1940, as
amended, may be included in Moody's Eligible Assets, but, with respect
to any financial contract, only upon receipt by the Fund of a writing
from Moody's specifying any conditions on including such financial
contract in Moody's Eligible Assets and assuring the Fund that including
such financial contract in the manner so specified would not affect the
credit rating assigned by Moody's to the ATP.
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:
27
<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.
Debt Securities. Under current Fitch guidelines, securities will not be
deemed "Debt Securities" includable in the calculation of the Discounted Value
of the Fund's portfolio unless (a) such securities 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) 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, (the "Securities Act")
or are restricted as to resale under federal securities laws but are eligible
for resale pursuant to Rule 144A under the Securities Act as determined by the
Fund's adviser acting subject to the supervision of the Fund's Board of
Directors; (e) such securities are issued by (1) a U.S. corporation, (2) a
corporation domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain, or the United Kingdom (the "Approved Foreign
Nations"), (3) the government of any Approved Foreign Nation or any of its
agencies, instrumentalities or political subdivisions (the debt securities of
Approved Foreign Nation issuers being referred to collectively as "Foreign
Bonds"), (4) a corporation domiciled in Canada or (5) the Canadian government or
any of its agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as "Canadian
Bonds"); and (f) in the case of Foreign and Canadian Bonds, such securities are
denominated in U.S. dollars. Foreign Bonds held by the Fund will qualify as
Fitch Eligible Assets only up to a maximum of 20% of the aggregate Market Value
of all assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held
by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 20% of
the aggregate Market Value of all assets constituting Fitch Eligible Assets.
Notwithstanding the limitations in the two preceding sentences, Foreign Bonds
and Canadian Bonds held by the Fund will qualify as Fitch Eligible Assets only
up to a maximum of 30% of the aggregate Market Value of all assets constituting
Fitch Eligible Assets. In addition, bonds which are issued in connection with a
reorganization under U.S. federal bankruptcy law ("Reorganization Bonds") will
be considered Debt Securities 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 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 Debt Securities 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 (A) 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 and (B) the Fitch Discount Factor applied to Foreign Bonds
will be 120% of the Fitch Discount Factor which would apply were the securities
issued by a U.S. corporation:
28
<PAGE>
Type I Debt Securities 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 Debt Securities 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 Debt Securities 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 Debt Securities 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
Type V Debt Securities 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 Debt Securities 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 Debt Securities 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 Debt Securities" means Debt Securities (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 Debt Securities" means Debt Securities 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 Debt Securities;
"Type III Debt Securities" means Debt Securities rated either at least
A- by Fitch or, if not rated by Fitch, rated at least A- by S&P
29
<PAGE>
and at least A3 by Moody's which do not constitute Type I or Type II Debt
Securities
"Type IV Debt Securities" means Debt Securities 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 Debt
Securities;
"Type V Debt Securities" means Debt Securities 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 Debt
Securities;
"Type VI Debt Securities" means Debt Securities 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
Debt Securities; and
"Type VII Debt Securities" means Debt Securities 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 Debt Securities.
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 Debt
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 Debt Securities 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.
(6) Foreign and Canadian Bonds issued by governments of the Approved Foreign
Nations and Canada or any of their agencies, instrumentalities, or
political subdivisions assigned to the "Sovereigns" industry
classification are not subject to any maximum single industry
concentration limitation."
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
Textiles & Furniture
30
<PAGE>
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.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii)
of the Investment Company of Act of 1940, as amended, may be included in Fitch
Eligible Assets, but, with respect to any financial contract, only upon receipt
by the Fund of a writing from Fitch specifying any conditions on including such
financial contract in Fitch Eligible Assets and assuring the Fund that including
such financial contract in the manner so specified would not affect the credit
rating assigned by Fitch to the ATP."
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."
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 $____, net
expenses associated with the Offer were $__________, 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.
31
<PAGE>
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 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 three interest rate swap arrangements having an aggregate
notional amount of $95 million, 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
Portfolio (net of -10% -5% 0% 5% 10%
expenses and costs
of leverage)
- --------------------------------------------------------------------------------
Corresponding
Return to Holder of
Common Stock*
================================================================================
* Assuming $100 million aggregate liquidation preference of leverage
outstanding, ___ 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."
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
32
<PAGE>
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 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
33
<PAGE>
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 Fund's shares have generally
traded in the market at a premium 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>
Robert F. Birch*.................... President and Director Mr. Birch, a private investor, joined
10 Winthrop Square, Fifth Floor the Fund as President, Treasurer and
Boston, MA 02110 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.
Joseph L. Bower..................... Director Professor since 1963, Donald K. David
Harvard Business School Professor of Business Administration
Boston, MA 02138 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.
34
<PAGE>
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 Economics
Massachusetts Institute from 1962 to 1970, Institute Professor
of Technology from 1970 to 1988, and Professor
77 Massachusetts Avenue Emeritus since 1988, Massachusetts
Cambridge, MA 02139 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.
Ernest E. Monrad.................... Director Trustee since 1960 and Chairman of
50 Congress Street the Trustees since 1969, Northeast
Boston, MA 02109 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 December 1992 to present and
Boston, MA 02110 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 [$50,000] 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
35
<PAGE>
for the fiscal year ended December 31, 1997 aggregate remuneration of
$__________ 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, 1997, 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.
<TABLE>
<CAPTION>
Pension or Retirement
Aggregate Benefits Accrued as Estimated Annual Total
Name of Person, Compensation Part of Fund Benefits Upon Compensation
Position From Fund Expenses Retirement from Fund
- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C>
Robert F. Birch, $ none none $*
President and Director
Joseph L. Bower, Director $ none none $
Richard E. Floor, Secretary $ none none $
and Director
Bernard J. Korman, $ none none $
Director
Franco Modigliani, Director $ none none $
Ernest E. Monrad, $ none none $
Director
Ellen E. Terry, $ none none $
Vice President and Treasurer
</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 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, 1997. 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,
1997, Wellington Management held discretionary authority over approximately
$__________ billion of assets, including $__________ billion of fixed income
securities of which $__________ billion represented "high-yield" investments.
Wellington Management and its predecessor organizations have provided investment
advisory services to investment
36
<PAGE>
companies since 1933 and to investment counseling clients since 1960.
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, 1997: 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 Fund, Vanguard Fixed Income Securities Fund,
Vanguard/Morgan Growth Fund, Vanguard Preferred Stock Fund, Vanguard Specialized
Portfolios (Energy Portfolio, Health Care Portfolio, and Utilities 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 .45% (on an annual basis) of the Fund's
"Average Net Assets," based on the average weekly net asset value of the Fund.
Prior to an amendment to the Advisory Agreement which was effective as of
September 1, 1997, the Investment Adviser received 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 the investment advisory 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, 1997, the Fund's Average Net Assets were $__________ 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, 1995 through December 31, 1995, January 1, 1996 through December 31,
1996 and January 1, 1997 through December 31, 1997 were $782,000, $851,000, and
$__________, 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 19, 1997. 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 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%
37
<PAGE>
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, 1995, 1996 and 1997, the Fund
paid brokerage commissions for the execution of portfolio transactions of
$3,000, $0 and $_________, respectively.
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 $[7,083] per month for the services set forth above
and her services are terminable by either party on ninety (90) days' notice. Mr.
Saidnawey receives $[4,167] 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, 1997, the
weighted average maturity of the Fund's portfolio holdings was approximately __
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
38
<PAGE>
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, 1995, 1996 and
1997 were 62.7%, 53.5% and _____%, respectively.
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) 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.
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.
39
<PAGE>
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 net 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. Subject to the discussion below regarding the Taxpayer
Relief Act of 1997, distributions of capital gains designated by the Fund as
capital gain dividends, if any, are taxable as capital gains, regardless of how
long the stockholder has held the Fund's shares and are not eligible for the
dividends received deduction. The Taxpayer Relief Act of 1997 (the "1997 Tax
Act") alters the taxation of capital gain income. Under the 1997 Tax Act,
individuals, trusts and estates that hold certain investments for more than 18
months may be taxed at a maximum long-term capital gain rate of 20% on the sale
or exchange of those investments. Individuals, trusts and estates that hold
certain investments for more than one year but not more than 18 months may be
taxed at a maximum mid-term capital gain rate of 28% on the sale or exchange of
those investments. The 1997 Tax Act allows the Internal Revenue Service to
prescribe regulations on how the Act's new capital gain rates will apply to
sales of capital assets by "pass-thru entities," which include regulated
investment companies such as the Fund. To date regulations have not yet been
prescribed. Investors are urged to consult their own tax advisors with respect
to the new rules contained in the 1997 Tax Act.
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.
Under the 1997 Tax Act, individuals, trusts and estates that hold
shares for more than 18 months may be taxed at a maximum long-term capital gain
rate of 20% on the sale or exchange of those shares. Individuals, trusts and
estates that hold shares for more than one year but not more than 18 months may
be taxed at a maximum mid-term capital gain rate of 28% on the sale or exchange
of those shares. If a
40
<PAGE>
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.
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 , 1998, there were [____________] outstanding shares of Common Stock of
the Fund and 6,000 outstanding shares of preferred stock of which 2,400 are
classified as ATP Series A, 1,600 are classified as ATP Series B and 2,000 are
classified as ATP Series C. 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 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
41
<PAGE>
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.
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
42
<PAGE>
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.
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 Arrangements. The Fund has entered into three interest payment
swap arrangements (the "Swap Arrangements") with BankBoston. Pursuant to each of
the Swap Arrangements the Fund makes payments to BankBoston on a monthly basis
at fixed annual rates. In exchange for such payments BankBoston makes payments
to the Fund on a monthly basis at a variable rate determined with reference to
the level of short-term interest rates from time to time. The notional amount,
maturity, and fixed rates of the swaps are as follows:
- --------------------------------------------------------------------------------
Notional Amount Maturity Fixed Annual Rate
- --------------------------------------------------------------------------------
$65 million February 2, 1999 5.25%
- --------------------------------------------------------------------------------
$20 million October 7, 2002 6.07%
- --------------------------------------------------------------------------------
$10 million October 2, 1999 6.225%
- --------------------------------------------------------------------------------
The effect of the Swap Arrangements is to hedge the Fund's dividend
payment obligations with respect to $95 million of the ATP. For example, with
respect to the swap having the notional amount of $65 million, 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 BankBoston in an amount equal to 8% (per annum) of the
$65 million notional amount of the Swap Arrangement, (ii) make a payment to
BankBoston 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 BankBoston in an amount equal to 4% (per annum) of the $65 million
notional amount of the Swap Arrangement, (ii) make a payment to BankBoston 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
Arrangements and rate of dividends on the three 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 Arrangements and will continue to do so in the event the Swap
Arrangements are terminated. The Fund is subject to the risk that BankBoston
will not make its required payments under the Swap Arrangements. In such event,
the Fund will have contractual remedies pursuant to the agreements related to
the Swap Arrangements.
The Fund obtained consents from Moody's and Fitch to enter into the
Swap Arrangements. In connection with obtaining such consent, the Fund agreed to
an increase in its discounted asset coverage requirement as described below
under "--Asset Maintenance." Each Swap Arrangement will remain in effect through
the maturity date specified above, 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,
BankBoston, 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 a Swap Arrangement to the extent the
notional amount of such 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
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
43
<PAGE>
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 $25,000 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
$25,000 plus accumulated but unpaid dividends plus a premium expressed as a
percentage or percentages of $25,000 or expressed in a formula using specified
variables as determined by the Board of Directors after consultation with the
Broker-Dealers.
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
44
<PAGE>
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
$25,000 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 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 $25,000; (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 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 the Fund has
agreed upon a methodology for adjusting the Basic
45
<PAGE>
Maintenance Amount in light of the Swap Arrangements. On any Valuation Date, the
Fund will determine the net amount that would be payable to or payable by the
Fund pursuant to each Swap Arrangement as if the Swap were being terminated as
of such Valuation Date (the "Termination Value"). The Termination Value will be
determined using the average of two market quotations provided by two dealers.
If the Termination Value would be payable by the Fund, the Fund will treat the
sum of the Termination Value and 1.5% of the notional amount of the Swap
outstanding (the "Adjusted Notional Amount") as a liability of the Fund in
calculating the Basic Maintenance Amount. If the Termination Value would be
payable to the Fund, for purposes of calculating compliance with the conditions
imposed by Fitch, the Fund will treat the "Discounted Termination Value" as
Eligible Assets in calculating the Basic Maintenance Amount. The Discounted
Termination Value will be the difference between the Termination Value and the
Adjusted Notional Amount adjusted by a Discount Factor which will be determined
by treating (a) each Swap as if it were a Debt Security, (b) the Swap
counterparty as the issuer of such Debt Security and (c) the time remaining
until the Swap's expiration date as the remaining maturity of such Debt
Security. If the Termination Value would be payable to the Fund, for purposes of
calculating compliance with the conditions imposed by Moody's, the Fund will
treat the difference between the Termination Value and the Adjusted Notional
Amount as Eligible Assets.
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 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 [_________], 1998, the 1940 Act ATP Asset Coverage was:
Value of Fund assets less
liabilities not constituting
senior securities [$278,943,337]
- ---------------------------- -------------- = [279%]
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.
46
<PAGE>
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 $25,000
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 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, ATP Series B
or ATP Series C, 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.
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
47
<PAGE>
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 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., $25,000 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 also utilizes prices supplied by its Custodian from
Kenny S&P Evaluation Services and Bridge Fixed - Income Services.
48
<PAGE>
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 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
$5,000 for investment in the Fund's shares. The Dividend Paying 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
49
<PAGE>
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 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 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
50
<PAGE>
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 passed
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 public accountants, 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.
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.
51
<PAGE>
FINANCIAL STATEMENTS
[to be filed by amendment]
<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 Rating Where no rating has been assigned or where a rating has 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.
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.
52
<PAGE>
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.
53
<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.
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.
54
<PAGE>
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 Issues assigned this rating are regarded as having the
Quality 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.
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.
55
<PAGE>
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.
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
56
<PAGE>
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.
57
<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.
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
58
<PAGE>
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.
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
59
<PAGE>
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.
60
<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........................................3
Fee Table......................................6
Financial Information Summary.................7
Capitalization and Information
Regarding Senior Securities...................8
Net Asset Value and
Market Price Information.....................10
The Offer....................................11
Use of Proceeds..............................20
The Fund.....................................21
Investment Objective and Policies............22
Rating Agency Guidelines.....................32
Risk Factors and Special Considerations......43
Management of the Fund.......................47
Portfolio Maturity and Turnover..............54
Taxation.....................................54
Description of Capital Stock.................58
Determination of Net Asset Value.............69
Dividends and Distributions;
Dividend Reinvestment Plan...................70
Conversion to Open-End Status and
Repurchase of Shares.........................72
Custodian, Auction Agent, Registrar,
Transfer Agent and Paying Agent..............73
Reports to Stockholders......................73
Certain Legal Matters........................73
Experts......................................73
Available Information........................73
Financial Statements.........................74
Appendix A...................................A-1
---------------------------
================================================================================
================================================================================
The New America
High Income Fund, Inc.
_____ Transferable
Rights to Subscribe
for
_____ Shares of
Common Stock
----------
PROSPECTUS
----------
__________, 1998
================================================================================
61
<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
1989
and For the Period from February 26, 1988
(Commencement of Operations) to December 31, 1988)
Financial Highlights and Financial Statements for the
fiscal year ended December 31, 1997 to be filed by
amendment to this Registration Statement
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. (i)
(a)(2) Articles of Amendment of The New America High
Income Fund, Inc. dated as of June 15, 1989. (i)
(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. (i)
(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 January 4, 1994 (i)
(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. (i)
(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. (i)
(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. (i)
(a)(8) Articles Supplementary of The New America High
Income Fund, Inc. Establishing and Defining the
Rights and Preferences of an Additional Series of
Shares of Auction Term Preferred Stock, as filed
with the State Department of Assessments and
Taxation of the State of Maryland on May 2, 1997.
(a)(9) 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 May 30, 1997.
(a)(10) 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 May 30, 1997.
(a)(11) 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 June 18, 1997.
(a)(12) 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 June 18, 1997.
(a)(13) 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 September 11, 1997.
(a)(14) 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 September 11, 1997.
C-1
<PAGE>
(a)(15) 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 23, 1997.
(a)(16) 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 23, 1997.
(b) By-Laws, as amended as of February 19, 1997, of the
Registrant. (v)
(c) Not applicable.
(d) Specimen Certificate for shares of Common Stock par
value $.01 per share. (v)
(e) Dividend Reinvestment Plan, as modified. (i)
(f) Not applicable.
(g) Investment Advisory Agreement dated as of February
19, 1992 between the Registrant and Wellington
Management Company, LLP. (i)
(h) Not applicable.
(i) Not applicable.
(j) Custodian Contract dated as of February 11, 1988
between the Registrant and State Street Bank and
Trust Company. (i)
(k)(1) Registrar, Transfer Agency and Service Agreement
dated as of February 11, 1988 between the
Registrant and State Street Bank and Trust Company.
(i)
(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. (i)
(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. (i)
(k)(4) Broker-Dealer Agreement dated as of March 19, 1997
between Bankers Trust Company and Lehman Brothers
Inc. with respect to the Auction Term Preferred
Stock of the Registrant. (v)
(k)(5) Form of Auction Agent Agreement with respect to the
Auction Term Preferred Stock, Series C, of the
Registrant. (v)
(k)(6) Form of Letter of Representations Agreement with
respect to the Auction Term Preferred Stock, Series
C, of the Registrant. (v)
(k)(7) Form of Broker-Dealer Agreement with Lehman
Brothers Inc. with respect to the Auction Term
Preferred Stock of the Registrant. (v)
(k)(8) Interest payment swap arrangement between the Fund
and First National Bank of Boston, N.A. (i)
(k)(9) Affirmation and Undertaking dated August 13, 1990
executed by certain directors and executive
officers of the Registrant. (iii)
(k)(10) Agreement dated as of October 29, 1997 between the
Registrant and Ellen E. Terry.
(k)(11) Agreement dated as of October 29, 1997 between the
Registrant and Paul E. Saidnawey.
(k)(12) Letter Agreement between Registrant and Lehman
Brothers Inc. dated March 24, 1997 with respect to
the Auction Term Preferred Stock of the Registrant.
(v)
(k)(13) Form of Letter Agreement between Registrant and
Lehman Brothers Inc. with respect to the Auction
Term Preferred Stock of the Registrant. (v)
(l) Opinion as to legality of securities being
registered and consent to its use. (ii)
(m) Not applicable.
C-2
<PAGE>
(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, 1997. (ii)
(s) Powers of Attorney for Robert F. Birch, Joseph L.
Bower, Richard E. Floor, Bernard J. Korman, Ernest
E. Monrad, Franco Modigliani and Ellen E. Terry
(filed as part of the signature page to this
Registration Statement).
- ---------------
Footnote
Reference Description
(i) Filed as an exhibit to the Registrant's Registration Statement
on Form N-2, Registration No. 33-17619, (filed December 11,
1996) under the same exhibit number and incorporated herein by
reference.
(ii) To be filed by amendment.
(iii) Filed as an exhibit to the Registrant's Registration Statement
on Form N-2, Registration No. 33-18664, (filed June 21, 1990)
under the same exhibit number and incorporated herein by
reference.
(iv) Filed as an exhibit to the Registrant's Registration Statement
on Form N-2, Registration No. 33-61674, (filed December 7,
1993) under the same exhibit number and incorporated herein by
reference.
(v) Filed as an exhibit Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2, Registration
No. 33-23253, (filed April 30, 1997) under the same exhibit
number and incorporated herein by reference.
Item 25: Marketing Arrangements
Not Applicable.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees............ $
Printing and engraving expenses....................
Legal fees and expenses............................
Accounting fees and expenses.......................
Miscellaneous expenses............................. --------
Total..................................... $
Item 27: Persons Controlled by or under Common Control with Registrant
None.
C-3
<PAGE>
Item 28: Number of Holders of Securities
At November 28, 1997 the numbers of record holders of shares of the
Registrant were as follows:
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, $.01 par value per share...................... 4,820
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
Series C 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 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
C-4
<PAGE>
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."
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.
Item 32: Management Services
Not applicable.
C-5
<PAGE>
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. Not applicable.
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-6
<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
24th day of December, 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 S. Birch President and Director December 24, 1997
- ----------------------------------- (Principal Executive Officer)
Robert F. Birch
/s/ Ellen E. Terry Vice President and Treasurer December 24, 1997
- ----------------------------------- (Principal Financial and
Ellen E. Terry Accounting Officer)
/s/ Joseph L. Bower Director December 24, 1997
- -----------------------------------
Joseph L. Bower
/s/ Richard E. Floor Director December 24, 1997
- -----------------------------------
Richard E. Floor
/s/ Bernard J. Korman Director December 24, 1997
- ---------------------------------
Bernard J. Korman
/s/ Franco Modigliani Director December 24, 1997
- ---------------------------------
Franco Modigliani
/s Ernest E. Monrad Director December 24, 1997
- ----------------------------------
Ernest E. Monrad
</TABLE>
<PAGE>
1933 Act File No.333-
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 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. |_|
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 23 |X|
--------------------
THE NEW AMERICA HIGH INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
--------------------
EXHIBITS
================================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Exhibit: Numbered Page:
<S> <C> <C>
A8 Articles Supplementary of The New America High Income Fund,
Inc. Establishing and Defining the Rights and Preferences of
an Additional Series of Shares of Auction Term Preferred
Stock, as filed with the State Department of Assessments and
Taxation of the State of Maryland on May 2, 1997.
A9 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 May
30, 1997.
A10 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 May
30, 1997.
A11 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 June
18, 1997.
A12 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 June
18, 1997.
A13 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
September 11, 1997.
A14 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
September 11, 1997.
A15 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
23, 1997.
A16 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
23, 1997.
K10 Agreement dated as of October 29, 1997 between the Registrant
and Ellen E. Terry.
K11 Agreement dated as of October 29, 1997 between the Registrant and Paul E.
Saidnawey.
N Consent of Arthur Andersen LLP.
</TABLE>
EXHIBIT A8
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND
PREFERENCES OF AN ADDITIONAL SERIES OF SHARES OF PREFERRED STOCK
The New America High Income Fund, Inc., a Maryland corporation (the
"Corporation"), certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: Pursuant to the authority expressly vested in the Board
of Directors of the Corporation by Article IV of its Articles of
Amendment and Restatement, as heretofore amended (which, as hereafter
restated or amended from time to time, are together with these Articles
Supplementary herein called the "Articles"), the Board of Directors
has, by resolution, authorized the issuance of 2,000 shares of its
Preferred Stock, par value $1.00 per share, liquidation preference
$25,000 per share, classified as Series C Auction Term Preferred Stock.
SECOND: The preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of such series of ATP are as follows:
DESIGNATION
-----------
Series C: A series of 2,000 shares of Preferred Stock, par value $1.00
per share, liquidation preference $25,000 per share, is hereby designated
"Series C Auction Term Preferred Stock" ("ATP Series C"). Each share of ATP
Series C shall have an Applicable Rate for its initial Dividend Period equal to
5.625% per annum and an initial Dividend Payment Date of June 10, 1997; and each
share of ATP Series C shall have such other preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law or set
forth in the Articles applicable to preferred stock of the Corporation, as are
set forth in Part I and Part II of these Articles Supplementary. The ATP Series
C shall constitute a separate series of Preferred Stock of the Corporation.
Subject to the provisions of Section 12(c) of Part I hereof, the Board
of Directors of the Corporation may, in the future, reclassify additional shares
of the Corporation's Preferred Stock as ATP Series C, with the same preferences,
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption and other terms of the respective series
herein described, except that the Applicable Rate for its initial Dividend
Period, its initial Dividend Payment Date and any other changes in the terms
herein
1
<PAGE>
set forth shall be as set forth in the Articles Supplementary reclassifying such
shares as ATP Series C .
As used in Part I and Part II of these Articles Supplementary,
capitalized terms shall have the meanings provided in Section 18 of Part I and
Section 1 of Part II.
PART I
1. Number of Shares; Ranking.
--------------------------
(a) The initial number of authorized shares constituting ATP
Series C is 2,000 shares. No fractional shares of ATP Series C shall be issued.
(b) Any shares of ATP Series C which at any time have been
redeemed or purchased by the Corporation shall, after such redemption or
purchase, have the status of authorized but unissued shares of Preferred Stock.
(c) The shares of ATP Series C shall rank on a parity with
shares of any other series of Preferred Stock (including any other shares of
ATP) as to the payment of dividends to which such shares are entitled and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation.
(d) No holder of shares of ATP Series C shall have, solely by
reason of being such a holder, any preemptive or other right to acquire,
purchase or subscribe for any shares of ATP Series C, shares of Common Stock of
the Corporation or other securities of the Corporation which it may hereafter
issue or sell.
2. Dividends.
----------
(a) The Holders of shares of ATP Series C shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, cumulative cash dividends on their shares at the
Applicable Rate, determined as set forth in paragraph (c) of this Section 2, and
no more, payable on the respective dates determined as set forth in paragraph
(b) of this Section 2. Dividends on the Outstanding shares of ATP Series C
issued on the Date of Original Issue shall accumulate from the Date of Original
Issue.
(b) (i) Dividends shall be payable when, as and if declared by
the Board of Directors following the initial Dividend Payment Date,
subject to subparagraph (b)(ii) of this Section 2, on the shares of ATP
Series C as follows:
2
<PAGE>
(A) with respect to any Dividend Period of
one year or less, on the Business Day next succeeding the last
day thereof and, if any, on the 91st, 181st and 271st days
thereof; and
(B) 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 within such Dividend Period and
on the Business Day following the last day of such Dividend
Period.
(ii) If a day for payment of dividends resulting from
the application of subparagraph (b)(i) above is not a Business Day,
then the Dividend Payment Date shall be the day next succeeding such
day, or if the day next succeeding such day for payment of dividends is
not a Business Day, then the Dividend Payment Date shall be the first
Business Day prior to such day for payment of dividends that is next
succeeded by a Business Day; provided, however, that if the Securities
Depository pays dividends in same-day funds, and such day for payment
is not a Business Day, the Dividend Payment Date shall be the first
Business Day following such day for payment of dividends.
(iii) The Corporation shall pay to the Paying Agent
not later than 3:00 p.m., New York City time, on the Business Day next
preceding each Dividend Payment Date for the shares of ATP Series C, an
aggregate amount of funds available on the next Business Day in the
City of New York, New York, equal to the dividends to be paid to all
Holders of such shares on such Dividend Payment Date. The Corporation
shall not be required to establish any reserves for the payment of
dividends.
(iv) All moneys paid to the Paying Agent for the
payment of dividends shall be held in trust for the payment of such
dividends by the Paying Agent for the benefit of the Holders specified
in subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying
Agent in accordance with the foregoing but not applied by the Paying
Agent to the payment of dividends, including interest earned on such
moneys, will, to the extent permitted by law, be repaid to the
Corporation at the end of 90 days from the date on which such moneys
were to have been so applied.
(v) Each dividend on ATP Series C shall be paid on
the Dividend Payment Date therefor to the Holders of the relevant
series as their names appear on the stock ledger or stock records of
the Corporation on the Business Day next preceding such Dividend
Payment Date. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as their names appear on the
stock ledger or stock records of the Corporation on such date, not
exceeding 15 days preceding the payment date thereof, as may be fixed
by the Board of Directors.
3
<PAGE>
(c) (i) The dividend rate on Outstanding shares of ATP Series
C during the period from and after the Date of Original Issue to and
including the last day of the initial Dividend Period therefor shall be
equal to the rate per annum set forth under "Designation" above. For
each subsequent Dividend Period with respect to the shares of ATP
Series C Outstanding thereafter, the dividend rate shall be equal to
the rate per annum that results from an Auction for Outstanding shares
of ATP Series C on the respective Auction Date therefor next preceding
such subsequent Dividend Period; provided, however, that if an Auction
for any subsequent Dividend Period of ATP Series C is not held for any
reason or if Sufficient Clearing Orders have not been made in an
Auction (other than as a result of all shares of ATP Series C being the
subject of Submitted Hold Orders), then the dividend rate on the shares
of ATP Series C for any such Dividend Period shall be the Maximum
Applicable Rate for such shares on the Auction Date for such Dividend
Period (except (i) during a Default Period when the dividend rate shall
be the Default Rate, as set forth in Section 2(c)(ii) below) or (ii)
after a Default Period and prior to the beginning of the next Dividend
Period when the dividend rate shall be the Maximum Applicable Rate at
the close of business on the last of such Default Period). With respect
to a Dividend Period of 93 days or fewer, the Minimum Applicable Rate
will apply automatically following an Auction in which all of the
Outstanding shares of ATP Series C are subject (or are deemed to be
subject) to Hold Orders. The rate per annum at which dividends are
payable on shares of ATP Series C as determined pursuant to this
Section 2(c)(i) shall be the "Applicable Rate."
(ii) A "Default Period" will commence on the
applicable date set forth below if the Corporation fails to (A) 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 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, (B)
deposit, irrevocably in trust, in same-day funds, with the Paying Agent
by 12:00 noon, New York City time, (I) 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 ATP Series C payable
on such Dividend Payment Date (together with the failure to timely
declare dividends described in (A) above, hereinafter referred to as a
"Dividend Default") or (II) on or (to the extent permitted as described
below) within two Business Days after any date fixed for redemption of
shares of ATP Series C called for redemption, the applicable redemption
price (a "Redemption Default") or (C) 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 Corporation fails to
maintain the "aaa"/AAA Credit Rating (a "Rating Default" and, together
with a Dividend Default and a Redemption Default, hereinafter referred
to as a "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
4
<PAGE>
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 Corporation 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 ATP Series C is
mandatorily redeemed as provided herein. The Applicable Rate for each
Default Period, and each Dividend Period commencing during a Default
Period, will be equal to 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. No Auction shall be held during a Default 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 Corporation has
declared such dividend payable on or within two 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 Corporation) be paid to such persons
in the same form of funds by 12:00 noon, New York City time, on any of
the first two 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 non-payment 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. The Default Rate is equal to the
Reference Rate multiplied by three (3).
(iii) The amount of dividends per share payable (if
declared) on each Dividend Payment Date of each Dividend Period of less
than one (1) year (or in respect of dividends on another date in
connection with a redemption during such Dividend Period) shall be
computed by multiplying the Applicable Rate (or the Default Rate) for
such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period
(or portion thereof) that such share was Outstanding and for which the
Applicable Rate or the Default Rate was applicable and
5
<PAGE>
the denominator of which will be 360, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest
cent. During any Dividend Period of one (1) year or more, the amount of
dividends per share payable on any Dividend Payment Date (or in respect
of dividends on another date in connection with a redemption during
such Dividend Period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year
consisting of twelve 30-day months.
(d) Any dividend payment made on shares of ATP Series C shall
first be credited against the earliest accumulated but unpaid dividends due with
respect to ATP Series C.
(e) For so long as the shares of the ATP are Outstanding,
except as contemplated by Sections 3(j) and 7(e), the Corporation 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 Corporation 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 Corporation 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 Corporation ranking junior to or on a parity with the ATP as to dividends
and upon liquidation), unless (i) immediately after such transaction, the
Corporation 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 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
Corporation has redeemed the full number of shares of the ATP required to be
redeemed by any provision for mandatory redemption contained in Section
3(a)(ii).
3. Redemption.
-----------
(a) (i) After the initial Dividend Period, subject to the
provisions of this Section 3 and to the extent permitted under the 1940
Act and Maryland law, the Corporation may, at its option, redeem in
whole or in part out of funds legally available therefor shares of ATP
Series C herein designated as (A) having a Dividend Period of one year
or less, on the Business Day after the last day of such Dividend Period
by delivering a notice of redemption not less than 15 days and not more
than 40 days prior to such redemption, at a redemption price per share
equal to $25,000, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date fixed
for redemption, or (B) having a Dividend Period of more than one year,
on any Business Day prior to the end of the relevant Dividend Period by
6
<PAGE>
delivering a notice of redemption not less than 15 days and not more
than 40 days prior to the date fixed for such redemption, at a
redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to the date fixed for redemption, plus a redemption premium,
if any, determined by the Board of Directors after consultation with
the Broker-Dealers and set forth in any applicable Specific Redemption
Provisions at the time of the designation of such Dividend Period as
set forth in Section 4 of these Articles Supplementary; provided,
however, that during a Dividend Period of more than one year no shares
of ATP Series C will be subject to optional redemption except in
accordance with any Specific Redemption Provisions approved by the
Board of Directors after consultation with the Broker-Dealers at the
time of the designation of such Dividend Period. Notwithstanding the
foregoing, the Corporation shall not give a notice of or effect any
redemption pursuant to this Section 3(a)(i) unless, on the date on
which the Corporation intends to give such notice and on the date of
redemption (a) the Corporation has available certain Deposit Securities
with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of ATP Series C by
reason of the redemption of ATP Series C on such date fixed for the
redemption and (b) the Corporation would have Eligible Assets with an
aggregate Discounted Value at least equal the ATP Basic Maintenance
Amount immediately subsequent to such redemption, if such redemption
were to occur on such date, it being understood that the provisions of
paragraph (d) of this Section 3 shall be applicable in such
circumstances in the event the Corporation makes the deposit and takes
the other action required thereby.
(ii) If the Corporation 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 Asset Coverage as of such
last Business Day (respectively, the "Asset Coverage Cure Date"), the
ATP will be subject to mandatory redemption out of funds legally
available therefor. The number of shares of ATP to be redeemed in such
circumstances will be equal to the lesser of (A) 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 Corporation 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 (B) the maximum number of
shares of ATP that can be redeemed out of funds expected to be
7
<PAGE>
available therefor on the mandatory redemption date at the Mandatory
Redemption Price set forth in subparagraph (a)(iv) of this Section 3.
(iii) If the Corporation at any time fails to
maintain the "aaa"/AAA Credit Rating and the Corporation is unable to
restore the "aaa"/AAA Credit Rating within 90 calendar days thereafter
(the "Rating Default Cure Date"), all shares of the ATP will be subject
to mandatory redemption out of funds legally available therefor, on the
Mandatory Redemption Date at the Mandatory Redemption Price set forth
in subparagraph (a)(iv) of this Section 3.
(iv) In determining the shares of the ATP required to
be redeemed in accordance with the foregoing Section 3(a)(ii), the
Corporation shall allocate the number of shares required to be redeemed
to satisfy the ATP Basic Maintenance Amount or the 1940 Act ATP Asset
Coverage, as the case may be, pro rata among the Holders of shares of
the ATP in proportion to the number of shares they hold and shares of
other Preferred Stock subject to mandatory redemption provisions
similar to those contained in this Section 3, subject to the further
provisions of this subparagraph (iv). The Corporation shall effect any
required mandatory redemption pursuant to subparagraph (a)(ii) or
(a)(iii) of this Section 3 no 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 Corporation does
not have funds legally available for the redemption of, or is not
otherwise legally permitted to redeem, the number of shares of the ATP
which would be required to be redeemed by the Corporation under clause
(A) of subparagraph (a)(ii) or subparagraph (a)(iii) of this Section 3
if sufficient funds were available, together with shares of other
Preferred Stock which are subject to mandatory redemption under
provisions similar to those contained in this Section 3, or the
Corporation otherwise is unable to effect such redemption on or prior
to such Mandatory Redemption Date, the Corporation shall redeem those
shares of the ATP, and shares of other Preferred Stock which it was
unable to redeem, on the earliest practicable date on which the
Corporation will have such funds available, upon notice pursuant to
Section 3(b) to record owners of shares of the ATP to be redeemed and
the Paying Agent. The Corporation will deposit with the Paying Agent
funds sufficient to redeem the specified number of shares of the ATP
with respect to a redemption required under subparagraph (a)(ii) or
subparagraph (a)(iii) of this Section 3, by 1:00 p.m., New York City
time, of the Business Day immediately preceding the Mandatory
Redemption Date. If fewer than all of the Outstanding shares of the ATP
are to be redeemed pursuant to this Section 3(a)(iv), the number of
shares to be redeemed shall be redeemed pro rata from the Holders of
such shares in proportion to the number of such shares held by such
Holders, by lot or by such other method as the Corporation shall deem
fair and equitable, subject, however, to the terms of any applicable
Specific Redemption Provisions. "Mandatory Redemption Price" means
$25,000 per share, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared)
8
<PAGE>
to the date fixed for redemption, plus (in the case of a Dividend
Period of one year or more only) a redemption premium, if any,
determined by the Board of Directors after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption
Provisions.
(b) In the event of a redemption pursuant to Section 3(a), the
Corporation will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Corporation shall deliver a notice of redemption to the Auction Agent (the
"Notice of Redemption") containing the information set forth below (i) in the
case of an optional redemption pursuant to subparagraph (a)(i) above, one
Business Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to subparagraph (a)(ii) or subparagraph (a)(iii)
above, on or prior to the 30th day preceding the Mandatory Redemption Date. The
Auction Agent will use its reasonable efforts to provide telephonic notice to
each Holder of shares of ATP Series C called for redemption not later than the
close of business on the Business Day immediately following the day on which the
Auction Agent determines the shares to be redeemed (or, during a Default Period
with respect to such shares, not later than the close of business on the
Business Day immediately following the day on which the Auction Agent receives
Notice of Redemption from the Corporation). The Auction Agent shall confirm such
telephonic notice in writing not later than the close of business on the third
Business Day preceding the date fixed for redemption by providing the Notice of
Redemption to each Holder of shares called for redemption, the Paying Agent (if
different from the Auction Agent) and the Securities Depository. Notice of
Redemption will be addressed to the registered owners of ATP Series C at their
addresses appearing on the share records of the Corporation. Such Notice of
Redemption will set forth (i) the date fixed for redemption, (ii) the number and
identity of shares of ATP Series C to be redeemed, (iii) the redemption price
(specifying the amount of accumulated dividends to be included therein), (iv)
that dividends on the shares to be redeemed will cease to accumulate on such
date fixed for redemption, and (v) the provision under which redemption shall be
made. No defect in the Notice of Redemption or in the transmittal or mailing
thereof will affect the validity of the redemption proceedings, except as
required by applicable law. If fewer than all shares held by any Holder are to
be redeemed, the Notice of Redemption mailed to such Holder shall also specify
the number of shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this
Section 3, but subject to Section 7(e), no shares of the ATP may be redeemed
unless all dividends in arrears on the Outstanding shares of the ATP and all
capital stock of the Corporation ranking on a parity with the ATP with respect
to payment of dividends or upon liquidation, have been or are being
contemporaneously paid or set aside for payment; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all Outstanding
shares of the ATP pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, Holders
of all Outstanding shares of the ATP.
9
<PAGE>
(d) Upon the deposit of funds sufficient to redeem shares of
ATP Series C with the Paying Agent and the giving of the Notice of Redemption to
the Auction Agent under paragraph (b) of this Section 3, dividends on such
shares shall cease to accumulate and such shares shall no longer be deemed to be
Outstanding for any purpose (including, without limitation, for purposes of
calculating whether the Corporation has maintained the requisite ATP Basic
Maintenance Amount or the 1940 Act ATP Asset Coverage), and all rights of the
holder of the shares so called for redemption shall cease and terminate, except
the right of such holder to receive the redemption price specified herein, but
without any interest or other additional amount. Such redemption price shall be
paid by the Paying Agent to the nominee of the Securities Depository. The
Corporation shall be entitled to receive from the Paying Agent, promptly after
the date fixed for redemption, any cash deposited with the Paying Agent in
excess of (i) the aggregate redemption price of the shares of ATP Series C
called for redemption on such date and (ii) such other amounts, if any, to which
Holders of shares of ATP Series C called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of two years from such
redemption date shall, to the extent permitted by law, be paid to the
Corporation, after which time the Holders of shares of ATP Series C so called
for redemption may look only to the Corporation for payment of the redemption
price and all other amounts, if any, to which they may be entitled. The
Corporation shall be entitled to receive, from time to time after the date fixed
for redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of
Redemption has been given is not made by reason of the absence of legally
available funds therefor, or is otherwise prohibited, such redemption shall be
made as soon as practicable to the extent such funds become legally available or
such redemption is no longer otherwise prohibited. Failure to redeem shares of
ATP Series C shall be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Corporation shall have failed, for
any reason whatsoever, to deposit in trust with the Paying Agent the redemption
price with respect to any shares for which such Notice of Redemption has been
given. Notwithstanding the fact that the Corporation may not have redeemed
shares of ATP Series C for which a Notice of Redemption has been given,
dividends may be declared and paid on shares of ATP Series C and shall include
those shares of ATP Series C for which Notice of Redemption has been given but
for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the
redemption price of shares of ATP Series C called for redemption shall be held
in trust by the Paying Agent for the benefit of holders of shares so to be
redeemed.
(g) So long as any shares of ATP Series C are held of record
by the nominee of the Securities Depository, the redemption price for such
shares will be paid on the date fixed for redemption to the nominee of the
Securities Depository for distribution to Agent Members for distribution to the
persons for whom they are acting as agent.
10
<PAGE>
(h) Except for the provisions described above, nothing
contained in these Articles Supplementary limits any right of the Corporation to
purchase or otherwise acquire any shares of ATP Series C 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 Series
C for which Notice of Redemption has been given and the Corporation 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 Corporation
shall have no voting rights. If fewer than all the Outstanding shares of ATP
Series C are redeemed or otherwise acquired by the Corporation, the Corporation
shall give notice of such transaction to the Auction Agent, in accordance with
the procedures agreed upon by the Board of Directors.
(i) In the case of any redemption pursuant to this Section 3,
only whole shares of ATP Series C shall be redeemed, and in the event that any
provision of the Articles would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
(j) Notwithstanding anything herein to the contrary,
including, without limitation, Sections 2(e), 6(g) and 12 of Part I hereof, the
Board of Directors may authorize, create or 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 affairs of the Corporation, to the extent permitted by the 1940 Act,
as amended, if, upon issuance, the net proceeds from the sale of such stock (or
such portion thereof needed to redeem or repurchase the Outstanding ATP) are
deposited with the Auction Agent in accordance with Section 3(d) of Part I
hereof, Notice of Redemption as contemplated by Section 3(b) of Part I hereof
has been delivered prior thereto or is sent promptly thereafter, and such
proceeds are used to redeem all Outstanding ATP.
4. Designation of Dividend Period.
-------------------------------
(a) The initial Dividend Period for ATP Series C is as set
forth under "Designation" above. The Corporation will designate the duration of
subsequent Dividend Periods of ATP Series C; provided, however, that no such
designation is necessary for a Standard Term Period and, provided further, that
any designation of an Alternate Term Period shall be effective only if (i)
notice thereof shall have been given as provided herein, (ii) any failure to pay
in a timely manner to the Auction Agent the full amount of any dividend on, or
the redemption price of, ATP Series C shall have been cured as provided above,
(iii) Sufficient Clearing Orders shall have existed in an Auction held on the
Auction Date immediately preceding the first day of such proposed Alternate Term
Period, (iv) if the Corporation shall have mailed a Notice of Redemption with
respect to any shares, the redemption price with
11
<PAGE>
respect to such shares shall have been deposited with the Paying Agent, and (v)
in the case of the designation of an Alternate Term Period, the Corporation has
confirmed that as of the Auction Date next preceding the first day of such
Alternate Term Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the ATP Basic Maintenance Amount, and the Corporation has
consulted with the Broker-Dealers and has provided notice of such designation
and an ATP Basic Maintenance Report to Fitch (if Fitch is then rating the ATP),
Moody's (if Moody's is than rating the ATP) and any Other Rating Agency which is
then rating the ATP and so requires.
(b) If the Corporation proposes to designate any Alternate
Term Period, not fewer than 15 (or two Business Days in the event the duration
of the Dividend Period prior to such Alternate Term Period is fewer than 15
days) nor more than 30 days prior to the first day of such Alternate Term
Period, notice shall be (i) made by press release and (ii) communicated by the
Corporation by telephonic or other means to the Auction Agent and confirmed in
writing promptly thereafter. Each such notice shall state (A) that the
Corporation proposes to exercise its option to designate a succeeding Alternate
Term Period, specifying the first and last days thereof and (B) that the
Corporation will by 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of such Alternate Term Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Alternate
Term Period, subject to the terms of any Specific Redemption Provisions, or (y)
its determination not to proceed with such Alternate Term Period, in which
latter event the succeeding Dividend Period shall be a Standard Term Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Alternate Term Period, the
Corporation shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Corporation has
determined to designate the next succeeding Dividend Period as an
Alternate Term Period, specifying the first and last days thereof and
(B) the terms of any Specific Redemption Provisions; or
(ii) a notice stating that the Corporation has
determined not to exercise its option to designate an Alternate Term
Period.
If the Corporation fails to deliver either such notice with respect to any
designation of any proposed Alternative Term Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of Paragraph (a) of this
Section 4 by 3:00 p.m., New York City time, on the second Business Day next
preceding the first day of such proposed Alternate Term Period, the Corporation
shall be deemed to have delivered a notice to the Auction Agent with respect
12
<PAGE>
to such Dividend Period to the effect set forth in clause (ii) above, thereby
resulting in a Standard Term Period.
5. Restrictions on Transfer. Shares of ATP Series C may be transferred
only (a) pursuant to an Order placed in an Auction, (b) to or through a
Broker-Dealer, (c) to a Person that has delivered a signed Master Purchaser's
Letter to the Auction Agent or (d) to the Corporation or any Affiliate.
Notwithstanding the foregoing, a transfer other than pursuant to an Auction will
not be effective unless the selling Existing Holder or the Agent Member of such
Existing Holder, in the case of an Existing Holder whose shares are listed in
its own name on the books of the Auction Agent, or the Broker-Dealer or Agent
Member of such Broker-Dealer, in the case of a transfer between persons holding
shares of ATP Series C through different Broker-Dealers, advises the Auction
Agent of such transfer. The certificates representing the shares of ATP Series C
issued to the Securities Depository will bear legends with respect to the
restrictions described above and stop-transfer instructions will be issued to
the Transfer Agent and/or Registrar.
6. Voting Rights. (a) Except as otherwise provided in the Articles or
as otherwise required by applicable law, (i) each Holder of shares of ATP Series
C shall be entitled to one vote for each share of ATP Series C held on each
matter submitted to a vote of shareholders of the Corporation, and (ii) the
holders of Outstanding shares of Preferred Stock, including ATP Series C, and
shares of Common Stock shall vote together as a single class; provided, however,
that, at any meeting of the stockholders of the Corporation held for the
election of directors, the holders of Outstanding shares of Preferred Stock,
including ATP Series C, represented in person or by proxy at said meeting, shall
be entitled, as a class, to the exclusion of the holders of all other securities
and classes of capital stock of the Corporation, to elect two directors of the
Corporation, each share of Preferred Stock, including ATP Series C, entitling
the holder thereof to one vote. Subject to paragraph (b) of this Section 6, the
holders of Outstanding shares of Common Stock and Preferred Stock, including ATP
Series C, voting together as a single class, shall elect the balance of the
directors.
(b) During any period in which any one or more of the
conditions described below shall exist (such period being referred to herein as
a "Voting Period"), the number of directors constituting the Board of Directors
shall be automatically increased by the smallest number that, when added to the
two directors elected exclusively by the holders of shares of Preferred Stock,
including ATP Series C, would constitute a majority of the Board of Directors as
so increased by such smallest number; and the holders of shares of Preferred
Stock, including ATP Series C, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), to elect such
smallest number of additional directors, together with the two directors that
such holders are in any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or declared)
on shares of the Preferred
13
<PAGE>
Stock, including ATP Series C, equal to at least two full years'
dividends shall be due and unpaid; or
(ii) if at any time holders of any other shares of
Preferred Stock are entitled under the 1940 Act to elect a majority of
the directors of the Corporation.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the Holders of shares of Preferred Stock,
including ATP Series C, upon the further occurrence of any of the events
described in this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of
the holders of shares of Preferred Stock, including ATP Series C, to elect
additional directors as described in paragraph (b) of this Section 6, the
Corporation shall notify the Auction Agent, and the Auction Agent shall call a
special meeting of such holders, by mailing a notice of such special meeting to
such holders, such meeting to be held not less than 10 nor more than 30 days
after the date of mailing of such notice. If the Corporation fails to send such
notice to the Auction Agent or if the Auction Agent does not call such a special
meeting, it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting of holders of shares of Preferred Stock, including ATP Series C, held
during a Voting Period at which directors are to be elected, such holders,
voting together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be entitled
to elect the number of directors prescribed in paragraph (b) of this Section 6
on a one-vote-per-share basis.
(d) The terms of office of all persons who are directors of
the Corporation at the time of a special meeting of holders of the ATP and
holders of other Preferred Stock to elect directors shall continue,
notwithstanding the election at such meeting by the holders and such other
holders of the number of directors that they are entitled to elect, and the
persons so elected by such holders, together with the two incumbent directors
elected by such holders and the remaining incumbent directors elected by the
holders of the Common Stock and Preferred Stock, shall constitute the duly
elected directors of the Corporation.
(e) Simultaneously with the termination of a Voting Period,
the terms of office of the additional directors elected by the Holders of the
ATP and holders of other Preferred Stock pursuant to paragraph (b) of this
Section 6 shall terminate, the remaining directors shall constitute the
directors of the Corporation and the voting rights of such holders to elect
additional directors pursuant to paragraph (b) of this Section 6 shall cease,
subject to the provisions of the last sentence of paragraph (b) of this Section
6.
14
<PAGE>
(f) So long as any of the shares of Preferred Stock, including
ATP Series C, are Outstanding, the Corporation will not, without the affirmative
vote of the holders of a majority of the Outstanding shares of Preferred Stock
determined with reference to a "majority of outstanding voting securities" as
that term is defined in Section 2(a)(42) of the 1940 Act, voting as a separate
class, (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 Preferred Stock; (iii)
create, authorize or issue shares of any class of capital stock ranking senior
to or on a parity with the Preferred Stock 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 a parity with the Preferred Stock or
reclassify any authorized shares of capital stock of the Corporation into any
shares ranking senior to or on a parity with the Preferred Stock (except that,
notwithstanding the foregoing, but subject to the provisions of Sections 3(j)
and 12, the Board of Directors, without the vote or consent of the holders of
the Preferred Stock, may from time to time authorize, create and classify, and
the Corporation may from time to time issue, shares or series of Preferred Stock
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 Corporation, and may reclassify and/or issue any shares of the
ATP previously purchased or redeemed by the Corporation subject to continuing
compliance by the Corporation with 1940 Act ATP Asset Coverage and ATP Basic
Maintenance Amount requirements); (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
Corporation 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 Corporation'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 Corporation'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
Corporation may borrow for temporary or emergency purposes as may be permitted
by the Corporation's investment restrictions or as permitted under the proviso
to Section 12(b) hereof;
15
<PAGE>
provided, however, that transfers of assets by the Corporation 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 Corporation has
Eligible Assets with an aggregate Discounted Value at least equal to the ATP
Basic Maintenance Amount as of the immediately preceding Valuation Date.
(g) The affirmative vote of the holders of a majority of the
Outstanding shares of Preferred Stock, including ATP Series C, voting as a
separate class, shall be required to approve any plan of reorganization (as such
term is used in the 1940 Act) adversely affecting such shares or any action
requiring a vote of security holders of the Corporation under Section 13(a) of
the 1940 Act. In the event a vote of holders of shares of Preferred Stock is
required pursuant to the provisions of Section 13(a) of the 1940 Act, the
Corporation shall, not later than ten Business Days prior to the date on which
such vote is to be taken, notify Moody's (if Moody's is then rating ATP Series
C), Fitch (if Fitch is then rating ATP Series C) and any Other Rating Agency
which is then rating ATP Series C and which so requires that such vote is to be
taken and the nature of the action with respect to which such vote is to be
taken and shall, not later than ten Business Days after the date on which such
vote is taken, notify Moody's, Fitch and any such Other Rating Agency, as
applicable, of the results of such vote.
(h) The affirmative vote of the holders of a majority of the
Outstanding shares of ATP Series C, 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 ATP Series C in a manner different
from that of other series of classes of the Corporation'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 vote
of holders of ATP Series C described in this Section 6(i) will in each case be
in addition to a separate vote of the requisite percentage of Common Stock
and/or ATP necessary to authorize the action in question.
(i) The Board of Directors, without the vote or consent of any
Holder of the Preferred Stock, including ATP Series C, or any other stockholder
of the Corporation, may from time to time amend, alter or repeal any or all of
the definitions of the terms or provisions listed below, and any such amendment,
alteration or repeal will not be deemed to affect the preferences, rights or
powers of shares of ATP or the Holders thereof, provided that the Board of
Directors receives written confirmation from Moody's (if Moody's is then rating
ATP Series C) and Fitch (if Fitch is then rating ATP Series C) (with such
confirmation in no event being required to be obtained from a particular rating
agency in the case of the definitions relevant only to and adopted in connection
with the rating of ATP Series C, if any, by any other rating agency) that such
amendment, alteration or repeal would not impair the rating then assigned by
Moody's or Fitch, respectively. In addition, the Board of Directors, without the
16
<PAGE>
vote or consent of any Holder of the Preferred Stock, including ATP Series C, or
any other stockholder of the Corporation, may from time to time adopt, amend,
alter or repeal any or all of any additional or other definitions or add
covenants and other obligations of the Corporation (e.g., maintenance of minimum
liquidity level) or confirm the applicability of covenants and other obligations
set forth herein in connection with obtaining or maintaining the rating of
Moody's, Fitch or any Other Rating Agency with respect to ATP Series C, and any
such amendment, alteration or repeal will not be deemed to affect the
preferences, rights or powers of ATP Series C or the Holders thereof, provided
the Board of Directors receives written confirmation from the relevant rating
agency (such confirmation in no event being required to be obtained from a
particular rating agency with respect to definitions or other provisions
relevant only to another rating agency's rating) that any such amendment,
alteration or repeal would not adversely affect the rating then assigned by such
rating agency.
Definitions and Provisions Subject to Change by Director Action:
----------------------------------------------------------------
ATP Basic Maintenance Amount Minimum Applicable Rate
ATP Basic Maintenance Moody's Discount Factor
Certificate Moody's Eligible Assets
Asset Coverage Cure Date Moody's Industry Classification
Deposit Securities 1940 Act Asset Coverage Cure
Discounted Value Date
Exposure Period 1940 Act ATP Asset Coverage
Fitch Discount Factor Volatility Factor
Fitch Eligible Assets Short Term Money Market
Fitch Industry Classification Instruments
Market Value
Maximum Applicable Rate
Last Paragraph of Section 12
In addition, subject to compliance with applicable law, 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 the shares of the
Preferred Stock, including ATP Series C, or any other stockholder of
the Corporation, and without receiving any confirmation from any rating
agency after consultation with the Broker-Dealers, provided that
immediately following any such increase the Corporation would be in
compliance with the ATP Basic Maintenance Amount.
(j) Unless otherwise required by law, holders of
shares of ATP Series C shall not have any relative rights or preferences or
other special rights other than those specifically set forth herein. The holders
of shares of ATP Series C shall have no rights
17
<PAGE>
to cumulative voting. In the event that the Corporation fails to pay any
dividends on the shares of ATP Series C, the exclusive remedy of the holders
shall be the right to vote for directors pursuant to the provisions of this
Section 6.
(k) The foregoing voting provisions will not apply
with respect to ATP Series C 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.
7. Liquidation Rights. (a) Upon the dissolution, liquidation
or winding up of the affairs of the Corporation, whether voluntary or
involuntary, the holders of ATP Series C then Outstanding, together with holders
of shares of any class of stock ranking on a parity with ATP Series C upon
dissolution, liquidation or winding up, shall be entitled to receive and to be
paid out of the assets of the Corporation (or the proceeds thereof) available
for distribution to its stockholders after satisfaction of claims of creditors
of the Corporation an amount equal to the liquidation preference with respect to
such shares. The liquidation preference for shares of ATP Series C shall be
$25,000 per share, plus an amount equal to all accumulated dividends thereon
(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. No redemption premium shall be paid upon any
liquidation even if such redemption premium would be paid upon optional or
mandatory redemption of the relevant shares.
(b) Upon the dissolution, liquidation or winding up
of the Corporation, whether voluntary or involuntary, until payment in full is
made to the holders of ATP Series C of the liquidation distribution to which
they are entitled, no dividend or other distribution shall be made to the
holders of shares of Common Stock or any other class of stock of the Corporation
ranking junior to ATP Series C upon dissolution, liquidation or winding up and
no purchase, redemption or other acquisition for any consideration by the
Corporation shall be made in respect of the shares of Common Stock or any other
class of stock of the Corporation ranking junior to ATP Series C upon
dissolution, liquidation or winding up.
(c) A consolidation or merger of the Corporation with
or into any other company or companies, or a sale, lease or exchange of all or
substantially all of the assets of the Corporation in consideration for the
issuance of equity securities of another company shall not be deemed to be a
liquidation, dissolution or winding up, whether voluntary or involuntary, for
the purposes of this Section 7; provided, however, that the consolidation,
merger, sale, lease or exchange does not materially adversely affect any
designation, right, preference or limitation of ATP Series C or any shares
issuable in exchange for shares of ATP Series C in any such consolidation or
merger.
18
<PAGE>
(d) After the payment to the Holders of ATP Series C
of the full preferential amounts provided for in this Section 7, the holders of
ATP Series C as such shall have no right or claim to any of the remaining assets
of the Corporation.
(e) In the event the assets of the Corporation or
proceeds thereof available for distribution to the Holders of ATP Series C, upon
any dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such holders are entitled pursuant to paragraph (a) of this
Section 7, no such distribution shall be made on account of any shares of any
other class or series of Preferred Stock ranking on a parity with ATP Series C
with respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the shares of ATP Series C, ratably, in proportion to the full distributable
amounts to which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
(f) Subject to the rights of the holders of shares of
any series or class or classes of stock ranking on a parity with ATP Series C
with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Corporation, after payment shall have been made
in full to the holders of the shares of ATP Series C as provided in paragraph
(a) of this Section 7, but not prior thereto, any other series or class or
classes of stock ranking junior to ATP Series C with respect to the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Corporation shall, subject to any respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to be paid
or distributed, and the holders of the shares of ATP Series C shall not be
entitled to share therein.
8. Auction Agent. For so long as any shares of ATP Series C
are Outstanding, the Auction Agent, duly appointed by the Corporation to so act,
shall be in each case a commercial bank, trust company or other financial
institution independent of the Corporation and its Affiliates (which, however,
may engage or have engaged in business transactions with the Corporation or its
Affiliates) and at no time shall the Corporation or any of its Affiliates act as
the Auction Agent in connection with the Auction Procedures. If the Auction
Agent resigns or for any reason its appointment is terminated during any period
that any shares of ATP Series C are Outstanding, the Corporation shall use its
best efforts promptly thereafter to appoint another qualified commercial bank,
trust company or financial institution to act as the Auction Agent.
9. 1940 Act ATP Asset Coverage. The Corporation shall
maintain, as of each Valuation Date on which any share of the ATP is
Outstanding, asset coverage with respect to the ATP which is equal to or greater
than the 1940 Act ATP Asset Coverage; provided, however, that Section 3(a)(ii)
shall be the sole remedy in the event the Corporation fails to do so.
19
<PAGE>
10. ATP Basic Maintenance Amount. So long as shares of the ATP
are Outstanding and Moody's, Fitch or any Other Rating Agency which so requires
is then rating the shares of the ATP, the Corporation shall maintain, as of each
Valuation Date, Moody's Eligible Assets (if Moody's is then rating the ATP),
Fitch Eligible Assets (if Fitch is then rating the ATP) and (if applicable)
Other Rating Agency Eligible Assets having an aggregate Discounted Value equal
to or greater than the ATP Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Corporation fails to
do so.
11. [Reserved]
12. Certain Other Restrictions. For so long as any shares of
ATP Series C are Outstanding and Moody's, Fitch or any Other Rating Agency which
so requires is then rating such shares, the Corporation will not, unless it has
received written confirmation from Moody's (if Moody's is then rating ATP Series
C), Fitch (if Fitch is then rating ATP Series C) and (if applicable) such Other
Rating Agency that any such action would not impair the rating then assigned by
such rating agency to ATP Series C, engage in any one or more of the following
transactions:
(a) 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 transaction;
(b) borrow money, except that the Corporation may,
without obtaining the written confirmation described above, borrow money for the
purpose of clearing securities transactions; provided that the ATP Basic
Maintenance Amount 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;
(c) except in connection with a refinancing of the
ATP (including the ATP Series C), issue any class or series of stock ranking
prior to or on a parity with ATP Series C with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Corporation, or reissue any shares of ATP Series C previously
purchased or redeemed by the Corporation;
(d) engage in any short sales of securities;
(e) lend portfolio securities; or
(f) merge or consolidate into or with any other
corporation.
For purposes of valuation of Moody's Eligible Assets and Fitch Eligible
Assets: (A) if the Corporation writes a call option, the underlying asset will
be valued as follows: (1) if the
20
<PAGE>
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of ATP Series C, at the lower of the
Discounted Value of the underlying security of the option and the exercise price
of the option or (2) otherwise, it has no value; (B) if the Corporation writes a
put option, the underlying asset will be valued as follows: the lesser of (1)
exercise price and (2) the Discounted Value of the underlying security; and (C)
call or put option contracts which the Corporation buys have no value. For so
long as ATP Series C is rated by Moody's or Fitch: (A) the Corporation will not
engage in options transactions for leveraging or speculative purposes; (B) the
Corporation will not write or sell any anticipatory contracts pursuant to which
the Corporation hedges the anticipated purchase of an asset prior to completion
of such purchase; (C) the Corporation will not enter into an option transaction
with respect to portfolio securities unless, after giving effect thereto, the
Corporation would continue to have Eligible Assets with an aggregate Discounted
Value equal to or greater than the ATP Basic Maintenance Amount; (D) the
Corporation will not enter into an option transaction with respect to portfolio
securities unless after giving effect to such transaction the Corporation would
continue to be in compliance with the provisions relating to the ATP Basic
Maintenance Amount; (E) for purposes of the ATP Basic Maintenance Amount assets
in margin accounts are not Eligible Assets; (F) the Corporation shall write only
exchange-traded options on exchanges approved by Moody's (if Moody's is then
rating ATP Series C) and Fitch (if Fitch is then rating ATP Series C); (G) where
delivery may be made to the Corporation with any of a class of securities, the
Corporation shall assume for purposes of the ATP Basic Maintenance Amount that
it takes delivery of that security which yields it the least value; (H) the
Corporation will not engage in forward contracts; and (I) there shall be a
quarterly audit made of the Corporation's options transactions by the
Corporation's independent accountants to confirm that the Corporation is in
compliance with these standards.
13. Compliance Procedures for Asset Maintenance Tests. For so
long as any shares of ATP Series C are Outstanding and Moody's, Fitch or any
Other Rating Agency which so requires is then rating such shares:
(a) As of each Valuation Date, the Corporation shall
determine in accordance with the procedures specified herein (i) the Market
Value of each Eligible Asset owned by the Corporation on that date, (ii) the
Discounted Value of each such Eligible Asset using the Discount Factors, (iii)
whether the ATP Basic Maintenance Amount is met as of that date, (iv) the value
of the total assets of the Corporation, less all liabilities, and (v) whether
the 1940 Act ATP Asset Coverage is met as of that date.
(b) Upon any failure to maintain the required ATP
Basic Maintenance Amount or 1940 Act ATP Asset Coverage on any Valuation Date,
the Corporation may use reasonable commercial efforts (including, without
limitation, altering the composition of its portfolio, purchasing shares of the
ATP outside of an Auction or in the event of a failure to file a certificate on
a timely basis, submitting the requisite certificate), subject to the fiduciary
obligations of the Board of Directors, to reattain (or certify in the case of a
failure to file on a timely basis, as the case may be) the required ATP Basic
Maintenance
21
<PAGE>
Amount or 1940 Act ATP Asset Coverage on or prior to the ATP Basic Maintenance
Cure Date or 1940 Act ATP Cure Date, as the case may be.
(c) Compliance with the ATP Basic Maintenance Amount
and 1940 Act Asset Coverage Tests shall be determined with reference to those
shares of the ATP which are deemed to be Outstanding hereunder.
(d) The Corporation shall deliver a certificate which
sets forth a determination of items (i) - (iii) of paragraph (a) of this Section
13 (an "ATP Basic Maintenance Certificate") (i) to the Auction Agent, Moody's
(if Moody's is then rating ATP Series C), Fitch (if Fitch is then rating ATP
Series C) and any Other Rating Agency which is then rating ATP Series C and
which so requires as of (A) the Business Day preceding the Date of Original
Issue and (B) any Valuation Date on which the Corporation fails to have Eligible
Assets with an aggregate Discounted Value at least equal to 125% of the ATP
Basic Maintenance Amount, (ii) to the Auction Agent, Fitch (if Fitch is then
rating ATP Series C) and any Other Rating Agency which is then rating ATP Series
C and which so requires (A) as of every fourth Valuation Date after the Date of
Original Issue for the first year following the Date of Original Issue, (B) if
the Corporation fails to have Eligible Assets with an aggregate Discounted Value
at least equal to ATP Basic Maintenance Amount, and (C) on request by Fitch or
such Other Rating Agency, as applicable, (iii) to the Auction Agent, Moody's (if
Moody's is then rating ATP Series C), Fitch (if Fitch is then rating ATP Series
C) and any Other Rating Agency which is then rating ATP Series C and which so
requires as of (A) the Valuation Date next following the date of redemption by
the Corporation 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 (B) the last Valuation Date of
each fiscal quarter and a Valuation Date during such fiscal quarter randomly
selected by the Corporation's independent accountants as provided in Section
10(g), and (iv) to the Auction Agent, Moody's (if Moody's is then rating ATP
Series C), Fitch (if Fitch is then rating ATP Series C) and any Other Rating
Agency which is then rating ATP Series C and which so requires as of a Business
Day on or before any Asset Coverage Cure Date relating to the Corporation's cure
of a failure to have Eligible Assets with an aggregate Discounted Value at least
equal to the ATP Basic Maintenance Amount. Such ATP Basic Maintenance
Certificate shall be delivered in the case of clause (i)(A) on the Date of
Original Issue and in the case of clauses (i)(B), (ii), (iii) and (iv) above on
or before the third Business Day after the relevant Valuation Date or Asset
Coverage Cure Date.
(e) The Corporation shall deliver to the Auction
Agent, Moody's (if Moody's is then rating ATP Series C), Fitch (if Fitch is then
rating ATP Series C), and any Other Rating Agency which is then rating ATP
Series C 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
Corporation (a "1940 Act ATP Asset Coverage Certificate") (i) as of the Business
Day preceding the Date of Original Issue, and (ii) as of (A) the last Valuation
Date of each quarter thereafter, and (B) as of the Business Day on or before the
Asset
22
<PAGE>
Coverage Cure Date relating to the failure to satisfy the 1940 Act Asset
Coverage. Such 1940 Act ATP Asset Coverage Certificate shall be delivered in the
case of clause (i) on the Date of Original Issue and in the case of clause (ii)
on or before the third Business Day after the relevant Valuation Date or the
Asset Coverage Cure Date.
(f) [Reserved]
(g) On the Date of Original Issue, the Corporation
shall deliver to the Auction Agent, Moody's (if Moody's is then rating ATP
Series C), Fitch (if Fitch is then rating ATP Series C) and any Other Rating
Agency which is then rating ATP Series C and which so requires a letter prepared
by the Corporation's independent accountants (an "Accountant's Certificate")
regarding the accuracy of the calculations made by the Corporation in the ATP
Basic Maintenance Certificate and the 1940 Act ATP Asset Coverage Certificate
required to be delivered by the Corporation as of the Date of Original Issue.
Within eight Business Days after the last Valuation Date of each fiscal quarter
of the Corporation on which an ATP Basic Maintenance Certificate is required to
be delivered, the Corporation (x) will deliver to the Auction Agent, Moody's (if
Moody's is then rating ATP Series C), Fitch (if Fitch is then rating ATP Series
C) and any Other Rating Agency which is then rating ATP Series C and which so
requires an Accountant's Certificate regarding the accuracy of the calculations
made by the Corporation in such ATP Basic Maintenance Certificate and in any
other ATP Basic Maintenance Certificate randomly selected by the Corporation's
independent accountants during such fiscal quarter. Within eight Business Days
after the last Valuation Date of each fiscal quarter of the Corporation on which
a 1940 Act ATP Asset Coverage Certificate is required to be delivered, the
Corporation will deliver to the Auction Agent, Moody's (if Moody's is then
rating ATP Series C), Fitch (if Fitch is then rating ATP Series C) and any Other
Rating Agency which is then rating ATP Series C and which so requires an
Accountant's Certificate regarding the accuracy of the calculations made by the
Corporation in such 1940 Act ATP Asset Coverage Certificate. In addition, the
Corporation will deliver to the relevant persons specified in the preceding
sentence an Accountant's Certificate regarding the accuracy of the calculations
made by the Corporation on each ATP Basic Maintenance Certificate and 1940 Act
ATP Asset Coverage Certificate delivered pursuant to clause (iv) of paragraph
(d) or clause (ii)(B) of paragraph (e) of this Section 13, as the case may be,
within five days after the relevant Asset Coverage Cure Date. If an Accountant's
Certificate delivered with respect to an Asset Coverage Cure Date shows an error
was made in the Corporation's report with respect to such Asset Coverage Cure
Date, the calculation or determination made by the Corporation's independent
accountants will be conclusive and binding on the Corporation with respect to
such reports. If any other Accountant's Certificate shows that an error was made
in any such report, the calculation or determination made by the Corporation's
independent accountants will be conclusive and binding on the Corporation;
provided, however, any errors shown in the Accountant's Certificate filed on a
quarterly basis shall not be deemed to be a failure to maintain the ATP Basic
Maintenance Amount on any prior Valuation Dates.
23
<PAGE>
(h) The Accountant's Certificates referred to in
paragraph (g) will confirm, based upon the independent accountant's review, (i)
the mathematical accuracy of the calculations reflected in the related ATP Basic
Maintenance Amount and 1940 Act ATP Asset Coverage Certificates, as the case may
be, and (ii) that the Corporation determined whether the Corporation had, at
such Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Basic Maintenance Amount in accordance with the Articles
Supplementary.
(i) In the event that an ATP Basic Maintenance
Certificate or 1940 Act ATP Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified in
this Section 13, the Corporation shall be deemed to have failed to maintain the
ATP Basic Maintenance Amount or the 1940 Act ATP Asset Coverage, as the case may
be, on such Valuation Date for purposes of Section 13(b). In the event that an
ATP Basic Maintenance Certificate or 1940 Act ATP Asset Coverage Certificate or
the applicable Accountant's Certificates with respect to an applicable Asset
Coverage Cure Date are not delivered within the time periods specified herein,
the Corporation 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 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 Asset
Coverage Cure Date for purposes of the mandatory redemption provisions.
14. [Reserved]
15. Notice. All notices or communications hereunder, unless
otherwise specified in these Articles Supplementary, shall be sufficiently given
if in writing and delivered in person, by telecopier or mailed by first-class
mail, postage prepaid. Notices delivered pursuant to this Section 15 shall be
deemed given on the earlier of the date received or the date five days after
which such notice is mailed.
16. Waiver. Holders of at least two-thirds of the Outstanding
shares of ATP, acting collectively, or the ATP Series C, acting as a separate
series, may waive any provision hereof intended for their respective benefit in
accordance with such procedures as may from time to time be established by the
Board of Directors.
17. Termination. In the event that no shares of ATP Series C
are Outstanding, all rights and preferences of such shares established and
designated hereunder shall cease and terminate, and all obligations of the
Corporation under these Articles Supplementary shall terminate.
18. Definitions. As used in Part I and Part II of these
Articles Supplementary, the following terms shall have the following meanings
(with terms defined in the singular having comparable meanings when used in the
plural and vice versa), unless the context otherwise requires:
24
<PAGE>
(a) ""aaa"/AAA Credit Rating" means a credit rating
in the highest category of any two nationally recognized statistical rating
organizations (as used in the rules and regulations under the Securities
Exchange Act of 1934), one of which shall be Moody's or S&P.
(b) "AA Composite Commercial Paper Rate" on any date
means (i) the interest equivalent of the 30-day rate, in the case of a Dividend
Period which is a Standard Term Period or shorter, or the 180-day rate, in the
case of all other Dividend Periods, on commercial paper on behalf of issuers
whose corporate bonds are rated AA by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the AA Composite
Commercial Paper Rate, such rate shall be determined on the basis of the
quotations (or quotation) furnished by the remaining Commercial Paper Dealers
(or Dealer), if any, or, if there are no such Commercial Paper Dealers, by the
Auction Agent. For purposes of this definition, (A) "Commercial Paper Dealers"
shall mean (1) Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman Sachs & Co.; (2) in lieu of any thereof, its respective
Affiliate or successor, and (3) in the event that any of the foregoing shall
cease to quote rates for commercial paper of issuers of the sort described
above, in substitution therefor, a nationally recognized dealer in commercial
paper of such issuers then making such quotations selected by the Corporation,
and (B) "interest equivalent" of a rate stated on a discount basis for
commercial paper of a given number of days' maturity shall mean a number equal
to the quotient (rounded upward to the next higher one-thousandth of 1%) of (1)
such rate expressed as a decimal, divided by (2) the difference between (x) 1.00
and (y) a fraction, the numerator of which shall be the product of such rate
expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.
(c) "Accountant's Certificate" has the meaning set
forth in Section 13(g).
(d) "Affiliate" means any person controlled by, in
control of or under common control with the Corporation; provided that no
Broker-Dealer controlled by, in control of or under common control with the
Corporation shall be deemed to be an Affiliate nor shall any corporation or any
person controlled by, in control of or under common control with such
corporation one of the directors or executive officers of which is also a
director of the Corporation be deemed to be an Affiliate solely because such
director or executive officer is also a director of the Corporation.
25
<PAGE>
(e) "Alternate Term Period" means a Dividend Period
that is not a Standard Term Period.
(f) "Applicable Rate" means, with respect to ATP
Series C, for each Dividend Period (i) if Sufficient Clearing Orders exist for
the Auction in respect thereof, the Winning Rate, (ii) if Sufficient Clearing
Orders do not exist for the Auction in respect thereof, the Maximum Applicable
Rate and (iii) in the case of any Dividend Period of 93 days or fewer if all the
shares of ATP Series C are the subject of Submitted Hold Orders for the Auction
in respect thereof, the Minimum Applicable Rate.
(g) "Articles" means the Articles of Amendment and
Restatement, as amended including any Articles Supplementary, of the
Corporation.
(h) "Asset Coverage Cure Date" has the meaning set
forth in Section 3(a)(ii).
(i) "ATP" means the Auction Term Preferred Stock,
$1.00 par value per share and liquidation preference $25,000 per share, Series C
of the Corporation or any other series of Preferred Stock heretofore or
hereinafter designated "Auction Term Preferred Stock" by Articles Supplementary
or Articles of Amendment.
(j) "ATP Basic Maintenance Amount" as of any
Valuation Date means the dollar amount equal to the sum of
(i) (A) the sum of the products
resulting from multiplying the number of Outstanding shares of each
series of ATP on such date by the liquidation preference per share of
such series (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, only if such 42nd day occurs after the first day
following the Dividend 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 Corporation 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 (i)(A) through (i)(D); and (F) without duplication, 10% of the
26
<PAGE>
exercise price of any call option written by the Corporation and the
exercise price of any put option written by the Corporation; less
(ii) the sum of any cash or the
value of any Corporation assets irrevocably deposited by the
Corporation for the payment of any of (i)(B) through (i)(F) ("value"
for purposes of this clause (ii) 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 P1 by Moody's and A1+ by S&P, it will be valued
at its face value).
(k) "ATP Basic Maintenance Certificate" has the
meaning set forth in Section 13(d).
(l) "ATP Series C" means the shares of Series C of
the ATP or any other shares of Preferred Stock hereinafter designated as shares
of Series C of the ATP by Articles Supplementary or Articles of Amendment.
(m) "Auction" means each periodic operation of the
procedures set forth under "Auction Procedures."
(n) "Auction Agent" means Bankers Trust Company
unless and until another commercial bank, trust company, or other financial
institution appointed by a resolution of the Board of Directors enters into an
agreement with the Corporation to follow the Auction Procedures for the purpose
of determining the Applicable Rate.
(o) "Auction Date" means the first Business Day next
preceding the first day of a Dividend Period for ATP Series C.
(p) "Auction Procedures" means the procedures for
conducting Auctions set forth in Part II hereof.
(q) "Board of Directors" means the Board of Directors
of the Corporation or any duly authorized committee thereof as permitted by
applicable law.
(r) "Broker-Dealer" or "Broker-Dealers" means any
broker-dealer or broker-dealers, or other entity permitted by law to perform the
functions required of a Broker-Dealer by the Auction Procedures, that has been
selected by the Corporation and has entered into a Broker-Dealer Agreement with
the Auction Agent that remains effective.
(s) "Broker-Dealer Agreement" means an agreement
entered into by the Auction Agent and a Broker-Dealer, pursuant to which such
Broker-Dealer agrees to follow the Auction Procedures.
27
<PAGE>
(t) "Business Day" means a day on which the New York
Stock Exchange is open for trading and which is not a Saturday, Sunday or other
day on which banks in the City of New York, New York are authorized or obligated
by law to close.
(u) "Code" means the Internal Revenue Code of 1986,
as amended.
(v) "Commercial Paper Dealers" has the meaning set
forth in the definition of AA Composite Commercial Paper Rate.
(w) "Commission" means the Securities and Exchange
Commission.
(x) "Common Stock" means the common stock, par value
$.01 per share, of the Corporation.
(y) "Corporate Bonds" means corporate debt securities
having the characteristics set forth in paragraph (iv) of the definition of
Fitch Eligible Assets.
(z) "Date of Original Issue" means the date on which
ATP Series C is originally issued by the Corporation.
(aa) "Default Period" has the meaning set forth in
Section 2(c)(ii).
(bb) "Default Rate" means the Reference Rate
multiplied by three (3).
(cc) "Deposit Securities" means cash and any
obligations or securities, including Short Term Money Market Instruments that
are Eligible Assets, rated at least AAA, A-1+ or SP-1+ by S&P, except that, for
purposes of section 3(a)(i) of this Part I, such obligations or securities shall
be considered "Deposit Securities" only if they are also rated at least P-1 by
Moody's.
(dd) "Discount Factor" means the Moody's Discount
Factor (if Moody's is then rating the ATP), the Fitch Discount Factor (if Fitch
is then rating the ATP) or the discount factor established by any Other Rating
Agency which is then rating the ATP and which so requires, whichever is
applicable.
(ee) "Discounted Value" means the quotient of the
Market Value of an Eligible Asset divided by the applicable Discount Factor
provided that with respect to an Eligible Asset that is currently callable,
Discounted Value shall be equal to the quotient as calculated above or the call
price, whichever is lower, and that with respect to an Eligible Asset that is
prepayable, Discounted Value shall be equal to the quotient as calculated above
or the par value, whichever is lower.
(ff) "Dividend Default" has the meaning set forth in
Section 2(c)(iii).
28
<PAGE>
(gg) "Dividend Payment Date" for ATP Series C, 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.
(hh) "Dividend Period" means, with respect to ATP
Series C, the period commencing on the Date of Original Issue thereof and ending
on the date specified for such series on the Date of Original Issue thereof and
thereafter, as to such series, the period commencing on the day following each
Dividend Period for such series and ending on the day established for such
series by the Corporation.
(ii) "Eligible Assets" means Moody's Eligible Assets
(if Moody's is then rating the ATP), Fitch Eligible Assets (if Fitch is then
rating the ATP) and/or Other Rating Agency Eligible Assets if any Other Rating
Agency is then rating the ATP, whichever is applicable.
(jj) "Exposure Period" means the period commencing on
(and including) a given Valuation Date and ending 41 days thereafter.
(kk) "Fitch" means Fitch Investors Service, Inc. and
its successors at law.
(ll) "Fitch Discount Factor" means, for purposes of
determining the Discounted Value of any Fitch Eligible Asset, the percentage
determined as follows. The Fitch Discount Factor for any Fitch Eligible Asset
other than the securities set forth below will be the percentage provided in
writing by Fitch.
(i) Corporate Bonds: The percentage determined
by reference to the type and remaining term to maturity of each
corporate bond in accordance with the table set forth below.
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
29
<PAGE>
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 1.27
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
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
30
<PAGE>
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
(ii) Short Term Money Market Instruments: 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.
(iii) 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
(iv) Rule 144A Securities: 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 Securities Act.
(mm) "Fitch Eligible Assets" means
(i) cash (including, for this purpose, interest and
dividends due on assets rated (A) Baa3 or higher by Moody's, BBB or
higher by S&P or BBB or higher by Fitch if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher by Moody's
and either A or higher by S&P or A or higher by Fitch if the
31
<PAGE>
payment date is within thirty days of the Valuation Date, and (C) A1 or
higher by Moody's and either A+ or higher by S&P or A+ or higher by
Fitch if the payment date is within the Exposure Period) and
receivables for Fitch 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 Corporation has received prior written
authorization from Fitch or (B) (1) with counterparties having a Fitch
long-term debt rating of at least BBB- by Fitch, if rated by Fitch or,
if not rated by Fitch, then rated at least BBB- by S&P and rated at
least Baa3 by Moody's or (2) with counterparties having a Fitch
Short-Term Money Market Instrument rating of at least F-1+ by Fitch, if
rated by Fitch or, if not rated by Fitch, then rated at least A-1 by
S&P and rated at least P-1 by Moody's;
(ii) Short-Term Money Market Instruments so long as
(A) such securities are rated at least P-1 by Moody's and either at
least A-1 + by S&P or F1+ by Fitch, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2 by Moody's and either at least A by S&P or A by Fitch, or (C)
in all other cases, the supporting entity (1) is rated at least A2 by
Moody's and at least A by S&P and the security matures within one
month, (2) is rated at least A1 by Moody's and either at least A+ by
S&P or at least A by Fitch and the security matures within three months
or (3) is rated at least Aa3 by Moody's and either at least AA by S&P
or at least AA by Fitch and the security matures within six months;
(iii) U.S. Treasury Securities;
(iv) debt securities constituting Corporate Bonds if
(A) such securities 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)
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 or are
restricted as to resale under federal securities laws but are eligible
for resale pursuant to Rule 144A under the Securities Act 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 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
32
<PAGE>
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.
(v) 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:
Maximum Maximum Minimum
Single Single Issue Size
Issuer Industry ($ in
Type of Corporate Bond (%)(1,2) (%)(2,3) millions)
---------------------- -------- -------- ---------
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)
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 Fitch Industry Classifications.
(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.
Where the Corporation 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 Corporation 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 Corporation purchases an asset and agrees to sell
it to a third party in the future, cash receivable by the Corporation thereby
will constitute a Fitch Eligible Asset if the long-term debt of such other party
is rated at least
33
<PAGE>
A2 by Moody's and at least 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 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 Fitch has indicated to the Corporation 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 Corporation by its
investment adviser, the Corporation's custodian, transfer agent or registrar or
the Auction Agent and (D) Liens by virtue of any repurchase agreement. See also
Section 12 for certain information with respect to Fitch Eligible Assets.
(nn) "Fitch Industry Classifications" means, for the purposes of
determining Fitch Eligible Assets, each of the following industry
classifications:
Aerospace & Defense
Automobiles
Banking, Finance & Insurance
Building & Materials
Chemicals
Computers & Electronics
Consumer Products
Energy
Environmental Services
Farming & Agriculture
Food, Beverage & Tobacco
Healthcare & Pharmaceuticals
Industrial Machinery
Media, Leisure & Entertainment
Metals & Mining
Miscellaneous
Paper & Forest Products
Retail
Sovereigns
Textiles & Furniture
Transportation
Utilities
The Corporation shall use its discretion in determining which industry
classification is applicable to a particular investment.
34
<PAGE>
(oo) "Holder" means, with respect to ATP Series C, the
registered holder of shares of ATP Series C as the same appears on the stock
ledger or stock records of the Corporation.
(pp) "Mandatory Redemption Date" has the meaning set forth in
Section 3(a)(iv).
(qq) "Market Value" shall mean the fair market value of an
asset of the Corporation (excluding interest and dividends due on such assets)
as computed based upon (i) pricing services to be provided by Merrill Lynch
Capital Markets Securities Pricing Service, Kenny S&P Evaluation Services or
such other pricing service determined from time to time by the Board of
Directors, provided that Moody's (if Moody's is then rating the ATP Series C),
Fitch (if Fitch is then rating the ATP Series C) and any Other Rating Agency
which is then rating the ATP Series C and so requires have informed the
Corporation in writing that use of such pricing service will not adversely
affect such rating agency's then current rating of the shares of ATP Series C or
(ii) the lower of the value set forth in bids from two independent dealers that
are members or Affiliates of members of the National Association of Securities
Dealers, Inc. and that make markets in such security, one of which bids shall be
in writing.
(rr) "Maximum Applicable Rate" means, on any date on which the
Applicable Rate is determined, the rate equal to 150% of the applicable
Reference Rate, subject to upward but not downward adjustment in the discretion
of the Board of Directors after consultation with the Broker-Dealers, provided
that immediately following any such increase the Corporation would be in
compliance with the ATP Basic Maintenance Amount.
(ss) "Minimum Applicable Rate" means, on any Auction Date with
respect to a Dividend Period of 93 days or fewer, 80% of the AA Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding such Auction Date. There shall be no Minimum Applicable Rate on any
Auction Date with respect to a Dividend Period of more than 93 days.
(tt) "Moody's" means Moody's Investors Service, Inc. and its
successors at law.
(uu) "Moody's Discount Factor" means, for purposes of
determining the Discounted Value of any Moody's Eligible Asset, the percentage
determined as follows. The Moody's Discount Factor for any Moody's Eligible
Asset other than the securities set forth below will be the percentage provided
in writing by Moody's.
(i) Corporate Debt Securities: The percentage
determined by reference to the rating on such asset (which percentage
is based upon the Exposure Period) with reference to the remaining term
to maturity of such assets, in accordance with the table set forth
below.
35
<PAGE>
Moody's Discount Factors --
Corporate Debt Securities
Rating Category
Maturity ----------------------------------------------------------
of Collateral Aaa Aa A Baa Ba B* Caa
- ------------- --- -- - --- -- -- ---
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..... 129 135 141 148 160 172 260
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.
(ii) Preferred Stock: For (A) utility preferred
stocks, 152%, (B) industrial/financial preferred stocks, 197%, and (C)
auction rate preferred stocks, 350%.
(iii) Short Term Money Market Instruments: The
Moody's 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, (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. A
Moody's Discount Factor of 100% will be applied to cash.
36
<PAGE>
(iv) U.S. Treasury Securities and Treasury Strips (as
defined by Moody's):
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
(v) Rule 144A Securities: The Moody's Discount Factor
applied to Rule 144A Securities will be 160% of the Moody's Discount
Factor which would apply were the securities registered under the
Securities Act.
(vv) "Moody's Eligible Assets" means
(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 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 Moody's
37
<PAGE>
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 Corporation 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 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;
(iii) U.S. Treasury Securities and Treasury Strips(as
defined by Moody's);
(iv) Corporate debt securities will be included in
Moody's Eligible Assets if (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 or are restricted as to resale under federal securities
laws but are eligible for resale pursuant to Rule 144A under the
Securities Act as determined by the Fund's adviser acting subject to
the supervision of the Fund's Board of Directors.
(v) Portfolio securities that are preferred stocks
will be included in Moody's Eligible Assets if (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
38
<PAGE>
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 Corporation
of each issue of preferred stock is $500,000 and the maximum holding of
preferred stock of each issue is $5 million. In addition, preferred
stocks issued by transportation companies will not be considered
Moody's Eligible Assets.
(vi) In addition, portfolio holdings as described
below must be within the following diversification and issue size
requirements in order to be included in Moody's Eligible Assets:
Maximum Maximum Minimum
Single Single Issue Size
Issuer Industry ($ in
Collateral Ratings(1) (%)(2,3) (%)(3,4) millions)(6)
--------------------- -------- -------- ------------
"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)
See accompanying notes
- --------------------
(1) Refers to the senior debt rating of collateral.
(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 Moody's Industry Classifications.
(5) Collateral 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.
Where the Corporation 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 Corporation is required to pay upon
repurchase of such asset will count as a liability for the
39
<PAGE>
purposes of ATP Basic Maintenance Amount. Where the Corporation purchases an
asset and agrees to sell it to a third party in the future, cash receivable by
the Corporation 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 shall be 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 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 Corporation 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
Corporation by its investment adviser, the Corporation's custodian, transfer
agent or registrar or the Auction Agent and (D) Liens by virtue of any
repurchase agreement. See also Section 12 for certain information with respect
to Moody's Eligible Assets.
(ww) "Moody's Industry Classification" means, for the purposes
of determining Moody's Eligible Assets, each of the following industry
classifications:
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),
40
<PAGE>
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
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
41
<PAGE>
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 of the
foregoing
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
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
42
<PAGE>
The Corporation shall use its discretion in determining which industry
classification is applicable to a particular investment.
(xx) "1940 Act" means the Investment Company Act of 1940, as
amended from time to time.
(yy) "1940 Act ATP Asset Coverage" means asset coverage, as
defined in Section 18(h) of the 1940 Act, of at least 200% with respect to all
Outstanding senior securities of the Corporation which are stock, including all
Outstanding ATP (or such other asset coverage as may in the future be specified
in or under the 1940 Act as the minimum asset coverage for senior securities
which are stock of a closed-end investment company as a condition of declaring
dividends on its common stock), determined on the basis of values calculated as
of a time within 48 hours next preceding the time of such determination.
(zz) "1940 Act ATP Asset Coverage Certificate" means the
certificate required to be delivered by the Corporation pursuant to Section
13(e).
(aaa) "Notice of Redemption" means any notice with respect to
the redemption of shares of ATP pursuant to Section 3.
(bbb) "Other Rating Agency" means any rating agency other than
Moody's or Fitch then providing a rating for the ATP pursuant to the request of
the Corporation.
(ccc) "Other Rating Agency Eligible Assets" means assets of
the Corporation designated by any Other Rating Agency as eligible for inclusion
in calculating the discounted value of the Corporation's assets in connection
with such Other Rating Agency's rating of ATP Series C.
(ddd) "Outstanding" means, as of any date, shares of ATP
theretofore issued by the Corporation except, without duplication, (i) any
shares of ATP theretofore canceled, redeemed or repurchased by the Corporation,
or delivered to the Auction Agent for cancellation or with respect to which the
Corporation has given notice of redemption and irrevocably deposited with the
Paying Agent sufficient funds to redeem such shares of ATP and (ii) any shares
of ATP represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Corporation. Notwithstanding the foregoing,
(A) for purposes of voting rights (including the determination of the number of
shares required to constitute a quorum), any shares of the ATP to which the
Corporation or any Affiliate of the Corporation shall be the Existing Holder
shall be disregarded and not deemed Outstanding; (B) in connection with any
Auction, any shares of the ATP Series C as to which the Corporation or any
person known to the Auction Agent to be an Affiliate of the Corporation shall be
the Existing Holder thereof shall be disregarded and deemed not to be
Outstanding; and (C) for purposes of determining the ATP Basic Maintenance
Amount, shares of ATP held by the
43
<PAGE>
Corporation shall be disregarded and not deemed Outstanding but shares held by
any Affiliate of the Corporation shall be deemed Outstanding.
(eee) "Paying Agent" means Bankers Trust Company unless and
until another entity appointed by a resolution of the Board of Directors enters
into an agreement with the Corporation to serve as paying agent, which paying
agent may be the same as the Auction Agent.
(fff) "Person" or "person" means and includes an individual, a
partnership, a corporation, a trust, an unincorporated association, a joint
venture or other entity or a government or any agency or political subdivision
thereof.
(ggg) "Preferred Stock" means the preferred stock of the
Corporation from time to time.
(hhh) "Proration Procedures" means:
(i) if Sufficient Clearing Orders exist, in the case
of a Submitted Hold/Sell Order specifying a rate equal to the Winning
Rate
(A) the number of shares of ATP Series C to
be the subject of an accepted Hold Order will be (1) the
number of shares of ATP Series C subject to such Submitted
Hold/Sell Order multiplied by (2) the total number of shares
of ATP Series C that are neither the subject of a Submitted
Buy Order or a Submitted Hold/Sell Order specifying a rate
lower than the Winning Rate nor the subject of a Submitted
Hold Order and divided by (3) the total number of shares of
ATP Series C subject to Submitted Hold/Sell Orders that
specified a rate equal to the Winning Rate, and
(B) the number of shares of ATP Series C to
be the subject of an accepted Sell Order will be the remaining
number of shares of ATP Series C subject to such Submitted
Hold/Sell Order,
(ii) if Sufficient Clearing Orders exist, in the case
of a Submitted Buy Order specifying a rate equal to the Winning Rate
(A) the number of shares of ATP Series C to
be the subject of an accepted Buy Order will be (1) the number
of shares of ATP Series C subject to such Submitted Buy Order
multiplied by (2) the difference between (x) the number of
shares of ATP Series C that are the subject of a Submitted
Sell Order or a Submitted Hold/Sell Order that specified a
rate higher than the Winning Rate and (y) the number of shares
of ATP Series C that are the subject of a Submitted Buy Order
that specified a rate lower than the Winning Rate and
44
<PAGE>
divided by (3) the total number of shares of ATP Series C
subject to Submitted Buy Orders that specified a rate equal
to the Winning Rate, and
(B) such Submitted Buy Order will not be
accepted as to the remaining number of shares subject to such
Submitted Buy Order, and
(iii) if Sufficient Clearing Orders do not exist, in
the case of a Submitted Hold/Sell Order specifying a rate higher than
the Maximum Applicable Rate and in the case of a Submitted Sell Order
(A) the number of shares of ATP Series C to
be the subject of an accepted Sell Order will be (1) the
number of shares of ATP Series C subject to such Submitted
Hold/Sell Order or Submitted Sell Order multiplied by (2) the
total number of shares of ATP Series C that are the subject of
a Submitted Buy Order specifying a rate equal to or lower than
the Maximum Applicable Rate and divided by (3) the total
number of shares of ATP Series C subject to all Submitted
Hold/Sell Orders that specified a rate higher than the Maximum
Applicable Rate and Submitted Sell Orders, and
(B) the number of shares of ATP Series C to
be the subject of an accepted Hold Order will be the remaining
number of shares of ATP Series C subject to such Submitted
Hold/Sell Order or Submitted Sell Order.
(iii) "Rating Default" has the meaning set forth in Section
3(c)(ii).
(jjj) "Rating Default Cure Date" has the meaning set forth in
Section 3(a)(iii).
(kkk) "Redemption Default" has the meaning set forth in
Section 3(c)(ii).
(lll) "Reference Rate" means, with respect to the
determination of the Maximum Applicable Rate, the applicable AA Composite
Commercial Paper Rate (for a Dividend Period of fewer than 184 days) or the
applicable Treasury Index Rate for a Dividend Period of 184 days or more).
(mmm) "Rule 144A Securities" means securities which are
restricted as to resale under federal securities laws but are eligible for
resale pursuant to Rule 144A under the Securities Act as determined by the
Fund's adviser acting subject to the supervision of the Fund's Board of
Directors.
(nnn) "S&P" means Standard & Poor's Corporation and its
successors at law.
45
<PAGE>
(ooo) "Securities Act" means the Securities Act of 1933, as
amended from time to time.
(ppp) "Securities Depository" means The Depository Trust
Company and its successors and assigns or any successor securities depository
selected by the Corporation that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of ATP
Series C.
(qqq) "Short-Term Money Market Instruments" means the
following types of instruments if, on the date of purchase or other acquisition
thereof by the Corporation, the remaining terms to maturity thereof are not in
excess of (a) 180 days for instruments rated at least Aa3 or 270 days for
instruments rated at least Aaa for purposes of determining Moody's Eligible
Assets (if Moody's is then rating ATP Series C), and (b) 180 days for purposes
of determining Fitch Eligible Assets (if Fitch is then rating ATP Series C):
(i) commercial paper that is rated as of each
Valuation Date P-1 by Moody's and either F-1+ by Fitch or A-1+ by S&P,
respectively;
(ii) demand or time deposits in, certificates of
deposit of (A) a depository institution or trust company incorporated
under the laws of the United States of America or any state thereof or
the District of Columbia or (B) a United States branch office or agency
of a foreign depository institution (provided that such branch office
or agency is subject to banking regulation under the laws of the United
States, any state thereof or the District of Columbia) if, in each
case, the certificates of deposit, if any, and the long-term unsecured
debt obligations (other than such obligations the ratings of which are
based on the credit of a person or entity other than such depository
institution or trust company) of such depository institution or trust
company that have (1) credit ratings on each Valuation Date of at least
P-1 from Moody's and either F-1+ from Fitch or A-1+ from S&P, in the
case of commercial paper or certificates of deposit, and (2) credit
ratings on each Valuation Date of at least Aa3 from Moody's and either
AA- from Fitch or AA- from S&P, in the case of long-term unsecured debt
obligations; provided, however, that in the case of any such investment
that matures in no more than one Business Day from the date of purchase
or other acquisition by the Corporation, all of the foregoing
requirements shall be applicable except that the required long-term
unsecured debt credit rating of such depository institution or trust
company from Moody's, Fitch and S&P shall be at least A2, A and A,
respectively; and provided further, however, that the foregoing credit
rating requirements shall be deemed to be met with respect to a
depository institution or trust company if (1) such depository
institution or trust company is the principal depository institution in
a holding company system, (2) the certificates of deposit, if any, of
such depository institution or trust company are not rated on any
Valuation Date below P-1 by Moody's, F-1+ by Fitch or A-l+ by S&P and
there is no long-term rating, and (3) the holding company shall meet
all of the foregoing credit rating requirements (including
46
<PAGE>
the preceding proviso in the case of investments that mature in no more
than one Business Day from the date of purchase or other acquisition by
the Corporation);
(iii) next-day federal funds; and
(iv) Eurodollar demand or time deposits in, or
certificates of deposit of, the head office or the London branch office
of a depository institution or trust company meeting the credit rating
requirements of commercial paper and long-term unsecured debt
obligations specified in clause (ii) above, provided that the interest
receivable by the Corporation shall not be subject to any withholding
or similar taxes.
(rrr) "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
Corporation pursuant to Section 3(a)(i) and/or Section 3(a)(ii) and/or 3(a)(iii)
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 Corporation's option pursuant to Section
3(a)(i) and/or in connection with any mandatory redemption pursuant to Section
3(a)(ii) and/or 3(a)(iii) at a price per share equal to $25,000 plus accumulated
but unpaid dividends plus a premium expressed as a percentage or percentages of
$25,000 or expressed as a formula using specified variables as determined by the
Board of Directors after consultation with the Broker-Dealers.
(sss) "Standard Term Period" means a Dividend Period 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.
(ttt) "Submission Deadline" means 1:00 p.m., New York City
time, on each Auction Date, or such other time on such Auction Date as may be
specified from time to time by the Auction Agent as the time by which each
Broker-Dealer must submit to the Auction Agent all Orders obtained by it for the
Auction to be conducted on such Auction Date.
(uuu) "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
47
<PAGE>
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 Corporation by at least three recognized dealers in U.S.
Government securities selected by the Corporation.
(vvv) "Type I Corporate Bonds" means Corporate Bonds rated
either AAA by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by
Moody's.
(www) "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.
(xxx) "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.
(yyy) "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.
(zzz) "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.
(aaaa) "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.
(bbbb) "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.
(cccc) "Valuation Date" means every Friday, or, if such day is
not a Business Day, the next preceding Business Day; provided, however, that the
first Valuation Date may occur on any other date established by the Corporation;
provided, further, however, that such date shall be not more than one week from
the date on which ATP Series C initially is issued.
(dddd) "Volatility Factor" means 1.89.
19. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be,
48
<PAGE>
unless specifically identified otherwise. In addition, capitalized terms not
defined in Section 18 of this Part I shall have the respective meanings
specified in Part II hereof.
PART II
1. Certain Definitions. As used in this Part II, the following terms
shall have the following meanings, unless the context otherwise requires and all
section references below are to this Part II except as otherwise indicated.
Capitalized terms not defined in this Section 1 of this Part II shall have the
respective meanings specified in Part I hereof.
(a) "Agent Member" means a member of or participant in the
Securities Depository that will act on behalf of a person placing an Order.
(b) "Available ATP" has the meaning specified in Section
5(a)(i).
(c) "Buy Order" has the meaning specified in Section 2(b).
(d) "Existing Holder" means (a) a person who has signed a
Master Purchaser's Letter and beneficially owns shares of ATP Series C listed in
that person's name in the records of the Auction Agent or (b) the beneficial
owner of shares of ATP Series C which are listed under such person's
Broker-Dealer's name in the records of the Auction Agent, which Broker-Dealer
shall have signed a Master Purchaser's Letter.
(e) "Hold Order" has the meaning specified in Section 2(b).
(f) "Hold/Sell Order"has the meaning specified in Section
2(b).
(g) "Master Purchaser's Letter" means a letter substantially
in the form of or containing provisions similar to those in the form attached to
the Corporation's Prospectus with respect to the initial issuance of ATP Series
C, which is required to be executed by (1) each prospective purchaser of shares
of ATP Series C or (2) the Broker-Dealer through whom such shares will be held.
(h) "Order" has the meaning specified in Section 2(b).
(i) "Potential Holder," when used with respect to shares of
ATP Series C, means any person, including any Existing Holder of shares of ATP
Series C, (i) who shall have executed a Master Purchaser's Letter or whose
shares will be listed under such person's Broker-Dealer's name on the records of
the Auction Agent, which Broker-Dealer shall have executed a Master Purchaser's
Letter and (ii) who may be interested in acquiring shares of ATP Series C (or,
in the case of an Existing Holder or such person, additional shares of ATP
Series C).
49
<PAGE>
(j) "Sell Order" has the meaning specified in Section 2(b).
(k) "Submitted Buy Order" has the meaning specified in Section
5(a).
(l) "Submitted Hold Order" has the meaning specified in
Section 5(a).
(m) "Submitted Hold/Sell Order" has the meaning specified in
Section 5(a).
(n) "Submitted Order" has the meaning specified in Section
5(a).
(o) "Submitted Sell Order" has the meaning specified in
Section 5(a).
(p) "Sufficient Clearing Orders" means that all shares of ATP
Series C are the subject of Submitted Hold Orders or that the number of shares
of ATP Series C that are the subject of Submitted Buy Orders by Potential
Holders specifying one or more rates equal to or less than the Maximum
Applicable Rate exceeds or equals the sum of (A) the number of shares of ATP
Series C that are the subject of Submitted Hold/Sell Orders by Existing Holders
specifying one or more rates higher than the Maximum Applicable Rate and (B) the
number of shares of ATP Series C that are subject to Submitted Sell Orders.
(q) "Winning Rate" means the lowest rate specified in the
Submitted Orders which, if (i) each Submitted Hold/Sell Order from Existing
Holders specifying such lowest rate and all other Submitted Hold/Sell Orders
from Existing Holders specifying lower rates were accepted and (ii) each
Submitted Buy Order from Potential Holders specifying such lowest rate and all
other Submitted Buy Orders from Potential Holders specifying lower rates were
accepted, would result in the Existing Holders described in clause (i) above
continuing to hold an aggregate number of shares of ATP Series C which, when
added to the number of shares of ATP Series C to be purchased by the Potential
Holders described in clause (ii) above and the number of shares of ATP Series C
subject to Submitted Hold Orders, would be equal to the number of shares of ATP
Series C.
Section 2. Orders by Existing Holders and Potential Holders.
(a) On or prior to the Submission Deadline on each Auction
Date with respect to ATP Series C:
(i) each Existing Holder may submit to a
Broker-Dealer information as to:
(A) the number of Outstanding shares of ATP
Series C, if any, held by such Existing Holder which such
Existing Holder desires to continue to hold without regard to
the Applicable Rate for the next succeeding Dividend Period;
50
<PAGE>
(B) (B) the number of Outstanding shares of ATP
Series C, if any, held by such Existing Holder which such
Existing Holder desires to continue to hold, provided that the
Applicable Rate for the next succeeding Dividend Period shall
not be less than the rate per annum specified by such Existing
Holder; and/or
(C) the number of Outstanding shares of ATP
Series C, if any, held by such Existing Holder which such
Existing Holder offers to sell without regard to the
Applicable Rate for the next succeeding Dividend Period; and
(ii) each Broker-Dealer, using a list of Potential
Holders that shall be maintained in good faith for the purpose of
conducting a competitive Auction, shall contact Potential Holders,
including persons that are not Existing Holders, on such list to
determine the number of Outstanding shares of ATP Series C, if any,
which each such Potential Holder offers to purchase, provided that the
Applicable Rate for the next succeeding Dividend Period shall not be
less than the rate per annum specified by such Potential Holder.
(b) For the purposes hereof, the communication to a
Broker-Dealer of information referred to in clause (i) or (ii) of Section 2(a)
of this Part II is hereinafter referred to as an "Order"; an Order containing
the information referred to in clause (i)(A) of Section 2(a) of this Part II is
hereinafter referred to as a "Hold Order"; an Order containing the information
referred to in clause (i)(B) of Section 2(a) of this Part II is hereinafter
referred to as a "Hold/Sell"; an Order containing the information referred to in
clause (i)(C) of Section 2(a) of this Part II is hereinafter referred to as a
"Sell Order"; and an Order containing the information referred to in clause (ii)
of Section 2(a) of this Part II is hereinafter referred to as a "Buy Order."
(c) (i) A Hold/Sell Order by an Existing Holder shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of ATP Series C
specified in such Order if the Applicable Rate determined on
such Auction Date shall be less than the rate per annum
specified in such Order; or
(B) a lesser number of Outstanding shares of ATP
Series C to be determined as set forth in Section 6(a)(v) if
the Applicable Rate determined on such Auction Date shall be
equal to the rate per annum specified therein; or
(C) a lesser number of Outstanding shares of ATP
Series C to be determined as set forth in Section 6(b)(iv) if
such specified rate per annum
51
<PAGE>
shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Orders do not exist.
(ii) A Sell Order by an Existing Holder shall
constitute an irrevocable offer to sell the number of Outstanding
shares of ATP Series C specified in such Sell Order.
(iii) A Buy Order by a Potential Holder shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of ATP
Series C specified in such Order if the Applicable Rate
determined on such Auction Date shall be higher than the rate
per annum specified in such Order; or
(B) such number or a lesser number of Outstanding
shares of ATP Series C to be determined as set forth in
Section 6(a)(vi) if the Applicable Rate determined on such
Auction Date shall be equal to the rate per annum specified
therein.
Section 3. [Reserved]
Section 4. Submission of Orders by Broker-Dealers to Auction Agent.
--------------------------------------------------------
(a) Each Broker-Dealer shall submit in writing to the Auction
Agent prior to the Submission Deadline on each Auction Date for the Auction to
be conducted on such Auction Date all Orders obtained by such Broker-Dealer and
specifying with respect to each Order:
(i) the aggregate number of shares of ATP Series C
that are the subject of such Order;
(ii) to the extent that such Order is placed by an
Existing Holder:
(A) the number of shares of ATP Series C, if any,
subject to any Hold Order placed by such Existing Holder;
(B) the number of shares of ATP Series C, if any,
subject to any Hold/Sell Order placed by such Existing Holder;
(C) the number of shares of ATP Series C, if any,
subject to any Sell Order placed by such Existing Holder;
52
<PAGE>
(iii) to the extent that such Order is placed by an
Potential Holder, the number of shares of ATP Series C subject to such
Order; and
(iv) the rate per annum specified in such Order.
(b) If any rate per annum specified in any Order contains more
than three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one-thousandth (.0001) of 1%.
(c) If an Order or Orders covering all shares of ATP Series C
held by any Existing Holder are not submitted to the Auction Agent by the
Submission Deadline, the Auction Agent shall, only in the case of an Auction
preceding a Dividend Period of 93 days or fewer and at the conclusion of a
Dividend Period of 93 days or fewer, deem a Hold Order to have been submitted on
behalf of such Existing Holder covering the number of shares held by such
Existing Holder and not subject to Orders submitted to the Auction Agent. If an
Order or Orders covering all shares of ATP Series C held by any Existing Holder
are not submitted to the Auction Agent by the Submission Deadline, the Auction
Agent will, in the case of all other Auctions, deem a Sell Order to have been
submitted on behalf of such Existing Holder covering the number of shares held
by such Existing Holder and not subject to Orders submitted to the Auction
Agent.
(d) If one or more Orders on behalf of an Existing Holder
covering in the aggregate more than the number of shares of ATP Series C held by
such Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(i) If one or more Hold Orders shall be submitted on
behalf of an Existing Holder as to a number of shares of ATP Series C
greater than the number of shares of ATP Series C held by such Existing
Holder, such Hold Order or Hold Orders shall be considered valid only
as to the number of shares of ATP Series C held by such Existing
Holder. In the case of multiple Hold Orders, each such Hold Order shall
be considered valid pro rata.
(ii) If one or more Hold/Sell Orders shall be
submitted on behalf of an Existing Holder as to a number of shares of
ATP Series C greater than the excess of the number of shares of ATP
Series C held by such Existing Holder over the number of shares of such
series of ATP subject to Hold Orders submitted on behalf of such
Existing Holder, such Hold/Sell Order or Hold/Sell Orders shall be
considered valid only as to the number of shares of such series of ATP
Series C equal to such excess. In the case of multiple Hold/Sell Orders
specifying different rates, such Hold/Sell Orders shall be considered
valid in increasing order of such rates. In the case of multiple
Hold/Sell Orders specifying the same rate, each such Hold/Sell Order
shall be considered valid pro rata.
53
<PAGE>
(iii) If one or more Sell Orders shall be submitted
on behalf of an Existing Holder as to a number of shares of ATP Series
C greater than the excess of the number of shares of ATP Series C held
by such Existing Holder over the number of shares of ATP Series C
subject to Hold Orders and Hold/Sell Orders submitted on behalf of such
Existing Holder, such Sell Order or Sell Orders shall be considered
valid only as to the number of shares equal to such excess. In the case
of multiple Sell Orders, each such Sell Order shall be considered valid
pro rata.
(e) If more than one Order is submitted on behalf of any
Existing Holder or Potential Holder, each Order submitted shall be a separate
Order with the rate and shares of ATP Series C therein specified.
(f) In the case of any Dividend Period of 93 days or fewer, if
any rate specified in any Order is lower than the Minimum Applicable Rate for
the Dividend Period with respect to which such Order is made, such Order will be
deemed to be an Order specifying a rate equal to such Minimum Applicable Rate.
(g) In the case of any Dividend Period of more than 93 days,
only Buy Orders, Hold/Sell Orders and Sell Orders may be submitted.
Section 5. Determination of Sufficient Clearing Orders, Winning Rate
---------------------------------------------------------
and Applicable Rate.
--------------------
(a) Not earlier than the Submission Deadline on each Auction
Date, the Auction Agent shall assemble all Orders submitted or deemed submitted
to it by the Broker-Dealers (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Hold/Sell Order", a "Submitted Sell Order" or a "Submitted
Buy Order," as the case may be, or as a "Submitted Order") and shall determine:
(i) the excess of the total number of Outstanding
shares of ATP Series C over the number of Outstanding shares of ATP
Series C that are the subject of Submitted Hold Orders (such excess
being hereinafter referred to as the "Available ATP");
(ii) from the Submitted Orders whether the number of
Outstanding shares of ATP Series C that are the subject of Submitted
Buy Orders by Potential Holders specifying one or more rates per annum
equal to or lower than the Maximum Applicable Rate exceeds or is equal
to the sum of:
(A) the number of shares of ATP Series C
that are the subject of Submitted Hold/Sell Orders by Existing
Holders specifying one or more rates per annum higher than the
Maximum Applicable Rate, and
54
<PAGE>
(B) the number of shares of ATP Series C
that are subject to Submitted Sell Orders (if such excess or
such equality exists (other than because the number of
Outstanding shares of such series of ATP in clauses (A) and
(B) above are each zero because all of the Outstanding shares
of ATP Series C are the subject of Submitted Hold Orders),
such Submitted Buy Orders by Potential Holders being
hereinafter referred to collectively as "Sufficient Clearing
Orders"), would result in the number of shares subject to all
Submitted Orders specifying the Winning Rate or a lower rate
per annum being at least equal to the Available ATP.
(b) Promptly after the Auction Agent has made the
determinations pursuant to Section 5(a), the Auction Agent shall advise the
Corporation of the Maximum Applicable Rate and, based on such determinations,
the Applicable Rate for the next succeeding Dividend Period as follows:
(i) If Sufficient Clearing Orders exist, that the
Applicable Rate for the next succeeding Dividend Period shall be equal
to the Winning Rate;
(ii) If Sufficient Clearing Orders do not exist
(other than because all of the Outstanding shares of ATP Series C are
the subject of Submitted Hold Orders), that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Maximum
Applicable Rate and the Dividend Period shall be a Standard Term
Period; or
(iii) If all Existing Holders submit (or are deemed
to have submitted) Hold Orders in an Auction, the Dividend Period next
succeeding the Auction shall automatically be the same Dividend Period
as that Dividend Period immediately preceding the Auction and the
Applicable Rate will be the Minimum Applicable Rate (or such other rate
if there is no Minimum Applicable Rate) in effect on the date of the
Auction with respect to such Dividend Period.
Section 6. Acceptance and Rejection of Submitted Orders and
------------------------------------------------
Submitted Sell Orders and Allocation of Shares.
-----------------------------------------------
Based upon the results of the Auction, the Auction Agent will determine
the aggregate number of shares to be held and sold by Existing Holders and to be
purchased by Potential Holders, and, with respect to each Broker-Dealer,
determine the extent to which such Broker-Dealer will deliver, and from which
other Broker-Dealers such Broker-Dealer will receive, shares.
(a) If Sufficient Clearing Orders exist:
(i) all Submitted Hold Orders will be accepted;
55
<PAGE>
(ii) all Submitted Sell Orders will be accepted and
all Submitted Hold/Sell Orders specifying any rate higher than the
Winning Rate will be accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a
rate lower than the Winning Rate will be accepted as Hold Orders;
(iv) all Submitted Buy Orders specifying a rate lower
than the Winning Rate will be accepted;
(v) all Submitted Hold/Sell Orders specifying a rate
equal to the Winning Rate will be accepted as Hold Orders unless the
number of shares subject to all such Submitted Hold/Sell Orders is
greater than the number of shares remaining unaccounted for after the
acceptances described in clauses (i), (iii) and (iv) above, in which
event each such Submitted Hold/Sell Order will be accepted as a Hold
Order and a Sell Order as to the respective number of shares determined
in accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal
to the Winning Rate will be accepted, unless the number of shares
subject to all such Submitted Buy Orders is greater than the number of
shares remaining unaccounted for after the acceptances described in
clauses (i), (iii), (iv) and (v) above, in which event each such
Submitted Buy Order will be accepted only as to the number of shares
determined in accordance with the Proration Procedures.
(b) If Sufficient Clearing Orders do not exist:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate
equal to or lower than the Maximum Applicable Rate will be accepted as
Hold Orders;
(iii) all Submitted Buy Orders specifying a rate
equal to or lower than the Maximum Applicable Rate will be accepted;
and
(iv) all Submitted Hold/Sell Orders specifying a rate
higher than the Maximum Applicable Rate and all Submitted Sell Orders
will be accepted as Hold Orders and as Sell Orders as to the respective
number of shares of ATP Series C determined in accordance with the
Proration Procedures.
(c) If as a result of the procedures described in Section 6(a)
or 6(b) any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
share of ATP Series C in any Auction, the Auction
56
<PAGE>
Agent will, in such manner as, in its sole discretion, it shall determine, round
up or down the number of shares of ATP Series C being sold or purchased on such
Auction Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of ATP Series C even if such allocation
results in one or more of such Potential Holders not purchasing any shares of
ATP Series C or in one or more Existing Holders no longer holding any shares of
ATP Series C.
(d) If, as a result of the procedures described in Section
6(a), any Potential Holder would be entitled or required to purchase a fraction
of a share of ATP Series C, as applicable, on any Auction Date, the Auction
Agent shall, in such manner as in its sole discretion it shall determine,
allocate shares of ATP Series C for purchase among Potential Holders so that
only whole shares of ATP Series C are purchased on such Auction Date by any
Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing any shares of ATP Series C on such Auction Date
or in one or more Existing Holders no longer holding any shares of ATP Series C.
(e) Based on the results of each Auction, the Auction Agent
shall determine, with respect to each Broker-Dealer that submitted Orders on
behalf of Existing Holders or Potential Holders, the aggregate number of shares
of ATP Series C to be purchased and the aggregate number of shares of ATP Series
C to be sold by such Potential Holders and Existing Holders and, to the extent
that such aggregate number of shares of ATP Series C to be purchased and such
aggregate number of shares of such series of ATP to be sold differ, the Auction
Agent shall determine to which other Broker-Dealer or Broker-Dealers acting for
one or more purchasers such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, shares of ATP Series C.
Section 7. Notification of Results; Settlement.
------------------------------------
(a) The Auction Agent will advise each Broker-Dealer that
submitted an Order whether such Order was accepted and of the Applicable Rate
for the next Dividend Period by telephone by approximately 3:00 p.m., New York
City time, on each Auction Date. Each Broker-Dealer that submitted an Order will
as soon as practicable advise each Existing Holder and Potential Holder whether
its Order was accepted and will confirm in writing purchases and sales with each
Existing Holder and Potential Holder purchasing or selling shares as a result of
an auction as soon as practicable on the Business Day next succeeding the
Auction Date. Each Broker-Dealer that submitted a Hold Order will advise each
Existing Holder on whose behalf such Hold Order was submitted of the Applicable
Rate for the shares of ATP Series C for the next Dividend Period.
(b) In accordance with the Securities Depository's normal
procedures, on the Business Day after the Auction Date, the transactions
described above will be executed through the Securities Depository and the
accounts of the respective Agent Members at the Securities
57
<PAGE>
Depository will be debited and credited and shares delivered as necessary to
effect the purchases and sales as determined in the Auction. Purchasers will
make payment through their Agent Members in same-day funds to the Securities
Depository against delivery through their Agent Members; the Securities
Depository will make payment in accordance with its normal procedures as in
effect from time to time.
(c) If any Existing Holder selling shares in an Auction fails
to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares in such Auction may deliver to such person a number of whole
shares that is less than the number of shares that otherwise was to be purchased
by such person. In such event, the number of shares to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares shall
constitute good delivery.
Section 8. Miscellaneous.
--------------
The Board of Directors may interpret the provisions of these Auction
Procedures to resolve any inconsistency or ambiguity, remedy any formal defect
or make any other change or modification that does not adversely affect the
rights of Existing Holders of shares of ATP Series C. Except as otherwise
required by law, an Existing Holder shall have the ownership of the shares of
ATP Series C held by it maintained in book entry form by the Securities
Depository in the account of (a) for an Existing Holder who holds shares of ATP
Series C directly, its Agent Member, which in turn will maintain records of such
Existing Holder's beneficial ownership or (b) for an Existing Holder holding
shares of ATP Series C through a Broker-Dealer, its Broker-Dealer's Agent
Member, in which case its Broker-Dealer shall maintain records of such Existing
Holder's beneficial ownership. Neither the Corporation nor any Affiliate of the
Corporation shall submit an Order in any Auction. Any Existing Holder that is
such an Affiliate shall not sell, transfer or otherwise dispose of shares of ATP
Series C to any Person other than the Corporation. All of the shares of ATP
Series C shall be represented by a single certificate registered in the name of
the nominee of the Securities Depository unless otherwise required by law or
unless there is no Securities Depository. If there is no Securities Depository,
at the Corporation's option and upon its receipt of such documents as it deems
appropriate, any shares of ATP Series C may be registered in the share register
for the shares of ATP Series C maintained by the Auction Agent in the name of
the Existing Holder thereof or in the name of such Existing holder's
Broker-Dealer and such Existing Holder or such Existing Holder's Broker-Dealer
thereupon will be entitled to receive certificates therefor and required to
deliver certificates therefor upon transfer or exchange thereof.
58
<PAGE>
IN WITNESS WHEREOF, THE NEW AMERICA HIGH INCOME FUND, INC. has caused
these presents to be signed in its name and on its behalf by its Vice-President,
and its corporate seal to be hereunto affixed and attested by its Secretary, and
the said officers of the Corporation further acknowledge said instrument to be
the corporate act of the Corporation, and state under the penalties of perjury
that to the best of their knowledge, information and belief the matters and
facts therein set forth with respect to approval are true in all material
respects.
THE NEW AMERICA HIGH INCOME
FUND, INC.
By: /s/ Ellen E. Terry
----------------------------------
Ellen E. Terry, Vice President
ATTEST:
/s/ Richard E. Floor
- ----------------------------------
Richard E. Floor, Secretary
DOCSC\501780.5
4/28/97
59
EXHIBIT A9
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that the Articles Supplementary to the Corporation=s
Articles of Amendment and Restatement relating to the Fund=s Series A Auction
Term Preferred Stock ("ATP Series A") and Series B Auction Term Preferred Stock
("ATP Series B", and together with ATP Series A, the "ATP"), as heretofore
amended, (the "Articles Supplementary") are hereby amended in the manner set
forth below.
FIRST: The charter of the Corporation is amended by splitting and
changing each issued and outstanding share of ATP Series A, par value
$1.00, liquidation preference $50,000 per share, into two issued and
outstanding shares of ATP Series A, each unit with a par value of $1.00
per share and a liquidation preference of $25,000 per share.
SECOND: After the effective time of this amendment, each holder of any
outstanding certificate or certificates representing shares of ATP
Series A, par value $1.00 per share, liquidation preference $50,000 per
share, may surrender same to the Corporation and receive in exchange
therefor, a certificate or certificates representing the number of
whole shares of ATP Series A, par value $1.00 per share, liquidation
preference of $25,000 per share, into which the ATP Series A of the
Corporation shall have been split pursuant to these Articles of
Amendment. Until so surrendered, any outstanding certificates of the
ATP Series A of the Corporation shall be deemed evidence of ownership
of the number of whole shares of ATP Series A, par value $1.00 per
share, liquidation preference of $25,000 per share, into which such
outstanding shares of the Corporation shall have been split pursuant to
these Articles of Amendment and shall be subject to the changes
hereunder to the Articles Supplementary.
THIRD: Article First of the Articles Supplementary is struck in its
entirety and replaced with the following:
"Pursuant to the authority expressly vested in the Board of
Directors of the Corporation by Article IV of its Articles of
Amendment and Restatement, as heretofore amended (which, as
hereafter restated or amended from time to time, are together
with these Articles Supplementary herein called the
"Articles"), the Board of Directors has, by resolution,
authorized the issuance of 4,000 shares of its Preferred
Stock, par value $1.00 per share, liquidation preference
$25,000 per share, classified into two series designated
respectively: Series A Auction Term Preferred Stock and Series
B Auction Term Preferred Stock."
60
<PAGE>
FOURTH: The first sentence of the first paragraph under the heading
"DESIGNATION" is struck in its entirety and replaced with a new
sentence as follows:
"Series A: A series of 2,400 shares of Preferred Stock, par
value $1.00 per share, liquidation preference $25,000 per
share, is hereby designated "Series A Auction Term Preferred
Stock ("ATP Series A")."
FIFTH: The first sentence of Section 1(a) of Part I is struck in its
entirety and replaced with the following:
"The initial number of authorized shares constituting each
series of ATP is 2,400 shares for ATP Series A and 1,600 for
ATP Series B."
SIXTH: Section 18(i) of Part I is struck in its entirety and replaced
with the following:
"18. (i) "ATP" means the Auction Term Preferred Stock, $1.00
par value per share and liquidation preference $25,000 per
share, Series A and Series B of the Corporation or any other
series of Preferred Stock hereinafter designated "ATP" by
Articles Supplementary or Articles of Amendment."
SEVENTH: The second sentence of Part I Section 7(a) is struck in its
entirety and replaced with the following:
"For this purpose, the liquidation preference for shares of
the ATP Series A and ATP Series B shall be $25,000 per share,
plus an amount equal to all accumulated dividends thereon
(whether or not earned or declared) 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."
EIGHTH: In addition to the amendments to the Article Supplementary set
forth above, said Articles Supplementary are hereby amended mutatis
mutandis to the extent necessary to give effect to the reduction of the
liquidation preference per share of ATP Series A from $50,000 to
$25,000 and the related two-for-one split of the outstanding shares of
ATP Series A set forth in Article First hereof.
NINTH: The amendments to the Articles of the Corporation as set forth
above have been duly advised by the Board of Directors and approved by
the Stockholders of the Corporation by the vote required by law.
TENTH: These Articles of Amendment do not increase the authorized stock
of the Corporation or the aggregate par value thereof.
ELEVENTH: This Amendment shall become effective on June 17, 1997 at
9:00 a.m.
61
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice-President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 29th day of May, 1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Richard E. Floor By: /s/ Robert F. Birch
- --------------------------- --------------------------
Richard E. Floor, Secretary Robert F. Birch, President
62
EXHIBIT A10
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that the Articles Supplementary to the Corporation's
Articles of Amendment and Restatement relating to the Fund's Series A Auction
Term Preferred Stock (the "ATP Series A") and Series B Auction Term Preferred
Stock (the "ATP Series B"), as heretofore amended, (the "Articles
Supplementary") are hereby amended in the manner set forth below.
FIRST: The charter of the Corporation is amended by splitting and
changing each issued and outstanding share of ATP Series B, par value
$1.00, liquidation preference $50,000 per share, into two issued and
outstanding shares of ATP Series B, each unit with a par value of $1.00
per share and a liquidation preference of $25,000 per share.
SECOND: After the effective time of this amendment, each holder of any
outstanding certificate or certificates representing shares of ATP
Series B, par value $1.00 per share, liquidation preference $50,000 per
share, may surrender same to the Corporation and receive in exchange
therefor, a certificate or certificates representing the number of
whole shares of ATP Series B, par value $1.00 per share, liquidation
preference of $25,000 per share, into which the ATP Series B of the
Corporation shall have been split pursuant to these Articles of
Amendment. Until so surrendered, any outstanding certificates of the
ATP Series B of the Corporation shall be deemed evidence of ownership
of the number of whole shares of ATP Series B, par value $1.00 per
share, liquidation preference of $25,000 per share, into which such
outstanding shares of the Corporation shall have been split pursuant to
these Articles of Amendment and shall be subject to the changes
hereunder to the Articles Supplementary.
THIRD: Article First of the Articles Supplementary is struck in its
entirety and replaced with the following:
"Pursuant to the authority expressly vested in the Board of
Directors of the Corporation by Article IV of its Articles of
Amendment and Restatement, as heretofore amended (which, as
hereafter restated or amended from time to time, are together
with these Articles Supplementary herein called the
"Articles"), the Board of Directors has, by resolution,
authorized the issuance of 1,200 shares of its Preferred
Stock, par value $1.00 per share, liquidation preference
$50,000 per share, classified into a series designated Series
A Auction Term Preferred Stock and the issuance of 1,600
shares of its Preferred Stock, par value $1.00 per share,
liquidation preference $25,000 per share, classified into a
series designated Series B Auction Term Preferred Stock."
63
<PAGE>
FOURTH: The first sentence of the second paragraph under the heading
"DESIGNATION" is struck in its entirety and replaced with the
following:
"Series B: A series of 1,600 shares of Preferred Stock, par
value $1.00 per share, liquidation preference $25,000 per
share, is hereby designated "Series B Auction Term Preferred
Stock ("ATP Series B")."
FIFTH: The first sentence of Section 1(a) of Part I is struck in its
entirety and replaced with the following:
"The initial number of authorized shares constituting each
series of ATP is 1,200 shares for ATP Series A and 1,600
shares for ATP Series B."
SIXTH: Section 18(i) of Part I is struck in its entirety and replaced
with the following:
"18. (i) "ATP" means the Series A Auction Term Preferred
Stock, $1.00 par value per share and liquidation preference
$50,000 per share, and Series B Auction Term Preferred Stock,
$1.00 par value per share and liquidation preference $25,000
per share, of the Corporation or any other series of Preferred
Stock hereinafter designated "ATP" by Articles Supplementary
or Articles of Amendment."
SEVENTH: The first sentence of Part I Section 2(c)(iii) is struck in
its entirety and replaced with the following:
"The amount of dividends per share payable (if declared) on
each Dividend Payment Date of each Dividend Period of less
than one (1) year shall be computed by multiplying the
Applicable Rate (or the Default Rate) for such Dividend Period
by a fraction, the numerator of which will be the number of
days in such Dividend Period such share was Outstanding and
for which the Applicable Rate or the Default Rate was
applicable and the denominator of which will be 360,
multiplying the amount so obtained by the designated
liquidation preference per share of the series of ATP on which
such dividends are payable, and rounding the amount so
obtained to the nearest cent."
EIGHTH: The first sentence of Part I Section 3(a)(i) is struck in its
entirety and replaced with the following:
"After the initial Dividend Period, subject to the provisions
of this Section 3 and to the extent permitted under the 1940
Act and Maryland law, the Corporation may, at its option,
redeem in whole or in part out of funds legally available
therefor shares of any series of ATP herein designated as (A)
having a Dividend
64
<PAGE>
Period of one year or less, on the Business Day after the last
day of such Dividend Period by delivering a notice of
redemption not less than 15 days and not more than 40 days
prior to such redemption, at a redemption price per share
equal to such share's designated liquidation preference per
share, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the
date fixed for redemption, or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of
the relevant Dividend Period by delivering a notice of
redemption not less than 15 days and not more than 40 days
prior to the date fixed for such redemption, at a redemption
price per share equal to such share's designated liquidation
preference 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 a redemption premium,
if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any
applicable Specific Redemption Provisions at the time of the
designation of such Dividend Period as set forth in Section 4
of these Articles Supplementary; provided, however, that
during a Dividend Period of more than one year no shares of
ATP will be subject to optional redemption except in
accordance with any Specific Redemption Provisions approved by
the Board of Directors after consultation with the
Broker-Dealers at the time of the designation of such Dividend
Period."
NINTH: The fifth sentence of Part I Section 3(a)(iv) is struck in its
entirety and replaced with the following:
""Mandatory Redemption Price" means the amount per share equal
to such share's designated liquidation preference 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 one
year or more only) a redemption premium, if any, determined by
the Board of Directors after consultation with the
Broker-Dealers and set forth in any applicable Specific
Redemption Provisions."
TENTH: The second sentence of Part I Section 7(a) is struck in its
entirety and replaced with the following:
"For this purpose, the liquidation preference shall be $50,000
per share in the case of shares of the ATP Series A and
$25,000 per share in the case of shares of the ATP Series B,
plus an amount equal to all accumulated dividends thereon
(whether or not earned or declared) 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."
65
<PAGE>
ELEVENTH: Section 18(j)(i)(A) is struck in its entirety and replaced
with the following:
"18. (j) (i) (A) the sum of the products resulting from
multiplying the number of Outstanding shares of each series of
ATP on such date by the designated liquidation preference per
share for such series;"
TWELFTH: Part I Section 18(sss) is struck in its entirety and replaced
with the following:
"18. (sss) "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 Corporation pursuant to
Section 3(a)(i) and/or Section 3(a)(ii) and/or 3(a)(iii) 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 Corporation's option pursuant to
Section 3(a)(i) and/or in connection with any mandatory
redemption pursuant to Section 3(a)(ii) and/or 3(a)(iii) at a
price per share equal to such share's designated liquidation
preference per share, plus accumulated but unpaid dividends
plus a premium expressed as a percentage or percentages of
such share's designated liquidation preference per share or
expressed as a formula using specified variables as determined
by the Board of Directors after consultation with the
Broker-Dealers."
THIRTEENTH: In addition to the amendments to the Article Supplementary
set forth above, said Articles Supplementary are hereby amended mutatis
mutandis to the extent necessary to give effect to the reduction of the
liquidation preference per share of ATP Series B from $50,000 to
$25,000 and the related two-for-one split of the outstanding shares of
ATP Series B set forth in Article First hereof.
FOURTEENTH: The amendments to the Articles of the Corporation as set
forth above have been duly advised by the Board of Directors and
approved by the Stockholders of the Corporation by the vote required by
law.
FIFTEENTH: These Articles of Amendment do not increase the authorized
stock of the Corporation or the aggregate par value thereof.
SIXTEENTH: This Amendment shall become effective on June 3, 1997 at
9:00 a.m.
66
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice-President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 29th day of May, 1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Richard E. Floor By: /s/ Robert F. Birch
- --------------------------- --------------------------
Richard E. Floor, Secretary Robert F. Birch, President
67
EXHIBIT A11
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation having
its principal office in Boston, Massachusetts (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: Part I of the Articles Supplementary to the Corporation's
Articles of Amendment and Restatement establishing the Corporation's Series A
and Series B Auction Term Preferred Stock, as heretofore amended, (the "Articles
Supplementary") is hereby further amended by replacing current Section 18(z)
with new Section 18(z) as follows:
" (z) "Debt Securities" means debt securities having the
characteristics set forth in paragraph (iv) of the definition of Fitch
Eligible Assets."
SECOND: Part I of the Articles Supplementary is hereby further amended
by replacing the first and second sentences of current Section 18(nn) and all of
current Section 18(nn)(i) with the following:
" (nn) "Fitch Discount Factor" means, for purposes of determining the
Discounted Value of any Fitch Eligible Asset, the percentage determined
as follows. The Fitch Discount Factor for any Fitch Eligible Asset
other than the securities set forth below will be the percentage
provided in writing by Fitch.
(i) Debt Securities: The percentage determined by reference to
the type of debt security in accordance with the table set
forth below.
Type I Debt Securities 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
68
<PAGE>
Type II Debt Securities 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 Debt Securities 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 Debt Securities 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
Type V Debt Securities 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
69
<PAGE>
Type VI Debt Securities 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 Debt Securities 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
THIRD: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(oo)(iv) with new Section 18(oo)(iv) as follows:
" (iv) debt securities constituting Debt Securities if (A) such
securities 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) 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, (the
"Securities Act") or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A under
the Securities Act as determined by the Corporation's adviser acting
subject to the supervision of the Corporation's Board of Directors; (E)
such securities are issued by (1) a U.S. corporation, (2) a corporation
domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain, or the United Kingdom (the
"Approved Foreign Nations"), (3) the government of any Approved Foreign
Nation or any of its agencies, instrumentalities or political
subdivisions (the debt securities of Approved Foreign Nation issuers
being referred to collectively as "Foreign Bonds"), (4) a corporation
domiciled in Canada or (5) the Canadian government or any of its
agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as
"Canadian Bonds"); and (F) in the case of Foreign and Canadian Bonds,
such securities are denominated in U.S. dollars. Foreign Bonds held by
the Corporation will qualify as Fitch Eligible Assets only up to a
maximum of 20% of the aggregate Market Value of all assets constituting
Fitch Eligible Assets. Similarly, Canadian Bonds held by the
Corporation will qualify as Fitch Eligible Assets only up to a maximum
of 20% of the aggregate Market Value of all assets constituting Fitch
Eligible Assets. Notwithstanding
70
<PAGE>
the limitations in the two preceding sentences, Foreign Bonds and
Canadian Bonds held by the Corporation will qualify as Fitch Eligible
Assets only up to a maximum of 30% of the aggregate Market Value of all
assets constituting Fitch Eligible Assets. In addition, bonds which are
issued in connection with a reorganization under U.S. federal
bankruptcy law ("Reorganization Bonds") will be considered Debt
Securities 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 the Securities Act
as determined by the Corporation's adviser acting subject to the
supervision of the Corporation'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 Debt Securities constituting Fitch
Eligible Assets if they have been approved by Fitch, which approval
shall not be unreasonably withheld."
FOURTH: Part I of the Articles Supplementary is hereby further amended
by replacing the first sentence of Section 18 (oo)(v) and the table with its
accompanying notes that immediately follows that sentence with the following:
"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:
Maximum Maximum Minimum
Single Single Issue Size
Issuer Industry ($ in
Type of Debt Security (%)(1,2) (%)(2,3,6) millions)
--------------------- -------- ---------- ---------
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)
See accompanying notes
- --------------------
(1) Companies subject to common ownership of 25% or more are considered
as one name.
71
<PAGE>
(2) Percentages represent a portion of the aggregate Market Value of Debt
Securities.
(3) Industries are determined according to Fitch Industry
Classifications.
(4) Includes Short Term Money Market Instruments which do not constitute
Type I or Type II Debt Securities 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.
(6) Foreign and Canadian Bonds issued by governments of the Approved
Foreign Nations and Canada or any of their agencies, instrumentalities,
or political subdivisions assigned to the "Sovereigns" industry
classification are not subject to any maximum single industry
concentration limitation."
FIFTH: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(www) through Section 18 (cccc) with new Section
18(www) through 18(cccc) as follows:
" (www) "Type I Debt Securities" means Debt Securities rated either AAA
by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by
Moody's.
(xxx) "Type II Debt Securities" means Debt Securities 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 Debt
Securities.
(yyy) "Type III Debt Securities" means Debt Securities 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 Debt Securities.
(zzz) "Type IV Debt Securities" means Debt Securities 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 Debt Securities.
(aaaa) "Type V Debt Securities" means Debt Securities 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 Debt Securities.
(bbbb) "Type VI Debt Securities" means Debt Securities 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 Debt Securities.
72
<PAGE>
(cccc) "Type VII Debt Securities" means Debt Securities 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 Debt Securities."
SIXTH: Part I of the Articles Supplementary is hereby further amended
by adding new Section 18(nn)(v) as follows:
"(v) Foreign Bonds: The Fitch Discount Factor which would otherwise
apply to Foreign Bonds shall be multiplied by an adjustment factor of
1.2."
SEVENTH: A majority of the Board of Directors of the Corporation has
approved the foregoing amendments to the charter.
EIGHTH: No stock entitled to vote on the foregoing amendments to the
charter was outstanding or subscribed for at the time of the approval of such
amendments by the Board of Directors of the Corporation.
NINTH: These Articles shall be effective on the date the State
Department of Assessments and Taxation of Maryland accepts the Articles for
record.
73
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 17th day of June, 1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Jackson B.R. Galloway By: /s/ Ellen E. Terry
- ------------------------------------------ ------------------------------
Jackson B.R. Galloway, Assistant Secretary Ellen E. Terry, Vice President
74
EXHIBIT A12
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation having
its principal office in Boston, Massachusetts (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: Part I of the Articles Supplementary to the Corporation's
Articles of Amendment and Restatement establishing the Corporation's Series C
Auction Term Preferred Stock, as heretofore amended, (the "Articles
Supplementary") is hereby further amended by replacing current Section 18(y)
with new Section 18(y) as follows:
" (y) "Debt Securities" means debt securities having the
characteristics set forth in paragraph (iv) of the definition of Fitch
Eligible Assets."
SECOND: Part I of the Articles Supplementary is hereby further amended
by replacing the first and second sentences of current Section 18(ll) and all of
current Section 18(ll)(i) with the following:
" (ll) "Fitch Discount Factor" means, for purposes of determining the
Discounted Value of any Fitch Eligible Asset, the percentage determined
as follows. The Fitch Discount Factor for any Fitch Eligible Asset
other than the securities set forth below will be the percentage
provided in writing by Fitch.
(i) Debt Securities: The percentage determined by reference to the
type of debt security in accordance with the table set forth below.
Type I Debt Securities 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
75
<PAGE>
Type II Debt Securities 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 Debt Securities 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 Debt Securities with remaining maturities of:
less than or equal to 2 years 1.27
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
Type V Debt Securities 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
76
<PAGE>
Type VI Debt Securities 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 Debt Securities 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
THIRD: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(mm)(iv) with new Section 18(mm)(iv) as follows:
" (iv) debt securities constituting Debt Securities if (A) such
securities 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) 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, (the
"Securities Act") or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A under
the Securities Act as determined by the Corporation's adviser acting
subject to the supervision of the Corporation's Board of Directors; (E)
such securities are issued by (1) a U.S. corporation, (2) a corporation
domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain, or the United Kingdom (the
"Approved Foreign Nations"), (3) the government of any Approved Foreign
Nation or any of its agencies, instrumentalities or political
subdivisions (the debt securities of Approved Foreign Nation issuers
being referred to collectively as "Foreign Bonds"), (4) a corporation
domiciled in Canada or (5) the Canadian government or any of its
agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as
"Canadian Bonds"); and (F) in the case of Foreign and Canadian Bonds,
such securities are denominated in U.S. dollars. Foreign Bonds held by
the Corporation will qualify as Fitch Eligible Assets only up to a
maximum of 20% of the aggregate Market Value of all assets constituting
Fitch Eligible Assets. Similarly, Canadian Bonds held by the
Corporation will qualify as Fitch Eligible Assets only up to a maximum
of 20% of the aggregate Market Value of all assets constituting Fitch
Eligible Assets. Notwithstanding
77
<PAGE>
the limitations in the two preceding sentences, Foreign Bonds and
Canadian Bonds held by the Corporation will qualify as Fitch Eligible
Assets only up to a maximum of 30% of the aggregate Market Value of all
assets constituting Fitch Eligible Assets. In addition, bonds which are
issued in connection with a reorganization under U.S. federal
bankruptcy law ("Reorganization Bonds") will be considered Debt
Securities 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 the Securities Act
as determined by the Corporation's adviser acting subject to the
supervision of the Corporation'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 Debt Securities constituting Fitch
Eligible Assets if they have been approved by Fitch, which approval
shall not be unreasonably withheld."
FOURTH: Part I of the Articles Supplementary is hereby further amended
by replacing the first sentence of Section 18 (mm)(v) and the table with its
accompanying notes that immediately follows that sentence with the following:
"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:
Maximum Maximum Minimum
Single Single Issue Size
Issuer Industry ($ in
Type of Debt Security (%)(1,2) (%)(2,3,6) millions)
--------------------- -------- ---------- ---------
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)
See accompanying notes
- --------------------
(1) Companies subject to common ownership of 25% or more are considered
as one name.
78
<PAGE>
(2) Percentages represent a portion of the aggregate Market Value of Debt
Securities.
(3) Industries are determined according to Fitch Industry
Classifications.
(4) Includes Short Term Money Market Instruments which do not constitute
Type I or Type II Debt Securities 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.
(6) Foreign and Canadian Bonds issued by governments of the Approved
Foreign Nations and Canada or any of their agencies, instrumentalities,
or political subdivisions assigned to the "Sovereigns" industry
classification are not subject to any maximum single industry
concentration limitation."
FIFTH: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(vvv) through Section 18 (bbbb) with new Section
18(vvv) through 18(bbbb) as follows:
" (vvv) "Type I Debt Securities" means Debt Securities rated either AAA
by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by
Moody's.
(www) "Type II Debt Securities" means Debt Securities 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
Debt Securities.
(xxx) "Type III Debt Securities" means Debt Securities 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 Debt Securities.
(yyy) "Type IV Debt Securities" means Debt Securities 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 Debt Securities.
(zzz) "Type V Debt Securities" means Debt Securities 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 Debt Securities.
(aaaa) "Type VI Debt Securities" means Debt Securities 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 Debt Securities.
79
<PAGE>
(bbbb) "Type VII Debt Securities" means Debt Securities 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 Debt Securities."
SIXTH: Part I of the Articles Supplementary is hereby further amended
by adding new Section 18(ll)(v) as follows:
"(v) Foreign Bonds: The Fitch Discount Factor which would otherwise
apply to Foreign Bonds shall be multiplied by an adjustment factor of
1.2."
SEVENTH: A majority of the Board of Directors of the Corporation has
approved the foregoing amendments to the charter.
EIGHTH: No stock entitled to vote on the foregoing amendments to the
charter was outstanding or subscribed for at the time of the approval of such
amendments by the Board of Directors of the Corporation.
NINTH: These Articles shall be effective on the date the State
Department of Assessments and Taxation of Maryland accepts the Articles for
record.
80
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 17th day of June, 1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Jackson B.R. Galloway By: /s/ Ellen E. Terry
- ------------------------------------------ ------------------------------
Jackson B.R. Galloway, Assistant Secretary Ellen E. Terry, Vice President
81
EXHIBIT A13
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation
(the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that the Articles Supplementary to the Corporation's
Articles of Amendment and Restatement relating to the Corporation's Series C
Auction Term Preferred Stock (the "ATP"), as heretofore amended, (the "Articles
Supplementary") are hereby amended in the manner set forth below.
FIRST: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(uu)(v) with new Section 18(uu)(v) as follows:
" (v) Rule 144A Securities: The Moody's Discount Factor
applied to Rule 144A Securities will be 130% of the Moody's
Discount Factor which would apply were the securities
registered under the 1933 Act."
SECOND: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(vv)(iv) with new Section 18(vv)(iv) as follows:
" (iv) Corporate debt securities will be included in Moody's
Eligible Assets if (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 or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule
144A under the Securities Act as determined by the Fund's
adviser acting subject to the supervision of the Fund's Board
of Directors. Rule 144A Securities held by the Corporation
will qualify as Moody's Eligible Assets only up to a maximum
of 25% of the aggregate Market Value of all assets
constituting Moody's Eligible Assets."
THIRD: A majority of the Board of Directors of the Corporation has
approved the foregoing amendments to the charter.
FOURTH: No stock entitled to vote on the foregoing amendments to the
charter was outstanding or subscribed for at the time of the approval of such
amendments by the Board of Directors of the Corporation.
82
<PAGE>
FIFTH: These Articles shall be effective on the date the State
Department of Assessments and Taxation of Maryland accepts the Articles for
record.
83
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 8th day of September,
1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Jackson B.R. Galloway By: /s/ Ellen E. Terry
- ------------------------------------------ ------------------------------
Jackson B.R. Galloway, Assistant Secretary Ellen E. Terry, Vice President
84
EXHIBIT A14
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation
(the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that the Articles Supplementary to the Corporation's
Articles of Amendment and Restatement relating to the Corporation's Series A
Auction Term Preferred Stock ("ATP Series A") and Series B Auction Term
Preferred Stock ("ATP Series B", and together with ATP Series A, the "ATP"), as
heretofore amended, (the "Articles Supplementary") are hereby amended in the
manner set forth below.
FIRST: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(ww)(v) with new Section 18(ww)(v) as follows:
" (v) Rule 144A Securities: The Moody's Discount Factor
applied to Rule 144A Securities will be 130% of the Moody's
Discount Factor which would apply were the securities
registered under the 1933 Act."
SECOND: Part I of the Articles Supplementary is hereby further amended
by replacing current Section 18(xx)(iv) with new Section 18(xx)(iv) as follows:
" (iv) Corporate debt securities will be included in Moody's
Eligible Assets if (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 or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule
144A under the Securities Act as determined by the Fund's
adviser acting subject to the supervision of the Fund's Board
of Directors. Rule 144A Securities held by the Corporation
will qualify as Moody's Eligible Assets only up to a maximum
of 25% of the aggregate Market Value of all assets
constituting Moody's Eligible Assets."
THIRD: A majority of the Board of Directors of the Corporation has
approved the foregoing amendments to the charter.
85
<PAGE>
FOURTH: No stock entitled to vote on the foregoing amendments to the
charter was outstanding or subscribed for at the time of the approval of such
amendments by the Board of Directors of the Corporation.
FIFTH: These Articles shall be effective on the date the State
Department of Assessments and Taxation of Maryland accepts the Articles for
record.
86
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 8th day of September,
1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Jackson B.R. Galloway By: /s/ Ellen E. Terry
- ------------------------------------------ ------------------------------
Jackson B.R. Galloway, Assistant Secretary Ellen E. Terry, Vice President
87
EXHIBIT A15
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation
(the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that the Articles Supplementary to the Corporation's
Articles of Amendment and Restatement relating to the Corporation's Series A
Auction Term Preferred Stock ("ATP Series A") and Series B Auction Term
Preferred Stock ("ATP Series B", and together with ATP Series A, the "ATP"), as
heretofore amended, (the "Articles Supplementary") are hereby amended in the
manner set forth below.
FIRST: Part I of the Articles Supplementary is hereby further amended
by adding new Section 18(oo)(vi) to the definition of Fitch Eligible Assets as
follows:
" (vi) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company of Act of 1940, as
amended, may be included in Fitch Eligible Assets, but, with
respect to any financial contract, only upon receipt by the
Company of a writing from Fitch specifying any conditions on
including such financial contract in Fitch Eligible Assets and
assuring the Company that including such financial contract in
the manner so specified would not affect the credit rating
assigned by Fitch to the ATP."
SECOND: Part I of the Articles Supplementary is hereby further amended
by adding new Section 18(xx)(vii) to the definition of Moody's Eligible Assets
as follows:
" (vii) Financial contracts, as such term is defined in
Section 3(c)(2)(B)(ii) of the Investment Company of Act of
1940, as amended, may be included in Moody's Eligible Assets,
but, with respect to any financial contract, only upon receipt
by the Company of a writing from Moody's specifying any
conditions on including such financial contract in Moody's
Eligible Assets and assuring the Company that including such
financial contract in the manner so specified would not affect
the credit rating assigned by Moody's to the ATP."
THIRD: A majority of the Board of Directors of the Corporation has
approved the foregoing amendments to the charter.
FOURTH: No stock entitled to vote on the foregoing amendments to the
charter was outstanding or subscribed for at the time of the approval of such
amendments by the Board of Directors of the Corporation.
88
<PAGE>
FIFTH: These Articles shall be effective on the date the State
Department of Assessments and Taxation of Maryland accepts the Articles for
record.
89
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 20th day of October,
1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Jackson B.R. Galloway By: /s/ Ellen E. Terry
- ------------------------------------------ ------------------------------
Jackson B.R. Galloway, Assistant Secretary Ellen E. Terry, Vice President
90
EXHIBIT A16
THE NEW AMERICA HIGH INCOME FUND, INC.
ARTICLES OF AMENDMENT
The New America High Income Fund, Inc., a Maryland corporation
(the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that the Articles Supplementary to the Corporation's
Articles of Amendment and Restatement relating to the Corporation's Series C
Auction Term Preferred Stock (the "ATP"), as heretofore amended, (the "Articles
Supplementary") are hereby amended in the manner set forth below.
FIRST: Part I of the Articles Supplementary is hereby further amended
by adding new Section 18(mm)(vi) to the definition of "Fitch Eligible Assets" as
follows:
" (vi) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company of Act of 1940, as
amended, may be included in Fitch Eligible Assets, but, with
respect to any financial contract, only upon receipt by the
Company of a writing from Fitch specifying any conditions on
including such financial contract in Fitch Eligible Assets and
assuring the Company that including such financial contract in
the manner so specified would not affect the credit rating
assigned by Fitch to the ATP."
SECOND: Part I of the Articles Supplementary is hereby further amended
by adding new Section 18(vv)(vii) to the definition of "Moody's Eligible Assets"
as follows:
" (vii) Financial contracts, as such term is defined in
Section 3(c)(2)(B)(ii) of the Investment Company of Act of
1940, as amended, may be included in Moody's Eligible Assets,
but, with respect to any financial contract, only upon receipt
by the Company of a writing from Moody's specifying any
conditions on including such financial contract in Moody's
Eligible Assets and assuring the Company that including such
financial contract in the manner so specified would not affect
the credit rating assigned by Moody's to the ATP."
THIRD: A majority of the Board of Directors of the Corporation has
approved the foregoing amendments to the charter.
FOURTH: No stock entitled to vote on the foregoing amendments to the
charter was outstanding or subscribed for at the time of the approval of such
amendments by the Board of Directors of the Corporation.
91
<PAGE>
FIFTH: These Articles shall be effective on the date the State
Department of Assessments and Taxation of Maryland accepts the Articles for
record.
92
<PAGE>
IN WITNESS WHEREOF The New America High Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President (or
its Vice President) and its corporate seal to be hereunto affixed and attested
by its Secretary (or its Assistant Secretary) as of this 20th day of October,
1997.
The undersigned acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that, to the best of his or her
knowledge, information and belief, the matters and facts set forth herein with
respect to the authorization and approval hereof are true in all material
respects and that this statement is made under the penalties of perjury.
[Affix corporate seal] THE NEW AMERICA HIGH INCOME
FUND, INC.
Attest:
/s/ Jackson B.R. Galloway By: /s/ Ellen E. Terry
- ------------------------------------------ ------------------------------
Jackson B.R. Galloway, Assistant Secretary Ellen E. Terry, Vice President
93
EXHIBIT K10
As of October 29, 1997
Ms. Ellen E. Terry
Ten Winthrop Square
Boston, MA 02110
Dear Ms. Terry:
This letter agreement confirms your engagement by The New America High
Income Fund, Inc. (the "Fund") to provide the administrative services set forth
below, subject to the overall supervision of the President of the Fund for the
term and on the terms set forth in this Agreement. You hereby accept such
engagement and agree during such period to render the services herein described
and to assume the obligations herein set forth, for the compensation herein
provided.
1. Duties
------
(a) Subject to the supervision of the President of the Fund, you shall
perform the following services:
a. Review the determination of the Fund's net asset value
based on data provided to you and transmit the same to appropriate
sources for publication;
b. Coordinate the maintenance of the books and records
required to be maintained by the Fund by the Fund's various service
providers and maintain on behalf of the Fund such books and records as
may be mutually agreed upon;
c. Monitor Fund expenses and accruals for expenses and arrange
for payment of the Fund's expenses, including instructing the custodian
as to the payment of bills;
d. Coordinate the preparation of the Fund's semi-annual,
annual and other periodic reports, proxy statements and other
communications with shareholders required or otherwise to be sent to
Fund shareholders (including overseeing the Fund's accountants and
other service providers in the preparation of financial statements),
arrange for the printing and dissemination of such reports and
communications to
94
<PAGE>
Ms. Ellen E. Terry
As of October 29, 1997
Page 2
shareholders and coordinate the preparation of materials for meetings
of the Board of Directors;
e. Oversee in the preparation of the Fund's periodic reports
required to be filed with the Securities and Exchange Commission on
Form N-SAR and Form N-2 and such other reports, forms or filings, as
may be mutually agreed upon;
f. Prepare analysis and forecasts of dividends based on
information provided to you;
g. Prepare such information and reports as may be required by
the New York Stock Exchange (the "NYSE") on which the Fund's shares of
Common Stock are listed, act as liaison with the NYSE and assist in
connection with the dissemination of Fund press releases;
h. Monitor/interface with lenders, auction agents,
broker-dealers and insurers and instruct the custodian to make payments
of interest, dividends and commissions and in respect of the Fund's
senior securities, if any, undertake such other activities as may be
required;
i. Assist in responding to shareholder/retail broker inquiries
and disseminating information to the same based on information provided
to you;
j. Oversee and review calculations of fees paid to the
investment adviser and the custodian;
k. Consult with the Fund's officers, independent accountants,
legal counsel, custodian, and transfer and dividend disbursing agent in
establishing the accounting policies of the Fund and generally oversee
the financial and accounting services provided by the Fund's
accountants, custodian and transfer agent;
l. Instruct the transfer agent with respect to the payment of
dividends;
m. Assist the Fund in obtaining and maintaining any fidelity
bond required under the Investment Company Act of 1940; and
95
<PAGE>
Ms. Ellen E. Terry
As of October 29, 1997
Page 3
n. Prepare reports relating to the business and affairs of the
Fund as may be mutually agreed upon and not otherwise appropriately
prepared by the Fund's investment adviser, custodian, counsel or
auditors.
It is agreed that your services as administrator of the Fund hereunder
shall be your primary responsibility but shall not be exclusive with respect to
the Fund. You shall be entitled to take reasonable vacations on reasonable
advance notice and agree to cooperate with the Fund in arranging for coverage of
the functions described herein during your absence.
(b) In addition to the services provided pursuant to the foregoing
paragraph (a), you shall, subject to the supervision of the President of the
Fund, oversee Paul E. Saidnawey or any successor to him appointed by the Fund in
the performance by him or such successor of the services listed below (it being
understood that the Fund shall be responsible for the fees and expenses
associated with the provision of such services):
i. Assistance in the preparation and filing of the Fund's
federal, state and local income tax returns and any other required tax
returns;
ii. Preparation and distribution of all compliance reports
relating to the Fund's senior securities, if any;
iii. Maintenance of the Fund's compliance model and work with
the Fund's accountants on the quarterly review of the model; and
iv. Assistance in the preparation of the Fund's financial
statements and Form N-SAR.
(c) Without the prior written consent of the Fund, you will not, at any
time, either during or subsequent to employment by the Fund, use any
Confidential Information for the benefit of anyone other than the Fund, or
disclose any Confidential Information to anyone except in furtherance of the
Fund's interests. The term "Confidential Information" includes all information,
not generally known or available to the public or the trade, which is acquired
by you from the Fund, its affiliates, or service providers and which relates to
the Fund or its operations.
96
<PAGE>
Ms. Ellen E. Terry
As of October 29, 1997
Page 4
2. Fee
---
The Fund will pay you at an annual rate of $________for your services
described herein. Such fee shall be payable in prorated monthly installments on
the first business day of each month commencing in ___________ 1997, subject to
proration for partial months.
3. Expenses
--------
You shall bear your own expenses incurred in connection with this
Agreement; provided, however, that the Fund shall provide for you at its own
cost the facilities, equipment (including telephone, fax and computer
facilities), personnel, support services and supplies at the offices of the Fund
or at such other offices as the Fund may occupy from time to time.
4. Term
----
This Agreement shall continue in effect until terminated as provided
herein. This Agreement may be terminated at any time without the payment of any
penalty by the Fund on 90 days' written notice to you or by you at any time
without the payment of any penalty on 90 days' written notice to the Fund.
5. Responsibility; Indemnification
-------------------------------
You assume no responsibility under this Agreement other than to render
the services called for hereunder, and specifically you assume no responsibility
for investment advice or the investment or reinvestment of the Fund's assets.
You shall not be liable to the Fund for any action taken or omitted to be taken
by you in connection with the performance of any of your duties or obligations
under this Agreement, and the Fund shall indemnify you and hold you harmless
from and against all damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in settlement, provided
the Fund has consented to such settlement and had an opportunity to defend the
relevant matter at its own expense) incurred by you in or by reason of any
pending, threatened or contemplated action, suit, investigation or other
proceeding (including an action or suit by or in the right of the Fund or its
security holders) arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by you in connection with the performance
of any of your duties or obligations under this Agreement; provided, however,
that nothing contained herein shall protect or be deemed to protect you against
or entitle or be deemed to entitle you to indemnification in respect of any
liability to the Fund or its security holders to which you would otherwise be
subject by reason of (a) willful misfeasance, bad faith or gross negligence
97
<PAGE>
Ms. Ellen E. Terry
As of October 29, 1997
Page 5
in the performance of your duties, (b) your receipt of an improper personal
benefit in money, property or service, or (c) in the case of any criminal
proceeding, your having reasonable cause to believe the act or omission was
unlawful.
6. Certain Records
---------------
Any records required to be maintained and preserved pursuant to the
provisions of Rule 31a-1 and Rule 31a-2 promulgated under the Investment Company
Act of 1940 which are maintained by the undersigned, if any, are property of the
Fund and will be surrendered promptly to the Fund on request.
7. Miscellaneous
-------------
This Agreement may be amended by mutual written consent. This Agreement
sets forth the entire agreement and understanding of the parties hereto solely
with respect to the matters covered hereby and the relationship between the Fund
and you, and supersedes and terminates any prior agreements between us. This
Agreement may not be assigned by you, except that your rights and duties under
this Agreement may be assigned to a corporation of which you are the sole
officer, director and stockholder with the written consent of the Fund, which
consent shall not be unreasonably withheld. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts
without reference to choice of law principles thereof and in accordance with the
Investment Company Act of 1940. In the case of any conflict the Investment
Company Act of 1940 shall control.
98
<PAGE>
Ms. Ellen E. Terry
As of October 29, 1997
Page 6
Please indicate your acceptance of the terms set forth herein by
signing the enclosed copy of this letter in the space provided below and
returning it to the Fund, whereupon this letter shall become a binding
agreement.
Very truly yours,
THE NEW AMERICA HIGH INCOME FUND,
INC.
By: /s/ Robert F. Birch
--------------------------
Robert F. Birch, President
ACCEPTED AND AGREED TO
AS OF October 29, 1997
/s/ Ellen E. Terry
- --------------------------
Ellen E. Terry
99
EXHIBIT K11
As of October 29, 1997
Mr. Paul E. Saidnawey
Ten Winthrop Square
Boston, MA 02110
Dear Mr. Saidnawey:
This letter agreement confirms your engagement by The New America High
Income Fund, Inc. (the "Fund") to provide the services set forth below, subject
to the overall supervision of the President of the Fund for the term and on the
terms set forth in this Agreement. You hereby accept such engagement and agree
during such period to render the services herein described and to assume the
obligations herein set forth, for the compensation herein provided.
1. Duties
------
(a) Subject to the supervision of the President of the Fund, you shall
perform the following services:
a. Assist in the preparation and filing of the Fund's federal,
state and local income tax returns and any other required tax returns;
b. Prepare and distribute all required compliance reports
relating to the Fund's senior securities, if any, based on information
provided or such other similar functions as may be required as a result
of any other capital structure adopted by the Fund;
c. Maintain the Fund's compliance model and work with the
Fund's accountants on the quarterly review of the model;
d. Assist in the preparation of the Fund's financial
statements and Form N-SAR; and
e. Perform any other analysis requested from time to time by
the Fund.
It is agreed that your services hereunder shall be your primary
responsibility but shall not be exclusive with respect to the Fund. You shall be
entitled to take reasonable vacations
100
<PAGE>
Paul E. Saidnawey
As of October 29, 1997
Page 2
on reasonable advance notice and agree to cooperate with the Fund and Ms. Terry
in arranging for coverage of the functions described herein during your absence.
(b) Without the prior written consent of the Fund, you will not, at any
time, either during or subsequent to employment by the Fund, use any
Confidential Information for the benefit of anyone other than the Fund, or
disclose any Confidential Information to anyone except in furtherance of the
Fund's interests. The term "Confidential Information" includes all information,
not generally known or available to the public or the trade, which is acquired
by you from the Fund, its affiliates, or service providers and which relates to
the Fund or its operations.
2. Fee
---
The Fund will pay you at an annual rate of $________ for your services
described herein. Such fee shall be payable in prorated monthly installments on
the first business day of each month commencing in ___________ 1997, subject to
proration for partial months.
3. Expenses
--------
You shall bear your own expenses incurred in connection with this
Agreement; provided, however, that the Fund shall provide for you at its own
cost the facilities, equipment (including telephone, fax and computer
facilities), personnel, support services and supplies at the offices of the Fund
or at such other offices as the Fund may occupy from time to time.
4. Term
----
This Agreement shall continue in effect until terminated as provided
herein. This Agreement may be terminated at any time without the payment of any
penalty by the Fund on 90 days' written notice to you or by you at any time
without the payment of any penalty on 90 days' written notice to the Fund.
5. Responsibility; Indemnification
-------------------------------
You assume no responsibility under this Agreement other than to render
the services called for hereunder, and specifically you assume no responsibility
for investment advice or the investment or reinvestment of the Fund's assets.
You shall not be liable to the Fund for any action taken or omitted to be taken
by you in connection with the performance of any of your duties or obligations
under this Agreement, and the Fund shall indemnify you and hold you
101
<PAGE>
Paul E. Saidnawey
As of October 29, 1997
Page 3
harmless from and against all damages, liabilities, costs and expenses
(including reasonable attorneys' fees and amounts reasonably paid in settlement,
provided the Fund has consented to such settlement and had an opportunity to
defend the relevant matter at its own expense) incurred by you in or by reason
of any pending, threatened or contemplated action, suit, investigation or other
proceeding (including an action or suit by or in the right of the Fund or its
security holders) arising out of or otherwise based upon any action actually or
allegedly taken or omitted to be taken by you in connection with the performance
of any of your duties or obligations under this Agreement; provided, however,
that nothing contained herein shall protect or be deemed to protect you against
or entitle or be deemed to entitle you to indemnification in respect of any
liability to the Fund or its security holders to which you would otherwise be
subject by reason of (a) willful misfeasance, bad faith or gross negligence in
the performance of your duties, (b) your receipt of an improper personal benefit
in money, property or service, or (c) in the case of any criminal proceeding,
your having reasonable cause to believe the act or omission was unlawful.
6. Miscellaneous
-------------
This Agreement may be amended by mutual written consent. This Agreement
sets forth the entire agreement and understanding of the parties hereto solely
with respect to the matters covered hereby and the relationship between the Fund
and you, and supersedes and terminates any prior agreement between us. This
Agreement shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts without reference to choice of law principles
thereof and in accordance with the Investment Company Act of 1940. In the case
of any conflict the Investment Company Act of 1940 shall control.
102
<PAGE>
Paul E. Saidnawey
As of October 29, 1997
Page 4
Please indicate your acceptance of the terms set forth herein by
signing the enclosed copy of this letter in the space provided below and
returning it to the Fund, whereupon this letter shall become a binding
agreement.
Very truly yours,
THE NEW AMERICA HIGH INCOME FUND, INC.
By: /s/ Robert F. Birch
--------------------------
Robert F. Birch, President
ACCEPTED AND AGREED TO
AS OF October 29, 1997
/s/ Paul E. Saidnawey
- --------------------------
Paul E. Saidnawey
103
Exhibit N
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
for The New America High Income Fund, Inc. dated January 17, 1997 (and to all
references to our firm) included in or made a part of the Fund's Registration
Statement on Form N-2 filed December 24, 1997 and Amendment No. 24 to
Registration Statement File No. 811-5399.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Boston, Massachusetts
December 23, 1997
104
