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 10, 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. Under some circumstances, the Subscription Price per share will be less
than the then net asset value per share, and under those circumstances the
Offer will result in a substantial dilution to stockholders who do not fully
exercise their Rights. In addition, the Rights entitle each Rightholder to
subscribe, subject to certain limitations and subject to allotment, for any
Shares not acquired by exercise of Rights in the primary subscription. The
Rights are transferable and both the Rights and the Shares will be admitted for
trading on the New York Stock Exchange (the "Exchange"). See "The Offer." THE
SUBSCRIPTION PRICE PER SHARE IS THE LOWER OF (A) 92% OF THE AVERAGE OF THE LAST
REPORTED SALES PRICES OF A SHARE OF THE FUND'S COMMON STOCK ON THE EXCHANGE ON
THE EXPIRATION DATE (AS DEFINED BELOW) AND THE NINE PRECEDING BUSINESS DAYS AND
(B) THE NET ASSET VALUE PER SHARE AS OF THE CLOSE OF BUSINESS ON THE EXPIRATION
DATE (the "SUBSCRIPTION PRICE").
The Fund announced its intention to make the Offer after the close of trading
on the New York Stock Exchange on December 24, 1997. The net asset value per
share of Common Stock at the close of business on December 24, 1997 and on
February 6, 1998 was $5.10 and $5.21, respectively, and the closing market
price of a share of the Fund's Common Stock on such Exchange on those dates was
$5.69 and $5.44, respectively. The Fund's Common Stock trades under the symbol
"HYB."
THE OFFER WILL EXPIRE AT 5:00 P.M. EASTERN TIME ON MARCH 18, 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.
- --------------------------------------------------------------------------------
Estimated
Estimated Proceeds
Subscription Price(1) Sales Load to Fund(2)(3)
- --------------------------------------------------------------------------------
Per Share ......... $ 5.01 None $ 4.99
- --------------------------------------------------------------------------------
Total(4) .......... $81,371,674 None $81,061,674
- --------------------------------------------------------------------------------
(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
$410,000, and is based on the Estimated Subscription Price (as defined
below). Wellington Management has agreed to voluntarily waive $100,000 of
its fees.
(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 10, 1998
<PAGE>
All questions and inquiries related to the Offer should be directed to
the Information Agent, Corporate Investors Communications, Inc., toll free at
1-800-805-9132.
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 17, 1998, written representation as to the number of additional
Rights required for such issuance.
________________________
Under some circumstances, the Subscription Price per share will be less
than the current net asset value per share of Common Stock at the time the
Shares are issued, and under these circumstances the Offer will result in
substantial dilution to stockholders who do not fully exercise their Rights. 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 may 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 the lower of (a) 92% of the average of the last
reported sales prices of a share of the Fund's Common Stock on the Exchange on
the Expiration Date and the nine preceding business days and (b) the net asset
value per share as of the close of business on the Expiration Date.
Stockholders of record will receive one Right for each three shares of Common
Stock of the Fund owned on the Record Date, subject to rounding. Rightholders
can then purchase one newly issued Share for each Right. Thus, if a stockholder
owns 300 shares on the Record Date, he or she will have the opportunity to
purchase up to 100 new Shares. Rightholders may request the right to purchase
additional Shares through an over-subscription privilege as described under
"The Offer--Over-Subscription Privilege." Rightholders may also elect to sell
their Rights as described under "The Offer--Sale of Rights." Stockholders who
do not exercise their Rights will suffer dilution as a result of the Offer and
should take steps to sell the Rights to avoid losing the market value, if any,
represented by such Rights. See "The Offer--Sale of Rights" and "Risk Factors
and Special Considerations--Dilution and Other Investment Considerations." 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
February 6, 1998 market price per share ...... $5.44
February 6, 1998 net asset value per share. .. $5.21
Estimated Subscription Price ................. $5.01
Shares outstanding at February 6, 1998 ....... 48,655,286
Transferable Rights issued ................... 16,241,851
Subscription ratio ........................... 1 Right to buy 1 Share
Maximum number of Shares to be issued ........ 16,241,851
How to Exercise Rights
[bullet] Complete, sign and date the enclosed Subscription Certificate.
[bullet] Make your check or money order for $5.01 for each Share subscribed
for, including any Shares subscribed for pursuant to the
over-subscription privilege. This payment may be more or less than
the actual Subscription Price. Additional payment may be required
for the Primary Subscription Shares, and any Over-Subscription
Privilege Shares, when the actual Subscription Price is determined.
[bullet] Registered stockholders should mail the Subscription Certificate and
payment in the enclosed envelope to State Street Bank and Trust
Company in a manner that will ensure receipt prior to 5:00 p.m.,
Eastern time, on March 18, 1998, unless extended.
[bullet] If shares are held in a brokerage account or by a custodian bank,
contact your broker or financial adviser.
Important Dates to Remember
Event Date
- ------------------------------------------- ---------------------------------
Record Date February 10, 1998
Expiration Date (Payment for Shares and March 18, 1998 (unless extended)
Notices of GuaranteedDelivery Due)
Due Date for Delivery of Subscription March 21, 1998 (unless extended)
Certificates to Subscription Agent
pursuant to Notice of Guaranteed Delivery
Not later than April 9, 1998
Mailing of Shares (unless extended)
Shareholder inquiries should be directed to the Information Agent:
Corporate Investors Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 805-9132
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Terms of the Offer
The Fund is issuing to stockholders of record as of the close of
business on February 10, 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 18, 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 the lower of (a) 92% of the average of the
last reported sales prices of a share of the Fund's Common Stock on the Exchange
on the Expiration Date and the nine preceding business days and (b) the net
asset value per share as of the close of business on the Expiration Date (the
"Subscription Price"). 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 $5.01
(approximately 92% of the average of the last reported sales prices of a share
of the Fund's Common Stock on the Exchange on February 6, 1998 and the nine
preceding business days). Exercising Rightholders will have no right to rescind
a purchase after the Subscription Agent has received payment. See "The
Offer--Exercise of Rights" and "The Offer--Payment for Shares."
The Rights are transferable and will be admitted for trading on the New
York Stock Exchange. See "The Offer--Sale of Rights."
The Fund
The Fund is a diversified, closed-end management investment company with
a leveraged capital structure. The Fund's investment objective is to provide
high current income, while seeking to preserve stockholders' capital, through
investment in a professionally managed, diversified portfolio of "high yield"
fixed-income securities, commonly known as "junk bonds." The Fund invests
primarily in "high yield" fixed-income securities rated in the lower categories
by established rating agencies, consisting principally of
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
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 38%, which would be reduced to approximately 31%
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 $174.6 billion of assets, including
$70.2 billion of fixed income securities of which $5.5 billion represented
"high-yield" investments. Wellington Management and its predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960. As an accommodation
to the Fund and based on the Board's determination that the Offer is in the best
interests of the stockholders, Wellington Management has agreed to voluntarily
waive $100,000 of its fees.
Risk Factors
Investment in the Fund involves a number of significant and substantial
risks, which are increased due to the Fund's leveraged capital structure, and no
assurance can be given that the Fund will achieve its investment objective. The
net asset value and market price of the Fund's Common Stock has declined sharply
at times and may do so in the future.
Before exercising the Rights pursuant to the Offer, potential investors
should consider the factors described herein, including without limitation, the
factors described under "The Fund," "Investment Objective and Policies" and
"Risk Factors and Special Considerations." These factors include the dilutive
effects of the Offer, the effects of the Fund's leveraged capital structure, the
significant and substantial risks involved in investing in high yield, high risk
securities, the limitations on the ability of the Fund to pay dividends if it
fails 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
Stockholder Transaction Expenses
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
attributable to Common Stock)(4)
Investment Advisory Fee....................................... .45%
Leverage Related Expenses.........................10%
Other Expenses....................................32%
--
Total Other Expenses(2)....................................... .42%
----
Total Annual Expenses............................................... .87%
====
- -------------------------
(1) The Fund has agreed to pay First Albany Corporation ("First Albany") a fee
of $40,000 for financial advisory services in connection with the Offer.
(2) Does not include expenses of the Fund incurred in connection with the
Offer, estimated at $410,000, which will be reduced by a $100,000 voluntary
fee waiver by Wellington Management. This estimate includes 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) Fund expense ratios have been calculated using Fund net assets attributable
to Common Stock after giving effect to the anticipated proceeds of the
Offer. 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 $29 $50 $110
</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 based on net assets
attributable to Common Stock of .87% of which .10% is attributable to leverage
expenses and .77% 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 (the "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(d) 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 .................... $4.94 $4.71 $4.13 $5.15 $4.32
-------- -------- -------- -------- --------
Net Investment Income .................... .70# .69 .67 .72# .59
Net Realized and Unrealized
Gain (Loss) on Investments
and Forward Foreign Currency
Contracts ............................ .25# .22 .62 (.82)# .89
-------- -------- -------- -------- --------
Total From Investment
Operations ..................... .95 .91 1.29 (.10) 1.48
Distributions:
Dividends from net investment
income:
To preferred stockholders
(including net swap
settlement/receipts
payments) ...................... (.16) (.16) (.17) (.17) (.05)
To common stockholders ........... (.53) (.52) (.50) (.53) (.53)
Dividends in excess of net
investment income:
To common stockholders ........... (.01) -- (.04) -- (.07)
Returns of capital:
To common stockholders ........... -- -- -- -- --
-------- -------- -------- -------- --------
Total Distributions .................. (.70) (.68) (.71) (.70) (.65)
-------- -------- -------- -------- --------
Effect of rights offering and
related expenses; and Auction
Term Preferred Stock offering
costs and sales load .................. (.16) -- -- (.22) --
-------- -------- -------- -------- --------
Net Asset Value:
End of period ........................ $5.03 $4.94 $4.71 $4.13 $5.15
Per Share Market Value:
End of period ........................ $5.63 $5.13 $4.75 $4.00 $5.13
Total Investment Return+ ................. 21.97% 19.89% 33.50% (11.88)% 40.08%
Net Assets, End of Period,
Applicable to Common Stock(b) ........ $243,541 $176,408 $164,823 $141,590 $130,673
Net Assets, End of Period,
Applicable to Preferred
Stock(b) ............................. $150,000 $100,000 $100,000 $100,000 $35,000
</TABLE>
<TABLE>
<CAPTION>
Period From
February 26, 1988
(Commencement
of Operations) to
For the Years Ended December 31, December 31, 1988
--------------------------------------------- -----------------
1992(a) 1991 1990 1989
------- ---- ---- ----
(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
and Forward Foreign Currency
Contracts ............................ .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 net swap
settlement/receipts
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
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------
1997(d) 1996 1995 1994(c) 1993
------- ---- ---- ------- ----
(For Each Share of Common Stock
Outstanding Throughout the Period)
<S> <C> <C> <C> <C> <C>
Total Net Assets, End of Period(b) ....... $393,541 $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** ..................... .08% .10% .11% .13% .40%
Ratio of operating expenses to
average net assets** ............. .58% .73% .84% .75% 1.56%
Ratio of litigation settlement expense
to average net assets** .......... -- -- .49% -- --
-------- -------- -------- -------- --------
Ratio of Total Expenses
to Average Net Assets** .............. .66% .83% 1.44% .89% 3.38%
======== ======== ======== ======== ========
Ratio of Net Investment
Income to Average Net
Assets** ............................. 8.75% 9.05% 8.90% 9.06% 9.21%
Portfolio Turnover Rate .................. 108.84% 53.45% 62.66% 58.56% 85.76%
</TABLE>
<TABLE>
<CAPTION>
Period From
February 26, 1988
(Commencement
of Operations) to
For the Years Ended December 31, December 31, 1988
--------------------------------------------- -----------------
1992(a) 1991 1990 1989
------- ---- ---- ----
(For Each Share of Common Stock
Outstanding Throughout the Period)
<S> <C> <C> <C> <C> <C>
Total Net Assets, End of Period(b) ....... $142,897 $128,227 $118,813 $210,656 $281,363
Expense Ratios
Ratio of interest expense to
average net assets** ............. 2.95% 3.25% 4.17% 3.56% 3.29%*
Ratio of preferred and other
debt expenses to average
net assets** ..................... .65% .78% .62% .24% .23%*
Ratio of operating expenses to
average net assets** ............. 1.22% 1.19% 1.10% .69% .70%*
Ratio of litigation settlement
expense to average net assets** .. -- -- -- -- --
-------- -------- -------- -------- --------
Ratio of Total Expenses
to Average Net Assets** .............. 4.82% 5.22% 5.89% 4.49% 4.22%*
======== ======== ======== ======== ========
Ratio of Net Investment
Income to Average Net
Assets** ............................. 10.09% 12.62% 14.50% 14.48% 13.56%*
Portfolio Turnover Rate .................. 129.86% 121.15% 49.98% 65.39% 149.00%*
</TABLE>
- ----------------------------
(a) Prior to the appointment on February 19, 1992 of Wellington Management
Company, LLP 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.
(d) The Fund issued Series C ATP on May 6, 1997 and the per share data and
ratios for the year ended December 31, 1997 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 net swap settlement receipts/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 and March 1997
rights offerings.
+ 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 February 6, 1998
The following table sets forth the Fund's capitalization as of February 6,
1998.
<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 48,655,286 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 6, 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 outstanding and the
reduction in net asset value per share of Common Stock would be less.
<TABLE>
<CAPTION>
Actual As Adjusted
----------- ------------
(in thousands)
<S> <C> <C>
Total Assets ................................................................... $ 411,160 $ 492,222
Total Liabilities .............................................................. 157,529 157,529
--------- ---------
Net Assets ..................................................................... $ 253,631 $ 334,693
========= =========
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, 48,655,286
shares issued and outstanding, 64,897,137 shares issued and outstanding as
adjusted ..................................................................... 487 649
Capital in excess of par value ................................................. 327,968 408,868
Accumulated net realized loss from security transactions ....................... (82,977) (82,977)
Net unrealized appreciation on investments ..................................... 5,236 5,236
Accumulated undistributed net investment income ................................ 2,917 2,917
--------- ---------
NET ASSETS ..................................................................... $ 403,631 $ 484,693
--------- ---------
Less liquidation value of Auction Term Preferred Stock ........................ 150,000 150,000
Net assets attributable to Common Stock outstanding ............................ $ 253,631 $ 334,693
========= =========
Net asset value per share of Common Stock ...................................... $ 5.21 $ 5.16
========= =========
</TABLE>
9
<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." In May
1997, an additional series of newly authorized Auction Term Preferred Stock
having an aggregate liquidation preference of $50 million plus accumulated and
unpaid dividends was issued.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------
1997 1996 1995 1994
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total Amount
Outstanding
Notes .............. $ -- $ -- $ -- $ --
Preferred
Stock .............. 150,000,000 100,000,000 100,000,000 100,000,000
Short-Term
Loan .............. -- -- -- --
Asset Coverage
Per $1,000 of
Note (1) .......... $ -- $ -- $ -- $ --
Per Preferred
Stock
Share (2) ......... 65,604 69,102 66,206 60,398
Per $1,000 of
Short-Term
Loan (1) .......... $ -- -- -- --
Involuntary
Liquidation
Preference
Preferred
Stock
Share (3) .......... $ 25,000 $ 25,000 $ 25,000 $ 25,000
Approximate
Market Value
Per Note ........... $ -- $ -- $ -- $ --
Per Preferred
Stock
Share (3) .......... 25,000 25,000 25,000 25,000
Per $1,000 of
Short-Term
Loan ............... $ -- -- -- --
<CAPTION>
1993 1992 1991 1990 1989 1988
-------------- -------------- -------------- -------------- -------------- ---------------
<S> <C> <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 35,000,000 58,500,000 79,000,000
Short-Term
Loan .............. 45,000,000 -- -- -- -- --
Asset Coverage
Per $1,000 of
Note (1) .......... $ -- $ 4,141 $ 3,819 $ 3,476 $ 3,192 $ 3,680
Per Preferred
Stock
Share (2) ......... 473,351 408,277 366,363 339,466 360,096 356,156
Per $1,000 of
Short-Term
Loan (1) .......... 4,682 -- -- -- -- --
Involuntary
Liquidation
Preference
Preferred
Stock
Share (3) .......... $ 100,000 $ 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) .......... 100,000 100,000 100,000 100,000 100,000 100,000
Per $1,000 of
Short-Term
Loan ............... 1,000 -- -- -- -- --
</TABLE>
- ------------
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such amount
by the number of Notes 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.
10
<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 5.10 4.79 5.13 4.75 1.1 (7.8)
June 30, 1997 5.03 4.76 5.25 4.63 4.4 (2.8)
September 30, 1997 5.15 5.02 5.38 5.00 5.2 0.2
December 31, 1997 5.19 5.04 5.75 5.06 12.7 3.8
</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.
11
<PAGE>
The Fund's Common Stock has sometimes traded at a premium and sometimes
at a discount to net asset value. See "Risk Factors and Special
Considerations--Premium/Discount from Net Asset Value." At the close of business
on December 24, 1997, and February 6, 1998 the Fund's net asset values per share
of Common Stock at the close of business were $5.10 and $5.21, respectively,
while the closing market prices of a share of Common Stock on the Exchange on
such dates were $5.69 and $5.44, respectively. The premiums as a percentage of
net asset value on such dates were 11.6% and 4.4%, respectively.
12
<PAGE>
THE OFFER
Terms of the Offer
The Fund is issuing to Record Date Stockholders, as of the close of
business on February 10, 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 10, 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 the lower of (a) 92% of the average of the last reported sales prices of a
share of the Fund's Common Stock on the Exchange on The Expiration Date and the
nine preceding business days and (b) the net asset value per share as of the
close of business on the Expiration Date 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 $5.01 per
Share (approximately 92% of the average of the last reported sales prices of a
share of the Fund's Common Stock on the Exchange on February 6, 1998 and the
nine preceding business days). 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 24, 1997. The net asset values per share of
Common Stock at the close of business on December 24, 1997 and February 6, 1998
were $5.10 and $5.21, respectively, and the closing market prices per share of
Common Stock on the Exchange on those dates were $5.69 and $5.44, respectively.
There can be no assurance that the Subscription Price will be less than the last
reported market sale price of a share of Common Stock on the Expiration Date.
Completed Subscription Certificates may be delivered to the Subscription
Agent at any time during the Subscription Period, which commences on the date of
this Prospectus and ends at 5:00 p.m., Eastern time, on March 18, 1998, unless
extended by the Fund until a time not later than 5:00 p.m., Eastern time, on
April 17, 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
13
<PAGE>
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 16, 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 18, 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 April 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.
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
14
<PAGE>
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 December 31, 1997, 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 38%, which would be reduced to
approximately 31% 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.
15
<PAGE>
Expiration of the Offer
The Offer will expire at 5:00 p.m., Eastern time, on March 18, 1998,
unless extended by the Fund until a time not later than 5:00 p.m., Eastern time,
on April 17, 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 $52,000, and reimbursement for all out-of-pocket expenses
related to the Offer. The Subscription Agent is also the Fund's Custodian,
Dividend Paying Agent, Transfer Agent and Registrar with respect to the Common
Stock. Questions regarding the Subscription Certificates should be directed to
State Street Bank and Trust Company, P.O. Box 9061, Boston, Massachusetts
02205-9061 (telephone 1 (800) 426-5523). SIGNED SUBSCRIPTION CERTIFICATES SHOULD
BE SENT TO STATE STREET BANK AND TRUST COMPANY, ATTENTION: CORPORATE
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:
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, Massachusetts 02205-8686
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
Boston EquiServe, L.P.
Corporate Reorganization
70 Campanelli Drive
Braintree, MA 02184
(3) BY HAND:
Securities Transfer and Reporting Services, Inc.
c/o Boston EquiServe, L.P.
1 Exchange Plaza/55 Broadway, 3rd Floor
New York, NY 10006
DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE GOOD DELIVERY.
Information Agent
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 805-9132
16
<PAGE>
The Information Agent will receive a fee estimated to be $16,000 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.
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.
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<PAGE>
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.
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
$5.01 per Share (approximately 92% of the average of the last reported
sales prices of a share of the Fund's Common Stock on the Exchange on
February 6, 1998 and the nine preceding business days). 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.
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<PAGE>
On or before the seventh 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
seven 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.
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 16, 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
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<PAGE>
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 and the
Over-Subscription Privilege may be effected through, the facilities of DTC.
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 $40,000.
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 nine 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.
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<PAGE>
Federal Income Tax Consequences of the Offer
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"), Roth IRA's under
21
<PAGE>
section 408A of the Code, 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 or Roth IRA is used as security for a loan, the
portion so used is also treated as distributed to the IRA or Roth IRA depositor,
which may result in current income taxation and penalty taxes.
Certain Plans may be subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which is a broad statutory framework that
governs most employer-maintained retirement plans ("ERISA Plans') and imposes
certain fiduciary obligations on the persons who manage such plans
("Fiduciaries"). In determining whether to exercise or transfer Rights,
Fiduciaries of Record Date Stockholders that are ERISA Plans must determine that
such actions are consistent with their fiduciary duties under ERISA and do not
result in transactions which are prohibited under Section 406 of ERISA. Further,
Record Date Stockholders which are Plans that are subject to Section 4975 of the
Code must determine that the exercise or transfer of Rights does not result in
transactions which are prohibited and subject to excise taxes under Section 4975
(under rules which generally parallel the prohibited transaction provisions of
Section 406 of ERISA). Employee benefit plans that are not ERISA Plans (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights.
The Fund is an investment company registered under the Investment
Company Act of 1940, as amended, and intends to continue to qualify as such.
Therefore, under ERISA the assets of an ERISA Plan which is a stockholder of the
Fund will include only the equity interest owned by such ERISA Plan and not the
underlying assets of the Fund. The Investment Adviser will therefore not be a
Fiduciary with respect to stockholders which are ERISA Plans and the operation
of the Fund will not be subject to ERISA.
Due to the complexity of the foregoing rules and the taxes, penalties,
and potential liability for noncompliance, stockholders which are Plans should
consult with their counsel and other advisors before their exercise or transfer
of Rights.
Notice of Net Asset Value Decline
The Fund has, as required by the staff of the Commission, undertaken to
suspend the Offer until it amends this Prospectus if subsequent to February 6,
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 $5.01 per Share, the net proceeds of the Offer are
estimated to be approximately $81,061,674 (after deducting offering expenses
payable by the Fund estimated at approximately $410,000 and after reflecting the
Fund's application of Wellington Management's $100,000 voluntary management fee
waiver against the expenses of the offer). 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
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<PAGE>
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."
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<PAGE>
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 57.3% 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 net assets were $393,625,000, net asset value per
share of Common Stock was $5.03 and outstanding senior securities aggregated
$150 million. Cumulative total investment return for an investment in Common
Stock for the one-, three- and five-year periods ended December 31, 1997 was
21.97%, 95.22% and 140.97%, 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
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<PAGE>
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, 1997 were 21.97%, 95.22%, and
140.97%, 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.................................... .68%
Ba..................................... 17.37%
B...................................... 76.69%
Caa.................................... 1.55%
Ca..................................... 0.00%
C...................................... .32%
NR..................................... 3.39%
--------
Total.......................... 100.00%
As of December 31, 1997, the weighted average maturity of the Fund's portfolio
was approximately 7.50 years.
The Fund's portfolio reflects requirements established by Moody's and
Fitch in connection with the issuance by such agencies of investment grade
ratings for the Fund's ATP (referred to herein as the "Rating Agency
Guidelines"). These guidelines relate, among other things, to industry and
credit quality characteristics of issuers and specify various "discount factors"
for debt securities (with the level of discount greater as the rating of a
security becomes lower). Under the Rating Agency Guidelines, certain types of
securities in which the Fund may otherwise invest consistent with its investment
strategy are not eligible for inclusion in the calculation of the discounted
value of the Fund's portfolio. Such instruments include, for example, securities
rated "CC"/"Ca" or lower by the Rating Agencies, non-rated securities, private
placements, non-U.S. securities, preferred or common stock, zero coupon or
similar securities that do not provide for the periodic payment of interest in
cash and other securities not within the investment guidelines. Accordingly,
although 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."
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<PAGE>
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.
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<PAGE>
The Fund has the right to invest up to 20% of its total assets in
securities that are not readily marketable (determined as of the time of
investment), including securities restricted as to resale, or so-called private
placements. Securities that are not readily marketable may offer higher yields
than comparable publicly traded securities. However, the Fund may not be able to
sell these securities when the Investment Adviser considers it desirable to do
so or, to the extent they are sold privately, may have to sell them at less than
the price of otherwise comparable securities. Also, like preferred stock,
private placements, unless they involve securities which may be resold pursuant
to Rule 144A, are not eligible for inclusion in the discounted value of the
portfolio for purposes of the Rating Agency Guidelines of Moody's or Fitch in
effect as of the date of this Prospectus. See "Rating Agency Guidelines."
The Fund is permitted to invest up to 20% of its total assets in zero
coupon securities, although such securities also may not be included in
calculating the discounted value of the Fund's portfolio under the Rating Agency
Guidelines. Zero coupon securities pay no cash income but are purchased at a
discount from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and their maturity
value. There may be special tax considerations associated with investing in
securities structured as deferred interest, zero coupon or payment-in-kind
securities. The Fund records the interest on these securities as income even
though it receives no cash interest until each security's maturity date. The
Fund will be required to distribute all or substantially all such amounts
annually and may have to obtain the cash to do so by selling securities. Thus,
to meet cash distribution obligations, the Fund may be required to liquidate a
portion of its assets, which it would otherwise continue to hold, at a
disadvantageous time. These distributions will be taxable to stockholders as
ordinary income. In the case of securities structured as deferred interest, zero
coupon or payment-in-kind securities, the market prices of such securities are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash.
The Fund may invest in U.S. dollar-denominated bonds sold in the United
States by non-U.S. issuers ("Yankee bonds").
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
27
<PAGE>
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.
11. Acquire more than 10% of the voting securities of any issuer.
28
<PAGE>
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 arrangement
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
29
<PAGE>
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 or is
limited with respect to certain practices such as engaging in options
transactions for leveraging or speculative purposes.
Repurchase Agreements. The Fund may enter into repurchase agreements on
up to 25% of the value of its total assets. A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller to repurchase
and the Fund to re-sell such security at a fixed time and price (representing
the Fund's cost plus interest). It is the Fund's present intention to enter into
repurchase agreements only with commercial banks and registered broker-dealers
and only with respect to obligations of the United States government or its
agencies or instrumentalities. Repurchase agreements may also be viewed as loans
made by the Fund which are collateralized by the securities subject to
repurchase. The Investment Adviser will monitor such transactions to ensure that
the value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor. If
the seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with respect to debt obligations which could otherwise be
sold by the Fund. A reverse repurchase agreement is an instrument under which
the Fund may sell an underlying debt instrument and simultaneously obtain the
commitment of the purchaser (a commercial bank or a broker or dealer) to sell
the security back to the Fund at an agreed upon price on an agreed upon date.
The value of underlying securities will be at least equal at all times to the
total amount of the resale obligation, including the interest factor. The Fund
receives payment for such securities only upon physical delivery or evidence of
book entry transfer by its custodian. Securities sold by the Fund under a
reverse repurchase agreement must be either segregated pending repurchase or the
proceeds must be segregated on the Fund's books and records pending repurchase.
Reverse repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. The Fund will not hold more than 5% of the value
of its total assets in reverse repurchase agreements.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e, delivery and payment can take place a month or
more after the date of the transaction). The purchase price and the interest
rate payable on the securities are fixed on the transaction date. The securities
so purchased are subject to market fluctuation, and no interest accrues to the
Fund until delivery and payment take place. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis, it
will record the transaction and thereafter reflect the value of such securities
in determining its net asset value. The Fund will
30
<PAGE>
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.
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
31
<PAGE>
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.
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
32
<PAGE>
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
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<PAGE>
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.
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,
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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.
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+
Remaining Term Rating Category
to -----------------------------------------------
Maturity Asset 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................ 139 135 141 148 160 172 260
5 Years................ 134 141 147 154 166 179 260
7 Years................ 142 149 155 162 176 189 260
10 Years................ 148 156 163 170 184 198 260
15 Years................ 153 161 168 175 190 205 260
20 Years................ 161 169 177 184 200 215 260
30 Years................ 162 170 178 185 201 216 260
* Senior debt securities of an issuer rated B3 shall be deemed to be Caa
rated securities for purposes of determining the applicable Moody's
Discount Factor.
+ The Moody's Discount Factor applied to Rule 144A Securities is 130% of the
Moody's Discount Factor which would apply were the securities registered
under the 1933 Act.
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<PAGE>
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:
Maximum Maximum
Single Single Minimum
Issuer Industry Issue Size
Asset Ratings(1) (%)(2,3) (%)(3,4) ($ in 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 asset.
(2) Companies subject to common ownership of 25% or more are considered as one
name.
(3) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(4) Industries are determined according to industry classifications specified
by Moody's ("Moody's Industry Classification"). See below.
(5) Bonds from issues ranging from $50 million to $100 million are limited to
20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50 million.
The Moody's Industry Classifications, for the purposes of determining
Moody's Eligible Assets, mean each of the following industry classifications,
determined with respect to particular issues in the discretion of the Fund:
Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft
Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors,
Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods,
Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks,
Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes,
Cigars, Leaf/Snuff, Vegetable Oil
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<PAGE>
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
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<PAGE>
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."
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
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<PAGE>
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:
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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
40
<PAGE>
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:
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
41
<PAGE>
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
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;
42
<PAGE>
"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
"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:
Maximum Maximum
Single Single Minimum
Issuer Industry Issue in Size
Type of Corporate Bond (%) (1,2) (%) (2,3) ($ in 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 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.
43
<PAGE>
(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
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."
44
<PAGE>
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
Under some circumstances, the Subscription Price will be less than the
then net asset value per share, and under those circumstances the offer will
result in a substantial dilution to stockholders who do not fully exercise their
rights. Although it is not possible to state precisely the amount of such a
potential 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
$5.01, net expenses associated with the Offer were $310,000 (after reflecting
the Fund's application of Wellington Management's $100,000 voluntary management
fee waiver against the estimated $410,000 expenses of the offer), 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 $0.05 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,
45
<PAGE>
receipt of which may be viewed as compensation for the dilution of their
interest in the Fund. In addition, a stockholder may participate in the Offer
without increasing his or her investment in the Fund by selling a sufficient
number of shares of the Fund to provide (after expenses) the necessary funds to
exercise Rights.
Leverage
The Fund is subject to a number of significant risks as a result of its
focus on investments in so called "junk bonds." See "High Yield, High Risk
Securities," below. As evidenced by its historical performance, the Fund's
leveraged capital structure magnifies and enhances these risks, particularly in
a declining market environment, while increasing the possibility for superior
performance in a rising market environment. See "The Fund." The Fund's leveraged
capital structure results in a higher volatility of the net asset value of the
Common Stock and potentially more volatility in the market value of the Common
Stock. Because the Fund will pay accumulated dividends on the ATP, an increase
or decrease in capital or income of the Fund will have an increased effect on
the Common Stock. Any investment income or gains earned from the capital
contributed by the purchasers of the ATP which is in excess of dividends due
thereon and associated expenses will be available for distribution to the
holders of the Fund's Common Stock and may cause the value of and dividends on
the Common Stock to rise more quickly than would be the case if the Fund were
unleveraged. Conversely, if the investment performance of the capital
contributed by the purchasers of the ATP fails to cover the dividends on such
capital, the value of the Common Stock may decrease more quickly than would
otherwise be the case and dividends thereon will be reduced or eliminated. This
is the speculative effect of "leverage." See "The Fund." In addition, the Fund
is required to meed certain asset coverage requirements imposed by the 1940 Act
and the rating agencies. Upon any failure to meet such requirements, the Fund
may seek to alter the composition of its portfolio to reattain compliance with
such requirements, thereby incurring additional transaction costs and possible
losses and/or gains on disposition of portfolio securities. Because higher
quality assets are given greater credit under the Rating Agency Guidelines, the
overall portfolio quality of the Fund may be higher, and the overall rate of
return on portfolio holdings may be lower, than if the Fund were unleveraged.
The Fund's capital structure is designed to take advantage of the
"spread" between the rate of return on the longer-term "high yield" securities
in which the Fund invests and the dividends required to be paid on the ATP,
which generally are determined with reference to short-term interest rates for
investment grade obligations. To the extent this "spread" decreases due to
increases in short term rates, decreases in the rate of return on portfolio
holdings, defaults, or increased Fund expenses, the incremental returns accruing
to holders of the Fund's Common Stock will be correspondingly reduced.
Short-term and long-term interest rates change from time to time as does their
relationship to each other (i.e., the slope of the yield curve) depending upon
such factors as supply and demand forces, monetary and tax policies and investor
expectations. Changes in such 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.
46
<PAGE>
- --------------------------------------------------------------------------------
Assumed
Return on -10% -5% 0% 5% 10%
Portfolio (net
of expenses
and costs of
leverage)
- --------------------------------------------------------------------------------
Corresponding
Return to -16.2% -8.0% 0% 8.0% 16.2%
Holder of
Common
Stock*
- --------------------------------------------------------------------------------
* Assuming $150 million aggregate liquidation preference of leverage
outstanding, 48.5 million Shares of Common Stock outstanding and a market
value of the Fund's portfolio of $392 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 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."
47
<PAGE>
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).
48
<PAGE>
At times a major portion of an issue of lower-rated securities may be
held by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund may find it more difficult to sell such securities when the
Investment Adviser believes it advisable to do so or may be able to sell such
securities only at prices lower than if the securities were more widely held. In
such circumstances, the Fund may also find it more difficult to determine the
fair value of such securities for purposes of computing the Fund's net asset
value. The Fund, in most instances, utilizes an independent pricing service to
determine the fair value of its securities for financial statement purposes
since market quotations are not readily ascertainable. Securities for which
market quotations are not readily available will be valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund.
Dividends and Distributions
The Fund will not be permitted to declare dividends or other
distributions with respect to the shares of Common Stock or the ATP or purchase
shares of Common Stock or the ATP unless at the time thereof the Fund meets
certain asset coverage requirements, including those imposed by the 1940 Act and
under the Fund's Articles of Amendment and Restatement, as amended (including
any Articles Supplementary of the Fund, the "Articles"). Failure to pay
dividends or other distributions could result in the Fund ceasing to qualify as
a regulated investment company under the Code. See "Taxation" and "Description
of Capital Stock--Dividends and Dividend Periods." Further, upon any failure to
pay dividends in an amount equal in two full years of dividends with respect to
the ATP, the holders thereof shall have the right to elect a majority of the
Directors until all accrued dividends have been provided for or paid. In the
event the Fund fails to satisfy certain asset coverage requirements, the Fund
may be required to effect mandatory partial redemptions of the ATP (subject to
certain limitations) or in certain circumstances may result in the mandatory
redemption of all of the ATP. Redemption of ATP would reduce the Fund's leverage
and could negatively affect potential returns with respect to the Common Stock.
The Fund intends, however, to the extent possible to redeem shares of ATP from
time to time to maintain compliance with applicable asset coverage requirements.
See "Taxation."
Premium/Discount From Net Asset Value
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at net asset value
at any time at the option of the stockholder and typically engage in a
continuous offering of their shares. Shares of closed-end funds frequently trade
at a market price which is less than the value of the net assets attributable
thereto. The possibility that shares of the Fund will trade at a discount from
net asset value is a risk separate and distinct from the risk that the Fund's
net asset value will decrease. It should be noted, however, that in some cases,
shares of closed-end funds may trade at a premium. The Fund's shares have traded
in the market above, at, and below net asset value since the commencement of the
Fund's operations. During the past three 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.
49
<PAGE>
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 the
10 Winthrop Square, Fund as President, Treasurer and a
Fifth Floor Director in August 1992 and since May 1993
Boston, MA 02110 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 Professor of Business Administration since
School 1986, and Chairman of the Doctoral
Boston, MA 02163 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 Anika Research,
Inc., Sonesta International Hotels
Corporation and Brown Group, Inc. and a
general partner of ML-Lee Acquisition
Fund, L.P.
Richard E. Floor*..... Secretary and Director Partner with the law firm of Goodwin,
Exchange Place Procter & Hoar LLP, Boston, Massachusetts,
Boston, MA 02109 since 1975 (individually and through his
professional corporation). Mr. Floor also
serves as a director of Town & Country
Corporation and Affiliated Managers Group.
50
<PAGE>
Bernard J. Korman..... Director Chairman of the Board of Directors of
Graduate Health Graduate Health System, Inc. and Nutramax
System, Inc. Products, Inc.; President, Chief Executive
22nd and Officer and a Director of MEDIQ
Chestnut Streets Incorporated from 1977 to 1995. Mr. Korman
Philadelphia, PA is a director of Innoserv Technologies,
19103 Inc., Kapson Senior Quarters Corp.;
Kranzco Realty Trust, Omega Healthcare
Investors, Inc., The Pep Boys, Inc. and
Today's Man, Inc.
Franco Modigliani..... Director Professor of Finance and Economics from
Massachusetts Institute 1962 to 1970, Institute Professor from
of Technology 1970 to 1988, and Professor Emeritus since
77 Massachusetts Avenue 1988, Massachusetts Institute of
Cambridge, MA 02139 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 the
50 Congress Street Trustees since 1969, Northeast Investors
Boston, MA 02109 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.
51
<PAGE>
Ellen E. Terry*....... Vice President and Vice President of the Fund from December
10 Winthrop Square, Treasurer 1992 to present and Treasurer from May
Fifth Floor 1993 to present; Acting President and
Boston, MA 02110 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 $56,667 for his services rendered to the Fund in his capacity
as President for the calendar year ended December 31, 1997, 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 for the fiscal year ended December 31,
1997 aggregate remuneration of $198,000 exclusive of compensation paid to Mr.
Birch for his services rendered to the Fund in his capacity as President. The
aggregate remuneration paid by the Fund to each of the Directors during its
fiscal year ended December 31, 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.
52
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Total
Name of Person, Compensation as Part of Fund Annual Benefits Compensation
Position From Fund Expenses Upon Retirement from Fund
- -------- --------- -------- --------------- ---------
<S> <C> <C> <C> <C>
Robert F. Birch, $ 89,667 none none $ 89,667*
President and Director
Joseph L. Bower, $ 33,000 none none $ 33,000
Director
Richard E. Floor, $ 33,000 none none $ 33,000
Secretary and Director
Bernard J. Korman, $ 33,000 none none $ 33,000
Director
Franco Modigliani, $ 33,000 none none $ 33,000
Director
Ernest E. Monrad, $ 33,000 none none $ 33,000
Director
Ellen E. Terry, $104,588 none none $104,588
Vice President and
Treasurer
</TABLE>
* Of this amount, $56,667 was paid for service as President and $33,000 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.
53
<PAGE>
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
$174.6 billion of assets, including $ 70.2 billion of fixed income securities of
which $5.5 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 accomodation to the Fund and based on the Board's determination that the
offer is in the best interests of the stockholders, Wellington Management has
agreed to voluntarily waive $100,000 of its fees.
Catherine A. Smith, a Senior Vice President of the Investment Adviser,
is primarily responsible for the day-to-day management of the Fund's portfolio.
Ms. Smith has served in such capacity since the Investment Adviser succeeded to
the management of the Fund's portfolio on February 19, 1992. In addition to
serving as the portfolio manager of the Fund, Ms. Smith serves as the portfolio
manager of several other high yield bond portfolios, including The High Yield
Plus Fund, Inc., a closed-end management investment company. After receiving her
Bachelor of Arts degree from Harvard College in 1983, Ms. Smith worked as a
securities analyst for Fred Alger Management, Inc. in New York and subsequently
joined Wellington Management in 1985. Ms. Smith is a CFA and a member of the
Boston Security Analysts Society.
Wellington Management managed the following other investment companies
as of December 31, 1997: AFL-CIO (American Federation of Labor and Congress of
Industrial Organizations) Housing Investment Trust, Anchor Series Trust, The
Arbor Fund OVB Prime Obligations Portfolio, Bank of America (International
Equity, International Fixed Income); Armada Small Cap Growth Fund, Bishop Street
Money Market Fund, Bishop Street Treasury Money Market Fund, First Financial
Fund, First Investors Global Fund, First Investors Growth and Income Fund, First
Investors Life Series Fund, 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
VA International Advisors Fund, Hartford VA MidCap Fund, Hartford VA Small
Company 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, Manufacturers Investment Series Trust, (Growth & Income Portfolio,
Investment Quality Bond Portfolio), North American Funds, (Growth & Income
Investment Quality Bond), 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, (GNMA Portfolio, High Yield
Corporate Portfolio, Long-Term Corporate Portfolio), Vanguard/Morgan Growth
Fund, Vanguard Preferred Stock Fund, Vanguard Specialized Portfolios (Energy
Portfolio, Health Care Portfolio, and Utilities Portfolio), Vanguard
54
<PAGE>
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 August
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 $247,435,625 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 $1,087,000, respectively.
The Fund bears all costs of its operation other than those incurred by
the Investment Adviser under the Advisory Agreement. In particular, the Fund
pays investment advisory fees, the fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets, legal, accounting and auditing fees, taxes,
expenses of preparing prospectuses and stockholder reports, registration fees
and expenses, fees and expenses for the transfer and dividend disbursing agent,
the compensation and expenses of the Directors who are not otherwise employed by
or affiliated with the Investment Adviser or any of its affiliates, and any
extraordinary expenses.
At a meeting held on February 18, 1992, the Board of Directors
(including all Directors who are not "interested persons" of the Fund, as
defined in the 1940 Act) unanimously approved the Advisory Agreement for a
two-year period commencing February 19, 1992. The Advisory Agreement was
subsequently approved by the Fund's stockholders at a meeting held on May 11,
1992. The Advisory Agreement was last approved by the Board of Directors and by
a majority of the Directors who are not parties to the Advisory Agreement or
interested persons of any such party on February 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
55
<PAGE>
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% 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.
56
<PAGE>
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 $1,499, 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
7.50 years. The weighted average of the Fund's portfolio will fluctuate
depending on market conditions and investment opportunities. The Fund, however,
does not expect that the weighted average maturity of the Fund's portfolio will,
under normal conditions, exceed 15 years.
The Investment Adviser actively makes portfolio adjustments that
reflect the Fund's investment strategy, but generally does not trade securities
for the Fund for the purpose of seeking short-term profits. It will, however,
change the Fund's securities, regardless of how long they have been held, when
it believes doing so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is
anticipated that the Fund's portfolio turnover rate may, from time to time,
exceed 100% per annum. A 100% annual turnover rate would occur, for example, if
all the securities in the Fund's portfolio were replaced once within a period of
one year. The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy is changed significantly, portfolio turnover
may be significantly higher than during times of economic and market price
stability, when investment strategy remains relatively constant. A high rate of
portfolio turnover will result in increased transaction costs for the Fund in
the form of increased dealer spreads and brokers commissions. The Fund's
portfolio turnover rates for the fiscal years ended December 31, 1995, 1996 and
1997 were 62.7%, 53.5% and 108.8%, respectively.
57
<PAGE>
TAXATION
The following discussion offers only a brief outline of the federal
income tax consequences of investing in the Common Stock. Investors should
consult their own tax advisors for more detailed information and for information
regarding the impact of state and local taxes upon such an investment.
Federal Income Tax Treatment of the Fund
The Fund qualifies and elects to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code, as amended (the "Code")
and intends to qualify under those provisions each year. 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 its 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 net investment income (i.e., the
Funds investment company taxable income, as that term is defined in the Code,
without regard to the deduction for dividends paid), 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 (i.e., the Fund's 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.
However, the Fund will be subject under current tax rates to a federal income
tax at a maximum effective rate of 35% on any undistributed net investment
income and net capital gain. 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. For this purpose, any income or gain retained by the Fund
that is subject to corporate tax will be considered to have been distributed by
year-end. 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 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 distributing 90% of its
net investment 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 taxable income (including
gain), or both.
58
<PAGE>
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) ATP in order to maintain or restore the requisite asset coverage and
avoid failure to remain qualified as a regulated investment company. The
determination to repurchase or redeem ATP and the amounts to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem ATP may adversely affect
the Fund's ability to distribute annually at least 90% of its net investment
income, which distribution is required to qualify for taxation as a regulated
investment company. The Fund may also recognize 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 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.
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 Fund's transactions in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) are 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 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 disqualification 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.
59
<PAGE>
Federal Income Tax Treatment of Holders of Common Stock
The Fund's income will consist of net investment income and may also
consist of net capital gains. For federal income tax purposes, the Internal
Revenue Service (the "Service") currently requires that a regulated investment
company that has two or more classes of shares allocate to each such class
proportionate amounts of each type of its income (such as ordinary income and
net capital gains) for each tax year. Accordingly, the Fund intends to designate
distributions made with respect to the Common Stock and the ATP as consisting of
particular types of income (net capital gains, ordinary income and dividend
income) in accordance with each class' proportionate share of the total
dividends paid to both classes. Thus, each dividend paid with respect to the
Common Stock during a year will be designated as ordinary income dividends and,
if the Fund designates any dividend as a capital gain dividend, capital gains in
proportion to the Common Stock's proportionate share of the total dividends paid
on the Common Stock during the year to the total dividends paid on both the
Common Stock and the ATP during the year. The amount of the net capital gains
realized by the Fund is not expected to be significant, and there is no
assurance that any such income will be realized by the Fund in any year.
Distributions of the Fund's net investment income are taxable to shareholders as
ordinary income. Subject to the discussion below regarding changes to the
capital gain tax rates, distributions of the Fund's net capital gains, if any,
are taxable to shareholders at rates applicable to long-term capital gains
regardless of the length of time the Common Stock has been held by the holders.
Distributions in excess of the Fund's earnings and profits will first reduce a
shareholder's adjusted tax basis in his or her shares of Common Stock and, after
the adjusted tax basis is reduced to zero, will constitute capital gains to a
holder of shares of Common Stock who holds his or her shares of Common Stock as
a capital asset.
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.
Although the Fund is required to distribute annually at least 90% of
its net investment income, the Fund is not required to distribute net capital
gains to its shareholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gains").
However, it is unclear whether a portion of the net undistributed capital gains
would have to be allocated to the ATP for federal income tax purposes. Until and
unless the Fund receives acceptable guidance from the Service as to the
allocation of the net undistributed capital gains between the Common Stock and
the ATP, the Fund intends to distribute its net capital gains for any year
during which it has shares of ATP outstanding.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November and December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31 prior to the date of payment. In
addition, solely for the purpose of satisfying the 90% distribution requirement
and the distribution requirement for avoiding income taxes, certain
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid during such taxable year. In such case, shareholders
will be treated as having received such dividends in the taxable year in which
the distribution was actually made. The Service has ruled privately that
dividends paid following the close of the taxable year that are treated for tax
purposes as derived from income from the prior year will be treated as dividends
"paid" in the prior year for purposes of determining the proportionate share of
a particular type of income for each class. Accordingly, the Fund intends to
treat any such dividends that are paid following the close of a taxable year as
"paid" in the prior year for purposes of determining a class' proportionate
share of a particular type of income. However, the private ruling is not binding
on the Service, and there can be no assurance that the Service will respect such
treatment.
Most of the Fund's net investment income is derived from
interest-bearing securities. Accordingly, dividends paid with respect to the
Common Stock generally will not qualify for the dividends received deduction.
However, from time to time, a portion of the Fund's net investment income may be
dividends on equity securities which are eligible for the dividends received
deduction under Section 243 of the Code.
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Corporate shareholders who otherwise are eligible to claim the dividends
received deduction under Section 243 of the Code can deduct 70% of the portion
of the Common Stock dividend representing the shareholder's portion of the
Fund's eligible dividend income. The Service has ruled that corporate
shareholders of a regulated investment company must meet the 45-day holding
requirement of Section 246(c)(1)(A) of the Code with respect to the shares of
the regulated investment company to qualify for the dividends received
deduction.
The Taxpayer Relief Act of 1997 (the "Relief Act") has altered the
taxation of certain long-term capital gain income. Under the Relief Act,
individuals, trusts and estates that hold certain investments for more than 18
months may be taxed at a maximum rate of 20% on the sale or exchange of those
investments. Individuals, trusts and estates that hold certain assets for more
than one year but not more than 18 months may be taxed at a maximum rate of 28%
on the sale or exchange of those investments. The Relief Act also provides a
maximum rate of 25% for "unrecaptured section 1250 gain" for individuals, trusts
and estates, special rules for "qualified 5-year gain," as well as other changes
to prior law. The Relief Act allows the Service to prescribe regulations on how
the Relief Act's new capital gain rates will apply to sales of assets by, and
sales of interests in, "pass-thru entities," which include regulated investment
companies such as the Fund. Pursuant to this grant of regulatory authority, the
Service has announced that it will issue temporary regulations providing that a
regulated investment company such as the Fund may designate a capital gain
dividend as a 20% rate gain distribution, an unrecaptured section 1250 gain
distribution, or a 28% rate gain distribution. If no such designation is made
regarding a capital gain dividend, it is a 28% rate gain distribution. In
general, a regulated investment company determines the maximum amounts which may
be designated in each class of capital gain dividends as if the regulated
investment company were an individual whose ordinary income is subject to a
marginal rate of at least 28 percent. The Fund will notify shareholders after
the close of its taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income (including any portion
thereof qualifying for the dividends received deduction generally available to
corporations), return of capital, and capital gain (and, with respect to capital
gain dividends, the portions constituting 20% rate gain distributions,
unrecaptured section 1250 gain distributions, and 28% rate gain distributions).
Sale of Shares
The sale of shares of Common Stock (including transfers in connection
with a redemption or repurchase of such shares of Common Stock or a liquidation
of the Fund) will be a taxable transaction for federal income tax purposes.
Selling shareholders will generally recognize gain or loss in an amount equal to
the difference between their basis in their shares and the amount received in
exchange therefor. If such shares of Common Stock are held as a capital asset,
the gain or loss will generally be a capital gain or loss and will be long-term
if such shareholders have held the shares for more than one year. Any loss
realized upon a taxable disposition of shares of Common Stock held for six
months or less will be treated as a long-term loss to the extent of any
distributions of net capital gains received with respect to such shares. All or
a portion of any loss realized upon a taxable disposition of shares of Common
Stock may be disallowed if other shares of Common Stock are purchased by the
shareholder within 30 days before or after the disposition.
Backup Withholding
The Fund may be required to withhold for 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 Service
that they are subject to backup withholding. Corporate stockholders and other
stockholders specified in the 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.
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Other Taxation
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. 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 6, 1998, there were 48,655,286 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
turn expected to distribute such dividends to the persons for whom they are
acting as agents. For each Dividend Period, subject to certain
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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
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Dividend Payment Date, (ii) to deposit, irrevocably in trust, in same-day funds,
with a designated paying agent by 12:00 noon, New York City time, (A) on or (to
the extent permitted as described below) within two business days after any
Dividend Payment Date the full amount of any declared dividend on the relevant
series of ATP payable on such Dividend Payment Date (together with the failure
to timely declare dividends described in (i) above, hereinafter referred to as a
"Dividend Default") or (B) on or (to the extent permitted as described below)
within two business days after any date fixed for redemption of shares of ATP
called for redemption, the applicable redemption price (a "Redemption Default"),
or (iii) to maintain the "aaa"/AAA Credit Rating unless the "aaa"/AAA Credit
Rating is restored by the Dividend Payment Date next following the date on which
the Fund fails to maintain the "aaa"/AAA Credit Rating (a "Rating Default"). A
Default Period with respect to a Dividend Default or a Redemption Default will
consist of the period commencing on and including the aforementioned Dividend
Payment Date or redemption date, as the case may be, and ending on and including
the business day on which, by 12:00 noon, New York City time, all unpaid
dividends and unpaid redemption price shall have been so deposited or shall have
otherwise been made available to the applicable holders in same day funds. A
Default Period with respect to a Rating Default shall commence as of the date on
which the Fund fails to maintain the "aaa"/AAA Credit Rating (provided that such
Rating Default shall be deemed not to have occurred and such Default Period
shall not commence if such Rating Default is cured by the next succeeding
Dividend Payment Date) and shall end on the earlier of the date on which such
default is cured as provided herein or the date on which the ATP is mandatorily
redeemed as provided herein. Holders of two-thirds of the ATP then outstanding
may waive any Dividend Default, Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend
Period commencing during a Default Period, will be equal to the Reference Rate
multiplied by three (3) (the "Default Rate"); and each subsequent Dividend
Period commencing after the beginning of a Default Period shall be a Standard
Term Period; provided, however, that the commencement of a Default Period will
not by itself cause the commencement of a new Dividend Period. Any dividend due
on any Dividend Payment Date (if, prior to 12:00 noon, New York City time, on
such Dividend Payment Date, the Fund has declared such dividend payable on or
within three business days after such Dividend Payment Date to the persons who
held such shares as of 12:00 noon, New York City time, on the business day
preceding such Dividend Payment Date) or redemption price with respect to such
shares not paid to such persons when due may (if such default is not solely due
to the willful failure of the Fund) be paid to such Persons in the same form of
funds by 12:00 noon, New York City time, on any of the first three business days
after such Dividend Payment Date or due date, as the case may be, provided that
such amount is accompanied by an additional amount for such period of
non-payment at the Default Rate applied to the amount of such default based on
the actual number of days comprising such period divided by 360. For the
purposes of the foregoing, payment to a person in same-day funds made on or
before 12:00 noon New York City time on any business day at any time will be
considered equivalent to payment to that person in New York Clearing House
(next-day) funds at the same time on the preceding business day, and any payment
made after 12:00 noon, New York City time, on any business day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next business day.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the ATP, it will be distributed to the holders of the
Common Stock. The term "net investment income" includes interest, dividends,
short-term capital gains and other income received or accrued less the advisory
fee, bank custodian charges, taxes (except capital gain taxes) and other
expenses properly chargeable against income, but does not include net capital
gains, stock dividends, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. Any realized net capital gains
(defined as the excess of net long-term capital gains over net short-term
capital losses) of the Fund will be distributed annually to the holders of the
Common Stock (subject to the prior rights of the holders of the ATP) subject to
the foregoing and any requirements of Maryland law.
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
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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 7, 1999 5.25%
---------------------------------------------------------------
$20 million October 7, 2002 6.07%
---------------------------------------------------------------
$10 million October 2, 2002 6.225%
The effect of the Swap Arrangement 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 $150 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 $150 million dollar aggregate liquidation
preference of the ATP. It should be noted that the relationship between the Swap
Arrangement and the ATP has been simplified in the foregoing examples for
purposes of illustration. The Fund's payment obligation under the Swap
Arrangement and rate of dividends on the 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 Arrangement and will continue to do so in the event the Swap
Arrangement is terminated. The Fund is subject to the risk that BankBoston will
not make its required payments under the Swap Arrangement. In such event, the
Fund will have contractual remedies pursuant to the agreements related to the
Swap Arrangement.
The Fund obtained consents from Moody's and Fitch to enter into the
Swap 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
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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 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,
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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 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.
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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 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
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(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 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, the Fund will treat the
Discounted Termination Value as Eligible Assets in calculating the Basic
Maintenance Amount. The Discounted Termination Value shall be the difference
between the Termination Value and the Adjusted Notional Amount adjusted by a
Discount Factor which shall be determined by treating (a) the 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.
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
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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 January 30, 1998, the 1940 Act ATP Asset Coverage was:
Value of Fund assets less
liabilities not constituting
senior securities $401,158,405
---------------------------------- -------------- = 267.4%
Senior securities $150,000,000
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.
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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
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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 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
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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
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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 most recently quoted bid price
provided by the principal market makers. The Fund also utilizes prices supplied
by its Custodian from Bridge Fixed - Income Services. 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
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will, as agent for Plan participants, buy shares in the open market, on the
Exchange or elsewhere, for the participants' accounts. If, before the Dividend
Paying Agent has completed its purchases, the market price exceeds the net asset
value of the shares of Common Stock, the average per share of Common Stock
purchase price paid by the Dividend Paying Agent may exceed the asset value of
the shares, resulting in the acquisition of fewer shares than if the dividend or
contribution had been paid in shares issued by the Fund.
In connection with the Offer, participants in the Fund's Dividend
Reinvestment Plan (the "Plan") will be issued Rights for the shares of Common
Stock held in their accounts in the Plan as of the Record Date. Participants
wishing to exercise such Rights must exercise such Rights in accordance with the
procedures set forth below in "Exercise of Rights" and "Payment for Shares."
Such Rights will not be exercised automatically by the Plan.
Participants in the Plan have the option of making additional cash
payments to the Dividend Paying Agent, quarterly, in any amount of $100 to $500
for investment in the Fund's shares. Effective March 17, 1998, the quarterly
maximum for additional cash payments will be $5,000. 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 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
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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
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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 number of factors, including, but not limited to,
the reliability and financial stability of the institution, the ability of the
institution to capably perform custodial services for the Fund, the reputation
of the institution in its national market, and the political and economic
stability of the countries in which the subcustodians will be located. In
addition, the 1940 Act requires that foreign subcustodians, among other things,
have stockholder equity in excess of $200 million, have no lien on the Fund's
assets and maintain adequate and accessible records. State Street Bank and Trust
Company serves as transfer agent, registrar and dividend disbursing agent for
the Fund's Common Stock.
Bankers Trust Company acts as the Registrar, Transfer Agent, Paying
Agent and Auction Agent for the ATP.
REPORTS TO STOCKHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to
stockholders, including a list of the portfolio investments held by the Fund.
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the Offer will be passed upon by
Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Richard E. Floor, a Director
and the Secretary of the Fund, is a partner of Goodwin, Procter & Hoar LLP
through a professional corporation. An opinion regarding the valid issuance of
the Common Stock and certain other matters of Maryland law will be rendered by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland. Goodwin, Procter & Hoar
LLP will rely as to matters of Maryland law upon such opinion.
EXPERTS
The audited balance sheet of the Fund, including the schedule of
investments, as of December 31, 1997, 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.
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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, 1997, 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.
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APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
MOODY'S INVESTORS SERVICE
Long-Term Ratings
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.
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
A-1
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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 Ratings
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial
paper, bank deposits, bankers' acceptances and obligations to deliver foreign
exchange. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Preferred Stock Ratings
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-2
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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.
Note Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. 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.
A-3
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FITCH IBCA
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in cases of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. 'B' ratings indicate that significant credit risk
is present but a limited margin of safety remains. Financial
commitments are currently being met; however, capital for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC, High default risk. Default is a real possibility. Capacity for meeting
CC financial commitments is solely reliant upon sustained, favorable
and C business or economic developments. A 'CC' rating indicates that default
of some kind appears probable. 'C' ratings signal imminent default.
DDD, Default. Securities are not meeting current obligations and are
DD, extremely speculative. 'DDD' designates the highest potential for
and D recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, 'DD' indicates expected recovery of 50% - of
such outstandings , and 'D' the lowest recovery potential.
Short-Term Credit Ratings
A short-term credit rating has a time horizon of less than 12 months
for most obligations, or up to three years for U.S. public finance securities,
and thus places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments and may have an added "+" to denote an
exceptionally strong credit feature.
A-4
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F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risks. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' rating category, to
categories below 'CCC', or to short-term ratings other than 'F1'.
'NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
RatingWatch: Ratings are placed on RatingWatch to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingWatch is typically dissolved over a relatively
short period.
Claims-Paying Ability Ratings
Fitch IBCA 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 is stated using the
same rating scale as international long-term credit ratings, although the
claims-paying rating does not apply to non-policy obligations of the insurer,
such as debt, nor does it address the suitability or terms of any individual
policy or contract.
AAA Exceptionally strong claims-paying ability. Insurers assigned this
highest rating have an exceptionally strong capacity to meet
policyholder obligations and provide policyholder benefits. The impact
of any adverse business and economic factors on the claims-paying
ability of these insurers is expected to be minimal.
AA Very strong claims-paying ability. Insurers rated 'AA' have a very
strong capacity to meet policyholder obligations and provide
policyholder benefits. The impact of any adverse business and economic
factors on the claims-paying ability of these insurers is expected to
be very small.
A Strong claims-paying ability. Insurers rated 'A' have a strong capacity
to meet policyholder obligations and provide policyholder benefits.
Although adverse business and economic factors may have an impact on
the claims-paying ability of these insurers, the effect of such factors
is expected to be small.
A-5
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BBB Good claims-paying ability. Insurers rated 'BBB' have a god capacity to
meet policyholder obligations and provide policyholder benefits.
However, their claims-paying ability may be more susceptible than that
of higher rated insurers to the impact of adverse business and economic
factors.
BB Speculative claims-paying ability. Insurers rated 'BB' have a capacity
to meet policyholder obligations and provide policyholder benefits
which is regarded as speculative. The impact of adverse business and
economic factors on their claims-paying ability is considered likely to
be significant.
B Vulnerable claims-paying ability. Insurers rated 'B' have a vulnerable
capacity to meet policyholder obligations and provide policyholder
benefits. The impact of adverse business and economic factors on their
claim-paying ability is considered likely to be significant.
CCC, CC,
and C Highly vulnerable claims-paying ability. Insurance companies assigned
one of these ratings are considered very weak with respect to their
capacity to meet policyholder obligations and provide policyholder
benefits. The insurer may be under the supervision of an insurance
regulator and already may not be making all payments in a timely
fashion.
D Insurers which have been placed in liquidation by insurance regulators
and for which policy or claims payments are being controlled, delayed
or reduced.
Notes: "+" or "-" may be appended to a rating to indicate the relative
position of a credit within the rating category. Such suffixes are not
added to the 'AAA' and 'D' categories.
Servicer Ratings
Master servicers service performing multifamily and commercial mortgage
loans. The servicer's responsibilities typically include: collecting monthly
principal, interest, and escrow payments from individual mortgagors and, in some
instances, subservicers; remitting funds to the trustees; investor reporting;
performing property inspections; gathering and reviewing property financial
statements; and monitoring and managing delinquencies and problem loan
resolutions. If the transaction requires a special servicer, the master servicer
must interact with it to facilitate the transfer and ultimate disposition of
problem loans. Master servicers also are responsible for providing liquidity to
a transaction by advancing principal and interest, as well as certain property
protection expenses, on delinquent loans.
Acceptable. Servicer possesses a solid management team, proven experience
servicing multifamily and commercial mortgage loans, effective in-place
policies, procedures and controls, and thorough systems and reporting
capabilities.
Unacceptable. Servicer seriously deficient in any of the aforementioned
categories and unacceptable to FITCH IBCA. Use of such a servicer most likely
would preclude FITCH IBCA rating the transaction's debt securities at 'BBB' or
higher levels.
Special servicers are key to maintaining the credit quality of a pool containing
nonperforming multifamily and commercial mortgages and real estate owned assets.
In assessing and analyzing a special servicer's capabilities, FITCH IBCA reviews
several key factors, including its management team, organizational structure,
track record, and workout and asset disposition experience and strategies.
Superior. A special servicer in this category possesses a strong, seasoned
management team, extensive workout and disposition experience with a variety of
asset types, and significant financial resources.
A-6
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Above Average. A special servicer in this category possesses a strong management
team, with good workout and disposition experience, and may have significant
financial resources.
Average. A special servicer in this category possesses adequate workout and
disposition experience but may lack significant financial resources.
Below Average. A special servicer in this category is acceptable but of subpar
quality. Senior management is relatively unseasoned, workout experience is
minimal, and the servicer typically lacks significant financial resources.
Unacceptable. A special servicer in this category is unacceptable to FITCH IBCA.
Use of such a servicer would probably preclude FITCH IBCA rating the
transaction's debt securities at 'BBB' or higher levels.
A-7
<PAGE>
STANDARD & POOR'S CORPORATION
Long-Term Issue Credit Ratings
AAA An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment is
EXTREMELY STRONG.
AA An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is VERY STRONG.
A An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in the higher rated categories. However, the obligor's capacity to meet
its financial commitment is still STRONG.
BBB An obligation rated 'BBB' exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to meet its financial commitment
on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated 'B' is MORE VULNERABLE to nonpayment than
obligations rated 'BB,' but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated 'CCC' is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment.
CC An obligation rated 'CC' is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation 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 or the taking of a similar action if
payments on an obligation are jeopardized
Plus (+) The ratings from 'AA' to 'CCC' may be modified by the addition of a
or plus or minus sign to show relative standing within the major rating
Minus categories.
(-)
A-8
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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.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation 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 or the taking of a similar action if payments on an
obligation are jeopardized.
Dual Rating Definitions
Standard & Poor's assigns "dual" ratings to all debt issues that have a
put option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and the
second rating addressed 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 for the put option (for example, AAA/A-1+). With short-term
demand debt, Standard & Poor's note rating symbols are used with the commercial
paper rating symbols (for example, SP-1+/A-1+).
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 ratings reflects the liquidity factors 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:
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-- 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 with some
vulnerability to adverse financial and economic changes over the term
of the notes.
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 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
CCC 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.
A-10
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'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 (+) To provide more detailed indications of preferred stock quality, the
or ratings from 'AA' to 'CCC' may be modified by the addition of a plus
Minus or minus sign to show relative standing within the major rating
(-) categories.
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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................... 9
Net Asset Value and
Market Price Information..................... 11
The Offer.................................... 13
Use of Proceeds.............................. 22
The Fund..................................... 23
Investment Objective and Policies............ 24
Rating Agency Guidelines..................... 34
Risk Factors and Special Considerations...... 45
Management of the Fund....................... 50
Portfolio Maturity and Turnover.............. 57
Taxation..................................... 58
Description of Capital Stock................. 62
Determination of Net Asset Value............. 73
Dividends and Distributions;
Dividend Reinvestment Plan................... 74
Conversion to Open-End Status and
Repurchase of Shares......................... 76
Custodian, Auction Agent, Registrar,
Transfer Agent and Paying Agent.............. 77
Reports to Stockholders...................... 77
Certain Legal Matters........................ 77
Experts...................................... 77
Available Information........................ 78
Financial Statements......................... 78
Appendix A...................................A-1
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<PAGE>
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The New America
High Income Fund, Inc.
16,241,851 Transferable
Rights to Subscribe
for
16,241,851 Shares of
Common Stock
----------
PROSPECTUS
----------
February 10, 1998
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