As filed with the Securities and Exchange Commission on February 4, 1998
1933 Act File No. 333-43315
1940 Act File No. 811-5399
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-2
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. __
and
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 24
--------------------
THE NEW AMERICA HIGH INCOME FUND, INC.
Exact Name of Registrant as Specified in Charter
10 Winthrop Square, Fifth Floor, Boston, Massachusetts 02110
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(617) 350-8610
Registrant's Telephone Number, including Area Code
Richard E. Floor, Secretary
The New America High Income Fund, Inc.
10 Winthrop Square, Fifth Floor
Boston, Massachusetts 02110
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
With a copy to:
Geoffrey R.T. Kenyon, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement
--------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. |_|
--------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
=============================|====================|=======================|========================|=====================
| | Proposed Maximum | Proposed Maximum |
Title of Securities Being | Amount Being | Offering Price | Aggregate Offering | Amount of
Registered | Registered | Per Share | Price | Registration Fee
- -----------------------------|--------------------|-----------------------|------------------------|---------------------
<S> <C> <C> <C> <C>
| | | |
Common Stock, $.01 par value | 16,241,851 shares | $5.625(1) | $91,360,412(1) | $26,951.32(2)
| | | |
Subscription Rights | 16,241,851 rights | -- | -- | --
=============================|====================|=======================|========================|=====================
</TABLE>
(1) Estimated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, on the basis of the average of the high and low prices reported on
the New York Stock Exchange on December 19, 1997.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
1
<PAGE>
THE NEW AMERICA HIGH INCOME FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
<TABLE>
<CAPTION>
Item Number of Form N-2 Location or Heading in Prospectus
<S> <C>
1. Outside Front Cover........................... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Page............................... Inside Front Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis........................ Summary; Fee Table
4. Financial Highlights.......................... Financial Information Summary--Financial Highlights;
Capitalization and Information Regarding Senior
Securities
5. Plan of Distribution ......................... Not applicable
6. Selling Stockholders.......................... Not applicable
7. Use of Proceeds............................... Use of Proceeds; Investment Objective and Policies
8. General Description of the Registrant......... Cover Page; The Fund; Investment Objective and
Policies; Rating Agency Guidelines; Risk Factors and
Special Considerations; Description of Capital Stock
9. Management.................................... The Fund; Management of the Fund; Dividends and
Distributions; Dividend Reinvestment Plan
10. Capital Stock, Long-Term Debt
and Other Securities........................ Description of Capital Stock
11. Defaults and Arrears on Senior
Securities.................................. Not applicable
12. Legal Proceedings............................. Not applicable
13. Table of Contents of the Statement
of Additional Information................... Not applicable
14. Cover Page.................................... Not applicable
15. Table of Contents............................. Not applicable
16. General Information and History............... The Fund
17. Investment Objective and Policies............. The Fund; Investment Objective and Policies; Rating
Agency Guidelines; Portfolio Maturity and Turnover
18. Management.................................... Management of the Fund
19. Control Persons and Principal Holders
of Securities............................... Management of the Fund
20. Investment Advisory and Other Services The Offer; The Fund; Management of the Fund
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
21. Brokerage Allocation and Other Policies Management of the Fund; Portfolio Maturity and
Turnover
22. Tax Status.................................... Dividends and Distributions; Dividend Reinvestment
Plan; Taxation
23. Financial Statements.......................... Financial Statements
</TABLE>
(ii)
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION
DATED FEBRUARY 4, 1997
THE NEW AMERICA HIGH INCOME FUND, INC.
16,241,851 Transferable Rights to Subscribe for
16,241,851 Shares of Common Stock
-----------------------
The New America High Income Fund, Inc. (the "Fund") is issuing to its
common stockholders of record ("Record Date Stockholders") as of the close of
business on February 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 $ , 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
$ , 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
Subscription Proceeds
Price(1) Sales Load to Fund (2)(3)
- --------------------------------------------------------------------------------
Per Share ................ $ None $
- --------------------------------------------------------------------------------
Total(4) ................. $ None $
================================================================================
(1) This is an estimated price. The actual Subscription Price will be
determined as set forth above on the Expiration Date.
<PAGE>
(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 __, 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."
------------------
<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 ...... $____________
February 6, 1998 net asset value per share ... $____________
Estimated Subscription Price ................. $____________
Shares outstanding at February 6, 1998 ....... ____________
Transferable Rights issued ................... ____________
Subscription ratio ........................... 1 Right to buy 1 Share
Maximum number of Shares to be issued ........ ____________
How to Exercise Rights
[bullet] Complete, sign and date the enclosed Subscription Certificate.
[bullet] Make your check or money order for $__________ for each Share
subscribed for, including any Shares subscribed for pursuant to
the over-subscription privilege. This payment may be more or
less than the actual Subscription Price. Additional payment may
be required for the Primary Subscription Shares, and any
Over-Subscription Privilege Shares, when the actual
Subscription Price is determined.
[bullet] Registered stockholders should mail the Subscription
Certificate and payment in the enclosed envelope to State
Street Bank and Trust Company in a manner that will ensure
receipt prior to 5:00 p.m., 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.
<TABLE>
<CAPTION>
Important Dates to Remember
Event Date
----- ----
<S> <C>
Record Date February 10, 1998
Expiration Date (Payment for Shares and
Notices of Guaranteed Delivery Due) March 18, 1998 (unless extended)
Due Date for Delivery of Subscription
Certificates to Subscription Agent pursuant
to Notice of Guaranteed Delivery March 21, 1998 (unless extended)
Mailing of Shares Not later than April 9, 1998 (unless extended)
</TABLE>
Shareholder inquiries should be directed to the Information Agent:
Corporate Investors Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 805-9132
4
<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 $__________
which is equal to (a) 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 and (b) the net asset value per share as of the
close of business on February 6, 1998. 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"
5
<PAGE>
fixed-income securities rated in the lower categories by established rating
agencies, consisting principally of fixed income securities rated "BB" or lower
by Standard & Poor's Corporation ("S&P") or "Ba" or lower by Moody's Investors
Service, Inc. ("Moody's"), and, subject to applicable rating agency guidelines
("Rating Agency Guidelines"), non-rated securities deemed by the Investment
Adviser to be of comparable quality. See "Investment Objective and Policies" and
"Management of the Fund--The Investment Adviser." The fixed-income securities in
which the Fund invests are regarded by the rating agencies, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. Such securities may
also be subject to greater market price fluctuations than lower yielding, higher
rated debt securities; credit ratings do not reflect this market risk. An
investment in the Fund involves a number of significant risks, which are
increased due to the Fund's leveraged capital structure. No assurance can be
given that the Fund will achieve its investment objective. See "Risk Factors and
Special Considerations."
The Fund has had a leveraged capital structure since its inception. The
Fund is subject to various portfolio diversification and related asset coverage
requirements under guidelines established by Moody's and Fitch Investors
Service, Inc. ("Fitch") in connection with such rating agencies' issuance of
ratings of "aaa" and AAA, respectively, with respect to the Fund's Auction Term
Preferred Stock (the "ATP"). Compliance with these guidelines limits to some
degree the Fund's flexibility to invest in certain types of portfolio
securities, that might otherwise be attractive investments, including private
placements. See "The Fund," "Investment Objective and Policies" and "Rating
Agency Guidelines."
The Fund currently intends to issue additional preferred stock following
completion of the Offer, subject to market conditions and rating agency
requirements. As of December 31, 1997, the Fund's leverage ratio (the ratio of
the Fund's senior securities to the sum of its net assets and its senior
securities) was approximately 38.11%, which would be reduced to approximately
__________% in the event all Rights are exercised and no additional leverage is
incurred. Incurring additional leverage will reduce any investment flexibility
gained by the Fund as a result of the availability of additional assets from the
exercise of Rights pursuant to the Offer. See "The Fund" and "Risk Factors and
Special Considerations--Leverage" for discussion of the risks and possible
benefits associated with a leveraged capital structure.
The Investment Adviser
Wellington Management Company, LLP, ("Wellington Management") with its
principal offices at 75 State Street, Boston, Massachusetts 02109, was selected
by the Fund's Board of Directors to serve as the Fund's investment adviser
starting February 19, 1992. As of December 31, 1997, Wellington Management held
discretionary authority over approximately $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.
6
<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."
7
<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
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>
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
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.
8
<PAGE>
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
Capitalization as of December 31, 1997
The following table sets forth the Fund's capitalization as of December 31,
1997.
<TABLE>
<CAPTION>
Amount Held Amount Outstanding
by the Fund Exclusive of Amount
or for its Held by the Fund
Title of Class Amount Authorized Account or for its Account
-------------- ----------------- ----------- -------------------
<S> <C> <C> <C>
Preferred Stock, $1.00 par value 1,000,000 shares -0- shares 6,000 shares
Common Stock, $0.01 par value 200,000,000 shares -0- shares 48,453,316 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 to Common Stock outstanding and the
reduction in net asset value per share of Common Stock would be less.
<TABLE>
<CAPTION>
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Total Asset ..................................................... $[ ] $
Total Liabilities ............................................... [ ] _______
Net Assets ...................................................... $[ ] $
======== =======
NET ASSETS REPRESENTS:
Auction Term Preferred Stock Series A, $1.00 par value,
liquidation preference $25,000 per share, 2,400 shares
authorized, 2,400 shares issued and outstanding ............... $60,000 $ 60,000
Auction Term Preferred Stock Series B, $1.00 par value,
liquidation preference $25,000 per share, 1,600 shares
authorized, 1,600 shares issued and outstanding ............... $40,000 $ 40,000
Auction Term Preferred Stock Series C, $1.00 par value,
liquidation preference $25,000 per share, 2,000 shares
authorized, 2,000 shares issued and outstanding ............... $50,000 $ 50,000
Common Stock, $.01 par value, 200,000,000 shares authorized,
[__________] shares issued and outstanding, [__________] shares
issued and outstanding as adjusted ............................ [ ]
Capital in excess of par value .................................. [ ]
Accumulated net realized loss from security transactions ........ [ ]
Net unrealized appreciation on investments ...................... [ ]
Accumulated undistributed net investment income ................. [ ]
--------
NET ASSETS ...................................................... $[ ] $
Less liquidation value of Auction Term Preferred Stock ........ 150,000 150,000
Net assets attributable to Common Stock outstanding ............. $[ ] $
======== =======
Net asset value per share of Common Stock ....................... $ $
======== =======
</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 1993
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total Amount
Outstanding
Notes............... $ -- $ -- $ -- $ -- $ --
Preferred Stock .... 150,000,000 100,000,000 100,000,000 100,000,000 35,000,000
Short-Term Loan .... -- -- -- -- 45,000,000
Asset Coverage
Per $1,000 of Note (1) $ -- $ -- $ -- $ -- $ --
Per Preferred Stock
Share (2)......... 65,590 69,102 66,206 60,398 473,351
Per $1,000 of
Short-Term Loan (1) $ -- -- -- -- 4,682
Involuntary Liquidation
Preference
Preferred Stock Share(3) $25,000 $ 25,000 $ 25,000 $ 25,000 $100,000
Approximate Market Value
Per Note............ $ -- $ -- $ -- $ -- $ --
Per Preferred Stock
Share(3).......... 25,000 25,000 25,000 25,000 100,000
Per $1,000 of
Short-Term Loan... $ -- -- -- -- 1,000
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------
1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total Amount
Outstanding
Notes............... $45,490,000 $45,490,000 $47,990,000 $96,100,000 $105,000,000
Preferred Stock .... 35,000,000 35,000,000 35,000,000 58,500,000 79,000,000
Short-Term Loan .... -- -- -- -- --
Asset Coverage
Per $1,000 of Note (1) $ 4,141 $ 3,819 $ 3,476 $ 3,192 $ 3,680
Per Preferred Stock
Share (2)......... 408,277 366,363 339,466 360,096 356,156
Per $1,000 of
Short-Term Loan (1) -- -- -- -- --
Involuntary Liquidation
Preference
Preferred Stock Share(3 $100,000 $100,000 $100,000 $100,000 $ 100,000
Approximate Market Value
Per Note............ $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Per Preferred Stock
Share(3).......... 100,000 100,000 100,000 100,000 100,000
Per $1,000 of
Short-Term Loan... -- -- -- -- --
</TABLE>
- ----------------------------
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such amount by
the principal amount of senior securities constituting debt outstanding.
(2) Calculated by subtracting the Fund's total liabilities (including senior
securities constituting debt but not including preferred stock) from the
Fund's total assets and dividing such amount by the number of shares of
preferred stock outstanding.
(3) Plus accumulated and unpaid dividends.
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.
Premium(Discount)
As A Percentage Of
Net Asset Value Market Price Net Asset Value*
--------------- ------------ ----------------
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
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 3.5 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
- -----------------
* 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 $__________,
respectively, while the closing market prices of a share of Common Stock on the
Exchange on such dates were $5.69 and $__________, respectively. The
premiums/(discounts) as a percentage of net asset value on such dates were
11.57% and (_____)%, 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
$__________ per Share which is equal to (a) 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 and (b) the net asset
value per share as of the close of business on February 6, 1998. 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 $__________, respectively, and the closing market prices per
share of Common Stock on the Exchange on those dates were $5.69 and $ ,
respectively. There can be no assurance that the Subscription Price will be less
than the last reported market sale price of a share of Common Stock on the
Expiration Date.
Completed Subscription Certificates may be delivered to the Subscription
Agent at any time during the Subscription Period, which commences on the date of
this Prospectus and ends at 5:00 p.m., Eastern time, on March 18, 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
13
<PAGE>
Fund on payments received by the Subscription Agent prior to the Expiration
Date. An Exercising Rightholder will have no right to rescind a purchase after
the Subscription Agent has received payment. See "Payment for Shares" below.
Shares issued pursuant to an exercise of Rights will be listed on the Exchange.
The Rights are transferable until the Expiration Date and will be admitted
for trading on the Exchange. Assuming a market for the Rights exists, the Rights
may be purchased and sold through usual brokerage channels, or delivered on or
before March 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
14
<PAGE>
22, 1994 and March 18, 1997. All of the rights issued by the Fund pursuant to
these rights offering were exercised. As a result of the first offering,
approximately 8,568,000 new shares of Common Stock were issued with the net
proceeds to the Fund of approximately $35.4 million. As a result of the second
offering, approximately 11,982,000 new shares of Common Stock were issued with
the net proceeds to the Fund of approximately $54 million. All of the proceeds
from these exercise of rights in the offering have been invested in new
securities in accordance with the Fund's investment objective.
In considering the Offer, the Board considered that the Offer will reduce
the net asset value of the Fund's Common Stock and will adversely affect any
holder of Common Stock who fails or is unable to exercise his or her Rights. The
Board also took note of the fact that the possible beneficial effects of the
Offer would be reduced to the extent expenses associated with the Offer were
high and the Offer was not well subscribed.
Reflecting the foregoing considerations, the Board has established the terms
of the Offer on a basis which is intended to provide all existing stockholders
with an equal opportunity to exercise Rights and to achieve full or substantial
subscription. The Board has specified that Rights will be transferable in order
to give non-exercising Rightholders an opportunity to receive partial
compensation for the dilution they will suffer through non-exercise by selling
their Rights, and has established the Subscription Price and the one-for-one
exchange ratio with a view toward providing both an incentive to exercise Rights
and an opportunity to obtain value for the sale of Rights. In this regard, the
Board has noted that an existing stockholder who seeks to maintain rather than
increase his or her investment in the Fund may, in lieu of selling Rights, sell
a portion of his or her shares of the Fund sufficient to provide, after expenses
including commissions, funds for the exercise of Rights. The Board has also
sought to reduce costs associated with the Offer by, among other things,
engaging an information agent rather than paying commissions to a broker or a
dealer-manager, and has sought to facilitate, through its arrangements with
First Albany, the existence of an adequate trading market for Rightholders who
do not exercise their Rights.
There can, of course, be no assurance that the Offer will be successful or
that the objectives sought by the Board will be achieved, as in the case of any
rights offer. However, following analysis and discussion of the Offer and
consideration of its terms at a series of meetings over the past year, the Board
of Directors has determined that the Offer, if successful, would result in a net
benefit to existing stockholders. The Offer was approved unanimously by all the
Directors, present and voting at a meeting of the Board of Directors at which a
quorum was present and acting throughout, and by all of including the Directors
who are not "interested persons" of the Fund. None of the members of the Fund's
Board of Directors is affiliated with the Investment Adviser. It should be noted
that the Investment Adviser will benefit from the Offer because its fee is based
on the level of the Fund's net assets attributable to Common Stock, which will
increase as a result of the issuance of Shares in connection with the Offer. The
benefit to the Investment Adviser was not a material element of the Board's
deliberations.
The Fund intends to issue additional preferred stock following the
completion of the Offer subject to rating agency consent and applicable asset
coverage requirements. As of 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 38.1%, which would be reduced to
approximately _____% in the event all Rights are exercised and no additional
leverage is incurred. The incurrence of additional leverage would reduce the
investment flexibility gained by the Fund through the increase in assets that
will result from the Offer. See "The Fund" and "Risk Factors Special
Considerations--Leverage" for discussion of the risks and possible benefits
associated with a leveraged capital structure.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to this Offer. Any such further rights offering will be
made in accordance with the 1940 Act.
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: CST CORPORATE
REORGANIZATION DEPARTMENT, by one of the methods described below. The Fund
reserves the right to accept Subscription Certificates actually received on a
timely basis at any of the addresses listed.
(1) BY FIRST CLASS MAIL:
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.
Corporate Reorganization
55 Broadway - 8th Floor
New York, NY 10006
DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE GOOD DELIVERY.
Information Agent
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (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.
17
<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
$__________ per Share which is equal to (a) 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
and (b) the net asset value per share as of the close of business on
February 6, 1998. 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.
18
<PAGE>
On or before the fourth business day after the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising
Rightholder (or, if shares are held by Cede or any other depository or nominee,
to Cede or such other depository or nominee), a confirmation showing (i) the
number of Shares purchased pursuant to the Primary Subscription and, if
applicable, the Over-Subscription Privilege, (ii) the per Share and total
purchase price for the Shares, (iii) any excess to be refunded by the Fund to
such Rightholder as a result of payment for Shares pursuant to the
Over-Subscription Privilege which the Rightholder is not acquiring and (iv) any
additional amount payable by such Rightholder to the Fund or any excess to be
refunded by the Fund to such Rightholder, in each case, based on the actual
Subscription Price as determined on the Expiration Date. Any additional payment
required from Rightholders must be received by the Subscription Agent within ten
business days after the Confirmation Date. Any excess payment to be refunded by
the Fund to a Rightholder will be mailed by the Subscription Agent as promptly
as practicable. An Exercising Rightholder will have no right to rescind a
purchase after the Subscription Agent has received payment, either by means of a
notice of guaranteed delivery or a check. See "Delivery of Shares."
Whichever of the two methods described above is used, issuance of the Shares
purchased is subject to collection of checks and actual full payment. If a
Rightholder who subscribes for Shares pursuant to the Primary Subscription or
Over-Subscription Privilege does not make payment of any amounts due, the
Subscription Agent reserves the right to take any or all of the following
actions: (i) find other stockholders for such subscribed and unpaid for Shares;
(ii) apply any payment actually received by it toward the purchase of the
greatest whole number of Shares which could be acquired by such holder upon
exercise of the Primary Subscription and/or Over-Subscription Privilege, and/or
(iii) exercise any and all other rights or remedies to which it may be entitled,
including, without limitation, the right to set off against payments actually
received by it with respect to such subscribed Shares.
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
19
<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 twelve
business days after the Confirmation Date and after full payment for the Shares
subscribed for has been received and cleared, which clearance may take up to
fifteen days from the date of receipt of the payment.
Foreign Stockholders
Subscription Certificates will not be mailed to Record Date Stockholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Stockholders"). The
Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Stockholders' accounts until
instructions are received to exercise, sell or transfer the Rights. If no
instructions have been received by 12:00 noon, Eastern time, three business days
prior to the Expiration Date regarding the Rights of those Foreign Record Date
Stockholders, the Subscription Agent will use its best efforts to sell the
Rights of those Foreign Record Date Stockholders on the Exchange. The net
proceeds, if any, from the sale of those Rights will be remitted to the Foreign
Record Date Stockholder.
20
<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 $__________ per Share, the net proceeds of the Offer are estimated to
be approximately $__________ (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
22
<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."
23
<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
24
<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."
25
<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.
26
<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
33
<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,
34
<PAGE>
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.
35
<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
36
<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
37
<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
38
<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:
39
<PAGE>
U.S. Treasury Securities:
Discount
Remaining Term to Maturity Factor
-------------------------- --------
1 year or less................................... 107%
2 years or less (but longer than 1 year)......... 113
3 years or less (but longer than 2 years)........ 118
4 years or less (but longer than 3 years)........ 123
5 years or less (but longer than 4 years)........ 128
7 years or less (but longer than 5 years)........ 135
10 years or less (but longer than 7 years)....... 141
15 years or less (but longer than 10 years)...... 146
20 years or less (but longer than 15 years)...... 154
30 years or less (but longer than 20 years)...... 154
U.S. Treasury Strips:
Discount
Remaining Term to Maturity Factor
-------------------------- --------
1 year or less................................... 107%
2 years or less (but longer than 1 year)......... 114
3 years or less (but longer than 2 years)........ 120
4 years or less (but longer than 3 years)........ 127
5 years or less (but longer than 4 years)........ 133
7 years or less (but longer than 5 years)........ 145
10 years or less (but longer than 7 years)....... 159
15 years or less (but longer than 10 years)...... 184
20 years or less (but longer than 15 years)...... 211
30 years or less (but longer than 20 years)...... 236
Fitch "AAA" Rating Guidelines
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Fitch guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Fitch Eligible Assets") must
be discounted by certain discount factors set forth below ("Fitch Discount
Factors"). The discounted value of a portfolio security under the Fitch
guidelines ("Discounted Value") is the market value thereof determined as
specified by Fitch ("Market Value") divided by the Fitch Discount Factor. The
Fitch Discount Factor with respect to securities other than those described
below will be the percentage provided in writing by Fitch.
Debt Securities. Under current Fitch guidelines, securities will not be
deemed "Debt Securities" includable in the calculation of the Discounted Value
of the Fund's portfolio unless (a) such securities are rated CCC or higher by
Fitch or, if unrated by Fitch, rated Caa or higher by Moody's and CCC or higher
by S&P; (b) such securities provide for the periodic payment of interest in cash
in U.S. dollars; (c) such securities do not provide for conversion or exchange
into equity capital at any time over their lives; (d) such securities have been
registered under the Securities Act of 1933, as amended, (the "Securities Act")
or are restricted as to resale under federal securities laws but are eligible
for resale pursuant to Rule 144A under the Securities Act as determined by the
Fund's adviser acting subject to the supervision of the Fund's Board of
Directors; (e) such securities are issued by (1) a U.S. corporation, (2) a
corporation domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain, or the United Kingdom (the "Approved Foreign
Nations"), (3) the government of any Approved Foreign Nation or any of its
agencies, instrumentalities or political subdivisions (the debt securities of
Approved Foreign Nation issuers being referred to collectively as "Foreign
Bonds"), (4) a corporation domiciled in Canada or (5) the Canadian government or
any of its agencies, instrumentalities or political subdivisions (the debt
securities of Canadian
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
$_____ , 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 $__________ 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
45
<PAGE>
of such Rights, receipt of which may be viewed as compensation for the dilution
of their interest in the Fund. In addition, a stockholder may participate in the
Offer without increasing his or her investment in the Fund by selling a
sufficient number of shares of the Fund to provide (after expenses) the
necessary funds to exercise Rights.
Leverage
The Fund is subject to a number of significant risks as a result of its
focus on investments in so called "junk bonds." See "High Yield, High Risk
Securities," below. As evidenced by its historical performance, the Fund's
leveraged capital structure magnifies and enhances these risks, particularly in
a declining market environment, while increasing the possibility for superior
performance in a rising market environment. See "The Fund." The Fund's leveraged
capital structure results in a higher volatility of the net asset value of the
Common Stock and potentially more volatility in the market value of the Common
Stock. Because the Fund will pay accumulated dividends on the ATP, an increase
or decrease in capital or income of the Fund will have an increased effect on
the Common Stock. Any investment income or gains earned from the capital
contributed by the purchasers of the ATP which is in excess of dividends due
thereon and associated expenses will be available for distribution to the
holders of the Fund's Common Stock and may cause the value of and dividends on
the Common Stock to rise more quickly than would be the case if the Fund were
unleveraged. Conversely, if the investment performance of the capital
contributed by the purchasers of the ATP fails to cover the dividends on such
capital, the value of the Common Stock may decrease more quickly than would
otherwise be the case and dividends thereon will be reduced or eliminated. This
is the speculative effect of "leverage." See "The Fund." In addition, the Fund
is required to meed certain asset coverage requirements imposed by the 1940 Act
and the rating agencies. Upon any failure to meet such requirements, the Fund
may seek to alter the composition of its portfolio to reattain compliance with
such requirements, thereby incurring additional transaction costs and possible
losses and/or gains on disposition of portfolio securities. Because higher
quality assets are given greater credit under the Rating Agency Guidelines, the
overall portfolio quality of the Fund may be higher, and the overall rate of
return on portfolio holdings may be lower, than if the Fund were unleveraged.
The Fund's capital structure is designed to take advantage of the "spread"
between the rate of return on the longer-term "high yield" securities in which
the Fund invests and the dividends required to be paid on the ATP, which
generally are determined with reference to short-term interest rates for
investment grade obligations. To the extent this "spread" decreases due to
increases in short term rates, decreases in the rate of return on portfolio
holdings, defaults, or increased Fund expenses, the incremental returns accruing
to holders of the Fund's Common Stock will be correspondingly reduced.
Short-term and long-term interest rates change from time to time as does their
relationship to each other (i.e., the slope of the yield curve) depending upon
such factors as supply and demand forces, monetary and tax policies and investor
expectations. Changes in such 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,
10 Winthrop Square, Fifth Floor joined the Fund as President,
Boston, MA 02110 Treasurer and a Director in August
1992 and since May 1993 has served as
President and a Director. Mr. Birch
served as Chairman and Chief
Executive Officer of Memtek
Corporation, a manufacturer of
capital equipment utilized in the
treatment of liquid toxic waste, from
1990 to July 1991, and was associated
with Finn Wishengrad Warnke & Geyton,
a consulting firm specializing in
work-outs of financially distressed
companies, from 1988 through 1989.
Prior to that time, Mr. Birch was
President and Chief Executive Officer
of Gardner and Preston Moss, Inc., a
Boston-based investment management
firm.
Joseph L. Bower................ Director Professor since 1963, Donald K. David
Harvard Business School Professor of Business Administration
Boston, MA 02163 since 1986, and Chairman of the
Doctoral Programs since 1990, Harvard
Business School. Mr. Bower also has
been a member and research fellow at
the Institute of Politics since 1966
and a faculty member of the Kennedy
School of Government since 1969. He
is a director of 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
Graduate Health System, Inc. of Graduate Health System, Inc. and
22nd and Chestnut Streets Nutramax Products, Inc.; President,
Philadelphia, PA 19103 Chief Executive Officer and a
Director of MEDIQ Incorporated from
1977 to 1995. Mr. Korman is a
director of Innoserv Technologies,
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
Massachusetts Institute from 1962 to 1970, Institute Professor
of Technology from 1970 to 1988, and Professor
77 Massachusetts Avenue Emeritus since 1988, Massachusetts
Cambridge, MA 02139 Institute of Technology. Mr.
Modigliani is a member of the
National Academy of Sciences, the
American Academy of Arts and
Sciences, and the Academia dei
Lincei. In 1985 he was awarded the
James Killan, Jr. Faculty Achievement
Award from MIT and the Alfred Nobel
Memorial Prize in Economic Sciences.
He is an Honorary President of the
International Economic Association
and a former President of the
American Econometric Association, the
American Finance Association and the
Econometric Society, and has served
as a consultant to the Federal
Reserve System, the U.S. Treasury
Department and a number of European
banks.
Ernest E. Monrad............... Director Trustee since 1960 and Chairman of
50 Congress Street the Trustees since 1969, Northeast
Boston, MA 02109 Investors Trust; Chairman, Assistant
Treasurer and Director since 1981,
Northeast Investors Growth Fund, Inc.
Mr. Monrad also serves as a vice
president and director of Guild,
Monrad & Oates, Inc., a registered
investment adviser, and as a director
of Century Shares Trust and Furman
Lumber, Inc.
51
<PAGE>
Ellen E. Terry*................ Vice President and Vice President of the Fund from
10 Winthrop Square, Fifth Floor Treasurer December 1992 to present and
Boston, MA 02110 Treasurer from May 1993 to present;
Acting President and Treasurer of the
Fund from October 1991 through
February 1992; and Vice President of
the Fund from February 1988 through
February 1992. From 1987 to February
1992, Ms. Terry was employed by
Ostrander Capital Management, L.P.,
the former investment adviser of the
Fund.
</TABLE>
- ---------------------
* Directors and officers who are "interested persons" of the Fund, as
defined in the 1940 Act.
The Fund's Board of Directors consists of six members. Under the Fund's
Articles and the 1940 Act, holders of the ATP are entitled to elect two
Directors with the other four Directors elected by the holders of the Common
Stock and the ATP voting as a single class, except in certain circumstances. In
the event the Fund has no outstanding preferred stock, all of the Directors will
be elected by the holders of the Common Stock. Since the Fund's inception,
Messrs. Bower and Korman have been nominated for election as Directors by, and
have been elected as Directors by the holders of, the Fund's outstanding
preferred stock. Election of Directors is non-cumulative; accordingly, holders
of a majority of the outstanding shares of Common Stock and ATP or a majority of
the outstanding ATP may elect all of the Directors who are subject to election
by them.
The Fund pays each Director a fee of $20,000 per year plus $2,000 per
Directors' meeting attended in person and $1,000 per telephonic Directors'
meeting in which the Director participates, together with actual out-of-pocket
expenses relating to attendance at such meetings. In addition, Mr. Birch
received a fee of $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.
60
<PAGE>
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.
61
<PAGE>
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 [____________] 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
62
<PAGE>
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
63
<PAGE>
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
64
<PAGE>
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
65
<PAGE>
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,
66
<PAGE>
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.
67
<PAGE>
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
68
<PAGE>
(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
69
<PAGE>
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.
70
<PAGE>
Liquidation
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of ATP and any other shares
ranking in parity with the ATP, in preference to the holders of Common Stock,
will be entitled to payment, out of the assets of the Fund or the proceeds
thereof available for distribution to stockholders after satisfaction of claims
of creditors of the Fund, of a liquidation distribution in the amount of $25,000
per share, plus an amount equal to accumulated dividends (whether or not earned
or declared but without interest) to the date payment of such distribution is
made in full or a sum sufficient for the payment thereof is set apart with the
paying agent. However, holders of ATP will not be entitled to any premium to
which such holder would be entitled to receive upon redemption of such shares of
ATP. After payment of the full amount of such liquidation distribution, the
owners of the ATP will not be entitled to any further participation in any
distribution of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the assets of the Fund or proceeds thereof available
for distribution to stockholders after satisfaction of claims of creditors of
the Fund shall be insufficient to pay in full the liquidation distribution to
which owners of any shares of ATP are entitled, such assets or the proceeds
thereof will be distributed among the owners of the shares of ATP and any other
shares ranking on a parity therewith, ratably.
In the event of any such liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, until payment in full is made to the owners of
the shares of ATP of the liquidation distribution to which they are entitled, no
dividend or other distribution shall be made to the holders of Common Stock and
no purchase, redemption or other acquisition for any consideration by the Fund
shall be made in respect of the Common Stock.
A consolidation or merger of the Fund with or into any other company or
companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any designation, right,
preference or limitation of the ATP or any shares issuable in exchange for
shares of ATP in any such consolidation or merger.
To the extent other shares of ATP are issued by the Fund, including
additional series of ATP or additional shares of the ATP Series A, ATP Series B
or ATP Series C, such shares will share equally and on a pro rata basis with the
ATP then outstanding in connection with any liquidation, dissolution or winding
up of the Fund.
Voting Rights
Except as otherwise indicated herein and except as otherwise required by
applicable law, holders of shares of ATP have equal voting rights with holders
of Common Stock (one vote per share) and vote together with holders of shares of
Common Stock as a single class. Under applicable rules of Exchange, the Fund is
currently required to hold annual meetings of stockholders.
In connection with the election of the Fund's Board, Holders of shares of
preferred stock, including the ATP, voting as a separate class, are entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by holders of Common Stock and the holders of shares of preferred stock,
including the ATP, voting as a single class. In addition, if at any time
dividends on outstanding shares of ATP, including the ATP, shall be unpaid in an
amount equal to two full years' dividends thereon, then the number of members
constituting the Board shall automatically be increased by the smallest number
that, when added to the two Directors elected exclusively by the holders of
shares of preferred stock as described above, would constitute a majority of the
Board as so increased by such smallest number; and at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the holders of shares
of preferred stock, including the ATP, voting as a separate class, will be
entitled to elect the smallest number of additional Directors that, together
with the two Directors
71
<PAGE>
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
72
<PAGE>
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
73
<PAGE>
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
74
<PAGE>
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
75
<PAGE>
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
76
<PAGE>
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.
77
<PAGE>
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.
78
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
MOODY'S INVESTORS SERVICE
Long-Term Debt
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuations or protective elements may be of
greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds which are Baa rated are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during other good and bad times
over the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Absence
of Rating Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
A-1
<PAGE>
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note Moody's applies numerical modifiers 1, 2 and 3 in each generic range
classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Short-Term Debt
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial paper,
bank deposits, bankers' acceptances and obligations to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and bonds
of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Preferred Stock
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
A-2
<PAGE>
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than
in the "aaa" and "aa" classifications, earnings and asset protections
are, nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be medium grade
preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be
small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payment.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
A-3
<PAGE>
FITCH
Investment Grade Bond Ratings
AAA Bonds considered to be investment grade and of the highest credit
quality. the obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonable foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated `AAA'.
Because bonds rated in the `AAA' and `AA' categories are not
significantly vulnerable to foreseeable future developments, short
term debt of these issuers is generally rated `F--1+'.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. the likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Plus (+)
Minus (--) Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the `AAA' category.
NR Indicated that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue natures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive", indicating a potential upgrade, "Negative", for
potential downgrade, or "Evolving", where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Credit Trend Credit trend indicators are not predictions that any
rating change will occur, and have a longer-term time frame than
issuers placed on FitchAlert.
Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
(`BB' to `C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in
A-4
<PAGE>
default. For defaulted bonds, the rating (`DDD' to `D') is an assessment of the
ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. the obligator's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD,
DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or
reorganization of the obligor. `DDD' represents the highest
potential for recovery on these bonds, and `D' represents the
lowest potential for recovery.
Plus (+)
Minus (--) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the
`DDD', `DD', or `D'; categories.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally
Strong Credit
Quality Issues assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
A-5
<PAGE>
F-1 Very Strong
Credit Quality Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated
`F-1+'.
F-2: Good
Credit Quality Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not
as great as for issues assigned `F-1+' and `F-1' ratings.
F-3 Fair
Credit Quality Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-5 Weak
Credit Quality Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and
economic conditions.
D Default Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
Preferred Stock Ratings
Preferred stock ratings should be viewed in the universe of quality
(preferred and preference) and not in relationship to bonds. Although certain
preferred stock issues may carry the same rating as an issuer's bond
obligations, preferred stocks by definition are junior to debt obligations.
Preferred capital is basically permanent capital which in certain instances may
be retired via sinking funds or called. The rating of a preferred stock issue is
on indication of the company's ability to pay the preferred dividends and any
sinking fund obligations on a timely basis. Preferred dividends are payable only
when declared; they are not contractually guaranteed.
AAA Preferred stock assigned this rating are the highest quality. Strong
asset protection, conservative balance sheet ratios, and positive
indications of continued protection of preferred dividend
requirements are prerequisites for an `AAA' rating.
AA Preferred or preference issues assigned this rating are very high
quality. Maintenance of asset protection and dividend paying ability
appears assured but not quite to the extent of the `AAA'
classification.
A Preferred or preference issues assigned this rating are good quality.
Asset protection and coverages of preferred dividends are considered
adequate and are expected to be maintained.
BBB Preferred or preference issues assigned this rating are reasonably
safe but lack the protections of the `A' to `AAA' categories. Current
results should be watched for possible signs of deterioration.
BB Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to aide
fluctuations. The longer term financial capacities of the enterprises
cannot be predicted with assurance.
B Issues assigned this rating are considered highly speculative. While
earnings should normally cover dividends, directors may reduce or
omit payment due to unfavorable developments, inability to finance,
or wide fluctuations in earnings.
A-6
<PAGE>
CCC Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend
payments may be in arrears with the status of the current dividend
uncertain.
CC Dividends are not currently being paid and may be in arrears. The
outlook for future payments cannot be assured.
C Dividends are not currently being paid and may be in arrears.
Prospects for future payments are remote.
D Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
D Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
Plus (+)
Minus (--) Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the `AAA', `CCC',
`CC', `C', and `D' categories.
Euro Issuers/Euro Dollars
These securities have not been and will not be registered under the U.S.
Securities Act of 1933. Any offer or sale of notes in the U.S. (including its
territories and possessions and all areas subject to it jurisdiction or to
nationals or residents thereof, including any corporation or other entity
created or organized therein) may constitute a violation of U.S. law.
Claims-Paying Ability Ratings
Fitch claims-paying ability ratings provide an assessment of an insurance
company's financial strength and, therefore, its ability to pay policy and
contract claims under the terms indicated. The rating does not apply to
non-policy obligations of the insurer, such as debt obligations (which are
addressed under Fitch's bond ratings), nor does it apply to the suitability or
terms of any individual policy or contract.
AAA The ability to pay claims is extremely strong for insurance companies
with this highest rating. Foreseeable business and economic risk
factors should not have any material adverse impact on the ability of
these insurers to pay claims. Profitability, overall balance sheet
strength, capitalization, and liquidity are all at very secure levels
and are unlikely to be affected by potential adverse underwriting,
investment, or cyclical events.
AA Insurance companies with this rating are very strong and only
slightly more susceptible to exhibiting any weakening of financial
strength due to adverse business and economic developments. Any
foreseeable deterioration in financial strength would still leave
carriers in this category with a strong claims-paying ability.
A Issuers in this category are strong companies with no immediate
expectations for encountering events significant enough to weaken
their claims-paying ability. However, major business or cyclical
pressures are more likely to have an adverse impact on profitability,
liquidity, and capitalization and, therefore, on the ability to pay
claims.
BBB Companies in this category have adequate financial strength and
claims-paying capability. For insurers with this rating, longer-term
obligations would be more susceptible to claims-paying concerns under
adverse circumstances that for higher rated companies.
A-7
<PAGE>
BB For insurers rated in this category, the ability to pay claims is
vulnerable to company-specific adverse financial events or stressful
cyclical downturns. It will be more difficult for carriers with this
rating to maintain adequate claims-paying ability under severe
business and economic circumstances.
B There is significant risk that companies in this category will not be
able to pay claims when due. Liquidity and capital adequacy are
likely to be impaired under even moderately negative business and
economic developments.
CCC, CC,
and C Insurance companies with one of these ratings are considered very
weak with respect to their ability to pay claims. The carrier may be
under the supervision of a state insurance department and already may
not be making all policy claims payments in a timely fashion.
D Insurance carriers have been placed in liquidation by state insurance
departments and policy claims payments are being controlled, delayed,
or reduced.
Plus (+)
Minus (--) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the
`AAA' and `D' categories.
Servicer Ratings
Servicers are key to maintaining the credit quality of a pool of
nonperforming commercial mortgages and real estate owned assets. In assessing
and analyzing a servicer's capabilities, Fitch reviews several key factors,
including the servicer's management team, organizational structure, track
record, and workout and asset disposition experience and strategies.
Superior Servicer considered to be of the highest quality. A servicer in
this category possesses a strong, seasoned management team,
extensive workout and disposition experience, and, typically,
significant financial resources.
Above Average Servicer considered to be of very high quality. A
servicer in this category possesses a strong management team,
with good workout and disposition experience, and may have
significant financial resources.
Average Servicer considered to be of high quality. A servicer in this
category possesses adequate workout and disposition experience
but may lack significant financial resources.
Below Average Servicer considered to be of acceptable, but sub-par,
quality. Senior management is relatively unseasoned, workout
experience is minimal, and typically lacks significant financial
resources.
Unacceptable Servicer unacceptable to Fitch. Use of such a servicer probably
would preclude Fitch's rating the transaction's debt securities
at `BBB' or higher levels.
A-8
<PAGE>
STANDARD & POOR'S CORPORATION
Long-Term Debt
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in the higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B,
CCC,
CC, C Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated `BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The `BB' rating category is also
used for debt subordinated to senior debt that is assigned an actual
or implied `BBB--' rating.
B Debt rated `B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The `B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied `BB' or `BB--' rating.
CCC Debt rated `CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The `CCC' rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied `B' or `B--' rating.
CC The rating `CC' is typically applied to debt subordinated to senior
debt that is assigned an actual or implied `CCC' rating.
C The rating `C' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied `CCC--' debt rating. The
`C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
C1 The rating C1 is reserved for income bonds on which no interest is
being paid.
A-9
<PAGE>
D Debt rated `D' is in payment default. The `D' rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during
such grace period. The `D' rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or
Minus (--) The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing
within the major rating categories.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard
& Poor's does not rate a particular type of obligation as a matter of
policy.
Commercial Paper
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The top two categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issued determined to possess
extremely strong safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated B are regarded as having only a speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating is used when
interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investment. These ratings are based on current information
furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. Standard & Poor's does not perform an
audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in or unavailability of such information or based on
circumstances.
Variable Rate Demand Bonds
Standard & Poor's assigns "dual" ratings to all long-term debt issues that
have as part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote
A-10
<PAGE>
the long-term maturity and the commercial paper rating symbols are used to
denote the put option (for example, "AAA/A-1") or if the nominal maturity is
short, a rating of "SP-1+/AAA" is assigned. Municipal Notes
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the longer the final maturity relative to
other maturities the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a
note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Preferred Stock
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for
issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
A-11
<PAGE>
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for preferred stock in this category than for issues
in the 'A' category.
BB, B Preferred stock rated 'BB', 'B', or 'CCC' is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations.
CCC 'BB' indicates the lowest degree of speculation and 'CCC' the highest
degree of speculation. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or
Minus (--) To provide more detailed indications of preferred stock
quality, the ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing
within the major rating categories.
A-12
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Fund or the Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.
--------------------------
TABLE OF CONTENTS
Page
Summary.................................................... 4
Fee Table.................................................. 7
Financial Information Summary.............................. 8
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..................................... 77
Financial Statements...................................... 78
Appendix A................................................ A-1
--------------------------
================================================================================
================================================================================
The New America
High Income Fund, Inc.
16,241,851 Transferable
Rights to Subscribe
for
16,241,851 Shares of
Common Stock
--------------------------
PROSPECTUS
--------------------------
February __, 1998
================================================================================
<PAGE>
THE NEW AMERICA HIGH INCOME FUND, INC.
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements
Financial Statements included in PART A (Prospectus) of this
Registration Statement:
Financial Highlights For Each Share of Common Stock
outstanding Throughout the Period (For the Years Ended
December 31, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990 and
1989 and For the Period from February 26, 1988
(Commencement of Operations) to December 31, 1988)
Schedule of Investments, December 31, 1997
Balance Sheet, December 31, 1997
Statement of Operations For the Year Ended December 31, 1997
Statement of Changes in Net Assets (For the Years Ended
December 31, 1997 and December 31, 1996)
Financial Highlights For Each Share of Common Stock outstanding
Throughout the Period (For the Years Ended December 31, 1997,
December 31, 1996, December 31, 1995, December 31, 1994,
December 31, 1993, December 31, 1992, December 31, 1991,
December 31, 1990 and December 31, 1989 and For the Period from
February 26, 1988 (Commencement of Operations) to
December 31, 1988)
Information regarding Senior Securities (For the Years Ended
December 31, 1997, December 31, 1996, December 31, 1995,
December 31, 1994, December 31, 1993, December 31, 1992,
December 31, 1991, December 31, 1990 and December 31, 1989 and
For the Period from February 26, 1988 (Commencement
of Operations) to December 31, 1988)
Notes to Financial Statements, December 31, 1997
Report of Independent Public Accountants
2. Exhibits
(a)(1) Articles of Amendment and Restatement of The New
America High Income Fund, Inc. dated as of
February 19, 1988 together with First, Second and Third
Certificates of Changes of Definitions set forth
therein dated as of March 8, 1988, May 3, 1988 and
October 14, 1988, respectively. (i)
(a)(2) Articles of Amendment of The New America High Income
Fund, Inc. dated as of June 15, 1989. (i)
(a)(3) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on December 28, 1993. (i)
(a)(4) Articles Supplementary of The New America High Income
Fund, Inc.
<PAGE>
Establishing and Defining the Rights and Preferences
of Two Series of Shares of Auction Term Preferred
Stock, as filed with the State Department of
Assessments and Taxation of the State of Maryland
on January 4, 1994 (i)
(a)(5) Certificate of Correction of The New America High
Income Fund, Inc., as filed with the State Department
of Assessments and Taxation of the State of Maryland
on February 1, 1996. (i)
(a)(6) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on October 31, 1996. (i)
(a)(7) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on October 31, 1996. (i)
(a)(8) Articles Supplementary of The New America High Income
Fund, Inc. Establishing and Defining the Rights and
Preferences of an Additional Series of Shares of
Auction Term Preferred Stock, as filed with the State
Department of Assessments and Taxation of the State of
Maryland on May 2, 1997. (ii)
(a)(9) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on May 30, 1997. (ii)
(a)(10) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on May 30, 1997. (ii)
(a)(11) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on June 18, 1997. (ii)
(a)(12) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on June 18, 1997. (ii)
(a)(13) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on September 11, 1997. (ii)
(a)(14) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on September 11, 1997. (ii)
(a)(15) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
on October 23, 1997. (ii)
(a)(16) Articles of Amendment of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland
<PAGE>
on October 23, 1997. (ii)
(b) By-Laws, as amended as of February 19, 1997,
of the Registrant. (v)
(c) Not applicable.
(d)(1) Specimen Certificate for shares of Common Stock par
value $.01 per share filed as an Exhibit D to
Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-2,
Registration No. 333-23253 (filed April 30, 1997).
(d)(2) Specimen Subscription Certificate.
(e)(1) Dividend Reinvestment Plan, as modified through
June 1, 1992 filed as an Exhibit E to the Registrant's
Registration Statement on Form N-2,
Registration No. 333-17619 (filed December 11, 1996).
(e)(2) Amendment to Dividend Reinvestment Plan effective
March 17, 1998.
(f) Not applicable.
(g)(1) Investment Advisory Agreement dated as of
February 19, 1992 between the Registrant and Wellington
Management Company, LLP filed as an Exhibit G to the
Registrant's Registration Statement on Form N-2,
Registration No. 333-17619 (filed December 11, 1996).
(g)(2) August 1, 1997 Amendment to Investment Advisory
Agreement dated as of February 19, 1992 between the
Registrant and Wellington Management Company, LLP.
(h) Not applicable.
(i) Not applicable.
(j) Custodian Contract dated as of February 11, 1988
between the Registrant and State Street Bank and Trust
Company. (i)
(k)(1) Registrar, Transfer Agency and Service Agreement dated
as of February 11, 1988 between the Registrant and
State Street Bank and Trust Company. (i)
(k)(2) Auction Agent Agreement dated as of January 4, 1994
between the Registrant and Bankers Trust Company with
respect to the Auction Term Preferred Stock,
Series A and Series B, of the Registrant. (i)
(k)(3) Letter of Representation Agreements dated as of
January 4, 1994 among the Registrant, Bankers Trust
Company and The Depository Trust Company with respect
to the Auction Term Preferred Stock, Series A and
Series B, of the Registrant. (i)
(k)(4) Broker-Dealer Agreement dated as of March 19, 1997
between Bankers Trust Company and Lehman Brothers Inc.
with respect to the Auction Term Preferred
<PAGE>
Stock of the Registrant. (v)
(k)(5) Form of Auction Agent Agreement with respect to the
Auction Term Preferred Stock, Series C,
of the Registrant. (v)
(k)(6) Form of Letter of Representations Agreement with
respect to the Auction Term Preferred Stock, Series C,
of the Registrant. (v)
(k)(7) Form of Broker-Dealer Agreement with Lehman Brothers
Inc. with respect to the Auction Term Preferred Stock
of the Registrant. (v)
(k)(8) Interest payment swap arrangement between the Fund and
First National Bank of Boston, N.A. (i)
(k)(9) Affirmation and Undertaking dated August 13, 1990
executed by certain directors and executive officers of
the Registrant. (iii)
(k)(10) Agreement dated as of October 29, 1997 between the
Registrant and Ellen E. Terry. (ii)
(k)(11) Agreement dated as of October 29, 1997 between the
Registrant and Paul E. Saidnawey. (ii)
(k)(12) Form of Letter Agreement between Registrant and Lehman
Brothers Inc. dated March 24, 1997 with respect to the
Auction Term Preferred Stock of the Registrant. (v)
(k)(13) Form of Letter Agreement between Registrant and Lehman
Brothers Inc. with respect to the Auction Term
Preferred Stock of the Registrant. (v)
(k)(14) Form of Subscription Rights Agency Agreement between
the Registrant and State Street Bank and Trust Company.
(k)(15) Form of Information Agency Agreement dated
December 18, 1997 between Registrant and Corporate
Investor Communications, Inc.
(k)(16) Engagement Letter between the Registrant and First
Albany Corporation.
(l) Opinion of Venable, Baetjer and Howard, LLP as to
legality of securities being registered and consent to
its use.
(m) Not applicable.
(n) Consent of Arthur Andersen LLP.
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Financial Data Schedule reflecting Registrant's
financial statements for the fiscal year ending
December 31, 1997.
<PAGE>
(s) Powers of Attorney for Robert F. Birch,
Joseph L. Bower, Richard E. Floor, Bernard J. Korman,
Ernest E. Monrad, Franco Modigliani, and
Ellen E. Terry. (ii)
- ---------------
Footnote
Reference Description
- --------- -----------
(i) Filed as an exhibit to the Registrant's Registration Statement on
Form N-2, Registration No. 333-17619, (filed December 11, 1996)
under the same exhibit number and incorporated herein by reference.
(ii) Filed as an exhibit to the Registrant's Registration Statement on
Form N-2, Registration No. 333-43315 (filed December 24, 1997)
under the same exhibit number and incorporated herein by reference.
(iii) Filed as an exhibit to the Registrant's Registration Statement on
Form N-2, Registration No. 33-18664, (filed June 21, 1990)
under the same exhibit number and incorporated herein by reference.
(iv) Filed as an exhibit to the Registrant's Registration Statement on
Form N-2, Registration No. 33-61674, (filed December 7, 1993)
under the same exhibit number and incorporated herein by reference.
(v) Filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2, Registration
No. 333-23253, (filed April 30, 1997) under the same exhibit number
and incorporated herein by reference.
Item 25: Marketing Arrangements
Not Applicable.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees...................... $ 26,952
New York Stock Exchange fees................................. 56,847
Printing and engraving expenses.............................. 42,500
Legal fees and expenses...................................... 76,000
Accounting fees and expenses................................. 22,000
Financial Advisor fee and expenses........................... 40,000
Subscription Agent fee and mailing expenses.................. 102,000
Information Agent fee and expenses........................... 20,000
Miscellaneous expenses....................................... 23,701
Third Party fee waiver....................................... (100,000)
-------
Total...................................................... $ 310,000
Item 27: Persons Controlled by or under Common Control with Registrant
None.
<PAGE>
Item 28: Number of Holders of Securities
At November 30, 1997 the numbers of record holders of shares of the
Registrant were as follows:
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, $.01 par value per share................... 5,013
Series A Auction Term Preferred Stock, $1.00 par value
per share............................................... 1
Series B Auction Term Preferred Stock, $1.00 par value
per share............................................... 1
Series C Auction Term Preferred Stock, $1.00 par value
per share............................................... 1
Item 29: Indemnification
Article V, paragraph (D) of the Registrant's Articles provides that the
Registrant shall indemnify its directors to the full extent permitted by the
Registrant's By-Laws and Maryland law.
Article V, Section 1 of the Registrant's By-Laws provides that the
Registrant shall indemnify its directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law and shall indemnify its officers to the same extent as its directors and to
such further extent as is consistent with law. Section 2-418 of the Maryland
General Corporation Law empowers a corporation, subject to certain limitations,
to indemnify its directors against judgments, penalties, fines, settlements, and
reasonable expenses (including attorneys' fees) actually incurred by the
director in connection with any suit or proceeding to which they are a party
unless it is established that the director's act or omission was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty, the director received an
improper personal benefit in money, property or services or, in a criminal
proceeding, the director had reasonable cause to believe the act or omission was
unlawful.
The Registrant's By-Laws further provide that the Registrant shall
indemnify its directors and officers who while serving as directors or officers
also serve at the request of the Registrant as a director, officer, partner,
trustee, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan to the fullest extent
consistent with law. The indemnification and other rights provided by the
Registrant's By-Laws continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person, and do not protect any such person against any
liability to the Registrant or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct").
Under the Registrant's By-Laws, any current or former director or
officer of the Registrant seeking indemnification within the scope of the
By-Laws shall be entitled to advances from the Registrant for payment of the
reasonable expenses incurred by him in connection with the matter as to which he
is seeking indemnification in the manner and to the fullest extent permissible
under the Maryland General Corporation Law. The person seeking indemnification
must provide to the Registrant a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Registrant has
been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met. In
addition, at least one of the following additional conditions shall be met: (i)
the person seeking indemnification shall provide a security in form and amount
acceptable to the Registrant for his undertaking; (ii) the Registrant is insured
against losses arising by reason of the advance; or (iii) a majority of a quorum
of directors of the Registrant who are neither "interested persons" as defined
in Section 2(a)(19) of the 1940 Act nor parties to the proceeding
("disinterested non-party directors"), or independent legal counsel in a written
opinion, shall have determined, based on a review of the facts readily available
to the Registrant at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
<PAGE>
At the request of any person claiming indemnification under the
Registrant's By-Laws, the Board of Directors shall determine, or cause to be
determined, in a manner consistent with the Maryland General Corporation Law,
whether the standards required by the By-Laws have been met. Indemnification
shall be made only following: (i) a final decision on the merits by a court or
other body before which the proceeding was brought that the person to be
indemnified was not liable by reason of disabling conduct or (ii) in the absence
of such a decision, a reasonable determination, based upon a review of the
facts, that the person to be indemnified was not liable by reason of disabling
conduct by (A) the vote of a majority of a quorum of disinterested non-party
directors or (B) an independent legal counsel in a written opinion.
Employees and agents who are not officers or directors of the
Registrant may be indemnified, and reasonable expenses may be advanced to such
employees or agents, as may be provided by action of the Board of Directors or
by contract, subject to any limitations imposed by the 1940 Act.
In connection with certain actions filed against the directors and
executive officers of the Registrant, the Registrant has, subject to the terms
and conditions outlined above, authorized the advancement of reasonable
attorneys' fees and related costs arising from the defense of such actions.
Under the terms of an Affirmation and Undertaking entered into by each of the
directors and executive officers, each such person has agreed to repay to the
Registrant all amounts advanced for expenses (including attorneys' fees) on his
or her behalf if it is ultimately determined that the director or executive
officer is not entitled to indemnification.
In addition to the foregoing, Article V(E) to Registrant's charter
provides as follows:
"(E) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General
Corporation Law, as from time to time amended, no director or officer
of the Corporation shall have any liability to the Corporation or its
stockholders for damages. This limitation on liability applies to
events occurring at the time a person serves as a director or officer
of the Corporation whether or not such person is a director or officer
at the time of any proceeding in which liability is asserted. No
provision of this Article V(E) shall be effective to protect or purport
to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. No future amendment to this Article V(E)
shall affect any right of any person under this Article V(E) based on
any event, omission or proceeding prior to such amendment."
Section 2-405.2 of the Maryland General Corporation Law together with
Section 5-349 of the Courts and Judicial Proceedings Article of the Maryland
Code provides that a charter provision limiting the liability of a director or
officer may not include a provision which limits or restricts the liability of a
director or officer to the corporation's stockholders to the extent it is proved
that the person actually received an improper personal benefit to the extent of
the value of such benefit or an adverse final adjudication is entered in a
proceeding based on a finding that the person's act or failure to act was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated.
As permitted by Section 2-418(k) of the Maryland General Corporation
Law, Article V, Section 3 of the Registrant's By-Laws provides that the
Registrant shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant or who, while a director, officer, employee or agent of the
Registrant, is or was serving at the request of the Registrant as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan against any liability asserted against and incurred by such person
in any such capacity or arising out of such person's positions.
The Investment Advisory Agreement between the Registrant and Wellington
Management Company, LLP provides that the Registrant will indemnify Wellington
Management Company, LLP for all liabilities and expenses, including defense
costs, in connection with any litigation pertaining to the period prior to
Wellington Management's relationship with the Registrant under such agreement,
other than liabilities resulting from willful misfeasance, bad faith or gross
negligence on the part of Wellington Management Company, LLP.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1940 Act and
will be governed by the final adjudication of such issues.
Item 30: Business and Other Connections of Investment Adviser
Wellington Management Company, LLP (the Registrant's investment adviser),
a Massachusetts limited liability partnership, is a registered investment
adviser primarily engaged in the investment advisory business. Information as to
the general partners of Wellington Management Company, LLP is included in its
Form ADV, as amended, filed with the Securities and Exchange Commission
(File No. 801-15908), and is incorporated herein by reference thereto together
with all amendments thereto subsequently filed, which amendments shall be deemed
to be incorporated by reference in this registration statement and be a part
hereof from the date of filing of such amendments to the extent permitted by the
applicable rules and regulations of the Securities and Exchange Commission.
Item 31: Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
(17 CFR 270.31a-1 to 31a-3) promulgated thereunder are maintained at the offices
of the custodian of the Registrant at One Heritage Drive, North Quincy,
Massachusetts 02171, except that the corporate records of the Registrant
(including its Articles of Incorporation and By-Laws) are maintained at the
offices of the Registrant at 10 Winthrop Square, Fifth Floor, Boston,
Massachusetts 02110.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. The Registrant undertakes to suspend the offering of its shares until
it amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule
497(h) under the Securities Act of 1933 shall be deemed to be part of
the Registration Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new
<PAGE>
registration statement relating to the securities offered therein, and
the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
6. Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this pre-effective amendment
to its Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Boston and the Commonwealth
of Massachusetts, on the 4th day of February, 1998.
THE NEW AMERICA HIGH INCOME
FUND, INC.
By: /s/ Ellen E. Terry
-----------------------
Ellen E. Terry
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-2 has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* President and Director February 4, 1998
- -------------------------- (Principal Executive Officer)
Robert F. Birch
/s/ Ellen E. Terry Vice President and Treasurer February 4, 1998
- -------------------------- (Principal Financial and
Ellen E. Terry Accounting Officer)
* Director February 4, 1998
- --------------------------
Joseph L. Bower
* Director February 4, 1998
- --------------------------
Richard E. Floor
* Director February 4, 1998
- --------------------------
Bernard J. Korman
* Director February 4, 1998
- --------------------------
Franco Modigliani
* Director February 4, 1998
- --------------------------
Ernest E. Monrad
*By: /s/ Ellen E. Terry
----------------------
Ellen E. Terry
(Attorney-in Fact under Powers of
Attorney incorporated herein by
reference.)
<PAGE>
1933 Act File No.333-43315
1940 Act File No. 811-5399
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 |_|
Pre-Effective Amendment No. 1 |X|
Post-Effective Amendment No. __ |_|
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 24 |X|
--------------------
THE NEW AMERICA HIGH INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
--------------------
EXHIBITS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit: Numbered Page:
- ------- -------- --------------
1 Registrant's Annual Report for the fiscal year
ended December 31, 1997
D2 Specimen Subscription Certificate
E2 Amendment to Dividend Reinvestment Plan effective
March 17, 1998.
G2 August 1, 1997 Amendment to Investment Advisory
Agreement dated as of February 19, 1992 between the
Registrant and Wellington Management Company, LLP.
K14 Form of Subscription Rights Agency Agreement between
the Registrant and State Street Bank and Trust Company.
K15 Form of Information Agency Agreement dated December
18, 1997 between Registrant and Corporate Investor
Communications, Inc.
K16 Engagement Letter between the Registrant and
First Albany Corporation.
L Opinion of Venable, Baetjer and Howard, LLP as to
legality of securities being registered and consent
to its use.
N Consent of Arthur Andersen LLP.
R Financial Data Schedule for the Registrant.
- --------------------------------------------------------------------------------
January 23, 1998
Dear Shareholder:
The Board of Directors is pleased to report that 1998 was a very good year for
our Fund. During the year the Fund was able to raise capital through a rights
offering, which raised approximately $54 million, and a $50 million offering of
Auction Term Preferred Stock. The effects of adding funds, increasing leverage
and a rising market lowered the Fund's ratio of expenses to average net assets
by approximately 20%, enabling us to raise the dividend. The dividend was
raised from 4 cents per share per month to 4.25 cents. At year end the yield on
net asset value ($5.03) was 10.14% and the yield on market price ($5.625) was
9.07%. The Fund's total returns for the periods ended December 31, 1997 are
shown below.
<TABLE>
<CAPTION>
Total Returns for Periods Ended December
31, 1997
----------------------------------------
One Year Three Years
---------- ---------------------------
Cumulative Avg. Annual
------------ ------------
<S> <C> <C> <C>
New America High Income Fund
(NAV and Dividends) 13.2% 69.1% 19.1%
New America High Income Fund
(Stock Price and Dividends) 22.0 95.2 25.0
New America High Income Fund
(NAV and Dividends)* 16.2 75.5 20.6
Lipper Closed-End Fund
Leveraged High Yield Average* 15.0 61.1 17.2
</TABLE>
*Returns are adjusted for dilutive effect of rights offerings as calculated by
Lipper Analytical Services, Inc.
Source: Lipper Analytical Services, Inc. and The New America High Income Fund,
Inc.
The Fund continues to maintain a Morningstar Five-star rating. We have had a
long bull market and the economic conditions have been very favorable for the
type of companies in which the Fund invests. Wellington Management Company, LLP,
the Fund's investment adviser, has continued to perform well in this market
environment. The Board, on which Wellington is not represented, reappointed them
as our financial adviser. As you know, the holdings in our Fund are riskier than
the investments in conservative bond funds. We are very conscious that the
leverage (in the form of the Auction Term Preferred Stock) is a two-edged sword.
The leverage magnifies the Fund's results in both favorable and unfavorable
market environments, i.e. the leverage is an asset in stable or rising markets,
but reduces the total return to common shareholders in declining markets.
High Yield Market Update
High yield returns once again outpaced the returns of the broader investment
grade bond market during the year. Market strength was driven by a favorable
economic backdrop, limited inflationary pressures, strength in the equity
markets and declining interest rates. While the sharp dislocations in the Asian
markets sent tremors through the emerging bond markets and to a lesser extent
the US equity and high yield markets in the fourth quarter, the US high yield
market has commenced the New Year on firm footing as demand continues to
outpace supply, continuing the trend of 1997.
<PAGE>
- --------------------------------------------------------------------------------
The health of the high yield market during 1997 was perhaps most evident by
noting the record amount of new issuance. The market absorbed almost $140
billion in new supply; this new supply represented over one-third of the total
market size (approximately $390 billion) at the start of the year. (Total
market size is now estimated at $495 billion according to data compiled by
Credit Suisse First Boston.)
With respect to industry trends, communications issuers continued to be highly
active; these issuers have been eager to finance their capital expenditure
requirements in order to build market share in their developing businesses such
as wireless telephony, satellite communications systems and new wireline. The
high yield market has become the capital source of choice for many of these
developing companies. In addition, foreign issuance (US$-denominated issuance
of corporations domiciled outside the US) continues to grow and represented
over 20% of total "US" issuance in 1997. We expect this trend to continue as
markets increasingly globalize.
Looking forward, we would expect that US issuance will continue at a blistering
pace, especially as corporations seek to lock in attractive financing rates
vis-a-vis the most recent decline in interest rates in the US. Of greatest
concern in the financial markets is the ultimate portent of the Asian market
crises. To date, we have not experienced unmanageable offsets in the US as a
result of the Asian crises, but we are considerate of the potential ripple
effects. Assuming that the US economy remains firm, as we expect, demand for
high yield instruments will most probably remain robust.
As always, we appreciate your interest in The New America High Income Fund.
Sincerely yours,
/s/ Robert F. Birch /s/ Catherine A. Smith
- -------------------------------------- ----------------------------------
Robert F. Birch Catherine A. Smith
President Senior Vice President
The New America High Income Fund, Inc. Wellington Management Company, LLP
2
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments -- December 31, 1997 (Dollar Amounts in Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- 91.13% (e)
- --------------------------------------------------------------------------------
Aerospace and Defense -- 2.96%
$ 5,000 Argo-Tech Corporation, Senior
Subordinated Notes, 8.625%,
10/01/07 (i) .......................... B3 $ 4,988
3,500 K&F Industries, Inc., Senior
Subordinated Notes, 9.25%,
10/15/07 (i) .......................... B3 3,596
3,065 Moog, Inc., Senior Subordinated
Notes, 10%, 05/01/06 .................. B2 3,310
------
11,894
------
Automobile -- 3.90%
2,500 Collins & Aikman Products Co.,
Senior Subordinated Notes,
11.50%, 04/15/06 ...................... B3 2,809
2,500 Federal-Mogul Corporation, Senior
Notes, 8.80%, 04/15/07 ................ Ba2 2,638
960 Hayes Wheels International, Inc.,
Senior Subordinated Notes,
11%, 07/15/06 ......................... B3 1,032
4,000 Key Plastics, Inc., Senior
Subordinated Notes, 10.25%,
03/15/07 B3 4,240
3,000 LDM Technologies, Inc., Senior
Subordinated Notes, 10.75%,
01/15/07 .............................. B3 3,270
1,500 Lear Corporation, Subordinated
Notes, 9.50%, 07/15/06 ................ Ba3 1,650
------
15,639
------
Banking -- 3.99%
1,250 Dime Bancorp, Inc., Senior Notes,
10.50%, 11/15/05 ...................... Ba1 1,343
2,500 First Nationwide (Parent) Holdings,
Inc., Senior Notes, 12.50%,
04/15/03 .............................. B3 2,844
1,500 FirstFed Financial Corp., Notes,
11.75%, 10/01/04 ...................... B2 1,620
3,500 Hawthorne Financial Corporation,
Notes, 12.50%, 12/31/04 (i) ........... (f) 3,500
5,000 Western Financial Bank,
Subordinated Capital
Debentures, 8.875%, 08/01/07 .......... B1 4,800
</TABLE>
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 2,064 WestFed Holdings, Inc., Split
Coupon Senior Debentures,
15.50%, 09/15/99 (a)(c) ............... (f) $ 1,899
------
16,006
------
Beverage, Food and Tobacco -- 0.54%
810 Aurora Foods Inc., Series C,
Senior Subordinated Notes,
9.875%, 02/15/07 ...................... B3 855
2,325 Del Monte Foods Company,
Senior Discount Notes, 12.50%,
12/15/07 (g)(i) ....................... Caa1 1,331
------
2,186
------
Buildings and Real Estate -- 2.54%
1,000 Associated Materials Incorporated,
Senior Subordinated Notes,
11.50%, 08/15/03 ...................... B3 1,070
3,000 Kaufman and Broad Home
Corporation, Senior
Subordinated Notes, 9.625%,
11/15/06 .............................. Ba3 3,165
4,000 Standard Pacific Corp., Senior
Notes, 8.50%, 06/15/07 ................ Ba2 4,000
2,000 Toll Corp., Senior Subordinated
Notes, 7.75%, 09/15/07 ................ Ba3 1,980
------
10,215
------
Chemicals, Plastics and Rubber -- 6.82%
5,000 Acetex Corporation, Senior
Secured Notes, 9.75%,
10/01/03 .............................. B1 5,150
1,000 Borden Chemicals and Plastics
Operating Limited Partnership,
Notes, 9.50%, 05/01/05 ................ Ba2 1,070
1,500 Buckeye Cellulose Corporation,
Senior Subordinated Notes,
8.50%, 12/15/05 ....................... Ba3 1,522
3,500 Freedom Chemical Company,
Senior Subordinated Notes,
10.625%, 10/15/06 ..................... B3 3,859
1,000 General Chemical Corporation,
Senior Subordinated Notes,
9.25%, 08/15/03 ....................... B2 1,035
2,500 Great Lakes Carbon Corporation,
Senior Secured Notes, 10%,
01/01/06 .............................. Ba3 2,687
The accompanying notes are an integral
part of these financial statements.
</TABLE>
3
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments -- December 31, 1997 -- Continued (Dollar Amounts in
Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- continued
- --------------------------------------------------------------------------------
$ 2,500 Huntsman Polymers Corp., Senior
Notes, 11.75%, 12/01/04 ............ B1 $ 2,788
1,100 PCI Chemicals Canada Inc.,
Senior Secured Notes, 9.25%,
10/15/07 (i) ....................... B2 1,105
2,000 Pioneer Americas Acquisition
Corp., Senior Secured Notes,
9.25%, 06/15/07 .................... B2 2,020
3,500 Sovereign Specialty Chemicals,
Inc., Senior Subordinated Notes,
9.50%, 08/01/07 (i) ................ B3 3,596
1,500 Texas Petrochemicals Corporation,
Senior Subordinated Notes,
11.125%, 07/01/06 .................. B3 1,613
825 UCAR Global Enterprises Inc.,
Senior Subordinated Notes,
12%, 01/15/05 ...................... B1 923
------
27,368
------
Containers, Packaging and Glass -- 10.32%
2,000 BWAY Corporation, Senior
Subordinated Notes, 10.25%,
04/15/07 (i) ....................... B2 2,180
2,500 Calmar Inc., Senior Subordinated
Notes, 11.50%, 08/15/05 ............ B3 2,650
1,805 Container Corporation of America,
Senior Notes, Series B, 10.75%,
05/01/02 ........................... B1 1,994
6,195 Container Corporation of America,
Senior Notes, 9.75%, 04/01/03 ...... B1 6,690
4,000 Doman Industries Limited, Senior
Notes, 8.75%, 03/15/04 ............. B1 3,860
1,000 Grupo Industrial Durango, S.A. de
C.V., Notes, 12.625%, 08/01/03...... B1 1,120
1,500 Paperboard Industries International
Inc., Senior Notes, 8.375%,
09/15/07 (i) ....................... Ba3 1,523
2,750 Repap New Brunswick Inc.,
Second Priority Senior Secured
Notes, 10.625%, 04/15/05 ........... Caa1 2,612
7,000 Silgan Corporation, Senior
Subordinated Debentures, 9%,
06/01/09 ........................... B1 7,175
</TABLE>
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 4,000 Tembec Finance Corp., Senior
Notes, 9.875%, 09/30/05 ............ B1 $ 4,110
4,000 S.D. Warren Company, Senior
Subordinated Notes, 12%,
12/15/04 ........................... B1 4,460
3,000 Zeta Consumer Products Corp.,
Senior Notes, 11.25%,
11/30/07 (i) ....................... B3 3,060
------
41,434
------
Diversified/Conglomerate Manufacturing -- 4.68%
1,735 AMTROL Inc., Senior
Subordinated Notes, 10.625%,
12/31/06 ........................... B3 1,787
690 Falcon Building Products, Inc.,
Senior Subordinated Notes,
9.50%, 06/15/07 .................... B3 704
4,000 International Wire Group, Inc.,
Senior Subordinated Notes,
Series B, 11.75%, 06/01/05 ......... B3 4,380
1,000 International Wire Group, Inc.,
Senior Subordinated Notes,
11.75%, 06/01/05 ................... B3 1,095
3,500 Johnstown America Industries,
Inc., Senior Subordinated Notes,
11.75%, 08/15/05 ................... B3 3,832
825 Johnstown America Industries,
Inc., Senior Subordinated Notes,
Series C, 11.75%, 08/15/05 ......... B3 903
1,385 Nortek, Inc., Senior Notes, 9.25%,
03/15/07 ........................... B1 1,413
1,190 Scotsman Group Inc., Senior
Subordinated Notes, 8.625%,
12/15/07 ........................... B1 1,194
2,000 Specialty Equipment Companies,
Inc., Senior Subordinated Notes,
11.375%, 12/01/03 .................. B3 2,165
1,250 Thermadyne Holdings Corporation,
Senior Notes, 10.25%, 05/01/02 B1 1,300
------
18,773
------
Diversified/Conglomerate Service -- 1.45%
515 Concentric Network Corporation,
Units, Senior Notes, 12.75%,
12/15/07, Warrants, exp.
12/15/07 (i) ....................... (f) 528
The accompanying notes are an integral
part of these financial statements.
</TABLE>
4
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments -- December 31, 1997 -- Continued (Dollar Amounts in
Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- continued
- -----------------------------------------------------------------------------------
$ 335 DecisionOne Holdings Corp.,
Units, Senior Discount
Debentures, 11.50%,
08/01/08, Warrants, exp.
08/01/07 (g) ....................... Caa1 $ 220
500 Heritage Media Services, Inc.,
Senior Secured Notes, 11%,
06/15/02 ........................... Ba1 522
2,000 Pierce Leahy Corp., Senior
Subordinated Notes, 9.125%,
07/15/07 ........................... B3 2,070
2,500 UNICCO Service Company, Senior
Subordinated Notes, 9.875%,
10/15/07 (i) ....................... B3 2,500
------
5,840
------
Electronics -- 4.03%
5,000 Advanced Micro Devices, Inc.,
Senior Secured Notes, 11%,
08/01/03 ........................... Ba1 5,363
7,000 Fairchild Semiconductor
Corporation, Senior
Subordinated Notes, 10.125%,
03/15/07 ........................... B2 7,403
3,000 Unisys Corporation, Senior Notes,
12%, 04/15/03 ...................... B1 3,398
------
16,164
------
Farming and Agriculture -- 1.51%
500 Agricultural Minerals and
Chemicals Inc., Senior Notes,
10.75%, 09/30/03 ................... Ba3 536
250 Aracruz Celulose S.A., Notes,
10.375%, 01/31/02 (i) .............. (f) 254
2,580 Aracruz Celulose S.A., Notes,
10.375%, 01/31/02 (i) .............. (f) 2,619
1,000 PMI Acquisition Corporation,
Senior Subordinated Notes,
10.25%, 09/01/03 ................... B2 1,063
1,500 Terra Industries Inc., Senior Notes,
10.50%, 06/15/05 ................... Ba3 1,609
------
6,081
------
</TABLE>
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance -- 3.77%
$1,000 Arcadia Financial Ltd., Senior
Notes, 11.50%, 03/15/07, ........... B2 $ 980
2,500 Navistar Financial Corporation,
Senior Subordinated Notes, 9%,
06/01/02 ........................... B1 2,594
4,000 Olympic Financial Ltd., Units,
Senior Notes, 11.50%, 03/15/07,
Warrants, exp. 03/15/07 ............ B2 4,000
4,000 Resource America, Inc., Senior
Notes, 12%, 08/01/04 (i) ........... Caa1 4,080
3,500 Southern Pacific Funding
Corporation, Senior Notes,
11.50%, 11/01/04 ................... B2 3,491
------
15,145
------
Grocery -- 0.90%
4,000 Homeland Stores, Inc., Senior
Subordinated Notes, 10%,
08/01/03 ........................... (f) 3,600
------
Healthcare, Education and Childcare -- 2.25%
975 Dade International Inc., Senior
Subordinated Notes, 11.125%,
05/01/06 ........................... B3 1,077
1,050 Graphic Controls Corporation,
Senior Subordinated Notes,
12%, 09/15/05 ...................... B3 1,171
3,000 Owens & Minor, Inc., Senior
Subordinated Notes, 10.875%,
06/01/06 ........................... B1 3,307
3,500 Vencor, Inc., Senior Subordinated
Notes, 8.625%, 07/15/07 ............ B1 3,491
------
9,046
------
Hotels, Motels, Inns and Gaming -- 5.07%
1,850 Argosy Gaming Company, First
Mortgage Notes, 13.25%,
06/01/04 ........................... B2 1,929
3,500 CapStar Hotel Company, Senior
Subordinated Notes, 8.75%,
08/15/07 ........................... B1 3,614
1,475 Fitzgeralds Gaming Corporation,
Senior Secured Notes, 12.25%,
12/15/04 (i) ....................... B3 1,497
The accompanying notes are an integral
part of these financial statements.
</TABLE>
5
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments -- December 31, 1997 -- Continued (Dollar Amounts in
Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- continued
- --------------------------------------------------------------------------------
$ 2,000 GB Property Funding Corp., First
Mortgage Notes, 10.875%,
01/15/04 (a)(c) ...................... B3 $ 1,660
7,500 John Q. Hammons Hotels, L.P.,
First Mortgage Notes, 8.875%,
02/15/04 ............................. B1 7,659
3,000 Hollywood Casino Corporation,
Senior Secured Notes, 12.75%,
11/01/03 ............................. B2 3,225
750 Lady Luck Gaming Finance
Corporation, First Mortgage
Notes, 11.875%, 03/01/01 ............. B2 761
------
20,345
------
Leisure, Amusement, Motion Pictures and
Entertainment -- 2.10%
2,275 EchoStar DBS Corporation, Senior
Secured Notes, 12.50%,
07/01/02 ............................. Caa1 2,468
2,500 Muzak Limited Partnership, Senior
Notes, 10%, 10/01/03 ................. Ba3 2,625
3,085 Plitt Theatres, Inc., Senior
Subordinated Notes, 10.875%,
06/15/04 ............................. B3 3,332
------
8,425
------
Machinery -- 0.14%
525 IDEX Corporation, Senior
Subordinated Notes, 9.75%,
09/15/02 ............................. Ba3 545
------
Mining, Steel, Iron and Non-Precious Metals -- 7.41%
4,500 ACINDAR Industria Argentina de
Aceros S.A., Notes, 11.25%,
02/15/04 ............................. B2 4,433
2,500 AK Steel Corporation, Senior
Notes, 9.125%, 12/15/06 .............. Ba2 2,562
1,000 AK Steel Corporation, Senior
Notes, 10.75%, 04/01/04 .............. Ba2 1,066
500 Armco Inc., Senior Notes, 9%,
09/15/07 ............................. B2 493
1,500 Armco Inc., Senior Notes, 9.375%,
11/01/00 ............................. B2 1,545
</TABLE>
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3,000 Bethlehem Steel Corporation,
Senior Notes, 10.375%,
09/01/03 ............................. B1 $ 3,195
2,000 Companhia Vale do Rio Doce,
Notes, 10%, 04/02/04 (i) ............. (f) 2,000
2,500 CSN Iron, S.A., Guaranteed
Notes, 9.125%, 06/01/07 (i) .......... B1 2,125
1,500 GS Technologies Operating Co.,
Inc., Senior Notes, 12.25%,
10/01/05 ............................. B2 1,676
3,500 Neenah Corporation, Senior
Subordinated Notes, 11.125%,
05/01/07 ............................. B3 3,841
1,200 NS Group, Inc., Senior Secured
Notes, 13.50%, 07/15/03 .............. Ba2 1,389
1,750 Weirton Steel Corporation, Senior
Notes, 10.875%, 10/15/99 ............. B2 1,794
3,500 Weirton Steel Corporation, Senior
Notes, 11.375%, 07/01/04 ............. B2 3,649
------
29,768
------
Oil and Gas -- 6.48%
7,000 Cross Timbers Oil Company,
Senior Subordinated Notes,
9.25%, 04/01/07 ...................... B2 7,298
3,000 Energy Corporation of America,
Senior Subordinated Notes,
9.50%, 05/15/07 ...................... B2 3,000
1,995 Flores & Rucks, Inc., Senior
Subordinated Notes, 9.75%,
10/01/06 ............................. B3 2,195
5,000 Petroleos Mexicanos, Global
Guaranteed Notes, 8.85%,
09/15/07 ............................. Ba2 4,950
5,000 Plains Resources Inc., Senior
Subordinated Notes, 10.25%,
03/15/06 ............................. B2 5,375
2,000 Pride Petroleum Services, Inc.,
Senior Notes, 9.375%,
05/01/07 ............................. Ba3 2,150
1,000 Seagull Energy Corporation,
Senior Subordinated Notes,
8.625%, 08/01/05 ..................... Ba3 1,041
------
26,009
------
The accompanying notes are an integral
part of these financial statements.
</TABLE>
6
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments -- December 31, 1997 -- Continued (Dollar Amounts in
Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- continued
- --------------------------------------------------------------------------------
Personal and Non-Durable Consumer Products -- 2.00%
$ 3,500 Cabot Safety Acquisition
Corporation, Senior
Subordinated Notes, 12.50%,
07/15/05 ............................. B3 $ 3,920
4,000 The Fonda Group, Inc., Senior
Subordinated Notes, 9.50%,
03/01/07 ............................. B3 3,800
310 Playtex Products, Inc., Senior
Notes, 8.875%, 07/15/04 .............. B1 316
-------
8,036
-------
Personal Transportation -- 0.00%
5,000 Braniff, Inc., Senior Reset Notes,
15%, 04/01/99 (a)(b)(c)(d) ........... (f) 0
-------
Printing, Publishing and Broadcasting -- 9.79%
1,830 Big Flower Press Holdings, Inc.,
Senior Subordinated Notes,
8.875%, 07/01/07 ..................... B2 1,844
3,170 Big Flower Press Holdings, Inc.
Senior Subordinated Notes,
8.875%, 07/01/07 (i) ................. B2 3,193
2,250 Cablevision Systems Corporation,
Senior Debentures, 8.125%,
08/15/09 ............................. Ba2 2,317
2,750 Cablevision Systems Corporation,
Senior Subordinated Notes,
9.25%, 11/01/05 ...................... B1 2,915
715 Cablevision Systems Corporation,
Senior Subordinated Notes,
9.875%, 05/15/06 ..................... B1 783
4,000 Chancellor Media Corporation,
Senior Subordinated Notes,
9.375%, 10/01/04 ..................... B2 4,150
500 Comcast Corporation, Senior
Subordinated Debentures,
9.375%, 05/15/05 ..................... Ba3 531
2,500 FrontierVision Holdings, L.P.,
Senior Discount Notes,
11.875%, 09/15/07 (g) ................ (f) 1,838
1,735 Jacor Communications Company,
Senior Subordinated Notes,
9.75%, 12/15/06 ...................... B2 1,865
</TABLE>
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 750 JCAC, Inc., Senior Subordinated
Notes, 10.125%, 06/15/06 ............. B2 $ 823
2,150 Marcus Cable Company, L.P.,
Senior Discount Notes, 14.25%,
12/15/05, (g) ........................ Caa1 1,854
3,500 Rifkin Acquisition Partners,
L.L.L.P., Senior Subordinated
Notes, 11.125%, 01/15/06 ............. B3 3,868
2,500 Sullivan Graphics, Inc., Senior
Subordinated Exchange Notes,
12.75%, 08/01/05 ..................... Caa1 2,525
3,500 Sun Media Corporation, Senior
Subordinated Notes, 9.50%,
02/15/07 ............................. B3 3,762
1,500 Videotron Ltee., Senior
Subordinated Notes, 10.25%,
10/15/02 ............................. Ba3 1,590
1,500 World Color Press, Inc., Senior
Subordinated Notes, 9.125%,
03/15/03 ............................. B1 1,567
3,500 Young Broadcasting Inc., Senior
Subordinated Notes, 11.75%,
11/15/04 ............................. B2 3,876
-------
39,301
-------
Retail Stores -- 0.33%
1,167 Guitar Center Management
Company, Inc., Senior Notes,
11%, 07/01/06 ........................ B1 1,319
-------
Telecommunications -- 6.32%
750 American Communications
Services, Inc., Senior Discount
Notes, 12.75%, 04/01/06 (g) .......... (f) 578
3,500 Globalstar, L.P., Senior Notes,
10.75%, 11/01/04 (i) ................. B3 3,404
1,265 GST Telecommunications, Inc.,
Senior Subordinated Accrual
Notes, 12.75%, 11/15/07 (g) .......... (f) 1,322
1,790 Hyperion Telecommunications,
Inc., Senior Secured Notes,
12.25%, 09/01/04 ..................... (f) 1,987
2,000 Intermedia Communications Inc.,
Senior Notes, 8.875%,
11/01/07 (i) ......................... B2 2,050
The accompanying notes are an integral
part of these financial statements.
</TABLE>
7
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments -- December 31, 1997 -- Continued (Dollar Amounts in
Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT SECURITIES -- continued
- --------------------------------------------------------------------------------
$ 1,500 Intermedia Communications Inc.,
Senior Notes, 8.50%,
01/15/08 (i) .......................... B2 $ 1,500
3,000 Iridium LLC, Senior Notes, Series
C, 11.25%, 07/15/05 (i) ............... B3 2,955
2,500 McLeodUSA, Incorporated, Senior
Notes, 9.25%, 07/15/07 (i) ............ B3 2,606
2,400 Microcell Telecommunications Inc.,
Senior Discount Notes,
11.125%, 10/15/07 (g)(i)(j) ........... B3 932
4,500 MobileMedia Communications,
Inc., Senior Subordinated Notes,
9.375%, 11/01/07 (a)(c) ............... C 450
2,000 Rogers Cantel Inc., Senior
Secured Notes, 8.30%, 10/01/07 Ba3 1,985
2,000 Telefonica de Argentina S.A.,
Notes, 11.875%, 11/01/04 .............. Ba3 2,320
4,000 Teleport Communications Group
Inc., Senior Discount Notes,
11.125%, 07/01/07 (g) ................. B1 3,285
-------
25,374
-------
Textiles and Leather -- 0.75%
2,790 Clark-Schwebel, Inc., Senior
Notes, 10.50%, 04/15/06 ............... B2 3,027
-------
Utilities -- 1.08%
3,000 Texas-New Mexico Power
Company, Secured Debentures,
10.75%, 09/15/03 ...................... Ba3 3,273
1,000 Transportadora de Gas del Sur
S.A., Notes 10.25%, 04/25/01 .......... Ba3 1,048
-------
4,321
-------
Total Corporate Debt Securities
(Total cost of $359,840) .............. 365,861
-------
</TABLE>
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT OBLIGATIONS (FOREIGN) -- 1.57% (e)
- --------------------------------------------------------------------------------
Sovereigns -- 1.57%
$ 2,500 Federal Republic of Brazil, Bonds,
6%, 09/15/13 .......................... B1 $ 1,975
1,500 Republic of Argentina, Bonds,
11.375%, 01/30/17 ..................... Ba3 1,642
2,500 Republic of Argentina, Global
Bonds, 11%, 10/09/06 .................. Ba3 2,675
------
Total Government Obligations
(Foreign) (Total cost of $5,352) 6,292
------
</TABLE>
<TABLE>
<CAPTION>
Principal Moody's Value
Amount/Units Rating (Note 1(a))
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK -- 1.38% (e)
- --------------------------------------------------------------------------------
Banking--0.00%
62,935 WestFed Holdings, Inc., Cumulative,
Series A, 15.50% (a)(d)(h) .......... (f) 0
------
Insurance -- 0.73%
2,850 Superior National Capital Trust I,
Trust Preferred Securities,
10.75% (i) .......................... b1 2,921
------
Machinery -- 0.36%
1,350 Fairfield Manufacturing Company,
Inc., Cumulative Exchangeable,
11.25% (f) 1,445
------
Printing, Publishing and Broadcasting -- 0.29%
1,063 Granite Broadcasting Corporation,
Cumulative Exchangeable,
12.75% (f) 1,180
------
Total Preferred Stock
(Total cost of $10,213).............. 5,546
------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
8
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schedule of Investments -- December 31, 1997 -- Continued (Dollar Amounts in
Thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1(a))
- ---------------------------------------------------------------
<S> <C> <C>
COMMON STOCK and WARRANTS -- .01% (e)
- ---------------------------------------------------------------
12,500 Benedek Communications
Corporation, Warrants, exp.
07/01/07 (b)(h) ................ $ 25
27,474 WestFed Holdings, Inc., Series B
(a)(d)(h) ...................... 0
--------
Total Common Stock and Warra
(Total cost of $188) ......... 25
--------
</TABLE>
<TABLE>
<CAPTION>
Principal Value
Amount (Note 1(a))
- ---------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT -- 3.58% (e)
- ---------------------------------------------------------------
$ 14,378 Swiss Bank Repurchase
Agreement, 6.55%, 01/02/98,
(Collateral: U.S. Treasury
Bonds, 11.25%, 02/15/15,
$7,952 principal; U.S. Treasury
Bonds, 8.75%, 11/15/08, $1,626
principal) ...................... 14,378
--------
Total Short-Term Investment
(Total cost of $14,378).......... 14,378
--------
TOTAL INVESTMENTS (Total cost of $389,971) $392,102
========
</TABLE>
(a) Denotes issuer is in bankruptcy proceedings.
(b) Restricted as to public resale. At the date of acquisition, these
securities were valued at cost. The total value of restricted securities
owned at December 31, 1997 was $25 or 0.01% of total assets.
(c) Nonincome producing security which is on nonaccrual and which has defaulted
on interest payments.
(d) Security is valued at fair value using methods determined by the Board of
Directors. The total value of these securities at December 31, 1997 was $0.
(e) Percentages indicated are based on total assets of $401,475.
(f) Not rated.
(g) Security is a step interest or accrual bond. Interest on these bonds accrue
based upon the effective interest rate.
(h) Nonincome producing.
(i) Securities are exempt from registration under Rule 144A or Regulation S of
the Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers in transactions exempt from registration.
See Note 1(a) of the Notes to Financial Statements for vaulation policy.
Total market value of Rule 144A or Regulation S securities amounted to
$60,043 as of December 31, 1997.
(j) Bond's par value and coupon rate are denominated in a foreign currency.
Market value is in US Dollars based on the Canadian Dollar foreign
exchange rate at December 31, 1997.
The accompanying notes are an integral
part of these financial statements.
9
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance Sheet
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
Assets: (Dollars in thousands, except per share amounts)
INVESTMENTS IN SECURITIES, at value (Identified
cost of $389,971, see Schedule of Investments
and Notes 1 and 2)............................... $392,102
RECEIVABLES:
Interest and dividends ........................... 8,970
Forward foreign currency portfolio hedge contract,
open (Note 4) .................................. 50
OTHER ASSETS ...................................... 17
PREPAID EXPENSES .................................. 26
DEFERRED OFFERING EXPENSES (Note 11) 310
--------
Total assets ................................... $401,475
--------
Liabilities:
PAYABLES:
Investment securities purchased ................. $ 2,615
Dividend payable on common stock ................ 4,475
Dividend payable on preferred stock ............. 204
ACCRUED EXPENSES (Note 3) ........................ 288
ACCRUED OFFERING EXPENSES (Note 11) 268
--------
Total liabilities .............................. $ 7,850
--------
Net Assets:
AUCTION TERM PREFERRED STOCK:
$1.00 par value, 1,000,000 shares authorized,
6,000 shares issued and outstanding,
liquidation preference of $25,000 per share
(Notes 5 and 6) ............................... $150,000
--------
COMMON STOCK:
$0.01 par value, 200,000,000 shares authorized,
48,453,316 shares issued and outstanding ...... $ 485
CAPITAL IN EXCESS OF PAR VALUE ................... 326,908
UNDISTRIBUTED NET INVESTMENT INCOME
(Note 2) ....................................... 370
ACCUMULATED NET REALIZED LOSS FROM
SECURITIES TRANSACTIONS (Note 2) ............... (86,319)
NET UNREALIZED APPRECIATION ON
INVESTMENTS AND FORWARD FOREIGN
CURRENCY CONTRACTS ............................. 2,181
--------
Net assets applicable to common stock
(Equivalent to $5.03 per share, based on
48,453,316 shares outstanding) ................ $243,625
--------
Total Net Assets ................................. $393,625
========
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
Investment Income: (Note 1) (Dollars in thousands, except per
share amounts)
Interest income ................................. $33,307
Dividend income ................................. 244
Other Income .................................... 366
--------
Total investment income ........................ $33,917
--------
Expenses:
Cost of Leverage:
Preferred and auction fees ...................... $ 296
--------
Total cost of leverage ......................... $ 296
--------
Professional services expenses:
Management fees (Note 3) ........................ $ 1,087
Custodian and transfer agent fees ............... 237
Legal fees ...................................... 102
Audit fees ...................................... 73
--------
Total professional services expenses ........... $ 1,499
--------
Administrative expenses:
General administrative fees ..................... $ 262
Directors' fees ................................. 200
NYSE fees ....................................... 46
Miscellaneous expenses ......................... 41
Shareholder meeting expenses .................... 34
--------
Total administrative expenses .................. $ 583
--------
Total expenses ................................. $ 2,378
--------
Net investment income .......................... $31,539
--------
Realized and Unrealized Gain on Investments:
Realized gain on investments, net ............... $11,676
Change in net unrealized appreciation on
investments and forward foreign currency
contracts .................................... (331)
--------
Net gain on investments ........................ $11,345
--------
Net increase in net assets resulting from operations $42,884
--------
Cost of Preferred Leverage:
Distributions to preferred stockholders ......... $(7,588)
Net swap settlement receipts (Note 7) ........... 174
--------
Total cost of preferred leverage ............... $(7,414)
--------
Net increase in net assets resulting from operations
less cost of preferred leverage .............. $35,470
========
- ---------------------------------------------------------------------
Amount Available for Distribution to Common Stockholders
Net investment income ........................... $31,539
Total cost of preferred leverage ............... (7,414)
--------
Net amount available for distribution to common
stockholders ................................ $24,125
========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
10
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December
31,
1997 1996
--------- ---------
<S> <C> <C>
From Operations: (Dollars in thousands, except per share amounts)
Net investment income .......................................................... $ 31,539 $ 24,443
Realized gain on investments ................................................... 11,676 3,613
Change in net unrealized appreciation on investments and forward foreign
currency contracts ............................................................ (331) 3,745
--------- ---------
Net increase in net assets resulting from operations .......................... $ 42,884 $ 31,801
--------- ---------
From Fund Share Transactions:
Proceeds from sale of Auction Term Preferred Stock (2,000 shares), net of $734
of offering costs and sales load (Note 5) ..................................... $ 49,266 $ --
Proceeds from rights offering (11,982,048 shares), net of $400 of offering costs
(Note 11) ..................................................................... 53,639 --
Net asset value of 754,386 shares and 738,917 shares issued to common
stockholders for reinvestment of dividends in 1997 and 1996, respectively ..... 3,786 3,565
--------- ---------
Increase in net assets resulting from fund share transactions ................. $ 106,691 $ 3,565
--------- ---------
Distributions to Stockholders:
Preferred dividends ($1,265 and $1,411 per share, respectively) ................ $ (7,588) $ (5,645)
Net swap settlement receipts ................................................... 174 131
Common Dividends:
From net investment income ($.53 and $.52 per share, respectively) ............ (24,496) (18,078)
In excess of net investment income ($.01 and $0 per share, respectively) ...... (448) (189)
--------- ---------
Decrease in net assets resulting from distributions to stockholders ........... $ (32,358) $ (23,781)
--------- ---------
Total net increase in net assets ................................................ $ 117,217 $ 11,585
--------- ---------
Net Assets Applicable to Common and Preferred Stock:
Beginning of period ............................................................ $ 276,408 $ 264,823
--------- ---------
End of period (Including $370 and $371 of undistributed net investment
income at December 31, 1997 and December 31, 1996, respectively) .............. $ 393,625 $ 276,408
========= =========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
11
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Financial Highlights
Selected Per Share Data and Ratios
For Each Share of Common Stock Outstanding Throughout the Period
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 (d) 1996 1995 1994 (c) 1993
---------- ---------- ---------- ------------- ----------
<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%
======= ======== ======== ========= ========
<CAPTION>
For the Period From
February 26, 1988
(Commencement
of Operations) to
1992 (a) 1991 1990 1989 December 31, 1988
---------- ---------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period .......... $ 3.79 $ 3.42 $ 6.23 $ 8.60 $ 9.25
------- ------- --------- --------- -------
NET INVESTMENT INCOME .57 .65 .92 1.54 1.42
NET REALIZED AND
UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 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%
======== ======== ========= ========= =======
</TABLE>
The accompanying notes are an integral
part of these financial statements.
12
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Financial Highlights
Selected Per Share Data and Ratios
For Each Share of Common Stock Outstanding Throughout the Period -- Continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 (d) 1996 1995 1994 (c) 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF
PERIOD, APPLICABLE
TO COMMON STOCK (b) $ 243,625 $ 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
========= ========= ========= ========= =========
TOTAL NET ASSETS, END
OF PERIOD (b) .................... $ 393,625 $ 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%
<CAPTION>
For the Period From
February 26, 1988
(Commencement
of Operations) to
1992 (a) 1991 1990 1989 December 31, 1988
------------- ------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF
PERIOD, APPLICABLE
TO COMMON STOCK (b) $ 107,897 $ 93,227 $ 83,813 $ 152,156 $ 202,363
========= ========= ========= ========= =========
NET ASSETS, END OF
PERIOD, APPLICABLE
TO PREFERRED
STOCK (b) ........................ $ 35,000 $ 35,000 $ 35,000 $ 58,500 $ 79,000
========= ========= ========= ========= =========
TOTAL NET ASSETS, END
OF PERIOD (b) .................... $ 142,897 $ 128,227 $ 118,813 $ 210,656 $ 281,363
========= ========= ========= ========= =========
EXPENSE RATIOS:
Ratio of interest expense
to average net assets** 2.95% 3.25% 4.17% 3.56% 3.29%*
Ratio of preferred and
other debt expenses to
average net assets** ............ .65% .78% .62% .24% .23%*
Ratio of operating
expenses to average
net assets** .................... 1.22% 1.19% 1.10% .69% .70%*
Ratio of litigation settlement
expense to average net
assets** ........................ -- -- -- -- --
--------- --------- --------- --------- ---------
RATIO OF TOTAL EXPENSES
TO AVERAGE NET ASSETS** 4.82% 5.22% 5.89% 4.49% 4.22%*
========= ========= ========= ========= =========
RATIO OF NET INVESTMENT
INCOME TO AVERAGE
NET ASSETS** ..................... 10.09% 12.62% 14.50% 14.48% 13.56%*
PORTFOLIO TURNOVER
RATE ............................. 129.86% 121.15% 49.98% 65.39% 149.00%*
</TABLE>
(a) Prior to the appointment on February 19, 1992 of Wellington Management
Company, LLP, the Fund was advised by Ostrander Capital Management, L.P.
(b) Dollars in thousands.
(c) 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) As discussed in Note 5, 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 and preferred shares relative to the average
net assets of both the common and preferred stockholders. The expense ratio
and net investment income ratio do not reflect the effect of dividend
payments (including 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.
The accompanying notes are an integral
part of these financial statements.
13
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Information Regarding
Senior Securities
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of December 31,
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
TOTAL AMOUNT OUTSTANDING:
Notes ..................................... $ -- $ -- $ -- $ -- $ --
Preferred Stock ........................... 150,000,000 100,000,000 100,000,000 100,000,000 35,000,000
Short-term Loan ........................... -- -- -- -- 45,000,000
ASSET COVERAGE:
Per Note (1) .............................. $ -- $ -- $ -- $ -- $ --
Per Preferred Stock Share (2) ............. 65,604 69,102 66,206 60,398 473,351
Per $1,000 of Short-term Loan (1) ......... -- -- -- -- 4,682
INVOLUNTARY LIQUIDATION PREFERENCE:
Preferred Stock Share (3) ................. $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 100,000
APPROXIMATE MARKET VALUE:
Per Note .................................. $ -- $ -- $ -- $ -- $ --
Per Preferred Stock Share (3) ............. 25,000 25,000 25,000 25,000 100,000
Per $1,000 of Short-term Loan ............. -- -- -- -- 1,000
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1992 1991 1990 1989 1988
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
TOTAL AMOUNT OUTSTANDING:
Notes ..................................... $45,490,000 $45,490,000 $47,990,000 $96,100,000 $105,000,000
Preferred Stock ........................... 35,000,000 35,000,000 35,000,000 58,500,000 79,000,000
Short-term Loan ........................... -- -- -- -- --
ASSET COVERAGE:
Per Note (1) .............................. $ 4,141 $ 3,819 $ 3,476 $ 3,192 $ 3,680
Per Preferred Stock Share (2) ............. 408,277 366,363 339,466 360,096 356,156
Per $1,000 of Short-term Loan (1) ......... -- -- -- -- --
INVOLUNTARY LIQUIDATION PREFERENCE:
Preferred Stock Share (3) ................. $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
APPROXIMATE MARKET VALUE:
Per Note .................................. $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Per Preferred Stock Share (3) ............. 100,000 100,000 100,000 100,000 100,000
Per $1,000 of Short-term Loan ............. -- -- -- -- --
</TABLE>
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such amounts
by the number of Notes outstanding.
(2) Calculated by subtracting the Fund's total liabilities (including the Notes
but not including the Preferred Stock) from the Fund's total assets and
dividing such amount by the number of Preferred Shares outstanding.
(3) Plus accumulated and unpaid dividends.
The accompanying notes are an integral
part of these financial statements.
14
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Significant Accounting and Other Policies
The New America High Income Fund, Inc. (the Fund) was organized as a
corporation in the state of Maryland on November 19, 1987 and is registered
with the Securities and Exchange Commission as a diversified, closed-end
investment company under the Investment Company Act of 1940. The Fund commenced
operations on February 26, 1988. The investment objective of the Fund is to
provide high current income while seeking to preserve stockholders' capital
through investment in a professionally managed, diversified portfolio of "high
yield" fixed-income securities.
The Fund invests primarily in fixed maturity corporate debt securities
that are rated less than investment grade. Risk of loss upon default by the
issuer is significantly greater with respect to such securities compared to
investment grade securities because these securities are generally unsecured
and are often subordinated to other creditors of the issuer and because these
issuers usually have high levels of indebtedness and are more sensitive to
adverse economic conditions, such as a recession, than are investment grade
issuers. In some cases, the collection of principal and timely receipt of
interest is dependent upon the issuer attaining improved operating results,
selling assets or obtaining additional financing.
See the schedule of investments for information on individual securities
as well as industry diversification and credit quality ratings.
The Fund's financial statements have been prepared in conformity with
generally accepted accounting principles that require the management of the
Fund to, among other things, make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted in
the investment company industry.
(a) Valuation of Investments--Investments for which market quotations are
readily available are stated at market value, which is determined by using the
most recently quoted bid price provided by an independent pricing service or
principal market maker. Independent pricing services provide market quotations
based primarily on quotations from dealers and brokers, market transactions,
accessing data from quotations services, offering sheets obtained from dealers
and various relationships between securities. Short-term investments having
maturities of 60 days or less are stated at amortized cost, which approximates
market value. Following procedures approved by the Board of Directors,
investments for which market quotations are not readily available (primarily
fixed-income corporate bonds and notes) are stated at fair value on the basis
of subjective valuations furnished by securities dealers and brokers. Other
investments, with a cost of approximately $7,695,000 and a value of $0, are
valued in good faith at fair market value using methods determined by the Board
of Directors.
(b) Interest and Dividend Income--Interest income is accrued on a daily
basis. Discount on short-term investments is amortized to investment income.
Market discounts or premiums on corporate debt securities are not amortized for
financial statement purposes. All income on original issue discount and step
interest bonds is accrued based on the effective interest method for both
financial reporting and tax reporting purposes as required by federal income
tax regulations. Dividend payments received in additional securities are
recorded on the ex-dividend date in an amount equal to the value of the
security on such date.
(c) Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code of 1986, as amended, applicable to
regulated
15
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements--Continued
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
investment companies and to distribute substantially all of its taxable income
to its shareholders each year. Accordingly, no federal income tax provision is
required.
(2) Tax Matters and Distributions
At December 31, 1997, the total cost of securities (excluding temporary
cash investments) for federal income tax purposes was approximately
$375,593,000. Aggregate gross unrealized gain on securities in which there was
an excess of value over tax cost was approximately $15,202,000. Aggregate
unrealized loss on securities in which there was an excess of tax cost over
value was approximately $13,071,000. Net unrealized gain for tax purposes at
December 31, 1997 was approximately $2,131,000.
At December 31, 1997, the Fund had approximate capital loss carryovers
available to offset future capital gain, if any, to the extent provided by
regulations:
<TABLE>
<CAPTION>
Carryover Available Expiration Date
- --------------------- ------------------
<S> <C>
$49,666,000 December 31, 1998
34,426,000 December 31, 1999
2,227,000 December 31, 2002
- -----------
$86,319,000
===========
</TABLE>
To the extent that capital loss carryovers are used to offset realized
capital gains, it is unlikely that gains so offset will be distributed to
shareholders.
Distributions on common stock are declared based upon annual projections
of the Fund's investment company taxable income. The Fund records all dividends
and distributions payable to shareholders on the ex-dividend date and declares
and distributes income dividends monthly.
In accordance with Statement of Position 93-2, the Fund has recorded
several reclassifications in the capital accounts. These reclassifications have
no impact on the net asset value of the Fund and are designed generally to
present undistributed net investment income or accumulated net realized gains
and losses on a tax basis, which is considered to be more informative to the
shareholder. As of December 31, 1997, the Fund has reclassified approximately
$818,000 primarily related to amortization of market discounts on corporate
bonds from accumulated net realized loss from securities transactions to
undistributed net investment income.
The difference between earnings for financial statement purposes and
earnings for tax purposes is primarily due to the tax treatment of the
amortization of market discounts on corporate bonds and the recognition of
interest income on corporate bonds that have defaulted on their interest
payments.
(3) Investment Advisory Agreement
Wellington Management Company, LLP, the Fund's Investment Advisor, earned
approximately $1,087,000 in management fees during the year ended December 31,
1997. Management fees paid by the Fund to Wellington Management are calculated
at .45 of 1% (on an annual basis) of the average weekly value of the Fund's net
assets attributable to common stock ($243.6 million at December 31, 1997). At
December 31, 1997, the fee payable to the Investment Advisor was approximately
$95,000, which was included in accrued expenses on the accompanying balance
sheet.
(4) Forward Foreign Currency Contract
The Fund may enter into forward foreign currency contracts in connection
with the purchase and sale of foreign investments. All commitments are marked
to market at the applicable translation rates and any unrealized gains or
losses are recorded in the Fund's financial statements. The aggregate principal
amounts of the contracts are not recorded in the financial statements. The Fund
records realized gains or losses at the time the forward contract is offset by
entry into a closing transaction or by delivery of the currency. Risks may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
16
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements--Continued
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 1997 the Fund had outstanding a forward foreign currency
contract as follows:
<TABLE>
<CAPTION>
Foreign
Currency Value on Current Unrealized
Sale Contract Settlement Date Value Gain
- --------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Canadian Dollar
Expiring 10/16/98 $1,033,131 $983,576 $49,555
</TABLE>
(5) Auction Term Preferred Stock (ATP)
On January 4, 1994, the Fund issued 1,200 shares of Series A ATP and 800
shares of Series B ATP. The underwriting discount of $1,500,000 and offering
expenses of $336,000 associated with the ATP offering were recorded as a
reduction of the capital in excess of par value on common stock. On May 6,
1997, the Fund issued 2,000 shares of Series C ATP. The underwriting discount
of $437,500 and offering expenses of $297,000 were recorded as a reduction of
the capital in excess of par value on common stock. The ATP's dividends are
cumulative at a rate determined at an auction, and dividend periods will
typically be 28 days unless notice is given for periods to be longer or shorter
than 28 days. Dividend rates ranged from 5.39% to 6.14% for the year ended
December 31, 1997.
At the May 29, 1997 Annual Meeting, the shareholders of the Fund's common
and preferred stock voted to split the Fund's ATP Series A and Series B 2:1.
Effective June 3, 1997, the liquidation preference of the Fund's Series B ATP
was reduced from $50,000 per share to $25,000 per share and the number of
shares outstanding doubled from 800 to 1,600 shares. Effective June 17, 1997,
the liquidation preference of the Fund's Series A ATP was reduced from $50,000
to $25,000 per share and the number of shares outstanding doubled from 1,200 to
2,400 shares.
The ATP is redeemable, at the option of the Fund, or subject to mandatory
redemption (if the Fund is in default of certain coverage requirements) at a
redemption price equal to $25,000 per share plus accumulated and unpaid
dividends. The ATP has a liquidation preference of $25,000 per share plus
accumulated and unpaid dividends. The Fund is required to maintain certain
asset coverages with respect to the ATP under the Fund's Charter and the 1940
Act.
(6) ATP Auction-Related Matters
Bankers Trust Company (BTC) serves as the ATP's auction agent pursuant to
an agreement entered into on January 4, 1994. The term of the agreement is
unlimited and may be terminated by either party. BTC may resign upon notice to
the Fund, such resignation to be effective on the earlier of the 90th day after
the delivery of such notice and the date on which a successor auction agent is
appointed by the Fund. The Fund may also replace BTC as auction agent at any
time.
After each auction, BTC as auction agent will pay to each broker-dealer,
from funds provided by the Fund, a maximum service charge at the annual rate of
.25 of 1% or such other percentage subsequently agreed to by the Fund and the
broker-dealers, of the purchase price of shares placed by such broker-dealers
at such auction. In the event an auction scheduled to occur on an auction date
fails to occur for any reason, the broker-dealers will be entitled to service
charges as if the auction had occurred and all holders of shares placed by them
had submitted valid hold orders. The Fund incurred approximately $270,000 for
service charges earned by Bear Stearns and Lehman Brothers through December 31,
1997. This amount is included under the caption preferred and auction fees in
the accompanying statement of operations.
(7) Interest Rate Swaps
On February 3, 1994, the Fund entered into an interest rate swap
transaction with BankBoston, N.A. (BBNA) for the purpose of partially hedging
its dividend payment obligations with respect to the ATP through February 7,
1999. Under the terms of the interest rate swap agreement, the Fund makes fixed
payments to BBNA at the rate of 5.25% per annum on the notional amount of the
interest rate swap ($65 million) and
17
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements--Continued
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
receives a variable payment from BBNA equivalent to the 30-day, AA rated
commercial paper rate in respect of such notional amounts. Interest rates on
the 30-day AA rated commercial paper ranged from 5.41% to 5.73% for the year
ended December 31, 1997. The interest rate swap agreement was effective on
February 7, 1994 and terminates on February 7, 1999.
The Fund entered into two additional interest rate swap transactions with
BBNA for the purpose of partially hedging its dividend payment obligations with
respect to the ATP. Under the terms of these interest rate swap agreements, the
Fund makes fixed payments to BBNA and receives a variable payment from BBNA
equivalent to one month LIBOR. The first interest rate swap agreement was
effective on October 2, 1997 and terminates on October 2, 2002. The fixed
payment rate is 6.225% per annum on the notional amount ($10 million). The
variable payment from BBNA ranged from 5.64% to 5.97% for the year ended
December 31, 1997. The second interest rate swap agreement was effective on
October 7, 1997 and terminates on October 7, 2002. The fixed payment rate is
6.07% per annum on the notional amount ($20 million). The variable payment from
BBNA ranged from 5.63% to 6.00% for the year ended December 31, 1997.
The Fund follows hedge accounting (off-balance-sheet) with respect to the
swap agreements and settles the net amount receivable or payable from each party
every 30 days. For the year ended December 31, 1997, the Fund's obligations
under the swap agreements were less than the amount receivable from BBNA by
approximately $174,000 and is included in the accompanying statement of
operations.
The Fund is exposed to credit loss in the event of nonperformance by
counterparties on interest rate swaps, but the Fund does not anticipate
nonperformance by any counterparty. While notional contract amounts are used to
express the volume of interest rate swap agreements, the amounts potentially
subject to credit risk, in the event of nonperformance by counterparties, are
substantially smaller. The estimated fair value of the interest rate swap
agreements at December 31,1997 amounted to approximately $38,000 unrealized
gain. This value is not included in total net assets.
(8) Repurchase Agreements
At the time the Fund enters into a repurchase agreement, the value of the
underlying security, including accrued interest, will be equal to or exceed the
value of the repurchase agreement, and, in the case of repurchase agreements
exceeding one day, the value of the underlying security, including accrued
interest, is required during the term of the agreement to be equal to or exceed
the value of the repurchase agreement.
The underlying securities for all repurchase agreements are held in
safekeeping in an investment account of State Street Bank and Trust Company
(SSBT), the Fund's custodian, at the Federal Reserve Bank of Boston. In the
case of repurchase agreements exceeding one day, SSBT's Money Market Department
monitors the market value of the underlying securities by pricing them daily,
and in the event any individual repurchase agreement is not fully
collateralized, SSBT advises the Fund and additional collateral is obtained.
(9) Purchase and Sales of Securities
Purchases and proceeds of sales or maturities of long-term securities
during the year ended December 31, 1997 were as follows:
Purchases of securities $465,029,000
Sales of securities $365,069,000
(10) Certain Transactions
A partner of Goodwin, Procter & Hoar, general counsel to the Fund, serves
as a Director of the Fund. Fees earned by Goodwin, Procter & Hoar amounted to
approximately $311,000 for the year ended December 31, 1997. The Fund paid
approximately $161,000 during the year ended December 31, 1997 to two officers
of the Fund for the provision of certain administrative services.
18
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements--Continued
December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(11) Rights Offering
The Fund issued to stockholders of record as of the close of business on
February 11, 1997, rights to subscribe for an aggregate of 11,982,048 shares of
common stock, $.01 par value per share, of the Fund. One right was issued for
each three full shares of common stock beneficially held on the record date.
The rights entitled a stockholder to acquire at the subscription price of $4.51
per share one share for each right held. The subscription price was 90% of the
net asset value per share as of the close of business on March 18, 1997, the
expiration date. On March 26, 1997, the Fund completed its rights offering.
Proceeds of approximately $54,039,000 and shares of 11,982,048 were recorded.
In addition, the deferred offering expense balance of $400,000 was netted
against the rights offering proceeds.
On December 24, 1997, the Fund filed a Registration Statement with the
Securities and Exchange Commission regarding a transferable rights offering to
the holders of the Fund's common stock. Under the expected terms of the
offering, as described in the Registration Statement, the Fund will issue to
its common stockholders rights to subscribe for an aggregate of approximately
16,242,000 shares of the Fund's common stock. Each stockholder will be issued
one right for each three full shares of common stock owned on the record date.
The method of pricing and the record date will be determined and announced
shortly before the commencement of the offering, which the Fund presently
anticipates will occur in February 1998. Total expenses of approximately
$410,000 are expected to be incurred in connection with the rights offering. As
an accommodation to the Fund and based on the Board's determination that the
offer is in the best interest of the stockholders, Wellington Management has
agreed to voluntarily waive $100,000 of its fees. Net deferred offering
expenses of approximately $310,000 will be netted against the rights offering
proceeds. At December 31, 1997, the Fund had approximately $268,000 in net
outstanding liabilities associated with the offering.
The rights offering will entitle shareholders, and other rightholders
purchasing rights in the market, to acquire one new share of stock for each
right held. In addition, holders of rights who subscribe for the maximum number
of shares to which they are entitled will be permitted to subscribe for
additional shares. The Fund intends to apply to list the rights for trading on
the New York Stock Exchange.
- --------------------------------------------------------------------------------
From time to time in the future, the Fund may effect redemptions and/or
repurchases of its ATP as provided in the applicable constituent instruments or
as agreed upon by the Fund and sellers. The Fund intends to effect such
redemptions and/or repurchases to the extent necessary to maintain applicable
asset coverage requirements.
19
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Directors
Robert F. Birch
Joseph L. Bower
Richard E. Floor
Bernard J. Korman
Franco Modigliani
Ernest E. Monrad
Officers
Robert F. Birch - President
Ellen E. Terry - Vice President, Treasurer
Richard E. Floor - Secretary
Investment Advisor
Wellington Management Company, LLP
75 State Street
Boston, MA 02109
Administrator
The New America High Income Fund, Inc.
Ten Winthrop Square
Boston, MA 02110
(617) 350-8610
Custodian and Transfer Agent
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
(617) 328-5000 ext. 6406
(800) 426-5523
Listed: NYSE
Symbol: HYB
Independent Public Accountants
Arthur Andersen LLP
Boston, MA
20
<PAGE>
The New America High Income Fund, Inc.
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of The New America High Income Fund,
Inc.:
We have audited the accompanying balance sheet of The New America High
Income Fund, Inc. (the Fund) (a Maryland Corporation), including the schedule
of investments, as of December 31, 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. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of The New America High Income Fund, Inc. as of December 31, 1997, and
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles.
Boston, Massachusetts ARTHUR ANDERSEN LLP
January 23, 1998
21
<PAGE>
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
The New
America
High Income
Fund, Inc.
- --------------------------------------------------------------------------------
Annual
- --------------------------------------------------------------------------------
Report
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Exhibit D2
SUBSCRIPTION CERTIFICATE
VOID IF NOT RECEIVED BY THE SUBSCRIPTION AGENT BEFORE 5:00 P.M.
EASTERN TIME ON MARCH 18, 1998 UNLESS EXTENDED
Cusip No. 641876115 Shares Available in Primary Subscription _______________
THE NEW AMERICA HIGH INCOME FUND, INC.
SUBSCRIPTION RIGHTS FOR COMMON STOCK
Dear Stockholder:
IN ORDER TO EXERCISE YOUR RIGHTS, YOU MUST COMPLETE THE TEAR OFF CARD BELOW.
As the registered owner of this Subscription Certificate, you are entitled to
subscribe for the number of shares of Common Stock of The New America High
Income Fund, Inc. shown above. You may subscribe for such shares pursuant to the
Primary Subscription right at the Subscription Price for each share specified in
the Prospectus accompanying this Subscription Certificate. The Rights
represented hereby include the Over-Subscription Privilege for all Rightholders
as described in the accompanying Prospectus. Under the Over- Subscription
Privilege, any number of additional shares may be purchased by Rightholders if
such shares are available and you have fully exercised your Primary Subscription
rights with respect to the rights issued to you hereby.
(continued on reverse side)
_______________________________________________________________
| How to Calculate your Full Primary Subscription Entitlement |
| ----------------------------------------------------------- |
| No. of shares owned __________ / 3 = Rights, |
| each of which entitles you to buy one new share. |
|_____________________________________________________________|
THIS SUBSCRIPTION RIGHT IS TRANSFERABLE
NOTE: $__________ is an estimated price only. The final price to be determined
on March 18, 1997 (unless extended) could be higher or lower depending on the
movement in the net asset value and share price. Additional payment may be
required for the primary Subscription Shares, and any Over-Subscription Shares
when the actual Subscription Price is determined. Please reference the Control
Number appearing on the form below on your check, money order, or notice of
guaranteed delivery.
CUSIP NO. 641876115
VOID IF NOT RECEIVED BY THE SUBSCRIPTION AGENT
BEFORE 5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE
Control No._________ Rights Represented by this Subscription Certificate ______
Account No._________
THE NEW AMERICA HIGH INCOME FUND, INC.
SUBSCRIPTION RIGHTS FOR COMMON STOCK
(Complete appropriate section on reverse side of this card)
The registered owner of this Subscription Certificate, named below, or assigns,
is entitled to the number of Rights to subscribe for the Common Stock, $.01 par
value of The New America High Income Fund, Inc. (the "Fund") shown above, in the
ratio of one share of Common Stock for each Right, pursuant to the Primary
Subscription right and upon the terms and conditions and at the Subscription
Price for each share of Common Stock specified in the Prospectus relating
thereto. The Rights represented hereby include the Over-Subscription Privilege
for all Rightholders, as described in the Prospectus. Under the
Over-Subscription Privilege, any number of additional shares may be purchased by
Rightholders if such shares are available and the owner's Primary Subscription
rights have been fully exercised. Stock certificates for the shares subscribed
for pursuant to the Primary Subscription right and Over-Subscription Privilege
will be delivered within twelve business days after the Confirmation Date and
after full payment for the shares subscribed for has been received and cleared,
and all allocations have been effected. Additional payment may be required for
the Primary Subscription shares, and any Over-Subscription Shares, when the
actual Subscription Price is determined. Any refund in connection with
subscriptions will be delivered as soon as practicable after the expiration of
the Offer. The Subscription Certificate may be transferred, in the same manner
and with the same effect as in the case of a negotiable instrument payable to
specific persons, by duly completing and signing the assignment on the reverse
side hereof.
TO SUBSCRIBE PURSUANT TO THE PRIMARY SUBSCRIPTION RIGHT OR THE OVER-SUBSCRIPTION
PRIVILEGE, A RIGHT AND FULL PAYMENT OF THE ESTIMATED SUBSCRIPTION PRICE ARE
REQUIRED FOR EACH SHARE OF COMMON STOCK. SEE REVERSE SIDE FOR FORMS.
THE NEW AMERICA HIGH INCOME FUND, INC.
By:---------------------------------------------
STATE STREET BANK AND TRUST COMPANY
By:---------------------------------------------
<PAGE>
THE NEW AMERICA HIGH INCOME FUND, INC.
If the aggregate Subscription Price paid by a Rightholder is insufficient to
purchase the aggregate number of shares subscribed for, then such Rightholder
will be deemed to have exercised first, the Primary Subscription right and
second, the Over-Subscription Privilege to the full extent of the payment
tendered. If the aggregate Subscription Price paid by a Rightholder exceeds the
amount necessary to purchase the number of shares for which the Rightholder has
indicated an intention to subscribe, then the Rightholder will be deemed to have
exercised first, the Primary Subscription right and second, the
Over-Subscription Privilege to the full extent of the excess payment tendered.
Stock certificates for the shares subscribed to pursuant to the Primary
Subscription right and Over-Subscription Price will be delivered within twelve
business days after the Confirmation Date and after full payment for the shares
subscribed for has been received and cleared. Any refund in connection with your
subscription will be delivered as soon as practicable after the expiration of
the offering.
Full Payment for both Primary and Over-Subscription Shares must accompany this
form and must be made payable in United States dollars by money order or check
drawn on a bank located in the United States payable to The New America High
Income Fund, Inc. Alternatively, a notice of guaranteed delivery must accompany
the exercise form.
THE NEW AMERICA HIGH INCOME FUND, INC.
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
PLEASE FILL IN ALL APPLICABLE INFORMATION
TO: State Street Bank and Trust Company, Subscription Agent
P.O. Box 9061
Boston, Massachusetts 02205-8686
Expiration Date: March 18, 1998 (unless extended)
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
A. Primary Subscription
___________ X $__________ = $____________ AMOUNT ENCLOSED $__________
(No. of new
shares)
B. I apply for the Over-Subscription Privilege
(You can only subscribe if you have fully
exercised your Primary Subscription rights.)
______________ X $__________ = $____________
(No. of additional
shares)
IF YOU WISH TO APPLY FOR LESS THAN YOUR FULL ENTITLEMENT:
C. I apply for ________________ X $_______ = $____________________
(No. of new shares) (AMOUNT ENCLOSED)
IF YOU WISH TO SELL ANY RIGHTS
D. Sell any remaining Rights [ ]
E. Sell all of my Rights [ ]
TO SUBSCRIBE: I hereby irrevocably subscribe for the face amount of Common Stock
indicated as the total of A and B or C above, hereon upon the terms and
conditions specified in the Prospectus relating thereto, receipt of which is
acknowledged. I hereby agree that if I fail to pay for the shares Common Stock
for which I have subscribed, the Fund may exercise any of the remedies set forth
in the Prospectus.
TO SELL RIGHTS: If I have checked either the box on line D or on line E, I
authorize the sale of Rights by the Subscription Agent according to the
procedures described in the Prospectus.
_______________________________________________________________
Signature(s) of Subscriber(s)
_______________________________________________________________
Address for delivery of shares if other than shown on front
If permanent change of address, check here [ ]
Please give your telephone number
(__)______________________________________
TO TRANSFER RIGHTS:(except pursuant to D or E above): For value received, _____
of the Rights represented by the Subscription Certificate are assigned to:
- ---------------------------------------------------------------
(Print Full Name of Assignee)
- ---------------------------------------------------------------
(Print Full Address)
- ---------------------------------------------------------------
Signature(s) of Assignor(s)
IMPORTANT: The Signature(s) must correspond in every particular, without
alteration, with the name(s) as printed on the reverse of this Subscription
Certificate. Your Signature must be guaranteed by: (a) a commercial bank or
trust company or (b) a member firm of a domestic stock exchange, (c) a savings
bank or credit union
Signature:_______________________________________________________
(Name of Bank or Firm)
By:_____________________________________________________________
(Signature of Officer and Title)
Exhibit E2
The New America High Income Fund, Inc.
Amendment to Terms and Conditions of
Dividend Reinvestment Plan
Dated June 1, 1992
Effective March 17, 1998, the first sentence of Section 6 on page 8 is replaced
with the following:
"Each quarter each Stockholder shall have the option of sending additional
funds, in any amount from $100 to $5,000, for the purchase on the open market
of the Fund's Common Stock for each such Stockholder's account."
Exhibit G2
[Wellington Management Company, LLP letterhead]
As of August 1, 1997
Ms. Ellen E. Terry
Vice President and Treasurer
The New America High Income Fund, Inc.
Fifth Floor
10 Winthrop Square
Boston, MA 02110
Dear Ellen:
This Letter confirms that the Investment Advisory Agreement (the
"Agreement") dated February 19, 1992 between The New America High Income Fund,
Inc. and Wellington Management Company, LLP is amended as of the date set forth
above to replace the first sentence of Section 3, "Compensation of the
Investment Adviser," of the Agreement with the following:
"For the services to be rendered by the Investment Adviser as provided in
Sections 1 and 2 of this Agreement, the Fund shall pay to the Investment
Adviser, as promptly as possible after the last day of each month, an
investment advisory fee at the annual rate of .45% of the Fund's "Average
Net Assets," based on the average weekly net asset value."
Please indicate the Fund's acceptance of this amendment by signing in the
space provided below and return one copy of this letter to me for our files.
Sincerely,
/s/ Robert W. Doran
----------------------
Robert W. Doran
Chairman
Agreed and Accepted:
The New America High Income Fund, Inc.
By: /s/ Ellen E. Terry
------------------------------
Ellen E. Terry
Vice President and Treasurer
Exhibit K14
NEW AMERICA HIGH INCOME FUND, INC.
SUBSCRIPTION RIGHTS AGENCY AGREEMENT
This Subscription Rights Agency Agreement (the "Agreement") is made as of
this ____ day of January, 1998, by and between New America High Income Fund, a
Maryland Corporation (the "Fund"); and State Street Bank and Trust Company, a
national banking association, as subscription and distribution agent ("Agent").
WHEREAS, the Fund proposes to make a subscription offer by issuing
certificates or other evidences of subscription rights, in the form designated
by the Fund (the "Subscription Certificates") to shareholders of record (the
"Shareholders") of its Common Stock, par value $.01 per share (the "Common
Stock"), as of a record date specified by the Fund (the "Record Date"), pursuant
to which each Shareholder will have certain rights (the "Rights") to subscribe
for shares of Common Stock, as described in and upon such terms as are set forth
in the final prospectus (the "Prospectus") included in the Form N-2 Registration
Statement originally filed by the Fund with the Securities and Exchange
Commission on December 24, 1997, as amended (as amended, the "Registration
Statement"), in accordance with the applicable requirements of the Securities
Act of 1933, as amended (the "Act") and the Investment Company Act of 1940, as
amended;
WHEREAS, the Fund wishes the Agent to perform certain acts on its behalf
and the Agent is willing to so act, in connection with the distribution of the
Subscription Certificates and the issuance and exercise of the Rights to
subscribe therein set forth, all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Pursuant to resolution of its Board of Directors, the Fund hereby
appoints and authorizes the Agent to act on its behalf in accordance with the
provisions hereof, and the Agent hereby accepts such appointment and agrees to
so act.
2. Each Subscription Certificate shall evidence the Rights of the
Shareholder therein named to purchase Common Stock upon the terms and conditions
therein and herein set forth.
(b) Upon the written advice of the Fund signed by its Chairman, President,
Secretary or Assistant Secretary, as to the Record Date, the agent shall, from a
list of Shareholders as of the Record Date to be prepared by the Agent in its
capacity as Transfer Agent of the Fund, prepare and record Subscription
Certificates in the names of the Shareholders, setting forth the number of
Rights to subscribe to Common Stock calculated on the basis of one Right for
each share of Common Stock recorded on the books of the Fund in the name of each
such Shareholder as of the Record Date.
1
<PAGE>
(c) Each Subscription Certificate shall be dated as of the Record Date and
shall be executed manually or by facsimiles signatures of a duly authorized
Officer of the Fund. Upon the written advice, signed as aforesaid, as to the
effective date of the Registration Statement, the Agent shall be as promptly as
practicable countersign and deliver the Subscription Certificates, together with
a copy of the Prospectus, as instructed by the Fund. No Subscription Certificate
shall be valid for any purposes unless so executed. Should any Officer whose
signature has been placed upon a Subscription Certificate cease to hold such
office at any time thereafter, such event shall have no effect on the validity
of such Subscription Certificate.
3. Rights and Issuance of Subscription Certificates.
(a) Each Subscription Certificate shall be transferable and shall, unless
exercised by the holder thereof in the manner set forth in the Prospectus expire
upon the expiration of the offer. The Agent shall, in its capacity as transfer
agent for the Fund, maintain a register of Subscription Certificates and the
holders of record thereof (each of whom shall be deemed a "Rightholder"
hereunder for purposes of determining the rights of holders of Subscription
Certificates). Each Subscription Certificate shall, subject to the provisions
thereof, entitle the Rightholder in whose name it is recorded to the following:
(1) The right (the "Basic Subscription Right") to purchase a number of
shares of Common Stock equal to one share of Common Stock for every one
Right; provided, however, that no fractional shares of Common Stock shall
be issued; and
(2) The right (the "Oversubscription Right") to purchase additional
shares of Common Stock, subject to the availability of such shares and to
allotment of such shares as may be available among Rightholders who
exercise Oversubscription Rights on the basis specified in the Prospectus;
provided, however, that a Rightholder who has not exercised his Basic
Subscription Right with respect to the full number of shares that such
Rightholder is entitled to purchase by virtue of his Basic Subscription
Right as of the Expiration Date, if any, shall not be entitled to any
Oversubscription Right.
(b) A Rightholder may exercise his Basic Subscription Right and
Oversubscription Right by delivery to the Agent at its corporate office
specified in the Prospectus of (i) the Subscription Certificate with respect
thereto, duly executed by such Rightholder in accordance with and as provided by
the terms and conditions of the Subscription Certificate, together with (ii) the
estimated subscription price for each share of Common Stock subscribed for by
exercise of such Rights, in United States dollars by money order or check drawn
on a bank located in the U.S. and in each case payable to the order of "The New
America High Income Fund, Inc."
(c) Rights may be exercised at any time after the date of issuance of the
Subscription Certificates with respect thereto but no later than 5:00 P.M.
Eastern Time on such date as the Fund shall designate to the Agent in writing
(the "Expiration Date"). For the purpose of determining the time of the exercise
of any Rights, delivery of any material to the Agent shall
2
<PAGE>
be deemed to occur when such materials are received at the corporate office of
the Agent specified in the Prospectus.
(d) Not withstanding the provisions of Section 3(b) and 3(c) above
regarding delivery of an executed Subscription Certificate to the Agent prior to
5:00 P.M. New York City Time on the Expiration Date, if prior to such time the
Agent receives a properly completed and executed notice of guaranteed delivery
in the form accompanying the Prospectus by facsimile (telecopier) or otherwise
from a financial institution that is a member of the Securities Transfer Agents
Medallion Program, the Stock Exchange Medallion Program or the New York Stock
Exchange Medallion Signature Program, guaranteeing delivery of (i) payment of
the full subscription price for shares purchased and subscribed for by virtue of
a Subscription Certificate, and (ii) a properly completed and executed
Subscription Certificate, then such exercise of Basic Subscription Rights and
Oversubscription Rights shall be regarded as timely, subject, however, to
receipt of the duly-executed Subscription Certificate by the Agent within three
business days after the Expiration Date and receipt of full payment within ten
business days after the Confirmation Date (as defined below).
(e) On a date (the "Confirmation Date") that is no later than four business
days after the Expiration Date, the Agent shall send a confirmation to each
Rightholder (or, for shares of Common Stock on the Record Date held by Cede &
Co. or any other depository or nominee, to Cede & Co. or such other depository
or nominee), showing (i) the number of shares acquired pursuant to the Basic
Subscription Rights, (ii) the number of shares, if any, acquired pursuant to the
Oversubscription Rights, (iii) the per share (the "Subscription Price") and
total purchase price for the shares, and (iv) any additional amount payable by
the Rightholder to the Fund or any excess to be refunded by the Fund to the
Rightholder, in each case, based on the Subscription Price. Any additional
payment required from a Rightholder must be received by the Agent within ten
business days after the Confirmation Date. Any excess payment to be refunded by
the Fund to a Rightholder shall be mailed by the Agent to the Rightholder as
provided in Section 6 below.
4. If, after allocation of shares of Common Capital Stock to persons
exercising Basic Subscription Rights, there remain unexercised Rights, then the
Agent shall allot the shares issuable upon exercise of such unexercised Rights
(the "Remaining Shares") to persons exercising Oversubscription Rights, in the
amounts of such oversubscriptions. If sufficient Remaining Shares are not
available to honor all oversubscriptions, the available shares will be allocated
first among persons exercising Oversubscription Rights who subscribe for an
aggregate of 1,000 or fewer shares (inclusive of shares subscribed for by such
persons exercising Oversubscription Rights in the Primary Subscription). Shares
remaining thereafter will be allocated among those who oversubscribe based on
the number of Rights originally exercised by them in the Primary Subscription.
The percentage of Remaining Shares each person exercising Oversubscription
Rights 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 oversubscriptions is
distributed on a pro rata basis.
3
<PAGE>
5. All proceeds from the exercise of Rights shall be held by the Agent in a
segregated, interest-bearing account in the name of the Fund. The Agent shall
advise the Fund immediately upon the completion of the allocation set forth
above as to the total number of shares subscribed and distributable.
6. (a) The Agent shall mail to the Rightholders as promptly as practicable
after the Confirmation Date and after full payment for the shares subscribed for
has cleared: (i) certificates representing those shares purchased pursuant to
exercise of Basic Subscription Rights and those shares purchased pursuant to the
exercise of Oversubscription Rights; and (ii) in the case of each Rightholder
who subscribed and paid for shares at an estimated Subscription Price greater
than the actual Subscription Price, a refund in the amount of the difference
between the estimated Subscription Price and the actual Subscription Price.
(b) The Agent shall deliver the proceeds of the exercise of Rights to the
Fund as promptly as practicable, but in no event later than 20 business days
after the Confirmation Date.
7. (a) The Agent shall account promptly to the Fund with respect to Rights
exercised and concurrently account for all monies received and returned by the
Agent with respect to the purchase of shares of Common Stock upon the exercise
of Rights.
(b) The Agent will advise the Fund from day to day during the period of,
and promptly after the termination of, the Offer as to all the names and
addresses of Rightholders exercising Rights, the total number of Rights,
exercised by each Rightholder during the immediately preceding day (indicating
the total number of Rights verified to be proper form for exercise, rejected for
exercise and being processed) and the number of Rights exercised on Subscription
Certificates indicating a soliciting broker as the broker-dealer with respect to
such exercise and such other information as the Fund may reasonably request.
(c) The Agent shall notify the Fund no later than 5:00 p.m., Eastern Time,
on the first business day following the Expiration Date, of the number of Rights
exercised, the total number of Rights verified to be in proper form for
exercise, rejected for exercised and being processed, and the number of Rights
exercised on Subscription Certificates indicating a soliciting broker as the
broker-dealer with respect to such exercise and such other information as the
Fund or the Dealer Manager may reasonably request.
(d) Upon request of the Fund after the Confirmation Date, the Agent shall
notify the Fund of any Right with respect of which the full amount due upon the
exercise thereof has not been received and the soliciting broker, if any,
specified as the broker-dealer with respect to such right.
8. In the event the Agent does not receive, within ten business days after
the Confirmation Date, any amount due from a Rightholder as specified in Section
3 (e), then it shall take such action with respect to such Rightholder's Rights
as may be instructed in writing by the Fund, including without limitation (i)
applying any payment actually received by it toward the
4
<PAGE>
purchase of the greatest whole number of shares of Common Stock which could be
acquired with such payment, (ii) allocating unpaid for shares subject to such
Subscription Rights to one or more other Rightholders, and (iii) selling all or
a portion of the shares of Common Stock deliverable upon exercise of such Rights
on the open market, and applying the proceeds thereof to the amount owed.
9. No Subscription Certificate shall entitle a Rightholder to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purpose, nor shall anything contained in any Subscription Certificate be
construed to confer upon any Rightholder any of the rights of a shareholder of
the Fund or any right to vote, give or withhold consent to any action by the
Fund (whether upon any recapitalization, issue of stock, reclassification of
stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings of other action affecting shareholders or receive dividends or
otherwise, until the Rights evidenced thereby shall have been exercised and the
shares of Common Stock purchasable upon the exercise thereof shall have become
deliverable as provided in this Agreement and in the Prospectus.
10. If there shall be delivered to the Agent (i) evidence to the Agent's
and the Fund's satisfaction of the destruction, loss or theft of any
Subscription Rights and (ii) such security or indemnity as may be required by
the Agent and the Fund to save each of them harmless, then, in the absence of
notice to the Agent that the Rights evidenced by such Subscription Rights have
been acquired by a bona fide purchaser, the Agent may issue a new Subscription
Certificate for a like number of Rights in substitution for the Subscription
Certificate so lost, stolen or mutilated or destroyed.
11. (a) The Fund covenants that all shares of Common Stock issued on
exercise of Rights will be validly issued, fully paid, non-assessable and free
of preemptive rights.
(b) Upon request, the Fund shall furnish to the Agent an opinion of counsel
or other evidence satisfactory to the Agent to the effect that a registration
statement is then in effect with respect to its shares of Common Stock issuable
upon exercise of the Rights set forth in the Subscription Rights. Upon written
advice to the Agent that the Securities and Exchange Commission shall have
issued or threatened to have issued any order preventing or suspending the use
of the Prospectus, or if for any reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Act, the Agent shall cease
acting hereunder until receipt of written instructions from the Fund and such
assurances as it may reasonably request that it may comply with such instruction
without violations of the Act.
12. (a) Any corporation into which the Agent may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Agent shall be a party, or any
corporation succeeding to the corporate trust business of the Agent, shall be
the successor to the Agent hereunder without the execution or filing of any
document by any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor to the Agent. In case at the time such
successor to the Agent shall succeed to the agency created by this Agreement,
any of the Subscription Certificates
5
<PAGE>
shall have been countersigned but not delivered, any such successor to the Agent
may adopt the countersignature of the Agent and deliver such Subscription
Certificates as countersigned, and in case at that time any of the Subscription
Certificates shall not have been countersigned, the successor to the Agent may
countersign such Subscription Certificates either in the name of the Agent or in
the name of the successor Agent, and in all such cases such Subscription
Certificates shall have the full force and legal effect provided in the
Subscription Certificates and in this Agreement.
(b) If, at any time, the name of the Agent shall be changed and at such
time any of the Subscription Certificates shall have been countersigned but not
delivered, the Agent may adopt the countersignature under its prior name and
deliver Subscription Certificates so countersigned, and in case at that time any
of the Subscription Certificates shall not have been countersigned, the Agent
may countersign such Subscription Certificates either in its prior name or in
its changed name, and in all such cases such Subscription Certificates shall
have the full force provided in the Subscription Certificates and in this
Agreement.
13. The Fund agrees to pay to the Agent at the completion of the offering,
on demand of the Agent, reasonable compensation for all services rendered by it
hereunder and also its reasonable out-of-pocket expenses and other disbursements
incurred in the administration and execution of this Agreement and the exercise
and performance of its duties hereunder.
14. The Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement the
Agent shall deem it necessary or desirable that any fact or matter be proved or
established, prior to taking or suffering any action hereunder, such fact or
matter (unless prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board or President or
a Vice President or the Secretary or Assistant Secretary or the Treasurer of the
Fund delivered to the Agent, and such certificate shall be full authorization to
the Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(b) The Agent shall not be responsible for and the Fund shall indemnify and
hold the Agent harmless from and against, any and all losses, damages, costs,
charges, counsel feels, payments, expenses and liability arising out of or
attributable to all actions of the Agent or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(c) The Agent shall be liable hereunder only for its own negligence or
misconduct, and for the negligence or misconduct of its agents or
subcontractors.
(d) Nothing herein shall preclude the Agent from acting in any other
capacity for the Fund or for any other legal entity;
6
<PAGE>
(e) The Agent is hereby authorized and directed to accept instructions with
respect to the performance of its duties hereunder from any officer or assistant
officer of the Fund and to apply to any such officer or assistant officer of the
Fund for advice or instructions in connection with its duties, and shall be
indemnified and not be liable for any action taken or suffered by it in good
faith in accordance with instructions of any officer or assistant officer of the
Fund; and
(f) The Agent shall be indemnified and shall incur no liability for or in
respect of any action taken, suffered, or omitted by it in reliance upon any
Subscription Certificate or Certificate for Common Stock, instrument of
assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement or other paper or document
that it reasonably believes to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper person or persons.
15. The Agent may, without the consent or concurrence of the Shareholders
in whose names Subscription Certificates are registered, by supplemental
agreement or otherwise, concur with the Fund in making any changes or
corrections in a Subscription Certificate that it shall have been advised by
counsel (who may be counsel for the Fund) is appropriate to cure any ambiguity
or to correct any defective or inconsistent provision or clerical omission or
mistake or manifest error therein or herein contained, and which shall not be
inconsistent with the provisions of the Subscription Certificate or the
Prospectus except insofar as any such change may confer additional rights upon
the Shareholders.
16. All the covenants and provisions of this Agreement by or for the
benefit of the Fund or the Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
17. The validity, interpretation and performance of this Agreement shall be
governed by the law of the Commonwealth of Massachusetts.
18. All capitalized terms used herein and not defined herein shall have the
meaning specified in the Prospectus.
7
<PAGE>
STATE STREET BANK AND THE NEW AMERICA HIGH INCOME
TRUST COMPANY FUND, INC.
_____________________________ ________________________________
Signature Signature
_____________________________ ________________________________
Title Title
8
Exhibit K15
[Corporate Investor Communications, Inc. letterhead]
December 23, 1997
Ms. Ellen Terry
The New America Income Fund, Inc.
10 Winthrop Square
Boston, Massachusetts 02110
Re: Contract Agreement
Dear Ellen:
This agreement will confirm that Corporate Investor Communications, Inc. has
been retained to act as information agent in connection with the upcoming rights
offer to the shareholders of The New America Income Fund, Inc. As information
agent, CIC will conduct a broker/nominee inquiry to ascertain the number of
beneficial owners, provide for the distribution of the offering documents to the
reorganization departments of each institution and forward additional materials
as requested. CIC will respond to the volume of shareholder inquiries regarding
the terms of the offer and proper execution of the documents and will monitor
the response rate for the duration of the offer. CIC can, if requested,
pro-actively contact registered shareholers and non-objecting beneficial owners
(NOBOs) to help promote a high level of participation.
Our fee to act as information agent based on a distribution of 20,000 sets of
offering documents and the duration of the offer will be $8,000. Our fees for
contacting NOBOs and registered holders, if requested, will include a unit fee
of $2.75 per holder contacted, a $300 set-up fee and out-of-pocket expenses
related to telephone number lookups. CIC will be reimbursed for all reasonable
out-of-pocket disbursements including postage, telephone and courier charges,
data transmissions and other expenses approved by your company. A retainer of
$4,000 is required to cover initial expenses and will be credited to your final
service charges. The retainer must be received prior to the mailing of
materials.
The company above hereby agrees to indemnify Corporate Investor Communications,
Inc.'s officers and employees against any and all losses, claims and expenses
incurred by CIC in conjunction with the services provided except to the extent
any such loss, claim or expense is the result of the negligence of any CIC
officer or employee. Reimbursement will be made to indemnified persons at the
time such loss, claim or expense is incurred. The company shall not be
responsible for any losses, claims and expenses incurred by CIC which result
from CIC's gross negligence or willful misconduct.
Please forward an executed agreement to our office and retain the other copy.
The New America Income Fund, Inc. Corporate Investor Communications, Inc.
Signed:__________________________ Signed:_________________________________
Name:____________________________ Name:___________________________________
Title:___________________________ Title:__________________________________
Date:____________________________ Date:___________________________________
Exhibit K16
[Letterhead of First Albany Corporation]
December 18, 1997
Board of Directors
The New America High Income Fund, Inc.
Ten Winthrop Square
Boston, Massachusetts 02110
Attention: Mr. Robert F. Birch
President
Gentlemen:
First Albany Corporation ("First Albany") is pleased to act as exclusive
financial advisor to the New America High Income Fund, Inc. (the "Fund") in
connection with a best efforts offering (the "Offering") of approximately
16,200,000 shares of the Fund's common stock (the "Common Stock"), pursuant to
transferable subscription rights (the "Rights"). This letter agreement is to
confirm our understanding with respect to our engagement.
In connection with First Albany's engagement hereunder, we anticipate that
our activities would include, as appropriate, the following:
(1) Assisting the Fund in structuring the Offering;
(2) Performing analysis and providing recommendations to the Fund relative
to the pricing of the Offering;
(3) Coordinating the process and activities of members of the working
group;
(4) Reviewing the business and financial characteristics of the Fund,
including, among other things a review of its investment philosophy,
absolute and relative investment performance, litigation and
regulatory background, dividend policy, management changes, fee
structure, financial results and portfolio composition;
(5) Assisting the Fund with the preparation of a Prospectus, Registration
Statement on Form N-2, other regulatory filings, order forms, sales
materials and other documentation for use in connection with the
Offering; and
<PAGE>
The New America High Income Fund, Inc.
December 18, 1997
Page 2
(6) Working with the Fund and its proxy solicitor to develop and execute a
communications process designed to ensure maximum contact with current
prospective Fund shareholders.
The Fund agrees to pay First Albany for its investment banking services a
$40,000 non-refundable advisory fee, $15,000 of which is due as of the date
hereof and $25,000 of which is due upon the expiration date of the Offering, in
each case payable in cash. In addition to any fees that may be payable to First
Albany under this letter agreement, the Fund agrees to reimburse First Albany,
upon request from time to time, for its out-of-pocket expenses incurred in
connection with First Albany's activities under this letter agreement, subject
to a limit of $1,000 in the aggregate, which may be revised under the mutual
written agreement of the Fund and First Albany.
The Fund will furnish First Albany with such information as First Albany
believes appropriate to its assignment and all other information material to an
investment decision to purchase or exercise rights (all such information so
furnished being the "Information"). The Fund recognizes and confirms that First
Albany (a) will use and rely primarily on the Information and on information
available from generally recognized public sources in performing the services
contemplated by this letter agreement without having independently verified the
same, (b) does not assume responsibility for the accuracy or completeness of the
Information and such other information and (c) will not make an appraisal of any
assets of the Fund
The Fund agrees to indemnify First Albany and its affiliates and its and
their respective directors, officers, employees, agents and controlling persons
(First Albany and each person being an "Indemnified Party") from and against any
and all losses, claims, damages and liabilities, joint or several to which such
an Indemnified Party may become subject under any applicable federal or state
law, or otherwise, and related to or arising out of the Offering contemplated by
this letter agreement or the engagement of First Albany pursuant to, and the
performance by First Albany of the services contemplated by, this letter
agreement and will reimburse any Indemnified Party for all expenses (including
without limitation counsel fees and expenses) promptly as they are incurred in
connection with the investigation of, preparation for or defense of any pending
or threatened claim or any action or proceeding arising therefrom, whether or
not such Indemnified Party is a party and whether or not such claim, action or
proceeding is initiate or brought by or on behalf of the Fund. The Fund also
agrees than no Indemnified Party shall have any liability (whether direct or
indirect, in contract or tort or otherwise) to the Fund or its security holders
or creditors related to or arising out the engagement of First Albany pursuant
to, or the performance by First Albany of the services contemplated by, this
letter agreement except to the extent that any loss, claim, damage or liability
is found in a final judgment by a court to have resulted form First Albany's bad
faith or gross negligence.
<PAGE>
The New America High Income Fund, Inc.
December 18, 1997
Page 3
If the indemnification of an Indemnified Party provided for in this letter
agreement is for any reason held unenforceable, the Fund agrees to contribute to
the losses, claims, damages and liabilities for which such indemnification is
held unenforceable (i) in such proportion as is appropriate to reflect the
relative benefits to the Fund, on the one hand, and First Albany on the other
hand, of the Offering contemplated hereby (whether or not any such Offering is
consummated) or (ii) if (but only if) the allocation provided for in clause (i)
is for any reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) but also the
relative fault of the Fund, on the one hand, and First Albany, on the other
hand, as well as any other relevant equitable considerations. The Fund agrees
that for the purpose of this paragraph the relative benefits to the Fund and
First Albany of the offering contemplated hereby shall be deemed to be in the
same proportion that the total value received by the Fund as a result of or in
connection with such Offering bears to the solicitation fees paid to First
Albany under this letter agreement; provided, however, that, in no event shall
the indemnified parties be required to contribute an aggregate amount in excess
of the aggregate solicitation fees actually paid to First Albany under this
agreement.
The Fund agrees that, without First Albany's prior written consent, it will
not settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding in respect of which indemnification could
be sought under the indemnification provision of the letter agreement (whether
or not First Albany or any other Indemnified Party is an actual or potential
party to such claim, action or proceeding), unless such settlement, compromise
or consent includes an unconditional release of each Indemnified Party form all
liability arising out of such claim, action or proceeding.
The Fund acknowledges and agrees that First Albany has been retained to act
solely as financial advisor. In such capacity, First Albany shall act as an
independent contractor, and any duties of First Albany arising out of its
engagement pursuant to this letter agreement shall be owed solely to the Fund.
Notwithstanding any of the foregoing terms, First Albany's engagement
hereunder will commence as of the date hereof and may be terminated by either
the Fund or First Albany at any time commencing eight months after the date of
this letter upon thirty days' prior written notice to that effect to the other
party, it being understood that the provisions relating to the payment of fees
and expenses, indemnification, limitations on the liability of Indemnified
Parties, contribution, settlements, the status of First Albany as an independent
contractor, the limitation on to whom First Albany shall owe any duties and
waiver of the right to trial by jury will survive any such termination.
In the event that an Indemnified Party is requested or required to appear
as a witness in any action brought by or on behalf of or against the Fund in
which such Indemnified Party is not named as a defendant, the Fund agrees to
reimburse First Albany and such Indemnified Parties promptly for all expenses
incurred by it in connection with such Indemnified Party's
<PAGE>
The New America High Income Fund, Inc.
December 18, 1997
Page 4
appearing and preparing to appear as such a witness, including, without
limitation, the fees and disbursements if its legal counsel, and to compensate
First Albany in an amount to be mutually agreed upon.
No waiver, amendment or other modifications of this letter agreement shall
be effective unless in writing and signed by each party to be bound thereby.
The letter agreement shall be governed by, and construed in accordance
with, the laws of the State of New York applicable to contracts executed in and
to be performed in that state. The Fund hereby consents to the jurisdiction of
the New York courts.
Each of First Albany and the Fund (in its own behalf and, to the extent
permitted by applicable law, on behalf of its shareholders) waives all right to
trial by jury in any action, proceeding or counterclaim (whether based upon
contract, tort or otherwise) related to or arising out of the engagement of
First Albany pursuant to, or the performance by First Albany of the services
contemplated by, this letter agreement.
<PAGE>
The New America High Income Fund, Inc.
December 18, 1997
Page 5
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to First Albany the duplicate copy of this letter
agreement enclosed herewith.
Very truly yours,
First Albany Corporation
By: /s/Michael S. Burd
----------------------------
Michael S. Burd
Senior Vice President
Accepted and agreed to as of the date first written above:
The New America High Income Fund, Inc.
By: /s/Robert F. Birch
------------------------------
Its: President
-----------------------------
Exhibit L
[Venable, Baetjer and Howard, LLP letterhead]
February 4, 1998
The New America High Income Fund, Inc.
Ten Winthrop Square, Fifth Floor
Boston, MA 02110
Ladies and Gentlemen:
We have acted as special Maryland counsel for The New America High Income
Fund, Inc., a Maryland corporation (the "Fund"), in connection with the issuance
of up to 16,241,581 additional shares of the Fund's common stock, par value $.01
per share (the "Additional Common Stock") pursuant to the Fund's rights offering
(the "Offering") as described in its Registration Statement filed with the
Securities and Exchange Commission on Form N-2, Securities Act File No.
333-43315 and Investment Company Act No. 811- 5399 (the "Registration
Statement"). All capitalized terms not otherwise herein defined shall have the
meaning set forth in the Registration Statement.
As special Maryland counsel for the Fund, we are familiar with its Charter
and Bylaws, as amended. We have examined its Registration Statement on Form N-2,
including the prospectus contained therein, substantially in the form in which
it is to become effective (the "Registration Statement"). We have further
examined and relied upon a certificate of the Maryland State Department of
Assessments and Taxation to the effect that the Fund is duly incorporated and
existing under the laws of the State of Maryland and is in good standing and
duly authorized to transact business in the State of Maryland.
We have also examined and relied upon such corporate records of the Fund
and other documents and certificates with respect to factual matters as we have
deemed necessary to render the opinion expressed herein. We have assumed,
without independent
<PAGE>
The New America High Income Fund, Inc.
February 4, 1998
Page 2
verification, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity with originals of all
documents submitted to us as copies.
Based on such examination, we are of the opinion:
1. The Fund is duly organized and validly existing as a corporation in
good standing under the laws of the State of Maryland.
2. The issuance and sale of the Additional Common Stock pursuant to the
Offering have been duly authorized by all necessary corporate actions
on the part of the Corporation.
3. Upon the issuance and sale of the Additional Common Stock pursuant to
the Offering, the Additional Common Stock will be validly issued,
fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities or "blue sky" laws
of Maryland, to federal securities laws or to other laws.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to us under the caption "Certain Legal Matters"
in the Prospectus. We do not thereby admit that we are "experts" as that term is
used in the Securities Act of 1993, as amended, and the regulations thereunder.
Very truly yours,
/s/Venable, Baetjer and Howard LLP
----------------------------------
Exhibit N
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
for The New America High Income Fund, Inc. dated January 23, 1998 (and to all
references to our firm) included in or made a part of Pre-Effective Amendment
No. 1 to the Fund's Registration Statement File No. 333-43315 on Form N-2 and
Amendment No. 24 to Registration Statement File No. 811-5399 on Form N-2 filed
February 4, 1998.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 3, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 389,971
<INVESTMENTS-AT-VALUE> 392,102
<RECEIVABLES> 9,020
<ASSETS-OTHER> 43
<OTHER-ITEMS-ASSETS> 310
<TOTAL-ASSETS> 401,475
<PAYABLE-FOR-SECURITIES> 2,615
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,235
<TOTAL-LIABILITIES> 7,850
<SENIOR-EQUITY> 150,000
<PAID-IN-CAPITAL-COMMON> 327,393
<SHARES-COMMON-STOCK> 48,453
<SHARES-COMMON-PRIOR> 35,717
<ACCUMULATED-NII-CURRENT> 370
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (86,319)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,181
<NET-ASSETS> 393,625
<DIVIDEND-INCOME> 244
<INTEREST-INCOME> 33,307
<OTHER-INCOME> 366
<EXPENSES-NET> 2,378
<NET-INVESTMENT-INCOME> 31,539
<REALIZED-GAINS-CURRENT> 11,676
<APPREC-INCREASE-CURRENT> (331)
<NET-CHANGE-FROM-OPS> 42,884
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 31,910
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 448
<NUMBER-OF-SHARES-SOLD> 11,982
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 754
<NET-CHANGE-IN-ASSETS> 117,217
<ACCUMULATED-NII-PRIOR> 371
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,087
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,378
<AVERAGE-NET-ASSETS> 360,374
<PER-SHARE-NAV-BEGIN> 4.94
<PER-SHARE-NII> .70
<PER-SHARE-GAIN-APPREC> .25
<PER-SHARE-DIVIDEND> .70
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.03
<EXPENSE-RATIO> .66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
