This Term Sheet, taken together with the Preliminary Prospectus dated May
11, 1998 (the "Preliminary Prospectus"), pursuant to Rule 434 under the
Securities Act of 1933, as amended, shall be deemed to constitute the final
prospectus for purposes of Section 10(a) of such Act with respect to the shares
of Auction Term Preferred Stock Series D of The New America High Income Fund,
Inc. offered hereby. Capitalized terms in this Term Sheet which are not defined
herein will have the meaning defined in the Preliminary Prospectus.
TERM SHEET
- ----------
Used pursuant to Rule 434 under the Securities Act of 1933, as amended
(Supplement to Preliminary Prospectus dated May 11, 1998)
$60,000,000
The New America High Income Fund, Inc.
Auction Term Preferred Stock ("ATP")
2,400 Shares, Series D
Liquidation Value--$25,000 Per Share
---------------
Terms of the Offering
The information appearing in the cover page of the Preliminary Prospectus
is supplemented and restated as follows:
<TABLE>
<CAPTION>
================================================================================
Price to Proceeds to
Public(1) Sales Load(2) Fund(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ......... $ 25,000 $ 212.50 $ 24,787.50
Total ............. $60,000,000 $510,000 $59,490,000
================================================================================
</TABLE>
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deducting offering expenses payable by the Fund, estimated at
$210,000.
---------------
The shares of ATP are offered by the Underwriter, subject to prior sale,
when, as and if issued by the Fund and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. It is expected that the one certificate for the ATP will be
delivered to the nominee of The Depository Trust Company on or about May 20,
1998.
---------------
The figures in the table above under the headings "Sales Load" and
"Proceeds to Fund" modify the related figures in the Preliminary Prospectus
under "Capitalization and Information Regarding Senior Securities" in the
second column opposite the captions "Capital in excess of par", "NET ASSETS",
"Net assets attributable to Common Stock outstanding" and "Net asset value per
share of Common Stock outstanding"; under "Use of Proceeds"; and under
"Description of ATP--Asset Maintenance".
---------------
The information appearing in the first two paragraphs on page 2 of the
Preliminary Prospectus is supplemented as follows:
Dividends on shares of ATP Series D will accumulate at the Applicable Rate
from the Date of Original Issue and shall be payable on each Dividend Payment
Date thereafter, commencing June 23, 1998. The initial Dividend Period for the
shares of ATP Series D will be 34 days. Dividend Periods after the initial
Dividend Period for shares of ATP Series D shall be either Standard Term
Periods or, subject to certain conditions and with notice to the holders of
shares, periods longer or shorter than 28 days and having such durations as the
Board of Directors shall specify. The initial Auction Date will be June 22,
1998. The dividend rate for the initial Dividend Period for the shares of ATP
Series D issued pursuant to the Offering will be 5.63% per annum.
The paragraph above also supplements information under "Description of
ATP--Dividends and Dividend Periods" and "Auction Procedures--Dividend Rates
and Auction Dates" in the Preliminary Prospectus.
---------------
Merrill Lynch & Co.
---------------
The date of this Term Sheet is May 15, 1998.
<PAGE>
Underwriting
The text of the second paragraph under "Underwriting" in the Preliminary
Prospectus is supplemented and restated as follows:
The Underwriter has advised the Fund that it proposes initially to offer
the shares of ATP to the public at the public offering price set forth on the
cover page of the Prospectus and to certain dealers at such price less a
concession not in excess of $125.00 per share. The Underwriter may allow, and
such dealers may reallow, a discount not in excess of $31.25 per share on sale
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed. The sales load of
$212.50 per share is equal to .85% of the initial public offering price.
Investors must pay for any shares of ATP purchased in the initial public
offering on or before May 20, 1998.
---------------
This Term Sheet also supplements the Preliminary Statement of Additional
Information dated May 11, 1998.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 11, 1998
PROSPECTUS
- ----------
$60,000,000
The New America High Income Fund, Inc.
Auction Term Preferred Stock ("ATP")
2,400 Shares, Series D
Liquidation Value--$25,000 Per Share
---------------
The New America High Income Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company with a leveraged capital structure.
The Board of Directors of the Fund appoints the Fund's investment adviser
annually. Currently, Wellington Management Company, LLP (the "Investment
Adviser" or "Wellington Management") 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"). The Fund invests primarily
in "high yield" fixed income securities rated in the lower categories by
established rating agencies and non-rated securities deemed by the Investment
Adviser to be of comparable quality. Such securities have predominantly
speculative characteristics and involve greater volatility of price and risk to
principal and income than securities in higher rating categories. See "Risk
Factors and Special Considerations."
The Fund's address is 33 Broad Street, Boston, Massachusetts 02109 and its
telephone number is (617) 263-6400. This Prospectus sets forth concisely the
information regarding the Fund that a prospective investor should know before
investing. Prospective investors should carefully review the information set
forth in this Prospectus and should retain this Prospectus for future
reference. A Statement of Additional Information dated May , 1998 containing
additional information regarding the Fund has been filed with the Securities
and Exchange Commission and is hereby incorporated by reference in its entirety
into this Prospectus. A copy of the Statement of Additional Information, the
table of contents of which appears on page 29 of this Prospectus, may be
obtained without charge by contacting the Fund at the address or phone number
set forth above. (Text continued on the following page.)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE
================================================================================
<TABLE>
<CAPTION>
Price to Proceeds to
Public(1) Sales Load(2) Fund(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ......... $ 25,000 $ $
- --------------------------------------------------------------------------------
Total ............. $60,000,000 $ $
</TABLE>
================================================================================
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deducting offering expenses payable by the Fund, estimated at
$210,000.
---------------
The shares of ATP are offered by the Underwriter, subject to prior sale,
when, as and if issued by the Fund and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. It is expected that the one certificate for the ATP will be
delivered to the nominee of The Depository Trust Company on or about May ,
1998.
---------------
Merrill Lynch & Co.
---------------
The date of this Prospectus is May , 1998.
[red herring]
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.
<PAGE>
The Fund currently has issued and Outstanding 2,400 shares of Auction Term
Preferred Stock Series A, 1,600 shares of Auction Term Preferred Stock Series
B, and 2,000 shares of Auction Term Preferred Stock Series C. The Fund is
initially offering 2,400 shares of ATP Series D at a price per share of $25,000
(the "Offering").
The dividend rate for the initial Dividend Period for the shares of ATP
Series D issued pursuant to the Offering will be % per annum. For each
Dividend Period following the initial Dividend Period, the dividend rate on
shares of ATP Series D will be the Applicable Rate for such series in effect
from time to time as determined, except as described herein, on the basis of
Orders placed in an Auction conducted on the Business Day preceding the
commencement of such Dividend Period, as set forth herein. The Applicable Rate
that results from an Auction for any Dividend Period will not be greater than
the Maximum Applicable Rate then in effect.
Dividends on shares of ATP Series D will accumulate at the Applicable Rate
from the Date of Original Issue and shall be payable on each Dividend Payment
Date thereafter, commencing June , 1998. The initial Dividend Period for the
shares of ATP Series D will be days. Dividend Periods after the initial
Dividend Period for shares of ATP Series D shall be either Standard Term
Periods or, subject to certain conditions and with notice to the holders of
shares, periods longer or shorter than 28 days and having such durations as the
Board of Directors shall specify (each, an "Alternate Term Period"). The
initial Auction Date will be June , 1998.
Subject to compliance with certain conditions, shares of ATP Series D may
be redeemed, in whole or in part, at the option of the Fund at a redemption
price per share equal to their Liquidation Value per share, plus accumulated
and unpaid dividends thereon to the date fixed for redemption plus (in the case
of a Dividend Period of one year or more only) a redemption premium, if any,
determined by the Board of Directors after consultation with the
Broker-Dealers. The ATP will, subject to certain conditions, be subject to
mandatory redemption, in whole or in part, if the Fund does not maintain the
"aaa"/AAA Credit Rating for the ATP or if the Fund, on any Valuation Date or
the last Business Day of any month, shall fail to meet the ATP Basic
Maintenance Amount or the 1940 Act ATP Asset Coverage, respectively, and in any
such case such failure is not cured on a timely basis as specified herein. It
is a condition of the Underwriter's obligation to purchase the ATP Series D
that the ATP Series D be rated "aaa" by Moody's and AAA by Fitch as of the Date
of Original Issue. See "Description of ATP--Ratings."
Certain capitalized terms not otherwise defined in this Prospectus have
the meanings provided in the Glossary included as part of this Prospectus.
2
<PAGE>
FINANCIAL HIGHLIGHTS
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
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value: (For Each Share of Common Stock Outstanding Throughout the Period)
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) ................... $243,625 $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
<CAPTION>
Period From
February 26, 1988
For the Years Ended December 31, (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%
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
</TABLE>
3
<PAGE>
Financial Highlights (continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
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>
<S> <C> <C> <C> <C> <C>
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.
4
<PAGE>
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
Capitalization
The following table of unaudited financial information sets forth the
total assets and liabilities of the Fund and the net assets of the Fund, as of
March 31, 1998 and as adjusted to give effect to the issuance of all of the
shares of ATP Series D.
<TABLE>
<CAPTION>
Actual As Adjusted
-------------- --------------
(in thousands)
<S> <C> <C>
Total Assets ................................................................... $487,702 $ 546,982
Total Liabilities Including Liquidation Value of Auction Term Preferred Stock .. (155,978) (215,978)
--------- ---------
Net Assets Attributable to Common Stock Outstanding ............................ $331,724 $ 331,004
========= =========
NET ASSETS REPRESENTS:
Preferred Stock, 1,000,000 shares authorized ....................................
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 as adjusted ...................................................... $ 50,000 $ 50,000
Auction Term Preferred Stock Series D, $1.00 par value, liquidation preference
$25,000 per share, 2,400 shares authorized, 0 shares issued and outstanding,
2,400 shares issued and outstanding as adjusted .............................. $ -- $ 60,000
Common Stock
Common Stock, $.01 par value, 200,000,000 shares authorized, 64,967,074
shares issued and outstanding ................................................ $ 650 $ 650
Capital in excess of par value ................................................. 404,518 403,798
Accumulated net realized loss from security transactions ....................... (78,294) (78,294)
Net unrealized appreciation on investments ..................................... 1,826 1,826
Accumulated undistributed net investment income ................................ 3,024 3,024
--------- ---------
NET ASSETS ...................................................................... $481,724 $ 541,004
Less liquidation value of Auction Term Preferred Stock ........................ (150,000) (210,000)
--------- ---------
Net assets attributable to Common Stock outstanding ............................ $331,724 $ 331,004
========= =========
Net asset value per share of Common Stock ...................................... $ 5.11 $ 5.09
========= =========
</TABLE>
5
<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 $150 million plus accumulated and unpaid dividends. See
"Description of ATP," "The Fund" and "Financial Statements." In May 1997, an
additional series of newly authorized Auction Term Preferred Stock having an
aggregate liquidation preference of $50 million plus accumulated and unpaid
dividends was issued.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------
1997 1996 1995 1994
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total Amount Outstanding
Notes .................... $ -- $ -- $ -- $ --
Preferred Stock .......... 150,000,000 100,000,000 100,000,000 100,000,000
Short-Term Loan .......... -- -- -- --
Asset Coverage
Per $1,000 of
Note (1) ................ $ -- $ -- $ -- $ --
Per Preferred Stock
Share (2) ............... 65,604 69,102 66,206 60,398
Per $1,000 of
Short-Term
Loan (1) ................ $ -- -- -- --
Involuntary Liquidation
Preference
Preferred Stock
Share(3) ............... $ 25,000 $ 25,000 $ 25,000 $ 25,000
Approximate Market Value
Per Note ................. $ -- $ -- $ -- $ --
Per Preferred
Stock Share(3) .......... 25,000 25,000 25,000 25,000
Per $1,000 of
Short-Term Loan ......... $ -- -- -- --
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
-------------- -------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total Amount Outstanding
Notes .................... $ -- $45,490,000 $45,490,000 $47,990,000 $96,100,000 $105,000,000
Preferred Stock .......... 35,000,000 35,000,000 35,000,000 35,000,000 58,500,000 79,000,000
Short-Term Loan .......... 45,000,000 -- -- -- -- --
Asset Coverage
Per $1,000 of
Note (1) ................ -- $ 4,141 $ 3,819 $ 3,476 $ 3,192 $ 3,680
Per Preferred Stock
Share (2) ............... 473,351 408,277 366,363 339,466 360,096 356,156
Per $1,000 of
Short-Term
Loan (1) ................ 4,682 -- -- -- -- --
Involuntary Liquidation
Preference
Preferred Stock
Share(3) ............... $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
Approximate Market Value
Per Note ................. $ -- $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Per Preferred
Stock Share(3) .......... 100,000 100,000 100,000 100,000 100,000 100,000
Per $1,000 of
Short-Term Loan ......... 1,000 -- -- -- -- --
</TABLE>
- ------------
(1) Calculated by subtracting the Fund's total liabilities (not including
senior securities) from the Fund's total assets and dividing such amount
by the number of notes outstanding.
(2) Calculated by subtracting the Fund's total liabilities (including senior
securities constituting debt but not including Preferred Stock) from the
Fund's total assets and dividing such amount by the number of Preferred
Shares outstanding.
(3) Plus accumulated and unpaid dividends.
6
<PAGE>
PORTFOLIO COMPOSITION
(Unaudited)
As of December 31, 1997, the Fund's portfolio included 156 holdings issued
by 139 different issuers (consolidated by affiliated companies) having an
average yield to maturity of 9.45%. The weighted average maturity of the
portfolio at this date was approximately 7.50 years.
The dollar weighted average of Moody's 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. See the Statement of Additional Information hereto for a
description of the ratings system used by Moody's.
<TABLE>
<CAPTION>
Moody's Percentage
Rating of Portfolio
- ------ ------------
<S> <C>
Baa ....................... 0.68%
Ba ........................ 17.37%
B ......................... 76.69%
Caa ....................... 1.55%
Ca ........................ 0.00%
C ......................... 0.32%
NR ........................ 3.39%
------
Total ................. 100.00%
</TABLE>
7
<PAGE>
THE FUND
The New America High Income Fund, Inc. is a diversified, closed-end
management investment company with a leveraged capital structure organized as a
corporation under the laws of Maryland. The Board of Directors of the Fund
appoints the Fund's investment adviser annually. Currently, Wellington
Management Company, LLP 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 "The Investment Adviser." No assurance can be given that the Fund will
achieve its investment objective. See "Risk Factors and Special
Considerations." 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.
On February 10, 1998, the Fund issued to the holders of its Common Stock,
$.01 par value per share, transferrable rights to purchase additional shares of
Common Stock (the "Rights Offering"). As a result of the Rights Offering,
16,241,851 shares of Common Stock were issued on March 25, 1998, resulting in
gross proceeds to the Fund of $76,661,537. As of March 31, 1998, the Fund had
total assets of $481,724,318 and total net assets applicable to Common Stock
(aggregate assets less senior securities and Fund liabilities) of $331,724,318.
After giving effect to such issuance of Common Stock, the Fund's capital
structure included 64,967,074 shares of Common Stock, 2,400 shares of ATP
Series A, 1,600 shares of ATP Series B and 2,000 shares of ATP Series C. The
Fund has entered into three interest payment swap arrangements (the "Swap
Arrangements") with BankBoston, N.A. ("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 effect of the Swap
Arrangement is to hedge the Fund's dividend payment obligations with respect to
$95 million of the ATP, 63% of the ATP outstanding as of March 31, 1998. See
"Investment Objective and Policies" and "Description of Capital ATP--Dividends
and Dividend Periods." After giving effect to the issuance of ATP Series D
provided for hereunder, the swap arrangement will hedge the Fund's dividend
obligations with respect to 45% of the ATP then outstanding. The Fund makes
dividend payments to the holders of the ATP based on the results of periodic
Auctions without regard to the swap. In light of the proposed increase in the
Fund's Outstanding ATP, the Fund will consider adjustments in its swap
arrangements. The timing and amount of any such adjustment will depend upon
market conditions.
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 33 Broad Street, Boston, Massachusetts 02109, and its
telephone number is (617) 263-6400. The Investment Adviser's address is 75
State Street, Boston, Massachusetts 02109, and its telephone number is (617)
951-5000.
USE OF PROCEEDS
The net proceeds from the sale of the shares of ATP Series D offered
hereby are estimated to be approximately $59,280,000 (after deducting sales
load and estimated offering expenses of approximately $720,000). The Fund
anticipates that investment of such net proceeds in accordance with the Fund's
investment objective and policies will take up to eight weeks from their
receipt by the Fund, depending on market conditions and the availability of
appropriate securities, but in no event will such investment take longer than
six months. Pending such investment in accordance with the Fund's investment
objective and policies, the proceeds will be held in U.S. Government securities
(which include obligations of the United States Government and its agencies and
instrumentalities) and other high-quality short-term money market instruments.
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DESCRIPTION OF ATP
General
The following is a brief description of the terms of the ATP. 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 shares of ATP Series D. A form of the Articles,
including a form of the Articles Supplementary establishing the ATP Series D,
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 "Available Information."
Pursuant to the Articles, the Fund is authorized to issue 1,000,000 shares
of Preferred Stock in one or more series. The Fund has previously issued 2,400
shares of ATP Series A, 1,600 shares of ATP Series B and 2,000 shares of ATP
Series C. The Fund is offering an additional 2,400 shares of ATP Series D at a
price per share of $25,000 in the Offering.
The Liquidation Value is currently $25,000 with respect to the ATP Series
A, Series B, Series C and Series D.
Dividends and Dividend Periods
With respect to shares of ATP Series D, the initial Applicable Rate and
the first Auction Date for the initial Dividend Period will be as set forth on
the inside cover page of this Prospectus. For each subsequent Dividend Period,
subject to certain exceptions, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Fund has resulted from an Auction. See
"Description of ATP--Dividends" in the Statement of Additional Information.
The initial Dividend Period for the ATP Series D shall be days.
Dividend Periods after the initial Dividend Period shall be either Standard
Term Periods 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 Sufficient Clearing
Orders exist at the Auction in respect of such Alternate Term Period (that is,
in general, the number of shares 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.
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. For
Dividend Periods of one year or less, Dividend Payment Dates shall 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. For Dividend Periods of more than
one year, Dividend Payment Dates shall 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 will be
paid through the Securities Depository (the Depository Trust Company or a
successor securities depository) on each Dividend Payment Date. See
"Description of ATP--Dividends and Dividend Periods" in the Statement of
Additional Information. The Securities Depository's current procedures provide
for it to distribute dividends in same-day funds to Agent Members who are in
turn expected to distribute such dividends to the persons for whom they are
acting as agents.
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 (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,
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provided that immediately following any such increase the Fund would be in
compliance with the ATP Basic Maintenance Amount.
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
Submitted Hold Orders) or following the failure to hold an Auction for any
reason on the Auction Date scheduled to occur (except for circumstances in
which the Dividend Rate is the Default Rate, as described below).
A Default Period will commence if the Fund fails (i) to declare in a
timely manner the full amount of any dividend due on any Dividend Payment Date,
(ii) to pay in a timely manner to the Auction Agent the full amount of any
dividends due on the ATP or the redemption price for any shares of ATP called
for redemption, and such failure is not cured in a timely manner, or (iii) to
maintain the "aaa"/AAA Credit Rating unless such failure is cured by the
Dividend Payment Date next following the date of such failure. The Applicable
Rate for a Default Period, including any Dividend Period commencing during a
Default Period, will be the Default Rate. The Default Rate is the Reference
Rate multiplied by three. Holders of two-thirds of the ATP Series D then
Outstanding may waive any Dividend Default, Redemption Default or Rating
Default.
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) Submitted
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.
Prior to each Auction, Broker-Dealers will notify holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each Auction, on the
Auction Date, Broker-Dealers will notify holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
The Fund may enter into transactions such as swaps, caps, collars and
floors with the purpose of hedging its dividend payment obligations with
respect to the ATP. See "The Fund" and Appendix A to this Prospectus-- "Certain
Investment Practices."
Notification of Dividend Period. The Fund will designate the duration of
Dividend Periods of ATP Series D; provided, however, that no such designation
is necessary for a Standard Term Period and that such designation shall be
effective only if (i) notice thereof shall have been given as provided herein,
(ii) any failure to pay in a timely manner to the Auction Agent the full amount
of any dividend on, or the redemption price of, the ATP shall have been cured
as set forth above, (iii) Sufficient Clearing Orders shall have existed in the
Auction held on the Auction Date immediately preceding the first day of any
proposed Alternate Term Period, (iv) if the Fund shall have mailed a notice of
redemption with respect to any shares, as described under "Redemption" below,
the Redemption Price with respect to such shares shall have been deposited with
the Paying Agent, and (v) the Fund has confirmed that as of the Auction Date
next preceding the first day of such Alternate Term Period, it has Eligible
Assets with an aggregate Discounted Value at least equal to the ATP Basic
Maintenance Amount, and has consulted with the Broker-Dealers and has provided
notice and an ATP Basic Maintenance Certificate to 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 so requires.
If the Fund proposes to designate any Alternate Term Period following the
Date of Original Issuance, generally not less than 15 (or two Business Days in
the event the duration of the Dividend Period prior to such Alternate Term
Period is fewer than 15 days) nor more than 30 days prior to the first day of
such Alternate Term Period, notice shall be (i) made by press release and (ii)
communicated by the Fund by telephonic or other means to the Auction Agent and
confirmed in writing promptly thereafter. Notwithstanding the foregoing if the
duration of the Dividend Period prior to such Alternate Term Period is fewer
than 15 days, such notice shall be given not less than two Business Days prior
to such Alternate Term Period. Each such notice shall state (A) that the Fund
proposes to exercise its option to designate a succeeding Alternate Term
Period, specifying the first and last days thereof and (B) that the Fund will
by 3:00 p.m., New York City time, on the second Business Day next preceding the
first
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day of such Alternate Term Period notify the Auction Agent, who will promptly
notify the Broker-Dealers, of either (x) its determination, subject to certain
conditions, to proceed with such Alternate Term Period, in which case the Fund
shall specify the terms of any Specific Redemption Provisions, or (y) its
determination not to proceed with such Alternate Term Period in which latter
event the succeeding Dividend Period shall be a Standard Term Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Alternate Term Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers, either:
(i) a notice stating (A) that the Fund has determined to designate
the next succeeding Dividend Period as an Alternate Term Period, specifying
the first and last days thereof and (B) the terms of any Specific
Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to exercise
its option to designate an Alternate Term Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Alternate Term Period to the Auction Agent by 3:00
p.m., New York City time, on the second Business Day next preceding the first
day of such proposed Alternate Term Period, the Fund shall be deemed to have
delivered a notice to the Auction Agent with respect to such Dividend Period to
the effect set forth in clause (ii) above, thereby resulting in a Standard Term
Period.
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 such
Valuation Date in the case of a failure to maintain the ATP Basic Maintenance
Amount as of such Valuation Date 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, the ATP will be subject to mandatory redemption out of
funds legally available therefor to the extent necessary to result in the Fund
having sufficient Eligible Assets or to restore the 1940 Act ATP Asset
Coverage, as the case may be. If the Fund at any time fails to maintain the
"aaa"/AAA Credit Rating and the Fund is unable to restore the "aaa"/AAA Credit
Rating within 90 calendar days thereafter, all shares of ATP will be subject to
mandatory redemption out of funds legally available therefor. 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 rules and regulations of the Securities Exchange
Act of 1934, as amended), one of which must be Moody's or S&P. The ATP will be
rated by Moody's and Fitch on the Date of Original Issue, although the Fund
reserves the right to obtain a rating or ratings from additional and/or
substitute rating agencies, subject to the preceding sentence.
The redemption price in the event of a mandatory redemption of a share of
ATP will be the Liquidation Value of such 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 Specific
Redemption Provisions. In the event any mandatory redemption is required, the
particular shares to be redeemed shall be selected by the Fund by lot, on a pro
rata basis between each series or by such other method as the Fund shall deem
fair and equitable, subject to the terms of any Specific Redemption Provisions.
The Fund's ability to make a mandatory redemption may be limited by the
provisions of the 1940 Act or Maryland law. See "Description of
ATP--Redemption--Mandatory Redemption" in the Statement of Additional
Information. Shares of ATP may be subject to mandatory redemption in accordance
with the foregoing mandatory redemption provisions notwithstanding the terms of
any Specific Redemption Provisions.
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<PAGE>
Optional Redemption
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 per share shall be the
Liquidation Value, 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, which may include the payment of
redemption premiums to the extent required under any applicable Specific
Redemption Provisions.
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 applicable Liquidation Value, but is under no
obligation to do so.
Ratings
It is a condition of the Underwriter's obligation to purchase the ATP
Series D offered in the Offering that the Fund obtain the "aaa"/AAA Credit
Rating from Moody's and Fitch for the ATP Series D on the Date of Original
Issue. While there is no assurance that the "aaa"/AAA Credit Rating with
respect to the ATP Series D 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
Under the Fund's Articles, the Fund must maintain (i) as of each Valuation
Date, Eligible Assets having, in the aggregate, a Discounted Value at least
equal to the ATP Basic Maintenance Amount, and (ii) as of the last Business Day
of each month, 1940 Act ATP Asset Coverage of at least 200%. See "Description
of ATP Asset-Maintenance" in the Statement of Additional Information.
The Discount Factors and guidelines for calculating the Discounted Value
of the Fund's portfolio for purposes of determining whether the ATP Basic
Maintenance Amount has been satisfied have been established by Moody's and
Fitch in connection with the Fund's receipt from Moody's and Fitch of the
"aaa"/AAA Credit Rating with respect to the shares of ATP Series D on their
Date of Original Issue. See "Rating Agency Guidelines" in the Statement of
Additional Information. Additional discount factors and guidelines for
calculating the discounted value of investment company portfolios have been
established by other rating agencies, such as S&P. Such guidelines, which are
similar but not identical to those established by Moody's and Fitch, as well as
various other covenants and tests such as liquidity tests, would apply in the
event the Fund determined to seek (and was successful in obtaining) a rating
from one or more of such agencies with respect to the ATP.
The Fund estimates that on the Date of Original Issue of the ATP Series D,
based on the composition of its portfolio as of March 31, 1998, the 1940 Act
ATP Asset Coverage, after giving effect to the issuance of the shares of ATP
Series D ($60 million), and the deduction of sales load and estimated offering
expenses for such shares ($720,000), will be 258%.
Liquidation Preference
Upon a liquidation of the Fund, whether voluntary or involuntary, the
holders of ATP then Outstanding will be entitled to receive and to be paid out
of the assets of the Fund available for distribution to its stockholders,
before any payment or distribution shall be made on the Common Stock or on any
other class of shares ranking junior to the ATP upon liquidation, an amount
equal to the liquidation preference with respect to the ATP. The liquidation
preference shall be Liquidation Value plus an amount equal to accumulated but
unpaid dividends thereon (whether
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or not earned or declared) to the date payment of such distribution is made in
full or a sum sufficient for the payment thereof is set apart with the Paying
Agent; no redemption premium shall be paid upon any liquidation even if such
redemption premium would be paid upon optional or mandatory redemption of the
relevant shares. After the payment to the holders of ATP of the full
preferential amounts provided for as described herein, the holders of ATP as
such shall have no right or claim to any of the remaining assets of the Fund.
See "Description of ATP--Liquidation" in the Statement of Additional
Information.
Voting Rights
Except as otherwise indicated herein or as otherwise required by
applicable law, holders of the ATP will have equal voting rights with holders
of Common Stock (one vote per share) and will vote together with holders of
Common Stock as a single class. The 1940 Act requires that the holders of
shares of ATP, voting as a separate class, have the right to elect at least two
directors at all times and to elect a majority of the directors at any time two
years' dividends on any shares of ATP are unpaid. The holders of shares of ATP
will vote as a separate class on certain other matters as required under the
Articles or applicable law. In addition, to the extent permitted by the 1940
Act, each series of ATP may vote as a separate series in certain circumstances.
See "Management of the Fund--Directors and Officers" and "Description of
ATP--Voting Rights" in the Statement of Additional Information.
AUCTION PROCEDURES
Dividend Rates and Auction Dates
The Dividend Rate for each Dividend Period will be determined on the
Auction Date in respect of such Dividend Period. If Sufficient Clearing Orders
exist for an Auction, the Dividend Rate for the ensuing Dividend Period will be
the Winning Rate, or, if all shares in an Auction are the subject of Submitted
Hold Orders in respect of a Dividend Period of fewer than 93 days, the Minimum
Applicable Rate. If Sufficient Clearing Orders do not exist for any Auction,
the ensuing Dividend Period will be a Standard Term Period and the Dividend
Rate for that Dividend Period will be the Maximum Applicable Rate. Except in
the case of a Default as described above or where all shares of the ATP are
subject to Submitted Hold Orders, if there is no Auction on any Auction Date,
the next Dividend Period will be a Standard Term Period, and the Dividend Rate
will be the Maximum Applicable Rate that could have resulted from an Auction in
respect of a Standard Term Period on such Auction Date. The Fund is obligated
to exercise its best efforts to maintain an Auction Agent.
Orders by Existing Holders and Potential Holders
On or prior to each Auction Date and prior to the Submission Deadline
(initially 1:00 P.M., New York City time), each Existing Holder, with respect
to shares it then holds, may submit to a Broker-Dealer by telephone or
otherwise a Hold Order, a Hold/Sell Order or a Sell Order and each
Broker-Dealer will contact Potential Holders to determine the Buy Orders, if
any, to be made by such Potential Holders.
Submission of Orders to Auction Agent
Each Order must be submitted in writing by a Broker-Dealer to the Auction
Agent prior to the Submission Deadline on each Auction Date for the Auction to
be conducted on such Auction Date and must specify (A) the aggregate number of
shares that are the subject of such Order, (B) to the extent that such Orders
are placed by an Existing Holder, the number of shares, if any, subject to any
Hold Order, Hold/Sell Order or Sell Order, and (C) the rate, if any, specified
in each Order.
If any rate specified in any Order contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next higher one thousandth of 1%.
Only in the case of an Auction preceding a Dividend Period of 93 days or
fewer and following a Dividend Period of 93 days or fewer, if an Order or
Orders covering all shares held by any Existing Holder are not submitted to the
Auction Agent by the Submission Deadline, the Auction Agent will deem a Hold
Order to have been submitted on behalf of such Existing Holder covering the
number of shares held by such Existing Holder and not subject to
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Orders submitted to the Auction Agent. In the case of all other Auctions, if a
Hold/Sell or Sell Order or Orders covering all shares held by any Existing
Holder are not submitted to the Auction Agent by the Submission Deadline, the
Auction Agent will deem a Sell Order to have been submitted on behalf of such
Existing Holder covering the number of shares held by such Existing Holder and
not subject to Orders submitted to the Auction Agent.
If one or more Orders covering in the aggregate more than the number of
shares of ATP held by an Existing Holder are submitted to the Auction Agent,
such Orders will be valid in accordance with the Validity Procedures.
If more than one Order is submitted on behalf of any Existing Holder or
Potential Holder, each Order submitted will be a separate Order.
In the case of any Dividend Period of 93 days or fewer, if any rate
specified in any Order is lower than the Minimum Applicable Rate for the
Dividend Period with respect to which such Order is made, such Order will be
deemed to be an Order specifying a rate equal to such Minimum Applicable Rate.
In the case of any Dividend Period of more than 93 days, only Buy Orders,
Hold/Sell Orders or Sell Orders may be submitted and Hold Orders may not be
submitted.
Determination of Sufficient Clearing Orders and Applicable Rate
Not earlier than the Submission Deadline, on each Auction Date, the
Auction Agent will assemble all Submitted Orders and will determine whether
Sufficient Clearing Orders exist and the Applicable Rate.
Acceptance of Orders and Allocation of Shares
Based upon the results of the Auction, the Auction Agent will determine
the aggregate number of shares to be held and sold by Existing Holders and to
be purchased by Potential Holders, and, with respect to each Broker-Dealer,
determine the extent to which such Broker-Dealer will deliver, and from which
other Broker-Dealers such Broker-Dealer will receive, shares.
If Sufficient Clearing Orders exist, subject to the Rounding Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all
Submitted Hold/Sell Orders specifying any rate higher than the Winning Rate
will be accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate lower
than the Winning Rate will be accepted as Hold Orders;
(iv) all Submitted Buy Orders specifying a rate lower than the
Winning Rate will be accepted;
(v) all Submitted Hold/Sell Orders specifying a rate equal to
the Winning Rate will be accepted as Hold Orders unless the number of
shares subject to all such Submitted Hold/Sell Orders is greater than the
number of shares remaining unaccounted for after the acceptances described
in clauses (i), (iii), and (iv) above, in which event each such Submitted
Hold/Sell Order will be accepted as a Hold Order and a Sell Order as to the
respective number of shares determined in accordance with the Proration
Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to the
Winning Rate will be accepted, unless the number of shares subject to all
such Submitted Buy Orders is greater than the number of shares remaining
unaccounted for after the acceptances described in clauses (i), (iii), (iv)
and (v) above, in which event each such Submitted Buy Order will be
accepted only as to the number of shares determined in accordance with the
Proration Procedures.
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If Sufficient Clearing Orders do not exist, subject to the Rounding Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate equal to
or lower than the Maximum Applicable Rate will be accepted as Hold Orders;
(iii) all Submitted Buy Orders specifying a rate equal to or
lower than the Maximum Applicable Rate will be accepted; and
(iv) all Submitted Hold/Sell Orders specifying a rate higher
than the Maximum Applicable Rate and all Submitted Sell Orders will be
accepted as Hold Orders and as Sell Orders as to the respective number of
shares of ATP determined in accordance with the Proration Procedures.
Notification of Results; Settlement
The Auction Agent will advise each Broker-Dealer that submitted an Order
whether such Order was accepted and of the Applicable Rate for the next
Dividend Period by telephone by approximately 3:00 p.m., New York City time, on
each Auction Date. Each Broker-Dealer that submitted an Order will as soon as
practicable advise each Existing Holder and Potential Holder whether its Order
was accepted and will confirm in writing purchases and sales with each Existing
Holder and Potential Holder purchasing or selling shares as a result of an
Auction as soon as practicable on the Business Day next succeeding the Auction
Date. Each Broker-Dealer that submitted a Hold Order will advise each Existing
Holder on whose behalf such Hold Order was submitted of the Applicable Rate for
the shares of ATP for the next Dividend Period.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales as determined
in the Auction. Purchasers will make payment through their Agent Members in
same-day funds to the Securities Depository against delivery through their
Agent Members; the Securities Depository will make payment in accordance with
its normal procedures, which now provide for payment against delivery to their
Agent Members in same-day funds.
If any Existing Holder selling shares in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased shares in
such Auction may deliver to such person a number of whole shares that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
Broker-Dealers; Commissions
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after any such termination.
A Broker-Dealer may acquire shares for its own account. If a Broker-Dealer
submits an Order for its own account in an Auction, it may have an advantage
over others because it would have knowledge of other Orders placed through it
in that Auction.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch" or the
"Underwriter"), the underwriter in the Offering, intends to serve as the
initial Broker-Dealer for the ATP Series D. Other firms may serve as Broker-
Dealers in connection with Auctions, although there is no assurance that they
will do so.
The Auction Agent after each Auction will initially pay to each
Broker-Dealer from funds provided by the Fund a service charge based on the
purchase price of shares placed by the Broker-Dealer at such Auction.
Initially, the annual rate of such service charge with respect to Dividend
Periods of less than one year shall be an annual
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<PAGE>
rate of .25%, depending on the results of the Auction and, in the case of
Dividend Periods of one year or more, a percentage agreed upon between the Fund
and the Broker-Dealer. For purposes of this paragraph, shares will be placed by
a Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to
have been made by Existing Holders and were acquired by such Existing Holders
through the Broker-Dealer or (ii) the subject of an Order submitted by the
Broker-Dealer that is (A) an Order of an Existing Holder that resulted in such
Existing Holder continuing to hold such shares as a result of the Auction or
(B) an Order of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (C) a valid Hold Order. In
the event an Auction scheduled to occur on an Auction Date fails to occur for
any reason, a Broker-Dealer 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 Auction Agent
Bankers Trust Company will serve as Auction Agent for so long as ATP
Series D shares are Outstanding. The Auction Agent is acting solely as agent of
the Fund and is not a trustee for holders of ATP Series D. In the absence of
bad faith or gross negligence on its part, the Auction Agent will not be liable
to the Fund for any action taken, suffered or omitted or for any error of
judgment made by it in the performance of its duties as Auction Agent.
The Auction Agent 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 the Auction Agent.
Master Purchaser's Letter
Each prospective purchaser of shares of ATP or its Broker-Dealer will be
required to sign and deliver to the Auction Agent, as a condition to such
purchaser's purchasing shares of ATP in any Auction or otherwise, a Master
Purchaser's Letter, the form of which is attached to this Prospectus, in which
such prospective purchaser or its Broker-Dealer will agree, among other things:
(a) to participate in Auctions for shares of ATP in accordance
with the Auction Procedures described in this Prospectus;
(b) to sell, transfer or otherwise dispose of shares of ATP
only pursuant to a Bid or a Sell Order in an Auction, or to or through a
Broker-Dealer or to a person that has delivered a signed Master Purchaser's
Letter to the Auction Agent, provided that in the case of all transfers
other than those pursuant to Auctions, the Existing Holder of the shares so
transferred, its Agent Member or its Broker-Dealer advises the Auction
Agent of such transfer; and
(c) to have the ownership of the shares of ATP as to which
such purchaser or its Broker-Dealer is the Existing Holder maintained in
book entry form by the Securities Depository for the account of its Agent
Member, which in turn will maintain records of such purchaser's beneficial
ownership, and to authorize such Agent Member to disclose to the Auction
Agent such information with respect to such purchaser's beneficial
ownership as the Auction Agent may request.
Each prospective purchaser should ask its Broker-Dealer whether such
prospective purchaser should sign a Master Purchaser's Letter. If the
Broker-Dealer submits Orders for such prospective purchaser listing the Broker-
Dealer as the Existing Holder or the Potential Holder, a Master Purchaser's
Letter signed by such prospective purchaser may not be required.
An execution copy of the Master Purchaser's Letter is included with this
Prospectus. Execution by a prospective purchaser or its Broker-Dealer of a
Master Purchaser's Letter is not a commitment to purchase shares of ATP in the
offering being made by this Prospectus or in any Auction or otherwise, but is a
condition precedent to such purchaser's purchasing shares of ATP.
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RATING AGENCY GUIDELINES-"aaa"/AAA RATING
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, which are set forth in greater detail in the Statement of
Additional Information, 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 ATP Basic Maintenance Amount.
Moody's and Fitch have each established separate guidelines for determining
Discounted Value. To the extent any particular portfolio holding does not
satisfy the applicable rating agency's guidelines, all or a portion of such
holding's value will not be included in the calculation of Discounted Value (as
defined by such rating agency). The Moody's and Fitch guidelines do not impose
any limitations on the percentage of Fund assets that may be invested in
holdings not eligible for inclusion in the calculation of the Discounted Value
of the Fund's portfolio. The amount of such assets included in the portfolio at
any time may vary depending upon the rating, diversification and other
characteristics of the Eligible Assets included in the portfolio.
Upon any failure to maintain the required Discounted Value, the Fund may
seek to alter the composition of its portfolio to reattain the ATP Basic
Maintenance Amount on or prior to the Asset Coverage Cure Date, thereby
incurring additional transaction costs and possible losses and/or gains on
disposition of portfolio securities. To the extent any such failure is not
cured within two (2) Business Days, the ATP will be subject to mandatory
redemption thereafter. The "ATP Basic Maintenance Amount" equals the sum of (i)
the aggregate liquidation preference of ATP then Outstanding and (ii) certain
accrued and projected payment obligations of the Fund. See "Description of ATP-
Asset Maintenance" in the Statement of Additional Information.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the ATP may, at any time, change or
withdraw any such rating. The Board of Directors may, without stockholder
approval, adopt, amend, alter or repeal any definitions, covenants or other
obligations of the Fund in the Articles Supplementary, provided the Board of
Directors has obtained written confirmation from any rating agency which is
then rating the ATP and which so requires that any such change would not impair
the respective rating then assigned to the ATP.
As described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. Fitch has stated that its rating on the ATP does not address the
market liquidity of the ATP. The rating on the ATP are not recommendations to
purchase, hold or sell ATP, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor nor do the rating agency
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guidelines described above address the likelihood that a holder of ATP will be
able to sell such shares in an Auction. The ratings are based on current
information furnished to Moody's and Fitch by the Fund and the Investment
Adviser, and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Stock has not been rated by a
nationally recognized statistical rating organization.
TAXATION
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the ATP. Investors should consult their own
tax advisors for more detailed information and for information regarding the
impact of state, local, foreign, and other tax consequences of such an
investment and of potential changes in applicable tax laws.
The Fund has elected to be treated as a regulated investment company (a
"RIC") under subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and intends to operate so as to meet the Code requirements for
qualification as a RIC. However, no assurance can be given that such
requirements will be met. If the Fund qualifies for taxation as a RIC, it
generally will not be subject to federal corporate income taxes on that portion
of its income that is currently distributed to its stockholders. This deduction
for dividends paid to stockholders substantially eliminates the federal "double
taxation" on earnings (once at the corporate level and once again at the
stockholder level) that generally results from investments in a corporation.
Under present law, counsel to the Fund is of the opinion that the ATP will
constitute stock of the Fund, and thus distributions with respect to the ATP
(other than distributions in redemption of the ATP subject to section 302(b) of
the Code) will constitute dividends to the extent of the Fund's current or
accumulated earnings and profits, as calculated for federal income tax
purposes. Such dividends generally will be taxable as ordinary income to the
stockholders and will not qualify for the dividends received deduction
available to corporations under section 243 of the Code. However, dividends
designated by the Fund as capital gain dividends will be treated as long-term
capital gains in the hands of the stockholders. The Internal Revenue Service
(the "Service") currently requires that a RIC 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 ATP as capital gain dividends in proportion to the ATP's share of the total
dividends paid to both the ATP and the Common Stock during the year. The amount
of net long-term capital gain realized by the Fund is not expected to be
significant, and there can be no assurance that any such income will be
realized by the Fund in any year. Any distribution in excess of the Fund's
earnings and profits will first reduce a stockholder's adjusted basis in his
shares of the ATP and, after such adjusted basis is reduced to zero, will
constitute a capital gain to a stockholder whose shares of the ATP are held as
a capital asset.
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.
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
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<PAGE>
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
Rating Agency Guidelines, 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.
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). The
Fund may invest in U.S. dollar-denominated bonds sold in the United States by
non-U.S. issuers ("Yankee bonds"). 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 Discounted Value under the Rating Agency Guidelines.
The Fund has the right to invest up to 20% of its total assets in
securities that are not readily marketable (determined as of the time of
investment), including securities restricted as to resale, or so-called private
placements. Securities that are not readily marketable may offer higher yields
than comparable publicly traded securities. However, the Fund may not be able
to sell these securities when the Investment Adviser considers it desirable to
do so or, to the extent they are sold privately, may have to sell them at less
than the price of otherwise comparable securities. Also, like preferred stock,
private placements, unless they involve securities which may be resold pursuant
to Rule 144A, are not eligible for inclusion in the Discounted Value of the
portfolio for purposes of the Rating Agency Guidelines in effect as of the date
of this Prospectus.
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.
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
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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.
Certain Investment Practices
The Fund and the Investment Adviser reserve the right to engage in certain
investment practices described in Appendix A to this Prospectus in order to
help achieve the Fund's investment objective. Such strategies include the
lending of portfolio securities, the short sale of securities and the use of
futures contracts and options thereon, entering into interest rate
transactions, such as swaps, caps, tears or collars for the purpose of hedging
the Fund's exposure to interest rates (including changes in dividend payments
on the ATP), reverse repurchase agreements and repurchase agreements (other
than certain repurchase agreements with qualified depository institutions
having maturities no longer than one day). So long as the ATP is Outstanding,
the Fund may not utilize certain of the practices described in Appendix A, 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 in Appendix A) 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. See "Rating Agency Guidelines" and Appendix A in the
Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
High Yield, High Risk Investments
The 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 issuers, as well
as the condition of the general high-yield market. Although the Fund seeks to
reduce risk by portfolio diversification, 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
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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 and 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 a company in a so-called
"leveraged buy-out" transaction. 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 market for "high yield," high risk securities has expanded rapidly
over the last decade. An economic downturn or an increase in interest rates
could have a negative effect on the "high yield," high risk securities market
and on the market value of the "high yield," high risk securities held by the
Fund, as well as on the ability of the issuers of such securities to repay
principal and interest on their borrowings.
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, Fitch
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 to the Statement of
Additional Information for a description of ratings of "high yield," high risk
securities).
At times a major portion of an issue of lower-rated securities may be held
by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund may find it more difficult to sell such securities when the
Investment Adviser believes it advisable to do so or may be able to sell such
securities only at prices lower than if the securities were more widely held.
In such circumstances, the Fund may also find it more difficult to determine
the fair value of such securities for purposes of computing the Fund's net
asset value. The Fund, in most instances, utilizes an independent pricing
service to determine the fair value of its securities for financial statement
purposes since market quotations are not readily ascertainable. Securities for
which market quotations are not readily available will be valued at fair value
as determined in good faith by or under the direction of the Board of Directors
of the Fund.
Leverage
The Fund has had a leveraged capital structure since its organization and
assuming issuance of the ATP Series D in the Offering (after giving effect to
the sales load and estimated offering expenses) at March 31, 1998, the Fund
would have had total net assets of approximately $541 million consisting of ATP
having an aggregate liquidation preference of approximately $210 million and
net assets attributable to Common Stock of approximately $331 million.
To the extent the Fund establishes Standard Term Periods in or other
relatively short Dividend Periods for the ATP and does not effectively hedge
the risk associated with changes in short-term interest rates, the Fund would
be vulnerable to increases in short-term interest rates. To the extent the Fund
is unable to satisfy required asset coverage requirements under the 1940 Act
and the Rating Agency Guidelines, the Fund may be required to redeem some or
all of the ATP, including possibly ATP having Dividend Periods of longer than
one year. The ATP will
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be rated "aaa" by Moody's and AAA by Fitch as a condition of issuance; in the
event such rating is lowered or withdrawn without timely replacement by a
rating from a suitable successor rating agency, the ATP will be subject to
mandatory redemption. As a result of various asset coverage requirements
established in connection with the rating of the ATP, the Fund may be unable to
utilize certain investment practices that it might otherwise utilize.
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 ATP-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 "Investment Objective
and Policies" in the Statement of Additional Information), 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."
Risks of Investing in ATP
An investment in the ATP involves potential risks.
The ability of an investor to dispose of shares of ATP may be largely
dependent on the success of an Auction. If in an Auction Sufficient Clearing
Bid Orders do not exist, then investors that have submitted Sell orders will
not be able to sell in the Auction all, and may not be able to sell in the
Auction any, shares of ATP subject to such submitted Sell Orders. There is no
assurance that any particular Auction will be successful. Neither the Fund nor
any Broker-Dealer is obligated to ensure that an Auction will be successful or
to purchase shares of ATP in an Auction or otherwise. The Fund is not required
to redeem shares of ATP in the event of a failed Auction. Further, there is no
assurance that a secondary market outside of the Auctions for the ATP will
develop, whether or not such Auctions are successful, or if such a market does
develop, that shares of ATP will trade at or close to the Liquidation Value. In
the event the Fund establishes a Dividend Period for ATP which is longer than a
Standard Term Period, particularly if such Dividend Period exceeds one year,
any increase in interest rates will likely have an adverse affect on the
secondary market price of ATP, holders of shares may have fewer opportunities
to obtain liquidity if Auctions do not occur frequently and may not be able to
sell their shares between Auctions at a price per share equal to the
Liquidation Value. Thus, under certain circumstances, holders of ATP may not
have liquidity of investment.
The Fund does not intend to apply for listing of the ATP Series D on a
national securities exchange, but has been advised by Merrill Lynch that it
currently intends to make a market in the ATP Series D as permitted by
applicable laws and regulations. Merrill Lynch is not obligated to make a
market in the ATP Series D between Auctions and, therefore, a holder of ATP
Series D may not be able to liquidate its position in the ATP Series D between
Auctions at a price per share equal to its liquidation preference (i.e.
Liquidation Value, plus accumulated dividends). In the event the Fund
establishes a Dividend Period for any series of ATP which is longer than a
Standard Term Period, particularly if such Dividend Period exceeds one year,
any increase in interest rates will likely have an adverse affect on the
secondary market price of such series, holders of such series may have fewer
opportunities
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to obtain liquidity if Auctions do not occur frequently and a holder of such
series may not be able to sell their shares between Auctions at a price per
share equal to Liquidation Value.
ATP represents a perpetual equity interest in the Fund (except to the
extent redeemable by the Fund) and does not give rise to a claim for payment of
a principal amount at a particular date. As such, ATP effectively ranks behind
all indebtedness or other non-equity claims on the Fund with respect to assets
available to satisfy claims on the Fund. In addition, in the event of the
dissolution, liquidation or winding up of the affairs of the Fund, after
payment of the liquidation preference and all dividends accumulated to and
unpaid through the date of final distribution, holders of ATP will not be
entitled to any further participation in any distribution of assets of the
Fund.
The credit ratings of the ATP could be reduced while an investor holds the
ATP, subject to the mandatory redemption requirements described therein.
Holders of shares of stock, including ATP, are entitled to receive
dividends only when, as and if declared by the Board of Directors and only out
of funds legally available therefor. State corporation laws generally limit the
funds out of which issuers incorporated thereunder may pay to stockholders as a
dividend. For example, under Maryland law, dividends may not be paid if after
giving effect to the dividend, the Fund would not be able to pay its debts as
they became due in the usual course of business or the Fund's total assets
would be less than the sum of its total liabilities plus the amount needed to
satisfy the preferential rights of stockholders whose preferential rights upon
dissolution are superior to those receiving the dividend. The Fund may also
incur indebtedness with the consent of the relevant rating agencies.
Private Placements
The Fund may invest up to 20% of its total assets in certain securities
acquired directly from issuers in direct placement transactions. Such direct
placement securities are generally ineligible for inclusion in the calculation
of the Discounted Value of the Fund's investment portfolio under the Rating
Agency Guidelines, unless they are Rule 144A Securities. Rule 144A Securities
may be resold under certain circumstances and to certain qualified
institutional buyers. 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.
Payment Restrictions
During any annual period when the Fund may not have funds legally
available to pay the scheduled dividends then due on the ATP, such inability
would preclude the Fund from paying dividends on the Common Stock until the
scheduled dividends on the shares of ATP have been paid or provided for. Also,
the Fund is not permitted to declare any cash dividends or distributions on its
Common Stock unless, at the time of such declaration and after deducting the
amount of such dividend, the Fund is in compliance with the 1940 Act ATP Asset
Coverage test and has Eligible Assets with an aggregate Discounted Value at
least equal to the ATP Basic Maintenance Amount. This prohibition on the
payment of dividends or distributions might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. The Fund intends, however, to redeem shares of ATP from time to
time to the extent necessary to comply with the asset coverage requirements.
There can be no assurance, however, that such redemptions can be effected in
time to permit the Fund to distribute its income as required to maintain its
qualification as a regulated investment company under the Code. See "Taxation."
Systems-Year 2000
Like other mutual funds and organizations around the world, the Fund could
be adversely affected if its computer systems or those of its service providers
do not properly process dates beginning with January 1, 2000 and information
related to those dates (the "Year 2000 Problem"). The Fund has taken and is
taking steps with respect to its computer systems that it believes are
reasonably designed to address the Year 2000 Problem and does not currently
expect its computer systems to experience a Year 2000 Problem which would have
a material adverse
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impact on the Fund. In addition, the Fund has sought and received assurances
from its service providers, including Wellington Management and State Street
Bank and Trust Company, that they have taken similar measures and do not
currently expect their computer systems or those of their service providers to
experience a Year 2000 Problem which would have a material adverse impact on
the Fund. Because of the highly complex nature of the Year 2000 Problem and the
extent to which the Fund cannot effect or control remedial measures by entities
on which it must directly or indirectly rely for its operation, there can,
however, be no assurance that the Year 2000 Problem will not have a material
adverse impact on 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 Board of Directors consists of Robert F. Birch, Joseph L. Bower,
Richard E. Floor, Bernard J. Korman, Franco Modigliani, and Ernest E. Monrad.
See "Management of the Fund" in the Statement of Additional Information.
THE INVESTMENT ADVISER
The Board of Directors of the Fund appoints the Fund's investment adviser
annually. 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. 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.
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.
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.
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
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<PAGE>
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 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.
DESCRIPTION OF COMMON STOCK
In addition to the Preferred Stock, the Fund's Articles authorize the
issuance of up to 200 million shares of Common Stock, par value $.01 per share.
All shares of Common Stock have equal rights as to voting, dividends and
liquidation. All shares of Common Stock issued and outstanding are fully paid
and nonassessable. Shares of Common Stock have no preemptive, conversion or
redemption rights and are freely transferable. On February 10, 1998, the Fund
issued one transferable right ("Right") to its common stockholders for each
share of common stock they owned entitling the holders thereof to acquire one
share of common stock for each right held (the "Rights Offering"). The Rights
Offering expired on March 18, 1998, and 16,241,851 Rights were exercised. After
giving effect to the issuance of Common Stock pursuant to the Rights Offering,
as of March 31, 1998, 64,967,074 shares of Common Stock were issued and
outstanding.
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 the
ATP can elect all 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 under "Description of
ATP-Voting."
The rights of the holders of the Common Stock may not be modified by a
vote of less than a majority of the shares of Common Stock outstanding.
The Common Stock is listed on the New York Stock Exchange (the "Exchange")
under the symbol "HYB."
Under the 1940 Act, the Fund cannot declare or pay dividends or other
distributions on the Common Stock or purchase any shares of Common Stock if, at
the time of the declaration or purchase, as applicable (and after giving effect
thereto), asset coverage with respect to senior securities representing
indebtedness (as defined in the 1940 Act), if any, would be less than 300%
and/or (as applicable) asset coverage with respect to the ATP would be less
than 200%. Dividends or other distributions on or purchases of the Common Stock
also will be prohibited at any time dividends on the ATP are in arrears or the
ATP Basic Maintenance Amount is not maintained.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), holders of
Common Stock may elect to receive all dividends and capital gains distributions
in cash paid by check mailed directly to such holders by State Street Bank and
Trust Company, as dividend disbursing agent. Pursuant to the Plan, holders of
Common Stock not making such election will have all such amounts automatically
reinvested by the bank serving as Plan agent, in whole or fractional shares of
Common Stock, as the case may be.
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
25
<PAGE>
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. 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. 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.
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, subject to compliance with rules adopted under the 1940 Act. 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.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Purchase Agreement with the Fund and the Investment Adviser, to purchase from
the Fund all of the shares of ATP offered hereby. The Underwriter is committed
to purchase all such shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer
the shares of ATP to the public at the public offering price set forth on the
cover page of the Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriter may allow, and such
dealers may reallow, a discount not in excess of $ per share on sale to
certain other dealers. After the initial public offering, the public offering
26
<PAGE>
price, concession and discount may be changed. The sales load of $ per share
is equal to % of the initial public offering price. Investors must pay for
any shares of ATP purchased in the initial public offering on or before May ,
1998.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act of 1933.
The Fund has also agreed that it will not, without the prior written
consent of the Underwriter, offer, sell, contract to sell or otherwise dispose
of any senior security of the Fund, as defined in the 1940 Act, for a period of
90 days after the date of this Prospectus. However, this restriction shall not
apply to the ATP Series D or any swap arrangements with respect to the ATP as
contemplated above under "The Fund".
The Underwriter will act in Auctions for the ATP Series D as a
Broker-Dealer and will be entitled to fees for services as a Broker-Dealer as
set forth under "Auction Procedures-Broker-Dealers; Commissions."
The Fund has been advised by the Underwriter that it currently intends to
make a market in the ATP, as permitted by applicable laws and regulations.
However, the Underwriter is not obligated to make a market in the ATP between
Auctions and such market making may be discontinued at any time at the sole
discretion of the Underwriter. See "Risk Factors--Risks of Investing in ATP."
The Fund anticipates that from time to time the Underwriter may act as
broker or dealer in connection with the execution of its portfolio transactions
after it has ceased to be the Underwriter and, subject to certain restrictions,
may act as a broker while it is the Underwriter. The Underwriter is an active
underwriter of, and dealer in, securities and acts a market maker in a number
of such securities, and therefore can be expected to engage in portfolio
transactions with the Fund.
Payment by each initial purchaser of shares of ATP Series D will be made
through such purchaser's Agent Member on the date of delivery of such shares to
the Underwriter in same-day funds. On the Date of Original Issue, the
Underwriter will deposit the shares of ATP Series D placed by it in its account
at the Security Depository and the Security Depository will deliver the shares
of ATP Series D purchased by each purchaser from the Underwriter's account to
the account of such purchaser's Agent Member of the Security Depository against
payment to the account of the Underwriter of an amount equal to the purchase
price from the account of such purchaser's Agent Member. Under the Master
Purchaser's Letter, each purchaser will be required to have the ownership of
the shares of ATP Series D owned by it maintained in book-entry form by the
Securities Depository through such purchaser's Agent Member, which in turn will
maintain records of such purchaser's beneficial ownership.
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the ATP will be passed upon for the
Fund by Goodwin, Procter & Hoar LLP, Boston, Massachusetts and for the
Underwriters by Brown & Wood LLP, New York, New York. Richard E. Floor, a
Director and Secretary of the Fund, is a partner of Goodwin, Procter & Hoar LLP
through a professional corporation. An opinion regarding the valid issuance of
the ATP will be rendered by Venable, Baetjer and Howard, LLP, Baltimore,
Maryland. Goodwin, Procter & Hoar LLP and Brown & Wood LLP will rely as to
matters of Maryland law upon such opinion.
EXPERTS
The audited balance sheet of the Fund, including the portfolio of
investments in securities by industry classification, 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 herein to the extent and for the periods indicated in
their report, have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report thereon incorporated herein by
reference, and are included herein upon the authority of said firm as experts
in accounting and auditing in giving said report.
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<PAGE>
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.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, 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. The Commission also maintains
a web site that contains reports, proxy statements and other information about
the Fund filed electronically with the Commission: http://www.sec.gov. 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 and the ATP 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.
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TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Investment Objective and Policies ..................... B-2
Rating Agency Guidelines .............................. B-3
Investment Restrictions ............................... B-15
Portfolio Maturity and Turnover ....................... B-17
Taxation .............................................. B-18
Management of the Fund ................................ B-22
Determination of Net Asset Value ...................... B-28
Description of ATP .................................... B-29
Auction Procedures .................................... B-44
Financial Statements .................................. B-48
Appendix A--Ratings of Corporate Obligations .......... B-A-1
</TABLE>
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GLOSSARY
""aaa"/AAA Credit Rating" means a credit rating in the highest category of
any two nationally recognized statistical rating organizations (as used in the
rules and regulations under the Securities Exchange Act of 1934, as amended),
one of which shall be Moody's or S&P.
"AA Composite Commercial Paper Rate" on any date means (a) the interest
equivalent of the 30-day rate, in the case of a Dividend Period which is a
Standard Term Period or shorter, or the 180-day rate, in the case of all other
Dividend Periods, on commercial paper on behalf of issuers whose corporate
bonds are rated AA by S&P, or the equivalent of such rating by another
nationally recognized rating agency, as announced by the Federal Reserve Bank
of New York for the close of business on the Business Day immediately preceding
such date; or (b) if the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the interest equivalent
of such rates on commercial paper placed on behalf of such issuers, as quoted
on a discount basis or otherwise by the Commercial Paper Dealers to the Auction
Agent for the close of business on the Business Day immediately preceding such
date (rounded to the next highest .001 of 1%). If any Commercial Paper Dealer
does not quote a rate required to determine the AA Composite Commercial Paper
Rate, such rate shall be determined on the basis of the quotations (or
quotation) furnished by the remaining Commercial Paper Dealers (or Dealer), if
any, or, if there are no such Commercial Paper Dealers, by the Auction Agent.
For purposes of this definition, (i) "Commercial Paper Dealers" shall mean (A)
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Goldman Sachs & Co.; (B) in lieu of any thereof, its respective Affiliate or
successor, and (C) in the event that any of the foregoing shall cease to quote
rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of
such issuers then making such quotations selected by the Fund, and (ii)
"interest equivalent" of a rate stated on a discount basis for commercial paper
of a given number of days' maturity shall mean a number equal to the quotient
(rounded upward to the next higher one-thousandth of 1%) of (A) such rate
expressed as a decimal, divided by (B) the difference between (x) 1.00 and (y)
a fraction, the numerator of which shall be the product of such rate expressed
as a decimal, multiplied by the number of days in which such commercial paper
shall mature and the denominator of which shall be 360.
"Advisory Agreement" means the Investment Advisory Agreement dated
February 19, 1992, as amended August 1, 1997, under which Wellington Management
serves as investment adviser for the Fund.
"Affiliate" means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Fund; provided that no
Broker-Dealer controlled by, in control of or under common control with the
Fund shall be deemed to be an Affiliate nor shall any corporation or any person
controlled by, in control of or under common control with such corporation one
of the directors or executive officers of which is also a director of the Fund
be deemed to be an Affiliate solely because such director or executive officer
is also a director of the Fund.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a person placing an Order.
"Alternate Term Period" means any Dividend Period that is not a Standard
Term Period.
"Applicable Rate" means, with respect to each series of ATP, for each
Dividend Period (A) if Sufficient Clearing Orders exist for the Auction in
respect thereof, the Winning Rate, (B) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Applicable Rate and (C)
in the case of any Dividend Period of 93 days or fewer if all the shares of ATP
are the subject of Submitted Hold Orders for the Auction in respect thereof,
the Minimum Applicable Rate.
"Articles" means the Articles of Amendment and Restatement, as amended,
including any Articles Supplementary of the Fund.
"Asset Coverage Cure Date" has the meaning set forth under "Description of
ATP--Redemption" in the Statement of Additional Information.
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<PAGE>
"ATP" means the Series D Auction Term Preferred Stock, $1.00 par value per
share and liquidation preference $25,000 per share of the Fund or any other
series of Preferred Stock heretofore or hereinafter designated "Auction Term
Preferred Stock" by Articles Supplementary or Articles of Amendment.
"ATP Basic Maintenance Amount" has the meaning set forth under "Rating
Agency Guidelines" in the Statement of Additional Information.
"ATP Basic Maintenance Certificate" has the meaning set forth under
"Description of ATP--Asset Maintenance" in the Statement of Additional
Information.
"ATP Series A" means the shares of Series A of the ATP previously issued
or any other series of Preferred Stock hereinafter designated as shares of
Series A of the ATP by Articles Supplementary or Articles of Amendment.
"ATP Series B" means the shares of Series B of the ATP previously issued
or any other series of Preferred Stock hereinafter designated as shares of
Series B of the ATP by Articles Supplementary or Articles of Amendment.
"ATP Series C" means the shares of Series C of the ATP previously issued
or any other series of Preferred Stock hereinafter designated as shares of
Series C of the ATP by Articles Supplementary or Articles of Amendment.
"ATP Series D" means the shares of Series D of the ATP issued hereby or
any other series of Preferred Stock hereinafter designated as shares of Series
D of the ATP by Articles Supplementary or Articles of Amendment.
"Auction" means each periodic operation of the procedures set forth under
"Auction Procedures."
"Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Directors enters into an agreement with the Fund to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Date" means the first Business Day next preceding the first day
of a Dividend Period for the relevant series of ATP.
"Auction Procedures" means the procedures for conducting Auctions set
forth under "Auction Procedures."
"Average Net Assets" has the meaning set forth under "The Investment
Adviser" in this Prospectus.
"BankBoston" means BankBoston, N.A.
"Board of Directors" or "Board" means the Board of Directors of the Fund
or any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" or "Broker-Dealers" means any broker-dealer or
broker-dealers, or other entity permitted by law to perform the functions
required of a Broker-Dealer by the Auction Procedures, that has been selected
by the Fund and has entered into a Broker-Dealer Agreement with the Auction
Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into by the Auction
Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to
follow the Auction Procedures.
"Buy Order" means the communication by a Potential Holder to a
Broker-Dealer of the number of shares of ATP which such Potential Holder offers
to purchase on an Auction Date if the Applicable Rate for the next succeeding
Dividend Period therefor is not less than the rate per annum then specified by
such Potential Holder.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
the City of New York, New York are authorized or obligated by law to close.
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<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.01 per share, of the
Fund.
"Date of Original Issue" means with respect to each of the ATP Series A,
ATP Series B, ATP Series C and ATP Series D the date on which such ATP are
originally issued by the Fund.
"Default Period" has the meaning set forth under "Description of
ATP--Dividends and Dividend Periods" in the Statement of Additional
Information.
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated
at least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of optional
redemption, such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-1 by Moody's.
"Discount Factor" means the Moody's Discount Factor (if Moody's is then
rating the ATP), the Fitch Discount Factor (if Fitch is then rating the ATP) or
the discount factor established by any Other Rating Agency which is then rating
the ATP and which so requires, whichever is applicable.
"Discounted Value" means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor provided that with respect to
an Eligible Asset that is currently callable, Discounted Value shall be equal
to the quotient as calculated above or the call price, whichever is lower, and
that with respect to an Eligible Asset that is prepayable, Discounted Value
shall be equal to the quotient as calculated above or the par value, whichever
is lower.
"Dividend Payment Date" for each 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.
"Dividend Period" means, with respect to the relevant series of ATP, the
period commencing on the Date of Original Issue and ending on the date
specified for such series on the Date of Original Issue and thereafter, as to
such series, the period commencing on the day following each Dividend Period
for such series and ending on the day established for such series by the Fund.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating
the ATP), Fitch Eligible Assets (if Fitch is then rating the ATP) and/or Other
Rating Agency Eligible Assets if any Other Rating Agency is then rating the
ATP, whichever is applicable.
"Existing Holder" means (a) a person who has signed a Master Purchaser's
Letter and beneficially owns shares of a series of ATP listed in that person's
name in the records of the Auction Agent or (b) the beneficial owner of shares
of the ATP which are listed under such person's Broker-Dealer's name in the
records of the Auction Agent, which Broker-Dealer shall have signed a Master
Purchaser's Letter.
"Exposure Period" means the period commencing on (and including) a given
Valuation Date and ending 41 days thereafter.
"Fitch" means Fitch IBCA, Inc. and its successors at law.
"Fund" means The New America High Income Fund, Inc., a Maryland
corporation that is the issuer of each series of ATP.
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"Holder" means, with respect to the Common Stock and the preferred stock,
including the ATP, of the Fund, the registered holder of shares of such Stock
as the same appears on the stock ledger or stock records books of the Fund.
"Hold Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of each series of ATP which
such Existing Holder desires to continue to hold without regard to the
Applicable Rate for the next succeeding Dividend Period therefor.
"Hold/Sell Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of each series of ATP which
such Existing Holder desires to continue to hold if the Applicable Rate for the
next Dividend Period therefor is not less than the rate per annum then
specified by such Existing Holder.
"Investment Adviser" means Wellington Management Company, LLP, the current
investment adviser to the Fund, or such other future investment adviser to the
Fund.
"Liquidation Value" means $25,000 per share for ATP Series A, ATP Series
B, ATP Series C and ATP Series D.
"Mandatory Redemption Date" has the meaning set forth under "Description
of ATP--Redemption" in the Statement of Additional Information.
"Mandatory Redemption Price" has the meaning set forth under "Description
of ATP--Redemption" in the Statement of Additional Information.
"Market Value" shall mean the fair market value of an asset of the Fund
(excluding interest and dividends due on such assets) as computed based upon
(i) pricing services to be provided by Merrill Lynch Capital Markets Securities
Pricing Service, Kenny S&P Evaluation Services or such other pricing service
determined from time to time by the Board of Directors, provided that Moody's
(if Moody's is then rating ATP. Fitch (if Fitch is then rating ATP) and any
Other Rating Agency which is then rating ATP and so requires have informed the
Corporation in writing that use of such pricing service will not adversely
affect such rating agency's then current rating of the shares of ATP or (ii)
the lower of the value set forth in bids from two independent dealers that are
members or Affiliates of members of the National Association of Securities
Dealers, Inc. and that make markets in such security, one of which bids shall
be in writing.
"Master Purchaser's Letter" means a letter substantially in the form of,
or containing provisions similar to those in the form, attached hereto which is
required to be executed by each prospective purchaser of shares of ATP or the
Broker-Dealer through whom the shares will be held.
"Maximum Applicable Rate" means, on any date on which the Applicable Rate
is determined, the rate equal to 150% of the applicable Reference Rate, subject
to upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers; provided that immediately
following any such increase the Fund would be in compliance with ATP Basic
Maintenance Amount.
"Minimum Applicable Rate" means, on any Auction Date with respect to a
Dividend Period of 93 days or fewer 80% of the AA Commercial Paper Rate at the
close of business on the Business Day next preceding such Auction Date. There
shall be no Minimum Applicable Rate on any Auction Date with respect to a
Dividend Period of more than 93 days.
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act ATP Asset Coverage" means asset coverage, as defined in Section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Fund which are stock, including all Outstanding
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ATP (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
stock of a closed-end investment company as a condition of declaring dividends
on its common stock), determined on the basis of values calculated as of a time
within 48 hours next preceding the time of such determination.
"Notice of Redemption" has the meaning provided under "Description of
ATP--Redemption" in the Statement of Additional Information.
"Offering" means the offering of 2,400 shares of ATP Series D issued by
the Fund under its Registration Statement of which this Prospectus is a part.
"Order" means a Hold Order, a Hold/Sell Order, a Sell Order or a Buy
Order.
"Other Rating Agency" means any rating agency other than Moody's or Fitch
then providing a rating for the ATP pursuant to the request of the Fund.
"Other Rating Agency Eligible Assets" means assets of the Fund designated
by any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the ATP.
"Outstanding" means, as of any date, shares of ATP theretofore issued by
the Fund except, without duplication, (i) any shares of ATP theretofore
canceled or redeemed by the Fund, or delivered to the Auction Agent for
cancellation or with respect to which the Fund has given notice of redemption
and irrevocably deposited with the Paying Agent sufficient funds to redeem such
shares of ATP, and (ii) any shares of ATP represented by any certificate in
lieu of which a new certificate has been executed and delivered by the Fund.
Notwithstanding the foregoing (A) for purposes of voting rights (including the
determination of the number of shares required to constitute a quorum), any
shares of the ATP to which the Fund or any Affiliate of the Fund shall be the
Existing Holder shall be disregarded and not deemed Outstanding; (B) in
connection with any Auction, any shares of the ATP Series D as to which the
Fund or any person known to the Auction Agent to be an Affiliate of the Fund
shall be the Existing Holder thereof shall be disregarded and deemed not to be
Outstanding; and (C) for purposes of determining the ATP Basic Maintenance
Amount, shares of ATP held by the Fund shall be disregarded and not deemed
Outstanding but shares held by any Affiliate of the Fund shall be deemed
Outstanding.
"Paying Agent" means Bankers Trust Company unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Fund to serve as paying agent which Paying Agent may be the same as
the Auction Agent.
"Potential Holder" when used with respect to shares of ATP, means any
person, including any Existing Holder of shares of ATP, (i) who shall have
executed a Master Purchaser's Letter or whose shares will be listed under such
person's Broker-Dealer's name in the records of the Auction Agent, which
Broker-Dealer shall have executed a Master Purchaser's Letter and (ii) who may
be interested in acquiring shares of ATP (or, in the case of an Existing Holder
or such person of shares of ATP, additional shares of ATP).
"Proration Procedures" means:
(A) if Sufficient Clearing Orders exist, in the case of a Submitted
Hold/Sell Order specifying a rate equal to the Winning Rate
(x) the number of shares of the relevant series of ATP to be the
subject of an accepted Hold Order will be (i) the number of shares of such
series of ATP subject to such Submitted Hold/Sell Order multiplied by (ii)
the total number of shares of such series of ATP that are neither the
subject of a Submitted Buy Order or a Submitted Hold/Sell Order specifying
a rate lower than the Winning Rate nor the subject of a Submitted Hold
Order and divided by (iii) the total number of shares of Submitted
Hold/Sell Orders that specified a rate equal to the Winning Rate, and
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<PAGE>
(y) the number of shares of the relevant series of ATP to be the
subject of an accepted Sell Order will be the remaining number of shares of
such series of ATP subject to such Submitted Hold/Sell Order,
(B) if Sufficient Clearing Orders exist, in the case of a Submitted Buy
Order specifying a rate equal to the Winning Rate
(x) the number of shares of the relevant series of ATP to be the
subject of an accepted Buy Order will be (i) the number of shares of such
series of ATP subject to such Submitted Buy Order multiplied by (ii) the
difference between (1) the number of shares of such series of ATP that are
the subject of a Submitted Sell Order or a Submitted Hold/Sell Order that
specified a rate higher than the Winning Rate and (2) the number of shares
of each series of ATP that are the subject of a Submitted Buy Order that
specified a rate lower than the Winning Rate and divided by (iii) the total
number of shares of such series of ATP subject to Submitted Buy Orders that
specified a rate equal to the Winning Rate, and
(y) such Submitted Buy Order will not be accepted as to the remaining
number of shares subject to such Submitted Buy Order, and
(C) if Sufficient Clearing Orders do not exist, in the case of a
Submitted Hold/Sell Order specifying a rate higher than the Maximum Applicable
Rate and in the case of a Submitted Sell Order
(x) the number of shares of the relevant series of ATP to be the
subject of an accepted Sell Order will be (i) the number of shares of such
series of ATP subject to such Submitted Hold/Sell Order or Submitted Sell
Order multiplied by (ii) the total number of shares of such series of ATP
that are the subject of a Submitted Buy Order specifying a rate equal to or
lower than the Maximum Applicable Rate and divided by (iii) the total
number of shares of such series of ATP subject to all Submitted Hold/Sell
Orders that specified a rate higher than the Maximum Applicable Rate and
Submitted Sell Orders, and
(y) the number of shares of the relevant series of ATP to be the
subject of an accepted Hold Order will be the remaining number of shares of
such series of ATP subject to such Submitted Hold/Sell Order or Submitted
Sell Order.
"Purchase Agreement" means the purchase agreement among the Underwriter,
the Fund and the Investment Adviser, a form of which is filed as an exhibit to
the Fund's Registration Statement of which this Prospectus is a part.
"Rating Agency Guidelines" means the guidelines established by Moody's (if
Moody's is then rating the ATP) and Fitch (if Fitch is then rating the ATP) as
set forth under "Rating Agency Guidelines," in the Statement of Additional
Information, as amended from time to time, or by any Other Rating Agency that
is then rating the ATP.
"Reference Rate" means, with respect to the determination of the Maximum
Applicable Rate, the applicable AA Composite Commercial Paper Rate (for a
Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
for a Dividend Period of 184 days or more).
"Rounding Procedures" means, if as a result of an Auction (including the
Proration Procedures) any Existing Holder would be entitled to hold or required
to sell, or any Potential Holder would be required to purchase, a number of
shares of the relevant series of ATP not evenly divisible by 1, on any Auction
Date, the Auction Agent will, in such manner as it determines, round up or down
the number of shares of such series of ATP to be held, purchased or sold by any
Existing Holder or Potential Holder on such Auction Date so that the number of
shares held, purchased or sold by each Existing Holder or Potential Holder on
such Auction Date will be a number of shares of such series of ATP evenly
divisible by 1.
"Rule 144A Securities" means securities that 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.
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<PAGE>
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and its successors at law.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of each series of ATP.
"Sell Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of the relevant series of ATP
which such Existing Holder offers to sell without regard to the Dividend Rate
for the next succeeding Dividend Period therefor.
"Service" means the United States Internal Revenue Service.
"Specific Redemption Provisions" means with respect to any Alternate Term
Period of more than one year, either, or any combination of, a period (a
"Non-Call Period") determined by the Board of Directors after consultation with
the Broker-Dealers, during which the shares subject to such Alternate Term
Period are not subject to redemption at the option of the Fund pursuant to
Section 3(a)(i) of the Articles and/or Section 3(a)(ii) and/or 3(a)(iii) of the
Articles and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years as determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such Alternate
Term Period shall be redeemable at the Fund's option pursuant to Section
3(a)(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 Liquidation Value plus accumulated but unpaid dividends plus a
premium expressed as a percentage or percentages of Liquidation Value or
expressed in a formula using specified variables as determined by the Board of
Directors after consultation with the Broker-Dealers.
"Standard Term Period" means a Dividend Period of 28 days, unless such
28th day is not a Business Day, then the number of days ending on the Business
Day next preceding such 28th day.
"Submission Deadline" means 1:00 p.m., New York City time, on each Auction
Date, or such other time on such Auction Date as may be specified from time to
time by the Auction Agent as the time by which each Broker-Dealer must submit
to the Auction Agent all Orders obtained by it for the Auction to be conducted
on such Auction Date.
"Submitted Buy Order" means each Buy Order submitted to the Auction Agent
by a Broker-Dealer.
"Submitted Hold Order" means each Hold Order submitted to the Auction
Agent by a Broker-Dealer.
"Submitted Hold/Sell Order" means each Hold/Sell Order submitted to the
Auction Agent by a Broker-Dealer.
"Submitted Order" means each Order submitted to the Auction Agent by a
Broker-Dealer.
"Submitted Sell Order" means each Sell Order submitted to the Auction
Agent by a Broker-Dealer.
"Sufficient Clearing Orders" means that all shares of the relevant series
of ATP are the subject of Submitted Hold Orders or that the number of shares of
such series of ATP that are the subject of Submitted Buy Orders by Potential
Holders specifying one or more rates equal to or less than the Maximum
Applicable Rate exceeds or equals the sum of (A) the number of shares of such
series of ATP that are the subject of Submitted Hold/Sell Orders by Existing
Holders specifying one or more rates higher than the Maximum Applicable Rate
and (B) the number of shares of such series of ATP that are subject to
Submitted Sell Orders.
"TARPS" means the Taxable Auction Rate Preferred Stock of the Fund which
were redeemed in 1994.
"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
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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.
"Underwriter" means Merrill Lynch, Pierce, Fenner & Smith Incorporated.
"Validity Procedures" means the following procedures and priorities:
(A) If one or more Hold Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the relevant series of ATP
greater than the number of shares of such series of ATP held by such
Existing Holder, such Hold Order or Hold Orders shall be considered valid
only as to the number of shares of such series of ATP held by such Existing
Holder. In the case of multiple Hold Orders, each such Hold Order shall be
considered valid pro rata.
(B) If one or more Hold/Sell Orders shall be submitted on behalf of
an Existing Holder as to a number of shares of the relevant series of ATP
greater than the excess of the number of shares of such series of ATP held
by such Existing Holder over the number of shares of such series of ATP
subject to Hold Orders submitted on behalf of such Existing Holder, such
Hold/Sell Order or Hold/Sell Orders shall be considered valid only as to
the number of shares of such series of ATP equal to such excess. In the
case of multiple Hold/Sell Orders specifying different rates, such
Hold/Sell Orders shall be considered valid in increasing order of such
rates. In the case of multiple Hold/Sell Orders specifying the same rate,
each such Hold/Sell Order shall be considered valid pro rata.
(C) If one or more Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the relevant series of ATP
greater than the excess of the number of shares of such series of ATP held
by such Existing Holder over the number of shares of such series of ATP
subject to Hold Orders and Hold/Sell Orders submitted on behalf of such
Existing Holder, such Sell Order or Sell Orders shall be considered valid
only as to the number of shares equal to such excess. In the case of
multiple Sell Orders, each such Sell Order shall be considered valid pro
rata.
"Valuation Date" means every Friday, or, if such day is not a Business
Day, the next preceding Business Day; provided, however, that the first
Valuation Date may occur on any other date established by the Fund; provided,
further, however, that such date shall be not more than one week from the date
on which the ATP initially is issued.
"Wellington Management" means Wellington Management Company, LLP, the
Fund's current Investment Adviser.
"Winning Rate" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/
Sell Order from Existing Holders specifying such lowest rate and all other
Submitted Hold/Sell Orders from Existing Holders specifying lower rates were
accepted and (B) each Submitted Buy Order from Potential Holders specifying
such lowest rate and all other Submitted Buy Orders from Potential Holders
specifying lower rates were accepted, would result in the Existing Holders
described in clause (A) above continuing to hold an aggregate number of shares
of the relevant series of ATP which, when added to the number of shares of such
series of ATP to be purchased by the Potential Holders described in Clause (B)
above and the number of shares of such series of ATP subject to Submitted Hold
Orders, would be equal to the number of shares of such series of ATP.
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APPENDIX A
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, as described under "Investment Objectives and
Policies--Certain Investment Practices."
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 for the purpose of clearing
securities transactions; provided that the ATP Basic Maintenance Amount (as
defined under "Description of ATP" in the Statement of Additional Information)
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
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obligation, including the interest factor. The Fund receives payment for such
securities only upon physical delivery or evidence of book entry transfer by
its custodian. Securities sold by the Fund under a reverse repurchase agreement
must be either segregated pending repurchase or the proceeds must be segregated
on the Fund's books and records pending repurchase. Reverse repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities. An additional risk is that the
market value of securities sold by the Fund under a reverse repurchase
agreement could decline below the price at which the Fund is obligated to
repurchase them. The Fund will not hold more than 5% of the value of its total
assets in reverse repurchase agreements.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e, delivery and payment can take place a month or
more after the date of the transaction). The purchase price and the interest
rate payable on the securities are fixed on the transaction date. The
securities so purchased are subject to market fluctuation, and no interest
accrues to the Fund until delivery and payment take place. At the time the Fund
makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction and thereafter reflect the value
of such securities in determining its net asset value. The Fund will make
commitments for such when-issued transactions only with the intention of
actually acquiring the securities. To facilitate such acquisitions, the Fund's
custodian bank will maintain, in a separate account of the Fund, liquid assets
from its portfolio, marked to market daily and having value equal to or greater
than such commitments. On the delivery dates for such transactions, the Fund
will meet its obligations from maturities or sales of the securities held in
the separate account and/or from then available cash flow. If the Fund chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of other portfolio obligations,
incur a gain or loss due to market fluctuation.
Permitted Investments in Direct Placement Securities. The Fund is
permitted by its investment objective and policies to invest without limitation
in direct placement securities. Direct placement securities are restricted
securities and therefore are subject to certain of the following risks which
would not apply to securities that were free for immediate public sale. In a
private sale of restricted securities, which may involve protracted
negotiations and a limited number of purchasers, the possibility of delay and
the necessity of obtaining a commitment of investment intent from the
purchasers might adversely affect the price of the securities. In a public
offering, the delay resulting from registration may make it impossible for the
Fund to sell securities at the most desirable time, and the price of the
securities may decline between the time of the decision to sell and the time
when the sale is accomplished. Since only the issuer of the securities can
prepare and file a registration statement under the Securities Act of 1933, as
amended, the Fund may not be able to obtain registration at the most desirable
time.
In view of the above risks, the proceeds to the Fund from the sale of
restricted securities acquired by direct placement could be less than the
proceeds from the sale of similar securities which were free for immediate
public resale. If the Fund is required to liquidate portfolio investments to
satisfy applicable asset coverage requirements, it may be required to dispose
of direct placement securities at times or prices which are disadvantageous to
the Fund.
Direct placement securities, unless eligible for resale under Rule 144A,
are generally ineligible for inclusion in the calculation of the discounted
value of the Fund's investment portfolio under the Rating Agency Guidelines
with which the Fund will be required to comply for so long as the shares of ATP
remain Outstanding. The guidelines require the Fund to maintain portfolio
assets eligible for inclusion in such calculation which have an aggregate
discounted value in excess of the specified asset coverage levels and may
therefore limit the Fund's ability to invest in direct placement securities.
Foreign Investments. The Fund may invest up to 10% of the value of its
total assets in securities principally traded in foreign markets. In addition,
subject to the Fund's basic investment strategy, the Fund may also purchase
Eurodollar certificates of deposit issued by branches of U.S. banks. Foreign
investments may involve risks not present to the same degree in domestic
investments, such as future political and economic developments, the imposition
of withholding taxes on interest income, seizure or nationalization of foreign
deposits, the establishment of exchange controls and the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal of and interest on such obligations. Foreign securities may be less
liquid and more volatile
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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 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 (the
"Swap Arrangements") with BankBoston--(a) an arrangement with a notional amount
of $65 million at a fixed annual rate of 5.25% maturing on February 7, 1999;
(b) an arrangement with a notional amount of $20 million at a fixed annual rate
of 6.07% maturing on October 7, 2002; and (c) an arrangement with a notional
amount of $10 million at a fixed annual rate of 6.225% maturing in October 2,
2002. 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 effect of the Swap Arrangement is to hedge the Fund's
dividend payment obligations with respect to $95 million of the ATP, 63% of the
ATP outstanding as of March 31, 1998. See "Investment Objective and Policies."
The Fund makes dividend payments to the holders of the ATP on the basis of the
results of periodic Auctions in accordance with its terms without regard to the
swap and would continue to do so in the event the swap is terminated. The Fund
has agreed to terminate the arrangement in the event it fails to maintain
certain asset coverage requirements. See "Rating Agency Guidelines." In light
of the proposed increase in the Fund's Outstanding ATP, the Fund will consider
adjustments in its swap arrangements. The timing and amount of any such
adjustment will depend upon market conditions.
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
A-3
<PAGE>
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 ATP-- 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
ATP--Asset Maintenance"); (iv) the Fund shall write only exchange-traded options
on exchanges approved by Moody's (if Moody's is then rating the ATP) and Fitch
(if Fitch is then rating the ATP); and (v) there shall be a quarterly audit made
of the Fund's options transactions, if any, by the Fund's independent
accountants to confirm that the Fund is in compliance with these standards.
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will invest in futures contracts or related
options with respect to the portfolio. However, the Fund has reserved the
right, subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser anticipates that
interest rates may rise, in which event the Fund could sell a futures contract
to protect against the potential decline in the value of its portfolio
securities. Conversely, if declining interest rates were anticipated, the Fund
could purchase a futures contract to protect against a potential increase in
the price of securities the Fund intends to purchase.
In the event the Fund determines to invest in futures contracts and
options thereon, it will not purchase or sell such instruments if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums
for unexpired options on futures contracts would exceed 5% of the value of the
Fund's total assets. In addition, in accordance with the regulations of the
Commodity Futures Trading Commission (the "CFTC") under which the Fund will be
exempted from registration as a commodity pool operator, the Fund may only
enter into futures contracts and options on futures contracts transactions for
other than hedging purposes if immediately thereafter the sum of the amount of
the initial margin deposits and premiums on open positions with respect to
futures and options used for non-hedging purposes would exceed 5% of the market
value of the Fund's net assets. There is no overall limitation on the
percentage of the Fund's portfolio securities which may be subject to a hedge
position. If the CFTC were to amend its regulations such that the Fund would be
permitted to write options on futures contracts for income purposes without
CFTC registration, the Fund would have the right to engage in such transactions
for those purposes, subject to the approval of the Board of Directors. The
extent to which the Fund may enter into transactions involving futures
contracts also may be limited by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code") for qualification as a regulated investment
company.
Risks of Hedging Transactions. The use of options, financial futures and
options on financial futures may involve risks not associated with other types
of investments which the Fund intends to purchase, and it is possible that a
portfolio that utilizes hedging strategies may perform less well than a
portfolio that does not make use of such devices. Use of put and call options
may result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the
Fund to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that
A-4
<PAGE>
losses on the hedging instrument may be greater than gains in the value of the
Fund's position. In addition, futures and options markets may not be liquid in
all circumstances and certain over-the-counter options may have no markets. As
a result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts and the sale of options thereon would create
a greater ongoing potential financial risk than would purchases of options,
where the exposure is limited to the cost of the initial premium.
Incurrence of Indebtedness. For so long as any of the ATP are Outstanding,
the Fund will not borrow money or issue senior securities representing
indebtedness unless it has received written notice from Moody's (if Moody's is
then rating the ATP) and Fitch (if Fitch is then rating the ATP) and any Other
Rating Agency which is then rating the ATP which so requires that such action
would not impair the "aaa"/AAA Credit Rating. For so long as any of the Fund's
preferred stock, including the ATP, is Outstanding, the lesser of (a) 67% of
the shares of the Fund's preferred stock, voting as a separate class, present
at a meeting at which more than 50% of the outstanding shares of preferred
stock entitled to vote is present or (b) more than 50% of the outstanding
shares of preferred stock, must approve any Fund borrowing. Preferred
stockholder approval is not, however, required if the Fund borrows for
temporary or emergency purposes in accordance with its investment policies and
restrictions or for the purpose of clearing transactions. To the extent that
the Fund does incur any borrowings, such borrowings would typically be senior
in right of payment to the ATP and the Common Stock upon liquidation of the
Fund.
Securities Loans. The Fund reserves the right to make secured loans of its
portfolio securities amounting to not more than one-third of the value of its
total assets, thereby realizing additional income. The risks in lending
portfolio securities, as with other extensions of credit, consist of possible
delays in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. As a matter of policy
securities loans are made to unaffiliated broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or
short-term debt obligations at least equal at all times to the value of the
securities subject to the loan. The borrower pays to the Fund an amount equal
to any interest or dividends received on the securities subject to the loan.
The Fund retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved.
A-5
<PAGE>
(This page intentionally left blank)
<PAGE>
TO BE SUBMITTED TO YOUR BROKER-DEALER WHO WILL THEN
DELIVER COPIES ON YOUR BEHALF TO THE
AUCTION OR REMARKETING AGENT
MASTER PURCHASER'S LETTER
Relating to
Securities Involving Rate Settings
Through Auctions or Remarketings
THE COMPANY
A REMARKETING AGENT
THE AUCTION AGENT
A BROKER-DEALER
AN AGENT MEMBER
OTHER PERSONS
Dear Sirs:
1. This letter is designed to apply to publicly or privately offered debt
or equity securities ("Securities") of any issuer ("Company") which are
described in any final prospectus or other offering materials relating to such
Securities as the same may be amended or supplemented (collectively, with
respect to the particular Securities concerned, the "Prospectus") and which
involve periodic rate settings through auctions ("Auctions") or remarketing
procedures ("Remarketings"). This letter shall be for the benefit of any
Company and of any auction agent, paying agent (collectively, "auction agent"),
remarketing agent, broker-dealer, agent member, securities depository or other
interested person in connection with any Securities and related Auctions or
Remarketings (it being understood that such persons may be required to execute
specified agreements and nothing herein shall alter such requirements). The
terminology used herein is intended to be general in its application and not to
exclude any Securities in respect of which (in the Prospectus or otherwise)
alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions or
Remarketings as set forth in the Prospectus.
3. We agree that any bid or sell order placed by us in an Auction or a
Remarketing shall constitute an irrevocable offer (except as otherwise
described in the Prospectus) by us to purchase or sell Securities subject to
such bid or sell order, or such lesser amount of Securities as we shall be
required to sell or purchase as a result of such Auction or Remarketing, at the
applicable price, all as set forth in the Prospectus, and that if we fail to
place a bid or sell order with respect to Securities owned by us with a
broker-dealer on any Auction or Remarketing Date, or a broker-dealer to which
we communicate a bid or sell order fails to submit such bid or sell order to
the auction agent or remarketing agent concerned, we shall be deemed to have
placed a hold or a sell order with respect to such Securities as described in
the Prospectus. We authorize any broker-dealer that submits a bid or sell order
as our agent in Auctions or Remarketings to execute contracts for the sale of
Securities by such bid or sell order. We recognize that the payment of such
broker-dealer for Securities purchased on our behalf shall not relieve us of
any liability to such broker-dealer for payment for such Securities.
4. We understand that in a Remarketing, the dividend or interest rate or
rates on the Securities and the allocation of Securities tendered for sale
between dividend or interest periods of different lengths will be based from
time to time on the determinations of one or more remarketing agent(s), and we
agree to be conclusively bound by such determinations. We further agree to the
payment of different dividend or interest rates to different holders of
Securities depending on the length of the dividend or interest period elected
by such holders. We agree that any notice given by us to a remarketing agent
(or a broker-dealer for transmission to a remarketing agent) of our desire to
tender Securities in a Remarketing shall constitute an irrevocable (except to
the limited extent set forth in the Prospectus) offer by us to sell the
securities specified in such Notice, or such lesser number of Securities as we
shall be required to sell as a result of such Remarketing, in accordance with
the terms set forth in the Prospectus, and we authorize the remarketing agent
to sell, transfer or otherwise dispose of such Securities as set forth in the
Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations
set forth in the Prospectus and we will sell, transfer or otherwise dispose of
any Securities held by us from time to time only pursuant to a bid or sell
order placed in an Auction, in a Remarketing, to or through a broker-dealer or,
when permitted in the Prospectus, to a person that has signed and delivered to
the applicable auction agent or a remarketing agent a letter substantially in
the form of this letter (or other applicable purchaser's letter), provided that
in the case of all transfers other than pursuant to Auctions or Remarketings we
or our broker-dealer or our agent member shall advise such auction agent or a
remarketing agent of such transfer.
B-1
<PAGE>
We understand that a restrictive legend will be placed on certificates
representing the Securities and stop-transfer instructions will be issued to
the transfer agent and/or registrar, all as set forth in the Prospectus.
6. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by one or more global
certificates registered in the name of the applicable securities depository or
its nominee, that we will not be entitled to receive any certificate
representing the Securities and that our ownership of any Securities will be
maintained in book-entry form by the securities depository for the account of
our agent member, which in turn will maintain records of our beneficial
ownership. We authorize and instruct our agent member to disclose to the
applicable auction agent or remarketing agent such information concerning our
beneficial ownership of Securities as such auction agent or remarketing agent
shall request.
7. We acknowledge that partial deliveries of Securities purchased in
Auctions or Remarketings may be made to us and such deliveries shall constitute
good delivery as set forth in the Prospectus.
8. This letter is not a commitment by us to purchase any Securities.
9. This letter supersedes any prior-dated version of this master
purchaser's letter, and supplements any prior to post-dated purchaser's letter
specific to any particular Securities, and this letter may only be revoked by a
signed writing delivered to the original recipients hereof.
10. The descriptions of Auction or Remarketing procedures set forth in each
applicable Prospectus are incorporated by reference herein and in case of any
conflict between this letter, any purchaser's letter specific to particular
Securities and any such description, such description shall control.
11. Any xerographic or other copy of this letter shall be deemed of equal
effect as a signed original.
12. Our agent member of The Depository Trust company currently is .
13. Our personnel authorized to place orders with broker-dealers for the
purposes set forth in the Prospectus in Auctions or Remarketings currently
is/are , telephone number ( ) - .
14. Our taxpayer identification number is .
15. In the case of each offer to purchase, purchase, offer to sell or sale
by us of Securities not registered under the Securities Act of 1933, as amended
(the "Act"), we represent and agree as follows:
(A) We understand and expressly acknowledge that the Securities have
not been and will not be registered under the Act and, accordingly, that
the Securities may not be reoffered, resold or otherwise pledged,
hypothecated or transferred unless an applicable exemption from the
registration requirements of the Act is available.
(B) We hereby confirm that any purchase of Securities made by us will
be for our own account, or for the account of one or more parties for which
we are acting as trustee or agent with complete investment discretion and
with authority to bind such parties, and not with a view to any public
resale or distribution thereof. We and each other party for which we are
acting which will acquire Securities will be "accredited investors" within
the meaning of Regulation D under the Act with respect to the Securities to
be purchased by us or such party, as the case may be, will have previously
invested in similar types of instruments and will be able and prepared to
bear the economic risk of investing in and holding such Securities.
(C) We acknowledge that prior to purchasing any Securities we shall
have received a Prospectus (or private placement memorandum) with respect
thereto and acknowledge that we will have had access to such financial and
other information, and have been afforded the opportunity to ask such
questions or representatives of the Company and receive answers thereto, as
we deem necessary in connection with our decision to purchase Securities.
(D) We recognize that the Company and broker-dealers will rely upon the
truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
<TABLE>
<S> <C>
Dated: ____________________________________ ____________________________________________
(Name of Purchaser)
Mailing Address of Purchaser
___________________________________________ By: _______________________________________
Printed Name:
___________________________________________ Title:
___________________________________________
</TABLE>
B-2
<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, the Investment Adviser or the
Underwriter. This Prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
an offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information contained herein is correct as of any time subsequent to the
date hereof.
-----------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Highlights .......................... 3
Capitalization and Information
Regarding Senior Securities .................. 5
Portfolio Composition ......................... 7
The Fund ...................................... 8
Use of Proceeds ............................... 8
Description of ATP ............................ 9
Auction Procedures ............................ 13
Rating Agency Guidelines-"aaa"/AAA Rating...... 17
Taxation ...................................... 18
Investment Objective and Policies ............. 18
Risk Factors and Special Considerations ....... 20
Board of Directors ............................ 24
The Investment Adviser ........................ 24
Description of Common Stock ................... 25
Conversion to Open-End Status and
Repurchase of Shares ....................... 25
Custodian, Auction Agent, Registrar,
Transfer Agent and paying Agent ............ 26
Underwriting .................................. 26
Certain Legal Matters ......................... 27
Experts ....................................... 27
Reports to Stockholders ....................... 28
Available Information ......................... 28
Table of Contents of the Statement of
Additional Information ..................... 29
Glossary ...................................... 30
Certain Investment Practices ..................A-1
Master Purchaser's Letter .....................B-1
</TABLE>
================================================================================
================================================================================
$60,000,000
The New America
High Income Fund, Inc.
Auction Term Preferred Stock
2,400 Shares, Series D
-----------------------------------------
PROSPECTUS
-----------------------------------------
Merrill Lynch & Co.
May , 1998
================================================================================
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 11, 1998
The New America High Income Fund, Inc.
Auction Term Preferred Stock
2,400 Shares, Series D
Liquidation Value-$25,000 Per Share
STATEMENT OF ADDITIONAL INFORMATION
The New America High Income Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company with a leveraged capital structure.
The Board of Directors of the Fund appoints the Fund's investment adviser
annually, subject to stockholder approval. Currently, Wellington Management
Company, LLP ("Wellington Management" or the "Investment Adviser") serves as
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"). This Statement
of Additional Information is not a prospectus, but should be read in
conjunction with the Prospectus for the Fund dated May , 1998 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing
shares of the Fund, and investors should obtain and read the Prospectus prior
to purchasing shares. A copy of the Prospectus may be obtained without charge,
by writing to the Fund, whose address is 33 Broad Street, Boston, Massachusetts
02109. This Statement of Additional Information incorporates by reference the
entire Prospectus.
Certain capitalized terms not otherwise defined in this Statement of
Additional Information have the meanings provided in the Glossary included as
part of the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Investment Objective and Policies ..................... B-2
Rating Agency Guidelines .............................. B-3
Investment Restrictions ............................... B-15
Portfolio Maturity and Turnover ....................... B-17
Taxation .............................................. B-18
Management of the Fund ................................ B-22
Determination of Net Asset Value ...................... B-28
Description of ATP .................................... B-29
Auction Procedures .................................... B-44
Financial Statements .................................. B-48
Appendix A--Ratings of Corporate Obligations .......... B-A-1
</TABLE>
The Prospectus and this Statement of Additional Information omit certain
of the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "Commission"). These
items may be obtained from the Commission upon payment of the fee prescribed,
or inspected at the Commission's office at no charge.
This Statement of Additional Information is dated May , 1998.
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 Statement of Additional Information does not constitute a
prospectus.
<PAGE>
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." 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. In the high yield securities market of 1989 and 1990, the
Fund suffered a substantial decline in its net asset value as a result of these
factors and thus failed to achieve this objective during that period. While the
Fund's cumulative total investment returns on the Fund's Common Stock 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" in the Prospectus 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'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 Moody's and Fitch, non-rated securities, private
placements (other than Rule 144A Securities), non-U.S. securities, preferred or
common stock, zero coupon or similar securities that do not provide for the
periodic payment of interest in cash and other securities not within the
investment guidelines. Accordingly, although the Fund reserves the right to
invest in such securities to the extent set forth herein, they have not and it
is anticipated that they will not constitute a significant portion of the Fund's
portfolio. See "Rating Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of the guidelines,
greater than the aggregate liquidation preference of the ATP plus specified
liabilities, payment obligations and other amounts, as of periodic valuation
dates. The Rating Agency Guidelines also require the Fund to maintain asset
coverage for the ATP on a non-discounted basis of at least 200% as of the end of
each month, and the 1940 Act requires such asset coverage as a condition to
paying dividends or other distributions on Common Stock. See "Description of
ATP--Asset Maintenance." The effect of compliance with the Rating Agency
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 (as defined herein), and to limit or delay the
Fund's ability to reinvest cash in a rising "high-yield" market. See "The Fund"
in the Prospectus. 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.
B-2
<PAGE>
"High-yield" bonds, the generic name for corporate bonds rated between
"BB"/"Ba" and "C"/"C" by Moody's and Fitch, are frequently issued by
corporations in the growth stage of their development. Bonds 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.
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.
The Fund intends to maintain a Discounted Value for its portfolio 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 ATP--Asset Maintenance." Moody's and Fitch have each established
separate guidelines for determining Discounted Value. To the extent any
particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency). The Moody's
and Fitch guidelines do not impose any limitations on the percentage of Fund
assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio. The amount of such
assets included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the assets included in the
portfolio which are eligible for inclusion in the Discounted Value of the
portfolio under the Rating Agency Guidelines ("Eligible AIt is a condition of
the Underwriter's obligation to purchase the ATP that the Fund obtain a rating
of "aaa" from Moody's and a rating of AAA from Fitch as of the Date of Original
Issue. As described by Moody's, an issue of preferred stock which is rated "aaa"
is considered to be top-quality preferred stock with good asset protection and
the least risk of dividend impairment within the universe of preferred stocks.
As described by Fitch, a preferred stock rating of AAA indicates strong asset
protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. A Moody's or Fitch
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful.
Ratings are not recommendations to purchase, hold or sell shares of ATP,
inasmuch as the rating does not comment as to market price or suitability for a
particular investor. The rating is based on current information furnished to
Moody's and Fitch by the Fund and obtained by Moody's and Fitch from other
sources. The rating may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information. The ATP will be subject to
mandatory redemption in the event that the "aaa"/AAA Credit Rating is not
available for the ATP and the Fund is unable to obtain the "aaa"/AAA Credit
Rating for the ATP from a substitute rating agency or agencies within the time
specified herein. 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.
B-3
<PAGE>
Moody's "aaa" Rating Guidelines
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Moody's Eligible Assets")
must be discounted by certain discount factors set forth below ("Moody's
Discount Factors"). The Discounted Value of a portfolio security under Moody's
guidelines is the Market Value thereof, determined as specified by Moody's,
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 Rule 144A Securities. Rule 144A Securities 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.
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 (which percentage is based upon the Exposure Period) with reference to the
remaining term to maturity of such assets, in accordance with the table set
forth below:
Moody's Discount Factors --
Corporate Debt Securities+
<TABLE>
<CAPTION>
Remaining Term
to Rating Category
Maturity Asset Aaa Aa A Baa Ba B* Caa
- -------------- --- -- - --- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year................. 112% 118% 123% 128% 139% 150% 260%
2 Years................ 118 124 130 135 147 158 260
3 Years................ 123 129 135 141 153 165 260
4 Years................ 139 135 141 148 160 172 260
5 Years................ 134 141 147 154 166 179 260
7 Years................ 142 149 155 162 176 189 260
10 Years................ 148 156 163 170 184 198 260
15 Years................ 153 161 168 175 190 205 260
20 Years................ 161 169 177 184 200 215 260
30 Years................ 162 170 178 185 201 216 260
</TABLE>
- -------------
* Senior debt securities of an issuer rated B3 shall be deemed to be Caa
rated securities for purposes of determining the applicable Moody's
Discount Factor.
+ The Moody's Discount Factor applied to Rule 144A Securities is 130% of
the Moody's Discount Factor which would apply were the securities
registered under the 1933 Act.
The Moody's guidelines impose minimum issue size, issuer and industry
diversification and other requirements for purposes of determining Moody's
Eligible Assets. Specifically, portfolio holdings as
B-4
<PAGE>
described below must be within the following diversification and issue size
requirements in order to constitute Moody's Eligible Assets includable within
the calculation of Discounted Value:
<TABLE>
<CAPTION>
Maximum Maximum
Single Single Minimum
Issuer Industry Issue Size
Asset Ratings(1) (%)(2,3) (%)(3,4) ($ in millions)(6)
---------------- -------- -------- ------------------
<S> <C> <C> <C>
"aaa", Aaa............................. 100 100 100
"aa", Aa............................... 20 60 100
"a", A, P-1............................ 10 40 100
"baa", Baa............................. 6 20 100
Ba..................................... 4 12 50(5)
B1-B2.................................. 3 8 50(5)
B3 (Caa subordinate)................... 2 5 50(5)
</TABLE>
See accompanying notes
- ---------------------
(1) Refers to the senior debt rating of asset.
(2) Companies subject to common ownership of 25% or more are considered as
one name.
(3) Percentages represent a portion of the aggregate Market Value of
corporate securities.
(4) Industries are determined according to industry classifications
specified by Moody's ("Moody's Industry Classification"). See below.
(5) Collateral bonds from issues ranging from $50 million to $100 million
are limited to 20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50
million.
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
B-5
<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, and Distribution and Sales of the foregoing
B-6
<PAGE>
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
Personal, Food and Miscellaneous Services
Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks, Radio, T.V., Cable Broadcasting Equipment
Cargo Transport: Rail, Shipping, Railroads, Rail-car builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail,
Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo,
Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
Personal Transportation: Air, Bus, Rail, Car Rental
Utilities: Electric, Water, Hydro Power, Gas, Diversified
Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national
Agencies
Where the Fund sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Moody's
Eligible Asset and the amount the Fund is required to pay upon repurchase of
such asset will count as a liability for the purposes of the ATP Basic
Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a
third party in the future, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such asset will constitute a Moody's Eligible Asset. For
the purposes of calculation of Moody's Eligible Assets, portfolio securities
which have been called for redemption by the issuer thereof are valued at the
lower of Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it has been irrevocably deposited for
the payment of (i)(A) through (i)(F) under the definition of ATP Basic
Maintenance Amount (see "Description of ATP--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
B-7
<PAGE>
thereon in cash in U.S. dollars and do not provide for conversion or exchange
into, or have warrants attached entitling the holder to receive, equity capital
at any time over the respective lives of such securities, (c) the issuer of such
a preferred stock has common stock listed on either the New York Stock Exchange
or the American Stock Exchange, (d) the issuer of such a preferred stock has a
senior debt rating from Moody's of Baa1 or higher or a preferred stock rating
from Moody's of "baa3" or higher and (e) such preferred stock has paid
consistent cash dividends in U.S. dollars over the last three years or has a
minimum rating of "al" (if the issuer of such preferred stock has other
preferred issues outstanding that have been paying dividends consistently for
the last three years, then a preferred stock without such a dividend history
would also be eligible). In addition, the preferred stocks must have the
following diversification requirements: (x) the preferred stock issue must be
greater than $50 million and (y) the minimum holding by the Fund of each issue
of preferred stock is $500,000 and the maximum holding of preferred stock of
each issue is $5 million. In addition, preferred stocks issued by transportation
companies will not be considered as Moody's Eligible Assets.
The Moody's Discount Factors for Moody's Eligible Assets that are
preferred stock are (a) 152% for utility preferred stocks, (b) 197% for
industrial/financial preferred stocks and (c) 350% for auction rate preferred
stocks.
Other Moody's Eligible Assets. In addition to corporate debt securities
and preferred stocks which satisfy the above requirements, Moody's Eligible
Assets also include the following:
(i) cash (including, for this purpose, interest and
dividends due on assets rated (A) Baa3 or higher by Moody's if the
payment date is within five Business Days of the date on which the
value of the portfolio is being determined for purposes of determining
compliance with Moody's or Fitch's investment guidelines (a "Valuation
Date"), (B) A2 or higher if the payment date is within thirty days of
the Valuation Date, and (C) A1 or higher if the payment date is within
the Exposure Period) and receivables for Moody's Eligible Assets sold
if the receivable is due within five Business Days of the Valuation
Date, and if the trades which generated such receivables are (A)
settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B)(1) with
counterparties having a Moody's long-term debt rating of at least Baa3
or (2) with counterparties having a Moody's short-term money market
instrument rating of at least P-1;
(ii) short-term money market instruments (as defined
by Moody's), so long as (A) such securities are rated at least P-1, (B)
in the case of demand deposits, time deposits and overnight funds, the
supporting entity is rated at least A2, or (C) in all other cases, the
supporting entity (1) is rated A2 and the security matures within one
month, (2) is rated A1 and the security matures within three months, or
(3) is rated at least Aa3 and the security matures within six months;
provided, however, that for purposes of this definition, such
instruments (other than commercial paper rated by S&P and not rated by
Moody's) need not meet any otherwise applicable S&P rating criteria;
and
(iii) U.S. Treasury Securities and Treasury Strips
(as defined by Moody's).
(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
B-8
<PAGE>
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:
U.S. Treasury Securities:
<TABLE>
<CAPTION>
Discount
Remaining Term to Maturity Factor
-------------------------- --------
<S> <C>
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
</TABLE>
U.S. Treasury Strips:
<TABLE>
<CAPTION>
Discount
Remaining Term to Maturity Factor
-------------------------- --------
<S> <C>
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
</TABLE>
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 is the Market Value thereof determined as specified by Fitch 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
B-9
<PAGE>
restricted as to resale under federal securities laws but are eligible for
resale pursuant to Rule 144A under the Securities Act as determined by the
Fund's adviser acting subject to the supervision of the Fund's Board of
Directors; (e) such securities are issued by (1) a U.S. corporation, (2) a
corporation domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain, or the United Kingdom (the "Approved Foreign
Nations"), (3) the government of any Approved Foreign Nation or any of its
agencies, instrumentalities or political subdivisions (the debt securities of
Approved Foreign Nation issuers being referred to collectively as "Foreign
Bonds"), (4) a corporation domiciled in Canada or (5) the Canadian government or
any of its agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as "Canadian
Bonds"); and (f) in the case of Foreign and Canadian Bonds, such securities are
denominated in U.S. dollars. Foreign Bonds held by the Fund will qualify as
Fitch Eligible Assets only up to a maximum of 20% of the aggregate Market Value
of all assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held
by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 20% of
the aggregate Market Value of all assets constituting Fitch Eligible Assets.
Notwithstanding the limitations in the two preceding sentences, Foreign Bonds
and Canadian Bonds held by the Fund will qualify as Fitch Eligible Assets only
up to a maximum of 30% of the aggregate Market Value of all assets constituting
Fitch Eligible Assets. In addition, bonds which are issued in connection with a
reorganization under U.S. federal bankruptcy law ("Reorganization Bonds") will
be considered Debt Securities constituting Fitch Eligible Assets if (a) they are
rated CCC or higher by Fitch or, if unrated by Fitch, rated Caa or higher by
Moody's and CCC or higher by S&P; (b) they provide for periodic payment of
interest in cash in U.S. dollars; (c) they do not provide for conversion or
exchange into equity capital at any time over their lives; (d) they have been
registered under the Securities Act or are restricted as to resale under federal
securities laws but are eligible for trading under Rule 144A promulgated
pursuant to the Securities Act as determined by the Fund's adviser acting
subject to the supervision of the Fund's Board of Directors; (e) they were
issued by a U.S. corporation; and (f) at the time of purchase at least one year
had elapsed since the issuer's reorganization. Reorganization Bonds may also be
considered Debt Securities constituting Fitch Eligible Assets if they have been
approved by Fitch, which approval shall not be unreasonably withheld."
The discounted value of any Fitch Eligible Assets that is a corporate
debt security constituting a Fitch Eligible Asset (see "Corporate Debt
Securities," above) is the percentage determined by reference to (i) the rating
on such asset (i.e., whether it is a Type I, Type II, Type III, Type IV, Type V,
Type VI or Type VII Corporate Bond as defined below) and (ii) the remaining term
to maturity of such assets, in accordance with the table set forth below, except
that (A) the Fitch Discount Factor applied to Rule 144A Securities will be 110%
of the Fitch Discount Factor which would apply were the securities registered
under the 1933 Act and (B) the Fitch Discount Factor applied to Foreign Bonds
will be 120% of the Fitch Discount Factor which would apply were the securities
issued by a U.S. corporation:
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
B-10
<PAGE>
Type II Debt Securities with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.26
greater than 4 years, but less than or equal to 7 years 1.43
greater than 7 years, but less than or equal to 12 years 1.44
greater than 12 years, but less than or equal to 25 years 1.51
greater than 25 years, but less than or equal to 30 years 1.56
Type III Debt Securities with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.29
greater than 4 years, but less than or equal to 7 years 1.46
greater than 7 years, but less than or equal to 12 years 1.50
greater than 12 years, but less than or equal to 25 years 1.55
greater than 25 years, but less than or equal to 30 years 1.60
Type IV Debt Securities with remaining maturities of:
less than or equal to 2 years 1.27
greater than 2 years, but less than or equal to 4 years 1.32
greater than 4 years, but less than or equal to 7 years 1.52
greater than 7 years, but less than or equal to 12 years 1.57
greater than 12 years, but less than or equal to 25 years 1.63
greater than 25 years, but less than or equal to 30 years 1.69
Type V Debt Securities with remaining maturities of:
less than or equal to 2 years 1.32
greater than 2 years, but less than or equal to 4 years 1.36
greater than 4 years, but less than or equal to 7 years 1.59
greater than 7 years, but less than or equal to 12 years 1.65
greater than 12 years, but less than or equal to 25 years 1.72
greater than 25 years, but less than or equal to 30 years 1.80
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
B-11
<PAGE>
For purposes of the foregoing:
"Type I Debt Securities" means Debt Securities (as defined above) rated
either AAA by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by
Moody's;
"Type II Debt Securities" means Debt Securities rated either at least
AA- by Fitch or, if not rated by Fitch, rated at least AA- by S&P and at least
Aa3 by Moody's which do not constitute Type I Debt Securities;
"Type III Debt Securities" means Debt Securities rated either at least
A- by Fitch or, if not rated by Fitch, rated at least A- by S&P and at least A3
by Moody's which do not constitute Type I or Type II Debt Securities;
"Type IV Debt Securities" means Debt Securities rated either at least
BBB- by Fitch or, if not rated by Fitch, rated at least BBB- by S&P and at least
Baa3 by Moody's which do not constitute Type I, Type II or Type III Debt
Securities;
"Type V Debt Securities" means Debt Securities rated either at least BB-
by Fitch or, if not rated by Fitch, rated at least BB- by S&P and at least Ba3
by Moody's which do not constitute Type I, Type II, Type III or Type IV Debt
Securities;
"Type VI Debt Securities" means Debt Securities rated either at least B-
by Fitch or, if not rated by Fitch, rated at least B- by S&P and at least B3 by
Moody's which do not constitute Type I, Type II, Type III, Type IV or Type V
Debt Securities; and
"Type VII Debt Securities" means Debt Securities rated either at least
CCC by Fitch or, if not rated by Fitch, rated at least CCC by S&P and at least
Caa by Moody's which do not constitute Type I, Type II, Type III, Type IV, Type
V or Type VI Debt Securities.
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included in
Fitch Eligible Assets:
<TABLE>
<CAPTION>
Maximum Maximum Minimum
Single Issuer Single Industry Issue in Size
Type of Debt Security (%) (1,2) (%) (2,3) ($ in millions)
- --------------------- --------- --------- ---------------
<S> <C> <C> <C>
Type I ................................. 100% 100% $100
Type II ................................. 20 75 100
Type III (4).............................. 10 50 100
Type IV................................... 6 25 100
Type V.................................... 4 16 50(5)
Type VI................................... 3 12 50(5)
Type VII.................................. 2 8 50(5)
</TABLE>
See accompanying notes
(1) Companies subject to common ownership of 25% or more are considered as
one name.
(2) Percentages represent a portion of the aggregate Market Value of Debt
Securities.
(3) Industries are determined according to industry classifications
specified by Fitch ("Fitch Industry Classifications") (see below).
B-12
<PAGE>
(4) Includes Short Term Money Market Instruments which do not constitute
Type I or Type II Debt Securities and which have a maturity greater
than the Exposure Period.
(5) Collateral bonds from issues ranging from $50 million to $100 million
are limited to 20% of the collateral pool.
(6) Foreign and Canadian Bonds issued by governments of the Approved
Foreign Nations and Canada or any of their agencies, instrumentalities,
or political subdivisions assigned to the "Sovereigns" industry
classification are not subject to any maximum single industry
concentration limitation."
The Fitch Industry Classifications, for the purposes of determining
Fitch Eligible Assets, mean the following industry classifications, determined
with respect to particular issues in the discretion of the Fund:
Aerospace & Defense
Automobiles
Banking, Finance & Insurance
Building & Materials
Chemicals
Computers & Electronics
Consumer Products
Energy
Environmental Services
Farming & Agriculture
Food, Beverage & Tobacco
Healthcare & Pharmaceutical
Industrial Machinery
Media, Leisure & Entertainment
Metals & Mining
Miscellaneous
Paper & Forest Products
Retail
Sovereigns
Textiles & Furniture
Transportation
Utilities
Other Fitch Eligible Assets. Other Fitch Eligible Assets include the
following:
(i) cash (including, for this purpose, interest and dividends
due on assets rated (A) Baa3 or higher by Moody's, BBB or higher by S&P
or BBB or higher by Fitch if the payment date is within five Business
Days of the Valuation Date, (B) A2 or higher by Moody's and either A or
higher by S&P or A or higher by Fitch if the payment date is within
thirty days of the Valuation Date, and (C) A1 or higher by Moody's and
either A+ or higher by S&P or A+ or higher by Fitch if the payment date
is within the Exposure Period) and receivables for Fitch Eligible
Assets sold if the receivable is due within five Business Days of the
Valuation Date, and if the trades which generated such receivables are
(A) settled through clearing house firms with respect to which the Fund
has received prior written authorization from Fitch or (B) (1) with
counterparties having a Fitch long-term debt rating of at least BBB- by
Fitch, if rated by Fitch or, if not rated by Fitch, then rated at least
BBB- by S&P and rated at least Baa3 by Moody's or (2) with
counterparties having a Fitch Short-Term Money Market Instrument rating
of at least F-1+ by Fitch, if rated by Fitch or, if not rated by Fitch,
then rated at least A-1 by S&P and rated at least P-1 by Moody's;
(ii) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1 by Moody's and either at least A-1 +
by S&P or F1+ by Fitch, (B) in the case of demand
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<PAGE>
deposits, time deposits and overnight funds, the supporting entity is
rated at least A2 by Moody's and either at least A by S&P or A by
Fitch, or (C) in all other cases, the supporting entity (1) is rated at
least A2 by Moody's and at least A by S&P and the security matures
within one month, (2) is rated at least A1 by Moody's and either at
least A+ by S&P or at least A by Fitch and the security matures within
three months or (3) is rated at least Aa3 by Moody's and either at
least AA by S&P or at least AA by Fitch and the security matures within
six months; and
(iii) U.S. Treasury Securities.
The Fitch Discount Factors for Fitch Eligible Assets that are U.S. Treasury
Securities are as follows:
U.S. Treasury Securities with remaining maturities of:
less than or equal to 1 year 1.06
greater than 1 year, but less than or equal to 2 years 1.11
greater than 2 years, but less than or equal to 5 years 1.16
greater than 5 years, but less than or equal to 15 years 1.24
greater than 25 years, but less than or equal to 30 years 1.26
The Fitch Discount Factor applied to short-term portfolio securities
will be (A) 100%, so long as such portfolio securities mature or have a demand
feature at par exercisable within the Exposure Period and, (B) 125%, so long as
such portfolio securities neither mature nor have a demand feature at par
exercisable within the Exposure Period. A Fitch Discount Factor of 100% will be
applied to cash.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii)
of the Investment Company of Act of 1940, as amended, may be included in Fitch
Eligible Assets, but, with respect to any financial contract, only upon receipt
by the Fund of a writing from Fitch specifying any conditions on including such
financial contract in Fitch Eligible Assets and assuring the Fund that including
such financial contract in the manner so specified would not affect the credit
rating assigned by Fitch to the ATP.
Under Fitch's current guidelines, portfolio securities that are
preferred stocks will not be deemed Fitch Eligible Assets.
When the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the ATP Basic Maintenance Amount.
Where the Fund purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a Fitch's Eligible
Asset if the long-term debt of such other party is rated at least A2 by Moody's
and A by S&P and such agreement has a term of 30 days or less; otherwise the
Discounted Value of such asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of ATP Basic Maintenance
Amount (see "Description of ATP--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.
* * *
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<PAGE>
For so long as any of the ATP is Outstanding and either Moody's, Fitch
or any Other Rating Agency is rating the ATP, the Fund will not, unless it has
received written confirmation from Moody's, Fitch or any Other Rating Agency as
applicable, that any such action would not impair the respective rating then
assigned by Moody's, Fitch, or such Other Rating Agency 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
transaction; or (ii) borrow money, except that the Fund may, without the written
confirmation described above, borrow money for the purpose of clearing
securities transactions; provided that the ATP Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and if the
borrowing matures in not more than 60 days and is non-redeemable; or (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; or (iv) engage in any short sales of securities; or (v)
lend portfolio securities; or (vi) merge or consolidate into or with any other
corporation. For purposes of valuation of Eligible Assets: (A) if the Fund
writes a call option, the underlying asset will be valued as follows: (1) 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 (2) otherwise, it has no value; (B) if the Fund writes a put
option, the underlying asset will be valued as follows: the lesser of (1)
exercise price and (2) the Discounted Value of the underlying security; and (C)
call or put option contracts which the Fund buys have no value. For so long as
ATP are rated by Moody's or Fitch: (A) the Fund will not engage in options
transactions for leveraging or speculative purposes; (B) 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; (C) the
Fund will not enter into an option transaction with respect to portfolio
securities unless, after giving effect thereto, the Fund would continue to have
Eligible Assets with an aggregate Discounted Value equal to or greater than the
ATP Basic Maintenance Amount; (D) the Fund will not enter into an option
transaction with respect to portfolio securities unless after giving effect to
such transaction the Fund would continue to be in compliance with the provisions
relating to the ATP Basic Maintenance Amount; (E) for purposes of the ATP Basic
Maintenance Amount assets in margin accounts are not Eligible Assets; (F) the
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);
(G) where delivery may be made to the Fund with any of a class of securities,
the Fund shall assume for purposes of the ATP Basic Maintenance Amount that it
takes delivery of that security which yields it the least value; (H) the Fund
will not engage in forward contracts; and (I) there shall be a quarterly audit
made of the Fund's options transactions by the Fund's independent accountants to
confirm that the Fund is in compliance with these standards.
The Board of Directors may, without approval of any Holder of the ATP
or any other stockholder of the Fund, from time to time amend, alter or repeal
any or all of the definitions required to be contained in the Articles by
Moody's, Fitch or any Other Rating Agency 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 ATP--Voting Rights."
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
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<PAGE>
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.
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
B-16
<PAGE>
the Fund or to repurchase agreements that have a maturity of seven days or less;
however, the Fund will attempt to dispose in an orderly fashion of any
securities received under these circumstances to the extent that such
securities, together with other securities that are not readily marketable,
exceed 20% of the market or other fair value of the Fund's total assets.
14. Invest in the securities of other registered investment companies,
except as they may be acquired as part of a merger or consolidation or
acquisition of assets or by purchases in the open market involving only
customary brokers' commissions.
15. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal in,
represent interests in or are secured by interests in such leases, rights or
contracts.
16. Make investments for the purpose of exercising control or
management over the issuer of any security.
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 7 permit the Fund to engage in certain practices to a limited
extent, the Fund does not currently engage in such practices. See "Investment
Practices."
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 "Rating Agency Guidelines."
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 maturity 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. 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. The Fund's portfolio
B-17
<PAGE>
turnover rates for the fiscal years ended December 31, 1995, 1996 and 1997 were
62.7%, 53.5% and 108.85%, respectively.
TAXATION
The following discussion offers only a brief outline of the federal
income tax consequences of investing in ATP. 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;
and (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, securities of other regulated
investment companies 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 or securities of other regulated investment companies).
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
Fund's 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. 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.
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<PAGE>
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 ATP--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.
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.
Federal Income Tax Treatment of Holders of ATP
Under present law and based, in part, on the Fund's representation that
there is no express or implied agreement between or among a Broker-Dealer or any
other party and the Fund or any owners of the
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<PAGE>
ATP that the Broker-Dealer or any other party will guarantee or otherwise
arrange to ensure that an owner of the ATP will be able to sell his or her
shares, counsel to the Fund is of the opinion that ATP will constitute stock of
the Fund, and thus distributions with respect to the ATP (other than
distributions in redemption of ATP subject to section 302(b) of the Code) will
constitute dividends to the extent of the Fund's current or accumulated earnings
and profits, as calculated for federal income tax purposes. The following
discussion assumes such treatment will apply.
The Fund's income will consist of net investment income and may also
consist of net capital gains. The character of the Fund's income will not affect
the amount of dividends to which the holders of the ATP are entitled. Holders of
the ATP are entitled to receive only the amount of dividends as determined by
periodic auctions. For federal income tax purposes, however, 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 four series of ATP
as consisting of particular types of income (net capital gains, dividend income
and ordinary income) in accordance with each class' proportionate share of the
total dividends paid to all classes. Thus, each dividend paid with respect to
the ATP during a year will be designated as ordinary income dividends and, if
the Fund designates any dividend as a capital gains dividend, capital gains in
proportion to the ATP's proportionate share of the total dividends paid on the
ATP during the year to the total dividends paid on the four series of ATP and
the Common Stock 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 stockholders as ordinary income.
Subject to the discussion below regarding changes to the capital gains tax
rates, distributions of the Fund's net capital gains, if any, are taxable to
stockholders at rates applicable to long-term capital gains regardless of the
length of time the ATP have been held by holders. Distributions in excess of the
Fund's earnings and profits will first reduce a stockholder's adjusted tax basis
in his or her shares of ATP and, after the adjusted tax basis is reduced to
zero, will constitute capital gains to a holder of shares of ATP who holds his
or her shares of ATP as a capital asset.
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 the stockholders. 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. Such distribution will affect the
tax character but not the amount of dividends to which holders of shares of ATP
are entitled.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to stockholders of
record in one of such months and paid in January of the following year will be
treated as having been distributed by the Fund and received by the stockholders
on December 31. 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, stockholders 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.
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<PAGE>
Most of the Fund's net investment income is derived from
interest-bearing securities. Accordingly, dividends paid with respect to the ATP
generally will not qualify for the dividend 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. Corporate stockholders who otherwise are eligible to
claim the dividends received deduction under Section 243 of the Code can deduct
70% of the portion of the ATP dividend representing the stockholder's portion of
the Fund's eligible dividend income. The Service has ruled that corporate
stockholders of a regulated investment company must meet the 45-day holding
requirements 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 gain from 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 gain from 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 ATP (including transfers in connection with a
redemption or repurchase of such shares of ATP or a liquidation of the Fund)
will be a taxable transaction for federal income tax purposes. Selling holders
of shares of ATP will generally recognize gain or loss in an amount equal to the
difference between their basis in the ATP and the amount received in exchange
therefor. If such shares of ATP 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
stockholders have held the shares for more than one year, subject to the
discussion relating to changes in capital gains tax rates above. Any loss
realized upon a taxable disposition of shares of ATP held for six months or less
will be treated as a long-term capital 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 ATP may be disallowed
if other shares of ATP are purchased by the shareholder within 30 days before or
after the disposition.
Backup Withholding
The Fund may be required to withhold for U.S. federal income taxes 31%
of all taxable distributions payable to stockholders who fail to provide the
Fund with their correct taxpayer identification number or who fail to make
required certifications or if the Fund or a stockholder has been notified by the
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.
B-21
<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 ATP.
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, Age and Address With Fund During Past 5 Years
--------------------- ------------- -------------------
<S> <C> <C>
Robert F. Birch*, 62 President and Director Mr. Birch, a private investor,
33 Broad Street, joined the Fund as President,
Boston, MA 02109 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.
B-22
<PAGE>
Positions Held Principal Occupation(s)
Name, Age and Address With Fund During Past 5 Years
- --------------------- ------------- -------------------
Joseph L. Bower, 59 Director Professor since 1963, Donald K.
Harvard Business School David Professor of Business
Boston, MA 02163 Administration since 1986, and
Chairman of the Doctoral Programs and
Director of Research from 1990 to 1995,
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*, 57 Secretary and Director Partner with the law firm of
Exchange Place Goodwin, Procter & Hoar LLP,
Boston, MA 02109 Boston, Massachusetts, since 1975
(individually and through his
professional corporation). Mr. Floor
also serves as a director of Town &
Country Corporation and Affiliated
Managers Group.
Bernard J. Korman, 66 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, 79 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
B-23
<PAGE>
Positions Held Principal Occupation(s)
Name, Age and Address With Fund During Past 5 Years
- --------------------- ------------- -------------------
Economic Sciences. He is an Honorary
President of the International Economic
Association and a former President of the
American Economic 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, 67 Director Trustee since 1960 and Chairman
50 Congress Street of the Trustees since 1969,
Boston, MA 02109 Northeast Investors Trust; Chairman,
Assistant Treasurer and Director since 1981,
Northeast Investors Growth Fund, Inc. Mr.
Monrad also serves as a vice president and
director of Guild, Monrad & Oates, Inc., a
registered investment adviser, and as a
director of Century Shares Trust and Furman
Lumber, Inc.
Ellen E. Terry*, 39 Vice President and Vice President of the Fund from
33 Broad Street, Treasurer December 1992 to present and
Boston, MA 02109 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.
B-24
<PAGE>
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.
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Annual Total
Name of Person, Compensation as Part of Fund Benefits Upon Compensation
Position From Fund Expenses 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 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
B-25
<PAGE>
(i) precludes indemnification for any liability, whether or not there is an
adjudication of liability, arising by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of duties as described in Section 17(h)
and (i) of the 1940 Act ("disabling conduct") and (ii) sets forth reasonable and
fair means for determining whether indemnification shall be made; in the case of
the Fund "reasonable and fair means" would include (1) a final decision on the
merits by a court or other body before whom the proceeding was brought that the
person to be indemnified ("indemnitee") was not liable by reason of disabling
conduct (including a dismissal for insufficiency of evidence) and (2) a
reasonable determination, based upon a review of the facts, that the indemnitee
was not liable by reason of disabling conduct, by (a) the vote of a majority of
a quorum of Directors who are neither "interested persons" of the Fund as
defined in Section 2(a)(10) of the 1940 Act nor parties to the proceeding, or
(b) an independent legal counsel in written opinion.
The Fund, at its expense, may in the future provide liability insurance
for the benefit of its Directors and officers.
Holdings of ATP and Common Stock
The Fund does not know of any person who beneficially owned more than
5% of the outstanding shares of the Common Stock or ATP at March 31, 1998. 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
The Board of Directors of the Fund appoints the Fund's investment
adviser annually, subject to stockholder approval.
In addition to the Fund, Wellington Management served as investment
adviser or sub-adviser to 126 other investment company portfolios as of December
31, 1997.
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
B-26
<PAGE>
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.
Advisory Agreement. 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 11, 1998. 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, voting as a single class, and (ii) by a majority
of the Directors who are not parties to the Advisory Agreement or interested
persons (as defined in the 1940 Act) of any such party. The Advisory Agreement
may be terminated at any time, without payment of any penalty, by vote of the
Board of Directors, by vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act and as further described below), or by
the Investment Adviser, in each case on sixty (60) days prior written notice,
and will terminate automatically in the event of its assignment. Under the 1940
Act, a vote of a majority of the outstanding voting securities of the Fund means
the lesser of either (a) the vote of 67% or more of the shares of the applicable
class or classes present at the relevant meeting, if the holders of more than
50% of the outstanding shares of the applicable class or classes are present or
represented by proxy, or (b) the vote of more than 50% 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
B-27
<PAGE>
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.
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, Moody's and Fitch;
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.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less
frequently than the close of trading on the Exchange (generally 4:00 p.m. New
York time) on the last Business Day of each week (generally Friday). It will be
determined by dividing the value of the net assets of the Fund (for the purpose
of determining the net asset value per share of the Common Stock, the value of
the Fund's net assets shall be deemed to equal the value of the Fund's assets
less (i) the Fund's liabilities, (ii) accumulated and unpaid dividends on the
Outstanding ATP and (iii) the aggregate Liquidation Value 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 Rating Agency Guidelines, 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 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,
B-28
<PAGE>
the last bid price quoted on such day. Options for which the primary market is
not 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.
DESCRIPTION OF ATP
General
The shares of ATP have a liquidation preference equal to their
Liquidation Value per share, plus all accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date of final distribution. The ATP
Series D when issued and sold through this offering (i) will be fully paid and
non-assessable, (ii) will not be convertible into Common Stock or other capital
stock of the Fund, (iii) will have no preemptive rights, and (iv) will not be
subject to any sinking fund. The ATP will be subject to optional and mandatory
redemption as described below under "Redemption."
Holders of the ATP Series D will not receive certificates representing
their ownership interest in such shares. The Depository Trust Company will act
as securities depository (together with any successor securities depository
selected by the Fund, the "Securities Depository") for the Agent Members with
respect to the ATP Series D.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, the Auction Agent will act as the transfer
agent, registrar, and paying agent for the ATP Series D. Furthermore, the
Auction Agent will send notices to Holders of the ATP of any meeting at which
Holders of shares of ATP have the right to vote. See "Voting Rights" below.
However, the Auction Agent generally will serve merely as the agent of the Fund,
acting in accordance with the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of ATP,
so long as the Fund is current in the payment of dividends on the ATP and on any
other capital shares of the Fund ranking on a parity with the ATP with respect
to the payment of dividends or upon liquidation.
Dividends and Dividend Periods
The Holders of ATP will be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefor,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code and to
B-29
<PAGE>
the extent available and in preference to and priority over any dividend
declared and payable on the Common Stock.
On the Business Day next preceding each Dividend Payment Date, the Fund
is required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Fund does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid to the record holder, which holder is
expected to be the nominee of the Securities Depository. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depository's normal procedures. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. The
Agent Member of a beneficial owner will be responsible for holding or disbursing
such payments on the applicable Dividend Payment Date to such beneficial owner
in accordance with the instructions of such beneficial owner. Dividends in
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the nominee of the
Securities Depository. Any dividend payment shall first be credited against the
earliest declared but unpaid dividends.
Holders will not be entitled to any dividends, whether payable in cash,
property or shares, in excess of full cumulative dividends except as described
under "Determination of Dividend Rate" below. No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"Default Period" below.
The amount of dividends per Outstanding share payable (if declared) on
each Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) such share was Outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by the Liquidation Value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
shall be computed as described in the preceding sentence, except that it will be
determined on the basis of a year consisting of twelve 30-day months.
Determination of Dividend Rate. The dividend rate during the period
from and including the Date of Original Issue to and including the initial
Auction Date will be the rate per annum set forth on the inside cover page of
the Prospectus. The first Auction Date will be as set forth on the cover page of
the Prospectus. For each subsequent Dividend Period, subject to certain
exceptions, the dividend rate will be the Applicable Rate that the Auction Agent
advises the Fund has resulted from an Auction.
Notification of Dividend Period. The Fund will designate the duration
of Dividend Periods of each series of ATP; provided, however, that no such
designation is necessary for a Standard Term Period and that any designation of
an Alternate Term Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) any failure to pay in a timely manner
to the Auction Agent the full amount of any dividend on, or the redemption price
of, the ATP shall have been cured as set forth under "Default Period," (iii)
Sufficient Clearing Orders shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Alternate Term Period,
(iv) if the Fund shall have mailed a notice of redemption with respect to any
shares, as described under "Redemption" below, the Redemption Price with respect
to such shares shall have been deposited with the Paying Agent, and (v) the Fund
has confirmed that, as of the Auction Date next preceding the first day of such
Alternate Term Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the ATP Basic Maintenance Amount and has consulted with the
Broker-Dealers and has provided notice and an ATP Basic Maintenance Certificate
(as defined below) to Moody's (if Moody's is then rating the ATP), to Fitch (if
Fitch is then rating the ATP) and any Other Rating Agency which is then rating
the ATP and so requires.
B-30
<PAGE>
If the Fund proposes to designate any Alternate Term Period, not fewer
than 15 (or two Business Days in the event the duration of the Dividend Period
prior to such Alternate Term Period is fewer than 15 days) nor more than 30 days
prior to the first day of such Alternate Term Period, notice shall be (i) made
by press release and (ii) communicated by the Fund by telephonic or other means
to the Auction Agent and confirmed in writing promptly thereafter. Each such
notice shall state (A) that the Fund proposes to exercise its option to
designate a succeeding Alternate Term Period, specifying the first and last days
thereof and (B) that the Fund will by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such Alternate Term Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to proceed with such
Alternate Term Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Alternate Term Period in which latter event the succeeding Dividend Period
shall be a Standard Term Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Alternate Term Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to
designate the next succeeding Dividend Period as an Alternate Term Period,
specifying the first and last days thereof and (B) the terms of the Specific
Redemption Provisions, if any; or
(ii) a notice stating that the Fund has determined not to
exercise its option to designate an Alternate Term Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Alternate Term Period to the Auction Agent or is unable to make
the confirmation described above by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such proposed Alternate Term
Period, the Fund shall be deemed to have delivered a notice to the Auction Agent
with respect to such Dividend Period to the effect set forth in clause (ii)
above, thereby resulting in a Standard Term Period.
Default Period. A "Default Period" will commence on the applicable date
set forth below if the Fund fails to (i) declare prior to the close of business
on the second Business Day preceding any Dividend Payment Date, for payment on,
or (to the extent permitted as described below) within two Business Days after,
such Dividend Payment Date to the persons who held shares of ATP as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date, the full amount of any dividend payable on such Dividend Payment Date,
(ii) to deposit, irrevocably in trust, in same-day funds, with a designated
paying agent by 12:00 noon, New York City time, (A) on or (to the extent
permitted as described below) within two Business Days after any Dividend
Payment Date the full amount of any declared dividend on the relevant series of
ATP payable on such Dividend Payment Date (together with the failure to timely
declare dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
Business Days after any date fixed for redemption of shares of ATP called for
redemption, the applicable redemption price (a "Redemption Default"), or (iii)
to maintain the "aaa"/AAA Credit Rating unless the "aaa"/AAA Credit Rating is
restored by the Dividend Payment Date next following the date on which the Fund
fails to maintain the "aaa"/AAA Credit Rating (a "Rating Default"). A Default
Period with respect to a Dividend Default or a Redemption Default will consist
of the period commencing on and including the aforementioned Dividend Payment
Date or redemption date, as the case may be, and ending on and including the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and unpaid redemption price shall have been so deposited or shall have otherwise
been made available to the applicable holders in same day funds. A Default
Period with respect to a Rating Default shall commence as of the date on which
the Fund fails to maintain the "aaa"/AAA Credit Rating (provided that such
Rating Default shall be deemed not to have occurred and such Default Period
shall not commence if such Rating Default is cured by the next succeeding
Dividend Payment Date) and shall end on the earlier of the date on which such
default is cured as provided herein or
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<PAGE>
the date on which the ATP is mandatorily redeemed as provided herein. Holders of
two-thirds of the ATP Series D 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 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 two Business Days after such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to such shares not paid to such persons when due may (if such default is
not solely due to the willful failure of the 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
two Business Days after such Dividend Payment Date or due date, as the case may
be, provided that such amount is accompanied by an additional amount for such
period of non-payment at the Default Rate applied to the amount of such 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.
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:
<TABLE>
<CAPTION>
Notional Amount Maturity Fixed Annual Rate
<S> <C> <C>
$65 million February 7, 1999 5.25%
$20 million October 7, 2002 6.07%
$10 million October 2, 2002 6.225%
</TABLE>
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
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<PAGE>
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 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.
In light of the proposed increase in the Fund's Outstanding ATP, the
Fund will consider adjustments in its swap arrangements. The timing and amount
of any such adjustment will depend upon market conditions.
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 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.
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<PAGE>
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 per share shall be the
Liquidation Value 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, 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 (i) the Fund has available certain
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less than the
amount (including any applicable premium) due to Holders of ATP by reason of the
redemption of ATP on such date fixed for the redemption and (ii) the Fund would
have Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount.
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
B-34
<PAGE>
be available therefor on the Mandatory Redemption Date (as defined below) at the
Mandatory Redemption Price (as defined below).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the ATP Basic Maintenance Amount or the 1940 Act ATP Asset Coverage, as
the case may be, pro rata among the Holders of shares of ATP in proportion to
the number of shares they hold and shares of other Preferred stock subject to
mandatory redemption provisions.
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 rules and
regulations under 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, 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 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 Paying 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 per share in the event of any mandatory redemption
will be the Liquidation Value 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)
any redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealer and set forth in any applicable Specific
Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the
Fund will file a notice of its intention to redeem with the Commission so as to
provide at least the minimum notice required by such Rule or any successor
provision (notice currently must be filed with the Commission at least 30 days
prior to the redemption date). The Auction Agent will use its reasonable efforts
to provide telephonic notice to each Holder of shares of ATP called for
redemption not later than the close of business on the Business Day immediately
following the Business Day on which the Auction Agent determines the shares to
be redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives notice of redemption from the Fund). Such
telephonic notice will be confirmed promptly in writing not later than the close
of business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each Holder of record of shares of ATP
called for redemption, the Paying Agent (if different from the Auction Agent)
and the Securities Depository ("Notice of Redemption"). Notice of Redemption
will be addressed to the registered owners of the ATP at their addresses
appearing on the share records of the Fund. Such notice will set forth (i) the
redemption date, (ii) the number and identity of shares of ATP to be redeemed,
(iii) the redemption price (specifying the amount of accumulated dividends to be
included therein), (iv) that dividends on the shares to be redeemed will cease
to accumulate on such redemption date, and (v) the provision under which
redemption shall be made.
B-35
<PAGE>
If fewer than all of the shares of a series of ATP are redeemed on any
date, the shares to be redeemed on such date will be selected by the Fund on a
pro rata basis in proportion to the number of shares held by such Holders, by
lot or by such other method as is determined by the Fund to be fair and
equitable, subject to the terms of any Specific Redemption Provisions. Shares of
ATP may be subject to mandatory redemption as described herein notwithstanding
the terms of any Specific Redemption Provisions. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder of
all of the shares of ATP, and the Securities Depository will determine the
number of shares to be redeemed from the account of the Agent Member of each
beneficial owner. Each Agent Member will determine the number of shares to be
redeemed from the account of each beneficial owner for which it acts as agent.
An Agent Member may select for redemption shares from the accounts of some
beneficial owners without selecting for redemption any shares from the accounts
of other beneficial owners. Notwithstanding the foregoing, if neither the
Securities Depository nor its nominee is the record holder of all of the shares,
the particular shares to be redeemed shall be selected by the Fund by lot, on a
pro rata basis between each series or by such other method as the Fund shall
deem fair and equitable, as contemplated above.
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 earned or
declared through the redemption date.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be Outstanding for any purpose. The Fund shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the shares of ATP called for redemption on such date and
(ii) such other amounts, if any, to which Holders of shares of ATP called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Fund upon its
request. Thereupon the Paying Agent will be relieved of all responsibility to
the owners of such shares and such owners may look only to the Fund for payment.
So long as any shares of ATP are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures now provide for it to distribute the amount of
the redemption price to Agent Members who, in turn, are expected to distribute
such funds to the persons for whom they are acting as agent.
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 legal 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
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<PAGE>
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.
Restrictions on Transfer
Shares of ATP Series D may be transferred only (a) pursuant to an Order
placed in an Auction, (b) to or through a Broker-Dealer, (c) to a person that
has delivered a signed Master Purchaser's Letter to the Auction Agent or (d) to
the Fund or any Affiliate. Notwithstanding the foregoing, a transfer other than
pursuant to an Auction will not be effective unless the selling Existing Holder
or the Agent Member of such Existing Holder, in the case of an Existing Holder
whose shares are listed in its own name on the books of the Auction Agent, or
the Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a
transfer between persons holding shares of ATP Series D through different
Broker-Dealers, advises the Auction Agent of such transfer. The certificates
representing the shares of ATP Series D issued to the Securities Depository will
bear legends with respect to the restrictions described above and stop-transfer
instructions will be issued to the Transfer Agent and/or Registrar. See "Auction
Procedures."
The certificates representing the shares of ATP Series D issued to the
Securities Depository will bear legends with respect to the restrictions
described above and stop-transfer instructions will be issued to the transfer
agent and/or registrar.
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 Bridge Fixed-Income 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 related Asset Coverage Cure Date, the Fund
will be required in certain circumstances to redeem certain of the shares of
ATP. See "Redemption."
The "ATP Basic Maintenance Amount" as of any Valuation Date is defined
as the dollar amount equal to the sum of
(1) (A) the sum of the products resulting from multiplying the
number of Outstanding shares of each series of ATP on such date by the
Liquidation Value per share of such series; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or
not earned or declared) to and including the first following Dividend
Payment Date for each share of ATP Outstanding that follows such
Valuation Date (or to the 42nd day after such Valuation Date, if such
42nd day occurs before the first following Dividend Payment Date); (C)
the aggregate amount of dividends that would accumulate at the then
current Maximum Applicable Rate for a Standard Term Period multiplied
by the Volatility Factor on any shares of ATP Outstanding from the
first day following the Dividend Payment Date referred to in (B) above
through the 42nd day after such Valuation Date, 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
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<PAGE>
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 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" and "Rating Agency Guidelines" above.
B-38
<PAGE>
1940 Act ATP Asset Coverage. The Fund is required under the Articles to
maintain 1940 Act ATP Asset Coverage on each Friday, or, if such day is not a
Business Day, the next preceding Business Day, 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 related Asset Coverage Cure Date, the Fund will
be required to redeem certain shares of the ATP. See "Redemption."
The Fund estimates that on the Date of Original Issue of the ATP Series
D, based on the composition of its portfolio as of March 31, 1998, the 1940 Act
ATP Asset Coverage, after giving effect to the issuance of the shares of ATP
Series D ($60 million) and the deduction of sales load and estimated offering
expenses for such shares ($720,000), will be computed as follows:
Value of Fund assets less
liabilities not constituting
senior securities $541,004,318
---------------------------- ------------ = 258%
Senior securities $210,000,000
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") (i) to
the Auction Agent, 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 as of (a) the Business Day preceding the Date of Original
Issue and (b) 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, (ii) to the Auction Agent, Fitch (if Fitch is than rating
the ATP) and any Other Rating Agency which is then rating the ATP and which so
requires as of (a) every fourth Valuation Date after the Date of Original Issue
for the first year following the Date of Original Issue, (b) if the Fund fails
to have Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount, and (c) on request by Fitch or such Other Rating
Agency, as applicable, (iii) to the Auction Agent, Moody's (if Moody's is then
rating 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 as of (a) 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 (b) 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, and (iv) to the Auction Agent,
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 as of a Business Day on or before any Asset Coverage 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. Such ATP
Basic Maintenance Certificate shall be delivered in the case of clause (i)(a) on
the Date of Original Issue and in the case of clauses (i)(b), (ii), (iii) and
(iv) above on or before the third Business Day after the relevant Valuation Date
or Asset Coverage Cure Date.
The Fund is required to deliver to the Auction Agent, 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, 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") (i) as of the Business Day preceding the Date of Original
Issue with respect to ATP Series D, and (ii) as of (a) the last Valuation Date
of each quarter thereafter, and (b) as of the Business Day on or before the
Asset Coverage Cure Date relating to the failure to satisfy the 1940 Act Asset
Coverage. Such 1940 Act ATP Asset Coverage Certificate shall be delivered in the
case of clause (i) on the Date of Original Issue and in the case of clause (ii)
on or before the third Business Day after the relevant Valuation Date or the
Asset Coverage
B-39
<PAGE>
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.
On the Date of Original Issue, the Fund shall deliver to the Auction
Agent, Moody's (if Moody's is then rating the ATP Series D), Fitch (if Fitch is
then rating the ATP Series D) and any Other Rating Agency which is then rating
the ATP Series D and which so requires, a letter prepared by the Fund's
independent accountants (an "Accountant's Certificate") regarding the accuracy
of the calculations made by the Fund in the ATP Basic Maintenance Certificate
and the 1940 Act ATP Asset Coverage Certificate required to be delivered by the
Fund on the Date of Original Issue. Within eight Business Days after the last
Valuation Date of each fiscal quarter of the Fund on which an ATP Basic
Maintenance Certificate is required to be delivered, the Fund will deliver to
the Auction Agent, 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, an Accountant's Certificate regarding the accuracy of the
calculations made by the Fund in such ATP Basic Maintenance Certificate and in
any other ATP Basic Maintenance Certificate randomly selected by the Fund's
independent accountants during such fiscal quarter. Within eight Business Days
after the last Valuation Date of each fiscal quarter of the Fund on which a 1940
Act ATP Asset Coverage Certificate is required to be delivered, the Fund will
deliver to the Auction Agent, 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 an Accountant's Certificate regarding the
accuracy of calculations made by the Fund in such 1940 Act ATP Asset Coverage
Certificate. In addition, the Fund will deliver to the relevant persons
specified in the preceding sentence an Accountant's Certificate regarding the
accuracy of the calculations made by the Fund on each ATP Basic Maintenance
Certificate and 1940 Act ATP Asset Coverage Certificate required to be delivered
as of a Business Day on or before any Asset Coverage Cure Date, within five days
after the relevant Asset Coverage Cure Date. If an Accountant's Certificate
delivered with respect to an Asset Coverage Cure Date shows an error was made in
the Fund's report with respect to such Asset Coverage Cure Date, the calculation
or determination made by the Fund's independent accountants will be conclusive
and binding on the Fund with respect to such reports. If any other Accountant's
Certificate shows that an error was made in any such report, the calculation or
determination made by the Fund's independent accountants will be conclusive and
binding on the Fund; provided, however, any errors shown in the Accountant's
Certificate filed on a quarterly basis shall not be deemed to be a failure to
have Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount on such prior Valuation Dates. In the event that an
ATP Basic Maintenance Certificate or 1940 Act ATP Asset Coverage Certificate or
the applicable Accountant's Certificates with respect to an applicable Asset
Coverage Cure Date are not delivered within the time periods specified 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 ATP Asset Coverage, as the case may be, as of the related Valuation
Date, and such failure shall be deemed not to have been cured as of such Asset
Coverage Cure Date for purposes of the mandatory redemption provisions.
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 equal to
the Liquidation Value per share of the ATP, 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.
B-40
<PAGE>
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,
ATP Series C or ATP Series D, 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 the New York
Stock Exchange, the Fund is currently required to hold annual meetings of
stockholders.
In connection with the election of the Fund's Board, the holders of
Outstanding shares of preferred stock, including ATP Series D, represented in
person or by proxy at said meeting, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital stock of
the Fund, to elect two directors of the Fund, each share of preferred stock,
including ATP Series D, entitling the holder thereof to one vote. The holders of
Outstanding shares of Common Stock and preferred stock, including ATP Series D,
voting together as a single class, shall elect the balance of the directors.
Notwithstanding the foregoing, if (a) at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or declared) on
Outstanding shares of the preferred stock, including Outstanding ATP Series D,
equal to at least two full years' dividends shall be due and unpaid; or (b) any
time holders of any other shares of preferred stock are entitled under the 1940
Act to elect a majority of the directors of the Fund, then the number of members
constituting the Board shall automatically be increased by the smallest number
that, when added to the two Directors elected exclusively by the Holders of
shares of preferred stock as described above, would constitute a majority of the
Board as so increased by such smallest number; and at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the Holders of shares
of preferred stock, including the ATP, voting as a separate class, will be
entitled to elect the smallest number of additional Directors that, together
with the two Directors which such Holders will be in any event entitled to
elect, constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding shares
of preferred stock, including the ATP, for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease, and the terms of office of
all of the additional Directors elected by the Holders of shares of preferred
stock, including the ATP (but not of the Directors with respect to whose
election the Holders of Common Stock were entitled to
B-41
<PAGE>
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 affirmative vote of the Holders of a majority of the outstanding
preferred stock determined with reference to a "majority of outstanding voting
securities" as the term is defined in Section 2(a)(42) of the 1940 Act,
including the ATP, voting as a class, is required to (i) amend, alter or repeal
any of the preferences, rights or powers of such class so as to affect
materially and adversely such preferences, rights or powers; (ii) increase the
authorized number of shares of ATP; (iii) create, authorize or issue shares of
any class of capital stock ranking senior to or on a parity with the ATP with
respect to the payment of dividends or the distribution of assets, or any
securities convertible into, or warrants, options or similar rights to purchase,
acquire or receive, such shares of capital stock ranking senior to or on parity
with the ATP or reclassify any authorized shares of capital stock of the Fund
into any shares ranking senior to or on parity with the ATP (except that, the
Board of Directors, without the vote or consent of the Holders of ATP, may from
time to time authorize, create and classify, and the Fund may from time to time
issue, series or shares of preferred stock, including ATP, ranking on a parity
with the ATP with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up to the affairs of the Fund,
subject to continuing compliance by the Fund with 1940 Act ATP Asset Coverage
and ATP Basic Maintenance Amount requirements, or in connection with a
refinancing of the ATP); (iv) institute any proceedings to be adjudicated
bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency
proceedings against it, or file a petition seeking or consenting to
reorganization or relief under any applicable federal or state law relating to
bankruptcy or insolvency, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Fund or a substantial part of its property, or make any assignment for the
benefit of creditors, or, except as may be required by applicable law, admit in
writing its inability to pay its debts generally as they become due or take any
corporate action in furtherance of any such action; (v) create, incur or suffer
to exist, or agree to create, incur or suffer to exist, or consent to cause or
permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust receipt
or other material encumbrance of any kind upon any of the Fund's assets as a
whole, except (A) liens the validity of which are being contested in good faith
by appropriate proceedings, (B) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) liens, pledges,
charges, security interests, security agreements or other encumbrances arising
in connection with any indebtedness permitted under clause (vi) below and (D)
liens to secure payment for services rendered including, without limitation,
services rendered by the Fund's custodian and the Auction Agent, or (vi) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money
or any direct or indirect guarantee of such indebtedness for borrowed money or
any direct or indirect guarantee of such indebtedness, except the Fund may
borrow from banks for temporary or emergency purposes or as may be permitted by
the Fund's investment restrictions; provided, however, that transfers of assets
by the Fund subject to an obligation to repurchase shall not be deemed to be
indebtedness for purposes of this provision to the extent that after any such
transaction the Fund has Eligible Assets with an aggregate Discounted Value at
least equal to the ATP Basic Maintenance Amount as of the immediately preceding
Valuation Date.
The affirmative vote of the Holders of a majority of the Outstanding
shares of ATP, voting as a separate class, will also be required to approve any
plan of reorganization adversely affecting such shares or any action requiring a
vote of security Holders under Section 13(a) of the 1940 Act including, among
other things, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Restrictions." The class vote of Holders of shares of ATP described above will
in each case be in addition to a separate vote of the requisite percentage of
shares of Common Stock necessary to authorize the action in question. In
addition, the affirmative vote of the Holders of a majority of the Outstanding
shares of each series of ATP, voting separately from any other series, shall be
required with respect to any matter that materially and adversely affects the
rights, preferences, or powers of such series in a manner different from that of
other series of classes of the Fund's
B-42
<PAGE>
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 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.
The Board of Directors, without the vote or consent of any holder of
the preferred stock, including the ATP, or any other stockholder of the
Corporation, may from time to time amend, alter or repeal any or all of the
definitions of the terms or provisions listed below provided that the Board of
Directors receives written confirmation from Moody's (if Moody's is then rating
the ATP) and Fitch (if Fitch is then rating the ATP) (with such confirmation in
no event being required to be obtained from a particular rating agency in the
case of the definitions relevant only to and adopted in connection with the
rating of the ATP, if any, by any other rating agency) that such amendment,
alteration or repeal would not impair the rating then assigned by Moody's or
Fitch, respectively.
<TABLE>
<S> <C>
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 of the Articles
and options transactions) (discussing valuation of certain option
provisions)
</TABLE>
In addition, the Board of Directors, without the vote or consent of any
Holder of the preferred stock, including ATP, or any other stockholder of the
Fund, may from time to time adopt, amend, alter or repeal any or all of any
additional or other definitions or add covenants and other obligations of the
Fund (e.g., maintenance of minimum liquidity level) or confirm the applicability
of covenants and other obligations set forth herein in connection with obtaining
or maintaining the rating of Moody's, Fitch or any Other Rating Agency with
respect to ATP and any such amendment, alteration or repeal will not be deemed
to affect the preferences, rights or powers of ATP or the Holders thereof,
provided the Board of Directors receives written confirmation from the relevant
rating agency (such confirmation in no event being required to be obtained from
a particular rating agency with respect to definitions or other provisions
relevant only to another rating agency's rating) that any such amendment,
alteration or repeal would not adversely affect the rating then assigned by such
rating agency.
Also, subject to compliance with applicable law, the Board of Directors
may amend the definition of Maximum Applicable Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum
Applicable Rate shown therein without the vote or consent of the Holders of the
shares of the preferred stock, including ATP, or any other stockholder of the
Fund, and without receiving any confirmation from any rating agency after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the ATP Basic Maintenance
Amount.
Unless otherwise required by law, holders of shares of ATP shall not have
any relative rights or preferences or other special rights other than those
specifically set forth herein. The holders of shares of
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<PAGE>
ATP shall have no rights to cumulative voting. In the event that the Fund fails
to pay any dividends on the shares of ATP, the exclusive remedy of the holders
shall be the right to vote for directors as discussed above.
AUCTION PROCEDURES
General
Neither the Fund nor any Affiliate shall submit an Order in any Auction.
Dividend Rates and Auction Dates
The Dividend Rate for each Dividend Period will be determined on the
Auction Date in respect of such Dividend Period. If Sufficient Clearing Orders
exist for an Auction, the Dividend Rate for the ensuing Dividend Period will be
the Winning Rate, or, if all shares in the Auction are the subject of Submitted
Hold Orders in respect of a Dividend Period of fewer than 93 days, the Minimum
Applicable Rate. If Sufficient Clearing Orders do not exist for any Auction, the
ensuing Dividend Period will be a Standard Term Period and the Dividend Rate for
that Dividend Period will be the Maximum Applicable Rate. Except in the case of
a Default (as discussed above), or where all shares of the relevant series of
ATP are subject to Submitted Holder Orders if there is no Auction on any Auction
Date, the next Dividend Period will be a Standard Term Period and the Dividend
Rate will be the Maximum Applicable Rate that could have resulted from an
Auction in respect of a Standard Term Period on such Auction Date. The Fund is
obligated to exercise its best efforts to maintain an Auction Agent.
Orders by Existing Holders and Potential Holders
On or prior to each Auction Date and prior to the Submission Deadline
(initially 1:00 P.M., New York City time), each Existing Holder, with respect to
shares it then holds, may submit to a Broker-Dealer by telephone or otherwise a
Hold Order, a Hold/Sell Order or a Sell Order and each Broker-Dealer will
contact Potential Holders to determine the Buy Orders, if any, to be made by
such Potential Holders.
Submission of Orders to Auction Agent
Each Order must be submitted in writing by a Broker-Dealer to the Auction
Agent prior to the Submission Deadline on each Auction Date for the Auction to
be conducted on such Auction Date and must specify (A) the name of the Existing
Holder or Potential Holder placing such Order, (B) the aggregate number of
shares that are the subject of such Order, (C) to the extent that such Orders
are placed by an Existing Holder, the number of shares, if any, subject to any
Hold Order, Hold/Sell Order or Sell Order, and (D) the rate, if any, specified
in each Order.
If any rate specified in any Order contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next higher one thousandth of 1%.
If an Order or Orders covering all shares held by any Existing Holder are
not submitted to the Auction Agent by the Submission Deadline, the Auction Agent
will, only in the case of an Auction preceding a Dividend Period of 93 days or
fewer and at the conclusion of a Dividend Period of 93 days or fewer, deem a
Hold Order to have been submitted on behalf of such Existing Holder covering the
number of shares held by such Existing Holder and not subject to Orders
submitted to the Auction Agent. If an Order or Orders covering all shares of ATP
held by any Existing Holder are not submitted to the Auction Agent by the
Submission Deadline, the Auction Agent will, in the case of all other Auctions,
deem a Sell Order to have been submitted on behalf of such Existing Holder
covering the number of shares held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
B-44
<PAGE>
If one or more Orders covering in the aggregate more than the number of
shares of the relevant series of ATP held by an Existing Holder are submitted to
the Auction Agent, such Orders will be valid in accordance with the Validity
Procedures.
If more than one Order is submitted on behalf of any Existing Holder or
Potential Holder, each Order submitted will be a separate Order.
If any rate specified in any Order is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Order is made in the
case of any Dividend Period of 93 days or fewer, such Order will be deemed to be
an Order specifying a rate equal to such Minimum Applicable Rate.
In the case of any Dividend Period of more than 93 days, only Buy Orders,
Hold/Sell Orders or Sell Orders may be submitted and Hold Orders may not be
submitted.
Determination of Sufficient Clearing Orders and Applicable Rate
Not earlier than the Submission Deadline, on each Auction Date, the
Auction Agent will assemble all Submitted Orders and will determine whether
Sufficient Clearing Orders exist and the Applicable Rate.
Acceptance of Orders and Allocation of Shares
Based upon the results of the Auction, the Auction Agent will determine
the aggregate number of shares to be held and sold by Existing Holders and to be
purchased by Potential Holders, and, with respect to each Broker-Dealer,
determine the extent to which such Broker-Dealer will deliver, and from which
other Broker-Dealers such Broker-Dealer will receive, shares.
If Sufficient Clearing Orders exist, subject to the Rounding Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all Submitted
Hold/Sell Orders specifying any rate higher than the Winning Rate will be
accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate lower than the
Winning Rate will be accepted as Hold Orders;
(iv) all Submitted Buy Orders specifying a rate lower than the Winning
Rate will be accepted;
(v) all Submitted Hold/Sell Orders specifying a rate equal to the
Winning Rate will be accepted as Hold Orders unless the number of shares subject
to all such Submitted Hold/Sell Orders is greater than the number of shares
remaining unaccounted for after the acceptances described in clauses (i), (iii)
and (iv) above, in which event each such Submitted Hold/Sell Order will be
accepted as a Hold Order and a Sell Order as to the respective number of shares
determined in accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to the Winning
Rate will be accepted, unless the number of shares subject to all such Submitted
Buy Orders is greater than the number of shares remaining unaccounted for after
the acceptances described in clauses (i), (iii), (iv) and (v) above, in which
event each such Submitted Buy Order will be accepted only as to the number of
shares determined in accordance with the Proration Procedures.
If Sufficient Clearing Orders do not exist, subject to the Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
B-45
<PAGE>
(ii) all Submitted Hold/Sell Orders specifying a rate equal to or lower
than the Maximum Applicable Rate will be accepted as Hold Orders;
(iii) all Submitted Buy Orders specifying a rate equal to or lower than
the Maximum Applicable Rate will be accepted; and
(iv) all Submitted Hold/Sell Orders specifying a rate higher than the
Maximum Applicable Rate and all Submitted Sell Orders will be accepted as Hold
Orders and as Sell Orders as to the respective number of shares of the relevant
series of ATP determined in accordance with the Proration Procedures.
Notification of Results; Settlement
The Auction Agent will advise each Broker-Dealer that submitted an Order
whether such Order was accepted and of the Applicable Rate for the next Dividend
Period by telephone by approximately 3:00 p.m., New York City time, on each
Auction Date. Each Broker-Dealer that submitted an Order will as soon as
practicable advise each Existing Holder and Potential Holder whether its Order
was accepted and will confirm in writing purchases and sales with each Existing
Holder and Potential Holder purchasing or selling shares as a result of an
auction as soon as practicable on the Business Day next succeeding the Auction
Date. Each Broker-Dealer that submitted a Hold Order will advise each Existing
Holder on whose behalf such Hold Order was submitted of the Applicable Rate for
the shares of the relevant series of ATP for the next Dividend Period.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales as determined in
the Auction. Purchasers will make payment through their Agent Members in
same-day funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment against delivery to their Agent
Members in same-day funds.
If any Existing Holder selling shares in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased shares in
such Auction may deliver to such person a number of whole shares that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
Broker-Dealers; Commissions
Broker-Dealers which submit Orders for the account of others must be
authorized by law to perform such function. A Broker-Dealer may acquire shares
for its own account. If a Broker-Dealer submits an Order for its own account in
an Auction, it may have an advantage over others because it would have knowledge
of other Orders placed through it in that Auction.
The Auction Agent after each Auction will initially pay to each
Broker-Dealer, from funds provided by the Fund a service charge based on the
purchase price of shares placed by the Broker-Dealer at such Auction. Initially,
the annual rate of such service charge with respect to Dividend Periods of less
than one year shall be an annual rate of .25%, depending on the results of the
Auction and, in the case of Dividend Periods of one year or more, a percentage
agreed upon between the Fund and the Broker-Dealer. For purposes of this
paragraph, shares will be placed by a Broker-Dealer if such shares were (i) the
subject of Hold Orders deemed to have been made by Existing Holders and were
acquired by such Existing Holders through the Broker-Dealer or (ii) the subject
of an Order submitted by the Broker-Dealer that is (A) a Submitted Order of an
Existing Holder that resulted in such Existing Holder continuing to hold such
shares as a result of the Auction or (B) a Submitted Order of a Potential Holder
that resulted in such Potential
B-46
<PAGE>
Holder purchasing such shares as a result of the Auction or (C) a valid Hold
Order. In the event an Auction scheduled to occur on an Auction Date fails to
occur for any reason, Broker-Dealers will be entitled to service charges as if
the Auction had occurred and all holders of shares placed by them submitted
valid Hold Orders.
The Auction Agent
Bankers Trust Company will serve as the Auction Agent for so long as ATP
Series D shares are Outstanding. The Auction Agent is acting solely as agent of
the Fund and is not a trustee for holders of ATP Series D. In the absence of bad
faith or gross negligence on its part, the Auction Agent will not be liable for
any action taken, suffered or omitted or for any error of judgment made by it in
the performance of its duties as Auction Agent.
The Auction Agent 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 the Auction Agent.
B-47
<PAGE>
FINANCIAL STATEMENTS
The Fund will furnish, without charge, a copy of its Annual Report, upon
written request to the Fund at 33 Broad Street, Fifth Floor, Boston,
Massachusetts or request by phone at (617) 263-6400.
B-48
<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>
B-49
<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>
B-50
<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>
B-51
<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>
B-52
<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>
B-53
<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.
B-54
<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.
B-55
<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.
B-56
<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.
B-57
<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.
B-58
<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.
B-59
<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.
B-60
<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
B-61
<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.
B-62
<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
B-63
<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.
B-64
<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.
B-65
<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
B-66
<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
B-67
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
MOODY'S INVESTORS SERVICE
Long-Term Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuations or protective elements may be of greater amplitude or there
may be other elements present which make long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are Baa rated are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note Moody's applies numerical modifiers 1, 2 and 3 in each generic range
classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in
B-A-1
<PAGE>
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 Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial paper,
bank deposits, bankers' acceptances and obligations to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and bonds
of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Preferred Stock Ratings
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
B-A-2
<PAGE>
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be medium grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
c This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.
B-A-3
<PAGE>
FITCH IBCA
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in cases of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. 'A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment grade category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B Highly speculative. 'B' ratings indicate that significant credit risk is
present but a limited margin of safety remains. Financial commitments are
currently being met; however, capital for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC,
CC and C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A 'CC' rating indicates
that default of some kind appears probable. 'C' ratings signal
imminent default.
DDD, DD,
and D Default. Securities are not meeting current obligations and are
extremely speculative. 'DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, 'DD' indicates expected recovery of 50% - of
such outstandings , and 'D' the lowest recovery potential.
Short-Term Credit Ratings
A short-term credit rating has a time horizon of less than 12 months for
most obligations, or up to three years for U.S. public finance securities, and
thus places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments and may have an added "+" to denote an exceptionally
strong credit feature.
B-A-4
<PAGE>
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as the case of the higher
ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risks. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' rating category, to
categories below 'CCC', or to short-term ratings other than 'F1'.
'NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
RatingWatch: Ratings are placed on RatingWatch to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingWatch is typically dissolved over a relatively
short period.
Claims-Paying Ability Ratings
Fitch IBCA claims-paying ability ratings provide an assessment of an
insurance company's financial strength and, therefore, its ability to pay policy
and contract claims under the terms indicated. The rating is stated using the
same rating scale as international long-term credit ratings, although the
claims-paying rating does not apply to non-policy obligations of the insurer,
such as debt, nor does it address the suitability or terms of any individual
policy or contract.
AAA Exceptionally strong claims-paying ability. Insurers assigned this
highest rating have an exceptionally strong capacity to meet policyholder
obligations and provide policyholder benefits. The impact of any adverse
business and economic factors on the claims-paying ability of these
insurers is expected to be minimal.
AA Very strong claims-paying ability. Insurers rated 'AA' have a very strong
capacity to meet policyholder obligations and provide policyholder
benefits. The impact of any adverse business and economic factors on the
claims-paying ability of these insurers is expected to be very small.
A Strong claims-paying ability. Insurers rated 'A' have a strong capacity
to meet policyholder obligations and provide policyholder benefits.
Although adverse business and economic factors may have an impact on the
claims-paying ability of these insurers, the effect of such factors is
expected to be small.
B-A-5
<PAGE>
BBB Good claims-paying ability. Insurers rated 'BBB' have a god capacity to
meet policyholder obligations and provide policyholder benefits. However,
their claims-paying ability may be more susceptible than that of higher
rated insurers to the impact of adverse business and economic factors.
BB Speculative claims-paying ability. Insurers rated 'BB' have a capacity to
meet policyholder obligations and provide policyholder benefits which is
regarded as speculative. The impact of adverse business and economic
factors on their claims-paying ability is considered likely to be
significant.
B Vulnerable claims-paying ability. Insurers rated 'B' have a vulnerable
capacity to meet policyholder obligations and provide policyholder
benefits. The impact of adverse business and economic factors on their
claim-paying ability is considered likely to be significant.
CCC, CC,
and C
Highly vulnerable claims-paying ability. Insurance companies assigned one
of these ratings are considered very weak with respect to their capacity to meet
policyholder obligations and provide policyholder benefits. The insurer may be
under the supervision of an insurance regulator and already may not be making
all payments in a timely fashion.
D Insurers which have been placed in liquidation by insurance regulators and
for which policy or claims payments are being controlled, delayed or
reduced.
Notes:
"+" or "-" may be appended to a rating to indicate the relative position
of a credit within the rating category. Such suffixes are not added to the
'AAA' and 'D' categories.
Servicer Ratings
Master servicers service performing multifamily and commercial mortgage
loans. The servicer's responsibilities typically include: collecting monthly
principal, interest, and escrow payments from individual mortgagors and, in some
instances, subservicers; remitting funds to the trustees; investor reporting;
performing property inspections; gathering and reviewing property financial
statements; and monitoring and managing delinquencies and problem loan
resolutions. If the transaction requires a special servicer, the master servicer
must interact with it to facilitate the transfer and ultimate disposition of
problem loans. Master servicers also are responsible for providing liquidity to
a transaction by advancing principal and interest, as well as certain property
protection expenses, on delinquent loans.
Acceptable. Servicer possesses a solid management team, proven experience
servicing multifamily and commercial mortgage loans, effective in-place
policies, procedures and controls, and thorough systems and reporting
capabilities.
Unacceptable. Servicer seriously deficient in any of the aforementioned
categories and unacceptable to FITCH IBCA. Use of such a servicer most likely
would preclude FITCH IBCA rating the transaction's debt securities at 'BBB' or
higher levels.
Special servicers are key to maintaining the credit quality of a pool containing
nonperforming multifamily and commercial mortgages and real estate owned assets.
In assessing and analyzing a special servicer's capabilities, FITCH IBCA reviews
several key factors, including its management team, organizational structure,
track record, and workout and asset disposition experience and strategies.
Superior. A special servicer in this category possesses a strong, seasoned
management team, extensive workout and disposition experience with a variety of
asset types, and significant financial resources.
B-A-6
<PAGE>
Above Average. A special servicer in this category possesses a strong management
team, with good workout and disposition experience, and may have significant
financial resources.
Average. A special servicer in this category possesses adequate workout and
disposition experience but may lack significant financial resources.
Below Average. A special servicer in this category is acceptable but of subpar
quality. Senior management is relatively unseasoned, workout experience is
minimal, and the servicer typically lacks significant financial resources.
Unacceptable. A special servicer in this category is unacceptable to FITCH IBCA.
Use of such a servicer would probably preclude FITCH IBCA rating the
transaction's debt securities at 'BBB' or higher levels.
B-A-7
<PAGE>
STANDARD & POOR'S
Long-Term Issue Credit Ratings
AAA An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment is
EXTREMELY STRONG.
AA An obligation rated 'AA' differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment
on the obligation is VERY STRONG.
A An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
the higher rated categories. However, the obligor's capacity to meet its
financial commitment is still STRONG.
BBB An obligation rated 'BBB' exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to meet its financial commitment on
the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated 'B' is MORE VULNERABLE to nonpayment than obligations
rated 'BB,' but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated 'CCC' is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment.
CC An obligation rated 'CC' is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D An obligation rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized
Plus (+) 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.
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NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these obligations is
extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The 'D' rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation are
jeopardized.
Dual Rating Definitions
Standard & Poor's assigns "dual" ratings to all debt issues that have a
put option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and the
second rating addressed only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the commercial
paper rating symbols for the put option (for example, AAA/A-1+). With short-term
demand debt, Standard & Poor's note rating symbols are used with the commercial
paper rating symbols (for example, SP-1+/A-1+).
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1") or if the nominal maturity is short, a rating of
"SP-1+/AAA" is assigned.
Municipal Notes
A Standard & Poor's note ratings reflects the liquidity factors and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
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-- Amortization schedule (the longer the final maturity relative
to other maturities the more likely it will be treated as a
note).
-- Source of payment (the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Preferred Stock
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for preferred stock in this category than for issues in the 'A'
category.
BB, B
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CCC Preferred stock rated 'BB', 'B', or 'CCC' is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. '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.
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