<PAGE>
As filed with the Securities and Exchange Commission on August 11, 2000
Securities Act Registration No. 333-37008
Investment Company Registration No. 811-07390
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. 3 |X|
Post-Effective Amendment No. |_|
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 9 |X|
------------------
Boulder Total Return Fund, Inc.
(Exact Name of Registrant as Specified In Charter)
1680 38th Street, Suite 800
Boulder, Colorado 80301
(Address of Principal Executive Offices)
(303) 444-5483
(Registrant's Telephone Number, including Area Code)
Stephen C. Miller
1680 38th Street, Suite 800
Boulder, Colorado 80301
(Name and Address of Agent for Service)
Copies to:
Rose F. DiMartino, Esq. Richard T. Prins, Esq.
Willkie Farr and Gallagher Skadden, Arps, Slate, Meagher & Flom LLP
787 Seventh Avenue Four Times Square
New York, NY 10019-6099 New York, NY 10036
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
==============================================================================================================================
Amount Proposed Proposed
Title of Securities Being Maximum Offering Maximum Aggregate Amount of
Being Registered Registered Price per Unit Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Taxable Auction Market Preferred Stock .... 775 shares $100,000 $77,500,000 $20,460.00
previously paid
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BOULDER TOTAL RETURN FUND, INC.
CROSS REFERENCE SHEET
Part A Prospectus
Items in Part A of Form N-2 Location in Prospectus
----------------------
Specified in Prospectus
-----------------------
<S> <C> <C>
Item 1. Outside Front Cover............................................. Cover page
Item 2. Cover Pages; Other Offering Information......................... Front Cover Page; Outside Back Cover Page
Item 3. Fee Table and Synopsis.......................................... Prospectus Summary
Item 4. Financial Highlights............................................ Financial Highlights
Item 5. Plan of Distribution............................................ Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders............................................ Inapplicable
Item 7. Use of Proceeds................................................. Use of Proceeds; Investment Objective and
Policies
Item 8. General Description of the Registrant........................... Cover Page; Prospectus Summary; The Company;
Investment Objective and Policies
Item 9. Management...................................................... Prospectus Summary; Management of the Company
Item 10. Capital Stock, Long-Term Debt, and Other Securities............. The Company; Investment Objective and Policies;
Description of AMPS; the Auction; Taxes
Item 11. Defaults and Arrears on Senior Securities....................... Inapplicable
Item 12. Legal Proceedings............................................... Inapplicable
Item 13. Table of Contents of the Statement of Additional Information.... Table of Contents of the Statement of Additional
Information
Part B Statement of Additional Information
Items In Part B of Form N-2 Location in Statement of
Additional Information
----------------------
Item 14. Cover Page...................................................... Cover Page
Item 15. Table of Contents............................................... Back Cover Page
Item 16. General Information and History................................. Inapplicable
Item 17. Investment Objective and Policies............................... Investment Objective and Policies;
Investment Policies and Techniques
Item 18. Management...................................................... Management of the Company
Item 19. Control Persons and Principal Holders of Securities............. Management of the Company
Item 20. Investment Advisory and Other Services.......................... Management of the Company
Item 21. Brokerage Allocation and Other Practices........................ Portfolio Transactions
Item 22. Tax Status...................................................... Tax Matters
Item 23. Financial Statements............................................ Financial Statements (incorporated by reference)
Part C Other Information
</TABLE>
Items 24-33 have been answered in Part C of this Registration Statement
<PAGE>
PROSPECTUS
$77,500,000
BOULDER TOTAL RETURN FUND, INC.
Taxable Auction Market Preferred Stock (the "AMPS")
775 Shares
Liquidation Preference $100,000 Per Share
Boulder Total Return Fund, Inc., or the Company, is a closed-end,
diversified management investment company. The Company's investment objective is
total return. The Company seeks to produce both long-term capital appreciation
through investment in common stocks and current income consistent with
preservation of capital through investments in income producing securities. The
Company typically invests in securities of U.S.-based companies, though it is
not limited to investing in the U.S. stock market. The Company anticipates a low
turnover rate in its portfolio of common stocks and, with respect to common
stocks held for capital appreciation rather than income, seeks to invest in
stocks that have a proven track record of earnings and the prospect of increased
future value through growth in revenues and profits. The Company has the
flexibility to invest in companies of any size; however, it is expected that it
will not make significant investments in start-up companies, initial public
offerings, non-public companies, or companies with little or no operating
history.
Boulder Investment Advisers, LLC (the "Adviser") acts as the
investment adviser to the Company. The address of the Company and the Adviser is
1680 38th Street, Suite 800, Boulder, Colorado 80301 and their common telephone
number is (303) 444-5483. Stewart West Indies Trading Company, Ltd. doing its
investment advisory business under the name Stewart Investment Advisers ("SIA")
acts as a sub-adviser to the Company and its address is Bellerive, Queen Street,
St. Peter, Barbados.
The AMPS will not be listed on an exchange. You may only buy or sell
AMPS through an order placed at an auction with or through a broker-dealer that
has entered into an agreement with the auction agent and the Company, or in a
secondary market maintained by certain broker-dealers. These broker-dealers are
not required to maintain this market, and it may not provide you with liquidity.
This prospectus sets forth concisely the information about the
Company you should know before investing. You should read the prospectus before
deciding whether to invest and retain it for future reference. A statement of
additional information, dated August 11, 2000, containing additional information
about the Company, has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference in its entirety into this
prospectus. You can review the table of contents of the statement of additional
information on page 35 of this prospectus. You may request a free copy of the
statement of additional information by calling 1-800-331-1710. You may also
obtain the statement of additional information and other information regarding
the Company on the SEC's web site (http://www.sec.gov).
Investing in the AMPS involves certain risks. See "Risks" beginning
on page 11. The minimum purchase amount of the AMPS is $100,000.
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price $100,000 $77,500,000
Sales Load $ 375 $ 290,625
Proceeds to Company (before expenses) 1 $ 99,625 $77,209,375
</TABLE>
-----------------
1 Offering expenses payable by the Company are estimated to be $250,000.
The underwriter is offering the AMPS subject to various conditions.
The underwriter expects to deliver the AMPS to purchasers, in book-entry form,
through the facilities of The Depository Trust Company on or about August 15,
2000.
August 11, 2000
Merrill Lynch & Co.
<PAGE>
The Company is offering 775 newly issued shares of Taxable Auction
Market Preferred Stock (the "Offering"). We refer to these shares as the "AMPS"
throughout this prospectus and the related statement of additional information.
The dividend rate for the initial rate period (the period from the date of issue
(which is August 15, 2000) through September 12, 2000) will be 6.57%, and will
be paid on September 13, 2000. After the initial rate period, the dividend rate
on the AMPS for each subsequent rate period generally will be determined
pursuant to auctions held every 28 days. Prospective purchasers should carefully
review the auction procedures described in this prospectus and in the statement
of additional information and should note:
o a buy order or sell order is a commitment to buy or sell AMPS
based on the results of an auction;
o auctions will be conducted by telephone; and
o purchases and sales will be settled on the next business day after
the auction.
The Company is required to allocate net capital gains and other
taxable income, if any, proportionately between common shares and preferred
shares, including the AMPS, based on the percentage of total dividends
distributed to each class for that year.
Dividends on the AMPS are cumulative. The AMPS are redeemable, in
whole or in part, at the option of the Company on any date dividends are paid on
the AMPS, and will be subject to mandatory redemption, in certain circumstances,
at a redemption price of $100,000 per share plus accumulated but unpaid
dividends to the redemption date (whether or not declared), plus a premium in
certain circumstances.
You should rely only on the information contained in this
prospectus. The Company has not authorized anyone to provide you with different
information. The Company is not making an offer of these securities in any state
where the offer is not permitted. You should not assume that the information
provided by this prospectus is accurate as of any date other than the date on
the front of this prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUMMARY....................................................................................................4
FINANCIAL HIGHLIGHTS..................................................................................................8
THE COMPANY...........................................................................................................9
USE OF PROCEEDS......................................................................................................10
INVESTMENT OBJECTIVE AND POLICIES....................................................................................10
OTHER INVESTMENT PRACTICES...........................................................................................11
Leverage.........................................................................................................11
Hedging..........................................................................................................11
Other Investment Techniques......................................................................................11
RISKS................................................................................................................11
Interest Rate and Hedging Risks..................................................................................12
Investments In Common Stocks.....................................................................................12
Investments in Real Estate Investment Trusts ("REITs")...........................................................12
Investments in Other Registered Investment Companies ("RICs")....................................................13
Investments in Preferred Stocks and Bonds........................................................................13
Auction Risk.....................................................................................................13
Secondary Market Risk............................................................................................14
Ratings and Asset Coverage Risk..................................................................................14
MANAGEMENT OF THE COMPANY............................................................................................14
Directors and Officers...........................................................................................14
Investment Advisers..............................................................................................14
Beneficial Ownership and Control Persons.........................................................................16
Investment Philosophy............................................................................................18
The Investment Advisory Agreements...............................................................................18
The Administration and Co-Administration Agreements..............................................................19
Expenses of The Company..........................................................................................20
DESCRIPTION OF AMPS..................................................................................................20
General..........................................................................................................21
Dividends and Rate Periods.......................................................................................21
Redemption.......................................................................................................23
Liquidation......................................................................................................24
Rating Agency Guidelines and Asset Coverage......................................................................24
Voting Rights....................................................................................................25
THE AUCTION..........................................................................................................26
General..........................................................................................................26
Auction Procedures...............................................................................................27
Secondary Market Trading and Transfer of AMPS....................................................................29
TAXES................................................................................................................29
Federal Income Tax Matters.......................................................................................29
State and Local Tax Matters......................................................................................30
DETERMINATION OF NET ASSET VALUE.....................................................................................30
REPURCHASE OF COMMON SHARES..........................................................................................30
DESCRIPTION OF CAPITAL STOCK.........................................................................................30
Common Shares....................................................................................................30
Preferred Stock..................................................................................................31
Anti-takeover Provisions of the Charter and By-Laws..............................................................31
OTHER SERVICE PROVIDERS..............................................................................................33
UNDERWRITING.........................................................................................................33
LEGAL OPINIONS.......................................................................................................33
EXPERTS..............................................................................................................34
REPORTS TO STOCKHOLDERS..............................................................................................34
AVAILABLE INFORMATION................................................................................................34
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION........................................................35
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following information is a summary of, and is qualified in its
entirety by reference to, more detailed information included in this prospectus
and the Company's statement of additional information.
<TABLE>
<S> <C>
The Company.............................................. Boulder Total Return Fund, Inc. is a diversified, closed-end
management investment company. The Company's investment objective is
total return. The Company seeks to produce both long-term capital
appreciation through investment in common stocks and current income
consistent with preservation of capital through investments in income
producing securities. The Company typically invests in securities of
U.S.-based companies. See "Investment Objective and Policies". As of
June 30, 2000, the Company had 9,416,743 shares of common stock
outstanding and 775 preferred shares outstanding. The 775 preferred
shares are Money Market Cumulative Preferred Stock (the "MMP Shares")
which will be redeemed in their entirety in conjunction with the
Offering out of the proceeds of the Offering. The Company's common
shares are traded on the New York Stock Exchange under the symbol
"BTF."
The Offering............................................. The Company is offering 775 shares of AMPS (the "Offering"). The
purchase price for each AMPS Share is $100,000 plus accumulated
dividends, if any, from the date the share is first issued (which is
August 15, 2000). The AMPS are being offered by Merrill Lynch & Co.
("Merrill Lynch").
Investment Objective and Policies........................ The Company's investment objective is total return. The Company seeks
to produce both long-term capital appreciation through investment in
common stocks and current income consistent with preservation of
capital through investments in income producing securities such as
dividend paying closed-end funds, real estate investment trusts, U.S.
Government securities, preferred stocks and bonds. No assurance can be
given that the Company will achieve its investment objective.
The Company operates as a "diversified" management investment company,
as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). Under this definition, at least 75% of the value of the
Company's total assets must at the time of investment consist of cash
and cash items (including receivables), U.S. Government securities,
securities of other investment companies, and other securities limited
in respect of any one issuer to an amount not greater in value than 5%
of the value of the Company's total assets and to not more than 10% of
the voting securities of a single issuer. This limit does not apply,
however, to 25% of the Company's assets, which may be invested in a
single issuer. The Company intends to concentrate its common stock
investments in a few issuers and to take large positions in those
issuers, consistent with being a "diversified" fund. As a result, the
Company is subject to a greater risk of loss than a fund that
diversified its investments more broadly. Taking larger positions is
also likely to increase the volatility of the Company's net asset
value reflecting fluctuation in the value of its large holdings.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Under normal market conditions, the Company intends to invest at least
80% of its net assets in common stocks and income securities. The term
"common stocks" includes income-producing closed-end funds and real
estate investment trusts ("REITs"). The term "income securities"
includes preferred stocks, bonds, notes, bills, debentures,
convertible securities, bank debt obligations, repurchase agreements
and short-term money market obligations.
Investment Advisers...................................... Boulder Investment Advisers, L.L.C. (the "Adviser") acts as the
investment adviser to the Company and Stewart Investment Advisers (the
"Sub-Adviser" or "SIA") is the Company's sub-investment adviser. The
Adviser has delegated to SIA full authority to make investment
decisions for the Company and to determine the Company's asset
allocation. The address of the Company and the Adviser is 1680 38th
Street, Suite 800, Boulder Colorado 80301 and their common telephone
number is (303) 444-5483. SIA's address is Bellerive, Queen Street,
St. Peter, Barbados.
Risk Factors............................................. Before investing in AMPS, you should consider carefully the following
risks of such an investment:
o If an auction fails you may not be able to sell some or all of
your shares;
o The Company holds a substantial position (more than 25% of its
assets) in the common stock of a single issuer, Berkshire
Hathaway, Inc. and thus, the volatility of the Company's common
stock, and the Company's net asset value and its performance in
general, depends disproportionately more on the performance of
such single issuer than might a more diversified fund;
o The Company has substantial investments in non-income producing
common stocks (e.g., Berkshire Hathaway as described above);
o Because of the nature of the market for AMPS, you may receive
less than the price you paid for your shares if you sell them
outside of the auction, especially when market interest rates are
rising;
o A rating agency could downgrade the rating assigned to the AMPS,
which could affect liquidity;
o The Company may be forced to redeem your shares to meet
regulatory or rating agency requirements and may voluntarily
redeem your shares without your consent;
o In certain circumstances the Company may not earn sufficient
income from its investments to pay dividends out of income;
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
o Market factors, such as declines in the value of its stock
holdings or increases in interest rates, may result in a decline
in the value of the Company's investment portfolio thus reducing
the asset coverage for the AMPS; and
o Adverse developments in the business affairs of issuers of
securities in which the Company invests may have a negative
impact on the value of the Company's portfolio and its income.
Secondary Market Trading................................. The AMPS will not be listed on a stock exchange. Instead, you may buy
or sell AMPS at a periodic auction by submitting orders to a
broker-dealer (a "Broker-Dealer") that has entered into a separate
agreement with the auction agent and the Company or to a broker-dealer
that has entered into an agreement with a Broker-Dealer. In addition
to the auctions, Broker-Dealers and other broker-dealers may maintain
a separate secondary trading market in AMPS, but may discontinue this
activity at any time. You may transfer shares outside of auctions only
to or through a Broker-Dealer, a broker-dealer that has entered into a
separate agreement with a Broker-Dealer, or other persons as the
Company may agree. There can be no assurance that a secondary trading
market for the AMPS will develop, or if it does develop, that it will
provide you with liquidity.
Dividends and Rate Periods............................... After the initial rate period, the AMPS normally will have a rate
period consisting of twenty-eight (28) days. The Board of Directors of
the Company (the "Board") may, from time to time, declare a different
rate period upon giving notice to the holders of the AMPS.
Dividends on the AMPS offered hereby are cumulative from the date they
are first issued (which is August 15, 2000) and are payable when, as
and if declared by the Board, out of funds legally available therefor.
The Company will pay the initial dividend for the AMPS on September
13, 2000 and thereafter generally on the business day following each
auction, subject to certain exceptions.
After the initial rate period, the dividend rate for the AMPS will be
determined by auction. The dividend rate for the initial rate period
is 6.57% and the first auction will be held on September 12, 2000.
In the event the Company wishes to designate a special rate period,
the Company will provide prior notice to the auction agent and each
Broker-Dealer and will not designate such period if the lead broker
for the auctions, initially Merrill Lynch, Pierce, Fenner and Smith
Incorporated, objects. See "Dividends and Rate Periods--Calculation of
Dividend Payment".
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Taxes.................................................... Because in normal circumstances the Company will invest substantially
all of its assets in securities that pay dividends or interest that is
not exempt from regular Federal income tax, the income you receive
will ordinarily be subject to regular Federal income tax. In addition,
your income may be subject to state and local taxes. Taxable income or
net realized capital gains earned by the Company will be allocated
proportionately to holders of the Company's preferred shares and
common shares, based on the percentage of total dividends paid to each
class for that year. In addition, income eligible for the "dividends
received deduction" will be allocated proportionally to holders of the
AMPS and the Company's common shares. Accordingly, a portion of the
dividends paid on the AMPS may be taxable at long-term capital gains
rates, which are lower for individuals than rates on ordinary income
and short-term capital gain.
Liquidation Preference................................... The liquidation preference of each AMPS share will be $100,000, plus
an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) plus the premium, if any, resulting from the
designation of a premium call period.
Ratings.................................................. It is a condition to their issuance that the AMPS be issued with a
rating of "aa1" from Moody's Investor Services, Inc. ("Moody's") and
"AA" from Standard & Poor's Ratings Group ("S&P"). These ratings are
an assessment of the capacity and willingness of an issuer to pay
preferred stock obligations. The ratings are not a recommendation to
purchase, hold or sell those shares, inasmuch as the rating does not
comment as to market price or suitability for a particular investor.
The rating agency guidelines described above also do not address the
likelihood that an owner of AMPS will be able to sell such shares in
an auction or otherwise. The ratings are based on current information
furnished to Moody's and S&P by the Company and the Adviser and
information obtained from other sources. The ratings may be changed,
suspended or withdrawn, in the rating agencies' discretion, as a
result of changes in, or the unavailability of, such information.
Redemption............................................... Holders of AMPS will not have the right to cause the Company to redeem
their shares. The Company may, however, be required by applicable law
or by rating agency guidelines to redeem the AMPS if, for example, the
Company does not meet an asset coverage ratio required by law or
correct a failure to meet a rating agency guideline in a timely
manner. The Company may also voluntarily redeem the AMPS without your
consent.
Voting Rights............................................ The 1940 Act requires that the holders of any preferred shares, voting
together as a single class separate from the holders of common shares,
have the right to elect at least two directors of the Company at all
times and to elect a majority of the directors at any time if two
years' dividends on the AMPS have not been paid and the Company has
not eliminated all dividend arrearages. The holders of AMPS and any
other outstanding preferred shares will vote as a separate class on
certain other matters as required under the Company's charter, the
1940 Act and Maryland law.
</TABLE>
7
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below set forth certain specified information for an
outstanding share of common stock and an outstanding share of MMP stock of the
Company throughout each period presented. The financial highlights for fiscal
years ended November 30 have been audited by PricewaterhouseCoopers LLP, the
Company's independent auditors, whose report covering each of the five years in
the period ended November 30, 1999, is included in the Company's most recent
Annual Report and is incorporated by reference in the statement of additional
information. The Company's unaudited financial statements in its May 31, 2000
Semi-Annual Report are also incorporated by reference in the statement of
additional information. On August 27, 1999 the Company changed its objective
from income to total return. The financial highlights should be read in
conjunction with the financial statements and notes thereto included in the
Company's most recent Annual Report and Semi-Annual Report, which are available
without charge from the Company by calling the Company at 1-800-331-1710.
<TABLE>
<CAPTION>
Year Ended November 30
Six Months Ended
May 31, 2000 1999 1998 1997
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period ........... $ 13.32 $ 16.06 $ 16.33 $ 15.31
Net investment income .......................... 0.38 1.29 1.33 1.36
Net realized and unrealized gain/(loss) on
investments .................................... 0.11 (1.93) 0.13 1.10
----------- ------------ ------------ ------------
Total from investment operations ............... 0.49 (0.64) 1.46 2.46
----------- ------------ ------------ ------------
Offering costs and MMP* underwriting commissions
charged to paid-in capital ..................... -- -- -- --
----------- ------------ ------------ ------------
DISTRIBUTIONS:
Dividends paid from net investment income to
MMP* Shareholders .............................. (0.24) (0.35) (0.25) (0.26)
Distributions paid from net realized capital
gains to MMP* Shareholders ..................... -- (0.03) (0.14) (0.06)
Dividends paid from net investment income to
Common Shareholders ............................ (0.14) (1.02) (1.07) (1.05)
Distributions paid from net realized capital
gains to Common Shareholders ................... -- (0.64) (0.29) (0.05)
Change in accumulated undeclared dividends on
MMP* Shareholders .............................. 0.03 (0.06)+ 0.02 (0.02)
----------- ------------ ------------ ------------
Total distributions ............................ (0.35) (2.10) (1.73) (1.44)
----------- ------------ ------------ ------------
Net asset value, end of period ................. $ 13.46 $ 13.32+ $ 16.06 $ 16.33
=========== ============ ============ ============
Market value, end of period .................... $ 10.75 $ 10.188 $ 13.625 $ 15.625
=========== ============ ============ ============
Total investment return based on net asset
value** ........................................ 2.47% (5.17)% 7.65% 14.66%
=========== ============ ============ ============
Total investment return based on market value**
7.01% (14.51)% (4.55)% 14.84%
=========== ============ ============ ============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON
STOCK SHAREHOLDERS:
Operating expenses (a) ......................... 2.67% 1.97% 1.83% 1.60%
Net investment income (a)*** ................... 2.51% 6.08% 5.92% 6.51%
SUPPLEMENTAL DATA:
Portfolio turnover rate ........................ 45% 69% 86% 77%
Net assets, end of period (in 000's) ........... $ 204,708 $ 203,609 $ 228,829 $ 231,572
Ratio of operating expenses to Total Average Net
Assets including MMP* .......................... 1.62% 1.26% 1.22% 1.05%
<CAPTION>
1996 1995 1994 1993****
<S> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period ........... $ 14.54 $ 12.22 $ 14.36 $ 13.95
Net investment income .......................... 1.41 1.39 1.40 0.83
Net realized and unrealized gain/(loss) on
investments .................................... 0.72 2.46 (1.94) 0.54
----------- ------------ ------------ ------------
Total from investment operations ............... 2.13 3.85 (0.54) 1.37
----------- ------------ ------------ ------------
Offering costs and MMP* underwriting commissions
charged to paid-in capital ..................... -- -- -- (.22)
----------- ------------ ------------ ------------
DISTRIBUTIONS:
Dividends paid from net investment income to
MMP* Shareholders .............................. (0.34) (0.36) (0.28) (0.09)
Distributions paid from net realized capital
gains to MMP* Shareholders ..................... (0.02) -- -- (0.01)
Dividends paid from net investment income to
Common Shareholders ............................ (1.02) (1.15) (1.09) (0.61)
Distributions paid from net realized capital
gains to Common Shareholders ................... -- -- (0.24) --
Change in accumulated undeclared dividends on
MMP* Shareholders .............................. 0.02 (0.02) 0.01 (0.03)
----------- ------------ ------------ ------------
Total distributions ............................ (1.36) (1.53) (1.60) (0.74)
----------- ------------ ------------ ------------
Net asset value, end of period ................. $ 15.31 $ 14.54 $ 12.22 $ 14.36
=========== ============ ============ ============
Market value, end of period .................... $ 14.625 $ 13.125 $ 11.125 $ 14.25
=========== ============ ============ ============
Total investment return based on net asset
value** ........................................ 13.89% 30.38% (5.79)% 7.40%
=========== ============ ============ ============
Total investment return based on market value**
20.50% 29.28% (13.55)% (.89)%
=========== ============ ============ ============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON
STOCK SHAREHOLDERS:
Operating expenses (a) ......................... 1.84% 1.89% 1.91% 1.66%
Net investment income (a)*** ................... 7.44% 7.81% 8.35% 6.59%
SUPPLEMENTAL DATA:
Portfolio turnover rate ........................ 98% 93% 110% 135%
Net assets, end of period (in 000's) ........... $ 221,840 $ 212,827 $ 192,795 $ 212,577
Ratio of operating expenses to Total Average Net
Assets including MMP* .......................... 1.17% 1.16% 1.18% 1.15%
</TABLE>
* Money Market Cumulative Preferred(TM)Stock.
** Assumes reinvestment of distributions at the price obtained by the
Company's Dividend Reinvestment Plan.
*** The net investment income ratios reflect income net of operating
expenses and payments to MMP(TM) Shareholders. **** The Company
commenced operations on February 19, 1993.
**** The Company commenced operations on February 19, 1993.
+ Includes effect of additional distribution available to MMP(TM)
Shareholders ($0.04 per common share).
(a) Annualized for the six months ended May 31, 2000, and for the period
ended November 30, 1993.
8
<PAGE>
Money Market Cumulative Preferred(TM) Stock
<TABLE>
<CAPTION>
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Total Shares Asset Coverage Involuntary Liquidating Average Market Value per
Outstanding per Share Preference Per Share (1) Share (1)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/31/00* 775 $264,165 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
11/30/99 775 $262,733 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
11/30/98 775 $295,263 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
11/30/97 775 $298,802 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
11/30/96 775 $286,246 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
11/30/95 775 $277,196 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
11/30/94 775 $248,767 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
11/30/93 775 $274,293 $100,000 $100,000
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes accumulated undeclared dividends.
* Unaudited
THE COMPANY
Boulder Total Return Fund, Inc. is a diversified, closed-end
management investment company. The Company was incorporated under the laws of
the State of Maryland on December 21, 1992, and is registered under the 1940
Act. The address of the Company is 1680 38th Street, Suite 800, Boulder,
Colorado 80301 and its telephone number is (303) 444-5483.
The Company commenced investment operations on February 19, 1993,
upon the closing of the initial public offering of 8,000,000 of its common
shares. The net proceeds of such offering were approximately $111.6 million.
Prior to August, 1999, the Company's investment objective was "high
current income consistent with preservation of capital". On August 27, 1999, a
special shareholders meeting was held at which the Company's shareholders
approved, among other things:
o A change in the Company's investment objective from "high
current income consistent with preservation of capital" to total
return;
o Three new advisers for the Company (Boulder Investment Advisers,
LLC, Stewart Investment Advisers and Spectrum Asset Management,
Inc.);
o A new name for the Company (from Preferred Income Management
Fund Incorporated to Boulder Total Return Fund, Inc.); and
o The amendment of certain investment restrictions consistent with
the Company's new investment objective.
The Company has outstanding 775 shares of Money Market Cumulative
Preferred Shares (the "MMP Shares"). The MMP Shares were issued with a
liquidation preference per share of $100,000, plus accumulated and unpaid
dividends. The MMP Shares will be redeemed in conjunction with the Offering out
of the proceeds from the Offering.
9
<PAGE>
As of June 30, 2000, the Company's issued and outstanding shares
were as follows:
<TABLE>
<CAPTION>
Amount Held by Company
Title and Class Amount Authorized or for Its Account Amount Outstanding
<S> <C> <C> <C>
Common Stock 240,000,000 0 9,416,743
Preferred Stock 10,000,000 0 775
</TABLE>
The Company's common shares are traded on the New York Stock
Exchange under the symbol "BTF."
USE OF PROCEEDS
The net proceeds of the Offering will be $76,959,375 after payment
of offering expenses (estimated to be $250,000) and the sales load.
The net proceeds of the Offering will be used to redeem the MMP
Shares and thus will be invested in accordance with the Company's investment
objective and policies as stated below.
INVESTMENT OBJECTIVE AND POLICIES
The Company's investment objective is total return. The Company
seeks to produce both long-term capital appreciation through investment in
common stocks and current income consistent with preservation of capital through
investments in income producing securities, such as dividend-paying closed-end
funds ("RICs"), real estate investment trusts ("REITs"), U.S. Government
securities, preferred stocks and bonds. No assurance can be given that the
Company will achieve its investment objective.
The Company operates as a "diversified" management investment
company, as defined in the 1940 Act. Under this definition, at least 75% of the
value of the Company's total assets must at the time of investment consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other investment companies, and other securities limited in
respect of any one issuer to an amount not greater in value than 5% of the value
of the Company's total assets and to not more than 10% of the voting securities
of a single issuer. This limit does not apply, however, to 25% of the Company's
assets, which may be invested in a single issuer. The Company intends to
concentrate its common stock investments in a few issuers and to take large
positions in those issuers, consistent with being a "diversified" fund. As a
result, the Company is subject to a greater risk of loss than a fund that
diversified its investments more broadly. Taking larger positions is also likely
to increase the volatility of the Company's net asset value reflecting
fluctuation in the value of its large holdings.
Under normal market conditions, the Company intends to invest in a
portfolio of common stocks and income securities. The portion of the Company's
assets invested in each can vary depending on market conditions. The term
"common stocks" includes both stocks acquired primarily for their appreciation
potential and stocks acquired for their income potential, such as
dividend-paying RICs and REITs. The term "income securities" includes bonds,
U.S. Government securities, notes, bills, debentures, preferred stocks,
convertible securities, bank debt obligations, repurchase agreements and
short-term money market obligations. The term "preferred stocks" or "preferreds"
includes traditional preferred stocks as well as so-called "hybrid," or taxable,
preferred securities and other similar or related investments. These hybrid
securities, which currently are marketed under such acronyms as TOPrS, TIPS,
QUIPS, MIPS, QUIDS, QUICS and Capital Securities, may be debt-like in key
characteristics. Income derived from these hybrid preferred securities is not
eligible for the corporate Dividends Received Deduction.
As of June 30, 2000 the Company's portfolio is invested primarily in
common stocks (53.4%), with 16.2% invested in preferred stocks and 30.4% in cash
equivalents. The Company currently intends to invest in RICs and REITs in order
to generate sufficient income to pay interest on the AMPS when due. Under
current market conditions, these investments and investments in hybrid preferred
securities generally are generating higher income than traditional preferred
stocks that had comprised most of the Company's portfolio prior to the change in
the Company's investment objective described above. Under the 1940 Act, the
Company must limit to 10% the portion
10
<PAGE>
of its assets invested in RICs and, absent an amendment to the Company's
industry concentration policy, must limit to 25% the portion of its assets
invested in REITs. Each of these percentage limitations is calculated at the
time of investment, and the Company will not be required to dispose of assets if
holdings increase above these levels due to appreciation. Under current market
conditions, it is expected that the Company will have investments in RICs and
REITs close to such 10% and 25% limitations as long as the AMPS or other
leverage is outstanding.
The volatility of common stock prices has historically been greater
than fixed-income securities, and as the Company continues to shift a greater
portion of its assets into common stocks, the volatility of the Company's net
asset value may also increase. The time horizon for the Company to achieve its
objective of total return will likely be longer than for a fund that invests
solely for income.
The Company may, for temporary defensive purposes, allocate a higher
portion of its assets to cash and cash equivalents. For this purpose, cash
equivalents consist of short-term (less than twelve months to maturity) U.S.
Government securities, certificates of deposit and other bank obligations,
investment grade corporate bonds and other debt instruments, and repurchase
agreements. Under normal market circumstances, the Company will not have more
than 10% of its assets in cash and cash equivalents.
Except for the Company's investment objective and the Company's
industry concentration and issuer diversification policies described above, the
percentage limitations and investment policies set forth in this Prospectus can
be changed by the Board without shareholder approval.
OTHER INVESTMENT PRACTICES
Leverage
Since February 1993, the Company has been leveraged with $77.5
million of the MMP Shares and, after redemption of the MMP Shares and issuance
of the AMPS, it is intended that the Company will remain leveraged to the same
degree with the AMPS (i.e., $77.5 million). It is expected that as long as the
Company utilizes the leverage, it will maintain an investment in
income-producing securities sufficient to pay the expenses of the Company and to
service the dividends payable on the AMPS.
Hedging
Historically the Company had entered into certain hedging
transactions to offset some of the interest rate risk associated with its
preferred stock portfolio when 100% of the Company's assets were in preferred
stocks. However, due to the cost of hedging, and the smaller percentage of the
Company's assets invested in fixed income securities, the Company has
discontinued hedging its portfolio.
Other Investment Techniques
The Company may engage in other types of transactions, including,
but not limited to, investment in restricted and illiquid securities, RICs or
REITs, repurchase and reverse repurchase agreements, when-issued and forward
commitment transactions, borrowing, securities lending and other transactions.
For a description of such types of transactions, see "Investment Policies and
Techniques" in the statement of additional information.
RISKS
Risk is inherent in all investing. Investing in any investment
company security involves risk, including the risk that you may receive little
or no return on your investment or that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in AMPS.
11
<PAGE>
Interest Rate and Hedging Risks
Since August 27, 1999, at which time the Company changed its
investment objective from "income" to "total return", the Company has steadily
reduced its holdings in preferred stocks in an effort to make cash available to
purchase common stocks. As a result of implementing the Company's change in
investment objective, the income available for servicing the dividends payable
to holders of the AMPS will decrease significantly from its historical levels,
although it is contemplated that such income will be more than adequate to pay
the expenses of the Company while at the same time servicing the dividend
payable to holders of the AMPS. Nonetheless, if short-term interest rates rise,
the dividend rates on the AMPS, which are expected to correlate with short-term
interest rates, may rise so that the amount of dividends paid to holders of the
AMPS approaches or exceeds the income from the entire portfolio. If that occurs,
the Company may have to liquidate a portion of its holdings in order to service
dividends to holders of the AMPS, which may have adverse tax consequences and
generate transaction costs.
Dividend rates on fixed rate preferred stocks held by the Company,
as their name implies, would be fixed regardless of the direction of interest
rates. In addition, the market prices of such fixed rate preferred stocks would
tend to (1) decline as interest rates rose and (2) rise as interest rates fell.
See "Risk Factors."
Investments In Common Stocks
Common stocks generally have greater risk exposure and reward
potential over time than bonds. The volatility of common stock prices has
historically been greater than bonds, and as the Company shifts a greater
portion of its assets into common stocks, the volatility of the Company's net
asset value may also increase. Further, because the time horizon for the
Company's investments in common stock is longer, the time necessary for the
Company to achieve its objective of total return will likely be longer than for
a fund that invests solely for income.
The Company presently has invested a significant percentage (41.4%
as of June 30, 2000) of its portfolio in low-dividend or non-dividend paying
common stocks such as Berkshire Hathaway, Inc. Accordingly, once the Company's
recently approved investment objective (i.e., total return) is fully
implemented, the Company will not generate income at its historic levels thus
resulting in a decreased distribution of investment income to the holders of the
Company's common stock. As of June 30, 2000, the Company held 750 Berkshire
Hathaway, Inc. "A" shares and 9010 "B" shares. At the time of investment, this
represented less than 25% of the Company's assets. However, because of
appreciation, as of June 30, 2000 these positions represented 29% of the
Company's assets. The Adviser does not currently intend to liquidate any portion
of its position in Berkshire Hathaway, Inc. Though not an insurance company
itself, Berkshire Hathaway owns Geico Insurance and General Re Insurance
companies, and therefore derives a significant portion of its income, and its
value, from these two insurance companies. Insurance companies can be
significantly affected by interest rates as well as price competition within the
industry. In addition, an insurance company may experience significant changes
in its year to year operating performance based both on claims paid and on
performance of invested assets. Insurance companies can also be affected by
government regulations and tax laws, which may change from time to time. A
significant decline in the market price of Berkshire Hathaway, Inc. or other
company in which the Company has made a significant common stock investment may
result in (i) the Company's failing the coverage ratio thresholds imposed on the
Company by the 1940 Act or by Moody's and S&P, (ii) a decline in the market
price of the Company's common shares and (iii) greater risk and market
fluctuation than a fund that has securities representing a broader range of
investment alternatives.
Investments in Real Estate Investment Trusts ("REITs")
REITs, or Real Estate Investment Trusts, are securities of companies
whose primary objective is investment in real property or providing services to
real property interests. The Company may invest up to 25% of its assets in REIT
securities. The Company intends to invest in REIT securities primarily for
income. As of June 30, 2000, the Company had 10.4% of its assets invested in
REITs.
There are risks associated with investing in REITs, including the
potential for loss of value if the underlying properties in which the REIT
invests decline in value. Property valuations may rise and fall with either the
local economy conditions or with the national economy. Furthermore, the dividend
income paid out by the
12
<PAGE>
REIT may be reduced or eliminated. In addition, the Company bears its ratable
share of a REIT's expenses while still paying management fees on the Company
assets so invested.
Investments in Other Registered Investment Companies ("RICs")
The Company may invest up to 10% of its assets in other investment
companies registered under the 1940 Act. The Company intends to invest in other
closed-end RICs having an income objective when they are trading at a discount,
and when market conditions seem appropriate to the Adviser. As of June 30, 2000,
the Company had 5.0% of its assets invested in RICs.
The Company intends to normally invest in RICs that pay dividends.
There are risks associated with investments in RICs, including the risk that the
dividend paid by the RIC could be reduced or eliminated. As a shareholder in
another fund, the Company will pay double fees, by bearing its ratable share of
that fund's expenses, including management fees, and remaining subject to the
Company's advisory and administrative fees with respect to the assets so
invested.
Investments in Preferred Stocks and Bonds
Preferred stocks constituted approximately 16.2% of the Company's
assets as of June 30, 2000. This is down significantly from August 27, 1999 (the
date shareholders approved the change in objective from income to total return),
when the Company held almost 100% of its assets in preferred stocks. Preferred
stock, along with common stock, is one of the two major types of equity
securities. Generally, preferred stock receives dividends prior to distributions
on common stock and usually has a priority claim over common stockholders if the
issuer of the stock is liquidated. Since 1993, a hybrid preferred security was
introduced to the market which had both equity and debt characteristics. Such
hybrid preferred securities pay dividends that are not eligible for the
corporate Dividends Received Deduction. The Company had approximately 15% of its
assets invested in such hybrid preferred securities as of June 30, 2000. On June
23, 2000, the Board approved a management proposal to substantially curtail or
eliminate entirely the Company's remaining holdings in preferred stocks.
Preferred stocks and corporate bonds may be substantially less
liquid than many other securities such as common stocks or U.S. Government
securities. In addition, preferred stocks and bonds purchased by the Company may
be subject to risk with respect to the issuing entity and to market
fluctuations. In particular, such preferred stocks and bonds may be subject to
"credit risk", which refers to an issuer's ability to make timely payments of
interest and principal. The Company does not expect to make substantial
investments in preferred stocks. Lower-quality securities in the Company's
portfolio may be subject to greater risk than higher rated securities. The
Company limits to 15% of its assets the portion of its portfolio invested in
preferred stocks and bonds rated below investment grade, which securities will
be rated at least either "ba" by Moody's or "BB" by S&P at the time of purchase
and will have been issued by an issuer having a class of outstanding senior debt
that is rated at least investment grade by Moody's or S&P.
Auction Risk
The dividend rate for the AMPS normally is set through an auction
process. In the auction, holders of AMPS indicate the dividend rate at which
they would be willing to hold or sell their AMPS or purchase additional AMPS and
potential investors indicate the rate at which they would be willing to purchase
AMPS. The auction also provides liquidity for the sale of AMPS. An auction fails
if there are more AMPS offered for sale than there are buyers. You may not be
able to sell your AMPS at an auction if the auction fails. In the event of a
failed auction, the applicable rate for the next rate period (except in the
event of an auction for a special rate period) will be the maximum rate on the
auction date. For a description of how the maximum rate is determined, see
"Description of AMPS -- Dividends and Rate Periods -- Calculation of Dividend
Payment". Also, if you place hold orders (orders to retain AMPS) at an auction
only at a specified dividend rate, and that rate exceeds the rate set at the
auction, you will be obligated to sell your AMPS to investors who bid a lower
rate. Finally, if you and enough other investors place bid or hold orders
without specifying a dividend rate below which you and such other investors
would not wish to buy or continue to hold those AMPS, you would receive a lower
dividend rate on your shares for the next rate period than the market rate. See
"The Auction".
13
<PAGE>
Secondary Market Risk
If you try to sell your AMPS between auctions, you may not be able
to sell any or all of your shares, or you may not be able to sell them for
$100,000 per share plus accumulated dividends. If the Company has designated a
special rate period of more than 28 days, changes in interest rates could affect
the price you would receive if you sold your shares in the secondary market more
than if the Company were utilizing the normal rate period. Broker-dealers that
maintain a secondary trading market for AMPS are not required to maintain this
market, and the Company is not required to redeem shares either if an auction or
an attempted secondary market sale fails because of a lack of buyers. AMPS are
not listed on a stock exchange or the NASDAQ stock market. If you sell your AMPS
to a broker-dealer between auctions, you may receive less than the price you
paid for them, especially if market interest rates have risen since the last
auction.
Ratings and Asset Coverage Risk
While it is a condition to the issuance of the AMPS that Moody's
assign a rating of "aa1" and S&P a rating of "AA" to the AMPS, such ratings do
not eliminate or necessarily mitigate the risks of investing in AMPS. Moody's or
S&P could downgrade the AMPS, which may make your shares less liquid at an
auction or in the secondary market. If Moody's or S&P downgrades the AMPS, the
Company may alter its portfolio or redeem AMPS in an effort to improve the
rating, although there is no assurance that it will be able to do so to the
extent necessary to restore the prior rating. The Company may voluntarily redeem
the AMPS without your consent. See "Rating Agency Guidelines and Asset Coverage"
for a description of the asset maintenance tests the Company must meet. Further
information concerning the rating categories of S&P and Moody's is provided in
Appendix A to the Statement of Additional Information.
MANAGEMENT OF THE COMPANY
Directors and Officers
The Company's Board is responsible for oversight of the overall
management of the Company, including supervision of the Adviser and Sub-Adviser.
There are five directors of the Company. Two of the directors are "interested
persons" (as defined in the 1940 Act). The names and business addresses of the
directors and officers of the Company and their principal occupations and other
affiliations during the past five years are set forth under "Management of the
Company" in the statement of additional information.
Investment Advisers
The Company engages the investment advisory services of the
following registered investment advisers:
o Boulder Investment Advisers, L.L.C. (referred to herein as the
"Adviser") is the investment adviser to the Company. The Adviser
has delegated to Stewart Investment Advisers ("SIA") full
authority to make investment decisions for the Company and to
determine the Company's asset allocation. The Adviser is
required to monitor and evaluate the services provided by SIA.
The Adviser was formed on April 8, 1999 as a Colorado limited
liability company; its principal place of business is 1680 38th
Street, Boulder, Colorado 80301. The Adviser, which is
registered as an investment adviser under the Investment
Advisers Act of 1940, as amended (the "Investment Advisers Act")
had not prior to August 1999 previously served as adviser to a
registered investment company or managed assets on a
discretionary or non-discretionary basis. The equity owners of
the Adviser are Evergreen Atlantic, L.L.C. ("EALLC"), and the
Lola Brown Trust No.1B (the "Lola Brown Trust"), each an
"affiliated person" with respect to the Company (as that term is
defined in the 1940 Act). Carl D. Johns, the Company's Vice
President and Treasurer, is responsible for the Adviser's
day-to-day activities. Mr. Johns received a Bachelors degree in
Mechanical Engineering at the University of Colorado in 1985,
and a Masters degree in Finance from the University of Colorado
in 1991. He worked at Flaherty & Crumrine Incorporated, the
former adviser for the Company, from 1992 to 1998. During that
period he
14
<PAGE>
was an Assistant Treasurer for the Preferred Income Fund
Incorporated, the Preferred Income Opportunity Fund
Incorporated, and the Company. The executive officers of the
Adviser and the principal occupation of each are set forth
below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Name and Position with the Adviser Principal Occupation
-------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Stephen C. Miller - Director, General Counsel, President, Chief Executive Officer and Chairman of the Board of the
Chairman of the Board, President and Chief Company since April 1, 1999; Vice President and Secretary of SIA;
Executive Officer Director and President of Horejsi, Inc. (dissolved in 1999); Director,
Vice President and Assistant Secretary of Badlands Trust Company; of
Counsel to Krassa, Madsen & Miller, LLC since 1991; Manager of Boulder
Administrative Services, L.L.C., the Co-Administrator of the Company
-------------------------------------------------------------------------------------------------------------------------------
Carl D. Johns - Investment Manager, Vice Chief Financial Officer, Chief Accounting Officer, Vice President and
President and Treasurer Treasurer of the Company; Assistant Manager of the Co-Administrator
-------------------------------------------------------------------------------------------------------------------------------
Laura Rhodenbaugh - Secretary Secretary of the Co-Administrator; Treasurer of SIA; Secretary and
Treasurer of various Horejsi family entities
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Stewart West Indies Trading Company, Ltd., doing business as Stewart
Investment Advisers (referred to herein as the "Sub-Adviser" or "SIA") acts
as the sub-adviser to the Company. SIA manages the Company's portfolio and
determines the Company's asset allocation. Stewart R. Horejsi, an employee
of SIA and its primary investment manager, is responsible for the day-to-day
strategic management of the Company's assets. Mr. Horejsi has full
discretion regarding specific investment decisions and the Company's asset
allocation among cash, common stocks and fixed income investments. Mr.
Horejsi has been a Director of the Company since July 1997; General Manager,
Brown Welding Supply, LLC, since April 1994; and the President or Manager of
various subsidiaries associated with the Horejsi family since June, 1986.
Mr. Horejsi has been the investment adviser for the Horejsi family trusts
(i.e., the Lola Brown Trust, the Ernest Horejsi Trust No. 1B, the Stewart R.
Horejsi Trust No. 2 and certain other related trusts and affiliates) since
1982. As of August 4, 2000, the size of these trusts' and affiliates' common
stock portfolio was approximately $481.7 million. Mr. Horejsi has been the
Director and President of the Horejsi Family Charitable Foundation, Inc.
since 1997. Mr. Horejsi received a Masters Degree in Economics from Indiana
University in 1961 and a Bachelor of Science Degree in Industrial Management
from the University of Kansas in 1959. The principal place of business for
SIA is Bellerive House, Queen Street, St. Peter, Barbados. SIA, a Barbados
international business company incorporated on November 12, 1996, is wholly
owned by the Stewart West Indies Trust, a South Dakota trust established by
Stewart R. Horejsi in 1996 primarily to benefit his issue. SIA, which is
registered as an investment adviser under the Investment Advisers Act, prior
to August 1999 had not served as adviser to a registered investment company
or managed assets on a discretionary or non-discretionary basis except for
Horejsi family interests. However, as described above, Stewart R. Horejsi, a
principal of SIA, has extensive experience managing common stocks for his
family interests. SIA currently has no investment advisory clients other
than the Company.
SIA is not a U.S. company and substantially all of its assets are located
outside the United States. As a result, it may be difficult for investors to
realize judgments of courts of the United States predicated upon civil
liabilities under federal securities laws of the United States. The Company
has been advised that there is substantial doubt as to the enforceability in
Barbados of such civil remedies and criminal penalties as are afforded by
the federal securities laws of the United States. Nonetheless, pursuant to
the sub-advisory agreement between SIA, the Adviser and the Company, SIA has
agreed to
15
<PAGE>
have an agent for service of process in any legal action in the United
States and to be subject to the jurisdiction of the U.S. courts. The
executive officers and directors of SIA and the principal occupation of each
are set forth below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Name and Position with SIA Principal Occupation
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Glade Christensen - President and Resident Sales Manager for SIA. Mr. Christensen does not participate in the
General Sales Manager investment advisory business of SIA.
-----------------------------------------------------------------------------------------------------------------------------------
Stephen C. Miller - Vice President and Secretary President, Chief Executive Officer and Chairman of the Board of the
Company; Vice President and Secretary of SIA; Director, Vice President
and Assistant Secretary of Badlands Trust Company; of Counsel to Krassa,
Madsen & Miller, LLC since 1991; Manager of the Co-Administrator
-----------------------------------------------------------------------------------------------------------------------------------
Laura Rhodenbaugh - Treasurer Secretary of Co-Administrator; Treasurer of SIA; Secretary and Treasurer
of various Horejsi family entities
-----------------------------------------------------------------------------------------------------------------------------------
Stewart R. Horejsi - Investment Manager Investment manager for SIA and investment and business consultant for
the Horejsi Affiliates
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Spectrum Asset Management, Inc. (referred to herein as "Spectrum"), will act
as a sub-adviser to the Company managing the Company's preferred stock
portfolio until August 15, 2000. Spectrum has its principal offices at 4
High Ridge Park, Stamford, Connecticut 06905.
On June 23, 2000, the Board approved a management proposal to substantially
curtail or eliminate entirely, in SIA's discretion, the Company's holdings
in preferred stocks. This decision necessarily contemplated the eventual
resignation of Spectrum. On June 30, 2000, management held discussions with
Spectrum and the parties mutually agreed to terminate the sub-advisory
agreement effective as of August 15, 2000.
Beneficial Ownership and Control Persons
The following table sets forth certain information regarding the
beneficial ownership of the Company's shares as of July 1, 2000, by each person
who is known by the Company to beneficially own 5% or more of the Company's
common stock. To the Company's knowledge, there are no 5% or greater beneficial
owners of MMP Shares.
16
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Number of Shares Beneficially
Name and Address of Owner* Owned Percentage Beneficially Owned
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EALLC(1) 257,811 2.74%
----------------------------------------------------------------------------------------------------------------------------
John S. Horejsi Trust(1)(2) 65,747 0.70%
----------------------------------------------------------------------------------------------------------------------------
Susan L. Ciciora Trust(1)(2) 131,475 1.40%
----------------------------------------------------------------------------------------------------------------------------
Stewart West Indies Trust(1)(2) 191,907 2.04%
----------------------------------------------------------------------------------------------------------------------------
The Evergreen Trust(1)(2) 47,632 0.51%
----------------------------------------------------------------------------------------------------------------------------
Lola Brown Trust No. 1B(1) 1,028,001 10.92%
----------------------------------------------------------------------------------------------------------------------------
Ernest Horejsi Trust No. 1B(1) 2,498,053 26.21%
----------------------------------------------------------------------------------------------------------------------------
Badlands Trust Company(3) 3,975,550 42.22%
----------------------------------------------------------------------------------------------------------------------------
Stewart R. Horejsi Trust No. 2(4) 3,975,550 42.22%
----------------------------------------------------------------------------------------------------------------------------
Aggregate Shares Owned** 3,975,550 42.22%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The address of EALLC is 1680 38th Street, Suite 800, Boulder, Colorado
80301. The address for each of the other listed owners is 614 Broadway,
P.O. Box 801, Yankton, South Dakota 57078.
** Aggregate number and percentage are less than the sum total of amounts
shown for each owner because the same shares may be deemed beneficially
owned by more than one party (see Footnotes 1 through 4).
(1) DIRECT OWNERSHIP. Evergreen Atlantic, L.L.C. ("EALLC"), John S. Horejsi
Trust ("John Trust"), Susan L. Ciciora Trust ("Susan Trust"), Stewart West
Indies Trust ("SWIT"), Lola Brown Trust No. 1B ("Lola Brown Trust"), the
Ernest Horejsi Trust No. 1B ("Ernest Trust") and Badlands Trust Company
("Badlands") directly own 257,811; 27,075; 54,132; 78,470; 1,028,001;
2,498,053; and 12,735, respectively, of the Company's common stock shares,
totaling 3,975,550 shares or 42.22% of the outstanding shares of the
Company.
(2) INDIRECT OWNERSHIP THROUGH EVERGREEN. Numbers shown in the table include
shares held directly (see Footnote No. 1) and shares that may be deemed to
be beneficially owned indirectly through ownership of EALLC. The
outstanding equity membership of EALLC is owned by SWIT, the John Trust,
the Susan Trust and the Evergreen Trust in the following percentages -
44%, 15%, 30% and 11%. The sole trustee of SWIT, the John Trust and the
Susan Trust is Badlands. Mr. Horejsi is not a beneficiary under any of
these trusts. The trustees of Evergreen Trust are Badlands, Stephen C.
Miller and Larry Dunlap. Any action by the Evergreen Trust requires a
majority vote of the trustees.
(3) OWNERSHIP BY BADLANDS. Numbers shown in the table includes shares held
directly by Badlands (see Footnote No. 1) and shares that may be deemed to
be beneficially owned indirectly by Badlands through direct or indirect
ownership by the Lola Brown Trust, the Ernest Trust, SWIT, the John Trust,
the Susan Trust and the Evergreen Trust. Badlands is the sole trustee of
three of the four trusts that control EALLC (see Footnote No. 2) and,
together with Larry Dunlap and Susan Ciciora, one of three trustees of the
Lola Brown Trust and the Ernest Trust. Badlands is a trust company
organized under the laws of South Dakota, which is wholly owned by the SRH
Trust, an irrevocable trust organized by Mr. Stewart Horejsi for the
benefit of his children. The directors of Badlands are Larry Dunlap,
Stephen C. Miller, Robert Ciciora, who is the brother of Mr. Horejsi's
son-in-law (John Ciciora), Daniel Loveland and Marty Jans.
(4) INDIRECT OWNERSHIP BY SRH TRUST. Numbers shown in the table reflects
shares that may be deemed to be beneficially owned indirectly through
ownership of Badlands. The trustees of the SRH Trust are Badlands, Robert
Ciciora and Robert Kastner.
EALLC, the John Trust, the Susan Trust, SWIT, the Lola Brown Trust,
the Ernest Trust, Badlands, the Stewart R. Horejsi Trust No. 2 ("SRH Trust") and
Stewart R. Horejsi are, as a group, considered to be a "control
17
<PAGE>
person" of the Company (as that term is defined in Section 2(a)(9) of the 1940
Act). These entities and other trusts or companies with interlocking management
and/or common ownership, including the Co-Administrator (collectively, the
"Horejsi Affiliates") may be deemed to indirectly own additional Company shares,
which are included in the table above. Further, Stewart R. Horejsi, the
investment manager for SIA, is also the primary investment consultant for the
Horejsi Affiliates and, on a discretionary basis, implements and directs their
investment objective and asset allocation.
Investment Philosophy
Common Stocks. With respect to the common stock portfolio (other
than common stocks purchased primarily for their income-producing potential),
SIA uses an "intrinsic value" approach to selecting and managing the Company's
assets. SIA defines intrinsic value as the discounted value of the cash that can
be taken out of a business during its remaining life. Accordingly, in its
securities selection process, SIA put primary emphasis on analysis of balance
sheets, cash flows, the quality of management and their ability to efficiently
and effectively allocate capital, various internal returns which indicate
profitability, and the relationships that these factors have to the price of a
given security. The intrinsic value approach is based on the belief that the
securities of certain companies may sell at a discount from SIA's estimate of
such companies' "intrinsic value". The Company will seek to invest at reasonable
prices in companies having a high return on assets where the companies use such
return to benefit their shareholders either by reinvesting in other high yield
assets or by distributing such returns to their owners.
Cash and Cash Equivalents. As of June 30, 2000, the Company had a
significant cash position (30.4% of assets), including investments in U.S.
Treasury securities. The cash position is higher than it would normally be due
to the transition from being an income fund to a total return fund. It is
expected that a significant portion of this cash will be used for common stock
investments. Once the Company has fully implemented its total return objective,
under normal market conditions, the Company's cash position is expected
typically to be less than 10% of the Company's total assets.
RICS and REITS. In seeking its total return objective, the Company
expects to invest a portion of its assets in RICS and REITS. In selecting
individual investments in RICS, SIA will consider, among other things, current
yield, the discount that the RIC is trading to its net asset value, the
underlying assets in the RIC and the investment quality of such assets, whether
or not the RIC is leveraged and the RIC's ability to maintain its dividend rate.
In selecting individual investments in REITs, SIA will consider, among other
things, the types of investment properties owned by the REIT, the capital
structure and the use of debt, funds from operations, the current yield and the
ability to maintain such dividend rate, the location of properties owned and the
percentage leased. Although the Company currently has approximately 16% of its
assets invested in preferred stocks, the Company currently intends to emphasize
RICs and REITs as the Company's primary income source.
The Investment Advisory Agreements
The Adviser and the Company are parties to an investment advisory
agreement dated as of August 27, 1999 (the "Adviser Agreement"). The
Sub-Adviser, the Adviser and the Company are parties to a sub-advisory agreement
dated August 27, 1999 (the "Sub-Adviser Agreement"). Under the terms of the
Adviser Agreement, the Adviser manages the investment of the Company's assets
and provides such investment research, advice and supervision, in conformity
with the Company's investment objective and policies, as necessary for the
operations of the Company. Under the terms of the Sub-Adviser Agreement, the
Adviser has engaged, on behalf of the Company, the investment sub-advisory
services of SIA. Under the Sub-Adviser Agreement, under the general direction of
the Adviser, SIA manages the investments of the Company and provides such
investment research, advice and supervision, in conformity with the Company's
investment objective and policies, as necessary for the selection and monitoring
of the portfolio. SIA also determines the Company's asset allocation. The
Adviser Agreement and the Sub-Adviser Agreement are referred to herein as the
"Advisory Agreements".
The Advisory Agreements provide, among other things, that the
Adviser and Sub-Adviser will bear all expenses in connection with the
performance of their services under the Advisory Agreements, although the
Company will bear certain other expenses to be incurred in its operation,
including organizational expenses, taxes,
18
<PAGE>
interest, brokerage costs and commissions and stock exchange fees; fees of
Directors of the Company who are not also officers, directors or employees of
the Adviser or Sub-Adviser; Securities and Exchange Commission fees; state Blue
Sky qualification fees; charges of any custodian, any sub-custodians and
transfer and dividend-paying agents; insurance premiums; outside auditing and
legal expenses; costs of maintenance of the Company's existence; membership fees
in trade associations; stock exchange listing fees and expenses; and litigation
and other extraordinary or non-recurring expenses.
The Adviser Agreement provides that the Company shall pay to the
Adviser for its services a monthly fee at the annual rate of 1.00% of the
Company's average monthly net asset value (the "Adviser Fee"). Under the terms
of the Sub-Adviser Agreement, the Adviser is required to pay SIA 80% of all fees
received by the Adviser pursuant to the Adviser Agreement net of fees paid to
any other sub-adviser. The liquidation value of any outstanding preferred stock
is included in determining the Company's net asset value.
Although the Adviser and Sub-Adviser intend to devote such time and
effort to the business of the Company as is reasonably necessary to perform
their respective duties to the Company, the services of the Adviser and
Sub-Adviser are not exclusive and the Adviser and Sub-Adviser may provide
similar services to other investment companies and/or other clients and may
engage in other activities.
The Advisory Agreements provide that the Adviser and Sub-Adviser
shall not be liable for any error of judgment or mistake of law or omission or
any loss suffered by the Company in connection with the matters to which the
agreements relate, although the agreements do not protect or purport to protect
the Adviser or Sub-Adviser against any liability to the Company to which the
Adviser or Sub-Adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on their part in the performance of
their duties or from reckless disregard by them of their obligations and duties
under the agreements. Each Advisory Agreement also provides for indemnification
by the Company of the Adviser or Sub-Adviser, as the case may be, and its
partners, members, officers, employees, agents and control persons for
liabilities incurred by them in connection with their services to the Company,
subject to certain limitations and conditions.
Each Advisory Agreement is in effect for an initial two-year term,
and thereafter will continue in effect without a term so long as its
continuation is specifically approved at least annually by both (i) the vote of
a majority of the Board or the vote of a majority of the outstanding voting
securities of the Company (as such term is defined in the 1940 Act) and (ii) by
the vote of a majority of the directors who are not parties to such Agreement or
interested persons (as such term is defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
Any of the Advisory Agreements may be terminated as a whole at any time by the
Company, without the payment of any penalty, upon the vote of a majority of the
Board or a majority of the outstanding voting securities of the Company or by
the Adviser or Sub-Adviser, on 60 days' written notice by either party to the
other. Except as otherwise provided by order of the SEC or any rule or provision
of the 1940 Act, all of the Advisory Agreements will terminate automatically in
the event of their assignment (as such term is defined in the 1940 Act and the
rules thereunder).
The Administration and Co-Administration Agreements
The Administration Agreement. PFPC, Inc. (the "Administrator"),
located at P.O. Box 1376, Boston, MA 02104, acts as administrator for the
Company. Under the Administration Agreement with the Company (the
"Administration Agreement"), the Administrator calculates the net asset value of
the Company's common stock and generally assists in all aspects of the
administration and operation of the Company, subject to the supervision of the
Board.
In connection with its administration of the corporate affairs of
the Company, the Administrator bears the following expenses: (i) the salaries
and expenses of all personnel of the Administrator; and (ii) all expenses
incurred by the Administrator in connection with administering the ordinary
course of the Company's business, other than those assumed by the Company, as
described below.
The Administration Agreement provides that the Company shall pay to
the Administrator a monthly fee for the services furnished by the Administrator
at the annual rate of 0.12% of the Company's average monthly net asset
19
<PAGE>
value. The liquidation value of any outstanding AMPS is included in determining
the Company's average weekly net asset value. The Administration Agreement is
terminable on 60 days' prior written notice by either party to the other.
The Co-Administration Agreement. Boulder Administrative Services,
L.L.C. (the "Co-Administrator"), located at 1680 38th Street, Suite 800, acts as
co-administrator for the Company. Under the Co-Administration Agreement with the
Company (the "Co-Administration Agreement"), the Co-Administrator provides
specific administration and executive management services to the Company
including, but not limited to: officers and staffing and general office services
and equipment (e.g., phones, copy machines, computers, fax, etc.) for the
Company; provides the Company's general offices and associated facilities;
negotiates and monitors all contracts with service providers; negotiates and
monitors all insurance policies of the Company as well as the rating agency
agreements with Moody's and S&P; provides shareholder relations and shareholder
support; conducts weekly backup calculation of the Company's net asset value;
prepares all shareholder communications and oversees the preparation of the
Company's periodic reports to the SEC; reviews and authorizes all expenses of
the Company; makes recommendations to the Board regarding policies of the
Company; and provides in house counsel and compliance personnel to the Company.
In connection with its co-administration of the corporate affairs of
the Company, the Co-Administrator bears the following expenses: (i) the salaries
and expenses of all personnel of the Co-Administrator; and (ii) all expenses
incurred by the Co-Administrator in connection with administering the ordinary
course of the Company's business, other than those assumed by the Company, as
described below. However, the Company bears travel-related expenses (1) of
employees of the Co-Administrator (including interested directors) engaged in
rendering services pursuant to their employment by the Co-Administrator other
than in connection with attendance at Board meetings and (2) of employees of the
Co-Administrator (other than Company directors and/or representatives of the
Adviser or BIA) primarily engaged in rendering administrative services under the
Co-Administration Agreement.
The Co-Administration Agreement provides that the Company shall pay
to the Co-Administrator a monthly fee for its services furnished by the
Co-Administrator at the annual rate of 0.10% of the Company's average monthly
net asset value. The liquidation value of any outstanding AMPS is included in
determining the Company's net asset value. The Co-Administration Agreement is
terminable on 60 days' prior written notice by either party to the other.
Expenses of The Company
Except as indicated above, the Company pays all of its expenses,
including fees of the directors not affiliated with the Adviser or the
Sub-Adviser and board meeting expenses; fees of the Adviser, Sub-Adviser,
Administrator and Co-Administrator; interest charges; taxes; charges and
expenses of the Company's legal counsel and independent accountants, and of the
transfer agent, registrar and dividend disbursing agent of the Company; expenses
of repurchasing shares; expenses of issuing any preferred shares (including the
AMPS) or indebtedness; expenses of printing and mailing share certificates,
stockholder reports, notices, proxy statements and reports to governmental
offices; brokerage and other expenses connected with the execution, recording
and settlement of portfolio security transactions; expenses connected with
negotiating, effecting purchase or sale, or registering privately issued
portfolio securities; custodial fees and expenses for all services to the
Company, including safekeeping of funds and securities and maintaining required
books and accounts; expenses of calculating and publishing the net asset value
of the Company's shares; expenses of membership in investment company
associations; expenses of fidelity bonding and other insurance expenses
including insurance premiums; expenses of stockholders meetings; SEC and state
registration fees; New York Stock Exchange listing fees; and fees payable to the
National Association of Securities Dealers, Inc. in connection with this
Offering and fees of any rating agencies retained to rate any preferred shares
(including the AMPS) issued by the Company.
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. This
description does not purport to be complete and is qualified by reference to the
Articles Supplementary and other charter documents, which have been filed as
exhibits to the Registration Statement of which this prospectus is a part. For
the complete terms of the AMPS, including definitions of terms used herein but
not defined, please refer to the detailed description of the
20
<PAGE>
AMPS in the Articles Supplementary. We refer to the Articles of Incorporation of
the Company in this prospectus as the "Articles" and the Articles Supplementary
as the "Articles Supplementary."
General
The Articles currently authorize the issuance of 240 million shares
of common stock and 10 million shares of preferred stock, par value $.01 per
share (which may be issued from time to time in such series and with such
designations, preferences, and other rights, qualifications, limitations and
restrictions as are determined in a resolution of the Board). As of June 30,
2000, there were issued and outstanding 9,416,743 shares of common stock and 775
MMP Shares. Under the Articles Supplementary, the Company will be authorized to
issue up to 1,000 shares of the AMPS with a liquidation preference of $100,000
per share plus an amount equal to dividends on each share (whether or not earned
or declared) accumulated and unpaid thereon. Each AMP Share carries one vote
with respect to matters on which AMPS can be voted. AMPS, when issued against
payment therefor, will be fully paid and non-assessable and have no preemptive,
conversion or cumulative voting rights.
As of the date of this prospectus, there are 775 MMP Shares issued
and outstanding but there are no AMPS issued or outstanding. It is expected and
is a condition precedent to issuance of the AMPS that the MMP Shares will be
redeemed in conjunction with the issuance of the AMPS and that the entirety of
the proceeds from the sale of the AMPS will be used, together with other assets
of the Company, if necessary, to fund such redemption.
The AMPS are shares of preferred stock of the Company. AMPS entitle
their holders to receive dividends when, as and if declared by the Board, out of
funds legally available therefor. The rate per annum on which dividends are paid
may vary from rate period to rate period for the AMPS. In general, the
applicable rate for a particular rate period for the AMPS will be determined by
an auction conducted on the day before the start of the rate period. Existing
holders and potential holders of AMPS may participate in the auctions. Existing
holders desiring to continue to hold all of their AMPS regardless of the
applicable rate resulting from the auction need not participate. For an
explanation of auctions and the method of determining the applicable rate, see
"The Auction".
After the fixed initial rate period, the AMPS will generally have a
rate period of 28 days in length although the AMPS may have a different rate
period if the Company declares a special rate period and certain conditions are
satisfied.
The AMPS have a liquidation preference of $100,000 per share plus an
amount equal to accumulated but unpaid dividends. The AMPS are fully paid and
non-assessable. The AMPS are not convertible into common shares or other capital
stock of the Company. Holders of AMPS have no preemptive rights. The AMPS are
not subject to any sinking fund. The AMPS are generally subject to redemption at
the option of the Company on any dividend payment date for the respective series
and, in certain circumstances, are subject to mandatory redemption by the
Company. In connection with the auction procedures described below, Bankers
Trust Company is the auction agent, the transfer agent, registrar, dividend
disbursing agent and redemption agent for the AMPS.
Dividends and Rate Periods
General. The following is a general description of dividends and
rate periods for the AMPS. The initial rate period for the AMPS will be
twenty-nine days and the dividend rate for this period will be 6.57%. Subsequent
rate periods generally will be twenty-eight days and the dividend rates for
those periods will be determined by auction. The Company, subject to certain
conditions, may change the length of subsequent rate periods by designating them
as special rate periods. See "Designation of Special Rate Periods" below.
Dividend Payment Dates. Dividends on AMPS will be payable, when, as
and if declared by the Board, out of legally available funds in accordance with
the Company's charter and applicable law. The initial dividend will be paid on
September 13, 2000 (the "Initial Dividend Payment Date"). Subsequent dividends
generally will be paid on each fourth Wednesday after the Initial Dividend
Payment Date. If dividends are payable on a Wednesday that is not a business
day, then dividends will generally be payable on the next day, if such day is a
business day, or as otherwise specified in the Articles Supplementary. In the
case of a special rate period of 56 days, dividends are generally payable on the
eighth Wednesday after the first day of such special rate period. In the case of
a special
21
<PAGE>
rate period of 91 days, dividends are generally payable on the thirteenth
Wednesday after the first day of such special rate period. In the case of a
special rate period of 182 days, dividends are generally payable on each of the
thirteenth and twenty-sixth Wednesday of such special rate period. In the case
of a special rate period of 365 days or more, dividends are generally payable on
the first day of the fourth month after the first day of such special rate
period, and on the first day of each succeeding third month thereafter.
Dividends will be paid through The Depository Trust Company ("DTC")
on each dividend payment date. DTC, in accordance with its current procedures,
is expected to distribute dividends received from the auction agent in same-day
funds on each dividend payment date to Agent Members (members of DTC that will
act on behalf of existing or potential holders of AMPS). These Agent Members are
in turn expected to distribute such dividends to the persons for whom they are
acting as agents. However, each of the current Broker-Dealers has indicated to
the Company that dividend payments will be available in same-day funds on each
dividend payment date to customers that use a Broker-Dealer or a Broker-Dealer's
designee as Agent Member.
Calculation of Dividend Payment. The Company computes the dividend
per AMP Share by multiplying the applicable rate in effect by a fraction. The
numerator of this fraction will normally be twenty-eight (i.e., the number of
days in the rate period) and the denominator will normally be 360. If the
Company has designated a special rate period of 56 days or more, then the
numerator will be the number of days in the rate period, and the denominator
will be 360. In either case, this rate is then multiplied by $100,000 to arrive
at the dividends per share.
Dividends on AMPS will accumulate from the date of their original
issue, which is August 15, 2000. For each dividend payment period after the
initial rate period, the dividend rate will be the dividend rate determined at
auction. The dividend rate that results from an auction will not be greater than
the maximum rate described below.
The maximum applicable rate for any regular rate period will be the
applicable percentage (set forth in the table below) of the 30-day "AA"
Composite Commercial Paper Rate. In the case of a special rate period, the
maximum applicable rate will be the applicable percentage of the Special
Dividend Period Reference Rate (which will ordinarily be specified by the
Company in the notice of the special dividend period) for such dividend payment
period. The applicable percentage is determined on the day that a notice of a
special dividend period is delivered if the notice specifies a maximum
applicable rate for a special rate period. The applicable percentage will be
determined based on the lower of the credit rating or ratings assigned to the
AMPS by Moody's and S&P. If Moody's or S&P or both shall not make such rating
available, the rate shall be determined by reference to equivalent ratings
issued by a substitute rating agency.
<TABLE>
<CAPTION>
Credit Ratings Applicable
-------------- Percentage:
Moody's S&P No Notification
------- ---- ---------------
<S> <C> <C> <C>
"aa3" or higher AA- or higher 150%
"a3" to "al" A- to A+ 200%
"baa3" to "baal" BBB- to BBB+ 225%
Below "baa3" Below BBB- 275%
</TABLE>
Prior to each dividend payment date, the Company is required to
deposit with the auction agent sufficient funds for the payment of declared
dividends. The failure to make such deposit will not result in the cancellation
of any auction. The Company does not intend to establish any reserves for the
payment of dividends.
Restrictions on Dividends and Other Distributions. While any of the
shares of the AMPS are outstanding, the Company generally may not declare, pay
or set apart for payment, any dividend or other distribution in respect of its
common shares (other than in additional shares of common stock or rights to
purchase common stock) or repurchase any of its common shares unless each of the
following conditions have been satisfied:
o In the case of the Moody's coverage requirements, immediately
after such transaction, the aggregate Moody's Coverage Value
(i.e., the aggregate value of the Company's portfolio discounted
according to
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<PAGE>
Moody's criteria) would be equal to or greater than the Eligible
Asset Coverage Amount (i.e., the amount necessary to pay all
outstanding obligations of the Company with respect to the AMPS,
any other preferred stock outstanding, expenses for the next 90
days and any other liabilities of the Company) (see "Rating
Agency Guidelines and Asset Coverage" below);
o In the case of S&P's coverage requirements, immediately after
such transaction, the Aggregate S&P Value (i.e., the aggregate
value of the Company's portfolio discounted according to S&P
criteria) would be equal to or greater than the Eligible Asset
Coverage Amount;
o Immediately after such transaction, the 1940 Act Asset Coverage
(as defined in this Prospectus under "Rating Agency Guidelines
and Asset Coverage" below) is met;
o Full cumulative dividends on the AMPS due on or prior to the
date of the transaction have been declared and paid or shall
have been declared and sufficient funds for the payment thereof
deposited with the auction agent; and
o The Company has redeemed the full number of AMPS required to be
redeemed by any provision for mandatory redemption contained in
the Articles Supplementary.
The Company generally will not declare, pay or set apart for payment
any dividend on any shares of the Company ranking, as to the payment of
dividends, on a parity with AMPS unless the Company has declared and paid or
contemporaneously declares and pays full cumulative dividends on the AMPS
through its most recent dividend payment date. However, when the Company has not
paid dividends in full on the AMPS through the most recent dividend payment date
or upon any shares of the Company ranking, as to the payment of dividends, on a
parity with AMPS through their most recent respective dividend payment dates,
the amount of dividends declared per share on AMPS and such other class or
series of shares will in all cases bear to each other the same ratio that
accumulated dividends per share on the AMPS and such other class or series of
shares bear to each other.
Designation of Special Rate Periods. The Company may, in certain
situations, at its sole option, declare a special rate period. Prior to
declaring a special rate period, the Company will give notice (a "notice of
special rate period") to the auction agent and to each Broker-Dealer. The notice
will state that the next succeeding rate period for the AMPS will be a number of
days (other than twenty-eight) as specified in such notice. The Company may not
designate a special rate period unless sufficient clearing bids were made in the
most recent auction. In addition, full cumulative dividends, any amounts due
with respect to mandatory redemptions and any additional dividends payable prior
to such date must be paid in full. The Company also must have received
confirmation from Moody's and S&P or any substitute rating agency that the
proposed special rate period will not adversely affect such agency's
then-current rating on the AMPS and the lead Broker-Dealer designated by the
Company, initially Merrill Lynch, Pierce, Fenner and Smith Incorporated, must
not have objected to declaration of a special rate period. A notice of special
rate period also will specify whether the shares of AMPS will be subject to
optional redemption during such special rate period and, if so, the redemption
premium, if any, required to be paid by the Company in connection with such
optional redemption.
Redemption
Mandatory Redemption. The Company is required to maintain
(a) An aggregate Coverage Value (i.e., the Moody's coverage value) of its
portfolio equal to the Eligible Asset Coverage Amount;
(b) An Aggregate S&P Value of its portfolio equal to the Eligible Asset
Coverage Amount; and
(c) The 1940 Act Asset Coverage.
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<PAGE>
Optional Redemption. The Company, at its option and upon notice to
the holders of the AMPS, may redeem the AMPS, in whole or in part, out of funds
legally available therefor. Any optional redemption will occur on a dividend
payment date at the optional redemption price per share of $100,000 per share
plus an amount equal to accumulated but unpaid dividends to the date fixed for
redemption. No AMPS may be redeemed if the redemption would cause the Company to
violate the 1940 Act or Maryland law.
Optional redemption during a special rate period consisting of seven
or more rate periods may also be subject to a redemption premium, which will be
an amount, if any, as determined by the Board after consultation with the lead
Broker-Dealer selected by the Company, initially Merrill Lynch, Pierce, Fenner
and Smith Incorporated.
Liquidation
If the Company is liquidated, the holders of outstanding AMPS will
receive $100,000 per share, plus all accumulated but unpaid dividends (whether
or not earned or declared). The holders of AMPS will be entitled to receive
these amounts from the assets of the Company available for distribution to its
shareholders in preference to the holders of the Company's common shares. After
the payment to the holders of AMPS of the full preferential amounts as
described, the holders of AMPS will have no right or claim to any of the
remaining assets of the Company.
For purposes of the foregoing paragraph, a voluntary or involuntary
liquidation of the Company does not include:
o The sale, lease or exchange of all or substantially all the
property or business of the Company;
o The merger or consolidation of the Company into or with any
other entity;
o The merger or consolidation of any other entity into or with the
Company; or
o A share exchange between the Company and any other entity.
Rating Agency Guidelines and Asset Coverage
The Company is required under guidelines of Moody's and S&P to
maintain assets having in the aggregate a Coverage Value (i.e., the Moody's
coverage value) and Aggregate S&P Value at least equal to the Eligible Asset
Coverage Amount. The aggregate Coverage Value and the Aggregate S&P Value are
collectively referred to herein as the "Aggregate Coverage Values". Moody's and
S&P have each established separate guidelines for calculating their respective
Aggregate Coverage Values. To the extent any particular portfolio holding does
not satisfy a rating agency's guidelines, all or a portion of the holding's
value will not be included in the rating agency's calculation of its respective
Aggregate Coverage Value. The Moody's and S&P guidelines do not impose any
limitations on the percentage of the Company's assets that may be invested in
holdings not eligible for inclusion in the calculation of the Aggregate Coverage
Value. The amount of ineligible assets included in the Company's portfolio at
any time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio. The Eligible
Asset Coverage Amount includes the sum of (a) the aggregate liquidation
preference of the AMPS then outstanding and (b) certain accrued and projected
payment obligations of the Company.
The Company is also required under the Articles Supplementary to
maintain asset coverage (as defined in the 1940 Act) of at least 200% with
respect to senior securities which are equity shares, including the AMPS
(referred to herein as the "1940 Act Asset Coverage"). The 1940 Act Asset
Coverage is tested as of the last business day of each month in which any senior
equity securities are outstanding. The minimum required 1940 Act Asset Coverage
amount of 200% may be increased or decreased if the 1940 Act is amended. Based
on the composition of the portfolio of the Company and market conditions as of
June 30, 2000, the 1940 Act Asset Coverage with respect to all of the AMPS,
assuming the issuance on that date of all AMPS offered hereby and giving effect
to the
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<PAGE>
deduction of related sales load and related offering costs estimated at $540,625
would have been computed as follows:
<TABLE>
<S> <C> <C>
Value of Company assets less liabilities
not constituting senior securities = $ 195,891,000 = 252.7 %
---------------------------------- -----------------
Senior securities representing indebtedness $ 77,500,000
plus
liquidation value of the preferred shares
</TABLE>
The Company will be required to redeem AMPS as described under
"--Redemption--Mandatory Redemption" if the Company does not timely cure a
failure to maintain:
(a) An aggregate Coverage Value equal to or greater than the
Eligible Asset Coverage Amount (in the case of Moody's coverage
requirements);
(b) An Aggregate S&P Value equal to or greater than the Eligible
Asset Coverage Amount (in the case of S&P's coverage
requirements); and
(c) 1940 Act Asset Coverage.
The Company is required under the Articles Supplementary to have
prior to each dividend payment date, an aggregate amount of funds equal to the
dividends to be paid to all holders of AMPS on such dividend payment date. If
the Company fails to maintain such asset coverage amounts and does not timely
cure such failure in accordance with the requirements of the rating agencies
that rate the AMPS, the Company must redeem all or a portion of the AMPS. This
mandatory redemption will take place on a date that the Board specifies out of
legally available funds in accordance with the Company's charter and applicable
law, at the redemption price of $100,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption.
The mandatory redemption will be limited to the number of AMPS necessary to
restore the required Coverage Value (i.e., the Moody's coverage value),
Aggregate S&P Value and 1940 Act Asset Coverage, as the case may be.
The Company may, but is not required to, adopt any modifications to
any guidelines that may be established by Moody's or S&P. Failure to adopt any
such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the AMPS may, at any time, change or withdraw any such
rating. The Board may, without shareholder approval, amend, alter or repeal
certain of the definitions and related provisions which have been adopted by the
Company pursuant to the rating agency guidelines in the event the Company
receives written confirmation from Moody's or S&P, as the case may be, that any
such amendment, alteration or repeal would not impair the rating then assigned
to the AMPS. To the extent permitted by applicable law, the Board also may,
without shareholder approval, amend, alter or repeal any provision of the
Articles Supplementary if such is at the request of S&P or Moody's or other
rating agency which the Company seeks to rate the AMPS and the Board determines
that such amendment, alteration or repeal will not adversely affect the rights
of the holders of AMPS or adversely affect the AMPS or the ratings of the AMPS.
A rating agency's guidelines will apply to AMPS only so long as the
rating agency is rating the shares. The Company will pay certain fees to Moody's
and S&P for rating the AMPS.
Voting Rights
Except as otherwise indicated in this prospectus and in the
statement of additional information, or as provided in the Articles and the
Articles Supplementary or as otherwise required by law, holders of AMPS will
have equal voting rights with holders of common shares and any other preferred
shares of the Company (one vote per share) and will vote together with holders
of common shares and any other preferred shares as a single class.
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Holders of outstanding preferred shares of the Company, including
AMPS, voting as a separate class, are entitled to elect two of the Company's
directors. The remaining directors are elected by holders of outstanding common
shares of the Company voting as a separate class. In addition, if at any time
dividends (whether or not earned or declared) on AMPS are due and unpaid in an
amount equal to two full years of dividends, and sufficient cash or specified
securities have not been deposited with the auction agent for the payment of
such dividends, the sole remedy of holders of outstanding preferred shares of
the Company is that the number of directors constituting the Board will be
automatically increased by the smallest number that, when added to the two
directors elected exclusively by the holders of preferred shares as described
above, would constitute a majority of the Board. The holders of preferred shares
of the Company will be entitled to elect that smallest number of additional
directors at a special meeting of shareholders held as soon as possible and at
all subsequent meetings at which directors are to be elected, unless such
special voting rights are terminated as explained below. The terms of office of
the persons who are directors at the time of that election will continue unless
the election of additional directors by holders of preferred stock would cause
the number of directors to exceed 12. If the Company thereafter pays in full all
accumulated and unpaid dividends on all outstanding preferred shares of the
Company, the special voting rights stated above will cease and the terms of
office of the additional directors elected by the holders of the preferred
shares will automatically terminate.
The affirmative vote of a majority of the votes entitled to be cast
by the holders of the outstanding shares of AMPS or such higher percentage as
may be required by the Articles, voting as a separate class, will be required to
amend the Articles so as to adversely affect in any material respect any
contract right of the AMPS or the holders thereof expressly set forth in the
Articles. The affirmative vote of at least 80% of the votes entitled to be cast
by the outstanding holders of AMPS, voting as a separate class, will be required
to issue any shares of preferred stock ranking prior to or on a parity with the
AMPS as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Company (other than
previously authorized and unissued shares of AMPS, including any shares of AMPS
purchased or redeemed by the Company), or increase the authorized amount of AMPS
or any other preferred stock. The affirmative vote of a majority of the votes
entitled to be cast by holders of the AMPS, voting as a separate class with
holders of other preferred stock entitled to vote on the matter, will be
required to approve certain other matters which, under the Articles, require the
approval of a majority of the votes entitled to be cast by stockholders if 80%
of the "Continuing Directors" (defined as a Director who (1) is not a person or
affiliate of a person who enters or proposes to enter a Business Combination (as
defined in the Articles) with the Company (such person or affiliate, an
"Interested Party"), (2) has been a member of the Board of Directors for a
period of at least 12 months or (3) is a successor to a Continuing Director who
is unaffiliated with an Interested Party and is recommended to succeed a
Continuing Director by a majority of Continuing Directors then on the Board) or
certain other requirements specified in the Articles are met. Unless a higher
percentage is provided for in the Articles, the affirmative vote of a majority
of the votes entitled to be cast by holders of the AMPS (as determined in
accordance with the 1940 Act), voting as a separate class, will be required to
approve any plan or reorganization adversely affecting the 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 Company's investment objective or
changes in certain restrictions described above under "Investment Objective and
Policies" and "Investment Restrictions". The class vote of holders of shares of
AMPS described above will in each case be in addition to a separate vote of the
requisite percentage of the votes entitled to be cast by holders of shares of
common stock and outstanding AMPS, voting as a single class, necessary to
authorize the action in question.
The voting provisions with respect to the AMPS described in this
prospectus will not apply if at, or prior to, the time at which the act with
respect to which the vote would otherwise be required is effected, all
outstanding AMPS have been redeemed or called for redemption and sufficient
funds shall have been deposited in trust to effect such redemptions.
THE AUCTION
General
The Articles Supplementary provide that, except as otherwise
described in this prospectus, the applicable rate for the AMPS for each rate
period after the initial rate period will be the rate that results from an
auction conducted as set forth in the Articles Supplementary and summarized
below. In such an auction, persons determine
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to hold or offer to sell or, based on dividend rates bid by them, offer to
purchase or sell AMPS. See the Articles Supplementary for a more complete
description of the auction process.
Auction Agency Agreement. The Company will enter into an auction
agency agreement with the auction agent (currently, Bankers Trust Company) which
provides, among other things, that the auction agent will follow the auction
procedures to determine the applicable rate for AMPS so long as the applicable
rate for AMPS is to be based on the results of an auction.
The auction agent may terminate the auction agency agreement upon
notice to the Company no earlier than the business day after the second dividend
payment date for the AMPS following delivery of such notice. If the auction
agent should resign, the Company will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Company may remove the
auction agent provided that prior to such removal the Company has entered into
such an agreement with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of
one or more Broker-Dealers. The auction agent will enter into agreements with
several Broker-Dealers selected by the Company, which provide for the
participation of those Broker-Dealers in auctions for AMPS.
The auction agent will pay to each Broker-Dealer after each auction,
from funds provided by the Company, a service charge at the annual rate of 1/4
of 1% of the stated value ($100,000 per share) of the AMPS held by a
Broker-Dealer's customer upon settlement in an auction.
Auction Procedures
Prior to the submission deadline on each auction date for the AMPS,
each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner of
AMPS may submit the following types of orders with respect to AMPS to that
Broker-Dealer:
1. Hold Order--indicating its desire to hold AMPS without regard to
the applicable rate for the next rate period.
2. Bid--indicating its desire to purchase or hold the indicated
number of AMPS at $100,000 per share if the applicable rate for
shares of such series for the next rate period is not less than
the rate or spread specified in the bid and which shall be
deemed an irrevocable offer to sell AMPS at $100,000 per share
if the applicable rate for shares of such series for the next
rate period is less than the rate or spread specified in the
bid.
3. Sell Order--indicating its desire to sell AMPS at $100,000 per
share without regard to the applicable rate for shares of such
series for the next rate period.
A beneficial owner of AMPS may submit different types of orders to
its Broker-Dealer with respect to AMPS then held by the beneficial owner. A
beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the maximum applicable rate on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have submitted
a hold order to its Broker-Dealer. However, if a beneficial owner fails to
submit an order for some or all of its shares to its Broker-Dealer for an
auction relating to a rate period of more than 91 days, such beneficial owner
will be deemed to have submitted a sell order for such shares to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the AMPS
subject to the sell order. A beneficial owner that offers to become the
beneficial owner of additional AMPS is, for purposes of such offer, a potential
holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is
not a beneficial owner of AMPS but that wishes to purchase AMPS or a beneficial
owner that wishes to purchase additional AMPS. A potential holder may submit
bids to its Broker-Dealer in which it offers to purchase AMPS at $100,000 per
share if the applicable rate for
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the next rate period is not less than the rate specified in such bid. A bid
placed by a potential holder specifying a rate higher than the maximum
applicable rate on the auction date will not be accepted.
Any bid by an existing holder that specifies a spread with respect
to an auction in which a spread is not included in any bid requirements or in
which there are no bid requirements and an order that does not specify a spread
with respect to an auction in which a spread is included in any bid requirements
will be treated as a sell order.
The Broker-Dealers in turn will submit the orders of their
respective customers who are beneficial owners and potential holders to the
auction agent. However, neither the Company nor the auction agent will be
responsible for a Broker-Dealer's failure to comply with these procedures. Any
order placed with the auction agent by a Broker-Dealer as or on behalf of an
existing holder or a potential holder will be treated the same way as an order
placed with a Broker-Dealer by a beneficial owner or potential holder.
Similarly, any failure by a Broker-Dealer to submit to the auction agent an
order for any AMPS held by it or customers who are beneficial owners will be
treated as a beneficial owner's failure to submit to its Broker-Dealer an order
in respect of AMPS held by it. A Broker-Dealer may also submit orders to the
auction agent for its own account as an existing holder or potential holder,
provided it is not an affiliate of the Company.
There are sufficient clearing bids in an auction if the number of
shares subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to the number of AMPS subject
to sell orders submitted or deemed submitted to the auction agent by
Broker-Dealers for existing holders. If there are sufficient clearing bids, the
applicable rate for AMPS for the next succeeding rate period thereof will be the
lowest rate specified in the submitted bids which, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of existing holders
and potential holders, would result in existing holders and potential holders
owning the AMPS available for purchase in the auction.
If there are not sufficient clearing bids, the applicable rate for
the next rate period will be the maximum rate on the auction date. However, if
the Company has declared a special rate period and there are not sufficient
clearing bids, the applicable rate for the next rate period will be the same as
during the current rate period. If there are not sufficient clearing bids,
beneficial owners of AMPS that have submitted or are deemed to have submitted
sell orders may not be able to sell in the auction all shares subject to such
sell orders. If all of the outstanding AMPS are the subject of submitted hold
orders, then the rate period following the auction will automatically be the
same length as the preceding rate period and the applicable rate for the next
rate period will be the 30-day "AA" Composite Commercial Paper Rate. The 30-day
"AA" Composite Commercial Paper Rate is the 30-day rate on commercial paper
issued by corporations whose bonds are rated AA by S&P as made available by the
Federal Reserve Bank of New York or, if such rate is not made available by the
Federal Reserve Bank of New York, the arithmetical average of such rates as
quoted to the auction agent by Merrill Lynch, Pierce, Fenner & Smith
Incorporated or such other commercial paper dealer as may be appointed by the
Company.
The auction procedures include a pro rata allocation of shares for
purchase and sale, which may result in an existing holder continuing to hold or
selling, or a potential holder purchasing, a number of AMPS that is different
than the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next business
day (which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their Agent Members in same-day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
The auctions for AMPS will normally be held every fourth Tuesday,
and each subsequent rate period will normally begin on the following Wednesday.
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Secondary Market Trading and Transfer of AMPS
The Broker-Dealers are expected to maintain a secondary trading
market in AMPS outside of auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that any
secondary trading market in AMPS will provide owners with liquidity of
investment. The AMPS are not registered on any stock exchange or on the NASDAQ
system.
A beneficial owner or an existing holder may sell, transfer or
otherwise dispose of AMPS only in whole shares and only (a) pursuant to a bid or
sell order placed with the auction agent in accordance with the auction
procedures; (b) to a Broker-Dealer; or (c) to such other persons as may be
permitted by the Company; provided, however, that (1) a sale, transfer or other
disposition of AMPS from a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer as the holder of such shares to that Broker-Dealer
or another customer of that Broker-Dealer shall not be deemed to be a sale,
transfer or other disposition if such Broker-Dealer remains the existing holder
of the shares; and (2) in the case of all transfers other than pursuant to
auctions, the Broker-Dealer (or other person, if permitted by the Company) to
whom such transfer is made will advise the auction agent of such transfer.
TAXES
Federal Income Tax Matters
The Company has qualified and elected, and intends to continue to
qualify, as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended, and intends to distribute at least 90% of its
net investment income (including taxable income and net short-term capital gain,
but not net capital gain, which is the excess of net long-term capital gain over
net short-term capital loss) and substantially all of its net capital gain to
its shareholders. The Company will not be subject to Federal income tax on any
net investment income and net capital gain that it distributes to its
shareholders, but will be subject to Federal income tax at the regular corporate
income tax rate on any net investment income and net capital gains that it
retains.
The Company expects that a substantial portion of the Company's
dividends to the common shareholders and the holders of the AMPS will be fully
taxable as ordinary income. In addition, the Company also intends to distribute
to its shareholders amounts that are treated as long-term capital gain. The
Company will allocate distributions to shareholders that are treated as
long-term capital gain and ordinary income, if any, proportionately among the
common shares and AMPS.
The sale or other disposition of common shares or AMPS of the
Company will normally result in capital gain or loss to shareholders. Present
law taxes both long-term and short-term capital gains of corporations at the
rates applicable to ordinary income. For non-corporate taxpayers, under current
law short-term capital gains and ordinary income will be taxed at a maximum rate
of 39.6%, while long-term capital gains will generally be taxed at a maximum
rate of 20%. Because of certain limitations on itemized deductions and the
deduction for personal exemptions applicable to higher income taxpayers, the
effective rate of tax may be higher in certain circumstances. Losses realized by
a shareholder on the sale or exchange of shares of the Company held for six
months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares, and, if not disallowed, such losses are
treated as long-term capital losses to the extent of any distribution of net
capital gain received with respect to such shares. A shareholder's holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. Any loss realized on a sale or exchange of shares of the Company will be
disallowed to the extent those shares of the Company are replaced by other
shares within a period of 61 days beginning 30 days before and ending 30 days
after the date of disposition of the original shares. In that event, the basis
of the replacement shares of the Company will be adjusted to reflect the
disallowed loss.
The statement of additional information contains a more detailed
summary of the Federal income tax rules that apply to the Company and its
shareholders. Legislative, judicial or administrative action may change the tax
rules that apply to the Company or its shareholders, and any such change may be
retroactive. You should consult with your tax advisor about Federal income tax
matters.
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State and Local Tax Matters
You should consult with your tax advisor about state and local tax
matters.
DETERMINATION OF NET ASSET VALUE
The net asset value of common shares of the Company will be computed
based upon the value of the Company's portfolio securities and other assets. Net
asset value per common share of the Company will be determined as of the close
of the regular trading session on the New York Stock Exchange no less frequently
than Friday of each week and the last business day of each month, provided,
however, that if any such day is a holiday or determination of net asset value
on such day is impracticable, the net asset value shall be calculated on such
earlier or later day as determined by the Adviser. The Company calculates net
asset value per common share of the Company by subtracting the Company's
liabilities (including accrued expenses, dividends payable and any borrowings of
the Company) and the liquidation value of any outstanding preferred shares
(including AMPS) of the Company from the Company's total assets (the value of
the securities the Company holds plus cash or other assets, including interest
accrued but not yet received) and dividing the result by the total number of
common shares of the Company outstanding.
The Company values its common and preferred securities by using
market quotations provided by pricing services, prices provided by market makers
or estimates of market values obtained from yield data relating to instruments
or securities with similar characteristics in accordance with procedures
established by the Board. Short-term securities having a maturity of 60 days or
less are valued at amortized cost, which approximates market value. Any
securities or other assets for which current market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Board.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount
to their net asset values, and the Company's common shares may also trade at a
discount to their net asset value. The market price of the Company's common
shares will be determined by such factors as relative demand for and supply of
such common shares in the market, the Company's net asset value, general market
and economic conditions and other factors beyond the control of the Company.
Although the Company's common shareholders will not have the right to have the
Company redeem their common shares, the Company may, subject to the restrictions
described above under "Description of AMPS", take action to repurchase common
shares in the open market or make tender offers for its common shares at their
net asset value. Nonetheless, the Company's largest shareholders have expressed
their opposition to attempts to manage the Company's discount through share
repurchases, tender offers or open-ending. In view of this and certain other
factors (such as the adverse impact of certain of these strategies on the
Company's asset coverage ratios and their failure to have a long-term impact on
the discount), the Board does not currently intend to pursue strategies to
narrow the discount at which the Company's shares trade. See "Repurchase of
Common Shares" in the statement of additional information.
DESCRIPTION OF CAPITAL STOCK
The Articles currently authorize the issuance of 240 million shares
of common stock and 10 million shares of preferred stock, par value $.01 per
share (which may be issued from time to time in such series and with such
designations, preferences, and other rights, qualifications, limitations and
restrictions as are determined in a resolution of the Board). In connection with
the offering of AMPS described herein, the Company will offer 775 AMPS.
Common Shares
The Company has no present intention of offering any additional
shares of capital stock other than AMPS as described herein. Any additional
offerings of shares of capital stock, if made, will require approval by the
Board. Any additional offering of common shares will be subject to the
requirements of the 1940 Act that common shares
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may not be issued at a price below the then current net asset value (exclusive
of underwriting discounts and commissions) except in connection with an offering
to existing stockholders or with the consent of a majority of the Company's
common shareholders.
So long as any AMPS or any other preferred shares of the Company are
outstanding, holders of common shares of the Company will not be entitled to
receive any net income of or other distributions from the Company unless all
accumulated dividends on outstanding preferred shares (including the AMPS) have
been paid, and unless asset coverage (as defined in the 1940 Act) with respect
to such preferred shares would be at least 200% after giving effect to such
distributions. See "Description of AMPS-Dividends and Rate Periods" for other
restrictions on dividends to holders of common shares which will be applicable
for so long as any preferred shares of the Company are outstanding.
The common shares have traded on the New York Stock Exchange (the
"Exchange") from between February 19, 1993 to August 27, 1999, under the symbol
"PFM". From August 28, 1999 to the present, the common shares have traded on the
Exchange under the symbol "BTF". On June 30, 2000, there were 9,416,743 common
shares of the Company issued and outstanding and the net asset value per common
share was $12.62 and the closing price per common share on the NYSE was
$10.1825.
Preferred Stock
Under the Company's charter, the Company is authorized to issue 10
million shares of preferred stock, $.01 par value. The Board is authorized to
classify and reclassify any unissued shares of capital stock from time to time
by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock. Under the 1940 Act, the
Company is permitted to have outstanding more than one series of preferred
shares so long as no single series has a priority over another series as to the
distribution of assets of the Company or the payment of dividends. Holders of
common shares and outstanding preferred shares (i.e., the MMP Shares) of the
Company have no preemptive right to purchase any preferred shares (including the
AMPS) that might be issued. It is anticipated that the net asset value per share
of the AMPS will equal its original purchase price per share plus accrued
dividends per share. See "Description of AMPS" for a description of the rights,
preferences, privileges and other terms of the AMPS.
Anti-takeover Provisions of the Charter and By-Laws
The Company presently has provisions in its charter and By-Laws
(commonly referred to as "antitakeover" provisions) which may have the effect of
limiting the ability of other entities or persons to acquire control of the
Company, to cause it to engage in certain transactions or to modify its
structure:
o A director elected by the holders of the common shares or by the
holders of AMPS and any other preferred shares may be removed
from office with or without cause only by vote of the holders of
at least 80% of the shares of common stock or preferred shares,
as the case may be, of the Company entitled to be voted in an
election to fill that directorship.
o The affirmative vote of at least 80% of the directors and of the
holders of at least 80% of the Company's outstanding shares of
common stock and preferred shares (including the AMPS) entitled
to be voted on the matter, voting as a single class, and the
affirmative vote of 80% of the outstanding preferred shares
(including the AMPS) voting as a separate class, will be
required to authorize the Company's conversion from a closed-end
to an open-end investment company, which conversion would result
in delisting of the common shares from the NYSE. If an amendment
providing for the conversion of the Company to an open-end
investment company has been previously approved by a vote of 80%
of the Continuing Directors of the Company, only a majority of
the votes entitled to be cast by the holders of outstanding
shares of common stock and preferred shares (including the
AMPS), voting as a single class, and a majority of the votes
entitled to be cast by the holders of outstanding shares of
preferred stock (including the AMPS), voting as a separate
class, would be required to approve the conversion. Conversion
to an open-end investment company would require redemption of
all outstanding preferred shares of the Company.
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o The Board is classified into three classes, each with a term of
three years, with only one class of directors standing for
election in any year. Such classification may prevent
replacement of a majority of the directors for up to a two year
period. The affirmative vote of at least 80% of the Company's
outstanding shares of capital stock entitled to be voted on the
matter, voting as a single class, and the affirmative vote of at
least 80% of outstanding AMPS, voting as a separate class, will
be required to amend the Charter to change any of the provisions
in this subparagraph. If, however, any such action is authorized
by at least 80% of the Continuing Directors, the vote required
to approve such action is a majority of the votes entitled to be
cast by the holders of the Company's common stock and preferred
stock to be voted on the matter, voting as a single class,
unless otherwise provided in the Charter or applicable law.
o Subject to certain limited exceptions provided in the Articles,
the Articles also require the favorable vote of at least 80% of
the directors and at least 80% of the votes entitled to be cast
by holders of common stock and any outstanding preferred stock
voting as a single class, and at least 80% of the votes entitled
to be cast by holders of any outstanding preferred stock
(including the AMPS), voting as a separate class, to approve,
adopt or authorize the following:
1. merger, consolidation or share exchange of the Company with
or into any other person;
2. issuance or transfer by the Company (in one or a series of
transactions in any 12 month period) of any securities of the
Company to any other person or entity for cash, securities or
other property (or combination thereof) having an aggregate
fair market value of $1,000,000 or more excluding sales of
securities of the Company in connection with a public
offering or private placement, issuances of securities of the
Company pursuant to a dividend reinvestment and cash purchase
plan adopted by the Company and issuances of securities of
the Company upon the exercise of any stock subscription
rights distributed by the Company;
3. sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Company (in one or a series of
transactions in any 12 month period) to or with any person of
any assets of the Company having an aggregate fair market
value of $1,000,000 or more except for portfolio transactions
effected by the Company in the ordinary course of its
business ((1), (2) and (3) each being a "Business
Combination");
4. any proposal as to the voluntary liquidation or dissolution
of the Company or any amendment to the Articles to terminate
its existence; and
5. any shareholder proposal as to specific investment decisions
made or to be made with respect to the Company's assets.
However, separate 80% votes of the holders of shares of Common Stock
and any outstanding Preferred Stock (including shares of AMPS), voting as a
single class, and of the holders of any Preferred Stock (including shares of
AMPS) outstanding, voting as a separate class, will not be required with respect
to the transactions described in (1) through (4) above (A) if they are approved
by a vote of at least 80% of the Continuing Directors or (B) if certain
conditions regarding the consideration paid by the person entering into, or
proposing to enter into, a Business Combination with the Company and various
other requirements are satisfied, in which case (x) the affirmative vote of a
majority of the votes entitled to be cast by shareholders shall be required to
approve a transaction within (1), (3) (if the transfer or other disposition
constitutes a transfer of all or substantially all of the assets of the Company
with respect to which a shareholder vote is required under applicable state law)
or (4) above unless otherwise required by the charter or otherwise required by
law and (y) no shareholder vote is required to approve a transaction within (2)
above or any other transaction within (3) above unless otherwise provided in the
Articles or required by law. The Company's Bylaws contain provisions the effect
of which is to prevent matters, including nominations of Directors, from being
considered at shareholders' meetings where the Company has not received
sufficient prior notice of the matters.
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The percentage of votes required under these provisions, which are
greater than the minimum requirements under Maryland law or in the 1940 Act,
will make more difficult a change in the Company's business or management and
may have the effect of depriving holders of common shares of an opportunity to
sell shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Company in a tender offer or similar
transaction. The Board, however, has considered these antitakeover provisions
and believes they are in the best interests of shareholders.
OTHER SERVICE PROVIDERS
Custodian. The Company's securities and cash are held under a
Custodial Agreement with Boston Safe Deposit and Trust Company, located at One
Boston Place, Boston, MA 02108.
Transfer Agent, Dividend Disbursing Agent and Registrar. The
transfer agent, dividend disbursing agent and registrar for the AMPS will be
Bankers Trust Company, located at 4 Albany Street, New York, NY 10006. The
transfer agent, dividend disbursing agent and registrar for the common shares of
the Company is PFPC Inc., located at P.O. Box 1376, Boston, MA 02104.
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated
the date hereof, Merrill Lynch, Pierce, Fenner and Smith Incorporated (the
"Underwriter") has agreed to purchase, and the Company has agreed to sell all of
the AMPS offered hereby.
The purchase agreement provides that the obligations of the
Underwriter to purchase the shares included in this Offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter is obligated to purchase all the AMPS if it purchases any of the
shares. In the purchase agreement, the Company and the Adviser have agreed to
indemnify the Underwriter against certain liabilities, including liabilities
arising under the Securities Act of 1933, or to contribute payments the
Underwriter may be required to make for any of those liabilities.
The Underwriter proposes to initially offer some of the AMPS
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the AMPS to certain dealers at the public
offering price less a concession not in excess of $375 per share. The sales load
the Company will pay per share is equal to 0.375% of the initial offering price.
The Underwriter may allow, and such dealers may reallow, a concession not in
excess of $125 per share on sales to certain other dealers. After the initial
public offering, the Underwriter may change the public offering price and the
concession. Investors must pay for any AMPS purchased in the initial public
offering on or before August 15, 2000.
The Company anticipates that the Underwriter may from time to time
act as broker or dealer in executing the Company's portfolio transactions after
it has ceased to be an Underwriter. The Underwriter is an active underwriter of,
and dealer in, securities and acts as a market maker in a number of such
securities, and therefore can be expected to engage in portfolio transactions
with the Company.
The Company anticipates that the Underwriter or its affiliates may,
from time to time, act in auctions as Broker-Dealers and receive fees as set
forth under "The Auction." The Underwriter engages in transactions with, and
performs services for, the Company in the ordinary course of business.
The principal business address of the Underwriter is 4 World
Financial Center, New York, NY 10080.
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby
will be passed upon for the Company by Willkie Farr & Gallagher, New York, New
York and for the Underwriter by Skadden, Arps, Slate, Meagher & Flom
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LLP, New York, New York. Each of such counsel will rely, as to certain matters
of Maryland law, on the opinion of Venable, Baetjer and Howard, LLP, Baltimore,
Maryland.
EXPERTS
The data in the "Financial Highlights" section of this prospectus
are based upon financial statements that have been audited by
PricewaterhouseCoopers, LLP, located at 160 Federal Street, Boston, MA 02110,
independent auditors, as indicated in their reports with respect thereto, and
are incorporated by reference herein in reliance on their reports given on their
authority as experts in auditing and accounting.
REPORTS TO STOCKHOLDERS
The Company sends unaudited semiannual reports and audited annual
reports, including a list of investments held, to stockholders.
AVAILABLE INFORMATION
The Company 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 SEC.
Any such reports, proxy statements and other information can be inspected and
copied at the public reference facilities of the SEC, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the SEC's New York Regional Office,
Seven World Trade Center, New York, New York 10048 and its Chicago Regional
Office, Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Reports, proxy statements and other information
concerning the Company can also be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
Additional information regarding the Company and the AMPS is
contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Company
with the SEC. This prospectus does not contain all of the information set forth
in the Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Company and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of 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 SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC. The SEC maintains a web site (http://www.sec.gov) that contains the
Registration Statement, other documents incorporated by reference, and other
information the Company has filed electronically with the SEC, including proxy
statements and reports filed under the Securities Exchange Act of 1934.
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TABLE OF CONTENTS FOR THE STATEMENT OF
ADDITIONAL INFORMATION
Page
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INVESTMENT OBJECTIVE AND POLICIES.....................................S-2
INVESTMENT POLICIES AND TECHNIQUES....................................S-3
MANAGEMENT OF THE COMPANY.............................................S-6
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................S-9
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS..............S-10
REPURCHASE OF COMMON SHARES..........................................S-11
TAX MATTERS..........................................................S-13
FINANCIAL STATEMENTS.................................................S-15
ADDITIONAL INFORMATION...............................................S-15
APPENDIX A -- RATINGS OF INVESTMENTS..................................A-1
APPENDIX B -- PORTFOLIO OF INVESTMENTS................................B-1
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Until September 5, 2000, 25 days after the effective date of this prospectus),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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BOULDER TOTAL RETURN FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Boulder Total Return Fund, Inc. (the "Company") is a closed-end, diversified
management investment company. This statement of additional information does not
constitute a prospectus, but should be read in conjunction with the prospectus
relating hereto dated August 11, 2000 (the "Prospectus"). This statement of
additional information does not include all information that a prospective
investor should consider before purchasing the Company's Taxable Auction Market
Preferred Stock ("AMPS"), and investors should obtain and read the Prospectus
prior to purchasing such shares. A copy of the Prospectus may be obtained
without charge by calling 1-800-331-1710. You may also obtain a copy of the
Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this statement
of additional information have the meanings given to them in the Prospectus.
This statement of additional information is dated August 11, 2000.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
INVESTMENT OBJECTIVE AND POLICIES.......................................................................2
Investment Objective........................................................................2
Investment Restrictions.....................................................................2
INVESTMENT POLICIES AND TECHNIQUES......................................................................3
Portfolio Investments.......................................................................3
Borrowings..................................................................................6
Lending of Securities.......................................................................6
Short Sales Against the Box.................................................................7
MANAGEMENT OF THE COMPANY...............................................................................7
Officers and Directors......................................................................7
Audit Committee.............................................................................8
Nominating Committee........................................................................9
Compensation to Directors...................................................................9
Code of Ethics..............................................................................9
Compensation to the Adviser, Sub-Advisers and Co-Administrators............................10
PORTFOLIO TRANSACTIONS AND BROKERAGE...................................................................10
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS................................................11
General....................................................................................11
Concerning the Auction Agent...............................................................12
Broker-Dealers.............................................................................12
REPURCHASE OF COMMON SHARES............................................................................12
TAX MATTERS............................................................................................14
FINANCIAL STATEMENTS...................................................................................16
Independent Auditors.......................................................................16
Incorporation by Reference.................................................................16
ADDITIONAL INFORMATION.................................................................................16
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INVESTMENT OBJECTIVE AND POLICIES
The Company was organized in 1992 under the name "Preferred Income Management
Fund Incorporated", which was changed to the current name on August 27, 1999.
Investment Objective
The Company's investment objective is total return. The Company seeks to produce
both long-term capital appreciation through investment in common stocks and
current income consistent with preservation of capital through investments in
income producing securities, such as real estate investment trusts ("REITs"),
registered closed end investment companies ("RICs"), preferred stocks, bonds and
other income-producing securities. No assurance can be given that the Company
will achieve its investment objective.
The Company operates as a "diversified" management investment company, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
Under this definition, at least 75% of the value of the Company's total assets
must consist of cash and cash items (including receivables), U.S. Government
securities, securities of other investment companies and other securities
limited in respect of any one issuer to an amount not greater in value than 5%
of the value of the Company's total assets and to not more than 10% of the
voting securities of a single issuer. This limit does not apply, however, to 25%
of the Company's assets, which may be invested in a single issuer. The Company
intends to concentrate its common stock investments in a few issuers and to take
large positions in those issuers, consistent with being a "diversified" fund. As
a result, the Company is subject to a greater risk of loss than a fund that
diversifies its investments more broadly. Taking larger positions is also likely
to increase the volatility of the Company's net asset value reflecting
fluctuation in the value of its large holdings.
Investment Restrictions
A number of the Company's investment policies are "fundamental" policies
("Fundamental Policies"). No Fundamental Policy may be changed without approval
by the vote of a majority of the Company's outstanding voting securities, voting
as a single class, and a majority of the Company's outstanding shares of
preferred stock, voting as a separate class. A "majority of the Fund's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the shares of common stock and shares of preferred stock present at a
meeting of shareholders, voting as a single class, if the holders of more than
50% of such shares are present or represented by proxy at the meeting, or (2)
more than 50% of the outstanding shares of common stock and shares of the
preferred stock, voting as a single class. A majority of the Company's
outstanding shares of preferred stock for this purpose is determined in a
similar manner, by applying the percentages in the previous sentence to shares
of preferred stock. With the exception of the Fundamental Policies and the
Company's investment objective, all other policies, statements, terms and
conditions may be changed by the Company's Board of Directors without
shareholder approval, unless provided to the contrary in the Company's Articles
of Incorporation.
Pursuant to the Fundamental Policies:
1. The Company may not purchase securities (other than Government
Securities) of any issuer if as a result of the purchase more
than 5% of the value of the Company's total assets would be
invested in the securities of that issuer, except that up to 25%
of the value of the Company's total assets may be invested
without regard to this 5% limitation.
2. The Company may not purchase more than 10% of the voting
securities of any one issuer, or more than 10% of the securities
of any class of any one issuer, except that (i) this limitation
is not applicable to the Company's investments in Government
Securities and (ii) up to 25% of the value of the Company's total
assets may be invested without regard to this 10% limitation.
3. The Company may not borrow except as permitted by law; provided
that, as long as the Company's money market cumulative preferred
stock ("MMP(R)") are outstanding, the Company may not borrow
except (1) (a) for temporary or emergency purposes or (b) in
connection with repurchases of its shares or (c) for clearance of
transactions, and then only in amounts not
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exceeding 10% of its total assets (not including the amount
borrowed) and as otherwise described in the Prospectus or (2) for
the purpose of redeeming all of the outstanding MMP. When the
Company's borrowings under (1)(a), (b) and (c) exceed 5% of the
value of its total assets, the Company will not make any
additional investments.
4. The Company may not sell securities short or purchase securities
on margin, except for such short-term credits as are necessary
for the clearance of transactions, but the Company may make
margin deposits in connection with transactions in futures
contracts, options on futures contracts and options on securities
and securities indices, and may make short sales of securities
"against the box."
5. The Company may not underwrite any issue of securities, except to
the extent that the sale of portfolio securities may be deemed to
be an underwriting.
6. The Company may not purchase, hold or deal in real estate or oil
and gas interests, except that the Company may invest in
securities secured by real estate or interests in real estate.
7. The Company may not invest in commodities, except that the
Company may enter into futures contracts, including interest rate
and stock index futures contracts, and may purchase options and
write covered options on futures contracts, securities and stock
indices, as described in the Prospectus.
8. The Company may not lend any funds or other assets, except
through purchasing debt securities, lending portfolio securities
and entering into repurchase agreements consistent with the
Company's investment objective.
9. The Company may not issue senior securities other than preferred
stock or as permitted by the Company's borrowing limitation.
10. The Company may not invest more than 25% of its total assets in
the securities of issuers in any single industry, except that
this limitation will not be applicable to the purchase of
Government Securities.
Although certain investment techniques are permitted by the restrictions set
forth above, the Company's ability to engage in them may nonetheless be limited
or prohibited by the Company's Articles of Incorporation or guidelines of
organizations rating the AMPS.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Company's investment
objective, policies and techniques in the Prospectus.
Portfolio Investments
Under normal market conditions, the Company invests primarily in a portfolio of
common stocks and income producing securities such as REITs, RICs, bonds and
preferred stocks.
Common Stocks. The Company may invest all or any portion of its assets in common
stock. Common stock is defined as shares of a corporation that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other shareholder or class of shareholders, including
holders of the corporation's preferred stock and other senior equity. Common
stock usually carries with it the right to vote and frequently an exclusive
right to do so. Holders of common stock also have the right to participate in
the assets of the corporation after all other claims are paid.
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In selecting investments, the Company expects to focus primarily on U.S.
companies, although there are no prohibitions on possible investment
opportunities outside the United States. Generally, target companies (other than
those common stocks purchased primarily for their income-producing potential)
will have a consistent high return on equity, while using modest amounts of debt
relative to their industry. The Company will seek investments in businesses SIA
understands, which have fairly predictable and improving future earnings, and
most importantly, are priced reasonably relative to the business' earnings and
anticipated growth in earnings. The Company will not necessarily focus its
investments in "large-cap", "mid-cap" or "small-cap" companies since SIA
believes it would be unwise to impose such investment restrictions. When the
Company makes an investment in a common stock, it will likely make a significant
investment and typically hold onto it for a long period of time. These
investment criteria will preclude the Company's investing in some of the
market's latest high flyers, but in the long run, the Company believes that
value-type investing will produce the best overall total return.
Investments in Real Estate Investment Trusts ("REITs"). REITs, or real estate
investment trusts, are securities of companies whose primary objective is
investment in real property or providing services to real property interests.
Most REITs are trusts under Sections 856 through 860 of the Internal Revenue
Code of 1986 (the "Code"). The Company may invest up to 25% of its assets in
REIT securities. The Company intends to invest in REIT securities primarily for
income. As of June 30, 2000, the Company had 10.4% of its assets invested in
REITs.
There are risks associated with investing in REITs, including the potential for
loss of value if the underlying properties in which the REIT invests decline in
value. Property valuations may rise and fall with either the local economy
conditions or with the national economy. Furthermore, the dividend income paid
out by the REIT may be reduced or eliminated, depending on the income produced
by the underlying properties owned by the REITs.
In the normal course of business, REITs face risks that are either non-financial
or non-quantifiable. These risks principally include credit risk as well as
legal risk. Because most REITs are typically financed with debt instruments,
they are also interest rate sensitive.
Investments in Other Registered Investment Companies ("RICs"). The Company may
invest up to 10% of its assets in other investment companies registered under
the 1940 Act. The Company intends to invest in closed-end RICs having an income
objective when they are trading at a discount, and when market conditions seem
appropriate to SIA. As of June 30, 2000, the Company had 5.0% of its assets
invested in RICs.
The Company intends to normally invest in RICs that pay dividends. There are
risks associated with investments in RICs, including the risk that the dividend
paid by the RIC could be reduced or eliminated. Dividend paying closed-end RICs
can also trade at substantial discounts to their net asset value. RICs typically
own interest rate sensitive securities, which tend to increase in value when
interest rates decline, and decrease in value when interest rates increase. RICs
also have expenses associated with their management and administration. To the
extent that the Company invests in other RICs, the Company's shareholders will
be incurring expenses for both the Company and, indirectly, for that portion of
the Company's assets invested in other RICs. However, even operating companies
also incur expenses in their daily operations. Profits are reported net of these
expenses, and RICs are no different in that respect. RICs fall under the
auspices of the 1940 Act, which requires disclosure of expenses and calculation
of net asset value ("NAV") net of expenses.
Additionally, in the case of bond fund RICs, the primary risk is interest rate
risk. The NAV and market value of RICs will fluctuate with the value of the
underlying assets.
Preferred Stocks. Prior to August 27, 1999, the Company was called "Preferred
Income Management Fund" and was virtually 100% invested in preferred stocks. As
of June 30, 2000, the Company had only 16.2 of its assets in preferred stocks.
Generally, preferred stock receives dividends prior to distributions on common
stock and usually has a priority of claim over common stockholders if the issuer
of the stock is liquidated. Unlike common stock, preferred stock does not
usually have voting rights; preferred stock, in some instances, is convertible
into common stock.
Credit Quality of Preferred Issuers. Preferred stock that the Company owns will
be rated investment grade (at least "baa" by Moody's or "BBB" by S&P) at the
time of investment or will be preferred stocks of issuers whose senior debt is
rated investment grade by Moody's or by S&P. In addition, the Company may
acquire unrated issues that the
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Adviser deems to be comparable in quality to rated issues in which the Company
is authorized to invest. The Company will limit to 15% of its assets the portion
of its portfolio invested in preferred stock rated below investment grade (which
preferred stock must be rated at least "ba" by Moody's or "BB" by S&P) or judged
to be comparable in quality at the time of purchase; however, any such
securities must be issued by an issuer having a class of senior debt rated
investment grade outstanding. Securities rated "baa" by Moody's or "BBB" by S&P,
although investment grade, are considered to have speculative elements and a
greater vulnerability to default than higher rated securities. Further
information concerning the rating categories of S&P and Moody's is provided in
Appendix A to this Statement of Additional Information.
Money Market Instruments. Under normal conditions, the Company may hold up to
10% of its assets in cash or money market instruments. The Company intends to
invest in money market instruments to help defray operating expenses, to serve
as collateral in connection with certain investment techniques, to hold as a
reserve pending the payment of dividends to investors and to meet the liquidity
requirements of Moody's, S&P or other rating agencies that rate the Company's
outstanding auction rate preferred stock. When SIA believes that economic
circumstances warrant a temporary defensive posture, the Company may invest
without limitation in short-term money market instruments.
Money market instruments that the Company may acquire will be securities rated
in the highest short-term rating category by Moody's or S&P or the equivalent
from another major rating service, securities of issuers that have received such
ratings with respect to other short-term debt or comparable unrated securities.
Money market instruments in which the Company typically expects to invest
include: Government Securities; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of U.S. or foreign banks);
commercial paper rated P-l by Moody's or A-I by S&P; and repurchase agreements.
Repurchase Agreements. The Company may invest temporarily, without limitation,
in repurchase agreements, which are agreements pursuant to which securities are
acquired by the Company from a third party with the understanding that they will
be repurchased by the seller at a fixed price on an agreed date. These
agreements may be made with respect to any of the portfolio securities in which
the Company is authorized to invest. Repurchase agreements may be characterized
as loans secured by the underlying securities. The Company may enter into
repurchase agreements with (i) member banks of the Federal Reserve System having
total assets in excess of $500 million and (ii) securities dealers, provided
that such banks or dealers meet certain creditworthiness standards established.
The Adviser will monitor the continued creditworthiness of qualified
institutions. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. The collateral is marked to market daily.
Such agreements permit the Company to keep all its assets earning interest while
retaining "overnight" flexibility in pursuit of investments of a longer-term
nature.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Company will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Company's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Company may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the Company may suffer a loss
to the extent proceeds from the sale of the underlying securities are less than
the repurchase price.
Government Securities. The Company may invest in government securities that
include direct obligations of the United States and obligations issued by U.S.
Government agencies and instrumentalities ("Government Securities"). Included
among direct obligations of the United States are Treasury Bills, Treasury Notes
and Treasury Bonds, which differ principally in terms of their maturities.
Included among the securities issued by U.S. Government agencies and
instrumentalities are: securities that are supported by the full faith and
credit of the United States (such as Government National Mortgage Association
certificates); securities that are supported by the right of the issuer to
borrow from the U.S. Treasury (such as securities of Federal Home Loan Banks);
and securities that are supported by the credit of the instrumentality (such as
Federal National Mortgage Association and Federal Home Loan Mortgage Corporation
bonds).
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Zero Coupon Securities. The Company may invest up to 10% of its total assets in
zero coupon securities issued by the U.S. Government, its agencies or
instrumentalities as well as custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain government securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Because interest on zero coupon securities is not paid on
a current basis, the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute income regularly
and may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall. In
addition, the Company's investments in zero coupon securities will result in
special tax consequences. Although zero coupon securities do not make interest
payments, for tax purposes a portion of the difference between a zero coupon
security's maturity value and its purchase price is taxable income of the
Company each year.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon Government Securities but are not
considered to be Government Securities. Although typically under the terms of a
custodial receipt the Company is authorized to assert its rights directly
against the issuer of the underlying obligation, the Company may be required to
assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, the Company may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Company had purchased a direct obligation of the issuer. In addition, in the
event that the trust or custodial account in which the underlying security has
been deposited is determined to be an association taxable as a corporation,
instead of a non-taxable entity, the yield on the underlying security would be
reduced in respect of any taxes paid.
The Company's unaudited portfolio of investments as of May 31, 2000 is attached
to this statement of additional information as Appendix B.
Borrowings
Although it has no present intention of doing so, the Company reserves the right
to borrow funds to the extent permitted as described under the caption
"Investment Objective and Policies--Investment Restrictions." The proceeds of
borrowings may be used for any valid purpose including, without limitation,
liquidity, investing and repurchases of capital stock of the Company. Borrowing
is a form of leverage and, in that respect, entails risks, including volatility
in net asset value, market value and income available for distribution.
Lending of Securities
The Company is authorized to lend securities it holds to brokers, dealers and
other financial organizations, although it has no current intention of doing so.
Loans of the Company's securities, if and when made, may not exceed 33 1/3% of
the Company's assets taken at value. The Company's loans of securities will be
collaterized by cash, letters of credit or Government Securities that will be
maintained at all times in a segregated account with the Company's custodian in
an amount at least equal to the current market value of the loaned securities.
From time to time, the Company may pay a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or a
third party that is unaffiliated with the Company and that is acting as a
"finder."
By lending its portfolio securities, the Company can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when Government Securities are used as collateral.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible delay in recovery of the securities or the possible
loss of rights in the collateral should the borrower fail financially. The
Company will adhere to the following conditions whenever it lends its
securities: (i) the Company must receive at least 100% cash collateral or
equivalent securities from the borrower, which will be maintained by daily
marking-to-market; (ii) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the collateral;
(iii) the Company must be able to terminate the loan at any time; (iv) the
Company must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities and any increase in
market value; (v) the Company may pay only reasonable custodian fees in
connection with the loan; and (vi) voting
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rights on the loaned securities may pass to the borrower, except that, if a
material event adversely affecting the investment in the loaned securities
occurs, the Board must terminate the loan and regain the Company's right to vote
the securities.
Short Sales Against the Box
The Company may make short sales of securities in order to reduce market
exposure and/or to increase its income if at all times when a short position is
open, the Company owns an equal or greater amount of such securities or owns
preferred stock, debt or warrants convertible or exchangeable into an equal or
greater number of the shares of common stocks sold short. Short sales of this
kind are referred to as short sales "against the box." The broker-dealer that
executes a short sale generally invests the cash proceeds of the sale until they
are paid to the Company. Arrangements may be made with the broker-dealer to
obtain a portion of the interest earned by the broker on the investment of short
sale proceeds. The Company will segregate the securities against which short
sales against the box have been made in a special account with its custodian.
Not more than 10% of the Company's net assets (taken at current value) may be
held as collateral for such sales at any one time.
MANAGEMENT OF THE COMPANY
Officers and Directors
The officers of the Company manage its day-to-day operations. The officers are
directly responsible to the Board, which sets broad policies for the Company and
chooses its officers. The following is a list of the members of the Board and
officers of the Company and a brief statement of their present positions and
principal occupations during the past five years. Board members who are
interested persons of the Company (as defined in the 1940 Act) are denoted by an
asterisk (*). The business address of the Adviser, the Company, members of the
Board and officers is 1680 38th Street, Suite 800, Boulder, Colorado 80301,
unless specified otherwise below.
<TABLE>
<CAPTION>
Name, Address and Age Position held with Principal Occupations
--------------------- the Company During the Past Five
----------- Years and Other Affiliations
----------------------------
<S> <C> <C>
Stephen C. Miller * Director, Chairman of the President, Chief Executive Officer and Chairman of the Board of the
Age: 47 Board, President and Chief Company since April 1999; vice president and secretary of SIA,
Executive Officer sub-adviser to the Company; Director and President of Horejsi, Inc.
(liquidated in 1999); Director, Vice President and Assistant
Secretary of Badlands Trust Company; Of Counsel to Krassa, Madsen &
Miller, LLC since 1991; Manager of Boulder Administrative Services,
L.L.C., the co-administrator to the Company. Mr. Miller received a
Bachelor of Science Degree from the University of Georgia in 1976 and
a law degree from the University of Denver Law School in 1987.
Stewart R. Horejsi * Director Investment Manager for Stewart Investment Advisers, a sub-adviser to
Bellerive the Company; Director of the Company since July 1997; General
Queen Street Manager, Brown Welding Supply, LLC (dissolved in 1999) since April
St. Peter Barbados 1994; Director, Sunflower Bank (resigned in June 2000); President or
Age: 62 Manager of various subsidiaries of Horejsi, Inc. since June, 1986;
investment adviser for the Horejsi family trusts (i.e., the Lola
Brown Trust, the Ernest Horejsi Trust, the Stewart R. Horejsi Trust
No. 2, and certain related trusts) since 1982; Director and
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C> <C>
President of the Horejsi Charitable Foundation, Inc. since 1997. Mr.
Horejsi received a Masters Degree in Economics from Indiana University
in 1961 and a Bachelor of Science Degree in Industrial Management from
the University of Kansas in 1959.
James G. Duff Director Director of the Company since 1997; retired since January 1997; prior
7544 South Dunn's Farm Road to January 1997, Chairman and CEO of USL Capital, Inc. (commercial
Maple City MI 49644 financing).
Age: 62
Alfred G. Aldridge, Jr. Director Director of the Company since April 1999; Sales Manager of Shamrock
6831 E. Presidio Road Foods Company since 1982; Director of the Fiesta Bowl, Tempe AZ;
Scottsdale AZ 85254 retired Brigadier General, CA Air National Guard.
Age: 63
Richard I. Barr Director Director of the Company since January 1999; Manager of Advantage
2502 E. Solano Drive Sales and Marketing since 1963 (retired in 2000).
Phoenix AZ 85016
Age: 62
Carl D. Johns Chief Financial Officer, Chief Financial Officer, Chief Accounting Officer, Vice President and
Age: 37 Chief Accounting Treasurer of the Company since January 1999; Vice President and
Officer, Vice President, Treasurer of Boulder Investment Advisers, LLC, sub-adviser to the
and Treasurer Company; prior to December 1998, employee of Flaherty & Crumrine
Incorporated, former adviser to the Company; Assistant Treasurer to
the Company, Preferred Income Fund and Preferred Income Opportunity
Fund prior to December 1998. Mr. Johns received a Bachelors Degree
in Mechanical Engineering at the University of Colorado in 1985, and
a Masters Degree in Finance from the University of Colorado in 1991.
Laura Rhodenbaugh Secretary Secretary of the Company since January 1999; secretary and treasurer
200 S. Santa Fe of various Horejsi family affiliates since June 1986.
Salina, KS 67401
Age: 49
</TABLE>
As of August 1, 2000, except as set forth in the Prospectus (see "Beneficial
Ownership and Control Persons"), no person is known to the Company to own of
record or beneficially 5% or more of the Company's outstanding common shares or
preferred shares. As of August 1, 2000, all directors and executive offices of
the Company as a group owned 0.2% directly and 42.22% indirectly of the
outstanding common stock (see "Beneficial Ownership and Control Persons" in the
prospectus); none of such persons owned any of the Company's preferred shares.
Audit Committee
The Board has an Audit Committee consisting of Messrs. Aldridge, Barr and Duff,
who were appointed to the Audit Committee on January 15, 1999. The Audit
Committee reviews the scope and results of the Company's annual audit
S-8
<PAGE>
with the Company's independent accountants and recommends the engagement of such
accountants. The Audit Committee met twice during the fiscal year ended November
30, 1999.
Nominating Committee
The Board has a Nominating Committee consisting of Messrs. Aldridge, Barr and
Duff which is responsible for considering candidates for election to the Board
in the event a position is vacated or created. The Nominating Committee would
consider recommendations by shareholders if a vacancy were to exist. Such
recommendations should be forwarded to the Secretary of the Company. The
Nominating Committee did not meet during the fiscal year ended November 30,
1999.
Compensation to Directors
No officer or employee of the Company, or officer or employee of the Adviser or
Sub-adviser to the Company, receives any compensation from the Company for
serving as an officer or director of the Company. Mr. Horejsi's compensation was
paid for services as a Director of the Company prior to the date that Boulder
Administrative Services, L.L.C. became co-administrator of the Company. The
annual fee paid to each Director is $6,000; the fee for each attended in-person
meeting is $2,000 per meeting; and the fee for each meeting attended by
telephone is $1,000. The aggregate remuneration paid to the members of the Board
for acting as such during the fiscal year ended November 30, 1999 amounted to
$65,574.97. Directors and executive officers of the Company do not receive
pension or retirement benefits from the Company. Independent directors receive
reimbursement for travel and other out-of-pocket expenses incurred in connection
with board meetings.
COMPENSATION TABLE
Name of person and Aggregate Compensation
Position with the Fund from the Fund Paid to Directors*
---------------------- --------------------------------
Alfred G. Aldridge, Jr. $17,652.17
Director
Richard I. Barr $21,148.90
Director
James G. Duff $22,573.90
Director
Steward R. Horejsi $ 4,200.00
Director
Stephen C. Miller $0
Director,
Chairman of the Board,
President and Chief Executive Officer
-------------------------------------
* Reflects information relating to the Company (and not of two other
funds that, until August 1999, had had the same investment adviser
as the Company), because the Company is no longer in the same fund
complex as those funds. In addition to the amounts shown above that
were paid to persons currently serving as Directors, the Company
paid Morgan Gust and Robert F. Wulf $1,450 each for their services
as Directors of the Fund prior to their resignations effective
January 15, 1999.
Code of Ethics
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<PAGE>
The Company and its investment adviser and sub-adviser have each adopted a Code
of Ethics under Rule 17j-1 under the 1940 Act, which permits personnel subject
to the Code to invest in securities, including securities that may be purchased
or held by the Company. Each Code also contains pre-clearance and reporting
requirements and other restrictions designed to prevent conduct by personnel
disadvantageous to the Company. These Codes of Ethics can be reviewed and copied
at the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-202-942-8090. These Codes are also available on
the EDGAR Database on the Commission's Internet site at http://www.sec.gov.
Copies of these Codes may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: [email protected], or by
writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
Compensation to the Adviser, Sub-Advisers and Co-Administrators
Information is provided in the Prospectus concerning the adviser, sub-advisers
and co-administrators and their agreements with the Company. The amounts paid to
such persons during the last three fiscal years or, if shorter, the period
during which the entity was retained to provide services to the Company are as
follows:
<TABLE>
<CAPTION>
Fees Paid
(For Fiscal Year Ending November 30)
----------------------------------------------------------------------
Name of Entity 1997 1998 1999
-------------- ---- ---- ----
<S> <C> <C> <C>
Boulder Investment Advisers, L.L.C.* 0 0
$38,130
Stewart Investment Advisers, Ltd.* 0 0
$152,522
Flaherty & Crumrine Incorporated** $1,361,148 $1,394,202
$726,056
Spectrum Asset Management, Inc.* 0 0
$319,726
Boulder Administrative Services, L.L.C.* 0 0
$148,985
PFPC Inc. $271,669 $276,939
$259,792
</TABLE>
* Retained to provide services to the Company beginning in fiscal year 1999.
** Contract to provide services to the Company was terminated during fiscal
year 1999.
PORTFOLIO TRANSACTIONS AND BROKERAGE
SIA is responsible for decisions to buy and sell securities for the Company, the
selection of brokers and dealers to effect the transactions and the negotiation
of prices and any brokerage commissions. The Company may purchase certain money
market instruments directly from an issuer in which case no commissions or
discounts are paid. Purchases and sales of debt securities on a stock exchange
are effected through brokers who charge a commission for their services. During
the last three fiscal years, the Company paid $3,962 for fiscal year 1999 and
only nominal amounts for fiscal year 1998 and 1997 in brokerage commissions. The
increase in brokerage commissions in the last fiscal year is due to the change
in the Company's investment focus from primarily preferred stocks to a
combination of common stocks and preferred stocks. No separate brokerage
commission is typically paid on preferred stock transactions, which are
typically executed on a principal basis, in contrast to common stock
transactions, where brokerage commissions are the norm.
SIA will effect securities transactions of the Company in a manner deemed fair
and reasonable to shareholders of the Company and not according to any formula.
The primary considerations in selecting the manner of executing securities
transactions for the Company will be prompt execution of orders, the size and
breadth of the market for the security, the reliability, integrity and financial
condition and execution capability of the firm, the amount of difficulty in
executing the order, and the best net price. There are many instances when, in
the judgment of the
S-10
<PAGE>
Adviser or Sub-Adviser, as the case may be, more than one firm can offer
comparable execution services. In selecting among such firms, consideration is
given to those firms which supply research and other services in addition to
execution services. Consideration may also be given to the sale of shares of the
Company. However, it is not the policy of the Adviser or the Sub-Adviser, absent
special circumstances, to pay higher commissions to a firm because it has
supplied such research or other services.
The Adviser and SIA are able to fulfill their obligations to furnish a
continuous investment program to the Company without receiving research from
brokers; however, they consider access to such information to be an important
element of financial management. Although such information is considered useful,
its value is not determinable, as it must be reviewed and assimilated by the
Adviser and SIA, and does not reduce the Adviser's or SIA's normal research
activities in rendering investment advice. It is possible that the Adviser's or
SIA's expenses could be materially increased if either attempted to purchase
this type of information or generate it through its own staff.
Currently, the Adviser and SIA manage only the Company's assets. However, if
either were to manage another account, investment decisions for the Company
would be made independently from those of such other accounts; however, from
time to time, the same investment decision might be made for more than one
company or account. If two or more accounts were to seek to purchase or sell the
same securities, the securities actually purchased or sold would be allocated
among the companies and accounts on a good faith equitable basis by the Adviser
or Sub-Adviser, as the case may be, in its discretion in accordance with the
accounts' various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable for the Company.
In other cases, however, the ability of the Company to participate in volume
transactions may produce better execution for the Company.
Although the Company has no restrictions on portfolio turnover, it is not the
Company's policy to engage in transactions with the objective of seeking profits
from short-term trading. It is expected that the annual portfolio turnover rate
of the Company will be less than 100% excluding securities having a maturity of
one year or less. Because it is difficult to accurately predict portfolio
turnover rates, actual turnover may be higher or lower. Higher portfolio
turnover results in increased Company expenses, including brokerage commissions,
dealer mark-ups and other transaction costs on the sale of securities and on the
reinvestment in other securities. For the fiscal years ended November 30, 1998
and 1999, the Company's portfolio turnover rates were 86% and 69%.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS
General
Auction Agency Agreement. The Company will enter into an auction agency
agreement with the auction agent (currently, Bankers Trust Company) which
provides, among other things, that the auction agent will follow the auction
procedures for purposes of determining the applicable rate for the AMPS shares
so long as the applicable rate for the AMPS shares is to be based on the results
of an auction.
Broker-Dealer Agreements. Each auction requires the participation of one or more
Broker-Dealers. The auction agent will enter into broker-dealer agreements with
several Broker-Dealers selected by the Company, which provide for the
participation of those Broker-Dealers in auctions for AMPS shares.
Securities Depository. The Depository Trust Company ("DTC") will act as
securities depository for the Agent Members with respect to the AMPS. One
certificate for all of the AMPS shares will be registered in the name of Cede &
Co., as nominee of DTC. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions restricting transfers of
shares of AMPS contained in the Articles Supplementary. The Company will also
issue stop-transfer instructions to the transfer agent for AMPS. Prior to the
commencement of the right of holders of preferred shares of the Company to elect
a majority of the Board, as described under "Description of AMPS - Voting
Rights" in the Prospectus, Cede & Co. will be the holder of record of all AMPS
shares and owners of such shares will not be entitled to receive certificates
representing their ownership interest in such shares.
S-11
<PAGE>
DTC, a New York-chartered limited purpose trust company, performs services for
its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such participant (the
"Agent Member") in AMPS, whether for its own account or as a nominee for another
person.
Concerning the Auction Agent
The auction agent will act as agent for the Company in connection with auctions.
In the absence of bad faith or 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 under the auction agency
agreement and will not be liable for any error of judgment made in good faith
unless the auction agent will have been negligent in ascertaining the pertinent
facts.
The auction agent may rely upon, as evidence of the identities of the existing
holders of AMPS, the auction agent's registry of existing holders, the results
of auctions and notices from any Broker-Dealer (or other person, if permitted by
the Company) with respect to transfers described under "The Auction" in the
Prospectus. The auction agent is not required to accept any such notice for an
auction unless it is received by the auction agent by 3:00 p.m., New York City
time, on the business day preceding such auction.
The auction agent may terminate the auction agency agreement upon notice to the
Company on a date no earlier than the business day after the second dividend
payment date for the AMPS following delivery of such notice. If the auction
agent should resign, the Company will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Company may remove the
auction agent provided that prior to such removal the Company shall have entered
into such an agreement with a successor auction agent.
Broker-Dealers
After each auction for AMPS, the auction agent will pay to each Broker-Dealer,
from funds provided by the Company, a service charge at the annual rate of 0.25%
of the aggregate liquidation preference of shares of AMPS placed by such
Broker-Dealer at such auction. For the purposes of the preceding sentence, AMPS
will be placed by a Broker-Dealer if such shares were (a) the subject of hold
orders deemed to have been submitted to the auction agent by the Broker-Dealer
and were acquired by such Broker-Dealer for its own account or were acquired by
such Broker-Dealer for its customers who are beneficial owners or (b) the
subject of an order submitted by such Broker-Dealer that is (i) a submitted bid
of an existing holder that resulted in such existing holder continuing to hold
such shares as a result of the auction or (ii) a submitted bid of a potential
holder that resulted in such potential holder purchasing such shares as a result
of the auction or (iii) a valid hold order. The Company 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 such termination.
If an auction was not held on an auction date, the auction agent will pay to
each Broker-Dealer a service charge at an annual rate of 0.25% of the aggregate
liquidation preference of the shares of AMPS acquired by existing holders
through such Broker-Dealer.
The Broker-Dealer agreements provide that a Broker-Dealer may submit orders in
auctions for its own account, unless the Company notifies such Broker-Dealer
that it may no longer do so, in which case such Broker-Dealer may continue to
submit hold orders and sell orders for its own account. Any Broker-Dealer that
is an affiliate of the Company may submit orders in auctions, but only if such
orders are not for its own account. If a Broker-Dealer submits an order for its
own account in any auction, it might have an advantage over other bidders
because it would have knowledge of all orders submitted by it in that auction;
such Broker-Dealer, however, would not have knowledge of orders submitted by
other Broker-Dealers in that auction.
REPURCHASE OF COMMON SHARES
The Company is a closed-end investment company and as such its common
shareholders do not have the right to cause the Company to redeem their shares.
Instead, the Company's common shares trade in the open market at a price that is
a function of several factors, including dividend levels (which are in turn
affected by expenses), net
S-12
<PAGE>
asset value, dividend stability, relative demand for and supply of such shares
in the market, general market and economic conditions and other factors. Because
shares of a closed-end investment company may frequently trade at prices lower
than net asset value, the Board may consider actions that might be taken to
reduce or eliminate any material discount from net asset value in respect of
common shares, which may include the repurchase of such shares in the open
market or in private transactions, the making of a tender offer for such shares
at net asset value, or the conversion of the Company to an open-end investment
company. The Board may not decide to take any of these actions. In addition,
there can be no assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
The Prospectus describes the Company's current policy with respect to
repurchasing shares of the Company's common stock in the open market or in
private transactions, or tendering for shares, in an attempt to reduce or
eliminate a market value discount from net asset value. Upon the issuance of the
AMPS, the Company's ability to repurchase shares of, or tender for, its common
stock may be limited by the asset coverage requirements of the 1940 Act and by
asset coverage and other requirements imposed by Moody's and S&P as a condition
to rating the AMPS. No assurance can be given that the Board will decide to
undertake share repurchases or tenders or, if undertaken, that repurchases
and/or tender offers will result in the Company's common stock trading at a
price that is close to, equal to or above net asset value. The Company may
borrow to finance repurchases and/or tender offers. Any tender offer made by the
Company for its shares may be at a price equal to or less than the net asset
value of such shares. Any service fees incurred in connection with any tender
offer made by the Company will be borne by the Company and will not reduce the
stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Company may borrow to finance any
repurchase of common shares or to make any tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Company in anticipation of share repurchases or tenders will reduce the
Company's net income. Any share repurchase, tender offer or borrowing that might
be approved by the Board would have to comply with the Securities Exchange Act
of 1934 and the 1940 Act and the rules and regulations under each of those acts.
Although the decision to take action in response to a discount from net asset
value will be made by the Board at the time it considers such issue, it is the
Board's present policy, which may be changed by the Board, not to authorize
repurchases of common shares or a tender offer for such shares if (1) such
transactions, if consummated, would (a) result in the delisting of the common
shares from the NYSE, or (b) impair the Company's status as a regulated
investment company under the Internal Revenue Code (which would make the Company
a taxable entity, causing the Company's income to be taxed at the corporate
level in addition to the taxation of shareholders who receive dividends from the
Company) or as a registered closed-end investment company under the 1940 Act;
(2) the Company would not be able to liquidate portfolio securities in an
orderly manner and consistent with the Company's investment objective and
policies in order to repurchase shares; or (3) there is, in the board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Company, (b) general suspension of or limitation on prices for trading
securities on the NYSE, (c) declaration of a banking moratorium by Federal or
state authorities or any suspension of payment by United States banks in which
the Company invests, (d) material limitation affecting the Company or the
issuers of its portfolio securities by Federal or state authorities on the
extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Company or its shareholders if shares were
repurchased. The Board may in the future modify these conditions in light of
experience.
The repurchase by the Company of its common shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Company's common shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Company's shares may be the subject of repurchase or tender offers at net
asset value from time to time, or that the Company may be converted to an
open-end company, may be helpful in reducing any spread between market price and
net asset value that might otherwise exist.
In addition, a purchase by the Company of its common shares will decrease the
Company's total assets which would likely have the effect of increasing the
Company's expense ratio. Any purchase by the Company of its common
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<PAGE>
shares at a time when preferred shares are outstanding will increase the
leverage applicable to the outstanding common shares then remaining and decrease
the asset coverage of the preferred shares.
Before deciding whether to take any action if the common shares trade below net
asset value, the Board would likely consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Company's portfolio,
the impact of any action that might be taken on the Company or its shareholders
and market considerations. Based on these considerations, even if the Company's
shares should trade at a discount, the Board may determine that, in the interest
of the Company and its shareholders, no action should be taken.
TAX MATTERS
The Company has qualified and elected, and intends to continue to qualify under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company. To qualify for tax treatment as a regulated
investment company, the Company must, among other things: (a) distribute to its
shareholders at least an amount equal to the sum of (i) 90% of its net
investment income (which is its investment company taxable income as that term
is defined in the Code but determined without regard to the deduction for
dividends paid) and (ii) 90% of its net tax-exempt interest income and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Company
(i) at least 50% of the market value of the Company's assets is represented by
cash, cash items, U.S. government securities and securities of other regulated
investment companies, and other securities, with these other securities limited,
with respect to any one issuer, to an amount not greater in value than 5% of the
Company's total assets, and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the market value of the
Company's assets is invested in the securities of any one issuer (other than
U.S. government securities or securities of other regulated investment
companies). In meeting these requirements, the Company may be restricted in the
utilization of certain of the investment techniques described above and in the
Prospectus. If in any year the Company should fail to qualify for tax treatment
as a regulated investment company, the Company would incur a regular Federal
corporate income tax upon its taxable income for that year, and distributions to
its shareholders would be taxable to such holders as ordinary income to the
extent of the Company's earnings and profits. A regulated investment company
that fails to distribute, by the close of each calendar year, at least an amount
equal to the sum of 98% of its ordinary taxable income for such year and 98% of
its capital gain net income for the one year period ending October 31 in such
year, plus any shortfalls from the prior year's required distribution, is liable
for a 4% excise tax on the portion of the undistributed amount of such income
that is less than the required amount for such distributions. To avoid the
imposition of this excise tax, the Company generally makes the required
distributions of its ordinary taxable income, if any, and its capital gain net
income, to the extent possible, by the close of each calendar year.
Certain of the Company's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain deductions or
losses of the Company, affect the holding period of securities held by the
Company and alter the character of the gains or losses realized by the Company.
These provisions may also require the Company to recognize income or gain
without receiving cash with which to make distributions in the amounts necessary
to satisfy the requirements for maintaining regulated investment company status
and for avoiding income and excise taxes. The Company will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Company as a regulated
investment company.
Distributions to shareholders by the Company of net income received, if any,
from taxable temporary investments and net short-term capital gains, if any,
realized by the Company will be taxable to its shareholders as ordinary income.
Distributions by the Company of net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss), if any, are taxable as
long-term capital gain, regardless of the length of time the shareholder has
owned common shares or AMPS. Distributions, if any, in excess of the Company's
earnings and profits will first reduce the adjusted tax basis of a shareholder's
shares and, after that basis has been reduced to zero, will constitute capital
gains to the shareholder (assuming the shares are held as a capital asset).
The Internal Revenue Service (the "IRS") requires that a regulated investment
company that has two or more classes of shares designate to each such class
proportionate amounts of each type of its income for each tax year based upon
the percentage of total dividends distributed to each class for such year. The
Company intends each year to allocate, to the fullest extent practicable, net
interest income, net capital gain and other taxable income, if any, between its
common shares and preferred shares, including the AMPS, in proportion to the
total dividends paid to each class
S-14
<PAGE>
with respect to such year. To the extent permitted under applicable law, the
Company reserves the right to make special allocations of income within a class,
consistent with the objective of the Company. The Company may, at its election,
notify the auction agent of the amount of any net capital gain or other income
taxable for Federal income tax purposes to be included in any dividend on shares
of its AMPS prior to the auction establishing the applicable rate for such
dividend.
If at any time when the AMPS are outstanding the Company fails to meet the
Eligible Asset Coverage and the 1940 Act Asset Coverage, the Company will be
required to suspend distributions to holders of its common shares until such
maintenance amount or asset coverage, as the case may be, is restored. This may
prevent the Company from distributing at least an amount equal to the sum of 90%
of its investment company taxable income and 90% of its net tax-exempt interest
income, and may therefore jeopardize the Company's qualification for taxation as
a regulated investment company or cause the Company to incur a tax liability or
a non-deductible 4% excise tax on the undistributed taxable income (including
gain), or both. Upon failure to meet the Eligible Asset Coverage or the 1940 Act
Asset Coverage, the Company will be required to redeem its AMPS in order to
maintain or restore such maintenance amount or asset coverage and avoid the
adverse consequences to the Company and its shareholders of failing to qualify
as a regulated investment company. There can be no assurance, however, that any
such redemption would achieve such objective.
The Company may, at its option, redeem the AMPS in whole or in part, and is
required to redeem AMPS to the extent required to maintain the Eligible Asset
Coverage Amount and the 1940 Act Asset Coverage. Gain or loss, if any, resulting
from a redemption of AMPS will be taxed as gain or loss from the sale or
exchange of the AMPS under Section 302 of the Code rather than as a dividend,
but only if the redemption distribution (a) is deemed not to be essentially
equivalent to a dividend, (b) is in complete redemption of an owner's interest
in the Company, (c) is substantially disproportionate with respect to the owner,
or (d) with respect to a non-corporate owner, is in partial liquidation of the
owner's interest in the Company. For purposes of (a), (b) and (c) above, a
shareholder's ownership of common shares will be taken into account and AMPS and
common shares held by parties who are related to the redeemed shareholder may
also have to be taken into account.
The sale or other disposition of common shares or AMPS will normally result in
capital gain or loss to shareholders. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, under current law short-term
capital gains and ordinary income will be taxed at a maximum rate of 39.6% while
long-term capital gains generally will be taxed at a maximum rate of 20%.
However, because of the limitations on itemized deductions and the deduction for
personal exemptions applicable to higher income taxpayers, the effective rate of
tax may be higher in certain circumstances. Losses realized by a shareholder on
the sale or exchange of shares of the Company held for six months or less are
disallowed to the extent of any distribution of exempt- interest dividends
received with respect to such shares, and, if not disallowed, such losses are
treated as long-term capital losses to the extent of any distribution of net
capital gain received with respect to such shares. A shareholder's holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. Any loss realized on a sale or exchange of shares of the Company will be
disallowed to the extent those shares of the Company are replaced by other
shares within a period of 61 days beginning 30 days before and ending 30 days
after the date of disposition of the original shares. In that event, the basis
of the replacement shares of the Company will be adjusted to reflect the
disallowed loss.
Nonresident alien individuals and certain foreign corporations and other
entities ("foreign investors") generally are subject to U.S. withholding tax at
the rate of 30% (or possibly a lower rate provided by an applicable tax treaty)
on distributions of net investment income (which includes net short-term capital
gain). To the extent received by foreign investors, exempt-interest dividends,
distributions of net capital gain and gain from the sale or other disposition of
the AMPS generally are exempt from United States Federal income taxation.
Different tax consequences may result if the owner is engaged in a trade or
business in the United States or, in the case of an individual, is present in
the United States for 183 or more days during a taxable year.
The Company is required in certain circumstances to backup withhold 31% of
taxable dividends and certain other payments paid to non-corporate holders of
the Company's shares who do not furnish to the Company their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts
S-15
<PAGE>
withheld from payments made to a shareholder may be refunded or credited against
such shareholder's United States Federal income tax liability, if any, provided
that the required information is furnished to the IRS.
The foregoing is a general summary of the provisions of the Code and regulations
thereunder presently in effect as they directly govern the taxation of the
Company and its shareholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Moreover, the foregoing does not address many of the factors that may be
determinative of whether an investor will be liable for the Federal alternative
minimum tax. Shareholders are advised to consult their own tax advisers for more
detailed information concerning the Federal income tax consequences and any
state, local or foreign tax consequences of purchasing, holding and disposing of
Company shares.
FINANCIAL STATEMENTS
Independent Auditors
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), at One Post Office
Square, Boston, Massachusetts 02109, has served as independent accountants for
the Company since its commencement of operations and has been selected to serve
in such capacity for the Company's fiscal year ending November 30, 2000. The
financial statements and independent auditors report incorporated by reference
into this statement of additional information have been so incorporated and the
financial highlights included in the Prospectus have been so included in
reliance upon the report of PricewaterhouseCoopers given on their authority as
experts in auditing and accounting.
Incorporation by Reference
The Company's Portfolio of Investments, dated November 30, 1999 (audited);
Statement of Assets and Liabilities, dated November 30, 1999 (audited);
Statement of Operations for the year ended November 30, 1999 (audited);
Statement of Changes in Net Investment Assets for the two years ended November
30, 1999 (audited); the independent auditors report included in the Company's
Annual Report for the fiscal year ended November 30, 1999, are incorporated
herein by reference. The Company will furnish, without charge, a copy of the
Annual Report and the Semi-Annual Report upon written request to PFPC Inc., P.O.
Box 1376, Boston, Massachusetts 02104 or by calling 1-800-331-1710.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to
the shares offered hereby, has been filed by the Company with the Securities and
Exchange Commission, Washington, D.C. The Prospectus and this statement of
additional information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Company and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
Prospectus and this statement of additional information as to the contents of
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.
The Registration Statement may be inspected without a charge at the Commission's
principal office in Washington, D.C. and copies of all or any part thereof may
be obtained from such office after payment of the fees prescribed by the
Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files and reports and other information with the Commission. Such reports, proxy
and public statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, DC 20549. Call 1-800-SEC-0330 for information about the public
reference facilities. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates. Such reports and other information concerning the
Company may also be inspected at the offices of the New York Stock Exchange. The
Commission maintains a web site (http://www.sec.gov) that contains the
Prospectus, material
S-16
<PAGE>
incorporated by reference into this statement of additional information and the
Prospectus, and reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
S-17
<PAGE>
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP
A brief description of the applicable Standard & Poor's Ratings Group ("S&P")
rating symbols and their meanings (as published by S&P) follows:
LONG TERM DEBT
An S&P corporate debt rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. The debt rating
is not a recommendation to purchase, sell, or hold a security, inasmuch as it
does not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other
circumstances. The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A-Debt rated "All has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CLARK CURBO" and "IC" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
'IC" the highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.
BB-Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
A-1
<PAGE>
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B-Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC-Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CLARK CURBO-The rating "CLARK CURB0" typically is applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" debt rating.
C-The rating "C" typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI-The rating "CI" is reserved for income bonds on which no interest is being
paid.
D-Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-)-The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS-The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely o entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
L-The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized.
In the case of certificates of deposit the letter "L" indicates that the
deposit, combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the federal
insurance limits within 30 days after closing of the insured institution or, in
the event that the deposit is assumed by a successor insured institution, upon
maturity. Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flow.
NR-Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
A-2
<PAGE>
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1-Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
designation.
SP-2-Satisfactory capacity to pay principal and interest.
SP-3-Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-111 for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2-Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
A-3-Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designation.
B-Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C-This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D-Debt rated "D" is in payment default. The "D" rating 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 S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-3
<PAGE>
MOODY'S INVESTORS SERVICE, INC.
A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings (as published by Moody's) follows:
LONG-TERM RATINGS
Aaa-Bonds that 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 fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds that 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 that are rated Baa 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 that 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
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B-Bonds that 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 that 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 that 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 that 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.
CON(-)-Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aal,
Al, Baal, Bal and Bl.
A-4
<PAGE>
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; and
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
PREFERRED STOCK RATINGS
Preferred stock rating symbols and their definitions are as follows:
aaa-An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa-An issue which is rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a-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.
A-5
<PAGE>
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 I indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
A-6
<PAGE>
<TABLE>
<CAPTION>
APPENDIX B
BOULDER TOTAL RETURN FUND, INC.
PORTFOLIO OF INVESTMENTS
COMMON STOCKS 5/31/00
(unaudited)
MARKET VALUE
<S> <C> <C>
DIVERSIFIED -- 29.8%
750 Berkshire Hathaway Inc., Class A+........................................................... $ 43,950,000
9,010 Berkshire Hathaway Inc., Class B+........................................................... 16,992,860
----------
TOTAL DIVERSIFIED........................................................................... 60,942,860
REITS -- 6.9%
200,000 First Industrial Realty Trust.............................................................. 5,812,500
600,000 New Plan Excel Realty Trust, Inc........................................................... 8,287,500
---------
TOTAL REITS ................................................................................ 14,100,000
FINANCIAL SERVICES-- 5.4%
400,000 Associates First Capital Corporation, Class A.............................................. 10,975,000
INVESTMENT COMPANIES-- 4.1%
300,000 ACM Government Securities Fund.............................................................. 1,912,500
8,100 John Hancock Patriot Preferred Dividend Fund................................................ 83,025
54,000 Kemper Multi-Market Income Trust............................................................ 438,750
40,000 MFS Charter Income Trust.................................................................... 325,000
10,000 MFS Intermediate Income Trust............................................................... 61,875
54,300 MFS Mulitmarket Income Trust................................................................ 319,012
65,500 Oppenheimer Multi-Sector Income Trust....................................................... 495,344
</TABLE>
B-1
<PAGE>
<TABLE>
<S> <C> <C>
286,600 Putnam Master Intermediate Income Trust..................................................... 1,701,687
400,000 Putnam Premier Income Trust................................................................. 2,300,000
86,700 RCM Strategic Global Government Fund........................................................ 742,369
-------
TOTAL INVESTMENT COMPANIES.................................................................. 8,379,562
INSURANCE -- 3.8%
60,000 Progressive Corporation..................................................................... 5,632,500
9,000 Wesco Financial Corporation................................................................. 2,187,000
---------
TOTAL INSURANCE............................................................................. 7,819,500
UTILITY -- 0.1%
7,950 WPS Resources Corporation................................................................... 248,437
-------
TOTAL COMMON STOCKS
(Cost $94,903,569).......................................................................... 102,465,359
PREFERRED STOCKS AND SECURITIES-- 25.2%
UTILITIES -- 11.4%
62,300 Alabama Power Capital Trust I, 7.375% TOPrS................................................. 1,335,556
29,700 Baltimore Gas & Electric Co,6.700% Pfd., Ser. 1993.......................................... 2,910,269
86,450 CPL Capital, 8.000% QUIPS, Series A......................................................... 1,912,706
7,134 Duke Energy Corporation, 4.500% Pfd., Series C.............................................. 481,260
53,300 Enterprise Capital Trust I, 7.440% TOPrS, Series A.......................................... 1,067,666
42,350 Florida Power & Light Company, 6.980% Pfd., Series S........................................ 4,187,568
1,167 Jersey Central Pwr & Light Co.,
7.52% Sinking Fund Pfd., Series K.......................................................... 120,049
2,500,000 KN Energy, Inc., KN Capital Trust I,
</TABLE>
B-2
<PAGE>
<TABLE>
<S> <C> <C>
8.560% 4/15/27 Capital Security, Series B................................................... 2,304,659
24,600 Mission Energy Company, 9.875% MIPS, Series A.............................................. 608,850
1,400 Mississippi Power Company, 7.000% Pfd....................................................... 142,434
8,500 Monongahela Power Company, $7.73 Pfd., Series L............................................. 871,675
12,600 Niagara Mohawk Power Corp., 4.1% Pfd........................................................ 671,139
: Ohio Edison Company:.....................................................................
2,700 4.440% Pfd......................................................................... 150,660
8,000 4.560% Pfd. ....................................................................... 484,335
Pennsylvania Power & Light Company,
105,425 PP&L Capital Trust II, 8.100% TOPrS......................................................... 2,395,124
34,200 PSE&G Capital Trust I, 8.625% QUIPS, Series U............................................... 805,838
17,050 San Diego Gas & Electric Company, 6.8% Pfd.................................................. 424,119
104,000 Southern California Edison, 8.375% QUIDS, Series A.......................................... 2,463,500
---------
TOTAL UTILITIES 23,337,407
FINANCIAL SERVICES-- 6.0%
29,500 Ace Capital Trust I, 8.875% TOPrS........................................................... 703,391
55,000 Bear Stearns Company, 5.720% Pfd., Series F................................................. 2,185,700
31,546 Canadian General Capital, 9.125% TOPrS...................................................... 753,161
5,000 FPC Capital I, 7.1% QUIPS, Series A......................................................... 99,063
1,500 Heller Financial, Inc., 6.95% Pfd., Series D................................................ 145,960
99,950 Household Capital Trust II, 8.700% TOPrS.................................................... 2,330,084
Lehman Brothers Holdings Inc:
26,300 5.940% Pfd., Series C....................................................................... 1,056,602
22,000 5.670% Pfd., Series D....................................................................... 797,829
5,000 MCN Financing, 8.625% TRUPS................................................................. 111,094
18,600 Merrill Lynch Capital Trust II, 8.0% TOPrS.................................................. 440,006
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C> <C>
5,000 Merrill Lynch Preferred Capital Trust V, 7.28% TOPrS........................................ 107,812
75,000 SLM Holding Corporation, 6.970% Pfd......................................................... 3,616,162
---------
TOTAL FINANCIAL SERVICES.................................................................... 12,346,864
BANKING -- 3.4%
51,800 Citigroup Inc., 6.213% Pfd., Series G....................................................... 2,260,552
3,100,000 First Empire State Corp., First Empire Capital Trust I,
8.234% 2/1/27 Capital Security.............................................................. 2,745,579
250 LaSalle National Corporation, 6.460% Pfd., 144A **.......................................... 226,339
30,000 HSBC USA Inc., $1.81 Pfd., Series E......................................................... 753,244
1,000,000 Summit Capital Trust I,
8.400% 03/15/27 Capital Security, Series B.................................................. 910,772
-------
TOTAL BANKING............................................................................... 6,896,486
REITS -- 2.0%
54,200 Avalonbay Communities, 8.960% Pfd., Series G................................................ 1,200,869
Equity Residential Properties:
56,000 9.375% Pfd., Series A....................................................................... 1,305,500
5,000 9.650% Pfd., Series F....................................................................... 117,188
8,100 First Industrial Realty, 7.950% Pfd......................................................... 153,647
48,500 Prologis Trust, 9.4% Pfd., Series A......................................................... 1,124,594
5,000 Rouse Capital, 9.250% QUIPS................................................................. 110,938
-------
TOTAL REITS................................................................................. 4,012,736
MISCELLANEOUS INDUSTRIES -- 1.7% Conagra Capital LC:
109,300 Series B, Adj. Rate Pfd..................................................................... 1,837,606
</TABLE>
B-4
<PAGE>
<TABLE>
<S> <C> <C>
22,700 9.350% Pfd., Series C....................................................................... 549,056
43,100 SBC Communications Inc., 8.5% Pfd........................................................... 1,054,603
---------
TOTAL MISCELLANEOUS INDUSTRIES.............................................................. 3,441,265
INSURANCE -- 0.8%
62,000 American Re Capital, 8.500% 9/30/25 QUIPS................................................... 1,458,937
5,500 Hartford Capital I, 7.7% QUIPS, Series A.................................................... 123,234
-------
TOTAL INSURANCE............................................................................. 1,582,171
TOTAL PREFERRED STOCKS AND SECURITIES(Cost $53,941,343) $51,616,929
U.S. TREASURY BILLS-- 14.6%..............................................................................
$10,000,000 5.340% due 06/08/00++......................................................................... $ 9,989,616
20,000,000 5.610% due 07/06/00++.......................................................................... 19,890,970
TOTAL U.S. TREASURY BILLS (Cost $29,880,586)............................................................. 29,880,586
Principal Amount REPURCHASE AGREEMENT-- 9.3% (Cost $19,047,000)
19,047,000 Agreement with Warburg Dillon Read, 6.350%
dated 5/31/00, to be repurchased at $19,050,360
on 6/01/00, collateralized by $15,909,000
U.S.Treasury Note, 8.125% due 8/15/21
(value $19,428,866) 19,047,000
TOTAL INVESTMENTS (Cost $197,772,498*) 99.2% 203,009,874
OTHER ASSETS AND LIABILITIES (Net) 0.8 1,718,185
NET ASSETS . . 100.0% $204,728,059
</TABLE>
-----------------
* Aggregate cost for Federal tax purposes.
** Security exempt from registration under Rule 144A of the Securities Act of
B-5
<PAGE>
1933. These securities may be resold in transactions exempt from registration to
qualified institutional buyers.
+ Non-income producing.
++Annualized yield at date of purchase.
ABBREVIATIONS:
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
QUIPS -- Quarterly Income Preferred Securities
TOPrS -- Trust Originated Preferred Securities
TRUPS -- Trust Preferred Securities
Capital Securities are debt instruments and the amounts shown in the Shares/Par
column are dollar amounts of par value.
BOULDER TOTAL RETURN FUND, INC.
PORTFOLIO OF INVESTMENTS
May 31, 2000 (Unaudited)
B-6
<PAGE>
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Financial Statements included in Part A (Prospectus) of this Registration
Statement:
Financial Highlights for each of the years ended November 30, 1999, 1998,
1997, 1996, 1995, 1994 and 1993 and for the six months ended May 31, 2000.
Financial Statements included in Part B (Statement of Additional
Information) of this Registration Statement:
Report of Independent Accountants.*
Statement of assets and liabilities as of November 30, 1999.*
Statement of operations for the year ended November 30, 1999.*
Statement of cash flows for the year ended November 30, 1999.*
Statement of changes in net assets for each of the years ended November 30,
1998 and 1999.*
Schedule of Investments as of May 31, 2000.
-----------
* Incorporated by reference.
(2) Exhibits
(a)(1)*** --Articles of Incorporation of the Fund
(a)(2)*** --Articles of Amendment to the Articles of Incorporation of the
Fund
(b)*** --Amended and Restated By-laws of the Fund
(c) --Not applicable
(d)(1) --Form of Articles Supplementary for the AMPS
(d)(2) --Form of Share Certificate for the AMPS
(e)* --Dividend Reinvestment Plan
(f) --Not applicable
(g)(1)*** --Investment Advisory Agreement between the Company and Boulder
Investment Advisers, L.L.C. ("BIA")
(2)*** --Investment Sub-Advisory Agreement between the Company, BIA and
Stewart Investment Advisers, Ltd. ("SIA")
(h)*** --Form of Purchase Agreement between the Company,
<PAGE>
BIA and Merrill Lynch & Co.
(i) --Not Applicable
(j) *** --Custody Agreement between the Company and Boston Safe Deposit
and Trust Company
(k)(1)*** --Transfer Agency Agreement between the Company and the
Shareholder Services Group, Inc.
(2)*** --Amended and Restated Administration Agreement between the
Company and First Data Investor Services Group, Inc. ("FDISG")
(the "Administration Agreement")
(3)*** --Amendment to the Administration Agreement between the Company
and FDISG
(4)*** --Co-Administration Agreement between the Company and Boulder
Administration Services, LLC
(5)*** --Fee Agreement among the Boston Company Advisers, Inc., Boston
Safe Deposit and Trust Company and the Company
(6)*** --Form of Auction Agency Agreement between the Company and
Bankers Trust Company
(7) --Form of Broker-Dealer Agreement between the Company and Merrill
Lynch & Co.
(l)(1) --Opinion and consent of Willkie Farr & Gallagher
(2) --Opinion and consent of Venable, Baetjer and Howard, LLP
(m) --Not applicable
(n) --Consent of PricewaterhouseCoopers L.L.P.
(o) --Not applicable
(p) --Not applicable
(q) --Not applicable
(r) --Code of Ethics of the Company, BIA and SIA
(s)** --Power of Attorney
(t) --Financial Data Schedule (EDGAR version only)
* Incorporated herein by reference to the Registrant's Form N30-D
filed on July 27, 1997.
** Incorporated herein by reference to the Registrant's Pre-effective
Amendment No. 1 to the Registrant's Registration Statement on Form N-2
(File Nos. 333-37008, 811-07390), Exhibit 2(s), filed on July 3, 2000.
*** Incorporated herein by reference to the Registrant's Pre-effective
Amendment No. 2 to the Registrant's Registration Statement on Form N-2
(File Nos. 333-37008, 811-07390), filed on August 7, 2000.
Item 25. Marketing Arrangements
Reference is made to the Form of Purchase Agreement for the AMPS filed with this
Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
2
<PAGE>
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
Registration fees........................... $ 20,460
Printing and engraving...................... $ 15,000
Legal fees and expenses..................... $ 179,540
Rating Agency fees.......................... $ 15,000
Miscellaneous............................... $ 20,000
----------
Total....................................... $ 250,000
==========
Item 27. Persons controlled by or under common control with the Fund
The following table sets forth certain information regarding the beneficial
ownership of the Company's shares as of May 31, 2000, by each person who is
known by the Company to beneficially own 5% or more of the Company's common
stock. To the Company's knowledge, there are no 5% or greater beneficial owners
of MMP Shares.
<TABLE>
<CAPTION>
Number and % of Shares
Name of Owner Beneficially Owned
------------ ------------------
<S> <C>
EALLC (1) 257,811 ( 2.74%)
John S. Horejsi Trust (1)(2) 65,747 ( 0.70%)
Susan L. Ciciora Trust (1)(2) 131,475 ( 1.40%)
Stewart West Indies Trust (1)(2) 191,907 ( 2.04%)
Evergreen Trust (2) 47,632 ( 0.51%)
Lola Brown Trust (1) 1,028,001 (10.92%)
Ernest Horejsi Trust No. 1B (1) 2,468,053 (26.21%)
Badlands Trust Company (3) 3,975,550 (42.22%)
Stewart R. Horejsi Trust No. 2 (4) 3,975,550 (42.22%)
Aggregate Shares Owned 3,975,550 (42.22%)
</TABLE>
* The address of EALLC is 1680 38th Street, Suite 800, Boulder, Colorado
80301. The address for each of the other listed owners is 614 Broadway, P.O.
Box 801, Yankton, South Dakota 57078.
** Aggregate number and percentage are less than the sum total of amounts shown
for each owner because the same shares may be deemed beneficially owned by
more than one party (see Footnotes 1 through 4).
(1) DIRECT OWNERSHIP. Evergreen Atlantic, L.L.C. ("EALLC"), John S. Horejsi
Trust ("John Trust"), Susan L. Ciciora Trust ("Susan Trust"), Stewart West
Indies Trust ("SWIT"), Lola Brown Trust No. 1B ("Lola Brown Trust"), the Ernest
Horejsi Trust No. 1B ("Ernest Trust") and Badlands Trust Company ("Badlands")
directly own 257,811; 27,075; 54,132; 78,470; 1,028,001; 2,498,053; and 12,735,
respectively, of the Company's common stock shares,
3
<PAGE>
totaling 3,975,550 shares or 42.22% of the outstanding shares of the Company.
(2) INDIRECT OWNERSHIP THROUGH EVERGREEN. Numbers shown in the table include
shares held directly and shares that may be deemed to be beneficially owned
indirectly through ownership of EALLC. The outstanding equity membership of
EALLC is owned by SWIT, the John Trust, the Susan Trust and the Evergreen Trust
in the following percentages - 44%, 15%, 30% and 11%. The sole trustee of SWIT,
the John Trust and the Susan Trust is Badlands. Mr. Horejsi is not a
beneficiary under any of these trusts. The trustees of Evergreen Trust are
Badlands, Stephen C. Miller and Larry Dunlap. Any action by the Evergreen Trust
requires a majority vote of the trustees.
(3) OWNERSHIP BY BADLANDS. Numbers shown in the table includes shares held
directly by Badlands (see Footnote No. 1) and shares that may be deemed to be
beneficially owned indirectly by Badlands through direct or indirect ownership
by the Lola Brown Trust, the Ernest Trust, SWIT, the John Trust, the Susan Trust
and the Evergreen Trust. Badlands is the sole trustee of three of the four
trusts that control EALLC (see Footnote No. 2) and, together with Larry Dunlap
and Susan Ciciora, one of three trustees of the Lola Brown Trust and the Ernest
Trust. Badlands is a trust company organized under the laws of South Dakota,
which is wholly owned by the SRH Trust, an irrevocable trust organized by Mr.
Stewart Horejsi for the benefit of his children. The directors of Badlands are
Larry Dunlap, Stephen C. Miller, Robert Ciciora, who is the brother of Mr.
Horejsi's son-in-law (John Ciciora).
(4) INDIRECT OWNERSHIP BY SRH TRUST. Numbers shown in the table reflects shares
that may be deemed to be beneficially owned indirectly through ownership of
Badlands. The trustees of the SRH Trust are Badlands, Robert Ciciora and Robert
Kastner.
EALLC, the John Trust, the Susan Trust, SWIT, the Lola Brown Trust, the
Ernest Trust, Badlands, the Stewart R. Horejsi Trust No. 2 ("SRH Trust") and
Stewart R. Horejsi are, as a group, considered to be a "control person" of the
Company (as that term is defined in Section 2(a)(9) of the 1940 Act). These
entities and other trusts or companies with interlocking management and/or
common ownership, including the Co-Administrator (collectively, the "Horejsi
Affiliates") may be deemed to indirectly own additional Company shares, which
are included in the table above. Further, Stewart R. Horejsi, the investment
manager for SIA, is also the primary investment consultant for the Horejsi
Affiliates and, on a discretionary basis, implements and directs their
investment objective and asset allocation.
Each of EALLC, the John Trust, the Susan Trust, SWIT, the Lola Brown Trust, the
Earnest Trust, Badlands and the SRH Trust are organized or formed under the laws
of the state of South Dakota.
4
<PAGE>
Except for the persons noted above that may be deemed to control the Registrant,
no other person is under common control with the Registrant.
The financial statements of the Registrant are not consolidated with those of
any of the persons noted above that may be deemed to control or be under common
control with the Registrant.
Item 28. Number of Holders of Shares
At June 30, 2000 (within 90 days prior to filing):
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, $.01 par value 9,416,743
Cumulative Money Market Preferred Stock, $.01 par value 775
Item 29. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland, Article
VIII of the Registrant's Articles of Incorporation (to be filed as an Exhibit to
this Registration Statement), Article 5.2 of the Registrant's By-laws (to be
filed as an Exhibit to this Registration), the Investment Advisory Agreement (to
be filed as an Exhibit to this Registration Statement) and the Purchase
Agreement (to be filed as an Exhibit to this Registration Statement) provide for
indemnification. In addition, the Registrant has entered into an agreement with
each director providing for indemnification and has purchased directors and
officers disability insurance.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant, pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 30. Business and Other Connections of the Investment Adviser
5
<PAGE>
Registrant is fulfilling the requirement of this Item 30 to provide a list of
the officers and directors of its investment advisers, together with information
as to any other business, profession, vocation or employment of a substantial
nature engaged in by that entity or those of its officers and directors during
the past two years, by incorporating herein by reference the information
contained in the current Form ADV filed with the Securities and Exchange
Commission by each of BIA, SIA and Spectrum pursuant to the Investment Advisers
Act of 1940, as amended.
Item 31. Location of Accounts and Records
PFPC Inc. Administrator and Common
P.O. Box 1376 Stock Transfer Agent
Boston, MA 02104
Boulder Administrative Services, L.L.C. Co-Administrator
1680 38th Street (Suite 800)
Boulder, CO 80301
Boston Safe Deposit and Trust Company Custodian
One Boston Place
Boston, MA 02108
Bankers Trust Company AMPS Transfer Agent
4 Albany Street
New York, New York 10006
Item 32. Management Services
Not applicable.
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of AMPS until it
amends its Prospectus if (a) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the Prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) The Registrant hereby undertakes that:
(a) for the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance on Rule 430A and contained in the form
of prospectus filed by the
6
<PAGE>
Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to
be part of the Registration Statement as of the time it was declared effective.
(b) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) The Registrant hereby undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of an oral or written request, any Statement of Additional
Information.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant has
duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Denver and
the State of Colorado, on the 11th day of August, 2000.
BOULDER TOTAL RETURN FUND,INC.
By:/s/ Stephen C. Miller
---------------------
Stephen C. Miller
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Stephen C. Miller Director, Chief Executive Officer, President and August 11, 2000
------------------------------------ Chairman of the Board
Stephen C. Miller
/s/ / Stephen C. Miller* Director August 11, 2000
------------------------------------
Stewart R. Horejsi
/s/ / Stephen C. Miller* Director August 11, 2000
------------------------------------
James G. Duff
/s/ / Stephen C. Miller* Director August 11, 2000
------------------------------------
Alfred G. Aldridge, Jr.
/s/ / Stephen C. Miller* Director August 11, 2000
------------------------------------
Richard I. Barr
/s/ / Stephen C. Miller* Chief Financial Officer, Chief Accounting August 11, 2000
------------------------------------ Officer, Vice President and Treasurer
Carl D. Johns
</TABLE>
*Pursuant to a Power of Attorney incorporated by reference as Exhibit 2(s)
hereto.
<PAGE>
763044.7
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page in
Sequential
Numbering
System
------
<S> <C>
(a)(1)*** --Articles of Incorporation of the Company
(a)(2)*** --Articles of Amendment to the Articles of Incorporation of the Company
(b)*** --Amended and Restated By-laws of the Fund.............................................
(c) --Not applicable.......................................................................
(d)(1) --Form of Articles Supplementary for the AMPS..........................................
(d)(2) --Form of Share Certificate for the AMPS...............................................
(e) * --Dividend Reinvestment Plan...........................................................
(f) --Not applicable.......................................................................
(g)(1)*** --Investment Advisory Agreement between the Company and BIA
(g)(2)*** --Investment Sub-Advisory Agreement between the Company, BIA and SIA
(h)*** --Form of Purchase Agreement between the Company, BIA and Merrill Lynch & Co.
(i) --Not Applicable.......................................................................
(j)*** --Custody Agreement between the Company and Boston Safe Deposit and Trust Company.
(k)(1)*** --Transfer Agency Agreement between the Company and The Shareholder Services Group, Inc
(k)(2)*** --Amended and Restated Administration Agreement between the Company and First Data
Investor Services Group, Inc. ("FDISG") (the "Administration Agreement")
(k)(3)*** --Amendment to the Administration Agreement between the Company and FDISG
(k)(4)*** --Co-Administration Agreement between the Company and Boulder Administration Services,
LLC....................................................................................
(k)(5)*** --Fee Agreement among the Boston Company Advisers, Inc., Boston Safe Deposit and Trust
Company and the Company................................................................
(k)(6)*** --Form of Auction Agency Agreement between the Company and Bankers Trust Company
(k)(7) --Form of Broker-Dealer Agreement between the Company and Merrill Lynch & Co.
(l)(1) --Opinion and consent of Willkie Farr & Gallagher
(l)(2) --Opinion and consent of Venable, Baetjer and Howard, LLP
(m) --Not applicable.......................................................................
(n) --Consent of Pricewaterhouse Coopers L.L.P.
(o) --Not applicable.......................................................................
(p) --Not applicable.......................................................................
(q) --Not applicable.......................................................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(r) (1) --Code of Ethics of the Company, BIA and SIA...........................................
(s)** --Power of Attorney....................................................................
(t) --Financial Data Schedule (EDGAR version only).........................................
</TABLE>
* Incorporated by reference to the Registrant's Form N30-D on July
29, 1997.
** Incorporated by reference to the Registrant's Amendment No. 1 to the
Registrant's Registration Statement on Form N-2 (File Nos. 333-37008,
811-07390), Exhibit 2(s), filed on July 3, 2000.
*** Incorporated by reference to the Registrant's Amendment No. 2 to the
Registrant's Registration Statement on Form N-2 (File Nos. 333-37008,
811-07390), Exhibit 2(s), filed on August 7, 2000.
2
