THE NEW AMERICA HIGH INCOME FUND, INC.
23,397,095 Shares of Common Stock
Issuable Upon Exercise of Transferable Rights to Subscribe for Such Shares
The New America High Income Fund, Inc. (the "Fund") is issuing transferable
rights ("Rights") to its stockholders (the "Offer"). You will receive one Right
for each three shares of common stock, par value $0.01, ("Common Stock") you own
on the record date, which is July 21, 2003 (the "Record Date"). If you hold a
number of shares of Common Stock ("Shares") that is not an integral multiple of
three, you will receive one additional Right. These Rights entitle you to
subscribe for new Shares to be issued by the Fund. You may purchase one Share
for every Right you receive. Also, stockholders on the Record Date may purchase
the Shares not acquired by other stockholders in this Offer, subject to the
limitations as discussed in this prospectus (the "Prospectus").
The Rights are transferable and you may sell your Rights. Holders of Rights
("Rightholders") may trade their Rights on the New York Stock Exchange (the
"Exchange") under the symbol "HYB.RT" during the course of the Offer. The Fund's
Common Stock is listed, and the Shares issued in this Offer will be listed, on
the Exchange under the symbol "HYB." Rights may be traded on the Exchange until
and including the close of trading on the Exchange on August 15, 2003. On
July 16, 2003, the last reported net asset value ("NAV") per Share was $2.20
and the last reported sales price of a Share on the Exchange on that date was
$2.25.
The subscription price per Share will be the lower of: (i) 94% of the
average of the last reported sales prices of a Share on the Exchange on the
expiration date of the Offer and on the previous nine business days, and (ii)
94% of the NAV per Share as of the close of business on the expiration date of
the Offer (the "Subscription Price"). You will not know the actual Subscription
Price at the time you exercise your Rights. Once you subscribe for Shares and
the Fund receives payment or a guarantee of payment, you will not be able to
change your decision. THE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON
AUGUST 18, 2003 (THE "EXPIRATION DATE"), UNLESS THE FUND EXTENDS THE OFFER AS
DESCRIBED IN THIS PROSPECTUS.
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. The Fund's investment objective is to provide high
current income, while seeking to preserve stockholders' capital, through
investment in a professionally managed, diversified portfolio of "high-yield"
fixed-income securities (commonly referred to as "junk bonds"). No assurance can
be given that the Fund will achieve its investment objective. IN DETERMINING
WHETHER TO INVEST IN SHARES, YOU SHOULD CAREFULLY CONSIDER THE SIGNIFICANT RISKS
DESCRIBED IN THIS PROSPECTUS. IN PARTICULAR, YOU SHOULD CONSIDER THE RISK
FACTORS DESCRIBED IN "RISK FACTORS AND SPECIAL CONSIDERATIONS" BEGINNING ON PAGE
48.
THE SUBSCRIPTION PRICE PER SHARE WILL BE LESS THAN THE NAV PER SHARE AT THE
EXPIRATION DATE AND, UNDER THOSE CIRCUMSTANCES, THE OFFER MAY RESULT IN A
SUBSTANTIAL DILUTION TO STOCKHOLDERS WHO DO NOT FULLY EXERCISE THEIR RIGHTS. If
you do not exercise your Rights, you will, upon the completion of the Offer, own
a smaller proportional interest in the Fund than you do now. The Fund is not yet
able to state precisely the extent of the dilution because the Fund does not
know what the NAV will be when the Offer expires, how many Rights will be
exercised or the exact expenses of the Offer. FOR FURTHER INFORMATION ON THE
EFFECTS OF DILUTION, SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" ON PAGE 48.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER SHARE TOTAL(2)
--------- -----------
ESTIMATED SUBSCRIPTION PRICE(1) $ 2.07 $48,431,986
SALES LOAD(3) None None
ESTIMATED PROCEEDS TO THE FUND(4)(5) $ 2.04 $47,660,211
(1) This is an estimated price. The actual Subscription Price will be
determined as set forth above on the Expiration Date.
(2) Assumes all Rights are exercised at the Estimated Subscription Price.
(3) The Fund has agreed to pay A.G. Edwards & Sons, Inc. ("A.G. Edwards") a fee
of $150,000 plus reasonable out-of-pocket expenses for financial advisory
services in connection with the Offer.
(4) Reflects deduction of offering expenses incurred by the Fund, estimated at
$771,775, and is based on the Estimated Subscription Price.
(5) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest-bearing account, pending allocation
and distribution of Shares. The interest on this account will accrue to the
benefit of the Fund regardless of whether Shares are issued by the Fund.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and should be retained for
future reference.
THE DATE OF THIS PROSPECTUS IS JULY 21, 2003
OUR PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 33 BROAD STREET, BOSTON,
MASSACHUSETTS 02109, AND OUR TELEPHONE NUMBER IS 1-617-263-6400.
ALL QUESTIONS AND INQUIRIES RELATED TO THE OFFER SHOULD BE DIRECTED TO THE
INFORMATION AGENT, THE ALTMAN GROUP, INC., TOLL FREE AT 1-800-467-0609.
2
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand the Offer
fully, you should read the entire Prospectus carefully, particularly the "Risk
Factors and Special Considerations" section.
PURPOSE OF THE OFFER
The Fund is offering its existing stockholders the opportunity to purchase
additional Shares at a price that will be below market value without paying a
brokerage commission. The Fund's Board of Directors has determined that the
Offer is in the best interests of the Fund and its stockholders. The Board of
Directors noted that an increase in the assets of the Fund would enable the Fund
to take advantage of attractive investment opportunities and that a
well-subscribed Offer may lower the Fund's expense ratio slightly by spreading
the Fund's fixed costs over a larger asset base. In addition, the Board noted
that an increase in the number of outstanding Shares could increase liquidity on
the Exchange, where the Fund's Shares are traded. See "The Offer - Purpose of
the Offer."
The Board considered that the Offer will reduce the NAV per Share and will
have a negative impact on any stockholder who fails or is unable to exercise his
or her Rights. The Board also took note of the fact that the possible benefits
of the Offer would be reduced if expenses of the Offer were high and few Shares
were sold. Reflecting these concerns, the Board has structured the Offer in a
way that is intended to provide all stockholders with an equal opportunity to
exercise Rights and for the Fund to sell a substantial number of Shares. In
particular, the Rights will be transferable so that non-exercising Rightholders
will have a chance to partially offset the dilution they will suffer by not
exercising their Rights. In addition, the Board has established the Subscription
Price and the exchange ratio with a view toward providing both an incentive to
exercise Rights and an active trading market for the Rights. See "The Offer -
Purpose of the Offer."
THE OFFER
The Fund is issuing Rights to its stockholders. The Rights entitle you to
subscribe for Shares at the rate of one Share for one Right held by you (the
"Primary Subscription"). You will receive one Right for each three Shares you
hold on the Record Date. If you hold a number of Shares that is not an integral
multiple of three, you will receive one additional Right. For example, if you
own one hundred Shares, you will receive thirty-four Rights entitling you to
purchase up to thirty-four additional Shares at the Subscription Price. You may
exercise Rights at any time from the date of this Prospectus until 5:00 p.m.,
Eastern time, on August 18, 2003, unless the Fund extends the Offer as described
below under "The Offer - Terms of the Offer" and "The Offer - Expiration of the
Offer."
If you subscribe for the maximum number of Shares to which you are
entitled, you also may subscribe for Shares that other stockholders have not
otherwise subscribed for through the Primary Subscription (the
"Over-Subscription Privilege"). Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, which is more fully
discussed below under "The Offer - Over-Subscription Privilege."
The Subscription Price per Share will be the lower of: (i) 94% of the
average of the last reported sales prices of a Share on the Exchange on the
Expiration Date and on the previous nine business days, and (ii) 94% of the NAV
per Share as of the close of business on the Expiration Date. A business day is
a day on which the Exchange is open for trading and which is not a Saturday,
Sunday or other day on which banks in the City of New York are authorized or
obligated by law to close. You will not know the actual Subscription Price at
the time you exercise your Rights. Once you subscribe for Shares and the Fund
receives payment or a guarantee of payment, you will not be able to change your
decision. See "The Offer - Terms of the Offer" and "The Offer - Payment for
Shares."
3
You may also elect to sell your Rights. Assuming a market for the Rights
exists, the Rights may be purchased and sold through usual brokerage channels
until August 15, 2003 (or, if the Offer is extended, until a comparable number
of business days before the final Expiration Date). In such case, you will need
to instruct your broker to sell any unexercised Rights in time for the broker to
execute the transaction by the close of trading on August 15, 2003. In addition,
you may instruct the subscription agent ("Subscription Agent") to sell any
unexercised Rights through A.G. Edwards until 4 p.m. on August 14, 2003. The
Rights will be traded on the Exchange. The Fund will use its best efforts to
ensure that an adequate trading market for the Rights will exist but there is no
assurance that a market for the Rights will develop. Trading in the Rights on
the Exchange may be conducted until and including the close of trading on the
last Exchange trading day prior to the Expiration Date. Holders of fewer than
100 Rights will have the opportunity to sell their Rights without paying
brokerage commissions. See "The Offer - Sale of Rights."
If you do not exercise your Rights, you will suffer dilution as a result of
the Offer. To avoid losing market value represented by your Rights you should
take steps to sell your Rights. See "The Offer - Sale of Rights" and "Risk
Factors and Special Considerations - Dilution."
KEY TERMS OF THE OFFER
July 16, 2003 market price per Share $2.25
July 16, 2003 net asset value per Share $2.20
Estimated Subscription Price(1) $2.07
Shares outstanding at July 16, 2003 70,131,299
Transferable Rights issued 23,397,095
Subscription ratio 1 Right to buy 1 Share
Maximum number of Shares to be issued 23,397,095
(1) Calculated as the lower of (i) 94% of the average of the last reported
sales prices of a Share on the Exchange on July 16, 2003 and on the
previous nine business days, and (ii) 94% of the NAV per Share as of
the close of business on July 16, 2003.
HOW TO EXERCISE RIGHTS
- Complete, sign and date the enclosed Subscription Certificate.
- Make your check or money order for the estimated Subscription Price (the
"Estimated Subscription Price") of $2.07 for each Share subscribed for,
including any Shares you wish to buy using the Over-Subscription Privilege.
This payment may be more or less than the actual Subscription Price.
When the actual Subscription Price is determined, the Fund will refund any
overpayment or require additional payment, as applicable.
- Registered stockholders should mail their completed Subscription Certificates
and payments in the enclosed envelopes to the Subscription Agent, EquiServe
Trust Company, N.A. ("EquiServe"), in a manner that will ensure receipt prior
to 5:00 p.m., Eastern time, on August 18, 2003, unless extended.
- If Shares are held in a brokerage account or by a custodian bank, contact
your broker or financial advisor.
- For further information on how to exercise your Rights, see "The Offer -
Exercise of Rights."
4
IMPORTANT DATES TO REMEMBER
EVENT DATE
----- -----
RECORD DATE............................................. JULY 21, 2003
RIGHTS CEASE TRADING ON THE EXCHANGE.................... AUGUST 15, 2003*
EXPIRATION DATE (PAYMENT FOR SHARES
AND NOTICES OF GUARANTEED DELIVERY DUE)........ AUGUST 18, 2003*
DUE DATE FOR DELIVERY OF SUBSCRIPTION CERTIFICATES
TO SUBSCRIPTION AGENT PURSUANT TO NOTICE OF
GUARANTEED DELIVERY............................ AUGUST 21, 2003*
MAILING OF SHARES....................................... NOT LATER THAN SEPTEMBER 8, 2003*
* UNLESS EXTENDED
STOCKHOLDER INQUIRIES SHOULD BE DIRECTED TO THE INFORMATION AGENT:
THE ALTMAN GROUP, INC.
1275 VALLEY BROOK AVENUE
LYNDHURST, NEW JERSEY 07071
TOLL FREE: 1-800-467-0609
THE FUND
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. The Fund's investment objective is to provide high
current income, while seeking to preserve stockholders' capital, through
investment in a professionally managed, diversified portfolio of "high-yield"
fixed-income securities, commonly known as "junk bonds." The Fund will generally
invest in securities that are rated below investment grade by recognized rating
agencies or that are non-rated. See "The Fund" and "Investment Objective and
Policies." Securities rated below investment grade are considered by rating
agencies, on balance, as predominantly speculative with respect to their
capacity to pay interest and repay principal in accordance with the terms of the
obligation and thus are generally considered to involve greater credit risk than
securities in the higher-rating categories. The market values of the
lower-quality securities tend to reflect individual corporate developments or
negative economic changes to a greater extent than higher-quality securities.
Credit ratings do not reflect this market risk. An investment in the Fund
involves a number of significant risks, which are magnified due to the Fund's
leveraged capital structure. No assurance can be given that the Fund will
achieve its investment objective. See "Risk Factors and Special Considerations."
The Fund has had a leveraged capital structure since it began operation.
The Fund is subject to various portfolio diversification and related asset
coverage requirements under guidelines established by Moody's Investors Service,
Inc. ("Moody's") and Fitch Ratings, Inc. ("Fitch") in connection with such
rating agencies' issuance of ratings of Aaa and AAA, respectively, with respect
to the Fund's Auction Term Preferred Stock (the "ATP"). Compliance with these
guidelines limits the Fund's flexibility to invest in certain types of
securities that might otherwise be attractive investments, including private
placements. See "The Fund," "Investment Objective and Policies," and "Rating
Agency Guidelines."
If all of the Common Stock covered by the Rights is sold, the Fund expects
that the Board of Directors will authorize the Fund to issue more ATP, so that
the percentage of the Fund's assets representing leverage will be approximately
the same as prior to the sale of that Common Stock. However, there is no
assurance that it will do so. In determining whether to issue additional ATP,
the Board of Directors will consider market conditions, the availability of
appropriate securities and any other factors they deem relevant. As of June 30,
2003, the Fund's leverage ratio (the ratio of the Fund's senior securities to
the sum of its net assets and its senior securities) was approximately 39.5%,
which would be reduced to approximately 33.2% in the event all Rights are
exercised and no additional leverage is incurred. Incurring additional leverage
will reduce any investment flexibility gained by the Fund as a result of the
availability of additional assets from the exercise of Rights pursuant to the
Offer. See
5
"The Fund" and "Risk Factors and Special Considerations - Leverage"
for discussion of the risks and possible benefits associated with a leveraged
capital structure.
THE INVESTMENT ADVISER
T. Rowe Price Associates, Inc. ("T. Rowe Price" or the "Investment
Adviser"), was selected by the Fund's Board of Directors to serve as the Fund's
investment adviser starting December 2, 2002. The Investment Adviser's principal
offices are located at 100 East Pratt Street, Baltimore, Maryland 21202, and its
telephone number is 1-410-345-2000. As of March 31, 2003, T. Rowe Price and its
affiliates managed approximately $139.9 billion of assets, including
approximately $49.9 billion of fixed income securities. "High-yield" investments
represented approximately $7.2 billion of these totals. T. Rowe Price has
provided investment advisory services to investment companies since 1937. T.
Rowe Price is not affiliated with the Fund's officers or its Board of Directors.
See "Management of the Fund - The Investment Adviser."
On October 17, 2002, the Fund's Board of Directors decided to replace the
Fund's previous investment adviser with T. Rowe Price. See "Management of the
Fund - The Investment Adviser."
RISK FACTORS
An investment in the Fund is subject to a number of significant risks,
which are magnified due to the Fund's leveraged capital structure. The Fund
cannot give any assurance that it will achieve its investment objective. The NAV
and market price of the Fund's Common Stock have declined sharply at times and
may do so in the future.
Before exercising the Rights pursuant to the Offer, you should consider all
of the factors described in this Prospectus. These factors include, among
others, the risks involved in investing in high-yield, high-risk investments,
the effects of the Fund's leveraged capital structure, potential dilution of the
NAV per Share caused by the Offer, the negative consequences for the Fund if it
fails to meet certain asset coverage requirements, and the fact that Shares may
trade at a discount from NAV, which are more fully discussed below. See "Risk
Factors and Special Considerations."
6
FEE TABLE
STOCKHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)(1)(2) None
Dividend Reinvestment and Cash Purchase Plan Fees(3) None
ANNUAL EXPENSES (as a percentage of net assets attributable to Common Stock)(4)
Investment Advisory Fee .52%
Leverage Related Expenses(5) 2.36%
Other Expenses .66%
-----
Total Other Expenses(2) 3.02%
-----
Total Annual Expenses 3.54%
=====
----------
(1) The Fund has agreed to pay A.G. Edwards a fee of $150,000 plus
reasonable out-of-pocket expenses for financial advisory services in
connection with the Offer.
(2) Does not include expenses of the Fund incurred in connection with the
Offer. Such expenses are estimated at $771,775. This estimate includes
the fee payable to A.G. Edwards described above. Such expenses will be
borne by the Fund and indirectly by all of the holders of the Fund's
Common Stock, including those who do not exercise their Rights, and will
reduce the Fund's NAV per Share. The reduction in NAV per Share caused
by expenses associated with the Offer will be increased to the extent
that a substantial number of Rightholders do not exercise their Rights.
Does not include expenses that the Fund would incur in connection with
the issuance of additional ATP, which the Board of Directors is expected
to authorize following this Offer. Such expenses would be borne by the
holders of the Fund's Common Stock. Does not include Special Meeting
expenses; incremental expenses are $113,000. Total Other Expenses are
based on estimated amounts for the current fiscal year.
(3) Each participant will pay a pro rata share of brokerage commissions if
Shares are purchased by the Fund's dividend paying agent in the open
market, which occurs only when the NAV of Shares exceeds the market
price. There is a $0.75 fee for each cash purchase under the Fund's
Cash Purchase Plan. See "Dividends and Distributions; Dividend
Reinvestment Plan."
(4) Fund expense ratios have been calculated using Fund net assets
attributable to Common Stock after giving effect to the anticipated
proceeds of the Offer. See "Management of the Fund - The Investment
Adviser" for additional information.
(5) Includes dividends on ATP, payments under interest rate swap, and
commissions and fees paid in connection with periodic auctions of the
ATP.
EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
An investor would pay the following expenses
on a $1,000 investment assuming a 5%
annual return throughout the periods $37 $113 $191 $394
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses that investors in the Fund will bear directly or
indirectly.
The Example above assumes reinvestment of all dividends and other
distributions at NAV and an expense ratio based on net assets attributable to
Common Stock of 3.54%, of which 2.36% is attributable to preferred stock
payments and related expenses. The tables above and the assumption in the
Example of a 5% annual return
7
are required by the Securities and Exchange
Commission (the "Commission" or the "SEC") regulations applicable to all
investment companies.
The Fee Table and Example should not be considered a representation of
future expenses or annual rates of return. Actual expenses or annual rates of
return may be greater or lesser than those assumed for purposes of the Fee Table
and Example. In addition, while the Example assumes reinvestment of all
dividends and distributions at NAV, participants in the Fund's Dividend
Reinvestment Plan may receive Shares purchased or issued at a price or value
different from NAV. See "Dividends and Distributions; Dividend Reinvestment
Plan."
8
FINANCIAL INFORMATION SUMMARY
FINANCIAL HIGHLIGHTS
The following data with respect to a share of Common Stock of the Fund
outstanding during the periods indicated has been audited by the Fund's current
independent public accountants, KPMG LLP, for the fiscal year ended December 31,
2002 and by the Fund's former independent public accountants, Arthur Andersen
LLP, for the fiscal years ended December 31, 2001, 2000, 1999, 1998, 1997, 1996,
1995, 1994 and 1993, as indicated in their respective reports thereto included
with the Fund's audited financial statements herein and incorporated by
reference, and should be read in conjunction with the audited financial
statements and related notes included therein.
FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001 (c) 2000 1999 1998 (b)
---------- ---------- ---------- ---------- ----------
(FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD)
NET ASSET VALUE:
Beginning of period $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03
---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME .37 .48 .60 .66 .71#
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND OTHER
FINANCIAL INSTRUMENTS (.72) (.24) (1.00) (.30) (.81)#
DISTRIBUTIONS FROM NET INVESTMENT
INCOME RELATED TO PREFERRED STOCK: (.08) (.12) (.18) (.18) (.17)
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS (.43) .12 (.58) .18 (.27)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income (.29) (.36) (.43) (.48) (.54)
In excess of net investment income - - - - -
---------- ---------- ---------- ---------- ----------
TOTAL DISTRIBUTIONS (.29) (.36) (.43) (.48) (.54)
---------- ---------- ---------- ---------- ----------
Effect of rights offering and
related expenses; and Auction
Term Preferred Stock offering
costs and sales load - - - - (.06)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE:
End of period $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16
========== ========== ========== ========== ==========
PER SHARE MARKET VALUE:
End of period $ 2.01 $ 2.64 $ 2.63 $ 3.13 $ 4.25
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN+ (12.97)% 13.97% (3.84)% (16.92)% (15.15)%
========== ========== ========== ========== ==========
NET ASSETS, END OF PERIOD,
APPLICABLE TO COMMON STOCK(a) $ 131,170 $ 178,231 $ 191,928 $ 258,215 $ 273,518
========== ========== ========== ========== ==========
NET ASSETS, END OF PERIOD,
APPLICABLE TO PREFERRED STOCK(a) $ 100,000 $ 150,000 $ 160,000 $ 210,000 $ 210,000
========== ========== ========== ========== ==========
TOTAL NET ASSETS APPLICABLE TO
COMMON AND PREFERRED STOCK, END
OF PERIOD(a) $ 231,170 $ 328,231 $ 351,928 $ 468,215 $ 483,518
========== ========== ========== ========== ==========
FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 (b) 1996 1995 1994 (b) 1993
---------- ---------- ---------- ---------- ----------
(FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD)
NET ASSET VALUE:
Beginning of period $ 4.94 $ 4.71 $ 4.13 $ 5.15 $ 4.32
---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME .70# .69 .67 .72# .59
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND OTHER
FINANCIAL INSTRUMENTS .25# .22 .62 (.82)# .89
DISTRIBUTIONS FROM NET INVESTMENT
INCOME RELATED TO PREFERRED STOCK: (.16) (.16) (.17) (.17) (.05)
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS .79 .75 1.12 (.27) 1.43
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income (.53) (.52) (.50) (.53) (.53)
In excess of net investment income (.01) - (.04) - (.07)
---------- ---------- ---------- ---------- ----------
TOTAL DISTRIBUTIONS (.54) (.52) (.54) (.53) (.60)
---------- ---------- ---------- ---------- ----------
Effect of rights offering and
related expenses; and Auction
Term Preferred Stock offering
costs and sales load (.16) - - (.22) -
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE:
End of period $ 5.03 $ 4.94 $ 4.71 $ 4.13 $ 5.15
========== ========== ========== ========== ==========
PER SHARE MARKET VALUE:
End of period $ 5.63 $ 5.13 $ 4.75 $ 4.00 $ 5.13
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN+ 21.97% 19.89% 33.50% (11.88)% 40.08%
========== ========== ========== ========== ==========
NET ASSETS, END OF PERIOD,
APPLICABLE TO COMMON STOCK(a) $ 243,625 $ 176,408 $ 164,823 $ 141,590 $ 130,693
========== ========== ========== ========== ==========
NET ASSETS, END OF PERIOD,
APPLICABLE TO PREFERRED STOCK(a) $ 150,000 $ 100,000 $ 100,000 $ 100,000 $ 35,000
========== ========== ========== ========== ==========
TOTAL NET ASSETS APPLICABLE TO
COMMON AND PREFERRED STOCK, END
OF PERIOD(a) $ 393,625 $ 276,408 $ 264,823 $ 241,590 $ 165,673
========== ========== ========== ========== ==========
9
FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001 (c) 2000 1999 1998 (b)
---------- ---------- ---------- ---------- ----------
FINANCIAL HIGHLIGHTS (CONTINUED)
EXPENSE RATIOS:
Ratio of interest expense to
average net assets* - - - - -
Ratio of preferred and other
debt expenses to average net
assets* .18% .17% .19% .18% .14%
Ratio of operating expenses to
average net assets* 1.46% 1.11% .99% .89% .82%
Ratio of Litigation Settlement
Expense to Average Net Assets* - - - - -
---------- ---------- ---------- ---------- ----------
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS* 1.64% 1.28% 1.18% 1.07% .96%
========== ========== ========== ========== ==========
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS* 16.48% 16.70% 17.46% 16.36% 15.22%
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS APPLICABLE TO COMMON
AND PREFERRED STOCK .89% .71% .64% .60% .58%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS APPLICABLE
TO COMMON AND PREFERRED STOCK 8.91% 9.23% 9.41% 9.16% 9.26%
PORTFOLIO TURNOVER RATE 82.47% 38.89% 45.58% 66.74% 124.67%
FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 (b) 1996 1995 1994 (b) 1993
---------- ---------- ---------- ---------- ----------
FINANCIAL HIGHLIGHTS (CONTINUED)
EXPENSE RATIOS:
Ratio of interest expense to
average net assets* - - - .01% 1.83%
Ratio of preferred and other
debt expenses to average net
assets* .13% .16% .18% .22% .51%
Ratio of operating expenses to
average net assets* .92% 1.16% 1.39% 1.31% 2.01%
Ratio of Litigation Settlement
Expense to Average Net Assets* - - .80% - -
---------- ---------- ---------- ---------- ----------
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS* 1.05% 1.32% 2.37% 1.54% 4.35%
========== ========== ========== ========== ==========
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS* 13.86% 14.36% 14.61% 15.89% 11.86%
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS APPLICABLE TO COMMON
AND PREFERRED STOCK .66% .83% 1.44% .89% 3.38%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS APPLICABLE
TO COMMON AND PREFERRED STOCK 8.75% 9.05% 8.90% 9.06% 9.21%
PORTFOLIO TURNOVER RATE 108.84% 53.45% 62.66% 58.56% 85.76%
----------
(a) Dollars in thousands.
(b) The Fund issued Series A and Series B ATP on January 4, 1994, Series C ATP
on May 6, 1997 and Series D ATP on May 20, 1998. The per share data and
ratios for the years ended December 31, 1994, 1997 and 1998 reflect these
transactions.
(c) As required, effective January 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing discount and premium on debt securities. This had no effect on
net investment income per share and a $.01 increase to net realized and
unrealized loss per share for the year ended December 31, 2001. The effect
of this change did increase the ratio of net investment income to average
net assets from 16.29% to 16.70%. Per share, ratios and supplemental data
for periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
* Ratios calculated on the basis of expenses and net investment income
applicable to the common shares relative to the average net assets of the
common stockholders only. The expense ratio and net investment income ratio
do not reflect the effect of dividend payments (including net swap
settlement receipts/payments) to preferred stockholders.
# Calculation is based on average shares outstanding during the indicated
period due to the per share effect of the Fund's June 1994, March 1997 and
March 1998 rights offerings.
+ Total investment return is calculated assuming a purchase of common stock
at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be reinvested
at prices obtained under the dividend reinvestment plan. This calculation
does not reflect brokerage commissions.
10
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
CAPITALIZATION. The following table sets forth the unaudited capitalization
of the Fund as of June 30, 2003.
AMOUNT OUTSTANDING
AMOUNT HELD EXCLUSIVE OF AMOUNT
BY THE FUND HELD BY THE FUND
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT OR FOR ITS ACCOUNT
-------------- ----------------- ------------------ ------------------
Preferred Stock, $1.00 par value 1,000,000 shares -0- shares 4,000 shares
Common Stock, $0.01 par value 200,000,000 shares -0- shares 70,131,299 shares
PRO FORMA CAPITALIZATION. The following table sets forth the total assets
and liabilities of the Fund and the net assets of the Fund as of June 30, 2003
and as adjusted to give effect to the issuance of all of the Shares offered
hereby at the Estimated Subscription Price. To the extent that fewer than all of
the Rights are exercised, both the increase in net assets attributable to Common
Stock outstanding and the reduction in NAV per Share would be less.
ACTUAL AS ADJUSTED
------------ -------------
(IN THOUSANDS)
Total Assets $ 266,313 $ 313,973
Total Liabilities 12,919 12,919
Auction Term Preferred Stock:
Auction Term Preferred Stock Series A, $1.00 par value, liquidation preference
$25,000 per share, 2,400 shares authorized, 1,400
shares issued and outstanding 35,000 35,000
Auction Term Preferred Stock Series B, $1.00 par value, liquidation
preference $25,000 per share, 1,600 shares authorized, 1,000
shares issued and outstanding 25,000 25,000
Auction Term Preferred Stock Series C, $1.00 par value, liquidation
preference $25,000 per share, 2,000 shares authorized, 600
shares issued and outstanding 15,000 15,000
Auction Term Preferred Stock Series D, $1.00 par value, liquidation
preference $25,000 per share, 2,400 shares authorized, 1,000
shares issued and outstanding 25,000 25,000
------------ -------------
Net Assets attributable to Common Stock $ 153,394 $ 201,054
------------ -------------
------------ -------------
REPRESENTED BY:
Common Stock, $0.01 par value, 200,000,000 shares authorized, 70,131,299 shares
issued and outstanding, 93,528,394 shares issued
and outstanding as adjusted $ 701 $ 935
Capital in excess of par value 340,840 388,266
Accumulated net realized loss from securities transactions (180,501) (180,501)
Net unrealized depreciation on investments and interest rate swaps (8,805) (8,805)
Accumulated undistributed net investment income 1,159 1,159
------------ -------------
NET ASSETS: $ 153,394 $ 201,054
------------ -------------
------------ -------------
Net asset value per share of Common Stock $ 2.19 $ 2.15
------------ -------------
------------ -------------
11
SENIOR SECURITIES. The following table shows certain information regarding
senior securities of the Fund as of the dates indicated. The information has
been audited by KPMG LLP, the Fund's current independent public
accountants, for the fiscal year ended December 31, 2002, and by Arthur Andersen
LLP, the Fund's former independent public accountants, for the fiscal years
ended December 31, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994 and 1993. In
connection with its initial public offering in February 1988, the Fund issued
senior securities consisting of $105 million aggregate principal amount of 9%
Senior Extendible Notes ("Notes") and $79 million (aggregate liquidation
preference) of Taxable Auction Rate Preferred Stock ("TARPS"), the dividends on
which were set in monthly auctions with reference to short-term interest rates.
The Fund subsequently repurchased substantial amounts of these securities and by
December 31, 1992 had $45.5 million aggregate principal amount of Notes and $35
million (aggregate liquidation preference) of TARPS outstanding. See "The Fund."
The Notes were refinanced in January 1993 with the proceeds of a credit facility
from BankBoston, N.A. (the "Credit Facility") in the aggregate principal amount
of $45 million. The Credit Facility was repaid and the outstanding TARPS were
redeemed in January 1994 with the proceeds from an offering of two series of
newly authorized Auction Term Preferred Stock having an aggregate liquidation
preference of $100 million plus accumulated and unpaid dividends. See
"Description of Capital Stock," "The Fund" and "Financial Statements." In May
1997 and in May 1998, two additional series of newly authorized Auction Term
Preferred Stock, with an aggregate liquidation preference of $50 and $60
million, respectively, plus accumulated and unpaid dividends were issued. In
connection with maintaining asset coverage requirements for the Auction Term
Preferred Stock, the Fund repurchased $50 million, $10 million, and $50 million
of Auction Term Preferred Stock in fiscal 2002, 2001, and 2000, respectively.
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
TOTAL AMOUNT
OUTSTANDING
($'s):
Preferred Stock 100,000,000 150,000,000 160,000,000 210,000,000 210,000,000
Short-Term Loan - - - - -
ASSET COVERAGE:
Per Preferred Stock Share (1) $57,793 $54,705 $54,989 $55,740 $57,562
Per $1,000 of Short-Term Loan - - - - -
INVOLUNTARY LIQUIDATION
PREFERENCE:
Preferred Stock Share (2) $25,000 $25,000 $25,000 $25,000 $25,000
APPROXIMATE MARKET VALUE:
Per Preferred Stock Share (2) $25,000 $25,000 $25,000 $25,000 $25,000
Per $1,000 of Short-Term Loan - - - - -
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
TOTAL AMOUNT
OUTSTANDING
($'s):
Preferred Stock 150,000,000 100,000,000 100,000,000 100,000,000 35,000,000
Short-Term Loan - - - - 45,000,000
ASSET COVERAGE:
Per Preferred Stock Share (1) $65,604 $69,102 $66,206 $60,398 $473,351
Per $1,000 of Short-Term Loan - - - - $ 4,682
INVOLUNTARY LIQUIDATION
PREFERENCE:
Preferred Stock Share (2) $25,000 $25,000 $25,000 $25,000 $100,000
APPROXIMATE MARKET VALUE:
Per Preferred Stock Share (2) $25,000 $25,000 $25,000 $25,000 $100,000
Per $1,000 of Short-Term Loan - - - - $ 1,000
----------
(1) Calculated by subtracting the Fund's total liabilities (not including the
Preferred Stock) from the Fund's total assets and dividing such amount by
the number of Preferred Shares outstanding.
(2) Plus accumulated and unpaid dividends.
12
NET ASSET VALUE AND MARKET PRICE INFORMATION
The Shares of the Fund are listed on the Exchange. The following table
shows, for each quarterly period since the beginning of the 1993 fiscal year (i)
the high and low NAVs per Share, (ii) the high and low sale prices per Share, as
reported on the New York Stock Exchange Composite Tape, and (iii) the largest
premium (or, if applicable, smallest discount) and the largest discount (or, if
applicable, the smallest premium) at which the Common Stock traded relative to
the Fund's NAVs per Share during the periods indicated.
PREMIUM (DISCOUNT) AS A
NET ASSET VALUE(1) MARKET PRICE PERCENTAGE OF NET ASSET VALUE(2)
---------------------- ---------------------- --------------------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------------ -------- -------- --------- --------- ------------ -------------
March 31, 1993 $ 4.68 $ 4.38 $ 4.88 $ 4.00 1.9 (3.8)
June 30, 1993 4.90 4.62 4.88 4.63 4.6 (1.0)
September 30, 1993 4.93 4.30 5.13 4.75 13.4 (2.3)
December 31, 1993 5.29 4.86 5.13 4.63 (0.5) (10.7)
March 31, 1994 5.31 4.92 5.38 4.75 4.2 (2.8)
June 30, 1994 4.68 4.43 5.00 4.25 11.6 (2.3)
September 30, 1994 4.47 4.32 4.38 4.00 (0.6) (5.8)
December 31, 1994 4.31 4.09 4.13 3.88 (0.6) (8.0)
March 31, 1995 4.32 4.13 4.50 3.88 4.9 (3.6)
June 30, 1995 4.64 4.36 5.13 4.38 10.4 0.3
September 30, 1995 4.67 4.60 5.13 4.63 8.7 0.3
December 31, 1995 4.74 4.62 5.00 4.63 5.3 0.1
March 31, 1996 4.88 4.73 5.13 4.75 4.6 (1.2)
June 30, 1996 4.75 4.64 5.00 4.75 6.6 0.6
September 30, 1996 4.91 4.67 5.25 4.75 6.8 0.9
December 31, 1996 5.00 4.90 5.38 4.88 7.7 1.0
March 31, 1997 5.09 4.79 5.13 4.75 1.1 (7.8)
June 30, 1997 5.03 4.76 5.25 4.63 4.4 (2.8)
September 30, 1997 5.15 5.02 5.38 5.00 5.2 0.2
December 31, 1997 5.19 5.04 5.75 5.06 12.7 3.8
March 31, 1998 5.21 5.04 5.69 5.06 12.85 (1.63)
June 30, 1998 5.15 4.94 5.31 5.06 4.38 0.49
September 30, 1998 4.98 4.04 5.19 3.81 11.83 2.90
December 31, 1998 4.30 3.84 4.81 3.94 13.93 4.17
March 31, 1999 4.18 4.09 4.56 4.19 9.49 2.16
June 30, 1999 4.27 4.07 4.56 4.31 9.22 2.94
September 30, 1999 4.09 3.84 4.63 3.88 12.18 2.54
December 31, 1999 3.89 3.72 4.06 3.00 4.71 (19.04)
March 31, 2000 3.81 3.52 3.31 2.94 (14.77) (20.42)
June 30, 2000 3.54 3.45 3.38 2.88 (3.57) (16.55)
September 30, 2000 3.56 3.37 3.69 3.31 3.86 (3.57)
December 31, 2000 3.35 2.85 3.56 2.50 6.42 (11.02)
March 31, 2001 3.15 2.90 3.50 2.69 6.61 (1.32)
June 30, 2001 3.06 2.87 3.10 2.75 4.53 (3.03)
September 30, 2001 2.93 2.54 3.07 2.32 4.84 (4.67)
December 31, 2001 2.69 2.52 2.98 2.61 15.08 3.82
13
PREMIUM (DISCOUNT) AS A
NET ASSET VALUE(1) MARKET PRICE PERCENTAGE OF NET ASSET VALUE(2)
---------------------- ---------------------- --------------------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------------ -------- -------- --------- --------- ------------ -------------
March 31, 2002 2.65 2.53 2.87 2.56 7.20 2.37
June 30, 2002 2.60 2.20 2.73 2.18 10.00 1.54
September 30, 2002 2.14 1.80 2.39 1.70 7.78 (3.65)
December 31, 2002 1.96 1.66 2.37 1.55 17.89 0.00
March 31, 2003 2.01 1.91 2.28 2.02 12.44 4.55
June 30, 2003 2.19 2.05 2.34 2.11 12.62 (.91)
----------
(1) High and low NAVs per Share are based on market values as of the last
business day of each week of the month.
(2) The data shown in this column generally is as of different dates than the
data appearing under "Net Asset Value" and "Market Price" and cannot be
calculated from that data.
The Fund's Common Stock has sometimes traded at a premium and sometimes at
a discount to NAV. See "Risk Factors and Special Considerations -
Premium/Discount from Net Asset Value." At the close of business on May 23,
2003, and July 16, 2003 the Fund's NAVs per Share were $2.12 and $2.20,
respectively, while the closing market prices of a Share on the Exchange on such
dates were $2.26 and $2.25, respectively. The premiums as a percentage of NAV
on such dates were 6.60% and 2.27%, respectively.
14
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to stockholders on the Record Date ("Record Date
Stockholders"), as of the close of business on July 21, 2003, Rights to
subscribe for the Shares. Each Record Date Stockholder will receive one
transferable Right for each three Shares owned on the Record Date. No fractional
Rights will be issued. The Rights entitle the holders thereof to acquire, at the
Subscription Price, one Share for every Right held. Record Date Stockholders
holding a number of Shares that is not an integral multiple of three will
receive one additional Right. For example, if you own one hundred Shares, you
will receive thirty-four Rights entitling you to purchase up to thirty-four
additional Shares at the Subscription Price. In the case of Shares held of
record by Cede & Co. ("Cede"), nominee for The Depository Trust Company ("DTC"),
or by any other depository or nominee, additional Rights to be received by
beneficial owners for whom Cede, or any other depository or nominee is the
holder of record, will be issued to Cede or such other depository or nominee
only if Cede or such other depository or nominee provides to the Fund on or
before the close of business on August 15, 2003, written representation as to
the number of additional Rights required for such issuance. The Rights are
evidenced by subscription certificates ("Subscription Certificates") which will
be mailed to Record Date Stockholders, except that Subscription Certificates
will not be mailed to Record Date Stockholders whose record addresses are
outside the United States. See "Foreign Stockholders" below.
The Subscription Price of the Shares to be issued pursuant to the Rights
will be the lower of: (i) 94% of the average of the last reported sales prices
of a Share on the Exchange on the Expiration Date and on the previous nine
business days, and (ii) 94% of the NAV per Share as of the close of business on
the Expiration Date. A business day is a day on which the Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York are authorized or obligated by law to close. Exercising
Rightholders, including both Rightholders purchasing Shares in the Primary
Subscription and those who purchase Shares pursuant to the Over-Subscription
Privilege (collectively, "Exercising Rightholders"), will not know the actual
Subscription Price at the time of exercise and will be required initially to pay
for the Shares at the Estimated Subscription Price of $2.07 per Share. The
actual Subscription Price may be more than the Estimated Subscription Price.
Exercising Rightholders will have no right to rescind a purchase after receipt
by the Subscription Agent of their payment for Shares.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on May 23, 2003. The NAVs per Share at the close of
business on May 23, 2003 and July 16, 2003 were $2.12 and $2.20,
respectively, and the closing market prices per Share on the Exchange on those
dates were $2.26 and $2.25, respectively.
Completed Subscription Certificates may be delivered to the Subscription
Agent at any time during the subscription period (the "Subscription Period"),
which commences on the date of this Prospectus and ends at 5:00 p.m., Eastern
time, on August 18, 2003, unless extended by the Fund until a time not later
than 5:00 p.m., Eastern time, on September 17, 2003. See "Expiration of the
Offer" below. All Rightholders may purchase Shares in the Primary Subscription.
All Rights may be exercised immediately upon receipt and until 5:00 p.m. on the
Expiration Date.
Any Rightholder who fully exercises all Rights held by such Rightholder in
the Primary Subscription is entitled to subscribe for Shares which were not
otherwise subscribed for in the Primary Subscription pursuant to the
Over-Subscription Privilege. Shares acquired pursuant to the Over-Subscription
Privilege may be subject to allotment, which is more fully discussed below in
"Over-Subscription Privilege."
Rights may be exercised by completing the Subscription Certificate and
delivering it, together with payment, to the Subscription Agent. The method by
which Rights may be exercised and Shares paid for is set forth below in
15
"Exercise of Rights" and "Payment for Shares." Interest will accrue to the
benefit of the Fund on payments received by the Subscription Agent prior to the
Expiration Date. An Exercising Rightholder will have no right to rescind a
purchase after the Subscription Agent has received payment. See "Payment for
Shares" below. Shares issued pursuant to an exercise of Rights will be listed on
the Exchange.
The Rights are transferable and will be admitted for trading on the
Exchange. Assuming a market for the Rights exists, the Rights may be purchased
and sold through usual brokerage channels until August 15, 2003 (or, if the
Offer is extended, until a comparable number of business days before the final
Expiration Date). In such case, you will need to instruct your broker to sell
any unexercised Rights in time for the broker to execute the transaction by the
close of trading on August 15, 2003. In addition, you may instruct the
Subscription Agent to sell any unexercised Rights through A.G. Edwards until 4
p.m. on August 14, 2003. Although no assurance can be given that a market for
the Rights will develop, if such a market does develop on the Exchange, trading
in the Rights on the Exchange may be conducted until and including the close of
trading on the last Exchange trading day prior to the Expiration Date. The
method by which the Rights may be transferred is set forth below in "Sale of
Rights."
There is no minimum number of Rights that must be exercised in order for
the Offer to close.
The Fund believes that the distribution to Record Date Stockholders of
transferable Rights, which themselves may have realizable value, will afford
nonparticipating Record Date Stockholders the potential to receive a cash
payment upon sale of such Rights. Stockholders who do not exercise their Rights
in full will suffer a greater level of dilution of their interest in the Fund
than stockholders who do. See "Risk Factors and Special Considerations
-Dilution."
The first regular monthly dividend to be paid on Shares acquired upon
exercise of Rights will be the first monthly dividend, the record date for which
occurs after the issuance of such Shares following the Expiration Date. It is
the Fund's present policy to pay dividends on the last business day of each
month to stockholders of record fourteen days prior to the payment date.
Assuming that the Subscription Period is not extended beyond August 18, 2003, it
is expected that the first dividend received by Rightholders acquiring Shares
pursuant to the Offer will be paid on the last business day of September 2003.
See "Dividends and Distributions; Dividend Reinvestment Plan."
Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will be
issued Rights for the Shares held in their accounts in the Plan as of the Record
Date. Participants wishing to exercise such Rights must exercise such Rights in
accordance with the procedures set forth below in "Exercise of Rights" and
"Payment for Shares." Such Rights will not be exercised automatically by the
Plan.
For purposes of determining whether a stockholder has fully exercised such
stockholder's Rights and for purposes of allotment, qualified financial
institutions and other nominee holders of Rights will be required to certify to
the Subscription Agent as to the aggregate number of Rights exercised pursuant
to the Primary Subscription and the number of Shares subscribed for pursuant to
the Over-Subscription Privilege by such beneficial owner and that such
beneficial owner's Primary Subscription was exercised in full.
PURPOSE OF THE OFFER
The Fund is seeking through the Offer to allow existing stockholders of the
Fund an opportunity to purchase additional Shares at a price that will be below
market value without paying a brokerage commission. The Board of Directors of
the Fund has determined that it would be in the best interest of the Fund and
its stockholders to increase the assets of the Fund available for investment. In
reaching its decision, the Board of Directors concluded that an increase in the
assets of the Fund would enable the Fund to take advantage of investment
opportunities. The Board also concluded that an increase in the assets of the
Fund through a well-subscribed Offer could tend to
16
reduce the Fund's expense ratio in the future, after the expenses associated
with the Offer have been recouped. The Board observed that a lower expense
ratio, if achieved, would be of long-term benefit to holders of Common Stock,
although no assurance can be given that the Fund will in fact achieve lower
expenses in the future as the Fund cannot predict with certainty its expenses
over time. The Board considered that a well-subscribed Offer could also tend
to increase liquidity on the Exchange, where the Fund's Shares are traded, by
increasing the number of outstanding Shares.
In considering the Offer, the Board considered that the Offer will reduce
the NAV of the Fund's Common Stock and will adversely affect any holder of
Common Stock who fails or is unable to exercise his or her Rights. The Board
also took note of the fact that the possible beneficial effects of the Offer
would be reduced to the extent expenses associated with the Offer were high and
the Offer was not well subscribed.
Reflecting the foregoing considerations, the Board has established the
terms of the Offer on a basis that is intended to provide all existing
stockholders with an equal opportunity to exercise Rights and to achieve full or
substantial subscription. The Board has specified that Rights will be
transferable in order to give non-exercising Rightholders an opportunity to
receive partial compensation for the dilution they will suffer through
non-exercise by selling their Rights, and has established the Subscription Price
and the exchange ratio with a view toward providing both an incentive to
exercise Rights and an opportunity to obtain value for the sale of Rights. In
this regard, the Board has noted that an existing stockholder who seeks to
maintain rather than increase his or her investment in the Fund may, in lieu of
selling Rights, sell a portion of his or her Shares of the Fund sufficient to
provide, after expenses including commissions, funds for the exercise of Rights.
The Board has also sought to reduce costs associated with the Offer by, among
other things, engaging an information agent rather than paying commissions to a
broker or a dealer-manager, and has sought to facilitate, through its
arrangements with A.G. Edwards, the existence of an adequate trading market for
Rightholders who do not exercise their Rights.
There can, of course, be no assurance that the Offer will be successful or
that the objectives sought by the Board will be achieved, as in the case of any
rights offering. However, following analysis and discussion of the Offer and
consideration of its terms at a series of meetings, the Board of Directors has
made a determination that the Offer, if successful, would result in a net
benefit to existing stockholders. The Offer was approved unanimously by all the
Directors, present and voting at a meeting of the Board of Directors at which a
quorum was present and acting throughout, and by all of the Directors who are
not "interested persons" of the Fund. None of the Fund's officers or members of
its Board of Directors is affiliated with the Investment Adviser. It should be
noted that the Investment Adviser will benefit from the Offer because its fee is
based on the Fund's average weekly NAV, which will increase as a result of the
issuance of Shares in connection with the Offer. The benefit to the Investment
Adviser was not a material element of the Board's deliberations.
If all of the Common Stock covered by the Rights is sold, the Fund expects
that the Board of Directors will authorize the Fund to issue more ATP, so that
the percentage of the Fund's assets representing leverage will be approximately
the same as prior to the sale of that Common Stock. However, there is no
assurance that it will do so. In determining whether to issue additional ATP,
the Board will consider market conditions, the availability of appropriate
securities and any other factors it deems relevant. As of June 30, 2003, the
Fund's leverage ratio (the ratio of the Fund's total senior securities to the
sum of its total net assets and its senior securities) was approximately 39.5%,
which would be reduced to approximately 33.2% in the event all Rights are
exercised and no additional leverage is incurred. Incurring additional leverage
will reduce any investment flexibility gained by the Fund as a result of the
availability of additional assets from the exercise of Rights pursuant to the
Offer. See "The Fund" and "Risk Factors and Special Considerations - Leverage"
for discussion of the risks and possible benefits associated with a leveraged
capital structure.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of Shares and on
terms that may or may not be similar to this Offer. Any such further rights
offering will be made in accordance with the Investment Company Act of 1940, as
amended (the "1940 Act").
17
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., Eastern time, on August 18, 2003,
unless extended by the Fund until a time not later than 5:00 p.m., Eastern time,
on September 17, 2003. Rights will expire on the Expiration Date and may not be
exercised thereafter.
SUBSCRIPTION AGENT
The Subscription Agent is EquiServe, 150 Royall Street, Canton,
Massachusetts, 02021, which will receive, for its administrative, processing,
invoicing and other services as Subscription Agent, a fee estimated to be
$140,000, and reimbursement for all out-of-pocket expenses related to the Offer.
The Subscription Agent is also the Fund's Transfer Agent, Registrar and Dividend
Paying Agent with respect to the Common Stock. Questions regarding the
Subscription Certificates should be directed to EquiServe, Corporate Actions,
161 Bay State Road, Braintree, Massachusetts 02184 (telephone 1-800-426-5523).
SIGNED SUBSCRIPTION CERTIFICATES SHOULD BE SENT TO EQUISERVE by one of the
methods described below. The Fund reserves the right to accept Subscription
Certificates actually received on a timely basis at any of the addresses listed.
(1) BY FIRST CLASS MAIL:
EquiServe
Corporate Actions
P.O. Box 859208
Braintree, Massachusetts 02185-9208
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
EquiServe
Corporate Actions
161 Bay State Road
Braintree, Massachusetts 02184
(3) BY HAND:
Securities Transfer and Reporting Services, Inc.
c/o EquiServe
100 Williams St. Galleria
New York, New York 10038
DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE GOOD DELIVERY.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
THE INFORMATION AGENT FOR THE OFFER IS:
The Altman Group, Inc.
1275 Valley Brook Avenue
Lyndhurst, New Jersey 07071
Toll Free: 1-800-467-0609
The Information Agent will receive a fee estimated to be $7,500 and
reimbursement for out-of-pocket expenses related to the Offer.
Stockholders may also contact their brokers or nominees for information
with respect to the Offer.
18
EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the Subscription
Certificate and mailing it in the envelope provided, or otherwise delivering the
completed and signed Subscription Certificate to the Subscription Agent,
together with payment for the Shares as described below under "Payment for
Shares." Rightholders may also exercise Rights by contacting a broker, bank or
trust company who can arrange, on behalf of the Rightholder, to guarantee
delivery of payment and of a properly completed and executed Subscription
Certificate. A fee may be charged for this service. Completed Subscription
Certificates and full payment for the Shares subscribed for must be received by
the Subscription Agent prior to 5:00 p.m., Eastern time, on the Expiration Date
(unless payment is effected by means of a notice of guaranteed delivery as
described below under "Payment for Shares") at one of the offices of the
Subscription Agent at the addresses set forth above.
Qualified financial institutions that hold Shares as nominee for the
account of others should notify the respective beneficial owners of such
Shares as soon as possible to ascertain such beneficial owners' intentions
and to obtain instructions with respect to the Rights. For purposes of this
Prospectus, "Qualified Financial Institution" shall mean a registered
broker-dealer, commercial bank or trust company, securities depository or
participant therein, or nominee thereof. If the beneficial owner so
instructs, the nominee should complete the Subscription Certificate and
submit it to the Subscription Agent with the proper payment. In addition,
beneficial owners of Common Stock or Rights held through such a nominee
should contact the nominee and request the nominee to effect transactions in
accordance with the beneficial owners' instructions.
Stockholders who are registered holders can choose between either option
set forth under "Payment for Shares" below.
OVER-SUBSCRIPTION PRIVILEGE
If Rightholders do not exercise all of the Rights held by them on Primary
Subscription, any Shares for which subscriptions have not been received (the
"Excess Shares") will be offered by means of the Over-Subscription Privilege to
those Rightholders (including those Rightholders who acquired their Rights
during the Subscription Period) who have exercised all the Rights held by them
on Primary Subscription and who wish to acquire more than the number of Shares
for which the Rights held by them are exercisable. Rightholders who exercise on
Primary Subscription all of the Rights held by them will be asked to indicate on
their Subscription Certificates how many Shares they would desire to purchase
pursuant to the Over-Subscription Privilege. If sufficient Excess Shares remain
as a result of unexercised Rights, all over-subscriptions will be honored in
full. If sufficient Excess Shares are not available to honor all
over-subscriptions, the available Shares will be allocated first among
Rightholders who subscribe for an aggregate of 1,000 or fewer Shares (inclusive
of Shares subscribed for by such Rightholders in the Primary Subscription).
Shares remaining thereafter will be allocated among those who over-subscribe
based on the number of Rights originally exercised by them in the Primary
Subscription. The percentage of Excess Shares each over-subscribing Exercising
Rightholder may acquire may be rounded up or down to result in delivery of whole
Shares. The allocation process may involve a series of allocations in order to
assure that the total number of Shares available for over-subscriptions is
distributed on a pro rata basis. Each Rightholder is required to purchase all
allocated Over-Subscription Shares requested on the Subscription Certificate.
The Fund will not otherwise offer or sell any Shares that are not
subscribed for pursuant to the Primary Subscription or the Over-Subscription
Privilege pursuant to the Offer.
Qualified financial institutions and other nominee holders of Rights will
be required to certify to the Subscription Agent, before any Over-Subscription
Privilege may be exercised as to any particular beneficial owner, as to the
aggregate number of Rights exercised pursuant to the Primary Subscription and
the number of Shares subscribed for pursuant to the Over-Subscription Privilege
by such beneficial owner and that such beneficial owner's Primary Subscription
was exercised in full.
19
PAYMENT FOR SHARES
Exercising Rightholders who acquire Shares on Primary Subscription or
pursuant to the Over-Subscription Privilege may choose between the following
methods of payment:
(1) An exercising Rightholder may send the Subscription Certificate,
together with payment for the Shares acquired on Primary Subscription and
for any additional Shares subscribed for pursuant to the Over-Subscription
Privilege, to the Subscription Agent, calculating the total payment on the
basis of the Estimated Subscription Price of $2.07 per Share. To be
accepted, such payment, together with the properly completed and executed
Subscription Certificate, must be received by the Subscription Agent at
one of the Subscription Agent's offices at the addresses set forth above,
prior to 5:00 p.m., Eastern time, on the Expiration Date. Exercise of the
Rights by this method is subject to actual collection of checks by 5:00
p.m. on the third business day after the Expiration Date. The Subscription
Agent will deposit all Share purchase checks and any orders received by it
prior to the final payment date into a segregated interest bearing account
pending proration and distribution of Shares or return of funds. All
interest earned on such funds will accrue to the benefit of the Fund. A
PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE
PAYABLE TO THE NEW AMERICA HIGH INCOME FUND, INC. AND MUST ACCOMPANY A
PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTHOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE
ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT PRIOR TO 5:00 P.M.,
EASTERN TIME, ON THE EXPIRATION DATE AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., EASTERN TIME, ON THE THIRD BUSINESS DAY AFTER THE EXPIRATION
DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE FIVE BUSINESS DAYS OR
MORE TO CLEAR, RIGHTHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
(2) Alternatively, a subscription will be accepted by the
Subscription Agent if, prior to 5:00 p.m., Eastern time, on the Expiration
Date, the Subscription Agent has received a notice of guaranteed delivery
by facsimile (telecopy) or otherwise from an Exchange member, a bank, a
trust company, or other financial institution that is a member of the
Securities Transfer Agents Medallion Program, the Stock Exchange Medallion
Program or the New York Stock Exchange Medallion Signature Program,
guaranteeing delivery of (i) payment of the full Subscription Price for
the Shares subscribed for on Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege, and
(ii) a properly completed and executed Subscription Certificate, and, if
applicable, a Nominee Holder Over-Subscription Form. The Subscription
Agent will not honor a notice of guaranteed delivery if a properly
completed and executed Subscription Certificate together with full payment
is not received by the Subscription Agent by the close of business on the
third business day after the Expiration Date.
On or before the fifth business day after the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising
Rightholder (or, if Shares are held by Cede or any other depository or nominee,
to Cede or such other depository or nominee), a confirmation showing (i) the
number of Shares purchased pursuant to the Primary Subscription and, if
applicable, the Over-Subscription Privilege, (ii) the per Share and total
purchase price for the Shares, (iii) any excess to be refunded by the Fund to
such Rightholder as a
20
result of payment for Shares pursuant to the Over-Subscription Privilege that
the Rightholder is not acquiring and (iv) any additional amount payable by
such Rightholder to the Fund or any excess to be refunded by the Fund to such
Rightholder, in each case, based on the actual Subscription Price as
determined on the Expiration Date. Any additional payment required from
Rightholders must be received by the Subscription Agent within ten business
days after the Confirmation Date. Any excess payment to be refunded by the
Fund to a Rightholder will be mailed by the Subscription Agent as promptly as
practicable. AN EXERCISING RIGHTHOLDER WILL HAVE NO RIGHT TO RESCIND A
PURCHASE AFTER THE SUBSCRIPTION AGENT HAS RECEIVED PAYMENT, EITHER BY MEANS
OF A NOTICE OF GUARANTEED DELIVERY OR A CHECK. SEE "DELIVERY OF SHARE
CERTIFICATES" BELOW.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL FULL PAYMENT. IF
A RIGHTHOLDER WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION OR
OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE, THE
SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING
ACTIONS: (i) FIND OTHER STOCKHOLDERS FOR SUCH SUBSCRIBED AND UNPAID FOR SHARES;
(ii) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE
GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON
EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE; AND/OR
(iii) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED,
INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY
RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED SHARES.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Subscription Agent, whose
determinations will be final and binding. The Subscription Agent, in its sole
discretion, may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Right. Subscriptions will not be deemed to have
been received or accepted until all irregularities have been waived or cured
within such time as the Subscription Agent determines in its sole discretion.
The Subscription Agent will not be under any duty to give notification of any
defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
SALE OF RIGHTS
SALES THROUGH SUBSCRIPTION AGENT. Rightholders who do not wish to exercise
any or all of their Rights may instruct the Subscription Agent to sell any
unexercised Rights. Subscription Certificates representing the Rights to be sold
by the Subscription Agent must be received by the Subscription Agent by 4 p.m.
on August 14, 2003 (or if the Offer is extended, until a comparable number of
business days before the final Expiration Date). Upon the timely receipt by the
Subscription Agent of appropriate instructions to sell Rights, the Subscription
Agent will use its reasonable best efforts to complete the sale; and the
Subscription Agent will remit the proceeds of sale, net of any commissions, to
the Rightholders. No brokerage commissions will be charged to holders in
connection with any sale of fewer than 100 Rights who elect to direct the
Subscription Agent to sell such Rights in whole but not in part. Any commission
on sales of 100 Rights or more will be paid by the selling Rightholders. If the
Rights can be sold, sales of such Rights will be deemed to have been effected at
the weighted-average price received by the Subscription Agent on the day such
Rights are sold. The Subscription Agent will also attempt to sell all Rights
which remain unclaimed as a result of Subscription Certificates being returned
by the postal authorities to the Subscription Agent as undeliverable as of the
fourth business day prior to the Expiration Date. Such sales will be made net of
commissions on behalf of the nonclaiming stockholders. The Subscription Agent
will hold the proceeds from those sales for the benefit of such nonclaiming
stockholders until such proceeds are either claimed or become subject to
escheat. There can be no assurance that the Subscription Agent will be able to
complete the sale of any such Rights, and neither the Fund nor the Subscription
Agent has guaranteed any minimum sales price for the Rights. All such Rights
will be sold at the market price, if any, on the Exchange.
21
OTHER TRANSFERS. The Rights are transferable and will be admitted for
trading on the Exchange. Assuming a market for the Rights exists, the Rights may
be purchased and sold through usual brokerage channels until August 15, 2003 (or
if the Offer is extended, until a comparable number of business days before the
final Expiration Date). In such case, you will need to instruct your broker to
sell any unexercised Rights in time for the broker to execute the transaction by
the close of trading on August 15, 2003. The Rights evidenced by a single
Subscription Certificate may be transferred in whole or in part by delivering to
the Subscription Agent a Subscription Certificate properly endorsed for
transfer, with instructions to register such portion of the Rights evidenced
thereby in the name of the transferee and to issue a new Subscription
Certificate to the transferee evidencing such transferred Rights. In such event,
a new Subscription Certificate evidencing the balance of the Rights will be
issued to the transferring Rightholder or, if the transferring Rightholder so
instructs, to an additional transferee.
Except for the fees charged by the Subscription Agent and brokerage
commissions on the sale of fewer than 100 Rights (which will be paid by the Fund
as described above), all commissions, fees and other expenses (including
brokerage commissions and transfer taxes) incurred in connection with the
purchase, sale or exercise of Rights will be for the account of the transferor
of the Rights and none of such commissions, fees or expenses will be paid by the
Fund or the Subscription Agent.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription and the Over-Subscription
Privilege may be effected through, the facilities of DTC.
FINANCIAL ADVISOR
A.G. Edwards & Sons, Inc., a nationally recognized investment banking and
securities firm, has been retained by the Fund to provide financial advisory
services in connection with the Offer. The Fund has agreed to pay A.G. Edwards a
fee for its advisory services in an amount equal to $150,000 plus reasonable
out-of-pocket expenses.
DELIVERY OF SHARE CERTIFICATES
Participants in the Fund's Dividend Reinvestment Plan will have any Shares
acquired with respect to Shares held in their stockholder dividend reinvestment
accounts in the Plan on Primary Subscription and pursuant to the
Over-Subscription Privilege credited to such accounts. Stockholders whose Shares
are held of record by Cede or by any other depository or nominee on their behalf
or their broker-dealers' behalf will have any Shares acquired on
Primary Subscription and pursuant to the Over-Subscription Privilege credited to
the account of Cede or such other depository or nominee. With respect to all
other stockholders, certificates for all Shares acquired on Primary Subscription
and pursuant to the Over-Subscription Privilege will be mailed within nine
business days after the Confirmation Date or as soon as practicable if
additional payment is due and after full payment for the Shares subscribed for
has been received and cleared, which clearance may take up to fifteen days from
the date of receipt of the payment.
FOREIGN STOCKHOLDERS
Subscription Certificates will not be mailed to Record Date Stockholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Stockholders"). The
Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Stockholders' accounts until
instructions are received to exercise, sell or transfer the Rights. If no
instructions have been received by 12:00 noon, Eastern time, three business days
prior to the Expiration Date regarding the Rights of those Foreign Record Date
Stockholders, the Subscription Agent will use its reasonable best efforts to
sell the Rights of those Foreign Record Date Stockholders on the Exchange. The
net proceeds, if any, from the sale of those Rights will be remitted to the
Foreign Record Date Stockholders.
22
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Stockholders will not
result in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights.
2. The basis of a Right will be (a) to a holder of Common Stock to
whom it is issued and who exercises or sells the Right (i) if the fair
market value of the Right immediately after issuance is less than 15% of
the fair market value of the Common Stock with regard to which it is
issued, zero (unless the holder elects, by filing a statement with his
timely filed federal income tax return for the year in which the Rights are
received, to allocate the basis of the Common Stock between the Right and
the Common Stock based on their respective fair market values immediately
after the Right is issued), and (ii) if the fair market value of the Right
immediately after issuance is 15% or more of the fair market value of the
Common Stock with regard to which it is issued, a portion of the basis in
the Common Stock based upon the respective fair market values of the Common
Stock and the Right immediately after the Right is issued; (b) to a holder
of Common Stock to whom it is issued and who allows the Right to expire,
zero; and (c) to anyone who purchases a Right in the market, the purchase
price for a Right.
3. The holding period of a Right received by a Record Date
Stockholder includes the holding period of the Common Stock with regard to
which the Right is issued.
4. Any gain or loss on the sale of a Right will be treated as a
capital gain or loss if the Right is a capital asset in the hands of the
seller. Such a capital gain or loss will be long- or short- term, depending
on how long the Right has been held, in accordance with paragraph 3 above.
A Right issued with regard to Common Stock will be a capital asset in the
hands of the person to whom it is issued if the Common Stock was a capital
asset in the hands of that person. If a Right is allowed to expire, there
will be no loss realized unless the Right had been acquired by purchase, in
which case there will be a loss equal to the basis of the Right.
5. If the Right is exercised by the Record Date Stockholder, the
basis of the Common Stock received will include the basis, if any,
allocated to the Right and the amount paid upon exercise of the Right.
6. If the Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
The Fund is required to withhold and remit to the U.S. Treasury at a
current rate of 28% on reportable payments paid on an account if the holder of
the account provides the Fund with either an incorrect taxpayer identification
number or no number at all or fails to certify that the taxpayer is not subject
to such withholding.
The foregoing is only a summary of applicable federal income tax laws and
does not include any state or local tax consequences of the Offer. Rightholders
should consult their own tax advisers concerning the tax consequences of this
transaction. See "Taxation."
23
CONSIDERATIONS FOR CERTAIN TAX-DEFERRAL ARRANGEMENTS AND EMPLOYEE PLANS
Special considerations apply with respect to Record Date Stockholders that
are tax-deferral arrangements such as plans qualified under Section 401(a) of
the Internal Revenue Service Code of 1986, as amended ("Code") (including
corporate savings and 401(k) plans and Keogh plans of self-employed
individuals), individual retirement accounts under Section 408(a) of the Code
("IRAs"), Roth IRA's under section 408A of the Code, and custodial accounts
under Section 403(b) of the Code (collectively, "Plans"). For example,
additional contributions to a Plan (other than permitted rollover contributions
or trustee-to-trustee transfers from other Plans) in order to exercise Rights,
when taken together with other contributions made to the Plan, may exceed limits
under the Code, resulting in (among other things) excise taxes for excess or
nondeductible contributions or the Plan's loss of its tax-favored status.
Furthermore, the sale or transfer of Rights may be treated as a distribution or
result in other adverse tax consequences.
Plans and other tax exempt entities should also be aware that if they
borrow in order to finance their exercise of Rights, they may become subject to
the tax on unrelated business taxable income ("UBTI") under Section 511 of the
Code. If any portion of an IRA or Roth IRA is used as security for a loan, the
portion so used is also treated as distributed to the IRA or Roth IRA depositor,
which may result in current income taxation and penalty taxes.
Certain Plans may be subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), which is a broad statutory framework that governs
most employer-maintained retirement plans ("ERISA Plans") and imposes certain
fiduciary obligations on the persons who manage such plans ("Fiduciaries"). In
determining whether to exercise or transfer Rights, Fiduciaries of Record Date
Stockholders that are ERISA Plans must determine that such actions are
consistent with their fiduciary duties under ERISA and do not result in
transactions which are prohibited under Section 406 of ERISA. Further, Record
Date Stockholders which are Plans that are subject to Section 4975 of the Code
must determine that the exercise or transfer of Rights does not result in
transactions which are prohibited and subject to excise taxes under Section 4975
(under rules which generally parallel the prohibited transaction provisions of
Section 406 of ERISA). Employee benefit plans that are not ERISA Plans (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights.
The Fund is an investment company registered under the 1940 Act, and
intends to continue to qualify as such. Therefore, under ERISA, the assets of an
ERISA Plan which is a stockholder of the Fund will include only the equity
interest owned by such ERISA Plan and not the underlying assets of the Fund. The
Investment Adviser will therefore not be a Fiduciary with respect to
stockholders which are ERISA Plans and the operation of the Fund will not be
subject to ERISA.
Due to the complexity of the foregoing rules and the taxes, penalties, and
potential liability for noncompliance, stockholders which are Plans should
consult with their counsel and other advisors before their exercise or transfer
of Rights.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the staff of the Commission, undertaken to
suspend the Offer until it amends this Prospectus if subsequent to July 21,
2003, the effective date of the Fund's Registration Statement, the Fund's NAV
declines more than 10% from its NAV as of that date. In such event, the Fund
will notify stockholders of any such decline and thereby permit them to cancel
their exercise of Rights.
24
USE OF PROCEEDS
The Fund anticipates investing substantially all of the net proceeds from
the Offer in accordance with the Fund's investment objective and policies
described below. See "Investment Objective and Policies." Assuming all Shares
offered hereby are sold at the Estimated Subscription Price of $2.07 per
Share, the net proceeds of the Offer are estimated to be approximately
$47,660,211 (after deducting offering expenses payable by the Fund estimated at
approximately $771,775). The Fund anticipates that investment of such net
proceeds will take up to three months from their receipt by the Fund, depending
on market conditions and the availability of appropriate securities, but in no
event will such investment take longer than six months. Pending such investment
in accordance with the Fund's investment objective and policies, the proceeds
will be held in U.S. Government securities (which include obligations of the
United States Government and its agencies and instrumentalities) and other
high-quality, short-term money market instruments.
THE FUND
The New America High Income Fund, Inc. is a diversified, closed-end
management investment company with a leveraged capital structure. T. Rowe Price
currently serves as the Fund's investment adviser. The Fund's investment
objective is to provide high current income, while seeking to preserve
stockholders' capital, through investment in a professionally managed,
diversified portfolio of "high-yield" fixed-income securities, commonly known as
"junk bonds."
The Fund invests primarily in "high-yield" fixed-income securities rated in
the lower categories by established rating agencies, consisting principally of
fixed income securities rated BB or lower by Standard & Poor's Corporation
("S&P") or Ba or lower by Moody's, and, subject to applicable rating agency
guidelines (see "Rating Agency Guidelines"), non-rated securities deemed by the
Investment Adviser to be of comparable quality. See "Investment Objective and
Policies" and "Management of the Fund - The Investment Adviser." The
fixed-income securities in which the Fund invests are regarded by the rating
agencies, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
Such securities may also be subject to greater market price fluctuations than
lower-yielding, higher-rated debt securities; credit ratings do not reflect this
market risk.
The Fund is subject to various portfolio diversification and related asset
coverage requirements under guidelines established by Moody's and Fitch in
connection with such rating agencies' issuance of ratings of Aaa and AAA,
respectively, with respect to the Fund's ATP. These guidelines require specific
asset coverage ratios to be maintained on the basis of the discounted values
("Discounted Values") of eligible securities in the Fund's portfolio, which
discounts are directly correlated to the ratings assigned to the securities. The
guidelines generally cause the Fund to invest in higher-quality, lower-yielding
assets and/or to maintain relatively substantial balances of highly liquid
assets than would otherwise be the case in order to remain in compliance with
applicable asset coverage requirements. See "Investment Objective and Policies,"
"Rating Agency Guidelines," "Risk Factors and Special Considerations - Leverage"
and "Description of Capital Stock - Asset Maintenance." An investment in the
Fund involves a number of significant risks, which are increased due to the
Fund's leveraged capital structure, and no assurance can be given that the Fund
will achieve its investment objective. See "Risk Factors and Special
Considerations."
The Fund has had a leveraged capital structure since its inception. Through
the use of leverage, the Fund seeks to increase dividend yields to holders of
Common Stock over those that would be available in the absence of leverage by
investing in securities which pay interest at a higher rate than the rates of
required dividend payments on its outstanding ATP after related expenses. By
issuing senior securities having a Aaa/AAA rating and agreeing to various
portfolio diversification guidelines established by the relevant rating agencies
in connection therewith, the Fund seeks to obtain a lower cost of leverage than
it believes would be available with lower-rated or unrated senior securities.
However, the use of leverage can, under certain circumstances, adversely affect
the Fund's
25
performance and generally will cause the NAV of the Common Stock to decline
more rapidly when the value of portfolio holdings declines than would be the
case for an unleveraged fund. The asset coverage requirements applicable to
the Fund's senior securities affect the management of its portfolio, as
described in the preceding paragraph. Also, in the event of a decline in the
value of the Fund's portfolio securities, the Fund may be forced to redeem or
repurchase senior securities in order to reduce investment leverage and
thereby remain in compliance with applicable asset coverage requirements,
which may require the liquidation of portfolio securities at prices below the
prices at which they were purchased. Events such as increases in short-term
interest rates, which increase the dividends required to be paid on the
Fund's outstanding ATP, or increases in expenses associated with the ATP,
will, absent a corresponding increase in the rate of return of portfolio
holdings or a decrease in other expenses, result in a decrease in dividends
paid to holders of Common Stock. See "Risk Factors and Special Considerations
- Leverage," "Investment Objective and Policies" and "Description of Capital
Stock."
The Fund's performance since inception illustrates the
significant risks (and potential rewards) associated with investing in
"high-yield, high-risk" securities on a leveraged basis. The Fund commenced
operations in 1988 with total assets of $396,386,000, a NAV per Share of
$9.25 and outstanding senior securities of $184 million. At December 31,
1990, following a significant decline in the high-yield market during 1989
and 1990, the Fund's total assets were $169,059,000 (a decline of 57.3% from
total assets at inception), its NAV per Share was $3.42 (a decline of 63.0%
from NAV per Share at inception), and outstanding senior securities
aggregated $82,990,000 (a decline of 54.9% relative to outstanding senior
securities at inception). Total return on an investment in Common Stock from
inception through December 31, 1990 was -58.74%. At December 31, 1997, the
Fund's total assets were $401,475,000, NAV per Share was $5.03 and
outstanding senior securities aggregated $150 million. Cumulative total
investment return for an investment in Common Stock for the one-, three-and
five- year periods ended December 31, 1997 was 21.97%, 95.22% and 140.97%,
respectively. At June 30, 2003, the Fund's total assets were $266,313,000,
NAV per Share was $2.19 and outstanding senior securities aggregated $100
million. Cumulative total investment returns for an investment in Common
Stock for the one-, three- and five- year periods ended June 30, 2003 were
13.57%, -8.41%, -16.29%, respectively. Past performance is no guarantee of
future results.
As previously noted, on December 2, 2002, T. Rowe
Price replaced Wellington Management as the Fund's investment adviser. The
Directors' decision to replace Wellington Management with T. Rowe Price was
prompted primarily by the Directors' view that the Fund's performance over
recent periods had not met expectations. See "Management of the Fund - The
Investment Adviser."
EXISTING LEVERAGE
During 1993, the Fund had outstanding senior securities having an aggregate
principal amount/liquidation preference of $80 million of which $45 million
consisted of short-term debt and $35 million consisted of credit enhanced,
auction preferred stock. In January 1994, the Fund refinanced its outstanding
senior securities through the issuance of two series of ATP having an aggregate
liquidation preference of $100 million plus accumulated and unpaid dividends and
no credit enhancement. In May 1997 and in May 1998, the Fund issued two
additional series of ATP having an aggregate liquidation preference of $50
million and $60 million, respectively, plus accumulated and unpaid dividends and
no credit enhancement. In connection with maintaining asset coverage
requirements for the ATP, the Fund repurchased $50 million, $10 million and $50
million of ATP in fiscal 2002, 2001, and 2000, respectively. Dividends on all
series of the ATP are established in periodic auctions generally held every
twenty-eight days (subject to the right of the Fund to establish longer or
shorter dividend periods), and generally reflect short-term interest rates
during short-term dividend periods. See "Description of Capital Stock -
Dividends and Dividend Periods."
The Fund has an interest payment swap arrangement (the "Swap Arrangement")
with Fleet National Bank ("Fleet"). The aggregate effect of this arrangement is
to hedge the Fund's dividend payment obligations with respect to the ATP.
Pursuant to the Swap Arrangement, the Fund makes payments to Fleet on a monthly
basis at a fixed annual rate. In exchange for such payment, Fleet makes payments
to the Fund on a monthly basis at a variable rate determined with reference to
the level of short-term interest rates from time to time. See "Description of
Capital Stock."
26
ORGANIZATION
The Fund is registered under the 1940 Act and was organized as a
corporation under the laws of the State of Maryland on November 19, 1987. The
Fund's address is 33 Broad Street, Boston, Massachusetts 02109, and its
telephone number is 1-617-263-6400.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide high current income,
while seeking to preserve stockholders' capital, through investment in a
professionally managed, diversified portfolio of "high-yield" fixed-income
securities, commonly known as "junk bonds." The Fund's investment objective and
the restrictions described below under "Investment Restrictions" are fundamental
policies and thus may not be changed without the affirmative vote of the holders
of a majority of the outstanding Shares and a majority of the outstanding Shares
of the ATP, voting as separate classes, which means for each class the lesser of
(a) more than 50% of such class or (b) 67% or more of such class present at a
meeting at which more than 50% of the outstanding shares of such class are
present or represented by proxy.
No assurance can be given that the Fund will attain its investment
objective. Because of the high-risk nature and price volatility of the Fund's
investments, as well as the Fund's leveraged structure, it may be difficult to
achieve capital preservation on a consistent basis. Specifically, the Fund's
cumulative total investment returns for an investment in Common Stock for one-,
three- and five- year periods ended June 30, 2003 were 13.57%, -8.41%, -16.29%,
respectively. See "The Fund" and "Risk Factors and Special Considerations."
INVESTMENT STRATEGY
The policies described below may be changed by the Fund without the
approval of the Fund's stockholders.
The Fund seeks to achieve its investment objective by investing
primarily in "high-yield" fixed-income securities rated in the lower
categories by recognized rating agencies, consisting principally of
fixed-income securities rated Ba or lower by Moody's or BB or lower by S&P
and, subject to applicable rating agency guidelines, (see "Rating Agency
Guidelines") non-rated securities deemed by the Investment Adviser to be of
comparable quality. Because non-rated securities are not eligible for
inclusion in the calculation of the Discounted Value of the Fund's assets
under the current rating agency guidelines to which the Fund is subject,
however, it is not presently anticipated that such securities will comprise a
significant percentage of the Fund's investments, although the Fund reserves
full flexibility in this regard. See "Rating Agency Guidelines." Under normal
market conditions, the Fund will have at least 80% of its net assets, plus
the amount of any borrowings for investment purposes, invested in securities
rated BB or lower by S&P or Ba or lower by Moody's or non-rated securities
deemed by the Investment Adviser to be of comparable quality. This policy may
not be changed without providing stockholders with sixty days' notice. The
average maturity of the Fund's portfolio is expected to be between six and
ten years; however, depending upon market conditions, this range may be
shortened or lengthened. The dollar weighted average of credit ratings of all
bonds held by the Fund for the twelve-month period ended June 30, 2003,
computed on a monthly basis, is set forth below. This information reflects
the average composition of the Fund's assets and is not necessarily
representative of the Fund as of the current fiscal year or at any other time
in the future.
27
MOODY'S RATING PERCENTAGE OF PORTFOLIO
-------------- -----------------------
Aa 0.13%
A 0.18%
Baa 3.00%
Ba 28.65%
B 59.72%
Caa 6.95%
Ca 0.49%
C 0.07%
NR 0.81%
------
Total 100.00%
As of June 30, 2003, weighted average maturity of the Fund's portfolio was
approximately 6.6 years.
The Fund's portfolio reflects requirements established by Moody's and
Fitch in connection with the issuance by such agencies of investment grade
ratings for the Fund's ATP (referred to herein as the "Rating Agency
Guidelines"). These guidelines relate, among other things, to industry and
credit quality characteristics of issuers and specify various "discount
factors" for debt securities (with the level of discount greater as the
rating of a security becomes lower). Under the Rating Agency Guidelines,
certain types of securities in which the Fund may otherwise invest consistent
with its investment strategy are not eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio. Such instruments
include, for example, securities rated CC/Ca or lower by the rating agencies,
non-rated securities, private placements, non-U.S. securities, preferred or
common stock, zero coupon or similar securities that do not provide for the
periodic payment of interest in cash and other securities not within the
investment guidelines. Accordingly, although the Fund reserves the right to
invest in such securities to the extent set forth herein, they have not and
it is anticipated that they will not constitute a significant portion of the
Fund's portfolio. See "Rating Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain assets having
an aggregate Discounted Value, determined on the basis of the guidelines,
greater than the aggregate liquidation preference of the ATP plus specified
liabilities, payment obligations and other amounts, as of periodic valuation
dates. The Rating Agency Guidelines also require the Fund to maintain asset
coverage for the ATP on a non-discounted basis of at least 200% as of the end of
each month, and the 1940 Act requires such asset coverage as a condition to
paying dividends on Common Stock. See "Description of Capital Stock - Asset
Maintenance." The effect of compliance with these guidelines may be to cause the
Fund to invest in higher-quality assets and/or to maintain relatively
substantial balances of highly liquid assets or to restrict the Fund's ability
to make certain investments that would otherwise be deemed potentially desirable
by the Investment Adviser, including private placements of other than Rule 144A
Securities as defined below, and to limit or delay the Fund's ability to
reinvest cash in a rising "high-yield" market. See "The Fund" and "Risk Factors
and Special Considerations - Leverage." The Rating Agency Guidelines are subject
to change from time to time with the consent of the relevant rating agency and
would not apply if the Fund in the future elected not to use investment leverage
consisting of senior securities rated by one or more rating agencies, although
other similar arrangements might apply with respect to other senior securities
that the Fund may issue.
There is no minimum rating requirement applicable to the fixed-income
securities which may be acquired by the Fund. However, compliance with the
Rating Agency Guidelines, under which securities rated below CCC/Caa are not
eligible for inclusion in the calculation of the Discounted Value of the Fund's
assets and other lower-rated securities are heavily discounted in such
calculation, may have the effect of precluding or limiting investments in such
issues.
28
"High-yield" bonds, the generic name for corporate bonds rated between
BB/Ba and C/C by the rating agencies, are frequently issued by corporations in
the growth stage of their development. Bonds which are rated BB/Ba, B/B,
CCC/Caa, CC/Ca and C/C are regarded by the rating agencies, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. Such securities are
also generally considered to be subject to greater risk than securities with
higher ratings with regard to a deterioration of general economic conditions.
Further information concerning the ratings of corporate bonds, including the
rating categories of Moody's, Fitch and S&P is provided in Appendix A.
"High-yield" securities held by the Fund may include securities received as a
result of a corporate reorganization or issued as part of a corporate takeover.
Securities issued to finance corporate restructurings may have special credit
risks due to the highly leveraged conditions of the issuers, and such securities
are usually subordinate to other securities issued by the issuer. In addition,
such issuers may lose experienced management as a result of the restructurings.
Finally, the market price of such securities may be more volatile to the extent
that expected benefits from restructuring do not materialize.
Fixed-income securities which the Fund has the right to acquire include
preferred stocks (limited to 20% of the Fund's total assets and subject to
compliance with the Rating Agency Guidelines as described above) and all
types of debt obligations having varying terms with respect to security or
credit support, subordination, purchase price, interest payments and
maturity. Such obligations may include, for example, bonds, debentures,
notes, mortgage or other asset-backed instruments, equipment lease
certificates, equipment trust certificates, conditional sales contracts,
commercial paper, zero coupon securities and obligations issued or guaranteed
by the United States government or any of its political subdivisions,
agencies or instrumentalities (including obligations, such as repurchase
agreements, secured by such instruments). Most debt securities in which the
Fund will invest will bear interest at fixed rates. However, the Fund
reserves the right to invest without limitation in fixed-income securities
that have variable rates of interest or involve equity features, such as
contingent interest or participations based on revenues, sales or profits
(i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to
share in the potential success of the venture). The Fund also has the right
to acquire common stock as part of a unit in connection with the purchase of
debt securities consistent with the Fund's investment policies, although such
investments are not eligible for inclusion in the calculation of the Fund's
Discounted Value under the Rating Agency Guidelines.
The Fund may invest up to 20% of its total assets in illiquid securities
(determined as of the time of investment). Securities that are eligible for
resale under Rule 144A of the Securities Act of 1933, as amended, ("Rule 144A")
are not included in this 20% limitation. In general, the Commission defines
illiquid securities as those that cannot be sold in the ordinary course of
business within seven days at approximately the value assigned to them by the
Fund. Illiquid securities may offer higher yields than comparable publicly
traded securities, but the Fund may not be able to sell these securities when
the Investment Adviser considers it desirable to do so. Illiquid securities are
generally eligible for inclusion in the Discounted Value of the portfolio for
purposes of the Rating Agency Guidelines of Moody's or Fitch in effect as of the
date of this Prospectus, only if they are eligible for resale under Rule 144A
("Rule 144A Securities"). See "Rating Agency Guidelines."
The Fund is permitted to invest up to 20% of its total assets in zero
coupon securities, although such securities also may not be included in
calculating the Discounted Value of the Fund's portfolio under the Rating Agency
Guidelines. Zero coupon securities pay no cash income but are purchased at a
discount from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and their maturity
value. There may be special tax considerations associated with investing in
securities structured as deferred interest, zero coupon or payment-in-kind
securities. The Fund records the interest on these securities as income even
though it receives no cash interest until each security's maturity date. The
Fund will be required to distribute all or substantially all such amounts
annually and may have to obtain the cash to do so by selling securities. Thus,
to meet cash distribution obligations, the Fund may be required to liquidate a
portion of its assets, which it would otherwise continue to hold, at a
disadvantageous time. These distributions will be taxable
29
to stockholders as ordinary income. In the case of securities structured as
deferred interest, zero coupon or payment-in-kind securities, the market
prices of such securities are affected to a greater extent by interest rate
changes and, therefore, tend to be more volatile than securities which pay
interest periodically and in cash.
The Fund may invest in U.S. dollar-denominated bonds sold in the United
States by non-U.S. issuers ("Yankee bonds").
Notwithstanding any of the foregoing, when market conditions warrant a
temporary defensive investment strategy, including when it is necessary to
maintain compliance with the Rating Agency Guidelines (under which the Fund's
ability to invest in lower-rated securities having relatively low Discounted
Values may be restricted, particularly as the market values of portfolio
holdings decline), the Fund may invest without limitation in money market
instruments, including rated and (subject to compliance with the Rating Agency
Guidelines) unrated commercial paper of domestic and foreign corporations,
certificates of deposit, bankers' acceptances and other obligations of banks,
repurchase agreements and short-term obligations issued or guaranteed by the
United States government or its instrumentalities or agencies. The yield on
these securities will tend to be lower than the yield on other securities to be
purchased by the Fund. The Fund reserves the right to invest in securities rated
higher than Ba by Moody's or BB by S&P or non-rated fixed-income securities of
comparable quality when the difference in yields between quality classifications
is relatively narrow or for temporary defensive purposes, including maintenance
of applicable asset coverage requirements, when the Investment Adviser
anticipates adverse market conditions. Investments in higher-rated issues may
serve to lessen a decline in NAV but may also affect the amount of current
income produced by the Fund, as the yields from such issues are usually lower
than those from lower-rated issues.
As noted herein, the Fund has had a leveraged capital structure since
its inception and, as of June 30, 2003, had outstanding 4,000 shares of
preferred stock issued in four series, the ATP, having an aggregate
liquidation preference of $100 million plus accumulated and unpaid dividends.
The ATP is subject to optional redemption by the Fund. The Fund is required
to redeem the ATP in whole or in part in the event the Fund fails to satisfy
applicable asset coverage requirements and is required to redeem the ATP in
whole in the event the Fund fails to maintain the Aaa/AAA Credit Rating (as
defined below) for the ATP and such rating is not restored on a timely basis.
See "Description of Capital Stock - Mandatory Redemption." The Aaa/AAA Credit
Rating is a rating for the ATP in the highest rating category of any two
nationally recognized statistical rating organizations (as used in the
Securities Exchange Act of 1934, as amended), one of which must be Moody's or
S&P. Any such redemption will result in a loss of investment leverage and a
reduction in Fund income, the effect of which will be borne exclusively by
the holders of Common Stock. See "The Fund."
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental policies of the Fund,
and may not be amended without the affirmative vote of the holders of a majority
of the outstanding Shares and a majority of the outstanding shares of the ATP,
voting as separate classes, which means for each class the lesser of (a) more
than 50% of such class or (b) 67% or more of such class present at a meeting at
which more than 50% of the outstanding shares of such class are present or
represented by proxy. Under these restrictions, the Fund may not:
1. Borrow money (through reverse repurchase agreements or otherwise) or
issue senior securities, except as permitted by Section 18 of the 1940 Act.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure borrowings permitted by restriction 1 above. Collateral arrangements
with respect to margins for futures contracts and options are not deemed to be
pledges or other encumbrances for purposes of this restriction.
30
3. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities and except
that the Fund may make margin payments in connection with transactions in
futures contracts and options.
4. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open the Fund
owns an equal amount of such securities or owns securities which, without
payment of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
5. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, the Fund
may be deemed to be an underwriter under the federal securities laws.
6. Purchase or sell real estate (including real estate mortgage loans),
although the Fund may purchase securities of issuers that deal in real estate,
securities that are secured by interests in real estate and securities
representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that the
Fund may purchase or sell financial futures contracts and related options.
8. Make loans, except by purchase of debt obligations in which the Fund
may invest consistently with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of the value of its
total assets, or through the lending of its portfolio securities with respect to
not more than one-third of the value of its total assets.
9. Acquire more than 10% of the voting securities of any issuer.
10. Invest more than 25% of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations issued or
guaranteed as to interest and principal by the United States government or its
agencies or instrumentalities.
11. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal in,
represent interests in or are secured by interests in such leases, rights or
contracts.
12. Make investments for the purpose of exercising control or management
over the issuer of any security.
The Fund also will be subject to certain investment restrictions so long as
the ATP remains outstanding, which may prohibit or limit certain practices that
are otherwise authorized. See "Certain Investment Practices" below and "Rating
Agency Guidelines."
CERTAIN INVESTMENT PRACTICES
The Fund and the Investment Adviser reserve the right to engage in certain
investment practices described below in order to help achieve the Fund's
investment objective. So long as the ATP is outstanding, the Fund may not
utilize certain of the practices described below, such as entering into swap
agreements, the making of securities loans and buying or selling futures
contracts and options thereon, unless the Fund receives written confirmation
from Moody's, Fitch or any other rating agency which is then rating the ATP and
which so requires, that any such action will not impair the Aaa/AAA Credit
Rating. Further, the Rating Agency Guidelines limit or have the effect of
limiting the Fund's use of other investment practices described below, such as
investments in
31
non-U.S. securities, private placements (except Rule 144A Securities as
discussed below) and options, to the extent such investments are not eligible
for inclusion in the Discounted Value of the Fund's portfolio or the Rating
Agency Guidelines specify terms and restrictions on such investments.
RATING AGENCY RESTRICTIONS. While the Fund has reserved the right to employ
the investment practices described below, for so long as any of the ATP is
outstanding and either Moody's or Fitch is rating the ATP, the Fund will not,
unless it has received written confirmation from Moody's and/or Fitch, as
applicable, that any such action would not impair the respective rating then
assigned by Moody's or Fitch to the ATP, engage in any one or more of the
following transactions: (i) purchase or sell futures contracts or options
thereon with respect to portfolio securities or write unsecured put or uncovered
call options on portfolio securities, engage in options transactions involving
cross-hedging, or enter into any swap arrangement, other than the arrangement
described herein for which the Fund has obtained consent of Moody's and Fitch;
(ii) borrow money, except that the Fund may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
securities transactions; provided that the ATP Basic Maintenance Amount (as
defined below under "Description of Capital Stock") would continue to be
satisfied after giving effect to such borrowing and if the borrowing matures in
not more than sixty days and is non-redeemable; (iii) except in connection with
a refinancing of the ATP, issue any class or series of stock ranking prior to or
on a parity with the ATP with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Fund,
or reissue any shares of ATP previously purchased or redeemed by the Fund; (iv)
engage in any short sales of securities; (v) lend portfolio securities; or (vi)
merge or consolidate into or with any other corporation.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements on up
to 25% of the value of its total assets. A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller to repurchase
and the Fund to re-sell such security at a fixed time and price (representing
the Fund's cost plus interest). It is the Fund's present intention to enter into
repurchase agreements only with commercial banks and registered broker-dealers
and only with respect to obligations of the United States government or its
agencies or instrumentalities. Repurchase agreements may also be viewed as loans
made by the Fund which are collateralized by the securities subject to
repurchase. The Investment Adviser will monitor such transactions to ensure that
the value of the underlying securities will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor. If
the seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements with respect to debt obligations which could otherwise
be sold by the Fund. A reverse repurchase agreement is an instrument under
which the Fund may sell an underlying debt instrument and simultaneously
obtain the commitment of the purchaser (a commercial bank or a broker or
dealer) to sell the security back to the Fund at an agreed upon price on an
agreed upon date. The value of underlying securities will be at least equal
at all times to the total amount of the resale obligation, including the
interest factor. The Fund receives payment for such securities only upon
physical delivery or evidence of book entry transfer by its custodian.
Securities sold by the Fund under a reverse repurchase agreement must be
either segregated pending repurchase or the proceeds must be segregated on
the Fund's books and records pending repurchase. Reverse repurchase
agreements could involve certain risks in the event of default or insolvency
of the other party, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities. An additional risk is that
the market value of securities sold by the Fund under a reverse repurchase
agreement could decline below the price at which the Fund is obligated to
repurchase them. The Fund will not hold more than 5% of the value of its
total assets in reverse repurchase agreements.
32
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place beyond the
customary settlement date for transactions in securities of that nature). The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The securities so purchased are subject to market
fluctuations, and no interest accrues to the Fund until delivery and payment
take place. At the time the Fund makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value of such securities in determining its NAV. The Fund
will make commitments for such when-issued transactions only with the intention
of actually acquiring the securities. To facilitate such acquisitions, the
Fund's custodian bank will maintain, in a separate account of the Fund, liquid
assets from its portfolio, marked to market daily and having value equal to or
greater than such commitments. On the delivery dates for such transactions, the
Fund will meet its obligations from maturities or sales of the securities held
in the separate account and/or from then available cash flow. If the Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of other portfolio obligations,
incur a gain or loss due to market fluctuation.
PERMITTED INVESTMENTS IN PRIVATE PLACEMENT SECURITIES. The Fund is
permitted by its investment objective and policies to invest without limitation
in private placement securities. Private placement securities are restricted
securities and therefore are subject to certain of the following risks which
would not apply to securities that were free for immediate public sale. In a
private sale of restricted securities, which may involve protracted negotiations
and a limited number of purchasers, the possibility of delay and the necessity
of obtaining a commitment of investment intent from the purchasers might
adversely affect the price of the securities. In a public offering, the delay
resulting from registration may make it impossible for the Fund to sell
securities at the most desirable time, and the price of the securities may
decline between the time of the decision to sell and the time when the sale is
accomplished. Because only the issuer of the securities can prepare and file a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), the Fund may not be able to obtain registration at the most
desirable time.
In view of the above risks, the proceeds to the Fund from the sale of
restricted securities acquired by private placement could be less than the
proceeds from the sale of similar securities which were free for immediate
public resale. If the Fund is required to liquidate portfolio investments to
satisfy applicable asset coverage requirements, it may be required to dispose of
private placement securities at times or prices which are disadvantageous to the
Fund.
Private placement securities, unless they are Rule 144A Securities, are
generally ineligible for inclusion in the calculation of the Discounted Value of
the Fund's investment portfolio under the Rating Agency Guidelines with which
the Fund will be required to comply for so long as the shares of ATP remain
outstanding. The guidelines require the Fund to maintain portfolio assets
eligible for inclusion in such calculation which have an aggregate Discounted
Value in excess of the specified asset coverage levels and may therefore limit
the Fund's ability to invest in private placement securities.
FOREIGN INVESTMENTS. The Fund may invest up to 10% of the value of its
total assets in securities principally traded in foreign markets. In
addition, subject to the Fund's basic investment strategy, the Fund may also
purchase Eurodollar certificates of deposit issued by branches of U.S. banks.
Foreign investments may involve risks not present to the same degree in
domestic investments, such as future political and economic developments, the
imposition of withholding taxes on interest income, seizure or
nationalization of foreign deposits, the establishment of exchange controls
and the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal of and interest on such
obligations. Foreign securities may be less liquid and more volatile than
U.S. securities, and foreign accounting and disclosure standards may differ
from U.S. standards. In addition, settlement of transactions in foreign
securities may be subject to delays, which could result in adverse
consequences to the Fund including restrictions on the subsequent resale of
such securities. The value of foreign investments may rise or fall because of
changes in currency exchange rates.
33
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate
transactions, such as swaps, caps, collars and floors for the purpose or with
the effect of hedging its portfolio and/or its payment obligations with respect
to senior securities. The Board of Directors, not the Investment Adviser, is
responsible for making hedging arrangements with respect to the Fund's senior
securities. The costs of any such interest rate transaction and the payment made
or received by the Fund thereunder would be borne by or inure to the benefit of
the holders of the Fund's Common Stock. If there is a default by the other party
to such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Adviser or the Board of Directors, as
applicable, is incorrect in its forecasts of market values, interest rates and
other applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
used. Moreover, even if the Investment Adviser is correct in its forecasts,
there is a risk that the swap position may correlate imperfectly with the price
of the asset or liability being hedged.
As noted above, the Fund has entered into an interest payment Swap
Arrangement with Fleet. The aggregate effect of this arrangement is to hedge the
Fund's dividend payment obligations with respect to the ATP. Pursuant to the
Swap Arrangement, the Fund makes payments to Fleet on a monthly basis at fixed
annual rate while receiving from Fleet payments at a variable rate determined
with reference to the level of short-term interest rates from time to time. See
"Description of Capital Stock."
The Fund makes dividend payments to the holders of the ATP on the basis of
the results of periodic auctions in accordance with its terms without regard to
the Swap Arrangement and would continue to do so in the event the Swap
Arrangement is terminated. The Fund has agreed to terminate the Swap Arrangement
in the event it fails to maintain certain asset coverage requirements. See
"Rating Agency Guidelines."
OPTIONS. The Fund may write (sell) call options which are traded on
national securities exchanges with respect to securities in its portfolio. The
Fund may only write "covered" call options, that is, options on securities it
holds in its portfolio or has an immediate right to acquire through conversion
or exchange of securities held in its portfolio. The Fund reserves the right to
write call options on its portfolio securities in an attempt to realize a
greater current return than would be realized on the securities alone. The Fund
may also write call options as a partial hedge against a possible market
decline. In view of its investment objective, the Fund generally would write
call options only in circumstances in which the Investment Adviser does not
anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a call option, the Fund receives a premium for undertaking the obligation to
sell the underlying security at a fixed price during the option period, if the
option is exercised. So long as the Fund remains obligated as a writer of a call
option, it forgoes the opportunity to profit from increases in the market price
of the underlying security above the exercise price of the option, except
insofar as the premium represents such a profit (and retains the risk of loss
should the value of the underlying security decline). The Fund may also enter
into "closing purchase transactions" in order to terminate its obligation as a
writer of a call option prior to the expiration of the option. Although the
writing of call options only on national securities exchanges increases the
likelihood that the Fund will be able to, make closing purchase transactions,
there is no assurance that the Fund will be able to effect such transactions at
any particular time or at any acceptable price. The writing of call options
could result in increases in the Fund's portfolio turnover rate, especially
during periods when market prices of the underlying securities appreciate.
For purposes of valuation of the Fund's assets under the Rating Agency
Guidelines (see "Description of Capital Stock - Asset Maintenance"): (i) if the
Fund writes a call option, the underlying asset will be valued as follows: (a)
if the option is exchange-traded and may be off set readily or if the option
expires before the earliest possible redemption of the ATP, at the lower of the
Discounted Value of the underlying security of the option and
34
the exercise price of the option or (b) otherwise, it has no value; (ii) if the
Fund writes a put option, the underlying asset will be valued as follows: the
lesser of (a) exercise price and (b) the Discounted Value of the underlying
security determined in accordance with Rating Agency Guidelines; and (iii) call
or put options which the Fund buys have no value. For so long as the ATP are
rated by Moody's or Fitch: (i) the Fund will not engage in options transactions
for leveraging or speculative purposes; (ii) the Fund will not write or sell any
anticipatory contracts pursuant to which the Fund hedges the anticipated
purchase of an asset prior to completion of such purchase; (iii) the Fund will
not enter into an option transaction with respect to portfolio securities
unless, after giving effect thereto, the Fund would continue to be in compliance
with applicable rating agency asset coverage requirements (see "Description of
Capital Stock - Asset Maintenance"); (iv) the Fund shall write only
exchange-traded options on exchanges approved by Moody's (if Moody's is then
rating the ATP) and Fitch (if Fitch is then rating the ATP); (v) the Fund will
not engage in forward contracts; and (vi) there shall be a quarterly audit made
of the Fund's options transactions, if any, by the Fund's independent
accountants to confirm that the Fund is in compliance with these standards.
FUTURES CONTRACTS AND RELATED OPTIONS. The Investment Adviser does not
currently intend that the Fund will invest in futures contracts or related
options with respect to the portfolio. However, the Fund has reserved the right,
subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser anticipates that
interest rates may rise, in which event the Fund could sell a futures contract
to protect against the potential decline in the value of its portfolio
securities. Conversely, if declining interest rates were anticipated, the Fund
could purchase a futures contract to protect against a potential increase in the
price of securities the Fund intends to purchase.
In the event the Fund determines to invest in futures contracts and options
thereon, it will not purchase or sell such instruments if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts would exceed 5% of the value of the
Fund's total assets. There is no overall limitation on the percentage of the
Fund's portfolio securities which may be subject to a hedge position. The Fund
also intends to comply with Rule 4.5 of the Commodity Futures Trading Commission
(the "CFTC") under which the Fund will be exempted from registration as a
commodity pool operator. The Fund may only enter into futures contracts and
options on futures contracts transactions for other than hedging purposes if
immediately thereafter the sum of the amount of the initial margin deposits and
premiums on open positions with respect to futures and options used for
non-hedging purposes would exceed 5% of the market value of the Fund's net
assets. The CFTC recently proposed amendments to Rule 4.5 that also would permit
the Fund to use futures and related options for non-hedging purposes provided
that the notional value of such positions does not exceed the liquidation value
of the Fund's portfolio. The CFTC has indicated that the funds may currently
rely on this alternative test, pending adoption of the final amendments to Rule
4.5. A further proposal is now under consideration by the CFTC which, if
adopted, would eliminate from Rule 4.5 any restriction on using futures and
related options for non-hedging purposes. The extent to which the Fund may enter
into transactions involving futures contracts also may be limited by the
requirements of the Code for qualification as a regulated investment company.
RISKS OF HEDGING TRANSACTIONS. The use of options, financial futures and
options on financial futures may involve risks not associated with other types
of investments which the Fund intends to purchase, and it is possible that a
portfolio that utilizes hedging strategies may perform less well than a
portfolio that does not make use of such devices. Use of put and call options
may result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As
35
a result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts and the sale of options thereon would create
a greater ongoing potential financial risk than would purchases of options,
where the exposure is limited to the cost of the initial premium.
INCURRENCE OF INDEBTEDNESS. For so long as any of the ATP are outstanding,
the Fund will not borrow money or issue senior securities representing
indebtedness unless it has received written notice from Moody's (if Moody's is
then rating the ATP) and Fitch (if Fitch is then rating the ATP) and any other
rating agency which is then rating the ATP which so requires that such action
would not impair the Aaa/AAA Credit Rating. For so long as any of the Fund's
preferred stock, including the ATP, is outstanding, the lesser of (a) a vote of
67% of the shares of the Fund's preferred stock present at a meeting at which
more than 50% of the outstanding shares of preferred stock entitled to vote is
present or (b) a vote of more than 50% of the outstanding shares of preferred
stock, in each case voting as a separate class, must approve any Fund borrowing.
Preferred stockholder approval, however, is not required if the Fund borrows for
temporary or emergency purposes in accordance with its investment policies and
restrictions or for the purpose of clearing transactions. To the extent that the
Fund does incur any borrowings, such borrowings would typically be senior in
right of payment to the ATP and the Common Stock upon liquidation of the Fund.
SECURITIES LOANS. The Fund reserves the right to make secured loans of its
portfolio securities amounting to not more than one-third of the value of its
total assets, thereby realizing additional income. However, for so long as any
of the ATP is outstanding and either Moody's or Fitch is rating the ATP, the
Fund will not lend portfolio securities unless it has received written
confirmation from Moody's and/or Fitch that such action would not impair the
respective rating. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delays in recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. As a matter of policy, securities loans are made to unaffiliated
broker-dealers pursuant to agreements requiring that loans be continuously
secured by collateral in cash or short-term debt obligations at least equal at
all times to the value of the securities subject to the loan. The borrower pays
to the Fund an amount equal to any interest or dividends received on the
securities subject to the loan. The Fund retains all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. Although voting rights or rights to consent with respect to the
loaned securities pass to the borrower, the Fund retains the right to call the
loans at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Fund if the holders of such securities are asked
to vote upon or consent to matters materially affecting the investment. The Fund
may also call such loans in order to sell the securities involved.
RATING AGENCY GUIDELINES
The Fund intends at all times that, so long as any ATP is outstanding and
Moody's and Fitch are then rating the ATP, the composition of its portfolio will
reflect guidelines established by Moody's and Fitch in connection with obtaining
the Aaa/AAA Credit Rating with respect to the ATP. Should the Fund determine to
seek (and be successful in obtaining) a rating from any other rating agency or
issue senior securities, other than the ATP, which are rated or otherwise
subject to portfolio diversification or similar requirements, the composition of
its portfolio would also reflect the guidelines and requirements established by
any rating agency rating such securities or by the purchaser or purchasers of
such securities. Moody's and Fitch, nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The Fund has paid certain fees to Moody's
and Fitch for rating shares of the ATP. The guidelines described below have been
developed independently by Moody's and Fitch in connection with issuance of
asset-backed and similar securities, including debt obligations and adjustable
rate preferred stocks, generally on a case-by-case basis through discussions
with the issuers of these securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred stock will be sufficiently
varied and will be of sufficient quality and
36
amount to justify investment-grade ratings. The guidelines do not have the
force of law, but have been adopted by the Fund in order to satisfy current
requirements necessary for Moody's and Fitch to issue the above-described
ratings for the ATP, which ratings are generally relied upon by institutional
investors in purchasing such securities. In the context of a closed-end
investment company such as the Fund, therefore, the guidelines provide a set
of tests for portfolio composition and asset coverage which supplement (and
in some cases are more restrictive than) the applicable requirements under
the 1940 Act, and which accordingly affect significantly the management of
the Fund's portfolio. A rating agency's guidelines will apply to the ATP only
so long as such rating agency is rating such shares and such guidelines are
subject to amendment with the consent of the relevant rating agency.
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the amount specified by each rating agency (the "ATP Basic Maintenance
Amount"), the determination of which is as set forth under "Description of
Capital Stock - Asset Maintenance." Moody's and Fitch have each established
separate guidelines for determining Discounted Value. "Valuation Date" is
defined under the Articles as every Friday, or, if such day is not a Business
Day, the next preceding Business Day; provided, however, that the first
Valuation Date may occur on any other date established by the Fund provided that
it shall be not more than one week from the date on which the ATP is issued. To
the extent any particular portfolio holding does not satisfy the applicable
rating agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Fitch guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines ("Eligible
Assets").
MOODY'S Aaa RATING GUIDELINES
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Moody's Eligible Assets")
must be discounted by certain discount factors set forth below ("Moody's
Discount Factors"). The Discounted Value of a portfolio security under Moody's
guidelines is the market value thereof determined in accordance with criteria
provided by the relevant rating agency ("Market Value") divided by the Moody's
Discount Factor. The Moody's Discount Factor with respect to securities other
than those described below will be the percentage provided in writing by
Moody's.
CORPORATE DEBT SECURITIES. Under current Moody's guidelines, portfolio
securities that are corporate debt securities will not be included in the
calculation of the Discounted Value of the Fund's portfolio unless (a) such
securities are rated Caa or higher by Moody's; (b) the senior unsecured rating
of the issuer's corporate bonds is higher than B3; (c) such securities provide
for the periodic payment of interest in cash in U.S. dollars; (d) such
securities do not provide for conversion or exchange into equity capital at any
time over their lives; (e) for debt securities rated Bal and below, no more than
10% of the original amount of such issue may constitute Moody's Eligible Assets;
(f) the issuer of such securities has not filed a petition seeking relief under
the U.S. Bankruptcy Code of which the issuer has given public notice; (g) the
issuer of such securities is not in default on the payment of principal and
interest on any of its fixed income obligations or the payment of dividends on
any of its preferred stock; (h) the auditor's report to the most recently issued
audited financial statements of such issuer includes an "unqualified opinion,"
as defined in applicable auditing standards; and (i) such securities have been
registered under the Securities Act or are restricted as to resale under federal
securities laws but are Rule 144A Securities as determined by the Fund's adviser
acting subject to the supervision of the Fund's Board of Directors. Thus, the
Moody's guidelines have the effect of prohibiting or significantly restricting
investments in securities other than fixed-income obligations of U.S. issuers
which are rated Caa or higher.
37
The Discounted Value of any Moody's Eligible Asset that is a corporate debt
security is the percentage determined by reference to the rating on such asset
with reference to the remaining term to maturity of such assets, in accordance
with the table set forth below:
MOODY'S DISCOUNT FACTORS --
CORPORATE DEBT SECURITIES+
REMAINING TERM RATING CATEGORY
TO --------------------------------------------------------------------------------------
MATURITY ASSET Aaa Aa A Baa Ba B* Caa
-------------- ---- ---- ---- ---- ---- ---- ----
1 Year 112% 118% 123% 128% 139% 150% 260%
2 Years 118 124 130 135 147 158 260
3 Years 123 129 135 141 153 165 260
4 Years 129 135 141 148 160 172 260
5 Years 134 141 147 154 166 179 260
7 Years 142 149 155 162 176 189 260
10 Years 148 156 163 170 184 198 260
15 Years 153 161 168 175 190 205 260
20 Years 161 169 177 184 200 215 260
30 Years 162 170 178 185 201 216 260
----------
* Senior debt securities of an issuer rated B3 shall be deemed to be Caa rated
securities for purposes of determining the applicable Moody's Discount
Factor.
+ The Moody's Discount Factor applied to Rule 144A Securities is (i) 130% of
the Moody's Discount Factor which would apply were the securities registered
under the Securities Act, if such securities are from issues of an original
issue size less than $125 million and (ii) the Moody's Discount Factor which
would apply were the securities registered under the Securities Act, if such
securities are from issues of an original issue size of $125 million or more.
The Moody's guidelines impose minimum issue size, issuer and industry
diversification and other requirements for purposes of determining Moody's
Eligible Assets. Specifically, portfolio holdings as described below must be
within the following diversification and issue size requirements in order to
constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM ISSUE SIZE
ASSET RATINGS(1) ISSUER (%)(2,3) INDUSTRY (%)(3,4) ($ IN MILLIONS)(6)
---------------- --------------- ----------------- ------------------
Aaa 100% 100% $ 100
Aa 20 60 100
A, Prime-1 10 40 100
Baa 6 20 100
Ba 4 12 50(5)
B1-B2 3 8 50(5)
B3 (Caa subordinate) 2 5 50(5)
See accompanying notes
----------
(1) Refers to the senior debt rating of asset.
(2) Companies subject to common ownership of 25% or more are considered as one
name.
(3) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(4) Industries are determined according to industry classifications specified by
Moody's ("Moody's Industry Classifications"). See below.
(5) Bonds from issues ranging from $50 million to $100 million are limited to
20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50 million.
38
The Moody's Industry Classifications, for the purposes of determining
Moody's Eligible Assets, mean each of the following industry classifications,
determined with respect to particular issues in the discretion of the Fund:
AEROSPACE AND DEFENSE: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
AUTOMOBILE: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
BANKING: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
Agency, Factoring, Receivables
BEVERAGE, FOOD AND TOBACCO: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar,
Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry
Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen
Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
BUILDINGS AND REAL ESTATE: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real Estate, Real
Estate Development, REITs, Land Development
CHEMICALS, PLASTICS AND RUBBER: Chemicals (non-agriculture),
Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings,
Paints, Varnish, Fabricating
CONTAINERS, PACKAGING AND GLASS: Glass, Fiberglass, Containers made
of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass
PERSONAL AND NON DURABLE CONSUMER PRODUCTS (MANUFACTURING ONLY):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies
DIVERSIFIED/CONGLOMERATE MANUFACTURING
DIVERSIFIED/CONGLOMERATE SERVICE
DIVERSIFIED NATURAL RESOURCES, PRECIOUS METALS AND MINERALS:
Fabricating, Distribution
ECOLOGICAL: Pollution Control, Waste Removal, Waste Treatment, Waste
Disposal
ELECTRONICS: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, TVS, Tape Machines, Speakers, Printers,
Drivers, Technology
FINANCE: Investment Brokerage, Leasing, Syndication, Securities
FARMING AND AGRICULTURE: Livestock, Grains, Produce; Agricultural
Chemicals, Agricultural Equipment, Fertilizers
GROCERY: Grocery Stores, Convenience Food Stores
HEALTHCARE, EDUCATION AND CHILDCARE: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment
39
HOME AND OFFICE FURNISHINGS, HOUSEWARES AND DURABLE CONSUMER PRODUCTS:
Carpets, Floor Coverings, Furniture, Cooking, Ranges
HOTELS, MOTELS, INNS AND GAMING
INSURANCE: Life, Property and Casualty, Broker, Agent, Surety
LEISURE, AMUSEMENT, MOTION PICTURES, ENTERTAINMENT: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing, Motion Picture Production Theaters, Motion Picture
Distribution
MACHINERY (NON-AGRICULTURE, NON-CONSTRUCTION, NON-ELECTRONIC):
Industrial, Machine Tools, Steam Generators
MINING, STEEL, IRON AND NON PRECIOUS METALS: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel Integrated Steel, Ore Production,
Refractories, Steel Mill Machinery, Mini-mills, Fabricating, Distribution
and Sales
OIL AND GAS: Crude Producer, Retailer, Well Supply, Service and
Drilling
PERSONAL, FOOD AND MISCELLANEOUS SERVICES
PRINTING, PUBLISHING AND BROADCASTING: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks, Radio, T.V., Cable Broadcasting Equipment
CARGO TRANSPORT: Rail, Shipping, Railroads, Rail-car builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking,
Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
RETAIL STORES: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
TELECOMMUNICATIONS: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
TEXTILES AND LEATHER: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
PERSONAL TRANSPORTATION: Air, Bus, Rail, Car Rental
UTILITIES: Electric, Water, Hydro Power, Gas, Diversified
SOVEREIGNS: Semi-sovereigns, Canadian Provinces, Supra-national
Agencies
Where the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Moody's Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the ATP Basic Maintenance Amount.
Where the Fund purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a Moody's Eligible
Asset if the long-term debt of such other party is rated at least A2 by Moody's
and such agreement has a term of thirty days or less; otherwise the Discounted
Value of such asset will constitute a Moody's Eligible Asset. For the purposes
of calculation of Moody's Eligible Assets, portfolio securities which have been
called for redemption by the issuer thereof are valued at the lower of Market
Value or the call price of such portfolio securities.
40
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of ATP Basic
Maintenance Amount (see "Description of Capital Stock - Asset Maintenance")
or it is subject to any material lien, mortgage, pledge, security interest or
security agreement of any kind (collectively, "Liens"), except for (a) Liens
which are being contested in good faith by appropriate proceedings and which
Moody's has indicated to the Fund will not affect the status of such asset as
a Moody's Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens to secure
payment for services rendered or cash advanced to the Fund by its investment
adviser, the Fund's custodian, transfer agent or registrar or the auction
agent for the ATP (the "Auction Agent") and (d) Liens by virtue of any
repurchase agreement.
The effect of the foregoing discount factors may be to cause the Fund to
invest in higher-rated securities than it would if it were not required to
maintain specified asset coverage on a discounted basis. This may have the
effect of reducing the yield on the portfolio. See "Risk Factors and Special
Considerations."
PREFERRED STOCK. Under current Moody's guidelines, portfolio securities
that are preferred stocks will not be included in the calculation of Discounted
Value of the Fund's portfolio unless (a) dividends on such preferred stock are
cumulative, (b) such securities provide for the periodic payment of dividends
thereon in cash in U.S. dollars and do not provide for conversion or exchange
into, or have warrants attached entitling the holder to receive, equity capital
at any time over the respective lives of such securities, (c) the issuer of such
a preferred stock has common stock listed on either the New York Stock Exchange
or the American Stock Exchange, (d) the issuer of such a preferred stock has a
senior debt rating from Moody's of Baal or higher or a preferred stock rating
from Moody's of Baa3 or higher and (e) such preferred stock has paid consistent
cash dividends in U.S. dollars over the last three years or has a minimum rating
of A1 (if the issuer of such preferred stock has other preferred issues
outstanding that have been paying dividends consistently for the last three
years, then a preferred stock without such a dividend history would also be
eligible). In addition, the preferred stocks must have the following
diversification requirements: (x) the preferred stock issue must be greater than
$50 million and (y) the minimum holding by the Fund of each issue of preferred
stock is $500,000 and the maximum holding of preferred stock of each issue is $5
million. In addition, preferred stocks issued by transportation companies will
not be considered as Moody's Eligible Assets.
The Moody's Discount Factors for Moody's Eligible Assets that are preferred
stock are (a) 152% for utility preferred stocks, (b) 197% for
industrial/financial preferred stocks and (c) 350% for auction rate preferred
stocks.
OTHER MOODY'S ELIGIBLE ASSETS. In addition to corporate debt securities and
preferred stocks which satisfy the above requirements, Moody's Eligible Assets
also include the following:
(i) cash (including, for this purpose, interest and dividends due
on assets rated (A) Baa3 or higher by Moody's if the payment date is within
five business days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within the Exposure Period) and receivables for Moody's
Eligible Assets sold if the receivable is due within five business days of
the Valuation Date, and if the trades which generated such receivables are
(A) settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B)(1) with
counterparties having a Moody's long-term debt rating of at least Baa3 or
(2) with counterparties having a Moody's short-term money market instrument
rating of at least Prime-1;
(ii) short-term money market instruments (as defined by Moody's),
so long as (A) such securities are rated at least Prime-1, (B) in the case
of demand deposits, time deposits and overnight funds, the supporting
entity is rated at least A2, or (C) in all other cases, the supporting
entity (1) is rated A2 and the security matures within one month, (2) is
rated Al and the security matures within three months, or (3) is rated at
least Aa3 and the security matures within six months; provided, however,
that for purposes of this
41
definition, such instruments (other than commercial paper rated by S&P
and not rated by Moody's) need not meet any otherwise applicable S&P
rating criteria;
(iii) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's); and
(iv) financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the 1940 Act, may be included in Moody's Eligible Assets,
but, with respect to any financial contract, only upon receipt by the Fund
of a writing from Moody's specifying any conditions on including such
financial contract in Moody's Eligible Assets and assuring the Fund that
including such financial contract in the manner so specified would not
affect the credit rating assigned by Moody's to the ATP.
A Moody's Discount Factor of 100% will be applied to cash. The Moody's
Discount Factor applied to Moody's Eligible Assets that are short-term money
instruments (as defined by Moody's) will be (a) 100%, so long
as portfolio securities mature or have a demand feature at par exercisable
within 41 days of the relevant valuation date (the "Exposure Period"), (b) 115%,
so long as such portfolio securities mature or have a demand feature at par not
exercisable within the Exposure Period, and (c) 125%, if such securities are not
rated by Moody's, so long as such portfolio securities are rated at least A-1
+/AA or SP-1 +/AA by S&P and mature or have a demand feature at par exercisable
within the Exposure Period.
The Moody's Discount factors for Moody's Eligible Assets that are U.S.
Treasury Securities and U.S. Treasury Strips are as follows:
U.S. TREASURY SECURITIES:
REMAINING TERM TO MATURITY DISCOUNT FACTOR
-------------------------- ---------------
1 year or less 107%
2 years or less (but longer than 1 year) 113
3 years or less (but longer than 2 years) 118
4 years or less (but longer than 3 years) 123
5 years or less (but longer than 4 years) 128
7 years or less (but longer than 5 years) 135
10 years or less (but longer than 7 years) 141
15 years or less (but longer than 10 years) 146
20 years or less (but longer than 15 years) 154
30 years or less (but longer than 20 years) 154
U.S. TREASURY STRIPS:
REMAINING TERM TO MATURITY DISCOUNT FACTOR
-------------------------- ---------------
1 year or less 107%
2 years or less (but longer than 1 year) 114
3 years or less (but longer than 2 years) 120
4 years or less (but longer than 3 years) 127
5 years or less (but longer than 4 years) 133
7 years or less (but longer than 5 years) 145
10 years or less (but longer than 7 years) 159
15 years or less (but longer than 10 years) 184
20 years or less (but longer than 15 years) 211
30 years or less (but longer than 20 years) 236
42
FITCH AAA RATING GUIDELINES
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Fitch guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Fitch Eligible Assets") must
be discounted by certain discount factors set forth below ("Fitch Discount
Factors"). The Discounted Value of a portfolio security under the Fitch
guidelines is the market value thereof determined as specified by Fitch ("Market
Value") divided by the Fitch Discount Factor. The Fitch Discount Factor with
respect to securities other than those described below will be the percentage
provided in writing by Fitch.
DEBT SECURITIES. Under current Fitch guidelines, securities will not be
deemed "Debt Securities" includable in the calculation of the Discounted Value
of the Fund's portfolio unless (a) such securities are rated CCC or higher by
Fitch or, if unrated by Fitch, rated Caa or higher by Moody's and CCC or higher
by S& P; (b) such securities provide for the periodic payment of interest in
cash in U.S. dollars; (c) such securities do not provide for conversion or
exchange into equity capital at any time over their lives; (d) such securities
have been registered under the Securities Act or are restricted as to resale
under federal securities laws but are Rule 144A Securities as determined
by the Fund's adviser acting subject to the supervision of the Fund's Board of
Directors; (e) such securities are issued by (1) a U.S. corporation, (2) a
corporation domiciled in Argentina, Australia, Brazil, Chile, France, Germany,
Italy, Japan, Korea, Mexico, Spain, or the United Kingdom (the "Approved Foreign
Nations"), (3) the government of any Approved Foreign Nation or any of its
agencies, instrumentalities or political subdivisions (the debt securities of
Approved Foreign Nation issuers being referred to collectively as "Foreign
Bonds"), (4) a corporation domiciled in Canada or (5) the Canadian government or
any of its agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as "Canadian
Bonds"); and (f) in the case of Foreign and Canadian Bonds, such securities are
denominated in U.S. dollars. Foreign Bonds held by the Fund will qualify as
Fitch Eligible Assets only up to a maximum of 20% of the aggregate Market Value
of all assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held
by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 20% of
the aggregate Market Value of all assets constituting Fitch Eligible Assets.
Notwithstanding the limitations in the two preceding sentences, Foreign Bonds
and Canadian Bonds held by the Fund will qualify as Fitch Eligible Assets only
up to a maximum of 30% of the aggregate Market Value of all assets constituting
Fitch Eligible Assets. In addition, bonds which are issued in connection with a
reorganization under U.S. federal bankruptcy law ("Reorganization Bonds") will
be considered Debt Securities constituting Fitch Eligible Assets if (a) they are
rated CCC or higher by Fitch or, if unrated by Fitch, rated Caa or higher by
Moody's and CCC or higher by S& P; (b) they provide for periodic payment of
interest in cash in U.S. dollars; (c) they do not provide for conversion or
exchange into equity capital at any time over their lives; (d) they have been
registered under the Securities Act or are restricted as to resale under federal
securities laws but are eligible for trading under Rule 144A as determined by
the Fund's adviser acting subject to the supervision of the Fund's Board of
Directors; (e) they were issued by a U.S. corporation; and (f) at the time of
purchase at least one year had elapsed since the issuer's reorganization.
Reorganization Bonds may also be considered Debt Securities constituting Fitch
Eligible Assets if they have been approved by Fitch, which approval shall not be
unreasonably withheld.
The Discounted Value of any Fitch Eligible Asset that is a debt security
constituting a Fitch Eligible Asset (see "Debt Securities," above) is the
percentage determined by reference to (i) the rating on such asset (i.e.,
whether it is a Type I, Type II, Type III, Type IV, Type V, Type VI or Type VII
Debt Security as defined below) and (ii) the remaining term to maturity of such
assets, in accordance with the table set forth below. However, the Fitch
Discount Factor that will be applied to: (A) Rule 144A Securities will be (i)
110% of the Fitch Discount Factor which would apply were the securities
registered under the Securities Act, if such securities are from issues of $100
million or less and (ii) the Fitch Discount Factor which would apply were the
securities registered under the Securities Act, if such securities are from
issues of more than $100 million and (B) Foreign Bonds will be 120% of the Fitch
Discount Factor which would apply were the securities issued by a U.S.
corporation.
43
Type I Debt Securities with remaining maturities of:
less than or equal to 2 years 1.16
greater than 2 years, but less than or equal to 4 years 1.26
greater than 4 years, but less than or equal to 7 years 1.40
greater than 7 years, but less than or equal to 12 years 1.44
greater than 12 years, but less than or equal to 25 years 1.48
greater than 25 years, but less than or equal to 30 years 1.52
Type II Debt Securities with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.26
greater than 4 years, but less than or equal to 7 years 1.43
greater than 7 years, but less than or equal to 12 years 1.44
greater than 12 years, but less than or equal to 25 years 1.51
greater than 25 years, but less than or equal to 30 years 1.56
Type III Debt Securities with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.29
greater than 4 years, but less than or equal to 7 years 1.46
greater than 7 years, but less than or equal to 12 years 1.50
greater than 12 years, but less than or equal to 25 years 1.55
greater than 25 years, but less than or equal to 30 years 1.60
Type IV Debt Securities with remaining maturities of:
less than or equal to 2 years 1.27
greater than 2 years, but less than or equal to 4 years 1.32
greater than 4 years, but less than or equal to 7 years 1.52
greater than 7 years, but less than or equal to 12 years 1.57
greater than 12 years, but less than or equal to 25 years 1.63
greater than 25 years, but less than or equal to 30 years 1.69
Type V Debt Securities with remaining maturities of:
less than or equal to 2 years 1.32
greater than 2 years, but less than or equal to 4 years 1.36
greater than 4 years, but less than or equal to 7 years 1.59
greater than 7 years, but less than or equal to 12 years 1.65
greater than 12 years, but less than or equal to 25 years 1.72
greater than 25 years, but less than or equal to 30 years 1.80
Type VI Debt Securities with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.40
greater than 4 years, but less than or equal to 7 years 1.67
greater than 7 years, but less than or equal to 12 years 1.74
greater than 12 years, but less than or equal to 25 years 1.82
greater than 25 years, but less than or equal to 30 years 1.91
44
Type VII Debt Securities with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.64
greater than 4 years, but less than or equal to 7 years 2.28
greater than 7 years, but less than or equal to 12 years 2.49
greater than 12 years, but less than or equal to 25 years 2.74
greater than 25 years, but less than or equal to 30 years 3.06
For purposes of the foregoing:
"Type I Debt Securities" means Debt Securities (as defined above) rated
either AAA by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by
Moody's;
"Type II Debt Securities" means Debt Securities rated either at least AA-
by Fitch or, if not rated by Fitch, rated at least AA- by S&P and at least Aa3
by Moody's which do not constitute Type I Debt Securities;
"Type III Debt Securities" means Debt Securities rated either at least A-
by Fitch or, if not rated by Fitch, rated at least A- by S&P and at least A3 by
Moody's which do not constitute Type I or Type II Debt Securities;
"Type IV Debt Securities" means Debt Securities rated either at least BBB-
by Fitch or, if not rated by Fitch, rated at least BBB- by S&P and at least Baa3
by Moody's which do not constitute Type I, Type II or Type III Debt Securities;
"Type V Debt Securities" means Debt Securities rated either at least BB- by
Fitch or, if not rated by Fitch, rated at least BB- by S&P and at least Ba3 by
Moody's which do not constitute Type I, Type II, Type III or Type IV Debt
Securities;
"Type VI Debt Securities" means Debt Securities rated either at least B- by
Fitch or, if not rated by Fitch, rated at least B- by S&P and at least B3 by
Moody's which do not constitute Type I, Type II, Type III, Type IV or Type V
Debt Securities; and
"Type VII Debt Securities" means Debt Securities rated either at least CCC
by Fitch or, if not rated by Fitch, rated at least CCC by S&P and at least Caa
by Moody's which do not constitute Type I, Type II, Type III, Type IV, Type V or
Type VI Debt Securities.
45
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included in
Fitch Eligible Assets:
MAXIMUM SINGLE MAXIMUM SINGLE MINIMUM
ISSUER INDUSTRY ISSUE SIZE
TYPE OF DEBT SECURITY (%)(1,2) (%)(2,3,6) ($ IN MILLIONS)
--------------------- -------------- -------------- --------------
Type I 100% 100% $ 100
Type II 20 75 100
Type III (4) 10 50 100
Type IV 6 25 100
Type V 4 16 50(5)
Type VI 3 12 50(5)
Type VII 2 8 50(5)
See accompanying notes
----------
(1) Companies subject to common ownership of 25% or more are considered as one
name.
(2) Percentages represent a portion of the aggregate Market Value of Debt
Securities.
(3) Industries are determined according to industry classifications specified
by Fitch ("Fitch Industry Classifications") (see below).
(4) Includes Short Term Money Market Instruments which do not constitute Type I
or Type II Debt Securities and which have a maturity greater than the
Exposure Period.
(5) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
(6) Foreign and Canadian Bonds issued by governments of the Approved Foreign
Nations and Canada or any of their agencies, instrumentalities, or
political subdivisions assigned to the "Sovereigns" industry classification
are not subject to any maximum single industry concentration limitation.
The Fitch Industry Classifications, for the purposes of determining Fitch
Eligible Assets, mean the following industry classifications, determined with
respect to particular issues in the discretion of the Fund:
Aerospace & Defense
Automobiles
Banking, Finance & Insurance
Building & Materials
Chemicals
Computers & Electronics
Consumer Products
Energy
Environmental Services
Farming & Agriculture
Food, Beverage & Tobacco
Healthcare & Pharmaceuticals
Industrial Machinery
Media, Leisure & Entertainment
Metals & Mining
Miscellaneous
Paper & Forest Products
Retail
Sovereigns
Textiles & Furniture
Transportation
Utilities
46
OTHER FITCH ELIGIBLE ASSETS. Other Fitch Eligible Assets include cash,
certain receivables for Fitch Eligible Assets, interest and dividends due on
certain assets rated not lower than Baa3 by Moody's or BBB- by S&P, U.S.
Treasury Securities (as defined by Fitch) and Short-Term Money Market
Instruments (as defined by Fitch). The Fitch Discount Factors for Fitch Eligible
Assets that are U.S. Treasury Securities are as follows:
U.S. TREASURY SECURITIES with remaining maturities of:
less than or equal to 1 year 1.06
greater than 1 years, but less than or equal to 2 years 1.11
greater than 2 years, but less than or equal to 5 years 1.16
greater than 5 years, but less than or equal to 15 years 1.24
greater than 25 years, but less than or equal to 30 years 1.26
The Fitch Discount Factor applied to short-term portfolio securities will
be (A) 100%, so long as such portfolio securities mature or have a demand
feature at par exercisable within the Exposure Period and, (B) 125%, so long as
such portfolio securities neither mature nor have a demand feature at par
exercisable within the Exposure Period. A Fitch Discount Factor of 100% will be
applied to cash.
FINANCIAL CONTRACTS, as such term is defined in Section 3(c)(2)(B)(ii) of
the 1940 Act, may be included in Fitch Eligible Assets, but, with respect to any
financial contract, only upon receipt by the Fund of a writing from Fitch
specifying any conditions on including such financial contract in Fitch Eligible
Assets and assuring the Fund that including such financial contract in the
manner so specified would not affect the credit rating assigned by Fitch to the
ATP.
Under Fitch's current guidelines, portfolio securities that are preferred
stocks will not be deemed Fitch Eligible Assets.
When the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the ATP Basic Maintenance Amount.
Where the Fund purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a Fitch Eligible
Asset if the long-term debt of such other party is rated at least A2 by Moody's
and A by S&P and such agreement has a term of thirty days or less; otherwise the
Discounted Value of such asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of ATP Basic
Maintenance Amount (see "Description of Capital Stock - Asset Maintenance")
or it is subject to any material Lien, except for (a) Liens which are being
contested in good faith by appropriate proceedings and which Fitch has
indicated to the Fund will not affect the status of such asset as a Fitch
Eligible Asset, (b) Liens for taxes that are not then due and payable or that
can be paid thereafter without penalty, (c) Liens to secure payment for
services rendered or cash advanced to the Fund by its investment adviser, the
Fund's custodian, transfer agent or registrar or the Auction Agent and (d)
Liens by virtue of any repurchase agreement.
The Board of Directors may, without approval of the Fund's stockholders,
from time to time amend, alter or repeal any or all of the definitions which
relate to the Moody's and Fitch guidelines and which generally establish the
investment guidelines for the Fund's portfolio in the event the Fund receives
written confirmation from the appropriate rating agency that any such amendment,
alteration or repeal would not impair the rating then assigned to the ATP by
such rating agency. In addition, the Board of Directors, without the vote or
consent of the Fund's stockholders, may from time to time adopt, amend, alter or
repeal any or all of additional or other definitions or add covenants and other
obligations of the Fund (e.g., maintenance of a minimum liquidity level) or
confirm the applicability of covenants and other obligations in connection with
obtaining or maintaining the rating of Moody's, Fitch or any other rating agency
with respect to the ATP. See "Description of Capital Stock - Voting Rights."
47
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
HIGH-YIELD, HIGH-RISK INVESTMENTS
The Fund is designed for long-term investors who can accept the risks
associated with its investment strategy and its leveraged structure. Investors
should not rely on the Fund for their short-term financial needs. The value of
the lower-quality securities in which the Fund invests will be affected by
interest rate levels, general economic conditions, specific industry conditions
and the creditworthiness of the individual issuer. Although the Fund seeks to
reduce risk by portfolio diversification, credit analysis and attention to
trends in the economy, industries and financial markets, these efforts will not
eliminate risk.
The Fund will generally invest in securities that are rated below
investment grade by recognized rating agencies or that are non-rated. The values
of these lower-quality securities tend to reflect individual corporate
developments or negative economic changes to a greater extent than
higher-quality securities, which react primarily to fluctuations in market
interest rates. Economic uncertainty and change generally results in increased
volatility in the market prices and yields of lower-quality securities and,
thus, in the NAV per Share.
Securities rated below investment grade are considered by rating agencies,
on balance, to be predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation and
thus are generally considered to involve greater credit risk than securities in
the higher-rating categories. Changes by rating agencies in their ratings of any
security in the Fund's portfolio may affect the value of the Fund's investments.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from those securities, but will affect the NAV per Share. The
credit ratings issued by rating agencies may not fully reflect the true risks of
an investment. For example, credit ratings typically evaluate the safety of
principal and interest payments, not market value risk. Also, rating agencies
may be late in changing a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Although these ratings
may be an initial screen in selecting investments, the Fund will rely primarily
on the Investment Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. (See Appendix A for a description of credit
agency ratings of lower-quality securities).
The lower-quality securities held by the Fund are frequently subordinated
to "other debt" owed by the issuing entity. This generally means that if the
Fund holds a security issued by a company that is unable to pay all of its
obligations, the holders of the company's "senior debt," such as secured bank
loans, will be paid before the Fund. The Fund may incur additional expenses if
it is required to seek recovery upon a payment default on its portfolio
holdings.
Some of the lower-quality securities in which the Fund invests were issued
to raise funds in connection with the acquisition of companies in so-called
"leveraged buy-out" transactions. The highly leveraged capital structure of such
issuers may make them especially vulnerable to adverse changes in economic
conditions.
Generally, when interest rates rise, the value of fixed-rate debt
securities tends to decrease. On the other hand, when interest rates fall, the
value of these security obligations tends to increase. If an issuer of a
lower-quality security containing redemption or call rights exercises these
rights when interest rates are declining, the Fund would have to reinvest the
proceeds of the redeemed securities at current interest rates, which could
result in a decreased return for holders of Common Stock.
The trading market for lower-quality securities tends to be less liquid
than the market for higher-rated securities. At times, a major portion of an
issue of lower-quality securities may be held by relatively few institutional
purchasers.
48
Although the Fund may consider securities to be liquid because of
the availability of an institutional market, under negative market conditions or
in the event of negative changes in the financial condition of the issuer, the
Fund may find it more difficult to sell its securities or may be able to sell
its securities only at prices lower than if the securities were more widely
held. In those circumstances, the Fund may also find it more difficult to
determine the correct value of securities when computing the Fund's NAV. The
Fund, in most instances, utilizes an independent pricing service to determine
the value of its securities. Securities for which market quotations are not
readily available will be valued at fair value as determined in good faith by or
as directed by the Board of Directors of the Fund.
The entire high-yield market can experience sudden and sharp price swings
due to a variety of factors, such as changes in economic forecasts, stock market
activity, large sustained sales by institutional investors, a high profile
default, or a change in the market's psychology. This type of volatility is
usually associated more with the equity markets than fixed income securities,
but junk bond investors should be prepared for it.
LEVERAGE
The Fund is subject to significant risks as a result of its focus on
investments in so called "junk bonds." See "High-Yield, High-Risk Investments"
above. As the Fund's historical performance shows, the Fund's leveraged capital
structure magnifies these risks, particularly in a declining market, while
increasing the possibility for superior performance in a rising market. See "The
Fund."
The Fund's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment objectives and
policies. These risks include a higher volatility of the NAV per Share and
potentially more volatility in the market price of the Common Stock.
The ATP has prior claim to the income of the Fund and against the assets
of the Fund in any potential liquidation. If the investment performance of
the assets purchased with the proceeds of the ATP is less than the cost of
the ATP and any related hedging arrangements, the NAV per Share will decrease
more quickly than would otherwise be the case. Under these circumstances,
Common Stock dividends may be reduced or eliminated. On the other hand, if
the investment performance of those assets exceeds the cost of the leverage,
the NAV per Share will increase more quickly than would otherwise be the case
and Common Stock dividends may be increased. Changes in the NAV per Share
tend to be reflected in its market price.
You, as holders of Common Stock, will bear any decline in the NAV of the
Fund's investments. In an extreme case, if the Fund's current investment
income were not sufficient to meet the cost of any leverage, it could be
necessary for the Fund to liquidate certain of its investments, potentially
reducing the NAV per Share. In addition, a decline in the value of the Fund's
investments may have serious consequences under the Fund's asset coverage
requirements, as discussed below under "Asset Coverage Requirements."
The following table illustrates the effect of leverage on the return of a
holder of Common Stock. It assumes $100 million of ATP currently outstanding and
a Fund portfolio of approximately $250 million. The purpose of the table is to
assist you in understanding the effect of leverage. The
figures appearing in the table are hypothetical and actual returns may be
greater or lesser than those appearing in the table.
Assumed Return on
Portfolio (net of
expenses) -10% -5% 0% 5% 10%
Corresponding Return
to Holder of Common
Stock -19.9% -11.5% -3.2% 5.1% 13.5%
49
If all of the Common Stock covered by the Rights is sold, the Fund expects
that the Board of Directors will authorize the Fund to issue more ATP, so that
the percentage of the Fund's assets representing leverage will be approximately
the same as prior to the sale of that Common Stock, although there is no
assurance that it will do so. Any such additional leverage would not require
stockholder approval. See "The Offer" and "Description of Capital Stock."
DILUTION
You will experience an immediate dilution of the NAV per Share you own.
This is because the number of Shares outstanding after the Offer will increase
in a greater percentage than the increase in the size of the Fund's assets. For
example, assuming that all Rights are exercised at the Estimated Subscription
Price of $2.07, the Fund's NAV per Share (after payment of the estimated
offering expenses) would be reduced by approximately $0.04 per Share.
The fact that the Rights are transferable may reduce the effects of any
dilution as a result of the Offer. You can transfer or sell your Rights. The
cash received from the sale of Rights is partial compensation for the dilution
you will suffer by not exercising your Rights. The Fund cannot give any
assurance that a market for the Rights will develop or that the Rights will have
any value.
You should also expect that if you do not fully exercise your Rights, you
will, at the completion of the Offer, own a smaller proportional interest in the
Fund than would otherwise be the case. The Fund cannot state precisely the
amount of the dilution in Share ownership because the Fund does not know at this
time what proportion of the Shares will be subscribed pursuant to the Offer.
ASSET COVERAGE REQUIREMENTS
The Fund is required to meet certain financial tests imposed by the 1940
Act and under the Rating Agency Guidelines. These are known as "asset coverage
requirements." Higher-quality assets are given greater credit under the Rating
Agency Guidelines, so the overall portfolio quality of the Fund may be higher,
and the overall rate of return on portfolio holdings may be lower, than if the
Fund were unleveraged. See "Description of Capital Stock - Asset Maintenance."
Failure to meet any of the asset coverage requirements would have very
serious consequences for the Fund. The Fund would not be allowed to declare
dividends or other distributions on the Common Stock until it returned to
compliance. Failure to pay dividends or distributions could cause serious tax
problems for the Fund. See "Taxation." In an extreme situation, failure to pay
two years worth of dividends on the ATP would give the holders of the ATP the
right to elect a majority of the Directors until all accrued dividends had been
provided for or paid.
To restore or maintain compliance with the asset coverage requirements,
the Fund might have to redeem some or all of the ATP. Redeeming the ATP would
reduce the Fund's leverage and could negatively affect potential returns on
the Common Stock. An asset coverage problem under the Rating Agency
Guidelines might also be addressed by changing the composition of its
portfolio. This would probably involve additional transaction costs and
losses or gains on the sale of portfolio securities. In addition, the value
of higher-quality assets may react with greater volatility to interest rate
changes than lower-quality assets. Later, if market conditions improved and
high-yielding securities were available at attractive prices, the Rating
Agency Guidelines might restrict the redeployment of assets from
higher-quality assets to lower-quality, higher-yielding assets. Also,
redeploying cash as the value of the Fund's assets rise involves significant
transaction costs and possible delays, which further inhibits the Fund's
ability to take advantage of a favorable investment environment. See "The
Fund."
50
PREMIUM/DISCOUNT FROM NET ASSET VALUE
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at NAV at any time
at the option of the stockholder and typically engage in a continuous offering
of their shares. Shares of closed-end funds frequently trade at a market price
that is less than the value of the net assets attributable to those shares. The
possibility that Shares of the Fund will trade at a discount from NAV is a
separate risk from the risk that the Fund's NAV will decrease. However, it
should be noted that in some cases, shares of closed-end funds may trade at a
premium. The Fund's Shares have traded in the market above, at, and below NAV
since the commencement of the Fund's operations. See "Net Asset Value and Market
Price Information" for the ranges of the market prices and the ranges of the net
asset values of the Shares for each calendar quarter since 1993. The Fund cannot
predict whether the Shares will trade at a premium or a discount in the future.
The risk of purchasing shares of a closed-end investment company that might
trade at a discount is more pronounced for investors who expect to sell their
shares in a relatively short period of time. For these investors, any gain or
loss on their investments may more dependent upon the existence of a premium or
discount than upon portfolio performance.
GIVEN THE RISKS INHERENT IN THE FUND, INVESTMENT IN SHARES SHOULD NOT BE
CONSIDERED A COMPLETE INVESTMENT PROGRAM AND IS NOT APPROPRIATE FOR ALL
INVESTORS. INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THESE
RISKS BEFORE EXERCISING RIGHTS.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The management of the Fund, including general supervision of the duties
performed by the Investment Adviser, is the responsibility of the Board of
Directors. The Board of Directors consists of five individuals, three of whom
are not "interested persons" as defined in the 1940 Act. During 2002, the
Directors of the Fund met five times.
The Directors of the Fund who are not "interested persons" of the Fund
within the meaning of Section 2(a)(19) of the 1940 Act, (the "Non-Interested
Directors") as well as their principal occupations for at least the past five
years, are as follows:
POSITIONS(S) PRINCIPAL OCCUPATION(S)
NAME AND AGE WITH THE FUND(1) DURING PAST 5 YEARS OTHER DIRECTORSHIPS
------------ ---------------- ----------------------- -------------------
Joseph L. Bower Director since 1988 Professor, Harvard Business School since Director of Anika
Date of Birth: 09/21/38 1963 - as Donald K. David Professor of Therapeutics, Inc., Sonesta
Business Administration since 1986, International Hotels
Senior Associate Dean, Chair of the Corporation, Loews
Doctoral Programs, Chair of the General Corporation (a conglomerate),
Management Area, and currently, Chair of and Brown Shoe Company, Inc.;
the General Manager Program; member and Independent General Partner
research fellow at the Institute of of ML-Lee Acquisition Fund,
Politics since 1966; faculty member of L.P.; and Trustee of TH
the John F. Kennedy School of Government Lee-Putnam Emerging
since 1969. Opportunities Portfolio.
51
POSITIONS(S) PRINCIPAL OCCUPATION(S)
NAME AND AGE WITH THE FUND(1) DURING PAST 5 YEARS OTHER DIRECTORSHIPS
------------ ---------------- ----------------------- -------------------
Bernard J. Korman Director since 1987 Chairman of the Board of Directors of Director of Kramont Realty
Date of Birth: 10/13/31 Philadelphia Health Care Trust Trust, Omega Healthcare
(non-profit corporation supporting Investors, Inc. (real estate
healthcare delivery, education and investment trust), The Pep
research). Boys, Inc. (automotive
supplies), and Nutramax
Products, Inc. (a consumer
healthcare products company).
Ernest E. Monrad Director since 1988 Trustee since 1960 and Chairman of the Trustee of Century Shares
Date of Birth: 05/30/30 Trustees from 1969 to May 2001 of Trust and Century Small Cap
Northeast Investors Trust; Chairman, Select.
Assistant Treasurer and a Director since
1981 of Northeast Investors Growth Fund;
Director and Vice President of Northeast
Investment Management, Inc., and Director
of Northeast Management & Research
Company, Inc.
----------
(1) The Fund is not part of any fund complex.
The address of each Director is: c/o The New America High Income Fund, Inc.,
33 Broad Street, Boston, Massachusetts 02109.
The Directors of the Fund who are "interested persons" of the Fund within
the meaning of Section 2(a)(19) of the 1940 Act (the "Interested Directors"), as
well as their principal occupations for at least the past five years, are set
forth below:
POSITIONS(S) PRINCIPAL OCCUPATION(S)
NAME AND AGE WITH THE FUND(1) DURING PAST 5 YEARS OTHER DIRECTORSHIPS
------------ ---------------- ----------------------- -------------------
Private investor and consultant. Director of Hyperion Funds (4
Robert F. Birch* Director and funds), and Director of the
Date of Birth: 03/12/36 President since 1992 Brandywine Funds (3 funds).
Partner through his professional Director of Affiliated
Richard E. Floor* Director and corporation with the law firm of Goodwin Managers Group, Inc.
Date of Birth: 08/03/40 Secretary since 1987 Procter LLP, Boston, Massachusetts.
* Messrs. Birch and Floor are deemed to be "Interested Directors" of the Fund
because, in the case of Mr. Birch, he is the President of the Fund and, in the
case of Mr. Floor, he is the Secretary of the Fund and a partner, through his
professional corporation, of Goodwin Procter LLP, counsel to the Fund.
(1) The Fund is not part of any fund complex.
52
The address of each Director is: c/o The New America High Income Fund,
Inc., 33 Broad Street, Boston, Massachusetts 02109.
The Fund's Board of Directors consists of five members. Under the Fund's
Articles and the 1940 Act, holders of the ATP are entitled to elect two
Directors with the other three Directors elected by the holders of the Common
Stock and the ATP voting as a single class, except in certain circumstances. In
the event the Fund has no outstanding preferred stock, all of the Directors will
be elected by the holders of the Common Stock. Since the Fund's inception,
Messrs. Bower and Korman have been nominated for election as Directors by, and
have been elected as Directors by, the holders of the Fund's outstanding
preferred stock. Election of Directors is non-cumulative; accordingly, holders
of a majority of the outstanding shares of Common Stock and ATP or a majority of
the outstanding ATP may elect all of the Directors who are subject to election
by them.
EXECUTIVE OFFICER
Ellen E. Terry (date of birth: 04/09/59), Vice President and Treasurer of
the Fund since February 18, 1992, is the only executive officer of the Fund not
named in the above table of Directors who are interested persons of the Fund.
Ms. Terry served as Acting President and Treasurer of the Fund from October 1991
through February 18, 1992, and as Vice President of the Fund from February 1988
through February 1992. Ms. Terry's address is: c/o The New America High Income
Fund, Inc., 33 Broad Street, Boston, Massachusetts 02109. A Fund officer holds
office until the officer's successor is duly elected and qualified, until the
officer's death or until the officer's resignation or removal.
SHARE OWNERSHIP OF MANAGEMENT
The following table shows the beneficial ownership of the Fund's Common
Stock by the Fund's Directors at December 31, 2002, based on information
provided to the Fund by the Directors. As of that date, no Director of the Fund
owned any shares of the Fund's ATP.
DOLLAR RANGE* OF EQUITY
NAME OF DIRECTOR SECURITIES IN THE FUND(1)
---------------- -------------------------
NON-INTERESTED DIRECTORS
Joseph L. Bower $10,001-$50,000
Bernard J. Korman over $100,000
Ernest E. Monrad over $100,000
INTERESTED DIRECTORS
Robert F. Birch over $100,000
Richard E. Floor over $100,000
* Dollar range is based on the closing price of a Share quoted on the
Exchange at December 31, 2002.
(1) The Fund is not part of any family of investment companies.
As of December 31, 2002, Joseph L. Bower, Bernard J. Korman, Ernest E.
Monrad, Robert F. Birch and Richard E. Floor owned 20,000, 507,309, 271,900,
147,425 and 144,542, respectively, Shares. As of that date, the Fund's Directors
as a group beneficially owned 1,091,176 Shares, which constituted 1.57% of the
issued and outstanding Shares.
53
COMPENSATION OF DIRECTORS AND OFFICERS
During the fiscal year ended December 31, 2002, the Fund paid each Director
a fee of $24,000 per year plus $2,000 per Directors' meeting in which the
Director participated, except in the case of telephonic Directors' meetings for
which the fee was $1,000, together with actual out-of-pocket expenses relating
to attendance at such meetings. In addition, Mr. Birch's compensation for
services rendered to the Fund in his capacity as President for the calendar year
ended December 31, 2002 was $100,000, and he currently receives an annual
retainer of $100,000 for his services to the Fund as President. Each member of
the Fund's Audit and Nominating Committee, which consists of the Fund's
Non-Interested Directors, receives $2,000 for each Audit and Nominating
Committee meeting attended, other than meetings held on days on which there is
also a Directors' meeting. Directors of the Fund received for the fiscal year
ended December 31, 2002 aggregate remuneration of $165,000 exclusive of
compensation paid to Mr. Birch for his services rendered to the Fund in his
capacity as President. The following table summarizes the compensation paid to
the Directors and officers of the Fund for the fiscal year ended December 31,
2002. The Fund does not provide remuneration in the form of pension or
retirement benefits to any of its Directors or officers.
PENSION OR
RETIREMENT ESTIMATED
AGGREGATE BENEFITS ACCRUED ANNUAL BENEFITS TOTAL
COMPENSATION AS PART OF FUND UPON COMPENSATION
NAME OF DIRECTOR OR OFFICER FROM FUND EXPENSES RETIREMENT FROM FUND(1)
--------------------------- ---------------- ---------------- ---------------- -----------------
NON-INTERESTED DIRECTORS
Joseph L. Bower $ 33,000 None None $ 33,000
Bernard J. Korman $ 33,000 None None $ 33,000
Ernest E. Monrad $ 33,000 None None $ 33,000
INTERESTED DIRECTORS/OFFICERS
Robert F. Birch $ 133,000 None None $ 133,000(2)
Richard E. Floor $ 33,000 None None $ 33,000
Ellen E. Terry $ 156,978 None None $ 156,978
----------
(1) The Fund is not part of any fund complex.
(2) Of this amount, $100,000 was compensation for services as President and
$33,000 was compensation for services as a Director.
The Fund's Articles and By-Laws provide that the Fund will indemnify its
Directors and officers against liabilities and expenses incurred in
connection with the performance of their duties on behalf of the Fund to the
full extent permitted under Maryland law, subject to the applicable
requirements of the 1940 Act. Maryland law generally permits a director or
officer to be indemnified with respect to any proceeding to which the
director or officer was made a party by reason of service in that capacity
unless: (i) the director's or officer's act or omission was material to the
matter giving rise to the proceeding and was committed in bad faith or was
the result of active and deliberate dishonesty; (ii) the director or officer
actually received an improper personal benefit in money, property or
services; or (iii) in the case of any criminal proceeding, the director or
officer had reasonable cause to believe that the act or omission was
unlawful. Under the 1940 Act, as interpreted by the staff of the Commission,
an indemnification provision is consistent with the 1940 Act if it precludes
indemnification for any liability, whether or not there is an adjudication of
liability, arising by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of duties as described in Section 17(h) and
(i) of the 1940 Act ("disabling conduct"). In addition, the indemnification
provision must set forth reasonable and fair means for determining whether
indemnification shall be made. The staff of the Commission has indicated that
"reasonable and fair
54
means" would include (1) a final decision on the merits by a court or other
body before which the proceeding was brought that the person to be
indemnified ("indemnitee") was not liable by reason of disabling conduct,
including a dismissal for insufficiency of evidence, and (2) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of disabling conduct, by (a) a vote of a majority of a
quorum of Directors who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the 1940 Act nor parties to the proceeding, or
(b) an independent legal counsel in written opinion.
The Fund, at its expense, may in the future provide liability insurance for
the benefit of its Directors and officers.
COMMITTEES
The Board of Directors has an Audit and Nominating Committee, which it
created in February 2000 to succeed the Fund's Audit Committee. The Audit and
Nominating Committee is responsible for: (a) overseeing the audit process for
the Fund and considering any questions raised by the Fund's independent public
accountants concerning the Fund's financial reporting process, internal
controls, and compliance procedures, (b) supervising the nomination and election
of Directors who are not "interested persons" of the Fund, (c) reviewing on a
periodic basis the Fund's governance structures and procedures, (d) approving
the engagement of the Fund's independent public accountants to provide the Fund
with audit or non-audit services, (e) reviewing the scope and procedures of the
year-end audit, (f) reviewing annual financial statements, and (g) conferring
with the Fund's independent public accountants. The Audit and Nominating
Committee is presently comprised of former members of the Audit Committee,
including Messrs. Korman and Monrad and Professor Bower, each of whom is not an
"interested person" of the Fund within the meaning of Section 2(a)(19) of the
1940 Act. The Audit and Nominating Committee met three times in 2002. The Audit
and Nominating Committee will consider nominees for Director recommended by
stockholders when submitted in writing to the Fund's Secretary at the Fund's
address in accordance with criteria for submitting stockholder proposals set
forth in the Fund's By-Laws.
At its January 1999 meeting, the Directors established a Compensation
Committee. The Compensation Committee is responsible for: (a) monitoring and
revising as appropriate the compensation of Fund employees other than Mr. Birch,
subject to review by the Board as a whole, and (b) monitoring Mr. Birch's
compensation as President of the Fund and making recommendations to the Board
regarding his compensation. Messrs. Monrad and Floor currently comprise the
Compensation Committee. The Compensation Committee met once during 2002.
PRINCIPAL HOLDERS OF ATP AND COMMON STOCK
At June 30, 2003, the following persons or entities owned of record more
than 5% of the outstanding Shares:
NUMBER OF SHARES OF PERCENT OF SHARES OF
NAME AND ADDRESS OF THE OWNER COMMON STOCK COMMON STOCK
----------------------------- ------------------- --------------------
CEDE & CO FAST 62,673,344.13 89.37%
The Depository Trust Company
55 Water Street
25th Floor
New York, NY 10041-0001
Except as noted above, the Fund does not know of any person who, as of June 30,
2003, beneficially owned more than 5% or more of the outstanding Shares of the
Fund. As of such date, all Directors and officers of the Fund owned 1,146,900
Shares, which constitutes 1.64% of the issued and outstanding Shares. No
Director or officer owned any of the ATP at June 30, 2003.
55
THE INVESTMENT ADVISER
T. Rowe Price, with its principal business address at 100 East Pratt
Street, Baltimore, Maryland 21202, has served as the Fund's investment adviser
since December 2, 2002. On that date, the Fund terminated its investment
advisory agreement with Wellington Management, which had served as investment
adviser to the Fund since February 19, 1992. T. Rowe Price is a registered
investment adviser under the Investment Advisers Act of 1940, as amended, and is
organized under the laws of Maryland. It is a wholly owned subsidiary of T. Rowe
Price Group, Inc. ("Price Group"), a publicly-traded financial services holding
company founded in 1937 by Thomas Rowe Price, Jr. The address of Price Group is
100 East Pratt Street, Baltimore, Maryland 21202. As of March 31, 2003, T. Rowe
Price and its affiliates held discretionary authority over approximately $139.9
billion of assets, including approximately $49.9 billion of fixed income
securities of which approximately $7.2 billion represented "high-yield"
investments. T. Rowe Price has provided investment advisory services to
investment companies since 1937.
The Fund is managed by the Investment Adviser's Investment Advisory
Committee chaired by Mark J. Vaselkiv, a Vice President of T. Rowe Price and a
Portfolio Manager in the Fixed Income Department, heading taxable "high-yield"
bond management. Mr. Vaselkiv is primarily responsible for day-to-day management
of the Fund and works with the committee in developing and executing the Fund's
investment program. Mr. Vaselkiv has served in this capacity since T. Rowe Price
succeeded to the management of the Fund's portfolio on December 2, 2002. He also
serves as President of the T. Rowe Price High Yield Fund and Chairman of its
Investment Advisory Committee. Mr. Vaselkiv has managed "high-yield" bond
portfolios at T. Rowe Price for 15 years through a variety of market conditions.
Prior to joining T. Rowe Price, he was employed as a Vice President, analyzing
and trading "high-yield" debt securities, for Shenkman Capital Management, Inc.
in New York, and as a Private Placement Credit Analyst in the Capital Markets
Group of Prudential Insurance Company. Mr. Vaselkiv earned a B.A. in Political
Science from Wheaton College, Illinois, and an M.B.A. in Finance from New York
University, New York.
CONSIDERATIONS OF THE BOARD OF DIRECTORS. In reaching a decision to engage
T. Rowe Price as the Fund's investment adviser, the Board of Directors reviewed
information derived from a number of sources and covering a range of issues. The
Directors concluded that (a) T. Rowe Price had a record of superior performance
in the "high-yield" asset class; (b) T. Rowe Price demonstrated an appropriate
awareness of the special requirements associated with the Fund's leveraged
structure; (c) T. Rowe Price is a large, well capitalized organization with
substantial resources and qualified personnel; and (d) T. Rowe Price's
disciplined but flexible investment approach is appropriate for the Fund. The
Board of Directors also considered the advisory fee under the advisory agreement
and information on fees charged by other investment advisers for comparable
services. The Board of Directors noted that the fee to be charged by T. Rowe
Price under the advisory agreement would be lower than the advisory fee rates
charged by most of the other investment advisers that the Fund considered,
although higher than the advisory fee rates of some of the other investment
advisers, including Wellington Management, the Fund's former investment adviser.
Taking into account this review, as well as the nature and the quality of the
services to be provided by T. Rowe Price, the Board of Directors determined that
the advisory fee rate of T. Rowe Price was reasonable. None of the Fund's
Directors and officers are employed or otherwise affiliated with T. Rowe Price.
The Directors' decision to replace Wellington Management with T. Rowe
Price was prompted primarily by the Directors' view that the Fund's
performance over recent periods had not met expectations. Before selecting
T. Rowe Price as the Fund's investment adviser, the Directors and Fund
management solicited and considered proposals from a range of investment
advisory organizations with experience investing in "high-yield" fixed income
securities. In connection with their final deliberations, the Directors
reviewed additional materials provided by T. Rowe Price in response to the
Board's request, including information regarding T. Rowe Price and its
personnel, operations and financial condition. Representatives of T. Rowe
Price also met with Fund management and with the Board of Directors and
discussed T. Rowe Price's philosophy of management, performance, expectations
and method of operation as they would relate to the Fund. Among other
matters, the
56
Directors also discussed with T. Rowe Price: (a) T. Rowe Price's
research methodology and the extent to which portfolio management in T. Rowe
Price's "high-yield" group had access to information and analysis from T.
Rowe Price's equity management group, (b) default rates in the "high-yield"
bond portfolios managed by T. Rowe Price, and (c) the special considerations
entailed in managing a leveraged capital structure such as the Fund's. In
addition, the Board of Directors reviewed and discussed the terms and
provisions of the advisory agreement.
Based on its review, the Board of Directors, including a majority of the
Non-Interested Directors, concluded that it was satisfied with the nature and
quality of the services to be provided by T. Rowe Price to the Fund and that the
advisory fee rate was reasonable in relation to such services. Accordingly, the
Board of Directors approved the advisory agreement as being in the interests of
the Fund's stockholders. The Non-Interested Directors were represented by
independent counsel who assisted them in their deliberations.
ADVISORY AGREEMENT. The investment advisory agreement between the
Investment Adviser and the Fund (the "Advisory Agreement") became effective on
December 2, 2002 following the termination of the advisory agreement with
Wellington Management, the Fund's former investment adviser. The Advisory
Agreement provides that, subject to the direction of the Board of Directors of
the Fund and the applicable provisions of the 1940 Act, the Investment Adviser
is responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular investment
rests with the Investment Adviser, subject to review by the Board of Directors
and compliance with the applicable provisions of the 1940 Act. The Board of
Directors, not the Investment Adviser, is responsible for determining the amount
and type of leverage to which the Fund is subject, and for making any related
hedging arrangements.
The Investment Adviser is not dependent on any other party in providing the
investment advisory services required for the management of the Fund. The
Investment Adviser may, however, consider analyses from various sources,
including broker-dealers with which the Fund does business. The Advisory
Agreement provides that the Investment Adviser will, upon request of the Fund
but subject to availability, make available to the Fund office facilities,
equipment, personnel and services (other than as specifically set forth in the
Advisory Agreement). Such office facilities, equipment, personnel and services
will be billed to the Fund at the Investment Adviser's cost.
Under the Advisory Agreement, the Investment Adviser receives a fee equal
to an annual rate of the Fund's Base Net Assets, based on the Fund's average
weekly NAV, equal to .50% on the first $50 million of Base Net Assets, .40% on
the next $50 million of Base Net Assets and .30% on Base Net Assets in excess of
$100 million. "Base Net Assets" means the Fund's net assets attributable to the
Fund's outstanding Common Stock and senior securities within the meaning of
Section 18 of the 1940 Act. Base Net Assets includes the liquidation preference
and principal amount attributable to the Fund's senior securities (currently the
ATP) but not accrued interest and dividends relating to those senior securities.
At December 31, 2002, the Fund's Base Net Assets were $231,170,000 under this
definition. The aggregate dollar amount paid by the Fund to T. Rowe Price under
the terms of the Advisory Agreement from December 2, 2002 through December 31,
2002 was $51,000. During this period, T. Rowe Price was paid under the
predecessor's fee structure pursuant to an SEC rule. Under the prior investment
advisory agreement with Wellington Management, the aggregate dollar amounts paid
by the Fund for the periods January 1, 2000 through December 31, 2000,
January 1, 2001 through December 31, 2001, and January 1, 2002 through
December 2, 2002 were $1,039,000, $873,622, and $635,000, respectively.
The Fund bears all costs of its operation other than those incurred by
the Investment Adviser under the Advisory Agreement. In particular, the Fund
pays investment advisory fees, the fees and expenses associated with the
Fund's administration, record keeping and accounting, fees and expenses for
the custodian of the Fund's assets, legal, accounting and auditing fees,
taxes, expenses of preparing prospectuses and stockholder reports,
registration fees and expenses, fees and expenses for the transfer and
dividend disbursing agent, the compensation and expenses of the Directors who
are not otherwise employed by or affiliated with the Investment Adviser or
any of its affiliates, and any extraordinary expenses.
57
At a meeting held on October 17, 2002, the Board of Directors, including
Non-Interested Directors, unanimously approved the Advisory Agreement for a
two-year period commencing December 2, 2002. The Advisory Agreement was
subsequently approved by the Fund's stockholders at a special meeting held on
February 13, 2003. The Advisory Agreement will remain in effect until
December 2, 2004, and thereafter year to year if approved annually (i) by the
Board of Directors of the Fund or by the holders of a majority of the Fund's
outstanding voting securities, voting as a single class, and (ii) by a majority
of the Directors who are not parties to the Advisory Agreement or interested
persons (as defined in the 1940 Act) of any such party. The Advisory Agreement
may be terminated at any time, without payment of any penalty, by vote of the
majority of Directors, by vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act and as further described
below), or by the Investment Adviser, in each case on sixty days' prior written
notice. The Advisory Agreement will terminate automatically in the event of its
assignment. Under the 1940 Act, a vote of a majority of the outstanding voting
securities of the Fund means the lesser of either: (a) the vote of 67% or more
of the voting securities present at the relevant meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy, or (b) the vote of more than 50% of the outstanding voting securities.
For purposes of voting on any approval, continuation or termination of the
Advisory Agreement, holders of the ATP and the Common Stock vote as a single
class.
Under the terms of the Advisory Agreement, the Investment Adviser is not
liable for any error of judgment or for any loss suffered by the Fund in
connection with performance of its obligations under the Advisory Agreement,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of, or from reckless disregard by it of its
obligations and duties under, the Advisory Agreement, or damages resulting from
a breach of fiduciary duty with respect to receipt of compensation for services.
PORTFOLIO EXECUTION. The Advisory Agreement authorizes T. Rowe Price to
arrange for the execution of the Fund's portfolio transactions by selecting the
brokers or dealers that will execute the purchases and sales of portfolio
securities of the Fund. The Advisory Agreement also directs T. Rowe Price to use
its best efforts to obtain the best net results, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved. T. Rowe Price may, in its discretion, purchase and sell
portfolio securities through brokers who provide T. Rowe Price or the Fund with
research, analysis, advice and similar services, and the Fund may pay to these
brokers, in return for research and analysis, a higher commission than may be
charged by other brokers, provided that T. Rowe Price determines in good faith
that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of T. Rowe Price to the Fund and
other clients of T. Rowe Price and that the total commission paid by the Fund
will be reasonable in relation to the benefits to the Fund over the long term.
Fixed income securities are generally purchased from the issuer or a primary
market-maker acting as principal for the securities on a net basis, with no
brokerage commission being paid by the Fund, although the price usually includes
a mark-up or undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the bid and asked
prices. Securities may also be purchased from underwriters at prices which
include underwriting fees.
In selecting a broker or dealer for each specific transaction, T. Rowe
Price will use its best judgment to choose the broker or dealer most capable of
providing the brokerage services necessary to obtain the best available price
and most favorable execution. The full range and quality of brokerage services
available will be considered in making these determinations. For example,
brokers may be selected on the basis of the quality of such brokerage services
related to the requirements of the specific transaction such as the following:
capable floor brokers or traders, competent block trading coverage, good
communication, ability to position, retail distribution and underwriting, use of
automation, arbitrage skills, administrative ability, or provision of market
information relating to the security. T. Rowe Price will make periodic
evaluations of the quality of these brokerage services as provided by various
firms and measure these services against its own standards of execution.
Brokerage services will be obtained only from those firms which meet its
standards, maintain a reasonable capital position and can be expected to
reliably and continuously supply these services.
58
On occasions when T. Rowe Price deems the purchase or sale of a security to
be in the best interest of the Fund as well as other clients, T. Rowe Price, to
the extent permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be so purchased or sold in order
to obtain a more favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction will be made by T. Rowe Price
in the manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients. In some instances,
this procedure may affect the price and size of the positions obtainable for the
Fund.
For the fiscal years ended December 31, 2000, 2001, and 2002, the Fund did
not pay any brokerage commissions for the execution of portfolio transactions.
ADMINISTRATIVE SERVICES. Unlike many other investment companies, the Fund
does not rely on its Investment Adviser to provide administrative and managerial
services. Accordingly, since February 1992 the Fund has engaged Ellen E. Terry,
Vice President and Treasurer, to perform administrative services. Subject to the
supervision of the Board of Directors and officers of the Fund, Ms. Terry, among
other things, coordinates the preparation of the Fund's semi-annual, annual and
other periodic reports, proxy statements and other communications with
stockholders; oversees the preparation of the Fund's periodic reports required
to be filed with the Commission and the rating agencies; and assists in
responding to stockholder/retail broker inquiries and disseminating information
to the same based on information provided. Since February 1992, the Fund has
also engaged Paul E. Saidnawey to provide certain related administrative
services subject to the supervision of the Board of Directors and Ms. Terry.
Ms. Terry receives $12,875 per month, plus an insurance premium that is
subject to adjustment upward if insurance premiums increase, for the services
set forth above. Ms. Terry's services are terminable by either party on ninety
days' written notice. Mr. Saidnawey receives $8,369 per month, plus insurance
premium that is subject to adjustment upward if insurance premiums increase, for
the services set forth above and his services are terminable by either party on
ninety days' written notice. Unlike other funds that are affiliated with larger
organizations, the Fund relies on Ms. Terry, Mr. Saidnawey and Robert F. Birch,
its President, for its administrative, managerial and related services. In the
event of a departure of these individuals, the Fund would likely be forced to
replace them with others or with a larger organization, which could result in an
increase in the Fund's annual expenses.
CODE OF ETHICS
The Fund and T. Rowe Price have each adopted a Code of Ethics under Rule
17j-1 of the 1940 Act. Each Code of Ethics establishes procedures for personal
investing and restricts certain transactions. Subject to certain conditions and
restrictions, these Codes of Ethics permit persons subject to these codes to
invest in securities for their personal investment accounts, including
securities that may be purchased, held or sold by the Fund. Securities
transactions by some of these persons may be subject to prior approval.
These Codes of Ethics can be reviewed and copied at the Commission's Public
Reference Room in Washington, D.C. Information about the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-8090.
These Codes of Ethics are available on the EDGAR Database at the Commission's
Internet site at http://www.sec.gov. Copies may also be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
publicinfo@sec.gov, or by writing to the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
59
PROXY VOTING POLICIES AND PROCEDURES
At its June 26, 2003 meeting, the Fund's Board of Directors authorized and
directed T. Rowe Price to vote proxies relating to the Fund's portfolio
securities in accordance with T. Rowe Price's proxy voting policies and
procedures. T. Rowe Price, as an investment adviser with a fiduciary
responsibility to the Fund, analyzes the proxy statements of issuers whose stock
is owned by the Fund, if any.
PROXY ADMINISTRATION. The T. Rowe Price Proxy Committee develops T. Rowe
Price's positions on all major corporate issues, creates guidelines, and
oversees the voting process. The Proxy Committee, composed of
portfolio managers, investment operations managers, and internal legal counsel,
analyzes proxy policies based on whether they would adversely affect
stockholders' interests and make a company less attractive to own. In evaluating
proxy policies each year, the Proxy Committee relies upon its own fundamental
research, independent research provided by third parties, and information
presented by company managements and stockholder groups.
Once the Proxy Committee establishes its recommendations, they are
distributed to the firm's portfolio managers as voting guidelines. Ultimately,
the portfolio manager votes on the proxy proposals of companies in his or her
portfolio. When portfolio managers cast votes that are counter to the Proxy
Committee's guidelines, they are required to document their reasons in writing
to the Proxy Committee. Annually, the Proxy Committee reviews T. Rowe Price's
proxy voting process, policies, and voting records.
T. Rowe Price has retained Institutional Shareholder Services ("ISS"), an
expert in the proxy voting and corporate governance area, to provide proxy
advisory and voting services. These services include in-depth research,
analysis, and voting recommendations as well as vote execution, reporting,
auditing and consulting assistance for the handling of proxy voting
responsibility and corporate governance-related efforts. While the Proxy
Committee relies upon ISS research in establishing T. Rowe Price's voting
guidelines - many of which are consistent with ISS positions - T. Rowe Price may
deviate from ISS recommendations on general policy issues or specific proxy
proposals.
FIDUCIARY CONSIDERATIONS. T. Rowe Price's decisions with respect to proxy
issues are made in light of the anticipated impact of the issue on the
desirability of investing in the portfolio company. Proxies are voted solely in
the interests of the Fund or Fund stockholders. Practicalities involved with
international investing may make it impossible at times, and at other times
disadvantageous, to vote proxies in every instance.
CONSIDERATION GIVEN MANAGEMENT RECOMMENDATIONS. When determining whether to
invest in a particular company, one of the key factors T. Rowe Price considers
is the quality and depth of its management. As a result, T. Rowe Price believes
that recommendations of management on most issues should be given weight in
determining how proxy issues should be voted.
T. ROWE PRICE VOTING POLICIES. Specific voting guidelines have been
established by the Proxy Committee for recurring issues that appear on proxies.
The following is a summary of the more significant T. Rowe Price policies:
- ELECTION OF DIRECTORS. T. Rowe Price generally supports slates with a
majority of independent directors and nominating committees chaired by
an independent board member. T. Rowe Price withholds votes for inside
directors serving on compensation and audit committees and for
directors who miss more than one-fourth of the scheduled board
meetings.
- EXECUTIVE COMPENSATION. T. Rowe Price's goal is to assure that a
company's equity-based compensation plan is aligned with stockholders'
long-term interests. While it evaluates most plans on a case-by-case
basis, T. Rowe Price generally opposes compensation packages that
provide what it views as excessive awards to a few senior executives
or that contain excessively dilutive stock option plans. T. Rowe Price
60
bases its review on criteria such as the costs associated with the
plan, plan features, dilution to stockholders and comparability to
plans in the company's peer group. T. Rowe Price generally opposes
plans that give a company the ability to reprice options.
- ANTI-TAKEOVER AND CORPORATE GOVERNANCE ISSUES. T. Rowe Price generally
opposes anti-takeover measures and other proposals designed to limit
the ability of stockholders to act on possible transactions. When
voting on corporate governance proposals, T. Rowe Price will consider
the dilutive impact to stockholders and the effect on stockholder
rights.
- SOCIAL AND CORPORATE RESPONSIBILITY ISSUES. T. Rowe Price generally
votes with a company's management on social issues unless they have
substantial economic implications for the company's business and
operations that have not been adequately addressed by management.
MONITORING AND RESOLVING CONFLICTS OF INTEREST. The Proxy Committee is also
responsible for monitoring and resolving possible material conflicts between the
interests of T. Rowe Price and those of its clients with respect to proxy
voting. Because T. Rowe Price's voting guidelines are pre-determined by the
Proxy Committee using recommendations from ISS, an independent third party,
application of the T. Rowe Price guidelines to vote clients' proxies should in
most instances adequately address any possible conflicts of interest. However,
for proxy votes inconsistent with T. Rowe Price guidelines, the Proxy Committee
reviews all such proxy votes in order to determine whether the portfolio
manager's voting rationale appears reasonable. The Proxy Committee also assesses
whether any business or other relationships between T. Rowe Price and a
portfolio company could have influenced an inconsistent vote on that company's
proxy. Issues raising possible conflicts of interest are referred to designated
members of the Proxy Committee for immediate resolution.
PROXY VOTING RECORDS. Information regarding how the Fund voted proxies
relating to portfolio securities for the twelve-month period ending June 30,
2004 will be available after August 31, 2004 without charge by calling the Fund
collect at 1-617-263-6400 or on the Commission's website at http://www.sec.gov.
PORTFOLIO MATURITY AND TURNOVER
The Fund's holdings may include issues of various maturities. Ordinarily,
the Fund will emphasize investments in medium and longer-term instruments (i.e.,
those with maturities in excess of three years), but the weighted average
maturity of portfolio holdings may be shortened or lengthened depending on the
Investment Adviser's general investment outlook or changes in the
characteristics of "high-yield" securities. To the extent the weighted average
maturity of the Fund's portfolio securities is lengthened, the value of such
holdings will be more susceptible to fluctuation in response to changes in
interest rates and general economic conditions. As of June 30, 2003, the
weighted average maturity of the Fund's portfolio holdings was approximately 6.6
years. The weighted average of the Fund's portfolio will fluctuate depending on
market conditions and investment opportunities. The Fund, however, does not
expect that the weighted average maturity of the Fund's portfolio will, under
normal conditions, exceed fifteen years.
The Investment Adviser actively makes portfolio adjustments that reflect
the Fund's investment strategy, but generally does not trade securities for the
Fund for the purpose of seeking short-term profits. It will, however, change the
Fund's securities, regardless of how long they have been held, when it believes
doing so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is anticipated
that the Fund's portfolio turnover rate may, from time to time, exceed 100% per
annum. A 100% annual turnover rate would occur, for example, if all the
securities in the Fund's portfolio were replaced once within a period of one
year. The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy is changed significantly, portfolio turnover
may be significantly
61
higher than during times of economic and market price stability, when
investment strategy remains relatively constant. A high rate of portfolio
turnover will result in increased transaction costs for the Fund in the form
of increased dealer spreads and brokers commissions. The Fund's portfolio
turnover rates for the fiscal years ended December 31, 2000, 2001, and 2002
were 45.58%, 38.89% and 82.47%, respectively. The change in the Fund's
investment adviser from Wellington Management to T. Rowe Price on December 2,
2002 contributed to the increased portfolio turnover rate in the year ended
December 31, 2002.
TAXATION
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Common Stock. Investors should consult
their own tax advisors for more detailed information and for information
regarding the impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund qualifies and elects to be treated as a regulated investment
company under Subchapter M of the Code and intends to qualify under those
provisions each year. To qualify as a regulated investment company, the Fund
must, among other things, (a) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its business
of investing in stocks, securities or currencies; (b) diversify its holdings
so that, at the end of each quarter of its taxable year, (i) at least 50% of
the market value of the Fund's assets is represented by (A) cash, cash items
(including receivables), U.S. Government securities and securities of other
regulated investment companies, and (B) other securities, with such other
securities of any one issuer generally limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities), or two
or more issuers which the Fund controls and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses.
As a regulated investment company, in any fiscal year with respect to which
the Fund distributes at least 90% of its net investment income (i.e., the Fund's
investment company taxable income, as that term is defined in the Code, without
regard to the deduction for dividends paid), the Fund (but not its stockholders)
generally will be relieved of U.S. federal income taxes on its net investment
income and net capital gains (i.e., the Fund's net long-term capital gains in
excess of the sum of net short-term capital losses and capital loss carryovers
from prior years, if any) that it distributes to stockholders. However, the Fund
will be subject under current tax rates to a federal income tax at a maximum
effective rate of 35% on any undistributed net investment income and net capital
gain. See "Federal Income Tax Treatment of Holders of Common Stock" below.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax payable by
the Fund. To avoid the tax, the Fund must distribute, or be deemed to have
distributed, during each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year, (2) at least 98% of its capital gains in excess
of its capital losses (adjusted for certain ordinary losses) for the
twelve-month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. For this purpose, any income or gain retained by the Fund
that is subject to corporate tax will be considered to have been distributed by
year-end. To prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
Compliance with the calendar year distribution requirement may limit the extent
to which the Fund will be able to retain its net capital gains for investment.
62
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund will be taxed in the same manner as an ordinary
corporation and distributions to its stockholders will not be deductible by the
Fund in computing its taxable income. In addition, in the event of failure to
qualify, the Fund's distributions, to the extent derived from the Fund's current
or accumulated earnings and profits, will constitute dividends (eligible for the
corporate dividends-received deduction) which are taxable to stockholders as
ordinary income, even though those distributions might otherwise (at least in
part) have been treated in the stockholder's hands as long-term capital gains.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Fund will be required to suspend distributions to the holders of the Common
Stock and/or the ATP until the asset coverage is restored. See "Description of
Capital Stock - Dividends and Dividend Periods." Such a suspension of
distributions might prevent the Fund from distributing 90% of its net investment
income, as is required in order to qualify for taxation as a regulated
investment company, or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund intends to repurchase or redeem (to the extent permitted under the 1940
Act) ATP in order to maintain or restore the requisite asset coverage and avoid
failure to remain qualified as a regulated investment company. The determination
to repurchase or redeem ATP and the amounts to be repurchased or redeemed, if
any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem ATP may adversely affect the
Fund's ability to distribute annually at least 90% of its net investment income,
which distribution is required to qualify for taxation as a regulated investment
company. The Fund may also recognize income in connection with funding
repurchases or redemptions of ATP, and such income would be taken into account
in determining whether or not the above-described distribution requirements
have been met. Depending on the size of the Fund's assets relative to its
outstanding senior securities, redemption of ATP might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
stockholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to satisfy the 90%
distribution requirement and the distribution requirements for avoiding income
and excise taxes. In order to generate sufficient cash to make distributions
necessary to satisfy the 90% distribution requirement and to avoid income and
excise taxes, the Fund may have to borrow money or dispose of securities that it
would otherwise have continued to hold.
Any transactions by the Fund in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) would be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to stockholders. These provisions
also may require the Fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out) which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it acquires any foreign currency, option, futures contract, forward
contract, or hedged investment in order to mitigate the effect of these rules
and prevent
63
disqualification of the Fund as a regulated investment company and minimize
the imposition of income and excise taxes.
If the Fund fails to qualify as a regulated investment company for any
year, it generally must pay out its earnings and profits accumulated in that
year, less an interest charge to the Treasury on 50% of such earnings and
profits before it can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF COMMON STOCK
The Fund's income will consist of net investment income and may also
consist of net capital gains. For federal income tax purposes, the Internal
Revenue Service (the "Service") currently requires that a regulated investment
company that has two or more classes of shares allocate to each such class
proportionate amounts of each type of its income (such as ordinary income and
net capital gains) for each tax year. Accordingly, the Fund intends to designate
distributions made with respect to the Common Stock and the ATP as consisting of
particular types of income (net capital gains and ordinary income) in accordance
with each class' proportionate share of the total dividends paid to both
classes. The amount of the net capital gains realized by the Fund is not
expected to be significant and there is no assurance that any such income will
be realized by the Fund in any year. Distributions of the Fund's net investment
income are taxable to stockholders as ordinary income. Distributions of the
Fund's net capital gains, if any, are taxable to stockholders at rates
applicable to long-term capital gains regardless of the length of time the
Common Stock has been held by the holders. Distributions in excess of the Fund's
earnings and profits will first reduce a stockholder's adjusted tax basis in his
or her Shares and, after the adjusted tax basis is reduced to zero, will
constitute capital gains to a holder of Shares who holds his or her Shares as a
capital asset.
Dividends and distributions will be taxable to stockholders as if actually
distributed, even if they are reinvested in additional Shares of the Fund.
Stockholders receiving distributions in the form of newly issued Shares will
have a cost basis in each Share received equal to the fair market value of a
Share of the Fund on the distribution date.
Although the Fund is required to distribute annually at least 90% of its
net investment income, the Fund is not required to distribute net capital gains
to its stockholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gains").
However, it is unclear whether a portion of the net undistributed capital gains
would have to be allocated to the ATP for federal income tax purposes. Until and
unless the Fund receives acceptable guidance from the Service as to the
allocation of the net undistributed capital gains between the Common Stock and
the ATP, the Fund intends to distribute its net capital gains for any year
during which it has shares of ATP outstanding.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November and December, payable to stockholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the stockholders on the December 31 prior to the date of payment. In
addition, solely for the purpose of satisfying the 90% distribution requirement
and the distribution requirement for avoiding income taxes, certain
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid during such taxable year. In such case, stockholders
will be treated as having received such dividends in the taxable year in which
the distribution was actually made. The Service has ruled privately that
dividends paid following the close of the taxable year that are treated for tax
purposes as derived from income from the prior year will be treated as dividends
"paid" in the prior year for purposes of determining the proportionate share of
a particular type of income for each class. Accordingly, the Fund intends to
treat any such dividends that are paid following the close of a taxable year as
"paid" in the prior year for purposes of determining a class' proportionate
share of a particular type of income. However, the private ruling is not binding
on the Service, and there can be no assurance that the Service will respect such
treatment.
64
Most of the Fund's net investment income is derived from interest-bearing
securities. Accordingly, dividends paid with respect to the Common Stock
generally will not qualify for the corporate dividends received deduction.
However, from time to time, a portion of the Fund's net investment income may be
dividends on equity securities which are eligible for the dividends received
deduction under Section 243 of the Code.
Corporate stockholders who otherwise are eligible to claim the dividends
received deduction under Section 243 of the Code can deduct 70% of the portion
of the Common Stock dividend representing the stockholder's portion of the
Fund's eligible dividend income. The Service has ruled that corporate
stockholders of a regulated investment company must meet the forty-five day
holding requirement of Section 246(c)(1)(A) of the Code with respect to the
shares of the regulated investment company to qualify for the dividends received
deduction.
Distributions that the Fund properly designates as capital gains dividends
will be taxable to U.S. stockholders as gains from the sale or disposition of a
capital asset held for more than one year to the extent that these gains do not
exceed the Fund's actual net capital gain for the taxable year. The Fund will
notify stockholders after the close of its taxable year as to the portions of
the distributions attributable to that year that constitute ordinary income
(including any portion thereof qualifying for the dividends received deduction
generally available to corporations), return of capital, and capital gain.
SALE OF SHARES
The sale of Shares (including transfers in connection with a redemption or
repurchase of such Shares or a liquidation of the Fund) will be a taxable
transaction for federal income tax purposes. Selling stockholders will generally
recognize gain or loss in an amount equal to the difference between their basis
in their Shares and the amount received in exchange therefor. If such Shares are
held as a capital asset, the gain or loss will generally be a capital gain or
loss and will be long-term if such stockholders have held the Shares for more
than one year. Any loss realized upon a taxable disposition of Shares held for
six months or less will be treated as a long-term loss to the extent of any
distributions of net capital gains received (or credited with undistributed
capital gain) with respect to such Shares. All or a portion of any loss realized
upon a taxable disposition of Shares may be disallowed if other Shares are
purchased by the stockholder within thirty days before or after the disposition.
BACKUP WITHHOLDING
The Fund may be required to withhold for federal income taxes at the
current rate of 28% on all taxable distributions payable to stockholders who
fail to provide the Fund with their correct taxpayer identification number or
who fail to make required certifications or if the Fund or a stockholder has
been notified by the Service that they are subject to backup withholding.
Corporate stockholders and other stockholders specified in the Code are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the stockholder's U.S.
federal income tax liability.
OTHER TAXATION
In general, federal withholding taxes at a 30% rate or a lesser rate
established by treaty may apply to distributions to stockholders (except to
those distributions designated by the Fund as capital gains dividends or
anticipated by the Fund to qualify as return of capital) that are nonresident
aliens or foreign partnerships, trusts or corporations. Investors are advised to
consult their own tax advisors with respect to the application to their own
circumstances of the above-described general taxation rules and with respect to
the state, local or foreign tax consequences to them of an investment in the
Common Stock.
65
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the terms of the capital stock of
the Fund. This description does not purport to be complete and is subject to
qualification in its entirety by reference to the Articles that establish and
fix the rights and preferences of the Common Stock and the shares of ATP. A copy
of the Articles, including a copy of the Articles Supplementary establishing the
ATP, and any amendments thereto, is filed as an exhibit and is incorporated by
reference to the Registration Statement of which this Prospectus is a part and
may be inspected and copies thereof may be obtained as described under
"Additional Information."
GENERAL
The authorized capital stock of the Fund consists of 1,000,000 shares of
preferred stock, $1.00 par value, issuable in one or more series and 200,000,000
shares of Common Stock, par value $0.01 per share. All shares of Common Stock
have equal rights as to voting, dividends and liquidation. At June 30, 2003,
there were 70,131,299 outstanding shares of Common Stock of the Fund and 4,000
outstanding shares of preferred stock of which 1,400 are classified as ATP
Series A, 1,000 are classified as ATP Series B, 600 are classified as ATP Series
C, and 1,000 are classified as ATP Series D. All shares of Common Stock and
shares of ATP issued and outstanding are fully paid and non-assessable. Shares
of Common Stock have no preemptive, conversion or redemption rights and are
freely transferable. Subject to confirmation from the rating agencies that the
rating of the ATP will not change, the Fund may issue additional shares of each
series or additional series of preferred stock in the future, which additional
series may have substantially different terms than the terms of the ATP. The
description herein of the Fund's capital structure relates to its capital
structure at the date hereof.
The following description refers to each series of ATP separately as and
when the context so requires.
DIVIDENDS AND DIVIDEND PERIODS
Dividends on shares of ATP are cumulative from the date on which such
shares were originally issued and are payable, when, as and if declared by the
Board of Directors of the Fund out of funds legally available therefor, on each
Dividend Payment Date thereafter. "Dividend Payment Date" for each series of
ATP, means (i) with respect to any Dividend Period of one year or less, the
business day next succeeding the last day thereof and, if any, the 91st, 181st
and 271st days thereof, and (ii) with respect to any Dividend Period of more
than one year, on a quarterly basis on each January 1, April 1, July 1 and
October 1 and on the business day following the last day of such Dividend
Period. For Dividend Periods of one year or less, Dividend Payment Dates occur
on the business day next succeeding the last day of such Dividend Period and, if
any, on the 91st, 181st and 271st days thereof. "Dividend Period" means, with
respect to the relevant series of ATP, the period commencing on the day
following each Dividend Period for such series and ending on the day established
for such series by the Fund. For Dividend Periods of more than one year,
Dividend Payment Dates occur on a quarterly basis on each January 1, April 1,
July 1 and October 1 within such Dividend Period and on the business day
following the last day of such Dividend Period. Dividends are paid through a
securities depository (DTC or a successor securities depository) (a "Securities
Depository") on each Dividend Payment Date. The Securities Depository's current
procedures provide for it to distribute dividends in same-day funds to members
of or participants in the Securities Depository that will act on behalf of a
holder of ATP or person placing an order for ATP ("Agent Member"), who are in
turn expected to distribute such dividends to the persons for whom they are
acting as agents. For each Dividend Period, subject to certain exceptions,
the dividend rates will be the rate (the "Applicable Rate") that the Auction
Agent advises the Fund has resulted from a periodic auction ("Auction") of
the ATP in accordance with the auction procedures.
Dividend Periods are either standard term periods of twenty-eight days
(unless such 28th day is not a business day, then the number of days ending on
the business day next preceding such 28th day) (a "Standard Term Period") or,
subject to certain conditions and with notice to holders, periods longer or
shorter than
66
twenty-eight days and having such duration as the Board of Directors shall
specify (each, an "Alternate Term Period"). During the Standard Term Period
for ATP, Series A (July 8, 2003 to August 4, 2003), Series B (June 24, 2003
to July 21, 2003), Series C (July 1, 2003 to July 28, 2003), and Series D
(June 17, 2003 to July 14, 2003), dividends were paid at an annual rate of
1.15%, 1.15%, 1.17% and 1.15%, respectively. The annual return on the Fund's
portfolio needed to cover dividend payments on the ATP at the current rate is
..45%, calculated as of July 1, 2003. The annual return on the Fund's
portfolio needed to cover total leverage related expenses is 1.86% calculated
as of July 1, 2003.
An Alternate Term Period will not be effective unless, among other things,
sufficient clearing orders exist at the Auction in respect of such Alternate
Term Period (that is, in general, the number of shares of ATP subject to buy
orders by potential holders is at least equal to the number of shares subject to
sell orders by existing holders). If sufficient clearing orders do not exist at
any Auction in respect of an Alternate Term Period, the Dividend Period
commencing on the business day succeeding such Auction will be a Standard Term
Period and the holders of the shares of the affected series will be required to
continue to hold such shares for such Standard Term Period.
Except during a "Default Period" as described below, the Applicable Rate
resulting from an Auction will not be greater than the "Maximum Applicable
Rate," which is equal to 150% of the applicable AA Composite Commercial Paper
Rate (for a Dividend Period of fewer than 184 days) or the applicable Treasury
Index Rate (as defined below) (for a Dividend Period of 184 days or more, (each,
a "Reference Rate")), in each case subject to upward but not downward adjustment
in the discretion of the Board of Directors after consultation with the
broker-dealers who place orders on behalf of their clients in connection with
the Auction ("Broker-Dealers"), provided that immediately following any such
increase the Fund would be in compliance with the ATP Basic Maintenance Amount.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of thirty-day periods to maturity as the length of the applicable
Dividend Period, determined, to the extent necessary, by linear interpolation
based upon the yield for such securities having the next shorter and next longer
number of thirty-day periods to maturity treating all Dividend Periods with a
length greater than the longest maturity for such securities as having a length
equal to such longest maturity, in all cases based upon data set forth in the
most recent weekly statistical release published by the Board of Governors of
the Federal Reserve System (currently in H.15(519)); provided, however, if the
most recent such statistical release shall not have been published during the
fifteen days preceding the date of computation, the foregoing computations shall
be based upon the average of comparable data as quoted to the Fund by at least
three recognized dealers in U.S. Government securities selected by the Fund.
The Maximum Applicable Rate for the shares of ATP will apply automatically
following an Auction for such shares in which sufficient clearing orders have
not been made (other than because all shares of ATP were the subject of hold
orders by existing holders) or following the failure to hold an Auction for any
reason on the first business day next preceding the first day of a Dividend
Period for the relevant series of ATP ("Auction Date") scheduled to occur
(except for circumstances in which the dividend rate for the ATP is the Default
Rate, as described below).
The "Minimum Applicable Rate" will apply automatically following an Auction
in respect of a Dividend Period of ninety-three days or fewer in which all of
the outstanding shares are subject to (or are deemed to be subject to) hold
orders. The Minimum Applicable Rate is 80% of the applicable AA Composite
Commercial Paper Rate. No minimum rate is specified for Auctions in respect of
Dividend Periods of more than ninety-three days.
DEFAULT PERIOD. A "Default Period" will commence on the applicable date
set forth below if the Fund fails to (i) declare prior to the close of
business on the second business day preceding any Dividend Payment Date, for
payment on or (to the extent permitted as described below) within two
business days after such Dividend
67
Payment Date to the persons who held shares of ATP as of 12:00 noon, New York
City time, on the business day preceding such Dividend Payment Date, the full
amount of any dividend payable on such Dividend Payment Date, (ii) to
deposit, irrevocably in trust, in same-day funds, with a designated paying
agent by 12:00 noon, New York City time, (A) on or (to the extent permitted
as described below) within two business days after any Dividend Payment Date
the full amount of any declared dividend on the relevant series of ATP
payable on such Dividend Payment Date (together with the failure to timely
declare dividends described in (i) above, hereinafter referred to as a
"Dividend Default") or (B) on or (to the extent permitted as described below)
within two business days after any date fixed for redemption of shares of ATP
called for redemption, the applicable redemption price (a "Redemption
Default"), or (iii) to maintain the Aaa/AAA Credit Rating unless the Aaa/AAA
Credit Rating is restored by the Dividend Payment Date next following the
date on which the Fund fails to maintain the Aaa/AAA Credit Rating (a "Rating
Default"). A Default Period with respect to a Dividend Default or a
Redemption Default will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be,
and ending on and including the business day on which, by 12:00 noon, New
York City time, all unpaid dividends and unpaid redemption price shall have
been so deposited or shall have otherwise been made available to the
applicable holders in same day funds. A Default Period with respect to a
Rating Default shall commence as of the date on which the Fund fails to
maintain the Aaa/AAA Credit Rating (provided that such Rating Default shall
be deemed not to have occurred and such Default Period shall not commence if
such Rating Default is cured by the next succeeding Dividend Payment Date)
and shall end on the earlier of the date on which such default is cured as
provided herein or the date on which the ATP is mandatorily redeemed as
provided herein. Holders of two-thirds of the ATP then outstanding may waive
any Dividend Default, Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend Period
commencing during a Default Period, will be equal to the Reference Rate
multiplied by three (the "Default Rate"). Each subsequent Dividend Period
commencing after the beginning of a Default Period shall be a Standard Term
Period; provided, however, that the commencement of a Default Period will not by
itself cause the commencement of a new Dividend Period. Any dividend due on any
Dividend Payment Date (if, prior to 12:00 noon, New York City time, on such
Dividend Payment Date, the Fund has declared such dividend payable on or within
three business days after such Dividend Payment Date to the persons who held
such shares as of 12:00 noon, New York City time, on the business day preceding
such Dividend Payment Date) or redemption price with respect to such shares not
paid to such persons when due may (if such default is not solely due to the
willful failure of the Fund) be paid to such Persons in the same form of funds
by 12:00 noon, New York City time, on any of the first three business days after
such Dividend Payment Date or due date, as the case may be, provided that such
amount is accompanied by an additional amount for such period of non-payment at
the Default Rate applied to the amount of such default based on the actual
number of days comprising such period divided by 360. For the purposes of the
foregoing, payment to a person in same-day funds made on or before 12:00 noon
New York City time on any business day at any time will be considered equivalent
to payment to that person in New York Clearing House (next-day) funds at the
same time on the preceding business day, and any payment made after 12:00 noon,
New York City time, on any business day shall be considered to have been made
instead in the same form of funds and to the same person before 12:00 noon, New
York City time, on the next business day.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the ATP, it will be distributed to the holders of the
Common Stock. The term "net investment income" includes interest, dividends,
short-term capital gains and other income received or accrued less the advisory
fee, bank custodian charges, taxes (except capital gain taxes) and other
expenses properly chargeable against income, but does not include net capital
gains, stock dividends, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. Any realized net capital gains
(defined as the excess of net long-term capital gains over net short-term
capital losses) of the Fund will be distributed annually to the holders of the
Common Stock (subject to the prior rights of the holders of the ATP) subject to
the foregoing and any requirements of Maryland law.
68
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), holders of
Common Stock may elect to receive all dividends and capital gains distributions
in cash paid by check mailed directly to such holders by EquiServe, as dividend
disbursing agent. Pursuant to the Plan, holders of Common Stock not making such
election will have all such amounts automatically reinvested by the bank serving
as Plan agent, in whole or fractional Shares, as the case may be. See "Dividends
and Distributions; Dividend Reinvestment Plan."
SWAP ARRANGEMENT. Effective October 1, 2001, the Fund entered into a
five-year interest payment Swap Arrangement with Fleet for the purpose of
hedging its dividend payment obligations with respect to the ATP. Pursuant to
the Swap Arrangement, the Fund makes payments to Fleet on a monthly basis at a
fixed annual rate of 4.50%, computed on a notional contract amount of $100
million. In exchange for these payments, Fleet makes payments to the Fund on a
monthly basis at a variable rate determined with reference to one month London
Inter-Bank Offered Rate ("LIBOR"). The variable rates ranged from 1.44% to 2.14%
for the year ended December 31, 2002. In the current interest rate environment,
the Swap Arrangement requires the Fund to make net payments to Fleet and
therefore less income is available for the Common Stock dividend than if the
Swap Arrangement were not in place.
Swap transactions, which involve future settlement, give rise to credit
risk. Credit risk is the amount of loss the Fund would incur in the event
counterparties failed to perform according to the terms of the contractual
commitments. In the event of nonperformance by the counterparty, the Fund's
dividend payment obligation with respect to the ATP would no longer be hedged.
The Fund does not anticipate nonperformance by any counterparty. While notional
contract amounts are used to express the volume of interest rate swap
agreements, the amounts potentially subject to credit risk, in the event of
nonperformance by counterparties, are substantially smaller.
The Fund accounts for the Swap Arrangement in accordance with the Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires an entity to recognize all
freestanding derivative instruments in the balance sheet as either assets or
liabilities and measure them at fair value. Any change in the unrealized gain or
loss is recorded in current earnings. For the year ended December 31, 2002, the
Fund's obligations under the Swap Arrangement were more than the amount received
from Fleet by approximately $2,851,000 and the estimated fair value of the Swap
Arrangement at December 31, 2002 amounted to approximately $6,768,000 of
unrealized loss.
The Fund obtained consents from Moody's and Fitch to enter into the Swap
Arrangement. In connection with obtaining such consent, the Fund agreed to an
increase in its discounted asset coverage requirement as described below under
"Asset Maintenance" below. The Swap Arrangement will remain in effect through
October 1, 2006, subject to early termination in certain circumstances, such as
a default in payment obligations under the Swap Arrangement, a breach by either
party of any agreement or obligation under the Swap Arrangement, the bankruptcy
of either party to the Swap Arrangement, certain changes in tax laws, and
illegality. Upon any such early termination the Fund will be required to make a
payment to, or will receive a payment from, Fleet, based on the market value of
the Swap Arrangement at that time. In the event that the Fund fails to satisfy
certain asset coverage requirements that give rise to a mandatory redemption of
ATP, the Fund has agreed with Moody's and Fitch that it will terminate the Swap
Arrangement to the extent the notional amount of such Swap Arrangement following
such redemption would exceed the aggregate liquidation preference of the ATP
that would remain outstanding following such redemption, or in such greater
amount as the Fund may determine, subject to deferral to the extent the value of
the Swap Arrangement then exceeds a specified benchmark.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on the Common Stock or
purchase any Common Stock if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the outstanding shares of ATP would be
less than 200%. Under the Code, the Fund must, among other things, distribute at
least 90% of its investment company taxable income each year in order to
69
maintain its qualification for tax treatment as a regulated investment company.
The foregoing limitation on dividends, distributions and purchases may, in
certain circumstances, impair the Fund's ability to maintain such qualification.
The Fund intends, however, to redeem shares of ATP to the extent necessary to
maintain such qualification. See "Taxation."
Upon failure to pay dividends for two years or more, the holders of ATP
will acquire certain additional voting rights. See "Voting Rights" below. Such
rights shall be the exclusive remedy of the holders of ATP upon any failure to
pay dividends on the ATP.
For so long as any shares of ATP are outstanding, except in connection
with the liquidation the Fund, or a refinancing of the ATP as provided in the
Articles, the Fund will not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase,
Common Stock or other shares, if any, ranking junior to the ATP as to
dividends or upon liquidation) in respect to Common Stock or any other shares
of the Fund ranking junior to or on a parity with the ATP as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Stock or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior
to the ATP as to dividends and upon liquidation) or any such parity shares
(except by conversion into or exchange for shares of the Fund ranking junior
to or on a parity with the ATP as to dividends and upon liquidation), unless
(i) immediately after such transaction, the Fund would have Eligible Assets
with an aggregate Discounted Value at least equal to the ATP Basic
Maintenance Amount and the 1940 Act ATP Asset Coverage (see "Asset
Maintenance" and "Redemption" below) would be achieved, (ii) full cumulative
dividends on the ATP due on or prior to the date of the transaction have been
declared and paid and (iii) the Fund has redeemed the full number of shares
of ATP required to be redeemed by any provision for mandatory redemption
contained in the Articles.
REDEMPTION
OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Maryland Law, the Fund at its option may redeem shares of ATP having a Dividend
Period of less than one year, in whole or in part, on the business day after the
last day of such Dividend Period upon not less than fifteen days and not more
than forty days prior notice. The optional redemption price shall be $25,000 per
share, plus an amount equal to accumulated but unpaid dividends thereon (whether
or not earned or declared) to the date fixed for redemption. Shares of ATP
having a Dividend Period of more than one year may be redeemable at the option
of the Fund prior to the end of the relevant Dividend Period, subject to any
Specific Redemption Provisions (as defined below), which may include the payment
of redemption premiums to the extent required under any applicable Specific
Redemption Provisions. The Fund shall not effect any optional redemption unless
after giving effect thereto the Fund would have Eligible Assets with an
aggregate Discounted Value at least equal to the ATP Basic Maintenance Amount.
"Specific Redemption Provisions" means with respect to any Alternate Term
Period of more than one year, either, or any combination of (i) a period (a
"Non-Call Period") determined by the Board of Directors after consultation with
the Broker-Dealers, during which the shares subject to such Alternate Term
Period are not subject to redemption at the option of the Fund pursuant to
Section 3(a)(i) of the Articles and/or Section 3(a)(ii) and/or 3(a)(iii) of the
Articles and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years as determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such Alternate
Term Period shall be redeemable at the Fund's option pursuant to Section 3(a)(i)
of the Articles and/or in connection with any mandatory redemption pursuant to
Section 3(a)(ii) and/or 3(a)(iii) of the Articles at a price share equal to
$25,000 plus accumulated but unpaid dividends plus a premium expressed as a
percentage or percentages of $25,000 or expressed in a formula using specified
variables as determined by the Board of Directors after consultation with the
Broker-Dealers.
70
The Fund also reserves the right to repurchase ATP in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the ATP, but is
under no obligation to do so.
MANDATORY REDEMPTION. If the Fund fails to maintain, as of any Valuation
Date, Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount or, as of the last business day of any month, the
1940 Act ATP Asset Coverage, and such failure is not cured within two business
days following the relevant Valuation Date in the case of a failure to maintain
the ATP Basic Maintenance Amount or the last business day of the following month
in the case of a failure to maintain 1940 Act ATP Asset Coverage as of such last
business day (each an "Asset Coverage Cure Date"), the ATP will be subject to
mandatory redemption out of funds legally available therefor. See "Asset
Maintenance" below. The number of shares of ATP to be redeemed in such
circumstances will be equal to the lesser of (i) the minimum number of shares of
ATP the redemption of which, if deemed to have occurred immediately prior to the
opening of business on the relevant Asset Coverage Cure Date, would result in
the Fund having Eligible Assets with an aggregate Discounted Value at least
equal to the ATP Basic Maintenance Amount, or sufficient to satisfy 1940 Act ATP
Asset Coverage, as the case may be, in either case as of the relevant Asset
Coverage Cure Date (provided that, if there is no such minimum number of shares
the redemption of which would have such result, all shares of ATP then
outstanding will be redeemed), and (ii) the maximum number of shares of ATP
that can be redeemed out of funds expected to be available therefor on the
Mandatory Redemption Date (as defined below).
If the Fund at any time fails to maintain the Aaa/AAA Credit Rating for the
ATP, and such failure is not cured within ninety calendar days thereafter (the
"Rating Default Cure Date"), all shares of ATP will be subject to mandatory
redemption out of funds legally available therefor, on the Mandatory Redemption
Date, and dividends thereon will be payable at the Default Rate until such
redemption is effected as provided above under "Dividends and Dividend Periods -
Default Period." To maintain the Aaa/AAA Credit Rating, the Fund must maintain a
rating for the ATP in the highest rating category from any two nationally
recognized statistical rating organizations, as used in the Securities Exchange
Act of 1934, as amended, one of which shall be Moody's or S&P.
Shares of ATP may be subject to mandatory redemption in accordance with the
foregoing redemption provision notwithstanding the terms of any Specific
Redemption Provisions.
The Fund is required to effect such a mandatory redemption not later than
thirty days after the Asset Coverage Cure Date or the Rating Default Cure Date,
as the case may be (the "Mandatory Redemption Date"), except that if the Fund
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of shares of ATP which
are subject to mandatory redemption, together with shares of other ATP which are
subject to mandatory redemption under provisions similar to the ATP, or the Fund
otherwise is unable to effect such redemption on or prior to such Mandatory
Redemption Date, the Fund will redeem those shares of ATP and shares of other
ATP which it was unable to redeem on the earliest practicable date on which the
Fund will have such funds available, upon notice to record owners of shares of
ATP and the Auction Agent. The Fund's ability to make a mandatory redemption may
be limited by the provisions of the 1940 Act or Maryland law.
The redemption price in the event of any mandatory redemption will be
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for redemption
plus (in the case of a Dividend Period of not less than one year only) any
redemption premium specified in any applicable Specific Redemption Provisions.
In connection with any redemption, whether optional or mandatory, the Fund
shall pay, together with the redemption price, an amount equal to all
accumulated dividends, whether or not such dividends have been declared through
the redemption date.
71
Notwithstanding the provisions for redemption described above, no shares of
ATP may be redeemed unless all dividends in arrears on the outstanding shares of
ATP, and all capital stock of the Fund ranking on a parity with the ATP with
respect to the payment of dividends or upon liquidation, have been or are being
contemporaneously paid or set aside for payment, except in connection with the
liquidation of the Fund in which case all shares of ATP and all shares ranking
in a parity with the ATP must receive proportionate amounts.
Except for the provisions described above, nothing contained in the
Articles limits any right of the Fund to purchase or otherwise acquire any
shares of ATP outside of an Auction at any price, whether higher or lower than
the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any shares of ATP for which Notice of Redemption has been given
and the Fund is in compliance with the 1940 Act ATP Asset Coverage and has
Eligible Assets with an aggregate Discounted Value at least equal to the ATP
Basic Maintenance Amount after giving effect to such purchase or acquisition on
the date thereof. Any shares which are purchased, redeemed or otherwise acquired
by the Fund shall have no voting rights. If fewer than all the outstanding
shares of ATP are redeemed or otherwise acquired by the Fund, the Fund shall
give notice of such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Directors.
RATINGS
The Fund has obtained the Aaa/AAA Credit Rating from Moody's and Fitch for
the ATP. While there is no assurance that the Aaa/AAA Credit Rating with respect
to the ATP will not be changed, suspended or withdrawn, the Fund will
endeavor to maintain such rating and any failure to maintain such rating
would, subject to cure and certain exceptions, result in mandatory redemption
of the ATP. See "Redemption" above. While the Fund does not presently intend
to seek a rating from a rating agency other than Moody's and Fitch, it
reserves the right to do so.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset coverage requirements
under the terms of the Articles. These requirements are summarized below.
ATP BASIC MAINTENANCE AMOUNT. The Fund is required to maintain as of each
Valuation Date Eligible Assets having in the aggregate a Discounted Value at
least equal to the ATP Basic Maintenance Amount, calculated separately for
Moody's (if Moody's is then rating the ATP) and Fitch (if Fitch is rating the
ATP). For this purpose, the Market Value of the Fund's portfolio securities is
(i) computed based upon one or more pricing services agreements approved by the
Board of Directors or (ii) the lower bid price from two independent dealers in
securities, one of which bids shall be in writing. The Fund has pricing services
agreements with Reuters Fixed-Income Services and State Street Bank and Trust
Company. The Fund may substitute another pricing service, provided that it has
received notice from Moody's (if Moody's is then rating the ATP) and Fitch (if
Fitch is rating the ATP) that such substitution will not impair the Aaa/AAA
Credit Rating. If the Fund fails to maintain Eligible Assets having in the
aggregate a Discounted Value at least equal to the ATP Basic Maintenance Amount
as of any Valuation Date and such failure is not cured on or before the second
business day after such Valuation Date, the Fund will be required in certain
circumstances to redeem certain of the shares of ATP. See "Redemption" above.
The "ATP Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to the sum of
(1) (A) the product of the number of outstanding shares of
ATP on such date multiplied by $25,000; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or not
earned or declared) to and including the first following Dividend Payment
Date for each share of ATP outstanding that follows such Valuation Date (or
to the 42nd day after such Valuation Date, if such 42nd
72
day occurs before the first following Dividend Payment Date); (C) the
aggregate amount of dividends that would accumulate at the then current
Maximum Applicable Rate for a Standard Term Period multiplied by the
volatility factor of 1.00 if the current Dividend Period is one year or
less and 1.89 if the current Dividend Period is greater than one year
(the "Volatility Factor") on any shares of ATP outstanding from the
first day following the Dividend Payment Date referred to in (B) above
through the 42nd day after such Valuation Date, but only if such 42nd
day occurs after the first day following the Dividend Payment Date,
except that if such Valuation Date occurs during a Default Period, the
dividend for purposes of the calculation would accumulate at the Default
Rate; (D) the amount of anticipated Fund expenses for the ninety days
subsequent to such Valuation Date; (E) any current liabilities,
including, without limitation, indebtedness due within one year and any
redemption premium due with respect to shares of ATP for which a Notice
of Redemption has been given, as of such Valuation Date to the extent
not reflected in any of (1)(A) through (1)(D); and (F) without
duplication, 10% of the exercise price of any call option written by the
Fund and the exercise price of any put option written by the Fund; less
(2) the sum of any cash or the value of any Fund assets
irrevocably deposited by the Fund for the payment of any of (1)(B) through
(1)(F) ("value" for purposes of this clause (2) shall mean the Discounted
Value of the security, except that if the security matures prior to the
relevant redemption payment date and is either fully guaranteed by the U.S.
Government or is rated Prime-1 by Moody's and A-1 + by S&P, it will be
valued at its face value).
Pursuant to the Fund's arrangements with Moody's and Fitch, the Fund has
agreed upon a methodology for adjusting the Basic Maintenance Amount in light of
the Swap Arrangement. On any Valuation Date, the Fund will determine the net
amount that would be payable to or payable by the Fund pursuant to the Swap
Arrangement as if the Swap were being terminated as of such Valuation Date (the
"Termination Value"). The Termination Value will be determined using the average
of two market quotations provided by two dealers. If the Termination Value would
be payable by the Fund, the Fund will treat the sum of the Termination Value and
1.5% of the notional amount of the Swap outstanding (the "Adjusted Notional
Amount") as a liability of the Fund in calculating the Basic Maintenance
Amount. If the Termination Value would be payable to the Fund, the Fund will
treat the Discounted Termination Value as Eligible Assets in calculating the
Basic Maintenance Amount. The Discounted Termination Value shall be the
difference between the Termination Value and the Adjusted Notional Amount
adjusted by a Discount Factor which shall be determined by treating (a) the
Swap as if it were a Debt Security, (b) the Swap counterparty as the issuer
of such Debt Security and (c) the time remaining until the Swap's expiration
date as the remaining maturity of such Debt Security.
Solely for purposes of calculating the ATP Basic Maintenance Amount,
interest on borrowed funds outstanding as of any date will be treated as
dividend payments, at a deemed dividend rate equal to the interest rate payable
on such funds on the relevant date, but shall be subject to multiplication by
the larger of the factors that the Fund has been informed by Moody's (if Moody's
is then rating the ATP) or Fitch (if Fitch is then rating the ATP) are
applicable (as described in 1(C) above) only in the event that interest on such
borrowed funds is payable on the basis of a variable rate of interest, and the
interest rate is subject to change within the relevant forty-three-day period.
In addition, for purposes of calculating the ATP Basic Maintenance Amount,
assets in margin accounts will not be treated as Eligible Assets. Moreover,
where delivery of a security may be made to the Fund with any of a class of
securities, the Fund shall assume for purposes of the ATP Basic Maintenance
Amount that it takes delivery of that security which yields it the least value.
The discount factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets and guidelines for determining
the market value of the Fund's portfolio holdings have been based on criteria
established in connection with rating the ATP. These factors include, but are
not limited to, the
73
sensitivity of the market value of the relevant asset to changes in interest
rates, the liquidity and depth of the market for the relevant asset, the
credit quality of the relevant asset (for example, the lower the rating of a
debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked to market. In no event shall the
Discounted Value of any asset of the Fund exceed its unpaid principal balance
or face amount as of the date of calculation. The Discount Factor relating to
any asset of the Fund, the ATP Basic Maintenance Amount, the assets eligible
for inclusion in the calculation of the Discounted Value of the Fund's
portfolio and certain definitions and methods of calculation relating thereto
may be changed from time to time by the Fund, without stockholder approval,
but only in the event that the Fund receives written confirmation from
Moody's (if Moody's is then rating the ATP), Fitch (if Fitch is then rating
the ATP) and any other rating agency which is then rating the ATP and which
so requires that any such changes would not impair the Aaa/AAA Credit Rating.
If the Fund fails to maintain the Aaa/AAA Credit Rating and is unable to
restore the Aaa/AAA Credit Rating by the Rating Default Cure Date, the Fund
will be required to redeem the ATP. See "Redemption" above.
1940 ACT ATP ASSET COVERAGE. The Fund is required under the Articles to
maintain 1940 Act ATP Asset Coverage as of the last business day of each month
in which any shares of ATP are outstanding. If the Fund fails to maintain 1940
Act ATP Asset Coverage and such failure is not cured as of the last business day
of the following month, the Fund will be required to redeem certain shares of
the ATP. See "Redemption" above.
On June 30, 2003, the 1940 Act ATP Asset Coverage was:
Value of Fund assets less liabilities
not constituting senior securities $253,394,000
--------------------------------------- ------------ = 253.4%
Senior securities representing $100,000,000
indebtedness ($0) plus liquidation
value of the ATP
NOTICES. The Fund is required to deliver a certificate with respect to the
calculation of the ATP Basic Maintenance Amount and the value of the portfolio
holdings of the Fund (an "ATP Basic Maintenance Certificate") to the Auction
Agent, and any rating agency which is then rating the ATP and which so requires
as of (a) any Valuation Date on which the Fund fails to have Eligible Assets
with an aggregate Discounted Value at least equal to 125% of the ATP Basic
Maintenance Amount, (b) every fourth Valuation Date for the first year following
the date of original issue of the ATP, (c) if the Fund fails to have Eligible
Assets with an aggregate Discounted Value at least equal to the ATP Basic
Maintenance Amount, (d) the Valuation Date next following the date of
redemption by the Fund of Shares of Common Stock which, together with all
other Shares purchased during the six months preceding such date, equal in
excess of 1,000,000 Shares and (e) the last Valuation Date of each fiscal
quarter and a Valuation Date during such fiscal quarter randomly selected by
the Fund's independent accountants as provided below, (f) a business day on
or before any cure date relating to the Fund's cure of a failure to have
Eligible Assets with an aggregate Discounted Value at least equal to the ATP
Basic Maintenance Amount, and at any time upon the request of a rating agency
then rating the ATP. Such certificate must be accompanied by a certificate
from the Fund's accountants certifying as to the accuracy of the Fund's
calculations.
The Fund is required to deliver to the Auction Agent, and any rating agency
which is then rating the ATP and which so requires, a certificate with respect
to the calculation of the 1940 Act ATP Asset Coverage and the value of the
portfolio holdings of the Fund (a "1940 Act ATP Asset Coverage Certificate") as
of (a) the last Valuation Date of each quarter thereafter, and (b) as of the
business day on or before the Asset Coverage Cure Date relating to the failure
to satisfy the 1940 Act Asset Coverage. Such 1940 Act ATP Asset Coverage
Certificate shall be delivered on or before the third business day after the
relevant Valuation Date or the Asset Coverage Cure Date. Such certificate must
be accompanied by a certificate from the Fund's accountants certifying as to the
accuracy of the Fund's calculations.
74
In the event that an ATP Basic Maintenance Certificate or a 1940 Act ATP
Asset Coverage Certificate or the applicable accountant's certificates with
respect thereto are not delivered within the time periods specified in the
Articles, the Fund shall be deemed to have failed to have Eligible Assets with
an aggregate Discounted Value at least equal to the ATP Basic Maintenance Amount
or the 1940 Act ATP Asset Coverage as the case may be, as of the related
Valuation Date, and such failure shall be deemed not to have been cured as of
such cure date for purposes of the mandatory redemption provisions.
LIQUIDATION
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of ATP and any other shares
ranking in parity with the ATP, in preference to the holders of Common Stock,
will be entitled to payment, out of the assets of the Fund or the proceeds
thereof available for distribution to stockholders after satisfaction of claims
of creditors of the Fund, of a liquidation distribution in the amount of $25,000
per share, plus an amount equal to accumulated dividends (whether or not earned
or declared but without interest) to the date payment of such distribution is
made in full or a sum sufficient for the payment thereof is set apart with the
paying agent. However, holders of ATP will not be entitled to any premium to
which such holder would be entitled to receive upon redemption of such shares of
ATP. After payment of the full amount of such liquidation distribution, the
owners of the ATP will not be entitled to any further participation in any
distribution of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the assets of the Fund or proceeds thereof available
for distribution to stockholders after satisfaction of claims of creditors of
the Fund shall be insufficient to pay in full the liquidation distribution to
which owners of any shares of ATP are entitled, such assets or the proceeds
thereof will be distributed among the owners of the shares of ATP and any other
shares ranking on a parity therewith, ratably.
In the event of any such liquidation, dissolution or winding up of the
Fund, whether voluntary or involuntary, until payment in full is made to the
owners of the shares of ATP of the liquidation distribution to which they are
entitled, no dividend or other distribution shall be made to the holders of
Common Stock and no purchase, redemption or other acquisition for any
consideration by the Fund shall be made in respect of the Common Stock.
A consolidation or merger of the Fund with or into any other company or
companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any designation, right,
preference or limitation of the ATP or any shares issuable in exchange for
shares of ATP in any such consolidation or merger.
To the extent other shares of ATP are issued by the Fund, including
additional series of ATP or additional shares of the ATP Series A, ATP Series B,
ATP Series C, or ATP Series D, such shares will share equally and on a pro rata
basis with the ATP then outstanding in connection with any liquidation,
dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated herein and except as otherwise required by
applicable law, holders of shares of ATP have equal voting rights with holders
of Common Stock (one vote per share) and vote together with holders of shares of
Common Stock as a single class. Under applicable rules of the Exchange, the Fund
is currently required to hold annual meetings of stockholders.
75
In connection with the election of the Fund's Board, holders of shares of
preferred stock, including the ATP, voting as a separate class, are entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by holders of Common Stock and the holders of shares of preferred stock,
including the ATP, voting as a single class. In addition, if at any time
dividends on outstanding shares of ATP, including the ATP, shall be unpaid in an
amount equal to two full years' dividends thereon, then the number of members
constituting the Board shall automatically be increased by the smallest number
that, when added to the two Directors elected exclusively by the holders of
shares of preferred stock as described above, would constitute a majority of the
Board as so increased by such smallest number; and at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the holders of shares
of preferred stock, including the ATP, voting as a separate class, will be
entitled to elect the smallest number of additional Directors that, together
with the two Directors which such holders will be in any event entitled to
elect, constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding shares
of preferred stock, including the ATP, for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease, and the terms of office of
all of the additional Directors elected by the holders of shares of preferred
stock including the ATP (but not of the Directors with respect to whose election
the holders of Common Stock were entitled to vote or the two Directors the
holders of shares of preferred stock, including the ATP, have the right to elect
in any event) will terminate automatically. Any shares of ATP issued after the
date hereof shall vote with the ATP as a single class on the matters described
above, and the issuance of any other shares of ATP by the Fund may reduce the
voting power of the ATP.
The voting rights of the Common Stock are non-cumulative, which means that
the holders of more than 50% of the shares of Common Stock and ATP voting for
the election of those Directors subject to election by the Common Stock and ATP
can elect 100% of the Directors subject to election by them if they choose to do
so, and, in such event, the holders of the remaining shares of Common Stock and
ATP voting for the election of Directors will not be able to elect any
Directors. The holders of the Common Stock vote as a single class with the
holders of the ATP on all matters except as described.
The rights of the holders of the Common Stock as set forth in the Articles
may not be modified by a vote of less than a majority of the shares of Common
Stock outstanding.
Also, the affirmative vote of the holders of a majority of the outstanding
preferred stock, including the ATP, voting as a class, is required to (i) amend,
alter or repeal any of the preferences, rights or powers of such class so as to
affect materially and adversely such preferences, rights or powers; (ii)
increase the authorized number of shares of ATP; (iii) create, authorize or
issue shares of any class of capital stock ranking senior to or on a parity with
the ATP with respect to the payment of dividends or the distribution of assets,
or any securities convertible into, or warrants, options or similar rights to
purchase, acquire or receive, such shares of capital stock ranking senior to or
on parity with the ATP or reclassify any authorized shares of capital stock of
the Fund into any shares ranking senior to or on parity with the ATP (except
that, the Board of Directors, without the vote or consent of the holders of ATP,
may from time to time authorize, create and classify, and the Fund may from time
to time issue, series or shares of preferred stock, including ATP, ranking on a
parity with the ATP with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up to the
affairs of the Fund, subject to continuing compliance by the Fund with 1940 Act
ATP Asset Coverage and ATP Basic Maintenance Amount requirements, or in
connection with a refinancing of the ATP); (iv) institute any proceedings to be
adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or file a petition seeking
or consenting to reorganization or relief under any applicable federal or
state law relating to bankruptcy or insolvency, or consent to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Fund or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such
action; (v) create, incur or
76
suffer to exist, or agree to create, incur or suffer to exist, or consent to
cause or permit in the future (upon the happening of a contingency or
otherwise) the creation, incurrence or existence of any material lien,
mortgage, pledge, charge, security interest, security agreement, conditional
sale or trust receipt or other material encumbrance of any kind upon any of
the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements
or other encumbrances arising in connection with any indebtedness permitted
under clause (vi) below and (D) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's custodian and
the Auction Agent, or (vi) create, authorize, issue, incur or suffer to exist
any indebtedness for borrowed money or any direct or indirect guarantee of
such indebtedness for borrowed money or any direct or indirect guarantee of
such indebtedness, except the Fund may borrow from banks for temporary or
emergency purposes or as may be permitted by the Fund's investment
restrictions; provided, however, that transfers of assets by the Fund subject
to an obligation to repurchase shall not be deemed to be indebtedness for
purposes of this provision to the extent that after any such transaction the
Fund has Eligible Assets with an aggregate Discounted Value at least equal to
the ATP Basic Maintenance Amount as of the immediately preceding Valuation
Date.
The affirmative vote of the Holders of a majority of the outstanding shares
of ATP, voting as a separate class, will also be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act including, among other
things, changes in the Fund's investment objective or changes in the investment
restrictions described as fundamental policies under "Investment Objective and
Policies - Investment Restrictions." The class vote of Holders of shares of ATP
described above will in each case be in addition to a separate vote of the
requisite percentage of shares of Common Stock necessary to authorize the action
in question. In addition, the affirmative vote of the holders of a majority of
the outstanding shares of each series of ATP, voting separately from any other
series, shall be required with respect to any matter that materially and
adversely affects the rights, preferences, or powers of such series in a manner
different from that of other series of classes of the Fund's shares of capital
stock. For purposes of the foregoing, no matter shall be deemed to adversely
affect any right, preference or power unless such matter (i) alters or abolishes
any preferential right of such series; (ii) creates, alters or abolishes any
right in respect of redemption of such series; or (iii) creates or alters (other
than to abolish) any restriction on transfer applicable to such series.
The Board of Directors may amend certain provisions of the Articles without
any vote or consent of the holders of ATP or any other stockholder of the Fund.
See "Rating Agency Guidelines" and Section 6(j), Part I of the form of Articles
filed as an Exhibit to the Registration Statement of which this Prospectus is a
part. Definitions and provisions in the Articles subject to amendment by action
of the Board (subject to rating agency approval) include the following:
ATP Basic Maintenance Amount
ATP Basic Maintenance Certificate
Asset Coverage Cure Date
Deposit Securities
Discounted Value
Exposure Period
Fitch Discount Factor
Fitch Eligible Assets
Fitch Industry Classification
Market Value (including certain provisions
relevant to futures and options transactions)
Maximum Applicable Rate
Minimum Applicable Rate
Moody's Discount Factor
Moody's Eligible Assets
Moody's Industry Classification
1940 Act Asset Coverage Cure Date
1940 Act ATP Asset Coverage
Short Term Money Market Instruments
Volatility Factor
Last Paragraph of Section 12
77
In addition, the Board of Directors may amend the definition of Maximum
Applicable Rate to increase the percentage amount by which the Reference Rate is
multiplied to determine the Maximum Applicable Rate shown therein without the
vote or consent of the holders of shares of the ATP, including the ATP, or any
other stockholder of the Fund and without confirmation of Moody's, Fitch or any
Other Rating Agency, after consultation with the Broker-Dealers.
The foregoing voting provisions will not apply with respect to the ATP if,
at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less frequently
than as of the close of regular trading on the Exchange (generally 4:00 p.m. New
York time) on the last business day of each week (generally Friday). It will be
determined by dividing the value of the net assets of the Fund by the total
number of Shares outstanding. For the purpose of determining the NAV per Share,
the value of the Fund's net assets shall be deemed to equal the value of the
Fund's assets less (i) the Fund's liabilities, (ii) accumulated and unpaid
dividends on the outstanding ATP and (iii) the aggregate liquidation value
(i.e., $25,000 per share, plus accrued and unpaid dividends to the date of
liquidation) of the outstanding ATP. In making its NAV calculation of the Fund's
assets other than the determination of the Discounted Value of such assets
pursuant to the investment guidelines of the rating agencies then rating the
ATP, portfolio securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, will be valued at the most recently quoted bid price
provided by the principal market makers. The Fund also utilizes prices supplied
by its Custodian from Reuters Fixed-Income Services and FT Interactive Data. Any
security or option for which the primary market is on an exchange will be valued
at the last sale price on such exchange on the day of valuation or, if there was
no sale on such day, the last bid price quoted on such day. Options for which
the primary market is not on an exchange or which are not listed on an exchange
will be valued at market value or fair value if no market exists. Securities and
assets for which market quotations are not readily available will be valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund. While no single standard for determining fair value
exists, as a general rule, the current fair value of a security would appear to
be the amount which the Fund could expect to receive upon its current sale.
Some, but not necessarily all, of the general factors which may be considered in
determining fair value include: (i) the fundamental analytical data relating to
the investments; (ii) the nature and duration of restrictions on disposition of
the securities; and (iii) an evaluation of the forces which influence the market
in which these securities are purchased and sold. Without limiting or including
all of the specific factors which may be considered in determining fair value,
some of the specific factors include: type of security, financial condition of
the issuer, cost at date of purchase, special reports prepared by analysts,
information as to any transaction or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
Short-term debt securities which mature in less than sixty days will be
valued at amortized cost if their term to maturity from the date of acquisition
by the Fund was less than sixty days or by amortizing their value on the 61st
day prior to maturity if their term to maturity from the date of acquisition by
the Fund was more than sixty days, unless this method is determined by the Board
of Directors not to represent fair value. Repurchase agreements will be valued
at cost plus accrued interest.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Fund distributes to stockholders substantially all of its net
investment income in monthly dividends on or about the last day of each month.
Capital gains, if any, net of capital losses, are distributed annually, with
such distribution to be declared in December of each year, or otherwise as
required by Treasury regulations then in effect. Stockholders are informed of
the tax consequences of the Fund's distributions after the end of the Fund's
fiscal year. See "Taxation."
78
Stockholders may elect to have all distributions of dividends and capital
gains paid in cash, which will be paid by check and mailed directly to the
stockholder by EquiServe (the "Dividend Paying Agent"). All distributions
from the Fund will be automatically reinvested by the Dividend Paying Agent
under the Automatic Dividend and Distribution Investment Plan (the "Plan"),
unless stockholders elect not to participate in the Plan. Stockholders may elect
not to participate in the Plan and to have all distributions of dividends and
capital gains paid in cash by sending written instructions to the Dividend
Paying Agent at the address set forth below.
If the Directors of the Fund declare a dividend or determine to make a
capital gains distribution payable either in Shares of the Fund or in cash, as
stockholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive the equivalent distribution in Shares.
If the market price of the Shares on the payment date for the dividend or
distribution is equal to or exceeds their NAV as determined on the payment date,
participants will be issued Shares of the Fund at a value equal to the higher of
NAV or 95% of the market price. The amount treated as received by the
participants is an amount equal to the fair market value of those Shares. If NAV
exceeds the market price of the Shares at such time, or if the Fund declares a
dividend or other distribution payable only in cash, the Dividend Paying Agent
will, as agent for Plan participants, buy Shares in the open market, on the
Exchange or elsewhere, for the participants' accounts. If, before the Dividend
Paying Agent has completed its purchases, the market price exceeds the NAV of
the Shares, the average purchase price per Share paid by the Dividend Paying
Agent may exceed the asset value of the Shares, resulting in the acquisition of
fewer Shares than if the dividend or contribution had been paid in Shares
issued by the Fund.
In connection with the Offer, participants in the Fund's Dividend
Reinvestment Plan (the "Plan") will be issued Rights for the Shares held in
their accounts in the Plan as of the Record Date. Participants wishing to
exercise such Rights must exercise such Rights in accordance with the procedures
set forth in "The Offer - Exercise of Rights" and "The Offer -Payment for
Shares." Such Rights will not be exercised automatically by the Plan.
Participants in the Plan have the option of making additional cash payments
each quarter to the Dividend Paying Agent, in any amount from $100 to $5,000,
for investment in the Fund's Shares. The Dividend Paying Agent uses all funds
received from participants to purchase Fund Shares in the open market on or
about the last day of each calendar quarter. Participant's cash payments are
also used to acquire Fund Shares under the same procedure as that used for
reinvestment of dividends and distributions. To allow ample time for receipt and
processing by the Dividend Paying Agent, participants should send voluntary cash
payments to be received by the Dividend Paying Agent not later than five
business days before the last day of each calendar quarter. To avoid unnecessary
cash accumulations, cash payments received after that time and cash payments
received more than thirty days prior to these dates will be returned by the
Dividend Paying Agent and interest will not be paid on any uninvested cash
payments. A participant may withdraw a voluntary cash payment by written notice,
if the notice is received by the Dividend Paying Agent not less than forty eight
hours before such payment is to be invested. There is a $0.75 fee for each cash
purchase under the Plan.
Participants in the Plan may withdraw from the Plan upon written notice to
the Dividend Paying Agent. When a participant withdraws from the Plan or upon
termination of the Plan as provided below, certificates for whole Shares
credited to the participant's account under the Plan will be issued and a cash
payment will be made for any fraction of a Share credited to such account.
The Dividend Paying Agent will maintain all stockholders' accounts in the
Plan and will furnish written confirmation of all transactions in the account,
including information needed by stockholders for tax records. Shares of Common
Stock in the account of each Plan participant (other than participants whose
Shares are registered in the name of banks, brokers, nominees or other third
parties) will be held by the Dividend Paying Agent in non-certificated form in
the name of the participant, and each stockholder's proxy will include those
Shares purchased pursuant to the Plan.
79
In the case of stockholders such as banks, brokers or nominees which hold
Shares for others who are the beneficial owners, the Dividend Paying Agent
administers the Plan on the basis of the number of Shares certified from time to
time by the record stockholders as representing the total amount registered in
the record stockholder's name and held for the account of beneficial owners who
are to participate in the Plan. Investors whose Shares are held in the name of
banks, brokers or nominees must confirm with such entities that participation in
the Plan is possible. Those who participate in the Plan may subsequently elect
not to participate by notifying such entities.
There is no charge to participants for reinvesting dividends or
distributions, except for certain brokerage commissions, as described below. The
Dividend Paying Agent's fees for the handling of the reinvestment of dividends
and distributions will be paid by the Fund. There will be no brokerage
commissions charged with respect to Shares issued directly by the Fund. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Dividend Paying Agent's open market purchases in connection
with the reinvestment of dividends or distributions.
Participants in the Plan should be aware that they will realize capital
gains and income for tax purposes upon dividends and distributions although they
will not receive any payment of cash. Experience under the Plan may indicate
that changes are desirable. Accordingly, the Fund reserves the right to amend or
terminate the Plan as applied to any dividend or distribution paid subsequent to
written notice of the change sent to the participants in the Plan at least
ninety days before the record date for such dividend or distribution. The Plan
also may be amended or terminated by the Dividend Paying Agent on at least
ninety days' written notice to participants in the Plan. All correspondence or
inquiries concerning the Plan should be directed to EquiServe, P.O. Box 43011,
Providence, Rhode Island 02940-3011 or by calling toll free at 1-800-426-5523.
CONVERSION TO OPEN-END STATUS AND REPURCHASE OF SHARES
CONVERSION TO OPEN-END STATUS
The Fund's Board of Directors may elect at any time to submit to the
holders of the Common Stock and the ATP a proposal to convert the Fund to an
open-end investment company and in connection therewith to redeem or otherwise
retire the ATP (subject to any Specific Redemption Provisions) as would be
required upon such conversion by the 1940 Act. In determining whether to
exercise its discretion to submit this issue to stockholders, the Board of
Directors would consider all factors then relevant, including the relationship
of the market price of the Common Stock to NAV, the extent to which the Fund's
capital structure is leveraged and the possibility of re-leveraging, the spread,
if any, between yields on "high-yield" securities in the Fund's portfolio as
compared to interest and dividend charges on senior securities and general
market and economic conditions. In addition to any vote required by Maryland
law, conversion of the Fund to an open-end investment company would require the
affirmative vote of the holders of a majority (as defined in the 1940 Act) of
each class of the shares entitled to be voted on the matter. Stockholders of an
open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the 1940
Act) at their NAV, less such redemption charges, if any, as might be in effect
at the time of redemption. If the Fund converted to an open-end investment
company, it could be required to liquidate portfolio securities to meet requests
for redemption, and the Common Stock would no longer be listed on the Exchange.
In the event the Fund converts to open-end status, the Fund would only be able
to borrow through bank borrowings within certain limits and would not be allowed
to have preferred stock, thus requiring a redemption of the ATP.
REPURCHASE OF COMMON STOCK
Shares of closed-end management investment companies frequently trade at a
discount from NAV but in some cases trade at a premium. In recognition of the
possibility that the Fund's Common Stock might similarly trade at a discount,
the Fund may from time to time take action to attempt to reduce or eliminate a
market value
80
discount from NAV by repurchasing its Common Stock in the open
market or by tendering for its own Shares at NAV. There can be no assurance that
the Board will, in fact, decide to undertake either of these actions or, if
undertaken, that such actions will result in the Fund's Common Stock trading at
a price that is equal to or approximates its NAV. The Board does not have a
policy with respect to a periodic consideration of the appropriateness of taking
action to repurchase or tender for the Fund's Shares. In addition, the Board
will not necessarily announce when it has given consideration to these matters.
Notwithstanding the foregoing, so long as any shares of ATP are outstanding, the
Fund may not purchase, redeem or otherwise acquire any Common Stock unless (1)
all accumulated dividends on the ATP have been paid or set aside for payment
through the date of such purchase, redemption or other acquisition and (2) at
the time of such purchase, redemption or acquisition the ATP Basic Maintenance
Amount and the 1940 Act ATP Asset Coverage (determined after deducting the
acquisition price of the Common Stock) are met. Any tender offer will be made
and holders of Common Stock notified in accordance with the requirements of
the Securities Exchange Act of 1934 and the 1940 Act, either by publication
or mailing or both.
Although Share repurchases and tenders could have a favorable effect on the
market price of the Fund's Common Stock, it should be recognized that the
acquisition of Shares by the Fund will decrease the total assets of the Fund
and, therefore, have the effect of increasing the Fund's expense ratio. In
addition, any purchase by the Fund of its Common Stock as at a time when the
shares of ATP are outstanding will increase the leverage applicable to the
outstanding Common Stock then remaining. Repurchases of Common Stock may result
in the Fund being required to redeem shares of ATP to satisfy asset coverage
requirements.
CUSTODIAN, AUCTION AGENT, REGISTRAR,
TRANSFER AGENT AND PAYING AGENT
State Street Bank and Trust Company, with principal place of business at
225 Franklin Street, Boston, Massachusetts 02110, serves as the custodian of
Fund's securities and cash ("Custodian"). Its services include holding
securities, delivering securities, registering securities, opening and
maintaining bank accounts, collecting income, paying of Fund monies, and
executing certain documents for tax purposes. In accordance with SEC rules, Fund
assets may be outside the United States in the custody of non-U.S. banks and
securities depositories.
Deutsche Bank Trust Company Americas, as successor to Bankers Trust
Company, acts as the Registrar, Transfer Agent, Paying Agent and Auction Agent
for the ATP. Deutsche Bank Trust Company Americas has its principal business
address at 60 Wall Street, New York, New York 10005-2958.
EquiServe Trust Company, N.A., as assignee of State Street Bank and Trust
Company, serves as the Transfer Agent, Registrar and Dividend Paying Agent for
the Fund's Common Stock. The principal business address of EquiServe Trust
Company, N.A. is 150 Royall Street, Canton, Massachusetts 02021.
REPORTS TO STOCKHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to
stockholders, including a list of the portfolio investments held by the Fund.
LEGAL MATTERS
Certain legal matters with respect to the Offer will be passed upon by
Goodwin Procter LLP, Boston, Massachusetts. Richard E. Floor, a Director and the
Secretary of the Fund, is a partner of Goodwin Procter LLP through a
professional corporation. An opinion regarding the valid issuance of the Common
Stock and certain other matters of Maryland law will be rendered by Venable,
Baetjer and Howard, LLP, Baltimore, Maryland. Goodwin Procter LLP will rely as
to matters of Maryland law upon such opinion.
81
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG LLP ("KPMG"), with principal business address at 99 High
Street, Boston, Massachusetts 02110, has acted as the Fund's independent public
accountants since June 27, 2002. Prior to that date, Arthur Andersen LLP had
acted as the Fund's independent public accountants since the Fund's inception.
The services provided by KPMG consist of the examination of the Fund's annual
financial statements, semi-annual review of the Fund's financial statements,
assistance and consultation in connection with the Securities and Exchange
Commission filings, review of tax and certain compliance matters on behalf of
the Fund, as well as certain additional services in connection with the Fund's
compliance with rating agency guidelines.
EXPERTS
The Fund's statement of assets and liabilities, including the schedule of
investments, as of December 31, 2002, and the related statement of operations,
statement of changes in net assets and financial highlights for the year then
ended, presented in the Fund's Annual Report for the fiscal year ended
December 31, 2002 and incorporated herein by reference, have been audited by the
Fund's independent public accountants, KPMG, as indicated in their
report with respect thereto, and are included herein upon the authority of said
firm as experts in accounting and auditing in giving said report.
The statement of changes in net assets for the year ended December 31,
2001, together with the financial highlights and the information regarding
senior securities for each of the years ended December 31, 2001, 2000, 1999,
1998, 1997, 1996, 1995, 1994 and 1993 were audited by Arthur Andersen LLP, the
Fund's former independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports. After reasonable efforts, the Fund has
been unable to obtain written consent from Arthur Andersen LLP to the
incorporation by reference of such financial statements in this Prospectus. Such
consents have therefore been omitted in reliance upon Rule 437a of the
Securities Act. Because Arthur Andersen LLP has not consented to the
incorporation by reference of such financial statements in the Prospectus, you
may not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of a material fact contained in such
financial statements or any omissions to state a material fact required to be
stated therein, if any.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by the Fund, including the
Fund's Code of Ethics, can be inspected without charge at the public reference
facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such materials may be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at the prescribed rates. The
Commission maintains a website at http://www.sec.gov containing reports and
information statements and other information regarding registrants, including
the Fund, that file electronically with the Commission. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund is contained in the Registration
Statement on Form N-2, including the Statement of Additional Information
comprising a part thereof and any amendments, exhibits and schedules thereto,
relating to such Shares filed by the Fund with the Commission. This Prospectus
does not contain all of the information set forth in the Registration Statement,
including the Statement of Additional Information comprising a part thereof and
any amendments, exhibits and schedules thereto. For further information with
respect to the Fund and the Shares offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of the Articles or any contract or other
82
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the
Commission upon the payment of certain fees prescribed by the Commission.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended December 31, 2002, which
includes audited financial statements and the related Independent Auditors'
Report of KPMG, accompanies this Prospectus and is incorporated herein by
reference in all respects except for the information set forth in the Letter to
Shareholders included therein. Any statement contained in the Fund's Annual
Report that was incorporated herein shall be deemed modified or superseded for
purposes of this Prospectus to the extent a statement contained in this
Prospectus varies from such statement. Any such statement so modified or
superseded shall not, except as so modified or superseded, be deemed to
constitute a part of this Prospectus. The Fund will furnish, without charge, a
copy of its Annual Report to each stockholder upon request. If you would like a
copy of the Annual Report, you may write to Ellen E. Terry, c/o The New America
High Income Fund, Inc., at 33 Broad Street, Boston, Massachusetts 02109 or you
may call the Fund collect at 1-617-263-6400.
83
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
MOODY'S INVESTORS SERVICE, INC.
A brief description of the applicable Moody's ratings symbols and their meanings
(as published by Moody's) follows:
DEBT RATINGS
Aaa Bonds and preferred stock which are rated Aaa are judged to be of
the best quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." 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 and preferred stock which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuations of protective
elements may be of greater amplitude or there may be other elements
present which make the long-term risk in Aa-rated bonds appear
somewhat larger than those securities rated Aaa.
A Bonds and preferred stock which are rated A possess many favorable
investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds and preferred stock which 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 and preferred stock which are rated Ba are judged to have
speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds and preferred stock which are rated B generally lack
characteristics of the desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds and preferred stock which are rated Caa are of poor standing.
Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds and preferred stock which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds and preferred stock which are rated C are the lowest rated
class of bonds, and issues so rated
A-1
can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of its generic
rating category.
PRIME RATING SYSTEM
Moody's short-term ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. Such obligations generally have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay 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 (or supporting institutions) rated Prime-3 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.
A-2
FITCH RATINGS, INC.
A brief description of the applicable Fitch ratings symbols and their meanings
(as published by Fitch) follows:
INTERNATIONAL LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. 'AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for
timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions
than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment
of financial commitments is considered adequate, but adverse
changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade
category.
SPECULATIVE GRADE
BB Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be
met. Securities rated in this category are not investment grade.
B Highly speculative. 'B' ratings indicate that significant credit
risk is present but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable
business and economic environment.
CCC, CC High default risk. Default is a real possibility. Capacity
AND C for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A 'CC' rating
indicates that default of some kind appears probable. 'C' ratings
signal imminent default.
DDD, DD, D (Default.) The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with
any precision, the following serve as general guidelines. 'DDD'
obligations have the highest potential for recovery, around 90% -
100% of outstanding amounts and accrued interest. "DD' indicates
potential recoveries in the range of 50% - 90% and 'D' the lowest
recovery potential, i.e., below 50%.
A-3
Entities rated in this category have defaulted on some or all of
their obligations. Entities rated 'DDD' have the highest prospect
for resumption of performance or continued operation with or
without a formal reorganization process. Entities rated 'DD' and
'D' are generally undergoing a formal reorganization or liquidation
process; those rated 'DD' are likely to satisfy a higher portion of
their outstanding obligations, while entities rated 'D' have a poor
prospect of repaying all obligations.
INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term credit rating has a time horizon of less than 12 months for
most obligations, or up to three years for U.S. public finance securities, and
thus places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote
an exceptionally strong credit feature.
F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as
in the case of the higher ratings.
F3 FAIR CREDIT QUALITY. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B SPECULATIVE. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C HIGH DEFAULT RISKS. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D DEFAULT. Denotes actual or imminent payment default.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' Long-Term rating
category, to categories below 'CCC', or to Short-term ratings other than 'F1'.
'NR' indicates that Fitch Ratings does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. Rating Watch is typically dissolved over a
relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one
to two-year period. Outlooks may be positive, stable or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
ratings for which outlooks are 'stable' could be upgraded or downgraded before
an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch Ratings may be unable to identify the fundamental
trend. In these cases, the Rating Outlook may be described as evolving.
A-4
INSURER FINANCIAL STRENGTH RATINGS
The Insurer Financial Strength Rating (IFS Rating) provides an assessment of the
financial strength of an insurance organization, and its capacity to meet senior
obligations to policyholders and contractholders on a timely basis. The IFS
Rating is assigned to the insurance organization itself, and no liabilities or
obligations of the insurer are specifically rated unless otherwise stated (for
example, Fitch Ratings may separately rate the debt obligations of an insurer).
The IFS Rating can be assigned to insurance and reinsurance companies in all
insurance sectors, including the life & health, property & casualty, mortgage,
financial guaranty and title insurance sectors, as well as managed care
companies such as health maintenance organizations.
The IFS Rating does not address the willingness of an insurance organization's
management to honor its company's obligations, nor does the IFS Rating address
the quality of an insurer's claims handling services. In the context of the IFS
Rating, the timeliness of payments is considered relative to both contract
and/or policy terms and also recognizes the possibility of acceptable delays
caused by circumstances unique to the insurance industry, including claims
reviews, fraud investigations and coverage disputes.
The IFS Rating is based on a comprehensive analysis of relevant factors that in
large part determine an insurance organization's financial strength, including
its regulatory solvency characteristics, liquidity, operating performance,
financial flexibility, balance sheet strength, management quality, competitive
positioning and long-term business viability.
The IFS Rating is an international-scale rating, and incorporates relevant
economic and political risks that could impair an insurance organization's
capacity to meet its obligations. As a result, in most cases it would be rare
for an insurance organization to achieve an IFS Rating that would be higher than
the long-term, international-scale local currency ratings assigned to the
obligations of its sovereign state of domicile. One exception could be cases in
which foreign parental support commitments are in place. Other exceptions could
include cases in which, due to the international nature of an insurer's
business, a major portion of its business and financial resources are not
exposed to the economic and political risks of its sovereign state. Since the
IFS Rating is not assigned to any specific obligations of the insurer, the
rating does not take into account the potential for government restrictions that
could prevent specific obligations from being met on a timely basis, such as
exchange controls placed on obligations owed in a foreign currency.
The IFS Rating uses the same ratings scale and symbols used by Fitch Ratings for
its international ratings of long-term debt obligations and issuers. However,
the definitions associated with the ratings reflect the unique aspects of the
IFS Rating within an insurance industry context. Ratings in the 'AA' through
'CCC' categories may be amended with a (+) or (-) sign to show relative standing
within the major rating category. Ratings of 'BBB-' and higher are considered to
be 'Secure', and those of 'BB+' and lower are considered to be 'Vulnerable'.
AAA EXCEPTIONALLY STRONG. Insurers assigned this highest rating are
viewed as possessing exceptionally strong capacity to meet
policyholder and contract obligations. For such companies, risk
factors are minimal and the impact of any adverse business and
economic factors is expected to be extremely small.
AA VERY STRONG. Insurers are viewed as possessing very strong capacity
to meet policyholder and contract obligations. Risk factors are
modest, and the impact of any adverse business and economic factors
is expected to be very small.
A STRONG. Insurers are viewed as possessing strong capacity to meet
policyholder and contract obligations. Risk factors are moderate,
and the impact of any adverse business and economic factors is
expected to be small.
BBB GOOD. Insurers are viewed as possessing good capacity to meet
policyholder and contract obligations. Risk factors are somewhat
high, and the impact of any adverse business and economic factors
is expected to be material, yet manageable.
A-5
BB MODERATELY WEAK. Insurers are viewed as moderately weak with an
uncertain capacity to meet policyholder and contract obligations.
Though positive factors are present, overall risk factors are high,
and the impact of any adverse business and economic factors is
expected to be significant.
B WEAK. Insurers are viewed as weak with a poor capacity to meet
policyholder and contract obligations. Risk factors are very high,
and the impact of any adverse business and economic factors is
expected to be very significant.
CCC, CC, C VERY WEAK. Insurers rated in any of these three categories
are viewed as very weak with a very poor capacity to meet
policyholder and contract obligations. Risk factors are extremely
high, and the impact of any adverse business and economic factors
is expected to be insurmountable. A 'CC' rating indicates that some
form of insolvency or liquidity impairment appears probable. A 'C'
rating signals that insolvency or a liquidity impairment appears
imminent.
DDD, DD, D DISTRESSED. These ratings are assigned to insurers that have either
failed to make payments on their obligations in a timely manner,
are deemed to be insolvent, or have been subjected to some form of
regulatory intervention. Within the DDD-D range, those companies
rated 'DDD' have the highest prospects for resumption of business
operations or, if liquidated or wound down, of having a vast
majority of their obligations to policyholders and contractholders
ultimately paid off, though on a delayed basis (with recoveries
expected in the range of 90 - 100%). Those rated 'DD' show a much
lower likelihood of ultimately paying off material amounts of their
obligations in a liquidation or wind down scenario (in a range of
50 - 90%). Those rated 'D' are ultimately expected to have very
limited liquid assets available to fund obligations, and therefore
any ultimate payoffs would be quite modest (at under 50%).
NOTES: "+" or "-" may be appended to a rating to indicate the
relative position of a credit within the rating category. Such
suffixes are not added to ratings in the "AAA" category or to
ratings below the "CCC" category.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two-year period. Outlooks may be positive, stable or
negative. A positive or negative Rating Outlook does not imply a
rating change is inevitable. Similarly, ratings for which outlooks
are 'stable' could be upgraded or downgraded before an outlook
moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch Ratings may be unable to identify the
fundamental trend. In these cases, the Rating Outlook may be
described as evolving.
Rating Watch: Ratings are placed on Rating Watch to notify
investors that there is a reasonable probability of a rating change
and the likely direction of such change. These are designated as
"Positive", indicating a potential upgrade, "Negative", for a
potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a
relatively short period.
SERVICER RATINGS
Residential, multifamily, and commercial mortgage loans can be serviced by a
combination of primary, master, and/or special servicers. Many transactions have
all three types of servicers present, while others may only have one or two.
Some of the reasons for the various structures are age of the transaction,
complexity of the loans, strength of the primary servicer, current or
anticipated delinquency, and need for advancing.
Primary servicers responsibilities typically include: collecting monthly
principal, interest, and escrow payments from individual mortgagors; remitting
and reporting to the master servicer; and monitoring delinquent and problem
loans, which may be directly handled by the special servicer. For commercial,
which includes multifamily, primary servicers are also responsible for
performing property inspections and collecting and analyzing property financial
A-6
statements. In the absence of a master servicer, the primary servicer is
responsible for the reporting and remitting of funds directly to the trustees
and/or advancing principal and interest payments on delinquent loans. When there
is no special servicer, the primary servicer would be directly handling the
work-out of sub-performing and/or delinquent loans.
Master servicers are responsible for the oversight of primary servicers, with
respect to the primary servicer's responsibilities; and providing liquidity to a
transaction by advancing principal and interest, as well as certain property
protection expenses, on delinquent loans. If the transaction requires a special
servicer, the master servicer will insure the smooth transfer from the primary
servicer to the special servicer and monitor the ultimate disposition of problem
loans.
Special servicers are responsible for maximizing recoveries on nonperforming
loans and real estate owned assets, and are key to maintaining the credit
quality of a pool containing nonperforming loans and REO assets. The specific
arrangement varies from one transaction to another, however, typically the loans
are transferred to the special servicer at some pre-determined point based on
delinquency and/or other performance measures. Currently, in residential
transactions, the use of a designated special servicer is not as common as in
the commercial products, however, the practice is becoming more widespread,
particularly in loan products which are expected to have high delinquencies and
therefore losses.
RATING DEFINITIONS
The servicer ratings are an indication of a servicer's ability to effectively
service commercial mortgage backed securities (CMBS) and residential mortgage
backed securities (RMBS) transactions. The ratings incorporate Fitch Ratings'
analysis of the servicer's experience in the servicing business, financial
condition, management, staff, training programs, procedures, controls, and
systems among others. Fitch rates commercial mortgage servicers on a scale of
1-4 and residential mortgage servicers on a scale of 1-5, with 1 being the
highest rating. The ratings are written with either a C or R first (indicating
commercial or residential), the second letter will designate the type of
servicer (P - primary, M - master, S - special), with the servicer level
following (S1 - highest, etc.).
LEVEL 1 SERVICER RATING (CPS1, CMS1, CSS1, RPS1, RMS1, RSS1)
Servicers that receive a level one (1) rating must have proven abilities and
performance of the highest standards. The servicers at level one are expected to
have all areas of their company operating at top efficiency and productivity.
Some of the characteristics of a level one (1) servicer are:
- Demonstrated expertise in servicing a diverse portfolio, i.e. loan type,
property type, and geographic concentration among others.
- Highly seasoned management team with a substantial working history
together.
- Stable employee base with little turnover.
- Very strong and stable financial resources.
- Very well documented and complete policies and procedures, which are
readily available to all employees.
- Fully integrated, flexible systems with versatile reporting
capabilities.
LEVEL 2 SERVICER RATING (CPS2, CMS2, CSS2, RPS2, RMS2, RSS2)
Servicers that receive a level two (2) rating have demonstrated high performance
in all relevant categories. Some of the characteristics of a level two (2)
servicer are:
A-7
- Effective management of a diverse portfolio.
- Seasoned management team with a history of working together.
- Stable employee base.
- Strong, stable financial resources.
- Well documented and complete policies and procedures.
- Strong systems and reporting capabilities.
LEVEL 3 SERVICER RATING (CPS3, CMS3, CSS3, RPS3, RMS3, RSS3)
Servicers that receive a level three (3) rating will exhibit the following
characteristics: Demonstrate proficiency in servicing diverse product groups.
- Ability to meet investor requirements.
- Adequate financial resources for its portfolio size.
- Effective internal controls.
- Proven proficiency in staffing and training.
- Established comprehensive policies and procedures.
- A master servicer must have experience and controls in place for
monitoring primary servicers and other sub-servicers.
- A special servicer must demonstrate adequate workout and disposition
experience.
LEVEL 4 SERVICER RATING (CPS4, CMS4, CSS4, RPS4, RMS4, RSS4)
Servicers that receive a level four (4) rating must demonstrate servicing
proficiency comparable to a level three (3) rated servicer. However, due to some
aspect or situation, Fitch Ratings believes continued surveillance is warranted.
Servicers at this rating level may not be acceptable for servicing Fitch Ratings
covered CMBS or RMBS transactions unless additional support or structural
features are incorporated. Listed below are a few situations that could cause
the assignment of a level four (4) rating to an otherwise fully acceptable
servicer:
- Length of time or experience in servicing type or product type.
- Recent event that has not had time to be resolved or its effect fully
assessed (i.e. merger, acquisition, change in management, or system
conversion, among others).
- Specific concern or problem with the servicer.
A level four (4) servicer might be upgraded to a level three (3) if and when the
circumstance(s) in question is positively resolved, as long as all other
features of the operation remain consistent.
LEVEL 5 SERVICER RATING (RMS5, RPS5, RSS5)
Residential mortgage servicers that receive a level five (5) rating meet minimum
industry standards and benchmarks. However, Fitch Ratings is concerned with
aspects of their operation, process, or financial condition. Residential
mortgage servicers at this level are not acceptable for servicing RMBS
transactions unless strong additional support or structural features are
incorporated.
A-8
STANDARD & POOR'S CORPORATION
A brief description of the applicable Standard & Poor's ratings symbols and
their meanings (as published by Standard & Poor's) follows:
LONG-TERM ISSUE CREDIT RATINGS
AAA An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in the higher rated categories. However, the obligor's
capacity to meet its financial commitment is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to meet its financial
commitment on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions, which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB,' but the obligor currently has the capacity
to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment
on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity
to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
D An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
A-9
PLUS (+)OR The ratings from 'AA' to 'CCC' may be modified by the addition of a
MINUS (-) plus or minus sign to show relative standing within the major
rating categories.
c The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is
below an investment-grade level and/or the issuer's bonds are
deemed taxable.
p 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 or entirely dependent upon the
successful, 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 his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high
volatility or high variability in expected returns as a result of
noncredit risks. Examples of such obligations are securities with
principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an 'r' symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
NR Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and
related uncertainties.
SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
A-10
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will
be made during such grace period. The 'D' rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
DUAL RATING DEFINITIONS
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the second
rating addressed only the demand feature. The long-term debt rating symbols are
used for bonds to denote the long-term maturity and the commercial paper rating
symbols for the put option (for example, AAA/A-1 +). With short-term demand
debt, Standard & Poor's note rating symbols are used with the commercial paper
rating symbols (for example, SP-1 +/A-1 +).
MUNICIPAL NOTES
A Standard & Poor's note ratings reflects the liquidity factors and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
- Amortization schedule the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
- 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. An
issue determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A-11
================================================================================
THE NEW AMERICA HIGH
INCOME FUND, INC.
23,397,095 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF
TRANSFERABLE RIGHTS TO SUBSCRIBE
FOR SUCH SHARES
----------
PROSPECTUS
----------
JULY 21, 2003
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
----------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 3
Fee Table 7
Financial Information Summary 9
Net Asset Value and Market Price
Information 13
The Offer 15
Use of Proceeds 25
The Fund 25
Investment Objective and Policies 27
Rating Agency Guidelines 36
Risk Factors and Special Considerations 48
Management of the Fund 51
Portfolio Maturity and Turnover 61
Taxation 62
Description of Capital Stock 66
Determination of Net Asset Value 78
Dividends and Distributions;
Dividend Reinvestment Plan 78
Conversion to Open-End Status
and Repurchase of Shares 80
Custodian, Auction Agent, Registrar,
Transfer Agent and Paying Agent 81
Reports to Stockholders 81
Legal Matters 81
Independent Public Accountants 82
Experts 82
Additional Information 82
Financial Statements 83
Appendix A A-1
================================================================================