As filed with the Securities and Exchange Commission on August 26, 2003
1933 Act File No. 333-_____
1940 Act File No. 811-05399
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
(Check appropriate box or boxes)
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No. __
/ / Post-Effective Amendment No. __
and/or
/ / REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ Amendment No. 29
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THE NEW AMERICA HIGH INCOME FUND, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER
33 Broad Street, Boston, Massachusetts 02109
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP CODE)
(617) 263-6400
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Richard E. Floor, Secretary
The New America High Income Fund, Inc.
33 Broad Street
Boston, Massachusetts 02109
NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENT FOR SERVICE
With copies to:
Geoffrey R.T. Kenyon, P.C. Sarah E. Cogan, Esq.
Goodwin Procter LLP Simpson Thacher & Bartlett LLP
Exchange Place 425 Lexington Avenue
Boston, Massachusetts 02109 New York, New York 10017
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
----------
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended ("Securities Act"), other than securities offered in connection with a
dividend reinvestment plan, check the following box. / /
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT
========================================================================================================================
PROPOSED MAXIMUM
AMOUNT BEING PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED OFFERING PRICE PER SHARE PRICE(1) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
Auction Term Preferred Stock, $1.00 1,200 shares $ 25,000 $ 30,000,000 $ 2,427.00
par value
========================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
THE NEW AMERICA HIGH INCOME FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
ITEM NUMBER OF FORM N-2
PART A - PROSPECTUS LOCATION/CAPTION IN PROSPECTUS
1. Outside Front Cover . . . . . . . . . . . . . . . . . . . . . . Outside Front Cover Page
2. Inside Front and Outside Back Cover Page. . . . . . . . . . . . Inside Front Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis. . . . . . . . . . . . . . . . . . . . . Prospectus Summary
4. Financial Highlights. . . . . . . . . . . . . . . . . . . . . . Financial Information Summary; Capitalization and Information
Regarding Senior Securities
5. Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . Underwriting
6. Selling Shareholders. . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds; Investment Objective and Policies
8. General Description of the Registrant . . . . . . . . . . . . . Portfolio Composition; The Fund; Rating Agency
Guidelines; Investment Objective and Policies; Risk
Factors and Special Considerations
9. Management. . . . . . . . . . . . . . . . . . . . . . . . . . . The Fund; Management of the Fund; Custodian, Auction Agent,
Registrar, Transfer Agent and Paying Agent; Independent
Public Accountants
10. Capital Stock, Long-Term Debt, and Other Securities . . . . . . Capitalization and Information Regarding Senior Securities;
Description of ATP; Auction Procedures; Rating Agency
Guidelines; Taxation; Description of Common Stock
11. Defaults and Arrears on Senior Securities . . . . . . . . . . . Not Applicable
12. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
13. Table of Contents of the Statement of Additional Information. . Table of Contents of the Statement of Additional Information
PART B - STATEMENT OF ADDITIONAL INFORMATION LOCATION/CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page. . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
15. Table of Contents . . . . . . . . . . . . . . . . . . . . . . . Cover Page
16. General Information and History . . . . . . . . . . . . . . . . Not Applicable
17. Investment Objective and Policies . . . . . . . . . . . . . . . Investment Objective and Policies; Rating Agency Guidelines;
Portfolio Maturity and Turnover
18. Management. . . . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund
19. Control Persons and Principal Holders of Securities . . . . . . Management of the Fund
20. Investment Advisory and Other Services. . . . . . . . . . . . . Management of the Fund
21. Brokerage Allocation and Other Practices. . . . . . . . . . . . Portfolio Maturity and Turnover; Management of the Fund;
Description of ATP; Auction Procedures
22. Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . . . Taxation
23. Financial Statements. . . . . . . . . . . . . . . . . . . . . . Financial Statements
PART C - OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
i
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 26, 2003
PROSPECTUS
$30,000,000
THE NEW AMERICA HIGH INCOME FUND, INC.
AUCTION TERM PREFERRED STOCK ("ATP")
1,200 SHARES, SERIES C
LIQUIDATION VALUE - $25,000 PER SHARE
----------
The New America High Income Fund, Inc. (the "Fund") is offering 1,200
shares of ATP Series C at a price per share of $25,000 plus accumulated
dividends, if any, from the Date of Original Issue, (the "newly issued shares of
ATP Series C" or "new shares of ATP Series C") which will increase the number of
shares of its ATP Series C Outstanding to 1,800. The Fund currently has
Outstanding 1,400 shares of ATP Series A, 1,000 shares of ATP Series B, 600
shares of ATP Series C and 1,000 shares of ATP Series D. Unless otherwise
indicated, references to the ATP in this prospectus (the "Prospectus") are to
the ATP Series A, ATP Series B, ATP Series C and ATP Series D. The Fund is a
diversified, closed-end management investment company with a leveraged capital
structure. The Fund's investment objective is to provide high current income,
while seeking to preserve stockholders' capital, through investment in a
professionally managed, diversified portfolio of "high-yield" fixed-income
securities (commonly known as "junk bonds"). The Fund invests primarily in
"high-yield" fixed-income securities rated in the lower categories by
established rating agencies and non-rated securities deemed by the Fund's
investment adviser to be of comparable quality. The Fund cannot ensure that it
will achieve its investment objective. AN INVESTMENT IN THE ATP INVOLVES CERTAIN
RISKS AND SPECIAL CONSIDERATIONS AND MAY NOT BE APPROPRIATE FOR ALL INVESTORS.
SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" BEGINNING ON PAGE ____ OF THIS
PROSPECTUS.
(TEXT CONTINUED ON THE FOLLOWING PAGE.)
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. A Statement of Additional Information, dated October __, 2003,
containing additional information regarding the Fund has been filed with the
Securities and Exchange Commission (the "Commission") and is hereby incorporated
by reference in its entirety into this Prospectus. You may obtain a free copy of
the Statement of Additional Information, the table of contents of which appears
on page ___ of this Prospectus, by calling the Fund collect at (617) 263-6400 or
by writing to the Fund at 33 Broad Street, Boston, Massachusetts 02109. You may
also obtain the Statement of Additional Information and other information
regarding the Fund on the Commission's website at http://www.sec.gov.
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.
PRICE TO PUBLIC(1) SALES LOAD(2) PROCEEDS TO FUND(1)(3)
------------------ ------------- ----------------------
Per Share..... $ 25,000 $ $
Total......... $ 30,000,000 $ $
----------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act. See
"Underwriting."
(3) Before deducting offering expenses payable by the Fund, estimated at
$_______.
The shares of the ATP Series C offered by this Prospectus are offered by
Lehman Brothers Inc. ("Lehman" or the "Underwriter"), subject to prior sale,
withdrawal, cancellation or modification of the Offering without notice and to
certain further conditions. The newly issued shares of ATP Series C will not be
offered on any national securities exchange. The Underwriter expects to deliver
the shares of newly issued ATP Series C to Broker-Dealers in book entry form
through the Securities Depository, on or about October __, 2003.
----------
LEHMAN BROTHERS
----------
The date of this Prospectus is October ___, 2003.
The dividend rate for the initial Dividend Period for the shares of the ATP
Series C issued pursuant to the Offering will be ___ % per annum. For each
Dividend Period following the initial Dividend Period, the dividend rate on the
shares of ATP Series C will be the Applicable Rate for such series in effect
from time to time as determined, except as described herein, on the basis of
Orders placed in an Auction conducted on the Business Day preceding the
commencement of such Dividend Period, as set forth herein. The Applicable Rate
that results from an Auction for any Dividend Period will not be greater than
the Maximum Applicable Rate then in effect.
Dividends on the newly issued shares of ATP Series C shall accumulate at
the Applicable Rate from the Date of Original Issue, which is October __, 2003,
and shall be payable on each Dividend Payment Date thereafter. The initial
Dividend Period for the newly issued shares of ATP Series C will be ___ days and
the initial Dividend Payment Date will be October __, 2003. Dividend Periods
after the initial Dividend Period for the shares of ATP Series C shall be either
Standard Term Periods or, subject to certain conditions and with notice to the
holders of shares, periods longer or shorter than 28 days and having such
durations as the Board of Directors shall specify (each, an "Alternate Term
Period"). The initial Auction Date will be October ___, 2003.
You should rely only on the information contained in or incorporated by
reference in this Prospectus. Neither the Fund nor the Underwriter has
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. Neither the Fund nor the Underwriter is making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this Prospectus is accurate as
of the date on the front cover of this Prospectus only. The Fund's financial
condition and prospects may have changed since that date.
T. Rowe Price Associates, Inc. (the "Investment Adviser" or "T. Rowe
Price") serves as the investment adviser for the Fund. It is a wholly owned
subsidiary of T. Rowe Price Group, Inc. ("Price Group").
The Fund's address is 33 Broad Street, Boston, Massachusetts 02109 and its
telephone number is (617) 263-6400.
Certain capitalized terms not otherwise defined in this Prospectus have the
meanings provided in the Glossary included as part of this Prospectus.
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It does not
contain all of the information that you should consider before investing in the
ATP Series C. To understand the Offering fully, you should read the more
detailed information contained in this Prospectus and the Statement of
Additional Information, especially information set forth under the heading "Risk
Factors and Special Considerations."
THE FUND; INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, closed-end management investment company,
organized as a Maryland corporation in 1987 and registered under the 1940 Act,
with a leveraged capital structure. As of August 31, 2003, the Fund had
outstanding ______ shares of Common Stock, _____ shares of ATP Series A, _____
shares of ATP Series B, ____ shares of ATP Series C and ____ shares of ATP
Series D. 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. 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 "The Fund," "Investment Objective and
Policies," and "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 and Fitch in
connection with such rating agencies' issuance of ratings of Aaa and AAA,
respectively, with respect to the Fund's 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
"Rating Agency Guidelines," "Investment Objective and Policies" and "Risk
Factors and Special Considerations."
THE OFFERING
The Fund is offering an aggregate of 1,200 newly issued shares of ATP
Series C, $1.00 par value, at a price of $25,000 per share plus accumulated
dividends, if any, from the Date of Original Issue. Except for the Date of
Original Issue, the initial Dividend Period, the initial Dividend Payment Date
and the initial dividend rate, the terms of the newly issued shares of ATP
Series C are the same as the terms of the Fund's currently Outstanding shares of
ATP Series C. The shares offered by this Prospectus represent additional shares
of the Fund's existing ATP Series C, rather than a separate series or class of
the ATP. Unless otherwise indicated, references to the ATP in this Prospectus
are to the ATP Series A, ATP Series B, ATP Series C and ATP Series D. 1,200
shares of ATP Series C are being offered by the Underwriter. Lehman has agreed,
subject to the terms and conditions of the Underwriting Agreement with the Fund
and the Investment Adviser, to purchase from the Fund all of the shares of ATP
Series C offered hereby. See "Underwriting."
RISK FACTORS
An investment in the Fund involves certain risks. Before investing in the
new shares of ATP Series C pursuant to the Offering, you should consider all of
the risk factors described in the "Risk Factors and Special Considerations"
section of this Prospectus. These factors include the risks involved in
investing in ATP (including auction risk, secondary market risk, ratings and
asset coverage risk, inflation risk, indebtedness risk and leverage), payment
restrictions, the risks associated with swap arrangements, the risks associated
with engaging in private placement transactions and other general risks of
investing in the Fund.
2
TRADING MARKET
The shares of ATP Series C being offered by this Prospectus will not be
listed on an exchange. Instead, you may buy or sell the ATP at an Auction that
generally is held every 28 days by submitting to a Broker-Dealer by telephone or
otherwise a Hold Order, a Hold/Sell Order or a Sell Order and the Broker-Dealer
will contact Potential Holders to determine the Buy Orders, if any, to be made
by such Potential Holders. The first Auction Date for the ATP Series C will be
October ___, 2003. See "Auction Procedures."
The Underwriter has indicated that it intends to make a secondary trading
market in the ATP Series C as permitted by applicable laws and regulations.
However, the Underwriter is not obligated to make a market in the ATP between
Auctions and such market making may be discontinued at any time at the
Underwriter's sole discretion. See "Risk Factors and Special Considerations -
Risks of Investing in ATP." If developed, there is no assurance that a secondary
market will provide stockholders with liquidity or that the trading price in any
secondary market would be $25,000.
You may transfer shares of the ATP outside of an Action only through a
Broker-Dealer, to a Person that has delivered a signed Master Purchaser's Letter
to the Auction Agent or to the Fund. Lehman will act in Auctions for the ATP
Series C as a Broker-Dealer and will be entitled to fees for services as a
Broker-Dealer as set forth under "Auction Procedures - Broker-Dealers;
Commissions."
DIVIDENDS AND DIVIDEND PERIODS
"Dividend Periods" are periods of time established by the Fund for each
series of the ATP during which dividends will accrue at a determined rate. After
the Date of Original Issue, each Dividend Period will be either a "Standard Term
Period" (a Dividend Period of 28 days, unless such 28th day is not a Business
Day, then the number of days ending on the Business Day next preceding such 28th
day) or, subject to certain conditions and with notice to the holders of shares,
an "Alternate Term Period" (a period longer or shorter than 28 days and having
such durations as the Board of Directors shall specify).
Dividends on the newly issued shares of ATP Series C will accumulate at the
Applicable Rate per annum from the Date of Original Issue and will be payable,
when, and if declared by the Board of Directors of the Fund out of funds legally
available therefor, on October ___, 2003. Thereafter, dividends will accumulate
at the Applicable Rate determined from an Auction of the newly issued ATP Series
C together will all existing shares of ATP Series C. The initial Dividend Period
for the newly issued shares of ATP Series C will be ___ days at a dividend rate
of ___% per annum. As noted above, subsequent Dividend Periods generally will be
28 days.
LIQUIDATION PREFERENCE
The liquidation preference for the newly issued shares of ATP Series C will
be $25,000 per share plus accumulated and unpaid dividends, if any. See
"Description of ATP - Liquidation Preference."
REDEMPTION
If certain conditions are met, the Fund has the option to redeem some or
all outstanding shares of ATP at a redemption price per share equal to their
Liquidation Value per share, plus accumulated and unpaid dividends (plus in the
case of a Dividend Period of one year or more, a redemption premium as may be
determined by the Board of Directors). For a discussion of these conditions, as
well as the method the Fund will use to determine the redemption price, see
"Description of ATP - Optional Redemption."
In addition, if the Fund fails to maintain the Aaa/AAA Credit Rating for
the ATP or, on any Valuation Date or the last Business Day of any month, the
Fund fails to meet the ATP Basic Maintenance Amount or the 1940 Act ATP Asset
Coverage, the Fund is required to redeem shares of ATP. For a further
description of these circumstances and the method the Fund will use to determine
the shares it must redeem and the redemption price for the shares, see
"Description of ATP - Mandatory Redemption."
RATINGS
3
It is a condition of the Underwriter's obligation to purchase the newly
issued shares of ATP Series C that they will be rated Aaa by Moody's and AAA by
Fitch. See "Description of ATP - Ratings." These ratings are an assessment of
the capacity and willingness of an issuer to pay preferred stock obligations.
The rating on the ATP is not a recommendation to purchase, hold or sell those
shares inasmuch as the rating does not comment as to market price or suitability
for a particular investor.
THE INVESTMENT ADVISER
T. Rowe Price was selected by the Fund's Board of Directors to serve as the
Fund's investment adviser and has served as the investment adviser since
December 2, 2002, pursuant to an investment advisory agreement dated as of that
date. T. Rowe Price's principal offices are located at 100 East Pratt Street,
Baltimore, Maryland 21202, and its telephone number is (410) 345-2000. As of
June 30, 2003, T. Rowe Price and its affiliates managed approximately $161.2
billion of assets, including approximately $52.3 billion of fixed-income
securities. "High-yield" investments represented approximately $8.7 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."
4
FINANCIAL INFORMATION SUMMARY
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial data for a share of Common
Stock outstanding throughout the periods presented. The financial highlights
have been derived from the Fund's financial statements which have 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. The Financial Highlights for the period commencing January 1, 2003
and concluding June 30, 2003 are unaudited. The following information should be
read in conjunction with the financial statements and related notes included
therein.
SIX MONTHS
ENDED JUNE FOR THE YEARS ENDED DECEMBER 31,
30, 2003 ---------------------------------------------------------------------------
(UNAUDITED) 2002 (d) 2001 (c) 2000 1999 1998 (b) 1997 (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 $ 4.94
---------- ---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME.... .37 .48 .60 .66 .71# .70#
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS AND
OTHER FINANCIAL
INSTRUMENTS............ (.72) (.24) (1.00) (.30) (.81)# .25#
DISTRIBUTIONS FROM NET
INVESTMENT INCOME
RELATED TO
PREFERRED STOCK:...... (.08) (.12) (.18) (.18) (.17) (.16)
---------- ---------- ---------- ---------- ---------- ----------
TOTAL FROM
INVESTMENT
OPERATIONS............ (.43) .12 (.58) .18 (.27) .79
---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO COMMON
SHAREHOLDERS:
From net investment
income................ (.29) (.36) (.43) (.48) (.54) (.53)
In excess of net
investment income..... - - - - - (.01)
---------- ---------- ---------- ---------- ---------- ----------
TOTAL
DISTRIBUTIONS....... (.29) (.36) (.43) (.48) (.54) (.54)
---------- ---------- ---------- ---------- ---------- ----------
Effect of rights
offering and
related expenses;
and Auction Term
Preferred Stock
offering costs and
sales load............ - - - - (.06) (.16)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE:
End of period....... $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03
========== ========== ========== ========== ========== ==========
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 (b) 1993
---------- ---------- ---------- ----------
(FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD)
NET ASSET VALUE:
Beginning of period... $ 4.71 $ 4.13 $ 5.15 $ 4.32
---------- ---------- ---------- ----------
NET INVESTMENT INCOME... .69 .67 .72# .59
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS AND
OTHER FINANCIAL
INSTRUMENTS........... .22 .62 (.82)# .89
DISTRIBUTIONS FROM NET
INVESTMENT INCOME
RELATED TO
PREFERRED STOCK:...... (.16) (.17) (.17) (.05)
---------- ---------- ---------- ----------
TOTAL FROM
INVESTMENT
OPERATIONS............ .75 1.12 (.27) 1.43
---------- ---------- ---------- ----------
DISTRIBUTIONS TO COMMON
SHAREHOLDERS:
From net investment
income................ (.52) (.50) (.53) (.53)
In excess of net
investment income..... - (.04) - (.07)
---------- ---------- ---------- ----------
TOTAL
DISTRIBUTIONS....... (.52) (.54) (.53) (.60)
---------- ---------- ---------- ----------
Effect of rights
offering and
related expenses;
and Auction Term
Preferred Stock
offering costs and
sales load............ - - (.22) -
---------- ---------- ---------- ----------
NET ASSET VALUE:
End of period....... $ 4.94 $ 4.71 $ 4.13 $ 5.15
========== ========== ========== ==========
5
SIX MONTHS
ENDED JUNE FOR THE YEARS ENDED DECEMBER 31,
30, 2003 ---------------------------------------------------------------------------
(UNAUDITED) 2002 (d) 2001 (c) 2000 1999 1998 (b) 1997 (b)
----------- ---------- ---------- ---------- ---------- ---------- ----------
PER SHARE MARKET VALUE:
End of period.............. $ 2.01 $ 2.64 $ 2.63 $ 3.13 $ 4.25 $ 5.63
========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN+..... (12.97)% 13.97% (3.84)% (16.92)% (15.15)% 21.97%
========== ========== ========== ========== ========== ==========
NET ASSETS, END OF
PERIOD, APPLICABLE
TO COMMON STOCK(a)......... $ 131,170 $ 178,231 $ 191,928 $ 258,215 $ 273,518 $ 243,625
========== ========== ========== ========== ========== ==========
NET ASSETS, END OF
PERIOD, APPLICABLE
TO PREFERRED
STOCK(a)................... $ 100,000 $ 150,000 $ 160,000 $ 210,000 $ 210,000 $ 150,000
========== ========== ========== ========== ========== ==========
TOTAL NET ASSETS
APPLICABLE TO
COMMON AND
PREFERRED STOCK,
END OF PERIOD(a)........... $ 231,170 $ 328,231 $ 351,928 $ 468,215 $ 483,518 $ 393,625
========== ========== ========== ========== ========== ==========
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% .13%
Ratio of operating
expenses to
average net assets*...... 1.46% 1.11% .99% .89% .82% .92%
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% 1.05%
========== ========== ========== ========== ========== ==========
RATIO OF NET INVESTMENT
INCOME TO AVERAGE
NET ASSETS*................ 16.48% 16.70% 17.46% 16.36% 15.22% 13.86%
RATIO OF TOTAL EXPENSES
TO AVERAGE NET
ASSETS APPLICABLE
TO COMMON AND
PREFERRED STOCK............ .89% .71% .64% .60% .58% .66%
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 (b) 1993
---------- ---------- ---------- ----------
PER SHARE MARKET VALUE:
End of period.............. $ 5.13 $ 4.75 $ 4.00 $ 5.13
========== ========== ========== ==========
TOTAL INVESTMENT RETURN+..... 19.89% 33.50% (11.88)% 40.08%
========== ========== ========== ==========
NET ASSETS, END OF
PERIOD, APPLICABLE
TO COMMON STOCK(a)......... $ 176,408 $ 164,823 $ 141,590 $ 130,673
========== ========== ========== ==========
NET ASSETS, END OF
PERIOD, APPLICABLE
TO PREFERRED
STOCK(a)................... $ 100,000 $ 100,000 $ 100,000 $ 35,000
========== ========== ========== ==========
TOTAL NET ASSETS
APPLICABLE TO
COMMON AND
PREFERRED STOCK,
END OF PERIOD(a)........... $ 276,408 $ 264,823 $ 241,590 $ 165,673
========== ========== ========== ==========
EXPENSE RATIOS:
Ratio of interest
expense to average
net assets*.............. - - .01% 1.83%
Ratio of preferred
and other debt
expenses to
average net assets*...... .16% .18% .22% .51%
Ratio of operating
expenses to
average net assets*...... 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*.................... 1.32% 2.37% 1.54% 4.35%
========== ========== ========== ==========
RATIO OF NET INVESTMENT
INCOME TO AVERAGE
NET ASSETS*................ 14.36% 14.61% 15.89% 11.86%
RATIO OF TOTAL EXPENSES
TO AVERAGE NET
ASSETS APPLICABLE
TO COMMON AND
PREFERRED STOCK............ .83% 1.44% .89% 3.38%
6
SIX MONTHS
ENDED JUNE FOR THE YEARS ENDED DECEMBER 31,
30, 2003 ---------------------------------------------------------------------------
(UNAUDITED) 2002 (d) 2001 (c) 2000 1999 1998 (b) 1997 (b)
----------- ---------- ---------- ---------- ---------- ---------- ----------
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% 8.75%
PORTFOLIO TURNOVER RATE...... 82.47% 38.89% 45.58% 66.74% 124.67% 108.84%
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 (b) 1993
---------- ---------- ---------- ----------
RATIO OF NET INVESTMENT
INCOME TO AVERAGE
NET ASSETS
APPLICABLE TO
COMMON AND
PREFERRED STOCK............ 9.05% 8.90% 9.06% 9.21%
PORTFOLIO TURNOVER RATE...... 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 $0.01 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.
(d) Prior to the appointment on December 2, 2002 of T. Rowe Price Associates,
Inc. as the Fund's investment adviser, the Fund was advised by Wellington
Management Company, LLP.
* 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.
7
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
CAPITALIZATION. The following table sets forth the unaudited capitalization
of the Fund as of August 31, 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 __________ shares
PRO FORMA CAPITALIZATION. The following table of unaudited financial
information sets forth the total assets and liabilities of the Fund and the net
assets of the Fund as of August 31, 2003 and as adjusted to give effect to the
issuance of all of the new shares of ATP Series C, as set forth in the
Prospectus.
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Total Assets..................................................................... $ $
---------- -----------
Total Liabilities................................................................
---------- -----------
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, 3,200 shares authorized, 600
shares issued and outstanding, 1,800 shares issued and
outstanding as adjusted........................................................ 15,000 45,000
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.......................................... $ $
========== ===========
REPRESENTED BY:
Common Stock, $0.01 par value, 200,000,000 shares authorized,
__________ shares issued and outstanding....................................... $ $
---------- -----------
Capital in excess of par value...................................................
---------- -----------
Accumulated net realized loss from securities transactions.......................
---------- -----------
Net unrealized depreciation on investments and interest rate swaps...............
---------- -----------
Accumulated undistributed net investment income..................................
---------- -----------
NET ASSETS:..................................................................... $ $
========== ===========
Net asset value per share of Common Stock....................................... $ $
========== ===========
8
SENIOR SECURITIES. The following table shows certain information
regarding senior securities of the Fund as of the dates indicated. The
information has been derived from the Fund's financial statements which have
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 as
indicated in their respective reports thereto included with the Fund's
audited financial statements. The information for the period commencing
January 1, 2003 and concluding June 30, 2003 is unaudited. 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. 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 ATP having an aggregate liquidation preference of
$100 million plus accumulated and unpaid dividends. In May 1997 and in May
1998, two additional series of newly authorized ATP, with an aggregate
liquidation preference of $50 and $60 million, respectively, plus accumulated
and unpaid dividends were issued. See "Description of ATP" and "Financial
Statements" in the Statement of Additional Information. In connection with
maintaining asset coverage requirements for the ATP, the Fund repurchased $50
million, $10 million, and $50 million of the ATP in fiscal years 2002, 2001,
and 2000, respectively.
9
SIX MONTHS
ENDED JUNE AS OF DECEMBER 31,
30, 2003 -----------------------------------------------------------------------------
(UNAUDITED) 2002 2001 2000 1999 1998
------------ ------------- ------------- ------------- ------------- -------------
TOTAL AMOUNT
OUTSTANDING ($'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.
PORTFOLIO COMPOSITION
(UNAUDITED)
As of August 31, 2003, the Fund's portfolio included ___ holdings issued by
_____ different issuers (consolidated by affiliated companies) having an average
yield to maturity of ____%. The weighted average maturity of the Fund's
portfolio as of this date was approximately ____ years.
The dollar weighted average of Moody's ratings of all bonds held by the
Fund for the twelve-month period ended August 31, 2003, computed on a monthly
basis, is set forth below. This information reflects the average composition of
the Fund's assets at August 31, 2003 and is not necessarily representative of
the Fund as of the date of this Prospectus or at any other time in the future.
As of August 31, 2003, the weighted average maturity of the Fund's portfolio was
approximately ___ years. See the Statement of Additional Information for a
description of the ratings system used by Moody's.
10
MOODY'S RATING PERCENTAGE OF PORTFOLIO
-------------- -----------------------
Aa........................ ______%
A......................... ______%
Baa....................... ______%
Ba........................ ______%
B......................... ______%
Caa....................... ______%
Ca........................ ______%
C......................... ______%
NR........................ ______%
Total..................... 100.00%
THE FUND
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure organized as a corporation under the laws of
Maryland. 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 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." No assurance can be given that
the Fund will achieve its investment objective. See "Risk Factors and Special
Considerations." The fixed income securities in which the Fund invests are
regarded by the rating agencies, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. Such securities may also be subject to greater market
price fluctuations than lower-yielding, higher-rated debt securities; credit
ratings do not reflect this market risk.
On July 21, 2003, the Fund issued to the holders of its Common Stock,
transferable rights (the "Rights") to purchase additional shares of Common
Stock. As a result of the Rights Offering, 23,397,095 shares of Common Stock
were issued on August 22, 2003, resulting in gross proceeds to the Fund of
$42,348,741.95. As of August 31, 2003, the Fund had total assets of $___________
and total net assets applicable to Common Stock (aggregate assets less senior
securities and Fund liabilities) of $__________. After giving effect to such
issuance of Common Stock, the Fund's capital structure included _________ shares
of Common Stock, __________ shares of ATP Series A, __________ shares of ATP
Series B, __________ shares of ATP Series C and __________ shares of ATP
Series D.
The Fund has entered into a five-year interest payment swap arrangement
(the "Swap Arrangement") with Fleet National Bank ("Fleet"). 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 such payments, 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. The aggregate effect of this Swap Arrangement is to
hedge the Fund's dividend payment obligations with respect to $____ million of
the ATP, ____% of the ATP Outstanding as of August 31, 2003. See "Investment
Objective and Policies" and "Description of ATP - Dividends and Dividend
Periods." After giving effect to the issuance of the new shares of ATP Series C,
the Swap Arrangement will hedge the Fund's dividend obligations with respect to
77% of the ATP then Outstanding. The Fund makes dividend payments to the holders
of the ATP based on the results of periodic Auctions without regard to the Swap
Arrangement. In the event that the Fund fails to satisfy certain asset coverage
requirements that give rise to a mandatory redemption of the ATP, the Fund has
agreed with Moody's and Fitch that it will terminate the Swap Arrangement to the
extent the notional amount of the 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
11
then exceeds a specified benchmark. In light of the proposed increase in the
Fund's Outstanding ATP, the Fund will consider adjustments in the Swap
Arrangement. The timing and amount of any such adjustment will depend upon
market conditions.
The Fund is registered under the 1940 Act and was organized as a
corporation under the laws of the State of Maryland on November 19, 1987. The
Fund's address is 33 Broad Street, Boston, Massachusetts 02109, and its
telephone number is (617) 263-6400. The Investment Adviser's address is 100 East
Pratt Street, Baltimore, Maryland 21202, and its telephone number is (410)
345-2000.
USE OF PROCEEDS
The Fund anticipates investing substantially all of the net proceeds from
the Offering in accordance with the Fund's investment objective and policies
described below. See "Investment Objective and Policies." The net proceeds from
the sale of the newly issued shares of ATP Series C offered hereby are estimated
to be approximately $____________ (after deducting sales load and estimated
offering expenses of approximately $______). The Fund currently anticipates that
investment of such net proceeds in accordance with the Fund's investment
objective and policies will take up to eight weeks from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities, but in no event will such investment take longer than six months.
Pending such investment in accordance with the Fund's investment objective and
policies, the proceeds will be held in high-quality, short-term money market
instruments.
DESCRIPTION OF ATP
GENERAL
The following is a brief description of the terms of the ATP. This
description does not purport to be complete and is subject to qualification in
its entirety by reference to the Articles which establish and fix the rights and
preferences of the newly issued shares of ATP Series C. A copy of the Articles,
including a form of the Articles Supplementary establishing the newly issued ATP
Series C, are filed as exhibits and are 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."
Pursuant to the Articles, the Fund is authorized to issue 1,000,000 shares
of Preferred Stock in one or more series. The Fund previously issued 1,200
shares of ATP Series A and 800 shares of ATP Series B in January 1994 (which
subsequently increased to 2,400 shares of ATP Series A and 1,600 shares of ATP
Series B pursuant to a stock split), 2,000 shares of ATP Series C in May 1997
and 2,400 shares of ATP Series D in May 1998. In connection with maintaining
asset coverage requirements for the ATP, the Fund repurchased $50 million, $10
million, and $50 million of the ATP in fiscal years 2002, 2001, and 2000,
respectively. The Fund is offering an additional 1,200 shares of ATP Series C at
a price per share of $25,000 plus accumulated dividends, if any, from the Date
of Original Issue. At August 31, 2003, there were ____ Outstanding shares of
Preferred Stock of which ____ are classified as ATP Series A, ____ are
classified as ATP Series B, _____ are classified as ATP Series C and _____ are
classified as ATP Series D.
The Liquidation Value is currently $25,000 with respect to the ATP Series
A, Series B, Series C and Series D.
DIVIDENDS AND DIVIDEND PERIODS
With respect to the newly issued shares of ATP Series C, the initial
Applicable Rate and the first Auction Date for the initial Dividend Period will
be as set forth on the inside cover page of this Prospectus. For each subsequent
Dividend Period, subject to certain exceptions, the dividend rate will be the
Applicable Rate that the Auction Agent advises the Fund has resulted from an
Auction. See "Description of ATP - Dividends" in the Statement of Additional
Information. During the Standard Term Period for ATP, Series A (__________, 2003
and
12
_________, 2003), Series B (__________, 2003 and _________, 2003), Series C
(__________, 2003 and _________, 2003), and Series D (__________, 2003 and
_________, 2003), dividends were paid at an annual rate of ____%, ____%, ____%
and ____%, respectively. The annual return on the Fund's portfolio needed to
cover dividend payments on the ATP at the current rate is ____% calculated as of
August 31, 2003. The annual return on the Fund's portfolio needed to cover total
leverage related expenses is ____% calculated as of August 31, 2003.
The initial Dividend Period for the newly issued shares of ATP Series C
shall be ___ days. Dividend Periods after the initial Dividend Period shall be
either Standard Term Periods or, subject to certain conditions and with notice
to holders, Alternate Term Period (periods longer or shorter than 28 days and
having such duration as the Board of Directors shall specify). 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.
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. For
Dividend Periods of one year or less, Dividend Payment Dates shall occur on the
Business Day next succeeding the last day of such Dividend Period and, if any,
on the 91st, 181st and 271st days thereof. For Dividend Periods of more than one
year, Dividend Payment Dates shall occur on a quarterly basis on each January 1,
April 1, July 1 and October 1 within such Dividend Period and on the Business
Day following the last day of such Dividend Period. Dividends will be paid
through the Securities Depository (the Depository Trust Company or a successor
securities depository) on each Dividend Payment Date. See "Description of ATP -
Dividends and Dividend Periods" in the Statement of Additional Information. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents.
Except during a Default Period as described below, the Applicable Rate
resulting from an Auction will not be greater than the Maximum Applicable Rate,
which is equal to 150% of the applicable AA Composite Commercial Paper Rate (for
a Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
(for a Dividend Period of 184 days or more, (each, a "Reference Rate")), in each
case subject to upward but not downward adjustment in the discretion of the
Board of Directors after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with the
ATP Basic Maintenance Amount.
The Maximum Applicable Rate for the shares of ATP will apply automatically
following an Auction for such shares in which Sufficient Clearing Orders have
not been made (other than because all shares of ATP were the subject of
Submitted Hold Orders) or following the failure to hold an Auction for any
reason on the Auction Date scheduled to occur (except for circumstances in which
the dividend rate is the Default Rate, as described below).
While any shares of ATP are Outstanding, the Fund generally may not
(subject to certain exceptions) declare, pay or set apart for payment any
dividend or other distribution 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 or any such
parity shares unless certain conditions have been satisfied. These conditions
include the following: (i) immediately thereafter 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 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. See "Description of ATP -
Dividends and Dividend Periods" in the Statement of Additional Information.
DEFAULT PERIOD. A Default Period will commence if the Fund fails to (i)
declare in a timely manner the full amount of any dividend due on any Dividend
Payment Date, (ii) pay in a timely manner to the Auction Agent the full amount
of any dividends due on the ATP or the redemption price for any shares of ATP
called for redemption,
13
and such failure is not cured in a timely manner, or (iii) maintain the Aaa/AAA
Credit Rating unless such failure is cured by the Dividend Payment Date next
following the date of such failure. The Applicable Rate for a Default Period,
including any Dividend Period commencing during a Default Period, will be the
Default Rate. The Default Rate is the Reference Rate multiplied by three.
Holders of two-thirds of the Outstanding shares of ATP, acting collectively, or
the ATP Series C, acting as a separate series, may waive any Dividend Default,
Redemption Default or Rating Default.
The Minimum Applicable Rate will apply automatically following an Auction
in respect of a Dividend Period of 93 days or fewer in which all of the
Outstanding shares are subject to (or are deemed to be subject to) Submitted
Hold Orders. The Minimum Applicable Rate is 80% of the applicable AA Composite
Commercial Paper Rate. No minimum rate is specified for Auctions in respect of
Dividend Periods of more than 93 days.
Prior to each Auction, Broker-Dealers will notify holders of the ATP of the
term of the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each Auction, on the
Auction Date, Broker-Dealers will notify holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
The Fund may enter into transactions such as swaps, caps, collars and
floors with the purpose of hedging its dividend payment obligations with respect
to the ATP. See "The Fund" and "Investment Objective and Policies - Certain
Investment Practices" in the Statement of Additional Information.
NOTIFICATION OF DIVIDEND PERIOD. The Fund will designate the duration of
Dividend Periods of ATP Series C; provided, however, that no such designation is
necessary for a Standard Term Period and such designation shall be effective
only if (i) notice thereof shall have been given as provided herein, (ii) any
failure to pay in a timely manner to the Auction Agent the full amount of any
dividend on, or the redemption price of, the ATP shall have been cured as set
forth above, (iii) Sufficient Clearing Orders shall have existed in the Auction
held on the Auction Date immediately preceding the first day of any proposed
Alternate Term Period, (iv) if the Fund shall have mailed a notice of redemption
with respect to any shares, as described under "Description of ATP - Redemption"
in the Statement of Additional Information, the Redemption Price with respect to
such shares shall have been deposited with the Paying Agent, and (v) the Fund
has confirmed that as of the Auction Date next preceding the first day of such
Alternate Term Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the ATP Basic Maintenance Amount, and has consulted with the
Broker-Dealers and has provided notice and an ATP Basic Maintenance Certificate
to Moody's (if Moody's is then rating the ATP), Fitch (if Fitch is then rating
the ATP) and any Other Rating Agency which is then rating the ATP and so
requires.
If the Fund proposes to designate any Alternate Term Period following the
Date of Original Issue, generally not less than three Business Days nor more
than 30 days prior to the first day of such Alternate Term Period, notice shall
be (A) made by press release and (B) communicated by the Fund by telephonic or
other means to the Auction Agent and confirmed in writing promptly thereafter.
Each such notice shall state (x) that the Fund proposes to exercise its option
to designate a succeeding Alternate Term Period, specifying the first and last
days thereof and (y) that the Fund will by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such Alternate Term Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(X) its determination, subject to certain conditions, to proceed with such
Alternate Term Period, subject to the terms of any Specific Redemption
Provisions, or (Y) its determination not to proceed with such Alternate Term
Period, in which latter event the succeeding Dividend Period shall be a Standard
Term Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Alternate Term Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating that (A) the Fund has determined to designate the
next succeeding Dividend Period as an Alternate Term Period,
specifying the first and last days thereof and (B) the terms of
any Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate an Alternate Term Period.
14
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Alternate Term Period to the Auction Agent or is
unable to make the confirmation pursuant to clause (v) above by 3:00 p.m., New
York City time, on the second Business Day next preceding the first day of such
proposed Alternate Term Period, the Fund shall be deemed to have delivered a
notice to the Auction Agent with respect to such Dividend Period to the effect
set forth in clause (ii) above, thereby resulting in a Standard Term Period.
Notwithstanding the foregoing, the Fund may designate the succeeding
Dividend Period as an Alternate Term Period on the second Business Day next
preceding the first day of such succeeding Dividend Period by giving notice as
contemplated by clause (i) above and by issuing a press release containing the
information in such notice.
If the Fund is unable to make the confirmation pursuant to clause (v) above
by 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such Alternate Term Period, the Fund shall deliver a notice to the
Auction Agent that the Fund has been unable to make such confirmation and that
such Dividend Period will be a Standard Term Period.
MANDATORY REDEMPTION
If the Fund fails to maintain, as of any Valuation Date, Eligible Assets
with an aggregate Discounted Value at least equal to the ATP Basic Maintenance
Amount, or as of the last Business Day of any month, the 1940 Act ATP Asset
Coverage, and such failure is not cured within two Business Days following such
Valuation Date in the case of a failure to maintain the ATP Basic Maintenance
Amount as of such Valuation Date or the last Business Day of the following month
in the case of a failure to maintain 1940 Act ATP Asset Coverage as of such last
Business Day, the ATP will be subject to mandatory redemption out of funds
legally available therefor to the extent necessary to result in the Fund having
sufficient Eligible Assets or to restore the 1940 Act ATP Asset Coverage, as the
case may be. If the Fund at any time fails to maintain the Aaa/AAA Credit Rating
and the Fund is unable to restore the Aaa/AAA Credit Rating within 90 calendar
days thereafter, all shares of ATP will be subject to mandatory redemption out
of funds legally available therefor. To maintain the Aaa/AAA Credit Rating, the
Fund must maintain a rating for the ATP in the highest rating category from any
two nationally recognized statistical rating organizations (as used in the rules
and regulations of the Exchange Act), one of which must be Moody's or S&P. The
ATP will be rated by Moody's and Fitch on the Date of Original Issue, although
the Fund reserves the right to obtain a rating or ratings from additional and/or
substitute rating agencies, subject to the preceding sentence.
The redemption price in the event of a mandatory redemption of a share of
ATP will be the Liquidation Value of such share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption plus (in the case of a Dividend Period of not less
than one year only) any redemption premium specified in any Specific Redemption
Provisions. In the event any mandatory redemption is required, the particular
shares to be redeemed shall be selected by the Fund by lot, on a pro rata basis
between each series or by such other method as the Fund shall deem fair and
equitable, subject to the terms of any Specific Redemption Provisions. The
Fund's ability to make a mandatory redemption may be limited by the provisions
of the 1940 Act or Maryland law. See "Description of ATP - Redemption" in the
Statement of Additional Information. Shares of ATP may be subject to mandatory
redemption in accordance with the foregoing mandatory redemption provisions
notwithstanding the terms of any Specific Redemption Provisions.
OPTIONAL REDEMPTION
To the extent permitted under the 1940 Act and Maryland Law, the Fund at
its option may redeem shares of ATP having a Dividend Period of less than one
year, in whole or in part, on the Business Day after the last day of such
Dividend Period upon not less than 15 days and not more than 40 days' prior
notice. The optional redemption price per share shall be the Liquidation Value,
plus an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to the date fixed for redemption. Shares of ATP having a
Dividend Period of more than one year may be redeemable at the option of the
Fund prior to the end of the relevant Dividend Period, subject to any Specific
Redemption Provisions, which may include the payment of redemption premiums to
the extent required under any applicable Specific Redemption Provisions. The
Fund shall not effect any optional redemption unless after giving effect thereto
the Fund would have Eligible Assets with an aggregate Discounted Value at least
equal to the ATP Basic Maintenance Amount. See "Description of ATP - Redemption"
in the Statement of Additional Information.
15
The Fund also reserves the right to repurchase ATP in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the applicable Liquidation Value, but is under no
obligation to do so.
RATINGS
It is a condition of the Underwriter's obligation to purchase the newly
issued shares of ATP Series C offered in the Offering that the Fund obtain the
Aaa/AAA Credit Rating from Moody's and Fitch for the newly issued shares of ATP
Series C on the Date of Original Issue. While there is no assurance that the
Aaa/AAA Credit Rating with respect to the newly issued shares of ATP Series C
will not be changed, suspended or withdrawn, the Fund will endeavor to maintain
such rating and any failure to maintain such rating would, subject to cure and
certain exceptions, result in mandatory redemption of the ATP. See "Mandatory
Redemption" above. While the Fund does not presently intend to seek a rating
from a rating agency other than Moody's and Fitch, it reserves the right to do
so.
ASSET MAINTENANCE
Under the Fund's Articles, the Fund must maintain (i) as of each Valuation
Date, Eligible Assets having, in the aggregate, a Discounted Value at least
equal to the ATP Basic Maintenance Amount, and (ii) as of the last Business Day
of each month, 1940 Act ATP Asset Coverage of at least 200%. See "Description of
ATP - Asset-Maintenance" in the Statement of Additional Information.
The Discount Factors and guidelines for calculating the Discounted Value of
the Fund's portfolio for purposes of determining whether the ATP Basic
Maintenance Amount has been satisfied have been established by Moody's and Fitch
in connection with the Fund's receipt from Moody's and Fitch of the Aaa/AAA
Credit Rating with respect to the newly issued shares of ATP Series C on their
Date of Original Issue. See "Rating Agency Guidelines" in the Statement of
Additional Information. Additional discount factors and guidelines for
calculating the discounted value of investment company portfolios have been
established by other rating agencies, such as S&P. Such guidelines, which are
similar but not identical to those established by Moody's and Fitch, as well as
various other covenants and tests such as liquidity tests, would apply in the
event the Fund determined to seek (and was successful in obtaining) a rating
from one or more of such agencies with respect to the ATP.
The Fund estimates that on the Date of Original Issue of the newly issued
shares of ATP Series C, based on the composition of its portfolio as of August
31, 2003, the 1940 Act ATP Asset Coverage, after giving effect to the issuance
of the new shares of ATP Series C ($30 million), and the deduction of sales load
and estimated offering expenses for such shares ($_______), will be ____%.
LIQUIDATION PREFERENCE
Upon a liquidation of the Fund, whether voluntary or involuntary, the
holders of ATP then Outstanding will be entitled to receive and to be paid out
of the assets of the Fund available for distribution to its stockholders, before
any payment or distribution shall be made on the Common Stock or on any other
class of shares ranking junior to the ATP upon liquidation, an amount equal to
the liquidation preference with respect to the ATP. The liquidation preference
shall be Liquidation Value plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date payment of
such distribution is made in full or a sum sufficient for the payment thereof is
set apart with the Paying Agent; no redemption premium shall be paid upon any
liquidation even if such redemption premium would be paid upon optional or
mandatory redemption of the relevant shares. After the payment to the holders of
ATP of the full preferential amounts provided for as described herein, the
holders of ATP as such shall have no right or claim to any of the remaining
assets of the Fund. See "Description of ATP - Liquidation" in the Statement of
Additional Information.
Neither a consolidation or merger of the Fund with or into any other
company or companies, nor 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 (unless there is a material adverse affect on any
designation, right, preference or
16
limitation of the ATP or any shares issuable in exchange for shares of ATP in
any such consolidation or merger), will be deemed to be a liquidation, whether
voluntary or involuntary, for the purposes of the foregoing paragraph.
VOTING RIGHTS
Except as otherwise indicated herein or as otherwise required by applicable
law, holders of the ATP will have equal voting rights with holders of Common
Stock (one vote per share) and will vote together with holders of Common Stock
as a single class. The 1940 Act requires that the holders of shares of ATP,
voting as a separate class, have the right to elect at least two directors at
all times and to elect a majority of the directors at any time two years'
dividends on any shares of ATP are unpaid. The holders of shares of ATP will
vote as a separate class on certain other matters as required under the Articles
or applicable law. In addition, to the extent permitted by the 1940 Act, each
series of ATP may vote as a separate series in certain circumstances. See
"Management of the Fund - Directors and Officers" and "Description of ATP -
Voting Rights" in the Statement of Additional Information.
AUCTION PROCEDURES
DIVIDEND RATES AND AUCTION DATES
The dividend rate for each Dividend Period will be determined on the
Auction Date in respect of such Dividend Period. If Sufficient Clearing Orders
exist for an Auction, the dividend rate for the ensuing Dividend Period will be
the Winning Rate, or, if all shares in an Auction are the subject of Submitted
Hold Orders in respect of a Dividend Period of 93 days or fewer, the Minimum
Applicable Rate. If Sufficient Clearing Orders do not exist for any Auction, the
ensuing Dividend Period will be a Standard Term Period and the dividend rate for
that Dividend Period will be the Maximum Applicable Rate. Except in the case of
a default as described above or where all shares of the ATP are subject to
Submitted Hold Orders, if there is no Auction on any Auction Date, the next
Dividend Period will be a Standard Term Period, and the dividend rate will be
the Maximum Applicable Rate that could have resulted from an Auction in respect
of a Standard Term Period on such Auction Date. The Fund is obligated to
exercise its best efforts to maintain an Auction Agent.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
On or prior to each Auction Date and prior to the Submission Deadline
(initially 1:00 p.m., New York City time), each Existing Holder, with respect to
shares it then holds, may submit to a Broker-Dealer by telephone or otherwise a
Hold Order, a Hold/Sell Order or a Sell Order and each Broker-Dealer will
contact Potential Holders to determine the Buy Orders, if any, to be made by
such Potential Holders.
SUBMISSION OF ORDERS TO AUCTION AGENT
Each Order must be submitted in writing by a Broker-Dealer to the Auction
Agent prior to the Submission Deadline on each Auction Date for the Auction to
be conducted on such Auction Date and must specify (A) the aggregate number of
shares that are the subject of such Order, (B) to the extent that such Orders
are placed by an Existing Holder, the number of shares, if any, subject to any
Hold Order, Hold/Sell Order or Sell Order, and (C) the rate, if any, specified
in each Order.
If any rate specified in any Order contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next higher one thousandth of 1%.
Only in the case of an Auction preceding a Dividend Period of 93 days or
fewer and following a Dividend Period of 93 days or fewer, if an Order or Orders
covering all shares held by any Existing Holder are not submitted to the Auction
Agent by the Submission Deadline, the Auction Agent will deem a Hold Order to
have been submitted on behalf of such Existing Holder covering the number of
shares held by such Existing Holder and not subject to Orders submitted to the
Auction Agent. In the case of all other Auctions, if a Hold/Sell or Sell Order
or Orders covering all shares held by any Existing Holder are not submitted to
the Auction Agent by the Submission
17
Deadline, the Auction Agent will deem a Sell Order to have been submitted on
behalf of such Existing Holder covering the number of shares held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
If one or more Orders covering in the aggregate more than the number of
shares of ATP held by an Existing Holder are submitted to the Auction Agent,
such Orders will be valid in accordance with the Validity Procedures.
If more than one Order is submitted on behalf of any Existing Holder or
Potential Holder, each Order submitted will be a separate Order.
In the case of any Dividend Period of 93 days or fewer, if any rate
specified in any Order is lower than the Minimum Applicable Rate for the
Dividend Period with respect to which such Order is made, such Order will be
deemed to be an Order specifying a rate equal to such Minimum Applicable Rate.
In the case of any Dividend Period of more than 93 days, only Buy Orders,
Hold/Sell Orders or Sell Orders may be submitted and Hold Orders may not be
submitted.
DETERMINATION OF SUFFICIENT CLEARING ORDERS AND APPLICABLE RATE
Not earlier than the Submission Deadline, on each Auction Date, the Auction
Agent will assemble all Submitted Orders and will determine whether Sufficient
Clearing Orders exist and the Applicable Rate.
ACCEPTANCE OF ORDERS AND ALLOCATION OF SHARES
Based upon the results of the Auction, the Auction Agent will determine the
aggregate number of shares to be held and sold by Existing Holders and to be
purchased by Potential Holders, and, with respect to each Broker-Dealer,
determine the extent to which such Broker-Dealer will deliver, and from which
other Broker-Dealers such Broker-Dealer will receive, shares.
If Sufficient Clearing Orders exist, subject to the Rounding Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all Submitted
Hold/Sell Orders specifying any rate higher than the Winning Rate
will be accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate lower than the
Winning Rate will be accepted as Hold Orders;
(iv) all Submitted Buy Orders specifying a rate lower than the Winning
Rate will be accepted;
(v) all Submitted Hold/Sell Orders specifying a rate equal to the
Winning Rate will be accepted as Hold Orders unless the number of
shares subject to all such Submitted Hold/Sell Orders is greater
than the number of shares remaining unaccounted for after the
acceptances described in clauses (i), (iii), and (iv) above, in
which event each such Submitted Hold/Sell Order will be accepted
as a Hold Order and a Sell Order as to the respective number of
shares determined in accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to the Winning
Rate will be accepted, unless the number of shares subject to all
such Submitted Buy Orders is greater than the number of shares
remaining unaccounted for after the acceptances described in
clauses (i), (iii), (iv) and (v) above, in which event each such
Submitted Buy Order will be accepted only as to the number of
shares determined in accordance with the Proration Procedures.
18
If Sufficient Clearing Orders do not exist, subject to the, Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate equal to or lower
than the Maximum Applicable Rate will be accepted as Hold Orders;
(iii) all Submitted Buy Orders specifying a rate equal to or lower than
the Maximum Applicable Rate will be accepted; and
(iv) all Submitted Hold/Sell Orders specifying a rate higher than the
Maximum Applicable Rate and all Submitted Sell Orders will be
accepted as Hold Orders and as Sell Orders as to the respective
number of shares of ATP determined in accordance with the
Proration Procedures.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will advise each Broker-Dealer that submitted an Order
whether such Order was accepted, and of the Applicable Rate for the next
Dividend Period by telephone by approximately 3:00 p.m., New York City time, on
each Auction Date. Each Broker-Dealer that submitted an Order will as soon as
practicable advise each Existing Holder and Potential Holder whether its Order
was accepted and will confirm in writing purchases and sales with each Existing
Holder and Potential Holder purchasing or selling shares as a result of an
Auction as soon as practicable on the Business Day next succeeding the Auction
Date. Each Broker-Dealer that submitted a Hold Order will advise each Existing
Holder on whose behalf such Hold Order was submitted of the Applicable Rate for
the shares of ATP for the next Dividend Period.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales as determined in
the Auction. Purchasers will make payment through their Agent Members in
same-day funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment against delivery to their Agent
Members in same-day funds.
If any Existing Holder selling shares in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased shares in
such Auction may deliver to such person a number of whole shares that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
BROKER-DEALERS; COMMISSIONS
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after any such termination.
A Broker-Dealer may acquire shares for its own account. If a Broker-Dealer
submits an Order for its own account in an Auction, it may have an advantage
over others because it would have knowledge of other Orders placed through it in
that Auction.
Lehman currently serves as the Broker-Dealer for the ATP Series C and
intends to serve as the Broker-Dealer for the newly issued shares of ATP Series
C. Other firms may serve as Broker-Dealers in connection with Auctions, although
there is no assurance that they will do so.
The Auction Agent after each Auction will pay to the Broker-Dealer, from
funds provided by the Fund, a service charge at an annual rate of __________
in the case of any Auction immediately preceding a Dividend Period of less
than one year
19
and, in the case of Dividend Periods of one year or more, a percentage agreed
upon between the Fund and the Broker-Dealer, of the purchase price of shares
placed by the Broker-Dealer at such Auction. For purposes of this paragraph,
shares will be placed by a Broker-Dealer if such shares were the subject of (i)
Hold Orders deemed to have been made by Existing Holders and were acquired by
such Existing Holders through the Broker-Dealer or (ii) an Order submitted by
the Broker-Dealer that is (A) an Order of an Existing Holder that resulted in
such Existing Holder continuing to hold such shares as a result of the Auction
or (B) an Order of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (C) a valid Hold Order. In
the event an Auction scheduled to occur on an Auction Date fails to occur for
any reason, a Broker-Dealer will be entitled to service charges as if the
Auction had occurred and all holders of shares placed by them had submitted
valid Hold Orders.
THE AUCTION AGENT
Deutsche Bank Trust Company Americas, as successor to Bankers Trust
Company, serves as Auction Agent with respect to the ATP and intends to serve as
the Auction Agent for the newly issued shares of ATP Series C. The Auction Agent
is acting solely as agent of the Fund and is not a trustee for holders of the
newly issued shares of ATP Series C. In the absence of bad faith or gross
negligence on its part, the Auction Agent will not be liable to the Fund for any
action taken, suffered or omitted or for any error of judgment made by it in the
performance of its duties as Auction Agent.
The Auction Agent may resign upon notice to the Fund, such resignation to
be effective on the earlier of (i) the 90th day after the delivery of such
notice and (ii) the date on which a successor Auction Agent is appointed by the
Fund. The Fund may also replace the Auction Agent.
MASTER PURCHASER'S LETTER
Each prospective purchaser of shares of ATP Series C or its Broker-Dealer
will be required to sign and deliver to the Auction Agent, as a condition to
such purchaser's purchasing shares of ATP in any Auction or otherwise, a Master
Purchaser's Letter, the form of which is attached as Appendix A to this
Prospectus, in which such prospective purchaser or its Broker-Dealer will agree,
among other things:
(a) to participate in Auctions for shares of ATP in accordance with
the Auction Procedures described in this Prospectus;
(b) to sell, transfer or otherwise dispose of shares of ATP only
pursuant to a Bid or a Sell Order in an Auction, or to or through a
Broker-Dealer or to a person that has delivered a signed Master Purchaser's
Letter to the Auction Agent, provided that in the case of all transfers
other than those pursuant to Auctions, the Existing Holder of the shares so
transferred, its Agent Member or its Broker-Dealer advises the Auction
Agent of such transfer; and
(c) to have the ownership of the shares of ATP as to which such
purchaser or its Broker-Dealer is the Existing Holder maintained in book
entry form by the Securities Depository for the account of its Agent
Member, which in turn will maintain records of such purchaser's beneficial
ownership, and to authorize such Agent Member to disclose to the Auction
Agent such information with respect to such purchaser's beneficial
ownership as the Auction Agent may request.
Each prospective purchaser should ask its Broker-Dealer whether such
prospective purchaser should sign a Master Purchaser's Letter. If the
Broker-Dealer submits Orders for such prospective purchaser listing the
Broker-Dealer as the Existing Holder or the Potential Holder, a Master
Purchaser's Letter signed by such prospective purchaser may not be required.
AN EXECUTION COPY OF THE MASTER PURCHASER'S LETTER IS INCLUDED WITH THIS
PROSPECTUS. EXECUTION BY A PROSPECTIVE PURCHASER OR ITS BROKER-DEALER OF A
MASTER PURCHASER'S LETTER IS NOT A COMMITMENT TO PURCHASE SHARES OF ATP IN THE
OFFERING BEING MADE BY THIS PROSPECTUS OR IN ANY AUCTION OR OTHERWISE, BUT IS A
CONDITION PRECEDENT TO SUCH PURCHASER'S PURCHASING SHARES OF ATP.
20
RATING AGENCY GUIDELINES
The Fund intends at all times that, so long as any shares of ATP are
Outstanding and Moody's and Fitch are then rating the ATP, the composition of
its portfolio will reflect guidelines established by Moody's and Fitch in
connection with obtaining the Aaa/AAA Credit Rating with respect to the ATP.
Should the Fund determine to seek (and be successful in obtaining) a rating from
any other rating agency or issue senior securities, other than the ATP, which
are rated or otherwise subject to portfolio diversification or similar
requirements, the composition of its portfolio would also reflect the guidelines
and requirements established by any rating agency rating such securities or by
the purchaser or purchasers of such securities. Moody's and Fitch, nationally
recognized statistical rating organizations, issue ratings for various
securities reflecting the perceived creditworthiness of such securities. The
Fund has paid certain fees to Moody's and Fitch for rating shares of the ATP.
The guidelines described below, which are set forth in greater detail in the
Statement of Additional Information, have been developed independently by
Moody's and Fitch in connection with issuance of asset-backed and similar
securities, including debt obligations and adjustable rate preferred stocks,
generally on a case-by-case basis through discussions with the issuers of these
securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be sufficiently varied and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law, but have been adopted by the Fund in
order to satisfy current requirements necessary for Moody's and Fitch to issue
the above-described ratings for the ATP, which ratings are generally relied upon
by institutional investors in purchasing such securities. In the context of a
closed-end investment company such as the Fund, therefore, the guidelines
provide a set of tests for portfolio composition and asset coverage which
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act, and which accordingly affect significantly the
management of the Fund's portfolio. A rating agency's guidelines will apply to
the ATP only so long as such rating agency is rating such shares and such
guidelines are subject to amendment with the consent of the relevant rating
agency.
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the ATP Basic Maintenance Amount. Moody's and Fitch have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency). The Moody's
and Fitch guidelines do not impose any limitations on the percentage of Fund
assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio. The amount of such
assets included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the Eligible Assets included in the
portfolio.
Upon any failure to maintain the required Discounted Value, the Fund may
seek to alter the composition of its portfolio to retain the ATP Basic
Maintenance Amount on or prior to the Asset Coverage Cure Date, thereby
incurring additional transaction costs and possible losses and/or gains on
disposition of portfolio securities. To the extent any such failure is not cured
within two Business Days, the ATP will be subject to mandatory redemption
thereafter. The "ATP Basic Maintenance Amount" equals the sum of (i) the
aggregate liquidation preference of ATP then Outstanding and (ii) certain
accrued and projected payment obligations of the Fund. See "Description of ATP -
Asset Maintenance" in the Statement of Additional Information.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the ATP may, at any time, change or
withdraw any such rating. The Board of Directors may, without stockholder
approval, adopt, amend, alter or repeal any definitions, covenants or other
obligations of the Fund in the Articles Supplementary, provided the Board of
Directors has obtained written confirmation from any rating agency which is then
rating the ATP and which so requires that any such change would not impair the
respective rating then assigned to the ATP.
As described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. Fitch has stated that its rating on the ATP does not address the
market liquidity of the ATP. The ratings on the ATP are not recommendations to
purchase, hold or sell ATP, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor nor do the Rating Agency
Guidelines described above address the likelihood that a holder of ATP will be
able to sell such
21
shares in an Auction. The ratings are based on current information furnished to
Moody's and Fitch by the Fund and the Investment Adviser, and information
obtained from other sources. The ratings may be changed, suspended or withdrawn
as a result of changes in, or the unavailability of, such information. The
Common Stock has not been rated by a nationally recognized statistical rating
organization.
TAXATION
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the ATP. Investors should consult their own tax
advisors for more detailed information and for information regarding the impact
of state, local, foreign, and other tax consequences of such an investment and
of potential changes in applicable tax laws.
The Fund has elected to be treated as a regulated investment company (a
"RIC") under subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and intends to operate so as to meet the Code requirements for
qualification as a RIC. However, no assurance can be given that such
requirements will be met. If the Fund qualifies for taxation as a RIC, it
generally will not be subject to federal corporate income taxes on that portion
of its income that is currently distributed to its stockholders. This deduction
for dividends paid to stockholders substantially eliminates the federal "double
taxation" on earnings (once at the corporate level and once again at the
stockholder level) that generally results from investments in a corporation.
Under present law, the ATP will constitute stock of the Fund, and thus
distributions with respect to the ATP (other than distributions in redemption of
the ATP subject to section 302(b) of the Code) will constitute dividends to the
extent of the Fund's current or accumulated earnings and profits, as calculated
for federal income tax purposes. Such dividends generally will be taxable as
ordinary income to the stockholders and will not qualify for the dividends
received deduction available to corporations under section 243 of the Code.
However, dividends designated by the Fund as capital gain dividends will be
treated as long-term capital gains in the hands of the stockholders. In
addition, under the Jobs and Growth Tax Relief Reconciliation Act of 2003
(effective for tax years through 2008), dividends paid by the Fund to
individuals may constitute qualified dividend income eligible for a maximum rate
of 15%. The amount of qualified dividend income 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. The Internal Revenue Service (the
"Service") currently requires that a RIC that has two or more classes of shares
allocate to each such class proportionate amounts of each type of its income
(such as ordinary income and net capital gains) for each tax year. Accordingly,
the Fund intends to designate distributions made with respect to the ATP as
capital gain dividends in proportion to the ATP's share of the total dividends
paid to both the ATP and the Common Stock during the year. The amount of net
long-term capital gain realized by the Fund is not expected to be significant,
and there can be no assurance that any such income will be realized by the Fund
in any year. Any distribution in excess of the Fund's earnings and profits will
first reduce a stockholder's adjusted basis in his shares of the ATP and, after
such adjusted basis is reduced to zero, will constitute a capital gain to a
stockholder whose shares of the ATP are held as a capital asset. See "Taxation"
in the Statement of Additional Information for additional information regarding
the tax aspects of investing in the Fund.
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 cannot ensure that it will
attain its investment objective. The Fund's investment objective and the
restrictions described below under "Investment Restrictions" are fundamental
policies and thus may not be changed without the affirmative vote of the holders
of a majority of the outstanding shares of the Fund's Common Stock and a
majority of the Outstanding shares of the ATP, voting as separate classes, which
means for each class the lesser of (a) more than 50% of such class or (b) 67% or
more of such class present at a meeting at which more than 50% of the
outstanding shares of such class are present or represented by proxy.
22
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 Rating Agency Guidelines, however, it is
not presently anticipated that such securities will comprise a significant
percentage of the Fund's investments, although the Fund reserves full
flexibility in this regard. See "Rating Agency Guidelines." Under normal market
conditions, the Fund will have at least 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 60 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.
Fixed-income securities which the Fund has the right to acquire include
preferred stocks (limited to 20% of the Fund's total assets and subject to
compliance with the Rating Agency Guidelines as described above) and all types
of debt obligations having varying terms with respect to security or credit
support, subordination, purchase price, interest payments and maturity. Such
obligations may include, for example, bonds, debentures, notes, mortgage or
other asset-backed instruments, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper, zero coupon
securities and obligations issued or guaranteed by the United States government
or any of its political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by such instruments). The
Fund may invest in U.S. dollar-denominated bonds sold in the United States by
non-U.S. issuers ("Yankee bonds"). Most debt securities in which the Fund will
invest will bear interest at fixed rates. However, the Fund reserves the right
to invest without limitation in fixed-income securities that have variable rates
of interest or involve equity features, such as contingent interest or
participations based on revenues, sales or profits (i.e., interest or other
payments, often in addition to a fixed rate of return, that are based on the
borrower's attainment of specified levels of revenues, sales or profits and thus
enable the holder of the security to share in the potential success of the
venture). The Fund also has the right to acquire common stock as part of a unit
in connection with the purchase of debt securities consistent with the Fund's
investment policies, although such investments are not eligible for inclusion in
the calculation of the Discounted Value under the Rating Agency Guidelines.
The Fund may invest up to 20% of its total assets in illiquid securities
(determined as of the time of investment). Rule 144A Securities 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 Rule 144A Securities.
The Fund is permitted to invest up to 20% of its total assets in zero
coupon securities, although such securities also may not be included in
calculating the Discounted Value of the Fund's portfolio under the Rating Agency
Guidelines. Zero coupon securities pay no cash income but are purchased at a
discount from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and their maturity
value. There may be special tax considerations associated with investing in
securities structured as deferred interest, zero coupon or payment-in-kind
securities. The Fund records the interest on these securities as income even
though it receives no cash interest until each security's maturity date. The
Fund will be required to distribute all or substantially all such amounts
annually and may have to obtain the cash to do so by selling securities. Thus,
to meet cash distribution obligations, the Fund may be required to liquidate a
portion of its assets, which it would otherwise continue to hold, at a
disadvantageous time. These distributions will be taxable to stockholders as
ordinary income. In the case of securities structured as deferred interest, zero
coupon or payment-
23
in-kind securities, the market prices of such securities are affected to a
greater extent by interest rate changes and, therefore, tend to be more volatile
than securities which pay interest periodically and in cash.
Notwithstanding any of the foregoing, when market conditions warrant a
temporary defensive investment strategy, including when it is necessary to
maintain compliance with the Rating Agency Guidelines (under which the Fund's
ability to invest in lower-rated securities having relatively low Discounted
Values may be restricted, particularly as the market values of portfolio
holdings decline), the Fund may invest without limitation in money market
instruments, including rated and (subject to compliance with the Rating
Agency Guidelines) unrated commercial paper of domestic and foreign
corporations, certificates of deposit, bankers' acceptances and other
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.
CERTAIN INVESTMENT PRACTICES
The Fund and the Investment Adviser reserve the right to engage in certain
investment practices in order to help achieve the Fund's investment objective.
Such strategies include the lending of portfolio securities, the short sale of
securities and the use of futures contracts and options thereon, entering into
interest rate transactions, such as swaps, caps, tears or collars for the
purpose of hedging the Fund's exposure to interest rates (including changes in
dividend payments on the ATP), reverse repurchase agreements and repurchase
agreements (other than certain repurchase agreements with qualified depository
institutions having maturities no longer than one day). So long as the ATP is
Outstanding, the Fund may not utilize certain investment practices, such as
entering into swap agreements, the making of securities loans and buying or
selling futures contracts and options thereon, unless the Fund receives written
confirmation from Moody's, Fitch or any other rating agency which is then rating
the ATP and which so requires, that any such action will not impair the Aaa/AAA
Credit Rating. Further, the Rating Agency Guidelines limit or have the effect of
limiting the Fund's use of other investment practices described below, such as
investments in non-U.S. securities, private placements (except Rule 144A
Securities) and options, to the extent such investments are not eligible for
inclusion in the Discounted Value of the Fund's portfolio or the Rating Agency
Guidelines specify terms and restrictions on such investments. See "Rating
Agency Guidelines" and "Investment Objective and Policies - Certain Investment
Practices" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental policies of the Fund,
and may not be amended without the affirmative vote of the holders of a majority
of the outstanding shares of Common Stock and a majority of the Outstanding
shares of the ATP, voting as separate classes, which means for each class the
lesser of (a) more than 50% of such class or (b) 67% or more of such class
present at a meeting at which more than 50% of the outstanding shares of such
class are present or represented by proxy. Under these restrictions, the Fund
may not:
1. Borrow money (through reverse repurchase agreements or otherwise)
or issue senior securities, except as permitted by Section 18 of
the 1940 Act.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 1 above.
Collateral arrangements with respect to margins for futures
contracts and options are not deemed to be pledges or other
encumbrances for purposes of this restriction.
3. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of
securities and except that the Fund may make margin payments in
connection with transactions in futures contracts and options.
24
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" above and "Rating
Agency Guidelines."
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
RISKS OF INVESTING IN ATP
AUCTION RISK. Your ability to dispose of shares of ATP may be largely
dependent on the success of an Auction, which provides liquidity for the sale of
the ATP. If the Auction fails; that is, if there are more ATP shares offered for
sale than there are buyers for those shares, then you may not be able to sell
your shares of the ATP. There is no assurance that any particular Auction will
be successful. Neither the Fund nor any Broker-Dealer is obligated to ensure
that an Auction will be successful or to purchase shares of ATP in an Auction or
otherwise. The Fund is not required to redeem shares of ATP in the event of a
failed Auction. In addition, if you place Hold Orders (Orders to retain the ATP)
at an Auction only at a specified rate, and that bid rate exceeds the rate set
at the Auction, you will not retain your shares of ATP. If you buy shares or
elect to retain shares without specifying a rate below which you would not wish
to continue to hold those shares, and the Auction sets a below-market rate, you
may
25
receive a lower rate of return on your shares than the market rate. Finally, the
Dividend Period may be changed, subject to certain conditions and with notice to
Holders of ATP, which could affect the liquidity of your investment. See
"Description of ATP" and "Auction Procedures."
SECONDARY MARKET RISK. There is no assurance that a secondary market
outside of the Auctions for the ATP will develop, whether or not such Auctions
are successful, or if such a market does develop, that shares of ATP will trade
at or close to the Liquidation Value. If the Fund has designated a Dividend
Period for ATP which is longer than a Standard Term Period, particularly if such
Dividend Period exceeds one year, any increase in interest rates will likely
have an adverse affect on the secondary market price of ATP. In such case, you
may have fewer opportunities to obtain liquidity if Auctions do not occur
frequently. If you try to sell your ATP shares between Auctions, you may not be
able to sell any or all of your shares, or you may not be able to sell them for
$25,000 per share or $25,000 per share plus accumulated dividends. Thus, under
certain circumstances, you may not have liquidity of investment.
The Fund does not intend to apply for listing of the newly issued shares of
ATP Series C on a national securities exchange, but has been advised by Lehman
that it currently intends to make a market in the ATP Series C as permitted by
applicable laws and regulations. Lehman is not obligated to make a market in the
ATP Series C between Auctions and, therefore, a holder of ATP Series C may not
be able to liquidate its position in the ATP Series C between Auctions at a
price per share equal to its liquidation preference (i.e. Liquidation Value,
plus accumulated dividends).
RATINGS AND ASSET COVERAGE RISK. While Moody's and Fitch assign ratings of
Aaa and AAA, respectively, to the ATP, the ratings do not eliminate or
necessarily mitigate the risks of investing in the ATP. A rating agency could
downgrade its rating of the ATP or withdraw its rating of the ATP at any time,
which may make your shares less liquid at an Auction or in the secondary market,
though probably with higher resulting dividend rates. If a rating agency
downgrades the rating of ATP or withdraws its rating without timely replacement
by a rating from a suitable successor rating agency, the Fund may alter its
portfolio or redeem the ATP. If the Fund fails to satisfy the asset coverage
requirements under the 1940 Act and the Rating Agency Guidelines discussed under
"Description of ATP - Asset Maintenance," the Fund may be required to redeem a
sufficient number of the ATP in order to return to compliance with the asset
coverage requirements, including possibly ATP having Dividend Periods of longer
than one year. The Fund may be required to redeem the ATP at a time when it is
not advantageous for the Fund to make such redemption or to liquidate portfolio
securities in order to have available cash for such redemption. The Fund may
voluntarily redeem the ATP under certain circumstances in order to meet asset
maintenance tests. See "Description of ATP - Mandatory Redemption" and
"Description of ATP - Optional Redemption." See also "Description of ATP - Asset
Maintenance" for a description of the asset maintenance tests the Fund must
meet.
INFLATION RISK. Inflation is the reduction in the purchasing power of money
resulting from the increase in the price of goods and services. Inflation risk
is the risk that the inflation adjusted (or "real") value of your ATP investment
or the income from that investment will be worth less in the future. As
inflation occurs, the real value of the ATP shares and distributions declines.
In an inflationary period, however, it is expected that, through the auction
process, ATP dividend rates would increase, tending to offset this risk.
INDEBTEDNESS RISK. The Fund may incur indebtedness with the consent of
Moody's and Fitch. 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. Certain types of borrowings may
result in the Fund being subject to covenants in credit agreements, including
those relating to asset coverage, borrowing base and portfolio composition
requirements and additional covenants that may affect the Fund's ability to pay
dividends and distributions in certain instances. The Fund also may be required
to pledge its assets to the lenders in connection with certain types of
borrowings. Interest payments on borrowings must be made prior to the payment of
dividends on Preferred Stock, including ATP.
ATP represents a perpetual equity interest in the Fund (except to the
extent redeemable by the Fund) and does not give rise to a claim for payment of
a principal amount at a particular date. As such, ATP effectively ranks behind
all indebtedness or other non-equity claims on the Fund with respect to assets
available to satisfy claims on the Fund. In addition, in the event of the
dissolution, liquidation or winding up of the affairs of the Fund, after
26
payment of the liquidation preference and all dividends accumulated to and
unpaid through the date of final distribution, holders of ATP will not be
entitled to any further participation in any distribution of assets of the Fund.
LEVERAGE. The Fund has had a leveraged capital structure since its
organization. Assuming issuance of the new shares of ATP Series C in the
Offering (after giving effect to the sales load and estimated offering expenses)
at August 31, 2003, the Fund would have had total net assets of approximately
$____ million consisting of ATP having an aggregate liquidation preference of
approximately $130 million and net assets attributable to Common Stock of
approximately $_______ million.
The terms of the Fund's arrangements with Moody's and Fitch, which have
been agreed to in order to obtain investment grade ratings for the ATP, require
that the Fund maintain (i) asset coverage with respect to the ATP at least
equal, on a discounted basis, to the liquidation preference of the ATP plus
certain accrued and projected payment obligations of the Fund and other amounts
on an on-going basis and (ii) non-discounted asset coverage of at least 200% of
the aggregate liquidation preference of the ATP as of the last Business Day of
each month. See "Description of ATP - Asset Maintenance." The 1940 Act also
requires that the Fund maintain asset coverage of at least 200% on a
non-discounted basis as a condition of paying dividends to the holders of the
Common Stock.
As market conditions and the value of portfolio securities decline, one
effect of the foregoing requirements is to cause the Fund to invest in
higher-quality, lower-yielding assets and/or to maintain relatively substantial
balances of highly liquid assets having low Discount Factors assigned by the
rating agencies in order to remain in compliance with asset coverage
requirements, which may tend to reduce portfolio yield. In addition, the value
of higher-quality assets may react with greater volatility to interest rate
changes than would lower quality assets.
If the dividend rate on the ATP exceeds the net rate of return on the
Fund's portfolio, the leverage will result in a lower net asset value than if
the Fund were not leveraged, and the Fund's ability to pay dividends and meet
its asset coverage requirements on the ATP would be reduced. Any decline in the
net asset value of the Fund's investments also could increase the risk of the
Fund failing to meet its asset coverage requirements, of losing its ratings on
the ATP or, in an extreme case, of the Fund's current investment income not
being sufficient, which would cause the Fund to liquidate investments in order
to fund a redemption of some or all of the ATP. Under some circumstances, the
Fund may be required to redeem or repurchase senior securities in order to
remain in compliance with applicable asset coverage requirements, which requires
the liquidation of portfolio securities, causing the possible realization of
substantial losses and the incurrence of transaction costs. As market conditions
improve and market opportunities arise, the discounted asset coverage
requirements tend to restrict the redeployment of assets from cash and
higher-quality assets having lower Discount Factors to lower quality,
higher-yielding assets having higher Discount Factors, even when such securities
are available at attractive prices. Also, redeploying cash as the value of the
Fund's assets rise involves significant transaction costs and possible delays,
which further inhibits the Fund's ability to take advantage of a favorable
investment environment.
To the extent the Fund establishes Standard Term Periods or other
relatively short Dividend Periods for the ATP and does not effectively hedge the
risk associated with changes in short-term interest rates, the Fund would be
vulnerable to increases in short-term interest rates.
PAYMENT RESTRICTIONS
Holders of shares of stock, including ATP, are entitled to receive
dividends only when, as and if declared by the Board of Directors and only out
of funds legally available therefor. State corporation laws generally limit the
funds out of which issuers incorporated thereunder may pay to stockholders as a
dividend. For example, under Maryland law, dividends may not be paid if after
giving effect to the dividend, the Fund would not be able to pay its debts as
they became due in the usual course of business or the Fund's total assets would
be less than the sum of its total liabilities plus the amount needed to satisfy
the preferential rights of stockholders whose preferential rights upon
dissolution are superior to those receiving the dividend.
During any annual period when the Fund may not have funds legally available
to pay the scheduled dividends then due on the ATP, the Fund may not pay
dividends on the Common Stock until the scheduled dividends on the shares of ATP
have been paid or provided for. Also, the Fund is not permitted to declare any
cash dividends or distributions on its Common Stock unless, at the time of such
declaration and after deducting the
27
amount of such dividend, the Fund is in compliance with the 1940 Act ATP Asset
Coverage test and has Eligible Assets with an aggregate Discounted Value at
least equal to the ATP Basic Maintenance Amount. This prohibition on the payment
of dividends or distributions might impair the Fund's ability to maintain its
qualification as a regulated investment company for federal income tax purposes.
The Fund intends, however, to redeem shares of ATP from time to time, to the
extent necessary to comply with the asset coverage requirements. There can be no
assurance, however, that such redemptions can be effected in time to permit the
Fund to distribute its income as required to maintain its qualification as a RIC
under the Code. See "Taxation."
SWAP ARRANGEMENT
In order to seek to hedge the value of the Fund's portfolio, to hedge
against increases in the Fund's costs associated with the dividend payments on
the ATP or to seek to enhance the Fund's return, the Fund may enter into
interest rate swap transactions. In interest rate swap transactions, there is a
risk that yields will move in the direction opposite of the direction
anticipated by the Fund, which would cause the Fund to make payments to its
counter-party in the transaction that could adversely affect the Fund's
performance. In addition, swap transactions give rise to credit risk. Credit
risk is the amount of loss the Fund would incur in the event its counter-party
failed to perform according to the terms of the contractual commitments. In the
event of nonperformance by the counter-party, the Fund's dividend payment
obligation with respect to the ATP would no longer be hedged. 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 a counter-party, are substantially smaller.
Effective October 1, 2001, the Fund entered into a 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 LIBOR. The variable rates ranged from 1.31% to 1.44% for
the six-month period ended June 30, 2003. Thus, in the current interest rate
environment, the Swap Arrangement requires the Fund to make net payments to
Fleet.
PRIVATE PLACEMENT SECURITIES
The Fund is permitted by its investment objective and policies to invest in
private placement securities, subject to the limitation on illiquid securities
described above under "Investment Objective and Policies - Investment Strategy."
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, the Fund may not be able to obtain registration at the most desirable time.
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.
28
GENERAL RISKS OF INVESTING IN THE FUND
The Fund will invest generally in securities that are rated below
investment grade by recognized rating agencies or, that are non-rated but
determined by the Investment Adviser to be of comparable quality. Securities
rated below investment grade quality are commonly known as "high-yield," high
risk or "junk bonds." Junk bonds, while generally offering higher yields that
investment grade securities with similar maturities and features, involve
greater risks, including the possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay dividends or interest and repay principal. The prices of these lower grade
securities are more sensitive to negative developments, such as a decline in the
issuer's revenues or a general economic downturn, than are the prices of
higher-rated securities. Issuers of junk bonds may be highly leveraged and may
not have available to them more traditional methods of financing. The issuer's
ability to service its debt obligations may be adversely affected by business
developments unique to the issuer, the issuer's inability to meet specific
projected business forecasts or the inability of the issuer to obtain additional
financing. High-yield securities are often unsecured and subordinated to other
creditors of the issuer.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The business and affairs of the Fund are managed under
the direction of the Board of Directors. The Directors approve all significant
agreements between the Fund and persons or companies furnishing services to it,
including the Fund's agreement with its Investment Adviser, custodian and
transfer agent. The management of the Fund's day-to-day operation is delegated
to its officers and the Investment Adviser, subject always to the investment
objective and policies of the Fund and to the general supervision of the
Directors. The names and business addresses of the Directors and officers of the
Fund and their principal occupations and other affiliations during the past five
years are set forth under "Management of the Fund" in the Statement of
Additional Information.
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 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 June 30, 2003, T. Rowe Price and
its affiliates held discretionary authority over approximately $161.2 billion of
assets, including approximately $52.3 billion of fixed income securities of
which approximately $8.7 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.
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
29
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.
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.
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, pursuant to an agreement dated as of October 31, 2002.
Ms. Terry's services are terminable by either party on 90 days' written notice.
Pursuant to an agreement dated as of October 31, 2002, 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 90 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.
DESCRIPTION OF COMMON STOCK
In addition to the Preferred Stock, the Fund's Articles authorize the
issuance of up to 200 million shares of Common Stock. All shares of Common Stock
have equal rights as to voting, dividends and liquidation. All shares of Common
Stock issued and outstanding are fully paid and non-assessable. Shares of Common
Stock have no preemptive, conversion or redemption rights and are freely
transferable. On July 21, 2003, the Fund issued to its holders of Common Stock
one Right for each three shares of Common Stock they owned on July 21, 2003.
Holders of Rights were entitled to acquire one new share of Common Stock for
each Right held. The Rights Offering
30
expired on August 18, 2003, and 23,397,095 Rights were exercised. After giving
effect to the issuance of Common Stock pursuant to the Rights Offering, as of
August 31, 2003, __________ shares of Common Stock were issued and outstanding.
The voting rights of the Common Stock are noncumulative, which means that
the holders of more than 50% of the shares of Common Stock and ATP voting for
the election of those Directors subject to election by the Common Stock and the
ATP can elect all of the Directors subject to election by them if they choose to
do so. In such event, the holders of the remaining shares of Common Stock and
ATP voting for the election of Directors who are subject to election by the
Common Stock and the ATP will not be able to elect any Directors. The holders of
the Common Stock vote as a single class with the holders of the ATP on all
matters except as described under "Description of ATP - Voting."
The rights of the holders of the Common Stock may not be modified by a vote
of less than a majority of the shares of Common Stock outstanding.
The Common Stock is listed on the New York Stock Exchange under the symbol
"HYB."
Under the 1940 Act, the Fund cannot declare or pay dividends or other
distributions on the Common Stock or purchase any shares of Common Stock if, at
the time of the declaration, distribution or purchase, as applicable, (and after
giving effect thereto), asset coverage with respect to senior securities
representing indebtedness (as defined in the 1940 Act), if any, would be less
than 300% and/or, as applicable, asset coverage with respect to the ATP would be
less than 200%. Dividends or other distributions on or purchases of the Common
Stock also will be prohibited at any time dividends on the ATP are in arrears or
the ATP Basic Maintenance Amount is not maintained.
Pursuant to the Fund's Dividend Reinvestment Plan, holders of the Fund's
Common Stock may elect to have all distributions of dividends and capital gains
paid in cash, which will be paid by check and mailed directly to such holders by
EquiServe Trust Company, N.A. as dividend paying agent (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 holders of Common Stock 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 following address: EquiServe,
P.O. Box 43011, Providence, Rhode Island 02940-3011 or by calling toll free at
(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 New York
Stock 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.
31
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 discount from NAV by repurchasing its Common Stock in the open
market or by tendering for its own shares of Common Stock at NAV. Any purchase
by the Fund of its Common Stock as at a time when the shares of ATP are
Outstanding will increase the leverage applicable to the outstanding Common
Stock then remaining. Repurchases of Common Stock may result in the Fund being
required to redeem shares of ATP to satisfy asset coverage requirements.
Notwithstanding the foregoing, so long as any shares of ATP are Outstanding, the
Fund may not purchase, redeem or otherwise acquire any Common Stock unless (1)
all accumulated dividends on the ATP have been paid or set aside for payment
through the date of such purchase, redemption or other acquisition and (2) at
the time of such purchase, redemption or acquisition, the ATP Basic Maintenance
Amount and the 1940 Act ATP Asset Coverage (determined after deducting the
acquisition price of the Common Stock) are met. Any tender offer will be made
and holders of Common Stock notified in accordance with the requirements of the
Exchange Act and the 1940 Act, either by publication or mailing or both.
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. 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.
UNDERWRITING
Lehman Brothers Inc., whose principal office is located at 745 Seventh
Avenue, New York, New York 10019, is acting as Underwriter in this Offering.
Lehman has agreed, subject to the terms and conditions contained in the
Underwriting Agreement with the Fund and the Investment Adviser, a copy of which
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part, to purchase from the Fund and the Fund has agreed to sell to Lehman, the
newly issued shares of ATP Series C offered hereby.
The Underwriting Agreement provides that, if any of the foregoing shares
are purchased by Lehman, all must be so purchased, and that the obligations of
Lehman to purchase the shares are subject to approval of certain legal matters
by counsel and to various other conditions. The Fund has agreed to indemnify
Lehman against, or to contribute to payments that Lehman may be required to make
in respect of, certain liabilities, including liabilities under the Securities
Act, and the Investment Adviser has agreed to indemnify the Underwriter to the
extent the Fund does not.
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Fund will sell the 1,200 newly issued shares of ATP Series C to
Lehman on the Date of Original Issue, which is October ___, 2003, by releasing
such shares to Lehman's account at the Securities Depository against payment by
Lehman for such securities to the Fund's account. On October ___, 2003, which is
the next Auction Date after the Date of Original Issue, all the new shares of
ATP Series C sold to Lehman will be auctioned in the Auction of the shares of
ATP
32
Series C pursuant to the Auction Procedures described under "Auction
Procedures," and will thereafter be held in book-entry form as set forth in the
Master Purchaser's Letter.
The newly issued shares of ATP Series C will be offered to the public by
Lehman at a price of $25,000 per share. The sales load for the newly issued
shares of ATP Series C of $__________ per share is equal to ____% of the initial
offering price. The shares of the ATP are not currently listed on any national
securities exchange and the Fund does not intend to apply for listing of the ATP
Series C on a national securities exchange. The Fund has been advised by Lehman
that Lehman currently intends to make a market in the ATP, as permitted by
applicable laws and regulations. However, Lehman is not obligated to make a
market in the ATP between Auctions and such market making may be discontinued at
any time at its sole discretion. See "Risk Factors and Special Considerations -
Risks of Investing in ATP."
After the Auction which includes the newly issued shares of ATP Series C,
payment by each purchaser of the ATP Series C sold through the Auction will be
made in accordance with the procedures described under "Auction Procedures -
Notification of Results; Settlement."
To the extent permitted under the 1940 Act and the rules and regulations
promulgated thereunder, the Fund anticipates that Lehman may from time to time
act as a Broker-Dealer and receive fees in connection with the execution of its
portfolio transactions after it has ceased to be the Underwriter and, subject to
certain restrictions, may act as a broker while it is the Underwriter. Lehman or
one of its affiliates will act in Auctions for the ATP Series C as a
Broker-Dealer and will be entitled to fees for services as a Broker-Dealer as
set forth under "Auction Procedures - Broker-Dealers; Commissions."
The settlement date for the purchase of shares of ATP Series C will be
________, 2003, as agreed upon by the Underwriter, the Fund and the Investment
Adviser pursuant to Rule 15c6-1 under the Exchange Act.
LEGAL MATTERS
Certain matters relating to the validity of the securities offered
hereunder will be passed upon for the Fund by Goodwin Procter LLP, Boston,
Massachusetts. Richard E. Floor, a Director and Secretary of the Fund, is a
partner of Goodwin Procter LLP through a professional corporation. Certain legal
matters will be passed on for the Underwriters by Simpson Thacher & Bartlett
LLP, New York, New York. Goodwin Procter LLP and Simpson Thacher & Bartlett LLP
may rely as to certain matters of Maryland law upon an opinion of Venable LLP,
Baltimore, Maryland.
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of KPMG LLP, 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 LLP 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 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 by industry classification, as of December 31, 2002, and the related
statement of operations, the statement of changes in net assets, and the
financial highlights and the information regarding senior securities included
herein, presented in the Fund's Annual Report for the fiscal year ended December
31, 2002, have been audited by the Fund's current independent public
accountants, KPMG LLP, 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.
33
The financial highlights and the information regarding senior securities
for each of the years in the nine-year period ended December 31, 2001 included
herein, together with the statement of changes in net assets for the year ended
December 31, 2001, 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 inclusion of
such financial statements in this Prospectus. Such consent has therefore been
omitted in reliance upon Rule 437a of the Securities Act. Because Arthur
Andersen LLP has not consented to the inclusion of such financial statements in
this 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.
REPORTS TO STOCKHOLDERS
The Fund sends audited Annual and unaudited Semi-Annual reports to
stockholders, including a list of the portfolio investments held by the Fund. If
you would like a free copy of the Annual Report or Semi-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
(617) 263-6400.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Exchange Act
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 and the ATP is contained in the
Registration Statement on Form N-2, including the Statement of Additional
Information comprising a part thereof and any amendments, exhibits and schedules
thereto, relating to such shares of ATP 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 of ATP offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of the Articles or any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
34
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
----
Investment Objective and Policies.......................... B-2
Rating Agency Guidelines................................... B-7
Portfolio Maturity and Turnover............................ B-19
Taxation................................................... B-19
Management of the Fund..................................... B-23
Determination of Net Asset Value .......................... B-33
Description of ATP......................................... B-34
Auction Procedures......................................... B-47
Financial Statements....................................... B-51
Appendix A - Ratings of Corporate Obligations.............. B-A-1
35
GLOSSARY
"1940 ACT" means the Investment Company Act of 1940, as amended from time
to time.
"1940 ACT ATP ASSET COVERAGE" means asset coverage, as defined in Section
18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Fund which are stock, including all Outstanding ATP (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring dividends on its
common stock), determined on the basis of values calculated as of a time within
48 hours next preceding the time of such determination.
"Aaa/AAA CREDIT RATING" means a credit rating in the highest category of
any two nationally recognized statistical rating organizations (as used in the
rules and regulations under the Securities Exchange Act of 1934, as amended),
one of which shall be Moody's or S&P.
"AA COMPOSITE COMMERCIAL PAPER RATE" on any date means (a) the interest
equivalent of the 30-day rate, in the case of a Dividend Period which is a
Standard Term Period or shorter, or the 180-day rate, in the case of all other
Dividend Periods, on commercial paper on behalf of issuers whose corporate bonds
are rated AA by S&P, or the equivalent of such rating by another nationally
recognized rating agency, as announced by the Federal Reserve Bank of New York
for the close of business on the Business Day immediately preceding such date;
or (b) if the Federal Reserve Bank of New York does not make available such a
rate, then the arithmetic average of the interest equivalent of such rates on
commercial paper placed on behalf of such issuers, as quoted on a discount basis
or otherwise by the Commercial Paper Dealers to the Auction Agent for the close
of business on the Business Day immediately preceding such date (rounded to the
next highest .001 of 1%). If any Commercial Paper Dealer does not quote a rate
required to determine the AA Composite Commercial Paper Rate, such rate shall be
determined on the basis of the quotations (or quotation) furnished by the
remaining Commercial Paper Dealers (or Dealer), if any, or, if there are no such
Commercial Paper Dealers, by the Auction Agent. For purposes of this definition,
(i) "Commercial Paper Dealers" shall mean (A) Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (B) in lieu
of any thereof, its respective Affiliate or successor, and (C) in the event that
any of the foregoing shall cease to quote rates for commercial paper of issuers
of the sort described above, in substitution therefor, a nationally recognized
dealer in commercial paper of such issuers then making such quotations selected
by the Fund, and (ii) "interest equivalent" of a rate stated on a discount basis
for commercial paper of a given number of days' maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of 1%)
of (A) such rate expressed as a decimal, divided by (B) the difference between
(x) 1.00 and (y) a fraction, the numerator of which shall be the product of such
rate expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.
"ADVISORY AGREEMENT" means the Investment Advisory Agreement dated December
2, 2002 under which T. Rowe Price serves as investment adviser for the Fund.
"AFFILIATE" means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Fund; provided that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any person
controlled by, in control of or under common control with such corporation one
of the directors or executive officers of which is also a director of the Fund
be deemed to be an Affiliate solely because such director or executive officer
is also a director of the Fund.
"AGENT MEMBER" means a member of or participant in the Securities
Depository that will act on behalf of a person placing an Order.
"ALTERNATE TERM PERIOD" means any Dividend Period that is not a Standard
Term Period.
36
"APPLICABLE RATE" means, with respect to each series of ATP, for each
Dividend Period (A) if Sufficient Clearing Orders exist for the Auction in
respect thereof, the Winning Rate, (B) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Applicable Rate and (C) in
the case of any Dividend Period of 93 days or fewer if all the shares of ATP are
the subject of Submitted Hold Orders for the Auction in respect thereof, the
Minimum Applicable Rate.
"ARTICLES" means the Articles of Amendment and Restatement, as amended,
including any Articles Supplementary of the Fund.
"ASSET COVERAGE CURE DATE" has the meaning set forth under "Description of
ATP - Redemption" in the Statement of Additional Information.
"ATP" means the Auction Term Preferred Stock Series A, Series B, Series C
and Series D, $1.00 par value per share and liquidation preference $25,000 per
share of the Fund or any other series of Preferred Stock heretofore or
hereinafter designated "Auction Term Preferred Stock" by Articles Supplementary
or Articles of Amendment.
"ATP BASIC MAINTENANCE AMOUNT" has the meaning set forth under "Rating
Agency Guidelines" in the Statement of Additional Information.
"ATP BASIC MAINTENANCE CERTIFICATE" has the meaning set forth under
"Description of ATP - Asset Maintenance" in the Statement of Additional
Information.
"ATP SERIES A" means the shares of Series A of the ATP previously issued or
any other series of Preferred Stock hereinafter designated as shares of Series A
of the ATP by Articles Supplementary or Articles of Amendment.
"ATP SERIES B" means the shares of Series B of the ATP previously issued or
any other series of Preferred Stock hereinafter designated as shares of Series B
of the ATP by Articles Supplementary or Articles of Amendment.
"ATP SERIES C" means the new shares of Series C of the ATP issued hereby
and shares of Series C of the ATP previously issued or any other series of
Preferred Stock hereinafter designated as shares of Series C of the ATP by
Articles Supplementary or Articles of Amendment.
"ATP SERIES D" means the shares of Series D of the ATP previously issued or
any other series of Preferred Stock hereinafter designated as shares of Series D
of the ATP by Articles Supplementary or Articles of Amendment.
"AUCTION" means each periodic operation of the procedures set forth under
"Auction Procedures."
"AUCTION AGENT" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Directors enters into an agreement with the Fund to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"AUCTION DATE" means the first Business Day next preceding the first day of
a Dividend Period for the relevant series of ATP.
"AUCTION PROCEDURES" means the procedures for conducting Auctions set forth
under "Auction Procedures."
"AVERAGE NET ASSETS" has the meaning set forth under "The Investment
Adviser" in this Prospectus.
"BOARD OF DIRECTORS" OR "BOARD" means the Board of Directors of the Fund or
any duly authorized committee thereof as permitted by applicable law.
37
"BROKER-DEALER" OR "BROKER-DEALERS" means any broker-dealer or
broker-dealers, or other entity permitted by law to perform the functions
required of a Broker-Dealer by the Auction Procedures, that has been selected by
the Fund and has entered into a Broker-Dealer Agreement with the Auction Agent
that remains effective.
"BROKER-DEALER AGREEMENT" means an agreement entered into by the Auction
Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
"BUSINESS DAY" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York, New York are authorized or obligated by law to close.
"BUY ORDER" means the communication by a Potential Holder to a
Broker-Dealer of the number of shares of ATP which such Potential Holder offers
to purchase on an Auction Date if the Applicable Rate for the next succeeding
Dividend Period therefor is not less than the rate per annum then specified by
such Potential Holder.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock, par value $0.01 per share, of the
Fund.
"DATE OF ORIGINAL ISSUE" means with respect to new shares of Series C of
the ATP issued hereby and with respect to each of the previously issued ATP
Series A, ATP Series B, ATP Series C and ATP Series D, the date on which such
ATP are originally issued by the Fund.
"DEFAULT PERIOD" has the meaning set forth under "Description of ATP -
Dividends and Dividend Periods" in the Statement of Additional Information.
"DEFAULT RATE" means the Reference Rate multiplied by three (3).
"DEPOSIT SECURITIES" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of optional
redemption, such obligations or securities shall be considered "DEPOSIT
SECURITIES" only if they are also rated at least P-1 by Moody's.
"DISCOUNT FACTOR" means the Moody's Discount Factor (if Moody's is then
rating the ATP), the Fitch Discount Factor (if Fitch is then rating the ATP) or
the discount factor established by any Other Rating Agency which is then rating
the ATP and which so requires, whichever is applicable.
"DISCOUNTED VALUE" means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor provided that with respect to an
Eligible Asset that is currently callable, Discounted Value shall be equal to
the quotient as calculated above or the call price, whichever is lower, and that
with respect to an Eligible Asset that is prepayable, Discounted Value shall be
equal to the quotient as calculated above or the par value, whichever is lower.
"DIVIDEND PAYMENT DATE" for each series of ATP, means (i) with respect to
any Dividend Period of one year or less, the Business Day next succeeding the
last day thereof and, if any, the 91st, 181st and 271st days thereof, and (ii)
with respect to any Dividend Period of more than one year, on a quarterly basis
on each January 1, April 1, July 1 and October 1 and on the Business Day
following the last day of such Dividend Period.
"DIVIDEND PERIOD" means, with respect to the relevant series of ATP, the
period commencing on the Date of Original Issue and ending on the date specified
for such series on the Date of Original Issue and thereafter, as to such series,
the period commencing on the day following each Dividend Period for such series
and ending on the day established for such series by the Fund.
38
"ELIGIBLE ASSETS" means Moody's Eligible Assets (if Moody's is then rating
the ATP), Fitch Eligible Assets (if Fitch is then rating the ATP) and/or Other
Rating Agency Eligible Assets if any Other Rating Agency is then rating the ATP,
whichever is applicable.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time.
"EXISTING HOLDER" means (a) a person who has signed a Master Purchaser's
Letter and beneficially owns shares of a series of ATP listed in that person's
name in the records of the Auction Agent or (b) the beneficial owner of shares
of the ATP which are listed under such person's Broker-Dealer's name in the
records of the Auction Agent, which Broker-Dealer shall have signed a Master
Purchaser's Letter.
"EXPOSURE PERIOD" means the period commencing on (and including) a given
Valuation Date and ending 41 days thereafter.
"FITCH" means Fitch Ratings, Inc. and its successors at law.
"FLEET" means Fleet National Bank.
"FUND" means The New America High Income Fund, Inc., a Maryland corporation
that is the issuer of each series of ATP
"HOLDER" means, with respect to the Common Stock and the Preferred Stock,
including the ATP, of the Fund, the registered holder of shares of such stock as
the same appears on the stock ledger or stock records books of the Fund.
"HOLD ORDER" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of each series of ATP which
such Existing Holder desires to continue to hold without regard to the
Applicable Rate for the next succeeding Dividend Period therefor.
"HOLD/SELL ORDER" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of each series of ATP which
such Existing Holder desires to continue to hold if the Applicable Rate for the
next Dividend Period therefor is not less than the rate per annum then specified
by such Existing Holder.
"INVESTMENT ADVISER" means T. Rowe Price Associates, Inc., the current
investment adviser to the Fund, or such other future investment adviser to the
Fund.
"LIBOR" means the London Inter-Bank Offered Rate.
"LIQUIDATION VALUE" means $25,000 per share for new shares of ATP Series C
issued hereby and ATP Series A, ATP Series B, ATP Series C and ATP Series D
previously issued.
"MANDATORY REDEMPTION DATE" has the meaning set forth under "Description of
ATP - Redemption" in the Statement of Additional Information.
"MANDATORY REDEMPTION PRICE" has the meaning set forth under "Description
of ATP - Redemption" in the Statement of Additional Information.
"MARKET VALUE" shall mean the fair market value of an asset of the Fund
(excluding interest and dividends due on such assets) as computed based upon (i)
pricing services to be provided by Reuters Fixed-Income Services and State
Street Bank and Trust Company or such other pricing service determined from time
to time by the Board of Directors, provided that Moody's (if Moody's is then
rating ATP, Fitch (if Fitch is then rating ATP) and any Other Rating Agency
which is then rating ATP and so requires have informed the Fund in writing that
use of such pricing service will not adversely affect such rating agency's then
current rating of the shares of ATP or (ii) the lower of the value set forth in
bids from two independent dealers that are members or Affiliates of members of
the
39
National Association of Securities Dealers, Inc. and that make markets in such
security, one of which bids shall be in writing.
"MASTER PURCHASER'S LETTER" means a letter substantially in the form of, or
containing provisions similar to those in the form, attached hereto which is
required to be executed by each prospective purchaser of shares of ATP or the
Broker-Dealer through whom the shares will be held.
"MAXIMUM APPLICABLE RATE" means, on any date on which the Applicable Rate
is determined, the rate equal to 150% of the applicable Reference Rate, subject
to upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers; provided that immediately
following any such increase the Fund would be in compliance with ATP Basic
Maintenance Amount.
"MINIMUM APPLICABLE RATE" means, on any Auction Date with respect to a
Dividend Period of 93 days or fewer 80% of the AA Commercial Paper Rate at the
close of business on the Business Day next preceding such Auction Date. There
shall be no Minimum Applicable Rate on any Auction Date with respect to a
Dividend Period of more than 93 days.
"MOODY'S" means Moody's Investors Service, Inc. and its successors at law.
"NAV" means the net asset value.
"NOTICE OF REDEMPTION" has the meaning provided under "Description of ATP -
Redemption" in the Statement of Additional Information.
"OFFERING" means the offering of 1,200 shares of ATP Series C issued by the
Fund under its Registration Statement of which this Prospectus is a part.
"ORDER" means a Hold Order, a Hold/Sell Order, a Sell Order or a Buy Order.
"OTHER RATING AGENCY" means any rating agency other than Moody's or Fitch
then providing a rating for the ATP pursuant to the request of the Fund.
"OTHER RATING AGENCY ELIGIBLE ASSETS" means assets of the Fund designated
by any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the ATP.
"OUTSTANDING" means, as of any date, shares of ATP theretofore issued by
the Fund except, without duplication, (i) any shares of ATP theretofore canceled
or redeemed by the Fund, or delivered to the Auction Agent for cancellation or
with respect to which the Fund has given notice of redemption and irrevocably
deposited with the Paying Agent sufficient funds to redeem such shares of ATP,
and (ii) any shares of ATP represented by any certificate, in lieu of, which a
new certificate has been executed and delivered by the Fund. Notwithstanding the
foregoing (A) for purposes of voting rights (including the determination of the
number of shares required to constitute a quorum), any shares of the ATP to
which the Fund or any Affiliate of the Fund shall be the Existing Holder shall
be disregarded and not deemed Outstanding; (B) in connection with any Auction,
any shares of the ATP as to which the Fund or any person known to the Auction
Agent to be an Affiliate of the Fund shall be the Existing Holder thereof shall
be disregarded and deemed not to be Outstanding; and (C) for purposes of
determining the ATP Basic Maintenance Amount, shares of ATP held by the Fund
shall be disregarded and not deemed Outstanding but shares held by any Affiliate
of the Fund shall be deemed Outstanding.
"PAYING AGENT" means Deutsche Bank Trust Company Americas, as successor to
Bankers Trust Company, unless and until another entity appointed by a resolution
of the Board of Directors enters into an agreement with the Fund to serve as
paying agent, which Paying Agent may be the same as the Auction Agent.
"POTENTIAL HOLDER" when used with respect to shares of ATP, means any
person, including any Existing Holder of shares of ATP, (i) who shall have
executed a Master Purchaser's Letter or whose shares will be listed under such
person's Broker-Dealer's name in the records of the Auction Agent, which
Broker-Dealer shall have
40
executed a Master Purchaser's Letter and (ii) who may be interested in acquiring
shares of ATP (or, in the case of an Existing Holder or such person of shares of
ATP, additional shares of ATP).
"PREFERRED STOCK" means the preferred stock, par value $1.00 per share, of
the Fund.
"PRORATION PROCEDURES" means:
(A) if Sufficient Clearing Orders exist, in the case of a Submitted
Hold/Sell Order specifying a rate equal to the Winning Rate
(x) the number of shares of the relevant series of ATP to be the
subject of an accepted Hold Order will be (i) the number of shares of such
series of ATP subject to such Submitted Hold/Sell Order multiplied by (ii)
the total number of shares of such series of ATP that are neither the
subject of a Submitted Buy Order or a Submitted Hold/Sell Order specifying
a rate lower than the Winning Rate nor the subject of a Submitted Hold
Order and divided by (iii) the total number of shares of Submitted
Hold/Sell Orders that specified a rate equal to the Winning Rate, and
(y) the number of shares of the relevant series of ATP to be the
subject of an accepted Sell Order will be the remaining number of shares of
such series of ATP subject to such Submitted Hold/Sell Order,
(B) if Sufficient Clearing Orders exist, in the case of a Submitted
Buy Order specifying a rate equal to the Winning Rate
(x) the number of shares of the relevant series of ATP to be the subject of
an accepted Buy Order will be (i) the number of shares of such series of
ATP subject to such Submitted Buy Order multiplied by (ii) the difference
between (1) the number of shares of such series of ATP that are the subject
of a Submitted Sell Order or a Submitted Hold/Sell Order that specified a
rate higher than the Winning Rate and (2) the number of shares of each
series of ATP that are the subject of a Submitted Buy Order that specified
a rate lower than the Winning Rate and divided by (iii) the total number of
shares of such series of ATP subject to Submitted Buy Orders that specified
a rate equal to the Winning Rate, and
(y) such Submitted Buy Order will not be accepted as to the remaining
number of shares subject to such Submitted Buy Order, and
(C) if Sufficient Clearing Orders do not exist, in the case of a
Submitted Hold/Sell Order specifying a rate higher than the Maximum Applicable
Rate and in the case of a Submitted Sell Order
(x) the number of shares of the relevant series of ATP to be the subject of
an accepted Sell Order will be (i) the number of shares of such series of
ATP subject to such Submitted Hold/Sell Order or Submitted Sell Order
multiplied by (ii) the total number of shares of such series of ATP that
are the subject of a Submitted Buy Order specifying a rate equal to or
lower than the Maximum Applicable Rate and divided by (iii) the total
number of shares of such series of ATP subject to all Submitted Hold/Sell
Orders that specified a rate higher than the Maximum Applicable Rate and
Submitted Sell Orders, and
(y) the number of shares of the relevant series of ATP to be the
subject of an accepted Hold Order will be the remaining number of shares of
such series of ATP subject to such Submitted Hold/Sell Order or Submitted
Sell Order.
"RATING AGENCY GUIDELINES" means the guidelines established by Moody's (if
Moody's is then rating the ATP) and Fitch (if Fitch is then rating the ATP) as
set forth under "Rating Agency Guidelines," in the Statement of Additional
Information, as amended from time to time, or by any Other Rating Agency that is
then rating the ATP.
41
"REFERENCE RATE" means, with respect to the determination of the Maximum
Applicable Rate, the applicable AA Composite Commercial Paper Rate (for a
Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
for a Dividend Period of 184 days or more).
"RIGHTS OFFERING" means the offering of transferable rights to purchase
shares of the Fund's Common Stock, made to the Fund's stockholders of record as
of July 21, 2003.
"ROUNDING PROCEDURES" means, if as a result of an Auction (including the
Proration Procedures) any Existing Holder would be entitled to hold or required
to sell, or any Potential Holder would be required to purchase, a number of
shares of the relevant series of ATP not evenly divisible by 1, on any Auction
Date, the Auction Agent will, in such manner as it determines, round up or down
the number of shares of such series of ATP to be held, purchased or sold by any
Existing Holder or Potential Holder on such Auction Date so that the number of
shares held, purchased or sold by each Existing Holder or Potential Holder on
such Auction Date will be a number of shares of such series of ATP evenly
divisible by 1.
"RULE 144A SECURITIES" means securities that are restricted as to resale
under federal securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as amended, as determined by the Fund's
adviser acting subject to the supervision of the Fund's Board of Directors.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and its successors at law.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time to
time.
"SECURITIES DEPOSITORY" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of each series of ATP.
"SELL ORDER" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of the relevant series of ATP
which such Existing Holder offers to sell without regard to the dividend rate
for the next succeeding Dividend Period therefor.
"SERVICE" means the United States Internal Revenue Service.
"SPECIFIC REDEMPTION PROVISIONS" means with respect to any Alternate Term
Period of more than one year, either, or any combination of, a period (a
"Non-Call Period") determined by the Board of Directors after consultation with
the Broker-Dealers, during which the shares subject to such Alternate Term
Period are not subject to redemption at the option of the Fund pursuant to
Section 3(a)(i) of the Articles and/or Section 3(a)(ii) and/or 3(a)(iii) of the
Articles and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years as determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such Alternate
Term Period shall be redeemable at the Fund's option pursuant to Section 3(a)(i)
of the Articles and/or in connection with any mandatory redemption pursuant to
Section 3(a)(ii) and/or 3(a)(iii) of the Articles at a price per share equal to
Liquidation Value plus accumulated but unpaid dividends plus a premium expressed
as a percentage or percentages of Liquidation Value or expressed in a formula
using specified variables as determined by the Board of Directors after
consultation with the Broker-Dealers.
"STANDARD TERM PERIOD" means a Dividend Period of 28 days, unless such 28th
day is not a Business Day, then the number of days ending on the Business Day
next preceding such 28th day.
"SUBMISSION DEADLINE" means 1:00 p.m., New York City time, on each Auction
Date, or such other time on such Auction Date as may be specified from time to
time by the Auction Agent as the time by which each Broker-Dealer must submit to
the Auction Agent all Orders obtained by it for the Auction to be conducted on
such Auction Date.
"SUBMITTED BUY ORDER" means each Buy Order submitted to the Auction Agent
by a Broker-Dealer
42
"SUBMITTED HOLD ORDER" means each Hold Order submitted to the Auction Agent
by a Broker-Dealer.
"SUBMITTED HOLD/SELL ORDER" means each Hold/Sell Order submitted to the
Auction Agent by a Broker-Dealer.
"SUBMITTED ORDER" means each Order submitted to the Auction Agent by a
Broker-Dealer.
"SUBMITTED SELL ORDER" means each Sell Order submitted to the Auction Agent
by a Broker-Dealer.
"SUFFICIENT CLEARING ORDERS" means that all shares of the relevant series
of ATP are the subject of Submitted Hold Orders or that the number of shares of
such series of ATP that are the subject of Submitted Buy Orders by Potential
Holders specifying one or more rates equal to or less than the Maximum
Applicable Rate exceeds or equals the sum of (A) the number of shares of such
series of ATP that are the subject of Submitted Hold/Sell Orders by Existing
Holders specifying one or more rates higher than the Maximum Applicable Rate and
(B) the number of shares of such series of ATP that are subject to Submitted
Sell Orders.
"T. ROWE PRICE" means T. Rowe Price Associates, Inc., the Fund's current
Investment Adviser.
"TARPS" means the Taxable Auction Rate Preferred Stock of the Fund which
were redeemed in 1994.
"TREASURY INDEX RATE" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15(519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government securities selected by the Fund.
"UNDERWRITER" means Lehman Brothers Inc.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement among the
Underwriter, the Fund and the Investment Adviser, a form of which is filed as an
exhibit to the Fund's Registration Statement of which this Prospectus is a part.
"VALIDITY PROCEDURES" means the following procedures and priorities:
(A) If one or more Hold Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the relevant series of ATP
greater than the number of shares of such series of ATP held by such
Existing Holder, such Hold Order or Hold Orders shall be considered valid
only as to the number of shares of such series of ATP held by such Existing
Holder. In the case of multiple Hold Orders, each such Hold Order shall be
considered valid-pro rata.
(B) If one or more Hold/Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the relevant series of ATP
greater than the excess of the number of shares of such series of ATP held
by such Existing Holder over the number of shares of such series of ATP
subject to Hold Orders submitted on behalf of such Existing Holder, such
Hold/Sell Order or Hold/Sell Orders shall be considered valid only as to
the number of shares of such series of ATP equal to such excess. In the
case of multiple Hold/Sell Orders specifying different rates, such
Hold/Sell Orders shall be considered valid in increasing order of such
rates. In the case of multiple Hold/Sell Orders specifying the same rate,
each such Hold/Sell Order shall be considered valid pro rata.
(C) If one or more Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the relevant series of ATP
greater than the excess of the number of shares of such series of ATP held
by such Existing Holder over the number of shares of such series of ATP
subject to Hold Orders and Hold/Sell Orders submitted on behalf of such
Existing Holder, such Sell Order or Sell Orders shall be
43
considered valid only as to the number of shares equal to such excess. In
the case of multiple Sell Orders, each such Sell Order shall be considered
valid pro rata.
"VALUATION DATE" means every Friday, or, if such day is not a Business Day,
the next preceding Business Day; provided, however, that the first Valuation
Date may occur on any other date established by the Fund; provided, further,
however, that such date shall be not more than one week from the date on which
the ATP initially is issued.
"WINNING RATE" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/Sell Order from Existing Holders specifying
such lowest rate and all other Submitted Hold/Sell Orders from Existing Holders
specifying lower rates were accepted and (B) each Submitted Buy Order from
Potential Holders specifying such lowest rate and all other Submitted Buy Orders
from Potential Holders specifying lower rates were accepted, would result in the
Existing Holders described in clause (A) above continuing to hold an aggregate
number of shares of the relevant series of ATP which, when added to the number
of shares of such series of ATP to be purchased by the Potential Holders
described in Clause (B) above and the number of shares of such series of ATP
subject to Submitted Hold Orders, would be equal to the number of shares of such
series of ATP.
44
APPENDIX A
TO BE SUBMITTED TO YOUR BROKER-DEALER WHO WILL THEN
DELIVER COPIES ON YOUR BEHALF TO THE
AUCTION OR REMARKETING AGENT
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS OR REMARKETINGS
THE COMPANY
A REMARKETING AGENT
THE AUCTION AGENT
A BROKER-DEALER
AN AGENT MEMBER
OTHER PERSONS
Dear Sirs:
1. This letter is designed to apply to publicly or privately offered
debt or equity securities ("Securities") of any issuer ("Company") which are
described in any final prospectus or other offering materials relating to such
Securities as the same may be amended or supplemented (collectively, with
respect to the particular Securities concerned, the "Prospectus") and which
involve periodic rate settings through auctions ("Auctions") or remarketing
procedures ("Remarketings"). This letter shall be for the benefit of any Company
and of any auction agent, paying agent (collectively, "auction agent"),
remarketing agent, broker-dealer, agent member, securities depository or other
interested person in connection with any Securities and related Auctions or
Remarketings (it being understood that such persons may be required to execute
specified agreements and nothing herein shall alter such requirements). The
terminology used herein is intended to be general in its application and not to
exclude any Securities in respect of which (in the Prospectus or otherwise)
alternative terminology is used.
2. We may from time to time offer to purchase, offer to sell and/or
sell Securities of any Company as described in the Prospectus relating thereto.
We agree that this letter shall apply to all such purchases, sales and offers
and to Securities owned by us. We understand that the dividend/interest rate on
Securities may be based from time to time on the results of Auctions or
Remarketings as set forth in the Prospectus.
3. We agree that any bid or sell order placed by us in an Auction or
a Remarketing shall constitute an irrevocable offer (except as otherwise
described in the Prospectus) by us to purchase or sell Securities subject to
such bid or sell order, or such lesser amount of Securities as we shall be
required to sell or purchase as a result of such Auction or Remarketing, at the
applicable price, all as set forth in the Prospectus, and that if we fail to
place a bid or sell order with respect to Securities owned by us with a
broker-dealer on any Auction or Remarketing Date, or a broker-dealer to which we
communicate a bid or sell order fails to submit such bid or sell order to the
auction agent or remarketing agent concerned, we shall be deemed to have placed
a hold or a sell order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our' agent in Auctions or Remarketings to execute contracts for the sale of
Securities by such bid or sell order. We recognize that the payment of such
broker-dealer for Securities purchased on our behalf shall not relieve us of any
liability to such broker-dealer for payment for such Securities.
4. We understand that in a Remarketing, the dividend or interest rate
or rates on the Securities and the allocation of Securities tendered for sale
between dividend or interest periods of different lengths will be based from
time to time on the determinations of one or more remarketing agent(s), and we
agree to be conclusively bound by such determinations. We further agree to the
payment of different dividend or interest rates to different holders of
Securities depending on the length of the dividend or interest period elected by
such holders. We agree that any notice given by us to a remarketing agent (or a
broker-dealer for transmission to a remarketing agent) of our desire to tender
Securities in a Remarketing shall constitute an irrevocable (except to the
limited extent set forth in the
A-1
Prospectus) offer by us to sell the securities specified in such Notice, or such
lesser number of Securities as we shall be required to sell as a result of such
Remarketing, in accordance with the terms set forth in the Prospectus, and we
authorize the remarketing agent to sell, transfer or otherwise dispose of such
Securities as set forth in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, in a Remarketing, to or through a broker-dealer or, when
permitted in the Prospectus, to a person that has signed and delivered to the
applicable auction agent or a remarketing agent a letter substantially in the
form of this letter (or other applicable purchaser's letter), provided that in
the case of all transfers other than pursuant to Auctions or Remarketings we or
our broker-dealer or our agent member shall advise such auction agent or a
remarketing agent of such transfer. We understand that a restrictive legend will
be placed on certificates representing the Securities and stop-transfer
instructions will be issued to the transfer agent and/or registrar, all as set
forth in the Prospectus.
6. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by one or more global
certificates registered in the name of the applicable securities depository or
its nominee, that we will not be entitled to receive any certificate
representing the Securities and that our ownership of any Securities will be
maintained in book-entry form by the securities depository for the account of
our agent member, which in turn will maintain records of our beneficial
ownership. We authorize and instruct our agent member to disclose to the
applicable auction agent or remarketing agent such information concerning our
beneficial ownership of Securities as such auction agent or remarketing agent
shall request.
7. We acknowledge that partial deliveries of Securities purchased in
Auctions or Remarketings maybe made to us and such deliveries shall constitute
good delivery as set forth in the Prospectus.
8. This letter is not a commitment by us to purchase any Securities.
9. This letter supersedes any prior-dated version of this master
purchaser's letter, and supplements any prior to post-dated purchaser's letter
specific to any particular Securities, and this letter may only be revoked by a
signed writing delivered to the original recipients hereof.
10. The descriptions of Auction or Remarketing procedures set forth in
each applicable Prospectus are incorporated by reference herein and in case of
any conflict between this letter, any purchaser's letter specific to particular
Securities and any such description, such description shall control.
11. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
12. Our agent member of The Depository Trust company currently is
_________________.
13. Our personnel authorized to place orders with broker-dealers for
the purposes set forth in the Prospectus in Auctions or Remarketings currently
is/are ___________, telephone number (___ ) ________________.
14. Our taxpayer identification number is ___________________.
15. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Securities Act"), we represent and agree as follows:
(A) We understand and expressly acknowledge that the Securities have
not been and will not be registered under the Securities Act and,
accordingly, that the Securities may not be reoffered, resold or otherwise
pledged, hypothecated or transferred unless an applicable exemption from
the registration requirements of the Securities Act is available.
(B) We hereby confirm that any purchase of Securities made by us will
be for our own account, or for the account of one or more parties for which
we are acting as trustee or agent with complete investment
A-2
discretion and with authority to bind such parties, and not with a view to
any public resale or distribution thereof. We and each other party for
which we are acting which will acquire Securities will be "accredited
investors" within the meaning of Regulation D under the Securities Act with
respect to the Securities to be purchased by us or such party, as the case
may be, will have previously invested in similar types of instruments and
will be able and prepared to bear the economic risk of investing in and
holding such Securities.
(C) We acknowledge that prior to purchasing any Securities we shall
have received a Prospectus (or private placement memorandum) with respect
thereto and acknowledge that we will have had access to such financial and
other information, and have been afforded the opportunity to ask such
questions or representatives of the Company and receive answers thereto, as
we deem necessary in connection with our decision, to purchase Securities.
(D) We recognize that the Company and broker-dealers will rely upon
the truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in
the future shall be deemed to constitute our concurrence in all of the
foregoing which shall be binding on us and each party for which we are
acting as set forth in Subparagraph B above.
Dated:
--------------------------------- --------------------------------------
(Name of Purchaser)
Mailing Address of Purchaser
By:
--------------------------------------- ----------------------------------
Printed Name:
--------------------------------------- Title:
---------------------------------------
A-3
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER OR THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
----------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.......................................... 2
FINANCIAL INFORMATION SUMMARY............................... 5
CAPITALIZATION AND INFORMATION REGARDING SENIOR
SECURITIES................................................ 8
PORTFOLIO COMPOSITION....................................... 10
THE FUND.................................................... 11
USE OF PROCEEDS............................................. 12
DESCRIPTION OF ATP.......................................... 12
AUCTION PROCEDURES.......................................... 17
RATING AGENCY GUIDELINES.................................... 21
TAXATION.................................................... 22
INVESTMENT OBJECTIVE AND POLICIES........................... 22
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 25
MANAGEMENT OF THE FUND...................................... 29
DESCRIPTION OF COMMON STOCK................................. 30
CONVERSION TO OPEN-END STATUS AND REPURCHASE OF
SHARES.................................................... 31
CUSTODIAN, AUCTION AGENT, REGISTRAR, TRANSFER AGENT
AND PAYING AGENT.......................................... 32
UNDERWRITING................................................ 32
LEGAL MATTERS............................................... 33
INDEPENDENT PUBLIC ACCOUNTANTS.............................. 33
EXPERTS..................................................... 33
REPORTS TO STOCKHOLDERS..................................... 34
ADDITIONAL INFORMATION...................................... 34
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION............................................... 35
GLOSSARY.................................................... 36
APPEXDIX A - MASTER PURCHASER'S LETTER...................... A-1
$30,000,000
THE NEW AMERICA
HIGH INCOME FUND, INC.
AUCTION TERM PREFERRED STOCK
1,200 SHARES, SERIES C
----------
PROSPECTUS
----------
LEHMAN BROTHERS
OCTOBER __, 2003
The Auction
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 26, 2003
THE NEW AMERICA HIGH INCOME FUND, INC.
AUCTION TERM PREFERRED STOCK
1,200 SHARES, SERIES C
LIQUIDATION VALUE -- $25,000 PER SHARE
STATEMENT OF ADDITIONAL INFORMATION
The New America High Income Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company with a leveraged capital structure.
Currently, T. Rowe Price Associates, Inc. ("T. Rowe Price" or the "Investment
Adviser") serves as investment adviser for the Fund. The Fund's investment
objective is to provide high current income, while seeking to preserve
stockholders' capital, through investment in a professionally managed,
diversified portfolio of "high-yield" fixed-income securities (commonly known as
"junk bonds"). This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus for the Fund dated October __,
2003. This Statement of Additional Information does not include all information
that a prospective investor should consider before purchasing shares of the
Fund, and investors should obtain and read the Prospectus prior to purchasing
shares. You may obtain a free copy of the Prospectus by calling the Fund collect
at (617) 263-6400 or by writing to the Fund at 33 Broad Street, Boston,
Massachusetts 02109. This Statement of Additional Information incorporates by
reference the entire Prospectus.
Certain capitalized terms not otherwise defined in this Statement of
Additional Information have the meanings provided in the Prospectus.
TABLE OF CONTENTS
PAGE
----
INVESTMENT OBJECTIVE AND POLICIES....................................... B-2
RATING AGENCY GUIDELINES................................................ B-7
PORTFOLIO MATURITY AND TURNOVER......................................... B-19
TAXATION................................................................ B-19
MANAGEMENT OF THE FUND.................................................. B-23
DETERMINATION OF NET ASSET VALUE........................................ B-33
DESCRIPTION OF ATP...................................................... B-34
AUCTION PROCEDURES...................................................... B-47
FINANCIAL STATEMENTS.................................................... B-51
APPENDIX A - RATINGS OF CORPORATE OBLIGATIONS........................... B-A-1
The Prospectus and this Statement of Additional Information omit certain of the
information contained in the Registration Statement filed with the Securities
and Exchange Commission, Washington, D.C. (the "Commission"). These items may be
obtained from the Commission upon payment of the fee prescribed, or inspected at
the Commission's office at no charge.
This Statement of Additional Information is dated October __, 2003
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide high current income,
while seeking to preserve stockholders' capital, through investment in a
professionally managed, diversified portfolio of "high-yield" fixed-income
securities, commonly known as "junk bonds." No assurance can be given that the
Fund will attain its investment objective. 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 August
31, 2003 were _____%, _____%, ______%, respectively. See "The Fund" and "Risk
Factors and Special Considerations" in the Prospectus.
INVESTMENT STRATEGY
The policies described below may be changed by the Fund without the
approval of the Fund's stockholders.
The Fund's portfolio reflects requirements established by Moody's and
Fitch in connection with the issuance by such agencies of investment grade
ratings for the Fund's ATP (referred to herein as the "Rating Agency
Guidelines"). These guidelines relate, among other things, to industry and
credit quality characteristics of issuers and specify various "discount factors"
for debt securities (with the level of discount greater as the rating of a
security becomes lower). Under the Rating Agency Guidelines, certain types of
securities in which the Fund may otherwise invest consistent with its investment
strategy are not eligible for inclusion in the calculation of the Discounted
Value of the Fund's portfolio. Such instruments include, for example, securities
rated CC/Ca or lower by the rating agencies, non-rated securities, private
placements (other than Rule 144A Securities), non-U.S. securities, preferred or
common stock, zero coupon or similar securities that do not provide for the
periodic payment of interest in cash and other securities not within the
investment guidelines. Accordingly, although the Fund reserves the right to
invest in such securities to the extent set forth herein, they have not and it
is anticipated that they will not constitute a significant portion of the Fund's
portfolio. See "Rating Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of the
guidelines, greater than the aggregate liquidation preference of the ATP plus
specified liabilities, payment obligations and other amounts, as of periodic
Valuation Dates. The Rating Agency Guidelines also require the Fund to
maintain asset coverage for the ATP on a non-discounted basis of at least
200% as of the end of each month, and the 1940 Act requires such asset
coverage as a condition to paying dividends or other distributions on Common
Stock. See "Description of ATP - Asset Maintenance." The effect of compliance
with these guidelines may be to cause the Fund to invest in higher-quality,
lower-yielding assets and/or to maintain relatively substantial balances of
highly liquid assets or to restrict the Fund's ability to make certain
investments that would otherwise be deemed potentially desirable by the
Investment Adviser, including private placements of other than Rule 144A
Securities, and to limit or delay the Fund's ability to reinvest cash in a
rising "high-yield" market. See "The Fund" and "Risk Factors and Special
Considerations - Risks of Investing in ATP" in the Prospectus. The Rating
Agency Guidelines are subject to change from time to time with the consent of
the relevant rating agency and would not apply if the Fund in the future
elected not to use investment leverage consisting of senior securities rated
by one or more rating agencies, although other similar arrangements might
apply with respect to other senior securities that the Fund may issue.
There is no minimum rating requirement applicable to the fixed-income
securities which may be acquired by the Fund. However, compliance with the
Rating Agency Guidelines, under which securities rated below CCC/Caa are not
eligible for inclusion in the calculation of the Discounted Value of the Fund's
assets and other lower-rated securities are heavily discounted in such
calculation, may have the effect of precluding or limiting investments in such
issues.
"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
B-2
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.
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.
RATING AGENCY RESTRICTIONS. While the Fund has reserved the right to
employ the investment practices described below, for so long as any of the ATP
is Outstanding and either Moody's or Fitch is rating the ATP, the Fund will not,
unless it has received written confirmation from Moody's and/or Fitch, as
applicable, that any such action would not impair the respective rating then
assigned by Moody's or Fitch to the ATP, engage in any one or more of the
following transactions: (i) purchase or sell futures contracts or options
thereon with respect to portfolio securities or write unsecured put or uncovered
call options on portfolio securities, engage in options transactions involving
cross-hedging, or enter into any swap arrangement, other than the arrangement
described herein for which the Fund has obtained consent of Moody's and Fitch;
(ii) borrow money, except that the Fund may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
securities transactions; provided that the ATP Basic Maintenance Amount (as
defined under "Description of ATP" in the Statement of Additional Information)
would continue to be satisfied after giving effect to such borrowing and if the
borrowing matures in not more than 60 days and is non-redeemable; (iii) except
in connection with a refinancing of the ATP, issue any class or series of stock
ranking prior to or on a parity with the ATP with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund, or reissue any shares of ATP previously purchased or redeemed by
the Fund; (iv) engage in any short sales of securities; (v) lend portfolio
securities; or (vi) merge or consolidate into or with any other corporation.
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
B-3
of the other party, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities. An additional risk is that the
market value of securities sold by the Fund under a reverse repurchase agreement
could decline below the price at which the Fund is obligated to repurchase them.
The Fund will not hold more than 5% of the value of its total assets in reverse
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place 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, 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.
B-4
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.
Effective October 1, 2001, the Fund entered into a five-year interest
payment Swap Arrangement with Fleet with a notional contract amount of $100
million at a fixed annual rate of 4.50%. The aggregate effect of this
arrangement is to hedge the Fund's dividend payment obligations with respect to
$100 million of 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 "Investment Objective and
Policies."
The Fund makes dividend payments to the holders of the ATP on the basis
of the results of periodic Auctions in accordance with its terms without regard
to the Swap 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." In light of the proposed increase in the Fund's
Outstanding ATP, the Fund will consider adjustments in its Swap Arrangement. The
timing and amount of any such adjustment will depend upon market conditions.
OPTIONS. The Fund may write (sell) call options which are traded on
national securities exchanges with respect to securities in its portfolio. The
Fund may only write "covered" call options, that is, options on securities it
holds in its portfolio or has an immediate right to acquire through conversion
or exchange of securities held in its portfolio. The Fund reserves the right to
write call options on its portfolio securities in an attempt to realize a
greater current return than would be realized on the securities alone. The Fund
may also write call options as a partial hedge against a possible market
decline. In view of its investment objective, the Fund generally would write
call options only in circumstances in which the Investment Adviser does not
anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a call option, the Fund receives a premium for undertaking the obligation to
sell the underlying security at a fixed price during the option period, if the
option is exercised. So long as the Fund remains obligated as a writer of a call
option, it forgoes the opportunity to profit from increases in the market price
of the underlying security above the exercise price of the option, except
insofar as the premium represents such a profit (and retains the risk of loss
should the value of the underlying security decline). The Fund may also enter
into "closing purchase transactions" in order to terminate its obligation as a
writer of a call option prior to the expiration of the option. Although the
writing of call options only on national securities exchanges increases the
likelihood that the Fund will be able to make closing purchase transactions,
there is no assurance that the Fund will be able to effect such transactions at
any particular time or at any acceptable price. The writing of call options
could result in increases in the Fund's portfolio turnover rate, especially
during periods when market prices of the underlying securities appreciate.
For purposes of valuation of the Fund's assets under the Rating Agency
Guidelines (see "Description of ATP - Asset Maintenance"): (i) if the Fund
writes a call option, the underlying asset will be valued as follows: (a) if the
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of the ATP, at the lower of the
Discounted Value of the underlying security of the option and the exercise price
of the option or (b) otherwise, it has no value; (ii) if the Fund writes a put
option, the underlying asset will be valued as follows: the lesser of (a)
exercise price and (b) the Discounted Value of the underlying security
determined
B-5
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 ATP - Asset
Maintenance"); (iv) the Fund shall write only exchange-traded options on
exchanges approved by Moody's (if Moody's is then rating the ATP) and Fitch (if
Fitch is then rating the ATP); (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
under which the Fund will be exempted from registration as a commodity pool
operator. Rule 4.5 was recently amended to eliminate any restrictions on trading
of commodity interests, but does continue to require disclosure to the investors
that the Fund has claimed the exclusion available under Rule 4.5 and that
therefore, the Fund is not subject to registration or regulation as a commodity
pool operator.
RISKS OF HEDGING TRANSACTIONS. The use of options, financial futures
and options on financial futures may involve risks not associated with other
types of investments which the Fund intends to purchase, and it is possible that
a portfolio that utilizes hedging strategies may perform less well than a
portfolio that does not make use of such devices. Use of put and call options
may result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts and the sale of options thereon would create
a greater ongoing potential financial risk than would purchases of options,
where the exposure is limited to the cost of the initial premium.
INCURRENCE OF INDEBTEDNESS. For so long as any of the ATP are
Outstanding, the Fund will not borrow money or issue senior securities
representing indebtedness unless it has received written notice from Moody's (if
Moody's is then rating the ATP) and Fitch (if Fitch is then rating the ATP) and
any Other Rating Agency which is then rating the ATP which so requires that such
action would not impair the Aaa/AAA Credit Rating. For so long as any of the
Fund's Preferred Stock, including the ATP, is outstanding, the lesser of (a) 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
B-6
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.
The Fund intends to maintain a Discounted Value for its portfolio at
least equal to the amount specified by each rating agency (the "ATP Basic
Maintenance Amount"), the determination of which is as set forth under
"Description of ATP - Asset Maintenance." Moody's and Fitch have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency). The Moody's
and Fitch guidelines do not impose any limitations on the percentage of Fund
assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio. The amount of such
assets included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the assets included in the
portfolio which are eligible for inclusion in the Discounted Value of the
portfolio under the Rating Agency Guidelines ("Eligible Assets").
It is a condition of the Underwriter's obligation to purchase the newly
issued shares of ATP Series C that the Fund obtain a rating of Aaa from Moody's
and a rating of AAA from Fitch as of the Date of Original Issue. As described by
Moody's, an issue of preferred stock which is rated Aaa is considered to be
top-quality preferred stock with good asset protection and the least risk of
dividend impairment within the universe of preferred stocks. As described by
Fitch, a preferred stock rating of AAA indicates strong asset protection,
conservative balance sheet ratios and positive indications of continued
protection of preferred dividend requirements. A Moody's or Fitch credit rating
of preferred stock does not address the likelihood that a resale mechanism
(e.g., the Auction) will be successful.
Ratings are not recommendations to purchase, hold or sell shares of
ATP, inasmuch as the rating does not comment as to market price or suitability
for a particular investor. The rating is based on current information furnished
to Moody's and Fitch by the Fund and obtained by Moody's and Fitch from other
sources. The rating may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information. The ATP will be subject to
mandatory redemption in the event that the Aaa/AAA Credit Rating is not
available for the ATP and
B-7
the Fund is unable to obtain the Aaa/AAA Credit Rating for the ATP from a
substitute rating agency or agencies within the time specified herein. While the
Fund does not presently intend to seek a rating from a rating agency other than
Moody's and Fitch, it reserves the right to do so.
MOODY'S AAA RATING GUIDELINES
For purposes of calculating the Discounted Value of the Fund's
portfolio under current Moody's guidelines, the fair market value of portfolio
securities eligible for consideration under such guidelines ("Moody's Eligible
Assets") must be discounted by certain discount factors set forth below
("Moody's Discount Factors"). The Discounted Value of a portfolio security under
Moody's guidelines is the Market Value thereof, determined as specified by
Moody's, divided by the Moody's Discount Factor. The Moody's Discount Factor
with respect to securities other than those described below will be the
percentage provided in writing by Moody's.
CORPORATE DEBT SECURITIES. Under current Moody's guidelines, portfolio
securities that are corporate debt securities will not be included in the
calculation of the Discounted Value of the Fund's portfolio unless (a) such
securities are rated Caa or higher by Moody's; (b) the senior unsecured rating
of the issuer's corporate bonds is higher than B3; (c) such securities provide
for the periodic payment of interest in cash in U.S. dollars; (d) such
securities do not provide for conversion or exchange into equity capital at any
time over their lives; (e) for debt securities rated 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 Rule 144A Securities. Thus, the
Moody's guidelines have the effect of prohibiting or significantly restricting
investments in securities other than fixed-income obligations of U.S. issuers
which are rated Caa or higher.
The Discounted Value of any Moody's Eligible Asset that is a corporate
debt security is the percentage determined by reference to the rating on such
asset (which percentage is based upon the Exposure Period) with reference to the
remaining term to maturity of such assets, in accordance with the table set
forth below:
MOODY'S DISCOUNT FACTORS -
CORPORATE DEBT SECURITIES+
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.
B-8
+ 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 $125 million or more.
The Moody's guidelines impose minimum issue size, issuer and industry
diversification and other requirements for purposes of determining Moody's
Eligible Assets. Specifically, portfolio holdings as described below must be
within the following diversification and issue size requirements in order to
constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
MAXIMUM SINGLE MAXIMUM SINGLE MINIMUM ISSUE SIZE
ASSET RATINGS(1) ISSUER (%)(2),(3) INDUSTRY (%)(3),(4) ($ 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) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50 million.
The Moody's Industry Classifications, for the purposes of determining
Moody's Eligible Assets, mean each of the following industry classifications,
determined with respect to particular issues in the discretion of the Fund:
AEROSPACE AND DEFENSE: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
AUTOMOBILE: Automotive Equipment, Auto-Manufacturing, Auto
Parts Manufacturing, Personal Use Trailers, Motor Homes,
Dealers
BANKING: Bank Holding, Savings and Loans, Consumer Credit,
Small Loan, Agency, Factoring, Receivables
BEVERAGE, FOOD AND TOBACCO: Beer and Ale, Distillers, Wines
and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery,
Mill Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat
Products, Poultry Products, Snacks, Packaged Foods,
Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes,
Cigars, Leaf/Snuff, Vegetable Oil
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
B-9
CHEMICALS, PLASTICS AND RUBBER: Chemicals (non-agriculture),
Industrial Gases, Sulphur, Plastics, Plastic Products,
Abrasives, Coatings, Paints, Varnish, Fabricating
CONTAINERS, PACKAGING AND GLASS: Glass, Fiberglass, Containers
made of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass
PERSONAL AND NON DURABLE CONSUMER PRODUCTS (MANUFACTURING
ONLY): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning
Supplies, School Supplies
DIVERSIFIED/CONGLOMERATE MANUFACTURING
DIVERSIFIED/CONGLOMERATE SERVICE
DIVERSIFIED NATURAL RESOURCES, PRECIOUS METALS AND MINERALS:
Fabricating, Distribution
ECOLOGICAL: Pollution Control, Waste Removal, Waste Treatment,
Waste Disposal
ELECTRONICS: Computer Hardware, Electric Equipment,
Components, Controllers, Motors, Household Appliances,
Information Service Communication Systems, Radios, TVS, Tape
Machines, Speakers, Printers, Drivers, Technology
FINANCE: Investment Brokerage, Leasing, Syndication,
Securities
FARMING AND AGRICULTURE: Livestock, Grains, Produce;
Agricultural Chemicals, Agricultural Equipment, Fertilizers
GROCERY: Grocery Stores, Convenience Food Stores
HEALTHCARE, EDUCATION AND CHILDCARE: Ethical Drugs,
Proprietary Drugs, Research, Health Care Centers, Nursing
Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment
HOME AND OFFICE FURNISHINGS, HOUSEWARES AND DURABLE CONSUMER
PRODUCTS: Carpets, Floor Coverings, Furniture, Cooking, Ranges
HOTELS, MOTELS, INNS AND GAMING
INSURANCE: Life, Property and Casualty, Broker, Agent, Surety
LEISURE, AMUSEMENT, MOTION PICTURES, ENTERTAINMENT: Boating,
Bowling, Billiards, Musical Instruments, Fishing, Photo
Equipment, Records, Tapes, Sports, Outdoor Equipment
(Camping), Tourism, Resorts, Games, Toy Manufacturing, Motion
Picture Production Theaters, Motion Picture Distribution
MACHINERY (NON-AGRICULTURE, NON-CONSTRUCTION, NON-ELECTRONIC):
Industrial, Machine Tools, Steam Generators
MINING, STEEL, IRON AND NON PRECIOUS METALS: Coal, Copper,
Lead, Uranium, Zinc, Aluminum, Stainless Steel Integrated
Steel, Ore Production, Refractories, Steel Mill Machinery,
Mini-mills, Fabricating, Distribution and Sales of the
foregoing
OIL AND GAS: Crude Producer, Retailer, Well Supply, Service
and Drilling
PERSONAL, FOOD AND MISCELLANEOUS SERVICES
B-10
PRINTING, PUBLISHING AND BROADCASTING: Graphic Arts, Paper,
Paper Products, Business Forms, Magazines, Books, Periodicals,
Newspapers, Textbooks, Radio, T.V., Cable Broadcasting
Equipment
CARGO TRANSPORT: Rail, Shipping, Railroads, Rail-car builders,
Ship Builders, Containers, Container Builders, Parts,
Overnight Mail, Trucking, Truck Manufacturing, Trailer
Manufacturing, Air Cargo, Transport
RETAIL STORES: Apparel, Toy, Variety, Drugs, Department, Mail
Order Catalog, Showroom
TELECOMMUNICATIONS: Local, Long Distance, Independent,
Telephone, Telegraph, Satellite, Equipment, Research, Cellular
TEXTILES AND LEATHER: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
PERSONAL TRANSPORTATION: Air, Bus, Rail, Car Rental
UTILITIES: Electric, Water, Hydro Power, Gas, Diversified
SOVEREIGNS: Semi-sovereigns, Canadian Provinces,
Supra-national Agencies
Where the Fund sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Moody's
Eligible Asset and the amount the Fund is required to pay upon repurchase of
such asset will count as a liability for the purposes of the ATP Basic
Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a
third party in the future, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such asset will constitute a Moody's Eligible Asset. For
the purposes of calculation of Moody's Eligible Assets, portfolio securities
which have been called for redemption by the issuer thereof are valued at the
lower of Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it has been irrevocably deposited for
the payment of (i)(A) through (i)(F) under the definition of ATP Basic
Maintenance Amount (see "Description of ATP - Asset Maintenance") or it is
subject to any material lien, mortgage, pledge, security interest or security
agreement of any kind (collectively, "Liens"), except for (a) Liens which are
being contested in good faith by appropriate proceedings and which Moody's has
indicated to the Fund will not affect the status of such asset as a Moody's
Eligible Asset, (b) Liens for taxes that are not then due and payable or that
can be paid thereafter without penalty, (c) Liens to secure payment for services
rendered or cash advanced to the Fund by its investment adviser, the Fund's
custodian, transfer agent or registrar or the auction agent for the ATP (the
"Auction Agent") and (d) Liens by virtue of any repurchase agreement.
The effect of the foregoing discount factors may be to cause the Fund
to invest in higher-rated, lower-yielding 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" in the Prospectus.
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
B-11
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 30 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 counter-parties having a Moody's long-term debt rating of
at least Baa3 or (2) with counter-parties 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 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:
B-12
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
FITCH AAA RATING GUIDELINES
For purposes of calculating the Discounted Value of the Fund's
portfolio under current Fitch guidelines, the fair market value of portfolio
securities eligible for consideration under such guidelines ("Fitch Eligible
Assets") must be discounted by certain discount factors set forth below ("Fitch
Discount Factors"). The Discounted Value of a portfolio security under the Fitch
guidelines is the Market Value thereof determined as specified by Fitch divided
by the Fitch Discount Factor. The Fitch Discount Factor with respect to
securities other than those described below will be the percentage provided in
writing by Fitch.
DEBT SECURITIES. Under current Fitch guidelines, securities will not be
deemed "Debt Securities" includable in the calculation of the Discounted Value
of the Fund's portfolio unless (a) such securities are rated CCC or higher by
Fitch or, if unrated by Fitch, rated Caa or higher by Moody's and CCC or higher
by S&P; (b) such securities provide for the periodic payment of interest in cash
in U.S. dollars; (c) such securities do not provide for conversion or exchange
into equity capital at any time over their lives; (d) such securities have been
registered under the Securities Act or are Rule 144A Securities; (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
B-13
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 Rule 144A
Securities; (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.
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
B-14
Type IV Debt Securities with remaining maturities of:
less than or equal to 2 years 1.27
greater than 2 years, but less than or equal to 4 years 1.32
greater than 4 years, but less than or equal to 7 years 1.52
greater than 7 years, but less than or equal to 12 years 1.57
greater than 12 years, but less than or equal to 25 years 1.63
greater than 25 years, but less than or equal to 30 years 1.69
Type V Debt Securities with remaining maturities of:
less than or equal to 2 years 1.32
greater than 2 years, but less than or equal to 4 years 1.36
greater than 4 years, but less than or equal to 7 years 1.59
greater than 7 years, but less than or equal to 12 years 1.65
greater than 12 years, but less than or equal to 25 years 1.72
greater than 25 years, but less than or equal to 30 years 1.80
Type VI Debt Securities with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.40
greater than 4 years, but less than or equal to 7 years 1.67
greater than 7 years, but less than or equal to 12 years 1.74
greater than 12 years, but less than or equal to 25 years 1.82
greater than 25 years, but less than or equal to 30 years 1.91
Type VII Debt Securities with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.64
greater than 4 years, but less than or equal to 7 years 2.28
greater than 7 years, but less than or equal to 12 years 2.49
greater than 12 years, but less than or equal to 25 years 2.74
greater than 25 years, but less than or equal to 30 years 3.06
For purposes of the foregoing:
"Type I Debt Securities" means Debt Securities (as defined above) rated
either AAA by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by
Moody's;
"Type II Debt Securities" means Debt Securities rated either at least
AA- by Fitch or, if not rated by Fitch, rated at least AA- by S&P and at least
Aa3 by Moody's which do not constitute Type I Debt Securities;
"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;
B-15
"Type VI Debt Securities" means Debt Securities rated either at least
B- by Fitch or, if not rated by Fitch, rated at least B- by S&P and at least B3
by Moody's which do not constitute Type I, Type II, Type III, Type IV or Type V
Debt Securities; and
"Type VII Debt Securities" means Debt Securities rated either at least
CCC by Fitch or, if not rated by Fitch, rated at least CCC by S&P and at least
Caa by Moody's which do not constitute Type I, Type II, Type III, Type IV, Type
V or Type VI Debt Securities.
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included in
Fitch Eligible Assets:
MAXIMUM 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
B-16
Media, Leisure & Entertainment
Metals & Mining
Miscellaneous
Paper & Forest Products
Retail
Sovereigns
Textiles & Furniture
Transportation
Utilities
OTHER FITCH ELIGIBLE ASSETS. Other Fitch Eligible Assets include the
following:
(i) cash (including, for this purpose, interest and dividends due
on assets rated (A) Baa3 or higher by Moody's, BBB or higher by S&P or BBB or
higher by Fitch if the payment date is within five Business Days of the
Valuation Date, (B) A2 or higher by Moody's and either A or higher by S&P or A
or higher by Fitch if the payment date is within 30 days of the Valuation Date,
and (C) A1 or higher by Moody's and either A+ or higher by S&P or A+ or higher
by Fitch if the payment date is within the Exposure Period) and receivables for
Fitch Eligible Assets sold if the receivable is due within five Business Days of
the Valuation Date, and if the trades which generated such receivables are (A)
settled through clearing house firms with respect to which the Fund has received
prior written authorization from Fitch or (B) (1) with counter-parties having a
Fitch long-term debt rating of at least BBB- by Fitch, if rated by Fitch or, if
not rated by Fitch, then rated at least BBB- by S&P and rated at least Baa3 by
Moody's or (2) with counter-parties having a Fitch Short-Term Money Market
Instrument rating of at least F-1 + by Fitch, if rated by Fitch or, if not rated
by Fitch, then rated at least A-1 by S&P and rated at least P-I by Moody's;
(ii) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1 by Moody's and either at least A-1 + by S&P or
F1 + by Fitch, (B) in the case of demand deposits, time deposits and overnight
funds, the supporting entity is rated at least A2 by Moody's and either at least
A by S&P or A by Fitch, or (C) in all other cases, the supporting entity (1) is
rated at least A2 by Moody's and at least A by S&P and the security matures
within one month, (2) is rated at least A1 by Moody's and either at least A+ by
S&P or at least A by Fitch and the security matures within three months or (3)
is rated at least Aa3 by Moody's and either at least AA by S&P or at least AA by
Fitch and the security matures within six months; and
(iii) U.S. Treasury Securities.
The Fitch Discount Factors for Fitch Eligible Assets that are U.S. Treasurities
are as follows:
U.S. TREASURY SECURITIES with remaining maturities of:
less than or equal to 1 year 1.06
greater than 1 year, but less than or equal to 2 years 1.11
greater than 2 years, but less than or equal to 5 years 1.16
greater than 5 years, but less than or equal to 15 years 1.24
greater than 25 years, but less than or equal to 30 years 1.26
The Fitch Discount Factor applied to short-term portfolio securities
will be (A) 100%, so long as such portfolio securities mature or have a demand
feature at par exercisable within the Exposure Period and, (B) 125%, so long as
such portfolio securities neither mature nor have a demand feature at par
exercisable within the Exposure Period. A Fitch Discount Factor of 100% will be
applied to cash.
FINANCIAL CONTRACTS, as such term is defined in Section 3(c)(2)(B)(ii)
of the 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.
B-17
Under current Fitch 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 30 days or less; otherwise the
Discounted Value of such asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of ATP Basic Maintenance
Amount (see "Description of ATP - Asset Maintenance") or it is subject to any
material Lien, except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Fitch has indicated to the Fund will not
affect the status of such asset as a Fitch Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Fund by its investment adviser, the Fund's custodian, transfer agent or
registrar or the Auction Agent and (d) Liens by virtue of any repurchase
agreement.
* * *
For so long as any of the ATP is Outstanding and either Moody's, Fitch
or any Other Rating Agency is rating the ATP, the Fund will not, unless it has
received written confirmation from Moody's, Fitch or any Other Rating Agency, as
applicable, that any such action would not impair the respective rating then
assigned by Moody's, Fitch, or such Other Rating Agency to the ATP, engage in
any one or more of the following transactions: (i) purchase or sell futures
contracts or options thereon with respect to portfolio securities or write
unsecured put or uncovered call options on portfolio securities, engage in
options transactions involving cross-hedging, or enter into any swap
transaction; or (ii) borrow money, except that the Fund may, without the written
confirmation described above, borrow money for the purpose of clearing
securities transactions; provided that the ATP Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and if the
borrowing matures in not more than 60 days and is non-redeemable; or (iii)
except in connection with a refinancing of the ATP, issue any class or series of
stock ranking prior to or on a parity with the ATP with respect to the payment
of dividends or the distribution of assets upon dissolution, liquidation or
winding up of the Fund, or reissue any shares of ATP previously purchased or
redeemed by the Fund; or (iv) engage in any short sales of securities; or (v)
lend portfolio securities; or (vi) merge or consolidate into or with any other
corporation.
For purposes of valuation of Eligible Assets: (A) if the Fund writes a
call option, the underlying asset will be valued as follows: (1) if the option
is exchange-traded and may be offset readily or if the option expires before the
earliest possible redemption of the ATP, at the lower of the Discounted Value of
the underlying security of the option and the exercise price of the option or
(2) otherwise, it has no value; (B) if the Fund writes a put option, the
underlying asset will be valued as follows: the lesser of (1) exercise price and
(2) the Discounted Value of the underlying security; and (C) call or put options
which the Fund buys have no value.
For so long as ATP are rated by Moody's or Fitch: (A) the Fund will not
engage in options transactions for leveraging or speculative purposes; (B) the
Fund will not write or sell any anticipatory contracts pursuant to which the
Fund hedges the anticipated purchase of an asset prior to completion of such
purchase; (C) the Fund will not enter into an option transaction with respect to
portfolio securities unless, after giving effect thereto, the Fund would
continue to have Eligible Assets with an aggregate Discounted Value equal to or
greater than the ATP Basic Maintenance Amount; (D) the Fund will not enter into
an option transaction with respect to portfolio securities unless after giving
effect to such transaction the Fund would continue to be in compliance with the
provisions relating to the ATP Basic Maintenance Amount; (E) for purposes of the
ATP Basic Maintenance Amount assets in margin accounts are not Eligible Assets;
(F) the Fund shall write only exchange-traded options on exchanges approved by
Moody's (if Moody's is then rating the ATP) and Fitch (if Fitch is then rating
the ATP); (G) where delivery may be made to the Fund with any of a class of
securities, the Fund shall assume for purposes of the ATP Basic Maintenance
Amount that it takes delivery of that security which yields it the least value;
(H) the Fund will not engage in
B-18
forward contracts; and (I) there shall be a quarterly audit made of the Fund's
options transactions by the Fund's independent accountants to confirm that the
Fund is in compliance with these standards.
The Board of Directors may, without approval of any Holder of the ATP
or any other stockholder of the Fund, from time to time amend, alter or repeal
any or all of the definitions 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 ATP - Voting Rights."
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 fluctuations in response to changes in
interest rates and general economic conditions. As of August 31, 2003, the
weighted average maturity of the Fund's portfolio holdings was approximately ___
years. The weighted average maturity of the Fund's portfolio will fluctuate
depending on market conditions and investment opportunities. The Fund, however,
does not expect that the weighted average maturity of the Fund's portfolio will,
under normal conditions, exceed 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 higher than during times of economic and market price
stability, when investment strategy remains relatively constant. A high rate of
portfolio turnover may result in increased transaction costs for the Fund in the
form of increased dealer spreads and brokers commissions. For fiscal years ended
December 31, 2000, 2001, and 2002, the Fund did not pay any brokerage
commissions for the execution of portfolio transactions. 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 ATP. Investors should consult their own
tax advisors for more detailed information and for information regarding the
impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
B-19
The Fund qualifies and elects to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") and intends to qualify under those provisions each year. To qualify as a
regulated investment company, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(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
securities of other regulated investment companies), 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. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax payable by the Fund. To avoid the tax, the Fund must
distribute, or be deemed to have distributed, during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses (adjusted for certain
ordinary losses) for the twelve-month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. For this purpose, any income or
gain retained by the Fund that is subject to corporate tax will be considered to
have been distributed by year-end. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement. Compliance with the calendar year distribution
requirement may limit the extent to which the Fund will be able to retain its
net capital gains for investment.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Code, the Fund will be taxed in the same manner as
an ordinary corporation and distributions to its stockholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, will constitute
dividends. Such distributions generally will be eligible (i) for the
dividends-received deduction in the case of corporate shareholders and (ii) for
treatment as qualified dividend income in the case of individual shareholders.
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of the
Common Stock and/or the ATP until the asset coverage is restored. See
"Description of ATP - Dividends and Dividend Periods." Such a suspension of
distributions might prevent the Fund from distributing 90% of its net investment
income, as is required in order to qualify for taxation as a regulated
investment company, or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) ATP in order to maintain or restore the requisite asset coverage and
avoid failure to remain qualified as a regulated investment company. The
determination to repurchase or redeem ATP and the amounts to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem ATP may adversely affect
the Fund's ability to distribute annually at least 90% of its net investment
income, which distribution is required to qualify for taxation as a regulated
investment company. The Fund may also recognize income in connection with
funding repurchases or redemptions
B-20
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 disqualification of the Fund as a regulated investment company and
minimize the imposition of income and excise taxes.
If the Fund fails to qualify as a regulated investment company for any
year, it generally must pay out its earnings and profits accumulated in that
year, less an interest charge to the Treasury on 50% of such earnings and
profits, before it can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF ATP
Under present law, so long as there is no express or implied agreement
between or among a Broker-Dealer or any other party and the Fund or any owners
of the ATP that the Broker-Dealer or any other party will guarantee or otherwise
arrange to ensure that an owner of the ATP will be able to sell his or her
shares, ATP will constitute stock of the Fund, and thus distributions with
respect to the ATP (other than distributions in redemption of ATP subject to
section 302(b) of the Code) will constitute dividends to the extent of the
Fund's current or accumulated earnings and profits, as calculated for federal
income tax purposes. The following discussion assumes such treatment will apply.
The Fund's income will consist of net investment income and may also
consist of net capital gains. The character of the Fund's income will not affect
the amount of dividends to which the holders of the ATP are entitled. Holders of
the ATP are entitled to receive only the amount of dividends as determined by
periodic Auctions. For federal income tax purposes, however, the Internal
Revenue Service (the "Service") currently requires that a regulated investment
company that has two or more classes of shares allocate to each such class
proportionate amounts of each type of its income (such as ordinary income and
net capital gains) for each tax year. Accordingly, the Fund intends to designate
distributions made with respect to the Common Stock and the four series of ATP
as consisting of particular types of income (net capital gains, ordinary income,
dividends qualifying for the dividends received deduction and qualified dividend
income) in accordance with each class' proportionate share of the total
dividends paid to all 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 generally are taxable to stockholders as ordinary
income. Distributions of the
B-21
Fund's net capital gains, if any, are taxable to stockholders at rates
applicable to long-term capital gains regardless of the length of time the ATP
have been held by holders. Distributions in excess of the Fund's earnings and
profits will first reduce a stockholder's adjusted tax basis in his or her
shares of ATP and, after the adjusted tax basis is reduced to zero, will
constitute capital-gains to a holder of shares of ATP who holds his or her
shares of ATP as a capital asset. In addition, under the Jobs and Growth Tax
Relief Reconciliation Act of 2003 (effective for tax years 2003 through 2008)
(the "Jobs and Growth Act"), dividends paid by the Fund to stockholders who are
individuals may constitute qualified dividend income eligible for a maximum rate
of 15%. Under the Jobs and Growth Act, if the aggregate amount of qualified
dividend income received by the Fund during any taxable year is less than 95% of
the Fund's gross income (as specifically defined for that purpose), such
distributions will be eligible for a maximum rate of 15% to individuals if
designated by the Fund as qualified dividend income. The Fund may designate such
distributions as qualified dividend income only to the extent the Fund itself
has qualified dividend income for the taxable year in which such distributions
are made. Qualified dividend income is generally dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with comprehensive tax treaties with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). The amount of qualified dividend income 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.
Although the Fund is required to distribute annually at least 90% of
its net investment income, the Fund is not required to distribute net capital
gains to the stockholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gains").
However, it is unclear whether a portion of the net undistributed capital gains
would have to be allocated to the ATP for federal income tax purposes. Until and
unless the Fund receives acceptable guidance from the Service as to the
allocation of the net undistributed capital gains between the Common Stock and
the ATP, the Fund intends to distribute its net capital gains for any year
during which it has shares of ATP Outstanding. Such distribution will affect the
tax character but not the amount of dividends to which holders of shares of ATP
are entitled.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to stockholders of
record in one of such months and paid in January of the following year will be
treated as having been distributed by the Fund and received by the stockholders
on December 31. In addition, solely for the purpose of satisfying the 90%
distribution requirement and the distribution requirement for avoiding income
taxes, certain distributions made after the close of a taxable year of the Fund
may be "spilled back" and treated as paid during such taxable year. In such
case, stockholders will be treated as having received such dividends in the
taxable year in which the distribution was actually made. The Service has ruled
privately that dividends paid following the close of the taxable year that are
treated for tax purposes as derived from income from the prior year will be
treated as dividends "paid" in the prior year for purposes of determining the
proportionate share of a particular type of income for each class. Accordingly,
the Fund intends to treat any such dividends that are paid following the close
of a taxable year as "paid" in the prior year for purposes of determining a
class' proportionate share of a particular type of income. However, the private
ruling is not binding on the Service, and there can be no assurance that the
Service will respect such treatment.
Most of the Fund's net investment income is derived from
interest-bearing securities. Accordingly, dividends paid with respect to the ATP
generally will not qualify for the corporate dividend received deduction.
However, from time to time, a portion of the Fund's net investment income may be
dividends on equity securities which are eligible for the dividends received
deduction under Section 243 of the Code. Corporate stockholders who otherwise
are eligible to claim the dividends received deduction under Section 243 of the
Code can deduct 70% of the portion of the ATP dividend representing the
stockholder's portion of the Fund's eligible dividend income. The Service has
ruled that corporate stockholders of a regulated investment company must meet
the 45-day holding requirements of Section 246(c)(1)(A) of the Code with respect
to the shares of the regulated investment company to qualify for the dividends
received deduction.
Distributions that the Fund properly designates as capital gains
dividends will be taxable to U.S. shareholders 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.
B-22
The Fund will notify shareholders after the close of its taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income (including any portion thereof qualifying for the
dividends received deduction generally available to corporations), qualified
dividend income, return of capital, and capital gain.
SALE OF SHARES
The sale of shares of ATP (including transfers in connection with a
redemption or repurchase of such shares of ATP or a liquidation of the Fund)
will be a taxable transaction for federal income tax purposes. Selling holders
of shares of ATP will generally recognize gain or loss in an amount equal to the
difference between their basis in the shares of ATP and the amount received in
exchange therefor. If such shares of ATP are held as a capital asset, the gain
or loss will generally be a capital gain or loss and will be long-term if such
stockholders have held the shares for more than one year. Any loss realized upon
a taxable disposition of shares of ATP held for six months or less will be
treated as a long-term capital loss to the extent of any distributions of net
capital gains received (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 of ATP may be disallowed if other shares of ATP are
purchased by the shareholder within 30 days before or after the disposition.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 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 ATP.
RECENT TAX SHELTER REPORTING REGULATIONS
Under recently promulgated Treasury regulations, if a stockholder
recognizes a loss on disposition of the Fund's shares of $2 million or more for
an individual stockholder or $10 million or more for a corporate stockholder (or
a greater loss over a combination of years), the stockholder must file with the
Service a disclosure statement on Form 8886. Direct stockholders of portfolio
securities are in many cases excepted from this reporting requirement, but under
current guidance, stockholders of a regulated investment company are not
excepted. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's treatment of the loss
is proper. Stockholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The business and affairs of the Fund are managed under the direction of
the Board of Directors. The Directors approve all significant agreements between
the Fund and persons or companies furnishing services to it,
B-23
including the Fund's agreement with its Investment Adviser, custodian and
transfer agent. The management of the Fund's day-to-day operation is delegated
to its officers and the Investment Adviser, subject always to the investment
objective and policies of the Fund and to the general supervision of the
Directors. The Board of Directors consists of five individuals, three of whom
are not "interested persons" of the Fund within the meaning of Section 2(a)(19)
of the 1940 Act (the "Non-Interested Directors"). During 2002, the Directors of
the Fund met five times. The names and business addresses of the Directors of
the Fund and their principal occupations and other affiliations during the past
five years are set forth below.
B-24
The Directors of the Fund who are 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 Therapeutics, Inc.,
Date of Birth: 09/21/38 1963 - as Donald K. David Professor of Sonesta International Hotels
Business Administration since 1986, Corporation, Loews Corporation (a
Senior Associate Dean, Chair of the conglomerate), and Brown Shoe Company,
Doctoral Programs, Chair of the General Inc.; Independent General Partner of
Management Area, and currently, Chair of ML-Lee Acquisition Fund, L.P.; and
the General Manager Program; member and Trustee of TH Lee-Putnam Emerging
research fellow at the Institute of Opportunities Portfolio.
Politics since 1966; faculty member of
the John F. Kennedy School of Government
since 1969.
Bernard J. Korman Director since 1987 Chairman of the Board of Directors of Director of Kramont Realty Trust,
Date of Birth: 10/13/31 Philadelphia Health Care Trust Omega Healthcare Investors, Inc. (real
(non-profit corporation supporting estate investment trust), The Pep
healthcare delivery, education and Boys, Inc. (automotive supplies), and
research). 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 Trust and
Date of Birth: 05/30/30 Trustees from 1969 to May 2001 of Century Small Cap Select.
Northeast Investors Trust; Chairman,
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.
B-25
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)
WITH THE FUND
AND LENGTH PRINCIPAL OCCUPATION(S)
NAME AND AGE OF TIME SERVED(1) DURING PAST 5 YEARS OTHER DIRECTORSHIPS
------------ ---------------- ----------------------- -------------------
Robert F. Birch* Director and Private investor and consultant. Director of Hyperion Funds (4 funds),
Date of Birth: 03/12/36 President and Director of the Brandywine Funds
since 1992 (3 funds).
Richard E. Floor* Director and Partner through his professional Director of Affiliated Managers Group,
Date of Birth: 08/03/40 Secretary corporation with the law firm of Goodwin Inc.
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.
The address of each Director is: c/o The New America High Income Fund,
Inc., 33 Broad Street, Boston, Massachusetts 02109. Each Director holds office
until the Director's successor is duly elected and qualified, until the
Director's death or until the Director's resignation or removal.
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
As of December 31, 2002, no Director of the Fund owned any shares of
the Fund's ATP. The following table shows the beneficial ownership of the Fund's
Common Stock by the Fund's Directors as of that date based on information
provided to the Fund by the Directors.
B-26
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 of Common Stock
quoted on the New York Stock 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 shares of Common Stock, respectively. As of that date, the
Fund's Directors as a group beneficially owned 1,091,176 shares of Common Stock,
which constituted 1.57% of the issued and outstanding shares of Common Stock.
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.
B-27
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(3)
----------
(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.
(3) $156,978 was compensation for services as Vice President and Treasurer of
the Fund.
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 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-
B-28
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 September 30, 2003, the following persons or entities owned of
record more than 5% of the outstanding shares of Common Stock:
NUMBER OF SHARES OF PERCENT OF SHARES OF
NAME AND ADDRESS OF THE OWNER COMMON STOCK COMMON STOCK
----------------------------- ------------------- --------------------
___________________ ______________ ____________%
Except as noted above, the Fund does not know of any person who, as of
September 30, 2003, beneficially owned more than 5% or more of the outstanding
shares of Common Stock of the Fund. The Fund does not know of any person who
owned more than 5% of the Outstanding shares of the ATP at September 30, 2003.
As of such date, all Directors and officers of the Fund owned_______ shares of
Common Stock, which constitutes ________% of the issued and outstanding shares
of Common Stock. No Director or officer owned any of the ATP at September 30,
2003.
THE INVESTMENT ADVISER
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.
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.
B-29
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 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 Advisory Agreement between the Investment
Adviser and the Fund became effective on December 2, 2002 following the
termination of the investment 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 Fund bears all costs of its operation other than those incurred by
the Investment Adviser under the Advisory Agreement. In particular, the Fund
pays investment advisory fees, the fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets, legal, accounting and auditing fees, taxes,
expenses of preparing prospectuses and stockholder reports, registration fees
and expenses, fees and expenses for the transfer and dividend disbursing agent,
the compensation and expenses of the Directors who are not otherwise employed by
or affiliated with the Investment Adviser or any of its affiliates, and any
extraordinary expenses.
At a meeting held on 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 60 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.
B-30
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.
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.
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
B-31
Commission at (202) 942-8090. These Codes of Ethics are available on the EDGAR
Database at the Commission's website 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.
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.
B-32
T. Rowe Price 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 (617) 263-6400 or on the Commission's website at http://www.sec.gov.
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 New York Stock
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 of Common Stock outstanding.
For the purpose of determining the NAV per share of Common Stock, the value of
the Fund's net assets shall be deemed to equal the value of the Fund's assets
less (i) the Fund's liabilities, (ii) accumulated and unpaid dividends on the
Outstanding ATP and (iii) the aggregate Liquidation Value of the Outstanding
ATP. In valuing the Fund's assets for all purposes, other than the determination
of the Discounted Value of such assets pursuant to the 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, State Street Bank and Trust Company, 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
B-33
securities, price and extent of public trading in similar securities of the
issuer or comparable companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be
valued at amortized cost if their term to maturity from the date of acquisition
by the Fund was less than 60 days or by amortizing their value on the 61st day
prior to maturity if their term to maturity from the date of acquisition by the
Fund was more than 60 days, unless this method is determined by the Board of
Directors not to represent fair value. Repurchase agreements will be valued at
cost plus accrued interest.
DESCRIPTION OF ATP
GENERAL
The shares of ATP have a liquidation preference equal to their
Liquidation Value per share, plus all accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date of final distribution. The newly
issued shares of ATP Series C when issued and sold through this Offering (i)
will be fully paid and non-assessable, (ii) will not be convertible into Common
Stock or other capital stock of the Fund, (iii) will have no preemptive rights,
and (iv) will not be subject to any sinking fund. The ATP will be subject to
optional and mandatory redemption as described below under "Redemption."
Holders of the newly issued shares of ATP Series C will not receive
certificates representing their ownership interest in such shares. The
Depository Trust Company will act as securities depository (together with any
successor securities depository selected by the Fund, the "Securities
Depository") for the Agent Members with respect to the newly issued shares of
ATP Series C.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, the Auction Agent will act as the transfer
agent, registrar, and paying agent for the newly issued shares of ATP Series C.
Furthermore, the Auction Agent will send notices to Holders of the ATP of any
meeting at which Holders of shares of ATP have the right to vote. See "Voting
Rights" below. However, the Auction Agent generally will serve merely as the
agent of the Fund, acting in accordance with the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of ATP,
so long as the Fund is current in the payment of dividends on the ATP and on any
other capital shares of the Fund ranking on a parity with the ATP with respect
to the payment of dividends or upon liquidation.
DIVIDENDS AND DIVIDEND PERIODS
The Holders of ATP will be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefor,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code and to the extent available and in
preference to and priority over any dividend declared and payable on the Common
Stock.
On the Business Day next preceding each Dividend Payment Date, the Fund
is required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Fund does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid to the record holder, which holder is
expected to be the nominee of the Securities Depository. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depository's normal procedures. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. The
Agent Member of a beneficial owner will be responsible for holding or disbursing
such payments on the applicable Dividend Payment Date to such beneficial
B-34
owner in accordance with the instructions of such beneficial owner. Dividends in
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the nominee of the
Securities Depository. Any dividend payment shall first be credited against the
earliest declared but unpaid dividends.
Holders will not be entitled to any dividends, whether payable in cash,
property or shares, in excess of full cumulative dividends except as described
under "Determination of Dividend Rate" below. No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"Default Period" below.
The amount of dividends per Outstanding share of ATP payable (if
declared) on each Dividend Payment Date of each Dividend Period of less than one
year (or in respect of dividends on another date in connection with a redemption
during such Dividend Period) shall be computed by multiplying the Applicable
Rate (or the Default Rate) for such Dividend Period (or a portion thereof) by a
fraction, the numerator of which will be the number of days in such Dividend
Period (or portion thereof) such share was Outstanding and for which the
Applicable Rate or the Default Rate was applicable and the denominator of which
will be 360, multiplying the amount so obtained by the Liquidation Value, and
rounding the amount so obtained to the nearest cent. During any Dividend Period
of one year or more, the amount of dividends per share payable on any Dividend
Payment Date shall be computed as described in the preceding sentence, except
that it will be determined on the basis of a year consisting of twelve 30-day
months.
DETERMINATION OF DIVIDEND RATE. The dividend rate during the period
from and including the Date of Original Issue to and including the initial
Auction Date will be the rate per annum set forth on the inside cover page of
the Prospectus. The first Auction Date will be as set forth on the cover page of
the Prospectus. For each subsequent Dividend Period, subject to certain
exceptions, the dividend rate will be the Applicable Rate that the Auction Agent
advises the Fund has resulted from an Auction.
NOTIFICATION OF DIVIDEND PERIOD. The Fund will designate the duration
of Dividend Periods of each series of ATP; provided, however, that no such
designation is necessary for a Standard Term Period and any designation of an
Alternate Term Period shall be effective only if (i) notice thereof shall have
been given as provided herein, (ii) any failure to pay in a timely manner to the
Auction Agent the full amount of any dividend on, or the redemption price of,
the ATP shall have been cured as set forth under "Default Period" below, (iii)
Sufficient Clearing Orders shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Alternate Term Period,
(iv) if the Fund shall have mailed a notice of redemption with respect to any
shares, as described under "Redemption" below, the Redemption Price with respect
to such shares shall have been deposited with the Paying Agent, and (v) the Fund
has confirmed that, as of the Auction Date next preceding the first day of such
Alternate Term Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the ATP Basic Maintenance Amount and has consulted with the
Broker-Dealers and has provided notice and an ATP Basic Maintenance Certificate
(as defined below) to Moody's (if Moody's is then rating the ATP), to Fitch (if
Fitch is then rating the ATP) and any Other Rating Agency which is then rating
the ATP and so requires.
If the Fund proposes to designate any Alternate Term Period, not fewer
than three Business Days nor more than 30 days prior to the first day of such
Alternate Term Period, notice shall be (A) made by press release and (B)
communicated by the Fund by telephonic or other means to the Auction Agent and
confirmed in writing promptly thereafter. Each such notice shall state (x) that
the Fund proposes to exercise its option to designate a succeeding Alternate
Term Period, specifying the first and last days thereof and (y) that the Fund
will by 3:00 p.m., New York City time, on the second Business Day next preceding
the first day of such Alternate Term Period, notify the Auction Agent, who will
promptly notify the Broker-Dealers, of either (X) its determination, subject to
certain conditions, to proceed with such Alternate Term Period, subject to the
terms of any Specific Redemption Provisions, or (Y) its determination not to
proceed with such Alternate Term Period, in which latter event the succeeding
Dividend Period shall be a Standard Term Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Alternate Term Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
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(i) a notice stating (A) that the Fund has determined to designate
the next succeeding Dividend Period as an Alternate Term Period, specifying the
first and last days thereof and (B) the terms of any Specific Redemption
Provisions; or
(ii) a notice stating that the Fund has determined not to exercise
its option to designate an Alternate Term Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Alternate Term Period to the Auction Agent or is
unable to make the confirmation pursuant to clause (v) above by 3:00 p.m., New
York City time, on the second Business Day next preceding the first day of such
proposed Alternate Term Period, the Fund shall be deemed to have delivered a
notice to the Auction Agent with respect to such Dividend Period to the effect
set forth in clause (ii) above, thereby resulting in a Standard Term Period.
Notwithstanding the foregoing, the Fund may designate the succeeding
Dividend Period as an Alternate Term Period on the second business day next
preceding the first day of such succeeding Dividend Period by giving notice as
contemplated by clause (i) above and by issuing a press release containing the
information in such notice.
If the Fund is unable to make the confirmation pursuant to clause (v)
above by 3:00 p.m., New York City time, on the second Business Day next
preceding the first day of such Alternate Term Period, the Fund shall deliver a
notice to the Auction Agent that the Fund has been unable to make such
confirmation and that such Dividend Period will be a Standard Term Period.
DEFAULT PERIOD. A "Default Period" will commence on the applicable date
set forth below if the Fund fails (i) to declare prior to the close of business
on the second Business Day preceding any Dividend Payment Date, for payment on
or (to the extent permitted as described below) within two Business Days after,
such Dividend Payment Date to the persons who held shares of ATP as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date, the full amount of any dividend payable on such Dividend Payment Date,
(ii) to deposit irrevocably in trust in same-day funds with a designated paying
agent by 12:00 noon, New York City time, (A) on or (to the extent permitted as
described below) within two Business Days after any Dividend Payment Date, the
full amount of any declared dividend on the relevant series of ATP payable on
such Dividend Payment Date (together with the failure to timely declare
dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
Business Days after any date fixed for redemption of shares of ATP called for
redemption, the applicable redemption price (a "Redemption Default"), or (iii)
to maintain the Aaa/AAA Credit Rating unless the Aaa/AAA Credit Rating is
restored by the Dividend Payment Date next following the date on which the Fund
fails to maintain the Aaa/AAA Credit Rating (a "Rating Default"). A Default
Period with respect to a Dividend Default or a Redemption Default will consist
of the period commencing on and including the aforementioned Dividend Payment
Date or redemption date, as the case may be, and ending on and including the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and unpaid redemption price shall have been so deposited or shall have otherwise
been made available to the applicable holders in same day funds. A Default
Period with respect to a Rating Default shall commence as of the date on which
the Fund fails to maintain the Aaa/AAA Credit Rating (provided that such Rating
Default shall be deemed not to have occurred and such Default Period shall not
commence if such Rating Default is cured by the next succeeding Dividend Payment
Date) and shall end on the earlier of the date on which such default is cured as
provided herein or the date on which the ATP is mandatorily redeemed as provided
herein. Holders of two-thirds of the ATP Series C then Outstanding may waive any
Dividend Default, Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend
Period commencing during a Default Period, will be equal to the Default Rate;
and each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Term Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Dividend
Period. Any dividend due on any Dividend Payment Date (if, prior to 12:00 noon,
New York City time, on such Dividend Payment Date, the Fund has declared such
dividend payable on or within two Business Days after such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to such shares not paid to such persons when due may (if such
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default is not solely due to the willful failure of the Fund) be paid to such
Persons in the same form of funds by 12:00 noon, New York City time, on any of
the first two Business Days after such Dividend Payment Date or due date, as the
case may be, provided that such amount is accompanied by an additional amount
for such period of non-payment at the Default Rate applied to the amount of such
default based on the actual number of days comprising such period divided by
360. For the purposes of the foregoing, payment to a person in same-day funds
made on or before 12:00 noon, New York City time, on any Business Day at any
time will be considered equivalent to payment to that person in New York
Clearing House (next-day) funds at the same time on the preceding Business Day,
and any payment made after 12:00 noon, New York City time, on any Business Day
shall be considered to have been made instead in the same form of funds and to
the same person before 12:00 noon, New York City time, on the next Business Day.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the ATP, it will be distributed to the holders of the
Common Stock. The term "net investment income" includes interest, dividends,
short-term capital gains and other income received or accrued less the advisory
fee, bank custodian charges, taxes (except capital gain taxes) and other
expenses properly chargeable against income, but does not include net capital
gains, stock dividends, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. Any realized net capital gains
(defined as the excess of net long-term capital gains over net short-term
capital losses) of the Fund will be distributed annually to the holders of the
Common Stock (subject to the prior rights of the holders of the ATP) subject to
the foregoing and any requirements of Maryland law.
SWAP 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 LIBOR.
The variable rates ranged from 1.31% to 1.44% for the six month period ended
June 30, 2003. 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
counter-parties failed to perform according to the terms of the contractual
commitments. In the event of nonperformance by the counter-party, the Fund's
dividend payment obligation with respect to the ATP would no longer be hedged.
The Fund does not anticipate nonperformance by any counter-party. 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 counter-parties, 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's payment obligation under
the Swap Arrangement and rate of dividends on the four series of ATP are likely
to differ, particularly if the Fund elects to establish a dividend period for
the ATP which is longer than 28 days, although each generally should be
determined with reference to short-term interest rates (except to the extent the
Fund establishes relatively long ATP dividend periods). See "Description of
ATP." The Fund makes dividend payments to the holders of ATP on the basis of the
results of periodic Auctions in accordance with its terms without regard to the
Swap Arrangement and will continue to do so in the event the Swap Arrangement is
terminated. The Fund is subject to the risk that Fleet will not make its
required payments under the Swap Arrangement. In such event, the Fund will have
contractual remedies pursuant to the agreements related to the Swap Arrangement.
The Fund obtained consents from Moody's and Fitch to enter into the
Swap Arrangement. In connection with obtaining such consent, the Fund agreed to
an increase in its discounted asset coverage requirement as described
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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.
In light of the proposed increase in the Fund's Outstanding ATP, the
Fund may consider adjustments in its Swap Arrangement. The timing and amount of
any such adjustment will depend upon market conditions.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the
Fund may not declare dividends or make other distributions on the Common Stock
or purchase any Common Stock if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act) with respect to the Outstanding shares of ATP would be
less than 200%. Under the Code, the Fund must, among other things, distribute at
least 90% of its investment company taxable income each year in order to
maintain its qualification for tax treatment as a regulated investment company.
The foregoing limitation on dividends, distributions and purchases may in
certain circumstances impair the Fund's ability to maintain such qualification.
The Fund intends, however, to redeem shares of ATP to the extent necessary to
maintain such qualification. See "Taxation."
Upon failure to pay dividends for two years or more, the holders of ATP
will acquire certain additional voting rights. See "Voting Rights" below. Such
rights shall be the exclusive remedy of the holders of ATP upon any failure to
pay dividends on the ATP.
For so long as any shares of ATP are Outstanding, except in connection
with the liquidation the Fund, or a refinancing of the ATP as provided in the
Articles, the Fund will not declare, pay or set apart for payment any dividend
or other distribution (other than a dividend or distribution paid in shares of,
or options, warrants or rights to subscribe for or purchase, Common Stock or
other shares, if any, ranking junior to the ATP as to dividends or upon
liquidation) in respect to Common Stock or any other shares of the Fund ranking
junior to or on a parity with the ATP as to dividends or upon liquidation, or
call for redemption, redeem, purchase or otherwise acquire for consideration any
Common Stock or any other such junior shares (except by conversion into or
exchange for shares of the Fund ranking junior to the ATP as to dividends and
upon liquidation) or any such parity shares (except by conversion into or
exchange for shares of the Fund ranking junior to or on a parity with the ATP as
to dividends and upon liquidation), unless (i) immediately after such
transaction, the Fund would have Eligible Assets with an aggregate Discounted
Value at least equal to the ATP Basic Maintenance Amount and the 1940 Act ATP
Asset Coverage (see "Asset Maintenance" and "Redemption" below) would be
achieved, (ii) full cumulative dividends on the ATP due on or prior to the date
of the transaction have been declared and paid and (iii) the Fund has redeemed
the full number of shares of ATP required to be redeemed by any provision for
mandatory redemption contained in the Articles.
REDEMPTION
OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Maryland law, the Fund at its option may redeem shares of ATP having a Dividend
Period of less than one year, in whole or in part, on the Business Day after the
last day of such Dividend Period upon not less than 15 days and not more than 40
days prior notice. The optional redemption price per share shall be the
Liquidation Value per share, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date fixed for
redemption. shares of ATP having a Dividend Period of more than one year may be
redeemable at the option of the Fund prior to the end of the relevant Dividend
Period, subject to any Specific Redemption Provisions, which may include the
payment of redemption premiums to the extent required under any applicable
Specific Redemption Provisions. The Fund shall
B-38
not effect any optional redemption unless after giving effect thereto (i) the
Fund has available certain Deposit Securities with maturity or tender dates not
later than the day preceding the applicable redemption date and having a value
not less than the amount (including any applicable premium) due to Holders of
ATP by reason of the redemption of ATP on such date fixed for the redemption and
(ii) the Fund would have Eligible Assets with an aggregate Discounted Value at
least equal to the ATP Basic Maintenance Amount.
The Fund also reserves the right to repurchase ATP in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the ATP, but is
under no obligation to do so.
MANDATORY REDEMPTION. If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the ATP Basic Maintenance Amount or, as of the last Business Day of any
month, the 1940 Act ATP Asset Coverage, and such failure is not cured within two
Business Days following the relevant Valuation Date in the case of a failure to
maintain the ATP Basic Maintenance Amount or the last Business Day of the
following month in the case of a failure to maintain 1940 Act ATP Asset Coverage
as of such last Business Day (each an "Asset Coverage Cure Date"), the ATP will
be subject to mandatory redemption out of funds legally available therefor. See
"Asset Maintenance" 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) at the Mandatory Redemption Price (as defined
below).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the ATP Basic Maintenance Amount or the 1940 Act ATP Asset Coverage, as
the case may be, pro rata among the Holders of shares of ATP in proportion to
the number of shares they hold and shares of other Preferred stock subject to
mandatory redemption provisions.
If the Fund at any time fails to maintain the Aaa/AAA Credit Rating for
the ATP, and such failure is not cured within 90 calendar days thereafter (the
"Rating Default Cure Date"), all shares of ATP will be subject to mandatory
redemption out of funds legally available therefor, on the Mandatory Redemption
Date, and dividends thereon will be payable at the Default Rate until such
redemption is effected as provided above under "Dividends and Dividend Periods -
Default Period." To maintain the Aaa/AAA Credit Rating, the Fund must maintain a
rating for the ATP in the highest rating category from any two nationally
recognized statistical rating organizations, as used in the rules and
regulations under the Exchange Act, one of which shall be Moody's or S&P.
Shares of ATP may be subject to mandatory redemption in accordance with
the foregoing redemption provision notwithstanding the terms of any Specific
Redemption Provisions.
The Fund is required to effect such a mandatory redemption not later
than 30 days after the Asset Coverage Cure Date or the Rating Default Cure Date,
as the case may be (the "Mandatory Redemption Date"), except that if the Fund
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of shares of ATP which
are subject to mandatory redemption, or the Fund otherwise is unable to effect
such redemption on or prior to such Mandatory Redemption Date, the Fund will
redeem those shares of ATP on the earliest practicable date on which the Fund
will have such funds available, upon notice to record owners of shares of ATP
and the Paying Agent. The Fund's ability to make a mandatory redemption may be
limited by the provisions of the 1940 Act or Maryland law.
The redemption price per share in the event of any mandatory redemption
will be the Liquidation Value per share, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to the date fixed
for redemption plus (in the case of a Dividend Period of not less than one year)
any redemption
B-39
premium, if any, determined by the Board of Directors after consultation with
the Broker-Dealer and set forth in any applicable Specific Redemption Provisions
(the "Mandatory Redemption Price").
REDEMPTION PROCEDURE. Pursuant to Rule 23c-2 under the 1940 Act, the
Fund will file a notice of its intention to redeem with the Commission so as to
provide at least the minimum notice required by such Rule or any successor
provision (notice currently must be filed with the Commission at least 30 days
prior to the redemption date). The Auction Agent will use its reasonable efforts
to provide telephonic notice to each Holder of shares of ATP called for
redemption not later than the close of business on the Business Day immediately
following the Business Day on which the Auction Agent determines the shares to
be redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives notice of redemption from the Fund). Such
telephonic notice will be confirmed promptly in writing not later than the close
of business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each Holder of record of shares of ATP
called for redemption, the Paying Agent (if different from the Auction Agent)
and the Securities Depository ("Notice of Redemption"). Notice of Redemption
will be addressed to the registered owners of the ATP at their addresses
appearing on the share records of the Fund. Such notice will set forth (i) the
redemption date, (ii) the number and identity of shares of ATP to be redeemed,
(iii) the redemption price (specifying the amount of accumulated dividends to be
included therein), (iv) that dividends on the shares to be redeemed will cease
to accumulate on such redemption date, and (v) the provision under which
redemption shall be made.
If fewer than all of the shares of a series of ATP are redeemed on any
date, the shares to be redeemed on such date will be selected by the Fund on a
pro rata basis in proportion to the number of shares held by such Holders, by
lot or by such other method as is determined by the Fund to be fair and
equitable, subject to the terms of any Specific Redemption Provisions. Shares of
ATP may be subject to mandatory redemption as described herein notwithstanding
the terms of any Specific Redemption Provisions. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder of
all of the shares of ATP, and the Securities Depository will determine the
number of shares to be redeemed from the account of the Agent Member of each
beneficial owner. Each Agent Member will determine the number of shares to be
redeemed from the account of each beneficial owner for which it acts as agent.
An Agent Member may select for redemption shares from the accounts of some
beneficial owners without selecting for redemption any shares from the accounts
of other beneficial owners. Notwithstanding the foregoing, if neither the
Securities Depository nor its nominee is the record holder of all of the shares,
the particular shares to be redeemed shall be selected by the Fund by lot, on a
pro rata basis between each series or by such other method as the Fund shall
deem fair and equitable, as contemplated above.
In connection with any redemption, whether optional or mandatory, the
Fund shall pay, together with the redemption price, an amount equal to all
accumulated dividends, whether or not such dividends have been earned or
declared through the redemption date.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be Outstanding for any purpose. The Fund shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the shares of ATP called for redemption on such date and
(ii) such other amounts, if any, to which Holders of shares of ATP called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Fund upon its
request. Thereupon the Paying Agent will be relieved of all responsibility to
the owners of such shares and such owners may look only to the Fund for payment.
So long as any shares of ATP are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures now provide for it to distribute the amount of
the redemption price to Agent Members who, in turn, are expected to distribute
such funds to the persons for whom they are acting as agent.
B-40
Notwithstanding the provisions for redemption described above, no
shares of ATP may be redeemed unless all dividends in arrears on the Outstanding
shares of ATP, and all capital stock of the Fund ranking on a parity with the
ATP with respect to the payment of dividends or upon liquidation, have been or
are being contemporaneously paid or set aside for payment, except in connection
with the liquidation of the Fund in which case all shares of ATP and all shares
ranking in a parity with the ATP must receive proportionate amounts.
Except for the provisions described above, nothing contained in the
Articles limits any legal right of the Fund to purchase or otherwise acquire any
shares of ATP outside of an Auction at any price, whether higher or lower than
the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any shares of ATP for which Notice of Redemption has been given
and the Fund is in compliance with the 1940 Act ATP Asset Coverage and has
Eligible Assets with an aggregate Discounted Value at least equal to the ATP
Basic Maintenance Amount after giving effect to such purchase or acquisition on
the date thereof. Any shares which are purchased, redeemed or otherwise acquired
by the Fund shall have no voting rights. If fewer than all the Outstanding
shares of ATP are redeemed or otherwise acquired by the Fund, the Fund shall
give notice of such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Directors.
RESTRICTIONS ON TRANSFER
Newly issued shares of ATP Series C may be transferred only (a)
pursuant to an Order placed in an Auction, (b) to or through a Broker-Dealer,
(c) to a person that has delivered a signed Master Purchaser's Letter to the
Auction Agent or (d) to the Fund or any Affiliate. Notwithstanding the
foregoing, a transfer other than pursuant to an Auction will not be effective
unless the selling Existing Holder or the Agent Member of such Existing Holder,
in the case of an Existing Holder whose shares are listed in its own name on the
books of the Auction Agent, or the Broker-Dealer or Agent Member of such
Broker-Dealer, in the case of a transfer between persons holding newly issued
shares of ATP Series C through different Broker-Dealers, advises the Auction
Agent of such transfer. The certificates representing the newly issued shares
of ATP Series C issued to the Securities Depository will bear legends with
respect to the restrictions described above and stop-transfer instructions will
be issued to the Transfer Agent and/or Registrar. See "Auction Procedures."
The certificates representing the newly issued shares of ATP Series C
issued to the Securities Depository will bear legends with respect to the
restrictions described above and stop-transfer instructions will be issued to
the transfer agent and/or registrar.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset coverage
requirements under the terms of the Articles. These requirements are summarized
below.
ATP BASIC MAINTENANCE AMOUNT. The Fund is required to maintain as of
each Valuation Date Eligible Assets having in the aggregate a Discounted Value
at least equal to the ATP Basic Maintenance Amount, calculated separately for
Moody's (if Moody's is then rating the ATP) and Fitch (if Fitch is rating the
ATP). For this purpose, the Market Value of the Fund's portfolio securities is
(i) computed based upon one or more pricing services agreements approved by the
Board of Directors or (ii) the lower bid price from two independent dealers in
securities, one of which bids shall be in writing. The Fund has a pricing
services 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 related
Asset Coverage Cure 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
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(1) (A) the sum of the products resulting from
multiplying the number of Outstanding shares of each series of ATP on
such date by the Liquidation Value per share of such series; (B) the
aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) to and including
the first following Dividend Payment Date for each share of ATP
Outstanding that follows such Valuation Date (or to the 42nd day after
such Valuation Date, if such 42nd day occurs before the first following
Dividend Payment Date); (C) the aggregate amount of dividends that
would accumulate at the then current Maximum Applicable Rate for a
Standard Term Period multiplied by the Volatility Factor (which means
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) on any shares of ATP
Outstanding from the first day following the Dividend Payment Date
referred to in (B) above through the 42nd day after such Valuation
Date, but only if such 42nd day occurs after the first day following
the Dividend Payment Date, except that if such Valuation Date occurs
during a Default Period, the dividend for purposes of the calculation
would accumulate at the Default Rate; (D) the amount of anticipated
Fund expenses for the 90 days subsequent to such Valuation Date; (E)
any current liabilities, including, without limitation, indebtedness
due within one year and any redemption premium due with respect to
shares of ATP for which a Notice of Redemption has been given, as of
such Valuation Date to the extent not reflected in any of (1)(A)
through (1)(D); and (F) without duplication, 10% of the exercise price
of any call option written by the Fund and the exercise price of any
put option written by the Fund; less
(2) the sum of any cash or the value of any Fund assets
irrevocably deposited by the Fund for the payment of any of (1)(B)
through (1)(F) ("value" for purposes of this clause (2) shall mean the
Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated 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 Arrangement was 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 ___% 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
counter-party as the issuer of such Debt Security and (c) the time remaining
until the expiration date the Swap Arrangement as the remaining maturity of such
Debt Security.
Solely for purposes of calculating the ATP Basic Maintenance Amount,
interest on borrowed funds outstanding as of any date will be treated as
dividend payments, at a deemed dividend rate equal to the interest rate payable
on such funds on the relevant date, but shall be subject to multiplication by
the larger of the factors that the Fund has been informed by Moody's (if Moody's
is then rating the ATP) or Fitch (if Fitch is then rating the ATP) are
applicable (as described in 1(C) above) only in the event that interest on such
borrowed funds is payable on the basis of a variable rate of interest, and the
interest rate is subject to change within the relevant 43-day period.
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 sensitivity of the Market Value of the relevant asset to
changes in interest rates, the liquidity and depth of the market for the
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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 "Rating Agency Guidelines" and "Redemption" above.
1940 ACT ATP ASSET COVERAGE. The Fund is required under the Articles to
maintain 1940 Act ATP Asset Coverage on each Friday, or, if such day is not a
Business Day, the next preceding Business Day, in which any shares of ATP are
Outstanding. If the Fund fails to maintain 1940 Act ATP Asset Coverage and such
failure is not cured as of the related Asset Coverage Cure Date, the Fund will
be required to redeem certain shares of the ATP. See "Redemption" above.
The Fund estimates that on the Date of Original Issue of the new shares
of ATP Series C, based on the composition of its portfolio as of August 31,
2003, the 1940 Act ATP Asset Coverage, after giving effect to the issuance of
the shares of ATP Series C ($30 million) and the deduction of sales load and
estimated offering expenses for such shares ($_______), will be computed as
follows:
Value of Fund assets less
liabilities not constituting senior
securities $ _________ = _______%
----------------------------------- ---------------------
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") (i) to
the Auction Agent, Moody's (if Moody's is then rating the ATP), Fitch (if Fitch
is then rating the ATP) and any Other Rating Agency which is then rating the ATP
and which so requires as of (a) the Business Day preceding the Date of Original
Issue and (b) any Valuation Date on which the Fund fails to have Eligible Assets
with an aggregate Discounted Value at least equal to 125% of the ATP Basic
Maintenance Amount; (ii) to the Auction Agent, Fitch (if Fitch is than rating
the ATP) and any Other Rating Agency which is then rating the ATP and which so
requires as of (a) every fourth Valuation Date after the Date of Original Issue
for the first year following the Date of Original Issue, (b) if the Fund fails
to have Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount, and (c) on request by Fitch or such Other Rating
Agency, as applicable; (iii) to the Auction Agent, Moody's (if Moody's is then
rating the ATP), Fitch (if Fitch is then rating the ATP) and any Other Rating
Agency which is then rating the ATP and which so requires as of (a) the
Valuation Date next following the date of redemption by the Fund of shares of
Common Stock which, together with all other shares of Common Stock purchased
during the six months preceding such date, equal in excess of 1,000,000 shares
of Common Stock, and (b) the last Valuation Date of each fiscal quarter and a
Valuation Date during such fiscal quarter randomly selected by the Fund's
independent accountants as provided below; and (iv) to the Auction Agent,
Moody's (if Moody's is then rating the ATP), Fitch (if Fitch is then rating the
ATP) and any Other Rating Agency which is then rating the ATP and which so
requires as of a Business Day on or before any Asset Coverage Cure Date relating
to the Fund's cure of a failure to have Eligible Assets with an aggregate
Discounted Value at least equal to the ATP Basic Maintenance Amount. Such ATP
Basic Maintenance Certificate shall be delivered in the case of clause (i)(a) on
the Date of Original Issue and in the case of clauses (i)(b), (ii), (iii) and
(iv) above on or before the third Business Day after the relevant Valuation Date
or Asset Coverage Cure Date.
The Fund is required to deliver to the Auction Agent, Moody's (if
Moody's is then rating the ATP), Fitch (if Fitch is then rating the ATP) and any
Other Rating Agency which is then rating the ATP and which so requires, a
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certificate with respect to the calculation of the 1940 Act ATP Asset Coverage
and the value of the portfolio holdings of the Fund (a "1940 Act ATP Asset
Coverage Certificate") (i) as of the Business Day preceding the Date of Original
Issue with respect to newly issued shares of ATP Series C, and (ii) as of (a)
the last Valuation Date of each quarter thereafter, and (b) as of the Business
Day on or before the Asset Coverage Cure Date relating to the failure to satisfy
the 1940 Act ATP Asset Coverage. Such 1940 Act ATP Asset Coverage Certificate
shall be delivered in the case of clause (i) on the Date of Original Issue and
in the case of clause (ii) on or before the third Business Day after the
relevant Valuation Date or the Asset Coverage Cure Date. Such certificate must
be accompanied by a certificate from the Fund's accountants certifying as to the
accuracy of the Fund's calculations.
On the Date of Original Issue, the Fund shall deliver to the Auction
Agent, Moody's (if Moody's is then rating the newly issued shares of ATP Series
C), Fitch (if Fitch is then rating the newly issued shares of ATP Series C) and
any Other Rating Agency which is then rating the newly issued shares of ATP
Series C and which so requires, a letter prepared by the Fund's independent
accountants (an "Accountant's Certificate") regarding the accuracy of the
calculations made by the Fund in the ATP Basic Maintenance Certificate and the
1940 Act ATP Asset Coverage Certificate required to be delivered by the Fund on
the Date of Original Issue. Within eight Business Days after the last Valuation
Date of each fiscal quarter of the Fund on which an ATP Basic Maintenance
Certificate is required to be delivered, the Fund will deliver to the Auction
Agent, Moody's (if Moody's is then rating the ATP), Fitch (if Fitch is then
rating the ATP) and any Other Rating Agency which is then rating the ATP and
which so requires, an Accountant's Certificate regarding the accuracy of the
calculations made by the Fund in such ATP Basic Maintenance Certificate and in
any other ATP Basic Maintenance Certificate randomly selected by the Fund's
independent accountants during such fiscal quarter. Within eight Business Days
after the last Valuation Date of each fiscal quarter of the Fund on which a 1940
Act ATP Asset Coverage Certificate is required to be delivered, the Fund will
deliver to the Auction Agent, Moody's (if Moody's is then rating the ATP), Fitch
(if Fitch is then rating the ATP) and any Other Rating Agency which is then
rating the ATP and which so requires an Accountant's Certificate regarding the
accuracy of calculations made by the Fund in such 1940 Act ATP Asset Coverage
Certificate. In addition, the Fund will deliver to the relevant persons
specified in the preceding sentence an Accountant's Certificate regarding the
accuracy of the calculations made by the Fund on each ATP Basic Maintenance
Certificate and 1940 Act ATP Asset Coverage Certificate required to be delivered
as of a Business Day on or before any Asset Coverage Cure Date, within five days
after the relevant Asset Coverage Cure Date. If an Accountant's Certificate
delivered with respect to an Asset Coverage Cure Date shows an error was made in
the Fund's report with respect to such Asset Coverage Cure Date, the calculation
or determination made by the Fund's independent accountants will be conclusive
and binding on the Fund with respect to such reports. If any other Accountant's
Certificate shows that an error was made in any such report, the calculation or
determination made by the Fund's independent accountants will be conclusive and
binding on the Fund; provided, however, any errors shown in the Accountant's
Certificate filed on a quarterly basis shall not be deemed to be a failure to
have Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount on such prior Valuation Dates.
In the event that an ATP Basic Maintenance Certificate or a 1940 Act
ATP Asset Coverage Certificate or the applicable Accountant's Certificates with
respect to an applicable Asset Coverage Cure Date are not delivered within the
time periods specified in the Articles, the Fund shall be deemed to have failed
to have Eligible Assets with an aggregate Discounted Value at least equal to the
ATP Basic Maintenance Amount or the 1940 ATP Asset Coverage, as the case may be,
as of the related Valuation Date, and such failure shall be deemed not to have
been cured as of such Asset Coverage Cure Date for purposes of the mandatory
redemption provisions.
LIQUIDATION
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the Holders of ATP and any other shares
ranking in parity with the ATP, in preference to the Holders of Common Stock,
will be entitled to payment, out of the assets of the Fund or the proceeds
thereof available for distribution to stockholders after satisfaction of claims
of creditors of the Fund, of a liquidation distribution in the amount equal to
the Liquidation Value per share of the ATP, plus an amount equal to accumulated
dividends (whether or not earned or declared but without interest) to the date
payment of such distribution is made in full or a sum sufficient for the payment
thereof is set apart with the Paying Agent. However, Holders of ATP will not be
entitled to any premium to which such Holder would be entitled to receive upon
redemption of such shares of ATP. After payment of the
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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 New York
Stock Exchange, the Fund is currently required to hold annual meetings of
stockholders.
In connection with the election of the Fund's Board, the holders of
outstanding shares of Preferred Stock, including ATP Series C, represented in
person or by proxy at said meeting, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital stock of
the Fund, to elect two directors of the Fund, each share of Preferred Stock,
including ATP Series C, entitling the holder thereof to one vote. The holders of
outstanding shares of Common Stock and Preferred Stock, including ATP Series C,
voting together as a single class, shall elect the balance of the directors.
Notwithstanding the foregoing, if (a) at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or declared) on
outstanding shares of the Preferred Stock, including Outstanding ATP Series C,
equal to at least two full years' dividends shall be due and unpaid; or (b) any
time holders of any other shares of Preferred Stock are entitled under the 1940
Act to elect a majority of the directors of the Fund, then the number of members
constituting the Board shall automatically be increased by the smallest number
that, when added to the two Directors elected exclusively by the Holders of
shares of Preferred Stock as described above, would constitute a majority of the
Board as so increased by such smallest number; and at a special meeting of
stockholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the Holders of shares
of Preferred Stock, including the ATP, voting as a separate class, will be
entitled to elect the smallest number of additional Directors that, together
with the two Directors which such Holders will be in any event entitled to
elect, constitutes a majority of the total number of Directors of the Fund as so
increased. The terms of office of the persons who are Directors at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding shares
of Preferred Stock, including the ATP, for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease, and the terms of office of
all of the additional Directors elected by the Holders of shares of Preferred
Stock, including the ATP (but not of the Directors with respect to whose
election the Holders of Common Stock were entitled to vote or the two Directors
the Holders of shares of
B-45
Preferred Stock, including the ATP, have the right to elect in any event), will
terminate automatically. Any shares of ATP issued after the date hereof shall
vote with the ATP as a single class on the matters described above, and the
issuance of any other shares of ATP by the Fund may reduce the voting power of
the ATP.
The affirmative vote of the Holders of a majority of the outstanding
Preferred Stock determined with reference to a "majority of outstanding voting
securities" as the term is defined in Section 2(a)(42) of the 1940 Act,
including the ATP, voting as a class, is required to (i) amend, alter or repeal
any of the preferences, rights or powers of such class so as to affect
materially and adversely such preferences, rights or powers; (ii) increase the
authorized number of shares of Preferred Stock; (iii) create, authorize or issue
shares of any class of capital stock ranking senior to or on a parity with the
Preferred Stock 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 Preferred Stock or reclassify any authorized
shares of capital stock of the Fund into any shares ranking senior to or on
parity with the Preferred Stock (except that, the Board of Directors, without
the vote or consent of the Holders of Preferred Stock, may from time to time
authorize, create and classify, and the Fund may from time to time issue, series
or shares of Preferred Stock, including ATP, ranking on a parity with the ATP
with respect to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up to the affairs of the Fund, subject to
continuing compliance by the Fund with 1940 Act ATP Asset Coverage and ATP Basic
Maintenance Amount requirements, or in connection with a refinancing of the
ATP); (iv) institute any proceedings to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against it,
or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent
to the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Fund or a substantial part of its property,
or make any assignment for the benefit of creditors, or, except as may be
required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any
such action; (v) create, incur or suffer to exist, or agree to create, incur or
suffer to exist, or consent to cause or permit in the future (upon the happening
of a contingency or otherwise) the creation, incurrence or existence of any
material lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness permitted under
clause (vi) below and (D) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's custodian and the
Auction Agent; or (vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow from banks for temporary or emergency
purposes or as may be permitted by the Fund's investment restrictions; provided,
however, that transfers of assets by the Fund subject to an obligation to
repurchase shall not be deemed to be indebtedness for purposes of this provision
to the extent that after any such transaction the Fund has Eligible Assets with
an aggregate Discounted Value at least equal to the ATP Basic Maintenance Amount
as of the immediately preceding Valuation Date.
The affirmative vote of the Holders of a majority of the Outstanding
shares of ATP, voting as a separate class, will also be required to approve any
plan of reorganization adversely affecting such shares or any action requiring a
vote of security Holders under Section 13(a) of the 1940 Act including, among
other things, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies in the Prospectus
under "Investment Objective and Policies - Investment Restrictions." 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 or 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 class vote of Holders
of shares of ATP described above will in each case be in addition to any
separate vote of the requisite percentage of shares of Common Stock and/or ATP
necessary to authorize the action in question.
B-46
The foregoing voting provisions will not apply with respect to the ATP
if, at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
The Board of Directors, without the vote or consent of any holder of
the Preferred Stock, including the ATP, or any other stockholder of the Fund,
may from time to time amend, alter or repeal any or all of the definitions of
the terms or provisions listed below provided that the Board of Directors
receives written confirmation from Moody's (if Moody's is then rating the ATP)
and Fitch (if Fitch is then rating the ATP) (with such confirmation in no event
being required to be obtained from a particular rating agency in the case of the
definitions relevant only to and adopted in connection with the rating of the
ATP, if any, by any Other Rating Agency) that such amendment, alteration or
repeal would not impair the rating then assigned by Moody's or Fitch,
respectively.
ATP Basic Maintenance Amount Maximum Applicable Rate
ATP Basic Maintenance Certificate Minimum Applicable Rate
Asset Coverage Cure Date Moody's Discount Factor
Deposit Securities Moody's Eligible Assets
Discounted Value Moody's Industry Classification
Exposure Period 1940 Act Asset Coverage Cure Date
Fitch Discount Factor 1940 Act ATP Asset Coverage
Fitch Eligible Assets Short Term Money Market Instruments
Fitch Industry Classification Volatility Factor
Market Value (including certain provisions Last Paragraph of Section 12 of the Articles
relevant to futures and options transactions) (discussing valuation of certain option
provisions)
In addition, the Board of Directors, without the vote or consent of any
Holder of the Preferred Stock, including ATP, or any other stockholder of the
Fund, may from time to time adopt, amend, alter or repeal any or all of any
additional or other definitions or add covenants and other obligations of the
Fund (e.g., maintenance of minimum liquidity level) or confirm the applicability
of covenants and other obligations set forth herein in connection with obtaining
or maintaining the rating of Moody's, Fitch or any Other Rating Agency with
respect to ATP and any such amendment, alteration or repeal will not be deemed
to affect the preferences, rights or powers of ATP or the Holders thereof,
provided the Board of Directors receives written confirmation from the relevant
rating agency (such confirmation in no event being required to be obtained from
a particular rating agency with respect to definitions or other provisions
relevant only to another rating agency's rating) that any such amendment,
alteration or repeal would not adversely affect the rating then assigned by such
rating agency.
Also, subject to compliance with applicable law, the Board of Directors
may amend the definition of Maximum Applicable Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum
Applicable Rate shown therein without the vote or consent of the Holders of the
shares of the Preferred Stock, including ATP, or any other stockholder of the
Fund, and without receiving any confirmation from any rating agency after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the ATP Basic Maintenance
Amount.
Unless otherwise required by law, holders of shares of ATP shall not
have any relative rights or preferences or other special rights other than those
specifically set forth herein. The holders of shares of ATP shall have no rights
to cumulative voting. In the event that the Fund fails to pay any dividends on
the shares of ATP, the exclusive remedy of the holders shall be the right to
vote for directors as discussed above.
AUCTION PROCEDURES
GENERAL
Neither the Fund nor any Affiliate shall submit an Order in any
Auction.
B-47
DIVIDEND RATES AND AUCTION DATES
The Dividend Rate for each Dividend Period will be determined on the
Auction Date in respect of such Dividend Period. If Sufficient Clearing Orders
exist for an Auction, the Dividend Rate for the ensuing Dividend Period will be
the Winning Rate, or, if all shares in the Auction are the subject of Submitted
Hold Orders in respect of a Dividend Period of fewer than 93 days, the Minimum
Applicable Rate. If Sufficient Clearing Orders do not exist for any Auction, the
ensuing Dividend Period will be a Standard Term Period and the Dividend Rate for
that Dividend Period will be the Maximum Applicable Rate. Except in the case of
a default (as discussed above), or where all shares of the relevant series of
ATP are subject to Submitted Holder Orders if there is no Auction on any Auction
Date, the next Dividend Period will be a Standard Term Period and the Dividend
Rate will be the Maximum Applicable Rate that could have resulted from an
Auction in respect of a Standard Term Period on such Auction Date. The Fund is
obligated to exercise its best efforts to maintain an Auction Agent.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
On or prior to each Auction Date and prior to the Submission Deadline
(initially 1:00 p.m., New York City time), each Existing Holder, with respect to
shares it then holds, may submit to a Broker-Dealer by telephone or otherwise a
Hold Order, a Hold/Sell Order or a Sell Order and each Broker-Dealer will
contact Potential Holders to determine the Buy Orders, if any, to be made by
such Potential Holders.
SUBMISSION OF ORDERS TO AUCTION AGENT
Each Order must be submitted in writing by a Broker-Dealer to the
Auction Agent prior to the Submission Deadline on each Auction Date for the
Auction to be conducted on such Auction Date and must specify (A) the name of
the Existing Holder or Potential Holder placing such Order, (B) the aggregate
number of shares that are the subject of such Order, (C) to the extent that such
Orders are placed by an Existing Holder, the number of shares, if any, subject
to any Hold Order, Hold/Sell Order or Sell Order, and (D) the rate, if any,
specified in each Order.
If any rate specified in any Order contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next higher one thousandth of 1%.
If an Order or Orders covering all shares held by any Existing Holder
are not submitted to the Auction Agent by the Submission Deadline, the Auction
Agent will, only in the case of an Auction preceding a Dividend Period of 93
days or fewer and at the conclusion of a Dividend Period of 93 days or fewer,
deem a Hold Order to have been submitted on behalf of such Existing Holder
covering the number of shares held by such Existing Holder and not subject to
Orders submitted to the Auction Agent. If an Order or Orders covering all shares
of ATP held by any Existing Holder are not submitted to the Auction Agent by the
Submission Deadline, the Auction Agent will, in the case of all other Auctions,
deem a Sell Order to have been submitted on behalf of such Existing Holder
covering the number of shares held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
If one or more Orders covering in the aggregate more than the number of
shares of the relevant series of ATP held by an Existing Holder are submitted to
the Auction Agent, such Orders will be valid in accordance with the Validity
Procedures.
If more than one Order is submitted on behalf of any Existing Holder or
Potential Holder, each Order submitted will be a separate Order.
If any rate specified in any Order is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Order is made in the
case of any Dividend Period of 93 days or fewer, such Order will be deemed to be
an Order specifying a rate equal to such Minimum Applicable Rate.
In the case of any Dividend Period of more than 93 days, only Buy
Orders, Hold/Sell Orders or Sell Orders may be submitted and Hold Orders may not
be submitted.
B-48
DETERMINATION OF SUFFICIENT CLEARING ORDERS AND APPLICABLE RATE
Not earlier than the Submission Deadline, on each Auction Date, the
Auction Agent will assemble all Submitted Orders and will determine whether
Sufficient Clearing Orders exist and the Applicable Rate.
ACCEPTANCE OF ORDERS AND ALLOCATION OF SHARES
Based upon the results of the Auction, the Auction Agent will determine
the aggregate number of shares to be held and sold by Existing Holders and to be
purchased by Potential Holders, and, with respect to each Broker-Dealer,
determine the extent to which such Broker-Dealer will deliver, and from which
other Broker-Dealers such Broker-Dealer will receive, shares.
If Sufficient Clearing Orders exist, subject to the Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all
Submitted Hold/Sell Orders specifying any rate higher than the Winning Rate will
be accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate
lower than the Winning Rate will be accepted as Hold Orders;
(iv) all Submitted Buy Orders specifying a rate lower than
the Winning Rate will be accepted;
(v) all Submitted Hold/Sell Orders specifying a rate
equal to the Winning Rate will be accepted as Hold Orders unless the number of
shares subject to all such Submitted Hold/Sell Orders is greater than the number
of shares remaining unaccounted for after the acceptances described in clauses
(i), (iii) and (iv) above, in which event each such Submitted Hold/Sell Order
will be accepted as a Hold Order and a Sell Order as to the respective number of
shares determined in accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to
the Winning Rate will be accepted, unless the number of shares subject to all
such Submitted Buy Orders is greater than the number of shares remaining
unaccounted for after the acceptances described in clauses (i), (iii), (iv) and
(v) above, in which event each such Submitted Buy Order will be accepted only as
to the number of shares determined in accordance with the Proration Procedures.
If Sufficient Clearing Orders do not exist, subject to the Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate
equal to or lower than the Maximum Applicable Rate will be accepted as Hold
Orders;
(iii) all Submitted Buy Orders specifying a rate equal to
or lower than the Maximum Applicable Rate will be accepted; and
(iv) all Submitted Hold/Sell Orders specifying a rate
higher than the Maximum Applicable Rate and all Submitted Sell Orders will be
accepted as Hold Orders and as Sell Orders as to the respective number of shares
of the relevant series of ATP determined in accordance with the Proration
Procedures.
B-49
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will advise each Broker-Dealer that submitted an
Order whether such Order was accepted and of the Applicable Rate for the next
Dividend Period by telephone by approximately 3:00 p.m., New York City time, on
each Auction Date. Each Broker-Dealer that submitted an Order will as soon as
practicable advise each Existing Holder and Potential Holder whether its Order
was accepted and will confirm in writing purchases and sales with each Existing
Holder and Potential Holder purchasing or selling shares as a result of an
Auction as soon as practicable on the Business Day next succeeding the Auction
Date. Each Broker-Dealer that submitted a Hold Order will advise each Existing
Holder on whose behalf such Hold Order was submitted of the Applicable Rate for
the shares of the relevant series of ATP for the next Dividend Period.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales as determined in
the Auction. Purchasers will make payment through their Agent Members in
same-day funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment against delivery to their Agent
Members in same-day funds.
If any Existing Holder selling shares in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
in such Auction may deliver to such person a number of whole shares that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
BROKER-DEALERS; COMMISSIONS
Broker-Dealers which submit Orders for the account of others must be
authorized by law to perform such function. A Broker-Dealer may acquire shares
for its own account. If a Broker-Dealer submits an Order for its own account in
an Auction, it may have an advantage over others because it would have knowledge
of other Orders placed through it in that Auction.
The Auction Agent after each Auction will pay to the Broker-Dealer,
from funds provided by the Fund, a service charge at an annual rate of ________
in the case of any Auction immediately preceding a Dividend Period of less than
one year and, in the case of Dividend Periods of one year or more, a percentage
agreed upon between the Fund and the Broker-Dealer, of the purchase price of
shares placed by the Broker-Dealer at such Auction. For purposes of this
paragraph, shares will be placed by a Broker-Dealer if such shares were (i) the
subject of Hold Orders deemed to have been made by Existing Holders and were
acquired by such Existing Holders through the Broker-Dealer or (ii) the subject
of an Order submitted by the Broker-Dealer that is (A) a Submitted Order of an
Existing Holder that resulted in such Existing Holder continuing to hold such
shares as a result of the Auction or (B) a Submitted Order of a Potential Holder
that resulted in such Potential Holder purchasing such shares as a result of the
Auction or (C) a valid Hold Order. In the event an Auction scheduled to occur on
an Auction Date fails to occur for any reason, Broker-Dealers will be entitled
to service charges as if the Auction had occurred and all holders of shares
placed by them submitted valid Hold Orders.
THE AUCTION AGENT
Deutsche Bank Trust Company Americas, as successor to Bankers Trust
Company, serves as Auction Agent with respect to the ATP and intends to serve
as the Auction Agent for the newly issued shares of ATP Series C. The Auction
Agent is acting solely as agent of the Fund and is not a trustee for holders of
ATP Series C. In the absence of bad faith or gross negligence on its part, the
Auction Agent will not be liable for any action taken, suffered or omitted or
for any error of judgment made by it in the performance of its duties as Auction
Agent.
B-50
The Auction Agent may resign upon notice to the Fund, such resignation
to be effective on the earlier of the 90th day after the delivery of such notice
and the date on which a successor Auction Agent is appointed by the Fund. The
Fund may also replace the Auction Agent.
FINANCIAL STATEMENTS
The Fund will furnish upon request, without charge, a copy of its
Annual Report and Semi-Annual Report. If you would like a free copy of the
Annual Report or the Semi-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 (617) 263-6400.
B-51
The New America High Income Fund, Inc.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2002 (Dollar Amounts in Thousands)
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- 172.55% (d)
AEROSPACE AND DEFENSE -- 1.17%
$ 1,600 Sequa Corporation, Senior Notes,
9%, 08/01/09 Ba3 $ 1,536
----------
AUTOMOBILE -- 5.00%
4,000 Accuride Corporation, Senior
Subordinated Notes,
9.25%, 02/01/08 Caa1 2,320
890 CSK Auto, Inc., Senior Notes,
12%, 06/15/06 B2 952
81 CSK Auto, Inc., Senior
Subordinated Notes,
11%, 11/01/06 B3 83
165 Cummins, Inc., Senior Notes,
9.50% 12/01/10 (g) Ba2 175
375 Dana Corporation, Notes
9%, 08/15/11 Ba3 363
395 Dana Corporation, Senior Notes,
10.125%, 03/15/10 Ba3 401
1,585 Dura Operating Corporation,
Senior Notes,
8.625%, 04/15/12 B1 1,601
690 Navistar International Corporation,
Senior Notes,
9.375%, 06/01/06 Ba3 662
----------
6,557
----------
BANKING -- 1.46%
1,670 People's Bank, Bridgeport, CT,
Subordinated Notes,
9.875% 11/15/10 Baa3 1,919
----------
BEVERAGE, FOOD AND TOBACCO -- 2.92%
1,050 Agrilink Foods, Inc., Senior
Subordinated Notes,
11.875%, 11/01/08 B3 1,129
1,200 B&G Foods, Inc., Senior
Subordinated Notes,
9.625%, 08/01/07 B3 1,236
1,500 Smithfield Foods, Inc., Senior
Subordinated Notes,
7.625%, 02/15/08 Ba3 1,470
----------
3,835
----------
BROADCASTING AND ENTERTAINMENT -- 17.49%
600 ACME Televison, LLC, Senior
Discount Notes,
10.875%, 09/30/04 B3 612
$ 720 Corus Entertainment Inc., Senior
Subordinated Notes,
8.75%, 03/01/12 B1 $ 763
950 CSC Holdings, Inc., Senior Notes,
7.625%, 04/01/11 B1 895
2,940 EchoStar DBS Corporation,
Senior Notes,
9.125%, 01/15/09 B1 3,072
225 EchoStar DBS Corporation,
Senior Notes,
10.375%, 10/01/07 B1 242
430 Entravision Communications Corp.,
Senior Subordinated Notes,
8.125%, 03/15/09 B3 447
3,450 Insight Midwest, L.P., Senior Notes,
9.75%, 10/01/09 B2 3,260
1,500 Insight Midwest, L.P., Senior Notes,
10.50%, 11/01/10 B2 1,455
1,500 Lamar Media Corporation, Senior
Subordinated Notes,
7.25%, 01/01/13 (g) Ba3 1,522
3,400 Mediacom Broadband LLC,
Senior Notes,
11%, 07/15/13 B2 3,434
1,955 Rogers Communications, Inc.,
Senior Notes,
8.875%, 07/15/07 Ba1 1,857
675 Salem Communications Holding
Corporation, Senior
Subordinated Notes,
7.75%, 12/15/10 B3 675
1,200 Sinclair Broadcasting Group, Inc.,
Senior Subordinated Notes,
8.75%, 12/15/11 B2 1,284
1,500 Time Warner Companies, Inc.,
Senior Notes,
9.125%, 01/15/13 Baa1 1,725
1,698 Young Broadcasting Inc., Senior
Subordinated Notes,
10%, 03/01/11 B3 1,698
----------
22,941
----------
BUILDING AND REAL ESTATE -- 6.73%
500 Associated Materials Incorporated,
Senior Subordinated Notes,
9.75%, 04/15/12 B3 525
The accompanying notes are an integral
part of these financial statements.
B-52
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 2,200 Beazer Homes USA, Inc.,
Senior Notes,
8.875%, 04/01/08 Ba2 $ 2,277
1,500 D.R. Horton, Inc., Senior Notes,
8%, 02/01/09 Ba1 1,500
1,750 The Ryland Group, Inc., Senior
Subordinated Notes,
8.25%, 04/01/08 Ba3 1,776
2,000 Standard Pacific Corp., Senior Notes,
8%, 02/15/08 Ba2 2,000
750 Standard Pacific Corp., Senior Notes,
8.50%, 06/15/07 Ba2 754
----------
8,832
----------
CARGO TRANSPORTATION -- 2.12%
2,530 The Kansas City Southern Railway
Company, Senior Notes,
9.50%, 10/01/08 Ba2 2,783
----------
CHEMICALS, PLASTICS AND RUBBER -- 11.77%
260 American Pacific Corporation,
Senior Notes,
9.25%, 03/01/05 B2 265
3,400 ARCO Chemical Company,
Debentures,
9.80%, 02/01/20 Ba3 2,788
1,040 Buckeye Cellulose Corp., Senior
Subordinated Notes,
8.50%, 12/15/05 Caa1 946
125 Compass Minerals Group, Inc.,
Guaranteed Senior
Subordinated Notes,
10%, 08/15/11 B3 137
2,175 Hercules Incorporated,
Senior Notes,
11.125%, 11/15/07 Ba2 2,425
2,000 IMC Global Inc., Senior Notes,
11.25%, 06/01/11 Ba2 2,170
1,525 Koppers Industries, Inc., Senior
Subordinated Notes,
9.875%, 12/01/07 B2 1,372
2,620 Lyondell Chemical Company,
Senior Subordinated Notes,
10.875%, 05/01/09 B2 2,214
$ 2,330 Resolution Performance
Products LLC, Senior
Subordinated Notes,
13.50%, 11/15/10 B3 $ 2,458
575 Salt Holdings Corporation, Senior
Discount Notes,
12.75%, 12/15/12 (g)(h) (e) 310
460 UCAR Finance Inc.,
Senior Notes,
10.25%, 02/15/12 B3 359
----------
15,444
----------
CONTAINERS, PACKAGING AND GLASS -- 10.33%
500 BWAY Corporation, Senior
Subordinated Notes,
10%, 10/15/10 (g) B3 519
415 Graphic Packaging Corp.,
Senior Subordinated Notes,
8.625%, 02/15/12 B2 438
460 MDP Acquisitions Plc, Senior Notes,
9.625%, 10/01/12 (g) B2 481
2,000 Owens-Brockway Glass
Container, Inc., Senior
Secured Notes,
8.875%, 02/15/09 B2 2,050
1,000 Owens-lllinois, Inc., Senior Notes,
7.85%, 05/15/04 B3 985
865 Paperboard Industries
International Inc.,
Senior Notes,
8.375%, 09/15/07 B2 830
1,700 Plastipak Holdings, Inc.,
Senior Notes,
10.75%, 09/01/11 B3 1,794
3,000 Silgan Corporation, Senior
Subordinated Debentures,
9%, 06/01/09 B1 3,120
550 Smurfit Capital Funding Plc,
Senior Notes,
6.75%, 11/20/05 Ba3 558
1,400 Stone Container Corporation,
Senior Notes,
8.375%, 07/01/12 B2 1,435
1,265 Stone Container Corporation,
Senior Notes,
9.25%, 02/01/08 B2 1,341
----------
13,551
----------
The accompanying notes are an integral
part of these financial statements.
B-53
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 5.83%
$ 575 Actuant Financial Corporation,
Senior Subordinated Notes,
13%, 05/01/09 B2 $ 673
275 AGCO Corporation, Senior Notes,
9.50%, 05/01/08 Ba3 297
475 The Manitowoc Company, Inc., Senior
Subordinated Notes,
10.50%, 08/01/12 (g) B2 494
420 Numatics, Incorporated, Senior
Subordinated Notes,
9.625%, 04/01/08 Caa2 189
625 SPX Corporation, Senior Notes,
7.50%, 01/01/13 Ba3 633
1,175 Trimas Corporation, Senior
Subordinated Notes,
9.875%, 06/15/12 (g) B3 1,163
195 Tyco International Group, S.A.,
Senior Notes,
5.80%, 08/01/06 Ba2 182
720 Tyco International Group, S.A.,
Senior Notes,
6.125%, 01/15/09 Ba2 659
360 Tyco International Group, S.A.,
Senior Notes,
6.375%, 02/15/06 Ba2 340
2,865 Tyco International Group, S.A.,
Senior Notes,
6.375%, 10/15/11 Ba2 2,679
360 Tyco International Group, S.A.,
Senior Notes,
6.75%, 02/15/11 Ba2 333
----------
7,642
----------
DIVERSIFIED/CONGLOMERATE SERVICE -- 1.14%
275 Brickman Group Ltd., Senior
Subordinated Notes,
11.75%, 12/15/09 (g) B2 287
1,500 United Rentals (North America), Inc.,
Senior Subordinated Notes,
9%, 04/01/09 B2 1,208
----------
1,495
----------
DIVERSIFIED NATURAL RESOURCES, METALS AND MINERALS -- 2.66%
2,300 Georgia Pacific Corporation, Notes,
9.50%, 12/01/11 Ba1 2,254
$ 350 Longview Fibre Company, Senior
Subordinated Notes,
10%, 01/15/09 B2 $ 368
825 National Waterworks, Inc., Senior
Subordinated Notes
10.50%, 12/01/12 (g) B3 866
----------
3,488
----------
ECOLOGICAL -- .77%
1,000 Allied Waste North America, Inc.,
Senior Notes,
8.50%, 12/01/08 Ba3 1,005
----------
ELECTRONICS -- 11.74%
4,000 Amkor Technology, Senior Notes,
9.25%, 05/01/06 B1 3,480
950 Amkor Technology, Senior
Subordinated Notes,
10.50%, 05/01/09 B3 741
150 Avaya Inc., Senior Secured Notes,
11.125%, 04/01/09 B2 138
575 Chippac International Ltd., Senior
Subordinated Notes, Series B,
12.75%, 08/01/09 B3 604
1,145 Fairchild Semiconductor Corporation,
Senior Subordinated Notes,
10.375%, 10/01/07 B2 1,202
875 Fairchild Semiconductor Corporation,
Senior Subordinated Notes,
10.50%, 02/01/09 B2 949
1,125 IPC Acquisition Corporation,
Senior Subordinated Notes,
11.50%, 12/15/09 B3 990
2,725 Lucent Technologies, Inc., Notes,
5.50%, 11/15/08 Caa1 1,335
450 Sanmina-SCI Corporation,
Senior Secured Notes,
10.375%, 01/15/10 (g) Ba2 455
4,705 SCG Holding Corporation, Senior
Subordinated Notes,
12%, 08/01/09 Caa1 1,929
1,875 Solectron Corporation, Senior Notes,
9.625%, 02/15/09 Ba3 1,828
2,175 WESCO Distribution, Inc., Senior
Subordinated Notes,
9.125%, 06/01/08 B3 1,740
----------
15,391
----------
The accompanying notes are an integral
part of these financial statements.
B-54
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
FINANCE -- .38%
$ 630 Fairfax Financial Holdings, Ltd., Notes,
7.375%, 03/15/06 Ba3 $ 504
----------
FURNISHINGS, HOUSEWARES, DURABLE CONSUMER PRODUCTS -- .48%
575 Simmons Company, Senior
Subordinated Notes,
10.25%, 03/15/09 B2 624
----------
GROCERY STORES -- .74%
950 Winn-Dixie Stores, Inc., Senior Notes,
8.875%, 04/01/08 Ba2 969
----------
HEALTHCARE, EDUCATION AND CHILDCARE -- 12.16%
640 Advanced Medical Optics Inc.,
Senior Subordinated Notes,
9.25%, 07/15/10 B3 659
1,500 Alaris Medical Systems, Inc.,
Senior Secured Notes
11.625%, 12/01/06 B2 1,695
785 Alaris Medical Systems, Inc.,
Senior Subordinated Notes,
9.75%, 12/01/06 Caa1 793
565 AmerisourceBergen Corporation,
Senior Notes,
7.25%, 11/15/12 (g) Ba3 581
3,125 Athena Neurosciences Financial,
Senior Notes,
7.25%, 02/21/08 Caa2 1,687
2,000 Beverly Enterprises, Inc.,
Senior Notes,
9%, 02/15/06 B1 1,700
1,000 Bio-Rad Laboratories, Inc.,
Senior Subordinated Notes,
11.625%, 02/15/07 B2 1,105
75 Concentra Operating Corporation,
Senior Subordinated Notes,
13%, 08/15/09 B3 76
1,150 CONMED Corporation, Senior
Subordinated Notes,
9%, 03/15/08 B2 1,196
405 HealthSouth Corporation,
Senior Notes,
8.50%, 02/01/08 Ba3 350
945 HealthSouth Corporation,
Senior Notes,
7.375%, 10/01/06 Ba3 817
$ 1,420 NDC Health Corporation, Senior
Subordinated Notes,
10.50%, 12/01/12 (g) (e) $ 1,424
2,815 Radiologix Inc., Senior Notes,
10.50%, 12/15/08 B2 2,196
380 Sybron Dental Specialities, Senior
Subordinated Notes,
8.125%, 06/15/12 B2 384
725 Total Renal Care, Inc.,
Subordinated Convertible Notes,
7%, 05/15/09 B2 719
275 Triad Hospitals Holdings, Inc.,
Senior Notes,
8.75%, 05/01/09 B1 294
250 Triad Hospitals Holdings, Inc.,
Senior Subordinated Notes,
11%, 05/15/09 B2 276
----------
15,952
----------
HOTELS, MOTELS, INNS AND GAMING -- 16.24%
1,500 Ameristar Casinos, Inc., Senior
Subordinated Notes,
10.75%, 02/15/09 B3 1,635
575 Coast Hotels and Casinos, Inc.,
Senior Subordinated Notes,
9.50%, 04/01/09 B2 611
75 Courtyard By Marriott II Limited
Partnership, Senior Notes,
10.75%, 02/01/08 B1 76
1,825 John Q. Hammons Hotels, L.P.,
First Mortgage Notes,
8.875%, 05/15/12 B2 1,839
775 Hard Rock Hotel, Inc., Senior
Subordinated Notes,
9.25%, 04/01/05 Caa1 787
1,575 Harrah's Operating Company, Inc.,
Guaranteed Senior Notes,
8%, 02/01/11 Baa3 1,816
1,000 Harrah's Operating Company, Inc.,
Guaranteed Senior
Subordinated Notes,
7.875%, 12/15/05 Ba1 1,067
180 Host Marriott, L.P., Senior Notes,
9.25%, 10/01/07 Ba3 181
The accompanying notes are an integral
part of these financial statements.
B-55
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 2,215 Host Marriott,L.P., Senior Notes,
9.50%, 01/15/07 Ba3 $ 2,248
1,750 MGM Mirage, Senior Secured Notes,
8.50%, 09/15/10 Ba1 1,925
1,650 Penn National Gaming, Inc.,
Senior Subordinated Notes,
11.125%, 03/01/08 B3 1,799
2,300 Riviera Holdings Corporation,
Senior Secured Notes,
11%, 06/15/10 B2 2,070
600 Starwood Hotels & Resorts
Worldwide Inc., Senior Notes
7.375%, 05/01/07 Ba1 592
2,200 Station Casinos, Inc., Senior
Subordinated Notes,
8.875%, 12/01/08 B2 2,293
400 Turning Stone Casino Resorts
Enterprise, Senior Notes
9.125%, 12/15/10 (g) B1 410
1,875 Venetian Casino Resort, LLC,
Second Mortgage Notes,
11%, 06/15/10 Caa1 1,959
----------
21,308
----------
LEISURE, AMUSEMENT AND ENTERTAINMENT -- 2.51%
825 Hasbro Inc., Notes,
6.15%, 07/15/08 Ba3 792
1,600 Icon Health and Fitness Inc.,
Senior Subordinated Notes,
11.25%, 04/01/12 B3 1,392
350 Speedway Motorsports, Inc.,
Senior Subordinated Notes,
8.50%, 08/15/07 Ba2 366
700 TravelCenters of America, Inc.,
Senior Subordinated Notes,
12.75%, 05/01/09 B3 742
----------
3,292
----------
MACHINERY -- 3.26%
1,450 Case Corporation, Notes,
7.25%, 08/01/05 Ba2 1,218
675 Terex Corporation, Senior
Subordinated Notes,
10.375%, 04/01/11 B3 635
$ 2,375 Universal Compression, Inc.,
Senior Discount Notes,
9.875%, 02/15/08 (h) B1 $ 2,422
----------
4,275
----------
MINING, STEEL, IRON AND NON-PRECIOUS METALS -- 4.70%
1,195 AK Steel Corporation, Senior Notes,
7.75%, 06/15/12 (g) B1 1,204
650 AK Steel Corporation, Senior Notes,
7.875%, 02/15/09 B1 657
1,800 Century Aluminum Company, Senior
Secured First Mortgage Notes,
11.75%, 04/15/08 Ba3 1,746
1,500 Russel Metals, Inc.,
Senior Notes, Units,
10%, 06/01/09 B1 1,586
255 Steel Dynamics, Inc., Senior Notes,
9.50%, 03/15/09 B2 268
600 United States Steel Corporation,
Senior Notes,
10.75%, 08/01/08 Ba3 591
1,100 Weirton Steel Corporation, Senior
Secured Notes,
10%, 04/01/08 (b) Caa3 110
----------
6,162
----------
OIL AND GAS -- 12.81%
3,500 Clark Refining & Marketing, Inc.,
Senior Notes,
8.375%, 11/15/07 Ba3 3,360
875 Dresser, Inc., Senior
Subordinated Notes,
9.375%, 04/15/11 B2 884
975 Energy Corporation of America,
Senior Subordinated Notes,
9.50%, 05/15/07 Caa3 566
1,275 Ferrellgas Partners L.P., Senior Notes,
8.75%, 06/15/12 B2 1,320
1,455 Forest Oil Corporation, Senior Notes,
8%, 06/15/08 Ba3 1,535
1,000 Forest Oil Corporation, Senior Notes,
8%, 12/15/11 Ba3 1,055
1,650 Giant Industries, Inc., Senior
Subordinated Notes,
11%, 05/15/12 B3 1,122
The accompanying notes are an integral
part of these financial statements.
B-56
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 750 Magnum Hunter Resources, Inc.,
Senior Notes,
9.60%, 03/15/12 B2 $ 795
2,000 Pioneer Natural Resources
Company, Senior Notes,
9.625%, 04/01/10 Ba1 2,330
1,400 Plains Exploration & Production
Co., L.P., Senior
Subordinated Notes,
8.75%, 07/01/12 (g) B2 1,456
2,650 Tesoro Petroleum Corporation,
Senior Subordinated Notes,
9.625%, 04/01/12 B3 1,723
580 Tesoro Petroleum Corporation,
Senior Subordinated Notes,
9.625%, 11/01/08 B3 371
275 Westport Resources Corporation,
Senior Subordinated Notes,
8.25%, 11/01/11 (g) Ba3 287
----------
16,804
----------
PERSONAL, FOOD AND MISCELLANEOUS SERVICES -- .90%
1,125 The Coinmach Corporation,
Senior Notes,
9%, 02/01/10 B2 1,181
----------
PERSONAL NON-DURABLE CONSUMER PRODUCTS -- 3.00%
2,500 Corning Consumer Products
Company, Senior
Subordinated Notes,
9.625%, 05/01/08 (a)(b) (e) 125
275 JohnsonDiversey, Inc., Senior
Subordinated Notes,
9.625%, 05/15/12 (g) B2 289
1,400 Jostens, Inc., Senior
Subordinated Notes,
12.75%, 05/01/10 B3 1,589
1,775 Playtex Products, Inc., Senior
Subordinated Notes,
9.375%, 06/01/11 B2 1,935
----------
3,938
----------
PERSONAL TRANSPORTATION -- 4.50%
3,440 Air Canada, Senior Notes,
10.25%, 03/15/11 B3 1,926
$ 2,000 Atlas Air, Inc., Senior Notes,
10.75%, 08/01/05 Caa1 $ 440
3,175 Delta Air Lines, Inc., Notes,
7.90%, 12/15/09 Ba3 2,159
325 Delta Air Lines, Inc., Notes,
10.375%, 02/01/11 Ba3 221
335 Northwest Airlines, Inc. Notes,
9.875%, 03/15/07 B2 214
1,500 Northwest Airlines, Inc., Senior Notes,
8.875, 06/01/06 B2 945
----------
5,905
----------
PRINTING AND PUBLISHING -- 11.47%
1,975 K III Communications Corporation,
Senior Notes,
8.50%, 02/01/06 B3 1,847
1,560 Mail-Well I Corp., Senior Notes,
9.625%, 03/15/12 B1 1,373
4,900 Quebecor Media Inc., Senior Notes,
11.125%, 07/15/11 B2 4,508
1,845 R.H. Donnelley, Inc.,
Senior Subordinated Notes,
10.875%, 12/15/12 (g) B2 2,011
2,150 Von Hoffman Corporation, Senior Notes,
10.25%, 03/15/09 B2 2,043
3,155 World Color Press, Inc., Senior
Subordinated Notes,
8.375%, 11/15/08 Baa2 3,259
----------
15,041
----------
RETAIL STORES -- 1.94%
1,400 Gap Inc., Notes,
10.55%, 12/15/08 Ba3 1,533
1,000 J.C. Penney Company, Inc., Notes,
7.60%, 04/01/07 Ba3 1,005
----------
2,538
----------
TELECOMMUNICATIONS -- 7.85%
1,025 AT&T Wireless Services, Inc.,
Senior Notes,
7.875%, 03/01/11 Baa2 1,025
4,500 NEXTEL Communications Inc.,
Senior Notes,
9.50%, 02/01/11 B3 4,117
2,322 Qwest Services Corporation, Senior
Subordinated Notes,
13.50%, 12/15/10 (g) (e) 2,438
The accompanying notes are an integral
part of these financial statements.
B-57
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 1,000 Rogers Wireless Inc., Senior
Secured Notes,
8.30%, 10/01/07 Ba3 $ 910
275 Rogers Wireless Inc., Senior
Secured Notes,
9.625%, 05/01/11 Ba3 257
125 Rogers Wireless Inc., Senior
Subordinated Notes,
8.80%, 10/01/07 B2 106
450 Tritel PCS, Inc., Senior
Subordinated Notes,
10.375%, 01/15/11 Baa2 477
825 Triton PCS, Inc., Senior
Subordinated Discount Notes,
11%, 05/01/08 (h) B3 710
390 US West Capital
Funding Inc., Notes,
6.375%, 07/15/08 Caa2 254
----------
10,294
----------
TEXTILES AND LEATHER -- 3.22%
775 Interface, Inc., Senior Notes,
7.30%, 04/01/08 B2 659
3,100 Levi Strauss & Co., Senior Notes,
11.625%, 01/15/08 Caa1 3,007
575 Levi Strauss & Co., Senior Notes,
12.25%, 12/15/12 (g) B3 564
----------
4,230
----------
UTILITIES -- 5.26%
1,820 Avista Corporation, Senior Notes,
9.75%, 06/01/08 Ba1 1,784
1,515 Calpine Corporation, Senior Notes,
8.625% 08/15/10 B1 667
1,850 Mirant Americas Generation, LLC,
Senior Notes,
7.20%, 10/01/08 Ba3 833
775 TNP Enterprises, Inc., Senior
Subordinated Notes,
10.25%, 04/01/10 Ba3 728
2,500 Western Resources, Inc.,
Senior Notes,
7.125%, 8/01/09 Ba2 1,975
$ 1,000 Western Resources, Inc.,
Senior Notes,
9.75%, 05/01/07 Ba2 $ 910
----------
6,897
----------
TOTAL CORPORATE DEBT SECURITIES
(Total cost of $245,127) 226,333
----------
SHARES
--------------------------------------------------------------------------------
PREFERRED STOCK-- 2.46% (d)
BANKING - 0.00%
57,935 WestFed Holdings, Inc., Cumulative,
Series A, Preferred Stock,
15.50% (a)(c)(f) (e) $ --
----------
BROADCASTING AND ENTERTAINMENT -- 2.45%
34,300 CSC Holdings, Inc.,
Preferred Stock B3 3,207
----------
MINING, STEEL, IRON, NON-PRECIOUS METALS -- 0.01%
18,000 Weirton Steel Corp., Series C
Preferred Stock (f) (e) 18
----------
TOTAL PREFERRED STOCK
(Total cost of $8,222) 3,225
----------
COMMON STOCK -- 0.00% (d)
4,780 Mediq Inc. Common Stock (a)(c)(f) --
27,474 WestFed Holdings, Inc., Series B,
Common Stock (a)(c)(f) --
----------
TOTAL COMMON STOCK
(Total cost of $2,596) --
----------
PRINCIPAL
AMOUNT
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.53% (d)
$ 3,325 Ciesco, L.P., Commercial Paper,
due 01/02/03,
Discount of 1.22% P-1 3,325
----------
TOTAL SHORT-TERM INVESTMENTS
(Total cost of $3,325) 3,325
----------
TOTAL INVESTMENTS
(Total cost of $259,270) $ 232,883
==========
The accompanying notes are an integral
part of these financial statements.
B-58
(a) Denotes issuer is in bankruptcy proceedings.
(b) Non-income producing security which is on non-accrual and/or has defaulted
on interest payments.
(c) Security is valued at fair value using methods determined by the Board of
Directors. The total value of these securities at December 31, 2002 was $0.
(d) Percentages indicated are based on total net assets to common shareholders
of $131,170.
(e) Not rated.
(f) Non-income producing.
(g) Securities are exempt from registration under Rule 144A of the Securities
Act of 1933. Such securities may be resold, normally to qualified
institutional buyers in transactions exempt from registration. See Note 1(a)
of the Notes to Financial Statements for vaulation policy. Total market
value of Rule 144A securities amounted to $16,936 as of December 31, 2002.
(h) Securities are step interest bonds. Interest on these bonds accrue based on
the effective interest rate.
The accompanying notes are an integral
part of these financial statements.
B-59
The New America High Income Fund, Inc.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
ASSETS: (Dollars in thousands, except per share amounts)
INVESTMENTS IN SECURITIES, at value (Identified
cost of $259,270 see Schedule of Investments
and Notes 1 and 2) $ 232,883
RECEIVABLES:
Investment securities Sold 450
Interest and dividends 5,892
PREPAID EXPENSES 31
-----------
Total assets $ 239,256
-----------
LIABILITIES:
PAYABLES:
Dividend on common stock $ 749
Dividend on preferred stock 43
INTEREST RATE SWAP, at fair value (Note 6) 6,768
ACCRUED EXPENSES (Note 3) 526
-----------
Total liabilities $ 8,086
-----------
AUCTION TERM PREFERRED STOCK:
$1.00 par value, 1,000,000 shares authorized,
4,000 shares issued and outstanding,
liquidation preference of $25,000 per share
(Notes 4 and 5) $ 100,000
-----------
NET ASSETS $ 131,170
===========
REPRESENTED BY:
COMMON STOCK:
$0.01 par value, 200,000,000 shares authorized,
69,548,153 shares issued and outstanding $ 695
CAPITAL IN EXCESS OF PAR VALUE 340,125
UNDISTRIBUTED NET INVESTMENT INCOME
(Note 2) 351
ACCUMULATED NET REALIZED LOSS FROM
SECURITIES TRANSACTIONS (Note 2) (176,846)
NET UNREALIZED DEPRECIATION ON
INVESTMENTS AND INTEREST RATE SWAPS (33,155)
-----------
Net assets applicable to common stock
(Equivalent to $1.89 per share, based on
69,548,153 shares outstanding) $ 131,170
===========
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2002
INVESTMENT INCOME: (Note 1) (Dollars in thousands)
Interest income $ 27,320
Other income 276
Dividend income 95
-----------
Total investment income $ 27,691
-----------
EXPENSES:
Cost of leverage:
Preferred and auction fees (Note 5) $ 278
-----------
Total cost of leverage $ 278
-----------
Professional services expenses:
Management fees (Note 3) $ 686
Legal fees 316
Custodian and transfer agent fees 240
Computer systems upgrade expense 101
Audit fees 77
-----------
Total professional services expenses $ 1,420
-----------
Administrative expenses:
General administrative fees $ 435
Directors' fees 212
NYSE fees 68
Miscellaneous expenses 64
Shareholder communications expenses 37
-----------
Total administrative expenses $ 816
-----------
Total expenses $ 2,514
-----------
Net investment income $ 25,177
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENT ACTIVITIES:
Realized loss on investments and interest rate
swap agreements $ (45,362)
-----------
Net swap settlement disbursements (Note 6) $ (2,851)
-----------
Change in net unrealized depreciation
on investments $ 3,926
Change in unrealized depreciation
on interest rate swap agreement (8,290)
-----------
Total change in net unrealized depreciation
on investments and interest rate swap $ (4,364)
-----------
Net loss on investments and interest rate swap $ (52,577)
-----------
COST OF PREFERRED LEVERAGE
Distributions to preferred stockholders $ (2,530)
-----------
Net decrease in net assets resulting from operations $ (29,930)
===========
The accompanying notes are an integral
part of these financial statements.
B-60
The New America High Income Fund, Inc.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
2002 2001
----------- ----------
FROM OPERATIONS: (Dollars in thousands, except per share amounts)
Net investment income $ 25,177 $ 32,459
Realized loss on investments, net (45,362) (67,922)
Net swap settlement disbursements (2,851) (1,327)
Change in net unrealized depreciation on investments and other
financial instruments (4,364) 51,137
Distributions from net investment income related to preferred stock
Dividends to preferred stockholders ($488 and $1,057 per preferred share in
2002 and 2001, respectively) (2,530) (6,652)
----------- ----------
Net increase (decrease) in net assets resulting from operations $ (29,930) $ 7,695
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Net asset value of 1,215,044 shares and 1,064,683 shares issued to common
stockholders for reinvestment of dividends in 2002 and 2001, respectively $ 2,710 $ 3,043
----------- ----------
Increase in net assets resulting from fund share transactions $ 2,710 $ 3,043
----------- ----------
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
From net investment income ($.29 and $.36 per share in 2002 and 2001,
respectively) $ (19,841) $ (24,435)
----------- ----------
Total net decrease in net assets $ (47,061) $ (13,697)
----------- ----------
NET ASSETS APPLICABLE TO COMMON STOCK:
Beginning of period $ 178,231 $ 191,928
----------- ----------
End of period (Including $351 and $317 of undistributed net investment
income at December 31, 2002 and December 31, 2001, respectively) $ 131,170 $ 178,231
=========== ==========
The accompanying notes are an integral
part of these financial statements.
B-61
The New America High Income Fund, Inc.
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD
FOR THE YEARS ENDED DECEMBER 31,
2002 2001(c) 2000 1999 1998(b) 1997(b)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE:
Beginning of period $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03 $ 4.94
-------- -------- -------- -------- -------- --------
NET INVESTMENT INCOME .37 .48 .60 .66 .71# .70#
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
OTHER FINANCIAL INSTRUMENTS (.72) (.24) (1.00) (.30) (.81)# .25#
DISTRIBUTIONS FROM NET INVESTMENT INCOME
RELATED TO PREFERRED STOCK: (.08) (.12) (.18) (.18) (.17) (.16)
-------- -------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS (.43) .12 (.58) .18 (.27) .79
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income (.29) (.36) (.43) (.48) (.54) (.53)
In excess of net investment income -- -- -- -- -- (.01)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (.29) (.36) (.43) (.48) (.54) (.54)
-------- -------- -------- -------- -------- --------
Effect of rights offering and related expenses;
and Auction Term Preferred Stock offering
costs and sales load -- -- -- -- (.06) (.16)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE:
End of period $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03
======== ======== ======== ======== ======== ========
PER SHARE MARKET VALUE:
End of period $ 2.01 $ 2.64 $ 2.63 $ 3.13 $ 4.25 $ 5.63
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+ (12.97)% 13.97% (3.84)% (16.92)% (15.15)% 21.97%
======== ======== ======== ======== ======== ========
The accompanying notes are an integral
part of these financial statements.
B-62
FOR THE YEARS ENDED DECEMBER 31,
2002 2001(c) 2000 1999 1998(b) 1997(b)
--------- --------- --------- --------- --------- ---------
NET ASSETS, END OF PERIOD, APPLICABLE
TO COMMON STOCK (a) $ 131,170 $ 178,231 $ 191,928 $ 258,215 $ 273,518 $ 243,625
========= ========= ========= ========= ========= =========
NET ASSETS, END OF PERIOD, APPLICABLE
TO PREFERRED STOCK (a) $ 100,000 $ 150,000 $ 160,000 $ 210,000 $ 210,000 $ 150,000
========= ========= ========= ========= ========= =========
TOTAL NET ASSETS APPLICABLE
TO COMMON AND PREFERRED STOCK,
END OF PERIOD (a) $ 231,170 $ 328,231 $ 351,928 $ 468,215 $ 483,518 $ 393,625
========= ========= ========= ========= ========= =========
EXPENSE RATIOS:
Ratio of preferred and other debt
expenses to average net assets* .18% .17% .19% .18% .14% .13%
Ratio of operating expenses to average
net assets* 1.46% 1.11% .99% .89% .82% .92%
--------- --------- --------- --------- --------- ---------
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS* 1.64% 1.28% 1.18% 1.07% .96% 1.05%
========= ========= ========= ========= ========= =========
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS* 16.48% 16.70% 17.46% 16.36% 15.22% 13.86%
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS APPLICABLE TO COMMON
AND PREFERRED STOCK .89% .71% .64% .60% .58% .66%
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% 8.75%
PORTFOLIO TURNOVER RATE 82.47% 38.89% 45.58% 66.74% 124.67% 108.84%
(a) Dollars in thousands.
(b) The Fund issued 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, 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 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.
The accompanying notes are an integral
part of these financial statements.
B-63
The New America High Income Fund, Inc.
INFORMATION REGARDING
SENIOR SECURITIES
AS OF DECEMBER 31,
2002 2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
TOTAL AMOUNT OUTSTANDING:
Preferred Stock $ 100,000,000 $ 150,000,000 $ 160,000,000 $ 210,000,000 $ 210,000,000 $ 150,000,000
ASSET COVERAGE:
Per Preferred Stock Share (1) $ 57,793 $ 54,705 $ 54,989 $ 55,740 $ 57,562 $ 65,604
INVOLUNTARY LIQUIDATION PREFERENCE:
Preferred Stock Share (2) $ 25,000 $ 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 $ 25,000
(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.
The accompanying notes are an integral
part of these financial statements.
B-64
The New America High Income Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
(1) SIGNIFICANT ACCOUNTING AND OTHER POLICIES
The New America High Income Fund, Inc. (the Fund) was organized as a
corporation in the state of Maryland on November 19, 1987 and is registered with
the Securities and Exchange Commission as a diversified, closed-end investment
company under the Investment Company Act of 1940. The Fund commenced operations
on February 26, 1988. The investment objective of the Fund is to provide high
current income while seeking to preserve stockholders' capital through
investment in a professionally managed, diversified portfolio of "high yield"
fixed-income securities.
The Fund invests primarily in fixed maturity corporate debt securities that
are rated less than investment grade. Risk of loss upon default by the issuer is
significantly greater with respect to such securities compared to investment
grade securities because these securities are generally unsecured and are often
subordinated to other creditors of the issuer and because these issuers usually
have high levels of indebtedness and are more sensitive to adverse economic
conditions, such as a recession, than are investment grade issuers. In some
cases, the collection of principal and timely receipt of interest is dependent
upon the issuer attaining improved operating results, selling assets or
obtaining additional financing.
See the schedule of investments for information on individual securities as
well as industry diversification and credit quality ratings.
The Fund's financial statements have been prepared in conformity with
generally accepted accounting principles in the United States that require the
management of the Fund to, among other things, make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted in
the investment company industry.
(a) VALUATION OF INVESTMENTS--Investments for which market quotations are
readily available are stated at market value, which is determined by using the
most recently quoted bid price provided by an independent pricing service or
principal market maker. Independent pricing services provide market quotations
based primarily on quotations from dealers and brokers, market transactions,
accessing data from quotations services, offering sheets obtained from dealers
and various relationships between securities. Short-term investments having
maturities of 60 days or less are stated at amortized cost, which approximates
market value. Following procedures approved by the Board of Directors,
investments for which market quotations are not readily available (primarily
fixed-income corporate bonds and notes) are stated at fair value on the basis of
subjective valuations furnished by securities dealers and brokers. Other
investments, with a cost of approximately $7,514,000 and a value of $0, are
valued in good faith at fair market value using methods determined by the Board
of Directors.
(b) INTEREST AND DIVIDEND INCOME--Interest income is accrued on a daily
basis. Discount on short-term investments is amortized to investment income.
Premiums or discounts on corporate debt securities are amortized based on the
interest method for financial reporting purposes. All income on original issue
discount and step interest bonds is accrued based on the effective interest
method for tax reporting purposes as required by federal income tax regulations.
The Fund does not amortize market premiums or discounts for tax purposes.
Dividend payments received in the
B-65
form of additional securities are recorded on the ex-dividend date in an amount
equal to the value of the security on such date.
(c) FEDERAL INCOME TAXES--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code of 1986, as amended, applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders each year. Accordingly, no federal income tax
provision is required.
(2) TAX MATTERS AND DISTRIBUTIONS
At December 31, 2002, the total cost of securities (including temporary cash
investments) for federal income tax purposes was approximately $259,345,000.
Aggregate gross unrealized gain on securities in which there was an excess of
value over tax cost was approximately $5,492,000. Aggregate unrealized loss on
securities in which there was an excess of tax cost over value was approximately
$31,954,000. Net unrealized loss on investments for tax purposes at December 31,
2002 was approximately $26,462,000.
At December 31, 2002, the Fund had approximate capital loss carryovers
available to offset future capital gains, if any, to the extent provided by
regulations:
CARRYOVER AVAILABLE EXPIRATION DATE
------------------- -----------------
$ 35,581,000 December 31, 2007
21,822,000 December 31, 2008
67,042,000 December 31, 2009
46,118,000 December 31, 2010
-------------
$ 170,563,000
=============
It is the policy of the Fund to reduce future distributions of realized gains
to shareholders to the extent of the unexpired capital loss carry forward.
The tax character of distributions paid to common and preferred shareholders
of approximately $22,371,000 in 2002 was from ordinary income.
As of December 31, 2002, the components of distributable earnings on a tax
basis were approximately:
Undistributed Net Investment Income $ 402,000
Undistributed Long-Term Gain --
Unrealized Gain (Loss) $ (26,462,000)
Capital Losses Carry Forward
and Post October Losses Deferred $ (176,822,000)
The difference between components of distributable earnings on a tax basis
and the amounts reflected in the Statement of Assets and Liabilities are
primarily due to wash sales, accrued interest on defaulted bonds and
amortization of swap termination payments.
Distributions on common stock are declared based upon annual projections of
the Fund's investment company taxable income. The Fund records all dividends and
distributions payable to shareholders on the ex-dividend date and declares and
distributes income dividends monthly.
The Fund was required to amortize market discounts and premiums for financial
reporting purposes beginning January 1, 2001. This new accounting policy
resulted in additional interest income for financial reporting purposes only.
The Fund does not amortize market discounts or premiums for tax purposes.
Therefore, the additional interest income for financial reporting purposes does
not result in additional common stock dividend income.
The Fund has recorded several reclassifications in the capital accounts to
present undistributed net investment income or accumulated net realized gains
and losses on a tax basis, which is considered to be more informative to the
shareholder. These reclassifications have no impact on the net asset value of
the Fund.
(3) INVESTMENT ADVISORY AGREEMENT
Wellington Management Company, LLP, the Fund's Investment Advisor, for the
eleven months ended
B-66
November 30, 2002 earned approximately $635,000 in management fees. Management
fees paid by the Fund to Wellington Management were calculated at .45 of 1% (on
an annual basis) of the average weekly value of the Fund's net assets
attributable to common stock.
The Fund's Board of Directors voted to appoint T. Rowe Price Associates, Inc.
(T. Rowe Price) as the Fund's investment advisor succeeding Wellington
Management Company, LLP in that capacity. An interim investment advisory
agreement with T. Rowe Price took effect concurrently with the termination of
the existing investment advisory agreement on December 2, 2002. Prior to the
expiration of the 150 day term of the interim contract, the Fund will hold a
meeting of stockholders to seek stockholder approval of the new advisory
agreement with T. Rowe Price. If stockholders approve the new advisory
agreement, the annual advisory fee payable to T. Rowe Price will be 0.50% on the
first $50,000,000 of the Fund's average weekly net assets, 0.40% on the next $50
million and 0.30% on average weekly net assets in excess of $100 million. T.
Rowe Price's fee will be calculated based on assets attributable to the Fund's
common and auction term preferred stock. At December 31, 2002, the fee payable
to T. Rowe Price was approximately $51,000, which was included in accrued
expenses on the accompanying statement of assets and liabilities.
(4) AUCTION TERM PREFERRED STOCK (ATP)
The Fund had 4,000 shares of ATP issued and outstanding at December 31, 2002.
The ATP's dividends are cumulative at a rate determined at an auction, and
dividend periods will typically be 28 days unless notice is given for periods to
be longer or shorter than 28 days. Dividend rates ranged from 1.40% to 2.35% for
the year ended December 31, 2002. The average dividend rate as of December 31,
2002 was 1.47%.
The ATP is redeemable, at the option of the Fund, or subject to mandatory
redemption (if the Fund is in default of certain coverage requirements) at a
redemption price equal to $25,000 per share plus accumulated and unpaid
dividends. The ATP has a liquidation preference of $25,000 per share plus
accumulated and unpaid dividends. The Fund is required to maintain certain asset
coverages with respect to the ATP under the Fund's Charter and the 1940 Act in
order to maintain the Fund's Aaa/AAA ratings by Moody's Investors Service, Inc.
and Fitch, Inc., respectively.
Under Emerging Issues Task Force (EITF) promulgation Topic D-98,
CLASSIFICATION AND MEASUREMENT OF REDEEMABLE SECURITIES, which was issued on
July 19, 2001, preferred securities that are redeemable for cash or other assets
are to be classified outside of permanent equity to the extent that redemption
is at a fixed or determinable price and at the option of the holder or upon the
occurrence of an event that is not solely within the control of the issuer.
Subject to the guidance of the EITF, the Fund's preferred stock is shown outside
of permanent equity (net assets) in the accompanying financial statements. In
connection with Topic D-98 distributions related to preferred stock are
reflected in the statements of changes in net assets and financial highlights as
distributions from operations. Prior year amounts have also been reclassified to
conform with this presentation. The impact of this reclassification creates no
change to the net assets available to common shareholders.
During 2002, the Fund repurchased $50,000,000 of ATP.
(5) ATP AUCTION-RELATED MATTERS
Bankers Trust Company (BTC) serves as the ATP's auction agent pursuant to an
agreement entered into on
B-67
January 4, 1994. The term of the agreement is unlimited and may be terminated by
either party. BTC may resign upon notice to the Fund, such resignation to be
effective on the earlier of the 90th day after the delivery of such notice and
the date on which a successor auction agent is appointed by the Fund. The Fund
may also replace BTC as auction agent at any time.
After each auction, BTC as auction agent will pay to each broker-dealer, from
funds provided by the Fund, a maximum service charge at the annual rate of 0.25
of 1% or such other percentage subsequently agreed to by the Fund and the
broker-dealers, of the purchase price of shares placed by such broker-dealers at
such auction. In the event an auction scheduled to occur on an auction date
fails to occur for any reason, the broker-dealers will be entitled to service
charges as if the auction had occurred and all holders of shares placed by them
had submitted valid hold orders. The Fund incurred approximately $278,000 for
service charges through December 31, 2002. This amount is included under the
caption preferred and auction fees in the accompanying statement of operations.
(6) INTEREST RATE SWAPS
The Fund entered into an interest payment swap arrangement with Fleet Bank
(Fleet) for the purpose of partially 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. In exchange for
such payment Fleet makes payments to the Fund on a monthly basis at a variable
rate determined with reference to one month LIBOR. The variable rates ranged
from 1.44% to 2.14% for the year ended December 31, 2002. The effective date,
notional amount, maturity and fixed rate of the swap is as follows:
NOTIONAL FIXED
EFFECTIVE CONTRACT ANNUAL
DATE AMOUNT MATURITY RATE
10/1/01 $100 million 10/1/06 4.50%
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 partially
hedged. Therefore, the ATP dividend would no longer be partially fixed. In an
unfavorable interest rate environment, the Fund would be subject to higher net
ATP dividend payments, resulting in less income available for the common share
dividend. 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 interest rate swaps 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 agreements were more than the amount received
from Fleet by approximately $2,851,000 and is included in the accompanying
statement of operations.
B-68
The estimated fair value of the interest rate swap agreement at December 31,
2002 amounted to approximately $6,768,000 of unrealized loss and is presented in
the accompanying balance sheet.
(7) REPURCHASE AGREEMENTS
At the time the Fund enters into a repurchase agreement, the value of the
underlying security, including accrued interest, will be equal to or exceed the
value of the repurchase agreement, and, in the case of repurchase agreements
exceeding one day, the value of the underlying security, including accrued
interest, is required during the term of the agreement to be equal to or exceed
the value of the repurchase agreement.
The underlying securities for all repurchase agreements are held in
safekeeping in an investment account of State Street Bank and Trust Company
(SSBT), the Fund's custodian, at the Federal Reserve Bank of Boston. In the case
of repurchase agreements exceeding one day, SSBT's Money Market Department
monitors the market value of the underlying securities by pricing them daily,
and in the event any individual repurchase agreement is not fully
collateralized, SSBT advises the Fund and additional collateral is obtained.
(8) PURCHASES AND SALES OF SECURITIES
Purchases and proceeds of sales or maturities of long-term securities during
the year ended December 31, 2002 were approximately:
Purchases of securities $ 224,214,000
Sales of securities $ 261,579,000
(9) RELATED PARTY TRANSACTIONS
A partner of Goodwin Procter LLP, counsel to the Fund, serves as a Director
of the Fund. Fees earned by Goodwin Procter LLP amounted to approximately
$248,000 for the year ended December 31, 2002. The Fund paid approximately
$249,000 during the year ended December 31, 2002 to two officers of the Fund for
the provision of certain administrative services.
CHANGE IN INDEPENDENT ACCOUNTANTS (UNAUDITED)
On June 27, 2002, the Board of Directors, upon the recommendation of the Board's
Audit and Nominating Committee, determined not to retain Arthur Andersen LLP and
approved a change in the Fund's independent auditors to KPMG LLP. For the fiscal
years ended December 31, 2001 and December 31, 2000, Arthur Andersen LLP's audit
reports on the Fund's financial statements contained no adverse opinion or
disclaimer of opinion; nor were their reports qualified or modified as to
uncertainty, audit scope, or accounting principals. Further, there were no
disagreements between the Fund and Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure or audit
scope or procedure, which if not resolved to the satisfaction of Arthur Andersen
LLP, would have caused them to make reference to the disagreements in their
report.
COMMON AND AUCTION TERM PREFERRED STOCK TRANSACTIONS
From time to time in the future, the Fund may effect redemptions and/or
repurchases of its ATP as provided in the applicable constituent instruments or
as agreed upon by the Fund and sellers. The Fund intends to effect such
redemptions and/or repurchases to the extent necessary to maintain applicable
asset coverage requirements.
The Fund may purchase shares of its Common Stock in the open market when the
Common Stock trades at a discount to net asset value or at other times if the
Fund determines such purchases are in the best interest of its stockholders.
There can be no assurance that the Fund will take such action in the event of a
market discount to net asset value or that Fund purchases will reduce a
discount.
B-69
The New America High Income Fund, Inc.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The New America High Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
New America High Income Fund, Inc., 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. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the year ended December 31, 2001 and the financial highlights
for each of the years in the five-year period ended December 31, 2001 were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on that financial statement and those financial
highlights in their report dated February 1, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2002 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
New America High Income Fund, Inc. as of December 31, 2002, the results of its
operations, changes in its net assets and financial highlights for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Boston, Massachusetts
January 31, 2003
B-70
DIRECTORS
Robert F. Birch
Joseph L. Bower
Richard E. Floor
Bernard J. Korman
Ernest E. Monrad
DIRECTOR EMERITUS
Franco Modigliani
OFFICERS
Robert F. Birch - President
Ellen E. Terry - Vice President, Treasurer
Richard E. Floor - Secretary
INVESTMENT ADVISOR
T. Rowe Price Associates, Inc.
100 E. Pratt Street
Baltimore, Maryland 21202
ADMINISTRATOR
The New America High Income Fund, Inc.
33 Broad Street
Boston, MA 02109
(617) 263-6400
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
TRANSFER AGENT
EquiServe Trust Company N.A.
P.O. Box 43011
Providence, RI 02940-3011
(617) 328-5000 ext. 6406
(800) 426-5523
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG LLP
99 High Street
Boston, MA 02110
Listed: NYSE
Symbol: HYB
Web site: www.newamerica-hyb.com
B-71
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 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
B-A-1
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.
B-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 for
AND C 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, (Default.) The ratings of obligations in this category are based on
D 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%.
B-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.
B-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 contract holders 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.
B-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 contract
holders 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
B-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:
B-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.
B-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.
B-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.
B-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.
B-A-11
THE NEW AMERICA HIGH INCOME FUND, INC.
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements
a. Financial Statements included in PART A (Prospectus) of this
Registration Statement:
Audited Financial Statements:
Financial Information Summary, including Financial Highlights
and Senior Securities (For the Years Ended December 31, 2002,
2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, and 1993)
Unaudited Financial Statements:
Financial Information Summary, including Financial Highlights
and Senior Securities (For the Six Months Ended June 30, 2003)*
b. Financial Statements included in PART B (Statement of Additional
Information) of this Registration Statement:
Audited Financial Statements:
Schedule of Investments, December 31, 2002
Statement of Assets and Liabilities, December 31, 2002
Statement of Operations For the Period Ended December 31, 2002
Statements of Changes in Net Assets (For the Years Ended
December 31, 2002 and December 31, 2001)
Financial Highlights Selected Per Share Data and Ratios
For Each Share of Common Stock Outstanding Throughout the
Period (For the Years Ended December 31, 2002, 2001, 2000,
1999, 1998, 1997)
Information Regarding Senior Securities (As of December 31,
2002, 2001, 2000, 1999, 1998, 1997)
Notes to Financial Statements, December 31, 2002
Independent Auditors' Report, January 31, 2003
Unaudited Financial Statements:
Schedule of Investments, June 30, 2003*
Balance Sheet, June 30, 2003*
Statement of Operations For the Period Ended June 30, 2003*
Statements of Changes in Net Assets (For the Six Months Ended
June 30, 2003)*
Financial Highlights Selected Per Share Data and Ratios For
Each Share of Common Stock Outstanding Throughout the Period
(For the Six Months Ended June 30, 2003)*
Information Regarding Senior Securities, June 30, 2003*
Notes to Financial Statements, June 30, 2003*
* To be filed by amendment.
2. Exhibits
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
(a)(1) Articles of Amendment and Restatement of The New America
High Income Fund, Inc. dated as of February 19, 1988
together with First, Second and Third Certificates of
Changes of Definitions set forth therein, dated as of March
8, 1988, May 3, 1988 and October 14, 1988, respectively. (i)
(a)(2) Articles of Amendment of The New America High Income Fund,
Inc., dated as of June 15, 1989. (i)
(a)(3) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on December 28, 1993. (i)
(a)(4) Articles Supplementary of The New America High Income Fund,
Inc. Establishing and Defining the Rights and Preferences of
Two Series of Shares of Auction Term Preferred Stock, as
filed with the State Department of Assessments and Taxation
of the State of Maryland on January 4, 1994. (i)
(a)(5) Certificate of Correction of The New America High Income
Fund, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland on
February 1, 1996. (i)
(a)(6) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on October 31, 1996. (i)
(a)(7) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on October 31, 1996. (i)
(a)(8) Articles Supplementary of The New America High Income Fund,
Inc. Establishing and Defining the Rights and Preferences of
an Additional Series of Shares of Auction Term Preferred
Stock, as filed with the State Department of Assessments and
Taxation of the State of Maryland on May 2, 1997. (iii)
(a)(9) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on May 30, 1997. (iii)
(a)(10) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on May 30, 1997. (iii)
(a)(11) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on June 18, 1997. (iii)
C-2
(a)(12) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on June 18, 1997. (iii)
(a)(13) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on September 11, 1997.
(iii)
(a)(14) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on September 11, 1997.
(iii)
(a)(15) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on October 23, 1997. (iii)
(a)(16) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on October 23, 1997. (iii)
(a)(17) Articles Supplementary of The New America High Income Fund,
Inc. Establishing and Defining the Rights and Preferences of
an Additional Series of Shares of Auction Term Preferred
Stock, as filed with the State Department of Assessments and
Taxation of the State of Maryland on May 15, 1998. (v)
(a)(18) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on August 7, 1998. (v)
(a)(19) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on August 7, 1998. (v)
(a)(20) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on August 7, 1998. (v)
(a)(21) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on October 22, 1998. (v)
(a)(22) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on October 22, 1998. (v)
(a)(23) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on October 22, 1998. (v)
(a)(24) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on July 10, 2000. (v)
C-3
(a)(25) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on July 10, 2000. (v)
(a)(26) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on July 10, 2000. (v)
(a)(27) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on July 8, 2002. (v)
(a)(28) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on July 8, 2002. (v)
(a)(29) Articles of Amendment of The New America High Income Fund,
Inc., as filed with the State Department of Assessments and
Taxation of the State of Maryland on July 8, 2002. (v)
(a)(30) Articles Supplementary of The New America High Income Fund,
Inc. Establishing and Defining the Rights and Preferences of
Additional Shares of Auction Term Preferred Stock, to be
filed with the State Department of Assessments and Taxation
of the State of Maryland. (vi)
(b) By-Laws of The New America High Income Fund, Inc., Amended
as of October 17, 2002. (v)
(c) Not Applicable.
(d)(1) Specimen Certificate for shares of Common Stock, par value
$0.01 per share. (ii)
(d)(2) Specimen Certificate for shares of Auction Term Preferred
Stock, Series B, par value $1.00 per share. (ii)
(d)(3) Specimen Certificate for shares of Auction Term Preferred
Stock, Series A, par value $1.00 per share. (ii)
(d)(4) Specimen Certificate for shares of Auction Term Preferred
Stock, Series C, par value $1.00 per share. (ii)
(d)(5) Specimen Certificate for shares of Auction Term Preferred
Stock, Series D, par value $1.00 per share. (iv)
(e)(1) Dividend Reinvestment Plan, as modified through June 1,
1992, filed as an exhibit E to the Registrant's Registration
Statement on Form N-2, Registration No. 333-17619 (filed
December 11, 1996).
(e)(2) Amendment to Dividend Reinvestment Plan, effective March 17,
1998, filed as an exhibit E2 to Pre-Effective Amendment
No.1 to the Registrant's Registration Statement on Form
N-2/A, Registration No. 333-43315 (filed February 4, 1998).
(f) Not Applicable.
C-4
(g) Investment Advisory Agreement dated December 2, 2002 between
the Registrant and T. Rowe Price Associates, Inc. (v)
(h)(1) Underwriting Agreement dated December 20, 1993 between the
Registrant and Bear, Stearns & Co. Inc. with respect to the
Auction Term Preferred Stock, Series A and Series B, of the
Registrant. (i)
(h)(2) Form of Merrill Lynch Standard Dealer Agreement. (iv)
(h)(3) Underwriting Agreement dated May 1, 1997 between the
Registrant, Wellington Management Company, LLP and Lehman
Brothers Inc. with respect to the Auction Term Preferred
Stock, Series C, of the Registrant. (iv)
(h)(4) Form of Underwriting Agreement among the Registrant,
Wellington Management Company, LLP and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated with
respect to the Auction Term Preferred Stock, Series D, of
the Registrant. (iv)
(h)(5) Underwriting Agreement dated ______, 2003 between the
Registrant, T. Rowe Price Associates, Inc. and Lehman
Brothers Inc. with respect to the Additional Shares of
Auction Term Preferred Stock, Series C, of the
Registrant. (vi)
(i) Not Applicable.
(j) Custodian Contract dated as of February 11, 1988 between the
Registrant and State Street Bank and Trust Company. (i)
(k)(1) Registrar, Transfer Agency and Service Agreement dated as of
February 11, 1988 between the Registrant and EquiServe Trust
Company, N.A., as assignee of State Street Bank and Trust
Company. (i)
(k)(2) Agreement for Direct Deposit (Automated Clearing House)
Dividend Disbursement Services, dated February 7, 2000,
between the Registrant and EquiServe Trust Company, N.A., as
assignee of State Street Bank & Trust. (v)
(k)(3) Fee and Service Schedule for Stock Transfer Services dated
May 1, 2003 between the Registrant and EquiServe, Inc. and
EquiServe Trust Company, N.A. (v)
(k)(4) Auction Agent Agreement dated as of May 6, 1997 between the
Registrant and Deutsche Bank Trust Company Americas, as
successor to Bankers Trust Company, with respect to the
Auction Term Preferred Stock of the Registrant, filed as an
exhibit K2 to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2/A,
Registration No. 333-49043 (filed May 11, 1998).
(k)(5) Letter of Representations Agreement dated as of January 4,
1994 among the Registrant, Deutsche Bank Trust Company
Americas, as successor to Bankers Trust Company, and The
Depository Trust Company with respect to the Auction Term
Preferred Stock, Series A and Series B, of the Registrant,
filed as an exhibit K3 to the Registrant's Registration
Statement on Form N-2, Registration No. 333-17619 (filed
December 11, 1996).
(k)(6) Letter of Representations Agreement dated as of May 6, 1997
among the Registrant, Deutsche Bank Trust Company Americas,
as successor to Bankers Trust Company, and The Depository
Trust Company with respect to the Auction Term Preferred
Stock, Series C, of the Registrant, filed as an exhibit K3
to Pre-Effective Amendment No. 1 to the
C-5
Registrant's Registration Statement on Form N-2/A,
Registration No. 333-49043 (filed May 11, 1998).
(k)(7) Form of Letter of Representations Agreement with respect to
the Auction Term Preferred Stock, Series D, of the
Registrant, filed as an exhibit K5 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form N-2/A, Registration No. 333-49043 (filed May 11,
1998).
(k)(8) Broker-Dealer Agreement dated May 6, 1997 between Deutsche
Bank Trust Company Americas, as successor to Bankers Trust
Company, and Lehman Brothers Inc. with respect to the
Auction Term Preferred Stock of the Registrant, filed as an
exhibit K4 to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2/A,
Registration No. 333-49043 (filed May 11, 1998).
(k)(9) Letter Agreement dated May 6, 1997 between the Registrant
and Lehman Brothers Inc. with respect to the Auction Term
Preferred Stock of the Registrant, filed as an exhibit K7 to
Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-2/A, Registration No.
333-49043 (filed May 11, 1998).
(k)(10) Form of Broker-Dealer Agreement between Deutsche Bank Trust
Company Americas, as successor to Bankers Trust Company, and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated with respect to the Auction Term Preferred
Stock of the Registrant, filed as an exhibit K6 to
Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-2/A, Registration No.
333-49043 (filed May 11, 1998).
(k)(11) Letter Agreement dated September 28, 2001 between the
Registrant and Fleet National Bank with respect to interest
rate swap. (v)
(k)(12) Partial Termination Agreement dated November 8, 2002 between
the Registrant and Fleet National Bank with respect to
interest rate swap. (v)
(k)(13) Agreement dated as of October 31, 2002 between the
Registrant and Ellen E. Terry. (v)
(k)(14) Agreement dated as of October 31, 2002 between the
Registrant and Paul E. Saidnawey. (v)
(l) Opinion as to the legality of securities being registered
and consent to its use. (vi)
(m) Not Applicable.
(n) Consent of KPMG LLP.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r)(1) Code of Ethics of the Registrant adopted under
Rule 17j-1. (v)
(r)(2) Code of Ethics of T. Rowe Price Associates, Inc. adopted
under Rule 17j-1. (v)
C-6
(s) Powers of Attorney for Robert F. Birch, Joseph L. Bower,
Richard E. Floor, Bernard J. Korman, Ernest E. Monrad and
Ellen E. Terry (filed as part of the signature page to this
Registration Statement).
----------
FOOTNOTE
REFERENCE DESCRIPTION
--------- -----------
(i) Filed as an exhibit to the Registrant's Registration Statement
on Form N-2, Registration No. 333-17619 (filed December 11,
1996) under the same exhibit number and incorporated herein by
reference.
(ii) Filed as an exhibit to the Registrant's Registration Statement
on Form N-2/A, Registration No. 333-23253 (filed April 30, 1997)
under the same exhibit number and incorporated herein by
reference.
(iii) Filed as an exhibit to the Registrant's Registration Statement
on Form N-2, Registration No. 333-43315 (filed December 24,
1997) under the same exhibit number and incorporated herein by
reference.
(iv) Filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2/A, Registration
No. 333-49043 (filed May 11, 1998) under the same exhibit number
and incorporated herein by reference.
(v) Filed as an exhibit to the Registrant's Registration Statement
on Form N-2, Registration No. 333-105549 (filed May 23, 2003)
under the same exhibit number and incorporated herein by
reference.
(vi) To be filed by amendment.
Item 25: Marketing Arrangements
Not Applicable.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission Fees $ 2,427
Printing and Engraving Expenses 20,000
Legal Fees and Expenses 212,500
Accounting Fees and Expenses 26,000
Rating Agencies' Fees 35,000
Miscellaneous Expenses 2,500
----------
Total $ 298,427
Item 27: Persons Controlled By or Under Common Control
None.
Item 28: Number of Holders of Securities
At August 31, 2003, the numbers of record holders of shares of the
Registrant were as follows:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares, $0.01 par value per share ___
Series A Auction Term Preferred Stock, $1.00 par value per share 1
Series B Auction Term Preferred Stock, $1.00 par value per share 1
Series C Auction Term Preferred Stock, $1.00 par value per share 1
Series D Auction Term Preferred Stock, $1.00 par value per share 1
C-7
Item 29: Indemnification
Article V, paragraph (D) of the Registrants' Articles provides that the
Registrant shall indemnify its directors to the full extent permitted by the
Registrants' By-Laws and Maryland law.
Article V, Section 1 of the Registrant's By-Laws provides that the
Registrant shall indemnify its directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law and shall indemnify its officers to the same extent as its directors and to
such further extent as is consistent with law. Section 2-418 of the Maryland
General Corporation Law empowers a corporation, subject to certain limitations,
to indemnify its directors and officers against judgments, penalties, fines,
settlements, and reasonable expenses (including attorneys' fees) actually
incurred by the director or officers in connection with any suit or proceeding
to which they are a party unless: (1) it is established that the director's or
officer's act or omission was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the director or officer actually received an
improper personal benefit in money, property or services or, (iii) in a criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful.
The Registrant's By-Laws further provide that the Registrant shall
indemnify its directors and officers who while serving as directors or officers
also serve at the request of the Registrant as a director, officer, partner,
trustee, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan to the fullest extent
consistent with law. The indemnification and other rights provided by the
Registrant's By-Laws continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such person.
Under Maryland law, a director or officer who is a party to a
proceeding may be paid or reimbursed by the Registrant in advance of the final
disposition of the proceeding upon receipt by the corporation of: (i) a written
affirmation by the director or officer of the director's or officer's good faith
belief that the standard of conduct necessary for indemnification by the
Registrant has been met and (ii) a written undertaking by or on behalf of the
director to pay the amount if it shall ultimately be determined that the
standard of conduct has not been met. Employees and agents who are not officers
or directors of the Registrant may be indemnified, and reasonable expenses may
be advanced to such employees or agents, as may be provided by action of the
Board of Directors or by contract, subject to any limitations imposed by the
1940 Act.
In connection with certain actions filed against the directors and
executive officers of the Registrant, the Registrant has, subject to terms and
conditions required by Maryland law, authorized the advancement of reasonable
attorneys' fees and related costs arising from the defense of such actions.
Under the terms of an Affirmation and Undertaking entered into by each of the
directors and executive officers, each such person has agreed to repay to the
Registrant all amounts advanced for expenses (including attorneys' fees) on his
or her behalf if it is ultimately determined that the director or executive
officer is not entitled to indemnification.
In addition to the foregoing, Article V(E) to Registrant's charter
provides as follows:
"(E) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, as
from time to time amended, no director or officer of the Corporation shall have
any liability to the Corporation or its stockholders for damages. This
limitation on liability applies to events occurring at the time a person serves
as a director or officer of the Corporation whether or not such person is a
director or officer at the time of any proceeding in which liability is
asserted. No provision of this Article V(E) shall be effective to protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders as to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. No future amendment to this Article V(E) shall affect any right of
any person under this Article V(E) based on any event, omission or proceeding
prior to such amendment."
C-8
Section 2-405.2 of the Maryland General Corporation Law together with
Section 5-418 of the Courts and Judicial Proceedings Article of the Maryland
Code provides that a charter provision limiting the liability of a director or
officer may not include a provision which limits or restricts the liability of a
director or officer to the corporation's stockholders to the extent it is proved
that the person actually received an improper personal benefit to the extent of
the value of such benefit or an adverse final adjudication is entered in a
proceeding based on a finding that the person's act or failure to act was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated.
As permitted by Section 2-418(k) of the Maryland General Corporation
Law, Article V, Section 3 of the Registrant's By-Laws provides that the
Registrant shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant, or who, while a director, officer, employee or agent of the
Registrant, is or was serving at the request of the Registrant as a director,
officer, partner, trustee, employee, or agent or fiduciary of another
corporation, partnership, joint venture, trust, enterprise or employee benefit
plan, against any liability asserted against and incurred by such person in any
such capacity or arising out of such person's positions.
The Investment Advisory Agreement between the Registrant and T. Rowe
Price Associates, Inc. ("T. Rowe Price") provides that the Registrant will
indemnify T. Rowe Price for all liabilities and expenses, including defense
costs, in connection with any litigation pertaining to the period prior to T.
Rowe Price's relationship with the Registrant under such agreement, other than
liabilities resulting from willful misfeasance, bad faith or gross negligence on
the part of T. Rowe Price.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission (the "Commission") such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1940 Act
and will be governed by the final adjudication of such issues.
Item 30: Business and Other Connections of Investment Adviser
T. Rowe Price, the Registrant's investment adviser, organized under
Maryland law, is a registered investment adviser primarily engaged in the
investment advisory business. T. Rowe Price is a wholly owned subsidiary of T.
Rowe Price Group, Inc., a publicly-traded financial services holding company.
Information as to the executive officers and directors of T. Rowe Price is
included in its Form ADV, as amended, filed with the Commission (File No.
801-00856), and is incorporated herein by reference thereto together with all
amendments thereto subsequently filed, which amendments shall be deemed to be
incorporated by reference in this registration statement and be a part hereof
from the date of filing of such amendments to the extent permitted by the
applicable rules and regulations of the Commission.
Item 31: Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
(17 CFR 270.31a-1 to 31a-3) promulgated thereunder are maintained at the offices
of the custodian of the Registrant at One Heritage Drive, North Quincy,
Massachusetts 02171, except that the corporate records of the Registrant
(including its Articles of Incorporation and By-Laws) are maintained at the
offices of the Registrant at 33 Broad Street, Boston, Massachusetts 02109.
Item 32: Management Services
C-9
Not applicable.
Item 33: Undertakings
1. The Registrant undertakes to suspend the offering of its
shares until it amends its prospectus if (1) subsequent to the effective date of
its Registration Statement, the NAV declines more than ten percent from its NAV
as of the effective date of the Registration Statement, or (2) the NAV increases
to an amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The undersigned Registrant hereby undertakes that:
a. For purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
b. For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
6. Not applicable.
C-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Boston and The Commonwealth
of Massachusetts, on the 26th day of August, 2003.
THE NEW AMERICA HIGH INCOME FUND, INC.
By: /s/ Robert F. Birch
---------------------------------
Robert F. Birch
President
Know all men by these presents that each person whose signature appears
below hereby severally constitutes and appoints Robert F. Birch and Ellen E.
Terry, and each of them singly, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution, for the undersigned and in the
undersigned's name, place and stead, in any and all capacities, to sign and
affix the undersigned's name to any and all amendments to this registration
statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing necessary or incidental
to the performance and execution of the powers herein granted, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form N-2 has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert F. Birch President and Director August 26, 2003
----------------------------------------- (Principal Executive Officer)
Robert F. Birch
/s/ Ellen E. Terry Vice President and Treasurer August 26, 2003
----------------------------------------- (Principal Financial and
Ellen E. Terry Accounting Officer)
/s/ Joseph L. Bower Director August 26, 2003
-----------------------------------------
Joseph L. Bower
/s/ Richard E. Floor Director August 26, 2003
-----------------------------------------
Richard E. Floor
/s/ Bernard J. Korman Director August 26, 2003
-----------------------------------------
Bernard J. Korman
/s/ Ernest E. Monrad Director August 26, 2003
-----------------------------------------
Ernest E. Monrad
1933 Act File No.333-__________
1940 Act File No. 811-05399
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. __ / /
Post-Effective Amendment No. __ / /
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 29 /X/
----------
THE NEW AMERICA HIGH INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
----------
EXHIBITS
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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N Consent of KPMG LLP