<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996
SECURITIES ACT FILE NO. 333-2067
INVESTMENT COMPANY ACT FILE NO. 811-5557
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 14 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
60 State Street, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 742-3800
----------------
RICHARD E. OMOHUNDRO, JR., PRESIDENT
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
With copies to:
LAURENCE E. CRANCH, ESQ.
G. DAVID BRINTON, ESQ.
ROGERS & WELLS
200 PARK AVENUE, NEW YORK, NEW YORK 10166
----------------
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, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [X]
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=====================================================================================================
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING PRICE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE(1) (1) FEE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 Par Value 8,450,000 shares $3.9375(2) $33,271,875(2) $11,474(3)
- -----------------------------------------------------------------------------------------------------
Common Stock, $.01 Par Value 30,000 shares $4.0625(4) $ 121,875(4) $43
===================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.
(2) Based on the average of the high and low sales prices reported on the New
York Stock Exchange on March 26, 1996.
(3) Previously paid on March 29, 1996.
(4) Based on the average of the high and low sales prices reported on the New
York Stock Exchange on May 7, 1996.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
FORM N-2
CROSS-REFERENCE SHEET
PARTS A AND B OF THE PROSPECTUS*
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
---------------------------------- ----------------------
<S> <C>
1. Outside Front Cover ........................ Outside Front Cover Page of Prospectus
Inside Front and Outside Back Cover Page of
Prospectus
3. Fee Table and Synopsis ..................... Fee Table; Prospectus Summary
4. Financial Highlights ....................... Financial Information Summary; Financial Highlights
5. Plan of Distribution ....................... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Offer
6. Selling Stockholders ....................... Not Applicable
7. Use of Proceeds ............................ Use of Proceeds; Investment Policies and Limitations
8. General Description of the Registrant ...... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Fund; Investment Policies and
Limitations; Risk Factors and Special
Considerations; Financial Information Summary;
Description of Capital Stock; Surety Arrangement
for Preferred Shares; Description of Notes
9. Management ................................. Prospectus Summary; Investment Adviser; Directors
and Officers; Portfolio Trading; Description of
Capital Stock; Surety Arrangement for Preferred
Shares; Description of Notes; Custodian, Transfer
Agent, Dividend Disbursing Agent, Paying Agents
and Registrars
10. Capital Stock, Long-Term Debt, and Other Description of Capital Stock; Surety Arrangement for
Securities ................................. Preferred Shares; Description of Notes; Federal
Taxation; Investment Policies and Limitations;
Dividends and Distributions; Dividend Reinvestment
Plan; Financial Highights
11. Defaults and Arrears on Senior Securities ... Not Applicable
12. Legal Proceedings .......................... Not Applicable
13. Table of Contents of the Statement of
Additional Information ..................... Not Applicable
14. Cover Page ................................. Not Applicable
15. Table of Contents .......................... Not Applicable
16. General Information and History ............ Prospectus Summary; The Fund
17. Investment Objective and Policies .......... Prospectus Summary; Investment Policies and
Limitations; Portfolio Trading
18. Management ................................. Prospectus Summary; Investment Adviser; Directors
and Officers
19. Control Persons and Principal Holders of
Securities ................................. Directors and Officers
20. Investment Advisory and Other Services ..... Prospectus Summary; Investment Adviser; Custodian,
Transfer Agent, Dividend Disbursing Agent, Paying
Agents and Registrars; Experts
21. Brokerage Allocation and Other Practices ... Portfolio Trading
22. Tax Status ................................. Federal Taxation
23. Financial Statements ....................... Financial Statements
----------
*Pursuant to Part B: Statement of Additional Information, all
information required to be set forth in Part B has been included in
Part A.
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C to this Registration Statement.
<PAGE>
--------------------------------------------
8,480,000 SHARES
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
COMMON STOCK
Prospect Street(R) High Income Portfolio Inc. (the "Fund") is issuing to
its shareholders of record ("Record Date Shareholders") as of the close of
business on May 10, 1996 transferable rights ("Rights") entitling the holders
thereof to subscribe for an aggregate of 8,480,000 shares (the "Shares") of
the Fund's Common Stock, par value $0.01 per share (the "Offer"). Each such
Record Date Shareholder is being issued one Right for each three shares of
Common Stock owned on the Record Date and the Rights entitle Record Date
Shareholders, and other holders of Rights acquired during the Subscription
Period (as defined herein), to acquire one share of Common Stock for each
Right held. In addition the Rights entitle each Record Date Shareholder, and
secondarily, holders of Rights acquired during the Subscription Period, to
subscribe, subject to certain limitations and subject to allotment, for any
Shares not acquired by exercise of primary subscription Rights. The Rights are
transferable, and the Rights and the Shares will be listed for trading on the
New York Stock Exchange (the "Exchange"). The Shares are listed on the
Exchange under the symbol "PHY." See "The Offer." Record Date Shareholders,
where the context requires, shall also include beneficial owners whose Shares
are held of record by Cede & Co. ("Cede"), nominee for The Depository Trust
Company ("DTC"), or by any other depository or nominee.
(text continued on following page)
The subscription price per share (the "Subscription Price") will be the
net asset value per share as of the close of business on the Expiration Date
(as defined below).
The offer will expire at 5:00 p.m., New York time on June 21, 1996 unless
extended as described herein (the "Expiration Date").
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. At the date hereof, the Fund is considering
various refinancing alternatives with respect to its leverage. Additionally,
following the completion of the Offer, it is the intention of the Fund,
subject to market conditions, to add incremental leverage (to the extent
permitted under the Investment Company Act of 1940, as amended) such that the
percentage of the Fund's assets representing leverage is approximately the
same as it was prior to the Offer. See "The Fund" and "Risk Factors and
Special Considerations -- Risk of Leverage. The Fund's investment objective is
to provide high current income, while seeking to preserve shareholders"
capital, through investment in a professionally managed, diversified portfolio
of "high-yield," high risk securities (commonly referred to as "junk bonds").
INVESTMENTS IN HIGH-YIELD, HIGH RISK SECURITIES ENTAIL RISKS THAT ARE
DIFFERENT AND MORE PRONOUNCED THAN THOSE INVOLVED IN HIGHER-RATED SECURITIES.
AN INVESTMENT IN THE FUND IS NOT APPROPRIATE FOR ALL INVESTORS, AND NO
ASSURANCE CAN BE GIVEN THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS." Prospect Street(R) Investment
Management Co., Inc. (the "Investment Adviser") has served as the Fund's
investment adviser since the Fund's inception in 1988.
Because the amounts received by the Fund with respect to the Subscription
Price per Share (after payment of soliciting fees and other expenses of the
Offer) are likely to be less than the net asset value per share of the Fund's
Common Stock and because the number of shares outstanding after the Offer is
likely to increase in a greater percentage than the increase in the size of
the Fund's assets, the Offer is likely to result in a dilution of the
aggregate net asset value of the shares owned by Record Date Shareholders who
do not fully exercise their Rights. In addition, as a result of the terms of
the Offer, Record Date Shareholders who do not fully exercise their rights
should expect that they will, upon the completion of the Offer, own a smaller
proportional interest in the Fund than would otherwise be the case. See "Risk
Factors and Special Considerations -- Dilution" and "The Offer -- Terms of the
Offer."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
=============================================================================================================================
<CAPTION>
ESTIMATED
SUBSCRIPTION PRICE SALES LOAD(2)(3) PROCEEDS TO FUND(2)(4)
(1) MINIMUM MAXIMUM MINIMUM MAXIMUM
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share ........................... $3.86 $0.077 $0.145 $3.715 $3.783
- -----------------------------------------------------------------------------------------------------------------------------
Total................................ $32,732,800 $652,960 $1,229,600 $31,503,200 $32,079,840
=============================================================================================================================
</TABLE>
(footnotes on following page)
--------------------
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. INVESTORS ARE ADVISED TO
READ THIS PROSPECTUS AND TO RETAIN IT FOR FUTURE REFERENCE.
--------------------
The date of this Prospectus is May 10, 1996.
<PAGE>
(text continued from cover page)
All questions and inquiries relating to the Offer should be directed to the
Information Agent, Corporate Investor Communications, Inc., 111 Commerce Road,
Carlstadt, New Jersey 07072-2586, toll-free at (800) 958-6468. The Fund's
address is 60 State Street, Boston, Massachusetts 02109, and its telephone
number is (617) 742-3800.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on March 29, 1996. The net asset value per share of
Common Stock at the close of business on March 29, 1996 and on May 9, 1996 was
$3.77 and $3.86, respectively, and the last reported sale price of a share
of the Fund's Common Stock on the Exchange on those dates was $3.875 and $4.00,
respectively.
Record Date Shareholders holding a number of shares of Common Stock that is
not an integral multiple of three will receive one additional Right. In the case
of shares held of record by Cede, the nominee for DTC, or any other depository
or nominee, additional Rights to be received by beneficial owners for whom Cede
or any other depository or nominee is the holder of record will be issued to
Cede or such other depository or nominee, only if Cede or such other depository
or nominee provides to the Fund on or before the close of business on June 3,
1996 written representation of the number of additional Rights required for such
issuance.
- --------------------
(footnotes from cover page)
(1) Estimated on the basis of the net asset value per share on May 9, 1996.
(2) In connection with the Offer, First Albany Corporation (the "Dealer
Manager") or other broker-dealers soliciting the exercise of Rights will
receive directly from the Fund soliciting fees equal to 2.00% of the
Subscription Price per Share with respect to Shares purchased by Record
Date Shareholders, and 3.75% of the Subscription Price per Share with
respect to Shares purchased by other holders of Rights (excluding Record
Date Shareholders), in each case where the exercise was solicited by the
Dealer Manager or such other soliciting broker- dealer, as the case may be.
The minimum amounts of Dealer Manager and Soliciting Fees and the maximum
amounts of Proceeds to Fund are based on the assumption that all of the
Shares sold will be purchased by the Record Date Shareholders where the
purchases were solicited by the Dealer Manager or another soliciting
broker-dealer, and the maximum amounts of Dealer Manager and Soliciting
Fees and minimum amounts of Proceeds to Fund are based on the assumption
that all of the Shares will be purchased by other holders of Rights where
the purchases were so solicited. The Fund cannot predict what portion of
any Shares sold will be purchased by Record Date Shareholders as compared
to other holders of Rights or what portion of the purchases will be
solicited by participating broker-dealers.
(3) The Fund has agreed to pay the Dealer Manager a fee for financial advisory
services in connection with the Offer equal to $150,000, and has agreed to
indemnify the Dealer Manager against certain liabilities under the U.S.
Securities Act of 1933, as amended.
(4) Before deduction of offering expenses incurred by the Fund, estimated at
$495,000, including up to $40,000 payable to the Dealer Manager as
reimbursement for its expenses.
<PAGE>
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
THE OFFER
Prospect Street High Income Portfolio Inc. (the "Fund") is issuing to its
shareholders of record ("Record Date Shareholders") as of the close of
business on May 10, 1996 (the "Record Date") transferable rights ("Rights") to
subscribe for an aggregate of 8,480,000 shares of Common Stock (sometimes
referred to herein as the "Shares") of the Fund. Each such Record Date
Shareholder is being issued one Right for each three shares of Common Stock
owned on the Record Date. No fractional Rights will be issued. Record Date
Shareholders, where the context requires, shall also include beneficial owners
whose shares are held of record by Cede & Co. ("Cede"), nominee for The
Depository Trust Company ("DTC") or by any other depository or nominee. The
Rights entitle the Record Date Shareholder to acquire at the Subscription
Price (as hereinafter defined) one Share for each Right held. Record Date
Shareholders holding a number of shares of Common Stock that is not an
integral multiple of three will receive one additional Right. In the case of
shares held of record by Cede or any other depository or nominee, additional
Rights to be received by beneficial owners for whom Cede or any other
depository or nominee is the holder of record will be issued to Cede or such
other depository or nominee, only if Cede or such other depository or nominee
provides to the Fund on or before the close of business on June 3, 1996
written representation of the number of Rights required for such issuance. The
Subscription Period commences on the date of this Prospectus and ends at 5:00
p.m., New York time, on June 21, 1996 unless extended by the Fund until 5:00
p.m., New York time, on July 22, 1996 (the "Expiration Date"). See "Expiration
of Offer." The Rights are evidenced by subscription certificates
("Subscription Certificates") which will be mailed to Record Date Shareholders
(except as discussed below under "Foreign Restrictions").
A Record Date Shareholder's right to acquire during the Subscription
Period at the Subscription Price one Share for each Right held is hereinafter
referred to as the "Primary Subscription." Holders of Rights who are not
Record Date Shareholders ("Rights Holders") may also purchase Shares in the
Primary Subscription. All Rights may be exercised immediately upon receipt and
until 5:00 p.m., New York time, on the Expiration Date. (Record Date
Shareholders and Rights Holders purchasing Shares in the Primary Subscription
including those who purchase Shares pursuant to the Over-Subscription
Privilege are hereinafter referred to as "Exercising Rights Holders.")
The first regular monthly dividend to be paid on shares of Common Stock
acquired upon exercise of Rights will be the first monthly dividend, the
record date for which occurs after the issuance of such shares following the
Expiration Date. It is the Fund's present policy to pay dividends on the last
business day of each month to shareholders of record seven days prior to the
payment date. Assuming the Subscription Period is not extended beyond June 21,
1996, it is expected that the first dividend received by shareholders
acquiring shares in this rights offering will be paid on the last business day
of July 1996.
At the date hereof, the Fund is considering various refinancing
alternatives with respect to its leverage. Additionally, following the
completion of the Offer, it is the intention of the Fund, subject to market
conditions, to add incremental leverage (to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act")) such that the
percentage of the Fund's assets representing leverage is approximately the
same as it was prior to the Offer.
The Fund completed transferable rights offerings on March 4, 1993 and
November 23, 1993 which permitted shareholders to acquire, at a subscription
price of $3.80 and $3.60, respectively, one new share for each three rights
held as of the record date of such rights offerings. All of the rights issued
by the Fund pursuant to the rights offerings were exercised and, as a result,
4,625,000 new shares of Common Stock were issued in March 1993 with net
proceeds to the Fund of approximately $16.7 million and 6,210,000 new shares
of Common Stock were issued in December 1993 with net proceeds to the Fund of
approximately $21.3 million. All of the net proceeds from the exercise of the
rights issued pursuant to the prior rights offerings have been invested in new
securities in accordance with the Fund's investment objective.
OVER-SUBSCRIPTION PRIVILEGE
Any Record Date Shareholder who fully exercises all Rights issued to him
is entitled to subscribe for Shares which were not otherwise subscribed for by
others by Primary Subscription (the "Primary Over-Subscription Privilege"). In
addition, any Rights Holder who exercises Rights is entitled to subscribe for
Shares which are not otherwise subscribed for in the Primary Subscription or
pursuant to the Primary Over-Subscription Privilege (the "Secondary Over-
Subscription Privilege", which, together with the Primary Over-Subscription
Privilege is referred to herein as the "Over-Subscription Privilege"). Shares
acquired pursuant to the Over-Subscription Privilege are subject to allocation
and proration, which is more fully discussed under "The Offer -- Over-
Subscription Privilege."
SUBSCRIPTION PRICE
The Subscription Price per Share ("Subscription Price") will be the net
asset value per share as of the close of business on the Expiration Date.
EXERCISING RIGHTS
Rights will be evidenced by Subscription Certificates (see Appendix A) and
may be exercised by completing a Subscription Certificate and delivering it,
together with payment, either by means of a Notice of Guaranteed Delivery or a
check to State Street Bank and Trust Company, Corporate Reorganization, Two
Heritage Drive, North Quincy, Massachusetts 02171 (the "Subscription Agent").
Checks sent in payment must actually clear by 5:00 p.m., New York time, on the
Expiration Date in order for Rights to be exercised. Exercising Rights Holders
will not know the Subscription Price for Shares being acquired, at the time of
exercise, and will be required initially to pay for such Shares at the
estimated Subscription Price (the "Estimated Subscription Price") of $3.86
(approximately the net asset value per share on May 9, 1996). Exercising
Rights Holders will have no right to rescind a purchase after the Subscription
Agent has received payment. See "The Offer -- Exercise of Rights" and "The
Offer -- Payment for Shares."
SOLICITING FEES
The Fund has agreed to pay directly to each broker-dealer, including the
Dealer Manager, who solicits the exercise of Rights a fee equal to 2.00% of
the Subscription Price per Share with respect to Shares purchased by Record
Date Shareholders, and 3.75% of the Subscription Price per Share with respect
to Shares purchased by other holders of Rights (excluding Record Date
Shareholders), in each case where the exercise was solicited by such
soliciting broker-dealer. Soliciting Fees will not be paid with respect to the
exercise of Rights by or for the account of the Dealer Manager or broker-
dealers participating in the solicitation. See "The Offer -- Distribution
Arrangements."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights and the
Shares will be listed for trading on the New York Stock Exchange (the
"Exchange"). Although no assurance can be given that a market for the Rights
will develop, trading in the Rights on the Exchange may be conducted until the
close of trading on the last Business Day (as defined below) prior to the
Expiration Date. The Fund expects that a market for the Rights will develop
and that the value of the Rights, if any, will be reflected by the market
price. Rights may be sold by individual holders or may be submitted to the
Subscription Agent for sale by the Dealer Manager. Any Rights to be submitted
by the Subscription Agent to the Dealer Manager for sale must be received by
the Subscription Agent on or before June 19, 1996 (or if the Offer is
extended, until two business days prior to the Expiration Date), due to normal
settlement procedures. Trading of the Rights on the Exchange will be conducted
on a when issued basis on May 13, 1996 and May 14, 1996, and thereafter on a
regular way basis until and including the last Exchange trading day prior to
the Expiration Date. If the Subscription Agent receives Rights for sale in a
timely manner, the Dealer Manager will use its best efforts to sell the Rights
on the Exchange. No brokerage commissions will be charged to holders of less
than 100 Rights or to beneficial owners of less than 100 Rights held on their
behalf by Qualified Financial Institutions (as defined below), who elect to
direct the Subscription Agent to sell such Rights, in whole but not in part.
For purposes of this Prospectus, "Qualified Financial Institution" shall mean
any registered broker-dealer, commercial bank or trust company, securities
depository or participant therein, or nominee thereof. Any commission on sales
of 100 Rights or more will be paid by the selling Rights holders. Neither the
Fund, the Subscription Agent nor the Dealer Manager will be responsible if
Rights cannot be sold and none of them has guaranteed any minimum sale price
for the Rights. For purposes of this Prospectus, a "Business Day" shall mean
any day on which trading is conducted on the Exchange.
Record Date Shareholders are urged to obtain a recent trading price for
the Rights on the Exchange from their broker, bank, financial adviser, or the
financial press. Exercising Rights Holders' inquiries should be directed to
the Information Agent. See "Information Agent" below.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the District of Columbia and the territories and possessions of the
United States) ("Foreign Record Date Shareholders"). The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for
such Foreign Record Date Shareholders' accounts until instructions are
received to exercise, sell or transfer the Rights. If no instructions have
been received by 12:00 Noon, New York time, three Business Days prior to the
Expiration Date, the Rights of those Foreign Record Date Shareholders will be
transferred by the Subscription Agent to the Dealer Manager who will use its
best efforts to sell the Rights on the Exchange. The net proceeds, if any,
from the sale of those Rights by the Dealer Manager will be remitted to the
Foreign Record Date Shareholders.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its shareholders to increase the assets of the
Fund available for investment so that the Fund will be in a better position to
take advantage of available investment opportunities. In approving the rights
offering, the Board of Directors of the Fund considered, among other things,
the benefits to shareholders resulting from prior rights offerings by the
Fund, the current yield to shareholders and the impact that a rights offering
would have on such yield and the benefits and drawbacks of conducting a
transferable versus non-transferable rights offering. Additionally, the Board
of Directors believes that increasing the size of the Fund would also result
in lowering the Fund's expenses as a proportion of average net assets, to the
extent that such expenses are not calculated with reference to the amount of
its assets. Further, the Offer seeks to reward the Fund's shareholders by
giving them the right to purchase additional shares at a price that may be
below the market value of the shares without incurring any direct transaction
costs. The distribution to shareholders of transferable Rights which
themselves may have a realizable value will also afford non-participating
shareholders the potential of receiving a cash payment upon sale of such
Rights, receipt of which may be viewed as compensation for the possible
dilution of their interest in the Fund.
USE OF PROCEEDS
Based on the Estimated Subscription Price of $3.86 per Share, the net
proceeds of the Offer, assuming all Shares offered hereby are sold and the
maximum Dealer Manager and soliciting fees are paid, are estimated to be
approximately $31,008,200, after deducting offering expenses payable by the
Fund estimated at approximately $495,000. The Investment Adviser anticipates,
based upon current market conditions, that investment of such proceeds in
accordance with the Fund's investment objective and policies will take up to
thirty days from their receipt by the Fund, depending on market conditions and
the availability of appropriate securities for purchase, but in no event will
such investment take longer than six months. Pending such investment in
accordance with the Fund's investment objective and policies, the proceeds
will be held in U.S. Government securities (which term includes obligations of
the United States Government, its agencies or instrumentalities) and other
high-quality short-term money market instruments.
<PAGE>
INFORMATION AGENT
Information Agent for the Offer is:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 958-6468
IMPORTANT DATES TO REMEMBER
EVENT DATE
----- ----
RECORD DATE MAY 10, 1996
SUBSCRIPTION PERIOD MAY 10, 1996 TO
JUNE 21, 1996
(UNLESS EXTENDED)
EXPIRATION DATE JUNE 21, 1996
PAYMENT FOR SHARES AND NOTICES OF
GUARANTEED DELIVERY DUE JUNE 21, 1996
DELIVERY OF SUBSCRIPTION CERTIFICATES TO SUBSCRIPTION
AGENT PURSUANT TO NOTICE OF GUARANTEED DELIVERY JUNE 26, 1996
CONFIRMATION DATE JULY 8, 1996
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a diversified, closed-end
management investment company since 1988. The Fund's investment objective is
to provide high current income, while seeking to preserve shareholders'
capital, through investment in a professionally managed, diversified portfolio
of "high-yield," high risk securities (commonly referred to as "junk bonds").
The Fund seeks to achieve its objective of preserving shareholder's capital
through careful selection of the Fund's "high-yield," high risk investments,
portfolio diversification, and portfolio monitoring and repositioning.
However, in the severe adverse interest rate and economic environment of 1989
and 1990 the Fund suffered a substantial decline in its net asset value and
thus failed to meet that objective during that period. Given the nature of the
Fund's investments and its leverage, it may be extremely difficult to achieve
this objective on a consistent basis in the future. See "Investment Policies
and Limitations."
The Fund invests primarily in fixed-income securities rated in the lower
categories by established rating agencies (consisting principally of fixed-
income securities rated "BB" or lower by Standard & Poor's Corporation ("S&P")
and "Ba" or lower by Moody's Investors Service, Inc. ("Moody's," and together
with S&P, the "Rating Agencies")), or nonrated fixed-income securities deemed
by the Investment Adviser to be of comparable quality. Such securities 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 obligation. In addition to investing in "high-yield," high risk
securities, the Fund may engage in certain options activities, the lending of
portfolio securities, and the use of futures contracts and options thereon,
reverse repurchase agreements and repurchase agreements. See "Investment
Policies and Limitations -- Investment Restrictions." Lower rated and nonrated
securities are subject to a greater degree of risk than higher rated
securities. See "Risk Factors and Special Considerations."
Concurrent with the Fund's initial public offering of 13,000,000 shares of
its Common Stock (the "Common Stock") in November 1988, the Fund issued
$50,000,000 aggregate principal amount of Senior Extendible Notes (the "Senior
Extendible Notes"), and 300 shares of Taxable Auction Rate Preferred Stock(R),
no par value per share, liquidation preference $100,000 per share ("Preferred
Shares"). During the fiscal years ended October 31, 1990 and 1991 the Fund
repurchased $45,000,000 of its Senior Extendible Notes. In July 1993, the Fund
repurchased the remaining $5,000,000 of Senior Extendible Notes then
outstanding, and thereafter issued, in a private placement, $20,000,000 of new
Senior Notes payable December 1, 1998 (the "Notes"), and redeemed 100
Preferred Shares, leaving 200 Preferred Shares outstanding. The Fund's
investments are subject to diversification, liquidity and related investment
guidelines (i) established in connection with the issuance of the Notes and
the Fund's receipt from Fitch Investors Service, Inc. of a rating of "Aaa" for
the Notes (the "Notes Investment Guidelines") and (ii) agreed upon by the Fund
and Financial Security Assurance Inc. ("Financial Security") in connection
with the issuance of the Surety Bond (as defined herein) with respect to
Scheduled Payments (as defined herein) on the Preferred Shares (the "Surety
Investment Guidelines" and, together with the Notes Investment Guidelines, the
"Investment Guidelines"). See "Investment Policies and Limitations --
Investment Guidelines." Fitch Investors Service, Inc. issued a rating of "Aaa"
for the Notes because the Fund's portfolio, although consisting principally of
lower rated securities, is managed in accordance with the Notes Investment
Guidelines which are designed to ensure that assets underlying the Notes will
be sufficiently diversified and will be of sufficient credit quality and
amount to justify an investment grade rating of "Aaa". As a result of the
issuance of the Surety Bond pursuant to an insurance agreement with Financial
Security (the "Surety Arrangement"), the Fund receives ratings from the Rating
Agencies of "AAA"/"Aaa" for the Preferred Shares. See "Description of Notes --
Asset Maintenance" and "Surety Arrangement for Preferred Shares --Insurance
Agreement."
The Fund's outstanding Common Stock, par value $0.01 per share, is listed
and traded on the Exchange. The average weekly trading volumes of the Fund's
shares on the Exchange for the Fund's fiscal years ended October 31, 1994 and
1995, and for the six month period ended April 30, 1996 were 290,115 shares,
187,338 shares and 230,319 shares, respectively. As of April 30, 1996, the
Fund had 25,380,503 shares of Common Stock outstanding and net assets
applicable to Common Stock of approximately $97.5 million. The Fund's
Preferred Shares and Notes are not traded on any stock exchange.
INFORMATION REGARDING THE INVESTMENT ADVISER
Prospect Street(R) Investment Management Co., Inc. (the "Investment
Adviser"), of Boston, Massachusetts, registered under the U.S. Investment
Advisers Act of 1940, has served as investment adviser to the Fund since its
inception. The Investment Adviser was organized in June 1988 to provide
institutional clients with investment management services.
Richard E. Omohundro, Jr., President of the Investment Adviser, served as
a "high-yield" specialist and Co-Manager of the High-yield Bond Group of
Merrill Lynch Capital Markets ("Merrill Lynch") from 1978 through 1987. During
that period, the High-yield Group raised approximately $13.6 billion in new
"high-yield" securities through 107 issues and provided one of the largest
secondary trading markets for "high-yield" securities. Mr. Omohundro provides
general advisory assistance to, analyzes certain policy considerations with,
and consults on a regular basis with, the Fund's portfolio manager. John A.
Frabotta, Vice President of the Investment Adviser, performed various
research, structuring and pricing functions involving "high-yield" securities
as a Vice President of Merrill Lynch. Mr. Frabotta serves as the portfolio
manager of the Fund (since September, 1990) and has over 20 years of
experience working with "high-yield", fixed income instruments.
The principals of the Investment Adviser are also involved in the
management of Prospect Street(R) Senior Loan Portfolio, L.P. Prospect
Street(R) Senior Loan Portfolio, L.P. is currently a $121 million portfolio
investing in assignments of or participations in U.S. senior floating rate
bank loans made primarily in connection with leveraged acquisitions and
financings. These bank loan interests are acquired in the syndication phase
and in the secondary market.
The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.65% of the Fund's average weekly value of the total assets less accrued
liabilities (excluding the principal amount of the notes and the liquidation
preference of the preferred stock and including accrued and unpaid dividends
on the preferred stock) up to and including $175,000,000 of such net assets,
0.55% on the next $50,000,000 of such net assets and 0.50% of the excess of
such net assets over $225,000,000. Since the Investment Adviser's fee is
based on the average weekly net assets of the Fund, the Investment Adviser
will benefit from an increase in the Fund's assets resulting from the Offer.
However, for a period of one-year commencing on the Expiration Date, the
Investment Adviser will waive its advisory fee with respect to any increase in
the Fund's net assets resulting from the exercise of any Rights pursuant to
the Offer in order to mitigate the impact of the offering expenses of this
Offer on the Fund and its shareholders. See "The Investment Adviser." In
addition, three of the Fund's seven Directors are "interested persons" (as
such term is defined under the Investment Company Act of 1940, as amended (the
"1940 Act")), of the Fund who could benefit indirectly from the Offer because
of such Directors' affiliations with the Investment Adviser. See "The
Investment Adviser."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered, among
others, in connection with the Offer.
Dilution. An immediate dilution of the aggregate net asset value of the
shares of Common Stock owned by Record Date Shareholders who do not fully
exercise their Rights is likely to be experienced as a result of the Offer
because the amounts received by the Fund with respect to the Subscription Price
(after payment of soliciting fees and other expenses of the Offer) are likely to
be less than the Fund's net asset value per share and because the number of
shares outstanding after the Offer is likely to increase in a greater percentage
than the increase in the size of the Fund's assets. As a result, Record Date
Shareholders are likely to experience a decrease in the net asset value per
share held by them, irrespective of whether they exercise all or any portion of
their Rights. In addition, Record Date Shareholders who do not fully exercise
their Rights should expect that they will, at the completion of the Offer, own a
smaller proportional interest in the Fund than would otherwise be the case.
Although it is not possible to state precisely the amount of such a decrease in
net asset value per share (and in the case of Record Date Shareholders who do
not fully exercise their Rights, in the aggregate net asset value of their
shares), because it is not known at this time what the Subscription Price will
be, what the net asset value per share will be on the Expiration Date or what
proportion of the Shares will be subscribed for, such dilution could be
substantial. For example, assuming (i) that all Rights are exercised by Record
Date Shareholders and the purchases of Shares upon the exercise of such Rights
are solicited by the Dealer Manager or a broker dealer, as the case may be and
(ii) that the Subscription Price is $3.86 per share which is the Fund's net
asset value per share at May 9, 1996, the Fund's net asset value per share
(after payment of the Dealer Manager and soliciting fees and estimated offering
expenses) would be reduced by approximately $0.04 per share or 1.0%. Assuming
(i) that all Rights are exercised by other holders of Rights and the purchases
of Shares upon the exercise of such Rights are solicited by the Dealer Manager
or a broker-dealer, as the case may be and (ii) that the Subscription Price is
$3.86 per share which is the Fund's net asset value per share, the Fund's net
asset value per share (after payment of the Dealer Manager and soliciting fees
and estimated offering expenses) would be reduced by approximately $1.3 per
share or 0.05%. The Fund cannot predict what portion of any Shares sold will be
purchased by Record Date Shareholders as compared to other holders of Rights or
what portion of the purchases will be solicited by participating broker-dealers.
The distribution to shareholders of transferable Rights, which themselves may
have realizable value, will afford nonparticipating shareholders the potential
of receiving a cash payment upon sale of such Rights, receipt of which may be
viewed as compensation for the possible dilution of their interest in the Fund.
Risk of "Leverage". Leverage creates the opportunity for greater total
returns, but at the same time involves certain risks. Any investment income or
gains earned from the capital contributed by the purchasers of the Notes and
the Preferred Shares which is in excess of interest and dividends due thereon
will cause the value of the dividends, if any, on the Common Stock to rise
more quickly than would otherwise be the case. Conversely, if the investment
performance of the capital contributed by the purchasers of the Notes and the
Preferred Shares fails to cover the interest and dividends on such capital,
the value of the Common Stock may decrease more quickly than would otherwise
be the case and dividends thereon will be reduced or eliminated. This is the
speculative effect of leverage. During the sharp "high-yield" market decline
of 1989 and 1990, the Fund's leverage contributed to a sharp decline in the
net asset value of the Common Stock. In order to remain in compliance with the
200% asset coverage ratio required by the 1940 Act, the Fund was required to
repurchase $45.0 million of the $50.0 million of outstanding Senior Extendible
Notes. Also, to maintain compliance with the Fund's Surety Investment
Guidelines the Fund was required to sell "high-yield" assets. The selling of
"high-yield" assets below their original cost and the retirement of $45.0
million of the Fund's Senior Extendible Notes during the fiscal years ended
October 31, 1990 and 1991, resulted in a reduction of the Fund's total assets
and caused the Fund to realize substantial capital losses. The Surety
Investment Guidelines and the asset coverage ratio requirements combined to
delay the Fund's reinvestment of cash into "high-yield" securities as the
market improved. The Fund's use of leverage is currently benefiting the
holders of Common Stock as the average cost of funds (pursuant to its
Preferred Share and Notes obligations) was approximately 5.97% as of April 30,
1996 while the "high-yield" market currently offers interest income at
annualized rates of approximately 10.0% to 12.0%.
The Fund may, if market conditions are appropriate, increase its level of
debt or other senior securities or refinance the Fund's current level of debt
or other senior securities in order to maintain or increase the level of
leverage that exists prior to this offering. At the date hereof, the Fund is
considering various refinancing alternatives with respect to its leverage.
Additionally, following the completion of the Offer, it is the intention of
the Fund, subject to market conditions, to add incremental leverage (to the
extent permitted under the 1940 Act) such that the percentage of the Fund's
assets representing leverage is approximately the same as it was prior to the
Offer.
Because the Notes and the Preferred Shares are senior to the Common Stock,
an investment in these securities is subject to a lesser degree of risk than
an investment in the Common Stock. In any liquidation of the Fund, first the
Notes, as Fund indebtedness, and next the Preferred Shares, as a senior class
of stock, would have to be paid in full before any payments would be made with
respect to the Common Stock. In addition, the risk of adverse changes in net
asset value is increased by the Fund's leveraged structure. See "Risk Factors
and Special Considerations."
Discount From Net Asset Value. Shares of closed-end funds frequently
trade at a market price which is less than the value of the net assets
attributable thereto. The possibility that shares of the Fund will trade at a
discount from net asset value is a risk separate and distinct from the risk
that the Fund's net asset value will decrease. It should be noted, however,
that in some cases, shares of closed-end funds trade at a premium to net asset
value. The Fund's shares have traded in the market above, at, and below net
asset value since the commencement of the Fund's operations. See "Trading and
Net Asset Value Information." In addition, the net asset value of the Fund
will change with changes in the value of its portfolio securities. Because the
Fund invests primarily in fixed-income securities, the net asset value of the
shares of the Fund can be expected to change as general levels of interest
rates fluctuate. When interest rates decline, the value of a fixed-income
portfolio can be expected to rise. Conversely, when interest rates rise, the
value of a fixed-income portfolio can be expected to decline.
High-Yield, High-Risk Investments. Fixed-income securities offering the
high current income sought by the Fund will ordinarily be in the lower rating
categories of recognized rating agencies or will be nonrated. These fixed-
income securities 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 obligation and will generally
involve more credit risk than securities in the higher rating categories. The
values of such securities tend to reflect individual corporate developments to
a greater extent than higher rated securities, which react primarily to
fluctuations in the general level of interest rates, and such securities are
frequently subordinated to the prior payment of senior indebtedness. In
addition, the trading market for "high-yield," high risk securities is
generally less liquid than the market for higher rated securities. As of April
30, 1996, approximately 96.10% of the Fund's total assets was invested in
fixed-income securities regarded by the Rating Agencies as below investment
grade (that is rated Ba1 or lower by Moody's or BB<p1> or lower by S&P).
In the severe adverse interest rate and economic environment of 1989 and
1990 the Fund suffered a substantial decline in its net asset value. In 1988,
when the Fund commenced operations, "high-yield" securities traded at yields
approximately 500 to 550 basis points higher than comparable U.S. Treasury
securities. In 1990, this spread widened to approximately 1250 basis points
resulting in substantial price declines in the corporate "high-yield" bond
market. During the fiscal years ended October 31, 1990 and 1991, the Fund was
obligated to repay $45.0 million of the Senior Extendible Notes, which
required the liquidation of investments that were selling at prices
substantially below their original purchase prices resulting in the
realization of substantial capital losses. Also during 1989 and 1990, the
level of "high-yield" debt security defaults increased as many issuers were
unable to obtain funds through financial intermediaries or the public "high-
yield" market. The effect of these developments on the Fund was a substantial
decline in the Fund's net asset value and a substantial reduction in the
Fund's monthly dividend. Also, the forced liquidation of a substantial portion
of the Fund's portfolio in order to repay the Senior Extendible Notes resulted
in the realization of substantial capital losses, and this severely limited
the ability of the Fund to return to its original net asset value as the
"high-yield" market improved. The "high-yield" market decline reversed in the
fourth quarter of 1990 and by mid year 1991, after reinvesting a substantial
amount of its cash, the Fund's net asset value had improved substantially but
to a level far less than the net asset value at the time the Fund commenced
operations.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt
retirements totaling $26.0 billion. Net new issue activity of "high-yield"
debt securities totaled $11.4 billion, $46.1 billion, $22.2 billion and $26.7
billion for the calendar years 1992, 1993, 1994 and 1995, respectively. Net
new issue activity of "high-yield" debt securities for the three month period
ended March 31, 1996 was $17.7 billion. The statistical information with
respect to new issue activity is based upon information the Fund obtained from
the CS First Boston High Yield Handbook. The spread between the yield on U.S.
Treasury securities and the high-yield market has fluctuated between 400 and
600 basis points (4.0% to 6.0%) during the 1992 to 1995 period, which is more
in line with the historical spread relationship.
Since 1978, the historical weighted default rate on "high-yield" debt
securities has been 3.20%. The default rates on "high-yield" debt securities
for the calendar years 1990, 1991, 1992, 1993, 1994 and 1995 were 7.98%,
9.33%, 2.89%, 0.96%, 0.44% and 2.24%, respectively. The default rate on "high-
yield" debt securities for the three month period ended March 31, 1996 was
0.20%. The defaulted amount of "high-yield" debt securities was $18.1 billion
in 1990, $20.7 billion in 1991, $6.5 billion in 1992, $24.0 billion in 1993,
$1.3 billion in 1994 and $6.6 billion in 1995. The defaulted amount on "high-
yield" debt securities for the three month period ended March 31, 1996 was
$612 million. The statistical information with respect to historical default
rates and amounts is based on information the Fund obtained from the CS First
Boston High Yield Handbook.
For a more detailed discussion of the risks and special considerations
with respect to "high-yield," high risk securities, see "Risk Factors and
Special Considerations -- High-Yield, High Risk Investments."
Other Matters. There are additional matters which should be considered in
connection with the Offer including provisions of the Fund's Articles of
Incorporation, as amended (the "Articles of Incorporation") which may grant
certain special voting rights to holders of the Preferred Shares, limitations
on the ability of the Fund to declare dividends or other distributions
contained in the 1940 Act and in the Note Purchase Agreement (as defined
herein) governing the Notes, and the possible conversion of the Fund to an
open-end investment company. See "Risk Factors and Special Considerations" and
"Share Repurchases; Conversion to Open-End Status."
Investors should carefully consider their ability to assume the foregoing
risks before making an investment in the Fund. An investment in shares of the
Fund is not appropriate for all investors. See "Risk Factors and Special
Considerations."
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
<S> <C>
Shareholder Transaction Expenses:
Sales Load (as a percentage of offering price)(1)(2) ....................................... 3.75%
-----
Annual Expenses (expenses paid by the Fund before it makes any distributions,
expressed as a percentage of the Fund's net assets at the conclusion of this
offering):
Management Fees(3) ......................................................................... 0.65%
-----
Interest Expense(4) ........................................................................ 0.99%
-----
Other Expenses(2) .......................................................................... 0.71%
-----
Total Annual Expenses .................................................................. 2.35%
====
<CAPTION>
EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aninvestor would pay the following expenses on a $1,00
investment, assuming a 5% annual return throughout
the periods(5) ....................................... $60 $109 $158 $296
<FN>
- ----------
(1) The Dealer Manager and other broker-dealers who have executed and delivered
a Soliciting Dealer Agreement and who have solicited the exercise of Rights
will receive fees for their soliciting efforts equal to 2.00% of the
Subscription Price per Share with respect to Shares purchased by Record Date
Shareholders and 3.75% of the Subscription Price per Share with respect to
Shares purchased by other holders of Rights (excluding Record Date
Shareholders), in each case where the exercise was solicited by the Dealer
Manager or such other soliciting broker-dealer, as the case may be. The Fund
has also agreed to pay the Dealer Manager a fee for financial advisory
services in connection with the Offer equal to $150,000. These fees will be
borne by the Fund and indirectly by all of the Fund's shareholders,
including those who do not exercise their Rights. The Sales Load percentage
assumes that all of the Rights are exercised by Rights holders other than
Record Date Shareholders where the exercise is solicited by the Dealer
Manager or a participating broker dealer.
(2) Does not include expenses of the Fund incurred in connection with the
Offer, estimated at $495,000.
(3) The Fund pays the Investment Adviser a monthly fee at an annual rate
ranging from 0.65% to 0.50%. See "The Investment Adviser".
(4) At the date hereof, the Fund is considering various refinancing alternatives
with respect to its leverage. Additionally, following the completion of the
Offer, it is the intention of the Fund, subject to market conditions, to add
incremental leverage (to the extent permitted under the 1940 Act) such that
the percentage of the Fund's assets representing leverage is approximately
the same as it was prior to the Offer. Accordingly, the Interest Expense as
set forth herein assumes that the Interest Expense as a percentage of the
Fund's net assets will be the same after the Offer.
(5) The example reflects the Sales Load and other expenses of the Fund incurred
in connection with the Offer and assumes that the Rights are exercised by
Rights holders other than Record Date Shareholders where the exercise is
solicited by the Dealer Manager or a participating broker dealer.
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly.
The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value and an expense ratio of 2.35%. The tables above
and the assumption in the Example of a 5% annual return are required by
Securities and Exchange Commission regulations applicable to all investment
companies. THE EXAMPLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN. Actual expenses or annual rates of
return may be more or less than those assumed for purposes of the Example. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan may receive shares purchased or issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."
The figures provided under "Other Expenses" are based upon estimated
amounts for the current fiscal year. See "The Investment Adviser" for
additional information.
<PAGE>
FINANCIAL INFORMATION SUMMARY
The table below sets forth certain specified information for a share of
Common Stock outstanding throughout each period presented. The financial
highlights for each period presented have been audited by Arthur Andersen LLP,
the Fund's independent public accountants, whose report thereon was unqualified.
The information should be read in conjunction with the financial statements and
notes thereto, which are incorporated herein by reference, in the Fund's Annual
Report as of October 31, 1995, which is available upon request from the Fund's
registrar and transfer agent, State Street Bank and Trust Company.
FINANCIAL HIGHLIGHTS
(FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
DECEMBER 5, 1988
(COMMENCEMENT
FOR THE FISCAL YEARS ENDED OCTOBER 31, OF OPERATIONS)
---------------------------------------------------------------------------------- TO OCTOBER 31,
1995 1994 1993 1992 1991 1990 1989
------- --------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value --
beginning of period ..... $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82 $ 9.15(b)
-------- -------- -------- ------- ------- ------- --------
Net investment income ..... .45 .48# .63# .62 .55 .98 1.31
Net realized and unrealized
gain (loss) on
investment .............. .03 (.38)# .39# .07 .56 (3.43) (2.32)
-------- -------- -------- ------- ------- ------- --------
Total from investment
operations ........ $ .48 $ .10 $ 1.02 $ .69 $ 1.11 $ (2.45) $ (1.01)
-------- -------- -------- ------- ------- ------- --------
Distributions:
Dividends from net
investment income
To preferred
stockholders ......... (.05) (.03) (.06) (.10) (.16) (.22) (.19)
To common stockholders (.42) (.45) (.62) (.45) (.36) (.76) (1.12)
Dividends to common stock-
holders from paid-in-
capital ............... -- -- -- -- -- (.09) (.01)
-------- -------- -------- ------- ------- ------- --------
Total distributions $ (.47) $ (.48) $ (.68) $ (.55) $ (.52) $ (1.07) $ (1.32)
-------- -------- -------- ------- ------- ------- --------
Effect of sale of common
stock and related
expenses ................ $ -- $ (.18) $ (.12) $ -- $ -- $ -- $ --
-------- -------- -------- ------- ------- ------- --------
Net asset value -- end
of period................ $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82
======== ======== ======== ======= ======= ======= ========
Per share market value:
End of period ........... $ 3.88 $ 3.50 $ 4.25 $ 4.00 $ 3.50 $ 2.50 $ 6.00
======== ======== ======== ======= ======= ======= ========
Total investment return 28.57% (7.78)% 23.25% 27.99% 57.36% (50.21)% (31.33)%
======== ======== ======== ======= ======= ======= ========
Net assets, end of period,
applicable to common
stock (a) ............... $ 93,309 $ 92,072 $ 79,438 $55,178 $53,040 $45,028 $ 92,487
======== ======== ======== ======= ======= ======= ========
Net assets, end of period,
applicable to preferred
stock (a) ............... $ 20,000 $ 20,000 $ 20,000 $30,000 $30,000 $30,000 $ 30,000
======== ======== ======== ======= ======= ======= ========
Net assets, end of period(a) $113,309 $112,072 $ 99,438 $85,178 $83,040 $75,028 $122,487
======== ======== ======== ======= ======= ======= ========
Ratio of operating expenses
to average net assets** 2.28%(+) 2.30%(+) 2.13%(+) 2.28%(+) 2.93%(+) 6.15%(+) 4.89%*(+)
Ratio of net investment
income to average
net assets** ............ 9.39% 8.64% 9.26% 9.33% 9.24% 13.23% 13.88%*
Portfolio turnover rate ... 80.71% 72.00% 117.20% 97.86% 114.00% 63.50% 89.70%*
<FN>
(a) Dollars in thousands.
(b) Net of initial offering and underwriting costs.
* Annualized.
** Ratios calculated on the basis of expenses and net investment income applicable to both the common and preferred shares
relative to the average net assets of both the common and preferred shareholders.
(+) Excluding interest expense, the ratio of operating expenses to average net assets is 1.29%, 1.32%, 1.50%, 1.72%, 2.23%,
2.60% and 1.279%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's
rights offerings.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPITALIZATION AT APRIL 30, 1996
AMOUNT OUTSTANDING AMOUNT HELD
EXCLUSIVE OF AMOUNT BY THE FUND
HELD BY THE FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT ACCOUNT
-------------- ----------------- ------------------- ------------
<S> <C> <C> <C>
Senior Notes(1) .................................... -- $20,000,000 -0-
Taxable Auction Rate Preferred Stock, no
par value, Liquidation Preference
$100,000 per share(2) ............................ 1,000 shares 200 shares -0- shares
Common Stock, $0.01 par value....................... 100,000,000 shares 25,380,503 shares -0- shares
</TABLE>
INFORMATION REGARDING SENIOR SECURITIES
The following table shows certain information regarding each class of senior
security of the Fund as of the end of each fiscal year of the Fund since its
inception.
<TABLE>
<CAPTION>
INVOLUNTARY
ASSET COVERAGE LIQUIDATION APPROXIMATE MARKET
AT TOTAL AMOUNT FOR NOTES(3) PREFERENCE VALUE PER
OCTOBER 31 OUTSTANDING OR SHARES(4) PER SHARE SHARE OR NOTE
---------- ------------ ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
Senior Extendible
Notes(1) 1989 $50,000,000 $ 3,450 -- $1,000.00
1990 15,000,000 6,002 -- 1,000.00
1991 5,000,000 17,608 -- 1,000.00
1992 5,000,000 18,036 -- 1,087.50
1993 0 -- -- --
Senior Notes(1)
1993 $20,000,000 $ 5,972 -- $ 997.50
1994 20,000,000 6,604 -- 937.10
1995 20,000,000 6,665 -- 987.50
Taxable Auction Rate
Preferred Stock(2) 1989 300 Shares $408,291 $100,000 $ 100,000
1990 300 Shares 250,094 100,000 100,000
1991 300 Shares 276,800 100,000 100,000
1992 300 Shares 283,927 100,000 100,000
1993 200 Shares 497,188 100,000 100,000
1994 200 Shares 560,358 100,000 100,000
1995 200 Shares 566,544 100,000 100,000
<FN>
- ----------
(1) In July 1993, the Fund repurchased the remaining $5,000,000 principal amount of its Senior Extendible Notes, which carried an
annual interest rate through December 31, 1993 of 10.28%, for $5,178,000. The Fund thereafter issued $20,000,000 of new Senior
Notes payable December 1, 1998, which bear interest at a fixed annual rate of 6.53%.
(2) In July 1993, the Fund redeemed 100 shares of its Taxable Auction Rate Preferred Stock for $100,000 per share plus accrued
interest, leaving 200 shares outstanding.
(3) Amount shown is per $1,000 of Senior Extendible Note or Senior Note, as the case may be. Calculated by subtracting the Fund's
total liabilities (not including senior securities) from the Fund's total assets and dividing such amount by the quotient of
(a) the principal amount of outstanding Senior Extendible Notes or the Senior Notes, as the case may be, divided by (b) $1,000.
At April 30, 1996, the asset coverage for the $20,000,000 of Senior Notes was approximately $6,880 per $1,000 of Senior Notes.
(4) Amount shown is per share of Taxable Auction Rate Preferred Stock. Calculated by subtracting the Fund's total liabilities
(including senior securities constituting debt but not including the Taxable Auction Rate Preferred Stock) from the Fund's
total assets and dividing such amount by the number of outstanding shares of Taxable Auction Rate Preferred Stock. At April 30,
1996, the asset coverage for the 200 outstanding shares of Taxable Auction Rate Preferred Stock was approximately $587,500 per
share of Taxable Auction Rate Preferred Stock.
</TABLE>
<PAGE>
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded both at a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above net asset value, there can be no assurance
that this premium will continue after the Offer or that the shares will not
again trade at a discount. Shares of other closed-end investment companies
frequently trade at a discount from net asset value. See "Risk Factors and
Special Considerations."
The following table shows the high and low sale prices of the Fund's Common
Stock on the New York Stock Exchange Composite Tape, quarterly trading volume on
the Exchange, the high and low net asset value per share and the high and low
premium or discount at which the Fund's shares were trading for each fiscal
quarter during the two most recent fiscal years and each fiscal quarter during
the current fiscal year.
<TABLE>
<CAPTION>
QUARTERLY
TRADING PREMIUM/(DISCOUNT)
MARKET PRICE VOLUME NET ASSET VALUE TO NET ASSET VALUE(%)
------------------------ --------------- ------------------------ ----------------------
QUARTER ENDED HIGH LOW (THOUSANDS HIGH LOW HIGH LOW
- ------------- ---- --- OF SHARES) ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1994 ..................... 4 3/8 3 7/8 7,028.8 4.28 4.08 3.16 (9.04)
April 30, 1994 ....................... 4 3/8 3 5/8 3,548.8 4.21 3.89 3.92 (6.81)
July 31, 1994 ........................ 4 3 5/8 2,544.3 3.93 3.84 1.78 (6.81)
October 31, 1994 ..................... 3 3/4 3 3/8 2,069.9 3.90 3.70 (1.06) (10.24)
January 31, 1995 ..................... 3 1/2 3 1/4 2,658.0 3.71 3.57 (2.23) (11.20)
April 30, 1995 ....................... 3 3/4 3 3/8 2,114.9 3.66 3.59 3.59 (4.37)
July 31, 1995 ........................ 3 7/8 3 1/2 2,484.4 3.73 3.68 4.45 (1.76)
October 31, 1995 ..................... 3 7/8 3 5/8 2,509.7 3.74 3.70 4.73 (2.82)
January 31, 1996 ..................... 4 3 3/4 2,826.5 3.73 3.67 8.70 0.81
April 30, 1996 ....................... 4 1/8 3 7/8 3,313.9 3.84 3.71 7.82 1.71
July 31, 1996
(through May 9, 1996) .............. 4 1/8 3 7/8 449.4 3.86 3.83 7.70 3.63
</TABLE>
The closing market price and net asset value per share of the Fund's Common
Stock on May 9, 1996 were $4.00 and $3.86, respectively.
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure, consisting of (i) $20,000,000 aggregate principal
amount of Notes, (ii) 200 Preferred Shares (liquidation preference $100,000 per
share) and (iii) 25,380,503 shares of Common Stock, as of April 30, 1996, The
Fund's investment objective is to provide high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high-yield," high risk securities (commonly referred
to as "junk bonds"). The Fund invests primarily in fixed-income securities rated
in the lower categories by established rating agencies (consisting principally
of fixed-income securities rated "BB"/"Ba" or lower by the Rating Agencies<1>)
or nonrated fixed-income securities deemed by the Investment Adviser to be of
comparable quality. The Fund's investments are subject to the Investment
Guidelines. See "Investment Policies and Limitations -- Investment Guidelines."
The fixed-income securities in which the Fund invests 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 obligation
and generally involve more credit risk than securities in the higher rating
categories. See "Investment Policies and Limitations" and "Risk Factors and
Special Considerations."
The Fund's portfolio consists primarily of "high-yield," high risk
fixed-income securities. "High-yield," high risk securities offer a higher yield
to maturity than comparable securities with higher ratings as compensation for
holding an obligation of an issuer perceived to be less creditworthy. In the
severe adverse interest rate and economic environment of 1989 and 1990 the Fund
suffered a substantial decline in its net asset value. In 1988, when the Fund
commenced operations, "high-yield" securities traded at yields approximately 500
to 550 basis points higher than comparable U.S. Treasury securities. In 1990,
this spread widened to approximately 1250 basis points resulting in substantial
price declines in the corporate "high-yield" bond market. During the fiscal
years ended October 31, 1990 and 1991 the Fund was obligated to repay $45.0
million of the previously outstanding Senior Extendible Notes, which required
the liquidation of investments that were selling at prices substantially below
their original purchase prices resulting in the realization of substantial
capital losses. Also during 1989 and 1990, the level of "high-yield" debt
security defaults increased as many issuers were unable to obtain funds through
financial intermediaries or the public "high-yield" market. The effect of these
developments on the Fund was a substantial decline in the Fund's net asset value
and a substantial reduction in the Fund's monthly dividend. Also, the forced
liquidation of a substantial portion of the Fund's portfolio in order to repay
the Senior Extendible Notes resulted in the realization of substantial capital
losses, and this severely limited the ability of the Fund to return to its
original net asset value as the high-yield market improved. The high-yield
market decline reversed in the fourth quarter of 1990 and by mid year 1991,
after reinvesting a substantial amount of its cash, the Fund's net asset value
had improved substantially but to a level far less than the net asset value at
the time the Fund commenced operations.
The high-yield market, as measured by the CS First Boston High Yield Index,
posted total annual returns of 43.75%, 16.66%, 18.91%, -0.97% and 17.38% for the
calendar years 1991, 1992, 1993, 1994 and 1995, respectively. For the three
month period ended March 31, 1996, the CS First Boston High Yield Index produced
a total return of 2.16% and for the trailing twelve month period produced a
total return of 16.14%. The ten year U.S. Treasury Bond produced a total return
of 16.46%, 6.52%, 11.94%, -6.08% and 23.68% for the calendar years 1991, 1992,
1993, 1994 and 1995, respectively. See "Financial Information Summary" for
information concerning the Fund's return.
<1>Throughout this Prospectus, references to ratings by the Rating Agencies will
indicate the S&P rating followed by the Moody's rating in the format shown.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt retirements
totaling $26.0 billion. Net new issue activity of "high-yield" debt securities
totaled $11.4 billion, $46.1 billion, $22.2 billion and $26.7 billion for the
calendar years 1992, 1993, 1994 and 1995, respectively. Net new issue activity
of "high-yield" debt securities for the three month period ended March 31, 1996
was $17.7 billion. The statistical information with respect to new issue
activity is based upon information the Fund obtain from the CS First Boston High
Yield Handbook. The spread between the yield on U.S. Treasury securities and the
high-yield market has fluctuated between 400 and 600 basis points (4.0% to 6.0%)
during the 1992 to 1995 period, which is more in line with the historical spread
relationship.
Since 1978, the historical weighted default rate on "high-yield" debt
securities has been 3.20%. The default rates on "high-yield" debt securities for
the calendar years 1990, 1991, 1992, 1993, 1994 and 1995 were 7.98%, 9.33%,
2.89%, 0.96%, 0.44% and 2.24%, respectively. The default rate on "high-yield"
debt securities for the three month period ended March 31, 1996 was 0.20%. The
defaulted amount of "high-yield" debt securities was $18.1 billion in 1990,
$20.7 billion in 1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion
in 1994 and $6.6 billion in 1995. The defaulted amount on "high-yield" debt
securities for the three month period ended March 31, 1996 was $612 million. The
statistical information with respect to historical default rates and amounts is
based on information the Fund obtained from the CS First Boston High Yield
Handbook.
The capital structure of the Fund has been designed to take advantage of the
historical spread in yields between "high-yield" securities and representative
U.S. Treasury securities, compared with the average default loss on "high-yield"
securities. In addition, through investment leverage, investors in the Common
Stock of the Fund receive increased yields to the extent that the rate of return
(i.e., the current interest yield on the Fund's portfolio reduced by the actual
default loss rate experienced on that portfolio) earned on the Fund's assets,
exceeds, after expenses of Fund management, the interest and dividend rates on
the Notes and Preferred Shares. Conversely, to the extent that the rate of
return on the portfolio does not exceed the interest and dividend rates on the
Notes and Preferred Shares, yield to investors in the Common Stock will be
reduced.
The Fund is a closed-end investment company. Closed-end investment companies
differ from open-end investment companies (commonly referred to as "mutual
funds") in that closed-end investment companies have a fixed capital base,
whereas open-end companies issue securities redeemable at net asset value at any
time at the option of the shareholder and typically engage in a continuous
offering of their shares. Accordingly, open-end investment companies are subject
to periodic asset in-flows and out-flows that can complicate portfolio
management. Closed-end investment companies do not face the prospect of having
to liquidate portfolio holdings to satisfy redemptions at the option of
shareholders or having to maintain cash positions to meet the possibility of
such redemptions. The Fund will, however, be required to have sufficient cash or
cash equivalents to meet interest payments on the Notes and dividend payments on
the Preferred Shares and to fund certain redemptions of these securities in
certain circumstances. See "Description of Notes," "Description of Capital
Stock" and "Surety Arrangement for Preferred Shares."
The Fund was organized as a corporation under the laws of Maryland on May
13, 1988 and has registered with the Securities and Exchange Commission (the
"SEC") under the 1940 Act. The Fund's principal office is located at 60 State
Street, Boston, Massachusetts 02109. The Fund's Investment Adviser is Prospect
Street(R) Investment Management Co., Inc., an investment management firm
registered with the SEC under the Investment Advisers Act of 1940, as amended.
See "The Investment Adviser."
THE OFFER
TERMS OF THE OFFER
The Fund is issuing Rights, as of the close of business on May 10, 1996, to
subscribe for the Shares to Record Date Shareholders. Each Record Date
Shareholder is being issued one transferable Right for each three shares of
Common Stock owned on the Record Date. No fractional Rights will be issued. The
Rights entitle the holders thereof to acquire at the Subscription Price one
Share for each Right held. Record Date Shareholders holding a number of shares
of Common Stock that is not an integral multiple of three will receive one
additional Right. In the case of shares held of record by Cede or by any other
depository or nominee, additional Rights to be received by beneficial owners for
whom Cede or any other depository or nominee is the holder of record will be
issued to Cede or such other depository or nominee, only if Cede or such other
depository or nominee provides to the Fund on or before the close of business on
June 3, 1996 written representation of the number of Rights required for such
issuance. The Rights are evidenced by Subscription Certificates which will be
mailed to Record Date Shareholders except that Subscription Certificates will
not be mailed to Record Date Shareholders whose record addresses are outside the
United States (the term "United States" includes the states, the District of
Columbia and the territories and possessions of the United States) ("Foreign
Record Date Shareholders"). The Rights to which such Subscription Certificates
relate will be held by the Subscription Agent for such Foreign Record Date
Shareholders' accounts until instructions are received to exercise, sell or
transfer the Rights. If no instructions have been received by 12:00 Noon, New
York time, three Business Days prior to the Expiration Date, the Rights of those
Foreign Record Date Shareholders will be transferred by the Subscription Agent
to the Dealer Manager who will use its best efforts to sell the Rights on the
Exchange. The net proceeds, if any, from the sale of those Rights by the Dealer
Manager will be remitted to the Foreign Record Date Shareholders. See "Sale of
Rights -- Sales through Subscription Agent and Dealer Manager."
Completed Subscription Certificates may be delivered to the Subscription
Agent at any time during the Subscription Period, which commences on the date of
this Prospectus and ends at 5:00 p.m., New York time, on June 21. 1996, unless
extended by the Fund until 5:00 p.m., New York time, on July 22, 1996, See
"Expiration of Offer." Rights Holders may also purchase Shares in the Primary
Subscription. All Rights may be exercised immediately upon receipt and until
5:00 p.m. on the Expiration Date.
Any Record Date Shareholder who fully exercises all Rights initially issued
to him is entitled to subscribe for Shares which were not otherwise subscribed
for by Exercising Rights Holders in the Primary Subscription. In addition, any
Rights Holder who exercises Rights is entitled to subscribe for Shares which are
not otherwise subscribed for in the Primary Subscription or pursuant to the
Primary Over-Subscription Privilege. Shares acquired pursuant to the
Over-Subscription Privilege may be subject to allotment, which is more fully
discussed below under "The Offer -- Over-Subscription Privilege."
Rights will be evidenced by Subscription Certificates (a form of
Subscription Certificate is attached hereto as Appendix A) and may be exercised
by completing the Subscription Certificate and delivering it, together with
payment, either by means of a Notice of Guaranteed Delivery or a check, to the
Subscription Agent. The method by which Rights may be exercised and Shares paid
for is set forth below in "Exercise of Rights" and "Payment for Shares." An
Exercising Rights Holder will have no right to rescind a purchase after the
Subscription Agent has received payment. See "Payment for Shares" below. Shares
issued pursuant to an exercise of Rights will be listed on the Exchange.
The Rights are transferable until the Expiration Date and will be admitted
for trading on the Exchange. Assuming a market exists for the Rights, the Rights
may be purchased and sold through usual brokerage channels, or delivered on or
before June 19, 1996 (or if the Offer is extended, until two business days prior
to the Expiration Date), to the Subscription Agent for sale through the Dealer
Manager. Although no assurance can be given that a market for the Rights will
develop, trading in the Rights on the Exchange may be conducted until and
including the close of trading on the last Exchange trading day prior to the
Expiration Date. The method by which Rights may be transferred is set forth
below in "The Offer -- Sale of Rights."
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
The distribution to Record Date Shareholders of transferable Rights which
themselves may have realizable value will also afford nonparticipating Record
Date Shareholders the potential of receiving a cash payment upon sale of such
Rights, receipt of which may be viewed as compensation for the possible dilution
of their interest in the Fund.
The first regular monthly dividend to be paid on shares of Common Stock
acquired upon exercise of Rights will be the first monthly dividend, the record
date for which occurs after the issuance of such shares following the Expiration
Date. It is the Fund's present policy to pay dividends on the last business day
of each month to shareholders of record seven days prior to the payment date.
Assuming the Subscription Period is not extended beyond June 21, 1996, it is
expected that the first dividend received by shareholders acquiring shares in
this rights offering will be paid on the last business day of July 1996.
The Fund completed transferable rights offerings on March 4, 1993 and
November 23, 1993, which permitted shareholders to acquire, at a subscription
price of $3.80 and $3.60, respectively, one new share for each three rights held
as of the record date of such rights offerings. All of the rights issued by the
Fund pursuant to the rights offerings were exercised and, as a result, 4,625,000
new shares of Common Stock were issued in March 1993 with net proceeds to the
Fund of approximately $16.7 million and 6,210,000 new shares of Common Stock
were issued in December 1993 with net proceeds to the Fund of approximately
$21.3 million. All of the net proceeds from the exercise of the rights pursuant
to the prior rights offerings have been invested in new securities in accordance
with the Fund's investment objective.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its shareholders to increase the assets of the
Fund available for investment so that the Fund will be in a better position to
take advantage of available investment opportunities. In approving the rights
offering, the Board of Directors of the Fund considered, among other things, the
benefits to shareholders resulting from prior rights offerings by the Fund, the
current yield to shareholders and the impact that a rights offering would have
on such yield and the benefits and drawbacks of conducting a transferable versus
non-transferable rights offering. Additionally, the Fund believes that
increasing the size of the Fund would also result in lowering the Fund's
expenses as a proportion of average net assets, to the extent that such expenses
are not calculated with reference to the aggregate amount of its assets.
Further, the Offer seeks to reward the Fund's shareholders by giving them the
right to purchase additional shares at a price that may be below the market
value of the shares without incurring any direct transaction costs.
In the event this offering proves successful, the additional Common Stock
thereafter issued and outstanding would enable the Fund to add additional
leverage through the issuance and sale of additional Preferred Shares and/or
notes, assuming such shares and/or notes could be sold upon terms satisfactory
to the Fund, or through other financing arrangements. Such leverage would be
added in the event the Board of Directors determines such action to be in the
best interests of the holders of the Common Stock and would be subject to the
existence and anticipation of a favorable interest rate environment. At the date
hereof, the Fund is considering various refinancing alternatives.
The Investment Adviser will benefit from the Offer because the Investment
Adviser's fee is based on the average weekly net assets of the Fund. However,
for a period of one year commencing on the Expiration Date, the Investment
Adviser will waive its advisory fee with respect to any increase in the Fund's
net assets resulting from the exercise of any rights pursuant to the Offer in
order to mitigate the impact of the offering expenses of this Offer on the Fund
and its shareholders. It is not possible to state precisely the amount of
additional compensation the Investment Adviser will receive as a result of the
Offer because it is not known how many Shares will be subscribed for and because
the proceeds of the Offer will be invested in additional portfolio securities
which will fluctuate in value. However, in the event that all the Rights are
exercised in full and on the basis of the Estimated Subscription Price of
$3.86 per Share (based upon the net asset value per share on May 9, 1996),
and assuming that all of the Shares are purchased by Record Date Shareholders
where the purchases were solicited by the Dealer Manager or other soliciting
broker-dealers and that the Investment Adviser had not waived a portion of its
advisory fee for one year with respect to the increase in the net assets of the
Fund resulting from the purchase of such shares, the Investment Adviser would
receive additional annual advisory fees of approximately $205,301 as a result
of the increase in assets under management (which may be more or less after such
one year period). Three of the Fund's Directors who voted to authorize the Offer
are "interested persons" of the Fund as that term is defined in the 1940 Act.
These three Directors could benefit indirectly from the Offer because of their
affiliations with the Investment Adviser. The other Directors who voted to
authorize the Offer are not "interested persons" of the Fund. See "The
Investment Adviser" and "Directors and Officers."
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Exercising Rights Holders (the "Excess Shares")
will be offered, by means of the Primary Over-Subscription Privilege, to the
Record Date Shareholders who have exercised all exercisable Rights issued to
them and who wish to acquire more than the number of Shares for which the Rights
issued to them are exercisable. Record Date Shareholders should indicate, on the
Subscription Certificate which they submit with respect to the exercise of the
Rights issued to them, how many Excess Shares they are willing to acquire
pursuant to the Primary Over-Subscription Privilege. If sufficient Excess Shares
remain, all over-subscriptions will be honored in full.
If subscriptions for Excess Shares exceed the Excess Shares available, the
available Excess Shares will be allocated first among Record Date Shareholders,
and beneficial owners for whom Qualified Financial Institutions (as defined
herein) hold Rights, who subscribe for an aggregate of 100 or fewer shares of
Common Stock (inclusive of shares subscribed for by such Record Date
Shareholders or beneficial owners in the Primary Subscription). Any Excess
Shares remaining thereafter will be allocated among all other Record Date
Shareholders. In each case, if Excess Shares are insufficient to permit such
allocation, Excess Shares will be allocated pro rata among Record Date
Shareholders being prorated, based on the number of Shares such Record Date
Shareholders subscribed for in the Primary Subscription relative to the
aggregate number of Shares subscribed for in the Primary Subscription by all
such Record Date Shareholders then being prorated. For purposes of this
Prospectus, "Qualified Financial Institution" shall mean a registered
broker-dealer, commercial bank or trust company, securities depository or
participant therein, or nominee thereof.
Any Rights Holder who exercises Rights is entitled to subscribe for Excess
Shares which are not otherwise subscribed for pursuant to the Primary Over-
Subscription Privilege. Rights Holders should indicate, in the Subscription
Certificate which they submit with respect to the exercise of any Rights, how
many Excess Shares they are willing to acquire pursuant to the Secondary Over-
Subscription Privilege. If sufficient Excess Shares remain, all
oversubscriptions by Rights Holders will be honored in full. If remaining Excess
Shares are insufficient to permit such allocation, such Excess Shares will be
allocated pro rata among Rights Holders being prorated, based on the number of
Shares such Rights Holders subscribed for in the Primary Subscription relative
to the aggregate number of Shares subscribed for in the Primary Subscription by
all such Rights Holders then being prorated.
The percentage of Excess Shares each over-subscribing Exercising Rights
Holder may acquire may be rounded up or down to result in delivery of whole
Shares. The allocation process may involve a series of allocations in order to
assure that the total number of Excess Shares available for over-subscriptions
is distributed on a pro rata basis.
The Fund will not offer or sell any Shares which are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Rights
will be the net asset value per share as of the close of business on the
Expiration Date. Exercising Rights Holders will not know the Subscription Price
at the time of exercise and will be required initially to pay for the Shares at
the Estimated Subscription Price of $3.86 per Share (based on the net asset
value on May 9, 1996). Exercising Rights Holders will have no right to rescind a
purchase after receipt by the Subscription Agent of their payment for Shares.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on March 29, 1996 and the final terms of the Offer after
the close of trading on the Exchange on May 10, 1996. The net asset value per
share of Common Stock at the close of business on March 29, 1996 and on May 9,
1996 was $3.77 and $3.86, respectively, and the last reported sale price of a
share of the Fund's Common Stock on the Exchange on those dates was $3.875 and
$4.00, respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on June 21, 1996, unless
extended by the Fund until 5:00 p.m., New York time, on July 22, 1996 (the
"Expiration Date"). Rights will expire on the Expiration Date and may not be
exercised thereafter.
SUBSCRIPTION AGENT
The Subscription Agent is State Street Bank and Trust Company, which will
receive for its administrative, processing, invoicing and other services as
subscription agent, a fee estimated to be $34,000 and reimbursement for all
out-of-pocket expenses related to the Offer. The Subscription Agent is also the
Fund's custodian, transfer agent, dividend-disbursing agent and registrar.
Questions regarding the Subscription Certificates should be directed to State
Street Bank and Trust Company, Corporate Reorganization, P.O. Box 9061, Boston,
Massachusetts 02205 (telephone (800) 426-5523, or if outside the United States
(617) 328-5000); shareholders may also consult their brokers or nominees. Signed
Subscription Certificates should be sent to State Street Bank and Trust Company,
by one of the methods described below:
(1) BY MAIL: (2) BY EXPRESS MAIL OR OVERNIGHT
State Street Bank and Trust Company COURIER:
Corporate Reorganization State Street Bank and Trust Company
P.O. Box 9061 Corporate Reorganization
Boston, Massachusetts 02205-8686 Two Heritage Drive
North Quincy, Massachusetts 02171
(3) BY HAND: (4) BY FACSIMILE (TELECOPIER):
Bank of Boston (617) 774-4519, with the original
Attention: Boston EquiServe Subscription Certificate to be sent
55 Broadway by one of the methods described in
3rd Floor (1), (2) or (3). Confirm facsimile
New York, New York 10006 by telephone to (617) 774-4511.
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 958-6468
The Information Agent will receive a fee estimated to be $8,000 and
reimbursement for all out-of-pocket expenses related to the Offer.
EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the Subscription
Certificate which accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment for the Shares as
described below under "Payment for Shares." Completed Subscription Certificates
must be received by the Subscription Agent prior to 5:00 p.m., New York time, on
the Expiration Date (unless payment is effected by means of a Notice of
Guaranteed Delivery as described below under "Payment for Shares") at the
offices of the Subscription Agent at the address set forth above. Rights may
also be exercised through an Exercising Rights Holder's broker, who may charge
such Exercising Rights Holder a servicing fee.
Qualified Financial Institutions who hold shares of Common Stock as nominee
for the account of others should notify the respective beneficial owners of such
shares as soon as possible to ascertain such beneficial owners' intentions and
to obtain instructions with respect to the Rights. If the beneficial owner so
instructs, the nominee should complete the Subscription Certificate and submit
it to the Subscription Agent with the proper payment. In addition, beneficial
owners of Common Stock or Rights held through such a nominee should contact the
nominee and request the nominee to effect transactions in accordance with the
beneficial owner's instructions.
EXERCISE OF THE OVER-SUBSCRIPTION PRIVILEGE
Record Date Shareholders who fully exercise all Rights issued to them and
secondarily Rights Holders may participate in the Over-Subscription Privilege by
indicating on their Subscription Certificate the number of Shares they are
willing to acquire pursuant thereto. If sufficient Excess Shares remain after
the Primary Subscription, all over-subscriptions will be honored in full;
otherwise Excess Shares will be allocated first to Record Date Shareholders and
then (if any Excess Shares remain) to Rights Holders, and the number of Shares
issued to some or all Exercising Rights Holders participating in the
Over-Subscription Privilege may be reduced as described above under "Over-
Subscription Privilege."
Qualified Financial Institutions and other nominee holders of Rights will be
required to certify to the Subscription Agent, before any Primary Over-
Subscription Privilege may be exercised as to any particular beneficial owner,
as to the aggregate number of Rights exercised pursuant to the Primary
Subscription Privilege and the number of Shares subscribed for pursuant to the
Primary Over-Subscription Privilege by such beneficial owner and that such
beneficial owner's Primary Subscription was exercised in full. Before any
Secondary Over-Subscription Privilege may be exercised as to any particular
beneficial owner, such Qualified Institutions and nominee holders of Rights will
be required to certify to the Subscription Agent as to the aggregate number of
Rights exercised pursuant to the Primary Subscription Privilege and the number
of Shares subscribed for pursuant to the Secondary Over- Subscription Privilege
by such beneficial owner. A Nominee Holder Over- Subscription Form is contained
in Appendix C.
PAYMENT FOR SHARES
Exercising Rights Holders who acquire Shares pursuant to the Offer may
choose between the following methods of payment:
(1) An Exercising Rights Holder can send the Subscription Certificate
together with payment for the Shares acquired on Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege to the Subscription Agent based on the Estimated Subscription
Price of $3.86 per share (based on the net asset value per share on
May 9, 1996). Subscription will be accepted when payment, together with the
properly completed and executed Subscription Certificate, is received by the
Subscription Agent at its Tender and Exchange Department; such payment and
Subscription Certificates to be received by the Subscription Agent no later
than 5:00 p.m., New York time, on the Expiration Date. The Subscription
Agent will deposit all checks received by it for the purchase of Shares into
a segregated interest-bearing account of the Fund (the interest from which
will belong to the Fund) pending proration and distribution of Shares. A
PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR
CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
PROSPECT STREET HIGH INCOME PORTFOLIO INC. AND MUST ACCOMPANY A PROPERLY
COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL
COLLECTION OF CHECKS BY 5:00 P.M. ON THE EXPIRATION DATE.
(2) Alternatively, an Exercising Rights Holder may acquire Shares, and a
subscription will be accepted by the Subscription Agent if, prior to 5:00
p.m., New York time, on the Expiration Date, the Subscription Agent has
received a Notice of Guaranteed Delivery (in the form set forth in Appendix
B) by facsimile (telecopy) or otherwise from a financial institution that is
a member of the Securities Transfer Agents Medallion Program, the Stock
Exchange Medallion Program or the New York Stock Exchange Medallion
Signature Program guaranteeing delivery of (i) payment of the full
Subscription Price for the Shares subscribed for on Primary Subscription and
any additional Shares subscribed for pursuant to the Over-Subscription
Privilege, and (ii) a properly completed and executed Subscription
Certificate. The Subscription Agent will not honor a Notice of Guaranteed
Delivery unless a properly completed and executed Subscription Certificate
and full payment for the Shares is received by the Subscription Agent by the
close of business on the third Business Day after the Expiration Date (the
"Protect Period").
On a date within ten Business Days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee), a confirmation showing (i) the number
of Shares purchased pursuant to the Primary Subscription (and, if applicable)
the Over-Subscription Privilege, (ii) the per Share and total purchase price for
the Shares, and (iii) any additional amount payable by such Exercising Rights
Holder to the Fund or any excess to be refunded by the Fund to such Exercising
Rights Holder, in each case, based on the Subscription Price as determined on
the Expiration Date. If any Record Date Shareholder exercises his right to
acquire Shares pursuant to the Over-Subscription Privilege, any such excess
payment which would otherwise be refunded to him will be applied by the Fund
toward payment for Shares acquired pursuant to exercise of the Over-Subscription
Privilege. Any additional payment required from Exercising Rights Holder must be
received by the Subscription Agent within seven Business Days after the
Confirmation Date. Any excess payment to be refunded by the Fund to an
Exercising Rights Holder will be mailed by the Subscription Agent to him as
promptly as practicable. An Exercising Rights Holder will have no right to
rescind a purchase after the Subscription Agent has received payment, either by
means of a Notice of Guaranteed Delivery or a check.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE SHARES
PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A HOLDER OF
RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION OR
OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE, THE
SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING
ACTIONS: (I) FIND OTHER SHAREHOLDERS FOR SUCH SUBSCRIBED AND UNPAID FOR SHARES;
(II) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE
GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON
EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE, AND/OR
(III) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED,
INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY
RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., NEW YORK TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS
MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Subscription Agent, whose
determinations will be final and binding. The Subscription Agent in its sole
discretion may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as the Subscription Agent determines in its sole discretion. The
Subscription Agent will not be under any duty to give notification of any defect
or irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.
SALE OF RIGHTS
Sales through Subscription Agent and Dealer Manager. Record Date
Shareholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through the Dealer
Manager. Subscription Certificates representing the Rights to be sold by the
Dealer Manager must be received by the Subscription Agent on or before June 19,
1996 (or if the Offer is extended, until two business days prior to the
Expiration Date). Upon the timely receipt by the Subscription Agent of
appropriate instructions to sell Rights, the Subscription Agent will request the
Dealer Manager to use its best efforts to complete the sale and the Subscription
Agent will remit the proceeds of sale, net of commissions, to the Record Date
Shareholders. No brokerage commissions will be charged to holders of less than
100 Rights, and beneficial owners of less than 100 Rights held on their behalf
by Qualified Financial Institutions, who elect to direct the Subscription Agent
to sell such Rights in whole but not in part. Any commissions on sales of 100
Rights or more will be paid by the selling Rights Holders. If the Rights can be
sold, sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Dealer Manager on the day such Rights are
sold. The Dealer Manager will also attempt to sell all Rights which remain
unclaimed as a result of Subscription Certificates being returned by the postal
authorities to the Subscription Agent as undeliverable as of the fourth Business
Day prior to the Expiration Date. Such sales will be made net of commissions on
behalf of the nonclaiming Record Date Shareholders. The Subscription Agent will
hold the proceeds from those sales for the benefit of such nonclaiming Record
Date Shareholders until such proceeds are either claimed or escheat. There can
be no assurance that the Dealer Manager will be able to complete the sale of any
such Rights and neither the Fund nor the Dealer Manager has guaranteed any
minimum sales price for the Rights. All such Rights will be sold at the market
price, if any, on the Exchange.
Other Transfers. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights.
In such event, a new Subscription Certificate evidencing the balance of the
Rights, if any, will be issued to the Record Date Shareholder or, if the Record
Date Shareholder so instructs, to an additional transferee. The signature on the
Subscription Certificate must correspond with the name as written upon the face
of the Subscription Certificate in every particular, without alteration or
enlargement, or any change whatever. A signature guarantee must be provided by
an eligible financial institution as defined in Rule 17Ad-15 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), subject to the standards and
procedures adopted by the Fund.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five Business Days prior to the Expiration Date for
(i) the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund nor the Subscription Agent nor the Dealer
Manager shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior to
the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund as described above), all commissions, fees and
other expenses (including brokerage commissions and transfer taxes) incurred or
charged in connection with the purchase, sale or exercise of Rights will be for
the account of the transferor of the Rights, and none of such commissions, fees
or expenses will be paid by the Fund, the Subscription Agent or the Dealer
Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the Over-
Subscription Privilege) may be effected through, the facilities of The
Depository Trust Company ("DTC"; Rights exercised through DTC are referred to as
"DTC Exercised Rights"). The holder of a DTC Exercised Right may exercise the
Over-Subscription Privilege in respect of such DTC Exercised Rights by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
New York time, on the Expiration Date, a Nominee Holder Over- Subscription
Exercise Form, together with payment of the Subscription Price for the number of
Shares for which the Over-Subscription Privilege is to be exercised. A form of
the Nominee Holder Over-Subscription Exercise Form is contained in Appendix C.
DISTRIBUTION ARRANGEMENTS
The Dealer Manager is First Albany Corporation, a broker-dealer and member
of the National Association of Securities Dealers, Inc. Under the terms and
subject to the conditions contained in a Dealer Manager Agreement dated the date
of this Prospectus, the Dealer Manager provides investment banking and financial
advisory services in connection with the Offer and, as a broker-dealer, will
solicit the exercise of Rights by Exercising Rights Holders and will assemble a
group of soliciting dealers to assist with the Offer. The Fund has agreed to pay
the Dealer Manager a fee for its advisory services in an amount equal to
$150,000, of which $25,000 has been paid prior to the date of this Prospectus
and to pay directly to each broker-dealer, including the Dealer Manager, who
solicits the exercise of Rights a fee (the "Soliciting Fee") equal to 2.00% of
the Subscription Price per Share with respect to Shares purchased by Record Date
Shareholders and 3.75% of the Subscription Price per Share with respect to
Shares purchased by other holders of Rights (excluding Record Date
Shareholders), in each case where the exercise was solicited by such soliciting
broker-dealer. The Soliciting Fees will be paid only when a broker-dealer
(including the Dealer Manager) has been designated on the applicable portion of
the Subscription Certificate. Soliciting Fees will not be paid with respect to
the exercise of Rights by or for the account of the Dealer Manager or
broker-dealers participating in the solicitation.
In addition, the Fund has agreed to reimburse the Dealer Manager for up to
$40,000 of its reasonable expenses incurred in connection with the Offer, and
will indemnify the Dealer Manager with respect to certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
The Staff of the Securities and Exchange Commission has advised the Fund that
the Staff is considering generally whether dealer managers of rights offerings
are underwriters for purposes of the Securities Act and the 1940 Act.
Under applicable law, during the Subscription Period, the Dealer Manager may
bid for and purchase Rights for certain purposes. Those purchases will be
subject to certain price and volume limitations when the Common Stock is being
stabilized by the Dealer Manager or when the Dealer Manager owns Rights without
an offsetting short position in the Common Stock. Those limitations provide,
among other things, that subject to certain exceptions, not more than one bid to
purchase Rights may be maintained in any one market at the same price at the
same time and that the initial bid for or purchase of Rights may not be made at
a price higher than the highest current independent bid price on the Exchange.
Any bid price may not be increased, subject to certain exceptions, unless the
Dealer Manager has not purchased any Rights for a full Business Day or the
independent bid price for those Rights on the Exchange has exceeded the bid
price for a full Business Day.
DELIVERY OF SHARE CERTIFICATES
Certificates representing Shares purchased pursuant to the Primary
Subscription and representing Shares purchased pursuant to the Over-
Subscription Privilege will be mailed within twelve Business Days after the
Expiration Date and after full payment for such Shares has been received and
cleared.
FOREIGN SHAREHOLDERS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). The
Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Shareholders' accounts until
instructions are received to exercise, sell or transfer the Rights. If no
instructions have been received by 12:00 noon, New York time, three Business
Days prior to the Expiration Date, the Rights of those Foreign Record Date
Shareholders will be transferred by the Subscription Agent to the Dealer Manager
who will use its best efforts to sell the Rights of those Foreign Record Date
Shareholders on the Exchange. The net proceeds, if any, from the sale of those
Rights will be remitted to the Foreign Record Date Shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will not
result in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights.
2. The basis of a Right will be (a) to a holder of Common Stock to whom
it is issued and who exercises or sells the Right (i) if the fair market
value of the Right immediately after issuance is less than 15% of the fair
market value of the Common Stock with regard to which it is issued, zero
(unless the holder elects, by filing a statement with his timely filed
federal income tax return for the year in which the Rights are received, to
allocate the basis of the Common Stock between the Right and the Common
Stock based on their respective fair market values immediately after the
Right is issued), and (ii) if the fair market value of the Right immediately
after issuance is 15% or more of the fair market value of the Common Stock
with regard to which it is issued, a portion of the basis in the Common
Stock based upon their respective fair market values immediately after the
Right is issued; (b) to a holder of Common Stock to whom it is issued and
who allows the Right to expire, zero; and (c) to anyone who purchases a
Right in the market, the purchase price for a Right.
3. The holding period of a Right received by a Record Date Shareholder
includes the holding period of the Common Stock with regard to which the
Right is issued.
4. Any gain or loss on the sale of a Right will be treated as a capital
gain or loss if the Right is a capital asset in the hands of the seller.
Such a capital gain or loss will be long- or short-term, depending on how
long the Right has been held, in accordance with paragraph 7 below. A Right
issued with regard to Common Stock will be a capital asset in the hands of
the person to whom it is issued if the Common Stock was a capital asset in
the hands of that person. If a Right is allowed to expire, there will be no
loss realized unless the Right had been acquired by purchase, in which case
there will be a loss equal to the basis of the Right.
5. If the Right is exercised by the Record Date Shareholder, the basis
of the Common Stock received will include the basis, if any, allocated to
the Right and the amount paid upon exercise of the Right.
6. If the Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
7. If the Right is sold, the holding period of the Right will include
the holding period of the Common Stock with regard to which it was issued.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if the holder of the account provides the
Fund with either an incorrect taxpayer identification number or no number at all
or fails to certify that he is not subject to such withholding.
The foregoing is only a summary of the applicable federal income tax laws
and does not include any state or local tax consequences of the Offer.
Exercising Rights Holders should consult their own tax advisers concerning the
tax consequences of this transaction. See "Federal Taxation."
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this Prospectus if, subsequent to May 10, 1996
(the effective date of the Fund's Registration Statement) the Fund's net asset
value declines more than 10% from its net asset value as of that date.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), (including
corporate savings and 401(k) plans), Keogh plans of self-employed individuals
and Individual Retirement Accounts (collectively, "Plans") should be aware that
additional contributions of cash to the Plan (other than rollover contributions
or trustee-to-trustee transfers from other Plans) in order to exercise Rights
would be treated as Plan contributions and, when taken together with
contributions previously made, may result in, among other things, excise taxes
for excess or nondeductible contributions. In the case of Plans qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code") and certain other Plans, additional cash contributions could
cause the maximum contribution limitations of Section 415 of the Internal
Revenue Code or other qualification rules to be violated. Furthermore, it may
also be a reportable distribution and there may be other adverse tax and ERISA
consequences if Rights are sold or transferred by a Plan.
Plans and other tax exempt entities, including governmental plans, should
also be aware that if they borrow in order to finance their exercise of Rights,
they may become subject to the tax on unrelated business taxable income ("UBTI")
under Section 511 of the Internal Revenue Code. If any portion of an Individual
Retirement Account ("IRA") is used as security for a loan, the portion so used
is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements and ERISA and the
Internal Revenue Code contain prohibited transaction rules that may impact the
exercise or transfer of Rights. Due to the complexity of these rules and the
penalties for noncompliance, Plans should consult with their counsel and other
advisors regarding the consequences of their exercise or transfer of Rights
under ERISA and the Internal Revenue Code.
USE OF PROCEEDS
Based on the Estimated Subscription Price of $3.86 per Share, the net
proceeds of the Offer, assuming all Shares offered hereby are sold and the
maximum Dealer Manager and soliciting fees are paid, are estimated to be
approximately $31,008,200, after deducting offering expenses payable by the Fund
estimated at approximately $495,000. The Investment Adviser anticipates that
investment of such proceeds in accordance with the Fund's investment objective
and policies will take up to thirty days from their receipt by the Fund,
depending on market conditions and the availability of appropriate securities
for purchase, but in no event will such investment take longer than six months.
Pending such investment in accordance with the Fund's investment objective and
policies, the proceeds will be held in U.S. Government securities (which term
includes obligations of the United States Government, its agencies or
instrumentalities) and other high-quality short-term money market instruments.
INVESTMENT POLICIES AND LIMITATIONS
The investment objective of the Fund is to provide high current income,
while seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of "high-yield," high risk
securities (commonly referred to as "junk bonds").
The Fund seeks to achieve its objective of preserving shareholders' capital
through a careful selection process for the Fund's "high-yield," high risk
investments which focuses on each issuer's financial condition and projected
ability to service its debt obligations, portfolio diversification which is
intended to minimize the impact of individual issuer defaults and adverse
economic conditions affecting particular issuers and industry segments, and
close monitoring of portfolio investments and economic developments in order to
reposition the Fund's portfolio in anticipation of negative developments which
the Investment Adviser believes are likely to occur. Given the high risk nature
and price volatility of the Fund's investments as well as the Fund's leverage,
however, it may be extremely difficult to achieve this objective on a consistent
basis in the future. In the severe adverse interest rate and economic
environment of 1989 and 1990, the Fund suffered a substantial decline in its net
asset value as a result of these factors and thus failed to achieve this
objective during that period.
During the sharp high-yield market decline of 1989 and 1990, the Fund's
leverage contributed to a sharp decline in the net asset value of the Common
Stock. In order to remain in compliance with the 200% asset coverage ratio
required by the 1940 Act, the Fund was required to repurchase $45.0 million of
the $50.0 million of previously outstanding Senior Extendible Notes. Also, to
maintain compliance with the Fund's Surety Investment Guidelines the Fund was
required to sell "high-yield" assets. The selling of "high-yield" assets below
their original cost and the retirement of $45.0 million of the Fund's Senior
Extendible Notes resulted in a reduction of the Fund's total assets and caused
the Fund to realize substantial capital losses. The Surety Investment Guidelines
and the asset coverage ratio requirements combined to delay the Fund's
reinvestment of cash into "high-yield" securities as the market improved. The
Fund's use of leverage is currently benefitting the holders of Common Stock as
the current average cost of funds (pursuant to its Preferred Share and Notes
obligations) was approximately 5.97% as of April 30, 1996 while the "high-yield"
market currently offers interest income at annualized rates of approximately
10.0% to 12.0%. There is no assurance that the Fund's investment objective will
be attained in the future.
The Fund's investment objective is a fundamental policy. Pursuant to the
1940 Act, fundamental policies may not be changed without the affirmative vote
of the holders of a majority of the outstanding shares of Common Stock and a
majority of the outstanding Preferred Shares, voting as separate classes, which,
for purposes of the 1940 Act, means for each class the lesser of (a) more than
50% of the outstanding shares of such class or (b) 67% or more of the shares of
such class present or represented at a meeting at which more than 50% of the
outstanding shares of such class are present or represented by proxy.
Accordingly, no change in the Fund's investment objective could occur without
the affirmative vote of both classes of stock.
INVESTMENT STRATEGY
It is the Fund's policy that under normal market conditions, at least 65% of
its total assets will be invested in "high-yield," high risk securities rated in
the lower categories by recognized rating agencies or nonrated fixed-income
securities deemed by the Investment Adviser to be of comparable quality,
although the Fund has invested and currently intends to continue to invest a
substantially higher percentage of its assets in such securities to the extent
permitted by market conditions. The Fund's portfolio investments have consisted
and will continue to consist principally of fixed-income securities rated
"BB"/"Ba" or lower by the Rating Agencies. The Fund reserves the right, under
normal market conditions, to invest up to 35% of its total assets in money
market instruments and fixed-income securities rated higher than "BB"/"Ba,"
although the percentage invested in such securities may increase under other
than normal market conditions, as discussed below.
The dollar weighted average of credit ratings of all bonds held by the Fund
during the four month period ended April 30, 1996, computed on a monthly basis,
is set forth below. This information reflects the composition of the Fund's
assets at the six month period ended April 30, 1996 and is not necessarily
representative of the Fund as of the current fiscal year or at any other time in
the future.
RATED BY
MOODY'S
--------
Ba ................................................ 2.59%
B ................................................. 75.16%
Caa ............................................... 5.36%
Ca ................................................ 0.01%
NR ................................................ 12.98%
-----
Total ......................................... 96.10%
Under the Investment Guidelines, certain types of securities in which the
Fund may otherwise invest pursuant to the foregoing strategy and the investment
policies stated below 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" and "C"/"C" by the Rating Agencies, 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 "Investment Guidelines" below, "Description of Notes -- Asset
Maintenance" and "Surety Arrangement for Preferred Shares -- Insurance
Agreement."
"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
obligation. Such securities are also generally considered to be subject to
greater risk than securities with higher ratings with regard to a deterioration
of general economic conditions. Further information concerning the ratings of
corporate bonds, including the rating categories of the Rating Agencies, is
provided in Appendix D. "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 securities subsequently
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.
Securities acquired by the Fund may include preferred stocks (including
convertible preferred stocks) 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 (including convertible debt securities), mortgage or
other asset-backed instruments, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper and obligations
issued or guaranteed by the United States government or any of its political
subdivisions, agencies or instrumentalities (including obligations, such as
repurchase agreements, secured by such instruments). Most debt securities in
which the Fund will invest will bear interest at fixed rates. However, the Fund
reserves the right to invest without limitation in fixed-income debt 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 or
warrants to purchase common stock or other equity securities as part of a unit
in connection with the purchase of debt securities consistent with the Fund's
investment policies.
The Fund may invest up to 30% of its total assets in securities that are not
readily marketable, including securities restricted as to resale, and nonrated
securities. A security that is not readily marketable will not be acquired
unless (i) the Investment Adviser believes such security to be of comparable
quality to publicly traded securities and (ii) such security carries rights to
be registered under the federal securities laws. Securities that are not readily
marketable may offer higher yields than comparable publicly traded securities.
However, the Fund may not be able to sell these securities when the Investment
Adviser considers it desirable to do so or, to the extent they are sold
privately, may have to sell them at less than the price of otherwise comparable
securities.
The Fund may also be permitted to invest up to 20% of its total assets in
zero coupon securities. Zero coupon securities pay no cash income but are
purchased at a deep discount from their value at maturity. When held to
maturity, their entire return, which consists of the amortization of discount,
comes from the difference between their purchase price and their maturity value.
For a discussion of certain tax consequences resulting from the inclusion of
zero coupon securities in the Fund's portfolio, see "Federal Taxation -- Federal
Income Tax Treatment of the Fund."
Notwithstanding the foregoing, if market conditions threaten to erode the
value of the Fund's assets, the Fund may adopt a temporary defensive investment
strategy and invest without limitation in high-grade money market instruments,
including 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, and also in fixed-income
securities rated higher than "BB"/"Ba" by the Rating Agencies. In addition,
under such market conditions, the Fund may invest in unrated commercial paper
which it deems to have risk characteristics comparable to such instruments. The
yield on these securities will tend to be lower than the yield on other
securities to be purchased by the Fund.
The Fund may also invest in fixed-income securities rated higher than
"BB"/"Ba" by the Rating Agencies or nonrated fixed-income securities deemed by
the Investment Adviser to be of comparable quality when the difference in yields
between quality classifications is relatively narrow. Investments in higher
rated issues may serve to lessen a decline in net asset value but may also
affect the amount of current income produced by the Fund, since the yields from
such issues are usually lower than those from lower rated issues. Accordingly,
the inclusion of such instruments in the Fund's portfolio may have the effect of
reducing the yield on the Common Stock.
The achievement of the Fund's objective depends upon the Investment
Adviser's analytical and portfolio management skills. There is no assurance that
this objective will be attained in the future. All nonfundamental investment
policies of the Fund, including those described below under "Investment
Guidelines," may be changed by the Board of Directors of the Fund without
shareholder approval.
INVESTMENT GUIDELINES
The composition of the Fund's portfolio reflects the Notes Investment
Guidelines and the Surety Investment Guidelines. Rating agencies issue ratings
for various securities reflecting the perceived creditworthiness of such
securities or, in the case of the Preferred Shares, the perceived claims-paying
ability of the surety that is guaranteeing the Scheduled Payments on the
Preferred Shares. See "Surety Arrangement for Preferred Shares -- Insurance
Agreement." The respective Investment Guidelines are designed to ensure that
assets underlying the Notes or the Preferred Shares, as the case may be, will be
sufficiently diversified and will be of sufficient credit quality and amount to
justify investment grade ratings of "Aaa" for the Notes by Fitch Investors
Services, Inc. and "AAA"/"Aaa" for the Preferred Shares. The Investment
Guidelines are not prescribed by law, but have been implemented by the Fund in
order to receive the above-described ratings for senior securities, 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 Investment Guidelines provide tests for portfolio diversification
and asset coverage that supplement the applicable requirements under the 1940
Act (and may be more or less restrictive), but are the sole determinants in the
rating of a security.
Under the respective Investment Guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Note Basic
Maintenance Amount and Surety Assets Coverage. For definitions of such terms,
see "Description of Notes -- Asset Maintenance" and "Surety Arrangement for
Preferred Shares -- Insurance Agreement." For the purpose of determining the
Fund's compliance with the respective Investment Guidelines, the market value of
the Fund's portfolio holdings will be discounted by dividing it by factors
determined by the respective rating agencies or Financial Security, as the case
may be, which vary according to the particular type of security being valued for
such purpose. To the extent any particular portfolio holding does not meet the
applicable Investment Guidelines, it would not be included for purposes of
determining compliance with the Note Basic Maintenance Amount or Surety Assets
Coverage, as the case may be. The respective Investment 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, and the amount of such assets included in the portfolio
at any time, if any, may vary depending upon the credit quality (and related
discounted value) of the Fund's eligible assets at such time.
Upon any failure to maintain the required Note Basic Maintenance Amount or
Surety Assets Coverage, the Fund would seek to alter the composition of its
portfolio to attain required asset coverage within an eight Business Day cure
period, thereby incurring additional transaction costs and possible losses
and/or gains on dispositions of portfolio securities. To the extent any such
failure is not cured in a timely manner, the holders of the Notes and/or
Financial Security, as surety under the Surety Bond, will acquire certain
rights. See "Description of Notes -- Asset Maintenance" and "Surety Arrangement
for Preferred Shares -- Insurance Agreement." "Business Day" means a day on
which the Exchange is open for trading and which is not a Saturday or Sunday or
a holiday, including New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Patriots' Day, Memorial Day, Bunker Hill Day, Independence
Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas Day or any other day
on which banks in New York City or Boston are authorized or obligated by law or
executive order to close.
Under the Notes Investment Guidelines, corporate debt obligations are not
included in the calculation of the discounted value of the Fund's portfolio for
the purpose of determining compliance with the Note Basic Maintenance Amount
unless they (a) are rated "CCC" or higher by S&P or "Caa" or higher by Moody's,
(b) provide for the periodic payment of interest thereon in cash, (c) have been
registered under the Securities Act, (d) do not provide for conversion or
exchange into equity capital at any time over their respective lives, (e) have
not had notice given in respect thereof that any such corporate debt obligations
are the subject of an offer by the issuer thereof of exchange or tender for
cash, securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the Fund's total assets at any
time shall not be subject to the provisions of this clause (e)) and (f) are not
subject to call options. In addition, portfolio holdings must be within the
following diversification requirements in order to be included in the
calculation of the discounted value of the Fund's portfolio for the purpose of
determining compliance with the Note Basic Maintenance Amount:
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
MINIMUM ORIGINAL VALUE OF ELIGIBLE PORTFOLIO ASSETS
ISSUE SIZE OF PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' EACH ISSUE INVESTED IN ANY ONE INDUSTRY
RATINGS(1) ($ IN MILLIONS) ONE ISSUER(2) CATEGORY(2)
- ---------------- ---------- ---------- ----------
<S> <C> <C> <C>
"AAA"/"Aaa" ............................................ $100 10.0% 50.0%
"AA"/"Aa" .............................................. 100 10.0 33.3
"A"/"A" ................................................ 100 10.0 33.3
"BBB"/"Baa" ............................................ 100 5.0 20.0
"BB"/"Ba".............................................. 100(3) 4.0 12.0
"B"/"B1," "B2" and "B3" (subordinated) ................. 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa"
(unsecured subordinated)(4) .......................... 100(3) 2.0 5.0
"A-1+"/"P-1"(5) ..................................... NA 10.0 NA
"A-1"/"P-1"(5) ......................................... NA 10.0 33.3
"A-2"/"P-2"(5) ......................................... NA 5.0 20.0
- ----------
<FN>
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or (3) modifiers to
the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-" may not be included in
determining compliance with the Note Basic Maintenance Amount. In the event that a corporate debt obligation has
received a different rating from S&P than from Moody's, the restrictions relating to the lower rating will apply. See
Appendix D for further information concerning S&P's and Moody's rating categories.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each lower rating
category, except that the calculations with respect to commercial paper investments constituting corporate bonds shall
be made separately and independently of, but on the same basis as, the cumulative total guidelines applicable to other
types of corporate debt obligations. To the extent the relevant limitation is less restrictive than that set forth under
"Investment Restrictions" below, the more restrictive limitation shall apply.
(3) 20% of the aggregate market value of all corporate debt obligations in these rating categories may be from issues with
an original issue size of greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied senior rating
of "B-" or higher (i.e., such subordinated debt would have a rating of "B-" or higher if it were senior debt of the
issuer) if rated by S&P to be included in determining compliance with the Note Basic Maintenance Amount. The aggregate
market value of corporate debt obligations in this rating category in excess of 20% of the aggregate market value of the
Fund's assets will not be included in determining such compliance.
(5) Represents commercial paper investments.
</TABLE>
Under the Surety Investment Guidelines, corporate debt obligations are not
included in the calculation of the discounted value of the Fund's portfolio for
the purpose of determining compliance with Surety Assets Coverage unless they
(a) are rated "CCC" or higher by S&P or "B3" or higher by Moody's, (b) provide
for the periodic payment of interest thereon in cash, (c) do not provide for
conversion or exchange into equity capital at any time over their respective
lives, (d) have been registered under the Securities Act, (e) have a remaining
term to maturity of not more than 30 years, (f) have not had notice given in
respect thereof that any such corporate debt obligations are the subject of an
offer by the issuer thereof of exchange or tender for cash, securities or any
other type of consideration (except that corporate debt obligations in an amount
not exceeding 10% of the Fund's total assets at any time shall not be subject to
the provisions of this clause (f)) and (g) are not subject to call options.
Notwithstanding the foregoing, nonrated fixed-income securities and unregistered
corporate debt securities may be included in the calculation of the discounted
value of the Fund's portfolio for the purpose of determining compliance with
Surety Assets Coverage, as long as they do not exceed 30% of the Fund's eligible
portfolio assets at any time, with certain limitations. In addition, portfolio
holdings of corporate debt obligations must be within the following
diversification requirements in order to be included in the calculation of the
discounted value of the Fund's portfolio for the purpose of determining
compliance with Surety Assets Coverage:
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
MINIMUM ORIGINAL VALUE OF ELIGIBLE PORTFOLIO ASSETS
ISSUE SIZE OF PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' EACH ISSUE INVESTED IN ANY ONE INDUSTRY
RATINGS(1) ($ IN MILLIONS) ONE ISSUER(2) CATEGORY(2)
- ---------------- ---------- ---------- ----------
<S> <C> <C> <C>
"AAA"/"Aaa" ............................................ $100 10.0% 50.0%
"AA"/"Aa" .............................................. 100 10.0 33.3
"A"/"A" ................................................ 100 10.0 33.3
"BBB"/"Baa" ............................................ 100 5.0 20.0
"BB"/"Ba" .............................................. 100(3) 4.0 12.0
"B"/"B1" or "B2" ....................................... 100(3) 3.0 8.0
"CCC"/"B3"(4) .......................................... 100(3) 3.0 8.0
Nonrated/unregistered corporate bonds(5) ............... 50 3.0 8.0
"A-1+"/"P-1"(6) ........................................ NA 10.0 NA
"A-1"/"P-1"(6) ......................................... NA 10.0 33.3
"A-2"/"P-2"(6) ......................................... NA 5.0 20.0
<FN>
- ----------
(1) Rating designations include (+) or (-) modifiers to the S&P rating where appropriate and (1), (2) or (3) modifiers to
the Moody's rating where appropriate, except that corporate debt obligations rated "CCC-" may not be included in
determining compliance with Surety Assets Coverage. In the event that a corporate debt obligation has received a
different rating from S&P than from Moody's, the restrictions relating to the lower rating will apply. See Appendix D
for further information concerning S&P's and Moody's rating categories. If only one of the Rating Agencies has issued a
rating for such instrument, then only the rating of such agency is required; provided, however, that not more than 15%
of the aggregate market value of the rated corporate debt obligations included in determining compliance with Surety
Assets Coverage shall be comprised of corporate debt obligations having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the related rating category and each lower rating
category, except that the calculations with respect to commercial paper investments constituting corporate bonds shall
be made separately and independently of, but on the same basis as, the cumulative total guidelines applicable to other
types of corporate debt obligations. To the extent the relevant limitation is less restrictive than that set forth under
"Investment Restrictions" below, the more restrictive limitation shall apply.
(3) 20% of the aggregate value of all corporate debt obligations in these rating categories may be from issues with an
original issue size of greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated debt of the issuer with an implied senior rating
of "B-" or higher (i.e., that such subordinated debt would have a rating of "B-" or higher if it were senior debt of the
issuer) if rated by S&P to be included in determining compliance with Surety Assets Coverage. The aggregate market value
of corporate debt obligations in this rating category in excess of 20% of the aggregate market value of the Fund's
eligible portfolio assets will not be included in determining such compliance.
(5) Nonrated/unregistered corporate bonds may not constitute more than 30% of the aggregate market value of the Fund's
eligible portfolio assets. Not more than 18% of the aggregate market value of the Fund's eligible portfolio assets may
consist of nonrated/unregistered corporate bonds from issues with original issue sizes of $50 million or more but less
than $100 million, provided that not more than 9% of the aggregate market value of the Fund's eligible portfolio assets
may consist of nonrated/unregistered corporate bonds from issues with an original issue size of $50 million or more but
less than $75 million.
(6) Represents commercial paper investments.
</TABLE>
Additionally, under the Surety Investment Guidelines, the Fund may not (i)
acquire or otherwise invest in (A) repurchase agreements except repurchase
agreements with a remaining term to maturity of not more than 30 days, (B)
reverse repurchase agreements, (C) futures contracts or (D) options on futures
contracts except to the extent such options do not exceed 5% of the total assets
of the Fund, (ii) engage in short sales, (iii) overdraw any bank account, (iv)
write options on portfolio securities other than call options on securities held
in the Fund's portfolio or that the Fund has an immediate right to acquire
through conversion or exchange of securities held in its portfolio or (v) engage
in the lending of portfolio securities. The Fund does not currently intend to
utilize any of the prohibited investment strategies as described above. However,
the Fund could utilize any of the foregoing with the written consent of
Financial Security, and therefore, the Fund may use such strategies in the
future.
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
primarily upon the Investment Adviser's outlook for interest rates. To the
extent the weighted average maturity of the Fund's portfolio securities is
lengthened, the value of such holdings will be more susceptible to fluctuation
in response to changes in interest rates, creditworthiness and general economic
conditions. As of April 30, 1996, the weighted average maturity of the Fund's
portfolio holdings was 7.5 years. The weighted average of the Fund's portfolio
will fluctuate depending on market conditions and investment opportunities. The
Fund, however, does not expect that the weighted average maturity of the Fund's
portfolio will, under normal conditions, exceed 15 years.
The Investment Adviser actively makes portfolio adjustments that reflect the
Fund's investment strategy, but 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 generally will not, although it 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 does, however, reserve full freedom
with respect to portfolio turnover. In periods when there are rapid changes in
economic conditions or security price levels or when investment strategy is
changed significantly, portfolio turnover may be significantly higher than
during times of economic and market price stability, when investment strategy
remains relatively constant. A high rate of portfolio turnover will result in
increased transaction costs for the Fund in the form of increased dealer spreads
and brokerage commissions. The Fund's portfolio turnover rates for the fiscal
years ended October 31, 1993, 1994 and 1995 were 117.20%, 72.00% and 80.71%,
respectively.
CERTAIN INVESTMENT STRATEGIES
The Investment Adviser reserves the right to employ the strategies described
below 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, reverse repurchase agreements
and repurchase agreements (other than certain repurchase agreements with
qualified depository institutions having maturities not longer than one day).
Unless so stated below, there are no limits to the Fund's use of these
investment strategies. The Fund's Board of Directors has adopted an operating
policy under which the Fund will not subject more than 5% of its total net
assets to investment techniques such as options, futures contracts and related
options, foreign currency transactions, interest rate transactions, and similar
techniques such as hedging or investment techniques. In addition, the respective
Investment Guidelines, as well as other terms of the Surety Arrangement, may
have the effect of limiting the Fund's use of other investment strategies
described below, such as investments in foreign securities and the use of
options, to the extent such investments are not eligible for inclusion in the
discounted value of the Fund's portfolio.
Securities Loans. The Fund may make secured loans of its portfolio
securities amounting to not more than one-third of the value of its total
assets, thereby realizing additional income. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delays in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. As a matter of policy, securities loans are made
to unaffiliated broker-dealers pursuant to agreements requiring that loans be
continuously secured by collateral in cash or short-term debt obligations at
least equal at all times to the value of the securities subject to the loan. The
borrower pays to the Fund an amount equal to any interest or dividends received
on 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.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place a month or
more after the date of the transaction). The Fund will invest in when-issued and
delayed delivery securities in order to lock in a favorable rate of return. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The securities so purchased are subject to market fluctuation,
and no interest accrues to the Fund until delivery and payment take place. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction and thereafter reflect
the value of such securities in determining its net asset value. The Fund will
make commitments for such when-issued transactions only with the intention of
actually acquiring the securities. To facilitate such acquisitions, the Fund's
custodian bank will maintain, in a separate account of the Fund, cash or United
States government or other high quality debt securities from its portfolio,
marked to market daily and having value equal to or greater than such
commitments. On 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. The Fund is dependent on the other party to successfully
complete when-issued and delayed delivery transactions. If such other party
fails to complete its portion of the transaction, the Fund will have lost the
opportunity to invest the amount set aside for such transaction in the
segregated asset account.
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). The Fund will invest in repurchase obligations
to assist in the management of its portfolio and also to obtain additional
revenue and thereby maximize shareholders' value. 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. The Investment Adviser will also evaluate the
creditworthiness of the repurchase agreement sellers with whom the Fund does
business and will monitor their creditworthiness during the period of any
repurchase agreement. 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 Fund will
undertake reverse repurchase transactions to assist in the management of its
portfolio and to obtain additional liquidity in its portfolios. 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. Regulations of the SEC require that if securities are
sold by the Fund under a reverse repurchase agreement, the Fund will maintain in
a segregated account of the Fund established with the Custodian, cash or United
States government or other high quality debt securities from its portfolio,
marked to market daily and having a value equal to the proceeds received on any
sale subject to repurchase plus interest. Reverse repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. An additional risk is that the market value of
securities sold by the Fund under a reverse repurchase agreement could decline
below the price at which the Fund is obligated to repurchase them. Reverse
repurchase agreements will be considered borrowings by the Fund and as such
would be subject to the restrictions on borrowing described below under
"Investment Restrictions." The Fund will not hold more than 5% of the value of
its total assets in reverse repurchase agreements and will enter into such
agreements only so long as it is not in violation of Section 18 of the 1940 Act.
Foreign Investments. The Fund may invest up to 10% of the value of its total
assets in securities principally traded in foreign markets and 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 or 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. In addition, the costs of exchanging foreign
currencies for payments in U.S. dollars and nonnegotiated brokerage commissions
in foreign countries may reduce the yield on foreign securities. In the event of
a default in payment on foreign securities, the Fund may incur increased costs
to obtain a judgment against the foreign issuer in the United States or abroad.
The Fund may buy or sell foreign currencies or deal in forward foreign currency
contracts to hedge against possible fluctuations in exchange rates that may
affect the yield of the Fund when the foreign currencies are converted in
payment in U.S. dollars. The Fund may engage in currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The Fund
will use currency transactions only for hedging and not speculation. A forward
currency contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
The Fund's dealings in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions denominated or
quoted in the currency.
The Fund may not use position hedging with respect to a particular currency
to an extent greater than the aggregate market value (at the time of entering
into the position hedge) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency. If the Fund
enters into a position hedging transaction, the Fund's custodian will place cash
or U.S. Government securities or other high grade liquid debt securities in a
segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to the forward contract.
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 may 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. The extent to which the Fund may enter into transactions
involving call options also may be limited by the requirements of the Internal
Revenue Code for qualification as a regulated investment company.
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will trade in futures contracts or related
options and has no experience in doing so. 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. However, employing this
technique effectively requires skills that are different from those required to
select portfolio securities and the Investment Adviser has no experience in
using this technique.
Under the regulations of the U.S. Commodity Futures Trading Commission
("CFTC"), the Fund will not be considered a "commodity pool", as defined under
such regulations, as a result of entering into transactions in futures contracts
and options on futures contracts, provided, among other things, that: (1) such
transactions are entered into solely for bona fide hedging purposes, as defined
under CFTC regulations; or (2) the aggregate initial margin and premiums for any
other such transactions entered into does not exceed 5% of the Fund's total
assets (after taking into account any unrealized profits and losses). The extent
to which the Fund may enter into transactions involving futures contracts also
may be limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company.
Risks of Hedging Transactions. The use of options, financial futures and
options on financial futures may involve risks not associated with other types
of investments which the Fund intends to purchase and it is possible that a
portfolio that utilizes hedging strategies may not perform as well as a
portfolio that does not make use of such devices. In particular, the Fund's
positions in options and financial futures may be entered and closed out only on
a federally licensed exchange which provides a market therefor, and there can be
no assurance that a liquid market will exist for any particular option or
futures contract. Because financial futures and related options markets
generally impose limits on daily price movement, it is possible that the
Investment Adviser will not be able to close out hedge positions promptly. The
inability to close out options and futures positions could have an adverse
impact on the Fund's ability to hedge its securities effectively and might, in
some cases, require the Fund to deposit substantial amounts of additional cash
to meet applicable margin requirements. The Fund's ability to hedge effectively
through transactions in financial futures or options depends on the degree to
which price movements, which include, in part, changes in interest rates, in the
Fund's holdings correlate with price movements of the hedging instruments.
Inasmuch as the Fund's options and futures will not duplicate such underlying
securities, the correlation will probably not be perfect. Consequently, the
prices, which include, in part, changes in interest rates, of the securities
being hedged may not move in the same amount as the hedging instrument. It is
possible that there may be a negative correlation between the hedging instrument
and the hedged securities, which would prevent the Fund from achieving the
anticipated benefits of hedging transactions or may cause the Fund to realize
losses and thus be in a worse position than if such strategies had not been
used.
Additional Leverage. The Fund has reserved the right to borrow money to the
extent such borrowing would not result in a violation of the 1940 Act Asset
Coverage (as defined under "Description of Notes -- Asset Maintenance") and
would not otherwise violate Section 18 of the 1940 Act or restrictions imposed
by the Insurance Agreement (as defined below). The Fund may borrow to the extent
then permitted by the 1940 Act through the public or private issuance of debt
securities and/or from lenders of all types, such as banks, savings and loan
associations, insurance companies and similar financial institutions. In
addition, the Fund may borrow up to 5% of its total assets for temporary
purposes. To the extent permitted by the 1940 Act, the Fund may also borrow
additional amounts as it redeems Notes and Preferred Shares.
At the date hereof, the Fund is considering various refinancing alternatives
with respect to its leverage. Additionally, following the completion of the
Offer, it is the intention of the Fund, subject to market conditions, to add
incremental leverage (to the extent permitted under the 1940 Act) such that the
percentage of the Fund's assets representing leverage is approximately the same
as it was prior to the Offer. See "Risk Factors and Special Considerations" for
a discussion of certain risks associated with borrowings by the Fund.
The Fund may also elect to sell additional Preferred Shares in the event
such shares can be issued and sold upon favorable terms. See "The Offer --
Purpose of the Offer" and "Description of Capital Stock."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. All percentage
limitations on investments will apply at the time of the making of an investment
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of such investment.
The Fund may not:
1. Borrow money (through reverse repurchase agreements or otherwise) to
the extent such borrowing would result in a violation of 1940 Act Asset
Coverage or otherwise result in a violation of Section 18 of the 1940 Act,
or issue any senior securities (as defined in the 1940 Act) other than
Notes, Preferred Shares or debt instruments related to borrowings described
under "Investment Policies and Limitations -- Certain Investment Strategies
-- Additional Leverage" to the extent such instruments are deemed to
constitute senior securities; provided that for this purpose temporary
borrowings in an amount not exceeding 5% of the Fund's total assets (not
including the amount borrowed) shall not be deemed a senior security.
Pursuant to Section 18 of the 1940 Act, not more than 33 1/3% of the Fund's
capital structure may consist of borrowings representing indebtedness, such
as the Notes, and not more than 50% of the Fund's capital structure may
consist of borrowings represented by indebtedness, such as the Notes, and
senior securities of a class which is stock, such as the Preferred Shares.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 1 above. Collateral
arrangements with respect to margin for futures contracts and options are
not deemed to be pledges or other encumbrances for purposes of this
restriction.
3. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities and
except that the Fund may make margin payments in connection with
transactions in futures contracts and options.
4. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open the
Fund owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and in equal amount to,
the securities sold short.
5. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, the
Fund may be deemed to be an underwriter under the federal securities laws.
6. Purchase or sell real estate, 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 as
provided herein.
8. Make loans, except by purchase of debt obligations in which the Fund
may invest consistently with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of the value of its
total assets, or through the lending of its portfolio securities with
respect to not more than one-third of the value of its total assets.
9. Invest in securities of any issuer, if, to the knowledge of the Fund,
officers and Directors of the Fund and officers and directors of the
Investment Adviser who beneficially own more than 0.50% of the securities of
that issuer together own more than 5% of such issuer.
10. With respect to 75% of the value of the Fund's total assets, invest
in securities of any issuer if, immediately after such investment, more than
5% of the value of the Fund's total assets would be invested in the
securities of such issuer, provided that this limitation does not apply to
obligations issued or guaranteed as to interest and principal by the United
States government or its agencies or instrumentalities.
11. With respect to 75% of the value of the Fund's total assets, acquire
more than 10% of the outstanding voting securities of any issuer.
12. Invest 25% or more of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations issued
or guaranteed as to interest and principal by the United States government
or its agencies or instrumentalities.
13. Invest more than 30% of the market value or other fair value of its
total assets in securities that are not readily marketable, including those
that are restricted as to disposition under the federal securities laws or
otherwise. This restriction shall not apply to securities received as a
result of a corporate reorganization or similar transaction affecting
readily marketable securities already held in the portfolio of the Fund or
to repurchase agreements that have a maturity of seven days or less;
however, the Fund will attempt to dispose in an orderly fashion of any
securities received under these circumstances to the extent that such
securities, together with other securities that are not readily marketable,
exceed 30% of the market or other fair value of the Fund's total assets.
14. Invest in the securities of other registered investment companies,
except as they may be acquired as part of a merger or consolidation or
acquisition of assets or by purchases in the open market involving only
customary brokers' commissions.
15. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal
in, represent interests in or are secured by interests in such leases,
rights or contracts.
16. Make investments for the purpose of exercising control or
management over the issuer of any security.
17. Write, purchase or sell puts, calls or combinations thereof, or
purchase or sell futures contracts or related options, except that the Fund
may write call options and invest in futures contracts and related options
as provided in "Investment Guidelines -- Certain Investment Strategies --
Options" and "-- Futures Contracts and Related Options."
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 7 permit the Fund to engage in certain practices to a limited
extent, the Fund does not have any current intention of engaging in such
practices. See "Investment Policies and Limitations -- Certain Investment
Strategies -- Futures Contracts and Related Options." Further, as noted, certain
practices are subject to the condition that they not adversely affect the then
current ratings of the Fund's outstanding securities and are subject to the
prior written approval of Financial Security.
Because they are fundamental policies, the 1940 Act requires that the
foregoing Investment Restrictions may not be changed without the approval of the
holders of a majority of the outstanding shares of Common Stock and a majority
of the outstanding Preferred Shares, voting as separate classes, which, for
purposes of the 1940 Act, means for each class the lesser of (a) more than 50%
of the total number of outstanding shares of such class or (b) 67% or more of
the shares of such class present or represented at a meeting at which more than
50% of the outstanding shares of such class are present or represented by proxy.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An Investment in the Fund is subject to a number of risks and special
considerations, including the following:
DILUTION
An immediate dilution of the aggregate net asset value of the shares of
Common Stock owned by Record Date Shareholders who do not fully exercise their
Rights is likely to be experienced as a result of the Offer because the amounts
received by the Fund with respect to the Subscription Price (after payment of
soliciting fees and other expenses of the Offer) are likely to be less than the
Fund's net asset value per share and because the number of shares outstanding
after the Offer is likely to increase in a greater percentage than the increase
in the size of the Fund's assets. Because the amounts received by the Fund with
respect to the Subscription Price (after payment of soliciting fees and other
expenses of the Offer) are likely to be less than the net asset value per share
when shares are issued upon the exercise of Rights, as a result of the terms of
the Offer, Record Date Shareholders are likely to experience a decrease in the
net asset value per share held by them, irrespective of whether they exercise
all or any portion of their Rights. In addition, Record Date Shareholders who do
not fully exercise their Rights should expect that they will, at the completion
of the Offer, own a smaller proportional interest in the Fund than would
otherwise be the case. Although it is not possible to state precisely the amount
of such a decrease in net asset value per share (and in the case of Record Date
Shareholders who do not fully exercise their Rights, in the aggregate net asset
value of their shares), because it is not known at this time what the
Subscription Price will be, what the net asset value per share will be on the
Expiration Date or what proportion of the Shares will be subscribed for, such
dilution could be substantial. For example, assuming (i) that all Rights are
exercised by Record Date Shareholders and the purchases of Shares upon the
exercise of such Rights are solicited by the Dealer Manager or a broker-dealer,
as the case may be and (ii) that the Subscription Price is $3.86 per share which
is the Fund's net asset value per share at May 9, 1996, the Fund's net asset
value per share (after payment of the Dealer Manager and soliciting fees and
estimated offering expenses) would be reduced by approximately $0.04 per share
or 1.0%. Assuming (i) that all Rights are exercised by other holders of Rights
and the purchases of Shares upon the exercise of such Rights are solicited by
the Dealer Manager or a broker-dealer, as the case may be and (ii) that the
Subscription Price is $3.86 per share which is the Fund's net asset value per
share at May 9, 1996, the Fund's net asset value per share (after payment of the
Dealer Manager and soliciting fees and estimated offering expenses) would be
reduced by approximately $0.05 per share or 1.3%. The Fund cannot predict what
portion of any Shares sold will be purchased by Record Date Shareholders as
compared to other holders of Rights or what portion of the purchases will be
solicited by participating broker-dealers. The distribution to shareholders of
transferable Rights which themselves may have a realizable value will afford
non-participating shareholders the potential of receiving a cash payment upon
sale of such Rights, receipt of which may be viewed as compensation for the
possible dilution of their interest in the Fund.
RISK OF LEVERAGE
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies,
including a higher volatility of the net asset value of the Common Stock and
potentially more volatility in the market value of the Common Stock. Because the
Fund will pay interest on the Notes and accumulated dividends on the Preferred
Shares, an increase or decrease in capital or income of the Fund will have an
increased effect on the Common Stock. For a description of the Notes and
Preferred Shares, see "Description of the Notes" and "Description of Capital
Stock." Any investment income or gains earned from the capital contributed by
the purchasers of the Notes and the Preferred Shares which is in excess of
interest and dividends due thereon will cause the value of and dividends, if
any, on the Common Stock to rise more quickly than would otherwise be the case.
Conversely, if the investment performance of the capital contributed by the
purchasers of the Notes and the Preferred Shares fails to cover the interest and
dividends on such capital, the value of the Common Stock may decrease more
quickly than would otherwise be the case and dividends thereon will be reduced
or eliminated. This is the speculative effect of "leverage."
Fluctuations in short-term dividend rates will affect the dividend rate per
annum ("Applicable Rate") on the Preferred Shares, and, in turn, will affect the
yield to holders of Common Stock, with increases in such rates decreasing such
yield. Short-term and long-term interest rates change from time to time as does
their relationship to each other (i.e., the slope of the yield curve) depending
upon such factors as supply and demand forces, monetary and tax policies and
investor expectations. Changes in such factors could cause the relationship
between short-term and long-term rates to change (i.e., to flatten or to invert
the slope of the yield curve) so that short-term rates may substantially
increase relative to the rates of longer term obligations in which the Fund may
be invested. To the extent that the Applicable Rate on the Preferred Shares
approaches the net return on the Fund's investment portfolio, the benefit of
leverage to holders of Common Stock will be reduced, and if the Applicable Rate
on the Preferred Shares were to exceed the net return on the Fund's portfolio,
the Fund's leveraged capital structure would result in a lower rate of return to
holders of Common Stock than if the Fund were not leveraged.
The interest rate on the Notes is a fixed annual rate of 6.53%, and the most
recent Applicable Rate is 5.40% on the Preferred Shares. Based on the interest
rate payable on the Notes and the current Applicable Rate payable on the
Preferred Shares, the annual return of the Fund's portfolio must equal at least
1.74% in order to cover the interest payments on the Notes and the dividend
payments on the Preferred Shares.
Since any decline in the net asset value of the Fund's investments will be
borne entirely by holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value to holders of
Common Stock than if the Fund were not leveraged, which would likely be
reflected in a greater decline in the market price for the Common Stock. In an
extreme case, if the Fund's current investment income were not sufficient to
meet dividend requirements on the Preferred Shares or interest payments on the
Notes, it could be necessary for the Fund to liquidate certain of its
investments, thereby reducing the net asset value attributable to the Common
Stock. In addition, a decline in the net asset value of the Fund's investments
may affect the ability of the Fund to make dividend payments on its Common Stock
and such failure to pay dividends or make distributions may result in the Fund
ceasing to qualify as a regulated investment company under the Internal Revenue
Code. The Notes and the Preferred Shares may constitute a substantial lien and
burden on the Common Stock by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. In addition, the
Fund may borrow up to 5% of its total assets for temporary purposes and, to the
extent that Notes or Preferred Shares are repaid or redeemed, may issue or incur
additional senior securities or indebtedness. The Fund has also reserved the
right to borrow money and to enter into reverse repurchase agreements. See
"Investment Policies and Limitations -- Certain Investment Strategies."
The Fund may, if market conditions are appropriate, increase its level of
debt or other senior securities or refinance the Fund's current level of debt or
other senior securities in order to maintain or increase the level of leverage
that exists prior to this offering. At the date hereof, the Fund is considering
various refinancing alternatives with respect to its leverage. Additionally,
following the completion of the Offer, it is the intention of the Fund, subject
to market conditions, to add incremental leverage (to the extent permitted under
the 1940 Act) such that the percentage of the Fund's assets representing
leverage is approximately the same as it was prior to the Offer.
The following table illustrates the effect of leverage (using senior
securities -- i.e., $20 million of Notes and 200 Preferred Shares with a $20
million liquidation preference) on the return of a holder of Common Stock,
assuming the annual returns set forth in such table and assuming a fixed annual
rate of 6.53% payable on the Notes and an Applicable Rate of 5.40% (which is the
most recent Applicable Rate payable on the Preferred Shares):
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses) ............................... -10% -5% 0% 5% 10%
Corresponding Return to
Common Stockholder .............................. -16.56% -9.50% -2.45% 4.60% 11.66%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are hypothetical
and the actual returns to a holder of Common Stock may be greater or less than
those appearing in the table.
DISCOUNT FROM NET ASSET VALUE
Shares of closed-end funds frequently trade at a market price which is less
than the value of the net assets attributable thereto. The possibility that
shares of the Fund will trade at a discount from net asset value is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. It should be noted, however, that in some cases, shares of closed-end
funds may trade at a premium. The Fund's shares have traded in the market above,
at, and below net asset value since the commencement of the Fund's operations.
See "Trading and Net Asset Value Information." In addition, the net asset value
of the Fund will change with changes in the value of its portfolio securities.
Because the Fund invests primarily in fixed-income securities, the net asset
value of the shares of the Fund can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a
fixed-income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can be expected to decline.
HIGH-YIELD, HIGH RISK INVESTMENTS
The Fund is designed for long-term investors who can accept the risks
entailed in seeking a high level of current income available from investments in
long-term, high-yielding, medium and lower quality, fixed-income securities.
Consistent with a long-term investment approach, investors in the Fund should
not rely on the Fund for their short-term financial needs. The principal value
of the lower quality securities in which the Fund invests, will be affected by
interest rate levels, general economic conditions, specific industry conditions
and the creditworthiness of the individual issuer. Although the Fund seeks to
reduce risk by portfolio diversification, extensive credit analysis, and
attention to trends in the economy, industries and financial markets, such
efforts will not eliminate risk.
Fixed-income securities offering the high current income sought by the Fund
will ordinarily be in the lower rating categories of recognized rating agencies
or will be nonrated. The values of such securities tend to reflect individual
corporate developments or adverse economic changes to a greater extent than
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices and yields of "high-yield,"
high risk securities and thus in the Fund's net asset value. Further, these
fixed-income securities are considered by 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 obligation and will generally
involve more credit risk than securities in the higher rating categories; the
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal of or interest on its portfolio
holdings. The "high-yield," high risk securities held by the Fund are frequently
subordinated to the prior payment of senior indebtedness and are traded in
markets that may be relatively less liquid than the market for higher rated
securities. Changes by recognized rating services in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of the Fund's investments.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from such securities, but will affect the Fund's net asset value.
The Fund will rely on the Investment Adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. In this evaluation, the
Investment Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
Some of the lower-rated securities in which the Fund invests were issued to
raise funds in connection with the acquisition of a company, in a so-called
"leveraged buy-out" transaction. The highly leveraged capital structure of such
issuers may make them especially vulnerable to adverse changes in economic
conditions.
Generally, when interest rates rise, the value of fixed rate debt
obligations, including "high-yield," high risk securities, tends to decrease;
when interest rates fall, the value of fixed rate debt obligations tends to
increase. If an issuer of a "high-yield," high risk security containing a
redemption or call provisions exercises either provision in a declining interest
rate market, the Fund would have to replace the security, which could result in
a decreased return for shareholders.
The market for "high-yield," high risk securities has expanded rapidly in
recent years and is relatively new. This expanded market has not yet completely
weathered an economic downturn. A further economic downturn or an increase in
interest rates could have a negative effect on the "high-yield," high risk
securities market and on the market value of the "high-yield," high risk
securities held by the Fund, as well as on the ability of the issuers of such
securities to repay principal and interest on their borrowings. During 1989 and
1990, the level of "high-yield" debt security defaults increased as many issuers
were unable to obtain funds through financial intermediaries or the public
"high-yield" market. The effect of these developments on the Fund was a
substantial decline in the Fund's net asset value and a substantial reduction in
the Fund's monthly dividend. Also, the forced liquidation of a substantial
portion of the Fund's portfolio in order to repay the Senior Extendible Notes
resulted in the realization of substantial capital losses, and this severely
limited the ability of the Fund to return to its original net asset value as the
high-yield market improved. The high-yield market decline reversed in the fourth
quarter of 1990 and by mid year 1991, after reinvesting a substantial amount of
its cash, the Fund's net asset value had improved substantially but to a level
far less than the net asset value at the time the Fund commenced operations.
The high-yield market, as measured by the CS First Boston High Yield Index,
posted total annual returns of 43.75%, 16.66%, 18.91%, -0.97% and 17.38% for the
calendar years 1991, 1992, 1993, 1994 and 1995, respectively. For the three
month period ended March 31, 1996, the CS First Boston High Yield Index produced
a total return of 2.16% and for the trailing twelve month period produced a
total return of 16.14%. The ten year U.S. Treasury Bond produced a total return
of 16.46%, 6.52%, 11.94%, -6.08% and 23.68% for the calendar years 1991, 1992,
1993, 1994 and 1995, respectively. See "Financial Information Summary" for
information concerning the Fund's return.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt retirements
totaling $26.0 billion. Net new issue activity of "high-yield" debt securities
totaled $11.4 billion, $46.1 billion, $22.2 billion and $26.7 billion for the
calendar years 1992, 1993, 1994 and 1995, respectively. Net new issue activity
of "high-yield" debt securities for the three month period ended March 31, 1996
was $17.7 billion. The statistical information with respect to new issue
activity is based on information the Fund obtained from the CS First Boston High
Yield Handbook. The spread between the yield on U.S. Treasury securities and the
high-yield market has fluctuated between 400 and 600 basis points (4.0% to 6.0%)
during the 1992 to 1995 period, which is more in line with the historical spread
relationship.
Since 1978, the historical weighted default rate on "high-yield" debt
securities has been 3.20%. The default rates on "high-yield" debt securities for
the calendar years 1990, 1991, 1992, 1993, 1994 and 1995 were 7.98%, 9.33%,
2.89%, 0.96%, 0.44% and 2.24%, respectively. The default rate on "high-yield"
debt securities for the three month period ended March 31, 1996 was 0.20%. The
defaulted amount of "high-yield" debt securities was $18.1 billion in 1990,
$20.7 billion in 1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion
in 1994 and $6.6 billion in 1995. The defaulted amount on "high-yield" debt
securities for the three month period ended March 31, 1996 was $612 million. The
statistical information with respect to historical default rates and amounts is
based on information the Fund obtained from the CS First Boston High Yield
Handbook.
The credit ratings issued by credit rating services may not fully reflect
the true risks of an investment. For example, credit ratings typically evaluate
the safety of principal and interest payments, not market value risk, of
"high-yield," high risk securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Although the
Investment Adviser considers ratings of recognized rating services such as
Moody's and S&P, the Investment Adviser primarily relies on its own credit
analysis, which includes a study of existing debt, capital structure, ability to
service debt and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. The
Investment Adviser continually monitors the investments in the Fund's portfolio
and carefully evaluates whether to dispose of or retain "high-yield," high risk
securities whose credit ratings have changed (see Appendix D for a description
of Moody's and S&P's ratings of "high-yield" securities). As of April 30, 1996,
approximately 96.10% of the Fund's total assets was invested in fixed-income
securities regarded by the Rating Agencies as below investment grade (that is
rated Ba1 or lower by Moody's or BB<p1> or lower by S&P).
At times a major portion of an issue of lower-rated securities may be held
by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund may find it more difficult to sell such securities when the
Investment Adviser believes it advisable to do so or may be able to sell such
securities only at prices lower than if the securities were more widely held. In
such circumstances, the Fund may also find it more difficult to determine the
fair value of such securities for purposes of computing the Fund's net asset
value. The Fund, in most instances, utilizes an independent pricing service to
determine the fair value of its securities for financial statement purposes
since market quotations are not readily ascertainable. Securities for which
market quotations are not readily available will be valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will not be permitted to declare dividends or other distributions
with respect to the Common Stock or the Preferred Shares or purchase shares of
Common Stock or Preferred Shares unless at the time thereof the Fund meets
certain asset coverage requirements, including those imposed by the 1940 Act.
Failure to pay dividends or other distributions could result in the Fund ceasing
to qualify as a regulated investment company under the Internal Revenue Code.
See "Federal Taxation" and "Description of Capital Stock -- Dividends and
Distributions." Further, upon any failure to pay dividends in an amount equal to
two full years of dividends with respect to the Preferred Shares, the holders
thereof shall have the right to elect a majority of the Directors until all
accrued dividends have been provided for or paid. In the event the Fund fails to
satisfy certain asset coverage requirements, the Fund may be required to effect
mandatory partial redemptions of the Notes or (subject to certain limitations)
Preferred Shares or in certain circumstances may result in the termination of
the Surety Bond and the mandatory redemption of all of the Notes and the
Preferred Shares. Redemptions of Preferred Shares and/or further redemptions of
Notes would reduce the Fund's leverage and could negatively affect potential
returns with respect to the Common Stock.
Given the above-described investment risks inherent in the Fund, investment
in shares of the Fund should not be considered a complete investment program and
is not appropriate for all investors. Investors should carefully consider their
ability to assume these risks before making an investment in the Fund.
<PAGE>
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their addresses and their principal
occupations for at least the past five years are set forth below.
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH REGISTRANT AGE DURING PAST 5 YEARS
- ---------------- --------------- --- ---------------------
<S> <C> <C> <C>
Richard E. Omohundro, Jr.*(3) President and Director 55 President or Co-President of
Prospect Street Investment Prospect Street Investment
Management Co., Inc. Management Co., Inc. since June
60 State Street 1988.
Boston, MA 02109
John A. Frabotta*(2) ................ Vice President, Treasurer, 53 Vice President of Prospect Street
Prospect Street Investment Director and Chief Investment Management Co., Inc.
Management Co., Inc. Investment Officer since June 1988. Director of
60 State Street HelpMate Robotics Inc.
Boston, MA 02109
John S. Albanese(1)(2) .............. Director 44 Senior Counsel to Washington
8955 Mountain Ash Court Headquarters Services (a
Springfield, VA 22153 Department of Defense Agency)
since June 1992. Lieutenant Colonel
of the United States Army, serving on active duty
from 1977 to 1992 in several legal positions.
C. William Carey(1)(3) .............. Director 59 Chairman and Chief Executive
Town & Country Corporation Officer of Town & Country
25 Union Street Corporation since 1965. Director
Chelsea, MA 02150 of Town & Country Corporation and
Little Switzerland, Inc.
Joseph G. Cote*(3) .................. Director 54 Co-President of Prospect Street
Prospect Street Investment Investment Management Co., Inc.
Management Co., Inc. since August 1995 and from
60 State Street February 1989 to November 1993.
Boston, MA 02109 Shareholder of Prospect Street
Investment Management Co., Inc.
from 1989 to present. Co-
President of Prospect Street
Senior Loan Management Co., Inc.
Harlan D. Platt(1)(3) ............... Director 45 Professor of Finance and Insurance,
Northeastern University College Northeastern University, College
of Business Administration of Business Administration, since
413 Hayden Hall 1981.
Boston, MA 02115
Christopher E. Roshier(3)(4) ........ Director 50 Corporate Finance Director of
120 Strawberry Vale European Capital Company Limited
Twickenham, since 1990. Director of a number
Middlesex TWI 4SH of other public and private
United Kingdom companies in the United Kingdom.
Karen J. Thelen ..................... Secretary 44 Vice President of Prospect Street
Prospect Street Investment Investment Management Co., Inc.
Management Co., Inc. since December 1992. Assistant
60 State Street Vice President of Prospect Street
Boston, MA 02109 Investment Management Co., Inc.
from December 1988 to December
1992.
<FN>
- ----------
* Directors who are "interested persons" of the Fund, as defined in the 1940 Act.
(1) Directors who are members of the Audit Committee of the Fund's Board of Directors.
(2) Elected by holders of the Preferred Shares.
(3) Elected by holders of the Common Stock and Preferred Shares voting together.
(4) Mr. Roshier is not a resident of the United States and has not authorized an agent to receive any notices.
</TABLE>
Pursuant to the Articles of Incorporation, holders of the Common Stock have
voting rights of one vote per share and holders of the Preferred Shares have
voting rights of one vote per $1,000 of liquidation preference without regard to
any liquidation preference attributable to accumulated and unpaid dividends
(i.e., 100 votes per Preferred Share); provided that all the votes represented
by a single Preferred Share must be voted together. Under the Articles of
Incorporation and the 1940 Act, the holders of the Preferred Shares, as a
separate class, are entitled to elect two directors (at least one of whom is not
an "interested person" as defined in the 1940 Act) with the other four Directors
(at least two of whom are not "interested persons" as defined in the 1940 Act)
elected by the holders of the Common Stock and the Preferred Shares, voting
together; provided, however, that the holders of the Preferred Shares (or
Financial Security pursuant to the Surety Custody Agreement), as a separate
class, will be entitled to elect as a class the smallest number of additional
Directors as shall be necessary to assure that a majority of the Directors has
been elected by the holders of the Preferred Shares if the Fund fails to pay
accumulated dividends on the Preferred Shares in an amount equal to two full
years of dividends. See "Description of Capital Stock -- Voting." Election of
Directors is noncumulative; accordingly, holders of a majority of the voting
power represented by the outstanding shares of Common Stock and Preferred
Shares, voting together as a single class, or a majority of the outstanding
Preferred Shares, voting separately as a class, may elect all of the Directors
who are subject to election by such class, as the case may be.
The Fund pays each Director not affiliated with the Investment Adviser a fee
of $10,000 per year plus $2,000 per Directors' meeting attended in person and
$1,000 per Directors' meeting attended by telephone, together with actual
out-of-pocket expenses relating to attendance at such meetings. In addition, the
members of the Fund's Audit Committee, which consists of certain of the Fund's
noninterested Directors, receive $1,000 for each Audit Committee meeting
attended, other than meetings held on days on which there is also a Directors'
meeting, together with actual out-of-pocket expenses relating to attendance at
such meetings. Directors of the Fund, other than directors who are affiliates of
the Investment Adviser, earned for the fiscal year ended October 31, 1995
aggregate remuneration of $76,500.
The following table summarizes the compensation paid to the Directors and
Officers of the Fund for the fiscal year ended October 31, 1995. The Fund is
not part of a fund complex.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
NAME OF AGGREGATE ACCRUED AS ANNUAL TOTAL
DIRECTOR COMPENSATION PART OF FUND BENEFITS UPON COMPENSATION
OR OFFICER FROM FUND EXPENSES RETIREMENT FROM FUND
- ---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Richard E. Omohundro, Jr. none none none none
Harlan D. Platt $18,500 none none $18,500
C. William Carey $18,500 none none $18,500
Christopher E. Roshier $18,000 none none $18,000
John F. Barry* none none none none
John S. Albanese $18,500 none none $18,500
John A. Frabotta none none none none
<FN>
- ------------
* Mr. Barry's term as a Director ended, and Mr. Cote's term as a Director began, on March 1, 1996.
</TABLE>
The Articles of Incorporation limit the personal liability of Directors and
officers to the Fund and its shareholders for monetary damages to the fullest
extent permitted by Maryland law. Based upon Maryland law and the Articles of
Incorporation, the Fund's Directors and officers have no liability to the Fund
and its shareholders for monetary damages except (a) for, and to the extent of,
actual receipt of an improper benefit in money, property or services, or (b) in
respect of an adjudication based upon a finding of active and deliberate
dishonesty which was material to the cause of action adjudicated. In accordance
with the 1940 Act, the Articles of Incorporation do not protect or purport to
protect Directors and officers against any liability to the Fund or its security
holders to which they would be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of their office.
In addition, the Articles of Incorporation and bylaws provide that the Fund
will indemnify its Directors and officers against liabilities and expenses in
connection with the performance of their duties on behalf of the Fund to the
fullest extent permitted by Maryland law, subject to the applicable requirements
of the 1940 Act and the interpretation by the Staff of the SEC of such
requirements. Under Maryland law and the Articles of Incorporation, the Fund is
entitled and obligated to indemnify each Director or officer in connection with
any proceeding to which such Director or officer is made a party by reason of
service in his capacity as a Director or officer, unless it is established that
(1) the act or omission of the Director or officer 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, or (2) the Director or officer actually
received an improper personal benefit in money, property or services, or (3) in
the case of any criminal proceeding, the Director or officer had reasonable
cause to believe that the act or omission was unlawful. The foregoing standards
apply both as to third party actions and derivative suits by or in the right of
the Fund. Indemnification may be against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the Director or officer
in connection with the proceeding. If the proceeding is one by or in the right
of the Fund, indemnification may not be made in respect of any proceeding in
which the Director or officer shall have been adjudged to be liable to the Fund.
In the view of the Staff of the SEC, an indemnification provision is consistent
with the 1940 Act if it (i) precludes indemnification for any liability, whether
or not there is an adjudication of liability, arising by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of duties as
described in Section 17(h) and (i) of the 1940 Act ("disabling conduct") and
(ii) sets forth reasonable and fair means for determining whether
indemnification shall be made; in the case of the Fund, "reasonable and fair
means" would include (1) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified
("indemnitee") was not liable by reason of disabling conduct (including a
dismissal for insufficiency of evidence) and (2) a reasonable determination,
based upon a review of the facts, that the indemnitee was not liable by reason
of disabling conduct, by (a) the vote of a majority of a quorum of Directors who
are neither "interested persons" of the Fund as defined in Section 2(a) (19) of
the 1940 Act nor parties to the proceeding, or (b) a written opinion of
independent legal counsel.
The indemnification rights provided or authorized by the Articles of
Incorporation or applicable law are not exclusive of any other rights to which a
person seeking indemnification may be entitled. The Fund has also obtained
liability insurance at its expense for the benefit of its Directors and officers
which includes coverage for liability arising from the performance of their
duties on behalf of the Fund which is not inconsistent with the indemnification
provisions of the Articles of Incorporation and applicable law.
HOLDINGS OF PREFERRED STOCK AND COMMON STOCK
As far as is known to the Fund, no person owned beneficially five percent or
more of the outstanding shares of Common Stock of the Fund at April 30, 1996.
DTC holds of record 76% of the outstanding shares of Common Stock at April 30,
1996. All of the outstanding Preferred Shares, which represent less than 1% of
the voting power of the Fund's outstanding shares (i.e., to the extent that the
Common Stock and Preferred Shares are voted together), were owned of record by
one institutional holder. As far as is known to the Fund, no person other than
DTC owned of record or beneficially, shares of the Fund representing more than
five percent of the voting power of the Fund's outstanding shares. The
Investment Adviser of the Fund beneficially owned 51,399 shares of Common Stock
at April 30, 1996.
As of April 30, 1996, all Directors and officers of the Fund, owned in the
aggregate less than 1% of the Common Stock. As of that date, no Directors or
officers owned any of the Fund's Preferred Stock.
THE INVESTMENT ADVISER
THE INVESTMENT ADVISER
The Investment Adviser is Prospect Street(R) Investment Management Co.,
Inc., a Massachusetts corporation having its principal offices at 60 State
Street, Boston, Massachusetts 02109. Organized in June 1988, the Investment
Adviser provides institutional clients with investment management services.
Richard E. Omohundro, Jr., Co-President of the Investment Adviser, served as
a Vice President (1978 to 1983) and a Managing Director (1983 to 1988) of
Merrill Lynch and was Co-Manager of the Merrill Lynch High-yield Bond Group from
1978 through 1987. During that period, the Group raised approximately $13.6
billion in new "high-yield" securities through 107 issues and provided one of
the largest secondary trading markets for "high-yield" securities. In 1987, the
Group raised approximately $5.8 billion in new offerings of "high-yield"
securities and employed over 40 persons. Mr. Omohundro provides general advisory
assistance to, analyzes certain policy considerations with, and consults on a
regular basis with, the Fund's portfolio manager.
John A. Frabotta, a Vice President of the Investment Adviser, assists Mr.
Omohundro in carrying on the business of the Investment Adviser. Mr. Frabotta
was a Vice President of Merrill Lynch from 1979 through June 1988, during which
time he performed various research, structuring and marketing functions
involving "high-yield" securities. Mr. Frabotta has served as the Fund's
portfolio manager since September, 1990. The principals of the Investment
Adviser are also involved in the management of Prospect Street(R) Senior Loan
Portfolio, L.P. Prospect Street(R) Senior Loan Portfolio, L.P. is currently a
$121 million portfolio investing in assignments of or participations in U.S.
senior floating rate bank loans made primarily in connection with leveraged
acquisitions and financings. These bank loans are acquired in the syndication
phase and in the secondary market.
ADVISORY AGREEMENT
The Investment Advisory Agreement between the Investment Adviser and the
Fund (the "Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the 1940 Act,
the Investment Adviser is responsible for the actual management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular investment rests with the Investment Adviser, subject to review by
the Board of Directors and compliance with the applicable provisions of the 1940
Act.
The Investment Adviser is not dependent on any other party in providing the
investment advisory services required for the management of the Fund. The
Investment Adviser may, however, consider analyses from various sources,
including broker-dealers with which the Fund does business. The Investment
Adviser is also responsible for providing the Fund with such executive, data
processing, clerical, accounting and bookkeeping services and statistical and
research data as are deemed advisable by the Fund's Board of Directors (although
the expenses thereof will be borne by the Fund as specified below), except to
the extent these services are provided by an administrator or an accounting firm
hired by the Fund.
Under the Advisory Agreement with the Fund, the Investment Adviser receives
a monthly advisory fee equal to 0.65% (on an annual basis) of the average weekly
value of the total assets of the Fund, less accrued liabilities (excluding the
principal amount of the notes and the liquidation preference of the preferred
stock and including accrued and unpaid dividends on the preferred stock) up to
and including $175,000,000 of such net assets, 0.55% on the next $50,000,000 of
such net assets and 0.50% of the excess of such net assets over $225,000,000.
However, for a period of one year commencing on the Expiration Date of the
Offer, the Investment Adviser will waive its advisory fee with respect to any
increase in the Fund's net assets resulting from the exercise of any rights
pursuant to the Offer in order to mitigate the impact of the offering expenses
of this Offer on the Fund and its shareholders. For the fiscal years ended
October 31, 1993, 1994 and 1995, the dollar value of total advisory fees earned
by the Investment Adviser aggregated approximately $527,643, $807,770 and
$874,812, 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, fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets and the Surety Custodian under the Surety
Arrangement, the premium payable in connection with the Surety Bond, legal,
accounting and auditing fees, taxes, expenses of preparing prospectuses and
shareholder 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. The Investment
Adviser will reimburse the Fund for any expenses (excluding brokerage
commissions, interest, taxes and litigation expenses) paid or incurred by the
Fund in any year in excess of the most restrictive expense limitation which is
imposed by any state and to which the Fund is then subject, if any. The Fund is
not known to be subject to any state expense limitations. Under the Advisory
Agreement, the Investment Adviser provides the Fund with office space,
facilities and business equipment and provides the services of executive and
clerical personnel for administering certain of the other affairs of the Fund.
The Investment Adviser compensates Directors of the Fund if such persons are
employed by the Investment Adviser or its affiliates.
The Advisory Agreement became effective on March 1, 1994 upon approval by
shareholders at a meeting held on March 1, 1994 and replaced the advisory
agreement in effect prior thereto. The Advisory Agreement as approved by the
shareholders included an increase in the level of advisory fees from 0.50% (on
an annual basis) of the Fund's annual net assets to the fees set forth above.
The Advisory Agreement was initially effective for a two year period and will
continue in effect from year to year thereafter 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 (as defined under "Investment Policies and
Limitations"), 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. At a meeting held on December 12, 1995, the
Board of Directors (including all Directors who are not "interested persons" of
the Fund, as defined under the 1940 Act) unanimously approved the renewal of the
Advisory Agreement for a one year term expiring on February 28, 1997. The
Advisory Agreement terminates on its assignment by either party and may be
terminated without penalty on not less than 30 nor more than 60 days' prior
written notice at the option of either party thereto, or by the affirmative vote
of the holders of a majority of the Fund's outstanding voting securities, voting
as a single class.
The Advisory Agreement provides that the Investment Adviser shall only be
liable for willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties and obligations under the Advisory Agreement.
PORTFOLIO TRADING
The Investment Adviser is responsible for decisions to buy and sell
securities and other portfolio holdings for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. Fixed-income securities are generally traded on a "net"
basis with dealers acting as principals for their own accounts without a stated
commission, although the price of the security will likely include a profit to
the dealer. In underwritten offerings, securities are usually purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain money market instruments may be purchased directly from an issuer, in
which case no commissions or discounts are paid.
In placing orders for portfolio securities of the Fund, the Investment
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Investment Adviser
will seek to execute each transaction at a price and commission, if any, which
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. In seeking the most favorable price and execution, the Investment
Adviser, having in mind the Fund's best interests, will consider all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions. Though the Investment Adviser generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread of commission available. Within the framework of the policy of
obtaining the most favorable price and efficient execution, the Investment
Adviser will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Investment Adviser or the Investment Adviser's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular issuers and industries. Such services are used by the
Investment Adviser in connection with all of its investment activities and some
of such services obtained in connection with the execution of transactions for
the Fund may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions for
such other accounts, and the services furnished by such brokers may be used by
the Investment Adviser in providing investment management for the Fund.
Commission rates are established pursuant to negotiations based on the quality
and quantity of execution services provided by the broker or dealer in light of
generally prevailing rates. The management fee paid by the Fund will not be
reduced because the Investment Adviser and/or other clients receive such
services. The allocation of orders and the commission rates paid by the Fund
will be reviewed periodically by the Board of Directors.
As permitted by Section 28(e) of the 1934 Act, the Investment Adviser may
cause the Fund to pay a broker-dealer which provides "brokerage and research
services" (as defined in the 1934 Act) to the Investment Adviser, an amount of
disclosed commission for effecting a securities transaction for the Fund in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
For the fiscal years ended October 31, 1993, 1994 and 1995, the Fund paid no
brokerage commissions for the execution of portfolio transactions. The rate of
portfolio turnover for the fiscal years ended October 31, 1993, 1994 and 1995
was 117.20%, 72.00% and 80.71%, respectively.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less frequently
than the close of trading on the Exchange (generally 4:00 P.M. New York time) on
the last business day of each week (generally Friday). It will be determined by
dividing the value of the net assets of the Fund (for the purpose of determining
the net asset value per share of the Common Stock, the value of the Fund's net
assets shall be deemed to equal the value of the Fund's assets less (i) the
Fund's liabilities (including the outstanding principal amount of the Notes and
unpaid interest on the Notes), (ii) accumulated and unpaid dividends on the
outstanding Preferred Shares and (iii) the aggregate liquidation value (i.e.,
$100,000 per share) of the outstanding Preferred Shares), by the total number of
shares of Common Stock outstanding. In valuing the Fund's assets for all
purposes other than the determination of the discounted value of such assets
pursuant to the respective Investment Guidelines, portfolio securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed to be over-the-counter, will be valued at
the mean between the most recently quoted bid and asked prices provided by the
principal market makers. 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 investment; (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, size
of holding, discount from market value, value of unrestricted securities of the
same type at the time of purchase, special reports prepared by analysts,
information as to any transaction or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be valued
at amortized cost if their term to maturity from the date of acquisition by the
Fund was less than 60 days or by amortizing their value on the 61st day prior to
maturity if their term to maturity from the date of acquisition by the Fund was
more than 60 days, unless this method is determined by the Board of Directors
not to represent fair value. Repurchase agreements will be valued at cost plus
accrued interest.
SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. To address this possibility, the Board of Directors
presently contemplates that the Fund may from time to time consider either the
repurchase of shares of its Common Stock on the open market or the making of
tender offers for such Common Stock. Since commencement of the Fund's
operations, no such open market purchases or tender offers have been made. The
Fund may borrow money to finance the repurchase of shares, subject to compliance
with 1940 Act Asset Coverage, Section 18 of the 1940 Act and the other
limitations described under "Investment Policies and Limitations -- Certain
Investment Strategies -- Additional Leverage." Shares of Common Stock may not be
repurchased, however, (i) if applicable asset coverage requirements under the
1940 Act (i.e., 300% with respect to the Notes and 200% with respect to the
Preferred Shares) are not met or would not be met following such repurchase,
(ii) when payments of principal of or interest on the Notes are in default,
(iii) when dividends on the Preferred Shares are in arrears or Surety Asset
Coverage is not maintained or (iv) if otherwise prohibited by applicable law.
There can be no assurance that repurchases or tenders will result in the
Common Stock trading at a price which is equal to its net asset value. The Fund
anticipates that the market price of the Common Stock will usually vary from net
asset value. The market price of the Common Stock will be determined, among
other things, by the relative demand for and supply of the Common Stock in the
market, the Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Common Stock may be the subject of repurchases or tender offers from time to
time may enhance its attractiveness to investors and thus reduce the spread
between market price and net asset value that may otherwise exist.
Although the Board of Directors believes that Common Stock repurchases and
tenders generally would have a favorable effect on the market price of the
Common Stock, it should be recognized that the acquisition of Common Stock of
the Fund will decrease the total assets of the Fund and therefore have the
effect of increasing the Fund's expense ratio. Furthermore, any interest on
borrowings to finance Common Stock repurchase transactions will reduce the
Fund's net income.
Even if a tender offer has been made, it is the Board's announced policy,
which may be changed by the Board, not to accept tenders or effect repurchases
if (1) such transactions, if consummated, would (a) result in the delisting of
the Common Stock from the Exchange (the Exchange having advised the Fund that it
would consider delisting if the aggregate market value of the Fund's outstanding
publicly held Common Stock is less than $5.0 million, the number of publicly
held shares of Common Stock falls below 600,000 or the number of round-lot
holders falls below 1,200), (b) result in a violation of applicable asset
coverage requirements, or (c) impair the Fund's status as a regulated investment
company under the Internal Revenue Code (which would make the Fund a taxable
entity, causing the Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from the Fund); (2) the
Fund would not be able to liquidate portfolio securities in an orderly manner
and consistent with the Fund's investment objective and policies in order to
repurchase Common Stock; or (3) there is, in the Board's judgement, any material
(a) legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or limitation on prices for trading securities generally on the
Exchange or any foreign exchange on which portfolio securities of the Fund are
traded, (c) declaration of a banking moratorium by federal, state or foreign
authorities or any suspension of payment by banks in the United States, New York
State or foreign countries in which the Fund invests, (d) limitation affecting
the Fund or issuers of its portfolio securities imposed by federal, state or
foreign authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, or (f) other event
or condition which would have a material adverse effect on the Fund or its
shareholders if shares of Common Stock were repurchased. The Board of Directors
may modify these conditions from time to time in light of experience and may
determine not to make a tender offer even if one of the above conditions exists.
If a tender offer is made, such tender offer shall be made in accordance with
the 1934 Act and the 1940 Act.
Any tender offer made by the Fund will be at a price equal to the net asset
value of the shares on a date subsequent to the Fund's receipt of all tenders.
Each offer will be made and shareholders notified in accordance with the
requirements of the 1934 Act and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. The Fund will
purchase all shares tendered by a shareholder at any time during the period of
the tender offer in accordance with the terms of the offer unless it determines
to accept none of them (based upon one of the conditions set forth above). Each
person tendering shares will be required to submit a check in an amount not to
exceed $25 payable to the Fund, which will be used to help defray the costs
associated with effecting the tender offer. This fee will be imposed upon each
tendering shareholder whose tendered shares are purchased in the tender offer
and will be imposed regardless of the number of shares purchased. The Fund
expects the cost to the Fund of effecting a tender offer will be greater than
the aggregate of all service charges received from those who tender their
shares. Costs associated with the tender offer will be charged against capital
of the Fund. During the period of a tender offer, the Fund's shareholders will
be able to obtain the Fund's current net asset value by use of a toll-free
telephone number.
If the Fund must liquidate portfolio securities in order to purchase shares
of Common Stock tendered, the Fund may realize gains and losses. Such gains, if
any, may be realized on securities held for less than three months ("short short
gain"). Because less than 30% of the Fund's gross income must be derived from
the sale of disposition of stock and securities held less than three months for
any taxable year in order to retain the Fund's tax status as a regulated
investment company, any such short short gains would reduce the amount of gain
on sale of other securities held for less than three months that the Fund could
realize in the ordinary course of its portfolio management. See "Federal
Taxation." The portfolio turnover rate of the Fund may or may not be affected by
the Fund's repurchases of shares of Common Stock pursuant to a tender offer.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Directors may elect to submit to the holders of the
Common Stock and the Preferred Shares at any time a proposal to convert the Fund
to an open-end investment company and in connection therewith to redeem or
otherwise retire the Notes and the Preferred Shares as would be required upon
such conversion by the 1940 Act. In determining whether to exercise its
discretion to submit this issue to shareholders, the Board of Directors would
consider all factors then relevant, including the relationship of the market
price of the Common Stock to net asset value, the extent to which the Fund's
capital structure is leveraged and the possibility of re-leveraging, the spread,
if any, between yields on "high-yield" securities in the Fund's portfolio as
compared to interest and dividend charges on senior securities and general
market and economic conditions. In addition to any vote required by Maryland
law, conversion of the Fund to an open-end investment company would require the
affirmative vote of the holders of a majority (as defined in the 1940 Act) of
each class of the shares entitled to be voted on the matter. Shareholders of an
open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the 1940
Act) at their net asset value, less such redemption charges, if any, as might be
in effect at the time of redemption. If the Fund converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption, and the Common Stock would no longer be listed on
the Exchange. In the event the Fund converts to open-end status, the Fund would
only be able to borrow through bank borrowings within certain limits and would
not be allowed to have preferred stock.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock of
investment company taxable income (but not including short-term capital gains or
"net capital gains," defined as the excess of net long-term capital gains over
net short-term capital losses), and to distribute any net short-term capital
gains and net capital gains annually. Under present law, if the Fund were to
retain net capital gains, taxes would be imposed with respect to those amounts.
See "Federal Taxation," "Description of Notes -- Asset Maintenance" and
"Description of Capital Stock -- Dividends and Distributions" for a discussion
of certain possible restrictions on the Fund's ability to declare dividends on
the Common Stock.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by State
Street Bank and Trust Company (the "Bank"), as agent under the Plan, unless a
shareholder elects to receive cash. An election to receive cash may be revoked
or reinstated at the option of the shareholder. Shareholders whose shares are
held in the name of a broker or nominee will have distributions reinvested
automatically by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee, or unless the
shareholder elects to receive distributions in cash. If the service is not
available, such distributions will be paid in cash. Shareholders whose shares
are held in the name of a broker or nominee should contact the broker or nominee
for details. All distributions to investors who elect not to participate (or
whose broker or nominee elects not to participate) in the Plan, will be paid by
check mailed directly to the record holder by the Bank, as dividend paying
agent.
The Bank will furnish each person who buys shares in the offering with
written information relating to the Plan. Included in such information will be
procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Directors of the Fund declare a dividend or capital gains
distribution payable either in shares of Common Stock or in cash, as holders of
Common Stock may have elected, then nonparticipants in the Plan will receive
cash and participants in the Plan will receive the equivalent in shares of
Common Stock valued at the lower of market price or net asset value. Whenever
market price is equal to or exceeds net asset value at the time shares are
valued for the purpose of determining the number of shares equivalent to the
cash dividend or capital gains distribution, participants will be issued shares
of Common Stock at the net asset value most recently determined as provided
under "Determination of Net Asset Value," but in no event less than 95% of the
market price. If the net asset value of the Common Stock at such time exceeds
the market price of Common Stock at such time, or if the Fund should declare a
dividend or capital gains distribution payable only in cash, the Bank will, as
agent for the participants, buy Common Stock in the open market, on the Exchange
or elsewhere, for the participants' accounts. If, before the Bank has completed
its purchases, the market price exceeds the net asset value of the Common Stock,
the average per share purchase price paid by the Bank may exceed the net asset
value of the Common Stock, resulting in the acquisition of fewer shares than if
the dividend or capital gains distribution had been paid in Common Stock issued
by the Fund. The Bank will apply all cash received as a dividend or capital
gains distribution to purchase Common Stock on the open market as soon as
practicable after the payment date of such dividend or capital gains
distribution, but in no event later than 30 days after such date, except where
necessary to comply with applicable provisions of the federal securities laws.
The Bank maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Common Stock in
the account of each Plan participant will be held by the Bank in noncertificated
form in the name of the participant, and each shareholder's proxy will include
those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Bank's fees for handling the reinvestment of dividends
and capital gains distributions will be paid by the Fund. There will be no
brokerage charges with respect to shares of Common Stock issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
stock or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Bank's open market purchases
in connection with the reinvestment of dividends and capital gains
distributions.
The automatic reinvestment of dividends and capital gains distributions will
not relieve participants of any income tax which may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid after written notice
of the change sent to the members of the Plan at least 90 days before the record
date for such dividend or capital gains distribution. The Plan also may be
amended or terminated by the Bank, with the Fund's prior written consent but,
except when necessary or appropriate to comply with applicable law or the rules
or policies of a regulatory body, only on at least 90 days' written notice to
participants in the Plan. All correspondence concerning the Plan should be
directed to the Bank at P.O. Box 8209, Boston, Massachusetts 02266.
FEDERAL TAXATION
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Common Stock. Investors should consult
their own tax advisors for more detailed information and for information
regarding the impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund qualifies and elects to be treated as a regulated investment
company of the Internal Revenue Code of 1986, as amended. To qualify as a
regulated investment company, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in stocks, securities or currencies
(including but not limited to, gains from options, futures and forward
contracts); (b) derive in each taxable year less than 30% of its gross income
from any of the following that are held for less than three months (i) stocks or
securities, (ii) options, future or forward contracts, or (iii) foreign
currencies (or foreign currency options, futures or forward contracts) that are
not directly related to its principal business of investing in stocks and
securities (or options and futures with respect to stocks or securities); and
(c) diversify its holdings so that, at the end of each quarter of each taxable
year, (i) at least 50% of the market value of the Fund's assets is represented
by cash, cash items, U.S. Government securities, securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies).
As a regulated investment company, in any fiscal year with respect to which
the Fund distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends and interest but excludes net
long-term capital gains in excess of net short-term capital losses), the Fund
(but not its shareholders) generally will be relieved of U.S. federal income tax
on its net investment income and net capital gains (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 shareholders. To the
extent the Fund retains its net capital gains for investment, it will be subject
under current tax rates to a federal income tax at a maximum effective rate of
35% on the amount retained. See "Federal Income Tax Treatment of Holders of
Common Stock" below. Amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax payable by the Fund. To avoid the tax, the Fund must distribute, or
be deemed to have distributed, during each calendar year an amount equal to the
sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the twelve-month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. 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 Internal Revenue Code, the Fund will be taxed in the same
manner as an ordinary corporation, and distributions to its shareholders will
not be deductible by the Fund in computing its taxable income. In addition, in
the event of failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, will constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholders' hands
as long-term capital gains.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Fund will be required to suspend distributions to the holders of the Common
Stock and/or the Preferred Shares until the asset coverage is restored. See
"Description of Capital Stock -- Dividends and Distributions." Such a suspension
of distributions might prevent the Fund from distributing 90% of its investment
company taxable 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 Notes and/or (to the extent permitted
under the 1940 Act) Preferred Shares 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 Notes or Preferred
Shares and the relative amounts of each to be repurchased or redeemed, if any,
will be made in the sole discretion of the Fund. Furthermore, the Fund will be
required to make mandatory partial redemptions of the Notes in the event failure
to maintain 1940 Act Asset Coverage (as defined under "Description of Notes --
Asset Maintenance") is not cured in a timely manner. See "Description of Notes
- -- Events of Default."
Use of the Fund's cash to repurchase or redeem Notes and/or Preferred Shares
may adversely affect the Fund's ability to distribute annually at least 90% of
its investment company taxable income, which distribution is required to qualify
for taxation as a regulated investment company. The Fund may also realize income
in connection with funding repurchases or redemptions of Notes or Preferred
Shares, 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 the Notes and/or Preferred Shares 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.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds are
original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of a
debt instrument over the issue price of the instrument. Original issue discount
on a taxable obligation is required to be currently included in the income of
the holder of the obligation (i) on a ratable basis if the obligation was issued
before July 2, 1982 and (ii) on a constant interest rate basis resembling the
economic accrual of interest if the obligation was issued after July 1, 1982.
The tax basis of the holder of an original issue discount debt instrument is
increased by the amount of original issue discount thereon properly included in
the holder's gross income as determined for federal income tax purposes. Current
inclusion in gross income of original issue discount on a taxable debt
instrument is required, even though no cash is received at the time the original
issue discount is required to be included in gross income. Because such income
may not be matched by a corresponding cash distribution to the Fund, the Fund
may be required to borrow money or dispose of other securities to be able to
make distributions to the investors. The extent to which the Fund may liquidate
securities at a gain may be limited by the 30% limitation discussed above.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will 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 shareholders. 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 90% and 98% 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 COMMON STOCK
For any period during which the Fund qualifies as a regulated investment
company for federal income tax purposes, dividends paid out of the Fund's net
investment income and short-term capital gains to holders of Common Stock will
be taxable as ordinary income. It is expected that dividends received by
corporate shareholders will not be eligible for the dividends received
deduction. Distributions of net long-term capital gains designated by the Fund
as capital gain dividends, if any, are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund's shares and are not
eligible for the dividends received deduction. Dividends and distributions will
be taxable to shareholders as if actually distributed, even if they are
reinvested in additional shares of the Fund. Shareholders receiving
distributions in the form of newly issued shares will have a cost basis in each
share received equal to the fair market value of a share of the Fund on the
distribution date.
Generally, dividends paid by the Fund are treated as received in the taxable
year in which the distribution is made; however, any dividend declared by the
Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in such a month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
Any distribution by the Fund to a holder of Common Stock not made out of the
Fund's earnings and profits will be treated as a return of capital to each
holder of Common Stock, will reduce the basis of each share of Common Stock with
respect to which it is distributed and will be subject to tax as capital gain to
the extent that the distribution exceeds the basis of the share of Common Stock
with respect to which it is distributed. Investors should carefully consider the
tax implications of buying shares of Common Stock just prior to a distribution,
as the price of shares purchased at this time may reflect the amount of the
forthcoming distribution which will, except in unusual circumstances, be taxable
when received.
After the close of each taxable year, the Fund will identify for its holders
of Common Stock the portions of its distributions that are attributable to
capital gains and to ordinary income, respectively.
The Internal Revenue Code limits certain miscellaneous itemized deductions
by individuals, including deductions of investment expenses, to the extent the
aggregate of such deductions exceeds 2% of an individual's federal adjusted
gross income. The Internal Revenue Code would treat such expenses incurred by a
regulated investment company as being indirectly incurred by the shareholders of
the investment company. Shareholder expenses of publicly offered regulated
investment companies are exempted from the application of the 2% floor. Thus,
the limitation will not apply with respect to indirect deductions through the
Fund. Such expenses will also be fully deductible by the Fund's corporate
shareholders.
If the Fund suffers a net taxable loss in any taxable year, the holders of
Common Stock will not be permitted to utilize that loss in their tax returns.
Generally, gain realized by a shareholder on the sale of shares held for
more than one year will be taxable as long-term capital gain. If a shareholder
holds shares primarily for sale to customers in the ordinary course of business
rather than for investment, any gain recognized on the sale of those shares
would be taxable as ordinary income. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received or treated as having been received by the
shareholder with respect to such shares. Shareholders who acquire shares on
multiple dates should consult their tax advisers to determine how to allocate
the cost of stock for basis purposes.
In general, federal withholding taxes at a 30% rate or a lesser rate
established by treaty will apply to distributions to shareholders (except to
those distributions designated by the Fund as capital gains dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations to the extent
that such income is not "effectively connected" with a U.S. trade or business
carried on by the shareholders.
In the event the Fund retains any net capital gains, it may designate such
retained amounts as undistributed capital gains in a notice to its shareholders.
In the event such a designation is made, shareholders subject to U.S. tax would
include in income, as long-term capital gains, their proportionate share of such
undistributed amounts, but would be allowed a credit or refund, as the case may
be, for their proportionate share of the 35% tax paid by the Fund. If the
designation is made, for U.S. federal income tax purposes, the tax basis of
shares owned by a shareholder would be increased by an amount equal to 65% of
the amount of undistributed capital gains included in the shareholder's income.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31% of
all taxable distributions payable to shareholders 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 shareholder has been notified by the U.S.
Internal Revenue Service that they are subject to backup withholding. Corporate
shareholders and other shareholders specified in the Internal Revenue Code are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax liability.
OTHER TAXATION
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the state, local or foreign tax consequences to them
of an investment in the Common Stock.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Fund consists of 1,000 Preferred Shares,
no par value, with a liquidation preference of $100,000 per share, and
100,000,000 shares of Common Stock, $.01 par value. As of April 30, 1996,
25,380,503 shares of Common Stock are outstanding and 200 Preferred Shares are
outstanding. The Board of Directors reserves the right to issue Preferred Shares
and Common Stock, from time to time, and any such shares shall be deemed
"Preferred Shares" and "Common Stock," respectively. The Preferred Shares and
the Common Stock issued are, or upon issuance will be fully paid and
nonassessable and will have no preemptive rights or conversion rights. As used
herein, the term "holder of Preferred Shares" refers to a beneficial owner of
Preferred Shares unless the context otherwise requires.
DIVIDENDS AND DISTRIBUTIONS
Dividends on the Preferred Shares are cumulative from the date on which such
shares are originally issued (the "Original Issuance Date") and are payable,
when, as and if declared by the Board of Directors of the Fund, out of funds
legally available therefor, on the last day of successive 30-day periods (each,
a "Dividend Payment Date") which commenced on January 19, 1989 (the 45th day
after the Original Issuance Date), subject to certain exceptions. Dividends will
be paid to the holders of the Preferred Shares on each Dividend Payment Date
through DTC or a successor securities depository appointed by the Fund. The
securities depository's normal procedures now provide for distribution of
dividends in next-day funds settled through the New York Clearing House to
broker-dealers acting as agent members on behalf of the holders of the Preferred
Shares, who in turn are expected to distribute such dividends to the persons for
whom they are acting as agent.
The dividend rate (the "Applicable Rate") is reset generally every 30 days
by an auction conducted on the first Business Day (an "Auction Date") next
preceding the first day of the next Dividend Period; provided, however, if such
day is a Thursday the Auction Date shall mean the Business Day next preceding
such Thursday. Accordingly, for each dividend period after the initial dividend
period, the dividend rate for the Preferred Shares will be the Applicable Rate
per annum that results from an auction. Pursuant to a broker-dealer agreement
(the "Broker-Dealer Agreement") between the Fund, Bear, Stearns & Co. Inc.
("Bear, Stearns") and Bankers Trust Company ("Bankers Trust"), Bankers Trust as
the auction agent for the Preferred Shares will pay a quarterly service charge
(from funds provided by the Fund) to Bear, Stearns, the Fund's exclusive
broker-dealer with respect to the Preferred Shares, of 1/8 of 1% of the purchase
price of Preferred Shares outstanding, prorated for the number of days in the
related dividend period. To the extent that the Fund does not make dividend
payments on the Preferred Shares on any Dividend Payment Date, such payments
shall be made to the holders by Financial Security pursuant to the Surety Bond
and thereafter Financial Security shall be subrogated to such holders' rights to
receive such dividend payments when, as and if declared by the Board of
Directors. See "Voting" below and "Surety Arrangement for Preferred Shares --
Surety Bond." The Fund has negotiated an extension of the Broker-Dealer
Agreement with Bear, Stearns whereby Bear, Stearns has agreed to continue to act
as the Fund's exclusive broker-dealer with respect to the Preferred Shares
through December 4, 1998.
Under the 1940 Act and the Articles of Incorporation, the Fund may not (i)
declare dividends on the Preferred Shares if at the time thereof (and after
giving effect thereto) asset coverage with respect to the Fund's senior
securities representing indebtedness, including the Notes, would be less than
200% (or such higher percentage as may in the future be required by law) or (ii)
declare any other distributions with respect to the Preferred Shares or purchase
or redeem Preferred Shares if at the time of such declaration, purchase or
redemption, as applicable (and after giving effect thereto), asset coverage with
respect to the Fund's senior securities representing indebtedness, including the
Notes, would be less than 300% (or such higher percentage as may in the future
be required by law). Further, the Fund may not declare dividends or other
distributions on the Common Stock or purchase or redeem any shares of Common
Stock if, at the time of the declaration, purchase or redemption, as applicable
(and after giving effect thereto), asset coverage with respect to the Fund's
senior securities representing indebtedness, including the Notes, would be less
than 300% (or such higher percentage as may in the future be required by law) or
asset coverage with respect to the Fund's senior securities of a class which is
stock, including the Preferred Shares, would be less than 200% (or such higher
percentage as may in the future be required by law). See "Description of Notes
- -- Restrictive Covenants" for certain definitions relating to the foregoing
restrictions. Under the Note Purchase Agreement, the declaration of dividends or
other distributions on or the purchase or the redemption of Preferred Shares or
Common Stock will be prohibited at any time payments of principal of or interest
on the Notes are in default. In addition, the declaration of dividends or other
distributions on or the purchase or redemption of Common Stock will be
prohibited at any time dividends on the Preferred Shares are in arrears or
Surety Assets Coverage is not maintained.
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 Preferred Shares, 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
interest payments with respect to the Notes, the advisory fee, bank custodian
and surety custodian charges, the premium paid pursuant to the Surety
Arrangement, taxes (except capital gains 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 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 Preferred Shares) subject to the foregoing
and any requirements of Maryland law.
REDEMPTION
To the extent permitted under the 1940 Act and Maryland law, the Fund may
redeem at its option some or all of the Preferred Shares on any Dividend Payment
Date (a "Preferred Stock Redemption"). The Fund shall be obligated (a) to
redeem, no later than the last day specified for the redemption of Preferred
Shares pursuant to a Redemption Request (as defined) from Financial Security the
number of Preferred Shares specified in such Redemption Request (a "Mandatory
Surety Redemption") and (b) to redeem all of the Preferred Shares at least one
full Business Day prior to any expiration date of the Surety Bond if, 190 days
prior to such expiration date, the Fund shall have failed to obtain from
Financial Security an extension of the term of the Surety Bond pursuant to its
terms (a "Mandatory Expiration Redemption"); provided that, under certain
circumstances, no Mandatory Expiration Redemption shall be required if the Fund
shall have obtained notice in writing from each of the Rating Agencies that such
expiration of the Surety Bond will not adversely affect the then outstanding
ratings of the Preferred Shares whether through obtaining a substitute surety
bond or otherwise. Preferred Stock Redemptions and any Mandatory Surety
Redemption or Mandatory Expiration Redemption will be made at a price equal to
$100,000 per share plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund), except that if any such
redemption is not made on a Dividend Payment Date, it will be made at a price
equal to $100,250 plus accumulated and unpaid dividends through the date of
redemption (whether or not declared by the Fund). Such redemptions may only be
made by the Fund to the extent permitted under the 1940 Act and Maryland law,
and provided neither principal nor interest payments with respect to the Notes
are then in default. A holder of Preferred Shares may elect not to have its
shares redeemed pursuant to a Mandatory Expiration Redemption by giving notice
to the Fund or the paying agent for the Preferred Shares at least five days
prior to the redemption date of its election to continue to hold its Preferred
Shares. The Fund is obligated to meet certain Deposit Securities requirements
pursuant to the Surety Arrangement to the extent necessary to satisfy a
Mandatory Expiration Redemption. See "Surety Arrangement for Preferred Shares --
Insurance Agreement."
Pursuant to the terms of the Insurance Agreement (as defined below),
Financial Security is entitled to cause the Fund to redeem certain of the
Preferred Shares to the extent permitted under the 1940 Act and Maryland law
(and provided payments of principal of and interest on the Notes are not then in
default), in the event that the Fund fails to maintain Surety Assets Coverage
while any of the Preferred Shares are outstanding, and such failure is not cured
within eight Business Days. See "Surety Arrangement for Preferred Shares --
Insurance Agreement." If on any date on which the payment of the redemption
price would constitute a Scheduled Payment, the Fund shall default in making
payment of such redemption price, Financial Security shall make such payments to
the holders of Preferred Shares to be redeemed and shall thereafter be
subrogated to all the rights of such holders with respect to their Preferred
Shares. See "Voting" below and "Surety Arrangement for Preferred Shares --
Surety Bond."
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the Fund (whether voluntary
or involuntary), holders of the Preferred Shares then outstanding shall be
entitled to receive, out of the assets of the Fund available for distribution to
stockholders, after satisfying claims of creditors (including the holders of the
Notes) but before any distribution of assets is made to holders of the Common
Stock or any other class of stock ranking junior to the Preferred Shares as to
liquidation payments, a liquidation distribution in the amount of $100,000 per
share plus an amount equal to accumulated and unpaid dividends (whether or not
earned or declared by the Fund, but without interest) to the date of the final
distribution. If, upon any liquidation, dissolution or winding up of the Fund,
the assets of the Fund shall be insufficient to make such full payments to
holders of the Preferred Shares, then such assets shall be distributed among the
holders of Preferred Shares ratably, according to the respective amounts which
would be payable on all such Preferred Shares if all amounts thereon were paid
in full. So long as the Surety Bond is in effect, to the extent of any such
insufficiency and provided Financial Security has consented to such liquidation,
Financial Security will pay the remaining liquidation preference to the holders
of the Preferred Shares at the time of liquidation. If Financial Security has
not consented to such liquidation, it shall continue to guarantee Scheduled
Payments on the Preferred Shares (including dividend payments and the
liquidation preference to the extent thereof not paid in liquidation) until the
expiration of the Surety Bond, at which time payment of the unpaid liquidation
preference of the Preferred Shares shall be paid by Financial Security. See
"Surety Arrangement for Preferred Shares -- Surety Bond." Unless and until
payment in full has been made to the holders of the Preferred Shares of the
liquidation distributions to which they are entitled, no dividends or
distributions will be made to holders of the Common Stock or any other stock
junior to the Preferred Shares on liquidation. After payment to the holders of
the Preferred Shares of the full amount of the liquidation distributions to
which they are entitled, such holders will not be entitled to any further
participation in any distribution of assets of the Fund. Neither a sale, lease
or exchange of all or substantially all of the property and assets of the Fund
nor a consolidation or merger of the Fund with or into any other corporation or
business trust will be deemed to be a liquidation, dissolution or winding up of
the Fund.
Upon any liquidation, the holders of the Common Stock, after required
payments to the holders of the Preferred Shares, will be entitled to participate
equally in the remaining assets of the Fund.
VOTING
Except as noted below, the Common Stock and the Preferred Shares vote
together as a single class. Holders of shares of Common Stock have voting rights
of one vote per share and holders of the Preferred Shares have voting rights of
one vote per $1,000 of liquidation preference without regard to any liquidation
preference attributable to accumulated and unpaid dividends (i.e., 100 votes per
Preferred Share); provided that all the votes represented by a single Preferred
Share must be voted together. In elections of Directors, the holders of the
Preferred Shares, as a separate class, vote to elect two Directors and the
holders of the Common Stock and the Preferred Shares, voting together, will
elect the remaining Directors. In addition, during any period (herein referred
to as a "Voting Period") that dividends payable on Preferred Shares equal to two
full years of dividends are unpaid, the holders of such Preferred Shares have
the right to elect as a class the smallest number of additional Directors as
shall be necessary to assure that a majority of the Directors has been elected
by the holders of the Preferred Shares. The terms of office of all persons who
are Directors of the Fund at the time of the commencement of a Voting Period
will continue, notwithstanding the election by the holders of Preferred Shares
of the additional number of Directors which such holders are entitled to elect
as a separate class. The persons elected by the holders of Preferred Shares,
together with the incumbent Directors elected by the holders of the Common Stock
and the Preferred Shares voting together, will constitute the duly elected
Directors of the Fund. When all accumulated and unpaid dividends have been paid
or provided for, the Voting Period shall end and the terms of office of the
additional Directors shall terminate. Election of Directors is noncumulative;
accordingly, holders of a majority of the voting power represented by the
outstanding shares of Common Stock and Preferred Shares, voting together as a
single class, or a majority of the outstanding Preferred Shares, voting
separately as a class, may elect all of the Directors who are subject to
election by such class, as the case may be.
Pursuant to the Surety Custody Agreement, to the extent Scheduled Payments
are paid by Financial Security pursuant to the Surety Bond, Financial Security
shall have the right to exercise the voting rights (including any right to elect
a majority of the Board of Directors described above) of the holders of the
Preferred Shares with respect to which such Scheduled Payments have been made by
Financial Security. See "Surety Arrangement for Preferred Shares -- Insurance
Agreement." The assignment to Financial Security of the voting rights of the
holders of the Preferred Shares shall terminate when the Fund has made payments
on the Preferred Shares with respect to which Financial Security had made
Scheduled Payments pursuant to the Surety Bond or the Fund has reimbursed
Financial Security with respect to such Scheduled Payments.
The Common Stock and the Preferred Shares each vote separately as a class on
amendments to the Articles of Incorporation that would adversely affect their
respective contractual rights as expressly set forth in the Articles of
Incorporation. In addition to any other vote required by the Articles of
Incorporation or applicable law, so long as any Preferred Shares are outstanding
(1) the Fund may not be voluntarily liquidated, dissolved or wound up, or merged
into or consolidated with any other entity in a transaction in which it is not
the successor entity, or converted to open-end status, and may not sell all or
substantially all of its assets and may not engage in a statutory share exchange
in which it is not the successor entity without the approval of at least a
majority of the outstanding Preferred Shares and the outstanding shares of
Common Stock, each voting as a separate class; (2) the adoption of any plan of
reorganization adversely affecting either the Preferred Shares or the Common
Stock shall require the approval of a majority of the outstanding shares of each
such class so affected; (3) the approval of a majority of the outstanding
Preferred Shares, voting separately as a class, shall be required to amend,
alter or repeal any of the express preferences, rights or powers of holders of
the Preferred Shares as set forth in the Articles of Incorporation, or increase
or decrease the number of Preferred Shares authorized to be issued; and (4) so
long as any Preferred Shares are outstanding, the approval of a majority (as
defined under "Investment Objective and Policies") of the outstanding Preferred
Shares and the outstanding shares of Common Stock, each voting as a separate
class, shall be required to approve 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 sub-classification as a closed-end investment company,
changes in its investment objective or changes in the investment restrictions
described under "Investment Policies and Limitations -- Investment
Restrictions." The Common Stock and the Preferred Shares will also vote
separately to the extent otherwise required under Maryland law or the 1940 Act
as in effect from time to time, and, to the extent required under the 1940 Act,
action by the Fund's shareholders shall require a vote of a majority of the
Fund's outstanding voting securities as defined under "Investment Policies and
Limitations."
For purposes of any right of the holders of the Preferred Shares to vote on
any matter, whether such right is created by the Articles of Incorporation, by
statute or otherwise, a holder of a Preferred Share will not be entitled to vote
and such Preferred Share will not be deemed to be outstanding for the purpose of
voting or determining the number of Preferred Shares required to constitute a
quorum, if prior to or concurrently with a determination of Preferred Shares
entitled to vote or of Preferred Shares deemed outstanding for quorum purposes,
as the case may be, a notice of redemption shall have been given in respect of
such Preferred Share and Deposit Securities for the redemption of such Preferred
Share shall have been deposited in trust, as provided above; provided, however,
that the foregoing sentence shall not be applicable to the holders of Preferred
Shares who elected to retain their Preferred Shares after notice of a Mandatory
Expiration Redemption. The Fund is required by the rules of the Exchange to hold
annual meetings of shareholders. The most recent annual meeting of shareholders
was held on March 1, 1996.
SURETY ARRANGEMENT FOR PREFERRED SHARES
FINANCIAL SECURITY
The information set forth below under this caption of this Prospectus was
furnished by Financial Security.
General. Financial Security acts as surety under the Surety Bond by which
Financial Security unconditionally and irrevocably guarantees Scheduled Payments
on the Preferred Shares. Financial Security is a monoline insurance company
incorporated in 1984 under the laws of the State of New York. Financial Security
is licensed, directly or through its subsidiaries, to engage in financial
guaranty insurance business in all 50 states, the District of Columbia, Puerto
Rico and the United Kingdom.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -- thereby enhancing the credit rating of those securities
- -- in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Holdings is owned approximately 51% by U S WEST Capital Corporation ("U S
WEST"), 8% by Fund American Enterprises Holdings, Inc. ("Fund American") and 6%
by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). U S WEST is a
subsidiary of U S WEST, Inc., which operates businesses involved in
communications, data solutions, marketing services and capital assets, including
the provision of telephone services in 14 states in the western and midwestern
United States. Fund American is a financial services holding company whose
principal operating subsidiary is one of the nation's largest mortgage
servicers. Tokio Marine is a major Japanese property and casualty insurance
company. U S WEST has announced its intention to dispose of its interest in
Holdings as part of its strategic plan to withdraw from businesses not directly
involved in telecommunications. Fund American has certain rights to acquire and
vote additional shares of Holdings from U S WEST and Holdings. No shareholder of
Holdings is obligated to pay any debt of Financial Security or any claim under
any insurance policy issued by Financial Security or to make any additional
contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100. At December 31, 1995, Financial Security and its subsidiaries
had 164 employees.
Reinsurance. Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
or any of its domestic operating insurance company subsidiaries are reinsured
among such companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability. Financial Security's claims-paying ability
is rated "Aaa" by Moody's and "AAA" by S&P, Nippon Investors Service Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. Copies of the statutory quarterly and annual statements filed with the
State of New York Insurance Department by Financial Security are available upon
request to the State of New York Insurance Department.
Insurance Regulation. Financial Security is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, Financial Security and
its insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, Financial Security is subject to Article 69 of the New York Insurance
Law which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the size
of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
SURETY BOND
Concurrent with the issuance of the Preferred Shares in November 1988, the
Fund caused Financial Security to deliver the Surety Bond to Bankers Trust
Company, as custodian under a custody agreement (the "Surety Custody
Agreement"), for the benefit of the holders of the Preferred Shares. Under the
Surety Bond, Financial Security unconditionally and irrevocably guarantees to
each holder of Preferred Shares, the full and complete payment of: (i) Scheduled
Payments; and (ii) the amount of any payment on the Preferred Shares which
subsequently is avoided in whole or in part as a preference under applicable law
until and including such date on which the Preferred Shares are paid in full.
"Scheduled Payments" shall mean (i) payments of dividends on the Preferred
Shares which holders of the Preferred Shares would be entitled to receive on
each Dividend Payment Date during the term of the Surety Bond (see "Expiration
or Termination of the Surety Arrangement" below) in accordance with the terms of
the Articles of Incorporation, without regard to whether the Fund has declared
any such dividend or such dividend could have been legally declared by the Fund,
(ii) payment of the redemption price of the Preferred Shares, without regard to
whether such redemption could have been legally made by the Fund (a) on the last
date on which the Fund was to have redeemed the Preferred Shares as specified in
a Redemption Request (as defined) given by Financial Security under the
Insurance Agreement (as defined below) upon the occurrence of an Event of
Default (as defined) under the Insurance Agreement in the event Financial
Security has notified the Surety Custodian that such redemption is to be a
Scheduled Payment and (b) on the date on which the Preferred Shares may be
required to be redeemed upon expiration of the Surety Bond (as described under
"Description of Capital Stock -- Redemption"), and (iii) payment of the
liquidation preference on the Preferred Shares in the event of a liquidation of
the Fund during the term of the Surety Bond on the date fixed for payment of
such liquidation preference pursuant to the Articles of Incorporation, so long
as Financial Security shall have consented to such liquidation. For the purposes
of the Scheduled Payments under the Surety Bond, in the event of a liquidation
of the Fund to which Financial Security has not consented in which only a
portion of the liquidation preference on the Preferred Shares is paid, a portion
of the Preferred Shares represented by the unpaid portion of the liquidation
preference shall be deemed to remain outstanding and shall be secured by the
Surety Bond as to all Scheduled Payments without regard to whether the Fund has
any obligation with respect thereto.
Financial Security shall be subrogated to all the rights of each holder of
Preferred Shares in the event Financial Security makes a Scheduled Payment to
any such holder under the Surety Bond.
The Surety Bond is a direct, unsecured and unsubordinated obligation of
Financial Security ranking equally with any other unsecured and unsubordinated
obligations of Financial Security except for certain obligations in respect of
tax and other payments to which preference is or may become afforded by statute.
The term of the Surety Bond cannot be modified or altered by any other agreement
or instrument or by the merger, consolidation or dissolution of the Fund. The
Surety Bond may not be cancelled or revoked by Financial Security prior to the
end of its term. See "Expiration of the Surety Arrangement" below. The Surety
Bond is governed by the laws of the State of New York but is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
INSURANCE AGREEMENT
General. As a precondition to Financial Security's issuing the Surety Bond,
the Fund entered into an Insurance Agreement (the "Insurance Agreement") with
Financial Security pursuant to which the Fund is obligated to reimburse
Financial Security for amounts paid by Financial Security under the Surety Bond.
A copy of the Insurance Agreement is filed as an exhibit to the Registration
Statement, as filed with the SEC on November 28, 1988. A copy of such
Registration Statement may be obtained as described under "Further Information."
Surety Asset Coverage. At any time that Preferred Shares are outstanding,
the Fund is required under the Insurance Agreement to maintain assets in its
portfolio meeting the Surety Investment Guidelines and having a discounted value
at least equal to the Surety Asset Coverage (as defined below). If the Fund
fails to meet the Surety Asset Coverage requirement and such failure is not
cured within eight Business Days, Financial Security may seek to cause the Fund
to redeem certain of the Preferred Shares. See "Events of Default; Remedies"
below. The discount factor for and market value of any asset of the Fund, the
method of calculating Surety Asset Coverage, 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 and Financial Security.
"Surety Asset Coverage" as of any date is defined as the dollar amount equal
to (A) the sum of (i) 100% of the aggregate principal amount of the Notes then
outstanding; (ii) $100,250 times the number of Preferred Shares then
outstanding; (iii) the aggregate amount of accrued interest on the Notes then
outstanding, plus an amount equal to 63 days' interest on such principal amount
of the Notes; (iv) the aggregate amount of accumulated but unpaid dividends with
respect to the Preferred Shares to such date, plus the amount of dividends
projected to accumulate on the Preferred Shares then outstanding from such date
until the 63rd day thereafter; (v) the aggregate principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the Notes);
and (vi) the greater of $200,000 or the Fund's liabilities in existence as of
such date to the extent not otherwise reflected in any of (i) through (v) above,
less (B) the combined value of any Deposit Securities irrevocably deposited by
the Fund for payment of principal of or interest on the Notes or redemptions of
or dividend payments with respect to the Preferred Shares. See "Deposit
Securities Requirement" below.
Deposit Securities Requirement. The Fund is obligated to deposit with the
payment agent with respect to the Preferred Shares, a specified amount of
Deposit Securities not later than 20 days prior to each Dividend Payment Date
and not later than the mailing of any notice of redemption with respect to any
redemption (except in the case of a Mandatory Expiration Redemption). In
addition, in the case of a Mandatory Expiration Redemption, the Fund will be
obligated to set aside Deposit Securities ratably over a period ending not less
than 30 days prior to the applicable redemption date. Deposit Securities in all
cases shall have an initial combined value greater than or equal to liquidation
preference and/or accumulated dividends on the Preferred Shares to become due
and payable on the applicable payment date, and shall mature on or prior to such
date.
Events of Default; Remedies. An "Event of Default" is defined in the
Insurance Agreement to include any of the following: (i) any default by the Fund
in its performance of any covenant contained in the Insurance Agreement and the
continuance of such default for at least 30 days after written notice is given
to the Fund; (ii) any material representation or warranty made by the Fund in
the Insurance Agreement or in connection therewith shall prove to be incorrect
in any material respect when made or deemed made; (iii) any failure of the Fund
to maintain assets in its portfolio with a discounted value such that the Surety
Asset Coverage requirement is met, which failure is not cured within eight
Business Days; (iv) any failure by the Fund to reimburse Financial Security for
amounts paid under the Surety Bond or pay to Financial Security when due any
other amount under the Insurance Agreement; (v) any failure by the Fund, on or
prior to the date six months prior to the expiration date of the Surety Bond to
obtain from Financial Security an extension of the term of the Surety Bond
pursuant to its terms or to obtain notice in writing from each of the Rating
Agencies that such expiration of the Surety Bond will not adversely affect the
then outstanding rating, if any, of the Preferred Shares by such Rating Agency
whether through obtaining a substitute surety bond or otherwise; (vi) a final
determination by the Internal Revenue Service that the Fund does not qualify for
any taxable year as a regulated investment company (as defined in the Internal
Revenue Code); (vii) certain events of bankruptcy, insolvency or receivership of
the Fund; (viii) denial by the Fund that it has any or further liability or
obligation under the Insurance Agreement or the Articles of Incorporation, or
any finding or ruling by any governmental agency or authority that the Insurance
Agreement or the Articles of Incorporation is not valid or binding on the Fund;
(ix) the failure to comply with certain covenants with respect to the
liquidation of portfolio securities in order to pay dividends or make
redemptions on Preferred Shares when due; and (x) the failure by the Fund to
make a payment of a dividend or redemption when due on the Preferred Shares or
to declare a dividend on the Preferred Shares when contemplated under the terms
of the Fund's Articles of Incorporation and not prohibited under Maryland law or
the 1940 Act; provided that, in the case of each of clauses (i), (ii), (vi) and
(viii), such event shall not constitute an Event of Default unless, in the
reasonable judgment of Financial Security, such event would materially and
adversely affect the ability of the Fund to perform its material obligations
under the Insurance Agreement or the Articles of Incorporation or would
materially and adversely affect the material rights or benefits or the
enforcement of remedies or the practicable realization of such rights of or
benefits to Financial Security under the Insurance Agreement or of Financial
Security or any holder of Preferred Shares under the Surety Custody Agreement or
the Articles of Incorporation or otherwise with respect to the Preferred Shares.
If an Event of Default has occurred and is continuing, the Fund is required
under the Insurance Agreement, upon receipt of a written request from Financial
Security (a "Redemption Request"): (a) in the case of an Event of Default other
than as specified in clause (iii) above, to deliver a Notice of Redemption with
respect to, and redeem within a specified period, such number of Preferred
Shares, as specified by Financial Security in such Redemption Request; and (b)
in the case of the occurrence and continuance of an Event of Default specified
in clause (iii) above relating to Surety Asset Coverage, to identify in the
Fund's sole discretion, and sell for cash, certain portfolio holdings, the
proceeds from the sale of which shall be added to the portfolio and shall
thereby cause the value of the portfolio to have equalled or exceeded the Surety
Asset Coverage requirement on a pro forma basis as of the immediately preceding
date such Surety Asset Coverage was determined ("Special Surety Redemption
Assets"). In addition, Financial Security will be entitled to deliver a
Redemption Request directing the Fund to redeem Preferred Shares with the
proceeds of the sale of such Special Surety Redemption Assets or similar assets.
Any Redemption Request (other than in respect of an Event of Default specified
in clause (iii) above), once delivered, may be withdrawn by Financial Security
at any time prior to the mailing of the related Notice of Redemption.
Any amount applied to payment on the Preferred Shares as to which Financial
Security has made payment under the Surety Bond shall be deemed to satisfy the
obligation of the Fund to reimburse Financial Security in an amount equal to the
amount so applied. Alternatively, if the Fund reimburses Financial Security for
any Scheduled Payments made by it, such reimbursement will satisfy the Fund's
obligation to make the dividend, redemption or liquidation preference payment
represented by such Scheduled Payment so reimbursed.
INDEMNIFICATION AND OTHER PAYMENTS BY THE FUND
The Fund has agreed to indemnify Financial Security against certain
liabilities, losses, costs, damages, attorneys' fees and other expenses. The
Fund paid to Financial Security, upon the issuance of the Surety Bond, and in
consideration thereof, a premium equal to $510,909 which represented the present
value of 0.40% of the aggregate liquidation preference of the Preferred Shares
originally issued (the "Annual Premium Amount") times the number of years (five)
in the initial term of the Surety Bond (which was from December 1988 through
December 1993) and also paid Financial Security for certain other legal fees and
expenses incurred by Financial Security in connection with the Insurance
Agreement. The Fund now pays an annual fee to Financial Security equal to 0.40%
of the aggregate liquidation preference of the outstanding Preferred Shares.
EXPIRATION OF THE SURETY ARRANGEMENT
The Surety Bond will expire December 5, 1998; provided, however, that,
subject to certain conditions contained in the Insurance Agreement including the
conditions that there is no Event of Default and Surety Asset Coverage is met at
the time of extension, the Fund may elect to extend the expiration date for one
or more additional periods of up to five years in the aggregate at a premium
payable annually equal to 0.40% of the aggregate liquidation preference of the
Preferred Shares outstanding at the time of extension of the Surety Bond. Except
under certain circumstances, upon an expiration of the Surety Bond prior to 10
years after the original issuance thereof, the Fund shall be obligated to pay
Financial Security a fee equal to the Annual Premium Amount. Accordingly, the
Fund may not replace the Surety Bond with a substitute surety bond, financial
guaranty or other credit enhancement without payment of such fee. Upon
expiration of the Surety Bond, the Preferred Shares will be subject to mandatory
redemption under certain circumstances as described under "Description of
Capital Stock -- Redemption."
DESCRIPTION OF NOTES
GENERAL
The Fund issued $20,000,000 (principal amount) of the Notes, due in December
1998, pursuant to a note purchase agreement (the "Note Purchase Agreement")
dated as of July 15, 1993, and amended and restated as of December 16, 1993,
between the Fund and Pacific Mutual Life Insurance Company ("Pacific Mutual").
The Note Purchase Agreement does not limit the aggregate principal amount of
senior notes of the Fund (including the Notes, the "Senior Notes") that may be
issued thereunder from time to time in one or more series. The issuance of any
subsequent Senior Notes will be subject to compliance with the 1940 Act,
including Section 18 thereof. Subject to the 1940 Act, any such subsequent
Senior Notes may have certain terms, including, but not limited to, those
relating to interest rate, redemptions, repurchases and maturity which differ
from the terms of the Notes. The following summary of the principal terms of the
Notes and certain terms of the Note Purchase Agreement is qualified in its
entirety by reference to all provisions of the Note Purchase Agreement,
including the definitions therein of certain terms. A copy of the Note Purchase
Agreement has been filed with the SEC as an exhibit to the Fund's Registration
Statement on Form N-2, which this Prospectus forms a part.
INTEREST
The Notes bear interest at the rate of 6.53% per annum from July 15, 1993
through and including November 30, 1998. Interest on the Notes is payable on
June 1 and December 1 of each year, commencing December 1, 1993. The Notes will
mature on December 1, 1998 if not repurchased or redeemed prior to that date.
REDEMPTION
The Notes will not be redeemable by the Fund prior to maturity, except that
(i) the Fund may redeem the Notes on or after December 5, 1993, in whole but not
in part, in connection with the conversion of the Fund to open-end status and
(ii) the Fund may elect to redeem such amount of Notes as shall (a) enable the
Fund to maintain asset coverage (as defined in and determined pursuant to the
1940 Act) with respect to the Fund's senior securities representing indebtedness
(as defined in the 1940 Act), including the Notes, of at least 300% (or such
higher percentage as may in the future be specified in the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of paying dividends on common
stock), (b) enable the Fund to maintain asset coverage (as defined in the 1940
Act) with respect to the Fund's senior securities of a class which is stock (as
defined in the 1940 Act), including the Preferred Shares, of at least 200% or
such higher percentage as may in the future be specified in the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of paying dividends on common
stock) or (c) enable the Fund to qualify for treatment as a regulated investment
company for federal income tax purposes. The Notes shall also be subject to
mandatory partial redemption upon the occurrence of certain events of default as
described under clauses (v) and (vi) under "Events of Default," below. All
redemptions of Notes by the Fund will be at a price of 100% of the principal
amount thereof, plus accrued interest to the date of redemption.
RANKING OF NOTES
The Notes will rank pari passu with all other existing and future senior
indebtedness of the Fund and will be senior to the Common Stock and the
Preferred Shares. "Senior indebtedness" means the principal of and interest on
and other amounts due on or in connection with any existing or future unsecured
indebtedness of the Fund.
RESTRICTIVE COVENANTS
Under the 1940 Act and the Note Purchase Agreement, the Fund may not declare
dividends or other distributions on the Common Stock or purchase any shares of
Common Stock if, at the time of the declaration or purchase, as applicable (and
after giving effect thereto), asset coverage with respect to the Fund's senior
securities representing indebtedness, including the Notes, would be less than
300% (or such higher percentage as may in the future be required by law). In
addition, under the 1940 Act and the Note Purchase Agreement, the Fund may not
(i) declare any dividends with respect to the Preferred Shares if, at the time
of such declaration (and after giving effect thereto), asset coverage with
respect to the Fund's senior securities representing indebtedness, including the
Notes, would be less than 200% (or such higher percentage as may in the future
be required by law) or (ii) declare any other distributions on the Preferred
Shares or purchase or redeem Preferred Shares if at the time of the declaration,
purchase or redemption, as applicable (and after giving effect thereto), asset
coverage with respect to the Fund's senior securities representing indebtedness,
including the Notes, would be less than 300% (or such higher percentage as may
in the future be required by law). Dividends or other distributions on or
purchases or redemptions of Common Stock or Preferred Shares are further
prohibited under the Note Purchase Agreement at any time that payments of
principal of or interest on the Notes are in default. Under the Internal Revenue
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
limitations on dividends, distributions and purchases may under certain
circumstances impair the Fund's ability to maintain such qualification. See
"Federal Taxation."
The asset coverage of a class of senior securities representing
indebtedness, such as the Notes, is defined as the ratio of (i) the total assets
of the Fund, less all liabilities and indebtedness not represented by senior
securities, to (ii) the aggregate amount of senior securities representing
indebtedness of the Fund. The asset coverage of a class of senior securities
representing stock, such as the Preferred Shares (see "Description of Capital
Stock -- Dividends and Distributions"), is defined as the ratio of (i) the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities, to (ii) the aggregate amount of senior securities
representing indebtedness of the Fund, plus the aggregate of the liquidation
preference of the Preferred Shares. "Senior securities representing
indebtedness" generally means any bond, debenture, note or similar obligation or
instrument constituting a security (other than stock) and evidencing
indebtedness. For purposes of determining asset coverage for senior securities
representing indebtedness in connection with the payment of dividends or other
distributions on or purchases or redemptions of stock, the term "senior
security" does not include any promissory note or other evidence of indebtedness
issued in consideration of any loan, extension or renewal thereof, made by a
bank or other person and privately arranged, and not intended to be publicly
distributed. The term "senior security" also does not include any such
promissory note or other evidence in any case where such a loan is for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the Fund at the time when the loan is made; a loan is presumed under the 1940
Act to be for temporary purposes if it is repaid within 60 days and is not
extended or renewed; otherwise it is presumed not to be for temporary purposes.
For purposes of determining whether the 300% and 200% asset coverage
requirements described above apply in connection with dividends or distributions
on or purchases or redemptions of Common Stock or Preferred Shares and for
purposes of determining 1940 Act Asset Coverage (as defined below), such asset
coverages may be calculated on the basis of values calculated as of a time
within 48 hours (not including Sundays or holidays) next preceding the time of
the applicable determination. The foregoing definitions reflect the provisions
of the 1940 Act as in effect on the date of the Note Purchase Agreement and are
subject to change to the extent necessary to reflect changes in the 1940 Act, if
any.
Pursuant to the Notes Investment Guidelines, the Note Purchase Agreement
contains a covenant limiting the Fund's ability to incur, assume, guarantee or
otherwise become liable with respect to any indebtedness for money borrowed
unless the incurrence of such indebtedness would not result in a default in the
performance or observance of the Fund's obligation to maintain 1940 Act Asset
Coverage (as defined) or otherwise cause a violation of Section 18 of the 1940
Act.
The Notes Investment Guidelines as reflected in the Note Purchase Agreement
also prohibit the Fund from creating, incurring or suffering to exist, or
agreeing to create, incur or suffer to exist, or consenting 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 sort (collectively, "Liens") upon any of its assets
which are eligible for inclusion in the discounted value of its portfolio,
except for (a) Liens the validity of which is 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 to secure payment for
services rendered by Bankers Trust Company or its successor as auction agent
with respect to the Preferred Shares and (d) Liens in respect of overnight
borrowings by the Fund not to exceed 5% of the total assets of the Fund at any
time outstanding. The terms of the Note Purchase Agreement also limit the Fund's
ability to employ certain investment strategies. See "Investment Policies and
Limitations -- Certain Investment Strategies."
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements that are incorporated into the terms of the Note Purchase
Agreement. The first of these requirements reflects the provisions of the 1940
Act with respect to asset maintenance for senior securities representing
indebtedness. The second of these requirements reflects the Notes Investment
Guidelines. These requirements are summarized below.
1940 Act Asset Maintenance. As set forth in the Note Purchase Agreement, the
Fund will agree to maintain, as of the last Business Day of each month in which
any of the Notes is outstanding, asset coverage with respect to senior
securities representing indebtedness, including the Notes, of at least 300% (or
such higher percentage as may in the future be specified in the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of paying dividends on common
stock) ("1940 Act Asset Coverage"). See "Restrictive Covenants" above for
certain definitions relating to 1940 Act Asset Coverage.
Note Basic Maintenance Amount. The Fund will be required under the Note
Purchase Agreement to maintain, on each Valuation Date (as defined), portfolio
holdings meeting the Notes Investment Guidelines (as described under "Investment
Policies and Limitations -- Investment Guidelines") having an aggregate
discounted value at least equal to the Note Basic Maintenance Amount. In the
event that the discounted value of the Fund's portfolio is less than the Note
Basic Maintenance Amount on any Valuation Date while any of the Notes is
outstanding, the Fund will seek to alter the composition of its portfolio so
that, on or before the eighth Business Day after such Valuation Date (the "Cure
Date"), the discounted value of the Fund's portfolio is at least equal to such
Note Basic Maintenance Amount. A "Valuation Date" means (i) the fifteenth day of
each month or, if such day is not a Business Day, the next succeeding Business
Day and (ii) the last Business Day of such month or, in the case of the first
Valuation Date, a date selected by the Fund no more than 15 days after the date
on which the Notes and the Preferred Shares are initially issued.
The "Note Basic Maintenance Amount" as of any date is defined as the dollar
amount equal to the sum of (i) 100% of the aggregate principal amount of the
Notes then outstanding; (ii) an amount equal to interest accrued on the
aggregate principal amount of the Notes then outstanding from the most recent
date to which interest has been paid or duly provided for through the next
succeeding Valuation Date plus all interest to accrue on the Notes during the 63
days following such Valuation Date; (iii) the principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the Notes);
and (iv) the greater of $200,000 or the Fund's current liabilities as of such
date to the extent not reflected in any of (i) through (iii) above. The
discounted value of the Fund's portfolio holdings as of any date means the
quotient of the market value (as defined in the Note Purchase Agreement, and
including accrued interest) of each such holding divided by the applicable
discount factor. Any security not in compliance with the Notes Investment
Guidelines (see "Investment Policies and Limitations -- Investment Guidelines")
shall be excluded from the calculation of the discounted value of the Fund's
portfolio holdings.
The discount factors and guidelines for determining the market value of the
Fund's portfolio holdings for purposes of determining compliance with the Note
Basic Maintenance Amount have been based upon criteria established in connection
with the expected rating of the Notes. In determining discount factors, several
factors are taken into consideration. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of a
corporate 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 for
and market value of any asset of the Fund, the method of calculating the
discounted value of any such asset and the Note Basic Maintenance Amount, the
assets eligible for inclusion in the calculation of the discounted value of the
Fund's portfolio and certain related definitions, methods of calculation and
reporting requirements, may be changed without the consent of the holders of the
Notes, provided that, among other things, such changes will not adversely affect
the ratings, if any, then assigned to the Notes by the respective Rating
Agencies.
MERGER AND CONSOLIDATION
The Fund may consolidate with or merge with or into, or transfer its assets
substantially as an entirety to, another corporation, limited partnership or
business trust, or engage in a statutory share exchange under Maryland law,
provided that (i) the successor corporation, limited partnership or business
trust (if other than the Fund) formed by or resulting from any such
consolidation or merger, or the transferee of the Fund's assets, is acceptable
to Pacific Mutual and shall assume payment of the principal of and interest on
the Notes and any other series of Senior Notes and the performance and
observance of the Note Purchase Agreement and (ii) the Fund or such successor
corporation, limited partnership or business trust or transferee shall not
immediately before such transaction or thereafter be in default under the Note
Purchase Agreement.
EVENTS OF DEFAULT
The following are "Events of Default" under the Note Purchase Agreement: (i)
failure to pay principal of any Note when due; (ii) default for five Business
Days in the payment of interest on any Note; (iii) failure to maintain asset
coverage with respect to senior securities representing indebtedness (as such
terms are defined above under "Restrictive Covenants") of at least 100% as of
the last Business Day of each of 24 consecutive months; (iv) failure to have, as
of the last Business Day of any month, 1940 Act Asset Coverage, which failure is
not cured by the last Business Day of the following month (for this purpose,
without limitation, the default will be deemed cured if, within the prescribed
period, the Fund has given an irrevocable notice to the registered holder of the
Notes to call Notes for redemption and that such redemption, alone or together
with other action taken by the Fund, will cause the Fund to have the requisite
1940 Act Asset Coverage); (v) failure to maintain, on each Valuation Date, a
discounted value for the Fund's portfolio equal to at least the Note Basic
Maintenance Amount, which failure is not cured by the applicable Cure Date; (vi)
default in the performance of any other covenant of the Fund under the Note
Purchase Agreement which has continued for 30 days as provided in the Note
Purchase Agreement; (vii) default under any instrument under which the Fund has
issued indebtedness or by which there may be secured or evidenced any
indebtedness of or guaranteed by the Fund, the effect of which is to cause or
permit the holders thereof to cause the acceleration of the maturity thereof,
provided that such default or defaults relate to indebtedness with an aggregate
principal amount in excess of $500,000 and have continued for 30 days as
provided in the Note Purchase Agreement; (viii) the making by the Internal
Revenue Service of a final determination that the Fund does not qualify for any
taxable year as a "regulated investment company" (as defined in the Internal
Revenue Code); (ix) certain events of bankruptcy, insolvency or reorganization;
and (x) the existence for 60 days of unstayed or unsatisfied final judgments
against the Fund in an aggregate amount in excess of $500,000.
If an Event of Default specified in any of clauses (i) through (viii) or (x)
above occurs with respect to the Notes, then and in every such case, the
registered holders of the outstanding Notes may by written notice delivered to
the Fund declare the Notes (or in the case of an Event of Default of the type
specified in clause (iv) or (v), such portion of the Notes as shall be required
under the Note Purchase Agreement to be redeemed) to be due and payable as
provided below. Upon an Event of Default specified in clause (iv), the amount of
Notes subject to mandatory partial redemption will equal the aggregate principal
amount of outstanding Notes (rounded to the next highest increment of $1,000)
the redemption of which would have caused the Fund to meet 1940 Act Asset
Coverage on a pro forma basis as of the last Business Day of the month in which
the failure to maintain 1940 Act Asset Coverage initially occurred. Upon an
Event of Default specified in clause (v), the amount of Notes subject to
mandatory partial redemption will equal the principal amount of outstanding
Notes which could be redeemed using the proceeds from the deemed sale of Special
Note Redemption Assets (rounded to the next highest increment of $1,000).
"Special Note Redemption Assets" are defined as portfolio holdings identified by
the Fund in its sole discretion, the deemed sale of which for cash on the
Valuation Date on which the discounted value of the Fund's portfolio failed to
equal or exceed the Note Basic Maintenance Amount would have resulted in the
Fund achieving the required Note Basic Maintenance Amount on a pro forma basis
as of such Valuation Date.
In the event of a mandatory partial redemption of Notes following an Event
of Default specified in clause (iv) or (v), the payment of principal of and
interest on the Notes due as a result of such mandatory partial redemption shall
be due within 45 days after the date on which such Event of Default occurs (in
the case of clause (iv)) and within 34 days after the applicable Cure Date (in
the case of clause (v)). In the event of an acceleration in the maturity of
Notes following an Event of Default specified in any of the other clauses above
other than clause (ix), the Fund shall immediately take action to liquidate
portfolio securities sufficient to pay the principal of and interest on such
Notes. If an Event of Default specified in clause (ix) occurs, the Notes shall
become due and payable immediately without any declaration or other act on the
part of any registered holder of the Notes.
ASSIGNMENT
Pacific Mutual may assign, subject to compliance with the Securities Act of
1933, as amended or regulations thereunder or any applicable state securities
laws or regulations, all or any portion of its interest in any rights under the
Note Purchase Agreement and the Notes to any individual, corporation,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof (individually, the "Person") or grant participation or beneficial
interests in the Note Purchase Agreement and the Notes to any Person; provided
that any assignment or grant of participation or beneficial interest by Pacific
Mutual of its interest in the Notes shall be of a minimum principal amount of
$5,000,000.
Upon any assignment of Pacific Mutual's rights under the Note Purchase
Agreement or under the Notes, any action under the Note Purchase Agreement
requiring the consent of Pacific Mutual and enforcement of any remedies provided
for under the Note Purchase Agreement may only be taken with the consent or at
the direction of the registered holders of more than 50% of the principal amount
of the Notes then outstanding.
CUSTODIAN, TRANSFER AGENTS, DIVIDEND
DISBURSING AGENT, PAYING AGENTS AND REGISTRARS
The Fund's securities and cash are held by State Street Bank and Trust
Company, whose principal business address is Two Heritage Drive, North Quincy,
Massachusetts 02171, as custodian (the "Custodian") under a custodian contract.
The Fund has not selected any foreign custodians or sub-custodians. However, if
the Fund determines that it should have any foreign custodians or sub-custodians
to maintain any of its foreign securities, the Board of Directors will make such
selection following a consideration of a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to perform capably custodial services for the Fund,
the reputation of the institution in its national market, the political and
economic stability of the country in which the institution is located, and the
risks of potential nationalization or expropriation of Fund assets.
State Street Bank and Trust Company serves as dividend disbursing agent, as
agent under the Plan and as transfer agent and registrar for the Common Stock.
Bankers Trust Company, whose principal business address is 4 Albany Street, New
York, New York 10006, serves as the Surety Custodian pursuant to the Surety
Custody Agreement for the benefit of the holders of the Preferred Shares and
serves as transfer agent, paying agent and registrar for the Preferred Shares.
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed upon for the Fund
by its special counsel, Rogers & Wells, New York, New York, and by its special
Maryland counsel, Piper & Marbury LLP, Baltimore, Maryland.
REPORTS TO SHAREHOLDERS
The Fund will send audited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The audited Financial Statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said report. The address of Arthur
Andersen LLP is One International Place, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, D.C. 20549, a Registration
Statement under the Securities Act of 1933, as amended, with respect to the
shares offered hereby. Further information concerning these securities and the
Fund may be found in the Registration Statement, of which this Prospectus
constitutes a part, on file with the SEC. The Registration Statement may be
inspected without charge at the SEC's office in Washington, D.C., and copies of
all or any part thereof may be obtained from such office after payment of the
fees prescribed by the SEC.
The Fund is subject to the informational requirements of the 1934 Act, and
the 1940 Act, and in accordance therewith files reports and other information
with the SEC. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street,
Washington, D.C. 20549 and the SEC's regional offices at Seven World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. Such reports and other information concerning
the Fund may also be inspected at the offices of the Exchange.
INCORPORATION OF FINANCIAL STATEMENTS BY REFERENCE
The Fund's Annual Report, which includes financial statements, for the
fiscal year ended October 31, 1995, which either accompanies this Prospectus or
has previously been provided to the person to whom this Prospectus is being
sent, is incorporated herein by reference with respect to all information other
than the information set forth in the Letter to Shareholders included therein.
Any statement contained in the Fund's Annual Report that was incorporated herein
shall be deemed modified or superseded for purposes of this Prospectus to the
extent a statement contained in this Prospectus varies from such statement. Any
such statement so modified or superseded shall not, except as so modified or
superseded, be deemed to constitute a part of this Prospectus. The Fund will
furnish, without charge, a copy of its Annual Report, upon request to State
Street Bank and Trust Company, Two Heritage Drive, Corporate Stock Transfer,
North Quincy, Massachusetts 02171, telephone (800) 426-5523 Monday through
Friday from 9:00 a.m. to 5:00 p.m.
<PAGE>
APPENDIX A
[FORM OF SUBSCRIPTION CERTIFICATE AND INSTRUCTIONS]
INSTRUCTIONS FOR COMPLETING THE
SUBSCRIPTION CERTIFICATE
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
The enclosed Subscription Certificate represents the number of Rights, as
set forth in the upper right hand corner of the Subscription Certificate, held
by the registered holder hereof (the "Holder"). The Holder is entitled to
acquire one (1) Share of the Common Stock of Prospect Street High Income
Portfolio Inc. (the "Fund") for each Right held.
To subscribe for Shares of Common Stock, the Holder must present to State
Street Bank and Trust Company (the "Subscription Agent"), prior to 5:00 p.m.,
New York time, on the Expiration Date, either:
(1) a properly completed and executed Subscription Certificate and a money
order or check drawn on a bank located in the United States of America and
payable to Prospect Street High Income Portfolio Inc. for an amount equal to
the number of Shares subscribed for under the Primary Subscription (and, if
such Holder is electing to exercise the Over-Subscription Privilege, under the
Over-Subscription Privilege) multiplied by the Estimated Subscription Price;
or
(2) a Notice of Guaranteed Delivery guaranteeing delivery of (i) a
properly completed and executed Subscription Certificate and (ii) a money
order or check drawn on a bank located in the United States of America and
payable to Prospect Street High Income Portfolio Inc. for an amount equal to
the number of Shares subscribed for under the Primary Subscription (and, if
such Holder is electing to exercise the Over-Subscription Privilege, under the
Over-Subscription Privilege) multiplied by the Estimated Subscription Price
(which certificate and money order or check must then be delivered on or
before the third Business Day after the Expiration Date).
If the Holder of the Subscription Certificate is entitled to subscribe for
additional Shares pursuant to the Over-Subscription Privilege, Part B of
Section I of the Subscription Certificate must be completed to indicate the
maximum number of Shares for which such privilege is being exercised.
On a date within ten (10) business days following the Expiration Date (the
"Confirmation Date"), subscribers will be notified as to (i) the number of
Shares subscribed for under the Primary Subscription and, if applicable, the
Over-Subscription Privilege, (ii) the per Share and total purchase price for
the Shares, and (iii) any additional amount payable by subscribers to the Fund
or any excess to be refunded by the Fund to such subscribers, in each case,
based on the Subscription Price as determined on the Expiration Date. The
Holder of the Subscription Certificate should note that the amount payable for
the Shares subscribed for pursuant to the Subscription Certificate may be more
than the Estimated Subscription Price and that additional amounts in respect
of the Subscription Price may be payable following the Expiration Date. Any
additional payment required by subscribers must be received by the
Subscription Agent within seven (7) business days after the Confirmation Date.
If the Holder does not make payment of any amounts due in respect of
Shares subscribed for, the Subscription Agent reserves the right to (i) find
other stockholders for the subscribed and unpaid for Shares; (ii) apply any
payment actually received by it toward the purchase of the greatest whole
number of Shares which could be acquired by such holder upon exercise of the
Primary Subscription and/or Over-Subscription Privilege, and/or (iii) exercise
any and all other rights and/or remedies to which it may be entitled,
including, without limitation, the right to set-off against payments actually
received by it with respect to such subscribed Shares.
The Subscription Certificate may be transferred, in the same manner and
with the same effect as in the case of a negotiable instrument payable to
specific persons, by duly completing and signing the assignment under Section
II of the Subscription Certificate. Capitalized terms used but not defined in
the Subscription Certificate shall have the meanings assigned to them in the
Prospectus, dated May 10, 1996, relating to the Rights.
Any questions regarding the Subscription Certificate and the Offer may be
directed to the Fund's Information Agent, Corporate Investor Communications,
Inc., toll-free (800) 958-6468.
<PAGE>
SUBSCRIPTION CERTIFICATE No.:
NUMBER OF RIGHTS:
CUSIP NO.: 74 3586 11 7
Expiration Date: June 21, 1996, unless extended
FORM OF
SUBSCRIPTION CERTIFICATE
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
PLEASE COMPLETE ALL APPLICABLE INFORMATION. REFER TO "INSTRUCTIONS FOR
COMPLETING THE SUBSCRIPTION CERTIFICATE" FOR ADDITIONAL DETAILS.
<TABLE>
<CAPTION>
BY MAIL: BY EXPRESS MAIL OR OVERNIGHT: BY HAND:
<S> <C> <C>
To: State Street Bank and State Street Bank and Bank of Boston
Trust Company Trust Company Attn: Boston EquiServe
Corporate Reorganization Corporate Reorganization 55 Broadway, 3rd Floor
P.O. Box 9061 Two Heritage Drive New York, New York 10006
Boston, MA 02205-8686 North Quincy, MA 02171
</TABLE>
SECTION I: TO SUBSCRIBE: I hereby irrevocably subscribe for the dollar
amount of Common Stock indicated as the total of A and B below upon the terms
and conditions specified in the Prospectus related hereto, receipt of which is
acknowledged.
TO SELL: If I have checked either the box on line C or the box on
line D, I authorize the sale of Rights by the Dealer Manager according to the
procedures described in the Prospectus. The check for the proceeds of sale
will be mailed to the address of record.
<TABLE>
PLEASE CHECK (x) BELOW:
<S> <C> <C> <C>
[ ] A. Primary Subscription __________________ = _______________ .000 X ______3.86________ = $ _________________
(Rights Exercised) (Full Shares of (Estimated (Amount Required)
Common Stock Subscription Price)
Requested)
[ ] B. Over-Subscription Privilege _______________ .000 X ______3.86________ = $ ______________(*)
(Full Shares of (Estimated (Amount Required)
Common Stock Subscription Price)
Requested)
</TABLE>
<TABLE>
<S> <C>
Amount of Check or Money Order Enclosed (Total of A + B) - - = = $ _________________
Make check payable to "Prospect Street High Income Portfolio Inc."
</TABLE>
[ ] C. Sell any remaining unexercised Rights
[ ] D. Sell all of my Rights
(*)The Over-Subscription Privilege can be exercised by Exercising Rights
Holders, as described in the Prospectus, and with respect to Record
Date Shareholders, only if the Rights issued to them are exercised
to the fullest extent possible.
E. The following Broker-Dealer is hereby designated as having been
instrumental in the exercise of the Rights:
[ ] First Albany Corporation __________________________ Account # _____________
[ ] Other Firm: _______________________________________ Account # _____________
<TABLE>
<S> <C> <C> <C>
__________________________________________________________________ Please provide Day ( )____________
Signature of Subscriber(s)/Seller(s) your Evening ( )____________
telephone number
</TABLE>
<PAGE>
SECTION II: TO TRANSFER RIGHTS: (except pursuant to C and D above)
For value received, ___________ of the Rights represented by this Subscription
Certificate are assigned to
_________ - ________ - ________ _______________________________________________
Social Security Number or (Print Full Name of Assignee)
Tax ID of Assignee
_______________________________ _______________________________________________
________________________________________________________________________________
Signature(s) of Assignee(s) (Print Full Address including postal Zip Code)
The signature(s) must correspond with the name(s) as written upon the face of
this Subscription Certificate, in every particular, without alteration.
IMPORTANT: For Transfer, a Signature Guarantee must be provided by an eligible
financial institution as defined in Rule 17Ad-15 of the Securities Exchange
Act of 1934, as amended, subject to the standards and procedures adopted by
the issuer.
SIGNATURE GUARANTEED BY:
_________________________________________
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES
UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT
AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
[ ] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE
HEREOF AND COMPLETE THE FOLLOWING:
NAME(S) OF REGISTERED OWNER(S): ________________________________________________
WINDOW TICKET NUMBER (IF ANY): _________________________________________________
DATE OF EXECUTION OF NOTICE OF GUARANTEED DELIVERY: ____________________________
NAME OF INSTITUTION WHICH GUARANTEED DELIVERY: _________________________________
STATE STREET BANK AND TRUST COMPANY PROSPECT STREET HIGH INCOME
PORTFOLIO INC.
By: __________________________________ By: __________________________________
Charles V. Rossi, Richard E. Omohundro, Jr.,
Senior Vice President President
THIS SUBSCRIPTION RIGHT IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED
(BUT ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE NUMBER
OF RIGHTS) AT THE OFFICE OF THE SUBSCRIPTION AGENT
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Information Agent, Corporate Investor Communications, Inc.,
toll-free (800) 958-6468.
<PAGE>
APPENDIX B
[FORM OF NOTICE OF GUARANTEED DELIVERY]
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF COMMON STOCK OF
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SUBSCRIBED FOR UNDER PRIMARY SUBSCRIPTION AND THE
OVER-SUBSCRIPTION PRIVILEGE
As set forth in the Prospectus under "The Offer-Payment for Shares", this
form or one substantially equivalent hereto may be used as a means of
effecting subscription and payment for all Shares of Prospect Street High
Income Portfolio Inc. Common Stock subscribed for under the Primary
Subscription and the Over-Subscription Privilege. Such form may be delivered
by hand or sent by facsimile transmission, overnight courier or mail to the
Subscription Agent.
The Subscription Agent is:
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
By Facsimile By Express Mail or
By Mail: (Telecopier): Overnight Courier: By Hand:
-------- ------------- ------------------ --------
<S> <C> <C> <C>
State Street Bank Telecopier State Street Bank Bank of Boston
and Trust Company (617) 774-4519 and Trust Company Attn: Boston EquiServe
Corporate Reorganization Confirm by Telephone Corporate Reorganization 55 Broadway, 3rd Floor
P.O. Box 9061 (617) 774-4511 Two Heritage Drive New York, NY 10006
Boston, MA 02205-8686 (May Call Collect) North Quincy, MA 02171
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION
OF INSTRUCTIONS VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN
AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY
The financial institution that completes this form must communicate the
guarantee and the number of Shares subscribed for (under both the Primary
Subscription and the Over-Subscription Privilege) to the Subscription Agent
and must deliver, this Notice of Guaranteed Delivery of Payment, guaranteeing
delivery of (i) payment in full for all subscribed Shares and (ii) a properly
completed and executed Subscription Certificate (which certificate and check
must then be delivered on or before the third business day after the
Expiration Date) to the Subscription Agent prior to 5:00 p.m., New York time,
on the Expiration Date (June 21, 1996 or July 22, 1996, if the Subscription
Period is extended). Failure to do so will result in a forfeiture of the
Rights.
GUARANTEE
The undersigned, a financial institution that is a member of the
Securities Transfer Agents Medallion Program, the Stock Exchange Medallion
Program or the New York Stock Exchange Medallion Signature Program guarantees
delivery to the Subscription Agent by the close of business (5:00 p.m., New
York City time) on the third business day after the Expiration Date (June 26,
1996 or July 25, 1996, if the Subscription Period is extended) of (A) a
properly completed and executed Subscription Certificate and (B) payment of
the full Estimated Subscription Price for Shares subscribed for on Primary
Subscription and pursuant to the Over-Subscription Privilege, as subscription
for such Shares is indicated herein or in the Subscription Certificate.
<TABLE>
<S> <C>
- --------------------------------------------------- -----------------------------------------------
Number of Primary Shares for which you are Number of Over-Subscription Shares for which
guaranteeing delivery of Rights and payment you are guaranteeing delivery of payment
Number of Rights Exercised: -----------------------------------------------
Aggregate amount: $----------------------------------------------
Method of delivery (circle one) A. Through DTC
B. Direct to Subscription Agent
</TABLE>
<PAGE>
Please note that if you are guaranteeing for over-subscription shares, and are
a DTC participant, you must also execute and forward to the Subscription Agent
a Nominee Holder Over-Subscription Exercise Form.
<TABLE>
<S> <C>
- --------------------------------------------------- -----------------------------------------------
Name of Firm Authorized Signature
- --------------------------------------------------- -----------------------------------------------
Address Title
- --------------------------------------------------- -----------------------------------------------
Zip Code Name (Please Type or Print)
- --------------------------------------------------- -----------------------------------------------
Name of Registered Holder (If Applicable) Date
- ---------------------------------------------------
Telephone Number
</TABLE>
<PAGE>
APPENDIX C
[FORM OF NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM]
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
RIGHTS OFFERING
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
BY MAIL: BY EXPRESS MAIL OR OVERNIGHT BY HAND:
To: State Street Bank State Street Bank Bank of Boston
and Trust Company and Trust Company Attn: Boston EquiServe
Corporate Reorganization Corporate Reorganization 55 Broadway, 3rd Floor
P.O. Box 9061 Two Heritage Drive New York, NY 10006
Boston, MA 02205-8686 North Quincy, MA 02171
</TABLE>
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE OVER-
SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE PRIMARY
SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF A
COMMON DEPOSITORY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE
EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION CERTIFICATES.
--------------------
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S
PROSPECTUS DATED MAY 10, 1996 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN
BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE
FUND.
--------------------
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00
PM, NEW YORK TIME, ON JUNE 21, 1996, UNLESS EXTENDED BY THE FUND (THE
"EXPIRATION DATE").
--------------------
1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in ----------------- [Name of Depository] (the "Depository") and
that it has either (i) exercised the Primary Subscription Privilege in respect
of Rights and delivered such exercised Rights to the Subscription Agent by
means of transfer to the Depository Account of the Fund or (ii) delivered to
the Subscription Agent a Notice of Guaranteed Delivery in respect of the
exercise of the Primary Subscription Privilege and will deliver the Rights
called in for such Notice of Guaranteed Delivery to the Subscription Agent by
means of transfer to such Depository Account of the Fund.
2. With respect to Record Date Shareholders, the undersigned hereby
exercises the Over-Subscription Privilege to purchase, to the extent
available, ---------shares of Common Stock and certifies to the Subscription
Agent that such Over-Subscription Privilege is being exercised for the account
or accounts of persons (which may include the undersigned) on whose behalf all
primary subscription rights have been exercised.
3. The undersigned understands that payment of the Estimated Subscription
Price of $3.86 per share of each share of Common Stock subscribed for pursuant
to the Over-Subscription Privilege must be received by the Subscription Agent
at or before 5:00 p.m. New York time on the Expiration Date and represents
that such payment, in the aggregate amount of $--------- either (check
appropriate box):
[ ] has been or is being delivered to the Subscription Agent pursuant to
the Notice of Guaranteed Delivery referred to above
or
[ ] is being delivered to the Subscription Agent herewith or
[ ] has been delivered separately to the Subscription Agent; and, in the
case of funds not delivered pursuant to a Notice of Guaranteed Delivery,
is or was delivered in the manner set forth below (check appropriate box
and complete information relating thereto):
[ ] uncertified check
[ ] certified check
[ ] bank draft
- ----------------------------------------- -------------------------------------
Primary Subscription Confirmation Number Name of Nominee Holder
- ----------------------------------------- -------------------------------------
Depository Participant Number Address
-------------------------------------
City State Zip Code
Contact Name: --------------------------- By: ---------------------------------
Phone Number: --------------------------- Name: ---------------------------
Dated ------------, 1996 Title: --------------------------
*PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION
OF PRIMARY RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES SUBSCRIBED AND THE
NUMBER OF OVER-SUBSCRIPTION SHARES REQUESTED BY EACH SUCH OWNER AND
INDICATING RECORD DATE AND NON-RECORD DATE POSITIONS.
<PAGE>
APPENDIX D
RATINGS OF CORPORATE OBLIGATIONS
Standard & Poor's Corporation describes classifications of bonds as
follows:
"AAA" Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
"AA" Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
"A" Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
"BBB" Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
"BB"-"B"-"CCC"-"CC"-"C" Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
"C1" The rating "C1" is reserved for income bonds on which no interest is
being paid.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
"Aaa" Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
"Aa" Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
"A" Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" Bonds which are 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 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 which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
"Ca" Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
"C" Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE HEREIN, IN
CONNECTION WITH THIS OFFER, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
SUPPLEMENTED OR AMENDED ACCORDINGLY.
----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................................................ 3
Fee Table ................................................................. 11
Financial Information Summary ............................................. 12
Capitalization at April 30, 1996 .......................................... 13
Information Regarding Senior Securities ................................... 13
Trading and Net Asset Value Information ................................... 14
The Fund .................................................................. 15
The Offer ................................................................. 16
Use of Proceeds ........................................................... 26
Investment Policies and Limitations ....................................... 26
Risk Factors and Special Considerations ................................... 38
Directors and Officers .................................................... 43
The Investment Adviser .................................................... 46
Portfolio Trading ......................................................... 47
Determination of Net Asset Value .......................................... 48
Share Repurchases; Conversion to Open-End
Status .................................................................. 49
Dividends and Distributions; Dividend
Reinvestment Plan ....................................................... 51
Federal Taxation .......................................................... 52
Description of Capital Stock .............................................. 56
Surety Arrangement for Preferred Shares ................................... 59
Description of Notes ...................................................... 64
Custodian, Transfer Agents, Dividend
Disbursing Agent, Paying Agents and
Registrars .............................................................. 68
Legal Opinions ............................................................ 68
Reports to Shareholders ................................................... 68
Experts ................................................................... 69
Further Information ....................................................... 69
Incorporation of Financial Statements
by Reference ............................................................ 69
Appendix A ................................................................ A-1
Appendix B ................................................................ B-1
Appendix C ................................................................ C-1
Appendix D ................................................................ D-1
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
8,480,000 SHARES
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
MAY 10, 1996
================================================================================
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
(i) -- Balance Sheet as of October 31, 1995*
(ii) -- Statement of Operations for the fiscal year ended
October 31, 1995*
(iii) -- Statement of Cash Flows for the fiscal year ended
October 31, 1995*
(iv) -- Statement of Changes in Net Assets for the fiscal years
ended October 31, 1995 and 1994*
(v) -- Financial Highlights for each Share of Common Stock
Outstanding through the fiscal years ended October 31,
1991, 1992, 1993, 1994 and 1995*
(vi) -- Notes to Financial Statements for the fiscal year ended
October 31, 1995*
(vii) -- Report of Independent Accountants dated December 1,
1995*
Statements, schedules and historical information other than these listed above
have been omitted since they are either not applicable, or not required or the
required information is shown in the financial statements or notes thereto.
- ----------
*Incorporated by reference.
(2) EXHIBITS
(a) -- Articles of Amendment and Restatement (Incorporated by
reference to Exhibit 1 to Post Effective Amendment No.
5 to Registrant's Registration Statement on Form N-2,
File No. 33-21949)+
(b) -- Amended and Restated By-Laws of the Registrant
(Incorporated by reference to Exhibit 2 to
Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-2, File No. 33-21949)+
(c) -- Not applicable
(d)(1) -- Specimen certificate of Common Stock*
(2) -- Specimen certificate of Taxable Auction Rate Preferred
Stock*
(3) -- Documents relating to Surety Bond issued by Financial
Security Assurance Inc. (See Exhibits (2)(k)(5) and
(2)(k)(6) below)
(4) -- Note Purchase Agreement dated as of July 15, 1993, as
amended and restated December 16, 1993, between the
Registrant and Pacific Mutual Life Insurance Company,
including Form of Promissory Note#
(5) -- Form of Subscription Certificate and Instructions
(included on pages A-1 to A-3 of the Prospectus forming
part of this Registration Statement)
(6) -- Form of Notice of Guaranteed Delivery (included on
pages B-1 to B-2 of the Prospectus forming part of this
Registration Statement)
(7) -- Form of Nominee Over-Subscription Exercise Form
(included on page C-1 of the Prospectus forming part of
this Registration Statement)
(8) -- Form of Subscription Agent Agreement between the
Registrant and State Street Bank and Trust Company##
(9) -- Information Agent Agreement between the Registrant and
Corporate Investor Communications, Inc.##
(e) -- Dividend Reinvestment Plan of the Registrant#
(f) -- Not applicable
(g) -- Advisory Agreement between Registrant and Prospect
Street Investment Management Co., Inc.#
(h)(1) -- Form of Dealer Manager Agreement##
(2) -- Underwriting Agreement relating to Common Stock dated
November 28, 1988 between the Registrant and Drexel
Burnham Lambert Incorporated (Incorporated by reference
to Exhibit 7(a) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-2, File
No. 33-21949)
(3) -- Preferred Stock Underwriting Agreement relating to
Taxable Auction Rate Preferred Stock dated November 28,
1988 between the Registrant and Drexel Burnham Lambert
Incorporated as underwriter (Incorporated by reference
to Exhibit 7(b) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-2, File
No. 33-21949)
(i) -- Not applicable
(j) -- Custodian Agreement between the Registrant and State
Street Bank and Trust Company#
(k)(1) -- Registrar, Transfer Agency and Service Agreement
between the Registrant and State Street Bank and Trust
Company#
(2) -- Auction Agent Agreement dated as of May 7, 1990 between
the Registrant and Bankers Trust Company**+
(3) -- Amendment, dated as of October 29, 1993, to a
Broker-Dealer Agreement dated as of May 7, 1990, among
the Registrant, Bankers Trust Company and Bear, Stearns
& Co., Inc.#
(4) -- Letter Agreement among Registrant, Bankers Trust
Company and The Depository Trust Company**+
(5)(A) -- Insurance Agreement between the Registrant and
Financial Security Assurance Inc.*+
(B) -- Amendment No. 1 to the Insurance Agreement between the
Registrant and Financial Security Assurance Inc.#
(6) -- Custody Agreement between Bankers Trust Company and
Financial Security Assurance Inc.*+
(l)(1) -- Opinion and Consent of Rogers & Wells##
(2) -- Opinion and Consent of Piper & Marbury LLP##
(m) -- Not applicable
(n) -- Consent of Arthur Andersen LLP##
(o) -- Not applicable
(p) -- Subscription Agreement dated as of November 21, 1988
from Prospect Street Investment Management Co., Inc.*++
(q) -- Not applicable
(r) -- Not applicable
- ----------
*Exhibits incorporated by reference to Pre-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form N-2, File No. 33-21949.
**Exhibits incorporated by reference to the Registrant's Registration Statement
on Form 8-K dated May 11, 1990.
#Previously filed.
##Filed herewith
+Filed on March 29, 1996 pursuant to the EDGAR (Electronic Data Gathering,
Analysis, and Retrieval) phase-in requirements.
++Filed herewith pursuant to the EDGAR (Electronic Data Gathering, Analysis and
Retrieval) phase-in requirements.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) of this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connection
with the Offer described in this Registration Statement:
Registration fees ................................................. $ 11,517
National Association of Securities Dealers, Inc. fees ............. 3,600
New York Stock Exchange listing fee ............................... 31,500
Printing (other than stock certificates) .......................... 65,000
Fees and expenses of qualification under state securities laws
(including fees of counsel ....................................... 7,000
Accounting fees and expenses ...................................... 18,000
Legal fees and expenses ........................................... 99,000
Dealer Manager financial advisory fee and expense reimbursement ... 190,000
Information Agent fees and expenses ............................... 25,000
Subscription Agent fees and expenses .............................. 40,000
Miscellaneous ..................................................... 4,383
--------
Total ......................................................... $495,000
========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant and the following corporations (as indicated) are under common
control of Richard E. Omohundro, Jr. ("Omohundro, Jr."), Joseph G. Cote
("Cote") and John A. Frabotta ("Frabotta") by virtue of their stock ownership
and positions with such corporations which are indicated below. None of the
corporations are subsidiaries of the Registrant.
1. Prospect Street Investment Management Co., Inc.
(a Massachusetts corporation) ("PSIM")
Business: Investment adviser registered under the Investment Advisers Act
of 1940. PSIM serves as investment adviser of the Registrant and
Prospect International High Income Portfolio N.V.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 40% shareholder, Co-President, Chairman of the
Board, Chief Executive Officer, Treasurer and
Director
Cote 40% shareholder, Co-President and Director
Frabotta 20% shareholder, Vice President, Secretary and
Director
2. Prospect Street Mezzanine Management Co., Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general partner of Bridge Investors,
L.P., a private investment partnership.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 40% shareholder, Co-President, Chief Executive
Officer, Treasurer and Director
Cote 40% shareholder, Co-President and Director
Frabotta 20% shareholder, Vice President, Secretary and
Director
3. Prospect Street Senior Loan Management Co., Inc.
(a Massachusetts corporation)
Business: Investment Adviser to Prospect Street Senior Portfolio, L.P.,
("Senior Portfolio")
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 37.5% shareholder, Co-President, Chief
Executive Officer, Treasurer and Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
4. Prospect Street Senior Loan Corp.
(a Massachusetts corporation)
Business: General Partner to Senior Portfolio
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 37.5% shareholder, Co-President, Chief
Executive Officer, Treasurer and Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
5. COMO Securities, Inc.
(a Massachusetts corporation) ("COMO")
Business: COMO is a registered broker/dealer.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 30% shareholder, Co-President, Chief Executive
Officer, Treasurer and Director
Cote 30% shareholder, Co-President and Director
Frabotta 10% shareholder, Vice President, Secretary and
Director
6. Prospect Street Connecticut Capital Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general
partner of Prospect St. Financial
Developments L.P.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 27% shareholder, Co-President and Director
Cote 27% shareholder, Co-President and Director
Frabotta 13% shareholder, Vice-President, Secretary and
Director
7. Prospect Street Discovery Fund Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general
partner of Prospect St. NYC Discovery Fund L.P.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 52% shareholder, President and Director
Frabotta 10% shareholder, Vice-President and Director
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF APRIL 30, 1996)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Preferred Shares 1
Common Stock 3,556
ITEM 29. INDEMNIFICATION
Reference is made to the Registrant's Articles of Amendment and
Restatement filed as Exhibit 2(a), the Registrant's Amended and Restated By-
laws filed as Exhibit 2(b), the Agreements filed as Exhibits 2(h)(1), 2(h)(2)
and 2(h)(3), and the Advisory Agreement filed as Exhibit 2(g), which provide
for indemnification or contribution. The Registrant's officers, Directors and
agents also have the benefit of the Maryland General Corporation law
provisions regarding indemnification and insurance, including but not limited
to Section 2-418 and Section 2-405.2 thereof, subject also to the
indemnification permitted under Sections 17(h) and 17(i) of the 1940 Act and
the regulations and releases promulgated by the SEC thereunder.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The description of the business of Prospect Street Investment Management
Co., Inc. is set forth under the caption "The Investment Adviser" in the
Prospectus forming part of this Registration Statement.
The information as to the Directors and officers of Prospect Street
Investment Management Co., Inc. set forth in Prospect Street Investment
Management Co., Inc.'s Form ADV filed with the Securities and Exchange
Commission on July 7, 1988 (File No. 801-32529) and as amended through the
date hereof is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Registrant: Prospect Street High Income Portfolio Inc.
60 State Street
Boston, Massachusetts 02109
Investment Adviser: Prospect Street Investment Management Co., Inc.
60 State Street
Boston, Massachusetts 02109
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend the offering of its shares until it
amends its Prospectus if:
(1) subsequent to the effective date of this Registration Statement,
the net asset value per share declines more than 10% from its net asset
value per share as of the effective date of the Registration Statement; or
(2) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(b) Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment 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.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) that for purposes 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
pursuant to Rule 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(5) that 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on the 10th day of May, 1996.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By /s/ RICHARD E. OMOHUNDRO, JR.
------------------------------------------
RICHARD E. OMOHUNDRO, JR.
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director and President
(Principal Executive
/s/ RICHARD E. OMOHUNDRO, JR. Officer) May 10, 1996
- ------------------------------------
RICHARD E. OMOHUNDRO, JR.
Director, Vice President
Treasurer (Principal
Financial and Accounting
/s/ JOHN A. FRABOTTA Officer) May 10, 1996
- ------------------------------------
JOHN A. FRABOTTA
* Director
- ------------------------------------
JOHN S. ALBANESE
* Director
- ------------------------------------
C. WILLIAM CAREY
* Director
- ------------------------------------
JOSEPH G. COTE
* Director
- ------------------------------------
HARLAN D. PLATT
* Director
- ------------------------------------
CHRISTOPHER E. ROSHIER
*By /s/ JOHN A. FRABOTTA
-------------------------------------------
JOHN A. FRABOTTA, Attorney-in-Fact May 10, 1996
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
(d)(8) Form of Subscription Agent Agreement
(d)(9) Information Agent Agreement
(h)(1) Form of Dealer Manager Agreement
(l)(1) Opinion and Consent of Rogers & Wells
(l)(2) Opinion and Consent of Piper & Marbury LLP
(n) Report and Consent of Arthur Andersen LLP
(p) Subscription Agreement
<PAGE>
EXHIBIT (d)(8)
SUBSCRIPTION AGENT AGREEMENT
May [ ], 1996
State Street Bank and Trust Company
150 Royall Street
Mail Stop 45-02-55
Canton, Massachusetts 02021
Attn: Michael Monahan
Dear Sirs:
Subscription Agent Agreement, dated as of May [ ], 1996,
between Prospect Street High Income Portfolio Inc., a Maryland corporation (the
"Corporation"), and State Street Bank and Trust Company, a Massachusetts trust
company (the "Subscription Agent").
Section 1. The Rights Offering. The Corporation is
distributing to the holders ("Stock Holders") of its outstanding Common Stock,
$0.01 par value (the "Common Stock"), of record at the close of business on May
10, 1996 (the "Record Date"), rights (the "Basic Subscription Rights") to
subscribe for and purchase up to 8,450,000 shares of Common Stock at the price
(the "Subscription Price") of the greater of (i) the net asset value per share
as of the Expiration Date (as defined below) or (ii) $[ ], on the basis of one
(1) Basic Subscription Right for each three (3) shares of Common Stock held of
record on the Record Date. One (1) Basic Subscription Right will be required to
purchase one (1) share of Common Stock. The subscription offer will expire on
June 21, 1996, or such later date (the "Expiration Date") if extended by the
Corporation as set forth in the Corporation's final prospectus (the
"Prospectus") which forms a part of the Corporation's Registration Statement
(the "Registration Statement") declared effective by the Securities and Exchange
Commission (the "Commission") on or about May [ ], 1996. The Subscription
Certificates (the form of which is attached as Appendix A to the Prospectus) and
payment equal to the amount of the estimated Subscription Price of $[ ] (the
"Estimated Subscription Price") times the number of shares of subscribed Common
Stock ("Payment"), or the Notice of Guaranteed Delivery (the form of which is
attached as Appendix B to the Prospectus), must be received by the Subscription
Agent before 5:00 P.M., New York City time, on the Expiration Date.
The Corporation filed its Registration Statement relating to
the Basic Subscription Rights, the Over-Subscription Privilege (as defined in
the Prospectus referred to above), and the Common Stock to be issued pursuant to
the Basic Subscription Rights and the Over-Subscription Privilege (collectively,
the "Subscription Rights") with the Commission under the Securities Act of 1933,
as amended (the "Act") and the Investment Company Act of 1940, as amended (the
"1940 Act") on March 29, 1996 and Amendment No. 1 thereto on May [ ], 1996. A
copy of the Prospectus is attached as Exhibit 1 hereto.
The Subscription Rights are evidenced by fully transferable
Subscription Certificates.
Section 2. The Basic Subscription Rights. The Subscription
Certificates entitle the holders to subscribe, upon Payment, for Common Stock at
the rate of one (1) Basic Subscription Right for one (1) share of Common Stock.
Stock Holders holding a number of shares of Common Stock that is not an integral
multiple of three (3) will receive one (1) additional Basic Subscription Right.
Reference is made to the Prospectus for a complete description of the Basic
Subscription Rights.
Section 3. Fractional Rights, Fractional Shares, etc. No
fractional Rights and no fractional shares of Common Stock will be issued. Any
fractional shares to which holders of Subscription Rights would otherwise be
entitled will be rounded down to the next whole share.
Section 4. The Over-Subscription Privilege. Any Stock Holder
who exercises all of its Basic Subscription Rights will have the right to
subscribe for additional shares of Common Stock, if any, that are not purchased
through the exercise of the Basic Subscription Rights (the "Primary
Over-Subscription Privilege"). If there are insufficient shares of Common Stock
to fill such oversubscriptions, the shares of Common Stock that are available
("Excess Shares") will be allocated first among the Stock Holders and beneficial
owners for whom Qualified Financial Institutions (as defined in the Prospectus)
hold Basic Subscription Rights and subscribe, for an aggregate of 100 or fewer
shares of Common Stock (inclusive of shares subscribed for by such Stock Holders
or beneficial owners in the Primary Subscription (as such term is described in
the Prospectus)). Any Excess Shares remaining thereafter will be allocated among
all other Stock Holders. In each case, if the Excess Shares are insufficient to
permit such allocation, Excess Shares will be allocated pro rata among Stock
Holders being prorated, based on the number of shares of Common Stock such Stock
Holders subscribed for in the Primary Subscription relative to the aggregate
number of shares of Common Stock subscribed for in the Primary Subscription by
all such Stock Holders then being prorated.
Purchasers of Basic Subscription Rights who are not Stock
Holders ("Rights Holders") will have the right to subscribe for Excess Shares
which are not otherwise subscribed for pursuant to the Primary Over-Subscription
(the "Secondary Over-Subscription Privilege," together with the Primary
Over-Subscription Privilege hereinafter referred to as the "Over-Subscription
Privilege"). If sufficient Excess Shares remain, all oversubscriptions by Rights
Holders will be honored in full. If remaining Excess Shares are insufficient to
permit such allocation, such Excess Shares will be allocated pro rata among
Rights Holders being prorated, based on the number of shares of Common Stock
such Rights Holders subscribed for in the Primary Subscription relative to the
aggregate number of shares of Common Stock subscribed for in the Primary
Subscription by all such Rights Holders then being prorated.
There is no limitation on the number of shares to which a
Stock Holder or a Rights Holder may oversubscribe. The exercise of the
Over-Subscription Privilege is irrevocable. Reference is made to the Prospectus
for a complete description of the Over-Subscription Privilege.
Section 5. Sale of Rights.
The Rights are transferable until the Expiration Date, and the
Rights and the Shares will be listed for trading on the New York Stock Exchange.
Reference is made to the Prospectus for a complete description of the sale of
the Rights.
Section 6. Appointment of Subscription Agent.
(a) The Corporation hereby appoints you as Subscription Agent
in connection with the offer made by the Corporation pursuant to the terms of
the Prospectus. In connection with your appointment as Subscription Agent, the
Corporation has also appointed you as Transfer Agent and as Registrar of the
Corporation for the Subscription Rights and the Common Stock to be issued
pursuant to the Subscription Rights, to act as is customary in such capacities.
Nothing herein shall preclude your acting in any other capacity for the
Corporation or for any other legal entity. No provision of this Agreement shall
require the Subscription Agent to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder
or in the exercise of its rights if there shall be reasonable grounds for
believing that repayment of such funds or adequate indemnification against such
risk or liability is not reasonably assured to it.
(b) You understand that the Corporation will:
(i) issue the Subscription Certificates in the
names of the Stock Holders on the Record Date and keep such
records as are necessary for the purpose of recording such
issuance;
(ii) no later than the second business day
following the date the Prospectus and the Subscription
Certificates are made available to you by the Corporation,
mail by first-class mail to each holder of Common Stock of
record on the Record Date whose address of record is within
the United States (including District of Columbia, territories
and possessions), (1) a Subscription Certificate evidencing
the Basic Subscription Rights to which such Stock Holder is
entitled under the subscription offer, (2) a copy of the
Prospectus; (3) other materials requested by the Corporation;
and (4) a return envelope addressed to the Subscription Agent;
and
(iii) withhold from mailing Subscription
Certificates issued to Stock Holders whose addresses of record
are outside the United States.
(c) In the performance of your duties hereunder, you may
consult with legal counsel of your choosing (which legal counsel may be legal
counsel to the Corporation), and the opinion of such counsel shall be full and
complete authorization and protection to you as the Subscription Agent with
respect to any matter taken or omitted by you in good faith and in accordance
with such opinion.
Section 7. Duties of the Subscription Agent. As a Subscription
Agent you are authorized and directed to:
(a) Effect divisions and combinations of Subscription
Certificates at the request of the holders thereof, in the manner and subject to
the terms and conditions set forth in the form of Subscription Certificate in
the Prospectus.
(b) Issue new Subscription Certificates under the
circumstances, in the manner and subject to the terms and conditions set forth
in the form of Subscription Certificate and in the Prospectus.
(c) Accept subscriptions upon the exercise of Subscription
Rights in accordance with the terms of the Subscription Certificates and of the
Prospectus, up to 5:00 P.M., New York City time, on the Expiration Date.
(d) Accept subscriptions received prior to 5:00 P.M., New York
City time, on the Expiration Date together with Payment for the total number of
shares of Common Stock subscribed for, or together with a letter or telegram
from a, financial institution that is a member of the Securities Transfer Agents
Medallion Program, the Stock Exchange Medallion Signature Program or the New
York Stock Exchange Medallion Signature Program (any of the foregoing is
hereinafter referred to as an "Eligible Institution"), stating the name of the
subscriber, the number of Subscription Rights represented by the Subscription
Certificate and the number of shares of Common Stock subscribed for, and
guaranteeing that the Subscription Certificate and full payment will be
delivered no later than the close of business on the third business day after
the Expiration Date to the Subscription Agent, subject to withholding of the
stock certificates representing the shares of Common Stock subscribed for
pending receipt of the duly executed Subscription Certificate.
(e) Accept subscriptions, without further authorization from
the Corporation, without procuring supporting legal papers or other proof of
authority to sign (including proof of appointment of a fiduciary or other person
acting in a representative capacity), and without signatures of co-fiduciaries,
(i) where the Subscription Certificate is
registered in the name of a fiduciary, the subscription form
is executed by such fiduciary, and the shares of Common Stock
are to be issued in the name of the registered owner of the
Subscription Certificate;
(ii) where the Subscription Certificate is in
the name of a corporation and the subscription form is
executed by an officer thereof, and the shares of Common Stock
are to be issued in the name of such corporation; or
(iii) where the Subscription Certificate is
registered in the name of a decedent and the subscription is
executed by a subscriber purporting to act as the decedent's
executor or administrator, the shares of Common Stock are to
be registered in the name of the subscriber as executor or
administrator of the estate of the deceased registered holder,
and there is no evidence indicating that the subscriber is not
the duly authorized representative that she purports to be.
(f) Accept subscriptions executed, as agent for the
subscriber, by an Eligible Institution.
(g) Refer to the Corporation, for specific instructions as to
acceptance or rejection, of subscriptions received after the Expiration Date,
subscriptions not authorized to be accepted pursuant to paragraph (c), (d), (e)
or (f) above, and subscriptions otherwise failing to comply with the
requirements to the Prospectus and terms of the Subscription Certificates.
(h) Consult with counsel to the Corporation as to Record Date
or non-Record Date status of certain Stock Holders.
(i) Upon acceptance of subscriptions, the Subscription Agent
shall:
(i) hold all proceeds received by you, on
behalf of the Corporation, in respect of the exercise of
Rights in a segregated interest-bearing escrow account pending
disbursement to the Corporation (along with any interest
earned) as soon as practicable after the Expiration Date;
(ii) advise the Corporation daily by telecopy
and confirmed by letter (Attn: Karen J. Thelen) as to the
total number of shares of Common Stock subscribed for and the
amount of funds received, with cumulative totals; and in
addition advise Karen J. Thelen, telephone number (617)
742-4727, confirmed by telecopy, of the amount of funds
received (identified in accordance with (i) above, deposited,
available or transferred in accordance with (i) above, with
cumulative totals;
(iii) issue certificates as Transfer Agent and
Registrar for shares of Common Stock subscribed for,
countersigned with the respective signature of a duly
authorized officer of the Transfer Agent or a duly authorized
officer of the Subscription Agent, each having authority to
sign on its behalf as Registrar, registered in the names
specified by the subscribers, and mail or deliver such
certificates as instructed by the subscribers as soon as
practicable in accordance with the rules of the National
Association of Securities Dealers, Inc., after collection of
remittances for subscriptions;
(iv) as promptly as possible but in any event
on or before 5:00 P.M., New York City time, on the second full
business day following the Expiration Date, advise the
Corporation in accordance with (ii) above of the number of
shares of Common Stock subscribed and the number of
subscription guarantees received. The number of shares of
Common Stock unsubscribed and the results of allocations
required, if any, to satisfy the Over-Subscription Privilege,
are to be provided as soon as practicable; and
(v) provide First Albany Corporation, the
dealer manager for the Corporation in connection with the
rights offering (the "Dealer Manager"), with such information
as it shall reasonably request, including, but not limited to,
the information to be provided to the Corporation pursuant to
this Agreement.
(j) Allocate Common Stock not required to satisfy the Basic
Subscription Rights to those Stock Holders, or those Rights Holders, who have
appropriately elected to execute their Over-Subscription Privilege. Stock
Holders who exercise all the Basic Subscription Rights granted to such Stock
Holders by the Corporation evidenced by a Subscription Certificate, and Rights
Holders, will have the privilege to oversubscribe for additional shares of
Common Stock. You shall allocate Common Stock to satisfy oversubscriptions
according to the allocation procedure described earlier in this Agreement and in
the Prospectus.
(k) If the Estimated Subscription Price is greater than or
less than the Subscription Price, then calculate the additional amounts payable
to or from, as the case may be, Stock Holders and Rights Holders and also accept
such additional payments from or make such additional payments to, as the case
may be, Stock Holders and Rights Holders.
(l) Request the Dealer Manager, as a broker dealer for the
Dealer Manager's customary broker dealer fees and commissions payable by the
Stock Holders, to effect the sale of Subscription Rights by Stock Holders in
accordance with the terms of the Prospectus upon request by such Stock Holders
or without instructions from Stock Holders in such circumstances set forth in
the Prospectus, provided, however that (i) the Corporation, and not the Stock
Holders, will pay the customary broker dealer fees and commission on behalf of
Stock Holders who either hold less than 100 Basic Subscription Rights or who
beneficially own less than 100 Basic Subscription Rights held on their behalf by
Qualified Financial Institutions (as defined in the Prospectus) and (ii) the
Subscription Certificates representing Subscription Rights to be sold by the
Dealer Manager must be received by the Subscription Agent two business days
prior to the Expiration Date.
Section 8. Subscription Agent Compensation. The Corporation
agrees that it will pay to the Subscription Agent compensation for its services
as such in accordance with its Fee Schedule to act as Subscription Agent set
forth hereto as Exhibit 2. The Subscription Agent agrees that such compensation
shall include its services as Transfer Agent and Registrar. The Corporation
further agrees that it will reimburse the Subscription Agent for its reasonable
expenses incurred in the performance of its duties as such, including without
limitation, postage, stationery and supplies, and counsel fees.
Section 9. Instructions. The Subscription Agent will be
entitled to rely upon any instructions or directions furnished to it in writing
by any officer of the Corporation, and will be entitled to treat as genuine, and
as the document purports to be, any letter or other document furnished to it by
any duly authorized officer of the Corporation. Additionally, the Subscription
Agent shall be entitled to apply to any officer of the Corporation for advice or
instructions in connection with its duties. Any application by the Subscription
Agent for written instructions from the Corporation may, at the option of the
Subscription Agent, set forth in writing any action proposed to be taken or
omitted by the Subscription Agent with respect to its duties or obligations
under this Agreement and the date on and/or after which such action shall be
taken or omitted and the Subscription Agent shall not be liable for any action
taken or omitted in accordance with a proposal included in any such application
on or after the date specified therein (which date shall not be less than three
business days after the date any such officer actually receives such
application, unless any such officer shall have consented in writing to an
earlier date) unless, prior to taking or omitting any such action, the
Subscription Agent has received written instructions from the Corporation in
response to such application specifying the action to be taken or omitted.
Section 10. Indemnification.
(a) Whenever in the performance of its duties under this
Agreement the Subscription Agent shall deem it necessary or desirable that any
fact or matter be proved or established, prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof is
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board or President or
a Vice President or the Secretary or the Treasurer of the Corporation delivered
to the Subscription Agent, and such certificate shall be full authorization to
the Subscription Agent for any action taken or suffered in good faith by it
under the provisions of this Agreement in reliance upon such certificate.
(b) The Subscription Agent shall not be responsible for and
the Corporation shall indemnify and hold the Subscription Agent harmless from
and against, any and all losses, damages, costs, charges, reasonable counsel
fees, payments, expenses and liabilities arising out of or attributable to all
actions of the Subscription Agent or its agents provided that such actions are
taken in good faith and without negligence or willful misconduct.
(c) The Subscription Agent shall be liable hereunder for its
own negligence, bad faith or willful misconduct.
(d) The Subscription Agent shall be indemnified and not be
liable for any action taken, suffered or omitted by it in good faith in
accordance with instructions of any officer of the Corporation.
(e) The Subscription Agent shall be indemnified and shall
incur no liability for or in respect of any action taken, suffered, or omitted
by it in reliance upon any Subscription Certificate or certificate for Common
Stock, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement or other
paper or document that it reasonably believes to be genuine and to be signed,
executed and, where necessary, verified or acknowledged, by the proper person or
persons.
(f) Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement of
for any consequential damages arising out of any act or failure to act
hereunder.
Section 11. Assignment.
(a) Except as provided in (c) below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
(b) This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
(c) The Subscription Agent may, without further consent on the
part of the Corporation, subcontract for the performance hereof with (i) Boston
Equiserve Limited Partnership, a Delaware Limited Partnership, which is duly
registered as a transfer agent pursuant to Section 17(c)(2) of the Securities
Exchange Act of 1934, or (ii) the current third party vendor utilized by the
Subscription Agent; provided, however, that the Subscription Agent shall be as
fully responsible to the Corporation for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
Section 12. Inquiry and Delivery Instructions. Signed
Subscription Certificates should be returned to the Subscription Agent by
holders of Subscription Rights by one of the methods described below.
BY MAIL: State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, Massachusetts 02205-8686
BY EXPRESS MAIL OR
OVERNIGHT COURIER: State Street Bank and Trust Company
Corporate Reorganization
Two Heritage Drive
North Quincy, Massachusetts 02171
BY HAND: Bank of Boston
Attention: Boston EquiServe
55 Broadway
3rd Floor
New York, New York 10006
BY FACSIMILE
(TELECOPIER): (617) 774-4519, with the original
Subscription Certificate to be sent by one
of the methods described above. Confirm
facsimile by telephone to
(617) 774-4511.
Questions from holders of Subscription Rights regarding the
Subscription Certificates should be directed to State Street Bank and Trust
Company, Corporate Reorganization, P.O. Box 9061, Boston, Massachusetts 02205
(Telephone 800-426-5523).
Section 13. Amendments. This Agreement may be amended,
supplemented or otherwise modified only by a written instrument executed and
delivered by each of the Corporation and the Subscription Agent.
Section 14. Governing Law. This Agreement will be governed by,
and construed and interpreted in accordance with, the laws of the State of New
York, without regard to the principles of conflicts of law.
Section 15. Counterparts. This Agreement may be executed by
the parties hereto on separate counterparts, which counterparts taken together
will be deemed to constitute one and the same instrument.
If the foregoing is acceptable to you, please indicate your
acceptance of your appointment as Subscription Agent upon the terms set forth
above by signing and returning to us one copy of this Agreement.
Very truly yours,
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By:____________________________
Name:
Title:
Accepted and agreed to as of
the date first set forth above
STATE STREET BANK AND TRUST COMPANY
By:__________________________
Name:
Title:
EXHIBIT 1
Prospectus
EXHIBIT 2
Fee Schedule
<PAGE>
EXHIBIT (d)(9)
CORPORATE INVESTOR COMMUNICATIONS, INC.
111 Commerce Road, Carlstadt, NJ 07072-2586
Tel: (201) 896-1900 o Fax: (201) 804-8017
- -------------------------------------------------------------- [Logo] ----------
March 21, 1996
Prospect Street High Income Portfolio Inc.
60 State Street, Suite 3750
Boston, Massachusetts 02109
Attn: Ms. Karen Thelen
Vice President
RE: CONTRACT AGREEMENT
Dear Karen:
This agreement will confirm that Corporate Investor Communications, Inc. has
been retained to act as information agent in connection with the upcoming rights
offer to the shareholders of Prospect Street High Income Portfolio Inc. As
information agent, CIC will conduct a broker/nominee inquiry to ascertain the
number of beneficial owners, provide for the distribution of the offering
documents to the reorganization departments of each institution and forward
additional materials as requested. CIC will respond to the volume of
shareholders inquiries regarding the terms of the offer and proper execution of
the documents and will monitor the response rate for the duration of the offer.
CIC can, if requested, pro-actively contact registered shareholders and
non-objecting beneficial owners (NOBOs) to help promote a high level of
participation.
Our fee to act as information agent based on a distribution of up to 12,000 sets
of offering documents and the duration of the offer will be $8,000.00 plus $3.00
for each registered and NOBO holder contacted if requested. CIC will be
reimbursed for all reasonable out-of-pocket disbursements including postage,
telephone and courier charges, data transmissions and other expenses approved by
your company. A retainer in the amount of $6,000.00 is required to cover initial
expenses and will be credited to your final service charges.
The company above hereby agrees to indemnify Corporate Investor Communications,
Inc.'s officers and employees against any and all losses, claims and expenses
incurred by CIC in conjunction with the services provided except to the extent
any such loss, claim or expense is the result of the negligence of any CIC
officer or employee. Reimbursement will be made to indemnified persons at the
time they are incurred. The company shall not be responsible for any losses,
claims and expenses incurred by CIC which result from CIC's gross negligence or
willful misconduct.
Please forward an executed agreement to our office and retain the other copy.
PROSPECT STREET CORPORATE INVESTOR
HIGH INCOME PORTFOLIO INC. COMMUNICATIONS, INC.
- -------------------------------------- --------------------------------------
SIGNED: /s/ Karen J. Thelen SIGNED: /s/ Kevin P. Joel
------------------------------ ------------------------------
NAME: Karen J. Thelen NAME: Kevin P. Joel
------------------------------ ------------------------------
TITLE: Vice President TITLE: Assistant Vice President
------------------------------ ------------------------------
DATE: March 21, 1996 DATE: March 21, 1996
------------------------------ ------------------------------
PROXY SOLICIATION o MARKET SURVEILLANCE
INFORMATION AGENT o SHAREHOLDER COMMUNICATIONS
<PAGE>
<PAGE>
EXHIBIT (h)(1)
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
(a Maryland corporation)
Shares of Common Stock Issuable Upon Exercise of
Transferable Rights to Subscribe for
Such Shares of Common Stock
(Common Stock Par Value $0.01 Per Share)
DEALER MANAGER AGREEMENT
FIRST ALBANY CORPORATION May 10, 1996
41 State Street
Albany, New York 12201
Dear Sirs:
Prospect Street High Income Portfolio, Inc., a Maryland
corporation (the "Fund"), and Prospect Street Investment Management Co., Inc.
(the "Adviser") each confirms its agreement with and appointment of First Albany
Corporation, a New York corporation (the "Dealer Manager"), to act as exclusive
dealer manager in connection with the issuance by the Fund to the holders (the
"Record Date Shareholders") on the record date (the "Record Date") set forth in
the Prospectus (as defined herein) of the Fund's common stock, par value $0.01
per share (the "Common Stock"), of transferable rights entitling such Record
Date Shareholders to subscribe for an aggregate of 8,480,000 shares (each a
"Share" and collectively, the "Shares") of Common Stock. The offer of Shares
contemplated by the Fund's issuance of rights as more fully described in the
Prospectus shall be defined in this Agreement as the "Offer." Pursuant to the
terms of the Offer, the Fund is issuing each Record Date Shareholder one
transferable subscription right (each a "Right" and collectively, the "Rights")
for each three shares of Common Stock owned on the Record Date. Such Rights
entitle Record Date Shareholders or holders of Rights acquired during the
subscription period excluding, Record Date Shareholders ("Rights Holders") as
the case may be, to acquire during the subscription period set forth in the
Prospectus (the "Subscription Period"), at the price set forth in such
Prospectus (the "Subscription Price"), one Share for each Right held and
exercised on the terms and conditions set forth in such Prospectus. No
fractional Rights will be issued. Record Date Shareholders holding a number of
shares that is not an integral multiple of three will receive one additional
Right. In addition, Record Date Shareholders and Rights Holders who exercise
Rights will be entitled to subscribe for, subject to allotment, Shares that were
not otherwise subscribed for during the Subscription Period ("Excess Shares").
The Fund has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form N-2 (No. 333-2067) and a
related preliminary prospectus for the registration of the Rights and the Shares
under the Securities Act of 1933, as amended (the "1933 Act"), and has filed
such amendments to such registration statement on Form N-2, if any, and such
amended preliminary prospectuses as may have been required to date hereof. The
Fund will prepare and file such additional amendments thereto and such amended
prospectuses as may hereafter be required. The Fund previously filed a
notification on Form N-8A of registration of the Fund as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
rules and regulations of the Commission under the 1940 Act (together with the
rules and regulations under the 1933 Act, the "Rules and Regulations"). The
registration statement (as amended, if applicable) and the prospectus
constituting a part thereof, as from time to time amended or supplemented
pursuant to the 1933 Act, are herein referred to as the "Registration Statement"
and the "Prospectus", respectively, except that if any revised prospectus shall
be provided to the Dealer Manager by the Fund for use in connection with the
Offer which differs from the Prospectus on file at the Commission at the time
the Registration Statement becomes effective (whether such revised prospectus is
required to be filed by the Fund pursuant to Rule 497(b) or Rule 497(h) of the
Rules and Regulations), the term "Prospectus" shall refer to each such revised
prospectus from and after the time it is first provided to the Dealer Manager
for such use. The Prospectus and letters to beneficial owners of Common Stock,
forms used to exercise rights, any letters from the Fund to securities dealers,
commercial banks, trust companies and other nominees and any newspaper
announcements, press releases and other offering materials and information that
the Fund may use, approve, prepare or authorize for use in connection with the
Offer, are collectively referred to hereinafter as the "Offering Materials."
SECTION 1. Representations and Warranties.
(a) The Fund represents and warrants to the Dealer Manager as
of the date hereof and as of the date of the commencement of the Offer (such
later date being hereinafter referred to as the "Representation Date") as
follows:
(i) At the time the Registration Statement becomes
effective and at the Representation Date, the Registration Statement
will comply in all material respects with the requirements of the 1933
Act, the 1940 Act and the Rules and Regulations, and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading. At the time the Registration Statement becomes
effective, the Prospectus (unless the term "Prospectus" refers to a
prospectus which has been provided to the Dealer Manager by the Fund
for use in connection with the Offer which differs from the Prospectus
on file with the Commission at the time the Registration Statement
becomes effective, in which case at the time such prospectus is first
provided to the Dealer Manager for such use) and the Offering
Materials, will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information concerning the Dealer
Manager furnished to the Fund in writing by the Dealer Manager
expressly for use in the Registration Statement or Prospectus.
(ii) The accountants who certified the financial statements
included in the Registration Statement are independent public
accountants as required by the 1933 Act and the Rules and Regulations.
(iii) The financial statements included in the Registration
Statement (including the schedule of investments, balance sheet,
statement of operations, statement of cash flows, statement of changes
in net assets, financial highlights and notes to financial statements
included therein) present fairly the financial position of the Fund as
at the date indicated and the results of its operations for the period
specified; such financial statements have been prepared in conformity
with generally accepted accounting principles; and the information in
the Prospectus under the heading "Schedule of Investments" included in
the financial statements in the Registration Statement sets forth the
composition of the investment portfolio of the Fund as of the date(s)
indicated.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse change
in the condition, financial or otherwise, of the Fund, or in the
earnings, business affairs or business prospects of the Fund, whether
or not arising in the ordinary course of business, (B) there have been
no transactions entered into by the Fund which are material to the Fund
other than those in the ordinary course of business, and (C) except for
regular monthly dividends on the outstanding shares of Common Stock and
on the outstanding shares of the Fund's Taxable Auction Rate Preferred
Stock, no par value per share and liquidation preference of $100,000
per share (the "Preferred Stock") of the Fund, there has been no
dividend or distribution of any kind declared, paid or made by the Fund
or any class of its capital stock.
(v) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Maryland with corporate power and authority to own, lease and
operate its properties and conduct its business as described in the
Registration Statement; the Fund is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which its ownership of properties or the conduct of its
business requires qualification (unless the failure to so qualify would
not have a material adverse effect upon the operations or financial
condition of the Fund), and the Fund has no subsidiaries.
(vi) The Fund is duly registered and in good standing with
the Commission under the 1940 Act as a diversified, closed-end
management investment company, and no order of suspension or revocation
of such registration has been issued or proceedings therefor initiated
or threatened by the Commission. No person is serving or acting as an
officer, director or investment advisor of the Fund except in
accordance with the 1940 Act or the Investment Advisers Act of 1940, as
amended, and the rules and regulations thereunder ("Advisers Act"), as
the case may be.
(vii) The authorized, issued and outstanding capital stock
of the Fund is as set forth in the Prospectus under the caption
"Capital Stock"; the outstanding shares of Common Stock and Preferred
Stock have been duly authorized by all requisite corporate action on
the part of the Fund and are validly issued and fully paid and
non-assessable; the Rights and the Shares have been duly authorized by
all requisite corporate action on the part of the Fund for issuance
pursuant to the Offer, the Rights have been validly issued pursuant to
the terms of the Offer, and, when the Shares are issued and delivered
by the Fund pursuant to the terms of the Offer against payment of the
consideration set forth in the Prospectus, such Shares will be validly
issued and fully paid and nonassessable; the Common Stock, the
Preferred Stock, the Rights and the Shares conform in all material
respects to the descriptions thereof set forth in the Prospectus; and
the issuance of the Shares is not subject to preemptive rights.
(viii) The Fund is not in violation of its Articles of
Incorporation, as amended (the "Charter") or By-laws, as amended (the
"By-Laws") or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which it is a party or by which it or its
properties may be bound (including without limitation the Note Purchase
Agreement with Pacific Mutual Life Insurance Company dated as of July
15, 1993, as amended and restated as of December 16, 1993, the "Note
Purchase Agreement" referred to in the Registration Statement); and the
execution and delivery of this Agreement, and the Subscription Agent
Agreement referred to in the Registration Statement (as used herein,
the "Subscription Agent Agreement"), and the consummation of the
transactions contemplated herein and therein, have been duly authorized
by all necessary corporate action and will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Fund pursuant to any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Fund is a party or by which it may be bound, including without
limitation the Note Purchase Agreement, or to which any of the property
or assets of the Fund is subject, nor will such action result in any
violation of the provisions of the Charter or By-laws or, to the best
knowledge of the Fund or the Adviser, any law, administrative
regulation or administrative or court decree applicable to the Fund;
and no consent, approval, authorization or order of any court or
governmental authority or agency is required for the consummation by
the Fund of the transactions contemplated by this Agreement and the
Subscription Agent Agreement except such as has been obtained under the
1940 Act or as may be required under the 1933 Act, state securities or
Blue Sky laws or foreign securities laws in connection with the Offer.
There are no material contracts or other documents that are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement under the 1933 Act, the 1940 Act or the Rules and Regulations
that have not been described in the Prospectus or filed as exhibits to
the Registration Statement (or incorporated by reference therein as
permitted by the Rules and Regulations).
(ix) The Fund owns or possesses or has obtained all
material governmental licenses, permits, consents, orders, approvals
and other authorizations necessary to lease or own, as the case may be,
and to operate its properties and to carry on its businesses as
contemplated in the Prospectus and the Fund has not received any notice
of proceedings relating to the revocation or modification of any such
licenses, permits, consents, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now
pending, or, to the knowledge of the Fund or the Adviser threatened
against or affecting, the Fund, which might result in any material
adverse change in the condition, financial or otherwise, business
affairs or business prospects of the Fund, or might materially and
adversely affect the properties or assets of the Fund.
(xi) The Fund owns or possesses adequate trademarks,
service marks and trade names necessary to conduct its business as
described in the Registration Statement, and the Fund has not received
any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names
which, singly or in the aggregate would materially adversely affect the
conduct of the business, operations, financial condition or income of
the Fund.
(xii) The Fund intends to direct the investment of the
proceeds of the Offering in such a manner as to comply with the
requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended ("Subchapter M of the Code"), and intends to continue to
qualify as a regulated investment company under Subchapter M of the
Code.
(xiii) This Agreement, the Subscription Agent Agreement, the
Advisory Agreement referred to in the Registration Statement (the
"Advisory Agreement"), the Surety Custody Agreement referred to in the
Registration Statement (the "Surety Custody Agreement"), the Note
Purchase Agreement, the Insurance Agreement (the "Insurance Agreement")
and the custodian agreement with the Custodian (the "Custodian
Agreement"), each referred to in the Registration Statement have each
been duly authorized by all requisite corporate action on the part of
the Fund, executed and delivered by the Fund and each complies with all
applicable provisions of the 1940 Act and the Advisers Act. This
Agreement and the Subscription Agent Agreement each constitute the
legal, valid and binding obligation of the Fund, enforceable against
the Fund in accordance with their respective terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization or similar laws
relating to or affecting creditor rights generally and to general
equity principles, and except as the enforcement of the indemnification
and contribution provisions of this Agreement may be limited by
applicable federal and state securities laws.
(xiv) The Rights and the Shares have been approved for
listing, subject to official notice of issuance, on the New York Stock
Exchange.
(xv) The Fund has not (i) taken, directly or indirectly,
any action designed to cause or to result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Fund to facilitate
the sale or resale of the Rights or Shares or (ii) since the filing of
the Registration Statement (A) sold, bid for, purchased, or paid anyone
any compensation for soliciting purchases of, any securities of the
Fund or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Fund (except
pursuant to this Agreement, including, the Soliciting Dealer Agreement
attached hereto as Exhibit A.)
(xvi) The Dealer Manager has the legal authority to sell
Rights of Foreign Record Date Shareholders who fail to deliver
instructions to exercise, sell or transfer their Rights as more fully
contemplated in the Registration Statement.
(b) The Adviser represents and warrants to the Dealer Manager
as of the date hereof and as of the Representation Date as follows:
(i) The Adviser has been duly organized and is validly
existing as a corporation in good standing under the laws of
Massachusetts with corporate power and authority to own, lease and
operate its properties and conduct its business as described in the
Prospectus, and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which its
ownership of properties or the conduct of its business requires
qualification (unless the failure to so qualify would not have a
material adverse effect on the operation or financial condition of the
Adviser or the Fund).
(ii) The Adviser is duly registered and in good standing as
an investment adviser under the Advisers Act and is not prohibited by
the Advisers Act or the 1940 Act, or the rules and regulations under
such acts, from acting under the Advisory Agreement for the Fund as
contemplated by the Prospectus.
(iii) The description of the Adviser in the Prospectus is
true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and except as set forth in the Prospectus, there are no
pending legal proceedings that would be required to be described under
Item 10 of Form N-2.
(iv) This Agreement has been duly authorized, executed and
delivered by the Adviser; each of this Agreement and the Advisory
Agreement is in full force and effect and constitutes a valid and
binding obligation of the Adviser, enforceable in accordance with the
terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization or other similar laws relating to or affecting
creditors' rights generally and to general equity principles, and
except as the enforcement of the indemnification and contribution
provisions of this Agreement may be limited by applicable federal and
state securities laws; and neither the execution and delivery of this
Agreement nor the performance by the Adviser of its obligations
hereunder will conflict with, or result in a breach of, any of the
terms and provisions of, or constitute, with or without giving notice
or lapse of time or both, a default under, the Advisory Agreement, any
other agreement or instrument to which the Adviser is a party or by
which the Adviser is bound, or any law, order, rule or regulation
applicable to it of any jurisdiction, court, federal or state
regulatory body, administrative agency other governmental body, stock
exchange or securities association having jurisdiction over the Adviser
or its properties or operations.
(v) The Adviser has the financial resources available to
it necessary for the performance of its services and obligations as
contemplated in the Prospectus.
(vi) The Adviser has not (i) taken, directly or indirectly,
any action designed to cause or to result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Fund to facilitate
the sale or resale of the Rights or Shares or (ii) since the filing of
the Registration Statement (A) sold, bid for, purchased, or paid anyone
any compensation for soliciting purchases of, any securities of the
Fund or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Fund (except
pursuant to this Agreement, including the Soliciting Dealer Agreement
attached hereto as Exhibit A.).
(c) Any certificate signed by any officer of the Fund, or the
Adviser and delivered to the Dealer Manager or counsel for the Dealer Manager
shall be deemed a representation and warranty by the Fund or the Adviser, as the
case may be, to the Dealer Manager, as to the matters covered thereby.
SECTION 2. Agreement to Act as Dealer Manager.
(a) On the basis of the representations and warranties
contained herein, and subject to the terms and conditions of the Offer:
(i) The Fund hereby appoints First Albany Corporation as
the exclusive dealer manager in connection with the Offer, and First
Albany Corporation hereby accepts that appointment.
(ii) The Fund hereby appoints the Dealer Manager and other
soliciting dealers entering into a Soliciting Dealer Agreement in the
form attached hereto as Exhibit A with the Dealer Manager (the
"Soliciting Dealers"), to solicit, in accordance with the 1933 Act, the
1940 Act and the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") and its customary practice, the exercise of the Rights,
subject to the terms and conditions of this Agreement and the
procedures described in the Prospectus; and
(iii) The Fund agrees to furnish, or cause to be furnished,
to the Dealer Manager, lists, or copies of those lists, showing the
names and addresses of, and number of Shares held by, Record Date
Shareholders as of the Record Date, and to use its best efforts to
advise the Dealer Manager, or cause it to be advised, on each day on
which the New York Stock Exchange is open for trading during the
Subscription Period, as to any transfer of Rights or Shares, and the
Dealer Manager agrees to use such information only in connection with
the Offer, and not to furnish the information to any other person
except for securities brokers and dealers that the Dealer Manager has
requested to solicit exercises of Rights.
(iv) The Fund agrees to furnish, or cause to be furnished,
to the Dealer Manager a Blue Sky Memorandum ("Blue Sky Memorandum")
indicating the states in which the Offer may be made and acceptances
received under the applicable Blue Sky or state securities laws, and
such additional copies thereof as requested by the Dealer Manager in
order to perform its services as contemplated hereby.
(b) The Dealer Manager agrees to provide to the Fund, in
addition to the services described in paragraph (a) of this Section 2, financial
advisory services in connection with the Offer.
(c) The Fund and the Dealer Manager agree that the Dealer
Manager is an independent contractor with respect to the solicitation of the
exercise of Rights and the performance of financial advisory and other services
to the Fund contemplated by this Agreement.
(d) In rendering the services contemplated by this Agreement,
the Dealer Manager will not be subject to any liability to the Fund or the
Adviser, or any of their affiliates, for any act or omission on the part of any
securities broker or dealer (except with respect to the Dealer Manager acting in
such capacity, including its officers and employees in the performance of such
duties for the Dealer Manager), or any other person, and the Dealer Manager will
not be liable for acts or omissions in performing its respective obligations
under this Agreement, except for any losses, claims, damages, liabilities and
expenses determined in a final judgment by a court of competent jurisdiction to
have resulted directly from any acts or omissions undertaken or omitted to be
taken by the Dealer Manager through its gross negligence or willful misconduct
or breach of any material agreement or obligation obtained in this Agreement.
SECTION 3. Dealer Manager and Solicitation Fees. In full
payment for investment banking services rendered and to be rendered hereunder by
the Dealer Manager, the Fund agrees to pay the Dealer Manager a $150,000
non-refundable advisory fee, $25,000 of which has been paid prior to the date
hereof, and $125,000 of which is due concurrently with the issuance of Shares
subscribed for (and only in the event such issuance occurs), in each case
payable in cash. The Fund also agrees to pay Soliciting Dealers and the Dealer
Manager, as the case may be, fees for their soliciting efforts (the "Soliciting
Fees") equal to:
(a) 2.00 percent (2.00%) of the Subscription Price (as defined
in the Prospectus) per share with respect to each Share purchased by Record Date
Shareholders through the exercise of Rights solicited by a Soliciting Dealer or
the Dealer Manager, as the case may be, including, without limitation, the
exercise of Rights for Excess Shares; and
(b) 3.75 percent (3.75%) of the Subscription Price per Share
with respect to each Share purchased by Rights Holders (excluding Record Date
Shareholders) through the exercise of Rights solicited by a Soliciting Dealer or
the Dealer Manager, as the case may be, including, without limitation, the
exercise of Rights for Excess Shares;
in each case such solicitation to be evidenced by a notation in the appropriate
place therefor on the Subscription Certificate (as defined in the Prospectus).
No such percentage fees will be payable for Shares purchased by the Dealer
Manager or a Soliciting Dealer for its own account through the exercise of
Rights. Payment to the Dealer Manager by the Fund will be in the form of a wire
transfer of next day funds to an account or accounts identified by the Dealer
Manager. Such payment will be made on the day Shares subscribed for are issued.
Payment to Soliciting Dealers will be made by the Fund directly to such
Soliciting Dealers by wire transfer of next day funds to an account identified
by each Soliciting Dealer. Such payments shall be made on the same date as
payment is made to the Dealer Manager.
SECTION 4. Covenants of the Fund. The Fund covenants with
the Dealer Manager as follows:
(a) The Fund will use its best efforts to cause the
Registration Statement to become effective under the 1933 Act, and will advise
the Dealer Manager promptly as to the time at which the Registration Statement
and any amendments thereto (including any post-effective amendment) becomes so
effective and, if required, to cause the issuance of any orders exempting the
Fund from any provisions of the 1940 Act and will advise the Dealer Manager
promptly as to the time at which any such orders are granted.
(b) The Fund will notify the Dealer Manager immediately, and
confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendment thereto (including any post-effective amendment),
(ii) of the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceeding for that purpose, and
(v) of the issuance by the Commission of an order of suspension or revocation of
the notification on Form N-8A of registration of the Fund as an investment
company under the 1940 Act or the initiation of any proceeding for that purpose.
The Fund will make every reasonable effort to prevent the issuance of any stop
order described in subsection (iv) hereunder or any order of suspension or
revocation described in subsection (v) hereunder and, if any such stop order or
order of suspension or revocation is issued, to obtain the lifting thereof at
the earliest possible moment.
(c) The Fund will give the Dealer Manager notice of its
intention to file any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Fund proposes for use by the Dealer
Manager in connection with the Offer, which differs from the prospectus on file
at the Commission at the time the Registration Statement becomes effective,
whether such revised prospectus is required to be filed pursuant to Rule 497(b)
or Rule 497(h) of the Rules and Regulations), whether pursuant to the 1940 Act,
the 1933 Act, or otherwise, and will furnish the Dealer Manager with copies of
any such amendment or supplement within a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file any such
amendment or supplement to which the Dealer Manager or counsel for the Dealer
Manager shall reasonably object.
(d) The Fund will deliver to the Dealer Manager, as soon as
practicable, two signed copies of the Registration Statement as originally filed
and of each amendment thereto, in each case with two sets of the exhibits filed
therewith.
(e) The Fund will furnish to the Dealer Manager, for the
benefit of the Dealer Manager and Soliciting Dealers, from time to time during
the period when the Prospectus is required to be delivered under the 1933 Act,
such number of copies of the Prospectus (as amended or supplemented) as the
Dealer Manager may reasonably request for the purposes contemplated by the 1933
Act or the Rules and Regulations.
(f) If any event shall occur as a result of which it is
necessary, in the opinion of the Fund (or the Dealer Manager), to amend or
supplement the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
the Fund will forthwith amend or supplement the Prospectus by preparing and
furnishing to the Dealer Manager a reasonable number of copies of an amendment
or amendments of or a supplement or supplements to, the Prospectus (in form and
substance satisfactory to counsel for the Dealer Manager) which will amend or
supplement the Prospectus so that the Prospectus will not contain an untrue
statement or a material fact or omit to state a material fact necessary in order
to make the statements therein in light of the circumstances existing at the
time the Prospectus is delivered not misleading.
(g) The Fund will endeavor to qualify the Shares and Rights
for offering and sale under the applicable securities laws of such states and
other jurisdictions of the United States as the Dealer Manager may designate,
and will maintain such qualifications in effect for a period of not less than
one year after the date hereof. The Fund will file such statements and reports
as may be required by the law of each jurisdiction in which the Rights or Shares
have been qualified as above provided.
(h) The Fund will make generally available to its security
holders as soon as practicable, but no later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Rules and Regulations) covering a twelve-month
period beginning not later than the first day of the Fund's fiscal quarter next
following the "effective" date (as defined in said Rule 158) of the Registration
Statement.
(i) The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the Code.
(j) For a period of 180 days from the date of this Agreement,
the Fund will not, without your prior consent, offer or sell, or enter into any
agreement to sell, any Common Stock or any securities of the Fund convertible or
exercisable into or exchangeable for Common Stock, other than the Shares and the
Common Stock issued in reinvestment of dividends or distributions.
(k) The Fund will advise or cause the Subscription Agent (as
defined in the Registration Statement) to advise the Dealer Manager and each
Soliciting Dealer from day to day during the period of, and promptly after the
termination of, the Offer, (i) as to all names and addresses of Record Date
Shareholders and Rights Holders exercising Rights, (ii) the total number of
Rights exercised by each Record Date Shareholder and Rights Holders during the
immediately preceding day, indicating the total number of Rights verified to be
in proper form for exercise, rejected for exercise and being processed and, for
the Dealer Manager and each Soliciting Dealer, as applicable, (iii) the number
of unexercised Rights which Record Date Shareholders (including foreign Record
Date Shareholders) who have instructed the Subscription Agent to sell their
Rights using the Dealer Manager as a broker dealer, and (iv) as to such other
information as the Dealer Manager may reasonably request. The Subscription Agent
will notify the Dealer Manager and each Soliciting Dealer, not later than 5:00
P.M., New York City time, on the first business day following the Expiration
Date, (w) of the total number of Rights exercised and Shares related thereto,
(x) the total number of Rights verified to be in proper form for exercise,
rejected for exercise and being processed, (y) for the Dealer Manager, and each
Soliciting Dealer as applicable, the number of Rights exercised for Shares on
Subscription Certificates indicating the Dealer Manager or a Soliciting Dealer
as the broker dealer with respect to such exercise and whether or not such
Rights were exercised by a Record Date Shareholder or Rights Holder, and (z) as
to such other information as the Dealer Manager may reasonably request.
(l) The Fund hereby requests that the Dealer Manager be
available as a broker dealer, and agrees to cause the Subscription Agent to
request the Dealer Manager as a broker dealer, for the Dealer Manager's
customary broker dealer fees and commissions payable by the Record Date
Shareholder, except (as provided below), to effect the sale of Rights by Record
Date Shareholders requested by the Subscription Agent on behalf of the Record
Date Shareholder in the manner described in the Prospectus, and to provide such
replacement Subscription Certificates or other documents or instruments as
reasonably requested by the Dealer Manager for its use in connection herewith.
The Fund hereby agrees that it will pay the Dealer Manager the customary broker
dealer fees and commissions on behalf of Record Date Shareholders who either
hold less than 100 Rights or who beneficially own less than 100 Rights held on
their behalf by Qualified Financial Institutions (as defined in the Prospectus),
and who direct the Subscription Agent to arrange for the sale of such shares
using the Dealer Manager as a broker dealer.
(m) The Fund and the Adviser will not take, directly, or
indirectly, any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Fund to
facilitate the Offer, including, without limitation, any action not permitted by
each of Rule 10-b(6), 10-b(7) and 10-b(8) of the Exchange Act.
SECTION 5. Payment of Expenses.
(a) The Fund will pay all expenses incident to the performance
of its obligations under this Agreement, including, but not limited to, expenses
relating to (i) the printing and filing of the registration statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Shares, (iii) the fees and
disbursements of the Fund's counsel and accountants, (iv) the qualification of
the Shares and Rights under securities laws in accordance with the provisions of
Sections 4(g) of this Agreement, including filing fees and any reasonable fees
or disbursements of counsel for the Dealer Manager in connection therewith and
in connection with the preparation of the Blue Sky Memorandum, (v) the printing
and delivery to the Dealer Manager of copies of the registration statement as
originally filed and of each amendment thereto, of the preliminary prospectus,
and of the Prospectus and any amendments or supplements thereto, (vi) any filing
for review of the Offer with the National Association of Securities Dealers,
Inc., including filing fees and the reasonable fees and disbursements of counsel
for the Dealer Manager in connection therewith, (vii) the preparation and
delivery of copies of the Blue Sky Memorandum, (viii) the fees and expenses
incurred in connection with the listing of the Rights and the Shares on the New
York Stock Exchange, (ix) the printing, mailing and delivery expenses incurred
in connection with Offering Materials.
(b) In addition to any fees that may be payable to the Dealer
Manager under this Agreement, the Fund agrees to reimburse the Dealer Manager
upon request made from time to time for its reasonable expenses incurred in
connection with its activities under this Agreement, including the reasonable
fees and disbursements of its legal counsel, up to a maximum aggregate payment
of $40,000, provided, however, that such maximum amount should not apply to or
otherwise impair in any manner any payments due pursuant to Section 7 of this
Agreement. The Fund's obligation to pay expenses as provided in this Section 5
shall survive termination of this Agreement until paid, irrespective of whether
or not the Offer is consummated.
SECTION 6. Conditions of Dealer Manager Obligations. The
Obligations of the Dealer Manager hereunder are subject to the accuracy of the
representations and warranties of the Fund and the Adviser herein contained, to
the performance by the Fund and the Adviser of their respective covenants and
obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:30 P.M., New York City time, on the date of this Agreement, or at a
later time and date not later, however, than 5:30 P.M. on the first business day
following the date hereof, or at such later time and date as may be approved by
the Dealer Manager, and at the commencement of the Offer no stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by the
Commission.
(b) On the date of this Agreement (or the effective date of
the Registration Statement, if later), the Dealer Manager shall have received
the favorable opinion, dated as of the date of this Agreement, of Rogers &
Wells, special counsel for the Fund and the Adviser, to the effect that:
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Maryland.
(ii) The Fund has corporate power and authority to own,
lease and operate its properties and conduct its business as described
in the Registration Statement and the Prospectus and to issue the
Rights, and issue and sell the Shares, as contemplated by this
Agreement and the Registration Statement.
(iii) The Fund is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in
which the failure to so qualify, either individually or in the
aggregate, could reasonably be expected to have a material adverse
effect on the operations or financial condition of the Fund.
(iv) The Common Stock and Preferred Stock outstanding on
the date hereof have been duly authorized by requisite corporate action
on the part of the Fund and have been validly issued and are fully paid
and non-assessable.
(v) The Rights and the Shares have been duly authorized
for issuance pursuant to the Offer; the Rights will be when issued,
duly and validly issued pursuant to the Offer; and, when issued and
delivered by the Fund pursuant to the Offer against payment of the
consideration set forth in the Prospectus, the Shares will be validly
issued and fully paid and nonassessable.
(vi) The issuance of the Shares will not be subject to any
preemptive or other rights to subscribe for any of the Shares under any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Fund is a party or by which the Fund or any of
its properties are bound, or under the Charter or By-Laws of the Fund,
or under the Maryland General Corporation Law.
(vii) The statements set forth in the Prospectus under the
headings "Description of Capital Stock," insofar as such statements
constitute a summary of legal matters or documents referred to therein,
provide a fair summary of such legal matters or documents.
(viii) The Rights and the Shares conform in all material
respects to the statements concerning them in the Prospectus.
(ix) This Agreement and the Subscription Agent Agreement
have been duly authorized, executed and delivered by the Fund, and each
constitutes the valid and binding obligation of the Fund enforceable
against the Fund in accordance with its terms, except to the extent
that enforceability may be limited by bankruptcy, insolvency,
moratorium and other similar laws relating to or affecting creditors'
rights and by general equity principles, and except as the enforcement
of the indemnification and contribution provisions of this Agreement or
the Subscription Agent Agreement may be limited by applicable federal
or state securities laws. This Agreement and the Subscription Agent
Agreement comply with all applicable provisions of the 1940 Act, except
as the enforcement of the indemnification and contribution provisions
thereof may be limited by the 1940 Act.
(x) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been
issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission.
(xi) The Registration Statement and the Prospectus (other
than the financial statements included therein, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the 1933 Act and the 1940 Act and the Rules and
Regulations.
(xii) To the best of their knowledge, there are no legal
or governmental proceedings pending or threatened against the Fund
which are required to be disclosed in the Registration Statement, other
than those disclosed therein.
(xiii) To the best of their knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments of the Fund required to be described or referred to
in the Registration Statement or to be filed as exhibits thereto other
than those described or referred to therein or filed as exhibits
thereto, and the descriptions thereof and references thereto are
correct in all material respects.
(xiv) No consent, approval, authorization or order of any
U.S. federal, State of Maryland or State of New York court or
governmental authority or agency is required in connection with
issuance of the Rights by the Fund or issuance of Shares by the Fund
upon an exercise of the Rights pursuant to the Offer, except such as
has been obtained under the 1933 Act, the 1940 Act or the Rules and
Regulations or such as may be required under state securities or Blue
Sky laws; and, the execution and delivery of this Agreement and the
Subscription Agent Agreement by the Fund and the consummation by the
Fund of the transactions contemplated herein and therein will not
conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Fund pursuant to, any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument
known to such counsel to which the Fund is a party or by which it may
be bound or to which any of the property or assets of the Fund is
subject; nor will such action result in any violation of the provisions
of the Charter or By-Laws of the Fund, or any U.S. federal or State of
New York law or administrative regulation; nor will any such action
result in any violation of any administrative or court decree known to
such counsel.
(xv) The Fund is duly registered with the Commission under
the 1940 Act as a diversified, closed-end management investment
company, and all required action has been taken by the Fund under the
1933 Act, the 1940 Act and the Rules and Regulations to make and
consummate the Offer; and, to the best of their knowledge and
information, no order of suspension or revocation of such registration
under the 1940 Act, pursuant to Section 8(e) of the 1940 Act, has been
issued or proceedings therefor initiated or threatened by the
Commission.
(xvi) The information in the Prospectus under the
captioned "The Offer - Federal Income Tax Consequences of the Offer",
to the extent that it constitutes matters of law or legal conclusions,
has been reviewed by them and is correct in all material respects.
Rogers & Wells shall additionally state that they have
participated in the preparation of the Registration Statement and the Prospectus
with officers of the Fund and the Adviser and the Fund's independent public
accountants, and that nothing has come to their attention that would lead them
to believe that the Registration Statement (other than the financial statements
included therein, as to which no belief need be stated), at the time it became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (other than the
financial statements included therein, as to which no opinion need be stated),
at the date of this Agreement and also, if different, the date of the
Prospectus, included an untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(c) On the date of this Agreement (or the effective date
of the Registration Statement, if later), the Dealer Manager shall have received
the favorable opinion, dated as of the date of the Agreement of Olshan Grundman
Frome & Rosenzweig L.L.P., general counsel for the Fund and the Adviser, to the
effect that:
(i) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against the
Fund which are required to be disclosed in the Registration Statement,
other than those disclosed therein.
(ii) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments of the Fund required to be described or referred to
in the Registration Statement or to be filed as exhibits thereto other
than those described or referred to therein or filed as exhibits
thereto; and the descriptions thereof are correct in all material
respects, references thereto are correct; and to the best of such
counsel's knowledge, no default exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, loan agreement, note or lease so
described, referred to or filed.
(iii) The Advisory Agreement, the Custodian Agreement, the
Surety Custody Agreement, Insurance Agreement, and the Note Purchase
Agreement each comply as to form in all material respects with all
applicable provisions of the 1940 Act and the Advisers Act and have
each been duly authorized and approved by the Fund and each is full
force and effect.
(iv) The provisions of the Charter and By-Laws of the Fund
comply as to form in all material respects with the requirements of the
1940 Act.
(v) The Adviser is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the Advisers
Act or the 1940 Act, or the rules and regulations under such acts, from
acting under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(vi) The Adviser has been duly organized as a corporation
under the laws of the Commonwealth of Massachusetts with corporate
power and authority to conduct its business as described in the
Prospectus.
(vii) This Agreement has been duly authorized, executed
and delivered by the Adviser; each of this Agreement and the Advisory
Agreement constitutes a valid and binding obligation of the Adviser
enforceable against the Adviser in accordance with its terms, except to
the extent that enforceability may be limited by bankruptcy,
insolvency, moratorium and other similar laws relating to or affecting
creditors' rights and by general equity principles, and except as the
enforcement of the indemnification and contribution provisions of this
Agreement may be limited by applicable federal and state securities
laws; no consent, approval, authorization or order of any court or
governmental authority or agency is required that has not been obtained
for the performance of this Agreement or the Advisory Agreement by the
Adviser; and, neither the execution and delivery of this Agreement or
the Advisory Agreement nor the performance by the Adviser of its
obligations hereunder or thereunder will conflict with, or result in a
breach of, any of the terms and provisions of, or constitute, with or
without the giving of notice or the lapse of time or both, a default
under, any agreement or instrument known to such counsel after due
inquiry to which the Adviser is a party or by which the Adviser is
bound, or any law, order, rule or regulation applicable to the Adviser
of any jurisdiction, court, federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Adviser or its
properties or operations; and
(viii) The description of the Adviser in the Registration
Statement and the Prospectus does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(d) At the date of this Agreement (or the effective date of
the Registration Statement, if later), (i) the Registration Statement and the
Prospectus shall contain all statements which are required to be stated therein
in accordance with the 1933 Act, the 1940 Act and the Rules and Regulations and
in all material respects shall conform to the requirements of the 1933 Act, the
1940 Act and the Rules and Regulations and the Prospectus shall not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, and no action, suit or proceeding at law or in equity
shall be pending or, to the knowledge of the Fund, or the Adviser, threatened
against the Fund, or the Adviser which would be required to be set forth in the
Prospectus other than as set forth therein, (ii) there shall not have been,
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change in the condition,
financial or otherwise, of the Fund or in its earnings, business affairs or
business prospects, whether or not arising in the ordinary course of business,
from that set forth in the Registration Statement and Prospectus, (iii) the
Adviser shall have the financial resources available to it necessary for the
performance of its services and obligations as contemplated in the Registration
Statement and the Prospectus and (iv) no proceedings shall be pending or, to the
knowledge of the Fund, or the Adviser, threatened against the Fund, or the
Adviser before or by any federal, state or other commission, board or
administrative agency wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, property, financial condition or
income of either the Fund or the Adviser other than as set forth in the
Registration Statement and the Prospectus; and the Dealer Manager shall have
received, at the commencement date of the Offer, a certificate of the President
or Treasurer of the Fund and of the Adviser dated as of such date, confirming
the respective representations and warranties contained in Section 1 of this
Agreement and evidencing, to the best of their knowledge and belief, after
reasonable investigation, compliance with the appropriate provisions of this
subsection (d).
(e) At the date of this Agreement (or the effective date of
the Registration Statement, if later), the Dealer Manager shall have received
from Arthur Andersen L.L.P. a letter, dated such date in form and substance
satisfactory to the Dealer Manager, to the effect that:
(i) they are independent accountants with respect to the
Fund within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the audited financial statements
examined by them and included in the Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the 1933 Act and the 1940 Act and the Rules and
Regulations; and
(iii) they have performed specified procedures, not
constituting an audit, including a reading of the latest available
interim financial statements of the Fund, a reading of the minute books
of the Fund, inquiries of officials of the Fund responsible for
financial accounting matters and such other inquires and procedures as
may be specified in such letter, and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
that at the date of the latest available financial statements read by
such accountants, or at a subsequent specified date not more than five
days prior to the date of this Agreement, there was any change in the
capital stock or net assets of the Fund as compared with amounts shown
on the statement of net assets included in the Prospectus except as set
forth in such letter, which exception(s), if any, shall be reasonably
acceptable to the Dealer Manager; and
(iv) in addition to the procedures referred to in clause
(iii) above, they have performed other specified procedures, not
constituting an audit, with respect to certain amounts, percentages,
numerical data, financial information and financial statements
appearing in the Registration Statement, which have previously been
specified by you and which shall be specified in such letter, and have
compared certain of such items with, and have found such items to be in
agreement with, the accounting and financial records of the Fund.
(f) At the date of this Agreement (or the effective date of
the Registration Statement, if later), counsel for the Dealer Manager shall have
been furnished with such documents and opinions as they may reasonably require
for the purpose of enabling them to pass upon the issuance of the Rights and the
Shares as contemplated herein and in the Registration Statement and to pass upon
related proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions
herein contained; and all proceedings taken by the Fund and the Adviser in
connection with the issuance, offer and sale of the Rights and the Shares as
contemplated herein and in the Registration Statement shall be satisfactory in
form and substance to the Dealer Manager and counsel for the Dealer Manager.
If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be terminated
by the Dealer Manager, by notice to the Fund at any time during the term hereof,
and such termination shall be without liability of any party to any other party
except as provided in Section 5 and Section 7.
SECTION 7. Indemnification and Contribution.
(a) The Fund agrees to indemnify and hold harmless the Dealer
Manager and its affiliates and their respective directors, officers, employees,
agents and controlling persons (the Dealer Manager and each such person being an
"Indemnified Party") as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, joint or several, to which
such Indemnified Party may become subject under any applicable federal
or state law, or otherwise, and related to or arising out of (A) an
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto) or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary in order to make the statements
therein not misleading, (B) an untrue statement or alleged untrue
statement of a material fact contained in the Prospectus or the
Offering Materials (including, for the purpose hereof, the Blue Sky
Memorandum) or any amendment or supplement thereto, or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, (C) any
breach by the Fund of any of its representations, warranties and
agreements contained in this Agreement, (D) the Fund's failure to make
the Offer, or its withdrawal, termination or extension of the Offer or
any other failure on its part to comply with the terms and conditions
specified in the Registration Statement, the Prospectus or the Offering
Materials, and (E) the Offer, the engagement of the Dealer Manager
pursuant to, and the performance by the Dealer Manager of the services
contemplated by, this Agreement;
(ii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation, or investigation
or proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon the occurrence of any
matter described in clause (i) above, if such settlement is effected
with the written consent of the Fund, which consent the Fund shall not
unreasonably refuse; and
(iii) from and against any and all expense whatsoever, as
incurred (including the fees and disbursements of counsel chosen by the
Dealer Manager), reasonably incurred in investigating, preparing or
defending against any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon the occurrence of any matter described in clause
(i) above, whether or not such Indemnified Party is a party and whether
or not such claim, action or proceeding is initiated or brought by or
on behalf of the Fund, to the extent, that any such expense is not paid
under clause (i) or (ii) above.
The Fund shall not, however, be liable to an Indemnified Party
for any loss, liability, claim, settlement, damage or expense under, (A) clauses
(i)(A) and (B) of this subsection 7(a), to the extent arising out of (i) an
untrue statement or omission or alleged untrue statement or omission made in the
Registration Statement or the Offering Materials in reliance upon and in
conformity with written information concerning the Dealer Manager furnished to
the Fund by or on behalf of the Dealer Manager expressly for use in the
Registration Statement (or any amendment thereto) which the parties agree is
only the first sentence under the caption heading "The Offer - Distribution
Arrangements" of the Registration Statement and the Prospectus and (B) clause
(i)(E) of this subsection 7(a), to the extent, and only to the extent, that such
loss, liability, claim, settlement, damage or expense is found in a final
judgment by a court to have resulted from the Dealer Manager's bad faith or
gross negligence or breach of any material agreement or obligation in this
Agreement.
The Fund also agrees that no Indemnified Party shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Fund, the Adviser or their respective security holders or creditors, related to
or arising out of the Offer or the engagement of the Dealer Manager pursuant to,
or the performance by the Dealer Manager of the services contemplated by this
Agreement, except to the extent, and only to the extent, that any loss,
liability, claim, damage or expense is found in a final judgment by a court of
competent jurisdiction to have resulted from the bad faith or gross negligence
of such Indemnified Party or breach of any material agreement or obligation in
this Agreement.
Each of the Fund and the Adviser agrees that, without the
Dealer Manager's prior written consent, it will not settle, compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding in respect of which indemnification could be sought under the
indemnification provisions of this Section 7 (whether or not the Dealer Manager
or any other Indemnified Party is an actual or potential party to such claim,
action or proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Indemnified Party from all liability arising out
of such claim, action or proceeding.
(b) The Dealer Manager agrees to indemnify and hold harmless
the Fund and each person that controls the Fund within the meaning of the 1933
Act from and against any loss, liability, claim, damage and expense to which the
Fund or any such controlling person may become subject under any applicable
federal or state law or otherwise, insofar as the loss, liability, claim, damage
or expense arises out of, or is based upon, any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
the Prospectus (or any amendment thereto) or arises out of, or is based upon,
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information concerning the Dealer Manager furnished to
the Fund by the Dealer Manager specifically for inclusion therein. The parties
hereto agree that the only written information concerning the Dealer Manager
furnished by the Dealer Manager specifically for inclusion in the Registration
Statement and the Prospectus or the Offering Materials is the first sentence
under the caption heading "The Offer - Distribution Arrangements" of the
Registration Statement and Prospectus.
(c) If the indemnification of an Indemnified Party provided
for in this Agreement is for any reason unenforceable (unless unenforceability
is due solely to the contractual inapplicability of such indemnification in
accordance with the express terms hereof), the Fund and the Dealer Manager,
shall contribute to the aggregate losses, liabilities, claims, damages and
expenses for which such indemnification is held unenforceable, as incurred, (i)
in the proportion that the compensation of the Dealer Manager payable hereunder
bears to the aggregate Subscription Price of the Shares, with the Dealer Manager
paying the smaller portion and the Fund paying the larger portion; or (ii) if
(but only if) the allocation provided for in clause (i) of this subsection 7(c)
is for any reason held unenforceable, in such proportion as is appropriate to
reflect the relative benefits and fault of the Fund on the one hand, and the
Dealer Manager on the other hand, with respect to the transaction contemplated
by this Agreement, including, without limitation, the Offer, to which the loss,
liability, claim, damage or expense or action in respect thereof relates, as
well as any other relevant equitable considerations. The benefits received by
the Fund in the aggregate and the benefits received by the Dealer Manager with
respect to the Offer will be deemed to be in the same proportion as the total
net proceeds from the subscription for the Shares (before deducting expenses)
received by the Fund bear to the amount of Soliciting Fees received by the
Dealer Manager pursuant to Section 3 of this Agreement with respect to the
Offer. The relative fault with respect to the Offer will be determined by
reference to whether the untrue or alleged untrue statement of a material fact
relates to information supplied by the Fund or by the Dealer Manager, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent the statement or omission. The Fund and the
Dealer Manager agree that it would not be just and equitable if contributions
pursuant to this Section 7 were to be determined by a proportionate allocation
or by any other method of allocation that does not take into account the
equitable considerations referred to in this paragraph (c). The amount paid or
payable by an Indemnified Party as a result of the loss, claim, damage or
liability, or action with respect thereto, referred to above in this Section 7
will be deemed to include, for purposes of this Section 7, any legal or other
expenses reasonably incurred by the Indemnified Party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this paragraph (c), the Dealer Manager will not be required to
contribute any amount in excess of the amount by which the Soliciting Fees
received by the Dealer Manager pursuant to Section 3 of this Agreement exceeds
the amount of any damages that the Dealer Manager has otherwise paid or become
liable to pay by reason of any untrue or alleged untrue statement or omission or
alleged omission. No person found guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) by a court of competent
jurisdiction will be entitled to contribution pursuant to this paragraph (c)
from any person who was not found guilty of the fraudulent misrepresentation. No
investigation or failure to investigate by any Indemnified Party shall impair
the foregoing indemnification and contribution agreement or any rights an
Indemnified Party may have.
(d) In the event that an Indemnified Party is requested or
required to appear as a witness in any action brought by or on behalf of or
against the Fund in which such Indemnified Party is not named as a defendant,
the Fund agrees to reimburse the Dealer Manager for all expenses incurred by it
in connection with such Indemnified Party's appearing and preparing to appear as
a witness, including, without limitation, the reasonable fees and disbursements
of its legal counsel, and to compensate the Dealer Manager in an amount to be
mutually agreed upon.
(e) Each of the Fund and the Adviser agree to notify the
Dealer Manager promptly of the assertion against it or any other person of any
claim or the commencement of any action or proceeding relating to a transaction
contemplated by this Agreement. Promptly after receipt by an Indemnified Party
of written notice of any claim or commencement of any action or proceeding with
respect to which indemnification is being sought hereunder, such Indemnified
Party will notify the Fund in writing of such claim or of the commencement of
such action or proceeding, but the failure to notify the Fund will not relieve
the Fund from any liability which it may have to such Indemnified Party under
this Agreement, and will not relieve the Fund from any other liability that it
may have to such Indemnified Party.
(f) The Fund agrees to indemnify each Soliciting Dealer and
its affiliates and their respective directors, officers, employees, agents and
controlling persons to the same extent and subject to the same conditions and to
the same agreements, including with respect to contribution, provided for in
subsections (a), (b) and (c) of this Section 7.
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery. All representations, warranties and agreements contained in
this Agreement, or contained in certificates of officers of the Fund or the
Adviser submitted pursuant hereto, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of the Dealer
Manager or any controlling person, or by or on behalf of the Fund, or the
Adviser and shall survive delivery of the Shares pursuant to the Offer.
SECTION 9. Termination of Agreement.
(a) The Dealer Manager, by notice to the Fund, may terminate
this Agreement at any time at or prior to the termination of the Offer (i) if
there has been, since the date of this Agreement or since the respective dates
as of which information is given in the Registration Statement, any material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Fund or the Adviser, whether or
not arising in the ordinary course of business, or (ii) if trading in the Common
Stock or the Rights has been suspended on the New York Stock Exchange, or (iii)
if there has occurred any material adverse change in the financial markets in
the United States or elsewhere or any outbreak of hostilities or other calamity
or crisis or any escalation of existing hostilities the effect of which is such
as to make it, in the Dealer Manager's judgment, impracticable to market the
Shares or the Rights or enforce contracts for the sale of the Shares or the
Rights, or (iv) if trading generally on the New York Stock Exchange has been
suspended, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices for securities have been required, by said exchange or by
order of the Commission or any other governmental authority, or if a banking
moratorium has been declared by United States or New York or Massachusetts
authorities.
(b) If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 5 and Section 7.
SECTION 10. Jurisdiction of Courts of New York. The Fund and
the Adviser each hereby appoint Rogers & Wells, 200 Park Avenue, New York, New
York 10166 as its authorized agent (the "Authorized Agent") upon which process
may be served in any action by the Dealer Manager, arising out of or based upon
this Agreement which may be instituted in any state or federal court in The City
of New York, and the Fund and the Adviser each expressly accepts the
jurisdiction of any such court in respect of such action. Such appointment shall
be irrevocable unless and until the appointment of a successor Authorized Agent
and such successor's acceptance of such appointment. The Fund and the Adviser
each will take any and all action, including the filing of any and all documents
and instruments, that may be necessary to continue such appointment or
appointments in full force and effect as aforesaid and will appoint a successor
Authorized Agent if the Authorized Agent named above ceases operations in The
City of New York. Service of process upon the Authorized Agent and written
notice of such service mailed or delivered to the Fund and/or the Adviser at its
address set forth in Section 11 hereof shall be deemed in every respect service
of process upon the Fund or the Adviser, as the case may be.
SECTION 11. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of written telecommunication. Notices
to the Dealer Manager shall be directed to First Albany Corporation, 53 State
Street, Boston, Massachusetts 02109-2811, Attention: Michael S. Burd, Senior
Vice President, with a copy to Michael R. Lindburg, Esq.; notices to the Fund or
the Adviser shall be directed to Prospect Street High Income Portfolio Inc., 60
State Street, Boston, Massachusetts 02109, Attention: John Frabotta.
SECTION 12. Parties. This Agreement shall inure to the benefit
of and be binding upon the Dealer Manager, the Fund, the Adviser and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the parties hereto and the Soliciting Dealer(s) and their respective
successors and the controlling persons, employees and their agents and officers
and directors referred to in Section 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the parties hereto and thereto and their respective
successors, and said controlling persons, employees and their agents and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation.
SECTION 13. Governing Law and Time. This Agreement shall be
governed by the laws of the State of New York applicable to contracts executed
and to be performed in said State. Specified times of day refer to New York City
time. Each of the Dealer Manager and the Fund (in its own behalf and, to the
extent permitted by applicable law, on behalf of its shareholders) waives all
right to trial by jury in any action, proceeding, or counterclaim (whether based
upon contract, tort or otherwise) related to or arising out of the engagement of
the Dealer Manager pursuant to, or by the performance by the Dealer Manger of
the services contemplated by this Agreement.
SECTION 14. Entire Agreement. This Agreement including,
without limitation, the indemnification provisions contained in Section 7
hereof, sets forth the entire agreement between the parties hereto concerning
the matters set forth herein, notwithstanding anything to the contrary contained
in the engagement letter dated March 4, 1996 between the Fund and the Dealer
Manager.
If the foregoing is in accordance with your understanding of
our Agreement, please sign and return to us a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a single binding agreement
among the Dealer Manager, the Fund and the Adviser in connection with its terms.
Very truly yours,
PROSPECT STREET HIGH INCOME
PORTFOLIO INC.
By: ___________________________
Name: John A. Frabotta
Title: Vice President
PROSPECT STREET INVESTMENT
MANAGEMENT CO., INC.
By: ___________________________
Name: John A. Frabotta
Title: Vice President
Confirmed and Accepted, as of the date first above written:
FIRST ALBANY CORPORATION
By:_________________________________
John H. Howland, Vice President
<PAGE>
EXHIBIT A
SOLICITING DEALER AGREEMENT
Dear Sirs:
Prospect Street High Income Portfolio Inc., a Maryland
corporation (the "Fund"), proposes to issue to holders (the "Record Date
Shareholders") or the record date of its outstanding shares of common stock, par
value $0.01 per share (the "Common Stock"), transferable rights entitling such
Shareholders to subscribe for shares (each a "Share" and collectively, the
"Shares") of Common Stock. For purposes of this Agreement the offer of Shares
contemplated by the Fund's issuance of Rights as more fully described in the
accompanying Prospectus ("Prospectus") shall be defined herein as the "Offer."
Pursuant to the terms of the Offer, the Fund is issuing each Shareholder one
transferable right (each a "Right" and collectively, the "Rights") for each
three shares of Common Stock held on the record date set forth in the
Prospectus. No fractional Rights will be issued. Record Date Shareholders
holding a number of shares that is not an integral multiple of three will
receive one additional Right. Such Rights entitle Record Date Shareholders or
holders of Rights acquired during the subscription period excluding, Record Date
Shareholders ("Rights Holders") (each as defined in the Prospectus) to acquire
during the subscription period set forth in the Prospectus, and at the price set
forth in the Prospectus, one share for each one full Right held on the terms and
subject to the conditions set forth in the Prospectus.
The undersigned, as the dealer manager (the "Dealer Manager")
named in the Prospectus, has entered into a Dealer Manager Agreement dated May
10, 1996 with the Fund and Prospect Street Investment Management Co., Inc., a
Massachusetts corporation (the "Adviser"), pursuant to which the undersigned
have agreed to form and manage, for purposes of soliciting exercises of Rights
pursuant to the Offer, a group of soliciting dealers, including the undersigned,
consisting of brokers and dealers who shall be members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"), the members of
such group being hereinafter called the "Soliciting Dealers." You are invited to
become one of the Soliciting Dealers and by your confirmation hereof you agree
to act in such capacity, in accordance with the terms and conditions herein and
in your confirmation hereof, to obtain exercises of Rights pursuant to the
Offer.
1. Solicitation and Solicitation Material. Solicitation and
other activities by you hereunder shall be undertaken only in accordance with
this Agreement, the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
applicable rules and regulations of the Securities and Exchange Commission.
Accompanying this Agreement are copies of the following documents: the
Prospectus describing the terms of the Offer, a Notice of Guaranteed Delivery
Form, a Nominee Holder Over-Subscription Exercise Form, a Letter to Beneficial
Shareholders and a Letter of Instructions. Additional copies of these documents
will be supplied in reasonable quantities upon your request. You agree that
during the period of the Offer you will not use any solicitation material other
than that referred to above and such as may hereafter be furnished to you by us.
2. Compensation of Solicitation Dealers. As compensation for
the services of the Soliciting Dealers hereunder, the Fund will pay to each
Soliciting Dealer a fee in the amount of 2.00% of the Subscription Price (as
defined in the Prospectus) per Share purchased by Record Date Shareholders
pursuant to the Offer through such Soliciting Dealer's efforts, and 3.75% of the
Subscription Price per Share with respect to each Share purchased by Rights
Holders pursuant to the Offer through such Soliciting Dealer's efforts, not
including the exercise of Rights by a Soliciting Dealer for its own account
pursuant to the Offer. A Soliciting Dealer shall be entitled to the foregoing
compensation only where the insertion of such Soliciting Dealer's name has been
made on the Subscription Certificate (as defined in the Prospectus), in the
place so provided and where the Fund and the Dealer Manager shall have received
from such Soliciting Dealer an executed copy of this Agreement in the form
hereof.
No compensation shall be payable in respect of any particular
exercise of Rights if, in the opinion of counsel for the Fund, such compensation
cannot legally be paid in respect of such exercise of Rights because of the
provisions of applicable state law or for any other reason. In the case of any
dispute or disagreement as to the amount of compensation payable to any
Soliciting Dealer hereunder, the decision of the Fund shall be conclusive; and
in the event of any dispute or disagreement as to the proper recipient of any
such compensation, the decision of the Dealer Manager shall be conclusive. The
payment of any compensation to Soliciting Dealers shall be solely the
responsibility of the Fund, and the Dealer Manager shall have no obligation or
liability to any Soliciting Dealer for the payment of such compensation or for
any other obligation of the Fund hereunder.
For the purpose of this Section 2, the Offer will expire on
the Expiration Date set forth in the Prospectus.
3. Trading. You represent that you have not engaged, and agree
that you will not engage, in any activity in respect of the Rights or the Shares
in violation of the Exchange Act, including, without limitation, Rule 10b-6 and
Rule 10b-8 thereunder. Acceptance of compensation by you will constitute a
representation that you are eligible to receive such compensation and that you
have complied with the preceding sentence and your other agreements hereunder.
4. Unauthorized Information and Representations. Neither you
nor any other person is authorized by the Fund or the Dealer Manager to give any
information or make any representations in connection with this Agreement or the
Offer other than those contained in the Prospectus and other authorized
solicitation material furnished by the Fund through the Dealer Manager, and you
hereby agree not to use any solicitation material other than material referred
to in this Section 4. Without limiting the generality of the foregoing, you
agree not to publish, circulate or otherwise use any other advertisement or
solicitation material without the prior approval of the Dealer Manager. You are
not authorized to act as agent of the Fund or the Dealer Manager in any respect,
and you agree not to act as such agent and not to purport to act as such agent.
On becoming a Soliciting Dealer and in soliciting sales and exercises of Rights,
you agree to comply with any applicable requirements of the Securities Act, the
Exchange Act, and the rules and regulations thereunder, and to perform and
comply with the agreements set forth in your confirmation of your acceptance of
this Agreement, a copy of the form of which is appended hereto.
5. Blue Sky and Securities Laws. The Dealer Manager assumes no
obligation or responsibility in respect of the qualification of Rights or Shares
issuable pursuant to the Offer under the laws of any jurisdiction. The enclosed
Blue Sky Memorandum indicates the states in which the Fund believes that
acceptances of the Offer may be solicited under the applicable Blue Sky or
securities laws. Under no circumstances will you as a Soliciting Dealer engage
in any activities hereunder in any state (a) which is not listed in said
enclosed Blue Sky Memorandum as a state in which acceptances of the Offer may be
solicited under the Blue Sky or securities law of such state or (b) in which you
may not lawfully so engage. The Blue Sky Memorandum shall not be considered
solicitation material as that term is herein used. You authorize the undersigned
to cause to be filed in the Department of State of the State of New York a
Further State Notice with respect to the Shares complying with the provisions of
Article 23-A of the General Business Law of the State of New York, if required
by such provisions. The Blue Sky Memorandum has been prepared by the Fund, and
the Dealer Manager assumes no responsibility for the contents thereof.
6. Termination. This Agreement may be terminated by written or
telegraphic notice to you from the Dealer Manager, or to the Dealer Manager from
you, and in any case it will terminate upon the expiration or termination of the
Offer; provided, however, that such termination shall not relieve the Fund of
the obligation to pay when due all fees payable to you hereunder with respect to
Shares acquired pursuant to the exercise of Rights through the close of business
on the date of such termination which are thereafter exercised pursuant to the
Offer, or relieve the Fund, or the Adviser, of its obligations referred to under
Section 8 hereof, and shall not relieve you of any obligation or liability under
Sections 3, 4, 9 and 10 hereof.
7. Liability of Dealer Manager. Nothing herein contained shall
constitute the Soliciting Dealers partners with the Dealer Manager or with one
another, or agents of the Dealer Manager or the Fund, or shall render the Fund
liable for the obligations of the Dealer Manager or the obligations of any
Soliciting Dealer, or shall render the Dealer Manager liable for the obligations
of any Soliciting Dealer other than itself, nor constitute the Fund or the
Dealer Manager the agent of any Soliciting Dealer. The Fund, the Adviser and the
Dealer Manager shall be under no liability to any Soliciting Dealer or any other
person for any act or omission or any matter connected with this Agreement or
the Offer, except that the Fund shall be liable for obligations expressly
assumed by the Fund in Section 2 of this Agreement and the Fund shall be liable
on the basis set forth in Section 8 hereof to indemnify certain persons.
8. Indemnification. Under the Dealer Manager Agreement, the
Fund has agreed to indemnify and hold harmless the Dealer Manager, each
Soliciting Dealer and each person, if any, controlling the Dealer Manager or any
Soliciting Dealer within the meaning of Section 15 of the Securities Act against
certain liabilities, including liabilities under the Securities Act and the
Exchange Act.
9. Delivery of Prospectus. You agree to deliver to each Record
Date Shareholder and Rights Holders who exercises Rights on an exercise form on
which your name, to your knowledge, has been inserted, and any other person to
whom you act as a broker dealer with respect to the sale of a Right, by a Record
Date Shareholder, a Prospectus prior to the offer, sale or exercise of such
person's Rights.
10. Status of Soliciting Dealer. You represent that you are a
member in good standing of the NASD, and you agree (1) to solicit exercises of
Rights only in accordance with the laws applicable to such activities and (2)
that you will conform to the Rules of Fair Practice of the NASD in soliciting
exercises of Rights.
11. Notices. Any notice hereunder shall be in writing or by
telegram and if to you as a Soliciting Dealer shall be deemed to have been duly
given if mailed or telegraphed to you at the address to which this letter is
addressed, and if to the Dealer Manager, if delivered or sent to First Albany
Corporation at 53 State Street, Boston, Massachusetts 02109-2811, Attention:
Michael S. Burd, Senior Vice President.
12. Parties in Interest. The Agreement herein set forth is
intended for the benefit of the Dealer Manager, the Soliciting Dealer, the Fund
and the Adviser.
13. Confirmation. Please confirm your agreement to become one
of the Soliciting Dealers under the terms and conditions set forth herein and in
the attached confirmation on the enclosed duplicate copy of this letter to First
Albany Corporation at 53 State Street, Boston, Massachusetts 02109-2811,
Attention: John H. Howland, Senior Vice President.
Very truly yours,
FIRST ALBANY CORPORATION
As Dealer Manager
By: __________________________
<PAGE>
CONFIRMATION
First Albany Corporation
53 State Street
Boston, Massachusetts 02109-2811
Attention: John H. Howland
Dear Sirs:
We hereby confirm our acceptance of the terms and conditions
of the letter captioned "Soliciting Dealer Agreement" which was attached hereto
upon our receipt hereof (this "Agreement") with reference to the Offer of
Prospect Street High Income Portfolio Inc. (the "Fund") described therein. We
hereby acknowledge receipt of the Prospectus and other solicitation material
referred to in this Agreement, and confirm that in executing this confirmation
we have relied upon such Prospectus and other solicitation material authorized
by the Fund and upon no other representations whatsoever, written or oral. We
also confirm that we are a broker or dealer who is a member in good standing of
the National Association of Securities Dealers, Inc. In connection with the
Offer, we represent that we have complied, and agree that we will comply, with
any applicable requirements of the Securities Act of 1933, the Securities
Exchange Act of 1934, any applicable securities or Blue Sky laws and the rules
and regulations under the Securities Act of 1933, the Securities Exchange Act of
1934 and any applicable securities or Blue Sky laws.
_______________________________
Firm Name
By: ___________________________
Authorized Signature
_______________________________
_______________________________
Dated: _____________, 1996
NOTICE: If a copy of this Agreement is not signed, dated and
returned to the Dealer Manager prior to , 1996 (5 days before the expiration of
the Offer), no fees will be payable hereunder.
<PAGE>
EXHIBIT (l)(1)
[ROGERS & WELLS LETTERHEAD]
May 10, 1996
Prospect Street High Income
Portfolio Inc.
60 State Street
Boston, Massachusetts 02109
Dear Sirs:
We have acted as special counsel for Prospect Street High
Income Portfolio Inc., a Maryland corporation (the "Fund"), in connection with
the filing with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as
amended, of a Registration Statement on Form N-2 (File Nos. 333-2067/811-5557)
(the "Registration Statement") relating to the issuance by the Fund of
transferable rights (the "Rights") to subscribe for up to 8,480,000 Shares of
Common Stock of the Fund, par value $0.01 (the "Shares").
In so acting, we have examined and relied upon originals or
copies, certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinions expressed below.
Based upon the foregoing, and such examination of law as we have deemed
necessary, we are of the opinion that:
1. The Fund has been duly incorporated and is validly existing
as a corporation under the laws of the State of Maryland.
2. The issuance of the Rights and the sale of the Shares have
been duly authorized; when issued as contemplated in the Registration Statement,
the Rights will be legally issued; when issued and paid for upon exercise of the
Rights as contemplated in the Registration Statement, the Shares will be legally
issued, fully paid and nonassessable.
3. The conclusions of U.S. tax law expressed under the
headings "The Offer - Federal Income Tax Consequences of the Offer" and
"Federal Taxation" in the Prospectus contained in the Registration
Statement are true and correct.
As to certain matters governed by the laws of the State of
Maryland, we have relied on the opinion of Piper & Marbury LLP, a copy of which
is attached hereto.
We consent to the filing of this opinion with the Securities
and Exchange Commission as an Exhibit to the Registration Statement and to the
reference to this firm under the heading "Legal Opinions" in such Prospectus. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required under Section 7 of the 1933 Act or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Rogers & Wells
Attachment
<PAGE>
EXHIBIT (l)(2)
[Letterhead of Piper & Marbury]
May 10, 1996
Rogers & Wells
200 Park Avenue
New York, New York 10166
Re: Prospect Street High Income Portfolio Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel to Prospect Street High
Income Portfolio Inc., a Maryland corporation (the "Company"), in connection
with the Company's Registration Statement on Form N-2, including all amendments
or supplements thereto, filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and the
Investment Company Act of 1940, as amended (File Nos. 333-2067 and 811-5557) and
the issuance of shares of the Company's Common Stock, par value of $0.01 per
share (the "Shares"), pursuant to the Registration Statement.
In this capacity, we have examined the Company's Charter and By-Laws,
the proceedings of the Board of Directors of the Company relating to the
issuance of the Shares and such other statutes, certificates, instruments and
documents relating to the Company and matters of law as we have deemed necessary
to the issuance of this opinion. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of all individuals who have
executed any of the aforesaid documents, the conformity of final documents in
all material respects to the versions thereof submitted to us in draft form, the
authenticity of all documents submitted to us as originals, the conformity with
originals of all documents submitted to us as copies and the due authorization,
validity and binding effect of all such documents (other than the authorization,
execution and delivery of the documents by the Company).
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Company has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The issuance of the Rights and the sale of the Shares have been duly
authorized; when issued as contemplated in the Registration Statement, the
Rights will be legally issued; when issued and paid for upon exercise of the
Rights as contemplated in the Registration Statement, the Shares will be legally
issued, fully paid and nonassessable.
You may rely upon this opinion in rendering your opinion to the Company
which is to be filed as an exhibit to the Registration Statement. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Piper & Marbury LLP
<PAGE>
EXHIBIT (n)
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated December 1, 1995 on the financial statements of Prospect Street
High Income Portfolio Inc. for the year ended October 31, 1995 and to all
references to our firm included in or made a part of Pre-Effective Amendment No.
1 to Registration Statement File No. 333-2067 and Amendment No. 14 to
Registration Statement File No. 811-5557.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 9, 1996
<PAGE>
EXHIBIT P
SUBSCRIPTION
As of November 21, 1988
To: The Board of Directors
of Prospect Street High
Income Portfolio Inc.
Gentlemen:
The undersigned hereby subscribes to 11,000 shares of Common Stock (the
"Common Stock"), $0.01 par value, of Prospect Street High Income Portfolio Inc.
at a net price of $9.30 per share and agrees to pay therefor cash in the
aggregate amount of $102,300.
The undersigned represents and warrants that it is acquiring the Common
Stock for its own account with no present intention of distributing the same in
a manner that would violate the Securities Act of 1933, as amended (the "Act").
The undersigned acknowledges that Common Stock has not been registered under the
Act by reason of a specific exemption from the registration provisions of the
Act which depends upon, among other things, the bona fide nature of the
investment intent of the undersigned as expressed herein.
Very truly yours,
PROSPECT STREET INVESTMENT
MANAGEMENT CO., INC.
By: /s/ John A. Frabotta
---------------------
John A. Frabotta
