SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule
14(a)-12
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
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(Name of Registrant as Specified in Charter)
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(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
<PAGE>
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street
Boston, Massachusetts 02109
January _, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Prospect Street High Income Portfolio Inc. (the "Fund") to be held at 60
State Street, 37th Floor, Boston, Massachusetts 02109, on March 11, 1998 at
10:00 a.m. You will have an opportunity to hear a report on the Fund and to
discuss other matters of interest to you as a stockholder.
In addition to the election of directors and the ratification of the
selection of the Fund's independent public accountants, the Board of Directors
is seeking your approval of several other proposals as follows: an Amendment to
the Fund's Articles of Amendment and Restatement authorizing the issuance of a
new class of preferred stock that would be issuable from time to time by the
Board of Directors in one or more series; an Amendment of the Fund's fundamental
investment restriction relating to borrowing and the issuance of Senior
Securities; a change of the Fund's investment policy restricting the purchase of
illiquid securities from a fundamental restriction to a non-fundamental
restriction; and a reverse stock split of the Fund's Common Stock.
Enclosed is a Proxy Statement which outlines these changes in further
detail including the Company's rationale in proposing these changes as well as a
Proxy Card with which you can vote on each of the foregoing matters.
We hope that you will be able to attend the meeting. Whether or not you
plan to attend, please complete, date, sign and mail the enclosed proxy card to
assure that your shares are represented at the meeting.
Sincerely,
Richard E. Omohundro, Jr.
President
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street
Boston, Massachusetts 02109
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on March 11, 1998
The Annual Meeting of Stockholders (the "Annual Meeting") of Prospect
Street High Income Portfolio Inc., a Maryland corporation (the "Fund"), will be
held at 60 State Street, 37th Floor, Boston, Massachusetts 02109, on March 11,
1998 at 10:00 a.m., for the following purposes:
To elect seven Directors of the Fund, two of which shall be elected by
the holders of the Fund's Taxable Auction Rate Preferred Stock and the remainder
of which shall be elected by the holders of the Fund's Common Stock and the
Taxable Auction Rate Preferred Stock, voting together, to hold office until the
next annual meeting of stockholders and until their successors shall have been
duly elected and qualified;
To approve an amendment to the Fund's Articles of Amendment and
Restatement, as amended (the "Charter") authorizing the issuance of a new class
of preferred stock that would be issuable from time to time by the Board of
Directors in one or more series.
To approve an amendment of the Fund's fundamental investment
restriction relating to borrowing and the issuance of senior securities.
To approve a proposal to change the Fund's investment policy
restricting the purchase of illiquid securities from a fundamental restriction
to a non-fundamental restriction.
To approve a reverse stock split of the Fund's Common Stock.
To ratify the selection of Arthur Andersen LLP as independent public
accountants of the Fund for the fiscal year ending October 31, 1998; and
To transact such other business as may properly come before the Annual
Meeting and any adjournment thereof. The matters referred to above may be acted
upon at the Annual Meeting or any adjournment thereof.
The close of business on December 29, 1997 has been fixed as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Annual Meeting and any adjournment thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE
FUND. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, PLEASE
COMPLETE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE
TO VOTE IN PERSON AT THE MEETING, YOU MAY REVOKE YOUR PROXY. HOLDERS OF THE
FUND'S COMMON STOCK SHOULD SIGN AND RETURN THE WHITE PROXY. HOLDERS OF THE
FUND'S TAXABLE AUCTION RATE PREFERRED STOCK SHOULD SIGN AND RETURN THE BLUE
PROXY.
By Order of the Directors
January _, 1998 Karen J. Thelen
Boston, Massachusetts Secretary
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<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street
Boston, Massachusetts 02109
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
March 11, 1998
This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of Prospect Street High Income
Portfolio Inc., a Maryland corporation (the "Fund"), for use at the Fund's
Annual Meeting of Stockholders (the "Annual Meeting") to be held at 60 State
Street, 37th Floor, Boston, Massachusetts 02109, on March 11, 1998 at 10:00
a.m., and at any and all adjournments thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting dated January 6, 1998. The Fund is a
registered investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
This Proxy Statement and the accompanying Notice of Annual Meeting and
form of proxy will be first sent to stockholders on or about January _, 1998.
The Board of Directors has fixed the close of business on December 29, 1997 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting. As of the record date, 30,970,768 shares of the
Fund's Common Stock, $.01 par value per share (the "Common Stock"), were issued
and outstanding and 200 shares of the Fund's Taxable Auction Rate Preferred
Stock, no par value per share, liquidation preference $100,000 per share (the
"Preferred Stock" or "TARPS"), were issued and outstanding. Holders of Common
Stock have one vote per share and holders of Preferred Stock have one vote per
$1,000 of liquidation preference (i.e. 100 votes per share of Preferred Stock)
on all matters submitted to stockholders of the relevant class or classes. To
the Fund's knowledge, no person beneficially owned shares of the Fund
representing more than five percent of the total voting power of all outstanding
shares at December 29, 1997.
If the accompanying form of proxy is properly executed and returned in
time to be voted at the Annual Meeting, the shares covered thereby will be voted
in accordance with the instructions marked thereon by the stockholder. Executed
proxies that are unmarked will be voted (1) FOR the election of the applicable
nominees named herein as Directors of the Fund, (2) FOR the approval of an
amendment to the Fund's Articles of Amendment and Restatement, as amended (the
"Charter") to authorize the issuance of a new class of preferred stock, (3) FOR
the approval of an amendment of the Fund's fundamental investment restriction
relating to borrowing and the issuance of senior securities, (4) FOR the
approval of a proposal to change the Fund's investment policy restricting the
purchase of illiquid securities from a fundamental restriction to a
non-fundamental restriction, (5) FOR the approval of a reverse stock split of
the Fund's Common Stock, (6) FOR the proposal to ratify the selection of Arthur
Andersen LLP as independent public accountants of the Fund for the fiscal year
ending October 31, 1998, and (7) in the discretion of the persons named as
proxies in connection with any other matter which may properly come before the
Annual Meeting or any adjournment thereof. The Board of Directors does not know
of any matter to be considered at the Annual Meeting other than the matters
referred to above. A stockholder may revoke his or her proxy prior to its use by
appearing at the Annual Meeting and voting in person, by giving written notice
of such revocation to the Secretary of the Fund or by returning a subsequently
dated proxy. Holders of Common Stock should sign and return the white proxy.
Holders of Preferred Stock should sign and return the blue proxy.
Shares of Common Stock and Preferred Stock representing a majority of
the votes entitled to be cast shall constitute a quorum at the Annual Meeting.
In the event a quorum is not present at the Annual Meeting or in the event a
quorum is present at the Annual Meeting but sufficient votes to approve any of
the proposals are not received, the persons named as proxies may propose one or
more adjournments of the Annual Meeting to permit further solicitation of
proxies. A stockholder vote may be taken on one or more of the proposals in this
Proxy Statement prior to such adjournment if sufficient votes have been received
and such vote is otherwise appropriate. Any such adjournment will require the
affirmative vote of a majority of those shares present at the Annual Meeting in
person or by proxy.
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<PAGE>
Under Maryland law, abstentions do not constitute a vote "for" or
"against" a matter and will be disregarded in determining the "votes cast" for
purposes of Proposals one through six. Abstentions will, however, be counted as
shares present at the Annual Meeting for purposes of a quorum. Broker
"non-votes" (i.e., proxies from brokers or nominees indicating that such persons
have not received instructions from the beneficial owner or other person
entitled to vote shares on a particular matter with respect to which the brokers
or nominees do not have discretionary power) will be treated as abstentions.
For the election of Directors, the affirmative vote of a plurality of
the applicable voting securities of the Fund present and voting at the Annual
Meeting is necessary.
For the approval of the proposals to (i) amend the Charter to permit
the issuance of new preferred stock, (ii) amend the Fund's fundamental
investment restriction relating to borrowing and the issuance of senior
securities, and (iii) change the Fund's investment policy restricting the
purchase of illiquid securities from a fundamental restriction to a
non-fundamental restriction, a majority of the outstanding shares of Common
Stock and a majority of the outstanding shares of the Preferred Stock, voting as
separate classes is required. Under the 1940 Act, a majority of the outstanding
shares is defined for each class as the lesser of (i) 67% of the outstanding
shares of such class represented at a meeting at which more than 50% of the
outstanding shares of such class are present in person or represented by proxy,
or (ii) more than 50% of the outstanding shares of such class.
For the approval of a reverse stock split of the Fund's Common Stock, a
majority of the outstanding shares of Common Stock and Preferred Stock voting
together in accordance with the voting requirements of the 1940 Act as described
above, is required.
For the ratification of the selection of independent public
accountants, the affirmative vote of the holders of a majority of the Common
Stock and Preferred Stock present and voting together as a single class is
necessary.
In addition to solicitation of proxies by mail, officers of the Fund
and officers and regular employees of Prospect Street Investment Management Co.,
Inc. (the "Manager"), affiliates of the Manager or other representatives of the
Fund may also solicit proxies by telephone or telegraph or in person. The Fund
is retaining a proxy solicitation firm to assist in the solicitation of proxies.
The costs of retaining such a firm will be approximately $30,000, would depend
upon the amount and type of services rendered. The costs of proxy solicitation
and expenses incurred in connection with preparing this Proxy Statement and its
enclosures will be paid by the Fund.
THE INVESTMENT ADVISER
Prospect Street Investment Management Co., Inc., with its principal
office at 60 State Street, Boston, Ma 02109, has served as the investment
adviser to the Fund since its inception in November 1988.
PROPOSAL 1
ELECTION OF DIRECTORS
The stockholders of the Fund are being asked to elect the following
seven nominees as Directors of the Fund, to serve as such until the next annual
meeting of the Fund's stockholders and until their successors shall have been
duly elected and qualified. All nominees named below are presently serving as
Directors of the Fund. All shares represented by valid proxies will be voted in
the election of Directors for the applicable nominees named below, unless
authority to vote for a particular nominee is withheld. Each nominee has agreed
to serve as a Director if elected. If any such nominee is not available for
election at the time of the Annual Meeting, the persons named as proxies will
vote for such substitute nominee as the Board of Directors may recommend.
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<PAGE>
Under the terms of the Charter, the holders of the Fund's Preferred
Stock are entitled as a class, to the exclusion of the holders of the Common
Stock, to elect two Directors of the Fund. John S. Albanese and John A. Frabotta
have been nominated for election by the holders of the Preferred Stock. The
Charter further provides for the election of the other five nominees named below
by the holders of the Common Stock and the Preferred Stock, voting together.
Election of Directors is non-cumulative; accordingly, holders of a majority of
the voting power represented by the outstanding shares of Common Stock and
Preferred Stock, voting together as a single class, or a majority of the
outstanding Preferred Stock, 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 nominees for election to the Board of Directors are as follows:
<TABLE>
<CAPTION>
Number of
Shares of
Common
Stock Ben-
eficially
Owned at
December
Positions Director 29, 1997
Name with Fund Age Since (1) (2)
---- --------- --- ----- -------
<S> <C> <C> <C>
Preferred Stock Nominees
- ------------------------
John S. Albanese Director 46 November, 1989 -0-
John A. Frabotta* Vice President, 55 November, 1988 2,769 (3)
Treasurer, and
Director
Common Stock and
Preferred Stock Nominees
- ------------------------
Richard E. Omohundro, Jr.* President and 57 November, 1988 1,000 (3)
Director
Harlan D. Platt Director 47 November, 1988 -0- (4)
C. William Carey Director 60 November, 1988 9,012
Christopher E. Roshier Director 51 November, 1993 -0-
Joseph G. Cote* Director 55 November, 1988
through
November, 1993
March, 1996 -0- (3)
</TABLE>
- -----------------
*These Directors are deemed to be "interested persons" of the Fund
under the 1940 Act. Messrs. Omohundro and Cote are Co-Presidents of the Manager.
Mr. Frabotta is a Vice President of the Manager.
(1) The amounts shown are based on information furnished by the nominee. Except
as otherwise indicated, each person has sole voting and investment power
with respect to the shares indicated. Fractional shares are rounded off to
the nearest whole share.
(2) No Director is the beneficial owner of more than 1% of the Common Stock
outstanding.
(3) 80,756 shares of Common Stock owned by the Manager.
(4) Does not include 2,372 shares of Common Stock owned by Mr. Platt's wife, as
to which Mr. Platt disclaims beneficial ownership.
-5-
<PAGE>
As of December 29, 1997, all of the officers and Directors of the Fund,
including the Manager, as a group beneficially owned 93,537 shares of Common
Stock, or less than 1% of the outstanding shares of Common Stock. No officer,
Director or nominee for Director of the Fund owns shares of the Fund's Preferred
Stock.
Preferred Stock Nominees
John S. Albanese has been Senior Counsel to Washington Headquarters
Services, a Department of Defense Agency located at the Pentagon since 1992. A
Lieutenant Colonel in the United States Army Reserve, he served on active duty
from 1977 until 1992 in various positions such as: Attorney-Adviser and
Litigation Attorney in the Office of the Judge Advocate General; Legal Counsel
to the U.S. Army Information Systems Selection and Acquisition Agency; and Legal
Adviser to the Defense Attache for the American Embassy in Paris, France.
John A. Frabotta has been Vice President of the Manager since June
1988, Co-Portfolio Manager of the Fund since October 1989 and Portfolio Manager
since October 1990. Previously, Mr. Frabotta was a Vice President of Merrill
Lynch Pierce Fenner & Smith ("Merrill Lynch") from 1979 through June 1988.
Common Stock and Preferred Stock Nominees
Richard E. Omohundro, Jr. has been Co-President of the Manager since
August 1995, has been President or Co-President of the Manager since July 1988
and has been President of the Fund since its inception. Previously he was a
Managing Director of Merrill Lynch from 1983 to 1988 and Co-Manager of the
Merrill Lynch High Yield Bond Group from 1978 through 1987. Mr. Omohundro is
also Co-President and Chief Executive Officer of Prospect Street Senior Loan
Management Co., Inc.
Harlan D. Platt is a Professor of Finance and Insurance, and has been
at Northeastern University, College of Business Administration, since 1981.
C. William Carey is President of Carey Associates, Inc. and formerly
Chairman and Chief Executive Officer of Town & Country Corporation from 1965
until December 1996.
Christopher E. Roshier, a citizen of the United Kingdom, has been a
Corporate Finance Director of European Capital Company Limited in London since
1990 and is a Director of a number of other public and private companies in the
U.K.
Joseph G. Cote has been Co-President of the Manager from February 1989
to November 1993, and has been Co-President of the Manager since August 1995.
Between November 1993 and August 1995 Mr. Cote was a shareholder of the Manager.
From 1978 to 1988 Mr. Cote was a Managing Director of Merrill Lynch and
Co-Manager of the Merrill Lynch High Yield Bond Group. Mr. Cote is also
Co-President of Prospect Street Senior Loan Management Co., Inc.
During the fiscal year ended October 31, 1997, the Directors of the
Fund met five times in person and one time by telephone. During such year each
incumbent Director (either in person or by telephone) attended all of the
meetings of the Board. The Board of Directors has one committee, the Audit
Committee. The Audit Committee is responsible for conferring with the Fund's
independent accountants, reviewing the scope and procedures of the year-end
audit, reviewing annual financial statements and recommending the selection of
the Fund's independent accountants. In addition, the Audit Committee may address
questions arising with respect to the
-6-
<PAGE>
valuation of certain securities in the Fund's portfolio. The Audit Committee is
comprised of Messrs. Carey, Albanese and Platt. The Audit Committee met once in
fiscal 1997.
Remuneration of Directors and Executive Officers
The executive officers of the Fund and those of its Directors who are
"interested persons" of the Fund receive no direct remuneration from the Fund.
Those Directors who are not interested persons are compensated at the
rate of $10,000 annually, plus $2,000 per Directors' meeting attended in person
or $1,000 per Directors' meeting attended by telephone, and are reimbursed for
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 non-interested Directors, receive $1,000 for each Audit Committee
meeting attended, together with actual out-of-pocket expenses relating to
attendance at such meetings. During the fiscal year ended October 31, 1997,
Directors who were not interested persons of the Fund earned fees aggregating
$85,000.
The following table summarizes the compensation paid to the Directors
and Officers of the Fund for the fiscal year ended October 31, 1997.
<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 $22,000 none none $22,000
C. William Carey $22,000 none none $22,000
Christopher E. Roshier $19,000 none none $19,000
John S. Albanese $22,000 none none $22,000
John A. Frabotta none none none none
Joseph G. Cote none none none none
</TABLE>
Share Ownership and Certain Beneficial Owners
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
December 29, 1997. The Depository Trust Company ("DTC") holds of record 90% of
the outstanding shares of Common Stock. All of the outstanding shares of
Preferred Stock of the Fund, which represent approximately less than 1% of the
voting power of the Fund's outstanding shares (i.e. to the extent that the
Common Stock and Preferred Stock 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 Manager
of the Fund beneficially owns 80,756 shares of Common Stock.
-7-
<PAGE>
Required Vote
The election of each of the nominees for Director requires the
affirmative vote of the holders of a plurality of the applicable voting
securities of the Fund present and voting at the Annual Meeting.
The Board of Directors recommends that stockholders vote FOR the
election of the seven nominees to the Fund's Board of Directors.
Pursuant to the Charter, holders of the Common Stock have voting rights
of one vote per share and holders of Preferred Stock 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
share of Preferred Stock); provided that all the votes represented by a single
share of Preferred Stock must be voted together. Under the Articles of
Incorporation and the 1940 Act, the holders of the Preferred Stock, 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). The remaining five Directors
(at least two of whom are not "interested persons" as defined in the 1940 Act)
are elected by the holders of the Common Stock and the Preferred Stock, voting
together. However, in general, upon the Fund's failure to pay dividends on the
Preferred Stock in an amount equal to two full years of dividends, the holders
of the Preferred Stock will have the right to elect the smallest number of
additional Directors as would be necessary to assure that a majority of the
Directors of the Fund have been elected by the holders of the Preferred Stock.
PROPOSAL 2
APPROVAL OF AN AMENDMENT TO THE FUND'S CHARTER
TO AUTHORIZE THE ISSUANCE OF A NEW
CLASS OF PREFERRED STOCK
The Fund's Board of Directors has considered and declared advisable,
and directed the submission to the stockholders of the Fund an amendment (the
"Amendment") to the Fund's Charter, authorizing the issuance of a new class of
preferred stock that would be issuable from time to time by the Board of
Directors in one or more series. The Fund's Board of Directors believes that the
Amendment is in the best interest of the Fund and its stockholders and
recommends that Fund stockholders approve the Amendment as more fully described
below. Under Maryland law, an amendment to the Charter requires the affirmative
vote of the holders of two-thirds of the total number of shares outstanding and
entitled to vote thereto, unless otherwise provided in the Charter. Under the
Charter, approval of the Amendment requires the approval of a majority of the
shares of Common Stock outstanding and entitled to vote thereon and the separate
approval of a majority of the shares of TARPS outstanding and entitled to vote
thereon.
The Amendment has been proposed in connection with the Board's
consideration of the refinancing of the Fund's senior securities (the TARPs and
the senior debt). It is presently contemplated that new senior securities will
be issued as a result of the repayment of the Fund's existing senior
indebtedness ($20 million aggregate principal amount) (the "Notes"), and the
likely mandatory redemption of the outstanding TARPS ($20 million aggregate
liquidation preference which expire in December 1998, unless extended prior to
June 5, 1998). Adoption of the Amendment would permit the issuance of shares of
a newly established preferred stock in one or more series to replace all or a
portion of the outstanding senior securities of the Fund. The Board of Directors
believes that providing the authority to issue preferred stock, possibly with
more flexible terms than the terms of the existing TARPS, would be in the best
interest of the Fund and its stockholders because such new preferred
-8-
<PAGE>
stock could over the long term, result in a lower cost of leverage for the Fund,
while also providing flexibility to alter the Fund's capital structure in
response to future changes in the capital markets. Stockholders should consider
the risks associated with the Fund's leveraged capital structure. See "Special
Risks" below. Holders of Common Stock and TARPS would have no preemptive rights
to purchase or otherwise acquire any preferred stock that might be issued.
Approval of the Amendment and the related amendment to the Fund's
fundamental investment restriction described in Proposal Three below are
conditions to completion of any refinancing transaction of the type described
herein. Also, if the Amendment and the related amendment in Proposal Three are
approved, the Board of Directors would be authorized to determine when and
whether to implement the Amendment by issuing a new preferred stock. Although it
is the Fund's present intention to pursue a refinancing transaction in which a
new preferred stock is issued, the Fund will consider such a transaction in
light of conditions in the financial markets and other relevant factors from
time to time. Accordingly, there can be no assurance that the Fund will complete
a refinancing transaction involving the issuance of new preferred stock.
However, the Fund is seeking stockholder approval of the Amendment in order to
provide it with the ability to effect such a transaction, and implementation of
the Amendment through the ultimate issuance of new preferred stock, will, after
stockholder approval, remain subject to the discretion of the Board of
Directors, which reserves the right to leave the TARPS in place.
Current and Prior Leverage Arrangements
At the time of its establishment in 1988, the Fund issued $50 million
aggregate principal amount of Senior Extendible Notes (the "Senior Extendible
Notes") and $30 million (aggregate liquidation preference) of TARPS, the
dividend rate for which is set in monthly auctions. Subsequent deleveraging
transactions resulted in repurchases of $45 million of the Senior Extendible
Notes. In July 1993, the Fund repurchased one-third of the then outstanding
TARPS and issued, in a private placement, $20 million aggregate principal amount
of the Notes, which are payable December 1, 1998. (The Notes replaced the Senior
Extendible Notes). The interest rate on the Notes was established at the fixed
rate of 6.53% through November 20, 1998 and the dividend rates on the TARPS have
ranged from a low of 3.385% in 1993 to a high of 6.6% in 1994. At December 31,
1997, $20 million aggregate principal amount of Notes and $20 million aggregate
liquidation preference of TARPS remain outstanding.
In November 1988, the Fund entered into a surety bond arrangement with
respect to the TARPS. Under this arrangement, Financial Security Assurance Inc.
("FSA") guaranteed payment of dividends and any redemption payments with respect
to the TARPS for a premium of .40% per annum of the aggregate liquidation
preference of the TARPS. The surety bond will expire on December 5, 1998.
From the Fund's inception through February 1990, Drexel
Burnham Lambert served as a broker-dealer in connection with auctions of the
TARPS. Drexel Burnham Lambert ceased to perform this function at the time of its
bankruptcy in February 1990. As a consequence, the TARPS auctions in early 1990
failed to attract sufficient clearing bids, resulting in the payment of
dividends at the maximum applicable rate specified for the TARPS. Subsequently,
in May 1990, the Fund engaged Bear, Stearns & Co. Inc. ("Bear Stearns") as
exclusive broker-dealer with respect to the TARPS. Under this arrangement, Bear
Stearns agreed to use reasonable commercial efforts to facilitate auctions of
the TARPS. The aggregate charges to the Fund for the Bear Stearns arrangements
have been $100,000 per year.
-9-
<PAGE>
The Fund intends to engage in discussions with Bear Stearns with respect to the
continuation of its broker-dealer services regarding replacement of the TARPS in
December 1998, if not before.
Since the issuance of the TARPS in 1988, the use of auction rate
preferred and similar preferred stocks by investment companies has become
relatively widespread. Although the general structure of current auction rate
preferred stocks is similar to that of the TARPS, the terms of some current
preferred stocks offer issuers more flexibility than do the terms of the TARPS.
The Board of Directors of the Fund has engaged in an ongoing review and
analysis of the Fund's capital structure, as a result of this analysis, the
Board of Directors has concluded that it would be in the best interests of the
Fund and its shareholders for the Board of Directors to have the flexibility to
replace the TARPS with an issue in one or more series of auction term or other
preferred stock and to ultimately supplement or refinance and/or possibly
refinance and enlarge the existing Note facility. The Board believes that a
capital structure which includes auction term or other preferred stock over the
long term could result in a lower cost of leverage for the Fund while providing
flexibility to meet changing market conditions. The Fund's Investment Adviser is
exploring the advisability of the issuance of a new auction term preferred stock
which would replace the TARPS. The Board has accordingly recommended the
amendment to the Charter described below.
The Proposed Amendment and Certain Legal Requirements
The Fund's Charter presently authorizes two classes of stock, Common
Stock and TARPS. If the Amendment and the related amendment set forth in
Proposal Three are approved by stockholders (and subject to the Board's
determination to proceed with a preferred stock refinancing and therefore issue
new preferred stock), the Fund's Charter would be amended to authorize the Fund
to issue up to 1,000,000 shares of preferred stock, par value of $1.00 per
share, issuable in one or more series. Thereafter, the Board of Directors would
be able to authorize the issuance of such preferred stock from time to time
without the approval of stockholders. The Amendment would authorize the Board of
Directors to divide such preferred stock into one or more series and to
determine the terms of each series, including but not limited to the redemption
provisions and dividend rate. In the event preferred stock is issued pursuant to
the Amendment, the TARPS would be redeemed and would no longer be authorized
stock of the Fund. A copy of the form of the Amendment is attached hereto as
Exhibit A. The Board of Directors reserves the right to make minor changes to
the form of Amendment set forth in Exhibit A prior to the Annual Meeting as it
may deem necessary or appropriate to the extent not inconsistent with the
description of the Amendment set forth in this Proposal.
It is contemplated that any new preferred stock issued would include
the ability to set adjustable dividend terms ranging from a period of days to a
period of years for any series. The Fund believes that this would provide
flexibility in adapting the Fund's leverage to changing market conditions over
time. Requiring the stockholders to meet and approve each separate issuance of
preferred stock would be time-consuming and costly and could, in some instances,
prevent the Fund from taking advantage of market opportunities that would
otherwise be available.
The ability of the Board of Directors to authorize the issuance of
preferred stock and to determine the terms of such stock is subject to certain
requirements under the 1940 Act. Pursuant to the requirements of the 1940 Act,
the Fund is authorized to issue preferred stock
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only to the extent that it has "asset coverage" of 200% immediately after such
issuance. "Asset coverage" means the ratio that the value of the Fund's total
assets, less all liabilities and indebtedness not represented by senior
securities, bears to the aggregate amount of senior securities representing
indebtedness of the Fund, if any, plus the aggregate liquidation preference of
any outstanding preferred stock.
The 1940 Act requires that preferred stock be voting stock having equal
voting rights with other outstanding voting stock, except as otherwise required
by law and except that holders of preferred stock have certain class voting
rights under the 1940 Act, which are summarized in this paragraph. The holders
of preferred stock, voting as a class, would have the right to elect two of the
Fund's Directors. In addition, if at any time dividends on the preferred stock
are unpaid in an amount equal to two full years' dividends thereon, the holders
of all outstanding preferred stock, voting as a class, would be entitled to
elect a majority of the Fund's Directors, until such arrearage has been cured.
In addition to any approval by stockholders that might otherwise be required,
the approval of the holders of a majority of any outstanding preferred stock,
voting as a class, would be required to (a) adopt any plan of reorganization
that would adversely affect the preferred stock and (b) take any action
requiring a vote of security holders pursuant to section 13(a) of the 1940 Act
including, among other things, changes in the Fund's subclassification as a
closed-end investment company, changes in its investment objective or changes in
its fundamental investment restrictions. The vote of the holders of the
preferred stock, voting as a class, may also be required with respect to certain
actions under Maryland corporate law. The Amendment would amend the current
voting provisions set forth in Article VI of the Charter effective upon the
elimination of the TARPS by removing all references to the TARPs and all special
voting requirements that must be followed so long as the TARPs are outstanding.
In addition, the Board of Directors may create additional voting rights for the
preferred stock.
The 1940 Act restricts the dividends the Fund may pay on its Common
Stock so long as it has preferred stock outstanding. The Fund could not declare
any dividend (other than a stock dividend) or other distribution with respect to
its Common Stock unless at the time of such declaration all accrued dividends on
the preferred stock have been paid and the 200% asset coverage test, described
above, would be met after deducting such dividend or distribution.
Contemplated Offering
Subject to stockholder approval of the Amendment and the proposed
amendment to the Fund's fundamental investment restriction relating to the
issuance of senior securities described below in Proposal Three, the Fund's
Board is contemplating the issuance sometime in 1998 of preferred stock and the
concurrent redemption or defeasance of the TARPS. The Fund's Investment Adviser
is currently engaged in discussions with Bear Stearns & Co., Inc. the
broker-dealer for the TARPS, with regard to the possible issuance of an auction
term preferred stock to replace the TARPS. Any offering of preferred stock would
be subject to market conditions and to the continuing belief of the Board of
Directors that leveraging the Fund's capital structure through the issuance of
preferred stock is in the best interests of the Fund and its stockholders. There
can be no assurance that preferred stock will be issued or, if issued, that the
terms of such preferred stock will be as currently being considered and
described below. If such offering of preferred stock is not undertaken or
completed, the Fund would consider other available options, including keeping
the TARPS outstanding, seeking to refinance or extend the term of and/or expand
the size of $20 million Note facility and/or seeking other sources of senior
debt financing. Further, there can be no assurance of any extension or
refinancing of the Note facility beyond its December 1, 1998 maturity date.
-11-
<PAGE>
Accordingly, it is possible that the Fund could become deleveraged for a period
of time and/or be required to pay dividends on the TARPS at a relatively high
rate, and any such deleveraging or payment could adversely affect returns to
holders of Common Stock and result in increased costs and potential losses to
the Fund in connection with the liquidation of portfolio securities.
A preferred stock alternative currently being considered by the Fund's
Board is an auction term preferred stock issuable in series which would enable
the Board to designate the dividend period for shares of any series from time to
time. The dividend period could vary from as short as several days to as long as
several years. The dividend rate payable with respect to the shares would be
determined pursuant to an auction and would vary based upon market conditions
and the dividend period selected by the Fund for the relevant series. The
dividends paid on the preferred stock would be considered, for tax purposes,
distributions of net investment income and capital gain, if any, by the Fund.
It is anticipated that the preferred stock may be subject to optional
redemption by the Fund from time to time (subject to applicable notice and other
requirements). To the extent the Fund opts for a relatively longer dividend
period for any series, the Fund's right to redeem the preferred stock of such
series at its option could be limited or eliminated. The Fund will be required
to redeem the preferred stock under certain limited circumstances. Such
redemption may cause the Fund to incur certain costs, including costs associated
with the deleveraging of the Fund.
The Board of Directors believes the under certain market conditions it
may be beneficial for a portion of its senior capital structure to have a fixed
rate of dividends or interest for a relatively long period and for a portion to
have a variable rate of dividends or interest reflecting short-term rates. The
Board believes that this structure provides some protection against changes in
short-term rates, given the longer-term nature of most of the Funds portfolio
securities. Accordingly, the Fund may seek to issue the preferred stock in more
than one series, with one or more series having relatively short initial
dividend periods and one or more other series having relatively long initial
dividend periods, although all of such series may initially be issued with a
relatively short dividend period. Alternatively, or in addition, the Fund may
seek to enter into an interest rate hedging transaction, such as an interest
rate swap, cap or other arrangement with respect to a portion of any auction
term preferred stock that it may issue, although there can be no assurance as to
whether or when such an arrangement will be deemed desirable, or be implemented.
Under such an arrangement, the holders of all outstanding shares of auction term
preferred stock would receive dividends at the rate determined in the auction
for the relevant series. However, with respect to a portion of the outstanding
auction term preferred stock, the hedging transaction would provide that the
Fund would be reimbursed for any dividends the Fund paid in excess of a
specified rate (in the case of a cap, for example) or would be reimbursed for
dividends the Fund paid in excess of a specified rate and would be required to
reimburse the counter-party in the event dividends were below the specified
rates (in the case of a swap, for example). The costs of any such arrangement
and the payments made or received by the Fund thereunder would be borne by or
inure to the benefit of the Fund's holders of Common Stock.
The TARPS currently provide for a maximum dividend rate in the event
sufficient clearing bids do not exist in an auction. It is anticipated that the
maximum dividend rate applicable to the new preferred stock in the event
sufficient clearing bids do not exist or under certain other circumstances could
exceed that of the TARPS. Although this may result in the dividend payments on
the preferred stock being greater than the dividends that would have been
payable on the TARPS, the higher maximum dividend rate of the new preferred
stock
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<PAGE>
may result in increased participation in auctions for such stock, thereby
reducing, in practice, the dividend rate payable for the new preferred stock.
The Fund proposes to seek a rating for any new preferred stock from one
or more nationally recognized rating agencies. In connection with such rating,
such rating agencies will impose certain asset coverage and liquidity
requirements, in addition to the asset coverage requirements under the 1940 Act
described above. Such requirements could differ from those applicable to the
Notes and TARPS under the Fund's existing arrangements.
As in the case of the TARPS, holders of preferred stock would be
entitled to receive dividends before holders of Common Stock and would be
entitled to receive the liquidation value of their shares before any
distributions are made to holders of Common Stock should the Fund ever be
liquidated and dissolved.
There can be no assurance that the offering of any preferred stock
described herein will be undertaken, completed or completed on the terms
described.
Special Risks
Current Capital Structure. As noted above, the TARPS facility expires
in December 1998 (unless extended prior to June 5, 1998). However, there can be
no assurance that any new preferred stock will be issued or that the Fund will
not be required to redeem the TARPS and retire the Note facility (which also
matures in December 1998) prior to any issuance of new preferred stock or other
senior securities, which would involve the liquidation of portfolio securities,
related costs, possible realization of losses, and reduced investment returns to
holders of Common Stock prior to releveraging.
Leverage. Holders of Common Stock are already subject to the following
special risks of leverage as a result of the Fund's existing leveraged
structure. As long as the Fund is able to invest the net assets of the Fund
attributable to the preferred stock offering in securities that provide a higher
net return than the then current dividend rate of the preferred stock after
taking into account the expenses of the preferred stock offering and the Fund's
operating expenses, the effect of leverage will be to cause holders of Common
Stock to realize a higher rate of return than if the Fund was not leveraged.
However, if the dividend rates on the preferred stock were to approach the net
return on the Fund's investment portfolio after expenses, the benefit of
leverage to holders of Common Stock would be reduced, and if the dividend rates
on the preferred stock were to exceed the net return on the Fund's portfolio,
the Fund's leveraged capital structure would result in a lower ratio of return
to the holders of Common Stock than if the Fund had an unleveraged capital
structure. If the Fund's senior capital structure consists exclusively of
preferred stock, the Fund will be permitted to leverage its capital structure to
a greater extent than a fund with a senior capital structure consisting of debt
(i.e. the Notes) and preferred stock, such as the Fund's existing capital
structure (which may be continued).
Leverage creates risks for holders of Common Stock, including the
likelihood of changes of greater magnitude in the net asset value and
potentially the market value of the Common Stock, and the risk that fluctuations
in the dividend rates of the preferred stock may adversely affect the yield to
holders of Common Stock. Holders of Common Stock will receive all net investment
income and net realized capital gains, if any, of the Fund remaining after
payment of dividends on any outstanding preferred stock. [In this regard, it is
anticipated that the new preferred stock could have a higher maximum dividend
rate than the TARPS, as described above. Upon any liquidation of the Fund, the
holders of the preferred
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<PAGE>
stock will be entitled to receive liquidating distributions (expected to equal
the original offering price per preferred share plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned or
declared on a cumulative basis) before any distribution is made to holders of
Common Stock.
Portfolio Management. As indicated above, the Fund will be subject to
certain asset coverage and other financial requirements that may be based, in
part, on the overall quality of the portfolio. Accordingly, these requirements
may impact the manner in which the investment adviser manages the Fund's
portfolio. A leveraged capital structure also places greater reliance on the
ability of the Fund's Investment Adviser to predict trends in interest rates
than if the Fund's capital structure were not leveraged. If the Fund determines,
or is otherwise required, to redeem any of the preferred stock, the Fund may be
required to pay a redemption premium and may have to liquidate portfolio
securities at an inopportune time. Further, redemption of the preferred stock
and the related trading of the Fund's portfolio securities would result in
increased transaction costs to the Fund and its holders of Common Stock. Because
the holders of Common Stock bear such expenses through reduction in the net
asset value of the Common Stock, any expenses and losses resulting from such
management or the composition of the Fund's portfolio will have a
proportionately greater impact on holders of Common Stock. Holders of Common
Stock are already subject to the portfolio management risks described above.
Certain Tax Considerations. Substantially all of the net income
realized by the Fund is interest income, which when distributed to stockholders
as dividends is treated as ordinary income. The Internal Revenue Service
currently requires that a regulated investment company that has two or more
classes of shares allocate to each such class proportionate amounts of each type
of its income (such as ordinary income and net long-term capital gains) for each
tax year. However, it is not clear how this requirement applies with respect to
undistributed net long-term capital gains. [The Fund currently has substantial
capital loss carryovers available to offset future capital gains, if any, to the
extent provided by regulations promulgated by the Internal Revenue Service. To
the extent that capital loss carryovers are used to offset realized capital
gains, it is unlikely that gains so offset will be distributed to stockholders.
Upon utilization of the capital loss carryovers, the Fund intends to distribute
all of its net long-term capital gains for any years during which it has
preferred stock outstanding unless the Fund determines that it could retain such
capital gains (or a part thereof) without adverse economic or tax consequences.]
During any period when the Fund's net investment income and
undistributed net realized capital gains are insufficient to pay the dividends
then due on any outstanding preferred stock, such inability to pay dividends on
the preferred stock would adversely affect the net asset value of the Common
Stock and would preclude the Fund from paying dividends on the Common Stock
until such dividends on the preferred stock have been paid or provided for. As
described above, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of such declaration and
after deducting the amount of such dividend or distribution, the Fund in
compliance with the 200% asset coverage requirements of the 1940 Act or the more
stringent dividend and distribution limitations on the Common Stock imposed in
connection with the Fund obtaining an investment grade rating of the preferred
stock. Such prohibition on the payment of dividends or distributions might
impair the Fund's ability to maintain its qualification as a regulated
investment company for federal income tax purposes or to avoid an excise tax
(currently %) for the failure to distribute a specified percentage of net
investment income and capital gains. If the Fund failed to qualify as a
regulated investment company in any taxable year, it would be taxed as an
ordinary corporation. The Fund would expect, however, to the extent possible
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<PAGE>
to purchase or redeem preferred stock from time to time, if necessary, to
maintain compliance with such asset coverage requirements. There can be no
assurance that such purchases or redemptions could be effected so as to bring
the Fund into compliance in time to enable the Fund to distribute its income so
as to maintain its qualification as a regulated investment company.
Other Considerations. The purpose of the Amendment is to make available
a mechanism for increasing the flexibility of the Fund in managing its capital
structure. However, issuances of preferred stock can be implemented, and have
been implemented by some companies in recent years, with voting provisions
intended to make acquisition of control of a company more difficult. Such
issuance could limit stockholders' participation in certain types of
transactions that might be proposed, whether or not such transactions were
favored by a majority of the stockholders, and could enhance the ability of
officers and directors to retain their positions.
If approved by the stockholders, the preferred stock that would be
authorized by the Amendment would be available for defensive use by the Fund.
For instance, if the Fund were to convert to an open-end investment company, any
outstanding preferred stock would have to be redeemed prior to any such
conversion. The Fund's Board of Directors is not currently aware of any efforts,
pending or threatened, to acquire control of the Fund or to force a conversion
to open-end status, merger, sale of assets, or liquidation or dissolution of the
Fund, and the purpose in presenting the Amendment is not to have available a
defensive mechanism.
The discussion above describes an issuance of preferred stock that is
currently being considered by the Fund's Board of Directors. The Amendment would
give broader authority than the issuance of the series of preferred stock
generally described above. Such broad authorization to issue preferred stock in
one or more series will provide the flexibility to take advantage of market
opportunities for which the issuance of preferred stock would be deemed
desirable by the Fund. Requiring the stockholders to meet and approve each
separate issuance of preferred stock would be time-consuming and costly, and
could cause the Fund to miss opportunities that might arise from time to time.
Accordingly, the Fund's Board of Directors recommends that stockholders approve
the Amendment.
Approval of Proposal Two is contingent upon approval of Proposal Three
relating to the Fund's fundamental investment restriction with respect to senior
securities. The Board of Directors would have full authority to determine when
and whether to cause the Amendment to be utilized through the issuance of new
preferred stock (assuming stockholder approval is obtained) based on the
Adviser's ongoing review of and advice to the Board regarding the financial
markets and other relevant factors. In any event, the new preferred stock
authorized by Proposal One, if approved, would not be issued except in
connection with the redemption or defeasance of the existing TARPS.
Implementation of the Amendment through the issuance of new preferred stock
will, after stockholder approval, remain subject to the discretion of the Board
of Directors, which reserves the right to leave the TARPS in place. Approval of
the Amendment requires the approval of a majority of the outstanding shares of
Common Stock and a majority of the outstanding shares of TARPS, voting as
separate classes. Under the 1940 Act, a majority of the outstanding shares is
defined for each class as the lesser of (i) 67% of the outstanding shares of
such class represented at a meeting at which more than 50% of the outstanding
shares of such class are present in person or represented by proxy, or (ii) more
than 50% of the outstanding shares of such class. Should the Fund fail to obtain
the required vote from the holders of the TARPS, the Fund reserves the right to
redeem the TARPS and to the extent required by Maryland law or the 1940 Act,
resubmit the Amendment to the holders of its Common Stock alone.
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<PAGE>
The Board of Directors, including those Directors who are not
interested persons of the Fund, unanimously recommends that you vote FOR
Proposal Two.
PROPOSAL 3
APPROVAL OF AN AMENDMENT OF
THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
RELATING TO BORROWING AND THE ISSUANCE OF SENIOR SECURITIES
The Fund's fundamental investment restriction with respect to the
issuance or senior securities presently contemplates only the issuance of TARPS
for the purpose of providing preferred stock financing. Thus, in order for the
Fund to be permitted to issue preferred stock as described in Proposal One, it
is also necessary to amend the Fund's investment restriction relating to
borrowing and the issuance of senior securities. In conjunction with the Board's
consideration and approval of the Amendment, the Board of Directors has
approved, subject to stockholder approval, an amendment of the Fund's investment
restrictions that would allow the Fund to borrow money and issue senior
securities, including preferred stock, to the full extent permitted by the 1940
Act. The Board of Directors believes that this change is in the best interests
of the Fund and its stockholders, and recommends that the stockholders approve
the change as more fully described below.
The current investment restriction of the Fund relating to investments
in senior securities provides as follows:
"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 [as defined under "Description of Notes--Asset
Maintenance" in the November 1988 and subsequent prospectuses of the
Fund] 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, [TARPS] or debt instruments related to borrowings described
under "Investment Policies and Limitations--Certain Investment
Strategies--Additional Leverage" [in the November 1988 and subsequent
prospectuses of the Fund] 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 331/3%
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 [TARPS]."
The Board of Directors recommends that fundamental investment
restriction number 1 of the Fund be amended and restated in its entirety as
follows:
The Fund may not;
1. Borrow money (through reverse repurchase agreements or
otherwise) or issue any senior securities (as defined in the 1940 Act)
except as permitted by the 1940 Act.
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<PAGE>
Discussion
The Fund's Board has recommended this change to stockholders to
accommodate the possible issuance of preferred stock pursuant to the Amendment.
The Board believes that this change will provide appropriate flexibility in
adapting the Fund's capital structure to changing market conditions, consistent
with the protections provided in the 1940 Act. Under the revised fundamental
investment restriction, the Fund could issue senior securities representing
indebtedness and/or preferred stock (see below) as the Board deemed appropriate
from time to time. The revised restriction would permit the Fund to issue
preferred stock, commercial paper, bonds, debentures or notes, in series or
otherwise, with such interest rates, dividend rates, conversion rights and other
terms and provisions, as are determined by the Board of Directors, consistent
with the requirements of the 1940 Act.
The 1940 Act generally imposes a 300% "asset coverage" test for "senior
securities representing indebtedness" and a 200% "asset coverage" test for
"senior securities representing stock." The 1940 Act generally restricts
distributions to holders of common stock and preferred stock while any senior
security representing indebtedness is outstanding and restricts distributions to
the holders of common stock while any senior security representing stock is
outstanding, unless such coverage requirements are satisfied. Furthermore, the
1940 Act generally limits registered closed-end investment companies, such as
the Fund, from issuing more than one class of senior securities representing
indebtedness and more than one class of senior securities representing stock,
subject to various exceptions. Under the 1940 Act, temporary borrowings in an
amount not exceeding 5% of the Fund's total assets (not including the amount
borrowed) are not be deemed a senior security, consistent with the current
restriction.
As indicated in Proposal Two, the Fund is contemplating a refinancing
of its senior capital structure through the issuance of one or more series of a
new preferred stock. The Fund may also continue to issue senior securities
representing indebtedness following refinancing or repayment of its existing
Note facility, although it reserves the right not to do so. The Board of
Directors believes that the current investment restriction relating to senior
securities, which limits senior securities representing stock solely to the
TARPS, now unduly limits the Fund's flexibility with respect to its capital
structure. The Board accordingly believes that it is in the best interests of
the Fund and its stockholders to provide the Fund with the flexibility to issue
senior securities (including senior securities representing stock) from time to
time in the future without the necessity of obtaining further stockholder
approval, through the approval of the revised fundamental investment
restriction. The proposed amendment to the Fund's fundamental investment
restriction relating to borrowing and the issuance of senior securities, if
approved by stockholders, will become effective concurrently with the
effectiveness of the Amendment described in Proposal Two.
See "Proposal 2 -- Special Risks -- Leverage."
Conclusion
The proposed amendment of the Fund's investment restriction number 1
requires the approval of the holders of a majority of the outstanding shares of
Common Stock and a majority of the outstanding shares of TARPS, voting as
separate classes. Under the 1940 Act, a majority of the outstanding shares is
defined for each class as the lesser of (i) 67% of the outstanding shares of
such class represented at a meeting at which more than 50% of the outstanding
shares of such class are present in person or represented by proxy, or (ii) more
than 50% of the outstanding shares of such class.
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<PAGE>
The Board of Directors unanimously recommends that stockholders vote
FOR the foregoing investment restriction amendment.
PROPOSAL 4
APPROVAL OF A PROPOSAL
TO CHANGE THE FUND'S INVESTMENT POLICY
RESTRICTING THE PURCHASE OF ILLIQUID SECURITIES FROM A
FUNDAMENTAL RESTRICTION TO A NON-FUNDAMENTAL RESTRICTION
The Fund currently is subject to a fundamental investment restriction
which precludes it from investing more than 30% 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." "Fundamental"
investment restrictions are those which may be altered only by stockholder vote.
The Board of Directors of the Fund has recommended that the Fund's stockholders
approve the elimination of the fundamental nature of this investment restriction
for the reasons set forth below.
The current investment restriction of the Fund relating to investments
in securities that are not readily marketable provides as follows:
"The Fund may not:
. . . .
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."
If this Proposal is approved by stockholders, investments in securities
that are not readily marketable will no longer be restricted by a fundamental
investment restriction. However, the Directors intend to replace this
fundamental restriction with a non-fundamental restriction providing that the
Fund will not invest more than 30% of its total assets in securities that are
not readily marketable (determined as of the time of investment). Under the
revised restriction, securities that may be restricted as to resale under
federal securities laws or otherwise would not be subject to the 30% restriction
to the extent such securities were determined by the Fund's investment adviser
(acting under the supervision of the Board) to be readily marketable as of the
time of purchase. Such securities could theoretically include, for example,
certain securities eligible for resale under Rule 144A promulgated by the
Securities and Exchange Commission (the "Commission"). If adopted, the new
non-fundamental restriction could be changed by vote of the Directors in
response to regulatory, market or other developments without further approval by
stockholders.
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<PAGE>
Although the Fund intends to retain a 30% limit on investments in
securities which are not readily marketable, adoption of this proposal will
allow the Fund to respond more quickly to regulatory, market or other
developments and to invest without limit in restricted securities, including
those eligible for resale under Rule 144A, determined by the Investment Adviser
to be readily marketable. The new policy would be effective concurrently with
the effectiveness of the Amendment, and upon receipt of consent from FSA and the
Fund's senior lender in the event the TARPS or the existing Senior Note are then
outstanding.
Discussion
In general, securities that are not readily marketable have included
those enumerated in the fundamental investment restriction currently in effect
for the Fund (e.g., securities that are restricted as to disposition under the
federal securities laws or otherwise). Such restricted securities could include
securities eligible for resale under Rule 144A, if such securities are
determined by the Fund's Adviser (acting pursuant to Board supervision) to be
"not readily marketable" at the time of acquisition.
The markets for certain types of securities, such as repurchase
agreements, commercial paper, many types of municipal securities and some
corporate bonds and notes, are almost exclusively institutional. These
instruments are often restricted securities because the securities are either
themselves exempt from registration or sold in transactions not requiring
registration. Institutional investors will, therefore, often rely either on the
issuer's ability to honor a demand for repayment in less than seven days or on
an institutional market in which the unregistered security can be readily
resold. The fact that there may be legal or contractual restrictions on resale
to the general public, therefore, may not be dispositive with respect to the
liquidity of such investments.
The Commission has adopted Rule 144A, which is viewed as a step toward
achieving a more liquid and efficient institutional resale market for restricted
securities. In adopting Rule 144A, the Commission indicated that restricted
securities traded under Rule 144A may be treated as liquid for purposes of
applying the investment limitations of registered open end investment companies
if the board of directors (or a fund's adviser acting subject to the board's
supervision) determines that the securities are liquid. The Fund currently makes
individual analyses (in accordance with certain SEC guidelines) with respect to
Rule 144A securities to determine whether they are readily marketable (liquid)
and will continue to do so, in any event, upon adoption of this Proposal. As
these institutional markets continue to develop, the Fund could be constrained
by its current investment restriction even though the institutional restricted
securities markets would provide ascertainable values and liquidity for such
restricted securities. The Board of Directors recommends that the current
fundamental investment restriction be eliminated so that Rule 144A and certain
other restricted securities that are deemed liquid may be purchased without
regard to the 30% limit.
Securities of foreign issuers acquired in a Rule 144A transaction may
also be resold pursuant to new Regulation S promulgated by the Commission. Under
Regulation S, U.S. holders of unregistered securities may resell them in an
offshore transaction, such as through the facilities of designated, major
foreign exchanges, under certain circumstances, provided that no directed
selling effort is made in the United States and that the transaction has not, to
the knowledge of the seller or the broker, been prearranged with a buyer in the
United States. Accordingly, Rule 144A is providing new liquid markets for both
domestic securities and foreign securities.
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<PAGE>
At the direction of the Board of Directors, the Fund's Investment
Adviser has implemented procedures to determine the liquidity of restricted
securities held by the Fund, subject to the oversight of the Board. Because
institutional trading in Rule 144A securities is relatively new, it is not
possible to predict how institutional markets will further develop. If
institutional trading in Rule 144A securities were to become limited in the
future, the liquidity of the Fund's portfolio could be adversely affected.
Specifically, it is possible that a restricted security deemed liquid at the
time of investment (i.e. a Rule 144A security) could become illiquid over time
because of market or other (regulatory) developments. This could result in the
Fund holding more than 30% of its total assets in illiquid securities at certain
times. Under such circumstances in the absence of stockholder approval of this
Proposal (and by virtue of the current fundamental investment restriction), the
Fund's holdings of illiquid (i.e. not readily marketable) securities would be
reviewed and a determination would be made as to what steps, if any, should be
taken. Under such circumstances the Fund could not make any additional
investments in illiquid securities until illiquid assets in its portfolio
comprise less than 30% of its total assets.
The Fund is also subject to various investment limitations pursuant to
certain over-collateralization guidelines required by rating agencies or
financial guarantors in connection with the issuance of ratings with respect to
the Fund's senior securities. Under these restrictions, the Fund's ability to
invest in securities restricted as to resale may be limited or as a practical
matter eliminated. Consequently, notwithstanding any adoption of the revised
policy described herein, the Fund's holdings of restricted securities may not be
significant.
Conclusion
The Board of Directors has considered this Proposal and believes that
changing the Fund's investment restriction on illiquid securities from
fundamental to non-fundamental, and thereby rendering it subject to further
modification by the Board of Directors (without further stockholder approval),
is in the best interests of stockholders. The proposed amendment of such
investment restriction requires the approval of the holders of a majority of the
outstanding shares of Common Stock and a majority of the outstanding shares of
TARPS, voting as separate classes. Under the 1940 Act, a majority of the
outstanding shares is defined for each class as the lesser of (i) 67% of the
outstanding shares of such class represented at a meeting at which more than 50%
of the outstanding shares are present in person or represented by proxy, or (ii)
more than 50% of the outstanding shares of such class.
The Directors unanimously recommend that stockholders vote FOR the
elimination of the fundamental nature of such investment restriction.
PROPOSAL 5
APPROVAL OF A REVERSE STOCK SPLIT OF THE FUND'S COMMON STOCK
The Board of Directors believes it would be in the best interests of
the Fund and its stockholders to effect a reverse stock split of three shares of
the Fund's issued and outstanding Common Stock for one new share of Common Stock
(the "Reverse Stock Split"). In this regard, the Board has unanimously approved,
and recommends to the holders of the Common Stock that they approve, the Reverse
Stock Split, as described hereinafter.
The Board of Directors believes that the current per share price of the
Common Stock may limit the effective marketability and liquidity of the Common
Stock due to the reluctance of many brokerage firms and institutional investors
to recommend lower-priced stocks to their
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<PAGE>
clients or to otherwise hold them in their own portfolios. The Reverse Stock
Split would reduce the number of shares of Common Stock outstanding, which may
increase the marketability and liquidity of the Common Stock. If the Reverse
Stock Split is approved by the holders of the Common Stock at the Meeting, the
Reverse Stock Split will be effected by the filing of an amendment to the Fund's
Charter which contains the changes relating to the Reverse Stock Split, as set
forth in Exhibit A to this Proxy Statement.
If this Proposal is approved, each three (3) shares of the Fund's
Common Stock would be changed into one (1) share of Common Stock. The par value
of the Common Stock shall be changed to $.03 per share (from $.01 per share).
Cash in lieu of fractional shares will be paid to the stockholders upon the sale
of such fractional interest.
The discussion of the Reverse Stock Split set forth below is qualified
in its entirety by reference solely to Article IV, Section (A)1. of Exhibit A,
which is incorporated herein by reference.
Purpose of the Reverse Stock Split
The principal purpose of the Reverse Stock Split is to increase the
marketability and liquidity of the Fund's Common Stock. The Board of Directors
believes that the Reverse Stock Split may improve the marketability and
liquidity of the Common Stock because the anticipated increase in the per share
price of the Common Stock should reduce the reluctance of many brokerage firms
and institutional investors to recommend the Common Stock to their clients or to
otherwise hold it in their own portfolios.
The Board of Directors believes that some of the practices of the
securities industry that may tend to discourage individual brokers within those
firms from dealing in lower-priced stocks or lending funds (i.e. providing
margin) to facilitate the purchase of such stocks have affected the per share
price of the Common Stock. Some of those practices involve time-consuming
procedures which make dealing in lower-priced stocks less appealing
economically. Furthermore, the brokerage commission on a sale of lower-priced
stock may also represent a higher percentage of the sale price than the actual
brokerage commission on a higher-priced issue.
The Board of Directors believes that a decrease in the number of issued
and outstanding shares of Common Stock, in the absence of any material
alteration in the proportionate economic interest in the Fund held by its
individual stockholders, may increase the aggregate market value of the
outstanding shares. However, the Board makes no assurance that the market value
of the Common Stock will rise in proportion to the reduction in the number of
outstanding shares resulting from the Reverse Stock Split.
The Board of Directors believes that by decreasing the number of shares
of Common Stock outstanding, the Reverse Stock Split should increase the trading
price of the outstanding shares of Common Stock, may encourage greater interest
in the Common Stock by the financial community and the investment public and may
promote greater liquidity for its holders. As a closed end investment company,
the Fund's Common Stock has historically traded at a market price which is close
to the net asset value per share of Common Stock, either at a discount or at a
premium to net asset value (NAV). Accordingly, the NAV per share of Common Stock
will automatically increase by a multiple of three, as a result of the
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<PAGE>
Reverse Stock Split, and it is highly likely that the market price of the Common
Stock on the New York Stock Exchange will increase commensurately, albeit not
exactly.
It is possible that the liquidity of the Common Stock could be
adversely affected by the reduction in the number of shares outstanding after
the Reverse Stock Split. Although any increase in the market price of the Common
Stock resulting from the Reverse Stock Split may be proportionately less than
the decrease in the number of shares outstanding (i.e. if the shares trade at a
discount to NAV), the Reverse Stock Split is expected to result in a market
price for the shares that would be high enough to overcome the reluctance on the
part of brokerage houses and investors to deal in the Fund's shares and to
diminish the adverse impact of correspondingly high trading commissions in the
market for such shares.
There can be no assurance, however, that the foregoing objectives will
be achieved or that the market price of the Common Stock resulting upon
implementation of the proposed Reverse Stock Split will be maintained for any
period of time or that such market price will approximate three times the market
price before the proposed Reverse Stock Split.
Effect of the Reverse Stock Split
If the Reverse Stock Split is approved by the holders of Common Stock
at the Meeting, the amendment to Article IV, Section (A)1. of the Charter, as
set forth in Exhibit A hereto, would be filed with the Secretary of State of the
State of Maryland 10 days following stockholder approval, or as soon as
practicable thereafter, and the Reverse Stock Split would become effective upon
such filing (the "Reverse Split Date"). Without any further action on the part
of the Fund or the holders of Common Stock, the shares of Common Stock held by
stockholders of record as of the Reverse Split Date would be converted at 5:00
p.m. on the Reverse Split Date into the right to receive an amount of whole
shares of new Common Stock equal to the number of their shares divided by three.
The number of authorized shares of Common Stock will remain at 100,000,000.
No fractional shares would be issued in connection with the Reverse
Stock Split, and no such fractional share interest or interests would entitle
the stockholder thereof to vote or to exercise any rights of a stockholder of
the Fund as to such fractions. In lieu of any fractional shares resulting from
the Reverse Stock Split, a temporary certificate evidencing the aggregate of all
fractional shares otherwise issuable will be issued as soon as practicable to
the Fund's transfer agent (the "Exchange Agent"), or its nominee, as agent for
the accounts of all holders of shares of Common Stock otherwise entitled to have
a fraction or fractions of a share issued to them in connection with the Reverse
Stock Split. Sales of such aggregated fractional interests will be effected by
the Exchange Agent as soon as practicable on the basis of prevailing market
prices of the Common Stock on the New York Stock Exchange (NYSE) at the time of
sale. [Brokerage commissions upon such sales will be borne by the Fund]. After
the Reverse Split Date, the Exchange Agent will pay to each stockholder its pro
rata share of the net proceeds derived from the sale of the aggregated
fractional interests upon surrender of such stockholder's certificates as soon
as practicable thereafter. [Commissions on the sale of the aggregated fractional
interests will be charged pro rata to each stockholder that receives cash in
lieu of a fractional interest in the Common Stock.] The interest in the Fund of
any stockholder with fewer than three shares of Common Stock prior to the
Reverse Split Date would thus be terminated.
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<PAGE>
Approval of the Reverse Stock Split would not affect any continuing
stockholder's percentage economic interest in the Fund or proportional voting
power, except for de minimis differences resulting from the payment of cash in
lieu of fractional shares. The shares of Common Stock which would be issued upon
approval of the Reverse Stock Split would be fully paid and nonassessable. The
voting rights and other privileges of the continuing holders of Common Stock
would not be affected materially by adoption of the Reverse Stock Split or its
subsequent implementation. However, because the number of outstanding shares of
Common Stock will be reduced by two-thirds and the Charter provides for holders
of the Common Stock and the TARPS to generally vote together as a class, the
votes of the holders of the TARPS will increase as a percentage of all voting
shares of stock of the Fund.
The par value of the Common Stock would be changed to $0.03 per share
(from $.01 per share) upon the consummation of the Reverse Stock Split, and the
number of shares of Common Stock outstanding would be reduced by two-thirds.
Exchange of Stock Certificates
Upon completion of the Reverse Stock Split, as soon as practicable
after the Reverse Split Date, the Fund will send a letter of transmittal to each
stockholder of record on the Reverse Split Date for use in transmitting
certificates representing shares of Common Stock ("Old Certificates") to the
Exchange Agent. The letter of transmittal will contain instructions for the
surrender of Old Certificates to the Exchange Agent in exchange for certificates
representing the appropriate number of whole shares of new Common Stock. No new
certificates will be issued to a stockholder until such stockholder has
surrendered all Old Certificates together with a properly completed and executed
letter of transmittal to the Exchange Agent.
Upon proper completion and execution of the letter of transmittal and
return thereof to the Exchange Agent, together with the return of all Old
Certificates, stockholders will receive a new certificate or certificates
representing the number of whole shares of new Common Stock into which their
shares of Common Stock represented by the Old Certificates have been converted
as a result of the Reverse Stock Split. Until surrendered, outstanding Old
Certificates held by stockholders will be deemed for all purposes to represent
the number of whole shares of Common Stock to which such stockholders are
entitled as a result of the Reverse Stock Split. Stockholders should not send
their Old Certificates to the Exchange Agent until they have received the letter
of transmittal. Shares not presented for surrender to the Exchange Agent as soon
as practicable after the letter of transmittal is sent will be exchanged at the
first time they are presented for transfer.
All expenses, [except for the commission charged for the sale by the
Exchange Agent of the aggregated fractional interests,] in connection with the
exchange of certificates will be borne by the Fund, and no service charge of any
kind will be payable by holders of shares of Common Stock in completing the
exchange.
Federal Income Tax Consequences
The following is a summary of the material anticipated Federal income
tax consequences of the Reverse Stock Split to stockholders of the Fund. It
should be noted that this summary is based upon the Federal income tax laws
currently in effect and as currently interpreted. This summary does not take
into account possible changes in such laws or
-23-
<PAGE>
interpretations, including any amendments to applicable statutes, regulations
and proposed regulations, or changes in judicial or administrative rulings, some
of which may have retroactive effect. The summary is provided for general
information only, and does not purport to address all aspects of the range of
possible Federal income tax consequences of the Reverse Stock Split and is not
intended as tax advice to any person. In particular, and without limiting the
foregoing, this summary does not account for or consider the Federal income tax
consequences to stockholders of the Fund in light of their individual investment
circumstances or to holders subject to special treatment under the Federal
income tax laws (for example, life insurance companies, regulated investment
companies, and foreign taxpayers). This summary does not discuss any consequence
of the Reverse Stock Split under any state, local or foreign tax laws.
No ruling from the Internal Revenue Service or opinion of counsel will
be obtained regarding the Federal income tax consequences to the stockholders of
the Fund in connection with the Reverse Stock Split. Accordingly, each
stockholder is encouraged to consult its tax adviser regarding the specific tax
consequences of the proposed Reverse Stock Split to such stockholder, including
the application and effect of federal, state, local and foreign taxes, and any
other tax laws.
The Fund believes that the Reverse Stock Split would be a tax-free
recapitalization to the Fund and its stockholders. If the Reverse Stock Split
qualifies as a recapitalization described in Section 368(a)(1)(E) of the
Internal Revenue Code of 1986, as amended (the "Code"), (i) no gain or loss will
be recognized by a stockholder of Common Stock who exchanges its Common Stock
for new Common Stock, except that a holder of Common Stock who receives cash
proceeds from the sale of fractional shares of Common Stock will recognize a
gain or loss equal to the difference, if any, between such proceeds and the
basis of its Common Stock allocated to its fractional share interests, and such
gain or loss, if any, will constitute capital gain or loss if its fractional
share interests are held as capital assets at the time of their sale, (ii) the
tax basis of the new Common Stock received by holders of Common Stock will be
the same as the tax basis of the Common Stock exchanged therefor, less the tax
basis allocated to fractional share interests and (iii) the holding period of
the new Common Stock in the hands of holders of new Common Stock will include
the holding period of their Common Stock exchanged therefor, provided that such
Common Stock was held as a capital asset immediately prior to the exchange.
Conclusion
The Board of Directors has considered this Proposal and believes that
the Reverse Stock Split of the Fund's issued and outstanding shares of Common
Stock is in the best interests of stockholders. The Reverse Stock Split requires
the approval of the holders of a majority of the outstanding shares of Common
Stock and Preferred Stock voting together as a class. Under the 1940 Act, a
majority of the outstanding shares is defined for each class as the lesser of
(i) 67% of the outstanding shares of such class represented at a meeting at
which more than 50% of the outstanding shares are present in person or
represented by proxy, or (ii) more than 50% of the outstanding shares of such
class.
The Directors unanimously recommend that the holders of Common Stock
vote FOR the Reverse Stock Split.
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<PAGE>
PROPOSAL 6
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected the firm of Arthur Andersen LLP as
independent public accountants for the Fund for the fiscal year ending October
31, 1998. In accordance with the 1940 Act, the employment of such accountants is
conditioned upon the right of a majority of the outstanding voting securities as
defined above to terminate such employment. Stockholders are being asked to
ratify the selection of Arthur Andersen LLP to perform audit services for the
Fund.
Arthur Andersen LLP has acted as independent public accountants for the
Fund since inception. The services provided by Arthur Andersen LLP consist of
(1) examination and audit of the Fund's semi-annual and annual financial
statements, (2) assistance and consultation in connection with Securities and
Exchange Commission filings and (3) review of tax matters on behalf of the Fund.
A representative of Arthur Andersen LLP is expected to be represented
at the Annual Meeting and will be available to respond to appropriate questions.
Required Vote
Approval of the foregoing proposal requires the affirmative vote of the
holders of a majority of the Common Stock and the Preferred Stock present and
voting together as a single class.
The Board of Directors, including those Directors who are not
interested persons of the Fund, recommends a vote FOR ratification of the
selection of Arthur Andersen LLP as independent public accountants of the Fund
for the fiscal year ending October 31, 1998.
ANNUAL REPORT
All stockholders of record as of December 29, 1997, have been furnished
or are concurrently herewith being furnished with, a copy of the Fund's Annual
Report for the fiscal year ended October 31, 1997, which contains certified
financial statements of the Fund for the fiscal year ended October 31, 1997. The
Fund will furnish, without charge, a copy of the Annual Report to a shareholder
upon request.
OTHER MATTERS TO COME BEFORE THE MEETING
The Directors do not intend to present any other business at the Annual
Meeting nor are they aware that any stockholder intends to do so. If, however,
any other matters are properly brought before the Annual Meeting, the persons
named in the accompanying proxy will vote thereon in accordance with their
judgment.
-25-
<PAGE>
STOCKHOLDER PROPOSALS
Any proposals of stockholders that are intended to be presented at the
Fund's 1999 Annual Meeting of Stockholders must be received at the Fund's
principal executive offices no later than August 31, 1998 and must comply with
all other legal requirements in order to be included in the Fund's proxy
statement and form of proxy for that meeting.
By Order of the Board of Directors
President
Boston, Massachusetts
January , 1998
-26-
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Annual Meeting of Stockholders - March 11, 1998 -
Proxy Solicited on Behalf of Board of Directors
The undersigned holder of shares of Common Stock of Prospect Street
High Income Portfolio Inc., a Maryland corporation (the "Fund"), hereby appoints
Richard E. Omohundro, Jr. and John A. Frabotta, and each of them, with full
power of substitution and revocation, as proxies to represent the undersigned at
the Annual Meeting of Stockholders of the Fund to be held at 60 State Street,
37th Floor, Boston, Massachusetts 02109, on March 11, 1998 at 10:00 a.m., and at
any and all adjournments thereof, and thereat to vote all shares of Common Stock
of the Fund which the undersigned would be entitled to vote, with all powers the
undersigned would possess if personally present, in accordance with the
instructions on this proxy.
Please mark the boxes in blue or black ink.
1. GRANTING /_/ WITHHOLDING /_/ authority to vote for the election as Directors
of all the nominees listed below:
Richard E. Omohundro, Jr., C. William Carey, Harlan D. Platt, Christopher E.
Roshier and Joseph G. Cote
- --------------------------------------------------------------------------------
(Instructions: To withhold authority to vote for any individual nominee, write
such nominee's name in the space provided above.)
2. With respect to the proposal to approve an amendment to the Fund's Articles
of Amendment and Restatement, as amended authorizing the issuance of a new class
of preferred stock.
FOR /_/ AGAINST /_/ ABSTAIN /_/
3. With respect to the proposal to amend the Fund's fundamental investment
restriction relating to borrowing and the issuance of senior securities.
FOR /_/ AGAINST /_/ ABSTAIN /_/
4. With respect to the proposal to change the Fund's investment policy
restricting the purchase of illiquid securities from a fundamental restriction
to a non-fundamental restriction.
FOR /_/ AGAINST /_/ ABSTAIN /_/
5. With respect to the proposal to approve a reverse stock split of the Fund's
Common Stock.
FOR /_/ AGAINST /_/ ABSTAIN /_/
6. With respect to the proposal to ratify the selection of Arthur Andersen LLP
as independent public accountants of the Fund for the fiscal year ending October
31, 1998.
FOR /_/ AGAINST /_/ ABSTAIN /_/
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<PAGE>
7. In their discretion, on such other matters as may properly come before the
meeting and any adjournment thereof.
Dated:____________________, 1998
___________________________
Signature
____________________________
Signature
Please sign exactly as
name or names appear on
this proxy.
If stock is held jointly,
each holder should sign.
If signing as attorney,
trustee, executor,
administrator, custodian,
guardian or corporate
officer, please give full
title.
WHEN THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED HEREBY WILL BE
VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR
THE ELECTION OF ALL NOMINEES AS DIRECTORS, FOR THE AMENDMENT TO THE FUND'S
ARTICLES OF AMENDMENT AND RESTATEMENT, FOR THE AMENDMENT TO THE FUND'S
FUNDAMENTAL INVESTMENT RESTRICTION RELATING TO BORROWING AND THE ISSUANCE OF
SENIOR SECURITIES, FOR THE CHANGE IN THE FUND'S INVESTMENT POLICY RESTRICTING
THE PURCHASE OF ILLIQUID SECURITIES, FOR THE REVERSE STOCK SPLIT, FOR THE
RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT PUBLIC ACCOUNTANTS AND IN THE
DISCRETION OF THE PROXIES WITH RESPECT TO ALL OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE MEETING AND ANY ADJOURNMENT THEREOF. THE UNDERSIGNED
ACKNOWLEDGES RECEIPT OF THE ACCOMPANYING NOTICE OF ANNUAL MEETING AND PROXY
STATEMENT.
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<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Annual Meeting of Stockholders - March 11, 1998 -
Proxy Solicited on Behalf of Board of Directors
The undersigned holder of shares of Taxable Auction Rate Preferred
Stock of Prospect Street High Income Portfolio Inc., a Maryland corporation (the
"Fund"), hereby appoints Richard E. Omohundro, Jr. and John A. Frabotta, and
each of them, with full power of substitution and revocation, as proxies to
represent the undersigned at the Annual Meeting of Stockholders of the Fund to
be held at 60 State Street, 37th Floor, Boston, Massachusetts 02109, on March
11, 1998 at 10:00 a.m., and at any and all adjournments thereof, and thereat to
vote all shares of Taxable Auction Rate Preferred Stock of the Fund which the
undersigned would be entitled to vote, with all powers the undersigned would
possess if personally present, in accordance with the instructions on this
proxy.
Please mark the boxes in blue or black ink.
GRANTING /_/ WITHHOLDING /_/ authority to vote for the election as Directors of
all the nominees listed below:
John S. Albanese and John A. Frabotta (Preferred Stock nominees) and Richard E.
Omohundro, Jr., C. William Carey, Harlan D. Platt, Christopher E. Roshier and
Joseph G. Cote (Common Stock and Preferred Stock nominees)
- ---------------------------------------------------------------
(Instructions: To withhold authority to vote for any individual nominee, write
such nominee's name in the space provided above.)
2. With respect to the proposal to approve an amendment to the Fund's Articles
of Amendment and Restatement, as amended authorizing the issuance of a new class
of preferred stock.
FOR /_/ AGAINST /_/ ABSTAIN /_/
3. With respect to the proposal to amend the Fund's fundamental investment
restriction relating to borrowing and the issuance of senior securities.
FOR /_/ AGAINST /_/ ABSTAIN /_/
4. With respect to the proposal to change the Fund's investment policy
restricting the purchase of illiquid securities from a fundamental restriction
to a Non-fundamental restriction.
FOR /_/ AGAINST /_/ ABSTAIN /_/
5. With respect to the proposal to approve a reverse stock split of the Fund's
Common Stock.
FOR /_/ AGAINST /_/ ABSTAIN /_/
6. With respect to the proposal to ratify the selection of Arthur Andersen LLP
as independent public accountants of the Fund for the fiscal year ending October
31, 1998.
FOR /_/ AGAINST /_/ ABSTAIN /_/
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<PAGE>
7. In their discretion, on such other matters as may properly come before the
meeting and any adjournment thereof.
Dated:____________________, 1998
___________________________
Signature
________________________
Signature
Please sign exactly as
name or names appear on
this proxy.
If stock is held jointly,
each holder should sign.
If signing as attorney,
trustee, executor,
administrator, custodian,
guardian or corporate
officer, please give full
title.
WHEN THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED HEREBY WILL BE
VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR
THE ELECTION OF ALL NOMINEES AS DIRECTORS, FOR THE AMENDMENT TO THE FUND'S
ARTICLES OF AMENDMENT AND RESTATEMENT, FOR THE AMENDMENT TO THE FUND'S
FUNDAMENTAL INVESTMENT RESTRICTION RELATING TO BORROWING AND THE ISSUANCE OF
SENIOR SECURITIES, FOR THE CHANGE IN THE FUND'S INVESTMENT POLICY RESTRICTING
THE PURCHASE OF ILLIQUID SECURITIES, FOR THE RATIFICATION OF THE APPOINTMENT OF
THE INDEPENDENT PUBLIC ACCOUNTANTS AND IN THE DISCRETION OF THE PROXIES WITH
RESPECT TO ALL OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING AND ANY
ADJOURNMENT THEREOF. THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE ACCOMPANYING
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT.
-30-
<PAGE>
EXHIBIT A
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
-----------------------
PROSPECT STREET HIGH INCOME PORTFOLIO INC., a corporation
organized and existing under the laws of the State of Maryland (the
"Corporation"), hereby certifies as follows:
FIRST: That the following resolutions were duly adopted by the
Board of Directors of the Corporation, setting forth a proposed amendment to
Articles of Amendment and Restatement (the "Charter") of the Corporation. The
resolutions are as follows:
"RESOLVED, that it would be advisable and in the best
interests of the Corporation and its stockholders to adopt, and the
Board of Directors hereby adopts, an amendment to the Charter of this
Corporation authorizing the issuance of a new class of preferred stock
that would be issuable from time to time by the Board of Directors in
one or more series, without further stockholder approval, whereby the
Board may fix from time to time before such issuance the number of
shares to be included in any series and the designation, preferences,
conversion or other rights, voting powers, restriction, limitations as
to dividends, qualifications, terms or conditions of redemption and
other terms of all shares of such series; and it is further
"RESOLVED, that in furtherance of such amendment, Article IV
of the Charter of the Corporation be, and hereby is, amended by
deleting in its entirety Article IV Section (A) and inserting in lieu
thereof the following Sections (A) and (B):
ARTICLE IV
CAPITAL STOCK
(A) CAPITAL STOCK
1. Class and Amount Authorized
The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is one hundred one
million one thousand (101,001,000) shares, of which one hundred million
(100,000,000) shares shall
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<PAGE>
be Common Stock, $.03 par value per share, one thousand (1000) shares
shall be Taxable Auction Rate Preferred Stock, no par value per share,
liquidation preference $100,000 per share (the "TARPS Stock") and one
million (1,000,000) shares shall be Preferred Stock, $1.00 par value
per share (the "Preferred Stock"). Each three (3) shares of the
Corporation's Common Stock issued and outstanding on the effective date
of this amendment shall be and hereby are changed without further
action into one (1) fully paid and nonassessable shares of the
Corporation's Common Stock, provided that no fractional shares shall be
issued pursuant to such change. Cash in lieu of fractional shares will
be paid to the stockholders."
2. No Preemptive Rights
No holder of any shares of any class of stock or any other
securities of the Corporation, whether now or hereafter authorized,
shall have any preemptive right to subscribe for or purchase any shares
of any class of stock or any other securities of the Corporation other
than such, if any, as the Board of Directors, in its sole discretion,
may determine and at such price or prices and upon such other terms as
the Board of Directors, in its sole discretion, may fix; and any shares
of any class of stock or other securities which the Board of Directors
may determine to offer for subscription may, as the Board of Directors
in its sole discretion shall determine, be offered to holders of any
class, series or type of stock or other securities at the time
outstanding to the exclusion of the holders of any or all other
classes, series or types of stock or other securities at the time
outstanding.
(B) PREFERRED STOCK
Preferred Stock may be issued in one or more series. The Board
of Directors may authorize the issuance of the Preferred Stock in such
series without stockholder approval and may fix from time to time
before issuance the number of shares to be included in any series and
the designation, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications,
terms or conditions of redemption and other terms of all shares of such
series. The authority of the Board of Directors with respect to each
series includes, without limiting the foregoing, the determination of
any or all of the following:
1. The number of shares of any series and the
designation to distinguish shares of such series from shares
of all other series;
2. The voting powers, if any, and whether such voting
powers are full or limited and whether other classes or series
have the right to vote on specific matters as to which voting
powers are granted to such series and whether voting is by
class;
3. The redemption provisions, if any, applicable to
such series, including the time or times and the prices;
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<PAGE>
4. The dividends (which may be cumulative or
non-cumulative) to be paid on such series, including the rate
or rates (or the procedures by which the rate or rates are to
be determined), the conditions and the times and whether
payable in preference to, or in such relation to, the
dividends payable on any other class or classes or series of
stock;
5. the rights of such series upon the dissolution
(voluntary or involuntary) of, or upon any distribution of the
assets of, the Corporation;
6. the provisions, if any, pursuant to which the
shares of such series are convertible into, or exchangeable
for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of
the Corporation or any other security of the Corporation and
the price or prices of the rates of exchange, and any
adjustments thereto;
7. the provisions, if any, of a sinking fund or
purchase fund to be applied to the redemption or purchase of
shares of such series;
8. the provisions, if any, relating to the conditions
and restrictions upon the creation of indebtedness of the
Corporation, upon the issuance of any additional stock
(including additional shares of such series or of any other
series) and upon the payment of dividends or the making of
other distributions on, and the purchase, redemption or other
acquisition by the Corporation of any outstanding stock of the
Corporation; and
9. any other relative, participating, optional or
other special rights and qualifications, limitations or
restrictions thereof;
all as shall be determined by the Board of Directors and stated in said
resolution or resolutions establishing or amending the characteristics
of such class or series of preferred stock. Except where otherwise set
forth in the resolution or resolutions adopted by the Board of
Directors providing for the classification of any series of Preferred
Stock, the number of shares comprising such series may be increased or
decreased (but not below the number of shares then outstanding) from
time to time by like action of the Board of Directors.
Preferred Stock of any series not issued or which has been
redeemed, converted, exchanged, purchased or otherwise acquired by the
Corporation shall constitute authorized but unissued Preferred Stock."
"RESOLVED, that in furtherance of such amendment, Article IV
Section (B) of the Charter of the Corporation be, and hereby is,
amended by deleting in its entirety the existing Section (B),
renumbering the Section and all references thereto as Section (C) and
substituting therefor the following:
(C) COMMON STOCK
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The preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption with respect to the Common Stock are as follows:
1. Ranking.
The Common Stock shall rank junior to the Preferred Stock and
the TARPS Stock with respect to payment of all dividends (other than
dividends in Common Stock) and distributions on liquidation or
dissolution and shall have such other qualifications, limitations and
restrictions as provided in this Charter.
2. Dividends.
After all accumulated and unpaid dividends upon all
outstanding shares of the Preferred Stock and TARPS Stock for all past
Dividend Periods (as defined below) have been or are contemporaneously
paid in full (or declared and sufficient Deposit Securities (as defined
below) have been set apart for their payment), then and not otherwise,
and subject to any other applicable provisions of the Charter, to the
extent there are funds legally available therefor, dividends or other
distributions may be declared upon and paid to the holders of shares of
the Common Stock, to the exclusion of the holders of shares of the
Preferred Stock and TARPS Stock.
3. Liquidation Rights.
In the event of the dissolution, liquidation or winding up of
the Corporation, whether voluntary or involuntary, after payment in
full of the amounts required to be paid to the holders of the Preferred
Stock and the TARPS Stock as provided for in this Charter, the holders
of shares of the Common Stock shall be entitled, to the exclusion of
the holders or shares of the Preferred Stock and TARPS Stock, to share
ratably in all remaining assets of the Corporation.
4. Voting Rights.
Each holder of Common Stock shall be entitled to one vote for
each such whole share (and a proportionate vote for each such
fractional share) on each matter on which the holders of shares of the
Common Stock shall be entitled to vote. Except as otherwise provided in
this Charter, the holders of shares of the Common Stock and the holders
of shares of Preferred Stock and TARPS Stock shall vote as a single
class on all matters submitted to the stockholders.
5. Redemption.
The Corporation may redeem or repurchase shares of Common
Stock to the extent now or hereafter permitted by the laws of the State
of Maryland, the Investment Company Act of 1940 (the "1940 Act") and by
the Charter."
"RESOLVED, that in furtherance of such amendment, Article IV
Section (C) of the Charter of the Corporation is hereby amended by
renumbering such Section and all references thereto as Section (D) and
by changing each reference
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to 'Preferred Stock' therein to 'TARPS Stock.' Article V and Article VI
are likewise amended by changing each reference to 'Preferred Stock'
therein to 'TARPS Stock.'"
"RESOLVED, that in furtherance of such amendment, Article IV
of the Charter of the Corporation and Restatement as heretofore amended
shall be amended by adding new Sections (E) and (F) as follows:
(E) CONFLICT BETWEEN TERMS OF TARPS STOCK AND
PREFERRED STOCK
Notwithstanding any other provision of this Charter which,
absent this Section (E), would limit the right of the Corporation or
the Board of Directors to create, classify or issue the Preferred Stock
or to grant rights, powers and preferences of any nature which might be
equal in any respect to the TARPS Stock, the Board of Directors as
specified in Section (A) and Section (B) may classify such stock and
grant any rights or preferences equal to the TARPS Stock, to the extent
permitted by the 1940 Act, as amended from time to time.
The creation, classification and issuance of Preferred Stock
at a time when the TARPS Stock is outstanding shall not be deemed to be
a default under subsection (D)(5)(b) or to cause the holders of the
TARPS Stock to have a right to elect a majority of the Board of
Directors under subsection (D)(6)(b) if, upon issuance, the net
proceeds from the sale of such Preferred Stock (or such portion thereof
needed to redeem the TARPS Stock) are deposited with the Paying Agent
in accordance with Article IV Section (D)(5)(c)(vii), notice of
Optional Redemption pursuant to subsection (D)(5)(a) has been delivered
prior thereto or is sent promptly thereafter and such proceeds are used
to redeem the TARPS Stock. The redemption price of all TARPS Stock
redeemed with such proceeds shall be the price set forth in subsection
(D)(5)(a).
Any classification of the Preferred Stock may provide for
rights, powers, privileges and preferences inconsistent with the terms
of the TARPs Stock even if such rights, powers, preferences or
privileges are subordinated to the rights of the TARPS Stock so long as
any of the TARPS Stock is deemed outstanding.
(F) ELIMINATION OF TARPS STOCK
At such time as all outstanding TARPS Stock has been redeemed
or Deposit Securities constituting immediately available funds
sufficient to redeem all of the TARPS Stock have been deposited with
the Paying Agent as required by Article IV Section (D)(5)(c)(vii), the
Board of Directors may adopt a resolution declaring that the
Corporation shall no longer be authorized to issue the TARPS Stock.
Upon adoption of such resolution, subsection (D), (E) and (F) of
Article IV and all other references to the TARPS Stock shall
automatically be deleted from the Charter and the Board of Directors is
hereby authorized to restate the Charter deleting all of such
provisions. Any former holdovers of TARPS Stock who have not then
submitted their TARPS Stock for redemption shall have only the right to
receive payment for their stock deposited with the
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Paying Agent in accordance with the terms formerly set forth in Section
(D) (without interest).
At such time as the TARPS Stock is eliminated, the following additional
amendments shall automatically take effect:
1. Article V Section (A) of the Fund's Charter of the
Corporation as heretofore amended shall be amended by deleting the same
and substituting in lieu thereof the following:
(A) All corporate power and authority of the Corporation
(except as otherwise provided by statute, by this Charter, or by the
Corporation's By-Laws) shall be vested in and exercised by the Board of
Directors. Except as may be required by other provisions of this
Charter, the number of Directors constituting the Board of Directors
shall be not less than three (3), nor more than fifteen (15) with the
exact number to be fixed pursuant to the By-Laws, provided that the
numbers of Directors shall at no time be less than the minimum number
required under the Maryland General Corporation law or, as long as any
shares of the Preferred Stock are outstanding, the 1940 Act, as amended
from time to time.
2. Article VI Sections (A) and (B) of the Charter of the
Corporation as hereinbefore amended shall be amended by deleting the
same and substituting in lieu thereof only the following Section (A)
and renumbering Section (C) and all references thereto as Section (B):
(A) The Corporation reserves the right from time to time to
amend, alter, change or repeal any provision contained in this Charter,
now or hereafter authorized by law, including any amendment that alters
the contract rights, as expressly set forth in this Charter, of any
outstanding stock. Any amendment to this Charter shall be adopted at
either a special meeting of the stockholders pursuant to the
affirmative vote of a majority of all the outstanding shares of the
Corporation's capital stock, which shall vote as a single class, except
as otherwise provided in this Charter. The Common Stock and the
Preferred Stock shall vote as separate classes to the extent otherwise
required under Maryland law or the 1940 Act, as amended from time to
time."
SECOND: That the Amendment to the Charter of the Corporation
effected by this Certificate was duly authorized by the Board of Directors of
the Corporation in accordance with the provisions of Section 2-604 of the
General Corporation Law of the State of Maryland, and by written consent of
stockholders of the Corporation in accordance with the provisions of Section
2-505 of the General Corporation Law of the State of Maryland.
THIRD: That the capital of the Corporation will not be reduced
under, or by reason of, the foregoing Amendment to the Charter of the
Corporation.
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IN WITNESS WHEREOF, Prospect Street High Income Portfolio Inc.
has caused this Certificate of Amendment to be signed by _____________, its
[President], who hereby acknowledges under penalties of perjury that the facts
herein stated are true and that this Certificate of Amendment is his act and
deed, and attested by ___________, its Secretary, this __the day of _______,
1997.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By:___________________________________
Name: Richard E. Omohundro, Jr.
Title: President
Attest:
_______________________
Name: Karen J. Thelen
Title: Secretary
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