<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1997
SECURITIES ACT FILE NO. 333-20689
INVESTMENT COMPANY ACT FILE NO. 811-5557
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 16 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
60 State Street, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 742-3800
----------------
RICHARD E. OMOHUNDRO, JR., PRESIDENT
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
With copies to:
LAURENCE E. CRANCH, ESQ. THOMAS A. HALE, ESQ.
G. DAVID BRINTON, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
ROGERS & WELLS 333 WEST WACKER DRIVE
200 PARK AVENUE, NEW YORK, NEW YORK 10166 SUITE 2100
CHICAGO, ILLINOIS 60606
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [X]
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==============================================================================================================
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 Par Value 13,000,000 shares $3.9375(2) $51,187,500(2) $15,512(3)
==============================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.
(2) Based on the average of the high and low sales prices reported on the New
York Stock Exchange on January 27, 1997.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
FORM N-2
CROSS-REFERENCE SHEET
PARTS A AND B OF THE PROSPECTUS*
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
<S> <C>
1. Outside Front Cover ........................ Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page Outside Front Cover Page of Prospectus; Inside Front
and Outside Back Cover Page of Prospectus
3. Fee Table and Synopsis ..................... Fee Table; Prospectus Summary
4. Financial Highlights ....................... Financial Highlights
5. Plan of Distribution ....................... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Offer
6. Selling Stockholders ....................... Not Applicable
7. Use of Proceeds ............................ Use of Proceeds; Investment Policies and Limitations
8. General Description of the Registrant ...... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Fund; Investment Policies and
Limitations; Risk Factors and Special
Considerations; Financial Highlights; Description
of Capital Stock; Surety Arrangement for Preferred
Shares; Description of Notes
9. Management ................................. Prospectus Summary; The Investment Adviser;
Directors and Officers; Portfolio Trading;
Description of Capital Stock; Surety Arrangement
for Preferred Shares; Description of Notes;
Custodian, Transfer Agent, Dividend Disbursing
Agent, Paying Agents and Registrars
10. Capital Stock, Long-Term Debt, and Other
Securities ................................. Description of Capital Stock; Surety Arrangement for
Preferred Shares; Description of Notes; Federal
Taxation; Investment Policies and Limitations;
Dividends and Distributions; Dividend Reinvestment
Plan; Financial Highights
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings .......................... Not Applicable
13. Table of Contents of the Statement of
Additional Information ..................... Not Applicable
14. Cover Page ................................. Not Applicable
15. Table of Contents .......................... Not Applicable
16. General Information and History ............ Prospectus Summary; The Fund
17. Investment Objective and Policies .......... Prospectus Summary; Investment Policies and
Limitations; Portfolio Trading
18. Management ................................. Prospectus Summary; The Investment Adviser;
Directors and Officers
19. Control Persons and Principal Holders of
Securities ................................. Directors and Officers
20. Investment Advisory and Other Services Prospectus Summary; The Investment Adviser;
Custodian, Transfer Agent, Dividend Disbursing
Agent, Paying Agents and Registrars; Experts
21. Brokerage Allocation and Other Practices Portfolio Trading
22. Tax Status ................................. Federal Taxation
23. Financial Statements ....................... Financial Statements
----------
*Pursuant to Part B: Statement of Additional Information, all
information required to be set forth in Part B has been included in
Part A.
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C to this Registration Statement.
<PAGE>
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
10,323,589 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR SUCH SHARES
----------------
Prospect Street(R) High Income Portfolio Inc. (the "Fund") is issuing to its
shareholders of record ("Record Date Shareholders"), as of the close of business
on February 28, 1997 (the "Record Date"), non-transferable rights ("Rights")
entitling the holders thereof to subscribe for an aggregate of 10,323,589 shares
(the "Shares") of the Fund's Common Stock, par value $0.01 per share (the
"Common Stock"), at the rate of one share of Common Stock for every three Rights
held (the "Offer"). Record Date Shareholders will receive one Right for each
whole share of Common Stock held on the Record Date, and shareholders who fully
exercise their Rights will be entitled to subscribe for additional shares of
Common Stock pursuant to the Over-Subscription Privilege described herein. The
Fund may increase the number of shares of Common Stock subject to subscription
by up to 25% of the Shares, or up to an additional 2,580,897 shares of Common
Stock, for an aggregate total of 12,904,486 Shares. Fractional shares will not
be issued upon the exercise of Rights. The Rights are non-transferable and,
therefore, may not be purchased or sold. The Rights will not be admitted for
trading on the New York Stock Exchange (the "Exchange") or any other securities
exchange. See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (THE "SUBSCRIPTION
PRICE") WILL BE 95% OF THE LOWER OF (i) THE AVERAGE OF THE LAST REPORTED SALES
PRICE OF A SHARE OF THE FUND'S COMMON STOCK ON THE EXCHANGE ON THE DATE OF THE
EXPIRATION OF THE OFFER (THE "PRICING DATE") AND ON THE FOUR PRECEDING BUSINESS
DAYS OR (ii) THE NET ASSET VALUE PER SHARE AS OF THE PRICING DATE.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 25, 1997
UNLESS EXTENDED AS DESCRIBED HEREIN (THE "EXPIRATION DATE").
Shares of the Fund's Common Stock trade on the Exchange under the symbol
"PHY." The Shares issued pursuant to the Offer will be listed for trading on the
Exchange, subject to notice of issuance.
Upon completion of the Offer, shareholders who do not fully exercise their
Rights will own a smaller proportional interest in the Fund than they owned
prior to the Offer. In addition, because the Subscription Price per Share will
be less than the net asset value per share on the Pricing Date, the completion
of the Offer will result in an immediate dilution of net asset value per share
for all shareholders. Such dilution will disproportionately affect
non-exercising shareholders. Such dilution is not currently determinable because
it is not known what the net asset value per share will be on the Pricing Date,
what proportion of the Shares will be subscribed for or what the Subscription
Price will be. If the Subscription Price per Share is substantially less than
the net asset value per share on the Pricing Date, such dilution could be
substantial. See "Risk Factors and Special Considerations -- Dilution" and "The
Offer -- Terms of the Offer." Except as described herein, shareholders will have
no rights to rescind their subscriptions after receipt of their payment for
Shares by the Subscription Agent (as defined herein).
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. The Fund's use of leverage creates the opportunity
for greater total returns but at the same time involves certain substantial
risks. See "The Fund" and "Risk Factors and Special Considerations -- Risk of
Leverage." The Fund's investment objective is to provide high current income,
while seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of "high-yield," high risk
securities (commonly referred to as "junk bonds"). INVESTMENTS IN "HIGH-YIELD,"
HIGH RISK SECURITIES ENTAIL RISKS THAT ARE DIFFERENT AND MORE PRONOUNCED THAN
THOSE INVOLVED IN HIGHER-RATED SECURITIES. AN INVESTMENT IN THE FUND IS NOT
APPROPRIATE FOR ALL INVESTORS, AND NO ASSURANCE CAN BE GIVEN THAT THE FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS."
Prospect Street(R) Investment Management Co., Inc. (the "Investment Adviser")
has served as the Fund's investment adviser since the Fund's inception in 1988.
The Investment Adviser will benefit from the Offer because its fees are based on
the average managed assets of the Fund. See "The Investment Adviser."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference.
(continued on following page)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
==============================================================================================================
<CAPTION>
Estimated Estimated
Subscription Estimated Proceeds to Fund
Price(1) Sales Load(2) (3)(4)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ............................... $3.76 $0.14 $3.62
- --------------------------------------------------------------------------------------------------------------
Total Maximum(5) ........................ $38,816,695 $1,455,626 $37,361,069
==============================================================================================================
</TABLE>
(footnotes on following page)
----------------
PAINEWEBBER INCORPORATED TUCKER ANTHONY INCORPORATED
----------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY 25, 1997.
<PAGE>
(continued from cover page)
All questions and inquiries relating to the Offer should be directed to the
Information Agent, Corporate Investor Communications, Inc., 111 Commerce Road,
Carlstadt, New Jersey 07072-2586, toll-free at (800) 242-4410. The Fund's
address is 60 State Street, Boston, Massachusetts 02109, and its telephone
number is (617) 742-3800.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on January 30, 1997. The net asset value per share of
the Fund's Common Stock at the close of business on January 24, 1997 (the last
trading date on which the Fund publicly reported its net asset value prior to
the announcement of the Offer) and on February 21, 1997 (the last trading date
on which the Fund publicly reported its net asset value prior to the Record Date
of the Offer) was $3.93 and $3.96, respectively, and the last reported sales
price of a share of the Fund's Common Stock on the Exchange on those dates was
$4.00 and $4.25, respectively.
In the case of shares held of record by Cede & Co. ("Cede"), the nominee for
The Depository Trust Company ("DTC"), or any other depository or nominee,
beneficial owners for whom Cede or any other depository or nominee is the holder
of record will be deemed to be the holders of the Rights that are issued to Cede
or such other depository or nominee on their behalf.
----------------
(footnotes from cover page)
(1) Estimated on the basis of 95% of the net asset value per share of the Fund's
Common Stock on February 21, 1997.
(2) In connection with the Offer, the Fund has agreed to pay PaineWebber
Incorporated and Tucker Anthony Incorporated (collectively, the "Dealer
Managers"), and other broker-dealers soliciting the exercise of Rights,
solicitation fees equal to 2.50% of the Subscription Price per Share for
each Share issued pursuant to the exercise of the Rights and the
Over-Subscription Privilege. The Fund has also agreed to pay the Dealer
Managers a fee for financial advisory and marketing services in connection
with the Offer equal to 1.25% of the aggregate Subscription Price for the
Shares issued pursuant to the exercise of the Rights and the
Over-Subscription Privilege. The Fund and the Investment Adviser have agreed
to indemnify the Dealer Managers and each soliciting dealer against certain
liabilities under the Securities Act of 1933, as amended.
(3) Before deduction of offering expenses incurred by the Fund, estimated
at $400,000, which includes up to $100,000 that may be paid to the Dealer
Managers as partial reimbursement for their expenses relating to the Offer.
(4) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest-bearing account (which interest will
accrue to the benefit of the Fund) pending proration and distribution of the
Shares.
(5) Assumes all 10,323,589 Shares are purchased at the Estimated Subscription
Price (as defined herein). Pursuant to the Over- Subscription Privilege, the
Fund may at the discretion of the Board of Directors increase the number of
Shares subject to subscription by up to 25% of the Shares offered hereby. If
the Fund increases the number of Shares subject to subscription by 25%, the
total maximum Estimated Subscription Price, Estimated Sales Load and
Estimated Proceeds to Fund will be $48,520,867, $1,819,533 and $46,701,334,
respectively.
----------------
Certain numbers in this Prospectus have been rounded for ease of
presentation, and, as a result, may not total precisely.
<PAGE>
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed information
included elsewhere in this Prospectus.
PURPOSE OF THE OFFER
The Board of Directors of Prospect Street High Income Portfolio Inc. (the
"Fund") has determined that it would be in the best interests of the Fund and
its shareholders to increase the assets of the Fund available for investment so
that the Fund will be in a better position to take advantage of available
investment opportunities and increase the diversification of its portfolio.
Prospect Street(R) Investment Management Co., Inc. (the "Investment Adviser")
informed the Board of Directors of the Fund that the Investment Adviser believes
the "high-yield" bond market currently has attractive investment opportunities
and that, under current market conditions, the net proceeds of the Offer (as
defined below) could be invested at or about the same rate of return that the
Fund is currently earning while achieving certain other net benefits to the
Fund. The Board of Directors noted that an increase in the Fund's assets
pursuant to the Offer will have the immediate effect of strengthening the Fund's
current common equity capital relative to its outstanding leverage. The Board of
Directors believes that increasing the Fund's assets will provide the Fund with
additional flexibility in connection with the Fund's leverage, including its
ability to increase the Fund's existing leverage and renegotiate or refinance
that portion of the Fund's leverage that comes due in 1998. In addition, the
Board of Directors believes that increasing the size of the Fund may lower the
Fund's expenses as a proportion of average net assets because the Fund's fixed
costs can be spread over a larger asset base and certain variable costs, such as
the fees paid to the Investment Adviser pursuant to the Advisory Agreement (as
defined herein), are reduced as the Fund's assets reach specific levels. In
addition, the issuance of additional shares may enhance the liquidity of the
Fund's shares on the New York Stock Exchange (the "Exchange"). The Board of
Directors also considered the impact of the Offer on its current distribution
policy to maintain, subject to market conditions, a relatively stable level of
distributions and, based upon information provided by the Investment Adviser and
current market conditions, believes that the Offer will not result in a change
in the Fund's current level of dividends. For a further discussion of the
anticipated impact of the Offer on the Fund's dividends, please refer to "Risk
Factors and Special Considerations -- Dividends and Distributions."
In determining that the Offer was in the best interests of the Fund and its
shareholders, the Board of Directors retained PaineWebber Incorporated and
Tucker Anthony Incorporated (collectively, the "Dealer Managers") to provide the
Fund with financial advisory and marketing services relating to the Offer,
including the structure, timing and terms of the Offer. In addition to the
foregoing, the Board of Directors considered, among other things, the benefits
and drawbacks of conducting a non-transferable versus a transferable rights
offering, the effect on the Fund if the Offer is under-subscribed and the
experience of the Dealer Managers in conducting rights offerings.
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record ("Record Date
Shareholders") as of the close of business on February 28, 1997 (the "Record
Date"), non-transferable rights ("Rights") entitling the holders thereof to
subscribe for an aggregate of 10,323,589 shares (the "Shares") of the Fund's
Common Stock, par value of $.01 per share (the "Common Stock") (12,904,486
Shares if the Fund increases the number of shares of Common Stock available by
up to 25% in connection with the Over- Subscription Privilege described below)
(the "Offer"). Each Shareholder is being issued one Right for each whole share
of Common Stock owned on the Record Date. The Rights entitle the holders thereof
to subscribe for one Share for every three Rights held (1 for 3). Fractional
shares will not be issued upon the exercise of Rights. Accordingly, Shares may
be purchased in the Primary Subscription (as described below) only pursuant to
the exercise of Rights in integral multiples of three. Record Date Shareholders
who fully exercise all Rights issued to them may request additional Shares
pursuant to the Over-Subscription Privilege as described below. Rights may be
exercised at any time during the subscription period (the "Subscription
Period"), which commences on February 28, 1997 and ends at 5:00 P.M., New York
City time, on March 25, 1997 (referred to herein as the "Expiration Date"),
unless extended by the Fund until 5:00 P.M., New York City time, to a date not
later than April 2, 1997. A shareholder's right to acquire Shares during the
Subscription Period at the Subscription Price (as defined below) of one
additional Share for every three Rights issued to such shareholder is referred
to herein as the "Primary Subscription." The Rights are evidenced by
Subscription Certificates ("Subscription Certificates") that will be mailed to
Record Date Shareholders, except as discussed below under "Foreign
Restrictions."
Since fractional shares will not be issued, shareholders who receive or have
remaining fewer than three Rights will be unable to purchase a Share upon the
exercise of such remaining Rights and will not be entitled to receive any cash
in lieu thereof. Such shareholders may, however, request additional Shares
pursuant to the Over-Subscription Privilege (as described below).
The first regular monthly dividend to be paid on Shares acquired upon
exercise of Rights will be the first monthly dividend, the record date for which
occurs after the issuance of such shares following the Expiration Date. It is
the Fund's present policy to pay dividends on the last Business Day (as defined
herein) of each month to shareholders of record seven days prior to the payment
date. Assuming the Subscription Period is not extended beyond March 25, 1997, it
is expected that the first dividend received by shareholders acquiring Shares in
the Offer will be paid on the last Business Day of April, 1997.
OVER-SUBSCRIPTION PRIVILEGE
Record Date Shareholders who fully exercises all Rights issued to them are
entitled to subscribe for those Shares which were not otherwise subscribed for
by others in the Primary Subscription (the "Over- Subscription Privilege"). If
sufficient Shares remain after completion of the Primary Subscription, all
over-subscription requests will be honored in full. If sufficient Shares are not
available after completion of the Primary Subscription to honor all
over-subscription requests, the Fund may, at the discretion of the Board of
Directors of the Fund, issue shares of Common Stock up to an additional 25% of
the Shares available pursuant to the Offer (up to an additional 2,580,897
Shares) in order to cover such over-subscription requests. Regardless of whether
the Fund issues such additional Shares, and to the extent Shares are not
available to honor all over-subscription requests, the available Shares will be
allocated among those who over-subscribe so that the number of Shares issued to
such shareholders will generally be in proportion to the number of shares of
Common Stock owned by such shareholders on the Record Date. The allocation
process may involve a series of allocations in order to assure that the total
number of Shares available for over-subscription is distributed on a pro rata
basis. See "The Offer -- Over-Subscription Privilege."
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined herein) before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to the
Primary Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certificate Forms will be
distributed to banks, brokers, trustees and other nominee holders with the
Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any Shares that
are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price per Share ("Subscription Price") will be 95% of the
lower of (i) the average of the last reported sales price of a share of the
Fund's Common Stock on the Exchange on the expiration of the Offer (the "Pricing
Date") and the four preceding Business Days or (ii) the net asset value per
share as of the Pricing Date. "Business Day" means a day on which the Exchange
is open for trading and which is not a Saturday or Sunday or a holiday,
including New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Patriots' Day, Memorial Day, Bunker Hill Day, Independence Day, Labor
Day, Columbus Day, Thanksgiving Day, Christmas Day or any other day on which
banks in New York City or Boston are authorized or obligated by law or executive
order to close.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be listed for trading on the Exchange or any other
securities exchange. However, the Shares to be issued pursuant to the Offer will
be listed for trading on the Exchange, subject to notice of issuance.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Restrictions," will be mailed to Record Date Shareholders
or, if a shareholder's shares of Common Stock are held by Cede & Co. ("Cede"),
as nominee for The Depository Trust Company ("DTC"), or any other depository or
nominee on their behalf, to Cede or such depository or nominee. Rights may be
exercised by completing and signing the Subscription Certificate that
accompanies this Prospectus and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment in full for the Shares at the
Estimated Subscription Price (as defined below). Rights may also be exercised by
contacting your broker, banker or trust company, which can arrange, on your
behalf, to guarantee delivery of payment and delivery of a properly completed
and executed Subscription Certificate pursuant to a Notice of Guaranteed
Delivery ("Notice of Guaranteed Delivery"). A fee may be charged for this
service. Fractional shares will not be issued and shareholders who receive or
who have remaining fewer than three Rights will not be able to purchase a Share
upon the exercise of such remaining Rights and will not be entitled to receive
any cash in lieu thereof. Such shareholders may, however, request additional
Shares pursuant to the Over-Subscription Privilege. Completed Subscription
Certificates must be received by the Subscription Agent prior to 5:00 P.M., New
York City time, on the Expiration Date at one of the addresses set forth herein
(unless the guaranteed delivery procedures are complied with as described below
under the heading "The Offer -- Payment for Shares").
OFFERING FEES AND EXPENSES
The Fund has agreed to pay the Dealer Managers a fee for financial advisory
and marketing services equal to 1.25% of the aggregate Subscription Price for
Shares issued pursuant to the exercise of the Rights and pursuant to the
Over-Subscription Privilege, and the Fund has also agreed to pay broker-dealers,
including the Dealer Managers, fees for their solicitation efforts
("Solicitation Fees") of 2.50% of the Subscription Price per Share for each
Share issued pursuant to the exercise of the Rights and pursuant to the
Over-Subscription Privilege as a result of their soliciting efforts.
Solicitation Fees will be paid to the broker-dealer designated on the applicable
portion of the Subscription Certificates or, in the absence of such designation,
to the Dealer Managers. See "The Offer -- Distribution Arrangements." Other
offering expenses incurred by the Fund are estimated at $400,000, which includes
up to $100,000 that may be paid to the Dealer Managers as partial reimbursement
for their expenses relating to the Offer.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the District of Columbia and the territories and possessions of the
United States) ("Foreign Record Date Shareholders"). Foreign Record Date
Shareholders will receive written notice of the Offer. The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for such
Foreign Record Date Shareholders' accounts until instructions are received to
exercise the Rights. If no instructions have been received by the Expiration
Date, the Rights of those Foreign Record Date Shareholders will expire.
USE OF PROCEEDS
Based on the estimated Subscription Price of $3.76 per Share (based upon 95%
of the net asset value per share on February 21, 1997) (the "Estimated
Subscription Price"), the net proceeds of the Offer, assuming 10,323,589 Shares
offered hereby are sold, are estimated to be approximately $36,961,069, after
deducting offering expenses payable by the Fund estimated at approximately
$400,000. If the Fund increases the number of Shares subject to subscription by
up to 25%, or 2,580,897 Shares, in order to satisfy over-subscription requests,
the additional net proceeds to the Fund will be approximately $9,340,265. The
Investment Adviser anticipates, based upon current market conditions, that
investment of such proceeds in accordance with the Fund's investment objective
and policies will take up to thirty days from their receipt by the Fund,
depending on market conditions and the availability of appropriate securities
for purchase, but in no event will such investment take longer than six months.
Pending such investment in accordance with the Fund's investment objective and
policies, the proceeds will be held in U.S. Government securities (which term
includes obligations of the United States Government, its agencies or
instrumentalities) and other high- quality short-term money market instruments.
INFORMATION AGENT
Any questions or request for assistance concerning the method of subscribing
for Shares or for additional copies of this Prospectus or Subscription
Certificates or Notices of Guaranteed Delivery may be directed to the
Information Agent at its telephone number and address listed below.
Information Agent for the Offer is:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 932-8492
Shareholders may also contact their brokers or nominees for information with
respect to the Offer.
IMPORTANT DATES TO REMEMBER
EVENT DATE
- ----- ------------------
Record Date ............................................. February 28, 1997
Subscription Period ..................................... February 28, 1997
to March 25, 1997*
Expiration Date and Pricing Date ........................ March 25, 1997*
Subscription Certificates and Payment for Shares Due+ ... March 25, 1997*
Notice of Guaranteed Delivery Due+ ...................... March 25, 1997*
Payment for Guarantees of Delivery Due .................. March 31, 1997*
Confirmation to Participants ............................ April 7, 1997*
Final Payment for Shares ................................ April 21, 1997*
- ------------
*Unless the Offer is extended to a date not later than April 2, 1997.
+A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed
Delivery by March 25, 1997.
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a diversified, closed-end
management investment company since 1988. The Fund's investment objective is to
provide high current income, while seeking to preserve shareholders' capital,
through investment in a professionally managed, diversified portfolio of
"high-yield," high risk securities (commonly referred to as "junk bonds"). The
Fund seeks to achieve its objective of preserving shareholder's capital through
careful selection of the Fund's "high- yield," high risk investments, portfolio
diversification, and portfolio monitoring and repositioning. However, in the
severe adverse interest rate and economic environment of 1989 and 1990 the Fund
suffered a substantial decline in its net asset value and thus failed to meet
that objective during that period. Given the nature of the Fund's investments
and its leverage, it may be extremely difficult to achieve this objective on a
consistent basis in the future. See "Investment Policies and Limitations."
The Fund invests primarily in fixed-income securities rated in the lower
categories by established rating agencies (consisting principally of
fixed-income securities rated "BB" or lower by Standard & Poor's Ratings Group
("S&P") and "Ba" or lower by Moody's Investors Service, Inc. ("Moody's," and
together with S&P, the "Rating Agencies")), or nonrated fixed-income securities
deemed by the Investment Adviser to be of comparable quality. Such securities
are regarded by the Rating Agencies, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. In addition to investing in "high-yield," high risk
securities, the Fund may engage in certain options activities, the lending of
portfolio securities, and the use of futures contracts and options thereon,
reverse repurchase agreements and repurchase agreements. See "Investment
Policies and Limitations." Lower rated and nonrated securities are subject to a
greater degree of risk than higher rated securities. See "Risk Factors and
Special Considerations."
The Fund completed an initial public offering of 13,000,000 shares of its
Common Stock in November 1988, raising approximately $119.0 million.
Concurrently with its initial public offeing, the Fund issued $50,000,000
aggregate principal amount of Senior Extendible Notes (the "Senior Extendible
Notes"), and 300 shares of Taxable Auction Rate Preferred Stock(R), no par value
per share, liquidation preference $100,000 per share ("Preferred Shares").
During the fiscal years ended October 31, 1990 and 1991 the Fund repurchased
$45,000,000 of its Senior Extendible Notes. In July 1993, the Fund repurchased
the remaining $5,000,000 of Senior Extendible Notes then outstanding, and
thereafter issued, in a private placement, $20,000,000 of new Senior Notes
payable December 1, 1998 (the "Notes"), and redeemed 100 Preferred Shares,
leaving 200 Preferred Shares outstanding.
The Offer is the Fund's first non-transferable rights offering. The Fund
completed transferable rights offerings on June 21, 1996, November 23, 1993 and
March 4, 1993 which permitted shareholders to acquire, at a subscription price
of $3.81, $3.60 and $3.80, respectively, one new share for each three rights
held as of the record date of such rights offerings. Approximately 61% of the
rights issued by the Fund pursuant to the rights offering completed in June 1996
were exercised and, as a result, 5,393,885 new shares of Common Stock were
issued in June 1996 with net proceeds to the Fund of approximately $19.5
million. All of the rights issued by the Fund pursuant to the rights offerings
completed in March 1993 and November 1993 were exercised and, as a result,
4,625,000 new shares of Common Stock were issued in March 1993 with net proceeds
to the Fund of approximately $16.7 million and 6,210,000 new shares of Common
Stock were issued in December 1993 with net proceeds to the Fund of
approximately $21.3 million. All of the net proceeds from the exercise of the
rights issued pursuant to the prior rights offerings have been invested in new
securities in accordance with the Fund's investment objective.
At the date hereof, the Fund does not intend to add incremental leverage to
the Fund following the completion of the Offer. Accordingly, the percentage of
the Fund's assets representing leverage will decrease upon completion of the
Offer. The Fund anticipates that it will renegotiate the terms of its
outstanding leverage in 1998. Management of the Fund believes that by not adding
incremental leverage permitted under the Investment Company Act of 1940, as
amended (the "1940 Act"), the Fund will enhance its ability to negotiate the
terms of any refinancing of its existing leverage. However, the Fund reserves
the right at any time, if it believes that market conditions are appropriate, to
increase its level of debt or other senior securities to maintain or increase
the Fund's current level of leverage to the extent permitted under the 1940 Act
and existing agreements between the Fund and third parties.
The Fund's outstanding Common Stock, par value $0.01 per share, is listed
and traded on the Exchange. The average weekly trading volumes of the Fund's
shares of Common Stock on the Exchange for the Fund's fiscal years ended October
31, 1994, 1995 and 1996 were 290,115 shares, 187,338 shares and 272,206 shares,
respectively. As of January 31, 1997, the Fund had 30,970,767 shares of Common
Stock outstanding and net assets applicable to Common Stock of approximately
$122.7 million. The Fund's Preferred Shares and Notes are not traded on any
securities exchange.
The Fund's investments are subject to diversification, liquidity and related
investment guidelines (i) established in connection with the issuance of the
Notes and the Fund's receipt from Fitch Investors Service, Inc. of a rating of
"Aaa" for the Notes (the "Notes Investment Guidelines") and (ii) agreed upon by
the Fund and Financial Security Assurance Inc. ("Financial Security") in
connection with the issuance of the Surety Bond (as defined herein) with respect
to Scheduled Payments (as defined herein) on the Preferred Shares (the "Surety
Investment Guidelines" and, together with the Notes Investment Guidelines, the
"Investment Guidelines"). See "Investment Policies and Limitations -- Investment
Guidelines." Fitch Investors Service, Inc. issued a rating of "Aaa" for the
Notes because the Fund's portfolio, although consisting principally of lower
rated securities, is managed in accordance with the Notes Investment Guidelines
which are designed to ensure that assets underlying the Notes will be
sufficiently diversified and will be of sufficient credit quality and amount to
justify an investment grade rating of "Aaa." As a result of the issuance of the
Surety Bond pursuant to an insurance agreement with Financial Security (the
"Surety Arrangement"), the Fund receives ratings from the Rating Agencies of
"AAA"/"Aaa" for the Preferred Shares. See "Description of Notes -- Asset
Maintenance" and "Surety Arrangement for Preferred Shares -- Insurance
Agreement."
INFORMATION REGARDING THE INVESTMENT ADVISER
Prospect Street(R) Investment Management Co., Inc., an investment adviser
registered under the U.S. Investment Advisers Act of 1940, has served as
investment adviser to the Fund since its inception. The Investment Adviser was
organized in June 1988 to provide institutional clients with investment
management services.
Richard E. Omohundro, Jr., Co-President of the Investment Adviser, served as
a "high-yield" specialist and Co-Manager of the High-yield Bond Group of Merrill
Lynch Capital Markets ("Merrill Lynch") from 1978 through 1987. During that
period, the High-yield Bond Group raised approximately $13.6 billion in new
"high-yield" securities through 107 issues and provided one of the largest
secondary trading markets for "high-yield" securities. Mr. Omohundro provides
general advisory assistance to, analyzes certain policy considerations with, and
consults on a regular basis with, the Fund's portfolio manager. John A.
Frabotta, Vice President of the Investment Adviser, performed various research,
structuring and pricing functions involving "high-yield" securities as a Vice
President of Merrill Lynch. Mr. Frabotta serves as the portfolio manager of the
Fund (since September, 1990) responsible for the day-to-day management of the
Fund's portfolio. Mr. Frabotta has over 20 years of experience working with
"high-yield," fixed income instruments.
The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.65% of the Fund's average weekly value of the total assets less accrued
liabilities (excluding the principal amount of the Notes and the liquidation
preference of the Preferred Shares and including accrued and unpaid dividends on
the Preferred Shares) up to and including $175,000,000 of such managed assets,
0.55% on the next $50,000,000 of such managed assets and 0.50% of the excess of
such managed assets over $225,000,000. Since the Investment Adviser's fee is
based on the average weekly managed assets of the Fund, the Investment Adviser
will benefit from an increase in the Fund's assets resulting from the Offer. See
"The Investment Adviser." In addition, three of the Fund's seven Directors are
"interested persons" (as such term is defined under the 1940 Act), of the Fund
who could benefit indirectly from the Offer because of such Directors'
affiliations with the Investment Adviser. See "The Investment Adviser" and
"Directors and Officers."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered, among
others, in connection with the Offer and investment in the Fund generally.
Dilution. An immediate dilution of the aggregate net asset value of the
shares of Common Stock will be experienced as a result of the Offer because the
amounts received by the Fund for each Share with respect to the Subscription
Price (after payment of soliciting fees and other expenses of the Offer) will be
less than the Fund's net asset value per share and because the number of shares
outstanding after the Offer will increase in a greater percentage than the
increase in the size of the Fund's assets. As a result, Record Date Shareholders
will experience a decrease in the net asset value per share held by them,
irrespective of whether they exercise all or any portion of their Rights. In
addition, Record Date Shareholders who do not fully exercise their Rights will,
at the completion of the Offer, own a smaller proportional interest in the Fund
than would otherwise be the case. Further, shareholders who exercise all of
their rights but do not participate in the Over-Subscription Privilege will, at
the completion of the Offer, own a smaller proportional interest in the Fund to
the extent that the Fund increases the number of Shares subject to subscription
by up to 25% as described herein and such Shares are subscribed for. It is not
possible to state precisely the amount of such a decrease in net asset value per
share because it is not known at this time what the Subscription Price will be,
what the net asset value per share will be on the Expiration Date or what
proportion of the Shares will be subscribed for, such dilution could be
substantial. For example, assuming all Rights are exercised by Record Date
Shareholders at the Estimated Subscription Price of $3.76 per share (which is
95% of the Fund's net asset value per share at February 21, 1997), the Fund's
net asset value per share (after payment of the Dealer Manager and soliciting
fees and estimated offering expenses) would be reduced by approximately
$0.10 per share or 2.53%.
Risk of "Leverage." Leverage creates the opportunity for greater
total returns, but at the same time involves certain risks. Any investment
income or gains earned from the capital contributed by the purchasers of
the Notes and the Preferred Shares which is in excess of interest and
dividends due thereon will cause the value of the dividends, if any, on
the Common Stock to rise more quickly than would otherwise be the case.
Conversely, if the investment performance of the capital contributed by
the purchasers of the Notes and the Preferred Shares fails to cover the
interest and dividends on such capital, the value of the Common Stock may
decrease more quickly than would otherwise be the case and dividends
thereon will be reduced or eliminated. This is the speculative effect of
leverage. During the sharp "high-yield" market decline of 1989 and 1990,
the Fund's leverage contributed to a sharp decline in the net asset value
of the Common Stock. In order to remain in compliance with the 200% asset
coverage ratio required by the 1940 Act, the Fund was required to
repurchase $45.0 million of the $50.0 million of outstanding Senior
Extendible Notes. Also, to maintain compliance with the Fund's Surety
Investment Guidelines the Fund was required to sell "high-yield" assets.
The selling of "high-yield" assets below their original cost and the
retirement of $45.0 million of the Fund's Senior Extendible Notes during
the fiscal years ended October 31, 1990 and 1991, resulted in a reduction
of the Fund's total assets and caused the Fund to realize substantial
capital losses. The Surety Investment Guidelines and the asset coverage
ratio requirements combined to delay the Fund's reinvestment of cash into
"high-yield" securities as the market improved. The Fund's use of leverage
is currently benefiting the holders of Common Stock as the average cost of
funds (pursuant to its Preferred Shares and Notes obligations) was
approximately 5.94% as of January 31, 1997 while the "high-yield" market
currently offers interest income at annualized rates of approximately
10.0% to 12.0%.
At the date hereof, the Fund does not intend to add incremental leverage to
the Fund following the completion of the Offer. Accordingly, the percentage of
the Fund's assets representing leverage will decrease upon completion of the
Offer. The Fund anticipates that it will renegotiate the terms of its
outstanding leverage in 1998. Management of the Fund believes that by not adding
incremental leverage permitted under the 1940 Act, the Fund will enhance its
ability to negotiate the terms of any refinancing of its existing leverage.
However, the Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted under the 1940 Act and existing agreements between the Fund and
third parties.
Because the Notes and the Preferred Shares are senior to the Common Stock in
any liquidation of the Fund, the Notes, as Fund indebtedness, and next the
Preferred Shares, as a senior class of stock, would have to be paid in full
before any payments would be made with respect to the Common Stock. In addition,
the risk of adverse changes in net asset value is increased by the Fund's
leveraged structure. See "Risk Factors and Special Considerations."
Discount from Net Asset Value. Shares of closed-end funds frequently trade
at a market price that is less than the value of the net assets attributable
thereto. The possibility that shares of the Fund will trade at a discount from
net asset value is a risk separate and distinct from the risk that the Fund's
net asset value will decrease. It should be noted, however, that in some cases,
shares of closed-end funds trade at a premium to net asset value. The Fund's
shares have traded in the market above, at and below net asset value since the
commencement of the Fund's operations. See "Trading and Net Asset Value
Information." In addition, the net asset value of the Fund will change with
changes in the value of its portfolio securities. Because the Fund invests
primarily in fixed- income securities, the net asset value of the shares of the
Fund can be expected to change as general levels of interest rates fluctuate.
When interest rates decline, the value of a fixed-income portfolio can be
expected to rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline. In addition, in a period of
rising short-term interest rates, the higher cost of the Fund's leverage and/or
increasing defaults by issuers of "high-yield" debt obligations would likely
exacerbate such decline in the Fund's net asset value.
"High-Yield," High-Risk Investments. Fixed-income securities offering the
high current income sought by the Fund will ordinarily be in the lower rating
categories of recognized rating agencies or will be nonrated. These fixed-income
securities are regarded by the Rating Agencies, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and will generally involve more
credit risk than securities in the higher rating categories. The values of such
securities tend to reflect individual corporate developments to a greater extent
than higher rated securities, which react primarily to fluctuations in the
general level of interest rates, and such securities are frequently subordinated
to the prior payment of senior indebtedness. In addition, the trading market for
"high- yield," high risk securities is generally less liquid than the market for
higher rated securities. As of January 31, 1997, approximately 93.34% of the
market value of the Fund's total investments was represented by fixed-income
securities regarded by the Rating Agencies as below investment grade (that is
rated Ba1 or lower by Moody's or BB+ or lower by S&P).
In the severe adverse interest rate and economic environment of 1989 and
1990 the Fund suffered a substantial decline in its net asset value. In 1988,
when the Fund commenced operations, "high-yield" securities traded at yields
approximately 500 to 550 basis points higher than comparable U.S. Treasury
securities. In 1990, this spread widened to approximately 1250 basis points
resulting in substantial price declines in the corporate "high-yield" bond
market. During the fiscal years ended October 31, 1990 and 1991, the Fund was
obligated to repay $45.0 million of the Senior Extendible Notes, which required
the liquidation of investments that were selling at prices substantially below
their original purchase prices resulting in the realization of substantial
capital losses. Also during 1989 and 1990, the level of "high-yield" debt
security defaults increased as many issuers were unable to obtain funds through
financial intermediaries or the public "high-yield" market. The effect of these
developments on the Fund was a substantial decline in the Fund's net asset value
and a substantial reduction in the Fund's monthly dividend. Also, the forced
liquidation of a substantial portion of the Fund's portfolio in order to repay
the Senior Extendible Notes resulted in the realization of substantial capital
losses, and this severely limited the ability of the Fund to return to its
original net asset value as the "high-yield" market improved. The "high-yield"
market decline reversed in the fourth quarter of 1990 and by midyear 1991, after
reinvesting a substantial amount of its cash, the Fund's net asset value had
improved substantially but to a level far less than the net asset value at the
time the Fund commenced operations.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt retirements
totaling $26.0 billion. Net new issue activity of "high-yield" debt securities
totaled $11.4 billion, $46.1 billion, $22.2 billion, $26.7 billion and $60.2
billion for the calendar years 1992, 1993, 1994, 1995 and 1996, respectively.
The statistical information with respect to new issue activity is based upon
information the Fund obtained from the Credit Suisse First Boston High Yield
Handbook. The spread between the yield on U.S. Treasury securities and the
"high-yield" market has fluctuated between 300 and 600 basis points (3.0% to
6.0%) during the 1992 to 1996 period, which is more in line with the historical
spread relationship.
Since 1977, the historical weighted default rate on "high-yield" debt
securities has been 3.29%. The default rates on "high-yield" debt securities for
the calendar years 1990, 1991, 1992, 1993, 1994, 1995 and 1996 were 7.98%,
9.33%, 2.89%, 0.96%, 0.44%, 2.24% and 1.14%, respectively. The defaulted amount
of "high-yield" debt securities was $18.1 billion in 1990, $20.7 billion in
1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion in 1994, $6.7
billion in 1995 and $4.2 billion in 1996. The statistical information with
respect to historical default rates and amounts is based on information the Fund
obtained from the Credit Suisse First Boston High Yield Handbook.
For a more detailed discussion of the risks and special considerations with
respect to "high-yield," high risk securities, see "Risk Factors and Special
Considerations -- 'High-Yield,' High Risk Investments."
Other Matters. There are additional matters which should be considered in
connection with an investment in the Fund including provisions of the Fund's
Articles of Incorporation, as amended (the "Articles of Incorporation"), which
may grant certain special voting rights to holders of the Preferred Shares,
limitations on the ability of the Fund to declare dividends or other
distributions contained in the 1940 Act and in the Note Purchase Agreement (as
defined herein) governing the Notes, and the possible conversion of the Fund to
an open-end investment company. See "Risk Factors and Special Considerations"
and "Share Repurchases; Conversion to Open-End Status."
Investors should carefully consider their ability to assume the foregoing
risks before making an investment in the Fund. An investment in shares of the
Fund is not appropriate for all investors. See "Risk Factors and Special
Considerations."
<PAGE>
FEE TABLE
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price per Share)(1) .... 3.75%
----
Annual Expenses (as a percentage of net assets attributable to
common stock)(2)
Management Fees(3) ..................................................... 0.77%
----
Interest Expense ....................................................... 0.92%
----
Other Expenses(2) ...................................................... 0.73%
----
Total Annual Expenses(4).......................................... 2.42%
====
<TABLE>
EXAMPLE:
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming a 5% annual return
throughout the periods ............................. $61 $110 $162 $304
</TABLE>
- ----------
(1) The Fund has agreed to pay the Dealer Managers and the other broker-
dealers soliciting the exercise of Rights solicitation fees equal to
2.50% of the Subscription Price per Share for each Share issued
pursuant to the exercise of the Rights and pursuant to the Over-
Subscription Privilege. The Fund has also agreed to pay the Dealer
Managers a fee for financial advisory and marketing services in
connection with the Offer equal to 1.25% of the aggregate Subscription
Price for the Shares issued pursuant to the exercise of the Rights and
the Over-Subscription Privilege and to reimburse the Dealer Managers
for its expenses relating to the Offer up to an aggregate of $100,000.
In addition, the Fund has agreed to pay fees plus transaction based
charges to the Subscription Agent (as defined herein) and the
Information Agent (as defined herein), estimated to be $20,000 and
$20,000, respectively, for their services related to the Offer, which
includes reimbursement for their out-of-pocket expenses. These fees
and expenses will be borne by the Fund and indrectly by all of the
Fund's shareholders, including those shareholders who do not exercise
their Rights.
(2) Amounts are based on estimated amounts for the Fund's current fiscal
year and assume that (i) all of the Rights are exercised and (ii) the
Fund does not increase the number of Shares subject to subscription
pursuant to the Over-Subscription Privilege.
(3) The Fund pays the Investment Adviser a monthly fee at an annual rate
ranging from 0.65% to 0.50%. Until June 21, 1997, the Investment
Adviser has waived its advisory fee with respect to the increase in
the Fund's managed assets attributed to the exercise of rights in the
most recent rights offering by the Fund in June 1996. See "The
Investment Adviser."
(4) Total annual expenses applicable to both the common and preferred shares
. relative to the average net assets of both the common and preferred
shareholders would be 2.07%.
THE FOREGOING FEE TABLE AND EXAMPLE ARE INTENDED TO ASSIST INVESTORS IN
UNDERSTANDING THE COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR
DIRECTLY OR INDIRECTLY.
The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value, a payment of a 3.75% sales load and an annual
expense ratio of 2.42%. The table above and the assumption in the Example of a
5% annual return are required by Securities and Exchange Commission regulations
applicable to all investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED AS
A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL
EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR
PURPOSES OF THE EXAMPLE. In addition, while the Example assumes reinvestment of
all dividends and distributions at net asset value, participants in the Fund's
Dividend Reinvestment Plan may receive shares purchased or issued at a price or
value different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD)
The table below sets forth certain specified information for a share of
Common Stock outstanding throughout each period presented. The financial
highlights for each period presented have been audited by Arthur Andersen LLP,
the Fund's independent public accountants, whose report thereon was unqualified.
The information should be read in conjunction with the financial statements and
notes thereto, which are incorporated herein by reference, in the Fund's Annual
Report as of October 31, 1996, which is available upon request from the Fund's
registrar and transfer agent, State Street Bank and Trust Company.
<TABLE>
<CAPTION>
DECEMBER 5, 1988
(COMMENCEMENT
FOR THE FISCAL YEARS ENDED OCTOBER 31, OF OPERATIONS)
------------------------------------------------------------------------- TO OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of
period .................................. $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82 $ 9.15(b)
-------- -------- -------- -------- -------- -------- -------- --------
Net investment income ..................... .50# .45 .48# .63# .62 .55 .98 1.31
Net realized and unrealized gain (loss) on
investment .............................. .20# .03 (.38)# .39# .07 .56 (3.43) (2.32)
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment operations .... $ .70 $ .48 $ .10 $ 1.02 $ .69 $ 1.11 $ (2.45) $ (1.01)
-------- -------- -------- -------- -------- -------- -------- --------
Distributions:
Dividends from net investment income
To preferred stockholders ............. (.04) (.05) (.03) (.06) (.10) (.16) (.22) (.19)
To common stockholders ................ (.42) (.42) (.45) (.62) (.45) (.36) (.76) (1.12)
Dividends to common stockholders
from paid-in- capital ................. -- -- -- -- -- -- (.09) (.01)
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions ............. $ (.46) $ (.47) $ (.48) $ (.68) $ (.55) $ (.52) $ (1.07) $ (1.32)
-------- -------- -------- -------- -------- -------- -------- --------
Effect of sale of common stock and related
expenses ................................ $ (.04) $ -- $ (.18) $ (.12) $ -- $ -- $ -- $ --
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value -- end of period $ 3.90 $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82
======== ======== ======== ======== ======== ======== ======== ========
Per share market value:
End of period ........................... $ 4.00 $ 3.88 $ 3.50 $ 4.25 $ 4.00 $ 3.50 $ 2.50 $ 6.00
======== ======== ======== ======== ======= ======== ======== ========
Total investment return ............. 15.29% 28.57% (7.78)% 23.25% 27.99% 57.36% (50.21)% (31.33)%
======== ======== ======== ======== ======= ======== ======== ========
Net assets, end of period, applicable to
common stock (a) ........................ $120,711 $ 93,309 $ 92,072 $ 79,438 $55,178 $ 53,040 $ 45,028 $ 92,487
======== ======== ======== ======== ======= ======== ======== ========
Net assets, end of period, applicable to
preferred stock (a) ..................... $ 20,000 $ 20,000 $ 20,000 $ 20,000 $30,000 $30,000 $ 30,000 $ 30,000
======== ======== ======== ======== ======= ======= ======== ========
Net assets, end of period (a) ............. $140,711 $113,309 $112,072 $ 99,438 $ 85,178 $ 83,040 $ 75,028 $122,487
======== ======== ======== ======== ======== ======== ======== ========
Ratio of operating expenses to average net
assets** ................................ 2.21%+ 2.28%+ 2.30%+ 2.13%+ 2.28%+ 2.93%+ 6.15%+ 4.89%*+
Ratio of net investment income to average
net assets** ............................ 9.51% 9.39% 8.64% 9.26% 9.33% 9.24% 13.23% 13.88%*
Portfolio turnover rate ................... 108.33% 80.71% 72.00% 117.20% 97.86% 114.00% 63.50% 89.70%*
(a) Dollars in thousands.
(b) Net of initial offering and underwriting costs.
* Annualized.
** Ratios calculated on the basis of expenses and net investment income applicable to both the
common and preferred shares relative to the average net assets of both the common and preferred
shareholders.
+ Excluding interest expense, the ratio of operating expenses to average net assets is 1.30%,
1.29%, 1.32%, 1.50%, 1.72%, 2.23%, 2.60% and 1.279%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per
share effect of the Fund's rights offerings.
</TABLE>
<PAGE>
CAPITALIZATION AT JANUARY 31, 1997
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING AMOUNT HELD
EXCLUSIVE OF AMOUNT BY THE FUND
HELD BY THE FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT ACCOUNT
-------------- ----------------- ------------------- -----------
<S> <C> <C> <C>
Senior Notes .... -- $20,000,000 -0-
Taxable Auction
Rate Preferred
Stock, no
par value,
Liquidation
Preference
$100,000 per share 1,000 shares 200 shares -0- shares
Common Stock,
$0.01 par value.. 100,000,000 shares 30,970,767 shares -0- shares
</TABLE>
INFORMATION REGARDING SENIOR SECURITIES
The following table shows certain information regarding each class of senior
security of the Fund as of the end of each fiscal year of the Fund since its
inception.
<TABLE>
<CAPTION>
INVOLUNTARY
ASSET COVERAGE LIQUIDATION APPROXIMATE MARKET
AT TOTAL AMOUNT FOR NOTES(3) PREFERENCE VALUE PER
OCTOBER 31 OUTSTANDING OR SHARES(4) PER SHARE SHARE OR NOTE
---------- ------------ -------------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Senior Extendible
Notes(1) 1989 $50,000,000 $ 3,450 -- $1,000.00
1990 15,000,000 6,002 -- 1,000.00
1991 5,000,000 17,608 -- 1,000.00
1992 5,000,000 18,036 -- 1,087.50
1993 0 -- -- --
Senior Notes(1)
1993 $20,000,000 $ 5,972 -- $ 997.50
1994 20,000,000 6,604 -- 937.10
1995 20,000,000 6,665 -- 987.50
1996 20,000,000 8,036 -- 990.00
Taxable Auction Rate
Preferred Stock(2) 1989 300 Shares $408,291 $100,000 $ 100,000
1990 300 Shares 250,094 100,000 100,000
1991 300 Shares 276,800 100,000 100,000
1992 300 Shares 283,927 100,000 100,000
1993 200 Shares 497,188 100,000 100,000
1994 200 Shares 560,358 100,000 100,000
1995 200 Shares 566,544 100,000 100,000
1996 200 Shares 703,553 100,000 100,000
- ----------
(1) In July 1993, the Fund repurchased the remaining $5,000,000 principal amount
of its Senior Extendible Notes, which carried an annual interest rate
through December 31, 1993 of 10.28%, for $5,178,000. The Fund thereafter
issued $20,000,000 of new Senior Notes payable December 1, 1998, which bear
interest at a fixed annual rate of 6.53%.
(2) In July 1993, the Fund redeemed 100 shares of its Taxable Auction Rate
Preferred Stock for $100,000 per share plus accrued interest, leaving 200
such shares outstanding.
(3) Amount shown is per $1,000 of Senior Extendible Note or Senior Note, as the
case may be. Calculated by subtracting the Fund's total liabilities (not
including senior securities) from the Fund's total assets and dividing such
amount by the quotient of (a) the principal amount of outstanding Senior
Extendible Notes or the Senior Notes, as the case may be, divided by (b)
$1,000. At January 31, 1997, the asset coverage for the $20,000,000 of
Senior Notes was approximately $8,084 per $1,000 of Senior Notes.
(4) Amount shown is per share of Taxable Auction Rate Preferred Stock.
Calculated by subtracting the Fund's total liabilities (including senior
securities constituting debt but not including the Taxable Auction Rate
Preferred Stock) from the Fund's total assets and dividing such amount by
the number of outstanding shares of Taxable Auction Rate Preferred Stock. At
January 31, 1997, the asset coverage for the 200 outstanding shares of
Taxable Auction Rate Preferred Stock was approximately $708,387 per share of
Taxable Auction Rate Preferred Stock.
</TABLE>
<PAGE>
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded both at a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above net asset value, there can be no assurance
that this premium will continue after the Offer or that the shares will not
again trade at a discount. Shares of other closed-end investment companies
frequently trade at a discount from net asset value. See "Risk Factors and
Special Considerations."
The following table shows the high and low sales prices of the Fund's Common
Stock on the New York Stock Exchange Composite Tape, quarterly trading volume on
the Exchange, the high and low net asset value per share and the high and low
premium or discount at which the Fund's shares were trading for each fiscal
quarter during the two most recent fiscal years and each fiscal quarter during
the current fiscal year.
<TABLE>
<CAPTION>
QUARTERLY
TRADING PREMIUM/(DISCOUNT)
MARKET PRICE VOLUME NET ASSET VALUE TO NET ASSET VALUE(%)
-------------------- ----------- -------------------- --------------------
QUARTER ENDED HIGH LOW (THOUSANDS HIGH LOW HIGH LOW
- ------------- ---- --- OF SHARES) ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1994 ................. 4 3/8 3 7/8 7,028.8 4.28 4.08 3.16 (9.04)
April 30, 1994 ................... 4 3/8 3 5/8 3,548.8 4.21 3.89 3.92 (6.81)
July 31, 1994 .................... 4 3 5/8 2,544.3 3.93 3.84 1.78 (6.81)
October 31, 1994 ................. 3 3/4 3 3/8 2,069.9 3.90 3.70 (1.06) (10.24)
January 31, 1995 ................. 3 1/2 3 1/4 2,658.0 3.71 3.57 (2.23) (11.20)
April 30, 1995 ................... 3 3/4 3 3/8 2,114.9 3.66 3.59 3.59 (4.37)
July 31, 1995 .................... 3 7/8 3 1/2 2,484.4 3.73 3.68 4.45 (1.76)
October 31, 1995 ................. 3 7/8 3 5/8 2,509.7 3.74 3.70 4.73 (2.82)
January 31, 1996 ................. 4 3 3/4 2,826.5 3.73 3.67 8.70 0.81
April 30, 1996 ................... 4 1/8 3 7/8 3,313.9 3.84 3.71 7.82 1.71
July 31, 1996 .................... 4 1/8 3 5/8 4,125.6 3.88 3.79 6.31 (4.35)
October 31, 1996 ................. 4 3 3/4 3,644.8 3.91 3.80 2.30 (1.32)
January 31, 1997 ................. 4 3 7/8 3,835.4 3.95 3.88 1.27 (0.13)
</TABLE>
The net asset value per share of the Fund's Common Stock at the close of
business on January 24, 1997 (the last trading date on which the Fund publicly
reported its net asset value prior to the announcement of the Offer) and on
February 21, 1997 (the last trading date on which the Fund publicly reported its
net asset value prior to the Record Date of the Offer) was $3.93 and $3.96,
respectively, and the last reported sales price of a share of the Fund's Common
Stock on the Exchange on those dates was $4.00 and $4.25, respectively.
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure, consisting of (i) $20,000,000 aggregate principal
amount of Notes, (ii) 200 Preferred Shares (liquidation preference $100,000 per
share) and (iii) 30,970,767 shares of Common Stock, as of January 31, 1997. The
Fund's investment objective is to provide high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed,
diversified portfolio of "high-yield," high risk securities (commonly referred
to as "junk bonds"). The Fund invests primarily in fixed-income securities rated
in the lower categories by established rating agencies (consisting principally
of fixed-income securities rated "BB"/"Ba" or lower by the Rating Agencies(1))
or nonrated fixed-income securities deemed by the Investment Adviser to be of
comparable quality. The Fund's investments are subject to the Investment
Guidelines. See "Investment Policies and Limitations -- Investment Guidelines."
The fixed-income securities in which the Fund invests are regarded by the Rating
Agencies, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation
and generally involve more credit risk than securities in the higher rating
categories. See "Investment Policies and Limitations" and "Risk Factors and
Special Considerations."
The Fund's portfolio consists primarily of "high-yield," high risk
fixed-income securities. "High-yield," high risk securities offer a higher yield
to maturity than comparable securities with higher ratings as compensation for
holding an obligation of an issuer perceived to be less creditworthy. In the
severe adverse interest rate and economic environment of 1989 and 1990 the Fund
suffered a substantial decline in its net asset value. In 1988, when the Fund
commenced operations, "high-yield" securities traded at yields approximately 500
to 550 basis points higher than comparable U.S. Treasury securities. In 1990,
this spread widened to approximately 1250 basis points resulting in substantial
price declines in the corporate "high-yield" bond market. During the fiscal
years ended October 31, 1990 and 1991 the Fund was obligated to repay $45.0
million of the previously outstanding Senior Extendible Notes, which required
the liquidation of investments that were selling at prices substantially below
their original purchase prices resulting in the realization of substantial
capital losses. Also during 1989 and 1990, the level of "high-yield" debt
security defaults increased as many issuers were unable to obtain funds through
financial intermediaries or the public "high-yield" market. The effect of these
developments on the Fund was a substantial decline in the Fund's net asset value
and a substantial reduction in the Fund's monthly dividend. Also, the forced
liquidation of a substantial portion of the Fund's portfolio in order to repay
the Senior Extendible Notes resulted in the realization of substantial capital
losses, and this severely limited the ability of the Fund to return to its
original net asset value as the "high-yield" market improved. The "high-yield"
market decline reversed in the fourth quarter of 1990 and by midyear 1991, after
reinvesting a substantial amount of its cash, the Fund's net asset value had
improved substantially but to a level far less than the net asset value at the
time the Fund commenced operations.
The "high-yield" market, as measured by the Credit Suisse First Boston High
Yield Index, posted total annual returns of 43.75%, 16.66%, 18.91%, -0.97%,
17.38% and 12.42% for the calendar years 1991, 1992, 1993, 1994, 1995 and 1996,
respectively. The ten year U.S. Treasury Bond produced a total return of 16.46%,
6.52%, 11.94%, -6.08%, 23.68% and 0.89% for the calendar years 1991, 1992, 1993,
1994, 1995 and 1996, respectively. See "Financial Highlights" for information
concerning the Fund's return.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt retirements
totaling $26.0 billion. Net new issue activity of "high-yield" debt securities
totaled $11.4 billion, $46.1 billion, $22.2 billion, $26.7 billion and $60.2
billion for the calendar years 1992, 1993, 1994, 1995 and 1996, respectively.
The statistical information with respect to new issue activity is based upon
information the Fund obtain from the Credit Suisse First Boston High Yield
Handbook. The spread between the yield on U.S. Treasury securities and the
"high-yield" market has fluctuated between 300 and 600 basis points (3.0% to
6.0%) during the 1992 to 1996 period, which is more in line with the historical
spread relationship.
- ----------
(1) Throughout this Prospectus, references to ratings by the Rating Agencies
will indicate the S&P rating followed by the Moody's rating in the format
shown.
<PAGE>
Since 1977, the historical weighted default rate on "high-yield" debt
securities has been 3.29%. The default rates on "high-yield" debt securities for
the calendar years 1990, 1991, 1992, 1993, 1994, 1995 and 1996 were 7.98%,
9.33%, 2.89%, 0.96%, 0.44%, 2.24% and 1.14%, respectively. The defaulted amount
of "high-yield" debt securities was $18.1 billion in 1990, $20.7 billion in
1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion in 1994, $6.7
billion in 1995 and $4.2 billion in 1996. The statistical information with
respect to historical default rates and amounts is based on information the Fund
obtained from the Credit Suisse First Boston High Yield Handbook.
The capital structure of the Fund has been designed to take advantage of the
historical spread in yields between "high-yield" securities and representative
U.S. Treasury securities, compared with the average default loss on "high-yield"
securities. In addition, through investment leverage, investors in the Common
Stock of the Fund receive increased yields to the extent that the rate of return
(i.e., the current interest yield on the Fund's portfolio reduced by the actual
default loss rate experienced on that portfolio) earned on the Fund's assets,
exceeds, after expenses of Fund management, the interest and dividend rates on
the Notes and Preferred Shares. Conversely, to the extent that the rate of
return on the portfolio does not exceed the interest and dividend rates on the
Notes and Preferred Shares, yield to investors in the Common Stock will be
reduced.
The Fund is a closed-end investment company. Closed-end investment companies
differ from open-end investment companies (commonly referred to as "mutual
funds") in that closed-end investment companies have a fixed capital base,
whereas open-end companies issue securities redeemable at net asset value at any
time at the option of the shareholder and typically engage in a continuous
offering of their shares. Accordingly, open-end investment companies are subject
to periodic asset in-flows and out-flows that can complicate portfolio
management. Closed-end investment companies do not face the prospect of having
to liquidate portfolio holdings to satisfy redemptions at the option of
shareholders or having to maintain cash positions to meet the possibility of
such redemptions. The Fund will, however, be required to have sufficient cash or
cash equivalents to meet interest payments on the Notes and dividend payments on
the Preferred Shares and to fund certain redemptions of these securities in
certain circumstances. See "Description of Notes," "Description of Capital
Stock" and "Surety Arrangement for Preferred Shares."
The Offer is the Fund's first non-transferable rights offering. The Fund
completed transferable rights offerings on June 21, 1996, November 23, 1993 and
March 4, 1993, which permitted shareholders to acquire, at a subscription price
of $3.81, $3.60 and $3.80, respectively, one new share for each three rights
held as of the record date of such rights offerings. Approximately 61% of the
rights issued by the Fund pursuant to the rights offering completed in June 1996
were exercised and, as a result, 5,393,885 new shares of Common Stock were
issued in June 1996 with net proceeds to the Fund of approximately $19.5
million. All of the rights issued by the Fund pursuant to the rights offerings
completed in March 1993 and November 1993 were exercised and, as a result,
4,625,000 new shares of Common Stock were issued in March 1993 with net proceeds
to the Fund of approximately $16.7 million and 6,210,000 new shares of Common
Stock were issued in December 1993 with net proceeds to the Fund of
approximately $21.3 million. All of the net proceeds from the exercise of the
rights pursuant to the prior rights offerings have been invested in new
securities in accordance with the Fund's investment objective.
The Fund was organized as a corporation under the laws of Maryland on May
13, 1988 and has registered with the Securities and Exchange Commission (the
"SEC") under the 1940 Act. The Fund's principal office is located at 60 State
Street, Boston, Massachusetts 02109. The Fund's Investment Adviser is Prospect
Street(R) Investment Management Co., Inc., an investment management firm
registered with the SEC under the Investment Advisers Act of 1940, as amended.
See "The Investment Adviser."
THE OFFER
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its shareholders to increase the assets of the
Fund available for investment so that the Fund will be in a better position to
take advantage of available investment opportunities and increase the
diversification of its portfolio. The Investment Adviser informed the Board of
Directors of the Fund that the Investment Adviser believes the "high-yield" bond
market currently has attractive investment opportunities and that, under current
market conditions, the net proceeds of the Offer could be invested at or about
the same rate of return that the Fund is currently earning while achieving
certain other net benefits to the Fund. The Board of Directors noted that an
increase in the Fund's assets pursuant to the Offer will have the immediate
effect of strengthening the Fund's current common equity capital relative to its
outstanding leverage. The Board of Directors believes that increasing the Fund's
assets will provide the Fund with additional flexibility in connection with the
Fund's leverage, including its ability to increase the Fund's existing leverage
and renegotiate or refinance that portion of the Fund's leverage that comes due
in 1998. In addition, the Board of Directors believes that increasing the size
of the Fund may lower the Fund's expenses as a proportion of average net assets
because the Fund's fixed costs can be spread over a larger asset base and
certain variable costs, such as the fees paid to the Investment Adviser pursuant
to the Advisory Agreement (as defined herein), are reduced as the Fund's assets
reach specific levels. In addition, the issuance of additional shares may
enhance the liquidity of the Fund's shares on the Exchange. The Board of also
considered the impact of the Offer on its current distribution policy to
maintain, subject to market conditions, a relatively stable level of
distributions and, based on information provided by the Investment Adviser and
current market conditions, believes that the Offer will not result in a change
in the Fund's current level of dividends. For a further discussion of the
anticipated impact of the Offer on the Fund's dividends, please refer to "Risk
Factors and Special Considerations -- Dividends and Distributions."
In determining that the Offer was in the best interests of the Fund and its
shareholders, the Board of Directors retained the Dealer Managers to provide the
Fund with financial advisory and marketing services relating to the Offer,
including the structure, timing and terms of the Offer. In addition to the
foregoing, the Board of Directors considered, among other things, the benefits
and drawbacks of conducting a non-transferable versus a transferable rights
offering, the effect on the Fund if the Offer is undersubscribed and the
experience of the Dealer Managers in conducting rights offerings.
At the date hereof, the Fund does not intend to add incremental leverage to
the Fund following the completion of the Offer. See "Investment Policies and
Limitations." The Investment Adviser will benefit from the Offer because the
Investment Adviser's fee is based on the average weekly managed assets of the
Fund.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to its Record Date Shareholders, as of the close of
business on February 28, 1997, Rights entitling the holders thereof to subscribe
for an aggregate of 10,323,589 Shares of the Fund's Common Stock (12,904,486
Shares if the Fund increases the number of shares of Common Stock available by
up to 25% in connection with the Over-Subscription Privilege described below).
Each shareholder is being issued one Right for each whole share of Common Stock
owned on the Record Date. The Rights entitle the holders thereof to subscribe
for one Share for every three Rights held (1 for 3). Fractional shares will not
be issued upon the exercise of Rights. Accordingly, Shares may be purchased in
the Primary Subscription only pursuant to the exercise of Rights in integral
multiples of three. Record Date Shareholders who fully exercise all Rights
issued to them may request additional Shares pursuant to the Over-Subscription
Privilege as described below. Rights may be exercised at any time during the
Subscription Period, which commences on February 28, 1997 and ends at 5:00 P.M.,
New York City time, on March 25, 1997, unless extended by the Fund until 5:00
P.M., New York City time, to a date not later than April 2, 1997. The Rights
are evidenced by Subscription Certificates that will be mailed to Record Date
Shareholders, except as discussed below under "Foreign Restrictions."
Shares not subscribed for in the Primary Subscription will be offered, by
means of the Over-Subscription Privilege, to those shareholders who have
exercised all Rights issued to them and who wish to acquire more than the number
of whole Shares they are entitled to purchase pursuant to the exercise of their
Rights. Shares acquired pursuant to the Over- Subscription Privilege are subject
to allotment and may be subject to increase, as more fully discussed below under
"Over-Subscription Privilege." For purposes of determining the maximum number of
Shares a shareholder may acquire pursuant to the Offer, shareholders whose
shares are held of record by Cede, as nominee for DTC, or by any other
depository or nominee will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee on their behalf.
Since fractional shares will not be issued, shareholders who receive or have
remaining fewer than three Rights will be unable to purchase a Share upon the
exercise of such remaining Rights and will not be entitled to receive any cash
in lieu thereof. Such shareholders, may, however, request additional Shares
pursuant to the Over-Subscription Privilege (as described below).
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
The first regular monthly dividend to be paid on Shares acquired upon
exercise of Rights will be the first monthly dividend, the record date for which
occurs after the issuance of the Shares following the Expiration Date. It is the
Fund's present policy to pay dividends on the last Business Day of each month to
shareholders of record seven days prior to the payment date. Assuming the
Subscription Period is not extended beyond March 25, 1997, it is expected that
the first dividend received by shareholders acquiring Shares in the Offer will
be paid on the last Business Day of April, 1997.
OVER-SUBSCRIPTION PRIVILEGE
To the extent shareholders do not exercise all the Rights issued to them,
any underlying Shares represented by such Rights will be offered by means of the
Over-Subscription Privilege to the shareholders who have exercised all the
Rights issued to them and who wish to over-subscribe for additional Shares. Only
shareholders who exercise all the Rights issued to them may indicate on the
Subscription Certificate, which they submit with respect to the exercise of the
Rights issued to them, how many Shares they desire to purchase pursuant to the
Over-Subscription Privilege. If sufficient Shares remain after completion of the
Primary Subscription, all over-subscription requests will be honored in full. If
sufficient Shares are not available after completion of the Primary Subscription
to honor all over-subscription requests, the Fund may, at the discretion of the
Board of Directors, issue shares of Common Stock up to an additional 25% of the
Shares available pursuant to the Offer (up to an additional 2,580,897 Shares) in
order to cover such over-subscription requests. Regardless of whether the Fund
issues such additional Shares, and to the extent Shares are not available to
honor all over-subscription requests, the available Shares will be allocated
among those who over-subscribe so that the number of Shares issued to such
shareholders will generally be in proportion to the number of shares of Common
Stock owned by such shareholders on the Record Date. The allocation process may
involve a series of allocations in order to assure that the total number of
Shares available for over-subscription is distributed on a pro rata basis.
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined herein), before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to the
Primary Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certification Forms will be
distributed to banks, brokers, trustees and other nominee holders with the
Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any Shares that
are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Offer
will be 95% of the lower of (i) the average of the last reported sales price of
a share of the Fund's Common Stock on the Exchange on the Pricing Date and on
the four preceding Business Days or (ii) the net asset value per share as of
the close of business on the Pricing Date. For example, if the average of the
last reported sales price of a share of the Fund's Common Stock on the Exchange
on the Pricing Date and on the four preceding Business Days is $4.25, and the
net asset value per share on the Pricing Date is $4.00, the Subscription Price
will be $3.80 (95% of $4.00). If, however, the average of the last reported
sales price on the Exchange on the Pricing Date and on the four preceding
Business Days is $3.75, and the net asset value per share on the Pricing Date is
$4.00, the Subscription Price will be $3.56 (95% of $3.75). See "Trading and Net
Asset Value Information."
The Fund announced the Offer after the close of trading on the Exchange on
January 30, 1997. The net asset value per share of Common Stock at the close of
business on January 24, 1997 (the last trading date on which the Fund publicly
reported its net asset value prior to the announcement) and on February 21, 1997
(the last trading date on which the Fund publicly reported its net asset value
prior to the Record Date) was $3.93 and $3.96, respectively, and the last
reported sales price of a share of the Fund's Common Stock on the Exchange on
those dates was $4.00 and $4.25, respectively.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be listed for trading on the Exchange or any other
securities exchange. However, the Shares to be issued pursuant to the Offer will
be listed for trading on the Exchange, subject to notice of issuance.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 P.M., New York City time, on March 25, 1997,
unless extended by the Fund until 5:00 P.M., New York City time, to a date not
later than April 2, 1997. The Rights will expire on the Expiration Date and
thereafter may not be exercised. Since the Expiration Date and the Pricing Date
will be the same date, shareholders who decide to acquire Shares in the Primary
Subscription or pursuant to the Over- Subscription Privilege will not know the
Subscription Price of the Shares when they make their decision. Any extension of
the Offer will be followed as promptly as practicable by announcement thereof.
Such announcement will be issued no later than 9:00 A.M., New York City time, on
the next business day following the previously scheduled Expiration Date.
Without limiting the manner in which the Fund may choose to make such
announcement, the Fund will not, unless otherwise required by law, have any
obligation to publish, advertise or otherwise communicate any such announcement
other than by making a release to the Dow Jones News Service or such other means
of announcement as the Fund deems appropriate.
SUBSCRIPTION AGENT
The subscription agent is State Street Bank and Trust Company (the
"Subscription Agent"). The Subscription Agent will receive for its
administrative, processing, invoicing and other services as subscription agent,
a fee estimated to be approximately $10,000, plus transaction based charges as
well as reimbursement for all out-of-pocket expenses related to the Offer
estimated to be $10,000. The Subscription Agent is also the Fund's transfer
agent, dividend-paying agent and registrar for the Common Stock. Questions
regarding the Subscription Certificates should be directed to State Street Bank
and Trust Company, Two Heritage Drive, North Quincy, Massachusetts 02171 U.S.A.
(800) 426-5523 (toll free); shareholders may also consult their brokers or
nominees. Completed Subscription Certificates must be sent together with proper
payment of the Estimated Subscription Price for all Shares subscribed for in the
Primary Subscription and the Over-Subscription Privilege to State Street Bank
and Trust Company by one of the methods described below. Alternatively, Notices
of Guaranteed Delivery may be sent by facsimile to (617) 794-6333 to be received
by the Subscription Agent prior to 5:00 P.M., New York City time, on the
Expiration Date. Facsimiles should be confirmed by telephone at (617) 794-6388.
The Fund will accept only properly completed and executed Subscription
Certificates actually received at any of the addresses listed below, prior to
5:00 P.M., New York City time, on the Expiration Date or by the close of
business on the third Business Day after the Expiration Date following timely
receipt of a Notice of Guaranteed Delivery. See "Payment for Shares" below.
<PAGE>
(1) BY FIRST CLASS MAIL OR EXPRESS MAIL:
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, Massachusetts 02205-8686
U.S.A.
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
State Street Bank and Trust Company
Corporate Reorganization
c/o Boston EquiServe
70 Campanelli Drive
Braintree, Massachusetts 02184
U.S.A.
(3) BY HAND:
Bank of Boston
c/o Boston EquiServe
Corporate Reorganization
55 Broadway -- 3rd Floor
New York, New York 10006
U.S.A.
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL
NOT CONSTITUTE VALID DELIVERY.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Restrictions," will be mailed to Record Date Shareholders
or, if a shareholder's shares of Common Stock are held by Cede or any other
depository or nominee on their behalf, to Cede or such depository or nominee.
Rights may be exercised by completing and signing the Subscription Certificate
that accompanies this Prospectus and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment in full for the Shares at the
Estimated Subscription Price. Rights may also be exercised by contacting your
broker, banker or trust company, which can arrange, on your behalf, to guarantee
delivery of payment and delivery of a properly completed and executed
Subscription Certificate pursuant to a Notice of Guaranteed Delivery. A fee may
be charged for this service. Fractional shares will not be issued and
shareholders who receive or who have remaining fewer than three Rights will not
be able to purchase a Share upon the exercise of such remaining Rights and will
not be entitled to receive any cash in lieu thereof. Such shareholders may,
however, request additional Shares pursuant to the Over- Subscription Privilege.
Completed Subscripiton Certificates must be received by the Subscription Agent
prior to 5:00 P.M., New York City time, on the Expiration Date at one of the
addresses set forth above (unless the guaranteed delivery procedures are
complied with as described below under "Payment for Shares").
Shareholders Who Are Record Owners. Shareholders who are record owners can
choose between either option to exercise their Rights as described below under
"Payment for Shares." If time is of the essence, option (2) under "Payment for
Shares" below will permit delivery of the Subscription Certificate and payment
after the Expiration Date.
Shareholders Whose Shares Are Held by a Nominee. Shareholders whose shares
are held by a nominee, such as a bank, broker or trustee, must contact that
nominee to exercise their Rights. In such case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods described below under "Payment for Shares."
Nominees. Nominees who hold shares of Common Stock for the account of others
should notify the beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee should
complete the Subscription Certificate and submit it to the Subscription Agent
with the proper payment as described below under "Payment for Shares."
INFORMATION AGENT
Any questions or requests for assistance concerning the method of subscribing
for Shares or for additional copies of this Prospectus or Subscription
Certificates or Notices of Guaranteed Delivery may be directed to the
Information Agent at its telephone number and address listed below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 932-8492
Shareholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated
to be $8,000 and reimbursement for all out-of-pocket expenses related to the
Offer.
PAYMENT FOR SHARES
Shareholders who wish to acquire Shares pursuant to the Offer may choose
between the following methods of payment:
(1) A shareholder may send the Subscription Certificate together with
payment for the Shares acquired on Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege to the
Subscription Agent based on the Estimated Subscription Price of $3.76 per
share (based on 95% of the net asset value per share on February 21,
1997). A subscription will be accepted when payment, together with a
properly completed and executed Subscription Certificate, is received by
the Subscription Agent's office at one of the addresses set forth above no
later than 5:00 P.M., New York City time, on the Expiration Date. The
Subscription Agent will deposit all checks and money orders received by it
for the purchase of Shares prior to the final payment date into a
segregated interest-bearing account (the interest from which will accrue
to the benefit of the Fund) pending proration and distribution of Shares.
A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER
OR CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE UNITED STATES, MUST BE
PAYABLE TO PROSPECT STREET HIGH INCOME PORTFOLIO INC. AND MUST ACCOMPANY A
PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS
SUBJECT TO ACTUAL COLLECTION OF CHECKS BY 5:00 P.M., NEW YORK CITY TIME,
ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR, SHAREHOLDERS ARE STRONGLY URGED TO PAY,
OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR
MONEY ORDER.
(2) Alternatively, a subscription will be accepted by the Subscription
Agent if, prior to 5:00 P.M., New York City time, on the Expiration Date,
the Subscription Agent has received a Notice of Guaranteed Delivery by
facsimile (telecopy) or otherwise from a financial institution that is a
member of the Securities Transfer Agents Medallion Program, the Stock
Exchange Medallion Program or the New York Stock Exchange Medallion
Signature Program guaranteeing delivery of (i) payment of the Estimated
Subscription Price of $3.76 per share for the Shares subscribed for in the
Primary Subscription and any additional Shares subscribed for pursuant to
the Over-Subscription Privilege, and (ii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not honor a
Notice of Guaranteed Delivery unless a properly completed and executed
Subscription Certificate and full payment for the Shares is received by
the Subscription Agent by the close of business on the third Business Day
after the Expiration Date (the "Protect Period").
On a date within eight Business Days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each subscribing
shareholder (or, if shares are held by Cede or any other depository or
nominee, to Cede or such other depository or nominee) a confirmation showing
(i) the number of Shares purchased pursuant to the Primary Subscription, (ii)
the number of Shares, if any, acquired pursuant to the Over-Subscription
Privilege, (iii) the per Share and total purchase price for the Shares, and
(iv) any additional amount payable by such subscribing shareholder to the Fund
or any excess to be refunded by the Fund to such subscribing shareholder, in
each case based on the Subscription Price as determined on the Expiration
Date. If any Record Date Shareholder exercises his or her right to acquire
Shares pursuant to the Over-Subscription Privilege, any such excess payment
which would otherwise be refunded to him or her will be applied by the Fund
toward payment for additional Shares acquired pursuant to exercise of the
Over-Subscription Privilege. Any additional payment required from a
shareholder must be received by the Subscription Agent within ten Business
Days after the Confirmation Date. Any excess payment to be refunded by the
Fund to a shareholder will be mailed by the Subscription Agent to such
shareholder as promptly as practicable. All payments by a shareholder must be
in U.S. dollars by money order or check drawn on a bank or branch located in
the United States and payable to PROSPECT STREET HIGH INCOME PORTFOLIO INC.
The Subscription Agent will deposit all checks received by it prior to the
final payment date into a segregated interest-bearing account (which interest
will accrue to the benefit of the Fund) pending proration and distribution of
the Shares.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE SHARES
PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A HOLDER OF
RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION OR
OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE BY THE
TENTH BUSINESS DAY AFTER THE CONFIRMATION DATE, THE SUBSCRIPTION AGENT RESERVES
THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING ACTIONS: (I) FIND OTHER RECORD
DATE SHAREHOLDERS FOR SUCH SUBSCRIBED AND UNPAID FOR SHARES; (II) APPLY ANY
PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER
OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY
SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE, AND/OR (III) EXERCISE ANY AND
ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED, INCLUDING, WITHOUT
LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH
RESPECT TO SUCH SUBSCRIBED SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
SUBSCRIBING SHAREHOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE
STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR
CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as the
Subscription Agent determines in its sole discretion. The Subscription Agent
will not be under any duty to give notification of any defect or irregularity
in connection with the submission of Subscription Certificates or incur any
liability for failure to give such notification.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER
RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
DISTRIBUTION ARRANGEMENTS
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York,
and Tucker Anthony Incorporated, One Beacon Street, Boston, Massachusetts,
each of whom is a broker-dealer and member of the National Association of
Securities Dealers, Inc., will act as the Dealer Managers for the Offer. Under
the terms and subject to the conditions contained in the Dealer Manager
Agreement dated the date hereof (the "Dealer Manager Agreement"), the Dealer
Managers will provide financial advisory and marketing services in connection
with the Offer and will solicit the exercise of Rights and participation in
the Over-Subscription Privilege by Record Date Shareholders. The Offer is not
contingent upon any number of Rights being exercised. The Fund has agreed to
pay the Dealer Managers a fee for financial advisory and marketing services
equal to 1.25% of the aggregate Subscription Price for Shares issued pursuant
to the exercise of the Rights and pursuant to the Over-Subscription Privilege,
and the Fund has also agreed to pay broker-dealers, including the Dealer
Managers, fees for their solicitation efforts (the "Solicitation Fees") of
2.50% of the Subscription Price per Share for each Share issued pursuant to
the exercise of the Rights and pursuant to the Over-Subscription Privilege as
a result of their soliciting efforts. Solicitation Fees will be paid to the
broker-dealer designated on the applicable portion of the Subscription
Certificates or, in the absence of such designation, to the Dealer Managers.
In addition, the Fund may reimburse the Dealer Managers up to an aggregate
of $100,000 for their reasonable expenses incurred in connection with the Offer.
The Fund and the Investment Adviser have each agreed to indemnify the Dealer
Managers or contribute to losses arising out of certain liabilities including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). The Dealer Manager Agreement also provides that the Dealer Managers
will not be subject to any liability to the Fund in rendering the services
contemplated by such Agreement except for any act of bad faith, willful
misconduct or gross negligence of the Dealer Managers or reckless disregard by
the Dealer Managers of their obligations and duties under such Agreement.
The Fund has agreed not to offer or sell, or enter into any agreement to
sell, any equity or equity related securities of the Fund or securities
convertible into such securities for a period of 180 days after the date of
the Dealer Manager Agreement, except for the Shares and Common Stock issued in
reinvestment of dividends or distributions or other limited circumstances.
DELIVERY OF SHARE CERTIFICATES
Certificates representing Shares acquired in the Primary Subscription will
be mailed promptly after the expiration of the Offer once full payment for
such Shares has been received and cleared. Certificates representing Shares
acquired pursuant to the Over-Subscription Privilege will be mailed as soon as
practicable after full payment for such Shares has been received and cleared
and all allocations have been completed. Participants in the Fund's Dividend
Reinvestment Plan (the "Plan") will have any Shares acquired in the Primary
Subscription and pursuant to the Over-Subscription Privilege credited to their
shareholder dividend reinvestment accounts in the Plan. Participants in the
Plan wishing to exercise Rights for the shares of Common Stock held in their
accounts in the Plan must exercise such Rights in accordance with the
procedures set forth above. Shareholders whose shares of Common Stock are held
of record by Cede or by any other depository or nominee on their behalf or
their broker-dealer's behalf will have any Shares acquired in the Primary
Subscription credited to the account of Cede or such other depository or
nominee. Shares acquired pursuant to the Over-Subscription Privilege will be
certificated and certificates representing such Shares will be sent directly
to Cede or such other depository or nominee. Stock certificates will not be
issued for Shares credited to Plan accounts.
FOREIGN SHAREHOLDERS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders").
Foreign Record Date Shareholders will receive written notice of the Offer. The
Rights to which such Subscription Certificates relate will be held by the
Subscription Agent for such Foreign Record Date Shareholders' accounts until
instructions are received to exercise the Rights. If no instructions have been
received by the Expiration Date, the Rights of those Foreign Record Date
Shareholders will expire.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will not
result in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights. No loss will be
realized if the Rights expire without exercise.
2. The basis of a Right will be (a) to a holder of Common Stock to
whom it is issued and who exercises the Right (i) if the fair market value
of the Right immediately after issuance is less than 15% of the fair
market value of the Common Stock with regard to which it is issued, zero
(unless the holder elects, by filing a statement with his timely filed
federal income tax return for the year in which the Rights are received,
to allocate the basis of the Common Stock between the Right and the Common
Stock based on their respective fair market values immediately after the
Right is issued), and (ii) if the fair market value of the Right
immediately after issuance is 15% or more of the fair market value of the
Common Stock with regard to which it is issued, a portion of the basis in
the Common Stock based upon their respective fair market values
immediately after the Right is issued, and (b) to a holder of Common
Stock to whom it is issued and who allows the Right to expire, zero.
3. The holding period of a Right received by a Record Date Shareholder
includes the holding period of the Common Stock with regard to which the
Right is issued. If the Right is exercised, the holding period of the
Common Stock acquired begins on the date the Right is exercised.
4. A Record Date Shareholder's basis for determining gain or loss upon
the sale of a Share acquired upon the exercise of a Right will be equal to
the sum of the Record Date Shareholder's basis in the Right, if any, and
the Subscription Price per Share. A Record Date Shareholder's gain or loss
recognized upon a sale of a Share acquired upon the exercise of a Right
will be capital gain or loss if the Share was held at the time of sale as
a capital asset and will be long-term capital gain or loss if the Share is
held for more than one year.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if the holder of the account provides
the Fund with either an incorrect taxpayer identification number or no number
at all or fails to certify that he is not subject to such withholding.
The foregoing is a general summary of the material U.S. federal income tax
consequences of the Offer under the provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"), and Treasury
regulations presently in effect that are generally applicable to Record Date
Shareholders that are citizens or residents of the United States, U.S.
corporations, trusts, estates and any other person who would be subject to
U.S. federal income tax upon the sale or exchange of the Common Stock acquired
upon the exercise of the Rights, and does not cover foreign, state or local
taxes. The Internal Revenue Code and such regulations are subject to change by
legislative or administrative action, which may be retroactive. Shareholders
should consult their tax advisers regarding specific questions as to foreign,
federal, state or local taxes. See "Federal Taxation."
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this Prospectus if, subsequent to February
25, 1997 (the effective date of the Fund's Registration Statement), the Fund's
net asset value declines more than 10% from its net asset value as of that
date. Accordingly, the Expiration Date would be extended and the Fund would
notify Record Date Shareholders of any such decline and permit Record Date
Shareholders to cancel their exercise of Rights.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders who are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), Keogh plans of self-employed individuals
and Individual Retirement Accounts (collectively, "Retirement Plans") should
be aware that additional contributions of cash to the Retirement Plan (other
than rollover contributions or trustee-to-trustee transfers from other
Retirement Plans) in order to exercise Rights would be treated as Retirement
Plan contributions and, when taken together with contributions previously
made, may result in, among other things, excise taxes for excess or
nondeductible contributions. In the case of Retirement Plans qualified under
Section 401(a) of the Internal Revenue Code and certain other Retirement
Plans, additional cash contributions could cause the maximum contribution
limitations of Section 415 of the Internal Revenue Code or other qualification
rules to be violated.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Internal Revenue Code. If any
portion of an Individual Retirement Account ("IRA") is used as security for a
loan, the portion so used is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Internal Revenue Code contain prohibited transaction rules that may impact the
exercise of Rights. Due to the complexity of these rules and the penalties for
noncompliance, Retirement Plans should consult with their counsel and other
advisors regarding the consequences of their exercise of Rights under ERISA and
the Internal Revenue Code.
IMPORTANT DATES TO REMEMBER
EVENT DATE
- ----- ----
Record Date ............................................... February 28, 1997
Subscription Period ....................................... February 28, 1997
to March 25, 1997*
Expiration Date and Pricing Date .......................... March 25, 1997*
Subscription Certificates and Payment for Shares Due+ ..... March 25, 1997*
Notice of Guaranteed Delivery Due+ ........................ March 25, 1997*
Payment for Guarantees of Delivery Due .................... March 31, 1997*
Confirmation to Participants .............................. April 7, 1997*
Final Payment for Shares .................................. April 21, 1997*
- ------------
* Unless the Offer is extended to a date not later than April 2, 1997.
+ A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed Delivery,
by March 25, 1997.
USE OF PROCEEDS
If all the Rights are exercised in full at the Estimated Subscription
Price of $3.76 per Share, the net proceeds of the Offer to the Fund are
estimated to be approximately $36,961,069, after deducting offering expenses
payable by the Fund estimated at approximately $400,000. If the Fund increases
the number of Shares subject to subscription by up to 25%, or 2,580,897
Shares, in order to satisfy over-subscription requests, the additional net
proceeds to the Fund will be approximately $9,340,265. The Investment Adviser
anticipates that investment of such proceeds in accordance with the Fund's
investment objective and policies will take up to thirty days from their
receipt by the Fund, depending on market conditions and the availability of
appropriate securities for purchase, but in no event will such investment take
longer than six months. Pending such investment in accordance with the Fund's
investment objective and policies, the proceeds will be held in U.S.
Government securities (which term includes obligations of the United States
Government, its agencies or instrumentalities) and other high-quality short-
term money market instruments.
INVESTMENT POLICIES AND LIMITATIONS
The investment objective of the Fund is to provide high current income,
while seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of "high-yield," high risk
securities (commonly referred to as "junk bonds").
The Fund seeks to achieve its objective of preserving shareholders'
capital through a careful selection process for the Fund's "high-yield," high
risk investments which focuses on each issuer's financial condition and
projected ability to service its debt obligations, portfolio diversification
which is intended to minimize the impact of individual issuer defaults and
adverse economic conditions affecting particular issuers and industry
segments, and close monitoring of portfolio investments and economic
developments in order to reposition the Fund's portfolio in anticipation of
negative developments which the Investment Adviser believes are likely to
occur. Given the high risk nature and price volatility of the Fund's
investments as well as the Fund's leverage, however, it may be extremely
difficult to achieve this objective on a consistent basis in the future. In
the severe adverse interest rate and economic environment of 1989 and 1990,
the Fund suffered a substantial decline in its net asset value as a result of
these factors and thus failed to achieve this objective during that period.
During the sharp "high-yield" market decline of 1989 and 1990, the Fund's
leverage contributed to a sharp decline in the net asset value of the Common
Stock. In order to remain in compliance with the 200% asset coverage ratio
required by the 1940 Act, the Fund was required to repurchase $45.0 million of
the $50.0 million of previously outstanding Senior Extendible Notes. Also, to
maintain compliance with the Fund's Surety Investment Guidelines the Fund was
required to sell "high-yield" assets. The selling of "high-yield" assets below
their original cost and the retirement of $45.0 million of the Fund's Senior
Extendible Notes resulted in a reduction of the Fund's total assets and caused
the Fund to realize substantial capital losses. The Surety Investment
Guidelines and the asset coverage ratio requirements combined to delay the
Fund's reinvestment of cash into "high-yield" securities as the market
improved. The Fund's use of leverage is currently benefitting the holders of
Common Stock as the current average cost of funds (pursuant to its Preferred
Shares and Notes obligations) was approximately 5.94% as of January 31, 1997
while the "high-yield" market currently offers interest income at annualized
rates of approximately 10.0% to 12.0%. There is no assurance that the Fund's
investment objective will be attained in the future.
The Fund's investment objective is a fundamental policy. Pursuant to the
1940 Act, fundamental policies may not be changed without the affirmative vote
of the holders of a majority of the outstanding shares of Common Stock and a
majority of the outstanding Preferred Shares, voting as separate classes,
which, for purposes of the 1940 Act, means for each class the lesser of (a)
more than 50% of the outstanding shares of such class or (b) 67% or more of
the shares of such class present or represented at a meeting at which more
than 50% of the outstanding shares of such class are present or represented by
proxy. Accordingly, no change in the Fund's investment objective could occur
without the affirmative vote of both classes of stock.
INVESTMENT STRATEGY
It is the Fund's policy that under normal market conditions, at least 65%
of its total assets will be invested in "high-yield," high risk securities
rated in the lower categories by recognized rating agencies or nonrated fixed-
income securities deemed by the Investment Adviser to be of comparable
quality, although the Fund has invested and currently intends to continue to
invest a substantially higher percentage of its assets in such securities to
the extent permitted by market conditions. The Fund's portfolio investments
have consisted and will continue to consist principally of fixed-income
securities rated "BB"/"Ba" or lower by the Rating Agencies. The Fund reserves
the right, under normal market conditions, to invest up to 35% of its total
assets in money market instruments and fixed-income securities rated higher
than "BB"/"Ba," although the percentage invested in such securities may
increase under other than normal market conditions, as discussed below.
The credit ratings of all bonds held by the Fund at January 31, 1997 is
set forth below. This information reflects the composition of the Fund's
assets at January 31, 1997 and is not necessarily representative of the Fund
as of the current fiscal year or at any other time in the future.
RATED BY
MOODY'S
-------
Ba ................................................ 3.68%
B ................................................. 66.78%
Caa ............................................... 6.97%
NR ................................................ 15.91%
-----
Total ......................................... 93.34%
Under the Investment Guidelines, certain types of securities in which the
Fund may otherwise invest pursuant to the foregoing strategy and the
investment policies stated below are not eligible for inclusion in the
calculation of the discounted value of the Fund's portfolio. Such instruments
include, for example, securities rated "CC"/"Ca" and "C"/"C" by the Rating
Agencies, preferred or common stock, zero coupon or similar securities that do
not provide for the periodic payment of interest in cash and other securities
not within the Investment Guidelines. Accordingly, although the Fund reserves
the right to invest in such securities to the extent set forth herein, they
have not and it is anticipated that they will not constitute a significant
portion of the Fund's portfolio. See "Investment Guidelines" below,
"Description of Notes -- Asset Maintenance" and "Surety Arrangement for
Preferred Shares -- Insurance Agreement."
"High-yield" bonds, the generic name for corporate bonds rated between
"BB"/"Ba" and "C"/"C" by the Rating Agencies, are frequently issued by
corporations in the growth stage of their development. Bonds which are rated
"BB"/"Ba," "B"/"B," "CCC"/"Caa," "CC"/"Ca" and "C"/"C" are regarded by the
Rating Agencies, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of
the obligation. Such securities are also generally considered to be subject to
greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Further information concerning
the ratings of corporate bonds, including the rating categories of the Rating
Agencies, is provided in Appendix A. "High-yield" securities held by the Fund
may include securities received as a result of a corporate reorganization or
issued as part of a corporate takeover. Securities issued to finance corporate
restructurings may have special credit risks due to the highly leveraged
conditions of the issuers, and such securities are usually subordinate to
securities subsequently issued by the issuer. In addition, such issuers may
lose experienced management as a result of the restructurings. Finally, the
market price of such securities may be more volatile to the extent that
expected benefits from restructuring do not materialize.
Securities acquired by the Fund may include preferred stocks (including
convertible preferred stocks) and all types of debt obligations having varying
terms with respect to security or credit support, subordination, purchase
price, interest payments and maturity. Such obligations may include, for
example, bonds, debentures, notes (including convertible debt securities),
mortgage or other asset-backed instruments, equipment lease certificates,
equipment trust certificates, conditional sales contracts, commercial paper
and obligations issued or guaranteed by the United States government or any of
its political subdivisions, agencies or instrumentalities (including
obligations, such as repurchase agreements, secured by such instruments). Most
debt securities in which the Fund will invest will bear interest at fixed
rates. However, the Fund reserves the right to invest without limitation in
fixed-income debt securities that have variable rates of interest or involve
equity features, such as contingent interest or participations based on
revenues, sales or profits (i.e., interest or other payments, often in
addition to a fixed rate of return, that are based on the borrower's
attainment of specified levels of revenues, sales or profits and thus enable
the holder of the security to share in the potential success of the venture).
The Fund also has the right to acquire common stock or warrants to purchase
common stock or other equity securities as part of a unit in connection with
the purchase of debt securities consistent with the Fund's investment
policies.
The Fund may invest up to 30% of its total assets in securities that are
not readily marketable, including securities restricted as to resale, and
nonrated securities. A security that is not readily marketable will not be
acquired unless (i) the Investment Adviser believes such security to be of
comparable quality to publicly traded securities and (ii) such security
carries rights to be registered under the federal securities laws. Securities
that are not readily marketable may offer higher yields than comparable
publicly traded securities. However, the Fund may not be able to sell these
securities when the Investment Adviser considers it desirable to do so or, to
the extent they are sold privately, may have to sell them at less than the
price of otherwise comparable securities.
The Fund may also be permitted to invest up to 20% of its total assets in
zero coupon securities. Zero coupon securities pay no cash income but are
purchased at a deep discount from their value at maturity. When held to
maturity, their entire return, which consists of the amortization of discount,
comes from the difference between their purchase price and their maturity value.
For a discussion of certain tax consequences resulting from the inclusion of
zero coupon securities in the Fund's portfolio, see "Federal Taxation -- Federal
Income Tax Treatment of the Fund."
Notwithstanding the foregoing, if market conditions threaten to erode the
value of the Fund's assets, the Fund may adopt a temporary defensive
investment strategy and invest without limitation in high-grade money market
instruments, including commercial paper of domestic and foreign corporations,
certificates of deposit, bankers' acceptances and other obligations of banks,
repurchase agreements and short-term obligations issued or guaranteed by the
United States government or its instrumentalities or agencies, and also in
fixed-income securities rated higher than "BB"/"Ba" by the Rating Agencies. In
addition, under such market conditions, the Fund may invest in unrated
commercial paper which it deems to have risk characteristics comparable to
such instruments. The yield on these securities will tend to be lower than the
yield on other securities to be purchased by the Fund.
The Fund may also invest in fixed-income securities rated higher than
"BB"/"Ba" by the Rating Agencies or nonrated fixed-income securities deemed by
the Investment Adviser to be of comparable quality when the difference in
yields between quality classifications is relatively narrow. Investments in
higher rated issues may serve to lessen a decline in net asset value but may
also affect the amount of current income produced by the Fund, since the
yields from such issues are usually lower than those from lower rated issues.
Accordingly, the inclusion of such instruments in the Fund's portfolio may
have the effect of reducing the yield on the Common Stock.
The achievement of the Fund's objective depends upon the Investment
Adviser's analytical and portfolio management skills. There is no assurance
that this objective will be attained in the future. All nonfundamental
investment policies of the Fund, including those described below under
"Investment Guidelines," may be changed by the Board of Directors of the Fund
without shareholder approval.
INVESTMENT GUIDELINES
The composition of the Fund's portfolio reflects the Notes Investment
Guidelines and the Surety Investment Guidelines. Rating agencies issue ratings
for various securities reflecting the perceived creditworthiness of such
securities or, in the case of the Preferred Shares, the perceived claims-
paying ability of the surety that is guaranteeing the Scheduled Payments (as
defined herein) on the Preferred Shares. See "Surety Arrangement for Preferred
Shares -- Insurance Agreement." The respective Investment Guidelines are
designed to ensure that assets underlying the Notes or the Preferred Shares,
as the case may be, will be sufficiently diversified and will be of sufficient
credit quality and amount to justify investment grade ratings of "Aaa" for the
Notes by Fitch Investors Services, Inc. and "AAA"/"Aaa" for the Preferred
Shares. The Investment Guidelines are not prescribed by law, but have been
implemented by the Fund in order to receive the above-described ratings for
senior securities, which ratings are generally relied upon by institutional
investors in purchasing such securities. In the context of a closed-end
investment company such as the Fund, therefore, the Investment Guidelines
provide tests for portfolio diversification and asset coverage that supplement
the applicable requirements under the 1940 Act (and may be more or less
restrictive), but are the sole determinants in the rating of a security.
Under the respective Investment Guidelines, the Fund is required to
maintain specified discounted asset values for its portfolio representing the
Note Basic Maintenance Amount and Surety Assets Coverage. For definitions of
such terms, see "Description of Notes -- Asset Maintenance" and "Surety
Arrangement for Preferred Shares -- Insurance Agreement." For the purpose of
determining the Fund's compliance with the respective Investment Guidelines,
the market value of the Fund's portfolio holdings will be discounted by
dividing it by factors determined by the respective rating agencies or
Financial Security as the case may be, which vary according to the particular
type of security being valued for such purpose. To the extent any particular
portfolio holding does not meet the applicable Investment Guidelines, it would
not be included for purposes of determining compliance with the Note Basic
Maintenance Amount or Surety Assets Coverage, as the case may be. The
respective Investment Guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the discounted value of the Fund's portfolio,
and the amount of such assets included in the portfolio at any time, if any,
may vary depending upon the credit quality (and related discounted value) of
the Fund's eligible assets at such time.
Upon any failure to maintain the required Note Basic Maintenance Amount or
Surety Assets Coverage, the Fund would seek to alter the composition of its
portfolio to attain required asset coverage within an eight Business Day cure
period, thereby incurring additional transaction costs and possible losses
and/or gains on dispositions of portfolio securities. To the extent any such
failure is not cured in a timely manner, the holders of the Notes and/or
Financial Security, as surety under the Surety Bond (as defined herein), will
acquire certain rights. See "Description of Notes -- Asset Maintenance" and
"Surety Arrangement for Preferred Shares -- Insurance Agreement."
Under the Notes Investment Guidelines, corporate debt obligations are not
included in the calculation of the discounted value of the Fund's portfolio
for the purpose of determining compliance with the Note Basic Maintenance
Amount unless they (a) are rated "CCC" or higher by S&P or "Caa" or higher by
Moody's, (b) provide for the periodic payment of interest thereon in cash, (c)
have been registered under the Securities Act, (d) do not provide for
conversion or exchange into equity capital at any time over their respective
lives, (e) have not had notice given in respect thereof that any such
corporate debt obligations are the subject of an offer by the issuer thereof
of exchange or tender for cash, securities or any other type of consideration
(except that corporate debt obligations in an amount not exceeding 10% of the
Fund's total assets at any time shall not be subject to the provisions of this
clause (e)) and (f) are not subject to call options. In addition, portfolio
holdings must be within the following diversification requirements in order to
be included in the calculation of the discounted value of the Fund's portfolio
for the purpose of determining compliance with the Note Basic Maintenance
Amount:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
MINIMUM ORIGINAL VALUE OF ELIGIBLE PORTFOLIO ASSETS
ISSUE SIZE OF PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' EACH ISSUE INVESTED IN ANY ONE INDUSTRY
RATINGS(1) ($ IN MILLIONS) ONE ISSUER(2) CATEGORY(2)
- ---------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
"AAA"/"Aaa" ............................................ $100 10.0% 50.0%
"AA"/"Aa" .............................................. 100 10.0 33.3
"A"/"A" ................................................ 100 10.0 33.3
"BBB"/"Baa" ............................................ 100 5.0 20.0
"BB"/"Ba".............................................. 100(3) 4.0 12.0
"B"/"B1," "B2" and "B3" (subordinated) ................. 100(3) 3.0 8.0
"CCC"/"B3" (senior) and "Caa"
(unsecured subordinated)(4) .......................... 100(3) 2.0 5.0
"A-1+"/"P-1"(5) ........................................ NA 10.0 NA
"A-1"/"P-1"(5) ......................................... NA 10.0 33.3
"A-2"/"P-2"(5) ......................................... NA 5.0 20.0
- ------------
(1) Rating designations include (+) or (-) modifiers to the S&P rating where
appropriate and (1), (2) or (3) modifiers to the Moody's rating where
appropriate, except that corporate debt obligations rated "CCC-" may not
be included in determining compliance with the Note Basic Maintenance
Amount. In the event that a corporate debt obligation has received a
different rating from S&P than from Moody's, the restrictions relating to
the lower rating will apply. See Appendix A for further information
concerning S&P's and Moody's rating categories.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category, except that the
calculations with respect to commercial paper investments constituting
corporate bonds shall be made separately and independently of, but on the
same basis as, the cumulative total guidelines applicable to other types
of corporate debt obligations. To the extent the relevant limitation is
less restrictive than that set forth under "Investment Restrictions"
below, the more restrictive limitation shall apply.
(3) 20% of the aggregate market value of all corporate debt obligations in
these rating categories may be from issues with an original issue size of
greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated
debt of the issuer with an implied senior rating of "B-" or higher (i.e.,
such subordinated debt would have a rating of "B-" or higher if it were
senior debt of the issuer) if rated by S&P to be included in determining
compliance with the Note Basic Maintenance Amount. The aggregate market
value of corporate debt obligations in this rating category in excess of
20% of the aggregate market value of the Fund's assets will not be
included in determining such compliance.
(5) Represents commercial paper investments.
</TABLE>
Under the Surety Investment Guidelines, corporate debt obligations are not
included in the calculation of the discounted value of the Fund's portfolio
for the purpose of determining compliance with Surety Assets Coverage unless
they (a) are rated "CCC" or higher by S&P or "B3" or higher by Moody's, (b)
provide for the periodic payment of interest thereon in cash, (c) do not
provide for conversion or exchange into equity capital at any time over their
respective lives, (d) have been registered under the Securities Act, (e) have
a remaining term to maturity of not more than 30 years, (f) have not had
notice given in respect thereof that any such corporate debt obligations are
the subject of an offer by the issuer thereof of exchange or tender for cash,
securities or any other type of consideration (except that corporate debt
obligations in an amount not exceeding 10% of the Fund's total assets at any
time shall not be subject to the provisions of this clause (f)) and (g) are
not subject to call options. Notwithstanding the foregoing, nonrated fixed-
income securities and unregistered corporate debt securities may be included
in the calculation of the discounted value of the Fund's portfolio for the
purpose of determining compliance with Surety Assets Coverage, as long as they
do not exceed 30% of the Fund's eligible portfolio assets at any time, with
certain limitations. In addition, portfolio holdings of corporate debt
obligations must be within the following diversification requirements in order
to be included in the calculation of the discounted value of the Fund's
portfolio for the purpose of determining compliance with Surety Assets
Coverage:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM PERCENT OF MARKET
PERCENT OF MARKET VALUE OF ELIGIBLE
MINIMUM ORIGINAL VALUE OF ELIGIBLE PORTFOLIO ASSETS
ISSUE SIZE OF PORTFOLIO ASSETS INVESTED IN ANY
RATING AGENCIES' EACH ISSUE INVESTED IN ANY ONE INDUSTRY
RATINGS(1) ($ IN MILLIONS) ONE ISSUER(2) CATEGORY(2)
- ---------- --------------- ----------------- -----------------
<S> <C> <C> <C>
"AAA"/"Aaa" ............................................ $100 10.0% 50.0%
"AA"/"Aa" .............................................. 100 10.0 33.3
"A"/"A" ................................................ 100 10.0 33.3
"BBB"/"Baa" ............................................ 100 5.0 20.0
"BB"/"Ba" .............................................. 100(3) 4.0 12.0
"B"/"B1" or "B2" ....................................... 100(3) 3.0 8.0
"CCC"/"B3"(4) .......................................... 100(3) 3.0 8.0
Nonrated/unregistered corporate bonds(5) ............... 50 3.0 8.0
"A-1+"/"P-1"(6) ........................................ NA 10.0 NA
"A-1"/"P-1"(6) ......................................... NA 10.0 33.3
"A-2"/"P-2"(6) ......................................... NA 5.0 20.0
- ------------
(1) Rating designations include (+) or (-) modifiers to the S&P rating where
appropriate and (1), (2) or (3) modifiers to the Moody's rating where
appropriate, except that corporate debt obligations rated "CCC-" may not
be included in determining compliance with Surety Assets Coverage. In the
event that a corporate debt obligation has received a different rating
from S&P than from Moody's, the restrictions relating to the lower rating
will apply. See Appendix A for further information concerning S&P's and
Moody's rating categories. If only one of the Rating Agencies has issued a
rating for such instrument, then only the rating of such agency is
required; provided, however, that not more than 15% of the aggregate
market value of the rated corporate debt obligations included in
determining compliance with Surety Assets Coverage shall be comprised of
corporate debt obligations having a rating from only one of such agencies.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category, except that the
calculations with respect to commercial paper investments constituting
corporate bonds shall be made separately and independently of, but on the
same basis as, the cumulative total guidelines applicable to other types
of corporate debt obligations. To the extent the relevant limitation is
less restrictive than that set forth under "Investment Restrictions"
below, the more restrictive limitation shall apply.
(3) 20% of the aggregate value of all corporate debt obligations in these
rating categories may be from issues with an original issue size of
greater than or equal to $50 million and less than $100 million.
(4) Corporate debt obligations in this rating category must be subordinated
debt of the issuer with an implied senior rating of "B-" or higher (i.e.,
that such subordinated debt would have a rating of "B-" or higher if it
were senior debt of the issuer) if rated by S&P to be included in
determining compliance with Surety Assets Coverage. The aggregate market
value of corporate debt obligations in this rating category in excess of
20% of the aggregate market value of the Fund's eligible portfolio assets
will not be included in determining such compliance.
(5) Nonrated/unregistered corporate bonds may not constitute more than 30% of
the aggregate market value of the Fund's eligible portfolio assets. Not
more than 18% of the aggregate market value of the Fund's eligible
portfolio assets may consist of nonrated/unregistered corporate bonds from
issues with original issue sizes of $50 million or more but less than $100
million, provided that not more than 9% of the aggregate market value of
the Fund's eligible portfolio assets may consist of nonrated/unregistered
corporate bonds from issues with an original issue size of $50 million or
more but less than $75 million.
(6) Represents commercial paper investments.
</TABLE>
Additionally, under the Surety Investment Guidelines, the Fund may not (i)
acquire or otherwise invest in (A) repurchase agreements except repurchase
agreements with a remaining term to maturity of not more than 30 days, (B)
reverse repurchase agreements, (C) futures contracts or (D) options on futures
contracts except to the extent such options do not exceed 5% of the total
assets of the Fund, (ii) engage in short sales, (iii) overdraw any bank
account, (iv) write options on portfolio securities other than call options on
securities held in the Fund's portfolio or that the Fund has an immediate
right to acquire through conversion or exchange of securities held in its
portfolio or (v) engage in the lending of portfolio securities. The Fund does
not currently intend to utilize any of the prohibited investment strategies as
described above. However, the Fund could utilize any of the foregoing with the
written consent of Financial Security, and therefore, the Fund may use such
strategies in the future.
PORTFOLIO MATURITY AND TURNOVER
The Fund's holdings may include issues of various maturities. Ordinarily,
the Fund will emphasize investments in medium and longer term instruments
(i.e., those with maturities in excess of three years), but the weighted
average maturity of portfolio holdings may be shortened or lengthened
depending primarily upon the Investment Adviser's outlook for interest rates.
To the extent the weighted average maturity of the Fund's portfolio securities
is lengthened, the value of such holdings will be more susceptible to
fluctuation in response to changes in interest rates, creditworthiness and
general economic conditions. As of January 31, 1997, the weighted average
maturity of the Fund's portfolio holdings was 5.6 years. The weighted average
of the Fund's portfolio will fluctuate depending on market conditions and
investment opportunities. The Fund, however, does not expect that the weighted
average maturity of the Fund's portfolio will, under normal conditions, exceed
15 years.
The Investment Adviser actively makes portfolio adjustments that reflect
the Fund's investment strategy, but does not trade securities for the Fund for
the purpose of seeking short-term profits. It will, however, change the Fund's
securities, regardless of how long they have been held, when it believes doing
so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is
anticipated that the Fund's portfolio turnover rate generally will not,
although it may, from time to time, exceed 100% per annum. A 100% annual
turnover rate would occur, for example, if all the securities in the Fund's
portfolio were replaced once within a period of one year. The Fund does,
however, reserve full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels
or when investment strategy is changed significantly, portfolio turnover may
be significantly higher than during times of economic and market price
stability, when investment strategy remains relatively constant. A high rate
of portfolio turnover will result in increased transaction costs for the Fund
in the form of increased dealer spreads and brokerage commissions. The Fund's
portfolio turnover rates for the fiscal years ended October 31, 1994, 1995 and
1996 were 72.00%, 80.71% and 108.33%, respectively.
CERTAIN INVESTMENT STRATEGIES
The Investment Adviser reserves the right to employ the strategies
described below in order to help achieve the Fund's investment objective. Such
strategies include the lending of portfolio securities, the short sale of
securities and the use of futures contracts and options thereon, reverse
repurchase agreements and repurchase agreements (other than certain repurchase
agreements with qualified depository institutions having maturities not longer
than one day). Unless so stated below, there are no limits to the Fund's use
of these investment strategies. The Fund's Board of Directors has adopted an
operating policy under which the Fund will not subject more than 5% of its
total net assets to investment techniques such as options, futures contracts
and related options, foreign currency transactions, interest rate
transactions, and similar techniques such as hedging or investment techniques.
In addition, the respective Investment Guidelines, as well as other terms of
the Surety Arrangement, may have the effect of limiting the Fund's use of
other investment strategies to the extent such investments are not eligible
for inclusion in the discounted value of the Fund's portfolio.
Securities Loans. The Fund may make secured loans of its portfolio
securities amounting to not more than one-third of the value of its total
assets, thereby realizing additional income. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delays in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. As a matter of policy, securities loans are
made to unaffiliated broker-dealers pursuant to agreements requiring that
loans be continuously secured by collateral in cash or short-term debt
obligations at least equal at all times to the value of the securities subject
to the loan. The borrower pays to the Fund an amount equal to any interest or
dividends received on securities subject to the loan. The Fund retains all or
a portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. Although voting rights, or rights to
consent, with respect to the loaned securities pass to the borrower, the Fund
retains the right to call the loans at any time on reasonable notice, and it
will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in
order to sell the securities involved.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place a month
or more after the date of the transaction). The Fund will invest in when-
issued and delayed delivery securities in order to lock in a favorable rate of
return. The purchase price and the interest rate payable on the securities are
fixed on the transaction date. The securities so purchased are subject to
market fluctuation, and no interest accrues to the Fund until delivery and
payment take place. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction and thereafter reflect the value of such securities in determining
its net asset value. The Fund will make commitments for such when-issued
transactions only with the intention of actually acquiring the securities. To
facilitate such acquisitions, the Fund's custodian bank will maintain, in a
separate account of the Fund, cash or United States government or other high
quality debt securities from its portfolio, marked to market daily and having
value equal to or greater than such commitments. On delivery dates for such
transactions, the Fund will meet its obligations from maturities or sales of
the securities held in the separate account and/or from then available cash
flow. If the Fund chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, it could, as with the disposition of other
portfolio obligations, incur a gain or loss due to market fluctuation. The
Fund is dependent on the other party to successfully complete when-issued and
delayed delivery transactions. If such other party fails to complete its
portion of the transaction, the Fund will have lost the opportunity to invest
the amount set aside for such transaction in the segregated asset account.
Repurchase Agreements. The Fund may enter into repurchase agreements on up
to 25% of the value of its total assets. A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). The Fund will invest in
repurchase obligations to assist in the management of its portfolio and also
to obtain additional revenue and thereby maximize shareholders' value. It is
the Fund's present intention to enter into repurchase agreements only with
commercial banks and registered broker-dealers and only with respect to
obligations of the United States government or its agencies or
instrumentalities. Repurchase agreements may also be viewed as loans made by
the Fund which are collateralized by the securities subject to repurchase. The
Investment Adviser will monitor such transactions to ensure that the value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. The
Investment Adviser will also evaluate the creditworthiness of the repurchase
agreement sellers with whom the Fund does business and will monitor their
creditworthiness during the period of any repurchase agreement. If the seller
defaults, the Fund could realize a loss on the sale of the underlying security
to the extent that the proceeds of sale including accrued interest are less
than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to
the seller's estate.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to debt obligations which could otherwise be sold by
the Fund. A reverse repurchase agreement is an instrument under which the Fund
may sell an underlying debt instrument and simultaneously obtain the
commitment of the purchaser (a commercial bank or a broker or dealer) to sell
the security back to the Fund at an agreed upon price on an agreed upon date.
The Fund will undertake reverse repurchase transactions to assist in the
management of its portfolio and to obtain additional liquidity in its
portfolios. The value of underlying securities will be at least equal at all
times to the total amount of the resale obligation, including the interest
factor. The Fund receives payment for such securities only upon physical
delivery or evidence of book entry transfer by its custodian. Regulations of
the SEC require that if securities are sold by the Fund under a reverse
repurchase agreement, the Fund will maintain in a segregated account of the
Fund established with the Custodian (as defined herein), cash or United States
government or other high quality debt securities from its portfolio, marked to
market daily and having a value equal to the proceeds received on any sale
subject to repurchase plus interest. Reverse repurchase agreements could
involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by the Fund under a reverse repurchase agreement
could decline below the price at which the Fund is obligated to repurchase
them. Reverse repurchase agreements will be considered borrowings by the Fund
and as such would be subject to the restrictions on borrowing described below
under "Investment Restrictions." The Fund will not hold more than 5% of the
value of its total assets in reverse repurchase agreements and will enter into
such agreements only so long as it is not in violation of Section 18 of the
1940 Act.
Foreign Investments. The Fund may invest up to 10% of the value of its
total assets in securities principally traded in foreign markets and
Eurodollar certificates of deposit issued by branches of U.S. banks. Foreign
investments may involve risks not present to the same degree in domestic
investments, such as future political and economic developments, the
imposition of withholding taxes on interest income, seizure or nationalization
of foreign deposits, the establishment of exchange controls or the adoption of
other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Foreign securities may
be less liquid and more volatile than U.S. securities, and foreign accounting
and disclosure standards may differ from U.S. standards. In addition,
settlement of transactions in foreign securities may be subject to delays,
which could result in adverse consequences to the Fund including restrictions
on the subsequent resale of such securities. The value of foreign investments
may rise or fall because of changes in currency exchange rates. In addition,
the costs of exchanging foreign currencies for payments in U.S. dollars and
nonnegotiated brokerage commissions in foreign countries may reduce the yield
on foreign securities. In the event of a default in payment on foreign
securities, the Fund may incur increased costs to obtain a judgment against
the foreign issuer in the United States or abroad. The Fund may buy or sell
foreign currencies or deal in forward foreign currency contracts to hedge
against possible fluctuations in exchange rates that may affect the yield of
the Fund when the foreign currencies are converted in payment in U.S. dollars.
The Fund may engage in currency exchange transactions to protect against
uncertainty in the level of future exchange rates. The Fund will use currency
transactions only for hedging and not speculation. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. The
Fund's dealings in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions denominated or
quoted in the currency.
The Fund may not use position hedging with respect to a particular
currency to an extent greater than the aggregate market value (at the time of
entering into the position hedge) of the securities held in its portfolio
denominated or quoted in or currently convertible into that particular
currency. If the Fund enters into a position hedging transaction, the Fund's
custodian will place cash or U.S. Government securities or other high grade
liquid debt securities in a segregated account of the Fund in an amount equal
to the value of the Fund's total assets committed to the consummation of the
forward contract. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account
so that the value of the account will equal the amount of the Fund's
commitment with respect to the forward contract.
Options. The Fund may write (sell) call options which are traded on
national securities exchanges with respect to securities in its portfolio. The
Fund may only write "covered" call options, that is, options on securities it
holds in its portfolio or has an immediate right to acquire through conversion
or exchange of securities held in its portfolio. The Fund may write call
options on its portfolio securities in an attempt to realize a greater current
return than would be realized on the securities alone. The Fund may also write
call options as a partial hedge against a possible market decline. In view of
its investment objective, the Fund generally would write call options only in
circumstances in which the Investment Adviser does not anticipate significant
appreciation of the underlying security in the near future or has otherwise
determined to dispose of the security. As the writer of a call option, the
Fund receives a premium for undertaking the obligation to sell the underlying
security at a fixed price during the option period if the option is exercised.
So long as the Fund remains obligated as a writer of a call option, it forgoes
the opportunity to profit from increases in the market price of the underlying
security above the exercise price of the option, except insofar as the premium
represents such a profit (and retains the risk of loss should the value of the
underlying security decline). The Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call
option prior to the expiration of the option. Although the writing of call
options only on national securities exchanges increases the likelihood that
the Fund will be able to make closing purchase transactions, there is no
assurance that the Fund will be able to effect such transactions at any
particular time or at any acceptable price. The writing of call options could
result in increases in the Fund's portfolio turnover rate, especially during
periods when market prices of the underlying securities appreciate. The extent
to which the Fund may enter into transactions involving call options also may
be limited by the requirements of the Internal Revenue Code for qualification
as a regulated investment company.
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will trade in futures contracts or related
options and has no experience in doing so. However, the Fund has reserved the
right, subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser anticipates that
interest rates may rise, in which event the Fund could sell a futures contract
to protect against the potential decline in the value of its portfolio
securities. Conversely, if declining interest rates were anticipated, the Fund
could purchase a futures contract to protect against a potential increase in
the price of securities the Fund intends to purchase. However, employing this
technique effectively requires skills that are different from those required
to select portfolio securities and the Investment Adviser has no experience in
using this technique.
Under the regulations of the U.S. Commodity Futures Trading Commission
("CFTC"), the Fund will not be considered a "commodity pool," as defined under
such regulations, as a result of entering into transactions in futures
contracts and options on futures contracts, provided, among other things,
that: (1) such transactions are entered into solely for bona fide hedging
purposes, as defined under CFTC regulations; or (2) the aggregate initial
margin and premiums for any other such transactions entered into does not
exceed 5% of the Fund's total assets (after taking into account any unrealized
profits and losses). The extent to which the Fund may enter into transactions
involving futures contracts also may be limited by the requirements of the
Internal Revenue Code for qualification as a regulated investment company.
Risks of Hedging Transactions. The use of options, financial futures and
options on financial futures may involve risks not associated with other types
of investments which the Fund intends to purchase and it is possible that a
portfolio that utilizes hedging strategies may not perform as well as a
portfolio that does not make use of such devices. In particular, the Fund's
positions in options and financial futures may be entered and closed out only
on a federally licensed exchange which provides a market therefor, and there
can be no assurance that a liquid market will exist for any particular option
or futures contract. Because financial futures and related options markets
generally impose limits on daily price movement, it is possible that the
Investment Adviser will not be able to close out hedge positions promptly. The
inability to close out options and futures positions could have an adverse
impact on the Fund's ability to hedge its securities effectively and might, in
some cases, require the Fund to deposit substantial amounts of additional cash
to meet applicable margin requirements. The Fund's ability to hedge
effectively through transactions in financial futures or options depends on
the degree to which price movements, which include, in part, changes in
interest rates, in the Fund's holdings correlate with price movements of the
hedging instruments. Inasmuch as the Fund's options and futures will not
duplicate such underlying securities, the correlation will probably not be
perfect. Consequently, the prices, which include, in part, changes in interest
rates, of the securities being hedged may not move in the same amount as the
hedging instrument. It is possible that there may be a negative correlation
between the hedging instrument and the hedged securities, which would prevent
the Fund from achieving the anticipated benefits of hedging transactions or
may cause the Fund to realize losses and thus be in a worse position than if
such strategies had not been used.
Additional Leverage. The Fund has reserved the right to borrow money to the
extent such borrowing would not result in a violation of the 1940 Act Asset
Coverage (as defined under "Description of Notes -- Asset Maintenance") and
would not otherwise violate Section 18 of the 1940 Act or restrictions imposed
by the Insurance Agreement (as defined below). The Fund may borrow to the extent
then permitted by the 1940 Act through the public or private issuance of debt
securities and/or from lenders of all types, such as banks, savings and loan
associations, insurance companies and similar financial institutions. In
addition, the Fund may borrow up to 5% of its total assets for temporary
purposes. To the extent permitted by the 1940 Act, the Fund may also borrow
additional amounts as it redeems Notes and Preferred Shares.
At the date hereof, the Fund does not intend to add incremental leverage
to the Fund following the completion of the Offer. Accordingly, the percentage
of the Fund's assets representing leverage will decrease upon completion of
the Offer. The Fund anticipates that it will renegotiate the terms of its
outstanding leverage in 1998. Management of the Fund believes that by not
adding incremental leverage permitted under the 1940 Act, the Fund will
enhance its ability to negotiate the terms of any refinancing of its existing
leverage. However, the Fund reserves the right at any time, if it believes
that market conditions are appropriate, to increase its level of debt or other
senior securities to maintain or increase the Fund's current level of leverage
to the extent permitted under the 1940 Act and existing agreements between the
Fund and third parties. See "Risk Factors and Special Considerations" for a
discussion of certain risks associated with borrowings by the Fund.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. All percentage
limitations on investments will apply at the time of the making of an
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
The Fund may not:
1. Borrow money (through reverse repurchase agreements or otherwise)
to the extent such borrowing would result in a violation of 1940 Act Asset
Coverage or otherwise result in a violation of Section 18 of the 1940 Act,
or issue any senior securities (as defined in the 1940 Act) other than
Notes, Preferred Shares or debt instruments related to borrowings
described under "Investment Policies and Limitations -- Certain Investment
Strategies -- Additional Leverage" to the extent such instruments are
deemed to constitute senior securities; provided that for this purpose
temporary borrowings in an amount not exceeding 5% of the Fund's total
assets (not including the amount borrowed) shall not be deemed a senior
security. Pursuant to Section 18 of the 1940 Act, not more than 33 1/3% of
the Fund's capital structure may consist of borrowings representing
indebtedness, such as the Notes, and not more than 50% of the Fund's
capital structure may consist of borrowings represented by indebtedness,
such as the Notes, and senior securities of a class which is stock, such
as the Preferred Shares.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 1 above. Collateral
arrangements with respect to margin for futures contracts and options are
not deemed to be pledges or other encumbrances for purposes of this
restriction.
3. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities
and except that the Fund may make margin payments in connection with
transactions in futures contracts and options.
4. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open the
Fund owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and in equal amount to,
the securities sold short.
5. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, the
Fund may be deemed to be an underwriter under the federal securities laws.
6. Purchase or sell real estate, although the Fund may purchase
securities of issuers that deal in real estate, securities that are
secured by interests in real estate and securities representing interests
in real estate.
7. Purchase or sell commodities or commodity contracts, except that
the Fund may purchase or sell financial futures contracts and related
options as provided herein.
8. Make loans, except by purchase of debt obligations in which the
Fund may invest consistently with its investment policies, by entering
into repurchase agreements with respect to not more than 25% of the value
of its total assets, or through the lending of its portfolio securities
with respect to not more than one-third of the value of its total assets.
9. Invest in securities of any issuer, if, to the knowledge of the
Fund, officers and Directors of the Fund and officers and directors of the
Investment Adviser who beneficially own more than 0.50% of the securities
of that issuer together own more than 5% of such issuer.
10. With respect to 75% of the value of the Fund's total assets,
invest in securities of any issuer if, immediately after such investment,
more than 5% of the value of the Fund's total assets would be invested in
the securities of such issuer, provided that this limitation does not
apply to obligations issued or guaranteed as to interest and principal by
the United States government or its agencies or instrumentalities.
11. With respect to 75% of the value of the Fund's total assets,
acquire more than 10% of the outstanding voting securities of any issuer.
12. Invest 25% or more of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations
issued or guaranteed as to interest and principal by the United States
government or its agencies or instrumentalities.
13. Invest more than 30% of the market value or other fair value of
its total assets in securities that are not readily marketable, including
those that are restricted as to disposition under the federal securities
laws or otherwise. This restriction shall not apply to securities received
as a result of a corporate reorganization or similar transaction affecting
readily marketable securities already held in the portfolio of the Fund or
to repurchase agreements that have a maturity of seven days or less;
however, the Fund will attempt to dispose in an orderly fashion of any
securities received under these circumstances to the extent that such
securities, together with other securities that are not readily
marketable, exceed 30% of the market or other fair value of the Fund's
total assets.
14. Invest in the securities of other registered investment companies,
except as they may be acquired as part of a merger or consolidation or
acquisition of assets or by purchases in the open market involving only
customary brokers' commissions.
15. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts, although the Fund may purchase securities of issuers which deal
in, represent interests in or are secured by interests in such leases,
rights or contracts.
16. Make investments for the purpose of exercising control or
management over the issuer of any security.
17. Write, purchase or sell puts, calls or combinations thereof, or
purchase or sell futures contracts or related options, except that the
Fund may write call options and invest in futures contracts and related
options as provided in "Investment Guidelines -- Certain Investment
Strategies -- Options" and "-- Futures Contracts and Related Options."
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 7 permit the Fund to engage in certain practices to a
limited extent, the Fund does not have any current intention of engaging in
such practices. See "Investment Policies and Limitations -- Certain Investment
Strategies -- Futures Contracts and Related Options." Further, as noted,
certain practices are subject to the condition that they not adversely affect
the then current ratings of the Fund's outstanding securities and are subject
to the prior written approval of Financial Security.
Because they are fundamental policies, the 1940 Act requires that the
foregoing investment restrictions may not be changed without the approval of
the holders of a majority of the outstanding shares of Common Stock and a
majority of the outstanding Preferred Shares, voting as separate classes,
which, for purposes of the 1940 Act, means for each class the lesser of (a)
more than 50% of the total number of outstanding shares of such class or (b)
67% or more of the shares of such class present or represented at a meeting at
which more than 50% of the outstanding shares of such class are present or
represented by proxy.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
DILUTION
An immediate dilution of the aggregate net asset value of the shares of
Common Stock will be experienced as a result of the Offer because the amounts
received by the Fund for each Share with respect to the Subscription Price
(after payment of soliciting fees and other expenses of the Offer) will be
less than the Fund's net asset value per share and because the number of
shares outstanding after the Offer will increase in a greater percentage than
the increase in the size of the Fund's assets. As a result of the terms of the
Offer, Record Date Shareholders will experience a decrease in the net asset
value per share held by them, irrespective of whether they exercise all or any
portion of their Rights. In addition, Record Date Shareholders who do not
fully exercise their Rights will, at the completion of the Offer, own a
smaller proportional interest in the Fund than would otherwise be the case.
Further, shareholders who exercise all of their rights but do not participate
in the Over-Subscription Privilege will, at the completion of the Offer, own a
smaller proportional interest in the Fund to the extent that the Fund
increases the number of Shares subject to subscription by up to 25% as
described herein and such Shares are subscribed for. It is not possible to
state precisely the amount of such a decrease in net asset value per share,
because it is not known at this time what the Subscription Price will be, what
the net asset value per share will be on the Expiration Date or what
proportion of the Shares will be subscribed for, such dilution could be
substantial. For example, assuming all Rights are exercised by Record Date
Shareholders at the Estimated Subscription Price of $3.76 per share (which is
95% of the Fund's net asset value per share at February 21, 1997), the Fund's
net asset value per share (after payment of the Dealer Manager and soliciting
fees and estimated offering expenses) would be reduced by approximately $0.10
per share or 2.53%.
RISK OF LEVERAGE
The Fund's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment objectives and
policies, including a higher volatility of the net asset value of the Common
Stock and potentially more volatility in the market value of the Common Stock.
For a description of the Notes and Preferred Shares, see "Description of the
Notes" and "Description of Capital Stock." Any investment income or gains
earned from the capital contributed by the purchasers of the Notes and the
Preferred Shares which is in excess of interest and dividends due thereon will
cause the value of and dividends, if any, on the Common Stock to rise more
quickly than would otherwise be the case. Conversely, if the investment
performance of the capital contributed by the purchasers of the Notes and the
Preferred Shares fails to cover the interest and dividends on such capital,
the value of the Common Stock may decrease more quickly than would otherwise
be the case and dividends thereon will be reduced or eliminated. This is the
speculative effect of "leverage."
Fluctuations in short-term dividend rates will affect the dividend rate
per annum ("Applicable Rate") on the Preferred Shares, and, in turn, will
affect the yield to holders of Common Stock, with increases in such rates
decreasing such yield. Short-term and long-term interest rates change from
time to time as does their relationship to each other (i.e., the slope of the
yield curve) depending upon such factors as supply and demand forces, monetary
and tax policies and investor expectations. Changes in such factors could
cause the relationship between short-term and long-term rates to change (i.e.,
to flatten or to invert the slope of the yield curve) so that short-term rates
may substantially increase relative to the rates of longer term obligations in
which the Fund may be invested. To the extent that the Applicable Rate on the
Preferred Shares approaches the net return on the Fund's investment portfolio,
the benefit of leverage to holders of Common Stock will be reduced, and if the
Applicable Rate on the Preferred Shares were to exceed the net return on the
Fund's portfolio, the Fund's leveraged capital structure would result in a
lower rate of return to holders of Common Stock than if the Fund were not
leveraged.
The interest rate on the Notes is a fixed annual rate of 6.53%, and the
Applicable Rate as of February 13, 1997 is 5.34% on the Preferred Shares.
Based on the interest rate payable on the Notes and the current Applicable
Rate payable on the Preferred Shares, the annual return of the Fund's
portfolio must equal at least 1.20% in order to cover the interest payments on
the Notes and the dividend payments on the Preferred Shares.
Since any decline in the net asset value of the Fund's investments will be
borne entirely by holders of Common Stock, the effect of leverage in a
declining market would result in a greater decrease in net asset value to
holders of Common Stock than if the Fund were not leveraged, which would
likely be reflected in a greater decline in the market price for the Common
Stock. In an extreme case, if the Fund's current investment income were not
sufficient to meet dividend requirements on the Preferred Shares or interest
payments on the Notes, it could be necessary for the Fund to liquidate certain
of its investments, thereby reducing the net asset value attributable to the
Common Stock. In addition, a decline in the net asset value of the Fund's
investments may affect the ability of the Fund to make dividend payments on
its Common Stock and such failure to pay dividends or make distributions may
result in the Fund ceasing to qualify as a regulated investment company under
the Internal Revenue Code. The Notes and the Preferred Shares may constitute a
substantial lien and burden on the Common Stock by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. In addition, the Fund may borrow up to 5% of its total assets for
temporary purposes and, to the extent that Notes or Preferred Shares are
repaid or redeemed, may issue or incur additional senior securities or
indebtedness. The Fund has also reserved the right to borrow money and to
enter into reverse repurchase agreements. See "Investment Policies and
Limitations -- Certain Investment Strategies."
At the date hereof, the Fund does not intend to add incremental leverage
to the Fund following the completion of the Offer. Accordingly, the percentage
of the Fund's assets representing leverage will decrease upon completion of
the Offer. The Fund anticipates that it will renegotiate the terms of its
outstanding leverage in 1998. Management of the Fund believes that by not
adding incremental leverage permitted under the 1940 Act, the Fund will
enhance its ability to negotiate the terms of any refinancing of its existing
leverage. However, the Fund reserves the right at any time, if it believes
that market conditions are appropriate, to increase its level of debt or other
senior securities to maintain or increase the Fund's current level of leverage
to the extent permitted under the 1940 Act and existing agreements between the
Fund and third parties.
The following table illustrates the effect of leverage (using senior
securities -- i.e., $20 million of Notes and 200 Preferred Shares with a $20
million liquidation preference) on the return of a holder of Common Stock,
assuming the annual returns set forth in such table and assuming a fixed
annual rate of 6.53% payable on the Notes and an Applicable Rate of 5.34%
(which is the Applicable Rate as of February 13, 1997 payable on the Preferred
Shares):
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses Except Interest Expense) ....... -10% -5% 0% 5% 10%
Corresponding Return to
Common Stockholder .............................. -14.05% -7.78% -1.51% 4.76% 11.03%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are
hypothetical and the actual returns to a holder of Common Stock may be greater
or less than those appearing in the table.
DISCOUNT FROM NET ASSET VALUE
Shares of closed-end funds frequently trade at a market price which is
less than the value of the net assets attributable thereto. The possibility
that shares of the Fund will trade at a discount from net asset value is a
risk separate and distinct from the risk that the Fund's net asset value will
decrease. It should be noted, however, that in some cases, shares of closed-
end funds may trade at a premium. The Fund's shares have traded in the market
above, at and below net asset value since the commencement of the Fund's
operations. See "Trading and Net Asset Value Information." In addition, the
net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed-income
securities, the net asset value of the shares of the Fund can be expected to
change as general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio
can be expected to decline. In addition, in a period of rising short-term
interest rates, the higher cost of the Fund's leverage and/or increasing
defaults by issuers of "high-yield" debt obligations would likely exacerbate
such decline in the Fund's net asset value. The Fund cannot predict whether
its shares will trade at, below or above net asset value. The risk of
purchasing shares of a closed-end investment company that might trade at a
discount is more pronounced for investors who wish to sell their shares in a
relatively short period of time because, for those investors, realization of
gain or loss on their investments is likely to be more dependent upon the
existence of a premium or discount than upon portfolio performance.
"HIGH-YIELD," HIGH RISK INVESTMENTS
The Fund is designed for long-term investors who can accept the risks
entailed in seeking a high level of current income available from investments
in long-term, high-yielding, lower quality, fixed-income securities.
Consistent with a long-term investment approach, investors in the Fund should
not rely on the Fund for their short-term financial needs. The principal value
of the lower quality securities in which the Fund invests, will be affected by
interest rate levels, general economic conditions, specific industry
conditions and the creditworthiness of the individual issuer. Although the
Fund seeks to reduce risk by portfolio diversification, extensive credit
analysis, and attention to trends in the economy, industries and financial
markets, such efforts will not eliminate risk.
Fixed-income securities offering the high current income sought by the
Fund will ordinarily be in the lower rating categories of recognized rating
agencies or will be unrated. The values of such securities tend to reflect
individual corporate developments or adverse economic changes to a greater
extent than higher rated securities, which react primarily to fluctuations in
the general level of interest rates. Periods of economic uncertainty and
changes generally result in increased volatility in the market prices and
yields of "high-yield," high risk securities and thus in the Fund's net asset
value. Further, these fixed-income securities are considered by the Rating
Agencies, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation and will generally involve more credit risk than securities in the
higher rating categories; the Fund may incur additional expenses to the extent
it is required to seek recovery upon a default in the payment of principal of
or interest on its portfolio holdings. The "high-yield," high risk securities
held by the Fund are frequently subordinated to the prior payment of senior
indebtedness and are traded in markets that may be relatively less liquid than
the market for higher rated securities. Changes by recognized rating services
in their ratings of any fixed-income security and in the ability of an issuer
to make payments of interest and principal may also affect the value of the
Fund's investments. Changes in the value of portfolio securities will not
necessarily affect cash income derived from such securities, but will affect
the Fund's net asset value. The Fund will rely on the Investment Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the Investment Adviser will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
Some of the lower-rated securities in which the Fund invests were issued
to raise funds in connection with the acquisition of a company, in a so-called
"leveraged buy-out" transaction. The highly leveraged capital structure of
such issuers may make them especially vulnerable to adverse changes in
economic conditions, including rising interest rates.
Generally, when interest rates rise, the value of fixed rate debt
obligations, including "high-yield," high risk securities, tends to decrease;
when interest rates fall, the value of fixed rate debt obligations tends to
increase. In addition, in a period of rising interest rates the higher cost of
the Fund's leverage and/or increasing defaults by issuers of "high-yield" debt
obligations would likely exacerbate any decline in the Fund's net asset value.
If an issuer of a "high-yield," high risk security containing a redemption or
call provision exercises either provision in a declining interest rate market,
the Fund would have to replace the security, which could result in a decreased
return for shareholders.
The market for "high-yield," high risk securities has expanded rapidly in
recent years and is relatively new. This expanded market has not yet
completely weathered an economic downturn. A further economic downturn or an
increase in interest rates could have a negative effect on the "high-yield,"
high risk securities market and on the market value of the "high-yield," high
risk securities held by the Fund, as well as on the ability of the issuers of
such securities to repay principal and interest on their borrowings. During
1989 and 1990, the level of "high-yield" debt security defaults increased as
many issuers were unable to obtain funds through financial intermediaries or
the public "high-yield" market. The effect of these developments on the Fund
was a substantial decline in the Fund's net asset value and a substantial
reduction in the Fund's monthly dividend. Also, the forced liquidation of a
substantial portion of the Fund's portfolio in order to repay the Senior
Extendible Notes resulted in the realization of substantial capital losses,
and this severely limited the ability of the Fund to return to its original
net asset value as the "high-yield" market improved. The "high-yield" market
decline reversed in the fourth quarter of 1990 and by midyear 1991, after
reinvesting a substantial amount of its cash, the Fund's net asset value had
improved substantially but to a level far less than the net asset value at the
time the Fund commenced operations.
The "high-yield" market, as measured by the Credit Suisse First Boston
High Yield Index, posted total annual returns of 43.75%, 16.66%, 18.91%,
- -0.97%, 17.38% and 12.42% for the calendar years 1991, 1992, 1993, 1994, 1995
and 1996, respectively. The ten year U.S. Treasury Bond produced a total
return of 16.46%, 6.52%, 11.94%, -6.08%, 23.68% and 0.89% for the calendar
years 1991, 1992, 1993, 1994, 1995 and 1996, respectively. See "Financial
Highlights" for information concerning the Fund's return.
New issue activity of "high-yield" debt securities was low in 1991, by
historical standards, totaling $10.1 billion with "high-yield" debt
retirements totaling $26.0 billion. Net new issue activity of "high-yield"
debt securities totaled $11.4 billion, $46.1 billion, $22.2 billion, $26.7
billion and $60.2 billion for the calendar years 1992, 1993, 1994, 1995 and
1996, respectively. The statistical information with respect to new issue
activity is based on information the Fund obtained from the Credit Suisse
First Boston High Yield Handbook. The spread between the yield on U.S.
Treasury securities and the "high-yield" market has fluctuated between 300 and
600 basis points (3.0% to 6.0%) during the 1992 to 1996 period, which is more
in line with the historical spread relationship.
Since 1977, the historical weighted default rate on "high-yield" debt
securities has been 3.29%. The default rates on "high-yield" debt securities
for the calendar years 1990, 1991, 1992, 1993, 1994, 1995 and 1996 were 7.98%,
9.33%, 2.89%, 0.96%, 0.44%, 2.24% and 1.14%, respectively. The defaulted
amount of "high-yield" debt securities was $18.1 billion in 1990, $20.7
billion in 1991, $6.5 billion in 1992, $24.0 billion in 1993, $1.3 billion in
1994, $6.7 billion in 1995 and $4.2 billion in 1996. The statistical
information with respect to historical default rates and amounts is based on
information the Fund obtained from the Credit Suisse First Boston High Yield
Handbook.
The credit ratings issued by credit rating services may not fully reflect
the true risks of an investment. For example, credit ratings typically
evaluate the safety of principal and interest payments, not market value risk,
of "high-yield," high risk securities. Also, credit rating agencies may fail
to change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Although the
Investment Adviser considers ratings of recognized rating services such as
Moody's and S&P, the Investment Adviser primarily relies on its own credit
analysis, which includes a study of existing debt, capital structure, ability
to service debt and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. The
Investment Adviser continually monitors the investments in the Fund's
portfolio and carefully evaluates whether to dispose of or retain "high-
yield," high risk securities whose credit ratings have changed (see Appendix A
for a description of Moody's and S&P's ratings of "high-yield" securities). As
of January 31, 1997, approximately 93.34% of the market value of the Fund's
total investments was represented by fixed-income securities regarded by the
Rating Agencies as below investment grade (that is rated Ba1 or lower by Moody's
or BB+ or lower by S&P).
At times a major portion of an issue of lower-rated securities may be held
by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of
the issuer, the Fund may find it more difficult to sell such securities when
the Investment Adviser believes it advisable to do so or may be able to sell
such securities only at prices lower than if the securities were more widely
held. In such circumstances, the Fund may also find it more difficult to
determine the fair value of such securities for purposes of computing the
Fund's net asset value. The Fund, in most instances, utilizes an independent
pricing service to determine the fair value of its securities for financial
statement purposes since market quotations are not readily ascertainable.
Securities for which market quotations are not readily available will be
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock of
investment company taxable income and to distribute any net short-term capital
gains and net capital gains annually. See "Dividends and Distributions;
Dividend Reinvestment Plan." Subject to market conditions, the Fund seeks to
provide holders of its Common Stock with a relatively stable level of
dividends. However, there can be no assurance that the Fund will be able to
maintain its current level of dividends, and the Board of Directors may, in
its sole discretion, change the Fund's current dividend policy or its current
level of dividends in response to market or other conditions. The Fund's
ability to maintain a stable level of dividends is a function of the yield
generated by the Fund's investments, which depends on market conditions at the
time those investments are made and on the performance of those investments.
To the extent that the Fund's portfolio investments generate income exceeding
that which is required to pay any target level of divdends set by the Board of
Directors, the Fund may decide to retain and accumulate that portion of the
Fund's income which exceeds such dividend level and may pay applicable taxes
thereon, including any federal income or excise taxes. Alternatively, to the
extent that the Fund's current income is not sufficient to pay any target
level of dividends set by the Board of Directors, the Fund may distribute to
holders of its Common Stock all or a portion of any retained earnings or make
a return of capital to maintain such target level. The Fund currently has
accumulated undistributed net investment income upon which it has paid taxes.
Consistent with the Fund's current dividend policy, the Fund's accumulated
undistributed net investment income may be utilized by the Fund to maintain a
stable level of dividends on the Fund's shares of Common Stock, including
the Shares issued pursuant to the Offer. Based upon current market
conditions, the Investment Adviser believes that the net proceeds of the Offer
may be invested at or about the same rate of return that the Fund is currently
earning. Accordingly, the Investment Adviser believes that the Fund can
maintain its current level of dividends based upon the Fund's earnings from
its portfolio, including earnings from new investments derived from the net
proceeds of the Offer, and its accumulated undistributed net investment
income. Based upon information provided by the Investment Adviser and current
market conditions, the Board of Directors believes that the Offer will not
result in a change in the Fund's current dividend policy or its ability to
maintain its current level of dividends. However, there can be no assurance
that the Fund can or will maintain its current dividend policy or current
level of dividends. See "Financial Highlights" and "The Offer -- Purpose of
the Offer."
The Fund will not be permitted to declare dividends or other distributions
with respect to the Common Stock or the Preferred Shares or purchase shares of
Common Stock or Preferred Shares unless at the time thereof the Fund meets
certain asset coverage requirements, including those imposed by the 1940 Act.
Failure to pay dividends or other distributions could result in the Fund
ceasing to qualify as a regulated investment company under the Internal
Revenue Code. See "Federal Taxation" and "Description of Capital Stock --
Dividends and Distributions." Further, upon any failure to pay dividends in an
amount equal to two full years of dividends with respect to the Preferred
Shares, the holders thereof shall have the right to elect a majority of the
Directors until all accrued dividends have been provided for or paid. In the
event the Fund fails to satisfy certain asset coverage requirements, the Fund
may be required to effect mandatory partial redemptions of the Notes or
(subject to certain limitations) Preferred Shares or in certain circumstances
may result in the termination of the Surety Bond and the mandatory redemption
of all of the Notes and the Preferred Shares. Redemptions of Preferred Shares
and/or further redemptions of Notes would reduce the Fund's leverage and could
negatively affect potential returns with respect to the Common Stock.
--------------------
Given the above-described investment risks inherent in the Fund,
investment in shares of the Fund should not be considered a complete
investment program and is not appropriate for all investors. Investors should
carefully consider their ability to assume these risks before making an
investment in the Fund.
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their addresses, their ages and
their principal occupations for at least the past five years are set forth
below.
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH REGISTRANT AGE DURING PAST 5 YEARS
- ---------------- --------------- --- --------------------
<S> <C> <C> <C>
Richard E. Omohundro, Jr.*(3) ....... President and Director 56 President or Co-President of
Prospect Street Investment Prospect Street Investment
Management Co., Inc. Management Co., Inc. since June
60 State Street 1988.
Boston, MA 02109
John A. Frabotta*(2) ................ Vice President, Treasurer, 54 Vice President of Prospect Street
Prospect Street Investment Director and Chief Investment Management Co., Inc.
Management Co., Inc. Investment Officer since June 1988. Director of
60 State Street BondNet Trading Systems, Inc.
Boston, MA 02109
John S. Albanese(1)(2) .............. Director 45 Senior Counsel to Washington
8955 Mountain Ash Court Headquarters Services (a
Springfield, VA 22153 Department of Defense Agency)
since June 1992. Lieutenant
Colonel of the United States
Army, serving on active duty from
1977 to 1992 in several legal
positions.
C. William Carey(1)(3) .............. Director 60 President, Carey Associates, Inc.
Carey Associates, Inc. since January 1997. Chairman and
177 Milk Street Chief Executive Officer of Town &
Suite 605 Country Corporation from 1965
Boston, MA 02109 until December 1996.
Joseph G. Cote*(3) .................. Director 55 Co-President of Prospect Street
Prospect Street Investment Investment Management Co., Inc.
Management Co., Inc. from August 1995 to present and
250 Park Avenue from February 1989 to November
New York, NY 10177 1993. Shareholder of Prospect
Street Investment Management Co.,
Inc. from 1989 to present.
Harlan D. Platt(1)(3) ............... Director 46 Professor of Finance and Insurance,
Northeastern University College Northeastern University, College
of Business Administration of Business Administration, since
413 Hayden Hall 1981.
Boston, MA 02115
Christopher E. Roshier(3)(4) ........ Director 50 Corporate Finance Director of
120 Strawberry Vale European Capital Company Limited
Twickenham, since 1990. Director of a number
Middlesex TWI 4SH of other public and private
United Kingdom companies in the United Kingdom.
Karen J. Thelen ..................... Secretary 44 Vice President of Prospect Street
Prospect Street Investment Investment Management Co., Inc.
Management Co., Inc. since December 1992. Assistant
60 State Street Vice President of Prospect Street
Boston, MA 02109 Investment Management Co., Inc.
from December 1988 to December
1992.
- ----------
* Directors who are "interested persons" of the Fund, as defined in the 1940
Act.
(1) Directors who are members of the Audit Committee of the Fund's Board of
Directors.
(2) Elected by holders of the Preferred Shares.
(3) Elected by holders of the Common Stock and Preferred Shares voting
together.
(4) Mr. Roshier is not a resident of the United States and has not authorized
an agent to receive any notices. It may not be possible, therefore, for
investors to effect service of process within the United States upon Mr.
Roshier or to enforce against him, in the U.S. courts or foreign courts,
judgments obtained in U.S. courts predicated upon the civil liability
provisions of the Federal securities laws of the United States. In
addition, it is not certain that a foreign court would enforce, in
original actions, liabilities against Mr. Roshier predicated solely upon
the U.S. securities laws.
</TABLE>
Pursuant to the Articles of Incorporation, holders of the Common Stock
have voting rights of one vote per share and holders of the Preferred Shares
have voting rights of one vote per $1,000 of liquidation preference without
regard to any liquidation preference attributable to accumulated and unpaid
dividends (i.e., 100 votes per Preferred Share); provided that all the votes
represented by a single Preferred Share must be voted together. Under the
Articles of Incorporation and the 1940 Act, the holders of the Preferred
Shares, as a separate class, are entitled to elect two directors (at least one
of whom is not an "interested person" as defined in the 1940 Act) with the
other five Directors (at least two of whom are not "interested persons" as
defined in the 1940 Act) elected by the holders of the Common Stock and the
Preferred Shares, voting together; provided, however, that the holders of the
Preferred Shares (or Financial Security pursuant to the Surety Arrangement),
as a separate class, will be entitled to elect as a class the smallest number
of additional Directors as shall be necessary to assure that a majority of the
Directors has been elected by the holders of the Preferred Shares if the Fund
fails to pay accumulated dividends on the Preferred Shares in an amount equal
to two full years of dividends. See "Description of Capital Stock -- Voting."
Election of Directors is noncumulative; accordingly, holders of a majority of
the voting power represented by the outstanding shares of Common Stock and
Preferred Shares, voting together as a single class, or a majority of the
outstanding Preferred Shares, voting separately as a class, may elect all of
the Directors who are subject to election by such class, as the case may be.
The Fund pays each Director not affiliated with the Investment Adviser a
fee of $10,000 per year plus $2,000 per Directors' meeting attended in person
and $1,000 per Directors' meeting attended by telephone, together with actual
out-of-pocket expenses relating to attendance at such meetings. In addition,
the members of the Fund's Audit Committee, which consists of certain of the
Fund's noninterested Directors, receive $1,000 for each Audit Committee
meeting attended, other than meetings held on days on which there is also a
Directors' meeting, together with actual out-of-pocket expenses relating to
attendance at such meetings. Directors of the Fund, other than directors who
are affiliates of the Investment Adviser, earned for the fiscal year ended
October 31, 1996 aggregate remuneration of $84,000.
The following table summarizes the compensation paid to the Directors and
Officers of the Fund for the fiscal year ended October 31, 1996. The Fund is
not part of a fund complex.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
NAME OF AGGREGATE ACCRUED AS ANNUAL TOTAL
DIRECTOR COMPENSATION PART OF FUND BENEFITS UPON COMPENSATION
OR OFFICER FROM FUND EXPENSES RETIREMENT FROM FUND
- ---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
John S. Albanese $22,000 none none $22,000
John F. Barry* none none none none
C. William Carey $22,000 none none $22,000
Joseph G. Cote* none none none none
John A. Frabotta none none none none
Richard E. Omohundro, Jr. none none none none
Harlan D. Platt $22,000 none none $22,000
Christopher E. Roshier $18,000 none none $18,000
- ------------
*Mr. Barry's term as a Director ended, and Mr. Cote's term as a Director
began, on March 1, 1996.
</TABLE>
The Articles of Incorporation limit the personal liability of Directors
and officers to the Fund and its shareholders for monetary damages to the
fullest extent permitted by Maryland law. Based upon Maryland law and the
Articles of Incorporation, the Fund's Directors and officers have no liability
to the Fund and its shareholders for monetary damages except (a) for, and to
the extent of, actual receipt of an improper benefit in money, property or
services, or (b) in respect of an adjudication based upon a finding of active
and deliberate dishonesty which was material to the cause of action
adjudicated. In accordance with the 1940 Act, the Articles of Incorporation do
not protect or purport to protect Directors and officers against any liability
to the Fund or its security holders to which they would be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
duties involved in the conduct of their office.
In addition, the Articles of Incorporation and bylaws provide that the
Fund will indemnify its Directors and officers against liabilities and
expenses in connection with the performance of their duties on behalf of the
Fund to the fullest extent permitted by Maryland law, subject to the
applicable requirements of the 1940 Act and the interpretation by the Staff of
the SEC of such requirements. Under Maryland law and the Articles of
Incorporation, the Fund is entitled and obligated to indemnify each Director
or officer in connection with any proceeding to which such Director or officer
is made a party by reason of service in his capacity as a Director or officer,
unless it is established that (1) the act or omission of the Director or
officer was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty,
or (2) the Director or officer actually received an improper personal benefit
in money, property or services, or (3) in the case of any criminal proceeding,
the Director or officer had reasonable cause to believe that the act or
omission was unlawful. The foregoing standards apply both as to third party
actions and derivative suits by or in the right of the Fund. Indemnification
may be against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by the Director or officer in connection with the
proceeding. If the proceeding is one by or in the right of the Fund,
indemnification may not be made in respect of any proceeding in which the
Director or officer shall have been adjudged to be liable to the Fund. In the
view of the Staff of the SEC, an indemnification provision is consistent with
the 1940 Act if it (i) precludes indemnification for any liability, whether or
not there is an adjudication of liability, arising by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of duties as
described in Section 17(h) and (i) of the 1940 Act ("disabling conduct") and
(ii) sets forth reasonable and fair means for determining whether
indemnification shall be made; in the case of the Fund, "reasonable and fair
means" would include (1) a final decision on the merits by a court or other
body before whom the proceeding was brought that the person to be indemnified
("indemnitee") was not liable by reason of disabling conduct (including a
dismissal for insufficiency of evidence) and (2) a reasonable determination,
based upon a review of the facts, that the indemnitee was not liable by reason
of disabling conduct, by (a) the vote of a majority of a quorum of Directors
who are neither "interested persons" of the Fund as defined in Section 2(a)
(19) of the 1940 Act nor parties to the proceeding, or (b) a written opinion
of independent legal counsel.
The indemnification rights provided or authorized by the Articles of
Incorporation or applicable law are not exclusive of any other rights to which
a person seeking indemnification may be entitled. The Fund has also obtained
liability insurance at its expense for the benefit of its Directors and
officers which includes coverage for liability arising from the performance of
their duties on behalf of the Fund which is not inconsistent with the
indemnification provisions of the Articles of Incorporation and applicable
law.
HOLDINGS OF PREFERRED SHARES AND COMMON STOCK
As far as is known to the Fund, no person owned beneficially five percent
or more of the outstanding shares of Common Stock of the Fund at January 31,
1997. DTC holds of record 68.6% of the outstanding shares of Common Stock at
January 31, 1997. All of the outstanding Preferred Shares, which represent
less than 1% of the voting power of the Fund's outstanding shares (i.e., to
the extent that the Common Stock and Preferred Shares are voted together),
were owned of record by one institutional holder. As far as is known to the
Fund, no person other than DTC owned of record or beneficially, shares of the
Fund representing more than five percent of the voting power of the Fund's
outstanding shares. The Investment Adviser of the Fund beneficially owned
73,948 shares of Common Stock at January 31, 1997.
As of January 31, 1997, all Directors and officers of the Fund, owned in
the aggregate less than 1% of the Common Stock. As of that date, no Director
or officer owned any of the Fund's Preferred Shares.
THE INVESTMENT ADVISER
THE INVESTMENT ADVISER
The Investment Adviser is Prospect Street(R) Investment Management Co.,
Inc., a Massachusetts corporation having its principal offices at 60 State
Street, Boston, Massachusetts 02109. Organized in June 1988, the Investment
Adviser provides institutional clients with investment management services.
Richard E. Omohundro, Jr., Co-President of the Investment Adviser, served
as a Vice President (1978 to 1983) and a Managing Director (1983 to 1988) of
Merrill Lynch and was Co-Manager of the Merrill Lynch High-yield Bond Group
from 1978 through 1987. During that period, the Group raised approximately
$13.6 billion in new "high-yield" securities through 107 issues and provided
one of the largest secondary trading markets for "high-yield" securities. In
1987, the Group raised approximately $5.8 billion in new offerings of "high-
yield" securities and employed over 40 persons. Mr. Omohundro provides general
advisory assistance to, analyzes certain policy considerations with, and
consults on a regular basis with, the Fund's portfolio manager.
John A. Frabotta, a Vice President of the Investment Adviser, assists Mr.
Omohundro in carrying on the business of the Investment Adviser. Mr. Frabotta
was a Vice President of Merrill Lynch from 1979 through June 1988, during
which time he performed various research, structuring and marketing functions
involving "high-yield" securities. Mr. Frabotta has served as the Fund's
portfolio manager since September, 1990, responsible for the day-to-day
management of the Fund's portfolio.
ADVISORY AGREEMENT
The Investment Advisory Agreement between the Investment Adviser and the
Fund (the "Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the 1940 Act,
the Investment Adviser is responsible for the actual management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular investment rests with the Investment Adviser, subject to review by
the Board of Directors of the Fund and compliance with the applicable
provisions of the 1940 Act.
The Investment Adviser is not dependent on any other party in providing
the investment advisory services required for management of the Fund's
portfolio. The Investment Adviser may, however, consider analyses from various
sources, including broker-dealers with which the Fund does business. The
Investment Adviser is also responsible for providing the Fund with such
executive, data processing, clerical, accounting and bookkeeping services and
statistical and research data as are deemed advisable by the Fund's Board of
Directors (although the expenses thereof will be borne by the Fund as
specified below), except to the extent these services are provided by an
administrator or an accounting firm hired by the Fund.
Under the Advisory Agreement with the Fund, the Investment Adviser
receives a monthly advisory fee equal to 0.65% (on an annual basis) of the
average weekly value of the total assets of the Fund, less accrued liabilities
(excluding the principal amount of the notes and the liquidation preference of
the preferred stock and including accrued and unpaid dividends on the
preferred stock) up to and including $175,000,000 of such managed assets,
0.55% on the next $50,000,000 of such managed assets and 0.50% of the excess
of such managed assets over $225,000,000. For the fiscal years ended October
31, 1994, 1995 and 1996, the dollar value of total advisory fees earned by the
Investment Adviser aggregated approximately $807,770, $874,812 and $928,792,
respectively. Until June 21, 1997, the Investment Adviser has waived its
advisory fee with respect to the increase in the Fund's managed assets
attributable to the exercise of rights in the most recent rights offering by
the Fund in June 1996.
The Investment Adviser will benefit from the Offer because the Investment
Adviser's fee is based on the average weekly managed assets of the Fund. It is
not possible to state precisely the amount of additional compensation the
Investment Adviser will receive as a result of the Offer because it is not
known how many Shares will be subscribed for and because the proceeds of the
Offer will be invested in additional portfolio securities which will fluctuate
in value. However, in the event that all the Rights are exercised in full and
on the basis of the Estimated Subscription Price of $3.76 per Share (based
upon 95% of the net asset value per share on February 21, 1997), the
Investment Adviser would receive additional annual advisory fees of
approximately $216,609 as a result of the increase in assets under management
($267,980 if the Fund offers and sells an additional 25% of the Shares as
described below). Three of the Fund's Directors who voted to authorize the
Offer are "interested persons" of the Fund as that term is defined in the 1940
Act. These three Directors could benefit indirectly from the Offer because of
their affiliations with the Investment Adviser. The other Directors who voted
to authorize the Offer are not "interested persons" of the Fund.
The Fund bears all costs of its operation other than those incurred by the
Investment Adviser under the Advisory Agreement. In particular, the Fund pays
investment advisory fees, fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets and Bankers Trust Company, the surety custodian
(the "Surety Custodian") under a Surety Custody Agreement (as defined herein),
the premium payable in connection with the Surety Bond, legal, accounting and
auditing fees, taxes, expenses of preparing prospectuses and shareholder
reports, registration fees and expenses, fees and expenses for the transfer
and dividend disbursing agent, the compensation and expenses of the Directors
who are not otherwise employed by or affiliated with the Investment Adviser or
any of its affiliates, and any extraordinary expenses. The Investment Adviser
will reimburse the Fund for any expenses (excluding brokerage commissions,
interest, taxes and litigation expenses) paid or incurred by the Fund in any
year in excess of the most restrictive expense limitation which is imposed by
any state and to which the Fund is then subject, if any. The Fund is not known
to be subject to any state expense limitations. Under the Advisory Agreement,
the Investment Adviser provides the Fund with office space, facilities and
business equipment and provides the services of executive and clerical
personnel for administering certain of the other affairs of the Fund. The
Investment Adviser compensates Directors of the Fund if such persons are
employed by the Investment Adviser or its affiliates.
The Advisory Agreement became effective on March 1, 1994 upon approval by
shareholders at a meeting held on March 1, 1994 and replaced the advisory
agreement in effect prior thereto. The Advisory Agreement as approved by the
shareholders included an increase in the level of advisory fees from 0.50% (on
an annual basis) of the Fund's annual net assets to the fees set forth above.
The Advisory Agreement was initially effective for a two year period and will
continue in effect from year to year thereafter if approved annually (i) by
the Board of Directors of the Fund or by the holders of a majority of the
Fund's outstanding voting securities (as defined under "Investment Policies
and Limitations"), voting as a single class, and (ii) by a majority of the
Directors who are not parties to the Advisory Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. At a meeting held on
December 17, 1996, the Board of Directors (including all Directors who are not
"interested persons" of the Fund, as defined under the 1940 Act) unanimously
approved the renewal of the Advisory Agreement for a one year term expiring on
February 28, 1998. The Advisory Agreement terminates on its assignment by
either party and may be terminated without penalty on not less than 30 nor
more than 60 days' prior written notice at the option of either party thereto,
or by the affirmative vote of the holders of a majority of the Fund's
outstanding voting securities, voting as a single class.
The Advisory Agreement provides that the Investment Adviser shall only be
liable for willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties and obligations under the Advisory Agreement.
PORTFOLIO TRADING
The Investment Adviser is responsible for decisions to buy and sell
securities and other portfolio holdings for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. Fixed-income securities are generally traded on a "net"
basis with dealers acting as principals for their own accounts without a
stated commission, although the price of the security will likely include a
profit to the dealer. In underwritten offerings, securities are usually
purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or
discount. On occasion, certain money market instruments may be purchased
directly from an issuer, in which case no commissions or discounts are paid.
In placing orders for portfolio securities of the Fund, the Investment
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Investment
Adviser will seek to execute each transaction at a price and commission, if
any, which provides the most favorable total cost or proceeds reasonably
attainable in the circumstances. In seeking the most favorable price and
execution, the Investment Adviser, having in mind the Fund's best interests,
will consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and
financial stability of the broker-dealer involved and the quality of service
rendered by the broker-dealer in other transactions. Though the Investment
Adviser generally seeks reasonably competitive spreads or commissions, the
Fund will not necessarily be paying the lowest spread of commission available.
Within the framework of the policy of obtaining the most favorable price and
efficient execution, the Investment Adviser will consider research and
investment services provided by brokers and dealers who effect or are parties
to portfolio transactions with the Fund, the Investment Adviser or the
Investment Adviser's other clients. Such research and investment services are
those which brokerage houses customarily provide to institutional investors
and include statistical and economic data and research reports on particular
issuers and industries. Such services are used by the Investment Adviser in
connection with all of its investment activities and some of such services
obtained in connection with the execution of transactions for the Fund may be
used in managing other investment accounts. Conversely, brokers furnishing
such services may be selected for the execution of transactions for such other
accounts, and the services furnished by such brokers may be used by the
Investment Adviser in providing investment management for the Fund. Commission
rates are established pursuant to negotiations based on the quality and
quantity of execution services provided by the broker or dealer in light of
generally prevailing rates. The management fee paid by the Fund will not be
reduced because the Investment Adviser and/or other clients receive such
services. The allocation of orders and the commission rates paid by the Fund
will be reviewed periodically by the Board of Directors.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Investment Adviser may cause the Fund to pay a
broker-dealer which provides "brokerage and research services" (as defined in
the 1934 Act) to the Investment Adviser, an amount of disclosed commission for
effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
For the fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid
no brokerage commissions for the execution of portfolio transactions. The rate
of portfolio turnover for the fiscal years ended October 31, 1994, 1995 and
1996 was 72.00%, 80.71% and 108.33%, respectively.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less frequently
than the close of trading on the Exchange (generally 4:00 P.M. New York City
time) on the last Business Day of each week (generally Friday). It will be
determined by dividing the value of the net assets of the Fund (for the
purpose of determining the net asset value per share of the Common Stock, the
value of the Fund's net assets shall be deemed to equal the value of the
Fund's assets less (i) the Fund's liabilities (including the outstanding
principal amount of the Notes and unpaid interest on the Notes), (ii)
accumulated and unpaid dividends on the outstanding Preferred Shares and (iii)
the aggregate liquidation value (i.e., $100,000 per share) of the outstanding
Preferred Shares), by the total number of shares of Common Stock outstanding.
In valuing the Fund's assets for all purposes other than the determination of
the discounted value of such assets pursuant to the respective Investment
Guidelines, portfolio securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed to be over-the-counter, will be valued at the mean between the most
recently quoted bid and asked prices provided by the principal market makers.
Any security or option for which the primary market is on an exchange will be
valued at the last sale price on such exchange on the day of valuation or, if
there was no sale on such day, the last bid price quoted on such day. Options
for which the primary market is not on an exchange or which are not listed on
an exchange will be valued at market value or fair value if no market exists.
Securities and assets for which market quotations are not readily available
will be valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund. While no single standard for
determining fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which the Fund could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include:
type of security, financial condition of the issuer, cost at date of purchase,
size of holding, discount from market value, value of unrestricted securities
of the same type at the time of purchase, special reports prepared by
analysts, information as to any transaction or offers with respect to the
security, existence of merger proposals or tender offers affecting the
securities, price and extent of public trading in similar securities of the
issuer or comparable companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be
valued at amortized cost if their term to maturity from the date of
acquisition by the Fund was less than 60 days or by amortizing their value on
the 61st day prior to maturity if their term to maturity from the date of
acquisition by the Fund was more than 60 days, unless this method is
determined by the Board of Directors not to represent fair value. Repurchase
agreements will be valued at cost plus accrued interest.
SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. To address this possibility, the Board of Directors
presently contemplates that the Fund may from time to time consider either the
repurchase of shares of its Common Stock on the open market or the making of
tender offers for such Common Stock. Since commencement of the Fund's
operations, no such open market purchases or tender offers have been made. The
Fund may borrow money to finance the repurchase of shares, subject to
compliance with 1940 Act Asset Coverage, Section 18 of the 1940 Act and the
other limitations described under "Investment Policies and Limitations --
Certain Investment Strategies -- Additional Leverage." Shares of Common Stock
may not be repurchased, however, (i) if applicable asset coverage requirements
under the 1940 Act (i.e., 300% with respect to the Notes and 200% with respect
to the Preferred Shares) are not met or would not be met following such
repurchase, (ii) when payments of principal of or interest on the Notes are in
default, (iii) when dividends on the Preferred Shares are in arrears or Surety
Asset Coverage is not maintained or (iv) if otherwise prohibited by applicable
law.
There can be no assurance that repurchases or tenders will result in the
Common Stock trading at a price which is equal to its net asset value. The
Fund anticipates that the market price of the Common Stock will usually vary
from net asset value. The market price of the Common Stock will be determined,
among other things, by the relative demand for and supply of the Common Stock
in the market, the Fund's investment performance, the Fund's dividends and
yield and investor perception of the Fund's overall attractiveness as an
investment as compared with other investment alternatives. Nevertheless, the
fact that the Common Stock may be the subject of repurchases or tender offers
from time to time may enhance its attractiveness to investors and thus reduce
the spread between market price and net asset value that may otherwise exist.
Although the Board of Directors believes that Common Stock repurchases and
tenders generally would have a favorable effect on the market price of the
Common Stock, it should be recognized that the acquisition of Common Stock of
the Fund will decrease the total assets of the Fund and therefore have the
effect of increasing the Fund's expense ratio. Furthermore, any interest on
borrowings to finance Common Stock repurchase transactions will reduce the
Fund's net income.
Even if a tender offer has been made, it is the Board of Directors'
announced policy, which may be changed by the Board of Directors, not to
accept tenders or effect repurchases if (1) such transactions, if consummated,
would (a) result in the delisting of the Common Stock from the Exchange (the
Exchange having advised the Fund that it would consider delisting if the
aggregate market value of the Fund's outstanding publicly held Common Stock is
less than $5.0 million, the number of publicly held shares of Common Stock
falls below 600,000 or the number of round-lot holders falls below 1,200), (b)
result in a violation of applicable asset coverage requirements, or (c) impair
the Fund's status as a regulated investment company under the Internal Revenue
Code (which would make the Fund a taxable entity, causing the Fund's income to
be taxed at the corporate level in addition to the taxation of shareholders
who receive dividends from the Fund); (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objective and policies in order to repurchase Common Stock;
or (3) there is, in the Board's judgment, any material (a) legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) suspension of or limitation on
prices for trading securities generally on the Exchange or any foreign
exchange on which portfolio securities of the Fund are traded, (c) declaration
of a banking moratorium by federal, state or foreign authorities or any
suspension of payment by banks in the United States, New York State or foreign
countries in which the Fund invests, (d) limitation affecting the Fund or
issuers of its portfolio securities imposed by federal, state or foreign
authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, or (f) other event
or condition which would have a material adverse effect on the Fund or its
shareholders if shares of Common Stock were repurchased. The Board of
Directors may modify these conditions from time to time in light of experience
and may determine to make a tender offer even if one of the above conditions
exists. If a tender offer is made, such tender offer shall be made in
accordance with the 1934 Act and the 1940 Act.
Any tender offer made by the Fund will be at a price equal to the net
asset value of the shares on a date subsequent to the Fund's receipt of all
tenders. Each offer will be made and shareholders notified in accordance with
the requirements of the 1934 Act and the 1940 Act, either by publication or
mailing or both. Each offering document will contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
The Fund will purchase shares tendered by a shareholder at any time during the
period of the tender offer in accordance with the terms of the offer unless it
determines to accept none of them (based upon one of the conditions set forth
above). Each person tendering shares will be required to submit a check in an
amount not to exceed $25 payable to the Fund, which will be used to help
defray the costs associated with effecting the tender offer. This fee will be
imposed upon each tendering shareholder whose tendered shares are purchased in
the tender offer and will be imposed regardless of the number of shares
purchased. The Fund expects the cost to the Fund of effecting a tender offer
will be greater than the aggregate of all service charges received from those
who tender their shares. Costs associated with the tender offer will be
charged against capital of the Fund. During the period of a tender offer, the
Fund's shareholders will be able to obtain the Fund's current net asset value
by use of a toll-free telephone number.
If the Fund must liquidate portfolio securities in order to purchase
shares of Common Stock tendered, the Fund may realize gains and losses. Such
gains, if any, may be realized on securities held for less than three months
("short short gain"). Because less than 30% of the Fund's gross income must be
derived from the sale of disposition of stock and securities held less than
three months for any taxable year in order to retain the Fund's tax status as
a regulated investment company, any such short short gains would reduce the
amount of gain on sale of other securities held for less than three months
that the Fund could realize in the ordinary course of its portfolio
management. See "Federal Taxation." The portfolio turnover rate of the Fund
may or may not be affected by the Fund's repurchases of shares of Common Stock
pursuant to a tender offer.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Directors may elect to submit to the holders of the
Common Stock and the Preferred Shares at any time a proposal to convert the
Fund to an open-end investment company and in connection therewith to redeem
or otherwise retire the Notes and the Preferred Shares as would be required
upon such conversion by the 1940 Act. In determining whether to exercise its
discretion to submit this issue to shareholders, the Board of Directors would
consider all factors then relevant, including the relationship of the market
price of the Common Stock to net asset value, the extent to which the Fund's
capital structure is leveraged and the possibility of re-leveraging, the
spread, if any, between yields on "high-yield" securities in the Fund's
portfolio as compared to interest and dividend charges on senior securities
and general market and economic conditions. In addition to any vote required
by Maryland law, conversion of the Fund to an open-end investment company
would require the affirmative vote of the holders of a majority (as defined in
the 1940 Act) of each class of the shares entitled to be voted on the matter.
Shareholders of an open-end investment company may require the company to
redeem their shares at any time (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption
charges, if any, as might be in effect at the time of redemption. If the Fund
converted to an open-end investment company, it could be required to liquidate
portfolio securities to meet requests for redemption, and the Common Stock
would no longer be listed on the Exchange. In the event the Fund converts to
open-end status, the Fund would only be able to borrow through bank borrowings
within certain limits and would not be allowed to have preferred stock.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock of
investment company taxable income (but not including short-term capital gains
or "net capital gains," defined as the excess of net long-term capital gains
over net short-term capital losses), and to distribute any net short-term
capital gains and net capital gains annually. Under present law, if the Fund
were to retain ordinary income or net capital gains, taxes would be imposed
with respect to those amounts. Subject to market conditions, the Fund seeks to
provide holders of its Common Stock with a relatively stable level of
dividends. However, there can be no assurance that the Fund will be able to
maintain its current level of dividends, and the Board of Directors of the
Fund may, in its sole discretion, change the Fund's current dividend policy or
its current level of dividends in response to market or other conditions. See
"Risk Factors and Special Considerations -- Dividends and Distributions." See
also "Federal Taxation," "Description of Notes -- Asset Maintenance" and
"Description of Capital Stock -- Dividends and Distributions" for a discussion
of certain possible restrictions on the Fund's ability to declare dividends on
the Common Stock.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by
State Street Bank and Trust Company (the "Bank"), as agent under the Plan,
unless a shareholder elects to receive cash. An election to receive cash may
be revoked or reinstated at the option of the shareholder. Shareholders whose
shares are held in the name of a broker or nominee will have distributions
reinvested automatically by the broker or nominee in additional shares under
the Plan, unless the service is not provided by the broker or nominee, or
unless the shareholder elects to receive distributions in cash. If the service
is not available, such distributions will be paid in cash. Shareholders whose
shares are held in the name of a broker or nominee should contact the broker
or nominee for details. All distributions to investors who elect not to
participate (or whose broker or nominee elects not to participate) in the
Plan, will be paid by check mailed directly to the record holder by the Bank,
as dividend paying agent.
The Bank will furnish each person who buys shares in the offering with
written information relating to the Plan. Included in such information will be
procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Directors of the Fund declare a dividend or capital gains
distribution payable either in shares of Common Stock or in cash, as holders
of Common Stock may have elected, then nonparticipants in the Plan will
receive cash and participants in the Plan will receive the equivalent in
shares of Common Stock valued at the lower of market price or net asset value.
Whenever market price is equal to or exceeds net asset value at the time
shares are valued for the purpose of determining the number of shares
equivalent to the cash dividend or capital gains distribution, participants
will be issued shares of Common Stock at the net asset value most recently
determined as provided under "Determination of Net Asset Value," but in no
event less than 95% of the market price. If the net asset value of the Common
Stock at such time exceeds the market price of Common Stock at such time, or
if the Fund should declare a dividend or capital gains distribution payable
only in cash, the Bank will, as agent for the participants, buy Common Stock
in the open market, on the Exchange or elsewhere, for the participants'
accounts. If, before the Bank has completed its purchases, the market price
exceeds the net asset value of the Common Stock, the average per share
purchase price paid by the Bank may exceed the net asset value of the Common
Stock, resulting in the acquisition of fewer shares than if the dividend or
capital gains distribution had been paid in Common Stock issued by the Fund.
The Bank will apply all cash received as a dividend or capital gains
distribution to purchase Common Stock on the open market as soon as
practicable after the payment date of such dividend or capital gains
distribution, but in no event later than 30 days after such date, except where
necessary to comply with applicable provisions of the federal securities laws.
The Bank maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Common Stock
in the account of each Plan participant will be held by the Bank in
noncertificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Bank's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Fund. There will
be no brokerage charges with respect to shares of Common Stock issued directly
by the Fund as a result of dividends or capital gains distributions payable
either in stock or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Bank's open market
purchases in connection with the reinvestment of dividends and capital gains
distributions.
The automatic reinvestment of dividends and capital gains distributions
will not relieve participants of any income tax which may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid after written
notice of the change sent to the members of the Plan at least 90 days before
the record date for such dividend or capital gains distribution. The Plan also
may be amended or terminated by the Bank, with the Fund's prior written
consent but, except when necessary or appropriate to comply with applicable
law or the rules or policies of a regulatory body, only on at least 90 days'
written notice to participants in the Plan. All correspondence concerning the
Plan should be directed to the Bank at P.O. Box 8209, Boston, Massachusetts
02266.
FEDERAL TAXATION
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Common Stock. Investors should consult
their own tax advisors for more detailed information and for information
regarding the impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund has qualified and intends to continue to qualify and to elect to
be treated as a regulated investment company under the Internal Revenue Code.
To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in stocks,
securities or currencies (including but not limited to, gains from options,
futures and forward contracts); (b) derive in each taxable year less than 30%
of its gross income from any of the following that are held for less than
three months (i) stocks or securities, (ii) options, future or forward
contracts, or (iii) foreign currencies (or foreign currency options, futures
or forward contracts) that are not directly related to its principal business
of investing in stocks and securities (or options and futures with respect to
stocks or securities); and (c) diversify its holdings so that, at the end of
each quarter of each taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies).
As a regulated investment company, in any fiscal year with respect to
which the Fund distributes at least 90% of its investment company taxable
income (which includes, among other items, dividends and interest but excludes
net long-term capital gains in excess of net short-term capital losses), the
Fund (but not its shareholders) generally will be relieved of U.S. federal
income tax on its net investment income and net capital gains (net long-term
capital gains in excess of the sum of net short-term capital losses and
capital loss carryovers from prior years, if any) that it distributes to
shareholders. To the extent the Fund retains its net capital gains for
investment, it will be subject under current tax rates to a federal income tax
at a maximum effective rate of 35% on the amount retained. See "Federal Income
Tax Treatment of Holders of Common Stock" below. Amounts not distributed on a
timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax payable by the Fund. To avoid the
tax, the Fund must distribute, or be deemed to have distributed, during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the twelve-month period ending on
October 31 of the calendar year, and (3) all ordinary income and capital gains
for previous years that were not distributed during such years. See "Risk
Factors and Special Considerations -- Dividends and Distributions."
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Internal Revenue Code, the Fund will be taxed in the same
manner as an ordinary corporation, and distributions to its shareholders will
not be deductible by the Fund in computing its taxable income. In addition, in
the event of failure to qualify, the Fund's distributions, to the extent
derived from the Fund's current or accumulated earnings and profits, will
constitute dividends (eligible for the corporate dividends-received deduction)
which are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gains.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Fund will be required to suspend distributions to the holders of the
Common Stock and/or the Preferred Shares until the asset coverage is restored.
See "Description of Capital Stock -- Dividends and Distributions." Such a
suspension of distributions might prevent the Fund from distributing 90% of
its investment company taxable income, as is required in order to qualify for
taxation as a regulated investment company or cause the Fund to incur a tax
liability or a non-deductible 4% excise tax on its undistributed taxable
income (including gain) or both.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund intends to repurchase or redeem Notes and/or (to the extent permitted
under the 1940 Act) Preferred Shares in order to maintain or restore the
requisite asset coverage and avoid failure to remain qualified as a regulated
investment company. The determination to repurchase or redeem Notes or
Preferred Shares and the relative amounts of each to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Furthermore, the Fund will be required to make mandatory partial redemptions
of the Notes in the event failure to maintain 1940 Act Asset Coverage (as
defined under "Description of Notes -- Asset Maintenance") is not cured in a
timely manner. See "Description of Notes -- Events of Default."
Use of the Fund's cash to repurchase or redeem Notes and/or Preferred
Shares may adversely affect the Fund's ability to distribute annually at least
90% of its investment company taxable income, which distribution is required
to qualify for taxation as a regulated investment company. The Fund may also
realize income in connection with funding repurchases or redemptions of Notes
or Preferred Shares, and such income would be taken into account in
determining whether or not the above-described distribution requirements have
been met. Depending on the size of the Fund's assets relative to its
outstanding senior securities, redemption of the Notes and/or Preferred Shares
might restore asset coverage. Payment of distributions after restoration of
asset coverage could requalify (or avoid a disqualification of) the Fund as a
regulated investment company, depending upon the facts and circumstances.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds are
original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of
a debt instrument over the issue price of the instrument. Original issue
discount on a taxable obligation is required to be currently included in the
income of the holder of the obligation (i) on a ratable basis if the
obligation was issued before July 2, 1982 and (ii) on a constant interest rate
basis resembling the economic accrual of interest if the obligation was issued
after July 1, 1982. The tax basis of the holder of an original issue discount
debt instrument is increased by the amount of original issue discount thereon
properly included in the holder's gross income as determined for federal
income tax purposes. Current inclusion in gross income of original issue
discount on a taxable debt instrument is required, even though no cash is
received at the time the original issue discount is required to be included in
gross income. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to borrow money or dispose
of other securities to be able to make distributions to the investors. The
extent to which the Fund may liquidate securities at a gain may be limited by
the 30% limitation discussed above.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Internal Revenue Code
that, among other things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund, defer Fund losses, and
affect the determination of whether capital gains and losses are characterized
as long-term or short-term capital gains or losses. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were disposed of at their fair market value at the close of the taxable year)
which may cause the Fund to recognize income without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% and 98%
distribution requirements for avoiding income and excise taxes. The Fund will
monitor its transactions, will make the appropriate tax elections, and will
make the appropriate entries in its books and records when it acquires any
foreign currency, option, futures contract, forward contract, or hedged
investment in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company and minimize
the imposition of income and excise taxes.
If the Fund fails to qualify as a regulated investment company for any
year, it generally must pay out its earnings and profits accumulated in that
year less an interest charge to the Treasury on 50% of such earnings and
profits before it can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF COMMON STOCK
For any period during which the Fund qualifies as a regulated investment
company for federal income tax purposes, dividends paid out of the Fund's net
investment income and short-term capital gains to holders of Common Stock will
be taxable as ordinary income. It is expected that dividends received by
corporate shareholders will not be eligible for the dividends received
deduction. Distributions of net long-term capital gains designated by the Fund
as capital gain dividends, if any, are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund's shares and are not
eligible for the dividends received deduction. Dividends and distributions
will be taxable to shareholders as if actually distributed, even if they are
reinvested in additional shares of the Fund. Shareholders receiving
distributions in the form of newly issued shares will have a cost basis in
each share received equal to the fair market value of a share of the Fund on
the distribution date.
Generally, dividends paid by the Fund are treated as received in the
taxable year in which the distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in such a month and actually paid
during January of the following year, will be treated as received on December
31 of the year in which declared.
Any distribution by the Fund to a holder of Common Stock not made out of
the Fund's earnings and profits will be treated as a return of capital to each
holder of Common Stock, will reduce the basis of each share of Common Stock
with respect to which it is distributed and will be subject to tax as capital
gain to the extent that the distribution exceeds the basis of the share of
Common Stock with respect to which it is distributed. Investors should
carefully consider the tax implications of buying shares of Common Stock just
prior to a distribution, as the price of shares purchased at this time may
reflect the amount of the forthcoming distribution which will, except in
unusual circumstances, be taxable when received.
After the close of each taxable year, the Fund will identify for its
holders of Common Stock the portions of its distributions that are
attributable to capital gains and to ordinary income, respectively.
The Internal Revenue Code limits certain miscellaneous itemized deductions
by individuals, including deductions of investment expenses, to the extent the
aggregate of such deductions exceeds 2% of an individual's federal adjusted
gross income. The Internal Revenue Code would treat such expenses incurred by
a regulated investment company as being indirectly incurred by the
shareholders of the investment company. Shareholder expenses of publicly
offered regulated investment companies are exempted from the application of
the 2% floor. Thus, the limitation will not apply with respect to indirect
deductions through the Fund. Such expenses will also be fully deductible by
the Fund's corporate shareholders.
If the Fund suffers a net taxable loss in any taxable year, the holders of
Common Stock will not be permitted to utilize that loss in their tax returns.
Generally, gain realized by a shareholder on the sale of shares held for
more than one year will be taxable as long-term capital gain. If a shareholder
holds shares primarily for sale to customers in the ordinary course of
business rather than for investment, any gain recognized on the sale of those
shares would be taxable as ordinary income. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
within a period of 61 days beginning 30 days before and ending 30 days after
the shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss. Any loss realized by a
shareholder on a disposition of Fund shares held by the shareholder for six
months or less will be treated as a long-term capital loss to the extent of
any distributions of capital gain dividends received or treated as having been
received by the shareholder with respect to such shares. Shareholders who
acquire shares on multiple dates should consult their tax advisors to
determine how to allocate the cost of stock for basis purposes.
In general, federal withholding taxes at a 30% rate or a lesser rate
established by treaty will apply to distributions to shareholders (except to
those distributions designated by the Fund as capital gains dividends) that
are nonresident aliens or foreign partnerships, trusts or corporations to the
extent that such income is not "effectively connected" with a U.S. trade or
business carried on by the shareholders.
In the event the Fund retains any net capital gains, it may designate such
retained amounts as undistributed capital gains in a notice to its
shareholders. In the event such a designation is made, shareholders subject to
U.S. tax would include in income, as long-term capital gains, their
proportionate share of such undistributed amounts, but would be allowed a
credit or refund, as the case may be, for their proportionate share of the 35%
tax paid by the Fund. If the designation is made, for U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder would be increased by
an amount equal to 65% of the amount of undistributed capital gains included
in the shareholder's income.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31% of
all taxable distributions payable to shareholders who fail to provide the Fund
with their correct taxpayer identification number or who fail to make required
certifications or if the Fund or a shareholder has been notified by the U.S.
Internal Revenue Service that distributions to the shareholder are subject to
backup withholding. Corporate shareholders and other shareholders specified in
the Internal Revenue Code are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability.
OTHER TAXATION
Investors are advised to consult their own tax advisors with respect to
the application to their own circumstances of the above-described general
taxation rules and with respect to the state, local or foreign tax
consequences to them of an investment in the Common Stock.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Fund consists of 1,000 Preferred
Shares, no par value, with a liquidation preference of $100,000 per share, and
100,000,000 shares of Common Stock, $.01 par value. As of January 31, 1997,
30,970,767 shares of Common Stock are outstanding and 200 Preferred Shares are
outstanding. The Board of Directors reserves the right to issue Preferred
Shares and Common Stock, from time to time, and any such shares shall be
deemed "Preferred Shares" and "Common Stock," respectively. The Preferred
Shares and the Common Stock issued are, or upon issuance will be fully paid
and nonassessable and will have no preemptive rights or conversion rights. As
used herein, the term "holder of Preferred Shares" refers to a beneficial
owner of Preferred Shares unless the context otherwise requires.
DIVIDENDS AND DISTRIBUTIONS
Dividends on the Preferred Shares are cumulative from the date on which
such shares are originally issued (the "Original Issuance Date") and are
payable, when, as and if declared by the Board of Directors of the Fund, out
of funds legally available therefor, on the last day of successive 30-day
periods (each, a "Dividend Payment Date") which commenced on January 19, 1989
(the 45th day after the Original Issuance Date), subject to certain
exceptions. Dividends will be paid to the holders of the Preferred Shares on
each Dividend Payment Date through DTC or a successor securities depository
appointed by the Fund. The securities depository's normal procedures now
provide for distribution of dividends in next-day funds settled through the
New York Clearing House to broker-dealers acting as agent members on behalf of
the holders of the Preferred Shares, who in turn are expected to distribute
such dividends to the persons for whom they are acting as agent.
The Applicable Rate (as defined herein) is reset generally every 30 days
by an auction conducted on the first Business Day (an "Auction Date") next
preceding the first day of the next dividend period; provided, however, if
such day is a Thursday the Auction Date shall mean the Business Day next
preceding such Thursday. Accordingly, for each dividend period after the
initial dividend period, the dividend rate for the Preferred Shares will be
the Applicable Rate per annum that results from an auction. Pursuant to a
broker-dealer agreement (the "Broker-Dealer Agreement") among the Fund, Bear,
Stearns & Co. Inc. ("Bear, Stearns") and Bankers Trust Company ("Bankers
Trust"), Bankers Trust as the auction agent for the Preferred Shares will pay
a quarterly service charge (from funds provided by the Fund) to Bear, Stearns,
the Fund's exclusive broker-dealer with respect to the Preferred Shares, of
1/8 of 1% of the purchase price of Preferred Shares outstanding, prorated for
the number of days in the related dividend period. To the extent that the Fund
does not make dividend payments on the Preferred Shares on any Dividend
Payment Date, such payments shall be made to the holders by Financial Security
pursuant to the Surety Bond and thereafter Financial Security shall be
subrogated to such holders' rights to receive such dividend payments when, as
and if declared by the Board of Directors. See "Voting" below and "Surety
Arrangement for Preferred Shares -- Surety Bond." The Fund has negotiated an
extension of the Broker-Dealer Agreement whereby Bear, Stearns has agreed to
continue to act as the Fund's exclusive broker-dealer with respect to the
Preferred Shares through December 4, 1998.
Under the 1940 Act and the Articles of Incorporation, the Fund may not (i)
declare dividends on the Preferred Shares if at the time thereof (and after
giving effect thereto) asset coverage with respect to the Fund's senior
securities representing indebtedness, including the Notes, would be less than
200% (or such higher percentage as may in the future be required by law) or
(ii) declare any other distributions with respect to the Preferred Shares or
purchase or redeem Preferred Shares if at the time of such declaration,
purchase or redemption, as applicable (and after giving effect thereto), asset
coverage with respect to the Fund's senior securities representing
indebtedness, including the Notes, would be less than 300% (or such higher
percentage as may in the future be required by law). Further, the Fund may not
declare dividends or other distributions on the Common Stock or purchase or
redeem any shares of Common Stock if, at the time of the declaration, purchase
or redemption, as applicable (and after giving effect thereto), asset coverage
with respect to the Fund's senior securities representing indebtedness,
including the Notes, would be less than 300% (or such higher percentage as may
in the future be required by law) or asset coverage with respect to the Fund's
senior securities of a class which is stock, including the Preferred Shares,
would be less than 200% (or such higher percentage as may in the future be
required by law). See "Description of Notes -- Restrictive Covenants" for
certain definitions relating to the foregoing restrictions. Under the Note
Purchase Agreement (as defined herein), the declaration of dividends or other
distributions on or the purchase or the redemption of Preferred Shares or
Common Stock will be prohibited at any time payments of principal of or
interest on the Notes are in default. In addition, the declaration of
dividends or other distributions on or the purchase or redemption of Common
Stock will be prohibited at any time dividends on the Preferred Shares are in
arrears or Surety Assets Coverage is not maintained.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current
or accumulated dividends on the Preferred Shares, it will be distributed to
the holders of the Common Stock. The term "net investment income" includes
interest, dividends, short-term capital gains and other income received or
accrued less interest payments with respect to the Notes, the advisory fee,
bank custodian and surety custodian charges, the premium paid pursuant to the
Surety Arrangement, taxes (except capital gains taxes) and other expenses
properly chargeable against income, but does not include net capital gains,
stock dividends, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. Any net capital gains
(defined as the excess of net long-term capital gains over net short-term
capital losses) of the Fund will be distributed annually to the holders of the
Common Stock (subject to the prior rights of the holders of the Preferred
Shares) subject to the foregoing and any requirements of Maryland law.
REDEMPTION
To the extent permitted under the 1940 Act and Maryland law, the Fund may
redeem at its option some or all of the Preferred Shares on any Dividend
Payment Date (a "Preferred Shares Redemption"). The Fund shall be obligated
(a) to redeem, no later than the last day specified for the redemption of
Preferred Shares pursuant to a Redemption Request (as defined herein) from
Financial Security the number of Preferred Shares specified in such Redemption
Request (a "Mandatory Surety Redemption") and (b) to redeem all of the
Preferred Shares at least one full Business Day prior to any expiration date
of the Surety Bond if, 190 days prior to such expiration date, the Fund shall
have failed to obtain from Financial Security an extension of the term of the
Surety Bond pursuant to its terms (a "Mandatory Expiration Redemption");
provided that, under certain circumstances, no Mandatory Expiration Redemption
shall be required if the Fund shall have obtained notice in writing from each
of the Rating Agencies that such expiration of the Surety Bond will not
adversely affect the then outstanding ratings of the Preferred Shares whether
through obtaining a substitute surety bond or otherwise. Preferred Shares
Redemptions and any Mandatory Surety Redemption or Mandatory Expiration
Redemption will be made at a price equal to $100,000 per share plus
accumulated and unpaid dividends through the date of redemption (whether or
not declared by the Fund), except that if any such redemption is not made on a
Dividend Payment Date, it will be made at a price equal to $100,250 plus
accumulated and unpaid dividends through the date of redemption (whether or
not declared by the Fund). Such redemptions may only be made by the Fund to
the extent permitted under the 1940 Act and Maryland law, and provided neither
principal nor interest payments with respect to the Notes are then in default.
A holder of Preferred Shares may elect not to have its shares redeemed
pursuant to a Mandatory Expiration Redemption by giving notice to the Fund or
the paying agent for the Preferred Shares at least five days prior to the
redemption date of its election to continue to hold its Preferred Shares. The
Fund is obligated to meet certain Deposit Securities (as defined herein)
requirements pursuant to the Surety Arrangement to the extent necessary to
satisfy a Mandatory Expiration Redemption. See "Surety Arrangement for
Preferred Shares -- Insurance Agreement."
Pursuant to the terms of the Insurance Agreement (as defined below),
Financial Security is entitled to cause the Fund to redeem certain of the
Preferred Shares to the extent permitted under the 1940 Act and Maryland law
(and provided payments of principal of and interest on the Notes are not then
in default), in the event that the Fund fails to maintain Surety Assets
Coverage while any of the Preferred Shares are outstanding, and such failure
is not cured within eight Business Days. See "Surety Arrangement for Preferred
Shares -- Insurance Agreement." If on any date on which the payment of the
redemption price would constitute a Scheduled Payment, the Fund shall default
in making payment of such redemption price, Financial Security shall make such
payments to the holders of Preferred Shares to be redeemed and shall
thereafter be subrogated to all the rights of such holders with respect to
their Preferred Shares. See "Voting" below and "Surety Arrangement for
Preferred Shares -- Surety Bond."
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the Fund (whether
voluntary or involuntary), holders of the Preferred Shares then outstanding
shall be entitled to receive, out of the assets of the Fund available for
distribution to stockholders, after satisfying claims of creditors (including
the holders of the Notes) but before any distribution of assets is made to
holders of the Common Stock or any other class of stock ranking junior to the
Preferred Shares as to liquidation payments, a liquidation distribution in the
amount of $100,000 per share plus an amount equal to accumulated and unpaid
dividends (whether or not earned or declared by the Fund, but without
interest) to the date of the final distribution. If, upon any liquidation,
dissolution or winding up of the Fund, the assets of the Fund shall be
insufficient to make such full payments to holders of the Preferred Shares,
then such assets shall be distributed among the holders of Preferred Shares
ratably, according to the respective amounts which would be payable on all
such Preferred Shares if all amounts thereon were paid in full. So long as the
Surety Bond is in effect, to the extent of any such insufficiency and provided
Financial Security has consented to such liquidation, Financial Security will
pay the remaining liquidation preference to the holders of the Preferred
Shares at the time of liquidation. If Financial Security has not consented to
such liquidation, it shall continue to guarantee Scheduled Payments on the
Preferred Shares (including dividend payments and the liquidation preference
to the extent thereof not paid in liquidation) until the expiration of the
Surety Bond, at which time payment of the unpaid liquidation preference of the
Preferred Shares shall be paid by Financial Security. See "Surety Arrangement
for Preferred Shares -- Surety Bond." Unless and until payment in full has
been made to the holders of the Preferred Shares of the liquidation
distributions to which they are entitled, no dividends or distributions will
be made to holders of the Common Stock or any other stock junior to the
Preferred Shares on liquidation. After payment to the holders of the Preferred
Shares of the full amount of the liquidation distributions to which they are
entitled, such holders will not be entitled to any further participation in
any distribution of assets of the Fund. Neither a sale, lease or exchange of
all or substantially all of the property and assets of the Fund nor a
consolidation or merger of the Fund with or into any other corporation or
business trust will be deemed to be a liquidation, dissolution or winding up
of the Fund.
Upon any liquidation, the holders of the Common Stock, after required
payments to the holders of the Preferred Shares, will be entitled to
participate equally in the remaining assets of the Fund.
VOTING
Except as noted below, the Common Stock and the Preferred Shares vote
together as a single class. Holders of shares of Common Stock have voting
rights of one vote per share and holders of the Preferred Shares have voting
rights of one vote per $1,000 of liquidation preference without regard to any
liquidation preference attributable to accumulated and unpaid dividends (i.e.,
100 votes per Preferred Share); provided that all the votes represented by a
single Preferred Share must be voted together. In elections of Directors, the
holders of the Preferred Shares, as a separate class, vote to elect two
Directors and the holders of the Common Stock and the Preferred Shares, voting
together, will elect the remaining Directors. In addition, during any period
(herein referred to as a "Voting Period") that dividends payable on Preferred
Shares equal to two full years of dividends are unpaid, the holders of such
Preferred Shares, voting as a separate class, have the right to elect as a
class the smallest number of additional Directors as shall be necessary to
assure that a majority of the Directors has been elected by the holders of the
Preferred Shares. The terms of office of all persons who are Directors of the
Fund at the time of the commencement of a Voting Period will continue without
change, notwithstanding the election by the holders of Preferred Shares of the
additional number of Directors which such holders are entitled to elect as a
separate class. The additional Directors elected by the holders of Preferred
Shares in connection with a Voting Period, together with the incumbent
Directors elected prior to the Voting Period, will constitute the duly elected
Directors of the Fund. When all accumulated and unpaid dividends have been
paid or provided for, the Voting Period shall end and the terms of office of
the additional Directors elected by the holders of the Preferred Shares in
connection with a Voting Period shall terminate. Election of Directors is
noncumulative; accordingly, holders of a majority of the voting power
represented by the outstanding shares of Common Stock and Preferred Shares,
voting together as a single class, or a majority of the outstanding Preferred
Shares, voting separately as a class, may elect all of the Directors who are
subject to election by such class, as the case may be.
Pursuant to the Surety Custody Agreement, to the extent Scheduled Payments
are paid by Financial Security pursuant to the Surety Bond, Financial Security
shall have the right to exercise the voting rights (including any right to
elect a majority of the Board of Directors described above) of the holders of
the Preferred Shares with respect to which such Scheduled Payments have been
made by Financial Security. See "Surety Arrangement for Preferred Shares --
Insurance Agreement." The assignment to Financial Security of the voting
rights of the holders of the Preferred Shares shall terminate when the Fund
has made payments on the Preferred Shares with respect to which Financial
Security had made Scheduled Payments pursuant to the Surety Bond or the Fund
has reimbursed Financial Security with respect to such Scheduled Payments.
The Common Stock and the Preferred Shares each vote separately as a class
on amendments to the Articles of Incorporation that would adversely affect
their respective contractual rights as expressly set forth in the Articles of
Incorporation. In addition to any other vote required by the Articles of
Incorporation or applicable law, so long as any Preferred Shares are
outstanding (1) the Fund may not be voluntarily liquidated, dissolved or wound
up, or merged into or consolidated with any other entity in a transaction in
which it is not the successor entity, or converted to open-end status, and may
not sell all or substantially all of its assets and may not engage in a
statutory share exchange in which it is not the successor entity without the
approval of at least a majority of the outstanding Preferred Shares and the
outstanding shares of Common Stock, each voting as a separate class; (2) the
adoption of any plan of reorganization adversely affecting either the
Preferred Shares or the Common Stock shall require the approval of a majority
of the outstanding shares of each such class so affected; (3) the approval of
a majority of the outstanding Preferred Shares, voting separately as a class,
shall be required to amend, alter or repeal any of the express preferences,
rights or powers of holders of the Preferred Shares as set forth in the
Articles of Incorporation, or increase or decrease the number of Preferred
Shares authorized to be issued; and (4) the approval of a majority (as defined
under "Investment Objective and Policies") of the outstanding Preferred Shares
and the outstanding shares of Common Stock, each voting as a separate class,
shall be required to approve any action requiring a vote of security holders
under Section 13(a) of the 1940 Act including, among other things, changes in
the Fund's sub-classification as a closed-end investment company, changes in
its investment objective or changes in the investment restrictions described
under "Investment Policies and Limitations -- Investment Restrictions." The
Common Stock and the Preferred Shares will also vote separately to the extent
otherwise required under Maryland law or the 1940 Act as in effect from time
to time, and, to the extent required under the 1940 Act, action by the Fund's
shareholders shall require a vote of a majority of the Fund's outstanding
voting securities as defined under "Investment Policies and Limitations."
For purposes of any right of the holders of the Preferred Shares to vote
on any matter, whether such right is created by the Articles of Incorporation,
by statute or otherwise, a holder of a Preferred Share will not be entitled to
vote and such Preferred Share will not be deemed to be outstanding for the
purpose of voting or determining the number of Preferred Shares required to
constitute a quorum, if prior to or concurrently with a determination of
Preferred Shares entitled to vote or of Preferred Shares deemed outstanding
for quorum purposes, as the case may be, a notice of redemption shall have
been given in respect of such Preferred Share and Deposit Securities for the
redemption of such Preferred Share shall have been deposited in trust, as
provided above; provided, however, that the foregoing sentence shall not be
applicable to the holders of Preferred Shares who elected to retain their
Preferred Shares after notice of a Mandatory Expiration Redemption. The Fund
is required by the rules of the Exchange to hold annual meetings of
shareholders. The most recent annual meeting of shareholders was held on March
1, 1996. The next annual meeting of shareholders is scheduled for March 7,
1997.
SURETY ARRANGEMENT FOR PREFERRED SHARES
FINANCIAL SECURITY
The information set forth below under this caption of this Prospectus was
furnished by Financial Security.
General. Financial Security acts as surety under the Surety Bond by which
Financial Security unconditionally and irrevocably guarantees Scheduled
Payments on the Preferred Shares. Financial Security is a monoline insurance
company incorporated in 1984 under the laws of the State of New York.
Financial Security is licensed to engage in financial guaranty insurance
business in all 50 states, the District of Columbia and Puerto Rico and the
United Kingdom.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -- thereby enhancing the credit rating of those securities
- -- in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., U S WEST and The Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make
any additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by
Financial Security or any of its domestic operating insurance company
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, Financial
Security reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit
Financial Security's obligations under any financial guaranty insurance
policy.
Ratings of Claims-Paying Ability. Financial Security's claims-paying
ability is rated "Aaa" by Moody's and "AAA" by S&P, Nippon Investors Service
Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the
views of the respective rating agencies, are not recommendations to buy, sell
or hold securities and are subject to revision or withdrawal at any time by
such rating agencies. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by Financial Security
are available upon request to the State of New York Insurance Department.
Insurance Regulation. Financial Security is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, Financial Security and
its insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State
of New York, Financial Security is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and
the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable
to non-life insurance companies such as Financial Security, regulate, among
other things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
SURETY BOND
Concurrent with the issuance of the Preferred Shares in November 1988, the
Fund caused Financial Security to deliver the Surety Bond (the "Surety Bond")
to Bankers Trust Company, as custodian under a custody agreement (the "Surety
Custody Agreement"), for the benefit of the holders of the Preferred Shares.
Under the Surety Bond, Financial Security unconditionally and irrevocably
guarantees to each holder of Preferred Shares, the full and complete payment
of: (i) Scheduled Payments; and (ii) the amount of any payment on the
Preferred Shares which subsequently is avoided in whole or in part as a
preference under applicable law until and including such date on which the
Preferred Shares are paid in full.
"Scheduled Payments" shall mean (i) payments of dividends on the Preferred
Shares which holders of the Preferred Shares would be entitled to receive on
each Dividend Payment Date during the term of the Surety Bond (see "Expiration
of the Surety Arrangement" below) in accordance with the terms of the Articles
of Incorporation, without regard to whether the Fund has declared any such
dividend or such dividend could have been legally declared by the Fund, (ii)
payment of the redemption price of the Preferred Shares, without regard to
whether such redemption could have been legally made by the Fund (a) on the
last date on which the Fund was to have redeemed the Preferred Shares as
specified in a Redemption Request (as defined herein) given by Financial
Security under the Insurance Agreement (as defined below) upon the occurrence
of an Event of Default (as defined herein) under the Insurance Agreement in
the event Financial Security has notified the Surety Custodian that such
redemption is to be a Scheduled Payment and (b) on the date on which the
Preferred Shares may be required to be redeemed upon expiration of the Surety
Bond (as described under "Description of Capital Stock -- Redemption"), and
(iii) payment of the liquidation preference on the Preferred Shares in the
event of a liquidation of the Fund during the term of the Surety Bond on the
date fixed for payment of such liquidation preference pursuant to the Articles
of Incorporation, so long as Financial Security shall have consented to such
liquidation. For the purposes of the Scheduled Payments under the Surety Bond,
in the event of a liquidation of the Fund to which Financial Security has not
consented in which only a portion of the liquidation preference on the
Preferred Shares is paid, a portion of the Preferred Shares represented by the
unpaid portion of the liquidation preference shall be deemed to remain
outstanding and shall be secured by the Surety Bond as to all Scheduled
Payments without regard to whether the Fund has any obligation with respect
thereto.
Financial Security shall be subrogated to all the rights of each holder of
Preferred Shares in the event Financial Security makes a Scheduled Payment to
any such holder under the Surety Bond.
The Surety Bond is a direct, unsecured and unsubordinated obligation of
Financial Security ranking equally with any other unsecured and unsubordinated
obligations of Financial Security except for certain obligations in respect of
tax and other payments to which preference is or may become afforded by
statute. The term of the Surety Bond cannot be modified or altered by any
other agreement or instrument or by the merger, consolidation or dissolution
of the Fund. The Surety Bond may not be cancelled or revoked by Financial
Security prior to the end of its term. See "Expiration of the Surety
Arrangement" below. The Surety Bond is governed by the laws of the State of
New York but is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
INSURANCE AGREEMENT
General. As a precondition to Financial Security's issuing the Surety
Bond, the Fund entered into an Insurance Agreement (the "Insurance Agreement")
with Financial Security pursuant to which the Fund is obligated to reimburse
Financial Security for amounts paid by Financial Security under the Surety
Bond. A copy of the Insurance Agreement, as amended, is filed as an exhibit to
the Registration Statement, as filed with the SEC on March 29, 1996. A copy of
such Registration Statement may be obtained as described under "Further
Information."
Surety Asset Coverage. At any time that Preferred Shares are outstanding,
the Fund is required under the Insurance Agreement to maintain assets in its
portfolio meeting the Surety Investment Guidelines and having a discounted
value at least equal to the Surety Asset Coverage (as defined below). If the
Fund fails to meet the Surety Asset Coverage requirement and such failure is
not cured within eight Business Days, Financial Security may seek to cause the
Fund to redeem certain of the Preferred Shares. See "Events of Default;
Remedies" below. The discount factor for and market value of any asset of the
Fund, the method of calculating Surety Asset Coverage, the assets eligible for
inclusion in the calculation of the discounted value of the Fund's portfolio
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the Fund and Financial Security.
"Surety Asset Coverage" as of any date is defined as the dollar amount
equal to (A) the sum of (i) 100% of the aggregate principal amount of the
Notes then outstanding; (ii) $100,250 times the number of Preferred Shares
then outstanding; (iii) the aggregate amount of accrued interest on the Notes
then outstanding, plus an amount equal to 63 days' interest on such principal
amount of the Notes; (iv) the aggregate amount of accumulated but unpaid
dividends with respect to the Preferred Shares to such date, plus the amount
of dividends projected to accumulate on the Preferred Shares then outstanding
from such date until the 63rd day thereafter; (v) the aggregate principal
amount of any then outstanding indebtedness of the Fund for money borrowed
(other than the Notes); and (vi) the greater of $200,000 or the Fund's
liabilities in existence as of such date to the extent not otherwise reflected
in any of (i) through (v) above, less (B) the combined value of any Deposit
Securities irrevocably deposited by the Fund for payment of principal or
interest on the Notes or redemptions of or dividend payments with respect to
the Preferred Shares. See "Deposit Securities Requirement" below.
Deposit Securities Requirement. The Fund is obligated to deposit with the
payment agent with respect to the Preferred Shares, a specified amount of
securities ("Deposit Securities") not later than 20 days prior to each
Dividend Payment Date and not later than the mailing of any notice of
redemption with respect to any redemption (except in the case of a Mandatory
Expiration Redemption). In addition, in the case of a Mandatory Expiration
Redemption, the Fund will be obligated to set aside Deposit Securities ratably
over a period ending not less than 30 days prior to the applicable redemption
date. Deposit Securities in all cases shall have an initial combined value
greater than or equal to liquidation preference and/or accumulated dividends
on the Preferred Shares to become due and payable on the applicable payment
date, and shall mature on or prior to such date.
Events of Default; Remedies. An "Event of Default" is defined in the
Insurance Agreement to include any of the following: (i) any default by the
Fund in its performance of any covenant contained in the Insurance Agreement
and the continuance of such default for at least 30 days after written notice
is given to the Fund; (ii) any material representation or warranty made by the
Fund in the Insurance Agreement or in connection therewith shall prove to be
incorrect in any material respect when made or deemed made; (iii) any failure
of the Fund to maintain assets in its portfolio with a discounted value such
that the Surety Asset Coverage requirement is met, which failure is not cured
within eight Business Days; (iv) any failure by the Fund to reimburse
Financial Security for amounts paid under the Surety Bond or pay to Financial
Security when due any other amount under the Insurance Agreement; (v) any
failure by the Fund, on or prior to the date six months prior to the
expiration date of the Surety Bond to obtain from Financial Security an
extension of the term of the Surety Bond pursuant to its terms or to obtain
notice in writing from each of the Rating Agencies that such expiration of the
Surety Bond will not adversely affect the then outstanding rating, if any, of
the Preferred Shares by such Rating Agency whether through obtaining a
substitute surety bond or otherwise; (vi) a final determination by the
Internal Revenue Service that the Fund does not qualify for any taxable year
as a regulated investment company (as defined in the Internal Revenue Code);
(vii) certain events of bankruptcy, insolvency or receivership of the Fund;
(viii) denial by the Fund that it has any or further liability or obligation
under the Insurance Agreement or the Articles of Incorporation, or any finding
or ruling by any governmental agency or authority that the Insurance Agreement
or the Articles of Incorporation is not valid or binding on the Fund; (ix) the
failure to comply with certain covenants with respect to the liquidation of
portfolio securities in order to pay dividends or make redemptions on
Preferred Shares when due; and (x) the failure by the Fund to make a payment
of a dividend or redemption when due on the Preferred Shares or to declare a
dividend on the Preferred Shares when contemplated under the terms of the
Fund's Articles of Incorporation and not prohibited under Maryland law or the
1940 Act; provided that, in the case of each of clauses (i), (ii), (vi) and
(viii), such event shall not constitute an Event of Default unless, in the
reasonable judgment of Financial Security, such event would materially and
adversely affect the ability of the Fund to perform its material obligations
under the Insurance Agreement or the Articles of Incorporation or would
materially and adversely affect the material rights or benefits or the
enforcement of remedies or the practicable realization of such rights of or
benefits to Financial Security under the Insurance Agreement or of Financial
Security or any holder of Preferred Shares under the Surety Custody Agreement
or the Articles of Incorporation or otherwise with respect to the Preferred
Shares.
If an Event of Default has occurred and is continuing, the Fund is
required under the Insurance Agreement, upon receipt of a written request from
Financial Security (a "Redemption Request"): (a) in the case of an Event of
Default other than as specified in clause (iii) above, to deliver a notice of
redemption ("Notice of Redemption") with respect to, and redeem within a
specified period, such number of Preferred Shares, as specified by Financial
Security in such Redemption Request; and (b) in the case of the occurrence and
continuance of an Event of Default specified in clause (iii) above relating to
Surety Asset Coverage, to identify in the Fund's sole discretion, and sell for
cash, certain portfolio holdings, the proceeds from the sale of which shall be
added to the portfolio and shall thereby cause the value of the portfolio to
have equalled or exceeded the Surety Asset Coverage requirement on a pro forma
basis as of the immediately preceding date such Surety Asset Coverage was
determined ("Special Surety Redemption Assets"). In addition, Financial
Security will be entitled to deliver a Redemption Request directing the Fund
to redeem Preferred Shares with the proceeds of the sale of such Special
Surety Redemption Assets or similar assets. Any Redemption Request (other than
in respect of an Event of Default specified in clause (iii) above), once
delivered, may be withdrawn by Financial Security at any time prior to the
mailing of the related Notice of Redemption.
Any amount applied to payment on the Preferred Shares as to which
Financial Security has made payment under the Surety Bond shall be deemed to
satisfy the obligation of the Fund to reimburse Financial Security in an
amount equal to the amount so applied. Alternatively, if the Fund reimburses
Financial Security for any Scheduled Payments made by it, such reimbursement
will satisfy the Fund's obligation to make the dividend, redemption or
liquidation preference payment represented by such Scheduled Payment so
reimbursed.
INDEMNIFICATION AND OTHER PAYMENTS BY THE FUND
The Fund has agreed to indemnify Financial Security against certain
liabilities, losses, costs, damages, attorneys' fees and other expenses. The
Fund paid to Financial Security, upon the issuance of the Surety Bond, and in
consideration thereof, a premium equal to $510,909 which represented the
present value of 0.40% of the aggregate liquidation preference of the
Preferred Shares originally issued (the "Annual Premium Amount") times the
number of years (five) in the initial term of the Surety Bond (which was from
December 1988 through December 1993) and also paid Financial Security for
certain other legal fees and expenses incurred by Financial Security in
connection with the Insurance Agreement. The Fund now pays an annual fee to
Financial Security equal to 0.40% of the aggregate liquidation preference of
the outstanding Preferred Shares.
EXPIRATION OF THE SURETY ARRANGEMENT
The Surety Bond will expire December 5, 1998; provided, however, that,
subject to certain conditions contained in the Insurance Agreement including
the conditions that there is no Event of Default and Surety Asset Coverage is
met at the time of extension, the Fund may elect to extend the expiration date
for one or more additional periods of up to five years in the aggregate at a
premium payable annually equal to 0.40% of the aggregate liquidation
preference of the Preferred Shares outstanding at the time of extension of the
Surety Bond. Except under certain circumstances, upon an expiration of the
Surety Bond prior to 10 years after the original issuance thereof, the Fund
shall be obligated to pay Financial Security a fee equal to the Annual Premium
Amount. Accordingly, the Fund may not replace the Surety Bond with a
substitute surety bond, financial guaranty or other credit enhancement without
payment of such fee. Upon expiration of the Surety Bond, the Preferred Shares
will be subject to mandatory redemption under certain circumstances as
described under "Description of Capital Stock -- Redemption."
DESCRIPTION OF NOTES
GENERAL
The Fund issued $20,000,000 (principal amount) of the Notes, due in
December 1998, pursuant to a note purchase agreement (the "Note Purchase
Agreement") dated as of July 15, 1993, and amended and restated as of December
16, 1993, between the Fund and Pacific Mutual Life Insurance Company ("Pacific
Mutual"). The Note Purchase Agreement does not limit the aggregate principal
amount of senior notes of the Fund (including the Notes, the "Senior Notes")
that may be issued thereunder from time to time in one or more series. The
issuance of any subsequent Senior Notes will be subject to compliance with the
1940 Act, including Section 18 thereof. Subject to the 1940 Act, any such
subsequent Senior Notes may have certain terms, including, but not limited to,
those relating to interest rate, redemptions, repurchases and maturity which
differ from the terms of the Notes. The following summary of the principal
terms of the Notes and certain terms of the Note Purchase Agreement is
qualified in its entirety by reference to all provisions of the Note Purchase
Agreement, including the definitions therein of certain terms. A copy of the
Note Purchase Agreement is filed as an exhibit to the Fund's Registration
Statement on Form N-2, as filed with the SEC on March 29, 1996.
INTEREST
The Notes bear interest at the rate of 6.53% per annum from July 15, 1993
through and including November 30, 1998. Interest on the Notes is payable on
June 1 and December 1 of each year, commencing December 1, 1993. The Notes
will mature on December 1, 1998 if not repurchased or redeemed prior to that
date.
REDEMPTION
The Notes will not be redeemable by the Fund prior to maturity, except
that (i) the Fund may redeem the Notes on or after December 5, 1993, in whole
but not in part, in connection with the conversion of the Fund to open-end
status and (ii) the Fund may elect to redeem such amount of Notes as shall (a)
enable the Fund to maintain asset coverage (as defined in and determined
pursuant to the 1940 Act) with respect to the Fund's senior securities
representing indebtedness (as defined in the 1940 Act), including the Notes,
of at least 300% (or such higher percentage as may in the future be specified
in the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
paying dividends on common stock), (b) enable the Fund to maintain asset
coverage (as defined in the 1940 Act) with respect to the Fund's senior
securities of a class which is stock (as defined in the 1940 Act), including
the Preferred Shares, of at least 200% or such higher percentage as may in the
future be specified in the 1940 Act as the minimum asset coverage for senior
securities representing indebtedness of a closed-end investment company as a
condition of paying dividends on common stock or (c) enable the Fund to
qualify for treatment as a regulated investment company for federal income tax
purposes. The Notes shall also be subject to mandatory partial redemption upon
the occurrence of certain events of default as described under clauses (v) and
(vi) under "Events of Default" below. All redemptions of Notes by the Fund
will be at a price of 100% of the principal amount thereof, plus accrued
interest to the date of redemption.
RANKING OF NOTES
The Notes will rank pari passu with all other existing and future senior
indebtedness of the Fund and will be senior to the Common Stock and the
Preferred Shares. "Senior indebtedness" means the principal of and interest on
and other amounts due on or in connection with any existing or future
unsecured indebtedness of the Fund.
RESTRICTIVE COVENANTS
Under the 1940 Act and the Note Purchase Agreement, the Fund may not
declare dividends or other distributions on the Common Stock or purchase any
shares of Common Stock if, at the time of the declaration or purchase, as
applicable (and after giving effect thereto), asset coverage with respect to
the Fund's senior securities representing indebtedness, including the Notes,
would be less than 300% (or such higher percentage as may in the future be
required by law). In addition, under the 1940 Act and the Note Purchase
Agreement, the Fund may not (i) declare any dividends with respect to the
Preferred Shares if, at the time of such declaration (and after giving effect
thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Notes, would be less than 200% (or
such higher percentage as may in the future be required by law) or (ii)
declare any other distributions on the Preferred Shares or purchase or redeem
Preferred Shares if at the time of the declaration, purchase or redemption, as
applicable (and after giving effect thereto), asset coverage with respect to
the Fund's senior securities representing indebtedness, including the Notes,
would be less than 300% (or such higher percentage as may in the future be
required by law). Dividends or other distributions on or purchases or
redemptions of Common Stock or Preferred Shares are further prohibited under
the Note Purchase Agreement at any time that payments of principal of or
interest on the Notes are in default. Under the Internal Revenue Code, the
Fund must, among other things, distribute at least 90% of its investment
company taxable income each year in order to maintain its qualification for
tax treatment as a regulated investment company. The foregoing limitations on
dividends, distributions and purchases may under certain circumstances impair
the Fund's ability to maintain such qualification. See "Federal Taxation."
The asset coverage of a class of senior securities representing
indebtedness, such as the Notes, is defined as the ratio of (i) the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities, to (ii) the aggregate amount of senior securities
representing indebtedness of the Fund. The asset coverage of a class of senior
securities representing stock, such as the Preferred Shares (see "Description
of Capital Stock -- Dividends and Distributions"), is defined as the ratio of
(i) the total assets of the Fund, less all liabilities and indebtedness not
represented by senior securities, to (ii) the aggregate amount of senior
securities representing indebtedness of the Fund, plus the aggregate of the
liquidation preference of the Preferred Shares. "Senior securities
representing indebtedness" generally means any bond, debenture, note or
similar obligation or instrument constituting a security (other than stock)
and evidencing indebtedness. For purposes of determining asset coverage for
senior securities representing indebtedness in connection with the payment of
dividends or other distributions on or purchases or redemptions of stock, the
term "senior security" does not include any promissory note or other evidence
of indebtedness issued in consideration of any loan, extension or renewal
thereof, made by a bank or other person and privately arranged, and not
intended to be publicly distributed. The term "senior security" also does not
include any such promissory note or other evidence in any case where such a
loan is for temporary purposes only and in an amount not exceeding 5% of the
value of the total assets of the Fund at the time when the loan is made; a
loan is presumed under the 1940 Act to be for temporary purposes if it is
repaid within 60 days and is not extended or renewed; otherwise it is presumed
not to be for temporary purposes. For purposes of determining whether the 300%
and 200% asset coverage requirements described above apply in connection with
dividends or distributions on or purchases or redemptions of Common Stock or
Preferred Shares and for purposes of determining 1940 Act Asset Coverage (as
defined below), such asset coverages may be calculated on the basis of values
calculated as of a time within 48 hours (not including Sundays or holidays)
next preceding the time of the applicable determination. The foregoing
definitions reflect the provisions of the 1940 Act as in effect on the date of
the Note Purchase Agreement and are subject to change to the extent necessary
to reflect changes in the 1940 Act, if any.
Pursuant to the Notes Investment Guidelines, the Note Purchase Agreement
contains a covenant limiting the Fund's ability to incur, assume, guarantee or
otherwise become liable with respect to any indebtedness for money borrowed
unless the incurrence of such indebtedness would not result in a default in
the performance or observance of the Fund's obligation to maintain 1940 Act
Asset Coverage or otherwise cause a violation of Section 18 of the 1940 Act.
The Notes Investment Guidelines as reflected in the Note Purchase
Agreement also prohibit the Fund from creating, incurring or suffering to
exist, or agreeing to create, incur or suffer to exist, or consenting to cause
or permit in the future (upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien, mortgage, pledge,
charge, security interest, security agreement, conditional sale or trust
receipt or other material encumbrance of any sort (collectively, "Liens") upon
any of its assets which are eligible for inclusion in the discounted value of
its portfolio, except for (a) Liens the validity of which is being contested
in good faith by appropriate proceedings, (b) Liens for taxes that are not
then due and payable or that can be paid thereafter without penalty, (c) Liens
to secure payment for services rendered by Bankers Trust Company or its
successor as auction agent with respect to the Preferred Shares and (d) Liens
in respect of overnight borrowings by the Fund not to exceed 5% of the total
assets of the Fund at any time outstanding. The terms of the Note Purchase
Agreement also limit the Fund's ability to employ certain investment
strategies. See "Investment Policies and Limitations -- Certain Investment
Strategies."
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements that are incorporated into the terms of the Note Purchase
Agreement. The first of these requirements reflects the provisions of the 1940
Act with respect to asset maintenance for senior securities representing
indebtedness. The second of these requirements reflects the Notes Investment
Guidelines. These requirements are summarized below.
1940 Act Asset Maintenance. As set forth in the Note Purchase Agreement,
the Fund will agree to maintain, as of the last Business Day of each month in
which any of the Notes is outstanding, asset coverage with respect to senior
securities representing indebtedness, including the Notes, of at least 300%
(or such higher percentage as may in the future be specified in the 1940 Act
as the minimum asset coverage for senior securities representing indebtedness
of a closed-end investment company as a condition of paying dividends on
common stock) ("1940 Act Asset Coverage"). See "Restrictive Covenants" above
for certain definitions relating to 1940 Act Asset Coverage.
Note Basic Maintenance Amount. The Fund will be required under the Note
Purchase Agreement to maintain, on each Valuation Date (as defined below),
portfolio holdings meeting the Notes Investment Guidelines (as described under
"Investment Policies and Limitations -- Investment Guidelines") having an
aggregate discounted value at least equal to the Note Basic Maintenance
Amount. In the event that the discounted value of the Fund's portfolio is less
than the Note Basic Maintenance Amount on any Valuation Date while any of the
Notes is outstanding, the Fund will seek to alter the composition of its
portfolio so that, on or before the eighth Business Day after such Valuation
Date (the "Cure Date"), the discounted value of the Fund's portfolio is at
least equal to such Note Basic Maintenance Amount. A "Valuation Date" means
(i) the fifteenth day of each month or, if such day is not a Business Day, the
next succeeding Business Day and (ii) the last Business Day of such month or,
in the case of the first Valuation Date, a date selected by the Fund no more
than 15 days after the date on which the Notes and the Preferred Shares are
initially issued.
The "Note Basic Maintenance Amount" as of any date is defined as the
dollar amount equal to the sum of (i) 100% of the aggregate principal amount
of the Notes then outstanding; (ii) an amount equal to interest accrued on the
aggregate principal amount of the Notes then outstanding from the most recent
date to which interest has been paid or duly provided for through the next
succeeding Valuation Date plus all interest to accrue on the Notes during the
63 days following such Valuation Date; (iii) the principal amount of any then
outstanding indebtedness of the Fund for money borrowed (other than the
Notes); and (iv) the greater of $200,000 or the Fund's current liabilities as
of such date to the extent not reflected in any of (i) through (iii) above.
The discounted value of the Fund's portfolio holdings as of any date means the
quotient of the market value (as defined in the Note Purchase Agreement, and
including accrued interest) of each such holding divided by the applicable
discount factor. Any security not in compliance with the Notes Investment
Guidelines (see "Investment Policies and Limitations -- Investment
Guidelines") shall be excluded from the calculation of the discounted value of
the Fund's portfolio holdings.
The discount factors and guidelines for determining the market value of
the Fund's portfolio holdings for purposes of determining compliance with the
Note Basic Maintenance Amount have been based upon criteria established in
connection with the expected rating of the Notes. In determining discount
factors, several factors are taken into consideration. These factors include,
but are not limited to, the sensitivity of the market value of the relevant
asset to changes in interest rates, the liquidity and depth of the market for
the relevant asset, the credit quality of the relevant asset (for example, the
lower the rating of a corporate debt obligation, the higher the related
discount factor) and the frequency with which the relevant asset is marked to
market. In no event shall the discounted value of any asset of the Fund exceed
its unpaid principal balance or face amount as of the date of calculation. The
discount factor for and market value of any asset of the Fund, the method of
calculating the discounted value of any such asset and the Note Basic
Maintenance Amount, the assets eligible for inclusion in the calculation of
the discounted value of the Fund's portfolio and certain related definitions,
methods of calculation and reporting requirements, may be changed without the
consent of the holders of the Notes, provided that, among other things, such
changes will not adversely affect the ratings, if any, then assigned to the
Notes by the respective Rating Agencies.
MERGER AND CONSOLIDATION
The Fund may consolidate with or merge with or into, or transfer its
assets substantially as an entirety to, another corporation, limited
partnership or business trust, or engage in a statutory share exchange under
Maryland law, provided that (i) the successor corporation, limited partnership
or business trust (if other than the Fund) formed by or resulting from any
such consolidation or merger, or the transferee of the Fund's assets, is
acceptable to Pacific Mutual and shall assume payment of the principal of and
interest on the Notes and any other series of Senior Notes and the performance
and observance of the Note Purchase Agreement and (ii) the Fund or such
successor corporation, limited partnership or business trust or transferee
shall not immediately before such transaction or thereafter be in default
under the Note Purchase Agreement.
EVENTS OF DEFAULT
The following are "Events of Default" under the Note Purchase Agreement:
(i) failure to pay principal of any Note when due; (ii) default for five
Business Days in the payment of interest on any Note; (iii) failure to
maintain asset coverage with respect to senior securities representing
indebtedness (as such terms are defined above under "Restrictive Covenants")
of at least 100% as of the last Business Day of each of 24 consecutive months;
(iv) failure to have, as of the last Business Day of any month, 1940 Act Asset
Coverage, which failure is not cured by the last Business Day of the following
month (for this purpose, without limitation, the default will be deemed cured
if, within the prescribed period, the Fund has given an irrevocable notice to
the registered holder of the Notes to call Notes for redemption and that such
redemption, alone or together with other action taken by the Fund, will cause
the Fund to have the requisite 1940 Act Asset Coverage); (v) failure to
maintain, on each Valuation Date, a discounted value for the Fund's portfolio
equal to at least the Note Basic Maintenance Amount, which failure is not
cured by the applicable Cure Date; (vi) default in the performance of any
other covenant of the Fund under the Note Purchase Agreement which has
continued for 30 days as provided in the Note Purchase Agreement; (vii)
default under any instrument under which the Fund has issued indebtedness or
by which there may be secured or evidenced any indebtedness of or guaranteed
by the Fund, the effect of which is to cause or permit the holders thereof to
cause the acceleration of the maturity thereof, provided that such default or
defaults relate to indebtedness with an aggregate principal amount in excess
of $500,000 and have continued for 30 days as provided in the Note Purchase
Agreement; (viii) the making by the Internal Revenue Service of a final
determination that the Fund does not qualify for any taxable year as a
"regulated investment company" (as defined in the Internal Revenue Code); (ix)
certain events of bankruptcy, insolvency or reorganization; and (x) the
existence for 60 days of unstayed or unsatisfied final judgments against the
Fund in an aggregate amount in excess of $500,000.
If an Event of Default specified in any of clauses (i) through (viii) or
(x) above occurs with respect to the Notes, then and in every such case, the
registered holders of the outstanding Notes may by written notice delivered to
the Fund declare the Notes (or in the case of an Event of Default of the type
specified in clause (iv) or (v), such portion of the Notes as shall be
required under the Note Purchase Agreement to be redeemed) to be due and
payable as provided below. Upon an Event of Default specified in clause (iv),
the amount of Notes subject to mandatory partial redemption will equal the
aggregate principal amount of outstanding Notes (rounded to the next highest
increment of $1,000) the redemption of which would have caused the Fund to
meet 1940 Act Asset Coverage on a pro forma basis as of the last Business Day
of the month in which the failure to maintain 1940 Act Asset Coverage
initially occurred. Upon an Event of Default specified in clause (v), the
amount of Notes subject to mandatory partial redemption will equal the
principal amount of outstanding Notes which could be redeemed using the
proceeds from the deemed sale of Special Note Redemption Assets (rounded to
the next highest increment of $1,000). "Special Note Redemption Assets" are
defined as portfolio holdings identified by the Fund in its sole discretion,
the deemed sale of which for cash on the Valuation Date on which the
discounted value of the Fund's portfolio failed to equal or exceed the Note
Basic Maintenance Amount would have resulted in the Fund achieving the
required Note Basic Maintenance Amount on a pro forma basis as of such
Valuation Date.
In the event of a mandatory partial redemption of Notes following an Event
of Default specified in clause (iv) or (v), the payment of principal and
interest on the Notes due as a result of such mandatory partial redemption
shall be due within 45 days after the date on which such Event of Default
occurs (in the case of clause (iv)) and within 34 days after the applicable
Cure Date (in the case of clause (v)). In the event of an acceleration in the
maturity of Notes following an Event of Default specified in any of the other
clauses above other than clause (ix), the Fund shall immediately take action
to liquidate portfolio securities sufficient to pay the principal of and
interest on such Notes. If an Event of Default specified in clause (ix)
occurs, the Notes shall become due and payable immediately without any
declaration or other act on the part of any registered holder of the Notes.
ASSIGNMENT
Pacific Mutual may assign, subject to compliance with the Securities Act
or regulations thereunder or any applicable state securities laws or
regulations, all or any portion of its interest in any rights under the Note
Purchase Agreement and the Notes to any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof
(individually, the "Person") or grant participation or beneficial interests in
the Note Purchase Agreement and the Notes to any Person; provided that any
assignment or grant of participation or beneficial interest by Pacific Mutual
of its interest in the Notes shall be of a minimum principal amount of
$5,000,000.
Upon any assignment of Pacific Mutual's rights under the Note Purchase
Agreement or under the Notes, any action under the Note Purchase Agreement
requiring the consent of Pacific Mutual and enforcement of any remedies
provided for under the Note Purchase Agreement may only be taken with the
consent or at the direction of the registered holders of more than 50% of the
principal amount of the Notes then outstanding.
CUSTODIAN, TRANSFER AGENTS, DIVIDEND
DISBURSING AGENT, PAYING AGENTS AND REGISTRARS
The Fund's securities and cash are held by State Street Bank and Trust
Company, whose principal business address is Two Heritage Drive, North Quincy,
Massachusetts 02171, as custodian (the "Custodian") under a custodian
contract. The Fund has not selected any foreign custodians or sub-custodians.
However, if the Fund determines that it should have any foreign custodians or
sub-custodians to maintain any of its foreign securities, the Board of
Directors will make such selection following a consideration of a number of
factors, including, but not limited to, the reliability and financial
stability of the institution, the ability of the institution to perform
capably custodial services for the Fund, the reputation of the institution in
its national market, the political and economic stability of the country in
which the institution is located, and the risks of potential nationalization
or expropriation of Fund assets.
State Street Bank and Trust Company serves as dividend disbursing agent,
as agent under the Plan and as transfer agent and registrar for the Common
Stock. Bankers Trust Company, whose principal business address is 4 Albany
Street, New York, New York 10006, serves as the Surety Custodian pursuant to
the Surety Custody Agreement for the benefit of the holders of the Preferred
Shares and serves as transfer agent, paying agent and registrar for the
Preferred Shares.
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed upon for the Fund
by its special counsel, Rogers & Wells, New York, New York, and by its special
Maryland counsel, Piper & Marbury LLP, Baltimore, Maryland.
REPORTS TO SHAREHOLDERS
The Fund will send audited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The audited Financial Statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said report. The address of Arthur
Andersen LLP is 225 Franklin Street, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, D.C. 20549, a Registration
Statement under the Securities Act with respect to the Shares offered hereby.
Further information concerning these securities and the Fund may be found in
the Registration Statement, of which this Prospectus constitutes a part, on
file with the SEC. The Registration Statement may be inspected without charge
at the SEC's office in Washington, D.C., and copies of all or any part thereof
may be obtained from such office after payment of the fees prescribed by the
SEC.
The Fund is subject to the informational requirements of the 1934 Act, and
the 1940 Act, and in accordance therewith files reports and other information
with the SEC. Such reports and other information can be inspected and copied
at the public reference facilities maintained by the SEC at 450 Fifth Street,
Washington, D.C. 20549 and the SEC's regional offices at Seven World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. Such reports and other information concerning
the Fund may also be inspected at the offices of the Exchange.
INCORPORATION OF FINANCIAL STATEMENTS BY REFERENCE
The Fund's Annual Report, which includes financial statements, for the
fiscal year ended October 31, 1996, which either accompanies this Prospectus
or has previously been provided to the person to whom this Prospectus is being
sent, is incorporated herein by reference with respect to all information
other than the information set forth in the Letter to Shareholders included
therein. Any statement contained in the Fund's Annual Report that was
incorporated herein shall be deemed modified or superseded for purposes of
this Prospectus to the extent a statement contained in this Prospectus varies
from such statement. Any such statement so modified or superseded shall not,
except as so modified or superseded, be deemed to constitute a part of this
Prospectus. The Fund will furnish, without charge, a copy of its Annual
Report, upon request to State Street Bank and Trust Company, Two Heritage
Drive, Corporate Stock Transfer, North Quincy, Massachusetts 02171, telephone
(800) 426-5523 Monday through Friday from 9:00 a.m. to 5:00 p.m.
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
Standard & Poor's Ratings Group describes classifications of bonds as
follows:
"AAA" Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
"AA" Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
"A" Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB" Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
"BB"-"B"-"CCC"-"CC"-"C" Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"C1" The rating "C1" is reserved for income bonds on which no interest is
being paid.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
"Aaa" Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
"A" Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba" Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B" Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
"Ca" Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
"C" Bonds which are rated "C" are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR THE DEALER MANAGER. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL
BE AMENDED OR SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary .............................. 3
Fee Table ....................................... 12
Financial Highlights ............................ 13
Capitalization at January 31, 1997 .............. 14
Information Regarding Senior Securities ......... 14
Trading and Net Asset Value Information ......... 15
The Fund ........................................ 16
The Offer ....................................... 17
Use of Proceeds ................................. 26
Investment Policies and Limitations ............. 26
Risk Factors and Special Considerations ......... 38
Directors and Officers .......................... 43
The Investment Adviser .......................... 46
Portfolio Trading ............................... 48
Determination of Net Asset Value ................ 49
Share Repurchases; Conversion to Open-End
Status ........................................ 49
Dividends and Distributions; Dividend
Reinvestment Plan ............................. 51
Federal Taxation ................................ 53
Description of Capital Stock .................... 56
Surety Arrangement for Preferred Shares ......... 60
Description of Notes ............................ 64
Custodian, Transfer Agents, Dividend Disbursing
Agent, Paying Agents and Registrars ........... 68
Legal Opinions .................................. 69
Reports to Shareholders ......................... 69
Experts ......................................... 69
Further Information ............................. 69
Incorporation of Financial Statements
by Reference .................................. 69
Appendix A ...................................... A-1
[Logo]
10,323,589 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR
SUCH SHARES
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
PAINEWEBBER INCORPORATED
TUCKER ANTHONY INCORPORATED
----------------
FEBRUARY 25, 1997
================================================================================
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
(i) -- Schedule of Investments as of October 31, 1996*
(ii) -- Balance Sheet as of October 31, 1996*
(iii) -- Statement of Operations for the fiscal year ended
October 31, 1996*
(iv) -- Statement of Cash Flows for the fiscal year ended
October 31, 1996*
(v) -- Statement of Changes in Net Assets for the fiscal years
ended October 31, 1996 and 1995*
(vi) -- Financial Highlights for each Share of Common Stock
Outstanding through the fiscal years ended October 31,
1992, 1993, 1994, 1995 and 1996*
(vii) -- Notes to Financial Statements for the fiscal year ended
October 31, 1996*
(viii) -- Report of Independent Accountants dated December 13,
1996*
Statements, schedules and historical information other than these listed above
have been omitted since they are either not applicable, or not required or the
required information is shown in the financial statements or notes thereto.
- ----------
*Incorporated by reference.
(2) EXHIBITS
(a) -- Articles of Amendment and Restatement+
(b) -- Amended and Restated By-Laws of the Registrant+
(c) -- Not applicable
(d)(1) -- Specimen certificate of Common Stock*
(2) -- Specimen certificate of Taxable Auction Rate Preferred
Stock*
(3) -- Documents relating to Surety Bond issued by Financial
Security Assurance Inc. (See Exhibits (k)(5) and (k)(6)
below)
(4) -- Note Purchase Agreement dated as of July 15, 1993, as
amended and restated December 16, 1993, between the
Registrant and Pacific Mutual Life Insurance Company,
including Form of Promissory Note+
(5) -- Form of Subscription Certificate and Instructions##
(6) -- Form of Notice of Guaranteed Delivery##
(7) -- Form of DTC/Nominee Over-Subscription Exercise Form##
(8) -- Form of Subscription Agent Agreement between the
Registrant and State Street Bank and Trust Company#
(9) -- Information Agent Agreement between the Registrant and
Corporate Investor Communications, Inc.#
(e) -- Dividend Reinvestment Plan of the Registrant+
(f) -- Not applicable
(g) -- Advisory Agreement between Registrant and Prospect
Street Investment Management Co., Inc.+
(h) -- Form of Dealer Manager Agreement (including the form of
the Soliciting Dealer Agreement)#
(i) -- Not applicable
(j) -- Custodian Agreement between the Registrant and State
Street Bank and Trust Company+
(k)(1) -- Registrar, Transfer Agency and Service Agreement
between the Registrant and State Street Bank and Trust
Company+
(2) -- Auction Agent Agreement dated as of May 7, 1990 between
the Registrant and Bankers Trust Company+
(3) -- Amendment, dated as of October 29, 1993, to a
Broker-Dealer Agreement dated as of May 7, 1990, among
the Registrant, Bankers Trust Company and Bear, Stearns
& Co., Inc.+
(4) -- Letter Agreement among Registrant, Bankers Trust
Company and The Depository Trust Company+
(5)(A) -- Insurance Agreement between the Registrant and
Financial Security Assurance Inc.+
(B) -- Amendment No. 1 to the Insurance Agreement between the
Registrant and Financial Security Assurance Inc.+
(6) -- Custody Agreement between Bankers Trust Company and
Financial Security Assurance Inc.+
(l)(1) -- Opinion and Consent of Rogers & Wells#
(2) -- Opinion and Consent of Piper & Marbury LLP#
(m) -- Not applicable
(n) -- Consent of Arthur Andersen LLP#
(o) -- Not applicable
(p) -- Subscription Agreement dated as of November 21, 1988
from Prospect Street Investment Management Co., Inc.++
(q) -- Not applicable
(r) -- Financial Data Schedule#
- ----------
*Exhibits incorporated by reference to Pre-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form N-2, File No. 33-21949.
#Filed herewith.
##Previously filed.
+Incorporated by reference to the Registrant's Registration Statement on Form
N-2, File No. 333-2067.
++Incorporated by reference to Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-2, File No. 333-2067.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit (h) of Item 24(2) of this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connection
with the Offer described in this Registration Statement:
Registration fees .................................................. $ 15,512
National Association of Securities Dealers, Inc. fees .............. 6,200
New York Stock Exchange listing fee ................................ 45,500
Printing (other than stock certificates) ........................... 41,200
Accounting fees and expenses ....................................... 18,000
Legal fees and expenses ............................................ 120,000
Dealer Managers' expense reimbursement ............................. 100,000
Information Agent fees and expenses ................................ 20,000
Subscription Agent fees and expenses ............................... 20,000
Miscellaneous ...................................................... 13,588
--------
Total .......................................................... $400,000
========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant and the following corporations (as indicated) are under common
control of Richard E. Omohundro, Jr. ("Omohundro, Jr."), Joseph G. Cote
("Cote") and John A. Frabotta ("Frabotta") by virtue of their stock ownership
and positions with such corporations which are indicated below. None of the
corporations are subsidiaries of the Registrant.
1. Prospect Street Investment Management Co., Inc.
(a Massachusetts corporation) ("PSIM")
Business: Investment adviser registered under the Investment Advisers Act
of 1940. PSIM serves as investment adviser of the Registrant and
Prospect International High Income Portfolio N.V.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 40% shareholder, Co-President, Chairman of the
Board, Chief Executive Officer, Treasurer and
Director
Cote 40% shareholder, Co-President and Director
Frabotta 20% shareholder, Vice President, Secretary and
Director
2. Prospect Street Mezzanine Management Co., Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general partner of Bridge Investors,
L.P., a private investment partnership.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 40% shareholder, Co-President, Chief Executive
Officer, Treasurer and Director
Cote 40% shareholder, Co-President and Director
Frabotta 20% shareholder, Vice President, Secretary and
Director
3. Prospect Street Senior Loan Management Co., Inc.
(a Massachusetts corporation)
Business: Investment Adviser to Prospect Street Senior Portfolio, L.P.,
("Senior Portfolio")
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 37.5% shareholder, Co-President, Chief Executive
Officer, Treasurer and Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
4. Prospect Street Senior Loan Corp.
(a Massachusetts corporation)
Business: General Partner to Senior Portfolio
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 37.5% shareholder, Co-President, Chief Executive
Officer, Treasurer
and Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
5. COMO Securities, Inc.
(a Massachusetts corporation) ("COMO")
Business: COMO is a registered broker/dealer.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 30% shareholder, Co-President, Chief Executive
Officer, Treasurer
and Director
Cote 30% shareholder, Co-President and Director
Frabotta 10% shareholder, Vice President, Secretary and
Director
6. Prospect Street Connecticut Capital Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general
partner of Prospect St. Financial
Developments L.P.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 27.55% shareholder, Co-President and Director
Cote 27.55% shareholder, Co-President and Director
Frabotta 13.27% shareholder, Vice-President, Secretary
and Director
7. Prospect Street Discovery Fund Inc.
(a Massachusetts corporation)
Business: Investment Adviser to and general
partner of Prospect St. NYC Discovery Fund L.P.
CONTROL PERSONS POSITIONS
--------------- ---------
Omohundro, Jr. 26.56% shareholder, Co-President and Director
Cote 26.56% shareholder, Co-President and Director
Frabotta 10.42% shareholder, Vice-President and Director
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF JANUARY 31, 1997)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Preferred Shares 1
Common Stock 2,695
ITEM 29. INDEMNIFICATION
Reference is made to the Registrant's Articles of Amendment and
Restatement filed as Exhibit 2(a), the Registrant's Amended and Restated By-
laws filed as Exhibit 2(b), the Dealer Manager Agreement filed as Exhibit 2(h)
and the Advisory Agreement filed as Exhibit 2(g), which provide for
indemnification or contribution. The Registrant's officers, Directors and
agents also have the benefit of the Maryland General Corporation law
provisions regarding indemnification and insurance, including but not limited
to Section 2-418 and Section 2-405.2 thereof, subject also to the
indemnification permitted under Sections 17(h) and 17(i) of the 1940 Act and
the regulations and releases promulgated by the SEC thereunder.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The description of the business of Prospect Street Investment Management
Co., Inc. is set forth under the caption "The Investment Adviser" in the
Prospectus forming part of this Registration Statement.
The information as to the Directors and officers of Prospect Street
Investment Management Co., Inc. set forth in Prospect Street Investment
Management Co., Inc.'s Form ADV filed with the Securities and Exchange
Commission on July 7, 1988 (File No. 801-32529) and as amended through the
date hereof is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Registrant: Prospect Street High Income
Portfolio Inc.
60 State Street
Boston, Massachusetts 02109
Investment Adviser: Prospect Street Investment
Management Co., Inc.
60 State Street
Boston, Massachusetts 02109
Transfer Agent for Common Stock: State Street Bank and Trust
Company
P.O. Box 8200
Boston, Massachusetts 02266
Transfer Agent for Preferred Shares: Bankers Trust Company
4 Albany Street
New York, New York 10006
Custodian: State Street Bank and Trust
Company
Two Heritage Drive
North Quincy, Massachusetts
02171
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend the offering of its shares until it
amends its Prospectus if:
(1) subsequent to the effective date of this Registration Statement,
the net asset value per share declines more than 10% from its net asset
value per share as of the effective date of the Registration Statement; or
(2) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(b) Registrant hereby undertakes:
(1) that for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events after the
effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(4) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts, on the 24th day of February, 1997.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By /s/ RICHARD E. OMOHUNDRO, JR.
-------------------------------
RICHARD E. OMOHUNDRO, JR.
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director and President
(Principal Executive
/s/ RICHARD E. OMOHUNDRO, JR. Officer) February 24, 1997
- --------------------------------------
RICHARD E. OMOHUNDRO, JR.
Director, Vice President
Treasurer (Principal
Financial and Accounting
/s/ JOHN A. FRABOTTA Officer) February 24, 1997
- --------------------------------------
JOHN A. FRABOTTA
* Director
- --------------------------------------
JOHN S. ALBANESE
* Director
- --------------------------------------
C. WILLIAM CAREY
* Director
- --------------------------------------
JOSEPH G. COTE
* Director
- --------------------------------------
HARLAN D. PLATT
* Director
- --------------------------------------
CHRISTOPHER E. ROSHIER
* By /s/ JOHN A. FRABOTTA February 24, 1997
- ---------------------------------
JOHN A. FRABOTTA
Attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
- ---------- ---------------------- ----
(d)(8) Form of Subscription Agent Agreement
between the Registrant and State
Street Bank and Trust Company
(d)(9) Information Agent Agreement between
the Registrant and Corporate Investor
Communications, Inc.
(h) Form of Dealer Manager Agreement
(including the form of the Soliciting
Dealer Agreement)
(l)(1) Opinion and Consent of Rogers & Wells
(l)(2) Opinion and Consent of Piper & Marbury LLP
(n) Consent of Arthur Andersen LLP
(r) Financial Data Schedule
<PAGE>
Exhibit (d)(8)
STATE STREET BANK AND TRUST COMPANY
SUBSCRIPTION, DISTRIBUTION AND ESCROW AGENCY AGREEMENT
This Subscription, Distribution and Escrow Agency Agreement (the "Agreement") is
made as of February _____ , 1997 between Prospect Street High Income Portfolio
Inc. (the "Fund"), a Maryland Corporation, and State Street Bank and Trust
Company, a Massachusetts Trust Company, as subscription, distribution and escrow
agent (the "Agent").
WHEREAS, the Fund proposes to make a subscription offer by issuing certificates
or other evidences of subscription rights, in the form designated by the Fund
("Subscription Certificates") to shareholders of record ("Record Date
Shareholders") of its Common Stock as of a record date specified by the Fund
(the "Record Date"), pursuant to which each Record Date Shareholder will have
certain non-transferable rights (the "Rights") to subscribe to shares of the
Fund Common Stock, par value $.01 (the "Common Stock"), as described in and upon
such terms as are set forth in the prospectus (the "Prospectus") included in the
Form N-2 Registration Statement filed by the Fund with the Securities and
Exchange Commission on January 30, 1997, as amended by any amendment filed with
respect thereto (the "Registration Statement");
WHEREAS, the Fund wishes the Agent to perform certain acts on behalf of the Fund
and the Agent is willing to so act, in connection with the distribution of the
Subscription Certificates and the issuance and exercise of the Rights to
subscribe therein set forth, all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein, the parties agree as follows:
1. Pursuant to the resolutions of its Board of Directors, the Fund
hereby appoints and authorizes the Agent to act on its behalf in
accordance with the provisions hereof, and the Agent hereby accepts
such appointment and agrees to so act.
2. (a) Each Subscription Certificate shall evidence the Rights of the
Record Date Shareholder therein named to purchase Common Stock
upon the terms and conditions therein and herein set forth.
(b) Upon the written advice of the Fund signed by its Senior Vice
President, Treasurer, Secretary or Assistant Secretary, as to the
Record Date, the Agent shall, from a list of the Fund
Shareholders as of the Record Date prepare and record
Subscription Certificates in the names of the Record Date
Shareholders, setting forth the number of Rights to subscribe for
shares of the Fund's Common Stock, par value $.01 per share,
calculated on the basis of one right for each share recorded on
the Fund's books in the name of each such Record Date Shareholder
as of the Record Date. Each Subscription Certificate shall be
dated as of the Record Date. Upon the written advice, signed as
aforesaid, as to the effective date of the Registration
Statement, the Agent shall as promptly as practicable deliver the
Subscription Certificates, together with a copy of the
Prospectus, to all Record Date Shareholders.
3. (a) Each Subscription Certificate shall be irrevocable and
non-transferable. The Agent shall maintain a register of
Subscription Certificates and the holders of record thereof (each
of whom shall be deemed a "Record Date Shareholder" hereunder for
purposes of determining the rights of holders of Subscription
Certificates). Each Subscription Certificate shall, subject to
the provisions thereof, entitle the Record Date Shareholders in
whose name it is recorded to the following:
(1) The right (the "Basic Subscription Right") to purchase a
number of shares of Common Stock equal to one share of Common
Stock for every three Subscription Rights: provided, however,
that no fractional shares of Common Stock shall be issued;
and
(2) The right (the "Oversubscription Right") to purchase from the
Fund additional shares of Common Stock, subject to the
availability of such shares and to allotment of such shares
as may be available among Record Date Shareholders who
exercise Oversubscription Rights on the basis specified in
the Prospectus; provided, however, that a Record Date
Shareholder who has not exercised his Basic Subscription
Rights with respect to the full number of shares that such
Record Date Shareholder is entitled to purchase by virtue of
his Basic Subscription Rights as of the Expiration Date, if
any, shall not be entitled to any Oversubscription Rights.
(b) A Record Date Shareholder may exercise his Basic Subscription
Rights and Oversubscription Rights by delivery to the Agent at
its corporate office specified in the Prospectus of (i) the
Subscription Certificate with respect thereto, duly executed by
such Record Date Shareholder in accordance with and as provided
by the terms and conditions of the Subscription Certificate,
together with (ii) the purchase price of each share of Common
Stock subscribed for by exercise of such Rights as set forth in
the Prospectus (the "Subscription Price"), in United States
dollars in cash, by check, or bank draft drawn on a bank in the
continental United States or by postal, telegraphic, or express
money order, in each case payable to the order of the Fund.
(c) Rights may be exercised at any time after the date of issuance of
the Subscription Certificates with respect thereto but no later
than 5:00 P.M. New York City Time on such date as the Fund shall
designate to the Agent in writing (the "Expiration Date"). For
the purpose of determining the time of the exercise of any
Rights, delivery of any material to the Agent shall be deemed to
occur when such materials are received at the corporate office of
the Agent specified in the Prospectus.
(d) Notwithstanding the provisions of Section 3(b) and 3(c)
regarding delivery of an executed Subscription Certificate to the
Agent prior to 5:00 P.M. New York City Time on the Expiration
Date, if prior to such time the Agent receives notice of
guaranteed delivery by telegram or otherwise from a bank, trust
company or a New York Stock Exchange member guaranteeing delivery
of (i) full payment for shares purchased and subscribed for by
virtue of a Rights Holder's Rights, and (ii) a properly completed
and executed Subscription Certificate, then such exercise of
Basic Subscription Rights and Oversubscription Rights shall be
regarded as timely, subject, however, to receipt of the duly
executed Subscription Certificate and full payment for the Common
Stock by the Agent within three business days after the
Expiration Date (as defined in the Prospectus).
(e) Within eight business days following the Expiration Date (the
"Confirmation Date"), the Agent shall send a confirmation to each
Shareholder (or, if shares of Common Stock on the Record Date are
held by Cede & Co. or any other depository or nominee, to Cede &
Co. or such other depository or nominee), showing (i) the number
of shares acquired pursuant to the Basic Subscription Rights,
(ii) the number of shares, if any, acquired pursuant to the
Oversubscription Rights, (iii) the per share and total purchase
price for the shares, (iv) any amount payable to the Shareholder
pursuant to Section 9, and (v) any excess to be refunded by the
Fund to such Shareholder, in each case based on the Subscription
Price. Any excess payment to be refunded by the Fund to a
Shareholder, shall be mailed by the Agent to the Shareholder as
promptly as possible after the Expiration Date, as provided in
Section 6 below.
4. If, after allocation of shares of Common Stock to persons exercising
Basic Subscription Rights, there remain unexercised Rights, then the
Agent shall allot the shares issuable upon exercise of such unexercised
Rights (the "Remaining Shares") to persons exercising Oversubscription
Rights, in the amounts of such oversubscriptions. If the number of
shares for which Oversubscription Rights have been exercised is greater
than the Remaining Shares, then the Agent shall allot the Remaining
Shares to the persons exercising Oversubscription Rights pro rata based
solely on the number of Basic Subscription Rights exercised by each of
them. The Agent shall advise the Fund immediately upon the completion
of the allocation set forth above as to the total number of shares
subscribed and distributable.
5. (a) The Agent, will deliver (i) certificates representing those shares
purchased pursuant to exercise of Basic Subscription Rights as soon as
practicable after the corresponding Rights have been validly exercised
and full payment for such shares has been received and cleared; (ii)
certificates representing those shares purchased pursuant to the
exercise of Oversubscription Rights as soon as practicable after the
Expiration Date and after all allocations have been effected; (iii) in
the case of each Record Date Shareholder who subscribed, pursuant to
the exercise of Oversubscription Rights, for a greater number of shares
than was allotted to such Record Date Shareholder under Section 4, as
soon as possible after the Expiration Date, a refund (and interest on
such) in the amount of the difference between the purchase price
delivered for the shares subscribed for pursuant to the exercise of
such Oversubscription Rights and the purchase price of the shares so
allotted under Section 4 (an "Excess Payment"); (iv) in the case of
record shareholders who are participants in the dividend reinvestment
and cash purchase plan, as soon as possible after Expiration Date,
account statements reflecting a credit of uncertificated shares for
their primary and oversubscription shares unless such shareholders have
elected to receive certificates.
6. (a) All proceeds received by the Agent from Rights holders in respect
of the exercise of rights shall be held by the Agent, on behalf
of the fund in a segregated, interest-bearing escrow account (the
"Escrow Account") (the interest of which shall be paid to the
Fund) pending disbursement in the manner described in Section
6(b) below.
(b) The Agent shall deliver all proceeds received in respect of the
exercise of the Rights (including interest earned thereon) to the
Fund as promptly as practicable, after the Confirmation Date.
Proceeds held in respect of Excess Payments shall be refunded to
Record Date Shareholders entitled to such a refund as promptly as
possible after the Expiration Date.
7. The Agent shall promptly advise the Fund as to the date of delivery
of Common Stock hereunder and shall supply the Fund with a certified
list of Shareholders as of the Record Date.
8. The Agent shall account promptly to the Fund with respect to Rights
exercised and concurrently account for all monies received and
returned by the Agent with respect to the purchase of shares of Common
Stock upon the exercise of Rights.
9. In the event the Agent does not receive, within three business days
after the Expiration Date, any amount due from a Rights Holder, as
specified in Section 3(e), then it shall take such action with respect
to such Rights Holder's Subscription Rights as may be instructed in
writing by the Fund, including without limitation (i) applying any
payment actually received by it toward the purchase of the greatest
whole number of shares of Common Stock which could be acquired with
such payment and, (ii) allocating the shares subject to such
Subscription Rights to one or more other Record Date Shareholders.
10. No Subscription Certificate shall entitle a Rights Holder to vote or
receive dividends or be deemed the holder of shares of Common Stock for
any purpose, nor shall anything contained in any Subscription
Certificate be construed to confer upon any Rights Holder any of the
rights of a shareholder of the Fund or any right to vote, give or
withhold consent to any action by the Fund (whether upon any
recapitalization, issue of stock, reclassification of stock,
consolidation, merger, conveyance or otherwise), receive notice of
meetings of other action affecting shareholders, or receive dividends
or otherwise, until the Rights evidenced thereby shall have been
exercised and the shares of Common Stock purchasable upon the exercise
thereof shall have become deliverable as provided in this Agreement and
in the Prospectus.
11. If any Subscription Certificate is lost, stolen, mutilated, or
destroyed the Agent may, on such terms which will indemnify the Fund as
the Agent may in its discretion impose (which shall, in the case of a
Subscription Certificate include the surrender thereof), issue a new
Subscription Certificate of like denomination in substitution for the
Subscription Certificate so lost, stolen or mutilated or destroyed.
12. (a) The Fund covenants that all shares of Common Stock issued on
exercise of Rights set forth in the Subscription Certificates
will be validly issued, fully paid, nonassessable and free of
preemptive rights.
(b) The Fund shall furnish to the Agent written notice to the effect
that a registration statement under the Securities Act of 1933,
as amended (the "Act"), is then in effect with respect to its
shares of Common Stock issuable upon exercise of the Rights set
forth in the Subscription Certificates. Upon written advice to
the Agent that the Securities and Exchange Commission shall have
issued or threatened to have issued any order preventing or
suspending the use of the Prospectus, or if for any reason it
shall be necessary to amend or supplement the Prospectus in order
to comply with the Act, the Agent shall cease acting hereunder
until receipt of written instructions from the Fund and such
assurances as it may reasonably request that it may comply with
such instruction without violations of the Act.
13. Any corporation into which the Agent may be merged or converted or with
which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Agent shall be a
party, or any corporation succeeding to the corporate trust business of
the Agent, shall be the successor to the Agent hereunder without the
execution or filing of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Agent. In
case at the time such successor to the Agent shall succeed to the
agency created by this Agreement, any of the Subscription Certificates
shall have been countersigned but not delivered, any such successor to
the Agent may adopt the countersignature of the original Agent and
deliver such Subscription Certificates so countersigned, and in case at
that time and of the Subscription Certificates shall not have been
countersigned, any successor to the Agent may countersign such
Subscription Certificates either in the name of the predecessor Agent
or in the name of the successor Agent, and in all such cases such
Subscription Certificates shall have the full force provided in the
Subscription Certificates and in this Agreement.
14. The Fund agrees to pay to the Agent such reasonable compensation for
all services rendered by it hereunder as set forth in Schedule A hereto
and in addition to its reasonable expenses and other disbursements
incurred in the exercise and performance of its duties hereunder.
15. The Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement
the Agent shall deem it necessary or desirable that any fact or
matter be proved or established, prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in
respect thereof is herein specifically prescribed) may be deemed
to be conclusively proved and established by a certificate signed
by the Chairman of the Board or President or a Vice President or
the Secretary or Assistant Secretary or the Treasurer of the Fund
delivered to the Agent, and such certificate shall be full
authorization to the Agent for any action taken or suffered in
good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(b) The Agent shall not be responsible for and the fund shall
indemnify and hold the Agent harmless from and against, any and
all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to all
actions of the Agent or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions
are taken in good faith and without negligence or willful
misconduct. The Fund shall not be liable for indemnification
under this Section 14 unless the Agent shall have notified the
Fund in writing of the commencement of any litigation or
proceeding in respect of which indemnity may be sought under this
Section 14. With respect to claims in such litigation or
proceedings for which indemnity may be sought, the Fund shall be
entitled to participate in any such litigation or proceeding and
the Fund shall be entitled to assume the defense of such
litigation or proceeding with counsel of its own expense in
respect of that portion of the litigation for which the Fund may
be subject to an indemnification obligation. If the fund is not
permitted to participate or control such litigation or proceeding
under applicable law or by a ruling of a court of competent
jurisdiction or otherwise, the Agent shall reasonably prosecute
such litigation or proceeding. In no event shall the Agent
consent to the entry of any judgment or enter into any settlement
in any such litigation or proceeding (including any threatened
litigation or proceeding) without providing the Fund with
adequate notice of any such settlement or judgment, and without
the Fund's prior written consent. The Agent shall submit written
evidence to the Fund with respect to any cost or expense for
which the Agent is seeking indemnification in any such form and
detail as the Fund may reasonably request.
(c) The Agent shall be liable hereunder only for its own negligence
or willful misconduct.
(d) Nothing herein shall preclude the Agent from acting in any other
capacity for the Fund or for any other legal entity.
(e) The Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties
hereunder from any officer or assistant officer of the Fund and
to apply to any such officer of the Fund for advice or
instructions in connection with its duties, and subject to the
other requirements set forth above, shall be indemnified and not
be liable for any action taken or suffered by it in good faith,
without negligence or willful misconduct, in accordance with
instructions of any officer or assistant officer.
(f) The Agent shall be indemnified and shall incur no liability for
or in respect of any action taken, suffered, or omitted by it in
reasonable reliance upon any Subscription Certificate or
certificate for Common Stock, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement or other paper
or document that it reasonably believes to be genuine and to be
signed, executed and, where necessary, verified or acknowledged,
by the proper person or persons.
(g) Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this
Agreement or for any consequential damages arising out of any
reasonable act or failure to act hereunder.
16. The Agent may, without the consent or concurrence of the Shareholders
in whose names Subscription Certificates are registered, by
supplemental agreement or otherwise, concur with the Fund in making any
changes or corrections in a Subscription Certificate that it shall have
been advised by counsel (who may be counsel for the fund) is
appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest
error therein or herein contained, and which shall not be inconsistent
with the provisions of the Subscription Certificate except insofar as
any such change may confer additional rights upon the Rights Holders.
17. Assignment
a. Except as provided in Section c below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
b. This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and
assigns.
c. The Agent may, without further consent on the part of the Fund
subcontract for the performance hereof with (i) Boston Equiserve
Limited Partnership, a Delaware Limited Partnership, which is
duly registered as a transfer agent pursuant to Section 17(c)(2)
of the Securities Exchange Act of 1934 ("Section A(c)(1)"), or
(ii) the current third party vendor utilized by Boston EquiServe;
provided, however, that the Agent shall be as fully responsible
to the Fund for the acts and omissions of any subcontractor as it
is for its own acts and omissions.
18. All the covenants and provisions of this Agreement by or for the
benefit of the Fund or the Agent shall bind and inure to the benefit of
their respective successors and assigns hereunder.
19. The validity, interpretation and performance of this Agreement shall be
governed by the laws of the State of New York without regard to the
principles of conflicts of law.
STATE STREET BANK AND TRUST PROSPECT STREET HIGH INCOME
COMPANY PORTFOLIO INC.
By: By:
----------------------------- --------------------------
Vice President (Officer)
<PAGE>
Exhibit (d)(9)
[LETTERHEAD OF CORPORATE INVESTOR COMMUNICATIONS, INC.]
December 31, 1996
Prospect Street High Income Portfolio Inc.
60 State Street
Suite 3750
Boston, Massachusetts 02109
Attn: Ms. Karen Thelen
Vice President
Re: CONTRACT AGREEMENT
Dear Karen:
This agreement will confirm that Corporate Investor Communications, Inc. has
been retained to act as information agent in connection with the upcoming rights
offer to the shareholders of Prospect Street High Income Portfolio Inc. As
information agent, CIC will conduct a broker/nominee inquiry to ascertain the
number of beneficial owners, provide for the distribution of the offering
documents to the reorganization departments of each institution and forward
additional materials as requested. CIC will respond to the volume of shareholder
inquiries regarding the terms of the offer and proper execution of the documents
and will monitor the response rate for the duration of the offer. CIC can, if
requested, pro-actively contact registered shareholders and non-objecting
beneficial owners (NOBOs) to help promote a high level of participation.
Our fee to act as information agent based on a distribution of up to 12,000 sets
of offering documents and the duration of the offer will be $8,000.00 plus $3.00
for each registered and NOBO holder contacted if requested. CIC will be
reimbursed for all reasonable out-of-pocket disbursements including postage,
telephone and courier charges, data transmissions and other expenses approved by
your company. A retainer in the amount of $6,000.00 is required to cover initial
expenses and will be credited to your final service charges.
The company above hereby agrees to indemnify Corporate Investor Communications,
Inc.'s officers and employees against any and all losses, claims and expenses
incurred by CIC in conjunction with the services provided except to the extent
any such loss, claim or expense is the result of the negligence of any CIC
officer or employee. Reimbursement will be made to indemnified persons at the
time they are incurred. The company shall not be responsible for any losses,
claims and expenses incurred by CIC which result from CIC's gross negligence or
willful misconduct.
Please forward an executed agreement to our office and retain the other copy.
PROSPECT STREET HIGH INCOME CORPORATE INVESTOR COMMUNICATIONS,
PORTFOLIO INC. INC.
SIGNED: /s/ Karen J. Thelen SIGNED: /s/ Charlotte Brown
--------------------------- ----------------------------------
NAME: Karen J. Thelen NAME: Charlotte Brown
--------------------------- ----------------------------------
TITLE: Vice President TITLE: Vice President,
Administration Group
--------------------------- ----------------------------------
DATE: January 22, 1997 DATE: December 31, 1996
--------------------------- ----------------------------------
PROXY SOLICITATION o MARKET SURVEILLANCE o INFORMATION AGENT o
SHAREHOLDER COMMUNICATIONS
<PAGE>
Exhibit (h)
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
10,323,589 Shares of Common Stock
Issuable Upon Exercise of Non-Transferable Rights
to Subscribe for Such Shares of Common Stock
DEALER MANAGER AGREEMENT
New York, New York
________ __, 1997
PaineWebber Incorporated
Tucker Anthony Incorporated
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Each of Prospect Street High Income Portfolio Inc., a Maryland
corporation (the "Company") and Prospect Street Investment Management Co., Inc.,
a Massachusetts corporation (the "Investment Adviser"), hereby confirms the
agreement with and appointment of PaineWebber Incorporated ("PaineWebber") on
their own behalf and on behalf of Tucker Anthony ("Tucker") to act as dealer
managers (PaineWebber and Tucker collectively being referred to herein as the
"Dealer Managers") in connection with the issuance by the Company to the holders
of record (the "Holders") at the close of business on the record date set forth
in the Prospectus (as defined herein) (the "Record Date") 30,970,768
non-transferable rights entitling such Holders to subscribe for 10,323,589
shares (each a "Share" and, collectively, the "Shares") of common stock, par
value $.01 per share (the "Common Stock"), of the Company (the "Offer").
Pursuant to the terms of the Offer, the Company is issuing each Holder one
non-transferable right (each a "Right" and, collectively, the "Rights") for
each share of Common Stock held by such Holder on the Record Date. Such Rights
entitle Holders to acquire during the subscription period set forth in the
Prospectus (the "Subscription Period"), at the price set forth in such
Prospectus (the "Subscription Price"), one Share for each three Rights exercised
on the terms and conditions set forth in such Prospectus. No fractional shares
will be issued. Any Holder who fully exercises all Rights initially issued to
such Holder will be entitled to subscribe for, subject to allocation, additional
Shares (the "Over-Subscription Privilege"). Pursuant to the Over-Subscription
Privilege, the Company may, at its discretion, increase the number of Shares
subject to subscription by up to 25%, or 2,580,897 Shares, for an aggregate
total of 12,904,486 Shares.
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form N-2 (Nos.
333-_____ and 811-5557) and a related preliminary prospectus under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations of the Commission under the Investment Company Act and the Securi-
ties Act (the "Rules and Regulations"), and has filed such amendments to such
registration statement on Form N-2, if any, and such amended preliminary
prospectuses as may have been required to the date hereof. If the registration
statement has not become effective, a further amendment to such registration
statement, including forms of a final prospectus necessary to permit such
registration statement to become effective will promptly be filed by the Company
with the Commission. If the registration statement has become effective and any
prospectus contained therein omits certain information at the time of
effectiveness pursuant to Rule 430A of the Rules and Regulations, a final
prospectus containing such omitted information will promptly be filed by the
Company with the Commission in accordance with Rule 497(h) of the Rules and
Regulations. The registration statement, as amended at the time it becomes or
became effective, including financial statements and all exhibits and all
documents, if any, incorporated therein by reference, and any information deemed
to be included by Rule 430A, is called the "Registration Statement." The term
"Prospectus" means the final prospectus in the form filed with the Commission
pursuant to Rule 497(c), (e), (h) or (j) of the Rules and Regulations, as the
case may be, as from time to time amended or supplemented pursuant to the
Securities Act. The Prospectus and letters to beneficial owners of the shares of
Common Stock of the Company, forms used to exercise rights, any letters from the
Company to securities dealers, commercial banks and other nominees and any
newspaper announcements, press releases and other offering materials and
information that the Company may use, approve, prepare or authorize for use in
connection with the Offer, are collectively referred to hereinafter as the
"Offering Materials".
1. Representations and Warranties.
(a) Each of the Company and the Investment Adviser
represents and warrants to, and agrees with, the Dealer Managers as of the date
hereof, as of the date of the commencement of the Offer (such later date being
hereinafter referred to as the "Representation Date") and as of the Expiration
Date (as defined below) that:
(i) the Company meets the requirements for use of
Form N-2 under the Securities Act and the Investment Company Act and
the Rules and Regulations. At the time the Registration Statement
became or becomes effective, the Registration Statement did or will
contain all statements required to be stated therein in accordance with
and did or will comply in all material respects with the requirements
of the Securities Act, the Investment Company Act and the Rules and
Regulations and did or will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
From the time the Registration Statement became or becomes effective
through the expiration date of the Offer set forth in the Prospectus
(the "Expiration Date"), the Prospectus and the other Offering
Materials will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement, Prospectus or Offering Materials made in reliance upon and
in conformity with information furnished to the Company in writing by
the Dealer Managers expressly for use in the Registration Statement,
Prospectus or Offering Materials.
(ii) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Maryland, has full corporate power and authority to
conduct its business as described in the Registration Statement and the
Prospectus, currently maintains all governmental licenses, permits,
consents, orders, approvals, and other authorizations (collectively,
the "Licenses and Permits") necessary to carry on its business as
contemplated in the Prospectus, and is duly qualified to do business as
a foreign corporation in each jurisdiction wherein it owns or leases
real property or in which the conduct of its business requires such
qualification, except where the failure to obtain or maintain such
Licenses and Permits or to be so qualified would not result in a
material adverse effect upon the business, properties, financial
position or results of operations of the Company. The Company has no
subsidiaries.
(iii) the Company is registered with the Commission
under the Investment Company Act as a closed-end, diversified
management investment company, no order of suspension or revocation of
such registration has been issued or proceedings therefor initiated or,
to the knowledge of the Company, threatened by the Commission, all
required action has been taken under the Securities Act and the
Investment Company Act to consummate the issuance of the Rights and the
issuance and sale of the Shares by the Company upon exercise of the
Rights, and the provisions of the Company's charter and by-laws comply
as to form in all material respects with the requirements of the
Investment Company Act.
(iv) Arthur Andersen LLP, the accountants who
certified the financial statements of the Company set forth or
incorporated by reference in the Registration Statement and the
Prospectus, are independent public accountants as required by the
Investment Company Act and the Rules and Regulations.
(v) the financial statements of the Company set
forth or incorporated by reference in the Registration Statement and
the Prospectus present fairly in all material respects the financial
condition of the Company as of the dates or for the periods indicated
in conformity with generally accepted accounting principles applied on
a consistent basis; and the information set forth in the Prospectus
under the headings "Fee Table" and "Financial Highlights" presents
fairly in all material respects the information stated therein.
(vi) the Company has an authorized capitalization as
set forth in the Prospectus; the outstanding shares of Common Stock
and outstanding shares of preferred stock, designated as Taxable
Auction Rate Preferred Stock, no par value, liquidation preference
$100,000 per share (the "Preferred Shares"), have been duly authorized
and are validly issued, fully paid and non-assessable and conform in
all material respects to the description thereof in the Prospectus
under the heading "Description of Capital Stock"; the Rights have been
duly authorized by all requisite action on the part of the Company for
issuance pursuant to the Offer; the Shares have been duly authorized
by all requisite action on the part of the Company for issuance and
sale pursuant to the terms of the Offer and, when issued and delivered
by the Company pursuant to the terms of the Offer against payment of
the consideration set forth in the Prospectus, will be validly
issued, fully paid and non-assessable; the Shares and the Rights
conform in all material respects to all statements relating thereto
contained in the Registration Statement, the Prospectus and the other
Offering Materials; and the issuance of each of the Rights and the
Shares is not subject to any preemptive rights.
(vii) the Company has authorized debt leverage as
set forth in the Prospectus; the outstanding Senior Notes payable
December 1, 1998 (the "Notes") have been duly authorized and conform in
all material respects to the description thereof in the Prospectus
under the heading "Description of Notes".
(viii) except as set forth in the Prospectus,
subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, (A) the Company has not
incurred any liabilities or obligations, direct or contingent, or
entered into any transactions, other than in the ordinary course of
business, that are material to the Company, (B) there has not been any
material change in the capital stock or long-term debt of the Company,
or any material adverse change, or any development involving a prospec
tive material adverse change, in the condition (financial or other),
business, prospects, net worth or results of operations of the Company
(excluding fluctuations in the Company's net asset value due to
investment activities in the ordinary course of business) and (C)
except for the regular monthly dividend on the outstanding shares of
Common Stock and the regular 30-day dividend on the outstanding shares
of Preferred Stock, there have been no dividends or distributions paid
or declared in respect of the Company's capital stock.
(ix) except as set forth in the Registration
Statement and Prospectus, there is no pending or, to the knowledge of
the Company, threatened action, suit or proceeding to which the Company
is a party before or by any court or governmental agency, authority or
body or any arbitrator, whether foreign or domestic, which might result
in any material adverse change in the condition (financial or other),
business prospects, net worth or results of operations of the Company,
or which might materially and adversely affect the properties or assets
thereof of a character required to be disclosed in the Registration
Statement or the Prospectus.
(x) there are no franchises, contracts or other
documents of the Company required to be described in the Registration
Statement or the Prospectus, or to be filed or incorporated by
reference as exhibits which are not described or filed or incorporated
by reference therein as permitted by the Securities Act, the
Investment Company Act or the Rules and Regulations.
(xi) each of this agreement (the "Agreement"), the
Subscription Agency Agreement (the "Subscription Agency Agreement")
dated as of ________ __, 19__ between the Company and State Street Bank
and Trust Company (the "Subscription Agent"), the Information Agent
Agreement (the "Information Agent Agreement") dated as of ________
__, 19__ between the Company and Corporate Investor Communications,
Inc. (the "Information Agent"), the Investment Advisory Agreement dated
as of ________ __, 19__ between the Company and the Investment Adviser
(the "Investment Advisory Agreement"), the Custodian Agreement dated as
of ________ __, 19__ between the Company and State Street Bank and
Trust Company (the "Custodian Agreement"), the Registrar, Transfer
Agency and Service Agreement dated as of ________ __, 19__ between the
Company and State Street Bank and Trust Company (the "Transfer Agency
Agreement"), the Amended and Restated Note Purchase Agreement dated as
of ________ __, 19__ between the Company and Pacific Mutual Life
Insurance Company (the "Note Purchase Agreement"), the Note dated as of
________ __, 19__ between the Company and Pacific Mutual Life Insurance
Company (the "Note"), the Insurance Agreement dated as of ________ __,
19__, including any amendments thereto, between the Company and
Financial Security Assurance Inc. (the "Insurance Agreement"), the
Custody Agreement dated as of ________ __, 19__ between the Bankers
Trust Company and Financial Security Assurance Inc. (the "Surety
Custodian Agreement"), the Auction Agent Agreement dated as of ________
__, 19__ between the Company and Bankers Trust Company (the "Auction
Agent Agreement"), the Letter Agreement dated as of ________ __, 19__
among the Company, Bankers Trust Company and The Depository Trust
Company and Pacific Mutual Life Insurance Company (the "Note Purchase
Agreement"), and the [insert any other material agreement(s), dated
as of ________ __, 19__ (the "__________ Agreement")] (collectively,
all the foregoing are the "Company Agreements") has been duly
authorized, executed and delivered by the Company; each of the
Company Agreements complies with all applicable provisions of the
Investment Company Act; and, assuming due authorization, execution and
delivery by the other parties thereto, each of the Company Agreements
constitutes a legal, valid, binding and enforceable obligation of the
Company, subject to the qualification that the enforceability of
the Company's obligations thereunder may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights, and to
general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
(xii) neither the issuance of the Rights, nor the
issuance and sale of the Shares, nor the performance and consummation
by the Company of any other of the transactions contemplated in the
Company Agreements, or any sub-custodial arrangements entered into
pursuant to the Custodian Agreement, nor the consummation of the
transactions contemplated in the Registration Statement will conflict
with, result in a breach or violation of, or constitute a default or
an event of default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any properties or assets of the
Company under the charter or by-laws of the Company, or the terms and
provisions of any agreement, indenture, mortgage, loan agreement,
note, insurance or surety agreement, lease or other instrument to which
the Company is a party or by which it may be bound or to which any of
the property or assets of the Company is subject, nor will such action
result in any violation of any order, law, rule or regulation of any
court or governmental agency or body, whether foreign or domestic,
having jurisdiction over the Company or any of its properties.
(xiii) no consent, approval, authorization,
notification or order of, or filing with, any court or governmental
agency or body, whether foreign or domestic, is legally required for
the consummation by the Company of the transactions contemplated by the
Company Agreements or the Registration Statement, except such as have
been obtained, or if the registration statement filed with respect to
the Shares is not effective under the Securities Act as of the time
of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Investment Company Act, the
Securities Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and state securities laws.
(xiv) the Company either owns or possesses all
governmental licenses, permits, consents, orders, approvals or other
authorizations to enable the Company to invest in securities as
contemplated in the Prospectus. Neither the execution or delivery by
the Company nor the performance by the Company of any of its
obligations under the Company Agreements contravenes or constitutes a
default under any provision contained in any law, rule or regulation
of any governmental or regulatory authority or any order or
regulation of any court by which the Company or any of its assets is
bound or affected.
(xv) the Common Stock has been duly listed on the
New York Stock Exchange and prior to their issuance the Shares will
have been duly approved for listing, subject to official notice of
issuance, on the New York Stock Exchange.
(xvi) the Company (A) has not taken, directly or
indirectly, any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the issuance of the Rights or the sale or resale
of the Shares, (B) has not since the filing of the Registration
Statement sold, bid for or purchased, or paid anyone any compensation
for soliciting purchases of, shares of Common Stock of the Company
(except for the solicitation of exercises of the Rights pursuant to
this Agreement) and (C) will not, until the later of the expiration of
the Rights or the completion of the distribution (within the meaning of
the anti-manipulation rules under the Exchange Act) of the Shares,
sell, bid for or purchase, pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company (except for the solicitation of the exercises of Rights
pursuant to this Agreement); provided that any action in connection
with the Company's dividend reinvestment plan will not be deemed to be
within the terms of this Section 1(a)(xvi).
(xvii) the Company has complied in all previous tax
years, and intends to direct the investment of the proceeds of the
offering described in the Registration Statement and the Prospectus in
such a manner as to continue to comply, with the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended
("Subchapter M of the Code"), and has qualified and intends to continue
to qualify as a regulated investment company under Subchapter M of the
Code.
(xviii) the Company has complied in all previous
years, and intends to direct the investment of the proceeds of the
offering described in the Registration Statement and the Prospectus in
such a manner as to continue to comply, with the diversification,
liquidity, investment guidelines and asset coverage requirements of the
Insurance Agreement and the Note Purchase Agreement for so long as such
agreements remain in effect and with the asset coverage requirements of
the Investment Company Act.
(xix) the Preferred Stock and the Notes have a
rating of "AAA"/"Aaa" from Standard and Poor's Ratings Group and
Moody's Investors Service, Inc. and "Aaa" from Fitch Investors Service,
Inc., respectively, and the Company is not aware of any proposed,
pending or threatened downgrading of either rating or placing the
Company under watch for downgrading by such rating agencies.
(b) The Investment Adviser represents and warrants to, and
agrees with, the Dealer Managers as of the date hereof, as of the
Representation Date and as of the Expiration Date that:
(i) the Investment Adviser has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the Commonwealth of Massachusetts, has full corporate
power and authority to own its properties and conduct its business as
described in the Registration Statement and the Prospectus, and is duly
qualified to do business as a foreign corporation in each jurisdiction
wherein it owns or leases real property or in which the conduct of its
business requires such qualification, except where the failure to be so
qualified does not involve a material adverse risk to the Investment
Adviser's business, properties, financial position or operations.
(ii) the Investment Adviser is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and is not prohibited by the Advisers Act
or the Investment Company Act, or the rules and regulations under such
Acts, from acting as an investment adviser for the Company as
contemplated in the Prospectus and the Investment Advisory Agreement.
(iii) each of this Agreement and the Investment
Advisory Agreement has been duly authorized, executed and delivered by
the Investment Adviser and complies with all applicable provisions of
the Advisers Act and the Investment Company Act, and is, assuming due
authorization, execution and delivery by the other parties thereto, a
legal, valid, binding and enforceable obligation of the Investment
Adviser, subject as to enforcement to bankruptcy, insolvency,
reorganization, moratorium and other laws of general applicability
relating to or affecting creditors' rights, and to general principles
of equity (regardless of whether enforceability is considered in a
proceeding in equity or at law).
(iv) neither the performance by the Investment
Adviser of its obligations under this Agreement or the Investment
Advisory Agreement nor the consummation of the transactions
contemplated therein or in the Registration Statement nor the
fulfillment of the terms thereof will conflict with, result in a breach
or violation of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
properties or assets of the Investment Adviser under the charter or
by-laws of the Investment Adviser, or the terms and provisions of any
agreement, indenture, mortgage, lease or other instrument to which the
Investment Adviser is a party or by which it may be bound or to which
any of the property or assets of the Investment Adviser is subject, nor
will such action result in any violation of any order, law, rule or
regulation of any court or governmental agency or body, whether foreign
or domestic, having jurisdiction over the Investment Adviser or any of
its properties.
(v) except as set forth in the Registration
Statement and Prospectus, there is no pending or, to the best knowledge
of the Investment Adviser, threatened action, suit or proceeding to
which the Investment Adviser is a party before or by any court or
governmental agency, authority or body or any arbitrator, whether
foreign or domestic, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth or
results of operations of the Investment Adviser, or which might
materially and adversely affect the properties or assets thereof of a
character required to be disclosed in the Registration Statement or
Prospectus.
(vi) the Investment Adviser does not require any
governmental licenses, permits, consents, orders, approvals or other
authorizations to enable the Investment Adviser to continue to
supervise investments in securities as contemplated in the Prospectus.
Neither the execution or delivery by the Investment Adviser nor the
performance by the Investment Adviser of any of its obligations under
this Agreement or the Investment Advisory Agreement will contravene or
constitute a default under any provision contained in any law, rule or
regulation of any governmental or regulatory authority or any order or
regulation of any court by which the Company or any of its assets is
bound or affected.
(vii) no consent, approval, authorization,
notification or order of, or any filing with, any court or governmental
agency or body is required under federal law or the laws of any other
jurisdiction, whether foreign or domestic, for the consummation by the
Investment Adviser of the transactions contemplated by this Agreement
or the Investment Advisory Agreement.
(viii) the Investment Adviser (A) has not taken,
directly or indirectly, any action designed to cause or to result in,
or that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the issuance of the Rights or the
sale or resale of the Shares, (B) has not since the filing of the
Registration Statement sold, bid for or purchased, or paid anyone any
compensation for soliciting purchases of, shares of Common Stock of the
Company (except for the solicitation of exercises of Rights pursuant to
this Agreement) and (C) will not, until the later of the expiration of
the Rights or the completion of the distribution (within the meaning of
the anti-manipulation rules under the Exchange Act) of the Shares,
sell, bid for or purchase, pay or agree to pay any person any
compensation for soliciting another to purchase any other securities of
the Company (except for the solicitation of exercises of Rights
pursuant to this Agreement); provided that any action in connection
with the Company's dividend reinvestment plan will not be deemed to be
within the terms of this Section 1(b)(viii).
(c) Any certificate required by this Agreement that is
signed by any officer of the Company, or the Investment Adviser and
delivered to the Dealer Managers or counsel for the Dealer Managers
shall be deemed a representation and warranty by the Company or the
Investment Adviser, as the case may be, to the Dealer Managers, as to
the matters covered thereby.
2. Agreement to Act as Dealer Managers.
(a) On the basis of the representations and warranties
contained herein, and subject to the terms and conditions of the Offer:
(i) The Company hereby appoints the Dealer Managers
and other soliciting dealers entering into a Soliciting Dealer Agree
ment, in the form attached hereto as Exhibit A, with the Dealer
Managers (the "Soliciting Dealers"), and the Dealer Managers hereby
agree to solicit, in accordance with the Securities Act, the Investment
Company Act and the Exchange Act, and its customary practice, the
exercise of the Rights, subject to the terms and conditions of this
Agreement, the procedures described in the Registration Statement, the
Prospectus and, where applicable, the terms and conditions of such
Soliciting Dealer Agreement; and
(ii) The Company agrees to furnish, or cause to be
furnished, to the Dealer Managers, lists, or copies of those lists,
showing the names and addresses of, and number of shares of Common
Stock held by, Holders as of the Record Date, and the Dealer Managers
agrees to use such information only in connection with the Offer, and
not to furnish the information to any other person except for
securities brokers and dealers that have been requested by the Dealer
Managers to solicit exercises of Rights.
(b) The Dealer Managers agree to provide to the Company,
in addition to the services described in paragraph (a) of this Section 2,
financial advisory and marketing services in connection with the Offer. No
advisory fee, other than the fees provided for in Section 3 of this Agreement
and the reimbursement of the Dealer Managers' out-of-pocket expenses as
described in Section 5 of this Agreement, will be payable by the Company, or any
other party hereto, to the Dealer Managers in connection with the financial
advisory and marketing services provided by the Dealer Managers pursuant to this
Section 2(b).
(c) The Company and the Dealer Managers agree that the
Dealer Managers are independent contractors with respect to the solicitation of
the exercise of Rights and the performance of financial advisory and marketing
services for the Company contemplated by this Agreement.
(d) In rendering the services contemplated by this
Agreement, the Dealer Managers will not be subject to any liability to the
Company or the Investment Adviser or any of their affiliates, for any act or
omission on the part of any soliciting broker or dealer (except with respect to
the Dealer Managers acting in such capacity) or any other person, and the Dealer
Managers will not be liable for acts or omissions in performing its obligations
under this Agreement, except for any losses, claims, damages, liabilities and
expenses that have resulted primarily from the bad faith, willful misconduct or
gross negligence of a respective Dealer Manager or by reason of the reckless
disregard of the obligations and duties of a respective Dealer Manager under
this Agreement.
3. Dealer Manager and Solicitation Fees. In full payment for
the financial advisory and marketing services rendered and to be rendered
hereunder by the Dealer Managers, the Company agrees to pay the Dealer Managers
a fee (the "Dealer Manager Fee") equal to 1.25% of the aggregate Subscription
Price for the Shares issued pursuant to the exercise of Rights and the
Over-Subscription Privilege. In full payment for the soliciting efforts to be
rendered, the Company agrees to pay fees (the "Solicitation Fees") to either the
Soliciting Dealer or the respective Dealer Manager equal to 2.50% of the
Subscription Price per Share for each Share issued pursuant to the exercise of
Rights and the Over-Subscription Privilege (such Solicitation Fees paid to the
respective Dealer Manager are in addition to the Dealer Manager Fee). The
Company agrees to pay the Solicitation Fees to the broker-dealer designated on
the applicable portion of the form used by the Holder to exercise Rights and the
Over-Subscription Privilege, provided that such broker-dealer has entered into a
Soliciting Dealer Agreement, and if no broker-dealer is so designated or a
broker-dealer is otherwise not entitled to receive compensation pursuant to the
terms of the Soliciting Dealer Agreement, then to pay PaineWebber the
Solicitation Fee for Shares issued pursuant to the exercise of Rights and the
Over-Subscription Privilege. Payment to the Dealer Managers by the Company will
be in the form of a wire transfer of same day funds to an account or accounts
identified by the respective Dealer Manager. Such payment will be made on each
date on which the Company issues Shares after the Expiration Date. Payment to a
Soliciting Dealer will be made by the Company directly to such Soliciting Dealer
by check to an address identified by such Soliciting Dealer. Such payments shall
be made on the tenth business day following the day of final payment for Shares
as set forth in the Prospectus.
4. Other Agreements.
(a) The Company covenants with the Dealer Managers as
follows:
(i) The Company will use its best efforts to cause
the Registration Statement to become effective under the Securities
Act, and will advise the Dealer Managers promptly as to the time at
which the Registration Statement and any amendments thereto (including
any post-effective amendment) becomes so effective.
(ii) The Company will notify, and confirm the notice
in writing to, the Dealer Managers immediately (A) of the effectiveness
of the Registration Statement and any amendment thereto (including any
post-effective amendment), (B) of the receipt of any comments from the
Commission, (C) of any request by the Commission for any amendment to
the Registration Statement or any amendment or supplement to the
Prospectus or for additional information, (D) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose, and (E) of the suspension of the qualification of the Shares
or the Rights for offering or sale in any jurisdiction. The Company
will make every reasonable effort to prevent the issuance of any stop
order described in subsection (D) hereunder and, if any such stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(iii) The Company will give the Dealer Managers
notice of its intention to file any amendment to the Registration
Statement (including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus which
the Company proposes for use by the Dealer Managers in connection with
the Offer, which differs from the prospectus on file at the Commission
at the time the Registration Statement becomes effective, whether or
not such revised prospectus is required to be filed pursuant to Rule
497(c), (e) or Rule 497(h) of the Rules and Regulations), whether
pursuant to the Investment Company Act, the Securities Act, or
otherwise, and will furnish the Dealer Managers with copies of any such
amendment or supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such
amendment or supplement to which the Dealer Managers or counsel for the
Dealer Managers shall reasonably object.
(iv) The Company will, without charge, deliver to the
Dealer Managers, as soon as practicable, the number of copies (one of
which is manually executed) of the Registration Statement as originally
filed and of each amendment thereto as it may reasonably request, in
each case with the exhibits filed therewith.
(v) The Company will, without charge, furnish to the
Dealer Managers, from time to time during the period when the
Prospectus is required to be delivered under the Securities Act, such
number of copies of the Prospectus (as amended or supplemented) as the
Dealer Managers may reasonably request for the purposes contemplated by
the Securities Act or the Rules and Regulations.
(vi) If any event shall occur as a result of which it
is necessary, in the reasonable opinion of counsel for the Dealer
Managers, to amend or supplement the Registration Statement or the
Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a Holder,
the Company will forthwith amend or supplement the Prospectus by
preparing and filing with the Commission (and furnishing to the Dealer
Managers a reasonable number of copies of) an amendment or amendments
of the Registration Statement or an amendment or amendments of or a
supplement or supplements to the Prospectus (in form and substance
satisfactory to counsel for the Dealer Managers), at the Company's
expense, which will amend or supplement the Registration Statement or
the Prospectus so that the Prospectus will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a Holder, not misleading.
(vii) The Company will endeavor, in cooperation with
the Dealer Managers and their counsel, to assist such counsel to
qualify the Rights and the Shares for offering and sale under the
applicable securities laws of such states and other jurisdictions of
the United States as the Dealer Managers may designate and maintain
such qualifications in effect for the duration of the Offer; provided,
however, that the Company will not be obligated to file any general
consent to service of process, or to qualify as a foreign corporation
or as a dealer in securities in any jurisdiction in which it is not now
so qualified. The Company will file such statements and reports as may
be required by the laws of each jurisdiction in which the Rights and
the Shares have been qualified as above provided.
(viii) The Company will make generally available to
its security holders as soon as practicable, but no later than 60 days
after the end of the Fund's fiscal semi-annual or fiscal year-end
period covered thereby, an earnings statement (which need not be
audited) (in form complying with the provisions of Rule 158 of the
Rules and Regulations of the Securities Act) covering a twelve-month
period beginning not later than the first day of the Company's fiscal
semi-annual period next following the "effective" date (as defined in
said Rule 158) of the Registration Statement.
(ix) For a period of 180 days from the date of this
Agreement, the Company will not, without the prior consent of
PaineWebber, which consent shall not be unreasonably withheld offer
or sell, or enter into any agreement to sell, any equity or equity
related securities of the Company or securities convertible into such
securities, other than the Rights and the Shares and the Common Stock
issued in reinvestment of dividends or distributions.
(x) The Company will apply the net proceeds from the
Offer as set forth under "Use of Proceeds" in the Prospectus.
(xi) The Company will use its best efforts to cause
the Shares to be duly authorized for listing by the New York Stock
Exchange prior to the time the Shares are issued.
(xii) The Company will use its best efforts to
maintain its qualification as a regulated investment company under
Subchapter M of the Code.
(xiii) The Company will use its best efforts to
direct the proceeds of the Offer in such a manner as to continue to
comply with the diversification, liquidity, investment guidelines and
asset coverage requirements of the Insurance Agreement and the Note
Purchase Agreement for so long as such agreements remain in effect and
with the asset coverage requirements of the Investment Company Act.
(xiv) The Company will advise or cause the
Subscription Agent to advise each Dealer Manager and each Soliciting
Dealer from day to day during the period of, and promptly after the
termination of, the Offer, as to the names and addresses of all Holders
exercising Rights, the total number of Rights exercised by each Holder
during the immediately preceding day, indicating the total number of
Rights verified to be in proper form for exercise, rejected for
exercise and being processed and, for each Dealer Manager and each
Soliciting Dealer, the number of Rights exercised on subscription
certificates indicating such Dealer Manager or such Soliciting Dealer,
as the case may be, as the broker-dealer with respect to such exercise,
and as to such other information as the Dealer Managers may reasonably
request; and will notify each Dealer Manager and each Soliciting
Dealer, not later than 5:00 P.M., New York City time, on the first
business day following the Expiration Date, of the total number of
Rights exercised and Shares related thereto, the total number of Rights
verified to be in proper form for exercise, rejected for exercise and
being processed and, for each Dealer Manager and each Soliciting
Dealer, the number of Rights exercised on subscription certificates
indicating such Dealer Manager or such Soliciting Dealer, as the case
may be, as the broker-dealer with respect to such exercise, and as to
such other information as the Dealer Managers may reasonably request.
(b) Neither the Company nor the Investment Adviser will
take, directly or indirectly, any action designed to cause or to result in, or
that has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the issuance of the Rights or the sale or resale of the Shares;
provided that any action in connection with the Company's dividend reinvestment
plan will not be deemed to be within the meaning of this Section 4(b).
5. Payment of Expenses.
(a) The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including, but not limited
to, expenses relating to (i) the printing and filing of the Registration
Statement as originally filed and of each amendment thereto, (ii) the
preparation, issuance and delivery of the certificates for the Shares and
subscription certificates relating to the Rights, (iii) the fees and
disbursements of the Company's counsel (including the fees and disbursements of
local counsel) and accountants, (iv) the qualification of the Rights and the
Shares under securities laws in accordance with the provisions of Section
4(a)(vii) of this Agreement, including filing fees, (v) the printing or other
production and delivery to the Dealer Managers of copies of the Registration
Statement as originally filed and of each amendment thereto and of the
Prospectus and any amendments or supplements thereto, (vi) the fees and expenses
incurred with respect to filing with the National Association of Securities
Dealers, Inc., (vii) the fees and expenses incurred in connection with the
listing of the Shares on the New York Stock Exchange, (viii) the printing or
other production, mailing and delivery expenses incurred in connection with
Offering Materials and (ix) the fees and expenses incurred with respect to the
Information Agent.
(b) In addition to any fees that may be payable to the
Dealer Managers under this Agreement, the Company agrees to reimburse
PaineWebber upon request made from time to time for its reasonable expenses
incurred in connection with its activities under this Agreement, including the
reasonable fees and disbursements of its legal counsel (excluding Blue Sky
filing fees which are paid directly by the Company), in an amount up to
$100,000.
(c) If this Agreement is terminated by the Dealer Managers
in accordance with the provisions of Section 6 or Section 9(a)(i), 9(a)(ii) or
9(a)(iii), the Company agrees to reimburse the Dealer Managers for all of its
reasonable out-of-pocket expenses incurred in connection with its performance
hereunder, including the reasonable fees and disbursements of counsel for the
Dealer Managers. In the event the transactions contemplated hereunder are not
consummated, the Company agrees to pay all of the costs and expenses set forth
in paragraphs (a) and (b) of this Section 5 which the Company would have paid if
such transactions had been consummated.
6. Conditions of the Dealer Managers' Obligations. The
obligations of the Dealer Managers hereunder are subject to the accuracy of the
respective representations and warranties of the Company and the Investment
Adviser contained herein, to the performance by the Company and the Investment
Adviser of their respective obligations hereunder, and to the following further
conditions:
(a) The Registration Statement shall have become effective
not later than 5:30 P.M., New York City time, on the Record Date, or at such
later time and date as may be approved by the Dealer Managers; the Prospectus
and any amendment or supplement thereto shall have been filed with the
Commission in the manner and within the time period required by Rule 497(c),
(e), (h) or (j), as the case may be, under the Securities Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company, the
Investment Adviser or the Dealer Managers, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement, the Prospectus or otherwise).
(b) On the Representation Date and the Expiration Date,
the Dealer Managers shall have received:
(1) The favorable opinions, dated the Representation
Date and the Expiration Date, of Rogers & Wells, counsel for the Company, in
form and substance satisfactory to counsel for the Dealer Managers to the effect
that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Maryland, has full corporate power and authority to
conduct its business as described in the Registration Statement and the
Prospectus, currently maintains all governmental licenses, permits,
consents, orders, approvals, and other authorizations necessary under
U.S. or New York or Maryland state law to carry on its business as
contemplated in the Prospectus (except that counsel need express no
opinion as to securities or "blue sky" laws of any state) and the
Company is duly qualified to do business as a foreign corporation in
each jurisdiction wherein it owns or leases real property or in which
the conduct of its business requires such qualification, except where
the failure to be so qualified would not result in a material adverse
effect upon the business, properties, financial position or results of
operations of the Company.
(ii) the Company is registered with the Commission
under the Investment Company Act as a closed-end, diversified
management investment company, to the best knowledge of such counsel,
no order of suspension or revocation of such registration has been
issued or proceedings therefor initiated or threatened by the
Commission, all required action has been taken under the Securities Act
and the Investment Company Act to make the public offering and
consummate the issuance of the Rights and the issuance and sale of the
Shares by the Company upon exercise of the Rights, and the provisions
of the Company's charter and by-laws comply as to form in all material
respects with the requirements of the Investment Company Act.
(iii) the Company's authorized capitalization is as
set forth in the Prospectus; the outstanding shares of Common Stock
and outstanding shares of Preferred Stock have been duly authorized and
are validly issued, fully paid and non-assessable and conform in all
material respects to the description thereof in the Prospectus under
the heading "Description of Capital Stock"; the Rights have been duly
authorized by all requisite action on the part of the Company for
issuance pursuant to the Offer; the Shares have been duly authorized by
all requisite action on the part of the Company for issuance and sale
pursuant to the terms of the Offer and, when issued and delivered by
the Company pursuant to the terms of the Offer against payment of the
consideration set forth in the Prospectus, will be validly issued,
fully paid and non-assessable; the Shares and the Rights conform in all
material respects to all statements relating thereto contained in the
Registration Statement, the Prospectus and the other Offering
Materials; and the issuance of each of the Rights and the Shares is not
subject to any preemptive rights.
(iv) the Company has authorized Notes as set forth in
the Prospectus; the outstanding Notes have been duly authorized and
conform in all material respects to the description thereof in the
Prospectus under the heading "Description of Notes".
(v) except as set forth in the Registration Statement
and Prospectus, to the best knowledge of such counsel, there is no
pending or threatened action, suit or proceeding to which the Company
is a party before or by any U.S., New York or Maryland state court or
governmental agency, authority or body or any arbitrator, whether
foreign or domestic, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth or
results of operations of the Company, or which might materially and
adversely affect the properties or assets thereof of a character
required to be disclosed in the Registration Statement or the
Prospectus.
(vi) to the best knowledge of such counsel after due
inquiry of corporate officers, there are no franchises, contracts or
other documents of the Company required to be described in the
Registration Statement or the Prospectus, or to be filed or
incorporated by reference as exhibits which are not described or filed
or incorporated by reference therein as permitted by the Securities
Act, the Investment Company Act or the Rules and Regulations.
(vii) neither the issuance of the Rights, nor the
issuance and sale of the Shares, nor the performance and consummation
by the Company of any other of the transactions contemplated in this
Agreement nor the consummation of the transactions contemplated in
the Registration Statement will conflict with or violate the charter or
by-laws of the Company or, to the best knowledge of such counsel, after
due inquiry, conflict with, result in a breach or violation of, or
constitute a default or event of default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company under the terms and provisions of
any agreement, indenture, mortgage, loan agreement, note, insurance
or surety agreement, lease or other instrument known to such counsel to
which the Company is a party or by which it may be bound or to which
any of the property or assets of the Company is subject, nor, to the
best knowledge of such counsel, will such action result in any
violation of any order, law, rule or regulation of any U.S., New York
or Maryland state court or governmental agency or body having
jurisdiction over the Company or any of its properties.
(viii) no consent, approval, authorization,
notification or order of, or any filing with, any U.S., New York or
Maryland state court or governmental agency or body, whether foreign or
domestic, is required for the consummation by the Company of the
transactions contemplated by the Company Agreements or the
Registration Statement, except (A) such as have been obtained and (B)
such as may be required under the blue sky laws of any jurisdiction
in connection with the transactions contemplated hereby.
(ix) the Common Stock has been duly listed on the New
York Stock Exchange and the Shares have been duly approved for listing,
subject to official notice of issuance, on the New York Stock Exchange.
(x) the Registration Statement is effective under the
Securities Act; any required filing of the Prospectus or any supplement
thereto pursuant to Rule 497(c), (e), (h) or (j) required to be made to
the date hereof has been made in the manner and within the time period
required by Rule 497(c), (e), (h) or (j), as the case may be; no stop
order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for that purpose have been instituted
or threatened; and the Registration Statement, the Prospectus and each
amendment thereof or supplement thereto (other than the financial
statements, schedules, the notes thereto and the schedules and other
financial, economic and statistical data contained or incorporated by
reference therein or omitted therefrom, as to which such counsel need
express no opinion) as to their respective effective or issue dates
comply as to form in all material respects with the applicable
requirements of the Securities Act and the Investment Company Act and
the Rules and Regulations.
(xi) the statements in the Prospectus under the
heading "Federal Taxation" fairly present the information disclosed
therein in all material respects.
In rendering such opinion, such counsel may rely as to matters of Maryland law
on the opinion of Piper & Marbury L.L.P. and as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and public officials.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, in the course of their review and discussion of the contents of the
Registration Statement and Prospectus with certain officers and employees of
the Company and its independent accountants, no facts have come to their
attention which cause them to believe that the Registration Statement, on the
date it became effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements contained therein not misleading or that the Prospectus, as
of its date and on the Representation Date or the Expiration Date, as the case
may be, contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(2) The favorable opinions, dated the Representation Date
and the Expiration Date, of Olshan Grundman Frome & Rosenzweig, counsel for the
Fund and the Investment Adviser, in form and substance satisfactory to counsel
for the Dealer Managers to the effect that:
(i) each of the Company Agreements has been duly
authorized, executed and delivered by the Company, and complies in all
material respects with all applicable provisions of the Investment
Company Act; and each such agreement, assuming due and valid
authorization, execution and delivery by the other parties thereto,
constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to
the extent such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights and general principles of equity and
except to the extent that the enforceability of the indemnification and
contribution provisions contained in this Agreement may be limited
under U.S. federal and state securities laws.
(ii) the Investment Adviser is duly registered as an
investment adviser under the Advisers Act and is not prohibited by the
Advisers Act or the Investment Company Act, or the rules and
regulations under such Acts, from acting as an investment adviser for
the Company as contemplated in the Prospectus.
(iii) each of this Agreement and the Investment
Advisory Agreement complies with all applicable provisions of the
Advisers Act and the Investment Company Act.
(iv) except as set forth in the Registration
Statement and Prospectus, to the best knowledge of counsel, there is no
pending or threatened action, suit or proceeding to which the
Investment Adviser is a party before or by any U.S. or state court or
governmental agency, authority or body or any arbitrator which might
result in any material adverse change in the Investment Adviser's
condition (financial or other), business prospects, net worth or
operations or which might materially and adversely affect the
properties or assets thereof of a character required to be disclosed in
the Registration Statement or Prospectus.
(v) no consent, approval, authorization,
notification or order of, or any filing with, any U.S. or state court
or governmental agency or body is required for the consummation by the
Investment Adviser of the transactions contemplated by this Agreement
or the Investment Advisory Agreement.
(vi) each of the Company Agreements to which the
Investment Adviser is a party has been duly authorized, executed and
delivered by the Investment Adviser, and, assuming due authorization,
execution and delivery by the other parties thereto, each of the
Company Agreements to which the Investment Adviser is a party
constitutes a legal, valid, binding and enforceable obligation of the
Investment Adviser subject to the qualification that the enforceability
of the obligations of the Investment Adviser thereunder may be limited
by bankruptcy, insolvency, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights.
(vii) the Investment Adviser has been duly
incorporated and is validly existing and in good standing under the
laws of Massachusetts, has full power and authority (corporate and
other) to own its properties and conduct its business as described in
the Registration Statement and the Prospectus, and is duly qualified to
do business as a foreign corporation in each jurisdiction wherein it
owns or leases real property or in which the conduct of its business
requires such qualification, except where the failure to be so
qualified does not involve a material adverse risk to the Investment
Adviser's business, properties, financial position or operations.
(viii) neither the performance by the Investment
Adviser of its obligations under this Agreement or the other Company
Agreements to which the Investment Adviser is a party nor the
consummation of the transactions contemplated therein or in the
Registration Statement nor the fulfillment of the terms thereof will
conflict with or violate the charter, by-laws or similar organizational
documents of the Investment Adviser, or to the best knowledge of such
counsel, after due inquiry, conflict with, result in a breach or
violation of, or constitute a default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any properties or
assets of the Investment Adviser under the terms and provisions of any
agreement, indenture, mortgage, lease or other instrument to which the
Investment Adviser is a party or by which it may be bound or to which
any of the property or assets of the Investment Adviser is subject, nor
will such action result in any violation of any order, law, rule or
regulation of any U.S. or state court or governmental agency or body,
having jurisdiction over the Investment Adviser or any of its
properties.
In rendering such opinion, such counsel may rely as to matters
of fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Investment Adviser and public officials.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, in the course of their review and discussion of the contents of the
Registration Statement and Prospectus with certain officers and employees of
the Investment Adviser and its affiliates, no facts have come to their
attention which cause them to believe that the Registration Statement, on the
date it became effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements contained therein not misleading or that the Prospectus, as
of its date and on the Representation Date or the Expiration Date, as the case
may be, contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(c) The Dealer Managers shall have received from
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Dealer
Managers, such opinion or opinions, dated the Representation Date and the
Expiration Date, with respect to the Offer, the Registration Statement, the
Prospectus and other related matters as the Dealer Managers may reasonably
require, and the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Dealer
Managers certificates of the Company, signed by the President, the Treasurer,
the Assistant Treasurer, the Secretary, the Assistant Secretary or a Vice
President of the Company, dated the Representation Date and the Expiration Date,
to the effect that the signer(s) of such certificate carefully examined the
Registration Statement, the Prospectus, any supplement to the Prospectus and
this Agreement and that, to the best of their knowledge:
(i) the representations and warranties of the
Company in this Agreement are true and correct in all material respects
on and as of the Representation Date or the Expiration Date, as the
case may be, with the same effect as if made on the Representation Date
or the Expiration Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the Representation
Date or the Expiration Date, as the case may be;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened;
(iii) since the date of the most recent balance
sheet included or incorporated by reference in the Prospectus, there
has been no material adverse change in the condition (financial or
other), earnings, business, prospects, net worth or results of
operations of the Company (excluding fluctuations in the Company's net
asset value due to investment activities in the ordinary course of
business), except as set forth in or contemplated in the Prospectus;
and
(iv) as of the most recent calculation dates as
required by each of the Note Purchase Agreement and Insurance
Agreement, the Company complied with the diversification, liquidity,
investment guidelines and asset coverage requirements of the Insurance
Agreement, the Note Purchase Agreement and the Investment Company Act.
(e) The Investment Adviser shall have furnished to the
Dealer Managers certificates of the Investment Adviser, signed by the President,
Treasurer, Secretary or Vice President, dated the Representation Date and the
Expiration Date, to the effect that the signer of such certificate has read the
Registration Statement, the Prospectus, any supplement to the Prospectus and
this Agreement and, to the best knowledge of such signer, the representations
and warranties of the Investment Adviser in this Agreement are true and correct
in all material respects on and as of the Representation Date or the Expiration
Date, as the case may be, with the same effect as if made on the Representation
Date or the Expiration Date, as the case may be.
(f) Arthur Andersen LLP shall have furnished to the
Dealer Managers letters, dated the Representation Date and the Expiration Date,
in form and substance satisfactory to the Dealer Managers stating in effect
that:
(i) they are independent accountants with respect to
the Company within the meaning of the Securities Act and the applicable
published Rules and Regulations;
(ii) in their opinion, the audited financial
statements examined by them and included or incorporated by reference
in the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Securities
Act and the Investment Company Act and the respective published Rules
and Regulations with respect to registration statements on Form N-2;
(iii) they have performed specified procedures, not
constituting an audit in accordance with generally accepted auditing
standards, including a reading of the latest available unaudited
financial information of the Company, a reading of the minute books of
the Company, and inquiries of officials of the Company responsible for
financial and accounting matters and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
that at a specified date not more than five business days prior to the
Representation Date, there was any change in the capital stock, any
decrease in net assets or any increase in long-term debt of the Company
as compared with amounts shown in the most recent statement of assets
and liabilities included or incorporated by reference in the
Registration Statement, except as the Registration Statement discloses
has occurred or may occur, or they shall state any specific changes,
increases or decreases;
(iv) in addition to the procedures referred to in
clause (iii) above, they have compared certain dollar amounts (or
percentages as derived from such dollar amounts) and other financial
information regarding the operations of the Company appearing in the
Registration Statement, which have previously been specified by the
Dealer Managers and which shall be specified in such letter, and have
found such items to be in agreement with, the accounting and financial
records of the Company.
(g) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall not have been (i) any change, increase or decrease specified in the letter
or letters referred to in paragraph (f) of this Section 6, or (ii) any change,
or any development involving a prospective change, in or affecting the business
or properties of the Company, the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the reasonable judgment of the Dealer Managers,
so material and adverse as to make it impractical or inadvisable to proceed with
the Offer as contemplated by the Registration Statement and the Prospectus.
(h) Prior to the Representation Date, the Company shall
have furnished to the Dealer Managers such further information, certificates and
documents as the Dealer Managers may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects satisfactory
in form and substance to the Dealer Managers and their counsel, this Agreement
and all obligations of the Dealer Managers hereunder may be canceled at, or at
any time prior to, the Representation Date by the Dealer Managers. Notice of
such cancellation shall be given to the Company in writing or by telephone
confirmed in writing.
7. Indemnification and Contribution.
(a) Each of the Company and the Investment Adviser,
jointly and severally, will indemnify and hold harmless the Dealer Managers, the
directors, officers, employees and agents of the Dealer Managers and each
person, if any, who controls the Dealer Managers within the meaning of Section
15 of the Securities Act and Section 20 of the Exchange Act against any and all
losses, claims, damages and liabilities, joint or several (including any
investigation, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act, the Investment Company Act, the Advisers Act
or other statutory law or regulation, at common law or otherwise, whether
foreign or domestic, insofar as such losses, claims, damages or liabilities
arise out of or are based on any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or the Prospectus, and
any amendment or supplement thereto, or the omission or alleged omission to
state in any or all such documents a material fact required to be stated therein
or necessary to make the statements in it not misleading (in the case of the
Prospectus, in light of the circumstances under which such statements were
made), provided, however, that neither the Company nor the Investment Adviser
will be liable to the extent that such loss, claim, damage or liability arises
from an untrue statement or omission or alleged untrue statement or omission (1)
made in reliance on and in conformity with information furnished in writing to
the Company by the Dealer Managers expressly for use in the document, or (2) if
a copy of the Prospectus was not sent or given to the purchaser of Shares at or
before the written confirmation of the sale to such person in any case where
such delivery is required by the Securities Act. This indemnity agreement will
be in addition to any liability that the Company or the Investment Adviser might
otherwise have.
(b) The Dealer Managers will indemnify and hold harmless
the Company and the Investment Adviser, the directors, officers and each person,
if any, who controls the Company or the Investment Adviser within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same
extent as the foregoing indemnity from the Company or the Investment Adviser to
the Dealer Managers, but only insofar as losses, claims, damages or liabilities
arise out of or are based on any untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
furnished in writing to the Company by the Dealer Managers expressly for use in
preparation of the documents in which the statement or omission is made or
alleged to be made. This indemnity agreement will be in addition to any
liability that the Dealer Managers might otherwise have.
(c) Any party that proposes to assert the right to be
indemnified under this Section 7 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made, promptly notify each such indemnifying party in writing of the
commencement of such action, enclosing a copy of all papers served, but the
omission to so notify such indemnifying party will not, except to the extent set
forth below, relieve it from liability that it may have to any indemnified
party. No indemnification provided for in Section 7(a) or (b) hereof shall be
available to any party who shall fail to give notice as provided in this Section
7(c) if the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was prejudiced by the failure to give
such notice, but the omission so to notify such indemnifying party of such
action shall not relieve it from any liability that it may have to any
indemnified party for contribution or otherwise on account of the provisions in
Section 7(a) or (b). If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in, and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel reasonably satisfactory to the indemnified party, and,
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses except as provided below and
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its counsel in any such action, but the fees and
expenses of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded that there may be legal defenses available to it or other indemnified
parties that are different from or in addition to those available to the
indemnifying party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party) or (3)
the indemnifying party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the commencement
of the action, in each of which cases the reasonable fees and expenses of
counsel will be at the expense of the indemnifying party or parties. All such
fees and expenses will be reimbursed promptly as they are incurred upon
submission in writing to the indemnifying party with regard to any cost or
expense for which the indemnified party is seeking indemnification in such form
and detail as the indemnifying party may reasonably request. An indemnifying
party will not be liable for any settlement of any action or claim effected
without its written consent or, in connection with any proceeding or related
proceeding in the same jurisdiction, for the fees and expenses of more than one
separate counsel for all indemnified parties except to the extent provided
herein.
(d) In no case shall the indemnification provided in this
Section 7 be available to protect any person against any liability to which any
such person would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its or his obligations or duties
hereunder, or by reason of its or his reckless disregard of its or his
obligations and duties hereunder.
(e) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in this
Section 7 is applicable in accordance with its terms but for any reason is held
to be unavailable from the Company, the Investment Adviser or the Dealer
Managers, the Company or the Investment Adviser and the Dealer Managers will
contribute to the total losses, claims, damages and liabilities (including any
investigation, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action or any claims asserted, but
after deducting any contribution received by the Company, the Investment Adviser
or from persons other than the Dealer Managers, such as persons who control the
Company or the Investment Adviser within the meaning of the Securities Act or
the Exchange Act, officers of the Company who signed the Registration Statement
and directors of the Company, who may also be liable for contribution) to which
the Company, the Investment Adviser or the Dealer Managers may be subject in
such proportion as is appropriate to reflect (i) the relative benefits received
by the indemnifying party or parties on the one hand and the indemnified party
on the other hand from the offering of the Shares or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law, not
only such relative benefits but also the relative fault of the indemnifying
party or parties on the one hand and the indemnified party on the other hand in
connection with the statements or omissions or alleged statements or omissions
that resulted in the losses, claims, damages or liabilities, joint or several
(including any investigation, legal or other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), for which contribution is sought. The
relative benefits received by the Company or the Investment Adviser (treated
jointly for this purpose as one person) on the one hand and the Dealer Managers
on the other hand shall be deemed to be in the same proportion as the total
proceeds from the offering (before deducting expenses) received by the Company
bear to the total fees received by the Dealer Managers. The relative fault of
the parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Investment Adviser or the Dealer Managers, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such statement or omission and any other equitable
considerations appropriate in the circumstances. Notwithstanding any other
provisions of this Section 7, (1) the Dealer Managers will not be responsible
for any amount in excess of the fees paid by the Company pursuant to Section 3
hereof and (2) no person found guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, any person who controls a
party to this Agreement within the meaning of the Securities Act will have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement and each director of the Company will have the
same rights to contribution as the Company, subject in each case to clause (i)
of the first sentence of this Subsection 7(e). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim for contribution may be
made under this Section 7, notify such party or parties from whom contribution
may be sought, but the omission so to notify will not relieve the party or
parties from whom contribution may be sought from any other obligation it or
they may have otherwise than under this Section 7. No party will be liable for
contribution with respect to any action or claim settled without its written
consent.
(f) The Company and the Investment Adviser agree to
indemnify each Soliciting Dealer and controlling persons to the same extent and
subject to the same conditions and to the same agreements, including with
respect to contribution, provided for in subsections (a), (b), (c), (d) and (e)
of this Section 7.
(g) The Company and the Investment Adviser acknowledge
that the statements under the caption "The Offer-Distribution Arrangements" in
the Prospectus constitute the only information furnished in writing to the
Company by the Dealer Managers expressly for use in such document, and each
Dealer Manager confirms that such statements as they relate to such Dealer
Manager are correct.
8. Representations, Warranties and Agreements to Survive
Delivery. The respective agreements, representations, warranties, indemnities
and other statements of the Company or its officers, of the Investment Adviser
and of the Dealer Managers set forth in or made pursuant to this Agreement shall
survive the Expiration Date and will remain in full force and effect, regardless
of any investigation made by or on behalf of Dealer Managers or the Company or
any of the officers, directors or controlling persons referred to in Section 7
hereof, and will survive delivery of and payment for the Shares pursuant to the
Offer. The provisions of Sections 5 and 7 hereof shall survive the termination
or cancellation of this Agreement.
9. Termination of Agreement.
(a) This Agreement shall be subject to termination in the
absolute discretion of the Dealer Managers, by notice given to the Company prior
to the expiration of the Offer, if prior to such time (i) financial, political,
economic, currency, banking or social conditions in the United States shall have
undergone any material change the effect of which on the financial markets makes
it, in the Dealer Managers' judgment, impracticable or inadvisable to proceed
with the Offer, (ii) there has occurred any outbreak or material escalation of
hostilities or other calamity or crisis the effect of which on the financial
markets of the United States is such as to make it, in the Dealer Managers'
judgment, impracticable or inadvisable to proceed with the Offer, (iii) trading
in the shares of Common Stock shall have been suspended by the Commission or the
New York Stock Exchange, (iv) trading in securities generally on the New York
Stock Exchange shall have been suspended or limited or (v) a banking moratorium
shall have been declared either by Federal or New York State authorities.
(b) If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 5.
10. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Dealer Managers, will be
mailed, delivered or telegraphed and confirmed to PaineWebber Incorporated,
Attn: Todd Reit, 1285 Avenue of the Americas, New York, New York 10019; or if
sent to the Company or the Investment Adviser will be mailed, or delivered or
telegraphed and confirmed to them at: Prospect Street High Income Portfolio
Inc., Attn: John A. Frabotta, 60 State Street, Boston, Massachusetts 02109, with
a copy to Rogers & Wells, 200 Park Avenue, New York, New York 10166 (Facsimile
No.: 212-878-8375), attention of Laurence E. Cranch, Esq.
11. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and will
inure to the benefit of the officers and directors and controlling persons
referred to in Section 7 hereof, and no other person will have any right or
obligation hereunder.
12. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
13. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
If the foregoing is in accordance with your understanding of
our agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company,
the Investment Adviser and the Dealer Manager.
Very truly yours,
Prospect Street High Income
Portfolio Inc.
By:
---------------------------
Name:
--------------------
Title:
--------------------
Prospect Street Investment
Management Co., Inc.
By:
---------------------------
Name:
--------------------
Title:
--------------------
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PaineWebber Incorporated
By:
------------------------------
Name:
------------------------
Title:
-----------------------
Tucker Anthony Incorporated
By:
------------------------------
Name:
------------------------
Title:
-----------------------
<PAGE>
EXHIBIT A
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
________ __, 1997(1)
To Securities Dealers and Brokers:
Prospect Street High Income Portfolio Inc. (the "Company") is
issuing to its shareholders of record ("Record Date Shareholders") as of the
close of business on ________ __, 1997 (the "Record Date") non-transferable
rights ("Rights") to subscribe for an aggregate of up to 12,904,486 shares (the
"Shares") of common stock, par value $0.01 per share (the "Common Stock"), of
the Company upon the terms and subject to the conditions set forth in the
Company's Prospectus (the "Prospectus") dated ________ __, 1997 (the "Offer").
Each such Record Date Shareholder is being issued one Right for each full share
of Common Stock owned on the Record Date. The Rights entitle the Record Date
Shareholder, during the Subscription Period (as hereinafter defined) to acquire
at the Subscription Price (as hereinafter defined), one Share for each three
Rights held in the primary subscription. No fractional Shares will be issued.
The Subscription Price will be ___% of the lower of (i) the average of the last
reported sales price of a share of the Company's Common Stock on the New York
Stock Exchange on the date of the expiration of the Offer (the "Pricing Date")
and the four preceding business days and (ii) the net asset value per share as
of the Pricing Date. The Subscription Period will commence on ________ __, 1997
and end on the Expiration Date. (With respect to the Offer, the term "Expiration
Date" means 5:00 p.m., New York City time, on ________ __, 1997, unless and
until the Company shall, in its sole discretion, have extended the period for
which the Offer is open, in which event the term "Expiration Date" with respect
to the Offer will mean the latest time and date on which the Offer, as so
extended by the Company, will expire.) Any Record Date Shareholder who fully
exercises all Rights issued to such shareholder is entitled to subscribe for
Shares which were not otherwise subscribed for by others on primary subscription
(the "Over-Subscription Privilege"). Shares acquired pursuant to the
Over-Subscription Privilege are subject to allocation, as more fully discussed
in the Prospectus.
For the duration of the Offer, the Company has agreed to pay
Solicitation Fees to any qualified broker or dealer executing a Soliciting
Dealer Agreement who solicits the exercise of Rights and the Over-Subscription
Privilege in connection with the Offer and who complies with the procedures
described below (a "Soliciting Dealer"). Upon timely delivery to State Street
Bank and Trust Company, the Company's Subscription Agent for the Offer, of
payment for Shares purchased pursuant to the exercise of Rights and the
Over-Subscription Privilege and of properly completed and executed documentation
as set forth in this Soliciting Dealer Agreement, a Soliciting Dealer will be
entitled to receive Solicitation Fees equal to 2.50% of the Subscription Price
per Share so purchased; provided, however, that no payment shall be due with
respect to the issuance of any Shares until payment therefor is actually
received. A qualified broker or dealer is a broker or dealer which is a member
of a registered national securities exchange in the United States or the
National Association of Securities Dealers, Inc. ("NASD") or any foreign broker
or dealer not eligible for membership who agrees to conform to the Rules of Fair
Practice of the NASD, including Sections 2730, 2740, 2420 and 2750 thereof, in
making solicitations in the United States to the same extent as if it were a
member thereof.
- ---------------
(1) Unless extended to a date no later than ___________ __, 1997.
<PAGE>
The Company has agreed to pay the Solicitation Fees payable to
the undersigned Soliciting Dealer and to indemnify such Soliciting Dealer on the
terms set forth in the Dealer Manager Agreement, dated ________ __, 1997, among
PaineWebber Incorporated as the Dealer Manager, the Company and others (the
"Dealer Manager Agreement"). Solicitation and other activities by Soliciting
Dealers may be undertaken only in accordance with the applicable rules and
regulations of the Securities and Exchange Commission and only in those states
and other jurisdictions where such solicitations and other activities may
lawfully be undertaken and in accordance with the laws thereof. Compensation
will not be paid for solicitations in any state or other jurisdiction in which
the opinion of counsel to the Company or counsel to the Dealer Manager, such
compensation may not lawfully be paid. No Soliciting Dealer shall be paid
Solicitation Fees with respect to Shares purchased pursuant to an exercise of
Rights and the Over-Subscription Privilege for its own account or for the
account of any affiliate of the Soliciting Dealer, except that each Dealer
Manager shall receive the Solicitation Fees with respect to Shares purchased
pursuant to an exercise of Rights and the Over-Subscription Privilege for its
own account provided that such Shares are offered and sold by such Dealer
Manager to its clients. No Soliciting Dealer or any other person is authorized
by the Company or the Dealer Managers to give any information or make any
representations in connection with the Offer other than those contained in the
Prospectus and other authorized solicitation material furnished by the Company
through the Dealer Manager. No Soliciting Dealer is authorized to act as agent
of the Company or the Dealer Managers in any connection or transaction. In
addition, nothing herein contained shall constitute the Soliciting Dealers
partners with the Dealer Managers or with one another, or agents of the Dealer
Managers or of the Company, or create any association between such parties, or
shall render the Dealer Managers or the Company liable for the obligations of
any Soliciting Dealer. The Dealer Managers shall be under no liability to make
any payment to any Soliciting Dealer, and shall be subject to no other
liabilities to any Soliciting Dealer, and no obligations of any sort shall be
implied.
In order for a Soliciting Dealer to receive Solicitation Fees,
the Subscription Agent must have received from such Soliciting Dealer no later
than 5:00 p.m., New York City time, on the Expiration Date, either (i) a
properly completed and duly executed Subscription Certificate with respect to
Shares purchased pursuant to the exercise of Rights and the Over-Subscription
Privilege and full payment for such Shares; or (ii) a Notice of Guaranteed
Delivery guaranteeing delivery to the Subscription Agent by close of business on
the third business day after the Expiration Date, of (a) full payment for such
Shares and (b) a properly completed and duly executed Subscription Certificate
with respect to Shares purchased pursuant to the exercise of Rights.
Solicitation Fees will only be paid after receipt by the Subscription Agent of a
properly completed and duly executed Soliciting Dealer Agreement and a
Subscription Certificate designating the Soliciting Dealer in the applicable
portion hereof. In the case of a Notice of Guaranteed Delivery, Solicitation
Fees will only be paid after delivery in accordance with such Notice of
Guaranteed Delivery has been effected. Solicitation Fees will be paid by the
Company (through the Subscription Agent) to the Soliciting Dealer by check to an
address designated by the Soliciting Dealer below by the tenth business day
after final payment for Shares as set forth in the Prospectus.
All questions as to the form, validity and eligibility
(including time of receipt) of this Soliciting Dealer Agreement will be
determined by the Company, in its sole discretion, which determination shall be
final and binding. Unless waived, any irregularities in connection with a
Soliciting Dealer Agreement or delivery thereof must be cured within such time
as the Company shall determine. None of the Company, the Dealer Manager, the
Subscription Agent, the Information Agent for the Offer, Corporate Investor
Communications, Inc., or any other person will be under any duty to give
notification of any defects or irregularities in any Soliciting Dealer Agreement
or incur any liability for failure to give such notification.
The acceptance of Solicitation Fees from the Company by the
undersigned Soliciting Dealer shall constitute a representation by such
Soliciting Dealer to the Company that: (i) it has received and reviewed the
Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise of
the Rights and the Over-Subscription Privilege, it has complied with the
applicable requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the applicable rules and regulations thereunder, any applicable
securities laws of any state or jurisdiction where such solicitations were made,
and the applicable rules and regulations of any self-regulatory organization or
registered national securities exchange; (iii) in soliciting purchases of Shares
pursuant to the exercise of the Rights and the Over-Subscription Privilege, it
has not published, circulated or used any soliciting materials other than the
Prospectus and any other authorized solicitation material furnished by the
Company through the Dealer Manager; (iv) it has not purported to act as agent of
the Company or the Dealer Managers in any connection or transaction relating to
the Offer; (v) the information contained in this Soliciting Dealer Agreement is,
to its best knowledge, true and complete; (vi) it is not affiliated with the
Company; (vii) it will not accept Solicitation Fees paid by the Company pursuant
to the terms hereof with respect to Shares purchased by the Soliciting Dealer
pursuant to an exercise of Rights and the Over-Subscription Privilege for its
own account; (viii) it will not remit, directly or indirectly, any part of
Solicitation Fees paid by the Company pursuant to the terms hereof to any
beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has
agreed to the amount of the Solicitation Fees and the terms and conditions set
forth herein with respect to receiving such Solicitation Fees. By returning a
Soliciting Dealer Agreement and accepting Solicitation Fees, a Soliciting Dealer
will be deemed to have agreed to indemnify the Company and the Dealer Managers
against losses, claims, damages and liabilities to which the Company may become
subject as a result of the breach of such Soliciting Dealer's representations
made herein and described above. In making the foregoing representations,
Soliciting Dealers are reminded of the possible applicability of the
anti-manipulation rules under the Exchange Act if they have bought, sold, dealt
in or traded in any Shares for their own account since the commencement of the
Offer.
Upon expiration of the Offer, no Solicitation Fees will be
payable to Soliciting Dealers with respect to Shares purchased thereafter.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Dealer Manager Agreement or, if not defined
therein, in the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws
of the State of New York.
Please execute this Soliciting Dealer Agreement below
accepting the terms and conditions hereof and confirming that you are a member
firm of the NASD or a foreign broker or dealer not eligible for membership who
has conformed to the Rules of Fair Practice of the NASD, including Sections
2730, 2740, 2420 and 2750 thereof, in making solicitations of the type being
undertaken pursuant to the Offer in the United States to the same extent as if
you were a member thereof, and certifying that you have solicited the purchase
of the Shares pursuant to exercise of the Rights, all as described above, in
accordance with the terms and conditions set forth in this Soliciting Dealer
Agreement. Please forward two executed copies of this Soliciting Dealer
Agreement to ________________________________________________________ (Tel. No.:
(___) ___-____; Facsimile No.: (___) ___-____). A signed copy of this Soliciting
Dealer Agreement will be promptly returned to the Soliciting Dealer at the
address set forth below.
Very truly yours,
PaineWebber Incorporated
By:
----------------------------------
Name:
----------------------------
Title:
---------------------------
Tucker Anthony Incorporated
By:
----------------------------------
Name:
----------------------------
Title:
---------------------------
PLEASE COMPLETE THE INFORMATION BELOW
- -------------------------------------------------------------------------------
Printed Firm Name Address
- ------------------------------- ------------------------------------
Contact at Soliciting Dealer
- ------------------------------- ------------------------------------
Authorized Signature Area Code and Telephone Number
- ------------------------------- ------------------------------------
Name and Title Facsimile Number
Dated:
-------------------------
Payment of the Solicitation
Fee shall be mailed by check to
the following address:
- -------------------------------
- -------------------------------
- -------------------------------
<PAGE>
Exhibit (l)(1)
[LETTERHEAD OF ROGERS & WELLS]
February 25, 1997
Prospect Street High Income Portfolio Inc.
60 State Street
Boston, Massachusetts 02109
Ladies and Gentlemen:
We have acted as special counsel for Prospect Street High
Income Portfolio Inc., a Maryland corporation (the "Fund"), in connection with
the preparation and filing with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, of a Registration Statement on Form N-2, including all amendments or
supplements thereto (File Nos. 333-20689 and 811-5557) (the "Registration
Statement"), relating to the Fund's issuance of nontransferable rights (the
"Rights") to subscribe for up to 12,904,487 shares of Common Stock of the Fund,
par value $0.01 per share (the "Shares").
In so acting, we have examined and relied upon originals or
copies, certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinions expressed below.
Based upon the foregoing, and on such examination of law as we have deemed
necessary, we are of the opinion that:
1. The Fund has been duly incorporated and is validly existing
as a corporation under the laws of the State of Maryland.
2. The issuance of the Rights and the sale of the Shares have
been duly authorized; when issued as contemplated in the Registration Statement,
the Rights will be legally issued; when issued and paid for upon exercise of the
Rights as contemplated in the Registration Statement, the Shares will be legally
issued, fully paid and nonassessable.
3. The conclusions of U.S. tax law expressed under the
headings "The Offer -- Federal Income Tax Consequences of the Offer" and
"Federal Taxation" in the Prospectus contained in the Registration Statement are
true and correct.
As to certain matters governed by the laws of the State of
Maryland, we have relied on the opinion of Piper & Marbury, L.L.P., a copy of
which is attached hereto.
We consent to the filing of this opinion with the Securities
and Exchange Commission as an Exhibit to the Registration Statement and to the
reference to this firm under the heading "Legal Matters" in the Prospectus
included in such Registration Statement. In giving this consent, we do not admit
that we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Rogers & Wells
<PAGE>
Exhibit (l)(2)
[LETTERHEAD OF PIPER & MARBURY]
February 24, 1997
Rogers & Wells
200 Park Avenue
New York, New York 10166
Re: Prospect Street High Income Portfolio Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel to Prospect Street High
Income Portfolio Inc., a Maryland corporation (the "Company"), in connection
with the Company's Registration Statement on Form N-2, including all amendments
or supplements thereto, filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and the
Investment Company Act of 1940, as amended (File Nos. 333-20689 and 811-5557)
and the issuance of shares of the Company's Common Stock, par value of $0.01 per
share (the "Shares"), pursuant to the Registration Statement.
In this capacity, we have examined the Company's Charter and By-Laws,
the proceedings of the Board of Directors of the Company relating to the
issuance of the Shares and such other statutes, certificates, instruments and
documents relating to the Company and matters of law as we have deemed necessary
to the issuance of this opinion. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of all individuals who have
executed any of the aforesaid documents, the conformity of final documents in
all material respects to the versions thereof submitted to us in draft form, the
authenticity of all documents submitted to us as originals, the conformity with
originals of all documents submitted to us as copies and the due authorization,
validity and binding effect of all such documents (other than the authorization,
execution and delivery of the documents by the Company).
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Company has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The issuance of the Rights and the sale of the Shares have been duly
authorized; when issued as contemplated in the Registration Statement, the
Rights will be legally issued; when issued and paid for as contemplated in the
Registration Statement, the Shares will be legally issued, fully paid and
nonassessable.
You may rely upon this opinion in rendering your opinion to the Company
which is to be filed as an exhibit to the Registration Statement. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Piper & Marbury LLP
<PAGE>
Exhibit (n)
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report for Prospect Street High Income Portfolio Inc. dated
December 31, 1996 (and to all references to our firm) included or incorporated
by reference in Pre-Effective Amendment No. 1 and Amendment No. 16 to
Registration Statement File Nos. 333-20689 and 811-5557, respectively.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
FINANCIAL DATA SCHEDULE FOR COMMON SHARES - Exhibit (r)
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 155,919,886
<INVESTMENTS-AT-VALUE> 154,537,562
<RECEIVABLES> 7,173,513
<ASSETS-OTHER> 74,543
<OTHER-ITEMS-ASSETS> 1,595,880
<TOTAL-ASSETS> 163,381,498
<PAYABLE-FOR-SECURITIES> 1,795,622
<SENIOR-LONG-TERM-DEBT> 20,000,000
<OTHER-ITEMS-LIABILITIES> 875,236
<TOTAL-LIABILITIES> 22,670,858
<SENIOR-EQUITY> 20,000,000
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</TABLE>
