<PAGE>
As filed with the Securities and Exchange Commission on February 13, 1998
1933 Act File No. 333-_________
1940 Act File No. 811-5557
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No. __
/ / Post-Effective Amendment No. __
and
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ Amendment No. 21
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:
Victor M. Rosenzweig, Esq. Sarah E. Cogan, Esq.
Daniel J. Gallagher, Esq. Simpson Thacher & Bartlett
Olshan Grundman Frome & Rosenzweig LLP 425 Lexington Avenue
505 Park Avenue New York, New York 10017
New York, New York 10022 Phone: (212) 455-2000
Phone: (212) 753-7200 Telecopier: (212) 455-2502
Telecopier: (212) 755-1467
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement
---------------------------
If any of the securities being registered on this form are to 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. [ ]
---------------------------
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==================================== =================== ==================== ==================== =================
Proposed Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of Securities Amount Being Price Offering Registration
Being Registered Registered Per Share Price Fee
- ------------------------------------ ------------------- -------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Series A Taxable Auction Rate 1,400 $25,000 $35,000,000 $10,325
Preferred Stock, par value $1.00 shares
per share
==================================== =================== ==================== ==================== =================
</TABLE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Parts A and B of the Prospectus*
<TABLE>
<CAPTION>
Item Number of Form N-2 Location or Heading in Prospectus
------------------------------------------ -------------------------------------------
<S> <C> <C>
1. Outside Front Cover...................... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Page ......................... Inside Front and Outside Back Cover Page
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 Objective and
Policies
8. General Description of the Registrant ... Outside Front Cover Page of Prospectus;
Prospectus Summary; The Fund; Investment
Objective and Policies; Risk Factors and
Special Considerations; Financial
Highlights; Description of Capital Stock;
Description of Senior Notes
9. Management .............................. Prospectus Summary; Management of the
Fund; Portfolio Trading; Description of
Capital Stock; Description of Senior
Notes; Custodian, Transfer Agent,
Dividend Disbursing Agent, Paying Agent
and Registrar
10. Capital Stock, Long-Term Debt, and Description of Capital Stock; Description
Other Securities ....................... of TARPS; Description of Senior Notes;
Federal Taxation; Investment Objective
and Policies; Financial Highlights
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 Objective
and Policies; Portfolio Trading
18. Management .............................. Prospectus Summary; Management of the Fund
19. Control Persons and Principal Holders
of Securities ........................... Management of the Fund
20. Investment Advisory and Other Services .. Prospectus Summary; Management of the
Fund; Custodian, Transfer Agent, Dividend
Disbursing Agent, Paying Agent and
Registrar; 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>
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
$35,000,000
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK
1,400 SHARES SERIES A
LIQUIDATION PREFERENCE $25,000 PER SHARE
Prospect Street(R) High Income Portfolio Inc. (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. See "Management of the Fund--Investment Adviser." The Fund's address is
60 State Street, Boston, Massachusetts 02109 and its telephone number is (617)
742-3800.
This Prospectus sets forth concisely the information regarding the Fund
that a prospective investor should know before investing. Prospective investors
should carefully review the information set forth in this Prospectus and should
retain this Prospectus for future reference.
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>
====================================================================================================================
PROCEEDS TO
PRICE TO PUBLIC(1) SALES LOAD(2) FUND(3)
- ------------------------------------------------------ ----------------------- -------------------- ----------------
<S> <C> <C> <C>
Per Share......................................... $ $ $
====================================================== ======================= ==================== ================
Total............................................. $ $ $
====================================================================================================================
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Investment Adviser have agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(3) Before deduction of offering expenses payable by the Fund, estimated at $_______.
</TABLE>
--------------------------
The shares of Series A Taxable Auction Rate Preferred Stock, par value
$1.00 per share and liquidation preference of $25,000 per share ("TARPS"),
offered by this Prospectus are offered by the Underwriter, subject to prior
sale, when, as and if delivered and accepted by the Underwriter and subject to
approval of certain legal matters by counsel and certain other conditions. It is
expected that the delivery of the shares of the TARPS will be made against
payment therefor through the facilities of The Depository Trust Company ("DTC")
on or about _________, 1998.
--------------------------
BEAR, STEARNS & CO. INC.
_________, 1998
<PAGE>
(cover page continued)
The Fund is offering 1,400 shares of TARPS at a price per share of
$25,000 (the "Offering"). It is a condition of the Underwriter's obligation to
purchase the TARPS that the TARPS be rated "aaa" by Moody's and "AAA" by Fitch
as of the Date of Original Issue. See "Underwriting" and "Investment Objective
and Policies--Investment Guidelines--Rating Agency Guidelines." The Fund is
required to satisfy two separate asset coverage requirements with respect to the
TARPS. See "Description of TARPS--Asset Maintenance." The Fund currently has
issued and Outstanding 200 shares of Taxable Auction Rate Preferred Stock, no
par value per share and liquidation preference of $100,000 per share (the "Old
TARPS").
The dividend rate for the initial Dividend Period for the shares of
TARPS issued pursuant to the Offering will be __% per annum. For each Dividend
Period following the initial Dividend Period, the dividend rate on shares of
TARPS will be the Applicable Rate for such series in effect from time to time as
determined, except as described herein, on the basis of Orders placed in an
Auction conducted on the Business Day preceding the commencement of such
Dividend Period, as set forth herein. The Applicable Rate that results from an
Auction for any Dividend Period will not be greater than the Maximum Applicable
Rate then in effect.
Dividends on shares of TARPS will accumulate at the Applicable Rate
from the Date of Original Issue and shall be payable on each Dividend Payment
Date thereafter, commencing _________, 1998. The initial Dividend Period for the
shares of TARPS will be __ days. Dividend Periods after the initial Dividend
Period for shares of TARPS shall be either Standard Term Periods or, subject to
certain conditions and with notice to the Holders of TARPS, periods longer or
shorter than 28 days and having such durations as the Board of Directors shall
specify (each, an "Alternate Term Period"). The initial Auction Date will be
_________, 1998.
TARPS having a Dividend Period of one year or less than one year may be
redeemed at the option of the Fund, in whole or in part, on any Dividend Payment
Date at a redemption price equal to $25,000 per share, plus accumulated and
unpaid dividends thereon to the date fixed for redemption. TARPS having a
Dividend Period of more than one year are redeemable at the option of the Fund,
in whole or in part, prior to the end of the relevant Dividend Period, subject
to any Specific Redemption Provisions, at a redemption price equal to $25,000
per share, plus accumulated and unpaid dividends thereon to the redemption date,
plus a redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers. See "Description of
TARPS--Redemption--Optional Redemption." The TARPS are, under certain
conditions, subject to mandatory redemption, in whole or in part, if the Fund
does not maintain the "aaa"/"AAA" Credit Rating for the TARPS or if the Fund, on
any Valuation Date or the last Business Day of any month, shall fail to meet the
TARPS Basic Maintenance Amount or the 1940 Act TARPS Asset Coverage,
respectively, and in any such case such failure is not cured on a timely basis
as specified herein. See "Description of TARPS--Redemption--Mandatory
Redemption."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF TARPS.
SUCH TRANSACTIONS INCLUDE THE PURCHASE OF TARPS TO COVER SYNDICATE SHORT
POSITIONS, OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF TARPS, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
Certain capitalized terms not otherwise defined in this Prospectus have
the meanings provided in the Glossary included as part of this Prospectus.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus.
THE FUND
Investment Objective ......... 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"). There
can be no assurance that the Fund will achieve
its investment objective. See "Investment
Objective and Policies."
Investment Strategy........... The Fund invests primarily in "high-yield"
fixed-income securities rated in the lower
categories by established rating agencies
(consisting principally of fixed-income
securities rated "Ba"/"BB" or lower by
Moody's and Fitch), or non-rated fixed-income
securities deemed by the Investment Adviser to
be of comparable quality. Lower rated and
non-rated securities are subject to greater
degree of risk than higher rated securities.
See "Risk Factors and Special Considerations."
In addition to investing in "high-yield"
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 Objective and Policies--Certain
Investment Practices."
The Fund's investments will be subject to
diversification, liquidity and related
investment guidelines established in
connection with the Fund's receipt from
Moody's and Fitch of ratings of "aaa"/"AAA"
for the TARPS and in connection with the
Fund's receipt from Fitch of a rating of "AAA"
for the Senior Notes. See "Investment
Objective and Policies--Investment
Guidelines." Moody's and Fitch will issue
ratings of "aaa"/"AAA" for the TARPS because
the Fund's portfolio, although consisting
principally of lower rated securities, will be
managed in accordance with the two separate
asset coverage requirements. See "Description
of TARPS--Asset Maintenance." The receipt of
such ratings is a condition to the
Underwriter's obligation to purchase the
TARPS. For a description of Moody's and Fitch
ratings, see Appendix B.
Investment Adviser............ Prospect Street Investment Management Co.,
Inc., has served as the Investment Adviser
since the Fund's inception.
Richard E. Omohundro, Jr., Co-President of the
Investment Adviser, served as a Vice President
(1978 - 1983) and a Managing Director (1983 -
1988) of Merrill Lynch Capital Markets
("Merrill Lynch") and was Co-Manager of the
Merrill Lynch High-Yield Bond Group (the
"High-Yield Group") from 1978 through 1987.
During that period, the High-Yield Group
raised approximately $13.6 billion in new
"high-yield" securities through 107 issues and
provided one of the largest secondary trading
markets for "high-yield" securities. In 1987,
the High-Yield 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, has served as the Fund's portfolio
manager since September 1990, and is
responsible for the day-to-day management of
the Fund's portfolio. 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.
Under the Advisory Agreement with the Fund,
the Investment Adviser receives an advisory
fee equal to (i) 0.65% of the Fund's net
assets up to and including $175,000,000, (ii)
0.55% on the next $50,000,000, and (iii) 0.50%
of the excess over $225,000,000. For purposes
of calculating the advisory fee, net assets
shall mean (a) the average weekly value of the
total assets of the Fund minus (b)(i) accrued
liabilities of the Fund (other than the
principal amount of the Fund's "senior
securities representing indebtedness" (as
defined in the 1940 Act), not to exceed $50
million, and not including the aggregate
liquidation preference of the Fund's Preferred
Stock, including TARPS or any other Preferred
Stock or other senior securities issued in
lieu thereof and (ii) accumulated and unpaid
dividends on the Preferred Stock, including
TARPS. The Investment Adviser's fee is
computed weekly and paid monthly.
THE OFFERING
The Issue..................... 1,400 shares of TARPS with a liquidation
preference of $25,000 per share.
Ratings....................... It is a condition of the Underwriter's
obligation to purchase the TARPS that the
TARPS receive a rating of "aaa" from Moody's
and "AAA" from Fitch. Ratings of "aaa"/"AAA"
are the highest category of ratings that
Moody's and Fitch assign to preferred stock.
Dividends..................... Dividends on the TARPS are cumulative from
the Date of Original Issue and are payable,
when, as and if declared by the Board of
Directors of the Fund, out of funds legally
available therefor, on each Dividend Payment
Date, commencing _______________, 1998 (the
28th day after the Date of Original Issue).
Dividends will be paid to the nominee of DTC
or a successor securities depository (the
"Securities Depository") on each Dividend
Payment Date. The Securities Depository's
normal procedures now provide for distribution
of dividends in same-day funds settled to
Agent Members, who in turn are expected to
distribute such dividends to the persons for
whom they are acting as agent.
The dividend rate for the Initial Dividend
Period ending ___________, 1998 will be ___%
per annum. Thereafter, the dividend rate per
annum (the "Applicable Rate") will be reset by
an Auction conducted on the Business Day (an
"Auction Date") next preceding the first day
of the next Dividend Period. After the Initial
Dividend Period, the dividend rate for the
TARPS will be the Applicable Rate per annum
that the Auction Agent advises the Fund has
resulted from an Auction. The Applicable Rate
that results from an Auction will not be lower
than 80% of the applicable AA Composite
Commercial Paper Rate (the "Minimum Applicable
Rate") or greater than 150% (the "Maximum
Applicable Rate") of the applicable AA
Composite Commercial Paper Rate (for a
Dividend Period of fewer than 184 days) or the
applicable Treasury Index Rate (for a Dividend
Period of 184 days or more) at the close of
business on the Business Day next preceding
such Auction Date. See "Description of
TARPS--Dividends and Dividend
Periods--Determination of Dividend Rate" and
"The Auction."
The Auction................... On or prior to the Submission Deadline on
each Auction Date, each Existing Holder may
submit Orders through a Broker-Dealer to the
Auction Agent as follows:
o Hold Order--indicating its desire to hold a
specified number of Outstanding TARPS
without regard to the Applicable Rate for
the next Dividend Period;
o Hold/Sell Order--indicating its desire to
hold a specified number of Outstanding
TARPS provided that the Applicable Rate for
the next Dividend Period is not less than
the rate specified by such Existing Holder;
and
o Sell Order--indicating its desire to sell a
specified number of Outstanding TARPS
without regard to the Applicable Rate for
the next Dividend Period.
Hold/Sell Orders submitted by Existing Holders
with rates higher than the Maximum Applicable
Rate will be treated as Sell Orders.
Each Broker-Dealer shall contact Potential
Holders to determine Buy Orders, if any. An
Existing Holder that offers to purchase
additional TARPS is, for purposes of such
offer to purchase additional TARPS, treated as
a Potential Holder.
Each Order must be submitted in writing by a
Broker-Dealer to the Auction Agent prior to
the Submission Deadline on each Auction Date
for the Auction to be conducted on such
Auction Date and must specify (A) the name of
the Existing Holder or Potential Holder
placing such Order, (B) the aggregate number
of shares that are the subject of such Order,
(C) to the extent that such Orders are placed
by an Existing Holder, the number of shares,
if any, subject to any Hold Order, Hold/Sell
Order or Sell Order, and (D) the rate, if any,
specified in each Order.
If an Order or Orders covering all shares held
by any Existing Holder are not submitted to
the Auction Agent by the Submission Deadline,
the Auction Agent will, only in the case of an
Auction preceding a Dividend Period of 93 days
or fewer and at the conclusion of a Dividend
Period of 93 days or fewer, deem a Hold Order
to have been submitted on behalf of such
Existing Holder covering the number of shares
held by such Existing Holder and not subject
to Orders submitted to the Auction Agent. If
an Order or Orders covering all shares held by
any Existing Holder are not submitted to the
Auction Agent by the Submission Deadline, the
Auction Agent will, in the case of all other
Auctions, deem a Sell Order to have been
submitted on behalf of such Existing Holder
covering the number of shares held by such
Existing Holder and not subject to Orders
submitted to the Auction Agent.
If one or more Orders covering in the
aggregate more than the number of shares held
by an Existing Holder are submitted to the
Auction Agent, such Orders will be valid in
accordance with the Validity Procedures.
If any rate specified in any Order is lower
than the Minimum Applicable Rate for the
Dividend Period with respect to which such
Order is made in the case of any Dividend
Period of 93 days or fewer, such Order will be
deemed to be an Order specifying a rate equal
to such Minimum Applicable Rate.
In the case of any Dividend Period of more
than 93 days, only Buy Orders, Hold/Sell
Orders or Sell Orders may be submitted and
Hold Orders may not be submitted.
On each Auction Date, the Auction Agent will
determine whether Sufficient Clearing Orders
exist and the Applicable Rate. If Sufficient
Clearing Orders exist, the Applicable Rate
will be the Winning Rate. If Sufficient
Clearing Orders do not exist, the Applicable
Rate will be the Maximum Applicable Rate and
the Dividend Period shall be a Standard Term
Period. In the case of any Dividend Period of
93 days or fewer, if all the shares of TARPS
are the subject of Submitted Hold Orders, the
Applicable Rate will be the Minimum Applicable
Rate and the Dividend Period shall
automatically be the same as the Dividend
Period immediately preceding the Auction.
Based upon the results of the Auction, the
Auction Agent will determine the aggregate
number of shares to be held and sold by
Existing Holders and to be purchased by
Potential Holders as follows. If Sufficient
Clearing Orders exist: (i) all Submitted Hold
Orders will be accepted; (ii) all Submitted
Sell Orders will be accepted and all Submitted
Hold/Sell Orders specifying any rate higher
than the Winning Rate will be accepted as Sell
Orders; (iii) all Submitted Hold/Sell Orders
specifying a rate lower than the Winning Rate
will be accepted as Hold Orders; (iv) all
Submitted Buy Orders specifying a rate lower
than the Winning Rate will be accepted; (v)
all Submitted Hold/Sell Orders specifying a
rate equal to the Winning Rate will be
accepted as Hold Orders unless the number of
shares subject to all such Submitted Hold/Sell
Orders is greater than the number of shares
remaining unaccounted for after the
acceptances described in clauses (i), (iii)
and (iv) above, in which event each such
Submitted Hold/Sell Order will be accepted as
a Hold Order and a Sell Order as to the
respective number of shares determined in
accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a
rate equal to the Winning Rate will be
accepted, unless the number of shares subject
to all such Submitted Buy Orders is greater
than the number of shares remaining
unaccounted for after the acceptances
described in clauses (i), (iii), (iv) and (v)
above, in which event each such Submitted Buy
Order will be accepted only as to the number
of shares determined in accordance with the
Proration Procedures.
If Sufficient Clearing Orders do not exist,
subject to applicable rounding procedures: (i)
all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying
a rate equal to or lower than the Maximum
Applicable Rate will be accepted as Hold
Orders; (iii) all Submitted Buy Orders
specifying a rate equal to or lower than the
Maximum Applicable Rate will be accepted; and
(iv) all Submitted Hold/Sell Orders specifying
a rate higher than the Maximum Applicable Rate
and all Submitted Sell Orders will be accepted
as Hold Orders and as Sell Orders as to the
respective number of shares of the relevant
series of Preferred Stock determined in
accordance with the Proration Procedures.
The Auction Procedures include a pro rata
allocation of TARPS for purchase and sale
under certain circumstances which may result
in an Existing Holder selling or holding, or a
Potential Holder purchasing, a number of TARPS
that is less than the number of TARPS
specified in its Hold/Sell Order, Sell Order
or Buy Order.
Settlement of purchases and sales will be made
on the next Business Day after the Auction
Date through the Securities Depository.
Purchasers will make payment through their
Agent Members in same-day funds to the
Securities Depository against delivery through
their Agent Members. The Securities Depository
will make payment to the sellers' Agent
Members in accordance with the Securities
Depository's normal procedures, which now
provide for payment against delivery to their
Agent Members in same-day funds. See "The
Auction."
Secondary Market.............. There is currently no secondary market for
the TARPS. While it is not obligated to do so,
Bear, Stearns & Co. Inc. ("Bear, Stearns") has
advised the Fund that it intends to make a
secondary market in the TARPS. There can be no
assurance that an active secondary trading
market will develop. Such secondary market
activity, if commenced, may be discontinued at
any time. In addition, other Broker-Dealers
may or may not choose to make a secondary
market in the TARPS, and there can be no
assurance that the trading price of TARPS in
any secondary market will be $25,000. Any
purchaser of TARPS in the secondary market
will be required to sign a Master Purchaser's
Letter.
Asset Maintenance............. Under the Articles Supplementary, the Fund is
required to satisfy two separate asset
coverage requirements. The Fund must maintain
Eligible Assets having an aggregated
Discounted Value at least equal to the TARPS
Basic Maintenance Amount as of each Valuation
Date. See "Description of TARPS--Asset
Maintenance--TARPS Basic Maintenance
Amount." The Fund also must maintain asset
coverage for the TARPS on a non-discounted
basis of at least 200% as of the last business
day of each month. See "Description of
TARPS--Asset Maintenance--1940 Act TARPS
Asset Coverage."
The Discount Factors and guidelines for
calculating the Discounted Value of the Fund's
portfolio for purposes of determining whether
the TARPS Basic Maintenance Amount has been
satisfied have been established by Moody's and
Fitch in connection with the Fund's receipt
from Moody's and Fitch of the "aaa"/"AAA"
Credit Rating with respect to the TARPS on
their Date of Original Issue. See "Investment
Objective and Policies--Investment
Guidelines--Rating Agency Guidelines."
The Fund estimates that on the Date of
Original Issue, the 1940 Act TARPS Asset
Coverage, based on the composition of its
portfolio as of January 31, 1998, after giving
effect to the issuance of the TARPS ($35
million), the redemption of the Old TARPS and
the deduction of sales loads and estimated
offering expenses for such shares ($320,000),
will be 517%.
Restricted Dividend,
Redemption and
Other Payments............... Under the 1940 Act and the Note Purchase
Agreement, the Fund is not permitted to
declare any dividend on TARPS unless, after
giving effect to such dividend, asset coverage
with respect to the Fund's senior securities
representing indebtedness, including the
Senior Notes, is at least 200%. In addition,
the Fund is not permitted to declare any
distribution on or purchase or redemption of
TARPS unless, after giving effect to such
distribution, purchase or redemption, asset
coverage with respect to the Fund's senior
securities representing indebtedness,
including the Senior Notes, is at least 300%.
Dividends or other distributions on or
redemptions or purchases of TARPS are also
prohibited at any time payments of principal
of or interest on the Senior Notes are in
default pursuant to the terms of the
Indenture. See "Description of
TARPS--Restrictions on Dividend, Redemption
and Other Payments."
Optional Redemption........... TARPS having a Dividend Period of one year or
less are redeemable at the option of the Fund,
in whole or in part, on any Dividend Payment
Date at a redemption price equal to $25,000
per share, plus accumulated and unpaid
dividends thereon to the redemption date.
TARPS having a Dividend Period of more than
one year are redeemable at the option of the
Fund, in whole or in part, prior to the end of
the relevant Dividend Period, subject to any
Specific Redemption Provisions, at a
redemption price equal to $25,000 per share,
plus accumulated and unpaid dividends thereon
to the redemption date, plus a redemption
premium, if any, determined by the Board of
Directors after consultation with the
Broker-Dealers. See "Description of
TARPS--Redemption--Optional Redemption."
Mandatory Redemption.......... If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an
aggregate Discounted Value at least equal to
the TARPS Basic Maintenance Amount or, as of
the last Business Day of any month, the 1940
Act TARPS Asset Coverage, and such failure is
not cured within two Business Days following
the relevant Valuation Date in the case of a
failure to maintain the TARPS Basic
Maintenance Amount or the last Business Day of
the following month in the case of a failure
to maintain 1940 Act TARPS Asset Coverage as
of such last Business Day, the TARPS will be
subject to mandatory redemption out of funds
legally available therefor. See "Description
of TARPS--Asset Maintenance" and
"--Redemption--Mandatory Redemption."
If the Fund at any time fails to maintain the
"aaa"/"AAA" Credit Rating for the TARPS, and
such failure is not cured within 90 calendar
days thereafter, all shares of TARPS will be
subject to mandatory redemption out of funds
legally available therefor and dividends
thereon will be payable at the Default Rate
until such redemption is effected. See
"Description of TARPS--Redemption-- Mandatory
Redemption."
Voting Rights................. Except as otherwise indicated, Holders of
TARPS have one vote per share and vote
together with holders of common stock, par
value $.03 per share ("Common Stock") as a
single class.
In connection with the election of the Board
of Directors, the holders of Outstanding
shares of Preferred Stock, including TARPS, as
a class, shall be entitled to elect two
directors of the Fund. The holders of
Outstanding shares of Common Stock and
Preferred Stock, including TARPS, voting
together, shall elect remainder. However, upon
the Fund's failure to pay dividends on the
Preferred Stock in an amount equal to two full
years of dividends, the Holders of the
Preferred Stock 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 Stock. The
terms of the additional Directors shall end
when the Fund pays or provides for all
accumulated and unpaid dividends. See
"Description of TARPS--Voting Rights."
Ranking....................... Payments to Holders of TARPS in liquidation
or otherwise will be subject to the prior
payment of all outstanding indebtedness of the
Fund, including the Senior Notes.
Restrictions on
Transfer; Master
Purchaser's Letter.......... As a condition to purchasing TARPS in
this offering and as a condition to
participating in any Auction, each prospective
purchaser of TARPS will be required to sign
and deliver a Master Purchaser's Letter,
through a Broker-Dealer, to the Auction Agent
in which such prospective purchaser will,
among other things, agree (i) to transfer
TARPS only (a) pursuant to a Buy, Buy/Sell or
Sell Order placed in an Auction, or (b) to or
through a person that has delivered a signed
Master Purchaser's Letter to the Auction
Agent; provided that in the case of all
transfers other than those pursuant to
Auctions, such purchaser, its Broker-Dealer or
its Agent Member advises the Auction Agent of
such transfer and (ii) that, except as
otherwise required by law, all of the
outstanding TARPS shall be represented by a
certificate registered in the name of the
Securities Depository (as defined) and such
purchaser's ownership of any such TARPS will
be maintained in book entry form by or through
the Securities Depository.
Execution of a Master Purchaser's Letter is
not a commitment to purchase TARPS in the
offering being made hereby or in any Auction,
but is a condition precedent to purchasing
TARPS. Any prospective purchaser which
previously delivered or caused to be delivered
on its behalf a signed Master Purchaser's
Letter to a Broker-Dealer will not be required
to sign and deliver a new Master Purchaser's
Letter to purchase TARPS offered hereby or to
participate in Auctions. See "Description of
TARPS--Restrictions on Transfer" and "The
Auction--Master Purchaser's Letter."
Use of Proceeds............... The net proceeds from the sale of the shares
of TARPS offered hereby are estimated to be
approximately $__________ (after deducting
sales load and estimated offering expenses of
approximately $_______). The Fund will apply
$20 million, plus an amount equal to accrued
and unpaid dividends on the Old TARPS, of such
net proceeds to the redemption and defeasance
of the Old TARPS and the balance may be
utilized in order to make additional portfolio
investments and to retire Short-Term
Indebtedness (as defined), if any.
Federal Income Taxes.......... Because the Fund's portfolio income will
consist principally of interest income,
corporate investors in the TARPS generally
will not be entitled to the 70% dividends
received deduction. See "Federal Taxation."
RISK FACTORS AND SPECIAL CONSIDERATIONS
"High-Yield", High
Risk Investments............ The Fund invests primarily in fixed-income
securities commonly referred to as
"high-yield", high risk securities (commonly
referred to as "junk bonds"). These 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 also 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.
See "Risk Factors and Special
Considerations--High-Yield, High Risk
Investments."
Risk of Leverage.............. The Fund's leveraged capital structure
creates special risks. The Senior Notes may
constitute a substantial lien and burden on
the TARPS by reason of their prior claim
against the income of the Fund and against the
net assets of the Fund in liquidation. The
Fund will not be permitted to declare
dividends or other distributions with respect
to the TARPS or purchase TARPS unless at the
time thereof the Fund meets certain asset
coverage requirements and payments of
principal of and interest on the Senior Notes
are not in default. See "Risk Factors and
Special Considerations--Risk of Leverage,"
"Description of TARPS-- Restrictions on
Dividend, Redemption and Other Payments,"
"Description of Senior Notes--Restrictive
Covenants" and "Federal Taxation."
Risks of Investing in
TARPS....................... The ability of an investor to dispose of
shares of TARPS may be largely dependent on
the success of an Auction. If in an Auction
Sufficient Clearing Bid Orders do not exist,
then investors that have submitted Sell Orders
will not be able to sell in the Auction any or
all shares of TARPS subject to such submitted
Sell Orders. There is no assurance that any
particular Auction will be successful. Neither
the Fund nor any Broker-Dealer is obligated to
ensure that an Auction will be successful or
to purchase shares of TARPS in an Auction or
otherwise. The Fund is not required to redeem
shares of TARPS in the event of a failed
Auction. Further, there is no assurance that a
secondary market outside of the Auctions for
the TARPS will develop, whether or not such
Auctions are successful, or if such a market
does develop, that shares of TARPS will trade
at or close to the Liquidation Value. In the
event the Fund establishes a Dividend Period
for TARPS which is longer than a Standard Term
Period, particularly if such Dividend Period
exceeds one year, Holders of TARPS may have
fewer opportunities to obtain liquidity since
an Auction will not occur frequently and may
not be able to sell their shares between
Auctions at a price per share equal to the
Liquidation Value; furthermore, any increase
in interest rates will likely have an adverse
affect on the secondary market price of TARPS.
Thus, under certain circumstances, holders of
TARPS may not have liquidity of investment.
See "Risk Factors and Special
Considerations--Risks of Investing in TARPS."
Payment Restrictions.......... The Fund is prohibited from declaring, paying
or making any dividends or distributions on
TARPS unless it satisfies certain conditions.
See "Description of TARPS--Restrictions on
Dividend, Redemption and Other Payments." The
Fund is also prohibited from declaring, paying
or making any dividends or distributions on
Common Stock unless it satisfies certain
conditions. See "Description of Capital
Stock--Common Stock--Restrictions on Dividend
and Other Payments." These prohibitions on the
payment of dividends or distributions might
impair the Fund's ability to maintain its
qualification as a regulated investment
company for federal income tax purposes. See
"Federal Taxation--Federal Income Tax
Treatment of the Fund."
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a share of
common stock, $.01 par value 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 Fund's
Financial Statements and notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 5, 1988
(Commencement of
Operations) to
For the Fiscal Years Ended October 31, October 31,
---------------------------------------------------------------------------------------------- ----------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(For Each Share of common stock, $.01 par value Outstanding Throughout the Period)
Net asset value:
Beginning of
period $ 3.90 $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82 $ 9.15(b)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income .46# .50# .45 .48# .63# .62 .55 .98 1.31
Net realized
and unrealized
gain (loss) on
investments .24# .20# .03 (.38)# .39# .07 .56 (3.43) (2.32)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations $ .70 $ .70 $ .48 $ .10 $ 1.02 $ .69 $ 1.11 $ (2.45) $ (1.01)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions:
Dividends from
accumulated net
investment
income:
To holders of
the Old TARPS (.03) (.04) (.05) (.03) (.06) (.10) (.16) (.22) (.19)
To common
stockholders (.42) (.42) (.42) (.45) (.62) (.45) (.36) (.76) (1.12)
Dividends to
common
stockholders
from
paid-in-capital -- -- -- -- -- -- -- (.09) (.01)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total
distributions $ (.45) $ (.46) $ (.47) $ (.48) $ (.68) $ (.55) $ (.52) $ (1.07) $ (1.32)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Effect of sale
of Common Stock
and related
expenses from
rights offering $ (.17) $ (.04) $ -- $ (.18) $ (.12) $ -- $ -- $ -- $ --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value:
End of period $ 3.98 $ 3.90 $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30 $ 6.82
======== ======== ======== ======== ======== ======== ======== ======== ========
Per share market
value:
End of period $ 4.13 $ 4.00 $ 3.88 $ 3.50 $ 4.25 $ 4.00 $ 3.50 $ 2.50 $ 6.00
======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment
return 14.82% 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) $175,909 $120,711 $ 93,309 $ 92,072 $ 79,438 $ 55,178 $ 53,040 $ 45,028 $ 92,487
======== ======== ======== ======== ======== ======== ======== ======== ========
Net assets, end of
period, applicable
to Old TARPS(a) $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
======== ======== ======== ======== ======== ======== ======== ======== ========
Net assets, end of
period (a) $195,909 $140,711 $113,309 $112,072 $ 99,438 $ 85,178 $ 83,040 $ 75,028 $122,487
======== ======== ======== ======== ======== ======== ======== ======== ========
Ratio of operating
expenses to average
net assets,
applicable to
Common Stock 2.30% 3.06% 3.27% 3.27% 3.10% 3.68% 4.64% 8.80% 6.37%
Ratio of net
investment income
to average net
assets, applicable
to Common Stock 11.94% 13.20% 13.47% 12.25% 13.49% 15.08% 14.63% 18.94% 17.78%
Ratio of operating
expenses to average
net assets** 1.81%+ 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** 9.42% 9.51% 9.39% 8.64% 9.26% 9.33% 9.24% 13.23% 13.88%*
Portfolio turnover
rate 176.04% 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 Stock and Old TARPS
relative to the average net assets (total assets less accrued liabilities (excluding senior notes)) of both the holders of
Common Stock and Old TARPS.
+ Excluding interest expense, the ratio of operating expenses to average net assets, applicable to Common Stock and Old TARPS is
1.13%, 1.30%, 1.29%, 1.32%, 1.50%, 1.72%, 2.23%, 2.60% and 1.28%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's March
1993, November 1993, June 1996 and March 1997 rights offerings.
</TABLE>
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company
with a leveraged capital structure. As of January 31, 1998, the Fund had total
assets of $293,282,360 and total net assets applicable to Common Stock
(aggregate assets less senior securities and Fund liabilities) of $229,760,677.
As of January 31, 1998, the Fund's capital structure consisted of (i)
$20,000,000 aggregate principal amount of Senior Notes (as defined), (ii) 200
shares of Old TARPS (liquidation preference $100,000 per share) and (iii)
58,962,711 shares of Common Stock.
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
"high-yield," fixed-income securities rated in the lower categories by
established rating agencies (consisting principally of fixed-income securities
rated "Ba" or lower by Moody's, or "BB" or lower by Fitch), or non-rated
fixed-income securities deemed by the Investment Adviser to be of comparable
quality. The Fund's investments are subject to the Rating Agency Guidelines and
Note Investment Guidelines. See "Investment Objective and Policies--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. Such securities may also be subject to greater market price
fluctuations than lower yielding, higher rated debt securities; credit ratings
do not reflect this risk. See "Investment Objective and Policies" and "Risk
Factors and Special Considerations."
"High-yield," high risk fixed-income 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 (5.0% to 5.5%) higher than comparable U.S. Treasury
securities. In 1990, this spread widened to approximately 1250 basis points
(12.5%) 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 in order to remain in compliance with the 200% asset coverage
ratio required by the 1940 Act. This forced liquidation of investments that were
selling at prices substantially below their original purchase prices resulted in
a reduction of the Fund's total assets and caused the Fund to realize
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 realization of substantial capital losses severely limited the ability of
the Fund to return to its original net asset value as the "high-yield" market
improved. In addition, the asset coverage ratio requirements delayed the Fund's
reinvestment of cash into "high-yield" securities as the 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 Fund will use $20 million of the net proceeds of the sale of TARPS
offered hereby to redeem all of the outstanding Old TARPS on the dividend
payment date of the Old TARPS next following the date of the consummation of the
sale of the TARPS as contemplated hereby (the "Old TARPS Redemption Date"). The
Fund will also use a portion of such net proceeds to pay all accrued and unpaid
dividends on the Old TARPS payable in connection with such redemption. In
accordance with the relevant provisions of the Articles, the Fund shall give the
required notice of redemption to the holders of Old TARPS and will deposit $20
million (plus accumulated but unpaid dividends) in cash or permitted securities
with Bankers Trust Company ("Bankers Trust") (or its successor), as paying
agent. With such deposit, the Fund will give Bankers Trust irrevocable
instructions and authority to pay the redemption price so deposited to the
holders of Old TARPS on the Old TARPS Redemption Date. Pursuant to the insurance
agreement (the "Surety Arrangement") with Financial Security Assurance Inc.
("Financial Security") entered into by the Fund in connection with the issuance
of the surety bond (the "Surety Bond") guaranteeing certain of the Fund's
payment obligations under the Old TARPS, the Fund agreed to comply with certain
investment guidelines and to follow certain optional redemption procedures in
respect of the Old TARPS. The Fund has obtained the consent of Financial
Security to the contemplated redemption of the Old TARPS as described above.
The Fund has completed five rights offerings (four transferable, one
non-transferable) since March 1993. The Fund completed a transferable rights
offering on January 23, 1998 which permitted shareholders to acquire, at a
subscription price of $3.80, one new share of Common Stock for every three
rights held as of the record date of such rights offering. All of the rights
issued by the Fund pursuant to the rights offering completed in January 1998
were exercised. As a result, 14,742,608 new shares of Common Stock were issued
in January 1998 with net proceeds to the Fund of approximately $53.5 million.
The Fund completed a non-transferable rights offering on March 25, 1997 which
permitted shareholders to acquire, at a subscription price of $3.59, one new
share of Common Stock for every three rights held as of the record date of such
rights offering. All of the rights issued by the Fund pursuant to the rights
offering completed in March 1997 were exercised plus an additional 25% pursuant
to the exercise of an over-allotment option by subscribers. As a result,
12,918,092 new shares of Common Stock were issued in March 1997 with net
proceeds to the Fund of approximately $44.2 million. In addition, 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 of Common Stock 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. 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. 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 these rights offerings have been invested in new securities in accordance
with the Fund's investment objective.
On ________, 1998, the Fund executed and delivered a demand promissory
note to a commercial bank providing for the Fund's ability to borrow from time
to time up to $14 million ("Short-Term Indebtedness"). The Short-Term
Indebtedness has a maturity of not more than 90 days from the date of such note.
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 address is 60 State Street, Boston,
Massachusetts 02109 and its telephone number is (617) 742-3800. The Investment
Adviser is an investment management firm registered with the SEC under the
Investment Advisers Act of 1940, as amended. See "Management of the
Fund--Investment Adviser." The Investment Adviser's address is 60 State Street,
Boston, Massachusetts 02109 and its telephone number is (617) 742-3800.
<PAGE>
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
CAPITALIZATION
The following table of unaudited financial information sets forth the
total assets and liabilities of the Fund and the net assets of the Fund, as of
January 31, 1998 and as adjusted to give effect to the issuance of all of the
shares of TARPS and the application of the net proceeds therefrom (including the
redemption of the Old TARPS), and the reverse stock split approved by the
shareholders on March 11, 1998.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------ -----------
(in thousands)
<S> <C> <C>
Total Assets .............................................................. $293,282 $307,656
Total Liabilities ......................................................... 43,521 43,521
-------- --------
Net Assets ................................................................ $249,761 $264,135
======== ========
NET ASSETS REPRESENT:
Old TARPS, no par value, liquidation preference $100,000 per share, 1,000
shares authorized, 200 shares issued and outstanding; nil shares issued
and outstanding as adjusted ............................................. $ 20,000 $ --
Preferred Stock, 1,000,000 shares authorized TARPS, $1.00 par value,
liquidation preference $25,000 per share, nil shares issued and
outstanding; 1,400 shares Series A issued and outstanding as adjusted .. $ -- $ 35,000
-------- --------
Common Stock, $.01 par value, 100,000,000 shares authorized, 58,962,711
shares issued and outstanding; $.03 par value and 19,654,237 shares
issued and outstanding as adjusted ..................................... $ 590 $ 590
Capital in excess of par value ........................................ 284,193 283,567
Accumulated net realized loss from security transactions ............... (59,604) (59,604)
Net unrealized appreciation on investments ............................. 1,052 1,052
Accumulated undistributed net investment income ........................ 3,530 3,530
-------- --------
NET ASSETS ............................................................... $249,761 $264,135
Less liquidation value of Old TARPS/TARPS .............................. (20,000) (35,000)
-------- --------
Net assets attributable to Common Stock outstanding .................... $229,761 $229,135
======== ========
Net asset value per share of Common Stock ................................ $ 3.90 $ 11.66
======== ========
</TABLE>
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. In connection with its initial public offering in November 1988,
the Fund issued $50 million aggregate principal amount of Senior Extendible
Notes (the "Senior Extendible Notes") and 300 shares of Old TARPS (liquidation
preference $100,000 per share), the dividends on which were set in monthly
auctions. During the fiscal years ended October 31, 1990 and 1991, the Fund
repurchased $45 million aggregate principal amount of the Senior Extendible
Notes during the severe decline in the high yield securities market which
occurred in 1989 and 1990. See "The Fund." In July 1993, the Fund repurchased
the remaining $5 million aggregate principal amount of the Senior Extendible
Notes, which carried an annual interest rate through December 31, 1993 of
10.28%, and issued $20 million aggregate principal amount of Senior Notes,
payable December 1, 1998, which bear interest at a fixed annual rate of 6.53%
through November 20, 1998. In July 1993, the Fund also redeemed 100 shares of
the then outstanding Old TARPS for $100,000 per share plus accrued interest. The
dividend rates on the Old TARPS have ranged from a low of 3.385% in 1993 to a
high of 6.6% in 1994. At January 31, 1998, $20 million aggregate principal
amount of Senior Notes and $20 million aggregate liquidation preference of Old
TARPS remain outstanding. See "The Fund" and "Financial Statements."
<TABLE>
<CAPTION>
Involuntary
Asset Coverage Liquidation Approximate
Senior At Total Amount for Notes(1) Preference Market Value Per
Security October 31 Outstanding or Shares(2) Per Share Share or Note
-------- ---------- ----------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Senior Extendible
Notes 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 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
1997 20,000,000 10,795 -- 1,003.80
Old TARPS 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
1997 200 Shares 979,545 100,000 100,000
- -----------------
(1) 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.
(2) Amount shown is per share of Old TARPS. Calculated by subtracting the Fund's total liabilities (including senior
securities constituting debt but not including the Old TARPS) from the Fund's total assets and dividing such
amount by the number of outstanding shares of Old TARPS.
</TABLE>
PORTFOLIO COMPOSITION
As of January 31, 1998, the Fund's portfolio included 169 bond holdings
issued by 156 different issuers (consolidated by affiliated companies) having an
average yield to maturity of 11.7%. The average maturity of the Fund's portfolio
holdings at this date was approximately 6.5 years.
The credit ratings of all bonds held by the Fund at January 31, 1998,
are set forth below. This information reflects the composition of the Fund's
assets at January 31, 1998 as a percentage of total investments (other than
short-term) and is not necessarily representative of the Fund as of the current
fiscal year or at any other time in the future. See Appendix B for a description
of the ratings system used by Moody's and Fitch.
MARKET VALUE
MOODY'S NUMBER OF ISSUES (IN THOUSANDS) PERCENT
------- ---------------- -------------- -------
Aaa 1 $ 182 .07%
Ba 1 528 .21
B 94 130,922 53.31
Caa 19 36,547 14.88
NR 54 67,103 27.32
----- --- -------- -----
Total 169 $235,282 95.79%
=== ======== =====
USE OF PROCEEDS
The net proceeds from the sale of the shares of TARPS offered hereby
are estimated to be approximately $__________ (after deducting sales load and
estimated offering expenses of approximately $_______). The Fund anticipates
that $20 million, plus an amount equal to accrued and unpaid dividends on the
Old TARPS of such net proceeds will be used for the redemption and defeasance of
the Old TARPS and the balance of such net proceeds will be used to make
additional portfolio investments and to retire Short-Term Indebtedness, if any.
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 uses, the proceeds
will be held in U.S. Government securities (which term includes obligations of
the U.S. Government, its agencies or instrumentalities) and other high-quality
short-term money market instruments.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
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. There is no assurance that the Fund's investment
objective will be attained in the future. Given the high risk nature and price
volatility of the Fund's investments as well as the Fund's leverage, 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.
While the Fund's cumulative total investment returns for the one-, three-, and
five-year periods ended October 31, 1997 were 14.82%, 70.20%, and 93.45%,
respectively, past performance is no guarantee of future results. See "The Fund"
and "Risk Factors and Special Considerations."
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 shares of Preferred Stock, 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 established rating agencies, or non-rated
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 "Ba" or lower by Moody's, or "BB" or lower by Fitch, or non-rated
fixed-income securities deemed by the Investment Adviser to be of comparable
quality. 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 "Ba"/"BB" although the percentage invested in such
securities may increase under other than normal market conditions, as discussed
below.
Under the Rating Agency Guidelines established in connection with the
Fund's receipt of a rating of "aaa" from Moody's and "AAA" from Fitch for the
TARPS and the Note Investment Guidelines established in connection with the
issuance of the Senior Notes and the Fund's receipt from Fitch of a rating of
"AAA" for the Senior Notes (the Rating Agency Guidelines and Note Investment
Guidelines, together 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 "Ca"/"CC"/"CC" and "C"/"C"/"C" by
Moody's, Fitch and S&P, 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 constituted, and it is anticipated that they will not
constitute, a significant portion of the Fund's portfolio. See "--Investment
Guidelines."
"High-yield" bonds, the generic name for corporate bonds rated between
"Ba"/"BB"/"BB" and "C"/"C"/"C" by Moody's, Fitch and S&P, are frequently issued
by corporations in the growth stage of their development. Bonds which are rated
"Ba"/"BB"/"BB," "B"/"B"/"B," "Caa"/"CCC"/"CCC," "Ca"/"CC"/"CC" and "C"/"C"/"C"
are regarded by Moody's, Fitch and S&P, 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 Moody's, Fitch
and S&P, is provided in Appendix B. "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), subject to compliance with the Investment
Guidelines, 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 U.S. 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, although such investments are not eligible for inclusion in the
calculation of the discounted value under the Investment Guidelines.
The Fund may invest up to 30% of its total assets in securities that
are not readily marketable, including those that are restricted as to
disposition under the federal securities laws or otherwise. 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 is also permitted to invest up to 20% of its total assets in
zero coupon securities, although such securities also may not be included in
calculating the discounted value of the Fund's portfolio under the Investment
Guidelines. 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, when market conditions threaten to erode
the value of the Fund's assets and warrant a temporary defensive investment
strategy, including when it is necessary to maintain compliance with the
Investment Guidelines (under which the Fund's ability to invest in lower rated
securities having relatively low discounted values may be restricted,
particularly as the market values of portfolio holdings decline), the Fund may
invest without limitation in 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 "Ba"/"BB" by Moody's and Fitch. In addition, under such market
conditions, the Fund may invest in non-rated 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
"Ba"/"BB" by Moody's and Fitch, or non-rated 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 non-fundamental 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.
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, 1998, the weighted average maturity of the Fund's
portfolio holdings was 6.5 years. The weighted average of the Fund's portfolio
will fluctuate depending on market conditions and investment opportunities. The
Fund, however, does not expect that the weighted average maturity of the Fund's
portfolio will, under normal conditions, exceed 15 years.
The Investment Adviser actively makes portfolio adjustments that
reflect the Fund's investment strategy, but does not trade securities for the
Fund for the purpose of seeking short-term profits. It will, however, change the
Fund's securities, regardless of how long they have been held, when it believes
doing so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is
anticipated that the Fund's portfolio turnover rate generally will not exceed
100% per annum, although it may from time to time and indeed did during the last
two years. 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, 1995,
1996 and 1997 were 80.71%, 108.33% and 176.04%, respectively.
INVESTMENT GUIDELINES
The composition of the Fund's portfolio reflects the Rating Agency
Guidelines and the Note Investment Guidelines.
RATING AGENCY GUIDELINES
The Rating Agency Guidelines are designed to ensure that assets
underlying the TARPS will be sufficiently diversified and will be of sufficient
credit quality and amount to justify the ratings for the TARPS of "aaa" by
Moody's and "AAA" by Fitch. The Fund intends at all times that, so long as any
TARPS are Outstanding and Moody's and Fitch are then rating the TARPS, the
composition of its portfolio will reflect these Guidelines. Moody's and Fitch,
nationally recognized statistical rating organizations, issue ratings for
various securities reflecting the perceived creditworthiness of such securities.
The Fund has paid certain fees to Moody's and Fitch for rating shares of the
TARPS. The guidelines described below have been developed independently by
Moody's and Fitch in connection with the issuance of asset-backed and similar
securities, including debt obligations and adjustable rate preferred stocks,
generally on a case-by-case basis through discussions with the issuers of these
securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be sufficiently varied and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law, but have been adopted by the Fund in
order to satisfy current requirements necessary for Moody's and Fitch to issue
the above-described ratings for the TARPS, which ratings are generally relied
upon by institutional investors in purchasing such securities. In the context of
a closed-end investment company such as the Fund, therefore, the guidelines
provide a set of tests for portfolio composition and asset coverage which
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act, and which accordingly affect significantly the
management of the Fund's portfolio. A rating agency's guidelines will apply to
the TARPS only so long as such rating agency is rating such shares and such
guidelines are subject to amendment with the consent of the relevant rating
agency. Should the Fund determine to seek (and be successful in obtaining) a
rating from any other rating agency or issue senior securities other than the
TARPS which are rated or otherwise subject to portfolio diversification or
similar requirements, the composition of its portfolio would also reflect the
guidelines and requirements established by any rating agency rating such
securities or by the purchaser or purchasers of such securities.
The Fund intends to maintain a Discounted Value for its portfolio at
least equal to the amount specified by Moody's and Fitch (the "TARPS Basic
Maintenance Amount"), the determination of which is as set forth under
"Description of TARPS--Asset Maintenance--TARPS Basic Maintenance Amount."
Moody's and Fitch have each established separate guidelines for determining
Discounted Value. To the extent any particular portfolio holding does not
satisfy the applicable rating agency's guidelines, all or a portion of such
holding's value will not be included in the calculation of Discounted Value (as
defined by such rating agency). The Moody's and Fitch guidelines do not impose
any limitations on the percentage of Fund assets that may be invested in
holdings not eligible for inclusion in the calculation of the Discounted Value
of the Fund's portfolio. The amount of such assets included in the portfolio at
any time may vary depending upon the rating, diversification and other
characteristics of the assets included in the portfolio which are eligible for
inclusion in the Discounted Value of the portfolio under the Rating Agency
Guidelines ("Eligible Assets"). For a detailed description of the separate
guidelines established by Moody's and Fitch for determining Discounted Value,
see Appendix A.
Upon any failure to maintain the required Discounted Value, the Fund
may seek to alter the composition of its portfolio to reattain the TARPS Basic
Maintenance Amount on or prior to the Asset Coverage Cure Date, thereby
incurring additional transaction costs and possible losses and/or gains on
disposition of portfolio securities. To the extent any such failure is not cured
within two Business Days, the TARPS will be subject to mandatory redemption
thereafter. See "Description of TARPS--Asset Maintenance" and "Description of
TARPS--Redemption--Mandatory Redemption."
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of the ratings altogether. In addition, any
rating agency providing a rating for the TARPS may, at any time, change or
withdraw any such rating.
As described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. As described by Moody's, an issue of preferred stock which is rated
"aaa" is considered to be top-quality preferred stock with good asset protection
and the least risk of dividend impairment within the universe of preferred
stocks. As described by Fitch, a Preferred Stock rating of "AAA" indicates
strong asset protection, conservative balance sheet ratios and positive
indications of continued protection of preferred dividend requirements. It is a
condition of the Underwriter's obligation to purchase the TARPS that the Fund
obtain a rating of "aaa" from Moody's and a rating of "AAA" from Fitch as of the
Date of Original Issue.
Ratings are not recommendations to purchase, hold or sell shares of
TARPS, inasmuch as the rating does not comment as to market price or suitability
for a particular investor. A Moody's or Fitch credit rating of preferred stock
does not address the likelihood that a resale mechanism (e.g., the Auction) will
be successful. The rating is based on current information furnished to Moody's
and Fitch by the Fund and obtained by Moody's and Fitch from other sources. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information. The TARPS will be subject to mandatory
redemption in the event that the "aaa"/"AAA" Credit Rating is not available for
the TARPS and the Fund is unable to obtain the "aaa"/"AAA" Credit Rating for the
TARPS from a substitute rating agency or agencies within the time specified
herein. While the Fund does not presently intend to seek a rating from a rating
agency other than Moody's and Fitch, it reserves the right to do so.
NOTE INVESTMENT GUIDELINES
The Note Investment Guidelines are designed to ensure that assets
underlying the Senior Notes will be sufficiently diversified and will be of
sufficient credit quality and amount to justify investment grade ratings of
"AAA" for the Senior Notes by Fitch. The Note Investment Guidelines are not
prescribed by law, but have been implemented by the Fund in order to receive the
above-described ratings for the Senior Notes 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 Note 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 Note Investment Guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Note Basic
Maintenance Amount (as defined in "Description of Senior Notes--Asset
Maintenance--Note Basic Maintenance Amount"). For the purpose of determining the
Fund's compliance with the Note Investment Guidelines, the market value of the
Fund's portfolio holdings will be discounted by dividing it by factors
determined by Fitch 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 Note Investment Guidelines, it would not be included for
purposes of determining compliance with the Note Basic Maintenance Amount. The
Note 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
portfolio holdings at such time.
Upon any failure to maintain the required Note Basic Maintenance
Amount, 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 Senior Notes will acquire certain
rights. See "Description of Senior Notes--Redemption" and "--Events of Default."
Under the Note 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 eligible portfolio holdings
for the purpose of determining compliance with the Note Basic Maintenance
Amount:
<TABLE>
<CAPTION>
Maximum Percent of
Maximum Percent of Market Value of
Market Value of Eligible Portfolio
Minimum Original Issue Eligible Portfolio Assets Invested in any
Size of Each Issue ($ Assets Invested in any One Industry
S&P and Moody's 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 B 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>
CERTAIN INVESTMENT PRACTICES
The Fund and the Investment Adviser reserve the right to employ the
practices described below in order to help achieve the Fund's investment
objective. Such practices include the lending of portfolio securities, the short
sale of securities and the use of futures contracts and options thereon,
entering into reverse repurchase agreements and repurchase agreements (other
than certain repurchase agreements with qualified depository institutions having
maturities not longer than one day). 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. Moreover, so long
as the TARPS are Outstanding, the Fund may not utilize certain of the practices
described below, such as the making of securities loans and buying and selling
futures contracts and options thereon, engaging in short sales of securities and
lending portfolio securities unless the Fund receives written confirmation from
Moody's, Fitch or any Other Rating Agency which is then rating the TARPS and
which so requires, that any such action will not impair the "aaa"/"AAA" Credit
Rating. Further, the Rating Agency Guidelines limit or have the effect of
limiting the Fund's use of other investment practices described below, such as
investments in non-U.S. securities, private placements (except Rule 144A
Securities) and options to the extent such investments are not eligible for
inclusion in the Discounted Value of the Fund's Eligible Assets or the Rating
Agency Guidelines specify terms and restrictions on such investments. See
"--Investment Guidelines--Rating Agency Guidelines."
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 U.S. 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 U.S. 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 U.S. 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 of 1986, as amended (the "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 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 Senior Notes--Asset Maintenance--1940 Act Asset
Coverage") and would not otherwise violate Section 18 of the 1940 Act. 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 Senior Notes.
The Fund seeks to add incremental leverage as a result of this
Offering. The Fund anticipates that it will also refinance the terms of its
outstanding Senior Notes which mature in December 1998. 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--Risk of Leverage" for a discussion of certain risks
associated with borrowings by the Fund.
INVESTMENT RESTRICTIONS
The following sixteen investment restrictions are fundamental policies.
Accordingly, no change in any of the following investment restrictions can be
made without the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock and a majority of the outstanding shares of
Preferred Stock, including TARPS. All percentage limitations on investments will
apply at the time of the making of the 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) or
issue any senior securities (as defined in the 1940 Act) except as permitted by
the 1940 Act.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction 1 above. Collateral
arrangements with respect to 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 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.
14. 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.
15. Make investments for the purpose of exercising control or
management over the issuer of any security.
16. 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 Practices--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 "-- Certain Investment Practices." 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 Moody's and Fitch.
At the Fund's March 11, 1998 Annual Meeting of Shareholders, the Fund's
shareholders approved the elimination of the fundamental nature of the Fund's
investment restriction, which provided that the Fund could not invest more than
30% of its total assets in securities that were not readily marketable,
including those that are restricted as to disposition under the federal
securities laws. Therefore, the investment by the Fund in securities that are
not readily marketable is no longer restricted by a fundamental investment
restriction, but rather is subject to a non-fundamental restriction which
provides that the Fund will not invest more than 30% of its total assets in
securities that are not readily marketable. Securities that may be restricted as
to resale under federal securities laws or otherwise are not subject to the 30%
restriction to the extent such securities are determined by the Investment
Adviser (acting under the supervision of the Board) to be readily marketable.
The Fund currently analyzes, in accordance with certain SEC guidelines, Rule
144A Securities to determine whether they are readily marketable prior to
acquiring such securities and will continue to do so in the future. Investing in
Rule 144A Securities, however, could have the effect of decreasing the liquidity
of the Fund's assets to the extent that qualified institutional buyers become,
for a time, uninterested in purchasing these securities.
In addition, the Fund's shareholders approved an amendment to the
Fund's investment restriction 1 permitting the Fund to issue the TARPS and to
issue senior securities to the full extent permitted by the 1940 Act. See "Risk
Factors and Special Considerations--Risk of Leverage."
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The management of the Fund, including general supervision of the duties
performed by the Investment Adviser, is the responsibility of the Board of
Directors. The 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 Fund Age During Past 5 Years
- ---------------- --------- --- -------------------
<S> <C> <C> <C>
Richard E. Omohundro, Jr*(1)...... President and Director 57 President or Co-President of Prospect
Prospect Street Investment Street Investment Management Co., Inc.
Management Co., Inc. since June 1988.
60 State Street
Boston, MA 02109
John A. Frabotta*(2).............. Vice President, Treasurer, 55 Vice President of Prospect Street
Prospect Street Investment Director and Chief Investment Management Co., Inc. since
Management Co., Inc. Investment Officer June 1988. Director of BondNet Trading
60 State Street Systems, Inc.
Boston, MA 02109
John S. Albanese(2)(3)............ Director 45 Senior Counsel to Washington
8955 Mountain Ash Court Headquarters Services (a Department of
Springfield, VA 22153 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 Chief
177 Milk Street Executive Officer of Town & Country
Suite 605 Corporation from 1965 until December
Boston, MA 02109 1996.
Joseph G. Cote*(1)................ Director 55 Co-President of Prospect Street
Prospect Street Investment Investment Management Co., Inc. from
Management Co., Inc. August 1995 to present and from
250 Park Avenue February 1989 to November 1993.
New York, NY 10177 Shareholder of Prospect Street
Investment Management Co., Inc. from
1989 to present.
Harlan D. Platt(1)(3)............. Director 47 Professor of Finance and Insurance,
Northeastern University College Northeastern University, College of
of Business Administration Business Administration, since 1981.
413 Hayden Hall
Boston, MA 02115
Christopher E. Roshier(1)(4)...... Director 51 Corporate Finance Director of European
120 Strawberry Vale Capital Company Limited since 1990.
Twickenham, Director of a number of other public
Middlesex TWI 4SH and private companies in the United
United Kingdom Kingdom.
Karen J. Thelen................... Secretary 45 Vice President of Prospect Street
Prospect Street Investment Investment Management Co., Inc. since
Management Co., Inc. December 1992. Assistant Vice
60 State Street President of Prospect Street
Boston, MA 02109 Investment Management Co., Inc. from
December 1988 to December
- --------------------
* Directors who are "interested persons" of the Fund, as defined in the 1940 Act.
(1) Elected by holders of the Common Stock and the Old TARPS voting together.
(2) Elected by holders of the Old TARPS.
(3) Directors who are members of the Audit Committee of the Fund's Board of Directors.
(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, holders of Common Stock and Preferred Stock,
including TARPS have voting rights of one vote per share. Under the Articles and
the 1940 Act, the holders of the Preferred Stock, including TARPS, 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 Stock, including
TARPS, voting together; provided, however, that the holders of the Preferred
Stock, including TARPS, 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 Stock, including TARPS if the Fund fails to pay accumulated dividends
on the Preferred Stock in an amount equal to two full years of dividends. See
"Description of TARPS--Voting Rights." Election of Directors is noncumulative;
accordingly, holders of a majority of the voting power represented by the
outstanding shares of Common Stock and Preferred Stock, including TARPS, voting
together as a single class, or a majority of the outstanding Preferred Stock,
including TARPS, voting separately as a class, may elect all of the Directors
who are subject to election by such class, as the case may be.
Effective upon the issuance of the TARPS, the Board of Directors has
designated Messrs. Omohundro and Frabotta as Preferred Stock directors until the
next annual meeting of stockholders and until their successors are elected and
qualify.
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, 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, 1997
aggregate remuneration of $85,000.
The following table summarizes the compensation paid to the Directors
and Officers of the Fund for the fiscal year ended October 31, 1997. The Fund is
not part of a fund complex.
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Annual
Compensation from as Part of Fund Benefits Upon Total Compensation
Name of Director or Officer Fund Expenses Retirement from Fund
- --------------------------- ---- -------- ---------- ---------
<S> <C> <C> <C> <C>
John S. Albanese $22,000 none none $22,000
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 $19,000 none none $19,000
</TABLE>
The Articles 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, 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 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 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, 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 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 and applicable law.
HOLDINGS OF OLD TARPS 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, 1998. DTC holds of record 90% of the outstanding shares of Common Stock at
January 31, 1998. All of the outstanding Old TARPS, 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 Old TARPS 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 beneficially owned 80,072 shares of Common Stock at January 31, 1998.
As of January 31, 1998, 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 Old TARPS.
INVESTMENT ADVISER
The Investment Adviser, Prospect Street(R) Investment Management Co.,
Inc., was incorporated under the laws of Massachusetts in June 1988. Its
principal offices are located at 60 State Street, Boston, Massachusetts 02109.
Richard E. Omohundro, Jr., Co-President of the Investment Adviser,
served as a Vice President (1978 - 1983) and a Managing Director (1983 - 1988)
of Merrill Lynch and was Co-Manager of the High-Yield Group from 1978 through
1987. During that period, the High-Yield Group raised approximately $13.6
billion in new "high-yield" securities through 107 issues and provided one of
the largest secondary trading markets for "high-yield" securities. In 1987, the
High-Yield 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, has
served as the Fund's portfolio manager since September 1990, and is responsible
for the day-to-day management of the Fund's portfolio. 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.
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.
Advisory Agreement
The Advisory Agreement between the Investment Adviser and the Fund
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.
Under the Advisory Agreement with the Fund, the Investment Adviser
receives an advisory fee equal to (i) 0.65% of the Fund's net assets up to and
including $175,000,000, (ii) 0.55% on the next $50,000,000, and (iii) 0.50% of
the excess over $225,000,000. For purposes of calculating the advisory fee, net
assets shall mean (a) the average weekly value of the total assets of the Fund
minus (b)(i) accrued liabilities of the Fund (other than the principal amount of
the Fund's "senior securities representing indebtedness" (as defined in the 1940
Act), not to exceed $50 million, and not including the aggregate liquidation
preference of the Fund's Preferred Stock, including TARPS or any other Preferred
Stock or other senior securities issued in lieu thereof and (ii) accumulated and
unpaid dividends on the Preferred Stock, including TARPS. The Investment
Adviser's fee is computed weekly and paid monthly. For the fiscal years ended
October 31, 1994, 1995, 1996 and 1997, the dollar value of total advisory fees
earned by the Investment Adviser aggregated approximately $807,770, $874,812,
$928,792 and $1,146,665, respectively. For a period of one year, the Investment
Adviser waived its advisory fee with respect to the increase in the Fund's
managed assets attributable to the exercise of rights in the rights offering by
the Fund in June 1996.
The Investment Adviser will benefit from the Offering 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 Offering
because a portion of the proceeds of the Offering (estimated at up to $15
million) will be invested in additional portfolio securities which will
fluctuate in value. However, based on the estimated proceeds from the Offering,
the Investment Adviser would receive additional annual advisory fees of
approximately $71,869 as a result of the increase in assets under management
over the Fund's current assets under management. Three of the Fund's Directors
who voted to authorize the Offering are "interested persons" of the Fund as that
term is defined in the 1940 Act. These three Directors could benefit indirectly
from the Offering because of their affiliations with the Investment Adviser. The
other Directors who voted to authorize the Offering 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, the surety custodian (the
"Surety Custodian") under a surety custody agreement (the "Surety Custody
Agreement") for the benefit of the Holders of the Old TARPS, the premium payable
in connection with the Surety Bond delivered in connection with the Surety
Custody Agreement, 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, dated March 1, 1994, 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 Objective and Policies"), 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 10, 1997, 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, 1999. 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.
Under the terms of the Advisory Agreement, the Investment Adviser is
not liable for any error of judgment or for any loss suffered by the Fund in
connection with the performance of its obligations under the Advisory Agreement,
except a loss resulting from willful misfeasance, bad faith, gross negligence on
its part in the performance of, or reckless disregard by it 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 "Exchange Act"), the Investment Adviser may cause the Fund to
pay a broker-dealer which provides "brokerage and research services" (as defined
in the Exchange 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, 1995, 1996 and 1997, the Fund
paid no brokerage commissions for the execution of portfolio transactions. The
rate of portfolio turnover for the fiscal years ended October 31, 1995, 1996 and
1997 was 80.71%, 108.33% and 176.04%, respectively.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined by State Street
Bank & Trust Company, or its successor, no less frequently than the close of
trading on the New York Stock Exchange (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 Senior Notes and unpaid interest on the Senior Notes), (ii)
accumulated and unpaid dividends on the TARPS and (iii) the aggregate
liquidation value (i.e., $25,000 per share) of the TARPS, 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 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 Objective and Policies --Certain
Investment Practices--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 Senior Notes and 200% with respect to
Preferred Stock) are not met or would not be met following such repurchase, (ii)
when payments of principal of or interest on the Senior Notes are in default,
(iii) when dividends on the Preferred Stock are in arrears 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 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
Exchange 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 Exchange 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.
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 Stock (including TARPS) 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 Senior Notes and the Preferred Stock
(including TARPS) 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.
THE AUCTION
GENERAL
Neither the Fund nor any Affiliate shall submit an Order in any Auction
of TARPS.
DIVIDEND RATES AND AUCTION DATES
The Dividend Rate for each Dividend Period will be determined on the
Auction Date in respect of such Dividend Period. If Sufficient Clearing Orders
exist for an Auction, the Dividend Rate for the ensuing Dividend Period will be
the Winning Rate, or, if all shares in the Auction are the subject of Submitted
Hold Orders in respect of a Dividend Period of fewer than 93 days, the Minimum
Applicable Rate. If Sufficient Clearing Orders do not exist for any Auction, the
ensuing Dividend Period will be a Standard Term Period and the Dividend Rate for
that Dividend Period will be the Maximum Applicable Rate. Except in the case of
a Default (as discussed above), or where all shares of the relevant series of
Preferred Stock are subject to Submitted Holder Orders if there is no Auction on
any Auction Date, the next Dividend Period will be a Standard Term Period and
the Dividend Rate will be the Maximum Applicable Rate that could have resulted
from an Auction in respect of a Standard Term Period on such Auction Date. The
Fund is obligated to exercise its best efforts to maintain an Auction Agent.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
On or prior to each Auction Date and prior to the Submission Deadline
(initially 1:00 P.M., New York City time), each Existing Holder, with respect to
shares it then holds, may submit to a Broker-Dealer by telephone or otherwise a
Hold Order, a Hold/Sell Order or a Sell Order and each Broker-Dealer will
contact Potential Holders to determine the Buy Orders, if any, to be made by
such Potential Holders.
SUBMISSION OF ORDERS TO AUCTION AGENT
Each Order must be submitted in writing by a Broker-Dealer to the
Auction Agent prior to the Submission Deadline on each Auction Date for the
Auction to be conducted on such Auction Date and must specify (A) the name of
the Existing Holder or Potential Holder placing such Order, (B) the aggregate
number of shares that are the subject of such Order, (C) to the extent that such
Orders are placed by an Existing Holder, the number of shares, if any, subject
to any Hold Order, Hold/Sell Order or Sell Order, and (D) the rate, if any,
specified in each Order.
If any rate specified in any Order contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next higher one thousandth of 1%.
If an Order or Orders covering all shares held by any Existing Holder
are not submitted to the Auction Agent by the Submission Deadline, the Auction
Agent will, only in the case of an Auction preceding a Dividend Period of 93
days or fewer and at the conclusion of a Dividend Period of 93 days or fewer,
deem a Hold Order to have been submitted on behalf of such Existing Holder
covering the number of shares held by such Existing Holder and not subject to
Orders submitted to the Auction Agent. If an Order or Orders covering all shares
held by any Existing Holder are not submitted to the Auction Agent by the
Submission Deadline, the Auction Agent will, in the case of all other Auctions,
deem a Sell Order to have been submitted on behalf of such Existing Holder
covering the number of shares held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
If one or more Orders covering in the aggregate more than the number of
shares held by an Existing Holder are submitted to the Auction Agent, such
Orders will be valid in accordance with the Validity Procedures.
If more than one Order is submitted on behalf of any Existing Holder or
Potential Holder, each Order submitted will be a separate Order.
If any rate specified in any Order is lower than the Minimum Applicable
Rate for the Dividend Period with respect to which such Order is made in the
case of any Dividend Period of 93 days or fewer, such Order will be deemed to be
an Order specifying a rate equal to such Minimum Applicable Rate.
In the case of any Dividend Period of more than 93 days, only Buy
Orders, Hold/Sell Orders or Sell Orders may be submitted and Hold Orders may not
be submitted.
DETERMINATION OF SUFFICIENT CLEARING ORDERS AND APPLICABLE RATE
Not earlier than the Submission Deadline, on each Auction Date, the
Auction Agent will assemble all Submitted Orders and will determine whether
Sufficient Clearing Orders exist and the Applicable Rate.
ACCEPTANCE OF ORDERS AND ALLOCATION OF SHARES
Based upon the results of the Auction, the Auction Agent will determine
the aggregate number of shares to be held and sold by Existing Holders and to be
purchased by Potential Holders, and, with respect to each Broker-Dealer,
determine the extent to which such Broker-Dealer will deliver, and from which
other Broker-Dealers such Broker-Dealer will receive, shares.
If Sufficient Clearing Orders exist, subject to the Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all
Submitted Hold/Sell Orders specifying any rate higher than the
Winning Rate will be accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate lower
than the Winning Rate will be accepted as Hold Orders;
(iv) all Submitted Buy Orders specifying a rate lower than the
Winning Rate will be accepted;
(v) all Submitted Hold/Sell Orders specifying a rate equal to
the Winning Rate will be accepted as Hold Orders unless the
number of shares subject to all such Submitted Hold/Sell
Orders is greater than the number of shares remaining
unaccounted for after the acceptances described in clauses
(i), (iii) and (iv) above, in which event each such Submitted
Hold/Sell Order will be accepted as a Hold Order and a Sell
Order as to the respective number of shares determined in
accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to the
Winning Rate will be accepted, unless the number of shares
subject to all such Submitted Buy Orders is greater than the
number of shares remaining unaccounted for after the
acceptances described in clauses (i), (iii), (iv) and (v)
above, in which event each such Submitted Buy Order will be
accepted only as to the number of shares determined in
accordance with the Proration Procedures.
If Sufficient Clearing Orders do not exist, subject to the Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate equal to
or lower than the Maximum Applicable Rate will be accepted as
Hold Orders;
(iii) all Submitted Buy Orders specifying a rate equal to or
lower than the Maximum Applicable Rate will be accepted; and
(iv) all Submitted Hold/Sell Orders specifying a rate higher
than the Maximum Applicable Rate and all Submitted Sell Orders
will be accepted as Hold Orders and as Sell Orders as to the
respective number of shares of Preferred Stock determined in
accordance with the Proration Procedures.
The Auction Procedures include a pro rata allocation of TARPS for
purchase and sale under certain circumstances which may result in an Existing
Holder selling or holding, or a Potential Holder purchasing, a number of TARPS
that is less than the number of TARPS specified in its Hold/Sell Order or Sell
Order or Buy Order.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will advise each Broker-Dealer that submitted an
Order whether such Order was accepted and of the Applicable Rate for the next
Dividend Period by telephone by approximately 3:00 p.m., New York City time, on
each Auction Date. Each Broker-Dealer that submitted an Order will as soon as
practicable advise each Existing Holder and Potential Holder whether its Order
was accepted and will confirm in writing purchases and sales with each Existing
Holder and Potential Holder purchasing or selling shares as a result of an
auction as soon as practicable on the Business Day next succeeding the Auction
Date. Each Broker-Dealer that submitted a Hold Order will advise each Existing
Holder on whose behalf such Hold Order was submitted of the Applicable Rate for
the shares of the relevant series of Preferred Stock for the next Dividend
Period.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales as determined in
the Auction. Purchasers will make payment through their Agent Members in
same-day funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment against delivery to their Agent
Members in same-day funds.
If any Existing Holder selling shares in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
in such Auction may deliver to such person a number of whole shares that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
BROKER-DEALERS; COMMISSIONS
Broker-Dealers which submit Orders for the account of others must be
authorized by law to perform such function. A Broker-Dealer may acquire shares
for its own account. If a Broker-Dealer submits an Order for its own account in
an Auction, it may have an advantage over others because it would have knowledge
of other Orders placed through it in that Auction.
The Auction Agent has entered into a broker-dealer agreement with the
Underwriter, dated as of March __, 1998 (the "Broker-Dealer Agreement"). Under
the terms of the Broker-Dealer Agreement, the Auction Agent after each Auction
will initially pay to the Underwriter, from funds provided by the Fund, a
service charge based on the purchase price of shares placed by the Underwriter
at such Auction. Initially, the annual rate of such service charge shall be up
to .25%, depending on the Dividend Rate set at auction. For purposes of this
paragraph, shares will be placed by the Underwriter if such shares were (i) the
subject of Hold Orders deemed to have been made by Existing Holders and were
acquired by such Existing Holders through the Underwriter or (ii) the subject of
an Order submitted by the Underwriter that is (A) a Submitted Order of an
Existing Holder that resulted in such Existing Holder continuing to hold such
shares as a result of the Auction or (B) a Submitted Order of a Potential Holder
that resulted in such Potential Holder purchasing such shares as a result of the
Auction or (C) a valid Hold Order. In the event an Auction scheduled to occur on
an Auction Date fails to occur for any reason, the Broker-Dealer will be
entitled to service charges as if the Auction had occurred and all holders of
shares placed by them submitted valid Hold Orders.
THE AUCTION AGENT
Bankers Trust will serve as the Auction Agent for the TARPS. The
Auction Agent is acting solely as agent of the Fund and is not a trustee for
holders of TARPS. In the absence of bad faith or gross negligence on its part,
the Auction Agent will not be liable for any action taken, suffered or omitted
or for any error of judgment made by it in the performance of its duties as
Auction Agent.
The Auction Agent may resign upon notice to the Fund, such resignation
to be effective on the earlier of the 90th day after the delivery of such notice
and the date on which a successor Auction Agent is appointed by the Fund. The
Fund may also replace the Auction Agent.
MASTER PURCHASER'S LETTER
Each prospective purchaser of shares of TARPS or its Broker-Dealer will
be required to sign and deliver to the Auction Agent, as a condition to such
purchaser's purchasing shares of TARPS in any Auction or otherwise, a Master
Purchaser's Letter, the form of which is attached to this Prospectus, in which
such prospective purchaser or its Broker-Dealer will agree, among other things:
(a) to participate in Auctions for shares of TARPS in
accordance with the Auction Procedures described in this Prospectus;
(b) to sell, transfer or otherwise dispose of shares of TARPS
only pursuant to a Buy, Buy/Sell or a Sell Order in an Auction, or to
or through a Broker-Dealer or to a person that has delivered a signed
Master Purchaser's Letter to the Auction Agent, provided that in the
case of all transfers other than those pursuant to Auctions, the
Existing Holder of the shares so transferred, its Agent Member or its
Broker-Dealer advises the Auction Agent of such transfer; and
(c) to have the ownership of the shares of TARPS as to which
such purchaser or its Broker-Dealer is the Existing Holder maintained
in book entry form by the Securities Depository for the account of its
Agent Member, which in turn will maintain records of such purchasers
beneficial ownership, and to authorize such Agent Member to disclose to
the Auction Agent such information with respect to such purchaser's
beneficial ownership as the Auction Agent may request.
Each prospective purchaser should ask its Broker-Dealer whether such
prospective purchaser should sign a Master Purchaser's Letter. If the
Broker-Dealer submits Orders for such prospective purchaser listing the
Broker-Dealer as the Existing Holder or the Potential Holder, a Master
Purchaser's Letter signed by such prospective purchaser may not be required.
AN EXECUTION COPY OF THE MASTER PURCHASER'S LETTER IS INCLUDED IN THIS
PROSPECTUS AS APPENDIX C. EXECUTION BY A PROSPECTIVE PURCHASER OR ITS
BROKER-DEALER OF A MASTER PURCHASER'S LETTER IS NOT A COMMITMENT TO PURCHASE
SHARES OF TARPS IN THE OFFERING BEING MADE BY THIS PROSPECTUS OR IN ANY AUCTION
OR OTHERWISE, BUT IS A CONDITION PRECEDENT TO SUCH PURCHASER'S PURCHASING SHARES
OF TARPS.
DESCRIPTION OF TARPS
The following summary is qualified in its entirety by reference to the
Articles which establish and fix the rights and preferences of the shares of
TARPS. A copy of the Articles, including the Articles Supplementary establishing
the TARPS, has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part and may be inspected and copies thereof may be
obtained as described under "Available Information."
GENERAL
The shares of TARPS have a liquidation preference of $25,000 per share,
plus all accumulated but unpaid dividends thereon (whether or not earned or
declared) to the date of final distribution. The TARPS when issued and sold
through this Offering (i) will be fully paid and non-assessable, (ii) will not
be convertible into Common Stock or other capital stock of the Fund, (iii) will
have no preemptive rights, and (iv) will not be subject to any sinking fund. The
TARPS will be subject to optional and mandatory redemption as described below
under "--Redemption."
Holders of the TARPS will not receive certificates representing their
ownership interest in such shares. DTC will initially act as Securities
Depository for the Agent Members with respect to the TARPS.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, the Auction Agent will act as the transfer
agent, registrar, and paying agent for the TARPS. Furthermore, the Auction Agent
will send notices to Holders of the TARPS of any meeting at which Holders of
shares of TARPS have the right to vote. See "--Voting Rights" below. However,
the Auction Agent generally will serve merely as the agent of the Fund, acting
in accordance with the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of
TARPS, so long as the Fund is current in the payment of dividends on the TARPS
and on any other capital shares of the Fund ranking on a parity with the TARPS
with respect to the payment of dividends or upon liquidation.
DIVIDENDS AND DIVIDEND PERIODS
The Holders of TARPS will be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefor,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "--Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the Common
Stock.
On the Business Day next preceding each Dividend Payment Date, the Fund
is required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Fund does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid by the Paying Agent to the record holder,
which holder is expected to be the nominee of the Securities Depository. The
Securities Depository will credit the accounts of the Agent Members of the
beneficial owners in accordance with the Securities Depository's normal
procedures. The Securities Depository's current procedures provide for it to
distribute dividends in same-day funds to Agent Members who are in turn expected
to distribute such dividends to the persons for whom they are acting as agents.
The Agent Member of a beneficial owner will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
beneficial owner in accordance with the instructions of such beneficial owner.
Dividends in arrears for any past Dividend Period may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment shall first be
credited against the earliest declared but unpaid dividends.
Holders will not be entitled to any dividends, whether payable in cash,
property or shares, in excess of full cumulative dividends except as described
under "--Determination of Dividend Rate" below. No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"--Default Period" below.
The amount of dividends per Outstanding share payable (if declared) on
each Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) such share was Outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by the Liquidation Value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
shall be computed as described in the preceding sentence, except that it will be
determined on the basis of a year consisting of twelve 30-day months.
Determination of Dividend Rate
The dividend rate for the initial Dividend Period, i.e. the period from
and including the Date of Original Issue to and including the initial Auction
Date, and the initial Auction Date will be as set forth on the inside cover page
of the Prospectus. For each subsequent Dividend Period, subject to certain
exceptions, the dividend rate will be the Applicable Rate that the Auction Agent
advises the Fund has resulted from an Auction.
The initial Dividend Period for the TARPS shall be ___ days. Dividend
Periods after the initial Dividend Period shall either be Standard Term Periods
or, subject to certain conditions and with notice to Holders, Alternate Term
Periods.
An Alternate Term Period will not be effective unless sufficient
Clearing Orders exist at the Auction in respect of such Alternate Term Period
(That is, in general, the number of shares subject to Buy Orders by Potential
Holders is at least equal to the number of shares subject to Sell Orders by
Existing Holders). If Sufficient Clearing Orders do not exist at any Auction in
respect of an Alternate Term Period, the Dividend Period commencing on the
Business Day succeeding such Auction will be Standard Term Period, and the
Holders of the shares of the affected series will be required to continue to
hold such shares for such Standard Term Period.
Dividends will accumulate at the Applicable Rate from the Date of
Original Issue and shall be payable on each Dividend Payment Date thereafter.
For Dividend Periods of one year or less, Dividend Payment Dates shall occur on
the Business Day next succeeding the last day of such Dividend Period and, if
any, on the 91st, 181st and 271st days thereof. For Dividend Periods of more
than one year, Dividend Payment Dates shall occur on a quarterly basis on each
January 1, April 1, July 1 and October 1 within such Dividend Period and on the
Business Day following the last day of such Dividend Period. Dividends will be
paid through the Securities Depository on each Dividend Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from Auction will not be greater than the Maximum Applicable Rate,
which is equal to 150% of the applicable AA Composite Commercial Paper Rate (for
a Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
(for a Dividend Period of 184 days or more (each, a "Reference Rate")), in each
case subject to upward but not downward adjustment in the discretion of the
Board Directors after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with the
TARPS Basic Maintenance Amount.
The Maximum Applicable Rate for the shares of TARPS will apply
automatically following an Auction for such shares in which Sufficient Clearing
Orders have not been made (other than because all shares of TARPS were subject
to Submitted Hold Orders) or following the failure to hold an Auction for any
reason on the Auction Date scheduled to occur (except for circumstances in which
the Dividend Rate is the Default Rate, as described below).
The Minimum Applicable Rate will apply automatically following an
Auction in respect of a Dividend Period of 93 days or fewer in which all of the
Outstanding shares are subject to (or are deemed to be subject to) Submitted
Hold Orders. The Minimum Applicable Rate is 80% of the applicable AA Composite
Commercial Paper Rate. No minimum rate is specified for Auctions in respect of
Dividend Periods of more than 93 days.
Prior to each Auction, Broker-Dealers will notify Holders of the term
of the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Notification of Dividend Period
The Fund will designate the duration of Dividend Periods of the TARPS;
provided, however, that no such designation is necessary for a Standard Term
Period and that any designation of an Alternate Term Period shall be effective
only if (i) notice thereof shall have been given as provided herein, (ii) any
failure to pay in a timely manner to the Auction Agent the full amount of any
dividend on, or the redemption price of, the TARPS shall have been cured as set
forth under "--Default Period," (iii) Sufficient Clearing Orders shall have
existed in an Auction held on the Auction Date immediately preceding the first
day of such proposed Alternate Term Period, (iv) if the Fund shall have mailed a
notice of redemption with respect to any shares, as described under
"--Redemption" below, the Redemption Price with respect to such shares shall
have been deposited with the Paying Agent, and (v) the Fund has confirmed that,
as of the Auction Date next preceding the first day of such Alternate Term
Period, it has Eligible Assets with an aggregate Discounted Value at least equal
to the TARPS Basic Maintenance Amount (as defined below) and has consulted with
the Broker-Dealers and has provided notice and a TARPS Basic Maintenance
Certificate (as defined below) to Moody's (if Moody's is then rating the TARPS),
to Fitch (if Fitch is then rating the TARPS) and any Other Rating Agency which
is then rating the TARPS and so requires.
If the Fund proposes to designate any Alternate Term Period, not fewer
than 15 (or two Business Days in the event the duration of the Dividend Period
prior to such Alternate Term Period is fewer than 15 days) nor more than 30 days
prior to the first day of such Alternate Term Period, notice shall be (i) made
by press release and (ii) communicated by the Fund by telephonic or other means
to the Auction Agent and confirmed in writing promptly thereafter.
Notwithstanding the foregoing, if the duration of the Dividend Period prior to
such Alternate Term Period is fewer than 15 days, such notice shall be given not
less than two Business Days prior to such Alternate Term Period. Each such
notice shall state (A) that the Fund proposes to exercise its option to
designate a succeeding Alternate Term Period, specifying the first and last days
thereof and (B) that the Fund will by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such Alternate Term Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to proceed with such
Alternate Term Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Alternate Term Period in which latter event the succeeding Dividend Period
shall be a Standard Term Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Alternate Term Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as an Alternate Term Period, specifying
the first and last days thereof and (B) the terms of the Specific
Redemption Provisions, if any; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate an Alternate Term Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Alternate Term Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Alternate Term Period, the Fund shall be deemed to have delivered a notice to
the Auction Agent with respect to such Dividend Period to the effect set forth
in clause (ii) above, thereby resulting in a Standard Term Period.
Default Period
A "Default Period" will commence on the applicable date set forth below
if the Fund fails to (i) declare prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on, or (to the
extent permitted as described below) within two Business Days after, such
Dividend Payment Date to the persons who held shares of TARPS as of 12:00 noon,
New York City time, on the Business Day preceding such Dividend Payment Date,
the full amount of any dividend payable on such Dividend Payment Date, (ii) to
deposit, irrevocably in trust, in same-day funds, with a designated paying agent
by 12:00 noon, New York City time, (A) on or (to the extent permitted as
described below) within two Business Days after any Dividend Payment Date the
full amount of any declared dividend on the relevant series of TARPS payable on
such Dividend Payment Date (together with the failure to timely declare
dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
Business Days after any date fixed for redemption of shares of TARPS called for
redemption, the applicable redemption price (a "Redemption Default"), or (iii)
to maintain the "aaa"/"AAA" Credit Rating unless the "aaa"/"AAA" Credit Rating
is restored by the Dividend Payment Date next following the date on which the
Fund fails to maintain the "aaa"/"AAA" Credit Rating (a "Rating Default"). A
Default Period with respect to a Dividend Default or a Redemption Default will
consist of the period commencing on and including the aforementioned Dividend
Payment Date or redemption date, as the case may be, and ending on and including
the Business Day on which, by 12:00 noon, New York City time, all unpaid
dividends and unpaid redemption price shall have been so deposited or shall have
otherwise been made available to the applicable holders in same day funds. A
Default Period with respect to a Rating Default shall commence as of the date on
which the Fund fails to maintain the "aaa"/"AAA" Credit Rating (provided that
such Rating Default shall be deemed not to have occurred and such Default Period
shall not commence if such Rating Default is cured by the next succeeding
Dividend Payment Date) and shall end on the earlier of the date on which such
default is cured as provided herein or the date on which the TARPS is
mandatorily redeemed as provided herein. Holders of two-thirds of the TARPS then
Outstanding may waive any Dividend Default, Redemption Default or Rating
Default.
The Applicable Rate for each Default Period, including each Dividend
Period commencing during a Default Period, will be equal to the Default Rate.
The Default Rate is the Reference Rate multiplied by three.
Each subsequent Dividend Period commencing after the beginning of a
Default Period shall be a Standard Term Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of a
new Dividend Period. Any dividend due on any Dividend Payment Date (if, prior to
12:00 noon, New York City time, on such Dividend Payment Date, the Fund has
declared such dividend payable on or within two Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon, New
York City time, on the Business Day preceding such Dividend Payment Date) or
redemption price with respect to such shares not paid to such persons when due
may (if such default is not solely due to the willful failure of the Fund) be
paid to such Persons in the same form of funds by 12:00 noon, New York City
time, on any of the first two Business Days after such Dividend Payment Date or
due date, as the case may be, provided that such amount is accompanied by an
additional amount for such period of non-payment at the Default Rate applied to
the amount of such default based on the actual number of days comprising such
period divided by 360. For the purposes of the foregoing, payment to a person in
same-day funds made on or before 12:00 noon New York City time on any Business
Day at any time will be considered equivalent to payment to that person in New
York Clearing House (next-day) funds at the same time on the preceding Business
Day, and any payment made after 12:00 noon, New York City time, on any Business
Day shall be considered to have been made instead in the same form of funds and
to the same person before 12:00 noon, New York City time, on the next Business
Day.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the TARPS, it will be distributed to the holders of the
Common Stock. The term "net investment income" includes interest, dividends,
short-term capital gains and other income received or accrued less the advisory
fee, bank custodian charges, taxes (except capital gain taxes) and other
expenses properly chargeable against income, but does not include net capital
gains, stock dividends, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. Any realized net capital gains
(defined as the excess of net long-term capital gains over net short-term
capital losses) of the Fund will be distributed annually to the holders of the
Common Stock (subject to the prior rights of the holders of the TARPS) subject
to the foregoing and any requirements of Maryland law.
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act and Note Purchase Agreement, the Fund may not (i)
declare any dividend with respect to the TARPS 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 Senior
Notes, would be less than 200% (or such higher percentage as may in the future
by specified in or under the 1940 Act as the minimum asset coverage for senior
securities representing stock of a closed-end investment company as a condition
of declaring dividends on its preferred stock) or (ii) declare any other
distribution on the TARPS or purchase or redeem of the TARPS if at the time of
the declaration (and after giving effect thereto), asset coverage with respect
to the Fund's senior securities representing indebtedness, including the Senior
Notes, would be less than 300% (or such higher percentage as may in the future
by specified in or under the 1940 Act as the minimum asset coverage for senior
securities representing stock of a closed-end investment company as a condition
of declaring distributions, purchases or redemptions of its capital stock).
"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 200% and 300% asset coverage requirements described above apply in
connection with dividends or distributions on or purchases or redemptions of
TARPS, 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. In addition, a declaration of a
dividend or other distribution on or purchase or redemption of TARPS is
prohibited under the Note Purchase Agreement (i) at any time that payments of
principal of or interest on the Senior Notes are in default; or (ii) after
giving effect to such declaration, the Fund would not have eligible portfolio
holdings with an aggregated Discounted Value at least equal to the Note Basic
Maintenance Amount; or (iii) the Fund has not redeemed the full amount of Senior
Notes required to be redeemed by any provision for mandatory redemption
contained in the Note Purchase Agreement. See "Description of Senior
Notes--Restrictive Covenants" and "--Asset Maintenance")
However, under the Code, the Fund must, among other things, distribute
at least 90% of its investment company taxable income each year in order to
maintain its qualification for tax treatment as a regulated investment company.
The foregoing limitation on dividends, distributions, purchases and redemptions
may in certain circumstances impair the Fund's ability to maintain such
qualification. The Fund intends, however, to redeem shares of TARPS to the
extent necessary to maintain such qualification. See "Federal Taxation--Federal
Income Tax Treatment of the Fund."
Upon failure to pay dividends for two years or more, the Holders of
TARPS will acquire certain additional voting rights. See "--Voting Rights"
below. Such rights shall be the exclusive remedy of the Holders of TARPS upon
any failure to pay dividends on the TARPS.
For so long as any shares of TARPS are Outstanding, except in
connection with the liquidation of the Fund, or a refinancing of the TARPS as
provided in the Articles, the Fund will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Stock or other shares, if any, ranking junior to the TARPS
as to dividends or upon liquidation) in respect to Common Stock or any other
shares of the Fund ranking junior to or on a parity with the TARPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Stock or any other such junior
shares (except by conversion into or exchange for shares of the Fund ranking
junior to the TARPS as to dividends and upon liquidation) or any such parity
shares (except by conversion into or exchange for shares of the Fund ranking
junior to or on a parity with the TARPS as to dividends and upon liquidation),
unless (i) payments of principal of or interest on the Senior Notes are not in
default; (ii) immediately after such transaction, the Fund would have Eligible
Assets with an aggregate Discounted Value at least equal to the TARPS Basic
Maintenance Amount (as defined below) (see "--Asset Maintenance"); (iii)
immediately after such transaction, the Fund would have eligible portfolio
holdings with an aggregated discounted value at least equal to the Note Basic
Maintenance Amount; (iv) full cumulative dividends on the TARPS due on or prior
to the date of the transaction have been declared and paid; (v) the Fund has
redeemed the full number of shares of TARPS required to be redeemed by any
provision for mandatory redemption contained in the Articles (see
"--Redemption"); and (vi) the Fund has redeemed the full amount of Senior Notes
required to be redeemed by any provision for mandatory redemption contained in
the Note Purchase Agreement.
REDEMPTION
OPTIONAL REDEMPTION
To the extent permitted under the 1940 Act and Maryland law, the Fund
at its option may redeem TARPS having a Dividend Period of one year or less, in
whole or in part, on the Dividend Payment Date upon not less than 15 days and
not more than 40 days prior notice. The optional redemption price per share
shall be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date fixed for
redemption. TARPS having a Dividend Period of more than one year are redeemable
at the option of the Fund, in whole or in part, prior to the end of the relevant
Dividend Period, subject to any Specific Redemption Provisions, which may
include the payment of redemption premiums to the extent required under any
applicable Specific Redemption Provisions. The Fund shall not effect any
optional redemption unless after giving effect thereto (i) the Fund has
available certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to Holders of TARPS
by reason of the redemption of TARPS on such date fixed for the redemption and
(ii) the Fund would have Eligible Assets with an aggregate Discounted Value at
least equal to the TARPS Basic Maintenance Amount.
The Fund also reserves the right to repurchase TARPS in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the TARPS, but is
under no obligation to do so.
MANDATORY REDEMPTION
If the Fund fails to maintain, as of any Valuation Date, Eligible
Assets with an aggregate Discounted Value at least equal to the TARPS Basic
Maintenance Amount or, as of the last Business Day of any month, the 1940 Act
TARPS Asset Coverage, and such failure is not cured within two Business Days
following the relevant Valuation Date in the case of a failure to maintain the
TARPS Basic Maintenance Amount or the last Business Day of the following month
in the case of a failure to maintain the 1940 Act TARPS Asset Coverage as of
such last Business Day (each an "Asset Coverage Cure Date"), the TARPS will be
subject to mandatory redemption out of funds legally available therefor. See
"--Asset Maintenance." The number of shares of TARPS to be redeemed in such
circumstances will be equal to the lesser of (i) the minimum number of shares of
TARPS the redemption of which, if deemed to have occurred immediately prior to
the opening of business on the relevant Asset Coverage Cure Date, would result
in the Fund having Eligible Assets with an aggregate Discounted Value at least
equal to the TARPS Basic Maintenance Amount, or sufficient to satisfy 1940 Act
TARPS Asset Coverage, as the case may be, in either case as of the relevant
Asset Coverage Cure Date (provided that, if there is no such minimum number of
shares the redemption of which would have such result, all shares of TARPS then
Outstanding will be redeemed), and (ii) the maximum number of shares of TARPS
that can be redeemed out of funds expected to be available therefor on the
Mandatory Redemption Date (as defined below) at the Mandatory Redemption Price
(as defined below).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the TARPS Basic Maintenance Amount or the 1940 Act TARPS Asset Coverage,
as the case may be, pro rata among the Holders of TARPS in proportion to the
number of shares they hold and shares of other Preferred Stock subject to
mandatory redemption provisions.
If the Fund at any time fails to maintain the "aaa"/"AAA" Credit Rating
for the TARPS, and such failure is not cured within 90 calendar days thereafter
(the "Rating Default Cure Date"), all shares of TARPS will be subject to
mandatory redemption out of funds legally available therefor, on the Mandatory
Redemption Date, and dividends thereon will be payable at the Default Rate until
such redemption is effected as provided above under "--Dividends and Dividend
Periods--Default Period." To maintain the "aaa"/"AAA" Credit Rating, the Fund
must maintain a rating for the TARPS in the highest rating category from any two
nationally recognized statistical rating organizations, as used in the rules and
regulations under the Exchange Act, one of which shall be Moody's or Fitch.
Shares of TARPS may be subject to mandatory redemption in accordance
with the foregoing redemption provision notwithstanding the terms of any
Specific Redemption Provisions.
The Fund is required to effect such a mandatory redemption not later
than 30 days after the Asset Coverage Cure Date or the Rating Default Cure Date,
as the case may be (the "Mandatory Redemption Date"), except that if the Fund
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of shares of TARPS which
are subject to mandatory redemption, or the Fund otherwise is unable to effect
such redemption on or prior to such Mandatory Redemption Date, the Fund will
redeem those shares of TARPS on the earliest practicable date on which the Fund
will have such funds available, upon notice to record owners of shares of TARPS
and the Paying Agent. The Fund's ability to make a mandatory redemption may be
limited by the provisions of the 1940 Act or Maryland law.
The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date fixed for
redemption, plus (in the case of a Dividend Period of more than one year) any
redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealer and set forth in any applicable Specific
Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure
Pursuant to Rule 23c-2 under the 1940 Act, the Fund will file a notice
of its intention to redeem with the SEC so as to provide at least the minimum
notice required by such Rule or any successor provision (notice currently must
be filed with the SEC generally at least 30 days prior to the redemption date).
The Auction Agent will use its reasonable efforts to provide telephonic notice
to each Holder of TARPS called for redemption not later than the close of
business on the Business Day immediately following the Business Day on which the
Auction Agent determines the shares to be redeemed (or, during a Default Period
with respect to such shares, not later than the close of business on the
Business Day immediately following the day on which the Auction Agent receives
notice of redemption from the Fund). Such telephonic notice will be confirmed
promptly in writing not later than the close of business on the third Business
Day preceding the redemption date by providing the notice sent by the Paying
Agent to each Holder of record of shares of TARPS called for redemption, the
Paying Agent (if different from the Auction Agent) and the Securities Depository
("Notice of Redemption"). Notice of Redemption will be addressed to the
registered owners of the TARPS at their addresses appearing on the share records
of the Fund. Such notice will set forth (i) the redemption date, (ii) the number
and identity of shares of TARPS to be redeemed, (iii) the redemption price
(specifying the amount of accumulated dividends to be included therein), (iv)
that dividends on the shares to be redeemed will cease to accumulate on such
redemption date, and (v) the provision under which redemption shall be made.
If fewer than all of the shares of a series of TARPS are redeemed on
any date, the shares to be redeemed on such date will be selected by the Fund on
a pro rata basis in proportion to the number of shares held by such Holders, by
lot or by such other method as is determined by the Fund to be fair and
equitable, subject to the terms of any Specific Redemption Provisions. Shares of
TARPS may be subject to mandatory redemption as described herein notwithstanding
the terms of any Specific Redemption Provisions. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder of
all of the shares of TARPS, and the Securities Depository will determine the
number of shares to be redeemed from the account of the Agent Member of each
beneficial owner. Each Agent Member will determine the number of shares to be
redeemed from the account of each beneficial owner for which it acts as agent.
An Agent Member may select for redemption shares from the accounts of some
beneficial owners without selecting for redemption any shares from the accounts
of other beneficial owners. Notwithstanding the foregoing, if neither the
Securities Depository nor its nominee is the record holder of all of the shares,
the particular shares to be redeemed shall be selected by the Fund by lot, on a
pro rata basis between each series or by such other method as the Fund shall
deem fair and equitable, as contemplated above.
In connection with any redemption, whether optional or mandatory, the
Fund shall pay, together with the redemption price, an amount equal to all
accumulated dividends, whether or not such dividends have been declared through
the redemption date.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be Outstanding for any purpose. The Fund shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the shares of TARPS called for redemption on such date and
(ii) such other amounts, if any, to which Holders of shares of TARPS called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Fund upon its
request. Thereupon the Paying Agent will be relieved of all responsibility to
the owners of such shares and such owners may look only to the Fund for payment.
So long as any shares of TARPS are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures now provide for it to distribute the amount of
the redemption price to Agent Members who, in turn, are expected to distribute
such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no
shares of TARPS may be redeemed unless all dividends in arrears on the
Outstanding shares of TARPS, and all capital stock of the Fund ranking on a
parity with the TARPS with respect to the payment of dividends or upon
liquidation, have been or are being contemporaneously paid or set aside for
payment, except in connection with the liquidation of the Fund in which case all
shares of TARPS and all shares ranking in a parity with the TARPS must receive
proportionate amounts.
Except for the provisions described above, nothing contained in the
Articles limits any legal right of the Fund to purchase or otherwise acquire any
shares of TARPS outside of an Auction at any price, whether higher or lower than
the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any shares of TARPS for which Notice of Redemption has been
given and the Fund is in compliance with the 1940 Act TARPS Asset Coverage and
has Eligible Assets with an aggregate Discounted Value at least equal to the
TARPS Basic Maintenance Amount after giving effect to such purchase or
acquisition on the date thereof. Any shares which are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the Outstanding shares of TARPS are redeemed or otherwise acquired by the Fund,
the Fund shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.
ASSET MAINTENANCE
The Fund is required under the Articles Supplementary to satisfy two
separate asset maintenance requirements in respect of the TARPS. The first of
these requirements reflects the requirement that the Fund maintain assets in its
portfolio that have a value, discounted in accordance with the Rating Agency
Guidelines, at least equal to the aggregate liquidation preference of the TARPS
plus specified liabilities, payment obligations and other amounts. The second of
these requirements reflect the requirement that the Fund maintain asset coverage
for TARPS of at least 200%.
TARPS Basic Maintenance Amount
The Fund is required to maintain, as of each Valuation Date on which
any share of TARPS is Outstanding, Eligible Assets having an aggregated
Discounted Value at least equal to the TARPS Basic Maintenance Amount, which is
calculated separately for Moody's (if Moody's is then rating the TARPS) and
Fitch (if Fitch is then rating the TARPS). If the Fund fails to maintain
Eligible Assets having an aggregated Discounted Value at least equal to the
TARPS Basic Maintenance Amount as of any Valuation Date and such failure is not
cured on or before the related Asset Coverage Cure Date, the Fund will be
required in certain circumstances to redeem certain of the shares of TARPS. See
"--Redemption--Mandatory Redemption."
The "TARPS Basic Maintenance Amount" as of any Valuation Date is
defined as the dollar amount equal to:
(1) (A) the sum of the products resulting from multiplying the number
of Outstanding shares of TARPS on such date by the Liquidation Value
per share of such series; (B) the aggregate amount of dividends that
will have accumulated at the Applicable Rate (whether or not earned or
declared) to and including the first following Dividend Payment Date
for each share of TARPS Outstanding that follows such Valuation Date
(or to the 42nd day after such Valuation Date, if such 42nd day occurs
before the first following Dividend Payment Date); (C) the aggregate
amount of dividends that would accumulate at the then current Maximum
Applicable Rate for a Standard Term Period multiplied by the Volatility
Factor on any shares of TARPS Outstanding from the first day following
the Dividend Payment Date referred to in (B) above through the 42nd day
after such Valuation Date, but only if such 42nd day occurs after the
first day following the Dividend Payment Date, except that if such
Valuation Date occurs during a Default Period, the dividend for
purposes of the calculation would accumulate at the Default Rate; (D)
the amount of anticipated Fund expenses for the 90 days subsequent to
such Valuation Date; (E) any current liabilities, including, without
limitation, indebtedness due within one year and any redemption premium
due with respect to shares of TARPS for which a Notice of Redemption
has been given, as of such Valuation Date to the extent not reflected
in any of (1)(A) through (1)(D); and (F) without duplication, 10% of
the exercise price of any call option written by the Fund and the
exercise price of any put option written by the Fund;
less
(2) the sum of any cash or the value of any Fund assets irrevocably
deposited by the Fund for the payment of any of (1)(B) through (1)(F)
(revalues for purposes of this clause (2) shall mean the Discounted
Value of the security, except that if the security matures prior to the
relevant redemption payment date and is either fully guaranteed by the
U.S. Government or is rated P-1 by Moody's and F-1 by Fitch, it will be
valued at its face value).
Solely for purposes of calculating the TARPS Basic Maintenance Amount,
interest on borrowed funds outstanding as of any date will be treated as
dividend payments, at a deemed dividend rate equal to the interest rate payable
on such funds on the relevant date, but shall be subject to multiplication by
the larger of the factors that the Fund has been informed by Moody's (if Moody's
is then rating the TARPS) or Fitch (if Fitch is then rating the TARPS) are
applicable (as described in 1(C) above) only in the event that interest on such
borrowed funds is payable on the basis of a variable rate of interest, and the
interest rate is subject to change within the relevant 43-day period.
The Market Value of the Fund's portfolio securities (used in
calculating the Discounted Value of Eligible Assets) is (i) computed based upon
one or more pricing services approved by the Board of Directors or (ii) the
lower of the value set forth in bids from two independent dealers in securities.
The Fund has entered into a pricing services agreement with State Street Bank
and Trust Company. The Fund may substitute another pricing service, provided
that it has received notice from Moody's (if Moody's is then rating the TARPS)
and Fitch (if Fitch is then rating the TARPS) that such substitution will not
impair the "aaa"/"AAA" Credit Rating.
The discount factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets, and guidelines for determining
the market value of the Fund's portfolio holdings for purposes of determining
compliance with the TARPS Basic Maintenance Amount are based on criteria
established in connection with rating the TARPS. 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 debt obligation, the higher the related discount factor) and the
frequency with which the relevant asset is marked to market. In no event shall
the Discounted Value of any asset of the Fund exceed its unpaid principal
balance or face amount as of the date of calculation. The Discount Factor
relating to any asset of the Fund, the TARPS Basic Maintenance Amount, the
assets eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund, without stockholder
approval, but only in the event that the Fund receives written confirmation from
Moody's (if Moody's is then rating the TARPS), Fitch (if Fitch is then rating
the TARPS) and any Other Rating Agency which is then rating the TARPS and which
so requires that any such changes would not impair the "aaa"/"AAA" Credit
Rating. If the Fund fails to maintain the "aaa"/"AAA" Credit Rating and is
unable to restore the "aaa"/"AAA" Credit Rating by the Rating Default Cure Date,
the Fund will be required to redeem the TARPS. See "--Redemption--Mandatory
Redemption" and "Investment Objective and Policies--Investment
Guidelines--Rating Agency Guidelines" above.
1940 Act TARPS Asset Coverage
The Fund is also required to maintain, as of the last Business Day on
any month in which any share of TARPS is Outstanding, asset coverage of at
least 200% (or such other percentage as may in the future by specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring dividends on its common stock) ("1940 Act TARPS Asset Coverage"). If
the Fund fails to maintain the 1940 Act TARPS Asset Coverage as of the last
Business Day of any month and such failure is not cured as of the related Asset
Coverage Cure Date, the Fund will be required to redeem certain shares of TARPS.
See "--Redemption--Mandatory Redemption."
The Fund estimates that based on the composition of its portfolio as of
January 31, 1998, after giving effect to the issuance of the TARPS ($35 million)
and the deduction of sales loads and estimated offering expenses for such shares
($320,000) and the redemption of the Old TARPS, the 1940 Act TARPS Asset
Coverage will be computed as follows:
Value of Fund assets less liabilities not
representing senior securities $284,134,427 = 517%
- ----------------------------------------- -------------------
Senior securities representing indebtedness $55,000,000
plus aggregate liquidation preference of the TARPS
Notices
The Fund is required to deliver a certificate with respect to the
calculation of the TARPS Basic Maintenance Amount and the value of the portfolio
holdings of the Fund (a "TARPS Basic Maintenance Certificate") (i) to the
Auction Agent, Moody's (if Moody's is then rating the TARPS), Fitch (if Fitch is
then rating the TARPS) and any Other Rating Agency which is then rating the
TARPS and which so requires as of (a) the Business Day preceding the Date of
Original Issue and (b) any Valuation Date on which the Fund fails to have
Eligible Assets with an aggregate Discounted Value at least equal to 125% of the
TARPS Basic Maintenance Amount, (ii) to the Auction Agent, Fitch (if Fitch is
then rating the TARPS) and any Other Rating Agency which is then rating the
TARPS and which so requires as of (a) every fourth Valuation Date after the Date
of Original Issue for the first year following the Date of Original Issue, (b)
if the Fund fails to have Eligible Assets with an aggregate Discounted Value at
least equal to the TARPS Basic Maintenance Amount, and (c) on request by Fitch
or such Other Rating Agency, as applicable, (iii) to the Auction Agent, Moody's
(if Moody's is then rating the TARPS), Fitch (if Fitch is then rating the TARPS)
and any Other Rating Agency which is then rating the TARPS and which so requires
as of (a) the Valuation Date next following the date of redemption by the Fund
of shares of Common Stock which, together with all other shares of Common Stock
purchased during the six months preceding such date, equal in excess of
___________ shares of Common Stock, and (b) the last Valuation Date of each
fiscal quarter and a Valuation Date during such fiscal quarter randomly selected
by the Fund's independent accountants as provided below, and (iv) to the Auction
Agent, Moody's (if Moody's is then rating the TARPS), Fitch (if Fitch is then
rating the TARPS) and any Other Rating Agency which is then rating the TARPS and
which so requires as of a Business Day on or before any Asset Coverage Cure Date
relating to the Fund's cure of a failure to have Eligible Assets with an
aggregate Discounted Value at least equal to the TARPS Basic Maintenance Amount.
Such TARPS Basic Maintenance Certificate shall be delivered in the case of
clause (i)(a) on the Date of Original Issue and in the case of clauses (i)(b),
(ii), (iii) and (iv) above on or before the third Business Day after the
relevant Valuation Date or Asset Coverage Cure Date.
The Fund is required to deliver to the Auction Agent, Moody's (if
Moody's is then rating the TARPS), Fitch (if Fitch is then rating the TARPS) and
any Other Rating Agency which is then rating the TARPS and which so requires, a
certificate with respect to the calculation of the 1940 Act TARPS Asset Coverage
and the value of the portfolio holdings of the Fund (a "1940 Act TARPS Asset
Coverage Certificate") (i) as of the Business Day preceding the Date of Original
Issue with respect to TARPS, and (ii) as of (a) the last Valuation Date of each
quarter thereafter, and (b) as of the Business Day on or before the Asset
Coverage Cure Date relating to the failure to satisfy the 1940 Act Asset
Coverage (as defined under "Description of Senior Notes--Asset Maintenance").
Such 1940 Act TARPS Asset Coverage Certificate shall be delivered in the case of
clause (i) on the Date of Original Issue and in the case of clause (ii) on or
before the third Business Day after the relevant Valuation Date or the Asset
Coverage Cure Date. Such certificate must be accompanied by a certificate from
the Fund's accountants certifying as to the accuracy of the Fund's calculations.
On the Date of Original Issue, the Fund shall deliver to the Auction
Agent, Moody's (if Moody's is then rating the TARPS), Fitch (if Fitch is then
rating the TARPS) and any Other Rating Agency which is then rating the TARPS and
which so requires, a letter prepared by the Fund's independent accountants (an
"Accountant's Certificate") regarding the accuracy of the calculations made by
the Fund in the TARPS Basic Maintenance Certificate and the 1940 Act TARPS Asset
Coverage Certificate required to be delivered by the Fund on the Date of
Original Issue. Within eight Business Days after the last Valuation Date of each
fiscal quarter of the Fund on which an TARPS Basic Maintenance Certificate is
required to be delivered, the Fund will deliver to the Auction Agent, Moody's
(if Moody's is then rating the TARPS), Fitch (if Fitch is then rating the TARPS)
and any Other Rating Agency which is then rating the TARPS and which so
requires, an Accountant's Certificate regarding the accuracy of the calculations
made by the Fund in such TARPS Basic Maintenance Certificate and in any other
TARPS Basic Maintenance Certificate randomly selected by the Fund's independent
accountants during such fiscal quarter. Within eight Business Days after the
last Valuation Date of each fiscal quarter of the Fund on which a 1940 Act TARPS
Asset Coverage Certificate is required to be delivered, the Fund will deliver to
the Auction Agent, Moody's (if Moody's is then rating the TARPS), Fitch (if
Fitch is then rating the TARPS) and any Other Rating Agency which is then rating
the TARPS and which so requires an Accountant's Certificate regarding the
accuracy of calculations made by the Fund in such 1940 Act TARPS Asset Coverage
Certificate. In addition, the Fund will deliver to the relevant persons
specified in the preceding sentence an Accountant's Certificate regarding the
accuracy of the calculations made by the Fund on each TARPS Basic Maintenance
Certificate and 1940 Act TARPS Asset Coverage Certificate required to be
delivered as of a Business Day on or before any Asset Coverage Cure Date, within
five days after the relevant Asset Coverage Cure Date. If an Accountant's
Certificate delivered with respect to an Asset Coverage Cure Date shows an error
was made in the Fund's report with respect to such Asset Coverage Cure Date, the
calculation or determination made by the Fund's independent accountants will be
conclusive and binding on the Fund with respect to such reports. If any other
Accountant's Certificate shows that an error was made in any such report, the
calculation or determination made by the Fund's independent accountants will be
conclusive and binding on the Fund; provided, however, any errors shown in the
Accountant's Certificate filed on a quarterly basis shall not be deemed to be a
failure to have Eligible Assets with an aggregate Discounted Value at least
equal to the TARPS Basic Maintenance Amount on such prior Valuation Dates. In
the event that a TARPS Basic Maintenance Certificate or 1940 Act TARPS Asset
Coverage Certificate or the applicable Accountant's Certificates with respect to
an applicable Asset Coverage Cure Date are not delivered within the time periods
specified in the Articles, the Fund shall be deemed to have failed to have
Eligible Assets with an aggregate Discounted Value at least equal to the TARPS
Basic Maintenance Amount or the 1940 Act TARPS Asset Coverage, as the case may
be, as of the related Valuation Date, and such failure shall be deemed not to
have been cured as of such Asset Coverage Cure Date for purposes of the
mandatory redemption provisions.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the Holders of TARPS then Outstanding and any
other shares ranking in parity with the TARPS then Outstanding, in preference to
the Holders of Common Stock, will be entitled to payment, out of the assets of
the Fund, or the proceeds thereof, available for distribution to stockholders
after satisfaction of claims of creditors of the Fund, of a liquidation
distribution in the amount equal to $25,000 per share of the TARPS, plus an
amount equal to accumulated dividends (whether or not earned or declared but
without interest) to the date of payment of such distribution is made in full or
a sum sufficient for the payment thereof is set apart with the Paying Agent.
However, Holders of TARPS will not be entitled to any premium to which such
Holder would be entitled to receive upon redemption of such shares of TARPS.
After payment of the full amount of such liquidation distribution, the owners of
the TARPS will not be entitled to any further participation in any distribution
of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the assets of the Fund or proceeds thereof
available for distribution to stockholders after satisfaction of claims of
creditors of the Fund shall be insufficient to pay in full the liquidation
distribution to which owners of any shares of TARPS are entitled, such assets or
the proceeds thereof will be distributed among the owners of the shares of TARPS
and any other shares ranking on a parity therewith, ratably.
In the event of any such liquidation, dissolution or winding up of the
Fund, whether voluntary or involuntary, until payment in full is made to the
owners of the shares of TARPS of the liquidation distribution to which they are
entitled, no dividend or other distribution shall be made to the Holders of
Common Stock and no purchase, redemption or other acquisition for any
consideration by the Fund shall be made in respect of the Common Stock.
A consolidation or merger of the Fund with or into any other company or
companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any designation, right,
preference or limitation of the TARPS or any shares issuable in exchange for
shares of TARPS in any such consolidation or merger.
To the extent other shares of TARPS are issued by the Fund, such shares
will share equally and on a pro rata basis with the TARPS then Outstanding in
connection with any liquidation, dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated herein and except as otherwise required
by applicable law, Holders of shares of TARPS have one vote per share and vote
together with holders of shares of Common Stock as a single class. Under
applicable rules of the Exchange, the Fund is currently required to hold annual
meetings of stockholders.
In connection with the election of the Board of Directors, the holders
of Outstanding shares of Preferred Stock, including the TARPS, represented in
person or by proxy at said meeting, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of capital stock of
the Fund, to elect two directors of the Fund. The holders of Outstanding shares
of Common Stock and Preferred Stock, including the TARPS, voting together as a
single class, shall elect the balance of the directors. Notwithstanding the
foregoing, if (a) at the close of business on any Dividend Payment Date
accumulated dividends (whether or not earned or declared) on Outstanding shares
of the Preferred Stock, including Outstanding TARPS, equal to at least two full
years' dividends shall be due and unpaid; or (b) any time holders of any other
shares of Preferred Stock are entitled under the 1940 Act to elect a majority of
the directors of the Fund, then the number of members constituting the Board
shall automatically be increased by the smallest number that, when added to the
two Directors elected exclusively by the Holders of shares of Preferred Stock as
described above, would constitute a majority of the Board as so increased by
such smallest number; and at a special meeting of stockholders which will be
called and held as soon as practicable, and at all subsequent meetings at which
Directors are to be elected, the Holders of outstanding shares of Preferred
Stock, including the TARPS, voting as a separate class, will be entitled to
elect the smallest number of additional Directors that, together with the two
Directors which such Holders will be in any event entitled to elect, constitutes
a majority of the total number of Directors of the Fund as so increased. The
terms of office of the persons who are Directors at the time of that election
will continue. If the Fund thereafter shall pay, or declare and set apart for
payment, in full all dividends payable on all outstanding shares of Preferred
Stock, including the TARPS, for all past Dividend Periods, the voting rights
stated in the preceding sentence shall cease, and the terms of office of all of
the additional Directors elected by the Holders of shares of Preferred Stock,
including the TARPS (but not of the Directors with respect to whose election the
Holders of Common Stock were entitled to vote or the two Directors the Holders
of shares of Preferred Stock, including the TARPS, have the right to elect in
any event), will terminate automatically. Any shares of TARPS issued after the
date hereof shall vote with the TARPS as a single class on the matters described
above, and the issuance of any other shares of TARPS by the Fund may reduce the
voting power of the TARPS.
The affirmative vote of the Holders of a majority of the Outstanding
Preferred Stock determined with reference to a "majority of outstanding voting
securities" as the term is defined in Section 2(a)(42) of the 1940 Act,
including the TARPS, voting as a class, is required to (i) amend, alter or
repeal any of the preferences, rights or powers of such class so as to affect
materially and adversely such preferences, rights or powers; (ii) increase the
authorized number of shares of TARPS; (iii) create, authorize or issue shares of
any class of capital stock ranking senior to or on a parity with the TARPS with
respect to the payment of dividends or the distribution of assets, or any
securities convertible into, or warrants, options or similar rights to purchase,
acquire or receive, such shares of capital stock ranking senior to or on parity
with the TARPS or reclassify any authorized shares of capital stock of the Fund
into any shares ranking senior to or on parity with the TARPS (except that, the
Board of Directors, without the vote or consent of the Holders of TARPS, may
from time to time authorize, create and classify, and the Fund may from time to
time issue, series or shares of Preferred Stock, including TARPS, ranking on a
parity with the TARPS with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up to the
affairs of the Fund, subject to continuing compliance by the Fund with the 1940
Act TARPS Asset Coverage and TARPS Basic Maintenance Amount requirements, or in
connection with a refinancing of the TARPS); (iv) institute any proceedings to
be adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or file a petition seeking or
consenting to reorganization or relief under any applicable federal or state law
relating to bankruptcy or insolvency, or consent to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Fund or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(v) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness permitted under
clause (vi) below and (D) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's custodian and the
Auction Agent, or (vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow from banks for temporary or emergency
purposes or as may be permitted by the Fund's investment restrictions; provided,
however, that transfers of assets by the Fund subject to an obligation to
repurchase shall not be deemed to be indebtedness for purposes of this provision
to the extent that after any such transaction the Fund has Eligible Assets with
an aggregate Discounted Value at least equal to the TARPS Basic Maintenance
Amount as of the immediately preceding Valuation Date.
The affirmative vote of the Holders of a majority of the Outstanding
shares of Preferred Stock, including the TARPS, voting as a separate class, will
also be required to adopt any plan of reorganization adversely affecting such
shares or take any action requiring a vote of security holders under Section
13(a) of the 1940 Act including, among other things, conversion from a
closed-end investment company to an open-end investment company, changes in the
Fund's investment objective or changes in the investment restrictions described
as fundamental policies under "Investment Objective and Policies--Investment
Restrictions." The class vote of Holders of shares of Preferred Stock, including
TARPS, described above will in each case be in addition to a separate vote of
the requisite percentage of shares of Common Stock necessary to authorize the
action in question. In addition, the affirmative vote of the Holders of a
majority of the Outstanding shares of TARPS, voting separately from any other
series, shall be required with respect to any matter that materially and
adversely affects the rights, preferences, or powers of such series in a manner
different from that of other series of classes of the Fund's shares of capital
stock. For purposes of the foregoing, no matter shall be deemed to adversely
affect any right, preference or power unless such matter (i) alters or abolishes
any preferential right of such series; (ii) creates, alters or abolishes any
right in respect of redemption of such series; or (iii) creates or alters (other
than to abolish) any restriction on transfer applicable to such series.
The foregoing voting provisions will not apply with respect to the
TARPS if, at or prior to the time when a vote is required, such shares have been
(i) redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
The Board of Directors, without the vote or consent of any holder of
the Preferred Stock, including the TARPS, or any other stockholder of the Fund,
may from time to time amend, alter or repeal any or all of the definitions of
the terms or provisions listed below provided that the Board of Directors
receives written confirmation from Moody's (if Moody's is then rating the TARPS)
and Fitch (if Fitch is then rating the TARPS) (with such confirmation in no
event being required to be obtained from a particular rating agency in the case
of the definitions relevant only to and adopted in connection with the rating of
the TARPS, if any, by any Other Rating Agency) that such amendment, alteration
or repeal would not impair the rating then assigned by Moody's or Fitch,
respectively.
Asset Coverage Cure Date Moody's Discount Factor
Deposit Securities Moody's Eligible Assets
Discounted Value Moody's Industry Classification
Exposure Period 1940 Act TARPS Asset Coverage
Fitch Discount Factor 1940 Act TARPS Asset Coverage Certificate
Fitch Eligible Assets Short Term Money Market Instruments
Fitch Industry Classification TARPS Basic Maintenance Amount
Market Value (including certain TARPS Basic Maintenance Certificate
provisions relevant to futures Volatility Factor
and options transactions) Last Paragraph of Section 12 of the
Maximum Applicable Rate Articles (discussing valuation of
Minimum Applicable Rate certain option provisions)
In addition, the Board of Directors, without the vote or consent of any
Holder of the Preferred Stock, including TARPS, or any other stockholder of the
Fund, may from time to time adopt, amend, alter or repeal any or all of any
additional or other definitions or add covenants and other obligations of the
Fund (e.g., maintenance of minimum liquidity level) or confirm the applicability
of covenants and other obligations set forth herein in connection with obtaining
or maintaining the rating of Moody's, Fitch or any Other Rating Agency with
respect to TARPS and any such amendment, alteration or repeal will not be deemed
to affect the preferences, rights or powers of TARPS or the Holders thereof,
provided the Board of Directors receives written confirmation from the relevant
rating agency (such confirmation in no event being required to be obtained from
a particular rating agency with respect to definitions or other provisions
relevant only to another rating agency's rating) that any such amendment,
alteration or repeal would not adversely affect the rating then assigned by such
rating agency.
Also, subject to compliance with applicable law, the Board of Directors
may amend the definition of Maximum Applicable Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum
Applicable Rate shown therein without the vote or consent of the Holders of the
shares of the Preferred Stock, including TARPS, or any other stockholder of the
Fund, and without receiving any confirmation from any rating agency after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the TARPS Basic Maintenance
Amount.
Unless otherwise required by law, holders of shares of TARPS shall not
have any relative rights or preferences or other special rights other than those
specifically set forth herein. The holders of shares of TARPS shall have no
rights to cumulative voting. In the event that the Fund fails to pay any
dividends on the shares of TARPS, the exclusive remedy of the holders shall be
the right to vote for directors as discussed above.
RESTRICTIONS ON TRANSFER
Shares of TARPS may be transferred only (a) pursuant to an Order placed
in an Auction, (b) to or through a Broker-Dealer, (c) to a person that has
delivered a signed Master Purchaser's Letter to the Auction Agent or (d) to the
Fund or any Affiliate. Notwithstanding the foregoing, a transfer other than
pursuant to an Auction will not be effective unless the selling Existing Holder
or the Agent Member of such Existing Holder, in the case of an Existing Holder
whose shares are listed in its own name on the books of the Auction Agent, or
the Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a
transfer between persons holding shares of TARPS through different
Broker-Dealers, advises the Auction Agent of such transfer. The certificates
representing the shares of TARPS issued to the Securities Depository will bear
legends with respect to the restrictions described above and stop-transfer
instructions will be issued to the Transfer Agent and/or Registrar. See "The
Auction."
DESCRIPTION OF SENIOR NOTES
GENERAL
The Fund issued $20,000,000 (principal amount) of the Senior 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 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 Senior Notes. The
following summary of the principal terms of the Senior 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 Senior Notes bear interest at the rate of 6.53% per annum from July
15, 1993 through and including November 30, 1998. Interest on the Senior Notes
is payable on June 1 and December 1 of each year, commencing December 1, 1993.
The Senior Notes will mature on December 1, 1998 if not repurchased or redeemed
prior to that date.
REDEMPTION
The Senior Notes are not redeemable by the Fund prior to maturity,
except that (i) the Fund may redeem the Senior 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 Senior
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
Senior 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 Stock, 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 Senior
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 Senior 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 SENIOR NOTES
The Senior Notes rank pari passu with all other existing and future
Senior Indebtedness of the Fund and are senior to the Common Stock and the
Preferred Stock (including TARPS). "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
(i) declare any dividends with respect to the Preferred Stock, including the
TARPS, 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 Senior 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 Stock, including the TARPS, or purchase or
redeem Preferred Stock, including the TARPS, 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 Senior Notes, would be less than 300% (or such higher percentage
as may in the future be required by law). See "Description of
TARPS--Restrictions on Dividend, Redemption and Other Payments." In addition,
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 Senior Notes, would be less
than 300% (or such higher percentage as may in the future be required by law).
See "Description of Capital Stock--Common Stock--Restrictions on Dividend and
Other Payments." Furthermore, dividends or other distributions on or purchases
or redemptions of Common Stock or Preferred Stock, including TARPS, are further
prohibited under the Note Purchase Agreement at any time that payments of
principal of or interest on the Senior Notes are in default. However, under the
Code, the Fund must, among other things, distribute at least 90% of its
investment company taxable income each year in order to maintain its
qualification for tax treatment as a regulated investment company. The foregoing
limitations on dividends, distributions and purchases may under certain
circumstances impair the Fund's ability to maintain such qualification. See
"Federal Taxation--Federal Income Tax Treatment of the Fund."
Pursuant to the Note Investment Guidelines, the Note Purchase Agreement
contains a covenant limiting the Fund's ability to incur, assume, guarantee or
otherwise become liable with respect to any indebtedness for money borrowed
unless the incurrence of such indebtedness would not result in a default in the
performance or observance of the Fund's obligation to maintain 1940 Act Asset
Coverage (as defined below) or otherwise cause a violation of Section 18 of the
1940 Act.
The Note 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 or its successor as auction agent
with respect to the Preferred Stock 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.
ASSET MAINTENANCE
The Fund is required under the Note Purchase Agreement to satisfy two
separate asset maintenance requirements. 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 Note Investment Guidelines (as described under Investment Objective
and Policies--Investment Guidelines"). These requirements are summarized below.
1940 Act Asset Coverage. As set forth in the Note Purchase Agreement,
the Fund is required to maintain, with respect to senior securities representing
indebtedness, including the Senior Notes, as of the last Business Day of each
month in which any of the Senior Notes is outstanding, asset coverage of at
least 300% (or such higher percentage as may in the future be specified in or
under 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 its common stock) ("1940 Act Asset Coverage").
The Fund estimates that based on the composition of its portfolio as of
January 31, 1998, after giving effect to the issuance of the TARPS ($35 million)
and the deduction of sales loads and estimated offering expenses for such shares
($320,000) and the redemption of the Old TARPS, the 1940 Act Asset Coverage will
be computed as follows:
Value of Fund assets less liabilities
not representing senior securities $284,134,427 = 1421%
- ---------------------------------- ------------
Senior securities representing indebtedness $20,000,000
Note Basic Maintenance Amount. The Fund is also required under the Note
Purchase Agreement to maintain, on each Valuation Date (as defined below),
portfolio holdings meeting the Note 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 Senior 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 Senior Notes and the Preferred Stock 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 Senior Notes then outstanding; (ii) an amount equal to interest accrued on
the aggregate principal amount of the Senior 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 Senior
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 Senior 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 Note
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 are based upon criteria established in connection
with rating the Senior 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 Senior Notes, provided
that, among other things, such changes will not adversely affect the ratings, if
any, then assigned to the Senior Notes by Fitch.
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 Senior 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 Senior Note when due; (ii)
default for five Business Days in the payment of interest on any Senior 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 Senior Notes to call the
Senior 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 (the "Service") of a final determination that the Fund does not
qualify for any taxable year as a "regulated investment company" (as defined in
the 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 Senior Notes, then and in every such
case, the registered holders of the outstanding Senior Notes may by written
notice delivered to the Fund declare the Senior Notes (or in the case of an
Event of Default of the type specified in clause (iv) or (v), such portion of
the Senior 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 Senior Notes subject to mandatory
partial redemption will equal the aggregate principal amount of outstanding
Senior 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 Senior Notes subject to mandatory partial
redemption will equal the principal amount of outstanding Senior 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 Senior Notes
following an Event of Default specified in clause (iv) or (v), the payment of
principal and interest on the Senior 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 Senior 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 Senior Notes. If an Event of Default
specified in clause (ix) occurs, the Senior Notes shall become due and payable
immediately without any declaration or other act on the part of any registered
holder of the Senior 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 Senior 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 Senior Notes to any Person;
provided that any assignment or grant of participation or beneficial interest by
Pacific Mutual of its interest in the Senior 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 Senior 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 Senior Notes then outstanding.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the TARPS is subject to a number of risks and special
considerations, including the following:
"HIGH-YIELD," HIGH RISK INVESTMENTS
The Fund is designed for long-term investors who can accept the risks
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%, 12.42% and 12.63% for the calendar years 1991, 1992, 1993, 1994, 1995,
1996 and 1997, respectively. The ten year U.S. Treasury Bond produced a total
return of 16.46%, 6.52%, 11.94%, -6.08%, 23.68%, 0.89% and 11.10% for the
calendar years 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively. See
"Financial Highlights" for information concerning the Fund's return.
Net new issue activity of "high-yield" debt securities in 1991 was low
by historical standards, totaling ($6.9) billion. Net new issue activity of
"high-yield" debt securities totaled $11.4 billion, $46.1 billion, $22.2
billion, $26.7 billion, $60.2 billion and $107.5 billion for the calendar years
1992, 1993, 1994, 1995, 1996 and 1997, 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 315 and 589 basis points (3.15% to 5.89%) during the 1992 to 1997
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, 1996 and 1997 were 7.98%,
9.33%, 2.89%, 0.96%, 0.44%, 2.24%, 1.14% and 1.08%, respectively. The defaulted
amount of "high-yield" debt securities was $18.1 billion in 1990, $20.7 billion
in 1991, $6.6 billion in 1992, $2.4 billion in 1993, $1.3 billion in 1994, $6.7
billion in 1995, $4.2 billion in 1996 and $4.8 billion in 1997. 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 Fitch, 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. As of January 31, 1998,
approximately 95.72% of the market value of the Fund's total investments was
represented by fixed-income securities regarded by Moody's and Fitch to be below
investment grade (that is rated "Ba" or lower by Moody's or "BB" or lower by
Fitch).
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. The Fund also purchases a significant number of Rule 144A Securities
which are considered "restricted" securities but which may be treated as liquid
by the Fund in appropriate circumstances, in accordance with SEC guidelines. The
Investment Adviser, pursuant to Board supervision, makes a determination
regarding the liquidity of such securities prior to their purchase and continues
to analyze the liquidity of such securities. Investing in Rule 144A Securities,
however, could have the effect of increasing the liquidity of the Fund's assets
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
RISK OF LEVERAGE
The Fund's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment objectives and
policies. The Fund's leveraged capital structure creates risks. The Senior Notes
may constitute a substantial lien and burden on the TARPS by reason of their
prior claim against the income of the Fund and against the net assets of the
Fund in liquidation. The Fund will not be permitted to declare dividends or
other distributions with respect to TARPS or purchase or redeem TARPS unless at
the time thereof the Fund meets certain asset coverage requirements and payments
of principal of and interest on the Senior Notes are not in default. See
"Description of TARPS-- Restrictions on Dividend, Redemption and Other
Payments," "Description of Senior Notes--Restrictive Covenants" and "Federal
Taxation." In addition, the Fund may borrow funds (a) in connection with a loan
made by a bank or other party that is privately arranged and not intended to be
publicly distributed or (b) in an amount equal to up to 5% of its total assets
for temporary purposes only. See "Investment Objective and Policies--Certain
Investment Practices."
The Fund seeks to add incremental leverage as a result of this
Offering. There can be no assurance that the Fund will be able to add leverage
in the amounts or at the time it believes to be most advantageous. The ability
to increase, or delays in increasing, the Fund's leverage could, depending on
market conditions, adversely affect the Fund's earnings and net asset value. The
Fund anticipates that it will also refinance the terms of its outstanding Senior
Notes which mature in December 1998. 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 by the 1940 Act and existing agreements
between the Fund and third parties.
RISKS OF INVESTING IN TARPS
The ability of an investor to dispose of shares of TARPS may be largely
dependent on the success of an Auction. If in an Auction Sufficient Clearing Bid
Orders do not exist, then investors that have submitted Sell orders will not be
able to sell in the Auction all, and may not be able to sell in the Auction any,
shares of TARPS subject to such submitted Sell Orders. There is no assurance
that any particular Auction will be successful. Neither the Fund nor any
Broker-Dealer is obligated to ensure that an Auction will be successful or to
purchase shares of TARPS in an Auction or otherwise. The Fund is not required to
redeem shares of TARPS in the event of a failed Auction. Further, there is no
assurance that a secondary market outside of the Auctions for the TARPS will
develop, whether or not such Auctions are successful, or if such a market does
develop, that shares of TARPS will trade at or close to the Liquidation Value.
In the event the Fund establishes a Dividend Period for TARPS which is longer
than a Standard Term Period, particularly if such Dividend Period exceeds one
year, holders of TARPS may have fewer opportunities to obtain liquidity since an
Auction will not occur frequently and may not be able to sell their shares
between Auctions at a price per share equal to the Liquidation Value. Thus,
under certain circumstances, holders of TARPS may not have liquidity of
investment.
The Fund does not intend to apply for listing of the TARPS on a
national securities exchange, but has been advised by the Underwriter that it
currently intends to make a market in the TARPS as permitted by applicable laws
and regulations. The Underwriter is not obligated to make a market in the TARPS
between Auctions and, therefore, a holder of TARPS may not be able to liquidate
its position in the TARPS between Auctions at a price per share equal to its
liquidation preference plus accumulated dividends. In the event the Fund
establishes a Dividend Period for any series of TARPS which is longer than a
Standard Term Period, particularly if such Dividend Period exceeds one year, any
increase in interest rates will likely have an adverse affect on the secondary
market price of such series, holders of such series may have fewer opportunities
to obtain liquidity if Auctions do not occur frequently and a holder of such
series.
TARPS represents a perpetual equity interest in the Fund (except to the
extent redeemable at the option of the Fund) and does not give rise to a claim
for payment of a principal amount at a particular date. As such, TARPS
effectively ranks behind all indebtedness or other non-equity claims on the Fund
with respect to assets available to satisfy claims on the Fund. In addition, in
the event of the dissolution, liquidation or winding up of the affairs of the
Fund, after payment of the liquidation preference and all dividends accumulated
to and unpaid through the date of final distribution, holders of TARPS will not
be entitled to any further participation in any distribution of assets of the
Fund.
The credit ratings of the TARPS could be reduced while an investor
holds the TARPS, subject to the mandatory redemption requirements described
therein.
Holders of shares of capital stock, including TARPS, are entitled to
receive dividends only when, as and if declared by the Board of Directors and
only out of funds legally available therefor. State corporation laws generally
limit the funds out of which issuers incorporated thereunder may pay to
stockholders as a dividend. For example, under Maryland law, dividends may not
be paid if after giving effect to the dividend, the Fund would not be able to
pay its debts as they became due in the usual course of business or the Fund's
total assets would be less than the sum of its total liabilities plus the amount
needed to satisfy the preferential rights of stockholders whose preferential
rights upon dissolution are superior to those receiving the dividend. The Fund
may also incur indebtedness with the consent of the relevant rating agencies.
PAYMENT RESTRICTIONS
The Fund is prohibited from declaring, paying or making any dividends
or distributions on TARPS unless it satisfies certain conditions. See
"Description of TARPS--Restrictions on Dividend, Redemption and Other Payments."
The Fund is also prohibited from declaring paying or making any dividends or
distributions on Common Stock unless it satisfies certain conditions. See
"Description of Capital Stock--Common Stock--Restrictions on Dividend and Other
Payments." These prohibitions on the payment of dividends or distributions might
impair the Fund's ability to maintain its qualification as a regulated
investment company for federal income tax purposes. The Fund intends, however,
to redeem shares of TARPS from time to time to the extent necessary to comply
with the asset coverage requirements. There can be no assurance, however, that
such redemptions can be effected in time to permit the Fund to distribute its
income as required to maintain its qualification as a regulated investment
company under the Code. See "Federal Taxation--Federal Income Tax Treatment of
the Fund."
FEDERAL TAXATION
The following discussion offers only a brief outline of the federal
income tax consequences of investing in TARPS. Investors should consult their
own tax advisors for more detailed information and for information regarding the
impact of state and local taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund qualifies and elects to be treated as a regulated investment
company under Subchapter M of the Code and intends to qualify under those
provisions each year. To qualify as a regulated investment company, the Fund
must, among other things, (a) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
stocks, securities or currencies; and (b) diversify its holdings so that, at the
end of each quarter of its taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash, 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 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 net investment income (i.e., the
Fund's investment company taxable income, as that term is defined in the Code,
without regard to the deduction for dividends paid), the Fund (but not its
stockholders) generally will be relieved of U.S. federal income taxes on its net
investment income and net capital gain (i.e., the Fund's net long-term capital
gain in excess of the sum of net short-term capital loss and capital loss
carryovers from prior years, if any) that it distributes to stockholders.
However, the Fund will be subject under current tax rates to a federal income
tax at a maximum effective rate of 35% on any undistributed net investment
income and net capital gain. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax payable by the Fund. To avoid the tax, the Fund must
distribute, or be deemed to have distributed, during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income for the
calendar year, (2) at least 98% of its capital gain net income for the
twelve-month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gain net income for previous years that were not
distributed during such years. For this purpose, any income or gain retained by
the Fund that is subject to corporate tax will be considered to have been
distributed by year-end. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement. Compliance with the calendar year distribution
requirement may limit the extent to which the Fund will be able to retain its
net capital gain for investment.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Code, the Fund will be taxed in the same manner as
an ordinary corporation, and distributions to its stockholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, will constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to stockholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the stockholder's hands
as long-term capital gain.
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 Stock until the asset coverage is restored.
See "Description of TARPS--Dividends and Dividend Periods." Such a suspension of
distributions might prevent the Fund from distributing 90% of its net investment
income, as is required in order to qualify for taxation as a regulated
investment company, or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) TARPS 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 TARPS and the amounts to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem TARPS may adversely
affect the Fund's ability to distribute annually at least 90% of its net
investment income, which distribution is required to qualify for taxation as a
regulated investment company. The Fund may also recognize income in connection
with funding repurchases or redemptions of TARPS, 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 TARPS might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances.
Investments of the Fund in securities issued at a discount or providing
for deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
stockholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to satisfy the 90%
distribution requirement and the distribution requirements for avoiding income
and excise taxes. In order to generate sufficient cash to make distributions
necessary to satisfy the 90% distribution requirement and to avoid income and
excise taxes, the Fund may have to borrow money or dispose of securities that it
would otherwise have continued to hold.
The Fund's transactions in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) will be subject to special provisions of the Code that,
among other things, may affect the character of gain and loss realized by the
Fund (i.e., may affect whether gain or loss is ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gain and loss is characterized as long-term or
short-term capital gain or loss. These rules could therefore affect the
character, amount and timing of distributions to stockholders. These provisions
also may require the Fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out) which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections, and will make the appropriate entries in its books
and records when it acquires any foreign currency, option, futures contract,
forward contract, or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment company
and minimize the imposition of income and excise taxes.
If the Fund fails to qualify as a regulated investment company for any
year, it generally must pay out its earnings and profits accumulated in that
year less an interest charge to the Treasury on 50% of such earnings and profits
before it can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TARPS
Under present law and based, in part, on the Fund's representation that
there is no express or implied agreement between or among a Broker-Dealer or any
other party and the Fund or any owners of the TARPS that the Broker-Dealer or
any other party will guarantee or otherwise arrange to ensure that an owner of
TARPS will be able to sell his or her shares, counsel to the Fund is of the
opinion that TARPS will constitute stock of the Fund, and thus distributions
with respect to the TARPS (other than distributions in redemption of the TARPS
subject to section 302(b) of the Code) will constitute dividends to the extent
of the Fund's current or accumulated earnings and profits, as calculated for
federal income tax purposes. The following discussion assumes such treatment
will apply.
The Fund's income will consist of net investment income and may also
consist of net capital gain. The character of the Fund's income will not affect
the amount of dividends to which the holders of the TARPS are entitled. Holders
of the TARPS are entitled to receive only the amount of dividends as determined
by periodic auctions. For federal income tax purposes, however, the Service
currently requires that a regulated investment company that has two or more
classes of shares allocate to each such class proportionate amounts of each type
of its income (such as ordinary income and net capital gain) for each tax year.
Accordingly, the Fund intends to designate distributions made with respect to
the Common Stock and the TARPS as consisting of particular types of income (net
capital gain, dividend income and ordinary income) in accordance with each
class' proportionate share of the total dividends paid to both classes. Thus,
each dividend paid with respect to the TARPS during a year will be designated as
ordinary income dividends and, if the Fund designates any dividend as a capital
gains dividend, capital gains in proportion to the TARPS's proportionate share
of the total dividends paid on the TARPS during the year to the total
distributions paid on both the TARPS and the Common Stock during the year. Each
holder of the TARPS during the year will be notified of the allocation within 60
days after the end of the year. The amount of the net capital gain realized by
the Fund may not be significant, and there is no assurance that any such income
will be realized by the Fund in any year. Distributions of the Fund's net
investment income are taxable to stockholders as ordinary income. Distributions
of the Fund's net capital gain, if any, are taxable to stockholders at rates
applicable to long-term capital gain regardless of the length of time the TARPS
have been held by holders. Under recently enacted legislation, capital gains of
individuals derived in respect of capital assets held for more than one year are
eligible for reduced rates of taxation which may vary depending upon the holding
period of such capital assets. Prospective investors should consult their own
tax advisors with respect to the tax consequences of the new legislation.
Distributions in excess of the Fund's earnings and profits will first reduce a
stockholder's adjusted tax basis in his or her shares of TARPS and, after the
adjusted tax basis is reduced to zero, will constitute capital gains to a holder
of shares of TARPS who holds his or her shares of TARPS as a capital asset.
Although the Fund is required to distribute annually at least 90% of
its net investment income, the Fund is not required to distribute net capital
gain to the stockholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gain").
However, it is unclear whether a portion of the net undistributed capital gain
would have to be allocated to the TARPS for federal income tax purposes. Until
and unless the Fund receives acceptable guidance from the Service as to the
allocation of the net undistributed capital gain between the Common Stock and
the TARPS, the Fund intends to distribute its net capital gain for any year
during which it has shares of TARPS Outstanding. Such distribution will affect
the tax character but not the amount of dividends to which holders of shares of
TARPS are entitled.
Although dividends generally will be treated as distributed when paid,
dividends declared on December 31, payable to stockholders of record on December
31 and paid on the first business day in January of the following year will be
treated as having been distributed by the Fund and received by the stockholders
on the December 31. In addition, solely for the purpose of satisfying the 90%
distribution requirement and the distribution requirement for avoiding income
taxes, certain distributions made after the close of a taxable year of the Fund
may be "spilled back" and treated as paid during such taxable year. In such
case, stockholders will be treated as having received such dividends in the
taxable year in which the distribution was actually made. The Service has ruled
privately that dividends paid following the close of the taxable year that are
treated for tax purposes as derived from income from the prior year will be
treated as dividends "paid" in the prior year for purposes of determining the
proportionate share of a particular type of income for each class. Accordingly,
the Fund intends to treat any such dividends that are paid following the close
of a taxable year as "paid" in the prior year for purposes of determining a
class' proportionate share of a particular type of income. However, the private
ruling is not binding on the Service, and there can be no assurance that the
Service will respect such treatment.
Most of the Fund's net investment income is derived from
interest-bearing securities. Accordingly, dividends paid with respect to the
TARPS generally will not qualify for the dividend received deduction. However,
from time to time, a portion of the Fund's net investment income may be
attributable to dividends on equity securities which are eligible for the
dividends received deduction under Section 243 of the Code. Corporate
stockholders who otherwise are eligible to claim the dividends received
deduction under Section 243 of the Code can deduct 70% of the portion of the
TARPS dividend representing the stockholder's portion of the Fund's eligible
dividend income. The Service has ruled that corporate stockholders of a
regulated investment company must meet the 45-day holding requirements of
Section 246(c)(1)(A) of the Code with respect to the shares of the regulated
investment company to qualify for the dividends received deduction. The Fund
will inform holders of shares of TARPS of the source and tax status of all
distributions shortly after the close of each calendar year.
SALE OF SHARES
The sale of shares of TARPS (including transfers in connection with a
redemption or repurchase of such shares of TARPS or a liquidation of the Fund)
will be a taxable transaction for federal income tax purposes. Selling holders
of shares of TARPS will generally recognize gain or loss in an amount equal to
the difference between their basis in the TARPS and the amount received in
exchange therefor. If such shares of TARPS are held as a capital asset, the gain
or loss will generally be a capital gain or loss. Any loss realized upon a
taxable disposition of shares of TARPS held for six months or less will be
treated as a long-term capital loss to the extent of any distributions of net
capital gain received with respect to such shares.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31%
of all taxable distributions payable to stockholders who fail to provide the
Fund with their correct taxpayer identification number or who fail to make
required certifications or if the Fund or a stockholder has been notified by the
Service that they are subject to backup withholding. Corporate stockholders and
other stockholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the stockholders U.S. federal income tax liability.
OTHER TAXATION
Foreign stockholders, including stockholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions at a
rate of 30% or such lower rates as may be prescribed by any applicable treaty.
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 TARPS.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Fund consists of 1,000,000 shares
of Preferred Stock, $1.00 par value per share, 1,000 shares of Old TARPS, no par
value per share with a liquidation preference of $100,000 per share, and
100,000,000 shares of Common Stock $.03 par value per share. As of January 31,
1998, 200 shares of Old TARPS and 58,962,711 shares of Common Stock were
outstanding. The Board of Directors has the authority under the Articles to, and
reserves the right to, issue Preferred Stock and Common Stock, from time to
time, and any such shares shall be deemed "Preferred Stock" and "Common Stock,"
respectively. The Preferred Stock 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 Old TARPS" refers to a
beneficial owner of Old TARPS unless the context otherwise requires. The Fund
plans to issue up to 1,400 shares of TARPS pursuant to this Offering. See
"Description of TARPS."
COMMON STOCK
Restrictions on Dividend and Other Payments
Under the Note Purchase Agreement, the Fund may not declare any
dividend, distribution or purchase with respect to the Common Stock 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
Senior Notes, would be less than 300% (or such higher percentage as may in the
future by specified in or under the 1940 Act as the minimum asset coverage for
senior securities representing stock of a closed-end investment company as a
condition of declaring dividends and distributions on or purchases of its common
stock)). In addition, the Fund may not declare or pay any dividend or
distribution on the Common Stock unless, (i) payments of principal of or
interest on the Senior Notes are not in default; (ii) immediately after such
transaction, the Fund would have eligible portfolio holdings with an aggregated
Discounted Value at least equal to the Notes Basic Maintenance Amount; (iii) the
Fund has redeemed the full amount of Senior Notes required to be redeemed by any
provision for mandatory redemption contained in the Note Purchase Agreement;
(iv) immediately after such transaction, the Fund would have Eligible Assets
with an aggregated Discounted Value at least equal to the TARPS Basic
Maintenance Amount; (v) full cumulative dividends on the TARPS due on or prior
to the date of the transaction have been declared and paid; and (vi) the Fund
has redeemed the full number of shares of TARPS required to be redeemed by any
provision for mandatory redemption. See "Description of Senior
Notes--Restrictive Covenants," "Description of Senior Notes--Asset Maintenance,"
"Description of TARPS--Asset Maintenance" and "--Redemption--Mandatory
Redemption." However, under the Code, the Fund must, among other things,
distribute at least 90% of its investment company taxable income each year in
order to maintain its qualification for tax treatment as a regulated investment
company.
OLD TARPS
Dividends and Distributions
Dividends on the Old TARPS 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,
an "Old TARPS 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 Old TARPS on each Old TARPS
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 Old TARPS, 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 an Auction Date; 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 Old TARPS 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 and Bankers Trust,
Bankers Trust as the auction agent for the Old TARPS 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 Old TARPS, of 1/8 of 1% of the
purchase price of Old TARPS 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 Old TARPS on any Old TARPS 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 Rights." 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 Old TARPS through
December 4, 1998.
Under the 1940 Act and the Articles, the Fund may not (i) declare
dividends on the Old TARPS if at the time thereof (and after giving effect
thereto) asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Senior 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 Old TARPS or purchase or
redeem Old TARPS 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 Senior 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 Senior 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 Old TARPS, would be less than 200% (or such higher
percentage as may in the future be required by law). See "Description of Senior
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 Old TARPS or Common Stock will be prohibited at any time payments
of principal of or interest on the Senior 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 Old TARPS 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 Old TARPS, 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 Senior Notes, the advisory fee, bank custodian and
surety custodian charges, the premium paid pursuant to the issuance of the
Surety Bond 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
Old TARPS) 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 Old TARPS on any Dividend Payment
Date (a "Preferred Stock Redemption"). The Fund shall be obligated (a) to
redeem, no later than the last day specified for the redemption of Old TARPS
pursuant to a Redemption Request (as defined herein) from Financial Security the
number of Old TARPS specified in such Redemption Request (a "Mandatory Surety
Redemption") and (b) to redeem all of the Old TARPS 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
Old TARPS whether through obtaining a substitute surety bond or otherwise.
Preferred Stock Redemptions and any Mandatory Surety Redemption or Mandatory
Expiration Redemption will be made at a price equal to $100,000 per share plus
accumulated and unpaid dividends through the date of redemption (whether or not
declared by the Fund), except that if any such redemption is not made on a
Dividend Payment Date, it will be made at a price equal to $100,250 plus
accumulated and unpaid dividends through the date of redemption (whether or not
declared by the Fund). Such redemptions may only be made by the Fund to the
extent permitted under the 1940 Act and Maryland law, and provided neither
principal nor interest payments with respect to the Senior Notes are then in
default. A holder of Old TARPS 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 Old TARPS at least five days prior to the redemption
date of its election to continue to hold its Old TARPS. The Fund is obligated to
meet certain Deposit Securities requirements pursuant to the Surety Arrangement
to the extent necessary to satisfy a Mandatory Expiration Redemption.
Pursuant to the terms of an Insurance Agreement with Financial Security
(the "Insurance Agreement"), Financial Security is entitled to cause the Fund to
redeem certain of the Old TARPS to the extent permitted under the 1940 Act and
Maryland law (and provided payments of principal of and interest on the Senior
Notes are not then in default), in the event that the Fund fails to maintain
Surety Assets Coverage while any of the Old TARPS are outstanding, and such
failure is not cured within eight Business Days. 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 Old TARPS to be redeemed and shall
thereafter be subrogated to all the rights of such holders with respect to their
Old TARPS. See "--Voting Rights".
Planned Redemption
The Fund will apply $20 million of the net proceeds from this Offering
for the redemption and defeasance of the Old TARPS. See "Use of Proceeds."
Liquidation Rights
Upon a liquidation, dissolution or winding up of the Fund (whether
voluntary or involuntary), holders of the Old TARPS 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
Senior 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 Old TARPS 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 Old TARPS, then such assets shall be distributed among the
holders of Old TARPS ratably, according to the respective amounts which would be
payable on all such Old TARPS 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 Old
TARPS at the time of liquidation. If Financial Security has not consented to
such liquidation, it shall continue to guarantee Scheduled Payments on the Old
TARPS (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 Old TARPS shall
be paid by Financial Security. Unless and until payment in full has been made to
the holders of the Old TARPS 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 Old TARPS on liquidation. After payment
to the holders of the Old TARPS 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 Old TARPS, will be entitled to participate
equally in the remaining assets of the Fund.
Voting Rights
Except as noted below, the Common Stock and the Preferred Stock vote
together as a single class. Holders of shares of Common Stock have voting rights
of one vote per share and holders of the Old TARPS have voting rights of one
vote per $1,000 of liquidation preference without regard to any liquidation
preference attributable to accumulated and unpaid dividends (i.e., 100 votes per
share); provided that all the votes represented by a single share of Old TARPS
must be voted together. In elections of Directors, the holders of the Old TARPS,
as a separate class, vote to elect two Directors and the holders of the Common
Stock and the Old TARPS, voting together, will elect the remaining Directors. In
addition, during any period (herein referred to as a "Voting Period") that
dividends payable on Old TARPS equal to two full years of dividends are unpaid,
the holders of such Old TARPS, 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 Old TARPS. 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 Old TARPS 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 Old TARPS 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 Old TARPS 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 Old TARPS, voting together as a single class, or a majority of the
outstanding Old TARPS, 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 Old TARPS with respect to which such Scheduled Payments have been made by
Financial Security. The assignment to Financial Security of the voting rights of
the holders of the Old TARPS shall terminate when the Fund has made payments on
the Old TARPS 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 Old TARPS each vote separately as a class on
amendments to the Articles that would adversely affect their respective
contractual rights as expressly set forth in the Articles. In addition to any
other vote required by the Articles or applicable law, so long as any Old TARPS
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 Old TARPS 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 Old TARPS 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 Old
TARPS, 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 Old TARPS as
set forth in the Articles, or increase or decrease the number of Old TARPS
authorized to be issued; and (4) the approval of a majority (as defined under
"Investment Objective and Policies") of the outstanding Old TARPS 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 fundamental investment restrictions
described under "Investment Objective and Policies--Investment Restrictions."
The Common Stock and the Old TARPS 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 Objective and Policies."
For purposes of any right of the holders of the Old TARPS to vote on
any matter, whether such right is created by the Articles, by statute or
otherwise, a holder of a share of Old TARPS will not be entitled to vote and
such share of Old TARPS will not be deemed to be outstanding for the purpose of
voting or determining the number of Old TARPS required to constitute a quorum,
if prior to or concurrently with a determination of Old TARPS entitled to vote
or of Old TARPS deemed outstanding for quorum purposes, as the case may be, a
notice of redemption shall have been given in respect of such share of Old TARPS
and Deposit Securities for the redemption of such share of Old TARPS shall have
been deposited in trust, as provided above; provided, however, that the
foregoing sentence shall not be applicable to the holders of Old TARPS who
elected to retain their Old TARPS 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 11, 1998.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT, PAYING AGENT AND REGISTRAR
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 Dividend Reinvestment Plan of the Fund and as transfer
agent and registrar for the Common Stock. Bankers Trust, 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 Old TARPS and serves as transfer agent, paying agent and
registrar for the TARPS and Old TARPS.
UNDERWRITING
Bear, Stearns & Co. Inc., the Underwriter, has agreed, subject to the
terms and conditions of the Underwriting Agreement, the form of which is filed
as an exhibit to the Registration Statement, to purchase from the Fund, and the
Fund has agreed to sell to the Underwriter, the shares of TARPS.
The Underwriting Agreement provides that the obligations of the
Underwriter to purchase the TARPS are subject to the approval of certain legal
matters by counsel and certain other conditions, including that the TARPS be
rated "aaa" by Moody's and "AAA" by Fitch as of the Date of Original Issue, and
that the Underwriter is obligated to purchase all of the shares of TARPS if any
are purchased.
The Fund has been advised by the Underwriter that it proposes to offer
shares of TARPS to the public initially at the public offering price set forth
on the cover page of this Prospectus. The sales load of $_____ per share is
equal to ______% of the initial offering price. After the initial public
offering, the public offering price may be changed by the Underwriter.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities under the Securities Act and to
contribute to payments which the Underwriter may be required to make in respect
thereof.
The Fund has also agreed that it will not, without the prior written
consent of the Underwriter, issue, sell, offer or agree to sell, grant any
option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of TARPS or any securities convertible into or exercisable or
exchangeable for Preferred Stock for a period of ____ days after the date of
this Prospectus, other than the sale of TARPS offered in the Offering.
In order to facilitate the offering of TARPS, the Underwriter may
engage in transactions that stabilize, maintain or otherwise affect the price of
TARPS. Specifically, the Underwriter may over-allot in connection with this
offering, creating a short position in TARPS for its own account. To cover
over-allotments, or to stabilize the price of, the Underwriter may bid for, and
purchase, shares of TARPS in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of TARPS. In addition, the Underwriter
makes no representation that it will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The Underwriter will act in Auctions as a Broker-Dealer and will be
entitled to fees for services as a Broker-Dealer as set forth under "The
Auction--Brokers-Dealers; Commissions."
The Fund has been advised by the Underwriter that it currently intends
to make a market in the TARPS, as permitted by applicable law and regulations.
However, the Underwriter is not obligated to make a market in the TARPS between
Auctions and such market making activity may be discontinued at any time at the
sole discretion of the Underwriter. See "Risk Factors and Special
Considerations--Risks of Investing in TARPS."
The Fund anticipates that from time to time the Underwriter may act as
broker or dealer in connection with the execution of its portfolio transactions
after it has ceased to be the Underwriter and, subject to certain restrictions,
may act as a broker while it is the Underwriter. The Underwriter is an active
underwriter of, and dealer in, securities and acts as a market maker in a number
of such securities, and therefore can be expected to engage in portfolio
transactions with the Fund.
On the Date of Original Issue, the Underwriter will deposit the shares
of TARPS placed by it in its account at the Security Depository. The Security
Depository will deliver the shares of TARPS purchased by each initial purchaser
from the Underwriter's account to the account of such initial purchaser's Agent
Member of the Security Depository against payment (in same-day funds) from the
account of such initial purchaser's Agent Member to the account of the
Underwriter in an amount equal to the purchase price. Under the Master
Purchaser's Letter, each purchaser will be required to have the ownership of the
shares of TARPS owned by it maintained in book-entry form by the Security
Depository through such purchaser's Agent Member, which in turn will maintain
records of such purchaser's beneficial ownership.
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the TARPS will be passed upon for
the Fund by Olshan Grundman Frome & Rosenzweig LLP, New York, New York and for
the Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York. An opinion regarding the valid
issuance of the TARPS will be rendered by Piper & Marbury, LLP, Baltimore,
Maryland. Olshan Grundman Frome & Rosenzweig LLP and Simpson Thacher & Bartlett
will rely as to matters of Maryland law upon such opinion.
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.
REPORTS TO STOCKHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to
stockholders, including a list of the portfolio investments held by the Fund.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Exchange
Act and the 1940 Act and in accordance therewith is required to file reports,
proxy statements and other information with the SEC. Any such reports, proxy
statements and other information can be inspected without charge at the public
reference facilities of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
Seven World Trade Center, New York, New York 10048 and Suite 1400, 500 W.
Madison Street, Chicago, Illinois 60621-2511. Copies of such materials may be
obtained from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York, and Chicago, Illinois, at prescribed rates.
The SEC also maintains a web site that contains reports, proxy statements and
other information about the Fund filed electronically with the SEC:
http://www.sec.gov. Reports, proxy statements and other information concerning
the Fund can also be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
Additional information regarding the Fund and the TARPS is contained in
the Registration Statement on Form N-2 and any amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the SEC. This
Prospectus does not contain all of the information set forth in the Registration
Statement, and any amendments, exhibits and schedules thereto. For further
information with respect to the Fund and the TARPS offered hereby, reference is
made to the Registration Statement. Statements contained in this Prospectus as
to the contents of the Articles or any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC.
<PAGE>
GLOSSARY
""aaa"/"AAA" Credit Rating" means a credit rating in the highest
category of Moody's and Fitch.
"AA Composite Commercial Paper Rate" on any date means (a) the interest
equivalent of the 30-day rate, in the case of a Dividend Period which is a
Standard Term Period or shorter, or the 180-day rate, in the case of all other
Dividend Periods, on commercial paper on behalf of issuers whose corporate bonds
are rated AA by S&P, or the equivalent of such rating by another nationally
recognized rating agency, as announced by the Federal Reserve Bank of New York
for the close of business on the Business Day immediately preceding such date;
or (b) if the Federal Reserve Bank of New York does not make available such a
rate, then the arithmetic average of the interest equivalent of such rates on
commercial paper placed on behalf of such issuers, as quoted on a discount basis
or otherwise by the Commercial Paper Dealers to the Auction Agent for the close
of business on the Business Day immediately preceding such date (rounded to the
next highest .001 of 1%). If any Commercial Paper Dealer does not quote a rate
required to determine the AA Composite Commercial Paper Rate, such rate shall be
determined on the basis of the quotations (or quotation) furnished by the
remaining Commercial Paper Dealers (or Dealer), if any, or, if there are no such
Commercial Paper Dealers, by the Auction Agent. For purposes of this definition,
(i) "Commercial Paper Dealers" shall mean (A) Bear, Stearns & Co. Inc., Lehman
Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman
Sachs & Co.; (B) in lieu of any thereof, its respective Affiliate or successor,
and (C) in the event that any of the foregoing shall cease to quote rates for
commercial paper of issuers of the sort described above, in substitution
therefor, a nationally recognized dealer in commercial paper of such issuers
then making such quotations selected by the Fund, and (ii) "interest equivalent"
of a rate stated on a discount basis for commercial paper of a given number of
days' maturity shall mean a number equal to the quotient (rounded upward to the
next higher one-thousandth of 1%) of (A) such rate expressed as a decimal,
divided by (B) the difference between (x) 1.00 and (y) a fraction, the numerator
of which shall be the product of such rate expressed as a decimal, multiplied by
the number of days in which such commercial paper shall mature and the
denominator of which shall be 360.
"Advisory Agreement" means the Investment Advisory Agreement dated
March 1, 1994 under which the Investment Advisor serves as investment adviser
for the Fund.
"Affiliate" means any person known to the Auction Agent to be
controlled by, in control of or under common control with the Fund; provided
that no Broker-Dealer controlled by, in control of or under common control with
the Fund shall be deemed to be an Affiliate nor shall any corporation or any
person controlled by, in control of or under common control with such
corporation one of the directors or executive officers of which is also a
director of the Fund be deemed to be an Affiliate solely because such director
or executive officer is also a director of the Fund.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a person placing an Order.
"Alternate Term Period" means any Dividend Period that is not a
Standard Term Period.
"Applicable Rate" means, with respect to each series of Preferred
Stock, for each Dividend Period (A) if Sufficient Clearing Orders exist for the
Auction in respect thereof, the Winning Rate, (B) if Sufficient Clearing Orders
do not exist for the Auction in respect thereof, the Maximum Applicable Rate and
(C) in the case of any Dividend Period of 93 days or fewer if all the shares of
TARPS are the subject of Submitted Hold Orders for the Auction in respect
thereof, the Minimum Applicable Rate.
"Articles" means the Articles of Amendment and Restatement, as amended,
including any Articles Supplementary of the Fund.
"Articles Supplementary" means the Articles Supplementary to the Fund
establishing and fixing the rights and preferences of the TARPS.
"Asset Coverage Cure Date" has the meaning set forth in "Description of
TARPS--Redemption--Mandatory Redemption."
"Auction" means each periodic operation of the procedures set forth
under "The Auction."
"Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Directors enters into an agreement with the Fund to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Date" means the first Business Day next preceding the first
day of a Dividend Period for the relevant series of Preferred Stock.
"Auction Procedures" means the procedures for conducting Auctions set
forth under "The Auction."
"Board of Directors" or "Board" means the Board of Directors of the
Fund or any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" or "Broker-Dealers" means any broker-dealer or
broker-dealers, or other entity permitted by law to perform the functions
required of a Broker-Dealer by the Auction Procedures, that has been selected by
the Fund and has entered into a Broker-Dealer Agreement with the Auction Agent
that remains effective.
"Broker-Dealer Agreement" means an agreement entered into by the
Auction Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees
to follow the Auction Procedures.
"Buy Order" means the communication by a Potential Holder to a
Broker-Dealer of the number of shares of TARPS which such Potential Holder
offers to purchase on an Auction Date if the Applicable Rate for the next
succeeding Dividend Period therefor is not less than the rate per annum then
specified by such Potential Holder.
"Business Day" means a day on which the Exchange is open for trading
and which is not a Saturday, Sunday or other day on which banks in the City of
New York, New York are authorized or obligated by law to close.
"Date of Original Issue" means with respect to the Old TARPS and TARPS
the respective date on which such preferred stock was originally issued by the
Fund.
"Default Period" has the meaning set forth in "Description of
TARPS--Dividends and Dividend Periods--Default Period."
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-l+ or SP-1+ by S&P, except that, for purposes of optional
redemption, such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-1 by Moody's.
"Discount Factor" means the Moody's Discount Factor (as defined in
Appendix A) (if Moody's is then rating the TARPS), the Fitch Discount Factor (as
defined in Appendix A) (if Fitch is then rating the TARPS) or the discount
factor established by any Other Rating Agency which is then rating the TARPS and
which so requires, whichever is applicable.
"Discounted Value" means the quotient of the Market Value of an
Eligible Asset divided by the applicable Discount Factor provided that with
respect to an Eligible Asset that is currently callable, Discounted Value shall
be equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable, Discounted
Value shall be equal to the quotient as calculated above or the par value,
whichever is lower.
"Dividend Payment Date" for each series of Preferred Stock, means (i)
with respect to any Dividend Period of one year or less, the Business Day next
succeeding the last day thereof and, if any, the 91st, 181st and 271st days
thereof, and (ii) with respect to any Dividend Period of more than one year, on
a quarterly basis on each January 1, April 1, July 1 and October 1 and on the
Business Day following the last day of such Dividend Period.
"Dividend Period" means, with respect to the relevant series of
Preferred Stock, the period commencing on the Date of Original Issue and ending
on the date specified for such series on the Date of Original Issue and
thereafter, as to such series, the period commencing on the day following each
Dividend Period for such series and ending on the day established for such
series by the Fund.
"Eligible Assets" means Moody's Eligible Assets (as defined in Appendix
A) (if Moody's is then rating the TARPS), Fitch Eligible Assets (as defined in
Appendix A) (if Fitch is then rating the TARPS) and/or Other Rating Agency
Eligible Assets if any Other Rating Agency is then rating the TARPS, whichever
is applicable.
"Existing Holder" means (a) a person who has signed a Master
Purchaser's Letter and beneficially owns shares of a series of Preferred Stock
listed in that person's name in the records of the Auction Agent or (b) the
beneficial owner of shares of Preferred Stock which are listed under such
person's Broker-Dealer's name in the records of the Auction Agent, which
Broker-Dealer shall have signed a Master Purchaser's Letter.
"Exposure Period" means the period commencing on (and including) a
given Valuation Date and ending 41 days thereafter.
"Fitch" means Fitch Investors Service, Inc. and its successors at law.
"Fund" means Prospect Street High Income Portfolio Inc., a Maryland
corporation that is the issuer of the TARPS offered hereby.
"Holder" means, with respect to the Common Stock and the Preferred
Stock, including the TARPS, of the Fund, the registered holder of shares of such
stock as the same appears on the stock ledger or stock records books of the
Fund.
"Hold Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of each series of Preferred
Stock which such Existing Holder desires to continue to hold without regard to
the Applicable Rate for the next succeeding Dividend Period therefor.
"Hold/Sell Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of each series of Preferred
Stock which such Existing Holder desires to continue to hold if the Applicable
Rate for the next Dividend Period therefor is not less than the rate per annum
then specified by such Existing Holder.
"Investment Adviser" means Prospect Street Investment Management Co.,
Inc. the current investment adviser to the Fund, or such other future investment
adviser to the Fund.
"Liquidation Value" currently means $100,000 per share for Old TARPS
and $25,000 per share for TARPS.
"Mandatory Redemption Date" has the meaning set forth in "Description
of TARPS--Redemption--Mandatory Redemption."
"Mandatory Redemption Price" has the meaning set forth in "Description
of TARPS-- Redemption--Mandatory Redemption."
"Market Value" shall mean the fair market value of an asset of the Fund
(excluding interest and dividends due on such assets) as computed based upon (i)
pricing services to be provided by State Street Bank & Trust Company or such
other pricing service determined from time to time by the Board of Directors,
provided that Moody's (if Moody's is then rating TARPS). Fitch (if Fitch is then
rating TARPS) and any Other Rating Agency which is then rating TARPS and so
requires have informed the Corporation in writing that use of such pricing
service will not adversely affect such rating agency's then current rating of
the shares of TARPS or (ii) the lower of the value set forth in bids from two
independent dealers that are members or Affiliates of members of the National
Association of Securities Dealers, Inc. and that make markets in such security,
one of which bids shall be in writing.
"Master Purchaser's Letter" means a letter substantially in the form
of, or containing provisions similar to those in the form, attached hereto as
Appendix C which is required to be executed by each prospective purchaser of
shares of TARPS or the Broker-Dealer through whom the shares will be held.
"Maximum Applicable Rate" means, on any date on which the Applicable
Rate is determined, the rate equal to 150% of the applicable Reference Rate at
the close of business on the Business Day next preceding such Auction Date,
subject to upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers; provided that immediately
following any such increase the Fund would be in compliance with TARPS Basic
Maintenance Amount.
"Minimum Applicable Rate" means, on any Auction Date with respect to a
Dividend Period of 93 days or fewer 80% of the AA Commercial Paper Rate at the
close of business on the Business Day next preceding such Auction Date. There
shall be no Minimum Applicable Rate on any Auction Date with respect to a
Dividend Period of more than 93 days.
"Moody's" means Moody's Investors Service, Inc. and its successors at
law.
"1940 Act" means the Investment Company Act of 1940, as amended from
time to time.
"1940 Act TARPS Asset Coverage" means asset coverage, as defined in
Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding
senior securities of the Fund which are stock, including all Outstanding TARPS
(or such other asset coverage as may in the future be specified in or under the
1940 Act as the minimum asset coverage for senior securities which are stock of
a closed-end investment company as a condition of declaring dividends on its
common stock), determined on the basis of values calculated as of a time within
48 hours next preceding the time of such determination.
"Note Investment Guidelines" means the diversification, liquidity and
related investment guidelines established in connection with the issuance of the
Senior Notes and the Fund's receipt from Fitch of a rating of "AAA" for the
Senior Notes.
"Note Basic Maintenance Amount" as of any date is defined as the dollar
amount equal to the sum of (1) 100% of the aggregate principal amount of the
Senior Notes then outstanding; (ii) an amount equal to interest accrued on the
aggregate principal amount of the Senior 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 Senior 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
Senior 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.
"Notice of Redemption" has the meaning provided in "Description of
TARPS--Redemption--Redemption Procedure."
"Note Purchase Agreement" means that certain note purchase agreement
dated as of July 15, 1993 and amended and restated as of December 16, 1993,
between the Fund and Pacific Mutual whereby the Fund issued $20,000,000 of
Senior Notes.
"Offering" means the offering of 1,400 shares of TARPS issued by the
Fund under its Registration Statement of which this Prospectus is a part.
"Old TARPS" means the 300 shares of Taxable Auction Rate Preferred
Stock, no par value per share with a liquidation preference of $100,000 per
share, issued by the Fund in November 1988, of which 200 shares remain
outstanding as of January 31, 1998.
"Order" means a Hold Order, a Hold/Sell Order, a Sell Order or a Buy
Order.
"Other Rating Agency" means any rating agency other than Moody's or
Fitch then providing a rating for the TARPS pursuant to the request of the Fund.
"Other Rating Agency Eligible Assets" means assets of the Fund
designated by any Other Rating Agency as eligible for inclusion in calculating
the discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the TARPS.
"Outstanding" means, as of any date, shares of Preferred Stock
theretofore issued by the Fund except, without duplication, (i) any shares of
Preferred Stock theretofore canceled or redeemed by the Fund, or delivered to
the Auction Agent for cancellation or with respect to which the Fund has given
notice of redemption and irrevocably deposited with the Paying Agent sufficient
funds to redeem such shares of Preferred Stock, and (ii) any shares of Preferred
Stock represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Fund. Notwithstanding the foregoing (A) for
purposes of voting rights (including the determination of the number of shares
required to constitute a quorum), any shares of the Preferred Stock to which the
Fund or any Affiliate of the Fund shall be the Existing Holder shall be
disregarded and not deemed Outstanding; (B) in connection with any Auction, any
shares of the TARPS as to which the Fund or any person known to the Auction
Agent to be an Affiliate of the Fund shall be the Existing Holder thereof shall
be disregarded and deemed not to be Outstanding; and (C) for purposes of
determining the TARPS Basic Maintenance Amount, shares of TARPS held by the Fund
shall be disregarded and not deemed Outstanding but shares held by any Affiliate
of the Fund shall be deemed Outstanding.
"Paying Agent" means Bankers Trust unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Fund to serve as paying agent which Paying Agent may be the same as the
Auction Agent.
"Potential Holder" when used with respect to shares of TARPS, means any
person, including any Existing Holder of shares of Old TARPS, (i) who shall have
executed a Master Purchaser's Letter or whose shares will be listed under such
person's Broker-Dealer's name in the records of the Auction Agent, which
Broker-Dealer shall have executed a Master Purchaser's Letter and (ii) who may
be interested in acquiring shares of TARPS.
"Preferred Stock" means all shares of the Fund's preferred stock, which
may be issued from time to time in one or more series under the Articles.
"Proration Procedures" means:
(A) if Sufficient Clearing Orders exist, in the case of a
Submitted Hold/Sell Order specifying a rate equal to the
Winning Rate
(x) the number of shares of TARPS to be the subject of an
accepted Hold Order will be (i) the number of shares
of such series of Preferred Stock subject to such
Submitted Hold/Sell Order multiplied by (ii) the
total number of shares of TARPS that are neither the
subject of a Submitted Buy Order or a Submitted
Hold/Sell Order specifying a rate lower than the
Winning Rate nor the subject of a Submitted Hold
Order and divided by (iii) the total number of shares
of Submitted Hold/Sell Orders that specified a rate
equal to the Winning Rate, and
(y) the number of shares of TARPS to be the subject of an
accepted Sell Order will be the remaining number of
shares of TARPS subject to such Submitted Hold/Sell
Order,
(B) if Sufficient Clearing Orders exist, in the case of a
Submitted Buy Order specifying a rate equal to the Winning
Rate
(x) the number of shares of TARPS to be the subject of an
accepted Buy Order will be (i) the number of shares
of TARPS subject to such Submitted Buy Order
multiplied by (ii) the difference between (1) the
number of shares of TARPS that are the subject of a
Submitted Sell Order or a Submitted Hold/Sell Order
that specified a rate higher than the Winning Rate
and (2) the number of shares of TARPS that are the
subject of a Submitted Buy Order that specified a
rate lower than the Winning Rate and divided by (iii)
the total number of shares of TARPS subject to
Submitted Buy Orders that specified a rate equal to
the Winning Rate, and
(y) such Submitted Buy Order will not be accepted as to
the remaining number of shares subject to such
Submitted Buy Order, and
(C) if Sufficient Clearing Orders do not exist, in the case of a
Submitted Hold/Sell Order specifying a rate higher than the
Maximum Applicable Rate and in the case of a Submitted Sell
Order
(x) the number of shares of TARPS to be the subject of an
accepted Sell Order will be (i) the number of shares
of TARPS subject to such Submitted Hold/Sell Order or
Submitted Sell Order multiplied by (ii) the total
number of shares of TARPS that are the subject of a
Submitted Buy Order specifying a rate equal to or
lower than the Maximum Applicable Rate and divided by
(iii) the total number of shares of TARPS subject to
all Submitted Hold/Sell Orders that specified a rate
higher than the Maximum Applicable Rate and Submitted
Sell Orders, and (y) the number of shares of TARPS to
be the subject of an accepted Hold Order will be the
remaining number of shares of TARPS subject to such
Submitted Hold/Sell Order or Submitted Sell Order.
"Rating Agencies" means Moody's and Fitch.
"Rating Agency Guidelines" means the guidelines established by Moody's
(if Moody's is then rating the TARPS) and Fitch (if Fitch is then rating the
TARPS) as set forth under "Investment Objective and Policies--Investment
Guidelines--Rating Agency Guidelines," or by any Other Rating Agency that is
then rating the TARPS.
"Redemption Request" means, with respect to the Old TARPS, and upon an
event of default under the Insurance Agreement, a written request from Financial
Security to redeem the Old TARPS.
"Reference Rate" means, with respect to the determination of the
Maximum Applicable Rate, the applicable AA Composite Commercial Paper Rate (for
a Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate
(for a Dividend Period of 184 days or more).
"Rounding Procedures" means, if as a result of an Auction (including
the Proration Procedures) any Existing Holder would be entitled to hold or
required to sell, or any Potential Holder would be required to purchase, a
number of shares of the relevant series of Preferred Stock not evenly divisible
by 1, on any Auction Date, the Auction Agent will, in such manner as it
determines, round up or down the number of shares of such series of Preferred
Stock to be held, purchased or sold by any Existing Holder or Potential Holder
on such Auction Date so that the number of shares held, purchased or sold by
each Existing Holder or Potential Holder on such Auction Date will be a number
of shares of such series of Preferred Stock evenly divisible by 1.
"Rule 144A Securities" means securities that are restricted as to
resale under federal securities laws but are eligible for resale pursuant to
Rule 144A under the Securities Act, as determined by the Fund's adviser acting
subject to the supervision of the Board of Directors.
"S&P" means Standard & Poor's Corporation and its successors at law.
"Scheduled Payments" shall mean (i) payments of dividends on the Old
TARPS which holders thereof would be entitled to receive on each Old TARPS
Dividend Payment Date during the term of the Surety Bond in accordance with the
terms of the Articles, 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 Old TARPS, 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 Old TARPS as specified in a Redemption
Request given by Financial Security under the Insurance Agreement upon the
occurrence of an event of default 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 Old TARPS may be
required to be redeemed upon expiration of the Surety Bond, and (iii) payment of
the liquidation preference on the Old TARPS 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, 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 Old TARPS is paid, a portion of the Old TARPS
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.
"Securities Depository" means DTC and its successors and assigns or any
successor securities depository selected by the Fund that agrees to follow the
procedures required to be followed by such securities depository in connection
with the shares of each series of Preferred Stock.
"Sell Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding shares of the relevant series of
Preferred Stock which such Existing Holder offers to sell without regard to the
Dividend Rate for the next succeeding Dividend Period therefor.
"Senior Extendible Notes" means the $50,000,000 aggregate principal
amount of senior extendible notes issued by the Fund in November 1988, all of
which have been repurchased by the Fund.
"Senior Notes" means the $20,000,000 of Senior Notes of the Fund
bearing interest at the rate of 6.53% per annum and payable December 1, 1998.
"Specific Redemption Provisions" means with respect to any Alternate
Term Period of more than one year, either, or any combination of, a period (a
"Non-Call Period") determined by the Board of Directors after consultation with
the Broker-Dealers, during which the shares subject to such Alternate Term
Period are not subject to redemption at the option of the Fund pursuant to
Section 3(a)(i) of the Articles and/or Section 3(a)(ii) and/or 3(a)(iii) of the
Articles and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years as determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such Alternate
Term Period shall be redeemable at the Fund's option pursuant to Section 3(a)(i)
of the Articles and/or in connection with any mandatory redemption pursuant to
Section 3(a)(ii) and/or 3(a)(iii) of the Articles at a price per share equal to
Liquidation Value plus accumulated but unpaid dividends plus a premium expressed
as a percentage or percentages of Liquidation Value or expressed in a formula
using specified variables as determined by the Board of Directors after
consultation with the Broker-Dealers.
"Standard Term Period" means a Dividend Period of 28 days, unless such
28th day is not a Business Day, then the number of days ending on the Business
Day next preceding such 28th day.
"Submission Deadline" means 1:00 p.m., New York City time, on each
Auction Date, or such other time on such Auction Date as may be specified from
time to time by the Auction Agent as the time by which each Broker-Dealer must
submit to the Auction Agent all Orders obtained by it for the Auction to be
conducted on such Auction Date.
"Submitted Buy Order" means each Buy Order submitted to the Auction
Agent by a Broker-Dealer.
"Submitted Hold Order" means each Hold Order submitted to the Auction
Agent by a Broker-Dealer.
"Submitted Hold/Sell Order" means each Hold/Sell Order submitted to the
Auction Agent by a Broker-Dealer.
"Submitted Order" means each Order submitted to the Auction Agent by a
Broker-Dealer.
"Submitted Sell Order" means each Sell Order submitted to the Auction
Agent by a Broker-Dealer.
"Sufficient Clearing Orders" means that all shares of the relevant
series of Preferred Stock are the subject of Submitted Hold Orders or that the
number of shares of such series of Preferred Stock that are the subject of
Submitted Buy Orders by Potential Holders specifying one or more rates equal to
or less than the Maximum Applicable Rate exceeds or equals the sum of (A) the
number of shares of such series of Preferred Stock that are the subject of
Submitted Hold/Sell Orders by Existing Holders specifying one or more rates
higher than the Maximum Applicable Rate and (B) the number of shares of such
series of Preferred Stock that are subject to Submitted Sell Orders.
"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 Senior
Notes then outstanding; (ii) $100,250 times the number of Old TARPS then
outstanding; (iii) the aggregate amount of accrued interest on the Senior Notes
then outstanding, plus an amount equal to 63 days' interest on such principal
amount of the Senior Notes; (iv) the aggregate amount of accumulated but unpaid
dividends with respect to the Old TARPS to such date, plus the amount of
dividends projected to accumulate on the Old TARPS 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
Senior 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
Senior Notes or redemptions of or dividend payments with respect to the Old
TARPS.
"TARPS" means the shares of Series A Taxable Auction Rate Preferred
Stock issued hereby or any other series of Preferred Stock hereinafter
designated as shares of Series A Taxable Auction Rate Preferred Stock by
Articles Supplementary or Articles of Amendment.
"TARPS Basic Maintenance Amount" has the meaning set forth in
"Description of TARPS--Asset Maintenance--TARPS Basic Maintenance Amount."
"TARPS Basic Maintenance Certificate" has the meaning set forth in
"Description of TARPS--Asset Maintenance--TARPS Basic Maintenance Amount."
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government securities selected by the Fund.
"Underwriter" means Bear, Stearns & Co. Inc.
"Underwriting Agreement" means the underwriting agreement among the
Underwriter, the Fund and the Investment Adviser, a form of which is filed as an
exhibit to the Fund's Registration Statement of which this Prospectus is a part.
"Validity Procedures" means the following procedures and priorities:
(A) If one or more Hold Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the relevant
series of Preferred Stock greater than the number of shares of
such series of Preferred Stock held by such Existing Holder,
such Hold Order or Hold Orders shall be considered valid only
as to the number of shares of such series of Preferred Stock
held by such Existing Holder. In the case of multiple Hold
Orders, each such Hold Order shall be considered valid pro
rata.
(B) If one or more Hold/Sell Orders shall be submitted on behalf
of an Existing Holder as to a number of shares of the relevant
series of Preferred Stock greater than the excess of the
number of shares of such series of Preferred Stock held by
such Existing Holder over the number of shares of such series
of Preferred Stock subject to Hold Orders submitted on behalf
of such Existing Holder, such Hold/Sell Order or Hold/Sell
Orders shall be considered valid only as to the number of
shares of such series of Preferred Stock equal to such excess.
In the case of multiple Hold/Sell Orders specifying different
rates, such Hold/Sell Orders shall be considered valid in
increasing order of such rates. In the case of multiple
Hold/Sell Orders specifying the same rate, each such Hold/Sell
Order shall be considered valid pro rata.
(C) If one or more Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of shares of the relevant
series of Preferred Stock greater than the excess of the
number of shares of such series of Preferred Stock held by
such Existing Holder over the number of shares of such series
of Preferred Stock subject to Hold Orders and Hold/Sell Orders
submitted on behalf of such Existing Holder, such Sell Order
or Sell Orders shall be considered valid only as to the number
of shares equal to such excess. In the case of multiple Sell
Orders, each such Sell Order shall be considered valid pro
rata.
"Valuation Date" means every Friday, or, if such day is not a Business
Day, the next preceding Business Day; provided, however, that the first
Valuation Date may occur on any other date established by the Fund; provided,
further, however, that such date shall be not more than one week from the date
on which the Preferred Stock initially is issued.
"Winning Rate" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/Sell Order from Existing Holders specifying
such lowest rate and all other Submitted Hold/Sell Orders from Existing Holders
specifying lower rates were accepted and (B) each Submitted Buy Order from
Potential Holders specifying such lowest rate and all other Submitted Buy Orders
from Potential Holders specifying lower rates were accepted, would result in the
Existing Holders described in clause (A) above continuing to hold an aggregate
number of shares of the relevant series of Preferred Stock which, when added to
the number of shares of such series of Preferred Stock to be purchased by the
Potential Holders described in Clause (B) above and the number of shares of such
series of Preferred Stock subject to Submitted Hold Orders, would be equal to
the number of shares of such series of Preferred Stock.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants ............................ F-2
Schedule of Investments as of October 31, 1997 ...................... F-3
Balance Sheet as of October 31, 1997 ................................ F-10
Statement of Operations for the Year Ended October 31, 1997 ......... F-11
Statement of Cash Flows for the Year Ended October 31, 1997 ......... F-12
Statement of Changes in Net Assets for the Years Ended October 31,
1996 and 1997 ..................................................... F-13
Financial Highlights for Each Share of Common Stock Outstanding for
the Years Ended October 31, 1993, 1994, 1995, 1996 and 1997 ....... F-14
Information Regarding Senior Securities as of October 31, 1993, 1994,
1995, 1996 and 1997 ............................................... F-15
Notes to Financial Statements ....................................... F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Prospect Street High Income Portfolio Inc.:
We have audited the accompanying balance sheet of PROSPECT STREET HIGH
INCOME PORTFOLIO INC., including the schedule of investments, as of October 31,
1997, the related statements of operations and cash flows for the year then
ended, the statements of changes in net assets for the years ended October 31,
1997 and 1996 and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Prospect Street High Income Portfolio Inc. as of October 31, 1997, and the
results of its operations, the changes in its net assets, its cash flows and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 5, 1997
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
FIXED INCOME -- 90.51%
Ratings
--------------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
----- ----------- -------- ------- --------
<S> <C> <C> <C> <C>
AEROSPACE AND DEFENSE - 0.23%
$ 500,000 Burke Industries Inc. 10%, sr. notes,
08/15/07, 144A ......................... B+ B2 $ 517,500
------------
AGRICULTURAL CHEMICALS/FARMING - 0.97%
500,000 Calmar Spraying Systems Inc., 11 1/2%, sr.
sub. notes, series B, 08/15/05 .......... B- B3 532,500
500,000 Hines Horticulture Inc., 11 3/4%, sr. sub.
notes, series B, 10/15/05 .............. CCC+ B3 550,000
1,000,000 Iridium Capital Corp., 14%, sr. notes,
series B, 07/15/05 ..................... B- B3 1,060,000
------------
2,142,500
------------
AUTOMOBILE/AUTO PARTS/TRUCK MANUFACTURING
- 5.80%
1,000,000 Aetna Industries Inc., 11 7/8%, sr. notes,
10/01/06 ............................... B- B3 1,015,000
2,500,000 Chatwins Group Inc., 13%, sr. exch. notes,
05/01/03 ............................... B- B2 2,625,000
500,000 Chief Auto Parts Inc., 10 1/2%, sr. notes,
05/15/05 ............................... B B2 487,500
4,500,000 Highway Master Communication, 13 3/4%, sr.
notes, 09/15/05 ........................ B Caa 4,432,500
1,250,000 Iochpe-Maxion SA, 12 3/8%, notes, 11/08/02 NR NR 1,225,000
1,000,000 Localiza Rent a Car, 10 1/4%, sr. notes,
10/01/05, 144A ......................... BB- B2 900,000
500,000 Motors & Gears Inc., 10 3/4%, sr. notes,
series B, 11/15/06 ..................... B B3 530,000
750,000 Simula Inc., 8%, conv. sr. sub. notes,
05/01/04 ............................... NR NR 821,250
781,000 Venture Holdings Trust, 9 3/4%, sr. sub.
notes, 04/01/04 ........................ B- B3 781,000
------------
12,817,250
------------
BANKS/SAVINGS AND LOANS/FINANCE COMPANIES/
CONSUMER CREDIT - 2.60%
1,000,000 Bank Plus Corp.,12%, sr. notes, 07/18/07 . NR NR 1,120,000
500,000 Emergent Group Inc., 10 3/4%, sr. notes,
09/15/04, 144A ......................... B- B3 485,000
1,500,000 Life Federal Savings Bank,13 1/2%, sub.
debs, 03/15/04 ......................... NR NR 1,515,000
500,000 Local Financial Corp., 11%, sr. notes,
09/05/04, 144A ......................... NR NR 525,000
1,000,000 Mego Mortgage, 12 1/2%, sr. sub. notes,
12/01/01 ............................... B Caa 1,000,000
1,000,000 Ocwen Federal Bank, 12%, sub. debs.,
06/15/05 ............................... B+ B1 1,090,000
------------
5,735,000
------------
BROADCASTING - TV/CABLE/RADIO/PUBLISHING -
14.13%
8,858 Australis Media Ltd., 0%, gtd. sr. secd.
disc. notes, 05/15/03 .................. NR Caa 6,466
1,000,000 Australis Media Ltd., 0%, sr. secd. disc.
notes, 05/15/03 ........................ NR Caa 750,000
500,000 Busse Broadcasting Corp., 11 5/8%, sr.
secd. notes, 10/15/00 .................. NR B3 533,750
10,000,000 CAI Wireless System Inc., 12 1/4%, sr.
disc. notes, 09/15/02 .................. CCC+ Caa 3,100,000
9,000,000 CS Wireless Systems Inc., 0%, sr. disc.
notes, series B, 03/01/06 .............. CCC+ Caa 2,565,000
6,000,000 DIVA Systems Corp., 0%, sub. disc. notes,
05/15/06, 144A ......................... NR NR 5,190,000
750,000 Emerson Radio Corp., 8 1/2%, conv. sr.
sub. deb, 08/15/02, 144A ............... NR NR 435,000
750,000 Emerson Radio Corp., 8 1/2%, conv. sr.
sub. deb, 08/15/02 ..................... NR NR 472,500
500,000 Galaxy Telecom, L.P., 12 3/8%, sr. sub.
notes, 10/01/05 ........................ B- B3 553,750
1,000,000 Global Star L.P., 11 1/4%, sr. notes,
06/15/04, 144A ......................... B B3 985,000
3,000,000 Global Star L.P., 10 3/4%, sr. notes,
11/01/04, 144A ......................... B B3 2,857,500
1,250,000 Heartland Wireless, 14%, sr. notes, series
B, 10/15/04 ............................ B B3 587,500
1,000,000 Katz Media Corp., 10 1/2%, sr. sub. notes,
series B, 01/15/07 ..................... B B2 1,085,000
1,000,000 Net Sat Services, 12 3/4%, sr. notes,
08/05/04 ............................... B B2 1,030,000
3,500,000 Optel Inc., 13%, sr. notes, series B,
02/15/05 ............................... B- B3 3,587,500
1,750,000 Paxson Communications Corp., 11 5/8%, sr.
sub. notes, 10/01/02 ................... B- B3 1,907,500
500,000 Radio One, Inc., 7%, sr. sub. notes,
05/15/04, 144A ......................... NR NR 481,250
500,000 RBS Participaco, 14%, notes, 12/15/03 .... BB- NR 575,000
2,000,000 Source Media Inc., 12%, sr. secd. notes,
11/01/04, 144A ......................... B- B3 2,000,000
2,000,000 Spanish Broadcasting System Inc., 12 1/2%,
sr. notes, 06/15/02 .................... B B2 2,270,000
500,000 Wireless One Inc., 13%, sr. disc. notes,
10/15/03 ............................... B- B3 240,000
------------
31,212,716
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING -
2.05%
500,000 Amtrol Acquisition Inc., 10 5/8%, sr. sub.
notes, 12/31/06 ........................ B- B3 506,250
1,000,000 Genmar Holdings Inc., 13 1/2%, sr. sub.
notes, series A, 07/15/01 .............. CCC- Caa 1,027,500
1,000,000 Haynes International Inc., 11 5/8%, sr.
notes, 09/01/04 ........................ B- B3 1,160,000
500,000 MVE Inc., 12 1/2%, sr. secd. notes,
02/15/02 ............................... B+ B3 500,000
500,000 Selmer Inc., 11%, sr. sub. notes, 05/15/05 B B3 550,000
500,000 Spinnaker Industries Inc., 10 3/4%, sr.
secd. notes, 10/15/06 .................. B B3 515,000
250,000 Therma Wave Inc., 10 5/8%, sr. notes,
series B, 05/15/04 ..................... B B2 266,250
------------
4,525,000
------------
DIVERSIFIED/CONGLOMERATE SERVICES - 0.27%
550,000 Coinmach Corp., 11 3/4%, sr. notes, series
B, 11/15/05 ............................ B+ B2 599,500
------------
ELECTRICAL EQUIPMENT/ELECTRONICS/COMPUTERS
- 1.40%
1,750,000 Computervision Corp., 11 3/8%, sr. sub.
notes, 08/15/99 ........................ B- B3 1,050,000
500,000 International Wire Group Inc., 11 3/4%,
sr. sub. notes, 06/01/05 ............... B- B3 545,000
990,000 Real Time Data Inc., 0%, sub. disc. notes,
08/15/06, 144A ......................... NR NR 564,300
1,000,000 Unifi Communications Inc., 14%, sr. notes,
03/01/04 ............................... NR NR 940,000
------------
3,099,300
------------
FINANCIAL SERVICES - 1.88%
1,000,000 Beal Financial Corp., 12 3/4%, sr. notes,
08/15/00 ............................... B- B2 1,070,000
425,000 First Federal Financial Corp., 11 3/4%,
notes, 10/01/04 ........................ B+ B2 467,500
500,000 Ocwen Financial Corp., 11 7/8%, notes,
10/01/03 ............................... B+ B1 560,000
2,000,000 Wilshire Financial Services Group Inc.,
13%, notes, 01/01/04 ................... NR NR 2,065,000
------------
4,162,500
------------
FOOD/TOBACCO - 10.41%
346,978 American Restaurant Group Inc., 13%,
series 92, sr. secd. notes, 09/15/98 ... B- Caa 340,038
2,500,000 American Rice Inc., 13%, mtg. notes,
07/31/02 ............................... B- Caa 2,500,000
250,000 AmeriKing Inc., 10 3/4%, sr. notes,
12/01/06 ............................... B- B3 265,000
3,228,442 Cafeteria Operators L.P., 12%, sr. secd.
notes, 12/31/01 ........................ NR NR 3,309,154
1,000,000 Doane Products Co., 10 5/8%, sr. notes,
03/01/06 ............................... B B3 1,065,000
500,000 Envirodyne Industries Inc., 10 1/4%, sr.
notes, 12/01/01 ........................ B- B3 493,750
1,000,000 Gorges Quik to Fix Foods Inc., 11 1/2%,
sr. sub. notes, series B, 12/01/06 ..... B- B3 1,035,000
500,000 International Home Foods Inc., 10 3/8%,
sr. sub. notes, 11/01/06 ............... B- B2 530,000
1,000,000 Krystal Company, 10 1/4%, sr. notes,
10/01/07 ............................... B+ B1 1,003,750
250,000 Liggett Group Inc., 16 1/2%, notes,
02/01/99 ............................... NR NR 175,000
3,070,000 Liggett Group Inc., 11 1/2%, gtd. sr.
secd. notes, series B, 02/01/99 ........ NR NR 1,964,800
500,000 North Atlantic Trading Inc., 11%, sr.
notes, 06/15/04, 144A .................. B B3 512,500
3,750,000 P&C Food Markets Inc., 11 1/2%, sr. notes,
10/15/01 ............................... B B3 3,543,750
3,000,000 Specialty Foods Corp., 11 1/4%, sr. sub.
notes, series B, 08/15/03 .............. CCC Caa 2,865,000
1,000,000 Sun World International Inc., 11 1/4%,
1st. mtg. notes, 04/15/04, 144A ........ B B2 1,055,000
1,000,000 Toms Foods Inc., 10 1/2%, sr. secd. notes,
11/01/04, 144A ......................... B B3 1,000,000
500,000 Unicco Service Co., 9 7/8%, sr. sub.
notes, 10/15/07, 144A .................. B- B3 495,000
750,000 Van De Kamps Inc., 12%, sr. sub. notes,
09/15/05 ............................... B- B2 832,500
------------
22,985,242
------------
GENERAL & SPECIALTY RETAIL - 1.65%
750,000 Hills Stores Co., 12 1/2%, sr. notes,
series B, 07/01/03 ..................... B- B2 562,500
1,000,000 Mothers Work Inc., 12 5/8%, sr. notes,
08/01/05 ............................... B B3 1,060,000
1,000,000 SRI Receivable Pure Inc., 12 1/2%, tr.
ctf. backed notes, series B, 12/15/00 .. NR NR 1,030,000
1,000,000 Wilsons Leather Experts Inc., 11 1/4%, sr.
notes, 08/15/04, 144A .................. B+ B3 990,000
------------
3,642,500
------------
GROCERY/CONVENIENCE FOOD STORES - 0.18%
351,000 Pantry Inc., 12%, sr. notes, series B,
11/15/00 ............................... B+ B2 386,100
------------
HEALTHCARE/DRUGS/HOSPITAL SUPPLIES - 3.62%
750,000 Complete Management Inc., 8%, conv. sub.
debs., 08/15/03 ........................ NR NR 937,500
500,000 Complete Management Inc., 8%, conv. sub.
debs., 12/15/03 ........................ NR NR 540,000
3,000,000 Phar Mor Inc., 11.72%, notes, 09/11/02 ... B- B3 3,150,000
500,000 Signature Brands, Inc., 13%, sr. sub.
notes, 08/15/02 ........................ B- B3 495,000
3,000,000 Urohealth System Inc., 12 1/2%, sr. sub.
notes, 04/01/04 ........................ B- B3 2,880,000
------------
8,002,500
------------
HOME FURNISHINGS/DURABLE CONSUMER PRODUCTS
- 1.31%
1,000,000 E&S Holdings Corp., 10 3/8%, sr. sub.
notes, 10/01/06 ........................ B- B3 845,000
500,000 Omega Cabinets Ltd., 10 1/2%, sr. sub.
notes, 06/15/07, 144A .................. B- B3 520,000
1,000,000 Simmons Co., 10 3/4%, sr. sub. notes,
04/15/06 ............................... B B2 1,040,000
500,000 Syratech Corp., 11%, sr. notes, 04/15/07 . B B1 480,000
------------
2,885,000
------------
HOTEL/GAMING - 0.36%
500,000 Courtyard By Mariott II Ltd., 10 3/4%, sr.
secd. notes, series B, 02/01/08 ........ B- NR 540,000
295,842 U.S. Trails Inc., 12%, sr. sub. pik notes,
07/15/03(b) ............................ NR NR 266,258
------------
806,258
------------
INSURANCE COMPANIES - 0.70%
1,500,000 Resource America Inc., 12%, sr. notes,
08/01/04, 144A ......................... NR Caa 1,556,250
------------
LEISURE/AMUSEMENT/MOTION PICTURES - 1.28%
1,000,000 Cobblestone Golf Group Inc., 11 1/2%, sr.
notes, series B, 06/01/03 .............. B B2 1,045,000
750,000 Discovery Zone Inc., 13 1/2%, sr. secd.
notes, 08/01/02 ........................ NR NR 791,250
1,500,000 Jumbo Sports Inc., 4 1/4%, conv. sub.
notes, 11/01/00 ........................ B- Caa 982,500
------------
2,818,750
------------
MACHINERY - 1.91%
1,000,000 Central Tractor Farm Country, 10 5/8%, sr.
notes, 04/01/07 ........................ B+ B2 1,030,000
3,250,000 Willcox & Gibbs Inc., 12 1/4%, sr. notes,
series B, 12/15/03 ..................... B+ B2 3,185,000
------------
4,215,000
------------
METALS/MINING - 5.54%
1,500,000 Algoma Steel Inc., 12 3/8%, 1st. mtg.
notes, 07/15/05 ........................ B B1 1,725,000
1,000,000 Anker Coal Group Inc., 9 3/4%, sr. notes,
10/01/07, 144A ......................... B B3 1,015,000
1,500,000 Continental Global Group Inc., 11%, sr.
notes, series B, 04/01/07 .............. B B2 1,590,000
750,000 GS Technologies Inc., 12%, gtd. sr. notes,
09/01/04 ............................... B B2 815,625
1,000,000 Gulf States Steel, 13 1/2%, 1st mtg.
notes, series, B, 04/15/03 ............. B- B1 1,030,000
500,000 International Knife and Saw, 11 3/8%, sr.
sub. notes, 11/15/06 ................... B- B3 535,000
2,000,000 IVACO Inc., 11 1/2%, sr. notes, 09/15/05 . B+ B1 2,210,000
1,000,000 Maxxam Group Inc., 11 1/4%, sr. secd.
notes, 08/01/03 ........................ CCC+ B3 1,055,000
450,000 NS Group Inc., 13 1/2%, sr. secd. notes,
07/15/03 ............................... B- B3 515,250
500,000 Royal Oak Mines Inc., 11%, sr. sub. notes,
series B, 08/15/06 ..................... B- B3 470,000
500,000 Sheffield Steel Corp., 12%, 1st. mtg.
notes, 11/01/01 ........................ B- Caa 515,000
750,000 Sheffield Steel Corp., 12%, 1st. mtg.
notes, 11/01/01 ........................ B- Caa 772,500
------------
12,248,375
------------
NON-AGRICULTURAL CHEMICALS/PLASTICS -
0.49%
1,000,000 Plastic Specialties & Technologies Inc.,
11 1/4%, bonds, 12/01/03 ............... NR B3 1,082,500
------------
OIL/NATURAL GAS/OIL SERVICES - 1.64%
436,000 HarCor Energy Inc., 14 7/8%, sr. secd.
notes, series B, 07/15/02 .............. B- B3 510,120
3,000,000 United Refining Co., 10 3/4%, sr. notes,
06/15/07, 144A ......................... B- B2 3,105,000
------------
3,615,120
------------
PACKAGING/CONTAINERS - 2.59%
3,250,000 Crown Packaging Ltd., 10 3/4%, sr. secd.
notes, series B, 11/01/00 .............. NR Caa 3,022,500
500,000 Portola Packaging Inc., 10 3/4%, sr.
notes, 10/01/05 ........................ B B2 520,000
2,000,000 Tekni-Plex Inc., 11 1/4%, sr. sub. notes,
series B, 04/01/07 ..................... B- B3 2,185,000
------------
5,727,500
------------
PAPER/FOREST PRODUCTS/PRINTING - 1.67%
325,000 American Pad & Paper Company, 13%,
sr. sub. notes, series B, 11/15/05 ..... B- B3 377,812
500,000 Day International Group, Inc., 11 1/8%,
sr. sub. notes, series B, 06/01/05 ..... B- B3 532,500
2,000,000 Fonda Group Inc., 9 1/2%, sr. sub. notes,
series B, 03/01/07 ..................... B- B3 1,900,000
1,000,000 FSW International Finance Co., 12 1/2%,
gtd. sub. notes, 11/01/06 .............. B+ B1 880,000
------------
3,690,312
------------
PERSONAL & MISCELLANEOUS SERVICES - 1.94%
500,000 Anchor Advanced Products Inc., 11 3/4%,
sr. notes, series B, 04/01/04 .......... B+ B3 530,000
750,000 ICON Health & Fitness Inc., 13%, sr. sub.
notes, series B, 07/15/02 .............. CCC+ NR 840,000
3,000,000 T/SF Communications Corp., 10 3/8%, sr.
sub. notes, 11/01/07, 144A ............. B- B3 2,910,000
------------
4,280,000
------------
POLLUTION CONTROL/WASTE REMOVAL - 0.12%
250,000 Compania de Infraes & Services, 11 5/8%,
gtd. sr. notes, 06/01/04, 144A ......... BB NR 263,750
-----------
PUBLIC UTILITY/ELECTRIC POWER/HYDRO POWER - 1.18%
2,000,000 Gothic Energy Corp., 12 1/4%, sr. notes,
09/01/04 ............................... NR NR 2,080,000
500,000 Texas New Mexico Power Co., 12 1/2%,
debs., 01/15/99 ........................ BB- Ba3 532,500
------------
2,612,500
------------
RAIL/TRUCKING/OVERNIGHT DELIVERY - 1.69%
375,000 Aftermarket Technology Corp., 12%, sr.
sub. notes, series B, 08/01/04 ......... NR B3 416,250
1,500,000 Golden Ocean Group Ltd., 10%, sr. notes,
08/31/01 ............................... CCC+ B3 1,237,500
750,000 Johnstown America Industries Inc.,
11 3/4%, sr. sub. notes,
series B, 08/15/05, 144A ............... B B3 810,000
667,000 Terex Corp., 13 1/4%, sr. secd. notes,
05/15/02 ............................... B- Caa 763,715
500,000 TFM, 10 1/4%, sr. notes, 06/15/07, 144A .. B+ B2 500,000
------------
3,727,465
------------
REAL ESTATE DEVELOPMENT/REITS/BUILDING/
CONSTRUCTION - 1.79%
290,820 Bramalea Limited, 11 1/8%, 03/22/98 ...... NR NR 72,705
1,000,000 ICF Kaiser International Inc., 13%, sr.
sub. notes, 12/31/03 ................... B- B3 1,030,000
2,000,000 ICF Kaiser International Inc., 12%, sr.
sub. notes, 12/31/03 ................... B- B3 2,070,000
750,000 Peters, J.M., Inc., 12 3/4%, sr. notes,
05/01/02 ............................... B- B3 772,500
------------
3,945,205
------------
TELEPHONE/COMMUNICATIONS - 13.97%
500,000 Alvey Systems, Inc., 11 3/8%, sr. sub.
notes, 01/31/03 ........................ B- B3 515,000
1,750,000 American Communications Services, Inc.,
13 3/4%, sr. notes, 07/15/07, 144A ..... NR NR 1,977,500
1,000,000 BTI Telecom Corp., 10 1/2%, sr. notes,
09/15/07, 144A ......................... B+ B2 975,000
2,000,000 Cell Net Data System Inc., 0%, sr. disc.
notes, 10/01/07, 144A .................. NR NR 1,010,000
1,000,000 Echostar DBS Corp., 12 1/2%, sr. secd.
notes, 07/01/02, 144A .................. B- NR 1,057,500
500,000 Econophone Inc., 13 1/2%, sr. notes,
07/15/07, 144A ......................... NR NR 540,000
4,000,000 Hyperion Telecommunications Inc., 12 1/4%,
sr. secd. notes, 09/01/04, 144A ........ B NR 4,240,000
1,000,000 Innova S. De R. L., 12 7/8%, sr. notes,
04/01/07 ............................... B- B2 1,025,000
2,000,000 Ionica PLC, 0%, sr. disc. notes, 05/01/07 NR B3 1,090,000
1,000,000 Knology Holdings Inc., 0%, sr. disc.
notes, 10/15/07 ........................ NR NR 520,000
5,000,000 MGC Communications Inc., 13%, sr. secd.
notes, 10/01/04, 144A .................. B Caa 4,950,000
1,000,000 Occidente Y Caribe Cellular, 0%, sr. disc.
notes, series B, 03/15/04 .............. B B3 750,000
4,500,000 Orbcomm Global L.P., 14%, sr. notes,
08/15/04 ............................... NR B3 4,713,750
2,750,000 Phonetel Technologies Inc., 12%, sr.
notes, 12/15/06 ........................ B- B2 2,811,875
500,000 Powertel Inc., 11 1/8%, sr. notes,
06/01/07 ............................... B B2 525,000
1,450,000 Telemundo Group Inc., 7%, sr. notes,
02/15/06 ............................... B B1 1,392,000
1,000,000 Tevecap SA, 12 5/8%, sr. notes, 11/26/04 . B B2 1,010,000
650,000 Winstar Communications Inc., 14%, sr.
disc. notes, 10/15/05 .................. NR NR 487,500
325,000 Winstar Communications Inc., 0%, conv. sr.
disc. notes, 10/15/05, 144A ............ NR NR 230,750
1,000,000 Winstar Equipment Corp., 12 1/2%, gtd. sr.
secd. exch. notes, 03/15/04 ............ CCC+ B3 1,042,500
------------
30,863,375
------------
TEXTILES/OTHER MANUFACTURING/APPAREL -
2.34%
2,000,000 Brazos Sportswear Inc., 10 1/2%, sr.
notes, 07/01/07 ........................ B+ B2 1,970,000
1,000,000 Glenoit Corp., 11%, sr. sub. notes,
04/15/07, 144A ......................... B- B2 1,055,000
2,000,000 Hosiery Corporation of America Inc.,
13 3/4%, sr. sub. notes, 08/01/02 ...... B- B3 2,140,000
542 JPS Cap Corp., 0%, contingent pay. notes,
09/10/98 ............................... NR NR 466
------------
5,165,466
------------
TRANSPORTATION/AIRLINES/BUS - 4.80%
1,000,000 CHC Helicopter Corp., 11 1/2%, sr. sub.
notes, 07/15/02 ........................ B- B3 1,065,000
1,000,000 Global Ocean Carriers Ltd., 10 1/4%, sr.
notes, 07/15/07, 144A .................. B+ B2 975,000
1,460,949 Mexico City Toluca Toll, 11%, notes,
05/19/02, 144A ......................... NR NR 1,417,120
1,000,000 Sabreliner Corp., 12 1/2%, sr. notes,
series B, 04/15/03 ..................... B B2 1,010,000
2,000,000 Trans World Airlines Inc., 12%, sr. secd.
notes, 04/01/02 ........................ NR NR 2,480,000
985,583 Tribasa Toll Road Trust, 10 1/2%, notes,
12/01/11 ............................... NR NR 827,890
985,583 Tribasa Toll Road Trust, 10 1/2%, notes,
series A, 12/01/11, 144A ............... NR NR 827,890
2,000,000 Valujet Airlines Inc., 10 1/2%, sr. secd.
notes, 04/15/01, 144A .................. NR NR 2,005,000
------------
10,607,900
------------
TOTAL FIXED INCOME (cost $198,461,345) .......................... $199,938,334
------------
COMMON STOCK AND WARRANTS -- 5.56%
<CAPTION>
Value
Units Description (Note 2)
----- ----------- --------
<S> <C> <C>
10,500 Ambassador Apartments Inc. ...................................... $ 225,094
10,000 American Capital Strategies ..................................... 180,000
13,550 American Communications Services, Inc.* ......................... 1,422,750
500,000 American Communications Services, Inc.* ......................... 470,250
2,000 American Telecasting Inc., warrants* ............................ 5,000
185,900 Ames Department Stores Inc., excess cash flow pmt., series A .... 0
594,876 Ames Department Stores Inc., lit. trust units ................... 0
10,000 Annaly Mortgage Management Inc .................................. 118,750
50,000 Annaly Mortgage Management Inc. ................................. 550,000
5,925 Capital Pac Holdings Inc., warrants, 144A* ...................... 22
1,000 Central Rents Inc., 144A ........................................ 60,000
750 Chattem Inc., warrants* ......................................... 3,000
100,000 Commodore Separation Technology, sr. conv. preferred ............ 775,000
100,000 Commodore Separation Technology ................................. 87,500
33,000 Cort Business Services Corp., warrants* ......................... 132,000
500 County Seat Holdings Inc., warrants* ............................ 0
20,000 Criimi Mae Inc., conv. preferred, series B ...................... 725,000
4,000 Crown America Realty Trust ...................................... 217,000
550 CS Wireless Systems Inc., 144A* ................................. 17,050
20,000 Engel General Developers Ltd.* .................................. 166,250
20,000 Excel Realty Trust Inc. ......................................... 602,500
2,000 Globalstar Telecommunications, warrants, 144A* .................. 0
1,500 Golden Ocean Group Ltd. ......................................... 123,750
11,000 HarCor Energy Inc., warrants* ................................... 0
500 HDA Management Corp., warrants* ................................. 0
20,000 Health & Retirement Properties Trust ............................ 375,000
1,500 Heartland Wireless Communications, warrants, 144A* .............. 1,500
10,000 Hospitality Properties Trust .................................... 355,625
4,800 ICF Kaiser International Inc., warrants* ........................ 0
750 IHF Capital Inc., warrants, 144A* ............................... 45,000
15,000 Imperial Credit Commercial Mortgage Investments Corp.* .......... 247,500
750 Intermedia Communications of Florida Inc., warrants, 144A* ...... 74,250
2,000 Ionica PLC, warrants* ........................................... 0
49,970 JPS Textile Group, Inc.* ........................................ 674,595
25,000 Local Financial Corp., 144A ..................................... 281,250
500 Motels of America Inc., 144A* ................................... 500
20,000 National Propane Partners L.P. .................................. 440,000
750 NS Group Inc.* .................................................. 0
4,000 Occidente Y Caribe Cellular, warrants, 144A* .................... 0
3,500 Optel Inc.* ..................................................... 35
2,000 Orion Network Systems Inc. ...................................... 35,000
125,449 Prime Retail Inc. ............................................... 1,873,894
1,000 Sabreliner Corp., warrants* ..................................... 0
500 Spanish Broadcasting Corp., warrants* ........................... 175,000
15,000 Supermarkets General Holdings Corp., exchangeable preferred ..... 345,000
4,000 Terex Corp., rights* ............................................ 80,000
5,133 Trans World Airlines Inc.* ...................................... 38,177
2,000 Trans World Airlines Inc., warrants* ............................ 0
25,000 Ugly Duckling Corp.* ............................................ 296,875
1,000 Unifi Communications Inc., warrants, 144A* ...................... 0
9,800 Uniroyal Technology Corp., warrants* ............................ 9,800
20,000 Walden Residential Properties, conv. preferred, series B ........ 560,000
5,000 WBK Strypes Trust ............................................... 155,000
7,000 WHX Corp., preferred* ........................................... 344,750
1,500 Wireless One Inc., warrants* .................................... 0
------------
TOTAL COMMON STOCK AND WARRANTS (cost $10,649,928) .............. 12,289,667
------------
TOTAL INVESTMENTS IN SECURITIES (cost $209,111,273) ............. 212,228,001
------------
OTHER ASSETS - 3.93% ............................................ 8,669,705
------------
TOTAL ASSETS - 100% ............................................. $220,897,706
============
* Non-income producing security.
(a) Percentages indicated are based on total assets.
(b) Pay in kind.
NR denotes not rated.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
October 31, 1997
ASSETS
Investments in securities at value (identified cost $209,111,273;
see Schedule of Investments and Note 2) ....................... $212,228,001
Receivables:
Investment securities sold .................................... 3,457,384
Interest and dividends ........................................ 5,064,840
Deferred debt issuance costs (Note 2) ........................... 4,997
Deferred auction agent fees (Note 6) ............................ 27,003
Prepaid surety bond premiums (Note 7) ........................... 7,012
Prepaid insurance ............................................... 83,174
Other assets .................................................... 25,295
------------
Total assets ............................................ $220,897,706
------------
LIABILITIES
Payables:
Investment securities purchased ............................... $ 2,439,382
Due to bank ................................................... 1,591,286
Accrued expenses (Note 3) ....................................... 958,136
Senior notes (Note 4) ........................................... 20,000,000
------------
Total liabilities ....................................... $ 24,988,804
------------
Net Assets:
Taxable auction rate preferred stock, no par value --
Authorized -- 1,000 shares
Issued -- 200 shares, liquidation preference of $100,000 per
share (Notes 5 and 7) ..................................... $ 20,000,000
------------
Common stock, $.01 par value --
Authorized -- 100,000,000 shares
Issued and outstanding -- 44,146,293 shares ................. $ 441,463
Capital in excess of par value (Notes 2 and 5) ................ 230,120,834
Accumulated undistributed net investment income (Note 2) ...... 2,845,247
Accumulated net realized loss from security transactions ...... (60,615,370)
Net unrealized appreciation of investments .................... 3,116,728
------------
Net assets applicable to common stock (equivalent to
$3.98 per share, based on 44,146,293 shares outstanding) $175,908,902
------------
Total net assets .................................... $195,908,902
============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF OPERATIONS
For the year ended October 31, 1997
INVESTMENT INCOME (Note 2):
Interest income ............................................... $18,589,675
Dividend income ............................................... 645,812
Accretion of discount ......................................... 1,999,323
Other income .................................................. 66,032
-----------
Total investment income ................................. $21,300,842
===========
EXPENSES:
Interest expense .............................................. $ 1,305,999
Investment advisory fee (Note 3) .............................. 1,146,665
Custodian and transfer agent fees ............................. 169,999
Preferred dividend auction costs .............................. 125,290
Professional fees ............................................. 159,002
Miscellaneous expenses ........................................ 156,047
Amortization of prepaid surety bond premiums (Note 7) ......... 80,001
Directors' fees ............................................... 91,165
Insurance expense ............................................. 107,595
Amortization of deferred auction agent fees (Note 6) .......... 26,999
Excise tax expense ............................................ 70,060
-----------
Total expenses .......................................... $ 3,438,822
-----------
Net investment income ................................... $17,862,020
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments sold ......................... $ 4,773,501
Change in net unrealized depreciation of investments (Note 2) . 4,499,052
----------
Net realized and unrealized gain on investments ......... $ 9,272,553
----------
Net increase in net assets resulting from operations .... $27,134,573
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS ($5,456 per share) ...... (1,091,099)
-----------
Net increase in net assets applicable to common
stockholders .......................................... $26,043,474
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CASH FLOWS
For the year ended October 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received .......................... $ 19,053,136
Operating expenses paid .................................. (1,807,203)
-------------
Net cash provided by operating activities .......... $ 17,245,933
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities ........................ $(370,804,113)
Sales and maturities of portfolio securities ............. 323,702,189
-------------
Net cash used in investing activities .............. $ (47,101,924)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock rights offering and sale
of common stock ........................................ 44,499,053
Preferred stock dividends paid ........................... (1,091,099)
Common stock dividends paid from operations .............. (15,053,657)
-------------
Net cash provided by financing activities .......... $ 28,354,297
-------------
NET DECREASE IN CASH ....................................... $ (1,501,694)
CASH, BEGINNING OF PERIOD .................................. 1,501,694
-------------
CASH, END OF PERIOD ........................................ $ --
=============
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net increase in net assets resulting from operations ... $ 27,134,573
Increase in interest and dividend receivables .......... (409,580)
Amortization of Fidelity Bond and other deferred assets 32,000
Increase in other assets ............................... (74,567)
Increase in accrued expenses and other payables ........ 1,674,186
Net realized gain on investments sold .................. (4,773,501)
Change in net unrealized depreciation of investments ... (4,499,052)
Accretion of bond discount ............................. (1,838,126)
-------------
Net cash provided by operating activities .......... $ 17,245,933
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ................... $ 1,305,999
Cash paid during the year for excise taxes ............... 70,060
=============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Fiscal Year Ended Fiscal Year Ended
October 31, October 31,
1997 1996
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................................ $ 17,862,020 $ 13,628,745
Net realized gain on investments sold ................ 4,773,501 351,405
Change in net unrealized depreciation of investments . 4,499,052 5,074,470
------------ ------------
Net increase in net assets resulting from
operations ................................... $ 27,134,573 $ 19,054,620
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (290,871 shares and 353,455 shares,
respectively) to common stockholders for
reinvestment of dividends .......................... $ 1,146,681 $ 1,333,077
Net proceeds from sale of common stock issued
(12,918,092 and 5,393,885 shares, after deducting
$2,167,500 and $996,862 of soliciting fees and other
expenses), respectively ............................ 44,208,450 19,553,840
------------ ------------
Increase in net assets resulting from fund share
transactions ................................. $ 45,355,131 $ 20,886,917
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Preferred dividends ($5,456 and $5,679 per share,
respectively) ...................................... $(1,091,099) $ (1,135,736)
Common dividends ($.42 and $.42 per share,
respectively) from operations ...................... (16,200,344) (11,404,136)
------------ ------------
Decrease in net assets resulting from
distributions to stockholders ................ (17,291,443) (12,539,872)
------------ ------------
Total net increase in net assets ............... $ 55,198,261 $ 27,401,665
NET ASSETS:
Beginning of period .................................. 140,710,641 113,308,976
------------ ------------
End of period (including $2,845,247 and $2,018,708 of
undistributed net investment income as of October
31, 1997 and 1996, respectively) ................... $195,908,902 $140,710,641
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIODS PRESENTED
For the Years Ended October 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ... $ 3.90 $ 3.70 $ 3.69 $ 4.25 $ 4.03
-------- -------- -------- -------- --------
Net investment income .................. .46# .50# .45 .48# .63#
Net realized and unrealized gain (loss)
on investments........................ .24# .20# .03 (.38)# .39#
-------- -------- -------- -------- --------
Total from investment operations $ .70 $ .70 $ .48 $ .10 $ 1.02
-------- -------- -------- -------- --------
Distributions:
Dividends from accumulated net
investment income
To preferred stockholders .......... (.03) (.04) (.05) (.03) (.06)
To common stockholders ............. (.42) (.42) (.42) (.45) (.62)
-------- -------- -------- -------- --------
Total distributions ............ $ (.45) $ (.46) $ (.47) $ (.48) $ (.68)
-------- -------- -------- -------- --------
Effect of sale of common stock and
related expenses from rights offering $ (.17) $ (.04) $ -- $ (.18) $ (.12)
-------- -------- -------- -------- --------
Net asset value, end of period ......... $ 3.98 $ 3.90 $ 3.70 $ 3.69 $ 4.25
======== ======== ======== ======== ========
Per share market value, end of period .. $ 4.13 $ 4.00 $ 3.88 $ 3.50 $ 4.25
======== ======== ======== ======== ========
Total investment return ................ 14.82% 15.29% 28.57% (7.78)% 23.25%
======== ======== ======== ======== ========
Net assets, end of period, applicable to
common stock (a) ..................... $175,909 $120,711 $ 93,309 $ 92,072 $ 79,438
======== ======== ======== ======== ========
Net assets, end of period, applicable to
preferred stock (a) .................. $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000
======== ======== ======== ======== ========
Net assets, end of period (a) .......... $195,909 $140,711 $113,309 $112,072 $ 99,438
======== ======== ======== ======== ========
Ratio of operating expenses to average
net assets, applicable to common stock 2.30% 3.06% 3.27% 3.27% 3.10%
Ratio of net investment income to average
net assets, applicable to common stock 11.94% 13.20% 13.47% 12.25% 13.49%
Ratio of operating expenses to average
net assets** ......................... 1.81%+ 2.21%+ 2.28%+ 2.30%+ 2.13%+
Ratio of net investment income to
average net assets** 9.42% 9.51% 9.39% 8.64% 9.26%
Portfolio turnover rate ................ 176.04% 108.33% 80.71% 72.00% 117.20%
(a) Dollars in thousands.
** 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 (total assets less accrued liabilities (excluding senior notes)) of both the common and
preferred shareholders.
+ Excluding interest expense, the ratio of operating expenses to average net assets, applicable to common stock and preferred
stock, is 1.13%, 1.30%, 1.29%, 1.32% and 1.50%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's
rights offerings.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
INFORMATION REGARDING SENIOR SECURITIES
As of October 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Amount Outstanding:
Notes $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000
Preferred stock 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
Asset Coverage:
Per note (a) 1,080% 804% 667% 660% 597%
Per preferred stock share (b) 540% 402% 333% 330% 299%
Involuntary Liquidation Preference:
Per preferred stock share (c) $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
Approximate Market Value:
Per note $ 1,003.80 $ 990.00 $ 987.50 $ 937.10 $ 997.50
Per preferred stock share 100,000 100,000 100,000 100,000 100,000
(a) Calculated by subtracting the Fund's total liabilities (not including senior securities) from the Fund's total
assets and dividing such amount by the principal amount of the debt outstanding.
(b) Calculated by subtracting the Fund's total liabilities (not including senior securities) from the Fund's total
assets and dividing such amount by the principal amount of the debt outstanding and aggregate liquidation
preference of the outstanding shares of Taxable Auction Rate Preferred Stock.
(c) Plus accumulated and unpaid dividends.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
(1) ORGANIZATION AND OPERATIONS
Prospect Street High Income Portfolio Inc. (the "Fund") was organized as a
corporation in the state of Maryland on May 13, 1988 and is registered with the
Securities and Exchange Commission as a diversified, closed-end, management
investment company under the Investment Company Act of 1940. The Fund commenced
operations on December 5, 1988. The Fund's financial statements have been
prepared in conformity with generally accepted accounting principles, which
requires the management of the Fund to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund, which are in
conformity with those generally accepted in the investment company industry.
The Fund invests primarily in securities of fixed-maturity, corporate debt
securities and in redeemable preferred stocks that are rated less than
investment grade. Risk of loss upon default by the issuer is significantly
greater with respect to such securities compared to investment-grade securities
because these securities are generally unsecured and are often subordinated to
other creditors of the issuer, and because these issuers usually have high
levels of indebtedness and are more sensitive to adverse economic conditions,
such as a recession, than are investment-grade issuers. In some cases, the
collection of principal and timely receipt of interest is dependent upon the
issuer attaining improved operating results, selling assets or obtaining
additional financing.
See the schedule of investments for information on individual securities, as
well as industry diversification and credit quality ratings.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) VALUATION OF INVESTMENTS
Investments for which listed market quotations are readily available are
stated at market value, which is determined using the last reported sale price
or, if no sales are reported, as in the case of some securities traded
over-the-counter, the last reported bid price. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost, which
approximates market.
Other investments, primarily noninvestment-grade corporate debt securities for
which market quotations are not readily available due to a thinly traded market
with a limited number of market makers, are stated at fair value on the basis of
valuations furnished by an independent pricing service, subject to adjustment by
the investment adviser based upon quotations obtained from market makers. The
independent pricing service determines value based primarily on quotations from
dealers and brokers, market transactions, accessing data from quotation
services, offering sheets obtained from dealers and various relationships
between securities. The independent pricing service utilizes the last sales
price based on odd-lot trades, if available. If such price is not available, the
price furnished is based on round-lot or institutional size trades. These
procedures have been approved by the Board of Directors.
The fair value of restricted securities is determined by the investment
adviser following procedures approved by the Board of Directors.
(b) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Realized gains and losses on investments sold are recorded on the
identified-cost basis. Interest income and accretion of discounts are recorded
on the accrual basis.
(c) FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies,
and to distribute substantially all of its investment company taxable income to
its stockholders each year. Accordingly, no federal income tax provision is
required.
The Fund has reclassified $262,889 from paid in capital to undistributed net
investment income and $6,927 from undistributed net investment income to
undistributed net realized loss from security transactions. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
At October 31, 1997, the cost of investments in securities for federal income
tax purposes was $209,111,273. Aggregate gross unrealized gains on securities in
which there was an excess of market value over tax cost was $10,968,585.
Aggregate gross unrealized losses on securities in which there was an excess of
tax cost over market value was $7,851,857. The net unrealized gain on securities
held by the Fund was $3,116,728 for federal income tax purposes.
At October 31, 1997, the Fund had the following capital loss carryovers
available to offset future capital gains, if any, to the extent provided by
regulations:
CARRYOVER
AVAILABLE EXPIRATION DATE
$(37,564,886) October 31, 1998
(18,529,051) October 31, 1999
(808,396) October 31, 2002
(3,703,531) October 31, 2003
------------
$(60,605,864)
============
(D) COMMON STOCK AND TAXABLE AUCTION RATE PREFERRED STOCK (PREFERRED STOCK),
OFFERING AND DEFERRED DEBT ISSUANCE COSTS
The costs incurred by the Fund in connection with the initial sale of the
common and preferred stock as well as the common stock rights offerings have
been recorded as a reduction of the common stock proceeds. The costs incurred by
the Fund in connection with the issuance of the senior notes have been deferred
and are being amortized on a straight-line basis over a period of five years.
(E) CASH FLOW INFORMATION
The Fund invests primarily in corporate debt securities and distributes
dividends from net investment income, which are paid in cash or shares of common
stock of the Fund. These activities are reported in the accompanying statement
of changes in net assets, and additional information on cash receipts and cash
payments is presented in the accompanying statement of cash flows.
(3) INVESTMENT ADVISORY AGREEMENT
Prospect Street Investment Management Co., Inc., the Fund's Investment
Adviser, earned $1,146,665 in management fees for the year ended October 31,
1997. Management fees paid by the Fund to the Investment Adviser were calculated
at .65% (on an annual basis) of the average weekly value of 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 net
assets, .55% on the next $50,000,000 of net assets and .50% of the excess of net
assets over $225,000,000. At October 31, 1997, the fee payable to the Investment
Adviser was $169,638, which was included in accrued expenses in the accompanying
balance sheet. However, for a period of one year commencing on the expiration
date of the May 1996 rights offering, the Adviser waived its advisory fee with
respect to any increase in the Fund's net assets resulting from the exercise of
any rights pursuant to that Offering.
(4) DEBT
In July 1993, the Fund repurchased the remaining $5,000,000 (principal amount)
of its senior extendible notes (the Notes), which carried an annual interest
rate through November 30, 1993 of 10.28%. The Fund simultaneously issued
$20,000,000 of new Senior Notes (the Senior Notes) that will mature, if not
previously redeemed, on December 1, 1998. The Fund is required to maintain
certain asset coverages with respect to the Senior Notes, as defined in the Note
Purchase Agreement, and the Senior Notes are subject to mandatory redemption if
the Fund fails to maintain these asset coverages. The Senior Notes bear interest
at the rate of 6.53% per annum through November 30, 1998. Interest on the Senior
Notes is due every June 1 and December 1, commencing December 1, 1993.
The Senior Notes are redeemable, in whole or in part, by the Fund at certain
times and under certain circumstances, as defined in the Note Purchase
Agreement.
(5) REDEEMABLE PREFERRED STOCK
In July 1993, the Fund redeemed 100 of the 300 shares of preferred stock that
were issued concurrently with the issuance of the Senior Extendible Notes.
Dividends are cumulative at a rate that was established at the offering of the
preferred stock and which has and will continue to be reset every 30 days
thereafter by an auction. Dividend rates ranged from 5.30% to 5.65% of the
liquidation preference during the year ended October 31, 1997. The remaining 200
shares of preferred stock are redeemable, at the option of the Fund, at a
redemption price equal to $100,000 per share, plus accumulated and unpaid
dividends, on any dividend payment date. The preferred stock is also subject to
mandatory redemption at a redemption price equal to $100,250 per share, plus
accumulated and unpaid dividends, if the Fund is in default of its surety asset
coverage requirements with respect to the preferred stock (see Note 7). In
general, the holders of the preferred stock and the common stock vote together
as a single class, except that the holders of the preferred stock, as a separate
class, vote to elect two members of the Board of Directors, and separate class
votes are required on certain matters that affect the respective interests of
the preferred stock and common stock. The preferred stock has a liquidation
preference of $100,000 per share, plus accumulated and unpaid dividends. The
Fund is required to maintain certain asset coverages with respect to the
preferred stock, as defined in the Fund's Note Purchase Agreement and Surety
Bond Agreement.
(6) AUCTION AGENT
The Fund amended and extended the auction agent agreement with Bear Stearns &
Co. Inc. on October 26, 1993 (which was originally dated May 7, 1990) to provide
for an extension to December 4, 1998. The Fund incurred additional costs of
$135,000 related to extending this agreement. These costs are being amortized on
a straight-line basis over the remaining life of the extended agreement.
Amortization expense for the year ended October 31, 1997 was $26,999.
(7) SURETY BOND
The Fund has entered into an insurance agreement, dated as of December 1,
1988, with Financial Security Assurance, Inc. (FSA), pursuant to which FSA has
issued a surety bond. Under the terms of the surety bond, FSA has
unconditionally and irrevocably guaranteed dividend, redemption and liquidation
payments to preferred shareholders upon failure of the Fund to do so, and the
Fund is then obligated to reimburse FSA for any amounts paid under the surety
bond. The surety bond had an initial term of five years and was scheduled to
expire on December 5, 1993. On July 15, 1993, the Fund extended the terms of the
surety bond from December 5, 1993 to December 5, 1998. The Fund will pay an
annual premium of 0.40% on the maximum aggregate liquidation preference of the
preferred stock.
The Fund executed an amendment to the insurance agreement on April 11, 1990,
which provides that the Fund must redeem or repurchase all of the then
outstanding shares of preferred stock in the event that the dividend rate on the
preferred stock for the period next succeeding the auction in September 1998 is
the maximum applicable rate (as defined) payable on the Fund's preferred stock.
(8) PURCHASES AND SALES OF SECURITIES
For the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $371,447,873 and $324,868,108,
respectively. There were no purchases or sales of U.S. Government obligations
during the year ended October 31, 1997.
(9) CERTAIN TRANSACTIONS
Certain officers of the Investment Adviser serve on the Board of Directors of
the Fund. They receive no compensation in this capacity.
Directors who are not officers or employees of the Investment Adviser receive
a fee of $10,000 per year plus $2,000 per Directors' meetings attended, together
with actual out-of-pocket expenses relating to attendance at such meetings and
$1,000 per telephone meeting. In addition, members of the Fund's audit
committee, which consists of certain of the Fund's noninterested Directors,
receive $1,000 per audit committee meeting attended, together with actual
out-of-pocket expenses relating to attendance at such meeting.
(10) DIVIDENDS AND DISTRIBUTIONS
The Board of Directors of the Fund declared regular dividends on the common
stock of $.035 per share payable on November 29 and December 30, 1996, and
January 31, February 28, March 31, April 30, May 30, June 30, July 31, August
29, September 30 and October 31, 1997.
Distributions on common stock are declared based on annual projections of the
Fund's net investment income (defined as dividends and interest income, net of
Fund expenses, less distributions on the preferred stock). The Fund plans to pay
monthly distributions to common shareholders. Meanwhile, as a result of market
conditions or investment decisions, the amount of distributions may exceed net
investment income earned at certain times throughout the period. It is
anticipated that, on an annual basis, the amount of distributions to common
shareholders will not exceed net investment income (as defined) applicable to
common shareholders on a tax basis. All shareholders of the Fund are
automatically considered a participant in the Dividend Reinvestment Plan (the
"Plan") unless otherwise elected. Under the Plan, when the market price of
common stock shares is equal to or exceeds the net asset value on record date
for distribution, participants will receive all dividends and distributions in
full and fractional shares of the Fund at the most recently determined net asset
value but in no event less than 95% of market price. If on record date for
distributions the net asset value of the common stock exceeds its market price,
or if the Fund shall declare a dividend or capital gains distribution payable
only in cash, the dividend-paying agent will buy common stock in the open market
for the participants' accounts. Participants are not charged a service fee for
the Plan but are subject to a pro rata share of brokerage fees incurred with
respect to open market purchases of common stock.
(11) FAIR VALUE OF LONG-TERM DEBT
The fair value of the Fund's long-term debt is estimated based on the quoted
market prices for the same issues or on the current rates offered to the Fund
for debt of the same remaining securities. At October 31, 1997, the fair value
of the Senior Notes was $20,076,400.
(12) RIGHTS OFFERING
On February 28, 1997 the Fund commenced a rights offering whereby the Fund
issued to its shareholders of record, as of that date, non-transferable rights
entitling the holders thereof to subscribe for an aggregate of 12,918,092 shares
of the Fund's common stock. Each record date shareholder had the ability to
receive one right for each whole share of common stock held. The rights allowed
the rights holder to subscribe for shares of common stock at the right of one
share of common stock for every three rights held. The subscription period for
the rights offering expired on March 25, 1997 and the Fund issued 12,918,092
shares of common stock at $3.59 per share. Proceeds to the Fund amounted to
$44,208,450, net of soliciting fees and offering expenses of $2,167,500.
On November 21, 1997 the Fund filed a registration statement for a
transferable rights offering to shareholders. Such rights, if exercised, will
entitle the holders thereof to subscribe for an aggregate of 14,718,295 shares
of the Fund's common stock. The expected offering date is December 1997 with a
closing date near the end of January 1998.
<PAGE>
APPENDIX A
RATING AGENCY GUIDELINES
MOODY'S INVESTORS SERVICES, INC.
MOODY'S "AAA" RATING GUIDELINES
For purposes of calculating the Discounted Value of the Fund's
portfolio under current Moody's guidelines, the fair market value of portfolio
securities eligible for consideration under such guidelines ("Moody's Eligible
Assets") must be discounted by certain discount factors set forth below
("Moody's Discount Factors"). The Discounted Value of a portfolio security under
Moody's guidelines is the Market Value thereof, determined as specified by
Moody's, divided by the Moody's Discount Factor. The Moody's Discount Factor
with respect to securities other than those described below will be the
percentage provided in writing by Moody's.
Corporate Debt Securities
Under current Moody's guidelines, portfolio securities that are
corporate debt securities will not be included in the calculation of the
Discounted Value of the Fund's portfolio unless (a) such securities are rated
Caa or higher by Moody's; (b) the senior unsecured rating of the issuer's
corporate bonds is higher than B3; (c) such securities provide for the periodic
payment of interest in cash in U.S. dollars; (d) such securities do not provide
for conversion or exchange into equity capital at any time over their lives; (e)
for debt securities rated Ba1 and below, no more than 10% of the original amount
of such issue may constitute Moody's Eligible Assets; and (f) such securities
have been registered under the Securities Act, or are Rule 144A Securities.
The Discounted Value of any Moody's Eligible Asset that is a corporate
debt security is the percentage determined by reference to the rating on such
asset (which percentage is based upon the Exposure Period) with reference to the
remaining term to maturity of such assets, in accordance with the table set
forth below:
Moody's Discount Factors
Corporate Debt Securities+
Rating Category
Remaining Term to ------------------------------------------------------
Maturity Asset Aaa Aa A Baa Ba B* Caa
- ----------------- --- -- - --- -- -- ---
1 Year.......... 112% 118% 123% 128% 139% 150% 260%
2 Years......... 118 124 130 135 147 158 260
3 Years......... 123 129 135 141 153 165 260
4 Years......... 139 135 141 148 160 172 260
5 Years ........ 134 141 147 154 166 179 260
7 Years......... 142 149 155 162 176 189 260
10 Years......... 148 156 163 170 184 198 260
15 Years......... 153 161 168 175 190 205 260
20 Years......... 161 169 177 184 200 215 260
30 Years......... 162 170 178 185 201 216 260
- --------------------------
* Senior debt securities of an issuer rated B3 shall be deemed to be Caa
rated securities for purposes of determining the applicable Moody's
Discount Factor.
+ The Moody's Discount Factor applied to Rule 144A Securities is 160% of
the Moody's Discount Factor which would apply were the securities
registered under the Securities Act.
The Moody's guidelines impose minimum issue size, issuer and industry
diversification and other requirements for purposes of determining Moody's
Eligible Assets. Specifically, portfolio holdings as described below must be
within the following diversification and issue size requirements in order to
constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
Maximum Single Maximum Single Minimum Issue Size
Asset Ratings(1) Issuer(%)(2,3) Industry(%)(3,4) ($ in millions)(6)
---------------- -------------- ---------------- ------------------
"aaa", "Aaa" ........... 100 100 100
"aa", "Aa" ............. 20 60 100
"a", "A", "P-1" ........ 10 40 100
"baa", "Baa" ........... 6 20 100
"Ba" ................... 4 12 50(5)
"B1"-"B2" .............. 3 8 50(5)
"B3" ("Caa" subordinate) 2 5 50(5)
- ----------
(1) Refers to senior debt rating of asset.
(2) Companies subject to common ownership of 25% or more are considered as one
name.
(3) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(4) Industries are determined according to industry classifications specified
by Moody's ("Moody's Industry Classification"). See below.
(5) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50 million.
The Moody's Industry Classifications, for the purposes of determining
Moody's Eligible Assets, mean each of the following industry classifications,
determined with respect to particular issues in the discretion of the Fund:
Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft
Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors,
Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods,
Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks,
Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes,
Cigars, Leaf/Snuff, Vegetable Oil
Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting,
Engineering, Construction, Hardware, Forest Products (building-related
only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development,
REITs, Land Development
Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial
Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints,
Varnish, Fabricating
Containers, Packaging and Glass: Glass, Fiberglass, Containers made of:
Glass, Metal, Paper, Plastic, Wood, or Fiberglass
Personal and Non Durable Consumer Products (Manufacturing Only): Soaps,
Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies
Diversified/Conglomerate Manufacturing Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals: Fabricating,
Distribution
Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste
Disposal
Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers,
Drivers, Technology
Finance: Investment Brokerage, Leasing, Syndication, Securities
Farming and Agriculture: Livestock, Grains, Produce; Agricultural
Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores
Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment
Home and Office Furnishings, Housewares and Durable Consumer Products:
Carpets, Floor Coverings, Furniture, Cooking, Ranges, Hotels, Motels, Inns
and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing), Motion Picture Production Theaters, Motion Picture
Distribution
Machinery (Non-Agriculture, Non-Construction, Non-Electronic): Industrial,
Machine Tools, Steam Generators
Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead, Uranium,
Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production,
Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, and
Distribution and Sales of the foregoing
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
Personal, Food and Miscellaneous Services
Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper Products,
Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks,
Radio, T.V., Cable Broadcasting Equipment
Cargo Transport: Rail, Shipping, Railroads, Rail-car builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking,
Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
Personal Transportation: Air, Bus, Rail, Car Rental
Utilities: Electric, Water, Hydro Power, Gas, Diversified
Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national Agencies
Where the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Moody's Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the TARPS Basic Maintenance
Amount.
Where the Fund purchases an asset and agrees to sell it to a third party in
the future, cash receivable by the Fund thereby will constitute a Moody's
Eligible Asset if the long-term debt of such other party is rated at least A2 by
Moody's and such agreement has a term of 30 days or less; otherwise the
Discounted Value of such asset will constitute a Moody's Eligible Asset. For the
purposes of calculation of Moody's Eligible Assets, portfolio securities which
have been called for redemption by the issuer thereof are valued at the lower of
Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of TARPS Basic Maintenance
Amount (see "Description of TARPS--Asset Maintenance--TARPS Basic Maintenance
Amount") or it is subject to any material lien, mortgage, pledge, security
interest or security agreement of any kind (collectively, "Liens"), except for
(a) Liens which are being contested in good faith by appropriate proceedings and
which Moody's has indicated to the Fund will not affect the status of such asset
as a Moody's Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens to secure
payment for services rendered or cash advanced to the Fund by its investment
adviser, custodian, transfer agent or registrar or the Auction Agent and (d)
Liens by virtue of any repurchase agreement.
The effect of the foregoing discount factors may be to cause the Fund to
invest in higher rated securities than it would if it were not required to
maintain specified asset coverage on a discounted basis. This may have the
effect of reducing the yield on the portfolio. See "Risk Factors and Special
Considerations."
Preferred Stock
Under current Moody's guidelines, portfolio securities that are preferred
stocks will not be included in the calculation of Discounted Value of the Fund's
portfolio unless (a) dividends on such preferred stock are cumulative, (b) such
securities provide for the periodic payment of dividends thereon in cash in U.S.
dollars and do not provide for conversion or exchange into, or have warrants
attached entitling the holder to receive, equity capital at any time over the
respective lives of such securities, (c) the issuer of such preferred stock has
common stock listed on either the Exchange or the American Stock Exchange, (d)
the issuer of such preferred stock has a senior debt rating from Moody's of Baa1
or higher or a preferred stock rating from Moody's of "baa3" or higher and (e)
such preferred stock has paid consistent cash dividends in U.S. dollars over the
last three years or has a minimum rating of "a1" (if the issuer of such
preferred stock has other preferred issues outstanding that have been paying
dividends consistently for the last three years, then a preferred stock without
such a dividend history would also be eligible). In addition, the preferred
stock must have the following diversification requirements: (x) the preferred
stock issue must be greater than $50 million and (y) the minimum holding by the
Fund of each issue of preferred stock is $500,000 and the maximum holding of
preferred stock of each issue is $5 million. In addition, preferred stocks
issued by transportation companies will not be considered as Moody's Eligible
Assets.
The "Moody's Discount Factor" for Moody's Eligible Assets that are
preferred stock are (a) 152% for utility preferred stocks, (b) 197% for
industrial/financial preferred stocks and (c) 350% for auction rate preferred
stocks.
Other Moody's Eligible Assets
In addition to corporate debt securities and preferred stocks which satisfy
the above requirements, Moody's Eligible Assets also include the following:
(i) cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is
within five Business Days of the date on which the value of the
portfolio is being determined for purposes of determining compliance
with Moody's or Fitch's investment guidelines (a "Valuation Date"),
(B) A2 or higher if the payment date is within thirty days of the
Valuation Date, and (C) Al or higher if the payment date is within the
Exposure Period) and receivables for Moody's Eligible Assets sold if
the receivable is due within five Business Days of the Valuation Date,
and if the trades which generated such receivables are (A) settled
through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B)(1) with
counterparties having a Moody's long-term debt rating of at least Baa3
or (2) with counterparties having a Moody's short-term money market
instrument rating of at least P-1;
(ii) short-term money market instruments (as defined by Moody's), so
long as (A) such securities are rated at least P-1, (B) in the case of
demand deposits, time deposits and overnight funds, the supporting
entity is rated at least A2, or (C) in all other cases, the supporting
entity (1) is rated A2 and the security matures within one month, (2)
is rated Al and the security matures within three months, or (3) is
rated at least Aa3 and the security matures within six months; and
(iii) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's).
A Moody's Discount Factor of 100% will be applied to cash. The Moody's
Discount Factor applied to Moody's Eligible Assets that are short term money
instruments (as defined by Moody's) will be (a) 100%, so long as portfolio
securities mature or have a demand feature at par exercisable within 41 days of
the relevant valuation date (the "Exposure Period"), (b) 115%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within the Exposure Period, and (c) 125%, if such securities are not rated by
Moody's, so long as such portfolio securities are rated at least A-1+/AA or
SP-1+/AA by S&P and mature or have a demand feature at par exercisable within
the Exposure Period.
The Moody's Discount factors for Moody's Eligible Assets that are U.S.
Treasury Securities and U.S. Treasury Strips are as follows:
U.S. Treasury Securities:
Discount
Remaining Term to Maturity Factor
-------------------------- --------
1 year or less................................. 107%
2 years of less (but longer than 1 year)....... 113
3 years or less (but longer than 2 years)...... 118
4 years or less (but longer than 3 years)...... 123
5 years or less (but longer than 4 years)...... 128
7 years or less (but longer than 5 years)...... 135
10 years or less (but longer than 7 years)..... 141
15 years or less (but longer than 10 years).... 146
20 years or less (but longer than 15 years).... 154
30 years or less (but longer than 20 years).... 154
U.S. Treasury Strips:
Discount
Remaining Term to Maturity Factor
-------------------------- --------
1 year or less................................. 107%
2 years of less (but longer than 1 year)....... 114
3 years or less (but longer than 2 years)...... 120
4 years or less (but longer than 3 years)...... 127
5 years or less (but longer than 4 years)...... 133
7 years or less (but longer than 5 years)...... 145
10 years or less (but longer than 7 years)..... 159
15 years or less (but longer than 10 years).... 184
20 years or less (but longer than 15 years).... 211
30 years or less (but longer than 20 years).... 236
FITCH INVESTORS SERVICE, INC.
FITCH "AAA" RATING GUIDELINES
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Fitch guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ("Fitch Eligible Assets") must
be discounted by certain discount factors set forth below ("Fitch Discount
Factors"). The Discounted Value of a portfolio security under the Fitch
guidelines is the Market Value thereof determined as specified by Fitch divided
by the Fitch Discount Factor. The Fitch Discount Factor with respect to
securities other than those described below will be the percentage provided in
writing by Fitch.
Corporate Debt Securities
Under current Fitch guidelines, portfolio securities that are corporate
debt securities will not be deemed "Corporate Bonds" includable in the
calculation of the Discounted Value of the Fund's portfolio unless (a) such
securities are rated either CCC or higher by Fitch or Caa or higher by Moody's;
(b) such securities provide for the periodic payment of interest in cash in U.S.
dollars; (c) such securities do not provide for conversion or exchange into
equity capital at any time over their lives; (d) such securities have been
registered under the Securities Act or are Rule 144A Securities; and (e) such
securities are issued by a U.S. corporation. In addition, bonds which are issued
in connection with a reorganization under U.S. federal bankruptcy law
(preorganization Bonds) will be considered Corporate Bonds constituting Fitch
Eligible Assets, if (a) they are rated CCC or higher by Fitch or, if unrated by
Fitch, rated Caa or higher by Moody's; (b) they provide for periodic payment of
interest in cash in U.S. dollars; (c) they do not provide for conversion or
exchange into equity capital at any time over their lives; (d) they have been
registered under the Securities Act or Rule 144A Securities; (e) they were
issued by a U.S. corporation; and (f) at the time of purchase at least one year
had elapsed since the issuer's reorganization. Reorganization Bonds may also be
considered Corporate Bonds constituting Fitch Eligible Assets if they have been
approved by Fitch, which approval shall not be unreasonably withheld.
The Discounted Value of any Fitch Eligible Asset that is a corporate debt
security constituting a Fitch Eligible Asset (see "--Corporate Debt Securities"
above) is the percentage determined by reference to (i) the rating on such asset
(i.e., whether it is a Type I, Type II, Type III, Type IV, Type V, Type VI or
Type VII Corporate Bond as defined below) and (ii) the remaining term to
maturity of such assets, in accordance with the table set forth below, except
that the Fitch Discount Factor applied to Rule 144A Securities will be 110% of
the Fitch Discount Factor which would apply were the securities registered under
the Securities Act:
Type I Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.16
greater than 2 years, but less than or equal to 4 years 1.26
greater than 4 years, but less than or equal to 7 years 1.40
greater than 7 years, but less than or equal to 12 years 1.44
greater than 12 years, but less than or equal to 25 years 1.48
greater than 25 years, but less than or equal to 30 years 1.52
Type II Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.26
greater than 4 years, but less than or equal to 7 years 1.43
greater than 7 years, but less than or equal to 12 years 1.44
greater than 12 years, but less than or equal to 25 years 1.51
greater than 25 years, but less than or equal to 30 years 1.56
Type III Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.25
greater than 2 years, but less than or equal to 4 years 1.29
greater than 4 years, but less than or equal to 7 years 1.46
greater than 7 years, but less than or equal to 12 years 1.50
greater than 12 years, but less than or equal to 25 years 1.55
greater than 25 years, but less than or equal to 30 years 1.60
Type IV Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.27
greater than 2 years, but less than or equal to 4 years 1.32
greater than 4 years, but less than or equal to 7 years 1.52
greater than 7 years, but less than or equal to 12 years 1.57
greater than 12 years, but less than or equal to 25 years 1.63
greater than 25 years, but less than or equal to 30 years 1.69
Type V Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.32
greater than 2 years, but less than or equal to 4 years 1.36
greater than 4 years, but less than or equal to 7 years 1.59
greater than 7 years, but less than or equal to 12 years 1.65
greater than 12 years, but less than or equal to 25 years 1.72
greater than 25 years, but less than or equal to 30 years 1.80
Type VI Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.40
greater than 4 years, but less than or equal to 7 years 1.67
greater than 7 years, but less than or equal to 12 years 1.74
greater than 12 years, but less than or equal to 25 years 1.82
greater than 25 years, but less than or equal to 30 years 1.91
Type VII Corporate Bonds with remaining maturities of:
less than or equal to 2 years 1.37
greater than 2 years, but less than or equal to 4 years 1.64
greater than 4 years, but less than or equal to 7 years 2.28
greater than 7 years, but less than or equal to 12 years 2.49
greater than 12 years, but less than or equal to 25 years 2.74
greater than 25 years, but less than or equal to 30 years 3.06
For purposes of the foregoing:
"Type I Corporate Bonds" means Corporate Bonds (as defined above) rated either
AAA by Fitch or, if not rated by Fitch, rated AAA by S&P and Aaa by Moody's;
"Type II Corporate Bonds" means Corporate Bonds rated either at least AA- by
Fitch or, if not rated by Fitch, rated at least AA- by S&P and at least Aa3 by
Moody's which do not constitute Type I Corporate Bonds;
"Type III Corporate Bonds" means Corporate Bonds rated either at least A- by
Fitch or, if not rated by Fitch, rated at least A- by S&P and at least A3 by
Moody's which do not constitute Type I or Type II Corporate Bonds.
"Type IV Corporate Bonds" means Corporate Bonds rated either at least BBB- by
Fitch or, if not rated by Fitch, rated at least BBB- by S&P and at least Baa3 by
Moody's which do not constitute Type I, Type II or Type III Corporate Bonds;
"Type V Corporate Bonds" means Corporate Bonds rated either at least BB- by
Fitch or, if not rated by Fitch, rated at least BB- by S&P and at least Ba3 by
Moody's which do not constitute Type I, Type II, Type III or Type IV Corporate
Bonds;
"Type VI Corporate Bonds" means Corporate Bonds rated either at least B- by
Fitch or, if not rated by Fitch, rated at least B- by S&P and at least B3 by
Moody's which do not constitute Type I, Type II, Type III, Type IV or Type V
Corporate Bonds; and
"Type VII Corporate Bonds" means Corporate Bonds rated either at least CCC by
Fitch or, if not rated by Fitch, rated at least CCC by S&P and at least Caa by
Moody's which do not constitute Type I, Type II, Type III, Type IV, Type V or
Type VI Corporate Bonds.
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included in
Fitch Eligible Assets:
Type of Maximum Single Maximum Single Minimum Issue in
Corporate Bond Issuer (%) (1,2) Industry (%)(3,4) Size ($ in millions)
- -------------- ---------------- ----------------- --------------------
Type I............ 100% 100% $100
Type II........... 20 75 100
Type III (4)...... 10 50 100
Type IV........... 6 25 100
Type V............ 4 16 50(5)
Type VI........... 3 12 50(5)
Type VII.......... 2 8 50(5)
- ----------
(1) Companies subject to common ownership of 25% or more are considered as one
name.
(2) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(3) Industries are determined according to industry classifications specified
by Fitch ("Fitch Industry Classifications") (see below).
(4) Includes Short Term Money Market Instruments which do not constitute Type I
or Type II Corporate Bonds and which have a maturity greater than the
Exposure Period.
(5) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
The Fitch Industry Classifications, for the purposes of determining Fitch
Eligible Assets, mean the following industry classifications, determined with
respect to particular issues in the discretion of the Fund:
Aerospace & Defense
Automobiles
Banking, Finance & Insurance
Building & Materials
Chemicals Computers &
Electronics Consumer Products
Energy
Environmental Services
Farming & Agriculture
Food, Beverage & Tobacco
Healthcare & Pharmaceutical
Industrial Machinery
Media, Leisure & Entertainment
Metals & Mining
Miscellaneous
Paper & Forest Products
Retail
Sovereigns
Textiles & Furniture
Transportation
Utilities
Other Fitch Eligible Assets.
Other Fitch Eligible Assets include the following:
(i) cash (including, for this purpose, interest and dividends due on assets
rated (A) Baa3 or higher by Moody's, BBB or higher by S&P or BBB or higher by
Fitch if the payment date is within five Business Days of the Valuation Date,
(B) A2 or higher by Moody's and either A or higher by S&P or A or higher by
Fitch if the payment date is within thirty days of the Valuation Date, and (C)
Al or higher by Moody's and either A+ or higher by S&P or A+ or higher by Fitch
if the payment date is within the Exposure Period) and receivables for Fitch
Eligible Assets sold if the receivable is due within five Business Days of the
Valuation Date, and if the trades which generated such receivables are (A)
settled through clearing house firms with respect to which the Fund has received
prior written authorization from Fitch or (B) (1) with counterparties having a
Fitch long-term debt rating of at least BBB- by Fitch, if rated by Fitch or, if
not rated by Fitch, then rated at least BBB- by S&P and rated at least Baa3 by
Moody's or (2) with counterparties having a Fitch Short-Term Money Market
Instrument rating of at least F-1+ by Fitch, if rated by Fitch or, if not rated
by Fitch, then rated at least A-1 by S&P and rated at least P-1 by Moody's;
(ii) Short-Term Money Market Instruments so long as (A) such securities are
rated at least P-1 by Moody's and either at least A-1 + by S&P or F1+ by Fitch,
(B) in the case of demand deposits, time deposits and overnight funds, the
supporting entity is rated at least A2 by Moody's and either at least A by S&P
or A by Fitch, or (C) in all other cases, the supporting entity (1) is rated at
least A2 by Moody's and at least A by S&P and the security matures within one
month, (2) is rated at least Al by Moody's and either at least A+ by S&P or at
least A by Fitch and the security matures within three months or (3) is rated at
least Aa3 by Moody's and either at least AA by S&P or at least AA by Fitch and
the security matures within six months; and
(iii) U.S. Treasury Securities.
The Fitch Discount Factors for Fitch Eligible Assets that are U.S. Treasury
Securities are as follows:
U.S. Treasury Securities with remaining maturities of:
less than or equal to 1 year 1.06
greater than 1 year, but less than or equal to 2 years 1.11
greater than 2 years, but less than or equal to 5 years 1.16
greater than 5 years, but less than or equal to 15 years 1.24
greater than 25 years, but less than or equal to 30 years 1.26
The Fitch Discount Factor applied to short-term portfolio securities will
be (A) 100%, so long as such portfolio securities mature or have a demand
feature at par exercisable within the Exposure Period and, (B) 125%, so long as
such portfolio securities neither mature nor have a demand feature at par
exercisable within the Exposure Period. A Fitch Discount Factor of 100% will be
applied to cash.
Under Fitch's current guidelines, portfolio securities that are preferred
stocks will not be deemed Fitch Eligible Assets.
When the Fund sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Fund is required to pay upon repurchase of such asset
will count as a liability for the purposes of the TARPS Basic Maintenance
Amount. Where the Fund purchases an asset and agrees to sell it to a third party
in the future, cash receivable by the Fund thereby will constitute a Fitch's
Eligible Asset if the long-term debt of such other party is rated at least A2 by
Moody's and A by S&P and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(F) under the definition of TARPS Basic Maintenance
Amount (see "Description of TARPS--Asset Maintenance") or it is subject to any
material Lien, except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Fitch has indicated to the Fund will not
affect the status of such asset as a Fitch Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Fund by its investment adviser, the Fund's custodian, transfer agent or
registrar or the Auction Agent and (d) Liens by virtue of any repurchase
agreement.
* * *
For so long as any of the TARPS is Outstanding and either Moody's, Fitch or
any Other Rating Agency is rating the TARPS, the Fund will not, unless it has
received written confirmation from Moody's, Fitch or any Other Rating Agency as
applicable, that any such action would not impair the respective rating then
assigned by Moody's, Fitch, or such Other Rating Agency to the TARPS, engage in
any one or more of the following transactions: (i) purchase or sell futures
contracts or options thereon with respect to portfolio securities or write
unsecured put or uncovered call options on portfolio securities, engage in
options transactions involving cross-hedging, or enter into any swap
transaction; or (ii) borrow money, except that the Fund may, without the written
confirmation described above, borrow money for the purpose of clearing
securities transactions; provided that the TARPS Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and if the
borrowing matures in not more than 60 days and is non-redeemable; or (iii)
except in connection with a refinancing of the TARPS, issue any class or series
of stock ranking prior to or on a parity with the TARPS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the Fund, or reissue any shares of TARPS previously purchased
or redeemed by the Fund; or (iv) engage in any short sales of securities; or (v)
lend portfolio securities; or (vi) merge or consolidate into or with any other
corporation. For purposes of valuation of Eligible Assets: (A) if the Fund
writes a call option, the underlying asset will be valued as follows: (1) if the
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of the TARPS, at the lower of the
Discounted Value of the underlying security of the option and the exercise price
of the option or (2) otherwise, it has no value; (B) if the Fund writes a put
option, the underlying asset will be valued as follows: the lesser of (1)
exercise price and (2) the Discounted Value of the underlying security; and (C)
call or put option contracts which the Fund buys have no value. For so long as
TARPS are rated by Moody's or Fitch: (A) the Fund will not engage in options
transactions for leveraging or speculative purposes; (B) the Fund will not write
or sell any anticipatory contracts pursuant to which the Fund hedges the
anticipated purchase of an asset prior to completion of such purchase; (C) the
Fund will not enter into an option transaction with respect to portfolio
securities unless, after giving effect thereto, the Fund would continue to have
Eligible Assets with an aggregate Discounted Value equal to or greater than the
TARPS Basic Maintenance Amount; (D) the Fund will not enter into an option
transaction with respect to portfolio securities unless after giving effect to
such transaction the Fund would continue to be in compliance with the provisions
relating to the TARPS Basic Maintenance Amount; (E) for purposes of the TARPS
Basic Maintenance Amount assets in margin accounts are not Eligible Assets; (F)
the Fund shall write only exchange-traded options on exchanges approved by
Moody's (if Moody's is then rating the TARPS) and Fitch (if Fitch is then rating
the TARPS); (G) where delivery may be made to the Fund with any of a class of
securities, the Fund shall assume for purposes of the TARPS Basic Maintenance
Amount that it takes delivery of that security which yields it the least value;
(H) the Fund will not engage in forward contracts; and (I) there shall be a
quarterly audit made of the Fund's options transactions by the Fund's
independent accountants to confirm that the Fund is in compliance with these
standards.
The Board of Directors may, without approval of any Holder of TARPS or
any other stockholder of the Fund, from time to time amend, alter or repeal any
or all of the definitions required to be contained in the Articles by Moody's,
Fitch or any Other Rating Agency in the event the Fund receives written
confirmation from the appropriate rating agency that any such amendment,
alteration or repeal would not impair the rating then assigned to the TARPS by
such rating agency. In addition, the Board of Directors, without the vote or
consent of the Fund's stockholders, may from time to time adopt, amend, alter or
repeal any or all of additional or other definitions or add covenants and other
obligations of the Fund (e.g., maintenance of a minimum liquidity level) or
confirm the applicability of covenants and other obligations in connection with
obtaining or maintaining the rating of Moody's, Fitch or any Other Rating Agency
with respect to the TARPS. See "Description of TARPS--Voting Rights."
<PAGE>
APPENDIX B
DESCRIPTIONS OF MOODY'S, FITCH AND S&P RATINGS
------------
MOODY'S INVESTORS SERVICE, INC.
LONG-TERM DEBT
Long-term debt rating symbols and their definitions are 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 fluctuations or protective elements may be of greater amplitude or
there may be other elements present which make 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 "Baa" rated 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 other 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.
ABSENCE OF RATING
Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
NOTE
Moody's applies numerical modifiers 1, 2 and 3 in each generic range
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC.
INVESTMENT GRADE BOND AND PREFERRED STOCK RATINGS
AAA Bonds and preferred stock considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally
strong ability to pay interest or dividends and repay principal,
which is unlikely to be affected by reasonable foreseeable
events.
AA Bonds and preferred stock considered to be investment grade and
of very high credit quality. The obligor's ability to pay
interest or dividends and repay principal is very strong,
although not quite as strong as bonds or preferred stock rated
"AAA". Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments,
short term debt of these issuers is generally rated "F--1+".
A Bonds and preferred stock considered to be investment grade and
of high credit quality. The obligor's ability to pay interest or
dividends and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and
circumstances than bonds or preferred stock with higher ratings.
BBB Bonds and preferred stock considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay
interest or dividends and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these securities, and therefore impair timely payment. The
likelihood that the ratings of these bonds or preferred stock
will fall below investment grade is higher than for securities
with higher ratings.
Plus (+) Plus and minus signs are used with a rating symbol to indicate
Minus (-) the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "AAA"
category.
NR Indicated that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue natures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Credit Trend Credit trend indicators are not predictions that any rating
change will occur, and have a longer-term time frame than issuers
placed on FitchAlert.
SPECULATIVE GRADE BOND AND PREFERRED STOCK RATINGS
Fitch speculative grade bond or preferred stock ratings provide a guide
to investors in determining the credit risk associated with a particular
security. The ratings ("BB" to "C") represent Fitch's assessment of the
likelihood of timely payment of principal and interest or dividends in
accordance with the terms of obligation for issues not in default. For defaulted
bonds or preferred stock, the rating ("DDD" to "D") is an assessment of the
ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds or preferred stock that have the same rating are of similar but
not necessarily identical credit quality since rating categories cannot fully
reflect the differences in degrees of credit risk.
BB Bonds and preferred stock are considered speculative. The
obligor's ability to pay interest or dividends and repay
principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements or paying dividends.
B Bonds and preferred stock are considered highly speculative.
While securities in this class are currently meeting debt service
requirements or paying dividends, the probability of continued
timely payment of principal and interest or dividends reflects
the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds and preferred stock have certain identifiable
characteristics which, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business and
economic environment.
CC Bonds and preferred stock are minimally protected. Default in
payment of dividends or interest and/or principal seems probable
over time.
C Bonds are in imminent default in payment of interest or
principal or suspension of preferred stock dividends is
imminent.
DDD, Bonds are in default on interest and/or principal payments or
DD, and D preferred stock dividends are suspended. Such securities are
extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on
these securities, and "D" represents the lowest potential for
recovery.
Plus (+) Plus and minus signs are used with a rating symbol to indicate
Minus (-) the relative position of a credit withinthe rating category.
Plus and minus signs, however, are not used in the "DDD", "DD",
or "D"; categories.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+".
F-2: Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5 Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
EURO ISSUERS/EURO DOLLARS
These securities have not been and will not be registered under the
U.S. Securities Act of 1933. Any offer or sale of notes in the U.S. (including
its territories and possessions and all areas subject to it jurisdiction or to
nationals or residents thereof, including any corporation or other entity
created or organized therein) may constitute a violation of U.S. law.
CLAIMS-PAYING ABILITY RATINGS
Fitch claims-paying ability ratings provide an assessment of an
insurance company's financial strength and, therefore, its ability to pay policy
and contract claims under the terms indicated. The rating does not apply to
non-policy obligations of the insurer, such as debt obligations (which are
addressed under Fitch's bond ratings), nor does it apply to the suitability or
terms of any individual policy or contract.
AAA The ability to pay claims is extremely strong for insurance
companies with this highest rating. Foreseeable business and
economic risk factors should not have any material adverse impact
on the ability of these insurers to pay claims. Profitability,
overall balance sheet strength, capitalization, and liquidity are
all at very secure levels and are unlikely to be affected by
potential adverse underwriting, investment, or cyclical events.
AA Insurance companies with this rating are very strong and only
slightly more susceptible to exhibiting any weakening of
financial strength due to adverse business and economic
developments. Any foreseeable deterioration in financial strength
would still leave carriers in this category with a strong
claims-paying ability.
A Issuers in this category are strong companies with no immediate
expectations for encountering events significant enough to weaken
their claims-paying ability. However, major business or cyclical
pressures are more likely to have an adverse impact on
profitability, liquidity, and capitalization and, therefore, on
the ability to pay claims.
BBB Companies in this category have adequate financial strength and
claims-paying capability. For insurers with this rating,
longer-term obligations would be more susceptible to
claims-paying concerns under adverse circumstances than for
higher rated companion.
BB For insurers rated in this category, the ability to pay claims is
vulnerable to company-specific adverse financial events or
stressful cyclical downturns. It will be more difficult for
carriers with this rating to maintain adequate claims-paying
ability under severe business and economic circumstances.
B There is significant risk that companies in this category will
not be able to pay claims when due. Liquidity and capital
adequacy are likely to be impaired under even moderately
negative business and economic developments.
CCC, CC, Insurance companies with one of these ratings are considered
and C very weak with respect to their ability to pay claims. The
carrier may be under the supervision of a state insurance
department and already may not be making all policy claims
payments in a timely fashion.
D Insurance carriers have been placed in liquidation by state
insurance departments and policy claims payments are being
controlled, delayed, or reduced.
Plus (+) Plus and minus signs are used with a rating symbol to indicate
Minus (-) the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "AAA" and "D"
categories.
SERVICER RATINGS
Master servicers service performing multifamily and commercial mortgage
loans. The servicer's responsibilities typically include: collecting monthly
principal, interest, and escrow payments from individual mortgagors and, in some
instances, subservicers; remitting funds to the trustees; investor reporting;
performing property inspections; gathering and reviewing property financial
statements; and monitoring and managing delinquencies and problem loan
resolutions.
Acceptable Servicer possesses a solid management team, proven experience
servicing multifamily and commercial mortgage loans, effective
in-place policies, procedures and controls, and thorough systems
and reporting capabilities.
Unacceptable Servicer seriously deficient in any of the aforementioned
categories and unacceptable to Fitch. Use of such a servicer most
likely would preclude Fitch rating the transaction's debt
securities at "BBB" or higher levels.
Special servicers are key to maintaining the credit quality of a pool
of nonperforming commercial mortgages and real estate owned assets. In assessing
and analyzing a servicer's capabilities, Fitch reviews several key factors,
including the servicer's management team, organizational structure, track
record, and workout and asset disposition experience and strategies.
Superior Special servicer considered to be of the highest quality. A
servicer in this category possesses a strong, seasoned
management team, extensive workout and disposition experience,
and, typically, significant financial resources.
Above Average Special servicer considered to be of very high
quality. A servicer in this category possesses a strong
management team, with good workout and disposition experience,
and may have significant financial resources.
Average Special servicer considered to be of high quality. A servicer
in this category possesses adequate workout and disposition
experience but may lack significant financial resources.
Below Average Servicer considered to be of acceptable, but sub-par,
quality. Senior management is relatively unseasoned, workout
experience is minimal, and typically lacks significant
financial resources.
Unacceptable Servicer unacceptable to Fitch. Use of such a servicer
probably would preclude Fitch's rating the transaction's debt
securities at "BBB" or higher levels.
STANDARD & POOR'S CORPORATION
LONG-TERM DEBT
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 very strong capacity to pay interest and
repay principal and differs from "AAA" 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 the higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
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, Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
CCC, CC, C 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.
BB Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments.
B Debt rated "B" has a greater vulnerability to default than
debt rated "BB" but currently has the capacity to meet
interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.
CC An obligation rated "CC" is currently highly vulnerable to
nonpayment.
C The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued.
D An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or The ratings from "AA" to "CCC" may be modified by the addition
minus (-) of a plus or minus sign to show relative standing within the
major rating categories.
r This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include: obligations
linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as
interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as
inverse floaters.
DUAL RATING DEFINITIONS
Standard & Poor's assigns "dual" ratings to all debt issues that have
as part of their structure a put option or demand feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA"/"A-l+n"). If the nominal maturity is short (three
years or less), a note rating is used with commercial paper rating symbols.
SHORT-TERM ISSUE CREDIT RATINGS
A Standard & Poor's note rating reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
-- Amortization schedule--the larger the final maturity
relative to other maturities the more likely it will
be treated as a note.
-- Source of payment--the more dependent the issue is on
the market for its refinancing, the more likely it
will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An
issue determined to possess a very strong capacity to
pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest,
with some vulnerability to adverse financial and
economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment - capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely
strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a
high-quality fixed income security. The capacity to pay
preferred stock obligations is very strong, although not as
overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for preferred
stock in this category than for issues in the "A" category.
BB,B Preferred stock rated "BB", "B", or "CCC" is regarded, on
balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations.
CCC "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments, but that is
currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the
issuer in default on debt instruments.
N.R. This indicates that no rating has been requested, that there
is insufficient information on which to base a rating or that
Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
Plus (+) or To provide more detailed indications of preferred stock
Minus (-) quality, the ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing
within the major rating categories.
<PAGE>
APPENDIX C
TO BE SUBMITTED TO YOUR BROKER-DEALER WHO WILL THEN
DELIVER COPIES ON YOUR BEHALF TO THE
AUCTION OR REMARKETING AGENT
MASTER PURCHASER'S LETTER
RELATING TO
SECURITIES INVOLVING RATE SETTINGS
THROUGH AUCTIONS OR REMARKETINGS
THE COMPANY
A REMARKETING AGENT
THE AUCTION AGENT
A BROKER-DEALER
AN AGENT MEMBER
OTHER PERSONS
Dear Sirs:
1. This letter is designed to apply to publicly or privately offered
debt or equity securities ("Securities") of any issuer ("Company") which are
described in any final prospectus or other offering materials relating to such
Securities as the same may be amended or supplemented (collectively, with
respect to the particular Securities concerned, the "Prospectus") and which
involve periodic rate settings through auctions ("Auctions") or remarketing
procedures ("Remarketings"). This letter shall be for the benefit of any Company
and of any auction agent, paying agent (collectively, "auction agent"),
remarketing agent, broker-dealer, agent member, securities depository or other
interested person in connection with any Securities and related Auctions or
Remarketings (it being understood that such persons may be required to execute
specified agreements and nothing herein shall alter such requirements). The
terminology used herein is intended to be general in its application and not to
exclude any Securities in respect of which (in the Prospectus or otherwise)
alternative terminology is used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions or
Remarketings as set forth in the Prospectus.
3. We agree that any bid or sell order placed by us in an Auction or a
Remarketing shall constitute an irrevocable offer (except as otherwise described
in the Prospectus) by us to purchase or sell Securities subject to such bid or
sell order, or such lesser amount of Securities as we shall be required to sell
or purchase as a result of such Auction or Remarketing, at the applicable price,
all as set forth in the Prospectus, and that if we fail to place a bid or sell
order with respect to Securities owned by us with a broker-dealer on any Auction
or Remarketing Date, or a broker-dealer to which we communicate a bid or sell
order fails to submit such bid or sell order to the auction agent or remarketing
agent concerned, we shall be deemed to have placed a hold or a sell order with
respect to such Securities as described in the Prospectus. We authorize any
broker-dealer that submits a bid or sell order as our agent in Auctions or
Remarketings to execute contracts for the sale of Securities by such bid or sell
order. We recognize that the payment of such broker-dealer for Securities
purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We understand that in a Remarketing, the dividend or interest rate
or rates on the Securities and the allocation of Securities tendered for sale
between dividend or interest periods of different lengths will be based from
time to time on the determinations of one or more remarketing agent(s), and we
agree to be conclusively bound by such determinations. We further agree to the
payment of different dividend or interest rates to different holders of
Securities depending on the length of the dividend or interest period elected by
such holders. We agree that any notice given by us to a remarketing agent (or a
broker-dealer for transmission to a remarketing agent) of our desire to tender
Securities in a Remarketing shall constitute an irrevocable (except to the
limited extent set forth in the Prospectus) offer by us to sell the securities
specified in such Notice, or such lesser number of Securities as we shall be
required to sell as a result of such Remarketing, in accordance with the terms
set forth in the Prospectus, and we authorize the remarketing agent to sell,
transfer or otherwise dispose of such Securities as set forth in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, in a Remarketing, to or through a broker-dealer or, when
permitted in the Prospectus, to a person that has signed and delivered to the
applicable auction agent or a remarketing agent a letter substantially in the
form of this letter (or other applicable purchaser's letter), provided that in
the case of all transfers other than pursuant to Auctions or Remarketings we or
our broker-dealer or our agent member shall advise such auction agent or a
remarketing agent of such transfer. We understand that a restrictive legend will
be placed on certificates representing the Securities and stop-transfer
instructions will be issued to the transfer agent and/or registrar, all as set
forth in the Prospectus.
6. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by one or more global
certificates registered in the name of the applicable securities depository or
its nominee, that we will not be entitled to receive any certificate
representing the Securities and that our ownership of any Securities will be
maintained in book-entry form by the securities depository for the account of
our agent member, which in turn will maintain records of our beneficial
ownership. We authorize and instruct our agent member to disclose to the
applicable auction agent or remarketing agent such information concerning our
beneficial ownership of Securities as such auction agent or remarketing agent
shall request.
7. We acknowledge that partial deliveries of Securities purchased in
Auctions or Remarketings may be made to us and such deliveries shall constitute
good delivery as set forth in the Prospectus.
8. This letter is not a commitment by us to purchase any Securities.
9. This letter supersedes any prior-dated version of this master
purchaser's letter, and supplements any prior to post-dated purchaser's letter
specific to any particular Securities, and this letter may only be revoked by a
signed writing delivered to the original recipients hereof.
10. The descriptions of Auction or Remarketing procedures set forth in
each applicable Prospectus are incorporated by reference herein and in case of
any conflict between this letter, any purchaser's letter specific to particular
Securities and any such description, such description shall control.
11. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
12. Our agent member of The Depository Trust company currently is
13. Our personnel authorized to place orders with broker-dealers for
the purposes set forth in the Prospectus in Auctions or Remarketings currently
is/are , telephone number ( )
14. Our taxpayer identification number is
15. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Act"), we represent and agree as follows:
(A) We understand and expressly acknowledge that the
Securities have not been and will not be registered under the Act and,
accordingly, that the Securities may not be reoffered, resold or
otherwise pledged, hypothecated or transferred unless an applicable
exemption from the registration requirements of the Act is available.
(B) We hereby confirm that any purchase of Securities made by
us will be for our own account, or for the account of one or more
parties for which we are acting as trustee or agent with complete
investment discretion and with authority to bind such parties, and not
with a view to any public resale or distribution thereof. We and each
other party for which we are acting which will acquire Securities will
be "accredited investors" within the meaning of Regulation D under the
Act with respect to the Securities to be purchased by us or such party,
as the case may be, will have previously invested in similar types of
instruments and will be able and prepared to bear the economic risk of
investing in and holding such Securities.
(C) We acknowledge that prior to purchasing any Securities we
shall have received a Prospectus (or private placement memorandum) with
respect thereto and acknowledge that we will have had access to such
financial and other information, and have been afforded the opportunity
to ask such questions or representatives of the Company and receive
answers thereto, as we deem necessary in connection with our decision
to purchase Securities.
(D) We recognize that the Company and broker-dealers will rely
upon the truth and accuracy of the foregoing investment representations
and agreements, and we agree that each of our purchases of Securities
now or in the future shall be deemed to constitute our concurrence in
all of the foregoing which shall be binding on us and each party for
which we are acting as set forth in Subparagraph B above.
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................................
Financial Highlights..................................
The Fund..............................................
Capitalization & Information Regarding Senior
Securities............................................
Portfolio Composition.................................
Use of Proceeds.......................................
Investment Objective and Policies.....................
Management of the Fund................................
Portfolio Trading.....................................
Determination of Net Asset Value......................
Share Repurchases; Conversion to Open-End Status......
The Auction...........................................
Description of TARPS..................................
Description of Senior Notes...........................
Risk Factors and Special Considerations...............
Federal Taxation......................................
Description of Capital Stock..........................
Custodian, Transfer Agent, Dividend Disbursing Agent,
Paying Agent and Registrar..........................
Underwriting..........................................
Certain Legal Matters.................................
Experts...............................................
Reports to Stockholders...............................
Available Information.................................
Glossary..............................................
Financial Statements..................................F-1
Appendix A: Rating Agency Guidelines..................A-1
Appendix B: Description of Moody's, Fitch and S&P
Ratings.............................................B-1
Appendix C: Master Purchaser's Letter.................C-1
$35,000,000
[LOGO]
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
1,400 SHARES OF
SERIES A TAXABLE AUCTION RATE
PREFERRED STOCK
LIQUIDATION PREFERENCE
$25,000 PER SHARE
-------------------
P R O S P E C T U S
-------------------
BEAR, STEARNS & CO. INC.
, 1998
================================================================================
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements
(1) Financial Statements
(i) -- Schedule of Investments as of October 31, 1997
(ii) -- Balance Sheet as of October 31, 1997
(iii) -- Statement of Operations for the fiscal year
ended October 31, 1997
(iv) -- Statement of Cash Flows for the fiscal year
ended October 31, 1997
(v) -- Statement of Changes in Net Assets for the
fiscal years ended October 31, 1997 and 1996
(vi) -- Financial Highlights for each Share of Common
Stock Outstanding for the fiscal years ended
October 31, 1993, 1994, 1995, 1996 and 1997
(vii) -- Notes to Financial Statements for the fiscal
year ended October 31, 1997
(viii) -- Report of Independent Accountants dated December
5, 1997
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.
2. Exhibits
(a) (1) -- Articles of Amendment and Restatement**
(2) -- Form of Articles Supplementary of Prospect Street High Income
Portfolio Inc. Establishing and Defining the Rights and
Preferences of the Series A Taxable Auction Rate Preferred Stock,
to be filed with the State Department of Assessments and Taxation
of the State of Maryland**
(b) -- Amended and Restated By-Laws of the Registrant+
(c) -- Not applicable
(d) (1) -- Specimen certificate of Common Stock*
(2) -- Specimen certificate of Old TARPS*
(3) -- Specimen Certificate for shares of TARPS**
(4) -- Documents relating to Surety Bond issued by Financial Security
Assurance Inc. (See Exhibits (k)(5) and (k)(6) below)
(5) -- 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+
(6) -- 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 Underwriting 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.+
(7) -- Form of Auction Agent Agreement with respect to the TARPS, of the
Registrant#
(8) -- Form of Letter of Representations Agreement with respect to the
TARPS of the Registrant**
(9) -- Form of Broker-Dealer Agreement with Bear, Stearns & Co. Inc. with
respect to the TARPS of the Registrant#
(l) (1) -- Opinion and Consent of Olshan Grundman Frome & Rosenzweig LLP**
(2) -- Opinion and Consent of Piper & Marbury L.L.P.**
(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) -- Powers of Attorney (incorporated by reference to the signature
pages to Registrant's Registration Statement on p. II-7).
Footnote
Reference Description
* 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.
+ 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.
** To be filed by Amendment.
Item 25: Marketing Arrangements
Not Applicable.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees $ 10,325
Printing and engraving expenses $ 50,000
Legal fees and expenses 125,000
Accounting fees and expenses 25,000
Miscellaneous expenses 109,675
Total $320,000
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.
<TABLE>
<CAPTION>
Control Persons Positions
- -------------------- ---------------------------------------------------------------------
<S> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
Control Persons Positions
- -------------------- ---------------------------------------------------------------------
<S> <C>
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
</TABLE>
3. Prospect Street Senior Loan Management Co., Inc.
(a Massachusetts corporation)
Business:Investment Adviser to Prospect Street Senior Portfolio, L.P.,
("Senior Portfolio")
<TABLE>
<CAPTION>
Control Persons Positions
- -------------------- ---------------------------------------------------------------------
<S> <C>
Omohundro, Jr. 37.5% shareholder, Co-President, Chief Executive Officer, Treasurer and
Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
</TABLE>
4. Prospect Street Senior Loan Corp.
(a Massachusetts corporation)
Business:General Partner to Senior Portfolio
<TABLE>
<CAPTION>
Control Persons Positions
- -------------------- ---------------------------------------------------------------------
<S> <C>
Omohundro, Jr. 37.5% shareholder, Co-President, Chief Executive Officer, Treasurer and
Director
Cote 37.5% shareholder, Co-President and Director
Frabotta 20% shareholder
</TABLE>
5. COMO Securities, Inc. (a Massachusetts corporation) ("COMO") Business:COMO is
a registered broker/dealer.
<TABLE>
<CAPTION>
Control Persons Positions
- -------------------- ---------------------------------------------------------------------
<S> <C>
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
</TABLE>
6. Prospect Street Connecticut Capital Inc.
(a Massachusetts corporation)
Business:Investment Adviser to and general
partner of Prospect St. Financial
Developments L.P.
<TABLE>
<CAPTION>
Control Persons Positions
- -------------------- ---------------------------------------------------------------------
<S> <C>
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
</TABLE>
7. Prospect Street Discovery Fund Inc. (a Massachusetts corporation)
Business:Investment Adviser to and general partner of Prospect St. NYC Discovery
Fund L.P.
<TABLE>
<CAPTION>
Control Persons Positions
- -------------------- ---------------------------------------------------------------------
<S> <C>
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
</TABLE>
Item 28: Number of Holders of Securities
At October 31, 1997 the numbers of record holders of shares of the Registrant
were as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Old TARPS 1
Common Stock 2,718
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 Underwriting 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 Stock: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
1. The Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value 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.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant under Rule 497(h) under
the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering
thereof.
6. A copy of any Statement of Additional Information will be sent by first class
mail or other means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request for such copy.
<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 Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts,
on the 13th day of February, 1998.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By /s/ Richard E. Omohundro, Jr.
---------------------------------------
RICHARD E. OMOHUNDRO, JR.
President
POWERS OF ATTORNEY AND SIGNATORIES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, this Registration Statement
has been signed by the following persons in the capacities and on the date
indicated. Each of the undersigned officers and directors of Prospect Street
High Income Portfolio Inc. hereby constitutes and appoints Richard E. Omohundro,
Jr. and John A. Frabotta and each of them singly, as true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him in his name in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and to prepare any and
all exhibits thereto, and other documents in connection therewith, and to make
any applicable state securities law or blue sky filings, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite or necessary to be done to enable Prospect
Street High Income Portfolio Inc. to comply with the provisions of the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended and all requirements of the Securities and Exchange Commission, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
Director and President February 13, 1998
(Principal Executive
/s/ Richard E. Omohundro, Jr. Officer)
- -------------------------------
RICHARD E. OMOHUNDRO, JR.
Director, Vice President February 13, 1998
Treasurer (Principal
Financial and Accounting
/s/ John A. Frabotta Officer)
- -------------------------------
JOHN A. FRABOTTA
/s/ John S. Albanese Director February 13, 1998
- -------------------------------
JOHN S. ALBANESE
/s/ C. William Carey Director February 13, 1998
- -------------------------------
C. WILLIAM CAREY
/s/ Joseph G. Cote Director February 13, 1998
- -------------------------------
JOSEPH G. COTE
/s/ Harlan D. Platt Director February 13, 1998
- -------------------------------
HARLAN D. PLATT
/s/ Christopher E. Roshier Director February 13, 1998
- -------------------------------
CHRISTOPHER E. ROSHIER
<PAGE>
Exhibit k(7)
================================================================================
AUCTION AGENT AGREEMENT
between
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
and
BANKERS TRUST COMPANY
Dated as of _______________, 1998
Relating to
Taxable Auction Rate Preferred Stock
of
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions and Rules of Construction ............................. 1
1.1 Terms Defined by Reference to TARPS Provisions ........... 1
1.2 Terms Defined Herein ..................................... 1
1.3 Rules of Construction .................................... 3
2. The Auction ....................................................... 3
2.1 Purpose; Incorporation by Reference of Auction
Procedures and Settlement Procedures ..................... 3
2.2 Preparation of Each Auction; Maintenance of Registry
of Beneficial Owners ..................................... 4
2.3 Information Concerning Rates ............................. 6
2.4 Auction Schedule ......................................... 6
2.5 Designation of Dividend Period ........................... 7
2.6 Notice of Auction Results ................................ 8
2.7 Broker-Dealers ........................................... 8
2.8 Ownership of TARPS ....................................... 9
2.9 Access to and Maintenance of Auction Records ............. 9
2.10 Dividend and Redemption Price Deposit .................... 9
3. The Auction Agent as Dividend and Redemption Price Disbursing
Agent ............................................................. 9
4. The Auction Agent as Transfer Agent and Registrar ................. 10
4.1 Issue of Share Certificates .............................. 10
4.2 Registration of Transfer of Shares ....................... 10
4.3 Removal of Legend on Restricted Shares ................... 10
4.4 Lost Share Certificates .................................. 10
4.5 Disposition of Canceled Certificates; Record Retention ... 10
4.6 Share Transfer Books ..................................... 11
4.7 Return of Funds .......................................... 11
5. Representations and Warranties of the Fund ........................ 11
6. The Auction Agent ................................................. 12
6.1 Duties and Responsibilities .............................. 12
6.2 Rights of the Auction Agent .............................. 13
6.3 Auction Agent's Disclaimer ............................... 13
6.4 Compensation, Expenses and Indemnification ............... 13
7. Miscellaneous ..................................................... 14
7.1 Term of Agreement ........................................ 14
7.2 Communications ........................................... 14
7.3 Entire Agreement ......................................... 15
7.4 Benefits ................................................. 15
7.5 Amendment; Waiver ........................................ 16
7.6 Successors and Assigns ................................... 16
7.7 Severability ............................................. 16
7.8 Execution in Counterparts ................................ 16
7.9 Governing Law ............................................ 16
EXHIBITS
EXHIBIT A - Form of Broker-Dealer Agreement
EXHIBIT B - Form of Master Purchaser's Letter
EXHIBIT C - Settlement Procedures
EXHIBIT D - Form of TARPS Provisions
EXHIBIT E - Form of Notice of Auction Dates
EXHIBIT F - Form of Notice of Proposed Designation of Alternate Term Period
EXHIBIT G - Form of Notice of Designation of Alternate Term Period
EXHIBIT H - Form of Notice of Determination Not to Designate Alternate Term
Period
<PAGE>
AUCTION AGENT AGREEMENT dated as of _____________, 1998 between
PROSPECT STREET HIGH INCOME PORTFOLIO INC., a Maryland corporation (the "Fund"),
and BANKERS TRUST COMPANY, a New York banking corporation (the "Auction Agent").
WHEREAS, the Fund proposes to issue a series of preferred stock, par
value $1.00 per share, liquidation preference $25,000 per share, designated
Taxable Auction Rate Preferred Stock, Series A ("TARPS Series A") and may in the
future designate additional series of Auction Term Preferred Stock (together
with the TARPS Series A, referred to as the "TARPS") pursuant to the TARPS
Provisions (as hereinafter defined), and desires that the Auction Agent perform
certain duties in connection with the TARPS upon the terms and subject to the
conditions of this Agreement, and hereby appoints the Auction Agent to act in
the capacities set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Fund and the Auction Agent agree as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined by Reference to TARPS Provisions. Capitalized terms
not defined herein shall have the respective meanings specified in the TARPS
Provisions.
1.2 Terms Defined Herein. As used herein and in the Settlement
Procedures, the following terms shall have the following meanings, unless the
context otherwise requires:
(a) "Adviser" shall mean Prospect Street Investment Management Co.,
Inc.
(b) "Agent Member" of any Person shall mean the member of, or
participant in, the Securities Depository.
(c) "Auction" shall have the meaning specified in Section 2.1
hereof.
(d) "Auction Procedures" shall mean the auction procedures
constituting Part II of the TARPS Provisions.
(e) "Authorized Officer" shall mean each Senior Vice President,
Vice President, Assistant Vice President, Assistant Treasurer and Assistant
Secretary of the Auction Agent and every other officer or employee of the
Auction Agent designated as an "Authorized Officer" for purposes hereof in a
communication to the Fund.
(f) "Broker-Dealer" shall mean any broker-dealer, commercial bank
or other entity permitted by law to perform the functions of a Broker-Dealer
that is a member of or a participant in, the Securities Depository or is an
affiliate of such member or participant, has been selected by the Fund and has
entered into a Broker-Dealer Agreement that remains effective.
(g) "Broker-Dealer Agreement" shall mean each agreement between the
Auction Agent as agent for the Fund and a Broker-Dealer substantially in the
form attached hereto as Exhibit A.
(h) "Existing Holder" means (a) a person who has signed a Master
Purchaser's Letter and beneficially owns shares of a series of TARPS listed in
that person's name in the records of the Auction Agent or (b) the beneficial
owner of shares of a series of TARPS which are listed under such person's
Broker-Dealer's name in the records of the Auction Agent, which Broker-Dealer
shall have signed a Master Purchaser's Letter.
(i) "Fund Officer" shall mean the Chairman of the Board of
Directors of the Fund, the President, each Vice President (whether or not
designated by a number or word or words added before or after the title "Vice
President"), the Secretary, the Treasurer, each Assistant Secretary and each
Assistant Treasurer of the Fund and every other officer or employee of the Fund
designated as a "Fund Officer" for purposes hereof in a notice to the Auction
Agent.
(j) "Master Purchaser's Letter" means a letter substantially in the
form of or containing provisions similar to those in the form attached hereto as
Exhibit B which is required to be executed by (1) each prospective purchaser of
shares of a series of the TARPS or (2) the Broker-Dealer through whom such
shares will be held.
(k) "Person" means and includes an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
(l) "Potential Holder," when used with respect to shares of a
series of the TARPS, means any person, including any Existing Holder of shares
of such series, (i) who shall have executed a Master Purchaser's Letter or whose
shares will be listed under such person's Broker-Dealer in the records of the
Auction Agent, which Broker-Dealer shall have executed a Master Purchaser's
Letter, and (ii) who may be interested in acquiring shares of such series (or,
in the case of an Existing Holder or such person, additional shares of such
series).
(m) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit C.
(n) "TARPS Provisions" shall mean the Articles Supplementary
designating the TARPS Series A and any additional series of Taxable Auction Rate
Preferred Stock as may be designated at some future time, and establishing the
rights and preferences thereof pursuant to the Articles of Incorporation, as
amended, attached hereto as Exhibit D.
(o) "Underwriter" shall mean Bear, Stearns & Co. Inc. and any other
person named as an underwriter of the TARPS in the Underwriting Agreement or any
schedule thereto.
(p) "Underwriting Agreement" shall mean the Underwriting Agreement
dated ______________, 1998 among the Fund, the Underwriter and the Adviser.
1.3 Rules of Construction. Unless the context or use indicates another
or different meaning or intent, the following rules shall apply to the
construction of this Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto" and other words of
similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
2. The Auction.
2.1 Purpose; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) The TARPS Provisions provide that the Applicable Rate per annum
for each series of TARPS for each Dividend Period after the initial Dividend
Period with respect to each series of TARPS shall, except under certain
conditions, be equal to the rate per annum that a bank or trust company
appointed by the Fund advises has resulted on the Business Day preceding the
first day of such Dividend Period from implementation of the Auction Procedures
for such series. Each periodic implementation of the Auction Procedures is
hereinafter referred to as an "Auction." The Board of Directors has adopted a
resolution appointing Bankers Trust Company as Auction Agent for purposes of the
Auction Procedures for each series of the TARPS. The Auction Agent accepts such
appointment and agrees to follow the procedures set forth in this Section 2 and
the Auction Procedures for the purpose of determining the Applicable Rate for
each series of TARPS for each Dividend Period thereof for which the Applicable
Rate is to be determined by an Auction.
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their entirety
and shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.
2.2 Preparation of Each Auction; Maintenance of Registry of Beneficial
Owners.
(a) Not later than seven days prior to the first Auction Date for
any series of TARPS, the Fund shall provide the Auction Agent with a list of the
Broker-Dealers and a manually signed copy of each Broker-Dealer Agreement for
execution by the Auction Agent. Not later than seven days prior to any Auction
Date for any series of TARPS for which any change in such list of Broker-Dealers
is to be effective, the Fund will notify the Auction Agent in writing of such
change and, if any such change involves the addition of a Broker-Dealer to such
list, shall cause to be delivered to the Auction Agent for execution by the
Auction Agent a Broker-Dealer Agreement signed by such Broker-Dealer; provided,
however, that if the Fund proposes to designate any Alternate Term Period of any
series of TARPS pursuant to Section 4 of Part I of the TARPS Provisions, not
later than 11:00 A.M., New York City time, on the Business Day next preceding
the Auction next preceding the first day of such Alternate Term Period, upon the
written request of the Auction Agent, the Fund shall provide the Auction Agent
with a list of the Broker-Dealers for such series and a manually signed copy of
each Broker-Dealer Agreement or a new Schedule A to the Broker-Dealer Agreement
(which Schedule A shall replace and supersede any previous Schedule A to such
Broker-Dealer Agreement) with each Broker-Dealer for such series. The Auction
Agent and the Fund shall have entered into a Broker-Dealer Agreement with each
Broker-Dealer prior to the participation of any such Broker-Dealer in any
Auction.
(b) In the event that any Auction Date for any series of TARPS
shall be changed after the Auction Agent shall have given the notice referred to
in clause (vii) of paragraph (a) of the Settlement Procedures, or after the
notice referred to in Section 2.5(a) hereof, if applicable, the Auction Agent,
by such means as the Auction Agent deems practicable, shall give notice of such
change to the Broker-Dealers for such series not later than the earlier of 9:15
A.M. on the new Auction Date or 9:15 A.M. on the old Auction Date.
(c)(i) The Auction Agent shall maintain a registry of the
beneficial owners of the shares of each series of TARPS who shall constitute
Existing Holders of shares of such series of TARPS for purposes of Auctions and
shall indicate thereon the identity of the respective Broker-Dealer of each
Existing Holder, if any, on whose behalf such Broker-Dealer submitted the most
recent order in any Auction which resulted in such Existing Holder continuing to
hold or purchasing shares of such series of TARPS. The Auction Agent shall keep
such registry current and accurate. The Fund shall provide or cause to be
provided to the Auction Agent at or prior to the Date of Original Issue of each
series of TARPS a list of the initial Existing Holders of the shares of each
such series, the number of shares purchased by each such Existing Holder and the
respective Broker-Dealer of each such Existing Holder or the affiliate thereof
through which each such Existing Holder purchased such shares. At the request of
the Fund, the Auction Agent shall advise the Fund in writing as to whether the
number of Existing Holders is 500 or more or any Existing Holder owns 5% or more
of the outstanding shares of any series of TARPS. The Auction Agent may rely
upon, as conclusive evidence of the identities of the Existing Holders of shares
of any series of TARPS, (A) such list, (B) the results of Auctions and (C)
notices from any Existing Holder, the Agent Member of any Existing Holder or the
Broker-Dealer of any Existing Holder as described in the first sentence of
Section 2.2(c)(iii) hereof.
(ii) In the event of any partial redemption of any
series of TARPS, the Auction Agent shall, at least two Business Days prior to
the next Auction for such series, request the Agent Member of each Existing
Holder of shares of TARPS of such series to disclose to the Auction Agent (upon
selection by such Agent Member of the Existing Holders whose shares of TARPS of
such series are to be redeemed) the number of shares of TARPS of such series, if
any, of such Existing Holder which are subject to such redemption, provided the
Auction Agent has been furnished with the name and telephone number of a person
or department at such Agent Member from which it shall request such information.
Upon any refusal of an Agent Member to release such information, the Auction
Agent shall deliver to such Agent Member a facsimile copy of the Existing
Holder's Master Purchaser's Letter, which authorizes and instructs such Agent
Member to release such information to the Auction Agent. In the absence of
receiving any such information with respect to an Existing Holder, from such
Existing Holder's Agent Member or otherwise, the Auction Agent may continue to
treat such Existing Holder as the beneficial owner of the number of shares of
TARPS of such series shown in the Auction Agent's registry.
(iii) The Auction Agent shall be required to register a
transfer of shares of TARPS of any series from an Existing Holder of such shares
of TARPS to another Person only if such transfer is made to a Person that has
delivered, or on whose behalf has been delivered, a signed Master Purchaser's
Letter to the Auction Agent and if (A) such transfer is pursuant to an Auction
or (B) the Auction Agent has been notified in writing (I) in a notice
substantially in the form of Exhibit D to the Broker-Dealer Agreement by such
Existing Holder, the Agent Member of such Existing Holder or the Broker-Dealer
of such Existing Holder of such transfer or (II) in a notice substantially in
the form of Exhibit E to the Broker-Dealer Agreement by the Broker-Dealer of any
Person that purchased or sold such TARPS in an Auction of the failure of such
shares of TARPS to be transferred as a result of such Auction. The Auction Agent
is not required to accept any such notice for an Auction unless it is received
by the Auction Agent by 3:00 P.M. on the Business Day preceding such Auction.
(iv) The Auction Agent is not required to accept the Master
Purchaser's Letter of any Potential Holder who wishes to submit a Buy Order for
the first time in an Auction or of any Potential Holder or Existing Holder who
wishes to amend its Master Purchaser's Letter unless such letter or amendment is
received by the Auction Agent by 3:00 P.M. on the Business Day preceding such
Auction.
(d) The Auction Agent may request the Broker-Dealers, as set forth
in the Broker-Dealer Agreement, to provide the Auction Agent with a list of
their respective customers that such Broker-Dealers believe are Existing Holders
of shares of any series of TARPS. The Auction Agent shall keep confidential such
registry of Existing Holders and shall not disclose the identities of the
Existing Holders of such shares of TARPS to any Person other than the Fund and
the Broker-Dealer that provided such information.
2.3 Information Concerning Rates.
(a) On each Auction Date, the Auction Agent shall determine the AA
Composite Commercial Paper Rate or the Treasury Index Rate, as the case may be,
and the Maximum Applicable Rate. If the AA Composite Commercial Paper Rate or
the Treasury Index Rate, as the case may be, is not quoted on an interest basis,
if the rate obtained by the Auction Agent is quoted on a discount basis, or if
the rate obtained by the Auction Agent is quoted on another basis the Auction
Agent shall convert the quoted rate to an interest rate after consultation with
the Fund as to the method of such conversion. Not later than 9:30 A.M. on each
Auction Date the Auction Agent shall notify the Fund and the Broker-Dealers of
the Maximum Applicable Rate so determined and the AA Composite Commercial Paper
Rate or the Treasury Index Rate, as the case may be, used to make such
determination.
(b) If any AA Composite Commercial Paper Rate is to be based on
rates supplied by Commercial Paper Dealers and one or more of the Commercial
Paper Dealers shall not provide a quotation for the determination of such AA
Composite Commercial Paper Rate, the Auction Agent shall immediately notify the
Fund so that the Fund can determine whether to subject a substitute Commercial
Paper Dealer or substitute Commercial Paper Dealers to provide the quotation or
quotations not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers. The Fund shall promptly advise the Auction Agent of any such selection.
(c) If any Treasury Index Rate is to be based on rates supplied by
U.S. Government Securities Dealers and one or more of the U.S. Government
Securities Dealers shall not provide a quotation for the determination of such
Treasury Rate, the Auction Agent shall immediately notify the Fund so that the
Fund can determine whether to select a Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers to provide the quotation
or quotations not being supplied by any U.S. Government Securities Dealers. The
Fund shall promptly advise the Auction Agent of any such selection.
2.4 Auction Schedule. The Auction Agent shall conduct Auctions for each
series of TARPS in accordance with the schedule set forth below. Such schedule
may be changed by the Auction Agent with the consent of the Fund, which consent
shall not be unreasonably withheld or delayed. The Auction Agent shall give
written notice of any such change to each Broker-Dealer. Such notice shall be
given prior to the close of business on the Business Day next preceding the
first Auction Date on which any such change shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Fund and Broker-Dealers
of the Maximum Applicable Rate and the Reference
Rate(s), used in determining such Maximum
Applicable Rate as set forth in Section 2.3(a)
hereof, with respect to each series of TARPS.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated to
it by Broker-Dealers as provided in Section 4(a) of
the Auction Procedures. Submission Deadline 1:00
P.M.
Not earlier than 1:00 P.M. Auction Agent makes determination pursuant to
Section 5(a) of the Auction Procedures.
By approximately 3:00 P.M. Auction Agent advises Fund of results of Auction as
provided in Section 5(b) of the Auction Procedures.
Submitted Orders are accepted and rejected and
shares of TARPS of the respective Series allocated
as provided in Section 6 of the Auction Procedures.
Auction Agent gives notice of Auction results as
set forth in Paragraph (a) of the Settlement
Procedures.
2.5 Designation of Dividend Period.
(a) The TARPS Provisions provide that, subject to the Fund's option
to designate an Alternate Term Period as referred to in paragraph (b) of this
Section 2.5, (i) the Dividend Period (other than the initial Dividend Period)
for each series of TARPS will be a Standard Term Period. Any such designation of
an Alternate Term Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) any failure to pay in a timely manner
to the Auction Agent the full amount of any dividend on, or the redemption price
of, the TARPS shall have been cured, (iii) Sufficient Clearing orders shall have
existed in an Auction held on the Auction Date immediately preceding the first
day of such proposed Dividend Period other than a Standard Term Period, (iv) if
the Fund shall have mailed a Notice of Redemption with respect to any shares,
the Redemption Price with respect to such shares shall have been deposited with
the Auction Agent, and (v) in the case of an Alternate Term Period, the Fund has
provided notice and an TARPS Basic Maintenance Report to Fitch (if Fitch is then
rating the TARPS) and Moody's (if Moody's is then rating the TARPS).
(b) Pursuant to the TARPS Provisions, the Fund may, at its option,
designate an Alternate Term Period for any series of TARPS in the manner
described below and in Section 4 of Part I of the TARPS Provisions. If the Fund
proposes to designate any succeeding Alternate Term Period the Fund shall
deliver to the Auction Agent:
(i) A notice of such proposed Alternate Term Period in the
form of Exhibit F hereto not less than 15 nor more than 30 days prior to the
first day of such proposed Alternate Term Period. The Auction Agent on behalf of
the Fund shall deliver such notice by first-class mail, postage prepaid, to each
Existing Holder of shares of such series of TARPS at the address specified in
such Existing Holder's Master Purchaser's Letter and to the Broker-Dealers for
such series as promptly as practicable after its receipt of such notice from the
Fund.
(ii) A notice in the form of Exhibit G hereto not later than
3:00 P.M. on the second Business Day next preceding the first day of such
proposed Alternate Term Period, of either (x) its determination, subject to
certain conditions, to proceed with such Alternate Term Period, in which case
the Fund shall specify the terms of the Specific Redemption Provisions, if any,
or (y) its determination not to proceed with such Alternate Period in which
latter event the succeeding Dividend Period shall be a Standard Term Period. The
Auction Agent shall promptly deliver such notice to the Broker-Dealers, but in
no event later than 3:00 P.M. on the date of such notice.
(iii) If the Fund fails to deliver either such notice
with respect to any designation of any proposed Alternate Term Period to the
Auction Agent by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such proposed Alternate Term Period, the Fund shall
be deemed to have delivered a notice to the Auction Agent with respect to such
Dividend Period to the effect that it has determined not to proceed with the
designation of an Alternate Term Period, thereby resulting in a Standard Term
Period.
2.6 Notice of Auction Results. On each Auction Date for any series of
TARPS, the Auction Agent shall notify Broker-Dealers of the results of the
Auction held on such date by telephone as set forth in paragraph (a) of the
Settlement Procedures.
2.7 Broker-Dealers.
(a) Not later than 12:00 Noon on each Auction Date for any series
of TARPS, the Fund shall pay to the Auction Agent an amount in cash equal to the
aggregate fees payable to the Broker-Dealers for such series pursuant to Section
2.8 of the Broker-Dealer Agreement for such series. The Auction Agent shall
apply such moneys as set forth in Section 2.8 of each such Broker-Dealer
Agreement.
(b) The Fund shall obtain the consent of the Auction Agent prior to
selecting any Person to act as a Broker-Dealer, which consent shall not be
unreasonably withheld.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement
as set forth therein if so directed by the Fund.
(d) Subject to the Auction Agent's having consented to the
selection of the relevant Broker-Dealer pursuant to Section 2.8(b) hereof, the
Auction Agent shall from time to time enter into such Broker-Dealer Agreements
with one or more Broker-Dealers as the Fund shall request, and shall enter into
such schedules to any such Broker-Dealer Agreements as the Fund shall request,
which schedules, among other things, shall set forth the series of TARPS to
which such Broker-Dealer Agreement relates.
2.8 Ownership of TARPS. The Fund shall notify the Auction Agent if the
Fund or any affiliate of the Fund acquires any shares of TARPS of any series.
Neither the Fund nor any affiliate of the Fund shall submit any Order in any
Auction for TARPS, except as set forth in the next sentence. Any Broker-Dealer
that is an affiliate of the Fund may submit Orders in Auctions, but only if such
orders are not for its own account. For purposes of this Section 2.8, a
Broker-Dealer shall not be deemed to be an affiliate of the Fund solely because
one or more of the directors or executive officers of such Broker-Dealer or of
any Person controlled by, in control of or under common control with such
Broker-Dealer is also a Director of the Fund. The Auction Agent shall have no
duty or liability with respect to enforcement of this Section 2.8.
2.9 Access to and Maintenance of Auction Records. The Auction Agent
shall, upon the receipt of prior written notice from the Fund, afford to the
Fund access at reasonable times during normal business hours to all books,
records, documents and other information concerning the conduct and results of
Auctions. The Auction Agent shall maintain records relating to an Auction for a
period of six years after such Auction and such records shall, in reasonable
detail, accurately and fairly reflect the actions taken by the Auction Agent
hereunder.
2.10 Dividend and Redemption Price Deposit. The Fund shall pay to the
Auction Agent, not later than 12:00 noon, New York City time, (A) on the
Business Day next preceding any Dividend Payment Date for any series of TARPS,
in funds available on such Dividend Payment Date in The City of New York, New
York, the full amount of any dividends to be paid on such Dividend Payment Date
on any share of such series, and (B) on the Business Day next preceding any
redemption date for any series of TARPS in funds available on such redemption
date for such series in The City of New York, New York, the Redemption Price to
be paid on such redemption date for the shares of any such series after notice
of redemption is given as set forth in the TARPS Provisions.
3. The Auction Agent as Dividend and Redemption Price Disbursing Agent. The
Auction Agent, as dividend and redemption price disbursing agent, shall pay to
the Holders of shares of TARPS of any series (i) on each Dividend Payment Date
for such series, dividends on the shares of TARPS of such series, (ii) an any
date fixed for redemption of shares of TARPS of any series, the Redemption Price
of any shares of such series called for redemption and (iii) any late charge
related to any payment of dividends or Redemption Price, in each case after
receipt of the necessary funds from the Fund with which to pay such dividends,
Redemption Price or late charge. The amount of dividends for any Dividend Period
for any series of TARPS to be paid by the Auction Agent to the Holders of such
shares of such series will be determined by the Fund as set forth in Section 2
of Part I of the TARPS Provisions with respect to such series. The Redemption
Price of any shares to be paid by the Auction Agent to the Holders will be
determined by the Fund as set forth in Section 3 of Part I of the TARPS
Provisions with respect to such series. The Fund shall notify the Auction Agent
in writing of a decision to redeem shares of any series of TARPS at least five
days prior to the date a notice of redemption is required to be mailed to the
Holders of the shares to be redeemed by paragraph (b) of Section 3 of Part I of
the TARPS Provisions. Such notice by the Fund to the Auction Agent shall contain
the information required by paragraph (b) of Section 3 of Part I of the TARPS
Provisions to be stated in the notice of redemption required to be mailed by the
Auction Agent to such Holders.
4. The Auction Agent as Transfer Agent and Registrar.
4.1 Issue of Share Certificates. Upon the Date of original Issue of
each series or TARPS, one certificate representing all of the shares of each
series issued on such date shall be issued by the Fund and, at the request of
the Fund, registered in the name of Cede & Co. and countersigned by the Auction
Agent.
4.2 Registration of Transfer of Shares. Shares of each series of TARPS
shall be registered solely in the name of the Securities Depository or its
nominee.
4.3 Removal of Legend on Restricted Shares. All requests for removal of
legends on shares of any series of TARPS indicating restrictions on transfer
shall be accompanied by an opinion of counsel stating that such legends may be
removed and such shares freely transferred, such opinion to be delivered under
cover of a letter from a Fund Officer authorizing the Auction Agent to remove
the legend on the basis of said opinion.
4.4 Lost Share Certificates. The Auction Agent shall issue and register
replacement certificates for certificates represented to have been lost, stolen
or destroyed upon the fulfillment of such requirements as shall be deemed
appropriate by the Fund and the Auction Agent, subject at all times to
provisions of law, the By-Laws of the Fund governing such matters and
resolutions adopted by the Fund with respect to lost securities. The Auction
Agent may issue new certificates in exchange for and upon the cancellation of
mutilated certificates. Any request by the Fund to the Auction Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Fund to the Auction Agent that such
issuance will comply with such provisions of law and the By-Laws and resolutions
of the Fund.
4.5 Disposition of Canceled Certificates; Record Retention. The Auction
Agent shall retain all share certificates which have been cancelled in transfer
or exchange and all accompanying documentation in accordance with applicable
rules and regulations of the Securities and Exchange Commission for two calendar
years. Upon the expiration of this two-year period, the Auction Agent shall
deliver to the Fund the cancelled certificates and accompanying documentation.
The Fund also shall undertake to furnish to the Securities and Exchange
Commission and to the Board of Governors of the Federal Reserve System, upon
demand, at either the principal office or at any regional office, complete,
correct and current hard copies of any and all such records. Thereafter such
records shall not be destroyed by the Fund without the concurrence of the
Auction Agent.
4.6 Share Transfer Books. For so long as the Auction Agent, Bankers
Trust Company, is acting as the transfer agent for any series of TARPS pursuant
to this Agreement, it shall maintain a share transfer book containing a list of
the Holders of the shares of each series of TARPS, the number of shares of each
series held by such Holders and the address of each Holder. The Auction Agent
shall record in such share transfer books any change of address of a Holder upon
notice by such Holder. In case of any request or demand for the inspection of
the share transfer books of the Fund or any other books in the possession of the
Auction Agent, the Auction Agent will notify the Fund and secure instructions as
to permitting or refusing such inspection. The Auction Agent reserves the right,
however, to exhibit the share transfer books or other books to any Person in
case it is advised by its counsel that its failure to do so would be unlawful.
4.7 Return of Funds. Any funds deposited with the Auction Agent
hereunder by the Fund for any reason, including but not limited to redemption of
shares of TARPS of any series, the remain unpaid after 90 days shall be repaid
to the Fund upon the written request of the Fund, together with interest, if
any, earned thereon.
5. Representations and Warranties of the Fund. The Fund represents and warrants
to the Auction Agent that:
(a) The Fund has been duly organized and is validly existing as a
corporation under the laws of the State of Maryland and has all necessary
corporate power and authority to execute and deliver this Agreement and to
authorize, create and issue the shares of each series of TARPS;
(b) This Agreement has been duly and validly authorized, executed
and delivered by the Fund and, assuming due authorization, execution and
delivery by the Auction Agent, constitutes the legal, valid and binding
obligation of the Fund subject, as to enforceability, to bankruptcy, insolvency,
reorganization, moratorium, receivership or similar laws, whether statutory or
decisional, relating to or affecting creditors' rights and to general equitable
principles (regardless of whether enforcement is sought in equity or at law);
(c) The form of the certificate evidencing the shares of TARPS
complies with all applicable laws of the State of Maryland;
(d) The shares of TARPS, when issued, delivered and paid for on the
Date of Original Issue as contemplated by the Underwriting Agreement, will have
been duly authorized, validly issued, fully paid and nonassessable, except as
provided under Maryland law;
(e) Assuming the Underwriter complies with its obligations under
the Underwriting Agreement and that the purchasers of the TARPS comply with
their obligations in the Master Purchaser's Letters, no consent, authorization
or order of, or filing or registration with, any court, governmental agency or
official (except such as have been obtained and such as may be required under
the Securities Act of 1933, as amended, or the Investment Company Act of 1940,
as amended, or under the blue sky or state securities laws) is required in
connection with the execution and delivery of this Agreement or the issuance of
the shares of the TARPS; and
(f) The issuance and sale of the TARPS, the execution, delivery and
performance of this Agreement, the compliance by the Fund with all provisions
hereof, and the consummation of the transactions contemplated hereby or by the
Underwriting Agreement or the Broker-Dealer Agreements, will not conflict with,
constitute a breach of any of the terms or provisions of, or a default under, or
result in the creation or imposition of any material lien, charge or encumbrance
upon any of the assets of the Fund pursuant to the terms of any agreement,
indenture or instrument to which the Fund is a party or by which the Fund is
bound, or result in a violation of the Articles of Incorporation, TARPS
Provisions or By-Laws of the Fund or of any order, rule or regulation of any
court or governmental agency having jurisdiction over the Fund or its property
which conflict, breach, default, lien or violation, individually or in the
aggregate, would have a material adverse effect on the business, financial
position or results of operations of the Fund.
6. The Auction Agent.
6.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Fund
hereunder and owes no fiduciary duties to any other Person by reason of this
Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are specifically set forth in this Agreement and the
Broker-Dealer Agreements, and no implied covenants or obligations shall be read
into this Agreement against the Auction Agent.
(c) In the absence of bad faith or gross negligence on its part,
the Auction Agent shall not be liable for any action taken, suffered, or omitted
or for any effort of judgment made by it in the performance of its duties under
this Agreement except that the Auction Agent shall be liable for any effort of
judgment made in good faith if the Auction Agent shall have been grossly
negligent in ascertaining the pertinent facts.
(d) Any funds deposited with the Auction Agent hereunder by the
Fund for any reason, including the payment of dividends or the redemption of
shares of TARPS of any series, that remain with the Auction Agent after 90 days
shall be repaid to the Fund as provided in Section 4.7 hereof.
6.2 Rights of the Auction Agent.
(a) The Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document believed by it to be
genuine. The Auction Agent shall not be liable for acting upon any telephone
communication authorized hereby which the Auction Agent believes in good faith
to have been given by the Fund or by any Broker-Dealer. The Auction Agent may
record telephone communications with the Fund or with any Broker-Dealer.
(b) The Auction Agent may consult with counsel reasonably
acceptable to the Fund and the advice of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial liability
in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its
rights hereunder either directly or by or through agents or attorneys and shall
not be responsible for any misconduct on the part of any agent or attorney
appointed by it with due care hereunder except as set forth above in Section
6.1(c).
6.3 Auction Agent's Disclaimer. The Auction Agent makes no
representation as to the validity or adequacy of this Agreement (except as to
the Auction Agent's duties hereunder and as to the due authorization, execution
and delivery of this Agreement), the Broker-Dealer Agreements (except as to the
Auction Agent's duties thereunder) or the shares of any series of TARPS.
6.4 Compensation, Expenses and Indemnification.
(a) The Fund shall pay the Auction Agent from time to time
reasonable compensation for all services rendered by it under this Agreement and
the Broker-Dealer Agreements in such amounts as may be agreed to by the Fund and
the Auction Agent from time to time.
(b) The Fund shall reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of this Agreement and the
Broker-Dealer Agreements (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any expense or disbursement
attributable to its gross negligence or bad faith.
(c) The Fund shall indemnify the Auction Agent for and hold it
harmless against, any loss, liability or expense incurred without gross
negligence or bad faith on its part, arising out of or in connection with its
agency under this Agreement and the Broker-Dealer Agreements, including the
costs and expenses of defending itself against any claim or liability in
connection with its exercise or performance of its duties hereunder and
thereunder for which indemnification is provided by this subsection.
7. Miscellaneous.
7.1 Term of Agreement.
(a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Fund may terminate this
Agreement any time by so notifying the Auction Agent in writing, provided that
the Fund has entered into an agreement in substantially the form of this
Agreement with a successor auction agent. The Auction Agent may terminate this
Agreement upon written notice to the Fund, such termination to be effective on
the earlier of (i) the date specified in such notice which shall not be earlier
than 90 days after the giving of such notice or (ii) the date on which a
successor trust company is appointed by the Fund pursuant to an agreement
containing substantially the same terms and conditions as this Agreement.
(b) Except as otherwise provided in this paragraph (b), the
respective rights and duties of the Fund and the Auction Agent under this
Agreement shall cease upon termination of this Agreement. The Fund's obligations
under Section 6.4 hereof and its representations and warranties contained in
Section 5 hereof and the Auction Agent's obligations and liabilities under
Sections 2.9 and 4.5 hereof shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall, at the Fund's request,
promptly deliver to the Fund copies of all books and records maintained by it in
connection with its duties hereunder.
7.2 Communications. Except for (a) communications authorized to be by
telephone pursuant to this Agreement or the Auction Procedures and (b)
communications in connection with Auctions (other than those expressly required
to be in writing) and unless otherwise specified by the terms of this Agreement
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) given to such person at its
address or telecopy number set forth below:
If to the Company, addressed: Prospect Street High Income Portfolio Inc.
60 State Street, Suite 3750
Boston, Massachusetts 02109
Attention: Chief Investment Officer
Telephone No.: (617) 371-9311
Telecopier No.: (617) 742-8591
With a copy sent to:
Victor Rosenzweig, Esq.
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022-1170
Telephone No.: (212) 753-7200
Telecopier No.: (212) 755-1467
If to the Auction Agent, addressed: Bankers Trust Company
[Address]
Attention: ______________
Telecopier No.:
Telephone No.:
or to such other address as the party to whom the communication is addressed
shall have previously communicated to the other party. Communications shall be
given on behalf of the Fund by a Fund Officer and on behalf of the Auction Agent
by an Authorized Officer. Communications shall be effective when received at the
proper address.
7.3 Entire Agreement. This Agreement contains the entire agreement
among the parties relating to the subject matter hereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or inferred, between the parties. This Agreement supersedes terminates
all prior agreements between the parties relating to the subject matter of this
Agreement, including without limitation the Auction Agent Agreement dated
_________________________.
7.4 Benefits. Nothing herein, express or implied, shall give to any
Person, other than the Fund, the Auction Agent and their respective successors
and assigns, any benefit of any legal or equitable right, remedy or claim
hereunder.
7.5 Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to be
charged. The Fund shall notify the auction Agent and each Broker-Dealer of any
change in the Fund's Articles, prior to the effective date of any such change.
(b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such rights or remedies with respect to any
subsequent breach.
7.6 Successors and Assigns. This Agreement shall be binding upon, inure
to the benefit of, and be enforceable by, the respective successors of each of
the Fund and the Auction Agent.
7.7 Severability. If any clause, provision or section hereof shall be
ruled invalid or unenforceable by any court of competent jurisdiction, the
invalidity or unenforceability of such clause, provision or section shall not
affect any of the remaining clauses, provisions or sections hereof.
7.8 Execution in Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
7.9 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Auction Agent
Agreement to be duly executed and delivered by their proper authorized officers
as of the date first above written.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By: -----------------------
Name:
Title:
BANKERS TRUST COMPANY
By: -----------------------
Name:
Title:
<PAGE>
EXHIBIT A
BROKER-DEALER AGREEMENT
<PAGE>
EXHIBIT B
MASTER PURCHASER'S LETTER
Relating to
Securities Involving Rate Settings
Through Auctions or Remarketings
THE COMPANY
A REMARKETING AGENT
THE AUCTION AGENT
A BROKER-DEALER
AN AGENT MEMBER
OTHER PERSONS
Dear Sirs:
1. This letter is designed to apply to publicly or privately offered
debt or equity securities ("Securities") of any issuer ("Company") which are
described in any final prospectus or other offering materials relating to such
Securities as the same may be amended or supplemented (collectively, with
respect to the particular Securities concerned, the "Prospectus") and which
involve periodic rate settings through auctions ("Auctions") or procedures
("Remarketings"). This letter shall be for the benefit of any Company and of any
auction agent, paying agent (collectively, "auction agent"), remarketing agent,
broker-dealer, agent member, securities depository or other interested person in
connection with any Securities and related Auctions or Remarketings (it being
understood that such persons may be required to execute specified agreements and
nothing herein shall alter such requirements). The terminology used herein is
intended to be general in its application and not to exclude any Securities in
respect of which (in the Prospectus or otherwise) alternative terminology is
used.
2. We may from time to time offer to purchase, purchase, offer to sell
and/or sell Securities of any Company as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the results of Auctions or
Remarketings as set forth in the Prospectus.
3. We agree that any bid or sell order placed by us in an Auction or a
Remarketing shall constitute an irrevocable offer (except as otherwise described
in the Prospectus) by us to purchase or sell Securities subject to such bid or
sell order, or such lesser amount of Securities as we shall be required to sell
or purchase as a result of such Auction or Remarketing, at the applicable price,
all as set forth in the Prospectus, and that if we fail to place a bid or sell
order with respect to Securities owned by us with a broker-dealer on any Auction
or Date, or a broker-dealer to which we communicate a bid or sell order fails to
submit such bid or sell order to the auction agent or remarketing agent
concerned, we shall be deemed to have placed a hold or a sell order with respect
to such Securities as described in the Prospectus. We authorize any
broker-dealer that submits a bid or sell order as our agent in Auctions or
Remarketings to execute contracts for the sale of Securities by such bid or sell
order. We recognize that the payment of such broker-dealer for Securities
purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We understand that in a Remarketing, the dividend or interest rate
or rates on the Securities and the allocation of Securities tendered for sale
between dividend or interest periods of different lengths will be based from
time to time on the determinations of one or more remarketing agent(s), and we
agree to be conclusively bound by such determinations. We further agree to the
payment of different dividend or interest rates to different holders of
Securities depending on the length of the dividend or interest period elected by
such holders. We agree that any notice given by us to a remarketing agent (or a
broker-dealer for transmission to a remarketing agent) of our desire to tender
Securities in a Remarketing shall constitute an irrevocable (except to the
limited extent set forth in the Prospectus) offer by us to sell the securities
specified in such Notice, or such lesser number of Securities as we shall be
required to sell as a result of such Remarketing, in accordance with the terms
set forth in the Prospectus, and we authorize the remarketing agent to sell,
transfer or otherwise dispose of such Securities as set forth in the Prospectus.
5. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, in a Remarketing, to or through a broker-dealer or, when
permitted in the Prospectus, to a person that has signed and delivered to the
applicable auction agent or a remarketing agent a letter substantially in the
form of this letter (or other applicable purchaser's letter), provided that in
the case of all transfers other than pursuant to Auctions or Remarketings we or
our broker-dealer or our agent member shall advise such auction agent or a
remarketing agent of such transfer. We understand that a restrictive legend will
be placed on certificates representing the Securities and stop-transfer
instructions will be issued to the transfer agent and/or registrar, all as set
forth in the Prospectus.
6. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by one or more global
certificates registered in the name of the applicable securities depository or
its nominee, that we will not be entitled to receive any certificate
representing the Securities and that our ownership of any Securities will be
maintained in book-entry form by the securities depository for the account of
our agent member, which in turn will maintain records of our beneficial
ownership. We authorize and instruct our agent member to disclose to the
applicable auction agent or remarketing agent such information concerning our
beneficial ownership of Securities as such auction agent or remarketing agent
shall request.
7. We acknowledge that partial deliveries of Securities purchased in
Auctions or Remarketings may be made to us and such deliveries shall constitute
good delivery as set forth in the Prospectus.
8. This letter is not a commitment by us to purchase any Securities.
9. This letter supersedes any prior-dated version of this master
purchaser's letter, and supplements any prior to post-dated purchaser's letter
specific to any particular Securities, and this letter may only be revoked by a
signed writing delivered to the original recipients hereof.
10. The descriptions of Auction or Remarketing procedures set forth in
each applicable Prospectus are incorporated by reference herein and in case of
any conflict between this letter, any purchaser's letter specific to particular
Securities and any such description, such description shall control.
11. Any xerographic or other copy of this letter shall be deemed of
equal effect as a signed original.
12. Our agent member of The Depository Trust company currently is
__________.
13. Our personnel authorized to place orders with broker-dealers for
the purposes set forth in the Prospectus in Auctions or Remarketings currently
is/are __________, telephone number (___) ________.
14. Our taxpayer identification number is __________.
15. In the case of each offer to purchase, purchase, offer to sell or
sale by us of Securities not registered under the Securities Act of 1933, as
amended (the "Act"), we represent and agree as follows:
(a) We understand and expressly acknowledge that the Securities
have not been and will not be registered under the Act and, accordingly, that
the Securities may not be reoffered, resold or otherwise pledged, hypothecated
or transferred unless an applicable exemption from the registration requirements
of the Act is available.
(b) We hereby confirm that any purchase of Securities made by us
will be for our own account, or for the account of one or more parties for which
we are acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which will
acquire Securities will be "accredited investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by us
or such party, as the case may be, will have previously invested in similar
types of instructions and will be able and prepared to bear the economic risk of
investing in and holding such Securities.
(c) We acknowledge that prior to purchasing any Securities we shall
have received a Prospectus (or private placement memorandum) with respect
thereto and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions or
representatives of the Company and receive answers thereto, as we deem necessary
in connection with our decision to purchase Securities.
(d) We recognize that the Company and broker-dealers will rely upon
the truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in the
future shall be deemed to constitute our concurrence in all of the foregoing
which shall be binding on us and each party for which we are acting as set forth
in Subparagraph (b) above.
Dated: ___________________________ ______________________________
(Name of Purchaser)
Mailing Address of Purchaser
___________________________________ By: __________________________
Printed Name:
Title:
- ----------------------------------
- ----------------------------------
<PAGE>
EXHIBIT C
SETTLEMENT PROCEDURES
Capitalized terms used herein shall have the respective meanings
specified in the Articles Supplementary or herein, as the case may be.
(a) On each Auction Date for any series of TARPS, the Auction Agent
shall notify by telephone or telecopy the Broker-Dealers that participated in
the Auction held for such series on such Auction Date and submitted an Order on
behalf of any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the subsequent Dividend Period
and the Dividend Payment Date therefor;
(ii) whether Sufficient Clearing Orders existed for the
determination of the Applicable Rate;
(iii) if such Broker-Dealer submitted a Hold/Sell Order or a Sell
Order for such series on behalf of an Existing Holder, whether such Hold/Sell
Order or Sell Order was accepted or rejected, in whole or in part, and the
number of shares, if any, of such series of TARPS then outstanding to be sold by
such Existing Holder;
(iv) if such Broker-Dealer submitted a Buy Order on behalf of a
Potential Holder, whether such Buy Order was accepted or rejected, in whole or
in part, and the number of shares, if any, of such series of TARPS to be
purchased by such Potential Holder;
(v) if the aggregate number of shares of such series of TARPS to be
sold by all Existing Holders on whose behalf such Broker-Dealer submitted
Hold/Sell Orders or Sell Orders for such series is different than the aggregate
number of shares of such series of TARPS to be purchased by all Potential
Holders on whose behalf such Broker-Dealer submitted Buy Orders, the name or
names of one or more other Broker-Dealers (and the name of the Agent Member, if
any, of each such other Broker-Dealer) and the number of shares of such series
of TARPS to be (x) purchased from one or more Existing Holders on whose behalf
such other Broker-Dealer submitted Hold/Sell Orders or Sell Orders for such
series, or (y) sold to one or more Potential Holders on whose behalf such other
Broker-Dealers submitted Buy Orders for such series; and
(vi) the scheduled Auction Date of the next succeeding Auction with
respect to such series of TARPS.
(b) On each Auction Date for any series of TARPS, each Broker-Dealer
that submitted an Order for such series on behalf of any Existing Holder or
Potential Holder shall:
(i) as soon as practicable, advise each Existing Holder and
Potential Holder on whose behalf such Broker-Dealer submitted a Buy Order,
Hold/Sell Order or Sell Order for such series whether such Buy Order, Hold/Sell
Order or Sell Order was accepted or rejected, in whole or in part;
(ii) instruct each Potential Holder on whose behalf such
Broker-Dealer submitted a Buy Order for such series that was accepted, in whole
or in part, to instruct such Potential Holder's Agent Member to pay to such
Broker-Dealer (or its Agent Member) through the Securities Depository the amount
necessary to purchase the number of shares of such series of TARPS to be
purchased pursuant to such Buy Order against receipt of such shares;
(iii) instruct each Existing Holder on whose behalf such
Broker-Dealer submitted a Hold/Sell Order for such series that was accepted, in
whole or in part, as a Sell Order or a Sell Order for such series that was
accepted, in whole or in part, to instruct such Existing Holder's Agent Member
to deliver to such Broker-Dealer (or its Agent Member) through the Securities
Depository the number of shares of such series of TARPS to be sold pursuant to
such Order against payment therefor;
(iv) advise each Existing Holder on whose behalf such Broker-Dealer
submitted an Order for such series that will continue to hold shares of TARPS of
such series and each Potential Holder on whose behalf such Broker-Dealer
submitted a Buy Order for such series that was accepted, in whole or in part, of
the Applicable Rate for such series for the next succeeding Dividend Period for
such series;
(v) advise each Existing Holder on whose behalf such Broker-Dealer
submitted an Order for such series of the Auction Date of the next succeeding
Auction for such series; and
(vi) advise each Potential Holder on whose behalf such
Broker-Dealer submitted a Buy Order for such series that was accepted, in whole
or in part, of the Auction Date of the next succeeding Auction for such series.
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Buy Order, a Hold/Sell Order or a
Sell Order for any series of TARPS shall allocate any funds received by it in
respect of such series pursuant to (b)(ii) above, and any shares of such series
of TARPS received by it pursuant to (b)(iii) above, among the Potential Holders,
if any, on whose behalf such Broker-Dealer submitted Buy Orders for such series,
the Existing Holders, if any, on whose behalf such Broker-Dealer submitted Buy
Orders, Hold/Sell Orders or Sell Orders for such series, and any Broker-Dealers
identified to it by the Auction Agent pursuant to (a)(v) above.
(d) On the Business Day after the Auction Date, the Securities
Depository shall execute the transactions described above, debiting and
crediting the accounts of the respective Agent Members as necessary to effect
the purchases and sales of shares of any series of TARPS as determined in the
Auction for such series.
<PAGE>
EXHIBIT D
FORM OF TARPS PROVISIONS
<PAGE>
EXHIBIT E
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTICE OF AUCTION DATE FOR
TAXABLE AUCTION RATE PREFERRED STOCK ("TARPS")
NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for the TARPS
Series ___ of PROSPECT STREET HIGH INCOME PORTFOLIO INC. (the "Fund") is
scheduled to be ________ and the next Dividend Payment Date for the Fund's TARPS
Series ___ will be ___________.
PROSPECT STREET HIGH INCOME PORTFOLIO, INC.
<PAGE>
EXHIBIT F
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTICE OF PROPOSED DESIGNATION OF
ALTERNATE TERM PERIOD FOR
TAXABLE AUCTION RATE PREFERRED STOCK
NOTICE IS HEREBY GIVEN that PROSPECT STREET HIGH INCOME PORTFOLIO INC. (the
"Fund") proposes to exercise its option to designate the Dividend Period of its
Series ___ Taxable Auction Rate Preferred Stock ("TARPS") commencing [the first
day of the proposed Alternate Term Period] and ending (the last day of the
proposed Alternate Term Period] as an Alternate Term Period.
By 9:00 A.M., New York City time, on the Business Day next preceding the first
day of such proposed Alternate Term Period, the Fund will notify the Auction
Agent for the TARPS of either (a) its determination to exercise such option,
designating the length of such Alternate Term Period and the terms of the
Specific Redemption Provisions, if any, or (b) its determination not to exercise
such option.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Dated: ___________
<PAGE>
EXHIBIT G
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTICE OF DESIGNATION OF ALTERNATE TERM PERIOD OF
AUCTION RATE PREFERRED STOCK
NOTICE IS HEREBY GIVEN that PROSPECT STREET HIGH INCOME PORTFOLIO INC. (the
"Fund") has determined to designate the Dividend Period of its Series ___
Taxable Auction Rate Preferred Stock ("TARPS") commencing on (the first day of
the Alternate Term Period] and ending on (the last day of the Alternate Term
Period] as an Alternate Term Period.
The Alternate Term Period will be ___ (days] [year(s]].
The Auction Date for the Alternate Term Period is (the Business Day next
preceding the first day of such Alternate Term Period].
The scheduled Dividend Payment Dates for such series of TARPS during such
Alternate Term Period will be
- ------------------.
[Specific Redemption Provisions, if applicable.]
[The Alternate Term Period shall not commence if on such Auction Date Sufficient
Clearing Orders shall not exist.]
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Dated: ______________
<PAGE>
EXHIBIT H
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTICE OF DETERMINATION NOT TO DESIGNATION
ALTERNATE TERM PERIOD OF
TAXABLE AUCTION RATE PREFERRED STOCK
NOTICE IS HEREBY GIVEN that PROSPECT STREET HIGH INCOME PORTFOLIO INC. (the
"Fund") has determined not to exercise its option to designate an Alternate Term
Period of its Series ___ Taxable Auction Rate Preferred Stock. Accordingly, the
next succeeding Dividend Period of such series will be a Standard Term Period.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Dated: ______________
<PAGE>
Exhibit k(9)
================================================================================
BROKER-DEALER AGREEMENT
between
BANKERS TRUST COMPANY
and
BEAR, STEARNS & CO. INC.
Dated as of _________, 1998
Relating to
TAXABLE AUCTION RATE PREFERRED STOCK
of
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
================================================================================
<PAGE>
BROKER-DEALER AGREEMENT dated as of ________, 1998 between BANKERS
TRUST COMPANY (the "Auction Agent"), a New York banking corporation (not in its
individual capacity but solely as agent of Prospect Street High Income Portfolio
Inc. (the "Fund") pursuant to authority granted it in the Auction Agent
Agreement, and BEAR, STEARNS & CO. INC. (together with its successors and
assigns, the "BD") .
The Fund proposes to designate a series of shares of Taxable Auction
Rate Preferred Stock, par value $1.00 per share, liquidation preference $25,000
per share, pursuant to its Articles of Incorporation, as amended, and the
Articles Supplementary establishing such series. In the event that the Fund
establishes one or more additional series of Taxable Auction Rate Preferred
Stock to which it desires that this Agreement be applicable, the Fund shall so
notify the BD in writing. If the BD is willing to render such services on the
terms provided for herein, it shall notify the Fund in writing, whereupon such
series of Taxable Auction Rate Preferred Stock (such series, together with the
Taxable Auction Rate Preferred Stock then subject to this Agreement, the
"TARPS") shall become subject to this Agreement.
The Articles Supplementary will provide that, for each Dividend Period
of any series of TARPS then outstanding, the Applicable Rate for such series for
such Dividend Period shall, under certain conditions, be the rate per annum that
a bank or trust company appointed by the Fund advises results from
implementation of the Auction Procedures for such series. The Board of Directors
has adopted a resolution appointing Bankers Trust Company as Auction Agent for
purposes of the Auction Procedures for each series of TARPS.
The Auction Procedures contemplate the participation of one or more
Broker-Dealers for each series of TARPS.
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein the Auction Agent and BD agree as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined by Reference to Articles Supplementary. Capitalized
terms not defined herein shall have the respective meanings specified in the
Articles Supplementary.
1.2 Terms Defined Herein. As used herein and in the Settlement
Procedures, the following terms shall have the following meanings, unless the
context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles Supplementary
authorizing the issuance of the relevant series of TARPS filed by the Fund with
the State Department of Assessments and Taxation of the State of Maryland.
(b) "Auction" shall have the meaning specified in Section 2.1
hereof.
(c) "Auction Agent Agreement" shall mean any Auction Agent
Agreement between the Fund and the Auction Agent dated as of ________, 1998
relating to the TARPS.
(d) "Auction Procedures" shall mean the auction procedures
constituting Part II of the Articles Supplementary.
(e) "Authorized Officer" shall mean each Senior Vice President,
Vice President, Assistant Vice President, Trust officer, Assistant Treasurer and
Assistant Secretary of the Auction Agent assigned to its Corporate Trust and
Agency Group and every other officer or employee of the Auction Agent designated
as an "Authorized Officer" for purposes of this Agreement in a communication to
the BD.
(f) "BD Officer" shall mean each officer or employee of BD
designated as a "BD Officer" for purposes of this Agreement in a communication
to the Auction Agent.
(g) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.
(h) "Existing Holder" shall have the meaning set forth in the
Articles Supplementary, and for purposes of this Broker-Dealer Agreement and
with respect to the Auction Procedures as referred to in this Agreement, shall
also include, as the circumstances may require, a Person who is listed as the
beneficial owner of TARPS in the records of a Broker-Dealer.
(i) "Master Purchaser's Letter" shall mean a letter addressed to
the Fund, the Auction Agent, a Broker-Dealer and an Agent Member, substantially
in the form attached hereto as Exhibit A.
(j) "Potential Holder" shall have the meaning set forth in the
Articles Supplementary, and for purposes of this Broker-Dealer Agreement and
with respect to the Auction Procedures as referred to in this Agreement, shall
also include, as the circumstances may require, any other Person, including any
Existing Holder of shares of TARPS, who may be interested in acquiring shares of
TARPS (or, in the case of an Existing Holder, additional shares of TARPS).
(k) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit B.
1.3 Rules of Construction. Unless the context or use indicates another
or different meaning or intent, the following rules shall apply to the
construction of this Agreement:
(a) Words importing the singular number shall include the plural
number and vice versa.
(b) The captions and headings herein are solely for the convenience
of reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto", and other words of
similar import refer to this agreement as a whole.
(d) All references herein to a particular time of day shall be to
New York City time.
2. The Auction.
2.1 Purposes; Incorporation by Reference of Auction Procedures and
Settlement Procedures.
(a) The provisions of the Auction Procedures will be followed by
the Auction Agent for the purposes of determining the Applicable Rate for any
Dividend Period of any series of TARPS for which the Applicable Rate is to be
determined by an Auction. Each periodic operation of such procedures is
hereinafter referred to as an "Auction".
(b) All of the provisions contained in the Auction Procedures and
the Settlement Procedures are incorporated herein by reference in their entirety
and shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.
(c) Before any series of the TARPS becomes subject to this
Broker-Dealer Agreement, the BD shall have delivered a Master Purchaser's Letter
executed by the BD. The BD agrees to act as, and assumes the obligations of, and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement
for each series of TARPS. The BD shall act as the exclusive Broker-Dealer for
the Fund until the later of (i) [__________, 1998] and (ii) such date on which
the Fund appoints one or more additional Broker-Dealers. The BD understands
that, subject to the preceding sentence, other Persons meeting the requirements
specified in the definition of "Broker-Dealer" contained in the Auction
Procedures may execute Broker-Dealer Agreements and Master Purchaser's Letters
and participate as Broker-Dealers in Auctions.
2.2 Preparation of Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for the TARPS,
the Auction Agent shall advise the Broker-Dealers for such series by telephone
of the Maximum Applicable Rate therefor and the AA Composite Commercial Paper
Rate(s) and the Treasury Index Rate(s), as the case may be, used in determining
the Maximum Applicable Rate.
(b) In the event that any Auction Date for the TARPS shall be
changed after the Auction Agent has given the notice referred to in clause (vi)
of paragraph (a) of the Settlement Procedures, or after the notice referred to
in Section 2.5(a) hereof, if applicable, the Auction Agent, by such means as the
Auction Agent deems practicable shall give notice of such change to the BD not
later than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the
old Auction Date. Thereafter, the BD shall notify customers of the BD who the BD
believes are Existing Holders of shares of TARPS of such change in the Auction
Date.
(c) The Auction Agent from time to time may request the
Broker-Dealers to provide the Auction Agent with a list of their respective
customers that such Broker-Dealers believe are Existing Holders of shares of
TARPS. BD shall comply with any such request, and the Auction Agent shall keep
confidential any such information so provided by BD and shall not disclose any
information so provided by BD to any Person other than the Fund and BD.
(d) The Auction Agent is not required to accept the Master
Purchaser's Letter of any Potential Holder who wishes to submit an Order for the
first time in an Auction or of any Potential Holder or Existing Holder who
wishes to amend its Master Purchaser's Letter unless such letter or amendment is
received by the Auction Agent by 3:00 P.M. on the Business Day preceding such
Auction.
2.3 Auction Schedule; Method of Submission of Order.
(a) The Fund and the Auction Agent shall conduct Auctions for TARPS
in accordance with the schedule set forth below. Such schedule may be changed by
the Auction Agent with the consent of the Fund, which consent shall not be
unreasonably withheld or delayed. The Auction Agent shall give written notice of
any such change to each Broker-Dealer. Such notice shall be given prior to the
close of business on the Business Day preceding the first Auction Date on which
such change shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises Fund and the Broker-Dealers
of the Maximum Applicable Rate and the AA Composite
Commercial Paper Rate(s) and the Treasury Index
Rate(s), as the case may be, used in determining
such Maximum Applicable Rate as set forth in
Section 2.2(a) hereof, with respect to the relevant
series of TARPS.
9:30 A.M. - 1:00 P.M. Auction Agent assembles information communicated to
it by Broker-Dealers as provided in Section 4(a) of
the Auction Procedures. Submission Deadline is 1:00
P.M.
Not earlier than 1:00 P.M. Auction Agent makes determination pursuant to
Section 5(a) of the Auction Procedures.
By approximately 3:00 P.M. Auction Agent advises the Fund of results of
Auction as provided in Section 5(b) of the Auction
Procedures. Submitted Orders are accepted and
rejected and shares of TARPS of the respective
series allocated as provided in Section 6 of the
Auction Procedures. Auction Agent gives notice of
Auction results as set forth in Section 2.4(a)
hereof.
(b) BD agrees to maintain a list of Potential Holders and to
contact the Potential Holders on such list whom the BD believes may be
interested in participating in the Auction on such Auction Date on or prior to
such Auction Date for the purposes set forth in the Auction Procedures. To the
extent required under the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder, BD shall deliver a Prospectus to each such
Potential. Holder. BD agrees, upon the request of a Potential Holder, to deliver
to such Potential Holder either (i) a Prospectus with such legends or stamps
regarding non-reliance by Potential Holders of certain information therein
(other than with respect to information concerning the TARPS and Settlement and
Auction Procedures) as BD deems appropriate or (ii) the Fund's summary
description of the TARPS and the Settlement Procedure and Auction Procedures.
(c) BD shall submit Orders to the Auction Agent in writing
substantially in the form attached hereto as Exhibit C. BD shall submit a
separate Order to the Auction Agent for each Potential Holder or Existing Holder
on whose behalf BD is submitting an Order and shall not net or aggregate the
Orders of different Potential Holders or Existing Holders on whose behalf BD is
submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit D, of transfers of shares
of TARPS made by or through BD by an Existing Holder to another Person other
than pursuant to an Auction and shall deliver or cause to be delivered the
related Master Purchaser's Letter executed by such Person if such Person will be
listed as the holder of such shares on the books of the auction agent and such
person has not previously so delivered a Master Purchaser's Letter and (ii) a
written notice, substantially in the form attached hereto as Exhibit E, of the
failure of any shares of TARPS to be transferred to or by any Person that
purchased or sold shares of TARPS through BD pursuant to an Auction. The Auction
Agent is not required to accept any such notice for an Auction unless it is
received by the Auction Agent by 3:00 p.m. on the Business Day preceding such
Auction.
(e) BD and other Broker-Dealers which have delivered duly executed
Master Purchaser's Letters may submit Orders in Auctions for their own accounts
unless the Fund shall have notified BD and all other Broker-Dealers that they
may no longer do so, in which case Broker-Dealers may continue to submit Hold
Orders and Sell Orders for their own accounts.
(f) BD agrees to handle its customers' Orders in accordance with
its duties under applicable securities laws and rules.
(g) To the extent that pursuant to Section 6 of the Auction
Procedures, BD continues to hold, sells, or purchases a number of shares that is
fewer than the number of shares in an Order submitted by BD to the Auction Agent
on behalf of Existing or Potential Holders whose shares are or will be held in
BD's name, BD shall make appropriate pro rata allocations among such Existing or
Potential Holders. If as a result of such allocations, any Potential Holder
would be entitled or required to sell, or any Potential Holder would be entitled
or required to purchase, a fraction of a share of TARPS on any Auction Date, BD
shall, in such manner as it shall determine in its sole discretion, round up or
down the number of shares of TARPS to be purchased or sold on such Auction Date
by any Existing Holder or Potential Holder on whose behalf BD submitted an Order
so that the number of shares so purchased or sold by each such Existing Holder
or Potential Holder on such Auction Date shall be whole shares of TARPS.
2.4 Notices of Auction Results.
(a) On each Auction Date for TARPS, the Auction Agent shall notify
BD by telephone of he results of the Auction as set forth in paragraph (a) of
the Settlement Procedures. As soon as reasonably practicable, the Auction Agent
shall confirm to BD in writing the disposition of all Orders submitted by BD in
such Auction.
(b) BD shall notify each Existing Holder or Potential Holder on
whose behalf BD has submitted an Order as set forth in paragraph (a) of the
Settlement Procedures and take such other action as is required of BD pursuant
to the Settlement Procedures.
2.5 Designation of Alternate Term Period.
(a) If the Fund delivers to the Auction Agent a notice of the
Auction Date for any series of TARPS for a Dividend Period thereof that next
succeeds a Dividend Period that is not a Standard Term Period in the form of
Exhibit E to the Auction Agent Agreement, the Auction Agent shall deliver such
notice to BD as promptly as practicable after its receipt of such notice from
the Fund.
(b) If the Board of Directors proposes to designate any succeeding
Dividend Period of any series of TARPS as an Alternate Term Period and the Fund
delivers to the Auction Agent a notice of such proposed Alternate Term Period in
the form of Exhibit F to the Auction Agent Agreement, the Auction Agent shall
deliver such notice to BD as promptly as practicable after its receipt of such
notice from the Fund.
(c) If the Board of Directors determines to designate such
succeeding Dividend Period as an Alternate Term Period and the Fund delivers to
the Auction Agent a notice of such Period in the form of Exhibit G to the
Auction Agent Agreement not later than 3:00 p.m. on the second Business Day next
preceding the first day of such proposed Alternate Term Period, the Auction
Agent shall deliver such notice to BD not later than 3:00 p.m. on such Business
Day.
(d) If the Fund shall deliver to the Auction Agent a notice not
later than 3:00 p.m. on the second Business Day next preceding the first day of
any Dividend Period stating that the Fund has determined not to exercise its
option to designate such succeeding Dividend Period as an Alternate Term Period,
in the form of Exhibit H to the Auction Agent Agreement, or shall fail to timely
deliver either such notice or a notice in the form of Exhibit G to the Auction
Agent Agreement, the Auction Agent shall deliver a notice in the form of Exhibit
H to the Auction Agent Agreement to BD not later than 3:00 p.m. on such Business
Day.
2.6 Service Charge to be Paid to BD.
On the Business Day next succeeding each Auction Date for any
series of TARPS, the Auction Agent shall pay to BD from moneys received from the
Fund an amount equal to (a)(i) where the Dividend Rate set at the Auction
equalled more than 102% of the AA Composite Commercial Paper Rate, 15 basis
points; (b) where the Dividend Rate set at the Auction equalled 99-102% of the
AA Composite Commercial Paper Rate, 20 basis points; or (c) where the Dividend
Rate set at the Auction equalled less than 99% of the AA Composite Commercial
Paper Rate, 25 basis points; times (b) a fraction, the numerator of which is the
number of days in the Dividend Period for such series beginning on such Business
Day and the denominator of which is 360, times (c) the liquidation preference
per share for such series times (d) the aggregate number of Outstanding shares
of such series placed by BD in such Auction (for this purpose shares will be
deemed placed by BD if such shares were (i) the subject of Hold Orders deemed to
have been made by Existing Holders and were acquired by such Existing Holders
through BD or (ii) the subject of an Order submitted by BD that is (A) a
Submitted Order of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (B) a Submitted
Order of a Potential Holder that resulted in such Potential Holder purchasing
such shares as a result of the Auction or (C) a valid Hold Order; provided that
in the event an Auction scheduled to occur on an Auction Date fails to occur for
any reason while the TARPS remains Outstanding, BD will be entitled to service
charges as if the Auction had occurred and all Holders of shares placed by them
submitted valid Hold Orders).
For purposes of subclause (d)(i) of the foregoing paragraph, if any
Existing Holder who acquired shares of any series of TARPS through BD transfers
those shares to another Person other than pursuant to an Auction, then such
Existing Holder shall be deemed to have acquired such shares through BD unless
the transfer was affected by, or transferee is, a Broker-Dealer other than BD.
2.7 Settlement.
(a) If any Existing Holder on whose behalf the BD submitted a
Hold/Sell Order that was accepted as a Sell Order or a Sell Order that was
accepted, in either case, in whole or in part, fails to instruct its Agent
Member to deliver the shares of TARPS with respect to which such Order was
accepted against payment therefor, the BD shall instruct such Agent Member to
deliver such shares against payment therefor. If (i) any Existing Holder on
whose behalf a Broker-Dealer other than the BD has submitted a Hold/Sell Order
that was accepted as a Sell Order or a Sell Order that was accepted, in either
case, in whole or in part, fails to instruct its Agent Member to so deliver the
shares of TARPS with respect to which such Order was accepted against payment
therefor, (ii) such other Broker-Dealer fails to instruct such Existing Holder's
Agent Member to deliver such shares and (iii) such Existing Holder is identified
to BD by the Auction Agent as provided in Section (a) (v) of the Settlement
Procedures as an Existing Holder from whom a Potential Holder on whose behalf BD
submitted a Buy Order is to purchase such shares, BD may deliver to such
Potential Holder a number of shares of TARPS that is less than the number of
shares of TARPS to be purchased by such Potential Holder by the number of shares
to be purchased from such Existing Holder. Notwithstanding the foregoing terms
of this Section 2.7, any delivery or non-delivery of shares of TARPS which
represents any departure from the results of an Auction for such series, as
determined by the Auction Agent, shall be of no effect unless and until the
Auction Agent shall have been notified of such delivery or non-delivery in
accordance with the terms of Section 2.3(d)(ii) hereof. The Auction Agent shall
have no duty or liability with respect to enforcement of this Section 2.7.
(b) Neither the Auction Agent nor the Fund shall have any
responsibility of liability with respect to the failure of an Existing Holder or
a Potential Holder or its Agent Member to deliver shares of TARPS of any series
or to pay for shares of TARPS of any series sold or purchased pursuant to the
Auction Procedures or otherwise.
3. The Auction Agent.
3.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Fund
hereunder and owes no fiduciary duties to any other Person, other than the Fund
by reason of this Agreement.
(b) The Auction Agent undertakes to perform such duties and only
such duties as are specifically set forth in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the Auction
Agent.
(c) In the absence of bad faith or negligence on its part, the
Auction Agent shall not be liable for any action taken, suffered, or omitted or
for any error of judgment made by it in the performance of its duties under this
Agreement. The Auction Agent shall not be liable for any error or judgment made
in good faith unless the Auction Agent shall have been negligent in ascertaining
the pertinent facts.
3.2 Rights of the Auction Agent.
(a) The Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document believed in good faith
by it to be genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized by this Agreement which the Auction Agent
believes in good faith to have been given by the Fund or by a Broker-Dealer. The
Auction Agent may record telephone communications with the Broker-Dealers.
(b) The Auction Agent may consult with counsel of its choice and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or
risk its own funds or otherwise incur or become exposed to financial liability
in the performance of its duties hereunder.
3.3 Auction Agent's Disclaimer. The Auction Agent makes no
representation as to the validity of adequacy of this Agreement, the Auction
Agent Agreement or the shares of TARPS of any series.
4. Miscellaneous.
4.1 Termination. Either party may terminate this Agreement at any time
on five (5) days notice to the other party, provided that neither BD nor the
Auction Agent may terminate this Agreement without first obtaining prior written
consent of the Fund to such termination, which consent shall not be unreasonably
withheld. This Agreement shall automatically terminate upon the termination of
the Auction Agent Agreement.
4.2 Participant in Securities Depository. BD is, and shall remain for
the term of this Agreement, a member of, or participant in, the Securities
Depository (or an affiliate of such a member participant).
4.3 Communications. Except (i) communications authorized to be by
telephone by this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its addressed or telecopy number set forth below:
If to BD, addressed: Bear, Stearns & Co. Inc.
Preferred Stock Sales and Trading Desk
245 Park Avenue
New York, NY 10167
Attention: Nancy Belcher
Telecopier No.: (212) 272-8151
Telephone No.: (212) 272-5098
If to the Auction Agent,
addressed: Bankers Trust Company
Four Albany Street
New York, New York 10006
Attention: Auction Rate/Remarketed
Securities
Telecopier No.: (212) 250-6688
Telephone No.: (212) 250-6850
or such other address or telecopy number as such party may hereafter specify for
such purpose by notice to the other parties. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a BD Officer and on behalf of
the Auction Agent by an Authorized Officer. BD may record telephone
communications with the Auction Agent.
4.4 Entire Agreement. This Agreement contains the entire agreement
among the parties hereto relating to the subject matter hereof, and there are no
other representations, endorsements, promises, agreements or understandings,
oral, written or implied, among the parties hereto relating to the subject
matter hereof. This Agreement supersedes and terminates all prior Broker-Dealer
Agreements between the parties.
4.5 Benefits. Nothing in this Agreement, express or implied, shall give
to any person, other than the Fund, the Auction Agent, BD and their respective
successors and assigns, any benefit of any legal or equitable right, remedy or
claim hereunder.
4.6 Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.
(b) Failure of any party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by any other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.
4.7 Successors and Assigns. This Agreement shall be binding upon, inure
to the benefit of, and be enforceable by, the respective successors and assigns
of each of the Auction Agent and BD. This Agreement may not be assigned by
either party hereto absent the prior written consent of the other party;
provided, however, that this Agreement may be assigned by the Auction Agent to a
successor Auction Agent selected by the Fund without the consent of BD.
4.8 Severability. If any clause, provision or section hereof shall be
ruled invalid or unenforceable by any court of competent jurisdiction, the
invalidity or unenforceability of such clause, provision or section shall not
affect any of the remaining clauses, provisions or sections thereof.
4.9 Execution in Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
4.10 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed in said State.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
BANKERS TRUST COMPANY
By:
------------------------------
Name:
Title:
BEAR, STEARNS & CO. INC.
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
MASTER PURCHASER'S LETTER
<PAGE>
EXHIBIT B
SETTLEMENT PROCEDURES
<PAGE>
EXHIBIT C
(Submit only one Order on this Order Form)
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK, SERIES ___ ("TARPS")
ORDER FORM
To: ___________________ Date of Auction
___________________
___________________
New York, New York
The undersigned Broker-Dealer submits the following Order covering the number of
shares indicated (complete only one blank):
____ shares now held by Bidder (an Existing Holder), and the Order is a
(check one):
____ Hold Order; or
____ Hold/Sell Order at a rate of ________%; or
____ Sell Order;
-or-
____ shares not now held by Bidder (a Potential Holder), and the Order is a
Buy Order at a rate of _____%.
Notes:
(1) If submitting more than one Order for one Bidder, use additional Order
forms.
(2) If one or more Orders covering in the aggregate more than the number of
outstanding shares of TARPS held by an Existing Holder are submitted,
such Orders shall be considered valid in the order of priority set
forth in the Auction Procedures.
<PAGE>
EXHIBIT D
(To be used only for transfers made
other than pursuant to in Auction)
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK,
SERIES ____ ("TARPS") TRANSFER FORM
We are (check one):
____ The Existing Holder named below;
____ The Broker-Dealer for such Existing Holding; or
____ The Agent Member for such Existing Holder.
We hereby notify you that such Existing Holder has transferred _______
shares of the above series of TARPS to ______________.
- ------------------------------
(Name of Existing Holder)
- ------------------------------
(Name of Broker-Dealer)
- ------------------------------
(Name of Agent Member)
By: ____________________________
Printed Name:
Title:
<PAGE>
EXHIBIT E
(To be used only for failures to
deliver shares of Auction Term Preferred
Stock sold pursuant to an Auction)
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
TAXABLE AUCTION RATE PREFERRED STOCK, SERIES ____ ("TARPS")
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for ___________ (the "Purchaser"), which purchased
____ shares of the above series of TARPS in the Auction held on _________ from
the seller of such shares. We hereby notify you that the Seller failed to
deliver such shares of Taxable Auction Rate Preferred Stock to the Purchaser.
II. We are a Broker-Dealer for ___________ (the "Seller"), which sold _____
shares of the above series of TARPS in the Auction held on________ to the
purchaser of such shares. We hereby notify you that the Purchaser failed to make
payment to the Seller upon delivery of such shares of Taxable Auction Rate
Preferred Stock.
Name: ____________________________
(Name of Broker-Dealer)
By: ______________________________
Printed Name:
Title:
<PAGE>
EXHIBIT F
<PAGE>
EXHIBIT G
<PAGE>
EXHIBIT H
<PAGE>
Exhibit (n)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
for Prospect Street High Income Portfolio Inc. dated December 5, 1997 (and to
all references to our firm) included or incorporated by reference in Form N-2
1940 Act File No. 811-5557 of Prospect Street High Income Portfolio Inc.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 11, 1998
