<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1998
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-5557
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 22 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
60 State Street, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 742-3800
----------
RICHARD E. OMOHUNDRO, JR., PRESIDENT
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------
With copies to:
LAURENCE E. CRANCH, ESQ. THOMAS A. HALE, ESQ.
G. DAVID BRINTON, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
ROGERS & WELLS LLP 333 WEST WACKER DRIVE
200 PARK AVENUE SUITE 2100
NEW YORK, NEW YORK 10166 CHICAGO, ILLINOIS 60606
----------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [X]
This form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act and the Securities Act registration
statement number of the earlier effective registration statement for the
offering is 333- . [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
====================================================================================================================================
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.03 Par Value........................ 6,700,000 $10.44 $69,948,000 $19,446
====================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. Based on the
average of the high and low sales prices reported on the New York Stock
Exchange on December 16, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
FORM N-2
CROSS-REFERENCE SHEET
PARTS A AND B OF THE PROSPECTUS*
<CAPTION>
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
---------------------------------- ----------------------
<S> <C>
1. Outside Front Cover............................ Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page....... Outside Front Cover Page of Prospectus; Inside Front and
Outside Back Cover Page of Prospectus
3. Fee Table and Synopsis......................... Fee Table; Prospectus Summary
4. Financial Highlights........................... Financial Highlights
5. Plan of Distribution........................... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Offer
6. Selling Stockholders........................... Not Applicable
7. Use of Proceeds................................ Use of Proceeds; Investment Policies and Limitations
8. General Description of the Registrant.......... Outside Front Cover Page of Prospectus; Prospectus
Summary; The Fund; Investment Policies and Limitations;
Risk Factors and Special Considerations; Financial
Highlights; Description of Capital Stock; Description
of Credit Agreement
9. Management..................................... Prospectus Summary; The Investment Adviser; Directors and
Officers; Portfolio Trading; Description of Capital
Stock; Description of Credit Agreement; Custodian,
Transfer Agent, Dividend Disbursing Agent, Paying
Agents and Registrars
10. Capital Stock, Long-Term Debt, and Other Description of Capital Stock; Description of Credit
Securities.................................. Agreement; Federal Taxation; Investment Policies and
Limitations; Dividends and Distributions; Dividend
Reinvestment Plan; 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 Policies and Limitations;
Portfolio Trading
18. Management.................................... Prospectus Summary; The Investment Adviser; Directors and
Officers
19. Control Persons and Principal Holders of Directors and Officers
Securities...................................
20. Investment Advisory and Other Practices....... Prospectus Summary; The Investment Adviser; Custodian,
Transfer Agent, Dividend Disbursing Agent, Paying
Agents and Registrars; Experts
21. Brokerage Allocation and Other Practices...... Portfolio Trading
22. Tax Status.................................... Federal Taxation
23. Financial Statements.......................... Financial Statements
</TABLE>
- ------------
* Pursuant to Part B: Statement of Additional Information, all information
required to be set forth in Part B has been included in Part A.
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 DECEMBER 18, 1998
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INc.
6,700,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR SUCH SHARES
- --------------------------------------------------------------------------------
Prospect Street(R) High Income Portfolio Inc. is issuing transferable
rights to its shareholders. You will receive one right for each share of common
stock you own on the record date, which is . These rights
entitle you to subscribe for shares of the Fund's common stock. You may purchase
one new share of common stock for every three rights you receive. If you receive
less than three rights, you will be entitled to buy one share. Also, you may
purchase the shares not acquired by other shareholders in this rights offering,
subject to the limitations as discussed in this prospectus.
The rights are transferable and will be listed for trading on the New
York Stock Exchange under the symbol "PHY.RT." The Fund's shares of common stock
are listed and the shares issued in this offer will be listed on the Exchange
under the symbol "PHY." On , the last reported net asset
value per share of the Fund's common stock was $ and the last reported sales
price of a share on the Exchange was $ .
The subscription price per share will be $ . This offer will expire
at 5:00 p.m., New York City time, on unless the Fund extends the
offering as described in this prospectus.
Per Share Total
--------- -----
Subscription Price $ $
Sales Load $ $
Proceeds to Fund $ $
The Fund is a diversified, closed-end management investment company
with a leveraged capital structure. The Fund's investment objective is to
provide high current income, while seeking to preserve shareholders' capital,
through investment in a professionally managed, diversified portfolio of
"high-yield," high risk securities (commonly referred to as "junk bonds").
Prospect Street(R) Investment Management Co., Inc. has served as the Fund's
investment adviser since the Fund's inception in 1988.
The Fund's investments in "high-yield," high risk securities and its
leveraged capital structure involve special risks. An investment in the Fund is
not appropriate for all investors. No assurance can be given that the Fund will
achieve its investment objective. SEE THE "RISK FACTORS AND SPECIAL
CONSIDERATIONS" SECTION ON PAGE 33 OF THIS PROSPECTUS FOR A MORE COMPREHENSIVE
DISCUSSION OF RISKS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
In connection with this offering, the Dealer Managers listed below may
effect transactions which stabilize or maintain the market price of the rights
and the common stock of the Fund at levels above those which might otherwise
prevail in the open market. Such transactions may be effected on the New York
Stock Exchange, on Nasdaq or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
Prior to the expiration of the offer, the Dealer Managers listed below
may offer shares of common stock, including shares acquired through purchasing
and exercising the rights, at prices they set. The Dealer Managers may realize
profits or losses independent of any fees described in this Prospectus.
-----------------
PAINEWEBBER INCORPORATED GRUNTAL & CO. LLC
-----------------
THE DATE OF THIS PROSPECTUS IS .
- --------------------------------------------------------------------------------
[red herring]
The Information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may
not contain all of the information that is important to you. To understand the
offer fully, you should read the entire prospectus carefully, including the risk
factors.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in
the best interests of the Fund and its shareholders to increase the assets of
the Fund available for investment so that the Fund can be in a better position
to take advantage of available investment opportunities and increase the
diversification of the Fund. In response to the current volatility in the
securities and financial markets, the investment adviser has recommended and
would, under current market conditions, seek to invest the net proceeds of the
offer in better quality securities in an effort to enhance the overall credit
quality of its portfolio.
In addition, the Board believes that this offer may lower the Fund's
expense ratio. This is because the Fund's fixed costs can be spread over a
larger asset base, and certain variable costs (e.g., advisory fees) are reduced
as the Fund's assets reach specific levels. Any possible reduction in the Fund's
expense ratio, however, may be offset by the proposed increase in the investment
adviser's fee, if approved by the Fund's shareholders at the annual meeting of
shareholders to be held on March 12, 1999. Also, the issuance of additional
shares may enhance the liquidity of the Fund's shares on the New York Stock
Exchange, and if conditions warrant, the Fund could use a portion of the net
proceeds of this offer to reduce leverage.
The Board of Directors has considered the impact of the offer on its
current distribution policy to maintain, subject to market conditions, a
relatively stable level of distributions. Based on current market conditions,
the Board believes that the offer will not result in a change in the Fund's
current level of dividends for the foreseeable future, while achieving other net
benefits to the Fund.
IMPORTANT TERMS OF THE OFFER
Aggregate number of shares offered 6,700,000
Number of transferable rights One right for each whole share owned
issued to each shareholder on the record date
Subscription price $
Subscription ratio One share for every three rights
(1-for-3)
IMPORTANT DATES TO REMEMBER
EVENT DATE
- ----- ---------------------
Record Date................................................
Subscription Period........................................
Expiration Date............................................
Subscription Certificates and Payment for Shares Due+......
Notice of Guaranteed Delivery Due+.........................
Payment for Guarantees of Delivery Due.....................
Confirmation to Participants...............................
- ----------
* Unless the offer is extended.
+ A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed Delivery
by .
OVER-SUBSCRIPTION PRIVILEGE
Record date shareholders who fully exercise all of the rights issued to
them are entitled to subscribe for those shares which were not subscribed for by
others. If sufficient shares are available, all record date shareholder
over-subscription requests will be honored in full. If these requests for shares
exceed the shares available, the available shares will be allocated pro rata
among those who over-subscribe based on the number of rights originally issued
to them by the Fund.
METHOD FOR EXERCISING RIGHTS
If you wish to exercise your rights, you may do so in the following
ways:
(1) Complete and sign the subscription certificate that accompanies
this prospectus. Mail it in the envelope provided or deliver the completed and
signed subscription certificate with payment in full to State Street Bank and
Trust Company at the address indicated on the subscription certificate. Your
completed and signed subscription certificate and payment must be received
by .
(2) Contact your broker, banker or trust company which can arrange, on
your behalf, to guarantee delivery of payment and delivery of a properly
completed and executed subscription certificate pursuant to a notice of
guaranteed delivery by the close of business on the third business day after the
expiration date of the offer. A fee may be charged for this service. The notice
of guaranteed delivery must be received on or before the expiration date of the
offer.
SALE OF RIGHTS
The Rights are transferable until the expiration date of the offer. The
rights will be listed for trading on the New York Stock Exchange. The Fund will
use its best efforts to ensure that an adequate trading market for the rights
will exist. No assurance can be given that a market for the rights will develop.
Trading in the rights on the Exchange may be conducted until the close of
trading on the Exchange on the last business day prior to the expiration date of
the offer.
OFFERING FEES AND EXPENSES
The Fund has agreed to pay the Dealer Managers a fee for their
financial advisory, marketing and soliciting services equal to % of the
aggregate subscription price for shares issued pursuant to the offer. The Dealer
Managers will reallow a part of their fees to other broker-dealers which have
assisted in soliciting the exercise of rights as described in this prospectus.
Other offering expenses incurred by the Fund are estimated at $ , which
includes up to $ that may be paid to the Dealer Managers as partial
reimbursement for their expenses relating to the Offer.
FOREIGN RESTRICTIONS
Subscription certificates will not be mailed to record date
shareholders whose record addresses are outside the United States. Foreign
record date shareholders will receive written notice of the offer, and their
rights will be held or transferred as set forth in this prospectus.
USE OF PROCEEDS
The estimated net proceeds of the offer are approximately $ . This
figure is based on the subscription price of $ per share and assumes all
6,700,000 shares offered are sold and that offering expenses estimated at
approximately $ are paid.
The Fund's investment adviser anticipates, that the Fund will take up
to thirty days to invest or employ these proceeds in accordance with the Fund's
investment objective and policies under current market conditions. This process
will not take longer than six months. The proceeds of the offer will be held in
U.S. Government securities and other high-quality short-term money market
instruments until they are invested.
INFORMATION AGENT
Please direct all questions or inquiries relating to the offer to the
Fund's information agent as follows:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 633-1822
Shareholders may also contact their brokers or nominees for information
with respect to the offer.
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a diversified, closed-end
management investment company since 1988. The Fund's investment objective is to
provide high current income, while seeking to preserve shareholders' capital,
through investment in a professionally managed, diversified portfolio of
high-yield, high risk securities (commonly referred to as "junk bonds"). The
Fund seeks to achieve its objective of preserving shareholder's capital through
careful selection of the Fund's high-yield, high risk investments, portfolio
diversification, and portfolio monitoring and repositioning. The Fund invests
primarily in fixed-income securities rated in the lower categories by
established rating agencies (consisting principally of fixed-income securities
rated "BB" or lower by Standard & Poor's Ratings Group and "Ba" or lower by
Moody's Investors Service, Inc.), or nonrated fixed-income securities deemed by
the Fund's investment adviser to be of comparable quality.
INFORMATION REGARDING THE INVESTMENT ADVISER
The Fund's investment adviser, Prospect Street Investment Management
Co., Inc., an investment adviser registered under the U.S. Investment Advisers
Act of 1940, has served as investment adviser to the Fund since its inception.
The investment adviser was organized in June 1988 to provide institutional
clients with investment management services.
Richard E. Omohundro, Jr., President of the investment adviser provides
general advisory assistance to, analyzes certain policy considerations with, and
consults on a regular basis with, the Fund's portfolio manager. John A.
Frabotta, Vice President of the investment adviser, serves as the portfolio
manager of the Fund and is responsible for the day-to-day management of the
Fund's portfolio. Mr. Frabotta has over 20 years of experience working with
high-yield, fixed income instruments.
The investment adviser's fee is based on the average weekly managed
assets of the Fund. Thus, the Fund's investment adviser will benefit from an
increase in the Fund's assets resulting from the offer.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes some of the matters that you should consider
before investing in the Fund in connection with this offer.
Dilution. Shareholders who do not fully exercise their rights should
expect that they will own a smaller proportional interest in the Fund than would
otherwise be the case. It is not possible to determine the extent of this
dilution in share ownership at this time because the Fund does not know what
proportion of the shares will be subscribed.
To the extent the subscription price per share is less than net asset
value per share (or the net proceeds per share exceed net asset value per share)
at the expiration of the offer, shareholders would experience an immediate
dilution, which could be substantial, of the aggregate net asset value of their
shares of common stock as a result of the offer. The Fund cannot state precisely
the amount of any such decrease in net asset value because it is not known at
this time what the net asset value per share will be at the expiration date or
what proportion of the shares will be subscribed.
If you do not wish to exercise your rights, however, you can still
transfer or sell these rights as set forth in this prospectus. The cash you
receive from transferring your rights should serve as partial compensation for
any possible dilution of your interest in the Fund. The Fund cannot give any
assurance, however, that a market for the rights will develop or the value, if
any, that such rights will have.
Risk of Leverage. Leverage creates the opportunity for greater total
returns, but at the same time involves certain risks. If the investment
performance of the proceeds of any leverage fails to cover the interest and
dividends on such capital, the value of the Fund's common stock may decrease
more quickly than would otherwise be the case and dividends thereon will be
reduced or eliminated. This is the speculative effect of leverage.
The Fund's use of leverage is currently benefiting the holders of
Common Stock as the average cost of funds (pursuant to its credit agreement
obligations discussed on page 54) was approximately 6.3% as of November 30, 1998
while the high-yield market currently offers interest income at annualized rates
of approximately 10.5% to 12.0%. This may change depending on the market
conditions at the time of the offer.
Because the Fund's loans under its credit agreement and other forms of
leverage are senior to the common stock in any liquidation of the Fund, such
indebtedness would have to be paid in full before any payments would be made
with respect to the common stock. See "Risk Factors and Special Considerations."
Discount from Net Asset Value. Shares of closed-end funds frequently
trade at a market price that is less than the value of the net assets
attributable to those shares. The Fund's shares have traded in the market above,
at and below net asset value since the commencement of the Fund's operations.
High-Yield, High Risk Investments. Fixed-income securities offering the
high current income sought by the Fund will ordinarily be in the lower rating
categories of recognized rating agencies or will be nonrated. The rating
agencies generally regard such securities as predominantly speculative with
respect to capacity to pay interest and repay principal and riskier than
securities in the higher rating categories. The values of such securities tend
to reflect individual corporate developments to a greater extent than higher
rated securities, which react primarily to fluctuations in the general level of
interest rates, and such securities are frequently subordinated to the prior
payment of senior indebtedness. In addition, the trading market for high-yield,
high risk securities is generally less liquid than the market for higher rated
securities. As of October 31, 1998, approximately 90.3% of the market value of
the Fund's total investments was represented by fixed-income securities regarded
by the Rating Agencies as below investment grade (that is rated Ba1 or lower by
Moody's or BB+ or lower by S&P).
Dividends and Distributions. Based on information provided by the
Fund's investment adviser on current market conditions in the high yield bond
market, the Board of Directors believes that the offer will not result in a
change in the Fund's current level of dividends per share for the foreseeable
future. However, there can be no assurance that the Fund will be able to
maintain its current level of dividends per share, and the Board of Directors
may, in its sole discretion, change the Fund's current dividend policy or its
current level of dividends per share in response to market or other conditions.
Year 2000 Processing Issue. The investment adviser does not anticipate
that the Year 2000 processing issue will have any material impact on its ability
to continue to service the Fund at current levels. In addition, the investment
adviser has sought assurances from the other Fund service providers that they
are taking the steps necessary to deal with the problems associated with
computer processing of the year 2000. The cost of any systems remediation by
persons other than the Fund or the investment adviser will not be borne by the
Fund. However, no assurance can be given that the actions taken by the
investment adviser or the Fund's other service providers will be sufficient to
avoid any adverse effect on the Fund.
You should carefully consider your ability to assume the foregoing
risks before making an investment in the Fund. An investment in shares of the
Fund is not appropriate for all investors.
- --------------------------------------------------------------------------------
<PAGE>
FEE TABLE
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price per Share)(1) .. 3.75%
Annual Expenses (as a percentage of net assets attributable to
common stock)(2)
Management Fees(3) ................................................... 0.64%
Interest Expense ..................................................... 1.38%
Other Expenses ....................................................... 0.56%
Total Annual Expenses........................................... 2.58%
EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
An investor would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return
throughout the periods ........... $26 $80 $137 $290
- ----------
(1) The Fund has agreed to pay the Dealer Managers a fee for their financial
advisory, marketing and soliciting services equal to % of the aggregate
subscription price for shares issued pursuant to the offer. The Dealer
Managers will reallow to broker-dealers included in the selling group to be
formed and managed by the Dealer Managers, solicitation fees equal to % of
the subscription price per share for each share issued pursuant to the offer
as a result of their soliciting efforts. In addition, the Dealer Managers
will reallow to other broker-dealers that have executed and delivered a
soliciting dealer agreement and have solicited the exercise of rights,
solicitation fees equal to % of the subscription price per share for each
share issued pursuant to the exercise of rights as a result of their
soliciting efforts, subject to a maximum fee based upon the number of shares
of common stock held by each broker-dealer through the Depository Trust
Company on the record date of the offer. The Fund has also agreed to
reimburse the Dealer Managers for their expenses relating to the offer up to
an aggregate of $ . In addition, the Fund has agreed to pay fees to the
subscription agent and the information agent (as defined in this
prospectus), estimated to be $30,000 and $36,000 respectively, for their
services related to the offer, which includes reimbursement for their
out-of-pocket expenses. These fees and expenses will be borne by the Fund
and indirectly by all of the Fund's shareholders, including those
shareholders who do not exercise their rights.
(2) Amounts are based on estimated amounts for the Fund's current fiscal year
after giving effect to anticipated net proceeds of the offer assuming that
all of the rights are exercised.
(3) The Fund pays the investment adviser a monthly fee at an annual rate ranging
from 0.65% to 0.50%. See "The Investment Adviser."
THE FOREGOING FEE TABLE AND EXAMPLE ARE INTENDED TO ASSIST INVESTORS IN
UNDERSTANDING THE COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR
DIRECTLY OR INDIRECTLY.
The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value, a payment of a 3.75% sales load and an annual
expense ratio of 2.58%. The table above and the assumption in the Example of a
5% annual return are required by Securities and Exchange Commission regulations
applicable to all investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED AS
A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL
EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR
PURPOSES OF THE EXAMPLE. In addition, while the Example assumes reinvestment of
all dividends and distributions at net asset value, participants in the Fund's
Dividend Reinvestment Plan may receive shares purchased or issued at a price or
value different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD)
The table below sets forth certain specified information for a share of
common stock outstanding throughout each period presented. The financial
highlights for each period presented have been audited by Arthur Andersen LLP,
the Fund's independent public accountants, whose report thereon was unqualified.
The information should be read in conjunction with the financial statements and
notes thereto, which are incorporated herein by reference, in the Fund's Annual
Report as of October 31, 1998, which is available upon request from the Fund's
registrar and transfer agent, State Street Bank and Trust Company.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED FOR THE FISCAL YEARS ENDED OCTOBER 31,
APRIL 30, --------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of period .. $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75
Net investment income .................. .66# 1.38# 1.50# 1.35 1.44#
Net realized and unrealized gain (loss)
on investments ...................... (.08)# .72# .60# .09 (1.14)#
Total from investment operations .... $ .58 $ 2.10 $ 2.10 $ 1.44 $ .30
Distributions:
Dividends from accumulated net
investment income:
To preferred stockholders ........... (.03) (.09) (.12) (.15) (.09)
To common stockholders .............. (.63) (1.26) (1.26) (1.26) (1.35)
Dividends to common stockholders from
paid-in capital ..................... -- -- -- -- --
Total distributions ................. $ (.66) $ (1.35) $ (1.38) $ (1.41) $ (1.44)
Effect of sale of common stock and
related expenses from rights offering $ (.22) $ (.51) $ (.12) $ -- $ (.54)
Net asset value-- end of period ........ $ 11.64 $ 11.94 $ 11.70 $ 11.10 $ 11.07
Per share market value: end of period .. $ 12.38 $ 12.39 $ 12.00 $ 11.64 $ 10.50
Total investment return ............. 5.26% $ 14.82% 15.29% 28.57% (7.78)%
Net assets, end of period, applicable to
common stock (a) .................... $229,375 $175,909 $120,711 $ 93,309 $ 92,072
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) .......... $249,375 $195,909 $140,711 $113,309 $112,072
Ratio of operating expenses to average
net assets, applicable to common stock 2.30%* 2.30% 3.06% 3.27% 3.27%
Ratio of net investment income to average
net assets, applicable to common stock 11.63%* 11.94% 13.20% 13.47% 12.25%
Ratio of operating expenses to average
net assets** ........................ 1.89%+ 1.81%+ 2.21%+ 2.28%+ 2.30%+
Ratio of net investment
income to average net assets** ...... 9.55%* 9.42% 9.51% 9.39% 8.64%
Portfolio turnover rate ................ 197.16* 176.04% 108.33% 80.71% 72.00%
<CAPTION>
DECEMBER 5, 1988
(COMMENCEMENT
FOR THE FISCAL YEARS ENDED OCTOBER 31, OF OPERATIONS)
------------------------------------------- TO OCTOBER 31,
1993 1992 1991 1990 1989(B)
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value-- beginning of period .. $ 12.09 $ 11.67 $ 9.90 $ 20.46 $ 27.45
Net investment income .................. 1.89# 1.86 1.65 2.94 3.93
Net realized and unrealized gain (loss)
on investments ...................... 1.17# 0.21 1.68 (10.29) (6.96)
Total from investment operations .... $ 3.06 $ 2.07 $ 3.33 $ (7.35) $ (3.03)
Distributions:
Dividends from accumulated net
investment income:
To preferred stockholders ........... (.18) (0.30) (0.48) (0.66) (0.57)
To common stockholders .............. (1.86) (1.35) (1.08) (2.28) (3.36)
Dividends to common stockholders from
paid-in capital ..................... -- -- -- (0.27) (0.03)
Total distributions ................. $ (2.04) $ (1.65 $ (1.56) $ (3.21) $ (3.96)
Effect of sale of common stock and
related expenses from rights offering $ (.36) $ -- $ -- $ -- $ --
Net asset value -- end of period ....... $ 12.75 $ 12.09 $ 11.67 $ 9.90 $ 20.46
Per share market value: end of period .. $ 12.75 $ 12.00 $ 10.50 $ 7.50 $ 18.00
Total investment return ............. 23.25 27.99 57.36 (50.21)% (31.33)%
Net assets, end of period, applicable to
common stock (a) .................... $ 79,438 $ 55,178 $ 53,040 $ 45,028 $ 92,487
Net assets, end of period, applicable to
preferred stock (a) ................. $ 20,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Net assets, end of period (a) .......... $ 99,438 $ 85,178 $ 83,040 $ 75,028 $122,487
Ratio of operating expenses to average
net assets, applicable to common stock 3.10% 3.68% 4.64% 8.80% 6.37%
Ratio of net investment income to average
net assets, applicable to common stock 13.49% 15.08% 14.63% 18.94% 17.78%
Ratio of operating expenses to average
net assets** ......................... 2.13%+ 2.28%+ 2.93%+ 6.15%+ 4.89%+
Ratio of net investment income to average
net assets** ........................ 9.26% 9.33% 9.24% 13.23% 13.88%*
Portfolio turnover rate ................ 117.20% 97.86% 114.00% 63.50% 89.70%*
- ----------
(a) Dollars in thousands.
(b) The selected per share data and ratios have been restated, where applicable, for all periods to give
effect for the one-for-three reverse stock split effected on April 1, 1998.
* Annualized.
** Ratios calculated on the basis of expenses and net investment income applicable to both the common and
preferred shares relative to the average net assets [total assets less accrued liabilities (excluding
debt or senior indebtedness or 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 1.24%, 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 rights offerings.
</TABLE>
<PAGE>
<TABLE>
CAPITALIZATION AT OCTOBER 31, 1998
<CAPTION>
AMOUNT OUTSTANDING
EXCLUSIVE OF AMOUNT AMOUNT HELD BY THE
HELD BY THE FUND OR FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED FOR ITS ACCOUNT ACCOUNT
-------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
Common Stock, $0.03 par value..................... 100,000,000 shares 19,805,323 shares -0- shares
Preferred Stock $1.00 par value................... 1,000,000 shares -0- shares -0- shares
INFORMATION REGARDING SENIOR SECURITIES
The following table shows certain information regarding each class of senior security of the Fund as of
the end of each fiscal year of the Fund since its inception.
<CAPTION>
INVOLUNTARY
ASSET COVERAGE LIQUIDATION APPROXIMATE MARKET
TOTAL AMOUNT FOR NOTES(4) PREFERENCE VALUE PER SHARE OR
AT OCTOBER 31 OUTSTANDING OR SHARES(5) PER SHARE NOTE
------------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Senior Extendible
Notes(1) 1989 $50,000,000 $3,450 -- $1,000.00
1990 15,000,000 6,002 -- 1,000.00
1991 5,000,000 17,608 -- 1,000.00
1992 5,000,000 18,036 -- 1,087.50
1993 - 0 - -- -- --
Senior Notes(1) 1993 $20,000,000 $5,972 -- $997.50
1994 20,000,000 6,604 -- 937.10
1995 20,000,000 6,665 -- 987.50
1996 20,000,000 8,036 -- 990.00
1997 20,000,000 10,795 -- 1,003.80
1998 - 0 - -- -- --
Taxable Auction Rate
Preferred Stock(2) 1989 300 Shares $408,291 $100,000 $100,000
1990 300 Shares 250,094 100,000 100,000
1991 300 Shares 276,800 100,000 100,000
1992 300 Shares 283,927 100,000 100,000
1993 200 Shares 497,188 100,000 100,000
1994 200 Shares 560,358 100,000 100,000
1995 200 Shares 566,544 100,000 100,000
1996 200 Shares 703,553 100,000 100,000
1997 200 Shares 979,545 100,000 100,000
1998 - 0 - -- -- --
Revolving Credit
Facility(3) 1998 $40,000,000 $4,941 -- --
- --------------
(1) In July 1993, the Fund repurchased the remaining $5,000,000 principal amount of its Senior Extendible Notes,
which carried an annual interest rate through December 31, 1993, of 10.28%, for $5,178,000. The Fund thereafter
issued $20,000,000 of new Senior Notes payable December 1, 1998, which bore interest at a fixed annual rate of
6.53%. On July 24, 1998, the Fund prepaid the $20,000,000 principal amount of its Senior Notes.
(2) In July 1993, the Fund redeemed 100 shares of its Taxable Auction Rate Preferred Stock for $100,000 per share
plus accrued interest, leaving 200 such shares outstanding. On May 14, 1998, the Fund redeemed the remaining
outstanding shares of its Taxable Auction Rate Preferred Stock for $100,000 per share plus accrued interest.
(3) The Fund entered into a $50,000,000 Credit Agreement with BankBoston dated April 30, 1998, as amended and
restated on July 10, 1998. As of December 18, 1998, the Fund has $45 million in loans outstanding under the
Credit Agreement.
(4) 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.
(5) Amount shown is per share of Taxable Auction Rate Preferred Stock. Calculated by subtracting the Fund's total
liabilities (including senior securities constituting debt but not including the Taxable Auction Rate Preferred
Stock) from the Fund's total assets and dividing such amount by the number of outstanding shares of Taxable
Auction Rate Preferred Stock.
</TABLE>
<PAGE>
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded both at a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above net asset value, there can be no assurance
that this premium will continue after the offer or that the shares will not
again trade at a discount. Shares of other closed-end investment companies
frequently trade at a discount from net asset value. See "Risk Factors and
Special Considerations."
The following table shows the high and low sales prices of the Fund's
common stock on the New York Stock Exchange (the "Exchange") Composite Tape,
quarterly trading volume on the Exchange, the high and low net asset value per
share and the high and low premium or discount at which the Fund's shares were
trading for each fiscal quarter during the two most recent fiscal years. The
selected per share data and ratios have been restated, where applicable, for all
periods to give effect for the one-for-three reverse stock split effected on
April 1, 1998.
<TABLE>
<CAPTION>
QUARTERLY
TRADING
VOLUME
(THOUSANDS PREMIUM/(DISCOUNT)
MARKET PRICE OF SHARES) NET ASSET VALUE TO NET ASSET VALUE(%)
------------ ---------- --------------- ---------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1997............ 12.0000 11.6250 3,835.4 11.8500 11.6400 1.27 (0.13)
April 30, 1997.............. 12.7500 10.8750 14,633.9 12.0000 11.2200 6.25 (3.07)
July 31, 1997............... 12.5625 11.4375 15,160.8 11.5500 11.2800 8.77 1.40
October 31, 1997............ 13.3125 12.3750 8,645.0 12.3900 11.5800 7.45 6.87
January 31, 1998............ 13.3125 12.0000 8,990.4 12.0000 11.7000 10.94 2.56
April 30, 1998.............. 12.7500 12.1875 6,764.3 11.8000 11.6100 8.05 4.97
July 31, 1998............... 12.5000 12.0000 2,305.3 11.8400 11.2400 6.76 5.57
October 31, 1998............ 12.0625 9.6250 2,708.7 11.0800 7.9700 20.77 8.87
</TABLE>
The net asset value per share of the Fund's common stock at the close
of business on (the last trading date on which the Fund publicly
reported its net asset value prior to the announcement of the offer), and on
, was $ and $ , respectively, and the last reported sales price
of a share of the Fund's common stock on the Exchange on those dates was
$ and $ , respectively.
<PAGE>
THE FUND
Prospect Street High Income Portfolio Inc. (the "Fund") is a
diversified, closed-end management investment company with a leveraged capital
structure, consisting of (i) a $50 million revolving credit facility (of which
$40 million was outstanding as of October 31, 1998) with BankBoston and (ii)
19,805,323 shares of the Fund's common stock, par value $0.03 per share (the
"Common Stock") as of October 31, 1998. The Fund's investment objective is to
provide high current income, while seeking to preserve shareholders' capital,
through investment in a professionally managed, diversified portfolio of
high-yield, high risk securities (commonly referred to as "junk bonds"). The
Fund invests primarily in fixed-income securities rated in the lower categories
by established rating agencies consisting principally of fixed-income securities
rated "BB" or lower by Standard & Poor's Ratings Group ("S&P") and "Ba" or lower
by Moody's Investors Service, Inc. ("Moody's," and together with S&P, the
"Rating Agencies(1)"), or nonrated fixed-income securities deemed by the Fund's
Investment Adviser (as defined below) to be of comparable quality. The
fixed-income securities in which the Fund invests are regarded by the Rating
Agencies, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation
and generally involve more credit risk than securities in the higher rating
categories. See "Investment Policies and Limitations" and "Risk Factors and
Special Considerations."
- --------
(1) Throughout this Prospectus, references to ratings by the Rating Agencies
will indicate the S&P rating followed by the Moody's rating in the format
shown.
The Fund's portfolio consists primarily of high-yield, high risk
fixed-income securities. The high-yield, high risk securities offer a higher
yield to maturity than comparable securities with higher ratings as compensation
for holding an obligation of an issuer perceived to be less creditworthy. In the
severe adverse interest rate and economic environment of 1989 and 1990 the Fund
suffered a substantial decline in its net asset value. In 1988, when the Fund
commenced operations, high-yield securities traded at yields approximately 500
to 550 basis points (5.0% to 5.5%) higher than comparable U.S. Treasury
securities. In 1990, this spread widened to approximately 1250 basis points
resulting in substantial price declines in the corporate high-yield bond market.
During the fiscal years ended October 31, 1990 and 1991 the Fund was obligated
to repay $45.0 million of the previously outstanding Senior Extendible Notes,
which required the liquidation of investments that were selling at prices
substantially below their original purchase prices resulting in the realization
of substantial capital losses. Also during 1989 and 1990, the level of
high-yield debt security defaults increased as many issuers were unable to
obtain funds through financial intermediaries or the public high-yield market.
The effect of these developments on the Fund was a substantial decline in the
Fund's net asset value and a substantial reduction in the Fund's monthly
dividend. Also, the forced liquidation of a substantial portion of the Fund's
portfolio in order to repay the Senior Extendible Notes resulted in the
realization of substantial capital losses, and this severely limited the ability
of the Fund to return to its original net asset value as the high-yield market
improved. The high-yield market decline reversed in the fourth quarter of 1990
and by midyear 1991, after reinvesting a substantial amount of its cash, the
Fund's net asset value had improved substantially but to a level far less than
the net asset value at the time the Fund commenced operations.
The high-yield market, as measured by the Credit Suisse First Boston
High Yield Index, posted total annual returns of 16.66%, 18.91%, -0.97%, 17.38%,
12.42% and 12.63% for the calendar years 1992, 1993, 1994, 1995, 1996 and 1997,
respectively. The high-yield market, as measured by the same index, produced a
total return of -1.99% for the period January 1, 1998 through October 31, 1998.
The ten year U.S. Treasury Bond produced a total return of 6.52%, 11.94%,
- -6.08%, 23.68%, 0.89% and 10.10% for the calendar years 1992, 1993, 1994, 1995,
1996 and 1997, respectively. The ten year U.S. Treasury Bond produced a total
return of 9.5% for the period January 1, 1998 through October 31, 1998. See
"Financial Highlights" for information concerning the Fund's return.
New issue activity of high-yield debt securities was low in 1991, by
historical standards, totaling $10.1 billion with high-yield debt retirements
totaling $26.0 billion. Net new issue activity of high-yield debt securities
totaled $46.1 billion, $22.2 billion, $26.7 billion, $60.2 billion and $126
billion for the calendar years 1993, 1994, 1995, 1996 and 1997, respectively.
For the period January 1, 1998 through October 31, 1998, net new issue activity
of "high yield" debt securities totaled $118 billion. The statistical
information with respect to new issue activity is based upon information the
Fund obtained from the Credit Suisse First Boston High Yield Handbook. The
spread between the yield on U.S. Treasury securities and the high-yield market
fluctuated between 300 and 600 basis points (3.0% to 6.0%) during the 1992 to
1996 period, which is more in line with the historical spread relationship. For
the period January 1, 1998 through November 30, 1998, the spread fluctuated
between 250 and 675 basis points (2.50% to 6.75%).
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 1991, 1992, 1993, 1994, 1995, 1996 and 1997 were 9.33%,
2.89%, 0.96%, 0.44%, 2.24%, 1.14% and 1.08%, respectively and the default rate
for the period from January 1, 1998 to October 31, 1998 was 0.90%. The defaulted
amount of high-yield debt securities was $20.7 billion in 1991, $6.5 billion in
1992, $24.0 billion in 1993, $1.3 billion in 1994, $6.7 billion in 1995, $4.2
billion in 1996, $3.5 billion in 1997 and $5.3 billion for the period January 1,
1998 through October 31, 1998. The statistical information with respect to
historical default rates and amounts is based on information the Fund obtained
from the Credit Suisse First Boston High Yield Handbook.
The capital structure of the Fund has been designed to take advantage
of the historical spread in yields between high-yield securities and
representative U.S. Treasury securities, compared with the average default loss
on high-yield securities. In addition, through investment leverage, investors in
the Common Stock of the Fund receive increased yields to the extent that the
rate of return (i.e., the current interest yield on the Fund's portfolio reduced
by the actual default loss rate experienced on that portfolio) earned on the
Fund's assets, exceeds, after expenses of Fund management, the interest and
dividends payable on the Fund's leverage. Conversely, to the extent that the
rate of return on the portfolio does not exceed the interest on the loans under
the Credit Agreement and any other form of leverage used by the Fund, yield to
investors in the Common Stock will be reduced.
The Fund is a closed-end investment company. These companies differ
from open-end investment companies (commonly referred to as "mutual funds") in
that closed-end investment companies have a fixed capital base, whereas open-end
companies issue securities redeemable at net asset value at any time at the
option of the shareholder and typically engage in a continuous offering of their
shares. Accordingly, open-end investment companies are subject to periodic asset
in-flows and out-flows that can complicate portfolio management. Closed-end
investment companies do not face the prospect of having to liquidate portfolio
holdings to satisfy redemptions at the option of shareholders or having to
maintain cash positions to meet the possibility of such redemptions. The Fund
will, however, be required to have sufficient cash or cash equivalents to meet
interest payments on the loans under the Credit Agreement and to fund certain
prepayments of the outstanding loans under the Credit Agreement in certain
circumstances. See "Description of Capital Stock" and "Description of the Credit
Agreement."
Prior to a one-for-three reverse Common Stock split effected on April
1, 1998, the Fund completed a transferable rights offering in January 1998 which
permitted shareholders to acquire, at a subscription price of $3.80, one new
share for every three rights held as of the record date of such rights offering.
On March 25, 1997, the Fund completed a non-transferable rights offering which
permitted shareholders to acquire, at a subscription price of $3.59, one new
share for every three rights held as of the record date of such rights offering.
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
for each three rights held as of the record date of such rights offerings. All
of the rights issued by the Fund pursuant to the rights offering completed in
January 1998 were exercised and, as a result, 14,742,609 shares of Common Stock
were issued in January 1998 with net proceeds to the Fund of approximately $53.4
million. 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 and, 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. Approximately 61% of the rights issued by
the Fund pursuant to the rights offering completed in June 1996 were exercised
and, as a result 5,393,885 new shares of Common Stock were issued in June 1996
with net proceeds to the Fund of approximately $19.6 million. All of the rights
issued by the Fund pursuant to the rights offerings completed in March 1993 and
November 1993 were exercised and, as a result, 4,625,000 new shares of Common
Stock were issued 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 $21.5 million. All of the
net proceeds from the exercise of the rights issued pursuant to the prior rights
offerings have been invested in new securities in accordance with the Fund's
investment objective.
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 Investment Company Act of 1940, as amended (the "1940 Act").
The Fund's principal office is located at 60 State Street, Boston, Massachusetts
02109. The Fund's investment adviser is Prospect Street(R) Investment Management
Co., Inc. (the "Investment Adviser"), an investment management firm registered
with the SEC under the Investment Advisers Act of 1940, as amended. See "The
Investment Adviser."
THE OFFER
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in
the best interests of the Fund and its shareholders to increase the assets of
the Fund available for investment so that the Fund will be in a better position
to take advantage of available investment opportunities and increase the
diversification of its portfolio. The Investment Adviser informed the Board of
Directors that it believes the high-yield bond market presents a number of
attractive investment opportunities.
The Investment Adviser has cautioned that, given the current volatility
in the securities markets, the Fund should seek to improve the overall credit
quality of its portfolio. The increased assets resulting from the offer will
permit the Fund to make new investments in better quality securities and enhance
the overall credit quality of its portfolio.
The Investment Adviser has also advised the Fund that the Fund could
advantageously employ a portion of the proceeds of the Offer to further reduce
leverage if it should become advantageous to do so. However, the Board of
Directors reserves the power to increase the amount of leverage in the future.
For a further discussion of the anticipated impact of the Offer on the Fund's
leverage, please refer to "Investment Policies and Limitations" and "Risk
Factors and Special Considerations--Risk of Leverage."
The Board of Directors also considered the impact of the Offer on its
current distribution policy to maintain, subject to market conditions, a
relatively stable level of distributions. Based on information provided by the
Investment Adviser on current market conditions in the bond markets, the Board
of Directors believes the Offer will not result in a change in the Fund's
current level of dividends per share for the foreseeable future, while achieving
other net benefits to the Fund. There can be no assurance the Fund will maintain
its current dividend policy or its current level of dividends per share. The
Board of Directors may, in its sole discretion, change the Fund's dividend
policy and level of dividends per share at any time. For a further discussion of
the anticipated impact of the Offer on the Fund's dividends, please refer to
"Risk Factors and Special Considerations--Dividends and Distributions."
In addition, the Board of Directors believes that increasing the size
of the Fund may lower the Fund's expenses as a proportion of average net assets
because the Fund's fixed costs can be spread over a larger asset base and
certain variable costs, such as the fees paid to the Investment Adviser pursuant
to the Advisory Agreement (as defined herein), are reduced as the Fund's assets
reach specific levels. However, it should be noted that the Board of Directors
has recommended, subject to shareholder approval, an increase in fees payable to
the Investment Adviser. See "The Investment Adviser--Advisory Agreement." In
addition, the issuance of additional shares may enhance the liquidity of the
Fund's shares on the Exchange.
In determining that the Offer was in the best interests of the Fund
and its shareholders, the Board of Directors retained PaineWebber Incorporated
and Gruntal & Co. LLC (collectively, the "Dealer Managers") to provide the Fund
with financial advisory and marketing services relating to the Offer, including
the structure, timing and terms of the Offer. In addition to the foregoing, the
Board of Directors considered, among other things, using a variable pricing
versus fixed pricing mechanism, the benefits and drawbacks of conducting a
non-transferable versus a transferable rights offering, the effect on the Fund
if the Offer is undersubscribed and the experience of the Dealer Managers in
conducting rights offerings.
The Investment Adviser will benefit from the Offer because the
Investment Adviser's fee is based on the average weekly managed assets of the
Fund.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record ("Record Date
Shareholders"), as of the close of business on (the "Record Date"),
transferable rights ("Rights") entitling the holders thereof to subscribe for an
aggregate of 6,700,000 shares (the "Shares") of the Fund's Common Stock (the
"Offer"). Each such Record Date Shareholder is being issued one Right for each
whole share of Common Stock owned on the Record Date. The Rights entitle the
holders thereof to subscribe for one Share for every three Rights held (1-for-3)
(the "Primary Subscription"). Fractional shares will not be issued upon the
exercise of Rights. Record Date Shareholders issued fewer than three Rights are
entitled to subscribe for one Share pursuant to the Primary Subscription.
The Rights are transferable among Record Date Shareholders and
non-Record Date Shareholders. Holders of Rights who are not Record Date
Shareholders ("Rights Holders") may purchase Shares in the Primary Subscription,
but are not entitled to subscribe for Shares pursuant to the Over-Subscription
Privilege described below. Record Date Shareholders and Rights Holders
purchasing Shares in the Primary Subscription and Record Date Shareholders who
purchase Shares pursuant to the Over-Subscription Privilege are hereinafter
referred to as "Exercising Rights Holders."
Rights may be exercised at any time during the subscription period
(the "Subscription Period"), which commences on and ends
at 5:00 P.M., New York City time, on , unless extended by the Fund
(the "Expiration Date"). The Rights are evidenced by Subscription
Certificates ("Subscription Certificates") that will be mailed to Record Date
Shareholders, except as discussed below under "Foreign Shareholders."
Shares not subscribed for in the Primary Subscription will be offered,
by means of the over-subscription privilege (the "Over-Subscription Privilege"),
to those Record Date Shareholders who have exercised all Rights issued to them
and who wish to acquire more than the number of Shares they are entitled to
purchase pursuant to the exercise of their Rights (other than those Rights which
cannot be exercised because they represent the right to acquire less than one
share). Shares acquired pursuant to the Over-Subscription Privilege are subject
to allotment, as more fully discussed below under "Over-Subscription Privilege."
For purposes of determining the maximum number of Shares a shareholder may
acquire pursuant to the Offer, shareholders whose shares are held of record by
Cede & Co. ("Cede"), as nominee for The Depository Trust Company ("DTC"), or by
any other depository or nominee will be deemed to be the holders of the Rights
that are issued to Cede or such other depository or nominee on their behalf.
The first regular monthly dividend to be paid on Shares acquired upon
exercise of Rights will be the first monthly dividend, the record date for which
occurs after the issuance of the Shares. It is the Fund's present policy to pay
dividends on the last Business Day (as defined below) of each month to
shareholders of record ten days prior to the payment date. Assuming the
Subscription Period is not extended, it is expected that the first dividend
received by shareholders acquiring Shares in the Offer will be paid on the last
Business Day of . "Business Day" means a day on which the Exchange is
open for trading and which is not a Saturday or Sunday or a holiday, including
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Patriots Day, Memorial Day, Bunker Hill Day, Independence Day, Labor Day,
Columbus Day, Thanksgiving Day, Christmas Day or any other day on which banks in
New York City or Boston are authorized or obligated by law or executive order to
close.
There is no minimum number of Rights which must be exercised in order
for the Offer to close.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Record Date Shareholders or Rights Holders
(the "Excess Shares") will be offered, by means of the Over-Subscription
Privilege, to the Record Date Shareholders who have exercised all exercisable
Rights issued to them (other than those Rights which cannot be exercised because
they represent the right to acquire less than one Share) and who wish to acquire
more than the number of Shares for which the Rights issued to them are
exercisable. Record Date Shareholders should indicate, on the Subscription
Certificate which they submit with respect to the exercise of the Rights issued
to them, how many Excess Shares they are willing to acquire pursuant to the
Over-Subscription Privilege. If sufficient Excess Shares remain, all Record Date
Shareholders over-subscription requests will be honored in full. If Record Date
Shareholder requests for Shares pursuant to the over-subscription Privilege
exceed the Excess Shares available, the available Excess Shares will be
allocated pro rata among Record Date Shareholders who oversubscribe based on the
number of Rights originally issued to such Record Date Shareholders.
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined herein), before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to the
Primary Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certification Forms will be
distributed to banks, brokers, trustees and other nominee holders with the
Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any Shares
that are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
SUBSCRIPTION PRICE
The subscription price for the Shares to be issued pursuant to the
Offer will be $ (the "Subscription Price").
The Fund announced the Offer after the close of trading on the Exchange
on December 18, 1998. The net asset value per share of Common Stock at the close
of business on (the last trading date on which the Fund publicly reported
its net asset value prior to the announcement) and on was $ and $
respectively, and the last reported sales price of a share of the Fund's Common
Stock on the Exchange on those dates was $ and $ , respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 P.M., New York City time, on ,
unless extended by the Fund. The Rights will expire on the Expiration Date and
thereafter may not be exercised. Any extension of the Offer will be followed as
promptly as practicable by announcement thereof. Such announcement will be
issued no later than 9:00 A.M., New York City time, on the next Business Day
following the previously scheduled Expiration Date. Without limiting the manner
in which the Fund may choose to make such announcement, the Fund will not,
unless otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such announcement other than by making a release to
the Dow Jones News Service or such other means of announcement as the Fund deems
appropriate.
SUBSCRIPTION AGENT
The subscription agent is State Street Bank and Trust Company (the
"Subscription Agent"). The Subscription Agent will receive for its
administrative, processing, invoicing and other services as subscription agent,
a fee estimated to be approximately $30,000 which includes reimbursement for all
out-of-pocket expenses related to the Offer. The Subscription Agent is also the
Fund's transfer agent, dividend-paying agent and registrar for the Common Stock.
Questions regarding the Subscription Certificates should be directed to State
Street Bank and Trust Company, 150 Royall Street, Canton, Massachusetts 02021
U.S.A. (800) 426-5523 (toll free); shareholders may also consult their brokers
or nominees.
Completed Subscription Certificates must be sent together with proper
payment of the Subscription Price for all Shares subscribed for in the Primary
Subscription and the Over-Subscription Privilege (for Record Date Shareholders)
to State Street Bank and Trust Company by one of the methods described below.
Alternatively, Notices of Guaranteed Delivery may be sent by facsimile to (781)
794-6333 to be received by the Subscription Agent prior to 5:00 P.M., New York
City time, on the Expiration Date. Facsimiles should be confirmed by telephone
at (781) 794-6388. The Fund will accept only properly completed and executed
Subscription Certificates actually received at any of the addresses listed
below, prior to 5:00 P.M., New York City time, on the Expiration Date or by the
close of business on the third Business Day after the Expiration Date following
timely receipt of a Notice of Guaranteed Delivery. See "Payment for Shares"
below.
(1) BY FIRST CLASS MAIL:
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, Massachusetts 02205-8686
U.S.A.
(2) BY OVERNIGHT COURIER:
State Street Bank and Trust Company
Corporate Reorganization
c/o Boston EquiServe
70 Campanelli Drive
Braintree, Massachusetts 02184
U.S.A.
(3) BY HAND:
Bank of Boston
c/o Boston EquiServe
Corporate Reorganization
55 Broadway - 3rd Floor
New York, New York 10006
U.S.A.
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE
WILL NOT CONSTITUTE VALID DELIVERY.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as
described below under "Foreign Restrictions," will be mailed to Record Date
Shareholders or, if a shareholder's shares of Common Stock are held by Cede or
any other depository or nominee on their behalf, to Cede or such depository or
nominee. Rights may be exercised by completing and signing the Subscription
Certificate that accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
Shares at the Subscription Price by the Expiration Date. Rights may also be
exercised by contacting your broker, banker or trust company, which can arrange,
on your behalf, to guarantee delivery of payment and delivery of a properly
completed and executed Subscription Certificate pursuant to a Notice of
Guaranteed Delivery by the close of business on , the third Business
day after the Expiration Date. A fee may be charged for this service. Fractional
shares will not be issued upon the exercise of Rights. Record Date Shareholders
issued fewer than three Rights are entitled to subscribe for one Share pursuant
to the Primary Subscription. Completed Subscription Certificates must be
received by the Subscription Agent prior to 5:00 P.M., New York City time, on
the Expiration Date at one of the addresses set forth above (unless the
guaranteed delivery procedures are complied with as described below under
"Payment for Shares").
Shareholders Who Are Record Owners. Shareholders who are record owners
can choose between either option to exercise their Rights as described below
under "Payment for Shares." If time is of the essence, option (2) under "Payment
for Shares" below will permit delivery of the Subscription Certificate and
payment after the Expiration Date.
Shareholders Whose Shares Are Held by a Nominee. Shareholders whose
shares are held by a nominee, such as a bank, broker or trustee, must contact
that nominee to exercise their Rights. In such case, the nominee will complete
the Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods described below under "Payment for Shares."
Nominees. Nominees who hold shares of Common Stock for the account of
others should notify the beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee should
complete the Subscription Certificate and submit it to the Subscription Agent
with the proper payment as described below under "Payment for Shares."
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Toll Free: (800) 633-1822
Shareholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated to
be $36,000 which includes reimbursement for its out-of-pocket expenses related
to the Offer.
PAYMENT FOR SHARES
Shareholders who wish to acquire Shares pursuant to the Offer may
choose between the following methods of payment:
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment for the Shares acquired in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege (for Record Date Shareholders) to the
Subscription Agent based on the Subscription Price of $ per share. A
subscription will be accepted when payment, together with a properly
completed and executed Subscription Certificate, is received by the
Subscription Agent's office at one of the addresses set forth above no
later than 5:00 P.M., New York City time, on the Expiration Date. The
Subscription Agent will deposit all checks and money orders received by
it for the purchase of Shares into a segregated interest-bearing
account (the interest from which will accrue to the benefit of the
Fund) pending proration and distribution of Shares. A PAYMENT PURSUANT
TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON
A BANK OR BRANCH LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO
PROSPECT STREET HIGH INCOME PORTFOLIO INC. AND MUST ACCOMPANY A
PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS
SUBJECT TO ACTUAL COLLECTION OF CHECKS BY 5:00 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY
TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, SHAREHOLDERS ARE STRONGLY
URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR
CASHIER's CHECK OR MONEY ORDER.
(2) Alternatively, an Exercising Rights Holder may acquire shares, and a
subscription will be accepted by the Subscription Agent if, prior to
5:00 P.M., New York City time, on the Expiration Date, the Subscription
Agent has received a Notice of Guaranteed Delivery by facsimile
(telecopy) or otherwise from a financial institution that is a member
of the Securities Transfer Agents Medallion Program, the Stock Exchange
Medallion Program or the New York Stock Exchange Medallion Signature
Program guaranteeing delivery of (i) payment of the Subscription Price
of $ per share for the Shares subscribed for in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege (for Record Date Shareholders), and (ii) a
properly completed and executed Subscription Certificate. The
Subscription Agent will not honor a Notice of Guaranteed Delivery
unless a properly completed and executed Subscription Certificate and
full payment for the Shares is received by the Subscription Agent by
the close of business on , the third Business Day after
the Expiration Date.
On a date within eight Business Days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee) a confirmation showing (i) the number
of Shares purchased pursuant to the Primary Subscription and (ii) the number of
Shares, if any, acquired pursuant to the Over-Subscription Privilege (for Record
Date Shareholders). All payments by an Exercising Rights Holder must be in U.S.
dollars by money order or check drawn on a bank or branch located in the United
States and payable to PROSPECT STREET HIGH INCOME PORTFOLIO INC.
The Subscription Agent will deposit all checks received by it prior to
the final payment date into a segregated interest-bearing account (which
interest will accrue to the benefit of the Fund) pending proration and
distribution of the Shares.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION
OR OVER-SUBSCRIPTION PRIVILEGE (FOR RECORD DATE SHAREHOLDERS) DOES NOT MAKE
PAYMENT OF ANY AMOUNTS DUE BY THE TENTH BUSINESS DAY AFTER THE CONFIRMATION
DATE, THE SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE
FOLLOWING ACTIONS: (I) FIND OTHER RECORD DATE SHAREHOLDERS FOR SUCH SUBSCRIBED
AND UNPAID FOR SHARES; (II) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE
PURCHASE OF THE GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE ACQUIRED BY SUCH
HOLDER UPON EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION
PRIVILEGE, AND/OR (III) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH
IT MAY BE ENTITLED, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET OFF AGAINST
PAYMENTS ACTUALLY RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER's CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole discretion may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion. The Subscription Agent will not be
under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Certificates or incur any liability for
failure to give such notification.
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR
SUBSCRIPTION AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION
AGENT, EXCEPT AS PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights will
be listed on the Exchange, subject to notice of issuance. The Fund will use its
best efforts to ensure that an adequate trading market for the Rights will
exist, although no assurance can be given that a market for the Rights will
develop. Trading in the Rights on the Exchange will be conducted on a regular
way basis from until and including , the last Business Day
prior to the Expiration Date. Exercising Rights Holders are encouraged to
contact their broker, bank or financial adviser for more details information
about trading of the rights.
Sales Through Subscription Agent and Dealer Managers. Record Date
Shareholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through or to the Dealer
Managers. Subscription Certificates representing the Rights to be sold by or to
the Dealer Managers must be received by the Subscription Agent on or before
(or if the Offer is extended, until two Business Days prior to the
Expiration Date). Upon the timely receipt by the Subscription Agent of
appropriate instructions to sell Rights, the Subscription Agent will request the
Dealer Managers either to purchase or to use their best efforts to complete the
sale and the Subscription Agent will remit the proceeds of sale, net of
commissions, to the Record Date Shareholders. Any commissions on sales of Rights
will be paid by the selling Record Date Shareholders. If the Rights can be sold,
sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Dealer Managers on the day such Rights
are sold. The sale price of any Rights sold to the Dealer Managers will be based
upon the then current market price for the Rights, less amounts comparable to
the usual and customary brokerage fees. The Dealer Managers will also attempt to
sell all Rights which remain unclaimed as a result of Subscription Certificates
being returned by the postal authorities to the Subscription Agent as
undeliverable as of the fourth Business Day prior to the Expiration Date. Such
sales will be made net of commissions on behalf of the nonclaiming Record Date
Shareholders. The Subscription Agent will hold the proceeds from those sales for
the benefit of such nonclaiming Record Date Shareholders until such proceeds are
either claimed or escheat. There can be no assurance that the Dealer Managers
will purchase or be able to complete the sale of any such Rights and neither the
Fund nor the Dealer Managers has guaranteed any minimum sales price for the
Rights.
Other Transfers. The Rights evidenced by a Subscription Certificate may
be transferred in whole by endorsing the Subscription Certificate for transfer
in accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights) may
be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register such
portion of the Rights evidenced thereby in the name of the transferee and to
issue a new Subscription Certificate to the transferee evidencing such
transferred Rights. In such event, a new Subscription Certificate evidencing the
balance of the Rights, if any, will be issued to the Record Date Shareholder or,
if the Record Date Shareholder so instructs, to an additional transferee. The
signature on the Subscription Certificate must correspond with the name as
written upon the face of the Subscription Certificate in every particular,
without alteration or enlargement, or any change whatever. A signature guarantee
must be provided by an eligible financial institution as defined in Rule 17Ad-15
of the Securities Exchange Act of 1934, as amended (the "1934 Act"), subject to
the standards and procedures adopted by the Fund.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five Business Days prior to the Expiration Date for
(i) the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund nor the Subscription Agent nor the Dealer
Managers shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior to
the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer
Managers (which will be paid by the Fund), all commissions, fees and other
expenses (including brokerage commissions and transfer taxes) incurred or
charged in connection with the purchase, sale or exercise of Rights will be for
the account of the transferor of the Rights, and none of such commissions, fees
or expenses will be paid by the Fund, the Subscription Agent or the Dealer
Managers.
The Fund anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription (but not the
Over-Subscription Privilege) may be effected through, the facilities of The
Depository Trust Company ("DTC"; Rights exercised through DTC are referred to as
"DTC Exercised Rights"). Record Date Shareholders of DTC Exercised Rights may
exercise the Over-Subscription Privilege in respect of such DTC Exercised Rights
by properly executing and delivering to the Subscription Agent, at or prior to
5:00 p.m., New York City time, on the Expiration Date, a Nominee Holder
Over-Subscription Exercise Form or a substantially similar form satisfactory to
the Subscription Agent, together with payment of the Subscription Price for the
number of Shares for which the Over-Subscription Privilege is to be exercised.
DISTRIBUTION ARRANGEMENTS
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New
York, and Gruntal & Co. LLC, One Liberty Plaza, New York, New York, each of whom
is a broker-dealer and member of the National Association of Securities Dealers,
Inc., will act as the Dealer Managers for the Offer. Under the terms and subject
to the conditions contained in the Dealer Manager Agreement dated the date
hereof (the "Dealer Manager Agreement"), the Dealer Managers will provide
financial advisory and marketing services in connection with the Offer and will
solicit the exercise of Rights and participation in the Over-Subscription
Privilege. The Offer is not contingent upon any number of Rights being
exercised. The Fund has agreed to pay the Dealer Managers a fee for their
financial advisory, marketing and soliciting services equal to % of the
aggregate Subscription Price for Shares issued pursuant to the Offer.
The Dealer Managers will reallow to broker-dealers included in the
selling group to be formed and managed by the Dealer Managers ("Selling Group
Members"), solicitation fees equal to % of the Subscription Price per Share
for each Share issued pursuant to the Offer as a result of their soliciting
efforts. In addition, the Dealer Managers will reallow to other broker-dealers
that have executed and delivered a soliciting dealer agreement and have
solicited the exercise of Rights, solicitation fees equal to % of the
Subscription Price per Share for each Share issued pursuant to the exercise of
Rights as a result of their soliciting efforts, subject to a maximum fee based
upon the number of shares of Common Stock held by each broker-dealer through DTC
on the Record Date. Fees will be paid to the broker-dealer designated on the
applicable portion of the Subscription Certificates or, in the absence of such
designation, to the Dealer Managers.
In addition, the Fund may reimburse the Dealer Managers up to an
aggregate of $ for their reasonable expenses incurred in connection with the
Offer. The Fund has agreed to indemnify the Dealer Managers or contribute to
losses arising out of certain liabilities including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Dealer Manager
Agreement also provides that the Dealer Managers will not be subject to any
liability to the Fund in rendering the services contemplated by such Agreement
except for any act of bad faith, willful misconduct or gross negligence of the
Dealer Managers or reckless disregard by the Dealer Managers of their
obligations and duties under such Agreement.
Prior to the expiration of the Offer, the Dealer Managers may
independently offer for sale shares of common stock, including Shares acquired
through purchasing and exercising the rights, at prices they set. The Dealer
Managers may realize profits or losses independent of any fees described in this
Prospectus.
The Fund has agreed not to offer or sell, or enter into any agreement
to sell, any equity or equity related securities of the Fund or securities
convertible into such securities for a period of 180 days after the date of the
Dealer Manager Agreement, except for the Shares and Common Stock issued in
reinvestment of dividends or distributions or other limited circumstances.
DELIVERY OF SHARE CERTIFICATES
Certificates representing Shares acquired in the Primary Subscription
and representing Shares acquired pursuant to the Over-Subscription Privilege
will be mailed promptly after the expiration of the Offer once full payment for
such Shares has been received and cleared. Participants in the Fund's Dividend
Reinvestment Plan (the "Plan") will have any Shares acquired in the Primary
Subscription and pursuant to the Over-Subscription Privilege credited to their
shareholder dividend reinvestment accounts in the Plan. Participants in the Plan
wishing to exercise Rights for the shares of Common Stock held in their accounts
in the Plan must exercise such Rights in accordance with the procedures set
forth above. Shareholders whose shares of Common Stock are held of record by
Cede or by any other depository or nominee on their behalf or their
broker-dealer's behalf will have any Shares acquired in the Primary Subscription
credited to the account of Cede or such other depository or nominee. Shares
acquired pursuant to the Over-Subscription Privilege will be certificated and
certificates representing such Shares will be sent directly to Cede or such
other depository or nominee. Stock certificates will not be issued for Shares
credited to Plan accounts.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date
Shareholders whose record addresses are outside the United States (the term
"United States" includes the states, the District of Columbia, and the
territories and possessions of the United States). Foreign Record Date
Shareholders will receive written notice of the Offer. The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for such
Foreign Record Date Shareholders' accounts until instructions are received to
exercise the Rights. If no instructions have been received by 5:00 P.M., New
York City time on , three business days prior to the Expiration Date, the
Rights of those Foreign Record Date Shareholders will be transferred by the
Subscription Agent to the Dealer Managers who will either purchase the rights or
use their best efforts to sell the Rights. The net proceeds, if any, from the
sale of those Rights by or to the Dealer Managers will be remitted to Foreign
Record Date Shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The U.S. federal income tax consequences to holders of Common Stock
with respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will
not result in taxable income to such holders nor will such holders
realize taxable income as a result of the exercise of the Rights. No
loss will be realized if the Rights expire without exercise.
2. The basis of a Right will be (a) to a holder of Common Stock
to whom it is issued and who exercises the Right (i) if the fair market
value of the Right immediately after issuance is less than 15% of the
fair market value of the Common Stock with regard to which it is
issued, zero (unless the holder elects, by filing a statement with his
timely filed federal income tax return for the year in which the Rights
are received, to allocate the basis of the Common Stock between the
Right and the Common Stock based on their respective fair market values
immediately after the Right is issued), and (ii) if the fair market
value of the Right immediately after issuance is 15% or more of the
fair market value of the Common Stock with regard to which it is
issued, a portion of the basis in the Common Stock based upon their
respective fair market values immediately after the Right is issued,
and (b) to a holder of Common Stock to whom it is issued and who allows
the Right to expire, zero.
3. The holding period of a Right received by a Record Date
Shareholder includes the holding period of the Common Stock with regard
to which the Right is issued. If the Right is exercised, the holding
period of the Common Stock acquired begins on the date the Right is
exercised.
4. If a Right is sold, gain or loss will be realized by the
holder in an amount equal to the difference between the basis of the
Right sold and the amount realized on its disposition.
5. A Record Date Shareholder's basis for determining gain or
loss upon the sale of a Share acquired upon the exercise of a Right
will be equal to the sum of the Record Date Shareholder's basis in the
Right, if any, and the Subscription Price per Share. A Record Date
Shareholder's gain or loss recognized upon a sale of a Share acquired
upon the exercise of a Right will be capital gain or loss if the Share
was held at the time of sale as a capital asset and will be long-term
capital gain or loss if the Share is held for more than one year. See
"Federal Taxation--Federal Income Tax Treatment of Holders of Common
Stock" for a summary of the capital gains rates applicable to capital
gains or losses recognized upon the sale of Shares.
The foregoing is a general summary of the material U.S. federal income
tax consequences of the Offer under the provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"), and Treasury regulations
presently in effect that are generally applicable to Record Date Shareholders
that are United States persons within the meaning of the Internal Revenue Code,
and does not cover foreign, state or local taxes. The Internal Revenue Code and
such regulations are subject to change by legislative or administrative action,
which may be retroactive. Exercising Rights Holders should consult their tax
advisers regarding specific questions as to foreign, federal, state or local
taxes. See "Federal Taxation."
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this Prospectus if, subsequent to the
effective date of the Fund's Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date. Accordingly,
the Expiration Date would be extended and the Fund would notify Record Date
Shareholders of any such decline and permit Exercising Rights Holders to cancel
their exercise of Rights.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders who are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), Keogh or H.R. 10 plans of self-employed
individuals and individual retirement accounts (collectively, "Retirement
Plans") should be aware that additional contributions of cash to the Retirement
Plan (other than rollover contributions or trustee-to-trustee transfers from
other Retirement Plans) in order to exercise Rights would be treated as
contributions to the Retirement Plan and, when taken together with contributions
previously made, may result in, among other things, excise taxes for excess or
nondeductible contributions. In the case of Retirement Plans qualified under
Section 401(a) of the Internal Revenue Code and certain other Retirement Plans,
additional cash contributions could cause the maximum contribution limitations
of Section 415 of the Internal Revenue Code or other qualification rules to be
violated. It may also be a reportable distribution and there may be other
adverse tax and ERISA consequences if Rights are sold or transferred by a
Retirement Plan.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Internal Revenue Code. If any
portion of an Individual Retirement Account ("IRA") is used as security for a
loan, the portion so used is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Internal Revenue Code contain prohibited transaction rules that may impact the
exercise of Rights. Due to the complexity of these rules and the penalties for
noncompliance, Retirement Plans should consult with their counsel and other
advisors regarding the consequences of their exercise of Rights under ERISA and
the Internal Revenue Code.
IMPORTANT DATES TO REMEMBER
EVENT DATE
- ----- ----
Record Date.............................................................
Subscription Period.....................................................
Expiration Date.........................................................
Subscription Certificates and Payment for Shares Due+...................
Notice of Guaranteed Delivery Due+......................................
Payment for Guarantees of Delivery Due..................................
Confirmation to Participants............................................
- ----------
* Unless the Offer is extended.
+ A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed Delivery
by .
USE OF PROCEEDS
If all the Rights are exercised in full at the Subscription Price of
$ per Share, the net proceeds of the Offer to the Fund assuming all 6,700,000
shares offered hereby are sold are estimated to be approximately $ , after
deducting offering expenses payable by the Fund estimated at approximately $ .
The Investment Adviser anticipates that the Fund will take up to thirty days
from its receipt of the net proceeds of the Offer to invest or otherwise employ
such proceeds (for example, to reduce leverage), but in no event will any such
use take longer than six months. Pending the use of the proceeds of the Offer,
the proceeds will be held in U.S. Government securities (which term includes
obligations of the United States Government, its agencies or instrumentalities)
and other high-quality short-term money market instruments.
INVESTMENT POLICIES AND LIMITATIONS
The investment objective of the Fund is to provide high current income,
while seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of high-yield, high risk
securities (commonly referred to as "junk bonds").
The Fund seeks to achieve its objective of preserving shareholders'
capital through a careful selection process for the Fund's high-yield, high risk
investments which focuses on each issuer's financial condition and projected
ability to service its debt obligations, portfolio diversification which is
intended to minimize the impact of individual issuer defaults and adverse
economic conditions affecting particular issuers and industry segments, and
close monitoring of portfolio investments and economic developments in order to
reposition the Fund's portfolio in anticipation of negative developments which
the Investment Adviser believes are likely to occur. Given the high risk nature
and price volatility of the Fund's investments as well as the Fund's leverage,
however, it may be extremely difficult to achieve this objective on a consistent
basis in the future. In the severe adverse interest rate and economic
environment of 1989 and 1990, the Fund suffered a substantial decline in its net
asset value as a result of these factors and thus failed to achieve this
objective during that period.
During the sharp high-yield market decline of 1989 and 1990, the Fund's
leverage contributed to a sharp decline in the net asset value of the Common
Stock. In order to remain in compliance with the 200% asset coverage ratio
required by the 1940 Act, the Fund was required to repurchase $45.0 million of
the $50.0 million of previously outstanding Senior Extendible Notes. Also, to
maintain compliance with the Fund's Surety Investment Guidelines the Fund was
required to sell high-yield assets. The selling of high-yield assets below their
original cost and the retirement of $45.0 million of the Fund's Senior
Extendible Notes resulted in a reduction of the Fund's total assets and caused
the Fund to realize substantial capital losses. The investment guidelines then
imposed on the Fund and the asset coverage ratio requirements combined to delay
the Fund's reinvestment of cash into high-yield securities as the market
improved. The Fund's use of leverage is currently benefitting the holders of
Common Stock as the current average cost of funds (pursuant to the terms of the
loans under the Credit Agreement) was approximately 6.3% as of November 30, 1998
while the high-yield market is currently offering interest income at annualized
rates of approximately 10.5% to 12.0%. There is no assurance that the Fund's
investment objective will be attained in the future.
The Fund's investment objective is a fundamental policy. Pursuant to
the 1940 Act, fundamental policies may not be changed without the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock and
a majority of any 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 securities rated in the
lower categories by recognized rating agencies or nonrated fixed-income
securities deemed by the Investment Adviser to be of comparable quality,
although the Fund has invested and currently intends to continue to invest a
substantially higher percentage of its assets in such securities to the extent
permitted by market conditions. The Fund's portfolio investments have consisted
and will continue to consist principally of fixed-income securities rated
"BB"/"Ba" or lower by the Rating Agencies. The Fund reserves the right, under
normal market conditions, to invest up to 35% of its total assets in money
market instruments and fixed-income securities rated higher than "BB"/"Ba,"
although the percentage invested in such securities may increase under other
than normal market conditions, as discussed below.
The credit ratings of all bonds held by the Fund at October 31, 1998
are set forth below. This information reflects the composition of the Fund's
assets at October 31, 1998 and is not necessarily representative of the Fund as
of the current fiscal year or at any other time in the future.
RATED BY MOODY'S
----------------
AAA..................................................... 0.01%
Ba...................................................... 0.45%
B....................................................... 43.78%
Caa..................................................... 23.79%
NR...................................................... 22.27%
Total............................................. 90.30%
High-yield bonds, the generic name for corporate bonds rated between
"BB"/"Ba" and "C"/"C" by the Rating Agencies, are frequently issued by
corporations in the growth stage of their development. Bonds which are rated
"BB"/"Ba," "B"/"B," "CCC"/"Caa," "CC"/"Ca" and "C"/"C" are regarded by the
Rating Agencies, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. Such securities are also generally considered to be subject to
greater risk than securities with higher ratings with regard to a deterioration
of general economic conditions. Further information concerning the ratings of
corporate bonds, including the rating categories of the Rating Agencies, is
provided in Appendix A. High-yield securities held by the Fund may include
securities received as a result of a corporate reorganization or issued as part
of a corporate takeover. Securities issued to finance corporate restructurings
may have special credit risks due to the highly leveraged conditions of the
issuers, and such securities are usually subordinate to securities subsequently
issued by the issuer. In addition, such issuers may lose experienced management
as a result of the restructurings. Finally, the market price of such securities
may be more volatile to the extent that expected benefits from restructuring do
not materialize.
Securities acquired by the Fund may include preferred stocks (including
convertible preferred stocks) and all types of debt obligations having varying
terms with respect to security or credit support, subordination, purchase price,
interest payments and maturity. Such obligations may include, for example,
bonds, debentures, notes (including convertible debt securities), mortgage or
other asset-backed instruments, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper and obligations
issued or guaranteed by the United States government or any of its political
subdivisions, agencies or instrumentalities (including obligations, such as
repurchase agreements, secured by such instruments). Most debt securities in
which the Fund will invest will bear interest at fixed rates. However, the Fund
reserves the right to invest without limitation in fixed-income debt securities
that have variable rates of interest or involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
interest or other payments, often in addition to a fixed rate of return, that
are based on the borrower's attainment of specified levels of revenues, sales or
profits and thus enable the holder of the security to share in the potential
success of the venture). The Fund also has the right to acquire common stock or
warrants to purchase common stock or other equity securities as part of a unit
in connection with the purchase of debt securities consistent with the Fund's
investment policies.
The Fund may invest up to 30% of its total assets in securities that
are not readily marketable. However, a security that may be restricted as to
resale under federal securities laws or otherwise, will not be subject to the
such non-fundamental restriction to the extent the Investment Adviser determines
that such securities are, at the time of acquisition, readily marketable. Such
securities may include for example, certain securities eligible for resale under
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act").
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 on an ongoing basis while in the Fund's portfolio.
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. Investing in Rule 144A securities
could have the effect of increasing the illiquidity of the Fund's assets to the
extent that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
The Fund may also be permitted to invest up to 20% of its total assets
in zero coupon securities. Zero coupon securities pay no cash income but are
purchased at a deep discount from their value at maturity. When held to
maturity, their entire return, which consists of the amortization of discount,
comes from the difference between their purchase price and their maturity value.
For a discussion of certain tax consequences resulting from the inclusion of
zero coupon securities in the Fund's portfolio, see "Federal Taxation--Federal
Income Tax Treatment of the Fund."
Notwithstanding the foregoing, if market conditions threaten to erode
the value of the Fund's assets, the Fund may adopt a temporary defensive
investment strategy and invest without limitation in high-grade money market
instruments, including commercial paper of domestic and foreign corporations,
certificates of deposit, bankers' acceptances and other obligations of banks,
repurchase agreements and short-term obligations issued or guaranteed by the
United States government or its instrumentalities or agencies, and also in
fixed-income securities rated higher than "BB"/"Ba" by the Rating Agencies. In
addition, under such market conditions, the Fund may invest in unrated
commercial paper which it deems to have risk characteristics comparable to such
instruments. The yield on these securities will tend to be lower than the yield
on other securities to be purchased by the Fund.
The Fund may also invest in fixed-income securities rated higher than
"BB"/"Ba" by the Rating Agencies or nonrated fixed-income securities deemed by
the Investment Adviser to be of comparable quality when the difference in yields
between quality classifications is relatively narrow. Investments in higher
rated issues may serve to lessen a decline in net asset value but may also
affect the amount of current income produced by the Fund, since the yields from
such issues are usually lower than those from lower rated issues. Accordingly,
the inclusion of such instruments in the Fund's portfolio may have the effect of
reducing the yield on the Common Stock.
The achievement of the Fund's objective depends upon the Investment
Adviser's analytical and portfolio management skills. There is no assurance that
this objective will be attained in the future. All nonfundamental investment
policies of the Fund, including those described below under "Investment
Guidelines," may be changed by the Board of Directors of the Fund without
shareholder approval.
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 October 31, 1998, the weighted average maturity of the Fund's
portfolio holdings was 6.3 years. The weighted average of the Fund's portfolio
will fluctuate depending on market conditions and investment opportunities. The
Fund, however, does not expect that the weighted average maturity of the Fund's
portfolio will, under normal conditions, exceed 15 years.
The Investment Adviser actively makes portfolio adjustments that
reflect the Fund's investment strategy, but does not trade securities for the
Fund for the purpose of seeking short-term profits. It will, however, change the
Fund's securities, regardless of how long they have been held, when it believes
doing so will further the Fund's investment objective.
In light of the Fund's investment objective and policies, it is
anticipated that the Fund's portfolio turnover rate generally will not, although
it may, from time to time, exceed 100% per annum. A 100% annual turnover rate
would occur, for example, if all the securities in the Fund's portfolio were
replaced once within a period of one year. The Fund does, however, reserve full
freedom with respect to portfolio turnover. In periods when there are rapid
changes in economic conditions or security price levels or when investment
strategy is changed significantly, portfolio turnover may be significantly
higher than during times of economic and market price stability, when investment
strategy remains relatively constant. A high rate of portfolio turnover will
result in increased transaction costs for the Fund in the form of increased
dealer spreads and brokerage commissions. The Fund's portfolio turnover rates
for the fiscal years ended October 31, 1996, 1997 and 1998 were 108.33%, 176.04%
and 159.93%, respectively.
CERTAIN INVESTMENT STRATEGIES
The Investment Adviser reserves the right to employ the strategies
described below in order to help achieve the Fund's investment objective. Such
strategies include the lending of portfolio securities, the short sale of
securities and the use of futures contracts and options thereon, reverse
repurchase agreements and repurchase agreements (other than certain repurchase
agreements with qualified depository institutions having maturities not longer
than one day). Unless so stated below, there are no limits to the Fund's use of
these investment strategies. The Fund's Board of Directors has adopted an
operating policy under which the Fund will not subject more than 5% of its total
net assets to investment techniques such as options, futures contracts and
related options, foreign currency transactions, interest rate transactions, and
similar techniques such as hedging or investment techniques.
Securities Loans. The Fund may make secured loans of its portfolio
securities amounting to not more than one-third of the value of its total
assets, thereby realizing additional income. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delays in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. As a matter of policy, securities loans are made
to unaffiliated broker-dealers pursuant to agreements requiring that loans be
continuously secured by collateral in cash or short-term debt obligations at
least equal at all times to the value of the securities subject to the loan. The
borrower pays to the Fund an amount equal to any interest or dividends received
on securities subject to the loan. The Fund retains all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. Although voting rights, or rights to consent, with respect to the
loaned securities pass to the borrower, the Fund retains the right to call the
loans at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Fund if the holders of such securities are asked
to vote upon or consent to matters materially affecting the investment. The Fund
may also call such loans in order to sell the securities involved.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis (i.e., delivery and payment can take place a month or
more after the date of the transaction). The Fund will invest in when issued and
delayed delivery securities in order to lock in a favorable rate of return. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The securities so purchased are subject to market fluctuation,
and no interest accrues to the Fund until delivery and payment take place. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction and thereafter reflect
the value of such securities in determining its net asset value. The Fund will
make commitments for such when-issued transactions only with the intention of
actually acquiring the securities. To facilitate such acquisitions, the Fund's
custodian bank will maintain, in a separate account of the Fund, cash or United
States government or other high quality debt securities from its portfolio,
marked to market daily and having value equal to or greater than such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the separate
account and/or from then available cash flow. If the Fund chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it could,
as with the disposition of other portfolio obligations, incur a gain or loss due
to market fluctuation. The Fund is dependent on the other party to successfully
complete when-issued and delayed delivery transactions. If such other party
fails to complete its portion of the transaction, the Fund will have lost the
opportunity to invest the amount set aside for such transaction in the
segregated asset account.
Repurchase Agreements. The Fund may enter into repurchase agreements on
up to 25% of the value of its total assets. A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller to repurchase
and the Fund to resell such security at a fixed time and price (representing the
Fund's cost plus interest). The Fund will invest in repurchase obligations to
assist in the management of its portfolio and also to obtain additional revenue
and thereby maximize shareholders' value. It is the Fund's present intention to
enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the United States
government or its agencies or instrumentalities. Repurchase agreements may also
be viewed as loans made by the Fund which are collateralized by the securities
subject to repurchase. The Investment Adviser will monitor such transactions to
ensure that the value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including the interest
factor. The Investment Adviser will also evaluate the creditworthiness of the
repurchase agreement sellers with whom the Fund does business and will monitor
their creditworthiness during the period of any repurchase agreement. If the
seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale including accrued interest are
less than the resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with respect to debt obligations which could otherwise be
sold by the Fund. A reverse repurchase agreement is an instrument under which
the Fund may sell an underlying debt instrument and simultaneously obtain the
commitment of the purchaser (a commercial bank or a broker or dealer) to sell
the security back to the Fund at an agreed upon price on an agreed upon date.
The Fund will undertake reverse repurchase transactions to assist in the
management of its portfolio and to obtain additional liquidity in its
portfolios. The value of underlying securities will be at least equal at all
times to the total amount of the resale obligation, including the interest
factor. The Fund receives payment for such securities only upon physical
delivery or evidence of book entry transfer by its custodian. Regulations of the
SEC require that if securities are sold by the Fund under a reverse repurchase
agreement, the Fund will maintain in a segregated account of the Fund
established with the Custodian (as defined herein), cash or United States
government or other high quality debt securities from its portfolio, marked to
market daily and having a value equal to the proceeds received on any sale
subject to repurchase plus interest. Reverse repurchase agreements could involve
certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. An additional risk is that the market value of
securities sold by the Fund under a reverse repurchase agreement could decline
below the price at which the Fund is obligated to repurchase them. Reverse
repurchase agreements will be considered borrowings by the Fund and as such
would be subject to the restrictions on borrowing described below under
"Investment Restrictions." The Fund will not hold more than 5% of the value of
its total assets in reverse repurchase agreements and will enter into such
agreements only so long as it is not in violation of Section 18 of the 1940 Act.
Foreign Investments. The Fund may invest up to 10% of the value of its
total assets in securities principally traded in foreign markets and Eurodollar
certificates of deposit issued by branches of U.S. banks. Foreign investments
may involve risks not present to the same degree in domestic investments, such
as future political and economic developments, the imposition of withholding
taxes on interest income, seizure or nationalization of foreign deposits, the
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on such obligations. Foreign securities may be less liquid and more volatile
than U.S. securities, and foreign accounting and disclosure standards may differ
from U.S. standards. In addition, settlement of transactions in foreign
securities may be subject to delays, which could result in adverse consequences
to the Fund including restrictions on the subsequent resale of such securities.
The value of foreign investments may rise or fall because of changes in currency
exchange rates. In addition, the costs of exchanging foreign currencies for
payments in U.S. dollars and nonnegotiated brokerage commissions in foreign
countries may reduce the yield on foreign securities. In the event of a default
in payment on foreign securities, the Fund may incur increased costs to obtain a
judgment against the foreign issuer in the United States or abroad. The Fund may
buy or sell foreign currencies or deal in forward foreign currency contracts to
hedge against possible fluctuations in exchange rates that may affect the yield
of the Fund when the foreign currencies are converted in payment in U.S.
dollars. The Fund may engage in currency exchange transactions to protect
against uncertainty in the level of future exchange rates. The Fund will use
currency transactions only for hedging and not speculation. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. The
Fund's dealings in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions denominated or
quoted in the currency.
The Fund may not use position hedging with respect to a particular
currency to an extent greater than the aggregate market value (at the time of
entering into the position hedge) of the securities held in its portfolio
denominated or quoted in or currently convertible into that particular currency.
If the Fund enters into a position hedging transaction, the Fund's custodian
will place cash or U.S. Government securities or other high grade liquid debt
securities in a segregated account of the Fund in an amount equal to the value
of the Fund's total assets committed to the consummation of the forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to the forward contract.
Options. The Fund may write (sell) call options which are traded on
national securities exchanges with respect to securities in its portfolio. The
Fund may only write "covered" call options, that is, options on securities it
holds in its portfolio or has an immediate right to acquire through conversion
or exchange of securities held in its portfolio. The Fund may write call options
on its portfolio securities in an attempt to realize a greater current return
than would be realized on the securities alone. The Fund may also write call
options as a partial hedge against a possible market decline. In view of its
investment objective, the Fund generally would write call options only in
circumstances in which the Investment Adviser does not anticipate significant
appreciation of the underlying security in the near future or has otherwise
determined to dispose of the security. As the writer of a call option, the Fund
receives a premium for undertaking the obligation to sell the underlying
security at a fixed price during the option period if the option is exercised.
So long as the Fund remains obligated as a writer of a call option, it forgoes
the opportunity to profit from increases in the market price of the underlying
security above the exercise price of the option, except insofar as the premium
represents such a profit (and retains the risk of loss should the value of the
underlying security decline). The Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although the writing of call options only
on national securities exchanges increases the likelihood that the Fund will be
able to make closing purchase transactions, there is no assurance that the Fund
will be able to effect such transactions at any particular time or at any
acceptable price. The writing of call options could result in increases in the
Fund's portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate. The extent to which the Fund may enter
into transactions involving call options also may be limited by the requirements
of the Internal Revenue Code for qualification as a regulated investment
company.
Futures Contracts and Related Options. The Investment Adviser does not
currently intend that the Fund will trade in futures contracts or related
options and has no experience in doing so. However, the Fund has reserved the
right, subject to the approval of the Board of Directors, to purchase and sell
financial futures contracts and options on such futures contracts for the
purpose of hedging its portfolio securities (or portfolio securities which it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if the Investment Adviser anticipates that
interest rates may rise, in which event the Fund could sell a futures contract
to protect against the potential decline in the value of its portfolio
securities. Conversely, if declining interest rates were anticipated, the Fund
could purchase a futures contract to protect against a potential increase in the
price of securities the Fund intends to purchase. However, employing this
technique effectively requires skills that are different from those required to
select portfolio securities and the Investment Adviser has no experience in
using this technique.
Under the regulations of the U.S. Commodity Futures Trading Commission
("CFTC"), the Fund will not be considered a "commodity pool," as defined under
such regulations, as a result of entering into transactions in futures contracts
and options on futures contracts, provided, among other things, that: (1) such
transactions are entered into solely for bona fide hedging purposes, as defined
under CFTC regulations; or (2) the aggregate initial margin and premiums for any
other such transactions entered into does not exceed 5% of the Fund's total
assets (after taking into account any unrealized profits and losses). The extent
to which the Fund may enter into transactions involving futures contracts also
may be limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company.
Risks of Hedging Transactions. The use of options, financial futures
and options on financial futures may involve risks not associated with other
types of investments which the Fund intends to purchase and it is possible that
a portfolio that utilizes hedging strategies may not perform as well as a
portfolio that does not make use of such devices. In particular, the Fund's
positions in options and financial futures may be entered and closed out only on
a federally licensed exchange which provides a market therefor, and there can be
no assurance that a liquid market will exist for any particular option or
futures contract. Because financial futures and related options markets
generally impose limits on daily price movement, it is possible that the
Investment Adviser will not be able to close out hedge positions promptly. The
inability to close out options and futures positions could have an adverse
impact on the Fund's ability to hedge its securities effectively and might, in
some cases, require the Fund to deposit substantial amounts of additional cash
to meet applicable margin requirements. The Fund's ability to hedge effectively
through transactions in financial futures or options depends on the degree to
which price movements, which include, in part, changes in interest rates, in the
Fund's holdings correlate with price movements of the hedging instruments.
Inasmuch as the Fund's options and futures will not duplicate such underlying
securities, the correlation will probably not be perfect. Consequently, the
prices, which include, in part, changes in interest rates, of the securities
being hedged may not move in the same amount as the hedging instrument. It is
possible that there may be a negative correlation between the hedging instrument
and the hedged securities, which would prevent the Fund from achieving the
anticipated benefits of hedging transactions or may cause the Fund to realize
losses and thus be in a worse position than if such strategies had not been
used.
Additional Leverage. The Fund has reserved the right to borrow money to
the extent such borrowing would not result in a violation of the 1940 Act Asset
Coverage (as defined under "Description of Credit Agreement--Asset Maintenance")
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 repays its loans under the Credit Agreement.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. All percentage
limitations on investments will apply at the time of the making of an investment
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of such investment.
The Fund may not:
1 Borrow money (through reverse repurchase agreements or
otherwise) 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 Policies and
Limitations--Certain Investment Strategies--Options" and "--Futures
Contracts and Related Options."
Although the provisions of restrictions 2 (with respect to futures
contracts), 3 and 7 permit the Fund to engage in certain practices to a limited
extent, the Fund does not have any current intention of engaging in such
practices. See "Investment Policies and Limitations--Certain Investment
Strategies--Futures Contracts and Related Options."
Because they are fundamental policies, the 1940 Act requires that the
foregoing investment restrictions may not be changed without the approval of the
holders of a majority of the outstanding shares of Common Stock and a majority
of 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 total number of outstanding shares of such class or (b) 67% or more of
the shares of such class present or represented at a meeting at which more than
50% of the outstanding shares of such class are present or represented by proxy.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
DILUTION
Record Date Shareholders who do not fully exercise their Rights should
expect that they will, at the completion of the Offer, own a smaller
proportional interest in the Fund than would otherwise be the case. The Fund
cannot state precisely the amount of any such dilution in share ownership
because the Fund does not know at this time what proportion of the Shares will
be subscribed.
To the extent the Subscription Price per share is less than net asset
value per share (or the net proceeds per share exceed net asset value per share)
at the expiration of the Offer, shareholders would experience an immediate
dilution, which could be substantial, of the aggregate net asset value of their
shares of common stock as a result of the Offer. The amount of any such decrease
in net asset value is not predictable because it is not known at this time what
the net asset value per share will be at the expiration date or what proportion
of the shares will be subscribed.
For example, if the Board sets the Subscription Price at lower than net
asset value per share, and assuming that all Rights are exercised at the
Subscription Price of $ , the Fund's net asset value per share (after payment
of the Dealer Manager and soliciting fees and estimated offering expenses) would
be reduced by approximately $ per share.
The fact that the Rights are transferable may reduce the effects of any
dilution in your share ownership as a result of the offer. You can transfer or
sell your Rights. The cash received from the sale of rights is partial
compensation for any possible dilution. The Fund cannot give any assurance that
a market for the Rights will develop or the value, if any, that the Rights will
have.
RISK OF LEVERAGE
The Fund's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment objectives and
policies. These risks include a higher volatility of the net asset value of the
Common Stock and potentially more volatility in the market value of the Common
Stock. If the investment performance of the assets purchased with the proceeds
of any leverage fails to cover the interest and dividends on such leverage, the
value of the Common Stock may decrease more quickly than would otherwise be the
case and dividends thereon will be reduced or eliminated. This is the
speculative effect of leverage.
The effective interest rate on the loans made under the Credit
Agreement as of November 30, 1998 is 6.3%. Based on the interest rate payable
under the Credit Agreement, the annual return of the Fund's portfolio must equal
at least 1.37% in order to cover the interest payments under the Credit
Agreement.
You, as holders of Common Stock, will bear any decline in the net asset
value of the Fund's investments. As a result, the effect of leverage in a
declining market would result in a greater decrease in net asset value to
holders of Common Stock than if the Fund were not leveraged. This would likely
be reflected in a greater decline in the market price for the Common Stock. In
an extreme case, if the Fund's current investment income were not sufficient to
meet dividend and interest payments due in respect of any leverage, it could be
necessary for the Fund to liquidate certain of its investments, thereby reducing
the net asset value attributable to the Common Stock. In addition, a decline in
the net asset value of the Fund's investments may affect the ability of the Fund
to make dividend payments on its Common Stock and such failure to pay dividends
or make distributions may result in the Fund ceasing to qualify as a regulated
investment company under the Internal Revenue Code.
The loans under the Credit Agreement and other forms of leverage may
constitute a substantial lien and burden on the Common Stock by reason of their
prior claim against the income of the Fund and against the net assets of the
Fund in liquidation. In addition, the Fund may borrow up to 5% of its total
assets for temporary purposes and, to the extent that the loans under the Credit
Agreement are repaid or redeemed, may issue or incur additional senior
securities or indebtedness.
At the Annual Meeting of Stockholders held on March 10, 1998, the
Fund's shareholders approved an amendment of the Fund's Amended and Restated
Articles of Incorporation authorizing the creation of a new class of preferred
stock, par value of $1.00 per share, that would be issuable from time to time by
the Board of Directors in one or more series. As of the date hereof, there is no
preferred stock outstanding. The shareholders also approved, at the Annual
Meeting, an amendment to the Fund's fundamental investment restriction relating
to borrowing and the issuance of senior securities, permitting the Fund to
borrow and issue senior securities to the full extent permitted by the 1940 Act.
The 1940 Act generally imposes a 300% "asset coverage" test for "senior
securities representing indebtedness" and a 200% "asset coverage" test for
"senior securities representing stock." The 1940 Act generally restricts
distributions to holders of common stock and preferred stock while any senior
security representing indebtedness is outstanding and restricts distributions to
the holders of common stock while any senior security representing stock is
outstanding, unless such coverage requirements are satisfied. Furthermore, the
1940 Act generally limits registered closed-end investment companies, such as
the Fund, from issuing more than one class of senior securities representing
indebtedness and more than one class of senior securities representing stock,
subject to various exceptions.
The following table illustrates the effect of leverage (using senior
securities -- i.e., $45 million of loans currently outstanding under the Credit
Agreement) on the return of a holder of Common Stock, assuming a Fund portfolio
of approximately $204 million, the annual returns set forth in such table and
assuming an effective interest rate of 6.3% payable on the loans under the
Credit Agreement (which assumed rate corresponds to the interest rate as of
November 30, 1998 payable on the loans outstanding under the Credit Agreement):
- --------------------------------------------------------------------------------
Assumed Return on Portfolio
(Net of Expenses Except Interest) -10% -5% 0% 5% 10%
Corresponding Return to
Common Stockholder............... -14.62% -8.21% -1.80% 4.62% 11.03%
- --------------------------------------------------------------------------------
THE PURPOSE OF THIS TABLE IS TO ASSIST YOU IN UNDERSTANDING THE EFFECTS
OF LEVERAGE. THE FIGURES IN THE TABLE ARE HYPOTHETICAL AND THE ACTUAL RETURNS TO
A HOLDER OF COMMON STOCK MAY BE GREATER OR LESS THAN THOSE APPEARING IN THE
TABLE.
DISCOUNT FROM NET ASSET VALUE
Shares of closed-end funds frequently trade at a market price which is
less than the value of the net assets attributable to those shares. The
possibility that shares of the Fund will trade at a discount from net asset
value is a separate risk from the risk that the Fund's net asset value will
decrease. It should be noted, however, that in some cases, shares of closed-end
funds may trade at a premium to net asset value. The Fund's shares have traded
in the market above, at and below net asset value since the commencement of the
Fund's operations. The Fund cannot predict whether its shares will trade at,
below or above net asset value.
The risk of purchasing shares of a closed-end investment company that
might trade at a discount is more pronounced for investors who wish to sell
their shares in a relatively short period of time. For those investors,
realization of gain or loss on their investments is likely to be more dependent
upon the existence of a premium or discount than upon portfolio performance.
HIGH-YIELD 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. The
Rating Agencies generally regards these securities as predominantly speculative
with respect to capacity to pay interest and repay principal and riskier 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 credit ratings issued by credit rating services may not fully
reflect the true risks of an investment. For example, credit ratings typically
evaluate the safety of principal and interest payments, not market value risk,
of high-yield, high risk securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Although the
Investment Adviser considers ratings of recognized rating services such as
Moody's and S&P, the Investment Adviser primarily relies on its own credit
analysis, which includes a study of existing debt, capital structure, ability to
service debt and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. The
Investment Adviser continually monitors the investments in the Fund's portfolio
and carefully evaluates whether to dispose of or retain high-yield, high risk
securities whose credit ratings have changed. As of October 31, 1998,
approximately 90.28% of the market value of the Fund's total investments was
represented by fixed-income securities regarded by the Rating Agencies as below
investment grade (that is rated Ba1 or lower by Moody's or BB+ or lower by S&P).
At times a major portion of an issue of lower-rated securities may be
held by relatively few institutional purchasers. Although the Fund generally
considers such securities to be liquid because of the availability of an
institutional market for such securities, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund may find it more difficult to sell such securities when the
Investment Adviser believes it advisable to do so or may be able to sell such
securities only at prices lower than if the securities were more widely held. In
such circumstances, the Fund may also find it more difficult to determine the
fair value of such securities for purposes of computing the Fund's net asset
value. The Fund, in most instances, utilizes an independent pricing service to
determine the fair value of its securities for financial statement purposes
since market quotations are not readily ascertainable. Securities for which
market quotations are not readily available will be valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund. 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 the Board of Directors 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 illiquidity of
the Fund's assets to the extent that qualified institutional buyers become, for
a time, uninterested in purchasing these securities.
DIVIDENDS AND DISTRIBUTIONS
Subject to market conditions, the Fund seeks to provide holders of its
Common Stock with a relatively stable level of dividends per share. However, the
Fund cannot give any assurance that it will be able to maintain its current
level of dividends per share. The Board of Directors may, in its sole
discretion, change the Fund's current dividend policy or its current level of
dividends per share in response to market or other conditions. The Fund's
ability to maintain a stable level of dividends is a function of the yield
generated by the Fund's investments, which depends on market conditions at the
time those investments are made and on the performance of those investments.
To the extent that the Fund's portfolio investments generate income
exceeding that which is required to pay any target level of dividends set by the
Board of Directors, the Fund may decide to retain and accumulate that portion of
the Fund's income which exceeds such dividend level and may pay applicable taxes
thereon, including any federal income or excise taxes. Alternatively, to the
extent that the Fund's current income is not sufficient to pay any target level
of dividends set by the Board of Directors, the Fund may distribute to holders
of its Common Stock all or a portion of any retained earnings or make a return
of capital to maintain such target level. The Fund currently has accumulated
undistributed net investment income upon which it has paid taxes.
Based on information provided by the Investment Adviser on current
market conditions in the high yield bond market, the Board of Directors believes
that the Offer will not result in a change in the Fund's current level of
dividends per share for the foreseeable future.
The Fund will not be permitted to declare dividends or other
distributions with respect to the Common Stock or any series of preferred shares
or purchase shares of Common Stock or any series of preferred shares unless at
the time thereof the Fund meets certain asset coverage requirements, including
those imposed by the 1940 Act. Further, the Fund will not be permitted to pay
any dividends or other distributions with respect to the Common Stock or any
series of preferred shares if a default or an event of default has occurred and
is continuing under the Credit Agreement or if such payment of dividend or
distribution would result in a default or an event of default under the Credit
Agreement. Failure to pay dividends or other distributions could result in the
Fund ceasing to qualify as a regulated investment company under the Internal
Revenue Code.
In the event the Fund fails to satisfy certain asset coverage
requirements, the Fund may be required to immediately pay all loans (together
with interest accrued thereon) outstanding under the Credit Agreement. Repayment
of the loans under the Credit Agreement would reduce the Fund's leverage and
could negatively affect potential returns with respect to the Common Stock.
YEAR 2000 PROCESSING ISSUE
Many computer systems were designed using only two digits to signify
the year (ie. 98 for 1998). On January 1, 2000, if these systems are not
corrected, they may incorrectly interpret 00 as 1900 instead of 2000, leading to
computer shutdowns and errors. To the extent these systems conduct
forward-looking calculations, the computer problems may occur prior to January
1, 2000. Like other investment companies and financial and business
organizations, the Fund could be adversely affected in its ability to process
securities trades, price securities, provide shareholder account services and
otherwise conduct normal business operations if the computer systems used by the
Investment Adviser or other Fund service providers do not adequately address
this problem in a timely manner. The Investment Adviser does not anticipate that
the Year 2000 processing issue will have any material impact on its ability to
continue to service the Fund at current levels. In addition, the Investment
Adviser has sought assurances from the other Fund service providers that they
are taking the steps necessary to deal with the problems associated with
computer processing of the year 2000. The cost of any systems remediation by
persons other than the Fund or the Investment Adviser will not be borne by the
Fund. However, no assurance can be given that the actions taken by the
Investment Adviser or the Fund's other service providers will be sufficient to
avoid any adverse effect on the Fund.
Given the above-described investment risks inherent in the Fund,
investment in shares of the Fund should not be considered a complete investment
program and is not appropriate for all investors. You should carefully consider
your ability to assume these risks before making an investment in the Fund.
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their addresses, their ages and
their principal occupations for at least the past five years are set forth
below.
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH REGISTRANT AGE DURING PAST 5 YEARS
- ---------------- --------------- --- -------------------
<S> <C> <C> <C>
Richard E. Omohundro, Jr.*(3)......... President and Director 58 President or Co-President of Prospect
Prospect Street Investment Street Investment Management Co.,
Management Co., Inc. Inc. since June 1988.
60 State Street
Boston, MA 02109
John A. Frabotta*(2).................. Vice President, Treasurer, 56 Vice President of Prospect Street
Prospect Street Investment Director and Chief Investment Management Co., Inc.
Management Co., Inc. Investment Officer since June 1988. Director of
60 State Street BondNet Trading Systems, Inc.
Boston, MA 02109
John S. Albanese(1)(2)................ Director 46 Senior Counsel to Washington
8955 Mountain Ash Court Headquarters Services (a
Springfield, VA 22153 Department of Defense Agency)
since June 1992. Lieutenant Colonel
of the United States Army, serving
on active duty from 1977 to 1992 in
several legal positions.
C. William Carey(1)(3)................ Director 61 President, Carey Associates, Inc.
Carey Associates, Inc. since January 1998. Chairman and
150 Federal Street Chief Executive Officer of Town &
12th Floor Country Corporation from 1965
Boston, MA 02110 until December 1996.
Joseph G. Cote*(3).................... Director 56 Shareholder of Prospect Street
19 Mallard Lane Investment Management Co., Inc.
Lloyd Neck, NY 11743 Co-President of Prospect Street
Investment Management Co., Inc.
from August 1995 to February 1998
and from February 1989 to November
1993. Shareholder of Prospect
Street Investment Management Co.,
Inc. from 1989 to present.
Harlan D. Platt(1)(3)................. Director 48 Professor of Finance and Insurance,
Northeastern University College Northeastern University, College
of Business Administration of Business Administration, since
413 Hayden Hall 1981. Member of Board of
Boston, MA 02115 Directors, VSI Enterprises, Inc.
Christopher E. Roshier(3)(4).......... Director 52 Corporate Finance Director of
120 Strawberry Vale European Capital Company Limited
Twickenham, since 1990. Director of a number
Middlesex TWI 4SH of other public and private
United Kingdom companies in the United Kingdom.
Karen J. Thelen....................... Secretary 46 Vice President of Prospect Street
Prospect Street Investment Investment Management Co., Inc.
Management Co., Inc. since December 1992. Assistant
60 State Street Vice President of Prospect Street
Boston, MA 02109 Investment Management Co., Inc.
from December 1988 to December
1992.
- ----------
* Directors who are "interested persons" of the Fund, as defined in the 1940 Act.
(1) Directors who are members of the Audit Committee of the Fund's Board of Directors.
(2) Elected by holders of the Preferred Shares. The Preferred Shares were redeemed on May 14, 1998. Directors will
be elected by holders of the Common Stock at the March 12, 1999 stockholder's meeting.
(3) Elected by holders of the Common Stock and Preferred Shares voting together. The Preferred Shares were redeemed
on May 14, 1998. Directors will be elected by holders of the Common Stock at the March 12, 1999 stockholder's
meeting.
(4) Mr. Roshier is not a resident of the United States and has not authorized an agent to receive any notices. It
may not be possible, therefore, for investors to effect service of process within the United States upon Mr.
Roshier or to enforce against him, in the U.S. courts or foreign courts, judgments obtained in U.S. courts
predicated upon the civil liability provisions of the Federal securities laws of the United States. In
addition, it is not certain that a foreign court would enforce, in original actions, liabilities against Mr.
Roshier predicated solely upon the U.S. securities laws.
</TABLE>
Pursuant to the Articles of Incorporation, holders of the Common Stock
have voting rights of one vote per share. See "Description of Capital
Stock--Voting." Election of Directors is noncumulative; accordingly, holders of
a majority of the voting power represented by the outstanding shares of Common
Stock, voting together as a single class, may elect all of the Directors who are
subject to election by such class. If and to the extent the Fund issues any
shares of preferred stock, such shares will have such voting rights as may be
established by the Board of Directors or as may otherwise be required by law.
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
disinterested 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, 1998
aggregate remuneration of $91,000.
The following table summarizes the compensation paid to the Directors
and Officers of the Fund for the fiscal year ended October 31, 1998. The Fund is
not part of a fund complex.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
NAME OF AGGREGATE ACCRUED AS ANNUAL TOTAL
DIRECTOR COMPENSATION PART OF FUND BENEFITS UPON COMPENSATION
OR OFFICER FROM FUND EXPENSES RETIREMENT FROM FUND
- ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
John S. Albanese $23,000 none none $23,000
C. William Carey $23,000 none none $23,000
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 $24,000 none none $24,000
Christopher E. Roshier $21,000 none none $21,000
</TABLE>
The Articles of Incorporation, as amended, limit the personal liability
of Directors and officers to the Fund and its shareholders for monetary damages
to the fullest extent permitted by Maryland law. Based upon Maryland law and the
Articles of Incorporation, as amended, the Fund's Directors and officers have no
liability to the Fund and its shareholders for monetary damages except (a) for,
and to the extent of, actual receipt of an improper benefit in money, property
or services, or (b) in respect of an adjudication based upon a finding of active
and deliberate dishonesty which was material to the cause of action adjudicated.
In accordance with the 1940 Act, the Articles of Incorporation do not protect or
purport to protect Directors and officers against any liability to the Fund or
its security holders to which they would be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of duties
involved in the conduct of their office.
In addition, the Articles of Incorporation and bylaws provide that the
Fund will indemnify its Directors and officers against liabilities and expenses
in connection with the performance of their duties on behalf of the Fund to the
fullest extent permitted by Maryland law, subject to the applicable requirements
of the 1940 Act and the interpretation by the Staff of the SEC of such
requirements. Under Maryland law and the Articles of Incorporation, as amended,
the Fund is entitled and obligated to indemnify each Director or officer in
connection with any proceeding to which such Director or officer is made a party
by reason of service in his capacity as a Director or officer, unless it is
established that (1) the act or omission of the Director or officer was material
to the matter giving rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty, or (2) the Director or
officer actually received an improper personal benefit in money, property or
services, or (3) in the case of any criminal proceeding, the Director or officer
had reasonable cause to believe that the act or omission was unlawful. The
foregoing standards apply both as to third party actions and derivative suits by
or in the right of the Fund. Indemnification may be against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
Director or officer in connection with the proceeding. If the proceeding is one
by or in the right of the Fund, indemnification may not be made in respect of
any proceeding in which the Director or officer shall have been adjudged to be
liable to the Fund. In the view of the Staff of the SEC, an indemnification
provision is consistent with the 1940 Act if it (i) precludes indemnification
for any liability, whether or not there is an adjudication of liability, arising
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of duties as described in Section 17(h) and (i) of the 1940 Act
("disabling conduct") and (ii) sets forth reasonable and fair means for
determining whether indemnification shall be made; in the case of the Fund,
"reasonable and fair means" would include (1) a final decision on the merits by
a court or other body before whom the proceeding was brought that the person to
be indemnified ("indemnitee") was not liable by reason of disabling conduct
(including a dismissal for insufficiency of evidence) and (2) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of disabling conduct, by (a) the vote of a majority of a quorum
of Directors who are neither "interested persons" of the Fund as defined in
Section 2(a) (19) of the 1940 Act nor parties to the proceeding, or (b) a
written opinion of independent legal counsel.
The indemnification rights provided or authorized by the Articles of
Incorporation or applicable law are not exclusive of any other rights to which a
person seeking indemnification may be entitled. The Fund has also obtained
liability insurance at its expense for the benefit of its Directors and officers
which includes coverage for liability arising from the performance of their
duties on behalf of the Fund which is not inconsistent with the indemnification
provisions of the Articles of Incorporation and applicable law.
HOLDINGS OF 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 October
31, 1998. DTC holds of record 90% of the outstanding shares of Common Stock at
October 31, 1998. As far as is known to the Fund, no person other than DTC owned
of record or beneficially, shares of the Fund representing more than five
percent of the voting power of the Fund's outstanding shares. The Investment
Adviser of the Fund beneficially owned 29,802 shares of Common Stock at October
31, 1998.
As of October 31, 1998, all Directors and officers of the Fund, owned
in the aggregate less than 1% of the Common Stock.
THE INVESTMENT ADVISER
THE INVESTMENT ADVISER
The Investment Adviser is Prospect Street(R) Investment Management Co.,
Inc., a Massachusetts corporation having its principal offices at 60 State
Street, Boston, Massachusetts 02109. Organized in June 1988, the Investment
Adviser provides institutional clients with investment management services.
Richard E. Omohundro, Jr., President of the Investment Adviser, served
as a Vice President (1978 to 1983) and a Managing Director (1983 to 1988) of
Merrill Lynch and was Co-Manager of the Merrill Lynch High-yield Bond Group from
1978 through 1987. During that period, the Group raised approximately $13.6
billion in new high-yield securities through 107 issues and provided one of the
largest secondary trading markets for high-yield securities. In 1987, the Group
raised approximately $5.8 billion in new offerings of high-yield securities and
employed over 40 persons. Mr. Omohundro provides general advisory assistance to,
analyzes certain policy considerations with, and consults on a regular basis
with, the Fund's portfolio manager.
John A. Frabotta, a Vice President of the Investment Adviser, assists
Mr. Omohundro in carrying on the business of the Investment Adviser. Mr.
Frabotta was a Vice President of Merrill Lynch from 1979 through June 1988,
during which time he performed various research, structuring and marketing
functions involving high-yield securities. Mr. Frabotta has served as the Fund's
portfolio manager since September, 1990, responsible for the day-to-day
management of the Fund's portfolio.
ADVISORY AGREEMENT
The Investment Advisory Agreement between the Investment Adviser and
the Fund (the "Advisory Agreement") provides that, subject to the direction of
the Board of Directors of the Fund and the applicable provisions of the 1940
Act, the Investment Adviser is responsible for the actual management of the
Fund's portfolio. The responsibility for making decisions to buy, sell or hold a
particular investment rests with the Investment Adviser, subject to review by
the Board of Directors of the Fund and compliance with the applicable provisions
of the 1940 Act.
The Investment Adviser is not dependent on any other party in providing
the investment advisory services required for management of the Fund's
portfolio. The Investment Adviser may, however, consider analyses from various
sources, including broker-dealers with which the Fund does business. The
Investment Adviser is also responsible for providing the Fund with such
executive, data processing, clerical, accounting and bookkeeping services and
statistical and research data as are deemed advisable by the Fund's Board of
Directors (although the expenses thereof will be borne by the Fund as specified
below), except to the extent these services are provided by an administrator or
an accounting firm hired by the Fund.
Under the Advisory Agreement with the Fund, the Investment Adviser
receives a monthly advisory fee equal to 0.65% (on an annual basis) of the
average weekly value of the total assets of the Fund, less accrued and unpaid
dividends on any outstanding shares of preferred stock and less accrued
liabilities (excluding the principal amount of the Fund's "senior securities
representing indebtedness" as defined in the 1940 Act, not to exceed $50
million, and excluding the liquidation preference of any outstanding shares of
preferred stock or other senior securities) up to and including $175,000,000 of
such managed assets, 0.55% on the next $50,000,000 of such managed assets and
0.50% of the excess of such managed assets over $225,000,000. For the fiscal
years ended October 31, 1994, 1995, 1996, 1997 and 1998, the dollar value of
total advisory fees earned by the Investment Adviser aggregated approximately
$807,770, $874,812, $928,792, $1,146,665 and $1,582,842, 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 Offer because the
Investment Adviser's fee is based on the average weekly managed assets of the
Fund. It is not possible to state precisely the amount of additional
compensation the Investment Adviser will receive as a result of the Offer
because it is not known how many Shares will be subscribed for and because the
proceeds of the Offer will be invested in additional portfolio securities which
will fluctuate in value. However, based on the estimated proceeds from the Offer
assuming all the Rights are exercised in full at the Subscription Price of $ per
Share, the Investment Adviser would receive additional annual advisory fees of
approximately $ 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 Offer are "interested persons" of the Fund as that term is
defined in the 1940 Act. These three Directors could benefit indirectly from the
Offer because of their affiliations with the Investment Adviser. The other
Directors who voted to authorize the Offer are not "interested persons" of the
Fund.
The Fund bears all costs of its operation other than those incurred by
the Investment Adviser under the Advisory Agreement. In particular, the Fund
pays investment advisory fees, fees and expenses associated with the Fund's
administration, record keeping and accounting, fees and expenses for the
custodian of the Fund's assets, legal, accounting and auditing fees, taxes,
expenses of preparing prospectuses and shareholder reports, registration fees
and expenses, fees and expenses for the transfer and dividend disbursing agent,
the compensation and expenses of the Directors who are not otherwise employed by
or affiliated with the Investment Adviser or any of its affiliates, and any
extraordinary expenses. The Investment Adviser will reimburse the Fund for any
expenses (excluding brokerage commissions, interest, taxes and litigation
expenses) paid or incurred by the Fund in any year in excess of the most
restrictive expense limitation which is imposed by any state and to which the
Fund is then subject, if any. The Fund is not known to be subject to any state
expense limitations. Under the Advisory Agreement, the Investment Adviser
provides the Fund with office space, facilities and business equipment and
provides the services of executive and clerical personnel for administering
certain of the other affairs of the Fund. The Investment Adviser compensates
Directors of the Fund if such persons are employed by the Investment Adviser or
its affiliates.
The Advisory Agreement became effective on March 1, 1994 upon approval
by shareholders at a meeting held on March 1, 1994 and replaced the advisory
agreement in effect prior thereto. The Advisory Agreement as approved by the
shareholders included an increase in the level of advisory fees from 0.50% (on
an annual basis) of the Fund's annual net assets to the fees set forth above.
The Advisory Agreement was initially effective for a two year period and will
continue in effect from year to year thereafter if approved annually (i) by the
Board of Directors of the Fund or by the holders of a majority of the Fund's
outstanding voting securities (as defined under "Investment Policies and
Limitations"), voting as a single class, and (ii) by a majority of the Directors
who are not parties to the Advisory Agreement or "interested persons" (as
defined in the 1940 Act) of any such party. At a meeting held on December 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.
At the December 14, 1998 meeting of the Board of Directors, the Board
approved the renewal of the Advisory Agreement for a two-year term expiring in
March 2001 and, subject to shareholder approval, the Board approved an amendment
to the Advisory Agreement. The Board proposed that the Fund pay the Investment
Adviser a monthly advisory fee equal to 0.70% (on an annual basis) of the
average weekly value of the total assets of the Fund, less accrued and unpaid
dividends on any outstanding shares of preferred stock and less accrued
liabilities (excluding the principal amount of the Fund's "senior securities
representing indebtedness" as defined in the 1940 Act, not to exceed $75
million, and excluding the liquidation preference of any outstanding shares of
preferred stock or other senior securities) up to and including $200,000,000 of
such managed assets and an annual rate of 0.65% of the excess of such managed
assets over $200,000,000. The Board has approved these changes to the Investment
Adviser's fees and has recommended that the stockholders approve these changes
at the March 12, 1999 stockholder's meeting. The Fund will distribute to
stockholders a copy of the proxy statement addressing this proposed amendment to
the Advisory Agreement when available.
The Advisory Agreement provides that the Investment Adviser shall only
be liable for willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties and obligations under the Advisory Agreement.
PORTFOLIO TRADING
The Investment Adviser is responsible for decisions to buy and sell
securities and other portfolio holdings for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. Fixed-income securities are generally traded on a "net"
basis with dealers acting as principals for their own accounts without a stated
commission, although the price of the security will likely include a profit to
the dealer. In underwritten offerings, securities are usually purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain money market instruments may be purchased directly from an issuer, in
which case no commissions or discounts are paid.
In placing orders for portfolio securities of the Fund, the Investment
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Investment Adviser
will seek to execute each transaction at a price and commission, if any, which
provides the most favorable total cost or proceeds reasonably attainable in the
circumstances. In seeking the most favorable price and execution, the Investment
Adviser, having in mind the Fund's best interests, will consider all factors it
deems relevant, including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions. Though the Investment Adviser generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread of commission available. Within the framework of the policy of
obtaining the most favorable price and efficient execution, the Investment
Adviser will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Investment Adviser or the Investment Adviser's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular issuers and industries. Such services are used by the
Investment Adviser in connection with all of its investment activities and some
of such services obtained in connection with the execution of transactions for
the Fund may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions for
such other accounts, and the services furnished by such brokers may be used by
the Investment Adviser in providing investment management for the Fund.
Commission rates are established pursuant to negotiations based on the quality
and quantity of execution services provided by the broker or dealer in light of
generally prevailing rates. The management fee paid by the Fund will not be
reduced because the Investment Adviser and/or other clients receive such
services. The allocation of orders and the commission rates paid by the Fund
will be reviewed periodically by the Board of Directors.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), the Investment Adviser may cause the Fund to pay a
broker-dealer which provides "brokerage and research services" (as defined in
the 1934 Act) to the Investment Adviser, an amount of disclosed commission for
effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
For the fiscal years ended October 31, 1995, 1996, 1997 and 1998, 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, 1997 and 1998 was 80.71%, 108.33%, 176.04% and 159.93%, respectively.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock will be determined no less
frequently than the close of trading on the Exchange (generally 4:00 P.M. New
York City time) on the last Business Day of each week (generally Friday). It
will be determined by dividing the value of the net assets of the Fund (for the
purpose of determining the net asset value per share of the Common Stock, the
value of the Fund's net assets shall be deemed to equal the value of the Fund's
assets less the Fund's liabilities (including the principal amount of the loans
outstanding under the Credit Agreement and accrued and unpaid interest on such
loans), by the total number of shares of Common Stock outstanding. In valuing
the Fund's assets for all purposes other than the determination of the
discounted value of such assets pursuant to the respective Investment
Guidelines, portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, will be valued at the mean between
the most recently quoted bid and asked prices provided by the principal market
makers. Any security or option for which the primary market is on an exchange
will be valued at the last sale price on such exchange on the day of valuation
or, if there was no sale on such day, the last bid price quoted on such day.
Options for which the primary market is not on an exchange or which are not
listed on an exchange will be valued at market value or fair value if no market
exists. Securities and assets for which market quotations are not readily
available will be valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. While no single standard
for determining fair value exists, as a general rule, the current fair value of
a security would appear to be the amount which the Fund could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial condition of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same type at the time of purchase, special reports prepared by analysts,
information as to any transaction or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
Short-term debt securities which mature in less than 60 days will be
valued at amortized cost if their term to maturity from the date of acquisition
by the Fund was less than 60 days or by amortizing their value on the 61st day
prior to maturity if their term to maturity from the date of acquisition by the
Fund was more than 60 days, unless this method is determined by the Board of
Directors not to represent fair value. Repurchase agreements will be valued at
cost plus accrued interest.
SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a
discount from net asset value. To address this possibility, the Board of
Directors presently contemplates that the Fund may from time to time consider
either the repurchase of shares of its Common Stock on the open market or the
making of tender offers for such Common Stock. Since commencement of the Fund's
operations, no such open market purchases or tender offers have been made. The
Fund may borrow money to finance the repurchase of shares, subject to compliance
with 1940 Act Asset Coverage, Section 18 of the 1940 Act and the other
limitations described under "Investment Policies and Limitations--Certain
Investment Strategies--Additional Leverage." Shares of Common Stock may not be
repurchased, however, (i) if applicable asset coverage requirements under the
1940 Act (i.e., 300% with respect to the loans under the Credit Agreement and
200% with respect to any shares of preferred stock that may hereafter be issued)
are not met or would not be met following such repurchase, (ii) when payments of
principal of or interest on the loans under the Credit Agreement are in default,
(iii) when dividends on any outstanding shares of preferred stock that may be
hereafter issued 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 Internal Revenue Code (which would make
the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund); (2) the Fund would not be able to liquidate portfolio
securities in an orderly manner and consistent with the Fund's investment
objective and policies in order to repurchase Common Stock; or (3) there is, in
the Board's judgment, any material (a) legal action or proceeding instituted or
threatened challenging such transactions or otherwise materially adversely
affecting the Fund, (b) suspension of or limitation on prices for trading
securities generally on the Exchange or any foreign exchange on which portfolio
securities of the Fund are traded, (c) declaration of a banking moratorium by
federal, state or foreign authorities or any suspension of payment by banks in
the United States, New York State or foreign countries in which the Fund
invests, (d) limitation affecting the Fund or issuers of its portfolio
securities imposed by federal, state or foreign authorities on the extension of
credit by lending institutions or on the exchange of foreign currency, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States or other countries
in which the Fund invests, or (f) other event or condition which would have a
material adverse effect on the Fund or its shareholders if shares of Common
Stock were repurchased. The Board of Directors may modify these conditions from
time to time in light of experience and may determine to make a tender offer
even if one of the above conditions exists. If a tender offer is made, such
tender offer shall be made in accordance with the 1934 Act and the 1940 Act.
Any tender offer made by the Fund will be at a price equal to the net
asset value of the shares on a date subsequent to the Fund's receipt of all
tenders. Each offer will be made and shareholders notified in accordance with
the requirements of the 1934 Act and the 1940 Act, either by publication or
mailing or both. Each offering document will contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
The Fund will purchase shares tendered by a shareholder at any time during the
period of the tender offer in accordance with the terms of the offer unless it
determines to accept none of them (based upon one of the conditions set forth
above). Each person tendering shares will be required to submit a check in an
amount not to exceed $25 payable to the Fund, which will be used to help defray
the costs associated with effecting the tender offer. This fee will be imposed
upon each tendering shareholder whose tendered shares are purchased in the
tender offer and will be imposed regardless of the number of shares purchased.
The Fund expects the cost to the Fund of effecting a tender offer will be
greater than the aggregate of all service charges received from those who tender
their shares. Costs associated with the tender offer will be charged against
capital of the Fund. During the period of a tender offer, the Fund's
shareholders will be able to obtain the Fund's current net asset value by use of
a toll-free telephone number.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Directors may elect to submit to the Fund's
stockholders at any time a proposal to convert the Fund to an open-end
investment company and in connection therewith to retire the loans under the
Credit Agreement and any outstanding shares of preferred stock, as would be
required upon such conversion by the 1940 Act. In determining whether to
exercise its discretion to submit this issue to shareholders, the Board of
Directors would consider all factors then relevant, including the relationship
of the market price of the Common Stock to net asset value, the extent to which
the Fund's capital structure is leveraged and the possibility of re-leveraging,
the spread, if any, between yields on high-yield securities in the Fund's
portfolio as compared to interest and dividend charges on senior securities and
general market and economic conditions. In addition to any vote required by
Maryland law, conversion of the Fund to an open-end investment company would
require the affirmative vote of the holders of a majority (as defined in the
1940 Act) of each class of the shares entitled to be voted on the matter.
Shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charges, if
any, as might be in effect at the time of redemption. If the Fund converted to
an open-end investment company, it could be required to liquidate portfolio
securities to meet requests for redemption, and the Common Stock would no longer
be listed on the Exchange. In the event the Fund converts to open-end status,
the Fund would only be able to borrow through bank borrowings within certain
limits and would not be allowed to have preferred stock.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
It is the Fund's present policy, which may be changed by the Board of
Directors, to pay dividends on a monthly basis to holders of Common Stock of
investment company taxable income (but not including short-term capital gains or
"net capital gains," defined as the excess of net long-term capital gains over
net short-term capital losses), and to distribute any net short-term capital
gains and net capital gains annually. Under present law, if the Fund were to
retain ordinary income or net capital gains, taxes would be imposed with respect
to those amounts. Subject to market conditions, the Fund seeks to provide
holders of its Common Stock with a relatively stable level of dividends.
However, there can be no assurance that the Fund will be able to maintain its
current level of dividends, and the Board of Directors of the Fund may, in its
sole discretion, change the Fund's current dividend policy or its current level
of dividends in response to market or other conditions. See "Risk Factors and
Special Considerations--Dividends and Distributions." See also "Federal
Taxation" and "Description of Capital Stock--Dividends and Distributions" and
"Description of Credit Agreement" for a discussion of certain possible
restrictions on the Fund's ability to declare dividends on the Common Stock.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by State
Street Bank and Trust Company (the "Bank"), as agent under the Plan, unless a
shareholder elects to receive cash. An election to receive cash may be revoked
or reinstated at the option of the shareholder. Shareholders whose shares are
held in the name of a broker or nominee will have distributions reinvested
automatically by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee, or unless the
shareholder elects to receive distributions in cash. If the service is not
available, such distributions will be paid in cash. Shareholders whose shares
are held in the name of a broker or nominee should contact the broker or nominee
for details. All distributions to investors who elect not to participate (or
whose broker or nominee elects not to participate) in the Plan, will be paid by
check mailed directly to the record holder by the Bank, as dividend paying
agent.
The Bank will furnish each person who buys shares in the offering with
written information relating to the Plan. Included in such information will be
procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Directors of the Fund declare a dividend or capital gains
distribution payable either in shares of Common Stock or in cash, as holders of
Common Stock may have elected, then nonparticipants in the Plan will receive
cash and participants in the Plan will receive the equivalent in shares of
Common Stock valued at the lower of market price or net asset value. Whenever
market price is equal to or exceeds net asset value at the time shares are
valued for the purpose of determining the number of shares equivalent to the
cash dividend or capital gains distribution, participants will be issued shares
of Common Stock at the net asset value most recently determined as provided
under "Determination of Net Asset Value," but in no event less than 95% of the
market price. If the net asset value of the Common Stock at such time exceeds
the market price of Common Stock at such time, or if the Fund should declare a
dividend or capital gains distribution payable only in cash, the Bank will, as
agent for the participants, buy Common Stock in the open market, on the Exchange
or elsewhere, for the participants' accounts. If, before the Bank has completed
its purchases, the market price exceeds the net asset value of the Common Stock,
the average per share purchase price paid by the Bank may exceed the net asset
value of the Common Stock, resulting in the acquisition of fewer shares than if
the dividend or capital gains distribution had been paid in Common Stock issued
by the Fund. The Bank will apply all cash received as a dividend or capital
gains distribution to purchase Common Stock on the open market as soon as
practicable after the payment date of such dividend or capital gains
distribution, but in no event later than 30 days after such date, except where
necessary to comply with applicable provisions of the federal securities laws.
The Bank maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Common Stock in
the account of each Plan participant will be held by the Bank in noncertificated
form in the name of the participant, and each shareholder's proxy will include
those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Bank's fees for handling the reinvestment of dividends
and capital gains distributions will be paid by the Fund. There will be no
brokerage charges with respect to shares of Common Stock issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
stock or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Bank's open market purchases
in connection with the reinvestment of dividends and capital gains
distributions.
The automatic reinvestment of dividends and capital gains distributions
will not relieve participants of any income tax which may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid after written notice
of the change sent to the members of the Plan at least 90 days before the record
date for such dividend or capital gains distribution. The Plan also may be
amended or terminated by the Bank, with the Fund's prior written consent but,
except when necessary or appropriate to comply with applicable law or the rules
or policies of a regulatory body, only on at least 90 days' written notice to
participants in the Plan. All correspondence concerning the Plan should be
directed to the Bank at P.O. Box 8209, Boston, Massachusetts 02266.
FEDERAL TAXATION
The following discussion offers only a brief outline of the federal
income tax consequences of investing in the Common Stock and is based on the
federal tax laws in effect on the date hereof. Such tax laws are subject to
change by legislative, judicial or administrative action, possibly with
retroactive effect. Investors should consult their own tax advisors for more
detailed information and for information regarding the impact of state, local
and foreign taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund has qualified and intends to continue to qualify and to elect
to be treated as a regulated investment company under the Internal Revenue Code.
To qualify as a regulated investment company, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in stocks, securities or
currencies (including but not limited to, gains from options, futures and
forward contracts), and (b) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
As a regulated investment company, in any fiscal year with respect to
which the Fund distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends and interest but excludes net
long-term capital gains in excess of net short-term capital losses), the Fund
(but not its shareholders) generally will be relieved of U.S. federal income tax
on its net investment income and net capital gains (net long-term capital gains
in excess of the sum of net short-term capital losses and capital loss
carryovers from prior years, if any) that it distributes to shareholders. To the
extent the Fund retains its net capital gains for investment, it will be subject
under current tax rates to a federal income tax at a maximum effective rate of
35% on the amount retained. See "Federal Income Tax Treatment of Holders of
Common Stock" below. Amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax payable by the Fund. To avoid this tax, the Fund must distribute, or
be deemed to have distributed, during each calendar year an amount equal to the
sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the twelve-month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. See "Risk Factors and Special Considerations--Dividends and
Distributions."
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Internal Revenue Code, the Fund will be taxed in
the same manner as an ordinary corporation, and distributions to its
shareholders will not be deductible by the Fund in computing its taxable income.
In addition, in the event of failure to qualify, the Fund's distributions, to
the extent derived from the Fund's current or accumulated earnings and profits,
will constitute dividends (eligible for the corporate dividends-received
deduction, subject to certain requirements) which are taxable to shareholders as
ordinary income, even though those distributions might otherwise (at least in
part) have been treated in the shareholders' hands as long-term capital gains.
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of the
Common Stock and/or to any outstanding shares of preferred stock until the asset
coverage is restored. See "Description of Capital Stock--Dividends and
Distributions." Such a suspension of distributions might prevent the Fund from
distributing 90% of its investment company taxable income, as is required in
order to qualify for taxation as a regulated investment company, or cause the
Fund to incur a tax liability or a non-deductible 4% excise tax on its
undistributed taxable income (including gain) or both.
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to prepay any outstanding loans under the Credit Agreement
in order to maintain or restore the requisite asset coverage and avoid failure
to remain qualified as a regulated investment company. The determination to
prepay any outstanding loans under the Credit Agreement and the amounts to be
repaid, if any, will be made in the sole discretion of the Fund. Furthermore,
the Fund will be required to make mandatory prepayment of the loans under the
Credit Agreement in the event failure to maintain 1940 Act Asset Coverage is not
cured in a timely manner.
Use of the Fund's cash to prepay any outstanding loans under the Credit
Agreement may adversely affect the Fund's ability to distribute annually at
least 90% of its investment company taxable income, which distribution is
required to qualify for taxation as a regulated investment company. Depending on
the size of the Fund's assets relative to its outstanding senior securities,
prepayment of any outstanding loans under the Credit Agreement might restore
asset coverage. Payment of distributions after restoration of asset coverage
could requalify (or avoid a disqualification of) the Fund as a regulated
investment company, depending upon the facts and circumstances.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds
are original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of a
debt instrument over the issue price of the instrument. Original issue discount
on a taxable obligation is required to be currently included in the income of
the holder of the obligation generally on a constant interest rate basis
resembling the economic accrual of interest. The tax basis of the holder of an
original issue discount debt instrument is increased by the amount of original
issue discount thereon properly included in the holder's gross income as
determined for federal income tax purposes. Current inclusion in gross income of
original issue discount on a taxable debt instrument is required, even though no
cash is received at the time the original issue discount is required to be
included in gross income. Because such income may not be matched by a
corresponding cash distribution to the Fund, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to the
investors.
The Fund's transactions in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) will be subject to special provisions of the Internal
Revenue Code that, among other things, may affect the character of gains and
losses realized by the Fund (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the Fund, defer Fund
losses, and affect the determination of whether capital gains and losses are
characterized as long-term or short-term capital gains or losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were disposed of at their fair market value at the close of the taxable year)
which may cause the Fund to recognize income without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% and 98%
distribution requirements for avoiding income and excise taxes. The Fund will
monitor its transactions, will make the appropriate tax elections, and will make
the appropriate entries in its books and records when it acquires any foreign
currency, option, futures contract, forward contract, or hedged investment in
order to mitigate the effect of these rules and prevent disqualification of the
Fund as a regulated investment company and minimize the imposition of income and
excise taxes.
If the Fund fails to qualify as a regulated investment company for any
year, it generally must pay out its earnings and profits accumulated in that
year less an interest charge to the U.S. Treasury on 50% of such earnings and
profits before it can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF COMMON STOCK
For any period during which the Fund qualifies as a regulated
investment company for federal income tax purposes, dividends paid out of the
Fund's net investment income and short-term capital gains to holders of Common
Stock will be taxable as ordinary income. It is expected that dividends received
by corporate shareholders will not be eligible for the dividends received
deduction as the Fund's income is expected to be income other than dividends
from domestic corporations. Distributions of net capital gains designated by the
Fund as "capital gain dividends," if any, are taxable as long-term capital
gains, regardless of how long the shareholder has held the Fund's shares. See
the discussion below for a summary of the capital gains rates applicable to
capital gain dividends. Capital gain dividends are not eligible for the
corporate dividends received deduction. Dividends and distributions will be
taxable to shareholders as if actually distributed, even if they are reinvested
in additional shares of the Fund. Shareholders receiving distributions in the
form of newly issued shares will have a cost basis in each share received equal
to the fair market value of a share of the Fund on the distribution date.
Generally, dividends paid by the Fund are treated as received in the
taxable year in which the distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in such a month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
Any distribution by the Fund to a holder of Common Stock not made out
of the Fund's current and accumulated earnings and profits will be treated as a
return of capital to each holder of Common Stock, will reduce the basis of each
share of Common Stock with respect to which it is distributed and will be
subject to tax as capital gain to the extent that the distribution exceeds the
basis of the share of Common Stock with respect to which it is distributed.
Investors should carefully consider the tax implications of buying shares of
Common Stock just prior to a distribution, as the price of shares purchased at
this time may reflect the amount of the forthcoming distribution which will,
except in unusual circumstances, be taxable when received.
After the close of each taxable year, the Fund will identify for its
holders of Common Stock the portions of its distributions that are attributable
to capital gains and to ordinary income, respectively.
The Internal Revenue Code limits certain miscellaneous itemized
deductions by individuals, including deductions of investment expenses, to the
extent the aggregate of such deductions exceeds 2% of an individual's federal
adjusted gross income. The Internal Revenue Code would treat such expenses
incurred by a regulated investment company as being indirectly incurred by the
shareholders of the investment company. Shareholder expenses of publicly offered
regulated investment companies are exempted from the application of the 2%
floor. Thus, the limitation will not apply with respect to indirect deductions
through the Fund. Such expenses will also be fully deductible by the Fund's
corporate shareholders.
If the Fund suffers a net taxable loss in any taxable year, the holders
of Common Stock will not be permitted to utilize that loss in their tax returns.
A shareholder will realize gain or loss on the sale or exchange of
shares of the Fund in an amount equal to the difference between the
shareholder's adjusted basis in the shares sold or exchanged and the amount
realized on their disposition. Generally, gain recognized by a shareholder on
the sale of shares held for more than one year will be taxable as long-term
capital gain. If a shareholder holds shares primarily for sale to customers in
the ordinary course of business rather than for investment, any gain recognized
on the sale of those shares would be taxable as ordinary income. Any loss
recognized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
recognized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of capital gain dividends received or treated
as having been received by the shareholder with respect to such shares.
Shareholders who acquire shares on multiple dates should consult their tax
advisors to determine how to allocate the cost of stock for basis purposes.
The maximum tax rates applicable to net capital gains recognized by
individuals and other non-corporate taxpayers are the same as ordinary income
rates for capital assets held for one year or less and 20% for capital assets
held for more than one year. Shareholders should consult their own tax advisors
regarding the availability and effect of a certain tax election to
mark-to-market shares of Common Stock held on January 1, 2001. Capital gains or
losses recognized by corporate shareholders are subject to tax at the ordinary
income tax rates applicable to corporations. The tax rates for capital gains
described above apply to distributions of capital gain dividends by regulated
investment companies such as the Fund as well as to sales and exchanges of
shares in regulated investment companies such as the Fund. With respect to
capital losses recognized on dispositions of shares of Common Stock held six
months or less where such losses are treated as long-term capital losses to the
extent of prior capital gain dividends received on such shares, it is unclear
how such capital losses offset the capital gains referred to above. Holders of
Common Stock should consult their own tax advisors as to the application of the
new capital gains rates to their particular circumstances.
In general, federal withholding taxes at a 30% rate or a lower rate
established by treaty will apply to distributions to shareholders (except to
those distributions designated by the Fund as capital gain dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations to the extent
that such income is not "effectively connected" with a U.S. trade or business
carried on by the shareholders.
In the event the Fund retains any net capital gains, it may designate
such retained amounts as undistributed capital gains in a notice to its
shareholders. In the event such a designation is made, shareholders subject to
U.S. tax would include in income, as long-term capital gains, their
proportionate share of such undistributed amounts, but would be allowed a credit
or refund, as the case may be, for their proportionate share of the 35% tax paid
by the Fund. If the designation is made, for U.S. federal income tax purposes,
the tax basis of shares owned by a shareholder would be increased by an amount
equal to the difference between (i) the amount included in such shareholder's
income as long-term capital gains and (ii) such shareholder's proportionate
share of the 35% tax paid by the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31%
of all taxable distributions paid to shareholders who (i) fail to provide the
Fund with their correct taxpayer identification number, (ii) fail to make
required certifications or (iii) have been notified or with respect to whom the
Fund has been notified by the U.S. Internal Revenue Service that distributions
to such shareholder are subject to backup withholding. Corporate shareholders
and certain other shareholders specified in the Internal Revenue Code are exempt
from such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.
The U.S. Internal Revenue Service has issued Treasury regulations,
generally effective for payments made after December 31, 1998, concerning the
withholding of tax and reporting for certain amounts paid to nonresident aliens
and foreign corporations. Among other things, these Treasury regulations may
require holders of Common Stock that are not United States persons within the
meaning of the Internal Revenue Code to furnish new certification of their
foreign status after December 31, 1998. Investors should consult their tax
advisors concerning the applicability and effect of such Treasury regulations on
an investment in Common Stock.
OTHER TAXATION
Investors are advised to consult their own tax advisors with respect to
the application to their own circumstances of the above-described general
taxation rules and with respect to the federal, state, local or foreign tax
consequences to them of an investment in the Common Stock.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Fund consists of 100,000,000 shares
of Common Stock, $.03 par value and 1,000,000 shares of preferred stock, $1.00
par value. As of October 31, 1998, 19,805,323 shares of Common Stock are
outstanding.
The shareholders of the Fund approved a one-for-three reverse stock
split, which became effective on April 1, 1998. As a result of the reverse stock
split, the number of authorized shares of Common Stock remained at 100,000,000
and the number of issued and outstanding Common Stock changed from 59,048,822
shares of Common Stock on March 31, 1998 to 19,711,875 shares of Common Stock on
April 30, 1998.
At the Annual Meeting of Shareholders held on March 10, 1998, the
Fund's shareholders approved an amendment to the Fund's Amended and Restated
Articles of Incorporation authorizing the creation of a new class of preferred
stock, par value of $1.00 per share. Pursuant to the Fund's Amended and Restated
Articles of Incorporation, the Board of Directors may issue up to 1,000,000
shares of preferred stock in one or more series having such terms as the Board
of Directors may designate.
Thus, the Board of Directors, without shareholder approval, has the
authority under the Articles of Incorporation, as amended, to, and reserves the
right to, issue any series of preferred stock and Common Stock, from time to
time, and any such shares shall be deemed "preferred shares" and "Common Stock",
respectively. As of October 31, 1998, the Board has not authorized the issuance
of any preferred shares. The preferred shares and the Common Stock issued are,
or upon issuance will be, fully paid and nonassessable and will have no
preemptive rights or conversion rights. As used herein, the term "holder of
preferred shares" refers to a beneficial owner of preferred shares unless the
context otherwise requires.
DIVIDENDS AND DISTRIBUTIONS
Under the 1940 Act and the Articles of Incorporation, as amended, the
Fund may not (i) declare dividends or other distributions on the Common Stock or
preferred shares, or purchase or redeem any shares of Common Stock or preferred
shares, if at the time thereof (and after giving effect thereto) asset coverage
with respect to the Fund's senior securities representing indebtedness,
including the loans under the Credit Agreement, 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 of a class which is stock,
including any preferred shares, would be less than 200% (or such higher
percentage as may in the future be required by law). Under the Credit Agreement,
the declaration of dividends or other distributions on or the purchase or the
redemption of preferred shares or Common Stock will be prohibited at any time
payments of principal of or interest on the loans under the Credit Agreement are
in default.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the Preferred Shares, it will be distributed to the
holders of the Common Stock. The term "net investment income" includes interest,
dividends, short-term capital gains and other income received or accrued less
interest payments with respect to the loans under the Credit Agreement, the
advisory fee, bank custodian and surety custodian charges, taxes (except capital
gains taxes) and other expenses properly chargeable against income, but does not
include net capital gains, stock dividends, transfer taxes, brokerage or other
capital charges or distributions designated as a return of capital. Any net
capital gains (defined as the excess of net long-term capital gains over net
short-term capital losses) of the Fund will be distributed annually to the
holders of the Common Stock, subject to the prior rights of the holders of the
preferred shares, subject to the foregoing and any requirements of Maryland law.
VOTING
Holders of shares of Common Stock have voting rights of one vote per
share. Election of Directors is noncumulative; accordingly, holders of a
majority of the voting power represented by the outstanding shares of Common
Stock may elect all of the Directors who are subject to election by such class,
as the case may be.
The Common Stock votes separately as a class on amendments to the
Articles of Incorporation, as amended, that would adversely affect their
respective contractual rights as expressly set forth in the Articles of
Incorporation, as amended. In addition to any other vote required by the
Articles of Incorporation, as amended, or applicable law, (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 shares of Common Stock; (2) the adoption of any plan of
reorganization adversely affecting the Common Stock shall require the approval
of a majority of the outstanding shares of each such class so affected; and (3)
the approval of a majority (as defined under "Investment Objective and
Policies") of the outstanding shares of Common Stock shall be required to
approve any action requiring a vote of security holders under Section 13(a) of
the 1940 Act including, among other things, changes in the Fund's
sub-classification as a closed-end investment company, changes in its investment
objective or changes in the investment restrictions described under "Investment
Policies and Limitations--Investment Restrictions." The Common Stock will also
vote separately to the extent otherwise required under Maryland law or the 1940
Act as in effect from time to time, and, to the extent required under the 1940
Act, action by the Fund's shareholders shall require a vote of a majority of the
Fund's outstanding voting securities as defined under "Investment Policies and
Limitations."
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 7, 1998. The next annual meeting of shareholders is scheduled for
March 9, 1999.
DESCRIPTION OF THE CREDIT AGREEMENT
COMMITMENT/BORROWINGS
The Fund entered into a credit agreement dated as of April 30, 1998
with BankBoston, N.A. ("BankBoston") providing for a $30 million revolving loan
facility. On April 30, 1998, the Fund borrowed $30 million under the credit
agreement to (1) refinance existing temporary indebtedness to BankBoston and (2)
redeem the Fund's outstanding 200 shares of taxable auction rate preferred
stock, together with dividends accrued thereon through the date of redemption.
On July 10, 1998, the Fund entered into an amended and restated credit
agreement (the "Credit Agreement") with BankBoston and another lender (the
"Lenders") that amended and restated the terms of the original credit agreement.
Under the Credit Agreement, the Fund may borrow, repay and reborrow loans from
the Lenders from time to time provided that the aggregate principal amount of
all loans outstanding at any time shall not exceed the lesser of (x) the
aggregate commitment amounts of the Lenders, which is $50 million (the
"Commitment Amounts") or (y) the maximum amount (the "Maximum Amount") the Fund
is permitted to borrow at such time under applicable laws and regulations,
including the Investment Company Act, the limitation on borrowing adopted by the
Fund under its investment policies and objectives or elsewhere, and any
agreements with federal, state, local or foreign governmental authorities or
regulators.
The obligations of the Lenders to make any loan at any time under the
Credit Agreement are subject to the following conditions, among others: (i) all
representations and warranties in the Credit Agreement are true and correct;
(ii) no default or event of default shall have occurred and be continuing
immediately before and after such borrowing; (iii) immediately after giving
effect to such loan, the aggregate amount of loans outstanding under the Credit
Agreement shall not exceed the lesser of (x) the Commitment Amounts or (y) the
Maximum Amount; and (iv) the Senior Notes of the Fund payable December 1, 1998
and bearing interest at a fixed annual rate of 6.53% (the "Senior Notes") shall
have been or will be with the proceeds of such borrowing, redeemed and repaid in
full.
Under the Credit Agreement, on July 24, 1998 the Fund borrowed $20
million and redeemed in full $20 million in principal amount of the outstanding
Senior Notes, plus interest accrued through the date of redemption. The proceeds
of any future borrowing by the Fund may only be used by the Fund for certain
specific purposes as described below.
On August 17, 1998, the Fund repaid $5 million in principal amount of
the loans under the Credit Agreement plus accrued interest. On October 13, 1998,
the Fund repaid an additional $5 million in principal amount of the loans. On
December 9, 1998, the Fund borrowed $5 million in principal amount of loans
under the Credit Agreement. As of the date hereof, loans aggregating $45 million
in principal amount were outstanding under the Credit Agreement.
USE OF PROCEEDS
The proceeds of the loans made under the Credit Agreement to the Fund
may only be used by the Fund to (i) redeem and cancel all of the Senior Notes
(which occurred on July 24, 1998) and (ii) finance the purchase of securities
for the Fund's portfolio.
MATURITY
The commitment under the Credit Agreement will expire on April 30,
2001, although it may be extended once by 364 days, upon the Fund giving 90 days
written notice prior to the expiration date of the commitment to each Lender
requesting such extension. All outstanding amounts under the Credit Agreement
must be repaid on or prior to the expiration date if there is no extension. If
the commitment is not extended, it shall expire on the expiration date.
The Fund has the right at any time and from time to time prior to
expiration of the commitment to reduce the unborrowed portion of the aggregate
Commitment Amounts of the Lenders by $1,000,000 or an integral multiple of
$1,000,000 or to terminate entirely each Lender's commitment. The Fund may
reduce or terminate Lender commitments at any time by giving seven business days
prior written notice.
INTEREST
Advances under the Credit Agreement will bear interest, at the Fund's
option, at either: (i) London Interbank Offered Rate ("LIBOR") for interest
periods of one, two, three, six or nine months plus 0.55% per annum (loans
bearing such interest rate are referred to as the "LIBOR Rate Loans") or (ii)
the higher of (x) the annual rate of interest announced from time to time by
Bank Boston, N.A., as its "base rate" and (y) the "Federal Funds Effective Rate"
plus 0.50% per annum (loans bearing such interest rate are referred to as the
"Base Rate Loans").
Interest on Base Rate Loans will be payable monthly. Interest on LIBOR
Rate Loans will be payable on the last day of each interest period applicable
thereto and, in each case of an interest period of two, three, six or nine
months, on the one month anniversary of the first day of such interest period.
Unused portion of the Commitment Amounts will be subject to commitment
fees of 0.09% per year.
COVENANTS
The Credit Agreement contains a variety of negative and affirmative
covenants. Such covenants in the Credit Agreement include: (i) a requirement
that the Fund limit its total liabilities such that its total liabilities do not
exceed 25% of its total assets; (ii) a limitation on indebtedness of the Fund
other than certain permitted indebtedness; (iii) a limitation on making
distributions or paying dividends to shareholders if a default or an event of
default shall have occurred and is continuing or will result from such
distributions; (iv) limitations on creating any liens on the assets of the Fund
other than liens for taxes, assessments or governmental charges, liens under the
Note Purchase Agreement, as in effect at such time and encumbrances created in
connection with Fund's investments provided that such encumbered assets do not
exceed 5% of the total assets of the Fund; (v) a limitation on the ability of
the Fund to effect any amendment to the Note Purchase Agreement and related
documents without prior written consent of certain Lenders who hold either at
least 51% of the principal amount of loans outstanding under the Credit
Agreement or if no loan is outstanding, at least 51% of the aggregate Commitment
Amounts (the "Required Lenders"); (vi) a requirement to maintain existence;
(vii) a requirement to comply with applicable laws; (viii) a requirement to
maintain records; (ix) a requirement to permit access to properties and permit
inspections and (x) requirements to deliver certain financial statements and
other information.
EVENTS OF DEFAULT
The following are "Events of Default" under the Credit Agreement: (i)
failure of the Fund to pay any principal when due, or failure of the Fund to pay
any interest, any fees or any other amount payable under the Credit Agreement
within five days of their due date; (ii) failure by the Fund to comply with
various covenants contained in Article V of the Credit Agreement; (iii) failure
by the Fund in performance of any other covenant or agreement (other than those
covered by (i) and (ii) above) contained in the Credit Agreement and other
related documents which has continued for ten business days (as such term is
defined in the Credit Agreement); (iv) any representation, warranty,
certification made by the Fund in the Credit Agreement or any other related
document shall prove to be incorrect in any material respect; (v) failure by the
Fund to make any payment in respect of indebtedness aggregating more than
$500,000 after expiration of applicable grace period; (vi) any event or
condition shall occur that results in the acceleration of the maturity of the
indebtedness of the Fund exceeding $500,000 in aggregate principal amount; (vii)
certain events involving bankruptcy, insolvency or reorganization of the Fund;
(viii) a judgment or order for the payment of money in excess of $500,000 shall
be rendered against the Fund and such judgment or order shall continue
unsatisfied and unstayed for a period of 10 days; (ix) the investment advisory
agreement which is in effect on the effective date of the Credit Agreement shall
terminate or the Investment Advisor shall cease to be the investment advisor of
the Fund and (x) the custodian of the Fund, as existing on the effective date of
the Credit Agreement, shall cease to be the custodian of the Fund.
If an Event of Default specified in any of the clauses above occurs,
then and in every such case, BankBoston, as agent, if requested by certain
Required Lenders, shall (i) by notice to the Fund terminate the commitments
under the Credit Agreement and (ii) by notice to the Fund declare the loans
(together with accrued interest) thereon to become immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are deemed waived by the Fund; provided that in case of any Event of Default
relating to an event involving bankruptcy, insolvency or reorganization of the
Fund, automatically without any notice to the Fund or any other act of the Agent
or the Lenders, the commitments shall terminate and loans (together with accrued
interest thereon) shall become immediately due and payable.
ASSET MAINTENANCE
The Fund is required to satisfy the requirements of the 1940 Act with
respect to asset maintenance for senior securities representing indebtedness.
The Fund must maintain, as of the last business day of each month in which any
of the loans under the Credit Agreement are outstanding, asset coverage with
respect to senior securities representing indebtedness, including the loans, of
at least 300% (or such higher percentage as may in the future be specified in
the 1940 Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition of paying
dividends on common stock) ("1940 Act Asset Coverage").
ASSIGNMENT AND PARTICIPATION
Subject to fulfillment of certain conditions, the Credit Agreement
provides for assignments of, and participation in, the Credit Agreement.
Assignments must be in minimum amounts of $5 million or an integral multiple of
$1 million in excess of $5 million.
AMENDMENT OF THE CREDIT AGREEMENT
Subject to certain exceptions, the Credit Agreement may be amended,
supplemented or otherwise modified with the consent of the Required Lenders and,
if rights and duties of BankBoston are affected, by BankBoston.
GOVERNING LAW
The Credit Agreement and other related documents will be governed by,
and construed in accordance with, the laws of the Commonwealth of Massachusetts.
CUSTODIAN, TRANSFER AGENTS, DIVIDEND
DISBURSING AGENT, PAYING AGENTS AND REGISTRARS
The Fund's securities and cash are held by State Street Bank and Trust
Company, whose principal business address is Two Heritage Drive, North Quincy,
Massachusetts 02171, as custodian (the "Custodian") under a custodian contract.
The Fund has not selected any foreign custodians or sub-custodians. However, if
the Fund determines that it should have any foreign custodians or sub-custodians
to maintain any of its foreign securities, the Board of Directors will make such
selection following a consideration of a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to perform capably custodial services for the Fund,
the reputation of the institution in its national market, the political and
economic stability of the country in which the institution is located, and the
risks of potential nationalization or expropriation of Fund assets.
State Street Bank and Trust Company serves as dividend disbursing
agent, as agent under the Plan and as transfer agent and registrar for the
Common Stock.
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed upon for the
Fund by its special counsel, Rogers & Wells LLP, New York, New York, and by its
special Maryland counsel, Piper & Marbury L.L.P., Baltimore, Maryland. Certain
matters will be passed on for the Dealer Managers by Skadden, Arps, Slate,
Meagher & Flom (Illinois), Chicago, Illinois.
REPORTS TO SHAREHOLDERS
The Fund will send audited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The audited Financial Statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said report. The address of Arthur
Andersen LLP is 225 Franklin Street, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, D.C. 20549, a Registration
Statement under the Securities Act with respect to the Shares offered hereby.
Further information concerning these securities and the Fund may be found in the
Registration Statement, of which this Prospectus constitutes a part, on file
with the SEC. The Registration Statement may be inspected without charge at the
SEC's office in Washington, D.C., and copies of all or any part thereof may be
obtained from such office after payment of the fees prescribed by the SEC.
The Fund is subject to the informational requirements of the 1934 Act,
and the 1940 Act, and in accordance therewith files reports and other
information with the SEC. Such reports and other information can be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, Washington, D.C. 20549 and the SEC's regional offices at Seven World
Trade Center, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports and other information
concerning the Fund may also be inspected at the offices of the Exchange.
INCORPORATION OF FINANCIAL STATEMENTS BY REFERENCE
The Fund's Annual Report, which includes financial statements for the
fiscal year ended October 31, 1997, and the Fund's Semi-Annual Report, which
includes financial statements for the six months ended April 30, 1998, each of
which either accompanies this Prospectus or has previously been provided to the
person to whom this prospectus is being sent, is incorporated herein by
reference with respect to all information other than information set forth in
the Letter to Shareholders included therein. Any statement contained in the
Fund's Annual Report and Semi-Annual Report that was incorporated herein shall
be deemed modified or superseded for purposes of this Prospectus to the extent a
statement contained in this Prospectus varies from such statement. Any such
statement so modified or superseded shall not, except as so modified or
superseded, be deemed to constitute a part of this Prospectus. The Fund will
furnish, without charge, a copy of its Annual Report and a copy of its
Semi-Annual Report, upon request to State Street Bank and Trust Company, 150
Royall Street, Corporate Stock Transfer, Canton, Massachusetts 02021, telephone
(800) 426-5523 Monday through Friday from 9:00 a.m. to 5:00 p.m.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR THE DEALER MANAGERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY PROSPECT STREET(R)
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION 6,700,000 Shares of Common Stock
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO Issuable Upon Exercise of
ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE Rights To Subscribe for
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS Such Shares
PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY IN ANY CIRCUMSTANCES IN PROSPECT STREET(R)
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. HIGH INCOME PORTFOLIO INC.
TABLE OF CONTENTS
Common Stock
PAGE
Prospectus Summary.................................... 2
Fee Table............................................. 7 -------------------
Financial Highlights.................................. 8 PROSPECTUS
Capitalization at October 31, 1998.................... 9 -------------------
Information Regarding Senior Securities............... 9
Trading and Net Asset Value Information............... 10
The Fund.............................................. 11
The Offer............................................. 13
Use of Proceeds....................................... 24 PAINEWEBBER INCORPORATED
Investment Policies and Limitations................... 24
Risk Factors and Special Considerations............... 33 GRUNTAL & CO. LLC
Directors and Officers................................ 38
The Investment Adviser................................ 41
Portfolio Trading..................................... 43
Determination af Net Asset Value...................... 44
Share Repurchases; Conversion to Open-End Status...... 45
Dividends and Distributions; Dividend Reinvestment
Plan ............................................... 47 ---------------------
Federal Taxation...................................... 48
Description of Capital Stock.......................... 53
Description of The Credit Agreement................... 54
Custodian, Transfer Agents, Dividend.................. 57
Legal Opinions........................................ 57
Reports to Shareholders............................... 58
Experts............................................... 58
Further Information................................... 58
=========================================================== ========================================================
</TABLE>
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
(i) -- Schedule of Investments as of April 30, 1998
(unaudited)*
(ii) -- Balance Sheet as of April 30, 1998 (unaudited)*
(iii) -- Statement of Operations for the six months ended April
30, 1998 (unaudited)*
(iv) -- Statement of Cash Flows for the six months ended April
30, 1998 (unaudited)*
(v) -- Statement of Changes in Net Assets for the six months
ended April 30, 1998 and 1997 (unaudited)*
(vi) -- Financial Highlights for each Share of Common Stock
Outstanding for the six months ended April 30, 1998
(unaudited) and the fiscal years ended October 31, 1993,
1994, 1995, 1996 and 1997*
(vii) -- Notes to Financial Statements for the six months ended
April 30, 1998 (unaudited)*
(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 through 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.
- ------------
*Incorporated by reference.
(2) EXHIBITS
(a) -- Articles of Amendment and Restatement, as amended*
(b) -- Amended and Restated By-Laws of the Registrant+
(c) -- Not applicable
(d) (1) -- Specimen certificate of Common Stock**
(2) -- Amended and Restated Credit Agreement dated July 10,
1998 with BankBoston, N.A. and another lender#
(3) -- Form of Subscription Certificate and Instructions#
(4) -- Form of Notice of Guaranteed Delivery#
(5) -- Form of DTC/Nominee Over-Subscription Exercise Form#
(6) -- Form of Subscription Agent Agreement between the
Registrant and State Street Bank and Trust Company#
(7) -- Information Agent Agreement between the Registrant and
Corporate Investor Communications, Inc.#
(e) -- Dividend Reinvestment Plan of the Registrant+
(f) -- Not applicable
(g) -- Advisory Agreement between Registrant and Prospect
Street Investment Management Co., Inc.+
(h) -- Form of Dealer Manager Agreement (including the form
of the Selling Group Agreement and Soliciting Dealer
Agreement)#
(i) -- Not applicable
(j) -- Custodian Agreement between the Registrant and State
Street Bank and Trust Company+
(k)(1) -- Registrar, Transfer Agency and Service Agreement
between the Registrant and State Street Bank and Trust
Company+
(l)(1) -- Opinion and Consent of Rogers & Wells 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) -- Financial Data Schedule#
* Incorporated by reference to filing with the Securities and Exchange
Commission on April 17, 1998.
** Exhibits incorporated by reference to Pre-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form N-2, File No. 33-21949.
# To be filed by amendment.
+ Incorporated by reference to the Registrant's Registration Statement on Form
N-2, File No. 333-2067.
++ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2, File No. 333-2067.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit (h) of Item 24(2) of this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration Statement:
Registration fees.................................................. $19,446
National Association of Securities Dealers, Inc. fees..............
New York Stock Exchange listing fee................................
Printing (other than stock certificates)...........................
Accounting fees and expenses.......................................
Legal fees and expenses............................................
Dealer Managers' expense reimbursement.............................
Information Agent fees and expenses................................
Subscription Agent fees and expenses...............................
Miscellaneous......................................................
Total........................................................... $
-------
The above listing of expenses will be completed by amendment.
ITEM 27 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant and the following corporations (as indicated) are under
common control of Richard E. Omohundro, Jr. ("Omohundro, Jr."), Joseph G. Cote
("Cote") and John A. Frabotta ("Frabotta") by virtue of their stock ownership
and positions with such corporations which are indicated below. None of the
corporations are subsidiaries of the Registrant.
1. Prospect Street Investment Management Co., Inc.
(a Massachusetts corporation) ("PSIM")
Business: Investment adviser registered under the Investment Advisers
Act of 1940. PSIM serves as investment adviser of the Registrant and
Prospect International High Income Portfolio N.V.
CONTROL PERSONS POSITIONS
- --------------- ---------
Omohundro, Jr ..... 33 1/3% shareholder, President, Chairman of the Board,
Chief Executive Officer, Treasurer and Director
Cote .............. 33 1/3% shareholder, Director
Frabotta .......... 33 1/3% shareholder, Vice President, Secretary and Director
2. Prospect Street Strategic Debt Management Co., Inc.
(a Massachusetts corporation) (PSSDM")
Business: Investment Adviser registered under the Investment Advisers
Act of 1940. PSSDM serves as investment adviser to
-------------------.
CONTROL PERSONS POSITIONS
- --------------- ---------
Omohundro, Jr ..... 33 1/3% shareholder, Co-President, Chief Executive
Officer, Treasurer and Director
Frabotta .......... 33 1/3% shareholder, Vice-President and Director
3. COMO Securities, Inc.
(a Massachusetts corporation) ("COMO")
Business: COMO is a registered broker/dealer.
CONTROL PERSONS POSITIONS
- --------------- ---------
Omohundro, Jr ..... 30% shareholder, Co-President, Chief Executive Officer,
Treasurer and Director
Cote .............. 30% shareholder, Co-President and Director
Frabotta .......... 10% shareholder, Vice President, Secretary and Director
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF OCTOBER 31, 1998)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
- -------------- ------------------------
Common Stock.............................. 4,103
ITEM 29. INDEMNIFICATION
Reference is made to the Registrant's Articles of Amendment and
Restatement filed as Exhibit 2(a), the Registrant's Amended and Restated By-laws
filed as Exhibit 2(b), the Dealer Manager Agreement filed as Exhibit 2(h) and
the Advisory Agreement filed as Exhibit 2(g), which provide for indemnification
or contribution. The Registrant's officers, Directors and agents also have the
benefit of the Maryland General Corporation law provisions regarding
indemnification and insurance, including but not limited to Section 2-418 and
Section 2-405.2 thereof, subject also to the indemnification permitted under
Sections 17(h) and 17(i) of the 1940 Act and the regulations and releases
promulgated by the SEC thereunder.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The description of the business of Prospect Street Investment
Management Co., Inc. is set forth under the caption "The Investment Adviser" in
the Prospectus forming part of this Registration Statement.
The information as to the Directors and officers of Prospect Street
Investment Management Co., Inc. set forth in Prospect Street Investment
Management Co., Inc.'s Form ADV filed with the Securities and Exchange
Commission on July 7, 1988 (File No.
801-32529) and as amended through the date hereof is incorporated herein by
reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Registrant: Prospect Street High Income Portfolio Inc.
60 State Street
Boston, Massachusetts 02109
Investment Adviser: Prospect Street Investment Management Co., Inc.
60 State Street
Boston, Massachusetts 02109
Transfer Agent for Common
Stock: State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266
Custodian: State Street Bank and Trust Company
Two Heritage Drive
North Quincy, Massachusetts 02171
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend the offering of its shares until
it amends its Prospectus if:
(1) subsequent to the effective date of this Registration
Statement, the net asset value per share declines more than 10% from
its net asset value per share as of the effective date of the
Registration Statement; or
(2) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(b) Registrant hereby undertakes:
(1) that for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(4) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(5) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on the 18th day of December, 1998.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By /s/ RICHARD E. OMOHUNDRO, JR.
-----------------------------
RICHARD E. OMOHUNDRO, JR.
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard E. Omohundro, Jr. and John A.
Frabotta, and each of them acting individually, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all Amendments (including pre-effective and
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, granting unto said attorneys-in-fact and
agents, and each of them acting individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, 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 either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
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
/s/ RICHARD E. OMOHUNDRO, JR. (Principal Executive December 18, 1998
- ----------------------------- Officer)
RICHARD E. OMOHUNDRO, JR.
Director, Vice President December 18, 1998
and Treasurer (Principal
/s/ JOHN A. FRABOTTA Financial and Accounting
- ----------------------------- Officer)
JOHN A. FRABOTTA
/s/ JOHN S. ALBANESE Director December 18, 1998
- -----------------------------
JOHN S. ALBANESE
/s/ C. WILLIAM CAREY Director December 18, 1998
- -----------------------------
C. WILLIAM CAREY
/s/ JOSEPH G. COTE Director December 18, 1998
- -----------------------------
JOSEPH G. COTE
/s/ HARLAN D. PLATT Director December 18, 1998
- -----------------------------
HARLAN D. PLATT
/s/ CHRISTOPHER E. ROSHIER Director December 18, 1998
- -----------------------------
CHRISTOPHER E. ROSHIER
