<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 1999
SECURITIES ACT FILE NO. 333-69243
INVESTMENT COMPANY ACT FILE NO. 811-5557
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 23 [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:
<TABLE>
<S> <C>
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, NEW YORK, NEW YORK 10166 SUITE 2100
CHICAGO, ILLINOIS 60606
</TABLE>
----------------
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- [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<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 shares $10.44 $69,948,000 $19,446(2)
===============================================================================================================
(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.
(2) Previously paid.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8}A{ OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8}A{, MAY DETERMINE.
================================================================================
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
FORM N-2
CROSS-REFERENCE SHEET
PARTS A AND B OF THE PROSPECTUS*
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
---------------------------------- ----------------------
<S> <C>
1. Outside Front Cover ........................ Outside Front Cover Page of Prospectus
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; Credit Agreement.
Description of Credit Agreement; Custodian,
Transfer Agent, Dividend Disbursing Agent and
Registrar
10. Capital Stock, Long-Term Debt, and Other
Securities ................................. Description of Capital Stock; Description of Credit
Agreement; Federal Taxation; Investment Policies
and Limitations; Dividends and Distributions;
Dividend Reinvestment Plan; Financial Highights
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings .......................... Not Applicable
13. Table of Contents of the Statement of
Additional Information ................... Not Applicable
14. Cover Page ................................. Not Applicable
15. Table of Contents .......................... Not Applicable
16. General Information and History ............ Prospectus Summary; The Fund
17. Investment Objective and Policies .......... Prospectus Summary; Investment Policies and
Limitations; Portfolio Trading
18. Management ................................. Prospectus Summary; The Investment Adviser;
Directors and Officers
19. Control Persons and Principal Holders of
Securities ............................... Directors and Officers
20. Investment Advisory and Other Practices Prospectus Summary; The Investment Adviser;
Custodian, Transfer Agent, Dividend Disbursing
Agent and Registrar; 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>
PROSPECT STREET(R) HIGH INCOME PORTFOLIO INC.
6,630,663 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 January 26, 1999. 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.
Shareholders on the record date who receive less than three rights will be
entitled to buy one share. Also, shareholders on the record date 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 January 22, 1999, the last reported net asset value
per share of the Fund's common stock was $8.18 and the last reported sales
price of a share on the Exchange was $9.75.
The subscription price per share will be $8.70. This offer will expire at
5:00 p.m., New York City time, on February 19, 1999 unless the Fund extends
the offering as described in this prospectus.
PER SHARE TOTAL
--------- -----
Subscription Price ................ $8.70 $57,686,768
Sales Load ........................ $0.33 $ 2,163,254
Proceeds to Fund .................. $8.37 $55,523,514
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. SEE THE "RISK FACTORS AND
SPECIAL CONSIDERATIONS" SECTION ON PAGE 31 OF THIS PROSPECTUS FOR A MORE
COMPREHENSIVE DISCUSSION OF 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.
Shareholders who do not 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. Also, shareholders should note that
as of the date of this prospectus, the subscription price per share for the
offer is greater than the Fund's net asset value per share. If the Fund's net
asset value per share should increase to a point where the subscription price
per share is at or below the 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 extent of this
dilution at this time because the Fund does not know what the net asset value
per share will be at the expiration of the offer or what proportion of the
shares will be subscribed.
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.
The prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read and retain it for future reference.
----------------
PAINEWEBBER INCORPORATED GRUNTAL & CO. LLC
----------------
THE DATE OF THIS PROSPECTUS IS JANUARY 25, 1999
<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 so the Fund may be in a better position to take advantage of investment
opportunities and increase the diversification of its portfolio while
achieving other net benefits to the Fund. The Fund's investment adviser
believes, as a result of recent events in the financial markets, that there
are a number of attractive investment opportunities in the high-yield, high
risk bond market. In addition, the investment adviser may, under current
market conditions, invest the net proceeds of the offer in better quality
high-yield, high risk securities in an effort to enhance the overall credit
quality of the Fund's portfolio.
The Board also 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. The issuance of
additional shares may also enhance the liquidity of the Fund's shares on the
New York Stock Exchange.
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
and available leverage opportunities, the Board believes that the offer will
not result in a change in the Fund's current level of dividends for the
foreseeable future.
The Board of Directors also has considered the impact of the offer on the
Fund's net asset value per share. The subscription price per share for the
offer is $8.70. The subscription price per share represents a premium of 6.36%
to the Fund's net asset value per share of $8.18 as of January 22, 1999.
Assuming that all rights are exercised and there is no change in the net asset
value per share, the offer (after expenses) should result in an increase to
the Fund's net asset value per share. If, however, the Fund's net asset value
per share increases to a level at or above the subscription price per share,
the offer (after expenses) would result in dilution, which could be
substantial, to the Fund's net asset value per share.
IMPORTANT TERMS OF THE OFFER
Aggregate number of shares offered 6,630,663
Number of transferable rights One right for each whole share owned on
issued to each shareholder the record date
Subscription ratio One share for every three rights (1-for-3)
Subscription price per share $8.70
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
IMPORTANT DATES TO REMEMBER
EVENT DATE
- ------ --------------------
Record Date ............................................ January 26, 1999
Subscription Period .................................... January 26, 1999 to
February 19, 1999*
Expiration Date ........................................ February 19, 1999*
Subscription Certificates and Payment for Shares Due+ .. February 19, 1999*
Notice of Guaranteed Delivery Due+ ..................... February 19, 1999*
Payment for Guarantees of Delivery Due ................. February 24, 1999*
Confirmation Mailed to Participants .................... March 3, 1999*
- ------------
* 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
February 19, 1999, unless the offer is extended.
The Fund's shares of common stock are expected to trade on the Exchange
with due bills attached from January 22, 1999 through January 27, 1999. You
are encouraged to contact your broker, bank or financial adviser about your
ability to participate in the offer if you anticipate purchase or sale
activity during this period.
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. 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 February 19,
1999, unless the offer is extended.
(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 3.75% 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 $475,000, which
includes up to $100,000 that may be paid to the Dealer Managers as partial
reimbursement for their expenses relating to the Offer.
FOREIGN RESTRICTIONS
Subscription certificates will not be mailed to record date shareholders
whose record addresses are outside the United States. 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 $55,048,514.
This figure is based on the subscription price of $8.70 per share and assumes
all 6,630,663 shares offered are sold and that offering expenses estimated at
approximately $475,000 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. While the proceeds are invested in
U.S. Government securities and other high-quality, short-term money market
instruments, the proceeds will not be invested in securities consistent with
the Fund's objective of high current income.
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: (888) 266-2038
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 shareholders' 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 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, at the completion of the offer, 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.
As of the date of this prospectus, the subscription price per share for
the offer is greater than the Fund's net asset value per share. Assuming that
all rights are exercised and there is no change in the net asset value per
share, the aggregate net asset value of each shareholder's shares of common
stock should increase as a result of the offer. If the Fund's net asset value
per share should increase to a point where the subscription price per share is
at or below the Fund's 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. For a more detailed discussion about
dilution, please refer to "Risk Factors and Special Considerations --
Dilution."
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) was approximately 6.3% as of December 31, 1998 while the high-
yield market currently offers interest income at annualized rates of
approximately 10.5% to 12.0%.
At the date of this prospectus, the Fund intends, but is not committed, to
add incremental leverage following the completion of the offer. Inability to
increase, or delays in increasing, the Fund's leverage could, depending on
market conditions, adversely affect the Fund's earnings, distributions and net
asset value.
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"
and "Description of Credit Agreement."
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 December 31, 1998, approximately 93.92% 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 Ba 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) ..................................................... 0.69%
----
Interest Expense ....................................................... 1.18%
----
Other Expenses ......................................................... 0.57%
----
Total Annual Expenses .............................................. 2.44%
====
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 $62 $113 $167 $313
- ----------
(1) The Fund has agreed to pay the Dealer Managers a fee for their
financialadvisory, marketing and soliciting services equal to 3.75% 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 2.50% 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 0.50% 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 $100,000. 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 currently pays the investment adviser a monthly fee at an annual
rate ranging from 0.65% to 0.50%. Subject to shareholder approval, the
Fund's Board of Directors has approved an increase in the investment
adviser's fee which would increase the annual rate of the fee to range
from 0.70% to 0.65%. 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 2.44%. 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 which are included herein. 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>
DECEMBER 5,
1988
(COMMENCEMENT
FOR THE FISCAL YEARS ENDED OCTOBER 31, OF OPERATIONS)
------------------------------------------------------------------------------------------- TO OCTOBER 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value --
beginning of period . $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75 $ 12.09 $ 11.67 $ 9.90 $ 20.46 $ 27.45
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment income 1.30# 1.38# 1.50# 1.35 1.44# 1.89# 1.86 1.65 2.94 3.93
Net realized and
unrealized gain
(loss) on investments (3.76)# .72# .60# .09 (1.14)# 1.17# 0.21 1.68 (10.29) (6.96)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations $ (2.46) $ 2.10 $ 2.10 $ 1.44 $ .30 $ 3.06 $ 2.07 $ 3.33 $ (7.35) $ (3.03)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions:
Dividends from
accumulated net
investment income
To preferred
stockholders ...... (.03) (.09) (.12) (.15) (.09) (.18) (0.30) (0.48) (0.66) (0.57)
To common
stockholders ...... (1.26) (1.26) (1.26) (1.26) (1.35) (1.86) (1.35) (1.08) (2.28) (3.36)
Dividends to common
stockholders from
paid-in-capital .... -- -- -- -- -- -- -- -- (0.27) (0.03)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions $ (1.29) $ (1.35) $ (1.38) $ (1.41) $ (1.44) $ (2.04) $ (1.65) $ (1.56) $ (3.21) $ (3.96)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Effect of sale of
common stock and
related expenses from
rights offering $ (.22) $ (.51) $ (.12) $ -- $ (.54) $ (.36) $ -- $ -- $ -- $ --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value -- end $ 7.97 $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75 $ 12.09 $ 11.67 $ 9.90 $ 20.46
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Per share market
value: end of period $ 10.25 $ 12.39 $ 12.00 $ 11.64 $ 10.50 $ 12.75 $ 12.00 $ 10.50 $ 7.50 $ 18.00
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Total investment
return ............ (7.63)% 14.82% 15.29% 28.57% (7.78)% 23.25% 27.99% 57.36% (50.21)% (31.33)%
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Net assets, end of
period, applicable to
common stock (a) .... $157,800 $175,909 $120,711 $ 93,309 $ 92,072 $ 79,438 $ 55,178 $ 53,040 $45,028 $ 92,487
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Net assets, end of
period, applicable to
preferred stock (a) . $ -- $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 30,000 $ 30,000 $30,000 $ 30,000
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Net assets, end of
period (a) .......... $157,800 $195,909 $140,711 $113,309 $112,072 $ 99,438 $ 85,178 $ 83,040 $75,028 $122,487
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Ratio of operating
expenses to average
net assets,
applicable to common
stock ............... 2.67% 2.30% 3.06% 3.27% 3.27% 3.10% 3.68% 4.64% 8.80% 6.37%*
Ratio of net
investment income to
average net assets,
applicable to common
stock ............... 11.92% 11.94% 13.20% 13.47% 12.25% 13.49% 15.08% 14.63% 18.94% 17.78%*
Ratio of operating
expenses to average
net assets** ........ 2.18%+ 1.81%+ 2.21%+ 2.28%+ 2.30%+ 2.13%+ 2.28%+ 2.93%+ 6.15%+ 4.89%+*
Ratio of net
investment income to
average net assets** 9.72% 9.42% 9.51% 9.39% 8.64% 9.26% 9.33% 9.24% 13.23% 13.88%*
Portfolio turnover
rate ................ 156.48% 176.04% 108.33% 80.71% 72.00% 117.20% 97.86% 114.00% 63.50% 89.70%*
(a) Dollars in thousands.
* 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 1.20%, 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>
<CAPTION>
CAPITALIZATION AT OCTOBER 31, 1998
AMOUNT OUTSTANDING AMOUNT HELD
EXCLUSIVE OF AMOUNT BY THE FUND
HELD BY THE FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT ACCOUNT
-------------- ----------------- ------------------ -----------
<S> <C> <C> <C>
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
</TABLE>
INFORMATION REGARDING SENIOR SECURITIES
The following table shows certain information regarding each class of
senior security of the Fund as of the end of each fiscal year of the Fund
since its inception.
<TABLE>
<CAPTION>
INVOLUNTARY
ASSET COVERAGE LIQUIDATION APPROXIMATE MARKET
AT TOTAL AMOUNT FOR DEBT(4) PREFERENCE VALUE PER
OCTOBER 31 OUTSTANDING OR SHARES(5) PER SHARE SHARE OR NOTE
---------- ----------- ------------ --------- -------------
Senior Extendible
<S> <C> <C> <C> <C> <C>
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 $4,945 -- --
- ------------
(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 redeemed
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 15, 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 24, 1998. As of the date hereof, the Fund has $50 million in loans
outstanding under the Credit Agreement.
(4) Amount shown is per $1,000 of Senior Extendible Note, Senior Note or credit facility, as the
case may be. Calculated by subtracting the Fund's total liabilities (not including bank loans
and 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, the Senior Notes or credit
facility, 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 PREMIUM/(DISCOUNT)
MARKET PRICE VOLUME NET ASSET VALUE TO NET ASSET VALUE(%)
------------------------ (HUNDREDS ---------------------- ----------------------
QUARTER ENDED HIGH LOW OF SHARES) 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 5,073.9 12.0000 11.7000 10.94 2.56
April 30, 1998 ......................... 12.7500 12.1875 4,880.6 11.8000 11.6100 8.05 4.97
July 31, 1998 .......................... 12.5000 12.0000 3,234.5 11.8400 11.2400 6.76 5.57
October 31, 1998 ....................... 12.0625 9.6250 4,492.5 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 December 18, 1998 (the last trading date on which the Fund
publicly reported its net asset value prior to the announcement of the Offer)
and on January 22, 1999 (the last trading date on which the Fund publicly
reported its net asset value prior to the date of this prospectus) was $8.30
and $8.18, respectively, and the last reported sales price of a share of the
Fund's common stock on the Exchange on those dates was $10.56 and $9.75,
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 $50
million is outstanding as of the date of this prospectus) with BankBoston and
(ii) 19,837,988 shares of the Fund's common stock, par value $0.03 per share
(the "Common Stock"), as of the date of this prospectus. 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 ("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%, 12.63% and 0.58% for the calendar years 1992, 1993, 1994, 1995, 1996,
1997 and 1998, respectively. The ten year U.S. Treasury Bond produced a total
return of 6.52%, 11.94%, -6.08%, 23.68%, 0.89%, 10.10% and 12.65% for the
calendar years 1992, 1993, 1994, 1995, 1996, 1997 and 1998, respectively. See
"Financial Highlights" for information concerning the Fund's return.
New issue activity of high-yield debt securities was low in 1991, by
historical standards, totaling $10.1 billion with high-yield debt retirements
totaling $26.0 billion. Net new issue activity of high-yield debt securities
totaled $46.1 billion, $22.2 billion, $26.7 billion, $60.2 billion, $126
billion and $138.9 billion for the calendar years 1993, 1994, 1995, 1996, 1997
and 1998, respectively. The statistical information with respect to new issue
activity is based upon information the Fund obtained from the Credit Suisse
First Boston High Yield Handbook. The spread between the yield on U.S.
Treasury securities and the high-yield market fluctuated between 315 and 583
basis points (3.15% to 5.83%) during the 1992 to 1997 period, which is more in
line with the historical spread relationship. For the calendar year 1998 the
spread fluctuated between 337 and 749 basis points (3.37% to 7.49%). Based on
information from Donaldson, Lufkin & Jenrette Securities Corporation, the high
yield premium over treasury yields (i.e. the spread of yields on the DLJ High
Yield Index relative to yields of 10 year U.S. Treasuries as a percentage of
those U.S. Treasuries) from January 31, 1986 through December 31, 1998 has
averaged 71% and the high yield premium over treasury yield was 138% as of
December 31, 1998. Over the same time period, the high yield premium over
treasury yields has ranged from a monthly low of 36% as of August 1987 to a
monthly high of 160% as of October 1998. The high yield premium over treasury
yields has been 69%, 52%, 49%, 100%, 136%, 109%, 82%, 70%, 54%, 86%, 53%, 63%
and 138% as of December 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994,
1995, 1996, 1997, and 1998, respectively.
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, 1997 and 1998 were
9.33%, 2.89%, 0.96%, 0.44%, 2.24%, 1.14%, 1.08% and 1.06%, respectively. 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 $6.0 billion in 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,
14,742,608 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 $44.5
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 $19.5 million. All of the rights issued
by the Fund pursuant to the rights offerings completed in March 1993 and
November 1993 were exercised and, as a result, 4,625,000 new shares of Common
Stock were issued March 1993 with net proceeds to the Fund of approximately
$16.7 million and 6,210,000 new shares of Common Stock were issued in December
1993 with net proceeds to the Fund of approximately $21.3 million. All of the
net proceeds from the exercise of the rights issued pursuant to the prior
rights offerings have been invested in new securities in accordance with the
Fund's investment objective.
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 the Fund's portfolio while achieving other net benefits to
the Fund. The Investment Adviser believes, as a result of recent events in the
financial markets, that there are a number of attractive investment
opportunities in the high-yield, high risk bond market. In addition, the
investment adviser may under current market conditions invest the net proceeds
of the Offer (as defined herein) in better quality high-yield, high risk
securities in an effort to enhance the overall credit quality of the Fund's
portfolio.
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.
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 and
available leverage opportunities, 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."
The Board of Directors has also considered the impact of the Offer on the
Fund's net asset value per share. The Subscription Price per share for the
offer is $8.70. The Subscription Price per share represents a premium of 6.36%
to the Fund's net asset value per share as of January 22, 1999. Assuming that
all rights are exercised and there is no change in the Fund's net asset value
per share, the Offer (after expenses) should result in an increase to the
Fund's net asset value per share. If, however, the Fund's net asset value per
share increases to a level at or above the Subscription Price per share, the
Offer (after expenses) would result in dilution, which could be substantial,
to the Fund's net asset value per share.
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 January 26, 1999 (the "Record
Date"), transferable rights ("Rights") entitling the holders thereof to
subscribe for an aggregate of 6,630,663 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 January 26, 1999 and ends at 5:00
P.M., New York City time, on February 19, 1999, 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 March 1999. "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 $8.70 (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 December 18, 1998 (the last trading date on which the Fund
publicly reported its net asset value prior to the announcement) and on
January 22, 1999 (the last trading date on which the Fund publicly reported
its net asset value prior to the date of this Prospectus) was $8.30 and $8.18,
respectively, and the last reported sales price of a share of the Fund's
Common Stock on the Exchange on those dates was $10.56 and $9.75,
respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 P.M., New York City time, on February 19,
1999, 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) 794-6352 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
40 Campanelli Drive
Braintree, Massachusetts 02184
U.S.A.
(3) BY HAND:
Securities Transfer and Reporting Services Inc.
c/o Boston EquiServe
100 William St. Galleria
New York, New York 10038
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 February 24, 1999, 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: (888) 266-2038
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 $8.70 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
(telescope) 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
$8.70 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 February
24, 1999, 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 EXPIRATION DATE OR THE DATE
GUARANTEED PAYMENTS ARE DUE UNDER A NOTICE OF GUARANTEED DELIVERY, 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 is expected to be conducted on
a when issued basis from January 27, 1999 until and including January 29, 1999
and thereafter are expected to trade on a regular way basis until and
including February 18, 1999, the last Business Day prior to the Expiration
Date. Exercising Rights Holders are encouraged to contact their broker, bank
or financial adviser for more 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 February 17, 1999 (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 3.75% 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 2.50% 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 0.50% 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 $100,000 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 February 16, 1999, 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 ........................................... January 26, 1999
Subscription Period ................................... January 26, 1999 to
February 19, 1999*
Expiration Date ....................................... February 19, 1999*
Subscription Certificates and Payment for Shares Due+ . February 19, 1999*
Notice of Guaranteed Delivery Due+ .................... February 19, 1999*
Payment for Guarantees of Delivery Due ................ February 24, 1999*
Confirmation Mailed to Participants ................... March 3, 1999*
- ------------
*Unless the Offer is extended.
**Shares of Common Stock of the Fund are expected to trade on the Exchange
with due bills attached from January 22, 1999 through January 27, 1999. You
are encouraged to contact your broker, bank or financial adviser about your
ability to participate in the Offer if you anticipate purchase or sale
activity during such period.
+A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed Delivery
by February 19, 1999, unless the Offer is extended.
USE OF PROCEEDS
If all the Rights are exercised in full at the Subscription Price of $8.70
per Share, the net proceeds of the Offer to the Fund assuming all 6,630,663
shares offered hereby are sold are estimated to be approximately $55,048,514,
after deducting offering expenses payable by the Fund estimated at
approximately $475,000. 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. While the proceeds are invested in U.S. Government
securities and other high-quality, short-term money market instruments, the
proceeds will not be invested in securities consistent with the Fund's
objective of high current income.
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 December
31, 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 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 December 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, the Fund's
portfolio turnover rate may 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 reserves 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 (i.e., 100% or
more) 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 156.48%, 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 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 Credit
Agreement covenants, 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.
As of the date of this prospectus, the Subscription Price per share for
the Offer is greater than the Fund's net asset value per share. Assuming that
all rights are exercised and there is no change in the net asset value per
share, the aggregate net asset value of each shareholder's shares of common
stock would increase as a result of the Offer by approximately $0.03 (or
0.37%). If the Fund's net asset value per share should increase to a point
where the Subscription Price per share is at or below the Fund's net asset
value per share at the Expiration Date, 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, assuming that all Rights are exercised at the Subscription
Price of $8.70 and the net asset value per share at the Expiration Date was
$9.00, the Fund's net asset value per share (after payment of the Dealer
Manager and soliciting fees and estimated offering expenses) would be reduced
by approximately $0.17 per share (or 1.89%).
With respect to the Fund's transferable rights offering completed in
January 1998 (prior to the Fund's one-for-three reverse stock split), the Fund
set the subscription price at $3.80 per share. The Fund's net asset value per
share on December 19, 1997, the last trading date on which the Fund publicly
reported its net asset value prior to the date of the prospectus for that
rights offering, was $3.98. The net asset value per share of the Fund on
January 30, 1998, the first trading date on which the Fund reported its net
asset value after the expiration of that offer, was $3.90. The Fund issued
14,742,608 shares of common stock and received net proceeds of approximately
$53.4 million from that rights offering. The net asset value per share on
January 30, 1998 included the net proceeds from that rights offering. Based on
the net asset value per share as of January 30, 1998, the offer resulted in
dilution of the Fund's net asset value per share of approximately $.08 or 2.01%.
The fact that the Rights are transferable may reduce the effects of any
dilution 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 December 31, 1998 is 6.3%. Based on the outstanding amount of leverage,
the interest rate payable under the Credit Agreement and the Fund's total
assets as of December 31, 1998, the annual return of the Fund's portfolio must
equal at least 1.35% 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 date hereof, the Fund intends, but is not committed, to add
incremental leverage following the completion of the Offer. There can be no
assurance that the Fund will be able to add leverage in the amounts or at the
time it believes to be most advantageous. Inability to increase, or delays in
increasing, the Fund's leverage could, depending on market conditions,
adversely affect the Fund's earnings, distributions and net asset value. If
such leverage is added, the percentage of the Fund's assets representing
leverage is expected to be substantially the same as it was prior to this
Offer. The Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted by the 1940 Act and existing agreements between the Fund and
third parties.
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 outstanding under the Credit
Agreement as of December 31, 1998) on the return of a holder of Common Stock,
assuming a Fund portfolio of approximately $208 million (which amount
corresponds to the total assets as of December 31, 1998), 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 December 31, 1998 payable on the loans
outstanding under the Credit Agreement):
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses Except Interest) ............... -10% -5% 0% 5% 10%
Corresponding Return to Common Stockholder ........ -14.51% -8.12% -1.74% 4.64% 11.02%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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 December 31,
1998, approximately 93.92% 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 Ba 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 and available leverage opportunities,
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 47 Senior Counsel to Washington
8955 Mountain Ash Court Headquarters Services (a Department
Springfield, VA 22153 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 until
Boston, MA 02110 December 1996.
Joseph G. Cote*(3) ................... Director 56 Shareholder of Prospect Street
19 Mallard Lane Investment Management Co., Inc.
Lloyd Neck, NY 11743 from 1989 to present, Co-President
of Prospect Street Investment
Management Co., Inc. from August
1995 to February 1998 and from
February 1989 to November 1993.
Harlan D. Platt(1)(3) ................ Director 48 Professor of Finance and Insurance,
Northeastern University College Northeastern University, College of
of Business Administration Business Administration, since
413 Hayden Hall 1981. Member of Board of Directors,
Boston, MA 02115 VSI Enterprise, 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 of
Middlesex TWI 4SH other public and private companies
United Kingdom 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 Vice
60 State Street 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 stockholders 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 stockholders 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 December 31,
1998. DTC holds of record 90% of the outstanding shares of Common Stock at
December 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 30,451 shares of Common
Stock at December 31, 1998.
As of December 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 $8.70 per Share,
the Investment Adviser would receive additional annual advisory fees of
approximately $282,000 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 one-year term expiring
February 28, 2000 and the Board approved a new advisory agreement, subject to
shareholder approval, which contains a two-year term and an increase in
advisory fee and would supercede the existing advisory agreement if approved
by shareholders. 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 156.48%, 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, 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.
Each offering document will also disclose the federal income tax consequences
of the Fund's repurchase of shares pursuant to the tender offer. 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 elected and qualified and intends to continue to qualify 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 at least an amount equal to the sum of (1) 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) 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 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. In addition, in
the event the Fund fails to qualify 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.
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 could 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.
Certain of the Fund's investments, including 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 or gain 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.
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
investment company taxable income 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 come from sources 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
such time may reflect the amount of the forthcoming distribution which will,
except in unusual circumstances, be taxable when received.
The Internal Revenue Service has taken the position in a revenue ruling
that if a regulated investment company has two classes of shares, it may
designate distributions made to each class in any year as consisting of no
more than such class's proportionate share of particular types of income based
on the total distributions paid to each class for such year, including
distributions out of net capital gain. Consequently, if both common stock and
preferred stock are outstanding, the Fund intends to designate distributions
made to the classes as consisting of particular types of income in accordance
with the classes' proportionate shares of such income. Thus, distributions of
net capital gain will be allocated between holders of common stock and holders
of preferred stock, if any, in proportion to the total distributions made to
each class during the taxable year, or otherwise as required by applicable
law.
After the close of each taxable year, the Fund will identify for its
holders of common stock and any preferred stock the portions of its
distributions that are attributable to capital gains and to ordinary income.
The Internal Revenue Code permits certain miscellaneous itemized
deductions by individuals, including deductions of investment expenses only to
the extent the aggregate of such deductions exceeds 2% of an individual's
federal adjusted gross income. The Internal Revenue Code treats such expenses
incurred by a regulated investment company as being indirectly incurred by the
shareholders of the regulated 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 on their federal
income 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 will 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.
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 such shareholders. Accordingly, investment in the Fund
is likely to be appropriate for such shareholders only if they can utilize a
foreign tax credit or corresponding tax benefit in respect of such federal
withholding taxes.
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 Internal Revenue Service has issued Treasury regulations, generally
effective for payments made after December 31, 1999, 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, 1999. 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 and any proposed tax
law changes.
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 the date of this prospectus, 19,837,988 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 11, 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 the date of this prospectus, 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 (defined as the excess
of net long-term capital gains over net short-term capital losses), stock
dividends, transfer taxes, brokerage or other capital charges or distributions
designated as a return of capital. Any net capital gains of the Fund will be
distributed annually to the holders of the Common Stock as capital gain
dividends, 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
12, 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 24, 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 1940 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. On January 20, 1999, the Fund borrowed $5 million
in principal amount of loans under the Credit Agreement. As of the date
hereof, loans aggregating $50 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 AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held by State Street Bank and Trust
Company, whose principal business address is Two Heritage Drive, North Quincy,
Massachusetts 02171, as custodian (the "Custodian") under a custodian
contract. The Fund has not selected any foreign custodians or sub-custodians.
However, if the Fund determines that it should have any foreign custodians or
sub-custodians to maintain any of its foreign securities, the Board of
Directors will make such selection following a consideration of a number of
factors, including, but not limited to, the reliability and financial
stability of the institution, the ability of the institution to perform
capably custodial services for the Fund, the reputation of the institution in
its national market, the political and economic stability of the country in
which the institution is located, and the risks of potential nationalization
or expropriation of Fund assets.
State Street Bank and Trust Company serves as dividend disbursing agent,
as agent under the 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.
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
Standard & Poor's describes classifications of bonds as follows:
"AAA" Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
"AA" Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from the higher rated issues only by a small degree.
"A" Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
"BBB" Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
"BB"-"B"-"CCC"-"CC"-"C" Debt rated "BB," "B," "CCC," "CC" and "C"
is regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C"the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposure to adverse conditions.
"C1" The rating "C1" is reserved for income bonds on which no interest is
being paid.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
"Aaa" Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
"Aa" Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
"A" Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
"Ba" Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B" Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
"Ca" Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
"C" Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998:
Report of Independent Public Accountants ............................... F-2
Schedule of Investments as of October 31, 1998 ......................... F-3
Balance Sheet as of October 31, 1998 ................................... F-11
Statement of Operations for the Year Ended October 31, 1998 ............ F-12
Statement of Cash Flows for the Year Ended October 31, 1998 ............ F-13
Statement of Changes in Net Assets for the Years Ended
October 31, 1998 and 1997 ............................................ F-14
Financial Highlights for each Share of Common Stock Outstanding
for the Years Ended October 31, 1998, 1997, 1996, 1995,
1994 and 1993 ........................................................ F-15
Information Regarding Senior Securities as of October 31, 1998, 1997,
1996, 1995, 1994 and 1993 ............................................ F-16
Notes to Financial Statements .......................................... F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Prospect Street High Income Portfolio Inc.:
We have audited the accompanying balance sheet of PROSPECT STREET HIGH
INCOME PORTFOLIO INC., including the schedule of investments, as of October
31, 1998, the related statements of operations and cash flows for the year
then ended, the statements of changes in net assets for the years ended
October 31, 1998 and 1997 and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of October 31, 1998 by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Prospect Street High Income Portfolio Inc. as of October 31, 1998, and the
results of its operations, the changes in its net assets, its cash flows and
the financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 14, 1998
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
FIXED INCOME -- 84.92%
Ratings
----------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
----- ----------- -------- ------- --------
<S> <C> <C> <C> <C>
AUTOMOBILE/AUTO PARTS/TRUCK MANUFACTURING - 2.48%
$ 375,000 Aftermarket Technology Corp., 12%, sr. sub. notes, series B, 08/01/04 ........... B B2 $ 337,500
6,443,000 Iochpe-Maxion SA, 12 3/8%, notes, 11/08/02 ...................................... NR NR 3,865,800
2,000,000 Localiza Rent a Car, 10 1/4%, sr. notes, 10/01/05 ............................... BB- B2 800,000
------------
5,003,300
------------
BANKS/SAVINGS AND LOANS/FINANCE COMPANIES/CONSUMER CREDIT - 4.04%
1,000,000 Bank Plus Corp.,12%, sr. notes, 07/18/07 ........................................ NR NR 1,010,000
2,533,000 Cityscape Financial Corp., 12 3/4%, sr. notes, series A, 06/01/04(b)* ........... D Ca 481,270
3,500,000 Emergent Group Inc., 10 3/4%, sr. notes, series B, 09/15/04 ..................... CCC Caa2 1,645,000
4,500,060 Federal Home Loan Mortgage, 4.10%, interest only stripped security, 12/15/22 (c) A1+ AAA 28,125
1,500,000 Life Federal Savings Bank, 13 1/2%, sub. debs, 03/15/04 ......................... NR NR 1,500,000
500,000 Local Financial Corp., 11%, sr. notes, 09/05/04, 144A ........................... NR NR 505,000
1,875,000 Mego Mortgage, 12 1/2%, sr. sub. notes, 12/01/01 ................................ NR Ca 1,500,000
1,000,000 Ocwen Federal Bank, 12%, sub. debs., 06/15/05 ................................... BB- B1 760,000
3,300,000 Southern Pacific Funding Corp., 11 1/2%, sr. notes, 11/01/04(b)* ................ D Caa3 726,000
------------
8,155,395
------------
BROADCASTING - TV/CABLE/RADIO/PUBLISHING - 12.95%
7,000,000 AMSC Acquisition Co., Inc., 12 1/4%, sr. notes, 04/01/08 ........................ NR NR 3,360,000
17,107 Australis Media Ltd., 0%, gtd. sr. secd. disc. notes, 05/15/03(b) ............... D C 214
1,000,000 Australis Media Ltd., 0%, sr. secd. disc. notes, 05/15/03(b) .................... D C 12,500
7,742,168 CAI Wireless System Inc., 0%, sr. notes, 10/14/04 ............................... NR NR 1,703,277
9,000,000 CS Wireless Systems Inc., 0%, sr. disc. notes, series B, 03/01/06 ............... C Ca 1,800,000
8,404,000 DIVA Systems Corp., 0%, sub. disc. notes, 03/01/08, 144A ........................ NR NR 2,773,320
1,000,000 Echostar DBS Corp., 12 1/2%, sr. secd. notes, 07/01/02 .......................... B- Caa1 1,005,000
500,000 Galaxy Telecom, L.P., 12 3/8%, sr. sub. notes, 10/01/05 ......................... B- B3 530,000
1,000,000 Goss Graphic Systems Inc., 12%, sr. sub. notes, 10/15/06 ........................ CCC+ B2 880,000
3,500,000 Net Sat Services, 12 3/4%, sr. notes, 08/05/04 .................................. B B3 2,100,000
2,000,000 One Point Communications Co., 14 1/2%, units, 06/01/08, 144A .................... NR NR 920,000
2,000,000 Optel Inc., 13%, sr. notes, series B, 02/15/05 .................................. B- B3 1,940,000
1,000,000 Park n View Inc., 13%, units, 05/15/08 .......................................... B- B3 850,000
700,000 RBS Participaco, 14%, notes, 12/15/03(f) ........................................ BB- NR 682,500
4,000,000 Source Media Inc., 12%, sr. secd. notes, 11/01/04 ............................... B- B3 3,000,000
2,000,000 Spanish Broadcasting System Inc., 12 1/2%, sr. notes, 06/15/02 .................. B B2 2,160,000
1,000,000 Star Choice Communications, 13%, sr. secd. notes, 12/15/05 ...................... B B3 912,500
1,000,000 Vialog Corporation, 12 3/4%, sr. notes, series B, 11/15/01 ...................... B- Caa3 800,000
4,500,000 Wireless One Inc., 13%, sr. disc. notes, 10/15/03 ............................... CCC+ Ca 742,500
------------
26,171,811
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING - 4.59%
1,000,000 AXIA Inc., 10 3/4%, sr. sub. notes, 07/15/08, 144A .............................. B- B3 930,000
500,000 Amtrol Acquisition Inc., 10 5/8%, sr. sub. notes, 12/31/06 ...................... B- B3 466,250
1,500,000 Chatwins Group Inc., 13%, sr. exch. notes, 05/01/03 ............................. B- B2 1,455,000
1,000,000 Genmar Holdings Inc., 13 1/2%, sr. sub. notes, series A, 07/15/01 ............... NR Caa2 1,022,500
1,000,000 Haynes International Inc., 11 5/8%, sr. notes, 09/01/04 ......................... B- B3 950,000
1,000,000 Key Components LLC, 10 1/2%, sr. notes, 06/01/08, 144A .......................... B- B3 940,000
500,000 MVE Inc., 12 1/2%, sr. secd. notes, 02/15/02 .................................... B B3 470,000
3,000,000 Phase Metrica Inc., 10 3/4%, sr. notes, 02/01/05, 144A .......................... NR Caa1 2,100,000
500,000 Selmer Inc., 11%, sr. sub. notes, 05/15/05 ...................................... B B2 513,750
500,000 Spinnaker Industries Inc., 10 3/4%, sr. secd. notes, 10/15/06 ................... B B3 425,000
------------
9,272,500
------------
DIVERSIFIED/CONGLOMERATE SERVICES - 1.02%
550,000 Coinmach Corp., 11 3/4%, sr. notes, series D, 11/15/05 .......................... B+ B2 572,000
1,000,000 Production Resource Group, 11 1/2%, sr. sub. notes, 01/15/08 .................... B- Caa2 930,000
1,500,000 Young America Corp., 11 5/8%, sr. sub. notes, series B, 02/15/06 ................ CCC+ B3 570,000
------------
2,072,000
------------
ELECTRICAL EQUIPMENT/ELECTRONICS/COMPUTERS - 1.77%
500,000 Decision Holdings Corp., 0%, sr. disc. debs., 08/01/08 .......................... B- NR 135,000
3,000,000 EV International Inc., 11%, sr. sub. notes, series A, 03/15/07 .................. B B3 2,235,000
500,000 International Wire Group Inc., 11 3/4%, sr. sub. notes, 06/01/05 ................ B- B3 495,000
1,300,000 Sharp Do Brasil, 9 5/8%, notes, 10/30/05 ........................................ NR NR 715,000
------------
3,580,000
------------
FINANCIAL SERVICES - 2.18%
1,000,000 Beal Financial Corp., 12 3/4%, sr. notes, 08/15/00 .............................. B- B2 1,030,000
425,000 First Federal Financial Corp., 11 3/4%, notes, 10/01/04 ......................... B+ B2 436,687
500,000 Hawthorne Financial Corporation, 12 1/2%, sr. notes, 12/31/04 ................... NR NR 490,000
500,000 Ocwen Financial Corp., 11 7/8%, notes, 10/01/03 ................................. BB- B1 420,000
1,500,000 Resource America Inc., 12%, sr. notes, 08/01/04 ................................. B- Caa1 1,230,000
2,000,000 Wilshire Financial Services Group Inc., 13%, notes, 01/01/04 .................... NR NR 800,000
------------
4,406,687
------------
FOOD/TOBACCO - 5.90%
3,105,000 American Rice Inc., 13%, mtg. notes, 07/31/02(d)* ............................... D Ca 1,707,750
250,000 AmeriKing Inc., 10 3/4%, sr. notes, 12/01/06 .................................... B- B3 252,500
3,228,442 Cafeteria Operators L.P., 12%, sr. secd. notes, 12/31/01 ........................ NR NR 3,228,442
1,000,000 Gorges Quik to Fix Foods Inc., 11 1/2%, sr. sub. notes, series B, 12/01/06 ...... CCC CCC2 350,000
250,000 Liggett Group Inc., 16 1/2%, notes, 02/01/99 .................................... NR NR 185,000
4,050,000 Liggett Group Inc., 11 1/2%, gtd. sr. secd. notes, series B, 02/01/99 ........... NR NR 2,875,500
200,000 Liggett Group Inc., 19 3/4%, gtd. sr. secd. notes, series C, 02/01/99 ........... NR NR 148,000
1,000,000 North Atlantic Trading Inc., 11%, sr. notes, 06/15/04 ........................... B B3 940,000
3,000,000 Specialty Foods Corp., 11 1/4%, sr. sub. notes, series B, 08/15/03 .............. CCC Caa3 1,200,000
1,000,000 Sun World International Inc., 11 1/4%, 1st. mtg. notes, series B, 04/15/04 ...... B B2 1,030,000
------------
11,917,192
------------
GENERAL & SPECIALTY RETAIL - 1.50%
1,000,000 Big 5 Corp., 10 7/8%, sr. notes, series B, 11/15/07 ............................. B- B2 950,000
1,000,000 Mothers Work Inc., 12 5/8%, sr. notes, 08/01/05 ................................. B B3 1,089,400
1,000,000 SRI Receivable Pure Inc., 12 1/2%, tr. ctf. backed notes, series B, 12/15/00 .... NR NR 1,000,000
------------
3,039,400
------------
GROCERY/CONVENIENCE FOOD STORES - 2.16%
2,000,000 Homeland Stores Inc., 10%, sr. notes, 08/01/03 .................................. NR NR 1,800,000
3,750,000 P&C Food Markets Inc., 11 1/2%, sr. notes, 10/15/01 ............................. B Caa2 2,212,500
351,000 Pantry Inc., 12%, sr. notes, series B, 11/15/00 ................................. B+ B2 351,000
------------
4,363,500
------------
HEALTHCARE/DRUGS/HOSPITAL SUPPLIES - 3.12%
1,785,000 Complete Management Inc., 8%, conv. sub. deb., 08/15/03 ......................... NR NR 370,387
3,906,000 Complete Management Inc., 8%, conv. sub. deb., 12/15/03 ......................... NR NR 810,495
3,000,000 Global Health Sciences Inc., 11%, sr. notes, 05/01/08 ........................... B+ Caa1 2,550,000
300,000 National Patent Developers, 5%, conv. notes, 08/31/99 ........................... NR NR 219,375
5,000,000 PHP Healthcare Corp., 6 1/2%, conv. sub. deb., 12/15/02(b)* ..................... D C 450,000
1,000,000 Sun Healthcare Group Inc., 6%, conv. sub. notes, 03/01/04, 144A ................. NR B3 550,000
2,695,000 Uromed Corp., 6%, conv. sub. notes, 10/15/03 .................................... NR NR 1,347,500
------------
6,297,757
------------
HOME FURNISHINGS/DURABLE CONSUMER PRODUCTS - 2.02%
5,000,000 Converse Inc., 7%, conv. sub. notes, 06/01/04 ................................... NR NR 2,000,000
1,000,000 Gothic Products Corp., 11 1/8%, sr. secd. notes, 05/01/05 ....................... CCC+ B3 650,000
1,000,000 Simmons Co., 10 3/4%, sr. sub. notes, 04/15/06 .................................. NR NR 1,040,000
500,000 Syratech Corp., 11%, sr. notes, 04/15/07 ........................................ B- B3 390,000
------------
4,080,000
------------
HOTEL/GAMING - 1.12%
1,000,000 Bluegreen Corp., 10 1/2%, sr. secd. notes, series B, 04/01/08 ................... B B3 860,000
500,000 Courtyard By Mariott II Ltd., 10 3/4%, sr. secd. notes,
series B, 02/01/08 ............................................................ B- NR 505,000
1,000,000 Epic Resorts LLC, 13%, sr. secd. notes, 06/15/05, 144A .......................... B- NR 900,000
------------
2,265,000
------------
INSURANCE COMPANIES - 0.46%
1,000,000 Superior National Insurance Group Inc., 10 3/4%, pfd. Trust notes, 12/01/17 ..... BB B1 920,000
------------
LEISURE/AMUSEMENT/MOTION PICTURES - 4.37%
4,200,000 Booth Creek Ski Holdings Inc., 12 1/2%, sr. notes, series B, 03/15/07 ........... B- Caa1 3,906,000
750,000 Discovery Zone Inc., 13 1/2%, sr. secd. notes, 08/01/02 ......................... NR NR 262,500
175,000 Discovery Zone Inc., 13 1/2%, units, 05/01/02 ................................... NR NR 175,000
20,125,000 Marvel Holdings Inc., 0%, sr. secd. disc. notes, series B, 04/15/98(b)* ......... D NR 805,000
4,000,000 Planet Hollywood International Inc., 12%, sr. sub. notes, 04/01/05 .............. CCC B3 2,000,000
2,000,000 Premier Cruise Ltd., 11%, sr. notes, 03/15/08, 144A ............................. CCC Caa2 1,220,000
500,000 SFX Entertainment Inc., 9 1/8%, sr. notes, 02/01/08 ............................. CCC+ B3 457,500
------------
8,826,000
------------
MACHINERY - 1.52%
1,000,000 Central Tractor Farm Country, 10 5/8%, sr. notes, 04/01/07 ...................... B+ B2 950,000
3,250,000 Willcox & Gibbs Inc., 12 1/4%, sr. notes, series B, 12/15/03 .................... B+ B3 2,112,500
------------
3,062,500
------------
METALS/MINING - 5.09%
1,500,000 Continental Global Group Inc., 11%, sr. notes, series B, 04/01/07 ............... B B2 1,230,000
1,000,000 Doe Run Corp., 11 1/4%, sr. notes, series B, 03/15/05 ........................... B+ B3 750,000
750,000 GS Technologies Inc., 12%, gtd. sr. notes, 09/01/04 ............................. B B2 622,500
1,500,000 IVACO Inc., 11 1/2%, sr. notes, 09/15/05 ........................................ B+ B1 1,455,000
500,000 International Knife and Saw, 11 3/8%, sr. sub. notes, 11/15/06 .................. B- B3 490,000
4,500,000 NSM Steel Inc., 12%, sr. mtg. notes, 02/01/06, 144A ............................. B- Caa3 1,125,000
3,000,000 PT Alatief Freeport, 9 3/4%, gtd. sr. notes, 04/15/01 ........................... CCC+ B3 2,850,000
1,000,000 Recycling Industries Inc., 13%, sub. notes, 12/05/05, 144A ...................... NR B3 900,000
1,500,000 TVX Gold Inc., 5%, conv. notes, 03/28/02 ........................................ NR NR 870,000
------------
10,292,500
------------
NON-AGRICULTURAL CHEMICALS/PLASTICS - 1.74%
1,000,000 RBX Corp., 12%, sr. secd. notes, series B, 01/15/03 ............................. B+ B3 783,750
3,500,000 Sterling Chemicals Inc., 11 3/4%, sr. sub. notes, 08/15/06 ...................... B+ B3 2,730,000
------------
3,513,750
------------
OIL/NATURAL GAS/OIL SERVICES - 1.59%
750,000 First Wave Marine Inc., 11%, sr. notes, 02/01/08 ................................ B- B3 703,125
5,000,000 Hurricane Hydrocarbons Ltd., 11 3/4%, sr. notes, 11/01/04 ....................... B- B3 2,500,000
------------
3,203,125
------------
PACKAGING/CONTAINERS - 2.35%
3,250,000 Crown Packaging Ltd., 10 3/4%, sr. secd. notes, series B, 11/01/00 .............. NR Caa2 2,210,000
500,000 Portola Packaging Inc., 10 3/4%, sr. notes, 10/01/05 ............................ B B2 492,500
2,000,000 Tekni-Plex Inc., 11 1/4%, sr. sub. notes, series B, 04/01/07 .................... B- B3 2,050,000
------------
4,752,500
------------
PAPER/FOREST PRODUCTS/PRINTING - 0.50%
800,000 Advanced Argo Publishing Co. Ltd., 13%, notes, 11/15/07, 144A ................... CCC B3 824,000
1,000,000 FSW International Finance Co., 12 1/2%, gtd. sub. notes, 11/01/06(d)* ........... D Caa3 195,000
------------
1,019,000
------------
PERSONAL & MISCELLANEOUS SERVICES - 0.72%
500,000 Anchor Advanced Products Inc., 11 3/4%, sr. notes, series B, 04/01/04 ........... BB- B1 510,000
1,000,000 Styling Technology Corp., 10 7/8%, sr. sub. notes, 07/01/08, 144A ............... B- B3 940,000
------------
1,450,000
------------
POLLUTION CONTROL/WASTE REMOVAL - 0.24%
500,000 GNI Group Inc., 10 7/8%, sr. notes, 07/15/05, 144A .............................. B+ B2 491,250
------------
PUBLIC UTILITY/ELECTRIC POWER/HYDRO POWER - 0.57%
2,000,000 Panda Global Energy Co., 12 1/2%, sr. secd. notes, 04/15/04 ..................... B- B2 1,160,000
------------
RAIL/TRUCKING/OVERNIGHT DELIVERY - 0.37%
750,000 Johnstown America Industries Inc., 11 3/4%, sr. sub. notes, series C, 08/15/05 .. B NR 746,250
------------
REAL ESTATE DEVELOPMENT/REITS/BUILDING/CONSTRUCTION - 1.36%
1,000,000 American Architecture, 11 3/4%, sr. notes, 12/01/07 ............................. B Caa1 860,000
290,820 Bramalea Limited, 11 1/8%, 03/22/98(b)* ......................................... NR NR 0
750,000 Peters, J.M., Inc., 12 3/4%, sr. notes, 05/01/02 ................................ B- B3 751,875
1,375,000 Presley Companies, 12 1/2%, sr. notes, 07/01/01 ................................. CCC Caa3 1,127,500
------------
2,739,375
------------
TELEPHONE/COMMUNICATIONS - 12.56%
500,000 Alvey Systems, Inc., 11 3/8%, sr. sub. notes, 01/31/03 .......................... B- B3 525,000
3,286,000 American Telecasting Inc., 0%, sr. disc. notes, series B, 08/15/05 .............. CCC Ca 722,920
2,000,000 Cell Net Data System Inc., 0%, sr. disc. notes, series B, 10/01/07 .............. NR NR 600,000
1,000,000 Consorcio Ecuatoriano de Telecomunicationes SA, 14%, notes, series B, 05/01/02 .. NR NR 350,000
1,000,000 Conecel Holdings Ltd., 14%, units, 10/01/00, 144A ............................... NR Caa1 350,000
500,000 Econophone Inc., 13 1/2%, sr. notes, 07/15/07 ................................... NR NR 523,750
2,000,000 Globix Corp., 13%, sr. notes, 05/01/05 .......................................... NR NR 1,560,000
3,000,000 Hyperion Telecommunications Inc., 12 1/4%, sr. secd. notes, series B, 09/01/04 .. B+ B3 2,850,000
2,000,000 In Flight Phone Corp., 14%, sr. disc. notes, series B, 05/15/02(b)* ............. NR C 180,000
2,000,000 Innova S De R.L., 12 7/8%, sr. exch. notes, 04/01/07 ............................ B- B2 1,060,000
4,000,000 Innova S De R.L., 12 7/8%, reg. sr. notes, 04/01/07 ............................. B- B2 2,400,000
3,500,000 Ionica PLC, 13 1/2%, sr. notes, 08/15/06(e) ..................................... NR Ca 1,225,000
2,000,000 Ionica PLC, 0%, sr. disc. notes, 05/01/07(e) .................................... NR Ca 60,000
750,000 Iridium Operations LLC, 10 7/8%, gtd. sr. notes, series D, 07/15/05 ............. B- B3 525,000
1,000,000 Knology Holdings Inc., 0%, sr. disc. notes, 10/15/07 ............................ NR NR 450,000
4,000,000 MGC Communications Inc., 13%, sr. secd. notes, series B, 10/01/04 ............... NR Caa2 2,960,000
1,000,000 Occidente Y Caribe Cellular, 0%, sr. disc. notes, series B, 03/15/04 ............ B B3 780,000
1,500,000 Orbcomm Global L.P., 14%, sr. notes, 08/15/04 ................................... B- B3 1,350,000
3,750,000 Teletrac Inc., 14%, sr. notes, series B, 08/01/07 ............................... CCC+ Caa2 2,212,500
2,000,000 Total Access Communication Ltd., 7 5/8%, bonds, 11/04/01, 144A .................. BB- B2 1,640,000
2,000,000 USN Communications Inc., 0%, sr. disc. notes, series B, 08/15/04 ................ CCC+ Ca 800,000
500,000 Verio Inc., 10 3/4%, sr. notes, 04/01/05 ........................................ B- B3 487,500
2,000,000 Viatel Inc., 11 1/4%, sr. notes, 04/15/08 ....................................... NR Caa1 1,760,000
------------
25,371,670
------------
TEXTILES/OTHER MANUFACTURING/APPAREL - 0.50%
150,000 GPO Synkro SA, 12%, bonds, 04/01/02 ............................................. NR NR 90,000
1,000,000 Glenoit Corp., 11%, sr. sub. notes, 04/15/07 .................................... B- B3 930,000
------------
1,020,000
------------
TRANSPORTATION/AIRLINES/BUS - 6.13%
1,000,000 Cenargo International Ltd., 9 3/4%, 1st mtg. notes, 06/15/08, 144A .............. BB- Ba3 860,000
2,500,000 Global Ocean Carriers Ltd., 10 1/4%, sr. notes, 07/15/07 ........................ B- B3 1,550,000
2,250,000 Golden Ocean Group Ltd., 10%, sr. notes, 08/31/01 ............................... CCC+ B3 787,500
1,000,000 MC Shipping Inc., 11 1/4%, sr. notes, series B, 03/01/08 ........................ B+ B1 750,000
1,418,031 Mexico City Toluca Toll, 11%, notes, 05/19/02, 144A ............................. NR NR 992,622
2,000,000 Sabreliner Corp., 11%, sr. notes, 06/15/08, 144A ................................ B B3 1,700,000
500,000 TBS Shipping International Ltd., 10%, 1st mtg. notes, 05/01/05 .................. B+ B3 335,000
1,850,000 TRISM Inc., 10 3/4%, gtd. sr. sub. notes, 12/15/00 .............................. B- Caa2 1,054,500
2,000,000 Trans World Airlines Inc., 11 1/2%, sr. secd. notes, 12/15/04 ................... CCC B2 1,720,000
1,000,000 Trans World Airlines Inc., 11 3/8%, sr. notes, 03/01/06 ......................... CC Caa1 780,000
2,000,000 Trans World Airlines Inc., 12%, sr. secd. notes, 04/01/02 ....................... NR B2 1,860,000
------------
12,389,622
------------
Total Fixed Income (cost $234,687,850).................................. $171,582,084
------------
COMMON STOCK AND WARRANTS -- 5.50%
<CAPTION>
Value
Units Description (Note 2)
----- ----------- --------
<S> <C> <C>
10,000 American Capital Strategies ........................................................................ $ 132,500
7,000 American Mobile Satellite, warrants, 144A* ......................................................... 33,845
2,000 American Telecasting Inc., warrants* ............................................................... 20
185,900 Ames Department Stores Inc., excess cash flow pmt., series A* ...................................... 0
594,876 Ames Department Stores Inc., lit. trust units* ..................................................... 0
10,000 Annaly Mortgage Management Inc ..................................................................... 75,625
50,000 Annaly Mortgage Management Inc. .................................................................... 350,000
50,000 Anthracite Capital Corp. ........................................................................... 287,500
5,806 Apartment Investment & Management Co. .............................................................. 202,847
2,000 Bell Technology Group Ltd., warrants* .............................................................. 0
12,888 Brooke Group Ltd. .................................................................................. 116,798
496,364 CAI Wireless Systems Inc.* ......................................................................... 248,182
550 CS Wireless Systems Inc., 144A* .................................................................... 0
50,000 Capital Automotive, REIT ........................................................................... 706,250
5,925 Capital Pac Holdings Inc., warrants, 144A* ......................................................... 593
2,000 Cell Net Data System Inc., warrants, 144A* ......................................................... 40,000
1,000 Central Rents Inc., 144A* .......................................................................... 30,500
170,000 Chastain Capital Corp. ............................................................................. 850,000
4,392 Chattem Inc.* ...................................................................................... 121,878
100,000 Commodore Separation Technology, warrants* ......................................................... 3,125
100,000 Commodore Separation Technology, sr. conv. preferred ............................................... 25,000
7,887 Cort Business Services Corp.* ...................................................................... 154,782
500 County Seat Holdings Inc., warrants* ............................................................... 72
750 Discovery Zone Inc., warrants, 144A* ............................................................... 0
6,000 DIVA Systems Corp., warrants* ...................................................................... 0
500 Econophone Inc., warrants, 144A* ................................................................... 4,000
1,000 Epic Resorts LLC, warrants, 144A* .................................................................. 10
20,000 Excel Legacy Corp.* ................................................................................ 55,000
25,000 FBR Asset Investment Corp., 144A ................................................................... 500,000
2,000 Globalstar Telecommunications, warrants, 144A* ..................................................... 270
1,500 Golden Ocean Group Ltd., warrants* ................................................................. 7,688
28,000 Gothic Energy Corp., warrants* ..................................................................... 31,500
9,533 Gothic Energy Corp., warrants* ..................................................................... 0
500 HDA Management Corp., warrants* .................................................................... 20,062
20,000 HRPT Properties Trust .............................................................................. 318,750
11,000 HarCor Energy Inc., warrants* ...................................................................... 6,864
1,500 Heartland Wireless Communications, warrants, 144A* ................................................. 202
10,000 Hospitality Properties Trust ....................................................................... 265,000
14,400 ICF Kaiser International Inc., warrants* ........................................................... 5,400
750 IHF Capital Inc., warrants, 144A* .................................................................. 7,594
15,000 Imperial Credit Commercial Mortgage Investments Corp. .............................................. 125,625
750 Intermedia Communications of Florida Inc., warrants, 144A* ......................................... 87,938
1,000 Knology Holdings Inc., warrants, 144A* ............................................................. 0
25,000 Local Financial Corp., 144A* ....................................................................... 187,500
2,000 Loral Orion Network Systems Inc., warrants* ........................................................ 20,000
3,000 MGC Communications Inc., warrants, 144A* ........................................................... 165,000
1,851,500 Marvel Entertainment Group Inc.* ................................................................... 277,725
625,000 Mego Mortgage Corp., pfd, series A* ................................................................ 560,367
500 Motels of America Inc., 144A* ...................................................................... 4,125
291 Mothers Work Inc.* ................................................................................. 2,437
750 NS Group Inc., warrants* ........................................................................... 90,000
20,000 National Propane Partners L.P. ..................................................................... 167,500
24,000 New Plan Excel Realty Trust Inc. ................................................................... 546,000
4,000 Occidente Y Caribe Cellular, warrants, 144A* ....................................................... 68,500
3,500 Optel Inc.* ........................................................................................ 140,000
125,449 Prime Retail Inc. .................................................................................. 1,215,290
4,094 Prime Retail Inc. conv. pfd., series B ............................................................. 72,668
33,333 Resource Asset Investment Trust .................................................................... 408,329
100 SF Holdings Group Inc., pfd., 144A* ................................................................ 900,000
1,000 Sabreliner Corp., warrants* ........................................................................ 1,000
3,750 Sheffield Steel Corp., warrants* ................................................................... 38
500 Signature Brands Inc., warrants* ................................................................... 0
500 Spanish Broadcasting Corp., warrants* .............................................................. 31,250
11,580 Star Choice Communications, warrants* .............................................................. 0
3,750 Teletrac Holdings Inc., warrants, 144A* ............................................................ 112,500
4,000 Terex Corp., rights* ............................................................................... 56,500
5,133 Trans World Airlines Inc.* ......................................................................... 25,665
2,000 Trans World Airlines Inc., warrants* ............................................................... 300,000
25,000 Ugly Duckling Corp. * .............................................................................. 128,125
1,000 Unifi Communications Inc., warrants, 144A* ......................................................... 0
9,800 Uniroyal Technology Corp., warrants* ............................................................... 58,800
1,000 Vialog Corporation, warrants* ...................................................................... 0
992 Viatel Inc., pfd., series A* ....................................................................... 59,768
1,500 WHX Corp., preferred ............................................................................... 64,125
20,000 Walden Residential Properties, conv. preferred, series B ........................................... 512,500
40,000 Wilshire Real Estate Investments ................................................................... 120,000
1,500 Wireless One Inc., warrants* ....................................................................... 15
------------
TOTAL COMMON STOCK AND WARRANTS (cost $14,014,809) ................................................. 11,111,147
------------
TOTAL INVESTMENTS IN SECURITIES (cost $248,702,659) ................................................ 182,693,231
------------
SHORT-TERM INVESTMENTS -- 3.62%
Par
Value
-----
COMMERCIAL PAPER:
$7,324,000 Western Pennsylvania Power, 5.30%, 11/02/98, A1/P1 ................................................. 7,321,843
------------
TOTAL SHORT-TERM INVESTMENTS (cost $7,321,843) ..................................................... 7,321,843
------------
TOTAL INVESTMENTS - 94.04% (COST $256,024,502) ..................................................... 190,015,074
------------
OTHER ASSETS - 5.96% ............................................................................... 12,044,811
------------
TOTAL ASSETS - 100% ................................................................................ $202,059,885
============
(a) Percentages indicated are based on total assets.
(b) Denotes company has filed for bankruptcy.
(c) Variable rate security. Coupon rate disclosed is that which is in effect at October 31, 1998.
(d) Denotes company currently in default.
(e) Security currently in receivership.
(f) A put option has been exercised on this security effective December 15, 1998.
NR denotes not rated.
* Non-income producing security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
October 31, 1998
ASSETS
Investments in securities at value (identified cost $256,024,502;
see Schedule of Investments and Note 2) ...................... $190,015,074
Cash ........................................................... 599,730
Receivables:
Investment securities sold ................................... 4,337,139
Interest and dividends ....................................... 6,908,185
Prepaid insurance .............................................. 180,135
Other assets ................................................... 19,622
------------
Total assets ........................................... $202,059,885
------------
LIABILITIES
Payables:
Investment securities purchased .............................. $ 3,694,537
Accrued expenses (Note 3) ...................................... 564,894
Bank loan (Note 14) ............................................ 40,000,000
------------
Total liabilities ...................................... $ 44,259,431
------------
Net Assets:
Common stock, $.03 par value --
Authorized -- 100,000,000 shares
Issued and outstanding -- 19,805,323 shares ................ $ 594,160
Capital in excess of par value (Notes 2 and 5) ............... 247,586,022
Accumulated undistributed net investment income (Note 2) ..... 3,682,152
Accumulated net realized loss from security transactions ..... (28,052,452)
Net unrealized depreciation of investments ................... (66,009,428)
------------
Total net assets (equivalent to $7.97 per share, based on
19,805,323 shares outstanding) ......................... $157,800,454
============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
INVESTMENT INCOME (Note 2):
Interest income .............................................. $ 27,183,822
Dividend income .............................................. 1,126,225
Accretion of discount ........................................ 1,742,564
------------
Total investment income ................................ $ 30,052,611
------------
EXPENSES:
Interest expense ............................................. $ 2,485,678
Investment advisory fee (Note 3) ............................. 1,582,842
Custodian and transfer agent fees ............................ 239,041
Professional fees ............................................ 184,724
Amortization of prepaid surety bond premiums (Note 7) ........ 80,001
Directors' fees .............................................. 95,077
Insurance expense ............................................ 74,595
Amortization of deferred auction agent fees (Note 6) ......... 27,003
Excise tax expense ........................................... 155,012
Miscellaneous expenses ....................................... 579,981
------------
Total expenses ......................................... $ 5,503,954
------------
Net investment income .................................. $ 24,548,657
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments sold ........................ $ (5,007,628)
Change in net unrealized appreciation of investments (Note 2) (69,126,156)
------------
Net realized and unrealized loss on investments ........ $(74,133,784)
------------
Net decrease in net assets resulting from operations ... (49,585,127)
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS ($3,144 per share) ..... (628,030)
------------
Net decrease in net assets applicable to common
stockholders ............................................ $(50,213,157)
============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CASH FLOWS
For the year ended October 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received ......................... $ 26,736,956
Operating expenses paid ................................. (7,507,449)
-------------
Net cash provided by operating activities ......... $ 19,229,507
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities ....................... $(428,103,749)
Sales and maturities of portfolio securities ............ 378,030,602
-------------
Net cash used in investing activities ............. $ (50,073,147)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock rights offering and sale
of common stock ....................................... $ 53,422,039
Proceeds from bank loan ................................. 40,000,000
Redemption of senior notes .............................. (20,000,000)
Redemption of taxable auction rate preferred stock ..... (20,000,000)
Preferred stock dividends paid .......................... (661,339)
Common stock dividends paid from operations ............. (21,317,330)
-------------
Net cash provided by financing activities ......... $ 31,443,370
-------------
NET INCREASE IN CASH ...................................... $ 599,730
CASH, BEGINNING OF PERIOD ................................. --
-------------
CASH, END OF PERIOD ....................................... $ 599,730
=============
RECONCILIATION OF NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations .. $ (49,585,127)
Increase in interest and dividend receivables ......... (1,843,345)
Amortization of Fidelity Bond and other deferred assets 32,000
Increase in other assets .............................. (84,276)
Decrease in accrued expenses and other payables ....... (1,951,219)
Net realized loss on investments sold ................. 5,007,628
Change in net unrealized appreciation of investments .. 69,126,156
Accretion of bond discount ............................ (1,472,310)
-------------
Net cash provided by operating activities ......... $ 19,229,507
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................ $ 3,280,081
Cash paid during the period for excise taxes ............ 114,557
=============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
October 31, October 31,
1998 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................................ $ 24,548,657 $ 17,862,020
Net realized gain (loss) on investments sold ......... (5,007,628) 4,773,501
Change in net unrealized appreciation (depreciation)
of investments ..................................... (69,126,156) 4,499,052
------------ ------------
Net increase (decrease) in net assets resulting
from operations .............................. $(49,585,127) $ 27,134,573
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (175,689 shares and 96,957 shares,
respectively) to common stockholders for
reinvestment of dividends .......................... $ 1,995,745 $ 1,146,681
Net proceeds from sale of common stock issued
(4,914,203 and 4,306,031 shares, respectively, after
deducting $2,599,872 and $2,167,500 of soliciting
fees and other expenses, respectively) ............. 53,422,039 44,208,450
Redemption of taxable auction rate preferred stock
(200 shares at $100,000 liquidation preference) .... (20,000,000) --
------------ ------------
Increase in net assets resulting from fund share
transactions ................................. $ 35,417,784 $ 45,355,131
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Preferred dividends ($3,144 and $5,456 per share,
respectively) ...................................... $ (628,030) $ (1,091,099)
Common dividends ($1.26 and $1.26 per share,
respectively) from operations ...................... (23,313,075) (16,200,344)
------------ ------------
Decrease in net assets resulting from
distributions to stockholders ................ (23,941,105) (17,291,443)
------------ ------------
Total net increase (decrease) in net assets .... $(38,108,448) $ 55,198,261
NET ASSETS:
Beginning of period .................................. 195,908,902 140,710,641
------------ ------------
End of period (including $3,682,152 and $2,845,247 of
undistributed net investment income as of October
31, 1998 and October 31, 1997, respectively) ....... $157,800,454 $195,908,902
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIODS PRESENTED
<CAPTION>
For the Years Ended October 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ..................... $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75 $ 12.09
-------- -------- -------- -------- -------- --------
Net investment income ........ 1.30# 1.38# 1.50# 1.35 1.44# 1.89#
Net realized and unrealized
gain (loss) on investments.. (3.76)# .72# .60# .09 (1.14)# 1.17#
-------- -------- -------- -------- -------- --------
Total from investment
operations ......... $ (2.46) $ 2.10 $ 2.10 $ 1.44 $ .30 $ 3.06
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from accumulated net
investment income
To preferred stockholders (.03) (.09) (.12) (.15) (.09) (.18)
To common stockholders ... (1.26) (1.26) (1.26) (1.26) (1.35) (1.86)
-------- -------- -------- -------- -------- --------
Total distributions .. $ (1.29) $ (1.35) $ (1.38) $ (1.41) $ (1.44) $ (2.04)
-------- -------- -------- -------- -------- --------
Effect of sale of common stock
and related expenses from
rights offering ............ $ (.22) $ (.51) $ (.12) $ -- $ (.54) $ (.36)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 7.97 $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75
======== ======== ======== ======== ======== =========
Per share market value, end of
period ..................... $ 10.25 $ 12.39 $ 12.00 $ 11.64 $ 10.50 $ 12.75
======== ======== ======== ======== ======== =========
Total investment return ...... (7.63)% 14.82% 15.29% 28.57% (7.78)% 23.25%
======== ======== ======== ======== ======== =========
Net assets, end of period,
applicable to
common stock (a) ........... $157,800 $175,909 $120,711 $ 93,309 $ 92,072 $ 79,438
======== ======== ======== ======== ======== =========
Net assets, end of period,
applicable to
preferred stock (a) ........ $ -- $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000
======== ======== ======== ======== ======== =========
Net assets, end of period (a) $157,800 $195,909 $140,711 $113,309 $112,072 $ 99,438
======== ======== ======== ======== ======== =========
Ratio of operating expenses to
average net assets,
applicable to common stock . 2.67% 2.30% 3.06% 3.27% 3.27% 3.10%
Ratio of net investment income
to average net assets,
applicable to common stock . 11.92% 11.94% 13.20% 13.47% 12.25% 13.49%
Ratio of operating expenses to
average net assets** ....... 2.18%+ 1.81%+ 2.21%+ 2.28%+ 2.30%+ 2.13%+
Ratio of net investment income
to average net assets** .... 9.72% 9.42% 9.51% 9.39% 8.64% 9.26%
Portfolio turnover rate ...... 156.48% 176.04% 108.33% 80.71% 72.00% 117.20%
(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 in April of 1998. (Note 10).
** 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 bank loans and 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 1.20%, 1.13%, 1.30%, 1.29%, 1.32% and 1.50%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's
rights offerings.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
INFORMATION REGARDING SENIOR SECURITIES
<CAPTION>
As of October 31,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Amount Outstanding:
Notes & Loans $40,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000
Preferred stock -- 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
Asset Coverage:
Per note (a) 495% 1,080% 804% 667% 660% 597%
Per preferred stock
share (b) n/a 540% 402% 333% 330% 299%
Involuntary Liquidation Preference:
Per preferred stock
share (c) n/a $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
Approximate Market Value:
Per note n/a $ 1,003.80 $ 990.00 $ 987.50 $ 937.10 $ 997.50
Per preferred stock share n/a 100,000 100,000 100,000 100,000 100,000
(a) Calculated by subtracting the Fund's total liabilities (not including bank loans and senior securities) from the Fund's total
assets and dividing such amount by the principal amount of the debt outstanding.
(b) Calculated by subtracting the Fund's total liabilities (not including bank loans and senior securities) from the Fund's total
assets and dividing such amount by the principal amount of the debt outstanding and aggregate liquidation preference of the
outstanding shares of Taxable Auction Rate Preferred Stock.
(c) Plus accumulated and unpaid dividends.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
(1) ORGANIZATION AND OPERATIONS
Prospect Street High Income Portfolio Inc. (the "Fund") was organized as a
corporation in the state of Maryland on May 13, 1988 and is registered with
the Securities and Exchange Commission as a diversified, closed-end,
management investment company under the Investment Company Act of 1940. The
Fund commenced operations on December 5, 1988. The Fund's financial statements
have been prepared in conformity with generally accepted accounting
principles, which requires the management of the Fund to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting periods. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted in
the investment company industry.
The Fund invests primarily in securities of fixed-maturity, corporate debt
securities and in redeemable preferred stocks that are rated less than
investment grade. Risk of loss upon default by the issuer is significantly
greater with respect to such securities compared to investment-grade
securities because these securities are generally unsecured and are often
subordinated to other creditors of the issuer, and because these issuers
usually have high levels of indebtedness and are more sensitive to adverse
economic conditions, such as a recession, than are investment-grade issuers.
In some cases, the collection of principal and timely receipt of interest is
dependent upon the issuer attaining improved operating results, selling assets
or obtaining additional financing.
See the schedule of investments for information on individual securities, as
well as industry diversification and credit quality ratings.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) VALUATION OF INVESTMENTS
Investments for which listed market quotations are readily available are
stated at market value, which is determined using the last reported sale price
or, if no sales are reported, as in the case of some securities traded over-
the-counter, the last reported bid price. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost, which
approximates market.
Other investments, primarily noninvestment-grade corporate debt securities
for which market quotations are not readily available due to a thinly traded
market with a limited number of market makers, are stated at fair value on the
basis of valuations furnished by an independent pricing service, subject to
adjustment by the investment adviser based upon quotations obtained from
market makers. The independent pricing service determines value based
primarily on quotations from dealers and brokers, market transactions,
accessing data from quotation services, offering sheets obtained from dealers
and various relationships between securities. The independent pricing service
utilizes the last sales price based on odd-lot trades, if available. If such
price is not available, the price furnished is based on round-lot or
institutional size trades. These procedures have been approved by the Board of
Directors.
The fair value of restricted securities is determined by the investment
adviser following procedures approved by the Board of Directors.
Gains and losses on sales of investments are calculated on the identified
cost method for both financial reporting and federal income tax purposes. It
is the Fund's practice to first select for sale those securities that have the
highest cost and also qualify for long-term capital gain or loss treatment for
tax purposes.
Settlements from litigation and class action suits are recognized when the
Fund acquires an enforceable right to such awards. Included in net realized
loss from investments is $3,273,015 attributable to class action settlements
received by the Fund during the year ended October 31, 1998.
(b) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Realized gains and losses on investments sold are recorded on the
identified-cost basis. Interest income and accretion of discounts are recorded
on the accrual basis.
(c) FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment
companies, and to distribute substantially all of its investment company
taxable income to its stockholders each year. Accordingly, no federal income
tax provision is required.
The Fund has reclassified $235,013 from paid in capital to accumulated
undistributed net investment income, $37,564,886 from paid in capital to
accumulated net realized loss from security transactions and $5,660 from
accumulated undistributed net investment income to accumulated net realized
loss from security transactions. These reclassifications have no impact on the
net asset value of the Fund and are designed to present the Fund's capital
accounts on a tax basis.
At October 31, 1998, the cost of investments in securities for federal
income tax purposes was $256,261,835. Aggregate gross unrealized gains on
securities in which there was an excess of market value over tax cost was
$3,620,256. Aggregate gross unrealized losses on securities in which there was
an excess of tax cost over market value was $69,867,017. The net unrealized
loss on securities held by the Fund was $66,246,761 for federal income tax
purposes.
At October 31, 1998, the Fund had the following capital loss carryovers
available to offset future capital gains, if any, to the extent provided by
regulations:
CARRYOVER
AVAILABLE EXPIRATION DATE
$(18,529,051) October 31, 1999
(808,396) October 31, 2002
(3,703,531) October 31, 2003
(4,698,150) October 31, 2006
------------
$(27,739,128)
============
(d) COMMON STOCK AND TAXABLE AUCTION RATE PREFERRED STOCK (PREFERRED STOCK),
OFFERING AND DEFERRED DEBT ISSUANCE COSTS
The costs incurred by the Fund in connection with the initial sale of the
common and preferred stock as well as the common stock rights offerings have
been recorded as a reduction of the common stock proceeds. The costs incurred
by the Fund in connection with the issuance of the senior notes had been
deferred and amortized on a straight-line basis over a period of five years.
The senior notes were redeemed (see Note 4) and the remaining deferred balance
was written-off during the year ended October 31, 1998.
(e) CASH FLOW INFORMATION
The Fund invests primarily in corporate debt securities and distributes
dividends from net investment income, which are paid in cash or shares of
common stock of the Fund. These activities are reported in the accompanying
statement of changes in net assets, and additional information on cash
receipts and cash payments is presented in the accompanying statement of cash
flows.
(3) INVESTMENT ADVISORY AGREEMENT
Prospect Street Investment Management Co., Inc., the Fund's Investment
Adviser, earned $1,582,842 in management fees for the year ended October 31,
1998. Management fees paid by the Fund to the Investment Adviser were
calculated at .65% (on an annual basis) of the average weekly value of total
assets of the Fund less accrued liabilities (excluding the principal amount of
the bank loan, notes and the liquidation preference of the preferred stock and
including accrued and unpaid dividends on the preferred stock) up to and
including $175,000,000 of net assets, .55% on the next $50,000,000 of net
assets and .50% of the excess of net assets over $225,000,000. At October 31,
1998, the fee payable to the Investment Adviser was $196,249, which was
included in accrued expenses in the accompanying balance sheet.
(4) DEBT
In July 1993, the Fund repurchased the remaining $5,000,000 (principal
amount) of its senior extendible notes (the Notes), which carried an annual
interest rate through November 30, 1993 of 10.28%. The Fund simultaneously
issued $20,000,000 of new Senior Notes (the Senior Notes) that would mature,
if not previously redeemed, on December 1, 1998. The Fund was required to
maintain certain asset coverages with respect to the Senior Notes, as defined
in the Note Purchase Agreement, and the Senior Notes were subject to mandatory
redemption if the Fund fails to maintain these asset coverages. Interest on
the Senior Notes was at the rate of 6.53% per annum through November 30, 1998
and was due every June 1 and December 1, commencing December 1, 1993.
The Senior Notes were redeemable, in whole or in part, by the Fund at
certain times and under certain circumstances, as defined in the Note Purchase
Agreement.
On July 24, 1998 the Fund redeemed all of its Senior Notes at an aggregate
redemption price of $20 million, plus accrued interest. The funds required to
redeem the Senior Notes were borrowed under a new $50 million credit facility
discussed in Note 14.
(5) REDEEMABLE PREFERRED STOCK
In July 1993, the Fund redeemed 100 of the 300 shares of preferred stock
that were issued concurrently with the issuance of the Senior Extendible
Notes. Dividends were cumulative at a rate that was established at the
offering of the preferred stock and which was reset every 30 days thereafter
by an auction. Dividend rates ranged from 5.52% to 5.89% of the liquidation
preference during the year ended October 31, 1998. The remaining 200 shares of
preferred stock were redeemable, at the option of the Fund, at a redemption
price equal to $100,000 per share, plus accumulated and unpaid dividends, on
any dividend payment date. The preferred stock was also subject to mandatory
redemption at a redemption price equal to $100,250 per share, plus accumulated
and unpaid dividends, if the Fund was in default of its surety asset coverage
requirements with respect to the preferred stock (see Note 7). In general, the
holders of the preferred stock and the common stock voted together as a single
class, except that the holders of the preferred stock, as a separate class,
voted to elect two members of the Board of Directors, and separate class votes
were required on certain matters that affected the respective interests of the
preferred stock and common stock. The preferred stock had a liquidation
preference of $100,000 per share, plus accumulated and unpaid dividends. The
Fund was required to maintain certain asset coverages with respect to the
preferred stock, as defined in the Fund's Note Purchase Agreement and Surety
Bond Agreement.
On May 15, 1998 the Fund redeemed all of its Taxable Auction Rate Preferred
Stock at an aggregate redemption price of $20 million. The funds required to
redeem the preferred stock were borrowed under a new credit facility discussed
in Note 14.
(6) AUCTION AGENT
The Fund amended and extended the auction agent agreement with Bear Stearns
& Co. Inc. on October 26, 1993 (which was originally dated May 7, 1990) to
provide for an extension to December 4, 1998. The Fund incurred additional
costs of $135,000 related to extending this agreement. These costs are being
amortized on a straight-line basis over the remaining life of the extended
agreement. Amortization expense for the year ended October 31, 1998 was
$27,003.
(7) SURETY BOND
The Fund had entered into an insurance agreement, dated as of December 1,
1988, with Financial Security Assurance, Inc. (FSA), pursuant to which FSA had
issued a surety bond. Under the terms of the surety bond, FSA unconditionally
and irrevocably guaranteed dividend, redemption and liquidation payments to
preferred shareholders upon failure of the Fund to do so, and the Fund would
then have been obligated to reimburse FSA for any amounts paid under the surety
bond. The surety bond had an initial term of five years and was scheduled to
expire on December 5, 1993. On July 15, 1993, the Fund extended the terms of the
surety bond from December 5, 1993 to December 5, 1998. The Fund paid an annual
premium of 0.40% on the maximum aggregate liquidation preference of the
preferred stock. In connection with the redemption of the preferred stock the
surety bond expired on May 15, 1998.
The Fund executed an amendment to the insurance agreement on April 11, 1990,
which provided that the Fund must redeem or repurchase all of the then
outstanding shares of preferred stock in the event that the dividend rate on
the preferred stock for the period next succeeding the auction in September
1998 is the maximum applicable rate (as defined) payable on the Fund's
preferred stock.
(8) PURCHASES AND SALES OF SECURITIES
For the year ended October 31, 1998, the aggregate cost of purchases and
proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $422,037,061 and
$375,637,342, respectively. There were no purchases or sales of U.S.
Government obligations during the year ended October 31, 1998.
(9) CERTAIN TRANSACTIONS
Certain officers of the Investment Adviser serve on the Board of Directors
of the Fund. They receive no compensation in this capacity.
Directors who are not officers or employees of the Investment Adviser
receive a fee of $10,000 per year plus $2,000 per Directors' meetings
attended, together with actual out-of-pocket expenses relating to attendance
at such meetings and $1,000 per telephone meeting. In addition, members of the
Fund's audit committee, which consists of certain of the Fund's noninterested
Directors, receive $1,000 per audit committee meeting attended, together with
actual out-of-pocket expenses relating to attendance at such meeting.
(10) DIVIDENDS AND DISTRIBUTIONS
The Board of Directors of the Fund declared regular dividends on the common
stock of $.105 per share,
giving effect to the April 1998 one for three reverse stock split. Dividends
were payable on November 28 and December 31, 1997, and January 30, February
27, March 31, April 30, May 29, June 30, July 31, August 31, September 30, and
October 30, 1998.
Distributions on common stock are declared based on annual projections of
the Fund's net investment income (defined as dividends and interest income,
net of Fund expenses, less distributions on the preferred stock). The Fund
plans to pay monthly distributions to common shareholders. Meanwhile, as a
result of market conditions or investment decisions, the amount of
distributions may exceed net investment income earned at certain times
throughout the period. It is anticipated that, on an annual basis, the amount
of distributions to common shareholders will not exceed net investment income
(as defined) applicable to common shareholders on a tax basis. All
shareholders of the Fund are automatically considered a participant in the
Dividend Reinvestment Plan (the "Plan") unless otherwise elected. Under the
Plan, when the market price of common stock shares is equal to or exceeds the
net asset value on record date for distribution, participants will receive all
dividends and distributions in full and fractional shares of the Fund at the
most recently determined net asset value but in no event less than 95% of
market price. If on record date for distributions the net asset value of the
common stock exceeds its market price, or if the Fund shall declare a dividend
or capital gains distribution payable only in cash, the dividend-paying agent
will buy common stock in the open market for the participants' accounts.
Participants are not charged a service fee for the Plan but are subject to a
pro rata share of brokerage fees incurred with respect to open market
purchases of common stock.
(11) FAIR VALUE OF LONG-TERM DEBT
The fair value of the Fund's long-term debt is estimated based on the quoted
market prices for the same issues or on the current rates offered to the Fund
for debt of the same remaining securities. At October 31, 1998, the fair value
of the bank term loan was $40,000,000.
(12) REVERSE STOCK SPLIT
In March of 1998, the shareholders of the Fund approved a one-for-three
reverse stock split which became effective on April 1, 1998. Certain per share
amounts included in the accompanying financial statements have been restated
to give effect for this reverse stock split.
(13) RIGHTS OFFERING
On December 24, 1997 the Fund commenced a rights offering whereby the Fund
issued to its shareholders of record, as of that date, non-transferable rights
entitling the holders thereof to subscribe for an aggregate of 4,914,203
shares of the Fund's common stock. Each record date shareholder had the
ability to receive one right for each whole share of common stock held. The
rights allowed the rights holder to subscribe for shares of common stock at
the rate of one share of common stock for every three rights held. The
subscription period for the rights offering expired on January 23, 1998 and
the Fund issued, on a post-split basis, 4,914,203 shares of common stock at
$11.40 per share. Proceeds to the Fund amounted to $53,422,039, net of
soliciting fees and offering expenses of $2,599,872.
(14) BANK LOAN
On April 30, 1998 the Fund entered into a credit agreement ("the Agreement")
with a lending institution and borrowed the maximum amount of $30 million
under a revolving credit facility. The Fund's ability to utilize this facility
extends until April 30, 2001, though there are provisions in the Agreement
which allow for its modification prior to April 30, 2001, including extension,
termination and reduction of the facility amount. The Fund has the option to
choose the applicable interest rate on its borrowing with such rates being
based upon either the higher of the lending institution's base lending rate or
one half percent above the Federal funds rate, or, LIBOR plus 0.55%. On July
24, 1998 the Fund entered into an amended agreement to increase the available
line of credit to $50 million. Under the terms of the loan agreement the Fund
is required to maintain certain debt covenants, which include that the Fund's
total liabilities plus, without duplication, the aggregate amount of its debt,
may not exceed 25% of its total assets. The weighted average loan balance and
interest rate for the year ended October 31, 1998 was approximately
$21,364,000 and 6.33%, respectively. The outstanding loan balance at October
31, 1998 was $40 million, with an interest rate on the outstanding loans of
6.30%. The Agreement also provides for commitment fees at a rate of 0.09% per
year on the daily amount by which the aggregate amount of the commitment
amount of 50 million exceeds the aggregate outstanding principal of the bank
loans.
<PAGE>
<TABLE>
<S> <C>
============================================================ ============================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR [Graphic Omitted]
TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR PROSPECT STREET(R)
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 IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE 6,630,663 Shares of Common Stock
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS Issuable Upon Exercise of
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF Rights to Subscribe for
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED Such Shares
BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR
SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES
TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY IN ANY PROSPECT STREET(R)
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS HIGH INCOME PORTFOLIO INC.
UNLAWFUL.
----------------
TABLE OF CONTENTS
PAGE
Prospectus Summary .............................. 2 COMMON STOCK
Fee Table ....................................... 7
Financial Highlights ............................ 8
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 ................................. 22 PROSPECTUS
Investment Policies and Limitations ............. 23 ----------------
Risk Factors and Special Considerations ......... 31
Directors and Officers .......................... 36
The Investment Adviser .......................... 39
Portfolio Trading ............................... 41
Determination of Net Asset Value ................ 41
Share Repurchases; Conversion to Open-End
Status ........................................ 42 PAINEWEBBER INCORPORATED
Dividends and Distributions; Dividend
Reinvestment Plan ............................. 44 GRUNTAL & CO. LLC
Federal Taxation ................................ 45
Description of Capital Stock .................... 49
Description of the Credit Agreement ............. 50
Custodian, Transfer Agent, Dividend Disbursing
Agent and Registrar ........................... 53
Legal Opinions .................................. 53
Reports to Shareholders ......................... 53 ----------------
Experts ......................................... 53
Further Information ............................. 53 JANUARY 25, 1999
Appendix A ...................................... A-1
Financial Statements ............................ F-1
============================================================ ============================================================
</TABLE>
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
(i) -- Schedule of Investments as of October 31, 1998
(ii) -- Balance Sheet as of October 31, 1998
(iii) -- Statement of Operations for the fiscal year ended
October 31, 1998
(iv) -- Statement of Cash Flows for the fiscal year ended
October 31, 1998
(v) -- Statement of Changes in Net Assets for the fiscal
years ended October 31, 1998 and 1997
(vi) -- Financial Highlights for each Share of Common Stock
Outstanding for the fiscal years ended October 31,
1993, 1994, 1995, 1996, 1997 and 1998
(vii) -- Notes to Financial Statements for the fiscal year
ended October 31, 1998
(viii) -- Report of Independent Accountants dated December 14,
1998.
Statements, schedules and historical information other than these listed above
have been omitted since they are either not applicable, or not required or the
required information is shown in the financial statements or notes thereto.
(2) EXHIBITS
(a) -- 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.
*** Incorporated by reference to filing with Securities and Exchange Commission
on July 21, 1998.
# Filed herewith.
+ Incorporated by reference to the Registrant's Registration Statement on Form
N-2, File No. 333-2067.
++ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-2, File No. 333-2067.
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 .............. $ 8,000
New York Stock Exchange listing fee ................................ $ 23,200
Printing (other than stock certificates) ........................... $ 86,000
Accounting fees and expenses ....................................... $ 25,000
Legal fees and expenses ............................................ $130,000
Dealer Managers' expense reimbursement ............................. $100,000
Information Agent fees and expenses ................................ $ 36,000
Subscription Agent fees and expenses ............................... $ 30,000
Miscellaneous ...................................................... $ 17,354
--------
Total .......................................................... $475,000
========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant and the following corporations (as indicated) are under common
control of Richard E. Omohundro, Jr. ("Omohundro, Jr."), Joseph G. Cote
("Cote") and John A. Frabotta ("Frabotta") by virtue of their stock ownership
and positions with such corporations which are indicated below. None of the
corporations are subsidiaries of the Registrant.
1. Prospect Street Investment Management Co., Inc.
(a Massachusetts corporation) ("PSIM")
Business: Investment adviser registered under the Investment AdvisersAct 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 Prospect Street Debt
Strategy Fund, Inc.
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 State Street Bank and Trust Company
Stock: 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 Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on the 25th day of January, 1999.
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By /s/ RICHARD E. OMOHUNDRO, JR.
---------------------------------------
RICHARD E. OMOHUNDRO, JR.
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Director and President
(Principal Executive
/s/ RICHARD E. OMOHUNDRO, JR. Officer) January 25, 1999
- ------------------------------
RICHARD E. OMOHUNDRO, JR.
Director, Vice President
and Treasurer (Principal
Financial and Accounting
/s/ JOHN A. FRABOTTA Officer) January 25, 1999
- ------------------------------
JOHN A. FRABOTTA
* Director January 25, 1999
- ------------------------------
JOHN S. ALBANESE
* Director January 25, 1999
- ------------------------------
C. WILLIAM CAREY
* Director January 25, 1999
- ------------------------------
JOSEPH G. COTE
* Director January 25, 1999
- ------------------------------
HARLAN D. PLATT
* Director January 25, 1999
- ------------------------------
CHRISTOPHER E. ROSHIER
*By /s/ JOHN A. FRABOTTA
- ------------------------------
JOHN A. FRABOTTA
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page
- ---------- ---------------------- ----
(d)(3) Form of Subscription certificate and
Instructions
(d)(4) Form of Notice of guaranteed Delivery
(d)(5) Form of DTC/Nominee Over-Subscription
Exercise Form
(d)(6) Form of Subscription Agent Agreement
between the Registrant and State Street
Bank and Trust Company
(d)(7) Information Agent Agreement between the
Registrant and Corporate Investor
Communications, Inc.
(h) Form of Dealer Manager Agreement
(including the form of the Selling Group
Agreement and Soliciting Dealer Agreement)
(l)(1) Opinion and Consent of Rogers & Wells LLP
(l)(2) Opinion and Consent of Piper & Marbury LLP
(n) Consent of Arthur Andersen LLP
(r) Financial Data Schedule
<PAGE>
Exhibit (d)(3)
Control No. ----------- Maximum Primary Subscription Shares Available ----
THE OFFER EXPIRES AT 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY 19, 1999*
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
RIGHTS FOR COMMON STOCK
SUBSCRIPTION CERTIFICATE
Prospect Street High Income Portfolio Inc. (the "Fund") issued to its
shareholders of record ("Record Date Shareholders"), as of the close of
business on January 26, 1999 (the "Record Date"), transferable rights
("Rights") entitling the holders thereof to subscribe for shares ("Shares") of
the Fund's common stock, par value $0.03 per share (the "Common Stock") at a
rate of one Share for every three Rights held (1-for-3). The terms and
conditions of the rights offer (the "Offer") are set forth in the Fund's
January 25, 1999 Prospectus (the "Prospectus") incorporated herein by
reference. The owner of this Subscription Certificate, or assignee, is
entitled to the number of Rights shown on this Subscription Certificate and is
entitled to subscribe for the number of Shares shown on this Subscription
Certificate. Record Date Shareholders issued fewer than three Rights are
entitled to subscribe for one Share pursuant to the Primary Subscription.
Record Date Shareholders who have fully exercised their Rights pursuant to the
Primary Subscription (other than those Rights which cannot be exercised
because they represent the right to subscribe for less than one Share) are
entitled to subscribe for additional Shares pursuant to the Over-Subscription
Privilege, subject to certain limitations and allotment, as described in the
Prospectus. Capitalized terms not defined herein have the meanings attributed
to them in the Prospectus. The Fund will not offer or sell in connection with
the Offer any Shares which are not subscribed for pursuant to the Primary
Subscription or the Over-Subscription Privilege.
<TABLE>
<S> <C>
SAMPLE CALCULATION
- ---------------------------------------------------------------------------------------------------------------------------
PRIMARY SUBSCRIPTION ENTITLEMENT (1-FOR-3)
300 3 100
No. of shares owned on the Record Date ----------------------------- / ------- = ------------------new shares
(equals no. of Rights issued) (ignore fractions)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE RIGHTS ARE TRANSFERABLE
The Rights are transferable until the Expiration Date (February 19, 1999). The
Rights will be listed for trading on the New York Stock Exchange under the
symbol "PHY.RT". If you wish to sell all or a portion of your Rights through
the Subscription Agent, the Rights MUST BE RECEIVED BY THE SUBSCRIPTION AGENT
AT OR PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY 17, 1999, two
business days prior to the Expiration Date.
SUBSCRIPTION PRICE
The Subscription Price will be $8.70 per share.
METHOD OF EXERCISE OF RIGHTS
IN ORDER TO EXERCISE YOUR RIGHTS, YOU MUST EITHER (i) COMPLETE AND SIGN THIS
SUBSCRIPTION CERTIFICATE ON THE BACK AND RETURN IT TOGETHER WITH PAYMENT OF
THE SUBSCRIPTION PRICE FOR THE SHARES SUBSCRIBED, OR (II) PRESENT A PROPERLY
COMPLETED NOTICE OF GUARANTEED DELIVERY, IN EITHER CASE TO THE SUBSCRIPTION
AGENT, STATE STREET BANK AND TRUST COMPANY, BEFORE 5:00 P.M., NEW YORK CITY
TIME, ON FEBRUARY 19, 1999 ("THE EXPIRATION DATE")*.
Full payment of the Subscription Price per share for all shares subscribed for
pursuant to both the Primary Subscription and, for Record Date Shareholders
only, the Over-Subscription Privilege must accompany this Subscription
Certificate and must be made payable in United States dollars by money order
or check drawn on a bank located in the United States payable to Prospect
Street High Income Portfolio Inc. Because uncertified personal checks may take
at least five business days to clear, we recommend you pay, or arrange for
payment, by means of certified or cashier's check or money order.
Alternatively, if a Notice of Guaranteed Delivery is used, a properly
completed and executed Subscription Certificate, and full payment, as
described in such notice, must be received by the Subscription Agent no later
than the close of business on the third business day (February 24, 1999) after
the Expiration Date (February 19, 1999). For additional information, see the
Prospectus.
Certificates for the Shares acquired pursuant to the Primary Subscription will
be mailed promptly after the expiration of the Offer and full payment for the
Shares subscribed for has been received and cleared. Certificates representing
Shares acquired pursuant to the Over-Subscription Privilege will be mailed as
soon as practicable after full payment has been received and cleared and all
allocations have been effected. Any excess payment to be refunded by the Fund
to a shareholder will be mailed by the Subscription Agent to such shareholder
as promptly as possible.
Account #:
Control #:
Number of Rights Issued:
CUSIP #: 743586 11 7
(continued on back)
<PAGE>
<TABLE>
<S> <C> <C>
BY FIRST CLASS MAIL: BY OVERNIGHT COURIER: BY HAND:
State Street Bank and Trust Company State Street Bank and Trust Company Securities Transfer and Reporting Services Inc.
Corporate Reorganization Corporate Reorganization c/o Boston EquiServe
P.O. Box 9061 40 Campanelli Drive 100 William St. Galleria
Boston, Massachusetts 02205-8686 Braintree, Massachusetts 02184 New York, New York 10038
U.S.A. U.S.A. U.S.A.
- -----------------------------------------------------------------------------------------------------------------------------------
Delivery to an address other than one of the addresses listed above will not constitute valid delivery.
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
- -----------------------------------------------------------------------------------------------------------------------------------
SECTION 1: OFFERING INSTRUCTIONS (CHECK THE APPROPRIATE BOXES)
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
[ ] I apply for ALL of my entitlement of new shares pursuant to the Primary Subscription. -----------------x $8.70 = $ -------
(no. of new shares)
[ ] I apply for new shares pursuant to the Over-Subscription Privilege** ----------------------------------x $8.70 = $ -------
(no. of additional shares)
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
[ ] I apply for -----------------------------------------------------------------------------------------x $8.70 = $ -------
(no of new shares)
Amount of check enclosed $-----------------
[ ] Sell any remaining Rights
[ ] Sell ALL of my Rights
Note: If I apply for ALL of my entitlement of new shares pursuant to the Primary Subscription, I hereby authorize the Subscription
Agent, in accordance with the procedures described in the Prospectus, to sell any Rights I am unable to exercise because such
Rights represent the right to subscribe for less than one share. If I have checked either box pertaining to a sale of Rights,
I authorize the sale of Rights by the Subscription Agent according to the procedures described in the Prospectus.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SECTION 2: SUBSCRIPTION AUTHORIZATION
I acknowledge that I have received the Prospectus for this Offer and I hereby irrevocably subscribe for the number of shares
indicated above on the terms and conditions specified in the Prospectus relating to the Primary Subscription and the Over-
Subscription Privilege.
I hereby agree that if I fail to pay in full for the shares for which I have subscribed, the Fund may exercise any of the
remedies set forth in the Prospectus.
Signature of subscriber(s) --------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Telephone number (including area code) ( ) ------------------------------------------------------------------------------------
If you wish to have your shares and refund check (if any) delivered to an address other than that listed on this Subscription
Certificate you must have your signature guaranteed by a member of the New York Stock Exchange or a bank or trust company. Please
provide the delivery address above and note if it is a permanent change.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SECTION 3: TRANSFER NOTIFICATION (EXCEPT PURSUANT TO A SALE THROUGH THE SUBSCRIPTION AGENT)
For value received, I request _________ Rights (in a number evenly divisible by three) represented by the Subscription
Certificate be assigned to:
Name of Assignee: --------------------------------------------------------------
Address of Assignee: -----------------------------------------------------------
Signature of Assignor: ---------------------------------------------------------
IMPORTANT: The Signature(s) must correspond with the name(s) printed on your Subscription Certificate. Your signature must be
guaranteed by: a commercial bank or trust company, or a member firm of a domestic stock exchange, or a savings bank or credit union.
Signature guaranteed by: ----------------------------------------------------------------------------------------------------------
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER
IDENTIFICATI ON NUMBER (OR CERTIFICATIO N REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT AND THE SELLER IS NOT
OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SECTION 4: DESIGNATION OF BROKER-DEALER
The following broker-dealer is hereby designated as having been instrumental in the exercise of the Rights hereby exercised:
FIRM: -----------------------------------------------------------------------------------------------------------------------------
REPRESENTATIVE NAME: --------------------------------------------------------------------------------------------------------------
REPRESENTATIVE NUMBER: ------------------------------------------------------------------------------------------------------------
- ------------------------
* Unless the Offer is extended.
** You can only participate in the Over-Subscription Privilege if you are a Record Date Shareholder and have subscribed for your
full entitlement of new shares pursuant to the Primary Subscription.
ANY QUESTIONS REGARDING THIS SUBSCRIPTION CERTIFICATE AND THE OFFER MAY BE DIRECTED TO THE INFORMATION AGENT, CORPORATE INVESTOR
COMMUNICATIONS, INC., TOLL-FREE AT (888) 266-2038.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit (d)(4)
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF
COMMON STOCK OF PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SUBSCRIBED FOR PURSUANT TO THE PRIMARY SUBSCRIPTION
AND THE OVER-SUBSCRIPTION PRIVILEGE
PROSPECT STREET HIGH INCOME PORTFOLIO INC. RIGHTS OFFERING
As set forth in the Fund's Prospectus dated January 25, 1999 (the
"Prospectus") under "The Offer -- Payment for Shares," this form or one
substantially equivalent hereto may be used as a means of effecting
subscription and payment for all shares of Prospect Street High Income
Portfolio Inc. Common Stock subscribed for by exercise of Rights pursuant to
the Primary Subscription and the Over-Subscription Privilege. Such form may be
delivered by hand or sent by facsimile transmission, overnight courier or mail
to the Subscription Agent and must be received prior to 5:00 p.m. New York
City time on February 19, 1999 (the "Expiration Date").* The terms and
conditions of the Offer set forth in the Prospectus are incorporated by
reference herein. Capitalized terms not defined herein have the meanings
attributed to them in the Prospectus.
<TABLE>
THE SUBSCRIPTION AGENT IS:
STATE STREET BANK AND TRUST COMPANY
<S> <C>
BY FACSIMILE: BY FIRST CLASS MAIL:
(TELECOPIES) State Street Bank and Trust Company
(781) 794-6352 Corporate Reorganization
Confirm by telephone to: P.O. Box 9061
(781) 794-6388 Boston, Massachusetts 02205-8686
U.S.A.
BY OVERNIGHT COURIER: BY HAND:
State Street Bank and Trust Company Securities Transfer and Reporting Services Inc.
Corporate Reorganization c/o Boston EquiServe
40 Campanelli Drive 100 William St. Galleria
Braintree, Massachusetts 02184 New York, New York 10038
U.S.A. U.S.A.
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE,
DOES NOT CONSTITUTE A VALID DELIVERY.
The New York Stock Exchange member firm or bank or trust company which
completes this form must communicate the guarantee and the number of Shares
subscribed for under both the Primary Subscription and the Over-Subscription
Privilege to the Subscription Agent and must deliver this Notice of Guaranteed
Delivery prior to 5:00 p.m., New York City time, on the Expiration Date,*
guaranteeing delivery of (i) payment in full for all subscribed Shares and (ii)
a properly completed and executed Subscription Certificate to the Subscription
Agent. The Subscription Certificate and full payment must then be delivered by
the close of business on the third business day (February 24, 1999) after the
Expiration Date (February 19, 1999) to the Subscription Agent. Failure to do so
will result in a forfeiture of the Rights.
(continued on other side)
*Unless extended by the Fund.
<PAGE>
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company, guarantees delivery of payment to the Subscription Agent by the
close of business (5:00 p.m., New York City time) on the third business day
(February 24, 1999) after the Expiration Date (February 19, 1999, unless
extended) of (i) a properly completed and executed Subscription Certificate
and (ii) payment of the full Subscription Price for shares subscribed for on
Primary Subscription and pursuant to the Over-Subscription Privilege, if
applicable, as subscription for such shares is indicated herein or in the
Subscription Certificate.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
1. Primary Subscription Number of Rights Number of Primary Payment to be made in
to be exercised Shares requested for connection with Primary
------Rights which you are Shares
guaranteeing delivery
of Rights and Payment
--------Shares
(Rights / by 3) $ ----------------
- --------------------------------------------------------------------------------------------------------------------------
2. Over-Subscription Number of Over- Payment to be made in
Subscription Shares connection with Over-
requested for which Subscription Shares
you are guaranteeing
payment
---------Shares $ ----------------
- --------------------------------------------------------------------------------------------------------------------------
3. Totals Total Number of
Rights to be Delivered $ ================
--------Rights Total Payment
- --------------------------------------------------------------------------------------------------------------------------
Method of Delivery of Rights (circle one) A. Through The Depository Trust Company ("DTC")*
B. Direct to the Subscription Agent
Please note that if you are guaranteeing for Over-Subscription Shares and are a DTC participant, you must also
execute and forward to State Street Bank and Trust Company a Nominee Holder Over-Subscription Exercise Form.
- ----------------------------------------------------------- -------------------------------------------------------------
Name of Firm Authorized Signature
- ----------------------------------------------------------- -------------------------------------------------------------
Address Title
- ----------------------------------------------------------- -------------------------------------------------------------
Zip Code Name (Please Type or Print)
- -----------------------------------------------------------
Name of Registered Holder (If Applicable)
- ----------------------------------------------------------- -------------------------------------------------------------
Telephone Number Date
* IF THE RIGHTS ARE TO BE DELIVERED THROUGH DTC, CALL THE SUBSCRIPTION AGENT TO OBTAIN A PROTECT IDENTIFICATION NUMBER,
WHICH NEEDS TO BE COMMUNICATED BY YOU TO DTC.
</TABLE>
<PAGE>
Exhibit (d)(5)
DTC PARTICIPANT OVER-SUBSCRIPTION EXERCISE FORM
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
RIGHTS OFFERING FOR COMMON STOCK
This form is to be used only by nominee holders or by the Depository Trust
Company ("DTC") participants to exercise the Over-Subscription Privilege in
respect of Rights with respect to which the Primary Subscription Privilege was
exercised in full and delivered through the facilities of a common depository
or DTC. All other exercises of Over-Subscription Privileges must be effected
by the delivery of the Subscription Certificate.
The terms and conditions of the Rights Offering are set forth in the
Fund's Prospectus dated January 25, 1999 (the "Prospectus") and are
incorporated herein by reference. Copies of the Prospectus are available upon
request from the Information Agent.
PLEASE COMPLETE ALL APPLICABLE INFORMATION
Void unless received by the Subscription Agent with payment in full or
with a properly completed Notice of Guaranteed Delivery before 5:00 p.m., New
York City time, on February 19, 1999 (the "Expiration Date"), unless extended
by the Fund.
<TABLE>
<S> <C>
BY FACSIMILE: BY FIRST CLASS:
(TELECOPIES) State Street Bank and Trust Company
(781) 794-6352 Corporate Reorganization
Confirm by telephone to: P.O. Box 9061
(781) 794-6388 Boston, Massachusetts 02205-8686
U.S.A.
BY OVERNIGHT COURIER: BY HAND:
State Street Bank and Trust Company Securities Transfer and Reporting Services Inc.
Corporate Reorganization c/o Boston EquiServe
40 Campanelli Drive 100 William St. Galleria
Braintree, Massachusetts 02184 New York, New York 10038
U.S.A. U.S.A.
</TABLE>
1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in ----------------- [Name of Depository] (the "Depository") and
that it has either (i) exercised the Primary Subscription in respect of the
Rights and delivered such exercised Rights to the Subscription Agent by means
of transfer to the Depository Account of the Fund or (ii) delivered to the
Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise
of the Primary Subscription Privilege and will deliver the Rights called for
in such Notice of Guaranteed Delivery to the Subscription Agent by means of
transfer to such Depository Account of the Fund.
2. The undersigned hereby exercises the Over-Subscription Privilege to
purchase, to the extent available, ------- shares of Common Stock and certifies
to the Subscription Agent that such Over-Subscription Privilege is being
exercised for the account or accounts of persons (which may include the
undersigned) on whose behalf all Primary Subscription Rights have been
exercised.
3. The undersigned understands that payment of the Subscription Price of
$8.70 per Share for each share of Common Stock subscribed for pursuant to the
Over-Subscription Privilege must be received by the Subscription Agent before
5:00 p.m., New York City time, on the Expiration Date, unless a Notice of
Guaranteed Delivery is used, in which case, payment in full must be received
by the Subscription Agent not later than the close of business on the third
business day after the Expiration Date. The undersigned represents that such
payment, in the aggregate amount of $-------------, either
(continued on other side)
<PAGE>
<TABLE>
<S> <C>
(CHECK APPROPRIATE BOX):
[ ] has been or is being delivered to the Subscription Agent pursuant to the Notice of Guaranteed Delivery referred to
above
or
[ ] is being delivered to the Subscription Agent herewith
or
[ ] has been delivered separately to the Subscription Agent;
- --------------------------------------------------------------- -----------------------------------------------------------
Primary Subscription Confirmation Number Name of Nominee Holder
- --------------------------------------------------------------- -----------------------------------------------------------
Depository Participant Number Address
Contact Name -------------------------------------------------- -----------------------------------------------------------
City State Zip Code
Phone Number --------------------------------------------------
By: -------------------------------------------------------
Dated: ---------, 1999
Name: -----------------------------------------------------
Title: ----------------------------------------------------
PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION OF RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES
SUBSCRIBED AND THE NUMBER OF OVER-SUBSCRIPTION SHARES, IF APPLICABLE, REQUESTED BY EACH SUCH OWNER.
PLEASE NOTE: THIS FORM WILL NOT BE ACCEPTED AS VALID UNLESS THE FOLLOWING INFORMATION IS PROVIDED FOR THE ALLOCATION OF
OVER-SUBSCRIPTION SHARES.
The positions below pertain to those persons on whose behalf the Over-Subscription is being exercised:
- ----------------------------------------- Total number of record date shares
- ----------------------------------------- Total number of primary rights exercised
</TABLE>
<PAGE>
Exhibit (d)(6)
SUBSCRIPTION AGENT AGREEMENT
This Subscription Agent Agreement (the "Agreement") is made as of January ,
1999 between Prospect Street High Income Portfolio Inc. (the "Fund"), a Maryland
Corporation, and State Street Bank and Trust Company, a Massachusetts Trust
Company, as subscription agent (the "Agent").
WHEREAS, the Fund proposes to make a subscription offer by issuing certificates
or other evidences of subscription rights, in the form designated by the Fund
("Subscription Certificates") to shareholders of record ("Record Date
Shareholders") of its Common Stock as of a record date specified by the Fund
(the "Record Date"), pursuant to which each Record Date Shareholder will have
certain transferable rights (the "Rights") to subscribe for shares of the Fund's
Common Stock, par value $0.03 (the "Common Stock"), as described in and upon
such terms as are set forth in the prospectus (the "Prospectus") included in the
Form N-2 Registration Statement filed by the Fund with the Securities and
Exchange Commission on December 18, 1998, as amended by any amendment filed with
respect thereto (the "Registration Statement"); and
WHEREAS, the Fund wishes the Agent to perform certain acts on behalf of the Fund
and the Agent is willing to so act, in connection with the distribution of the
Subscription Certificates and the issuance and exercise or transfer of the
Rights, all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein, the parties agree as follows:
1. Pursuant to the resolutions of its Board of Directors, the Fund hereby
appoints and authorizes the Agent to act on its behalf in accordance with
the provisions hereof, and the Agent hereby accepts such appointment and
agrees to so act.
2. (a) Each Subscription Certificate shall evidence the Rights of the Record
Date Shareholder therein named to purchase Common Stock upon the terms
and conditions therein and herein set forth.
(b) Upon the written advice of the Fund signed by its Senior Vice
President, Treasurer, Secretary or Assistant Secretary, as to the
Record Date, the Agent shall, from a list of Record Date Shareholders
prepare Subscription Certificates in the names of the Record Date
Shareholders, setting forth the number of Rights to subscribe for
shares of Common Stock, calculated on the basis of one right for each
share recorded on the Fund's books in the name of each such Record
Date Shareholder as of the Record Date. Each Subscription Certificate
shall be dated as of the Record Date. Upon the written advice, signed
as aforesaid, as to the effective date of the Registration Statement,
the Agent shall as promptly as practicable deliver the Subscription
Certificates, together with a copy of the Prospectus, to all Record
Date Shareholders.
3. (a) Each Subscription Certificate shall be irrevocable and fully
transferable. The Agent shall maintain a register of Subscription
Certificates and the holders of record thereof (each of whom shall be
deemed a "Holder" hereunder for purposes of determining the rights of
holders of Subscription Certificates). Each Subscription Certificate
shall, subject to the provisions thereof, entitle the Holder in whose
name it is recorded to the following:
(1) The right (the "Basic Subscription Right") to purchase a number of
shares of Common Stock equal to one share of Common Stock for
every three Rights held: provided, however, that Record Date
Shareholders issued fewer than three Rights are entitled to
purchase one share of Common Stock; and provided further, that no
fractional shares of Common Stock shall be issued; and
(2) With respect to Record Date Shareholders, the right (the
"Oversubscription Right") to purchase from the Fund additional
shares of Common Stock, subject to the availability of such shares
and to allotment of such shares as may be available among Record
Date Shareholders who exercise Oversubscription Rights on the
basis specified in the Prospectus; provided, however, that a
Record Date Shareholder who has not exercised his Basic
Subscription Rights with respect to the full number of shares that
such Record Date Shareholder is entitled to purchase by virtue of
his Basic Subscription Rights as of the Expiration Date, if any,
shall not be entitled to any Oversubscription Rights.
(b) A Holder may exercise his Basic Subscription Rights and, a Record Date
Shareholder may exercise his Oversubscription Rights by delivery to
the Agent at its corporate office located at EquiServe, 150 Royall
Street, Canton, MA 02021 (the "Corporate Office") specified in the
Prospectus of (i) the Subscription Certificate with respect thereto,
duly executed by such Holder in accordance with and as provided by the
terms and conditions of the Subscription Certificate, together with
(ii) the purchase price of each share of Common Stock subscribed for
by exercise of such Rights as set forth in the Prospectus (the
"Subscription Price"), in United States dollars in cash, by check, or
bank draft drawn on a bank in the continental United States or by
postal, telegraphic, or express money order, in each case payable to
the order of the Fund.
(c) Rights may be exercised at any time after the date of issuance of the
Subscription Certificates with respect thereto but no later than 5:00
P.M. New York City Time on the expiration date (the "Expiration Date")
as specified in the Prospectus. For the purpose of determining the
time of the exercise of any Rights, delivery of any material to the
Agent shall be deemed to occur when such materials are received at the
Corporate Office.
(d) Notwithstanding the provisions of Section 3(b) and 3(c) regarding
delivery of an executed Subscription Certificate to the Agent prior to
5:00 P.M. New York City Time on the Expiration Date, if prior to such
time the Agent receives notice of guaranteed delivery by telegram or
otherwise from a bank, trust company or a New York Stock Exchange
member guaranteeing delivery of (i) full payment for shares purchased
and subscribed for by virtue of a Holder's Rights, and (ii) a properly
completed and executed Subscription Certificate, then such exercise of
Basic Subscription Rights and Oversubscription Rights shall be
regarded as timely, subject, however, to receipt of the duly executed
Subscription Certificate and full payment for the Common Stock by the
Agent within three business days after the Expiration Date.
(e) Within eight business days following the Expiration Date (the
"Confirmation Date"), the Agent shall send a confirmation to each
Holder (or, if shares of Common Stock on the Record Date are held by
Cede & Co. or any other depository or nominee, to Cede & Co. or such
other depository or nominee), showing (i) the number of shares
acquired pursuant to the Basic Subscription Rights, (ii) the number of
shares, if any, acquired pursuant to the Oversubscription Rights,
(iii) the per share and total purchase price for the shares, (iv) any
amount payable to the Record Date Shareholder pursuant to Section 9,
and (v) any excess to be refunded by the Fund to such Record Date
Shareholder, in each case based on the Subscription Price. Any excess
payment to be refunded by the Fund to a Record Date Shareholder, shall
be mailed by the Agent to the Record Date Shareholder as promptly as
possible after the Expiration Date, as provided in Section 7 below.
4. If, after allocation of shares of Common Stock to persons exercising Basic
Subscription Rights, there remain unexercised Rights, then the Agent shall
allot the shares issuable upon exercise of such unexercised Rights (the
"Excess Shares") to Record Date Shareholders exercising Oversubscription
Rights, in the amounts of such oversubscriptions. If there are
insufficient shares of Common Stock to fill such oversubscriptions, the
Excess Shares will be allocated pro rata among Record Date Shareholders
being prorated, based on the number of shares of Common Stock such Record
Date Shareholders subscribed for in the Primary Subscription relative to
the aggregate number of shares of Common Stock subscribed for in the
Primary Subscription by all such Record Date Shareholders then being
prorated. The Agent shall advise the Fund immediately upon the completion
of the allocation set forth above as to the total number of shares
subscribed and distributable.
5. The Rights are transferable until the Expiration Date, and the Rights and
the shares of Common Stock will be listed for trading on the New York
Stock Exchange. Reference is made to the Prospectus for a complete
description of the sale of the Rights.
6. (a) The Agent, will deliver (i) certificates representing those shares
purchased pursuant to exercise of Basic Subscription Rights as soon as
practicable after the corresponding Rights have been validly exercised and
full payment for such shares has been received and cleared; (ii)
certificates representing those shares purchased pursuant to the exercise
of Oversubscription Rights as soon as practicable after the Expiration
Date and after all allocations have been effected; (iii) in the case of
each Record Date Shareholder who subscribed, pursuant to the exercise of
Oversubscription Rights, for a greater number of shares than was allotted
to such Record Date Shareholder under Section 4, as soon as possible after
the Expiration Date, a refund (and interest on such) in the amount of the
difference between the purchase price delivered for the shares subscribed
for pursuant to the exercise of such Oversubscription Rights and the
purchase price of the shares so allotted under Section 4 (an "Excess
Payment"); (iv) in the case of Record Date Shareholders who are
participants in the dividend reinvestment and cash purchase plan, as soon
as possible after the Expiration Date, account statements reflecting a
credit of uncertificated shares pursuant to their exercise of Basic
Subscription Rights and Oversubscription Rights unless such Record Date
Shareholders have elected to receive certificates.
7. (a) All proceeds received by the Agent from Holders in respect of the
exercise of rights shall be held by the Agent, on behalf of the Fund
in a segregated, interest-bearing account (the "Account") (the
interest of which shall be paid to the Fund) pending disbursement in
the manner described in Section 7(b) below.
(b) The Agent shall deliver all proceeds received in respect of the
exercise of the Rights (including interest earned thereon) to the Fund
as promptly as practicable, after the Expiration Date. Proceeds held
in respect of Excess Payments shall be refunded to Record Date
Shareholders entitled to such a refund as promptly as possible after
the Expiration Date.
8. The Agent shall promptly advise the Fund as to the date of delivery of
Common Stock hereunder and shall supply the Fund with a certified list of
Record Date Shareholders.
9. The Agent shall account promptly to the Fund with respect to Rights
exercised and concurrently account for all monies received and returned by
the Agent with respect to the purchase of shares of Common Stock upon the
exercise of Rights.
10. In the event the Agent does not receive, within three business days after
the Expiration Date, any amount due from a Holder, as specified in Section
3(e), then it shall take such action with respect to such Holder's Basic
Subscription Rights or Oversubscription Rights as may be instructed in
writing by the Fund, including without limitation (i) applying any payment
actually received by it toward the purchase of the greatest whole number
of shares of Common Stock which could be acquired with such payment and,
(ii) allocating the shares subject to such Basic Subscription Rights or
Oversubscription Rights to one or more other Record Date Shareholders.
11. No Subscription Certificate shall entitle a Holder to vote or receive
dividends or be deemed the holder of shares of Common Stock for any
purpose, nor shall anything contained in any Subscription Certificate be
construed to confer upon any Holder any of the rights of a shareholder of
the Fund or any right to vote, give or withhold consent to any action by
the Fund (whether upon any recapitalization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings of other action affecting
shareholders, or receive dividends or otherwise, until the Rights
evidenced thereby shall have been exercised and the shares of Common Stock
purchasable upon the exercise thereof shall have become deliverable as
provided in this Agreement and in the Prospectus.
12. If any Subscription Certificate is lost, stolen, mutilated, or destroyed
the Agent may, on such terms which will indemnify the Fund as the Agent
may in its discretion impose (which shall, in the case of a Subscription
Certificate include the surrender thereof), issue a new Subscription
Certificate of like denomination in substitution for the Subscription
Certificate so lost, stolen or mutilated or destroyed.
13. (a) The Fund covenants that all shares of Common Stock issued on
exercise of Rights set forth in the Subscription Certificates will be
validly issued, fully paid, nonassessable and free of preemptive
rights.
(b) The Fund shall furnish to the Agent written notice to the effect that
a registration statement under the Securities Act of 1933, as amended
(the "Act"), is then in effect with respect to its shares of Common
Stock issuable upon exercise of the Rights set forth in the
Subscription Certificates. Upon written advice to the Agent that the
Securities and Exchange Commission shall have issued or threatened to
have issued any order preventing or suspending the use of the
Prospectus, or if for any reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Act, the Agent
shall cease acting hereunder until receipt of written instructions
from the Fund and such assurances as it may reasonably request that it
may comply with such instruction without violations of the Act.
14. Any corporation into which the Agent may be merged or converted or with
which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Agent shall be a party,
or any corporation succeeding to the corporate trust business of the
Agent, shall be the successor to the Agent hereunder without the execution
or filing of any of the parties hereto, provided that such corporation
would be eligible for appointment as a successor Agent. In case at the
time such successor to the Agent shall succeed to the agency created by
this Agreement, any of the Subscription Certificates shall have been
countersigned but not delivered, any such successor to the Agent may adopt
the countersignature of the original Agent and deliver such Subscription
Certificates so countersigned, and in case at that time the Subscription
Certificates shall not have been countersigned, any successor to the Agent
may countersign such Subscription Certificates either in the name of the
predecessor Agent or in the name of the successor Agent, and in all such
cases such Subscription Certificates shall have the full force provided in
the Subscription Certificates and in this Agreement.
15. The Fund agrees to pay to the Agent such reasonable compensation for all
services rendered by it hereunder as set forth in Schedule A hereto.
16. The Agent undertakes the duties and obligations imposed by this Agreement
upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement the
Agent shall deem it necessary or desirable that any fact or matter be
proved or established, prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect
thereof is herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
Chairman of the Board or President or a Vice President or the
Secretary or Assistant Secretary or the Treasurer of the Fund
delivered to the Agent, and such certificate shall be full
authorization to the Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon
such certificate.
(b) The Agent shall not be responsible for and the Fund shall indemnify
and hold the Agent harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to all actions of the Agent
or its agents or subcontractors required to be taken pursuant to this
Agreement, provided that such actions are taken in good faith and
without negligence or willful misconduct. The Fund shall not be liable
for indemnification under this Section 14 unless the Agent shall have
notified the Fund in writing of the commencement of any litigation or
proceeding in respect of which indemnity may be sought under this
Section 14. With respect to claims in such litigation or proceedings
for which indemnity may be sought, the Fund shall be entitled to
participate in any such litigation or proceeding and the Fund shall be
entitled to assume the defense of such litigation or proceeding with
counsel of its own expense in respect of that portion of the
litigation for which the Fund may be subject to an indemnification
obligation. If the Fund is not permitted to participate or control
such litigation or proceeding under applicable law or by a ruling of a
court of competent jurisdiction or otherwise, the Agent shall
reasonably prosecute such litigation or proceeding. In no event shall
the Agent consent to the entry of any judgment or enter into any
settlement in any such litigation or proceeding (including any
threatened litigation or proceeding) without providing the Fund with
adequate notice of any such settlement or judgment, and without the
Fund's prior written consent. The Agent shall submit written evidence
to the Fund with respect to any cost or expense for which the Agent is
seeking indemnification in any such form and detail as the Fund may
reasonably request.
(c) The Agent shall be liable hereunder only for its own negligence or
willful misconduct.
(d) Nothing herein shall preclude the Agent from acting in any other
capacity for the Fund or for any other legal entity.
(e) The Agent is hereby authorized and directed to accept instructions
with respect to the performance of its duties hereunder from any
officer or assistant officer of the Fund and to apply to any such
officer of the Fund for advice or instructions in connection with its
duties, and subject to the other requirements set forth above, shall
be indemnified and not be liable for any action taken or suffered by
it in good faith, without negligence or willful misconduct, in
accordance with instructions of any officer or assistant officer.
(f) The Agent shall be indemnified and shall incur no liability for or in
respect of any action taken, suffered, or omitted by it in reasonable
reliance upon any Subscription Certificate or certificate for Common
Stock, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document that it reasonably
believes to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper person or persons.
(g) Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any
consequential damages arising out of any reasonable act or failure to
act hereunder.
17. The Agent may, without the consent or concurrence of the Holders in whose
names Subscription Certificates are registered, by supplemental agreement
or otherwise, concur with the Fund in making any changes or corrections in
a Subscription Certificate that it shall have been advised by counsel (who
may be counsel for the Fund) is appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or clerical omission or
mistake or manifest error therein or herein contained, and which shall not
be inconsistent with the provisions of the Subscription Certificate except
insofar as any such change may confer additional rights upon the Holders.
18. a. Except as provided in subsection (c) below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
b. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
c. The Agent may, without further consent on the part of the Fund
subcontract for the performance hereof with (i) EquiServe Limited
Partnership, a Delaware Limited Partnership, which is duly registered
as a transfer agent pursuant to Section 17(c)(2) of the Securities
Exchange Act of 1934, or (ii) the current third party vendor utilized
by EquiServe; provided, however, that the Agent shall be as fully
responsible to the Fund for the acts and omissions of any subcontractor
as it is for its own acts and omissions.
19. All the covenants and provisions of this Agreement by or for the benefit
of the Fund or the Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
20. The validity, interpretation and performance of this Agreement shall be
governed by the laws of the State of New York without regard to the
principles of conflicts of law.
<PAGE>
STATE STREET BANK AND TRUST PROSPECT STREET HIGH INCOME
COMPANY PORTFOLIO INC.
By: By:
------------------------ ----------------------
Name: Name: Karen J. Thelen
Title: Vice President Title: Secretary
<PAGE>
Schedule A
BANKBOSTON N.A.
FEE SCHEDULE
to serve
PROSPECT STREET High Income Portfolio, Inc.
as
Subscription Agent
This Fee Schedule sets forth the fees for the services to be performed under the
Exchange Agent Agreement between BankBoston N.A. and Prospect Street High Income
Portfolio, Inc. dated _________.
A. FEES FOR SERVICES
For the services set forth in the Exchange Agency Agreement dated _______.
Prospect Street High Income Portfolio, Inc. will be charged as follows:
- --------------------------------------------------------------------------------
$10,000.000 Project Management Fee*
$ 2.00 Per subscription form issued and mailed
$ 9.00 Per subscription processed registered and beneficial
$ 12.50 Per defective subscription form received and processed
$ 15.00 Per Notice of Guaranteed Delivery received
$ 1.75 Per refund check issued and mailed
$ 4.50 Per invoice mailed
$ 2.25 Subsequent cash management
$ 2.75 Per sale of right
$ 2.00 Per broker split certificate issued
$ 15.00 Per withdrawal of subscription certificate, if applicable
$ 1,000.00 New York window fee upon expiration
$ 3,000.00 Per offer extension
- --------------------------------------------------------------------------------
Excludes out-of-pocket expenses as described in Section B, "Items Not Covered"
B. ITEMS NOT COVERED
o Services not specified in the Exchange Agency Agreement dated ______,
including any services associated with new duties, legislation or
regulatory fiat which become effective after the date of the Exchange
Agency Agreement (these will be provided on an appraisal basis)
o All out-of-pocket expenses such as telephone line charges, overprinting,
certificates, checks, postage, stationery, wire transfers, and excess
material disposal (these will be billed as incurred)
o Reasonable legal review fees if referred to outside counsel; provided
that BankBoston N.A. shall notify Prospect Street High Income Portfolio,
Inc. in writing of its intention to use outside counsel
o Overtime charges assessed in the event of late delivery of material for
mailings unless the target mail date is rescheduled
C. LIMITATIONS
o Schedule based upon document review and information known at this time
about the transaction
o Significant changes made in the terms or requirements of this
transaction could require modifications to this Schedule
o Schedule based upon approximately 2,750 shareholders of record.
o Material to be mailed to shareholders must be received no less than five
(5) business days prior to the start of the mailing project
D. PAYMENT FOR SERVICES
It is agreed that an invoice for the Project Management Fee will be rendered
and payable on the effective date of the transaction. An invoice for any
out-of-pockets and per item fees realized will be rendered and payable on a
monthly basis, except for postage expenses in excess of $5,000. Funds for
such mailing expenses must be received one (1) business day prior to the
scheduled mailing date.
In witness whereof, the parties hereto have caused this Fee Schedule to be
executed by their respective officers, hereunto duly agreed and authorized,
as of the effective date of this Fee Schedule.
STATE STREET BANK AND PROSPECT STREET High Income
TRUST COMPANY Portfolio, Inc.
By: /s/ John J. Regan By:
--------------------- -----------------------
John J. Regan
Title: Vice President Title:
--------------------- -----------------------
Date: 1/19/99 Date:
--------------------- -----------------------
<PAGE>
Exhibit (d)7
Corporate
Investor
[Logo] Communications,
CIC Inc.
- -------------------------------------------------------------------------------
111 Commerce Road
Carlstadt, NJ 07072-2586
(201) 896-1900
(201) 804-8017 Fax
January 12, 1999
Prospect Street High Income Portfolio, Inc.
60 State Street, Suite 3750
Boston, Massachusetts 02109
Attn.: Ms. Karen J. Thelen
Secretary
RE: RETAINER AGREEMENT
Dear Karen:
In accordance with the terms of this Agreement, The Client indicated below ("The
Client") hereby retains Corporate Investor Communications, Inc. ("CIC") to
perform the following services ("Services"):
In connection with the upcoming Rights Offering to shareholders, CIC will
conduct a broker/nominee inquiry to ascertain the number of beneficial
owners, provide for the distribution of the offering documents to the
reorganization departments of each institution and forward additional
materials as requested. CIC will respond to the volume of shareholder
inquiries regarding the terms of the offer and proper execution of the
documents and will monitor the response rate for the duration of the offer.
CIC will, if requested, proactively contact registered shareholders and
NOBOs to help promote a high level of participation.
1. Fee. In consideration of the Services to be provided, The Client shall pay a
Retainer Fee of Four Thousand Dollars ($4,000) ("Retainer Fee") which shall
be payable by The Client simultaneously with execution of this Agreement.
This Retainer Fee shall be credited against the following fee to be charged
to The Client for the Services hereunder:
The fee for Information Agent is $8,000, based on a distribution of 16,000
sets of offering documents. The fee for contacting NOBOs and registered
shareholders, if requested, will include a unit fee of $3.00 per holder
contacted, a $300 set-up fee and out-of-pocket expenses related to telephone
number lookups. The Client will reimburse CIC for all reasonable
out-of-pocket disbursements which may include postage, telephone and courier
charges, data transmissions and other expenses approved by The Client.
2. Term/Termination. This Agreement shall commence on the date indicated below
and shall continue until CIC has completed the Services required of it
hereunder. CIC may terminate this Agreement in the event of default by The
Client. Default is defined to inlcude: The Client's failure to pay any
amount within thirty (30) days after invoice for said amount is delivered to
The lient; if The Client defaults in the performance of any representation,
warranty or obligation of The Client set forth herein and such default
continues, uncured, for a period of twenty (20) days after delivery of
written notice of such default by CIC to The Client.
<PAGE>
3. Additional Terms and Conditions. This Agreement is subject to the General
Terms and Conditions set forth on the reverse side hereof.
CORPORATE INVESTOR PROSPECT STREET HIGH INCOME
COMMUNICATIONS,INC. PORTFOLIO, INC.
----------------------------
[CLIENT]
/s/ Virginia Porcaro
- ---------------------------------------- ----------------------------
Authorized Signature Authorized Signature
- ---------------------------------------- ----------------------------
Virginia Porcaro Name
- ---------------------------------------- ----------------------------
Vice President, Corporate Services Group Title
- ---------------------------------------- ----------------------------
January 12, 1999 Date
PROXY SOLICITATION o MARKET SURVEILLANCE
INFORMATION AGENT o SHAREHOLDER COMMUNICATION
<PAGE>
Exhibit h
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
6,630,663 Shares of Common Stock
Issuable Upon Exercise of Transferable Rights
to Subscribe for Such Shares of Common Stock
DEALER MANAGER AGREEMENT
New York, New York
January 25, 1999
PaineWebber Incorporated
Gruntal & Co. LLC
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Each of Prospect Street High Income Portfolio Inc., a Maryland
corporation (the "Company") and Prospect Street Investment Management Co., Inc.,
a Massachusetts corporation (the "Investment Adviser"), hereby confirms the
agreement with and appointment of PaineWebber Incorporated ("PaineWebber") on
their own behalf and on behalf of Gruntal & Co. LLC ("Gruntal") to act as dealer
managers (PaineWebber and Gruntal collectively being referred to herein as the
"Dealer Managers") in connection with the issuance by the Company to the holders
of record (the "Holders") at the close of business on the record date set forth
in the Prospectus (as defined herein) (the "Record Date") transferable rights
entitling such Holders to subscribe for up to 6,630,663 shares (each a "Share"
and, collectively, the "Shares") of common stock, par value $.03 per share (the
"Common Stock"), of the Company (the "Offer"). Pursuant to the terms of the
Offer, the Company is issuing each Holder one transferable right (each a "Right"
and, collectively, the "Rights") for each share of Common Stock held by such
Holder on the Record Date. Such Rights entitle holders to acquire during the
subscription period set forth in the Prospectus (the "Subscription Period"), at
the price set forth in such Prospectus (the "Subscription Price"), one Share for
each three Rights exercised (except that any Holder who is issued fewer than
three Rights will be able to subscribe for one full Share pursuant to the
primary subscription), on the terms and conditions set forth in such Prospectus.
No fractional shares will be issued. Any Holder who fully exercises all Rights
initially issued to such Holder (other than those Rights that cannot be
exercised because they represent the right to acquire less than one Share) will
be entitled to subscribe for, subject to allocation, additional Shares (the
"Over-Subscription Privilege") on the terms and conditions set forth in the
Prospectus. The Rights are transferable and are expected to be listed on the New
York Stock Exchange under the symbol "PHY.RT".
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form N-2 (Nos. 333-69243 and 811-5557)
and a related preliminary prospectus under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations of the Commission
under the Investment Company Act and the Securities Act (the "Rules and
Regulations"), and has filed such amendments to such registration statement on
Form N-2, if any, and such amended preliminary prospectuses as may have been
required to the date hereof. If the registration statement has not become
effective, a further amendment to such registration statement, including forms
of a final prospectus necessary to permit such registration statement to become
effective will promptly be filed by the Company with the Commission. If the
registration statement has become effective and any prospectus contained therein
omits certain information at the time of effectiveness pursuant to Rule 430A of
the Rules and Regulations, a final prospectus containing such omitted
information will promptly be filed by the Company with the Commission in
accordance with Rule 497(h) of the Rules and Regulations. The registration
statement, as amended at the time it becomes or became effective, including
financial statements and all exhibits and all documents, if any, incorporated
therein by reference, and any information deemed to be included by Rule 430A, is
called the "Registration Statement." The term "Prospectus" means the final
prospectus in the form filed with the Commission pursuant to Rule 497(c), (e),
(h) or (j) of the Rules and Regulations, as the case may be, as from time to
time amended or supplemented pursuant to the Securities Act. The Prospectus and
letters to beneficial owners of the shares of Common Stock of the Company, forms
used to exercise rights, any letters from the Company to securities dealers,
commercial banks and other nominees and any newspaper announcements, press
releases and other offering materials and information that the Company may use,
approve, prepare or authorize for use in connection with the Offer, are
collectively referred to hereinafter as the "Offering Materials."
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with, the Dealer
Managers as of the date hereof, as of the date of the commencement
of the Offer (such later date being hereinafter referred to as the
"Representation Date") and as of the Expiration Date (as defined
below) that:
(i) the Company meets the requirements for use of Form N-2
under the Securities Act and the Investment Company Act
and the Rules and Regulations. At the time the
Registration Statement became or becomes effective, the
Registration Statement did or will contain all statements
required to be stated therein in accordance with and did
or will comply in all material respects with the
requirements of the Securities Act, the Investment Company
Act and the Rules and Regulations and did not or will not
contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
From the time the Registration Statement became or becomes
effective through the expiration date of the Offer set
forth in the Prospectus (the "Expiration Date"), the
Prospectus and the other Offering Materials will not
contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; provided, however, that the representations
and warranties in this subsection shall not apply to
statements in or omissions from the Registration
Statement, Prospectus or Offering Materials made in
reliance upon and in conformity with information furnished
to the Company in writing by the Dealer Managers expressly
for use in the Registration Statement, Prospectus or
Offering Materials.
(ii) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws
of the State of Maryland, has full corporate power and
authority to conduct its business as described in the
Registration Statement and the Prospectus, currently
maintains all governmental licenses, permits, consents,
orders, approvals, and other authorizations (collectively,
the "Licenses and Permits") necessary to carry on its
business as contemplated in the Prospectus, and is duly
qualified to do business as a foreign corporation in each
jurisdiction wherein it owns or leases real property or in
which the conduct of its business requires such
qualification, except where the failure to obtain or
maintain such Licenses and Permits or to be so qualified
would not result in a material adverse effect upon the
business, properties, financial position or results of
operations of the Company. The Company has no
subsidiaries.
(iii) the Company is registered with the Commission under the
Investment Company Act as a closed-end, diversified
management investment company, no order of suspension or
revocation of such registration has been issued or
proceedings therefor initiated or, to the knowledge of the
Company, threatened by the Commission, all required action
has been taken under the Securities Act and the Investment
Company Act to consummate the issuance of the Rights and
the issuance and sale of the Shares by the Company upon
exercise of the Rights, and the provisions of the
Company's charter and by-laws comply as to form in all
material respects with the requirements of the Investment
Company Act.
(iv) Arthur Andersen LLP, the accountants who certified the
financial statements of the Company set forth or
incorporated by reference in the Registration Statement
and the Prospectus, are independent public accountants as
required by the Investment Company Act and the Rules and
Regulations.
(v) the financial statements of the Company set forth or
incorporated by reference in the Registration Statement
and the Prospectus present fairly in all material respects
the financial condition of the Company as of the dates or
for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent
basis; and the information set forth in the Prospectus
under the headings "Fee Table" and "Financial Highlights"
presents fairly in all material respects the information
stated therein.
(vi) the Company has an authorized capitalization as set forth
in the Prospectus; the outstanding shares of Common Stock
have been duly authorized and are validly issued, fully
paid and non-assessable and conform in all material
respects to the description thereof in the Prospectus
under the heading "Description of Capital Stock"; the
Rights have been duly authorized by all requisite action
on the part of the Company for issuance pursuant to the
Offer; the Shares have been duly authorized by all
requisite action on the part of the Company for issuance
and sale pursuant to the terms of the Offer and, when
issued and delivered by the Company pursuant to the terms
of the Offer against payment of the consideration set
forth in the Prospectus, will be validly issued, fully
paid and non-assessable; the Shares and the Rights conform
in all material respects to all statements relating
thereto contained in the Registration Statement, the
Prospectus and the other Offering Materials; and the
issuance of each of the Rights and the Shares is not
subject to any preemptive rights.
(vii) the Company has authorized debt leverage as set forth in
the Prospectus; the Credit Agreement between the Fund and
BankBoston, N.A., dated April 30, 1998 and amended and
restated on July 24, 1998 (the "Credit Agreement") and
amounts outstanding under such Credit Agreement as set
forth in the Prospectus have been duly authorized and
conform in all material respects to the description
thereof in the Prospectus under the heading "Description
of Credit Agreement".
(viii) except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the
Registration Statement and the Prospectus, (A) the Company
has not incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, other than
in the ordinary course of business, that are material to
the Company, (B) there has not been any material change in
the capital stock or long-term debt of the Company, or any
material adverse change, or any development involving a
prospective material adverse change, in the condition
(financial or other), business, prospects, net worth or
results of operations of the Company (excluding
fluctuations in the Company's net asset value due to
investment activities in the ordinary course of business)
and (C) except for the regular monthly dividend on the
outstanding shares of Common Stock, there have been no
dividends or distributions paid or declared in respect of
the Company's capital stock.
(ix) except as set forth in the Registration Statement and
Prospectus, there is no pending or, to the knowledge of
the Company, threatened action, suit or proceeding to
which the Company is a party before or by any court or
governmental agency, authority or body or any arbitrator,
whether foreign or domestic, which might result in any
material adverse change in the condition (financial or
other), business prospects, net worth or results of
operations of the Company, or which might materially and
adversely affect the properties or assets thereof of a
character required to be disclosed in the Registration
Statement or the Prospectus.
(x) there are no franchises, contracts or other documents of
the Company required to be described in the Registration
Statement or the Prospectus, or to be filed or
incorporated by reference as exhibits which are not
described or filed or incorporated by reference therein as
permitted by the Securities Act, the Investment Company
Act or the Rules and Regulations.
(xi) each of this agreement (the "Agreement"), the Subscription
Agency Agreement (the "Subscription Agency Agreement")
dated as of January 25, 1999 between the Company and State
Street Bank and Trust Company (the "Subscription Agent"),
the Information Agent Agreement (the "Information Agent
Agreement") dated as of January 12, 1999 between the
Company and Corporate Investor Communications, Inc. (the
"Information Agent"), the Investment Advisory Agreement
dated as of March 1, 1994 between the Company and the
Investment Adviser (the "Investment Advisory Agreement"),
the Custodian Agreement dated as of June 6, 1994 between
the Company and State Street Bank and Trust Company (the
"Custodian Agreement"), the Registrar, Transfer Agency and
Service Agreement dated as of June 6, 1994 between the
Company and State Street Bank and Trust Company (the
"Transfer Agency Agreement"), and the Credit Agreement
(collectively, all the foregoing are the "Company
Agreements") has been duly authorized, executed and
delivered by the Company; each of the Company Agreements
complies with all applicable provisions of the Investment
Company Act; and, assuming due authorization, execution
and delivery by the other parties thereto, each of the
Company Agreements constitutes a legal, valid, binding and
enforceable obligation of the Company, subject to the
qualification that the enforceability of the Company's
obligations thereunder may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors'
rights, and to general principles of equity (regardless of
whether enforceability is considered in a proceeding in
equity or at law).
(xii) neither the issuance of the Rights, nor the issuance and
sale of the Shares, nor the performance and consummation
by the Company of any other of the transactions
contemplated in the Company Agreements, or any
sub-custodial arrangements entered into pursuant to the
Custodian Agreement, nor the consummation of the
transactions contemplated in the Registration Statement
will conflict with, result in a breach or violation of, or
constitute a default or an event of default under, or
result in the creation or imposition of any lien, charge
or encumbrance upon any properties or assets of the
Company under the charter or by-laws of the Company, or
the terms and provisions of any agreement, indenture,
mortgage, loan agreement, note, insurance or surety
agreement, lease or other instrument to which the Company
is a party or by which it may be bound or to which any of
the property or assets of the Company is subject, nor will
such action result in any violation of any order, law,
rule or regulation of any court or governmental agency or
body, whether foreign or domestic, having jurisdiction
over the Company or any of its properties.
(xiii) no consent, approval, authorization, notification or order
of, or filing with, any court or governmental agency or
body, whether foreign or domestic, is legally required for
the consummation by the Company of the transactions
contemplated by the Company Agreements or the Registration
Statement, except such as have been obtained, or if the
registration statement filed with respect to the Shares is
not effective under the Securities Act as of the time of
execution hereof, such as may be required (and shall be
obtained as provided in this Agreement) under the
Investment Company Act, the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and
state securities laws.
(xiv) the Company either owns or possesses all governmental
licenses, permits, consents, orders, approvals or other
authorizations to enable the Company to invest in
securities as contemplated in the Prospectus. Neither the
execution or delivery by the Company nor the performance
by the Company of any of its obligations under the Company
Agreements contravenes or constitutes a default under any
provision contained in any law, rule or regulation of any
governmental or regulatory authority or any order or
regulation of any court by which the Company or any of its
assets is bound or affected.
(xv) the Common Stock has been duly listed on the New York
Stock Exchange and prior to their issuance the Rights and
the Shares will have been duly approved for listing,
subject to official notice of issuance, on the New York
Stock Exchange.
(xvi) the Company (A) has not taken, directly or indirectly, any
action designed to cause or to result in, or that has
constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the issuance
of the Rights or the sale or resale of the Rights or the
Shares, (B) has not since the filing of the Registration
Statement sold, bid for or purchased, or paid anyone any
compensation for soliciting purchases of, shares of Common
Stock of the Company (except for the solicitation of
exercises of the Rights pursuant to this Agreement) and
(C) will not, until the later of the expiration of the
Rights or the completion of the distribution (within the
meaning of the anti-manipulation rules under the Exchange
Act) of the Shares, sell, bid for or purchase, pay or
agree to pay to any person any compensation for soliciting
another to purchase any other securities of the Company
(except for the solicitation of the exercises of Rights
pursuant to this Agreement); provided that any action in
connection with the Company's dividend reinvestment plan
will not be deemed to be within the terms of this Section
1(a)(xvi).
(xvii) the Company has complied in all previous tax years, and
intends to direct the investment of the proceeds of the
offering described in the Registration Statement and the
Prospectus in such a manner as to continue to comply, with
the requirements of Subchapter M of the Internal Revenue
Code of 1986, as amended ("Subchapter M of the Code"), and
has qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the
Code.
(xviii) the Company has complied in all previous years, and
intends to direct the investment of the proceeds of the
offering described in the Registration Statement and the
Prospectus in such a manner as to continue to comply with
the asset coverage requirements of the Investment Company
Act.
(b) The Investment Adviser represents and warrants to, and agrees with,
the Dealer Managers as of the date hereof, as of the Representation
Date and as of the Expiration Date that:
(i) the Investment Adviser has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the Commonwealth of Massachusetts, has full
corporate power and authority to own its properties and
conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to do
business as a foreign corporation in each jurisdiction
wherein it owns or leases real property or in which the
conduct of its business requires such qualification, except
where the failure to be so qualified does not involve a
material adverse risk to the Investment Adviser's business,
properties, financial position or operations.
(ii) the Investment Adviser is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and is not prohibited by the
Advisers Act or the Investment Company Act, or the rules and
regulations under such Acts, from acting as an investment
adviser for the Company as contemplated in the Prospectus
and the Investment Advisory Agreement.
(iii) each of this Agreement and the Investment Advisory Agreement
has been duly authorized, executed and delivered by the
Investment Adviser and complies with all applicable
provisions of the Advisers Act and the Investment Company
Act, and is, assuming due authorization, execution and
delivery by the other parties thereto, a legal, valid,
binding and enforceable obligation of the Investment
Adviser, subject as to enforcement to bankruptcy,
insolvency, reorganization, moratorium and other laws of
general applicability relating to or affecting creditors'
rights, and to general principles of equity (regardless of
whether enforceability is considered in a proceeding in
equity or at law).
(iv) neither the performance by the Investment Adviser of its
obligations under this Agreement or the Investment Advisory
Agreement nor the consummation of the transactions
contemplated therein or in the Registration Statement nor
the fulfillment of the terms thereof will conflict with,
result in a breach or violation of, or constitute a default
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets of the
Investment Adviser under the charter or by-laws of the
Investment Adviser, or the terms and provisions of any
agreement, indenture, mortgage, lease or other instrument to
which the Investment Adviser is a party or by which it may
be bound or to which any of the property or assets of the
Investment Adviser is subject, nor will such action result
in any violation of any order, law, rule or regulation of
any court or governmental agency or body, whether foreign or
domestic, having jurisdiction over the Investment Adviser or
any of its properties.
(v) except as set forth in the Registration Statement and
Prospectus, there is no pending or, to the best knowledge of
the Investment Adviser, threatened action, suit or
proceeding to which the Investment Adviser is a party before
or by any court or governmental agency, authority or body or
any arbitrator, whether foreign or domestic, which might
result in any material adverse change in the condition
(financial or other), business prospects, net worth or
results of operations of the Investment Adviser, or which
might materially and adversely affect the properties or
assets thereof of a character required to be disclosed in
the Registration Statement or Prospectus.
(vi) the Investment Adviser does not require any governmental
licenses, permits, consents, orders, approvals or other
authorizations to enable the Investment Adviser to continue
to supervise investments in securities as contemplated in
the Prospectus. Neither the execution or delivery by the
Investment Adviser nor the performance by the Investment
Adviser of any of its obligations under this Agreement or
the Investment Advisory Agreement will contravene or
constitute a default under any provision contained in any
law, rule or regulation of any governmental or regulatory
authority or any order or regulation of any court by which
the Company or any of its assets is bound or affected.
(vii) no consent, approval, authorization, notification or order
of, or any filing with, any court or governmental agency or
body is required under federal law or the laws of any other
jurisdiction, whether foreign or domestic, for the
consummation by the Investment Adviser of the transactions
contemplated by this Agreement or the Investment Advisory
Agreement.
(viii) the Investment Adviser (A) has not taken, directly or
indirectly, any action designed to cause or to result in, or
that has constituted or which might reasonably be expected
to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the
issuance of the Rights or the sale or resale of the Rights
or the Shares, (B) has not since the filing of the
Registration Statement sold, bid for or purchased, or paid
anyone any compensation for soliciting purchases of, shares
of Common Stock of the Company (except for the solicitation
of exercises of Rights pursuant to this Agreement) and (C)
will not, until the later of the expiration of the Rights or
the completion of the distribution (within the meaning of
the anti-manipulation rules under the Exchange Act) of the
Shares, sell, bid for or purchase, pay or agree to pay any
person any compensation for soliciting another to purchase
any other securities of the Company (except for the
solicitation of exercises of Rights pursuant to this
Agreement); provided that any action in connection with the
Company's dividend reinvestment plan will not be deemed to
be within the terms of this Section 1(b)(viii).
(c) Any certificate required by this Agreement that is signed by any
officer of the Company, or the Investment Adviser and delivered to
the Dealer Managers or counsel for the Dealer Managers shall be
deemed a representation and warranty by the Company or the
Investment Adviser, as the case may be, to the Dealer Managers, as
to the matters covered thereby.
2. Agreement to Act as Dealer Managers.
(a) On the basis of the representations and warranties contained
herein, and subject to the terms and conditions of the Offer:
(i) The Company hereby appoints the Dealer Managers to solicit
the exercise of Rights and authorizes the Dealer Managers to
sell Shares purchased by PaineWebber from the Fund though
the exercise of Rights as described herein; the Company
hereby authorizes the Dealer Managers to form and manage a
group of selling broker-dealers (each a "Selling Group
Member" and collectively the "Selling Group") that enter
into a Selling Group Agreement with PaineWebber in the form
attached hereto as Exhibit A to solicit the exercise of
Rights and to sell Shares purchased by the Selling Group
Member from PaineWebber as described herein; and the Company
hereby authorizes other soliciting broker-dealers (each a
"Soliciting Dealer" and collectively the "Soliciting
Dealers") that enter into a Soliciting Dealer Agreement with
PaineWebber in the form attached hereto as Exhibit B to
solicit the exercise of Rights. The Dealer Managers hereby
agree to solicit the exercise of Rights in accordance with
the Securities Act, the Investment Company Act and the
Exchange Act, and its customary practice subject to the
terms and conditions of this Agreement, the procedures
described in the Registration Statement, the Prospectus and,
where applicable, the terms and conditions of such Selling
Group Agreement or Soliciting Dealer Agreement; and the
Dealer Managers hereby agree to form and manage the Selling
Group to solicit the exercise of Rights and to sell Shares
to the Selling Group purchased by PaineWebber from the Fund
though the exercise of Rights as described herein in
accordance with the Securities Act, the Investment Company
Act and the Exchange Act, and its customary practice subject
to the terms and conditions of this Agreement, the
procedures described in the Registration Statement, the
Prospectus and, where applicable, the terms and conditions
of the Selling Group Agreement
(ii) The Company hereby authorizes PaineWebber to buy and
exercise Rights, including unexercised Rights delivered to
the Subscription Agent for resale and Rights of "Foreign
Record Date Shareholders" (as defined in the Prospectus)
held by the Subscription Agent for which no instructions are
received on the terms and conditions set forth in such
Prospectus, and to sell Shares to the public or to Selling
Group Members at the offering price set by PaineWebber from
time to time. Sales of Shares by PaineWebber or Selling
Group Members shall not be more than the offering price set
by PaineWebber from time to time.
(b) The Company agrees to furnish, or cause to be furnished, to the
Dealer Managers, lists, or copies of those lists, showing the names
and addresses of, and number of shares of Common Stock held by,
Holders as of the Record Date, and the Dealer Managers agrees to
use such information only in connection with the Offer, and not to
furnish the information to any other person except for securities
brokers and dealers that have been requested by the Dealer Managers
to solicit exercises of Rights.
(c) The Dealer Managers agree to provide to the Company, in addition to
the services described in paragraph (a) of this Section 2,
financial advisory and marketing services in connection with the
Offer. No advisory fee, other than the fees provided for in Section
3 of this Agreement and the reimbursement of the Dealer Managers'
out-of-pocket expenses as described in Section 5 of this Agreement,
will be payable by the Company, or any other party hereto, to the
Dealer Managers in connection with the financial advisory and
marketing services provided by the Dealer Managers pursuant to this
Section 2(c).
(d) The Company and the Dealer Managers agree that the Dealer Managers
are independent contractors with respect to the solicitation of the
exercise of Rights and the performance of financial advisory and
marketing services for the Company contemplated by this Agreement.
(e) In rendering the services contemplated by this Agreement, the
Dealer Managers will not be subject to any liability to the Company
or the Investment Adviser or any of their affiliates, for any act
or omission on the part of any soliciting broker or dealer (except
with respect to the Dealer Managers acting in such capacity) or any
other person, and the Dealer Managers will not be liable for acts
or omissions in performing its obligations under this Agreement,
except for any losses, claims, damages, liabilities and expenses
that have resulted primarily from the bad faith, willful misconduct
or gross negligence of a respective Dealer Manager or by reason of
the reckless disregard of the obligations and duties of a
respective Dealer Manager under this Agreement.
3. Dealer Manager and Solicitation Fees. In full payment for the financial
advisory, marketing and soliciting services rendered and to be rendered
hereunder by the Dealer Managers, the Company agrees to pay the Dealer
Managers a fee (the "Dealer Manager and Solicitation Fee") equal to
3.75% of the aggregate Subscription Price for the Shares issued
pursuant to the exercise of Rights and the Over-Subscription Privilege
of which 1.25% represents financial advisory and marketing fees split
between the Dealer Managers with 1.00% to PaineWebber and 0.25% to
Gruntal. In full payment for the soliciting efforts to be rendered, the
Dealer Managers agree to reallow selling fees (the "Selling Fees") to
Selling Group Members equal to 2.50% of the Subscription Price per
Share for each Share issued pursuant to either (a) the exercise of
Rights and the Over-Subscription Privilege where such Selling Group
Member is so designated on the subscription form or (b) the purchase
for resale from PaineWebber in accordance with the Selling Group
Agreement. In full payment for the soliciting efforts to be rendered,
the Dealer Managers agree to reallow soliciting fees (the "Soliciting
Fees") to Soliciting Dealers equal to 0.50% of the Subscription Price
per Share for each Share issued pursuant to the exercise of Rights and
the Over-Subscription Privilege where such Soliciting Dealer is so
designated on the subscription form, subject to a maximum fee based on
the number of shares of Common Stock held by such Soliciting Dealer
through The Depository Trust Company ("DTC") on the Record Date. The
Dealer Managers agree to pay the Selling Fees or Solicitation Fees, as
the case may be, to the broker-dealer designated on the applicable
portion of the form used by the holder to exercise Rights and the
Over-Subscription Privilege, and if no broker-dealer is so designated
or a broker-dealer is otherwise not entitled to receive compensation
pursuant to the terms of the Selling Group Agreement or Soliciting
Dealer Agreement, then PaineWebber shall retain such Selling Fee or
Solicitation Fee for Shares issued pursuant to the exercise of Rights
and the Over-Subscription Privilege. Payment to the Dealer Managers by
the Company will be in the form of a wire transfer of same day funds to
an account or accounts identified by the respective Dealer Manager.
Such payment will be made on each date on which the Company issues
Shares after the Expiration Date. Payment to a Selling Group Member or
Soliciting Dealer will be made by the Dealer Managers directly to such
Selling Group Member by check to an address identified by such
broker-dealer. Such payments shall be made on or before the tenth
business day following the day the Company issues Shares after the
Expiration Date.
4. Other Agreements.
(a) The Company covenants with the Dealer Managers as follows:
(i) The Company will use its best efforts to cause the
Registration Statement to become effective under the
Securities Act, and will advise the Dealer Managers promptly
as to the time at which the Registration Statement and any
amendments thereto (including any post-effective amendment)
becomes so effective.
(ii) The Company will notify, and confirm the notice in writing
to, the Dealer Managers immediately (A) of the effectiveness
of the Registration Statement and any amendment thereto
(including any post-effective amendment), (B) of the receipt
of any comments from the Commission, (C) of any request by
the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus
or for additional information, (D) of the issuance by the
Commission of any stop order suspending the effectiveness of
the Registration Statement or the initiation of any
proceedings for that purpose, and (E) of the suspension of
the qualification of the Shares or the Rights for offering
or sale in any jurisdiction. The Company will make every
reasonable effort to prevent the issuance of any stop order
described in subsection (D) hereunder and, if any such stop
order is issued, to obtain the lifting thereof at the
earliest possible moment.
(iii) The Company will give the Dealer Managers notice of its
intention to file any amendment to the Registration
Statement (including any post-effective amendment) or any
amendment or supplement to the Prospectus (including any
revised prospectus which the Company proposes for use by the
Dealer Managers in connection with the Offer, which differs
from the prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not
such revised prospectus is required to be filed pursuant to
Rule 497(c), (e) or Rule 497(h) of the Rules and
Regulations), whether pursuant to the Investment Company
Act, the Securities Act, or otherwise, and will furnish the
Dealer Managers with copies of any such amendment or
supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not
file any such amendment or supplement to which the Dealer
Managers or counsel for the Dealer Managers shall reasonably
object.
(iv) The Company will, without charge, deliver to the Dealer
Managers, as soon as practicable, the number of copies (one
of which is manually executed) of the Registration Statement
as originally filed and of each amendment thereto as it may
reasonably request, in each case with the exhibits filed
therewith.
(v) The Company will, without charge, furnish to the Dealer
Managers, from time to time during the period when the
Prospectus is required to be delivered under the Securities
Act, such number of copies of the Prospectus (as amended or
supplemented) as the Dealer Managers may reasonably request
for the purposes contemplated by the Securities Act or the
Rules and Regulations.
(vi) If any event shall occur as a result of which it is
necessary, in the reasonable opinion of counsel for the
Dealer Managers, to amend or supplement the Registration
Statement or the Prospectus in order to make the Prospectus
not misleading in the light of the circumstances existing at
the time it is delivered to a Holder, the Company will
forthwith amend or supplement the Prospectus by preparing
and filing with the Commission (and furnishing to the Dealer
Managers a reasonable number of copies of) an amendment or
amendments of the Registration Statement or an amendment or
amendments of or a supplement or supplements to the
Prospectus (in form and substance satisfactory to counsel
for the Dealer Managers), at the Company's expense, which
will amend or supplement the Registration Statement or the
Prospectus so that the Prospectus will not contain an untrue
statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to
make the statements therein, in the light of the
circumstances existing at the time the Prospectus is
delivered to a Holder, not misleading.
(vii) The Company will endeavor, in cooperation with the Dealer
Managers and their counsel, to assist such counsel to
qualify the Rights and the Shares for offering and sale
under the applicable securities laws of such states and
other jurisdictions of the United States as the Dealer
Managers may designate and maintain such qualifications in
effect for the duration of the Offer; provided, however,
that the Company will not be obligated to file any general
consent to service of process, or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction
in which it is not now so qualified. The Company will file
such statements and reports as may be required by the laws
of each jurisdiction in which the Rights and the Shares have
been qualified as above provided.
(viii) The Company will make generally available to its security
holders as soon as practicable, but no later than 60 days
after the end of the Fund's fiscal semi-annual or fiscal
year-end period covered thereby, an earnings statement
(which need not be audited) (in form complying with the
provisions of Rule 158 of the Rules and Regulations of the
Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal semi-annual
period next following the "effective" date (as defined in
said Rule 158) of the Registration Statement.
(ix) For a period of 180 days from the date of this Agreement,
the Company will not, without the prior consent of
PaineWebber, which consent shall not be unreasonably
withheld offer or sell, or enter into any agreement to sell,
any equity or equity related securities of the Company or
securities convertible into such securities, other than the
Rights and the Shares and the Common Stock issued in
reinvestment of dividends or distributions.
(x) The Company will apply the net proceeds from the Offer as
set forth under "Use of Proceeds" in the Prospectus.
(xi) The Company will use its best efforts to cause the Rights
and the Shares to be duly authorized for listing by the New
York Stock Exchange prior to the time the Rights are issued.
(xii) The Company will use its best efforts to maintain its
qualification as a regulated investment company under
Subchapter M of the Code.
(xiii) The Company will use its best efforts to direct the proceeds
of the Offer in such a manner as to continue to comply with
the asset coverage requirements of the Investment Company
Act.
(xiv) The Company will advise or cause the Subscription Agent (A)
to advise each Dealer Manager and, only where specifically
noted, each Selling Group Member who so requests, from day
to day during the period of, and promptly after the
termination of, the Offer, as to the names and addresses of
all holders exercising Rights, the total number of Rights
exercised by each holder during the immediately preceding
day, indicating the total number of Rights verified to be in
proper form for exercise, rejected for exercise and being
processed and, for each Dealer Manager and each Selling
Group Member, the respective number of Rights exercised on
subscription certificates indicating such Dealer Manager or
such Selling Group Member, as the case may be, as the
broker-dealer with respect to such exercise; and as to such
other information as the Dealer Managers may reasonably
request; and will notify each Dealer Manager and, only where
specifically noted, each Selling Group Member, not later
than 5:00 P.M., New York City time, on the first business
day following the Expiration Date, of the total number of
Rights exercised and Shares related thereto, the total
number of Rights verified to be in proper form for exercise,
rejected for exercise and being processed and, for each
Dealer Manager and each Selling Group Member, the respective
number of Rights exercised on subscription certificates
indicating such Dealer Manager or such Selling Group Member,
as the case may be, as the broker-dealer with respect to
such exercise, and as to such other information as the
Dealer Managers may reasonably request; (B) to sell any
Rights received for resale from Holders exclusively to or
through PaineWebber, which may, at its election, purchase
such Rights as principal or act as agent for the resale
thereof; and (C) to issue Shares upon PaineWebber's exercise
of Rights no later than the close of business on the
business day following the day that full payment for such
Shares has been received by the Subscription Agent.
(b) Neither the Company nor the Investment Adviser will take, directly
or indirectly, any action designed to cause or to result in, or
that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the issuance of the Rights or
the sale or resale of the Rights or the Shares; provided that any
action in connection with the Company's dividend reinvestment plan
will not be deemed to be within the meaning of this Section 4(b).
5. Payment of Expenses.
(a) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, including, but not limited
to, expenses relating to (i) the printing and filing of the
Registration Statement as originally filed and of each amendment
thereto, (ii) the preparation, issuance and delivery of the
certificates for the Shares and subscription certificates relating
to the Rights, (iii) the fees and disbursements of the Company's
counsel (including the fees and disbursements of local counsel) and
accountants, (iv) the qualification of the Rights and the Shares
under securities laws in accordance with the provisions of Section
4(a)(vii) of this Agreement, including filing fees, (v) the
printing or other production and delivery to the Dealer Managers of
copies of the Registration Statement as originally filed and of
each amendment thereto and of the Prospectus and any amendments or
supplements thereto, (vi) the fees and expenses incurred with
respect to filing with the National Association of Securities
Dealers, Inc., (vii) the fees and expenses incurred in connection
with the listing of the Shares on the New York Stock Exchange,
(viii) the printing or other production, mailing and delivery
expenses incurred in connection with Offering Materials and (ix)
the fees and expenses incurred with respect to the Information
Agent.
(b) In addition to any fees that may be payable to the Dealer Managers
under this Agreement, the Company agrees to reimburse PaineWebber
upon request made from time to time for its reasonable expenses
incurred in connection with its activities under this Agreement,
including the reasonable fees and disbursements of its legal
counsel (excluding Blue Sky filing fees which are paid directly by
the Company), in an amount up to $100,000.
(c) If this Agreement is terminated by the Dealer Managers in
accordance with the provisions of Section 6 or Section 9(a)(i),
9(a)(ii) or 9(a)(iii), the Company agrees to reimburse the Dealer
Managers for all of its reasonable out-of-pocket expenses incurred
in connection with its performance hereunder, including the
reasonable fees and disbursements of counsel for the Dealer
Managers. In the event the transactions contemplated hereunder are
not consummated, the Company agrees to pay all of the costs and
expenses set forth in paragraphs (a) and (b) of this Section 5
which the Company would have paid if such transactions had been
consummated.
6. Conditions of the Dealer Managers' Obligations. The obligations of the
Dealer Managers hereunder are subject to the accuracy of the respective
representations and warranties of the Company and the Investment
Adviser contained herein, to the performance by the Company and the
Investment Adviser of their respective obligations hereunder, and to
the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., New York City time, on the Record Date, or at such
later time and date as may be approved by the Dealer Managers; the
Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time period
required by Rule 497(c), (e), (h) or (j), as the case may be, under
the Securities Act; no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto shall have been
issued, and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company, the
Investment Adviser or the Dealer Managers, shall be contemplated by
the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be
included in the Registration Statement, the Prospectus or
otherwise).
(b) On the Representation Date and the Expiration Date, the Dealer
Managers shall have received:
(1) The favorable opinions, dated the Representation Date and the
Expiration Date, of Rogers & Wells LLP, counsel for the Company, in
form and substance satisfactory to counsel for the Dealer Managers
to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Maryland, has full corporate power and
authority to conduct its business as described in the
Registration Statement and the Prospectus, currently
maintains all governmental licenses, permits, consents,
orders, approvals, and other authorizations necessary under
U.S. federal or New York or Maryland state law to carry on
its business as contemplated in the Prospectus (except that
counsel need express no opinion as to securities or "blue
sky" laws of any state) and the Company is duly qualified to
do business as a foreign corporation in each jurisdiction
wherein it owns or leases real property or in which the
conduct of its business requires such qualification, except
where the failure to be so qualified would not result in a
material adverse effect upon the business, properties,
financial position or results of operations of the Company.
(ii) the Company is registered with the Commission under the
Investment Company Act as a closed-end, diversified
management investment company and, to the best knowledge of
such counsel, no order of suspension or revocation of such
registration has been issued or proceedings therefor
initiated or threatened by the Commission; all required
action has been taken under the Securities Act and the
Investment Company Act to make the public offering and
consummate the issuance of the Rights and the issuance and
sale of the Shares by the Company upon exercise of the
Rights, and the provisions of the Company's charter and
by-laws comply as to form in all material respects with the
requirements of the Investment Company Act.
(iii) the Company's authorized capitalization is as set forth in
the Prospectus; the outstanding shares of Common Stock have
been duly authorized and are validly issued, fully paid and
non-assessable and conform in all material respects to the
description thereof in the Prospectus under the heading
"Description of Capital Stock"; the Rights have been duly
authorized by all requisite action on the part of the
Company for issuance pursuant to the Offer; the Shares have
been duly authorized by all requisite action on the part of
the Company for issuance and sale pursuant to the terms of
the Offer and, when issued and delivered by the Company
pursuant to the terms of the Offer against payment of the
consideration therefore determined as provided set forth in
the Prospectus, will be validly issued, fully paid and
non-assessable; the Shares and the Rights conform in all
material respects to all statements relating thereto
contained in the Registration Statement, the Prospectus and
the other Offering Materials; and the issuance of the Rights
and the Shares is not subject to any preemptive rights.
(iv) the Credit Agreement and amounts outstanding under such
Credit Agreement as set forth in the Prospectus have been
duly authorized and conform in all material respects to the
description thereof in the Prospectus under the heading
"Description of Credit Agreement."
(v) except as set forth in the Registration Statement and
Prospectus, to the best knowledge of such counsel, there is
no pending or threatened action, suit or proceeding to which
the Company is a party before or by any U.S. federal, New
York or Maryland state court or governmental agency,
authority or body or any foreign or domestic arbitrator
which might result in any material adverse change in the
condition (financial or other), business prospects, net
worth or results of operations of the Company, or which
might materially and adversely affect the properties or
assets thereof of a character required to be disclosed in
the Registration Statement or the Prospectus.
(vi) to the best knowledge of such counsel after due inquiry of
corporate officers, there are no franchises, contracts or
other documents of the Company required to be described in
the Registration Statement or the Prospectus, or to be filed
or incorporated by reference as exhibits which are not
described or filed or incorporated by reference therein as
permitted by the Securities Act, the Investment Company Act
or the Rules and Regulations.
(vii) neither the issuance of the Rights, nor the issuance and
sale of the Shares, nor the consummation by the Company of
any other of the transactions contemplated in this Agreement
nor the consummation of the transactions contemplated in the
Registration Statement will violate the charter or by-laws
of the Company or result in a breach or violation of, or
constitute a default or event of default under, or result in
the creation or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company
under the terms and provisions of any agreement, indenture,
mortgage, loan agreement, note, insurance or surety
agreement, lease or other instrument known to such counsel
to which the Company is a party or by which it may be bound
or to which any of the property or assets of the Company is
subject, nor, to the best knowledge of such counsel, will
such action result in any violation of any order, law, rule
or regulation of any U.S., New York or Maryland state court
or governmental agency or body having jurisdiction over the
Company or any of its properties.
(viii) no consent, approval, authorization, notification or order
of, or any filing with, any U.S. federal, New York or
Maryland state court or governmental agency or body is
required for the consummation by the Company of the
transactions contemplated by the Company Agreements or the
Registration Statement, except (A) such as have been
obtained and (B) such as may be required under the blue sky
laws of any jurisdiction in connection with the transactions
contemplated hereby.
(ix) the Company's outstanding Common Stock has been duly listed
on the New York Stock Exchange and the Rights and the Shares
have been duly approved for listing, subject to official
notice of issuance, on the New York Stock Exchange.
(x) the Registration Statement is effective under the Securities
Act; any required filing of the Prospectus or any supplement
thereto pursuant to Rule 497(c), (e), (h) or (j) required to
be made prior to the date hereof has been made in the manner
and within the time period required by Rule 497(c), (e), (h)
or (j), as the case may be; to the best knowledge of such
counsel no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings
for that purpose have been instituted or threatened; and the
Registration Statement, the Prospectus and each amendment
thereof or supplement thereto (other than the financial
statements, schedules, the notes thereto and the schedules
and other financial, economic and statistical data contained
or incorporated by reference therein or omitted therefrom,
as to which such counsel need express no opinion) as of
their respective effective or issue dates complied as to
form in all material respects with the applicable
requirements of the Securities Act and the Investment
Company Act and the Rules and Regulations.
(xi) the statements in the Prospectus under the heading "Federal
Taxation" fairly present the information disclosed therein
in all material respects.
In rendering such opinion, such counsel may rely as to matters of Maryland law
on the opinion of Piper & Marbury L.L.P. and as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and public officials.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, in the course of their review and discussion of the contents of the
Registration Statement and Prospectus with certain officers and employees of the
Company and its independent accountants, no facts have come to their attention
which cause them to believe that the Registration Statement, on the date it
became effective, contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements contained therein not misleading or that the Prospectus, as of
its date and on the Representation Date or the Expiration Date, as the case may
be, contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(2) The favorable opinions, dated the Representation Date and the
Expiration Date, of Olshan Grundman Frome & Rosenzweig LLP, counsel
for the Investment Adviser, in form and substance satisfactory to
counsel for the Dealer Managers to the effect that:
(i) each of the Company Agreements has been duly authorized,
executed and delivered by the Company, and complies in all
material respects with all applicable provisions of the
Investment Company Act; and each such agreement, assuming
due and valid authorization, execution and delivery by the
other parties thereto, constitutes a legal, valid and
binding obligation of the Company, enforceable against the
Company in accordance with its terms, except to the extent
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights and general
principles of equity and except to the extent that the
enforceability of the indemnification and contribution
provisions contained in this Agreement may be limited under
U.S. federal and state securities laws.
(ii) the Investment Adviser is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the
Advisers Act or the Investment Company Act, or the rules and
regulations under such Acts, from acting as an investment
adviser for the Company as contemplated in the Prospectus.
(iii) each of this Agreement and the Investment Advisory Agreement
complies with all applicable provisions of the Advisers Act
and the Investment Company Act.
(iv) except as set forth in the Registration Statement and
Prospectus, to the best knowledge of counsel, there is no
pending or threatened action, suit or proceeding to which
the Investment Adviser is a party before or by any U.S. or
state court or governmental agency, authority or body or any
arbitrator which might result in any material adverse change
in the Investment Adviser's condition (financial or other),
business prospects, net worth or operations or which might
materially and adversely affect the properties or assets
thereof of a character required to be disclosed in the
Registration Statement or Prospectus.
(v) no consent, approval, authorization, notification or order
of, or any filing with, any U.S. or state court or
governmental agency or body is required for the consummation
by the Investment Adviser of the transactions contemplated
by this Agreement or the Investment Advisory Agreement.
(vi) each of the Company Agreements to which the Investment
Adviser is a party has been duly authorized, executed and
delivered by the Investment Adviser, and, assuming due
authorization, execution and delivery by the other parties
thereto, each of the Company Agreements to which the
Investment Adviser is a party constitutes a legal, valid,
binding and enforceable obligation of the Investment Adviser
except to the extent such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting
creditors' rights and general principles of equity and
except to the extent that the enforceability of the
indemnification and contribution provisions contained in
this Agreement may be limited under U.S. federal and state
securities laws.
(vii) the Investment Adviser has been duly incorporated and is
validly existing and in good standing under the laws of
Massachusetts, has full power and authority (corporate and
other) to own its properties and conduct its business as
described in the Registration Statement and the Prospectus,
and is duly qualified to do business as a foreign
corporation in each jurisdiction wherein it owns or leases
real property or in which the conduct of its business
requires such qualification, except where the failure to be
so qualified does not involve a material adverse risk to the
Investment Adviser's business, properties, financial
position or operations.
(viii) neither the performance by the Investment Adviser of its
obligations under this Agreement or the other Company
Agreements to which the Investment Adviser is a party nor
the consummation of the transactions contemplated therein or
in the Registration Statement nor the fulfillment of the
terms thereof will conflict with or violate the charter,
by-laws or similar organizational documents of the
Investment Adviser, or to the best knowledge of such
counsel, after due inquiry, conflict with, result in a
breach or violation of, or constitute a default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any properties or assets of the Investment
Adviser under the terms and provisions of any agreement,
indenture, mortgage, lease or other instrument to which the
Investment Adviser is a party or by which it may be bound or
to which any of the property or assets of the Investment
Adviser is subject, nor will such action result in any
violation of any order, law, rule or regulation of any U.S.
or state court or governmental agency or body, having
jurisdiction over the Investment Adviser or any of its
properties.
In rendering such opinion, such counsel may rely as to matters of fact, to the
extent such counsel deems proper, on certificates of responsible officers of the
Investment Adviser and public officials.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, in the course of their review and discussion of the contents of the
Registration Statement and Prospectus with certain officers and employees of the
Investment Adviser and its affiliates, no facts have come to their attention
which cause them to believe that the Registration Statement, on the date it
became effective, contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements contained therein not misleading or that the Prospectus, as of
its date and on the Representation Date or the Expiration Date, as the case may
be, contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(c) The Dealer Managers shall have received from Skadden, Arps, Slate,
Meagher & Flom (Illinois), counsel for the Dealer Managers, such
opinion or opinions, dated the Representation Date and the
Expiration Date, with respect to the Offer, the Registration
Statement, the Prospectus and other related matters as the Dealer
Managers may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request
for the purpose of enabling them to pass upon such matters.
(d) The Company shall have furnished to the Dealer Managers
certificates of the Company, signed by the President, the
Treasurer, the Assistant Treasurer, the Secretary, the Assistant
Secretary or a Vice President of the Company, dated the
Representation Date and the Expiration Date, to the effect that the
signer(s) of such certificate carefully examined the Registration
Statement, the Prospectus, any supplement to the Prospectus and
this Agreement and that, to the best of their knowledge:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on
and as of the Representation Date or the Expiration Date, as
the case may be, with the same effect as if made on the
Representation Date or the Expiration Date, as the case may
be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied at or prior to the Representation Date or the
Expiration Date, as the case may be;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or, to the Company's
knowledge, threatened;
(iii) since the date of the most recent balance sheet included or
incorporated by reference in the Prospectus, there has been
no material adverse change in the condition (financial or
other), earnings, business, prospects, net worth or results
of operations of the Company (excluding fluctuations in the
Company's net asset value due to investment activities in the
ordinary course of business), except as set forth in or
contemplated in the Prospectus; and
(iv) as of the most recent calculation dates the Company complied
with the asset coverage requirements of the Investment
Company Act.
(e) The Investment Adviser shall have furnished to the Dealer Managers
certificates of the Investment Adviser, signed by the President,
Treasurer, Secretary or Vice President, dated the Representation
Date and the Expiration Date, to the effect that the signer of such
certificate has read the Registration Statement, the Prospectus,
any supplement to the Prospectus and this Agreement and, to the
best knowledge of such signer, the representations and warranties
of the Investment Adviser in this Agreement are true and correct in
all material respects on and as of the Representation Date or the
Expiration Date, as the case may be, with the same effect as if
made on the Representation Date or the Expiration Date, as the case
may be.
(f) Arthur Andersen LLP shall have furnished to the Dealer Managers
letters, dated the Representation Date and the Expiration Date, in
form and substance satisfactory to the Dealer Managers stating in
effect that:
(i) they are independent accountants with respect to the Company
within the meaning of the Securities Act and the applicable
published Rules and Regulations;
(ii) in their opinion, the audited financial statements examined
by them and included or incorporated by reference in the
Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the
Securities Act and the Investment Company Act and the
respective published Rules and Regulations with respect to
registration statements on Form N-2;
(iii) they have performed specified procedures, not constituting an
audit in accordance with generally accepted auditing
standards, including a reading of the latest available
unaudited financial information of the Company, a reading of
the minute books of the Company, and inquiries of officials
of the Company responsible for financial and accounting
matters and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe
that at a specified date not more than five business days
prior to the Representation Date, there was any change in the
capital stock, any decrease in net assets or any increase in
long-term debt of the Company as compared with amounts shown
in the most recent statement of assets and liabilities
included or incorporated by reference in the Registration
Statement, except as the Registration Statement discloses has
occurred or may occur, or they shall state any specific
changes, increases or decreases;
(iv) in addition to the procedures referred to in clause (iii)
above, they have compared certain dollar amounts (or
percentages as derived from such dollar amounts) and other
financial information regarding the operations of the Company
appearing in the Registration Statement, which have
previously been specified by the Dealer Managers and which
shall be specified in such letter, and have found such items
to be in agreement with, the accounting and financial records
of the Company.
(g) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall not
have been (i) any change, increase or decrease specified in the
letter or letters referred to in paragraph (f) of this Section 6,
or (ii) any change, or any development involving a prospective
change, in or affecting the business or properties of the Company,
the effect of which, in any case referred to in clause (i) or (ii)
above, is, in the reasonable judgment of the Dealer Managers, so
material and adverse as to make it impractical or inadvisable to
proceed with the Offer as contemplated by the Registration
Statement and the Prospectus.
(h) Prior to the Representation Date, the Company shall have furnished
to the Dealer Managers such further information, certificates and
documents as the Dealer Managers may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects satisfactory in form and
substance to the Dealer Managers and their counsel, this Agreement and all
obligations of the Dealer Managers hereunder may be canceled at, or at any time
prior to, the Representation Date by the Dealer Managers. Notice of such
cancellation shall be given to the Company in writing or by telephone confirmed
in writing.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless the Dealer Managers,
the directors, officers, employees and agents of the Dealer
Managers and each person, if any, who controls the Dealer Managers
within the meaning of Section 15 of the Securities Act and Section
20 of the Exchange Act against any and all losses, claims, damages
and liabilities, joint or several (including any investigation,
legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them,
may become subject under the Securities Act, the Exchange Act, the
Investment Company Act, the Advisers Act or other statutory law or
regulation, at common law or otherwise, whether foreign or
domestic, insofar as such losses, claims, damages or liabilities
arise out of or are based on any untrue statement or alleged untrue
statement of a material fact contained in the Registration
Statement or the Prospectus, and any amendment or supplement
thereto, or the omission or alleged omission to state in any or all
such documents a material fact required to be stated therein or
necessary to make the statements in it not misleading (in the case
of the Prospectus, in light of the circumstances under which such
statements were made), provided, however, that the Company will not
be liable to the extent that such loss, claim, damage or liability
arises from an untrue statement or omission or alleged untrue
statement or omission (1) made in reliance on and in conformity
with information furnished in writing to the Company by the Dealer
Managers expressly for use in the document, or (2) if a copy of the
Prospectus was not sent or given to the purchaser of Shares at or
before the written confirmation of the sale to such person in any
case where such delivery is required by the Securities Act. This
indemnity agreement will be in addition to any liability that the
Company might otherwise have.
(b) The Investment Adviser will indemnify and hold harmless the Dealer
Managers, the directors, officers, employees and agents of the
Dealer Managers and each person, if any, who controls the Dealer
Managers within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to the Dealer Managers, but only insofar
as losses, claims, damages or liabilities arise out of or are based
on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information
furnished in writing to the Company by the Investment Adviser for
use in preparation of the documents in which the statement or
omission is made or alleged to be made which includes all
statements attributed to the Investment Adviser in such documents
and the sections entitled "Prospectus Summary-Information Regarding
the Investment Adviser" and "The Investment Adviser". This
indemnity agreement will be in addition to any liability that the
Investment Adviser might otherwise have.
(c) The Dealer Managers will indemnify and hold harmless the Company
and the Investment Adviser, the directors, officers and each
person, if any, who controls the Company or the Investment Adviser
within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, to the same extent as the foregoing
indemnity from the Company or the Investment Adviser to the Dealer
Managers, but only insofar as losses, claims, damages or
liabilities arise out of or are based on any untrue statement or
omission or alleged untrue statement or omission made in reliance
on and in conformity with information furnished in writing to the
Company by the Dealer Managers expressly for use in preparation of
the documents in which the statement or omission is made or alleged
to be made. This indemnity agreement will be in addition to any
liability that the Dealer Managers might otherwise have.
(d) Any party that proposes to assert the right to be indemnified under
this Section 7 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a
claim is to be made, promptly notify each such indemnifying party
in writing of the commencement of such action, enclosing a copy of
all papers served, but the omission to so notify such indemnifying
party will not, except to the extent set forth below, relieve it
from liability that it may have to any indemnified party. No
indemnification provided for in Section 7(a), (b) or (c) hereof
shall be available to any party who shall fail to give notice as
provided in this Section 7(d) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice, but
the omission so to notify such indemnifying party of such action
shall not relieve it from any liability that it may have to any
indemnified party for contribution or otherwise on account of the
provisions in Section 7(a), (b) or (c). If any such action is
brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will
be entitled to participate in, and, to the extent that it elects by
delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of the action, with
counsel reasonably satisfactory to the indemnified party, and,
after notice from the indemnifying party to the indemnified party
of its election to assume the defense, the indemnifying party will
not be liable to the indemnified party for any legal or other
expenses except as provided below and except for the reasonable
costs of investigation subsequently incurred by the indemnified
party in connection with the defense. The indemnified party will
have the right to employ its counsel in any such action, but the
fees and expenses of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the
indemnified party has been authorized in writing by the
indemnifying party, (2) the indemnified party has reasonably
concluded that there may be legal defenses available to it or other
indemnified parties that are different from or in addition to those
available to the indemnifying party (in which case the indemnifying
party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (3) the indemnifying party
has not in fact employed counsel to assume the defense of such
action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable
fees and expenses of counsel will be at the expense of the
indemnifying party or parties. All such fees and expenses will be
reimbursed promptly as they are incurred upon submission in writing
to the indemnifying party with regard to any cost or expense for
which the indemnified party is seeking indemnification in such form
and detail as the indemnifying party may reasonably request. An
indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent or, in
connection with any proceeding or related proceeding in the same
jurisdiction, for the fees and expenses of more than one separate
counsel for all indemnified parties except to the extent provided
herein.
(e) In no case shall the indemnification provided in this Section 7 be
available to protect any person against any liability to which any
such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
its or his obligations or duties hereunder, or by reason of its or
his reckless disregard of its or his obligations and duties
hereunder.
(f) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this
Section 7 is applicable in accordance with its terms but for any
reason is held to be unavailable from the Company, the Investment
Adviser or the Dealer Managers, the Company or the Investment
Adviser and the Dealer Managers will contribute to the total
losses, claims, damages and liabilities (including any
investigation, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action
or any claims asserted, but after deducting any contribution
received by the Company, the Investment Adviser or from persons
other than the Dealer Managers, such as persons who control the
Company or the Investment Adviser within the meaning of the
Securities Act or the Exchange Act, officers of the Company who
signed the Registration Statement and directors of the Company, who
may also be liable for contribution) to which the Company, the
Investment Adviser or the Dealer Managers may be subject in such
proportion as is appropriate to reflect (i) the relative benefits
received by the indemnifying party or parties on the one hand and
the indemnified party on the other hand from the offering of the
Shares or (ii) if the allocation provided by the foregoing clause
(i) is not permitted by applicable law, not only such relative
benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other hand
in connection with the statements or omissions or alleged
statements or omissions that resulted in the losses, claims,
damages or liabilities, joint or several (including any
investigation, legal or other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted), for which contribution
is sought. The relative benefits received by (x) the Dealer
Managers shall be deemed to be the total fees received by the
Dealer Managers and (y) the Company and the Investment Adviser in
such proportion as shall be appropriate to reflect the relative
benefits received by the Fund on the one hand and the Investment
Adviser on the other. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information
supplied by the Company, the Investment Adviser or the Dealer
Managers, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such
statement or omission and any other equitable considerations
appropriate in the circumstances. Notwithstanding any other
provisions of this Section 7, (1) the Dealer Managers will not be
responsible for any amount in excess of the fees paid by the
Company pursuant to Section 3 hereof and (2) no person found guilty
of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, any person who controls a party to
this Agreement within the meaning of the Securities Act will have
the same rights to contribution as that party, and each officer of
the Company who signed the Registration Statement and each director
of the Company will have the same rights to contribution as the
Company, subject in each case to clause (i) of the first sentence
of this Subsection 7(f). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may
be made under this Section 7, notify such party or parties from
whom contribution may be sought, but the omission so to notify will
not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have otherwise than
under this Section 7. No party will be liable for contribution with
respect to any action or claim settled without its written consent.
(g) The Company agrees to indemnify each Selling Group Member and
Soliciting Dealer and controlling persons to the same extent and
subject to the same conditions and to the same agreements,
including with respect to contribution, provided for in subsections
(a), (d), (e) and (f) of this Section 7.
(h) The Investment Adviser agrees to indemnify each Selling Group
Member and Soliciting Dealer and controlling persons to the same
extent and subject to the same conditions and to the same
agreements, including with respect to contribution, provided for in
subsections (b), (d), (e) and (f) of this Section 7.
(i) The Company and the Investment Adviser acknowledge that the
statements under the caption "The Offer-Distribution Arrangements"
in the Prospectus constitute the only information furnished in
writing to the Company by the Dealer Managers expressly for use in
such document, and each Dealer Manager confirms that such
statements as they relate to such Dealer Manager are correct.
8. Representations, Warranties and Agreements to Survive Delivery. The
respective agreements, representations, warranties, indemnities and
other statements of the Company or its officers, of the Investment
Adviser and of the Dealer Managers set forth in or made pursuant to
this Agreement shall survive the Expiration Date and will remain in
full force and effect, regardless of any investigation made by or on
behalf of Dealer Managers or the Company or any of the officers,
directors or controlling persons referred to in Section 7 hereof, and
will survive delivery of and payment for the Shares pursuant to the
Offer. The provisions of Sections 5 and 7 hereof shall survive the
termination or cancellation of this Agreement.
9. Termination of Agreement.
(a) This Agreement shall be subject to termination in the absolute
discretion of the Dealer Managers, by notice given to the Company
prior to the expiration of the Offer, if prior to such time (i)
financial, political, economic, currency, banking or social
conditions in the United States shall have undergone any material
change the effect of which on the financial markets makes it, in
the Dealer Managers' judgment, impracticable or inadvisable to
proceed with the Offer, (ii) there has occurred any outbreak or
material escalation of hostilities or other calamity or crisis the
effect of which on the financial markets of the United States is
such as to make it, in the Dealer Managers' judgment, impracticable
or inadvisable to proceed with the Offer, (iii) trading in the
shares of Common Stock shall have been suspended by the Commission
or the New York Stock Exchange, (iv) trading in securities
generally on the New York Stock Exchange shall have been suspended
or limited or (v) a banking moratorium shall have been declared
either by Federal or New York State authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other
party except as provided in Section 5.
10. Notices. All communications hereunder will be in writing and effective
only on receipt, and, if sent to the Dealer Managers, will be mailed,
delivered or telegraphed and confirmed to PaineWebber Incorporated,
Attn: Corporate Finance Department, 1285 Avenue of the Americas, New
York, New York 10019; or if sent to the Company or the Investment
Adviser will be mailed, or delivered or telegraphed and confirmed to
them at: Prospect Street High Income Portfolio Inc., Attn: John A.
Frabotta, 60 State Street, Boston, Massachusetts 02109, with a copy to
Rogers & Wells, 200 Park Avenue, New York, New York 10166 (Facsimile
No.: 212-878-8375), attention of Laurence E. Cranch, Esq.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and will inure
to the benefit of the officers and directors and controlling persons
referred to in Section 7 hereof, and no other person will have any
right or obligation hereunder.
12. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York.
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company,
the Investment Adviser and the Dealer Manager.
Very truly yours,
Prospect Street High Income Portfolio Inc.
By: ------------------------------------------
Name: --------------------------------------
Title: -------------------------------------
Prospect Street Investment Management Co., Inc.
By: ------------------------------------------
Name: --------------------------------------
Title: -------------------------------------
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
PaineWebber Incorporated
By: ------------------------------------------
Name: --------------------------------------
Title: -------------------------------------
Gruntal & Co. LLC
By: ------------------------------------------
Name: --------------------------------------
Title: -------------------------------------
<PAGE>
EXHIBIT A
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
6,630,663 Shares of Common Stock
Issuable Upon Exercise of Transferable Rights
to Subscribe for Such Shares of Common Stock
SELLING GROUP AGREEMENT
New York, New York
---------- --, 199-
PaineWebber Incorporated
Gruntal & Co. LLC
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
We understand that Prospect Street High Income Portfolio Inc., a
Maryland corporation (the "Company"), proposes to issue to holders of record
(the "Holders") at the close of business on the record date set forth in the
Prospectus (as defined herein) (the "Record Date") transferable rights entitling
such Holders to subscribe for up to 6,630,663 shares (each a "Share" and,
collectively, the "Shares") of common stock, par value $.03 per share (the
"Common Stock"), of the Company (the "Offer"). Pursuant to the terms of the
Offer, the Company is issuing each Holder one transferable right (each a "Right"
and, collectively, the "Rights") for each share of Common Stock held by such
Holder on the Record Date. Such Rights entitle holders to acquire during the
subscription period set forth in the Prospectus (the "Subscription Period"), at
the price set forth in such Prospectus (the "Subscription Price"), one Share for
each three Rights (except that any Holder who is issued fewer than three Rights
will be able to subscribe for one full Share pursuant to the primary
subscription), on the terms and conditions set forth in such Prospectus. No
fractional shares will be issued. Any Holder who fully exercises all Rights
initially issued to such Holder (other than those Rights that cannot be
exercised because they represent the right to acquire less than one Share) will
be entitled to subscribe for, subject to allocation, additional Shares (the
"Over-Subscription Privilege") on the terms and conditions set forth in such
Prospectus. The Rights are transferable and are expected to be listed on the New
York Stock Exchange.
We further understand that the Company has appointed PaineWebber
Incorporated ("PaineWebber") on their own behalf and on behalf of Gruntal & Co.
LLC ("Gruntal") to act as dealer managers (PaineWebber and Gruntal collectively
being referred to herein as the "Dealer Managers") in connection with the Offer
and has authorized the Dealer Managers to form and manage a group of
broker-dealers (each a "Selling Group Member" and collectively the "Selling
Group") to solicit the exercise of Rights and to sell Shares purchased by
PaineWebber from the Company through the exercise of Rights.
We hereby express our interest in participating in the Offer as a
Selling Group Member.
We hereby agree with you as follows:
1. We have received and reviewed the Company's prospectus dated
January 25, 1999 (the "Prospectus") relating to the Offer and we
understand that additional copies of the Prospectus (or of the
Prospectus as it may be subsequently supplemented or amended, if
applicable) and any other solicitation materials authorized by the
Company relating to the Offer ("Offering Materials") will be
supplied to us in reasonable quantities upon our request therefor
to you. We agree that we will not use any solicitation material
other than the Prospectus (as supplemented or amended, if
applicable) and such Offering Materials and we agree not to make
any representation, oral or written, to any shareholders or
prospective shareholders of the Company that are not contained in
the Prospectus, unless previously authorized to do so in writing by
the Company.
2. From time to time during the period (the "Subscription Period")
commencing on January 26, 1999 and ending at 5:00 p.m., New York
City time, on the Expiration Date (the term "Expiration Date" means
February 19, 1999, unless and until the Company shall, in its sole
discretion, have extended the period for which the Offer is open,
in which event the term "Expiration Date" with respect to the Offer
will mean the latest time and date on which the Offer, as so
extended by the Company, will expire), we may solicit the exercise
of Rights in connection with the Offer. We will be entitled to
receive fees in the amounts and at the times described in Section 4
of this Agreement with respect to Shares purchased pursuant to the
exercise of Rights and with respect to which State Street Bank and
Trust Company (the "Subscription Agent") has received, no later
than 5:00 p.m., New York City time, on the Expiration Date, either
(i) a properly completed and executed Subscription Certificate
identifying us as the broker-dealer having been instrumental in the
exercise of such Rights, and full payment for such Shares or (ii) a
Notice of Guaranteed Delivery guaranteeing to the Subscription
Agent by the close of business of the third business day after the
Expiration Date of a properly completed and duly executed
Subscription Certificate, similarly identifying us, and full
payment for such Shares. We understand that we will not be paid
these fees with respect to Shares purchased pursuant to an exercise
of Rights for our own account or for the account of any of our
affiliates. We also understand and agree that we are not entitled
to receive any fees in connection with the solicitation of the
exercise of Rights other than pursuant to the terms of this
Agreement and, in particular, that we will not be entitled to
receive any fees under the Company's Soliciting Dealer Agreement.
We agree to solicit the exercise of Rights in accordance with the
Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the Investment Company Act of 1940, as amended, and the rules
and regulations under each such Act, any applicable securities laws
of any state or jurisdiction where such solicitations may be
lawfully made, the applicable rules and regulations of any
self-regulatory organization or registered national securities
exchange and customary practice and subject to the terms of the
Subscription Agent Agreement between the Company and the
Subscription Agent and the procedures described in the Company's
registration statement on Form N-2 (File Nos. 333-69243 and
811-5557), as amended (the "Registration Statement").
3. From time to time during the Subscription Period, we may indicate
interest in purchasing Shares from PaineWebber as a Dealer Manager.
We understand that from time to time PaineWebber intends to offer
Shares obtained or to be obtained by PaineWebber through the
exercise of Rights to Selling Group Members who have so indicated
interest at prices which shall be determined by PaineWebber (the
"Offering Price"). We agree that with respect to any such Shares
purchased by us from PaineWebber the sale of such Shares to us
shall be irrevocable and we will offer them to the public at the
Offering Price at which we purchase them from PaineWebber. Shares
not sold by us at such Offering Price may be offered by us after
the next succeeding Offering Price is set at the latest Offering
Price set by PaineWebber. PaineWebber agrees that, if requested by
any Selling Group Member, and subject to applicable law,
PaineWebber will set a new Offering Price prior to 4:00 p.m., New
York City time, on any business day. We agree to advise PaineWebber
from time to time upon request, prior to the termination of this
Agreement, of the number of Shares remaining unsold which were
purchased by us from PaineWebber and, on PaineWebber's request, we
will resell to PaineWebber any of such Shares remaining unsold at
the purchase price thereof if in PaineWebber's opinion such Shares
are needed to make delivery against sales made to other Selling
Group Members. Any shares purchased hereunder from PaineWebber
shall be subject to regular way settlement through the facilities
of the Depository Trust Company.
4. We understand that you will remit to us on or before the tenth
business day following the day the Company issues Shares after the
Expiration Date, following receipt by you from the Company of the
Dealer Manager and Solicitation Fee, a selling fee equal to 2.50%
of the Subscription Price per Share for (A) each Share issued
pursuant to the exercise of Rights or the Over-Subscription
Privilege pursuant to each Subscription Certificate upon which we
are designated, as certified to you by the Subscription Agent, as a
result of our solicitation efforts in accordance with Section 2 and
(B) each Share sold by PaineWebber to us in accordance with Section
3 less any Shares resold to PaineWebber in accordance with Section
3. Your only obligation with respect to payment of the foregoing
selling fee to us is to remit to us amounts owing to us and
actually received by you from the Company. Except as aforesaid, you
shall be under no liability to make any payments to us pursuant to
this Agreement.
5. We agree that you, as Dealer Managers, have full authority to take
such action as may seem advisable to you in respect of all matters
pertaining to the Offer. You are authorized to approve on our
behalf any amendments or supplements to the Registration Statement
or the Prospectus.
6. We represent that we are a member in good standing of the NASD and,
in making sales of Shares, agree to comply with all applicable
rules of the National Association of Securities Dealers, Inc. (the
"NASD") including, without limitation, the NASD's Interpretation
with Respect to Free-Riding and Withholding, as set forth in IM
2110-1 of the NASD's Conduct Rules, and Rule 2740 of the NASD's
Conduct Rules. We understand that no action has been taken by you
or the Company to permit the solicitation of the exercise of Rights
or the sale of Shares in any jurisdiction (other than the United
States) where action would be required for such purpose. We agree
that we will not, without your approval in advance, buy, sell, deal
or trade in, on a when-issued basis or otherwise, the Rights or the
Shares or any other option to acquire or sell Shares for our own
account or for the accounts of customers, except as provided in
Sections 2 and 3 hereof and except that we may buy or sell Rights
or Shares in brokerage transactions on unsolicited orders which
have not resulted from activities on our part in connection with
the solicitation of the exercise of Rights and which are executed
by us in the ordinary course of our brokerage business. We will
keep an accurate record of the names and addresses of all persons
to whom we give copies of the Registration Statement, the
Prospectus, any preliminary prospectus (or any amendment or
supplement thereto) or any Offering Materials and, when furnished
with any subsequent amendment to the Registration Statement and any
subsequent prospectus, we will, upon your request, promptly forward
copies thereof to such persons.
7. Nothing contained in this Agreement will constitute the Selling
Group Members partners with the Dealer Managers or with one another
or create any association between those parties, or will render the
Dealer Managers or the Company liable for the obligations of any
Selling Group Member. The Dealer Managers will be under no
liability to make any payment to any Selling Group Member other
than as provided in Section 4 of this Agreement, and will be
subject to no other liabilities to any Selling Group Member, and no
obligations of any sort will be implied. We agree to indemnify and
hold harmless you and each other Selling Group Member and each
person, if any, who controls you and any such Selling Group Member
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, against loss or liability caused by
any breach by us of the terms of this Agreement.
8. We agree to pay any transfer taxes which may be assessed and paid
on account of any sales or transfers for our account.
9. All communications to you relating to the Offer will be addressed
to: PaineWebber Incorporated, Attn: Joseph Zabik, 1285 Avenue of
the Americas, New York, New York 10019; Telephone No.: (212)
713-2711 and Facsimile No.: (212) 713-4205.
10. This Agreement will be governed by the internal laws of the State
of New York.
A signed copy of this Selling Group Agreement will be promptly returned
to the Selling Group Member at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By: --------------------
Name: ----------------
Title: ---------------
PLEASE COMPLETE THE INFORMATION BELOW
------------------------------
Printed Firm Name Address
- --------------------------------------------------------------------------------
Contact at Selling Group Member
------------------------------
Authorized Signature Area Code and Telephone
Number
------------------------------
Name and Title Facsimile Number
Dated: ------------------
Payment of the Selling Fee shall be mailed by check to the following address:
<PAGE>
EXHIBIT B
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
FEBRUARY 19, 1999, UNLESS EXTENDED
To Securities Dealers and Brokers:
Prospect Street High Income Portfolio Inc. (the "Company") is issuing
to its shareholders of record ("Record Date Shareholders") as of the close of
business on January 26, 1999 (the "Record Date") transferable rights ("Rights")
to subscribe for an aggregate of up to 6,630,663 shares (the "Shares") of common
stock, par value $0.03 per share (the "Common Stock"), of the Company upon the
terms and subject to the conditions set forth in the Company's Prospectus (the
"Prospectus") dated January 25, 1999 (the "Offer"). Each such Record Date
Shareholder is being issued one Right for each full share of Common Stock owned
on the Record Date. Such Rights entitle holders to acquire during the
Subscription Period (as hereinafter defined) at the Subscription Price (as
hereinafter defined), one Share for each three Rights (except that any Record
Date Shareholder who is issued fewer than three Rights will be able to subscribe
for one full Share pursuant to the primary subscription), on the terms and
conditions set forth in such Prospectus. No fractional shares will be issued.
Any Record Date Shareholder who fully exercises all Rights initially issued to
such holder (other than those Rights that cannot be exercised because they
represent the right to acquire less than one Share) will be entitled to
subscribe for, subject to allocation, additional Shares (the "Over-Subscription
Privilege") on the terms and conditions set forth in such Prospectus. The Rights
are transferable and are expected to be listed on the New York Stock Exchange.
The Subscription Price will be $8.70. The Subscription Period will commence on
January 26, 1999 and end at 5:00 p.m., New York City time on the Expiration Date
(the term "Expiration Date" means February 19, 1999 unless and until the Company
shall, in its sole discretion, have extended the period for which the Offer is
open, in which event the term "Expiration Date" with respect to the Offer will
mean the latest time and date on which the Offer, as so extended by the Company,
will expire).
For the duration of the Offer, the Company has authorized and the
Dealer Managers have agreed to reallow a Solicitation Fee to any qualified
broker or dealer executing a Soliciting Dealer Agreement who solicits the
exercise of Rights and the Over-Subscription Privilege in connection with the
Offer and who complies with the procedures described below (a "Soliciting
Dealer"). Upon timely delivery to State Street Bank and Trust Company, the
Company's Subscription Agent for the Offer, of payment for Shares purchased
pursuant to the exercise of Rights and the Over-Subscription Privilege and of
properly completed and executed documentation as set forth in this Soliciting
Dealer Agreement, a Soliciting Dealer will be entitled to receive the
Solicitation Fee equal to 0.50% of the Subscription Price per Share so purchased
subject to a maximum fee based on the number of shares of Common Stock held by
such Soliciting Dealer through The Depository Trust Company ("DTC") on the
Record Date; provided, however, that no payment shall be due with respect to the
issuance of any Shares until payment therefor is actually received. A qualified
broker or dealer is a broker or dealer which is a member of a registered
national securities exchange in the United States or the National Association of
Securities Dealers, Inc. ("NASD") or any foreign broker or dealer not eligible
for membership who agrees to conform to the Rules of Fair Practice of the NASD,
including Sections 2730, 2740, 2420 and 2750 thereof, in making solicitations in
the United States to the same extent as if it were a member thereof.
The Company has authorized and the Dealer Managers have agreed to pay
the Solicitation Fees payable to the undersigned Soliciting Dealer and to
indemnify such Soliciting Dealer on the terms set forth in the Dealer Manager
Agreement, dated January 25, 1999, among PaineWebber Incorporated
("PaineWebber") on their own behalf and on behalf of Gruntal & Co. LLC
("Gruntal") as the dealer managers (PaineWebber and Gruntal collectively
referred to herein as the "Dealer Managers"), the Company and others (the
"Dealer Manager Agreement"). Solicitation and other activities by Soliciting
Dealers may be undertaken only in accordance with the applicable rules and
regulations of the Securities and Exchange Commission and only in those states
and other jurisdictions where such solicitations and other activities may
lawfully be undertaken and in accordance with the laws thereof. Compensation
will not be paid for solicitations in any state or other jurisdiction in which
the opinion of counsel to the Company or counsel to the Dealer Manager, such
compensation may not lawfully be paid. No Soliciting Dealer shall be paid
Solicitation Fees with respect to Shares purchased pursuant to an exercise of
Rights and the Over-Subscription Privilege for its own account or for the
account of any affiliate of the Soliciting Dealer. No Soliciting Dealer or any
other person is authorized by the Company or the Dealer Managers to give any
information or make any representations in connection with the Offer other than
those contained in the Prospectus and other authorized solicitation material
furnished by the Company through the Dealer Manager. No Soliciting Dealer is
authorized to act as agent of the Company or the Dealer Managers in any
connection or transaction. In addition, nothing herein contained shall
constitute the Soliciting Dealers partners with the Dealer Managers or with one
another, or agents of the Dealer Managers or of the Company, or create any
association between such parties, or shall render the Dealer Managers or the
Company liable for the obligations of any Soliciting Dealer. The Dealer Managers
shall be under no liability to make any payment to any Soliciting Dealer, and
shall be subject to no other liabilities to any Soliciting Dealer, and no
obligations of any sort shall be implied.
In order for a Soliciting Dealer to receive Solicitation Fees, the
Subscription Agent must have received from such Soliciting Dealer no later than
5:00 p.m., New York City time, on the Expiration Date, either (i) a properly
completed and duly executed Subscription Certificate with respect to Shares
purchased pursuant to the exercise of Rights and the Over-Subscription Privilege
and full payment for such Shares; or (ii) a Notice of Guaranteed Delivery
guaranteeing delivery to the Subscription Agent by close of business on the
third business day after the Expiration Date, of (a) full payment for such
Shares and (b) a properly completed and duly executed Subscription Certificate
with respect to Shares purchased pursuant to the exercise of Rights.
Solicitation Fees will only be paid after receipt by the Subscription Agent of a
properly completed and duly executed Soliciting Dealer Agreement and a
Subscription Certificate designating the Soliciting Dealer in the applicable
portion hereof. In the case of a Notice of Guaranteed Delivery, Solicitation
Fees will only be paid after delivery in accordance with such Notice of
Guaranteed Delivery has been effected. Solicitation Fees will be paid by the
Company (through the Subscription Agent) to the Soliciting Dealer by check to an
address designated by the Soliciting Dealer below by the tenth business day
following the day the Company issues Shares after the Expiration Date.
All questions as to the form, validity and eligibility (including time
of receipt) of this Soliciting Dealer Agreement will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
Unless waived, any irregularities in connection with a Soliciting Dealer
Agreement or delivery thereof must be cured within such time as the Company
shall determine. None of the Company, the Dealer Manager, the Subscription
Agent, the Information Agent for the Offer, Corporate Investor Communications,
Inc., or any other person will be under any duty to give notification of any
defects or irregularities in any Soliciting Dealer Agreement or incur any
liability for failure to give such notification.
The acceptance of Solicitation Fees from the Company by the undersigned
Soliciting Dealer shall constitute a representation by such Soliciting Dealer to
the Company that: (i) it has received and reviewed the Prospectus; (ii) in
soliciting purchases of Shares pursuant to the exercise of the Rights and the
Over-Subscription Privilege, it has complied with the applicable requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
applicable rules and regulations thereunder, any applicable securities laws of
any state or jurisdiction where such solicitations were made, and the applicable
rules and regulations of any self-regulatory organization or registered national
securities exchange; (iii) in soliciting purchases of Shares pursuant to the
exercise of the Rights and the Over-Subscription Privilege, it has not
published, circulated or used any soliciting materials other than the Prospectus
and any other authorized solicitation material furnished by the Company through
the Dealer Manager; (iv) it has not purported to act as agent of the Company or
the Dealer Managers in any connection or transaction relating to the Offer; (v)
the information contained in this Soliciting Dealer Agreement is, to its best
knowledge, true and complete; (vi) it is not affiliated with the Company; (vii)
it will not accept Solicitation Fees paid by the Company pursuant to the terms
hereof with respect to Shares purchased by the Soliciting Dealer pursuant to an
exercise of Rights and the Over-Subscription Privilege for its own account;
(viii) it will not remit, directly or indirectly, any part of Solicitation Fees
paid by the Company pursuant to the terms hereof to any beneficial owner of
Shares purchased pursuant to the Offer; and (ix) it has agreed to the amount of
the Solicitation Fees and the terms and conditions set forth herein with respect
to receiving such Solicitation Fees. By returning a Soliciting Dealer Agreement
and accepting Solicitation Fees, a Soliciting Dealer will be deemed to have
agreed to indemnify the Company and the Dealer Managers against losses, claims,
damages and liabilities to which the Company may become subject as a result of
the breach of such Soliciting Dealer's representations made herein and described
above. In making the foregoing representations, Soliciting Dealers are reminded
of the possible applicability of the anti-manipulation rules under the Exchange
Act if they have bought, sold, dealt in or traded in any Shares for their own
account since the commencement of the Offer.
Upon expiration of the Offer, no Solicitation Fees will be payable to
Soliciting Dealers with respect to Shares purchased thereafter.
Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Dealer Manager Agreement or, if not defined therein, in
the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws of the
State of New York.
Please execute this Soliciting Dealer Agreement below accepting the
terms and conditions hereof and confirming that you are a member firm of the
NASD or a foreign broker or dealer not eligible for membership who has conformed
to the Rules of Fair Practice of the NASD, including Sections 2730, 2740, 2420
and 2750 thereof, in making solicitations of the type being undertaken pursuant
to the Offer in the United States to the same extent as if you were a member
thereof, and certifying that you have solicited the purchase of the Shares
pursuant to exercise of the Rights, all as described above, in accordance with
the terms and conditions set forth in this Soliciting Dealer Agreement. Please
forward two executed copies of this Soliciting Dealer Agreement to PaineWebber
Incorporated, Attn: Joseph Zabik, 1285 Avenue of the Americas, New York, New
York 10019; Telephone No.: (212) 713-2711 and Facsimile No.: (212) 713-4205.
<PAGE>
A signed copy of this Soliciting Dealer Agreement will be promptly
returned to the Soliciting Dealer at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By: --------------------
Name: ----------------
Title: ---------------
PLEASE COMPLETE THE INFORMATION BELOW
------------------------------
Printed Firm Name Address
- --------------------------------------------------------------------------------
Contact at Soliciting Dealer
------------------------------
Authorized Signature Area Code and Telephone Number
------------------------------
Name and Title Facsimile Number
Dated: ------------------
Payment of the Selling Fee shall be mailed by check to the following address:
<PAGE>
Exhibit (l)(1)
(LETTERHEAD OF ROGERS & WELLS LLP)
January 25, 1999
Prospect Street High Income Portfolio Inc.
60 State Street
Boston, MA 02109
Ladies and Gentlemen:
We have acted as special counsel for Prospect Street High Income Portfolio Inc.,
a Maryland corporation (the "Fund"), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, of a
Registration Statement on Form N-2, including all amendments or supplements
thereto (File Nos. 333-69243 and 811-5557) (the "Registration Statement"),
relating to the Fund's issuance of transferable rights (the "Rights") to
subscribe for up to 6,630,663 shares of Common Stock of the Fund, par value
$0.03 per share (the "Shares").
In so acting, we have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such corporate records, documents,
certificates and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinions expressed below. Based upon the
foregoing, and on such examination of law as we have deemed necessary, we are of
the opinion that:
1. The Fund has been duly incorporated and is validly existing as a corporation
under the laws of the State of Maryland.
2. The issuance of the Rights and the sale of the Shares have been duly
authorized; when issued as contemplated in the Registration Statement, the
Rights will be legally issued; when issued and paid for upon exercise of the
Rights as contemplated in the Registration Statement, the Shares will be legally
issued, fully paid and nonassessable.
3. The conclusions of U.S. tax law expressed under the headings "The Offer --
Federal Income Tax Consequences of the Offer" and "Federal Taxation" in the
Prospectus contained in the Registration Statement are true and correct in all
material respects.
As to certain matters governed by the laws of the State of Maryland, we have
relied on the opinion of Piper & Marbury, L.L.P., a copy of which is attached
hereto, and this opinion is subject to the same qualifications, exceptions and
limitations set forth therein.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an Exhibit to the Registration Statement and to the reference to
this firm under the heading "Legal Matters" in the Prospectus included in such
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Rogers & Wells LLP
<PAGE>
Exhibit (l)(2)
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH WASHINGTON
36 SOUTH CHARLES STREET NEW YORK
BALTIMORE, MARYLAND 21201-3018 PHILADELPHIA
410-530-2530 EASTON
FAX: 410-530-0489
January 25, 1999
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
Re: Prospect Street High Income Portfolio Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel to Prospect Street High
Income Portfolio Inc., a Maryland corporation (the "Company"), in connection
with the Company's Registration Statement on Form N-2, including all amendments
or supplements thereto, filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and the
Investment company Act of 1940, as amended (File Nos. 333-69243 and 811-5557)
and the issuance of transferable rights (the "Rights") entitling holders to
subscribe for shares of the company's Common Stock, par value of $0.03 per share
(the "Shares"), pursuant to the Registration Statement.
In this capacity, we have examined the Company's Charter and By-Laws, the
proceedings of the Board of Directors of the company relating to the issuance of
the Shares and such other statues, certificates, instruments and documents
relating to the Company and matters of law as we have deemed necessary to the
issuance of this opinion. In such examination, we have assumed the genuineness
of all signatures, the legal capacity of all individuals who have executed any
of the aforesaid documents, the conformity of final documents in all material
respects to the versions thereof submitted to us in draft form, the authenticity
of all documents submitted to us as originals, the conformity with originals of
all documents submitted to us as copies and the due authorization, validity and
binding effect of all such documents (other than the authorization, execution
and delivery of the documents by the Company).
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Company has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The issuance of the Rights and the sale of the Shares have been duly
authorized; when issued as contemplated in the Registration Statement, the
Rights will be legally issued; when issued and paid for upon exercise of the
Rights as contemplated in the Registration Statement, the Shares will be legally
issued, fully paid and nonassessable.
You may rely upon this opinion in rendering your opinion to the Company
which is to be filed as an exhibit to the Registration Statement. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
Exhibit n
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report for Prospect Street High Income Portfolio Inc. dated
December 14, 1998 (and to all references to our firm) included or incorporated
by reference in Pre-Effective Amendment No. 1 and Amendment No. 23 to
Registration Statement File Nos. 333-69243 and 811-5557, respectively.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
FINANCIAL DATA SCHEDULE FOR COMMON SHARES - Exhibit (r)
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 256,024,502
<INVESTMENTS-AT-VALUE> 190,015,074
<RECEIVABLES> 11,245,324
<ASSETS-OTHER> 799,487
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 202,059,885
<PAYABLE-FOR-SECURITIES> 3,694,537
<SENIOR-LONG-TERM-DEBT> 40,000,000
<OTHER-ITEMS-LIABILITIES> 4,259,431
<TOTAL-LIABILITIES> 44,259,431
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 247,586,022
<SHARES-COMMON-STOCK> 19,805,323
<SHARES-COMMON-PRIOR> 44,146,293
<ACCUMULATED-NII-CURRENT> 3,682,152
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (28,052,452)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (66,009,428)
<NET-ASSETS> 157,800,454
<DIVIDEND-INCOME> 1,126,225
<INTEREST-INCOME> 27,183,822
<OTHER-INCOME> 1,742,564
<EXPENSES-NET> 5,503,954
<NET-INVESTMENT-INCOME> 24,548,657
<REALIZED-GAINS-CURRENT> (5,007,628)
<APPREC-INCREASE-CURRENT> (69,126,156)
<NET-CHANGE-FROM-OPS> (74,133,784)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 23,313,075
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,914,203
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 175,689
<NET-CHANGE-IN-ASSETS> (38,108,448)
<ACCUMULATED-NII-PRIOR> 2,845,247
<ACCUMULATED-GAINS-PRIOR> (60,615,370)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,582,842
<INTEREST-EXPENSE> 2,485,678
<GROSS-EXPENSE> 5,503,954
<AVERAGE-NET-ASSETS> 205,987,702
<PER-SHARE-NAV-BEGIN> 11.94
<PER-SHARE-NII> 1.30
<PER-SHARE-GAIN-APPREC> (3.76)
<PER-SHARE-DIVIDEND> (1.29)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.97
<EXPENSE-RATIO> 2.67
<AVG-DEBT-OUTSTANDING> 40,000,000
<AVG-DEBT-PER-SHARE> 2.02
</TABLE>
