SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934 (Amendment No. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)2))
/ / Definitive Proxy Statement
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
Prospect Street High Income Portfolio Inc.
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(Name of Registrant as Specified in Charter)
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(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0- 11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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Preliminary Copy
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street
Boston, Massachusetts 02109
November __, 1999
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
of Prospect Street High Income Portfolio Inc. (the "Fund") to be held at 60
State Street, 37th Floor, Boston, Massachusetts 02109, on [December 17, 1999] at
10:00 a.m. You will have an opportunity to hear a report on the Fund and to
discuss other matters of interest to you as a stockholder.
The Board of Directors is seeking your approval of (i) a new investment
advisory agreement between the Fund and Highland Capital Management, L.P.
("Highland Capital") to take effect upon the closing of the acquisition of
certain assets of Prospect Street Investment Management Co., Inc. by Highland
Capital and (ii) the election of six new directors to the Board of Directors of
the Fund, four of whom will be "non-interested
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persons" within the meaning of the Investment Company Act. The current
"non-interested" Directors will be continuing as Directors of the Fund.
Enclosed is a Proxy Statement which outlines the new investment
advisory agreement, including the rationale of the Board of Directors for
approving the new investment advisory agreement with Highland Capital, as well
as a Proxy Card with which you can vote on each of the foregoing matters.
We hope that you will be able to attend the meeting. Whether or not you
plan to attend, please complete, date, sign and mail the enclosed proxy card to
assure that your shares are represented at the meeting.
Sincerely,
C. William Carey
Chairman of the Board of Directors
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Preliminary Copy
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street
Boston, Massachusetts 02109
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on [December 17, 1999]
The Special Meeting of Stockholders (the "Special Meeting") of Prospect
Street High Income Portfolio Inc., a Maryland corporation (the "Fund"), will be
held at 60 State Street, 37th Floor, Boston, Massachusetts 02109, on [December
17, 1999] at 10:00 a.m., for the following purposes:
To consider and act upon the approval of a new investment advisory
agreement between the Fund and Highland Capital Management, L.P. ("Highland
Capital") to take effect upon the closing of an acquisition of certain assets of
Prospect Street Investment Management Co., Inc. by Highland Capital.
To elect six additional Directors of the Fund to hold office until the
next annual meeting of stockholders and until their successors shall have been
duly elected and qualified; and
The matters referred to above may be acted upon at the Special Meeting
or any adjournment thereof.
The close of business on November 5, 1999 has been fixed as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Special Meeting and any adjournment thereof.
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YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE
FUND. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, PLEASE
COMPLETE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE
TO VOTE IN PERSON AT THE MEETING, YOU MAY REVOKE YOUR PROXY.
By Order of the Board of Directors
___________, 1999 Karen J. Thelen
Boston, Massachusetts Secretary
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PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street
Boston, Massachusetts 02109
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
December 17, 1999
This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of Prospect Street High Income
Portfolio Inc., a Maryland corporation (the "Fund"), for use at the Fund's
Special Meeting of Stockholders (the "Special Meeting") to be held at 60 State
Street, 37th Floor, Boston, Massachusetts 02109, on [December 17, 1999] at 10:00
a.m., and at any and all adjournments thereof, for the purposes set forth in the
accompanying Notice of Special Meeting dated [November __, 1999]. The Fund is a
registered investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
This Proxy Statement and the accompanying Notice of Special Meeting and
form of proxy will be first sent to stockholders on or about [November__, 1999].
The Board of Directors has fixed the close of business on November 5, 1999 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Special Meeting. As of the record date, [ ] shares of the Fund's
Common Stock, $.01 par value per share (the "Common Stock"), were issued and
outstanding. As far as is known to the Fund, as of [November 5, 1999], no person
or entity was the beneficial owner of shares of Common Stock representing more
than five percent of the Fund's outstanding shares of Common Stock.
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If the accompanying form of proxy is properly executed and returned in
time to be voted at the Special Meeting, the shares covered thereby will be
voted in accordance with the instructions marked thereon by the stockholder.
Executed proxies that are unmarked will be voted (1) FOR the approval of a new
investment advisory agreement (the "New Advisory Agreement") between the Fund
and Highland Capital Management, L.P. ("Highland Capital") to take effect upon
the closing of an acquisition of certain assets of Prospect Street Investment
Management Co., Inc. ("Prospect Management") by Highland Capital (the
"Transaction"); and (2) FOR the election of the nominees named herein as
Directors of the Fund to hold office together with four continuing Directors
(none of whom are affiliates of Prospect Management or Highland Capital). The
Board of Directors does not know of any matter to be considered at the Special
Meeting other than the matters referred to above. A stockholder may revoke his
or her proxy prior to its use by appearing at the Special Meeting and voting in
person, by giving written notice of such revocation to the Secretary of the Fund
or by returning a subsequently dated proxy.
Shares of Common Stock representing a majority of the votes entitled to
be cast shall constitute a quorum at the Special Meeting. In the event a quorum
is not present at the Special Meeting or in the event a quorum is present at the
Special Meeting but sufficient votes to approve any of the proposals are not
received, the persons named as proxies may propose one or more adjournments of
the Special Meeting to permit further solicitation of proxies. Any such
adjournment will require the affirmative vote of a majority of those shares
present at the Special Meeting in person or by proxy. As described under
"Proposal 1 -- The New Advisory Agreement" and "Proposal 2 -- Election of
Directors," each Proposal is
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contingent upon the approval of the other. Accordingly, no stockholder vote may
be taken on only one of the two proposals in this Proxy Statement prior to such
adjournment.
Shares of Common Stock represented by properly executed proxies with
respect to which a vote is withheld, an abstention is indicated, or a broker
does not vote will be treated as shares that are present and entitled to vote
for purposes of determining a quorum. However, under applicable Maryland law,
abstentions and broker non-votes will not be treated as having been voted for
purposes of determining the approval of Proposal 1 and thus will have the effect
of a vote against such Proposal.
In addition to solicitation of proxies by mail, officers of the Fund
and officers and regular employees of Prospect Management, affiliates of
Prospect Management or other representatives of the Fund (none of whom will
receive additional compensation therefor) may also solicit proxies by telephone,
telegraph, mail or in person. The Fund is retaining Corporate Investor
Communications, a proxy solicitation firm to assist in the solicitation of
proxies. The costs of retaining such firm will be approximately [$______], and
will depend upon the amount and type of services rendered. The first $150,000 of
costs of this proxy solicitation and other stockholder meeting-related expenses,
including the engagement of a proxy solicitation firm, incurred in connection
with preparing this Proxy Statement and its enclosures will be paid by Highland
Capital and any amount in excess of $150,000 will be paid by Prospect
Management. However, Prospect Management will reimburse Highland Capital for the
first $60,000 of such proxy solicitation expenses if the Fund's stockholders do
not approve the New Advisory Agreement. None of the costs and expenses
associated with the transactions described in this proxy statement (such as the
costs of special meetings
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of Directors) will be borne by the Fund. They will be paid by Prospect
Management or Highland Capital.
PROPOSAL 1
TO CONSIDER A NEW ADVISORY AGREEMENT
WHICH WILL TAKE EFFECT UPON THE CLOSING
OF THE ACQUISITION OF THE PROSPECT MANAGEMENT ASSETS
Summary of the Transaction
On October 4, 1999 Highland Capital and Prospect Management entered
into a definitive agreement (the "Agreement") whereby Highland Capital will
acquire certain assets, including goodwill, of Prospect Management at a purchase
price equal to 5% of the value of the total assets of the Fund on the closing
date of the transaction (the "Transaction"). The purchase price is payable in
cash.
There are a number of conditions precedent to the closing of the
Transaction. Such conditions include, among other things, that the existing
credit facility entered into among the Fund and Bank Boston, N.A., Commerzbank
AG, New York Branch, and Bank Boston, N.A., as Agent shall continue after the
Closing or that the Fund enter into a replacement credit facility in form and
substance satisfactory to Highland Capital. In addition, pursuant to Section 15
of the 1940 Act and the terms of the existing advisory agreement, the existing
investment advisory agreement automatically terminates upon its assignment.
Section 15(a) of the 1940 Act prohibits any person from serving as an investment
advisor to a registered investment company except pursuant to a written contract
that has been approved by the
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stockholders. Therefore in order for Highland Capital to provide investment
advisory services to the Fund after the closing of the Transaction, the
stockholders of the Fund must approve the New Advisory Agreement.
The Transaction also contemplates that Prospect Street and Highland
Capital and other persons will use their best efforts to comply with the
requirements of Section 15(f) of the 1940 Act after the closing. Section 15(f)
provides, in pertinent part, that Prospect Management may receive any amount or
benefit in connection with a sale of securities of, or a sale of any other
interest in, Prospect Management which results in an assignment of an investment
advisory contract if (1) for a period of three years after such event, at least
75% of the members of the board of directors of the Fund are not "interested
persons" (as defined in the 1940 Act) of Highland Capital or Prospect
Management; and (2) for a two-year period no "unfair burden" is imposed on the
Fund as a result of the Transaction.
The New Advisory Agreement, if approved by the Fund's stockholders,
will commence at the closing of the Transaction. It will remain in effect for an
initial two-year term and will continue in effect thereafter for successive
periods if and so long as such continuance is specifically approved annually by
(a) the Board of Directors or (b) a majority vote (as defined under the 1940
Act) of the Fund's stockholders, provided that in either event, the continuance
also is approved by a majority of the directors who are not "interested persons"
by vote cast in person at a meeting called for the purpose of voting on such
approval.
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If the conditions for the proposed transaction are not met and the
transaction is not completed, the existing investment advisory agreement with
Prospect Management will remain in effect until February 28, 2000. The current
advisory agreement, dated March 1, 1994, was last approved by the Directors on
December 14, 1998 and by the stockholders on March 1, 1994. On December 14,
1998, the non-interested Directors of the Fund and, in addition, the full Board
of Directors approved a proposal, subject to stockholder approval, that would
have increased the advisory fee payable to Prospect Management. Although a
majority of the votes were cast in favor of the proposal at the Annual Meeting
of Stockholders of the Fund held on March 12, 1999, such proposal failed to win
the requisite 1940 Company Act supermajority vote necessary for approval.
During the fiscal year ended October 31, 1998 and the eleven months
ended September 30, 1999, the Fund paid $1,582,842 and $1,365,334, respectively,
in advisory fees to Prospect Management. The Fund did not effect any
transactions through affiliated brokerage firms during the fiscal year ended
October 31, 1998 or thereafter.
After careful consideration, the Board of Directors of the Fund,
including all of the "non-interested" Directors (as defined under the Investment
Company Act) (hereinafter "Independent Directors") unanimously recommends that
stockholders vote "FOR" the New Advisory Agreement between the Fund and Highland
Capital to replace the current advisory agreement between the Fund and Prospect
Management upon consummation of the Transaction. See "Evaluation by the Board"
below.
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Benefits to Stockholders
The Independent Directors have identified the following benefits which
the stockholders are anticipated to realize as a result of the Transaction:
1. In engaging Highland Capital, the Fund is believed to be
contracting with a larger organization having a greater depth
of personnel with the potential of strengthening the
investment advisory services available to the Fund.
2. Highland Capital has committed not to seek any increase in
investment advisory fees for two years after the closing
(i.e., during the two-year period of the New Advisory
Agreement).
3. Highland Capital has advised the Independent Directors that it
intends to seek to manage the Fund in a manner such that the
Fund's total expenses (exclusive of interest, taxes, brokerage
expenses and extraordinary items, such as litigation expenses
and expenses of new securities offerings) as a percentage of
net assets would not exceed, in any material respect, the
Fund's average total expenses similarly calculated over the
last two years. No assurance can be given that Highland
Capital will be able to achieve such objective.
Highland Capital
Highland Capital is a registered investment adviser located at
1150 Galleria Tower, 13455 Noel Road LB #45, Dallas, Texas 75240. Highland
Capital has advised the Fund that as of September 30, 1999, it managed
approximately $5.5 billion in debt securities on behalf of institutional
investors. These assets consist of approximately $4.8 billion of
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senior secured bank loans and $700 million of subordinated debt securities of
"high yield" issuers, principally in structured finance vehicles, such as
"Collateralized Loan Obligations" (CLOs). Highland Capital is controlled by
James Dondero and Mark Okada, by virtue of their respective share ownership, and
its general partner Strand Advisors, Inc. ("Strand") of which Mr. Dondero is the
sole shareholder. James Dondero, Mark Okada and Todd Travers are Highland
Capital's principal portfolio managers. The address of Strand and Messrs.
Dondero, Okada and Travers is 1150 Galleria Tower, 13455 Noel Road LB #45,
Dallas, Texas 75240.
Mr. Dondero has been President and Chief Investment Officer of Highland
Capital since March 1993. From December 1989 through 1993, Mr. Dondero was Chief
Investment Officer of a guaranteed investment contract subsidiary of Protective
Asset Management Company ("PAMC"), where he and four other investment
professionals managed portfolios consisting of high-yield securities, corporate
bonds, mortgage-backed securities, bank loans and preferred and common stocks.
From August 1985 to December 1989, Mr. Dondero managed approximately $1 billion
in proprietary fixed-income portfolios for a subsidiary of American Express
Company. Between July 1984 and August 1985, he was a member of the Morgan
Guaranty Trust Co. NYC Financial Training Program. Mr. Dondero graduated from
the University of Virginia (Beta Gamma Sigma) with a B.S. in Accounting and a
B.S. in Finance in May 1984. He is a Certified Public Accountant, Certified
Managerial Accountant and Chartered Financial Analyst, and is a full member of
the New York Society of Security Analysts.
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Mr. Okada has been Executive Vice President of Highland Capital since
March 1993. From July 1990 to March 1993, Mr. Okada was Manager-Fixed Income for
PAMC, where his responsibilities included management and administration of
approximately $1.3 billion in bank loan purchases, credit evaluation of
fixed-income assets and quantitative analysis for special projects. From
September 1986 to July 1990, Mr. Okada was employed by Hibernia National Bank,
where he most recently served as Vice President and Section Head of the Capital
Markets Group and was responsible for a portfolio of $1 billion in highly
leveraged transactions. Prior thereto, he was a management trainee for Mitsui
Manufacturers Bank. Mr. Okada graduated with honors from UCLA with a B.S. in
Economics and a B.S. in Psychology in 1984. Mr. Okada is a Chartered Financial
Analyst, and is a member of the Dallas Society of Security Analysts.
Mr. Travers has been a Senior Portfolio Manager at Highland Capital
since January 1995. He specializes in high-yield, bank loan, leveraged loan and
aviation asset investments. Before January 1995, he was Senior Financial Analyst
at American Airlines, where he assisted in the development and maintenance of
that company's jet fleet plan. Mr. Travers graduated from Iowa State University
with a B.S. in Industrial Engineering in 1985 and from Southern Methodist
University with an M.B.A. in Finance in 1989. Mr. Travers is a Chartered
Financial Analyst, and is a member of the Dallas Society of Security Analysts.
The Fund has been advised that Messrs. Dondero, Okada and Travers
intend to serve as Portfolio Managers for the Fund.
The following table sets forth the name, title and principal occupation
of each executive officer of Highland Capital:
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<TABLE>
<CAPTION>
Name and Address Title Principal Occupation
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<S> <C> <C>
James Dondero * President President of Highland Capital
13455 Noel Road - LB#45
Dallas, Texas 75240
Mark Okada Executive Vice Executive Vice President of Highland Capital
13455 Noel Road - LB#45 President
Dallas, Texas 75240
Todd Travers Senior Portfolio Senior Portfolio Manager of Highland Capital
13455 Noel Road - LB#45 Manager
Dallas, Texas 75240
</TABLE>
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* Mr. Dondero, through his ownership of its corporate general partner, is a
controlling person of Highland Capital and may be deemed to be the "Parent" (as
such term is defined in item 22 of Rule 14a-101 of the Securities Exchange Act
of 1934, as amended) of Highland Capital.
Prospect Management
Prospect Management is a registered investment adviser. The following
table sets forth the name, title and principal occupation of each director and
executive officer of Prospect Management.
<TABLE>
<CAPTION>
Name and Address Title Principal Occupation
- ---------------- ----- --------------------
<S> <C> <C>
Richard E. Omohundro, Jr. * President President of the Fund, President of
60 State Street Prospect Management, and Co-President
Boston, MA 02109 and Chief Executive Officer of Prospect Street
Strategic Debt Management Co., Inc.
Karen J. Thelen Vice President Secretary of the Fund and Vice President
60 State Street Management.
Boston, MA 02109
John A. Frabotta* Vice President Vice President, Treasurer, Chief Investment Officer
60 State Street and Portfolio Manager of the Fund
Boston, MA 02109 and Vice President and Secretary of Prospect
Management.
William O'Connell Controller Controller of Prospect Management and
60 State Street an officer of various companies affiliated with
Boston, MA 02109 Prospect Management.
</TABLE>
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* Messrs. Omohundro and Frabotta, and Joseph Cote, a shareholder of Prospect
Management, are the controlling stockholders of Prospect Management and may be
deemed to be the "Parents"(as such term is defined in Item 22 of Rule 14a-101 of
the Securities Exchange Act of 1934, as amended) of Prospect Management.
The New Advisory Agreement
The Fund's current advisory agreement and the New Advisory Agreement
are identical, except for the parties, the termination date and a provision
requiring Highland Capital to advise the Fund of any changes to its general
partners. Accordingly, if the New Advisory Agreement is approved, Highland
Capital will be retained, for a two-year period at the existing fee schedule, to
manage the investments of the Fund and to provide such investment research,
advice and supervision, in conformity with the Fund's investment objectives and
policies, as may be necessary for the operation of the Fund. Under the New
Advisory Agreement, the Fund will pay Highland Capital a monthly advisory fee
which is equal to $0.65% (on an annual basis) of the average weekly value of the
net assets of the Fund up to and including $175,000,000 of such net assets,
0.55% on the next $50,000,000 of such net assets and 0.50% of the excess of such
net assets over $225,000,000. Net assets is defined as the total assets of the
Fund less (i) accrued liabilities of the Fund (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) and (ii)
accumulated and unpaid dividends on preferred stock, if any.
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Under the New Advisory Agreement, the Fund would bear all costs of its
operation other than those to be incurred by Highland Capital. In particular,
the Fund will pay investment advisory fees, fees and expenses associated with
the Fund's administration, record keeping and accounting, fees and expenses for
the custodian of the Fund's assets and the legal, accounting and auditing fees,
taxes, expenses of preparing prospectuses and stockholder 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 advisor or any of its affiliates,
and any extraordinary expenses. Highland Capital will reimburse the Fund for any
expenses (excluding brokerage commissions, interest, taxes and extraordinary
items, such as 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 New Advisory Agreement,
Highland Capital will provide the Fund with office space, facilities and
business equipment and provides the services of executive and clerical personnel
for administering certain of the affairs of the Fund. Highland Capital will
compensate Directors of the Fund if such persons are employed by Highland
Capital or its affiliates.
Pursuant to the New Advisory Agreement, the services of Highland
Capital are not exclusive and it may provide similar services to other
investment companies and other clients, so long as its services under the New
Advisory Agreement are not impaired.
The New Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, Highland
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Capital would not be liable to the Fund or any of the Fund's stockholders for
any act or omission by the Highland Capital in the supervision or management of
its respective investment activities or for any loss sustained by the Fund or
the Fund's stockholders, and that the Fund will indemnify Highland Capital
subject to the requirements of the 1940 Act.
The New Advisory Agreement may be terminated at any time by the Fund or
Highland Capital, without the payment of any penalty, upon the vote of a
majority of the Fund's Board or a majority of the outstanding voting securities
of the Fund or by Highland Capital, on no less than 30 days' or more than 60
days' written notice by either party to the other.
A copy of the form of the New Advisory Agreement is annexed hereto as
Exhibit A and is incorporated herein by reference.
In connection with the engagement of Highland Capital pursuant to the
New Advisory Agreement, the Independent Directors have nominated six additional
Directors for election by the stockholders (See Proposal No. 2), of which four
will be "non-interested" (as defined under the Investment Company Act), and two,
Messrs. Dondero and Okada, are principals of Highland Capital. The four current
"non-interested" Independent Directors, John S. Albanese, C. William Carey,
Harlan D. Platt and Christopher E. Roshier, will remain as Directors. The
Independent Directors invited Highland Capital to provide the names of qualified
individuals as Board members. The additional "non-interested" nominees were
selected from a list of potential nominees submitted by Highland Capital for
consideration and evaluation by the Fund's current Independent Directors. The
three
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Directors of the Fund who are affiliated with Prospect Management will resign
upon the closing of the Transaction.
The Independent Directors, following consultation with representatives
of Highland Capital, and in light of the election of six new Directors at this
Special Meeting, also determined to amend the By-laws of the Fund to set the
date of the next annual meeting on or before August 31, 2000. Such change is
contingent upon stockholder approval of the New Advisory Agreement and the
closing of the Transaction. Accordingly, upon the occurrence of such events, the
next annual meeting of stockholders is expected to be held in July or August of
the year 2000. It is anticipated that subsequent annual meetings will be held in
March, commencing in March 2001.
In addition, Messrs. John S. Albanese and Christopher E. Roshier do not
plan to stand for re-election as Directors at the next annual meeting and their
vacancies are not anticipated to be filled by successor nominees. Messrs.
Albanese and Roshier have stated their intention to resign their directorships
on or before the later of July 1, 2000 or the second regular quarterly Board of
Directors' meeting held following the closing of the Transaction at which the
Board considers Highland Capital's management of the Fund. At the request of the
current Independent Directors, Messrs. Albanese and Roshier have agreed to
continue for a period of six months thereafter, if they wish, as paid advisory
members to the Board (for fees at the same rate as are payable to Independent
Directors) to continue to assist the Board during this transitional period with
Highland Capital, as the new advisor.
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Evaluation by the Board
The Independent Directors met seven times over the course of more than
two months to determine whether or not to approve the New Advisory Agreement and
whether to recommend approval of the New Advisory Agreement to the entire Board
and to the shareholders of the Fund. In addition, there were several informal
meetings of certain Independent Directors relating to this matter. The
Independent Directors reviewed various materials, including the (i) due
diligence report prepared by Shields & Co., special independent financial
advisor to the Independent Directors, (ii) memoranda and other materials
provided by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., special counsel
to the Independent Directors, (iii) reports produced by Highland Capital and
(iv) supplemental due diligence materials provided by Shields & Co. In addition,
the Independent Directors interviewed the principals of Highland Capital, both
during site visits made to Highland Capital's headquarters in Dallas, Texas and
during formal presentations made by the principals of Highland Capital to the
Independent Directors.
The progression of the events leading up to the determination to
approve the New Advisory Agreement are, briefly, as follows.
At their July 30, 1999 meeting, the Independent Directors met to
discuss the proposed Transaction (which had been brought to their attention by
Prospect Management) and the prospect of engaging Highland Capital to replace
Prospect Management as the Fund's new investment adviser. Senior officers of
Highland Capital and Prospect Management were present to answer questions from
the Independent Directors. The Independent Directors reviewed materials
furnished by Highland Capital, including information regarding Highland
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Capital and its affiliates and their respective personnel, operations and
financial condition. The Independent Directors met with Highland Capital's
principals, Messrs. Dondero and Okada and Mr. Joseph Dougherty. The principals
of Highland discussed Highland Capital's philosophy of management, performance
expectations and methods of operation insofar as they related to the Fund and
indicated their belief that, as a consequence of the Transaction, the ability to
provide investment advisory services to the Fund would not be adversely affected
and would likely be enhanced by the greater resources of Highland Capital. The
Independent Directors formally engaged an independent financial adviser, Shields
& Co., to assist them in their due diligence and evaluation of Highland Capital.
They also engaged special counsel to represent them in connection with their
evaluation of the New Advisory Agreement and related matters.
At a meeting held on August 12, 1999, the Independent Directors met and
discussed the results of Shields & Co.'s preliminary on-site due diligence
investigation of Highland Capital conducted at Highland Capital's headquarters
in Dallas, Texas. The Independent Directors reviewed a draft due diligence
report from Shields & Co. and made inquiries of its principal, Thomas Shields,
including inquiries into Highland Capital's investment strategy, historical
performance, future plans for the Fund, financial solvency, management expertise
and fee structure. The Independent Directors requested more comparative
performance data, including comparisons of Highland Capital against Prospect
Street and other industry indices.
At a meeting held on August 19, 1999, the issue of Board composition
after the Transaction was discussed, including the requirement of the 1940 Act
that 75% of the
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Directors be "non-interested" members. The Independent Directors heard
presentations from special counsel. In addition, the Independent Directors were
provided supplemental due diligence materials by Shields & Co.
At a meeting held on August 26, 1999, Shields & Co. provided the
Independent Directors with an updated due diligence report and other
supplemental materials and advised the Independent Directors of additional
comparative performance data. There was further discussion about the
post-Transaction composition of the Board. The Independent Directors considered
Highland Capital's suggestion to add four additional non-interested members to
the Board after the Transaction and arrived at a consensus that the quality of
the candidates was more important than the number of the candidates.
At their meeting on September 2, 1999, Messrs. C. William Carey and
John S. Albanese, two of the Independent Directors, discussed their favorable
impressions of Highland Capital's operations and management formed during a site
visit they had made at Highland Capital's offices in Dallas. A discussion then
ensued about the quality of independent directors to be added to the Board after
the Transaction, resulting in the consensus that the Independent Directors would
interview as many qualified candidates as were suggested without strict regard
to the number of directors.
At a meeting held on September 10, 1999, the Independent Directors
further discussed Messrs. Carey and Albanese's onsite review of Highland
Capital's operations and their discussions with the principals of Highland
Capital regarding the 1940 Act obligations of the non-interested members of the
Board. At the September 10th meeting a discussion ensued regarding the
possibility that two of the existing Independent Directors might resign
-17-
<PAGE>
after a transition period of approximately six months, but remain available to
serve as observers for a period of six additional months.
At their September 28, 1999 meeting, a further presentation to the
Independent Directors and Shields & Co. was made by representatives of Highland
Capital regarding recent investment performance, after which the Independent
Directors had the opportunity to direct questions to the principals of Highland
Capital. The Independent Directors, and thereafter the full Board of Directors,
considered and approved the proposed form of New Advisory Agreement, subject to
the execution and delivery of the Purchase and Sale Agreement between Highland
Capital and Prospect Management and subject to approval by stockholders of the
Fund as required by the 1940 Act. The Board also elected C. William Carey as
interim Chairman of the Board of Directors.
On October 8, 1999, the Independent Directors completed the interview
and nominating process and nominated six new Directors.
On the basis of the information made available to them and the results
of research carried out on their behalf, the Independent Directors have
concluded that Highland Capital is well qualified to serve as the Fund's
investment advisor by virtue of its depth of management and experience and the
depth of resources of its organization.
The Board of Directors, including all of the non-interested Directors,
recommends approval by the stockholders of the New Advisory Agreement. In making
this recommendation, the Directors carefully evaluated the experience of
Highland Capital's key personnel in institutional investing, and the quality of
services Highland Capital is expected to provide to the Fund; and have given
careful consideration to various factors deemed to be
-18-
<PAGE>
relevant to the Fund, including, but not limited to: (1) the history,
reputation, qualification and background of Highland Capital, as well as the
qualifications of its personnel and its financial condition; (2) the investment
performance of Highland Capital since its commencement of operations,
particularly with respect to its investment record in managing "high yield"
subordinated debt securities in leveraged portfolios; (3) the nature and quality
of the services expected to be rendered to the Fund by Highland Capital; (4)
that the compensation payable to Highland Capital by the Fund under the New
Advisory Agreement will be at the same rate as the compensation now payable to
Prospect Management under the existing advisory agreement; (5) the advisory fees
and expense ratios of comparable leveraged high-yield closed-end funds; (6) that
Highland Capital intends to manage the Fund in such a manner that the expenses
to be incurred under the New Advisory Agreement would generally not be greater
than those that would otherwise be incurred under the current advisory
agreement; and (7) that the essential economic terms of the current advisory
agreement (with Prospect Management) will be unchanged for two years from the
closing date of the Transaction under the New Advisory Agreement.
Highland Capital has advised the Board of Directors that it expects
that there will be no reduction in the scope and quality of advisory services
provided to the Fund as a result of the proposed transaction. Based upon
information furnished by Highland Capital, the Board of Directors is not aware
of any financial condition of Highland Capital which is reasonably likely to
impair its ability to perform its commitments under the New Advisory Agreement.
Accordingly, although there can be no assurance thereof, the Board of Directors
believes that the Fund should receive investment advisory services under the New
Advisory
-19-
<PAGE>
Agreement at least equal to those it currently receives under the current
advisory agreement, at the same fee levels.
Accordingly, after consideration of the above, and such other factors
and information as it deemed relevant, the Board, including all of the Board
Members who are not "interested persons" (as such term is defined by the 1940
Act), unanimously approved the New Advisory Agreement and voted to recommend its
approval to the Fund's stockholders.
Required Vote
Under the 1940 Act, approval of the New Advisory Agreement (this
Proposal No. 1) will require a vote of a majority of the outstanding voting
securities of the Fund, which means the lesser of either (a) the vote of 67% or
more of the shares present at the relevant meeting, if the holders of more than
50% of the outstanding shares of the applicable class or classes are present or
represented by proxy, or (b) the vote of more than 50% of the outstanding
shares. UNDER APPLICABLE MARYLAND LAW, IN DETERMINING WHETHER THIS PROPOSAL NO.
1 HAS RECEIVED THE REQUISITE NUMBER OF AFFIRMATIVE VOTES, ABSTENTIONS AND BROKER
NON-VOTES WILL NOT BE COUNTED AND THUS WILL HAVE THE EFFECT OF A VOTE AGAINST
SUCH PROPOSAL.
-20-
<PAGE>
PROPOSAL 2
Election of Directors
The stockholders of the Fund are being asked to elect the following six
nominees as additional Directors of the Fund, to serve as such until the next
annual meeting of the Fund's stockholders and until their successors shall have
been duly elected and qualified. (See the Discussion under "Proposal 1 - New
Advisory Agreement" with respect to the nomination of the new Directors).
Subject to shareholder approval of and upon effectiveness of the New Advisory
Agreement, the Board of Directors has fixed the number of Directors of the Fund
at ten pursuant to the Bylaws and the Articles of Amendment and Restatement of
the Fund. If the New Advisory Agreement is not approved, the current Board of
Directors of the Fund (consisting of seven members) will continue to serve until
the next annual meeting of stockholders and until their successors have been
duly elected and qualified. The current Board consists of Richard E. Omohundro,
Jr., John A. Frabotta, Joseph G. Cote, John S. Albanese, Harlan D. Platt, C.
William Carey and Christopher E. Roshier. If the New Advisory Agreement is
approved and the six nominees are elected, Richard E. Omohundro, Jr., John A.
Frabotta and Joseph G. Cote will resign their positions on the Board. Two of the
Fund's four current Independent Directors, Messrs. Albanese and Roshier intend
to resign their Directorships effective the later of July 1, 2000 or immediately
following the second regular quarterly Board meeting following such closing.
All shares represented by valid proxies will be voted in the election
of Directors for the applicable nominees named below, unless authority to vote
for a particular nominee is withheld. Each nominee has agreed to serve as a
Director if elected. If any such nominee
-21-
<PAGE>
is not available for election at the time of the Special Meeting, the persons
named as proxies will vote for such substitute nominee as the Independent
Directors may recommend and select.
Nominees
The nominees for election to the Board of Directors are as follows:
<TABLE>
<CAPTION>
Number of
Shares of
Common
Stock
Beneficial-
ly Owned
at
Positions Director November 5,
Name with Fund Age Since 1999
- ---- --------- --- ----- ----
<S> <C> <C> <C> <C>
James Dondero* Nominee for 37 N/A 0
Director
Mark Okada* Nominee for 37 N/A 0
Director
John William Honis Nominee for 41 N/A 0
Director
Timothy K. Hui Nominee for 51 N/A 0
Director
Scott F. Kavanaugh Nominee for 38 N/A 0
Director
James F. Leary Nominee for 69 N/A 0
Director
</TABLE>
*If the New Advisory Agreement is approved, these Nominees would be
deemed to be "interested persons" of the Fund under the 1940 Act. Mr. Dondero is
the President of Highland Capital and Mr. Okada is its Executive Vice President.
James Dondero has been President and Chief Investment Officer of
Highland Capital since March 1993. For further information relating to Mr.
Dondero, please see "Proposal 1 - Highland Capital."
-22-
<PAGE>
Mark Okada has served as Executive Vice President of Highland Capital since
March 1993. For further information relating to Mr. Okada, please see "Proposal
1 - Highland Capital."
John William Honis has been working on the ownership transfer of the
Northeast Phone System Communication Group ("Northeast Phone") since June 1999.
From July 1989 to May 1999, he served as President and owner of Northeast Phone.
From October 1995 to March 1999, Mr. Honis also served as Vice President of
Value Call International, Inc. Mr. Honis is on the Board of Directors of the
Jenna Foundation for Non-Violence.
Timothy K. Hui has been the Director of the Masland Learning Resource
Center of the Philadelphia College of Bible since September 1998. Prior thereto,
Mr. Hui was in private practice as an attorney (i) serving as the managing
partner of the law firm of Hui & Malik, L.L.P. from 1993 to 1998 and (ii) at the
law firm of Thompson & Knight, P.C. from 1989 to 1993.
Scott F. Kavanaugh has been the Managing Principal and Chief Operating
Officer of Financial Institutional Partners Mortgage Company and the Managing
Principal and President of Financial Institutional Partners, LLC, an investment
banking firm, since April 1998. From 1991 to April 1998, Mr. Kavanaugh was the
Managing Partner and Director of Trade of Great Pacific Securities, Inc.
James F. Leary is the founder of Sunwestern Management, Inc., a venture
capital fund, where he has been serving as President and Director since 1981.
From 1995 to 1998, he was the Vice Chairman, Finance and a Director of Search
Financial Services, Inc., a financial services firm. From 1989 to 1995, he was
the founder and General
-23-
<PAGE>
Partner of Sunwestern Advisors, L.P. Mr. Leary is currently a member of the
Boards of Directors of Associated Materials, Inc., Capstone Group (a group of
mutual funds) and Quest Products Corporation.
Continuing Directors
The following Directors will continue in office following the Special
Meeting until the next scheduled annual stockholders' meeting (i.e., to be held
prior to August 31, 2000) except for Messrs. Albanese and Roshier, who intend to
resign earlier, as described above.
<TABLE>
<CAPTION>
Number of
Shares of
Common
Stock
Beneficial-
ly Owned
at
November
Positions Director 5, 1999
Name with Fund Age Since (1) (2)
- ---- --------- --- ----- -------
<S> <C> <C> <C>
John S. Albanese Director 47 November, -0-
1989
C. William Carey Chairman of 62 November, 9,012
the Board, 1988
Director
Harlan D. Platt Director 48 November, -0-(3)
1988
Christopher E. Roshier Director 53 November, -0-
1993
</TABLE>
-24-
<PAGE>
- ----------------
(1) The amounts shown are based on information furnished by the nominee. Except
as otherwise indicated, each person has sole voting and investment power
with respect to the shares indicated. Fractional shares are rounded off to
the nearest whole share.
(2) No Director is the beneficial owner of more than 1% of the Common Stock
outstanding.
(3) Does not include 2,372 shares of Common Stock owned by Mr. Platt's wife, as
to which Mr. Platt disclaims beneficial ownership.
As of [November 5, 1999], all of the officers and Directors of the Fund,
and Prospect Management, as a group, beneficially owned [ ] shares of Common
Stock, or less than 1% of the outstanding shares of Common Stock. Prospect
Management owns 43,693 shares of Common Stock as of August 31, 1999. Highland
Capital does not own any shares of Common Stock of the Fund.
John S. Albanese, 47, has been Senior Counsel to Washington Headquarters
Services, a Department of Defense Agency located at the Pentagon since 1992. A
Lieutenant Colonel in the United States Army Reserve, he served on active duty
from 1977 until 1992 in various positions such as: Attorney-Adviser and
Litigation Attorney in the Office of the Judge Advocate General; Legal Counsel
to the U.S. Army Information Systems Selection and Acquisition Agency; and Legal
Adviser to the Defense Attache for the American Embassy in Paris, France.
C. William Carey, 62, was Chairman and Chief Executive Officer of Town &
Country Corporation from 1965 until December 1996 and has been the President of
such
-25-
<PAGE>
Company since September 1998. Mr. Carey has been President of Carey Associates,
Inc., a real estate investment management company, since January 1998. On
September 28, 1999, the Independent Directors and the full Board also elected C.
William Carey as interim Chairman of the Board of Directors of the Fund.
Harlan D. Platt, 48, is a Professor of Finance and Insurance, and has been
at Northeastern University, College of Business Administration, since 1981 and
has been a Director of VSI Enterprises, Inc. (a manufacturer of video
conferencing equipment) (NASDAQ) since September 1998.
Christopher E. Roshier, 53, a citizen of the United Kingdom, has been a
Corporate Finance Director of European Capital Company Limited in London since
1990 and is a Director of a number of other public and private companies in the
United Kingdom.
Current Directors Who Will No Longer Serve As Directors If Proposals 1 and 2 are
Approved
Richard E. Omohundro, Jr. has been President or Co-President of
Prospect Management since July 1988 and has been President of the Fund since its
inception. Previously he was a Managing Director of Merrill Lynch from 1983 to
1988 and Co-Manager of the Merrill Lynch High Yield Bond Group from 1978 through
1987. Mr. Omohundro is also President and Chief Executive Officer of Prospect
Street Strategic Debt Management Co., Inc.
John A. Frabotta has been Vice President of the Manager since June
1988, Co- Portfolio Manager of the Fund since October 1989 and Portfolio Manager
since October
-26-
<PAGE>
1990. Previously, Mr. Frabotta was a Vice President of Merrill Lynch Pierce
Fenner & Smith ("Merrill Lynch") from 1979 through June 1988.
Joseph G. Cote has been a stockholder of Prospect Management since 1989.
Previously, he was Co-President of Prospect Management from August 1995 to
February 1998 and from February 1989 to November 1993. From 1978 to 1988, Mr.
Cote was a Managing Director of Merrill Lynch and Co-Manager of the Merrill
Lynch High Yield Bond Group.
-27-
<PAGE>
Board of Directors' Meetings
During the fiscal year ended October 31, 1998, the Directors of the Fund
met five times in person and four times by telephone. During the eleven months
ended September 30, 1999, they met ______ times in person and _____times by
telephone. During such year each incumbent Director (either in person or by
telephone) attended all of the meetings of the Board. The Board of Directors has
one committee, the Audit Committee. The Audit Committee is responsible for
conferring with the Fund's independent accountants, reviewing the scope and
procedures of the year-end audit, reviewing annual financial statements and
recommending the selection of the Fund's independent accountants. In addition,
the Audit Committee may address questions arising with respect to the valuation
of certain securities in the Fund's portfolio. The Audit Committee is comprised
of Messrs. Carey, Albanese and Platt. The Audit Committee met once in fiscal
1998.
Remuneration of Directors and Executive Officers
The executive officers of the Fund and those of its Directors who are
"interested persons" of the Fund receive no direct remuneration from the Fund.
Those Directors who are not interested persons are compensated at the rate
of $10,000 annually, plus $2,000 per Directors' meeting attended in person or
$1,000 per Directors' meeting attended by telephone, and are reimbursed for
actual out-of-pocket expenses relating to attendance at such meetings. In
addition, the members of the Fund's Audit Committee, which consists of certain
of the Fund's non-interested Directors, receive $1,000 for each Audit Committee
meeting attended, together with actual out-of-pocket
-28-
<PAGE>
expenses relating to attendance at such meetings. During the fiscal year ended
October 31, 1998 at the eleven-months ended September 30, 1999, Directors who
were not interested persons of the Fund earned fees aggregating $91,000, and
$65,000, respectively. The foregoing Directors' fees do not include fees and
expenses payable to the Independent Directors in connection with special
meetings relating to the approval of the New Advisory Agreement, none of which
are payable by the Fund.
The following tables summarize the compensation paid to Directors of the
Fund for the fiscal year ended October 31, 1998 and the eleven-months ended
September 30, 1999, respectively, excluding any fees payable in connection with
special meetings relating to the approval of the New Advisory Agreement:
1998 Fiscal Year
<TABLE>
<CAPTION>
Name of Director Aggregate Pension or Retirement Estimated Annual Total
or Officer Compensation Benefits Accrued as Benefits Upon Compensation
- --------------- from Fund Part of Fund Expenses Retirement from Fund
- --------------- --------- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
Richard E. Omohundro, Jr. none none none none
John A. Frabotta none none none none
Joseph G. Cote none none none none
John S. Albanese $23,000 none none $23,000
Harlan D. Platt $24,000 none none $24,000
C. William Carey $23,000 none none $23,000
Christopher E. Roshier $21,000 none none $21,000
</TABLE>
-29-
<PAGE>
November 1, 1998 - September 30, 1999
<TABLE>
<CAPTION>
Name of Director Aggregate Pension or Retirement Estimated Annual Total
or Officer Compensation Benefits Accrued as Benefits Upon Compensation
- ---------------- from Fund Part of Fund Expenses Retirement from Fund
--------- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
Richard E. Omohundro, Jr. none none none none
John A. Frabotta none none none none
Joseph G. Cote none none none none
John S. Albanese $23,000 none none $23,000
Harlan D. Platt $24,000 none none $24,000
C. William Carey $23,000 none none $23,000
Christopher E. Roshier $18,000 none none $18,000
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION
OF THE SIX NOMINEES TO THE FUND'S BOARD OF DIRECTORS.
Required Vote
The election of each of the nominees for Director requires the affirmative
vote of the holders of a plurality of the Common Stock of the Fund present and
voting at the Special Meeting. Pursuant to the Articles of Incorporation,
holders of Common Stock have one vote per share. Abstentions will not be counted
as votes cast and will have no effect on the result of the vote, although
abstentions will count towards the presence of a quorum. Under the Articles of
Incorporation and By-laws of the Fund, the Independent Directors determined to
submit six nominees for election by the stockholders. Under the 1940 Act, the
holders of the Common Stock are, therefore, entitled to elect these nominees as
Directors (at least 75% of whom are not "interested persons" as defined in the
1940 Act).
-30-
<PAGE>
Annual Report and Semi-Annual Report
The Fund will furnish, without charge, a copy of the Fund's Annual Report
for the fiscal year ended October 31, 1998 and the Fund's Semi-Annual Report for
the six months ended April 30, 1999 to a stockholder upon request. Stockholders
should send such requests to the Fund at 60 State Street, 37th Floor, Boston,
Massachusetts 02109, Attention Karen Thelen, or call the Fund toll free at
1-800-426-5523.
-31-
<PAGE>
OTHER MATTERS TO COME BEFORE THE MEETING
The Directors do not intend to present any other business at the Special
Meeting nor are they aware that any stockholder intends to do so. If, however,
any other matters are properly brought before the Special Meeting, the persons
named in the accompanying proxy will vote thereon in accordance with their
judgment.
By Order of the Board of Directors
C. William Carey
Chairman of the Board
Boston, Massachusetts
November __, 1999
-32-
<PAGE>
Preliminary Copy
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Special Meeting of Stockholders - December 17, 1999 -
Proxy Solicited on Behalf of Board of Directors
The undersigned holder of shares of Common Stock of Prospect Street
High Income Portfolio Inc., a Maryland corporation (the "Fund"), hereby appoints
Richard E. Omohundro, Jr. and John A. Frabotta, and each of them, with full
power of substitution and revocation, as proxies to represent the undersigned at
the Special Meeting of Stockholders of the Fund to be held at 60 State Street,
37th Floor, Boston, Massachusetts 02109, on December 17, 1999 at 10:00 a.m., and
at any and all adjournments thereof, and thereat to vote all shares of Common
Stock of the Fund which the undersigned would be entitled to vote, with all
powers the undersigned would possess if personally present, in accordance with
the instructions on this proxy.
Please mark the boxes in blue or black ink.
1. With respect to the proposal to approve a new investment advisory agreement
between the Fund and Highland Capital Management, L.P. ("Highland Capital") to
take effect upon the closing of the acquisition of certain assets of Prospect
Street Investment Management Co., Inc. by Highland Capital.
FOR /_/ AGAINST /_/ ABSTAIN /_/
2. GRANTING /_/ WITHHOLDING /_/ authority to vote for the election as Directors
of all the nominees listed below: James Dondero, Mark Okada, John William Honis,
Timothy K. Hui, Scott F. Kavanaugh and James F. Leary.
- ---------------------------------------------------------------------
(Instructions: To withhold authority to vote for any individual nominee, write
such nominee's name in the space provided above.)
<PAGE>
Dated:____________________, 1999
________________________
Signature
------------------------
Signature
Please sign exactly as name or names appear
on this proxy.
If stock is held jointly, each holder should
sign. If signing as attorney, trustee,
executor, administrator, custodian, guardian
or corporate officer, please give full
title.
WHEN THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED HEREBY WILL BE
VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR
THE APPROVAL OF THE NEW ADVISORY AGREEMENT AND THE ELECTION OF ALL NOMINEES AS
DIRECTORS, AND ANY ADJOURNMENT THEREOF. THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF
THE ACCOMPANYING NOTICE OF SPECIAL MEETING AND PROXY STATEMENT.
-2-
<PAGE>
ADVISORY AGREEMENT
ADVISORY AGREEMENT made as of ___________, 1999, by and between
Highland Capital Management, L.P., a Delaware limited partnership (the
"Manager"), and Prospect Street High Income Portfolio Inc., a Maryland
corporation having its principal place of business in Boston, Massachusetts (the
"Fund").
WHEREAS, the Fund is engaged in business as a closed-end management
investment company and is registered as such under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS the Manager is engaged principally in the business of rendering
investment management services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended;
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the
parties hereto as follows:
1. APPOINTMENT OF MANAGER.
The Fund hereby appoints the Manager to act as manager and investment
adviser to the Fund for the period and on the terms herein set forth. The
Manager accepts such appointment and agrees to render the services herein set
forth, for the compensation herein provided.
2. DUTIES OF MANAGER.
The Manager, at its own expense, shall furnish the following services
and facilities to the Fund:
(a) Investment Program. The Manager shall (i) furnish
continuously an investment program for the Fund, (ii) determine
(subject to the overall supervision and review of the Board of
Directors of the Fund) what investments shall be purchased, held, sold
or exchanged by the Fund and what portion, if any, of the assets of the
Fund shall be held uninvested, and (iii) make changes in the
investments of the Fund. The Manager also shall manage, supervise and
conduct the other affairs and business of the Fund and matters
incidental thereto, subject always to the control of the Board of
Directors of the Fund, and to the provisions of the Articles of
Amendment and Restatement (the "Articles of Incorporation") and By-laws
of the Fund, the Prospectuses of the Fund, and the 1940 Act, in each
case as from time to time amended and in effect. Subject to the
foregoing, the Manager shall have the authority to engage one or more
sub-advisers in connection with the management of the Fund, which
sub-advisers may be affiliates of the Manager.
(b) Office Space and Facilities. The Manager shall furnish the
Fund office space in the offices of the Manager, or in such other place
or places as may be agreed upon from time to time, and all necessary
office facilities, simple business equipment, supplies, utilities and
telephone service for managing the affairs and investments of the Fund.
(c) Regulatory Reports. The Manager shall furnish to the Fund
necessary assistance in:
(i) the preparation of all reports now or hereafter
required by federal or other laws; and
(ii) the preparation of prospectuses, registration
statements and amendments thereto that may be
required by federal or other laws or by the rules or
regulations of any duly authorized commission or
administrative body.
(d) Services of Personnel. The Manager shall provide all
necessary executive and administrative personnel for managing the
affairs of the Fund, including personnel to perform clerical,
bookkeeping,
<PAGE>
accounting and other office functions. These services are exclusive of
the bookkeeping and accounting services of any dividend disbursing
agent, transfer agent, registrar or custodian. The Manager shall
compensate all personnel, officers and directors of the Fund if such
persons are also employees of the Manager or its affiliates.
In providing services of the type contemplated by the
foregoing paragraphs (c) and (d), the Manager shall be entitled to
retain the services of one or more accounting, consulting or similar
firms, provided that the Manager shall pay all fees and expenses of any
firms so retained and shall remain responsible for the provision of the
services described herein.
(e) Fidelity Bond. The Manager shall arrange for providing and
maintaining a bond issued by a reputable insurance company authorized
to do business in the place where the bond is issued against larceny
and embezzlement covering each officer and employee of the Fund who may
singly or jointly with others have access to funds or securities of the
Fund, with direct or indirect authority to draw upon such funds or to
direct generally the disposition of such funds. The bond shall be in
such reasonable amount as a majority of the directors who are not
"interested persons" of the Fund, as defined in the 1940 Act, shall
determine, with due consideration given to the aggregate assets of the
Fund to which any such officer or employee may have access. The premium
for the bond shall be payable by the Fund in accordance with paragraph
3(m).
(f) Portfolio Transactions. The Manager shall place all orders
for the purchase and sale of portfolio securities for the account of
the Fund with brokers or dealers selected by the Manager, although the
Fund will pay the actual brokerage commissions on portfolio
transactions in accordance with paragraph 3(d) .
In placing portfolio transactions for the Fund, it is recognized that
the Manager will give primary consideration to securing the most favorable price
and efficient execution. Consistent with this policy, the Manager may consider
the financial responsibility, research and investment information and other
services provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party. It is understood that neither the Fund nor the Manager has adopted a
formula for allocation of the Fund's investment transaction business. It is also
understood that it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and economic analysis
provided by brokers who may execute brokerage transactions at a higher cost to
the Fund than would otherwise result when allocating brokerage transactions to
other brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Manager is authorized to place orders for the purchase
and sale of securities for the Fund with such brokers, subject to review by the
Fund's Board of Directors from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers may be useful or beneficial to the Manager in connection with its
services to other clients.
On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients, the Manager, to
the extent permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be so sold or purchased in order
to obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction will be made by the Manager in
the manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
3. ALLOCATION OF EXPENSE.
Except for the services and facilities to be provided by the Manager as
set forth in paragraph 2 above, the Fund assumes and shall pay all expenses for
all other Fund operations and activities and shall reimburse the Manager for any
such expenses incurred by the Manager. The expenses to be borne by the Fund
shall include, without limitation:
(a) all expenses of organizing the Fund;
-2-
<PAGE>
(b) the charges and expenses of (i) any registrar, stock
transfer or dividend disbursing agent, shareholder servicing agent,
custodian or depository appointed by the Fund for the safekeeping of
its cash, portfolio securities and other property, including the costs
of servicing shareholder investment accounts and bookkeeping,
accounting and pricing services, provided to the Fund (other than those
utilized by the Manager in providing the services described in Section
2), (ii) any agent engaged for the purposes of conducting auctions with
respect to the Fund's taxable auction rate preferred stock, if any
shall be issued, (iii) any institution serving as trustee with respect
to the Fund's Senior Extendible Notes, and (iv) fees of any stock
exchange or any rating agency responsible for rating outstanding
securities of the Fund;
(c) the charges and expenses of bookkeeping, accounting and
auditors;
(d) brokerage commissions and other costs incurred in
connection with transactions in the portfolio securities of the Fund,
including any portion of such commissions attributable to brokerage and
research services as defined in Section 28(e) of the Securities
Exchange Act of 1934;
(e) taxes, including issuance and transfer taxes, and
corporate registration, filing or other fees payable by the Fund to
federal, state or other governmental agencies;
(f) expenses, including the cost of printing certificates,
relating to the issuance of securities of the Fund;
(g) expenses involved in registering and maintaining
registrations of the Fund and of its securities with the Securities and
Exchange Commission and various states and other jurisdictions,
including reimbursement of actual expenses incurred by the Manager or
others in performing such functions for the Fund, and including
compensation of persons who are employees of the Manager, in proportion
to the relative time spent on such matters;
(h) expenses of shareholders' and directors' meetings,
including meetings of committees, and of preparing, printing and
mailing proxy statements, quarterly reports, semi-annual reports,
annual reports and other communications to existing security holders;
(i) expenses of preparing and printing prospectuses and
marketing materials;
(j) compensation and expenses of directors who are not
affiliated with the Manager;
(k) charges and expenses of legal counsel in connection with
matters relating to the Fund, including, without limitation, legal
services rendered in connection with the Fund's corporate and financial
structure and relations with its security holders, issuance of shares
of the Fund and registration and qualification of securities under
federal, state and other laws;
(l) the cost and expense of maintaining the books and records
of the Fund, including general ledger accounting;
(m) insurance premiums on fidelity, errors and omissions and
other coverages, including the expense of obtaining and maintaining a
fidelity bond as required by Section 17(g) of the 1940 Act which may
also cover the Manager;
(n) expenses incurred in obtaining and maintaining any surety
bond or similar coverage with respect to securities of the Fund;
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(o) interest payable on Fund borrowings;
(p) such other non-recurring expenses of the Fund as may
arise, including expenses of actions, suits or proceedings to which the
Fund is a party and expenses resulting from the legal obligation which
the Fund may have to provide indemnity with respect thereto; and
(q) expenses and fees reasonably incidental to any of the
foregoing specifically identified expenses.
4. ADVISORY FEE.
For the services and facilities to be provided by the Manager as set
forth in paragraph 2 hereof, the Fund will pay to the Manager as full
compensation therefor a fee at an annual rate of 0.65% of the Fund's net assets
up to and including $175 million, outstanding 0.55% on the next $50 million, and
0.50% of the excess over $225 million (which for purposes hereof, shall mean (a)
the average weekly value of the total assets of the Fund, minus (b)(i) accrued
liabilities of the Fund (other than the principal amount of the Fund's "senior
securities representing indebtedness" (as defined in the 1940 Act), not to
exceed $50 million, and not including the aggregate liquidation preference of
the Fund's outstanding preferred stock (the "Preferred Stock"), if any, and (ii)
accumulated and unpaid dividends on the Preferred Stock). The fee to the Manager
will be computed weekly and will be paid to the Manager monthly as soon as
practicable following the end of each month.
In the case of commencement or termination of this Agreement during any
month, the fee with respect to such month shall be adjusted proportionately.
5. EXPENSE LIMITATION.
The Manager agrees that if the total expenses of the Fund (exclusive of
interest, taxes, brokerage expenses and extraordinary items such as litigation
expenses) for any fiscal year of the Fund exceed the lowest expense limitation
imposed by any jurisdiction to which the Fund is then subject, if any, the
Manager will pay or reimburse the Fund for that excess up to the amount of its
advisory fees payable with respect to the Fund during that fiscal year. The
amount of the monthly advisory fee payable by the Fund under paragraph 4 hereof
shall be reduced to the extent that the monthly expenses of the Fund, on an
annualized basis, would exceed the foregoing limitation. At the end of each
fiscal year of the Fund, if the aggregate annual expenses chargeable to the Fund
for that year exceed the foregoing limitation based upon the average of the
monthly average net asset values of the Fund for the year, the Manager will
promptly reimburse the Fund for the amount of such excess to the extent not
already reimbursed by reduction of the monthly advisory fee, but if such
expenses are within the foregoing limitation, any excess amount previously
withheld from the monthly advisory fee during that fiscal year will be promptly
paid over to the Manager.
In the event that this Agreement (i) is terminated as of a date other
than the last day of the fiscal year of the Fund or (ii) commences as of a date
other than the first day of the fiscal year of the Fund, then the expenses of
the Fund shall be annualized and the Manager shall pay to, or receive from, the
Fund a pro rata portion of the amount that the Manager would have been required
to pay or would have been entitled to receive, if any, had this Agreement been
in effect with respect to the Fund for the full fiscal year.
6. RELATIONS WITH FUND.
Subject to and in accordance with the Articles of Incorporation and
By-laws of the Fund and the organizational documents of the Manager, it is
understood that Directors, officers, agents and shareholders of the Fund are or
may be interested in the Manager (or any successor thereof) as directors,
officers or otherwise, that partners, officers and agents of the Manager (or any
successor thereof) are or may be interested in the Fund as Directors, officers,
agents, shareholders or otherwise, that the Manager (or any such successor
thereof) is or may be interested in the Fund as a shareholder or otherwise.
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7. LIABILITY OF MANAGER.
The Manager shall not be liable to the Fund for any error of judgment
or mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates; provided, however, that no provision of
this Agreement shall be deemed to protect the Manager against any liability to
the Fund or its shareholders to which it might otherwise be subject by reason of
any willful misfeasance, bad faith or gross negligence in the performance of its
duties, or the reckless disregard of its obligations and duties under this
Agreement, nor shall any provision hereof be deemed to protect any director or
officer of the Fund against any such liability to which he might otherwise be
subject by reason of any willful misfeasance, bad faith or gross negligence in
the performance of his duties or the reckless disregard of his obligations and
duties. The Fund hereby agrees to indemnify and hold harmless the Manager and
each of its agents, employees, officers, directors and stockholders from and
against any and all liabilities arising in connection with the performance of
this Agreement other than liabilities arising as a result of any willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations
and duties on the part of the Manager or any such agent, employee, officer,
director or stockholder.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective on the date first
set forth above, such date being the date on which this Agreement has been
executed. Unless terminated as herein provided, this Agreement shall remain in
full force and effect until the date which is two years after the effective date
of this Agreement. Subsequent to such initial period of effectiveness this
Agreement shall continue in full force and effect, subject to Section 8(c), for
successive one-year periods so long as such continuance is approved at least
annually (a) by either the directors of the Fund or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, voting
as a single class, and (b) in either event, by the vote of a majority of the
directors of the Fund who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. Notwithstanding the
foregoing provisions of this Section 8(a), the continuance of this Agreement is
subject to the approval of this Agreement, by a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund, voting as a single
class, at the initial meeting of shareholders after the date of this Agreement.
(b) Amendment. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by vote of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, voting as a single class.
(c) Termination. This Agreement may be terminated at any time, without
payment of any penalty, by vote of the Directors or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, voting
as a single class, or by the Manager, in each case on not more than sixty (60)
days' nor less than thirty (30) days' prior written notice to the other party.
(d) Automatic Termination. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
9. SERVICES NOT EXCLUSIVE.
The services of the Manager to the Fund hereunder are not to be deemed
exclusive, and the Manager shall be free to render similar services to others so
long as its services hereunder are not impaired hereby.
10. PRIOR AGREEMENTS SUPERSEDED .
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This Agreement supersedes any prior agreement relating to the subject
matter hereof between the parties hereto.
11. NOTICES.
Notices under this Agreement shall be in writing and shall be
addressed, and delivered or mailed postage prepaid, to the other party at such
address as such other party may designate from time to time for the receipt of
such notices. Until further notice to the other party, the address of each party
to this Agreement for this purpose shall be __________________, Texas.
12. GOVERNING LAW; COUNTERPARTS.
This Agreement shall be construed in accordance with the laws of the
State of New York. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
such counterparts shall, together, constitute only one instrument.
13. MISCELLANEOUS.
The Manager agrees to advise the Fund of any change of its membership
(which shall mean its general partner) within a reasonable time after such
change. If the Manager enters into a definitive agreement that would result in a
change of control (within the meaning of the 1940 Act) of the Manager, it agrees
to give the Fund the lesser of sixty days' notice or such notices as is
reasonably practicable before consummating the transaction.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above.
HIGHLAND CAPITAL MANAGEMENT, L.P.
By: ____________________, its general partner
By: ____________________
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
By: ____________________________________
John A. Frabotta
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